November 16, 2012

When The Crisis Comes, Who Will Pay For It?

It’s Friday desk clearing time for this blogger. “A 2008 Senate report, titled ‘A Good House is Hard to Find’, found that ‘the average house price in the capital cities is now equivalent to over seven years of average earnings; up from three in the 1950s to the early 1980s.’ As the commodity boom begins to deflate, business has put immense pressure on the Reserve Bank of Australia to lower official interest rates. Major party politicians have been urging it to do it, as have right-wing unionists, as well as the big banks and mortgage brokers. In September, the Australian Prudential Regulation Authority said the big banks and financial firms ‘have begun to unwind the more conservative housing lending standards that they had imposed during the early phases of the global financial crisis.’ Similar rises in debt have emerged in other nations, such as Canada.”

“The Australian Treasury would have us believe we can just transfer out of the commodity boom into a debt-fuelled property bubble with no real consequences. Yet that disastrous path has been trodden too many times before. There may be short-term profits for big capital in the rush from commodities into property. But for the rest of us it will mean higher house prices, more debt and a financial system that risks collapse under the weight of unpayable debt. As it is in Europe now, the question is: When the crisis comes, who will be made to pay for it?”

“Federal Reserve Chairman Ben S. Bernanke said the Fed will take action to speed growth and a rebound in a housing market. Bernanke said housing-finance authorities have taken steps to ‘remove barriers to the flow of mortgage credit.’ ‘Overly tight lending standards may now be preventing creditworthy borrowers from buying homes,’ he said.”

“The housing market is sizzling again, fueled in part by record-low interest rates and fewer foreclosed properties. Robert Meadows took us on a tour of West L.A.: ‘It’s booming. People are having seven to 15 multiple offers on every house that is on the market. Over my shoulder, we have a house that was listed for $1.1 million. It sold like that. And then we relisted it for 1.4 [million] and it sold instantly, like that. The first day, we had a hundred people come through the house — a hundred people! I mean I could not keep the people from coming into the house.’”

“Deborah Cavallaro is a ‘flipper.’ She’s flipped four homes in the past year, including this one. Cavallaro: ‘One of them was on West 48th street, I purchased that property for $115,000 and then we sold it about six months later for $268,000.’”

“Phil Gilboy of TLC investments has bought over thirty homes in the past two years. This is his latest flip. It’s a home in Westwood he and his investors picked up for $1.3 million. He’ll soon put it back on the market for over $2 million. After investing a few hundred thousand on remodeling, his company is expecting to make a nice return. Gilboy: ‘This should be $455,000 profit on this property.’”

“It’s one thing to jump on the bandwagon when things are getting better, it’s quite another to jump off of it when everyone around you, not to mention your own company’s earnings, would seem to confirm that sentiment. But that’s just what Donald J. Tomnitz, CEO of D.R. Horton, the nation’s largest homebuilder by volume did. ‘I still don’t see a lot of jobs being created,’ he told an earnings conference call.”

“Until about five years ago, the Folks were living comfortably with their two children outside Boise, Idaho. They owned a home. Chris made a good living as a self-employed flooring installer. Once Boise-area home prices collapsed, though, the Folks’ lifestyle did, too. Work dried up for Chris. Amanda quit college. And they moved to Montana to be closer to her family. The family’s credit is shot. They blew through nearly $30,000 in savings, mainly on mortgage payments. Attorneys tell them their only way out is bankruptcy protection.”

“The Folks can’t afford to save for retirement. They struggle to cover $1,280 in monthly rent. Gasoline expenses sometimes hit $600 a month to fuel Chris’ van, so he can reach out-of-town flooring jobs. ‘Everything I worked so hard for is just slipping away,’ Chris Folk says. ‘It just feels so far away to get back to where we were.’”

“Amanda Folk is ’scared to death’ she won’t find a job to repay $25,000 in student loans. She hasn’t returned to their Idaho house in two years; she can’t bear it. Vandals have broken in. A former neighbor has taken to mowing the lawn. The couple is reluctant to rent the house for fear that their lender would end up with whatever money they collected. They’re seeking a smaller place to rent. But they don’t want to move far. Their daughter has cycled through four elementary schools in the past few years.”

“‘The hardest part is the psychological part of it,’ Amanda Folk says. ‘Our kids don’t have any sense of security. My daughter still asks, ‘Are we going to be here next year?’”

“William and Heather Sirotak have spent the last five years dealing with cancer, grief and job loss. They are living in a $117-a-night hotel suite with a 10-year-old who is terrified of change. And that credit card will max out by Thanksgiving. In 2008 William lost his construction job in the collapse of the housing market. The Sirotaks were forced to refinance to pay for Heather’s hysterectomy — a $36,000 bill — and, they concede, quit making monthly payments on the 3,600-square-foot home with the saltwater pool.”

“Accounts differ dramatically about which side balked when short-sale offers were available on the Alameda house that would have allowed the Sirotaks to escape their $650,000 debt. And if the Oregon Legislature has ordered foreclosure mediation, the banks have little or no incentive to participate. Why should they, Heather Sirotak asks, when redevelopers will scoop up foreclosures on the courthouse steps, boot the distressed homeowners to the curb, and quickly flip the properties: ‘This generates new optimized mortgages for a new crop of chumps.’”

“A new report says Metro Detroit’s foreclosure crisis is improving. RealtyTrac says mortgage defaults across the Tri-Counties plunged 52-percent in October, compared to last year. But Rachael Saltmarshall, President of the Detroit Association of Realtors, is among those refuting the relevance of those numbers. The reality, Saltmarshall said, is that the Metro Detroit area remains littered with thousands of technically bank-owned but abandoned, homes in disrepair. ‘They haven’t done anything with the properties,’ she said. ‘They haven’t started foreclosure proceedings, boarded that property up — they’re just kind of in purgatory.’”

“The dire shortage of houses for sale in the Auckland market has desperate buyers going door-to-door pleading with homeowners to sell, as short supply has pushed prices up to record levels. Auckland couple Kate Sutton and Oliver Mannion have asked agents to use their names in personal letters to homeowners to try to secure their first home. The couple have been house-hunting for seven months, have looked at 150 homes and have been outbid at four auctions. But even with a good deposit and a budget of between $600,000 and $700,000, the desperate couple are still flatting in an Onehunga property Sutton and her brother own.”

“Sellers appeared happy to mislead potential buyers to take advantage of the shortage. ‘We looked at one house that was advertised as three- or four-bedroom, and we get there and one room is a laundry with a single bed in it and the other is a sleepout outside. It was nice but a room outside is not suitable for a family,’ Mannion said.”

“That house, in the Auckland suburb of Penrose, went for $817,000 - $200,000 over the recent valuation.”

“The couple had noticed price jumps in the past six months and they have had to increase their budget in the hope of securing a home. Personalised letters, which used the couple’s names and family details, dropped in letterboxes by real-estate agents in areas they liked, were their latest attempt to find a home. ‘We are kicking ourselves we didn’t buy six months ago because houses that would have gone for $650,000 are now going for $700,000,’ Sutton said. ‘We are hoping that approach may work, that someone will come forward and we can finally get into a family home,’ Sutton said.”

“Why are some economists prattling on about the rampant housing market in Auckland with medium sale prices nudging $600,000? Here is why: A country becomes richer by increasing its production of actual goods and services. This is measured by Gross Domestic Product. This ultimately determines average incomes in a country. New Zealand’s GDP is increasing at the pace of a three-legged turtle.”

“The sale of an existing house represents a transfer of assets between the buyer and seller. There is no new physical output or incomes or employment generated except for real estate agents and bankers. Housing inflation in New Zealand over the past decade has largely been matched by increases in private debt, much of it borrowed from overseas. We have used overseas money to bid up our own house prices. There is no increase in New Zealand’s ability to service this debt through this process.”

“Some of the housing inflation has been attributed to wealthy overseas buyers. This may be the case, but they are not contributing to increased output or incomes in New Zealand or this would have shown up in our GDP figures. Young people wishing to buy a first home are forced to take on a massive debt which reduces their ability to save and invest. Parents may fund their offspring into a first home but this still represents a loss of funds that could have been used to grow our economy.”

“Individuals can get rich by buying and selling houses but a nation cannot. In such a situation a housing market resembles a giant game of pass the parcel hosted by a very profitable banking sector. There is no net gain to our country, just more debt and higher house prices. In most cases they are the same houses they were 20 years ago.”

“Real estate bubbles can last for many, many years. They are self-reinforcing. The ultimate cost to a society is far greater than that of a sharemarket crash because of the massive debt hangover and the impact on the real economy in lower output, employment and incomes. This is why some economists are ringing alarm bells.”




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