December 3, 2014

Forgetting The Lessons Of The Financial Crisis

Bloomberg reports on New York. “A single apartment at Manhattan’s One57 was sold in the third quarter, leaving about 25 percent of the ultra-luxury tower’s units without buyers more than three years after they reached the market. The most recent contract was only the third this year at One57, where sales have slowed as the tower faces competition from other projects planned nearby. ‘We definitely have seen a slowdown on that super-luxury end,’ said Andy Gerringer, managing director at the Marketing Directors, a new-development brokerage not involved with One57. ‘People know there’s a lot more product coming to the market in that range.’”

The Washington Post. “Only four cities or counties in the Washington region have fully rebuilt their property tax bases since the 2008 recession, a study from George Mason University’s Center for Regional Analysis says, raising questions about the wisdom of tying local government operating budgets to the real estate market. Property values have stagnated in most suburbs since 2005, said David Versel, the senior research associate who wrote the report. ‘People might be surprised to learn how much Montgomery County (in Maryland) and Fairfax County (in Virginia) are struggling,’ Versel said. ‘They’re thought of as powerhouse jurisdictions. But they’re clearly in a transition from affluent suburbs to whatever they’re going to become.’”

The Houston Chronicle in Texas. “The recent sharp drop in oil prices is clouding the region’s economic forecast, potentially threatening to curtail employment growth across industries and perhaps even slow down the multifamily real estate segment, a prominent local economist said. ‘Things have changed in Houston,’ said Bill Gilmer, director of the Institute for Regional Forecasting at the University of Houston. ‘And they changed fast.’”

“Gilmer said there are 24,000 apartment units under construction but there may be a need for only 19,000 units next year. He predicted demand will continue to fall. Apartment leasing can be an indicator of where the economy is headed, said Nipul Patel, regional manager of Wells Fargo Bank. He said that market is strong today, but he agreed that not all projects on the books might get built. For the first time in awhile, real estate observers say some apartments are waiving first month rents and offering other specials to attract new tenants. ‘In 2015 and 2016 there are going to be a fair bit of deliveries on the multifamily side,’ he said.”

The Elko Daily Free Press in Nevada. “According to the Multiple Listing Service, there were 519 homes sold in Elko County through October this year. A year ago, that number was 591 homes. With construction of new homes at a much slower pace than in 2013, the average price of homes has also dropped. Tammy Bawcom, owner of Bawcom Realty in Spring Creek, thought a big part of the decrease in housing sales was the availability of more rentals in Elko. ‘People can take their time deciding where they’re going to move into,’ she said.”

The Daily Chronicle in Illinois. “To Mark Emerson, the vacant sprawl of land across from his home in DeKalb’s Bridges of Rivermist subdivision is a prairie, but to city officials and local developers, it’s a symbol of the city’s stagnant housing market. The land, 85 undeveloped lots along Bethany Road, is in foreclosure, and it appears Emerson won’t have to see homes outside his front door anytime soon. Those lots, along with 20 others, including one with a single-family home, will be sold during a sheriff’s sale as a result of a nearly a yearlong foreclosure suit against the properties’ owners and an even longer battle between the owners and the Homeowners Association.”

“Local developer John Pappas and Park Ridge businessman Peter Iatredes, the two members of Rivermist Unit 5 LLC, which owns the property, made a business decision to walk away, Pappas said. ‘There’s zero growth in DeKalb,’ Pappas said. ‘and there’s nothing I can do about it.’”

The Idaho Statesman. “Northwest Bank Idaho President and CEO Rob Perez tends to zig when others zag. Sitting in his Boise office, Perez told the Statesman that some bankers are forgetting the lessons of the financial crisis. He said the number of banks is artificially high, thanks to bailout money from the Troubled Relief Asset Program, leaving too many banks chasing too few loans. The result is relaxed loan underwriting standards. Banks are also trying to stretch their cash by holding onto long-term assets such as mortgages without hedging them sufficiently, balancing them mainly with short-term investments that could lose value if interest rates increase.”

“Q: Do you see banks backsliding into the dangerous practices that caused the financial crisis? A: Absolutely. The next round of stupid is in full swing: stretching for yield. Making loans that don’t have appropriate equity, real equity. Making loans in higher-risk areas because the yields are higher. Going long-term in investment portfolios even though liabilities or deposits are short-term in efforts to stretch yield on their liquidity. Treating the business like a sales business and focusing on top line growth instead of asset quality.”

“Q: Most bankers I’ve talked to will say some regulatory change was in order to fix the problems that led to the recession. Most also say regulators have gone too far and become burdensome. What’s your take?”

“A: I’m not so sure we haven’t gone far enough to make sure we fix those things. I think it’s helpful to say if you are going to originate and sell mortgages that you have to have some skin in the game. Whether or not that’s enough, I don’t know, but it’s certainly a step in the right direction. I’m not so sure we’ve done enough to make sure there’s a consequence for those people who had these financial instruments that created these layers of risk. If you look at the Wall Street guys that created all this mess - like Goldman Sachs, which is now an FDIC-insured bank - they were involved in putting together these syndications of loans where risk was transferred from investment bankers to unknowing consumers.”

“Q: The local housing market heated up last year, then leveled off. What trends are you seeing in housing? A: Lot and land costs have gone up dramatically. You had finished lots during the downturn getting sucked up for $20,000 to $45,000. Those same lots today are $65,000 to $85,000. The cost of the dirt has ratcheted up the cost of the housing.”

“Q: You were among those who met with Sen. Mike Crapo when he was in Boise to talk about the Johnson-Crapo bill that would wind down Fannie Mae and Freddie Mac. What was your impression of the Johnson-Crapo bill? A: I think you can wind down Fannie and Freddie it in a way that limits damage, but you are going to see increases in mortgage rates. I don’t see any way around it. Will it happen? I doubt it. There will be enough awareness around the increase in rates that there will be public outcry. But do I think reform needs to happen? Yes. Do I think that results in increased rates? Yes. Do I think that’s a problem? No.”

“Q: Would most bankers agree with that? A: If it’s a mortgage banker, probably not. But home ownership is not an inalienable right, and we treat it as if it is. A house is not an investment. An investment is defined as a positive cash flow. A rental might. Your house doesn’t. We have fixation on home ownership, that it’s a good thing. I’m not convinced.”

Bits Bucket for December 3, 2014

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