Housing In America - Part II

|
Includes: BBRE, CLAW, DRA, DRN, DRV, FREL, FRI, FTY, HOML, IARAX, ICF, IFNA, ITB, IYR, JRS, KBWY, LRET, NAIL, NRO, PKB, PPTY, PSR, REK, RFI, RIF, RIT, RNP, RORE, RQI, RWR, SCHH, SRS, URE, USRT, VNQ, WREI, XHB, XLRE
by: Bruce Wilds

When it comes to real estate, low interest rates at some point becomes a double-edge sword that affects both its value by making it easier to purchase thus driving up prices, and at the same time allowing more building to take place and increasing the supply. Often we reach or exceed demand, this eventually has a dampening effect on rents and people stop buying it as an "investment". Rents from real estate and the prices it brings when sold must appreciate more than the natural depreciation from the wear and tear from age or the main driver for owning it as an investment quickly vanishes. Oversupply is the bane of real estate and crushes the value of this hard and expensive to maintain commodity. History has generally shown homes that are paid for and unleveraged to be a better than average place to store wealth when purchased for a good price, as to whether now is a good time to buy that is difficult to say.

Housing Prices Should Not Become A Game

How does the reality of a half-empty apartment complex and a slew of empty houses gel with what we hear about soaring rents, the demand for more housing, and more affordable housing? Those declaring housing has fully recovered must admit housing prices vary greatly across the nation and this is a problem that can be difficult to get your head around. Only politicians in Washington would be silly enough to think that landlords who have to compete against subsidized housing would be eager to remain in the game or that someone working for a living enjoys paying more for an older apartment than someone on the dole who moves into a brand new unit for a fraction of the cost. By not rewarding those who do the right thing, our current policies have a corrosive effect on both housing and society.

America has built a lot of housing units over the years, now we must face the fact that they need to be maintained. Instead of focusing and creating policies to rebuild our cities by encouraging homeowners to invest more in upgrading windows, adding insulation and improving the existing housing stock, Washington has doled out low-interest money to Wall Street and home builders in an effort to kick-start the economy by building new housing to generate the illusion of growth and rising prices. Currently, we are in uncharted waters and where this market is headed is anyone's guess, but one thing is certain it is not straight up. Speculating on housing is dangerous and should not be encouraged through bad policy. When people leave older neighborhoods and move to a new house in the suburbs enticed by current artificially low interest rates, they in effect hollow out our cities.

Get your financing in order and get the project started before the market dries up has been how developers everywhere have operated for decades. I have owned an apartment complex in the Midwest for many years and many houses in my area are empty or under leased. In 2005 and 2006 prior to the housing collapse, many people were looking at second homes, today not only have they shed the extra home, many have doubled up with family or friends, reducing the need for housing. This has left me busy trying to sort out and make sense of the current economy. This is no easy task, it seems we are pushing on a string and calling it demand when someone who can barely pay the rent is encouraged by the government to buy a house they can neither afford or maintain. Currently, we have a shortage of "qualified" buyers and renters. Adding to our housing problems is low down payments and other policies often put people in older houses that they have no interest or knowledge in how to maintain. This can cause even more people to flee the area and brings about further decay. When offered the choice, many people find moving easier than repairing and maintaining their homes or neighborhoods and low interest rates power this trend forward. Policies should be geared toward creating jobs that maintain these units instead of making them prematurely obsolete. This is a flashing red light warning of danger ahead. By choosing the easy answers, America has not faced its housing problems with long-term solutions and encouraging this bodes poorly for the future.

A close look of permits and starts shows many of the future housing starts are multi-family units, these are being built with cheap "Wall Street" money for the markets of tomorrow with little regard for the realities of today. A new report by Yardi Systems Inc. indicates apartment construction is far outpacing demand in many markets, this overbuilding of multi-family will have ramifications on the cost of living and the resale value of homes going forward. It is a fact that single-family housing starts have languished as the percentage of multi-unit buildings under construction has risen. Some of these may be slated as condos but another name for an unsold condo that is being leased is "apartment." Let us call a spade a spade, much of what we see today is not a housing market, it is a place where too much money has gone to hide under the impression and hope it will pay off when inflation awakes and comes out roaring from its quiet slumber.

Footnote: The links below are to articles that delve deeper into housing and what we are building when it comes to housing. The first link is to the first part of series:

http://brucewilds.blogspot.com/2018/09/the-housing-picture-is-not-brightening.html
http://brucewilds.blogspot.com/2017/10/city-boast-of-constructing-another.html
http://brucewilds.blogspot.com/2018/02/housing-policy-feeds-and-hides-growing.html
http://brucewilds.blogspot.com/2015/11/cookie-cutter-urban-sprawl.html