June 21, 2015

The Short End Of The Stick

The state of the housing bubble is the weekend topic. Reuters, “Housing stocks rallied on Friday and the industry group should get more good news next week, though sustained and robust future gains may depend on wage growth and other signs of improving home affordability. The median home became less affordable for the median family between April 2014 and April 2015 as prices rose with demand but new home construction did not, according to the latest data from The National Association of Realtors. Furthermore, average new home prices seem out of reach of first-time buyers. Millennials, those born after 1981, are entering the market more slowly than their predecessors.”

“Entry-level buyers cannot afford new homes because builders are concentrating on constructing higher-end houses that are out of their price range rather than building so-called starter homes, according to Alex Barron, senior research analyst at Housing Research Center. As a result sales volume is about half where it should be, making home builder stocks less attractive, Barron said.”

“Shares of homebuilders jumped on Friday after KB Home posted stronger-than-expected quarterly earnings and revenue as it sold more homes at higher prices. That earnings-bolstered bump may not last unless the market improves more fully, which may take two years or more, said John Augustine, chief investment officer at the Huntington Trust. ‘The best scenario is that the stock market keeps moving up, the baby boomers retire and the millennials get their jobs,’ said Augustine.”

The Press of Atlantic City. “South Jersey millennials are getting the short end of the stick when it comes to homeownership and rent costs. A decade after home sales peaked during the housing bubble, rents and accompanying fees have risen to the point that buying might be the smarter choice. Ciara McClinton, 21, a King’s College student from Little Egg Harbor Township, agreed that millennials — those born between 1980 and 2000 — don’t know much about the market.”

“‘I don’t know how I’ll afford it. Mostly because I don’t understand how the housing market works,’ she said. ‘Our ignorance to the pricing makes it easier for landlords to boost prices and make things more expensive.’”

From KTRH Newsradio. “Bad news for anyone looking to buy a house in Houston as Forbes now says the Houston market is the second most overvalued in the country. The list points out a long trend in the market that has seen prices rise consistently since the housing bubble burst back in 2008. Houston’s average price for a home is now over $530,000, which is up over 5% in just the last week.”

“Michael Weaster with Berkshire Hathaway and Anderson Properties says part of the problem in Houston is the investors and hedge funds. ‘There were the investors that came to town, a lot of the hedge funds came to town and bought up the median priced homes. Anywhere from $100,000 to $200,000 and it really made a lot of buyers unable to buy homes.’”

“Right now the price growth of housing in Houston has far out gained growth in jobs which has created a situation where housing prices continue to rise but sales are declining. Weaster says homes are now staying on the market longer without getting any offers because there just aren’t buyers able to afford the homes.”

The Vancouver Observer. “The most common argument I’ve heard against recent suggestions that we should tax real estate speculators and/or limit foreign buying goes something like this, ‘We shouldn’t make any changes to existing policy because that would be interfering with the free market.’ This argument is completely disingenuous. Very little about the current situation is the result of a free market.”

“Most Canadian mortgages issued today come with a taxpayer guarantee from the Canada Mortgage and Housing Corporation (CMHC). According to their 2014 Annual Report, CMHC insures $543 billion worth of mortgages, which is 42.7 per cent of the outstanding residential mortgage market. They also guarantee another $422 billion, which is 32.8 per cent of outstanding residential mortgages. Combined, CMHC insures or guarantees just over 75 per cent of the entire Canadian residential mortgage market.”

“In a truly free market economy, the lender — not the taxpayer — would take the risk of default. If that were the case, mortgage rates would probably be significantly higher. How many intelligent investors would loan someone a million at 2.75 per cent to buy an East Vancouver teardown?”

“Gains on principle residences are tax-free. Why does real estate enjoy this favourable tax treatment when most other asset classes don’t? Sounds like the government is using tax policy to steer the market towards buying real estate as an investment. Free market?”

“The flood of foreign capital pouring into the Vancouver real estate market is mostly coming from Mainland China. Many seem to have forgotten that China is still a communist country that plays by different rules than democratic, free-market western countries. The Chinese government has deliberately — and dramatically — lowered the value of its currency to gain an unfair advantage over other countries. Since 1981, the yuan has been devalued 75 per cent.”

“The result of this currency manipulation has been a large and persistent trade surplus, which exploded after 2004 and is still growing. In a free market system, China would convert that surplus back to its own currency. This would cause the value of the yuan to rise and diminish the Chinese advantage — something their government clearly doesn’t want.”

“Therefore, to maintain their undervalued currency, China must take those trillions of dollars and recycle them back into Western countries. They do so primarily by buying foreign government bonds. (This is also one of the reasons mortgage rates are so low). But increasingly, they are also buying foreign companies and residential real estate.”

“I have yet to hear these believers in free-market economics ever express concerns over any of these other policies which distort the market and cause real estate values to rise. They only seem concerned when actions are considered which would make housing more affordable. In my experience, when people invoke free-market principles to push back against policy changes what they really mean is the current environment is working quite well for them.”

Bits Bucket for June 21, 2015

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