May 31, 2017

The Massive Leverage Will Flow Over

A report from the Australian. “When three similar global city real estate markets start showing the same patterns, it’s highly likely you are seeing a major trend emerging. The three major markets showing the same nervous trends are Vancouver, Sydney and Melbourne. And what is happening in the real estate market is being duplicated in other areas of the economies of Australia and North America. What we are seeing in the three markets (Vancouver, Sydney, Melbourne) is a reduction in Chinese buying and reluctance by the non-Chinese locals to buy at the high prices. Melbourne prices dropped 0.5 per cent last week to sit 1.8 per cent lower than a month earlier. Prices in Sydney fell by 0.1 per cent, a seventh straight weekly decline that left prices in the NSW capital 1.3 per cent down over a month.”

From Domain News. “Foreign property investors are shifting their focus away from Victoria after several government policy changes which experts say could lead to a slowdown in the economy. Many China-based businesses that only sold Australian properties have already closed, while some are diversifying their businesses by selling other countries’ real estate. The removal of the Victorian stamp duty concession for off-the-plan investors was introduced against a backdrop of Australian banks tightening lending rules and the Chinese government limiting the amount of money moving offshore.”

“AMP Capital chief economist Shane Oliver said it appeared building approvals for new apartments in Victoria had already peaked, which would be a dampener on the Victorian economy. ‘Hopefully other parts of the economy will fill the gap [such as tourism, higher education and infrastructure projects]; it was never going to be the case that housing was going to keep us going forever,’ he said.”

From ABC News. “In a surprise move, Australia’s booming property market has made one asset manager worried enough to shut down his multi-million-dollar fund and hand back all the money to his investors. Philip Parker, the chairman and chief investment officer of Altair Asset Management, had written to investors explaining that he was returning their funds at an ‘overvalued and dangerous time in this cycle.’”

“‘In the last six to eight months, the investment committee of Altair have felt, to varying degrees, that the property market was heading into bubble territory,’ he told the ABC in an exclusive radio interview on Business PM. ‘The massive leverage that you’re seeing in terms of people’s exposure to property will then flow over to other liquid assets. Secondly, I felt China property and debt issues will become a major factor later in the year.’”

From Bloomberg. “Australian house prices fell in May for the first time in 17 months, in an early sign lending restrictions are starting to damp demand. The monthly decline comes after regulators tightened lending curbs amid fears of a housing bubble, and the nation’s banks raised interest rates — especially for interest-only loans which are popular with property investors seeking to take advantage of tax breaks.”

“‘The market has lost momentum, particularly in Sydney and Melbourne where affordability constraints are more evident and investors have comprised a larger proportion of housing demand,’ CoreLogic’s head of research Tim Lawless said.”

From Perth Now. “Perth’s property market has taken another hit as signs grow runaway prices in Sydney and Melbourne have finally come to an end. CoreLogic reported over the past year values for houses in Perth have fallen by 4.2 per cent, the second worst market in the country behind Darwin where prices have tumbled by 8.8 per cent. Nationally, unit prices edged down by 2.6 per cent led by a 3.8 per cent fall in Melbourne. There have been concerns of an over-build of units, particularly in parts of Brisbane and Melbourne, driven by investors looking for capital gains.”

“‘It appears that housing activity has eased which is attributable to a range of factors including affordability constraints, tighter credit policies, rising mortgage rates and a downturn in consumer sentiment towards housing,’ said CoreLogic head of research Tim Lawless. ‘Considering we are yet to see the full effect of the recent round of macroprudential measures flow through, there is a high possibility that investor activity, and consequently housing demand, will slow further during 2017.’”

From The New Daily. “The latest building approval numbers may herald the beginning of the end of the construction boom that the Australian economy is so reliant on, according to experts. Data released by the Australian Bureau of Statistics on Tuesday showed that buildings approvals fell by 17.2 per cent between April 2016 and April 2017, based on seasonally adjusted figures.”

“The Melbourne and Brisbane apartment markets are widely thought to be oversupplied. About 5000 new apartments are expected to be completed and up for sale in Melbourne this year alone. BIS Economics found 50 per cent of new apartments bought and sold in the last five years sold at a loss. The Reserve Bank sounded the alarm earlier this year about deteriorating market conditions after investment declined in late 2016. The central bank warned that increased supply and lower population growth had already depressed rents and apartment prices in Perth and Brisbane.”

The Courier Mail. “Another Brisbane construction company has gone under in the latest sign the downturn in the city’s apartment market is deepening, and a damning prediction from an industry insider says many more companies will soon fall. Liquidators were called in to wind up Nathan-based CMF Projects this week, leaving scores of subcontractors in the lurch and at least two incomplete projects around Brisbane.”

“Subcontractors Alliance spokesman Les Williams said he expected at least one construction company to collapse every month as the market unravelled. Mr Williams said that since Christmas creditors, including subbies, had lost an estimated $100 million, as building companies went under.”

From Reuters on China. “The banker at the other end of the phone line was furious, recalled Shanghai lawyer Wang Chaoyu. A pile of steel pledged as collateral for a loan of almost $3 million from his bank, China CITIC, had vanished from a warehouse on the outskirts of the city. Just several months earlier, in mid-2013, Wang and the banker had visited the warehouse and verified that the steel was there. ‘The first time I went, I saw the steel,’ recalled Wang, an attorney at Beijing DHH Law Firm, which represents the Shanghai branch of CITIC. ‘Afterwards, the banker got in contact with me and said, ‘The pledged assets are no longer there.’”

“it is indicative of a much wider problem that could endanger the health of China’s financial system – fraudulent or ‘ghost’ collateral. When bank auditors in China go looking, they too often find that collateral recorded on the books simply isn’t there. In some cases, collateral that has been pledged simply doesn’t exist. In others, it disappears as borrowers in financial distress sell the assets. There are also instances in which the same collateral has been pledged to multiple lenders. One lawyer said he discovered that the same pile of steel was used to secure loans from 10 different lenders.”

“With the mainland facing its slowest growth in over a quarter of a century, defaults are mounting as borrowers struggle to repay their loans. The danger of fraudulent collateral in this situation, say economists, is that it exacerbates the problem of bad debt for China’s banks, increasing the risk of financial turmoil. A Reuters review of dozens of court cases involving collateralized loans and interviews with lawyers, regulators and 30 bankers in China reveal that fraudulent collateral – in the form of buildings, private apartments, copper and steel – is haunting loans across a wide swath of business and industry.”

“Fraudulent collateral is ‘a huge issue,’ said Violet Ho, senior managing director and co-head of Greater China Investigations and Disputes Practice at Kroll, which conducts corporate investigations on the mainland. ‘Often you also see that the paperwork around collateral may be dodgy, and the bank loan officer knows, the intermediary knows, and the goods owner knows – so it’s essentially a Ponzi scheme.’”

“In a report last September, Fitch Ratings estimated that it would cost as much as $2.1 trillion to clean up China’s bad debt – almost a fifth of annual Chinese economic output. Fitch Ratings has mentioned ‘wildly misleading’ property valuations as one reason why high collateral coverage may not protect banks. Another is a sudden fall in property prices. According to Fitch’s Grace Wu, over 60 percent of financing in China uses property as collateral in some way. More than three years since lawyer Wang Chaoyu took the phone call from the incensed CITIC banker about the missing collateral from Hanning Iron and Steel, the lender is still trying to get back some of its money. CITIC is now trying to sell several apartments that were put up as part of the security for the ill-fated loan.”

What They See As An Insatiable Appetite

A report from the Boston Globe in Massachusetts. “It’s too soon to declare victory, but Mayor Marty Walsh’s housing policies are clearly starting to help the two-thirds of Boston residents who rent their homes. City statistics show that average rents fell by 4 percent last year in older units in Boston. The biggest reason for the dip in rental prices up to this point is visible on the skyline: After taking office, Walsh pledged to build 53,000 new units of housing, a goal he appears to be on track to meet. Many of those new units, whether they’re condos or apartments, are too expensive for the average family. But the city believes that they’ve reduced the demand on older housing stock enough that owners of existing units have been forced to lower their prices to compete. The law of supply and demand, it would appear, is working in Boston.”

The Daily Press in Virginia. “As apartment rent growth stabilizes after high post-recession demand, renters are expecting more from Peninsula properties, managers say. Hampton Roads is expected to lag behind the nation in apartment demand this year after experiencing job losses related to cuts in defense spending and lagging population growth, according to the latest Hampton Roads Real Estate Review and Forecast. ‘We’re still slightly oversupplied,’Chris McKee, president of operations for The Franklin Johnston Group, said.”

The Baltimore Sun in Maryland. “As developers flood Baltimore with apartments in response to what they see as an insatiable appetite for new residences, the numbers raise a question: Are there too many? Just over 5,600 residential units, mostly apartments, were under construction in Baltimore and 1,800 more were approved as of April, according to the city’s planning department. Another 1,400 units opened just last year.”

“William H. Cole IV of the Baltimore Development Corp., said he thinks the market will determine its own saturation point. ‘As soon as lenders stop financing these projects, we’ll know we’ve reached our capacity,’ he said. ‘But we haven’t reached that yet.’”

“But it could be coming. The Wall Street Journal reported in February that major banks were becoming increasingly cautious in lending for multifamily projects nationwide.”

The Journal Sentinel in Wisconsin. “The Brady St. area is landing another new apartment development, the latest in a series of higher-end projects targeting younger renters on Milwaukee’s east side. Ogden Multifamily Partners LLC will start construction soon on a five-story, 30-unit building, said Jason Pietsch, firm principal. The new buildings are tapping into continued strong demand among millennials for higher-end apartments in the area near E. Brady St.’s taverns, restaurants and shops, Pietsch said.”

“Keystone on Brady’s average monthly rent is $1,650 for a one-bedroom unit, Pietsch said. Nine10 at Land Place will have larger units, and somewhat higher rents, he said. There are some concerns about whether the east side and downtown apartment market is being overbuilt, Pietsch said, especially with River House bringing a large number of new units. But interest in and around Brady St. remains high, he said.”

The New York Post. “Billionaire’s Row is headed for its first foreclosure. The dubious distinction is going to a stunning apartment on the 56th floor of 157 W. 57th St. — the city’s first ‘billionaire’s building,’ which is home to the Big Apple’s only $100 million condo. ‘This is the first high-end condo to go into foreclosure,’ said Kashy Eyn, of Platinum Properties, who is listing the property with Cash Bernard.”

“A mystery buyer who shielded his identity behind an LLC, Central Park Immobilier, bought the unit for $21.4 million in 2015. It is now on the market for $22.5 million — where it has agonizingly lingered for the past 547 days, according to Streeteasy. There is now a lien on the property for $20.9 million ‘plus interest and costs,’ and a foreclosure auction is slated for June 14, according to Property Shark. ‘We rarely see luxury condos up for auction, let alone in such an exclusive building as One57, home to the city’s most expensive condo ever sold,’ a Property Shark spokesman said.”

“A source told The Post there have been several offers on the unit, but the seller has rejected them ‘because they weren’t high enough.’ Only about 30 residential properties in Manhattan have been slated for the first time to go to foreclosure auction during the first quarter of 2017, said Property Shark’s Nancy Jorisch. One57 was funded by a subsidiary of an Abu Dhabi company linked to a $7 billion global money-laundering investigation, The Post revealed last year.”

May 30, 2017

A Supply-Demand Imbalance Of A Different Kind

A report from Arlington Now in Virginia. “A report this week revealed the 20 most profitable cities for real estate appreciation. Nothing in our area came close. Arlington showed zero percent appreciation in 2016 across the board for all types of housing; condos, townhomes, and single family. Can anyone explain how home values remained flat when there was only about 2.2 months of inventory and interest rates remained relatively stable? A conundrum…”

From Nevada Public Radio. “The story that helped build Nevada was that you came here, worked hard and could soon buy a home. That story is being edited. Home prices are through the roof, especially in Reno. In Reno, the Reno-Gazette Journal recently reported that a home that cost you $135,000 in 2012 will cost you more than $320,000 today. For first time homeowners and millennials at the lower end of the pay scale, that kind of mortgage payment is almost impossible to make.”

“However, Mike Kazmierski with the Economic Development Authority of Western Nevada told KNPR’s State of Nevada that while those prices seem high it is important to keep them in perspective. ‘That same house that you’re talking about for $320,000 - three bedroom, two car garage with a nice sized lot - that would be a million dollars in the Bay Area,’ he said.”

The Sun Sentinel in Florida. “The South Florida housing market is something of a riddle these days. Values are going up, but some appraisals aren’t matching the agreed-upon sale prices. Low- and mid-priced homes tend to sell quickly, but buyers are getting picky, unwilling to overpay or even to make offers on properties that aren’t in move-in condition. To help buyers and sellers better understand the market, the Citron Real Estate Group at Re/Max ParkCreek has organized a free real estate seminar. ‘It’s definitely a time to be informed about what your current value is,’ said agent Michael Citron.”

The Los Angeles Times in California. “John Burns is chief executive of John Burns Real Estate Consulting. He describes his job as running around and talking to a lot of ‘insanely smart people all the time.’ Burns says he knew last decade’s housing boom was over the day after the 2006 Super Bowl. He recalls seeing an ad from national home builder Centex that offered $100,000 off a $500,000 home in Sacramento. Surprised, he called the company’s chief executive, Tim Eller — who was also a client. ‘He said, ‘John, I have seen many of these cycles and they are always worse than everyone thinks they are, and the first guy to drop price sells homes.’”

“In coastal California, home values have become ‘overpriced’ based on income, Burns says. As a result, he’s recommending that clients be cautious when making big investments, especially since some analysts think a recession could be likely in the years ahead. ‘2017 looks great because the economies are strong. But this would not be a time to really grow your business dramatically in those markets and borrow a lot of money and take a lot of risk.’ he says. ‘As soon as we have a recession … if you don’t have a strong balance sheet you are done.’”

The Daily Camera in Colorado. “Jeffrey Long wants to move to California. He wanted to move four years ago, but he failed to find a buyer for his home north of Longmont in unincorporated Boulder County, situated on 5 acres overlooking Terry Lake. So he kept the house on the market for another year, hoping for a bite. Then another. Now, Long has turned to a North Carolina-based auction marketplace for high-end homes, Interluxe. Next weekend, thirty prospective buyers will be previewing the property and preparing for a June 5 online auction that Long hopes will push the price past the $1.25 million minimum bid.”

“‘It’s startling how much interest it’s gotten,’ he said . No matter what price the house ultimately fetches, ‘it’s a lot better than sitting on it and waiting.’”

“Longmont’s luxury market is very different from Boulder’s, according to Kevin Byrne, the listing broker on the property at 9722 Meadow Ridge Lane. The area is beset by a supply-demand imbalance of a different kind. With 30 current listings and a historic sell-rate of one per month, there is a 30-month supply of luxury inventory. A healthy market would be closer to six to twelve months. ‘We’ve got to limit the supply,’ Byrne said. ‘If you don’t have to sell your house, you shouldn’t have it on the market.’”

From The Monitor in Texas. “Despite McAllen’s economy narrowing late last year, it has avoided declining wages that have plagued Texas border economies, according to a study from the Texas A&M Real Estate Center. McAllen has seen an uptick in homes sales, the study said, even though the number of monthly housing permits is down substantially. ‘A glut of new houses in McAllen fueled the sales surge,’ said A&M Research Economist Luis Torres, ‘as the months of inventory (MOI) for new homes remains longer than 12 months and continues climbing.’”

May 29, 2017

Too Much Money Gets In And You End Up In Tears

A report from the Toronto Star in Canada. “A stomach churning drop of up to 61 per cent in the number of home sales in some municipalities around Toronto could translate to a single-digit decline in regional prices by the end of the month, says a realtor who has crunched the numbers. John Pasalis of Realosophy, found that Toronto region ground-level home sales — detached, semi-detached and town houses — dropped 26 per cent overall between April 20 and May 20 — the period directly following the provincial Fair Housing plan announcement designed to cool real estate speculation in the area.”

“‘Of all the sellers out there, half of them aren’t motivated, the other half are desperate because usually they’ve already bought a house. They weren’t planning for this slowdown and it’s very difficult because they need to sell and they have no options,’ said Pasalis.”

From Mmegi Online on Botswana. “The state of the economy has also affected the residential market where demand for high-end properties has severally diminished while low to medium housing is in low supply. Gaborone has a diminishing supply of low-to-middle income housing, with most people on average incomes finding it difficult to locate affordable housing or finance their own self-build homes.”

“‘Many residential buy-to- let investors are struggling to find tenants, particularly as expatriate workers have found it difficult to renew work permits. Sales at the high end of the market are far less frequent and likely to stay muted for some time,’ states the Knight Frank Africa 2017 report.”

The Daily Trust in Nigeria. “An Estate Valuer, Joe Nelson, has explained that landlords are cutting down on house rents in Benue State due to adverse effect of recession on tenants. Tenants in the state who are majorly civil servants are being owed salaries between five and 10 months. Nelson told our correspondent in an interview that house rents were seriously on the decline. ‘House rents have reduced drastically because in any recess economy, the first victim is property,’ Nelson said.”

“He, however, expressed optimism that the value of property would rise after the recession. ‘But, right now, landlords are reducing rents for tenants. Some of them have taken away 30 percent off their rents to enable tenants pay and even at that only few occupants could renew their rents,’ he added.”

From The Island on Sri Lanka. “Sri Lanka’s high-end luxury apartment developments may already be in trouble, according to at least two developers responding the Central Bank’s concern over a property bubble that could potentially undermine the entire economy. The private Iconic Developments, an apartment builder, said it was aware of at least two projects that failed to take off resulting in cautious lending to the sector while another condo developer, Fairway Holdings, acknowledged a ‘bubble’ in the high-end segment.”

“Central Bank of Sri Lanka Governor Indrajith Coomaraswamy announced earlier this month that they were closely monitoring the real estate sector after fears that excessive credit may have fuelled a property bubble that could cause distress to all. He said a low interest regime about three to four years ago encouraged money into real estate which at the time appeared to give the highest rate of return on investment. ‘What has been happening is that this sector has given a much higher rate of return than anything else,’ he said. ‘When that happens, in whatever sector, usually too much money gets in and then you end up in tears.’”

From The Edge Malaysia. “The residential property market in Johor will remain under pressure with the completion of several high-rise residential projects in the next few years, according to industry observers. About 9,500 ‘five-star living’ condominiums in Country Garden Danga Bay will be ready by September, putting more pressure on the rental market in Johor Baru.”

“However, Bursa Malaysia-listed Johor-based developer BCB Bhd is unfazed by the oversupply in Johor as most of the projects launched by Chinese developers were started in the past few years and most of them had been taken up by investors between 2014 and 2015. ‘As most of the buyers are from China, I don’t think they will resell their properties. They will likely rent them out, so the concern should be the impact on the sub-sector; the pressure will be on the rents,’ BCB executive director Tan Vin Sern tells The Edge.”

From AFP on China. “Quick and easy access to credit has encouraged many young Chinese to go into the red to buy cars and apartments they could not otherwise afford. When Wu Qi and her husband traded in their Mazda 3 for a more expensive Mercedes Benz sedan, they applied for a 200,000 yuan (US$29,000) bank loan to help pay for it. They got the money within minutes. ‘It is very easy - the car company encourages you to borrow the money and enjoy the car,’ said Wu, 39, adding the couple is also paying off a one million yuan mortgage for a three-bedroom flat in Beijing.”

“Since Chinese leaders turned on the credit taps in late 2008 to shield the country from the global recession, household borrowing has soared and pushed China’s overall debt liabilities above 260 per cent of gross domestic product - compared with about 140 per cent before the crisis hit. But slowing growth in the world’s second-largest economy has raised concerns that years of risky lending could lead to a disaster worse than the US sub-prime collapse.”

“Mortgages make up the bulk of household debt. ‘Other countries have usually taken decades to complete such an increase,’ said Chen Long, an economist at Gavekal Dragonomics. ‘For bank lending to households to rise very rapidly usually means lending standards are loosened so credit is extended to both more and less creditworthy consumers.’”

From ABC News on Australia. “Sign a lease, and get a free TV or an iPad. How about a $500 gift voucher, two weeks’ free rent? Or, a free gym membership? These are just some of the out-of-the-box incentives agents are offering renters in south-east Queensland to get them to sign a lease. The rental vacancy rate within five kilometres of Brisbane’s CBD has reached a record 4.4 per cent, driven by a glut of apartments. It is pushing rents down, some slashed by an estimated 10 to 15 per cent.”

“Real estate agent Gabrielle Trickey has taken over managing a three-bedroom Queenslander at Paddington that has been empty for three months at $600 a week. It had been going for $650. Tenants only swooped after Ms Trickey advised the landlord to drop the rent to $580. She said the owners are competing with flashy units, where the rent is the same, but they get pools, spas and saunas. ‘A lot of tenants are actually offering a considerable amount less … up to $50,’ she said. ‘That is a real shock.’”

“Beyond property management’s Heather Jopson offered a $500 gift voucher to entice renters to a townhouse in Jubilee Terrace, Bardon. It was a hard hit, but dropping the rent from $580 a week to $495 a week also stung. Vacancy rates outside the 5km CBD radius sit at 3.7 per cent, which is considered healthy by the REIQ. Nevertheless, outer suburbs are not immune to the price drops. Another of Ms Jopson’s properties, this time in Inala has gone from $350 to $320, after a tenant broke the lease.”

“‘It is tough time at the moment but I don’t think it is dire straits, it is just the new norm,’ she said. ‘I don’t think we are going to crash and burn from here.’ In the meantime some prospective tenants continue to name their own price. Ms Jospon said most owners were very realistic about the market being soft at the moment. ‘There are some cheeky ones out there,’ laughs Ms Jopson.”

May 28, 2017

It Is Obvious And Apparent There Will Be Oversupply

A report from the Star Tribune in Minnesota. “Even after almost four years of booming apartment construction, the Minneapolis-St. Paul metro still has the tightest vacancy rate of any major U.S. city, according to Witten Advisors, a national multifamily housing consulting firm. But some counterforces are emerging. Financial backers, who are seeing longer lease-up times for new luxury urban projects, are becoming more cautious. Those were some of the insights voiced by a panel of experts this week at a Minnesota Multi Housing Association seminar. Others on the panel, meanwhile, said they are seeing few signs that the apartment boom is in the ‘ninth inning,’ despite a bit of sluggish start to 2017. Opus Vice President Matt Rauenhorst said what’s most important in a new development now is that there be a compelling ’story’ and location differentiating it in an increasingly crowded multifamily market.”

“Rauenhorst said he’s aware of concerns about hitting the top of the market for rents. ‘But in talking to our residents, this is what they want,’ he said. ‘They’re saying, ‘We’ll pay more if you can give us condo-like finishes.’”

From Michigan Live. “It’s been more than three years since Happy’s Pizza burned down at the corner of Main and Madison streets in Ann Arbor. That was January 2014. And it’s been nearly two years since the City Council approved a private developer’s plans to breathe new life into the property and build a five-story building with 26 luxury apartments above ground-level retail. That was September 2015. But while other new developments are underway, including a new apartment building taking shape on the other side of Main Street, the southwest corner of Main and Madison remains a vacant lot.”

“Ann Arbor developer Dan Ketelaar said he’s had trouble locking in financing. He said he had financing lined up, but it fell through, and there are questions about the project’s viability now. When he won approval in September 2015, he expected to begin construction within a month. At the time, he was wrapping up work on another luxury apartment development on an adjacent site. Ketelaar said he’s still hoping to do something with the site, but he might need to come up with a different plan.”

The Memphis Daily News in Tennessee. “Even before he went to federal prison for 25 years on a racketeering conviction in 1995, Danny Owens had a real estate portfolio. Owens is like many buyers of single-family homes for rental purposes in the Memphis market in that he bought some of them sight unseen. Of all of the single-family home sales in Shelby County in 2016, 25 percent were sold to investors or non-occupants, according to Chandler Reports.”

“And his portfolio is relatively small and selective compared to investor groups that buy dozens and hundreds at a time – single-family and multifamily apartment complexes. Archie Willis, the president of Community Capital who is also part of the nonprofit Neighborhood Preservation Inc., talks to them frequently. ‘You’ve got your guys who come in and buy these for $9,000, $12,000 – whatever it is a unit – and that’s a bargain for them coming from Florida, New York and other high-cost housing markets,’ Willis said. ‘When they get here and realize what the economics are – it may be $12,000 but you can only rent it for X and you’ve got to spend way more than you think to make it habitable, and the math doesn’t work.’”

“The goal then is to find another portfolio investor that is just as clueless or just doesn’t care and sell it to them. The impact on neighborhoods is incalculable. ‘They will milk it. They will get it for whatever they can rent it for, do minimal improvements and obviously spiral downward,’ Willis said of the owners. ‘They will keep renting it, the rents go down. Eventually it will be only people who have no options. … Then eventually it goes totally vacant and they try to sell it.’”

From Bisnow on New York. “As one of the priciest and most luxurious high-rise residences in New York City, 432 Park does not seem like the type to have a sale — but that is just what is happening. As concessions have become the norm for landlords competing to fill the glut of available apartments and condos in Manhattan, the next logical step appears to be beginning — a drop in sticker price, at least at the upper end of the market in buildings such as 432 Park, The Real Deal reports.”

“Though the remaining units at 432 Park are gravy with the debt paid off, such a new building having to drop its asking price could be a bellwether for New York’s multifamily market. It appears the days of finding a billionaire to take a penthouse condo in New York may be over.”

From The Real Deal on California. “Construction sites litter almost every district of Downtown Los Angeles. If all proposed and under construction projects are completed, 29,383 new units will hit the market, according to a first quarter market report released by the Downtown Center Business Improvement District. Experts are concerned that demand in greater DTLA will not meet supply. Given that the vast majority of units in the pipeline fall in the luxury category, they worry an oversupply of expensive apartments is imminent. These fears are causing some lenders to be cautious about financing downtown construction projects, experts told The Real Deal.”

“Meanwhile, the number of rental units continues to skyrocket. Developers proposed 3,200 market rate and 350 affordable units in the first quarter alone. ‘It is obvious and apparent from all the projects in the pipeline that there will be some period of oversupply,’ said Mike Condon Jr. of Cushman & Wakefield. ‘But, at the same time, investors shouldn’t take a ‘the sky is falling’ approach to these temporary numbers.’”

The Associated Press. “Failed land-development deals in Idaho and Colorado have cost the Dallas Police and Fire Pension System approximately $100 million, officials for the system say. The deals account for a significant portion of the half-billion-dollar losses the fund has endured in recent years because of bad bets on real estate and private equity. The fund has spent $25 million just in fees to advisers and managers of the land deals. Earlier fund managers intended to build sprawling housing developments, but the plans were ruined when the housing bubble burst.”

“Speculative investments in past years also included luxury homes in Hawaii, a resort near Napa and high-rise condos in Dallas. Kelly Gottschalk said she was left in disbelief when she toured thousands of acres of empty land outside Boise, Idaho, shortly after she became director of the fund in 2015. She was left to wonder how prior leaders could allow a public pension, tasked with protecting the retirements of those who safeguard the city, throw away so much money on vacant land.”

“No lots were ever sold in Idaho and no homes were built. New appraisals of the land in Idaho and Colorado revealed more than $110 million invested by the pension ‘was no longer reflected in the value of the property,’ according to court records. ‘It was really shocking,’ Gottschalk told The Dallas Morning News. ‘I don’t know what they were ever thinking.’”

May 27, 2017

The Question Lingering Behind Every Headline

A weekend topic starting with KGW in Oregon. “‘I was on the edge of a cliff, hanging by my fingernails, fearing that my kids and I would have to leave Portland,’ Roscoe Ryan remembers. The 41-year-old single mother had been renting a home in Portland’s St. Johns neighborhood for three years when the bad news came. ‘The landlady told me she wanted to sell the house, and I would have to move,’ she recalls.”

“Then the owner offered to sell the 800-square-foot house to Ryan for $290,000. Ryan, who earns $30,000 a year working at an organic grocery store, initially was hopeful. But when lenders told her she’d need to make a $35,000 down payment to qualify for a mortgage, she balked. Scraping together a down payment bigger than her annual salary seemed impossible. Ryan began scrambling for alternatives. At $290,000, the price tag on Ryan’s home is an anomaly in Portland. The city’s current median home price is $422,450. A down payment of 10 percent on a house of that value pencils out to $42,000 — more than half the $73,000 annual earnings for a median-income family of four. That’s a lot to save when rents are exploding and incomes are stagnating, says Chris Bonner, director of the city’s Bureau of Planning.”

“Ryan eventually purchased her home with the help of a modest inheritance, plus a coveted, publicly funded $15,000 down-payment-assistance grant and counseling from Portland Housing Center. She is near her financial limit, with housing costs that consume well over half her earnings and exceed what she was paying for rent.”

“But Ryan believes the benefits are worth the costs. ‘I’m happy,’ she says. ‘My kids, who are 8 and 11, can stay at James Johns Elementary School, and I can walk three blocks to work. I love our whole St. Johns neighborhood.’”

From Neel Kashkari, president of the Federal Reserve Bank of Minneapolis. “Everyone can recognize a bubble after it bursts, and then many people convince themselves that they saw it on the way up. Michael Lewis’ highly entertaining book, ‘The Big Short,’ is a perfect example. With the benefit of hindsight, Lewis picked four guys who happened to be right this time. It would have been far more impressive if Lewis had identified and written about them when the housing bubble was forming. Why didn’t he?”

“Because on any given day, there are lots of people predicting various doomsday scenarios. How do you know which one is right among all the cranks? And maybe today’s crank will look brilliant tomorrow. As they say about broken clocks…”

“Monetary policy is a blunt instrument: We set the overnight interest rate, and it then affects rates all across the country, across different asset classes. That’s one of the biggest challenges in trying to use monetary policy to change asset prices. The Fed also has regulatory and supervisory tools that it can use to change the behavior of the financial institutions it supervises.”

“While the Fed can limit the amount of debt used to buy stocks, some countries can also adjust the loan-to-value (LTV) requirements of mortgages. By increasing the down payment requirement (lowering LTVs), those countries could directly target the housing market if it were showing signs of overheating. This is an example of a highly targeted tool that, in theory, should be effective in slowing down the housing market without slowing down the entire economy the way raising rates would.”

“My takeaway from these countries’ experiences is that when asset prices are climbing rapidly, they can be very difficult to slow down, even with policy tools that are targeted squarely at the asset class. That suggests to me that if central bankers were to try to use monetary policy to slow those bubbles down, the rate increases necessary to be effective would likely be large, resulting in high economic cost to the rest of the economy.”

“My takeaway from the varied costs of false negatives is that we must first try to assess the cost of a correction before we determine whether to try to address asset prices that appear elevated. What determines if an asset price correction will trigger a crisis or just a milder downturn? Debt seems to be a key factor. Housing is a huge, highly leveraged market. The mortgage market is roughly a $10 trillion market.”

“Today, people often buy homes with 20% as a down payment. Going into the financial crisis, people were putting little to nothing down with those infamous no-doc loans. Those loans were bundled into mortgage-backed securities, which were then bundled into collateralized debt obligations, and then banks bought them with yet more borrowed money. It was leverage on top of leverage with little equity supporting it all.”

“It’s the Fed’s job to put the brakes on the economy before it overheats, which almost by definition will be unpopular with many people. So why should public awareness matter to the Fed? Regulators don’t exist in a vacuum. The Fed ultimately gets its power from the American people, through authorities granted to it by their elected representatives. Yes, the Fed must make tough, sometimes unpopular choices, but the ability of the Fed to impose and sustain steep costs on the economy and Main Street is limited by the willingness of the people to accept those costs.”

“This essay has been pretty skeptical about the powers of the Fed to identify and slow down bubbles. But there is something we can do that does not require us to identify bubbles in the first place. We can make sure our financial institutions are sound and can withstand the shock of asset price corrections.”

From CBC News. “It’s the question lingering behind every headline. It’s whispered among homeowners, would-be buyers and sellers, economists and policy-makers. What actually happens if Canadian real estate prices crash? On the one hand, a crash might be good for some Canadians already priced out of the market. And even a dramatic 40 per cent drop in prices would set homeowners in markets like Toronto or Vancouver back, what, two or three years?”

“But there are broader concerns for the market and the economy itself that could prove devastating. Home prices are notoriously off the charts. Everyone from the governor of the Bank of Canada to the chatty guy in your local cafe has said, repeatedly, that this increase in prices is not sustainable. But what that means, precisely, is vague.”

“First of all, what is a real crash? Think Toronto in 1989. Prices fell off a cliff. The average cost of a home in Toronto hit a whopping $273,698, a 30-year high. Then the bottom fell out. By 1996, that average had fallen to $198,150. (Yes, you read that right, you could buy a home in Toronto for a mere fraction of the $920,000 it costs today.)”

“Benjamin Tal, deputy chief economist at CIBC World Markets, says the important question isn’t how far prices would fall, but why they fell in the first place. If prices fell because Toronto’s well established supply issue was sorted out, that could actually prove positive for the economy. But if they fell as a result of a quick rise in interest rates, as happened in the United States in 2006, the impact could be severe.”

“‘The higher interest rate environment would lead to a significant increase in debt financing as opposed to other spending,’ says Tal. That would require people to spend more covering their mortgage and leave them with less to spend elsewhere in the economy. ‘Then you get into a consumer-led recession. And this would lead to increased unemployment and people defaulting and continued decline in prices. That’s the worst scenario.’”

“Based on this theory, it’s not hard to see why a double-digit correction in prices could cascade through other parts of the economy, ‘and that can feed on itself,’ says Tal.”

“On the upside, just about everyone agrees that nightmare scenario is still unlikely. Prices are slowing in Toronto and Vancouver. And Tal says one big difference between today’s situation and the U.S. housing crash is that everyone in this country is trying to slow down the market. ‘It’s banks, even developers, clearly policy-makers. You don’t have the situation where banks are seeing green and trying to maximize profits. In fact they are really trying to slow it down. Regulators are trying to slow it down and more is coming.’”

May 26, 2017

Desperate To Sell In A Supposedly Hot Market

It’s Friday desk clearing time for this blogger. “On the cusp of the summer season and with housing sales overall on a steady upswing, homes at the lower end of the market on Martha’s Vineyard are being snapped up at a record clip. Real estate broker Doug Reece added that sellers now appear to be testing the upper limits of the market. As one indication, he noted that while the median price of properties sold has risen slightly since last year, the figure doubles to $1.65 million when looking at all homes currently on the market. ‘Everybody likes to take advantage of an up-market,’ he said. ‘And that’s okay. But when you see the median price being double what the median price sold is, you wonder where the market’s going to go. You’ve got to wonder at what point a buyer is going to say, no, we’re not going there. So this is going to be an interesting year coming up.’”

“Owners of Manhattan luxury homes are waking up to a simple reality: If you want your place to sell, drop your price. For high-end homes that found buyers in 2017, the median asking price was the lowest in at least five years, according to data from luxury brokerage Olshan Realty Inc. Perhaps sellers got tired of waiting. The homes that found takers this year lingered on the market for an average of 389 days, a record in data going back five years, according to the brokerage. ‘People are thinking harder about price cuts sooner,’ said Donna Olshan, president of the brokerage.”

“Sellers need to be mindful, not of their fabulous floorplans or views, but what a competitor with a similar apartment is seeking for their unit, she said. ‘The most important thing for sellers is to see who’s swimming in the lane next to you,’ Olshan said.”

“There is a construction frenzy across the South Bay. However, the U.S. Commerce Department noticed a hiccup last month. New home sales in the West dropped 26 percent, the largest drop in over six years. ‘I think we’re about to see a shift in the marketplace, and the new home sales may be the leading indicator of that,’ real estate broker Quincy Virgilio said. He’s starting to see a softening of the market. ‘Where I used to get 10 to 12 officers on a property, now I get two or three and where it used to be $100,000 over asking, it’d be $20,000 or $30,000.’”

“The median priced home in San Jose has gone from $800,000 to $1 million, but the number of buyers who can afford to buy that home is at a tipping point. ‘Right now, it’s about 20 percent. Meaning 1 in 5 people, 1 in 5 families, can afford to buy the median-priced home. If that number falls below 20 percent, which it did in 2006 and 2007, typically we see a slowing in the marketplace,’ Virgilio said. No one is predicting a bubble bursting, but change could be in the wind.”

“When a 59-year-old accountant in Shanghai wanted to invest for her looming retirement, she bought two cheap apartments — on the other side of the country. ‘When friends told me about a chance to buy properties in Xishuangbanna, I thought ‘why not?’ said Yuan Junxi, talking of the steamy, subtropical region in Yunnan province, bordering Laos and Myanmar. ‘No buying limits; cheap, easy mortgages; and maybe property prices will jump over there too.’”

“‘The current surge in sales in third- and fourth-tier cities is fueled largely by expectations of a future price rally, not by asset yields, and that’s exactly a sign of a bubble,’ said Zhao Yang, Hong Kong-based chief China economist at Nomura Holdings Inc.”

“Chinese investors are pulling out of Melbourne’s apartment market, prompting a downturn. In the past, they helped drive the inner-city apartment market to new heights. However, around 80 per cent of Chinese buyers will not be able to settle because of trouble getting finance, according to Ming Li, a real estate agent in Melbourne’s eastern suburbs who specialises in selling Australian property to Chinese investors.”

“He said many of his clients had either forfeited their deposits or sold their apartments at a loss. ‘The Melbourne apartment market is cooling down,’ he said. ‘It is kind of the oversupplied market, and the Chinese investors are losing their interest in buying an apartment in Melbourne. ‘The capital gains return is so low.’”

“According to economist Philip Soos: ‘There certainly is a housing bubble in Australia. Since 1996, we’ve seen housing prices inflate above all known fundamentals, such as GDP, inflation, income, rents and population growth. Australia has accumulated the world’s second highest household debt to GDP ratio at 123 per cent and rising,’ Mr Soos added. “All countries that have a ratio above 100 per cent have experienced or are currently experiencing a housing bubble.’”

“After a decade of being able to command high prices, London property sellers are having to offer discounts in order to secure deals, according to real estate listings website Zoopla, which indicates that the price cuts are getting larger in outer London boroughs. Affordability is the main factor. The average London salary is £34,000 while the average property price is £600 000 – far beyond the reach of most city workers. Even with the discounts of at least 20%, homes in many areas with easy commuting access to the city centre still look very expensive.”

“‘Peripheral areas, which buyers turned to when inner London became too expensive, have seen considerable inflation recently and reached a point where affordability is stretched,’ said Neal Hudson, founder of researcher Residential Analysts Ltd. ‘Before, people got around it with longer-term mortgages, but the limit has been reached.’”

“Less than two months ago, Toronto’s housing market was roaring. Just a single new listing on the market, especially of single-detached homes, would send buyers into a feeding frenzy, clamouring over each other to view properties and upping their bids by as much as 30 to 40 percent in some cases. Then in late April, in a move that some say was unnecessary and politically-motivated, the Ontario government intervened to cool the housing market.”

“‘There were 140-plus listings in the downtown core alone earlier this week. I’ve never ever seen a surge like this before,’ said David Fleming, a Toronto-based realtor with Bosley Real Estate. ‘April was a weird month too — we suddenly started seeing all this inventory creep onto the market.’”

“‘I think there’s a change in the psychology of home buyers and sellers, ever since the government intervened,’ Bruce Joseph of Anthem Mortgages told VICE Money. ‘Perhaps the big cash out is at play now, people listing their homes and wanting to sell because they think prices are going to go down.’”

“Buyers too, seem to think prices are may taper off. One buyer, Oakville resident Vijayalakshmi Govindasamy was surprised to see that open houses in her neighbourhood were deserted. ‘I went to view three properties in Oakville over the weekend. In the first house, there were only two other people. In the second and third houses, I was the only interested buyer.’ Govindasamy says that she was told by one of the realtors present to make an offer for ‘even just $1 million,’ despite the fact that the said home, a single-detached house, was being listed for $1.4 million. ‘Why are people desperate to sell in a supposedly hot market?’”

“Joseph, a mortgage broker in Barrie, Ontario, has long believed that Toronto and its surrounding towns never had a supply problem. ‘That’s just what real estate players want you to believe. Our home ownership rate is one of the highest in the world. If you just go on Kijiji, you’ll see that there is no lack of places for people to live in.’”

May 25, 2017

Vulnerable To Financial Ruins In A Minor Correction

A report from Bloomberg on Canada. “Toronto’s hot housing market has entered a new phase: jittery. After a double whammy of government intervention and the near-collapse of Home Capital Group Inc., sellers are rushing to list their homes to avoid missing out on the recent price gains. The new dynamic has buyers rethinking purchases and sellers asking why they aren’t attracting the bidding wars their neighbors saw just a few weeks ago in Canada’s largest city.”

“‘We are seeing people who paid those crazy prices over the last few months walking away from their deposits,’ said Carissa Turnbull, a Royal LePage broker in the Toronto suburb of Oakville, who didn’t get a single visitor to an open house on the weekend. ‘They don’t want to close anymore.’”

The Globe and Mail. “Have you heard the one about how supply is going to solve the great Canadian housing crisis? If you’ve listened to the real estate industry or our political leaders, you likely have. Just build more condo towers and presto, problem solved. Well, they’re building them in Metro Vancouver and Greater Toronto – lots of them. Here is the other brutal reality about the great supply argument: vast swaths of these units are being built and presold to foreign purchasers. These buyers, in turn, are either flipping the properties for a profit before they are even finished or hanging on to them as safe investments and renting them out.”

“No, the great supply argument is a myth, a dodge. It is not solving anything.”

The Drayton Valley Western Review. “If you are looking at putting your house up in the market, take into consideration these tips provided by local realtors Tammie Sharpe and Lorinda Gustafson. According to them, it is important to ask for a realtor’s advice as to what needs to be improved in a home before putting it out in the market. If a seller decides to make home renovations, Sharpe advised to do it right the first time and get a professional to do the work.”

“‘Most buyers will get an inspector to come in and inspect the house and if you have done a whole lot of work but not properly, the inspectors are going to find it so the buyers are going to know and they will either back away from making an offer or they are going to drop their price especially now that it is a buyers market and there are a lot of houses for buyers to choose from,’ she said.”

From Better Dwellings. “Vancouver real estate may be showing signs of exhaustion. According to the Bank of Canada (BoC) and the Ministry of Finance (MoF), the quality of mortgages are showing increasing signs of quality deterioration. Over the past year this trend has accelerated, leaving more homeowners vulnerable to financial ruins in the event of a minor correction.”

“A high-ratio mortgage is one where less than 20% is placed as a down payment, and the owner has as little as 5% equity in the home. Chances of these mortgages going underwater (i.e. the owner ending up with negative equity in the home) are already pretty high. The BoC and the MoF data shows that the quality of high-ratio loans in Vancouver is quickly deteriorating. The fiscal year ending in 3Q of 2016 saw high-ratio mortgages with an average LTI higher than 350%, in more than 75% of postal codes in Vancouver. This is an 11% increase from the period prior.”

“These subprime loans are actually getting worse in Vancouver. 36% of postal codes saw the average loan-to-income ratio increase from the year prior. V5X, known to humans as South Vancouver, saw the largest increase. The ratio jumped from insignificant numbers, to an average high-ratio loan-to-income of over 450% – the highest measure the BoC gives.”

“The BoC’s concerns are not just limited to Vancouver, they previously noted that Canadians across the country are increasingly stretching themselves thin to pursue homeownership.”

From The Province. “The Fraser Valley Real Estate board (FVREB) has warned managing brokers that offshore investors have apparently been asking realtors to complete illegal transactions that would break money-laundering and tax-evasion laws. A May 18 memo titled ‘Important notice’ was sent out to hundreds of broker-managers who were told to distribute it to realtor employees.”

“‘It has come to our attention that overseas clients may be asking realtors to allow money to be transferred to their personal accounts, so that the realtors can arrange a bank draft to give to the sellers/developers for their purchase,’ the May 18 notice states. ‘It’s important everyone understands that this violates federal income-tax laws, Fintrac laws and the Real Estate Services Act.’”

“In an interview, board president Gopal Sahota said his board isn’t aware of specific cases where realtors have completed such transactions, but the board acted on information gathered by its members. ‘It is a strongly worded notice,’ Sahota said. ‘We want our members to know lots of laws could be broken. Money has to be legitimate or you have the money-laundering and illegal aspects coming into (transactions) … You can’t be handling suitcases of cash.’”

May 24, 2017

Genuine Sellers And Speculators Alike High And Dry

A report from Bloomberg on Canada. “Home Capital’s troubles started with ‘unlucky’ brokers. That’s what Canadian banks and insurers call the mortgage merchants who get caught submitting fraudulent loan documents. Yet the brokers, whose names are now on databases maintained by lenders and mortgage insurers, can still win business since they haven’t been prosecuted for fraud. The failure to stop such practices is exposing cracks in Canada’s vaunted regulatory structure, drawing parallels to the U.S. a decade ago. ‘The early days of growth in the subprime market in the U.S. were like this — then it got out of hand,’ said Jim MacGee, an associate professor of economics at Western University in London, Ontario. ‘At some point, you’re going to have people who take short cuts. When people are facing pressure to get into a house, you have brokers who are facing pressure to get them in there. They just hear, ‘How can you get me in there?’”

From AOL Money on the UK. “A house price crash is notoriously difficult to predict. At the time, we all merrily carry on buying and selling, oblivious to the fact that disaster is lurking just around the corner. It’s only after the fact that we can see the glaring signs that change was coming. The signs are there, however, if you look closely, and should be ringing alarm bells for us all. House prices have reached a record of 7.6 times earnings, which has pushed them out of reach of a huge number of buyers. In some parts of the country, they have hit more than ten times average earnings.”

“A third of properties on the market at the moment are discounted by an average of £25,000. Prices have fallen over the past month, and the past three months. In the pricier parts of London, the falls are even more marked. Prices here peaked some time ago, and in many cases have dropped significantly since. The number of buyers registering with estate agents is falling too. In March, the number of buyers per branch dropped to 397 - down from 425 in February. It means that despite the fact that there are very few homes for sale - sellers are still struggling.”

The National on Dubai. “‘Why do you still recommend Dubai property as an investment?’ asked an old friend worn out by an onerous refurbishment project and annoyed at the recent fall of rents in the city. Landlords have seen the capital value of their units fall in value by 25-30 per cent in the past three years since the government acted to prick what looked like another housing bubble in formation back at the end of 2013.”

“You have to look at the downside risk in stocks and note that hey, it looks an awful lot bigger than the upside. Dubai property by contrast looks to be at the bottom of a classic three-year real estate down cycle. As I have remarked in this column before, this summer is likely the bottom. Note that my picks are completed and not off-plan property. I am weary of anything that smacks of flipping property after watching the implosion of the last Dubai bubble in 2009. The rental yield of a villa or apartment yet to be delivered is zero, and negative really if you have to keep your money tied up in it for much longer than originally promised.”

“One final reason to pick real estate over stocks and bonds is so obvious people often forget it – the leverage of a mortgage.”

The Japan Times. “Apartment construction is booming as the wealthy rush to invest in rental housing as a way to reduce inheritance tax and banks hand out easy mortgages, but concerns are mounting that excessive supply paired with a shrinking population could soon lead to the bursting of the bubble. Many are investing in apartments to take advantage of a discount that applies to land with rental housing on it. Banks have been only too happy to accommodate them with mortgages.”

“The rapid expansion of housing supply has left landlords in areas other than Tokyo and Osaka struggling to fill units. A realtor at a major company warned that the market is ‘in dangerous territory where landlords are struggling to pay the bills.’”

The Vietnam Bridge. “Tien Phong has quoted analysts warning about a ‘bubble’ in the high-end apartment market segment, with more and more apartment projects put up for sale recently. From central business to new districts, investors and brokers are struggling to boost sales. High-end apartments are in a two-year slump. ‘Hanoi doesn’t have more low-cost apartment projects, while there are very few new house and villa projects,’ explained Nguyen Van Dinh, deputy chair of the Vietnam Real Estate Brokers Association.”

From The Australian. “Rents for Brisbane apartments have fallen by as much as 17 per cent over the past six months amid an unprecedented flood of unit ­developments on to the city’s market, according to one of Queensland’s biggest property managers. Prominent agency owner Andrew Coronis, managing director of Coronis, which operates 23 offices across southeast Queensland, said tenants were moving more readily to get better deals, forcing existing unit stock and ‘investor-style’ apartment owners to cut prices.”

“Brisbane’s market has suffered a sharp turnaround with a collapse in off-the-plan apartments to one-third of the level compared to last year and strain in the construction industry resulting in builder CMF Projects going into admin­istration. ‘We’re seeing a 17 per cent drop in rents and it is happening right now,’ Mr Coronis said. ‘It is between 10 (per cent) and 17 (per cent). Everybody is scrambling to lock tenants down.’”

The China Economic Review. “Struggling to control a housing bubble, the city government announced measures on March 26 that effectively closed loopholes that had allowed new commercial buildings to be turned into homes and sold to individual buyers. The new measures have purchasers of such homes scrambling for a way out, Caixin reports. In desperation, dozens of buyers trapped in other commercial housing developments appealed to the city government for help The restrictions have also sent the commercial real-estate market in China’s biggest cities into a tailspin, leaving genuine sellers and speculators alike high and dry, and forcing developers to change their business models.”

From Shanghai Daily in China. “About one month ago, Janet Li moved into a two-bedroom apartment with her husband in the Huangpu District. In what was a bit of a surprise, the couple was able to find a rental in just over a week. The landlord, whose flat has been vacant for three months, was so happy when the property agent brought Li and her husband to view the apartment, that she reduced the rent by 1,000 yuan (US$144) a month, about a 7 percent discount.”

“Many factors play into the decline. Migrant workers are going home as metropolitan life becomes too expensive and job prospects in the hinterland hometowns improve. People investing in rental properties have increased, causing a glut of homes to let. And people who can’t sell homes in an increasingly regulated market are sometimes forced to rent them out instead.”

“‘I’ve heard so many times from work colleagues and friends that rents have been soaring in Shanghai in the past few years,’ Li said. ‘I hardly expected a landlord to give us discount and even without any haggling. This will give us time to look around for an apartment to purchase and will help cut commute time for me and my husband.’”

May 23, 2017

A Disconnect Between Economics And Reality

A report from the Seattle Times in Washington. “As Seattle summers keep getting hotter and hotter, a once-unthinkable perk for renters here has become more commonplace: air conditioning. Traditionally, there hasn’t been much of a point for local developers to spend the extra money to install A/C and new construction was rare enough that new buildings didn’t need extras — they stood out just for being new. But now the record apartment construction boom sweeping the city has created what some in the industry have called an ‘amenities arms race’ to attract tenants. Things like rooftop decks, gyms and dog play areas are a dime a dozen. Now A/C has become a way for landlords to stand out in a sea of apartment ads.”

“‘I don’t think it’s a fad, I think it’s probably going to be a new normal, because it is getting warmer,’ said Megan Murphy, a senior manager at one of the biggest developers in town, Paul Allen’s Vulcan Real Estate. ‘Now it’s becoming more competitive, as well — it’s not just about being the new kid on the block, it’s about being the new kid on the block with all the extras.’”

From the Denver Post in Colorado. “Metro Denver landlords are cutting their advertised rents at one of the highest rates in the country, according to Trulia. Nationally, rent increases have plateaued and more landlords are starting to realize that rent hikes year-after-year aren’t a given, noted Felipe Chacón, author of the report.”

“Compounding the problem, many of the apartments and homes built are on the more expensive end of the market, while the jobs created in metro Denver are mostly on the lower-end of the wage scale, said Mark Vitner, a senior economist with Wells Fargo Securities. ‘There is a real affordability issue in Denver,’ Vitner said, adding that could be contributing to a recent slow down in in-bound migration and job growth.”

From Construction Dive. “On a national basis, rental hikes are finally easing, with about one in 10 listings experiencing a rate cut year-over-year, and the national median rent dropping by 2.9%, Trulia reported. Of the 100 largest metro areas, 83 saw a growth in price cuts this year as compared with the previous year. The Texas cities of Dallas, Austin, Houston and Fort Worth had the highest proportion of increases in rent reductions. When it comes to price reductions of for-sale listings, Dallas and Austin topped the list in year-over-year increases, followed by San Antonio, TX, San Jose, CA, Camden, NJ, and San Francisco.”

The Norman Transcript in Oklahoma. “Rent charged on multi-family properties in Norman is on the decline, according to recent studies. City leaders approved a moratorium in January for a wide swath of central Norman in reaction to R-3 zoning, which allowed large, multi-family structures to be built alongside historic bungalows. That six-month moratorium on new construction is set to expire soon, but the multi-family rental market is already experiencing the effects of a soft market, according to some experts.”

“‘What’s happening is we are starting to see more concessions in the market,’ said Mike Buhl of Commercial Realty Resources Co. in Norman. ‘If you just drive around town, you see signs up at apartments like ‘$99 Move In’ and I saw one that said ‘Two Months Free.’ When you see signs like that for concessions, lower rents are a result. All of that is adding inventory, and I’m not sure there’s full demand for that inventory.’”

“Buhl said many investors bought older apartment properties thinking they could do some improvements and raise rents on those properties. ‘That may be much more difficult when the market is showing signs of softness,’ he said.”

The Sun Sentinel in Florida. “If you want to rent in the lap of luxury atop downtown Fort Lauderdale’s tallest building, you’ll have to pay eye-popping prices. Penthouses in the new 45-story Icon Las Olas apartment tower that offer panoramic water views will command $7,000 a month and up. A one-bedroom, 960-square-foot unit will rent for a more accessible $2,500 a month. Originally planned as a condo tower, the $200 million project at 500 E. Las Olas Blvd. is now best suited as a rental, says developer Jorge Perez, though he isn’t ruling out a conversion to condominiums at some point.”

“Lewis Goodkin, a longtime South Florida housing analyst, agrees that Perez’s best bet now is to cater to the rental market. He cited a softening condo market and challenges in acquiring financing. Apartments are safer investments, and Goodkin said the superb downtown location means Icon Las Olas won’t have trouble renting the more modest-sized units. But he’s less sure about demand for the priciest digs.”

“‘When you’re talking about $7,000 a month, the market thins out a lot,’ Goodkin said. ‘People who can afford that are pretty fussy about where they are.’”

From Multi-Housing News. “Jay Rollins, managing principal & co-founder of JCR Capital, talked to Multi-Housing News about the next stage in the cycle. MHN: Could you give us some details on a particular market where this theory could apply? Rollins: Many markets are overbuilt—such as Denver, L.A. and Tampa—and rents will fall, but lenders have been conservative in their underwriting, and they will be fine. It will be equity and mezzanine lenders who will be disappointed.”

“MHN: What are your predictions in connection to the multifamily market’s future? What is the next stage of this cycle going to look like? Rollins: Not very different, except you will not see much more new construction of Class A multifamily in urban markets for a while.”

From Forbes. “In the last 10 years, Treetop Development has become one of the major and more sophisticated multifamily housing players throughout the greater New York City area. The company, founded by Azi Mandel and Adam Mermelstein, now owns and manages about 8,500 apartments. However, at its peak, it had over 10,000 units. Over the last two years, Treetop sold a number of projects, specifically in northern Manhattan.”

“Omri Barzilay, Contributor: The markets are rallying for more than eight years. Do you think that’s something that can continue?”

“Mandel: Pointing to history, the real estate market has experienced a downturn every seven to 10 years, and some of the fundamentals that have forced market downturns in the past are in place right now. There are signs that demonstrate a disconnect between economics and reality. For example, apartment rents are going down while building prices are not, which is typically indicative of a bubble.”

May 22, 2017

The Crux Of The Problem Is Oversupply

A report from Fox News. “Top Republican lawmakers have expressed concerns about the cuts President Trump plans to make for the 2018 budget year, which is due out Tuesday. The blueprint is certain to include a wave of cuts to benefit programs such as Medicaid, food stamps, federal employee pensions and farm subsidies. ‘We think it’s wrongheaded,’ Rep. Mike Conaway, R-Texas, chairman of the House Agriculture Committee, said about the looming cuts to farm programs. ‘Production agriculture is in the worst slump since the depression — 50 percent drop in the net income for producers. They need this safety net.’”

From Iowa Public Radio. “Don Batie farms in Dawson County. Batie is 58-years-old and says that makes him one of the younger farmers around. He and his wife farm about 1,500 acres of mostly corn and soybeans. They’re raising more grain than ever before, but it’s not paying off right now. ‘We’ll probably end up losing money for the year,’ Batie says. ‘Unfortunately that’s kind of the way agriculture goes, we have boom and bust.’”

The Des Moines Register in Iowa. “When his 31-row planter broke down while sowing soybeans earlier this month, Michael Fritch and his dad patched it up as best they could, after deciding to put off buying new equipment for a while. It’s one more way to cut costs when commodity prices are dismally low and a farming downturn is now in its fourth year. ‘There’s no question, you stress about it,’ said Fritch, 39, who farms near Mitchellville.”

“This year could be pivotal for many Iowa farmers, battling to turn a profit as they plant 23.4 million corn and soybean acres across the state. Delinquency rates are rising from record lows to around historic averages, said Chad Hart, an Iowa State University agricultural economist. Record corn and soybean production last year helped blunt the financial drag, but farmers are paying for it this year as the glut of grain depresses prices, he said. Iowa farmland values have fallen about 18 percent to $7,183 an acre from a 2013 record high, according to ISU land surveys. ‘There could be a wave of financial issues still coming in the farm sector as we continue to see low prices and the erosion of the farm financial sheet,’ Hart said.”

The Lincoln Journal Star. “Total agricultural land property values across Nebraska dropped for the first time since at least the early 1990s, based on the Department of Revenue preliminary valuation report for 2017. Commodity prices have declined to about half of what they were in 2013-14. We are entering the fourth consecutive year of a downturn in the ag economy since the near record incomes of 2013, said Nathan Kauffman, assistant vice president with the Federal Reserve Bank of Kansas City.”

“Commodity prices have a lot to do it, said Hall of the ag land valuation decrease. ‘Cash rents are down, too. So if someone is buying land to make a living, it is going to be less,’ he said.”

From Kansas Farmer. “If you are hoping for a turnaround in the free fall of the ag economy over the past couple of years, you’ll be disheartened by what USDA Chief Economist Rob Johansson had to say to the North American Ag Journalists when he addressed them in Washington, D.C. If his read on market signals is accurate, farmers will be facing a decade of prices very close to what they are seeing today.”

“The crux of the problem, he said, is oversupply. U.S. farmers produce far more corn, soybeans, wheat, cotton, beef, pork and dairy products than the U.S. can consume. Johansson said commodity prices are already down between 50% and 70% even as production is increasing, creating the likelihood that prices will stay depressed. ‘Right now, it looks like record crops of corn and beans will be coming out of South America, and that will continue the downward pressure,’ he told the journalists.”

The Tennessean. “Members of the Rollins family were looking to diversify their real estate portfolio beyond industrial properties that house their Nashville Wire Products Co. when they stumbled upon the concept of investing in farmland. ‘Unless people are burning down forests to create more arable land, it’s pretty much a fixed thing,’ said Steve Rollins, third-generation president of shelving products maker Nashville Wire Products.”

“Investing in farmland is seeing growth as a vehicle for taking advantage of the long-term need to feed a growing world population. More wealthy individuals, pension funds and other institutions also see that emerging asset class as a way to reduce risk in their portfolios. Randy Dickhut, senior vice president of real estate operations for Omaha, Neb.-based farm and ranch management and real estate company Farmers National Co., sees direction of interest rates and effects of grain and livestock prices impacting land prices and values. He also cites risk factors such as projections of global population growth and food and fiber demand falling short and expectations of slow improvement in farm incomes, which means farmland values might not rise as much in the near term.”

“Dickhut cautions investors to seek help from people who understand variations in the quality of land, which can determine the rate of appreciation in value and income for the farmland owner. ‘When people invest in farmland and don’t know everything they need to know and engage the right experts for help, it ends up being a poor investment because farmland is a long-term investment,’ he said.”

May 21, 2017

Tremendous Velocity That Is Not Normal In Any Market

Expanding on the previous weekend topic with the Amarillo Globe News in Texas. “Housing demand keeps rising in Amarillo, and the supply isn’t keeping up. Local real estate agents say first-time buyers, retirees seeking medical care and country folk moving into town have crowded the housing market and caused prices to rise, especially in the city’s most expensive neighborhoods. A similar imbalance persists in cities across the country. Oklahoma City saw an 8.6 percent drop in houses on the market from March 2016 to March 2017, per The Oklahoman. In Westchester, N.Y., a real estate agent told how he showed a house to 26 prospective buyers on one Sunday afternoon in April.”

“Listing prices are skyrocketing in Amarillo’s most expensive neighborhoods. According to Amarillo Multiple Listing Service (MLS), the average asking price for a home in Eagle Tree jumped by about $180,000 (50.8 percent) in the last year, La Paloma/Tascosa Estates homes on the market increased by about $130,000 (33 percent), and other neighborhoods are seeing significant increases in average asking price as well. The average listing in the Puckett neighborhood went from $161,353 to $249,035, a 54.3 percent increase.”

“Amarillo Triangle Realty co-founder Jamie Haynes doesn’t expect the trend to slow down any time soon. ‘I think we’re in a growth spurt, and Amarillo just hit this mystical, magical number (of 200,000 residents) where it started to boom,’ she said. ‘We’re going to see that see all the way down to Canyon.’”

The Waco Tribune-Herald in Texas. “It’s hard to be too surprised about rising tax appraisals when the superlatives about Waco real estate keep piling up. Waco-area ZIP codes last year topped the list for most popular searches on, thanks in part to a certain television show. In the first quarter of 2017, the city of Waco saw a record 151 housing permits issued. And local real estate agents are seeing things they’ve never seen in Waco, such as bidding wars over coveted homes.”

“The most obvious change has been the phenomenal success of the HGTV show ‘Fixer Upper,’ which has driven national attention to the bargain home prices here. ‘In 37 years, this is the strongest seller’s market I’ve seen,’ said Kathy Schroeder, vice president of residential property at Coldwell Banker Jim Stewart Realtors. She said the media coverage has brought in out-of-town investors who are willing to put far more money into older homes than was once thought prudent.”

“‘We’ve had a good diversity of buyers,’ Schroeder said. ‘We’ve seen some investor-speculators, some Baylor-related, but also a lot of people who have been renting property who can now qualify for a loan.’”

From The Oklahoman. “Ian Colgan was a real buzz buster at the otherwise celebratory Mayor’s Development Roundtable last week, presenting a sobering but necessary housing reality check on all the good Oklahoma City has going for it. Housing affordability has been a key strength of the city’s renaissance, but we’re losing it.”

“Rising costs are hitting the working poor hard, and rising rents and house payments are eating away at the stats that earned the city its reputation as a great place for first-time homebuyers and renters, said Colgan, assistant executive director of the Oklahoma City Housing Authority. Of the 50 biggest cities in the country, he said, Oklahoma City is the 32nd most expensive for homeownership and the 43rd most expensive for renting. So far, so good.”

“‘No Midwestern, Southern or Mountain West city’s rental market grew faster than that of Oklahoma City, including Texas,’ Colgan said. ‘Only Austin and Fort Worth (Texas) had faster growth rates for non-coastal cities. In Oklahoma City, Colgan said, more than 20,000 households pay more than half of their gross income for rent, which makes them ’severely’ cost-burdened. ‘The less income, the more burden. The estimate is that about 20 percent of city households making between 30 to 50 percent of area median income, and about 60 percent of households making 30 percent or less of median income, are severely burdened,’ he said.”

“‘Whether this is gentrification, this trend is worrisome,’ he said, referring to investing and renovating housing in poor areas to levels that attract higher-income renters who can pay the higher rents, shutting out poorer residents. Stagnant wages, in the face of rising home values and costs, also are taking a toll and creeping up the income scale. New apartments are almost all market rate, not aimed at the affordable market. Of 2,546 apartment units under construction or in planning in the city during the 2014-2015 research period, just 238 were affordable.”

The Real Deal on Florida. “While Miami’s residential market has hit the downside of the cycle, fears of a potential crash are largely unfounded, according to real estate professionals who spoke at Keyes Company’s 2017 South Florida New Development Showcase. Anthony Graziano, chairman of Integra Realty Resources who joined Pappas onstage, said the biggest problem facing brokers is convincing sellers to readjust their prices in a buyer’s market. ‘We cannot expect Miami to go back to 2013 and 2014 when Brazil was flush with petroleum dollars and Venezuela was not in the middle of civil unrest,’ Graziano said, referring to the record-setting boom years of the most recent cycle.”

“Reza Parsiani also said any comparisons to the boom years of the cycle are unfair. ‘We have seen tremendous velocity and movement that is not normal in any market,’ he said. ‘In 2015, I did 17 transactions a day. That is extraordinary. Now, we are just normalizing.’”

The New Zealand Herald. “It is remarkable the extent to which the tone of conversations about property has changed in Auckland. The slowdown started as far back as July last year when there were signs that the rate of growth had peaked. But it was hard to be sure, at least until April, because the same kind of slowdown occurred in late 2015. This time around growth appears to have stalled good and proper.”

“What got me was how quickly the tone of the conversation has changed at social events in Auckland over the past few weeks. The stories are told by those who are trying to sell, or have close friends or family trying to sell. And they all suggest it’s taking longer than they’d like. Open homes aren’t packed, auctions aren’t happening. Fear and worry are starting to take hold among sellers and their real estate agents. The lawyers and the bankers are getting antsy.”

“The difference between nine potential buyers or 10 turning up at your open home isn’t much at all. But one buyer instead of two makes a huge difference to the price you can command. No buyers, compared to one, and it doesn’t take long for the panic to set in.”

“In theory, with immigration still at record levels and supply slow to catch up, prices can’t fall far. But if immigration has been such a big driver of growth, why has Auckland growth hit the wall while longterm visitor arrivals continue to hit new records?”