The Apartment Glut Cometh – Adios Housing Market

Driving by the west-side border of downtown Denver (on I-25), I can count 9 cranes in air plus one semi-finished high-rise building.  What’s amusing about this is that there’s already an oversupply of rental apartments and condos as the 1-2 month free + free parking incentives reflect.   What will happen when all these new projects hit the market?

This is not unique to Denver.   I witnessed it first-hand in New York City over the holidays. Douglas Elliman, the high profile NYC real estate brokerage, issued a report which showed that NYC real estate prices plunged in Q4, with the median sales price dropping nearly 9% from Q3. Days on the market increased 14.6% and the number of sales dropped 3.7% I can recall from the demise of the big housing bubble that the impending housing bust started first in NYC.  I remember walking around NYC in late 2006 and seeing several apartment complexes under construction on which work had been abandoned. I would
suggest that the current bubble is already popping in several bubble areas per this canceled contract data: LINK.  I also am confident that the weakness that is developing in NYC will soon spread to the rest of the country.  – from the  Jan 15th Short Seller’s Journal

Miami was the leading indicator of the demise of the mid-2000’s housing bubble.  An apartment glut quickly appeared as speculators took almost free money and put deposits on apartments being built by reckless builders.  Builders always get reckless when other people’s money is cheap. Greenspan and Bernanke made sure there was plenty of cheap capital for developers.   Wolf Richter details the current apartment market implosion occurring in Miami – LINK – and coming to city near you soon.

Ditto for San Francisco/Bay Area, which was right behind Miami during the big housing bubble and is concomitantly blowing up with Miami.  The SF/Bay Area market was driven by big foreign money laundering and a massive private equity tech bubble in Palo Alto. The foreign money has dried up and the PE tech bubble is fading quickly.  It’s like the cheap money rug has been pulled out from under reckless speculators and developers.  Mark Hanson describes the situation here:  Adios SF Housing Market.

Even some of the industry associations are starting to report the truth -something we’ll NEVER get from the National Association of Realtors, as the National Multifamily Housing Council reported a week ago that, “weaker conditions are evident across all sectors of the apartment industry.”  Its sales volume index dropped for the second quarter in a row.

At the same time that a glut in apartment/condo buildings is appearing everywhere, the luxury high-end market is falling apart as well, the latter of which was also a leading feature of the demise of the big housing bubble. Douglas Elliman reported recently, “that prices in the Hamptons real estate market dropped nearly 30% in Q4, with sales volume down 14.5% But in the luxury end of the market – homes with an average price of $7 million – prices were down 42.6% in Q4. This is an all-out crash in housing in one of the most high-end areas of the country. This is exactly what began occurring in 2006/2007 in the Hamptons.

CNBC reported last week that “luxury home sales continued to slump in Q4.” It cited the
Hamptons but also Aspen and Beverly Hills. I reported in SSJ a few months ago that Aspen
was starting to go into a price freefall. Prices and volume started collapsing in the summer.
Apparently in Q4 sales volume fell another 25% and prices were down another 11%. Beverly Hills sales volume plummeted 33%, though prices were flat. Again, the affects of the bursting big mid-2000’s real estate bubble was first felt in these same markets.

Record low mortgage rates combined with the U.S. Government’s providing the easiest, most accessible borrowing terms and credit standards in the GSE program history has enabled the greatest misallocation of financial resources in history.  It’s been manifest in every asset class but is particularly prevalent in stocks and the housing market.  While it may be somewhat easy to unload stocks when they are dropping out of the sky, housing is a different matter.  It’s easy to sell a home when the buying frenzy is rampant.  But as the market begins to head south, the entire real estate becomes “offered with no bid,” meaning that everyone stuck with an “investment” is looking to dump and buyers scatter like cockroaches when the kitchen light is switched on.

The home construction market is over-ripe with short opportunities.  I have been focusing on the sector (plus retail and autos) in the Short Seller’s Journal.  Since August,  shorting the retailers has been a lay-up.

In the SSJ, I present in detail the ways in which the industry associations, Wall Street – with the help of mainstream media cheerleading – distort the facts about the housing and auto markets.    As the reality of what I described above sinks in to the market, the price path of least resistance for home builders, home construction suppliers and auto-related equities will be down.   The same is true for the companies that provide financing to these industries.

In every issue of the Short Seller’s Journal I provide what I believe somewhat unique market analysis and commentary along with dependable research sources to back-up my assertions.  I also typically provide at least 2 or 3 short ideas, accompanied by suggestions for using options (although I first and foremost recommend shorting stocks outright).  I also disclose when I’m trading an idea presented, including which options contract if applicable.   You can subscribe to the weekly newsletter with this link:  Short Seller’s Journal

You certainly do provide research and with that, Value. But also… YOU actually are there responding to emails which says a TON about you, your commitment to your products, company, and us….the subscribers. For that, I thank you.  – Subscriber, Larry


8 thoughts on “The Apartment Glut Cometh – Adios Housing Market

  1. Craig Hemke says that the apartment glut/construction boom is due to a different phenomenon (over & above obvious explanation of cheap interest rate construction loan addiction for builders like heroin & cocaine). He says, it has to do with worthless low quality jobs for college graduate millennials saddled with college debt, and so their inability to even think about a single family home or townhouse/condominium. Which basically is herding them all into urban/semi-urban apartments, driving up apartment demand.

    Put another way: It’s the dream of the United Nations Agenda 21 architects (pun intended) come true.

  2. As far as Denver is concerned (I always love reading your commentary on the local market,) it would be nice if we could get some of these apartment buildings converted to condos for sale in the next few years. There was talk of that happening at one point during the condo construction law debate that took place here one or two years back. I am a millennial with no student loan debt, and would love to buy a condo or town house at some point.

    However, if rents stay high and home prices don’t cool off in the Denver area significantly, I’ll be setting my sights on moving to a different city where I can actually afford to purchase something modest. The prices here are out of control, in my opinion.

    1. Rents are falling. See the article in the Denver Post. Even if a luxury building wants to keep rents flat, offering 1-2 months free rent takes the net rent down anyway. Some bldgs in LODO are also offering free garage space. Home prices are already lower in Denver and areas that are hot
      are no longer hot. Foreclosure starts spiked up 65% in Denver in October. This is 2006-2008 all over again.

      Go ahead and buy something but do-so only if you don’t care about whether or not your house is worth a lot less than you paid 24 months from now

  3. The Vancouver housing bubble is stalled, prices are still holding but if the foreign money stays out, there’s no way locals can make up the difference :

    The number of sales of detached houses, condos and townhomes fell to 1,523 transactions last month, down 39.5 per cent compared with January, 2016. It marks the 10th consecutive time that sales declined month over month and the seventh month in a row that they fell year over year.

    Last month’s sales volume rang in 10.3 per cent below the 10-year average for January.

    Amid falling home sales, prices are sagging. The benchmark price for various housing types slipped last month to $896,000, down 3.7 per cent since July, but still up 15.6 per cent from January, 2016. The benchmark price is an industry representation of a typical property.

    Since last July, the benchmark price for detached houses sold in Greater Vancouver has dropped 6.6 per cent to $1.47-million.

  4. Hi Dave, like your work. Have a friend who I just found out is looking to buy in the North Front Rane and sent her this post of yours soon as I read it.
    Question: Do you think there might be another California exodus in the next couple of years that might hold up the market in CO for a while. I just saw a post at Jesse’s, link which showed home prices in Denver, Portland and Seattle were up pretty much Nov.’15 to Nov.’16. I can’t remember when the last exodus was-20 years ago or so when you could sell out in Cali and buy 3 in CO. Best regards

    1. “Question: Do you think there might be another California exodus in the next couple of years….”

      I don’t know about Denver, but my son lives in Austin and there is a constant emmigration out of California to there.

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