A Price To Pay
It’s Friday desk clearing time for this blogger. “As debate rages about whether the Federal Reserve’s aggressive asset-buying policy will revive a frail economy, some prominent central bank watchers have made it clear just where they stand on the subject. ‘The Fed will write $1 trillion or more in checks over the next twelve months, the ECB will write the same,’ Bill Gross, the founder of Pimco, the world’s biggest bond funds, wrote via Twitter. ‘(There is) reflation ahead. (It) will create asset bubbles but little growth.’”
“Martin Feldstein, a former chairman of the Council of Economic Advisers which advises the U.S. president on economic policy, said the Fed’s decision to buy mortgage-backed assets for an unlimited time means the central bank has now embarked on a ‘very dangerous strategy’ that could lead to high inflation and destabilizing asset bubbles.”
“‘I would prefer they did something rather than nothing and an asset bubble may be a small price to pay for that,’ said Nizam Idris, managing director, head of strategy for fixed income and currencies at Macquarie Bank in Singapore.”
“‘What we’re dealing with is the new norm,’ said Cliff Long, CEO of the Emerald Coast Association of Realtors. ‘A lot of times, people think we’re dealing with slumping sales, but in reality there’s no such thing as slumping sales in a new economy. This is the new norm and this is the message that homebuyers have to accept.’”
“Long said he believes the housing market will continue to improve, partly because of a recent increase in Asian buyers who are looking to invest in the Northwest Florida market. ‘Our market has no place to go but up,’ Long said.”
“A new analysis shows the condo market is losing the most as the Vancouver housing sector cools. ‘Buyers are being very cautious. However, the variety and choices of housing that is available as well as price reductions will spur activity sooner rather than later,’ says Chris Simmons with Royal LePage. ‘Chinese buyers have not been as active in the housing market as in previous years,” he adds. But he expects them to return’ once prices stabilize.”
“Wei Min Tan, executive VP of Castle Avenue Partners at Rutenberg Realty, says that his ‘gut feeling’ is that 25% of the condo buyers in Manhattan are international. Tan is working with clients from Hong Kong, China, Singapore and the U.K. and he reports that business is booming. Why? Tan explains, ‘New York real estate is cheap globally. It may be the most expensive in the U.S., but it’s still cheap globally — 10th on the list of the most expensive properties in the world’s most popular cities.’”
“‘Condos in New York average $1,300 per square foot,’ he adds. ‘Compare that to the most expensive, Monaco which is $4,500; London, $3,500; Paris, $2,400. There’s a huge property bubble in China and Hong Kong now — so much speculation and sky-high prices have convinced investors to come here to buy.’”
“About 80 percent of speculators from the prefecture-level city in southeastern Zhejiang have been trapped by their property investments that have recently depreciated 30 to 50 percent from levels in 2010, state media reported. While property speculation is rampant in the mainland, Wenzhou wheeler- dealers are known as the most hardcore - often overextending themselves by investing at home and overseas.”
“Their speculative activities domestically have been blamed for soaring real estate prices in China, where they have been nicknamed ‘locusts.’ Veteran Wenzhou speculator Zhang Ming said he borrowed 30 million yuan from friends and relatives, who put up their own firms and properties to secure mortgages from banks. ‘In 2010, I spent 38 million yuan buying four floors of houses in Wenzhou. But now, I cannot sell them for even 20 million yuan,’ he lamented.”
“In Chongqing, one Wenzhou investor dumped 90 flats onto the secondary market, saying he needed to liquidate. Another speculator said: ‘I don’t know whether to sell or not. But I am sure I will lose a lot.’”
“The mainland’s latest home boom - or bubble - commenced at the end of 2008, when the country launched a series of stimulus measures to weather the global economic crisis. Some analysts warned of a potential credit default by the end of the year, as more than 70 percent of the funds tied up in property speculation came from underground loans and banks. ‘If all these people go bankrupt due to depreciation in property assets, their businesses are done,’ an unnamed banker said.”
“A few years after the fall of Saddam Hussein’s regime in 2003, the pillars of Kurdistan’s real estate market started to rise unexpectedly. Real estate agents say that less than a decade ago, a plot of land in Erbil’s Bakhtiyari neighborhood cost only around $3,000. Now, that same lot is worth around $230,000, illustrating an increase of almost 75 times. Anwar Anaid, a professor of political economy at the University of Kurdistan, attributes the rise in real estate prices in Kurdistan to a ‘herd mentality.’”
“‘As soon as there is rise in prices, large numbers of people enter the market. As soon as there is rise in prices, large numbers of people enter the market. And normally the cultural tendency is that people think the price increase will go on forever,’ said Anaid.”
“Data out from RealtyTrac shows flipping is making a comeback in parts of the country, mostly those hardest hit by the housing crash. The story locally shows more caution. The Seattle metro area, which includes Bellevue and a small part of Pierce County, rings in at No. 15. In the past three years, the average gross profit of flips has been $58,930, and the flip takes about 113 days. Gross profit doesn’t take into account the cost of repairs, which vary widely by property.”
“In Pierce County, flips are up 58 percent from 2011, but gross profit is still in the negative — an average loss of $4,857 since 2010. Several Washington counties has negative gross profits, including Spokane, at an average loss of $124,358. The negative numbers were ’somewhat surprising to us, but is likely the result of a very competitive flipping market and possibly an unexpected decrease in home prices (unexpected on the part of the flippers),’ RealtyTrac VP Daren Blomquist said.”
“Nationally, almost 100,000 homes have been flipped in the first six months of the year, and that’s up 25 percent from 2011. California, Arizona, Nevada and Georgia are the top states to flip right now. In the top metro areas, Phoenix, Las Vegas, Los Angeles and Miami are tops.”
“Marquita Shealey is having a tough time after the Lithonia, Ga., house she bought lost more than half its value in two years. The loss put the 29-year-old first-time buyer in the same position as about 31 percent of U.S. homeowners, according to Zillow: She is upside down. She can’t sell and take a loss and has also suffered some other financial hits, such as expensive home repairs and a split with the man with whom she bought the house. So she is stuck in a home that suppresses her ability to flex with new financial constraints. She cut back spending and is considering pulling her daughter out of private school.”
“‘I thought once I closed, everything would be smooth sailing,’ Shealey said. ‘Now everything is on me.’”
“Georgia real estate investor Bob Massey said he has friends with one child who want to sell their small house and move to a more spacious home, but they cannot because they are underwater. The couple is holding off having a second child. Another friend in the military moved here from Maryland but cannot sell his underwater home there. If they are able to rent it, the income will still be less than the mortgage payment and the couple will have to make up the difference.”
“‘Here is a young couple spending an extra $400 or $500 a month and trying to keep his credit clean because it affects his job,’ Massey said.”
“Those underwater are a mix of people who have lost jobs and are having a difficult time financially and those who can afford their monthly payments, but resent paying top dollar for a languishing investment. ‘I meet with a lot of people who are upside down and for most part can afford the payments. And a lot are looking for an easy way out,’ said Bartow County, Ga., real estate agent Bill Cook. ‘They don’t want to pay … is there a way around it? Really, there isn’t.’”
“With the average sale price of a single-family home in Jamaica Plain this year hitting well over $500,000, according to data provided to the Gazette by local real estate agent Paul Melanson from Coldwell Banker Residential Brokerage, the Gazette asked real estate agents in other markets what that budget could buy. In Missoula, a small and liberal city in western Montana, that budget could buy ‘half the valley,’ Mark Twite of Twite Realty Corp. said.”
“Rentals are just as big a bargain. The average rent for a two-bedroom apartment in JP is $2,000 a month, according to Melanson. For that, in Missoula, one could rent a six-bedroom, three-bath, 3,300-square-foot house, with front and rear porches, fireplace and a family room in the basement, according to rentals.com.”
“For a little more luxury in Montana, that same budget could also afford a four-bedroom, newly-remodeled 2,600-square-foot house with granite countertops, walk-in closets and a volleyball court and fire pit, on half-an-acre of land. ‘I’d rather be a lamp post here than a millionaire in Boston,’ Twite said.”
“My summary insight from studying hundreds of years of all types of manias and panics is simply that bubbles always burst, and then they go back to where they started or a bit lower. Even we’ve seen doubling and better in the stock prices of homebuilders. It’s unlikely that this latest bubble bursting in real estate is truly finished.”
“We shouldn’t be surprised at what happens after a major housing bubble bursts as Japan went through this starting in 1991 after home prices rose 160% in just 6 years and then fell 64% — and they are still down that much 21 years later as a smaller generation followed a large baby boom for the first time in history. The U.S. followed with a 130% bubble up in 6 years from 2000–2006. The Japanese market went back just below where its bubble started in 1986. For that to occur in the U.S., home prices would have to fall 55% – 65%, not the 34% we saw at worst in 2009.”
“Around the world, the greatest bubble by far occurred in Shanghai, up 525% since 2000, and in China in general. (China’s supposed to have a soft landing?) Mumbai saw a 400% bubble, Dubai 300% and Seoul 205%. The greatest bubble in developed-country cities starts with Brisbane, Australia at 210% followed by 180% in Miami, 170% in L.A. and 165% in Vancouver. There are many cities that could see real estate drop 70% to 85%!”
“The real estate bubble is like a popcorn popper with different markets frothing over and peaking at different times, but all will burst ultimately. Given that real estate is so local, the best way to gauge the downside potential of your home or commercial real estate is to find out what it was worth at the beginning of 2000 at best and the beginning of 1996 at worst. If you can’t take that much heat consider selling and renting for the next three years plus. From around early 2015 forward we could see the greatest bargains in real estate of our lifetime.”
