July 28, 2014

The Real Estate Economy

NTD TV reports on China. “Recently, Chinese Communist Party (CCP) Premier Li Keqiang said in an internal conversation that China’s economic problem is the real estate economy. In the Win Business Network article, Li admitted that, ‘China’s economy is basically the real estate economy, and China’s economic problems are basically real estate economic problems.’ Real estate prices continue to fall, but why do investments continue to flow into the real estate industry?”

“Mainland finance analyst Ren Zhongdao: ‘Without constructing new buildings, the local governments do not sell land, and then they have no money to pay debts. If the real estate developers do not buy land, then they have no land to use as loan collateral or issue trusts and other financial products. Therefore, in order to return the money, they still have to construct buildings. Now this has become a vicious cycle.’”

From the BBC. “At one property development here in eastern Hangzhou, the asking price of new apartments has been reduced by 25%, compared to the original sales price in 2011. The sales agent, who only gives her name as Miss Wang, shows me around. She explains it is a ‘perfect apartment’ for a three-person family - a family that can afford $900,000, that is. ‘The banks have tighter cash flow. People think the government might launch something like a property tax. That would make the price go a bit lower so buyers have started to wait and see,’ she explains. ‘The real estate developer wants to get their investment back. That’s why we’re giving a better discount,’ she says.”

“In Hangzhou, some of the price falls have been fast. One property developer’s office in the city was smashed up by buyers. They were angry they had paid more for their apartments a year ago than their new neighbours were now paying. ‘A lot in China depends on confidence, and it’s a matter of trying to get the middle class to think the value of their investment will go up again,’ says Jonathan Fenby, China director at Trusted Sources.”

The Global Times. “Driving in the downtown area of Hohhot, capital of North China’s Inner Mongolia Autonomous Region, Jin Fang felt surprised to see so much more high-rise apartment buildings compared to three years ago, when she left the city for studies. ‘How can these apartments be sold out in such a short period given the limited demand here?’ Jin, a 31-year-old white collar worker who lives in the city, said skeptically to the Global Times.”

“Jin said recently she was always being bothered by calls from housing agencies staff promising high discounts on apartments, but she kept refusing them because she had already bought an apartment of 125 square meters with her husband in 2012.”

“The total inventory of new apartments for Hohhot hit a high number of around 120,000 units as of June, according to Centaline Property Agency. However, only 3,780 units were sold in the first five months of this year, according to Hohhot real estate portal 365hf.com. In the light of the current poor sales, it will take around 10 years for the city to fill up its housing inventory, according to Centaline. Jin still remembers when three years ago, people from other cities rushed to Hohhot to buy property, which directly caused home prices to rise.”

“‘Most of the buyers were private lenders from Ordos city, where unregulated private lending activities were rampant’ partly due to excessive liquidity, said Jin. ‘I hope a rapid rise in home prices will not happen again,’ Jin said.”

The Wall Street Journal. “When Monte Burnham, the president of Birmingham, Ala.-based Foundry Manufacturing Solutions, recently visited Tianjin, China, he was pleasantly surprised to find its air more breathable than during his previous stay. ‘Then I realized, the smelters weren’t running,’ recalled Mr. Burnham, referring to the northern port city’s giant steel plants, which until recently had been delivering economic growth rates as high as 16% to Tianjin province.”

“So, how is China achieving 7.5% growth if it is powering down steel plants and letting copper stockpiles build up? With debt. Despite official instructions to banks to curtail lending to overstretched developers and municipalities, loans are still increasing at rates twice as fast as the economy—and those numbers exclude a so-called shadow-banking lending system estimated at more than $5 trillion, or 80% of gross domestic product.”

“‘That doesn’t make sense,’ says PNC Financial economist Bill Adams. ‘Eventually, sustainability concerns will either cause Chinese policy makers to slow credit growth or investor risk aversion will cause less credit to flow through the trust companies’ that manage the shadow lending programs.”

Radio Australia. “The top 1 per cent of households in Communist-ruled China control more than one third of the country’s wealth, while the bottom 25 per cent control just one hundredth, official media said, citing an academic report. The wealth gap is of significant concern for the ruling Communist Party, which places huge importance on preserving social stability to avoid any challenge to its grasp on power.”

“‘One per cent of households at the top level nationwide control more than one third of the country’s wealth,’ the website of the People’s Daily newspaper said late Friday in a report on the university’s statistics. ‘Twenty-five per cent of families at the bottom level only own one per cent of the country’s wealth.’”

The New York Post. “To avoid taxes or even seizure by the government, rich Chinese have exported a stunning $1.4 trillion between 2002 and today. China leads the world in ‘illicit capital flows’ — we call it ‘money laundering’ — while Russia, with $800 billion hidden outside the country, is runner-up. So much money is fleeing China — $10 billion a month — that it’s distorting the global economy, particularly in the art market and with real-estate booms in cities like New York.”

“China began to crackdown on the practice in 2012, following the arrest of powerful politician Bo Xilai for bribery and corruption and his wife for murder. Thousands of high-level confiscations have followed and this month two top oil executives, a popular television anchorman and the Bank of China itself were accused of laundering money and other forms of skullduggery.”

“It wasn’t until 2013 that China’s first money-laundering convictions occurred, and these were bit players. A 19-year-old Hong Kong delivery boy was convicted of laundering $1.7 billion in eight months through his bank account in a subsidiary of the Bank of China. Another involved an illiterate 61-year-old woman who laundered $876 million in three years by making small deposits of cash daily in several banks. Both netted 10-year jail sentences, and no one else was charged despite evidence they did not act alone.”

“Even more devious schemes by big shots have moved tens of billions offshore without handling cash or involving banks at all. For instance, money managers in North America were offered inflated fees of 20% to invest billions of Chinese corporate funds abroad. The catch was that half of the fees would be paid out to shell companies owned secretly by Chinese officials to buy them condos or art.”

“Other tactics involve bribing officials by selling assets at a loss so they can pocket immediate profits; or wiring cash to ‘fronts’ owned by officials or their children who wash the bribes as though they were legitimate income.”

The Market Has Stalled Because Buyers Are Picky

The Philadelphia Post Gazette reports from Pennsylvania. “While Pittsburgh never had a housing price bubble, the region suffered a foreclosure crisis along with other major cities where real estate values did rise to a peak and then crash back down to earth. ‘What we saw was wealth stripped from people who had built it in their homes,’ said Ernie Hogan, executive director of the Pittsburgh Community Reinvestment Group. ‘We didn’t see the overexaggeration in price of houses, but we did see people who might have been in their homes for many years lose that wealth through the foreclosure process and subprime lending.’”

“Howard Hanna, CEO of Howard Hanna Real Estate Services, said the difficulty many working-class borrowers face now stems from the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. One of the provisions prohibits banks from approving mortgages for anyone whose debt-to-income ratio is higher than 43 percent. Banks used to be able to approve borrowers with a ratio of around 50 percent or even higher. Credit score requirements also have gone from around 570-580 to around 640-650.”

“‘The provisions in the Act makes it very difficult for lenders to lend money to low- and moderate-income borrowers,’ Mr. Hanna said. ‘It hurts moderate-income borrowers because credit scores are not there and down payments are not there.’”

The Times Tribune in Pennsylvania. “First-half property seizures, mortgage-default notices and home auction warnings in the Scranton/Wilkes-Barre metro area were up 10 percent over the first six months of 2013, according to RealtyTrac. Foreclosure activity in the region was the most-active among Pennsylvania metro areas in 2013, advancing by 60 percent, RealtyTrac data indicate. ‘There is still above-average activity for us,” said Mike Elick, CEO at Consumer Credit Counseling Service of Northeastern Pennsylvania. ‘Some of this goes back 18 to 24 months.’”

“The area’s unemployment predicament continues to provide fuel for the foreclosure pipeline, said Austin Jaffe, Ph.D., chairman of the insurance and real estate department at Penn State University. The region has held the state’s highest jobless rate for more than four years. ‘In the northeast, housing is weak, but the jobs are weaker,’ he said. Housing has failed to contribute significantly to the choppy economic recovery nationally and probably will not become a major growth driver for years, Dr. Jaffe predicted. ‘It’s back to basics,’ he said. ‘You need strength in the fundamental economy.’”

The Watauga Democrat in North Carolina. “After four years of incremental sales growth, the High Country real estate market is showing signs of slowing. Median sold prices are down 5 percent from the first half of 2013, and 10 percent from that span in 2012, according to the High Country Association of Realtors. Those declines are occurring as supply is expanding. There are currently more than 3,240 homes for sale within the High Country MLS, which records Realtor activity in Ashe, Avery and Watauga counties. That’s a 26 percent increase compared to the 2,571 listings active last August, according to the group’s report.”

“‘With the current high inventory, our Realtor association has teamed up with the High Country Host to reach potential buyers interested in coming to our area,’ said Laurie Phillips, executive officer of High Country Association of Realtors. ‘This campaign will encourage residents from surrounding states to visit the High Country by highlighting our unique natural beauty.’”

The Loudoun Times in Virginia. “For the third month in a row, Loudoun’s housing market has hit a snag. Second quarter reports released by Dulles Area Association of Realtors for April, May and June 2014 showed a 6.7 percent drop in home sales compared to the second quarter of 2013. The number of houses on the market has grown, however, with a 21.1 percent increase in new listings since last quarter, showing a buyer’s market this season.”

“Sue Smith, associate broker with Remax Premier and The Sue Smith Team owner, said the market has stalled because buyers are picky. The surplus of listings means buyers can afford to take their time. ‘It is a great time to buy,’ Smith said. ‘You have a lot of options right now. You have a lot of homes to choose from and you possibly could have a little more negotiation power if you’re a buyer, depending on the situation. I expect to see that role into the fall.’”

The Virginian Pilot. “The story of Hampton Roads’ real estate market in 2013 was one of slow and steady growth. This year, the tale has taken a turn. Hampton Roads has shown signs of retreating. ‘We’re just not as healthy as we should be, due to the hangover with the downturn,’ said Terry Gearhart, a sales manager with Rose & Womble Realty Co.”

“In The Pilot’s comparison of metro areas in the first quarters of 2013 and 2014, the three lowest performers were, starting from the bottom, Hampton Roads, Baltimore and Washington, D.C. Vinod Agarwal, an economics professor (at) Old Dominion University, said the three metro areas are heavily reliant on federal spending. Hampton Roads’ dependence on the military, in particular, has kept the percentage of distressed sales – foreclosures and short sales – much higher than before the housing crisis.”

“‘If you are in the military and you get reassigned, you have to go – even if you are underwater,’ Gearhart said. Many of the homebuyers in the region qualify for Department of Veterans Affairs loans, which require no down payment. ‘If housing prices don’t appreciate, when you go to sell a house, many homeowners are underwater the day they buy their house,’ Agarwal said. ‘This economy is basically crawling,’ Agarwal said. ‘If you look at the amount of jobs we’re creating, it is pitiful.’”

From WBAL TV 11. “Thousands of Maryland families have lost their homes to foreclosure or short sales, but many don’t know that third-party debt collectors can still come after them for money they may not have known they owed. In 2005, Miranda Cisneros Bell and her husband, Ed Bell, bought a house in Emmitsburg for $535,000. They still had the house they are living in currently in Frederick County. ‘We could not sell this house. We were stuck between two mortgages,’ Cisneros Bell said.”

‘They were forced to let the Emmitsburg house go into foreclosure in 2009. Thinking that the case was over, they moved on with their lives, but then a third-party debt collector out of Texas started calling. ‘The debt collector was saying I owed $51,000,’ Cisneros Bell said.”

“Avy Mallik, an attorney with the group Civil Justice said if the bank does file a deficiency judgment, they can go after a person’s assets and garnish their wages, and they may wait a while to do so. ‘The banks may wait a couple of years until you are employed and have some assets, and they will go after that balance,’ Mallik said.”

“As for Cisneros Bell, her case remains mired in litigation. ‘I’ve tried to see about refinancing my house now, but I can’t because I have had a foreclosure. It’s very stressful. It’s very upsetting,’ she said. ‘It’s going to take me years of getting these things turned around.’”

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