With rent control being passed in California, Oregon, and New York, government intervention in rental housing is heating up. This is something we have been predicting for a number of years given the housing shortage and relatively stagnant wages for lower to middle-income earners. We also had a lot of experience with it when we owned manufacturing housing communities where it was much more widespread than apartments so we had a sense of the conditions that would lend itself to rent control pressures.
Answers can only come after a question has been posed. Thus, formulating great questions is the first, and most important, step to growing one’s base of knowledge. As I have written in my book, the two most important questions I need the answers to in terms of our investments at CWS are:
What is going to happen to our Net Operating Income?…
It has been our belief at CWS that housing in totality has been undersupplied. This does not mean that apartments may not be over-supplied in certain metro areas, particularly in the urban core. This is the case because these properties are often very dense and result in the delivery of a lot of units at one time that can often result in rent discounts to entice people to rent at these communities so developers can expedite getting out of their construction loans and/or be in a position to sell their properties.
The last few weeks have been a good representation as to why I have an aversion to fixed-rate loans when doing a refinance or an acquisition. Assuming fixed rate loans from sellers when acquiring properties, however, is a different story and worthy of its own write up so I won’t address the distinctions here.
As property values have escalated greatly in major cities, particularly with a tech orientation, I ask myself if secondary markets make more sense as the cost of living is cheaper and yields are initially higher. The tradeoff historically has been far less growth potential and lower appreciation.
I recently completed Titan: The Life of John D. Rockefeller, Sr. by Ron Chernow and it is a wonderful read about the fascinating life and times of John D. Rockefeller. Ida Tarbell, one of the great muckraking writers and profilers who gained her fame while writing for McClure’s was personally impacted by Standard Oil’s brash business tactics.
With the tax overhaul now being law, I wanted to do a granular analysis of what the changes mean for those who own and those who rent in a high tax, high-cost state (California) and one residing in a low cost, low tax state (Texas).
In some ways, it is understandable why the subprime meltdown took place. Prior to 2006 home prices in the United States in the post World War II era rarely, if ever, declined materially on a sustainable basis. Based on this rearview mirror modeling investors in mortgages were led to believe that default rates would be manageable and if they did default then losses would be negligible because recovery rates would be strong because home prices kept rising.
I typically wouldn’t discuss Tax Reform until it has passed since it would usually be speculative, I am making an exception given that many of the parameters are known and because of its potential impact on housing. The basis of the plan was to cut the corporate tax rate first and then work around the constraints that Senate rules and supposed deficit hawks impose on the process.