February 12, 2016

People Were In Shock, Then Denial, Now They’re Angry

It’s Friday desk clearing time for this blogger. “The amount of recent job layoffs around southern West Virginia has the market for selling houses down thousands of dollars. The Beckley Board of Realtors reports there are currently 425 houses up for sale in Raleigh County, alone. At this time last year, the average home sold for $118,000. That price has dropped by $7,000 in 2016. ‘They feel like they know the price of the home and they know what it’s worth, but in all honesty, in most cases they’re not going to get that price,’ says Cathy Smith, Beckley Board of Realtors president. ‘Prices are low and it’s a buyers market right now.’”

“The low price of oil is bringing on more uncertainty for a big chunk of Houston’s economy. Leon Green sees it every day in his property management business, Green Residential. Green deals mostly with home rentals, and he’s telling his clients to move a property quickly, they’ve got to drop their prices. ‘This house that we’re in right now, it rented for $5,000 about 18 months ago,’ Green said. ‘It’s being advertised for lease for $3,800 a month right now.’”

“Byron Calais lost his job two weeks ago working for an oil and gas maintenance company. Adding to the stress, the family just bought their home five months ago, and now they’re not sure how they’ll keep it. ‘I’m nervous,’ Calais said. ‘I’m willing to drive Uber if I have to — anything to just keep some momentum going.’”

“The nation is seeing some of the lowest gas prices in decades. But while drivers are celebrating filling up for under $30, Vernal, located about three hours northeast of Salt Lake City is in tears over it — and these are not tears of joy. From businesses, to hotels, to housing, to jobs, everyone is feeling the pain. Troy Allred and Angela Walker, who have been working in the real estate business for years, said it’s a sad sight to see so many homes up for sale. They say right now residential sales are down 30 percent. ‘There is probably four to five listings right here on this street,’ said Allred.”

“‘When you see these foreclosures — that’s families without a job and a home,’ said real estate agent Angela Walker as she points out all the homes for sale on one block.”

“In the early days of the downturn, most Albertans believed this would be just another V-shaped dip, over in a matter of months, and made virtually no lifestyle changes, figuring they’d be rehired within six months. Instead, a year later, oil is trading even lower, more layoffs are being announced, wages are falling and the housing market is stalled. ‘A year ago, people were in shock, then they were in denial, now they’re angry,’ says Todd Hirsch, chief economist at ATB Financial, an Alberta crown corporation. ‘They’ve lost their job. Their neighbour has lost their job. They’re watching this thing we built come collapsing in on itself.’”

“‘I don’t think we’ll see the tsunami of houses coming on the market that we saw in the late ’80s,’ Hirsch says. However, house sales are falling, and he believes prices could decline in 2016 by as much as 10 per cent. On the other hand, the fall from $100 a barrel was inevitable, and the adjustment, though painful, is necessary, Hirsch says. As oil prices rose, so did the cost of production, particularly labour rates, pushing the break-even point for new production to $80 or $90 a barrel. ‘Everyone knew someone whose son was driving a truck for $80,000 a year,’ Hirsch recalls. ‘It’s not sustainable.’”

“‘If housing prices fall, it will very much deepen the downturn we have now,’ Hilde C Bjørnland, professor of economics at the Norwegian Business School BI in Oslo, told newspaper Dagens Næringsliv (DN). ‘High housing prices and a high degree of household debt makes us vulnerable if unemployment rises rapidly,’ Bjørnland told DN, adding that the economic fallout will no longer be confined to the areas of Western Norway where there’s the biggest concentration of oil and offshore firms that have been cutting back and laying off workers.”

“Some upmarket Abu Dhabi landlords are starting to offer tenants small rent reductions as the low price of oil prompts the capital’s housing market to soften. ‘In response to the tempered market outlook, some landlords are now starting to offer tenants more flexibility, while also becoming more receptive to minor rental discounts, as they strive to maintain and build tenant loyalty to uphold occupancy rates,’ said Matthew Green, the head of research and consulting in CBRE’s Dubai office.”

“Imagine being an award-winning investor at just 24, only to end up owing banks $3 million by the age of 27. What a roller-coaster ride that would be. But that’s exactly what ‘Property Investor of the Year 2012,’ Kate Moloney, claims has happened to her. Moloney has recently written a book, explaining how the tumbling value of her property portfolio has left her ‘living with financial cancer.’ On her website she explains that the portfolio was worth $8.5 million when she won the award, but just three years later, ‘if we were to sell our properties, we would still owe the banks about three million dollars (not including arrears interest and selling costs).’”

“Moloney and her partner Matt Moloney have been hammered by the end of the mining boom. Thirteen of the 16 properties that helped them win the award were in Moranbah or Mackay, and heavily exposed to the end of the mining boom. Curiously, the award judges were well aware of that fact.”

“It’s hard not to feel a tiny bit of sympathy for the Moloneys – as much as this kind of property investing is driven by avarice, young investors are nonetheless surrounded by an army of spruikers, financial spivs, and cheerleading journalists all hollering that the paper profits will just keep coming. The magazine that ran the awards, Your Investment Property, is simply taking the same view as our politicians and regulators – a view which fails to distinguish between investment in productive assets, and speculation on proverbial ‘tulips‘. As with the flowers of 17th-century Holland, house prices surged way above anything that could relate to the utility they offer their owner.”

“When I spoke to the magazine’s editor Nila Sweeney this week, she confirmed that house prices in Moranbah had fallen ‘30 or 40 per cent’ which would make Moloney’s story ring true ‘if you’re highly geared.’ She added: ‘At the time of the awards, the market was performing differently. The judges can’t be blamed for what happened later.’”

“As unsold homes mount up, Chinese developers have lost their appetite for land and have become focused on getting rid of inventory. The sales center of a new development in Nanning is offering discounts of 80,000 yuan (12,100 U.S. dollars) for each home bought. The average price per square meter is about 8,000 yuan. The heady days of housing consumption are gone. New home buyers are more savvy now, with little expectation of buying low and selling high.”

“A lack of shops and restaurants, coupled with poor transportation has scared buyers off. ‘The nearest wet market is too far from here, and buses are too few,’ said one potential buyer, prioritizing convenience over price. ‘More supportive policies are expected to be unveiled for the property sector,’ marketing director of a real estate company Lin Qu predicted. ‘House prices remain high in many cities, which means developers still have huge room for future promotion.’”

“Say you have $10 and lose 50%, leaving you with $5. How much must you gain to have $10 again? Many people understandably answer ‘50%,’ but the answer is actually ‘100%.’ Quite a difference. The smaller the loss, the lower the hurdle. But the deeper the loss, the more it takes the Jolly Green Giant to clear the hurdle.”

“Not too bad at smaller losses. Stock markets present these at regular intervals and so far, they recover. But individual stocks can do far worse and lose money permanently. Losses such as 70%, 80% and 90% require high hurdle gains of 233%, 400% and 900%. Hard to find. Consider newer companies offering more promise than performance. Ouch. This flashes the danger of paying too much for a stock. By ‘too much’ I mean value, not price. Many people who snapped up Las Vegas homes willy-nilly in the housing boom forked over way beyond any real values – the rents people would pay to live there. It was a mania followed by a crash.”

“Often, in it’s the same with stocks. Hey, everyone will tweet, listen to Pandora, wear a Fitbit, use Groupons, drive a Tesla or make soda at home! It’s a sure thing. Maybe not. Yes, investors could probably not do any work, buy big familiar companies, and not lose too much, but no one in the 1970s believed that Bethlehem Steel, Eastman Kodak, Woolworth’s or General Motors would someday be bankrupt, either.”

“If we don’t know the value of what we’re buying, we don’t know if we’re paying too much, and we certainly don’t know whether to sell or hold on. We become fools, gambling that a greater fool will throw more money at us. That may work, until it doesn’t. Then it’s a robbery where accomplices scram while shoving the money at the hapless slowpoke. The police nab the unlucky one holding the bag. That’s the result of any loss with too high a hurdle.”

Bits Bucket for February 12, 2016

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