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The One Bright Spot in Real Estate
After my weekly dump on residential real estate yesterday, I feel obliged to reveal one corner of this beleaguered market that might actually make sense.
By 2050 the population of California will soar from 37 million to 50 million, and that of the US from 300 million to 400 million, according to data released by the US Census Bureau and the CIA fact Book (check out the population pyramid below).
That means enormous demand for the low end of the housing market--apartments in multi-family dwellings. Many of our new citizens will be cash short immigrants. They will be joined by generational demand for limited rental housing by 65 million Gen Xer’s and 85 million Millennials enduring a lower standard of living than their parents and grandparents. These people aren’t going to be living in cardboard boxes under freeway overpasses.
The trend towards apartments also fits neatly with the downsizing needs of 80 million retiring Baby Boomers. As the age, boomers are moving from an average home size of 2,500 sq. ft. down to 1,000 sq ft condos and eventually 100 sq. ft. rooms in assisted living facilities. The cumulative shrinkage in demand for housing amounts to about 4 billion sq. ft. a year, the equivalent of a city the size of San Francisco.
In the aftermath of the economic collapse, rents are still falling and vacancies are historically high. Fannie and Freddie financing is still abundantly available at the lowest interest rates on record. Institutions combing the landscape for low volatility cash flows and limited risk are starting to pour money in.
To see the data, charts, and graphs that support this research piece, as well as more iconoclastic and out-of-consensus analysis, please visit me at www.madhedgefundtrader.com . There, you will find the conventional wisdom mercilessly flailed and tortured daily, and my last two years of research reports available for free. You can also listen to me on Hedge Fund Radio by clicking on the “Today’s Radio Show” menu tab on the left on my home page.
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Yes, but if we are only going to allow 3x salary for mortgage calculation, then we're talkin' 'bout Cardboard City.
and how much farm land did you buy 23% ago,, or are you setting on family land
I guess agricultural land is not considered real estate.
Since fall of 2008, farm land in our area has appreciated in value 23% with NO downturn during the last quarter of 08 and the 1st quarter of 09.
I don't mean to be critical of the poster, but the California experience is not everyone else's experience. Those parts of the country that didn't overleverage during boom times are doing remarkably well. In central Texas where I live, sales are down but homes are still moving and we're not just talking about foreclosures. It seems as though there is significant demand. Perhaps that's because it's still possible to buy here for about the same monthly cost as rent in a decent apartment. That really is the key, it seems. In places where prices detached from rents, there are problems. In places where they didn't, the problems that do exist are much more manageable. Perhaps we have greater challenges ahead of us here, but I don't think so. We make it easy to move here and easy to find work. Housing remains a bargain relative to wages. It's getting crowded with out of state plates, which anecdotally suggests we are the exception, but it seems to me that those states that have kept regulation reasonable and allowed the private sector to grow, especially those segments that actually produce something (here it's power and food) are doing remarkably well in the face of a structural problem that undoubtedly will get worse before it can truly get better. Just my .0235 euros.
I agree with this post provided that someone can secure property very cheap and be prepared to wait several years for decent returns.
More useless drivel by madtrader. Do you even address any supply considerations????
This could explain why Apartment REITs (CLP comes to mind) have went parabolic in the last two weeks.
I am sure they could may some nice loft style apartments in the empty malls all over America. Looks like there will plenty of empty video stores too for some hollywood style apartments.
Why apartments? Dodge Caravans, GMC Savannahs and other roomy vehicles are better than cardboard boxes and cheaper than apartments.
I recall San Francisco was , at one time, toying with the idea of making those fiberglass igloo dog houses available for that cities abundant derelict population. Cheaper than SRO hotels they are also easier to maintain as they could just be hosed out periodically.
Why is madhedge featured all the time now on ZH?
I find his articles to be drivel lately.
Anyone else care to vote him off the island?
He's trying to be funny, but he has no talent and chooses his subjects poorly. It's like trying to be more bitchy than Barbara Boxer. In an age of Capitalist Pig, Hairy Wanker, and Jim Cramer, over the top investment advice just doesn't work. So solly.
+1 @ Babs Boxer. Ugh
"As the age, boomers are moving from an average home size of 2,500 sq. ft. down to 1,000 sq ft condos"
Don't know if my math is right but those are places around 700 m2 and 300m2?? That's fucking huge.
"There is no way to collect against someone that is not a US Citizen. Plus, they live differently than Americans and there is more damage."
That sounds a lot like Glenn Miller campaign ads, only you missed the "mongrel" part.
My little 78 m2 condo is "huge?" Who knew? On the other hand, the building is filling up with retiring Europeans and my condo has almost tripled in price since I bought it in 2004....that's right. Tripled. With rents on the order of 8% ROI. That's very solid.
Sawasdee Krab, America: we toldya Greenspan would turn the dollar into a Wiemar special when Bush transferred trillions to his "base" with "tax cuts." in 2001.
And quickly made the plans to vamoose the military dictatorship Bush left behind, along with all the "past due" notices he hid to dump on Obama, who couldn't run it if Clinton had left HIM a $150 billion surplus...how long did it take for Bush to turn black ink to red? Like a magician he was. Before 9/11/01 occurred, btw.
Who listened to us "way" back then? Kill the savers, "Debt is good says Dick," destroy your economic base. That was the Greenspan plan: worked to perfection. Oh yeah, while Dick converted his holdings to Euro based one. Nice to be "on the inside" ain't it?
Now you want to discuss investing opportunities in the US real estate market? Good luck.
Give Blankfein a call: he specializes in providing the "risk you desire." ALL you want. Eat it up!
Me? "im lao" (I am full, thank you.)
Clinton managed to get a surplus by using Enron-worthy accounting gimmicks. He "borrowed" funds from the Social Security "Trust" fund... It's all double-speak, and nothing but 1s, 0s, and accounting entries in ledger. Once you start looking at what's right in front of your eyes, you might decide it's time to take off the team jerseys and put down the foam finger; the purple team has been screwing us for a long time...
A quick rule of thumb calc that works for me is that 1 m2 = about 10 ft2. i.e. 250 m2 houses and 100 m2 apartments.
Of course that is huge for most of europe. Our poor in the US can afford more expansive housing than the european's middle class, and that's before the Fannie/Freddie CRM fueled housing-for-the-insovlent spree of late. High taxes in the Europe cause this by draining away resources people might have spent on more living space. Tough zoning laws and construction codes, plus ultra stupid rent control laws, prevent such building. On the other side high taxes on fuel and personal vehicles, combined with heavy subsidies for public transportation, also contribute to europeans stacking themselves one upon the other in crowded, compact living quarters. It may be a small world in most places, but not in most of the USA.
Maybe the very fact that Europe was covered with cities long before petroleum oil was used for transportation might play a part.
You are not offered the chance of land grabbing a preserved continent every day.
Right now the economics don't work for multifamily construction, at least in the Northeast. It only worked when rates were low and so were cap rates. Now, between the land costs, costs to build, and the carry costs during the rent up period on the one hand, and essentially flat or declining rents, you'd be "mad" to start one of these projects.
Agreed that multifamily is the best of all commercial real estate assets right now. However, yr analysis seems flawed. Where will this wave of immigration come from, and what will draw them to the USA. There are no jobs here, giving them promise of a better future....hence, in my opinion, no new wave of immigration. In fact, my money is on a wave of emigration from the USA -- many seniors, who no longer will be able to afford healthcare in the USA will head south to Mexico and South America. Also, no Baby Boomer can sell their house, so they aren't going anywhere until the residential market comes back with a furor. Lastly, with college grads unable to secure reasonable employment, they have no choice but to move back with parents...hence, the parents may need those 3000sf mcmansions, after all, as they may need to eventually hold 3 or 4 generations of the family. In any event, the C class apartments should certainly outperform all other apartment classes. There is no doubt that residents of A and B assets, once they lose their jobs will have no choice but to move into a C apartment.
Cheers.
Apartment demand assumes the millenials can pay rent. They cannot, so they live with their parents. Stacking. Immigrants have been doing it for years and it is the bane of landlords.
The State will eventually need to legalize sleeping in parks. Why is this illegal in the first place? It's like guns. If you outlaw guns only outlaws will have guns. If you outlaw sleeping in parks only bums will sleep in the parks.
Plenty of broke millenial hipsters would jump at the opportunity to live rent-free in a park and they would probably care for it reasonably well (better than the bums).
You are correct. This "stacking" trend is well established. Boomerang kids with college degrees coming back home to live with Mom and Dad. Sometimes the boomerangers bring their spouse and a couple of kids.
Walmart parking lots are filling up with beat up vans and 25 year old RVs, the newly homeless are going mobile.
Low income apartment buildings are the bottom of the barrel real estate investments. Tenants tear them up and you become a slumlord very quickly.
I see the government turning their new inventory of foreclosed houses into a Section 8 utopia. Where the "poor" who qualify for Section 8 housing are given government owned homes for little or no cost. No more living in the projects when the government can gift to you a McMansion in the suburbs. The government has taken almost complete control of the mortgage market, so this will be the final step in Barney Franks plan to provide the "deserving" people with home ownership.
One flaw in your analysis is that most Landlords like myself will not Rent to People that are not United States Citizens. The only exception is if they pay the enite year up front and a double Security Deposit.
There is no way to collect against someone that is not a US Citizen. Plus, they live differently than Americans and there is more damage.
I knew a Landlord that Rented from someone from the Middle East and they did not know that you have to flush the Toilet. They rented a Condo and the waste from the Toilet eventually seeped down 3 floors. Into the ceilings, walls, floors. It was a mess.
I am a landlord as well and disagree... I live in Lafayette, IN and we have a sizeable hispanic population. If the tenants are undocumented we just get an extra month of security deposit. It takes only 3-4 weeks to evict in my county so if they don't pay they are out fast. Collecting from tenants that have no assets and transitory employment is a mostly futile effort whether they are US citizens or not.
In my experience the immigrants pay more reliably than my other tenants on average. I'd rather have a hard working immigrant in my rental than a lazy Section 8 tenant any day.
I had a US citizen that knew the toilet needed to be flushed, but kept using the toilet for two months AFTER the water company cut off the water. When the toilet got too full they switched to the linen closet. You gotta love landlording!
Obama's Immigration reform (just in time for the elections) will put nationals at odds with the "NEW" nationals. CRE blow-ups in apartments should expand until there's a fix of some sort. Look at Philly or Detroit where whole complex's have been filled with squatters. It beats cardboard in the rain.
the descendants of the people that lived in this slum (see link) now buy houses in the suburbs
http://en.wikipedia.org/wiki/Swede_Hollow#History
"Swede Hollow was a neighborhood of Saint Paul, Minnesota. ...Although one of the oldest settlements in the city, it was also arguably the poorest as each wave of immigrants settled in the valley.[1] Swedes, Poles, Italians and Mexicans all at one point called the valley home. A similar community just downstream called Connemara Patch also existed for Irish immigrants."
"Although remembered with a certain sense of nostalgia today, it is not an exaggeration to describe the former area as a true slum. People and industries occupying the surrounding "upper" neighborhoods used the Hollow for an impromptu dump, which the inhabitants down below routinely scavenged for clothing, metals, building supplies, and even shoe repair needs.[4] Several gristmills operated on the creek by the 1850s. In addition railroad tracks were built along the creek in 1865, because the creek bed provided a relatively easy grade up from the Mississippi River compared to the bluffs in other places.[2]
Quite remarkable for a neighborhood in the heart of a major American city of the mid-twentieth century (and even more so considering the challenging climate of the Twin Cities region), Swede Hollow was never electrified, and plumbing conditions were extremely primitive. The residences were constructed almost entirely out of recovered and scrapped building materials, and the entire affair was serviced by a single meandering dirt road. Toilet facilities consisted of outhouses constructed directly over Phalen Creek. The original inhabitants of Swede Hollow got their water from springs and used Phelan Creek as their sewer, leading to water and sanitation problems.[5]"
But unassimilated immigrants stay in the slum generation after generation.
With US Blacks, I suppose you have your share of 'unassimilated' 'immigrants' staying in the slum generation after generation...
So what you're really saying is that the Obama years are going to spawn a massive, urban, third world style underclass in the USA?
Now that's Change with a capital 'C'.
If Malaria makes a comeback you're going to want to be long mosquito nets too.
Welcome to Hooverville obamaville!
I have some friends doing pretty well buying REO stuff since it cash flows now, but I wonder how long that will last with more supply coming on the market and deteriorating rents.
Do you really need more apartments? Or will the oversupply of homes already built be lower price rentals?
Invest money in housing for Mexicans that crossed the border with no money or greencard in their pocket....
...
$$$ THIS INVESTMENT HAS GOT "WINNER" WRITEN ALL OVER IT!! $$$
These people have money, and they have free of govt burden. Which means their cost of living is lower. My mother works for a school district with many migrant workers here in SoCal. They pay $1000/mo cash....to rent an unimproved garage.
Takeaway? As with AG/AU, own physical
Kid me not.
Malinvestment drivel again?
Low end buildings are the ones less likely to be built in the US as the general environment is more appropriate for the wealthier people in the world. You dont build motels on Park Avenue.
In only one decade, the subprime bubble will prove to have been a gift for the US territory, allowing to build houses that could not have been built in the first place without the promise of weighting more in a turnover.
Not sure: are you stating we will all be happy as clams regarding the bubble in six years (the bubble burst in 2006)? A "gift?" Huh. First I want to see how we are going to repay the trillions in loans we took out to save the Wall Street scamsters. That *might* put a crimp in your assertion. Ask Greece or Spain.
With 7 million homes now 30+ days on their mortgage and almost as many years of inventory?
Hard to see an upside in pricing (which is why we invest, isn't it?) in six years time. Ask Schiller what the Futures market is saying on pricing first. "Gift" isn't on the map...at all.
On the other hand, if this is correct, and there turns out to be a need for apartments and lower income housing, I suggest all the commercial real estate about to pop and drop is ready to be converted. I know I won't mind living alone in some new, but unoccupied strip mall.
As far as Baby Boomers (me middle baby boomer) needing to downsize: we will be required to bring the parents and adult children we still care for with us?
Basics eluding.
Mass production is kicking the bucket. What do you think will happen when oil becomes less available in terms of houses building?
Houses prices are getting to rise because building new houses is going to be less and less affordable.
Debt is not an issue in this context.
Should be clear: buy when there are plenty and cheap, sell when there are few and expensive.