August 15, 2017

Everybody Thinks They Are Rich Priced Off The Top Bid

A report from the News Tribune in Washington. “What goes up will — eventually — come down, bubble or no bubble. A recent national survey by ValueInsured, which sells policies to guard against falling home values, put the spotlight on our red-hot housing market and the question, ‘Are we approaching a housing bubble?’ Washington topped the list of those worried about that question, at 71 percent, closely followed by New York at 68 percent. Also in the top 5 of concerned states: Florida, California and Texas. Dick Beeson, principal managing broker with Re/Max Professionals responded via email to questions seeking his view of what’s happening on this side of the county line, away from King County’s meteoric rise in median home prices, up more than $100,000 in one year.”

“‘This survey is a good example of how a small sampling of people, whose opinions are based on personal beliefs, extrapolates into a fearful and fretful story of eminent doom in the housing market,’ he said. Beeson says, hang on. ‘There will be a slowdown in price increases; nothing lasts forever. I think price increases will continue to rise through 2018 throughout Pierce County. The pace will be half of the 12 percent we’ve experienced in the last 3 years. After that, we’ll probably see a reduction in the rate of price increases.’”

From CNBC. “It feels like deja vu in mortgage land all over again. In the past 12 months, 1.5 million borrowers bought their homes with down payments of less than 10 percent, marking a seven-year high, according to Black Knight Financial Services. ‘The increase is primarily a function of the overall growth in purchase lending, but, after nearly four consecutive years of declines, low down payment loans have ticked upward in market share over the past 18 months as well,’ said Ben Graboske, executive vice president at Black Knight Data & Analytics. ‘In fact, they now account for nearly 40 percent of all purchase lending.’”

“The growth in this sector is likely due to new programs offered by Fannie Mae and Freddie Mac that are actually gaining market share from the FHA, which was the only low down payment game in town during the recession. The government-sponsored enterprises brought back 3 percent down payment loans in late 2014.”

From Bloomberg. “After deleveraging in the aftermath of the last U.S. recession, Americans once again have taken on record debt loads that risk holding back the world’s largest economy. Household debt outstanding — everything from mortgages to credit cards to car loans — reached $12.7 trillion in the first quarter, surpassing the previous peak in 2008 before the effects of the housing market collapse took its toll, Federal Reserve Bank of New York data show. To put the borrowing in perspective, it’s more than the size of China’s economy or almost four times that of Germany’s.”

“People are borrowing more not necessarily because they’re confident about their financial prospects. They’re doing it for necessities like education or transportation and, in many cases, just to get by. On the surface, liabilities at an all-time high aren’t alarming when the assets side of ledger is taken into account. Household net worth stands at a record $94.8 trillion, thanks to rebounding home values and soaring stock portfolios. But that increase has primarily benefited the nation’s wealthiest, said Lance Roberts, chief investment strategist at Clarity Financial LLC in Houston.”

“For most Americans, whose median household income, adjusted for inflation, is lower than it was at its peak in 1999, borrowing has been the answer to maintaining their standard of living. ‘When you look at net worth, it’s heavily skewed by the top 10 percent,’ Roberts said. ‘The average family of four is living paycheck to paycheck.’”

From Curbed San Francisco in California. “Blaming a ’severe lack of homes for sale and high demand,’ the California Association of Realtors (CAR) claims in a report released last week that it now takes almost double the income to qualify to buy a home in California as it did in 2012. The situation is even worse in the Bay Area. CAR now recommends ‘“a minimum annual income of $110,890′ (before taxes) in order to purchase a single-family home in California selling for the median price of $533,260, based on a $2,770/month mortgage payment after 20 percent down and an interest rate of just over four percent.”

“That is if buyers stick to the time-honored (but for many unreachable goal) of only paying 30 percent of monthly income to housing. In the Bay Area, the association recommends bringing in $179,390/year, which would come out to nearly $15,000/month.”

“To put that amazing sum in perspective, computer programmers in the Bay Area are averaging only $106,710/year, according to the Occupational Employment and Wage Estimates from the Bureau of Labor Statistics from May 2016. Software developers are bringing in about $133,500/year. Cops somewhere around $105,540. And teachers $43,340.”

From KRIS TV in Texas. “Take a drive around Corpus Christi, and you will see plenty of ‘for sale’ signs. Right now there is a peak in housing inventory. There have not been this many houses on the local market in years. That means it is a buyers market right now. Dr. Jim Lee, Professor of Economics at Texas A&M Corpus Christi, says housing prices have not yet dropped, but if this trend continues he expects they will. ‘The local housing market is overheated,’ Dr. Lee said.”

“This June there were 3,331 active listings on the market, according to a Coastal Bend Economic Briefing study. That’s up 19 percent from June of 2016. Dr. Lee says supply and demand in the housing market is tied to the oil industry. ‘A lot of homeowners who benefited from the last oil boom are selling their houses because they want to downsize,’ he said. ‘It’s not we’re lacking demand, but we have a lot of supply.’”

“It is the first time the market has seen a surge like this in years. ‘It’s a record in seven years. The last time was 2011,’ Dr. Lee said.”

The Real Deal on New York. “Barry Sternlicht sees doomsday waiting at the end of Billionaires’ Row. And that could be a good thing for him. Speaking on a second-quarter Starwood Property Trust earnings call, Sternlicht called the development of the high-end residential strip on West 57th Street an impending ‘debacle.’ He noted the out-of-balance mezzanine loan at JDS Development and Property Markets Group’s 111 West 57th Street project and predicted more distress in the luxury residential market, including at 53 W 53, a supertall condo being developed next to the Museum of Modern Art by Hines, Pontiac Land Group and Goldman Sachs.”

“‘We are beginning to see the cracks of the high-end residential market in Manhattan,’ he said. ‘The building on 57th Street just went through it’s B-lender. Those deals, and the building going up next to MoMA, those deals are going to be a disaster. So high-end resi in New York really is in trouble.’”

“Sternlicht, who was quick to point out that Starwood is not exposed to that market, said it won’t be banks licking their wounds in the event of a luxury condo slump. Rather, it’s the hedge funds, private equity firms and alternative lenders chasing high returns who backed projects asking prices of $7,000 to $10,000 a foot.”

“‘There’s a hedge fund that made $1 billion mortgages against some of these properties out of Europe and we will see how that fares,’ said Sternlicht, appearing to refer to the Children’s Investment Fund, which has backed the likes of 432 Park Avenue and 76 Eleventh Avenue. ‘Maybe they like the return, but they will lose capital. They can’t get paid off and they find out their basis is accreting because they are not getting paid currently, obviously….That is not going to end well.’”

“Sternlicht also said there’s concern among commercial real estate investors about foreign investors leaving the market amid turbulence in Washington. Property sales have declined and the gulf between asking and selling prices has widened, he said.”

“Those foreign investors, particularly those from Asia, bid up the price of assets dramatically and affected underwriting. ‘All the markets price off the top bid and the top bid has been an Asian bid, whether it was the sale of the Waldorf or the bailouts of a Strategic Hotel deal. Everybody thinks they are rich when the guy pays the 2 percent cap for an asset, or a 1 percent cap. If there are six bids at $1 billion and one guy is at $1.5 billion, I would ask you to tell me where the loan-to-value is of the loan, right?’”