And higher rent means the valuation of the property goes up. All the incentives are there for them to do this, we just all need to really convince ourselves they would never do such a thing.
Investors aren't stupid. If you're financing a building with high rents but high vacancy, it's pretty obv and their revenue will necessarily be lower than charging market price (which is by definition the profit maximizing price to charge).
If someone can figure out the con on a message board unrelated to real estate I'm pretty sure investors financing this stuff could figure it out as well
Investors have heard of such a thing as "diversification" and will surely look at their entire portfolio before jumping to short-sighted conclusions. It's very likely real-estate investors have an intimate knowledge of rental markets. There's a nontrivial cost to acquiring tenants and maintaining the buildings.
If they did the math after all the various factors are considered and this happened, then clearly this is the best play from their perspective. It's not even malice it's just "economic sense", except the way the economics works out just happens to screw people with barely enough money to afford rent.
That still doesn't mean they're not culpable under the textbook legal definition of collusion.
Banks are that stupid. For loans, you demonstrate expected rental income, based on rents of comps. We were in that exact situation. Just provided estimates based on a listing search. Question of vacancy rates or whatever did not come up.
No. This was multifamily, and we occupied one unit. Wrt default, not sure wrt all the details with property liens, but isn't that only when you don't make your monthly payment, regardless of income?
An asset can be owned by multiple investors who have competing interests with some wanting to take a large amount of risk by allowing real estate to remain vacant if it can mean a larger reward later.
The TL;DR is that there's weak evidence that the contractual conditions attached to financing from investors who seek high risk and high reward makes those landlords ignore local market conditions and incentivizes those landlords to leave commercial units vacant instead of renting them out at market value.
These companies don't care. A lot of these tenant management companies do legal grey area things and landlords pay for it (even though it's begging to be tackled). A good example is they keep tenant blacklists based on scraped court records [1]. Landlords are not supposed to be using stuff like this. I wouldn't have imagined they are price fixing too.
To remain in compliance with the law, OAG recommends landlords and property owners refrain from requesting a potential tenant’s court records and rental histories altogether and cease relationships with tenant screening bureaus who continue to provide court records. Any New Yorker who believes that they have been denied an apartment because of their rental history should submit a tenant blacklisting complaint online with OAG.
In its investigation of Clipper Equity, OAG determined the company had improperly obtained housing court records for 25 potential tenants and then denied housing to seven of those same applicants. The OAG found that Clipper thus violated the law. Clipper also violated city and state Human Rights laws by requiring potential tenants to disclose their marital status. As part of the agreement, Clipper Equity will take the necessary steps to comply with the laws it broke and has committed to ending its discriminatory screening policies.
> A lot of these tenant management companies do legal grey area things and landlords pay for it (even though it's begging to be tackled).
Back when I was renting (and this I acknowledge isn't even a grey area thing, just shady), I even called out a small local PM company... their "main" website, listing properties was all about their "ethics" and "fairness" and "transparency". But when you went into the "Owners" section you got then told to visit a different site, which talked about how the company would "work with you" to get "the maximum value for your property, strategically adjusting rental pricing upwards" while "shielding the landlord".
They mostly just look at most recent sales in the area. It sounds simple, but can be bewildering. Just because everyone gobbled up mortgages at low interest rates in 2020, does not mean you can keep pricing houses at 2020 levels. But that's exactly what the housing market keeps doing because they simply care about the last max bid/sale.
>But that's exactly what the housing market keeps doing because they simply care about the last max bid/sale.
"The housing market" is, by far, individual home sellers. Home sellers without sufficient incentive to sell can afford to wait for a higher prices. They are getting massive utility from the house already, they live in it, they might have no reason to sell if they cannot get a sufficiently high price.
Barring loss of income, death, or something else that really motivates a home owner to sell, there is little reason for homeowners to sell the property at a price they deem too low.
Hence increasing supply is the only way to lower prices, because an empty house usually has has negative utility (property tax, maintenance, security, etc), so the seller (home builders) are far more motivated to sell it.
At the end of the day people will only pay what they will pay.
Data like Zillow's Zestimate may impact the prices that people start with, but supply and demand take care of the rest.
I think that the lack of housing supply in most markets and higher demand for housing is what is keeping prices inflated.
If anything, this shows how high prices _would have gone_ had the interest rates stayed low, given that they are still high with today's high mortgage rates lowering demand.
I don't think supply and demand would autofix the issue. When a baseline is set, everyone believes it to be the new price. Same as how when a lie is repeated multiple times, it can dangerously become the false truth.
> At the end of the day people will only pay what they will pay.
this is empty verbage -- the money supply is run by groups of people i.e. the tender is tendered by tenders. Those comfortable with double-dipping into the cash supplies and using it to boost asset prices, did so with gusto. The rest of society suffers with a small (governing,lending) few benefiting mightily. The "copium" statements by the intellectually uncurious, those who are benefitting, and those that are perpetrating, come off like this vacuous non-statement above.
In the end you can only pay with the money you have. If rents go to a million and you are making $15 an hour you can't pay (no one can) and prices drop.
Keeping adding people and not housing supply and prices will go up. Remove people and add housing supply and prices will go down
What about the time component? Holding a market wide price even for a month can demoralize anyone into accepting the rent if you need to move in a month. Time pressure is the multiplier here. You cannot wait out being homeless by being combative against unreasonable rent.
When it is shown that landlords are discriminating based on a protected "Class" such as race, religion, etc... Otherwise they are just discriminating against the poor.
Until we make housing into a much less attractive "Investment" we will see obscene pricing levels. The only way to do that is to increase supply of housing. The hands down best way to do that is to end R1 zoning, minimum offsets, and parking minimums. At least within 20 miles of major cities.
The private homebuilding sector is not going to build at the rate required to improve supply, because excess supply will cut into their margins. Deregulating will just allow them to build a ton of cheap low quality housing and still charge enormous amounts for it. Landlords would just pass that on.
The solution is quality social housing, built by the state in large enough quantities to disrupt the market.
This is being downvoted, but it’s actually what countries that have solved this problem have done. Even everyone’s favorite “no zoning, build, build, build” paradise Japan accomplished this by also building a large amount of public housing:
The younger generation is coming around. In a hundred years or so things may change, but until then we're stuck with our current political economic system.
If you convert 10 single-family-homes worth a million dollars each into a skyscraper with a thousand units there's plenty of room for profit, even if the thousand units are cheaper than the current median cost for a condo (or rental).
Cities have been writing laws and zoning that prevent economies of scale from kicking in for decades. If they just stop doing that, we'll get more housing.
Allowing existing homeowners to increase their revenue by densifying housing will drive prices down. Although developers for single family dwellings will not be as happy about it, if you have a 1/3 Acre lot 10 miles from downtown S.F. which you can turn from a single family $3000 a month rental into a multi-unit $30,000 a month rental then you will be happy to do so. Even if it drives down the value of your $800/month rental in the middle of nowhere.
Imagine if you are currently owning and occupying a house and have a chance to pay your mortgage by building a rental property on the unoccupied half of your lot. A lot of people would be very happy to do so if it were legalized.
Edit: But you are totally right that socialized housing would be an excellent solution.
R1 zoning prevents the creation of affordable housing. Since you can only fit maybe two or three households per acre, and land prices are sky high, the only affordable housing is in the middle of nowhere, 2 hours from anything.
Something like this would be a huge improvement and reduce housing costs.
I agree with this. But the person i responded to was implying that relaxed zoning rules would leave more shoddy houses by developers. Despite building regulations being completely different than zoning.
> Until we make housing into a much less attractive "Investment" we will see obscene pricing levels. The only way to do that is to increase supply of housing.
That isn't the only way.
We could eliminate the many tax benefits like: accelerated depreciation, 1031 exchange, step up cost basis for inherited property, etc.
Even without those tax benefits, I still made $60k in equity just by owning my own house. Probably more in the time since I last checked. There just is too much money and not enough houses.
Decrease the benefits for owning an investment property, then the number of people purchasing investment properties will be lower and prices will likely fall.
No, the best way is to build housing. As long as we try make developers build housing through whatever incentives we can invent, they'll always be an investment. Developers aren't going to make new housing out of the goodness of their hearts. It is a business deal, an investment with an expected ROI. Making it a less attractive investment is going to end up with less of it being made. If the government builds housing, or subsidizes it (improving ROI for developers), we'll have more housing.
> The only way to do that is to increase supply of housing
And gave some examples of reduced regulation (zoning, parking) that would make it easier to build. They didn't say anything about government subsidies.
You said
> No, the best way is to build housing
Aren't you both saying the same thing?
I think you might have stopped reading at "don't make housing such a good investment" and not considered the substance of their argument.
America sucks at socialized housing to be honest. We always build sprawling tracts of public houses in the worst locations so as not to piss off their neighbors.
Soviet style block housing with mixed use development would be awesome but rich Americans would HATE it. Especially when you are building on a 10 acre lot next to their $2M 3 bedroom house, 3-5 miles from downtown, to build 4,000 units for the poors that make them coffee and deliver their Uber Eats.
It's much more politically viable to allow them to build a 20 unit apartment building on their 1/3 acre lot and rent it for $40,000/month to help pay for their $2M mortgage.
OP is talking mostly about housing being considered an 'investment' for the average homeowner, I think. Homeowners, on paper at least, are the biggest beneficiaries of the housing crisis:
And yet when I actually go building the only place I could afford it was to go to a place with no code or safety inspections. This make HN mind melt, many folks here want to maintain the house crushing regulatory machine because all said they'd rather an extra homeless guy freeze behind a dumpster than elevate risk of fire spreading to their home.
The only way to increase the housing supply is to increase the price of the house. So you're left with a death spiral. Build to lower prices, but the actual building is costing more than what people are willing to pay for a house, let alone the markup needed to justify KB homes (or others) to get involved at all.
Sure they're building, and you can go to job sites, but they're not going to charge what you think they will at the end. Long gone are those signs that say NEW HOMES LOW $400s!!!
And if you do, they're undesirably small condos. The sales cycles are extended or, unfortunately, they're just going to keep selling at the $800 prices you're seeing for a new home.
And I'd even add that shelter is also one of those things we shouldn't just let the free market sort out (as it has been, and we all see how that's been going).
Except the problem is we haven't been letting the free market sort it out. The market is highly distorted by laws which prevent development, which is why prices are so high.
Exactly. In the developed world the least free market is the real estate market. Free market extremists show up as NIMBYs at local council meetings. Progressives are no better, placing all sorts of rules on development in the name of fairness that only result in even higher prices and less development.
Zoning rules like height restrictions, floor area ratio, lot coverage, setbacks, parking minimums, square footage minimums, lot size minimums, and other zoning restrictions place extreme limits what can be built before we even mention exclusive single family zoning.
Wholly agree. Basic necessities Food, Water, Shelter, HealthCare etc should not be left to the whims of the free market. It isn't even hard to fix in the US where land is still plenty but artificially controlled by regulations as opposed to heavily population density places like Japan.
It only took a few generations, but we've gone from America, land of the free and home of the brave, to America: we tried it once in the past and there were problems, so we should give up now and never try again.
Public housing can be amazing, especially when the people involved actually want it to succeed.
Besides - even if there weren't many success stories to draw from, which there are - things can be improved on. Just because the first bicycles kinda sucked, doesn't mean that modern e-bikes aren't amazing. There are similar examples everywhere.
What's going on right now is a horror show. It's stupid, economically and morally.
It's a pipe dream to expect public housing to meet the demand for shelter in a political climate like that of the USA. That said, I'll still take as much public housing as I can get in my city.
When you sell the thing you sell (say, your labor) - do you try to sell it to the highest bidder (ie, prefer high salary) or do you not "discriminate" in this way?
Does this even have to be a citizenship issue? The DHS is providing evidence that could alter the judgement of many of these people's cases. Do you have to be American to request that evidence be vetted? If anything, one wrong algo and you can re-open or close buckets of cases at once.
I hear such conflicting information. For a normal looking new development, I hear that developers are looking to offload asap to recoup the investment. Certain markets in America make it almost seem as if these investors are willing to wait years for rates to come back up.
I don't think Powell gives two fucks about the inflation or unemployment rate. Think he's very interested in cost of living and rent more than anything else. Housing prices barely have moved down at we're on the wrong side over 5%. If housing just thinks its going to wait this wait out and emerge from all of this with this inflated money house has left in tact, while the rest of get slammed by the waves, well ... well I guess I've seen dumber stuff.
Housing needs to get hit for any of this to be worthing anything.
There’s no conflict. Developers are building and selling as soon as they can. That’s their job and that’s their business model.
The people withholding units from the market are your normal landlords and speculators who can stomach reduced rents in the income. They need to be taxed out of existence. LVT continues to be the right answer here, both for incentivizing development and disincentivizing speculation/holdouts.
The vacancy rate suggests most vacant units are in-between occupants, something you'd require for a healthy market. The vacancy rate should probably be double what it is -- it's probably at historic lows.
The sentence says “may”. And the previous sentence says “ A housing unit is vacant if no one is living in it at the time of the interview, unless its occupants are only temporarily absent.”
I guess we would have to read further on how they determine temporary. But given the sampling method, I would guess people doing a door to door survey and noting it as temporary absent if it’s well kept?
We have both problems, but the issue with low construction is not developers simply deciding not to build and/or building but deciding not to sell.
The headwinds on construction are labor shortages, material shortages, zoning, and land prices. Zoning and land prices are both also alleviated by LVT.
Another option that I really like is forcing rent control on landlords who don't have at least 80% occupancy. Don't want to reduce your rents to market rate? Fine, the law will do that for you.
Places like Vancouver, Canada do this through a vacancy tax. It doesn't appear to do much as those leaving the unit vacant are the extreme wealthy and just factor in the tax to the cost of maintaining the house.
I always love this counterargument to penalty based enforcement in these sorts of situations. "The penalties don't seem to have the desired effect!" Then the natural conclusion is that they aren't high enough.
If you print a trillion dollars and give it to the lower and middle class, they'd spend a good chunk of it in a few days to a year(see covid checks and unemployment bonuses) eventually resulting in inflation that disproportionately affects the low income folks, so it's temporary relief which is great during things like pandemics. If the same money is given(or flows) to the super rich folks, they either save it or buy appreciable assets, since they already pretty much already have everything they need.
So the fed doesn't have any other good options. They cannot raise taxes on the rich or institute a wealth tax or 'take' the rich's assets. That's up to Congress. Blaming the Fed I think is unproductive because they seem to be doing their job trying to balance low inflation and a low unemployment rate as much as they can, within the limitations of only being able to change interest rates and quantitative tightening/easing(not to mention things like the war in Ukraine increasing energy prices which affect prices of almost everything). If you had the choice between high(or run away) inflation and slightly higher unemployment(which was historically low), what would you choose? Wage increases are eaten up by inflation.
Asset inflation at this point is a runaway process caused by companies raising prices to cover increased costs and adding a margin for safety because of volatility. Companies in one area raising prices has a downstream effect, both in raising costs for other producers, and in allowing other producers to raise prices because of people's expectation of "inflation."
> Asset inflation at this point is a runaway process caused by companies raising prices to cover increased costs and adding a margin for safety because of volatility
You could use the same exact reasons to justify wage inflation while suppressing asset inflation lol. Of course, we know who has the power to get what they want. It's called capitalism for a reason.
> The feds actions show they want high asset prices relative to wages.
It’s an economic axiom that high interest rates mean lower asset prices.
So can you explain what you mean?
Also - as far as I know every us city except for Miami has had a decline in real estate prices - so again - where are you and everyone in this thread getting information? Anecdotes?
To be precise, high real rates generally means lower asset prices. We came in at 0.4% Month over month CPI. Overnight rates are 5.5%, so we still have a historically low real rate (5.5-4.8=0.7% CPI, 5.5-3.6=1.9% Core CPI).
The Fed hasn't really squeezed hard. They're looking for a soft landing. We went from super loose negative real rates to just loose policy, but to hear Jay Powell say it, we're already tight and restrictive. We probably need to get up to 3%+ real rate (maybe 6%+ overnight rate) to get a good washout and some forced selling.
Because interest rates have been artificially low since 2001. And then we got money printing too after 2008.
Housing prices have nothing to do with 2023 interest rates. Well they do, the fact that they are stalling/falling is very much to do with the higher interest rates.
You can't look at 20+ years of loose monetary policy, take the 1 year of high interest rates, and blame that on high asset prices.
Btw, have you looked at stocks and bonds in the last 1 year? PE ratios? They've collapsed. Because asset prices collapse with high interest rates, and stocks and bonds are much faster at responding than real estate.
But still, real estate prices have fallen in every major city bar one.
Seems like they're trying to balance out the other end of the equation by punishing labor through very high interest rates. My personal pet theory is that the fed wanted to raise rates enough so that the static interest rates on student loan debt didn't look so absurd when student loan payments came back online. Otherwise people would be demanding student loan debt relief. That ~7% doesn't seem so silly now, it's about inline with mortgage rates. But when mortgages were approaching 2%, that same 7% looked usurious.
Developers are not investors. They borrow money to build and hope to sell at a profit. It’s just like a new car dealership. The “inventory” isn’t owned by the builder or lot, it’s owned by the bank. The builder pays interest, taxes, insurance, every day a home sits unsold. They are motivated to sell and due to market factors they are starting to offer steep discounts. Now existing homes are a bit of a different story. There is a mix of owners and investors and they are likely locked in at a comparably low rate. If they bought in the last 2 years they may even be underwater. And if looking to move they may need to get a certain price to be able to get into their next home.
The investors keeping a building empty don't care about return on investment like most investors do they want to hide assests from their local government and possible have a place to flee to if things get even worse locally.
Investors looking for a return on investment want to rent everything. They leave property empty when remodeling, or when between tenants.
If property prices are going up 10% per year and price to rent is 30:1 (Vancouver) - to some it's not worth the risk of renting out the property.
You're just banking on leveraged appreciation.
Take a $2M condo. The rent is will be ~$60k for a year. The appreciation will be ~$200k, and the the principal (@ 3% interest - which they have if they're leaving it empty - is $35k).
You're getting an expected $235k if you leave it empty, and $280k (after vacancy and management) if you take on the risk of renting it.
Why go through all the hassle when the government is doing everything they can to pump up prices on leverage?
That depends on cashflow needs, and just how sure someone is that their spreadsheet (and expected future value) will turn out to be true. For property prices to go up 10% yoy credibly, property in that market has to actually change hands after all, and that requires someone spending cash or financing every year do the deal and to produce the data.
If that stops happening, eventually everyone has to adjust their spreadsheets/models, and all the sudden that model gets very grim.
actual cashflow is real/concrete and hence has a momentum and credibility that tends to reduce panic. It gives time to wait out market valuation issues, since there is money to pay the bills coming in.
And once the money changes hands, it also is ‘permanently’ the owners. That reduces risk.
Expected market value? Not so much, on any of those fronts. And at some point, all but the most die hard true believers are going to want to know why they’re dumping cash into finance payments (or keeping cash locked up) for property that isn’t worth it.
At some point with speculation, enough people blink that it collapses.
Or maybe not. At least that is what everyone in that situation tells themselves.
But it isn’t panning out for Chinese firms anymore like it used to.
This takes time to actually happen though, as everyone has very strong incentives to keep wil-e-coyote’ing once they’ve run off the edge of the cliff.
And somehow people always find reasons to not update those spreadsheets when the numbers are going down instead of up. For many of them, they ran off this cliff many years ago.
And it does work, as long as there are enough ‘greater fools’ around, and there are a lot of greater fools, or they can afford to wait.
Boomers here and in China can still go for many years before they have to sell.
In high demand metropolitan areas, I don't see how housing prices are ever going to take a hit. There are plenty of young, well-paid professionals interested in good real estate who are capable of and willing to pay high prices. Demand is severely constrained because interest rates are high. I can't see how the needle is going to move unless rates drop.
