March 15, 2015

A Bottomless Pit If They Cut Prices

It’s Friday desk clearing time for this blogger. “The housing bubble brought bidding wars. This manic bidding was, in effect, a sign of the bubble, as well as a factor that helped inflate it. But a curious thing has happened since the housing market has returned to something more rational: The bidding wars haven’t gone away. A practice that was rare in the 1980s and 1990s now seems here to stay in markets like Washington, D.C., a permanent gift of the housing bubble. Lu Han and William Strange, economists at the University of Toronto’s Rotman School of Management, have concluded as much after looking at data from the National Association of Realtors dating back to the 1980s.”

“‘People are making these million-dollar trades,’ Strange says of homebuyers. ‘But we really don’t know that much about the housing market, where it’s going, what demand and supply are. It’s an amateur market where people are making these huge, huge decisions.’”

“Declining oil prices eroded Houston home sales last month, the Houston Association of Realtors reported. The upper-end of the home market — homes priced at $500,000 and up — faltered in February, after being one of the strongest selling brackets for months, the association noted. ‘I think you have some slowdown in the marketplace just because of oil prices going down,’ says Shad Bogany of Better Homes and Gardens Gary Greene. ‘I’ve lost at least two buyers (employed at energy companies) lately who had signed contracts and backed out of them a week later.’”

“Although the overall Houston statistics showed some softness in the upper-end of the market, there is still a lot of strength in affluent neighborhoods close to the city’s center, says Cheri Fama, president of John Daugherty Realtors, which specializes in the upscale homes. ‘Houston has had such as accelerated market over the last few years. If we go down a little bit we are just getting closer to normal,’ she says.”

“Home prices fell in eight of 11 major Canadian real estate markets in February as more weakness crept into the real estate market, according to the Teranet-National Bank national composite house price index. ‘The effects of significantly lower oil prices had already turned up in resale activity, with sales in Calgary and Edmonton down more than 40 per cent and 30 per cent respectively, from October to January,’ notes TD economic analyst Admir Kolaj in a commentary. ‘Calgary had been on a decelerating streak since November. Today’s data release indicates that cracks are also beginning to appear in Edmonton.’”

“Price corrections were even larger in some other cities. Prices in Ottawa-Gatineau dropped for the fifth time in six months and are now down 5.2 per cent in that period. Montreal prices fell for the sixth time in seven months — down 5.0 per cent overall. And in Halifax, prices have dropped 5.5 per cent in the last five months.”

“Singapore’s home prices and rentals fell last year, marking a general downtrend in the sector. The decline in housing prices was the first in six years. Bungalows were sold in Sentosa for an average price of S$1,676 psf, 20 percent lower from 2013, according to CBRE data. ‘The dismal sales were primarily due to the absence of foreign buyers, deterred by the hefty 15 percent Additional Buyer’s Stamp Duty payable,’ said Desmond Sim, CBRE research head for Singapore and Southeast Asia.”

“He noted, though, that price cuts may not be a sound strategy to boost transactions. ‘It will be a bottomless pit if they cut prices. If they lower prices by 10 percent, buyers might wait for even further cuts,’ he said.”

“Home sales by members of the Greater Wilkes-Barre Association of Realtors rose modestly in 2014 after recovering from a slow first quarter depressed by harsh weather. ‘There’s just a lot of pent-up demand on the selling side,’ said Ted Poggi, broker/owner of Berkshire Hathaway Home Services, Poggi Realtors. Active listings among member agencies are hovering around 1,900, very near the total sales last year. ‘Whatever sells it’s replenishing,’ Poggi said.”

“Poggi thinks sellers have come to accept that prices were unsustainably inflated in the early and mid 2000s, and have become willing to list at more realistic values. Since most sellers plan to buy another home at today’s lower prices, ‘what they’re losing on selling a house they’re gaining on buying a new one,’ he said.”

“Home equity lines of credit with balances run up in Southwest Florida’s real estate boom will be coming back to haunt a lot of homeowners still underwater at today’s prices, according to RealtyTrac. The Fort Myers-Cape Coral area ranks 22nd nationally for the percent of HELOCs resetting from 2015-18 for houses worth less than the debt for which they’re the collateral. Fort Myers-Cape Coral also has the 24th largest amount, $763 million, for underwater HELOCs that will be resetting from 2015-18.”

“Robbie Roepstorff, president of Fort Myers-based Edison National Bank, said it may be premature to say that HELOCs resetting over the next three years will be a serious problem. But he warned that the ones resetting over the next three years have a higher percentage of underwater homes – and home price appreciation is slowing nationwide. Roepstorff acknowledged that some local homeowners with HELOCs could get in trouble if price increases fall off. ‘If property values don’t come up, they could be in trouble.’”

“Bank of Montreal senior economist Sal Guatieri had a winner on his hands last October when he analyzed the Canadian housing market and showed that three cities alone—Toronto, Vancouver and Calgary—were driving most of the overall price and sales gains in the country, while almost everywhere else, activity was slowing. He dubbed these cities the ‘Hot 3′ and, for a short time, it became the main lens through which people talked about the Canadian housing market. That is, until one of the Hot 3 plunged into a deep freeze. And then there were two.”

“At the same time, tales of excess from the market fail to shock anymore. And so, as the average price of a detached home in Toronto passes the $1-million mark, it was noted with more amusement than alarm. In Vancouver, rundown shacks continue to list for close to $1 million. And why not? Lenders are hard at work pushing mortgages with rates as low as 2.24 per cent for two years, barely a notch above the Bank of Canada’s latest core inflation reading of 2.2 per cent.”

“Canadians should put aside what they might think about the importance of oil prices to the economy. Because, for all the talk of Canada being an energy superpower, we’ve clearly shown that our greater strength lies in buying, selling, renovating and renting houses and condominiums. Real estate now makes up close to 13 per cent of Canada’s GDP, compared to less than 10 per cent for energy. The real estate industry is also a bigger employer than the mining, oil and gas sector. Should house prices actually crash, then we’re looking at a crisis far worse than anything oil prices could inflict.”

“The constant focus on the link between inflation and unemployment, which is evident in the minutes of the Federal Reserve’s Federal Open Market Committee and in the media discussion of what the Fed should do next, does present a real danger. It reflects an outdated economic paradigm that, twice in the past twenty years, has misled policy-makers and produced bad policy decisions. When that threat failed to materialize, it kept rates at low levels for long periods. Cheap credit, in turn, encouraged the development of speculative bubbles and other financial imbalances.”

“But rather than changing its policy framework to prioritize avoiding yet another speculative bust, top Fed policy makers once again committed themselves to focusing on inflation, publishing a target rate of two per cent. The real policy dilemma isn’t the trade-off between inflation and unemployment. It’s the tradeoff between cheap money and financial instability. How long can the Fed keep interest at ultra-low levels without sparking another bubble and all that goes with it?”

“Terry Jones, a founding member of the Monty Python comedy team, targets the global financial system in a provocative new documentary and warns of more meltdowns if the system isn’t fixed soon. Jones, co-writer and co-director of ‘Boom Bust Boom,’ uses puppetry and animation to get the message across — as well as interviews with economist Paul Krugman, actor John Cusack, Bank of England Chief Economist Andy Haldane and others.”

“‘It bugs me that teachers or professors blindly teach economics without recognising the crashes, the real world,’ Jones said in a telephone interview. ‘Throughout history, crashes were constantly going on. This film is about the Achilles heel of capitalism — how human nature drives the economy to crisis after crisis time and time again,’ he declares.”

“It concludes that unless the teaching of economics is overhauled — and economic models factor in instability as a normal feature of capitalism — crises will keep happening. ‘If the professors start parroting these party lines, I think you should pelt them with vegetables and rotten fruit,’ actor and commentator Cusack recommends to students watching. ‘That’s what I would do.’”

Bits Bucket for March 15, 2015

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