March 11, 2016

Cheap Debt Sustained The Frenzy

It’s Friday desk clearing time for this blogger. “Just how bubbly is the San Francisco real-estate market? Home builder Hovnanian announced Wednesday it would exit the market, calling it ‘frothy’ and saying that prices for land in the Bay Area are ‘lofty, almost speculative.’ San Francisco home prices are surging. They’ve risen by double-digit percentages compared with a year earlier for each of the last six months, according to S&P/Case-Shiller data, and have retaken bubble-era highs. Hovnanian also announced it would pull out of the Raleigh, N.C.; Tampa; and Minneapolis markets.”

“When energy prices dipped to 12-year lows in December, Sullivan Brothers Builders decided to try to spur sales of its single-family homes in the Houston area by offering a $5,000 bonus—and payment of buyers’ electric bills for one year. Two months later Sullivan Brothers is still offering the incentives, and likely will continue them through the spring, to see if the global energy downturn deepens for the nation’s most important oil and gas corridor, said Karen Travelstead, director of sales and marketing for Sullivan Brothers. ‘The price of oil has stalled some buyers,’ said Travelstead. ‘There were buyers ready to make decisions that kind of decided, ‘Let’s wait three to six more months before we decide.’”

“‘Overall we are seeing a little more caution about spending money in Dallas because it is part of Texas,’ said Paige Shipp, Metrostudy’s regional director for Dallas-Fort Worth. ‘That is a 2016 revelation. It was kind of no-holds barred in 2015 – buy as much land as you can, get as many deals as you can.’”

“Weld County, where much of the state’s oil and gas activity is concentrated, suffered a 1.3 percent decline in employment in the third quarter. Only a year before that, in the third quarter of 2014, Weld led the country with a 8.8 percent rate of annual job growth. But like a driver who blows his engine after leading for most of the race, the county dropped back to 331st out of the nation’s 343rd largest counties. Weak wage growth matters because metro Denver had some of the steepest home-price gains in the country last year. If wages don’t keep pace, home ownership will be out of reach for a larger share of the population, leaving the housing market more vulnerable to price declines.”

“‘Weld County has always been a commodity-based economy. Whether agriculture or oil and gas, we are very familiar historically with fluctuations,’ said Rich Werner, CEO of Upstate Colorado in Greeley.”

“Dubai developers are pressing ahead with their construction plans despite expectations that property prices will fall yet further this year, undaunted by memories of a 2008 crash. Property markets can be driven as much by sentiment as supply and demand, so such overt bullishness is perhaps understandable. However, it ignores a 19 percent decline in Dubai unit sales and a 24 percent drop in the combined sales value in 2015, CBRE estimates. It also echoes 2008 when that October the developer Nakheel announced plans to build a kilometre-high tower, which at almost 200 metres more than the Burj Khalifa would be a global record.”

“‘People who really want to sell are willing to accept considerably lower prices,’ said Alexander von Sayn-Wittgenstein, sales director at luxury property broker Luxhabitat. ‘The official price may be the same but when a buyer makes an offer that is much lower, the seller is more flexible and will likely accept a price they wouldn’t have a year ago.’”

“The slowdown in the Information Technology industry, leading to uncertainty in career prospects for employees, is a major cause of the slump in the housing sector. The India Real Estate report on residential housing trends by Knight Frank shows that 2015 ended with the lowest number of new launches and sales volume across the top eight cities in the country since 2010. Increasingly, NRI professionals in the IT space find remote-managing their let-out homes in India difficult. This has consequently seen a drastic drop in housing demand from these professionals, said Srinivas Acharya, Managing Director of Sundaram BNP Paribas Home Finance Ltd.”

“‘Thanks to these IT professionals and the availability of long-term loans that made housing affordable, the market had been on a healthy incline,’ he said. But things have changed now. For one, the slowdown has introduced an element of uncertainty to their jobs. It has also made them somewhat unsure of their choice of location, given their willingness to move cities pursuing new opportunities. All these have combined to contribute to their indecision on buying a house for themselves, argued Mr. Acharya.”

“With talk of an Australian property bubble ramping up, few businesses stand more exposed than the nation’s real estate agents. One of the east coast’s major players, McGrath, listed on the ASX in December and, if its share price since is any indication, Australian real estate is in trouble. After listing at $2.10, the stock has lost more than a third of its value in just three months. The principal of Parramatta-based real estate agency Just Think, Edwin Almeida, said the downturn fund manager Roger Montgomery warns of is already hitting western Sydney.”

“‘We’ve identified some areas were properties have already actually gone backwards by anywhere between 8 and 15 per cent,’ he told The Business. ‘Asking prices are dramatically being pulled back, in some parts of Sydney by up to 20 per cent.’”

“Roger Montgomery is convinced the McGrath float is another cautionary tale of buying into IPOs when private owners are selling. ‘When a highly knowledgeable, skilled and successful real estate agent is selling down their own exposure to their business, that for us is a red flag,’ he concluded. Perhaps it should also be a red flag for those who steadfastly believe Australian property prices cannot crash.”

“If China ignores the rising amount of leverage in the housing market it could lead to a financial disaster, according to Huang Qifan, mayor of Southwest China’s Chongqing, media reports said. Huang pointed out that banks have already lowered down payments for housing purchases and real estate developers and realtors are now offering loans to help people cover the down payments, bringing the actual down payment to between 5 and 10 percent and even as low as zero in some cases. ‘And zero down payments were the origin of the U.S. subprime crisis,’ he noted.”

“The housing market in first-tier cities such as Beijing and Shanghai has been heating up rapidly since the beginning of the year. Meanwhile, the price-to-rent ratio has continued to rise in recent years in China’s first-tier cities, a research note by analysts at brokerage Haitong Securities said on Tuesday. A house buyer in Shenzhen would now have to rent out their home for nearly 60 years to get back the investment, the note said.”

“In January 2012, I traveled to Oklahoma City for the first time to report on what was considered a surprising development: a U.S. oil boom. Still folded in my notebook is a typed list given to me that week by Gene Pflughoft, then the executive director of Central Oklahoma Regional Development. It enumerated the benefits of tapping shale: ‘Leasing the land, drilling rigs, built with hundreds of components, thousands of employees; trucks to deliver drilling rigs; drilling: many employees, highly skilled; training facilities, teachers, cooks, coordinators, janitors. Restaurants full. Motels full. Welding shops opening.’”

“The list now reads like a prediction of everything that’s being lost in the bust. The last bust began in 1982 and tipped the state into a slump that lasted decades. Politicians said they’d diversify the economy. But the present just echoes the past. In 1982 the oil industry paid 13 percent of worker earnings in Oklahoma, according to the Kansas City Fed. At the end of 2014, it was 14 percent.”

“As Stanley Druckenmiller, an investor with one of the best long-term records in money management, said of Texans in January 2015: ‘Those guys know how to gamble, and if you let them stick a hole in the ground with your money, they’re going to do it.’ Shale wasn’t sustaining the frenzy; cheap debt was.”

“At the State Capitol building, built on an oil well, State Representative Lewis Moore pulls up the posh suburb of Edmond on his Zillow app; blue dots marking foreclosures and pre-foreclosures cloud the screen. He lives in and represents Edmond, home to some of the state’s best-paid oil professionals. ‘It’s not good,’ he says, zooming in on a house with a pool. ‘It’s not good that it can happen this fast.’”

“Tom Kashatus remembers the good old days when his community was a booming coal town. A generation later, his hometown is plagued with a 48 percent poverty rate and more than half of adults are out of work. One in five lack a high school diploma. Nearly a third of homes sit vacant, many in deteriorating condition. Those troubling statistics make the Glen Lyon section of Newport Township the most distressed place in Pennsylvania, according to a report published by a Washington, D.C.-based think tank.”

“Newport Township Commissioner Paul Czapracki, who lived in Glen Lyon most of his life, said news of the report was ‘disheartening.’ Czapracki lamented the fact that many Glen Lyon homes once occupied by coal mining families who built the town are now abandoned. The study found 31 percent of properties in Glen Lyon are vacant. ‘Glen Lyon was one of the richest towns around,’ Czapracki said, recalling the great memories he’s heard of yesteryear. ‘The amount of money that flowed through here was unbelievable.’”

Bits Bucket for March 11, 2016

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