October 1985
Vol 8 No 1
For about as long as I can remember, real estate investment has enjoyed many advantages over other forms of investment. In an envy-based society, that can prove to be hazardous and it appears that 1985 will be a year in which some of those advantages will be reduced. Thanks to my voluntary 'national clipping service', I've been inundated with articles from newspapers and magazines which indicate the enemy is marshaling his forces over a broad front.
Your responses to engagements with those who would deprive you of your rights in property will depend upon the location of the houses and the various laws which apply. In general, the greater the demand for housing, the greater the potential for profits from either rentals or sales – and the greater the threat of interference from government at one level or another. There's another maxim in the world of business which bears repeating: “When the lines form, raise the prices.“ In this month's letter we'll examine some of the current trends to see how these might affect our opportunities. We'll try to develop some concepts to tide you over in the event you're apprehensive.
RENT CONTROLS AND TENANT MILITANCY ARE ON THE RISE AGAIN.
California has always been a land of superlatives. Highest incomes, highest expenses, highest taxes, first to set trends. We might add most ridiculous court rulings, most landlord litigation, biggest rent strike, most potential for rent control, most anti-capitalist attitudes, most hostile environment for real estate investment. Here are some examples.
ITEM: Santa Ana can lay claim to the largest rent strike which involved over 200 families. Some of them have been withholding rents since January. The strike is being orchestrated by a professional agitator who also represents an immigrant rights group – many of whom are undocumented aliens.
ITEM: Under a new minimum housing code enforcement program, many landlords are opting to withdraw their housing from the market, displacing hundreds of former tenants. As a result, taxpayers in Santa Ana are being levied $124,500 in 1985, $100,000 in 1986 to match the $200,000 from the federal government (spelled taxpayers) to relocate and house the displaced persons who now can't find homes at any price.
ITEM: In view of the above, rent strikes are now being spread to Anaheim. Who's next?
ITEM: Tenant's rights attorneys are forced to sue landlords to recover fees tenants won't pay. To counter this, landlords are filing for protection under Chapters 11/13 of the Bankruptcy statutes. This way they can avoid both the fees and the claims of the tenants which could exceed the value of the property.
ITEM: Over 3,000 former tenants are now homeless in Orange County because of housing shortages. Solutions recommended to the Board of Supervisors would require that builders build low-income housing in order to obtain building permits for sale-able housing. Meanwhile, shelters will be constructed at tax-payer expenses.
ITEM: Tenants are being instructed to file bankruptcy to prevent eviction.
ITEM: California court holds owner liable for not verifying a shower door was made of
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safety glass even though any certification would have been positioned out of sight under the metal molding during manufacture.
Orange County was the site of the nation's fastest rising residential housing prices in the late 70's. In the 80's it promises to lead the costs of ownership too for investors and ultimately the public. The Marshal in Chino California has gone one step further. He's borrowed a form from San Bernardino County which informs a tenant being served for eviction that if any occupant claims to have been in residence on the date of filing an unlawful detainer action but who has not been named on the writ, the eviction can be stopped until it has been refiled. This notice is delivered to the tenant along with his notice to vacate. Only in California will one find the enforcement officials and the courts using tax-payer's money to assist undocumented aliens and vagrants to use housing that productive citizens might occupy. But the trend is beginning to spread.
West Hollywood used rent control as a lure in attracting the votes and voters necessary for its incorporation. Recent legislation in that city will roll back rents to May 1984 levels and restrict future rent increases to 75% of the consumer price index. In Marina del Rey, residents there are prevented from obtaining their city charter by a bill which would require at least 50% of any proposed city to be held in private (and thus taxable) hands. Yet, 887 of West Hollywood's voters are tenants!
In Oxnard, after the Coastal Commission ruled that it would be unlawful to restrict public access to privately owned beach front, the State Lands Commission filed a prescriptive rights suit against 97 beach front property owners which states that since the public has been using the beaches, they now have the right to continue to use them in perpetuity without any compensation whatsoever to the owners. Talk about CATCH 22!
And the State Supreme Court recently ruled that cities can prevent owners from running away from their tenant problems by means of converting apartments into condos as long as there's a rational basis for imposing moratoriums on conversions. Specifically cited was Santa Monica's ordinance which bars demolition of rental housing because of a rental shortage in that city. Apparently they haven't considered how little additional rental housing will ever be built in their city because of this 'right to steal' law.
Rent controls have already been imposed to some degree in Sonoma, Napa, Placer Solano, Contra Costa, Alameda, San Mateo, Merced, Fresno, Santa Cruz, San Francisco, San Luis Obispo, Santa Barbara, Ventura, Los Angeles, Orange, San Bernardino and San Diego counties or cities according to the Apartment Political Action Committee (APAC) whose address is listed as 1107 Ninth Street, Suite 1010, Sacramento, CA 95814. Write to them for a map showing locations of proposed rent controls. There are lots of them.
ANTI-PROPERTY RIGHTS ATTACKS ARE BECOMING A NATIONAL PASTIME.
In Orlando, Florida for the past few years they've been trying to impose a new housing code which would effectively hand over control of rentals to tenants and/or bureaucrats. So far the defenders are winning. Tax-payer funded Legal Services, Inc. has helped organize the Association of Tenants for Better Housing. One of their leader's first acts has been to sue a local realty firm, asking that the courts declare invalid rental agreements which impose 'excessive' late fees or which 'unconscionably' make the tenant's responsible for maintaining property they are occupying.
In Pensacola, Florida the same page of the newspaper reported 'rent wars' due to high vacancy rates in private housing which was causing owners of apartments to lose money and property while a following story reported the Area Housing Committee's crying need for emergency housing for the indigent. Of course they'll build that surplus shelter with funds milked from the distressed apartment owners' property taxes. On the national scene, the proposed tax bill seems tailor made to bring housing shortages too.
HOW DO YOU CATCH A FAT CHIPMUNK? EASILY!
On a recent visit to a National Park in the Colorado Rockies I saw chipmunks which had been fed by tourists. They were too fat to run, hence had become dependent upon being hard-fed. They were no longer free. They were docile. And they were easy prey to their natural enemies – hawks. What at first blush had seemed an easy path to survival ultimately turned to almost certain disaster. So it is with most government programs.
HUD Section 8 and local welfare assistance programs virtually guarantee a steady stream of owners and occupants who have become dependent upon government policies and standards for their respective incomes and housing. Investors and syndicators are but a silly millimeter removed. They depend upon tax policy and financing for their daily bread. This is subject to change as we all are beginning to realize.
The tax payers are now supporting a HUD Housing Voucher program in 20 cities which cover 55,000 families who will receive housing vouchers for the next 5 years at a cost of $1,016,000,000. This is so low income families can obtain 'DECENT HOUSING' in the market. Presumably, Section 8 housing isn't decent. This new program is intended to be the cornerstone of HUD policy for the future at the expense of Section 8. Thus a new group of 'chipmunks' will be fattened up, L.A., Oakland, San Diego, New Haven, Pinellas County, FL; Atlanta, Montgomery County, MD; Boston, Minneapolis, Omaha, New Jersey, Erie County, PA; New York State and City, Cuyahoga County, OH; Dayton, OH; Pittsburgh, PA; Houston, San Antonio, Seattle will all participate in the program.
Some other 'fat chipmunks' have been caught between changing tax laws and credit restrictions. First, let's consider what happening in the tax laws. In the past 7 years, commencing with TRA-78, real estate has been the beneficiary of much of the new tax legislation. We've all reaped the bounty of fast write-offs, easy mortgage and bond financing, government programs which eased qualifying standards for marginal purchasers. Secondary markets – Ginny Mae and Freddi Mac – created billions of dollars by packaging loans and creating bonds against them for sale in the security markets. Builders were allowed to buy down interest rates, pay down payments, kick back 'decorating allowances' in order to sell to people who wouldn't ordinarily be able to make payments. Reverse amortization mortgages, variable rate financing, adjustable payment plans created enough demand in the markets to enable lenders to earn all-time-high interest yields. Syndicates were formed by the thousands to lend money or to buy property for quick write offs.
Like Hurricane Elena, tax legislation for the past 2 years has been threatening investment. No one knows where it will hit and who will be damaged, so everyone is heading for the high ground. And like so many who lingered too long in that storm, those who wait until the final hour may not be able to scramble to safety. Uncertainty is doing most of the damage as investors lose confidence and seek safety in the stock market. In areas where real estate values are declining, owners are handing properties back to the lenders. And the lenders are discovering that their loans exceeded market values. Fraud has been charged in as many as 25,000 VA foreclosures. In Camden, NJ; Flint, MI; New York, Las Vegas, Milwaukee and Memphis HUD is investigating allegations of fraudulently obtained mortgages HUD lost $540,000,000 last year in foreclosures. Bank of America lost $95 million in Texas and California properties. Thrift institutions are holding the bag on potentially ruinous loan scams all over the country. Fannie Mae with a $95 BILLION loan portfolio is currently sitting on about 8,000 foreclosed homes with more coming in daily.
The upshot of this is that loans are becoming more difficult to obtain and the market is becoming less liquid in many areas of the country. Fannie Mae now requires on a loan with less than 10% down payment that monthly housing expenses can't exceed 25% of monthly income. Mortgage payments plus all installment debt can't exceed 33% of income. Builder buy-downs of ARMs will be disallowed. All 'third party' contributions will be limited. Thus a prospective home buyer will need 12% more income to qualify for the same mortgage as before. Appraisal standards are being tightened considerably.
ALL GOOD THINGS COME ROUND TO HIM WHO WILL BUT WAIT . . .
The foregoing pages are enough to frighten a novice out of his/her wits. But things have a way of correcting themselves. As was pointed out, restricting profits in real estate in California will result in less housing. That leads to higher rents which eventually will lead to rent controls resulting in investors selling to owner occupants (or as was the case in New York, abandonment of apartment buildings). This puts tenants into the streets where they become a social problem which only easing of credit, taxes or regulations will solve. Ergo, a whole new round of real estate opportunities.
The Boston area is a perfect example of this scenario. In the late 70's they enjoyed ruinously high property taxes, interest rates, and costs of construction. As a result, rents rose. They then restricted rent increases and owners converted apartments to condominiums. When condo conversions were restricted by law, it became apparent that formidable housing shortages would be the result and house prices started to soar. For the past 3 years they've enjoyed over 20% average increases per annum in prices of their houses. Fortunately, I was able to participate because of a house I had an interest in on the South Bay. Before you panic and dump your real estate in the face of all the negative news, remember, that long term holders of real estate will enjoy appreciation of rents and values comparable to any other investment return once the cycle swings back just as those in New England are experiencing now. The house I sold in November 1984 has appreciated another $50,000 since then. That's well worth waiting for.
And the long term trend is nothing short of terrific. Unlike the securities and commodity markets, real estate is a NON-DISCRETIONARY survival necessity. Demographics rule the market place. Baby boomers are reaching their peak earning years. Single parent households have added millions of potential buyers and renters to the market. Departure of thousands of amateur investors from the market will cause a dip in prices and terms which will enable us to expand our portfolios at pre-1980 prices. Meanwhile, as more and more owners re-convey their over-mortgaged homes to the lenders, both the rental market and the foreclosure market will become glutted with opportunities to make a profit. There will be myriad choices to appeal to managers, rehab specialists, dealers, R.E.O. negotiators and private mortgage syndicators. We'll deal with these aspects of the emerging markets in sufficient time for you to take advantage of your own special situation.
MEANWHILE, SFH INVESTMENTS STILL LOOK PRETTY GOOD. SO DO SFH LOT SALES.
According to Coldwell Banker, SFH houses continue to appreciate around 2% over the inflation rate at about 8.7% per year for the median house in the USA. L.A., Boston, Austin, San Francisco, Stamford, CT, New York, Anchorage, Norfolk and Fort Wayne all have houses which average more than those in many sunbelt cities. In Tampa/St. Petersburg prices have declined in 1985 even though sales continue strong. Boston led the parade at 37% increase in the past year, followed by New York/New Jersey at 23.3%, Hartford, Atlanta and Albany/Troy/Schenectady at about 13% and Syracuse at 11.4%. And Orange County, CA saw more than 10% average increase despite all its anti-landlord political maneuvering.
The reason is simple. Investors buy houses for yield, but people buy houses to live in. Thus, SFH enjoy the best of both markets. 'Investors can bargain for the best prices and terms – and walk away if they don't get what they want. They're unemotional. Then they can turn around and sell (or rent) houses to people who want them for EMOTIONAL reasons. And they can price them accordingly in a more-or-less non-competitive market to the extent that the house offers an appealing environment to the occupant. So can you.
