October 11, 2013

Right Back Where We Were Before

It’s Friday desk clearing time for this blogger. “Texas, known for its open spaces and cheap property, is experiencing the types of real estate bidding frenzies seen in tightly built markets from New York to San Francisco. Institutional investors may be playing a part in shrinking inventories and driving up prices near Dallas and Houston, said Sam Khater, deputy chief economist at CoreLogic. Companies that are trying to build a national business of renting out single-family houses have already fueled price increases in Arizona and Atlanta, and are moving into other lower-cost markets such as Texas, he said.”

“Texas’s surge in prices ‘begins to defy the fundamentals,’ Khater said. ‘Those forces don’t shift that fast. The only factor it can be that can move things that much is an investment-type mentality driven by investors.’”

“In metro Phoenix, the market share of luxury homes, or those priced in the millions of dollars, rose to 21 percent from 15 percent in the year ending in August, according to an analysis by Mike Orr, at the W. P. Carey School of Business at Arizona State University. Meantime, the market share for the lowest-priced homes, or those priced under $150,000, fell to 14 percent from 25 percent. Anthony Salcito, a luxury-home developer in Scottsdale, said he went through the recession building one or two houses a year to sell for between $2 million and $3 million.”

“He is currently working on five homes in that price range, ‘right back where we were before the crash,’ he said.”

“With the growth picking up pace, predictions about the property market’s future trajectory have become even more polarized. ‘If the past 10 years can be hailed as ‘the Golden Decade’ of China’s property market, what follows will be ‘the Platinum Decade’,’ says Zhou Xin, chair of the Shanghai-based E-house China, a leading real estate service provider. Dong Fan, a professor from Beijing Normal University, adds that ‘it’s not difficult to foresee that houses in Beijing will reach over 800,000 yuan (130,000 U.S. dollars) per square meter 25 years from now.’”

“Corresponding to their optimism are warnings from other pundits that buyers should act with caution as the bubble-prone property market has accumulated many risks. ‘The growth momentum in first- and second-tier cities highly resembles the 1980s property market in Japan, whose housing bubble finally burst. We should be more cautious,’ warns Wang Shi, chair of Vanke, China’s largest residential developer.”

“The British know a thing or two about housing bubbles but still propagated a bubble in 2007 which peaked at 5.7 times income, with the subsequent crash once again exposing the weakness in the banking system. Have we learned? It would appear not! The current price to income ratio is 4.6, just shy of the late 80s peak and a worrying starting point for the traditional UK housing-led economic recovery, fed this time by mis-timed government incentives in the form of ‘Help to Buy’.”

“Aside from the fact that housing overvaluation effectively transfers wealth from the young to the property-owning old, when the obligation for government debt is going the other way, the housing market is being held aloft on the expectation that prices will rise indefinitely. It is an exemplary demonstration, as only the UK housing market knows, of the ‘greater fool theory’ of asset pricing: someone will always give you more than you paid.”

“Colin James’ article alluded to a potential problem in his last paragraph, ‘in any case , debt cannot go on rising forever. the circus will stop. At least houses are safe. Or are they? What’s your exit strategy?’ He clearly believes that debt offerings will diminish and interest rates will rise, meaning that invariably house prices will fall in New Zealand as they have in the USA after a ‘housing bubble’ caused by easy debt.”

“The indecent haste with which Aucklanders are panicking about required deposits for houses and the huge boom in housing prices, coupled with money printing, suggests a crash of major proportions. You should either downsize or pay off your debt quickly, the writing is not only on the wall, but on the floor and ceiling too.”

“Mortgage brokers, realtors and developers have seen a surge the last few months in people who bought pre-construction condos two to three years ago ’scrambling’ to get financing to close deals. Some have had to walk away from deposits worth tens of thousands of dollars. Others have been forced to borrow from family — or against their principal residence — to come up with final payments on condos that lenders are no longer keen to finance, according to interviews with a number of players in Toronto’s condo industry.”

“Financial analys Ben Rabidoux believes these are just the first ‘cracks’ in Toronto’s housing market and could worsen next year when a record number of new condos — estimates range from about 20,000 to almost 43,000 depending on construction bottlenecks — are expected to be completed. ‘An estimated 85 per cent of condo units under construction in Toronto have been sold, but they’ve not (all) been sold to end users, and buyers have not yet been financed,’ Rabidoux says in a recent note to investor clients. ‘Therein lies the problem.’”

“The housing market’s rebound slowed in September, with King County home sales sliding 14 percent and the median price dipping 2.3 percent from the prior month. Single-family home prices in King County saw a remarkable run from January to July, when the median price hit $434,000, a 24 percent increase in just seven months. ‘That’s way too fast. That’s a 2006 market,’ said Dick Beeson, principal managing broker at RE/MAX Professionals in Tacoma.”

“For more than five years, Jim Redgate has been living next door to a zombie. During the summer, the stench of rot and neglect forces his family to close the windows of their Harnett County home. In the winter, the odor is replaced with hordes of roaches looking for a warm place to live. Redgate isn’t alone. In the Cape Fear region, dozens of abandoned properties, known as ‘zombie titles,’ rot in limbo as mortgage companies pursue owners to care for their vacant house.”

“If loan companies don’t think a property will find a buyer at a suitable price, they may leave it in limbo as they work through more promising inventory. Counties end up with homes that don’t produce property taxes, and neighbors end up living with abandoned homes next door that can’t be resold because they’ve never technically been foreclosed. ‘Basically, if they don’t think they can get what they want for the property, they’ll just let it rot,’ Redgate said.”

“On August 22 Olivér Hendricks was evicted from his home of 18 years after a contentious foreclosure battle that lasted more than three years and went all the way to the Massachusetts supreme court. Similar to countless cases across the U.S., Hendricks lost his job and had too much debt, which lead to his foreclosure and eviction. In 1996, Hendricks bought his home for $132,000. He refinanced twice, which doubled his mortgage to $265,000. ‘My situation is that I lost my job,’ he said. ‘I’m an iron worker and when your contract you go from here to there, and what happened is the economy tanked, and so nobody’s building anymore, and we depend on building.’”

“Underwater mortgages are still a problem that a lot of people face. In Massachusetts, in July and August, there was an uptick in foreclosure filings from the month before.”

“Janet Yellen, whom President Barack Obama is poised to pick to lead the Federal Reserve, is likely to keep the US central bank on the track mapped out by Ben Bernanke. She has spent more than a dozen years altogether at the Fed, starting as an economist, in the 1990s doing three years on the board of governors, and from 2004-2010 as head of the Fed’s San Francisco branch. Since 2010 she has sat next to Bernanke as vice chair of the Fed, and also serves on the policy-setting Federal Open Market Committee (FOMC).”

“At the time she was elevated to Bernanke’s deputy in 2010, she was assailed for not having forseen the economic crisis that hit the region under her watch at the San Francisco Fed especially hard. While in 2007 she had warned of possible recession, she candidly admitted, in testimony to a congressional committee in 2010, that she didn’t anticipate how bad things could get. ‘For my own part, I did not see and did not appreciate what the risks were with securitization, the credit ratings agencies, the shadow banking system… I didn’t see any of that coming until it happened.’”

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