Nov. 29, 2017 — Florence’s current rental crisis began in earnest in the mid-2000s, though nobody seemed to notice. In fact, it was celebrated. This was the era of housing as quick investment.
House flipping was the buzz phrase, with cable TV chock full of shows extolling the opportunities from the practice. The Learning Channel had “Flip This House,” while A&E had “Flip That House,” among others.
Previous crashes in the stock market, from the dot-com bubble crash to the attack on the World Trade Center in 2001, scared off many people from the stock market exchanges.
Housing, on the other hand, was always a safe bet. Real estate hadn’t seen a devastating crash in decades.
“You could buy a home in Florence for $120,000,” Coastal Property Management co-owner Barry Nivilinszky said. “They were selling for $180,000. For investment purposes, the value would increase by 15 percent within a year. So, people were buying on the premise of letting it grow and reselling. And so, all of these homes were bought at top dollar.”
Nivilinszky started his business in 2004, right in the middle of that boom. He’s seen the rise, fall and rise again of the rental industry in Florence. Now he’s anticipating another fall.
“We’re in the next housing bubble,” he said. “But the bubble is not working for us today.”
A housing bubble is a run-up in housing prices fueled
by demands, speculation and exuberance, according to Investopedia. It usually starts with an increase in demand in the face of limited supply, made worse when speculators enter the market, further driving demand.
Why the bubble is not working for Florence is a complicated story, and many financial experts believe it’s a global problem. One-bedroom homes in Australia are selling for $3 million while dilapidated houses in California run for $600,000 or more.
As the prices go up, the working poor struggle to find affordable housing, with some workers in Florence resorting to living in their cars.
Every city has different situations that led to this moment, but for Florence the seeds were planted in the late 1990s.
“Best Place to Retire”
After the decline in the lumber and fishing industries, the town had slowly moved from a rough coastal town to a tourist destination, led by the hard work of developers, business owners and retirees. The city had found its footing, but it needed a stronger direction to truly thrive. It had tourism, but what else could the community be?
“I think the most important thing is to have choices and diversity in anything you’re doing, because the more diverse you are, just like in a financial portfolio, the stronger your foundation is,” Florence City Manager Erin Reynolds said.
For the past three years, Reynolds, along with city staff and the Florence City Council, has been working on finding solutions for the housing crisis.
In 2015, she co-wrote a report on the history of Florence’s economic development efforts.
In the 1990s, the city looked to diversify its offerings beyond tourism.
“We strived to reinvent our economic development mission with the creation of the ‘The Greater Florence Strategic Plan for Community Economic Development,’” Reynolds wrote in her report. “The plan began the establishment of retirees as a strong economic development community, asserting, ‘The Retirement Industry is perhaps the primary source of economic development growth and stability in Florence.’”
Along with tourism, Florence was now a retirement community, and in 2004, the moniker paid off.
In 2004, the City of Florence was awarded the “Best Place to Retire” from Frommer’s Travel Guide. The ranking made national news, including publication of the list in the online version of USA Today.
Retirees came to the town in droves.
“I think this town is still touted as an excellent retirement community, and it is,” Nivilinszky said. “I came here from Chicago. Just the very word Oregon wouldn’t even roll off my tongue. What the heck is in Oregon? But my wife grew up here. And I just knew that’s where I wanted to be. There are a lot of different coastal towns, but Florence seems to have more of a charm. The pace of the town is very relaxed, and you think ‘Wow, I could get used to this.’ It’s still an excellent retirement community, and that’s what I see. A lot of retirees.”
People came for various reasons. Some came here to actually retire, but others came just to flip homes. What better investment than the best place to retire? Looking to supplement their income, retirees began building and buying properties left and right.
“They thought, ‘Oh, this is quick and fast money,’” Nivilinszky said. “Buy it for a year and make $20,000. That was the mindset back in 2007.”
The biggest construction came in single-family homes for the retirees, but the City of Florence also began building infrastructure, including plans for the Pacific View Business Park.
“I have a long list of projects that were completed and the city was growing and expanding,” Reynolds said. “We added a lot of housing units. We added all the condos, multiple duplexes and quads. We had the Habitat for Humanity project. The Northwood Apartments were built. The city was just seeing the importance for workforce housing.”
Investors bet on Florence, except the market wasn’t as healthy as they thought. At the time, nobody knew about subprime mortgages, false AAA-rated bonds and a lack of government oversight on the shadow banking system.
“When they overextended themselves back in 2008, they were borrowing from Peter to pay Paul to get that next project going because everything was going very fast,” Nivilinszky said.
“And then it all imploded.”
“These goals were not followed through”
When the housing bubble burst in 2008, it laid waste to the housing market and economy, plunging the U.S. into one of the worst economic crises the world had ever seen.
“People got stuck with properties that quickly depreciated. They paid $230,000 in the mid-2000s and the prices dropped to $180,000 after the crash,” Nivilinszky said.
The booming construction industry also took a major hit, which drained the local economy.
Dana Rodet, owner of Rodet Construction Co., Inc., saw this first hand.
“Back when the economy went south, a lot of guys left,” Rodet said. “There were a lot of contractors who were building new homes and, when the new home market went south, some of them tried to get into remodel or repair. There just wasn’t enough of that going around either. Some of us managed to stay busy and some didn’t. Some just left town. They couldn’t do anything.”
As people left and home prices depreciated, the City of Florence ran into financial hardships. With low-valued homes and high-wage jobs disappearing, taxes tanked.
“With the recession hitting the country and local economy, the City of Florence began to take a much harder look at its finances beginning in 2009,” Reynolds’ report read. “These tough conversations led to a reduction in workforce in the years following 2009. Although the City Council set goals for economic development initiatives, these goals were not followed through with resources for adoption due to the city placing a high priority on building its financial reserves.”
About the period, Reynolds said, “You cannot stress enough that in 2008 we had a major financial market bust that was primarily related to housing and mortgages. And we were definitely not immune to it. We as a city had to be good stewards of the money we had during that time as well.”
Many of the city’s development projects fell through. For example, a planned development on a 17-acre lot on Highway 101 was planned that would have provided scores of rental units to the area. But after the crash, the company went bankrupt. Rumors spread about its demise, with residents thinking it, along with other big projects, were stopped because the city wanted to halt growth and keep the “small town feel” Florence had cultivated.
Reynolds said that couldn’t be further from the truth.
“There’s sometimes the feeling that the city made it so the community won’t grow,” she said. “The issue is so much broader than putting a kibosh on projects or not allowing it to happen. There were many things in the works that just ended up not working financially for people due to the bust. I could see that the rumors started to spin.”
While projects like the Pacific View Business Park were completed, many others were not.
Growth came to a standstill.
However, depending on one’s point of view, there was a silver lining to all of the city’s troubles. Because of the crash, living in Florence suddenly became affordable for low-income earners.
“The homeowners said, ‘Well, crud, I’ve got to hang on to the home until we recover,’” Nivilinszky said. “I’m just going to rent it.’ And so, it flooded the market with all of these rentals.”
This is how the young families who work at seasonal stores and businesses were able to survive in Florence.
“It takes a middle-income community to support the retirement community,” Nivilinszky said. “It does. There’s just no way around it. If we’re not doing things to provide for the mid-income services, we’re shooting ourselves in the foot. Retirees aren’t looking for jobs. They’re already situated.”
Because of the overabundance of rentals and the low rents that accompanied them, these low-wage workers were able to live in Florence and help bolster the tourist economy.
But that doesn’t mean there was equilibrium between the low-income workers and the retirees. The retirees were losing money.
“The money they were getting in rent was not even paying the mortgage,” Nivilinszky said. “And they would be subsidizing every month for that mortgage payment because rents just did not cover the mortgage — because they bought at the peak.”
In the eight years prior to the current rental crisis, Nivilinszky only raised rents three times for three different properties.
“I’ve kept rents flat, or lowered rents to keep tenants,” Nivilinszky said. “I saw signs in the market that said, ‘If we have someone capable and taking care of the property, I would rather make it affordable for them so they can stay, than keep nickel and diming them and make them want to leave.’
While the tenants weren’t getting “nickeled and dimed,” the homeowners were. That is, until the economy recovered.
This is when Florence’s current housing crisis began.
“I displaced a lot of people this year”
“Houses here have finally started appreciating considerably,” Nivilinszky said. “Owners are going, ‘Huh, I can finally get my money back and be done with it.’ That’s the attitude.”
The owners are recouping their investment back in two ways, the first being selling their properties outright.
The homeowner who sank their savings into a home in 2008 can sell their homes at the current higher prices, balancing their savings after years of paying interest on mortgages.
The problem is, those homes were being rented out to low-wage workers.
“An owner contacts us and says, ‘Hey, I’m selling my house. Tell the renters to vacate the house before it closes.’ So, we have to give 60-day notices to those folks to leave. In 60 days, we’re scrambling to find another property for those folks to move into.”
This is why the properties Nivilinszky manages don’t go up on websites and the newspaper when they become available for rent. Nivilinszky is shuffling his renters around.
“I’m trying to find a house for someone who’s being told to vacate their home because it’s being sold,” he said. “It has displaced a lot of people this year. A lot.”
The vast majority of those being given a notice to vacate are families, Nivilinszky said, the makeups of which vary: Children, single parents, married couples. Only a few are retirees who are being displaced, many of whom came from out of town and are renting solely to get their feet planted in the city until they decide what home they want to buy.
Because of all the selling, rentals have dried up.
“I would say we have probably 20 to 25 percent less homes available in the rental market today than in the last 18 months,” Nivilinszky said. “And these are single family homes, not buildings or anything. ... And there’s nothing to replace them.”
But that’s not to say that business isn’t booming in the housing sector. Florence, along with the rest of the world, is experiencing a housing bubble.
“They’re getting into the $250,000 range,” Rodet said. “And they’re selling. I just had a friend put their home up for sale and the same day they had four offers. They sold it with a 15-day turnaround, paid with cash. There was another person who sold in a week. Unless something is so overpriced that it sits on the market for a while, homes are going pretty damn quick.”
Because current homes are selling so rapidly, retirees are turning to building their own homes.
“Everybody is busy,” Rodet said about the current state of construction. “You could be a lousy contractor and still be busy. There are a lot of new homes being built.”
Retirees are able to afford building homes because of another aspect of the current housing bubble.
“People are moving here from out of state or out of town. We still have good prices for real estate for those who are coming in from California. I don’t know when the last time you visited California, but I don’t know if you can find a place for less than $650,000,” Rodet said.
He said that a family member recently purchased a home in Costa Mesa that was built in the 1950s and hadn’t been upgraded since.
“There was nothing new in there, and they paid $625,000,” Rodet said.
People flip their house in California, take the cash, and buy or build a home to their liking in Florence.
Building is where Dan Lofy of Lofy Construction comes in. He’s been in the thick of building new homes for out-of-towners, and the homes he’s building are expensive.
“In 2008, the standard figure to build a home was about $135,000 to $155,000,” he said. The lowest you can get now is around $175,000, and that would be a terrible house.”
One of the reasons the prices are so high is because people are looking for different styles.
“A lot of the older homes have lower pitched roofs and they’re a ranch style, while the newer homes are more of a Tuscan style,” Lofy said. “They have the tall doors.”
Higher ceiling and taller doors mean more material costs. And materials are rapidly rising, even beyond the prices at the highest peaks of the 2000-era housing bubble.
“Materials are going up,” Lofy said. “When you have all these disasters, the hurricanes and the fires, that puts a big damper on wood and materials. It’s supply and demand. And they haven’t even started rebuilding yet. So, when they really start cranking up and rebuilding those homes, you’re going to see lumber go crazy. It will get worse.”
Lofy has been in the business for over 30 years and he’s seen this happen before. Lumber isn’t what worries him, though. It’s plywood.
“I purchase lots of plywood,” he said. “In 2006 sheets of plywood were about $17 a sheet. They had hurricanes and a month later they were over $70. Right now, they’re close to $30. I think you’ll probably see $100 a sheet at the peak. For a good-sized house, you’ll need about 300 sheets of plywood. That’s $30,000, just in sheet goods.”
And it’s not just the hurricanes. The housing bubble began long before the recent natural disasters, and the increase in home production had already put a burden on material supply.
Lofy is also being saddled with new federal regulations from the Occupational Safety and Health Administration (OSHA), which increase labor costs.
“A few regulations that have come out have had a big impact. Right now, if you get a guy on a roof, he has to be tied off with safety gear. ... We have to put stainless steel safety rings on the roof. If anybody goes up on the roof, they have to have something to tie off to,” he said.
The safety rings weren’t the expense for Lofy, as they are only $70 dollars apiece. But installing the rings, coupled with hooking up to them on a daily basis, takes time. Time increased labor, which then increased price.
The higher prices seen now for new homes is just the tip of the iceberg.
“It’s an apology letter”
As prices go up, the low-wage workers have been priced out of the market, a fact that isn’t lost on Lofy.
“Even my daughter is having a hard time,” he said. “They’re having a hard time trying to save the money to put down to buy a house. The percentage you have to have to put down is really hard for younger couples to come up with.”
A couple without children, both working 40 hours a week at the minimum wage of $10.25 an hour, will bring in approximately $42,000 a year before taxes.
If the couple has no debt, including car payments, medical bills or student loans, and is able to afford a down payment of $10,000 with a 30-year fixed mortgage, the couple can afford a home worth $121,300, paying $762 a month.
But these types of starter homes are few and far between in Florence. The average home price in the city is $235,900, according to realty site Zillow.com. At that rate, the couple would have to put a down payment of $45,000 to purchase a home, and still have a monthly payment of $1,269.
But at the minimum wage, the couple is only bringing in $3,200 a month before taxes. Maintaining a house can be expensive, let alone the utilities, property taxes and monthly payments. And this assumes that the couple can find full time employment, which many people are having difficulty finding on the Oregon coast.
So, the workers have to rent. However, the rentals that do remain are seeing prices increase dramatically.
This is the second way homeowners are recouping their investments.
“People who are hanging onto their properties are going, ‘Well if you got nothing available, why am I raising my rents $25 and $50? I want $100. I want $150,’” Nivilinszky said.
He pointed out that this isn’t because of greed. Since the crash of 2008, these homeowners have been taking considerable financial hits.
“Their rental income has been flat for the last 8 years, but their expenses have been going up every year. So now they’re going, ‘Well, I need to capitalize on that before it busts again.’ I get emails from owners every day asking why the rent hasn’t been raised. And they’re dictating to me what they want to do,” he said.
Nivilinszky said that anything available for rent today is $100 or $200 more expensive than what it was nine months ago. He sees this leading to a vicious cycle, particularly when tenants move out because of the high rent.
“It takes a year to 18 months to recoup one month’s vacancy in a rental,” he said. “If you’re raising your rents to $1,250 a month and they vacate, now you have a month’s vacancy where the owner’s not getting $1,250. How do you make $1,250 up? You raise the rents even more.”
And because there’s nowhere else to go, the renters will pay it.
“I can tell you, when we send out a rental increase, it is not a standard, sterilized form. It’s an apology letter. ‘I’m sorry, we just got a call, this is what the owner wants. We don’t initiate this. It’s just being dictated to us.’ And that’s the nature.”
It puts a stress on relationships between homeowners and renters.
Nivilinszky said he ensures that all homes under the Coastal Property Management umbrella are in pristine condition before taking homes on as rental properties. Hundreds of photographs are taken, and the owners and renters must maintain those standards. If a problem occurs with the house, such as plumbing or electrical malfunctions, most often the owner must pay for it.
If the owner or the renter does not accept these standards, Nivilinszky said he refuses their business.
“I will not work with an owner who will not make repairs. That’s the bottom line, and we’re pretty quick to identify who is a responsible owner and who wants to do things right. I probably refuse half,” he said. “If I see any signs of mold, or shoddy repairs, I won’t do it. I’m not going to be his savior to fix it all up so he can sell it.”
However, there’s an onus on the renters as well. They must also work to upkeep the property and tell Nivilinszky when there is a problem. But what about standard issues, such as the general wear and tear of living in a home? This has created some friction between owners and tenants as well.
In the past, renters were blasé when it came to fixing minor issues. They weren’t always vocal about the problems in the past; semi-leaky faucets, an electrical outlet that doesn’t work. Tenants just lived with it.
Or they were scared.
“The mindset used to be, ‘I don’t want to call the property manager or the landlord with these problems because they’ll kick me out,’” Nivilinszky explained.
Now that the rents are going up, tenants are becoming more demanding. Tensions get frayed.
“When you’re paying $1,250 for a home that 18 months ago went for $950, you should not have to deal with outlets that fall out of the wall and faucets that drip,” Nivilinszky said.
The tenants want problems fixed immediately.
“Owners who decided to put their home on the market and plant a realtor sign in the yard get a little frustrated when all of a sudden, tenants are saying, ‘Hey, we’ve got this problem now.’”
This leads to an entirely new set of issues, as many craftspeople left town for other work years ago and never came back. Now that homes are selling and being built, trades people are in high demand.
Nivilinszky is finding he has to pull craftspeople from Eugene just to get work done.
While it would be better to have them move back into the community, Rodet has his doubts that will be happening any time soon.
“I know that some contractors are looking for employees. You can see them advertising in the paper. Their ad is in there for a long time. It’s not just we don’t have the bodies, we don’t have the bodies of the people that want to get up in the morning, go to work, not mess around, put 40 hours in and not complain. A lot of guys just aren’t brought up that way,” he said.
Rodet believes that the way to conquer this problem is by introducing craftwork to high schoolers, so they get involved with the business and see its potential. However, this solution would take time.
Even if craftspeople were to come to Florence, they would still have difficulty finding a home.
While there is good money to be had in the industry, according to Rodet, the current housing market could prove too high a cost for them.
The way to fix that, Rodet and Nivilinszky believe, is by having more rentals. But, while the city is working on plans to bring rentals to the community, no complexes are currently being built.
“If I had money, I would build multi-unit housing — fourplexes or eightplexes,” Nivilinszky said. “They would be filled in a heartbeat. ... There’s nothing available. People are just stuck with where they’re at. So, they’re hunkering down and hoping to brave it out. And if you’re in a rental, you do your best to stay in it because you don’t have any options.”
“Significantly out of balance”
“I hope that the bubble bursts,” Nivilinszky said, but then he stopped himself. “No, I hope rental units are built, and then the bubble bursts.”
Getting the rental units built before the bubble bursts is vital, Nivilinszky believes, because once that happens, investors won’t build. They had been bitten before in 2008.
“Today, builders and investors are looking at that as a sad example. That’s why there’s nothing going on today,” Nivilinszky said. “Everybody is holding their cards close to their vest. They’re not investing because they’re not sure how long this bubble is going to last. Some realtors say, ‘This will go on for another two, three years,’ and others are not sure. They just want to make their money today.”
Rentals are risky. Large rental properties cost millions of dollars, so investors look for the safe bets.
“People make their own private decisions for their investment portfolio as to where they’re going to make money that matches their risk tolerance,” Reynolds said. “And then the builders are doing the same thing. They’re going to build for those projects that seem the least risk for them. Lenders are going to lend easily on things that are less risky. And multi-unit housing is much riskier from an underwriting perspective than just a single-family home. And that risk increases as you go from a single-family dwelling to a second home to a townhome, condos, apartments and low-income-housing. The low-income funding has been drying up since the ’90s.”
If the investors begin major construction and the bubble bursts, they may be out millions of dollars for the entire project.
It’s a race against time. Build the rentals before the bubble bursts.
Exactly when the housing bubble will burst — or even if there is one — is in hot debate. While some observers, including those who predicted the 2008 crash, firmly believe the country is in the midst of a bubble, other organizations like Freddie Mac believe that the market is only “significantly out of balance,” not a bubble.
While the debate goes on in the U.S., globally countries are officially calling this a bubble — and there are signs that it’s bursting.
In Australia, the housing market had seen extreme rises in prices. In two separate articles this month, the Daily Mail reported a “tiny” one bedroom home in Melbourne hit the market for a “whopping” $2.2 million, after the owners bought it for $875,000.
The Daily Mail also reported that, “Australia’s ‘golden housing years’ are officially over with a full-blown crash expected if rates increase too quickly or not enough.”
In the U.S., the housing crisis is spreading coast to coast. According to a Seattle Times report earlier this month, one of the major contributors to Seattle’s housing problem is that no one is moving out of homes, creating a housing shortage and higher prices.
And this week, Oregon’s Josephine County Board of Commissioners declared an official housing emergency in hopes to free up state assistance and suspend building rules.
Florence is merely a symptom of a national and global crisis.
So is there good news for the city?
“I’m happy it’s not raining and the sun is out right now,” Nivilinszky said. “And that’s what makes this town one hell of a community to be in. When the sun comes out, life is good.”
Though he categorically believes there is a housing bubble, and that it’s hurting the economy, Nivilinszky said he hoped that this article would not be too pessimistic.
Lofy has the answer to that.
“I think the City of Florence really has its s**t together,” he said. “The city is the best place to get a permit. If you go outside the city, like Lane County, it takes forever to get a permit. Florence is one step ahead. Other cities aren’t thinking that way,” he said.
In 2015, Reynolds, along with Mayor Joe Henry and the newly-seated Florence City Council, created a plan to correct Florence’s housing crisis and increase economic development. Many of those plans involved bringing living-wage jobs to the people in the community. This includes partnerships with economic drivers in the region, county organizations and reaching out to other entities.
Most recently, the city formed the Housing and Economic Opportunity Project to gather information on needed housing types and to review the city’s processes for building and permitting.
But, as Reynolds points out, these are typically not the purview of a city.
“The city has a foundation of being a great place to build, work and play, but traditionally all that happens in the private market,” she said. “Because of the recession, that makes it more and more difficult for change to happen. That’s where we’re at as a city today. What is our community support for what the city is doing? What are they seeing as our role in this multifaceted, challenging situation? We don’t have an answer on that. We don’t know where we should be sending public dollars in what has traditionally been a private issue for housing.”
Those questions are still being discussed between the city and its residents as the City of Florence strives to continue to be a city in motion.
Editor’s Note: In Part IV of this series, Siuslaw News will explore county and regional solutions to the housing crisis, and how the City of Florence is working to bring sustainable change to the area’s economy and housing market.