July 1, 2018

The Narrative Pushing To Overvalue An Investment

A weekend topic starting with two emails from readers. “I’ve been following your Housing Bubble Blog for years now, but I have to admit that I’m not sure we’ll see another bust similar to 2008-2010. Over the past eleven years, beginning in the summer of 2007, I have lived in numerous boom-bust areas of the country so I have witnessed the collapse–and massive reflation–of the real estate sector first hand. Additionally, I have spent the last twenty or so years closely following worldwide macro-economics (or what I call ‘The Ponzi Monetary System’). I am very familiar with the GSEs, the Fed, as well as how fiat currency/fractional reserve lending/securitization/derivatives and central banking in general work. Which brings me to my point about ‘this time being different.’”

“Especially seeing first hand yet-another real estate bubble being blown right here in my backyard (example: Vegas houses that they literally couldn’t GIVE AWAY for $50k back in 2010 are now fetching $200k). However, I have also been sobered to the fact that the entire real estate and mortgage space has been literally hijacked, as described above. Not to mention that the N.A.R. has strong DC lobbyists and will keep the pressure on Uncle Thug and the Fed to stop any material fall in real estate prices dead in its tracks. So, while I still find your blog entertaining, I’m no longer a believer that another ‘Great Crash’ will be allowed.”

The second email. “I have a situation where I would appreciate input from you guys. I am a 50 year old single father (never married) to a 6 year old with Aspergers/high functioning autism. I just went to probate court and was awarded shared physical custody on the condition I am no more than a 15 minute drive from my son’s school. I have had him a minimum of 3 days his entire life. I am currently 47 miles away. I’m about 15 minutes north of Boston and his mother is 30 minutes south of Boston. As far as my financial situation goes I own my small single family home outright - not fancy but a small condo alternative (4 rooms, two bedrooms, 1 bath 900 sq. ft.).”

“Anyway, in addition I have about 100k cash on hand, about 15k in my 401k (started very late) and ZERO debt. I am a nurse for the state and make about 80k / year with great benefits and a good pension. My question is - do I rent or suck it up and buy. I could probably get $1500+ to rent my house but will probably let my sister live here for about $400 / month, as she has no money nor a place to live. I know the majority would say rent. But my question is - when will do you guys think the market will finally crater/go down? This is the question i’d most like answered. I cringe renting because while my son is really smart and I love him to death I must admit he’s very impulsive and destructive. No way I get any security deposit back.”

From the Vancouver Courier. “The ‘narrative’ around real estate is helping push more than half of Metro Vancouver homebuyers into bidding wars, according to a Canada Mortgage and Housing Corporation (CMHC) survey, which paints an unflattering picture of a buyer group easily influenced by wider public perception. CMHC report author Guillaume Neault, senior housing analytics researcher, wrote, ‘Homebuyers measure the value of a home through rule of thumb mechanisms. ‘It’s a hot market, I can’t miss out, it’s really tight right now, we will have to revise our budget if we want to get in’ – all are phrases pushing homebuyers to overvalue an investment. For behavioural economists, overreacting to data likens to lacking self-control. The survey looks into bidding wars as a prime example of lacking self-control.’”

“CMHC’s poll examined whether this ‘fear of missing out factor’ had an impact on buyers’ final spending patterns. It found that those who bought a home earlier than previously planned in order to get into the market sooner, tended to overspend on their initial budget more than those who stuck with their timeline. Further, the data suggested that those who bought later than previously planned also tended to overspend more often, because of rising prices.”

“Part of the ‘narrative’ influencing buyers is the perception of foreign investors driving up prices, said the CMHC. CMHC observed that a separate study by Statistics Canada released this week found that 4.8 per cent of homes in Metro Vancouver are owned by non-resident owners, including Canadians living overseas. The CMHC report added, ‘What is striking is the significant gap between perceptions of the public [regarding foreign ownership] and available data.’”

“With all its data coming from homeowners who purchased in 2017, the survey was not able to consider the more recent softening of the real estate market and whether public perception had changed due to increased or new demand-side cooling measures, such as taxation.”

“The CMHC concluded, ‘The works of Robert Shiller on narrative economics sound prescient to describe what could be happening in the local imaginary of homebuyers. The human brain has a natural draw towards stories whether they are factual or not… It is still a challenge for economists to measure the impacts of narratives on the housing market, but it is a challenge we will seek to address.’”

From the Leicester Property Insight on the UK. “Over the last 6 months, Thurmaston house prices look even more grim with fall of 2.38% since January 2018. Homeowners who purchased their Thurmaston property five or more years ago will be fine, for those who bought properties before 2013 will have seen their property values rise by a whopping £40’000+, or 26.87%. For homeowners and landlords who purchased their Thurmaston flats and houses within the last five years, especially those who have a high loan-to-value mortgage, may have trouble if falling property values become a trend as they may find themselves falling into negative equity meaning if they sold their home in Thurmaston or Leicester (if falling property values become more widespread), they may still owe money to their bank and with around 13 new properties being listed for sale in Thurmaston each fortnight, finding a quick buyer at market value may be difficult!”

“It isn’t an easy fix either way, according to Harry Albert Lettings & Estates, a letting agent in Leicester, for most people who fall into negative equity they will be able to ‘ride out the storm,’ so to speak as the market always corrects itself over time. On the other hand, this may not be possible for those who want or need to move but wouldn’t be able to keep up repayments on two mortgages and the only options they would have is to take the hit financially when they sell.”

“Alternatively, you can use a reputable letting agent like Harry Albert Lettings & Estates to manage your property on your behalf so you don’t have to. Harry Albert Lettings & Estates also advises homeowners to get in touch with their auction department if you need to sell your home in Leicester quick.”

From Stuff New Zealand. “Renters are being warned to expect landlords to want better rental returns from their investment properties, in the absence of capital gains. Compared to house prices, the amount of rent most landlords get from their investments is low. That has been okay while house prices have shot ahead, but now they are stalling, the situation starts to change. Economist Cameron Bagrie said the situation could not continue in an environment where pressure was increasing on landlords, and the opportunity for capital gains was slim.”

“‘There is a battle royale starting to open up,’ Bagrie said. ‘The property market in Auckland is weaker than the official statistics show – anecdotally in some suburbs you hear stories of prices down 5 to 10 per cent. But the issue is that the sellers’, particular property investors’, expectations are based on the old normal. But if you look at where the new buyers are, they are a lot more cash flow than capital gains focused. They need to be, seeing the changes across the market.’”

From Domain News in Australia. “The Sydney housing market has been favourable to vendors for several years but the pendulum has swung towards buyers. Several leading market indicators suggest further price deterioration. The auction clearance rate in May dropped to 53 per cent and was weaker in April at 52 per cent. Compare this with the robust 69 per cent achieved in May and 73 per cent in April last year.”

“Sydney buyers are benefiting from a greater choice of homes, with total stock sitting at the highest level in just over five years. This extra time on the market is affecting prices. During the first three months of the year, on average the median house price dropped $344 daily and $38 a day was shaved off the median unit price. Those homes that languish on the market will often find themselves discounted. Discounting is at the highest level in five years, with houses having 6.3 per cent shaved off the original asking price and units 5.5 per cent.”

“The ability to sell your home in a matter of days and achieve an eye-watering sale price has passed. Sydney’s median house price remains above a hefty $1 million, following the 71.8-per-cent price rise that has occurred during the past five years. But smashing an unrealistic reserve price is a whimsical dream under the current market conditions. The buyers’ sense of urgency that engulfed the market has been lost. The frantic pace of market growth gave buyers a fear of missing out. Now it is sellers who have a fear of not securing the right deal.”

From the Culver City Observer in California. “The median price of a single-family home in the state reached a record $600,860 in May, the California Association of Realtors said last week, while prices in Culver City and the rest of the Los Angeles Metro Area jumped 2.9 percent from the previous month and a whopping 9.3 percent from a year earlier. Separately, though, figures published by Zillow this week suggest that many of the houses and condos that are currently for sale in Culver City are already in the foreclosure or pre-foreclosure process.”

“There were 86 Culver homes for sale at the start of this week, Zillow reported, but dozens of them were either in foreclosure or in pre-foreclosure proceedings. Real estate economists blame the slow but steady rise of foreclosure and pre-foreclosure offerings across the nation on a variety of factors. Some buyers in the last one or two years have over-extended their borrowing power, experts say, to purchase a house before prices could move even higher. Others have seen their original monthly housing bills rise sharply because payments on their adjustable-rate mortgage, or ARM, have moved higher in lock-step with this year’s climbing interest rates.”

“Zillow reports that one of the most luxurious and expensive local homes for sale this week is a five-bedroom, three-bath English Tudor-style house at 10738 Molony Road in the exclusive Culver Crest community. It’s listed for nearly $3 million.”