February 17, 2012

Not Sustainable, And Certainly Not Affordable

It’s Friday desk clearing time for this blogger. “Long before behavioural finance became a popular theme, central bankers took psychology into account. Monetary policy aims at modifying crowd behaviour. By tightening or loosening money supply and tinkering with interest rates, central banks try to nudge economies in the right direction. In the 1980s, the US Federal Reserve developed a very harsh inflation doctrine, consisting of raising rates till all inflation expectations had been squeezed out. In the late 1990s and early 2000s, Fed policy swung in the opposite direction. At the slightest signs of trouble anywhere, it would loosen money supply.”

“The excess liquidity, eventually, caused a massive bubble with all asset valuations rising. Since the dollar is, for better or worse, the global default currency, that bubble affected the global economy. For the past four years, the world has been struggling to deflate that bubble without any catastrophic ramifications. India was a beneficiary of the boom. Now, it is walking a tightrope to ride out the bust.”

“Twelve European economies including Britain, Italy and France have deep weaknesses that are undermining growth and need to be tackled, the EU said on Tuesday as it stepped up its surveillance to avoid a repeat of the devastating debt crisis. From a potential real estate bubble in Sweden to a sharp export downturn in Belgium, the European Commission pointed to what it considers major structural problems that leave 12 members of the 27-nation EU vulnerable to market attacks and global shocks.”

“‘A correction is now under way … and the deleveraging process has began,’ the Commission said in reference to efforts to tackle debt as well as house prices across the bloc. ‘It is unclear how far it will go and for how long it will continue.’”

“A true speculative bubble requires impressive levels of irresponsibility from banks and regulators, something that took a long time to develop in the U.S. Canada never matched this achievement. A mere 10-per-cent or so of overvaluation, which is roughly what we have in Canada, is no bubble. Homeowners are very reluctant to sell what’s usually their biggest asset at a loss, so many will hang on like grim death rather than sell into a devalued market, making it unusual for prices to drop rapidly.”

“Apart from some overheated niches in the market, history suggests that we’ll more likely see home prices that simply go sideways for several years, allowing incomes to catch up.”

“Probably the biggest property myth of 2011 was the claim that Australia was in a ‘property bubble’ that was about to burst. I agree that to many, housing in Australia is expensive. But that’s what comes from having large dwellings in some of the best spots in the world to live.”

“The most commonly used benchmark to determine whether housing is affordable is if it costs less than 30% of the household income. A new study by the Australian Housing and Urban Research Institute strongly suggests that the traditional method of calculating housing affordability is outdated. I’m not saying that some people are not suffering from mortgage stress. What I am saying is that some households can easily afford 50 to 60% of their income going on rents or mortgages and still have plenty enough left over.”

“We are moving into the next stage of the property cycle. And the next stage is the stabilisation phase of the cycle. By the way, the stabilisation phase is a great time for savvy investors to get set for the upturn stage of the cycle.”

“In 2007, the price of housing in many first and second-tier cities in China witnessed an unprecedented rise, it was also the year that the city began to ban the use of ‘extravagant phrases’ in real estate advertising. At the time, Wang Qishan, currently the vice-premier in charge of economic, energy and financial affairs, was mayor of Beijing. After publicly lamenting how the excessive use of such terms as ’supreme,’ ‘luxury,’ and ‘enjoying an extravagant lifestyle’ in property advertisments were impacting on the ‘harmonious atmosphere’ of the capital, Mayor Wang went on to tell the meeting of city officials that, ‘Some people would be willing to carve the word ‘rich’ on their faces!’”

“When the market was hot, real estate companies would include phrases such as ‘Only Company Directors Can View this Property’, ‘Only for the Outstanding People of the World.’”

“But now that things are down in the dumps, the ads read like something you might find in a bargain basement store - ‘We Can’t Go Any Lower’”

“Plunging real estate prices are the root of the problem in Beverly Hills. But the dynamics of the residential real estate collapse are very different in elite neighborhoods such as this. The majority of delinquent homeowners here owe more than $1 million. Many are walking away not because they can’t pay, but because they judge it would be foolish to keep doing so.”

“‘It’s a business decision, not an emotional one which it is for normal people,’ said Deborah Bremner, owner of the Bremner Group at Coldwell Banker, which specializes in high-end properties in the Los Angeles area. ‘I go to cocktail parties and all people are talking about is whether it is time to walk away, although they will never be quoted in the real world.’”

“Bremner said she helped a client buy a Beverly Hills mansion last year that the prior owner had bought for over $4 million. He decided to stop paying his $3 million mortgage when the value of the property had dropped to $2.5 million. ‘They were able to comfortably cover the loan,’ Bremner said. ‘They were just no longer willing to see the value of the property drop.’”

“A few dozen Floridians from around the state converged in the Capitol Thursday for one reason: homeowner rights. All of them were angry about House Bill 213, which they say weakens the rights of foreclosure defendants. ‘I’m 62, and I’m homeless,’ said Marie Ogilus of Miami Gardens. ‘Foreclosed after 30 years.’”

“The stories of other frustrated homeowners were a collage of the housing crisis. They lamented the devaluation of their properties and described their battles with the banks. They say the banks are the reason foreclosures are grinding through the courts. ‘I have a property that I’m losing money on,’ said Donna Tovin, 53, who came up from West Palm Beach. ‘It’s affecting my relationships, my marriage.’”

“A three-decker currently occupied by members of the anti-foreclosure group City Life/Vida Urbana located on Fowler Street stands as a prime example of the bubble’s impact on home values. Assessed in 1985 at $40,000, the three-family home saw a nearly $100,000 increase in assessed value between 2003 and 2004 from $217,000 to $305,000, ultimately topping out at $439,000 by 2007. Since that time, the home’s value dropped to $268,000 in 2011 when it went into foreclosure and was ultimately sold at auction for $163,000.”

“With nearly 100 homes now in various stages of the foreclosure process within a 10-block area around Fowler Street, City Life activists believe the settlement, while a promising move forward, could be too little, too late. City Life-Vida Urbana’s director Curdina Hill said the majority of her organization’s members are currently paying mortgages with principles between $100,000 and $200,000 more than their properties’ actual values. A blanket payout of $20,000 to qualified borrowers would do little to improve their chances of staying in their homes, Hill said.”

“‘Most of the conversation has been people’s anger and disappointment about the fact that the banks aren’t being held accountable,’ Hill said before a meeting in Jamaica Plain. ‘They’re focused less on ‘how do I get this money’ than ‘this is not an adequate solution’ and anger that so many attorney generals were not willing to push for a bigger settlement from the banks. That’s what you’re going to hear tonight: people’s anger.’”

“Every home built in West Michigan creates three spinoff jobs, according to the findings of a study commissioned by the National Association Home Builders. Bill Roersma, president of the Home Builders Association of Greater Grand Rapids, hopes that economic impact will grow in 2012 after the homebuilding market has been digging itself out of a 20-year low in 2009.”

“The current signs of homebuilding recovery are being driven by young first-time homeowners who are not saddled with debt and eager to take advantage of low interest rates, Roersma said. ‘I anticipate growth, but it will be steady growth,’ said Roersma, a partner in Roersma & Wurn Builders. ‘It’s never going to be like it used to be.’”

“The average price for a single-family home in Toronto hit $606,000 last month. It’s not a misprint. The cost of a Toronto house is up by approximately 50% since 2005. But, fear not! According to Canadian Real Estate Association, the astronomical cost to be a homeowner in the 416 is actually still affordable to the average Torontonian. It’s not the cost of city real estate per se that has me steamed. It’s that real estate organizations like CREA are still trying to sell our uber-expensive housing as affordable. That is irresponsible in my view and, to many, insulting.”

“I’m not anti-home-ownership; the opposite, actually. I own a condo (well, the mortgage company and I share it at this point) and I hope to buy a house in the city with the fiancé after our wedding. This, of course, will take our combined incomes and a heck of a lot of scrimping and saving. And there’s nothing wrong with that.”

“What I’m against is irresponsible home ownership. That is, if you’re barely scraping by to make your monthly payments now and an (inevitable) uptick in interest rates results in a personal financial crisis of cataclysmic proportions, well then, guess what? That’s not sustainable, and it’s certainly not affordable. In a lagging economy, at a time when we are bombarded with messages of austerity, reminded over and over that the average Canadian carries too much debt and that we must start to live within our means, the fact we’re being told expensive real estate is affordable, thanks to low interest rates, is a recipe for disaster.”

“But then, we can’t expect the CREA, or any other organization with a vested interest in keeping Toronto’s real estate market red hot, to hold our hands. People have to be their own watch dogs. And we need to have informed, realistic expectations about what we can and cannot afford.”

Weekend Topic Suggestions

Please post topic ideas here!

Bits Bucket for February 17, 2012

Post off-topic ideas, links, and Craigslist finds here.