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The Investor’s Bet On Boom Times May Just Go Bust

A report from My Northwest in Washington. “The glory days of 30-year mortgage rates hovering around 3% or less may be in the rearview mirror. Windermere’s Chief Economist Matthew Gardner was on Seattle’s Morning News Wednesday and declared, ‘Are we ever going to get back to sub 3%?’ No, that was artificial. It was fake. It was government-induced. It should never have happened in the first place. But it did. So anyone waiting for that 2.95% 30-year fixed rate? They’ll be waiting a very long time. I expected her to see a drop in values because we peaked in the region back last May. We certainly have seen a year-over-year drop,’ Gardner said. ‘So far this year, we are still down 7 to 8%, roughly, depending on the part of the region where you are.'”

Vice Magazine. “Kristin Turner’s first few months as an Airbnb host had gone off without a hitch. She and her husband had purchased a home in Austin, Texas, in 2022 as a place to stay when they commuted into the city to work at a downtown trauma center, where they are both nurses. In July, they closed on a three-bedroom home, planning to put it on short-term rental sites like Airbnb. Then, one night last October, Turner received an email that changed everything. It was from a member of the Airbnb team who identified herself only as ‘Eleanor,’ saying that the company had decided to remove her from the platform not because of her own behavior, but because her account had been ‘closely associated with a person who isn’t allowed to use Airbnb.'”

“Soon enough, all her home’s bookings had been deleted and she could not get into her account. The potential consequences were clear. She had purchased a home on the idea that she would rent it out to help cover the mortgage, and now the company that dominated the short-term rental market had suddenly and permanently banned her from doing so. Immediately, she began to fear that her family would face financial ruin. The ban, Turner said, proved to be more than an inconvenience. It became ‘absolutely life-changing,’ causing her and her husband ‘horrific and traumatic stress,’ she said. Austin housing prices have since dropped, meaning they’d take a large loss if they sold it.”

The Real Deal. “In 2014, Starwood thought it hit a gusher in West Texas oil country. But like many would-be wildcatters, the firm may now be left with little more than a sad story and a sunburn. As rates have risen and rent growth slowed, swaths of Sun Belt rental properties acquired at the top of the market have spiraled into distress. But for a stretch of West Texas multifamily owned by Starwood Capital, it’s not the macro factors that sparked trouble; the area’s oil industry is to blame.”

“On the heels of the 2014 oil bust, Starwood picked up four investments in Midland and Odessa, twin cities in Permian Basin, the heart of Texas oil country. Through the down years of 2016 and 2020, the Miami Beach, Florida-based private equity firm struggled to keep up with payments on $100 million in debt covering more than 900 units. Two multifamily assemblages have landed in default and face foreclosure, while the other two are struggling with delinquency.”

“In 2020, Park at Caldera’s occupancy slipped from 94 percent to 80 percent. As of November 2021, the development’s debt service coverage ratio hovered at a mere 0.48. University Gardens fared little better with a DSCR of .72 by the end of 2021. In February 2022, the portfolio transferred to special servicing for imminent default after Starwood ‘indicated it can no longer cover payment shortfalls.’ The firm declared imminent default for Park at Caldera the next month. Both assets are marked REO or real estate owned in servicer records, signaling the borrower defaulted on its debt obligations and the property failed to sell in a foreclosure auction.”

“The average rent at Hawthorne House still stands 32 percent below what its lender underwrote for. Aviare Place is 44 percent below underwriting. That is, the investor’s bet on boom times may just go bust.”

The San Francisco Chronicle in California. “Park Hotels & Resorts’ plan to surrender ownership of two of San Francisco’s biggest hotels reflects the city’s slow tourism recovery and the widening financial distress hitting local property owners. The company plans to give up nearly 3,000 hotel rooms in the Hilton San Francisco Union Square and Parc 55 properties. Its expected $725 million loan default appears to be the largest U.S. hotel default during the pandemic. Though unmatched in size, Park Hotels is far from alone. Other San Francisco hotels such as the Huntington on Nob Hill and Yotel on Market Street were recently sold in foreclosure auctions. And more than 30 additional San Francisco hotels are facing loans due in the next two years, said Emmy Hise, senior director of hospitality analytics at CoStar, a real estate data firm.”

“Numerous hotels around the country, from Portland, Ore., to Minneapolis to New York, have also gone into foreclosure in the past year.”

The Financial Post. “Just as Canada’s housing market was starting to rebound, the Bank of Canada has dealt it another blow. The bank’s decision to raise its key interest rate 25 basis points to 4.75 per cent on June 7 will put downward pressure on home prices, which have rebounded faster than the bank had expected, according to James Laird, president of CanWise mortgage lender. The rise brings the policy rate to the highest it’s been since April 2001.”

“‘The Bank of Canada just stomped on housing sentiment in a way that only it can,’ mortgage analyst and strategist Rob McLister said, adding that the stress test will get ‘meaningfully more stressful’ for borrowers at the margin. Royal LePage chief executive Phil Soper said he was not surprised with the rate hike due to the rapid rise in prices. He said the rate hike may be the ‘borrowing straw that breaks the camel’s back’ for some people, as it will keep them from buying and they’ll decide just to step back.”

CBC News in Canada. “Ontario’s Home Construction Regulatory Authority (HCRA) has revoked a Mississauga-based developer’s licence to build or sell homes in the province after it says the company tried to charge a buyer significantly more for a home than was contractually agreed upon. It’s the first time a home builder has received the regulator’s most serious punishment for increasing a price since CBC Toronto reported last March that the Doug Ford government planned to crack down on the practice. The move comes after Pinetree Developments Inc. demanded a buyer pay more than half a million dollars extra for a home in Mississauga than was contractually agreed to, according to HCRA notices of proposal to revoke the licence. When the buyer refused, the company listed the home online, the HCRA documents say.”

“But that wasn’t the only issue. A HCRA inspection that began in December 2022 found falsified documents were used to obtain building permits, the developer failed to enroll homes in the provincial warranty plan and that there was a lack of explanation when the HCRA came inquiring about the increase in price. A phone number listed for Pinetree in the HCRA’s registry is disconnected, and an email sent to an email address listed for Pinetree returned a message saying it couldn’t be delivered. An additional request for comment sent to an email address listed on the company’s website received no response.”

“NDP housing critic Jessica Bell said there’s more to be done. She said people filing complaints with the HCRA have often spent their life savings in pursuit of home ownership. ‘These people are stressed, they’re furious, their lives have been turned upside down. They just want their home built,’ she said.”

The Guardian on Australia. “Jack Lynch and his partner moved out of Sydney to the picturesque but cheaper Blue Mountains to become homeowners in 2021, and promptly locked in a cut-rate, fixed-rate loan. The couple, in their early 30s, are now bracing for that loan to expire, and for repayments to increase by more than $2,000 a month. ‘It is going to be a massive, massive struggle,’ Lynch says. His partner, who is on maternity leave, has picked up two teaching jobs, and Lynch is negotiating with his own employer to take on extra work. At the same time, they are caring for three young daughters, including a one-month-old. ‘We moved so far away to afford a mortgage instead of rent to have extra room for the girls – that line of thinking is now totally pointless.'”

“Lynch and his partner are among 880,000 Australian households with fixed-rate mortgages expiring this year who will need to find hundreds, if not thousands, of dollars more each month to meet repayments, as an era of cheap rates is replaced with financial stress. Along with the personal toll, the ‘mortgage cliff,’ as it is widely known, represents one of the biggest challenges for the property sector and wider economy, with the peak resetting period starting in July, according to bank data. Along with the 880,000 expiring fixed loans in 2023, there are a further 450,000 due to expire in 2024 and beyond.”

“For Lynch, it will be an extra $24,000 a year; an amount he is unsure the family can find. He says their savings will only cover five months of the inflated repayments that will kick in after the fixed loan expires in September. ‘What if the fridge breaks down? What if one of the kids gets hurt or sick? Our savings are for emergencies.'”

The South China Morning Post. “From now on, visitors to the Unesco-listed Malaysian island of Penang will have fewer accommodation options. After mulling it over for more than a year, on May 25, the Penang state government imposed a ban on almost all forms of short-stay accommodation in residential units – the kind typically found listed on Airbnb and Booking.com – throughout the island, with immediate effect. Penang is the first state in Malaysia, and the first tourist hotspot in Southeast Asia, to take such measures – mostly, it claims, to regulate hordes of tourists, some of whom behave badly and disturb local residents.”

“Airbnb quoted a Penang-based host, Sharinah Bte Mohd Ibrahim, as saying that, after her husband was laid off due to the Covid-19 pandemic, ‘the income earned through hosting helped our family survive … it will be difficult to service my bank mortgage and I will bear losses if I’m forced to sell the unit now.'”

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This Post Has 61 Comments

  1. ‘Immediately, she began to fear that her family would face financial ruin. The ban, Turner said, proved to be more than an inconvenience. It became ‘absolutely life-changing,’ causing her and her husband ‘horrific and traumatic stress,’ she said. Austin housing prices have since dropped, meaning they’d take a large loss if they sold it’

    Again, why is the guberment backing 30 year loans into a fly by night bunch of crooks? Well they fooked you Kristin but it was cheaper than renting.

    1. “It was only after Motherboard reached out for comment about the specifics of Turner’s situation that Airbnb decided to reverse its decision and reinstate Turner.”

      Ta-da!

    2. “It was only after Motherboard reached out for comment about the specifics of Turner’s situation that Airbnb decided to reverse its decision and reinstate Turner.”

      Ta-da!

      1. “The pain and suffering,” Turner said, “you know, you can’t put a dollar amount on that.”

        Just pick a number, and put six zeros behind it!

  2. ‘These people are stressed, they’re furious, their lives have been turned upside down. They just want their home built’

    There’s always the time tested K-dn stamping of little feet Jessica.

    ‘‘The Bank of Canada just stomped on housing sentiment in a way that only it can’

    Tiff broke it off in yer a$$ Rob. Again.

    1. Tiff broke it off in yer a$$ Rob. Again.

      Why have central banks been allowed to take over the shelter market?

  3. No, that was artificial. It was fake. It was government-induced. It should never have happened in the first place. But it did.

    Sounds like the scamdemic.

  4. Immediately, she began to fear that her family would face financial ruin. The ban, Turner said, proved to be more than an inconvenience. It became ‘absolutely life-changing,’ causing her and her husband ‘horrific and traumatic stress,’ she said.

    Die, speculator scum.

    1. Sounds like her speculation was going well, until she was “associated” with someone banned from AirBnB. What was that all about?

  5. “The average rent at Hawthorne House still stands 32 percent below what its lender underwrote for. Aviare Place is 44 percent below underwriting. That is, the investor’s bet on boom times may just go bust.”

    Wut? You mean to tell me Mr. Market gets a vote when it comes to rental rates?

  6. ‘In 2014, Starwood thought it hit a gusher in West Texas oil country. But like many would-be wildcatters, the firm may now be left with little more than a sad story and a sunburn’

    This is an interesting story I know a little about. I drove out there in around 2017 IIRC, specifically looking at apartments. At the time the big story was luxury. Midland/Odessa had the biggest increase in lux apartments just years previously, over 1000%.

    Here’s the thing: these are tiny markets. The number of say office staff was never going to support these airboxes. The oil field guys don’t care about bocce ball. So while these Florida clowns may have thought they hit the jackpot, truth is they paid too much. Vultures feed on bulls and bears.

    1. West TX is full of roughnecks, illegals, and cowboys. Nobody wants luxury apartments.

      1. So why did they build them? And they go bust and these clowns buy in, and go bust too.

        1. We know why they built them. They borrowed money at 2%, convinced some greater fool to buy rental-backed securities at a 5% cap rate, collected profit, and went to live ANYwhere else except those luxury apartments. Die, speculator scum.

        2. I’m a CPA and specialize in private equity and especially CRE and MFH. Starting around 2016 the funds and Wall Street have been building thousands of these luxury apartment complexes and flipping them to greater fools. I’ve worked with the Goldman and Blackstone funds that did this along with many smaller PE groups. Entire buildings and apartment complexes have been getting flipped like pennystocks the past 8 years or so. Few are cash flow positive and they’re in it for the cap gains. The syndicators raise funds for a 10-20% down payment. The rest of the funding comes from regional bank loans usually with a 3-5 year term. About half are interest only. When the FMV increases, they either sell or cashout refi. The syndicators get paid either way through deal broker fees and management fees. If the property sells for a big profit, the syndicator gets a chunk of that. The risk is all on the banks and investors. Once they run out of greater fools or the lending dries up, it will be a massacre for anyone who didn’t hedge rates. That is just getting started.

          1. “About half are interest only”

            Oh that is s-o-o-o-o 2006. We know what happened after that.

            And if you’re a CRE/MFH CPA, you and Ben have a lot to talk about! 😎

    2. That area is special, a special kind of hell. I encourage people to zoom in on google earth and observe how the wells dominate the landscape like some kind of weird planetary mining operation. It is a great example of a place having all of it’s eggs in one basket. At some point it will clear out and become a notorious wasteland. The luxury housing will rapidly decay and crumble because there is no good reason to be there other than oil. Interestingly, Texas is already full of ghost towns that no one ever talks about.

      1. Historically, it’s been ranching and farming. You’re right that there is no other reason to be out there and the area would only support 10% of the population once the fracking dries up in a few decades. The new big industry is the green energy scam. There are thousands of wind turbines and many solar farms out there.

      2. Or just watch “Friday Night Lights,” the original movie. You get a good sense of the place. Seems that oil really likes deserts.

  7. ‘‘We moved so far away to afford a mortgage instead of rent to have extra room for the girls – that line of thinking is now totally pointless’

    Drive til you qualify strikes again. Jack, lets be real. You and yer GF and the little girls are just going to have to stop eating. It’s the only way forward.

  8. ‘These people are stressed, they’re furious, their lives have been turned upside down. They just want their home built,’ she said.”

    Did they stamp their little feet?

  9. “Airbnb quoted a Penang-based host, Sharinah Bte Mohd Ibrahim, as saying that, after her husband was laid off due to the Covid-19 pandemic, ‘the income earned through hosting helped our family survive … it will be difficult to service my bank mortgage and I will bear losses if I’m forced to sell the unit now.’”

    I love the smell of burning housing speculators in the morning. It smells like…VICTORY!

  10. Re: No, that was artificial. It was fake. It was government-induced. It should never have happened in the first place. But it did.

    So what lesson is there for us to learn ?

    1. The lesson is it is best to wait until the market is a smoldering wreck and no one is excited about any of it. Then lowball out of spite.

      This bust is shaping up to be epic. So many debt binging hipsters are going to get kicked to the curb as the tide goes out. It becomes clearer every day.

      1. Then lowball out of spite.

        I plan to get a realtor license and pay myself the 3% commission out of spite.

      2. So many debt binging hipsters are going to get kicked to the curb as the tide goes out.

        I’ve noticed over the past 3 years on auto forums that these debt junkies are neck deep into auto loans, and mock people who complain about high vehicle prices.

        1. I was looking for a Toyota Tundra last year and saw my local dealer had them listed for over $100K. Prices are down to $53K now.

  11. Local news: Candi CdeBaca has been voted OUT of Denver City Council.

    Good riddance.

    1. The biggest surprise of the Denver runoff elections went down in District 9 on Tuesday, June 6, as incumbent councilwoman Candi CdeBaca got walloped by small-business owner Darrell Watson by more than 3,500 votes.

      While she got the boot, the ultra far left picked up two seats on the city council. Dumver is still on its way to becoming the San Francisco of the Front Range

    1. DC area is very smoky today. We’ve had wildfire smoky skies before, but in the past it’s only been visually hazy or yellow. Today it’s irritating and smells burned, like being in a smoke-filled room from a mob movie.

      1. The Western U.S. summer of 2020 was really bad, now it’s the East Coast’s turn. We’re all in this together?

        This has been the wettest, greenest spring in Colorado since I moved here.

        1. The Western U.S. summer of 2020 was really bad, now it’s the East Coast’s turn. We’re all in this together?

          Yep, nasty stuff here. Today and yesterday were well into the worst category (Maroon-Hazardous) on the Air Quality Index scale. I’ve been mostly holed up in one room with a HEPA filter running full blast.

          We’re finally down to Orange-Unhealthy for Sensitive Groups, but the TV says it may get worse again before the smoke clears out for good.

    2. “Excellent opportunity to get into home ownership and build equity! This property is ideal for a young professional that wants to be close to downtown for work. This unique and affordable one bedroom unit is a cosmetic fixer. The new owner will enjoy an approximately 450 square foot roof top patio which is perfect for entertaining! Plus, they will be conveniently located to retail shops, LA Fitness, 99 Ranch, and good eats on Main Street. Property boasts neighborhood views and no invasion of privacy…”

      It is none of those things. These people should be tarred and feathered.

  13. ” fixed-rate mortgages expiring this year”

    They need to stop referring to these mortgages as “fixed-rate”.

    “their savings will only cover five months of the inflated repayments …. What if the fridge breaks down? What if one of the kids gets hurt or sick?”

    What if SIX months go by?

  14. Colorado Sun — New Colorado energy rules will require solar and electrical hookups in all new buildings (6/8/2023):

    “Colorado cities and towns must adopt new energy rules promoting solar and electric vehicle hookups when they revise their local codes beginning July 1, part of the state’s ongoing push to embed clean electrification in all new buildings and make long-term cuts to greenhouse gas emissions.

    The code minimums require more efficient appliances and prewiring for solar panels and electric vehicle charging in new buildings, which state energy officials call one of the five largest categories for greenhouse gas emissions.

    The Colorado Apartment Association said only about 1% of current renters surveyed said they want an EV charger right now. Those numbers will increase, the association said, but requiring more than half of all parking spaces to be wired for chargers adds costs that can’t be justified by current EV growth.”

    https://coloradosun.com/2023/06/08/colorado-new-energy-codes-solar-ev-charging/

    More than half? In an existing building? Good luck with all that.

    2. , but requiring more than half of all parking spaces to be wired for chargers adds costs that can’t be justified by current EV growth.

      As if housing costs in the Centennial state weren’t onerous already. I suspect that negative net migration to Colorado isn’t far off.

  15. “Are we ever going to get back to sub 3%?’ No, that was artificial. It was fake. It was government-induced. It should never have happened in the first place. But it did. So anyone waiting for that 2.95% 30-year fixed rate? They’ll be waiting a very long time.”

    Past is prologue.

    However, given the raging inferno of inflation that was unleashed by the Fed’s brief experiment with Modern Monetary Theory, it seems unlikely that they will soon institute another protracted period of extraordinary accommodation. So good luck to those holding out hope for a return to 3% mortgage rates.

    2. I guess by luck, I re-fi’d to a 2.25% mortgage in September 2021. Yes, I actually clicked on one of those silly “lower my payment” ads on the interwebs, decided to put in my real info, and by gosh it worked. I was getting calls within 2 hours, and they set me up, and sold my new loan to Freddie Mac even before the ink was dry. (and I mean that almost literally. I think they sold the loan the day I signed the papers.)

      Ultimately I didn’t lower my payment, but I did shorten my loan term. I’ll burn the mortgage before I retire, which was the original goal.

      1. “I guess by luck, I re-fi’d to a 2.25% mortgage in September 2021”

        “I’d rather be lucky than good”

        Lefty Gomez

  16. ‘A phone number listed for Pinetree in the HCRA’s registry is disconnected, and an email sent to an email address listed for Pinetree returned a message saying it couldn’t be delivered’

    The endings always have many similarities.

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