Tag Archives: New York City

Signs You Are In A Bubble

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photo by Jeff Kubina

Trulia.com quoted me in Signs Your Local Real Estate Market Is A Bubble. It reads, in part,

If you were burned in 2008, the last time the housing bubble burst, you’re probably (and understandably!) gun-shy about jumping into the housing market again — especially if you think your local area could be experiencing another bubble. If you buy during a bubble, overpaying for your home, you might be forced to sell for less than the property is worth — either that or stay put longer than you’d like until you build up enough equity to sell. So if you’re thinking of buying, it’s important to have a sense of the signs that point to a real estate bubble. Here are five of them.

1. Shaky loans are common

As we learned from the 2008 recession, subprime lending (lending to anyone with a pulse) is not sound practice. And we have made changes. “Credit remains relatively tight,” says Jonathan Miller, CRE, CRP, and president of Miller Samuel Inc., a New York, NY, real estate appraisal company.

Yet the U.S. government still backs loans that some might consider risky, particularly ones that require only a 3.5% down payment, which the Federal Housing Administration (FHA) offers. Before you get too alarmed, keep in mind that the FHA has been helping people become homeowners since 1934. The underwriting standards are higher with FHA loans than with some of the subprime low-down-payment products offered in the early 2000s, explains David Reiss, professor of law at Brooklyn Law School in Brooklyn, NY.

2. There’s lots of leverage

When you take out a mortgage, you’re leveraging your money — the smaller the down payment you make, the more you have leveraged the deal by using the lender’s money to make the purchase. “A bubble means lots of leverage,” says Miller. “And this [current] cycle has been remarkably devoid of leverage.” Miller cites New York City as an example. “About 45% of the transactions are cash. And for the price points below half a million dollars, the average person puts about 35% down.”

3. Home prices are rising faster than salaries

When housing prices are rising and your salary isn’t, you’re left with two options: continue to rent, or buy a house you can barely afford. If you think your market is in a bubble, you might want to wait to buy, especially if you’re really stretching to make ends meet.

“I would review the mean income levels and employment levels compared to real estate prices for signs of discord,” says Michael Kelczewski, a Pennsylvania and Delaware real estate agent. “Indicators of a local real estate bubble are asset values exceeding the local market’s capacity to absorb prices.” Reiss says that when home prices rise faster than salaries, “It could be the sign of froth in the market.”

Miller agrees that a “rapid run-up in prices that don’t match wage growth leads to discussions about bubbles.” But he says that as long as credit conditions from bank lenders are tight, you won’t have runaway price inflation. In New York, prices aren’t rising like they were, but they aren’t falling either. Miller says they’ve leveled off and are “stuck on a high plateau.”

So what do you do when affordability isn’t improving in pricey markets like New York, NY, San Francisco, CA, Los Angeles, CA, or any other high-cost urban market? Buy in the burbs. Miller notes that for New York, the market is booming in the outlying suburbs.

 *     *     *

When there are no signs

Of course, you might think your market is (or isn’t) in a bubble, but you could be wrong. “The problem with bubbles is that we don’t know them when we see them,” says Reiss. He explains that San Francisco, CA, for example, a hugely unaffordable city for most people, isn’t in a bubble just because prices are high. “Bubbles do not refer to rapid price appreciation. They refer to unsustainable rapid price appreciation. [The market] is unsustainable because fundamentals do not support the appreciation.”

The bottom line is, it’s difficult to know whether it’s really a bubble. “If homeowners buy a house that works for their family and that they can afford over the long haul, they will have made a decision that benefits them every day, even if real estate prices drop significantly,” says Reiss. But heed his warning: “If homeowners instead buy a house that is a financial stretch in the belief that it will appreciate down the road and fund their retirement, there is a good chance that they have set down a road to ruin.”

Small Multifamilies and The Affordability Illusion

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Fannie Mae’s September Multifamily Market Commentary repeats a common misunderstanding about small multifamily properties that is worth addressing. By way of background, it opens,

Multifamily rental units can be found in high-rise structures or in garden-style buildings, but there are a number of properties that house between just five and 50 housing units. These properties are usually identified as small multifamily and can be found in many different metros across the country. In many places, they can also be a key source of affordable rental units. (1)

While the data is not definitive, there appears to be somewhere between “296,000 and 360,000 small multifamily properties” with between 2.3 million and 4.4 million units of housing among them. (1) These units appear to be concentrated in about ten states that contain three quarters of the stock.  California and NY have the most small multifamilies by a wide margin and the cities with the most come as no surprise:  LA, NYC, SF-Oakland, Chicago and San Diego.

Here’s where I have issues with the analysis:

Fewer Small Multifamily Properties in the Pipeline

According to data from the Dodge Data & Analytics Construction Pipeline, the number of new multifamily projects being started has been declining since peaking in the second quarter of 2015, falling to 678 projects during the first quarter of 2016 . . . . The average number of units rose, however, to about 117 units per project.

Given the high land acquisition and construction costs in most metros, this trend of maximizing square footage in multifamily development, rehabilitation, and renovation should not be surprising. Unfortunately, it does have implications for the small multifamily segment, which in many places tends to offer more affordable rents when compared to newer properties.

An Uncertain Future for Small Multifamily

Over the next decade, the nation’s multifamily stock will likely see an influx of higher unit count properties. As older small multifamily rental properties age and/or fall into disrepair, they will likely be replaced with properties with more density per square foot. Developers will likely create more, but much smaller, units on the same size lot. As a result, these small multifamily properties may end up moving out of the 5-50 unit category and push up into the 50+ unit category, making preservation of the existing stock of small multifamily rental properties offering more affordable rents even more critical.(6)

The logic of this last sentence is faulty, but it is also oft-repeated by sophisticated housing market commentators. Small multifamilies are not cheap because they are small, they are cheap because they are old. Old housing is generally cheaper than new housing. So this notion that we should preserve old housing for its own sake is faulty. Generally, we would want to see an expansion in the supply of housing, so replacing an aging small building with a bigger new one would generally be a positive development. We also would like to see investments in upgrades to the housing stock, either through rehabilitation or replacement. Effectively, this Fannie Mae Commentary is saying that we should preserve very old small multifamilies instead of upgrading those properties. That is short-sighted because while it may keep particular units affordable, it will also tend to raise rents more generally (by restricting supply) and lowering the overall quality of the housing stock (by disincentivizing investment).

The Commentary acknowledges that “it seems that there are a variety of financing sources available in the financing of small multifamily rental properties, indicating there is sufficient and ongoing liquidity for this property type. ” (5) Perhaps it is best to treat small multifamilies just like the bigger ones and let the market determine the highest and best use of each parcel zoned for multifamily construction.

Just a Dude Fixin’ Cars

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car-lift

Realtor.com quoted me in Neighbors Sue Man for Tinkering With Cars in His Own Garage. It opens,

Charles Williams loves working on cars, a hobby he’s continued even after losing his legs in 1993 in a freak construction accident. So in 2007, he poured $65,000 into building a nearly 2,000-square-foot four-car garage next to his house in Harbeson, DE. The place—which has vintage license plates covering the walls and lifts so he and his buddies can tinker to their heart’s content without lying on the concrete floor—is a car nut’s fantasy. At least, it was, until some of Williams’ neighbors—apparently offended by the sight, smell, and sounds of guys doing guy stuff—decided to sue Williams for repairing cars in his own garage.

In 2014, three of Williams’s neighbors—Margaret Foulke next door and John and Carol Kane, who live 800 feet down the road—filed a lawsuit against Williams saying that the garage was a noisy, stinky nuisance and must be torn down, according to The Cape Gazette. In June, a judge ruled in favor of Williams, explaining simply, “Mr. Williams has a not-uncommon hobby—working on cars—that he pursues with an uncommon vigor.”

Nonetheless, the neighbors plan to take their case up the chain to the Delaware Supreme Court.

Williams says he’s spent $30,000 defending himself from his accusers, who also claim he built the garage without permits and runs it as an illegal business. But Williams denies these allegations as well, saying he received the proper permission to build and has never accepted money in exchange for repairs. In fact, he has even fixed vehicles owned by the very people are demanding that he tear down his garage!

“I’ve fixed their lawnmowers, I’ve fixed their tractor, I’ve fixed their golf carts… I did everything for them, anything they asked, since that’s what neighbors do,” says Williams.

At first glance, the plaintiffs seem like candidates for a “worst neighbors” award. But we had to wonder: Is there anything to this case? Is it ever illegal for to tinker with  cars in your own garage?

While local laws vary by area, as a general rule, David Reiss, a professor of Law at Brooklyn University and editor of REFinBlog.com, thinks the neighbors are spinning their wheels.

“The facts sure don’t seem to be on their side, at least as this article portrays them,” says Reiss. Here’s a rundown of the neighbor’s complaints about the garage, and why Williams appears to be in the clear.

Noise complaints

“There are a lot of loud things in and near homes,” points out Reis. Compare a vacuum cleaner at 10 feet (70 decibels) to a lawnmower (as high as 90 decibels) to a train (100 decibels).

“Many localities have restrictions on the decibel level of noise that can come from a property, but those levels can be pretty darn high,” Reiss explains. “New York City, for instance, limits garbage trucks to 80 decibels from a distance of 35 feet when they’re not compacting. It limits music from commercial establishments to 42 decibels when measured from inside a neighbor’s home.”

In other words, the sound of a few motors running or rock music probably aren’t loud enough to write home about—or to sue over.

Noxious fumes and other nuisances

Sure, these neighbors could claim that the eau de motor oil emanating from William’s garage is a “nuisance.” It’s just that they would have to be deemed “unreasonable in the context of their residential neighborhood,” says Reiss.

“The neighbors could also argue that the increased traffic that resulted from this use was a nuisance too, but that also seems like a major stretch,” says Reiss.

Illegal activity

“The neighbors could claim that Williams is running a commercial establishment in a residential neighborhood, but it sounds from the article like the facts don’t support this claim,” says Reiss. So unless the neighbors catch a huge wad of cash passing hands, Williams is just a regular dude who digs cars.

Historic Preservation and Affordable Housing

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photo by Ebyabe

Lior Strahilevitz has posted Historic Preservation and Its Even Less Authentic Alternative to SSRN. The abstract reads,

Historic preservation regulations are costly, contentious, and – as best we can tell – tend to promote residential segregation. Preservation as practiced in the United States also tells historical tales in a way that is inevitably selective, often more attuned to contemporary needs than historical objectivity, and likely to signal current residents and visitors about whose stories aren’t worth commemorating. Yet historical preservation, even to its critics, can further desirable goals. This essay examines traditional historic preservation strategies while also considering two potential alternatives, neither of which has received much attention.

The first alternative to traditional historic preservation – fake history – is employed on a large scale in the fastest growing residential community in the United States. The essay provides a case study of the use of fake history and theming in The Villages, Florida, revealing both the strategy’s potential for generating low-cost cultural resonance and its pitfalls. The possible connections between The Villages’ omnipresent theming and its disturbingly homogenous demographics are explored. The essay suggests that The Villages’ alternative to historic preservation might be replicated elsewhere and speculates about the demographic results of efforts to create more inclusive fake historical narratives.

A second, and novel, alternative to traditional historic preservation would select sites for historic preservation restrictions at random within a given community. Many of the problems associated with the way historic preservation regulations are implemented in the United States stem from the arbitrary and occasionally ugly battles over what to preserve and what to erase. Historic preservation becomes a battlefield for cultural warfare. Compared with this alternative, the case for randomly preserving in each city a few blocks that date from each particular era, while letting market forces dictate what gets preserved or destroyed elsewhere, may be surprisingly strong.

While I do not like either of these novel alternatives, we would certainly benefit from fresh thinking about what we are trying to achieve with historic preservation. Historic preservation remains too much of a niche area of regulation dominated by the few who feel most strongly about it. It has slowly but surely increased its reach in cities like New York. But it has not been accompanied by much serious thinking by broader constituencies about the costs and benefits of each incremental step.

There are obvious trade-offs with landmarking that don’t just affect landowners and developers. By restricting new construction, landmarking tends to restrict the supply of new housing units. This might be okay, but we should certainly think through those costs before just letting preservation districts cover more and more of a city. I am not particularly interested in communities based on fake history, but others are welcome to them. For me though, I am concerned that our most important cities might end up like Paris — stunning historic playgrounds for the wealthy, encircled by high-rise ghettos for the poor.

Airbnb’s Tourist Tenements

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The New York State Independent Conference issued a report, Tourist Tenements in the Making. The report concludes,

New York City has long been at the forefront of ensuring that its housing stock is safe for residents. We have instituted laws such as the Multiple Dwelling Law, the Housing Maintenance Code, and the Fire Code to ensure that buildings are constructed to the right standards for their intended uses, and have passed laws to prohibit activities that endanger people’s lives. One such action is turning residential properties into illegal hotels hosting over a dozen guests.

Residential properties are not meant to host dozens of transient guests. The IDC’s investigation found over 100 ads featuring residential spaces for groups of more than a dozen people, some claiming to house over 30 people. This kind of behavior not only creates an inconvenience for neighbors, but creates real dangers to both residents of this city and those guests that may choose housing not knowing that it is an illegal posting, since they saw the ad on Airbnb. We should not wait for a tragedy to strike before taking actions to curb illegal rentals that create dangerous conditions.

It is important that the State government take steps to protect our residents and tourists visiting New York from this kind of irresponsible behavior. As such, the Executive should act and sign into law the recent bill passed by the Legislature that will impose fines on individuals advertising illegal short term rentals and the Legislature should examine additional steps necessary to make sure that illegal short term rentals are handled not only in multi-family buildings but in private homes as well and that hosting websites be made responsible for the content they profit from. (11)

While the sharing economy is here to stay, it is hard to imagine that it will not face some form of increased regulation after reports like these come out. One Airbnb rental highlighted in the report advertises space for 16 people in a two-family house and another claims that it can house 32 people. The pictures in the report tell a thousand words each — bunk beds, beds in the kitchen, air mattresses lined up one next to the other.

This report shows some extreme examples of what can happen when the free market for residential space goes unfettered in a high-cost city. But, as the report notes, the government has a legitimate interest in protecting the health and safety of its residents and visitors. New York first regulated tenements over a hundred years ago. No doubt, they will soon act on this 21st century version of them, hopefully before a Triangle Factory Fire-type event strikes.

Jacob_Riis,_Lodgers_in_a_Crowded_Bayard_Street_Tenement

Micro-Units for Millennials

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Construction Dive quoted me in An Emerging Megatrend? Developers Experiment with Microunits to Target Millennial Market. It opens,

As U.S. home prices and rents continue to soar, some developers are taking aim at a new target market — those willing to sacrifice square footage to be able to live near their work and area nightlife at a more budget-friendly price.

These microhousing units, also known as microapartments and microcondos, have most of the amenities of their full-size counterparts but typically range from around 350 square feet to 550 square feet, with some buildings offering up units at a relatively roomy 1,000 square feet. Many also come outfitted with furnishings specifically designed for the unit — folding beds, hidden storage and convertible pieces that do double duty, such as a dining table that also functions as a work desk.

However, the growing concept is seeing mixed results in the U.S. Is microhousing just a passing fad as younger renters look for an affordable stepping stone to a larger space, or does it represent a shift in what some Americans are looking for in a home?

The Draw of Smaller Spaces

Jam-packed cities like Tokyo are prime markets for these tiny units because the cost of land is at a premium, according to David Reiss, professor of law and academic program director at the Center for Urban Entrepreneurship at the Brooklyn Law School. Microunits are particularly appealing to single, young professionals who spend a lot of time working and hanging out with friends rather than entertaining in their own homes, he said.

The primary draw, however, is “location, location, location,” Reiss said. “When young adults are choosing between a small space in the center city or a larger space further afield, there will always be some who opt for the former.”

This hasn’t always been the case, according to architect David Senden, partner at international design firm KTGY. Americans used to put a premium on living space, but there’s been a “shift on the priority list,” and “location and has jumped to the absolute top,” he said. There’s also a growing desire for shorter commuting times.

However, whether the overall demand for microhousing is on the uptick is debatable. Some developers see microunits as the solution that will provide millennials with the opportunity to live in vibrant urban settings, as well as offer baby boomers or those looking to downsize a minimalist living space without having to give up the modern conveniences they’ve come to expect.

When Microhousing Is a Viable Concept

Reiss said population density  and high prices need to be components of any successful micro project . When prices, in both rent and homes, “outpace middle-class income,” as they have done in cities like San Francisco and New York City, then some people will give up square footage in order to stay close to their friends or jobs. “The microunit might present a very attractive trade-off of space and cost for that demographic,” he said. Reiss added that New York City is even amending its zoning laws to allow for more micro developments.

Homeownership in NYC

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photo by Nathan Hart

Brooklyn’s Charles Millard Pratt House

NYU’s Furman Center and Citi have released their joint Report on Homeownership & Opportunity in New York City. It opens,

In New York City, the notoriously high costs of rental housing are well documented. But becoming a homeowner in the New York City real estate market is also a considerable challenge for low- to middle-income households. Households earning less than $114,000 face a severely constrained supply of homeownership opportunities in New York City.

This report seeks to shed light on the extreme variation in homeownership rates among New Yorkers and quantify the homeownership options that exist at different income levels. We do this by analyzing 2014 home sales prices and examining the potential purchasing power of households at various income levels in New York City, as well as in the nearby counties of Nassau, Suffolk, and Westchester.

We use five income categories for this analysis—Low-Income, Moderate-Income, Middle-Income, NYC-Middle-Income, and High-Income. These income bands are based on percentages of Area Median Family Income (AMFI) for the New York City metropolitan statistical area established by the Federal Financial Institutions Examination Council (FFIEC) and are based on data from the 2006-2010 American Community Survey. This report includes an additional middle-income band (NYC-Middle-Income), given that affordable housing programs in New York City serve households up to 165 percent of the U.S. Department of Housing and Urban Development (HUD) area median income (AMI). (3)

You’re all wondering, of course, what NYC-Middle Income is, so the report provides the following explanation of the income categories:

“Low-Income” households have an annual income of $34,000 or less, or 50 percent of AMFI;

“Moderate-Income” households have an annual income between $34,001-$55,000, or 50 percent to less than 80 percent of AMFI;

“Middle-Income” households have an annual income of $55,001-$83,000, or 80 percent to less than 120 percent of AMFI;

“NYC-Middle-Income” households have an annual income of $83,001-$114,000, or 120 percent to less than 165 of AMFI; and

“High-Income” households have an annual income above $114,001, or 165 percent of AMFI or greater. (3, emphasis added)

The report finds that

the purchasing power of most New York City households is limited, largely due to growing housing prices and stagnating incomes since 1990. In addition, while New York City had a relatively low share of homeowners compared to the U.S. in 2014, it was disproportionately low for Low-Income and Moderate-Income households relative to their U.S. counterparts.

The vast majority of home sales in New York City in 2014 were at prices unaffordable to Low-Income and Moderate-Income households, which comprised 51 percent of New York City households. Of the nine percent of sales in the city affordable to these households, three percent were affordable to Low-Income households and an additional six percent were affordable to Moderate-Income households. Home sales with prices that were affordable to Low-Income and Moderate-Income households in 2014 were, for the most part, concentrated outside of Manhattan.

Prospects for homeownership were not much better for Middle-Income households. In 2014, Middle-Income households, which comprise 15 percent of New York City households, could afford an additional 13 percent of sales (based on a total purchase price of up to $364,000), leaving 78 percent of sales out of reach for households with incomes of less than $83,000 annually. Less than half of sales in 2014 (42%) were affordable to 77 percent of New York households, including those characterized as NYC-Middle-Income.

Moving outside of New York City does not necessarily improve a New York City household’s potential to buy a home. In Westchester County, only two percent of sales were affordable to New York City Low-Income and Moderate-Income homebuyers combined in 2014. In Nassau County, only 24 percent of sales were affordable to New York City Low-Income, Moderate-Income, and Middle-Income homebuyers in 2014. In Suffolk County, 42 percent of sales were affordable to New York City Low-Income, Moderate-Income, and Middle-Income households. (4)

New Yorkers, and a lot of non-New Yorkers, are going to eat up the graphs in this report (what IS the median sales price in Brooklyn?!?), so it is worth a read for the real estate obsessed (yes, you). But it also has policy implications about the housing stock of the City and the surrounding region. The report itself does not make any policy recommendations, but it offers a stark reminder of how important rental housing policy is to any effort to maintain socio-economic diversity in the City.