May 27, 2014

Booms Have Unintended Consequences

The San Francisco Chronicle reports from California. “After getting outbid on three houses, Shura Kelly decided not to mess around with 117 De Montfort St. True, it was in Ingleside Heights - not the Sunset District where she and her firefighter partner, James Quirke, grew up and would have preferred to stay. But the Sunset had become too expensive. Kelly, who runs a doggy day-care business, and her partner ‘came in strong’ with an offer of $810,000, 35 percent over the asking price of $599,000. The good news was that they beat out 46 other offers. The bad news was that someone else offered more than 50 percent over asking.”

“‘I thought for sure we had it but someone went bananas and offered $910,000 for a house in the Ingleside,’ Kelly said.”

“‘Housing affordability is the biggest single issue facing the Bay Area economy,’ said Ken Rosen, chairman of the Fisher Center for Real Estate at UC Berkeley. ‘Booms have unintended consequences.’”

From KTVU. “The strengthening U.S. economy has transformed the Bay Area’s already strong housing market into the juggernaut of the nation. Employment agent Debra Monroe said the 20 and sometimes 30-somethings she places tell her they’re are not thinking homes. ‘It’s not even on our bucket list of ideas anymore of what they want to do,’ said Monroe.”

“Home ownership will have to come somewhere else according to what they tell Monroe saying things like, ‘I’d be happy to move somewhere else where I could probably afford a house,’ and so it does affect peoples’ planning,’ she said. In fact, many of the folks who sell their Bay Area homes usually exercise one of three options. ‘When they see the houses that they’re gonna get for that price, that’s when the shock really sets in,’ said Pacific Union Realtor Kathee Shatter ‘They often move out of state or move north to a different county or something like that or downsize.’”

The Signal. “Local Santa Clarita Valley realtors noted some trends occurring in the market today. There are fewer multiple offers than a year ago when buyers were willing to write an offer on anything and as investors have mostly left the market. But the number of homes listed for sale has increased, taking pressure off of prospective buyers to find a home – any home. ‘In the Santa Clarita Valley cities there are anywhere between 10 to 20 new listings entering the resale market in a 24-hour period,’ said Connor MacIvor with Re/Max.”

“With that steady inflow of new listings, chances are good a buyer will find something in a relatively short period of time, he said. Buyers, however, are not ‘rushing’ into the market today as they were last year when inventory was slim. MacIvor points to the increase in the number of days a home is on the market compared to last year. ‘Real estate hinges on jobs,’ said Nancy Starczyk, president of the Santa Clarita Valley Division of SRAR. ‘The younger generation is finding it difficult to get employment; hence, they’re not looking at real estate investment early on, it’s being put on the back burner.’”

The Union Tribune. “Nearly five years after the Great Recession, more than 55,000 San Diego County homeowners are still underwater on their mortgages, says Zillow. The report found that in the first quarter of the year, 12.6 percent of homeowners with mortgages in San Diego County owed more on their properties than they were worth, down from 21 percent a year earlier. The drop in those underwater was aided by big home price appreciation in 2013. Still, the annual gains slowed in the second half of the year, and weren’t enough to get everyone’s value to recover to a point that they could sell their home for a profit or at least break even to get out of their loan.”

“Many of the areas with the most negative equity contain tract homes, built during the housing boom that led to the recession. These include eastern Oceanside, Otay Mesa, and Chula Vista, where many overpaid for tract homes, aided by loans that required little to no down payment.”

“‘Those houses got bid up the farthest, the fastest. They’re the ones who were the most vulnerable to swings of the market’ said Mark Goldman, a loan officer and real-estate lecturer at San Diego State University. ‘A lot of the people who bought there bought way beyond their means to repay and they were using the nothing down, stated-income loans and those were the markets that got hit the hardest.’”

The Daily Bulletin. “When John Bulgin bought his house in a Fontana neighborhood eight years ago, he didn’t think he would find himself living with his mortgage worth more than the house. But despite reports of an improving housing market around the country, that’s the situation he and 9.8 million households in the U.S. find themselves in: He bought his home for around $450,000, and the last time he checked, it was valued at about $270,000.”

“‘We refinanced, so the mortgage is a lot less than it used to be, but most all of these houses here, I’m sure, are upside down,’ Bulgin said. ‘We bought the wrong house at the wrong time.’”

“‘There’s a lot of happy talk about rising housing prices,’ said Peter Dreier, a professor of politics and chair of the urban and environmental policy department at Occidental College in Eagle Rock. Dreier said the report disputes the theory that rising home prices in an improving economy will rescue people from the recession and from the epidemic of underwater mortgages around the country.”

“‘It is true that the number of homeowners who are underwater has declined across the country,’ Dreier said. ‘But there are still many parts of the country where the recovery is bypassing entire cities and many neighborhoods, and there are so many underwater homeowners that the housing market alone will not rescue them. The Inland Empire is one of those areas.’”

From Bloomberg. “The golf courses and beaches of Los Cabos are luring Americans who are able to get home-equity loans to buy in Mexico as U.S. housing prices rise. Buyers, mostly from California, are purchasing condominiums, villas and estates ranging from $200,000 to more than $7 million following a plunge in prices, according to Deloitte & Touche LLP.”

“‘What I really wanted to do was take advantage of the market,’ said Joy Gipson of Lake County, California, who this year financed a 1,600 square-foot Los Cabos condo with a home-equity loan. ‘Real estate is starting to revive and I didn’t want to get priced out again.’”

“The 31 percent gain in U.S. home prices since January 2012 has given property owners more equity. That’s made it easier for them to get home equity lines of credit, or Helocs, for as much as $500,000. American buyers in Mexico are benefiting from the decline in the costs of credit lines, which have adjustable rates tied to the prime rate.”

“Gipson, 57, a marketer for the public transit program in Santa Rosa, California, bought her two-bedroom, two-bathroom condo in Los Cabos as a place to possibly retire. The $193,000 home is a six-minute walk to the beach. Gipson said the addition of more elite golf courses in Los Cabos will make it even more appealing to Americans. ‘It’s going to turn into San Diego South,’ she said. ‘I leveraged the equity in my house and spent my savings.’”

When Housing Prices Fall, Problems Will Be Exposed

The Wall Street Journal reports on China. “Pan Shiyi, the co-founder and chairman of Soho China Ltd., is taking a very bearish view on the housing market, which has struggled this year. Demand is also weakening in an expanding number of cities as banks tighten mortgage lending and sales are dampened by widespread expectations of price cuts. ‘I think China’s property market is like the Titanic and it will soon hit an iceberg in front of it,’ Mr. Pan told a financial forum on Friday, according to the China Business News. ‘After hitting the iceberg, the risks will not only be in the real estate sector. The bigger risk will be in the financial sector,’ he added.”

“He said serious problems lie with financial products like trust and wealth management products, as well as entrusted loans that charge higher interest rates than banks and are key financing vehicles for the property sector. ‘When housing prices fall 20% to 30%, these problems will be all exposed,’ he was quoted as saying.”

From Reuters. “The Chinese developer behind an eight-storey clubhouse with a billion-dollar view over Shanghai’s Huangphu River is turning to lower-end coffee shops and restaurants to fill the space, as a broad anti-graft campaign puts the brakes on conspicuous spending. Developers and owners of luxury residential property are also feeling the heat. ‘The Beijing market is particularly slow. There’s a lot of supply because people are dumping their high-end property into the market because of anti-corruption,’ said a manager of a property company who declined to be named.”

“In Beijing’s secondary home market, the number of units on sale in April doubled from January to 14,622 units, while average selling prices eased 2.4 percent during the period, according to property brokerage Midland Holdings. In Shanghai, a manager at a developer said sales of villas had been hurt as some investors were opting to go overseas. ‘It’s hard for an ordinary person to have many assets; one has to have power to generate money, and it’s difficult for him to be totally clean. These people have to protect themselves and their family so they’d rather invest overseas,’ said the manager, who declined to be identified.”

From NTD TV. “Since 2014, the Chinese property market has been suffocated with a glut of real estate inventory, sluggish sales, and a sharp drop in transaction volume. The market is awash with various promotional activities. Recently, ‘Zero Down’ was launched in Beijing. In the Greater Beijing area, lower-cost promotions were also heavily promoted recently. Prior to May 1, developers in Guangzhou also advertised slogans such as ‘Move in with zero down payment.’”

“Duan Shaoyi, Beijing Normal University MBA instructor and economic columnist: ‘It is the eve of the real estate bubble burst, many people are aware of it. They are hoping that the promotion will push up sales and reduce the losses in the future bubble burst. My advice is to sell the house as soon as possible. In the place where I live, 70% of the houses are occupied by mice, 20% by house nannies, and only 10% by the real owners.’”

Want China Times. “More than 30 Chinese cities, excluding Beijing, Shanghai, Guangzhou and Shenzhen, plan to relax restrictions imposed on housing purchases because of the slowdown in the country’s real estate market. ‘The housing market in China is not just slow but cold. If the downtrend continues, risks will be posted in the market,’ said an executive from a major real estate developer, adding that agencies might go out of business if the trend continues.”

“The trend of bankruptcies in Wenzhou continues unabated, according to a study conducted by the Chinese-language Economic Information Daily, while restricted lending to enterprises has made matters worse. It is understood that Zhejiang courts processed 346 cases of bankruptcy in 2013, up 145% from the previous year, and the total debt of the bankrupt enterprises amounted to 159.5 billion yuan (US$25.6 billion), nearly six times the 24.3 billion (US$3.9 billion) in 2012. Of these, the number of businesses going bankrupt in Wenzhou totaled 198 and the situation could be even worse this year.”

“Sources also indicated that over 90% of guarantee companies in Wenzhou have gone out of business. ‘The credit system is on the brink of collapse and we are afraid it will be difficult to make a breakthrough in financial reforms this year,’ a business source in Wenzhou told the paper.’”

From Forbes. “On Friday last week the owners of Hong Kong-listed Greentown China Holdings, announced that they would be selling up to 30 percent of their stake in the Hangzhou-based company to sometimes-partner Sunac Holdings. The sale would mean a relinquishment of control in the oft-troubled developer, which has been struggling during China’s current real estate slowdown.”

“The company’s soon-to-be former chairman Song Weiping played the part of wounded warrior in the message posted on the company’s website, comparing the sale of the controlling interest in Greentown to his future demise. The tycoon declared that, ‘Leaving the real estate industry makes it possible to preview death.’”

“‘This year will separate the men from the boys’ in China’s real estate market. That was the prediction from Ronnie Chan, the billionaire chairman of Hong Kong’s Hang Lung Properties, when I appeared with him at a real estate event in Shanghai last month. This seems to be the type of bear market moment that more experienced developers, such as the proudly non-PC Chan, relish.”

“‘In the past companies in China have not gone bankrupt. This is crazy. Bankruptcy is good,’ Chan stated. He added, ‘You need to use the toilet every day. You have to discharge something.’”

Bits Bucket for May 27, 2014

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