June 14, 2013

A Housing Bubble Built On Sand

It’s Friday desk clearing time for this blogger. “With inventory down and prices rising, buyers are exhibiting the kind of frenzied behavior not seen since 2005. It is not enough that they are mobbing open houses, bidding thousands of dollars over asking price, and making all-cash offers. They are going so far as to Google owners and craft pitches in which they pretend to enjoy the same things the sellers do. Family photos are not uncommon. As word spread in Jamaica Plain that Tanya Contos’s Colonial might be going on the market, strangers began ringing her doorbell. ‘It was like trick-or-treating, but for houses,’ she said. ‘They were slipping notes through my mail slot.’”

“The letters are a ploy resurrected from past competitive markets, but do they work? ‘When you have five people writing similar letters telling the same story about how much they love the house, what does that become?’ asked Gary Rogers, a past president of the Massachusetts Association of Realtors. ‘Junk mail.’”

“If you’re relocating to the Washington region from places such as Atlanta, Charlotte or Philadelphia and are looking to buy a home in the $750,000 range, chances are you’ve already experienced a reality check. In those cities, $750,000 would be considered the luxury market — where you can buy an estate on several acres. ‘Buyers who come to our area looking for an equivalent home go through sticker shock in this area when they try to duplicate what they had before,’ said Jeremy Cunningham, a real estate agent who mainly covers Northern Virginia.”

“In this area, $750,000 is considered the mid-range. Luxury starts around $1.2 million, he said.”

“Foreclosure sales plummeted in May after federal banking authorities reminded lenders to play by the rules when foreclosing on homes. Sales at courthouse auctions fell from April to May a combined 25 percent in Santa Clara, San Mateo, Alameda and Contra Costa counties, according to PropertyRadar. There were similar declines across California, the company said. Foreclosure sales have been declining for months and are now 70 percent below their level a year ago in those counties as rising property values pull more homeowners out of trouble and banks work on loan modifications with those who are still struggling.”

“Lenders still have plenty of foreclosed properties that they haven’t put on the market. The number of foreclosed properties they hold has dropped more than 45 percent from a year ago, but they are holding 3,413 foreclosed properties in the East Bay, Peninsula and South Bay, according to PropertyRadar. That’s reduced the number of homes for sale and caused prices to jump, said Maeve Elise Brown, executive director of Housing and Economic Rights Advocates in Oakland.”

“Foreclosed properties ‘are not being released by investors or banks,’ Brown said. ‘They are completely, artificially jacking up prices.’”

“Foreclosure filings in May more than doubled in Flagler County compared with April, according to a new report. ‘Not only was there a jump in Flagler County for scheduled auctions, but there was a statewide jump of 79 percent as well, so we are seeing an overall trend,’ said Jennifer von Pohlmann, a RealtyTrac spokeswoman. ‘We see the pattern in Volusia as well.’”

“‘We’re starting to see the shadow inventory coming out,’ said local Realtor Ron Wysocarski in Port Orange. ‘It’s a perfect storm. There’s a low inventory and demand is up as those hedge funds are buying and renting distressed houses. Together, they raise prices. There is an appetite now and banks can dump homes on the market without much of an impact because they are being bought up so quickly.’”

“Surging home prices in parts of Dubai and rebounding shopping and tourism markets are prompting developers to announce projects on a scale not seen since the emirate’s property market collapsed in 2008. So far, sovereign wealth, pension and insurance funds are staying away even as they splurge on real estate elsewhere. ‘It’s a thin market and it has a reputation of being something of a casino,’ said Richard Price, chief executive for Asia at CBRE Global Investors, which manages $93 billion of property assets. ‘The housing bubble was built on sand rather than fundamentals.’”

“House-hunters are seeing a return of ‘buy-off-the-plans’ developments which advertise low deposits and no repayments until completion. Marketing material for Urba Residences offers ‘just $1000 down and nothing else for 18 months’ for those using existing equity in their current house, or a 10 per cent cash deposit. Barfoot & Thompson agent Alistair Brown told the New Zealand Herald that of the 140 apartments about 80 had been bought, with about half choosing the $1000 down-payment option.”

“‘What happened in 2007 is everyone piled into those things without thinking them through, thinking ‘Yay the property market will keep rising and in 18 months I’ll have a profit, because they’re $250,000 today and they’ll be $300,000 in 18 months time and I will have only put up $1000. Good for me’. It might not be that way,’ said Real Estate Institute chief executive Helen O’Sullivan.”

“Australia’s GDP growth expanded merely 0.6% in the first quarter. This was after a 0.6% rise in Q4 2012. Minus export growth, Societe Generale’s Albert Edwards writes that gross national expenditure has fallen for two straight quarters. ‘All we have in Australia is, at its simplest, a credit bubble built upon a commodity boom dependent for its sustenance on an even greater credit bubble in China,’ he said. ‘Although a Chinese bumpy/hard landing will bring Australia to its knees, what will will send Australia into a deep recession after 22 years is the collapse in its grotesquely over-valued housing market.’”

“For years the resources boom made Port and South Hedland one of the tightest property markets in Australia. Now, the cancellation of big projects could leave the remote West Australian city with a property glut and a lot of burned investors. Greg and Karen Thompson pulled their home off the market in Hedland after just one viewer inspected the house over three months. The couple, who have lived in the area since 1996, planned to use the proceeds to help fund their retirement. ‘We had to take it off the market,’ Mrs Thompson said. ‘It’s dead.’”

“John Briggs of Port Hedland Real Estate predicts tough times ahead. ‘Sales are few and far between,’ he said. ‘Anybody who has bought in the last 18 months is in for a torrid time.’ ‘Anyone looking to buy into towns like Port Hedland is buying at the wrong end of the market cycle,’ said Gavin Hegney, of valuers Hegney Property Group. ‘There’s also the threat of a collision of new supply coming on the market and falling demand.’”

“A recent report from the Organization for Economic Co-operation and Development revealed Canada has the third most overvalued real estate in the developed world. Ben Rabidoux, creator of the blog Economic Analyst, which looks into housing and mortgage trends, said while low interest rates certainly contributed to the housing boom, said much has been fuelled by the availability of credit.”

“‘It’s not like we haven’t seen periods of relatively low interest rates in the past and even in those periods we found that prices weren’t in the extreme like they are today,’ Rabidoux said. ‘I think it’s very clear — it’s not so much the interest rate itself, it’s that really what we’ve seen in the last decade has been an unprecedented credit boom. And that’s what’s really driving these housing prices.’”

“During the past four centuries, there have been five occasions when major credit bubbles have led to stonking crashes. Tulip mania in 17th-century Holland was the first; the South Sea bubble in the 18th century was the second; the US real estate crash of the 1830s was the third; the 1929 Wall Street Crash and the Great Depression was the fourth. The sub-prime crisis that began in 2007 was the fifth.”

“As the world approaches the sixth anniversary of the freezing up of credit markets, a terrible idea has occurred to investors: we might only be part-way through the crisis. This has come as something of a shock. For the best part of the year markets have been pushing asset prices higher in the belief that the worst of the crisis is over. They have given a big round of thanks to Ben Bernanke, Sir Mervyn King et al for keeping monetary policy ultra-loose and avoiding a repeat of the 1930s.”

“Doubts are now starting to set in, and rightly so. Cheap credit has done wonders for equity and bond markets but precious little to revive real activity. An extremely aggressive and highly dangerous dependency culture has developed and it is not easy to see how central banks get out of the problem that they have created for themselves. There is also a risk that seeking to solve a debt problem with still more debt is creating the conditions for an even bigger bubble.”

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