September 13, 2013

Chinks In The Armor Are Starting To Show

It’s Friday desk clearing time for this blogger. “How should we define a housing bubble? The classic housing 2004 housing bubble paper by Karl Case and Robert Schiller explains it this way: ‘We believe that in its widespread use the term refers to a situation in which excessive public expectations of future price increases cause prices to be temporarily elevated. During a housing price bubble, homebuyers think that a home that they would normally consider too expensive for them is now an acceptable purchase because they will be compensated by significant further price increases.’”

“So where do we stand today? Well people buying homes are cite future price increases as one of the ‘key factors’ motivating them to buy. The most recent survey by the real-estate company Redfin found that almost one third of buyers are motivated by rising prices.”

“Fully 70% of the psychology for buying houses is now driven by low rates – low mortgage rates at 37% and rising prices at 33%. John Carney tells us that not only are homes now growing increasingly less affordable, but the psychology of the US housing market is changing to one of the fear of being priced out. People are now falling all over themselves to buy houses because they think prices are running away from them. And literally a year or two ago, the psychology was almost exactly the opposite. Wow. Frankly, I can’t believe we are here again, but we are.”

“A guy we’ll just call Frank is having a tough time in the current Toronto real estate market. He figures he’ll have to borrow upward of half a million dollars, and he’s freaking out. Frank and his wife make good money, they’ve got no debt other than their condo mortgage and they’ve put together a down payment of $125,000. The bank says buying a $700,000 house is no problem for them, but Frank is squeamish about spending that much money. For the past three years, he’s been saving with a goal of spending $500,000 on a starter home.”

“‘The problem is that over the past two or three years, while we’ve been saving our down payment, the half-million-dollar starter home became a three-quarters-of-a-million-dollar starter home,’ he said. ‘Inevitably, you’re at the will of the masses. And if the masses are going to jump and make a horrible mistake, you’re almost forced to do it as well.’”

“‘If you’re going to own real estate in Toronto for the next 20 or 30 years, then we’re not at the high end of the market now,’ said Rona Birenbaum, a financial planner.”

“The Lubbock economy has remained stable and — if the local housing market is any indicator — it is now stronger than ever. This year’s Parade of Homes featured 26 houses valued at $300,000 or more, and all except one sold by the conclusion of the event. ‘One of the main focuses of this market has been anticipation of good economic times,’ said Coby Crump, president of the Lubbock Association of Realtors. Houses between $70,000 and $150,000 and those priced above $300,000 have become the fastest selling price range of homes, which Crump called ‘unusual,’ as more and more people are investing in Lubbock real estate.”

“‘Inventory is low on the homes in the $100,000 to $150,000 range, and they tend to get snatched up before you can even get a sign in the yard,’ said Robin Long, a realtor for Century 21. ‘People are buying them for kids going to school, and just as an investment. They can’t make very much in the stock market or with CDs, so they figure, ‘We have the money,’ so they are buying real estate.’”

“Year over year, finished lot values were up 87% in San Francisco and Oakland, 75% in Atlanta and 70% in Las Vegas. Builders expect future home prices will cover their higher lot costs. ‘We’re betting on things two years from now,’ says Dennis Webb, vice president of operations for Fulton Homes, a Phoenix-area home builder.”

“Bigger homes are coming along with higher land and lot prices. The average size of a new home hit a record 2,642-square-feet in the second quarter, the Census Bureau says. Later this year, Fulton plans to start selling luxury homes in a Phoenix suburb ranging from 3,800 to 6,800 square feet. They will be the biggest homes Fulton has built in Phoenix since 2005.”

“Workers in many of Southwest Florida’s most prominent occupations are now dedicating more of their paychecks toward housing than they can financially afford, a new study concludes. ‘We have seen rapidly increasing housing costs again, but the people in Florida can’t afford it because we rely on so many tourism and service-related jobs,’ said Jack McCabe, a real estate consultant in Deerfield Beach. ‘These positions just don’t support the cost of housing.’”

“Fueled by the recovering housing market, the assessed value of all taxable properties in Los Angeles County rose 4.7  percent, according to the latest annual report from the Los Angeles County Office of the Assessor. Robert Smith, a Realtor with Keller Williams Realty AV in the Antelope Valley, said ‘chinks in the armor’ are now starting to show. ‘Homeowners are placing more properties on the market, but on the other side interest rates are rising,’ he said. ‘We’re seeing less of the bidding wars. Buyers are asking for more concessions, but sellers are standing their ground. It’s kind of a standoff.’”

“Recent research by a Japanese scholar shows that China’s urban land is now valued at a combined 265 trillion yuan ($43.3 trillion), roughly six times the country’s GDP last year. Under normal circumstances, land prices should not exceed GDP by more than a factor of two. And when Japan got hit by its own financial crisis, its land was worth four times GDP. Many have warned of the threat lurking just under the surface of China’s housing market. But none of the warnings have been taken seriously. By and large, Chinese ‘experts’ deny the existence of a bubble altogether, saying the market has plenty of room to expand further. ”

“Explaining the reasons behind the poor sales, Pankaj Kapoor, managing director of Liases Foras said, ‘It is due to the high prices. In most of the markets, prices have almost doubled from 2009, while the incomes have not risen. High prices have made the housing unaffordable; therefore sales have been slow over the last 2-3 years. Since, other avenues of raising funds are also limited, the developers are faced with liquidity crunch.’”

“Anand Gupta, ex-president of the Builders’ Association of India said, ‘It would be improper to say that these 1.35 lakh flats are ‘unsold’. Rather, it should be termed as ‘unused’ flats because builders have already sold most of these flats to the investors, who are looking for the right time to sell it.’ However, Mr Gupta also admitted that, ‘Builders are likely to face liquidity crunch in the near future, if they do not unlock the sale by reducing the prices.’”

“Several areas in Bangkok and provincial towns are already experiencing a glut housing due to rapid growth during the past few years. Making matters worse is the surge in speculation, seldom reported, but constantly active beneath the surface. Clearly the sense of a saturated market and intense competition bodes ill for speculators who had bought in the hope of making a quick profit. Sales have been sluggish for months. To make matters worse, many punters have raised their prices. A studio now sells for almost Bt3.5 million, equal to that of downtown projects. Banks are also cautious, if not nervous, about giving Bt3 million plus to buyers of studio units.”

“Why does a property crash take a long time? Like the seven stages of death, punters go through a number of stages before they capitulate. The stages are shock, denial, anger, bargaining, guilt, depression and finally, acceptance. We are somewhere in the middle. Denial seems to run the longest course with punters rejecting there is a bubble. Ultimately the cost of paying for a condo they can ill afford and the probability they would be stuck with it forever sinks in.”

“Beyond the fear of a property bubble, Malaysians are asking themselves one question - is it really important to own a house and at what cost? ‘The younger generation is unfortunately enslaved by the powers-to-be,’ veteran property consultant Dr Ernest Cheong told The Malaysian Insider in Kuala Lumpur. During the two decades after Merdeka, the government encouraged house ownership to secure the loyalty of immigrants. However, since the 80s, it has cynically been seen as a way for the government and industry to pursue profits instead of offering a roof over citizens’ heads, said Cheong.”

“Cheong said young working adults aged 25-35 and holding their first jobs earn between RM3,000 and RM5,000 a month and would not be able to afford anything beyond RM100,000. ‘They actually cannot afford to buy anything without the help of their parents,’ he said. ‘Sadly, this generation must come to terms that they may never own a house as long as prices continue to rise.’”

“Ferdinand Pereira is one who has opted to rent. He added that he sees it as an option rather than a problem, and that people should not be so preoccupied with owning a property that life passes them by. ‘It is ingrained in us that home ownership equals security, but no one speaks about the burden of a 30-year loan over your head, which also ties you down to a fixed place.’”

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