May 19, 2017

The Sound Of The Pincer Grip

It’s Friday desk clearing time for this blogger. “Low inventory has caused home prices to rise and forced prospective homebuyers into bidding wars, which in some cases has produced another side effect: appraisals that come in lower the contracted sales price, according to Allison Bartholomew, president of the Greater Louisville Association of Realtors. ‘The prices have increased so much and so quickly that the appraisers are having a hard time justifying the sale prices,’ Bartholomew said. ‘It’s not that the houses aren’t worth it,’ but it does create a problem for homebuyers.”

“The homebuyer’s options are to come up with cash to pay the difference, renegotiate the sale price, make a compelling case for why the appraiser’s valuation is wrong, or walk away. On a single day this year, she said, 38 houses that had been pending came back on the market. ‘It’s sort of a conundrum,’ Bartholomew said.”

“It’s clear from up here that downtown San Jose is ascendant, with activity in all directions: cranes swinging, bulldozers digging. Now, as developers build more high-rise housing with luxury amenities — the most downtown has ever seen — they expect the well-heeled residents moving in will lure more restaurants and coveted retailers. Downtown San Jose’s luxury housing generally gets built in response to new jobs. But while Silicon Valley’s job market has enjoyed a strong recovery from the recession, the area’s job growth has been up and down these last few months. ‘The party can’t go on forever,’ Mike Kim, chief investment officer for Simeon Properties observes with a shrug.”

“Maria Sicola, the CEO of Integrity Data Solutions, says Portland is in the midst of a real estate boom, but approaching the end. ‘I think we’ll see a slowdown in 2019, but I don’t think that we are in a position economically to have the great recession or anything like the great recession that we saw in 08 and 09,’ Sicola says.”

“Christopher Lee, President of CEL & Associates, has predicted the previous two housing cycles, and says that if you think of this real estate boom as a baseball game, we’re probably in the 7th or 8th inning. ‘We’re in a place where we’ve got a little more oversupply, we have not enough demand for that supply, and so we’re gonna slow down,’ Lee says.”

“Areas north of Tallahassee are seeing fast sales, while properties south of the city aren’t seeing the same amount of traffic. Realtor Joe Manausa he believes there are more sellers than buyers, especially in the median price range, and that specifically is causing property values to drop at the high end. Manausa said that homes below $350,000 are in a sellers’ market, which means there are more buyers than sellers. But once the price goes over $500,000, there becomes a ‘glut of supply.’”

“In New York City, first-quarter property sales plummeted 58 percent, to $4.3 billion, compared with a year earlier, according to data from brokerage Cushman & Wakefield Inc. It marked the lowest quarterly sales volume in six years. Nationwide, the picture wasn’t much better. Sales dropped 18 percent, research firm Real Capital Analytics Inc. found.”

“As sales of existing properties languish, developers are mired in a glut of hotels, condos and apartment complexes following a construction boom. Landlords are cutting rents and prices, and spooked lenders are holding back. In Manhattan, even the biggest names in real estate are scrambling. Concern is mounting that real estate prices have peaked following six years of record-shattering growth, and there are signs of overbuilding in large cities such as New York and San Francisco—the biggest beneficiaries of the recent boom. ‘People are just not making decisions quickly at all,’ said Robert Verrone, a principal at Iron Hound Management Co. ‘Everything in real estate is taking longer.’”

“Tick. Tick. Tick. That’s the sound of the inner-city apartment market. There are 15,000 brand-spanking-new apartments due to settle before June 30 this year. Many of these apartments won’t settle … because the buyers can’t come up with the balance of their money after paying a deposit. This week I caught up with Li Ming, a co-director of Aussiehome, who specialises in selling Aussie property to Chinese investors. Ming: ‘The Melbourne off-the-plan apartment market is the worst I have seen in the past 10 years.’”

“Ming believes that about 80 per cent of Chinese buyers won’t be able to settle on their Australian apartments. Here’s a real-life example of one of Ming’s clients: Three years ago his client bought a yet-to-be-built, off-the-plan, two-bedroom apartment in Southbank for $750,000. They put down a $75,000 deposit (10 per cent) and planned to organise a loan for $675,000 (90 per cent) in three years’ time when the apartment was built.”

“Because of the oversupply of inner-city apartments, the Aussie banks are now being cautious about how much they’ll lend (and they’re also charging investors a higher interest rate for their loans). They told Ming’s client they wouldn’t stump up 90 per cent of the purchase price — only 80 per cent. Bottom line: he was $75,000 out of pocket.”

“So where does he find the extra money? Well, that’s the second part of the pincer grip: the Chinese Government. For the past year, the Chinese Government has been clamping down on investors taking money out of this communist country. Investors used to be able to take out $US50,000 per person per year … yet now many state-owned banks are lowering the amount, or outright blocking the money going overseas.”

“‘So what did your clients do?’ I asked Ming. ‘They had no choice. They walked away … and lost their $75,000 deposit.’”

“Ming told me he has other clients who flat-out couldn’t get finance from the banks. ‘They managed to negotiate to flip their apartment for a 7 per cent loss … but even that is getting harder to do. Everyone is getting desperate,’ he said.”