January 27, 2012

Somebody Might Buy It For Less Than It’s Worth

It’s Friday desk clearing time for this blogger. “A partner in the 46-story Trump Soho, the condo hotel that opened in April 2010 in the Hudson Square district over the objections of neighborhood preservation advocates, last week put the building on the auction block. Of the 391 units, about 90 have been sold and 42 were currently listed for sale with prices ranging from $995,000 for a 425-square-foot studio to $8.74 million for a 2,331-square-foot two-bedroom suite.”

“Sean Sweeney, director of the Soho Alliance and one of the neighborhood critics of the project, said he thought the Trump Soho was in financial trouble. ‘Trump and his shady partners have learned the hard way not to come to Soho with a dubious scheme that violates our zoning and expect the community to roll over,’ Sweeney said. ‘Trump behaved arrogantly and now his brand name is attached to a bankrupt property being sold at public auction to the highest bidder,’ he added and concluded with, ‘Soho to Trump: You’re fired!’”

“For around four years, China has been building around 1 billion square meters of housing a year, ten times the figure in the U.S. The amount needed to accommodate real owners — people moving from farms to the cities, for example — is 700 million square meters. Prices in the frothiest markets are fifty or sixty time rents. The 50 to 60 multiple is far above the level in most U.S. markets at the height of the bubble in 2006; in those heady days, a multiple of 40 was considered giant.”

“While the government’s official figures show modest declines starting late last year, those numbers are famously unreliable. A better view comes from owners trying to sell their units. Losses of 30% aren’t uncommon. In fact, many owners who paid, say, $600,000 in 2010 are furious that their landlords are now offering unsold units in the same building for $450,000.”

“As professor and mentor at the University of Chicago’s Booth School of Business, Robert Aliber observes, ‘In China, the housing boom is a far bigger source of growth than is widely recognized, and it’s totally unsustainable. China’s spurt of a 10% growth rate is likely to be history.’”

“The million-dollar view from this 28th floor corner condo at the Ritz-Carlton Hotel and Residences is beyond one of a kind. But for a very long time, no one was buying. This ‘mansion in the sky’ took 180 days to sell. And it’s far from alone. ‘I think we’re seeing already with the Ritz that there’s not a lot of demand for resale (condos) in this price range,’ says realtor John Pasalis, who has been watching this sector closely and is concerned about an oversupply of luxury condos. ‘In some ways this (the number of Ritz and Trump units now for sale) is the sign of a market that was very speculative and is reaching a point where investors are starting to realize that just because they bought (early) doesn’t mean they are going to make an easy buck.’”

“According to the National Association of Realtors, non-residents of the United States accounted for some $41 billion of real estate purchases in 2010, and as of late 2011, 23% of all international sales were to Canadians. Canadian buyers are able to finance about 70% of the purchase price from either banks or private lenders, and often use home equity lines of credit for the down payment to ‘generate cash flow with almost 100% leverage,’ says Wendy Fedoruk, a Calgary-based investor, consultant and broker.”

“‘It wasn’t an accident that Phoenix and Las Vegas had a bubble,’ says Calgary-based broker and consultant Mike Wolf. ‘People want to live there.’ After all, he points out, the weather is good and the cost of living is low. Nevada has a business-friendly climate, with no state income tax. ‘You can buy a house here and have a good life just working at McDonald’s,’ he says.”

“Ash Cutchin, owner of Ash Cutchin Real Estate Appraisals, noted that when Wingate and Associates assessed the county’s 12,000 properties last year as required by law, the Roanoke firm did not include foreclosed properties. ‘They kind of seemed to ignore foreclosures,’ said Cutchin, noting that in 2011, one-third of home sales in Hampton Roads, which includes Southampton County, were foreclosures.”

“‘They have a willing buyer and a willing seller, neither under duress,’ said Harold Wingate, president of Wingate and Associates. ‘In other words, if you put your house on the market and I offer you $50,000 less than you’re asking, you don’t have to sell it. But, if you get foreclosed on, the bank owns your house, and they don’t want to hang onto it. They want to unload it, so somebody might buy it for $100,000 less than it’s worth.’”

“A foreclosed mansion on the shores of Lake Norman is no longer the most expensive real estate listing in the area. The home took more than $22 million to build. It was previously listed at $8 million. Now it is a bargain at $5.9 million. The broker who has the listing said there’s been a lot of interest, but so far no offers, so the bank decided to make a drastic reduction in price.”

“‘We still have had long interest. But BB&T is ready to sell that property. We’d love to get it off the books,’ said Debbie Monroe, Broker with Lake Norman Realty.”

“Mitt Romney’s campaign has staged rallies at foreclosure hot spots and struggling construction companies. Tampa retirees Chris and Mary Lou Ferguson, lost $200,000 when they sold their home. ‘That’s our nest egg, gone,’ said Mary Lou Ferguson.”

“Struggling to keep her business going after the recession, Land O’Lakes homeowner Lisa Shorts tried six times to reduce the mortgage on her home before the bank finally sent her a foreclosure notice. ‘They have the capacity to take the loss,’ she told Romney. ‘Why have they not been forced to do that?’”

“Area housing experts believe the banks are purposely holding back on releasing more foreclosure properties to the market. ‘I know for sure that there is still a fair number of homes being foreclosed every day,’ Skip Murphy of The Address Realty in Redding said earlier this week. ‘And a great many more are somewhere in the pre-foreclosure limbo. I see vacant and empty homes in every local neighborhood.’”

“‘Since that inventory is mostly under government control via Fannie (Mae), Freddie (Mac), HUD, the government will solely determine 2012’s housing market,’ said Murphy, who also sits on the board of the Shasta Association of Realtors. ‘And Fannie and Freddie are the only lenders willing to offer 30-year loans. So it’s all in their court.’”

“One-third of single family home sales in King County last year were sales of distressed properties, while one-half of single family home sales in Snohomish and Pierce Counties were distressed, according to a new report from Washington Property Solutions. The median price paid for a single family home in King County in a short sale was $286,000, while the median price for bank-owned properties was $202,000.”

“However, Washington Properties Solutions CEO Richard Eastern said, ‘There’s a myth out there that you will be able to sell a short sale significantly below market value.’ Actually, ‘there is a bit of a check-and-balance process,’ Eastern said, with lenders typically basing their valuation on three active listings and three closed sales in the surrounding neighborhood. One challenge he sees is that banks do not take the listing history into account in evaluating offers on a distressed property. Eastern recently had a deal fall apart on a property that originally listed for $200,000 before dropping to $190,000. The only offer on the home in four months was for $163,000, which the lender rejected as too low, even though it was the only offer made, he said.”

“Federal Reserve Chairman Ben Bernanke has proposed one solution to help the country’s ailing housing market: ‘redeploy foreclosed homes as rental properties.’ In a white paper released earlier this month, Bernanke noted the flow of new REO homes could be ‘perhaps as high as 1 million properties per year in 2012 and 2013.’”

“Skilled and intelligent specialists, trained in neoclassical economics in leading US institutions, did not see their enormous housing bubble until it burst in front of them with horrendous consequences. What makes Australia’s ‘experts’ any more competent?”

“That Australia’s residential property market has resembled the Ponzi stage of financing for the last 11 years is nothing short of astonishing. On aggregate, net real rental income has resulted in continuing losses starting at $966 million in 2000, and peaking at $8.8 billion in 2008. Rental income has not exceeded interest costs since 2000, let alone met the costs of maintenance, rates, agent fees, and property tax.”

“As investor Jeremy Grantham has noted: ‘Bubbles have quite a few things in common but housing bubbles have a spectacular thing in common, and that is every one of them is considered unique and different.’”

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