April 3, 2015

Many Are Looking To Exit Their Investment

It’s Friday desk clearing time for this blogger. “If you’re interested in buying a newly constructed house in the Washington region, you’ll find plenty of options in a variety of price ranges. Just be prepared for a long wait — there may be few move-in-ready options this spring. ‘There’s definitely a lot of building going on, but builders are being a little more cautious and avoiding getting ahead of buyers,’ says Ben Sage, director of the Mid-Atlantic region of Metrostudy. ‘Builders were optimistic in 2014, but they found that the demand wasn’t what they thought it would be.’”

“Towns and neighborhoods across the Boston area posted big gains in both sales and prices in February. Boston was more of a mixed bag; some neighborhoods posted strong numbers, but others all but fell off the map. The dire cold may have made buyers stingier, as selling prices were down in a number of towns. Somerville home sales plunged 36 percent, with just seven properties changing hands so far this year, while condo sales were down 14 percent. The median price of a condo dropped 6 percent, to $422,000. Downtown Boston saw condo sales drop by a quarter through the end of February, while the median price edged down 14 percent to $757,500.”

“Believe it or not, Manhattan residential sales prices are flat. That’s the takeaway from Douglas Elliman’s latest quarterly report, which found that the median sales price in Manhattan was $970,000 during the first quarter of 2015, compared with $980,000 last quarter. The luxury segment saw its median sales price drop 10.6 percent to $5.1 million. There were also nearly 20 percent fewer luxury sales compared to last year, with 266 closed sales in the first quarter.”

“In a separate analysis published on Tuesday, the Wall Street Journal found that resale prices are rising. The median price of a resale condo in the first quarter was $1.4 million, up 9.8 percent. New condo prices dropped 22.8 percent to $1.4 million. ‘I contend that surplus demand has largely been satiated or absorbed,’ said Jonathan Miller, president of real estate appraisal firm Miller Samuel. ‘The prior level was not sustainable…. So even though sales fell sharply, they are still high.’”

“After financing oil-related hotel and apartment boom in parts of the country, CMBS lenders and investors are now worried low oil prices will leave them facing foreclosures and heavy losses. Many are declining to funnel more cash into once-hot areas in North Dakota and Texas, and are keeping a nervous eye on the properties underpinning the investments they already hold.”

“Some of those loans are already struggling. A Strata Estate Suites CMBS loan of US$23.7m on a pair of apartment buildings in the North Dakota towns of Williston and Watford City went into foreclosure just a year after the ink dried on a new mortgage underwritten in May 2013. By July 2014, a foreclosure was started. Kroll Bond Rating Agency estimated a US$3.8m loss on the loan to the CMBS trust. A nearly US$4m loss on just one loan for less than US$24m underscores the size of the risk now facing CMBS investors with exposure to oil-drilling areas.”

“The numbers look better for Sonoma County, but the U.S. still has a large quantity of homeowners who are underwater on their mortgages, and the picture didn’t improve in the final months of 2014. Zillow called the flattening ‘a major turning point’ for the housing market. ‘The days in which rapid and fairly uniform home value appreciation contributed to steep drops in negative equity are behind us, and a new normal has arrived,’ the report stated. The report concluded that ’some homeowners trapped very deeply underwater may essentially be in negative equity forever.’”

“Seven percent of Sonoma County mortgage holders owed more than their homes were worth in the fourth quarter, according to Zillow. For Mendocino County, 14 percent were underwater in the fourth quarter, while in Lake County the rate was 23 percent. In Napa County, the negative equity rate was 8 percent and in Marin County, 3 percent. For the nation, 27 percent of mortgage holders in the bottom tier were underwater. In Atlanta, Chicago, Detroit, Kansas City, Las Vegas and St. Louis, more than four in 10 such homeowners had negative equity.”

“Public and private home prices across Singapore kept falling in the first quarter of this year, with further declines expected. The market is now so moribund it could start hurting jobs in the real estate industry, they said. Savills Singapore research head Alan Cheong noted overall private market transactions nearly halved last year. In the first quarter of this year, new sales slid 42.3 per cent year on year, and secondary market sales fell 8.2 per cent. ‘Given transaction volumes have declined significantly since June 2013, the multiplier effects on those directly and indirectly employed in the residential property market (is a concern),’ he said.”

“For those of you looking to hop onto the property bandwagon in Dubai, waste no time; it’s currently a buyer’s market. Brigitte Tenbergen, a luxury sales specialist at LuxHabitat, a luxury real estate brokerage in Dubai, said: ‘It’s definitely a buyer’s market emerging in Dubai as prices have been dropping by almost 15 to 20 per cent since the peak of prices on luxury properties last year between February and June.’”

“‘We are definitely more within a buyer’s market as they appear to be calling the shots, not just in their lethargic activity but also in their approach to viewings and offers,’ says Mario Volpi, managing director of Ocean View Real Estate. ‘Anyone who is re-selling any recently bought off-plan properties are likely to see a negative premium on their asking price. Many are looking to exit their investment before the next payment is due to the developer by selling at a loss to buyers.’”

“Chinese bankers are gritting their teeth over the risks they face in further relaxing lending rules to home buyers. China’s biggest banks recently reported lower profits and a spike in bad loans to multi-year highs at the economy slows, adding to their concerns about increasing their exposure to weaker areas of the economy such as the property market. A massive glut of unsold homes could also offset higher sales, keeping prices and fresh investment under pressure.”

“‘The difficulty for us now is that the deposit has gone down, which increases the risks for us,’ said a loan officer at one of China’s four biggest banks. ‘We’re already losing money at a 70 percent downpayment level,’ said a banker at a mid-sized Chinese bank. ‘We’re unlikely to reduce the lending rate.’”

“In early 2012, a few months after she left China for a new life as an immigrant investor in the United States, Shi Lan Zhao flew to Metro Vancouver, bought a numbered B.C. company and began searching for properties in which to invest. Flush with money that she and her ex-husband, Jianjun Qiao, had moved from China through banks in China, Hong Kong and Canada, Zhao first bought a Richmond condo, paying for it outright. A few months later, on a return trip, she bought a five-bedroom White Rock home, also paying for it outright.”

“Zhao, 51, moved easily between B.C. and her home outside Bellevue in Washington state, making at least 20 trips since 2011. She became familiar to real estate agents and people at the Vancouver company that managed her properties and the banks where she and Qiao kept accounts. But U.S. and Chinese investigators now suspect the money for the Metro homes purchases came from an embezzlement scheme that was just one part of a massive corruption and bribery operation that nearly crippled the China Grain Reserves Corporation, also known as Sinograin.”

“Zhao was arrested at her home in Newcastle, just outside of Bellevue. Qiao has not been found, and investigators believe he has fled to the Caribbean. A search of property and title records conducted by The Vancouver Sun show that Zhao’s numbered company bought the properties outright. However, a few months later, it took out mortgages on both, totalling $1.1 million, that represented almost their entire market value. According to the U.S. indictment, a few weeks later Zhao and Qiao took money from their Canadian RBC account to pay for a Bellevue home. Zhao recently put the White Rock property up for sale for $689,000.”

“Although the Federal Reserve and others cheer on the rise in housing (and stock market) prices as good for homeowners and the economy, there is a dark side to rising home prices. The current surge in home prices is not driven by strong economic fundamentals such as higher productivity, wages and labor participation rates, but rather by artificially low interest rates orchestrated by the Federal Reserve’s zero interest rate policy and quantitative easing programs.”

“Former Federal Reserve Chairman Ben Bernanke admitted as such when he testified to Congress in July 2013 during his tenure: ‘I don’t think the Fed can get interest rates up very much, because the economy is weak, inflation rates are low; if we were to tighten policy, the economy would tank.’”

“The Fed’s manipulation of the economy by driving rates down to get people to move in and out of houses is as foolish as paying people to dig ditches and then paying others to fill them up. Nothing of lasting structural value is produced in either example. This artificially manipulated game of real estate musical chairs works until the music stops. And it will as the low inventory/strong demand dynamic reverses and inventory increases and demand drops.”

Bits Bucket for April 3, 2015

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