As other countries are challenging and breaking engineering boundaries, approaching a kilometer in height of buildings, piercing through the skies and going closer to the clouds, going deep down the sea and stretching several kilometers, digging deep underneath the earth, breaking through rocks and building mega structures with resilience and flexibility to withstand earthquake, Nigeria is still struggling to build robust one storey, two storey and three storey buildings that won’t collapse.
Buildings have collapsed, are collapsing, and are likely to continue collapsing in Nigeria. But the recent collapse of a three storey residential, business, and educational building all under one roof, on one foundation and housing some innocent school children points to our insensitivity and lack of willpower to face the problem head-on. Buildings collapse due to myriad of reasons from natural to manmade and in some cases, due to negligence.
To start with, our schools of Engineering are not preparing seasoned engineers. Our schools are only producing students that memorised what they can’t put into practice on site.
So many engineers out there can’t use design codes, interpret, and implement engineering drawings. Also, some engineers leave construction site at the mercy of artisans with less or no supervision. Like the average Nigerian, most engineers are corrupt.
Reducing quality and diverting and making excess money on site.
Clients, especially the general populace focuses on the money aspect of a building over quality. As a result, most people resist engaging professionals, solely supervising and handling every aspect of their projects. Contractors on the other hand are greedy.
To maximise profit, they cut all sort of corners. Consultants and government officials are compromised to look the other way. On one of my recent visit to a three storey primary school under construction, I was shocked to realise that the person supervising the project has no engineering background.
In fact, when I asked him about the mix ratio he uses on site, his answer was that he uses his eyes to determine whether the cement is sufficient enough for the concrete from the colour of the cement after combinining it with enough sand, gravel, and water
. In a nutshell, he is not adopting the design mix for the structure. But then, what else do you expect when the contractor is a friend to the governor?
Construction is capital intensive. and in Nigeria, being in charge of a construction site is synonymous to becoming rich. So, everyone wants to join and eat from the cake. That was how a metallugical engineer supervised the construction of a faculty of engineering office while I was an undergraduate. That building brought so much shame to the whole faculty of engineering. Not until it was recently demolished and a new one erected. Because most Nigerians don’t know the difference between architects and Engineers, most architects tend to override engineers and hijack their responsibilities on site. And in some cases, architects will insist on aesthetic over structural integrity.
The majority of Irish people believe the Government should make housing more affordable even if it means raising taxes, a survey by the Organisation for Economic Co-operation and Development (OECD) has found.
The study of 22,000 people in 21 OECD countries also suggests that more than two-thirds of Irish people list “financial security in old age” as a top risk.
When presented with a range of policy options, Irish people were most likely to identify better health care (61 per cent), better pensions (46 per cent), and more affordable housing (41 per cent) as the public supports they need most to feel more economically secure.
The survey about perceived social and economic risks suggested most Irish people are willing to pay for investments in these policy areas even if it means that taxes rise.
“In these and other policy areas, the Irish are more likely than people in other countries to say that they are willing to pay more in taxes to receive better public-services and benefits,” the survey said.
Housing and health
The findings tally with recent polls here, suggesting much of the electorate was unhappy with public services related to housing and health. In the short run, the OECD study suggested people here fear falling ill and making ends meet.
Some 52 per cent of people listed “becoming ill or disabled” as a top-three risk in the next year or two.
As a whole, the study suggested a strong majority of people in wealthy countries want to tax the rich more and there is broad support for building up the welfare state in most countries.
In all of the 21 countries surveyed, more than half of those people polled said they were in favour when asked: “Should the government tax the rich more than they currently do in order to support the poor?” The OECD gave no definition of rich.
Higher taxation of the rich has emerged as a political lightning rod in many wealthy countries, with US Democrats proposing hikes and “yellow vest” protesters in France demanding the wealthy bear a bigger tax burden.
Support was highest in Portugal and Greece, both emerging from years of economic crisis, at nearly 80 per cent compared with an average of 68 per cent, the OECD said.
The OECD study also found deep discontent with governments’ social welfare polices, which many people said were insufficient, the OECD said.
On average, only 20 per cent said they could easily receive public benefits if needed while 56 per cent thought it would be difficult to get benefits, the survey found. People were on average particularly concerned about access to good quality, affordable long-term care for the elderly, housing and health services. Not only did people say they were not getting their fair share given what they paid into the system, people in all countries except Canada, Denmark, Norway and the Netherlands did not think that their governments were heeding their views.
“These feelings spread across most social groups, and are not limited just to those deemed ‘left behind’,” the OECD said in an analysis of the survey’s results. The feeling of injustice was even higher among the highly educated and high-income households, it added.
In light of the high level of discontent, a majority of people wanted their government to do more in all countries except France and Denmark, whose welfare systems are among the most generous in the world.
Everyone knows living in the San Francisco Bay Area isn’t cheap, especially for people like teachers, firefighters, and service-industry workers whose wages haven’t kept up with the skyrocketing cost of housing in one of the nation’s most expensive places to live.
But increasingly, even tech workers — some of the Bay Area’s highest-paid residents — are having a hard time achieving the bedrock of the American Dream: home ownership. These workers average six-figure salaries but increasingly can’t afford to buy a house in San Francisco, where the average home value is around $1.34 million and the median down payment needed was around $250,000 last year. And although there’s been a bit of a slowdown in recent sales, that’s expected to change quickly. A new class of freshly minted tech IPO millionaires are set to “eat San Francisco alive,” as described in a headline of a recent New York Times story.
When Joshua Davis, 28, a software engineer at a machine learning startup who said he makes upward of $100,000 a year, was looking to buy a one-bedroom condo in Oakland, he knew most places would be far above his budget of $500,000. So he considered fixer uppers. He was hoping he could find somewhere that, with a little bit of work, could be a place to settle down — somewhere he could paint the walls any color he wanted.
But he quickly realized that was an unrealistic goal. One place he saw had a rotted mud sill, the structure that provides separation between the house and its foundation. Someone showing the house offered do a “Mickey Mouse job” to repair it for $20,000, but Davis knew that would only be a temporary fix. The house was seriously structurally flawed.
“These were the kinds of places that were affordable,” said Davis, who gave up on the idea of buying a home for now. He’s hoping the market will eventually calm down. In the meantime, he’s paying around $2,300 a month for a one-bedroom apartment in Downtown Oakland.
Davis isn’t alone. Around 70 percent of tech workers for top tech companies living in the Bay Area say they can’t afford to buy a house near where they work, according to a recent study from the workplace chat app Blind, which polled around 3,000 tech workers. Many of the employees surveyed are high-skilled talent — engineers, product managers, and data scientists — who may be able to make rent but can’t afford to buy a home.
The fact that these relatively highly compensated employees like Davis are having problems is a sign that the housing situation in the Bay Area has become an untenable and unsustainable situation for tech’s workforce. And while tech giants like Facebook can afford to pay their employees a median salary of $240,000, other smaller players in the industry are wondering how much higher salaries can go to keep up with the cost of housing, and how much longer tech workers will live in an area they can’t afford.
Companies like Facebook and Google have already started to build housingspecifically for their own employees next to their sprawling mega-campuses. At one point, Facebook offered a $10,000 bonuses to employees who lived near the office to alleviate the strain of housing costs and reduce commute time. Almost every major tech company provides private, free shuttle buses that transport workers from Silicon Valley — where tech campuses like Google and Facebook are located — to relatively more densely populated areas like San Francisco and Oakland.
Last month, Facebook CEO Mark Zuckerberg and his wife, Priscilla Chan, donated $500 million through the Chan Zuckerberg Initiative toward building and preserving affordable housing in the San Francisco Bay Area. While half a billion dollars is a lot, it won’t be enough to single-handedly change the market dynamics of housing in the Bay Area, where for every 4.5 jobs created, only one new home is added, according to the Building Industry Association of the Bay Area. But it’s a sign that tech companies are taking the issue of rising housing costs in their headquarters seriously.
“I do think the large corporations want to work with cities to address the housing issue because they want to expand and they want their employees to have a place to live,” said Lisa Matichak, the mayor of Google’s hometown of Mountain View.
Matichak and other members of the city council are in the process of reviewing competing plans from Google and another company to build more offices on a coveted 30-acre plot of land in the city. One of their chief concerns is making sure the development includes not just office space, but new housing units. In Silicon Valley’s Mountain View, the median home is priced around $1.6 million dollars and the average one-bedroom rents for $2,800, according to online real estate platform Trulia.
And with a new wave of San Francisco tech companies an hour to the north like Uber, Lyft, Slack, and Airbnb expected to go public soon, there will be thousands of new millionaires who may further crowd the housing market, further driving up prices. While there will be a cohort of freshly minted IPO techies, there will be many more who don’t win in the startup lottery.
“I’m guessing with all these IPOs from Lyft and Airbnb and stuff, these prices are only going to go up,” said Davis. “If these prices get crazier and crazier, I don’t know if I’ll able to afford to live out here.”
A housing crisis
Housing prices in the San Francisco Bay Area have skyrocketed at such an extreme rate that the housing shortage and homelessness in the city has been deemed a “human rights violation” by a UN official. In the past seven years, the percentage of households that can afford to purchase a median-priced home in the San Francisco Bay Area has decreased by over 50 percent, according to the California Association of Realtors.
Of course, the people this hits the hardest arepeople working in sectors that aren’t as high paid as tech — like the service industry, teaching, and law enforcement. A recent study found that a whopping 90 percent of workers in Silicon Valley have seen their real wages, meaning their annual salaries adjusted for inflation and rising cost of living expenses, decline over the past 20 years.
That means economic inequality is getting worse in tech’s capital during the same time period that companies like Facebook, Twitter, and Uber have popped up and created billions in value for those lucky enough to be early investors or employee shareholders living in the area.
Some labor advocates have blamed tech for contributing to this economic disparity. A few years ago, protesters hurled rocks at tech worker commuter buses that have become symbols of new money and gentrification. Tech is changing the face of what were once working-class, immigrant neighborhoods in San Francisco like the Mission, where Facebook CEO Mark Zuckerberg owns a home he bought for $10 million in 2013. But now, even many of those tech workers sitting in the shiny charter buses also can’t afford to live in the Mission, or any of the equally expensive Peninsula suburbs along the way to Facebook’s Menlo Park headquarters.
“If the engineers and programmers of the world can’t afford to keep up with rising costs, how in the world are other people ever going to afford to live comfortably here?” said Jeffrey Buchanan, director of public policy at Bay Area-based labor-backed nonprofit, Working Partnerships USA.
The tech worker affordability divide
When it comes to purchasing power to buy property, not all tech workers are created equal.
At major tech companies like Google and Facebook, over 50 percent of workers are contract workers — many of whom make less than their full-time salaried counterparts. There are reports of Google employees who sleep in their vans in the parking lot — taking their showers in the office gym and eating meals in the company kitchen. The engineers doing this are extreme cases; most programmers making six figures may not be able to afford a home, but they can afford a place to rent.
The options are more limited for many others, like the unionized Google janitors who make around $26 an hour including benefits, according to numbers labor union SEIU shared with Bloomberg last July. If those workers are working 40 hours a week, that would put them at an annual income of around $50,000 a year — a little more than half of what the federal Department of Housing and Urban Development considers to be “low income” for a family of four in Google’s home county of Santa Clara.
Because it’s harder for lower-salaried employees to get by in the Bay Area, some tech companies have outsourced large portions of their workforce in functions like content moderation and customer support to places where salaries — and rent — are cheaper, like Phoenix, Arizona.
But these companies can’t outsource everyone they need to keep their San Francisco operations running. They still need facilities workers to keep the lights on, cooks to keep the programmers fed, and janitors to keep the buildings clean at their sprawling campuses.
And aside from the service workers, temps, and contractors at tech companies, the housing crisis is also hard on entrepreneurs and startups.
Davis said the machine learning-backed visual search startup he works for, Zorroa, used to staff most of its programmers remotely, outside California, where their salaries went further. Now that the company has raised a round of VC funding, it can afford to pay more of its workforce enough to live in the Bay Area, Davis said.
By some metrics, California’s entrepreneurship scene is slowing down relative to other startup locales. The Kauffman Foundation, a nonprofit that measures entrepreneurship in the US, found that places like Maine and Washington, DC, had higher indicators of startup activity than California in their latest report. This makes sense given that more people are moving out of the Bay Area than moving in, according to a 2018 report last year from two leading Silicon Valley community organizations. And a survey from the Bay Area City Council in 2018 found that 46 percent of Bay Area residents want to move.
The struggle that these smaller startups go through represents an existential crisis within tech’s core: If Silicon Valley and San Francisco are valuable because they’re a hub for scrappy engineers, what will happen when only the elite of the elite, the post-IPO techies, can afford to buy homes in the city? Sure, younger programmers can squeeze into tinier and more strained living situations, but that becomes harder for people who want to start families.
“The people who move into the San Francisco Bay Area tend to be younger than the people who move out,” said Issi Romem, chief economist at online real estate company Trulia. “By the time people want to settle down, that’s when they hit this wall of affordability.”
There’s also an interesting split in the housing economy. While the prices of homes have gone up astronomically in areas like San Jose in the past several years, rent has been rising at a much slower pace. “It’s a bit of a mystery to economists,” said Jeff Tucker, an analyst on the economic research team at online realty company Zillow.
What this means is that 20- and 30-something tech workers who are relatively well-compensated may be able to keep up with rising rents, but buying a home will remain perpetually out of reach.
These workers are in a much more fortunate position than many of their neighbors, who may be struggling to keep a roof over their heads. But they’re also stuck. For the programmers and product managers who want to own a home but also want to keep pursuing their promising careers in San Francisco, there’s no immediate solution except to wait around in the hope that the housing market will crash.
Can tech solve this crisis?
Some tech leaders are trying to help solve the housing problem.
“I think there’s been this question of, ‘Oh, tech money, is that going to solve our housing crisis?’ And I think it’s taken quite a long time for companies to get serious about what they’re doing,” said Kristy Wang, community planning policy director at a nonprofit research, education, and advocacy organization focused on issues of planning.
While donations like the money from the Chan Zuckerberg Initiative might help, some housing advocates view them as only scratching the surface of a much bigger issue. Matthew Lewis, director of communications at California YIMBY, a pro-development housing advocacy organization, said that while philanthropy efforts help, they ultimately make a “tiny dent” in a housing market that’s as crowded as San Francisco. The YIMBY acronym plays on the well-known NIMBY — for “not in my backyard” — by giving it a “yes” instead.
The solution, as Lewis sees it, is pretty straightforward: “Just build more damn housing.”
In order to do that, developers need city approval, which can be difficult to get based on strict zoning laws that limit density in San Francisco and even more so in Silicon Valley’s suburbs. While some locals argue that these policies preserve neighborhood character, critics argue they are classist: benefitting those who already own property at the expense of others, especially minorities and lower-income residents.
History reveals a dark past to the intentions of many zoning laws in the Bay Area. One of San Francisco’s oldest housing density laws, the Cubic Air Ordinance of 1870, was largely used to criminalize Chinese residents living in boarding houses. Across the bay, similar laws were used in Berkeley to separate more affluent white residents from their black neighbors.
Fast-forward to today and the Bay Area is still revealing deep societal divides in local debates over housing density.
In a city council hearing this past September in Apple’s hometown of Cupertino, one local teenager said he was against high-density affordable housing because it “would mean that we would have uneducated people living in Cupertino.” He and his fellow neighbors were concerned that it would make current residents “uncomfortable.” The city’s mayor dismissed the comments as being made by a “kid” who didn’t know better — but to many, they revealed a candid unveiling of the true feelings of older residents who are anti-development.
But there’s another strain of critique against changing zoning laws. In a city like San Francisco, increased density laws could allow rapid development of multimillion dollar luxury condos that mostly benefit the wealthy, and at least in the short term, displace rent-controlled apartments or other cheaper housing.
In the past, YIMBYs in San Francisco have been accused by some local anti-gentrification activists of being pro-development without enough caution for those locals who could get displaced. Now, Lewis says, YIMBY is working with these groups to advocate for other measures like rent control and affordable housing quotas. The group is also pushing for an amended version of a statewide bill, SB50, that would reform zoning laws to allow for denser construction of housing in areas near major public transit hubs and job centers. It has the support of the Bay Area Rapid Transit’s board of directorsbut faces opposition from some local leaders such as the executive director of the LA County Democratic Party.
While there are certainly many minds — and opinions — debating solutions to the Bay Area’s housing crisis, all this will take a time. Some tech workers say they’re losing patience.
Paul Anzel, 32, is a data scientist who dropped out of his physics PhD program to work in tech in the Bay Area. After years of struggling to save enough to buy a home in the Bay Area — and fighting for more housing development — he finally decided to give up. He, his wife, and their small child moved to San Antonio, Texas, where with the same income they were able to buy a two-bedroom home.
“The Bay Area housing problem isn’t going to be instantly fixed. It’s going to take a long while and a big political will,” said Anzel. “Once I had my kid, I realized there’s no sense in bashing my head against a wall.”
Other tech workers, many of them younger and without families, still feel the pull of the Bay Area, despite the frustrating housing situation.
“There’s a certain amount of energy when you walk around,” said Davis. “All these people who you go around and talk to who have built these great things before you and have the experience to learn from. It’s hard to leave.”
An under-construction building in the Indian city of Dharwad collapsed on 19 March claiming the lives of at least two people and leaving around 152 more trapped under the debris, AFP reported, citing the district’s regional emergency officials. Emergency services arrived at the scene soon after the collapse. At least 20 ambulances and heavy machinery for debris removal have been spotted.
A search and rescue operation is currently under way. At least 28 people have been rescued and sent to nearby hospitals, The Times of India reported.
Although the building was still under construction, the first two floors had already been rented out with around 60 shops functioning at the time of collapse. One eyewitness has suggested that around 150 people were inside the shops when the incident took place.
Local residents, interviewed by The Times of India, say the quality of the building’s construction was low and that it was a miracle that it passed the inspections.
Let’s be honest: Real estate valuations are very high today. But worries of an impending housing crash are premature. There are many trends that could continue to drive real estate values. A millennial middle class hungry for the independence of owning a home and a reasonable economy outweigh housing indicators that might signal a downturn is imminent. That doesn’t mean U.S. real estate markets are not in a pivotal phase. In fact, 2019 is poised to create significant opportunity for those who understand the five significant economic and demographic trends driving the market. Let’s consider the following five trends:
1. Rise in Interest Rates
Predicting Federal Reserve actions on rates is impossible. The Fed has wound down its unprecedented bond-buying program triggered by the 2008 financial crisis. Although mortgage rates have been in decline over the past several months with the 30 year mortgage around 4.5%, many analysts see mortgage rates rising on average to a high of around 5% on a 30-year fixed in 2019 and remaining at that level. As of this writing, the Fed’s next rate decision is a few weeks away and (at its mid-March meeting). It is widely expected that the fed funds rate will remain in the 2.25% to 2.5% and will delay any future rate hikes. However, mortgage rates geared off the 10-year Treasury rate may rise and increase the cost for real estate buyers and investors.
Some real estate price softening will be seen where cost of financing is critical. Given the amount of institutional capital chasing multifamily and industrial real estate investments, I expect investment activity to continue with lower IRR return expectations.
2. Millennial Homebuyers Enter The Market
There are 74 million millennials, a larger demographic than the huge number of baby boomers. So follow the millennial money. Many millennials are at prime home buying age, and they continue to push trends in the real estate industry. Millennial homeownership rates are below the national average of 64%. That represents a deep well of demand that could convert to 10 million home purchases. With the average millennial home buyer having a reasonably high household income at $88,200, millennials have the means, and they want to buy first homes.
The year 2020 marks the pinnacle of millennial home buying. For the next decade, this generation will represent the largest share of the market. The desire for their first home may continue to push single-family home prices higher in select markets. If prices are seen as too high in some markets, then millennials will focus on newer, expensive rental properties.
3. Growth Of Secondary Cities
High prices in first-tier cities are forcing many homebuyers and investors to consider second-tier cities in search of better value. This trend is likely to continue through 2020. The influx of capital to second-tier markets is driving double-digit growth in investment activity and price appreciation. Major employers such as Toyota have pulled out of Southern California and relocated to the Dallas metro area. Apple is opening a billion-dollar campus in Austin, and Amazon is opening HQ2 just outside Washington, D.C. These moves, and others like them, may be signs that economic growth could support continued rising real estate values in second-tier markets.
In a typical late cycle, capital leaves the overvalued first tier such as New York and San Francisco and flows to the less-expensive second tier. Eventually, capitalization rates in the two markets converge. Premium cap rates on secondary market investments range from 75 basis points to 100 basis points higher than major markets and a full 300 basis point higher than top tier cities. Expect to see rising property values in the secondary cities, which will reduce cap rates.
4. Housing Affordability
Currently, renting is more affordable in 59% of U.S. housing markets, and home prices have continued to increase more than wages in 80% of markets, according to an analysis by ATTOM Data Solutions. So, expect continued strong rental housing demand rather than continuing single family home price increases. Evidence of this shows up in strong markets such as Seattle, San Jose, Las Vegas and Portland, where the number of homes for sale rose last year, but the share of affordable homes fell, due to rising home values and increasing mortgage rates. Multifamily investors will be rewarded in markets where housing affordability is strained.
According to ATTOM, it has gotten increasingly difficult to afford a home purchase in virtually every market with a population over 1 million. Currently, it is more affordable to rent than to buy a home in Miami, New York City, Seattle, Las Vegas, San Jose, San Francisco and Boston. It’s my take that this will push rents higher, making multifamily investors happy.
5. Impact of Opportunity Zone Funds
Real estate investors should consider a new tax incentive included in the Tax Cuts and Jobs Act of 2017 for investments in real estate in qualified opportunity zones (QOZs). The provisions include deferment, reduction and complete elimination of capital gains taxes for certain investments. I believe local expertise in these markets is a requirement and fold it into my company’s own QOZ Fund offerings, because local operators will have the best understanding of these opportunities. It is projected that $6 trillion in unrealized capital gains are eligible for QOZ investment, which could result in very strong real estate values in these QOZs. With core property in first-tier markets flooded with capital, the right investment in a QOZ with the right local partner could be a diamond in the rough.
The Bottom Line
There are certain drivers that will push rents and home prices higher. For longer-term real estate gains, the trends of millennial renting and buying upscale homes, the increasing prices in secondary markets, and capital flowing to opportunity zones will provide great opportunities to make outsize returns. A disciplined approach to real estate investing can uncover opportunities that lead to outperformance with less risk.
More than half of Texas’ poor children live in families where 50 percent or more of household income goes to housing, leaving little money left for necessities such as healthcare, a new national study shows.
That lack of affordable housing carries a ripple effect that can also lead to a lack of healthy food, an inability to fill prescriptions or seek medical care, transportation problems and it influences where children go to school, which can ultimately determine their success as adults, researchers concluded.
“Where we live matters to our health, ” said Joe Hinton, a researcher with the 2019 County Health Rankings & Roadmaps, an annual project that looks at health and demographic indicators at the county level across the United States. “All people don’t have the same opportunities for a long and healthy life.”
In Harris County, for instance, 23 percent of the county’s children live in poverty — more than triple the rate in Denton County. The overall child poverty rate in Texas is 21 percent.
The study also shows that one in five households in Harris County face “severe housing problems,” which could include high costs, overcrowding or even a lack of plumbing or functional kitchen.
Compare that to nearby Fort Bend County, which reported 14 percent of households experienced such housing problems.
Statewide there is a deep divide when it comes to race and housing. Overall, the 20 percent of black households who face severe housing problems is double that of white households.
The study, released Tuesday, is a collaborative effort between the Robert Wood Johnson Foundation and the University of Wisconsin-Madison. It uses the most recent available data from a range of sources, much coming from last year.
While Texas is often thought to be immune from the affordable housing crisis typically associated with California or New York, the data from Texas counties are eye-opening and should be studied further, Hinton said.
A wide range of indicators were broken down county-by-county, including life expectancy, birth weight, number of days with poor physical or mental health, level of education, sleep deprivation, access to healthy food, firearm fatalities and even length of commute.
According to the 2019 ranking, the healthiest county in Texas is Hartley, followed by Denton, Williamson, Collin, and Fort Bend counties. The least healthy county, although not all counties reported, is San Augustine followed by Duval, Morris, Hall and Marion counties.
“”It’s unacceptable that so many individuals and families face barriers to health because of what they have to spend on housing, ” said Dr. Richard Besser, chief executive of Robert Wood Johnson, in a statement.”We are all healthier and stronger together when everyone has access to safe and affordable housing, regardless of the color of their skin or how much money they make.”
The 2004-07 bubble era in U.S. housing markets was a time of utter madness. Much has been written about it, but almost nothing has been said about the craziest aspect of it — the cash-out re-financing lunacy.
Let’s take a good look at it and explore why the scope of this insanity was so massive that it could — once again — start to take down numerous major housing markets within the next year.
Although traditional refinancing had been done by homeowners to lock in lower interest rates for their mortgage, what became known as a cash-out refinancing was different.
With home prices soaring nationwide during the housing bubble, homeowners an opportunity to pull some of that growing equity out of their house. The main vehicle was a refinance of the homeowner’s first mortgage. The owner cashed out the growing equity in the house by refinancing the first mortgage with a larger first. The difference between the two amounts went directly into the pocket of that homeowner. Just like printing money!
How much extra cash are we talking about? Freddie Mac publishes a quarterly cash-out refinance report. Between 2004 and 2007, homeowners were able to cash-out a total of $964 billion. They were free to spend it on anything, and they did. Freddie Mac’s figures include only refinancing of prime first-lien conventional mortgages. They do not include refinancing of second liens nor refinancing of subprime loans.
The second method was for the owner to refinance a second lien called a home equity line of credit (HELOC). The HELOC was similar to a business line of credit where the homeowner could draw on the available credit up to the limit provided by the lender. The beauty of this HELOC was that almost all of them required only interest payments for 10 years. Who could resist? Few did.
Cashing out the refinanced HELOC was similar to the cash-out first lien. A borrower was offered a line of credit larger than the current HELOC. The difference was extra money upon which the homeowner could draw.
During the peak bubble years of 2004-06, roughly 20 million first liens were refinanced across the country. According to the Freddie Mac report, more than 85% of all refinances were cash-outs in 2006.
Los Angeles: the epicenter of the madness
Since California was the center of the housing bubble in the U.S., it also became the epicenter for the cash-out refinancing lunacy. Between 2000 and 2007, home prices across California almost tripled. Homeowners used this to turn their rising home value into real spending money.
Roughly five times as many refinance loans were originated in California compared to mortgages for purchasing a home. Millions of Californians refinanced their first mortgage once, twice, even three times during the bubble years. They also refinanced with a cash-out HELOC while their home soared in value. Homeowners partied as if it would never end.
If California was the epicenter for the cash-out refinancing madness, metropolitan Los Angeles was undoubtedly the epicenter of the California craziness. Here is why.
The Los Angeles metro is comprised of Los Angeles and Orange counties, with a population of about 13 million during the bubble years. For four years, utter lunacy prevailed.
According to Mortgagedataweb.com, 2.72 million conventional mortgages were refinanced between 2004 and 2007 in the Los Angeles metro alone. How much money was involved? A total of $627 billion in refinanced mortgages was originated. That’s right – $627 billion for one metro.
While these L.A. numbers are mind-boggling, the average refinanced loan was just $232,000. That puzzled me for some time. This was California during the craziest real estate bubble in U.S. history. Eventually I realized that most of these were refinanced HELOCs and not first mortgages.
Since the median California home sale price at the peak was close to $500,000, how many refinanced first liens in Los Angeles metro were jumbo mortgages? These were mortgages that exceeded the limits for a loan to be guaranteed by Fannie Mae or Freddie Mac. Mortgagedataweb.com gives us the answer. In 2005 and 2006 alone, 231,000 jumbo mortgages were refinanced in the Los Angeles metro. With an average size of slightly over $600,000, the total came to an astronomical $140 billion — among a population of around 13 million.
The housing collapse in L.A. and its turnaround
By 2008, the housing market collapse in Los Angeles was in full swing. That year, 37,670 homes in Los Angeles County were foreclosed by mortgage servicers according to data provider Property Radar. Although foreclosures nationwide did not peak until 2010, the peak for Los Angeles was in 2008.
Prices were cratering throughout California in 2009. More than 500,000 delinquent homeowners received a default notice that year. According to the California Association of Realtors, nearly half of all sales were either repossessed properties or short sales. DataQuick reported that in February 2009, 58% of all home sales in California were repossessed properties.
As home prices showed no sign of leveling off in 2009 or early 2010, lenders and their servicers panicked. They decided that the bleeding might be stopped if they drastically reduced the number of repossessed properties placed on the active housing market. RealtyTrac had begun reporting as early as April 2009 that most foreclosed properties were being held off the market. They estimated that roughly 80,000 foreclosed properties in California had been deliberately kept off the market.
What began in California spread nationwide. This table shows what servicers in major metros were doing with their foreclosed homes according to data provided by RealtyTrac.
By mid-2010, Los Angeles County mortgage servicers had just under 30,000 properties in their foreclosure inventory. A mere 1,214 were actively for sale.
Did this desperate strategy prevent home prices from falling further? Not at first. There were simply too many delinquent properties that had not yet been foreclosed. As late as December 2010, 34% of all homes sold in Los Angeles metro and the other four surrounding counties were repossessions. Two months later, 40% of all sales in the state were foreclosed properties. More drastic action was clearly necessary.
The solution was to sharply restrict the number of delinquent properties actually foreclosed. Early in 2012, the number of homes repossessed by the servicers began to plunge.
Take a look at this table showing the sharp drop.
Because of this massive cutback in repossessions, home prices in Los Angeles County finally began to level off and then turn up. ATTOM DATA reported that sellers in the second quarter of 2012 actually showed a profit from their original purchase price.
Servicers realized that reducing foreclosures to a trickle had worked. By February 2013, repossessions plunged in LA County to a mere 310. For all of 2013, only 3,340 houses were foreclosed. What servicers were doing went unreported by the media.
Cash-out refinancing exacerbated the L.A. collapse
There is an excellent source that explores why Los Angeles was so devastated by the housing crash. Steven Lauffer was a professional staffer at the Federal Reserve Board. In 2013, he published a paper entitled “Equity Extraction and Mortgage Default.” Lauffer carefully laid out the case that mortgage defaults in Los Angeles County were caused by cash-out refinancing much more than by anything else.
Using CoreLogic’s search tools and database, Lauffer was able to search more than 1.2 million homes between 2000 and 2009 in Los Angeles County. Through this, he could identify every open mortgage against all these properties during the study period. He selected 100,000 homes purchased between 2002 and 2004 before the bubble reached its peak. From this, he randomly chose 20,000 properties to make his study more manageable.
What Lauffer found was truly shocking. Half of these homeowners had taken out a second mortgage at the time of purchase. After buying the property, these owners took out an average of 2.5 new mortgages through 2009. Of these new mortgages, 45% were cash-out refinances and an additional 10% were HELOCs.
When home prices stopped rising in 2006 and then began to decline, homeowners started defaulting in droves. Of those who bought a house in 2003, 10% had defaulted by 2009. Those who purchased in the peak bubble year of 2006 saw their equity evaporate almost overnight. By the end of 2009, 40% of this cohort had defaulted on their mortgage.
Here is the real shocker: Lauffer found that of those homeowners who defaulted by 2009, 40% of them had purchased their home in 2003 or earlier. Although their houses had increased in value considerably until the bubble popped in late 2006, more than 40% of their outstanding mortgage debt in 2009 was the result of cash-out refinancing – what Lauffer called “equity extraction.” For 90% of the defaulters, he found that their original mortgage debt at the time of purchase was less than the value of their home when they defaulted. It was this cash-out refinancing more than losing a job or anything else that led these homeowners to default.
Why difficult times are still ahead of us
In a recent column, I discussed why the massive delinquency of bubble-era non-agency mortgages is a disaster waiting to happen. Comments by quite a few readers showed me they had a hard time understanding how fewer than 4 million mortgages could take down major housing markets.
That is a fair objection. You need to understand that the problem is much greater than just the non-agency mortgages. During the bubble years, a total of 28 million first and second liens were refinanced. Recall that roughly 80% of these were cash-out refinances.
Although the cash-out refinancing lunacy was most excessive in the Los Angeles metro, it took place throughout the nation, especially in the major metros. When home prices began declining in late 2006 and early 2007, the vast majority of these homeowners had a total mortgage debt which was much greater than when they bought their home.
This massive problem of underwater homeowners could not be resolved only by shutting off the spigot of foreclosures. That is why a total of 25 million permanent mortgage modifications and other so-called “workout plans” were put in place from 2008 until June 2018 according to data provider Hope Now.
Modifying mortgages as an alternative to foreclosure just kicked the can down the road. It succeeded in bringing these delinquent homeowners into current status. Yet millions of them are re-defaulting on these modified mortgages. The number of re-defaults is increasing relentlessly around the U.S. Worse yet, many re-defaulters are on their second- or third mortgage modification.
Which investors might be vulnerable? Owners of some mortgage REITs, owners of nearly any mortgage-backed securities (RMBS) originated by Ginnie Mae (FHA-insured mortgages), and more than a few hedge funds.
It is quite likely that there is no feasible solution to this massive problem of mortgage modification re-defaults. As home sales weaken now around the country and sale prices level off, you’ll do well to prepare by assuming the worst.
While the powerhouse capitals Melbourne and Sydney are continuing to suffer a property downturn, it’s not all bad news for the rest of the country – if you know where to look.
In fact, some areas that had been weaker during the property boom are now beating the rest in a major rebound, according to property adviser Anna Porter, principal of Suburbanite.
“There are markets throughout the country that are seeing sales going through quicker [and] there’s more buyer demand, and that usually leads to some level of price increase,” Porter told Your Money Live.
“So that’s a big bounce-back for markets that might have been really subdued over the last couple of years.”
Unfortunately for investors in Sydney and Melbourne, that growth story is mostly a tale of just two cities: Brisbane and Perth.
“They’ve entered that timing in the cycle where you’ve got a lot of affordability coupled with a number of economic drivers. It’s driving that growth back up again,” she explained.
Good news for Perth
It’s been a particularly difficult five years for Western Australia’s capital city, with the property market delivering consecutive negative growth year-on-year.
“Everyone in the country has heard that Perth has been through some tough times. It’s had not only the housing boom but the mining boom coming off,” she said.
The good news is that it appears to be going through a surprise rebound, with a number of areas delivering solid growth, according to Porter.
While the property downturn is slowing, she said other economic drivers are also starting to come into play, such as solid employment figures and population growth.
And according to Porter, there are five key Perth suburbs that investors should watch, having delivered high growth in the last 12 months:
South Perth: 13.7 per cent
Glen Forrest: 14.4 per cent
Subiaco: 10 per cent
Murdoch: Nine per cent
Osborne Park: 7.4 per cent
Slow times over for Brisbane
Despite a positive 2016 and 2017 for the Queensland city, last year saw Brisbane’s property market feeling the pinch.
With higher lending restrictions, Porter said investors had been starting to look toward less expensive locations in regional Queensland, pushing buyers out of the more expensive Brisbane.
“We are now seeing some of the better Brisbane suburbs really power through the past 12 months, even in a declining or flat environment, and there are certainly a few stand out suburbs that are emerging,” said Porter.
While not all areas of Brisbane are in the growth zones, key economic drivers are painting a positive overall picture for the city in the long run.
“We’re seeing some great data coming out, not just in the growth but vacancy rates are going down, days on market are going down… We’re seeing the buyer demand increasing,” she noted.
According to Porter, the Brisbane suburbs delivering high growth in the last 12 months include:
The Ministry of Housing, through the New Urban Communities Authority (NUCA), has achieved significant sales in the cities of New Mansoura and New Alamein, in contrast to the expectations of real estate developers regarding the deceleration in sales of the real estate market during the current year.
The ministry announced in early March that 536 distinguished housing units were electronically booked in New Alamein in just 26 minutes. This is a great indicator of the popularity of the ministry of housing, which is almost the sole developer in the New Alamein city.
The substantial sales are not merely for the New Alamein city, but the ministry has also achieved sales which exceeded EGP 1.5bn in the Zahya project in New Mansoura in just three days, contrary to what was expected by City Edge Developments, the marketer and the project manager on behalf of the NUCA.
Additionally, in late February, Amr El-Kady, the CEO of City Edge Developments, elaborated that the company has achieved EGP 8.5bn in sales of New Alamein by the end of 2018, and has achieved EGP 500m in sales in the city in the first two months of the current year.
Moreover, the company achieved EGP 1.5bn in sales in New Mansoura in 2018, and EGP 600m in the first two months of 2019, according to El-Kady.
Some developers believe that this represents a significant competition for them, and not in favour of developers, but rather in favour of the ministry, which may affect their sales in the coming period.
Chief Projects Officer at Capital Group Properties, Amgad Hassanein, said that the government’s offers of luxury or distinguished housing projects are not its role, but rather the role of private sector companies.
Hassanein added that the continuation of the state in offering luxury housing may lead to problems in the real estate market, which may lead to the reluctance of some companies to exist in some areas where the ministry strongly competes.
For his part, Alaa Fekri, chairperson of Beta Egypt for Urban Development, said that this competition is unbalanced, especially after increasing the implementation cost by about 80%, in addition, developers incur the payment of the value of land purchased from the state.
Fekri explained that the companies’ advertising expenses are rather extensive and therefore companies are working under financial pressure, and at the same time are required to pay the instalments of the land’s value, so it is strongly seeking to accelerate marketing rates.
He elaborated that real estate companies currently face major challenges because they are competing for the same housing category, as well as facing intense competition from the ministry of housing.
Meanwhile, Ayman Sami, the JLL country head-Egypt, believes that the state had to first start by entering these new markets such as New Mansoura and New Alamein in order to reassure investors wishing to operate in these new cities–expecting that there will be a great presence by developers in those cities in the coming period.
Furthermore, Waleed Abbas, the assistant housing minister of the NUCA, said that there is no competition between the state and developers in new cities, especially New Alamein and New Mansoura, proving that the NUCA has offered four plots of land to investors in these two cities in November.
Abbas denied that the state is the only investor or the winning competitor in those cities.
He explained that competition exists if the ministry is offering the same features in projects provided by the investors, noting that develops must distinguish their products in order to be more attractive to the client than what the ministry offers.
He also pointed out that the ministry’s prices are not competitive but are rather market prices as the ministry calculated the cost and profit margins much like developers, in the case of units offering in any of the new urban communities.