Turning The Fiasco From Bad To Worse
It’s Friday desk clearing time for this blogger. “As Vancouver’s real estate market cools, losses on the troubled Olympic Village development could soar above $225-million unless condo king Bob Rennie quickly drops prices on unsold units that have languished on the market for too long. That’s the view of developer and architect Michael Geller, who suggests flawed pricing and weak marketing is turning the fiasco on False Creek from bad to worse. ‘The problem with arm chair gossip that the Michael Gellers of the world have, is they don’t sit in the board room with the decision makers and the stake holders … and we have fine-tuned the pricing all the way through,’ Rennie said. ‘People come to town and say it is a bubble, but what do they know? When you look at how conservative the banks are in Canada … banking has really restricted (housing) supply.’”
“‘I think Bob’s problem with me is that no one else is saying he’s not the condo king or even the condo prince,’ Geller said. ‘A lot of people in the real estate community are saying this project shouldn’t be taking years to sell out.’ In interviews with The Province, Geller said he fears the city will be unable to sell many of the remaining condos at current prices, as Vancouver’s real estate market seems to have peaked ‘a year ago when there was a lot of fervour from Asian buyers.’”
“A mortgage broker in Nelson Bay, the most mortgage delinquent suburb in Australia, agrees the blame on its unenviable record rests with impulsive holidaymakers. Local broker Ben Eick says holidaymakers bought a slew of properties in 2005 and 2006 gambling on prices going up. ‘[They thought] these places would keep appreciating … and of course what they’ve done since then is depreciate. And that’s where they’ve come unstuck.’”
“Imagine a brand new city built for 18 million people—yet only 4.5 million live there. Imagine another city built for 1 million—but only 25,000 people call it home. Picture 20 more such cities and no people. And the building continues. Only in the ‘economic miracle’ that is China could this be possible. Yet, sometimes supposed ‘miracles’ turn out to be little more than sleight of hand.”
“China’s massive real-estate boom has now eclipsed that of Japan during the 1980s. Construction spending in China hit a whopping 12 percent of gross domestic product last year. In Japan it peaked out at 10 percent. Everyone knows what happened in Japan next. Stocks and real estate fell by 75 percent and still haven’t recovered.”
“To put China’s property boom in perspective, in coastal regions the average house costs 18 times the median salary in those regions. In America, the equivalent would be expecting someone making $60,000 to purchase a $1.1 million house. In other words, it is not the typical Chinese person buying all the newly constructed homes. It is wealthy speculators who can borrow cheap money from the banks. China is still dangerously dependent on exports for the lion’s share of its wealth. Over half of its gdp comes from selling products abroad. And herein is the pin that may bust China’s bubble.”
“As an example of how interconnected the global economy is, international real estate stocks are hoping Federal Reserve Chairman Ben Bernanke will initiate stronger economic stimulus measures when he speaks this Friday at the economic policy summit in Jackson Hole. Xinyuan Real Estate, a Chinese home builder, and Gafisa SA, a Brazilian home builder, have both rallied in 2012. Traders are betting on a fresh round of quantitative easing or some similar policy initiative.”
“But Gafisa and Xinyuan Real Estate need strong local economies. The entire international real estate sector does: low interest rates can only do so much. For that, demand from the U.S. must be strong so the export sector in China and Brazil can provide the jobs needed for workers to buy homes.”
“Connecticut, for 25 years the state with the highest per capita income in the U.S., is now leading the nation in home-price declines as Wall Street trims jobs and bonuses that had driven multimillion-dollar property sales. Jeffrey Weisz put his five-bedroom house on five acres in New Canaan up for sale five months ago for $1.2 million. While prospective buyers came to ‘kick the tires,’ he received only one offer, which fell through because the borrower didn’t qualify for a mortgage. He said his neighbor has had three offers fall through because of financing problems.”
“‘I don’t think they have the wherewithal to put down down payments,’ he said.”
“According to banking and real estate insiders, Las Vegas real estate is about to take another big hit, and it could delay the recovery for years to come. Realtor Jared Jones,who the Wall Street Journal named the 4th most productive agent in the nation in 2011, is so convinced prices are going to drop here, that he’s selling some of his own investment properties now before prices decline. ‘A lot of experts that are watching the default data are saying there are 70,000 homes that are in some type of default status,’ Jones said.”
“The Charlotte Regional Realtor Association’s monthly report for July shows gains in both home sales and prices. That being said, we still have a major problem. One-third of Charlotte area homeowners owe more than their homes are worth. Jack Wilson is one of them, and his case is so bad, he’s thought of letting it go.”
“‘It’s very difficult,’ he says. ‘I have thought about doing strategic default and just relinquishing my property as it’s just not a good investment any more for me, because I’m so underwater.’”
“Zillow says the Charlotte metro area is underwater by $6.9 billion.”
“‘Occupy” protestors have taken up residence outside one family’s home in Van Nuys hoping to save them from eviction. A ‘tent city’ has sprung up for what Occupy San Fernando organizers are calling an ‘occuparty.’ They are there in support of the Hernandez family, who tells KTLA they have lived in the neighborhood for about seven years. About four years ago, their mortgage adjusted and went from $3,900 per month to more than $4,500 per month. That’s when they started fighting to keep their home.”
“‘This has happened to millions of families across the country,’ said Ulises Hernandez who lives in the foreclosed home.’
“There’s good news and bad news to be found in the latest research regarding the effect of foreclosed homes on neighborhood property values. The upside is the financial dents that distressed properties make on nearby home sales aren’t nearly as deep as thought in some previous studies. In fact, they are ‘economically small,’ according to the working paper from the Federal Reserve Bank of Atlanta.”
“But here’s the rub. Researchers also found that homeowners are wrong to start worrying about a decline in their own property’s value when a nearby home goes into foreclosure. Actually, their home values start to slip when the neighbors start skipping mortgage payments, months before the home officially enters foreclosure.”
“Because of that finding, the study’s four authors, two from Federal Reserve banks and two from Fannie Mae, argue that policies adopted to stretch the amount of time a home is in foreclosure don’t necessarily benefit borrowers but they do cost society.”
“The researchers also used their results to suggest that various policies that allow homeowners to linger in serious delinquency and foreclosure exacerbate the costs to nearby homeowners and communities. In the Chicago area, it takes an average of more than 600 days for a distressed home to move from initial default notice to bank-owned.”
“Most Aussies think housing is an economic driver. But it’s not. Housing is consumption. Housing, along with other consumption (such as food, fuel, clothing, etc.) is the reward for productive labour. So for the central bank to claim that residential building will fill the void left by the end of the resources boom is just barmy. Thanks to the fractional reserve banking system, banks can use $10 of deposits to lend $90 to borrowers. It’s not the $10 deposited in the bank that filters through the economy, it’s the $90 created by the banks from thin air that filters through the economy.”
“Or put another way, the $60 billion of exports to China doesn’t mean a $60 billion benefit to the Australian economy…it means there’s a $600 billion benefit to the Australian economy. The money flows in from China, it goes into bank accounts, and then the banks leverage this to create new loans. It explains why the Australian housing market was strong despite crashes elsewhere in the world.”
“But as anyone who knows about leverage will tell you, leverage is a double-edged sword. It magnifies returns when the market goes your way, but it magnifies losses when the market goes against you. In this case, even if exports to China only fell to $50 billion, it wouldn’t mean a $10 billion hit to the Australian economy. Because of the leverage used by the banks to drive up credit, it would actually be a $100 billion hit to the economy.”
“So for anyone to think that housing will boom once the resources boom ends, they’re in for a rude awakening. The fact is, contrary to what the brains trust at the RBA may think, far from leading the Australian economy to recovery, housing will be the worst investment to own when the resources boom finally end.”
