May 2, 2014

The Momentum Is Gone

It’s Friday desk clearing time for this blogger. “After a frigid and molasses-like start to the year, the metro Detroit housing market has blossomed this spring into a seller’s market. Out in Orion Township, Scott Herkes and his wife are building a two-story, four-bedroom house in the new Stonegate West development by Pulte Homes. About 40 of the Stonegate’s 140 house sites have been sold at prices ranging from $310,000 to $425,000. But they won’t be selling their Birmingham house quite yet. As they bought their existing house near the top of the local price market a decade ago, and have since made home improvements, Herkes said they are planing to rent the property as the market continues to rise.”

“‘At least in the short term, to see where the values go,’ he said.”

“Melia Campbell, president of the Sutter-Yuba Association of Realtors, said, in some ways, the buying frenzy actually hurt the market. The investors that concerned Campbell were large hedge funds and investment banks, which bought homes in bulk sales from banks at below-market price. These homes never went to the market and were never an option for traditional buyers. By skipping the conventional market, it limited supply, thereby raising home prices — sometimes past that point where people could afford them, Campbell said.”

“THR California, a subsidiary of the large hedge fund the Blackstone Group, bought about 1,000 homes in the Sacramento area that never went to the market, Campbell said. As a result of that, and other activity, median price increased by 24 percent in Yuba-Sutter between March 2012 and 2013, Campbell said. Last August, that activity began to taper off, Campbell said. ‘Home prices are up enough that investors are no longer interested because they can’t turn them for a profit, and that stabilizes the market,’ Campbell said.”

“After a decade of boom-bust-boom, the U.S. housing market is going downhill just when many economists thought it would be heading upward. Sales are slipping in Phoenix and Las Vegas, where traditional buyers aren’t stepping in to fill the void left by investors—whose activity pushed prices up. In Arizona, where investors helped drive a 44 percent increase in home prices in the past two and a half years, ‘momentum is gone,’ says Jim Belfiore, president of Belfiore Real Estate Consulting. ‘The market has been deteriorating since June of last year,’ Belfiore says.”

“Prices have climbed so fast in the past two years that buyers have sticker shock, says Lawrence Yun, chief economist for the National Association of Realtors. He projects that sales will decline 2 percent this year. ‘Housing is a victim of its own success,’ he says. ‘It’s just that the fast price growth is not healthy.’”

“Regina is the only major city where prices have fallen since the end of last year, according to the Canadian Real Estate Association’s home price index. ‘In the last six to eight months we’re certainly starting to see a little bit of a downward trend in pricing,’ says Mike Duggleby, a local realtor. His hypothesis? ‘The builders may have gotten ahead of themselves a little bit. We’ve got what for us is a fairly high inventory of resale homes right now. Buyers have got a lot of choice.’”

“Dozens of investors want their concerns to be properly addressed before accepting a handover of the Remraam apartments they sank their cash into seven years ago. ‘I’m frustrated and fed up because since my building has not come up, they will give me another one-bedroom in another building,’ said Ayman, a software professional who currently rents in Sharjah. ‘I want my money back, but if I cancel I will have to pay a huge sum and forget my first installment.’”

“Another buyer, H S, said he was in a bind because his contract did not specify a handover date. He has already paid Dh120,000 towards a Dh750,000 studio apartment. ‘I could wait 20 years or 30 years for possession,’ he said. ‘I just want my cheque back and to cancel the contract. But I’m told I have to make the remaining payments. I will never buy anything under construction ever.’”

“Developers first reduced home prices in Hangzhou on high vacancy rates. Meanwhile, the cities of Changzhou and Ningbo also face a housing glut. In Hangzhou, garment manufacturer Youngor Group and ceramic tile producer Hangzhou Nabel Group Co., Ltd. withdrew from the housing market by returning land, selling shares and making drastic price cuts. ‘Large developers will attempt to achieve their sales targets through price cuts. Cities and regions with an oversupply situation will see large slashes in home prices,’ said Zhang Hongwei, a director of real estate consulting company Tospur.”

“A general manager at a Hangzhou property company, who declined to be named, said developers were spurred to cut prices on home buyers taking a wait-and-see approach. ‘When the market is at a downturn period, the timing of price cuts is very important. The first to reduce prices will attract buyers, but those that cut prices later may not,’ said Li Xiaotao, general manager of Hangzhou Xinsheng Real Estate Development Company.”

“Anxiety around China’s rise today is a déjà vu of how the world’s leading economies once felt around Japan. But that rise could become a replay of Japan’s subsequent decline and stagnation, says Patrick Chovanec of Silvercrest Asset Management, an expert on the Chinese economy. ‘There are striking similarities between China and Japan in the 1980s and ’90s, and they’re not superficial,’ he says. ‘They’re two very different countries but they ended up with a banking system that basically produces the same result—the outcome being a rapid deceleration of (hitherto high) growth, as well as zombie banks and corporations.’”

“Carmen Reinhart and Kenneth Rogoff, two professors of economics, studied centuries of financial crises and panics, repeatedly coming to the same conclusion. ‘If there is one theme to the vast range of crises we consider,’ they wrote in their book, ‘This Time Is Different,’ ‘it is that excessive debt accumulation, whether it be by the government, banks, corporations or consumers, often poses greater systemic risks than it seems during the booms.’”

“The euphoria around economic booms often obscures the possibility for a bust, which explains why leaders typically miss the warning signs. ‘Debt fueled booms all too often provide false affirmation of a government’s policies, a financial institution’s ability to make outsized profits, or a country’s standard of living. Most of these booms end badly,’ Reinhart and Rogoff write. Indeed, it is possible that the flood-the-zone strategy of the Federal Reserve and European Central Bank to pump the system with money could backfire badly.”

“‘Critics contend that the mopping-up-after strategy sows the seeds of yet more bubbles. It is argued, for example, that the Fed’s super low interest rates after the stock market bubble burst led us directly to the housing bubble. The Fed now stands accused of being a serial bubble blower,’ Alan Blinder, a professor of economics and public affairs at Princeton and former Fed vice chairman, wrote in an Op-ed in The New York Times.”

“When did Blinder write that? Not in 2012, or 2014. He wrote it in 2008, just two months before Lehman Brothers collapsed. If he’s right, a crisis may well be coming again.”

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