Has America Drowned Itself In "Luxury" Housing?

so the solution to the problem of unaffordable housing seems so simple right just build more houses well we have been new construction is approaching the highest rate it has ever been since the 2008 crash and that's despite record high construction costs that came about because of disrupted supply chains the problem has been if we were building the right kind of housing as costs rose and margin shrank the only kind of property that remained profitable to build was luxury property and now we have found ourselves in a strange situation we might have too many houses now

I know what you're thinking sounds great right wrong despite all of this new development we are still short about 4 million homes by most estimates and if developers can't sell the luxury homes they have already built it's much less likely we will build the other homes we actually need landlords could be left holding the bag and renters unless something really big happens could go homeless these landlords are on the verge of bankruptcy of these apartment buildings behind me and across America this is what $218 million buys you in Palm Beach Florida the luxury rental market

is crashing half of all renters in the US are paying more in rent than they should sold anything that I've had that's worth selling to try to make ends meet so there's actually a bit more to the numbers of new homes we are building but what is clear is that in America in particular we have been building way more apartments two years ago we actually broke the all-time record for the total number of new apartments built within a year a record that has been held since the 1970s that last spike was caused by demand from

baby boomers entering the housing market for the first time they wanted cheaper places closer to city centers instead of the Levittown style suburbia they were raised in these new apartments were pretty good they were mostly well-built with relatively large floor plans that could easily accommodate larger families this was helped by government subsidized housing programs that meant developers could always rely on someone to sell or rent to largely though it was simply supply increasing to meet demand this building boom eventually collapsed because of the recession of 1973 the oil crisis the end of Bretton Woods and

new international competition all took turns beating on the US economy making it more expensive to build for people with less money to buy new apartments by the time the market had recovered the baby boomers had largely lost interest in apartments and were moving back into the suburbs only this time with much bigger houses potential spoiler alert but at that time we didn't realize we were in a recession until the end of 1974 new property construction has consistently been more in tune with the economy than the economists so anyway the most recent construction boom was fueled

by a lot of things new construction had recovered after the 2008 crash and people were once again interested in living in apartments according to a report by the Harris poll dualincome no kids or dink households have become the fastest group of home buyers in America both people working makes lowmaintenance apartments ideal and the lack of kids means there is less need for extra space that typically comes with a single family freestanding home dink households also have more spending power on average so accommodating them with new property developments became very profitable young cashed up renters or

buyers were more likely to pay a premium for expensive looking fittings fixtures materials designs and amenities in their apartment builders loved this because a faux marble waterfall countertop and a few treadmills tucked into a corner room somewhere were very cheap to include in a build but properties could then be sold at a much higher markup than typical budget friendly housing even if the apartments themselves were exactly the same size interest rates were also very low builders usually take out construction loans to finance the land purchase and the actual building of the structure once this is

complete there are various options for developers to get their money back but the interest rate during construction is extremely important for a little while new apartment construction started to stagnate as interest rates were raised around 2016 but then everything changed when the CO 19 attacked immediately following global lockdowns sturbing new construction was very difficult but quickly a few extra factors made apartments a hot commodity people took remote work opportunities to move to different cities at a record rate add in stimulus low interest rates booming asset markets and young adults who didn't feel like being stuck

inside with their parents 24 hours a day and it was the perfect storm for developers to make some money new luxury apartment buildings sprung up across the country often accompanied by flashy marketing campaigns to attract renters and buyers the biggest factor of all though was that the developers didn't need to hold on to these buildings once constructed and rented out the whole building could be packaged up and sold to a financial institution that would put them into a residential real estate investment trust which would then be sold onto other investors who wanted exposure to a

broad portfolio of real estate without actually having to manage the real estate directly these reads are not new but they have grown in popularity especially for residential real estate this worked well to encourage building but you might have already noticed that it sounds very familiar for the builders and lenders once heads were in beds they didn't really care what happened to the building because it wasn't their asset anymore unsurprisingly a lot of this new luxury housing turned out to be not so luxurious after all and that was really the least of its problems millions of

jobs from architects to plumbers rely on building these homes financial institutions have invested heavily into them and even beyond the finances this is all very dependent on these buildings not falling apart within the next 20 years so it's time to learn how many works to find out how the real estate market drowned itself in the worst kind of over supply this week's video is brought to you by Brilliant brilliant is an interactive learning app designed to help you truly understand complex topics in math data science programming and even AI instead of passive learning Brilliant lessons

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extremely large but poorly designed and cheaply built homes are not a new feature in most suburbs around the world especially here in America mcmansions as they are affectionately known appeal to a market of buyers who don't have an endless budget but still want a house with a fourcar garage a billiard's room two guest bedrooms and an extra formal living room that never gets used the solution was houses with a lot of square footage but very low cost per square foot this normally means sacrifices are made in materials insulation and build quality long-term that makes these

homes very expensive to maintain but the upfront cost for the space you are getting is almost unbeatable or at least it was unbeatable until supply chain disruptions made building materials extremely expensive no matter how many corners are cut bigger homes are just going to take more materials according to the National Association of Homebuilders the average price of a new home in 2024 was $428,000 which means in most areas it's simply not financially viable to build a new home since an established house plus the land it's sitting on could be purchased for just as much that

has meant that the new wave of luxury housing development has mostly been in the form of apartment buildings which have effectively just become McMansions in the sky at the extreme high end there are developments like 432 Park Avenue 157 the Shore Club and Central Park Tower these highrises mainly along Billionaires Row in Manhattan have sold individual apartments for hundreds of millions of dollars to people like Michael Dell Ken Griffin and everybody's second favorite Twitter poster Bill Aman below that there are a new wave of premium developments with accommodations ranging from$ 1.5 to $10 million in

most large cities across the country households in the top 10% of incomes already account for half of all consumption in America and they are willing to pay a lucrative premium for new upmarket housing then there's the largest group of these new developments which are pretty much just investor stock apartments with nice sounding names like the Concord or the Bay View these are primarily mid-rise or 5 over1 style developments made to a budget for the express intention of being a financial asset with the added side effect of giving some people a place to live thanks to

a change in building codes around fireproof construction following the 2008 crash 50 over1 developments became much easier to build this bottom floor is typically dedicated to retail spaces and then at top that there are four to five stories of woodframe construction for apartments these buildings per square meter are some of the cheapest structures to build and have become the most profitable to develop because they were possible to sell or rent at a significant markup over their building costs and then they made the perfect riskreward asset to put in the portfolio of institutions that have purchased

thousands of these multif family dwellings additionally the retail space below gives a secondary rental income stream that is not directly correlated with the residential market now hot take alert but yes these buildings often do look very ugly but at a time when we are desperate for more housing we might not have the luxury of being too picky about aesthetics however there are two other problems that are far more serious than some goddy facades the first problem is that the people constructing the buildings are a long way removed from the people who will eventually own them

a developer will normally subcontract a builder who will subcontract tradesmen who will actually do the construction the developer will either then sell the building to individual apartment owners or more likely they will sell it to a firm that aggregates these buildings before selling them as a portfolio to an investment fund which will further bundle them up to sell them as a residential real estate investment fund which will be sold to retirement funds which will be sold to you that is assuming you have retirement savings now the financialization of the real estate market never hurt anybody

before right but it does mean that building standards have consistently been lacking because all of the groups involved just want to build to a set budget before passing the hot potato of responsibility along to the next person this has happened across all of these tiers of luxury housing even ultra luxury developments like the trash can tower at 432 Park Avenue are riddled with structural issues leading to lengthy lawsuits just to figure out who is ultimately responsible for fixing the problems now obviously in a building where the average apartment sold for more than $10 million the

residents will have the time and resources to take a property developer to court but a lot of other less high-profile property buyers don't have that luxury if their hastily constructed home falls apart the second problem with these new developments is something that affects you even if you never buy build or invest in these properties higher density housing needs higher density services to deal with traffic waste management schools and emergency services these have to be supplied by the municipality not the developer and property dues on these units are normally much lower than freestanding single family homes

to be clear mid to high density housing is much more fiscally manageable than suburban sprawls which requires proportionally more roads and connecting services but the boom in new apartments are still a significant short-term expense that has to be accounted for even if they are cheaper in the long term but then there's the biggest problem of all with this new luxury living space nobody wants to live in it because of the luxury branding many of these new units are more expensive than homes that are much larger this is especially the case for larger apartments with enough

bedrooms for families with children a four-bedroom home is a pretty typical staple of most American suburbs a four-bedroom apartment is a penthouse that commands an ultra luxury premium if you enjoy a good doom scroll on Zillow try and find a four-bedroom apartment in your city or town that costs less than the average four-bedroom home as new buildings are finished they are further saturating a market that has done too much too quickly in certain cities developers are now offering multiple months of free rent or concessions like holidays or jewelry for people who sign year-long leases in

their new buildings now you have probably already asked the logical question which is that if nobody is renting these places unless they are given freebies why don't they just make the rent cheaper instead well they can't yes according to some rigorous calculations $2,000 a month in rent for a year with 3 months free is the same as just charging $1,500 a month but the number crunchers don't see it this way most of these buildings will be sold based on a multiple of how much income they are generating something known as the capitalization rate or cap

rate in non-financial jargon this is what% of the purchase price a building returns in income every year so a $10 million building returning $500,000 a year in income would have a cap rate of 5% or put another way if investors are willing to accept a 5% cap rate which is generally where the market has been heading then a building returning $500,000 a year is worth $10 million but if those apartments are rented out at a higher base rate and are returning $600,000 a year then the building is worth an extra $2 million it looks much

better on paper to have an apartment rented out for $2,000 because that can be multiplied by 15 or 25 to give an appropriate sales price and then the valuers don't need to know about the special deals made earlier in the lease now the institutions buying these multi-million dollar properties aren't stupid they know this is happening but they don't really care because they know that once people have moved into a home they don't typically want to leave if they can avoid it according to Nerd Wallet the average cost to move houses is more than $1,700 and

on top of that it's a major pain in the ass even if people do move out because the rent gets too expensive that doesn't really matter because by the time that happens the building would have been securitized and sold onto some faceless REIT investor now there is one other reason why the whole industry is desperate to make these numbers look as good as possible as quickly as possible a lot of these new constructions were financed back when rates were very cheap and most construction loans only last between 3 and 5 years before they need to

be refinanced unless they start generating an income these buildings will be very hard to refinance meaning that a lot of highly leveraged developers could find themselves in a very dangerous situation the most disappointing about this whole trend is that medium-density housing is desperately needed in America it's probably the best way to address the problems of endless urban sprawl car dependence and unaffordable housing unfortunately we have implemented a good idea in the dumbest way possible now if you are thinking this all sounds like a golden opportunity to finally build up some affordable real estate go and

watch this video next to find out why a real estate crash probably won't help you afford a home and make sure to like and subscribe to keep on learning how money works