Are we in a new real estate bubble? What are billionaire moguls selling and holding now? How will it impact your retirement plan?
New questions and concerns are being raised about the US real estate market. Is another bubble or correction possibly on the horizon? How are leading investors reacting? What strain might this put on current retirement savings and expectations? What smart moves should individuals be making now in order to protect themselves?
What Kind of Bubbly is the Real Estate Market in for in 2016?
The National Association of Realtors had forecast a year worth breaking out the glasses and bubbly for. An even better year than 2015, and a return to ‘normal’. New data suggests the hangover from that party may come sooner rather than later.
Although the facts are disputed by PropertyShark; the Financial Times proclaims that New York City’s property market began crumbling last year. FT states that NYC luxury real estate sales fell 27% year over year in 2015. A new report from FMA Data states that the “Orlando Affordability Index topped 177% in January 2016, meaning housing costs are almost double what the median income earner can afford.” This report, and statistics from The Real Deal also show that Miami Beach home inventory has swollen to 24.6 months. 6 months of inventory reflects a balanced market. New records have been set in NYC, with a Manhattan penthouse selling to a hedge fund major for almost $100M. He says it is a speculative investment he hopes to flip in the future.
Of course not all markets have reached these new highs. RealtyTrac reports that New York City as a whole is facing a 300%+ spike in foreclosure auctions, and bank repossessions in early 2016. Over 50k Detroit homes were slated for foreclosure auction for past due properties this year.
Stock market declines and uncertainty in the economy is driving even more capital to real estate. So while some markets still appear to offer great value, analysts can fairly argue that some niches of the market have already peaked.
What Sam Zell is Selling, and Holding
All real estate is local, and different types of real estate assets move on different cycles. So what are the savviest investors buying, holding, and selling?
According to The Wall Street Journal billionaire real estate investor Sam Zell made a deal to sell off 23,000 apartments for $5.4B in the third quarter of 2015. The Denver Business Journal notes that Zell arrange to sell off $1.4B of metro Denver apartments in early 2016; more than 25% of the sales volume of the whole market in 2015.
Note that Zell is also credited with one of the largest single sell off deals ever, right before the last bubble burst. He unloaded a $39B portfolio of office properties to Blackstone, just before most of them ended up tanking in value.
Interestingly the one most consistent area of growth for Sam Zell, and one he has held onto for years, through multiple cycles is manufactured housing parks. He owns hundreds of them.
What a New Housing Slowdown Would Mean for Americans
Firstly; those approaching retirement should consider that a new decline or at least a stall in higher end housing prices and sales in top metros could negatively impact plans for retirement. During slower period home equity lines of credit can be frozen and reeled in by lenders. It may be tougher to sell. Hopes for tapping equity with a reverse mortgage as a form of pension may be cramped.
Recently we’ve seen many investors and home buyers buying at prices which only make sense as Airbnb short term rentals at incredibly high prices. Some of that activity may dry up in a leaner economic period. It is also worth noting that some cities are banning short term rentals or are using permits to minimize them to 30% of less of local housing stock. The move recently hit one Minnesota neighborhood hard where 78% of the properties were rentals.
Then there is the impact on REITs and real estate stocks. The Street recently reported that Real Estate would be given its own sector in the S&P 500 later in 2016. Some analysts speculate this was aimed at propping up the index during a forecast recessionary period. However, higher interest rates, and a slowdown in condos, apartment buildings, office, and single family rental homes could drag down the performance and trading prices of these publicly traded, and highly volatile investments.
The Need for Affordable Housing
The pressure from all the above is only going to increase the demand for affordable housing. Mortgage lending is still tight, and rents have been spiraling upwards to a point where Zillow reports the average income required to rent an apartment in many cities is several times minimum wage.
One of Sam Zell’s keys to success is “supply and demand.” Those that control the supply of affordable housing are going to find substantial demand for their product. Taking a page out of Zell’s playbook, manufactured or ‘mobile’ home parks could be one of the most prized assets, and most desirable property types ahead.
In comparison to other housing types there are not many manufactured home parks. Yet, the need for living in them can only grow. Owning one of these properties could be key to empowering individuals to continue to generate income in lean times, preserve and grow their wealth, and possibly even secure affordable or essentially free housing for themselves, and their loved ones.
A new housing bubble and correction may happen this year, or several years from now. When it happens it will hurt the retirement plans of millions of Americans. It will likely hurt their stock portfolios, and many of their real estate investments, while cramping the ability to leverage existing home equity. The opposite may be true for mobile home park owners. These investments ought to flourish ahead. Right now interest rates are low, seller financing may be available on these properties, and many are ripe for increasing rents and profitability. This could provide exactly what many need to maintain their lifestyles, and stay on track to a comfortable retirement.