February 1, 2015

Debt, Prices, And A Self-Augmenting Spiral

It’s Friday desk clearing time for this blogger. “San Jose and San Francisco lead the nation in house flipping, according to Trulia, but the best days for making a profit may be over as price gains slow. Glenn Polf of Diversified Ventures Group in San Ramon said his group bought a house in East Oakland at auction but only broke even on the resale. ‘We overpaid. That’s what happens when you don’t get deals for a while. You get a little bit more aggressive. We were more optimistic than we should have been,’ he said.”

“‘The buyers are paying such a premium for houses, it doesn’t make sense for flippers,’ said Alisha Karandikar of CSR Real Estate Services in San Jose. ‘The acquisition costs are so high, that one little tweak in the market and they are going to lose their shirts,’ she said.”

“The Related Group is pacing itself in this new development boom so it doesn’t flood the market with too much supply – a strategy it’s employing in Miami’s wealthy Brickell area. ‘The way Related programs all its condo development is we don’t want to flood the market with too much product at once,’ said Arden Karson, Related’s project manager for Brickell Heights. ‘We are strategic in how we release inventory. It allows us to go to market with a lot of pent up demand.’”

“According to Cranespotters, about 6,400 condos are scheduled to be completed east of Interstate 95 in South Florida this year, followed by 6,700 units in 2016 and 5,000 in 2017. That’s assuming all of those projects move forward as scheduled. Related is once again the largest developer in this round of building.”

“Robb Miller and Curt Gunsbury received final approval this week to build 30 upscale condominiums in a new glass-and-concrete building in the heart of the Minneapolis Warehouse District. Final prices haven’t been set but are expected to range from $900,000 to $3 million for units with private elevators, terraces and recessed balconies. Since the 2007 housing crash, downtown developers have been focused on building thousands of high-end rental apartments. There’s growing concern, however, that too many apartments are hitting the market at the same, and some say there’s pent-up demand among those who want to buy.”

“‘I think the market is ripe for new construction,’ said B.J. LaVelle, a sales agent with the Downtown Resource Group in the North Loop.”

“A combination of plunging oil prices and falling interest rates risks pushing Norway’s housing market beyond its breaking point, the financial regulator said. ‘Lower interest rates and strong competition in the mortgage lending market could contribute to continued rapid growth in debt and house prices,’ Morten Baltzersen, head of Norway’s Financial Supervisory Authority, said. That could drive the housing market into a ’self-augmenting spiral,’ he said.”

“I read a stat in the FT yesterday that absolutely blew my mind. There are now 54,000 homes planned or under construction ‘in the priciest areas of the capital.’ Most will cost ‘close to or above the £1m mark’ and most are two-bed flats. Here’s the mind-blowing bit: in the same areas last year, just 3,900 homes were sold for more than £1m. That would put potential supply at almost 14 times annual demand. Welcome to the train crash about to happen that is high-end, new-build property in London.”

“So who’s buying? Well, as Charlie Ellingworth of Property Vision puts it, many new builds are marketed at ‘unsophisticated’ foreign investors. Sorry if I’ve seemed a bit London-centric, but this is really no different to the pre-2008 buy-to-let bubbles we saw in Manchester, Birmingham and Leeds. For the most part, those ‘trendy’ city centre tower block flats weren’t bought by locals, but from investors elsewhere in the UK. The same happened in Dubai, Spain and even parts of the US. Locals weren’t buying, foreign investors were. They didn’t have the ‘sophisticated’ knowledge that locals do – so they bought the BS. And when the crash came, they paid the price.”

“With more residential units to be completed in the next two years, the rental scene has become a ‘tenants’ market,’ said experts. Horizon Real Estates’ key executive officer Lena Low said that, while nine in 10 of rental inquiries she received used to be for two-year leases, half are now asking for one-year leases instead. ‘They say prices may go further south. Or maybe they can upgrade to a bigger place for the same price. They are very shrewd,’ said Ms Low.”

“The softer rental market is also attracting more Singaporeans, said agents. ‘When the resale market started to decline (in 2013), some sold off their place before prices crashed further,’ said DWG agent Felix Mui. ‘They want to purchase a new home, but opt to rent first and monitor the market as resale prices are falling.’”

“Investors dominated at Ray White’s mega-auction. Ray White Surfers Paradise Group chief executive Andrew Bell said investors dominated this year with a strong showing from Melbourne and Sydney buyers. The buyers of a two-bedroom unit in the Soul building at Surfers Paradise got an absolute bargain, purchasing the apartment for $905,000, $795,000 less than it last sold for in 2012. ‘Selling close to 60 properties in the space of six hours is a big statement for the state of the local property market,’ he said.”

“A little over a year ago, a Chinese credit agency downgraded a government-owned financing company in this dusty industrial city. Default—nearly unheard-of in China on government bonds—was a possibility, it said. But during discussions with lenders, city officials made sure Wuhan Urban Construction Investment & Development Corp. could keep borrowing. Roughly 8,000 local-government-financing firms across China are responsible for the rapid development of cities but also the glut of housing, industrial parks and other projects economists and officials say threaten China’s economic health.”

“Roughly 8,000 local-government-financing firms across China are responsible for the rapid development of cities but also the glut of housing, industrial parks and other projects economists and officials say threaten China’s economic health. ‘If you’re building projects that can’t cover their cost, you’re spending money on keeping them going,’ says Fraser Howie, co-author of ‘Red Capitalism,’ a study of China’s financial system. ‘Some hospital somewhere isn’t being built; some small company isn’t getting money.’”

“Early in 2014, China’s premier and central-bank officials made clear that Beijing might allow some defaults, to chasten lenders and reduce credit growth. But as China’s economic growth fell below Beijing’s 7.5% target, willingness to allow defaults evaporated, say Chinese officials and economists. ‘It’s the Japan syndrome,’ says Fred Hu, chairman of Primavera Capital, a Beijing private-equity firm. ‘You keep pushing off problems. That creates a crisis, but a slow-motion crisis.’”

“Central bankers are increasingly viewed as wizards capable of rescuing countries from the doldrums by printing money to manage interest rates and control currencies. But the monetary magic is unleashing unintended consequences on the global economy, financial markets and ordinary people. The action by the Swiss central bank, which came in mid-January, was one of the biggest surprises.”

“Many Poles who took out loans were the first in their family to do so. Katarzyna Szczerbowska said she was advised by a financial consultant when she bought a two-story apartment in 2008. She says she is now so far behind on her payments, and feels so trapped by her accumulating debts, that she has contemplated suicide. Because Poland also had a housing bubble that collapsed during the crisis, many who borrowed in francs are now underwater. ‘Everybody kept saying that the crisis in the States was very local — nobody knew why — but it was the U.S. that had problems,’ Ms. Szczerbowska said. ‘People had to be idiots to think the crisis wouldn’t spread. Unfortunately, I was the idiot.’”

“Massachusetts has among the lowest poverty rates, highest educational attainment, and best access to health care in the country. But high housing costs continue to hurt economic opportunity in the state, which has one of the lowest rates of homeownership in the nation. The report by the Corporation for Enterprise Development, ranked Massachusetts 48th of 50 states in housing affordability, with only California and Hawaii having higher housing costs. Median home values of $327,200 in Massachusetts were nearly five times higher than the state’s median income of about $66,768.”

“‘The lack of affordability is keeping people from being homeowners,’ said Jennifer Medina, a research contributor to the report. ‘It’s also putting many homeowners at risk of being delinquent on their mortgage loans.’”

“Margaret Miley, executive director of Midas, said even in areas where Massachusetts scored better than the nation as a whole, the data painted a troubling picture. For example, about 47 percent of Massachusetts consumers had subprime credit scores, or below 700, making them ineligible for credit card and home loans at favorable interest rates. For many, Miley added, subprime credit can affect job prospects, as some employers conduct credit checks on prospective employees.”

“Miley added that 35 percent of poor households in the state have less than three months of savings. ‘It’s surprising in such a high-income state,’ she said, ‘that people are that fragile.’”

Bits Bucket for February 1, 2015

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