What do you think about this article about the current housing bubble?

13 Replies

@Chris L.

One thing I find interesting about the article is asking 'How are people managing to pay for these rising rents?' I think it illustrates the point that is often made on BP: Home ownership has a lot more hidden costs than people realize. I think capex is often underestimated, especially by retail buyers. 

With greater flexibility in the job market and their lives, renters are managing to keep up with crazy markets like SF and NY (where we both live). I don't think it's a pertinent strategy for building wealth, but occupying a high-priced, bank-financed home isn't exactly a great strategy either.

@Trevor Ewen

I've been waiting for the "bubble" in much of Canada to lose cohesion for about a decade, yet somehow it continues to defy economic sanity.

I may be a little myopic because I live in Manhattan, but I think part of the rise may be due to the sharing economy. ALL the other renters on my floor do Airbnb currently (but I do not). 1 in 5 apartments in popular parts of NYC is on Airbnb:

http://ny.curbed.com/archives/2015/07/29/in_popula...

In my area, you can bring in $4000 a month (gross) on a rental that costs $1800/mo to rent. Without any of the costs of ownership! It's no wonder people Airbnb their spare bedrooms. Some people say Airbnb one of the reasons why rents increased in Williamsburg Brooklyn so much, some tourists prefer to stay there over Times Square. This is not just NY, I have friends who use the site in Boulder, Austin, SF, Connecticut, etc. And this doesn't even factor in VRBO, and other sites.

All this to say, some people who normally couldn't afford condos, duplexes, etc now can through renting out spare rooms on Airbnb. I know this isn't the only factor in price growth, though. In lower CT, builders are buying small houses and knocking them down to build bigger ones in order to profit. Naturally, sale prices are increasing. But onimously, I'm hearing from people that properties in that area are now sitting on the market longer than they used to...(though it maybe partly seasonal, I didn't track the area as closely last year).

Originally posted by @Chris L. :

I may be a little myopic because I live in Manhattan, but I think part of the rise may be due to the sharing economy. ALL the other renters on my floor do Airbnb currently (but not me). 1 in 5 apartments in popular parts of NYC is on Airbnb:

http://ny.curbed.com/archives/2015/07/29/in_popula...

In my area, you can bring in $4000 a month (gross) on a rental that costs $1800/mo to rent. Without any of the costs of ownership! It's no wonder I have have friends who Airbnb their spare bedroom. Some people say Airbnb one of the reasons why rents increased in Williamsburg Brooklyn so much, some tourists prefer to stay there over Times Square. This is not just NY, I have friends who use the site in Boulder, Austin, SF, Connecticut, etc. And this doesn't even factor in VRBO, and other sites.

All this to say, some people who normally couldn't afford condos, duplexes, etc now can through renting out spare rooms on Airbnb. I know this isn't the only factor in price growth, though. In lower CT, builders are buying small houses and knocking them down to build bigger ones in order to profit. Naturally, sale prices are increasing. But onimously, I'm hearing from people that properties in that area are now sitting on the market longer than they used to...

 I wonder how long this can last.  Last week, I was talking with a friend who sells luxury apartments in Manhattan, and she was telling me that many condo boards and management companies search AirBnB every day to make sure that apartments are not being put out on the site.   Coop and Condo boards are writing anti AirBnB provisions into their bylaws.  Coming soon to a lease near you is a provision that will make it a breach of your lease to sublet on AirBnB, VRBO, etc.  Landlords of conventional market rate apartments are more than happy to kick out a tenant and get more rent on the apartment.  Some landlords are also using AirBnB as a way of taking back apartments from deadbeat tenants, who are notoriously hard to evict in New York.  When the landlords find the place on AirBnB, they rent it themselves, and take possession of the apartment while the deadbeat tenant is gone.  Many tenants think that the management companies and landlords aren't watching, or that they can disguise the apartments, but in fact this is very difficult when you are trying to market the apartment to a renter.

I think the talk of bubble is offbase.

Robert Schiller one of the few who warned of the subprime crises defines bubbles:

"I define a bubble as a social epidemic that involves extravagant expectations for the future. Today, there is certainly a social and psychological phenomenon of people observing past price increases and thinking that they might keep going."

The reason I think the current housing market is NOT a bubble is that is driven by supply factors.   My theory is that new land developments have slow to return to the marketplace in response to the demand preferences of millennials and boomers both choosing to rent versus purchase.  As rents continue to escalate I believe the land developers will be enitced to return to the game because some the rent sticker shock will exceed lifestyle presences at some price point.

Schillers definition contains an element of subjectivity.   However if  you look to data to support your bubble or no bubble I believe it is largely fundamental driven not IRRATIONAL EXHUBERANCE.

Originally posted by @Douglas Dowell :

I think the talk of bubble is offbase.

Robert Schiller one of the few who warned of the subprime crises defines bubbles:

"I define a bubble as a social epidemic that involves extravagant expectations for the future. Today, there is certainly a social and psychological phenomenon of people observing past price increases and thinking that they might keep going."

The reason I think the current housing market is NOT a bubble is that is driven by supply factors.   My theory is that new land developments have slow to return to the marketplace in response to the demand preferences of millennials and boomers both choosing to rent versus purchase.  As rents continue to escalate I believe the land developers will be enitced to return to the game because some the rent sticker shock will exceed lifestyle presences at some price point.

Schillers definition contains an element of subjectivity.   However if  you look to data to support your bubble or no bubble I believe it is largely fundamental driven not IRRATIONAL EXHUBERANCE.

 I agree that constrained supply is an issue in New York, but constrained supply has always been an issue in New York and that did not stop us from having a bubble in 2006-2008 either.  It just means that the set point for rents is higher here, mostly because it is so hard to build, and so expensive to build on top of that.  And, in any event, if not a bubble, there is evidence that the cycle is nearing the peak in New York, as two days ago the WSJ reported an all-time high in construction in New York City.

http://www.wsj.com/articles/construction-in-new-york-city-goes-through-the-roof-1438217274

I think that's the right way to frame it @Jonathan Twombly a cyclical issue versus a bubble.   I guess the real question what is the difference and how should we respond?

I believe the response is build if it make sense but have high equity and solid exit strategy lined out assuming the cycle turns in the middle of the project. 

If you not interested or willing to take the risk of construction then it might be good to be very selective on what value add deals you buy and what markets you play in.   It seems to me that the 24 hour cities recovered very quickly.  

Secondary and Tertiary markets seem to finally turning around a bit.  Probably better bets for new construction and value add deals.

Originally posted by @Douglas Dowell :

I think that's the right way to frame it @Jonathan Twombly a cyclical issue versus a bubble.   I guess the real question what is the difference and how should we respond?

I believe the response is build if it make sense but have high equity and solid exit strategy lined out assuming the cycle turns in the middle of the project. 

If you not interested or willing to take the risk of construction then it might be good to be very selective on what value add deals you buy and what markets you play in.   It seems to me that the 24 hour cities recovered very quickly.  

Secondary and Tertiary markets seem to finally turning around a bit.  Probably better bets for new construction and value add deals.

 Depends on the secondary and tertiary market.  Charlotte and Greenville (SC) are probably overbuilt at this point.

I agree rates will go up a skosh but wth so much EU uncertainty and issues in China I see a moderate increase.   Just my take.

BTW for those interested the Urban Land Institute publishes a groovy consensus forecast.

http://uli.org/wp-content/uploads/ULI-Documents/2015-Spring-ULI-Consensus-Forecast.pdf?utm_source=reportspage&utm_medium=view&utm_campaign=smreport15

Under our lease, subletting requires our written consent.  We have recently added wording explicitly identifying that short-term re-renting of any portion of the premises under AirBnB or similar VRBO/rental service is a form of sublet and requires our written consent.  Violation is cause for eviction.

The local authorities here are not very happy with AirBnB and the time to handing out significant fines is short.

Originally posted by @Douglas Dowell :

I think the talk of bubble is offbase.

Robert Schiller one of the few who warned of the subprime crises defines bubbles:

"I define a bubble as a social epidemic that involves extravagant expectations for the future. Today, there is certainly a social and psychological phenomenon of people observing past price increases and thinking that they might keep going."

Douglas,  look up ... way up ... north of the 49th.  You have bank economists, politicians, and, of course, the media, talking about "the new normal" and any correction being a gentle "soft landing".

... sound familiar?

Originally posted by @Chris L. :

This article came out today:

http://www.businessinsider.com/housing-bubble-2-ha...

I have some thoughts about it but wanted to see what you guys think first. 

So what do you think?

Based on the historical 'house price index', it would seem somewhat of an exaggeration by some although not impossible.

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