Aug 252014
 

Owen Courreges

I’m just going to come right out and say what everything is thinking: What the @#$% is going on with home prices in Orleans Parish?

It’s getting crazy out there. I’ve been seeing listings of renovated homes for over $300 per square foot on the edge of Central City.  A “fixer-upper” needing a “total renovation” on the edge of City Park recently hit the market for $700,000.

Some of this extravagance is probably the result of wishful thinking on the part of sellers, but it’s substantive as well.  Uptown, the Marigny and the Bywater show the most dramatic increases.  For zip code 70115 in the heart of Uptown, the average price per square foot went from $173 before Katrina to $247 in the first four months of 2014.

The Bywater is even worse.  Prices have gone from $75 per square foot before Katrina to $131 today, an increase of nearly 75%. Even less desirable locations in New Orleans have started to match their pre-Katrina values, while more central locations have become absurdly unaffordable.

It’s difficult to see exactly what has precipitated this high-priced market.  There is still a ridiculous number of vacant and blighted properties out there.  Moreover, New Orleans is hardly a wealthy city.  Our economy has improved somewhat, but people generally aren’t flush.

Furthermore, stricter Fannie Mae/Freddie Mac rules enacted following the real estate crash of 2008 have restrained the mortgage market.  The freewheeling days of people with bad credit and little income getting huge mortgages is basically over.

So who is buying these homes? Blogger Jeff Bostick is as confused as I am. “Every personal story I come across has to do with friends or acquaintances being priced out of neighborhoods not buying into them,” Bostick writes.  “So, who is buying in?”

“We can talk about our pet theories of gentrification all day long.  Are the majority of these huge sale prices investment properties? Are they full time homes or vacation rentals?”

Unfortunately, I don’t have the answer to that.  It’s difficult to see who is buying these homes, or why they’re paying such high prices.

Regardless of where the market for these houses is coming from,  I do fear we’re seeing a local real estate bubble developing.  These prices can’t be sustainable in the long-term.  As of 2012, the median household income for Orleans Parish was $34,361, compared to $44,379 for the metropolitan area and $51,371 for the U.S. as a whole.  Those incomes can’t support this housing market.

A recent study by the finance website WalletHub.com bears this out.  Among the 300 largest cities in the U.S., New Orleans ranked 4th in terms of the health of the real estate market.  However, it ranked 240th in terms of affordability.

Making matters worse is the fact that the overall cost of living has been ever increasing.  While Mayor Landrieu pitches major tax increases, citizens are facing ever-increasing homeowner’s insurance rates.  This means higher mortgages and higher escrow payments to boot.

Finally, this all trickles down to the rental market.  There doesn’t appear to be any ceiling on how high rent can go, and in a city that depends so much on tourism with a sizable employment base in the service industry, one wonders who can afford these excessively high rents.

Although I’m a homeowner myself and rising home values certainly benefit me personally, I don’t think the values are real.  Unless we make real headway on improving the local economy, this can’t hold in the long term.  After all, it’s in the nature of bubbles to burst.

Owen Courrèges, a New Orleans attorney and resident of the Garden District, offers his opinions for UptownMessenger.com on Mondays. He has previously written for the Reason Public Policy Foundation.

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  • Roland Deschain

    Investment properties and vacation homes for people who live out of market and still see New Orleans as a bargain in terms of $ per sq foot. A lot of these sales are all cash deals. Hey, New Orleans is one of the trendy cities to move to right now.

    I still think we’ll see another 2 years of price growth before any dip. Scary as hell to think about as a first time home buyer in that same time frame.

  • Darrell Kocha

    This pretty much sums up my thoughts on the matter. How can a tourist economy sustain itself when its workers are priced out of the city? What, are they all going to move to Metairie and ride the bus to work? That would require JP buses to run later than they do. Some of them have cars, but many don’t.

    More likely, you’ll see an increasing divide between well to-do professionals and extremely poor people living in public or Section 8 housing, while the middle class is pushed out to the suburbs. The only way this works in the short term is if these investments all become expensive vacation rentals. But again, who’s going to serve these tourists their drinks and cook their meals? At some point, they’re going to face a labor shortage.

    The sooner this bubble bursts, the better. True, a few ambitious investors will take a bath, but people who can afford to blow six figures on a Central City investment (and I have to believe these investors aren’t local; someone who understands the economics of this city would know that such an investment is wildly overpriced) will probably be fine. Meanwhile, housing prices can become affordable again, and the city can work on growing its economy more naturally.

  • 2noame

    Let’s not forget we are No. 2 in the nation in inequality. This means a strong divide between the haves and the have-nots, where those without are getting less and less, and those with are getting more and more. For those with the cash, New Orleans is a good deal, and for every person with money moving here from elsewhere or buying yet another home to vacation in or rent out, inequality only goes up and pushes those at the bottom further down.

    This is a problem we really need to address, and something likely already linked to our street violence. We have to work on increasing real opportunity across the board.

    How do we go about this? We need to get more income into the hands of the bottom and middle of the income spectrum, and we need to make it more expensive to sit on vacant and blighted property. Combining these two goals would involve instituting a land-value tax, such that taxes go up on land speculation and down on developing, and distributing that money equally to all residents of Orleans Parish as a means of increasing affordability across the board for all residents.

    Of course this is only my opinion of a good solution, but even something like raising the minimum wage would be a step in the right direction.

  • crabioscar

    $75 in 2004 dollars is $94 in 2014 dollars….corresponds to a 40% increase. still a lot, but surely not %75. And the price per square foot uptown corresponds to something like a %13 increae

    • Owen Courrèges

      crabioscar,

      I didn’t say that I was adjusting for inflation, and even if I were, I probably wouldn’t use the consumer price index (I consider it an outdated measure that tends to exaggerate inflation). Regardless, you’re still talking about major increases that have been getting continually worse.

      • crabioscar

        Yeah, they’re big increases even with inflation, I have no argument there. But I think you should adjust for inflation, otherwise the increase looks twice as big as it actually is.

        • Owen Courrèges

          Fair enough. I just tend not to bother adjusting for relatively short time periods, but I’ll grant that it does make a significant difference here.

  • Owen Courrèges

    Fat Harry,

    More and more people are bringing in roommates or moving further out to avoid high rents. I understand that people are paying it now, but that doesn’t mean it’s sustainable in the long-term. The numbers just don’t add up; our median income is too low for these prices.

  • Owen Courrèges

    martine,

    I probably won’t be alive in 80 years, but in any event, I just don’t see that happening.

    • Kezia

      Why don’t you see that happening? Because of how much you trust the Army Corps? Or is it the SWB that you think is protecting us? Or the state government which just blocked us from getting any $$ from the oil companies? How exactly do you think we will be protected from the rising sea levels and record levels of subsidence the land this city is built on is currently experiencing?

      • Owen Courrèges

        Kezia,

        I think we’ll continue upgrading defenses as needed over time, but I don’t see New Orleans simply becoming some modern day Atlantis while people blithely watch it happen. There were some people with that attitude after Katrina but it remains a fringe view.

  • Owen Courrèges

    Deux,

    If there’s a bubble and major problems with affordability, it’s a problem. People are priced out based on artificially high values. And when the bubble bursts, it’ll be very bad for the city economically.

  • William Dwyer

    “What has precipitated this high-priced market?” The old NORA (New Orleans Redevelopment Authority) was not market driven.

  • Dogmom13

    Speaking personally, the buyer for our Uptown home last fall (priced out because of homeowner’s insurance — it was 1/4 of our total mortgage payment by the time we sold), the buyer was a retiree from another area in Louisiana who wanted a home “in town” and paid cash. The home next door was purchased by a local attorney who presumably could put down a healthy down payment as well as afford the insurance. Our rental is actual reasonable considering it’s larger than the home we owned. (Our landlord had purchased before Katrina, and thus seems to have been grandfathered in to pre-K insurance rates.)

    • Deux amours

      Did you sell your house for an artificially high price?

  • esther

    so, who is civilized?

  • Eugene Anderson

    I think the issue is the amount of “new” New Orleanians that have moved into the city combined with the current “back to the city” trend of a lot of the more affluent home-buyers that is spurring this price increase.

    Before it became the new normal to move to the core of the city, most people with the financial ability, that moved to New Orleans would have looked to buy a house in the suburbs. Now those same people are looking to buy in the city. I think that also speaks to the high income inequality that we have seen in the city currently, higher paid professionals are moving into the city as opposed to the suburbs. Consequently, it causes the less affluent to not be able to live in the city, and forces them to the suburbs. In my opinion, you will see New Orleans resemble New York and DC, cities with an affluent core, and less wealthy suburb. I think we are seeing less of a housing bubble, and more of the gentrification of the core New Orleans.

    • Owen Courrèges

      Who,

      I don’t see that at all. Remember this? “As of 2012, the median household income for Orleans Parish was $34,361, compared to $44,379 for the metropolitan area and $51,371 for the U.S. as a whole.”

      New Orleans is a long way from being a “wealthy core.” The wealth just isn’t there. The high paying jobs aren’t there.. What’s more, I don’t see those things changing.

      • http://www.lindabordenave.com Linda

        Who is supporting all the new restaurants?

    • Ailuri

      I agree with this- the places where the truly high-priced real estate trends are happening are fairly small in terms of the whole city. Median includes everything- NO East, suburban Algiers (everything that isn’t the point), lower 9th, etc. – lots of non-core areas that aren’t seeing the gentrification trend. (The median income in upper Garden was *never* in the $35,000 range.)
      It’s not that New Orleans (with its median $35K income) will be THE gentrified core…it’s that there is a trend toward having A gentrified core INSIDE the city (sliver by the river, around city park, etc) surrounded by the rest of the city (with it’s below-median income levels and lower-priced housing options) and suburbs
      The core areas should continue to gentrify as long as population trends continue- Nola had population growth of 10% between 2010 and 2013 according to the Census Bureau. In sheer numbers- New Orleans had 2,191 new households (new households receiving mail accd to post office) in 2013 alone. At least some percentage of those people are above the median income level- and those households will continue to want to live in or as close as possible to the desirable areas, pushing those below that income level further outward until some equilibrium occurs (a few central uber-rich areas, surrounded by rich areas, surrounded by a bit less-rich areas, etc…)

  • boathead12

    Owen, as always, you ask the pointy questions. Another good one.

    I ask myself frequently how sustainable is this price growth. Here are the points I continue to return to in convincing myself it is real:

    -Orleans Parish maximum capacity is 600,000 persons or less. and fixed right about there thanks to HDLC, the river and the lake. (NOE does not count)
    -”High ground” properties, that capacity is around 250,000.
    -That is a vanishingly small number compared to the numbers of folks “underwater” in their $400/sq.ft. and more homes elsewhere in the US and world.
    -It only takes something on the order of a few hundred such persons / year to transplant to NOLA to sustain and further bouy these home prices.

    Yes, it may plateau, and even decline a bit, but until we reach price parity with places like Portland, I anticipate a continuing upward trend.

  • Owen Courrèges

    Deux,

    I am a free market advocate, although there can be market distortions. Nobody disputes that there were inflated values during, say, the national housing bubble. What I’m saying is that we seem to be experiencing a bubble here in New Orleans because sale prices are skyrocketing while median wages are still low even for the metroplex.

    • http://www.lindabordenave.com Linda

      I am sure that the median wage has increased since 2012.

      • Owen Courrèges

        Linda,

        In two years? Sure, but not by much.

  • Owen Joyner

    old port cities are hot right now – NYC is the leader – every slum in manhattan and Brooklyn (almost) is now spoken for – the trend will continue since many suburbs aren’t worth returning to

  • Deux amours

    It is astounding when good news is treated as bad news. People want to live uptown, and they are willing to pay for the privilege.

    • Michael

      Every Sale requires a buyer as well as a seller…..

  • Deux amours

    Wow, Mid-City, Irish Bayou, and Annunciation Street. With such eclectic tastes, you should be comfortable anywhere

    • boathead12

      da Channel and da Bayou are a bit different. You can still find em real cheep in Irish Bayou.

    • Daniel Perez

      You’re mostly right. I’ll sacrifice some safety for affordability, but there’s a limit. When we bought our house, the neighbors were quiet. New renters came in over the past two years that made ours a very busy block. We’re putting it on the market in January. I probably won’t get much more than what I paid for it because this isn’t a neighborhood that doubled in value like the others.

  • Angie Peckham

    Just wait until more tech moves in. I watched Silicon Valley become Silicon Valley. It prices everyone out (I have friends with three-hour commutes each way). Traffic becomes a nightmare. Oh, and that loss of culture nobody believes could ever happen? Happens.

    • Deux amours

      Is it filled with restaurants that nobody goes to anymore because they are too crowded?

      • Angie Peckham

        YES!

  • Michael

    Sorry with average rehab cost exceeding $125 per ft. Your bywater price per sq ft is an absolute bargain.
    Yes prices are increasing but 2014 sales have trended more to fully renovated properties than avg or rehab candidates. I dont think its a buble as much as a statistical anomaly.
    The market for fully renovated properties is greater than the market for avg and fixer uppers. In recent years it has been just the opposite.

    • Owen Courrèges

      Michael,

      Unless you’re talking about an utterly blighted property, you should be able to do a budget renovation with $60-80 per square foot. And there’s no way I’m seeing a doubling of property costs as being a “bargain.”

  • Static50

    Eventually interest rates will rise. I’ve thought that would have happened before now, but it hasn’t. So, since the overwhelming majority of homes purchased, especially below $1 million have a mortgage, prices will continue to rise according to demand. But when rates do rise, and you can bet that they will, the escalation in home prices will reflect that rate rise and prices will then stay the same or drop, depending on how quickly and to what extent. The monthly payment will have lots of influence on affordability.

  • http://www.lindabordenave.com Linda

    I think you’re right.! Not to mention our limited ability to grow outward since we are surrounded by land on 3 sides. Love the expansion of the neighborhoods! The same thing was happening Pre Katrina and we are just now getting back to the same expansion that we were seeing then. Very exciting times for New Orleans! I don’t think it is a bubble. There is a very diverse age group of people buying in New Orleans.

  • Momof3

    I am someone in the process of moving to Uptown from out of state due to a work transfer. At least in my case, most of what the commenters are saying is not true. We are not wealthy folks buying an investment/vacation home; rather, we are trying to find a home to live in in an area with very few available homes. The prices are very high relative to where we live now, but people who have to move into the area for work don’t really have a choice but to pay the prices that are being charged. At first I wondered how the market supports these prices given the relative poverty of the area, but in the process of making several bids on homes in the area, I learned that many are being bought by people who intend to rent out the homes via sites such as airbnb. I guess this makes sense for such a popular tourist town. I am not sure buying these homes as regular rental properties would make much sense given the rent that would be required. While that rent might be available in today’s market, that is unlikely to always be the case. The tourists, on the other hand, are probably never going away.

  • Michael

    Owen, When was the last time you hired a contractor?

    $60 per square ft rehab is pie in the sky fantasy. I don’t know of a single reputable (e.g. licensed and insured) contractor quoting less than $100 per square ft. And that is for pretty low ‘suburban apartment quality’ rehab. Many are quoting more than $200 a foot for quality rehab. And some are quoting more than $300 per foot for high quality rehab I stick by my average of $125 as representing ‘average’ quality rehab unless of course you are hiring out of the Home Depot parking lot;)

    By comparison, to be able to purchase high quality historic property in average (e.g. not needing rehab) condition for only $131 a foot is a very reasonable price if not a bargain.

    It ain’t the bargain it used to be, but then what is? (the French Quarter can’t be had for $75 per sq. ft. any more either, even though that’s what I paid 26 yrs ago)

    Even the so called “contractors” that have their offices in the parking lot at Home Depot charge more than they used to.

  • http://www.brottworks.com/ Andy Brott

    The move back is a national trend, yet ignoring our history will doom ourselves to repeat it. Remember when oil pulled out in the 80′s?… The market collapsed so badly it was not recovered when my wife and I moved here in 1993 and bought into the Turo B. for a laughable $ and learned it was not “flip this house”, but flip this neighborhood that made equity to build from… Bubble? HELL YES!!! if we keep with all our eggs in a tourist basket, Airbnb, and let real estate realtors write the rules to buy up and rent out (example- http://www.wwltv.com/news/Cultural-district-slated-for-University-area-to-bring-tax-credits-for-renovations-161683305.html ) and lastly with insurance. As y’all stupidly keep that high building with sticks and twigs- I say y’all because we d/b 5110 Freret http://www.glassartists.org/Gal37447_BrottWorks_New_Studio.asp
    and get disgusted Brad Pitt’s Exploit Us White and others lack of 3hr fire walls and 240mph wind ratings… 5110 cost the same as sticks to build- yet is penalized to pay LA. Citizens Ins. and other subsidies to termite farms that burn.
    The bubble will pop when were hit by a storm (not missed as we were in Katrina) and tourist are gone with the Tulane Loyola for the semester (+?)…
    Best from 5110 Freret,
    Andy Brott

  • Angie Peckham

    My guess is “because crime.”

    • Who….Him?

      But there are other areas of the city with comparably low crime and cheaper housing. Gentilly Terrace, Bayou St John, Black Pearl etc.

      • Angie Peckham

        I can’t speak for Gentilly Terrace or Bayou St. John, but I live in the Black Pearl, and it’s considered Uptown and is priced accordingly. And yes, I pay the premium for lack of gunshots.

  • kight

    A finance commentator on WWL’s morning show this week said that some neighborhoods uptown may be in a bubble but generally the city is not.

  • Katie Smith

    The Guardian recently published an article about the widening wealth gap in New Orleans and the threat of a bubble: http://www.theguardian.com/world/2014/aug/29/new-orleans-economic-growth-widening-wealth-gap

  • Sarah Ledgerwood

    Where are we now? Will 2014 be seen as the year where things stabilized, or are we in for a market drop in 2015?