June 3, 2016

A Greater Fool Theory Of Investment

It’s Friday desk clearing time for this blogger. “After cooling off in 2014, home flipping is on the rise again, according to a new report from RealtyTrac. It is reaching new peaks in 7 percent of the nation’s metro markets, including Baltimore, Buffalo, New Orleans, San Diego and even pricey Seattle. Usually flippers look for distressed properties. There are fewer of those today, so flippers are moving to the mainstream market, creating that new pressure. ‘A telltale sign is when flippers are acquiring properties at or close to full market value. Those markets are so competitive that even the off-market properties flippers are looking to buy are not selling at much of a discount — and there may be very few distressed properties available,’ said Daren Blomquist, senior VP at RealtyTrac.”

“Examples of these markets include San Antonio, where Blomquist says flippers are actually purchasing at a 7.8 percent premium above estimated full market value, as well as Austin, Texas; Salt Lake City; Naples, Florida; Dallas and San Jose, California.”

“A Dumbo three-bedroom used to be the real estate equivalent of a total eclipse or Halley’s Comet: Rare. But not any more. There are an unusually high number of three-bedroom listings in Dumbo at the moment. ‘There has been a visible slow down with higher priced properties, both rental and sales, which includes two- and three-bedrooms,’ Dumbo resident and Halstead agent Terrence LeRay told Brownstoner. ‘This slowdown may be economy related, election related, concerns over P.S. 8 or a combination thereof.’”

“During the boom, Elk City’s RV parks and hotels were full of oil-field workers and the city had to bus people in from as far away as Oklahoma City to work at the Walmart Supercenter because there was a shortage of workers. Elk City recruited St. Louis-area-based developer USA Wealth Partners to build new homes in the addition in 2012 as the city responded to a housing shortage prompted by the oil boom brought on by $100 a barrel oil. A few of the brick homes in the Swales development sit unfinished with boarded-up windows, missing finishing touches like light fixtures and carpeting.”

“Swales addition homeowner Quincy Hudson can point out his neighbors’ homes in the Swales addition with the ‘for sale’ signs and list what energy company the homeowner was laid off from. ‘The economy is terrible, and people are moving,’ Hudson said. ‘But this house isn’t going to sell until the economy comes back.’”

“Tyler Harrison, a real estate broker for Elk City-based Western Oklahoma City Realty, has had so many new home listings over the past few months that he had to order more yard signs. Any of the higher-end homes in the $300,000 price range are a tough sell right now in Elk City, he said. Homeowners who bought at the top of the market a few years ago and don’t have a lot of equity in their homes often find themselves unable to sell their homes for a price that will allow them to pay off their mortgage, he said. ‘We still have buyers coming in, but it’s a limited amount of people,’ Harrison said. ‘There are people without much equity in their homes who are limited in what they can take.’”

“Central Saanich’s Marc Tardif has been trying to sell his renovated two-storey house with four bedrooms and three bathrooms for two years. No offers have come. The price has been knocked down to $399,000 from $499,000. It’s now below the $466,000 assessed value. What’s going on? Well, it might be that Tardif’s house is in Quebec City. A condominium building boom is one factor in the Quebec City market. As well, potential buyers have more choice, as do renters, Tardif said. Quebec City’s rising rental vacancy rate was four per cent in 2015, up from 3.1 per cent in 2014.”

“He calls the city’s rental market dead. ‘They built so many condominiums in Quebec and they are still building like crazy.’”

“Australia is building more apartments than ever: Every corner I drive past has a big hole in the ground waiting for foundations to be poured, and the horizon is a jagged mess of cranes. Apartment prices got crazy there for a while. That sent builders into a frenzy. But that period may be coming to an end. The financial press is full of stories about people buying apartments off the plan and losing money on them. Big money. Like the central Melbourne apartment bought for $2.2 million being sold for $1.6 million.”

“Banks are now restricting lending for construction of apartments in large areas of Australian cities. They don’t want to be left holding bad loans on apartments that have tumbled in price. Even the Reserve Bank has got in on the warnings, with the head of Financial Stability, Lucy Ellis, pointing out that even if a crash seems to be coming, property developers will still rush to get buildings finished. ‘Just as there’s a Greater Fool Theory of investment that helps perpetuate booms in prices of financial assets, it sometimes seems that there is a Slower Builder Theory of property development, where everyone knows that not all the projects underway will make money but yours will if you can just complete it before the other guys complete theirs,’ said Ms Ellis.”

“Nguyen Tri Hieu, a renowned banking expert, believes that the HCMC real estate market is now full of high-end apartment projects because investors put high hopes on Vietnam’s Trans Pacific Partnership membership and other free trade agreements. He noted the high expectation has made the real estate market heat up. Most people are buying apartments at this moment just for investments, while very few people buy for accommodations. In other words, real demand is not so high. ‘Investors have the right to keep a high hope that the high-end market segment would bring high profit, but it is necessary to reconsider liquidity,’ Hieu said.”

“Singapore’s residential rents are falling at a precipitous rate - and the reason could be a sea-change in the make-up of the city-state’s expat workers. Official rental price indexes showing declines in the neighborhood of 10 percent since 2013, while anecdotally, much larger drops are bandied about. Alexander Karolik Shlaen, an economist and CEO of Panache Management, a luxury brands and real estate investment adviser, said a unit he owns has seen a rent drop of 40 percent, from 13,000 Singapore dollars (around $9,400) a month in 2008, down to under 8,000 Singapore dollars now.”

“Rents are set to head even lower, with the numbers of new units exceeding the number of new arrivals, noted Chandran V.R., managing director at luxury property agent CRE. Additionally, with some of those units’ developers likely to rent the apartments if they can’t be sold, tenant-seeking ‘owners are going to be competing with developers,’ he said.”

“After two decades trying to make a life in China’s entrepreneurial city of Wenzhou, Ji Shouquan and his brother Shoufang are ready to head home. They say they have no hope of stepping onto the city’s housing ladder and it is getting more difficult to earn a decent wage. China is relying on millions of internal migrants taking up jobs in cities to boost the urban population and consumption. But migration is slowing down and workers are more reluctant to travel across the country to find jobs, trends that could undermine these efforts.”

“Analysts say China’s massive stock of unsold homes is evidence that the urbanization drive is faltering as migrants struggle to build a future away from their villages or towns. Despite some signs that house prices are recovering from a downturn, official data shows that the inventory of unsold homes in China rose in the year to April by 4.5 percent to 450 million sq meters.”

“‘It’s really tough to make money,’ said Shouquan, who earns about 5,000 yuan ($767) a month as a sound technician in a karaoke lounge. ‘Of the six or seven friends who used to work at the KTV, only two of us are still holding on. Most have gone home.’”

“In the London city center, there are whole neighborhoods of multi-million-dollar homes that are largely empty. Last summer, Roman Borisovich, a Russian banker turned anti-corruption activist, collaborated on a documentary that aired on British TV, called ‘From Russia With Cash.’ In the film, Borisovich went undercover, pretending to be a corrupt Russian official named Boris. He approached five separate realtors from well-known London brokerages, telling them he wanted to buy a multi-million dollar property. He made explicit that he would pay for it with money stolen from the Russian state.”

“All five realtors were willing to help him. Their commissions would have been in the six figures. ‘They had all been trained to watch for money-laundering, but five out of five agreed to play along. That was the appalling part,’ Borisovich recalls. ‘Victorian bricks and mortar have become the currency of international crime,’ he says, adding that he believes the British establishment has been complicit.”

“Home prices went up in March. All indications are that April was an up month too. Bit by bit, prices are regaining the ground lost during the long collapse from 2006 through early 2012. If there’s one thing we should have learned from the housing bust, it’s that rising home prices aren’t an unalloyed good. Rapid price increases in the early 2000s directly led to the subsequent crash. Sale prices lost all connection with both rents and incomes; after a certain point they were going up mainly just because they were going up, and buyers feared missing out. That couldn’t go on forever.”

“For homeowners, housing isn’t just something one consumes; it’s an investment. And when your investment rises in price, that’s a good thing. This simple truth explains a lot about public policy surrounding housing in the U.S. The home mortgage interest deduction is a subsidy for the affluent that serves no discernible economic purpose, but is almost impossible to get rid of because removing it would (1) raise taxes for those with mortgages and (2) depress home prices across the board. Zoning and other land-use regulations have been accused (and to some extent convicted) of segregating Americans by income and slowing U.S. economic growth, but it’s almost impossible to get rid of them because they raise the price of existing homes.”

“So no, I don’t see my nation suddenly embracing the idea that rising home prices are a terrible thing. But it seems like it’s worth the effort to try and at least sow a little doubt.”