The Housing Bubble

It’s Friday desk clearing time for this blogger. “Imagine trying to sell your home and realizing it just isn’t worth what you thought it was. If two homes are for sale, one for sale by owner and the other by a bank that desperately needs to get rid of foreclosed property, then a buyer will likely choose the foreclosed home because of the deep discounts offered. It can lower the value of other homes in the neighborhood, like Anna and Fred Kirby’s house, which has been on the market for nearly three years.”

“‘We thought it would go pretty fast because it’s a nice built home and it didn’t and we’re still waiting,’ the Kirbys said. But the Kirbys said they just can’t compete with big banks who have to get rid of foreclosures. ‘Its not fair. It’s really not fair but there’s really not a lot I can do about it,’ Anna Kirby said.”

“A 40-year-old Donner Summit ski resort has defaulted on a $16.7 million loan, leaving a controversial housing proposal in considerable doubt. A Bay Area developer, and two partners paid a reported $35 million for the resort in 2005, at around the peak of the property bubble. They quickly charted a plan for 900 residential units on the property. ‘People have dreams, and sometimes dreams happen at the wrong time,’ said Bob Roberts, executive director of the California Ski Industry Association.”

“Wendy and Danny Mulqueen were the first residents to move in to the Carolina Park subdivision, a huge master-planned development where more than 2,000 homes are proposed. That was in early 2009, before Carolina Park became a casualty of the housing meltdown and the development went into foreclosure. Today, the Mulqueen’s home is one of just four, all on the only occupied residential street in the 1,600-acre property.”

“‘I didn’t go out there with the understanding that I’d be one of four. None of us did,’ Wendy Mulqueen said. ‘Hopefully, it will get going again.’”

“Ada and Canyon counties now have a combined 423 golf holes for a population of 581,288. All of the golf growth has come on the western end of the Valley because of the vast supply of open land. Nearly every new course has been tied to housing developments — and that area also is where the Valley’s housing boom thrived in the 2000s. ‘There’s too much golf in the entire Valley. There’s just too much for the demand of what the market has to produce,’ said Jim Brown, the director of golf for Nampa’s two city courses.”

“In its latest farmland survey issued in May, the Kansas City Fed reported that farmland values in its district stretching across southern Plains wheat and cattle areas had soared 20 percent higher than a year ago in the first quarter. ‘That is an incredible increase. I don’t think increases like that are sustainable,’ Joseph Glauber, chief economist at the U.S. Agriculture Department, said in an interview. ‘The real question is whether or not they (land values) are adversely affected. Right now, I don’t think anybody has foreseen big declines in commodity prices.’”

“Chinese property tycoon Tu Haiming is looking to invest in the Prague tourist market and might also expand his Czech quarter concept. Q: Will your Prague project be as ambitious as that of the Czech quarter in Shanghai? A: In China the rule is that when you build a new district, the bigger it is, the more successful it is. The government is ready to invest in infrastructure for bigger projects, build schools or the subway.”

“Q: Was the project profitable? A: Yes. From the moment I sold the first apartment I realized that it was no longer a risk. In the first phase 456 flats were built. People stood in line for three days and the flats were sold in half a day. Part of the area was a sort of show area which is now being turned into flats. There will be 200 flats there and 700 people have already expressed their interest in buying them.”

“Q: Some people say that the bubble in China is even more dangerous than that of the US. What do you say about that? A: The Americans did not correct their bubble. The Chinese government does not want a big bubble and has taken steps to ensure that it does not burst. That’s the difference between the approach of the two governments.”

“The government’s nearly 20-month tightening campaign has resulted in growing inventories of unsold homes and higher mortgage costs — all in a delicate attempt to avoid a property bubble and guide red-hot home prices lower without causing the market to implode and destabilise the economy.”

“‘We will not cut prices in the next six months,’ boldly proclaims Cui Fan, a sales agent from Jingxu Real Estate Development Co, which offers non-furnished residences more than an hour from downtown Beijing at 19,000 yuan, or nearly $3,000, per square metre.”

“By some estimates, China has as many as 64 million apartments that remain unlived in. This is a function of the “ghost cities” phenomenon, in which vast metropoli are constructed with no rhyme or reason. It doesn’t make sense. With so many residences barren and empty, why is the Chinese labor class packed in like human sardines?”

“The vast majority of apartments remain empty. Sold by Ponzi real estate developers… bought by Ponzi investors… a self-sustaining cycle in which prices go up because the buyers are making them go up. It’s the ‘greater fool theory’ in full effect.”

“Here’s a thought: Why don’t Chinese officials just order large price markdowns on these expensive, empty albatrosses, so that the crowded laboring class can move into them and have nice places to live? There is just one big problem with that notion: A wholesale markdown on Chinese real estate, to levels anywhere near what real buyers can afford, would potentially bankrupt China’s property developers… thoroughly outrage the well-connected property investor class… and lead to a full-blown banking crisis as hundreds of billions in loans went bad.”

“The forces that pushed the rise of the debt mountain of the past three decades were global. The policemen of this system remain the same too. There is no value judgement in this. It just IS. For Australia this has meant a profound change to the way in which the economy is funded. No longer can or do the major banks endlessly expand lending with cheap and easy funds from offshore.”

“All of the economists of the old economy continue to see a consumer ready to spring back to life and shower retail and housing with largesse. Perhaps it’s possible. But none of these economists acknowledges that in taking that position, they’re effectively arguing for a seamless transition from an externally funded bubble to an internally funded one.”

“It’s possible. Internally funded bubbles do happen. Look at China.”

“But right now the evidence is very much the opposite. Instead of a resuming a bubble, we have an economy desperately rebuilding its savings because it sees little choice. Whether it’s the systemic global debt crunch or it’s the RBA, exuberance is so yesterday.”

“Alas, we all want a painless solution. We want to find a pill or Band-Aid that will provide immediate relief. But in the world of economic difficulties, economic potions needlessly prolong the ailment, often delay or prevent a cure, and habitually make the situation worse in the long run.”

“The housing slump provides the first example of taking the slow-peeling of the Band-Aid approach. Everyone wanted the government, banks or someone to fix it. Yet, we are still suffering a multiyear decline in housing prices accompanied by steadily rising numbers of foreclosures. The actions to try to keep prices of houses up and to avert foreclosures have only delayed the solution to the housing problem. We have suffered a slow-motion painful decline in housing prices that would have occurred faster without the several monetary and fiscal interventions.”

“We didn’t avoid pain; we just stretched the pain out over more than a few years. The Hippocratic Oath says never to do harm. We are seeing that much of our economic palliatives and potions are ones that do not heal, do not alleviate pain, and cause lasting harm. We need to clean the wound, stitch it up, and get on to real business of healing.”

“With lenders filing foreclosures more slowly and an excess inventory of homes, housing prices could fall another 20 percent next year, says one economist. Gary Shilling, one of the economists who predicted the subprime mortgage crisis, says the ‘depressing effect’ of two to 2.5 million homes in excess inventory will push prices down.”

“‘In the past, almost everyone was sure that house prices would never fall, and on a national level, they hadn’t since the 1930s,’ Shilling wrote. ‘Now everyone knows prices can fall, have collapsed and continue to drop. Who wants to buy an asset that is highly likely to continue dropping in price?’”

“Shilling said a place to live and a great investment ‘are no longer contained in the same package,’ an owner-occupied home.”