The Housing Bubble

It’s Friday desk clearing time for this blogger. “Nobody’s sugar coating it. Real estate in Grand County, like anywhere these days, is a tough sell. There is 4 years worth of inventory in the $650,000 to $900,000 segment. One of the toughest things for sellers out there, said broker Katie Riemenschneider with Real Estate of Winter Park, is that many of them can’t wrap their heads around current market. ‘They used to be able to throw something out there with a $50,000 mark up on it and somebody would buy it.’”

“It was the worst spring for real estate prices in nine years, according to numbers provided by the Eastern Connecticut Association of Realtors, and sales of single-family homes fell nearly 30 percent when compared with the same period last year, plunging to their lowest level in the second quarter since records were kept. Realtors association chief executive John Bolduc admitted the supply of homes for sale at $400,000 and above is ‘astronomical,’ at one point earlier this year reaching a level that would require six years to fully resolve, given the current rate of sales - and assuming no other homes in the same range were added to the inventory.”

“Bolduc said the sales numbers were off dramatically because this spring’s housing market did not include the tax credits that had been available last year. ‘The second quarter was when all the activity was (last year),’ Bolduc said. ‘It’s tough to beat an $8,000 tax credit.’”

“Sales of new condominiums in Montgomery, with 127 units, and Prince George’s, with 107 units, during the past year have fallen to barely 10 percent of the peak in 2006 before the Great Recession ravaged the housing industry, according to a quarterly report by Delta Associates of Alexandria, Va. The drag on condo sales, despite few new buildings coming on the market, is reflected in the continuing glut of new unit supply. During the second quarter, the ratio of sales to inventory in Montgomery translates into 4.8 years of inventory in Montgomery the most in the Washington area.”

“‘Resales are being heavily influenced by foreclosures in some jurisdictions such as Prince George’s County where prices declined 54.6 percent in the past year,’ the report said.”

“George Vallone was recently chosen as the first head of the New Jersey Builders Association’s new mixed-use alliance. He spoke with The Record recently. Q. How are foreclosures affecting the housing market? A. In New Jersey, foreclosure activity has been suppressed because of court action. That is getting resolved, and it’s expected that there will be new rules issued by fall. There’s the potential for 50,000 more foreclosed homes to hit the market.”

“Our association is working on a plan to deal with both the affordable housing issue and the big backlog of foreclosed homes that is going to come on the market soon. We’re trying to set up a situation where, using the state Housing Mortgage Finance Agency, we can begin to have the foreclosed homes be used by municipalities to fulfill affordable housing obligations, and not have them go on the market.”

“Sales in the largest segment of the real estate market in New London and Windham counties fell 30 percent during the three months ended June 30 compared with a year earlier, as the end of a government tax credit and weak job conditions curtailed purchasing impulses the Norwich-based Eastern Connecticut Association of Realtors reported. The weak housing numbers should provide added motivation to the jobs special session of the General Assembly set for September, association CEO John Bolduc said Thursday.”

“‘The state and federal governments should be encouraging the housing market, but they’re not doing that,’ he said. ‘If housing goes up, then jobs go up.’”

“Prices for U.S. homes may climb as soon as the third quarter, ending declines as foreclosures decline make more home available for sale, Housing and Urban Development Secretary Shaun Donovan said. Donovan said lenders are adding requirements ‘that don’t make sense’ for risky borrowers after the government, through the Federal Housing Administration, raised the minimum down payments for a house purchase. ‘We can’t over correct,’ Donovan said. ‘We can’t go so far in the other direction that we cut off homeownership for people who really can be successful homeowners.’”

“Encouraging home ownership should avoid giving buyers an expectation of making $1 million overnight, Donovan said. ‘We can get back to the place where it’s a good investment and we will be able to make money over time.’”

“President Obama said during Wednesday’s virtual town hall that his initial response to the housing crisis was one of the two mistakes he made in responding to the recession. The administration’s marquee program, the Home Affordable Modification Program, which aims to help struggling borrowers avoid foreclosure, has been criticized from both the political left and right as a failure.”

“Mr. Obama said today that improvement in the housing market will depend largely on the improvement of the overall economy. ‘No federal program is going to be able to solve the housing problem’ entirely, he said. ‘Most of this is going to be free market.’”

“‘The one thing we can do for homeowners who have been responsible,’ the president continued, is to ‘try to match them up with bankers so that each side ends up winning.’ One of the challenges, Mr. Obama said, is ’sorting through who owns what’ given that loans were ’sliced and diced’ into mortgage-backed securities.”

“The housing crisis repeatedly came up Wednesday as Obama conducted his first ever town hall meeting via Twitter. One person asked in a tweet: ‘How will admin work to help underwater homeowners who aren’t behind in payments but are trapped in homes they can’t sell?’”

“Later, another questioner asked a follow-up question about whether the market could heal itself. Obama responded that ‘given the size of the housing market, no federal program is going to be able to solve the housing problem.’”

“He later added: ‘Some folks just bought more home than they could afford and probably they’re going to be better off renting.’”

“Boutique condominium residences are such a sought-after commodity in the established Beaches community, Reserve Properties sold 90 per cent of its church-conversion project in the first month and the rest shortly after that earlier this year. People who didn’t have a chance to buy a unit at Bellefair before they sold out, were put on a list to be the first to purchase at the builder’s latest mid-rise development nearby, called Lakehouse Beach Residences.”

“‘It’s about 65-per-cent sold out and we haven’t had our grand opening,’ vice-president Shane Fenton said prior to the official launch last month.”

“In one corner we have journalists at The Economist newspaper, who in a recent survey make the extraordinary claim that Australian house prices are overvalued by 55% using their preferred benchmark. In the other corner we have a crowd of the most respected economic minds in Australia, almost all market economists, and leading house price index providers.”

“This latter cohort essentially contends that The Economist does not know what it is talking about. They argue that Australian house prices are not materially overvalued, and there is no reason to believe that they must suffer precipitous price falls in order to obtain some more desirable valuation benchmark. This group has also produced vast reams of analysis showing that robust demand and supply-side fundamentals underpin Australian housing valuations while dwelling-price-to-income ratios remain unexceptional by international standards.”

“In fact, recent research by Rismark has demonstrated that house price growth in Australia’s capital cities and our regional areas has not kept pace with disposable household income growth since the end of the last cycle in 2003.”

“Unless you believe that we are going to get double digit inflation and 17% mortgage rates, which most observers think are near impossibilities, the housing market benchmarks of the 1980s are irrelevant to home owners in the second decade of the 2000s. The same principle applies to The Economist’s analysis.

It would, of course, be wonderful if our ever-changing, multi-dimensional world could be judged by crude long-term ratios that blissfully ignore all sorts of key facts. Unfortunately, that’s just a recipe for confusing further an issue that already has many confused.”

“Looking ahead, it is highly likely that Australian house prices will track household earnings in what PIMCO’s Bill Gross has aptly described as the ‘New Normal.’”

“In the last few years, cities’ efforts have helped government infrastructure and real estate spending surpass foreign trade as the biggest contributor to China’s growth. Subways and skyscrapers, in other words, are replacing exports of furniture and iPhones as the symbols of this nation’s prowess. But there are growing signs that China’s long-running economic boom could be undermined by these building binges, which are financed through heavy borrowing by local governments and clever accounting that masks the true size of the debt.”

“As municipal projects play out across China, spending on so-called fixed-asset investment — a crucial measure of building that is heavily weighted toward government and real estate projects — is now equal to nearly 70 percent of the nation’s gross domestic product. It is a ratio that no other large nation has approached in modern times.”

“Even Japan, at the peak of its building boom in the 1980s, reached only about 35 percent.”

“In the case of Wuhan, a close look at its finances reveals that the city has borrowed tens of billions of dollars from state-run banks. But the loans seldom go directly to the local government. Instead, the borrowing is done by special investment corporations set up by the city — business entities whose debt shows up nowhere on Wuhan’s official financial balance sheet. Adding to the risk, the collateral for many loans is local land valued at lofty prices that could collapse if China’s real estate bubble burst. Wuhan’s land prices have tripled in the last decade.”

“Beijing helped ratchet up the municipal building boom in early 2009, when in response to the global recession, it pressed local governments to think big and announced a huge economic stimulus package. That unleashed a wave of government-backed bank lending.”

“Kenneth S. Rogoff, a Harvard economics professor and co-author of ‘This Time Is Different: Eight Centuries of Financial Folly,’ has studied China’s boom. He predicts that within a decade China’s lofty property bubble and its mounting debts could cause a regional recession in Asia and stifle growth in the rest of the world.”

“‘With China, you have the ultimate ‘this time is different’ syndrome,’ Professor Rogoff said. ‘Economists say they have huge reserves, they have savings, they’re hard-working people. It’s naïve. You can’t beat the odds forever.’”