We are just ending the worst real estate slump in 40 years. The most recent boom peaked in 2005-06 and then the bottom dropped out.
In July 2006, I kept lifting up my office phone receiver to see if it was working. It’s absolutely amazing how quick things can turn down and after a lag time, turn back up.
We have an artificial economy today where everything is being manipulated: the unemployment rate, CPI, interest rates, stock market, savings accounts interest, Social Security payments. Nearly everything economically, it seems.
Generally, higher priced residential units in the coastal zone are a harbinger of what the “smart money” thinks the future holds for huge profits in apartments. All cities in San Diego County are irrevocably committed to what economists call “barriers to entry.”
They are creating a shortage of homes and apartments through “smart growth” and land-use regulations, while the Federal Reserve is pumping money willy-nilly ($85 billion a month, a trillion a year) to re-inflate the real estate bubble (the stock market and the economy).
After a lag time, can government's artificially created shortages — coupled with artificially stimulated demand (low interest rates) — result in anything other than skyrocketing real estate prices? (Apartments have skyrocketed four times in 40 years).
First, I’d like to say something about apartment brokers. Over the years I’ve found many brokers feel guilty about what they do — selling apartments at ever higher prices — and the seemingly “unfair” impact on tenants.
So let me acknowledge you who are apartment owners, builders and brokers.
If you think about it for 15 seconds, you'll recognize that people who own apartments are today’s unsung heroes. If not for those who build, buy and broker rental units, up to 45 percent of the people in San Diego could not afford a place to live without doubling up with relatives, friends or strangers. We would have two and three generations living under the same roof as found in much of the rest of the world.
What’s the alternative to renting? Owning a home, or the stigma of government housing with its eight-year waiting list of 50,000 households in San Diego. The December 2012 median priced home was $399,000. Average home mortgage payments with 20 percent down, 3.5 percent interest rate, including taxes and insurance run $2,600 to $2,800 per month depending on attached or detached.
The average apartment rent, however, is only $1,455 per month, or about half the cost of owning a home. The average apartment security deposit of $1,000 is not even in the same ballpark with the $12,000 to $80,000 down payments (3 percent VA to 20 percent conventional) required to buy a home.
How apartment owners can pay $125,000 to $200,000-plus per unit and rent them so cheap is a marvel of free enterprise. You’d think apartment owners would be lauded, applauded and praised by the media rather than sought out to find a few aberrations about which to write sob stories.
Recently approved government low-income apartments are costing $300,000 to $500,000 per apartment to build — yes, apartments not homes. This is more than double the cost of brand new, privately built apartments.
Rental owners, builders and brokers should always feel proud of making safe, clean, housing available for people climbing the economic ladder. And never be ashamed of making a profit. It is only through profits that savings can be increased and reinvested in more apartments increasing the supply and quality. The greater the profits, the greater the number of dwellings per capita that can be built, resulting in a continuing higher standard of living.
A University of Michigan study, “New Homes and Poor People” affirmed that the construction of 1,000 new dwelling units, both homes and apartments, makes it possible for 3,545 households to move to better accommodations. Of the 3,545 moves surveyed, 1,290 were by low and moderate-income families. This is the essence of upward mobility and how the free market works. People start out in cheaper older apartments and move up as their income increases. (The same mobility enables 3/4 of poor people to own cars). Virtually everyone I know moved into an existing (older-used) apartment when first leaving his or her parents’ home or college. Today’s housing advocates say this isn’t good enough. Developers must provide brand new housing (Inclusionary Zoning) for people who can’t afford it, sometimes supplemented by the taxpayers. This is idiotic. It also means less housing for all income levels being built (regardless of what it’s called — all zoning is exclusionary).
You saw Feb. 1 that first-time unemployment claims jumped by 368,000 for a 7.9 percent unemployment rate. Well, there are six categories of unemployment, U-1 to U-6. The media typically reports U-3, but the Bureau of Labor Statistics reports also U-6, which is 14.7 for the United States and 19.3 percent for California. This is astounding. An element of risk.
The official inflation rate, CPI-U is reported as 2.1 percent, but if you calculate as it was in 1990, it’s 5.6 percent and in 1980, 9.8 percent. You only need to shop at your grocery store to prove it. Soon, the higher inflation rate will be reflected in apartments.
As we all know there are a lot of opinions on the economy. It brings to mind President Truman’s lament in seeking out a one-armed economist. One who doesn’t say, “On one hand, but then on the other hand.”
Nonetheless, on one hand since April — the year’s low in the coastal areas — the average apartment price per unit in coastal areas has risen from $182,119 per unit to $221,263. The increase implies a profit of $391,000 on a 10-unit apartment building and $3,900,000 on a 100 units over the last nine months. If the trend holds you can expect prices to double within the next five years as they have in four different five-year periods over the last 40 years. With 25 percent down payments, that’s a potential profit of five times the down payment.
Prices, as we all know, depend on location, number of bedrooms, rents, condition and financing. The Coastal Zone is the cutting edge with relatively few sales being posted but shows the trend as the government printing presses are creating money out of thin air and being reflected in accelerating real estate prices (and near record auto sales and stock market). Money flows first to the coastal areas and then eastward to El Cajon, Ramona, etc.
If nothing else, remember this: Increases by the Federal Reserve in money and credit cause booms, contractions in money and credit cause recessions, depression, or panics as they used to be called. Booms and inflation across the board are impossible without an expansion of money and credit and, in other words, impossible without government intervention in the economy. When things get out of hand the government blames businessmen, rental owners and oil companies.
Schnaubelt, president of Citizens for Private Property Rights, has been a commercial real estate broker for 35 years and was a San Diego city councilman from 1977 to 1981.