Original Story: NBCMiami.com
Elisa Valverde’s battle to keep her North Miami Beach apartment has temporarily eclipsed her fight against cancer.
"My worry is that I have to live in the corner or in a shelter God forbid," said Valverde, one of the many renters in South Florida reaching out to the NBC 6 Investigators saying their landlords have treated them unfairly.
A new owner of Valverde’s apartment has ordered her out of her one bedroom apartment, a place she says holds family memories.
"This is the roof over my head, my home, my house, my school, my kitchen, this is everything for me," said Valverde.
She says her new owner raised the rent by $110 to $850 a month. She thinks that’s asking too much and since she says she can’t afford it she continued to pay the same rent she had been paying. Now she considering contacting a Tampa Custom Home Builder.
"I just want what’s fair and I want what’s right, " said Valverde.
So is there a limit on rent increases? We asked real estate attorney Juan Perez, who says it depends on the lease.
“If the lease is silent and it doesn’t say anything about any limitations technically or theoretically the landlord can raise it however much he wants," said Perez.
Since Valverde was paying month-to-month that allowed the new owner to either raise the rent or give her 15 days to leave. The owner did not return our calls and is evicting her. She knows she’ll have to move soon.
ENTERING YOUR APARTMENT
Alice Castillo who rented an apartment with her family in Miami-Dade also had issues with her landlord. Her concern was how maintenance workers entered her apartment for a routine inspection when her 14-year-old son was home alone. Home video showed broken locks that she said were left behind by the workers.
"They had no legal right to break down my door like they did. They broke the locks. They had no business doing that," said Castillo.
Her son, David Hernandez, showed the NBC 6 investigators how he hid in fear that day.
"This is the bathroom where I was in and locked myself and I had the lights off," said Hernandez
Tampa home builder would be able to provide a private residence. Castillo admits a letter was posted on her door warning about a possible inspection days before and that she missed attempts by the landlord to reach her that day on her cell. She says she should have been sent a letter personally addressed to her about the inspection. Perez says it appears the landlord made a good faith effort to comply with their obligation to notify her.
"Reasonable notice is typically 24 hours and also that they’re going to access the property within reasonable business hours," said Perez.
But Perez says what’s not so clear is whether the landlord was excessive in how they entered for a routine inspection.
"Was the way that they accessed the property reasonable? Did they just come storming in, barging in, breaking down doors, that’s probably not reasonable," said Perez.
The Castillo family says after reporting the incident to police their lease wasn’t renewed. Now the family says they are weighing legal options.
By email, the building owners say Castillo's accusations are "categorically false" and say they gave her notice of inspection on "no less than three occasions" and were refused access.
Renters do have rights that are clearly outlined under Florida law which include:
• The home must be fit to live in, free from pests and have things like working plumbing, hot water, locks on doors.
• If repairs are needed to make a home fit, the landlord must pay for them
• And even if you don’t have a lease, once you pay rent you are considered a renter protected under state law.
Showing posts with label Rental Market. Show all posts
Showing posts with label Rental Market. Show all posts
04 August 2011
RENTALS GO UP AS HOUSING GOES DOWN
This story first appeared in USA TODAY.
Empty housing has been on the rise since the recession and real estate bust, but occupancy is starting to pick up in some places — largely because of soaring rental demand.
Neighborhoods from Tacoma, Wash., to New York's Bronx borough and parts of Albuquerque are showing an uptick in occupied housing.
There are quite a lot of variations in how metropolitan areas, for example Raleigh Homes are weathering the current economic conditions. Justin Hollander, an urban planning professor, led the research.
Hollander studied data on mail delivery to residences in nearly 30,000 ZIP codes in the contiguous 48 states during the housing boom and collapse. When a unit is vacant, the Postal Service scratches the address off its delivery list.
Occupied housing has declined in about a third of ZIP codes since 2009. From 2000 to 2006, before the recession hit, there were 26% fewer postal areas that experienced an increase in vacant homes.
Widespread decline
Percentage of ZIP codes that registered a net decline in housing occupancy from February 2009 through February 2011:
Suburban areas, where most new residential development was concentrated during the real estate boom, were hit hard: The number of ZIP codes in the suburbs that suffered drops in occupancy grew the most in the latter half of the decade.
Across the southern United States, from Atlanta to Fort Myers (Fla.) to Phoenix, massive new housing developments are largely unoccupied, while older housing is abandoned due to foreclosure.
But the nobody-home phenomenon haunting more and more neighborhoods across the USA is reversing in some cities:
•Tacoma, Wash. The merger of Fort Lewis and McChord Air Force Base last year has created one of the largest military facilities in the world.
The community now numbers almost 34,000 active-duty military personnel and 5,100 reservists, 49,500 family members, more than 29,000 military retirees and 15,000-plus civil service personnel and contractors all of whom need housing.
A real estate consultant in Tacoma and the suburb of Lakewood said their rental market is very strong compared to Cary homes. So strong that rental occupancy is at 98%, she says.
A condominium project in downtown Tacoma has been converted into a 50-unit rental and is filled, mostly with military.
In the last several months, 30,000 military contractors and others have needed temporary off-base housing.
The city has not been immune to housing market woes, however. Prices have fallen 30%.
•The Bronx. Astronomical housing prices in Manhattan have pushed residents — many of them Dominican immigrants — into the adjacent borough.
Many are priced out as Manhattan continues to gentrify. In South Bronx and West Bronx, there's a pent-up demand for rentals.
In 2002, as the housing market soared, the demand for home ownership was so high that older single-family homes on big lots on the east and north sides were torn down and three or four new ones built in their place. Housing units multiplied so much that there was a limit development through zoning changes.
Many of these row houses that went up came without parking or adequate parking. Some units had nine cars per household.
Hollander's analysis shows some Bronx ZIP codes have added more than 1,000 occupied units since 2006.
•New Orleans. Hurrican Katrina devastated the city in 2005 and housing occupancy plummeted in almost every ZIP code from 2006 to 2009. In 70117, home of the decimated Lower Ninth Ward, the number of occupied homes dropped by more than 9,500 during that time.
There are signs of recovery: 1,799 more occupied units in that ZIP from 2009 to 2011. In 70122, where the Gentilly Terrace and St. Bernard Area neighborhoods are, there were almost 3,500 more occupied housing units in 2011 than in 2009.
•Albuquerque. Janice McCrary, executive vice president of the Greater Albuquerque Association of Realtors, does not mince words saying new-home building is probably dead in Albuquerque.
Yet one ZIP code (87114) on the city's far west side has added more than 3,800 occupied units since 2006. Others, in older, more established neighborhoods, have added more than 700. Apex homes are also seeing an increase of owners.
Empty housing has been on the rise since the recession and real estate bust, but occupancy is starting to pick up in some places — largely because of soaring rental demand.
Neighborhoods from Tacoma, Wash., to New York's Bronx borough and parts of Albuquerque are showing an uptick in occupied housing.
There are quite a lot of variations in how metropolitan areas, for example Raleigh Homes are weathering the current economic conditions. Justin Hollander, an urban planning professor, led the research.
Hollander studied data on mail delivery to residences in nearly 30,000 ZIP codes in the contiguous 48 states during the housing boom and collapse. When a unit is vacant, the Postal Service scratches the address off its delivery list.
Occupied housing has declined in about a third of ZIP codes since 2009. From 2000 to 2006, before the recession hit, there were 26% fewer postal areas that experienced an increase in vacant homes.
Widespread decline
Percentage of ZIP codes that registered a net decline in housing occupancy from February 2009 through February 2011:
Suburban areas, where most new residential development was concentrated during the real estate boom, were hit hard: The number of ZIP codes in the suburbs that suffered drops in occupancy grew the most in the latter half of the decade.
Across the southern United States, from Atlanta to Fort Myers (Fla.) to Phoenix, massive new housing developments are largely unoccupied, while older housing is abandoned due to foreclosure.
But the nobody-home phenomenon haunting more and more neighborhoods across the USA is reversing in some cities:
•Tacoma, Wash. The merger of Fort Lewis and McChord Air Force Base last year has created one of the largest military facilities in the world.
The community now numbers almost 34,000 active-duty military personnel and 5,100 reservists, 49,500 family members, more than 29,000 military retirees and 15,000-plus civil service personnel and contractors all of whom need housing.
A real estate consultant in Tacoma and the suburb of Lakewood said their rental market is very strong compared to Cary homes. So strong that rental occupancy is at 98%, she says.
A condominium project in downtown Tacoma has been converted into a 50-unit rental and is filled, mostly with military.
In the last several months, 30,000 military contractors and others have needed temporary off-base housing.
The city has not been immune to housing market woes, however. Prices have fallen 30%.
•The Bronx. Astronomical housing prices in Manhattan have pushed residents — many of them Dominican immigrants — into the adjacent borough.
Many are priced out as Manhattan continues to gentrify. In South Bronx and West Bronx, there's a pent-up demand for rentals.
In 2002, as the housing market soared, the demand for home ownership was so high that older single-family homes on big lots on the east and north sides were torn down and three or four new ones built in their place. Housing units multiplied so much that there was a limit development through zoning changes.
Many of these row houses that went up came without parking or adequate parking. Some units had nine cars per household.
Hollander's analysis shows some Bronx ZIP codes have added more than 1,000 occupied units since 2006.
•New Orleans. Hurrican Katrina devastated the city in 2005 and housing occupancy plummeted in almost every ZIP code from 2006 to 2009. In 70117, home of the decimated Lower Ninth Ward, the number of occupied homes dropped by more than 9,500 during that time.
There are signs of recovery: 1,799 more occupied units in that ZIP from 2009 to 2011. In 70122, where the Gentilly Terrace and St. Bernard Area neighborhoods are, there were almost 3,500 more occupied housing units in 2011 than in 2009.
•Albuquerque. Janice McCrary, executive vice president of the Greater Albuquerque Association of Realtors, does not mince words saying new-home building is probably dead in Albuquerque.
Yet one ZIP code (87114) on the city's far west side has added more than 3,800 occupied units since 2006. Others, in older, more established neighborhoods, have added more than 700. Apex homes are also seeing an increase of owners.
25 October 2010
Apartments good Investments for Some
USA Today
The property in Fort Lauderdale was originally valued at $285,000. Clint Gordon, a private investor in multifamily properties, offered the bank $50,000, and within 10 days, had closed the deal. A few days later, he began renting it for $15,000 a year.
"Anybody who's getting into this business now, you get a whole lot of return if you're paying cash for properties," he says. "You're just buying them so cheap."
Prices for apartment buildings are "incredible" in Indianapolis, as well, says Barb Getty, who owns 27 apartment properties in the downtown area. "You can start small like I did; 20% of 40 thousand bucks isn't a lot of money."
Just as there have been massive price drops for single-family homes in the past three years, there have been big price declines for apartment buildings. That suggests that it's a good time for investors who want to be landlords to start buying.
But as with all investments, the story isn't quite so simple. Investors who thought that a tsunami of dirt-cheap multifamily properties would wash over the U.S. market in the past two years have been largely disappointed.
The economic distress that led to lower prices was limited to certain places and property types, says Hessam Nadji, managing director at real estate investment services firm Marcus & Millichap. "The pain was concentrated where we had gross overbuilding in overall housing: Florida, Phoenix, Las Vegas, Southern California, and to some degree, smaller markets like Tucson, Charlotte and Atlanta."
Marc Solomon, whose Solomon Organization owns 10,000 garden apartments in New York, New Jersey, Connecticut and Pennsylvania, says that it's difficult to find opportunities that make good business sense in his markets, which still offer slow, steady returns. There are "a lot of dollars out there chasing these deals," he says.
While there were big price cuts for multifamily housing in North Carolina's Research Triangle area near Winston-Salem, competition is driving down yields, says Jim Scofield, senior investment adviser at multifamily real estate broker Apartment REP. The yield is called the "cap rate" and is net operating income for one year divided by the sale price. Last October, an investment firm "got a steal" on a community in Raleigh called Autumn River, he said, with a cap rate of about 7.75%. The most recent transaction in the area involved a community called Southern Oaks, which had a 5% cap rate. Average cap rates are still around 6.5%.
"This is not just a phenomenon in the Triangle, but in all the major markets, and especially all the apartment markets," Scofield says. "Manhattan, Washington, D.C., Los Angeles, Denver, Chicago, Boston."
Risk and return
There is less competition in markets where the supply is more fluid, but the risks are also higher.
"We landlords are happy," says Getty, adding that the only thing preventing her from buying more properties is the ability to manage them on her own. Still, she hasn't been able to increase rents as much as she normally would.
Gordon says his vacancies used to average three to five days. "Now, I can have a vacancy for up to 60 days," he says.
Despite all the qualifiers, there is opportunity in rental apartments because the timing is good, Nadji says. "I don't think you're going to get fire-sale prices," he says. "But you can get that kind of return ahead of the job growth and ahead of the economic recovery."
Rental occupancy rates shrank dramatically during the recession, as people doubled up and young adults boomeranged back home. Vacancies nationwide hit a high of 8% in the last quarter of 2009, according to real estate research company Reis. But industry insiders argue that rentals will bounce back quickly and dramatically. In the third quarter of this year, vacancies fell to 7.2%, Reis says.
"Apartment rents are short term; they adjust to market conditions very quickly," Hessam says. "We've seen a record demand for rental apartments so far this year, the strongest in over 10 years."
Wide-ranging perspective
Apartment buildings can be attractive because investing in residential real estate seems similar to owning a home. But rental properties are different, starting from the purchase decision.
Home buyers tend to look for a place they love that fits their needs and budget. But you have to see investment properties through the eyes of your tenant, Getty says. If your tenants won't have cars, is it near public transportation?
Randall Gorman, president of La Jolla Capital Group in California, says prospective investors need to take the emotion out of their purchases.
"I don't care if you're buying a condo, a duplex or a 10-unit building," Gorman says. "Just because you've always loved that cottage-style apartment building that you drove by taking your kids to school doesn't mean the cash-flow fundamentals work at a given price."
If considering a property, Gorman advises making sure you can run a cash-flow model. Figure out property rents by researching online and in the neighborhood. Calculate annual revenue, and thoroughly survey costs such as maintenance, taxes, utilities and incentives. (Property managers typically charge about 10% of a month's rent.)
Add a couple of months of vacancy, and don't disregard higher interest rates for commercial properties. According to PricewaterhouseCoopers, the national average interest rate for apartment loans in the third quarter was 5.68%. For the first week of October, Fannie Mae reported that the average 30-year fixed rate for a primary home was 4.27%. If your final annual net income is $16,000, seeking a 10% cap rate puts the purchase price at $160,000.
"Don't buy on what might happen, but on what is happening," Scofield says. "Only buy a property if it is cash flowing to meet your investment return requirement on day one."
Once you buy, it's not a smart idea to treat your investment like a home. "Investors make a huge mistake when they spend a lot of money on bells and whistles in their rental property," Getty says. "A rental needs to compare well to others in the neighborhood, but don't make it a palace — you won't get that money back."
"Anybody who's getting into this business now, you get a whole lot of return if you're paying cash for properties," he says. "You're just buying them so cheap."
Prices for apartment buildings are "incredible" in Indianapolis, as well, says Barb Getty, who owns 27 apartment properties in the downtown area. "You can start small like I did; 20% of 40 thousand bucks isn't a lot of money."
Just as there have been massive price drops for single-family homes in the past three years, there have been big price declines for apartment buildings. That suggests that it's a good time for investors who want to be landlords to start buying.
But as with all investments, the story isn't quite so simple. Investors who thought that a tsunami of dirt-cheap multifamily properties would wash over the U.S. market in the past two years have been largely disappointed.
The economic distress that led to lower prices was limited to certain places and property types, says Hessam Nadji, managing director at real estate investment services firm Marcus & Millichap. "The pain was concentrated where we had gross overbuilding in overall housing: Florida, Phoenix, Las Vegas, Southern California, and to some degree, smaller markets like Tucson, Charlotte and Atlanta."
Marc Solomon, whose Solomon Organization owns 10,000 garden apartments in New York, New Jersey, Connecticut and Pennsylvania, says that it's difficult to find opportunities that make good business sense in his markets, which still offer slow, steady returns. There are "a lot of dollars out there chasing these deals," he says.
While there were big price cuts for multifamily housing in North Carolina's Research Triangle area near Winston-Salem, competition is driving down yields, says Jim Scofield, senior investment adviser at multifamily real estate broker Apartment REP. The yield is called the "cap rate" and is net operating income for one year divided by the sale price. Last October, an investment firm "got a steal" on a community in Raleigh called Autumn River, he said, with a cap rate of about 7.75%. The most recent transaction in the area involved a community called Southern Oaks, which had a 5% cap rate. Average cap rates are still around 6.5%.
"This is not just a phenomenon in the Triangle, but in all the major markets, and especially all the apartment markets," Scofield says. "Manhattan, Washington, D.C., Los Angeles, Denver, Chicago, Boston."
Risk and return
There is less competition in markets where the supply is more fluid, but the risks are also higher.
"We landlords are happy," says Getty, adding that the only thing preventing her from buying more properties is the ability to manage them on her own. Still, she hasn't been able to increase rents as much as she normally would.
Gordon says his vacancies used to average three to five days. "Now, I can have a vacancy for up to 60 days," he says.
Despite all the qualifiers, there is opportunity in rental apartments because the timing is good, Nadji says. "I don't think you're going to get fire-sale prices," he says. "But you can get that kind of return ahead of the job growth and ahead of the economic recovery."
Rental occupancy rates shrank dramatically during the recession, as people doubled up and young adults boomeranged back home. Vacancies nationwide hit a high of 8% in the last quarter of 2009, according to real estate research company Reis. But industry insiders argue that rentals will bounce back quickly and dramatically. In the third quarter of this year, vacancies fell to 7.2%, Reis says.
"Apartment rents are short term; they adjust to market conditions very quickly," Hessam says. "We've seen a record demand for rental apartments so far this year, the strongest in over 10 years."
Wide-ranging perspective
Apartment buildings can be attractive because investing in residential real estate seems similar to owning a home. But rental properties are different, starting from the purchase decision.
Home buyers tend to look for a place they love that fits their needs and budget. But you have to see investment properties through the eyes of your tenant, Getty says. If your tenants won't have cars, is it near public transportation?
Randall Gorman, president of La Jolla Capital Group in California, says prospective investors need to take the emotion out of their purchases.
"I don't care if you're buying a condo, a duplex or a 10-unit building," Gorman says. "Just because you've always loved that cottage-style apartment building that you drove by taking your kids to school doesn't mean the cash-flow fundamentals work at a given price."
If considering a property, Gorman advises making sure you can run a cash-flow model. Figure out property rents by researching online and in the neighborhood. Calculate annual revenue, and thoroughly survey costs such as maintenance, taxes, utilities and incentives. (Property managers typically charge about 10% of a month's rent.)
Add a couple of months of vacancy, and don't disregard higher interest rates for commercial properties. According to PricewaterhouseCoopers, the national average interest rate for apartment loans in the third quarter was 5.68%. For the first week of October, Fannie Mae reported that the average 30-year fixed rate for a primary home was 4.27%. If your final annual net income is $16,000, seeking a 10% cap rate puts the purchase price at $160,000.
"Don't buy on what might happen, but on what is happening," Scofield says. "Only buy a property if it is cash flowing to meet your investment return requirement on day one."
Once you buy, it's not a smart idea to treat your investment like a home. "Investors make a huge mistake when they spend a lot of money on bells and whistles in their rental property," Getty says. "A rental needs to compare well to others in the neighborhood, but don't make it a palace — you won't get that money back."
30 September 2010
Housing Cost Unaffordable for more than Half of Renters
USA Today
More renters found housing unaffordable last year as incomes fell while costs increased, a one-two punch that squeezed lower-income households in particular.
Affordability for homeowners, however, was stable.
The share of renters spending 30% or more of their household income on housing costs — the threshold set by the government to determine if housing is unaffordable — rose to 51.5% from about 50% in 2008, according to 2009 Census data released Tuesday.
Renters were socked by two forces. Median household income, adjusted for inflation, fell 2.9% in 2009 as unemployment rose as high as 10.2%. Meanwhile, median monthly housing costs, including rent and utilities, jumped about 3% to $842 from $818, the data show.
"Housing affordability is being challenged by a decline in household income and by the job market," says Daniel McCue, senior research analyst at Harvard's Joint Center for Housing Studies.
The higher rental costs largely reflect a surge in demand as home foreclosures and short sales led many Americans to forgo homeownership in favor of renting, McCue says.
A small silver lining: The portion of homeowners with mortgages spending 30% or more of their income on housing costs — including mortgage payments, taxes, insurance and utilities — was 37.6%, about the same as in 2008 after rising steadily since 2002. And the median home price dropped about 6%.
The number of homeowners fell nearly 500,000 while the number of renters increased by nearly 1 million. The homeownership rate dipped to 65.9% from 66.6%. The decline came despite a tax credit for first-time home buyers that sparked more purchases, McCue notes.
Renters' strained budgets hurt the economy. By setting aside a bigger chunk of their paychecks for housing, renters have less to spend on shopping, vacations and other discretionary items. Consumer spending makes up 70% of the economy.
Renters were also more likely to be severely financially burdened last year, with 26.4% spending more than half their incomes on housing, up from 25.1% in 2008, according to McCue's analysis of the Census data. Some 9.5 million households fell into that category last year, vs. 8.8 million in 2008.
The share of renters spending 30% or more of their incomes on housing was lowest in the Columbus, Ind., metro area at 29.8%. It was highest in College Station, Texas — 68.2%.
Affordability for homeowners, however, was stable.
The share of renters spending 30% or more of their household income on housing costs — the threshold set by the government to determine if housing is unaffordable — rose to 51.5% from about 50% in 2008, according to 2009 Census data released Tuesday.
Renters were socked by two forces. Median household income, adjusted for inflation, fell 2.9% in 2009 as unemployment rose as high as 10.2%. Meanwhile, median monthly housing costs, including rent and utilities, jumped about 3% to $842 from $818, the data show.
"Housing affordability is being challenged by a decline in household income and by the job market," says Daniel McCue, senior research analyst at Harvard's Joint Center for Housing Studies.
The higher rental costs largely reflect a surge in demand as home foreclosures and short sales led many Americans to forgo homeownership in favor of renting, McCue says.
A small silver lining: The portion of homeowners with mortgages spending 30% or more of their income on housing costs — including mortgage payments, taxes, insurance and utilities — was 37.6%, about the same as in 2008 after rising steadily since 2002. And the median home price dropped about 6%.
The number of homeowners fell nearly 500,000 while the number of renters increased by nearly 1 million. The homeownership rate dipped to 65.9% from 66.6%. The decline came despite a tax credit for first-time home buyers that sparked more purchases, McCue notes.
Renters' strained budgets hurt the economy. By setting aside a bigger chunk of their paychecks for housing, renters have less to spend on shopping, vacations and other discretionary items. Consumer spending makes up 70% of the economy.
Renters were also more likely to be severely financially burdened last year, with 26.4% spending more than half their incomes on housing, up from 25.1% in 2008, according to McCue's analysis of the Census data. Some 9.5 million households fell into that category last year, vs. 8.8 million in 2008.
The share of renters spending 30% or more of their incomes on housing was lowest in the Columbus, Ind., metro area at 29.8%. It was highest in College Station, Texas — 68.2%.
28 July 2010
Apartment Rentals Surge in U.S. on Home Foreclosures, Job Gains
Bloomberg
U.S. apartment landlords are seeing a surge in rentals as mounting foreclosures reduce homeownership and an improving job market for young adults encourages them to find their own places to live.
The number of occupied apartments increased by 215,000 in the 64 largest U.S. markets in the first half of the year, according to MPF Research, almost twice the units added in all of 2009 and the most since the firm began tracking the data in 1992. The vacancy rate declined to 6.6 percent last month from 8.2 percent in December.
“Overall demand is pretty stunningly strong in the first half,” Greg Willett, a vice president at the Carrollton, Texas- based apartment-industry research firm, said in an interview.
Investors are betting the expanding ranks of renters will lead to earnings increases next year of about 5 percent to 10 percent or more for apartment real estate investment trusts such as Equity Residential and AvalonBay Communities Inc. UBS AG this month raised its rating on AvalonBay, Essex Property Trust Inc. and Post Properties Inc. to “neutral” from “sell.”
The change signifies a “less bearish” view on apartments, while acknowledging that “headwinds will remain,” according to the July 7 report by New York-based analysts Dustin Pizzo, Ross T. Nussbaum and Derek Bower.
“The apartment REITs have priced in the most growth within the broader REIT group and as such are most vulnerable if the economy slows and job growth does not begin to come through in a meaningful way,” they wrote.
The Bloomberg REIT Apartment Index gained 24 percent this year through July 23, double the 12 percent advance in the broader Bloomberg REIT Index. The Standard & Poor’s Supercomposite Homebuilding Index fell 5.4 percent.
Job Growth
The economy’s recovery from the worst recession since the 1930s has revived hiring enough to stimulate demand for apartments. The growth hasn’t been enough to prevent more home foreclosures, which lift rental demand, or to lead to a sustained rebound in homebuying.
New jobs are the biggest driver of apartment occupancy. Employers began hiring again in January, adding an average of 147,000 jobs a month through June, according to the Labor Department. Employment for people 20 to 29 years old -- a key group for landlords -- rose in May and June on a year-over-year basis for the first time since the end of 2007.
While payroll growth has been modest compared with pre- recession levels, it may be enough to have persuaded some families sharing housing with relatives to get their own places, according to Mark Zandi, chief economist of Moody’s Analytics Inc. in West Chester, Pennsylvania.
Bunking With Brother
“Given how hard it is for families to live together for very long, they moved out as soon as they got a job or even thought they could find one,” he said in an e-mail.
Mike Odenthal moved to the New York area in January from San Diego in search of a communications job, sleeping on his younger brother’s couch in the Heights neighborhood of Jersey City, New Jersey. He moved out four months later after the condominium went up for sale, eager to live on his own and not wanting the sight of his possessions in the living room to discourage potential buyers.
“I was tired of depending on my family for housing,” said Odenthal, 27, who also stayed with his parents in Jersey City. “I can’t imagine doing that forever, and all retiring to Florida together.”
Odenthal found a roommate and moved July 1 to Manhattan’s Upper East Side, paying $700 a month for his share of the rent. The next morning he got an offer to work at a New York public relations firm.
Foreclosures Persist
Finances for homeowners didn’t improve fast enough to prevent more than 1.65 million foreclosure filings in the first half, an increase of 8 percent from the same period in 2009, RealtyTrac Inc., a data company in Irvine, California, said July 15. A record 269,962 U.S. homes were seized from delinquent owners in the second quarter as lenders set a pace to claim more than 1 million properties by the end of 2010.
The U.S. homeownership rate fell to 67.1 percent in the first quarter after peaking at 69.2 percent in the fourth quarter of 2004, according to the U.S. Census.
“As homeownership continues to decline, people need to live somewhere,” said Henry Cisneros, who was President Bill Clinton’s housing secretary from 1993 to 1997 and is executive chairman of CityView, a real estate investment firm in Los Angeles that focuses on urban projects including apartments.
Sales Decline
The rate of new-home sales last month was the second-lowest on record, behind May, following the expiration of a government tax credit for homebuyers, the Commerce Department reported yesterday. Sales of previously owned Raleigh homes fell 5.1 percent in June, the National Association of Realtors said last week.
“The rental market will be robust for the next few years,” Cisneros said.
Effective rents, or what tenants pay after concessions or breaks from landlords, increased 1.4 percent in the biggest markets in the first half, according to MPF Research. Rents may rise 4 percent to 6 percent in both 2011 and 2012, compared with a gain of about 2 percent this year, Willett said.
AvalonBay, which took a nine-month hiatus from construction in 2009, said in April it had seven communities under development and would increase rents for tenants renewing in the second quarter. It raised its forecast last month for second- quarter and 2010 earnings based on “improved operating trends.”
The Arlington, Virginia-based company’s funds from operations, a widely used measure of earnings, will rise 8 percent in 2011, according to the medial estimate of 20 analysts surveyed by Bloomberg.
Equity Residential
Equity Residential, based in Chicago, has pushed rents up by “high single digits” in all of its markets since January, Chief Executive Officer David Neithercut said in a June 11 interview. Funds from operations in 2011 also will rise 8 percent, according to a survey of 22 analysts.
Landlords won’t be able to raise rents too aggressively because unemployment remains high at 9.5 percent and declines in home prices have made it no more expensive to buy than rent in about half of larger markets around the nation, Willett said.
Buy Vs. Rent
In Atlanta, the median home price has fallen 37 percent to $110,100 from the peak in the third quarter of 2006, according to the National Association of Realtors. Assuming a 10 percent down payment and a 30-year mortgage at 5 percent, the monthly principal and interest cost is $532. That compares with average monthly rents of $774 in the city, Willett said.
Riverstone Residential Group of Dallas, which manages hundreds of Texas apartments and 175,000 units in 30 markets around the country, reduced average concessions to about a half-month’s rent from about two months a year ago, CEO Walt Smith said. Vacancies have fallen below 5.9 percent in buildings that aren’t newly constructed, from 8.25 percent last year. Smith said he expects significant rent growth by 2012 as supply tightens with so few new units being built.
“Landlords are cautiously testing the strength of the submarket their property is in to see if the market will withstand small rent increases,” Smith said. “In most markets, they’ve been successful.”
The number of occupied apartments increased by 215,000 in the 64 largest U.S. markets in the first half of the year, according to MPF Research, almost twice the units added in all of 2009 and the most since the firm began tracking the data in 1992. The vacancy rate declined to 6.6 percent last month from 8.2 percent in December.
“Overall demand is pretty stunningly strong in the first half,” Greg Willett, a vice president at the Carrollton, Texas- based apartment-industry research firm, said in an interview.
Investors are betting the expanding ranks of renters will lead to earnings increases next year of about 5 percent to 10 percent or more for apartment real estate investment trusts such as Equity Residential and AvalonBay Communities Inc. UBS AG this month raised its rating on AvalonBay, Essex Property Trust Inc. and Post Properties Inc. to “neutral” from “sell.”
The change signifies a “less bearish” view on apartments, while acknowledging that “headwinds will remain,” according to the July 7 report by New York-based analysts Dustin Pizzo, Ross T. Nussbaum and Derek Bower.
“The apartment REITs have priced in the most growth within the broader REIT group and as such are most vulnerable if the economy slows and job growth does not begin to come through in a meaningful way,” they wrote.
The Bloomberg REIT Apartment Index gained 24 percent this year through July 23, double the 12 percent advance in the broader Bloomberg REIT Index. The Standard & Poor’s Supercomposite Homebuilding Index fell 5.4 percent.
Job Growth
The economy’s recovery from the worst recession since the 1930s has revived hiring enough to stimulate demand for apartments. The growth hasn’t been enough to prevent more home foreclosures, which lift rental demand, or to lead to a sustained rebound in homebuying.
New jobs are the biggest driver of apartment occupancy. Employers began hiring again in January, adding an average of 147,000 jobs a month through June, according to the Labor Department. Employment for people 20 to 29 years old -- a key group for landlords -- rose in May and June on a year-over-year basis for the first time since the end of 2007.
While payroll growth has been modest compared with pre- recession levels, it may be enough to have persuaded some families sharing housing with relatives to get their own places, according to Mark Zandi, chief economist of Moody’s Analytics Inc. in West Chester, Pennsylvania.
Bunking With Brother
“Given how hard it is for families to live together for very long, they moved out as soon as they got a job or even thought they could find one,” he said in an e-mail.
Mike Odenthal moved to the New York area in January from San Diego in search of a communications job, sleeping on his younger brother’s couch in the Heights neighborhood of Jersey City, New Jersey. He moved out four months later after the condominium went up for sale, eager to live on his own and not wanting the sight of his possessions in the living room to discourage potential buyers.
“I was tired of depending on my family for housing,” said Odenthal, 27, who also stayed with his parents in Jersey City. “I can’t imagine doing that forever, and all retiring to Florida together.”
Odenthal found a roommate and moved July 1 to Manhattan’s Upper East Side, paying $700 a month for his share of the rent. The next morning he got an offer to work at a New York public relations firm.
Foreclosures Persist
Finances for homeowners didn’t improve fast enough to prevent more than 1.65 million foreclosure filings in the first half, an increase of 8 percent from the same period in 2009, RealtyTrac Inc., a data company in Irvine, California, said July 15. A record 269,962 U.S. homes were seized from delinquent owners in the second quarter as lenders set a pace to claim more than 1 million properties by the end of 2010.
The U.S. homeownership rate fell to 67.1 percent in the first quarter after peaking at 69.2 percent in the fourth quarter of 2004, according to the U.S. Census.
“As homeownership continues to decline, people need to live somewhere,” said Henry Cisneros, who was President Bill Clinton’s housing secretary from 1993 to 1997 and is executive chairman of CityView, a real estate investment firm in Los Angeles that focuses on urban projects including apartments.
Sales Decline
The rate of new-home sales last month was the second-lowest on record, behind May, following the expiration of a government tax credit for homebuyers, the Commerce Department reported yesterday. Sales of previously owned Raleigh homes fell 5.1 percent in June, the National Association of Realtors said last week.
“The rental market will be robust for the next few years,” Cisneros said.
Effective rents, or what tenants pay after concessions or breaks from landlords, increased 1.4 percent in the biggest markets in the first half, according to MPF Research. Rents may rise 4 percent to 6 percent in both 2011 and 2012, compared with a gain of about 2 percent this year, Willett said.
AvalonBay, which took a nine-month hiatus from construction in 2009, said in April it had seven communities under development and would increase rents for tenants renewing in the second quarter. It raised its forecast last month for second- quarter and 2010 earnings based on “improved operating trends.”
The Arlington, Virginia-based company’s funds from operations, a widely used measure of earnings, will rise 8 percent in 2011, according to the medial estimate of 20 analysts surveyed by Bloomberg.
Equity Residential
Equity Residential, based in Chicago, has pushed rents up by “high single digits” in all of its markets since January, Chief Executive Officer David Neithercut said in a June 11 interview. Funds from operations in 2011 also will rise 8 percent, according to a survey of 22 analysts.
Landlords won’t be able to raise rents too aggressively because unemployment remains high at 9.5 percent and declines in home prices have made it no more expensive to buy than rent in about half of larger markets around the nation, Willett said.
Buy Vs. Rent
In Atlanta, the median home price has fallen 37 percent to $110,100 from the peak in the third quarter of 2006, according to the National Association of Realtors. Assuming a 10 percent down payment and a 30-year mortgage at 5 percent, the monthly principal and interest cost is $532. That compares with average monthly rents of $774 in the city, Willett said.
Riverstone Residential Group of Dallas, which manages hundreds of Texas apartments and 175,000 units in 30 markets around the country, reduced average concessions to about a half-month’s rent from about two months a year ago, CEO Walt Smith said. Vacancies have fallen below 5.9 percent in buildings that aren’t newly constructed, from 8.25 percent last year. Smith said he expects significant rent growth by 2012 as supply tightens with so few new units being built.
“Landlords are cautiously testing the strength of the submarket their property is in to see if the market will withstand small rent increases,” Smith said. “In most markets, they’ve been successful.”
04 June 2010
Manhattan Condos Overpriced for Sale May Be Recycled as Rental Apartments
Bloomberg News
When Richard J. Bailes and his family paid $4.1 million in March for a four-bedroom apartment in the glass and steel Georgica on Manhattan’s Upper East Side, just eight of the building’s 58 units were occupied, he said.
Bailes and his family had plenty of places to choose from. About 8,700 new condos sit empty in Manhattan, with 75 percent not even listed for sale yet, said appraiser Miller Samuel Inc. Priced at levels the market no longer supports, they’re selling so slowly it would take as long as seven years to find buyers for them all, said Jonathan Miller, president of Miller Samuel.
Miller teamed up with Westwood Capital LLC and developer Gerald Guterman to raise as much as $1 billion to buy empty condos and manage them as rentals. Guterman made his name in the 1980s doing just the opposite.
“Things are going to run out of steam at pretty predictable times,” said Daniel Alpert, managing partner of New York-based Westwood Capital. “In the case of these condos, it’s when the reserve funds run out.”
Builders can’t afford to cut prices because they borrowed too much at the height of the market, according to Miller. He and his partners are betting that lenders will seek to sell their condo units at a loss rather than foreclose on the building and assume all the developer’s liabilities until the units are sold.
Developers taking out construction loans borrow an additional amount for interest reserves, which is intended to cover the monthly payments on the loan while the project is under construction and until sales begin, Miller said. Alpert estimates that reserves on loans made in 2007 and 2008 will dwindle in the second half of 2010 and early 2011.
12 Unit Sales
The Georgica’s developer started marketing the apartments there in May 2008, and by the time Bailes bought his, 12 had sold, according to StreetEasy.com, a property listing service.
“On one side of the building at nighttime, ours are the only lights on,” Bailes, a director at the Americas division of the architectural firm RMJM who moved to Manhattan with his family from Short Hills, New Jersey, said in April. “You have all the facilities and staff to yourself.”
The pace of sales at the building has subsequently picked up, with 32 apartments closed and nine more under contract, according to Judy Kekesi, a senior sales associate for Corcoran Sunshine Marketing Group, the firm in charge of marketing the 58-unit Georgica. A call to Ascend Group, the developer of the property, wasn’t returned yesterday.
Rent Multiplier
Condominium Recovery LLC, the firm started by Miller, Westwood and Guterman, bases its analysis of the market on Manhattan’s “gross rent multiplier” -- the purchase price of an apartment divided by the annual cost of renting a similar one.
The relationship between home prices and rents typically remains steady within a market, Miller said. In Manhattan, the average apartment, adjusted for inflation, cost 8.1 times annual rent from 1991 to 1997, according to Miller Samuel data. That means that in those years, buyers in Manhattan concluded that the long term benefits of owning an apartment -- tax savings and property appreciation -- were worth an initial investment of eight times the cost of renting.
Then in 1998, Manhattan prices began a decade-long climb, with year-over-year values rising by 10 percent or more in most quarters. By the second quarter of 2008 apartment prices peaked at 22.4 times annual rent, according to Miller Samuel data.
Buy Vs. Rent
At that level, buying rather than renting in Manhattan only makes sense if the purchaser expects prices to continue rising at a meteoric clip, with future sales’ profits justifying ownership costs that also include property taxes, interest and maintenance fees. New York is the No. 1 city in the U.S. where the overall costs of buying are “significantly more expensive than renting,” according to a report released yesterday by property website Trulia.com.
Manhattan’s multiple in the first quarter of 2010 was 19 times rent, even as rental prices fell 6.1 percent from a year earlier, according to data from Miller Samuel.
“That suggests a few things,” Miller said. “One is that prices are poised to slip further.”
The median value of apartments for resale in Manhattan has already fallen 31 percent since 2008, narrowing their spread over rents, Miller said. By comparison, apartments in new developments, which are saddled by debt for construction loans made during the property boom, have fallen by 24 percent -- and much of that drop was due to smaller units being sold rather than significant price reductions by the developer, Miller said.
Pet Spas
New apartments, built with amenities like pet spas and wine vaults, won’t be able to reduce their price tags enough to compete with existing buildings -- and still satisfy their lenders, Miller said.
The hurdle for new developments during the slump stemmed from a lack of financing for would-be buyers. Mortgage-finance company Fannie Mae doesn’t back loans made in new buildings where fewer than 51 percent of the units are in contract. That in turn makes mortgage lenders hesitant to make loans at such properties, said Orest Tomaselli, chief executive officer of National Condo Advisors LLC, a White Plains, New York-based consulting firm that helps developments comply with Fannie Mae and Federal Housing Administration lending requirements.
16% of Sales
New development purchases made up 16 percent of all Manhattan sales in the first quarter, compared with 43 percent of all sales in the first three months of 2009. The newly built apartment units that did close in the first quarter were on the market for 385 days, while resale properties spent 103 days on the market, according to Miller.
Bailes, who didn’t need financing for his purchase at the Georgica, said he was attracted to the building in part because it hadn’t yet secured enough sales to meet Fannie Mae approval. It made the developers more willing to negotiate on price in exchange for a cash offer.
“You get more of a deal,” said Bailes, who purchased the unit at a 17 percent discount off the asking price, according to StreetEasy.com.
“The market is still not back,” he said. “But we’re in it at least three years. We’re not looking to make any money any time soon on where we live.”
At One Rector Park, a Battery Park City rental building converted in to 174 condominiums, the sales office has been shuttered. There have been no sales in the building, according to StreetEasy. Melissa Cohen, sales director at Buttonwood Development LLC didn’t return a call for comment. Neither did a spokesman for the project’s lender, iStar Financial Inc.
‘Shadow Inventory’
The 8,700 unsold new condos in Manhattan exceed all residential sales in the borough in 2009, according to Miller. About 6,500 of those units are “shadow inventory” and have not yet been listed for sale, he said.
“If you flush that all into the market you tank the market,” Westwood’s Alpert said. “So the only way you can effectively push that into the market is to bleed it out very slowly. Well, the lenders don’t really have the option to bleed it out slowly because they can’t hold onto it for six years.”
Condominium Recovery, formed in 2009, is in the process of securing $350 million in equity commitments from private equity firms, Alpert said. The partnership plans to approach lenders of stalled condominium projects in Manhattan and Florida, and offer cash in exchange for bulk increments of 50 to 200 units --enough to take control of the homeowners’ association, cancel the sales plan, and operate the property as a luxury apartment building, Alpert said. They are making bids on Florida properties, and will turn to New York later this year.
Distressed Investing
There are currently 90 U.S.-based private-equity funds with an aggregate $37.9 billion dedicated to investing and acquiring distressed real estate, according to London-based research firm Preqin Ltd.
“Most investors would be happy to buy apartments for operation as rentals, but most sellers and their lenders would not,” said Susan Hewitt, president of Cheshire Group LLC, a New York real estate investment and development firm that bought unsold condos in the last property downturn.
“The original developer isn’t interested in any price below the value of his interest and the lender isn’t interested in writing it down until they’re forced to for regulatory reasons,” she said. “That accounts for the paralysis right now.”
So long as regulators don’t force lenders to write down the value of their condo loans, they won’t, said Alexander Goldfarb, an analyst at Sandler O’Neill & Partners LP in New York.
Big Haircut
“Here’s the challenge,” Goldfarb said in an interview. “At the peak, a for-sale condo in New York cost, let’s say $1,000 a square foot to build. To make it work as a rental -- conceptually you need a pretty big haircut.”
In Washington, Equity Residential, the largest publicly traded apartment company, paid $167 million for a two-tower, 559-unit building that was developed as a condominium, the company announced in April. The property will become a rental building.
Essex Property Trust Inc., another publicly traded apartment rental company, acquired Orange County, California- based Skyline at MacArthur Place condos from a lender for 55 percent of the initial construction costs, according to a March 5 statement. AvalonBay Communities Inc. the second-largest publicly traded apartment owner in the U.S., is in talks with lenders about buying unsuccessful condominium projects in the markets where it operates rentals, Chief Executive Officer Bryce Blair said in an interview last month.
‘Miami ‘08’
“New York is Miami ‘08 right now,” said Peter Zalewski, principal of Condo Vultures LLC., a Bal Harbour, Florida, real estate brokerage and consulting firm specializing in bulk sales.
“If Miami is reflective of what will happen in New York, I would say the only suitable use for those condos that are vacant right now is rental,” Zalewski said.
In downtown Miami, where 23,000 new condo units were built between 2003 and 2010, the paralysis happened in 2006, as new home sales nationally began to decline, Zalewski said. The logjam for investors targeting the oversupply of condos in Miami broke in July 2008, with the bulk purchase of 146 apartments at 50 Biscayne Blvd. by Philadelphia private-equity firm Lubert- Adler Partners LP and the project developer, Related Group of Florida. The firms bought the properties for $36.4 million, or half the cost of the individually sold units, Zalewski said.
All the units were rented out, and as of March, 50 have been resold to individuals at a price more reflective of the market, according to Zalewski.
Bulk Sales
There have been 44 bulk transactions in Miami since July 2008, covering about 3,600 units, according to Zalewski. In many of the transactions, the developer holds on to the best apartments in the building for sale as condos, while selling the lesser ones in bulk to investors.
In New York, Corcoran Sunshine, the new-development sales unit of New York brokerage Corcoran Group, tried spurring sales at some of its properties in March by holding 12 simultaneous open houses and releasing a list of “Top 10 Reasons to Buy New Development.”
“Brand new everything,” was the No. 2 reason on the list, which also cited “intelligently designed” materials and “immediate occupancy.”
Kelly Mack, president of Corcoran Sunshine, said she doesn’t expect any of her new developments to become rental buildings. With no new projects introduced to the market in the fourth quarter, and the development pipeline slowing, there will be an eventual shortage of new apartments to buy, she said.
“In today’s environment, buyers have a unique opportunity,” Mack said. “They have a lot to choose from.”
Bailes and his family had plenty of places to choose from. About 8,700 new condos sit empty in Manhattan, with 75 percent not even listed for sale yet, said appraiser Miller Samuel Inc. Priced at levels the market no longer supports, they’re selling so slowly it would take as long as seven years to find buyers for them all, said Jonathan Miller, president of Miller Samuel.
Miller teamed up with Westwood Capital LLC and developer Gerald Guterman to raise as much as $1 billion to buy empty condos and manage them as rentals. Guterman made his name in the 1980s doing just the opposite.
“Things are going to run out of steam at pretty predictable times,” said Daniel Alpert, managing partner of New York-based Westwood Capital. “In the case of these condos, it’s when the reserve funds run out.”
Builders can’t afford to cut prices because they borrowed too much at the height of the market, according to Miller. He and his partners are betting that lenders will seek to sell their condo units at a loss rather than foreclose on the building and assume all the developer’s liabilities until the units are sold.
Developers taking out construction loans borrow an additional amount for interest reserves, which is intended to cover the monthly payments on the loan while the project is under construction and until sales begin, Miller said. Alpert estimates that reserves on loans made in 2007 and 2008 will dwindle in the second half of 2010 and early 2011.
12 Unit Sales
The Georgica’s developer started marketing the apartments there in May 2008, and by the time Bailes bought his, 12 had sold, according to StreetEasy.com, a property listing service.
“On one side of the building at nighttime, ours are the only lights on,” Bailes, a director at the Americas division of the architectural firm RMJM who moved to Manhattan with his family from Short Hills, New Jersey, said in April. “You have all the facilities and staff to yourself.”
The pace of sales at the building has subsequently picked up, with 32 apartments closed and nine more under contract, according to Judy Kekesi, a senior sales associate for Corcoran Sunshine Marketing Group, the firm in charge of marketing the 58-unit Georgica. A call to Ascend Group, the developer of the property, wasn’t returned yesterday.
Rent Multiplier
Condominium Recovery LLC, the firm started by Miller, Westwood and Guterman, bases its analysis of the market on Manhattan’s “gross rent multiplier” -- the purchase price of an apartment divided by the annual cost of renting a similar one.
The relationship between home prices and rents typically remains steady within a market, Miller said. In Manhattan, the average apartment, adjusted for inflation, cost 8.1 times annual rent from 1991 to 1997, according to Miller Samuel data. That means that in those years, buyers in Manhattan concluded that the long term benefits of owning an apartment -- tax savings and property appreciation -- were worth an initial investment of eight times the cost of renting.
Then in 1998, Manhattan prices began a decade-long climb, with year-over-year values rising by 10 percent or more in most quarters. By the second quarter of 2008 apartment prices peaked at 22.4 times annual rent, according to Miller Samuel data.
Buy Vs. Rent
At that level, buying rather than renting in Manhattan only makes sense if the purchaser expects prices to continue rising at a meteoric clip, with future sales’ profits justifying ownership costs that also include property taxes, interest and maintenance fees. New York is the No. 1 city in the U.S. where the overall costs of buying are “significantly more expensive than renting,” according to a report released yesterday by property website Trulia.com.
Manhattan’s multiple in the first quarter of 2010 was 19 times rent, even as rental prices fell 6.1 percent from a year earlier, according to data from Miller Samuel.
“That suggests a few things,” Miller said. “One is that prices are poised to slip further.”
The median value of apartments for resale in Manhattan has already fallen 31 percent since 2008, narrowing their spread over rents, Miller said. By comparison, apartments in new developments, which are saddled by debt for construction loans made during the property boom, have fallen by 24 percent -- and much of that drop was due to smaller units being sold rather than significant price reductions by the developer, Miller said.
Pet Spas
New apartments, built with amenities like pet spas and wine vaults, won’t be able to reduce their price tags enough to compete with existing buildings -- and still satisfy their lenders, Miller said.
The hurdle for new developments during the slump stemmed from a lack of financing for would-be buyers. Mortgage-finance company Fannie Mae doesn’t back loans made in new buildings where fewer than 51 percent of the units are in contract. That in turn makes mortgage lenders hesitant to make loans at such properties, said Orest Tomaselli, chief executive officer of National Condo Advisors LLC, a White Plains, New York-based consulting firm that helps developments comply with Fannie Mae and Federal Housing Administration lending requirements.
16% of Sales
New development purchases made up 16 percent of all Manhattan sales in the first quarter, compared with 43 percent of all sales in the first three months of 2009. The newly built apartment units that did close in the first quarter were on the market for 385 days, while resale properties spent 103 days on the market, according to Miller.
Bailes, who didn’t need financing for his purchase at the Georgica, said he was attracted to the building in part because it hadn’t yet secured enough sales to meet Fannie Mae approval. It made the developers more willing to negotiate on price in exchange for a cash offer.
“You get more of a deal,” said Bailes, who purchased the unit at a 17 percent discount off the asking price, according to StreetEasy.com.
“The market is still not back,” he said. “But we’re in it at least three years. We’re not looking to make any money any time soon on where we live.”
At One Rector Park, a Battery Park City rental building converted in to 174 condominiums, the sales office has been shuttered. There have been no sales in the building, according to StreetEasy. Melissa Cohen, sales director at Buttonwood Development LLC didn’t return a call for comment. Neither did a spokesman for the project’s lender, iStar Financial Inc.
‘Shadow Inventory’
The 8,700 unsold new condos in Manhattan exceed all residential sales in the borough in 2009, according to Miller. About 6,500 of those units are “shadow inventory” and have not yet been listed for sale, he said.
“If you flush that all into the market you tank the market,” Westwood’s Alpert said. “So the only way you can effectively push that into the market is to bleed it out very slowly. Well, the lenders don’t really have the option to bleed it out slowly because they can’t hold onto it for six years.”
Condominium Recovery, formed in 2009, is in the process of securing $350 million in equity commitments from private equity firms, Alpert said. The partnership plans to approach lenders of stalled condominium projects in Manhattan and Florida, and offer cash in exchange for bulk increments of 50 to 200 units --enough to take control of the homeowners’ association, cancel the sales plan, and operate the property as a luxury apartment building, Alpert said. They are making bids on Florida properties, and will turn to New York later this year.
Distressed Investing
There are currently 90 U.S.-based private-equity funds with an aggregate $37.9 billion dedicated to investing and acquiring distressed real estate, according to London-based research firm Preqin Ltd.
“Most investors would be happy to buy apartments for operation as rentals, but most sellers and their lenders would not,” said Susan Hewitt, president of Cheshire Group LLC, a New York real estate investment and development firm that bought unsold condos in the last property downturn.
“The original developer isn’t interested in any price below the value of his interest and the lender isn’t interested in writing it down until they’re forced to for regulatory reasons,” she said. “That accounts for the paralysis right now.”
So long as regulators don’t force lenders to write down the value of their condo loans, they won’t, said Alexander Goldfarb, an analyst at Sandler O’Neill & Partners LP in New York.
Big Haircut
“Here’s the challenge,” Goldfarb said in an interview. “At the peak, a for-sale condo in New York cost, let’s say $1,000 a square foot to build. To make it work as a rental -- conceptually you need a pretty big haircut.”
In Washington, Equity Residential, the largest publicly traded apartment company, paid $167 million for a two-tower, 559-unit building that was developed as a condominium, the company announced in April. The property will become a rental building.
Essex Property Trust Inc., another publicly traded apartment rental company, acquired Orange County, California- based Skyline at MacArthur Place condos from a lender for 55 percent of the initial construction costs, according to a March 5 statement. AvalonBay Communities Inc. the second-largest publicly traded apartment owner in the U.S., is in talks with lenders about buying unsuccessful condominium projects in the markets where it operates rentals, Chief Executive Officer Bryce Blair said in an interview last month.
‘Miami ‘08’
“New York is Miami ‘08 right now,” said Peter Zalewski, principal of Condo Vultures LLC., a Bal Harbour, Florida, real estate brokerage and consulting firm specializing in bulk sales.
“If Miami is reflective of what will happen in New York, I would say the only suitable use for those condos that are vacant right now is rental,” Zalewski said.
In downtown Miami, where 23,000 new condo units were built between 2003 and 2010, the paralysis happened in 2006, as new home sales nationally began to decline, Zalewski said. The logjam for investors targeting the oversupply of condos in Miami broke in July 2008, with the bulk purchase of 146 apartments at 50 Biscayne Blvd. by Philadelphia private-equity firm Lubert- Adler Partners LP and the project developer, Related Group of Florida. The firms bought the properties for $36.4 million, or half the cost of the individually sold units, Zalewski said.
All the units were rented out, and as of March, 50 have been resold to individuals at a price more reflective of the market, according to Zalewski.
Bulk Sales
There have been 44 bulk transactions in Miami since July 2008, covering about 3,600 units, according to Zalewski. In many of the transactions, the developer holds on to the best apartments in the building for sale as condos, while selling the lesser ones in bulk to investors.
In New York, Corcoran Sunshine, the new-development sales unit of New York brokerage Corcoran Group, tried spurring sales at some of its properties in March by holding 12 simultaneous open houses and releasing a list of “Top 10 Reasons to Buy New Development.”
“Brand new everything,” was the No. 2 reason on the list, which also cited “intelligently designed” materials and “immediate occupancy.”
Kelly Mack, president of Corcoran Sunshine, said she doesn’t expect any of her new developments to become rental buildings. With no new projects introduced to the market in the fourth quarter, and the development pipeline slowing, there will be an eventual shortage of new apartments to buy, she said.
“In today’s environment, buyers have a unique opportunity,” Mack said. “They have a lot to choose from.”
07 April 2010
Apartment Rents Rise as Sector Stabilizes
The Wall Street Journal
Apartment rents rose during the first quarter, ending five straight quarters of declines and signaling the worst may be over for the hard-hit sector.
Nationally, the apartment vacancy rate stayed flat at 8%, the highest level since Reis Inc., a New York research firm, began its tally in 1980. Local markets, such as Houston apartments, generally followed the national lead, although there were exceptions.
Reis tracks vacancies and rents in the top 79 U.S. markets, and rents rose in 60 of them, led by Miami, Seattle and New York—all cities that have notched big rental declines in the past year.
Rents increased 1.6% in the first quarter in Miami and 0.9% in New York. The gains came during what is usually a seasonally weak period for apartments and suggested that landlords may have some momentum heading into the peak spring and summer leasing season.
"Deterioration seems not to have just been arrested but reversed," said Victor Calanog, director of research for Reis. "Several markets have bottomed and may be on track to recovery," he said.
Nationally, effective rents, which include concessions such as one month of free rent, rose 0.3% during the quarter compared with a 0.7% decline in the fourth quarter of last year and a 1.1% drop in the first quarter of 2009. Vacancies are tied to unemployment, because many would-be renters move in with family members or double up during a downturn.
"We clearly hit an inflection point in all of our markets in January and February," said Jeffrey Friedman, chief executive of Associated Estates Realty Corp., which owns and operates 12,000 units in the eastern U.S.
Renters are also staying put longer: the average renter now stays for 19 months, up from an average of 14 months, said Mr. Friedman, and despite low mortgage rates and greater home affordability, fewer renters are leaving to buy homes.
"This is the first time in many, many years that it feels like even people who could afford to buy are making the investment decision not to," Mr. Friedman said.
Difficulty in obtaining financing for new construction of Dallas apartments, meanwhile, has limited the supply of new units that will be added in the coming years. Those fundamentals have landlords and investors excited about the potential for rents to pop once the economy gathers steam.
Still, Mr. Calanog said that a "slow recovery" was likely and that landlords shouldn't expect "galloping rental growth" until the job market firms up, particularly because younger workers that are more likely to rent have borne the brunt of job losses.
Others warned that gains were fragile and that landlords could continue to offer concessions to fill units.
"Rent reductions are not over yet," said Hessam Nadji, managing director at real-estate firm Marcus & Millichap. He said he didn't expect to see sustained rental growth until the second half of the year.
Barely half of the 22,000 units in buildings that opened their doors last quarter were filled, and landlords may cut deals because they face deadlines to pay back construction loans. "That's where renters are going to find deals," Mr. Calanog said.
Portland, Ore., posted the largest rent decline, at 0.7%, followed by Las Vegas, San Diego, and Southern California's Inland Empire. Those three markets have all seen an uptick in home-buying activity, particularly among the low end from first-time buyers and investors.
South Florida, meanwhile, appears to show signs of stabilizing after a painful years-long slump prompted by heavy overbuilding. Rents gained 1.1% last quarter in Palm Beach and 0.8% in Tampa-St. Petersburg.
"That market has been so bad for so long that many people had started to forget about it," said Alexander Goldfarb, an analyst at Sandler O'Neill & Partners LP.
Nationally, the apartment vacancy rate stayed flat at 8%, the highest level since Reis Inc., a New York research firm, began its tally in 1980. Local markets, such as Houston apartments, generally followed the national lead, although there were exceptions.
Reis tracks vacancies and rents in the top 79 U.S. markets, and rents rose in 60 of them, led by Miami, Seattle and New York—all cities that have notched big rental declines in the past year.
Rents increased 1.6% in the first quarter in Miami and 0.9% in New York. The gains came during what is usually a seasonally weak period for apartments and suggested that landlords may have some momentum heading into the peak spring and summer leasing season.
"Deterioration seems not to have just been arrested but reversed," said Victor Calanog, director of research for Reis. "Several markets have bottomed and may be on track to recovery," he said.
Nationally, effective rents, which include concessions such as one month of free rent, rose 0.3% during the quarter compared with a 0.7% decline in the fourth quarter of last year and a 1.1% drop in the first quarter of 2009. Vacancies are tied to unemployment, because many would-be renters move in with family members or double up during a downturn.
"We clearly hit an inflection point in all of our markets in January and February," said Jeffrey Friedman, chief executive of Associated Estates Realty Corp., which owns and operates 12,000 units in the eastern U.S.
Renters are also staying put longer: the average renter now stays for 19 months, up from an average of 14 months, said Mr. Friedman, and despite low mortgage rates and greater home affordability, fewer renters are leaving to buy homes.
"This is the first time in many, many years that it feels like even people who could afford to buy are making the investment decision not to," Mr. Friedman said.
Difficulty in obtaining financing for new construction of Dallas apartments, meanwhile, has limited the supply of new units that will be added in the coming years. Those fundamentals have landlords and investors excited about the potential for rents to pop once the economy gathers steam.
Still, Mr. Calanog said that a "slow recovery" was likely and that landlords shouldn't expect "galloping rental growth" until the job market firms up, particularly because younger workers that are more likely to rent have borne the brunt of job losses.
Others warned that gains were fragile and that landlords could continue to offer concessions to fill units.
"Rent reductions are not over yet," said Hessam Nadji, managing director at real-estate firm Marcus & Millichap. He said he didn't expect to see sustained rental growth until the second half of the year.
Barely half of the 22,000 units in buildings that opened their doors last quarter were filled, and landlords may cut deals because they face deadlines to pay back construction loans. "That's where renters are going to find deals," Mr. Calanog said.
Portland, Ore., posted the largest rent decline, at 0.7%, followed by Las Vegas, San Diego, and Southern California's Inland Empire. Those three markets have all seen an uptick in home-buying activity, particularly among the low end from first-time buyers and investors.
South Florida, meanwhile, appears to show signs of stabilizing after a painful years-long slump prompted by heavy overbuilding. Rents gained 1.1% last quarter in Palm Beach and 0.8% in Tampa-St. Petersburg.
"That market has been so bad for so long that many people had started to forget about it," said Alexander Goldfarb, an analyst at Sandler O'Neill & Partners LP.
Biggest Annual Rent Gains
| Rank | Metro Market | 12-month Effective Rent Growth |
| 1 | Colorado Springs | 2.5% |
| 2 | District of Columbia | 2.0% |
| 3 | San Antonio apartments | 1.5% |
| 4 | Dayton | 1.4% |
| 5 | Little Rock | 1.3% |
| 6 | Chattanooga | 1.2% |
| 7 | Austin | 1.0% |
| 8 | Suburban Maryland | 1.0% |
| 9 | Louisville | 0.8% |
| 10 | Pittsburgh | 0.8% |
31 March 2010
Austin is Highest Rental Market in TX
Austin Business Journal
Austin is the most expensive city in Texas for paying rent and buying a home, according to a study released this week by Washington D.C.-based Center for Housing Policy.
The study “Paycheck to Paycheck" compares and ranks costs in more than 200 metro areas in the United States and ultimately concludes homeownership is still unaffordable for many workers despite low interest rates and steep drops in home prices.
Austin ranks as the 65th most expensive U.S. rental market and the 73rd most expensive homeownership market of all metro areas studied. The center studied data provided by the National Association of Home Builders, the National Association of Realtors and the U.S. Department of Housing and Urban Development.
Austin’s median home price is $176,000, unchanged from 2008, the study found. However, Austin’s ranking rose to No. 73 for 2009 compared with No. 84 in 2008.
The markets with the highest median home prices were in California: with San Francisco and San Jose leading the way, followed by Honolulu in third place, and then back to California in Santa Ana and Santa Cruz in fourth and fifth place respectively.
The typical rent for a two-bedroom home rose in 89 percent of the markets studied, with Austin’s price hitting $954 in 2009 from $912 in 2008, although Austin did fall in rankings down to 65 from 59. Once again, San Francisco was the most expensive city at $1,760.
Despite some perceptions it’s a renter’s market in the U.S., the study found that in the vast majority of metropolitan's fair market rents have held steady or increased, even occasionally surpassing monthly mortgage payments for a median-priced home.
The study also found that some occupations are more prone to being priced out of renting. Specifically, retail salespeople continue to be priced out of renting a two-bedroom apartment in every market studied. Janitors fare almost the same, being able to afford a two-bedroom apartment in only one of the 210 rental markets studied. Licensed practical nurses are unable to rent a two-bedroom apartment in 55, police officers in 12, and elementary school teachers in 11, of the markets studied.
“We must develop the common sense, cost-effective policy solutions at the state and local levels that will help ensure long-term affordability for homes and Austin apartments,” said Center for Housing Policy Chair John K. McIlwain, senior resident fellow and the J. Ronald Terwilliger chair for housing at the Urban Land Institute.
“Otherwise, our workforce will face longer commutes and higher transportation costs, leading to increased traffic congestion and adverse environmental impacts."
25 March 2010
Rent City
NY Daily News
Rentals are the backbone of the NYC real estate market
Call it hustle, or preparation, but Citi Habitats rented over 12,900 apartments last year, more than ever before and a record for any New York City rental company. Almost 2,400 more than they rented in 2008, this increase represents what Citi Habitat’s president, Gary Malin, thought all along.
“The backbone of New York City’s real estate market is rentals,” says Malin. “Seventy-five percent of the apartment stock in New York City are rentals. Of those, 75% are studios and one-bedrooms. That’s a lot of apartments where people are moving in and out on a constant basis. It’s why rental agents love to work. If you’re good, you can make fast cash.”
“The backbone of New York City’s real estate market is rentals,” says Malin. “Seventy-five percent of the apartment stock in New York City are rentals. Of those, 75% are studios and one-bedrooms. That’s a lot of apartments where people are moving in and out on a constant basis. It’s why rental agents love to work. If you’re good, you can make fast cash.”
Currently averaging over 850 rentals a month in what is a traditionally slow period for rentals, the company is on pace to beat last year’s mark. While industry revenue is lower than past years because sales prices are down, Malin points to his company’s positioning and business model as a reason for the success.
“I’ve always thought that if there was a company situated and strong enough to weather any economic time and remain the dominant rental company in the city, it was us,” he says. “Over the past few years, we proved it, and we did it by renting and selling apartments. Before any agent hits the streets, they go through a week of training. From that moment on, they are geared toward renting and selling, or doing whatever they want to be their own success.”
Some stay with rentals
“Do the math,” Malin says. “If you rent a $25,000-per-month apartment and get a month fee, standard in the industry, that’s $25,000 for not nearly the amount of work you’d have to do earn that sales commission. After closing costs and who knows how much time sitting on the market marketing the apartment, you’d have to sell a $600,000 apartment to make that.”
Malin also estimates a good 40% of renters in Manhattan are new to the city. New York’s constant draw almost makes it recession-proof, although the market crash after the fall of Lehman Brothers impacted the rental market first. Immediately, prices dropped slightly. Fast to react to avoid vacancies and decreased profits, landlords started offering concessions like one or two months free rent. What the industry refers to as “owner paid fees,” or “OP,” also became an incentive, meaning building owners paid broker fees, not the would-be tenant.
“Make no mistake about it,” says Malin. “Even though prices were slightly lower, those costs are built into the rents. Landlords also asked for longer-term leases because they were giving away free months.”
When the market didn’t stabilize in 2009, Citi Habitats still saw an increase. Malin and other real-estate leaders watched as midsize sales and rental companies such as Coldwell Banker Hunt Kennedy and J.C. DeNiro shut down. Malin closed two offices, one downtown in the Financial District and another on W. 57th St. He watched as 10% of around 740 agents left the firm.
“We had to trim on the office side,” he says. “Everyone did.”
Chris Shiamili, founding president and CEO of Ardor Realty Corp., which at one time had 120 agents, also saw a drop in personnel over the past year. At the same time, he saw an increase in per-agent sales volume.
“If something doesn’t kill you, it makes you stronger,” he says. “The people who stuck it out were of higher quality. This crisis was like a war for us in real estate. Everything was a struggle. Rentals are directly related to unemployment, so until the labor market picks up, it will stay tough. At the end of 2009, we saw a nice increase in sales.”
That increase in sales recently ended. At the same time, rentals picked up again. Shiamili, who is pursuing a doctorate in economics at New York University in his spare time, doesn’t see competition as a problem in the New York rental and sales market.
“The market is flooded with inventory on the sales and rental side,” he says, despite low vacanies. “There is no competition in the New York real estate market right now. There is more than enough business to go around.”
So why then is there still a slowdown, or more importantly, who is doing business? According to Shiamili, it’s those organizations generating the most qualified leads, and those with the best customer service and agent training programs.
Of all the companies in the rental industry, Citi Habitats says it’s as good, if not better, as anyone else. Their 12,900 rentals last year was by far the top in the industry, likely nationwide. They also sought to legitimize rentals as a bona fide business. Before Citi Habitats was founded in 1994, the rental business was dominated by local companies who developed relationships with building owners. They opened doors and collected commissions. When other companies entered the fray in the late 1980s, the business became quick and dirty, with agents falsely advertising a price of an apartment and presenting would-be renters with more expensive units when showing apartments.
The same shenanigans occur now, mostly in the Financial District where new firms pop up every day advertising on Craigslist.org. Citi Habitats vowed to stop all that. Their size and business model — rentals and sales together — keep them honest as customer service is the hallmark of their strategy. Agents who mislead clients are simply asked to leave.
“The perception on the rental side was one of basement brokerages,” says Malin. “Little places that you can’t even tell if they’re a legit business or not. Look at our offices. From the beginning we understood the importance of perception, and the reality of doing good business.”
The organization also developed a new development team strictly devoted to new-construction rentals. Led by Clifford Finn, they represent Larry Silverstein's Silver Towers, Forest City Ratner’s 80 DeKalb, and Dwell95 by Philippe Starck, three of the city’s top rental projects.
Now with 12 offices dedicated to rental and sales, the company also allows agents to develop personalities and brands. Developing “hybrid agents,” or agents who can both rent and sell apartments, Citi Habitats can be many things at once. A client can go from renting a small one-bedroom to buying a $3 million loft working with the same real estate broker.
Andreas Metzger, a top Citi agent, rented more than 160 apartments last year, grossing more than any agent in the company’s history. He has exclusives on some of the upper East Side’s top buildings. Caroline Bass focuses on customer service. At 27 years old, she has become a force from her referral business.
“Being a rental agent offers someone a chance to build a career in real estate quickly,” says Malin. “New York is made for rentals. People need, want and crave living here. In your first year, you can do 30 to 40 deals. Sales takes longer.”
Malin, who believes 2009 was the “year of the rental,” is optimistic about 2010. If his organization does near the same numbers, his firm will dominate. Shiamili, a realist, hopes to survive and grow.
“A good chunk of our customers are current tenants who at the same time negotiate with their current landlords for price reduction,” he says. “It’s all about weak consumer demand and a glut of inventory in both sales and rentals.”
15 January 2010
U.S. Now A Renter's Market
The Wall Street Journal
Apartment vacancies hit a 30-year high in the fourth quarter, and rents fell as landlords scrambled to retain existing tenants and attract new ones.
The vacancy rate ended the year at 8%, the highest level since Reis Inc., a New York research firm that tracks vacancies and rents in the top 79 U.S. markets, began its tally in 1980.
Rents fell 3% last year, according to Reis, led by declines in San Jose, Calif., Seattle, San Francisco and other cities that had brisk growth until the recession.
Gains in home sales have been driven by government stimulus, leading some to wonder if the nascent housing recovery needs federal assistance to sustain, Nick Timiraos reports.
In New York City, the vacancy rate improved by 0.1 percentage point for the second straight quarter, but around 60% of rental buildings dropped their rents in the fourth quarter from the previous quarter. Effective rents -- which include concessions such as one month of free rent -- fell 5.6% in New York last year, the worst since Reis began tracking the data in 1990.
The vacancy rate ended the year at 8%, the highest level since Reis Inc., a New York research firm that tracks vacancies and rents in the top 79 U.S. markets, began its tally in 1980.
Rents fell 3% last year, according to Reis, led by declines in San Jose, Calif., Seattle, San Francisco and other cities that had brisk growth until the recession.
Gains in home sales have been driven by government stimulus, leading some to wonder if the nascent housing recovery needs federal assistance to sustain, Nick Timiraos reports.
In New York City, the vacancy rate improved by 0.1 percentage point for the second straight quarter, but around 60% of rental buildings dropped their rents in the fourth quarter from the previous quarter. Effective rents -- which include concessions such as one month of free rent -- fell 5.6% in New York last year, the worst since Reis began tracking the data in 1990.
Landlords now must entice tenants to renew leases. "We'll shampoo their carpets. We'll paint accent walls. We'll add Starbucks cards," said Richard Campo, chief executive of Camden Property Trust, a Houston-based real-estate investment trust that owns 63,000 units. He said the first half of 2010 should be "pretty ugly," but was optimistic the sector would pick up later in the year.
Few markets have been spared. During the fourth quarter, vacancies increased in 52 markets, while they improved in 17 and stayed flat in 10. Vacancies increased most sharply for the year in Tucson, Ariz.; Charlotte, N.C.; and Lexington, Ky.
Vacancies are tied to unemployment, because many would-be renters move in with family members or double up during a downturn. Apartments have been squeezed because younger workers, who are more likely to rent, have experienced the brunt of job losses during the downturn.
Landlords were also hit last year by competition from a wave of new supply that hit the market. The 120,000 units that came onto the market last year, including some busted condo projects that had to be converted to rentals, represented the most new construction since 2003, according to Reis.
Few markets have been spared. During the fourth quarter, vacancies increased in 52 markets, while they improved in 17 and stayed flat in 10. Vacancies increased most sharply for the year in Tucson, Ariz.; Charlotte, N.C.; and Lexington, Ky.
Vacancies are tied to unemployment, because many would-be renters move in with family members or double up during a downturn. Apartments have been squeezed because younger workers, who are more likely to rent, have experienced the brunt of job losses during the downturn.
Landlords were also hit last year by competition from a wave of new supply that hit the market. The 120,000 units that came onto the market last year, including some busted condo projects that had to be converted to rentals, represented the most new construction since 2003, according to Reis.
Many of those developments had secured financing before credit markets seized up. The credit crunch has frozen most new development, which means that new apartment completions should fall by half in 2011. That's one potential silver lining for apartment owners: The limited new supply should give them the ability to boost rents quickly whenever job growth returns.
"If you are renting a place, now might be a good time to renegotiate that lease," said Victor Calanog, director of research for Reis, who added that the sector could see a recovery in the second half of the year, buoyed by either job growth or at least the perception that the economy was turning around.
Such oversupplied markets as Florida, Phoenix and Las Vegas are hurting, even though housing sales have picked up. "Landlords aren't benefiting because jobs aren't recovering," said Hessam Nadji, managing director at Marcus & Millichap, a real-estate firm.
"If you are renting a place, now might be a good time to renegotiate that lease," said Victor Calanog, director of research for Reis, who added that the sector could see a recovery in the second half of the year, buoyed by either job growth or at least the perception that the economy was turning around.
Such oversupplied markets as Florida, Phoenix and Las Vegas are hurting, even though housing sales have picked up. "Landlords aren't benefiting because jobs aren't recovering," said Hessam Nadji, managing director at Marcus & Millichap, a real-estate firm.
Marcus & Millichap is to release a separate report on Friday that forecasts a further 2% to 3% drop in apartment rents over the next year, most of which will be concentrated over the next six months. The report forecasts Washington, D.C., will be the healthiest rental market in 2010 for the second straight year.
Government efforts to prop up the housing market also threaten the apartment sector by making it easier for some renters to buy homes. Some landlords have reported a slight uptick in renters moving out to buy homes. Around 13% of Camden Property's move-outs last summer left to buy homes, up from 11% at the beginning of the year. But that is still roughly half of the rate seen during the housing boom, when mortgage standards were much looser. "During the housing boom days, you had people who weren't qualified to rent but could buy a half-million-dollar home," said Alexander Goldfarb, an analyst at Sandler O'Neill & Partners LP.
Thanks to falling home prices and record low mortgage rates, it now costs less to own than it has in the past decade on a mortgage-payment-to-rent basis. But falling rents are expected to offset some of the recent improvement in affordability, making renting more attractive than owning in some markets.
Government efforts to prop up the housing market also threaten the apartment sector by making it easier for some renters to buy homes. Some landlords have reported a slight uptick in renters moving out to buy homes. Around 13% of Camden Property's move-outs last summer left to buy homes, up from 11% at the beginning of the year. But that is still roughly half of the rate seen during the housing boom, when mortgage standards were much looser. "During the housing boom days, you had people who weren't qualified to rent but could buy a half-million-dollar home," said Alexander Goldfarb, an analyst at Sandler O'Neill & Partners LP.
Thanks to falling home prices and record low mortgage rates, it now costs less to own than it has in the past decade on a mortgage-payment-to-rent basis. But falling rents are expected to offset some of the recent improvement in affordability, making renting more attractive than owning in some markets.
12 December 2009
The Other American Dream: Default, Then Rent Instead
Wall Street Journal
PALMDALE, Calif. -- Schoolteacher Shana Richey misses the playroom she decorated with Glamour Girl decals for her daughters. Fireman Jay Fernandez misses the custom putting green he installed in his backyard.
But ever since they quit paying their mortgages and walked away from their homes, they've discovered that giving up on the American dream has its benefits.
Both now live on the 3100 block of Club Rancho Drive in Palmdale, where a terrible housing market lets them rent luxurious homes -- one with a pool for the kids, the other with a golf-course view -- for a fraction of their former monthly payments.
"It's just a better life. It really is," says Ms. Richey. Before defaulting on her mortgage, she owed about $230,000 more than the home was worth.
People's increasing willingness to abandon their own piece of America illustrates a paradoxical change wrought by the housing bust: Even as it tarnishes the near-sacred image of home ownership, it might be clearing the way for an economic recovery.
Thanks to a rare confluence of factors -- mortgages that far exceed home values and bargain-basement rents -- a growing number of families are concluding that the new American dream home is a rental.
Some are leaving behind their homes and mortgages right away, while others are simply halting payments until the bank kicks them out. That's freeing up cash to use in other ways.
But ever since they quit paying their mortgages and walked away from their homes, they've discovered that giving up on the American dream has its benefits.
Both now live on the 3100 block of Club Rancho Drive in Palmdale, where a terrible housing market lets them rent luxurious homes -- one with a pool for the kids, the other with a golf-course view -- for a fraction of their former monthly payments.
"It's just a better life. It really is," says Ms. Richey. Before defaulting on her mortgage, she owed about $230,000 more than the home was worth.
People's increasing willingness to abandon their own piece of America illustrates a paradoxical change wrought by the housing bust: Even as it tarnishes the near-sacred image of home ownership, it might be clearing the way for an economic recovery.
Thanks to a rare confluence of factors -- mortgages that far exceed home values and bargain-basement rents -- a growing number of families are concluding that the new American dream home is a rental.
Some are leaving behind their homes and mortgages right away, while others are simply halting payments until the bank kicks them out. That's freeing up cash to use in other ways.
Ever since they quit paying their mortgages and walked away from their homes, they've discovered that giving up on the American dream has its benefits.
Ms. Richey's family of five used some of the money to buy season tickets to Disneyland, and plans to take a Carnival cruise to Mexico in March. Mr. Fernandez takes his girlfriend out to dinner more frequently. "We're saving lots of money," Ms. Richey says.
The U.S home-ownership rate has charted its biggest decline in more than two decades, falling to 67.6% as of September from a peak of 69.2% in 2004. And more renters are on the way: Credit firm Experian and consulting firm Oliver Wyman forecast that "strategic defaults" by homeowners who can afford to pay are likely to exceed one million in 2009, more than four times 2007's level.
Stiffing the bank is bad for peoples' credit, and bad for banks. Swelling defaults could also mean more losses for taxpayers through bank bailouts.
Analysts at Deutsche Bank Securities expect 21 million U.S. households to end up owing more on their mortgages than their homes are worth by the end of 2010. If one in five of those households defaults, the losses to banks and investors could exceed $400 billion. As a proportion of the economy, that's roughly equivalent to the losses suffered in the savings-and-loan debacle of the late 1980s and early 1990s.
The flip side of those losses, though, is massive debt relief that can help offset the pain of rising unemployment and put cash in consumers' pockets.
For the 4.8 million U.S. households that data provider LPS Applied Analytics estimates haven't paid their mortgages in at least three months, the added cash flow could amount to about $5 billion a month -- an injection that in the long term could be worth more than the tax breaks in the Obama administration's economic-stimulus package.
"It's a stealth stimulus," says Christopher Thornberg of Beacon Economics, a consulting firm specializing in real estate and the California economy. "The quicker these people shed their debts, the faster the economy is going to heal and move forward again."
As the stigma of abandoning a mortgage wanes, the Obama administration could face an uphill battle in its effort to keep people in their homes by pressuring banks to cut their mortgage payments. Some analysts argue that's not always the right approach, particularly if it prevents people from shedding onerous debts and starting afresh.
"The effect of these programs is often to lead homeowners to make decisions that are not in their economic best interests," says Brent White, a law professor at the University of Arizona who has studied mortgage defaults.
Few places in the U.S. were better suited to attract true believers in home ownership than Palmdale. A farming community that expanded in the 1950s to accommodate the aerospace industry around nearby Edwards Air Force Base, the city more than doubled its population from 1990 to the present as it became the final frontier for Los Angeles-area workers looking to buy.
About half of Palmdale's 147,000 residents endure a daily commute that can extend to two hours or more one way. In return, they get a homestead in a high-desert locale of haunting beauty, with Joshua trees dotting the landscape, and real-estate developments locked into a master grid of streets with anonymous names such as Avenue O-8 or Avenue M-4.
The 3100 block of Club Rancho Drive, built by Beazer Homes mostly in 2002, captures the essence of Palmdale's appeal. Winding along the southern edge of the Rancho Vista golf course just south of Avenue N-8, its spacious homes, verdant lawns and imported birch and sycamore trees exude a sense of middle-class tranquility.
Club Rancho became a solid community of owner-occupiers, many of whom stretched their finances to the limit. As of the end of 2007, total mortgage debt attached to the 13 houses on the block for which records are available had reached $4.5 million.
Fast-forward to the end of 2009, and the picture changes radically. Thanks to a 50% drop in home prices, at least two owners on the block now owe between $60,000 and $160,000 more on their mortgages than their houses are worth. Four more homes have already passed through foreclosure into the hands of new owners.
In the process, the block's total mortgage debt has fallen 37%, to $2.7 million.
Much of Club Rancho also has converted to rentals, a shift mirrored across Palmdale. Five homes on the 3100 block are now occupied by renters, up from only two in 2007. In the past six months, at least three families have moved into those rentals after walking away from other homes.
Ms. Richey, the teacher, arrived in Palmdale in 1999. In 2004, she and her husband, Timothy, bought a two-story home on Caspian Drive, near Avenue O-8, with a no-down-payment loan. They took pride in the amenities they installed: a powder room with granite countertops, a backyard pool and play area, and the purple-and-turquoise fantasy playroom upstairs for their three daughters.
But the value of the house plunged to less than $200,000 in 2009. Their $430,000 mortgage, with its $3,700 monthly payment, began to look more like an unwanted burden. By May, amid troubles getting tenants for two rental properties she also owned, Ms. Richey decided the time had come to cut a deal with America's Servicing Co., a unit of Wells Fargo & Co. servicing the mortgage on the house.
After three months of wrangling, she says she finally received a modification approval. The new monthly payment: about $3,300, far more than she had hoped. A Wells Fargo spokesman confirmed the bank offered Ms. Richey a modification under the Obama administration's Making Home Affordable program, and said, "The Richeys turned down the lowest payment we could offer."
Ms. Richey and her husband had already been working on Plan B -- exploring the neighborhood's "For Rent" signs.
On one trip, they drove by the house at 3152 Club Rancho Drive. It was bigger than their house on Caspian, had a pool with three waterfalls, and boasted a cascading staircase that Ms. Richey says she could picture her daughters descending on prom night. The rent was $2,195 a month.
The situation presented Ms. Richey with a quandary now facing more than 10 million U.S. homeowners who owe more on their mortgages than their houses are worth.
On one hand, walking away from her home would be easy. California is one of 10 states that largely prevent mortgage lenders from going after the other assets of borrowers who default. But she also had to consider the negatives. Her credit could be tarnished for years and, perhaps most importantly, she feared her friends and neighbors might ostracize her.
"It was scary," she says, noting that people tended to keep such decisions to themselves for fear of being stigmatized. "It's still very hush-hush."
Tom Sobelman, whose family of four lives across the street from Ms. Richey, at 3127 Club Rancho Drive, sees mortgages as a moral as well as financial obligation. He's still paying the mortgage on an investment property he owns nearby, despite the fact that the rent is about $1,000 a month short of covering his costs.
Mr. Sobelman, 37, argues that people who choose to default are unfairly benefiting at the expense of taxpayers, who have put trillions of dollars at risk to bail out struggling banks. "All these people are gaming the system, and I'm paying for it," he says. "My kids are going to be paying it off."
Mr. Sobelman has plenty of company. In a recent study of people who owe more on their mortgages than their houses are worth, economists Luigi Guiso, Paola Sapienza and Luigi Zingales found that about four out of five believe defaulting on a mortgage is morally wrong if one can afford to pay it. But they also found that the people become 82% more likely to say they'll default if they know someone else who defaulted.
Moral or not, the individuals who want to shed their mortgage debts are quickly transforming the Palmdale real-estate market.
Adam Robbins, who runs the local Realty World franchise and manages about 80 properties, says about 90% of his prospective tenants are people in Ms. Richey's situation. So he and other rental managers are loosening rules to accept people who have been through foreclosures.
"Those are all good people," he says. "They just got bad loans or bought at the wrong time."
Ms. Richey and her family made the move to Club Rancho Drive in August, when she was already several months behind on the mortgage. With Mr. Robbins's help, she recently sold the house on Caspian Drive for $195,000, money that the bank will accept to settle the $430,000 mortgage debt. She's also considering walking away from the mortgages on her two rental properties.
Showing a visitor the personal touches in her new home, including a $1,800 dining set she bought with some of her newly available income, she notes the advantages of being a renter rather than an owner.
"You take a risk for the American dream," she says. "I don't have to worry about paying property tax, homeowners' insurance, the landscaping, cleaning the pool or any repairs."
Others on Ms. Richey's block have made similar moves. Mr. Fernandez, the firefighter, moved into 3139 in July, after stopping the $4,800 monthly payments on the home he owned around the corner on Champion Way.
Mr. Fernandez says he made four attempts to modify the larger of the two mortgages on his home, which add up to $423,000. Ultimately, he was offered a monthly payment that, together with back taxes, was higher than what he had been paying. Today he's working to partially reimburse his lenders, IndyMac Bank (now OneWest Bank) and American First Credit Union, by selling the home, which he expects to fetch about $300,000.
A spokeswoman for OneWest Bank said the bank "offered Mr. Fernandez the lowest payment possible under the [Federal Deposit Insurance Corp.] loan modification guidelines." A spokesman for American First said the company always seeks to help clients stay in their homes.
With an income of about $8,300 a month and a rent of $2,200, Mr. Fernandez says he now has the wherewithal to do things he couldn't when he was stretching to pay the mortgage. He recently went to concerts by Rob Thomas and Mat Kearney. He also kept his black BMW 6 Series coupe, which has payments of about $700 a month.
"I don't know if I'll buy another house again, because it's such a huge headache," he says.
The U.S home-ownership rate has charted its biggest decline in more than two decades, falling to 67.6% as of September from a peak of 69.2% in 2004. And more renters are on the way: Credit firm Experian and consulting firm Oliver Wyman forecast that "strategic defaults" by homeowners who can afford to pay are likely to exceed one million in 2009, more than four times 2007's level.
Stiffing the bank is bad for peoples' credit, and bad for banks. Swelling defaults could also mean more losses for taxpayers through bank bailouts.
Analysts at Deutsche Bank Securities expect 21 million U.S. households to end up owing more on their mortgages than their homes are worth by the end of 2010. If one in five of those households defaults, the losses to banks and investors could exceed $400 billion. As a proportion of the economy, that's roughly equivalent to the losses suffered in the savings-and-loan debacle of the late 1980s and early 1990s.
The flip side of those losses, though, is massive debt relief that can help offset the pain of rising unemployment and put cash in consumers' pockets.
For the 4.8 million U.S. households that data provider LPS Applied Analytics estimates haven't paid their mortgages in at least three months, the added cash flow could amount to about $5 billion a month -- an injection that in the long term could be worth more than the tax breaks in the Obama administration's economic-stimulus package.
"It's a stealth stimulus," says Christopher Thornberg of Beacon Economics, a consulting firm specializing in real estate and the California economy. "The quicker these people shed their debts, the faster the economy is going to heal and move forward again."
As the stigma of abandoning a mortgage wanes, the Obama administration could face an uphill battle in its effort to keep people in their homes by pressuring banks to cut their mortgage payments. Some analysts argue that's not always the right approach, particularly if it prevents people from shedding onerous debts and starting afresh.
"The effect of these programs is often to lead homeowners to make decisions that are not in their economic best interests," says Brent White, a law professor at the University of Arizona who has studied mortgage defaults.
Few places in the U.S. were better suited to attract true believers in home ownership than Palmdale. A farming community that expanded in the 1950s to accommodate the aerospace industry around nearby Edwards Air Force Base, the city more than doubled its population from 1990 to the present as it became the final frontier for Los Angeles-area workers looking to buy.
About half of Palmdale's 147,000 residents endure a daily commute that can extend to two hours or more one way. In return, they get a homestead in a high-desert locale of haunting beauty, with Joshua trees dotting the landscape, and real-estate developments locked into a master grid of streets with anonymous names such as Avenue O-8 or Avenue M-4.
The 3100 block of Club Rancho Drive, built by Beazer Homes mostly in 2002, captures the essence of Palmdale's appeal. Winding along the southern edge of the Rancho Vista golf course just south of Avenue N-8, its spacious homes, verdant lawns and imported birch and sycamore trees exude a sense of middle-class tranquility.
Club Rancho became a solid community of owner-occupiers, many of whom stretched their finances to the limit. As of the end of 2007, total mortgage debt attached to the 13 houses on the block for which records are available had reached $4.5 million.
Fast-forward to the end of 2009, and the picture changes radically. Thanks to a 50% drop in home prices, at least two owners on the block now owe between $60,000 and $160,000 more on their mortgages than their houses are worth. Four more homes have already passed through foreclosure into the hands of new owners.
In the process, the block's total mortgage debt has fallen 37%, to $2.7 million.
Much of Club Rancho also has converted to rentals, a shift mirrored across Palmdale. Five homes on the 3100 block are now occupied by renters, up from only two in 2007. In the past six months, at least three families have moved into those rentals after walking away from other homes.
Ms. Richey, the teacher, arrived in Palmdale in 1999. In 2004, she and her husband, Timothy, bought a two-story home on Caspian Drive, near Avenue O-8, with a no-down-payment loan. They took pride in the amenities they installed: a powder room with granite countertops, a backyard pool and play area, and the purple-and-turquoise fantasy playroom upstairs for their three daughters.
But the value of the house plunged to less than $200,000 in 2009. Their $430,000 mortgage, with its $3,700 monthly payment, began to look more like an unwanted burden. By May, amid troubles getting tenants for two rental properties she also owned, Ms. Richey decided the time had come to cut a deal with America's Servicing Co., a unit of Wells Fargo & Co. servicing the mortgage on the house.
After three months of wrangling, she says she finally received a modification approval. The new monthly payment: about $3,300, far more than she had hoped. A Wells Fargo spokesman confirmed the bank offered Ms. Richey a modification under the Obama administration's Making Home Affordable program, and said, "The Richeys turned down the lowest payment we could offer."
Ms. Richey and her husband had already been working on Plan B -- exploring the neighborhood's "For Rent" signs.
On one trip, they drove by the house at 3152 Club Rancho Drive. It was bigger than their house on Caspian, had a pool with three waterfalls, and boasted a cascading staircase that Ms. Richey says she could picture her daughters descending on prom night. The rent was $2,195 a month.
The situation presented Ms. Richey with a quandary now facing more than 10 million U.S. homeowners who owe more on their mortgages than their houses are worth.
On one hand, walking away from her home would be easy. California is one of 10 states that largely prevent mortgage lenders from going after the other assets of borrowers who default. But she also had to consider the negatives. Her credit could be tarnished for years and, perhaps most importantly, she feared her friends and neighbors might ostracize her.
"It was scary," she says, noting that people tended to keep such decisions to themselves for fear of being stigmatized. "It's still very hush-hush."
Tom Sobelman, whose family of four lives across the street from Ms. Richey, at 3127 Club Rancho Drive, sees mortgages as a moral as well as financial obligation. He's still paying the mortgage on an investment property he owns nearby, despite the fact that the rent is about $1,000 a month short of covering his costs.
Mr. Sobelman, 37, argues that people who choose to default are unfairly benefiting at the expense of taxpayers, who have put trillions of dollars at risk to bail out struggling banks. "All these people are gaming the system, and I'm paying for it," he says. "My kids are going to be paying it off."
Mr. Sobelman has plenty of company. In a recent study of people who owe more on their mortgages than their houses are worth, economists Luigi Guiso, Paola Sapienza and Luigi Zingales found that about four out of five believe defaulting on a mortgage is morally wrong if one can afford to pay it. But they also found that the people become 82% more likely to say they'll default if they know someone else who defaulted.
Moral or not, the individuals who want to shed their mortgage debts are quickly transforming the Palmdale real-estate market.
Adam Robbins, who runs the local Realty World franchise and manages about 80 properties, says about 90% of his prospective tenants are people in Ms. Richey's situation. So he and other rental managers are loosening rules to accept people who have been through foreclosures.
"Those are all good people," he says. "They just got bad loans or bought at the wrong time."
Ms. Richey and her family made the move to Club Rancho Drive in August, when she was already several months behind on the mortgage. With Mr. Robbins's help, she recently sold the house on Caspian Drive for $195,000, money that the bank will accept to settle the $430,000 mortgage debt. She's also considering walking away from the mortgages on her two rental properties.
Showing a visitor the personal touches in her new home, including a $1,800 dining set she bought with some of her newly available income, she notes the advantages of being a renter rather than an owner.
"You take a risk for the American dream," she says. "I don't have to worry about paying property tax, homeowners' insurance, the landscaping, cleaning the pool or any repairs."
Others on Ms. Richey's block have made similar moves. Mr. Fernandez, the firefighter, moved into 3139 in July, after stopping the $4,800 monthly payments on the home he owned around the corner on Champion Way.
Mr. Fernandez says he made four attempts to modify the larger of the two mortgages on his home, which add up to $423,000. Ultimately, he was offered a monthly payment that, together with back taxes, was higher than what he had been paying. Today he's working to partially reimburse his lenders, IndyMac Bank (now OneWest Bank) and American First Credit Union, by selling the home, which he expects to fetch about $300,000.
A spokeswoman for OneWest Bank said the bank "offered Mr. Fernandez the lowest payment possible under the [Federal Deposit Insurance Corp.] loan modification guidelines." A spokesman for American First said the company always seeks to help clients stay in their homes.
With an income of about $8,300 a month and a rent of $2,200, Mr. Fernandez says he now has the wherewithal to do things he couldn't when he was stretching to pay the mortgage. He recently went to concerts by Rob Thomas and Mat Kearney. He also kept his black BMW 6 Series coupe, which has payments of about $700 a month.
"I don't know if I'll buy another house again, because it's such a huge headache," he says.
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