Category: Real Estate

Zillow’s inflation forecasts

by philg

From February 2022, when we were dumb enough to sign a contract to buy a house:

The market will go up 23%.

In April, when we were dumb enough to close on a house:

The market has gone up a little and will go up 18.3 percent more.

In June, Zillow is busy celebrating Pride Month (from 2020: “They’re bold, bright and one-of-a-kind — they’re the homes we love, Pride-month style. We may not be celebrating together in person, but we’ll never stop celebrating what’s beautiful.”), but the company’s robot still has time to say that the forecast is 14.6 percent:

August 5, 2022, the “typical home value” is up by a staggering amount and the forecast is 7.8 percent more:

August 14, 2022, the “typical home value” is still up (yet houses have seemingly been slow to sell for a few months now and there have been many price cuts) and, with the Inflation Reduction Act nearly signed by the vigorous Vanquisher of Corn Pop, the inflation forecast is down to 5.3 percent:

These forecasts aren’t mutually inconsistent. If we take the starting “typical home value” and inflate it by the forecast 23.1 percent increase we get $647,098 for the expected typical home value in February 2023. If, indeed, the current value is already $627,655, the forecast 5.3 percent inflation rate (to August 2023) will make that happen.

Do we believes these precise forecasts? If so, should Joe Biden ask Zillow to come in and take over the Fed?

Separately, speaking of house price inflation, it occurs to me that the capital gains tax applied to homeowners does not make any sense. Suppose that Dana Dentist, a gender-neutral driller of teeth, purchased a 4BR house for $500,000 fifteen years ago. Dana falls in love with someone he/she/ze/they met at a Pride March in another city. Dana sells his/her/zir/their house for $1.5 million (in 2022 mini-dollars) and buys an identical size/quality house in the new sweetheart’s city, which just so happens to cost $1.5 million. Dana is no better off. He/she/ze/they has exactly the same size and quality of house. Yet the IRS now hits him/her/zir/them for capital gains and Obamacare investment income tax on $750,000 (the first $250,000 of gain on a primary residence is exempt). There may be state capital gains taxes to pay as well if Dana did not live in Texas, Florida, or a similar state.

Note that this wouldn’t happen to a commercial property owner. If he/she/ze/they sold House 1, which had been rented out, and bought House 2 in order to rent it out, the sale/purchase would be done in a 1031 exchange and there would be no tax on the fictitious capital gain until, perhaps, House 2 was sold and not replaced.

What’s the downside of the Feds and states taxing fictitious capital gains? By making moving more expensive, the policy discourages people from moving for better career opportunities and, thus, reduces the overall growth rate of the U.S. economy (not as much as our family law system does, but at least to some extent).

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Cost of luxury high-rise construction in Florida

by philg

A neighbor is a refugee from the Land of Lockdown (Illinois) and is a partner in a real estate development company. “We decided to stop doing projects in Chicago because so many people were leaving,” he explained. He’s finishing a sold-out project of $4 million Florida beachfront condos that will be ready for occupancy early in 2023. It is on the site of a former hotel. What does construction cost right now for a luxury concrete high-rise? “It is $450 per square foot,” he responded. Three years ago? “Mid-$200s.”

Here’s a new one near us, which was planned starting at $4 million per unit, announced at $6-10 million, and has apparently been selling for up to $18 million for a 5,000-square-foot unit ($3,600 per square foot): SeaGlass, Jupiter Island (it is not in Jupiter, but in the next town up: Tequesta).

Some friends in northeast Florida will be moving into their new 3BR house soon. They bought it 18 months ago, which is when the developer began work on design and construction (theirs is a tweak to a standard design within the development). It will cost just under $1 million and is a 20-minute drive to the beach. The developer complains that, due to inflation, this particular house will actually be unprofitable.

Related:

  • City rebuilding costs from the Halifax explosion, from 2019, in which I describe an affordable apartment construction project in Boston. Even with free real estate, the construction cost of each unit ($555,555 per) rendered them unaffordable, without taxpayer subsidies, to a dual-income couple in which both of the partners (who will, one hopes, come in a rainbow of gender IDs) worked full time at the median Maskachusetts wage. Presumably that construction cost has now also doubled, but the median wage won’t have followed.
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Mighty brains of academia and non-profit figure out why Americans are homeless

by philg

There is a new book from some of America’s smartest people. First, the credentials…

GREGG COLBURN is an assistant professor of real estate at the University of Washington’s College of Built Environments. … Gregg holds a PhD and an MSW from the University of Minnesota and an MBA from Northwestern University. … Gregg is also a member of the Bill & Melinda Gates Foundation Family Homelessness Evaluation Committee and co-chair of the University of Washington’s Homelessness Research Initiative.

CLAYTON PAGE ALDERN is a neuroscientist turned journalist and data scientist based in Seattle. … A Rhodes scholar and a Reynolds Journalism Institute fellow, he holds a master’s in neuroscience and a master’s in public policy from the University of Oxford. He is also a research affiliate at the Center for Studies in Demography and Ecology at the University of Washington.

What have these mighty brains learned? From Homelessness is a Housing Problem:

the researchers illustrate how absolute rent levels and rental vacancy rates are associated with regional rates of homelessness.

The higher the rent, the higher the rate of people who can’t afford the rent:

In other words, we aren’t wealthy enough to build and maintain the housing to which we believe ourselves entitled.

Meanwhile, more than 200,000 people come over the southern border every month to claim asylum (US CBP stats) and common decency demands that, regardless of whether any can or do work, all be provided with reasonable quality housing. According to a book that I recently finished, The Swamp, there may be a limit to how many of these newcomers can come to South Florida. From a legal point of view, we can’t keep robbing the federally-protected Everglades of water. Our abuse of the animals who live there has some limits.

From a newspaper that passionately advocates for expanded low-skill immigration… “The Housing Shortage Isn’t Just a Coastal Crisis Anymore” (NYT, July 14):

What once seemed a blue-state coastal problem has increasingly become a national one, with consequences for the quality of life of American families, the health of the national economy and the politics of housing construction.

Freddie Mac has estimated that the nation is short 3.8 million housing units to keep up with household formation.

It is not an expanding population due to immigration that drives up prices in an Econ 101 supply and demand curve intersection, but rather inequality:

Other forces like widening income inequality also worsen housing affordability, said Chris Herbert, managing director of the Harvard Joint Center for Housing Studies. That’s because more higher-income households compete for limited housing (prompting builders to build high-end homes).

Our brightest minds are working on this:

The Biden administration also released a long list of ideas this spring for boosting housing supply.

The word “immigration” does not occur in this article.

Related:

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Real estate market has peaked? (that $3.225 million house in our neighborhood)

by philg

From early March… Open house today in our neighborhood:

There’s a house for sale in our neighborhood (we rent a 2BR for $2800/month). It went on the market about a week ago. The first showings are today, 10a-4p, and “All contracts must be submitted by 5:00pm on March 3rd.” This million dollar home (built in 2012; re-sold in 2017 for $1.3 million) sits on a princely quarter-acre lot and offers a vast interior space of 4,574′. It was “coming soon” at $2.95 million two weeks ago, but the asking price now is $3.225 million (escaping NY, MA, and CA vaccine coercion and mask orders is not cheap!). The house comes with the opportunity for a lifetime close friendship with the appliance repair brothers, sisters, and binary resisters (i.e., there is a Sub-Zero fridge).

Zillow estimates the value at $2.225 million. Redfin admits “we don’t have enough information to generate an accurate estimate at this time.”

Zillow now says that the estimated value is $2.54 million and also that the house finally closed on May 9 at $3 million.

My theory is that the real estate market peaked in February 2022. The above failure to achieve asking price is a small data point in favor of this theory. The bigger data point is that… I made the decision to buy a house in February 2022. If I go long, that’s a signal to go short! (“I like to do everything in the dumbest way imaginable”) My feeble justifications: our rent was likely to go up to $5,000 per month in August; the mortgage on a house more than 2X the size (using the 3.25 percent rate that we locked in back in Feb) is about $10,000 per month (but not cheaper per square foot once you factor in property tax, maintenance costs, and unpaid maintenance and management labor); kids won’t have to share a bedroom; we now have a real guest bedroom; more kids in the immediate neighborhood. The house is still in the same Abacoa neighborhood that was developed by the MacArthur Foundation (search process explained).

(We just recently closed and moved in, so be prepared for numerous posts on systems and maintenance! My productive hours per week have been cut by 40. There are daily trips to Home Depot. One recent day I counted five different contractors/service people who showed up.)

Who wants to guess at the real estate price trend for the next 2 years? My guess is that house prices will fall, but not by falling. The price in 2 years will be the same as the price today (maybe with a dip in the middle), but inflation will have eroded the value in real terms by at least 10 percent.

Even if you overpaid by $1 million for a house, one great thing about this climate is that you can grow orchids by wiring them to a tree and walking away. The tree gives the orchid sufficient shade and the orchid gets everything else that it needs from the Florida sky. A neighbor’s house this morning:

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Is anyone dumb enough to pay $55 million for a non-waterfront house in our town?

by philg

I’ve been watching a $3+ million house in our own neighborhood (see Open house today in our neighborhood) to see what it finally sells for (this could be an official Florida spectator sport?), but now there is a house on the market for $55 million about two miles away. Here’s a photo/rendering revealing that the house is not on the water and does not have a dock, the two pre-lockdown requirements for anyone to pay more than $10 million for a house in Florida:

The house is listed as used, having been built in 2020 (“Property condition: Resale; New construction: No”). The good news is that, according to Zillow, members of the 2SLGBTQQIA+ community who have $305,000 per month (estimated) to spend can feel comfortable in this 16,000 square foot home:

There’s a home theater in case you want a wide viewing angle without holding your phone close to your face. The pool looks big enough to host a family of alligators.

Update: Toucan Sam, in a comment below, points out that the house might be largely fictitious! It appears to be 95 percent finished in a satellite view, but definitely not 100 percent, so the Zillow “used” description is probably wrong. Whoever hands over $55 million will find him/her/zir/theirself in a brand new home!

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The Boulder County fire

by philg

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.

Related:

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

by philg

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?

by philg

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.

Related:

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

by philg

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):

Related:

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Flush toilets in New York City for $60 per hour

by philg

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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