The Bottom Line on an Upbeat Market

condo construction

Though the market appears to be in recovery mode, apartment-building construction has been on fire. (Robert Galbraith, Reuters / June 3, 2014)

Ever heard the phrase “damned with faint praise”? That’s what continually came to mind about the state of the housing recovery as journalists and industry representatives came together here for the annual conference of the National Association of Real Estate Editors.
It was one big “yes, but” discussion. Short version: The consensus was that the market has stabilized (and, in places like Houston, is going like gangbusters).
The longer version swirls around a number of concerns: Worry about young adults who just can’t seem to get interested in homeownership. Rising interest rates that will discourage many people from wanting to sell. And as much as homebuilding would like to recover, builders are having trouble getting their hands on the right kind of dirt.
Take note of this phrase: That would be “rate lockout,” two words that were uttered repeatedly here (alternately referred to as “rate lock-in,” but the same idea).
Rising rates have generally halted a years-long mortgage refinance party, which may only feed the problem of a shortage of homes for sale.
“Watch out for the lock-in effect on new rates,” said Lawrence Yun, chief economist of the National Association of Realtors. “People don’t want to give up their 3.5 percent mortgage rates unless they really need to move.
“We already have low inventory” of homes for sale, he said. What these movers “may do is rent their house and buy another one, if they can get another mortgage. Inventory (of homes for sale) isn’t coming to the market, even as they are buying. Unless builders ramp up, I think we could have a persistent housing shortage.”
It’s always sunny in Miami? For those of us who watched the housing train wreck unfold, Miami (with its no-down-payment excesses) was a source of fascination. It still is. Real estate there, it seems, continues to live in a parallel universe, according to local experts who addressed conference attendees.
“At one point during the downturn, we had a six-year inventory of condos” for sale, said Matey Veissi, who heads the Veissi Associates brokerage there. “At this point, we have a six-month inventory and 27,000 condos (being readied for sale) in the next year or two.”
But this time, as they’re fond of saying in real estate, is different.
“We see you out there thinking, ‘How could you do that?'” Veissi said, “but with most of the condos now, the developers are taking 50 to 70 percent upfront pre-construction (deposits). It’s nonrefundable. That’s what happened after the downturn.”
A lot of those cash deals are with people bringing in buckets of money from abroad, she said.
“Our recovery is coming back primarily from the international marketplace,” Veissi said. “I would say 42percent of sales in Dade County alone come from international people. Most are from Central and South America. They’re from the United Kingdom and Germany. There are large contingents of Chinese coming.”
Then there’s the weatherman factor.
“But this year, we’re also seeing more people from the Northeast and Midwest, strictly due to the winter you had this year,” Veissi said.
When (and if) renters turn into owners: Though the market appears to be in a recovery mode “at a meandering pace,” apartment-building construction has been on fire, said Hugh Kelly, chairman of the Counselors of Real Estate, a professional association of leaders in real estate fields. But landlords should tread carefully because renters in many markets are getting over their fears of homeownership, said Kelly, also a professor of finance at New York University.
This potential bleed in demand will exert downward pressure on apartment fundamentals, he said.
But Kelly may have been a minority voice on this topic. Numerous others said young adults, for many reasons, are afraid of taking on the financial burden of homeownership or are just taking their sweet time or are too saddled with student loan debt, said several speakers at the event.
“One of the areas that makes this particular recovery cycle different from the four that I have experienced is that the universe of buyers has changed substantially,” said Anthony Hsieh, chief executive of loanDepot, a mortgage originator. “Instead of first-time buyers — who have put their purchases on hold, for how long, we’re not certain — we have institutional investors coming in from hedge funds, and we have international buyers. All of that is helping to prop up real estate values, but all of that fights against first-time buyers.”
There’s small, and then there’s small: How big do we want our houses to be?
Consumers are telling builders the recession made them come to their senses.
That’s what they say, anyway.
“They say they want a small home, but what they want is a small home with lots and lots of big rooms,” said Will Holder, president of Trendmaker Homes in Houston, who spoke on a panel about the state of the homebuilding market. “They say they need a secondary suite on the first floor, a game room, a media room, a sunroom.
“Yeah,” he said, smiling. “Something small.”
And if you think the typical subdivision lot size is a little, shall we say, constrained now, just wait.
In order to make the costs work — particularly for first-time buyers, who are the missing piece of the housing recovery puzzle — many builders will shrink lots further, the builders said.
Not that there are that many lots, anyway.
“This is issue No.1 for the builders, lot shortages,” said Bradley Hunter, chief economist for Metrostudy, which tracks homebuilding data. “There’s a copious supply of lots around the country, but where there’s demand and where builders want to build, there are shortages.”
Chicago, Hunter said, is “one of those markets that is definitely lagging in the recovery.”
“There’s a large supply (of lots), but they’re mostly in areas that aren’t in favor” with buyers.
This post originally appeared on on June 20, 2014.