Not So Bright

One headline fits all. – By Mickey Kaus – Slate Magazine

I thought a “housing crisis” was when people couldn’t find housing, not when it got cheaper. (NBC’s expert: “It’s very, very difficult to find any silver lining.” No it’s not.) …

Mickey is usually pretty interesting, but he should stick to something he knows a little about. If he thinks housing has become more “affordable,” let him go out and try to buy something in the new lending climate brought on by the housing crisis-caused liquidity crunch.

UPDATE: Mickey responds: One headline fits all. – By Mickey Kaus – Slate Magazine

**–Update: “Affordable housing,” and “housing crisis,” as traditionally used by critics on the left, includes rental housing. If the credit crunch prevents people from buying houses, and those houses are sitting around unsold, they’ll be rented, no?

Well, not exactly.

The San Francisco Real Estate Blog

Even as Bay Area home values weaken, a new report shows rents are soaring – indicative of the curious mix of a sturdy economy and a faltering housing market.

Average monthly rents in the region’s financial and high-tech hubs have jumped more than 10 percent in the last year, and occupancy rates hover around 95 percent, according to a quarterly rental survey by RealFacts.

While robust hiring is boosting apartment prices, the purchase side of the market languishes amid the subprime crisis and a supply of homes for sale that far outstrips demand.

“We have very strong employment, and typically it increases demands for rentals and raises home prices,” said Michael Carney, director of the Real Estate Research Council of Northern California. “But because we’ve had these problems with the mortgage market, the shift is toward rentals.”

It helps to understand real estate markets. Sure, some will be rented. Eventually. But the crisis has drastically increased the number of people looking for rentals. So the market reacts as it always does, and rentals become more expensive. The big difference between renters and purchasers, of course, is credit. And the credit crunch created by the housing collapse has created a whole bunch of new renters whose credit will no longer permit them to purchase.

FURTHER UPDATE: Of course, a recession and rising unemployment could relieve pressure on the rental market by removing that “robust hiring” from the equation, but I don’t think the net result would be more affordable housing. It would be a race toward the bottom, with wages very likely dropping faster than rents. Unemployment checks aren’t usually considered the bulwark of a strong economy.

Posted in Housing permalink

About Bill Quick

I am a small-l libertarian. My primary concern is to increase individual liberty as much as possible in the face of statist efforts to restrict it from both the right and the left. If I had to sum up my beliefs as concisely as possible, I would say, "Stay out of my wallet and my bedroom," "your liberty stops at my nose," and "don't tread on me." I will believe that things are taking a turn for the better in America when married gays are able to, and do, maintain large arsenals of automatic weapons, and tax collectors are, and do, not.


Not So Bright — 16 Comments

  1. That’s hitting at the core problem. In effect, even though the Fed is easing, interest rates have gone up. For some people, they are effectively infinity, as no one will lend to them.

    A few years ago, when the Fed was telegraphing 1/4 pt increases at each meeting, effective rates, the rates could actualy borrow at, were falling.

    Not enough attention is paid in the media to credit spreads.

  2. Bill a conundrum for you. In my area I am seeing a major build up of condominiums not low scale either, high end expensive units. I would think with the current market the developers would try to put these on hold. True they have probably been in the planning stage for 2 years but they are still breaking ground to build them now. It doesn’t seem to make sense.

  3. It doesn’t seem to make sense.

    Credit, credit, credit. Developers use lines of credit to build these things. If they put the project on hold, they risk the possibility of having their lines yanked. In fact, putting a project on hold is ipso facto evidence to a lender that his money is at risk.

    Better to complete the projects and then, if necessary, rent them to cover as much of the nut as possible, then sell them later into an improving market. The lenders understand this as well – letting a project go forward to completion and then if necessary renting is a better risk than eating whatever credit has already been extended. If very little or none has been extended, of course, the project will be shut down, or never started. By the time you actually see condos being built, everybody is in too deep to back out without a lot of pain.

    We’re starting to see some large scale condo renting going on here in SF now, in fact. I personally think that is going to be the fate of the huge development going in across the street from me in the old Hunters Point Naval Shipyard.

  4. …I would think with the current market the developers would try to put these on hold. True they have probably been in the planning stage for 2 years but they are still breaking ground to build them now. It doesn’t seem to make sense.

    It makes a certain sort of sense when you understand a bit more about the way developers/builders operate, and about how they are set up financially.

    In general, low-end developers/builders may be able to pull back on more construction in a falling housing market. However, the more high-end ones – especially the larger-volume outfits – may not have the ability to do so, since they have to keep going in order to keep up their cash-flow. They’re held prisoner, in many cases, to a set of economic conditions built into the financing of their ventures. In order to keep the flow going – and thus avoid filing for bankruptcy, or simply falling apart in place – they have to continue to meet certain levels of productivity. They simply must keep going. Therefore, they gamble on being able to sell enough units to cover base expenses, and to make the minimum payments required to keep their financing alive – and they try to get their financing source(s) to agree to “carry” them until times are better.

    In addition: At the top end, housing sales are almost never entirely flat – there is always some sales activity going – and top-end buyers (and the banks, brokers, etc. that will back them) tend to favor new construction over existing housing (for a variety of reasons). If the developer/builder doesn’t have new, fresh units for sale, his competition will get what sales are available – and he goes in the dumper.

    It seems highly likely that the new development you’re seeing fits this pattern somewhere…

  5. You’re extrapolating the economics of the People’s Republic of San Francisco to the rest of the nation?

    Sigh. Did you want to argue with my explanation (I note you didn’t) or did you just want to beat off while muttering “People’s Republic of San Francisco,” as if that meant anything?

  6. No, I always call it that.

    But Kaus notes that other areas of the country do not share the anomaly of falling prices and rising rents. The Bay Area (satisfied?) is not a representative microcosm of the rest of the nation, and a single data point is not adequate for valid extrapolation.

  7. Let me put it this way: You may be right. I didn’t address your argument, because my point was not to address your argument — it was to challenge the supposed corroboration of your thesis by using San Francisco as your example. But various factors that affect San Francisco’s economy — the age, career, and education profiles of the population, the number of minors per household, the state of the tech and financial services sectors, and the existence of rent control will also affect the price and availability of real estate and rental housing in ways that may not be at all typical of the rest of the nation.

  8. Mickey and I are pursuing the discussion in private, where he has “seen my Bay Area and raised me South Florida.” There his cite describes low rents thanks to the housing crisis, which would seem to contradict my analysis, except it doesn’t. Later on in the same cite is this:

    Axiometrics is predicting this fortunate situation for renters will last perhaps another year or so.

    The reasons start with job growth, which is slow now but is expected to ramp up in 2009. Meanwhile, the supply of new apartments on the market is shrinking dramatically. The number of building permits for multifamily units has fallen in Fort Lauderdale by 23 percent through August, compared with the year before. In Palm Beach County, that same figure is off by almost 68 percent, and in Miami-Dade it’s off by 43 percent.

    The result is short supply and greater demand down the road. Axiometrics predicts that will lead to a 7.1 percent increase in rents in Fort Lauderdale in 2009, 3.6 percent in West Palm Beach and 3.5 percent in Miami-Dade. That would be followed the next year by more increases.

    In other words, they are predicting for South Florida precisely the same conditions that currently prevail in the Bay Area, and for the same reasons.

    UPDATE: I note that Mickey has now published his South
    Florida link, though, oddly, he doesn’t point to the part of his own cite that I do. He adds:

    I’m saying that during the runup in housing prices the air was filled with complaints from the left that the rich were bidding up the value of housing, which was becoming unaffordable for ordinary Americans whose wages were rising only slowly, etc.. Now that this process is unwinding, much of this affordability problem is presumably being corrected. I’m amazed Quick resists this point. He must own. …

    I don’t particularly care about complaints from the left, who are, as a breed, notably clueless about the economy. The prices were being driven by easy credit, not by “the rich,” the left’s usual bugaboo. And it was the easy credit that made those houses “affordable,” not their pricing. A guy making fifty grand a year can no more afford a 400k house than he can a 700k house, under normal lending standards – 20% down, total home cost no more than a third of take-home pay. So the falling housing prices don’t make that big a difference to him. And if he can’t buy, he must rent. If you have more renters looking for housing than are rentals available, rents go up. I can’t imagine why Mickey resists this point. He’s down in LA, so maybe he’s hoping he’ll finally be able to afford something better than what he rents today….

    Yes, by the way, I do own. I own a 1300 sq foot condo townhome in the Hunters Point neighborhood of San Francisco, only a few blocks from one of the worst stretches of public housing in the nation. I bought it in 2003 with a 30 year fixed at 5.25 percent, and even today it is valued about 40% less than a similar home in a better neighborhood.

    It was all I could afford then, but I like it, and I’m not worried about losing it. See, I could afford it even without the wonky lending standards that made a lot of unaffordable housing “affordable.” Until the bubble burst and made it unaffordable again.

  9. The number of vacant homes went up 34% to 2.1 MILLION at the end of 2006. Simple supply and demand dictate that both rents and housing prices are falling.

    Anyone who still thinks housing is not in absolute free fall is either in denial or can’t comprehend basic economic principles. This reminds me of summer 2000 when the tech bubble was just about to fully burst and people were still saying things aren’t so bad.

    All bubbles are followed by busts. It was the case 400 years ago with tulips, it was the case with stocks in the 1920s, with Japanese real estate in the 80s, stocks in the 1990s and it will be the case with the housing bubble of the 2000s.

  10. Simple supply and demand dictate that both rents and housing prices are falling.

    Except where they aren’t. You must be a liberal, so I expect you to ignore actual evidence. Can you cite me anything that indicated average rents are in “free fall?” Here’s Mickey’s example of great rental bargains:

    Research from Axiometrics, a Dallas firm that studies major apartment markets around the country, shows that rents in Fort Lauderdale in the third quarter of this year are down by 2.2 percent compared with last year. In Palm Beach County, the decline is 7.8 percent and in Miami-Dade County rents are off by 0.7 percent.

    Down 2.2 percent. That means a $1000 apartment is now going for $978. 0.7% means that apartment is going for $993. And even the 7.8% drop means that the apartment is going for $922. These changes are not enough to represent some vast new “affordability” as Mickey posits, especially coupled with the fact that a far smaller percentage of renters will be able to buy under new tighter credit rules.

    And even these limp rental “savings” are expected to evaporate, indeed, be overwhelmed by rising rents in the near future:

    The result is short supply and greater demand down the road. Axiometrics predicts that will lead to a 7.1 percent increase in rents in Fort Lauderdale in 2009, 3.6 percent in West Palm Beach and 3.5 percent in Miami-Dade. That would be followed the next year by more increases.

    You ought to learn something about the way housing markets really work before you make a fool of yourself in public accusing others of error that is plainly nothing more than your own ignorance.

  11. Bill, an honest query, not an attempt to be contentious —

    “The City” (see? I’m being nice!) has rent control, as do New York and Los Angeles. This clearly is not a free market situation. (Are rental houses covered, or only apartments?) What effects do you believe this will have on the rental market if real estate prices decline precipitously, and how will the rest of the country differ?

  12. Okay, let me explain a bit about SF Rent control First off, it doesn’t freeze rents permanently. If somebody moves, the landlord is able to raise the rent to market rates. That is mandated by state law. At that point, rental turnover becomes a big factor in how onerous the rent control regime actually is. In SF rental turnover runs about 75% over a ten year period.

    Further, rental housing built after (I think) 1979 is also not covered by rent control. Also, single-family homes, while once covered, are no longer so. There are various other exceptions and inclusions relating to size, time of occupancy, and so forth, but it boils down to this: Almost 70% of SF residents are renters, and most (I’m still looking for a credible number) are covered. A further question is how many of them have moved in within the past year and are therefore paying near market rates. I’m honestly not sure.

    Of course this distorts the rental market. But SF is special for other reasons as well, and not immune to market forces simply because of rent control. San Francisco is essentially an island. It is the second most dense city in the US after New York. Its housing stock is quite old and does not expand rapidly. However, it is a destination city that never lacks for high-income immigrants ready and able to battle for housing, whether rental or purchase.

    I run a real estate blog, SF Real Estate Blog, and I have been saying for some time that while the Bay Area in general would eventually be affected by lower prices, SF had several things affecting its market that would tend to support prices in the single family home market, not least of which was scarcity.

    Now, am I in error to extrapolate the rent situation in SF to other regions? Not really, because the same forces that work to drive up rents here – scarcity and increasing job growth – are also expected to affect markets in as different a region as South Florida – which has experienced a larger boom in housing construction. And while S. Fla. may experience a temporary and minor decrease in rents over the short term, that will be erased 12-18 months down the road and rents will rise, even while the housing collapse continues apace.

    Almost all owners who lose their homes become renters, but nowhere near all foreclosed homes become rentals. Banks and other creditors may lower prices, but the lower prices, particularly in bubble areas, are generally not enough to make these homes “affordable” in any meaningful sense. In California overall, the affordability index is somewhere around 24% (up from 14% in 2005 just before the turn). In San Francisco, the AI is currently about 17%, AFAIK.

    Median housing price in SF is $833,000. This is not affordable. Given fed standards on jumbo loans, lopping off 300k still wouldn’t make them affordable.

    At the bottom, Mickey’s original contention was that the housing crash would create more affordable housing. I replied that this wouldn’t be the case, because even if prices fell, stiffer lending requirements would make these lower prices homes even further out of reach for most buyers.

    He then moved the goalposts to the question of rentals, and I demonstrated at least one instance where the housing crunch had created increased rents. Then I looked carefully at his own cite, and saw that even in S.Fla the crunch was expected to have a similar effect 12-18 months out. Decreasing construction of new units, thanks to – the housing crunch, natch – which would impact the available pool, creating…scarcity. And higher rents.

    The key factor to understand is that until housing prices fall low enough to counter increasing lending requirements, you haven’t actually increased affordability in the real world. And they have to fall quite a bit more than they have yet in order to accomplish that – especially in the bubble areas where the crunch is hitting the hardest. Mickey dragged in rents because he couldn’t really counter that argument – and even when he did, his own cite proved him wrong.

    I’m not going to pursue this much more. I think what I have written is self explanatory. I don’t think huffing and puffing about SF’s rent control ordinance has much relevance to the issues Mickey raised.

    Of course, I live here and I’m a screeching libertarian conservative with a California license to sell real estate, (at least I had one until I let it lapse a few months ago) so what do I know?

  13. Thanks, Bill. That was informative. I guess we’ll find out more in the months and years ahead.

    BTW, I used to live in California (L.A. and San Diego) and I’m a screeching libertarian constitutionalist (for Fred, so far). Sorry to offend you with the “People’s Republic” thing, but I’m really not at all favorably inclined towards the people who are in charge of governing the City and County of San Francisco. And I never call it “Frisco.”

  14. I have a question. About 70% of the people in SF rent, but that’s almost directly reversed from the country as a whole, which is 60-70% home owners (loosely termed). Is it not possible that a housing meltdown in someplace with high home ownership like Dallas or Denver would cause a glut of previously-owned homes to go into the rental market, driving down both home prices and rent prices, while in a place like SF the bigger effect would be increasing the number of renters (even marginally), so it would sustain or increase rents? Some event, different effects, so people in SF are screwed either way but it could, eventually, help people re-enter the home market in other locations?

    I really don’t know, so don’t take this as combative. Eventually, I would like to own a home, so I’m interested. 🙂

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