October 8, 2015

Sellers Are Starting To Chase The Market Down

The Denver Post reports from Colorado. “Residential real estate markets typically slow in September and the autumn months. But the changes underway in metro Denver appear to be going beyond the normal seasonal changing of colors. ‘Sellers are starting to chase the market down,’ said Anthony Rael, chairman of the market trends committee with the Denver Metro Association of Realtors.”

“Rael said he is noticing more homes in the $500,000 and $600,000 range coming down substantially from the original list price after spending weeks on the market. Of two dozen listings in that price range he recently reviewed for a client, about 20 had dropped their prices. Lower-priced homes are still moving quickly, but not at the frenzied pace seen from February to June, when multiple bids with waived contingencies above list price were common.”

The Seattle Times in Washington. “After the most brisk summer selling season in a decade, the Seattle area’s home prices showed signs of easing in September. Potential buyers may welcome a cooling, but it’s grim news for the large slice of the region’s homeowners whose mortgage debt remains greater than their home’s value. More than 33,500 King County homes had negative equity at the end of June, or 9 percent of homes with a mortgage, according to Zillow. An additional 19,600 homes in Snohomish County, or 13 percent of mortgaged homes, were in the same predicament. Collectively, the homeowners owe $7.5 billion more than their homes are worth, Zillow estimates.”

“‘It’s causing a lot of friction at the bottom of the market, which then ripples through to the entire market,’ said Zillow Chief Economist Svenja Gudell. ‘For some of these homeowners, they may pay off their mortgages before they resurface.’”

The Foothills News in Arizona. “John Schneider, a realtor who specializes in Foothills real estate, and others working the area commonly recognize two markets in the Catalina Foothills community: Those priced at $1 million or more, and those priced below $1 million. Homes priced over $1 million have been struggling for about seven years, creating a buyer’s market. Schneider says he thinks sellers of high-end homes are playing the waiting game.”

“‘I believe, because sellers of high-end homes have the financial means to hold on to their homes, they don’t have to sell — and they continue to wait for prices to climb,’ he said. ‘But, so far, that has not proven to be a good strategy as many overpriced high-end homes continue to languish on the market. And now, with six to seven years of tepid sales at $1 million-plus, it is obvious that many high-end buyers have moved on.’”

“There are currently 73 homes listed at $1 million or more, and only 25 have sold year-to-date. ‘This works out to a 26-month supply of homes — a huge supply,’ said Schneider. ‘At $1 million-plus, it’s a strong buyer’s market, but, unfortunately, very few buyers are jumping in.’”

From Chicago Now in Illinois. “On Thursday I wrote about all of Chicago’s new high rise construction in the South Loop that has recently been announced. With just the 5 projects I wrote about I estimate that we are looking at approximately 2061 new apartments and 1123 new condos/ townhomes. That’s a ton of new housing units so the question is whether or not the South Loop can absorb all that new supply.”

“If you recall the South Loop became a real wasteland during the housing bust and it wasn’t until Related Midwest bought 504 condos and remarketed them that we were able to put that whole series of unfortunate events behind us. But according to a May article in Crain’s it took Related Midwest just about 3 years to sell all those condos. So how long will it take the South Loop to absorb 1123 new condos and 2061 new apartments?”

The New York Times. “Buyers may be reaching a breaking point when it comes to outsize prices for luxury real estate. ‘At the upper end of the market, I believe there is a little bit of a pushback from the buyers,’ said Diane M. Ramirez, chief executive of Halstead Property, which found that the average sales price of co-ops with at least three bedrooms declined 26 percent to approximately $3.1 million in the third quarter of the year, from $4.2 million during the same period last year.”

“Hall F. Willkie, president of Brown Harris Stevens Residential Sales, said that though demand remained strong, ‘more sellers are asking prices that are just not justified.’ Especially at the high end, he said, ‘there’s a glut of inventory that’s overpriced.’”

From DNS News. ” Kroll Bond Rating Agency analysts Christopher Whalen and Joe Scott reviewed the U.S. bank sector’s credit outlook and concluded that having the banking industry reporting zero or low default rates is a clear sign ‘of mounting future credit risk.’ In fact, we may be looking at another asset price bubble within the housing sector among others. During the mortgage bubble of 2004-2005, Washington Mutual and Countrywide—two of the lenders that eventually had to be bailed out by larger banking institutions—reported negative defaults, Whalen and Scott reported. On the surface this looks like good news since it means the banks’ recoveries exceeded charge-offs, the pair explained.”

“But it also could be a sign of overheating in the market with asset values exceeding economic fundamentals such as employment, income and GDP, according to KBRA’s note. Whalen and Scott have this warning about the banking industry’s low default rate data: ‘the credit results measured by metrics such as charge-offs and recoveries are simply too good to be believed—or sustained.’”

“While others have praised the Fed for keeping interest rates low on the grounds that economic fundamentals support a push back against rising interest rates, KBRA’s note says ‘the responsibility for the rising risk in bank loan portfolios lies squarely at the feet of the Federal Open Market Committee (FOMC), which explicitly set a policy to push up asset prices to facilitate greater risk taking.’”

“The problem with rising prices is the creation of an asset price bubble where as Whalen and Scott point out, ‘these higher asset values … have not been validated by the performance of the U.S. economy, either in terms of rising income or GDP.’ In other words, you cannot create confident consumers out of thin air. They are either making enough money to swim in your pond and buy your house, or they’re not.”

“They also warn that loan-to-value ratios are on the rise, which is another déjà vu moment, given the fact that LTVs reached a great imbalance in the years leading up to the housing crash. With rates staying low, asset prices rise artificially, and now consumers who are taking a bite of the apple are buying into a price structure that is artificially stimulated since it is not supported by economic fundamentals. Is this the year 2008 all over again?”

Bits Bucket for October 8, 2015

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