The Housing Bubble

It’s Friday desk clearing time for this blogger. “Warnings from tax-reform advocate David Collyer, commentator Kris Sayce and academic Steve Keen contrast with banks and developers that claim a shortage of about 200,000 homes will underpin prices. More than two-thirds of the government’s shortage estimate arises by including people who can’t afford housing, such as the homeless or those living in trailer parks, Mr Sayce said. Mr Collyer said there’s actually a surplus of more than 250,000 dwellings after 15 years of overbuilding, while Mr Keen argues the shortage estimate is swollen by inflated demand from handouts to property buyers of as much as $21,000.”

“‘We look at underlying demand, how many dwellings are needed to house our population, as opposed to market demand,’ said Owen Donald, chairman of the Housing Supply Council. ‘There are submarkets that aren’t being supplied adequately and there may well be a surfeit in other submarkets. And in any market, there are going to be people who struggle to find a product they can afford.’”

“‘Our methodology is logically sound,’ Mr Donald said. ‘But none of us would bet our own house on the precision of our estimate of the extent of undersupply.’”

“‘It’s important for the government and banks to keep the myth of a shortage alive,’ said Mr Sayce. ‘Without it, prices drop, and negative equity results in housing repossessions and insolvent banks.’”

“Riots in London, fear in France and Italy, meltdown in Greece and downgrades in Washington. These are worrying times for anyone with half a brain and terrifying for anyone with a whole one. Give or take the occasional riot, we in Britain have tended to think we’re relatively safe from these storms. But the British economy is stalling badly and our financial system is much weaker than the authorities would have you believe.”

“Worse still, the biggest threat to our financial system is one that most likely affects you personally. British property prices are far too high and set for a fall.”

“You only have to look at the US to realise what happens when you get a cycle of mortgage defaults, repossessions and distress sales. In America, prices have already fallen at least 30 per cent and they’re still headed down with no bottom in sight.”

“No? You still don’t believe me? Then look at it this way. Can you name any occasion in history when a developed country simultaneously faces savage government cuts, swingeing rates of tax, high inflation, rising unemployment, depressed growth abroad, rising interest rates, huge levels of debt, and doesn’t have a housing crisis?”

“These thoughts aren’t comfortable ones. Not for me, not for you. But you don’t avoid disaster by wishing it away.”

“Average homes prices in British Columbia are expected to surge to yet a new record high by the end of the year, according to a report. Bryan Yu, an economist with Central 1 Credit Union, said the median home price in the province will increase 6.8% to $417,000. Average home prices in increasingly pricey Vancouver are likely to hit $521,000 by the end of this year, an increase of 8.5% compared to last.”

“However, as the housing market storms ahead, Mr. Yu says concerns of a possible bubble in that city are overblown. ‘Our research shows few signs that speculators are overly active in the Vancouver market, which means we are unlikely to see a speculation-induced bust,’ he said in a statement.”

“Ben Myers, executive editor at real estate research firm Urbanation, has his forecast there will be 25,000 new condominium sales by the end of 2011. If he’s right, it’ll be a new record, surpassing 2007’s previous record of about 22,500 new condo sales. And with the Toronto new-condo market coming off a busier-than-normal summer and a record-setting second quarter, he’s not surprised. ‘We’re certainly on pace to have the most condominium sales in any one year in 2011,’ Mr. Myers says.”

“‘There was a huge number of new projects coming on line,’ Mr. Myers says. ‘And surprisingly, even with all of this extra supply, they had the highest absorption rate ever of new product.’”

“Developers are paying less attention to the sales seasons of the past. Since the market is being driven by investors more than ever, Mr. Myers says, there was less need to wait out the summer season, when end users are typically on holiday and less focused on condo buying. ‘Forget the old conventions of a spring and fall market,’ says Stephen Dupuis, Building Industry and Land Development Association CEO. ‘The market’s that much bigger now — it’s active all the time.’”

“Those who purchase and move into a condo in the former Olympic Village can receive a free kayak, a bicycle, a year’s worth of groceries from Urban Fare, along with other incentives. Those who aren’t lured by a year’s membership to a car co-op, a bus pass and a coffee every day for a year, can instead choose $5,000.”

“Bob Rennie, principal of Rennie Marketing Systems which created the ads, says offering them makes good business sense when you consider accumulating interest, maintenance costs and property taxes for unsold units. ‘If this accelerates sales, the cost of $5,000 is nothing’ he said. ‘It’s not desperation, it’s lifestyle.’”

“Raimon Land Plc is planning to launch two new condominiums in Bangkok and Pattaya worth a total of 5 billion baht in the next six months. Chief executive Hubert Viriot said the Pattaya market was booming. According to the property consultant Colliers International Thailand, condominium units launched in Pattaya in the first half of this year exceeded the number for all of 2010.”

“Colliers’ managing director Patima Jeerapaet said the Central Festival shopping centre remained a very strong draw card even for Bangkok residents. Another important attraction is the King Power Duty Free Complex, which is set to open by the end of this year. The main target groups are tourists from China, Russia, India and Vietnam.”

“Waterfront homes and condominiums will be offered at a massive bank-ordered auction scheduled Oct. 18 in Orange Beach, with another 100 properties to be auctioned on the Florida coast Oct. 20, according to The National Auction Group. Lenders, including Fannie Mae and Freddie Mac, are trying to think outside the box and use as many different strategies as they can to get rid of properties, according to Jonathan Keith of Keller Williams Realty in Mobile.”

“Foreclosures slowed down for about six weeks in the summer, but have started to ramp back up, he said. There were 50 properties scheduled for sale on the courthouse steps last Friday, he said. ‘Buyers are out there,’ Keith said. ‘When the price gets right, it’s not uncommon to have multiple offers.’”

“Homes, lots and commercial buildings from Mobile, Baldwin and Clarke counties will be offered to the highest bidder. More than half are bankruptcy properties, with the others in foreclosure, according to Frank Crain of Coastal. ‘The banks have accumulated foreclosures and have got them listed with Realtors, and they can’t sell it,’ he said. ‘They are tightening the screws on banks execs to get rid of it.’”

“The Federal Housing Finance Agency is considering renting out real estate that’s held by government-controlled mortgage companies Fannie Mae and Freddie Mac and the Federal Housing Administration. Federal officials haven’t shared the number of properties they are considering renting out. According to 2010 U.S. Census Bureau reports, 17.45 percent – or 1.6 million – of the Sunshine State’s homes are vacant. That’s an increase of more than 66 percent during the past 10 years.”

“In Collier County, 32.5 percent of homes — or 64,119 — were vacant, while Lee County had a 30 percent — or 111,281 homes — vacancy rate, according to the census. What the agency needs to start offering is a rental deal before a house is foreclosed on, such as a ‘rent to own’ program, suggested John Steinwand, broker and owner of Naples Realty Services.”

“The agency should have used the rental program approach before foreclosure, he added. ‘Until they stop the foreclosure totally, we are never going to get out of (what) we are in,’ said Steinwand, a broker for 20 years and past president of the Naples Area Board of Realtors.”

“Police have arrested and charged a Tarboro man with squatting for at least seven months in a North Raleigh home valued at nearly $2 million. The 7,664-square-foot home in Wakefield Plantation has six bedrooms, six full bathrooms, theater and game rooms, a wine cellar, vaulted ceilings and an elevator. There is also a swimming pool and a Jacuzzi whirlpool bath.”

“Thomas Everette Jr. apparently enjoyed the luxury home so much that he created a fake company with forged documents to transfer the property to himself at no cost, according to police reports. But the scam fell apart when a concerned neighbor did some investigating and called police.”

“‘They have been living in the house, and we’ve been trying to figure out what to do,’ the neighbor said. ‘I’ve contacted a couple of different banks and stuff, and one bank doesn’t know who they are, but they shouldn’t be in there because it’s owned by Bank of America.’”

“It’s been a rough week on world sharemarkets and that’s prompting serious speculation about whether the Eurozone might fracture. There are fears Greece will default on its debt and have to leave the euro, even though France and Germany are trying to shore up markets by declaring they’re confident that won’t happen as long as Greece imposes strict austerity measures.”

“One expert though says that strategy should be turned on its head. Ann Pettifor is a fellow of the New Economics Foundation in London. She forecast the current problems five years ago in a book called The Coming First World Debt Crisis. Pettifor: ‘The fact is the world is burdened by too much debt, too much leverage. It’s not gonna be easy, and the bankers will scream blue murder. But we’ve gotta make our choices.’”

“Stephen Long: ‘Not the choices made in 2008, when governments bailed out insolvent banks, but demanded little or nothing in return. How could it have been done differently? A: We could’ve said to the bankers, ‘We need to bail you out. This is a systemic crisis. We hate what you’ve done, but off course we have to bail you out, but there are terms and conditions. Thou shalt lend to real businesses doing real productive economic activity. You will not speculate and you will lend at very low rates of interest, and we will take away your license if you don’t. And by the way, you can’t pay yourself bonuses.’ We said nothing of the sort. Our governments just simply, in a state of shock, maintained the system as it was prior to crisis.’”

“Pettifor says the current debt crisis is an opportunity to reform the financial system, imposing capital controls, credit controls and taxes on speculation to redirect the banks to good, old-fashioned lending. But she’s not optimistic. Pettifor: ‘The really frightening thing is that passivity of our policymakers as the liberalised financial system, after 30 years, finally disintegrates.’”

“You want to fix this economic crisis? You want to put people back to work? You want to light a fire under the economy? There’s a way to do it. Fast. And relatively simple. But you’re not going to like it.”

“We’re hocked up to the eyeballs, and then some. We’re at the bottom of a lake of debt, lashed to an anchor. American households today owe $13.3 trillion. That has quadrupled in a generation. It has doubled just in the last 11 years. We owe more than any other nation, ever. More than a quarter of American mortgages are underwater. Many are deeply underwater. In states like Nevada and Florida the figures are astronomical.”

“The key thing to understand is that most of that money has gone to what a fund manager friend of mine calls ‘money heaven.’ Most of these debts will never, ever be repaid in real money.”

“American mortgage contracts allow for default. Half of the states in this country are ‘non-recourse,’ which broadly speaking means you can send in the keys and walk away from a bad loan. The other half are sort of ’semi-recourse.’ The bank can come after you for any shortfall, but only in a limited way. Most of the people who are deeply underwater don’t have that much anyway.’

“And the banks knew this. When they were lending $500,000 to a bus driver with $1,000 in his checking account, they knew that their loan was only guaranteed by the value of the home. If they didn’t know it, they should have. Their incompetence is not our problem.”

“Twice before, advanced economies have gone through what we are going through now — namely a massive hangover after a massive debt binge. The first was the U.S. in the 1930s, the second was Japan in the 1990s. The U.S. didn’t get out of it until the 1940s unleashed inflation and reduced the debt’s value in real terms. Japan still hasn’t gotten out of it. They have deflation, while government debt has skyrocketed. The correct moral hazard is to punish the banks who lent imprudently by making them eat their own losses.”

“I told you that you wouldn’t like it. I don’t either. But the alternatives are worse.”