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Peak Housing 2.0: Sam Zell Dumps 23,000 Apartments In 2007 Deja Vu
If you’ve been apartment shopping in the US lately, you might have noticed that rents are becoming more and more unaffordable seemingly by the month.
We’ve documented the inexorable rise in the cost of renting on too many occasions to count, but for those who need a refresher, we recommend rereading one of our more lengthy treatments in “The Mystery Of The ‘Missing Inflation’ Solved, And Why The US Housing Crisis Is About To Get Much Worse”, published late last month. In it, we explained why riotous laughter invariably ensues every time the Fed tells Americans that inflation is negligible.
In short, the collapse of the housing bubble transformed America into a nation of renters as the following chart of the homeownership rate makes abundantly clear:
That means that when Janet Yellen talks about low inflation, she’s talking to a nation which is struggling to cope with the following reality on a day to day basis:
When looking at the above, and when considering that, as we reported over the summer, in no state can a minimum wage worker afford a 1-bedroom apartment, one might be tempted to suggest that the top is in.
But not so fast.
It’s also possible that between crippling student debt and demographic shifts, the homeownership rate will continue to plunge.
As things stand today, household formation is being delayed as new graduates cope with i) a jobs market that churns out waiters and bartenders rather than breadwinner jobs, and ii) a student debt burden that averages $35,000 but is in many cases far higher. Meanwhile, a shift in the population to include more Hispanic Americans is also putting pressure on the the percentage of Americans who own a home. These factors could provide a tailwind for the market for the foreseeable future and that, in turn, means rents will only rise further.
One person who’s betting that we may have hit peak-rent is billionaire Sam Zell who just dumped a quarter of the apartments held by his real estate company for some $5.4 billion. Here’s more via WSJ:
Sam Zell has agreed to sell more than 23,000 apartments controlled by his real-estate company, Equity Residential, for $5.4 billion to Starwood Capital Group, the companies said.
The transaction, announced Monday, represents about a quarter of the units in Equity Residential’s portfolio of apartments and would be one of the largest since the recession. It also comes on the heels of Blackstone Group LP’s announcement on Tuesday that it is buying Stuyvesant Town and Peter Cooper Village in Manhattan for $5.3 billion.
Across the commercial-property sector, which includes office, retail and apartment buildings, growing numbers of investors have begun to question how long good times can last after a steep run-up in prices since the downturn.
Record values for offices and hotels in the U.S. and Europe, fueled in part by central banks’ multiyear efforts to keep interest rates near record lows, have prompted some big investors to reassess the market. Apartments have been especially hot, with average U.S. rents climbing 20% over the past five years, according to research firm REIS Inc.
The transaction brings together two savvy deal makers on opposite sides of the trade, Mr. Zell and Starwood Capital Chairman and Chief Executive Barry Sternlicht.
Why is the deal particularly notable? Because Zell has traditionally had a very keen nose about such things as "market peaks": the 74 years old is credited with calling the top of the real-estate market in 2007, when he sold another of his companies, Equity Office Properties Trust, to Blackstone for $23 billion. Soon after, the commercial-property market crashed as prices fell and debt defaults surged.
As for the current cycle, this deal merely marks the latest liquidation by Mr. Zell’s since 2012. Back then, Equity Residential was a buyer. The firm teamed with AvalonBay Communities to purchase apartment giant Archstone for $6.5 billion, not including about $9.5 billion in debt.
But Equity Residential has become “less aggressive as buyers of assets” in recent years, Mr. Zell said in an interview late Friday. Instead, it is getting out of suburban markets and into downtown urban centers, where young people are moving and where it is more difficult to build, he said.
Most of the 23,300 apartment units in the deal, roughly a quarter of Equity Residential’s total, are low-rise and mid-rise units in suburban markets in and around southern Florida, Denver, Seattle, Washington, D.C., and Southern California. Analysts expect a significant amount of new supply to be concentrated in those markets in coming years.
For Mr. Sternlicht, who made his name in the hotel industry, the move represents a big wager on apartments. His Greenwich, Conn., company has bought or put under contract 67,800 apartment units over the past year, including the Equity Residential deal.
“This is the healthiest U.S. apartment market in my lifetime,” Mr. Sternlicht said in an interview Friday. “We don’t see that trend reversing.”
Maybe not, but on the other hand, it's only a matter of time before renters are simply priced out of the market. Because while the BLS can seasonally adjust rent payments to make them as low as a bunch of bureaucrats want, the bigger problem is that US household income is not only not keeping up with rent inflation, it is far below it. In fact, as reported last month, real income is now back at 1989 levels!
As Harvard's Center for Housing Studies noted in a recent report, the cost burden on renter is rising at a remarkable pace:
This would seem to suggest that Zell - who also called the top prior to the collapse of the housing bubble - may end up looking like the smart money before it's all said and done.
As for what happens to cash strapped renters if Sternlicht is correct... well, there's always the basement...
We close with Zell's warning from last year: "This is the first time I ever remember where having cash isn't such a terrible thing, despite the fact that interest rates are as low as they are,"
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Real Estate...
it can only go up from here!
China and BRICS in general going tits up...US can kiss goodbye the foreign RE bid representing up to a 1/4 of all US residential RE buying for the last 3 years.
Explosion of China Shopping Centers For A Declining Shopping Population...Implosion Dead Ahead?!? China's version of the subprime crisis dead ahead...
http://econimica.blogspot.com/2015/10/explosion-of-china-shopping-centers-for.html
The guy's no genius. He's a Zionist insider who probably gets his tips from the Usurers via Odigo (i.e. 9/11). It's not too hard to call the rises and falls when you're in on the fix.
Guess you like Jewish people? I like all people.
Not me. I like good people. I guess that makes me an evil bigoted discriminator... a badge I wear proudly.
Hear Here Maestro!
RIPS
I have no idea what percentage 23000 is on the market, but the more product you can dump in a small amount of time, the less accurate you can be in timing that "peak".
Errr, that assumes, of course, that such things actually "affect" the "market". Must ... keeep ... prices .... going .... UP! Those bonuses don't pay themselves ...
Why isn't Sam Zell in prison for running the Tribune Company as a bust-out operation? Zell bought the company in 2007 for $8 billion, almost all borrowed. Then, overnight, the Tribune Company had $13 billion. Zell lied to everyone claiming he would turn the company into an ESOP. Zell hired his friends, many of them sexual predators, to be top officers of the company while laying off who knows how many longterm employees. If Tony Soprano had done what Zell did, looting the Tribune Company, Tony Soprano would be in prison for fraud. But Tony Soprano is a fictional character, he doesn't exist, just like Justice doesn't exist at that cesspool of fraud, mendaccity, looting, murder and torture that goes by the name United States Department of Justice.
What are you, a fucking communist?
The "grave dancer" is also the largest trailer park landlord in the US. His company, Equity LifeStyles Properties (formerly Manufactured Home Communities Inc.), buys mobile home parks and raises the rents. Most of the residents aren't flush with money, but it seems he has no problem doing this and using his lawyers to bully municipalities to get rid of rent controls. He also has no problem filing a SLAPP lawsuit to try and silence his critics.
"Here were the statements Zell’s company — Manufactured Homes Communities — claimed defamed it.
That was from 2002. Isn't Uncle Warren the current trailer park overlord?
Got to love people like you.
Really ... "bust-out operation". When the hell was the last time anybody under 50 years old bought a fucking newspaper? Where the fuck was the Tribune Company going? Here's an amazing insight for you - With or without Sam Zell, the Tribune Company, bloated, legacy pig and all, was going bankrupt, and deservedly so.
Here's a prescient quote for the likes of you, from you know where:
"Greed, for lack of a better word, is good. Greed is right. Greed works. Greed clarifies, cuts through, and captures, the essence of the evolutionary spirit. Greed, in all of its forms; greed for life, for money, for love, knowledge, has marked the upward surge of mankind and greed, you mark my words, will not only save Teldar Paper, but that other malfunctioning corporation called the U.S.A."
They don't call him the "Grave Digger" for nothing... Well it could be because he looks like Egore from Young Frankenstein too
Smart man Sam Zell...he'll buy them all back in the next few years at a 50% discount...whether the market inplodes or interest rates rise, either way it means prices are going down soon.
Where will he park the cash to wait out the collapse? A bank? Lotsa luck there. Treasuries. Ha. Stocks. Good luck.
That's the tough part of selling into a storm. You've got to be long something.
GOLD
Brilliant tactical move on Zell's part.
They say no one rings a bell at the top ... however this Zell just rang the top.
Expect MOAR blackstone/Zell like dishoarding of Res RE blocks in the $3-5 billion range in the weeks ahead.
I was expecting a peak in late November and another crashcade of Res RE into next late next summer. Looks like we started early. :\
Get ready for a bloody ride my friends. The world will be quite a different place by then.
The Grave Dancer has yet to be wrong. Who says you cant call tops?
Well, he bought the Chicago Trib in 2007 and put it in bankruptcy about a year later.
He's been spot on in real estate though.
Zell is selling those properties as part of his estate planning. As in, "You have at best 12 months to live, Mr. Zell. The pancreatic cancer has spread. I can give you a prescription for when you start feeling strong pains."
ho you short sternliht?
Zell should build urban ' coffin apartments ' for the millions of USSA minimum wagers..... like they do in Tokyo
http://www.dailymail.co.uk/news/article-2286069/Living-box-The-tiny-coffin-apartments-Tokyo-cost-400-month-rent.html
Need to think more creatively!
http://i162.photobucket.com/albums/t252/silvergray1358/Bubble%20Boy/moo.jpg
must be nice to have 23k apartments to 'dump'
Goldman: Homeownership Rate Decline Is Bullish For HousingEspecially if that still leaves you with 60,000 apartments, all generating monthly cash flow.
Yep. Peak rental rates. Smart move.
Why is Zell such an expert? Because he has benefitted from shitloads of insider info and bought and paid for pols?
Because he was sober enough to realize prop values couldnt go up forever?
If you own any rental property -the last thing you should do right now is sell it.
"If you own any rental property -the last thing you should do right now is sell it."
Oh, my! Carlyle you didn't get through to Starwood on that bit of advice!
Seriously, are you saying that no one should sell? What if someone has an ARM and the rates are notched up?
If something is the LAST THING that one does then does it really matter? I mean, that's usually what someone does when one sells in the dips!
I'm sorry - you clearly know more than I do.
anyone who owns a 3 family or cottage and rents it out - look, prices will go down, so sell it, get rid of that income taxed at 20% - and buy some treasuries and maybe some Starbucks stock instead.
Get out of land, because housing prices are in a bubble, and invest in something non-tangible that is sure to go up in price.
Is that right?
Strike TWO! Care to take another swing?
Strike 1: Giving "investment" advice using such absolute phrases as "the last thing;"
Strike 2: Making wild assumptions of what I do/am/have- nowhere will you find anything that you've tossed at me will stick (because nowhere here or elsewhere, and especially not in my "real" life [not this virtual world] does it even remotely resemble what you've tossed out there).
Thanks for playing!
Could be that Raymond is an idiot savant. More likely he is just an idiot.
If Zell is merely a connected member of the zionist cabal, why does he telegraph what he is doing and why?
For my money, when Sam Zell speaks (which is rare), the rest of us would do well to listen.
Raymond - Your comment is making my head hurt. You do realize that rentals have numerious deductions prior to determining the income tax to be paid...
But I do think that housing prices are in a bubble - just comparing income to rental and/or purchase price. I'm just not sure that the 'pop' is going to be be all that large.
First, you have made the case that Zell knows what is going on better than most in the markets.
Second, you fail to notice that he sold over 25% of his portfolio in a single sale. (Which probably was repackaged shit which would perform very poorly in this next down cycle.)
Third, you fail to recall that Blackrock just did the same deal on a comp lot of $5+ billion, so Zell is certainly not alone in his assessment.
Fourth, Zell has proven his track record in actually making billions of bux by being AHEAD of all the other players in RE, which is a far cry MORE evidence of his cunning than you have displayed.
Frankly, you have contradicted yourself by your own reasoning, which is a sign of your being emotionally bound to positions which your own thinking would warn you are at risk...
... but you keep going on that track and report back here with your winnings 6 months from now. BTW Zell just netted at least a billion from this sale, so know that he's already quite ahead of you in this race to prove whose smarter than whom.
So the problem is not apartments per se but suburban apartments. As home ownership goes down, urban apartments would seem to be the thing to own.
He must be betting on deflation.
He's culled out the shit from his portfolio. He's betting that shit will start to stink in a few months.
The country is reclaiming itself...
Folks being herded back into the cities.
It's one thing to own, it's another to also have to manage. Folks like Zell don't actually manage the shit.
A straight shooting no BS guy. Does what he thinks. He knows real estate and is usually ahead of the game.
And by sheer power/weight he's also able to influence the outcomes by moving his chess pieces, something that us little folks aren't able to do.
But, yeah, the "game" is that of pumping money around in different segments and countries in a kind of pea-shell game. TPTB cannot let the pea (wherever the fuck it really is- not likely on the table) stay under one shell for too long.
Job cuts/layoffs = falling rent, falling house prices, falling off buildings (or jumping out of). If you see those coming and move your chips accordingly, then you too, could be the next Sam Zell...
you can't look at the rental/flip market without looking at total available housing compared to local demographics.
the remtal amrket is strong because it is difficult to buy a house so if you want to be civilized you must rent. i see a huge comsback in the efficiency appartment and even the rooming house with the bathroom down the hall or micro apartments. renters are the real slaves, paying off someone else's debt with an increasing capitalization rate. now we will see the first upscale urban ghetto apartment complexes just like the housing authority specializes in.
Biut at some point you have to ask yourself how the cities will be able to sustain all the folks there. The country-side folks aren't going to be giving away food and raw materials for free.
Clearly this is an equation that is going to turn out badly...
Seer... QE 4 is going to fix everything, just wait and see. Stay calm , don't panic. Ben Bernake says so in his new book. Or you can have him give you the message in person for $250k. Y'see how everyting works out when you just beleeve !
Sell the Peak...Buy the Dip!
It's the same old 2-step.
Obviously, if true, a smart move with rents having skyroceted recently (shhhh.....don't tell anybody...the media isn't talking about it and you don't want to antogonise Uncle Sam now...do you? You could find you are on the no fly list the next time you arrive for your flight....there,....now,,, thatsagoodboy)
All I know is that I couldn't jump aboard the ponzimatic express. I bought my house at the supposed bottom of the market, put 20% down and still lost my ass. I sold the house for a $20k loss and had no equity to utilize when I moved to the current garbage pit I reside.
I feel like I am living 200 years ago. I burn wood for heat because oil is so damned expensive. My current place is not well insulated and the baseboards are old. Last January cost me $750 to heat my place. The jackass electric company jacked up electric rates to $.60 per kWh and I got a $320 electric bill.
ALMOST $1100 FOR HEAT AND ELECTRICITY. To keep the house at 65 and barely use anything by the way.
All thanks to contract speculation, not real demand. I remember thinking I was going to get a decent break on oil, only to see the contract jump almost $1.00 last January when the bottom was found by the algos.
I'm renting a shithole for $1000 a month. Everyone says I'm getting a good deal because the cheapest home I could find around me elsewhere was $1700 a month for a 900 sq ft prefab. I'm saving cash for a down payment on a new home. But I've got to build back the $50k I blew buying and selling my previous place.
I did laugh out loud when I saw mobile homes in a trailer park listed for $90k with a $200 a month HOA fee. I WONDERED WHAT FUCKING PLANET I WAS ON.
Based on my income I am supposedly in the top 15% of wage earners. Yes I can easily afford the $90k trailer park. sorry, not really a life goal to work my ass off to live in a trailer park. The issue is trying to afford the median price of $345k in the area. 80% of the available properties are over $400k. Especially hard to afford when you factor in the potential of $1000 a month untility bills. Everyone is putting up solar panels, but after the rough winter people are getting hit with heavy roof repair bills. A few hundred pounds of solar panels don't mix well with three feet of snow on hundred+ year old homes.
It's fucking bullshit. There are hundreds of homes for sale, hundreds more abandoned because people sent the keys back after losing a job. Prices should be cratering, but they aren't. The hedge funds are keeping a bid up on prices when they buy a place to register with HUD so they can move a family or two of mexicans in for government guaranteed rent. Of course the NAR doesn't care, they want the higher prices for commission rates.
I don't know how people are doing it. Must be why all the recreational areas are empty. Every dime goes to pay for housing. The only way you are doing ok is if you make six figures+. With that you still need a second wage earner hopefully making $30k or more. My wife makes $18k a year as a part time teacher. Her money is more of a tax liability than a help with finances.
This is what it's like to be middle class today. Fucked up the ass every single day.
NO. People aren't paying.
The Banks cannot forclose or they will be INSOLVENT.
GO HERE & PLUG IN ZIP CODES & YOU WILL UNDERSTAND:
http://www.zillow.com/visuals/negative-equity/#11/40.6765/-74.3338
head to the Midwest young man
Yep, Im making less now per hour than I was 15 years ago, But yet the cost of everything is way more now. Luckily Im the maintenance supervisor at the apartment complex where I live and I get cheap rent...I only pay 580 a month for a decent 2 bedroom. All around me people are struggling. 3or 4 people roomating together is becoming the norm. Im getting worried how all of this is gonna play out though and I dont feel very secure. Rents cant keep rising forever. Now people are starting to "flip" houses again...dont people ever learn?
If someone could please enlighten me as to how all this is likely to play out Id appreciate it. I dont know why and I cant put my finger on it but deep down I know things are fucked up and I know things cant end well.
Here are some signs of a coming recession.
1. Business loans for M&A not CAPEX.
http://www.zerohedge.com/news/2015-10-15/there-goes-final-pillar-us-recovery-loan-growth-paradox-explained
2. Factory orders continue to drop
http://www.zerohedge.com/news/2015-10-02/us-factory-orders-flash-recession-warning-drop-yoy-10th-month-row
3. Default risk spikes
http://www.zerohedge.com/news/2015-10-02/us-financials-default-risk-spikes-2-year-high
4. M&A set record
http://michaelekelley.com/2015/05/29/mergers-and-acquisitions-set-record/
5. Fed sees 2 bubbles
http://michaelekelley.com/2015/02/20/fed-warns-of-two-bubbles/
Here is how to prepare.
http://michaelekelley.com/2014/10/16/8-things-to-do-when-recession-happens/
Here is how to get your mind off this stuff.
http://michaelekelley.com/category/humor/
Good luck!
Who remember's Sam Zell's holiday card from just before the previous crisis? Raindrops...
North East RE is prime for a crash.
The amount of properties underwater and in delinquency is worsening.
The Banks/Note Holders CANNOT foreclose or they will have to mark enormous losses. The Banks will need another $700B just to cover the hole in their balance sheets from the 200 mile radius around NYC/Newark, NJ.
Go pick a zip code:
http://www.zillow.com/visuals/negative-equity/#11/40.6765/-74.3338
In some zip codes in Newark nearly HALF of the residential mortgages outstand are underwater and the delinquencies are closing on HALF of mortgages outstanding.
The whole NE around NYC, Newark, Baltimore, Atlantic City, Philadelphia, etc.: are all in serious collapse mode.
IF ALL of these delinquencies in the NE are forclosed and liquidated $1.7TRILLION in MBS will vaporize and nearly 4 MILLION people will be thrown into the streets, their credit destroyed, their lives in turmoil and no where to go.
-It would look very much like migrant exodus from the ME into Eastern Europe does presently..
Note: the NYC Rent Board also froze rents on 630K units this year..
Kirk dumped numerous Detroit rental properties to Chinese investors late last year.
Good luck to all, and may Detroit and both parties (Buyers and Inner-City Tenants) live in interesting times.
Just as in ~2004 to 2007 this cannot continue.
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Real income continues to fall.
Real home prices continue to rise.
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That cannot work. For one thing, the greater the percentage of their income people spend on buying/renting their home (their biggest expense), the less money remains to spend on "everything else".
And "everything else" is just a synonym for "the economy".
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Quote taken from secret federal reserve meeting:
Yeah, this is gonna work. /sarcasm
Sam knows that the props from the money printers will not be in CREs. You do not need to play the last rounds, just leave it to the funds when they are still around to smoke.