April 5, 2013

The Rapid Transition From Glut To Scarcity

It’s Friday desk clearing time for this blogger. “Under the scheme announced by finance minister George Osborne last week, people will be able to buy new-build homes worth up to 600,000 pounds with only a 5 percent deposit, covering the rest with an interest-free loan for five years, open to all, not just first-time buyers. The government will also guarantee 130 billion pounds of mortgages from next year for three years, allowing banks to lend to buyers who don’t have big deposits to put down. Fathom Consulting, along with several others, argue that Osborne’s new scheme will only serve to raise house prices and put the government on the line for any future decline in prices.”

“‘This is effectively a policy to allow sub-prime lending,’ said Fathom’s Philip Lachowycz.”

“It is remarkable that here we are in 2013, and not a day goes by without another headline regarding the return of subprime lending. Just yesterday, you have a headline that the Obama administration is pushing for banks to loosen their mortgage lending standards. I have a news flash for the Obama administration: the US government backed mortgage entities such as the FHA will already underwrite almost any person with a pulse. All it takes is a downpayment of 3.5% and a credit score of 580 and you can get an FHA loan. How much more loose do the mortgage standards need to be?”

“Until the President, Congress, and the Federal Reserve come to grips with the real world impact of their policies it is just a matter of time before the lemmings lead us off the cliff again.”

“Monetary policy took market focus Thursday after the Bank of Japan said it would amp up its bond-buying program in an effort to stimulate growth that has not come despite two decades of similar effort. The BoJ measures resemble a similar program by the U.S. Federal Reserve , which has taken its balance sheet past $3 trillion as it has bought government debt in an effort to flood liquidity into the markets and reduce unemployment while stoking inflation.”

“‘Rather than step back and ask why (the measures have not succeeded), they just go deeper and deeper,’ Pimco’s Mohamed El-Erian told CNBC. ‘The question is, will they finally succeed in transitioning from assisted growth to real growth, or will it end in tears.’”

“A report from Arizona State University’s W.P. Carey School of Business said the median price for single-family homes in the greater Phoenix area rose 36.5 percent from last year. Confidence is important with the burst housing bubble still fresh in peoples’ minds, said economist Michael Orr, author of the report. But another housing-driven economic boom is not likely, ‘as long as we don’t let it run out of control again,’ Orr said.”

“‘That rarely happens, and that is unlikely to happen again in the foreseeable future,’ he said. ‘That’s probably not something we will be subject to again in the next 20 years, not until all the people who remember it have died out.’”

“As soon as it hit the market, the four-bedroom Sea Cliff home inspired a bidding war, with the top two prospective buyers both offering well above the multimillion-dollar listing price, in cash. In today’s fevered real estate market, that’s no longer unusual. But there was a twist: Both bidders were located in China, and both made their big-bucks offers without ever setting foot in the house. One of them ended up buying the house for $3.1 million, substantially above its $2.8 million list price.”

“‘At first, I was really, really surprised and kind of suspicious,’ said Nina Hatvany of Pacific Union, the listing agent. ‘I was concerned that they hadn’t seen the property. After all, they might not like it when they saw it. I said to the sellers, ‘This seems like a new buyer profile. You might as well take it.’”

“Lynne and Brandon’s Scott’s house-hunting story sounds like something out of the housing bubble of 2006. They got in a bidding war. Then a house came on the market in the Clarkson Woods subdivision in Chesterfield, where houses sell in the $275,000 to $325,000 range. So the Scotts wrote an offer for the house before they could see the inside, contingent on their approval once they visited.”

“‘This house popped up in a neighborhood we were happy with. We knew it would go fast. We would look at a house and they would instantly have an offer. I felt like, oh my gosh, we have to move fast,’ said Lynne Scott.”

“They wrote a letter to the owners, saying how much they liked the house, and included pictures drawn by their little girls. They got the house — at $13,000 over the asking price, and after they dropped the requirement of a professional inspection.”

“Nick Grandy loves his newly-built home in Noblesville. After moving in a few weeks ago, he’s just getting settled. He’s not the only one. ‘Just since we moved in, I think nine houses behind us have popped up,’ Grandy said.”

“Central Indiana building permits are up 40 percent so far this year — double the increase this time last year. February alone saw a 30 percent improvement. Alan Goldsticker, president of Ryland Homes of Indiana, said he hasn’t seen sales like this in seven years. ‘These are all sold homes,’ he said, pointing to a row of homes under construction. ‘We basically ran out of lots and we’re getting started developing the next section.’”

“In 1995, Allan and Karin Hoegg were mortgage-free. But no more: today their Vancouver home is a valuable source of income as they plan for full retirement. Mr. Hoegg says when their son and daughter-in-law wanted to buy a house, they took out a variable-rate mortgage so they could help them out. To cover the mortgage payments, they rent out a suite in the home to students.”

“The couple also established a home line of credit that allows them to free up cash for investment purposes when they need it. ‘It gives you maximum flexibility and you can pay it any time you want without penalty,’ he says. ‘It’s dead easy.’”

“Rob Regan-Pollock, senior mortgage consultant says. ‘If for some reason you can’t meet your monthly expenses, a line of credit on your home can be a very good buffer. The interest rates are low. It’s also quite sustainable, since your home will often appreciate in value more than the amount of debt being drawn down against it.’”

“A year and a half after he put it on the market, former Chicago Cub Carlos Zambrano’s six-bedroom, five-bath River Forest home sold for $675,000, which is 56 percent of what he had paid for it seven years earlier. He bought the River Forest house for $1.19 million in July 2006, according to the Cook County Recorder of Deeds. Only a year and a half after buying in River Forest, Zambrano bought again. In January 2008, I reported that he had paid $2.66 million for another six-bedroom house in Lakeview.”

“Later in 2012, he put the Lakeview home on the market asking $2.395 million—a 10 percent loss—but took it back off the market at the end of the year.”

“He didn’t put the River Forest house on the market until August 2011. At that time, he was already asking for a loss, listing the home for $969,000, or 80 percent of what he had paid. The River Forest property came down in price several times and changed agents twice. It wasn’t actively listed from September 2012 until December, when Weichert Realtors/Nickel Group got the listing and cut the asking price to $829,000. The ultimate selling price took 19 percent off even that deeply reduced ask.”

“National news reports trumpet the rising demand for housing, and the rapid transition from glut to scarcity. Treasure Valley is facing a serious shortage of affordable homes, with prices skyrocketing, and the problem is far broader. Fifty percent of Idaho’s residents cannot afford to buy an average-priced home in their community, and one out of five cannot afford rent.”

“At Neighborhood Housing Services, which I lead, we see the challenges in Treasure Valley first-hand. It’s comforting for many to see property values rising again. But, as they do, we must remember our fellow citizens for whom it is not good news. Those citizens, whom we try to help every day, are typically hard-working contributing members of our community, who just need an affordable home.”

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