The Housing Bubble

It’s Friday desk clearing time for this blogger. “Two large development projects in Palm Springs have hit the pause button, alarming residents who fear a work stoppage for months or even years to come. Construction equipment seems to have all but disappeared where Rael Development is constructing a 150-room luxury hotel. Residents are wondering why the project is being delayed. ‘Seems like there hasn’t been any activity for a while now,’ wrote David Robertson in an email in early October. ‘Are we getting burned with another development going belly up before it has even been completed?’”

“About a mile away is another construction fence, this one encircling an 11.6-acre tract of blank desert, which is set to become The Cameron, a collection of 80 two-story town-homes, 22 live-work units and 15,000 square feet of retail. Work there has all but stopped, due to a change in the builder. ‘The previous builder was a partner with a company called Rialto Capital, and they’re the major financial partner. That’s what they do with different builders,’ said Todd Cunningham, a partner in Woodbridge Pacific, based in Mission Vejo. ‘And they just had some issues and they decided to separate from the previous builder.’”

“No two words sound more onerous to wealthy home sellers than ‘price reduction.’ But with Miami more than a year deep into a housing market slowdown that’s seen sales tumble and listings linger, EWM International Realty CEO Ron Shuffield is urging luxury homeowners to face reality. Many homeowners in Miami are already taking the hint. By the beginning of July, 37 percent of the city’s luxury listings had seen their asking prices cut by an average of 14 percent, according to EWM’s data.”

“Miami is now grappling with nearly three years worth of inventory. That means buyers are more inclined to sit on the sidelines and shop around for deals. ‘When you have inventory growing to that level and sales falling off, the major motivator to buyers is going to be an adjustment in price,’ he said.”

“The Park Avenue townhouse housing the nonprofit Queen Sofía Spanish Institute sold for $25 million at the end of last month, according to public records, falling $23 million short of its original listing price of $48 million in October 2014. Meanwhile, a nearby townhouse at 68th Street sold last week for $20.4 million, down $17.6 million from the $38 million asked in March 2015. The deep discount of the recent townhouse sales might also fall into a so-called ‘aspirational pricing’ phenomenon, experts say.”

“Townhouse properties are generally skewed to the high end of the market where conditions are weakest and many listings are ‘aspirationally’ overpriced, said Jonathan Miller, president and CEO of real estate appraisal and consultancy firm Miller Samuel. ‘Now that these conditions have been in place for more than a year, sellers are capitulating to the actual market conditions and reducing their prices to actually sell,’ he added.”

“The Attom Data Solution report for Chicago foreclosure activity shows a huge spike that occurred last month, entirely attributable to a 127% spike in auctions from September. At the national level all 3 components of foreclosure activity were up around 25 - 30% each. Daren Blomquist, senior vice president at ATTOM Data Solutions, commented that a lot of this increase may be coming from newer mortgages Daren went on to point out how a lot of these foreclosures are coming from government programs.’”

“‘The loans used in this housing recovery that appear to be most susceptible to foreclosure are those such as FHA and VA with low down payments. Our data shows FHA and VA loans combined represent 49 percent of all active foreclosure inventory for loans originated in the seven years ending in 2015. By comparison, FHA and VA loans only represent 12 percent of all active foreclosure inventory among loans originated in the previous seven-year period, from 2002 to 2008,’ he said.”

“Hmmmm. Government programs with problems. Low down payment mortgages that default. Who would have thought?”

“No matter where you live in the Las Vegas valley, no neighborhood is immune to squatters. Banks may be partly to blame for our squatter problem because of something called ’shadow inventory’ — homes that are bank controlled but maybe were left in a long-gone owner’s name or simply languishing in limbo because the bank has failed to foreclose, making the homes easy prey for squatters. The home in Darcy Spears’ neighborhood went into default in 2005, but GMAC didn’t take action to foreclose until this September — after Contact 13 got involved.”

“Phnom Penh investors and property owners are getting creative in the wake of subdued demand and oversupply in the residential market, with some deciding to renovate existing apartments and remodel them into hotels. Din Somethearith, president of the Cambodian Hotel Association, told Post Property there is a fair number of apartments located in the Tonle Bassac and Boeung Keng Kang areas that are being renovated into hotels due to the current apartment oversupply and downcast demand.”

“Somethearith added, ‘My friend has rented a villa to open up his own boutique hotel, and as a result, he is currently waiting for the boutique hotel to close down, because he hadn’t asked for my advice before continuing with his business endeavour. He tried to follow others’ example, while not taking into account that many small hotels in Phnom Penh and Siem Reap are closing down one by one.’”

“If you’re renting in Brisbane, chances are you’ve had a good year. Perhaps you’ve applied for a property, negotiated a hefty discount on the rent … and still been approved. The problem is that not every landlord can afford to take the hit. As rents continue to plunge, it’s likely to have an effect on apartment sales, said Angus Commins, principal at Space Property South Brisbane.”

“‘In fact, it’s already affecting sales. Investors are nowhere to be seen right now, what with yields going down and vacancy rates going up. Add in the lack of capital gains and the scare-mongering about negative gearing and of course no one is going to be buying,’ he said. Mr Commins said that as the issue unfurls into next year, it will likely mean a serious correction to Brisbane’s apartment market – sales and rentals.”

“‘It’s a train wreck and anyone who tells you otherwise has a vested interest,’ he said. ‘We get calls to our office every day from lawyers representing investors who are trying to offload apartments they can’t afford anymore. That’s going to start flowing through to some distressed sales. Any other agent around here will tell you the same. Looking into next year, we’re going to see a lot of people walking away from their deposits.’”

“Remember the infamous Fannie Mae and Freddie Mac that kick-started the last financial crisis? Last month hedge fund Bayview Financial bundled their junk securities into $118 million new bonds. Fitch Rating immediately stamped it with A- for investment grade. Didn’t they do the same for subprime mortgage bonds that were once top-rated AAA debts before the US housing bubble burst?”

“This is just the start. There is a total of $6 trillion US government-backed mortgage bonds waiting to be offloaded to the investors. Whether this is rock solid or a time bomb, only time will tell. We tend to have selective amnesia for painful lessons from bad investment. When the market crashes, everyone feels the pain. We mourn and shed tears. But when everything’s over, it is soon forgotten.”

“What is the worst thing that can happen to the property market? Cooling measures? Market oversupply? Price corrections? The biggest nightmare in any property market is the burst of the housing bubble. Because once that happens, even when government lifts all cooling measure; developers clear units at rock bottom prices; and prices drop to a ridiculous level, there will be no taker.”

“Because bad debts are everywhere. Fire sales are everywhere. Negative equities are everywhere. The banks are forced to absorb the bad debts. Even printing of more money cannot save the market. You can’t end such a big problem with no pain.”