January 15, 2016

How Quickly Real Estate Can Change

It’s Friday desk clearing time for this blogger. “Talk to the experts in Palm Beach or Naples or Fort Myers or even Punta Gorda, and you get variations on a theme. The theme is this: Home prices will continue to rise in 2016, wherever you are. It’s a seller’s market now, but in Florida a market for rational sellers, not proud sellers — for people who will do best by not expecting to get more than the market bears, says Denny Grimes, owner of Denny Grimes & Co, a southwest coast firm. ‘Every property sells now if it’s priced right, but I see some bubbles forming (in the region) with higher inventory — one problematic area in Collier County is near the heart of Naples, with a lot of tear-downs and people rebuilding.’”

“It’s problematic because some people are using ‘dartboard logic,’ he explains, a fact that could affect markets almost everywhere. ‘One seller put a home on the market for $2.7 million for a year. He had an offer at $2.6, turned it down, and went shopping for a new agent. Now he wants $3.4,’ Mr. Grimes says. ‘That’s called dartboard logic.’”

“The number of foreclosure petitions filed in Massachusetts spiked in November compared to the same month in 2014. According to the Warren Group’s data, foreclosure activity has increased year-over-year by double digits for each of the past 21 months. Marlborough lawyer John-Paul LaPré agrees banks are beginning to take action on many mortgages that previously fell into default during the nation’s housing crisis in 2007 and 2008. ‘I think it is a delayed backlog from that same crisis, absolutely,’ said LePré, who specializes in foreclosure defense and other civil litigation.”

“As an example, LaPré said he is assisting in one home foreclosure case in the region that began in 2009. He said the mortgage included an adjustable interest rate, which began increasing 30 days after the deal closed. One bank transferred the mortgage to another, which increased the homeowner’s monthly payments to more than $4,000, he said. LaPré said the bank moved to foreclose on the property and evict the owner, but was blocked by a federal judge, who reprimanded the bank for not following proper bankruptcy procedures. ‘We don’t have a trial date in sight,’ he said.”

“The market for homes priced over $2 million was stronger in the beginning of 2015, demand cooled with the financial markets and remains relatively weak as a result, according to the W. P. Carey School of Business at Arizona State University. ‘Demand at the higher end of the luxury market is the softest we’ve seen in a long time,’ said Michael Orr, director of the Center for Real Estate Theory and Practice. ‘I expect this weakness will continue as long as we experience uncertainty in the financial markets worldwide.’”

“From the days of heated bidding wars 20 months ago to now seeing houses sit idle with a ‘for sale’ sign on the front lawn — how quickly real estate can change. The white hot market in Calgary is clearly in the rearview mirror as homes take much longer to sell, buyers are hunting for bargains and some properties are taken off the market after few inquiries. Frank Hickey has seen the many ups and downs as head of the Concord Mortgage Group. One his clients had a property appraised at $2.5 million dollars two years ago. It’s now appraised at $1.6 million.”

“Prices could also fall as discounted properties start hitting the market as banks take over homes from people who couldn’t pay their debts. Albertans routinely have the highest debt loads in the country. The condo market is in particularly rough shape with sales down around 30 per cent and prices declining about five per cent, according to John Andrew, with the Queen’s University Real Estate Roundtable. ‘[The sales number] is a very, very dramatic drop,’ he said. ‘That 5 per cent decline in prices, I think that’s the tip of iceberg and we will see significant price drops in that market.’”

“The latest survey by Brazil’s Central Bank has this to say about the economy heading into the new year: it’s going to be worse than we thought a month ago. The housing market boom is over. The credit fueled real estate market is now dealing with higher levels of defaults and low demand for mortgages. According to Fitch, for every 100 housing units sold in high rise residential housing projects, 41 of them were returned back to the developer unpaid last year.”

“Malaysia could see a property bubble in 2016 with demand weakened by the slowing economy, an estate agent has warned. CH Williams Talhar & Wong is predicting flat demand for property in key cities, including the capital, Penang and Johor Baru. Foo Gee Jen, WTW’s managing director, expects high-rise residential and retail segments to be particularly challenged. There is an oversupply of premium apartments, with many ’shoebox’ units under 46 sq. meters sitting empty. Foo said developers will probably take at least a year to clear these units before they consider more building. Some 13,000 high-rise apartments are due for completion in 2017, adding to supply in a bearish market.”

“Plagued by weakening market sentiment, rising interest rates and a slowing economy, flat owners in Hong Kong are feeling compelled to slash prices to attract buyers, pushing secondary home prices down for four straight months. In one example, an owner of a three-bedroom unit at Nan Fung Sun Chuen in Quarry Bay sold his flat at HK$6.42 million after cutting the asking price by HK$1 million. The price is now back to levels seen in early 2014. Investment bank CLSA had forecast a 2 per cent price correction in the fourth quarter of 2015. Instead, prices tumbled 7.5 per cent during the quarter, according to CLSA calculations. ‘We expect the price correction to accelerate in the first quarter of 2016, driven by developers’ price cuts,’ the investment bank said in a report.”

“In the fourth quarter of 2015 developers had largely used non-price marketing strategies, such as direct offer of first mortgages or waiving of stamp duties to entice buyers. However, price reductions could become a feature of developers’ marketing plans this year. ‘With the price downtrend now so obvious, there is no longer incentive to hide price cut,’ CLSA said.”

“Capital flight from China may deal another blow to global financial markets, raising U.S. interest rates above where they would otherwise be at a sensitive time. Massive amounts of capital are leaving China, driven variously by fears of a slowdown, of a falling yuan and of a corruption crackdown, with some estimates putting the figure for 2015 at or above $1 trillion.”

“This is really simply the flip-side of the phenomenon of Chinese reserve accumulation over the last 15 years, a trend which arguably also drove U.S. interest rates too low, despite Fed efforts. That was one of the underlying causes of the U.S. housing bubble, and may also have contributed to the earlier dotcom bubble, as investors took on risk and borrowers found money too cheap not to borrow. ‘In my view, the downside risks relate mostly to the influence of the rest of the world on our economy,’ Atlanta Federal Reserve President Dennis Lockhart said on Monday. ‘Last week we saw a global sell-off in stock markets apparently triggered by data from China that fell short of expectations.’”

“Over the last few years, New York’s luxury housing market was propelled upward by a geyser of global wealth. Foreign billionaires, hiding discreetly behind impenetrable corporate structures, bought up the city’s most expensive condos, and developers began erecting 1,000-foot skyscrapers to cater to their demand. Now, however, the real-estate market is shifting. And just as in the original, the tale of two cities is not ending well for the rich folks. The latest blow came from the U.S. Treasury Department, which Wednesday announced new regulations meant to pierce the secrecy surrounding luxury real-estate transactions.”

“The federal regulators are apparently concerned that the opacity of such transactions could make them an ideal vehicle for money laundering. But the move sent a shock wave through the world of high-end real estate, where secrecy is not just considered respectable — it’s a key selling point. At One57, the first of the 57th Street developments, one unit recently resold for a $1 million loss. Sales have been sluggish at similarly positioned developments, forcing developers to do the unthinkable: offer price cuts.”

“‘I’ve been trying to figure this out amongst my colleagues, and we’ve come to the realization that this is more of a scare tactic,’ said Edward Mermelstein, a New York attorney who represents many Russian real-estate investors. ‘My feeling is there is an ulterior motive to some of this, and it’s very likely that there is a large group of individual investors that is being targeted, whether Chinese or Russian.’ He contends that the industry is already well-monitored by existing regulations and professional practices. ‘There has actually been a substantial slowdown in cash sales,’ he added. ‘It’s a little bit late in the game to do this.’”

“There is more to this new American urbanization wave than the return of the middle class, young upwardly mobile professionals and immigrants. In fact, they increasingly find themselves priced out of America’s largest cities. Instead, as has happened in London before, such cities are becoming playgrounds for the super-rich — and not only native ones. Foreigners are buying up high-end real estate in U.S. cities – and developers cater ever more directly to foreign buyers and investors.”

“But, like all easy money, this massive international money laundering operation comes with considerable risks attached. The selling prices of the average Manhattan apartment has now reached $1.1 million, an all-time high, surpassing the bubble years before the 2008 financial debacle. But New York is merely the tip of an iceberg. Miami, Los Angeles, San Francisco, Houston and, to a lesser extent, Washington, Chicago, Boston and other cities, are not very far behind.”

“Regional real estate bubbles are being inflated in many markets across the United States, even as home prices on average remain stable – and some regions are still depressed. New York is a prime candidate for a spectacular implosion. It is only a matter of time before disaster strikes overbuilt American urban centers, hitting developers and their lenders and burying ordinary people straining to pay their mortgages in overpriced markets.”

Bits Bucket for January 15, 2016

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