The Boulder County fire

In January, I visited the site of the 2021–2022 Boulder County fires. The section that I visited is directly behind a huge fire station:

More shocking than the inequality that AOC and Bernie Sanders highlight, here’s an undamaged house right next to one that burnt down.

(A friend in the area said that homeowners of undamaged houses have nonetheless been able to get insurance companies to pay out hundreds of thousands of dollars per house to address carcinogenic chemicals that got onto and into their houses.)

These cars were likely insured, but they’re going to be tough to replace given the perennial “chip shortage.”

There is a community center with gym and pool directly across the street from this scene of destruction:

Miscellaneous images:

My friend who lives in a burned neighborhood (but his house was spared) said that people got away in their pajamas and had no time to rescue anything from within their homes. “I told my neighbor, who is about the same size, to just come and grab anything that he wanted from my closet,” he said.

Builders are quoting $500 per square foot to rebuild, which translates to $1 million for a modest 2,000 square foot house. Hardly anyone is insured to that extent, so it is unclear what will happen (government bailout?).

The cost of building a house in Colorado raises the question of how the U.S. will house the next 103 million migrants and their children (see “Modern Immigration Wave Brings 59 Million to U.S., Driving Population Growth and Change Through 2065” (Pew, 2015) for a calculation that 73 million folks who needed housing were added “due to 1965-2015 immigration”). Americans who earn at the median wage cannot afford the construction cost of a new house (see City rebuilding costs from the Halifax explosion for how this was true in 2019, before the inflation of 2021). Colorado itself is not handling immigrants, whether from other states or foreign nations, gracefully. Everyone with whom I talked said that the state had become overcrowded and was a far more pleasant place to live 15 or 20 years ago (4.1 million people lived in CO in 2000; it is currently nearly 6 million). Traffic in Denver was jammed from about 3 pm to 7 pm on a Friday. From 4:39 pm:

Colorado apparently cannot afford to build the highway network that it needs to support the population that it currently has, but is adding more people by the day.

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Real estate peak near? (cost to buy a crummy old apartment building about the same as to build new)

I met a real estate developer in Sarasota who said that his specialty of buying “Class B-/C+” apartment buildings on behalf of investors and lightly fixing them up no longer made sense. “A year ago, I was paying $60,000 to $70,000 per door and now it is $130,000 or more,” he said. “I can build something new for about the same price.” (These are buildings with at least 40 units.)

Why didn’t he buy the fanciest buildings? “You don’t want to buy in the ghetto, but these buildings are like a Toyota Camry,” he responded. “Even if the economy turns down, there will always be a market for a Camry.”

If used apartment buildings are about the same cost as building new, doesn’t that suggest that the real estate market is near a peak? I say “Yes” because (a) new is better, and (b) there is still a lot of land in the U.S. The developer, who surely knows more than I do, says “No.” He expects 3-5 more years of 20 percent annual inflation in SW Florida until prices reach parity with California. “People are moving here every day from California and also from Miami,” he said. “They want to get away from taxes in California and from the crazy congestion in Miami.”

Readers: Is there anything special that happens to the real estate market when used buildings being to cost as much or more than new buildings? Am I right in thinking that the curve will flatten? (after only the first 2 years of 14 days!)

The Mote Marine Laboratory & Aquarium reminded us that invasives will displace a native population.

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How did Zillow become the world’s dumbest buyer of real estate?

I used to pride myself on being the world’s dumbest buyer of real estate. I like to overpay for a house, overpay for renovations, contract at fictitious prices for non-existent products, fail to account for the risk that a state could revoke residents’ freedoms and necessitate a move, etc. It seems, however, that I’ve been unseated. “Zillow Quits Home-Flipping Business, Cites Inability to Forecast Prices” (WSJ, November 2):

Real-estate firm Zillow Group Inc. is exiting from the home-flipping business, saying Tuesday that its algorithmic+ model to buy and sell homes rapidly doesn’t work as planned.

In a statement Tuesday, Chief Executive Rich Barton said Zillow had failed to predict the pace of home-price appreciation accurately, marking an end to a venture the company once said could generate $20 billion a year. Instead, the company said it now plans to cut 25% of its workforce.

The move represents a big hit to Zillow’s top line. Home-flipping was the company’s largest source of revenue, but it has never turned a profit.

Zillow, which released earnings Tuesday, said its home-flipping business, Zillow Offers, lost $381 million last quarter, as measured by adjusted earnings before interest, taxes, depreciation and amortization. That resulted in a combined adjusted Ebitda loss of $169 million across all of Zillow.

They were using the fraudulent EBITDA measure, which excludes the interest they had to pay to hold onto these houses. So $381 million/quarter would have been the minimum loss.

How is it possible for people who do nothing but real estate all day every day to lose their own money in this spectacular fashion? It isn’t surprising when some big developers go bust. They are in an arrangement where they keep the upside if a high-risk project goes well and stick a bank with the downside if the economy tanks (1990 calling!). But Zillow didn’t have this incentive to take crazy risks. And the real estate market did not tank. To the contrary, we’re in a period of inflation not seen since around 1980. A monkey should have been able to make money buying houses in this market since the cost of borrowing is lower than the rate of inflation in house prices.

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If Zillow is right about inflation, is everyone who rents stupid?

The Zillow August 2021-August 22 forecast:

Zillow expects home values to grow 11.7% between August 2021 and August 2022, and to end 2021 up 19.9% from December 2020.

The September 2021-Sep 22 forecast:

Zillow expects home values to grow 13.6% between September 2021 and September 2022, and to end 2021 up 19.5% from December 2020.

The 10-year mortgage rate is about 2 percent. If Zillow is right, even for someone who wanted to live in a place for only one year, it would be cheaper to buy a house, pay the cost of capital, pay property tax and insurance, and pay a realtor 5 percent at the end of the year to sell the house than to pay rent (since the preceding scenario will yield at least a small cash profit).

So…. either (1) everyone who rents is stupid, (2) nobody who rents can qualify for a mortgage, or (3) Zillow is wrong about where the price of a house to purchase is going.

(Since we are renters and I am stupid, I am going to bet on Explanation 1!)

Note the pasted-on price adjustment in the chocolate alligator for sale below (PBI):

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Flush toilets in New York City for $60 per hour

Our mole inside the New York real estate industry told us about a newly available career path: toilet flusher. “The office towers are empty and if you don’t have someone go in and flush toilets and run sinks, you’ll get Legionnaires’ disease. Even when the sinks and toilets are electronically controlled, nobody ever envisioned a time when buildings would be vacant for months or years. So there is no way to program them to run themselves automatically every few days. We’re paying people $60 per hour to go in and flush toilets.”

Why isn’t it $20 per hour? “There’s government funding for this so it has to be prevailing wage,” he replied. “Union wages start at $60 per hour.”

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