Percent loss in value of residential real estate oligopolies due to hybrid work

[CorpRaider]

Yeah I'ma fade this.  Youngs trying to get dates through the local church group so they can go get some papa johns?  Nah man.

[thepupil]

so this is all of course anecdotal, but I beyond multifamily / condos, I have seen very little evidence of any loss in value of well-located  residential real estate. the single family market seems to be universally doing well, both close to cities and further out

 

my zestimate (which seems correct based on some recent sales/comps, but not a huge # of data points because inventory / transaction activity is so low) has gone from $470 / foot (2019 real price) to ~$513/foot. there's no reason to pay those prices unless you value the convenience and lifestyle of living near the city / in good school districts, access to restaurants, airports, amenities, etc. i don't think WFH has drastically changed the value of those things.

 

as long as people are realistic on pricing, homes continue to sell w/i a couple of days of listing.

 

this probably has more to do with how low rates are, but you'd think that if everyone wanted to have 4K sf and an acre in the exurbs, people wouldn't be tripping over themselves to buy 2K sf on 1/4 acre near the city (for more $)

 

i think WFH will make people priced out into the exurbs have a better life, they won't have to commute every day, but it's not clear to me that there will be marked decrease in pricing for well-located close-in convenient real estate near cities. maybe if rates rise significantly that will change.

 

here's an example of the type of thing that i think needs to correct pretty hard:

 

https://www.zillow.com/homedetails/7171-Woodmont-Ave-UNIT-307-Bethesda-MD-20815/166716517_zpid/

 

2015 built condo offered at $740K / $690/foot, sold for $800K in 2016. you can see this was a rental asking $3,300 / month pre-covid). this building is popular with downsizing boomers who want to live a convenient walkable and luxurious lifestyle (not a thing during covid, but probably will still be afterwards).

 

This building was built at the exact time (I think by the same developer) as a rental building across the street, where you can rent a similar unit for $3,600 / month, that's before any incentives.

https://www.flatsatbethesdaavenue.com/floor-plans/apartments?bed_count=2

 

I'd say the market rental rate for the condo is $2,700 - $3,000

 

so if you bought the condo for cash at $740K, you'd have $800/month in HOA and $700/month in property taxes=$1,500 of cost and you'd be getting about $3,000 / month in imputed rent for a $1,500 / month "NOI" = $18K / year = $18K / $740K = 2.4% cap rate.

 

The fact that it's "expensive" doesn't really matter so much as there are 100's more of these being built and rent growth is not likely in the near term or intermediate term.

 

single family homes trade at similar cap rates, but there' no more land to create more of those and demand > supply. 

 

 

[LearningMachine]

so this is all of course anecdotal, but I beyond multifamily / condos, I have seen very little evidence of any loss in value of well-located  residential real estate. the single family market seems to be universally doing well, both close to cities and further out

 

my zestimate (which seems correct based on some recent sales/comps, but not a huge # of data points because inventory / transaction activity is so low) has gone from $470 / foot (2019 real price) to ~$513/foot. there's no reason to pay those prices unless you value the convenience and lifestyle of living near the city / in good school districts, access to restaurants, airports, amenities, etc. i don't think WFH has drastically changed the value of those things.

 

as long as people are realistic on pricing, homes continue to sell w/i a couple of days of listing.

 

this probably has more to do with how low rates are, but you'd think that if everyone wanted to have 4K sf and an acre in the exurbs, people wouldn't be tripping over themselves to buy 2K sf on 1/4 acre near the city (for more $)

 

i think WFH will make people priced out into the exurbs have a better life, they won't have to commute every day, but it's not clear to me that there will be marked decrease in pricing for well-located close-in convenient real estate near cities. maybe if rates rise significantly that will change.

 

here's an example of the type of thing that i think needs to correct pretty hard:

 

https://www.zillow.com/homedetails/7171-Woodmont-Ave-UNIT-307-Bethesda-MD-20815/166716517_zpid/

 

2015 built condo offered at $740K / $690/foot, sold for $800K in 2016. you can see this was a rental asking $3,300 / month pre-covid). this building is popular with downsizing boomers who want to live a convenient walkable and luxurious lifestyle (not a thing during covid, but probably will still be afterwards).

 

This building was built at the exact time (I think by the same developer) as a rental building across the street, where you can rent a similar unit for $3,600 / month, that's before any incentives.

https://www.flatsatbethesdaavenue.com/floor-plans/apartments?bed_count=2

 

I'd say the market rental rate for the condo is $2,700 - $3,000

 

so if you bought the condo for cash at $740K, you'd have $800/month in HOA and $700/month in property taxes=$1,500 of cost and you'd be getting about $3,000 / month in imputed rent for a $1,500 / month "NOI" = $18K / year = $18K / $740K = 2.4% cap rate.

 

The fact that it's "expensive" doesn't really matter so much as there are 100's more of these being built and rent growth is not likely in the near term or intermediate term.

 

single family homes trade at similar cap rates, but there' no more land to create more of those and demand > supply.

 

My handicapping model is mostly consistent with what you're saying.  Currently, I see three key features impacting what human neural nets' desire:

* #1. Avoid multifamily due to Covid risk

* #2. More willingness for some folks to commute some more miles from their employer as a result of WFH announcements while still staying near the city / in good school districts, access to restaurants, airports, amenities, etc.

* #3. Interest rates

 

Presence of all three features is already starting to have positive impact on pricing of residential real estate in exurbs. 

 

Currently, these features are also having somewhat positive impact on residential real estate in suburbs, next to key employers. When Covid is over, #1 feature will stop having an impact, while #2 will continue.  The impact of #1 stopping will effectively release a supply of multifamily housing that is currently being avoided, which will have some negative impact on price of houses that are currently being bid up just for feature #1.

 

To handicap the impact of #2, I've been looking at various pieces of data.  Here are a couple of the data points to consider.

 

First, here is what Zillow found at: https://www.zillow.com/research/coronavirus-remote-work-suburbs-27046/

 

Previous Zillow research 1 found renters, buyers and sellers overwhelmingly agreed that the longest one-way commute they’d be willing to accept when considering a new home or job was 30 minutes.

 

This new survey from Zillow and The Harris Poll finds those priorities appear to change if people have the flexibility to work from home regularly. When given that option, half of those who are able to do their job from home (50%) say they would be open to a commute that was up to 45 minutes or longer.

 

Next, I did a survey myself with two questions:

(a) What is the max you would have commuted pre-Covid when you had to work in office 100%?

(b) What is the max you would be willing to commute post-Covid assuming your company will let you WFH 50% without manager approval and 100% with manager approval?

 

The results are enlightening and consistent with Zillow.  Percentage of people who used to be willing to commute only 15-minutes has gone down drastically.  Percentage of people who used to be willing to commute only 30-minutes has also gone down a lot.  Percentage of people willing to commute 45-minutes or 60-minutes for their dream house has gone up a lot.

[thepupil]

What’s an example of an exurb that you think will do well because of WFH over the next 5-10 years.

[LearningMachine]

What’s an example of an exurb that you think will do well because of WFH over the next 5-10 years.

 

Looking at Seattle area, these are areas that are desirable for high-tech workers or support workers for different reasons.  Here are some examples:

• Good school districts: Dieringer School District (Lake Tapps, WA), Bainbridge Island School District, Tahoma School District, Snoqualmie Valley School District, University Place School District, Pullman School District, etc.
  
• Waterfront/island living: Warm Beach, Bainbridge Island, Kitsap Peninsula in general, Camano Island, Whidbey Island, Lake Tapps, Lake Stevens, San Juan Islands, etc.
  
• Access to airport: Areas within x miles of SeaTac airport.
  
• Areas giving access to multiple metropolises for support workers: Mount Vernon, WA.
  
• New construction: Monroe, Marysville and Snohomish County in general, Maple Valley, Enumclaw, Snoqualmie, Pierce County, Skagit County, etc.
  

 

For San Francisco/silicon valley, I'm hearing Lake Tahoe is getting popular.  Another thing that is incentivizing silicon valley folks to work out of Nevada or Texas is zero income-taxes.

 

[thepupil]

Suburban DC Maryland data; price up 10%-11% for the zip codes with only SFH, collapse in transactions.

 

Note the hopeful tone from realtor that prices will “come back down to earth” easy to understand why this actually hurts realtors as they get paid on transactions.

 

Not taking my 10% to the bank, but happy to own some expensive ass dirt with eroding tiny structure on top for well below the average dirt+house cost of $1.5mm

 

 

[thepupil]

really not much wisdom to share. I don't think work from home will drastically affect well-located single family homes that derive some of their value from being close to cities.

 

maybe that's me just being delusional. I just think that for the most part rich people pay to be around other rich people: good schools/amenities/etc. and that proximity to major metropolitan areas has appeal beyond short commutes. we'll see. perhaps my straight up and to the right zestimate is making me feel overconfident.

 

 

hyper elitist education for the win. Palm Beach Day just ain't gonna cut it. Dalton or Bust!*

 

https://www.bloomberg.com/news/articles/2021-03-10/wall-street-a-listers-fled-to-florida-many-are-eyeing-a-return

 

The main drivers for people to stay in New York are access to top private schools and a bigger pool of young professionals to fill jobs, according to interviews with several hedge fund executives.

 

 

*for the record, pupil went to a poseur south florida prep school, not in NYC/Northeast

 

[Spekulatius]

really not much wisdom to share. I don't think work from home will drastically affect well-located single family homes that derive some of their value from being close to cities.

 

maybe that's me just being delusional. I just think that for the most part rich people pay to be around other rich people: good schools/amenities/etc. and that proximity to major metropolitan areas has appeal beyond short commutes. we'll see. perhaps my straight up and to the right zestimate is making me feel overconfident.

 

 

 

 

hyper elitist education for the win. Palm Beach Day just ain't gonna cut it. Dalton or Bust!*

 

https://www.bloomberg.com/news/articles/2021-03-10/wall-street-a-listers-fled-to-florida-many-are-eyeing-a-return

 

The main drivers for people to stay in New York are access to top private schools and a bigger pool of young professionals to fill jobs, according to interviews with several hedge fund executives.

 

 

*for the record, pupil went to a poseur south florida prep school, not in NYC/Northeast

 

Arn't public schools in Florida total crap? That's what my wife heard from folks that moved there from Long Island. LI school were excellent when we lived there.

[CorpRaider]

I am not surprised that the young professionals and intelligentsia prefer to be where the other young professionals and intelligentsia are. 

[ValueArb]

I’m paying ridiculous rent to keep my kids in a good school district, but am seriously considering moving to Cancun and letting ex-wife carry the burden for once. My day job has been remote before COVID, and no reason I can’t do it and invest remotely from somewhere with a beach and jet skis.

[fareastwarriors]

Homebuyers Are Heading to Florida During Covid, But Nearly As Many Are Moving Out

 

Thanks to hurricanes, heat and red-hot home prices, the state’s population growth hit its lowest rate since 2014 during the pandemic

 

https://www.wsj.com/articles/people-moving-to-florida-during-covid-11615463911?mod=hp_featst_pos3

[fareastwarriors]

Goldman Sachs Seeks Volunteers for Move to West Palm Beach Digs

 

A couple hundred people might go, and more could follow later

Top executive Stephanie Cohen plans a second office in Dallas

 

https://www.bloomberg.com/news/articles/2021-03-18/goldman-sachs-drafts-volunteers-for-move-to-west-palm-beach-digs

[LearningMachine]

I've been thinking about why I've been wrong so far on my theory that I shared at the beginning of this thread. 

 

Here is the part of the prediction that is actually happening:

• #P1. The search area for dream home has indeed expanded for tech workers by not just a small percentage but by 100s of times.  In the past, the most desirable area for a significant percentage of tech workers was within a mile of campus, i.e. a search area of pi * 1^2 square miles = pi square miles.  Now, tech workers have no qualms about looking at least 30 miles from campus, i.e. pi * 30^2 square miles = 900 pi square miles. 
• #P2. This has resulted in prices of homes in the much expanded 900 pi square mile area to now approach the prices in the much smaller pi square mile area, but the prices in the smaller pi square mile area have also gone up drastically. 

 

In Detroit, 20% effective increase in supply (i.e. 20% vacancy) had resulted in a huge drop in housing prices.   So, why did increase in search area of 800+% did not result in any drop in housing prices?  Few things were different so far. 

• #R1. Because folks didn't want to list their homes during the pandemic, the inventory of homes listed for sale hit 40 year low.   So, there was no effective increase in supply so far.  There was only increase in search area for supply. 
• #R2. Remote work resulted in demand for more space and bigger homes.
• #R3. Pandemic had such a huge emotional impact on people that they went into You-Live-Only-Once-Just-Get-What-You-Want-Now mode. 
• #R4. Interest rates went lower.

 

Regarding #R1, more folks are now starting to come out of the wood-works to list their homes.  See https://fred.stlouisfed.org/series/MSACSR.  We are now up to 6.2 months of supply from a low of 3.5 months of supply. 

 

#R3 is going to just need some time for folks to come out of that mode. 

#R4 is a wildcard that none of us can predict, but once it reverses, will impact all asset classes, not just real estate.  

 

Now regarding #R2, unless something stops it, e.g. interest rate spikes, I think the current 1.6 million annualized rate of new housing starts will get to 2 million annualized rate at some point soon. That was the peak rate we hit before the last crash.  See https://fred.stlouisfed.org/series/HOUST. 

 

Household creation rate is still around the same: 1.2 to 1.3 million.  So, we need that extra construction for a few years to create excess supply of 3-5 million homes like last time. 

 

I think I posted earlier what Buffett said in 2010: "We had more supply than demand for many years, three or four years in housing. We produced 2 million housing units a year.  We created 1.3 million households [a year].  Result trouble. ... If we would blow 3 to 4 million houses today... If you have inventory overhang, you need demand to be above supply for a significant period of time to work it out. "  Source: https://buffett.cnbc.com/video/2010/01/20/buffett-a-bad-number-for-housing-starts-is-good.html

 

So, unless inflation rate goes up longer term, I think those with investments in housing (beyond primary residence) would probably want to sell the latest by the second year builders are producing 2 million housing units a year.  That's a very general recommendation for housing nationwide.   We can just monitor it at https://fred.stlouisfed.org/series/HOUST. 

 

Of course, there will be some local variations in magnitude and timing. 

 

Specifically #P1 so far has only impacted increase in search area of supply for knowledge workers.   As folks come out of the woodworks to list their homes, #P1 should also increase effective supply for knowledge workers in the now expanded search area much faster than builders can get to creating 3-4 million overall extra supply. 

Edited August 26, 2021 by LearningMachine

[Gregmal]

I think the biggest thing you are missing is that there is still a lot of demand that has yet to be unleashed. Regulation on mortgages is still relatively firm. What happens when everyones who's as colored as Elizabeth Warren is indigenous can get a 0% down mortgage? Or a $50k credit for being an "underserved" participant? If theres one thing Trump taught Republicans, its that the lemming vote can be bought. The CLF vaccine initiative is further evidence of that. So the stimulus will not likely stop. Housing is the easiest area to goose. 

 

I'd also add that you're overlooking investor demand as far as supply increases goes, in terms of its effect. Last year supposedly investors made up about 20% of the market which is down substantially from a decade ago and well below the 2007 levels. What happens when all the liquidity in the systems moves into housing? Anecdotally, I know tons of folks who are waiting for the 10-20% pullback to start jumping...myself included. 

 

Also, why cant the Canadian cycle occur here as well? This is not to say there won't be slowdowns or dips, but what makes housing a bad investment? I dont see it.

[thepupil]

9 hours ago, LearningMachine said:

I've been thinking about why I've been wrong so far on my theory that I shared at the beginning of this thread. 

 

 

For the time being, I think you vastly underestimated how much money and buying power people have, overestimated the speed of change of where and how people wish to live, underestimated the appeal of expensive areas to wealthy high income people, failed to incorporate any practical real life experience or anecdata into your overly theoretical analysis / metaphor based on one dying industrial city (detroit), and failed to take into account hugely accommodative policy/demographic trends. 

 

we will see what the future brings!

 

early is sometimes different than wrong! 

 

[SharperDingaan]

In our neighbourhood bungalow-loft condominium prices have jumped 30-40% in <5 months, with sales routinely going > ask, at 1.2M+ in < 3 days. Why?

'Cause they are cheap, versus immediate neighbours where prices are both higher, and you have to maintain your own property.

 

Most of these transactions are all equity, the prevailing interest rates is a non-issue. Condo fees vs commuting cost are a far bigger issue. Condo fees on bungalow condominiums are often < 50% than those on high rise condominiums. Typically you will get 5-10x more space, 1/2 the monthly upkeep cost, others do the work for you - but it is 45-minutes+ to the financial district via fast train. A young person might commute 5 days/week in favour of better career prospects/more 'facetime', but most others are going to commute 3 days/week and WFH the remaining two. THAT is what living/working in the fashionable district needs to overcome; some headwind!

 

REITs are no different to bonds. Interest rates go up, the value of the asset goes down.

The property manager tries to compensate by leasing up, and/or charging higher rent, both of which are limited. Where practical, demolish the building and start again with a better asset. NY focused REITS need folks to return to the city, and housing prices to remain high - folks have to rent 'cause they can't afford to buy, and folks funneled onto a limited supply to raise rents.

 

SD

 

  

[Spekulatius]

So the answer to question:

Percent loss in value of residential real estate oligopolies due to hybrid work

 

=zero.

[SharperDingaan]

Canada votes on new management Sep-20, housing is an issue, lots of promises are being made. Most would expect the Liberals to prevail, either as the leaders of a continuing minority government, or the majority government. https://www.cbc.ca/news/politics/trudeau-housing-plan-1.6151154

 

"To reduce mortgage costs, a Trudeau-led government would force the Canada Mortgage and Housing Corporation to slash mortgage insurance rates by 25 per cent — a $6,100 savings for the average person. The Liberals are also proposing a sort of "rent-to-own" program, with $1 billion in new funding to "create a pathway for renters in five years or less.""

 

As was common in many parts of Canada during the 50's-80's, the government bought your house and essentialy leased it to you via a capital lease over a 30 year period, at a fixed rate of 1-2%. At the end of 30 years you owned the house, every 're-set' period (typically 5 years) the lessee had the opportunity to buy out the lease. Whenever the house was resold, proceeds paid off the lease, and the balance was yours. It built a lot of houses, and put the parents of boomers on the property ladder.

 

Put a program like this in the housing market, and housing is not going to be an 'issue' anymore. 

The value of residential REIT oligopolies go through the roof 

 

SD

 

 

 

 

[KJP]

12 hours ago, LearningMachine said:

I've been thinking about why I've been wrong so far on my theory that I shared at the beginning of this thread. 

 

 

 

Earlier in the thread I suggested your theory didn't adequately account for demand.  I continue to think that's right.  You've framed your analysis in terms of "effective supply," but, in the short run, the supply of city housing is quite inelastic (it's hard to quickly convert housing to an alternative use or to quickly build new housing).  So, what I believe your theory depended on was a significant drop in demand for city housing, in other words, a shift left in the demand curve along a relatively inelastic (relatively vertical) supply curve.  That is what I suspect happened in Detroit -- supply didn't change drastically (you need to demolish or convert housing for that); rather, the demand curve shifted left along a relatively inelastic (vertical) supply curve, causing large price declines.

 

I doubt the supply of, for example, rental housing in New York City has changed significantly in the last 18 months.  So, if market rents are back to where they were, I think that implies that demand for that housing did not change as you expected it to. 

 

Also, you believed that there would be greater demand for housing in close-in metro suburbs.  Many of those areas are already heavily built up (making adding supply quite expensive or impossible) and, in any event, new construction takes time.  So the supply curves in those suburbs are quite inelastic as well, particularly in the short run.  Moreover, everyone needs a place to live.  So, if the demand curve for close-in suburban housing shifts right against inelastic supply, we'd expect significant price appreciation, which we've had, perhaps helped along by the income effect of lower rates/higher asset prices.  But those sellers themselves need a place to live, which ought to increase the demand for housing somewhere else.  Where are those sellers going in your model?

 

Also, I understod you to be talking about relative prices, i.e., you were predicting that the price of urban real estate would fall relative to the price of close-in suburban real estate.  Would interest rates affect this, or do interest rates effect the nominal price levels of both types of real estate, rather than their relative prices?

 

 

Edited August 26, 2021 by KJP

[LearningMachine]

Thanks everyone, great points.   It is great to see how our collective brain power brings more to the discussion.  I think we can use this collective brain power to figure out things that will happen with high certainty.  

 

I'm hoping we all agree with Buffett's characterization here of why the housing crash happened last time, i.e. extra supply of 3 to 4 million houses resulting from building 2 million houses per year while household creation was 1.3 million households per year. 

 

Last time, I was able to predict the housing crash and the bottom a little differently by plotting Notice of Trustee sales per week, but I still agree with Buffett's explanation as well as that was the root cause and what I was seeing in the data that I was using at the time was an effect.

 

Similarly, I'm hoping we also all agree that if we build 2 million houses per year this time, even though household creation is at 1.2 million households per year, we will end up creating excess supply of 3 to 4 million houses this time also? 

 

I understand there will be local nuances, and some people would still want that lakefront property or a certain location even if there are millions of extra brand new houses available farther out or somewhere else, and so my question is at a general level. 

 

If you don't agree, it would be good to know how much construction do you think we would need per year to create that extra supply of 3 to 4 million houses when we are forming 1.2 to 1.3 million new households per year?  Some data that will help you come up with an answer:

• https://fred.stlouisfed.org/series/HOUST: We are currently building about 1.6 million houses per year.
• https://fred.stlouisfed.org/series/TTLHH: We are currently at about 128.5 million total households in the U.S. (those people are presumably living somewhere already), and we have been adding about 1.2 million households per year in the long run.

 

Edited August 26, 2021 by LearningMachine

[Spekulatius]

This is what Altice stated in their Q2 earnings report:

Altice is interesting because their footprint is strong in NYC. They are basically saying that urban customers moved out to the suburbs and moved right back into the city again after the pandemic was over.

Anyways, the pandemic caused a temporary dislocation in housing supply with more demand in some areas and less damned I urban areas, but did not really change overall demand. So, basically right now, the whole thing seems to have played out by now, except prices are without doubt higher, but that may be due to lower interest rates. I don’t think that COVID-19 has changed the overall demand for housing much at all.

 

Edited August 26, 2021 by Spekulatius

[SharperDingaan]

Without high rises, It's very hard to add material volumes of new housing in the major cities. So ... if you have a sprawling house in such a place, its price is very unlikely to decline - if only because it could be easily demolished and 2 replacement new and more modern/smaller ones built on the land instead.

 

A high volume high rise is a ghetto, a bottom of the market feeder that depends on ongoing in-bound migration. New builds have an advantage, but its a devaluing asset. A low volume high rise is a jewel box. At few floors, a 1/4 floor per aprtment, and multiple elevators, it's a gilded bird cage popuated with rich people. The name of the game is price insensitive condo fees, and cachet.

 

Obviously, if you can own a REIT full of bird cages in the major cities, you should do well!

 

SD   

Edited August 27, 2021 by SharperDingaan