The Housing Bubble

A housing bubble report from Wall Street to Washington. Bloomberg, “The largest U.S. banks have lowered their standards for some of the riskiest lending in a sign that weak underwriting is returning to levels seen before the 2008 financial crisis, according to a regulator’s report. The banks have continued to erode standards, especially in large corporate loans, consumer loans and in leveraged lending, according to an annual Office of the Comptroller of the Currency survey of examiners. ‘As banks continue to reach for volume and yield to improve margins and compete for limited loan demand, supervisors will focus on banks’ efforts to maintain prudent underwriting standards,’ said Jennifer Kelly, the OCC’s chief national bank examiner. She said the trends are ‘very similar’ to those from 2004 through 2006.”

“Tuesday’s report said such lending showed the most loosening among commercial products, with 48% of banks that engage in the lending easing their standards. A particular area of concern is commercial real estate, as examiners cited rapid growth and uncertain collateral.”

The Daily Caller. “The government is offering cheaper mortgages to first-time homebuyers, a risky move that could pave the way for another financial crisis, a mortgage foreclosure lawyer told The Daily Caller News Foundation. The new rules, announced by Fannie Mae and Freddie Mac last week, allow lenders to offer mortgages with a minimum downpayment of 3 percent — down from 5 percent.”

“‘I think it’s setting up the ability for another crisis to come,’ Adam Deutsch, senior associate at New Jersey firm Denbeaux & Denbeaux Law told TheDCNF. ‘If a homebuyer does not have the savings to deposit 5 percent of their home purchase, it is a safe assumption they will not have a savings contingency to cover unexpected costs of homeownership, such as a leaky roof or replacement water heater.’”

From Al Jazeera. “Aisha McKnight-Baron couldn’t believe her ears. Turned down by Bank of America for a home mortgage, McKnight-Baron was stunned to learn from her real-estate agent that she could still qualify for a loan. The lender was Angel Oak Home Loans. The company offered a loan program that targeted the millions of people like her with credit problems who, since the 2008 financial crisis, have been unable to secure a traditional mortgage.”

“For McKnight-Baron, a plastic surgeon in Atlanta, the subprime loan was a lifesaver. ‘The rate is a bit higher, but [Angel Oak] considered my circumstances, and I’ll be able to refinance,’ said McKnight-Baron.”

The Associated Press. “Six years after the collapse of Lehman Brothers, the lessons of the financial crisis may already be fading from collective memory. Just last week: Congress acted to loosen the regulation of the high-risk investments that ignited the 2008 crisis. Housing regulators cut minimum down payments on home loans. The Institute of International Finance declared it ‘worrisome’ that global indebtedness, as a share of world economic output, has reached record levels. All this comes as subprime auto loans for financially stretched buyers are surging.”

“And the so-called too-big-to-fail banks that needed a taxpayer bailout in 2008 now loom even larger than before the crisis: America’s five biggest banks account for 44 percent of bank assets, up from 38 percent in 2007, according to SNL Financial. Despite its overall finding that threats are moderate, Treasury’s research office warned of ‘excessive risk-taking during an extended period of low interest rates.’”

“The Treasury Department announced on Dec. 4 that homeowners in their sixth year of payments on a modified mortgage will get a $5,000 principal reduction to help them build equity and handle possible financial trouble. The assistance, which could total $5 billion, is part of the Home Affordable Modification Program, or HAMP, which began in 2009 to stem the flood of foreclosures after the housing crash.”

“As the interest rate on many of these loans rises to 3 percent in the sixth year and 4 percent in the seventh year from 2 percent in the first five years, officials say the $5,000 reduction will help curb additional defaults. The program made about 1.4 million modifications by the end of September and 961,648 of the loans are still active. Thirty percent of the loans, or 419,401, defaulted after the modification.”

“In making the $5,000 payouts, HAMP isn’t distinguishing between borrowers who might need the support and those who don’t. A homeowner who got a modification five years ago because of a job loss could be financially stable today and still get the payoff.”

“‘If people still need this kind of help, five years down the road, then they are simply not in a home they can afford,’ said Mark Calabria, director of financial regulation studies at the Cato Institute research group in Washington and a former senior staffer on the Senate Banking Committee. ‘The Republican leadership in Congress wants to end the program, and we’re way beyond the point where people could argue there’s a housing crisis.’”

National Mortgage Professional. “November was an unhappy month in the 2014 housing calendar, according to a pair of new data reports. ‘Following strong new home sales in October, our data shows November sales volume dropped significantly,’ said Mike Fratantoni, chief economist at the MBA. ‘Average loan size increased to almost $307,000 in November from roughly $300,000 in October, indicating that builders are having greater success with higher priced homes and difficulty at the entry level, as first-time buyers continued to face tight credit conditions.’”

“Separately, RealtyTrac’s U.S. Foreclosure Market Report for November found a total of 55,906 U.S. properties started the foreclosure process in November, a decrease of one percent from the previous month but a six percent increase from a year ago, the first year-over-year increase following 27 consecutive months of year-over-year decreases.”

From Builder Magazine. “It was four years ago that I wrote my last By George! Column in October of 2010. As we know, cheese gets moved when you look away or don’t pay attention. One of the first things I did was go back to the last piece I wrote to see how we have progressed from those dark days of 2010. Sadly, much of the piece read like I wrote it last week. I have included the piece at the end of this one.”

“A release from Freddie Mac on December 8, 2014, about attitudes among renters about renting and homeownership. The essence is that although 91% of renters view homeownership as something to take pride in, only 39% expect to purchase a home in the next three years. However, 45% of renters say they live paycheck to paycheck and will probably never be able to buy.”

“Whether we like it or not, our housing situation is looking more and more like the 1920’s than the 1990’s. Then, only 40% of the population owned a home and 60% rented. Many of those who rented paid a significant portion of their income toward rent and never could save enough to purchase. Sounds more like where we are going, based on the trend lines of the past couple of years.”

“But, what I think should be considered currently is the thought that we may have had way more of a structural shift in the underlying factors that drove homeownership and the home building and residential development industries in the period from 1945-2007 than many have realized or chosen to accept. The implications of such a shift for company business models, product, land values, and who participates in the industry are significant and not always to the good. However, with every disruptive change comes both the opportunity to thrive in the new environment and the risk of sudden extinction.”

Bloomberg reports on the UK. “Bank of England Governor Mark Carney said the selloff in emerging markets may worsen, posing the risk of higher borrowing costs and weaker growth in core markets. Even as U.K. banks’ exposure to Russia is ‘very modest,’ and ties between the two countries ‘relatively limited,’ Carney said the central bank was ‘not complacent at all about the dynamics in the global economy.’ ‘There is a risk that, in economies where core inflation is already weak, particularly some parts of the euro area, low headline readings further depress expectations of future inflation,’ the BOE said in the report. This ‘could result in slower rates of growth of nominal incomes, increasing the burden of existing debts.’”

“Tighter lending standards may still be contributing to a slowdown in mortgage approvals and might be deterring borrowers and banks from high-risk loans, officials said. ‘High household indebtedness continues to pose risks to financial stability,’ so recommendations in June against risky mortgages “continue to act as insurance against a significant deterioration in lending terms,’ the BOE said.”

RTE News reports on Ireland. “In a review of risks to the Irish economy, the Central Bank noted that house price growth in Dublin is now higher than that recorded at the peak of the property bubble in 2006. House price growth in Dublin has been above 23% since June. The Central Bank said Irish households remain highly indebted, leaving them vulnerable to economic shocks, falls in income and rises in interest rates. There has also been a rise in the number and value of mortgages in very long term arrears - classed as more than two years overdue.”

“It warned that in the current low interest rate, low inflation environment increasing numbers of investors are searching for yield - a return on their money - and that this is increasing the risk of volatility in the financial system. The Dublin office market and Government bonds - which have benefited from the inflow of foreign funds - are vulnerable to a change in investor sentiment if higher yield opportunities present elsewhere.”

Reuters on Canada. “Fort McMurray has long drawn thousands with jobs that paid six-figure salaries to a region that produces more crude than anywhere else in the Western Hemisphere. But a slide in oil prices since June has fueled a sense of unease in the community of nearly 73,000 which for over a decade has rarely known anything but the good times. Some signs of a looming slowdown can already be seen in the local property market. New housing starts in the municipality of Wood Buffalo comprising Fort McMurray and nine surrounding hamlets are forecast to fall 62 per cent this year, according to the Canada Mortgage and Housing Corporation.”

“Two-story-high ‘now leasing’ signs that adorn some downtown apartment blocks, would have been unthinkable at the height of the recent decade-long boom when, as mayor Melissa Blake put it, the city had ‘more people than places to put them.’ ‘There seems to be a lot of layoffs up here so people are just kind of holding on to their money,’ said Sandy Mastel, a manager at Raven Truck Accessories and Motor Sports.”

The National on Dubai. “The property broker CBRE is predicting that if the price of Brent crude continues to drop for a sustained period then the huge government-owned funds tasked with spending surplus cash on assets abroad may cut back on their ambitious plans to buy European trophy assets. ‘The biggest impact is potentially on the international property markets than the local markets,’ said Nick Maclean, the managing director of CBRE’s Dubai office. ‘And the sovereigns in the GCC are such an important component of new cash for the international markets that if that is withdrawn a little then it has an impact.’”

“CBRE said housing rents in Dubai rose 1 per cent during the final three months of the year, cancelling out a 1 per cent fall recorded during the third quarter. At the same time sales prices increased 18 per cent over the year – down from 30 per cent in 2013. The company added that more than 20,000 new homes are expected to enter the market during the course of the next 12 months, which ‘could have a deflationary impact on sales and rental rates.’ It said there were 65,000 new units potentially going to be delivered over the next three years.”

ABC News in Australia. “The rural town of Katherine has gone from a well-publicised housing shortage to an ‘unusual’ lack of rental demand, according to a real estate agent. Territory Rural’s Alison Ross told 105.7 ABC Darwin that Katherine housing demand had anecdotally dwindled to its lowest level in almost a decade. ‘There hasn’t been this certain number [of houses] available for quite some time,’ she said. She put the trend down to several factors, including economic downturn, the development of additional defence housing, and the scaling back of mining operations at Roper River and Pine Creek.”

“The mayor of Katherine, Fay Miller, said the housing market had noticeably dropped, but this was partly due to cyclical factors. She said mining redundancies and new housing developments were contributing to the rental glut, but things were not set in stone. ‘I’m sure that we will see things start to pick up again [and] that those rates will certainly improve.’”

Smart Property in Australia. “With almost double the number of listings on the market in Western Australia compared to last year, one real estate commentator has warned against overpricing properties for sale. ‘The days of coming up with a dream price, then adding on another 10 per cent, are well and truly over. Today’s buyer is much more informed and simply does not have the time to be deciphering over-priced properties,’ said RE/MAX WA managing director, Geoff Baldwin.”

Quartz on China. “Between 2003 and 2012, $1.3 trillion slipped out of mainland China—more than any other developing country—says a report by Global Financial Integrity, a financial transparency group. $725 billion—more than half of the outflows from the last decade—has left since 2009, just after the Chinese government launched its 4 trillion yuan ($586 billion) stimulus package. The government’s June 2013 crackdown on fake trade invoicing caused a seize-up in liquidity, pushing banks close to a meltdown. This precarious relationship with liquidity might partially explain ‘Operation Fox Hunt,’ the crackdown on Chinese government officials who have fled China or transferred assets to family members abroad.”

“With China’s real estate market in the doldrums, its economy slowing, and its leader cracking down, the ‘foxes’ have more reason than ever to sneak their spoils overseas. Making sure they don’t isn’t just a matter of legality, but of protecting China’s financial system from freezing up once again.”

Want China Times. “Luo Fei, mistress of China’s former railways minister and transportation bureau chief Zhang Shuguang, has been sentenced to five years in prison for taking bribes. The court ruled that the monetary support she received from Chang constitutes a bribe, reports our Chinese-language sister newspaper China Times. Zhang is 25 years older than Luo and is married. He has been known for being a ‘naked official’ since his wife and children emigrated to the US, where they bought houses and opened companies.”

“His expenses increased dramatically when he was courting Luo. Zhang called Ge Jianming, president of railway equipment maker KTK Group and asked for money. Ge handed Zhang a black briefcase containing two million yuan (US$325,000) in cash. Zhang set aside 700,000 yuan (US$113,000) of the savings to pay for his and Luo’s daily expenses and used the remaining and his own savings to buy a house as a gift to her.”

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