February 26, 2016

A Real Sense Of The Opposite Of Optimism

It’s Friday desk clearing time for this blogger. “Generally speaking, home resales started falling from Sarasota to Naples in the last two to three months of 2015, said Denny Grimes, president of Denny Grimes & Co. in Fort Myers. ‘It’s kind of across the board,’ he said. ‘We saw sales down in Lee County 30 percent in January. We’re in the middle of a downshift in the marketplace. And it’s a good thing.’”

“He said the consumer confidence tank is ‘low on fuel.’ Part of the low confidence, he said, is ‘our fault,’ with home prices rising too quickly. ‘We have seen tremendous price increases in the last two or three years and we are pricing ourselves out of a lot of the market. You can ask for more, but buyers won’t pay it,’ Grimes said.”

“Some builders have already noticed a slowing demand for new homes, with several starting to offer incentives to entice buyers to purchase the inventory. One of the areas where that is happening is in the Immokalee Road corridor in North Naples, which has seen a surge in new construction over the past few years.”

“Developer of tall towers Extell has announced that they’re scaling back condo prices at their 80-story Lower East Side project One Manhattan Square. The pricing rollback comes alongside news of slowing sales in the city’s uber-luxury housing stock (which Extell has no small part in.) Condos in the city’s inaugural residential supertall, 432 Park Avenue, have been divided into smaller, less pricey units to spur sales. Extell relisted some One57 condos as rentals to cast a wider net. Vornado CEO Steven Roth declined to comment on the status of sales of 220 Central Park South during the company’s Q4 earnings call last week, noting that ‘[t]he market is slowing. It’s slowing for everybody. It’s slowing a little bit less for us, but of course it’s slowing for us as well.’”

“There are signs that the red-hot tech scene is slowing down in Silicon Valley. KRON Tech Trends reporter Gabe Slate learned tech stocks are down, layoffs are happening, and there will be more to come. Venture capitalists are starting to close their wallets and not invest in tech. Real estate analysts are warning the rate of growth for the housing costs in the Bay Area has surpassed where it was at right before the dot-com bust in 2001.”

“‘It sounds so dramatic to say a big bubble pop,’ said tech financial expert Erica Sandberg. ‘But it’s definitely a slowdown. And that is a fact. It is happening. People are losing their job and companies are not hiring as aggressive as they were before. There is definitely a real sense of fear that is out there, and when fear is there, the opposite of optimism, then certainly venture capitalists and any other sort of backers are going to put the brakes on.’”

“The slump in oil prices is making an impact on the Minot housing market. An average home is currently selling for around $200,000. That’s $50,000 less than it was during the peak of the oil boom. Driving through neighborhoods in Minot, you may notice multiple for sale signs. Hundreds of homes are on the market throughout the Magic City right now. ‘We’ve seen a major shift in the market,’ said Tracy Dachs, Century 21 Action Relators.”

“During the peak of the boom in 2012, Century 21 Action Realtors say they sold a total of 968 houses. At that time more than 200 rigs were in operation, the city was still recovering from the 2011 flood, and housing was extremely limited. ‘We would drive people by a dirt lot and hold up a picture saying, this is the house going on this lot, this is the house on that lot and you have two to choose from, which one do you want?’ Dachs said.”

“Moody’s said that property prices in Brazil had fallen by 5 to 20 percent in 2015 and that, according to projections, the industry will continue to be ‘under pressure’ until at least halfway through 2017. The Brazilian real estate industry has also been suffering from oversupply. Despite an ongoing reduction in the launch of new releases, the perception of a flooded market remains. Terminated contracts and poor sales have left large numbers of finished, sale-able properties on balance sheets and are only serving to prolong the downturn.”

“‘These price declines are primarily due to a sharp contraction in consumer confidence, which is based on economic uncertainty in Brazil, including the poor employment and high inflation,’ explained Cristiane Spercel, Moody’s vice president-senior analyst. Moody’s citied the liquidity of construction companies as the ‘most serious concern’ in their report. ‘We note signs of industry contraction since 2012, but the challenges for builders have been aggravated by a tighter funding availability and deterioration in real-estate prices,’ said Spercel.”

“The housing boom once fuelled loan growth in Singapore, but analysts warn that lenders in the city-state will have a tough time peddling mortgages this year as the home vacancy rate hits a record high. This chart from BMI Research shows that the vacancy rate of non-landed properties rose to 9.4% in the fourth quarter of 2015,, the highest level since at least the first quarter of 2006 when the series was first compiled.”

“‘Singapore’s real estate market is set for another year of price declines in 2016 as a middling macroeconomic outlook, subdued rental demand dynamics, the retention of market cooling measures by the government and central bank, and a gradually tighter credit environment continue to weigh,’ the report noted.”

“Rents at blue-chip housing estates are falling faster than home prices. Rents at Taikoo Shing – a housing estate targeting middle class families with household income of HK$80,000 to HK$100,000 a month – have fallen 16 per cent from their peak in October last year compared with an overall 11 per cent drop in home prices over the same period. ‘We have seen more leasing transactions record low rents on Hong Kong Island than in other districts. It reflects that middle class families are more careful in budgeting their expenses to prepare for tough times to come,’ said Wong Leung-sing, an associate director of research at Centaline Property Agency.”

“Landlords will need to react promptly by adjusting their asking rents downward if they want to find tenants before market sentiment turns worse, he said. Midland Realty chief analyst Buggle Lau Ka-fai said leasing for luxury apartments would also be affected as the stock market turbulence could dent financial institution profits, resulting in lay offs as a way of cost control. ‘Investment bankers will become less generous than before in terms of paying rents,’ he said.”

“I have been wondering about Beijing’s decision to intervene in the market since last year. What prompted policymakers to pour in trillions to prop up the bourse? Some people have argued that the incompetency of regulators and financial technocrats was a driving force. It is fair to say that some regulators are inexperienced. But are they so incompetent as to make such an elementary mistake? It wasn’t until I read Professor Zhu Ning’s book China’s Guaranteed Bubble that I was able to make sense of Beijing’s decision.”

“What do Chinese investors do when the stockmarket crashes? They cry, curse and occasionally jump out of buildings, but they’re also likely to stage protests at the gates of the Chinese securities regulator. There is a similar situation in the real estate sector. Chinese homeowners are likely to protest outside a developer’s office if it offers more discounts to new buyers or if prices drop. Some buyers even smash up the display centre and take sales staff hostage.”

“Instead of sending in the cops, local governments often act as meditator, asking property developers to compensate aggrieved buyers. Once again, social stability trumps all. The real danger of these actions is that it encourages the widespread assumption that the government will step in when things go wrong. Professor Zhu argues that unless Beijing reins in these implicit guarantees, a financial crisis is inevitable. It reminds me of the false sense of security created by the AAA ratings handed out willy-nilly to various mortgage-backed securities and collateralised debt obligations ahead of the great crash.”

“An economist and hedge-fund manager went undercover and found that Australia now has ‘one of the biggest housing bubbles in history’. Bronte Capital’s chief investment officer John Hempton and economist Jonathan Tepper toured suburbs across north-west and south-west Sydney to view housing developments and met with 20 mortgage brokers three weeks ago. They discovered that mortgage brokers were advising them to lie on loan application documents about the deposit for a house and about income, the Australian Financial Review (AFR) has reported.”

“When the pair asked banks to call their employer, ‘both reputable and disreputable brokers said banks rarely verified payslips,’ Mr Tepper wrote in a report. They also encountered developers lying about units and houses being sold in the west, the ‘epicentre’ of the housing bubble. To Mr Tepper’s surprise, some of Sydney’s poorest suburbs, such as Blacktown, Rooty Hill and Mount Druitt in Sydney’s west had properties selling from $500,000 to $700,000 - prices that are at least eight times the income of people from those areas.”

“There were more advertisements for deposit guarantees, where rather than putting a deposit down on a house you can take out an insurance contract that will pay the deposit if you default. Another shocking revelation was that the verification of documents was sometimes done by Indian call centres, according to Mr Hempton. ‘The further west I went, the more irrational it felt. Lots and lots of supply and prices that bore no resemblance to construction cost and income of people around there,’ Mr Hempton told AFR.”

“Tepper writes of getting a ride with an Uber driver who said he had his own house, had bought five investment properties in Queensland with no cash deposits, and went guarantor for his daughter who bought a $2.2 million home. His report noted that ‘over the past few years over 40 per cent of all new mortgages originated have been interest-only mortgages. This is truly Ponzi financing, where home buyers only make money if their houses keep rising in value. Paying interest only and revaluing property allows for a Ponzi dynamic. As prices rise in a Ponzi fashion, more equity allows for more deposits. This will reverse viciously when prices fall.’”

“Their research is an unrepresentative sample of all of Australia but Hempton challenges anyone to go out and start looking at the glut of property that exists in the west. ‘Go drive around western Sydney at the moment. It was pretty obvious to us there was a lot of unsold inventory.’”

Bits Bucket for February 26, 2016

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