January 4, 2013

An Unbelievable Money Machine

It’s Friday desk clearing time for this blogger. “Maybe it’s the strength of the loonie, the increasing value of their principal residences or the lure of still deeply discounted housing, but Canadians love the United States — especially the Sun Belt — where we remain the No. 1 foreign buyer of property. Richard Levert, a 57-year-old from Sudbury, Ont.,, is one of those who pulled the trigger on a recent deal by upgrading his vacation home. He bought a two-bedroom, two-bathroom condo in the Naples-area in 1997, but this past June he decided to upgrade to a villa, which has about 2,000 square feet. ‘I am above water [on the 1997 property],’ says Mr. Levert, who is now selling that unit to pay for his new purchase.”

“‘I also have a piece of property [in nearby Cape Coral] I’ve never developed. It’s just a lot,’ he says of the land purchased in 2005. ‘It’s just an investment,’ says Mr. Levert, ‘it hasn’t gone too well. That one I’m under water on.’”

“Buyers from China, assisted by a surge of new real estate professionals catering to their needs, are plunking down growing piles of cash for properties in Mercer Island, West Bellevue and Kirkland. ‘For a lot of Chinese, especially businessmen, they are being smart and want to have an escape plan,’ said Nelson Lee, partner at a Seattle firm that has developed a specialty in helping Chinese people obtain what are known as EB-5 visas, which offer affluent foreign investors a shortcut to legal residency.”

“‘So if things implode or get a little crazy,’ Lee said, ‘they can legally and swiftly move here and be safe and have their families with them and live a comfortable life.’”

“Sean Shi, left a 14-year career as a Microsoft software developer to focus on selling Puget Sound-area homes, in the $700,000 to $3 million range, to people from China. The Chinese stock market isn’t regulated to U.S. standards, China’s urban real estate market is considered overheated and Chinese people aren’t allowed to buy overseas securities. ‘There is a lot of extra money in China right now,’ he said, ‘but there is no secure or comfortable way to invest in China.’”

“For the nouveau riche in China with a portfolio of real estate assets, there is a certain appeal about buying overseas property. There are no limitations from banks on home loans, the returns are stable, ownership is permanent and some countries even throw in a package deal for a citizenship with purchase. But a big investment return always comes with high risk.”

“Indeed, there are many stories from affluent Chinese who purchased properties in the United States or Europe but are then confronted with massive tax bills and high maintenance fees. Wang Min, owner of a textile company in Guangdong province in South China, bought an 80-square-meter apartment in Houston, Texas, for $100,000 two years ago. He thought he could just sit on it and count the dollars as it appreciated in price. But he quickly discovered there was a lot more to do after the down payment.”

“‘It’s harder than you think to invest in the US real estate market,’ he says. ‘Apart from the payment of the house, there are so many invisible costs like monthly management fees, garbage fees and property tax every year, so basically you earn very little because you have to use the rent to cover those expenditures.’”

“Melbourne’s property market has posted its weakest performance in nearly a generation as home prices continue to fall despite deep interest rate cuts. ‘The interest rate cuts have probably shielded the market somewhat from bigger falls over the last year, but I think Melbourne will continue to be one of the weakest performing markets in the country,’ said RP Data analyst Cameron Kusher. ”I wouldn’t be surprised to see values fall again over the next year.”’

“The prediction will be welcome news for buyers but a bitter pill for home owners, who saw prices soar nearly 37 per cent in 2009-10. That boom, fuelled by record low interest rates and the generous first home buyer grants on offer during the global financial crisis, is being blamed for the serious affordability problem in the city. ”Prices have gotten too high in Melbourne and it hasn’t taken its medicine yet,’ Mr Kusher said.”

“The number of households that spent more than 30 percent of their income on rent or housing increased 11 percent in four years, said Linda Gyimoty, executive director of United Way of Ocean County. In Ocean County alone, there was a 154 percent increase in children receiving food stamps between 2007 and 2011 while the population of children grew by about 6 percent over four years, she said. The county group provided services to more than 120,000 Ocean County individuals through a United Way funded program last year, Gyimoty said, noting that’s about 1 of every 5 residents.”

“Census data from 2011 showed one-third of children here live in families considered low-income, said Cecilia Zalkind, executive director for Advocates of Children in New Jersey. A low-income family has four or fewer people living off $44,000 per year, she said. Fifteen percent are living at or below the poverty level, measured at $22,000 a year for a family of four, Zalkind said. ‘That’s pretty shocking in New Jersey, especially considering housing is so high,’ she said.”

“Forbes recently ran an article by William Baldwin titled ‘Do You Live in a Death Spiral State?’ In the article, Baldwin calls states with declining economies Death Spiral States. He correctly included California among his Death Spiral States, a result of decades of bad policy decisions. Then, he gives real estate advice and that’s where he gets it wrong. And I quote: ‘If your career takes you to Los Angeles or Chicago, don’t buy a house. Rent.’”

“California is not most places, though, and there are lots of reasons to move to California if you don’t have a job. There are even more reasons if you don’t need a job. Real estate will do just fine in large regions of California, even without a vibrant economy. People want to live here, and some can afford it. Why not? It’s as good as it gets. As long as that’s true, real estate prices will not reflect the economy. I own a home. I’m not selling.”

“Are prices accelerating too quickly, leading up to another potential housing bubble? Michael Lea, director of the Corky McMillin Center for Real Estate at San Diego State University: Although San Diego housing prices have been rising smartly over the past year, I do not believe there is another bubble in the making. A bubble has characteristics not present in the current environment. Prices are not significantly above fundamental values. There is not excessive media and cocktail hour speculation about house prices. We have not seen a relaxation in lending standards that fuels a bubble. And there is still a significant shadow inventory that can hit the market and depress prices in the future. San Diego house prices are still high on a national basis but hardly in bubble territory.”

“Clemente Casillas, broker and president at South County Real Estate in Chula Vista: Yes, it is unsustainable. Investors with cash are coming in, making it hard for regular buyers. In turn, buyers are now starting to pay above appraised value just to get a property, creating an artificial bubble. For a stable recovery, not only do we need more jobs, we also need better-paying jobs. Controlling the market by holding down interest rates is not a good thing because you create internal factors that are not market driven but politically driven.”

“Finance Minister Jim Flaherty has recently floated privatization of the government-owned Canada Mortgage and Housing Corp. CMHC has a mandate to promote home ownership and, among other functions, provide insurance against defaults by borrowers on their mortgages. Mr. Flaherty thinks mortgage insurance is a business ‘that we’re in that we don’t need to be in.’”

“But fully privatizing mortgage insurance is wrong. The risks from housing to the whole economy and ultimate government guarantee are exactly why CMHC needs to stay government-owned. If Canadians can learn anything from recent U.S. experience, it should be that housing markets affect the economy as a whole. When a housing bubble bursts, the shockwave blows through the financial system. Central banks have a limited tool kit of relatively blunt instruments to curb excesses and restore balance. Government intervention in mortgage borrowing is necessary to restrain bubbles in advance.”

“A home is most families’ major asset (and a mortgage their largest debt), so home values shape how families borrow, consume and save. How many baby boomers have you heard say that their home is their pension? Housing prices don’t just ebb and flow with economic ups and downs. To take one economist’s phrase, ‘housing IS the business cycle.’”

“Bank of America’s mortgage origination’s plunged by 37 percent to $21.3 billion in the third quarter from a year earlier, according to newsletter Inside Mortgage Finance. Once the largest home lender, the Charlotte, N.C.-based bank has slumped to fourth, Inside Mortgage Finance data show, after it closed a business that bought debt marketed by third-party firms. Residential mortgage lending at Citigroup dropped 5 percent. Citigroup, which said in February it would stop using brokers to originate mortgages, this quarter fell below Quicken Loans, to sixth in the newsletter’s rankings.”

“‘We continue to believe that mortgages represent the greatest risk to any major bank balance sheet and a number of headwinds remain,’ Chief Financial Officer John Gerspach said in an April call with investors. The firm continues to reduce what Gerspach and CEO Mike Corbat describe as ‘non-core’ assets at Citi Holdings, which contains $95 billion of U.S. mortgages.”

“‘Loans have never been safer, they’ve never been more profitable,’ said Scott Simon, the mortgage head at Pacific Investment Management Co., manager of the world’s largest bond fund. ‘Bank of America is the biggest mystery to us. Now I get that they got their faces torn off. But this is a different environment.’”

“‘How does it get more ‘core?’ Simon said. ‘If you’re Wells Fargo, you sell six products to the average person who has a mortgage with you. It’s unbelievable. It’s a money machine.’”

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