The Housing Bubble

It’s Friday desk clearing time for this blogger. “In his corner of American finance, where hard selling meets hard luck, Angelo Christian is a star. Each time Christian sells a home loan, the company he works for, American Financial Network Inc., takes as much as 5 percent. Many of Christian’s customers have no savings, poor credit, or low income—sometimes all three. Some are like Joseph Taylor, a corrections officer who saw Christian’s roadside billboard touting zero-down mortgages. Taylor had recently filed for bankruptcy because of his $25,000 in credit card debt. But he just bought his first home for $120,000 with a zero-down loan from Christian’s company. Monthly debt payments now eat up half his take-home pay. ‘If he can help me, he can help anyone,’ Taylor says. ‘My credit history was just horrible.’”

“Christian can do this kind of deal because he is, in effect, making the loan on behalf of the federal government through its most important affordable housing program. It’s a sweet deal: He gets his nearly risk-free commission. Taylor puts no money down. If things go south, the government ultimately bears the risk. Many borrowers ‘are living paycheck to paycheck and, if they lose their jobs, they go into default immediately,’ says John Burns, a housing consultant.”

“One reason more borrowers may be stretching: Real estate prices are soaring again.”

“Far south of Orlando, the city of St. Cloud has had a lot of room to expand outward and attract developers. St. Cloud has no shortage of land, but it doesn’t have enough local jobs. About 90 percent of the residents who work commute out of the city to get to their jobs. Builders are ‘going crazy’ buying up residential lots and creating a housing bubble, said Craig Shadrix, Ocoee’s assistant city manager. ‘If you had asked me 10 years ago if we would be seeing housing prices from $400,000 to $500,000 up there on a routine basis, I would have laughed, but that’s what’s happening now,’ he said.”

“The City of Trees is getting noticed. The limited run Fixer Upper-style show on HGTV is helping put the spotlight on the booming Boise area in yet another way. The concept is simple: the pair buy a house, make improvements (usually drastic) and work to resell the homes for a profit. Two of the homes on the show with the highest price tags have sat on the market unsold, despite a tidy wrap-up at the end of each episode. A home along the rim at Kathryn Albertson Park was purchased for $350,000 - with another $350,000 into renovation costs.”

“Toward the end of the episode, Robertson tells the camera they have a deal in hand. But the home didn’t sell until well after the episode was produced and the show was aired. The home was removed from the market just Sunday after a price reduction from $989,700 down to $974,900. Another home in Boise’s North End was said to have sold ‘above asking’ during the show, but is still listed for sale - listed since March 10th at $897,700.”

“Nestled into the side of Mt. Soledad about a half-mile from the coast sits the residence dubbed ‘Essencia.’ In more recent years, the group has fallen on harder times — a home on Plum Street in Point Loma sat unfinished for years before falling into foreclosure, eventually netting a handful of misdemeanor charges for Concepto principal Francisco Mendiola. La Jolla’s ‘Essencia’ suffered a similar fate — the property appears to have bounced between a series of investor-owners since it was built, with ten documents related to foreclosure proceedings having been filed against the property between 2008 and 2014.”

“A handful of attempts have been made to sell the property, none publicly successful. In 2007 a listing at $18-20 million failed to attract a buyer, same with a 2008 attempt that ranged from $19.5 down to $14.95 million. A six-month stint on the market for $17.9 million in late 2015 did not result in a sale, nor did 2016 attempts at $16,750,000 and $14,600,000. An attempt to rent the mansion for $20,000 per month also met no takers. The property sat off-market for more than a year before it was re-listed in April, this time carrying an asking price of $14,500,000, the lowest reported to date.”

“Southern California home prices notched yet another record in April, with the median price hitting $520,000. Still, there’s been a shift this year as the number of homes on the market increases slightly and buyers become more price sensitive, market watchers say. ‘We’re still seeing multiple offers on well-priced homes, (but) we’re seeing price reductions on higher-priced homes,’ added Mike Cocos, general manager for ERA North Orange County in Yorba Linda. ‘Now that we have the inventory, buyers are going to take a little longer to pick and choose. … (Buyers) are a little more selective than they were last year.’”

“A group of Montreal condominium buyers fear they’ve lost both their deposits and their condos after the unfinished building they were to move into in Saint-Henri was sold to another developer. It may be a case of buyer beware: real estate experts and commercial lawyers say buying into a new condo development often doesn’t work out as planned. ‘I feel kind of scammed,’ said Ying Zhang, one of 14 buyers taking both of the developers to court in the hope of either getting their condos or their money back. ‘How can you pay a down payment and now have nothing?’”

“It was an ambitious plan: Donna Pirie offered to give away her £1.7m Aberdeenshire mansion in a competition, but she wanted to sell £3.75m worth of tickets to do so and give £1m to charity. In the end, she sold just 10,000 tickets at £25 each – totalling £250,000 – despite national newspaper coverage, so she ended up with a net loss of £31,500. Pirie is one of a growing number of people who are trying to sell their homes through ‘win a house’ schemes. The slowdown in the property market over the past year has led to an explosion in the number of properties being offered as prizes, particularly by homeowners who fail to achieve the asking price they want.”

“Sam Mitchell of online estate agents House Simple thinks sellers simply need to lower their prices. ‘If you are finding it difficult to sell your property, rather than resorting to desperate measures, take a step back and find out why it might not be selling,’ he says.”

“Guo Qirui says it’s a lonely journey when he goes home to his rented luxury condominium in Phnom Penh, where the Chinese retail executive has lived for nearly half a decade. The majority of the homes, sales agents and residents say, are sold to absent Chinese landlords. ‘Probably half of the completed units have been handed over but every night it’s all dark. Not one light is switched on,’ Guo told Reuters.”

“‘In terms of the high-end segment there is oversupply,’ said Ross Wheble, Cambodia country head at property consultancy Knight Frank. ‘This is a question that everyone’s asking in terms of sustainability. With Chinese investors buying these units, are they actually going to be occupied?’”

“The hype is such that some like Beijing native Jiang Zheming bought a unit last month despite having never visited Cambodia before. Another Chinese buyer who asked to only identified as Alex, said he bought more than 100 flats. CBRE and Knight Frank said there were already signs the market was softening. The frequency of new launches has fallen while landlords were reducing their asking rents, they said.”

“Chrek Soknim, chief executive of Cambodian property agency Century21 Mekong, said he did not think a market slowdown would be bad for locals given that these apartment owners were mostly Chinese. ‘If they can’t sell, it’s not a problem for us.’”

“Mortgage revaluations of second-hand homes in inner Brisbane are between 20 per cent and 30 per cent lower than the prices they originally exchanged for, one more sign of falling demand and over-supply in the Queensland capital, according to private property lender Development Finance Partners (DFP). DFP, which provides commercial loans to residential developers, has discovered that not only are the values of new dwellings being pushed down, but secondary apartments and townhouses have been swept up in the downward slide.”

“The large number of newly completed apartments – about 8300 – expected to hit the city in 2017-18 will only worsen the problem DFP says, quoting the latest residential data from property research group BIS Oxford Economics. An additional 5000 units are in the pipeline for 2019.”

“‘It’s a shock and it pressures those owners who do not have substantial equity,’ DFP director Matthew Royal said. ‘The new, shiny, state-of-the-art properties are easier to let and those owners, keen to get cash flow, may set a rental that is lower than rentals applying for nearby, older, properties. Making things worse is that, in a new development a large number of rental properties emerge at once, flooding the market.’”

“Adding to the woes of lower rents, banks are refraining from refinancing interest-only loans, forcing many borrowers to repay both principal and interest. ‘Lower rents push down a property’s value, reduced cash flow arrives as principal and interest needs to be paid and an investor, financially comfortable up until then, is suddenly struggling to ‘hang on’, Mr Royal said. ‘Unfortunately I am predicting more pain than gain for the most exposed assets this time next year.’”

“Financial bubble are not accidents. Our asset-backed banking system creates bubbles by design—they’re an inevitability. Imagine a homeowner who owns a $1 million house free and clear. The owner goes to a bank and borrows $800,000 against the house. This credit money springs into existence as an accounting entry of a private bank. The borrower goes out into the market and starts purchasing other assets: stocks or a weekend house. The new money drives prices higher, including the assets that form the collateral of the banking system.”

“Since collateral values now have increased, the banking system is happy to increase its loans to borrowers, which pushes prices yet higher, and so on, in a positive feedback loop. The Chicago Tribune reported in June last year: ‘Several major lenders are offering 1 percent down payment loans, and now a large national mortgage company has gone all the way, requiring absolutely nothing down.’”

“It looks like the lessons from the 2008 housing crash have been erased completely: a quasi-government agency, which operates under federal conservatorship, is guaranteeing loans made by reckless institutions to shaky borrowers. The difference is that the reckless institutions are not banks but non-bank lenders. If we follow all of the credit tributaries back to their source, we see that this system is more malignant than ever. The banks are, in fact, still funding mortgages, just surreptitiously. In the new normal mortgage transaction, the non-bank lender funds its loan to the borrower by in turn borrowing ‘warehouse loans’ from a bank.”

“These banks loans are secured by the new mortgages and are extremely short-term, generally for only 15 days, which is the time needed for the non-bank lender to flip the mortgage to one of the government-sponsored enterprises or Ginnie Mae. These GSE then securitize the incoming mortgages into mortgage-backed securities (MBS) and guarantee the payments ‘to increase affordable, sustainable lending,’ Fannie Mae claims. And who owns most of the $7 trillion of outstanding MBS? The Federal Reserve owns 25 percent and banks another 27 percent.”