Jul282015
Why are condo prices so volatile?
Condo prices remain low until better alternatives are removed from the market and people are forced to compete for lower quality digs.
Condo prices are notoriously volatile, far more volatile than house prices. But why is that? Is it because nobody wants to live in a condo? There’s something special about a detached house on a clearly defined lot that a person can point to and say, “that’s mine.” But why should that matter to the volatility of condo prices?
When you look at the cities where prices are most volatile, and when you look at the type of housing that’s most volatile, one common element stands out: the less desirable a housing alternative is, the more volatile its price, particularly in Coastal California where growth restrictions limit the inventory.
Undesirable communities, neighborhoods, or housing types only gain buying interest when better alternatives are not available. In areas where supply is perpetually in short supply, the value of undesirable properties gets bid up to prices nobody would otherwise pay if they had a better alternative.
During housing busts when supply is abundant, people shun the undesirable supply, and prices get pounded back to the stone ages. Any time there is a change in supply, eventually it works its way down to condo prices that either rise or fall significantly depending on whether the supply is short or abundant. It’s the substitution effect combined with changes in supply that create enormous volatility in condos.
Condos will be the last class of housing to recover because once all the single-family homes have been absorbed by the market, people will be forced to substitute to different housing options, and when they do, the prices at Sceneca Residence Condo will soar.
Condos Left Behind in Housing Rebound
By Kris Hudson, Updated July 21, 2015
…With the housing market in its fourth year of recovery, construction of single-family homes and multifamily rentals is rebounding.Not so for condo construction, which has been slammed by tough rules on condo mortgages enacted after the housing bust as well as stronger demand among young people for rentals and tight lending conditions for builders.
Condos haven’t come back because better alternatives are still relatively affordable in many markets. The condo market here rebounded sharply already due to the lack of supply prevalent in Coastal California. This is illustrated by the Irvine community of Orangetree, which is nearly all condos. The report from December 2013 shows a 48% y-o-y increase in price.
In the first quarter, condo construction accounted for just 5.5% of all construction of multifamily housing in the U.S. That was the lowest ratio since the Commerce Department started tracking the figures in 1974, and far below the 24% average.
The condo market will remain moribund in Florida and other states where prices are still well below the peak.
That poses a dilemma for developers, who often reap better returns from building condos than from rental apartments. That is because condo prices are far more responsive to market moves than rents are, so in a strong market a developer can sell out of condos at rising prices faster than it would take to lease up an entire apartment building and sell it. …
Responsiveness to the market is wonderful when prices are going up, but when prices are crashing, not so much.
Condos also play a critical role in the broader housing market. While some are bought by investors and second-home buyers, many serve as entry-level housing for young buyers, who use them to start building equity they can use toward later home purchases. The National Association of Home Builders estimates that first-time home buyers will account for just 18% of new-home purchases this year, well below the 27% rate logged in the more normal market of 2001 to 2003. …
(See: First-time homebuyer participation hits three-decade low)
Since the downturn, condo prices have lagged those of single-family homes in bouncing back. The median condo resale price in May, $216,400, remains $15,400 less than its pre-downturn peak set in June 2005, without adjusting for inflation. Meanwhile, the median resale price for single-family homes in May, $230,300, is only $600 less than its pre-downturn peak set in July 2006.
Condos are the first to crash and the last to recover due to their lack of desirability.
the Federal Housing Administration, which backs mortgages made to low-wealth buyers, tightened its lending standards in a series of moves from 2008 to 2012. Under the new rules, in order for the FHA to insure mortgages in a given condo complex, at least half of the units must be owner-occupied and no more than half can be FHA-insured, among other requirements. For condo projects under development, at least 30% of units must be under contract for sale before the FHA will start backing mortgages there. Mortgage giants Fannie Mae and Freddie Mac tightened their standards as well.Some observers worry the stricter rules are constraining buying. “All of these things were undertaken during the throes of the crisis,” said Steve O’Connor, senior vice president of public policy and industry relations for the Mortgage Bankers Association. “At that time, we supported many of these changes. But the environment has changed.”
The answer to every problem in housing is to relax standards, right?
Some developers now see hints of a condo revival on the horizon. Rising apartment rents provide renters more reason to buy instead of renting. Job growth is improving for young would-be buyers. And real-estate lobbyists say they are making inroads in Washington to build support for easing the FHA restrictions on condo mortgages.For condo construction to revive, “the millennials need to start buying,” Mr. Lev said.
Are Millennial first-time homebuyers finally active? Unfortunately, not yet.
First-time homebuyers are absent due to high debt levels with student loans and credit cards, and move-up markets are hampered by the fact that more than a quarter of borrowers are underwater. The housing market will not recover until first-time homebuyers come back in large numbers at price points high enough to lift existing loanowners above water.
The federal reserve and the banks are doing their part. The federal reserve has lowered interest rates to record low levels to allow buyers to bid up prices, and the banks stopped foreclosures to restrict MLS inventory to force the few active buyers to pay more thus raising neighborhood comps. Now all they need is an improving economy and a flood of first-time homebuyers to get the housing market moving again.
When first-time homebuyers do start buying properties at Century21-stmaarten, expect the condo market to really take off.
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Trash neighbors + their stupid kids + garbage HOAs = no condo.
This condo in other upscale areas outside of OC would be priced at 200k.Is the OC lifestyle worth 500k ? Even with the interest write off,that is still a big premium.Does a couple that make 170k a year expect more for their 718k ?
This is exactly the problem created by a chronic lack of supply. Someone spending $718K gets a mansion anywhere else in the country except here. High wages bid up the value of all properties, but prices also get an extra boost by the downward substitution effect that forces people making $170K to by old condos as a starter home.
I haven’t been pricing ~1,500 sq ft Irvine homes, but this one seems a bit over-priced. It’s across the street from a decommissioned elementary school that was redeveloped into near-3,000 sq ft homes on ~3,500 sq ft lots (Willowbend). Those homes sold a couple years ago for low-$1Ms.
$475/SF for a 40 year old condo does seem pricy.
Homeownership rate drops to 48-year low
The homeownership rate in the United States in the second quarter declined to 63.4%, the lowest it has been since 1967, according to data from the Department of Commerce’s Census Bureau.
For the second quarter 2015, the homeownership rates were highest in the Midwest (68.4%) and lowest in the West (58.5%).
Cash Sales Share at Lowest Point Since 2008
The share of cash sales in the housing market have dropped to their lowest point since September 2008. According to the CoreLogic July 2015 MarketPulse report, cash sales made up 33.7 percent of total home sales in April 2015, a decrease from 37.4 percent in April 2014.
Molly Boesel, senior economist at CoreLogic found that cash sales have been on a downward fall every month since January 2013, making April 2015 the 28th consecutive month of declines. Month-over-month, the cash sales share fell 0.9 percentage points. Due to market seasonality, CoreLogic reports that cash sales share comparisons should be made each year.
“The cash sales share peak occurred in January 2011 when cash transactions made up 46.5 percent of total home sales nationally,” Boesel said. “Prior to the housing crisis, the cash sales share of total home sales averaged approximately 25 percent. If the cash sales share continues to fall at the same rate it did in April 2015, the share should hit 25 percent by mid-2017.”
Proof of Posers in Southern California
5 most debt-burdened cities in America
Americans are falling in love with their credit cards once again — and residents of some cities are going to have a particularly tough time dealing with that issue.
While Americans say they’ve learned many financial lessons from the last recession, their current credit card statements say otherwise: In 2014, Americans added more than $57 billion in new credit card debt to their tabs, according to an analysis by financial site CardHub — and as of the first quarter of this year, we’ve had six consecutive quarters of year-over-year increases in credit card debt. What’s more, based on current spending patterns, CardHub projects that that number will rise roughly 5% this year, hitting a whopping $60 billion.
Three of top ten payment burdens are in Southern California.
RIVERSIDE-SAN BERNARDINO = $312
LOS ANGELES = $323
SAN DIEGO = $342
This is terrible. We need more rules, making the market less free, to prevent people from indebting themselves so much. Yes, the nanny state should interfere in the free market to protect citizens from doing very dumb things.
Dumb people do dumb things!
The definition of a free market is not caveat emptor.
FDIC, GSE, FED funds rate, Monetarism. Are you really arguing for further centralization?
I’m not sure what you mean by “centralization.” My argument above, supports greater regulation at the federal and/or state level on credit, similar to Dodd-Frank’s regulation of mortgage credit.
the banking sector is completely rotten from excessive regulation, of which I provided 4 examples. Dodd Frank or similar type ‘good rules’, will prove futile against the problems created by ZIRP and other forms of regulation / central planning / centralization.
It’s akin to waving a palm frond to stop a hurricane.
Stupid can borrow from dumb and both can fail. Consequence is healthy, but due to regulation, ie taxpayer money involved, more regulation must be piled on top. It’s unnecessary.
Well, that’s one way to look at it…
Do we know if that is revolving debt or is paid-in-full monthly?
Those monthly payments don’t seem excessive. An economy car will set you back more than $300/mo. Debt naturally rises during a recovery. A 5% rise in balances at low interest rates could be a good sign. Not enough information to really know whether this is good news or bad news.
rising debt signals a boom, not a bust (recovery).
Auction.com: Existing-home sales continue surge in July
June’s existing-home sales data, released last week by the National Association of Realtors, showed that existing-home sales increased 3.2% to a seasonally adjusted annual rate of 5.49 million in June from a downwardly revised 5.32 million in May – marking the highest pace since February 2007.
Auction.com Executive Vice President Rick Sharga said that the good times will continue when we get a look at July’s existing-home sale report from NAR.
“May and June existing home sales have both been very encouraging for anyone looking for proof that the housing market is in recovery, and our July Nowcast indicates that this positive momentum will continue into July,” Sharga said.
But the good times may not continue into perpetuity, Sharga said.
“One potential area of concern is the steeper-than expected increase in home prices,” Sharga said.
“While this is driven by limited inventory, and a declining number of distressed home sales, affordability may start to become an issue if home price increases continue to outpace wage growth,” Sharga added. “And if the Fed does move to raise interest rates as expected this fall, we could see home sales volume begin to weaken.”
The hubris of some people in power is truly astonishing.
NY state senator convicted in foreclosure embezzlement scheme
Pay-offs, fraud and bribery marked Democrat senator’s tenure
New York State Senator John Sampson, D-Brooklyn, was convicted by a federal jury for one count of obstruction of justice and two counts of making false statements to federal agents related to his practice of embezzling foreclosure funds. (Technically, former Senator, as of today.)
The guilty verdicts follow evidence at trial and publicly filed documents establishing that, among other things, Sampson as an attorney practicing in Brooklyn embezzled funds he held in escrow from the sale of real estate properties.
Sampson vacated his senate seat on Friday after the conviction.
Concerned that his theft might be discovered by law enforcement, the Democrat lawmaker in 2006 asked an associate for $188,500 to replenish the stolen funds.
In exchange, Sampson used his position as a Senator to assist the associate’s real estate business interests.
In the summer of 2011, the associate was arrested and charged with bank and wire fraud.
Sampson feared that the associate might cooperate with the government and disclose Sampson’s embezzlement, so Sampson contacted a close personal friend, who was also a supervisory paralegal in this office, and asked him to find out if Sampson was under investigation and to obtain confidential information about the associate’s case, including the identities of cooperating witnesses. The paralegal agreed and reported his findings to Sampson.
Sampson told his associate about his source and added that if they could determine the identities of cooperating witnesses in the associate’s case, they could “take them out.” Sampson also suggested that they hire a private investigator to do the “dirty work.”
Sampson then directed his associate to withhold from the government evidence regarding the $188,500 payment. At a February 2012 meeting, the associate told Sampson that the government had subpoenaed the associate’s business records, including a check register page documenting the payment.
The associate showed the page to Sampson, who examined it and stated, “That’s a problem . . . I mean for me.” Sampson kept the page and instructed his associate not to disclose it to the government.
On July 27, 2012, FBI Special Agents interviewed Sampson, and he denied being familiar with the check register page. Sampson also falsely denied directing his Senate staffers to take certain actions relating to regulatory issues for a liquor store in which Sampson held an ownership interest. At the conclusion of the interview, the agents advised Sampson that he had lied to federal agents, which constituted a federal crime. When asked whether he wished to revise his statement, Sampson stated, “Not everything I told you was false.”
Since 1997, Sampson has served in the New York State Senate representing the 19th Senate District in southeastern Brooklyn. From June 2009 to December 2012, Sampson was the leader of the Democratic Conference of the Senate, and from January 2011 to December 2012, he was also the Senate Minority Leader.
Sampson has also served as the chairman of the Senate Ethics Committee.
I’m assuming his plan was to borrow the money, and pay it back? That’s the only way this could possibly end without him going to prison.
There’s always the possibility of simply getting away with it. I think the fools that do stuff like this believe it will never be discovered.
Housing Bust Legacy? Too Much Fear of Debt
19 JUL 27, 2015 8:00 AM EDT
By Noah Smith
After the great American housing bubble blew up in 2008, taking the financial system and the economy with it, there was an often-bitter debate about the underlying causes. Why had housing prices been driven to unsustainable heights in the first place? Were Americans borrowing to overconsume, or were they just trying to make a quick buck? The answer matters because it will guide future policy.
One hypothesis — let’s call it the debt hypothesis — was that homeowners chose to take on too much housing debt, and that this debt allowed prices to rise above reasonable levels. A duo of well-known economists, Princeton University’s Atif Mian and the University of Chicago’s Amir Sufi, have advanced this idea in a magisterial recent book, “House of Debt.” The debt hypothesis is appealing both to many conservatives (who think government policy encouraged overborrowing), and to many liberals (who think that the unscrupulous finance industry tricked borrowers into piling on too much debt).
Why would Americans take out so much debt? Perhaps they were trying to replace their declining incomes. Median household income in the U.S. peaked in 1999. People probably have consumption benchmarks — no one wants to be less well-off than their parents. Also, income inequality in the U.S. climbed substantially during the late 20th century, and people may have a desire to spend more when they see their richer neighbors spending more. This explanation has been advanced by some heavy hitters, such as former University of Chicago economist Raghuram Rajan, now governor of India’s central bank.
The alternative hypothesis is that the housing bubble was simply a classic speculative asset bubble, in which people knowingly overpaid for houses because they expected other people to come along and pay even higher prices. This explanation — let’s call it the bubble hypothesis – says that the housing bubble wasn’t fundamentally different from the late-1990s tech bubble, or any other bubble throughout history. This suggests that the inherent instability of financial markets, not the borrowing decisions of homeowners, was to blame.
This debate seems arcane, but it matters a lot for public policy. If household debt is a destabilizing force in the economy, maybe the government should act to limit the amount that people can borrow. But if the housing bubble was just a normal asset bubble, then such distortionary measures are likely to hurt more than they help.
So which is right? Economists have come up with evidence both for and against the debt hypothesis. In 2011, a group of economists from the Federal Reserve Bank of New York found that much of the increase in mortgage origination in the bubble years went to people who owned multiple properties, many of them house flippers who were speculating on price increases, rather than people buying homes to live in or hold as rental properties. That solidly supports the idea that speculation, not debt, was the culprit.
But Mian and Sufi offer evidence in the other direction. They show that in areas where income grew less during the mid-2000s, mortgage credit went up more. In other words, it looks like people were using debt to make up for falling incomes, giving support to the debt hypothesis. Lower income meant more debt, and a bigger housing bubble.
In January, however, opponents of the debt hypothesis released a rebuttal to Mian and Sufi. Economists Manuel Adelino, Antoinette Schoar and Felipe Severino show that when you look at individuals rather than zip codes, the pattern reverses — people whose incomes grew more also borrowed more during the boom. Even more crucially, it was middle- and high-income borrowers who were more likely to default after the bubble burst. So if we restrict our attention to only the loans that went bad — the loans that, in a perfect world, shouldn’t have been made in the first place — we see that debt wasn’t a substitute for income. Instead, this research suggests that the housing bubble was a game played by the well-off, who used their increased incomes to speculate on rising price. In other words, the bubble hypothesis.
The fight isn’t over — Mian and Sufi shot back with a response questioning their rivals’ methodology. Expect a return of fire. But to me, the evidence seems conclusive that there was a lot more at work in the housing bubble than a surplus of lending to lower-income Americans.
So what is the upshot for policy? We should think twice about having the government restrict the flow of lending. Although there are definitely cases in which lending is done in a fraudulent or predatory manner, which we should try to prevent, there is great danger in the idea that debt itself is a toxin that wreaks havoc on the economy. The long asset booms of the ’80s, ’90s, and 2000s made us complacent about debt, but the bursting of the housing bubble has made us too suspicious of it. We need to find a happy medium.
The point is, a complicated set of factors caused the housing bubble – not your simple partisan one-liner causation explanation, but the truth nonetheless.
artificially low interest rates was the dealer. All other factors were subsidiary.
Yes, there’s one, of many, partisan one-liners explaining the cause.
From this all else flows.
I don’t see people having too much fear of debt. Anyone with a rational fear of debt would avoid all forms of consumer debt, and would only take on asset debt if the asset provides cashflow to make the debt service payments. Any other debt is potentially harmful, and people should be afraid of it.
I agree that you dont see much fear regarding debt because as of now those taking on debt have been rewarded while the prudent saver is being punished. At some point the excesses in the system must be purged. At that point in time there will be plenty of fear.
Ten years ago I would have totally agreed with your assessment, but after watching all the bailouts over the last decade, I really wonder if the excesses will ever be purged, or if the excesses will simply be papered over. There was a lot of fear in 2008 and 2009, but the bailouts helped remove that fear, and moral hazard dictates people will be less fearful in the future when making foolish financial decisions — or worse yet, the definition of what’s foolish will change because of the implied protection of future bailouts.
[…] I noted in yesterday’s post Why are condo prices so volatile?, undesirable communities, neighborhoods, or housing types only gain buying interest when better […]