June 19, 2015

The Widely-Held Impression Explained By Psychology

It’s Friday desk clearing time for this blogger. “Chinese buyers topped Canadians to rank as the biggest foreign purchasers of U.S. homes by both sales and dollar volume, accounting for more than a quarter of all international spending. Buyers from China have helped drive up prices in Cambridge, Massachusetts, according to Jason Zhang, an agent with Realty Direct in Quincy, Massachusetts. Many of those buyers purchase homes for their children and then buy a winter retreat in Florida, he said. ‘If you go to an open house here, maybe eight of 10 buyers are Chinese, one is Indian and the other is American,’ said Zhang, an agent for 10 years and a Chinese speaker.”

“The U.S. surge of buying by Chinese occurs at the same time the central government in their home country is trying to control overheated markets in stocks and real estate, said David Woo, head of global rates and currencies at Bank of America Merrill Lynch. ‘The housing bubble is still there,’ Woo said in an interview.”

“The housing market in the Bay Area remained strong in May, but the rise in home prices and sales has begun to level off, according to a report. ‘Instead of getting 20 offers on a house, sellers are getting, three, four, five offers,’ said Mike James, president of the Concord-based Bay Area office of Coldwell Banker.”

“The leveling of activity means sellers can’t simply price homes $200,000 or $300,000 above current market prices for an area. ‘Sellers who are reaching for the sky, the buyers are saying ‘wait a minute’ when they see homes listed at well above the market,’ said David Tonna, a past president of the Silicon Valley Association of Realtors.”

“Nine years after the Florida housing bubble burst, more than 45 percent of Pensacola metro area homeowners with a mortgage owe at least 20 percent more than their home is currently worth, according to Zillow. Chris McIntosh, a senior loan officer with Supreme Lending, said Zillow’s 20 percent negative equity rate sounds about right for the area. Underwater himself, McIntosh said negative equity isn’t always as bad as it sounds. ‘I’m $60,000 upside down on my house but I couldn’t go out and duplicate the property I live in or the payment I have. Yeah I’m upside down but my payment is really affordable,’ he said.”

“New housing numbers suggest banks are advancing foreclosure cases that have been sitting in limbo for years. RealtyTrac says foreclosure starts, or notices of default, were down 15 percent from a year ago. However, completions, or bank repos, were up 31 percent. Those numbers may seem to contradict each other. ‘Those are tied to loans that were originated back between 2004 and 2008, believe it or not, that have just taken so long to make their way through the foreclosure process, and are now finally being foreclosed on,’ says RealtyTrac’s Daren Blomquist.”

“Banks and other lenders continued to aggressively repossess central Ohio homes in May, in some cases years after the homeowners had fallen into foreclosure. But agents who deal in foreclosed homes say banks have been slow to put their repossessed homes back on the market. ‘What I’m mainly seeing is they foreclose and don’t sell them. They just sit there,’ said Dora Clifford, the owner of Clifford Realtors in Reynoldsburg. ‘I see vacant homes everywhere going downhill with banks just sitting on them.’”

“Matt Beckett, an agent with Realty Executives Decision, agreed that banks are not moving to sell the homes, despite high demand from both owner-occupants and investors. ‘I haven’t seen it yet, but I’ve heard on the grapevine that stuff is starting to increase,’ he said.”

“Mortgage arrears are as good as they’re going to get and stress is already rising in the riskier end of the market, despite record low interest rates and surging house prices in Sydney and Melbourne, according to ratings agency Fitch. Fitch’s index tracking low-documentation loans — primarily given to the self-employed — worsened by 61 basis points to 5.44 per cent in the first three months of the year. The performance of non-conforming loans — borrowers with adverse credit histories and those shunned by mortgage insurers and mainstream lenders — also worsened, with arrears of 30-plus days rising 88 basis points to 7.58 per cent and repayment rates ­declining.”

“Fitch’s primary index, which tracks the arrears and performance of the mortgages underlying the nation’s pool of residential mortgage-backed securities, ­increased 2 basis points to 1.17 per cent ‘even though property ­market conditions in Australia are improving, with historically low interest rates, high house ­prices and a stable economy.’”

“Approximately 20 per cent of Vancouver detached-housing sales can be defined as flips. Vancouver realtor Ken Leong, who admits to a brief — and heady — history of flipping condominiums for himself and clients, said it takes more nerve and cash to speculate on Vancouver’s detached-house market than during the exuberant days of condo flips a decade ago. Leong said that if house price increases go soft — as in the current condo market — investors could find themselves financially under water fast. That was the experience of at least one East Vancouver speculator, who lost $61,000 in 57 days last fall flipping a $905,000 detached house on East 29th Avenue.”

“As Leong explained, if an investor bought a house for $1 million and flipped it a few months later for $1.1 million, he or she would have to pay $18,000 in B.C.’s property purchase tax. Realtor commissions to sell the house would total around $33,500. The capital gains tax, likely at the highest tax bracket, would be roughly $30,000. ‘So now your $100,000 gain is down to less than $20,000, and you still have to add in the carrying costs of financing of around $4,000 per month while the house is for sale,’ he said. ‘It would be hard to make a big profit on such a flip,’ Leong said. ‘Actually the government would make more than the investor.’”

“China’s housing market is roaring back to life in the biggest cities while local governments are issuing bonds at a blistering pace. Data showed that home prices in the ‘tier I’ cities jumped 2.8pc in May, the largest one-month rise in over five years. Property continued to lag in the rest of the country with a glut of 4.3m unsold units still hanging over the market. Bo Zhuang from Trusted Sources said Beijing has now pulled a set of stimulus levers, reverting to the same ‘stop-go’ pattern of past years. The benchmark market lending rate (7-day repo) has dropped abruptly from 5pc to 2pc, flushing the market with liquidity.”

“The country is still in the grip of powerful deflationary forces. Factory gate inflation remains stuck at minus 4.6pc and has been negative for 37 months. Yet there is little doubt that the Communist Party has blinked once again, putting off the day of reckoning. ‘They want a correction without actually having to go through one,’ said Patrick Chovanec, a China veteran at Silvercrest Asset Management.”

“Beijing is winking at a vertiginous stock market boom that has lifted the Shanghai composite index by 150pc over the last year, fuelled by margin debt that eclipses even the final blow-off phase of the Wall Street bubble in 1929. Mr Chovanec said China’s leaders are now in much the same position as Japanese officials in the early 1990s when they discovered that it was already too late to escape the consequences of a credit bubble and systemic over-capacity. ‘In the end, they will have to turn on the fiscal taps to prevent a collapse of GDP, just like Japan,’ he said.”

“Robert Shiller, author of the classic analysis of behavioural economics, Irrational Exuberance, has determined that going back to 1890, U.S. housing prices have risen faster than inflation only twice. Once in the generational boom after the Second World War and again only in the run-up to the sub-prime mortgage crisis of 2008. To which we may now add, price levels in Toronto and Vancouver the last few years. Otherwise, the rate of return, in real dollars adjusted for inflation is with extremely rare exceptions, zero.”

“As Shiller notes, ‘the widely-held impression that single family homes have historically shown high real capital gains when in fact over the last century the gains overall have been only nominal and hence illusory (and) can only be explained by using other social sciences like psychology.’ With data like that why are people incurring Frankenmortgages and crawling over broken glass to buy? Shiller’s answer, simply put, is that they’re crazy. Whether it’s tulip bulbs in Holland in 1637, dot-com stocks in Silicon Valley in 2000 or homes in Toronto in 2015, people are terrified of not having one, whether they need it or not.”

“The important thing is not to be critical of people for their investment decisions but rather to correct a dangerous economic distortion. Real estate is a huge business, bigger even than oil and gas. Do we want a significant portion of our GDP dependent on fundamentals that a Nobel laureate has called ‘illusory?’”

“Have you ever heard a bank manager or real estate agent say, ‘You know at these prices, you may want to hold off and rent til you grow your down payment?’ Not bloody likely. They make billions selling people mortgages and products they would be better off without. They are no better than Big Pharma or Big Tobacco. Call them Big Mortgage. They are enabling addictions that, left uncorrected, are well known for leading to catastrophic outcomes.”

Bits Bucket for June 19, 2015

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