May 3, 2017

A Risky, Inappropriate Investment

A pair of reports from Reuters on Canada. “The troubles at Home Capital Group Inc are about liquidity rather than mortgage quality - it is not a U.S.-style subprime mortgage crisis - but the shift in sentiment just a week after Ontario unveiled more measures to cool housing has investors in the mood to sell. A housing slowdown is just what many have been hoping for, with concern about a real estate bubble at a fever pitch. Toronto mortgage broker Calum Ross, who does not do subprime lending himself, has advised clients who are real estate investors to sell their Toronto real estate holdings because the combination of price gains and rent control make it a poor investment.”

“‘I sincerely hope the market is going to cool, because anyone who doesn’t think that double digit rate of appreciation in real estate is problematic clearly doesn’t understand real estate economics,’ Ross said.”

“Canada’s No. 2 listed alternative lender Equitable Group said it has taken steps to reinforce its liquidity position on Monday after it experienced a quickened pace of withdrawals late last week. The troubles at Home Capital, which provides subprime mortgage loans and has seen a 73-percent decline in HISA deposits since March 30, has raised fears it may be the first sign of a crack in Canada’s red-hot housing market, which some have called a bubble.”

“The Ontario’s Public Service Employees union said it opposed using pension funds to finance Home Capital and wants stricter guidelines governing pension funds’ investments. ‘It’s workers’ money going to finance a finance company that sells mortgages to people who maybe can’t afford the mortgages,’ said Warren Thomas, president of the union. ‘I think it’s a risky, inappropriate investment … I just don’t think we should be in the business of financing banks.’”

The Globe and Mail. “The safety, soundness, prudent business practices and governance of Home Capital’s operating subsidiaries, Home Trust and Home Bank, are supervised by the Office of the Superintendent of Financial Institutions and Canada Deposit Insurance Corp. These financial businesses operated with an unstable business model, providing subprime mortgages and consumer loans financed by short-term, high-interest deposits and investment certificates.”

“Has Ottawa not learned the severe consequences that can erupt from this funding mismatch after earlier experiences? Presumably, Home Trust and Home Bank were high on Ottawa’s watchlist, but shareholders and depositors, whose money was exposed, were not aware. So where were the regulators?”

From Bloomberg. “Toronto home price gains slowed in April and new listings soared the most in seven years, signaling the red-hot market may be cooling after the Ontario government imposed new measures to curb runaway gains in Canada’s biggest city. In further signs of a slowdown, sales fell 3.2 percent to 11,630 units, the first year over year decline since 2014. The number of new homes on the market jumped 34 percent to 21,630, the biggest increases since 2010, the figures released Wednesday show.”

From Urban Toronto. “The first quarter of 2017 saw 9,932 new condo units sold in the GTA, a massive 73% year-over-year increase that represents a new quarterly high. The quantity of new condo units launched for pre-construction sales in Q1 2017 more than doubled, with 6,293 new units compared to 3,061 units launched during Q1 2016. At the current pace of sales, less than three months of housing inventory is available, and a substantial number of new launches will be needed to balance the growing supply-demand disparity.”

“This is evidenced in the record number of units pre-sold during the quarter, rising to 94% from an 86% share in 2016’s first quarter, and an 84% share the year before. The number of projects to sell out in Q1 2017 more than tripled from last year’s figures, with 80 sold-out projects versus the 25 recorded in Q1 2016. Urbanation’s report diverges from the TREB narrative in regards to condominium flipping practices, noting an increase in resale activity within newly-built condo developments. The 1,059 re-sales recorded in Q1 2017 represent a 69% jump over the 625 units resold in Q1 2016, while 249 re-sale units were sold for the second time within the past year, a 53% growth from Q1 2016.”

“‘The shortening of holding periods for some condo buyers is an outcome of the rapidly accelerating market,’ said Shaun Hildebrand, Urbanation’s Senior Vice President. ‘Although the share of short-term condo market participants still appears relatively low, it will be important to monitor the situation closely going forward as market conditions evolve.’”

From CTV News. “New reports are painting a bleak picture for Saskatchewan’s housing market. More homeowners in the province are falling behind on their mortgages, while home sales in Saskatoon continue to decline. A report from the Canadian Bankers Association shows the percentage of people in Saskatchewan behind three months or more on residential mortgages has reached 0.7 per cent — the highest level in 24 years and more than twice the national average of 0.28 per cent.”

“Saskatoon is ‘firmly in a buyer’s market,’ according to the realtors association. Jason Yochim, the CEO of the Saskatoon Region Association of Realtors, says the market conditions do not favour speculative selling. ‘Today’s consumers are very well informed and, with many homes to choose from, are not afraid to move on if the seller is unwilling to respond to an offer at market value,’ Yochim said.”

The Calgary Sun. “A developer behind suburban communities in Calgary and Edmonton has landed in severe financial turmoil that it blames on two recessions, including the latest rout in Alberta. Walton International Group Inc. and 32 of its affiliates have obtained protection from their creditors and will attempt to restructure under the Companies’ Creditors Arrangement Act.”

“The Calgary-based developer, which has $245 million in assets and $253 million in liabilities, is the Canadian arm of the Walton group of companies that’s involved in real estate projects spanning 105,000 acres in North America. William Doherty, chief executive of Walton International, said in an affidavit that the Walton group has been hit by lingering effects of the 2008 recession, a general decline in the U.S. real estate market and the latest recession in Alberta.”

“Doherty said the 2008 downturn, widely linked to a housing bubble that helped trigger a global financial crisis, changed the behaviour of builders and developers south of the border. Their less aggressive approach, combined with a slower than expected recovery in the U.S. economy and real estate market, extended the timelines for Walton projects.”

“‘These economic conditions have in turn created a tight credit market for real estate developers, making it relatively difficult to obtain financing extensions and new project financing,’ Doherty said, adding it’s also been difficult raising funds from investors.”

From Vice Money. “The slow oil sector and declining employment have cooled the property market. City assessors report the median value of a Calgary home is now $460,000, down from $480,000 last year. According to the CMHC, the vacancy rate of Calgary rentals was seven percent in 2016, the highest in 25 years. Rent prices went down by 7.5 percent last year.”

“‘Let’s talk about the fact that life might be easier for artists for a while,’ says poet Nikki Reimer, who works in communications at the University of Calgary. I used to be intimated by Nikki, not because she is anything but kind, but because I knew her first through her ruthless poetry. Here she ironically adopts the ‘common sense’ of a couple talking themselves into buying a condo:

Anyways we’re just paying somebody else’s

Mortgage think how good we’ll feel to be in our

Own place those prices will always go up & the

Figures don’t matter once we’re in the market

“The poem’s skepticism seems justified. In Calgary prices have not gone up, and a recent study shows that 81 percent of Canadian millennials regret buying their homes because it has made them cash poor.”

A Year Without The Frenzy Seen In The Prior Several

A report from KPBS News in California. “The number of building permits issued in San Diego County in the first quarter of this year could suggest a slowdown in construction of new homes. The head of San Diego’s Building Industry Association, Borre WInckel said 1,409 building permits were issued in the first three months of 2017 in San Diego. If you multiply that by four, a total of 5,636 new permits would be issued this year, considerably fewer than the 10,000 issued last year. Winckel said developers can not make middle class housing pencil out because of the high cost of government regulation, and voter resistance to new development. He said the high-end of the housing market is saturated and workforce housing is stagnant.”

“That’s the new name for middle-class housing, is ‘workforce housing,’ he said. ‘That in essence has stopped, so if we don’t figure it out how to re-energize the supply of workforce housing, this area’s in trouble.’”

The Arizona Republic. “The popular mortgage-deduction tax break isn’t being cut under President Donald Trump’s plan to overhaul the tax system. That seems like a very good thing for homeowners and the housing industry. But the nation’s biggest real-estate groups aren’t celebrating. Proposed tax changes under the new plan, especially doubling the standard deduction, will lead to fewer people buying homes to tap the mortgage deduction, according to the National Association of Realtors and the National Association of Home Builders.”

“When a housing advocate group talks about falling home prices, many of us get a little alarmed. Particularly because as Arizona Association of Realtors CEO Michelle Lind told me, ‘Arizona’s real-estate market has recently recovered from falling home prices, and we do not want to see home values tumble again due to a tax plan that eliminates the tax benefits of homeownership.’”

From Curbed New York. “It’s a new year, which means it’s time to look at the slew of market reports from the last quarter of 2016, offering a few hints of what’s ahead for New York’s often unpredictable real estate market in 2017. Among those things: a continued slog for ultra luxury apartments, the end of aspirational pricing, and fewer bidding wars.”

“The Douglas Elliman report reveals the Manhattan sales market ’showed a continued easing of conditions,’ according to numbers wiz Jonathan Miller, meaning we are ‘capping off a year without the frenzy seen in the prior several.’”

“One big issue was the sharp decline of bidding wars: the market share of folks fighting over pricey pads fell by more than half, to the lowest level in four years. While 12.9 percent of inventory in the overall market saw bidding wars, the luxury market share of bidding wars was just two percent while new development was zero percent. Because of that, sellers started pulling overpriced properties off the market. As Miller puts it, ‘Listings are falling in the luxury market, the weakest segment, so overpriced ‘aspirationally’ priced listings are falling out of the market.’”

The Miami Herald. “You probably have strong beliefs about abortion, police brutality or immigration. Would you change those beliefs if presented with inarguable, factual information that contradicts them? You likely want to say yes, but in reality the answer for most people is no. A comic by Matthew Inman, better known as The Oatmeal, depicts this phenomenon called the backfire effect, a psychological behavior that involves not only rejecting information that challenge our core beliefs, but actually letting that information further entrench us in the beliefs we already hold.”

“The comic explains the science behind the effect, citing studies of the brain that showed it reacts to intellectual threats the same way it reacts to physical threats. If a belief is a major part of your worldview, and a new piece of information doesn’t fit in with your worldview, your brain protects you by rejecting the new information. ‘Just remember that your worldview isn’t a perfect house that was built to last forever,’ Inman wrote. ‘It’s a cheap condo, and over time most of it will turn to s—.’”

From WTVF in Tennessee. “A TV news crew went to investigate a man accused of moving into a home he did not own. The man came back at the crew with an axe. A bank has promised to evict a squatter from a Mt. Juliet, Tennessee home following an investigation by Nashville-based WTVF. The investigation found that Jude Pischke moved into the home more than two years ago, despite having no legal claim to the property. The banks that had foreclosed on the previous owners essentially forgot about it, allowing it to sit empty for years.”

“Attempts to sell the luxury log cabin were unsuccessful for years because of confusion among banks after the housing crisis. In late 2012 JP Morgan/Chase foreclosed on the home and sold it to Bank of New York Mellon, as trustees for investors in mortgage a backed security. Control over the home has since passed from Countrywide Financial — to Bank of America — and finally to NationStar. Meanwhile it has sat empty.”

“Mt. Juliet City Commissioner Ray Justice contacted more than one bank about the abandoned home, but they didn’t seem to care. ‘We could not get in touch with anybody that would claim responsibility for the maintenance or the ownership or anything else,’ Justice said.”

“NationStar Bank finally sent us a statement saying ‘We greatly appreciate that you brought this to our attention.’ The statement went on to say ‘We are moving quickly to evict the home of its current residents so the home can be prepared for sale.’”

“But when WTVF approached Pischke he made it clear he was not interested in talking about the property. As Pischke walked to his truck he pulled out an axe. ‘I’m dealing with the bank, but let me see what would you like me to get you with? This will probably f****** work won’t it. Get the f*** out of here!’ Pischke said as he charged at the WTVF crew with the axe.”

“Pischke swung the axe and said, ‘Cut off your foot.’ WTVF crew members were not hurt, but police arrested Pischke and charged him with three counts of aggravated assault. He bonded out, and still lives in the house.”