June 2, 2017

Caught Up In The Desirability Of A Quick And High Return

It’s Friday desk clearing time for this blogger. “When I see record-high homes prices and worst-in-seven-years job growth … I gulp! The median selling price for an Orange County home hit a record $675,000 in April, CoreLogic reports. In a county with chronic housing affordability challenges, a modest pullback from buying mania could be good for the financially challenged stakeholders in the marketplace. Still, who’d want a total collapse? So let’s just call these recent anxiety-producing patterns a must-watch trend for the coming months. Orange County real estate, you’ve been warned.”

“The number of April sales of Naples-area houses and condos fell to 902 from 947 last year, a five percent decline. The Naples Area Board of Realtors also reported that the median price of houses sold in April dropped six percent to $525,000 from $559,000 last year. Brokers said unrealistic pricing led to the sharp increase in the number of days that houses and condos spent on the market before they were sold. ‘There appears to be a number of sellers who, when pricing their homes, refuse to take into account the added competition from the new construction market,’ said Jeff Jones, managing broker at the Naples-Park Shore office of Coldwell Banker.”

“Last year, Starwood Capital Group’s CEO Barry Sternlicht called Greenwich, Conn. the worst real estate market in the country, as reported by Bloomberg. He apparently was correct. The Wall Street Journal reports: ‘There were only five sales for $10 million or more in 2015 and 2016, the slowest pace in this category since at least 2008, and less than half the average, according to brokerage Houlihan Lawrence. In all, there are 38 properties listed for $10 million in and around Greenwich, meaning it would take at least seven years to sell them all at the current pace.’”

“In granting developer Mark Bulman a comprehensive permit in 2007, the Chatham zoning board of appeals agreed to waive 18 zoning regulations and allow construction of 10 condominiums on a lot which otherwise would have only supported two single-family homes. The trade-off was that two of the units had to be sold as affordable. Nearly a decade later, Bulman is asking for a refund of the $130,000 that he’s paid to date, warning that without the town’s cooperation the affordable units could be foreclosed upon.”

“Bulman said he hasn’t been able to sell the units because his ‘hands are tied’ by the looming foreclosure. Failure to obtain a refund of the money he’s already paid the trust fund could have dire consequences, he said. ‘My last resort is bankruptcy,’ he said.”

“Is Chicago’s cab industry on the verge of collapse? The competition is fierce as rideshares like Uber and Lyft take business from traditional cabs. The result is a crash in the cab market as more driver face foreclosure and surrender their once-prized medallions. ‘I have talked to over 1,200 cab drivers or medallion owners and they fall into three buckets: Either 1. They are in foreclosure proceedings, or they have already defaulted and are not in foreclosure yet, or they are at the verge of defaulting on the loan,’ said Furqan Mohammed, attorney.”

“In the wake of the housing crisis, investors have been snapping up foreclosed properties across the city and suburbs and then cutting deals with low-income buyers who don’t qualify for traditional mortgages. Carolyn Smith and her elderly mother bought one of the homes in the city’s Austin neighborhood. The seller was Harbour Portfolio Advisors of Dallas. The company bought more than 6,000 U.S. homes, according to the City of Cincinnati lawsuit. Harbour paid $1,000 for the two-story property in Austin in August 2011, records show. She says she spent so much on repairs that she couldn’t keep up with her taxes. They were purchased last year in a sale. Smith now has to pay over $7,500 in back taxes and fees by next year, or else lose the home. ‘I’ve been duped,’ Smith says.”

“In a statement, an attorney for Harbour defends the deals. ‘Every person that buys or gets a mortgage for a home is responsible for repairs, taxes and insurance which is in fact a privilege that goes along with home ownership. There is absolutely nothing predatory about charging people less money than one would pay in rent, yet at the same time fulfilling the dream of home ownership.’”

“Investors who bought apartments on the south bank of London’s River Thames hoping to flip them for a quick profit face falling values and declining premiums for new homes. ‘I expect values to fall further in the Nine Elms area after a huge amount of supply came — and is still coming — at the wrong price,’ said Neal Hudson, founder of research firm Residential Analysts Ltd., ‘Investors have dried up and the bulk of demand for London homes is now from owner-occupiers who can only afford’ to pay 450 pounds per square foot.”

“The Nine Elms homes are priced between 750 pounds and 1,500 pounds a square foot, he said. The apartments are often sold with facilities including gyms, swimming pools and 24-hour concierge services.”

“Despite the sharp rise in house prices, hundreds of thousands of homes bought between 2004 and 2012 are still in negative equity, the Telegraaf reported. Property researcher Calcasa reveals that 340,000 homes throughout the country are still now worth less than their purchase price. The company said most of the homes ‘virtually’ in negative equity were in the east (120,000) and south (127,000) of the country. The average sales price for a home in the Netherlands is now €266,000, up from €262,000 in the peak year of 2008. But Calcasa warned that this was not the case in 282 towns.”

“Norway’s notoriously high housing prices, especially in the Oslo area, are showing signs of flattening out in the midst of an unprecedented homebuilding boom. That’s expected to further cool off the red-hot real estate market of the past several years, but experts warn it’s still way too expensive for far too many to buy a home. While many welcome a halt in the soaring home prices of the past few years, those who bought when prices peaked won’t enjoy gains on their investments and may even find themselves vulnerable to losses.”

“Sellers, one broker told NRK, ‘think the market is falling and that prices will go down, so they’re trying to sell now.’”

“According to Lightstone, only 10 properties with a combined value of R79.8m changed hands in Inanda in the 12 months ending 30 April with Atholl faring a little better with 24 sales realising R146.5m, but Justine Roux, area specialist for Lew Geffen Sotheby’s International Realty, says that there were many more potential sales which fell through during this period. ‘One of the main reasons homes aren’t selling is that sellers simply won’t budge from their listing prices despite the notable decline in investor numbers that has precipitated a shift to a buyers’ market,’ he said.”

“Two brothers who rode the wave of the Pilbara property boom to become multimillionaires are facing a potential financial headache, with a bank foreclosing on part of their property portfolio after they allegedly failed to pay their mortgages. Ryan and Morgan Crawford claimed to have made millions of dollars from investments in Pilbara towns when property and rent prices reached astronomical levels during the mining boom.”

“But in a spectacular example of the Pilbara property crash, part of the Crawford property empire has been sold for a fraction of the buying price, according to Landgate records, with documents filed in the Supreme Court last week revealing the proceeds fell well short of what was owed. Morgan Crawford was once quoted in the press saying he was ‘often asked if I’m worried about the debt that’s in my name, and whether I could sustain my financial obligations if something goes wrong. I’d be lying if I said I didn’t consider this, I think about the risks before and after every purchase,’ he said.”

“Real Estate Institute of WA president Hayden Groves said the men may have ’suffered the same as mum and dad investors’ in the region. ‘Investors are attracted to quick returns in any environment … but any immediate and high-return strategy comes with more risk. Unfortunately many investors were caught up in the desirability of having a quick and high return, and sadly many did not get out in time and suffered significant losses as a result.’”

“Maybe prices in Toronto and the surrounding suburbs really have reached a new normal, and a wide swath of people are permanently shut out of the market. ‘There is no particular reason housing has to be affordable for the average person,’ wrote Ernest Wong last month, a research analyst with Baskin Wealth Management. Toronto is still cheaper than cities such as Hong Kong, he argued. ‘Despite being increasingly unaffordable for new home buyers, the current expensive housing prices are rational, and should be expected in the low interest rate environment.’”

“This line of thinking could be classified as a ‘this time is different’ argument, which is used by investors to justify what turn out to be unsustainable market trends. Investment guru John Templeton is known to have remarked that ‘this time it’s different’ are the four most dangerous words for investors. Economists Carmen Reinhart and Kenneth Rogoff published an entire book on the subject in 2010 and examined eight centuries of financial disasters. They found ‘this-time-is-different syndrome’ pops up again and again.”

“‘It is rooted in the firmly held belief that financial crises are things that happen to other people in other countries at other times,’ they write. ‘We are doing things better, we are smarter, we have learned from past mistakes. The old rules of valuation no longer apply.’”

“‘Every bubble begins with a good fundamental story,’ says Doug Porter, chief economist at BMO Financial Group. But people then take sound economic trends to an extreme. ‘Investors extrapolate a good thing into something that can never go wrong—until it does,’ Porter says.”