September 30, 2016

The Market Is Getting Ready To Make A Big Switch

A report from KSBY in California. “If you live in Santa Maria, you may have noticed more homes for sale in your neighborhood. There may have been a lot of price reductions, too. One local realtor says the market is getting ready to make a big switch. ‘We start seeing it shifting from a sellers’ market now to an actual buyers’ market,’ said Vatche Maestas, a real estate agent with Keller Williams. ‘We are not seeing the rapid price increases now. A year ago, we could put a house the market on one month, and the following months it could go up by $10,000. We aren’t seeing that. Right now, we are seeing more price reductions.’”

“And according to agents, new homes are selling quickly. The challenge is the older, higher-priced homes, which are stalling out. ‘Save me some money,’ said Mike Alexander, a home buyer and Orcutt resident. ‘We’ve waited a while, so were looking forward to it. The only question we have is, ‘Do we wait longer and get a better deal? Right now, I’m seeing more and more property coming available.’”

The Marin Independent Journal. “The median price of a Marin home was almost $1.1 million last month, up 14 percent from the previous August, according to CoreLogic. In contrast, prices in San Francisco edged up a mere 1 percent this August compared with August 2015. Price jumps and drops in the Bay Area generally begin with San Francisco and radiate throughout the area. ‘The rate of increase in appreciation is starting to level off,’ said Peter Nielsen, an agent with Marin Realty Experts. ‘The upper range is softening. Also, I’m seeing price decreases once in a while.’”

“Nielsen said the decreases are probably ‘more a case of someone operating under the assumption that the appreciation is skyrocketing and they are trying to hit that next level.’ Instead, Nielsen said, ‘it may be time for sellers to take a more realistic look at their pricing and not keep trying to break the record.’”

The Orange County Register. “California’s housing market will post modest gains next year amid tight supplies and the lowest housing affordability in six years, the California Association of Realtors forecast Thursday. Home sales are leveling off. Prices are rising more slowly. And even with mortgage rates near all-time lows, the California housing market is making a lackluster recovery from the Great Recession, said Realtor Chief Economist Leslie Appleton-Young.”

“‘I think we’re getting close to the peak of the market, but we haven’t really had a stellar recovery either,’ Appleton-Young said in an online news conference. ‘What you’re seeing in the California housing market is not what I would consider robust activity.’”

“Even though the market is approaching its peak, she said, it’s not edging toward a crash – barring a major catastrophe like sudden mortgage rate hikes or a stock market meltdown. ‘It’s really going to be more of a slow squeeze than a big drop,’ Appleton-Young said. ‘We’re living that right now.’”

General Market Conditions Have Deteriorated

It’s Friday desk clearing time for this blogger. “The economy officially bottomed in June of 2009, according to the National Bureau of Economic Research. Since then, our country has been slowly working its way back to less dire, more promising, conditions. The road to recovery has been somewhat slow and bumpy, but this morning’s S&P Case-Shiller housing report is further confirmation that we are heading in the right direction. Specifically, housing prices continue to strengthen, and have now risen nearly 40% from the lows of 2012.”

“Nationally, prices are now less than 1% from their previous highs. In fact, pockets in the west are reporting double digit yearly price gains, with all-time record highs in Portland, Seattle and Denver (in more ways than one). We can all thank Fed Chair, Janet Yellen, and our friends at the Fed for serving us low interest rates. Historically, low mortgage rates have been a boon for newbie home buyers and real estate in general. But what’s going to happen if interest rates rise? Ah, who cares, for now everything is ‘Rocky Mountain High.’”

“Construction on the H3 Hollywood condominium has stopped, at least temporarily — and that may be an indication that the market for new condos in Broward County is softening, analysts say. In a letter to buyers, the developer, Hollywood Station Investments, noted that ‘general market conditions have deteriorated’ and the company is trying to get construction financing. ‘This may be the first sign that [southern Broward] is catching the flu that Miami-Dade has,’ said Peter Zalewski, principal of the Condo Vultures consulting firm.”

“Ken Thomas, a South Florida economist and banking analyst, said lenders will make every attempt to work with developers, but they’ll insist on more equity in the projects and other terms to reduce risk. ‘A loan that seemed good six months ago or last year may not make sense now,’ he said. ‘[H3] is only one, but I think we’ll be seeing more of these.’”

“Residential mortgage default insurance premiums are likely to increase for homes in hot real estate markets as a result of beefed-up capital requirements for Canada’s mortgage insurers coming into force next year. And it is homebuyers who are expected to bear the added cost, rather than the financial institutions that lend the money for home purchases, according to Peter Routledge, an analyst at National Bank Financial.”

“Routledge said he expects two headwinds to hit the Canadian housing market if the OSFI mandated changes go ahead as proposed: higher mortgage rates and a higher probability that foreclosures will increase. The combined impact could contribute to a cooling of the market. The analyst said the new rules could also serve to crimp the practice of extending the amortization period of a mortgage to reduce monthly payments when a borrower is in financial distress. ‘In our view, this weakens the incentive for mortgage insurance companies to forbear, potentially increasing the likelihood of foreclosure,’ Routledge wrote.”

“A massive new hotel and resort will be developed by Emaar, Dubai’s biggest and most successful property developer on the emirate’s famed Jumeirah Beach. The Emaar move is surprising as the Dubai hotel market is fast approaching an oversupply which is already impacting on the emirate’s occupancy and room rates. Some developers have walked away from projects, even though the buildings have been almost completed.”

“The Kempinski Palace Hotel on the Palm has been under construction for some years. Investors are being told it will be completed this year, but short of a miracle that will not happen. The construction of the Seaview Hotel near the Zabeel Saray Hotel is almost complete however the site has been abandoned for well over a year. The Taj Exotica Hotel is another abandoned construction site, notwithstanding the hotel is partially built. The massive Kingdom of Sheba Hotel and Residences development at the top of the Palm is also an abandoned construction site.”

“Cluttons, a firm of international real estate consultants, has noted that there is an overall slowdown of activities in Lagos’ commercial real estate market, with rents either stagnating or declining across most segments of the sector. According to Faisal Durrani, Head of Research and Partner at Cluttons, ‘The deteriorating global economic conditions have also impacted Lagos’ commercial real estate market, with transaction levels dipping and vacancy rates rising across the board, putting rents under downward pressure and driving landlords towards offering a range of lease incentives to entice demand.’”

“Perth property sellers were feeling a whole lot of pain in the past June quarter, with one in five selling their home for less than the previous purchase price. In the Perth CBD, more than one in two properties, 52.8 per cent, sold at a loss. Nationally the average loss hit its highest level since 2004, with those who lost out taking a bath to the tune of an average of $73,009. But for those who turned a profit, the reward was an average $262,550.”

“‘The loss makes sales figures for houses in Perth at their highest level since September 1996 and for units the highest level ever with data going back to 1994,’ said CoreLogic analyst Cameron Kusher. ‘I think there is probably some more pain to come over the next few quarters at least.’”

“The Singapore property market overall has been muted in this quarter but the auction scene has thrived, according to consultancy JLL. ‘The third quarter also showed a fairly even mix of successfully auctioned property types as well as owner profiles. Preceding quarters typically saw more residential non-landed units and mortgagee sale listings being auctioned off,’ the report said.”

“JLL auction and sales head Mok Sze Sze said: ‘With the uncertain economic outlook and current buyers’ market, the auction will likely become a preferred mode of sale for owners where a definite timeline is set for decision with no cooling-off period. In addition, we anticipate that there will be an increase in mortgagee sales of between 10 and 20 per cent next year.’”

“Speculative buyers have eschewed Chinese stocks in favor of property, prompting even the chief economist at the central bank of the world’s second largest economy to declare that housing was in a ‘bubble.’ Deutsche Bank AG Chief China Economist Zhiwei Zhang thinks he’s pinpointed ‘a clear sign of a bubble’ in the market — one that will end in a major correction in two years’ time. After analyzing how much developers were willing to spend to win land auctions in 10 major Chinese cities in which values are already up 23 percent year-over-year, the economist found that the business case for these bids evaporates unless property prices continue to increase.”

“If property prices simply tread water from here, the Deutsche Bank economist reckons that buyers accounting for more than half of land sales values in these auctions would lose money. The ’soaring land auction premium revealed very high expectation of further property price inflation,’ Zhang said. ‘Indeed unit land prices in many auctions are even higher than the finished apartments nearby, a phenomenon referred to as ‘flour more expensive than bread,’ he writes.”

“Federal Reserve Chair Janet Yellen said that she believes the largest banks in the country can legally exist, days before a handful of them are due to submit reports to the Fed that could lead to their breaking-up. ‘We believe it is possible, even though it is extremely challenging for [these] organizations to comply with the law,’ she said, in testimony before the House Financial Services Committee.”

“Yellen made the remarks in response to questions about Wells Fargo that had been asked by Rep. Brad Sherman (D-Calif.). In their exchange, Yellen told Sherman that the Fed ‘will hold the largest organizations to exceptionally high standards of risk management, internal controls, [and] consumer protection.’”

“Sherman replied that the regulatory body has proven itself incapable. ‘Two million phony accounts not detected by regulators,’ he said. ‘Break ’em up.’ ‘From a Democratic side, I’ve heard too big to fail is too big to manage. From a Republican side, I’ve heard that too big to fail is too big to regulate,’ he added. ‘But whether the fault is the regulators who can’t regulate it, or the managers who can’t manage it, too big to fail is too big to exist.’”

“The line of questioning was repeated later in the hearing by Rep. Mike Capuano (D-Mass.), who pointed out that the Fed had punished Wells Fargo in 2011, for policies similar to those that fostered account falsifications. ‘We are very concerned with all of the compliance problems and violations of laws that have occurred,’ Yellen told Capuano, at the end of his round of questioning. ‘You know they’re laughing at you,’ he replied.”

September 29, 2016

A Price That Is At Once Unbelievable And Plausible

A report from the Sierra Sun in California. “While the recent regional housing study shows that more than half of Truckee-Tahoe’s workforce commutes to the region from other locations, real estate sales in the area are on the rise. ‘The majority of the buyers in our area are second homeowners, vacation homeowners, investment buyers,’ Ellen Grace, president of the Tahoe Sierra Board of Realtors and a Realtor with Coldwell Banker in Truckee, said.”

“Grace said that locally, the median home price across all three categories (entry level, midrange and luxury) within the Tahoe Sierra market footprint is $565,000 — an 8 percent increase from last year. The median income for a four-person household this year in Nevada County is $73,500, and in Placer County, it is $76,100, according to the California Department of Housing and Community Development. The Regional Housing Study also reports that roughly 65 percent of homes in the North Tahoe-Truckee are vacant most of the year, primarily used for vacation homes.”

“Nick Pullen, owner of Truckee-based Pullen Realty Group, told the Sierra Sun that although his business does mostly vacation property management for second homeowners in the Tahoe area, he thinks more can be done to accommodate the housing needs of locals. ‘I would characterize the Truckee-Tahoe economy as a ‘Master and Servant’ economy, where second homeowners are the masters, and most people in Truckee make their living servicing them,’ said Pullen. ‘Our economy is heavily dependent on all things real estate, where people finance it, appraise it, sell it, design it, engineer it, approve it, build it, rent it, clean it, maintain it.’”

“Pullen said that almost every person he knows is involved in one of these businesses that can be tied to real estate. Still, the real money lies in owning real estate. ‘Without attracting higher-paying jobs and capitalizing new businesses that are outside of the real estate and tourism industries, local incomes will continue to stagnate,’ he said.”

From Chicago Now in Illinois. “I was tempted to say that there is no chance of the Chicago area currently being in a bubble but the fact is that just about anything is possible so I settled for ’slim chance.’ As Robert Shiller (of Case Shiller Home Price Index fame) said in a recent interview ‘There’s always reason to worry [about a coming collapse].’ However, he goes on to say that the difference between now and 2006 is that back then people had crazy expectations of where home prices were going and they don’t feel that way now. As for the Chicago real estate market all the data points to us remaining comfortably out of bubble territory despite all the hand wringing out there.”

“The first piece of evidence is that the Case Shiller home price index for the Chicago area is still showing single family home prices 18.4% below the bubble peak. Condo prices are a bit closer to the peak but still fall short by 12.3%. What kind of bubble would it be if prices hadn’t even reached the level of the last bubble?”

“In addition, according to the 2nd Quarter CoreLogic Equity Report the Chicago area is one of the top 5 metro areas in terms of homes with negative equity. 13.4% of our homes are in a negative equity position with another 4.9% of the homes near negative equity. Again, that is a function of not having fully recovered from the last bubble.”

“UBS also recently published their Global Real Estate Bubble Index of the major financial centers, one of which is Chicago. In the ranking below you can see that not only is Chicago ranked last but they also have it as being a depressed market. Their methodology apparently looks at home prices relative to incomes and rents and indications of excessive lending and construction activity - although I have to say that it sure does look like we have a ton of construction going on here.”

The Coloradoan. “This past spring, I received a marketing postcard from my former real estate agent in Denver. My family and I were still living in Richmond, Virginia. But we were preparing to move back to Colorado and trying to figure out where we were going to live. The difference between the two state capitals is one largely of timing and scale: the Western city offers its Eastern kin a glimpse of a future in which opportunity beckons. But not for all. And always at a price. Nine hundred thousand dollars, in this case.”

“That’s what the postcard says — $900,000 for the 2,000-square-foot brick bungalow on a corner lot on Newton Street around 37th Avenue. It is a price that is at once unbelievable and plausible because every once in a while after we moved, I would go online to check the estimated value of our old house in the same Northside neighborhood. We lived in a 1920s, two-bedroom, one-bath, galley-kitchen red brick bungalow with a little more than 900 square feet upstairs and a smaller basement that was inhabitable if you weren’t picky. When the estimated market value surpassed $440,000 — $440,000! –– almost 40 percent more than our sales price, I stopped looking.”

“I consider myself part of the middle-class, shrinking as it may be, and it’s a jolt to realize that I can no longer afford the neighborhood I left only a few years earlier.”

“In the Resurgence of the City, real estate speculators saw, just as city leaders did, what was coming to these neighborhoods so conveniently close to downtown. But where the public sector plods, the private sprints. Developers, bankers, investors vault the very same walls that they once helped create. And Denver, the study points out, now ranks seventh of the 50 largest U.S. cities in terms of the extent of gentrification.”

“We have decided to live in Fort Collins. It wasn’t much of decision, actually. Denver is too expensive and my husband is joining the faculty at CSU. Someone tells him that if everyone in the country wants to live in Denver, then everyone in Denver wants to live in Fort Collins. Perhaps that it is true because the house hunt is brutal. As in Denver, homes for sale are getting multiple bids. Multiple as in 8, 9, 10. Would-be buyers are waiving inspections and appraisals. They are paying cash.’

“I joke that I am moving through the stages of house-hunting grief: Disbelief, disappointment, anger, resentment. Full of indignation, we say screw it, and decide to wait for the cooler seasonal markets of late summer and fall. We manage to find an overpriced three-bedroom apartment a mile from the kids’ school.”

“Perhaps this is the predictable lament of one generation watching the reshaping of its legacy by another. Perhaps Denver is being remade in some way that fundamentally alters its identity. The summer housing market cools from a boil to a simmer and we resume our search, finally finding a patio home at a price we can afford. It’s smaller than our home in Richmond with an unfinished basement. But it is lovely, and in the same school zone as our apartment. The mortgage is $500 less a month that what we are paying in rent. We await the bank’s appraisal and count ourselves lucky.”

September 28, 2016

No Bubble Has A Happy Ending

A report from Mingtiandi on China. “It may have seemed like an attack by the undead, but a crazed mob that tore the doors off a Hangzhou real estate office last weekend came in search of apartments, not human flesh. When homes went on sale at the unnamed property firm in the capital of Zhejiang province on Saturday, the crowd that had gathered outside could not wait for company employees to finish letting them in and instead tore the company’s doors from their hinges, and knocked each other down, in a rush to get in on the perceived bonanza.”

“The incident, which was filmed on company security cameras, quickly found its way onto Chinese social media, where the country’s always active netizens voiced a range of interpretations of the buying frenzy. The crowd of what one online commentator described as ‘zombies’ appeared to be undeterred by the home purchase restrictions put in place by the local government less than one week before. The housing rush – as well as the intended cooling measure – came after prices in Hangzhou have jumped 22 percent in the last year, with values in August rising some 7.9 percent compared to July, according to China’s National Bureau of Statistics. The city, which has now seen home values rise for 16 straight months, is one of many Chinese second-tier communities to see a rapid upswing in housing prices in 2016.”

“While the reaction of the city’s home buyers seems extreme in this case, the condition of Hangzhou’s housing market appears to be typical or even relatively stable for a Chinese second-tier city. In Nanjing, the cost of home is now up by more than 36 percent compared to 12 months ago, while in Xiamen the one year differential is over 44 percent.”

Business in Vancouver. “Authorities in Shenzhen, a city in China’s Guangdong Province, have invalidated the sale of a series of tiny 6 square-metre flats (approximately 65 square feet) costing 880,000 yuan (around $175,000 Canadian) each, saying the properties violated existing laws and regulations. The move came after an online outcry after local media reported that 11 mini studio apartments located in the 15-storey Qiaocheng Shangyu building in the city’s Nanshan district, sold out in half a day on Saturday.”

“A statement released on the commission’s official microblog said the reports that 11 of the apartments were sold was false news spread by four local property agencies. Only four apartments had been sold before the official investigation began, the statement said. The building is located on Shenzhen’s Xinzhong Road next to Baishizhou community. On the streets of Baishizhou pedestrians dodge passing cars and bikes amid rows of ‘handshake’ buildings where neighbours can reach out of their windows to greet one another.”

“‘The living and hygiene conditions are not good here, but property prices nearby have been soaring to over 70,000 yuan [per square metre],’ said a local resident. Shenzhen citizens now spend an average of 4.2 million yuan (around $835,000 Canadian) on buying their first apartment, an increase of 75% from the average 2.4 million yuan paid in 2013, according to Centaline Property.”

From “It appears love doesn’t conquer all in China, well not the property market anyway. Pictures have emerged of Chinese residents queuing up to file for divorce in Nanjing province following rumours of a tightening of property buying regulations. With residents worried about married couples having to pay a larger deposit and a limit on how many properties they can own, some have chosen to divorce so they can buy property as two singles instead.”

“The latest Global Property Guide said demand in Shanghai was rising strongly. ‘In June 2016, the value of Shanghai homes sold rose 22 per cent from a year earlier, after a year on year rise of 32.9 per cent the previous month,’ it said. The report said despite a surge in demand in some cities, there was quite a bit of oversupply in other areas. ‘Currently, unsold homes are estimated at around 13 million,’ it said.”

From Bloomberg. “Here’s the latest uncertainty facing China’s currency: sky high house prices. A runaway boom in the largest cities will push investors to look for cheaper alternatives overseas, draining money out of China and putting downward pressure on the yuan in the process, according to analysis by Harrison Hu, Chief Greater China Economist at Royal Bank of Scotland Group Plc. in Singapore.”

“‘It’s commonly believed that China’s policymakers will sacrifice the yuan exchange rate to avoid a sharp correction in domestic property prices, as the latter will more significantly derail China’s economy and the financial system,’ Hu wrote.”

“That’s because the importance of the property market in the world’s second largest economy far outweighs many sectors, including the stock market. A real estate crash in China could have far reaching consequences and it would be a long time before investors regained their confidence, according to Hu.”

“That will put policy makers in a very difficult position. While the government has some cards in its hand, such as an ability to control land supply and enforce curbs on new home-buying, history shows that some tightening measures risk backfiring and only stoking speculative behavior such as ‘panic buying’ like that seen in Shanghai earlier this year.”

“Besides, the regulator’s handling of last year’s stock market turmoil did little to inspire confidence in the government’s ability to oversee the bubbly housing market. ‘No bubble has a happy ending,’ Hu wrote.”

September 27, 2016

The Availability Of Liquidity And Financial Pain

A report from the Associated Press. “Pale green and 8 feet tall, tightly packed corn stalks reach to the horizon throughout the Midwest in what is likely to be the biggest harvest the U.S. has ever seen. Aside from a sense of pride in breaking the previous record by nearly a billion bushels, farmers won’t benefit. They’ll lose money on virtually every cob. It’ll be the third consecutive year in which most corn farmers will spend more than they’ll earn. The growing has been too good and the resulting glut of corn depressed prices to a decade-low. It’s a similar story for soybeans, the second most common Midwest crop.”

“As a result, farmers are cutting costs, dipping into savings or going further into debt. The drop in farm profits raises questions about agriculture’s boom-and-bust cycles and why people adhere to what at times is seemingly not a sustainable business model. The less-established farmers who rent expensive farmland or went into debt to purchase land or new equipment are ‘the ones I worry about,’ said Harold Wolle, a fifth-generation family farmer from south-central Minnesota.”

“But sixth-generation Iowa farmer Grant Kimberley, who farms with his father, cautions that all is not well for those who’ve been doing this for a while, either. ‘It’s getting to a tougher stage even for farms that are more established. Everybody’s feeling it now, especially guys like my dad. He’s 65 years old and has done really well and built things up, but we hope this doesn’t last forever because you hate to see a lot of those gains they’ve made over the years virtually get eroded,’ Kimberley said.”

The Farmers Exchange. “Purdue University agricultural economist Chris Hurt came to Goshen with a message about the farm economy: ‘Something’s got to give.’ With bumper corn and soybean crops forecast, farmers will have more bushels to sell. But with crop prices lagging below the cost of production, those extra bushels won’t be worth as much. Hurt said the farm economy is nearing the middle of a five-year stretch in which costs are higher than revenues. Currently, farmers are earning almost $600 per acre on a corn-soybean rotation, while the cost of production is $718 per acre.”

“Back in 2012, when crop prices were high, farmers were earning $824 per acre while costs averaged $707. Hurt expects to see a gradual pullback in farmland values and cash rent prices. According to Purdue’s own survey, farmland values reached a peak of $7,976 per acre in 2014. They are now at $7,041 per acre and are expected to decline further, reaching $6,020 per acre in 2019.”

“Next year, cash rents will decline by 4 percent to 6 percent, he said. The current cash rent price for average farmland in north central Indiana is $202 per acre, down 11 percent from 2015. Rather than prices going up, Hurt said the best chance for improved margins is for costs to come down. ‘One thing we do know from the marketplace,’ Hurt said, ‘that is, if there’s enough financial pain, things will eventually adjust.’”

The Des Moines Register. “A panel of farm leaders explored how much further rents and land values will fall, how growers will fare in growing mega mergers mania, the ag economy and other issues at the Iowa Bankers Association’s annual convention in Des Moines. Even though farmland values have fallen — nearly 9 percent over the past year, according to a new survey this month — tight supplies, low interest rates and investors looking for alternatives to the stock market have help slow price declines across the state, experts said.”

“‘We’re really puzzled why people pay what they’re paying’ for farmland in some areas, said Bruce Rastetter, CEO of Summit Agricultural Group, a diverse farming and investment business in north Iowa, even with investors wanting to jump out of the stock market. Already, price declines are hurting some buyers who purchased when values were at their peak. Bruere said it’s difficult for a seller to get the same $12,000 he paid for land a couple years ago. ‘There are some tough conversations being had right now,’ he said.”

“Typically, on Sept. 1, landowners terminate Iowa farmland leases to negotiate higher rents, said Steve Bruere, president of Peoples Co., a Clive farm management and real estate group. ‘This is the first time in our farm management business that we’ve seen farmers terminate the lease’ to negotiate lower rents, he said. ‘A lot of it was driven by conversations with lenders, who said, ‘Hey, are you going to lose money or make money? Are you entering the year with an expected loss?’”

“‘This is the fourth year we’ve been in that environment. With liquidity drying up, those conversations have gotten a lot more real. The days of $400 and $500 (an acre) rents are over,’ he said.”

“Rastetter said: ‘A couple years ago … we had $1,200 gross acre revenue. Today the reality is that we’re at $600, and there is significant amount of pain going on. Maybe a lot of people aren’t talking about it. I assume a lot of you lenders are talking privately. … You will and should see those tough negotiations on cash rents. Instead of $300 and $350, I think you should be $225 and $250, and even then it’s a challenge to make money.’”

The High Plains Journal. “A new report from the Rabobank Food & Agribusiness Research and Advisory group finds in order for U.S. agricultural commodity production activity to remain economically viable, land rent must decline. The report, ‘The Land Value Wave Dips: Land Values Set to Decline Further, Despite Sticky Rental Prices,’ explores the impact of low commodity prices on land values and rent prices.”

“The report goes on to note that from 2006 to 2013, significant increases in commodity prices, due to surging demand, signaled the need for more land to be converted to row crop production. The subsequent steep increases in agricultural land values have pulled enough acres into row crop production to oversupply most commodities, both domestically and globally.”

“‘The result of this oversupply has been to drive agri commodity price levels below breakeven. After two years of economic losses at the farm level—which resulted largely from the significant drop in commodity prices—the cost of renting land remains sticky and unsustainably high,’ notes report author and Rabobank senior analyst Sterling Liddell.”

“‘The most significant driver in the deteriorating economics of farming is a 40 percent to 50 percent decline in commodity row crop prices and the inability for some costs—particularly land—to decline at the same rate,’ the report said. ‘The lack of decline is primarily a result of ample working capital that was available following the 2006-13 surge in profit margins. The availability of liquidity in the farm business and farmers’ desire to control land in the longer term, combined with land owners’ reluctance to accept reduced income, have led to a bidding process which kept rental values above breakeven levels.’”

“According to Rabobank, in 2017-18 and moving forward, rent values need to begin dropping in order to balance with lower commodity prices over the long term. ‘We believe this will lead to the valuation of land also adjusting lower,’ notes Liddell. ‘If rental costs remain sticky at unsustainable levels through the 2017-18 growing period, individual land assets face the threat of much deeper devaluation, as nutrient and crop protection programs are cut and abandonment (usage changes) increases.’”

It’s A Buyer’s Market, But Not Many Out There

A report from Bloomberg on Connecticut. “In Greenwich, the leafy Connecticut town famous for its cluster of hedge funds and the titans of Wall Street who occupy many a gated mansion, the rich are being maddeningly frugal. As Barry Sternlicht complained when he assailed his former hometown as possibly the country’s worst housing market. ‘You can’t give away a house in Greenwich,’ the head of Starwood Capital Group said, causing something of a ruckus. Many continue to try to sell their real estate holdings. As of Sept. 14, there were 46 homes at $10 million or more on the market, some that have been lingering since 2014, according to data from Miller Samuel and Douglas Elliman.”

“One problem is that risk levels have gone through the wringer. Members of the younger Wall Street crowd are quite conservative, says Robin Kencel, a broker with Douglas Elliman. ‘They used to say Oh, I’ll stretch.’ Now they’re more practical. They’ll ask ‘What are the utility bills? Oh, wait — I don’t want it.’”

The Casper Star Tribune in Wyoming. “Casper’s housing market was recently ranked as one of the least healthy in the country, largely due to the oil and gas bust. Realtors report that homes are retaining their value, and the current market offers opportunity. ‘Right now, the interests rates are screaming low, lower than they have ever been,’ said Gary Bryan, a real estate agent with Broker One Real Estate in Casper. ‘There are better houses on the market, better inventory than we’ve had before because we’ve had a little bit of an adjustment. It’s not a bad adjustment. It’s a good thing for buyers.’”

“Two years ago, Casper was a seller’s market, he said. But times have changed. ‘There is a little more negotiation going on,’ he said.”

The Williston Herald in North Dakota. “Despite the oil industry’s slowdown, Williams County’s population and housing needs continue to grow at one of the fastest rates in the nation, researchers say. Making predictions for Williston is challenging, though, in light of the dramatic swings that the city has seen in its housing needs, Nancy Hodur, assistant research professor and director for the North Dakota Center for Social Research, said.”

“‘Now all of a sudden you have vacant housing,’ she said, pointing out that although the market has opened up, what’s available needs to fit the needs of the majority of the population. ‘The tricky thing about saying you have a surplus of housing, is maybe you have too many $325,000 houses when what you need is houses for $125,000.’”

The Vindicator on Ohio. “Karen Humphries lives on Halls Heights Avenue on the Youngstown’s West Side, and she’s witnessed firsthand the damage out-of-state investors can do to a neighborhood. Out-of-state owners from various states own six of the 16 houses on the first block of Halls Heights and nine of 38 on the entire street. Humphries said those houses often sit empty for long periods of time. She sees children going in and out of them when they play.”

“Code enforcement scheduled two hearings for the property at 44 Halls Heights. Both times the property owner failed to appear in court. The Mahoning County Land Bank took control of the property on July 13 – nine years after it was purchased by a limited liability company in California. The land bank has since purchased three more properties on Halls Heights. ‘These out-of-town people have no idea what they’ve done to our neighborhood,’ Humphries said. ‘They’ve destroyed our neighborhood.’”

“The problem isn’t unique to the West Side’s Garden District. Out-of-state owners control 15 percent of properties citywide and 22 percent of the city’s 3,900 vacant properties. Out-of-state-owned properties are about 50 percent more likely to be vacant than locally owned properties. Nancy Martin, president of the Brownlee Woods Neighborhood Association, said investors from Taiwan and Australia own property in her neighborhood.”

“People from the Netherlands, England and Australia own property in the Garden District, said Jerry O’Hara, president of the Garden District Neighborhood Association. Out-of-state owners range from companies that specialize in flipping properties to ill-informed investors who get in over their heads purchasing homes over the internet. ‘Some of them have no idea what they’re doing,’ said Ian Beniston, executive director of the Youngstown Neighborhood Development Corp. ‘When you say, ‘Do you understand Youngstown has 4,000 vacant properties?’ You can feel their mouth drop over the phone.’”

“Houses will show up on the internet selling for just a few thousand dollars. ‘Then they buy it, and they’re stuck with it,’ O’Hara said. ‘That’s what happens a lot of times, and then they just sit because they can’t do anything with them.’”

WSIL TV in Illinois. “Dismal home sales numbers in Carbondale get worse as more folks hang out the ‘for sale’ sign. ‘Last year was the beginning of what’s going on this year, and this year it’s worse,’ explains realtor Terri Henry. Block by block, sign after sign, she says she hasn’t seen home sales this slow in the past two decades. ‘There were 11 homes on the market and up till now there’s only been one that has sold and closed, so it’s going to take us 66 months to get rid of these homes at that rate,’ says Henry.”

“Resident Ingrid Hansen noticed that same trend hit what she describes as a ‘well established’ neighborhood near the university. ‘The home next door has been vacant for four months but usually they sell within a year. I don’t know, maybe this year it will be different,’ she says.”

“Henry says it’s definitely a buyer’s market, but she doesn’t see many out there. ‘If you have 100 homes and you only have 25 people to buy, you’re going to be left over with 75 homes, so its going to be those homes that are in great condition, great area, ready to sell or the best deal,’ she explains.”

“Realtors say if a homeowner is having trouble selling the property they might choose to rent it out, but that creates another challenge since Carbondale already has a saturated rental market.”

September 26, 2016

We Are Sinking Fast

The Age reports from Australia. “All across Melbourne, new apartments riddled with faults have been sold to investors and residents. Some of the problems are so costly to fix that it would be cheaper to build the apartments again. Often these cases play out behind closed doors or, quietly, in the courts. After all, who wants to tell the world that they’ve bought a disaster? Strata Community Australia (which represents Victoria’s body corporate managers) is aware of at least 58 apartment buildings in Melbourne with defects, valued at a total of about $49 million. ‘That’s just the tip of the iceberg,’ the group’s Victorian general manager, Rob Beck, said. ‘It is rare for buildings to be defect-free.’”

“Consider the case of Amanda Frazer, a first-home buyer who bought in Ormond off the plan in 2012. When she went to inspect her two-bedroom home, she discovered something different to what she had signed up for. The developer had squeezed another unit into the building and significantly reduced the size of her property’s balcony. She called the council. The council inspected the building and declared it illegal; because of the extra apartment jammed in, the complex no longer complied with the planning permit.”

“Ms Frazer received no compensation from the developer and there was little point pursuing him for the lost value in her home and repairs (estimated to be up to $100,000) as his businesses went into administration. This is not unusual. Ms Frazer said an inspector found further breaches in the building code: the floors weren’t level, the stairs were too steep and the ceilings too low. ‘It was a shoddy finish. You could see the lack of care,’ she said.”

From “It made headlines as Melbourne’s ‘tallest, skinniest skyscraper,’ but media buzz around 54 Clarke St in apartment-flooded Southbank wasn’t enough to save the developers from the rapidly turning property market. Like many others, the original private syndicate of developers behind 54 Clarke St were forced to walk away. The ‘Elysium’ site went under the hammer earlier this month. As pre-sales drop and banks tighten lending for developers, a growing number of ‘mum-and-dad’ apartment builders are being forced to abandon construction, experts have warned — sparking fears of a domino effect.”

“The trend is noteworthy because it appears to gel with a scenario floated by investment firm CLSA earlier this month of a looming apartment ‘crisis.’ The broker predicted that a wave of defaults would force smaller developers into receivership, pushing down prices and potentially causing wider contagion that could lead to a recession. Meriton founder Harry Triguboff, Australia’s richest man, has also sounded increasingly urgent warnings, telling recently that a ‘very significant’ number of Chinese buyers were walking away from apartment purchases.”

“Last week, Mr Triguboff told The Australian he would not be able to get 50 deposits on a new project, compared with 105 in the previous month. ‘We are sinking fast,’ he said.”

“Albert Callegher from ACM Finance, a specialist ‘last-mile’ finance broker that provides top-up funding for property developers, said CLSA’s prediction was already coming true. ‘The small to medium developers doing projects between $2 million and $20 million, they’re going broke,’ he said. ‘I’ve had one client say to me he’s got one developer with over 2000 apartments that can’t settle. We’re hearing it everywhere but it’s not making the news, because you don’t want an avalanche.’”

“He warned Melbourne may be facing another 2004-style Docklands-style property bubble. ‘The developers simply sold the water view and position as the most fantastic, New York-inspired development in the universe,’ he said. ‘As a result, poor investors paid 25 per cent above market, the market corrected itself, and as a result a lot lost their homes through unscrupulous pricing structures. What’s happening now is the same as the Docklands. The last three years it’s been exuberant buying.’”

From ABC News. “Darwin locals trying to sell their properties are feeling the pinch of a depressed housing market as the volume of sales reaches an all-time low. Some have been forced to leave the market altogether. Glenn Chandler’s tropical, open-plan house in Darwin’s northern suburbs has been on the market for more than a year and has had just six enquiries. ‘When we moved in it was only a couple of years before Cyclone Carlos knocked it over entirely, so we had to build it from scratch … and that was a good four-and-a-half years ago,’ he said. ‘It’s been on the market for a good year, year-and-a-half, but not actively. I’ve been told that in a depressed market that’s what you expect.’”

“Anne Clifford has lived in Darwin for more than 40 years and has just taken her inner-city Darwin apartment, in Larrakeyah, off the market. ‘My apartment’s been on the market on and off for the last two-and-a-half years, I had it with an agent for three months and didn’t get much interest at all,’ she said. ‘Certainly didn’t get any offers that I liked so I just decided it wasn’t worth just throwing it away because the prices have dropped $50,000 to $100,000 in the last three years I think. In 2010, it was actually valued by a proper valuer for $620,000 and we had it on the market for $550,000 this time.’”

“Ms Clifford said she would wait for the market to improve. ‘I’m not going to rush into selling it because I just don’t think the market’s right, but I’ve been in Darwin 40 years and there’s a lot of ups and downs and I know Darwin will pick up and it will get better.’”

Landlords Beware, People Are Shopping Price

A report from the San Mateo Daily Journal in California. “Renters struggling to afford the considerable cost of living locally may see some relief on the horizon according to county real estate professionals who project the market will soften. Average rents have nearly doubled in and around San Mateo over the past five years, jumping to about $3,100 for a one-bedroom apartment, according to market data offered by RentJungle. But in the last month, average rents have been dropping incrementally, down about $100 from the heights hit over the summer, and local property managers said they expect the trend to continue. ‘We sit in these markets that are hot for so long, I think that we forget that we are starting to see the rents come down,’ said Sally Navarro, a property manager with AVR Realty in Burlingame. ‘Things are softening up.’”

“Andrew Peceimer, a representative of Westbay Real Estate Group who manages roughly 60 properties throughout San Mateo County, expressed a similar sentiment. He said the recent building boom bringing online a swath of new units particularly in Redwood City and San Mateo may begin to offer some space in a market which has been historically tight. ‘We are headed toward having an over supply on the market and rents will go down,’ he said. ‘The market will soften.’”

“Indicative of his position is data offered by real estate information company CoStar, showing average vacancy rates have jumped to 8.8 percent, up more than 5 percent from the five-year average of 3.4 percent.”

The Mercury News. “Abodo, an apartment search website, says monthly rents dropped markedly from August to September in San Jose and San Francisco. Those cities were on Abodo’s Top 10 list for the ‘Biggest Fall’ in rents for one-bedroom apartments during that period. Some observers are emphatic: ‘The prices have reached their saturation point,’ said Ron Stern, CEO of Bay Rentals, a housing relocation service. ‘Tenants cannot be soaked for one extra dollar.’”

“Particularly in Santa Clara County, he said, ‘the rental market has slowed down to almost a crawl. We do a lot of credit reports, and the number of reports we’re doing has declined. … Landlords say, ‘Is my price too high? I’m not getting any calls.’”

“From August 2015 to August 2016, said Jeffrey M. Mishkin, regional manager at the San Francisco office of Marcus & Millichap, San Francisco’s rental market ‘was flat.’ ‘One-bedrooms were down 7.7 percent year-over-year, from $3,395 to $3,150. Two-bedrooms were down from $4,500 to $4,300, a 4.7 percent drop.’ Plus, he just had received an informal report about a ‘very large owner’ of apartments on the Peninsula ‘who said that rents are down on every one of his properties.’”

“Stern advised apartment hunters to look in smaller apartment developments, rather than the larger — and often more expensive — complexes. ‘You can get a nice place for $1,600 or $1,700, maybe less,’ he said. ‘There’s a nice duplex in Campbell for $1,850 in a good neighborhood. The landlord says, ‘I don’t want to squeeze it for an extra 200 bucks. I just want to get it rented.’ ‘Landlords beware,’ he warned. ‘People are shopping price, not quality, right now.’”

The Orange County Register. “All that local construction activity is adding up to more options for Orange County house hunters. The supply of new homes for sale and being constructed was 1,093 in 2016’s second quarter, according to data from MarketPointe and the Real Estate Research Council of Southern California. That’s almost double the inventory from a year earlier and it’s local builders’ largest supply since the end of 2007.”

“So far this year, the median selling price for a new Orange County home averaged $807,000 vs. $693,000 for resales of existing, single-family homes and $444,500 for existing condominiums. The bulk of Orange County new homes for sale are priced between $700,000 and $1.5 million, so this added supply greatly aids shoppers looking in essentially the upper half of the market.”

“While it appears the overall market is not oversupplied like a decade ago, added supply will force builders to compete further. For example, Orange County’s median price for new homes this year has fallen by 4 percent.”

The Fresno Bee. “Wathen Castanos Homes is getting ready to build $800,000 houses in Marina, north of Monterey. It’s a feat the owners of the Fresno-based home-building company still can’t believe today, almost a decade after the Great Recession nearly crushed the business. ‘I don’t think any of us had the confidence that we would make it through,’ President Joshua Peterson said.”

“Now, Wathen Castanos, one of Fresno’s oldest home builders, is constructing in a dozen cities across the central San Joaquin Valley, from Tulare to Clovis, as well as the Central Coast.”

The Manteca Bulletin. “Manteca’s future health — economically and as a community — is becoming more and more reliant not on just the Bay Area/Silicon Valley but also on a larger footprint planners have dubbed the Northern California Mega Region. A recent Wall Street front page article about Silicon Valley home prices and the lack of buildable land is prompting more traditional Bay Area single family home builders to look at opportunities in Manteca and nearby. Manteca has more than 9,000 housing units in various stages of approval while next door Lathrop has 11,000 approved units as part of the River Islands project.”

“Even though City Manager Elena Reyes is upbeat about how quality housing will raise the Manteca economy, she is well aware of the downside. ‘People in Manteca can be impacted by Bay Area paychecks,’ she said.”

The Silicon Valley Business Journal. “Silicon Valley’s infamously high housing prices might be responsible for recent increases in the number of residences listed for sale. ‘We see more and more equity from price gains entice (homeowners) to sell their homes and reap those gains,’ said Ralph McLaughlin, chief economist for residential real estate site Trulia.”

“Housing inventory in Santa Clara and San Benito counties increased 8.7 percent, and in San Francisco and San Mateo counties the number increased by 19.3 percent. The third quarter was the second quarter in a row in which inventory increased in the San Jose metro area, and the third consecutive quarter for the San Francisco metro division. The largest gain in the San Jose metro inventory came from homes valued in the middle-third of the market, whose number of for-sale homes increased by 13.1 percent this quarter from 2015.”

September 25, 2016

Now There Is A Slowdown On Everything

A report from the Financial Post in Canada. “Your home may have climbed in value as much as 35 per cent in the past year, so why wouldn’t you want to own another one? Increasing numbers of homeowners keen to take advantage of a booming market for low-rise detached homes are ‘doubling up’ on their investment by holding on to their existing homes, even as they move into larger ones. In essence, their old principal residence becomes an investment property — one they hope will deliver some income but more importantly will lead to massive capital appreciation — especially in two of Canada’s hottest cities for real estate.”

“The phenomenon, though not widespread, has been present in the Vancouver market as it heated up and is beginning to work its way into Toronto transactions. Calum Ross, a Toronto mortgage broker and wealth planner, said if you’re not cash-flow positive, even after factoring in a jump in interest rates, you are playing with fire when it comes to an investment property. And that includes your former principal residence.”

“‘My concern is some people are keeping their home not because it’s part of a sound financial plan; it’s the greed,’ said Ross. ‘You have to be mindful, you don’t want to be overweight in real estate.’”

“For the wary, it is worth considering what is happening in Vancouver. Simon Coutts, an agent with Macdonald Realty, said a lot of people who were holding onto their principal residence with hopes of flipping in the near future may have tough time now realizing a gain. ‘Now there is a slowdown on everything. Deals are in the can that are collapsing,’ Coutts said, adding some of those Vancouver owners are getting nervous. ‘Last month there were lineups of people to buy everything. Those lineups are gone.’”

The Metro News. “The B.C. government’s newly-introduced foreign buyer tax led to a steep drop in both total home sales across Metro Vancouver and the dollar value of residential home sales in the month of August. In Metro Vancouver, there were 1974 home sales involving foreign nationals in the period from June 10 to August 1. That fell to just 60 from August 2 to August 31. Total dollar value of home sales in Metro Vancouver fell from $14 billion to $6.5 billion.”

“B.C.’s Ministry of Finance released data that compared two periods of different duration: 53 days between June 10 and August 1, and 30 days between August 2 and 31. Home sales to foreign buyers dropped 94% between the two periods, when the number of deals in the first period is averaged over a 30-day period. ‘I hope all the people who said (foreign buyers) were just 3 to 5 per cent of the market are hanging their heads,’ said David Eby, MLA for Vancouver-Point Grey and the Opposition NDP’s critic for housing.”

“On July 29, just before the tax took effect, more than $850 million in transactions involving foreign buyers were registered at the B.C. Land Titles office, ‘equal to more than 55 per cent of all transactions registered in Metro Vancouver on that day, and almost 40 per cent of the total foreign investment in Metro Vancouver residential real estate for the entire period after data collection began and before the additional tax took effect (June 10-Aug. 1, 2016),’ according to a government press release.”

“Eby said the numbers are likely much higher because of techniques like assigning properties to permanent residents or Canadian citizens to avoid paying the tax. ‘This is just a small portion of what’s happening,’ he said. ‘We know that in the Trump Tower building, the developer was helping people assign their properties to permanent residents and citizens to avoid the tax.’”

The Global News. “The U.S. Department of Treasury has named a a relatively unknown Vancouver company with offices downtown as a ’significant transnational criminal organization,’ which has helped to defraud Americans of hundreds of millions of dollars. The allegations against PacNet Services Ltd., which have not be proven in court, came during a press conference with U.S. Attorney General Loretta Lynch.”

“The U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) said PacNet is an ‘international payments processor and money services business’ with a long history of money laundering by ‘knowingly processing payments on behalf of a wide range of mail fraud schemes’ that targets victims across North America and the world.”

“Vancouver anti-money laundering lawyer Christine Duhaime says the news is ‘unfortunate for Canada.’ ‘We are getting a bit of a reputation for money laundering,’ she told Global News.”

“Peter Ferlow, the husband of Ruth Ferlow who is listed as the director, manager, or company secretary of several PacNet-linked companies, told Global News he was not aware of any evidence proving these allegations are true. According to Ferlow, the company has roughly 100 employees in Vancouver who were surprised to find the competition bureau and Vancouver Police at their office after the news broke.”

“‘The company and all the principles and higher managers in the company are now listed on the U.S. Treasury site with personal home addresses and nobody’s guilty here. Like, what is going on? It’s kind of wrong,’ he added. ‘Everybody is out of work, and they’re just regular people there. From one week to the next you can’t make your mortgage payment.’”

Stagnant Inventory At Unrealistic Prices

A report from the Culpeper Star Exponent in Virginia. “The latest news in the long-stalled Clevenger’s Corner mega-development and other housing projects topped the Friday morning agenda of the Culpeper County Board of Supervisors retreat meeting. Culpeper County Planning & Community Development Department Director Sam McLearen told the board that Centex Homes recently withdrew its 2013 proffer amendment to build 762 single family homes on quarter-acre lots in the planned neighborhood, Clevenger’s Corne. ‘That’s one of the biggest things that has happened in the last couple of weeks,’ he said, describing the grandly imagined development as a ‘dormant project.’”

“Withdrawal of the 2013 proffer amendment that removed apartments, duplexes and the large commercial component means the project reverts back to its original, closely contested 2005 rezoning that included those features. But the development appears permanently stalled.”

From WFTS in Florida. “They’re called ‘Zombie’ homes: in foreclosure and abandoned. Despite several years since the housing crash, many of these ‘Zombie’ properties that were bought at peak value, and later foreclosed upon, still sit empty in the Tampa Bay Area. That includes a boarded-up home with an over-grown grassy yard on East 26th Ave in Tampa, which sits just around the corner from Rosetta Jacobs. ‘There were renters there, but not legal renters there,’ explains Jacobs’s daughter Lida Williams. ‘Now there’s nobody there and it’s been vacant for months.’”

“According to RealtyTrac , about 7.4% of the foreclosed homes in the Tampa Bay Area are ‘Zombies’ or abandoned. The Bradenton-Sarasota Area has the same percentage. And that percentage not only leads the entire state of Florida, but is among the highest rates in the entire country. What’s the problem? Florida was among the hardest-hit by the housing crash, and some small banks that made bad loans have been unwilling to sell the abandoned properties for less than the original purchase.”

“‘So rather than make the sale at fair market value they hold on to the stagnant inventory at unrealistic prices,’ explains Vincent Arcuri, a longtime Tampa Bay Area realtor. ‘The homes are over-priced. If you see a home that’s been on the market for a year, clearly it’s an over-priced property or there’s something wrong with it. A big problem for the bank is the longer it sits there,’ explains Arcuri, ‘the roof is leaking, there’s mold issues, then it becomes even less desirable for even an investor.’”

The News Tribune in Washington. “In May 2015, I took a car ride with city of Tacoma code inspection supervisor Dan McConaughy. It was a tour of a handful of derelict homes — 13 of what he described at the time as ‘the worst’ Tacoma had to offer. Back then, there were 308 unoccupied derelict homes on the books in Tacoma, with many of them — about 60 percent, by McConaughy’s estimation — wallowing in what he described as ‘the black hole of foreclosure.’”

“That’s a colorful way of depicting homes that sit in a state of unfortunate financial limbo — where homeowners, who’ve received a foreclosure notice, have moved on, but the bank holding the mortgage has yet to finalize the foreclosure process. So the home sits empty, sometimes for years, with the bank presumably waiting for just the right time to initiate the trustee sale to unload the property.”

“Recently, I decided to check in again with McConaughy — who was nice enough to give me an updated tour of the 13 homes he showed me last year. With the real estate market in Tacoma and throughout the region humming — thanks, Seattle! — I couldn’t help but wonder if the situation with derelict homes stuck in McConaughy’s ‘black hole of foreclosure’ had changed”

“I was surprised to hear the answer. ‘Right now the market’s hot, so you would think of (the banks) selling more. But, no, I don’t see that,’ McConaughy told me. ‘I don’t think the inspectors see that. I’m very disappointed in the banks,’ McConaughy reiterated.”

“How consistent has the problem of derelict homes in Tacoma remained since the last time I wrote about it? Of the 13 derelict and abandoned homes he showed me last time out, seven of these cases have been closed. They’re ‘wins,’ as McConaughy calls them. The trouble? ‘Half of them have been taken care of,’ McConaughy says. ‘But there’s a new 13. That’s for sure.’”

“As of Sept. 6, there were a total of 390 unoccupied derelict homes throughout Tacoma. That’s 82 more than the last time I jumped in the passenger seat of McConaughy’s city-issued Prius. While it’s important to note that not all derelict homes represent foreclosures, McConaughy and Lisa Wojtanowicz, the division manager with Tacoma’s Neighborhood and Community Services Department, confirm that many of them are.”

“While anecdotal, McConaughy sticks by his 60 percent estimate for the number of these homes stuck in the foreclosure purgatory.”

The Alaska Journal of Commerce. “‘There was cautious optimism in the first six months of the year,’ said First National Bank Alaska Senior Vice President Michelle Schuh. ‘Now I think people are just being cautious.’ Schuh clarified that the second quarter of 2016 was steady for her bank, and likely for the rest of the state, but the lack of legislative solutions to the state’s $4 billion budget deficit is starting to affect the business community’s outlook, if not the numbers.”

“Schuh said state budget cuts are the beginning of a trend she hopes doesn’t materialize, with declining home values at the end. Though none of the banks have noticed home values dropping in the state, Schuh said the lack of a state budget solution could produce such a decline.”

“‘If we don’t address the budget, we know we’re going to have state layoffs,’ she said. ‘If you’re seeing lower state employment, and you’re already seeing private sector layoffs happen, your housing concerns are going to be next. That’s where we’re going to see a softening in the real estate market.’”

“Like Schuh, Northrim Chief Financial Officer Latosha Frye said the bank’s balance sheet is still healthy, but the gloom of the state’s fiscal situation is setting in. ‘General sentiment is people are waiting for what’s going to happen next, and every day there’s a barrage of information about all the action the state isn’t taking with fiscal issues,’ she said. ‘It’s just unavoidable. At some point that becomes a downer. The psyche impact takes that to another level, I think.’”

“For credit unions, which have higher rates of consumer loan portfolios than that of banks, number are looking even less optimistic. Alaska’s credit unions, unlike the banks, posted an overall decrease in quarterly net income of 22 percent year over year. Each of the three largest credit unions posted rises in the rate of delinquent loans. Alaska USA’s delinquent loan rate rose a negligible 0.1 percent, but the delinquent loan rate for Credit Union 1 and Denali Alaskan rose by 54 percent and 77 percent respectively.”

September 24, 2016

Something More Complicated Might Be Going On

A report from the Daily Nebraskan. “In the past four years downtown Lincoln has quintupled its number of beds through the addition of several student-marketed apartment complexes, adding the perfect living option for some, but a nightmare for others. Often targeted toward students, the new downtown apartment complexes provide housing and other amenities for those looking for a place to live while in school. They also tend to rent by bedroom, rather than by unit. And with the university aiming to increase enrollment – and by extension, the amount of students seeking off campus apartments – developers smelled a market for apartment complexes.”

“But, at least according to initial numbers, that market may not be developed yet. Vacancy rates reported by student-oriented apartment complexes are higher than the most recent statewide average of 5.6 percent. Aspen and 8 | N reported a 36.7 and 27.7 percent vacancy rate, respectively. Students moving in have found unfinished construction, exposed nails, appliances that don’t work and a host of other problems. After living at Claremont Apartments his sophomore year, Austin Moylan switched to Prime Place in August 2015. Shortly after moving in, he noticed residents weren’t treating the property well.”

“‘People just treated the place kind of how it was given,’ Moylan said. ‘It became kind of a trend to punch holes in the wall. There were entire walls that were just shredded with the insulation ripped out. People kicking walls in and punching walls in, up and down every stairwell in the building.’”

The Los Angeles Times in California. “An Orange County developer is proposing one of the most ambitious developments of the current real estate boom in downtown Los Angeles — a massive mixed-use complex with twin towers soaring 58 stories. SunCal is proposing 1,736 residences, two hotels, shops and creative offices and a school on a lot now the site of two warehouses. About 430 of the residences would be condos, the rest apartments.”

“SunCal’s proposal comes amid growing concern over the level of development in downtown Los Angeles. Though experts don’t foresee a crash as in 2008, there’s debate whether the top of the current cycle has been reached. Some lenders have grown wary of new projects and a handful of recently opened luxury apartments are offering concessions, such as free rent and free parking, to attract wealthy tenants.”

“In all, nearly 10,400 apartments and condos are under construction downtown, according to a July report from real estate firm Transwestern. In just three years, Mike Parillo has watched development in the Arts District explode while rising rents have forced many of his fellow artists out of the neighborhood. He said the proposed project could dramatically change the aesthetic of the area. ‘Sixty stories? That’s crazy,’ Parillo said. ‘That seems out of place. It doesn’t even compute.’”

From Hawaii News Now. “For some time now, Hawaii’s skyrocketing rents have been explained with simple economics – not enough supply, too much demand. But new Census figures suggest something more complicated might be going on. In the second quarter of 2016, nearly 11 percent of Hawaii’s rentals were vacant, Census estimates show. That’s up from 8 percent at the same time last year (and a far healthier 5 percent in early 2015), and is on par with states with far more affordable housing markets.”

“In fact, Hawaii had the sixth-highest rental vacancy rate in the nation during the quarter. Nationally, the vacancy rate was 6.7 percent in the second quarter of 2016. Meanwhile, Hawaii also has the highest rents in the nation, Census numbers also show, and they’re only rising. Eugene Tian, state economist, said the rental vacancy rate might be legitimately increasing in some areas (such as urban Honolulu) because renters are being priced out or moving into homeownership thanks to a construction boom in Kakaako.”

“He said some renters are undoubtedly ‘withdrawing from the market’ because of the rising prices, moving in with family or sharing their housing cost burden by getting roommates. (In the second quarter of 2016, the rental vacancy rate in urban Honolulu was 10.1 percent, up from 7.5 percent in the same period a year ago.)”

“Meanwhile, economists say, the state’s rental housing vacancy rate is also likely going up because of a glut of vacation and seasonal rentals on the Neighbor Islands. The issue is particularly acute on Kauai and Maui. Kauai, for example, has a rental vacancy rate approaching 18 percent (up from 6 percent in 2000). Maui County’s rental vacancy rate is 26 percent, from 7 percent in 2000, according to a 2015 state housing availability report.”

“The report concluded that the significant increases in rental vacancy rates on the Neighbor Islands highlighted the ‘increase in the number of seasonal and vacation units.’”

The Houston Chronicle in Texas. “The glut of new apartments is dragging down average rents in Houston, with rent in August falling the most in six years, a new report showed. Not everyone is getting relief, however, as renters in suburban markets with concentrations of older complexes saw the highest rent increases, Axiometrics reported.”

“‘Though job gains in education, health care and hospitality somewhat offset the continued job losses in the energy sector, the demand for apartments is just not there,’ Stephanie McCleskey, vice president of research for Axiometrics, said in an announcement. ‘With new properties being completed every month, they just won’t be filled as quickly as we would like to see until job growth picks up.’”

The Elko Daily Free Press in Nevada. “One of Elko’s biggest downsides has gone by the wayside. After having a shortage of apartments and multi-family dwellings for most of the past four decades, we now have an ample supply. Today, it’s actually ‘a renter’s market,’ as one real estate manager told us for a recent article on the wealth of new rental properties. The experts were divided on whether Elko has a ‘glut’ of rental housing, but they all agreed there is no longer a shortage.”

“Large apartment complexes have literally been popping up all over town. Instead of a waiting list, newcomers might find themselves being offered a free month’s rent. Like many aspects of living in Elko, prices are geared toward people employed by the high-income mining industry. But the arrival of more upscale apartments also means that more lower-end properties are left open and available for those not making a miner’s salary.”

“The abundance of rentals also frees up motel rooms. Many newcomers have had to live out of motels, some of which offer weekly and monthly rates. At the same time, hundreds of more motel rooms are being added to the inventory. If anyone was reluctant to move to Elko because of the lack of apartments, they now have no reason to delay. We almost wish we didn’t live here already, so we could move here now.”

Another Bubble Within The Bubble

An interview from the Epoch Times. “To make outsized returns or avoid some nasty losses in investing, you have to go against the grain. There are few people who live that principle more than Reggie Middleton, the CEO of fintech (financial technology) company Veritaseum. On his independent research website BoomBustBlog, he called the demise of Bear Stearns, Lehman Brothers, and BlackBerry maker Research in Motion, the subprime market, and a correction in Apple. In this exclusive interview with the Epoch Times, Mr. Middleton tells us why he is getting worried about U.S. real estate again in 2016.”

“Epoch Times: You called the latest housing crash in 2007 and 2008. Why are you worried about U.S. real estate in 2016? Reggie Middleton: After the bubble had popped, you had corporate welfare come in where regulatory agencies and central bankers insisted that they did not want the markets to go down to their clearing level. So you had quantitative easing, zero interest rates, TARP, and all these other acronyms giving free money to save risk-taking entities who didn’t want to take their losses; they just wanted to make profits.”

“They privatize the profits and socialize the losses. In doing that, they create another bubble within the bubble that hadn’t even finished deflating.”

“The second bubble was very hard to see coming. But it limited supply because a lot of the builders were still insolvent from the last bust and those who were able to build were reluctant, so when you limit supply, you automatically inflate demand relative to supply.”

“When that happened, prices started shooting up again. But when prices started shooting up, they shot up in a very uneven perspective. Affordable housing is harder to come by, and most of the money is in the high end; that’s where most of the development came on. Now, if you look around here in New York, there are cranes everywhere—from New York City going down to Miami.”

“Epoch Times: In our neighborhood alone, we have five developments within a couple of blocks. Mr. Middleton: Massive amounts of inventory. In Miami, it’s the same thing. In South Beach, downtown Miami, up and down Biscayne, everywhere. If you go to D.C., Philadelphia, Georgia, Texas, on the West Coast, it’s the same.”

“Demand is also going up because of tight supply in certain areas, but income has only gone up incrementally. When income goes up this much, supply goes up that much, who’s going to buy these or pay for these houses?”

“Epoch Times: Especially in the high-end market. Mr. Middleton: Exactly. The high end has already softened. The Hamptons, much of the Upper East Side, Aspen. The middle and low end are going to soften as well. The reason is that supply’s starting to pick up more and more. It’s picking up because of zero interest rates and negative interest rates; we have institutional investors who are trying to get yield because they are pension funds, and they rely on income-producing investments.”

“Now, this perspective seems to differ from many of the real estate publications and analysts you’d see, where they say there’s significant demand and tight supply. I look around; I just don’t see it. Unless an extra 5,000 to 6,000 people are going to move into this six-block or this three-block area like where we are right now, or an extra 200 or 300 extra businesses are going to move in over the next 12 months, then I think there’s excess supply.”

“It’s the bubble 2.0, but this bubble seems to be an elastic bubble that’s difficult to pop. Every time we stick a needle in the bubble, the Fed comes in and papers over with another acronym: TARP, MARP, bubble patch, etc. In the United States, you had—if you don’t count the bubble—for the last 50 years, you had roughly 1 to 3 percent residential housing appreciation per year. Now, you have 5, 10, 15, or 20 percent annually in certain areas.”

“That’s ridiculous. Unsustainable. Especially when you have the same income. If you factor in unemployment, you have negative income growth. That means housing is going this way; income is going that way.”

From Bloomberg. “The consensus that Chair Janet Yellen has worked hard to maintain among Federal Reserve policy makers showed signs of severe strain on Wednesday. Three members of the Federal Open Market Committee, notably including Boston Fed President Eric Rosengren, dissented when the majority of voters elected to hold interest rates steady despite strong progress this year in the labor market, expectations for higher inflation and calm in global financial markets.”

“Rosengren, 59, played a key role during the 2008 financial crisis leading the Fed’s efforts to prevent a collapse in money-market mutual funds. He has also frequently cited the number of cranes he sees while heading to and from work in downtown Boston as he warns about a potential bubble in commercial real-estate valuations.”

“The disagreement shows the mood on the FOMC is shifting, said Roberto Perli, a partner at Cornerstone Macro LLC in Washington and former Fed economist. ‘The chair is not an emperor,’ he said. ‘I don’t think she can, even if she wanted to, hold these guys back.’”

The Journal Star. “Wells Fargo CEO John Stumpf wants Americans to believe that 5,300 of his former employees — yes, 5,300 — of their own initiative without any direction from above, worked in unison if unconsciously to defraud customers by creating more than 2 million phony bank and credit card accounts without authorizations or signatures and then charged them fees for something many didn’t even know they had.”

“To say next to nothing of the allegations of Wells Fargo’s abusive mortgage service and foreclosure practices that had what by then had become the nation’s largest bank socking customers with outrageous fees for services sometimes not even delivered, such as an $1,800 charge to a widow for an eviction that never took place.”

“Again, the guy regrets it, truly. Hey, ‘the housing downturn was a challenging time for the nation’ — if less for some than for others, if we may say so — according to a spokesman. The bank ‘has acknowledged … mistakes.’ There’s blame to go around: ‘Lenders, investors, along with policymakers and regulators — all sides — learned foreclosure processes had to be addressed.’ So can’t we all just stop harping on it, chalk it up as lesson learned, and move on?”

“Did we mention that this fraud went on for years after it was initially uncovered in 2013 by the Los Angeles Times (not, interestingly, by regulators)? Did we mention that no members of Wells Fargo’s upper management were fired (unless you count the head of community bank operations being allowed to retire over the summer with a golden parachute in the tens of millions)? Did we mention that most of the 5,300 who did get canned — the company is all about accountability, capital A — were among its lowest paid, making as little as $12 an hour? Did we mention that no one near the top has had their pay docked, including a Stumpf who reportedly made — we hesitate to use the term ‘earned’ — $19 million last year, $103 million in combined compensation between 2011 and 2015?”

“If the conduct of Wells Fargo — and of course we’re talking about the institution and its leadership; we trust many who work there are as appalled by these revelations as anyone — doesn’t make Americans even angrier in this, the Year of Rage, what will? Unfortunately, so much of that fury has been misplaced. In this case, it’s perfectly placed.”

“What are the lyrics of that Dylan song (thanks for the reminder from a Wall Street Journal commenter)? ‘Steal a little and they put you in jail. Steal a lot and they make you king.’ Until that changes, expect more of this kind of fundamental immorality.”