Imagine just one tiny little blip in the economy and all these luxury developments start to sit idle with no renters or buyers.....yea it's going to happen. It always does. These luxury developments are everywhere....in the last decade there have been millions of units up for rent, most of them priced sky high, and that's only because of the 10 year old bull market that's in place and the job market being plentiful....none of these luxury home developers have felt any slow down at all since the great bull market started running, so to hear there is an over supply shouldn't phase anyone. With wages absolutely stagnant and renters paying a third of their income to rent, any inkling of a slowdown could have this entire market seeing red for years. I know of a few people that pay 2000-3000 a month to live in these amenity filled buildings...it's mostly millennials....most of them haven't lived through a recession or an era of extreme high unemployment....and as prices of these high end rentals keep going higher and wages go absolutely no where eventually it will catch up with most of these builders who think it can keep going and going. One inkling of a recession and there goes that entire luxury market of high end rentals.... Major apartment developer: 'There is an acute crisis headed our way' The luxury market is largely overbuilt, while there is a shortage of affordable rental housing. Lower- and middle-income households are spending proportionally more on their rent, says apartment developer Toby Bozzuto. Nearly half of all renter households pay more than 30 percent of their income for housing. Scan the downtowns of the nation's largest cities, and you are likely to see a staggering array of cranes. Most of them are helping to build luxury apartment buildings. In fact, multifamily construction is now at a 40-year high; the trouble is, developers are putting up the wrong kinds of buildings. The luxury market is largely overbuilt, while there is a shortage of affordable rental housing, and developers are hamstrung by the now record-high cost of construction. Apartment completions in the 150 largest U.S. cities jumped to 395,775 units in 2017, beating 2016 production by a staggering 46 percent and more than doubling the long-term average, according to RealPage, an apartment management software and data company. Luxury, upscale buildings accounted for between 75 and 80 percent of the new supply in the current cycle.
Agreed - what is scary to me is that so much of this sh*t is dependent upon on 3.75% mortgages: Mortgage amount: $450,000 Interest rate: 3.75% Monthly payment: $2,084 What happens if we go back to 2006 rates: Mortgage amount: $450,000 Interest rate: 7.00% <--2006 rates Monthly payment: $2,994 Going to create a lot of underwater bagholders...
Seriously, guys -- you think the market for $1800/month apartments is just going to evaporate right along with the $2000-$2500-$3000/month market? That's hilarious. (Do you remember your Substitute Goods lecture from college? Remember scaling things like roast beef to sirloin hamburger to 'mystery meat' hotdogs? Yeah. It's like that. The world won't end.) "Slutsky! Slutsky! Oh where art thou, Slutsky!?!?" https://en.wikipedia.org/wiki/Substitution_effect
Point taken. I'm more worried about people who have bought these $500,000 homes thanks to rock-bottom interest rates. If we go back to 2006 prime rates, the same mortgage would now cost new buyers 30% more a month than what the original buyers paid for it using current mortgage rates. Couple this with a bad economy, and I don't know who the hell will be there to buy these homes from the sellers at $500,000? Probably will have to drop the asking price down to where the monthly mortgage payments are equal, if not lower. That means a -30% shave on the asking price just to offload it. If that ever happens, banks are going to be taking massive losses once the defaults start piling up.
An acquaintance was able to sell his house within three months of the peak in '07 because he'd been following the residential building construction index, which had been coming apart well ahead of the high in the Nasdaq. To make a long story short, this enabled him to get his house ready for listing, find the right broker, etc. Selling so close to the peak was a matter of good fortune, but he avoided being a bag-holder by being prepared and knowing what to look for. Currently, this index is about 30% below its January high.
What is being said is true on todays rules. The problem is between construction, building products, real estate, mortgage banking, etc. there is to much of economy set to suffer a big setback. Thus some new creative loan products ( or creative tax code incentive ) will be allowed and approved by the regulators to keep the machine going. The new scheme will blowup eventually and there will be another BIG setback. Fingers will be pointed, movies made, former hero's scandalized. Rinse, repeat.
You ever read history and it repeats itself? So during lengthy depression, prices of everything kept going down, and near the end like 1939, those with cash bought much real estate, the war came on, and wars are good for the economy as much money going into jobs that mainly women did eventually. USA did not entry the World War 2 till middle of it, but supply UK with weapons, food and medical supplies.
I was just reading about NYC Times Square business lease prices. That is so true...everything is just a spin of a spin of words, or a variety of a variety...constantly dynamic...to keep things fresh and cater to the current climate and audience.