July 4, 2014

Creating A Frenzy

It’s Friday desk clearing time for this blogger. “Local real estate agents are classifying the housing market in the Tomball and Magnolia area as a seller’s market. ‘There’s a real low inventory [in Tomball and Magnolia] that’s creating almost a frenzy of people [looking for homes] certainly in the $200,000–$250,000 pricing [range], and above that they still sell quickly,’ said Pamela Sitterly, a real estate agent with RE/MAX in Tomball and Magnolia. ‘People are trying to put offers in without even seeing the house.’”

“Developers across the U.S. are reviving a concept that collapsed with the real estate crash in 2008: combining condominiums and hotels. The $150 million Beachwalk hotel-residential project in Hallandale Beach, Florida, which Related Group CEO Jorge Perez expects to be completed in 2015, has 300 residential units. The units sold out in two months, with an average price of $500,000, according to Perez. ‘The money that is coming in from buyers from Latin America and Europe is unprecedented today,’ he said. ‘When we talked to some of these potential buyers, a lot of them said they were investors. But they also wanted to be able to enjoy their condos and at the same time maximize their income. That’s why we are creating a hybrid product.”

“Jumbo-mortgage borrowers feasted on interest-only loans during the housing boom, enticed by low down payments and monthly outlays. But a monthly sticker shock could be ahead for these borrowers. Mark Livingstone, president of Cornerstone First Financial, a mortgage broker in Washington, D.C., purchased an investment property in Odenton, Md., with the help of a 10-year interest-only, nonjumbo loan with a fixed rate. The monthly payment recently shot up to $2,424 from $1,463 with the start of principal payments. He plans to list the property this month because the rental price won’t cover the cost of the new payment.”

“More than 300 investors from Delhi and NCR, who had booked flats in a Gurgaon housing project and deposited 25% of the cost upfront, are demanding investigation into what they call a multi-crore fraud because the developer had allegedly sold off the project land. According to one of the investors, B P Gautam, after the investors paid 25% of the amount, company gave them receipts and allotment letters. ‘But since 2011, there has been no movement on the project. We visited the company’s office several times but they are not willing to share any information with us.’”

“It was a month that every stockbroker would like to forget. As screens turned red and losses mounted, some investors were left wiped out. The entire Dubai market came to be viewed through the prism of a single publicly traded construction company. Shares of Arabtec have lost 65 per cent of their value in less than two months amid uncertainty over the company’s strategy, hundreds of layoffs, and the future of announced projects. ‘I can safely say that 95 per cent of my customers that bought into Arabtec lost money. No one came out with a profit. I had clients that were crying. Can you imagine? They were crying,’ said Khaldoun Jaradat, the head of Brokerage House Securities in Abu Dhabi.”

“For the second time in five months, the executive chairman of Hong Leong Group Singapore and City Development Limited, Kwek Leng Beng, has called on the government to review property restriction measures here.He told the press that ‘foreigners were choosing to plough their investment dollars into countries like Britain, Australia and the US over Singapore, while Singaporeans have been investing abroad.’”

“In a reaction to the report of Kwek’s remarks, a young concerned Singaporean posted the following comments online: ‘First, the government has no business helping private real estate companies like Kwek Leng Beng’s to attract international business. Second, it is of no loss to Singapore if we miss out on Kwek Leng Beng’s so-called [foreign] ‘investments.’ In fact, what we have observed is the extreme negative externalities wrought by the free flow of such ‘investments’ (read: cash) due to excess liquidity which has its roots in the liberal cash-printing US, EU and Chinese central bank policies. Third, by Cheryl Ong’s calculation, private home prices have spiked 60% since 2009. Assuming a generous sustainable rate of 6% compound increase for home prices since 2009, home prices should only have increased by 33.8%. We are about 25% over-valued. Quarterly decreases of 1.5% is nothing.”

“Forth and finally, the government’s role should be to develop a sustainable, moderate, gradual increase in home prices (just like overall inflation!) so that homes remain affordable for the masses in land-scarce Singapore – and not to indulge folks like Kwek Leng Beng who are too happy to make a quick buck from policy errors and mistakes.”

“The Federal Reserve should not raise interest rates in order to battle financial bubbles, according to the central bank’s chairwoman Janet Yellen Wednesday. Her remarks suggest that the Fed is ‘more interested in having a resilient financial system that can cope when asset bubbles burst than it is in popping them through rate rises,’ the Financial Times reports. Yellen argued that higher interest rates in the run-up to the housing crisis would not have averted it, nor would higher rates have addressed the problem of overleveraged big banks.”

“Starting with Alan Greenspan as chairman of the Federal Reserve Bank to his successors Ben Bernanke and now Janet Yellen, policy has essentially meant granting unlimited interest-free or nearly interest-free money to major banks and other Wall Street players. Although not discussed publicly, monetary policy makers of Wall Street at the head of the Federal Reserve Bank and the Treasury Department have come to view the bestowing of cheap money upon Wall Street as a monetary stimulus measure that would work through asset-price inflation and the subsequent trickle-down mechanism.”

“The official rationale for the injection of cheap money into the financial system is still justified, publicly, on the same grounds as the traditional Keynesian monetary stimulus: that such infusions of money into the financial sector would prompt enhanced lending to the real sector, thereby encouraging productive investment, employment and growth. Portraying asset-price inflation as a monetary tool of economic stimulation, policymakers in the United States and other core capitalist countries are no longer averse to creating financial bubbles; as such bubbles are viewed and depicted as fueling the economy through demand enhancement effects of asset-price appreciation.”

“Instead of regulating or containing the disruptive speculative activities of the financial sector, economic policy makers, spearheaded by the Federal Reserve Bank since the days of Alan Greenspan, have been actively promoting asset-price or financial bubbles.”

“Professor Peter Gowan of London Metropolitan University describes this rather perverse strategy in the following words: ‘Both the Washington regulators and Wall Street evidently believed that together they could manage bursts. This meant that there was no need to prevent such bubbles from occurring: on the contrary, it is patently obvious that both regulators and operators actively generated them, no doubt believing that one of the ways of managing bursts was to blow another dynamic bubble in another sector.’”

“The following dialogue has circulated widely on China’s Internet, posted by an anonymous netizen. It helps explain the psychology that keeps China’s housing bubble afloat. At a karaoke bar, a middle-aged man sat with his nephew in a private compartment. ‘Uncle,” the nephew said, ‘No one is buying the houses we build. You must think of a solution fast.’”

“The middle-aged man said to his nephew: ‘You don’t need to worry. All you need to do is construct the houses. I’m not building houses to sell. Most people couldn’t afford them, anyhow. The construction is just a vanity project.’ Surprised, the nephew asked, ‘Where will the money come from if you do not sell the houses?’ ‘We will get a loan from the bank,’ the uncle replied.”

“‘Wouldn’t we need to pay it back?’ the nephew asked. The uncle explained: ‘Say I borrow 500 million from the bank and use only 200 million for investment and development. 300 million will be mine to keep. So it doesn’t matter whether I sell the houses or not. After the houses are built, we will engage in speculation until the houses are worth a billion yuan each. We will gift some of the best houses to public servants. ‘Once these public servants have many houses on their hands, they will do all they can to keep the value of the houses from dropping because if the value drops, it means the money they’ve got is disappearing. That’s how they will begin providing services for us,’ the uncle said.”

“‘But why wouldn’t we need to pay the bank back?’ the nephew asked. ‘Pay what?” scoffed the uncle. ‘We’ll use this billion-yuan house as collateral, and take out a loan for a new housing development. Just watch me get rich.’ ‘What if the bank runs out of money?’ the nephew asked. ‘No worries. The government will print more,’ the uncle replied.”

“‘Suppose it doesn’t?’ the nephew asked. ‘We’ll just announce bankruptcy and leave the houses for the government to deal with,’ the uncle replied. ‘All my money is in foreign banks, anyhow.’”

Bits Bucket for July 4, 2014

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