March 20, 2015

Interwoven In An Obscure Chain Of Ponzi Credit

It’s Friday desk clearing time for this blogger. “If you’re trying to sell a single-family house priced at $1 million or more in Northern Virginia, better make sure it’s in tip-top shape. Demand for pricey houses in that range has cooled in that part of the region. Listings rose the most in Fairfax City, by 40 percent, followed by a jump of 31.1 percent in Fairfax County, 24 percent in Montgomery County and 23.3 percent in Arlington County. ‘In the city, the market is still competitive, and the pace of new contracts is exceeding the pace of new listings, but we’re seeing the opposite trend in Northern Virginia,’ says David Howell, executive VP for McEnearney Associates in McLean. ‘That trend is more pronounced the farther you go from the city.’

‘In January, we started seeing inventory from last year that was priced incorrectly come back on the market and once they were re-priced buyers started to snap them up,’ says William F.X. Moody, an agent of Washington Fine Properties in Washington. ‘Last year, sellers didn’t want to let go of the crown and thought they were still in control, but it was shifting to a buyers’ market.’”

“Las Vegas used-home prices are rising, which is good news for the real estate market. But, if there is one concern about the region’s housing market it would be homeowners setting their asking prices too high. As a result these overpriced listings go unsold for months. GLVAR President Keith Lynam argues overpriced listings may be holding back the local housing market. ‘We’d like to see more Nevada homeowners realistically pricing their homes at fair market value,’ Lynam said. ‘One of our challenges lately is too many would-be sellers have been watching home prices go up for the past few years and are now asking too much for their homes.’”

“In 2013, of 905,639 households in Miami-Dade, 55.8% owned their residences compared with 67.6% statewide, according to the University of Florida Bureau of Economic and Business Research. Javier Gonzalez, an associate with RE/MAX Advance Realty, said the market is flooded with too many condos right now and the prices are too high for the average buyer. ‘We need to slow down the building and let the properties become ownership [rather than investment],’ he said. ‘An investment is used and traded; your home is not.’”

“For investors with dollars, the dream of a condominium by Rio de Janeiro’s most famous beaches is suddenly within reach. A 467-square-meter (5,027-square-foot), four-bedroom apartment with views of ocean swells rolling up on Ipanema Beach sells for 17 million reais, or $5.2 million. That’s about half the price in dollars from a year ago thanks to sliding property prices and a rout in the local currency, according to Judice & Araujo, a Rio-based luxury home broker.”

“The slowdown in the energy industry coincides with a surplus of new properties in Rio, leading to a weaker real estate market, said Pedro de Seixas Correa, a professor at the Getulio Vargas Foundation specializing in the construction industry. ‘The market is suffering this negative economic outlook and will continue doing so,’ he said . ‘When we have a reduction in business activity, revenue falls and the real estate market is immediately impacted.’”

“India’s debt-laden property developers are turning to deep discounts, free parking spots and even gimmicks like gifts of gold coins and motorbikes as they struggle to sell billions of dollars worth of as-yet unfinished homes. India has a real estate market mired in debt piled up in a 2006-2007 construction boom that gave way to slowdown. It now takes developers about 4-1/2 years to turn property inventory into cash, more than a full year longer than it takes developers in China, according to Thomson Reuters Starmine data.”

“‘It is a buyer’s market,’” said Preeti Patil, a 28-year-old who was in the market for a two-bedroom house in the suburbs of Mumbai. ‘Last week, we turned down a deal, two days later we had the builder call us to offer $8 (500 rupees) per square foot discount.’ Even worse for developers, Patil is among those who have little confidence property prices will rise in future. Despite cut-price offers, she abandoned plans to buy, saying she feared the investment would not reap near-term returns.”

“House prices in China can fall fast. According to private surveys, units sold in 48 cities declined by 10.9 percent over the year as government revenue from land sales cratered 36.2 percent in the first two months of the year, according to Shanghai Daily. More than one in five homes in China’s urban areas is vacant, with 49 million sold but vacant units, and 3.5 million homes that remain unsold. The other problem is that most of the debt incurred building this huge bubble is on the books of property developers.”

“On March 17, Evergrande Real Estate Group, one of the country’s largest developers announced it had secured new financing (i.e. a bailout) from large state-owned banks. How much? A staggering $16 billion. This makes the $4.1 billion Bank of America spent on Countrywide Financial at the beginning of 2008 pale in comparison. It can only be hoped that losses don’t multiply the same way they did at Countrywide, but chances are they will.”

“Chinese developers and construction companies are interwoven in an obscure chain of Ponzi credit. If one doesn’t pay, the other will almost certainly default. At the end of this chain stands the Chinese banking system and by extension the Chinese regime. Both are too big to fail and too big to bail out at the same time. ‘Quite simply, China has produced and built far too much capacity, through overinvestment in steel and cement firms and in accelerated housing development. In the process, it has amassed the largest buildup of bad debt in history,’ writes economist Richard Vague.”

“Homeowners in one of Queensland’s most prestigious property markets want the Federal Government to open the door to foreign buyers. ‘We have an abundance of luxury property where our demographic can’t really support it,’ said Keith Douglas, who recently sold his home for $400,000 less than the purchase value. ‘I’m not alone there was another property that sold for $9 million under auction a few years ago and it only realised $7.3 million so there are still some fairly serious losses being incurred.’”

“In India, it is a leading electric utility, Jaiprakash Power Ventures, selling off facilities and negotiating with lenders to avoid a default, having increasing its debts thirtyfold in six years. In China, it is one of the country’s largest real estate developers, the Kaisa Group, threatening to pay only 2.4 cents on the dollar to its creditors, leaving countless would-be Chinese home buyers stuck in the middle of a multibillion dollar standoff. And in Brazil, a wave of bankruptcies among sugar producers has been driven not just by falling sugar prices, but also by debts that they owe in United States dollars, which are becoming more expensive practically by the day.”

“Years of low-interest-rate policies from the Fed have encouraged companies in these fast-growing economies to borrow dollars because they could do it more cheaply than if they took out loans in their local currencies. By September 2014 there were $9.2 trillion of such dollar loans outside the United States, up 50 percent since 2009, according to the Bank for International Settlements. As Raghuram Rajan, the Reserve Bank of India’s governor, put it earlier this year in an interview with Bloomberg Television, ‘Borrowing in dollars is like playing Russian roulette, especially if you’re borrowing relatively short term.’”

“A leading financial advisor is projecting a 40-50 per cent housing price correction and is laying the blame on the CMHC. Author Hilliard MacBeth says the Canadian real estate market is poised for a painful 40 to 50 per cent drop in value when the bubble pops. ‘I think the government has genuinely tried to encourage the housing market and home ownership, which started after the Second World War. But in the last 15 years it’s kind of taken on a life of its own. It’s this monster that nobody can really tame. The reality is, lenders don’t really take any risk, so they keep on providing more and more [loans].’”

“U.S. housing finance companies Fannie Mae and Freddie Mac could require more bailouts from U.S. taxpayers as risks are rising due to shrinking reserves, an internal watchdog for the firms’ regulator said. Washington bailed out the two firms in 2008 at the height of the financial crisis and has since seized all their quarterly profits while demanding the firms reduce their capital buffers.”

“‘Future profitability is far from assured,’ Federal Housing Finance Agency Office of Inspector General said in a report, pointing out that the firms could again chalk up losses on their derivatives portfolios, similar to those they reported in the fourth quarter. ‘(This) increases the likelihood of additional Treasury investment,’ the report stated.”

Bits Bucket for March 20, 2015

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