The Housing Bubble

Two reports from Bloomberg on Canada. “Canadians fretted for years that home prices in the country’s largest city are rising at an unsustainable rate. Now they’re doing something about it. Ontario, the country’s most populous province, announced on Thursday a set of measures aimed at cooling the Toronto housing market. The province’s securities regulator on Wednesday also accused an alternative mortgage lender, Home Capital Group Inc., of making misleading disclosures, sending its shares tumbling. The issues at Home Capital relate to an investigation into loans with faulty income information. The company cut ties with 45 brokers in 2015 after finding falsified borrower income information, the same flaw that sunk many subprime lenders in the U.S. during the housing crisis.”

“The Ontario Securities Commission alleged Wednesday night that the company’s former officials didn’t satisfy disclosure requirements, made ‘materially misleading statements’ and failed to comply with other securities rules. ‘I think a lot of this mortgage fraud in Canada has been covered up and you’re now starting to see tips of various icebergs hitting the boat,’ Marc Cohodes, an investor who’s betting against Home Capital’s stock, said in a telephone interview.”

“Home Capital Group Inc.’s shares plunged more than 60 percent after the mortgage lender disclosed a costly new loan to tide it over as its deposits dwindle, intensifying a spiral of bad news. The company is effectively paying 22.5 percent on the first C$1 billion it borrows, which falls to 15 percent if it uses the full C$2 billion available to it, according to Jaeme Gloyn, an analyst at National Bank of Canada.”

“‘They did what appears to be to us a very expensive deal,’ said David Baskin, president of Baskin Wealth Management in Toronto, a former investor in Home Capital stock. ‘Basically they blew up the income statement in order to save the balance sheet, which I guess if you’re facing an existential crisis is what you have to do.’”

The Hamilton Spectator. “Nearly one quarter of Hamilton area homes sold in the first three months of the year were purchased by buyers from the Greater Toronto Area, a new analysis of the local marketplace has found. Conrad Zurini, broker of record for RE/MAX Escarpment Realty said: ‘Increasingly, these are (Toronto) investors looking to purchase townhomes and small single-detached homes as rental properties (in Hamilton).’”

“He suggested a frenzy by Toronto buyers to purchase investment properties could be adding an inventory of new rental properties to the marketplace faster than demand. Central Hamilton really jumped in the numbers. The vacancy rate went to 9.9 per cent in 2016, compared to 5 per cent the previous year.”

The Windsor Star. “Windsor’s real estate market has become so hot, sales agents for the majority of listings are restricting bids to one day — a strategy reserved for the nation’s most competitive housing markets in Toronto or Vancouver.”

“‘It first started (in Windsor) about six or eight months ago,’ said Denny Laurin, a broker/manager at Re/Max Preferred Realty Ltd. ‘But now we are in a situation with ample buyers that, for a seller, the best product to serve them is the multiple-offer situation. At the very start of this (a couple years ago) the average sale price in Windsor was $140,000, now it is nearly $250,000,’ Laurin said. ‘I have seen quite a few in South Windsor being sold for $100,000 over the asking price. A property that last year was worth $250,000 is now sold for $325,000.’”

From Mississauga News. “Residential sale prices in Mississauga shot up more than 30 per cent in the first quarter of 2017, according to a RE/MAX report. Mississauga’s 2017 average residential sale price for the first quarter is $753,788, an increase of 31 per cent from the same time last year. Significant price increases and high demand in the Greater Toronto Area during the first quarter of 2017 spurred growing numbers of buyers to leave the downtown core, RE/MAX said in its Spring Market Trends report. ”

The Winnipeg Free Press. “A new Re/Max report predicts a five per cent increase this year in the average selling price of a Winnipeg home, although one local agent said developments in recent weeks suggest that number may be a bit high. Akash Bedi, owner of Winnipeg’s Re/Max Executives Realty, said selling prices have been climbing at a slightly slower pace since the first-quarter data for the Re/Max report was compiled. ‘We are down a bit so far because of an oversupply of condos and an oversupply of higher-priced homes,’ he explained.”

The Regina Leader Post. “As options for renters in Regina increase, landlords are dealing with higher property taxes but often without the ability to raise rents. Jason Hall, a landlord with multiple properties in the city, is also trying to manage increased property costs in a wide-open rental market. ‘As much as you want to increase, if the market won’t handle that, you can increase it all you want but it will be empty,’ he said.”

“Hall agreed that since the market is favouring renters, it often results in landlords unable to raise rents. ‘I think it would be crazy for a landlord to pass this on to the tenant because they can just go down the street to someone who is not going to raise the rent. It is not good news for any property owner or homeowner. If you have one house, it is probably not as bad as someone who owns 150.’”

From Macleans. “On any given day now you can expect to hear at least one economist, public official or financial commentator express grave concern about the mountain of debt Canadians now carry. As a licensed insolvency trustee firm, our practice is on the front lines of Canada’s household debt binge and the bad personal finance habits that ensnare so many people. And what we see every day is that the majority of those grappling with serious debt trouble are the most typical individuals and families you could imagine.”

“Here is just a sample of recent files that have crossed our desks: A staff accountant with multiple lines of credit, several maxed-out credit cards, a big mortgage, a significant home-equity line of credit (HELOC) and two leased luxury cars; a TTC driver with two mortgages and $100,000 in unsecured lines of credit.”

“Those disturbing financial cases are no longer the extreme end of the spectrum that they were at one time. They are the ‘new normal’ in our trustee practice. The real horror stories are far worse, albeit less frequent. Two or three decades ago, it would have been unthinkable for people to hold the equivalent of $30,000 or $40,000 (or more) in credit card debt. Yet now that has crept into the Canadian psyche as just something one does.”

“(By the way, have you noticed the ‘Estimated Time To Pay’ wording on your credit card statement? It is a calculation of how long it will take to pay off your credit card balance if only the monthly minimum payments are made. The record we’ve seen is 330 years and 10 months.”

From CBC News. “There’s a difference between housing and real estate. Housing is where we live; real estate is an investment. It’s a pedantic but critical distinction. In all the breathless debates over housing bubbles and policy options, we look primarily at the investment. Imagine for a moment those debates centred around an investment other than real estate. A mutual fund. Or gold. Or an Exchange Traded Fund. Wouldn’t there be a backlash against government intervention in those investments? Would any of the stern statements from politicians keen on cooling the market make any sense?”

“The point here is that nearly all the oxygen in any discussion around housing focuses on that investment, and on one generation being priced out while the retirement plans of another generation are based almost exclusively on the soaring value of their homes.”

“But it’s hard to change decades of thinking. Economist Armine Yalnizian says politicians need to rethink the path to prosperity. Traditionally, she says, the two paths were higher education and/or home ownership. ‘The former no longer guarantees even employability, let alone higher wages; the latter is increasingly out of reach in part because of the former,’ she says.”

But Yalnizian says breaking from that orthodoxy comes with risk. ‘Politically it is hard for politicians to get off the ‘ownership society’ narrative track, because it looks like they’re waving the white flag on the future of the middle class for younger voters,’ she says.”

A report from the Los Angeles Times in California. “Bidding wars are common and prices are rising during the popular spring buying season. A report out Tuesday from CoreLogic shows the Southern California median home price jumped 7.1% in March from a year earlier, hitting $480,000 in the six-county area. And despite low inventory, sales rose 7.8%. When Elizabeth Rodriguez and her husband realized that the market was white-hot in the Northeast L.A. burbs where they wanted to raise their three children, they devised a strategy. The couple began writing a ‘love letter’ to sellers describing how much they wanted the house. And then they bid over asking — way, way over asking.”

“In one case, they offered $102,000 above the $798,000 list price for a three-bedroom Spanish-style home in Mount Washington. The house sold to someone else for $985,000. ‘After that I was like, this is insane,’ said the 35-year-old mother of three. The couple bid on 11 homes, she said, before they finally purchased a three-bedroom in the hills of Glassell Park listed at $799,900. To seal the deal, they again bid about $100,000 over asking, this time before an open house was held. ‘It was a crazy process,’ Rodriguez said. ‘I’m glad we are on the other side of it.’”

The Union Tribune. “The San Diego County median home price reached $515,000 in March, its highest point in a decade and a 7.7 percent increase in a year, CoreLogic reported. The median price had been below half a million dollars since October last year, which had some analysts surmising costs had hit an affordability wall. But, the March numbers show some buyers are willing to go higher to get homes. ‘Home prices are going up faster than household incomes,’ said Mark Goldman, finance and real estate lecturer at San Diego State University.”

“Many analysts, including Goldman, say the market is not heading for a housing bubble because the last crash was built on riskier loans. ‘I don’t see any speculative value in the market. We’re seeing very cautious underwriting when it comes to appraisals,’ he said. ‘Even though people are anxious to get into the market, it’s not one of those markets where any fool who wants to buy can buy.’”

The LA Daily News. “If you want to buy a home in the San Fernando Valley, make sure you’ve got money — lots of it. The median price of a home in the area hit $671,500 — the highest ever on record for March. The last time a home’s median cost — the price at which half the homes are less and half are more – was this high in the area it was June 2007, when the housing bubble was about to burst and the median was $655,000, according to the Southland Regional Association of Realtors report.”

“The new median price number for March was up 13.3 percent from a year ago, and was a definite leap from most of 2016, when the median price was stuck in the $600,000s, according to the association. Back then, buyers resisted paying more, and the ‘pool’ of buyers who could afford such prices had constricted.”

“But the new numbers are in another galaxy compared to the low point not so long ago. Just take March 2011, after the bubble had burst in the midst of the Great Recession: The median cost of a single-family home in the San Fernando Valley was $370,000, according to the association. And if you go way back to March 1998, the median price of a single-family home in the San Fernando Valley was a whopping $180,000.”

From KRON-TV. “In San Francisco and San Mateo Counties, a family of four making $105,350 or less is now considered low income by the federal government Department of Housing and Urban Development. That means they can qualify for affordable housing. ‘They are eligible now to apply for housing through the local housing authority, be it Section 8, be it public housing, or other HUD-subsidized programs,’ HUD Regional Public Affairs Officer and Homeless Liaison Ed Cabrera told KRON-TV.”

“The income limits in the Bay Area are the highest of any area in the country, Cabrera said. In neighboring Santa Clara County, low income starts at $84,000. Contra Costa County is at about $80,000. For Napa, it is $74,000. And for Solano, it is $64,000.”

The San Francisco Chronicle. “California dreaming? Hardly. Mattresses on sidewalks, moving vans in driveways and hasty garage sales hint at a trend Bay Area residents have long suspected – exodus. Real estate brokerage site Redfin released its annual ‘migration report’ and found that those residing in San Francisco Metro are the most likely to leave. The catalyst for moving – high housing costs – should surprise no one.”

“San Francisco recorded the highest ‘net outflow’ – the number of potential homebuyers looking to move to San Francisco Metro subtracted from the number of those who want to leave. The region’s outflow was double that of New York.”

The Marin Independent Journal. “The California Association of Realtors reported Monday that pending sales in the Bay Area were down in March for the sixth straight month on a year-over-year basis. Redfin’s new report shows the San Francisco metro area has the highest ‘net outflow’ of users: 15,087. That figure is the difference between the number of potential homebuyers who want to move to the San Francisco metro area and the number who want to leave it; a lot more want to leave than come.”

“New York had the second highest ‘net outflow,’ followed by Los Angeles, Washington, D.C., and Chicago.”

The Coachella Valley Independent. “Despite a growing economy and decreasing unemployment, the homeless population in the Coachella Valley is expanding—at an alarming rate. The annual Riverside County ‘point in time’ count in January showed the homeless population had increased from 1,351 unsheltered and 814 sheltered individuals in 2016, to 1,638 unsheltered and 775 sheltered in 2017.”

“The Coachella Valley cities had 297 homeless individuals in 2016—and 425 individuals in 2017. Another alarming fact: The number of homeless individuals locally without shelter is about to rise, because Roy’s Resource Center, the only shelter for the homeless on the west end of the Coachella Valley, is slated to close at the end of June. The beleaguered facility in North Palm Springs is shutting its doors largely because some local city governments have not been paying their share to keep Roy’s financially solvent.”

“The closure will undoubtedly lead to a significant increase in the number of unsheltered homeless—at the time of year when shelter is needed most. ‘We just had a ‘point in time’ count, and it shows that if we look at the nine valley cities, the increase in homelessness in the Coachella Valley is 43 percent: We went from 297 to 425. That’s huge. If Roy’s closes down, and we have no provision for the 90 people it currently houses, the increase is even more dramatic, because we’re talking about going from 297 to 515, and that’s crazy,’ said Sabby Jonathan, the mayor pro tem of Palm Desert.”

From KQED News. “Augie Cortez and his wife, Blanca, bought a little slice of the American Dream about 17 years ago in Bloomington, a working-class community in San Bernardino about 50 miles east of Los Angeles. Their roomy four-bedroom house was the very first on the block of a brand-new subdivision not unlike scores of others that began carpeting Inland Southern California toward the end of the 1990s. The Cortezes gathered up their savings and managed to put up a healthy down payment on a 15-year mortgage. After a couple of other home purchasing efforts collapsed, they were eager to make this one stick and they wanted to pay it off fast.”

“Monthly payments would be high. But the name of the little cul-de-sac seemed like a good omen: Dream Street. And for a while, the dream was good. With so much homebuilding going on, it was easy for just about anyone to get a mortgage back then, even if you had shaky credit or no job at all. Low-income minority neighborhoods like the ones around Dream Street were ripe targets for subprime lenders.”

“Augie and his wife had a sound conventional loan, but still got dragged under in a housing crisis that would ultimately steamroll through neighborhoods across the country. In 2006, the last of the brand-new homes on Dream Street sold for about $430,000. Three years later, at the peak of the mortgage meltdown, the same home was worth barely a quarter of that.”

“It was the same story up and down the block and across the region as the bubble burst on the housing market and people couldn’t afford their mortgages. Even people like Augie Cortez, who didn’t have mortgages spring-loaded with dangerous adjustable rates and hidden fees, were dragged down. Construction work vanished and Cortez’s cement finishing jobs dried up.”

“To put food on the table Cortez sold lumber and other items online. He did odd jobs for neighbors. Mortgage payments got skipped for months. Default notices were dropping into mailboxes across the neighborhood — including his own. ‘Just walk away, that’s what people were doing, just walking away,’ he says, recalling what it was like then.”

“Local real estate experts warn that Inland Empire housing is once again way overvalued, and overdue for a ‘correction.’ Prices have surged to an unsustainable level in the last year, according to Neighborhood Housing Services of the Inland Empire, a nonprofit that helped guys like Augie hold onto their houses 10 years ago.”

“At the edge of those vacant lots, a sign lashed to a post beckons with a come-on that sounds a little suspicious, given what this neighborhood has survived over the last decade: ‘Buy a Home, 1% Down.’ There’s no name for a real estate agent or mortgage broker. But there’s a local phone number. I give it a call. ‘Hi, this is Emily your friendly real estate professional,’ chirps a pre-recorded message. ‘Buying a home has never been easier! Here’s how it works,’ continues Emily. ‘You put down 1 percent and your lender 2 percent toward your down payment, which puts you on your way to home ownership.’”

“Emily asks me to leave my number and a good time to call back. I don’t. But I do find out more about that sign, and about new trends in home loans that are stoking old fears.”