July 12, 2013

Financial Barbarians Drive Activity Up The Housing Chain

It’s Friday desk clearing time for this blogger. “A woeful financial crisis (1720) in Europe resulted from the crash of stock prices of the British South Sea Bubble (notice the name). The Bubble was a joint-stock company founded in 1711 as a public-private partnership (PPP) granted a monopoly by the Crown to trade with South America. But the War of Spanish Succession (1713) intervened, and the Bubble was never able to exercise its monopoly fully. Instead, it expanded its operations by selling down government debt (acquired from debt for equity swaps), then a novel financial scheme for which the Bubble’s stock rose in unexpected value, driven by speculators and investors pushed to the alternate new opportunity. From the hyped demand, the overvalued stocks peaked in 1720, and then drastically plunged to a little above its original flotation price.”

“From the experience with the British South Sea Bubble, the other overvalued stocks and assets rising dramatically from inordinate investor demand, and then collapsing to lower than fundamental value from the panic selling, were since then nicknamed ‘Bubbles.’ The nickname stuck.”

“The most fearsome bubble that may occur in the Philippines is the real estate bubble, which is much argued about as here or not here — and if already here, is it to burst soon? Think about it: banks suffering (and surely surviving) a default of 50% of their real estate portfolio would mean about 410.8 billion of the investors/end users money gambled on real estate would have been lost by them. Bailouts and subsidies can only increase money supply more, and did not work as in the US expansionary track, now being re-studied by the Fed. Should the advantage of hindsight be pointing to some traditional measures in preempting bubble situations, like controlling liquidity and inflation, maybe raising interest rates, increasing capital reserve requirements, and surely, strengthening financial institutions — while the economy is still strong?”

“But everyone’s so engrossed in blowing bubbles.”

“The cost of the average home rose by £2,000 a month between April and June to stand at £235,912 ­– up 2.6 per cent. The cost of the average London home rose by £12,610 to £478,256 but the hottest spots, according to online experts Zoopla, are Ellesmere in Shropshire, Ripon in North Yorkshire, Snodland in Kent, Totnes in Devon and Ormskirk in Lancashire, where increases are 3.2 per cent or above. Even the worst-performing areas – Glenrothes in Fife, Heywood in Greater Manchester and Spennymoor in County Durham, saw prices go up by at least 1.6 per cent in the past three months.”

“The Government hopes further initiatives such as New Buy and Help To Buy will encourage young people with small deposits to get on the property ladder. In a sign of growing confidence, Leeds Building Society yesterday launched a mortgage with a ‘zero’ interest rate for the first six months. Lawrence Hall, spokesman for Zoopla.co.uk, said: ‘Mortgage lending has improved markedly this year, which is unclogging the bottleneck at the lowest end of the market. This is starting to drive activity all the way up the housing chain.’”

“The failure of banks to apply risk management and improve the mortgage industry, combined with the government’s practice of merely issuing regulations to control their high-risk behaviour, are key weaknesses in one of the most vital sectors of Nepal’s financial world. Nepali banks sank a lot of money in real estate for a lack of investment options, which triggered an artificial boom. When the bubble burst due to market saturation and new government regulations, prices plunged, leading to economic turmoil.”

“All these malpractices and an unhealthy investment climate created a trend of lowered lending standards for banks, higher-risk mortgage investment and artificial growth of the mortgage market. So a housing bubble was created when housing prices, especially in the Kathmandu Valley, went on an unhealthy climb, instead of rising gradually with inflation or with a rise in average incomes. When the bubble burst, housing prices tumbled, causing the real estate market to collapse.”

“As a result of adjustable-rate mortgages, financial barbarians, vested interests of promoters and board directors along with loan officers and property valuators, a lack of understanding of market dynamics and the deteriorating financial strength of borrowers, there were adverse consequences on the Nepali financial market.”

“A veteran Moranbah real estate agent has shot holes through a recent Australian Property Investor report which labels the town’s housing market as ‘bulletproof.’ Moranbah Real Estate director Bella Exposito has been involved in real estate in the town for 26 years and said the past two years had been among the most volatile in Moranbah’s history. ‘I wouldn’t call it bulletproof - a rental that used to be $1800 a week two years ago is now $300 to $350,’ Ms Exposito said. She said the last house she had sold went for $320,000, a stark contrast to the $660,500 median house price listed in the API report.”

“Thousands of real estate agents took to Hong Kong’s streets Sunday in protest at government efforts to curb soaring property prices, saying new transaction taxes and other measures are threatening their business. ‘There are 37,000 agents in Hong Kong and there were only 3,000 transactions last month,’ said Raymond Ho, a spokesman for the rally organisers. ‘The policies have frozen the market. A lot of small property agent firms will close in the future.’”

“In the desperate days of the early eighties real estate crash, the developer of a luxury tower on New York’s Upper East Side offered buyers a free Rolls Royce with every condo. Recounting this story to city insiders at the recent launch of Trump Tower Vancouver, one offered this deadpan reply: ‘Well, they could always sleep in it after losing their shirt on the real estate market.’”

“The sudden appearance of sales incentives to attract buyers in the city’s glutted condo market has been nothing short of enthusiastic. And realtors, when not busy employing extra staging techniques to sell new and old properties, are inundated with offers of special $5,000 bonuses if they bring buyers to projects. ‘We have to be careful before saying ‘the sky is falling,’ says Diana McMeekin of real estate marketing firm Artemis. ‘What we’re seeing in the market today is a response to the shift from speculators to long-term investors. The kinds of people that are buying now are owner-occupiers as opposed to ‘flippers.’”

“It wouldn’t be an exaggeration to say Houston’s real estate market is on fire — with record-high median prices and tight inventory. But are we approaching a housing bubble? Or, could we already be in a bubble? Bill Gilmer of the Institute For Regional Forecasting at the University of Houston’s Bauer College of Business, says, ‘Many of the price increases that we have seen over the last twelve months (are) likely to be reversed.’”

“But Gilmer says his prediction of a price reversal applies only to the suburbs, not to the neighborhoods closer to downtown. ‘The good lord will never make any more land inside the loop.’”

“Leslie Appleton-Young, chief economist for the California Association of Realtors, updated attendees at this year’s Awesome Females in Real Estate conference with the latest economic trends from both California and the nation. The California foreclosure funnel is much worse than it looks on the surface, primarily due to the ‘underwater’ inventory. Appleton-Young broke it out in the following way: 435,000 delinquencies; 117,000 in foreclosure; and 61,000 bank-owned. At the current rate of 18,000 distressed sales per month, this means there are 34 months of shadow inventory.”

“When you add the ‘underwater’ category of 2.1 million homes and add it to the other three categories, you now have approximately 10 years of shadow inventory as opposed to 34 months. As Appleton-Young noted, ‘If you don’t have equity, you’re not a homeowner.’”

“Last month, Gov. Brian Sandoval signed a bill that is supposed to make it easier for banks to foreclose on delinquent homeowners. So far, things haven’t quite worked out that way. A mere 249 notices of default were filed statewide last month, down 88 percent from 2,108 notices in May, according to RealtyTrac. It helped improve Nevada’s overall foreclosure rate. Nevada’s foreclosure rate was fifth-highest in the country last month, compared to second-highest in May.”

“With the legal barrier from the robosigning law pushed aside, it’s now ‘entirely upon the banks’ whether they seize more homes, Las Vegas Valley real estate agent Keith Lynam said. ‘They have no more bogeyman to hide behind,’ said Lynam, the 2013 legislative chairman of the Nevada Association of Realtors, which pushed for the changes to the robosigning law.”

“Ohio had more than 90,000 foreclosures last year. In March of 2012, 49 states signed on to the National Mortgage Settlement with mortgage servicers who had admitted to massive ‘robo-signing’ of loan documents and other abuses. The settlement was supposed to be an expedient way for some 1 million people to keep their homes. But Paul Bellamy, director of an advocacy group involved in foreclosure prevention likens it and other programs to ‘foaming the runway, again and again and again.’ As in, preparing for a major crash and trying to keep things from blowing up.”

“The number of foreclosures in Washington state has climbed 78 percent in the first half of this year, according to RealtyTrac. New foreclosure filings have risen as well even though. Real estate economist Matthew Gardner says it’s not because all of a sudden a lot more people can’t pay their mortgages. He says lawsuits in Washington state artificially suppressed the number of foreclosures in 2011 and part of last year. Now that those cases have been settled or ruled on, he says banks are moving ahead, which may give people shopping for a home a little more hope of finding something.”

“‘It’s not going to be the cure-all to the housing shortage, but flushing these homes through the system is amazingly important,’ Gardner said.”

“A major reason behind the financial crisis that started in late 2008 was the fact that the Western countries had built many more homes than were required to house their populations. Ironically the solution that central banks came up with for mitigating the negative effects of the financial crisis was to get home prices up and running again. This was done by printing money and pumping it into the financial system and ensure that the interest rates remain at very low levels. The hope was that at low interest rates people will borrow money and buy homes.”

“Initially people stayed away but gradually they seem to be getting back to borrowing and home prices in Western countries are up and running again.”

“Governments and central banks pushing up real estate prices does help in the short term and translates into some sort of economic growth. But it does have serious long term repercussions as we have seen over the last few years. Albert Edwards of Societe Generale writes in a report titled If UK Chancellor George Osborne is a moron, Fitch’s Charlene Chu is a heroine ‘Young people today haven’t got a chance of buying a house at a reasonable price, even with rock bottom interest rates. What makes me genuinely really angry is that burdening our children with more debt (on top of their student loans) to buy ridiculously expensive houses is seen as a solution to the problem of excessively expensive housing…First time buyers need cheaper homes not greater availability of debt to inflate house prices even further. This is madness.’”

“To conclude, let me quote economist Robert J Shiller from The Subprime Solution: How Today’s Global Financial Crisis Happened, and What to Do about It ‘The idea that public policy should be aimed at…preventing a collapse in home prices from ever happening, is an error of the first magnitude. In the short run a sudden drop in home prices may indeed disrupt the economy, producing undesirable systemic effects. But, in the long run, the home-price drops are clearly a good thing.’”

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