Rental Vacancies up several 100% in Detroit Area

[Goldilocks]

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[Pee Brain]

just curious,

 

what kinda rental rates are you talking about and what style of house?

 

i recently looked at a 5-plex of all studios in a funky coastal community here - about 3/4-mile from the beach. it sold for almost $1M earlier this year (and is re-listed at a higher price) and rents ranged from $1,350 to $1,750 on the small cottages (garages are extra) around 350 SF (one is larger).

 

in some areas, however, rents on houses have kinda disconnected from values. have a feeling that people in socal are afraid to sell a house if they dont need equity to buy another. id guess smaller, 1500 SF, 3Br/2bth homes rent for near $1,500/month in master-planned area of central portion of north san diego county (typical yuppieville). the same homes probbaly sell for $425,000 on up.... i met a guy who sold a dump here for almost $400,000 and he's building a custom home on a 20-acre ranch in OK. he's unwinding his r.e. holdings here by moving into them with his wife, getting his 24-mos in and then selling them with the tax break - pretty smart.

 

maybe scottcardiff can shed some lite on coastal north county.

[Goldilocks]

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[ShitEatingGrinner]

Goldi, you are exactly correct. In Dallas, the money is in the pipeline and the houses are being built--despite the fact that the bubble is cooling. Demand has come off some, yet housing starts are still up there. As Fannie advertises, that 30 million population growth in the U.S. in the next 7 years better soak it all up.

 

Another note...the company I work for does most of its business with Citi Financial. Citi has been cutting back on what they want done to the houses upon which we work. They are clearly trying to pinch pennies at this point.

[Guest yobob1]

This is a point I have been trying to make for a long time. Everyone says it can't be a bubble, where's the over-build? I keep saying it's a stealth over-build. Housing is housing, whether it's a rental or owned property. When you see rental vacancies skyrocketing almost everywhere around the country, it's pretty obvious what is happening. So yes the new homes are getting occupied, but at the same time they are leaving a wake of vacant units with no takers. If those properties aren't occupied they're creating a lot of negative cash flow. At some point the rental owners will try and sell which will keep adding to supply.

 

I've always used the 1% rule as a rough guideline. A $100,000 property should rent for about $1,000. Rents in many cases are way below the 1%. Yes part of this is interest rates, though rates on income properties are usually well above personal occupation rates, and tax and insurance rates in many areas are rapidly rising.

 

This is a national bubble of unprecedented scale, all based on fed induced interest rates which morphed into a mania. The builders are still going hogwild around here in all types and price ranges. Yet our local paper recently created a totally new separate section for Legal Notices. It runs 12 pages every Monday. 90% of it is trustee sale notices and it still isn't enough. About twice a week you'll find another page or two of trustee sales scattered in the paper. We're wiping out about 70 homeowners a week in our little county of about 100,000 total population. In general once these people have defaulted, they will have a hard time renting. In our area you have to be better qualified to rent than you do to buy. So don't count on these people to fill up the rentals, they'll be a) moving in with their parents or other relatives, trying to hang a house number on their Escalade, or c) hanging out behind the appliance store to be first in line to nab the premium refer boxes.

 

The other aspect I find disturbing is the huge numbers of "over-sized" houses being built. Empty nesters building and financing to the max 3000 to 4000 square doesn't make a lot of sense. They think they'll cash in big when they decide to retire and sell. I think there's going to be a lot of white elephants that nobody wants to pay the upkeep, utilities and taxes on. This is so reminiscent of the late 1920s. Palatial homes that were abandoned, many sat empty for decades. It wasn't the bank runs that took banks down in the 1930s, it was real estate. WaMu and Wells look particularly vulnerable.

 

Equity on a national scale is at an all-time low while prices are at an all time high. Take out the 50% of the homes that are owned outright and you can deduce that maximum leverage has been employed. Most people are only a few percentage points away from being upside down, and in reality by the time you factor in transactional costs, they are upside down from the get go. Not a good thing when the market gets a little soft and these people for one reason or another are forced to sell. I think the potential for cascading price drops is pretty high.

[Goldilocks]

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[Goldilocks]

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[Sphinxter]

As I, and many others, written before, you cannot build houses at 4x the rate of the underlying population growth without creating an oversupply problem.

 

I presume the hope of the 'hopers' out there in "FRE/FNM land" is that we'll gently work off the oversupply as the next generation comes into their own and buys up the excess supply. To which I scoff, "With what? Their ChinaMart job earnings?".

 

Additionally, to the points above, the level of overbuild in these McMansions is ridiculous. Try heating the 500 ft/sq vaulted room with the 10,000 ft/cube volume when heating oil goes up 3x.

 

You will not be able to sell these things for more than 20 cents on the dollar within the decade. That is a take-it-to-the-bank guarantee. Unless it is found that the melting icecaps were hiding actual oceans of light-sweet crude, McMansions will sell like a Chevy cube van at the height of the '73 oil shock. Whole businesses will spring up that will 'subdivide' these POS houses into livable areas. Not unlike putting a brick in the toilet, someone will figure out a way to fill up the excess volume in the foyer and make a bundle selling to desperate empty nesters who can't afford to live there but can't afford to sell.

 

Anyway, once the NYT comes out and puts this very issue on the front page, you know we are not too far away from a POR.

 

So obvious, even my idiot sister in law may begin to notice....

 

Apartment Glut Forces Owners to Cut Rents in Much of U.S.

By DAVID LEONHARDT

 

Published: November 29, 2003

 

MEMPHIS, Nov. 25 ? Renting an apartment in much of the country these days can feel a little like waking up on your birthday.

 

Waiting for the tenants in some building lobbies around Memphis every morning are free cups of Starbucks coffee. In the Atlanta suburbs, people who move into one garden-style apartment building receive $500 gift certificates to Best Buy, the electronics chain. In Cleveland, Denver and many other cities, landlords have been giving new tenants gifts worth $1,000 or more: one, two or even three months of rent-free living.

 

While rents have continued to rise in many big cities on the coasts, including New York and Los Angeles, they are falling in more than 80 percent of metropolitan areas across the country. Low interest rates in recent years have persuaded many families to move out of rented apartments and buy their first homes at the same time that developers have been putting up thousands of new rental buildings, leaving many landlords desperate to fill apartments.

 

The portion of apartments sitting vacant this summer rose to 9.9 percent, the highest level since the Census Bureau began keeping statistics in 1956.

 

"I've been doing this for 30 years, and this is the worst rental climate I've ever seen," said Leonard Richman, president of the Sunshine Corporation, which manages almost 4,000 apartments in Memphis. "Rents have gone down to where they were about three or four years ago."

[EasyAl]

It's interesting to note that the NY Times article also mentioned that rent in Los Angeles area actually increased about 5% over the last 12 month. It explains the some differences in the point of views by wrnsdy and yobob.

 

While the rents in Los Angeles area has been up, I have noticed a lot of construction activities in Pasadena area. Many apartment and office buildings are being built, sometimes cause big traffic delay on busy local street. It is going to see how those constructions will play out.

[Madame Wrecked Him]

The other aspect I find disturbing is the huge numbers of "over-sized" houses being built. 

Here in the Detroit Metro Area that is all that is being built.  This includes, run down neighborhoods where 1960-1970's era houses are bought and torn down to be replaced by homes 100-200% larger. 

The builders have to do a very minimal amount of work building a shell and then sell it as if it is a mansion due to the square footage.

So, so true, also across the river in Windsor.

 

The scale of the building spree is just astounding. I've heard complaints about builders from Toronto who put up poor quality houses in some of the new subdivisions, and now are very difficult to track down. Is that not a typical sign of a mature RE bubble?

 

WH and I walked into a condo development the other day just to check it out - we have absolutely no interest in buying anything now - and saw they were offering $10k cash-backs or no interest for 12 months. The asking prices are ludicrous though and our 50 year old "tear down" (due to its advanced age ) seems to my fairly inexperienced but critical eye, to be of a significantly better underlying quality.

 

While I've seen less tearing down of houses in older neighbourhoods over here, I think there is a migration out of the older houses into new subdivisions and I'm convinced this is contributing greatly to the well-named "stealth overbuild."

[scottcardiff]

Frenzy is the only word applicable here in North SD County.

 

The general consensus is that SD county will be home to 15-20 million people within the next 40 years.

 

Currently over 3 million.

 

So where will the additional people live?

 

Camp Pendleton? Maybe.

 

Near the border? OK for some people.

 

In the desert? No

 

In the hills? Fire country.

 

Short of annexing Mexico, the only area left is the 15 mile strip of land down the coastline from Pendleton to San Diego.

 

And what we are seeing is absolue madness in this area as people stake their claim to yet another California gold rush, abetted by no-down, adjustable rate mortgages.j

 

Our neighbor is a perfect example. Recently divorced she refinanced her home at interest only so she could make the payments. Took out a bunch of cash, and now she's making $4000 payments monthly of interest only.

[Pee Brain]

Frenzy is the only word applicable here in North SD County.

 

The general consensus is that SD county will be home to 15-20 million people within the next 40 years.

 

Currently over 3 million.

 

So where will the additional people live?

 

Camp Pendleton? Maybe.

 

Near the border? OK for some people.

 

In the desert? No

 

In the hills? Fire country.

 

Short of annexing Mexico, the only area left is the 15 mile strip of land down the coastline from Pendleton to San Diego.

 

And what we are seeing is absolue madness in this area as people stake their claim to yet another California gold rush, abetted by no-down, adjustable rate mortgages.j

 

Our neighbor is a perfect example. Recently divorced she refinanced her home at interest only so she could make the payments. Took out a bunch of cash, and now she's making $4000 payments monthly of interest only.

 

 

scott cardiff,

 

i might post some listings, so stoolies around the world can get an idea of the insanity here. i mean, go back and think about 5 crappy studios selling for like $500/SF? the weird part is, no one blinks an eye, and it will probably resell higher.

 

yobob1 - you're figuring a +/-8.5x gross multiplier; not a bad rule of thumb. i used to figure 15x gross on well located SFRs here in socal, and much less on inland props (just a general rule of thiumb). also in the past, id be willing to take down a small coastal MFD at 8x-10x gross (basically, you get squat for 3 years then the rent increases kick in and asset value grows - again, just my RofT). obviously, i havent purchased anything in socal for awhile (as it turns out, to my dismay) as i again generally look at 4x-7x gross as doable deals unless the area is crappy (probably doesnt exist south of barstow ). you make an excellent point, in that the price declines will result from multiply contraction.... and if you get rent rate declines as people leave CA when the economy dumps, that slim equity stake will evaporate overnight. its easy to say "ill buy and hold", but other stuff like divorce and business weakness seem to crop-up when you are feeding the pig (owe more than its worth). funny how the stress riples thru the "matrix".

 

prices have risen so high, that some apt lenders have lowered their coverage ratios to 1.15 vs. 1.20... wndysrf could comment, but the cash flows werent supporting 75% LTVs, so they tweaked the ratios - again, interest rates are not the only way to regulate lending. im going to look at a crappy little property this morning that they think is worth +/-$150K/unit; mix of 1br and 2br units, older inland property - you guys get the idea.... 3/4 million $$$ used to be a alot of money, now it might not even get you a 5-plex.

 

as to the $/SF: along the coast our rents can range between $2.25/sf to $2.50/sf with values of like $525-$533/sf. there - make that work with high tax assessment and 25% down

[Goldilocks]

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[Down Jones]

We are looking for a house for rent in the Detroit Metro area.

(Brighton, Farmington, Bloomfield, Wixom, etc - the northwest).

Goldie,

Welcome to the neighborhood! We're in Farmington Hills. We sold our house in West Bloomfield 3.5 years ago with a nice profit and no regrets. We've been renting ever since, and we aren't even thinking of "biting" yet on another house even though there is such a glut.

Some unsolicited advice if you haven't already signed the lease:

1. Do the drive during rush hour from your prospective house to your work place.

2. Check out the school systems (all very different based on the suburbs you listed).

3. Set up an escrow account where part of your rent can be deposited in case landlord doesn't make necessary major repairs (furnace, water heater etc.).

4. Put an escape clause into your lease in case you must move prior to the end of the agreed upon term.

Feel free to PM me, I would be happy to talk to you and answer any questions about the area.

DJ

[Guest yobob1]

She told us that the whole neighborhood was flooded with people like the house we were looking at - they spent far to much upgrading the house and now they are underwater. The asking price on this house started at $230,000 and is now $198,000. She told us they had to lower it under $175,000 to have a prayer of selling it but they wouldn't due to their new 'investment' in a Chrome and Marble kitchen along with the bathrooms that had showers, floors and tubs in all new ceramics.

Another aspect I've wondered about with the Home Repo/Lowes do it yourselfers crowd is the amount of money some people have poored (sic) into properties upgrading beyond the surrounding norm. I was taught early on that if you want to come out ahead on RE you don't buy the biggest, fanciest, most expensive house in a neighborhood because normally the surrounding properties will have the tendency to drag the higher prices to a lower level as opposed to the other way around. I am also very concerned that we may exhaust the world's supply of granite and marble and hand painted ceramic tiles. Been a lot of lipstick applied to pigs, but you know, underneath they're still pigs.