May 11, 2014

If/When We Will Run Out Of Rich People

Readers suggested a topic on the current market. “The Great Depression, the Savings and Loans scandal, and the Financial Crisis of 2008 all had a common thread - rapid real estate price escalation and speculation. Is this a a hallmark of coming economic collapses? And if so, why or why not?”

A reply, “I guess my question is whether there have been occasions of rapid RE price escalation and speculation WITHOUT an economic collapse following. IMHO, I think real estate going up in value is a hallmark of a part of every economic cycle. As the economy gets better, more lenders are willing to lend, more borrowers willing to borrow, and so assets that are acquired with leverage go up in value…until they don’t.”

And one said. “Does it seem to others besides me that the disconnect between Housing Market Recovery happy talk and the grim underlying situation has reached a similar gap to that achieved in 2007, just before the SHTF?”

The Independent. “A small garden in the affluent west London area of Chelsea has sold for £84,000. In what appears to be a symptom of steepening property prices in London and the looming prospect of a UK housing bubble, a foreign buyer bought the plot at an auction despite it having no rights of way, or planning permission for development, the Evening Standard reported.”

“The lawn garden measures 55ft (17m) by 40ft (12m), was sold for over the average price of a home fewer than 300 miles away in the northern city of Durham, according to the newspaper. This means the land was valued at £1.68 million per acre. By selling the plot, its previous owner is believed to have made £31,000 in profit in just eight months, after it was acquired for £53,000 last September.”

“It was sold by Savills, whose director of national auctions, Christopher Coleman-Smith, told the newspaper: ‘The new owner can do what he likes with it. I suppose he could put up a marquee when the flower show comes around. Little bits of London like that are in scarce supply, and in 20 years time who knows what it might be possible to do with it?” It is the latest example of a tiny slice of London real estate selling for a huge sum despite not having planning permission to build on it.’”

The Times Picayune. “Home buyers and sellers are making deals in a peak market in the New Orleans area right now with a dwindling number of houses for sale in the city’s historic core and top prices for condos in the French Quarter and downtown areas, analysts said. French Quarter condos are selling for more than $500 per square foot — that is, if a buyer can actually find one, said Geoff Lutz of G. Geoffrey Lutz Appraisal Services. Only about a dozen hit the market each year, he said.”

“In the city’s other major condo market, the Central Business and Warehouse districts, condos are priced around $350 per square foot, and the number of sales are down ’substantially’ from last year, Lutz said. ‘This is not because there’s no demand,’ Lutz said. ‘It’s because there’s just no supply.’”

The Kansas City. “The Kansas City housing market is on a fast track this spring with sellers in the driver’s seat, so real estate agents are telling buyers they better move fast or the houses they want will be gone. ‘It’s taking potential buyers longer to find a home, and when they do find it there are multiple offers,’ said Kathy Minden, president of the Kansas City Regional Association of Realtors. ‘It’s clearly a seller’s market.’”

“‘The biggest concern we have now is the lack of inventory. It’s really scarce,’ said Ellen Bradbury, a real estate agent at Reece & Nichols. ‘As a result, homes come on the market, and they go fast with multiple offers. It creates an anxiety-ridden atmosphere. There aren’t any homes. That’s why my sales have dropped.’”

“The numbers reflect how challenging the hunt is this spring. There were 10,593 existing homes listed in the area in March, down 2 percent from a year ago and almost 19 percent lower compared to March 2012. As a result of that shortage, sales were actually down 9 percent in March over last year.”

From SNL Financial. “Dallas, Detroit, and San Diego might be drastically different markets, but Realtor associations in all three leveled the same primary gripe: a lack of inventory. ‘There’s plenty of interest, but the problem is there is a lack of inventory. People want to buy, but there is nothing for them to buy,’ Embry Webb, president of the Detroit Association of Realtors, told SNL.”

“In Dallas, Bill Head, director of communications for the MetroTex Association of Realtors, said there are 19,268 active listings, compared to 42,952 in 2007 before the crash. ‘It amazes me, because if you look at where the pricing structure is, it would certainly seem to be an ideal time to sell,’ Head told SNL. ‘Several homes in my neighborhood went on sale at a price that (a) I couldn’t imagine the home selling for and (b) I just didn’t see any way that that property could appraise for that price. And literally within a matter of two weeks, those homes were off the market.’”

“While the Dallas market remains affordable for the typical household based on the median price, Head said prices continue to ride higher, in contrast to San Diego and Detroit, where Realtors report a moderation in price increases. In San Diego, real estate agents think the market might be stabilizing, but prices are so high that first-time buyers are struggling to find entry. But that does not necessarily mean the market is in a bubble again.”

“Rich Toscano, a financial adviser with Pacific Capital Associates in San Diego, launched a blog in 2004 presciently predicting a housing crash based on overvaluation. He maintains a graph that compares home prices to a blended value of rent and per capita income. The index is now at the peaks seen in 1979 and 1990, but it is still well-below the most recent bubble. ‘People say to me, ‘Are you worried about it?’ And I think, ‘It’s expensive, but it’s always been that way,’ Toscano told SNL.”

“At the same time, he does not think there is much more room for prices to sustainably rise. ‘I wouldn’t say there couldn’t be more upside, but what I would say is that whatever upside there is, I would expect to be given back eventually, at least in relative terms,’ he said.”

“Real estate agents in the San Diego metro area seem to agree with Toscano that prices are starting to stabilize and that the days of double-digit annual growth have likely passed. Still, for buyers interested in the lower end of the market where homes are more affordable, bidding wars remain fairly common. Jim Klinge, a real estate broker in the metro area told SNL via email that the most recent low-end buyers he represented lost several bidding wars before nabbing a home.”

“On Klinge’s blog, which gained national fame during the housing crisis for its candor and brash style, the agent reports hyper-local statistics on supply and demand. For now, the fundamentals suggest San Diego’s housing market is strong. ‘What really matters is wondering if/when we will run out of rich people,’ Klinge wrote.”

Bits Bucket for May 11, 2014

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