Aug232016
New houses will be smaller over the next decade
As Millennials buy new homes, builders will provide smaller houses Millennials can afford.
For years, academics in planning circles touted the rise of the small, high-density housing alternatives near mass-transit hubs. While this product might be the future of housing, it won’t be due to any preference by Americans for smaller digs. People will substitute down to smaller properties conveniently located near mass transit, but they will do this because the more desirable McMansions in the suburbs will become too expensive.
Fortunately there are companies that buy houses in any condition and thus help sellers tremendously to be able to move forward with their projects without having to see their houses stuck in the market for years without being able to sell them.
Builders aren’t concerned with what academics think they should build; builders will provide whatever product buyers in the market want. Very few entry-level buyers are active in the market because Generation X is trapped in their starter homes, and the Millennials are not yet in a position financially to complete a sale.
Right now, the only group of buyers with the cash and credit who can close the deal are move-up buyers who didn’t HELOC themselves into oblivion during the housing bubble. Move-up buyers don’t want small condos near transit stops; they want McMansions, so builders focus their attention on what’s selling and build bigger homes. Heard about wilmington nc moving companies services? Well check their website to read more information.
For the last few years I expected the average home size to retreat, but as Millennials delay buying, the move-up market dominated new construction, and the average home size went up consistently. At some point, Millennial demand will pick up, but they won’t be able to afford McMansions. To meet this demand, homebuilders will shift from larger McMansions to entry-level housing, and when they do that, the average home size will fall. Smaller doesn’t always mean worse. Apartments and condominiums have become pretty popular lately due to them being very cost-friendly. If you’re looking for a condominium to invest in or buy, 2021 will be an interested year for new residential mixed development, One-North Eden.
Why houses in America are getting smaller
Diana Olick, August 23, 2016
Size matters, especially in housing, but preferences can change quickly, and that is the case today. Small is happening in a big way.
For the first time since the recession, home size is shrinking. Median single-family square floor area fell from the first to the second quarter of this year by 73 feet, according to the National Association of Home Builders (NAHB) and U.S. Census data. That may not sound like a lot, but it is a clear reversal in the trend of builders focusing on the higher-end buyer.
(See: Americans don’t want small houses)
An increase in home size post-recession is normal, historically, as credit tightens and more wealthy buyers with more cash and better credit, rule the market. As with everything else in this unique housing cycle, however, the trend this time is more profound.
“This pattern was exacerbated during the current business cycle due to market weakness among first-time homebuyers,” wrote Robert Dietz, NAHB’s chief economist. “But the recent small declines in size indicate that this part of the cycle has ended and size should trend lower as builders add more entry-level homes into inventory.” …
Considering how high home prices are today and how difficult it’s been for Millennials to find high-paying jobs, if houses don’t get smaller, many Millennials may never become homeowners.
“At 3 to 3.5 percent mortgage interest rates, you’d think they would be very affordable, but all of the financial requirements for higher FICO scores and larger down payments and all those other things and income ratios have made it harder, even with a low interest rate,” said Stephen Paul, executive vice president of homebuilding operations at Mid-Atlantic Builders, also in Maryland. “In our market it’s been financing is driving the deals and builders are adjusting their product to meet the affordability issue.”
Very low mortgage rates would make houses more affordable if we hadn’t reflated the old housing bubble. Houses are not affordable today because lenders still need to recover from their bad bubble-era loans. For these houses to be affordable to the Millennial generation, prices need to come down, wages need to go up, or interest rates need to go even lower.
Don’t be surprised if mortgage rates fall below 2%. As crazy as that sounds, it’s the only reasonable path forward.
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Los Angeles enters a new era as a global city, with home demand and prices to match
Is this reality or wishful thinking?
It’s August, and as Cole Porter once mentioned in a song, “It’s Too Darn Hot!” And along with the thermometer, real estate values in the City of Angels continue to stay high, despite the typical late summer slowdown we’re experiencing.
Check out more Location Scouts reports on housing-market conditions across the U.S.
Housing inventories are close to historic lows, and prices are at historic highs, so the hot conversation this month is: When will the market take a dive? There are differing opinions on when or if that will happen. Here’s my take on it.
Ever since I moved to Los Angeles in 1988, the folks in the know have been saying that L.A. would be the “next big thing”. Meaning globally. We have a setting of incredible natural beauty, a vibrant art and culture scene, a strong business community and of course the best weather in the world. But somehow the city has lacked a unified identity and vision; residents have thought of themselves more as being from Culver City or Encino or Beverly HIlls or Burbank or Santa Monica or Venice or West Hollywood, than of being from Los Angeles. A collection of suburbs in search of a city.
So L.A. hasn’t quite seemed to have the luster and character of New York, London, Hong Kong, or other global powerhouses. And the Los Angeles “La La Land” stereotype has been difficult to dislodge, despite the fact that it hasn’t been apt in decades, if ever (notwithstanding the upcoming Ryan Gosling/Emma Stone film).
But over the past decade, that which has been prophesied for many years has finally come to pass. We have become a magnet for the young, the aspiring, the driven and the rich of the world. Especially the young and the rich. And that has propelled us from a very important American city, to a global megalopolis. And along with that transformation may have come a new reality: we will be less prone to big downturns and price swings, especially in urban areas where growth has been strongest.
And along with that transformation may have come a new reality: we will be less prone to big downturns and price swings, especially in urban areas where growth has been strongest.
This guy is pushing a dangerous mindset. Yes, LA will be a good long term investment just as it has always been, but declaring the end of downturns and price swings is pretty reckless given the last 50 years of evidence to the contrary.
Exactly. Once people believe prices won’t go down, they behave in ways that destabilize the market. Without a healthy fear of downturns, people will speculate wildly believing they can’t lose, which drives prices up to unsustainable levels and creates downturns.
The Housing Market Is Finally Starting to Look Healthy
One small and volatile data point inspired a great deal of optimism
It has been an excruciatingly long time coming, but the housing sector in the United States is finally getting healthy. Thank millennials and thank homebuilders who are starting to produce more of the starter houses young people demand.
That’s the conclusion to be drawn from a new report Tuesday that shows that more new homes were sold in July than in nearly a decade. Buyers purchased single-family houses at the annual rate of 654,000, the highest rate since October 2007, the government said. That is 31 percent higher than a year earlier. Those numbers are volatile and include a wide margin of error, but combined with other evidence, the United States housing market seems to be solidly on the mend in 2016.
Builders have started work on new housing units at a pace of more than 1 million homes a year every month since April 2015, more than doubling from a low of 478,000 in the spring of 2009. Residential investment has made a positive contribution to overall gross domestic product for eight of the last nine quarters (and economists think that a drop in the second quarter was an aberration).
And in home price trends, there are some good signs, too, though not in the obvious way. In the new Census Bureau report Tuesday, the median sale price for new homes actually fell, to $294,600 from $310,500 in June. That is a strong hint that there is more supply being built at the lower end of the housing market. In other words, exactly the kind of smaller houses that young adults can afford.
“For years, the market has been practically begging builders to both ramp up their efforts over all and to put more focus on serving the less expensive end of the market,” said Svenja Gudell, the chief economist of Zillow, in an email. “Today’s data confirms both are happening in earnest.”
“The dip in price will be welcome relief to buyers struggling to find affordable inventory in this incredibly tight market.”
A skyscraper in two weeks: Does China’s building boom hide bigger problems?
China’s fast-paced construction industry has long been the subject of discussion and for some countries, jealously with some construction companies building skyscrapers in as little as two weeks. But are the foundations of the China’s break-neck building on shaky ground?
In April last year, a Chinese construction company Broad Sustainable Building claimed itself to be the world’s fastest builder after erecting a 57-storey skyscraper in just 19 working days. The company, which specializes in prefabricated construction, prepared 90 percent of the structure at the factory before the site work began and then assembled the remaining 10 percent structure like a jigsaw puzzle at the site.
“I think this goes back to an innovative form of modular Lego like construction,” Alastair Campbell, Investment Manager-Asia Pacific at Kames Capital told CNBC via email.
“This is not a case of a Chinese builder throwing up a building as fast as possible in order to make a quick buck and a sign of lax building regulations. Rather the intention was to demonstrate an efficient building technique, after all the Chinese have built a lot of huge apartment blocks over the last 20 years.”
However, such speed has raised questions on the buildings’ sustainability, longevity and safety even though some analysts have said that the construction companies follow international building standards and regulations.
“Undoubtedly, there are poorly constructed and designed buildings in China, particularly due to historically poor application and oversight of planning and building laws. However, I suspect that the application of laws has probably been tightened and standards enforced since the anti-corruption drive initiated by President Xi Jinping in 2012. The penalties for breaching building laws can be severe,” Kames’ Campbell told CNBC.
Opinion: This is the best time in history to invest in real estate
No, 2011 was the best time in history to invest in real estate
If you want to hate on the housing market recovery, there are certainly plenty of items to dwell on.
Ads for house-flipping seminars have returned to AM radio and late-night cable TV in many markets — and so have Better Business Bureau complaints. So-called “liar loans” or “Alt-A mortgages” that played a big role in the housing crash are increasing in popularity. And, of course, there are the fears that a low-interest-rate environment has already prompted everyone to refinance and has artificially created demand for housing thanks to cheap access to mortgages.
But while plenty of pundits are sounding the alarm bells — including MarketWatch contributor Michael Brush a few months back — I think the hysteria over another housing crisis is a lot of hogwash.
Particularly if you’re an investor, there has never been a better time in history to get into real estate.
The scars from the Great Recession are real, and many can’t shake the fear and financial pain caused by the housing crisis. I get that. But recency bias also caused many small-time investors to dump stocks at the very bottom of the market, and caused many to miss out on the 200% gains in the recovery.
If you think we are in the middle of another housing bubble and that real-estate investing is only a sucker’s game, you may simply be letting the past color your perceptions despite continued signs of strength.
And considering the investment potential — particularly in the rental market — you may want to take another look.
This is a healthy market, not a bubble
For starters, let’s talk about the real estate environment. Generally, it’s quite good.
By any measure prices continue to rise. Median home prices shot past pre-recession levels to new all-time highs. National home prices were up 5.7% in June, according to CoreLogic — an even faster rate of appreciation than the 5.3% rate in May and the 5.4% rate in April. New home sales have powered to a seven-year high on strong demand.
Critics will warn that rising prices and rising demand can indicate a bubble the same way they did in 2005. But when you dig deeper, the housing market is much healthier than during the previous run-up. In fact, Realtor.com has created a “bubble index” to show how different conditions are from 10 years ago, using metrics like the prevalence of house-flipping, price-to-income ratios and the share of buyers using mortgage financing. Even in high-growth markets like San Francisco, we aren’t seeing behavior that mirrors the frenzy of the mid-aughts.
Housing starts mirror that change in behavior, with recent “highs” north of 1.2 million still roughly half the bubble-era peak of nearly 2.3 million monthly starts. If this was a bubble, we would see a supply glut instead of a lack of inventory actually acting as a headwind to sales.
Another important data point: Foreclosures are at the lowest level since at least 2000, so it’s not like people are burying themselves in big debts they can’t pay just to buy a home.
MarketWatch really seems to be pushing the Kool-aid lately.
I like a good bullish argument, but some of these are pretty weak. As you noted, MarketWatch seems to be pandering to people who want to hear good news about their investments.
It’s about time!
I grew up in an area where for years wealthy buyers (Wall Street execs, hedge fund managers, etc.) would tear down old houses and replace them with huge McMansions. It never appealed to me.
I recently down-sized into a small 2-bedroom SFR bungalow in town near the beach. I’m a single professional man with no family. Why in the world would I need anything over, say, 1,000-square feet?
I’m saving my money and waiting for the next downturn to buy another property. I like Aliso Viejo and Laguna Niguel.
As an aside, I have to say there’s nothing more pathetic than a single man or woman in a large, empty house.
With fewer people getting married and having kids, and more people choosing to live alone, small homes are the future, IMO.
I know a guy who lives in Newport Beach in a condo near Hoag Hospital. The condo is worth about what he makes in a year. He could afford to buy a much, much larger and more opulent place, but what would he need that for? He doesn’t have a big ego, so he doesn’t need to impress anyone. Some of his friends think he’s crazy, but I have enormous respect for anyone who can live that far below their means and be comfortable with it.
It depends on your goals to some extent. Buying a smaller place below your means will help you pay it off faster, but on the other hand a larger place will probably net you more appreciation dollars in the long run if your goal is to maximize overall wealth. Buying the smallest place acceptable ultimately leads to more peace of mind. You aren’t very worried about making the house payment and paying the mortgage off extremely early is an achievable goal.
When we purchased our house in 2010 our DTI was below 20%. This was partially out of necessity because we still had the mortgage on our prior condo, so the combined DTI needed to be low enough to cover two mortgages. Now the condo is back above water and salable, so it’s going away eventually, while the DTI on our primary is down to 11% with 18 years left on the schedule, although I think it’s likely that we pay it off in the next 10 years.
If you sell that condo, or if it becomes cashflow positive, that would free up some monthly cash to pay the loan down quicker. With your discipline, I imagine you will pay it off in ten years.
I just saw this now:
‘McMansions prove to be poor investment’
http://www.housingwire.com/articles/37858-mcmansions-prove-to-be-poor-investment
No sh*t, Sherlock!
You mention Gen X’ers are trapped in their houses, but so are Boomers. With no X’ers trading up, they cannot trade down and realize some of that wealth they have stolen from the other generations. At some point they (or their heirs) will want to escape their McMansions to grab the cash. Maybe the bigger houses will remain less desirable due to their comparative age, but at some point the Boomers will have to voluntarily or involuntarily let go.
http://www.cnbc.com/2016/08/23/the-other-wealth-gap-dividing-americas-earners.html
I find this astonishing. Typically, you would think it would be the other way around. People are supposed to acquire assets while they are young, and then spend those assets to live while they are old. For this to be exactly backward is a troubling sign.
Welcome to 35 year bond bubble of continually lower interest rates.
What happens when a much lower income and smaller recent generation follows in the wake of a larger and more affluent one?
The Government/Federal Reserve is desperate to cause inflation to lower the real debt load without affecting nominal asset prices of boomers. This technique appears to be failing.
I initially thought median “income” was 211,000… rather it was median “wealth”. I assume by “wealth” they are taking about their total assets? If the total asset is only 211,000 for the median American over the age of 65 that is sad. That money will not go long in retirement.
Perhaps they haven’t learned to correct all the mistakes the previous generation made.
Millennials are tapping home equity for vacations and emergency cash
Millennials are often described as prioritizing leisure and entertainment, but many are going into debt to fund them.
Most financial planners caution homeowners against using home-equity loans to fund short-term expenses, including vacations. Yet that is the most popular use of the money for the more than half of U.S. homeowners between the ages of 30 and 34 who have owned a home for three years or more and have taken out a home-equity loan, according to results of a Discover Home Equity Loans survey, released on Wednesday.
“It mystifies me that they’re taking out additional debt,” said Jackson Mueller, deputy director of the FinTech Program for the Center for Financial Markets at the Milken Institute, a nonpartisan think tank that aims to increase global prosperity. “But it doesn’t really surprise me that they’re using alternative financing to fund certain things.”
[Is paying for a vacation over 30 years ever a good idea?]
Many millennials are shunning credit cards, looking for less expensive ways to borrow, he said.
Borrowing against a home can be a less expensive way to attain funds than credit cards. The average interest rate on a home-equity loan was 4.88% for the week ending Aug. 17, according to Bankrate.com; the average rate on a home-equity line of credit was 4.75%. The average credit-card rate was 16.1%. Interest on home-equity loans is also tax deductible, said TJ Freeborn, spokeswoman for Discover Home Equity Loans.
The survey findings show that for many borrowers, “the home not only is the place they live and create memories, but also a financial asset,” Freeborn said. The results of the survey showed that 30 to 34 year-olds were also more likely than other age groups to view their home as an investment property.
But borrowing against your home comes with risks. “It’s because people took money out of their homes that they went underwater,” said Deidre Campbell, global chair of the financial services sector for Edelman, a communications marketing firm that has done research on millennials and money. When housing prices fell during the last housing crash, some who took money out of their homes ended up owing more than the homes were worth — leading to a rise in foreclosures and short sales.
[No kidding.]
The survey findings show that for many borrowers, “the home not only is the place they live and create memories, but also a financial asset”
It’s amazing how irresponsible behavior is framed as financial savvy these days.
“Very low mortgage rates would make houses more affordable if we hadn’t reflated the old housing bubble.”
Is the argument here, “House prices would be lower, if we’d all just stop trying to buy houses competing against each other thereby raising prices.”?
No. I was just making the point that if house prices were lower, they would be more affordable. It was only be restricting supply and forcing buyers to compete that prices moved up quicker than they otherwise would have.