The Housing Bubble

A report from the Wall Street Journal. “Owners of an apartment complex near Pittsburgh, who wanted to take out a mortgage on the buildings, allegedly made vacant units look occupied by turning on radios, placing shoes and mats outside doors and in one instance having a woman tell inspectors her boyfriend was asleep inside. The owners obtained a $45.8 million loan, which was wrapped into mortgage securities and sold to investors.”

“Practices such as these—which were alleged in a federal search-warrant application—have sparked one of the largest mortgage-fraud investigations since the financial crisis. It focuses on whether income from commercial properties was falsified, a move that would enable owners to get larger mortgages and take out cash or expand their businesses faster.”

“Still in its early stages, the investigation has so far yielded a fraud-conspiracy indictment against four real-estate executives in upstate New York. Loans that some or all of them were involved with totaled about $170 million, the indictment alleges. Investigators have sought mortgage data on dozens of other apartment buildings, according to documents reviewed by The Wall Street Journal and interviews with people familiar with the probe. Investigators have looked at student housing and self-storage facilities in addition to apartment complexes.”

“About $1.5 billion of securities issued by Fannie Mae and Freddie Mac are backed by mortgages from just one developer who has been under scrutiny, according to a Journal analysis of loan data from Thomson Reuters. The 2010 Dodd-Frank financial overhaul required home borrowers to document their income, and home lenders to verify it. The rule doesn’t apply to multifamily housing.”

“‘All the systems will work fine as long as people are being honest,’ said Sam Berns, senior vice president at NorthMarq Capital LLC, one of about two dozen firms licensed to originate and sell multifamily mortgages to Fannie Mae and Freddie Mac. If borrowers or their mortgage brokers choose, they can easily submit and certify false numbers, he said. ‘It’s a fault and a failure within the system.’”

“One owner of properties investigators reviewed is Robert C. Morgan, the founder of a suburban Rochester, N.Y.,-based apartment development company. He built a business of more than 140 properties with over 34,000 rental units across 14 states, according to its website. ‘There’s a lot of money chasing the multifamily assets, more money than deals,’ Mr. Morgan said at a Freddie Mac housing conference last year.”

From Crain’s New York. “Some 8,278 condo units are in the Manhattan development pipeline and around 2,000 of those are expected to hit the market within the next year, according to Halstead Property Development Marketing. The new development market has grown increasingly soft, especially for the priciest product, as projects planned after the height of the market in 2014 now come up for sale—joining many existing new buildings that have not moved all of their units.”

“As a result, supply has grown. Halstead’s first-quarter report showed around 6,000 apartments available in the borough, though some of those were being held off the market by developers until they can unload more units. How quickly these units will sell depends on the location, according to Halstead.”

“‘The supply-constrained neighborhoods that are most in demand are still seeing healthy absorption,’ said Robin Schneiderman, managing director at Halstead’s new-development arm. ‘When you go into the second-tier neighborhoods that have a lot of product and the pricing is not meeting the market, that is where you are starting to see too much inventory.’”

“However, sales volume has been declining and absorption—the amount of time it would take to sell all available supply at the market’s current pace—has been on the rise. If existing product does not sell, adding more will balloon inventory and put downward pressure on prices.”

From Long Island Business News. “For some time now, year-over-year home sales prices have increased while sales have declined. National figures for new and existing home sales confirm this. Some observers even worry that another housing price bubble – a rapid and unsustainable run-up on prices – is on the horizon. With homes being the major purchase for most consumers, this would be harmful for Long Island and elsewhere.”

“A confluence of factors has contributed to declining sales. Clearly, rising mortgage interest rates have given potential home buyers pause. Changes in the deductibility of mortgage interest and property taxes have likely been contributing factors as well. On Long Island, the situation is similar to the national experience. In Nassau County, year-over-year sales prices have increased every month for at least the past year. But year-over-year sales have declined for nine of the past 12 months. The steady growth in prices in the face of declining sales seems unsustainable. But evidence suggests that home sales inventories are finally starting to rise, both nationally and on Long Island.”

A report from the Times Free Press in Tennessee. “Already, rising home prices and mortgage rates have cut into some home sales, keeping overall sales of single-family homes relatively stable despite the overall improving economy. In June, for instance, single-family home sales by Chattanooga Realtors were down 5 percent from a year earlier. Credit standards are higher than before the Great Recession so qualifying for a mortgage is more difficult than a generation ago for many young home buyers. In response, the Tennessee Valley Federal Credit Union (TVFCU) said it is offering a no downpayment mortgage for those with strong credit ratings and good income ‘and we’re really killing it with that product,’ TVFCU President Todd Fortner said. ‘This is our most popular mortgage product right now,’ he said.”

“Home prices in Chattanooga during the second quarter already rose twice the rate of inflation.”

From ABC 7 News in California. “What was once the murder capital of the U.S. is now a town selling multi-million dollar homes - East Palo Alto. Forty-four percent of students in the Ravenswood School District are considered homeless. Schools Superintendent Gloria Hernandez-Goff said, ‘Families that are split up with children in a friend’s house and another child in a friend’s house. Their parents are sleeping in cars.’”

“East Palo Alto has always been a working community. Most residents hold down two jobs to survive. Simply put, the socio-economic condition has not caught up with the rising home and rental prices.”

From Northern Nevada Business View. “In July, sales of single family homes in Washoe County decreased 17 percent compared to July 2017. While this drop in unit sales may seem high, it can be attributed to the seasonal cycle we see annually, but also due to the fact that there’s not enough supply of homes to buy. What we have seen is that year-to-date sales are lagging behind prior years. Does this mean we have reached the peak?”

“A correction in housing, like in any market sector. is normal, foreseeable and possible. In February 2018, we started to see a shift for the first time in 16 months that pending sales were not tracking closely with new listings coming on the market. You only need to drive around the Reno-Sparks area to see the number of new home projects coming online. When they are in full swing, I expect the resale market will adjust.”

The Orlando Sentinel in Florida. “Prospective buyers of Metro Orlando homes who sat on the sidelines in June might have scored a bit of a bargain in July as prices dropped 1.3 percent during the month, according to Orlando Regional Realtor Association. The median sale price dropped for all home types to $235,000 – down $3,000 from a month earlier. It’s the second time in three months that prices dropped month-to-month, with a $4,000 drop recorded between April and May.”

“Among numbers that have remained consistent from June to July: Pace of sales: Down 2 percent. Distressed sales: 3.6 percent of all sales. Supply of listed homes: 2.2 months. Pending sales: Down 9.9 percent for the second straight month.”

The Dallas Observer in Texas. “Rent prices in Dallas are known to skew high. The August 2018 National Apartment List Rent Report shows Dallas has a median rent of $894 for a one-bedroom apartment. While that’s nowhere near as high as rents get in the suburbs, the near constant rise of new developments such as the 400-unit tower at 2000 Ross Ave. has done much to add high-priced square footage to the local apartment market.”

“‘I mean prices are just ridiculous,’ says Kara Zielinski, a local realtor and agent for The Locators Real Estate Brokerage. ‘If I was to pinpoint it to a neighborhood, I would say Uptown proper and then also the Arts District for sure, and those are like $2,500 [a month] easy. It’s crazy.’”

“Here are 10 of Dallas’ most expensive apartment complexes with vacancies to spare: One Uptown. It’s our first Uptown entry to make the list but certainly not the last. At one point rent for a 571-square-foot entry-level unit ran for as high as $1,805. With the recent slump in rent price, $1,600 per month will get you in the building.”

From Williamette Week in Oregon. “Renters who can afford an apartment in one of the new luxury towers sprouting up across Portland are now being offered cash incentives to move in. Take the Emery, a seven-story building along the South Waterfront. It has nine apartments available within the next two months, starting with a $1,356-a-month one-bedroom. There’s air conditioning, a shared bike if you don’t have one, a bike room if you do, a pet washing station, and a clubhouse for parties. And there’s a bonus for some units: a $1,000 gift card from Amazon to encourage prospective renters to sign a lease.”

“Not far away, at Sky3 in the West End, the owners as recently as last week were giving some tenants a $1,000 Visa check card and six weeks free rent to move in. (Studios there start at $1,328 a month.) That’s just the start. As of last month, at least 33 high-end buildings in the central city and South Waterfront have more than 700 apartments sitting vacant or available for rent within the next two months, according to numbers WW found via publicly available listings and on a private management company spreadsheet.”

“So landlords in those buildings are advertising concessions: free rent for as long as eight weeks, along with other perks like gift cards, free parking and a yearlong free membership at a nearby health club. Even Burnside 26—the building that captured Portland’s imagination in 2015 as a symbol of invading yuppies driving out artists—is now offering six weeks free rent.”

“The deals represent a 180-degree change for a Portland housing market that’s seen relentlessly rising rents and vacancy rates lower than 3 percent. New construction has sent a flood of new luxury apartments onto the market—by December, it’ll be 12,000 units over two years—and they’re arriving at a faster clip than landlords can fill them.”

“‘It’s a sign that the market is weakening,’ says Portland economist Joe Cortright. ‘The last thing that apartment owners want to discount is the rent on a building. One-time offers—gift cards, free parking, waived deposits or other fees—it’s an indication they’re scrambling to fill apartments. It tends to predict that rents should ease further.’”

“The glut of new buildings is having a larger effect. After years of rent hikes, last month brought news that the average rent in Portland had fallen. From June 2016 through June 2017, average rent for one-bedroom apartments dropped 3 percent, according to ApartmentList. Data from real estate company CBRE show rents fell 3.1 percent during the last quarter of 2017 alone. That’s the largest drop in a single quarter since the early 2000s.”

“‘The market works, but with a lag,’ writes Cortright. “After lagging well behind demand in the early post-recession years, housing supply has finally caught up, with the predictable effect that rents have flattened out and now clearly started to decline.’”

A report from the South China Morning Post. “Mr Shen Weipeng is a 29-year-old trust manager in Beijing, working in one of the highest-paid vocations in China. His after-tax income last year was about 260,000 yuan (S$52,000). He decided to cut his spending this year by replacing his favourite cocktail with water, cancelling a planned trip to Europe and sticking with his current mobile phone even though the screen is badly cracked.”

“Mr Shen said he was trying to save money because he had a monthly mortgage payment of 11,000 yuan on his flat and was concerned about his income prospects, with the government’s crackdown on shadow banking having significantly reduced average incomes in the trust investment industry. ‘I just have no better choice than to cut back on my spending,’ he said. ‘My income was cut by about 30 per cent this year from a year earlier because of the broad downturn in my industry.’”

“Mr Shen’s financial situation is not unusual in China, where discretionary spending is often limited by a large mortgage payment and confidence about future income has been undermined by a less optimistic economic outlook. At the end of last year, total outstanding individual mortgage loans and borrowing from the public housing fund rose to 26.4 trillion yuan, meaning that housing-related loans made up 57 per cent of overall household debt, according to government data.”

“Considering that many Chinese use consumer loans to come up with the down payment on a house or to help pay their monthly mortgage bill, the weight of real estate debt on purchasing power is even heavier. Mr Qin Han, chief fixed-income analyst at Guotai Junan Securities, wrote in a research note last month about the recent emergence of the ‘consumption downgrade’ phenomenon. ‘Mortgages are an obstacle to consumption that cannot be avoided,’ he said. ‘Rents are also significantly squeezing consumer spending.’”

“‘The lipstick effect has emerged in China,’ Mr Li Xunlei, chief economist with Zhongtai Securities, told the South China Morning Post, referring to the phenomenon of consumers being more willing to buy less costly luxury goods instead of more expensive ones.”

“A number of articles on how to change one’s lifestyle to save money have gone viral on Chinese social media this year. ‘No afternoon tea, just use the time to diet,’ one article advised. ‘No more taxis or ride hailing, buses and shared bikes will do. And no new clothes; after all, work uniforms should be fine.’ One question posted on Zhihu, the Chinese version of question-and-answer site Quora, about ‘how to downgrade consumption to survive 2018′ has attracted more than 1,300 answers and 17.5 million views.”

“The responses offered suggestions such as ‘no food delivery, no milk tea and no electronics upgrades’ as well as ‘cooking your own food, eating Lao Gan Ma chilli sauce (only 10 to 30 yuan) and pickled mustard.’”

From Bloomberg. “Signs that China’s attempts to cool its red-hot property market are working are hard to find: housing prices rose the most in 21 months in June, and as soon as authorities squelch one buying frenzy another pops up. Scratch below the surface though, and something interesting emerges — land is going unsold in some of the nation’s most-crowded cities as the government’s deleveraging campaign and a relentless flow of property curbs squeeze developers’ profit margins.”

“A total of 419 land sites went unsold in the first seven months of 2018, up 78% from a year earlier, data compiled by China Real Estate Information Corp. show. A slowdown in land acquisitions preceded the past two housing downturns, and the surge in failed sales suggests the pattern may be repeating. ‘The series of failed land auctions shows that the home market is already in a correction,’ said Zhang Hongwei, a research director at Tospur Real Estate Consulting Co. ‘Developers will face increasingly harder times ahead, becoming forced to take a steeper cut in prices.’”

“Three suburban plots in Guangzhou attracted no bids at six separate auctions this year, even as the asking price was continually cut. In Shanghai, a small site close to the city centre drew no offers earlier this month. Land has also gone unsold in Hangzhou, Suzhou and Hefei, all considered popular markets due to a scarcity of space.”

“‘Sometimes companies don’t have enough funds,’ Liu Wei, executive vice president at developer China Merchants Shekou Industrial Zone Holdings Co., said. ‘Sometimes, under the pricing curbs, you just give up after doing the math.’”

From the Global Times. “China is ramping up efforts to tighten real estate transactions, thwarting speculation that the nation might loosen restrictions on the real estate market to stimulate economic growth amid escalating China-US trade tension.According to media reports, banks in some Chinese cities have raised lending rates to curb overheating in the real estate market. In Beijing, the average increase in rates for first-home loans was 10 percent above the benchmark rate, and 20 percent for second-home loans. An employee at a bank in Beijing told the Global Times on Monday that his bank’s rate for first-home loans was 40 percent above the benchmark rate.”

“There has been speculation that China might loosen restrictions on the real estate market to stimulate economic growth amid escalating China-US trade tension, but an industry insider surnamed Dong predicted that the real estate regulations will be further strengthened, rather than relaxed in the next six months.”

“‘The Chinese economy is now facing both domestic and external challenges, but preventing financial risks is a much more important task than maintaining rapid growth,’ Dong said, adding that deleveraging and structural reforms should remain the government’s priority. Song Ding, a research fellow at the China Development Institute, warned that while it’s important ‘to curb the pace of price increases in the real estate market, it’s also important to prevent a slump, which might lead to a financial breakdown and a plunge in growth.’”

“Auctions of land have also seen a slump in recent months, and some cities have reported failures of land auctions. For example, in Taiyuan, North China’s Shanxi Province, auctions of eight plots of land were reported to have failed on Saturday, and there has been a similar situation in some first-tier cities, including Shanghai and Guangzhou, capital of South China’s Guangdong Province.”

The Asia Times. “Let’s allow Japan to answer this most impactful of economic questions. Through the prism of Tokyo’s long experience, the bears have it. Xi’s government, after all, is reading right from the Japan Inc playbook. After Japan’s bubble economy imploded around 1990, bureaucrats fell into a decade-plus cycle of one-step-forward-two-steps-back on deleveraging efforts. The pattern: Tokyo would get serious about reducing debt levels and then, at the first sign of slower gross domestic product or market fallout, reopen the credit spigot. Close, reopen, repeat.”

“It was only about 2002-2003 that then-Prime Minister Junichiro Koizumi prodded banks to write down bad loans. The costs of that dozen or so years of dithering are still being calculated today. Glacial and unsteady clean-up efforts explain why the Bank of Japan is still holding interest rates below zero. And why, after 18 years of toying with quantitative easing, Tokyo is barely halfway to 2% inflation.”

“President Xi Jinping wants to break a cycle with which Japan is still grappling. Granted, the timing seems terrible, as Donald Trump’s escalating trade war imperils China’s $12 trillion economy. And so, Xi’s two-year crackdown on shadow-banking is taking a backseat to GDP – again. In the weeks since Trump took direct aim at Beijing’s export engine, Xi rolled out fresh fiscal stimulus and tax cuts. The People’s Bank of China, meantime, is prodding banks to up lending and easing capital requirements.”

“Easier credit means it’s now cheaper for mainland banks to borrow from one another than from the central bank. They also mean local-government leaders have greater latitude to borrow anew. It’s troubling, then, that roughly 80% of the jump in bad loans last quarter was among rural commercial institutions. Declines in capital adequacy ratios, though notable throughout China, are most pronounced among smaller banks.”

“And therein lies the Japan-like threat to China’s future as a balanced, vibrant economy. Xi is running into an inconvenient financial truth: the more he prioritizes short-term GDP gain over pain, the more he prolongs an inevitable Chinese reckoning. We’ve seen this movie before. It won’t end any better for Beijing than it did for Tokyo.”