Blog #8 – A Surprise in Housing’s Top 10

Real estate website Trulia.com recently unveiled its list of the Top 10 housing markets to watch in 2015.  The list consisted of:

• Salt Lake City, UT
• Seattle, WA
• Fresno, CA
• San Diego, CA
• Dallas, TX
• Nashville, TN
• Raleigh, NC
• New York City, NY
• Boston, MA
• Middlesex County, MA

These markets are said to show strong fundamentals of housing activity, and surprisingly left off the list are San Francisco, CA and Denver, CO.  Trulia’s reasoning behind this is the overpricing of homes in these markets, estimating that San Francisco homes are overpriced by 12%, and Denver homes are overvalued by 7%.  Cities in the midwest as well as Washington DC didn’t make the cut due to sluggish job growth.  The midwest also exhibits higher vacancies than other regions, outweighing the advantages of low prices seen in the region.

Surprisingly on the list, however, is the relatively smaller market of Fresno, CA.

Fresno exhibits many of the positives you look for in a housing market.  They have strong job growth, low vacancy rates, and a large share of millennials living in the market.  Having a population consisting of a large portion of young adults promotes household formation and demand for rental properties.

The only Texas market to snag a place in the top 10, was the Dallas housing market which has seen growth driven by sizable population gains as well as job growth to match.

http://blogs.wsj.com/developments/2014/12/03/fresno-not-san-francisco-among-nations-strong-housing-markets-trulia-says/

Blog #7 – Houston’s No Zoning Code

Zoning codes are a major way that local governments can shape the growth of their city and place restrictions on what can and can’t be developed in certain parts of town.  Houston, TX is an exception.  Houston is the only major city in the US that doesn’t have a zoning code.  This is a perplexing idea to people around the country and the world, but Houston has seen tremendous economic growth in recent years, and provides a case study of how no zoning can be a beneficial policy.

Profit maximization and other economic forces have proved to be strong forces in separation of land uses in Houston compared to mandatory zoning used by other major cities in the US.  Houston developers have adapted to the no zoning policy the city employs by placing private covenants and numerous deed restrictions on their projects, a comparable yet still vastly different role to a traditional zoning code.  One venture many developers partake in is to design industrial and business parks in which many offices and buildings are constructed in close proximity to fit demands of the area.  These projects are the most pursued developments by institutional investors in the Houston market.

Above: Energy Plaza office tower development rendering along Houston’s Energy Corridor.

Houston, though it lacks a formal zoning code, does have many restricting regulations in place that foster an environment that can thrive without zoning.  Strict minimum parking regulations, minimum lot size regulations, as well as wide streets and long blocks successfully limit density and promote the feasibility of mass transit.  The urban planning strategy employed by Houston has been a strong factor in the growth success seen by the city.

http://www.businessweek.com/the_thread/hotproperty/archives/2007/10/how_houston_gets_along_without_zoning.html

Blog #6 – DFW’s Real Estate Boom

Being from the Dallas – Fort Worth area, I have seen first hand the immense growth the region has seen recently.  The metroplex is in the midst of one of the largest real estate booms in decades.  Since 2010, 106 companies have expanded pr relocated in the DFW space, the largest numbers ever seen by any Texas market.

The question remains: will this growth continue?  Many researchers say yes.  For example,  Jeannette Rice, a researcher with CBRE group, says the good times in the real estate market will continue for another 2 to 3 years.  Most analysts forecast the industrial and apartment sectors to soften their growth over the next two years while office and retail will continue to see robust growth in that time.

 

Above: Dallas, TX skyline

The growth in opportunities provided by the real estate sector in DFW is led primarily by significant population and job gains.  The expansion and relocation of companies in the Dallas Fort Worth metroplex is primarily composed of insurance companies, financial services companies, and tech firms.  While Houston and Austin have seen significant growth recently as well, led by energy in Houston and technology in Austin, Dallas has the luxury of not being tied to a single major industry, but being diversified among many sectors of the economy, allowing the market to shield itself from overdependence on any single sector.

If you are a believer that interest rates will remain low for the next few years, as the Fed has hinted at being a likely possibility, you can bet safely that the real estate boom we’ve seen in the past 5 years will continue for some time to come.

 

Above: Fort Worth, TX in the evening

http://www.dallasnews.com/business/columnists/steve-brown/20141120-looking-ahead-real-estate-forecasters-see-more-good-times-coming.ece

Blog #5 – Austria’s Environmentally Friendly Homes

In Schlins, Austria, a local builder named Martin Rauch has gained some fame for developing a sustainable way to construct and decorate homes.  Rauch uses ordinary soil and an ancient technique to compress it into a building material as sturdy as concrete.  The soil mixture consists of sand, small stones, clay, and silt.  The technique is used to make home components ranging from fireplaces to stoves to walls.

One of his projects was the Ricola Herb Center that is used to store and process herbs in an ideally humid environment that is fostered by the “rammed earth” technique used by Rauch and his colleagues.  Pictured here is the center:

The “rammed earth” floors run from $23-$30 a square foot, which is almost double what standard oak floors cost in Austria.

Part of Rauch’s job is to soothe his client’s nerves as the perception of the material he uses is that it is not as sturdy as concrete.  The process is proven, having been used to construct parts of the Great Wall of China and many residential structures around the world. The structures are fully recyclable, often using ground dug up during a building’s own construction phase.

The use of compressed soil, in summary, provides a sustainable form of residential construction.

http://www.wsj.com/articles/the-dirt-on-sustainable-luxury-1416503198

Blog #4 – Why You Should Avoid Reverse Mortgages

Reverse mortgages are home loans that provide cash payments to older borrowers based on the value of their home equity.  The borrowers, who must be 62 or older, typically receive payments and then defer payment of the loan until they die, sell, or move out of the home.  While turning the equity in your home into cash sounds appealing, there are many reasons to avoid seeking a reverse mortgage.

1. There are high fees associated with reverse mortgages, such as origination fees and other fees that are unique to these loans mandated by the unique nature of the risks associated.
2. Interest rates on reverse mortgages are also typically higher than traditional loans.  While this additional interest expense does provide a tax benefit by deducting from your taxable income while not having to make any payment on the interest until the loan is payable, it adds a significant amount to the balance on the loan when it comes due.
3. Perhaps the most important reason to avoid reverse mortgages is that your heirs may not get the collateralized property.  Upon death, the property will likely have to be sold to pay off the loan, and if not sold, the loan amount will most likely have to be paid by the deceased’s estate, still reducing what your heirs receive.  If you intend to leave a legacy with your descendants, a reverse mortgage can be harmful.
4. If you move out of your home, you must repay the loan immediately.  That is a large payment that you would be accountable for at a time that you may already be low on funds.
5. You are still responsible for other payments on your home such as property taxes, insurance, and routine home maintenance.

While reverse mortgages can be a good retirement option in some situations, the cons must be seriously weighed against the gains you would receive from the loan.

Blog #3 – Mansion Taxes

Major cities around the globe have been weighing existing and proposed taxes that are to be directed at wealthy home buyers.  Cities like New York, London, Singapore, Hong Kong, and San Francisco have existing transfer taxes on home purchases that meet a price threshold that ranges from >$1 million in New York to >$20 million in Hong Kong.

London has instituted a transfer tax they call the “stamp duty land tax” that levies a tax on home purchases based on an increasing scale that maxes out at 12% of the sales price on purchases of 1.5 million euros, or roughly $2.35 million in U.S. currency.  The transfer tax will affect affluent London neighborhoods such as Belgravia, pictured below.

This additional tax is sure to change the thinking of some prospective mansion buyers in the London market, while most likely not changing the plans of the exceptionally wealthy who can certainly afford the extra 12% tax.

In terms of the tax being applied to more cities throughout the US, it is hard to speculate on the issue.  This tax is a form of progressive tax, defined as a tax that contributes to the redistribution of wealth from the wealthy to the poor.  New York and California, two of the states to have implemented these transfer taxes on mansion purchases, have a traditionally progressive tax structure, whereas Texas has one of the most regressive tax structures, meaning the ratio of taxes paid to wealth is relatively even across the board from the poorest of the poor to the most affluent residents.  Because of this, I don’t think it is likely that we will see this kind of tax imposed in the state of Texas in the near future.

http://www.wsj.com/articles/how-a-mansion-tax-could-affect-wealthy-neighborhoods-1417709847

Blog Assignment #2 – Property Rights

Task #1:

Real estate is defined simply as property in land and buildings.  This consists of the physical land and structures.  Conversely, real property is defined as the legal interests associated with ownership of the physical real estate.  The two terms are used almost interchangeably in practice.

An example of a property rights dispute going on currently is in Franklin County Virginia.  Residents around Smith Mountain Lake are in a dispute with Appalachian Power regarding the company’s five foot easement around the lake, which they have had since the 1960s to allow them to properly manage the lake.  Neighbors argue that their deeds allow them to build docks on the lake, but Appalachian Power argues that their easement gives them the power to keep residents from doing so.  A federal judge is currently deciding whether or not to hear a case filed by the homeowners in the area.

Task #2:

Many private restrictions on real estate exist, and they include:

• Covenants, conditions, and restrictions (CC&Rs)
• Liens
• Easements
• Profit a prendre
• Adverse possession
• Encroachments

A Raleigh County judge recently ruled a man the lawful owner by adverse possession, or “squatter’s rights”, of a section of property which previously belonged to a community church.  Adverse possession allows individuals to acquire title to land they don’t own but have openly possessed for a period of time.  The church’s pastor was devastated by the court’s ruling against the church’s property, which was going to be used to construct a food pantry and community hall.  The ruling was made on October 22nd, and from that date, the church had 90 days to deliver the deed to the squatter.

Task #3:

Public restrictions are government imposed restrictions on real property, and stem from the government’s powers of:

• Taxation
• Eminent Domain
• Police Power
• Escheat

The government exerts these powers through policies such as property taxes and zoning laws.

Recently, a neighborhood in Hartford, CT saw a home’s living situation trigger a cease-and-desist order and many debates over what constitutes a legal family.  A nine bedroom mansion in a wealthy neighborhood had been housing 8 adults and 3 children who had arranged the living situation to share monthly expenses, chores and legal ownership.  Zoning officials determined that the setup does not meet the definition of a family, yet were unclear if the owners would be forced to vacate the property.

Blog Assignment #1 – Task #2

As I mentioned in my last blog post, I was blessed enough to visit the amazing city of London two summers ago.  Because of this, I have a bit of bias towards the city and its buildings when selecting my favorite piece of real estate.  With that being said, my choice is The Shard in London, a relatively new addition to the London skyline.

The Shard is an architecturally beautiful skyscraper that incorporates retail, offices, hotel, apartments, fine restaurants, and even a public viewing gallery.  Due to its size and more importantly its shape, light reflects off its glass facades in constantly changing ways.  It is the most striking building on the London skyline representing modern London, which often is secondary to historic London (The Tower of London was built in 1078 and is located less than a mile away from the Shard).

Ultimately, what I find most amazing about the Shard, is that it truly is a city within a building.  The housing, the restaurants, the offices, and the entertainment can all be found inside the sleek glass windows that cover the tower.  This piece of real estate is used for such a diverse array of businesses, and because of this, I find it to be very appealing from the perspective of a business major as it presents so many careers under one roof.

 

-Matt Henderson

Blog Assignment #1 – Task #1

My name is Matt Henderson and I am a Class of 2015 Finance Major at Texas A&M from Fort Worth, TX.  I enjoy spending my time around sports, whether that means playing them or just watching from the sidelines (or on TV, of course).  Whether at the professional or collegiate level, basketball, football, and baseball are my favorite sports to watch, at least when my teams are doing well (it has been very tough to cheer for my Cowboys lately).  When it comes to actually playing the sport, I can’t imagine a better way to spend a Saturday morning than on a golf course.  

 

While I haven’t put much thought into a bucket list, I do know of a few little adventures that I aspire to embark on.  I hope to one day travel through the majority of Europe, stopping through Ireland, France, Spain, and the Czech Republic.  I’ve had the pleasure of traveling to London, Paris, and Normandy in the past and can’t wait to go back across the Atlantic and see the rest of Europe and all of the history it has to offer.

Some of my favorite sites on the Internet include:

1. http://online.wsj.com/home-page

2. http://espn.go.com/espn/blogs 

I’m excited for this section of Finance 371, and I look forward to advancing my knowledge of finance into the broad field of real estate this semester.  I hope to gain a solid base of knowledge in the field of real estate through this course that I may build upon in the future and apply to a wide variety of potential careers.  My current ambitions would lead me to pursue commercial banking as a short term career opportunity, as I interned in the industry this past summer, but I have the hopes of ending up with a small wealth management firm down the road.

-Matt Henderson