So much for their “affordable housing” policy.
So much for their “affordable housing” policy.
(Daniel Amerian) Home buyers in every city and state have been benefiting from a powerful financial cycle for almost five years. Most people are not aware of this cycle, but it has lowered the average monthly mortgage payment for home buyers on a national basis by about $250 per month since the end of 2013.
The interest rate cycle in question is one of “yield curve spread” expansion and compression, with yield curve spreads being the difference between long-term and short-term interest rates. This interest rate spread has been going through a compression phase in its ongoing cycle, meaning that the gap between long-term interest rates and short-term interest rates fell sharply in recent years.
The green bars in the graph above show national average mortgage payments (principal and interest only), and they fell from $861 a month in 2013 to $809 a month in 2016 and have now risen to $894 per month. However, without the narrowing of the spread between short-term rates and long-term rates, mortgage payments would have been entirely different (and likely home prices as well).
Without the cycle of yield curve spread compression then, as shown with the blue bars, average mortgage payments would have been above $900 per month even in 2014, and they would have risen every year since without exception. If it had not been for compression, national average mortgage payments would have reached $978 per month in 2016 (instead of $809) and then $1,138 per month in 2018 (instead of $894).
The yellow bars show the average monthly savings for everyone buying a home during the years from 2014 to 2018. The monthly reduction in mortgage payments has risen from $57 per month in 2014 to $169 per month in 2016, to $244 per month by 2018 (through the week of October 11th).
In other words, the average home buyer in the U.S. in 2018 is saving almost $3,000 per year in mortgage payments because of this little-known cycle, even if they’ve never heard of the term “yield curve.” Indeed, while the particulars vary by location, home affordability, home prices and disposable household income have been powerfully impacted in each of the years shown by this interest rate cycle, in every city and neighborhood across the nation.
While knowledge of this cyclical cash flow engine has not been necessary for home buyers (and sellers) to enjoy these benefits in previous years, an issue has developed over the course of 2018 – the “fuel” available to power the engine has almost run out. That means that mortgage payments, home affordability and housing prices could be traveling a quite different path in the months and years ahead.
The yield curve spread is shown in the blue area above, and it was quite wide at the beginning of this particular cycle, equaling 2.62% as of the beginning of 2014. It has been steadily used up since that time, however, with the compression of the spread being shown in red. As of the current time, the yield curve compression which has powered the reduction in mortgage payments has almost maxed out, the blue area is almost gone and the ability to further compress (absent an inversion) is almost over.
This analysis is part of a series of related analyses; an overview of the rest of the series is linked here.
(More information on the data sources and calculations supporting the summary numbers above can be found in the rest of series, as well as in the more detailed analysis below. A quick summary is that mortgage rates are from the Freddie Mac Primary Mortgage Market Survey, Treasury yields are from the Federal Reserve, the national median home sale price is from Zillow for the year 2017 and the assumed mortgage LTV is 80%.)
A yield curve spread is the difference in yields between short-term and long-term investments, and the most common yield curve measure the markets looks to is the difference between the 2-year and 10-year U.S. Treasury yields.
An introduction to what yield curves are and why they matter can be found in the analysis “A Remarkably Accurate Warning Indicator For Economic And Market Perils.” As can be seen in the graph below and as is explored in more detail in some of the linked analyses, there is a very long history of yield curve spreads expanding and compressing as part of the overall business cycle of economic expansions and recessions, as well as the related Federal Reserve cycles of increasing and decreasing interest rates.
Since the beginning of 2014, the rapid shrinkage of the blue area shows the current compression cycle, and a resemblance (in broad strokes) can be seen with the compression cycles of 1992-2000 and of 2003-2006.
What has seized the attention of the markets in recent months is what followed next in some previous cycles, which is that yield curve spreads went to zero and then became negative, creating “inversions” where short-term yields are higher than long-term yields (as shown in the golden areas). This is important because, while such inversions are quite uncommon, when they do occur they have had a perfect record in recent decades (over the last 35 years) of being followed by economic recessions within about 1-2 years.
However, yield curves don’t have to actually invert in order to turn the markets upside down, and as explored in the analysis linked here, when the Fed goes through cycles of increasing interest rates, we have a long-term history of yield curve spreads acting as a counter cyclical “shock absorber” and shielding long-term interest rates and bond prices from the Fed actions.
That only works until the “shock absorber” is used up, however, and as of the end of the third quarter of 2018, the yield curve “shock absorber” has been almost entirely used up. So, when the Fed increased short-term rates in late September of 2018, there was almost no buffer, and that increase passed straight through to 10-year Treasury yields. The results were painful for bond prices, stock prices and even the value of emerging market currencies.
The same lack of compression led to a sudden and sharp leap to the highest mortgage rates in seven years. Unfortunately, that jump may also potentially be just a taste of what could be on the way, with little further room for the yield curve to compress (without inverting).
The graphic below shows weekly yields for Fed Funds, 2-year Treasuries, 10-year Treasuries and 30-year fixed-rate mortgages since the beginning of 2014.
The first relationship is the visually obvious close correlation between the top purple line of mortgage rates and the green line of 10-year Treasury yields. Mortgage amortization and prepayments mean that most mortgage principal is returned to investors well before the 30-year term of the mortgage, and therefore, investors typically price those mortgage rates at a spread (the distance between the green and purple lines) above 10-year Treasury yields. It isn’t a perfect relationship – the 10-year Treasury tends to be a bit more volatile – but is a close one.
The bottom two lines are the short-term yields, with the yellow line being effective overnight Fed Funds rates, and the red line being 2-year Treasury yields. Because the yield curve has been positive over the entire time period shown (as it almost always is), long-term rates have consistently been higher than short-term rates, and 10-year Treasury yields have been higher than 2-year Treasury yields, which have been higher than Fed Funds rates.
Now, the long-term rates have been moving together, and while the relationship is not quite as close, the short-term rates have also been generally moving together, with the 2-year Treasury yield more or less moving up with the Fed’s cycle of increasing interest rates (each “step” in the yellow staircase is another 0.25% increase in interest rates by the Federal Reserve).
However, the long-term rates have not been moving with the short-term rates. As can be seen with point “D,” 10-year Treasury yields were 3.01% at the beginning of 2014, 2-year Treasury yields were a mere 0.39% and the yield curve spread – the difference between the yields – was a very wide 2.62%.
About a year later, by late January of 2015 (point “E”), 10-year Treasury yields had fallen to 1.77%, while 2-year Treasury yields had climbed to 0.51%. The yield curve spread – the distance between the green and red lines – had narrowed to only 1.26%, or a little less than half of the previous 2.62% spread.
It can be a little hard to accurately track the relative distance between two lines that are each continually changing, so the graphic below shows just that distance. The top of the blue area is the yield curve spread; it begins at 2.62% at point “D” and falls to 1.26% by point “E.” The great reduction between points “D” and “E” is now visually obvious.
So, if there had been no change in yield curve spreads, and the 2-year Treasury had risen to 0.51% while the spread remained constant at 2.62%, then the 10-year Treasury yields would have had to have moved to 3.13%.
But they didn’t – the yield curve compressed by 1.36% (2.62% – 1.26%) between points “D” and “E,” and the compression can be seen in the growing size of the red area labeled “Cumulative Yield Curve Compression.” If we start with a 2.62% interest rate spread, and that spread falls to 1.26% (the blue area), then we have used up 1.36% (the red area) of the starting spread and it is no longer available for us.
The critical importance of this yield curve compression for homeowners and housing investors, as well as some REIT investors, can be seen in the graphic below:
The top of the green area is the national average 30-year mortgage rate as reported weekly by Freddie Mac. That rate fell from 4.53% in the beginning of 2014 (point “D”) to 3.66% in late January of 2015.
But remember the tight relationship between the green and purple lines in the graph of all four yields / rates. Mortgage investors demand a spread above the 10-year Treasury, mortgage lenders will only lend at rates that will enable them to meet that spread requirement (and sell the mortgages), and therefore, it was the reduction in 10-year Treasury yields that drove the reduction in mortgage rates. And if the yield curve compression had not occurred, then neither would have the major reduction in mortgage rates.
As we saw in the “Running Out Of Room” graphic, the red area of yield curve compression increased by 1.36% between points “D” and “E.” If we simply take the red area of yield curve compression from that graph and we add it to the green area of actual mortgage rates, then we get what mortgage rates would have been with no yield curve compression (all else being equal).
With no yield curve compression, mortgage rates of 3.66% at point “E” would have been 5.02% instead (3.66% + 1.36% – 5.02%).
With a $176,766 mortgage in late January of 2015, a monthly P&I payment at a 3.66% rate is $810. (This is based on a national median home sale price for 2017 of $220,958 (per Zillow) and an assumed 80% mortgage LTV.)
At a 5.02% mortgage rate – which is what it would have been with no yield curve compression – the payment would have been $951. This meant that for any given size mortgage, monthly payments were reduced by 15% over the time period as a result of yield curve spread compression ($810 / $951 = 85%).
Now, at that time, housing prices were still in a somewhat fragile position. The largest decrease in home prices in modern history had just taken place between the peak year of 2006 and the floor years of 2011-2012. Nationally, average home prices had recovered by 9.5% in 2013, and then another 6.4% in 2014.
Here is a question to consider: Would housing prices have risen by 6.4% in 2014 if mortgage rates had not reduced monthly mortgage payments by 15%?
Our next key period to look at is between points “E” and “G,” late January of 2015 to late August of 2016. We are now beginning a rising interest rate cycle when it comes to short-term rates. The Fed had done its first slow and tentative 0.25% increase in Fed Funds rates, and 2-year Treasury yields were up to 0.80%, which was a 0.29% increase.
All else being equal, when we focus on the yellow and red lines of short-term interest rates, mortgage rates should have climbed as well. (Graphs are repeated for ease of scrolling.)
However, that isn’t what happened. After a brief jump upwards at point “F,” yield curve spreads had substantially fallen to 0.78% by point “G,” as can be seen in the reduction of the blue area above. For this to happen, the compression of yield curve spreads had to materially increase to 1.84%, as can be seen in the growth of the red area.
In the early stages of a cycle of rising interest rates (as part of the larger cycle of exiting the containment of crisis), mortgage rates did not rise, but fell from the very low level of 3.66% at point “E” to an even lower level of 3.46% at point “G,” as can be seen in the reduction of the green area.
To get that reduction in the green area during a rising interest rate cycle required a major growth in the red area of yield curve compression. To see what mortgage rates would have been without yield curve compression (all else being equal), we add the red area of cumulative yield curve compression of 1.84% to the green area of actual mortgage rates of 3.46% and find that mortgage rates would have been 5.30%.
Returning to our $176,766 mortgage example, the monthly mortgage payment (P&I only) is $790 with a 3.46% mortgage rate, and is $982 with a 5.30% mortgage rate. Yield curve compression was responsible for a 20% reduction in mortgage payments for any given borrowing amount by late August of 2016.
However, a problem is that by late August of 2016, the 1.84% cumulative cyclical compression of the yield curve meant that only 0.78% of yield curve spreads remained. A full 70% of the initial yield curve spread had been used up.
(Please note that the mortgage payments in this section of the analysis are calculated based on historical mortgage rates for the particular weeks identified. The annual average payments presented in the beginning of this analysis are the average of all weekly payment calculations for a given year, and therefore, do not correspond to any given week.)
After its slow and tentative start, the Federal Reserve returned to 0.25% Fed Funds rate increases in December of 2016, and has kept up a much steadier pace since that time. As of October of 2018, Fed Funds rates are now up a total of 2% from their floor. As can be seen in the line graph of the yield curve over time, 2-year Treasury yields have also been steadily climbing and were up to 2.85% by point “J,” the week ending October 11th.
However, 10-year Treasury yields are not up by nearly that amount. By late August of 2018, 10-year Treasury yields were only up to 2.87%, which was 1.29% above where they had been two years before.
The difference can be found by looking at the very small amount of blue area left by point “J” – yield curve spreads were down to a mere 0.22% by the week ending August 29th, or less than one 0.25% Fed Funds rate increase. This meant that the red area of total cumulative yield curve compression was up to 2.40%, which means that 92% of the “fuel” that had been driving the compression profit engine had been used up – before the Fed’s 0.25% Fed Funds rate increase of September 2018.
As explored in much more detail in the previous analysis linked here, when the Federal Reserve raised rates for the eighth time in September, the yield curve did not compress. Such a compression could have been problematic, as the yield curve would have been right on the very edge of inverting, and there is that troubling history when it comes to yield curve inversions being such an accurate warning signal of coming recessions.
Instead, the short-term Fed Funds rate increase went straight through to the long-term 10-year Treasury yields, full force, with no buffering or mitigation of the rate increase by yield curve compression. The resulting shock as the 10-year Treasury yield leaped to 3.22% led to sharp losses in bonds, stocks and even emerging market currencies.
The same shock also passed through in mostly un-buffered form to the mortgage market via the demand for mortgage investors to be able to buy mortgages at a spread above the 10-year Treasury bond. Thirty-year mortgage rates leaped from 4.71% to 4.90%, an increase of 0.19%, and the highest rate seen in more than seven years.
(I’ve concentrated on the 2- to 10-year yield curve spread in this analysis to keep things simple, to correspond to the market norm for the most commonly tracked yield curve spread and because it has a strong explanatory power for the big picture over time. If one wants to get more precise (and therefore, quite a bit messier), there are also the generally much smaller spread fluctuations between 1) Fed Funds rates and 2-year Treasury yields; and 2) 10-year Treasury yields and mortgage rates.)
When we look at the period between points “G” and “J,” it looks quite different than either of the previous periods we looked at. Mortgage rates have been rising, with the largest spike occurring at the time that the Federal Reserve proved it was serious about actually materially increasing interest rates with the Fed Funds rate increase of December 2016 (point “H”).
However, this does not mean that the money saving power of yield curve compression had lost its potency. Between points “D” and “J,” early January of 2014 and early October of 2018, average annual mortgage rates rose from 4.53% to 4.90%, as can be seen in the green area – which is an increase of only 0.37%. Meanwhile, the yield curve spread between the 2- and 10-year Treasuries was compressing from 2.62% to 0.29%, which was a yield curve compression of 2.33%. Adding the red area of cumulative yield curve compression to the green area of actual mortgage rates shows that current mortgage rates would be 7.23% if there had been no yield curve compression (all else being equal).
Mortgage principal and interest payments on a 30-year $176,766 mortgage with 4.90% interest rate are $938 per month, and they are $1,203 per month with a 7.23% mortgage rate. This means that yield curve compression has reduced the national average mortgage payment by about 22%.
This particular analysis is a specialized “outtake” from the much more comprehensive foundation built in the Five Graphs series linked here, which explores the cycles that have created a very different real estate market over the past twenty or so years.
As developed in that series, as part of the #1 cycle of the containment of crisis, the attempts to cure the financial and economic damage resulting from the collapse of the tech stock bubble and the resulting recession, the Federal Reserve pushed Fed Funds rates down into an outlier range (shown in gold), the lowest rates seen in almost 50 years.
As part of the #3 cycle of the containment of crisis, in the attempt to overcome the financial and economic damage from the Financial Crisis of 2008 and the resulting Great Recession, the Federal Reserve pushed interest rates even further into the golden outlier range, with near-zero percent Fed Funds rates that were the lowest in history.
By the time we reach early January of 2014 to late January of 2015, points “D” to “E,” Fed Funds rates were still where they had been the previous five to six years – near zero. Mathematically, there was no room to reduce interest rates, without the U.S. going to negative nominal interest rates.
But yet, mortgage rates fell sharply, from an already low 4.53% to an extraordinarily low 3.66%. This sharp reduction in rates transformed the housing markets and would steer extraordinary profits to homeowners and investors over the years that followed. However, none of it would have been possible without the compression of yield curve spreads.
Once the past has already happened, it is easy to not only take it for granted, but to internalize it and to make it the pattern that we believe is right and natural. Once this happens, the next natural step is to then either explicitly or implicitly project this assumed reality forward, as that trend line then becomes the basis for our financial and investment decisions.
However, where this natural process can run into difficulties is when what made the past possible becomes impossible. Yield curve spread compression took what would have been impossible – a plunge in mortgage rates even as short-term rates remained near a floor – and made it possible. But that pattern can’t repeat (at least not in that manner) when there is no longer the spread to compress.
In the not-too-distant future, it’s not improbable that low-wage laborers in San Francisco will be replaced by ubiquitous machines (the city is already home to the first restaurant run by a robot). And not just fast food workers, either – the jobs of teachers, fire fighters and law enforcement will all be assumed by robots, as NorCal’s prohibitively high cost of living and astronomical home prices spark a mass exodus of families earning less than $250,000 a year.
While this scenario might seem like an exaggeration (and it very well might be), we’ve paid close attention to the flight of Californians who are abandoning the Bay Area for all of the reasons mentioned above, as well as what Peter Thiel (himself a Bay Area emigre) once described as a political “monoculture” that has made California inhospitable for conservatives. And as if circumstances weren’t already dire enough for would-be homeowners (even miles away from San Francisco, relatively modest homes still sell for upwards of $2 million), a report published earlier this year by realtor.com illustrated how a lapse in new home construction has led to a serious imbalance between home supply and the increasing demand of the state’s ever-growing population, leading to a cavernous supply gap.
With this in mind, it shouldn’t be surprising that Californians comprise a majority of the residents moving into other states in the American West – even states like Idaho where the culture is very different from the liberal Bay Area. This week, Bloomberg published a story about how Californians constitute an increasing share of out-of-state homebuyers in small cities like Boise, Phoenix and Reno, which are significantly more affordable than California, and offer some semblance of the walkable urban environment that nesting millennials crave.
As Californians sell their homes in the Bay Area in search of roomier, cheaper locales, they’re bringing the curse of surging property prices with them. In fact, the influx of Californians is the primary factor leading to some of the largest YoY price increases in the country, as Bloomberg explains:
About 29 percent of the Idaho capital’s home-listing views are from Californians, according to Realtor.com. Reno and Prescott, Ariz., also were popular. These housing markets are soaring while much of the rest of the country cools. In Nevada, where Californians make up the largest share of arrivals, prices jumped 13 percent in August, the biggest increase for any state, according to CoreLogic Inc. data. It was followed closely by Idaho, with a 12 percent gain.
Even in places like deep-red Idaho, these transplants are beginning to remake the terrain in their own image, as food co-ops and Women’s Marches starting to populate the landscape. Businesses are rushing to Boise to meet every desire of the newly arrived Cali transplants.
D’Agostino, the Bay Area transplant, isn’t ashamed of her progressive views and is finding her place: at the natural foods co-op downtown, the Boise’s Women’s March last year, and with the volunteer group she founded to collect unused food for the needy. But it was also good to get out of her comfort zone, she says. “I can’t remember a time when it’s ever been this divided, so the fact that I can have some interaction with people who might not have exactly the same beliefs as me, that’s fine,” she says. “As long as we can respect each other.”
It’s not new for politics to factor into moving decisions—it’s just that in the age of Trump, tensions get magnified. “What’s different now is how far apart the parties are ideologically,” says Matt Lassiter, a professor of history at the University of Michigan.
Politics aside, businesses are rushing into Boise to fill every West Coast craving. In nearby Eagle, the new Renovare gated community is selling 1,900- to 4,000-square-foot homes with floor-to-ceiling glass and “wine walls” that start at $650,000—a bargain by California standards, says sales agent Nik Buich. About half of buyers are from out of state, he says.
One couple even opened a “boutique taqueria” and another transplant is preparing to start a blog about his experience moving to Idaho.
Julie and John Cuevas left Southern California a year ago to open Madre, a “boutique taqueria” in Boise that would make many of their fellow transplants feel at home. It’s more fusion than typical Mexican fare, with taco fillings including kimchi short rib and the popular “Idaho spud & chorizo.” It would have cost them three times as much to open a restaurant in California, says John, a former chef at a Beverly Hills hotel.
John Del Rio, a real estate agent sporting a beard, baseball cap, and sunglasses, just registered moving2idaho.com, where he’s planning to blog about all the things that make his new home great. He left Northern California two years ago with his wife in search of a place with less crime, lighter regulation, and more open space. Del Rio, a conservative with a libertarian bent, is reassured to see average people walking through Walmart with handguns in their holsters. In Idaho, he says, “nobody even flinches.”
In Boise alone, Californians made up 85% of new arrivals, and have driven home prices up nearly 20% in the span of a year. One realtor described the attitude of transplants as like “they’re playing with monopoly money.”
Nestled against the foothills of the Rocky Mountains, Boise (pop. 227,000) has drawn families for decades to its open spaces and short commutes. It’s been particularly attractive to Californians, who accounted for 85 percent of net domestic immigration to Idaho, according to Realtor.com’s analysis of 2016 Census data. While it has always prided itself on being welcoming, skyrocketing housing costs fueled by the influx is testing residents’ patience. In his state of the city speech last month, Mayor David Bieter outlined steps to keep housing affordable and asked Boise to stay friendly: “Call it Boise kind, our kindness manifesto,” he said.
It’s especially easy for buyers who have sold properties in the Golden State to push up prices in relatively cheap places because they feel like they’re playing with Monopoly money, Kelman says. The median existing-home price in Boise’s home of Ada County was $299,950 last month—up almost 18 percent from a year earlier, but still about half California’s. The influx is great news for people who already own homes in the area, says Danielle Hale, chief economist for Realtor.com. “But if you’re a local aspiring to home ownership, it feels very much that Californians are bringing high prices with them.”
And now that Trump’s tax reform package has been implemented, it’s only a matter of time before a whole new batch of Californian home owners, unwilling to forego their SALT tax write offs, start looking for greener pastures in low-cost red states.
With unaffordability reaching levels not seen in decades across some of the most expensive urban markets in the US, a housing-market rout that began in the high-end of markets like New York City and San Francisco is beginning to spread. And as home sales continued to struggle in August, a phenomenon that realtors have blamed on a dearth of properties for sale, those who are choosing to sell might soon see a chasm open up between bids and asks – that is, if they haven’t already.
While home unaffordability is most egregious in urban markets, cities don’t have a monopoly on unaffordability. According to a report by ATTOM, which keeps the most comprehensive database of home prices in the US, of the 440 US counties analyzed in the report, roughly 80% of them had an unaffordability index below 100, the highest rate in ten years. Any reading below 100 is considered unaffordable, by ATTOM’s standards. Based on their analysis, one-third of Americans (roughly 220 million people) now live in counties where buying a median-priced home is considered unaffordable. And in 69 US counties, qualifying for a mortgage would require at least $100,000 in annual income (Assuming a 3% down payment and a maximum front-end debt-to-income ratio of 28%). As one might expect, prohibitively high home prices are inspiring some Americans to relocate to areas where the cost of living is lower. US Census data revealed that two-thirds of those highest-priced markets experienced negative net migration, while more than three-quarters of markets where people earning less than $100,000 a year can qualify for a mortgage experienced net positive migration.
Rising home prices have played a big part in driving home unaffordability, but they’re not the whole story. Stagnant wages are also an important factor. The median nationwide home price of $250,000 in Q3 2018 climbed 6% from a year earlier, which is nearly twice the 3% growth in wages during that time. Looking back over a longer period, median home prices have increased 76% since bottoming out in Q1 2012, while average weekly wages have increased 17% over the same period.
Instead of fighting to overpay for existing inventory, one study showed that, for now at least, most Americans would be better off renting than buying a residential property. According to the latest national index produced by Florida Atlantic University and Florida International University faculty, renting and reinvesting will “outperform owning and building equity in terms of wealth creation.”
However, with the average national rent at an all-time high, American consumers are increasingly finding that there are no good options in the modern housing market. Which could be one reason why millennials, despite having more college degrees than any preceding generation, are increasingly choosing to rent instead of buying, even after they get married and start a family.
Millennials in New York are known for living in a state of perpetual brokeness – between student loans, $20 nightclub drinks and $15 avocado toast, it’s easy to understand why 70% of millennials have less than $1,000 in savings.
Now we can add expensive, glorified closets to the mix, as the Wall Street Journal reports.
30-year-old marketing manager Scott Levine lives in an $1,800 per month, 98-square-foot room in a postage-stamp of an apartment – “basically, a kitchen” – with two roomates. Every week, someone from Ollie – his property manager, stops by to drop off towels and toiletries.
A “community-engagement team” at Ollie helps plan Mr. Levine’s social calendar. A live-in “community manager”—sort of like a residential adviser for a college dorm—gets to know Mr. Levine and everyone else living on the 14 Ollie-managed floors of the Alta LIC building, known as Alta+, and finds creative ways to get them engaged in shared activities, like behind-the-scenes tours of Broadway shows or trips to organic farms. –WSJ
“Life in general can be a bit of a headache,” says Mr. Levine. Thanks to Ollie, he adds, “Everything is done for you, which is convenient.”
Ollie’s business model is all about convenience and roommates – usually single people in their 20s and 30s who have all amenities provided for them, while sharing a kitchen and common area.
For city-dwellers accustomed to living cheek-by-jowl with people whose names they’ll never bother to learn, this might seem strange. But for young people still forming their postcollege friend groups—in an era when participation in civic life is down and going to a bar can mean huddling in a corner swiping on Tinder—it makes sense. So much sense that people put up with apartments so small they’re called “micro.” But hey, free shampoo. –WSJ
Meanwhile, startups such as Ollie and Common are competing with big-city real-estate developers. Common manages 20 co-living properties in six cities where roommate situations are more common, such as New York, Los Angeles and Washington DC. They have approximately 650 renters according to CEO Brad Hargreaves.
“Our audience is people who make $40,000 to $80,000 a year, who we believe are underserved in most markets today,” Mr. Hargreaves says.
Other startups are managing existing homes and apartments, “Airbnb-style” as the WSJ puts it.
Bungalow, which just announced $64 million in funding, wants property owners to offer space to “early-career professionals” looking for a low-maintenance place to stay. It charges rent that’s “slightly higher” than what it pays those owners, a company spokeswoman says. It currently maintains over 200 properties—housing nearly 800 residents—across seven big cities, says co-founder and CEO Andrew Collins.
As with Common and Ollie, Bungalow advertises that it furnishes the common areas in its homes, installs fast free Wi-Fi, and cleans them regularly. The company also organizes events and outings to help you “build a community with… your new friends.” –WSJ
One of the underlying aspects of the co-living startup models is a technology platform that both advertises to prospective tenants and takes care of their needs once they’re living on-site. Ollie’s “Bedvetter” system, for example, shows apartments to potential tenants – and shows who’s already signed up to live there with links to their personal profiles in order to match roommates. Bedvetter also matches people into “pods” of “potential roommates” before they begin an apartment hunt.
“It’s like online dating,” says Levine – while his roommate, Joseph Watson, 29, compares it to eHarmony or Match.com vs. Tinder, as it’s designed for long term pairings.
While millennials in New York and other urban areas scramble to make ends meet, developers are making hand over fist on the co-living movement – even though the renters themselves are paying less than they would for a private studio.
The Alta LIC building also has conventional apartments, but the co-living units are filling up faster, says Matthew Baron, one of the Alta LIC building’s developers. What’s more, he adds, he can get more than $80 a square foot for Ollie units compared with around $60 a square foot for the others, even though the Ollie ones are on the lower, less-desirable floors. –WSJ
Another complication with co-living arrangements is tricky community management. L.A.’s PodShare, for example, vets potential tenants beforehand – however issues with problem tenants are unavoidable. “We’ve hosted 25,000 people at this point, so there’s bound to be some problems,” says founder Elvina Beck.
Common building tenant Teiko Yakobson said that the “community vibe broke down after Common eliminated the paid “house leader,” complaining that “We all just became strangers, and it was no better than living in any other apartment.” Common instead replaced the program with “centralized” community managers at the corporate level – which Hargreaves says is “more coherent” for them.
It’s not all bad, however…
When it does work, co-living can re-create the kind of communities tenants seek online—ones grounded in common interests and shared socioeconomic status.
Mr. Levine, who not only lives in a co-living building but also works in a co-working space—and in whose social circle most people do either one of those or the other—is aware that, while this isn’t for everyone, he is hardly a standout. “One thing I’ve heard before is that I’m a stereotype of a New York millennial,” he says.
Just make sure you have earplugs in case your roommate is able to get laid in their respectively expensive, tiny room.
There is a serious economic crisis brewing that few seem to be paying attention. According to a new survey from Zillow Group Inc. (ZG – Get Report), approximately 22.5% of millennials ages 24 through 36 are living at home with their moms or both parents, up nine percentage points since 2005 which was 13.5% and the most in any year in the last decade. Between the student loans which cannot be discharged thanks to the Clintons (to get the support of bankers) even after they find that degrees are worthless when 60% of graduates cannot find employment with such a degree and the fact that taxes have escalated to nearly doubling over the last 20 years that is predominantly state and local, the affordability of buying a home has been fading fast. Despite the fact that millennials are eager to enter the real estate market, they’re bearing the brunt of the challenge directly caused by the combination of taxes and non-dischargeable student loans.
Now 63% of millennials under the age of 29 cannot even afford the cost of home ownership, according to a CoreLogic and RTi Research study. The expense, in fact, is their number one reason for remaining a renter. In their research, they concluded that one-third of millennial renters reported feeling they cannot afford a down payment to buy a home. This is a sad response that is not being taken into consideration by governments.
Where home prices have not risen sharply, taxes have. First-time home buyers face ever-growing challenges to find and buy affordable entry-level homes as the economics of inefficient governments at the state and local levels have refused to reform and raise taxes to meet pension costs they promised themselves. Politicians from London to Vancouver have increased taxes to try to bring home prices down rather than looking at the problem objectively. All they are accomplishing is punishing people who have owned homes and destroying their future when home values were their retirement savings.
California and Illinois are just two major examples at the top of the list of grossly mismanaged state governments. It is this net affordability factor that has begun to encumber sales of real estate, softening prices and turning many millennials into renters rather than home buyers. Then add the rise of interest rates and we have an economic cocktail of taxes that is beginning to kill the real estate market in a slow death drip by drip. Depressions take place when the debt and real estate markets collapse – not equities and commodities. The amount of money invested in debt markets dwarfs equities, It is ALWAYS the debt market that you undermine when you want to destroy an economy.
Taxes and the rise in interest rates will further erode affordability and is beginning to slow existing-home sales in many markets already. As this trend continues, home prices and mortgage rates over the next couple of years will likely dampen sales and home price growth. There was another study conducted by Freddie Mac which also found that affordability challenges are contributing to a downtrend in young adult home ownership. Long-term, real estate prices will decline as taxes and interest rates rise. The next crop of buyers is being culled and as that unfolds, real estate cannot rise when banks also begin to curtail the availability of mortgages.
Educated, but poor, millennials are transforming neighborhoods in several Rust Belt states like Ohio, Michigan, and Wisconsin in search for affordable communities.
Since the end of the American high (the late 1960s), the Rust Belt had experienced decades of de-industrialization and a mass exodus of residents. Manufacturing plants closed down, jobs disappeared, and communities disintegrated, as this once vibrant region is now a symbol of decay and opioids.
However, this trend has reversed in recent years, as some millennials have abandoned big cities for Rust Belt communities, in hopes to catch the falling knife and invest in real estate that could be near its lows.
It is a massive risk, and the narrative behind this “attractive investment bet” are affordable communities, unlike the Washington Metropolitan Area, San Francisco, New York, San Diego County, and Boston.
Yet this revitalization of the Rust Belt economy could not have come at the worse time: Last week, Bank of America rang the proverbial bell on the US real estate market, saying existing home sales have peaked, reflecting declining affordability, greater price reductions and deteriorating housing sentiment.
While it is difficult to say what exactly happens in Rust Belt communities in the next downturn, one should understand that housing prices in these regions will probably stay depressed for the foreseeable future. So, if the millennial who was hoping for a Bitcoin-style like move, they should think again as investing in Rust Belt communities is a long-term strategy.
Constantine Valhouli, Director of Research for the real estate research and analytics firm NeighborhoodX, told CNBC that millennials are flocking to these areas not just for home ownership, but rather rebuilding these communities from the bottom up.
“It is about having roots and contributing to the revival of a place that needs businesses that create jobs and create value.”
According to Paul Boomsma, president and CEO of Leading Real Estate Companies of the World (LeadingRE), some of these formerly blighted towns are gradually coming back to life. The latest influx of millennials view these regions as financial opportunities and places to construct new economies – especially with real estate prices far below the Case–Shiller 20-City Composite Home Price Index.
“Millennials are swiping up properties for next-to-nothing prices near downtown city areas that have completely revitalized,” Boomsma said. LendingRE has listed a three-bedroom Victorian home in Mansfield, Ohio, with an asking price of $39,900.
The median home value in Mansfield is $60,300, now compare that to the median home value of nearly $700,000 in New York City and a whopping $1.3 million in San Francisco, and it is obvious why millennials are flocking to the Rust Belt. Experts add that there is more to consider than discounted prices.
“There is a community-mindedness with millennials that attracts them to the smaller Rust Belt towns,” said Peter Haring, president of Haring Realty in Mansfield, Ohio.
“We are seeing an intense interest in participating in the revitalization of our towns and being a part of the community. It’s palpable, and it’s exciting,” he added.
Haring said affordable homes in Mansfield comes with a significant drawback: distance. The closest large cities, Cleveland and Columbus, are each an hour’s drive, and amenities are lacking.
“For people working in those cities, they are sacrificing drive time,” Haring said. “In some cases, they are sacrificing the convenience of nearby shopping and restaurants.”
But for millennials that is a little concern: they have the luxury of working remotely and ordering consumable goods from Amazon.
“More and more people are now working virtually, which means they do not need to be in their office and can work from almost anywhere,” said Ralph DiBugnara, senior vice president at Residential Home Funding. “So why not find somewhere to live where your city dollars can go a lot further?”
CNBC points out that some large corporations are moving back into these areas, the same areas that they left decades ago for cheap labor overseas. One example is home appliance manufacturer Whirlpool, whose corporate headquarters are in Benton Harbor, Michigan.
“It helped revitalize surrounding areas with new lifestyle and cultural amenities,” said LendingRe’s Boomsma. “This type of corporate commitment draws a young workforce, who are attracted by the lifestyle, paired with the relative affordability.”
Todd Stofflet, a Managing Partner at the KIG CRE brokerage firm, said for the millennials who still cannot afford to buy a home, the Rust Belt also has a robust rental market. Millennials who are heavily indebted with student loans, auto debt, and high-interest credit card loans could discover that these low-cost regions are perfect strategies to break free from the debt ball and chain and start saving again. Restore capitalism and say goodbye to creditism, something the Federal Reserve and the White House would not be happy about.
Millennials are creating demand for new apartments, which is a “a catalyst for retail, grocery and office development,” Stofflet added. “As downtown populations experience a resurgence, so does the dining, entertainment and lifestyle of the area.”
Although discounted real estate prices in Rust Belt regions are appealing in today’s overinflated Central Bank controlled markets, Daniela Andreevska, a marketing director at real estate data analytics company Mashvisor, cautioned millennials to learn about the dynamics of why these communities have low prices.
“One should keep in mind that many of the homes there are foreclosures or other types of distressed properties,” she said. “You should analyze and inspect the property well in order to know how much exactly you will have to pay in repairs before buying it.”
These migration trends indicate both positive and negative shifts: on one hand millennials are fleeing unaffordable large cities to Rust Belt regions, in an adverse reaction to failed economic policies to reinflate the housing market. On the other hand, for millennials with insurmountable debt, migrating to these low-cost regions could be the most viable solution to get their finances under control.