February 8, 2013

The Pathology Of Boom Bust Mania

It’s Friday desk clearing time for this blogger. “The U.S. housing market, entering its busiest season, is tipped so far in favor of sellers that almost a third of listings in areas from Washington, D.C., to Denver and Seattle are under contract in two weeks or less. One home in Washington attracted 168 offers in December and sold for almost twice the asking price. At the Solaire at Gale Ranch community in San Ramon, prospective buyers camped out in tents for as long as two weeks in August before the developer released nine houses for sale, said Sonal Basu, an agent with Redfin.”

“The builder, Shapell Homes, shifted to a lottery system this year after neighbors complained about people living outdoors for weeks, Basu said. Last month, about 70 people waited in line for the chance to buy four Solaire model homes, ranging from $729,000 to $989,900, she said. A few dozen families ultimately participated in the lottery. ‘In 10 minutes, they sold four homes for full price,’ Basu said. ‘Buyers were lining up like crazy because there is no inventory.’”

“There’s still a world of hurt in neighborhoods across Inland Southern California as thousands of homeowners remain in the thicket to resolve mortgage woes. This year, though, they are likely to see less push-back in as negative equity lessens, the California Homeowner Bill of Rights kicks in and program adjustments by Keep Your Home California gain steam. It’s been a difficult environment up to now, said homeowner Ronald Ensley, of Norco. ‘I had property that was foreclosed on in Arizona,’ he said. ‘We lost one through short sale, and one rental. Through it, there was very little communication at all. We were left in the dark, as the whole process went along.’”

“Mike Teer, broker of Teer One Properties in Riverside, said the numbers show there still is a group of people who aren’t being helped because they don’t meet the loan modification criteria. The National Settlement Report said 15,310 such borrowers in California got a solicitation, but did not qualify for refinancing because the loan-to-value exceeded 80 percent. ‘My personal experience with clients I’m talking to, many of whom have lost 30 to 40 percent of their equity, is that they hear they’re getting back 4 to 5 percent, and it makes them smile, but they’re still way in the hole,’ Teer said.”

“One in 34 homes in DuPage County had foreclosure paperwork filed against them in 2012, according to RealtyTrac. That’s about 2.9 percent, up from 1.9 percent of homes in 2011. The numbers in Will County also show a rise in foreclosures. Numbers are also bad in other nearby counties. David Field, owner of Home Field Realtors of Naperville, said the figures showing that foreclosures are rising don’t accurately portray the current market.”

“‘These figures are up due to ’shadow inventory’ as there were a number of homeowners that were going through the foreclosure process that the bank hadn’t caught up with yet,’ Field said. ‘Banks have an extensive loss mitigation process they have to go through, and it takes time to process the paperwork. There were houses in foreclosure months ago, but they didn’t show up on the ‘books’ because the paperwork wasn’t complete. There’s been a huge backlog.’”

“Nelson Chen of the Chen Agency in Fort Lee said he’s seen a rise in demand from buyers. ‘My schedule on Saturday was like 2006; I had appointments booked literally every half hour,’ Chen said. ‘There’s a million people looking. But they’re still very picky.’”

“The New Jersey MLS reports that the number of properties for sale in Bergen County dropped more than 25 percent from last January to January 2013. Inventories are also down nationwide. Many homeowners are apparently waiting for prices to rebound. ‘I had a meeting with someone who bought in 2004, and the home is worth less now,’ Chen said. So the homeowner decided not to sell, he said: ‘They’re not willing to take that loss.’”

“Sales continue to plummet in Canada’s most expensive housing market, but realtors in Vancouver insist sellers would rather not sell at all than for a discounted price. ‘It appears many home sellers are opting to remove their homes from the market rather than settle for a price they don’t want,’ said Eugen Klein, president of the Real Estate Board of Greater Vancouver.”

“Agent turned celebrity real estate critic, Andrew Winter, is rounding up his Selling Houses Australia team mates for the sixth season of Foxtel’s hit program. Mr Winter says the show is also an insight into how Australia’s regional markets are comparing with metropolitan areas. ‘I think the main lesson I’d like to get out there from this season is that all of you people sitting out there in your nice comfortable Sydney, Melbourne and Perth markets where you complain your house hasn’t sold after five weeks - and its value has maybe only gone up $500,000 in five years - have a heart! Think about a huge chunk of Australia where the housing market is really struggling,’ he said.”

“There is one thing the 10 corrupt officials reported by whistle-blowers in the past two months have in common: each owned more than a dozen properties. From local police heads to bank executives, officials who own an unusually large number of properties - in an extreme case, one is suspected of having 192. ‘In big cities there are plenty of rich people and corrupt officials, so someone owning 10 or 20 properties is hardly noticeable,’ said Professor Hu Xingdou, a political analyst at the Beijing Institute of Technology. ‘Property is a bribe less traceable than straight cash, which leaves clues in bank accounts.’”

“Yuan Gangming , a researcher at the Tsinghua University, said housing has the characteristic of being valuable but not high-profile. ‘More importantly, you cannot easily tell whether money used to buy property is clean or not, so it could facilitate laundering of illegal gains,’ he said.”

“Since November, a large amount of luxury housing has been dumped on to the market by sellers including government officials and senior managers of state-owned enterprises, spooked by the latest round of corruption busting, a source told The Economic Observer. Some 714 officials fled overseas between September 30 and October 7 last year, according to the Beijing newspaper.”

“On a quiet leafy street north of Toronto, Mr. Zhang – who asked that his full name not be used – taps the walls and inspects the furnace of a $2.68-million home. He’s looking to buy because his 15-year-old daughter will be attending private school in Canada later this year. The owner of a steel business in Beijing has applied to immigrate to Canada, and figures he may as well purchase a home now. ‘Canada is a beautiful country. It is good for living, for higher education and it is not that populated,’ said Mr. Zhang, who ultimately bought a $2.2-million home in Oakville, Ont.”

“Rumours are rife about foreign buyers. In Toronto, Russian and Iranian buyers, flush with cash, are snapping up condos. In Vancouver, Chinese investors are buying luxury apartments. In the Maritimes, wealthy Americans and Europeans are acquiring coastal vacation property. Estimates of the level of foreign buying are all over the map. In the Toronto and Vancouver markets, they can range from 3 per cent to – in some pockets of the condo market – upward of 60 per cent.”

“Canadians, meanwhile, are flocking to the U.S. market, snapping up holiday homes in the sun. They are now, by far, the biggest bunch of foreign buyers of American real estate. Each year, the National Association of Realtors publishes a study on international buying activity in the U.S. It shows who the biggest buyers are, the fastest-growing nationalities of buyers (Canada, China), where they’re buying (Florida, California), why (bargain vacation homes!)”

“Foreign appetite for Canadian homes will persist, says Michael Adelson, Toronto-based sales rep for ReMax Realtron, who recently represented a seller that sold their bungalow for $421,800 over asking to a foreign buyer. He has worked in the industry for 25 years, and seen interest from Hong Kong, Korea and Iran flourish. As someone in the industry, he’s happy to see such strong demand. As a citizen, he’s worried some local people might be getting priced out of the market. ‘People have recognized this is a relatively cheap country to buy,’ he says. ‘I think it will continue unless they put some controls in place.’”

“Tony Ma agrees. The agent in Markham, Ont., has hosted several groups of visiting Chinese buyers in recent months alone. They typically buy a house for $1-million or $2-million, either to live or as an offshore investment. Canada’s multicultural communities, affordability and democratic system will continue to lure buyers, he says. ‘I don’t see this market cooling any time soon.’”

“For anyone who has followed the global property market over recent years, it is difficult not to notice that central bankers are possibly the least reliable and most incompetent of all economists when it comes to identifying asset bubbles. Their record is truly terrible, for not only completely missing trillion-dollar bubbles that formed in their own backyard but they have continually put effort into denying these bubbles exist.”

“Central bankers cannot identify these epic asset bubbles for two primary reasons: lousy economic theory and an unwillingness to take responsibility. The former revolves around a non-empirical form of economics that is taught in universities and practiced in government and industry. If it did, why are so many countries generating the largest asset bubbles in their respective histories after undergoing reforms of privatization and deregulation?”

“The latter reason is simple: if a central bank warned about a housing bubble as it was forming, the market would react by changing its attitude from greed to panic, typical of the pathology of boom bust mania. Economists in the central bank are considered the foremost authority on the economy, so when they speak, everyone listens. This institution’s most powerful influence upon the economy is not the ability to print money or adjust the interest rate, but its loudspeaker.”

“If the Fed had warned about a bubble forming in the housing market in 2002, central bankers would have copped the blame for the financial and economic fallout, which would not endear them to political and economic elites, or the general population. Economists in the central bank are not going to put their substantial six-figure salaries and secure job placements on the line, including being subject to an immense amount of flak from the FIRE sector, for correctly stating the perfectly obvious that anyone with a modicum of knowledge of the financial and real estate markets would realize.”

“Every country that has suffered through a housing boom and crash in recent years had so-called ‘experts’ claiming prices were based upon fundamental valuations due to dwelling shortages. Take the US as a case study. Leading institutions such as the Federal Reserve, National Association of Realtors, California Building Industry Association and Harvard University’s Joint Center for Housing Studies produced sophisticated studies to show that the housing boom was caused, in part, by dwelling shortages. In this way, Australia is not different because there is no housing shortage here.”

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