May 23, 2014

Only Four Years Later, New Signs Of Excess

It’s Friday desk clearing time for this blogger. “A London resident on a typical salary can expect to spend 50 years saving for a house – just to afford the deposit on a mortgage. In London, the average house costs £458,000 , while the average salary stands at £34,000. The ratio between the two, at 13.5, is far higher than levels considered ‘affordable’ by independent researchers (three and less). ‘There are not sufficient houses built in the UK,’ said Bank of England Governor Mark Carney an interview with Sky TV. Comparing the situation to his home country of Canada, he added: ‘There are half as many people in Canada as in the UK, [yet] twice as many houses are built every year in Canada as in the UK.’”

“The most expensive housing market in North America is not New York City or Orange County, California, but Vancouver, British Columbia. Single-family houses now sell for close to a million dollars apiece and ordinary condos go for five or six hundred thousand dollars. ‘If you look at per-capita incomes, we look like Reno or Nashville,’ Andy Yan, an urban planner at the Vancouver-based firm Bing Thom Architects, told me. ‘But our housing prices easily compete with San Francisco’s. If the choice is between losing ten to twenty per cent in Vancouver versus potentially losing a hundred per cent in Beijing or Tehran, then people are still going to be buying in Vancouver.’”

“And the tendency of foreign buyers not to inhabit investment properties raises the spectre of what Yan has called ‘zombie neighborhoods.’ A recent study he did found that a quarter of the condos in a luxury neighborhood called Coal Harbour were vacant on census day.”

“Helen O’Sullivan, CEO of the Real Estate Institute of New Zealand, says it’s not investors and foreign buyers pushing up prices – it’s ‘nutters’ desperate to get on the property ladder. Ms O’Sullivan said investors don’t drive up prices because they are ‘rational’ about how much they’re prepared to pay, unlike people buying a home to live in. ‘If the maths doesn’t stack up, then they’ll stop… where perhaps people who have fallen in love with a property, or who become what we call ‘the nutter in the room’ because they’ve been outbid for so many properties. A housing crisis would suggest we had people camping in tents in the Domain,’ says Ms O’Sullivan.”

“Prime Minister John Key is playing down findings of an OECD report which rates New Zealand houses among the most expensive in the world. Mr Key said Auckland prices were still well below those in cities such as London and Sydney. But Labour’s housing spokesman Phil Twyford says Mr Key is in denial about the housing crisis. ‘We’ve got falling rates of home ownership, a generation of young New Zealanders who cannot get a home of their own. At the bottom end of the market there are people living in garages,’ he said.”

“Homes for sale in Cambridge now last only about eight days on the market before they’re snapped up by buyers, according to CoStar. Even at the very peak of last decade’s housing frenzy, Cambridge homes still took more than a month to sell on average. ‘It’s been crazy,’ said Jessica Ye, a broker at Keller Williams Realty in Cambridge, where bidding wars and all-cash offers are common when homes come on the market. ‘Both local and overseas buyers really want to be in Cambridge.’”

“Jan Kuypers and his wife bought a two-bedroom condo in Cambridgeport four years ago for $410,000, and were content to just get their investment back when they decided to sell. But their real estate agent advised they ask for $525,000. Within a week of the condo going on the market this month, Kuypers took the highest of four bids at just over $575,000. ‘It’s beyond anything we ever imagined,’ said Kuypers, who is moving with his wife to California. ‘It’s just incredible.’”

“Billy Gasparino and Jenna Dillon-Gasparino were savvy enough to wait out the housing boom of a decade ago as renters. Not until 2010, well into the bust, did they buy a house in the Venice neighborhood of Los Angeles, less than a mile from the beach, for $810,000. Only four years later, the couple see new signs of excess in the housing market and have decided to go back to renting. They are close to a deal to sell their house – for $1.35 million, a cool 67 percent gain.”

“‘It just seems like the housing market came back so strongly, so fast, that maybe there’s a little bit of a bubble there,’ said Mr. Gasparino. ‘When we bought four years ago after the crash, the market was dead, and it felt like everybody learned their lesson. It just went back so fast.’”

“Collin County is one of the hottest areas in the country for job creation, as evidenced by Toyota’s recent announcement it was moving its North American headquarters and 4,000 jobs to Plano. Another sign of the healthy real estate market in Plano is that foreclosures have decreased dramatically over the past three years. George Roddy, a local real estate analyst, said it is impossible to tell why the number of foreclosures dropped 50.4 percent from 2012 to 2013, but he thinks lenders may be giving people a longer leash.”

“‘In my estimation, they are keeping properties off the market for one reason or another,’ said Roddy, who began his real estate analysis business in 1970. ‘I don’t have the exact answer, but I think the federal government has told the lenders to slow it down. … They have just quit foreclosing, and there are many people who have lived in their house for a year or 18 months without paying a nickel.’”

“Two books published this month each tell a very different story about the housing bubble, the 2008 financial crisis and the weak recovery that has followed. The first book is ‘Stress Test,’ former Treasury Secretary Timothy Geithner’s memoir. The second is ‘House of Debt,’ by Atif Mian and Amir Sufi, economists at Princeton and the University of Chicago, respectively.”

“Housing, is the central focus of ‘House of Debt.’ The authors’ groundbreaking work on the relationship among indebtedness, falling consumption and high unemployment puts the real economy, families and a collapsed housing market, rather than the financial sector, at the center of the story. They make a convincing case that restructuring housing debt is as important as fiscal and monetary policy for economic recovery from severe recession.”

“‘The financial crisis left tragic pain and suffering in its wake,’ Geithner tellingly says. ‘Financial crises always do.’ Why would that be? Because of the ‘healing process’ of deleveraging. For ‘House of Debt,’ on the other hand, financial crises leave pain because they are associated with high debt levels, and with political efforts by creditors to make sure those debts are never reduced or eliminated.”

“Although Geithner’s ‘Stress Test’ is an entertaining story, the result of reading it alongside ‘House of Debt’ is damning. The worst thing about taking in the two books together isn’t that bailouts are tragic, necessary even when they feel unjust. Nor is it that nobody appreciates the good that was accomplished. Rather, it’s that the bailouts — Geithner’s magnum opus —were ultimately less important than the serious work of trying to deleverage household balance sheets, fix the housing crisis and focus on full employment.”

“‘A number of participants pointed to possible sources of downside risk to growth, including a persistent slowdown in the housing sector,’ according to minutes of the April 29-30 meeting of the Federal Open Market Committee. Fed Chair Janet Yellen cited the housing slowdown as a risk in her May 7 testimony to the Joint Economic Committee of Congress, saying it’s part of the reason ‘a high degree of monetary accommodation’ remains necessary.”

“Residents of the U.S. states that suffered the steepest home price declines and record foreclosures face labor markets that remain impaired five years after the most severe recession since the 1930s ended. Underemployment, including those in part-time jobs who want full-time work, remained highest in 2013 in Nevada, Arizona, California and Florida, with those states also seeing some of the steepest increases since 2007, an analysis of data from the U.S. Bureau of Labor Statistics shows.”

“The broadest measure of unemployment — which includes part-time workers who can’t find full time jobs, discouraged laborers, and those marginally attached, who want a job but are not actively looking — averaged 18.1 percent in Nevada last year, 17.3 percent in California, 16 percent in Arizona and 14.3 percent in Florida. The U.S. rate was 13.8 percent.”

“Housing prices rose 44 percent in Las Vegas in the last two years, 38 percent in Phoenix, 35 percent in Los Angeles and 28 percent in Miami.”

“Cliff Powell lost his job as a mechanical engineer in 2008 as Florida’s construction industry slumped. He hasn’t landed a lasting permanent position since. ‘I’ve been a roller coaster ride since 2008,’ said Powell, a fire protection specialist with more than 25 years of experience. He says reports of improving job prospects and lower unemployment rates are hard to believe in construction. ‘Most people I deal with in the industry say it’s a joke,’ he said. ‘Unemployment isn’t dropping, people are giving up.’”

“Barbara Spaulding of New Tampa, Florida, spent the past nine years looking for full-time, permanent work before landing a job. ‘There are more jobs, but there are also a lot of very well-qualified people applying for them,’ she said. ‘I think of all of these talented people not working. It is a crime.’”

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