December 23, 2011

A Bubble Requires Belief That There Is No Bubble

It’s Friday desk clearing time for this blogger. “A wave of suspicious deals by real estate agents selling bank-owned or distressed homes at ultra-low prices is sweeping Southwest Florida, a News-Press investigation shows. The practice is called ‘flopping.’ In it, the banker, on the advice of its own real estate agent, sells a property for less than it’s worth. Then the agent arranges for the property to be sold to an associate — who quickly resells it at a much higher price, sometimes the same day.”

“Mari Rozett of Discovery Bay, Calif., a real estate investor and former Silicon Valley executive, lost a Lehigh Acres investment house in foreclosure — it was sold by Synovus Bank in a suspicious bank sale. ‘I had no idea,’ she said when told of transactions. ‘But I’m not shocked because I’m in the industry and I know what goes on.’ The housing crash ‘financially ruined me,’ Rozett said. ‘I lost two houses and I’m about to lose my own home.’”

“Florida’s mandatory foreclosure mediation program was canned by the Supreme Court this week after problems in the process led to subpar settlement rates. Since its inception, just 3.6 percent of the 78,076 statewide cases eligible for mediation resulted in a settlement, which could include a loan modification, short sale or deed-in-lieu foreclosure. ‘It was a great opportunity and a noble experiment, but by-in-large, I don’t think you could say it was a financially positive experience for anyone,’ said Circuit Judge Lee Haworth, who helped craft the program as a member of the Supreme Court’s task force.”

“Raleigh’s African-American and Latino populations have been hit hardest locally by the national foreclosure crisis, according to a report issued by the Center for Responsible Lending. Homeowners with low and moderate income, as well as neighborhoods with the highest minority populations, also took a hit in Raleigh. Loans with ballooning payments and adjustable rates often cause problems for people later, according to Dennis Harris, housing director at Telmon, a nonprofit organization that provides housing assistance and other services.”

“Loans were often issued to those who could not afford them, which is why many are in foreclosure now, he said. ‘We saw initially, year and a half ago, a lot of loans were made … no documentations were done on the loans,’ he said. ‘In that, as long as [lenders] had a warm body in front of them to get the loan, they made it a few days later. They put a lot of people in the housing market that were not technically qualified.’”

“Some people were told they could refinance in a few years, Harris said, a dream that disintegrated with the economy. ‘A lot of families a few years ago said, ‘I knew I was going to have difficulty making payments anyway,’ he said.”

“Most of the front-line workers who have helped consumers prepare for the holidays still can’t afford to buy homes, even in a year of vastly improved housing affordability. That’s the consensus of new research from the Center for Housing Policy, which highlights the gap between for-purchase and rental housing and the wages of much of the American workforce.”

“The report showed that among the workers who toil to make the holidays happy — delivery truck driver, mail carriers, retail salespeople, retail assistant managers and stock clerks — only mail carriers earn enough to be able to afford a median-priced home.”

“The lingering question, of course, is this: If working consumers can’t afford a home when home prices are some 30 percent below their peak and 30-year, fixed-rate mortgage interest rates are barely brushing 4 percent, when will they be able to?”

“When the historic Moffitt House, built six years before the birth of America in 1776, was demolished by its owner March 15, 2005, it caused outrage in the borough. Now, three unfinished residential units stand on the property. There is mold growing on the vinyl siding, only the bare bones of outdoor decks visible and missing garage doors. A source told the Herald it was likely the condos would ultimately be demolished in a few years if mold takes over the property.”

“The Moffitt house was torn down in March 2005 and the real estate market peaked in June 2006, said Brian Groestsch Jr. of Century 21, Gilmartin and Company of Cape May. ‘In 2005, the sky was still the limit,’ he said.”

“The final weekend in a dismal 2011 drew to a close with the steady low clearance rate trend exhibited all spring. Data provided by the Real Estate Institute of Victoria indicated 53 per cent of reported properties were sold over the weekend. Woodards agent Tony Nathan had a taste of better conditions over the weekend with the auction of a 1950s cream brick terrace in East Hawthorn, which attracted seven bidders.”

“The 15 Roseberry Street property, close to the Fritsch Holzer Park, was sold for $682,000 in front of a large crowd of more than 120 people. ‘The buyers were young couples, some parents acting on behalf of children and it was finally bought by a young woman who plans to live in it for a while and then rent it as an investment,’ Mr Nathan said.”

“I have been engaged in a friendly debate with a number of economists about the date when the Chinese real estate market ‘bubble’ will finally burst. Some believe the bubble will never burst. Some project that the bubble will burst ’sometime’ in the future. The future date is usually something vague like 2013. The argument being that the Chinese government will not allow the bubble to burst until after its 2012 power transition.”

‘For the last year, I have been arguing that all of these projections are far too optimistic and since June I have been contending that the bubble has already burst. Recent events here in Qingdao (where I live) illustrate my point. Since June of this year, officially advertised prices for new residential real estate projects in Qingdao have fallen an average of 30%. In a market that has seen nothing but price increases for many years, this has been a shock to the local real estate purchasers.”

“As is typical in China, most of the new projects have not been completed. In a typical project, buyers purchased in June for a project that will not be completed until sometime at the end of next year. Now they are seeing units in that very same complex being sold at 30% or more less than the amount that they paid in June. Since the price is in free fall, they have no idea how bad it will be.”

“Once a real estate bubble bursts there is no government powerful enough to stop the resulting collapse in prices and subsequent effects. Though governments cannot stop the bubble from bursting, governments can play an important role in dealing with the impact. Some governments push the economy to recover quickly. Others take counteractive measures that make matters worse.”

“Keith Jacobs, from the University of Tasmania, writes why falling house prices aren’t the calamity the media would have us believe: ‘It is an uncomfortable truth that government policies have been instrumental in maintaining housing inequality. The current taxation arrangements serve the interests of homeowners and rental investors, and politicians are reluctant to advocate reforms that might damage their electoral prospects.’”

“Those in Australia who are fortunate enough to own their own home have become accustomed to believing the value of their home should rise and that the capital gains they accrue should be exempt from tax. The media in their role have largely failed to make explicit the societal implications of the current housing arrangements.”

“Phillip Soos, a researcher with the School of International and Political Studies at Deakin University, takes on the most common arguments used by Australia’s property bubble ‘deniers’. ‘Australia is not unique in having a disbelief in the idea of a housing bubble. By definition, a bubble requires that complicity of the majority of people and institutions to believe that there is no bubble. Otherwise, individual rational action would be promptly taken, which would result in bursting the bubble in the early stages or preventing the formation of one altogether.’”




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