Apartments are the next real estate bubble

Money seeking returns in real estate is flowing into apartment development. The financial assumptions may not be realistic, and the money flows portend of another real estate bubble.

Irvine Home Address … 38 REMINGTON #31 Irvine, CA 92620

Resale Home Price …… $309,900

It's not as if you didn't get the warning

You got the transcripts and recordings

History has a way of signing us up in the morning

But you're a late starter make it easy to ignore it

Later not recall it – yo

You had unfettered access to the facts

But the fact is your back was turned to the atlas

Nothing like not being in the crash test

To help you make your mind up

2020 — The Herd

There is an old saying in investments: the herd is always wrong. This is only partially true. The herd is wrong about 80% of the time, and for a short time, the movement of the heard makes it right. However, once the herd has taken a position and nobody is left to buy, the herd realizes their mistake and panics to get out causing epic financial disasters.

The latest movement of the herd is into apartment development. As the only asset class related to real estate that makes sense for institutional investors, it stands to reason that some capital flows are warranted. However, in our era of cheap money, more than a little capital is flowing into apartment development.

Cheap money and the flow of capital

The federal reserve is attempting to flood the economy with cheap money. The problem with this approach is that the few good investment alternatives available receive an inordinate amount of capital inflows which causes prices to bubble. This was the consistent criticism of Alan Greenspan, and the same is true of Ben Bernanke. Both of them are bubble boys.

The asset class to receive an over-abundance of capital is apartments. Capital managers have put a small box around class A apartments and said they are acceptable investments. As a result, the capital inflows are keeping apartment cap rates south of 5.5%. Many deals being underwritten today have low cap rates, aggressive assumptions on rent growth, and ridiculous assumptions on the cap rates future buyers will be willing to pay — and capital managers are funding these deals.

This flow of capital is causing apartment development in class A markets — whether they need apartments or not. This supply being added will prevent the rental increases the proformas all rely on. Further, in today's risk adverse environment, 5.5% cap rates sound great, but ten years from now when apartment REITs want to unload these investments at 4% cap rates, buyers will be less risk adverse, and they likely will have better use for the funds than paying a huge premium for a 4% cap rate apartment complex.

The bottom line is apartment deals being underwritten today will not perform as expected. They will not achieve the rent growth, and they will not obtain the resale price at liquidation. It's a bubble. It will likely inflate for another two or three years, then the REITs will watch for the next several years while these investments underperform. Ultimately, they will liquidate for a loss.

So much for being risk adverse.

Analyst: Rents to rise 4.5% for years

June 20th, 2011, 12:00 am — posted by Jon Lansner

The folks at John Burns Real Estate Consulting in Irvine have some bad news for renters: The landlord has pricing power!

“We believe the apartment business is set to explode, with steadily rising rents and occupancy that will justify new construction.”

I also believe the apartment business is set to explode. There will be a boom in construction because dumb money is forcing it to happen. The steadily risiing rents will not materialize at the stellar rates they are hoping for, primarily due to the new supply which will come to the market.

JBREC’s forecast shows rents growing 4.5% annually on average through 2015. The report notes that “Wall Street and pension fund consensus, at least for apartments in good locations in coastal cities, seems to be that 25%-plus rent growth over the next three years can easily occur.”

The pension fund herd is all moving in the same direction. That spells disaster for whatever asset class they are piling into.

Why are landlords in a good spot? Growing household formation and homeownership skittishness. Your landlord’s best new customer will be “young adults, who have either moved back in with their parents or taken on roommates.” Also, weak jobs. “The uncertain environment is enough to convince consumers that renting is safer than taking on a mortgage.”

Weak jobs is a plus for apartments? That is pretty stupid. Rents are directly tied to incomes. Without both job growth and wage growth, rents aren't going anywhere.

Caveats … or why JBREC sees some hope for renters – and homeownership:

Affordability Favors Homeownership: From a mortgage payment to income standpoint, for-sale housing has not been this inexpensive in at least 30 years. We calculate an own vs. rent premium across all metropolitan areas, and in many areas, it is considerably cheaper to own a home than to rent an apartment. …

That is true. However, in our market, it is still cheaper to rent than to own.

Not Smart to Rent Forever: Increasing rents will provide the motivation renters will need to explore owning. As rents start to grow, more renters will consider buying. Most people realize that paying rent all your life is probably not a great retirement decision unless you are a fantastic saver. … Construction Will Increase: Development money is flowing steadily into apartments. One of our favorite land brokers in Tampa, Bruce Erhardt, told us that there are at least eight apartment development sites in escrow right now! … Renters Have a Limit: Several of our apartment clients feel that they are already near the limit of what their tenants can afford. Renters are a clever, creative bunch who won’t take huge rent increases easily.

Rents will start rising from where they are today, but unless incomes go up, rental rate increases will be muted.

Apartments Shine as Beacon of Hope

By Hessam Nadji — August 3, 2011

The nation’s apartment market continues to beat expectations as it speeds along to a full-scale recovery. Vacancy rates peaked in early 2010 at 8 percent and have since dropped to a healthy 5.9%. Effective rental rates have been moving upward for a year-and-a-half now, by 2.5% per year on average, and picking up pace to the 4% to5% range this year. Select markets are registering high single-digit rent growth.

The outlook is quite positive. Tenant demand appears likely to continue to swell, driven by a still-recovering economy, unbundling of households that doubled up during the Great Recession, continued weakness in the for-sale housing market and movement of the relatively large Generation Y (those born between 1983 and 1992) into their peak renter-household-formation years of their 20s and early 30s.

He is overlooking the fact that a weak housing market is direct competition to rentals. As rental rates go up, the rent versus own calculation begins to favor owning, and rental demand will diminish as people chose to buy.

While the number of planned projects is picking up, and the risk of overbuilding by 2013 is increasing in certain pockets, overall construction activity remains very restrained. These factors strongly suggest that vacancy rates will soon fall into the 5% range nationwide, and into the low single-digits in a number of high-beta areas (MSAs, primarily in the Sun Belt and in the West, with above average job growth and net absorption during recovery years) and in a number of supply-constrained areas, primarily coastal MSAs. As it does, rent growth will likely escalate sharply.

This is the kind of delusional nonsense asset managers are listening to. This guy writes a good narrative on why rents should to up, but it is fiction. We will not see above-average job growth for several years, and rents in coastal MSAs will not rise dramatically because they are already astronomically high.

How long will the up market last? Probably through at least 2014 or 2015. It will take at least that long for construction completions to pick up enough to cause vacancy to climb significantly once again. Also, while at some point there likely will be some shift back toward home ownership as consumer confidence in the for-sale market improves, that probably won’t happen to the degree that significantly impacts the apartment market for at least another three to four years. In the meantime, these should be great years for apartment investors.

As i stated earlier, apartment REITs will watch the values of their holdings underperform in the last several years of their ownership. Overbuilding and a renewed enthusiasm for owning will limit demand and prevent large increases in rents.

The investment community already has already anticipated this. The total dollar volume of apartment sales priced at $1 million or greater climbed by an exceptional 77% in 2010 over 2009, albeit from a depressed level in 2009. During the first half of 2011 apartment sales volume reached $25 billion, a 67% jump over the first half of 2010. The average price per unit climbed by 16% in 2010 and by an additional 7% so far in 2011. Median cap rates across the United States have dropped from 7.5% in 2009 to 6.8% as of mid-year 2011, which masks the dramatic drop in cap rates among top-tier assets in primary markets. Prices for large, Class A apartment complexes have come back first, with appreciation starting in late 2009. Class A cap rates in primary markets have re-compressed by 150 bps to 200 bps since the market bottom with many reporting 4% to 4.5% averages, and some below 4%. Given the extraordinary levels of capital looking to enter the sector, the razor-thin cap rate to interest rate spread in upper tiers of the market place, is causing a capital migration to Class B and secondary markets. Value-add, a shunned strategy viewed as too risky just 12 months ago, has reemerged as a viable alternative, even for some institutional investors.

Asset mangers are clueless herd-following sheeple just like residential loan owners. They are overpaying for apartments in anticipation of the greater fool to come along. This is a bubble in the making.

Price support in the future will come from significantly above-inflation rent growth and low vacancies.

LOL! Yeah, right.

In addition, the spread between average, overall cap rates and underlying mortgage rates is near record highs, providing exceptional opportunities for apartment investors.

While many investors are concerned about future funding from the GSEs and their eventual restructuring, the biggest risk to this forecast is the economy.

No, the biggest risk is that asset managers wake up from their delusions and realizes they are a foolish herd being led to slaughter.

This is because other sources of financing are rapidly entering the multifamily market led by life insurance companies and healthy commercial banks. Although the recent boom in rental demand appears to defy weak employment, the tie between apartment absorption and job creation is still significant. Approximately 78% of the jobs added in the last 12 months went to young adults between the ages of 20 years old and 34 years old. While the release of pent up-demand and reversal in home ownership are important drivers, jobs still matter the most.

We have a persistent problem with unemployment. Without great job growth, the dreams of apartment investors will not come to pass.

Even modest job growth should continue to support base line demand for apartments but should the unlikely scenario of an economic contraction materialize, apartment occupancy gains will lose steam, at lease temporarily. The other risk is the lack of economic recovery in the tertiary markets. While the capital migration will bring more capital to secondary markets, and secondary submarket within major metros, true tertiary locations will continue to lag for some time.

Hessam Nadji is managing director, research and advisory services, for Marcus & Millichap Real Estate Investment Services. Contact him at

Stay away from apartment REITs as long-term investments. Perhaps in three to five years, this will be an asset class to short as the bubble becomes obvious.

Flip that REO

Flipping is easy when prices are going up 10% or more a year. No matter how incompetent the flipper, time and appreciation will bail them out. In a flat or declining market, flipping is much more difficult.

This property was taken back by the bank at auction on 4/13/2011 for $256,950. It was sold to the flippers for $236,500. The flippers went and borrowed $285,000 from a private investment group who funded the improvements and basically took all the profit from the deal. The flippers have to net more than $285,000 to make any money. If they get their full asking price and pay a 6% commission, they stand to make about $15,000. If they have to come down on the price, they won't make anything.

The previous HELOC abusing Ponzi

The interesting sub-plot to this property is with the woman who owned it previously.

  • This property was purchased as the last bubble was deflating on 1/23/1992. The the original mortgage data is not available, but based on later loans, it is likely this was a 20% down loan. The purchase price was $151,000. The first mortgage was likely $120,800 and the down payment was likely $30,200.
  • On 5/31/2000 (the date I was married), the owner refinanced with a $140,000 first mortgage.
  • On 6/6/2002 she refinanced with a $147,000 first mortgage.
  • On 12/4/2002 she refinanced with a $185,250 first mortgage.
  • On 6/11/2004 she obtained a $125,000 HELOC.
  • On 4/12/2005 she refinanced the first mortgage with a $316,500 Option ARM.
  • After five years on the Option ARM, she likely hit their recast and couldn't afford the payments.

Foreclosure Record

Recording Date: 12/13/2010

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 07/22/2010

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 04/13/2010

Document Type: Notice of Default

Foreclosure Record

Recording Date: 04/13/2010

Document Type: Notice of Rescission

Foreclosure Record

Recording Date: 03/12/2010

Document Type: Notice of Default

This woman was one of thousands of Irvine residents who spent themselves out of house and home.


This property is available for sale via the MLS.

Please contact Shevy Akason, #01836707


Irvine House Address … 38 REMINGTON #31 Irvine, CA 92620

Resale House Price …… $309,900

Beds: 2

Baths: 2

Sq. Ft.: 1016


Property Type: Residential, Condominium

Style: One Level, Traditional

View: Faces South

Year Built: 1986

Community: Northwood

County: Orange

MLS#: S669573

Source: SoCalMLS

On Redfin: 2 days


This Remodeled Single Story Lower end unit has 2 Master bedrooms each with their own full bathroom and all on one level. This is off the main road with a large patio for BBQ's or for the kids to play. Also inludes an Inside Laundry area. Granite Kitchen and bathroom counter tops. Seperate Dining area. Walk in Closet with direct patio access from one of the bedrooms. Unit has a Shared 1 car Garage. Garage is number 31. Plenty of additional parking in the complex. Very Clean and a great location in this complex. Standard Sale.


Proprietary IHB commentary and analysis

Resale Home Price …… $309,900

House Purchase Price … $236,500

House Purchase Date …. 6/28/2011

Net Gain (Loss) ………. $54,806

Percent Change ………. 23.2%

Annual Appreciation … 173.7%

Cost of Home Ownership


$309,900 ………. Asking Price

$10,847 ………. 3.5% Down FHA Financing

4.19% …………… Mortgage Interest Rate

$299,054 ………. 30-Year Mortgage

$92,428 ………. Income Requirement

$1,461 ………. Monthly Mortgage Payment

$269 ………. Property Tax (@1.04%)

$0 ………. Special Taxes and Levies (Mello Roos)

$65 ………. Homeowners Insurance (@ 0.25%)

$344 ………. Private Mortgage Insurance

$250 ………. Homeowners Association Fees


$2,388 ………. Monthly Cash Outlays

-$230 ………. Tax Savings (% of Interest and Property Tax)

-$416 ………. Equity Hidden in Payment (Amortization)

$16 ………. Lost Income to Down Payment (net of taxes)

$59 ………. Maintenance and Replacement Reserves


$1,816 ………. Monthly Cost of Ownership

Cash Acquisition Demands


$3,099 ………. Furnishing and Move In @1%

$3,099 ………. Closing Costs @1%

$2,991 ………… Interest Points @1% of Loan

$10,847 ………. Down Payment


$20,035 ………. Total Cash Costs

$27,800 ………… Emergency Cash Reserves


$47,835 ………. Total Savings Needed


64 thoughts on “Apartments are the next real estate bubble

  1. Planet Reality

    10 year t bill scratching 2%, who predicted that? Lol Cashed in a nice portion of the bond portfolio today.

    5/1 ARM is 2.9%?

    Wow we all know folks in Orange County won’t use that rate, thankfully.

    Another 10% drop in the stock market and I will be ready for another great time to buy real estate in high demand.

    1. Swiller

      Yup, rates lower, Fed and banskters in bed together. Far left and far right polarization. Plutocracy rules the land.

      Good times in store for americans. Well done wise voters, well done. Perhaps the TV evangelist/Governor of Texas will save you all.

      I’ll vote Ron Paul again. “The doctor will free you now.”

        1. screwedbyanelephant

          “If you have ever been robbed by a black teen-aged male, you know how unbelievably fleet-footed they can be.” – Ron Paul, 1992

          “Given the inefficiencies of what D.C. laughingly calls the `criminal justice system,’ I think we can safely assume that 95 percent of the black males in that city are semi-criminal or entirely criminal.” – Ron Paul, 1992

          “We don’t think a child of 13 should be held responsible as a man of 23. That’s true for most people, but black males age 13 who have been raised on the streets and who have joined criminal gangs are as big, strong, tough, scary and culpable as any adult and should be treated as such.” – Ron Paul, 1992

          “What else do we need to know about the political establishment than that it refuses to discuss the crimes that terrify Americans on grounds that doing so is racist? Why isn’t that true of complex embezzling, which is 100 percent white and Asian?” – Ron Paul, 1992

          1. Shevy

            His lack of popularity makes more sense now, I’d never seen those quotes before, disappointing.

          2. screwedbyanelephant

            he’s not completely against blacks…

            Stating that lobbying groups who seek special favors and handouts are evil, Paul wrote, “By far the most powerful lobby in Washington of the bad sort is the Israeli government” and that the goal of the Zionist movement is to stifle criticism.

          3. just some guy

            There…you see? It appears Ron Paul is an equal opportunity offender. He gets my vote.

          4. just some guy

            He has bashed Asians, Whites, Blacks, and now Jewish people. If anything, I am offended that he hasn’t….errrr….offended Hispanics.

          5. Alan

            It’s looks simpler than that to me: Ron Paul supports decriminalization of drugs, closing of overseas military bases and ending all foreign deployments with major reductions in military spending, return to the gold standard, etc., along with the more usual Tea Party Republican must-haves and does not drape it all in righteous Christian rhetoric. So the right-wing social conservative religious Republicans can’t live with his program, nor can any significant proportion of Democrats or independents. Lots of people like some bits of what he stands for, but not enough, or strongly disagreeing with other parts.

          6. tazman

            I’ve seen these quotes surface before, yet no one seems to be able to produce the newsletters in full…perhaps because they are being taken completely out of context?

            Bill Cosby has also been villified for speaking such truths as “the number one killer of a young black male is another black male” and “Let me tell you something, your dirty laundry gets out of school at 2:30 every day, it’s cursing and calling each other n—— as they’re walking up and down the street,” and, in a stunningly parallel statement to the Ron Paul statement about D.C. criminals “There’s a Fulton County juvenile court judge in Atlanta who’s black. He grew tired of so many young black men coming through his courtroom. He said they made up 95 percent of his cases. So in April, he cleared the courtroom of all the white people and began to chastise these young black men. He scolded them, told them what they should be doing instead of standing before him for conduct and crimes against society and their ancestors.”

            So is Bill Cosby a racist? Is Ron Paul? Is speaking the truth “racist?”

          7. screwedbyanelephant

            he’s not racist if he spoke the truth, but you would be an idiot or racist yourself not to see that these are racist statements that have nothing to do with the truth.

            “If you have ever been robbed by a black teen-aged male, you know how unbelievably fleet-footed they can be.” – Ron Paul, 1992

            — aren’t most [non-overweight] teens of all races “fleet-footed”?

            “I think we can safely assume that 95 percent of the black males in that city are semi-criminal or entirely criminal.” – Ron Paul, 1992

            — nuff said

            “We don’t think a child of 13 should be held responsible as a man of 23. That’s true for most people, but black males age 13 who have been raised on the streets and who have joined criminal gangs are as big, strong, tough, scary and culpable as any adult and should be treated as such.” – Ron Paul, 1992

            — according to the law it’s your mental state that determines culpability, not how “big and strong” you are.

            “complex embezzling, which is 100 percent white and Asian?” – Ron Paul, 1992

            — really? only whites and asians are capable of “complex” embezzling?

          8. Swiller

            Simply ending the War on Drugs, would do more for black americans than any other single issue. The War on Drugs and how it has eroded our constitutional rights, created a police state, and burdened us with the prison industrial complex is horrific. There are more people incarcerated in the U.S.A. per capita, than *any* industrialized nation on the earth, that includes Russia and China BTW.

            The War on Drugs is the biggest travesty to america since slavery. There cannot be a free america, if your goal is a drug-free america.

            “The prestige of government has undoubtedly been lowered considerably by the Prohibition law. For nothing is more destructive of respect for the government and the law of the land than passing laws which cannot be enforced. It is an open secret that the dangerous increase of crime in this country is closely connected with this.”
            – Albert Einstein

          9. Laura Louzader

            Agree with every word of this great post, Swiller.

            Worse, our drug prohibition is creating addicts, not preventing addiction. As long as drug distribution is in the hands of criminal outlaws, it is they who will decide what is sold, and to whom it is sold. And if they decide they will sell heroin to the high school kids in your suburb, that’s who it will be sold to.

            If we want to control access to dangerous street drugs, we need to decriminalize them and impose multi-tiered regulation that recognizes different levels of impairment and threat to health. As things are now, we have no control at all and we are are only adding to the death toll as criminal gangs engage in daytime gun battles on our city streets for control of drug turf.

          10. matt138

            I dont think he has a problem with any person, of any race, color, or creed, who strives to be a productive member of society.

            He is speaking the truth even if it is an ugly one.

        2. Hooey

          Why isn’t Ron Paul more popular?

          He is popular, but the MSM doesn’t want you to know that. Especially so here in Kalifornia.

        3. Charlie Potts

          Ron Paul is anti-war and the Pentagon hates him (as do all the war contractors like GE — which happens to own a TV network.) Perpetual war is great business — especially for the wealthy who never see action.

      1. HydroCabron

        To his credit, Ron Paul is the only free-market firebrand I know who actually adheres to the principles he espouses.

        Unlike many conservatives, Ron Paul does not try to reconcile statements such as “no public employee adds value” and “it is always better for the government to stay out of markets”, on the one hand, with “cash-flow investors should enjoy credit subsidies because they’re deserving”, on the other.

        One root cause of America’s problems is that so many conservatives favor government spending they claim to oppose, which helps fuel tax-cut and deregulation ardor without corresponding spending cuts. Seems that nearly everyone has cherished government programs they’d rather not see cut, or others they’d like to see enacted.

        As much as I admire Ron Paul for his consistency, it is consistency in adhering to views I do not share. So I don’t support him. But I believe that if free-market conservatives actually acted on their principles this nation would be better off, much as I find their principles simplistic.

        1. screwedbyanelephant

          “But I believe that if free-market conservatives actually acted on their principles this nation would be better off, much as I find their principles simplistic.”

          agree with you there, i’m a conservative, and was a registered republican until bush decided to invade iraq for oil… i actually agree with most of ron paul’s positions… but, “fool me once, shame on you, fool me twice, shame on me”

          or as W puts it…

          “There’s an old saying in Tennessee — I know it’s in Texas, probably in Tennessee — that says, fool me once, shame on — shame on you. Fool me — you can’t get fooled again.” —Nashville, Tenn., Sept. 17, 2002

          1. Shevy Akason

            From what I’ve seen from politicians regarding economic issues Ron Paul seems head and shoulders ahead of most. I know a lot of people that are economically conservative and believe in free-market economic policy but are socially liberal. A candidate like this could appeal to moderate Republicans, moderate Democrats, and independents, I don’t know if he is racist but those comments make it seem like he is, if he is, that’s unfortunate.

          2. Shevy

            Good point, regardless, if this perception is out there my question is answered. I know some strong Ron Paul supporters that are not racist, I am curious regarding their thoughts on this.

          3. screwedbyanelephant

            one of my buddies is a black dude… he’s a ron paul supporter… we talk about this once in a while. his thing is but his ideas are what’s important… voting for anyone else will be ruinous for the country, but my response was that sometimes you have to step back and and see who around you cheering at the crowds… not drawing comparisons, but hitler had a singular “unifying” theme for germany too at the beginning… and it was nothing more than a bunch of pissed off people at rallies that thrusted the nazi’s into power.

          4. Skepticus Maximus

            OK, I’ll bite at the bait.

            I’m a very strong supporter of Ron Paul. I WAS a registered Democrat, now registered Independent. I always considered myself fiscally conservative and socially liberal. I don’t think of myself as a racist (mixed-race background).

            Ron Paul occasionally says some kookie things, but I GREATLY prefer listening to him than to almost any other politicians. Most of what he says MAKES SENSE. Other politicians just make me gag. Ron Paul seems to really want to get the government out of our lives and just generally make it smaller. Other politicians, both left and right, want to use the government for their own ends, whatever words they say. Look at Rick Perry. He warbles on and on about making government smaller. But then he wants to MASSIVELY increase military spending. Yet another hypocrite. And don’t get me started on the Democrats.


          5. Chris

            “Ron Paul seems to really want to get the government out of our lives and just generally make it smaller.”

            Well, then get him to stop the govt from locking up all those wonderful black people.

    2. IrvineRenter

      “10 year t bill scratching 2%, who predicted that? Lol Cashed in a nice portion of the bond portfolio today.”

      That was a brilliant trade, particularly if you actually did cash in and take your profits. Several astute observers wondered why you didn’t stop by to gloat earlier.

      1. Planet Reality

        I didn’t cash in all of it yet.

        There is another 2 years of this at least, if the fed says 2 then bank on 3 years or more. This means only one thing for mortgage rates… Lower lower lower, how low can they go? I would say 100 basis points above the 10 year, as I said long ago. They will definitely head into the high 3’s at a minimum. It was so easy to see this, I can’t understand those who doubted me vehemently.

        Not sure about these rental predictions. However I’m confident the fed will eventually succeed. In 10 years rents will be 50% higher in Irvine at a minimum.

        5/1 arm will probably be in the low 2s that will be a killer play at the bottom. Speculation will eventually boom again. Its all too easy to see.

        1. winstongator

          Rates staying low and rents increasing are an either-or position. If you get really increasing rents, like the 50% you’re claiming, that will be a sign of general inflation. If we have general inflation, rates will rise.

          I begrudgingly agreed with your call on rates staying low, but didn’t trade on it myself. Congrats on the gain, but don’t get greedy.

          1. Planet Reality

            You don’t get it. Mortgage rates lowering and rents increasing can happen simultaneously as they have by design. That is the intention. They longer the fed rate is held at zero mortgage rates are manipulated to conform lower. The ensuing inflation from the manipulation will inflate rents.

            Eventually rates will rise, but eventually is a long time. By the time that happens inflation will probably he horribly out of control. Unless you believe the fed is looking out for the little guy lol.

          2. winstongator

            No, I get it, but I just don’t believe that rents will go up 25-50% in the short term. That would happen if there were a true shortage in dwellings, which there isn’t. Funny to see Tampa listed. Nearly all of FL has too many dwellings, not too few. Sure people may not want to buy, but as rents go up, investors will buy the vacant homes and rent them.

            Plus, the recent construction in apartments will put downward pressure on rents. There is this dream of massive new household formation, but those people forget the huge increase in 2nd home and investment buying that created excess housing supply when those purchases reversed.

          3. Hooey

            As IR has stated ad infinitum, rental rates are correlated to income levels. And I doubt incomes will rise by 50% in ten years. In fact, in real terms, higher inflation and taxes (yes it’s coming) will eat away at wages thereby DECREASING the net incomes people have for housing. Rents will have to decline or stagflate in order to remain marketable in that scenario.

          4. so_scared

            short term? he said 10 years. You realize that Jaysen’s exact trend line of 2.5%, that equals 28% after 10 years right?

            To get to 50%, all you need is 4% a year. Seems hardly a stretch given the massive printing of money they have already done…much less will do in the next several years.

          5. Eat that!

            I’m sorry but you are dead wrong. The reason rates have fallen so quickly is fear. Major investors are pouring into the safest thing they can find right now because they are worried about another major down turn. It may not matter if rates are low, if there is too much negative equity out there to capitalize on.

      2. Skepticus Maximus

        Actually, probably a lot of people did this trade. Certainly anyone who’s been following Mish for the last few years would at least have had the idea for it. Mish, David Rosenberg, John Hussman, and others have been saying for years that we’re in an extended underlying deflationary environment in the US, Europe, and Japan. Governments keep playing at QE, but the gravitational pull of debt deflation keeps pulling us back.

        But the far more profitable trade was in gold. Unfortunately, I only nibbled on that one.


        1. matt138

          We will have inflation when pricing things in dollars and deflation when pricing things in real money, gold.

          Mish is right in that we are in economic contraction, but he is delusional in thinking the Fed and govt wont fill the streets with dollars to repudiate all the debt. They already are but the general public is fooled into thinking there is no inflation. Inflation has a funny way of showing up in various places and taking years to do so, catching everyone off guard. 0% fed funds rate for the next 2 years +? Subsidies as far as the eye can see. This robs savers of the benefit of falling prices and is inflationary in every sense of the word.

          House prices have been falling off a cliff when priced in gold and i’ve been heavily weighted on this trade. It will continue in the same direction. 60% of treasuries expire in the next 3 years and thus are adjustable rate. Govt default is an inevitability and this treasury bubble marks the beginning of the dollar’s fall. how far will it fall? nobody knows.

          I recommend making that nibble the biggest bite you can chew.

    3. awgee

      “10 year t bill scratching 2%, who predicted that? Lol Cashed in a nice portion of the bond portfolio today.”

      Congratulations. Good call.

      1. zubs

        I hear that if the interest rates go up, the US immediately goes into default, so can we say that interest rates go up means insolvency for our US government?…

        So interest rates will never go up again. It will stay low indefinitely.

    4. AZDavidPhx

      Mortgage rates reached record lows this week, according to the weekly market survey from Freddie Mac. The average rate on a 30-year fixed-rate loan fell to 4.15 percent, with borrowers paying an average point of 0.7 percent. That rate is down from 4.32 percent last week.

      PR, it looks like you got it right with your prediction about record lows being broken. Have to give credit where credit is due. It did not even take a Greek default, go figure.

      1. Planet Reality

        David, even a downgrade of US debt couldn’t stop it. Hell it probably helped it.

        Another 10% drop in the stock market and it will be the ideal time for you to pull the trigger on your Scottsdale dream home. Get ready.

  2. winstongator

    In some places apartments and rental homes are making a killing. We were renting a home in a one-owner rental community of 120 homes. $1200/mo for something that was probably $75k to build. That’s close to a 20% return. Same guy is building nicer models closer to our new neighborhood. Will probably get > $2k/mo for homes costing $100k to build. Almost a 25% return. When we lived in the old community, homes did not stay vacant very long – maybe one month. Lots of long-term residents too, meaning less turnover costs (paint/carpet). Upkeep costs are a little higher than normal rentals – communities have workout areas & a pool, but you could pay for a lot of that with 20-25% returns.

  3. winstongator

    “Weak jobs is a plus for apartments? That is pretty stupid. Rents are directly tied to incomes. Without both job growth and wage growth, rents aren’t going anywhere.”

    I think what the author is saying is that with a weak job market, those that have jobs will be more likely to rent than if the job market is strong. There is still lots of uncertainty, and it’s easier (maybe) to bail on a rental lease than a home you ‘own’.

  4. Alan

    Hmmm, when your prospective renters have been living at home or doubling and tripling up to shared expenses, that does not seem like the same people who can or will tolerate 25% rent increases in 3 years in their own new rental unit.

    And the only “jobs miracle” is Perry’s Texas where most of the jobs are at or below minimum wage with no health insurance (if there really is any such miracle at all).

    For it to work, doesn’t there need to be a high-rate creation of solid middle-class salary jobs, or substantial wage inflation, or both? I just don’t see it, but I admit that I have not made any fortune in real estate, so I could be just totally clueless. I’m here to learn!

  5. tenmagnet

    Kudos to PR for his bold and accurate rate call.
    Agree with his assessment that rates will continue to move even lower.
    The FED/Washington is trying to recapitalize the residential and commercial real estate markets.

    1. zubs

      since we are following Japans fate, it is not a hard call to make. Are all you financial gurus going to study up on Japans lost 2 decades going on 3?…

      I think you can get 1% mortgage loans over there, but their loans are recourse.

      1. irvine_home_owner

        “I think you can get 1% mortgage loans over there, but their loans are recourse.”

        So are real estate prices still high over there?

        A 1% rate? Isn’t there some cost in there that makes that almost impossible to carry?

        Although I’m sure people will take it even if it’s recourse.

  6. irvine_home_owner

    So if there is an apartment bubble… can they same be said for rental properties?

    Won’t the same factors that will pop that bubble also affect the cash flow for investment homes? Or are rental SFRs different?

    1. IrvineRenter

      SFR rentals in Las Vegas have good current cashflow and low valuations. OC SFRs and apartments have poor current cashflow and high valuations. It is only the pie-in-the-sky growth rates of rents that make the proformas work.

      In finance the surest way to see a disaster in the making is when you see buyers ignoring current cashflow and betting on rates of appreciation to justify their decisions. Whether the appreciation is in rents or resale value, reliance on stellar growth rates nearly always turns out badly.

  7. Boston2theBay

    Rates are low and credit relatively easy in Japan abut that hasn’t helped the asset markets there, as the populace is conditioned to “stocks and real estate always go down.” In that case the herd has proved right, and the Japanese populace is happy to fund their record low rates by plowing their trillions of $$ of national savings into JGBs. If they weren’t able to recapitalized their real estate markets what makes anyone think we can accomplish that here? The American populace is starting to wake up.

  8. IrvineRenter

    In other news:

    Pet stores banned from renting Irvine Co. store space

    Orange County mega-developer the Irvine Co. has decided to stop renting space to stores that sell cats and dogs. Other animals, such as birds, fish and reptiles, weren’t included in the decision.

    “Effective immediately, the Irvine Co. will not lease space in any of its centers to tenants that intend to sell dogs or cats,” spokeswoman Erin Freeman said in an email. “The Irvine Co. will honor its existing contractual commitments with Russo’s until the expiration of current lease terms.”

    The new policy means Russo’s Pet Experience, which has sold purebred puppies and fancy cats for more than three decades at Fashion Island, is likely to close.

    The Irvine Co. does not plan to renew Russo’s leases at Fashion Island or at the Irvine Spectrum, a company spokeswoman told the Daily Pilot.

  9. frank

    Forget about if CAP rates go down to 4%.

    What happens when rates eventually rise and cap rates go back to 8 or 9. What will rents have to have risen up to so you reach breaken even.

    Buying a 5.5 CAP is a guaranteed loser. CAPS can’t go lower without a concommitant lower rent roll.

  10. DarthFerret


    Do you see a way to capitalize on this bubble? I didn’t at all like being the stooge of the last bubble, and I’d rather be the victimizer than the victim in this next one.


    1. IrvineRenter

      It’s very difficult to capitalize on bubbles. You can try to play the short side, but the timing is always difficult. The apartment REITs won’t blow up for several years.

      IMO, the best bubble bets are picking up the pieces in the aftermath. That’s why I am out in Las Vegas pickup up properties. Perhaps buying apartment REITs eight years from now when investors flee that asset class will be a good play. I’m a believer in distressed asset investment.

    2. Planet Reality

      I agree that picking up pieces in the panic and aftermath is the easiest safest bet. Unfortunately Vegas is not long term viable.

      Darth, wait for the 10-20% further drop in the stock market.

      That is going to be the ideal time to buy a house again in the panic and pick up stocks with high returns in a 1-2 year time frame.

      1. gepetoh

        Haven’t been here a while; same cast of characters, some new ones, and better dialogue!!

        Actually Vegas is not short-term viable unless you’re looking for slumlordship. Long-term shouldn’t be an issue and as long as an investor is prepared to be in it for the long-term (10+ years), it’s probably a good investment right now or in the next year or two.

        20% drop in stocks would put the DOW at below 9000… Not sure that will happen for anything longer than a blip in time, but 10% is probably a pretty realistic number. Not convinced it will go that low, but it’s entirely possible.

        As for picking up housing once the returns come back in a stable fashion. I think as soon as Fed notices a stable growth, interest rates will start going up and buyers will err at that. I see the stock market growth stabilizing (not just going back up, but actually lowering volatility) in a year’s time, I don’t see housing doing the same for at least 5 years, probably more like 10. It will stagnate for years.

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