January 3, 2014

Building Up A Big Bubble

It’s Friday desk clearing time for this blogger. “Part of the reason housing prices have taken off? Investors. Some from other countries, some from Wall Street. Investor interest sparked bidding wars in housing markets, which Anthony Sanders saw first-hand when he bid on a house in the Virginia suburbs of Washington several years ago. ‘I just happened to have one Chinese investor literally arrive at the house at the same time I did,’ he says. ‘And we almost had a foot race to the door. Fortunately, I’m faster.’”

“Sanders teaches real-estate finance at George Mason University, and says the bidding wars are producing bubbles in the hottest housing markets, like Los Angeles, San Diego and Charlotte. ‘That’s where the bubbles are forming,’ he says. ‘They’re old bubble cities, that are re-bubbling.’”

“It’s getting harder to make a bundle buying up foreclosures and renting them out. The auction prices of homes climbed faster than rents in 2013, so returns on investment dropped, according to CoreLogic. Glenn Plantone, a real estate investor in Las Vegas, said that there were only 208 properties sold there at auction to third party purchasers — not lenders — in October. That was the first time in six years that a month had fewer than 300 of such sales.”

“In Tampa, which was the top city in 2012, returns declined to a yield of 9.7% in 2013 from 10.5%. The reason for the decline: An influx of institutional investors with money to spend at Tampa’s foreclosure auctions. ‘It’s much more difficult to get a return when prices have been pushed up,’ said Sean Galaris of financial services firm LM Funding, which is based in Tampa.”

“Mike Conlon’s big break came when the housing market bubble burst. His company went around snatching up bank-owned properties and housing owned by the financially distressed. But after two years and 3,000 home spaces acquired, fixed up and managed, he is slowing down. ‘For 2014, I’m being cautious,’ Conlon says. ‘It looks like we are building up a big bubble again; it’s like 2008 is repeating itself. Low interest rates are staying low too long. We see it in real estate. Things we were able to buy at rock bottom, it’s ended now. Things are way overpriced again.’”

“Weak conditions in the territory’s property market mean an increasing number of people are selling their homes in Canberra for a loss. A housing price report for the September quarter, issued on Thursday, shows 7.5 per cent of homes were sold for a loss, and the median loss was $18,900. Despite the increase, Canberra had the third-lowest proportion of loss-making sales in the country. Sydney recorded the lowest at 4.8 per cent, followed by Perth at 4.9 per cent. ‘The recent weakness in capital growth conditions across Canberra is resulting in an increasing proportion of loss-making resales,’ the RP Data report says.”

“Cooling measures have turned Singapore property agent Sanam Mahesh Daswani into a ‘chaser’ of clients, instead of a clincher of deals. In the past, her cellphone used to ring off the hook with eager buyers. Now, she needs to prod clients relentlessly before they make a purchase. ‘Before they (buyers) came to us, now we have to follow them. And we need more patience now, because they take longer to decide,’ said Ms Sanam.”

“She is not alone in her situation. Agent Frederick Chia said that he had to sell a 1,200 sq ft condominium unit in Changi Court for $1.22 million two months ago, a figure lower than its market rate of about $1.3 million. Even so, his client ‘could have lost more.’ ‘I don’t think we would have been able to obtain that (same) price today,’ noted Mr Chia, whose monthly sales from the sector have nearly halved in recent months.”

“‘It’s little surprise that buyers are holding off purchases, because the government has no intention to loose its property tightening measures,’ said Buggle Lau, chief analyst of a Hong Kong real estate agency. Barclays UBS and Merrill Lynch Bank of America foresee a downturn, with home prices falling 30 percent or more by the end of Y 2015 on the back of supply increases and stalling income growth. ‘The magnitude of the fall is underestimated,’ wrote Barclays’ analysts. ‘The property market is about to enter its first real downturn since 1998.’”

“When Michael Shuken recently bought his family’s first home, a four-bedroom in Mar Vista, his adjustable-rate mortgage helped them stay on the pricey Westside. For now, his interest-only loan costs him about 35% less per month than a 30-year fixed mortgage, he said. But he’ll have a much bigger monthly bill in 10 years, when the loan terms require him to start paying off principal at potentially high rates.”

“‘What is going to happen if I can’t restructure my loan and extend it? Are interest rates going to be 7%, 8%?’ the 43-year-old commercial real estate broker said. ‘The home is big enough for me to grow into. The question is, will I be able to?’”

“More homeowners in Southern California were willing to take that risk last year. In November, 11.2% of homes bought with loans carried adjustable-rate mortgages, or ARMs. That’s double the rate of the same month a year earlier, according to DataQuick. Mortgage brokers say borrowers who plan to move after a few years, or those with considerable, but irregular, income could be well-suited for an ARM. ‘A big percentage of my clients are freelance employees in entertainment,’ said John Ciolino, a senior loan consultant with Luther Burbank Mortgage. ‘So they are going job to job, and they are concerned with having a higher mortgage payment.’”

“One of the most important changes is a new standard set by the Consumer Financial Protection Bureau for determining whether a borrower is qualified to repay the loan, or theability-to-repay mandate. Jerry DeMaio, a loan officer and a real estate agent in Woodbridge, said what concerns him most about the new regulations is the change in debt-to-income ratio. He said that in 2013, he was able to get mortgages for people whose debt-to-income ratio was 45 percent. However, in 2014, that will drop to 43 percent. DeMaio said that will make it a little more difficult for some people to qualify for loans.”

“On the positive side, DeMaio said, most people even at the 43 percent ratio, are overextending themselves with a 43-percent loan-to-income ratio.”

“The 2007 Mortgage Foreclosure Debt Forgiveness Act has been dismissed that tax on short sales has ended in 2014. ‘I don’t know how this will shake out, but it’s a very sad thing. And I don’t know how they are going to pay taxes (on forgiven debt). They have no money to pay them with,’ said Sharon Clark, the executive director of the Central Jersey Housing Resource Center in Raritan Borough.”

“Two Monterey real estate brokers were found guilty in civil court of defrauding the public when they falsified loan documents that caused an elderly woman to lose her house, the District Attorney’s Office said. In 2008, prosecutors opened their investigation of the marketing and business practices of real estate loan brokerage Estates on the Bay, Inc. and its owners, Susana Silva and Deanna Gobert, who were assessed fines after a 10-day bench trial. The 43-page order indicates Silva said she started in real estate in her 20s and was taught to ‘push everything through,’ even if it meant falsifying loan documents.”

“If Janet Yellen, who takes over as chairman of the Federal Reserve if the Senate confirms her in a vote scheduled for next week, tapers too quickly, investors could panic, causing mortgage rates to surge, said Diane Swonk, an adviser to the Federal Reserve Board. If the new chairwoman goes too slowly, low rates coupled with an improving economy will cause the housing market to overheat, Swonk said.”

“The share of homes bought by first-timers fell to 28 percent in November from 30 percent at the beginning of 2013, according to the National Association of Realtors. During the decade ending in 2012, the average was about 40 percent. ‘So far, first-time buyers have been missing from the housing recovery,’ Swonk said. ‘They need to come into the market in greater numbers because they have to buy properties before sellers can move up.’”

“‘Yellen has control of the punch bowl,’ said Swonk. ‘If there’s not enough punch, the party starts to die. If there is too much, it gets out of control.’”

“‘It’s clear that the rise in mortgage rates slowed the pace of improvement in the housing market in addition to double-digit price increases and tough lending standards which have put a particularly on those buying a home with a mortgage,’ emailed Peter Boockvar, chief market analyst at the Lindsey Group. ‘How the U.S. economy responds to higher rates in 2014 will be the true test of its health and whether it’s a perpetual addict to cheap money or not.’”

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