The Housing Bubble

It’s Friday desk clearing time for this blogger. “Brian Persaud keeps his finger on the pulse of the Toronto real estate market and has an uncanny ability to sense a new trend before it happens. With the proliferation of so many investment condo units, one wonders if Toronto will become a city of rentals. ‘It’s really interesting,’ says Persaud. ‘Are they all becoming rental units? In the beginning yes, but there’s so much demand for home ownership now that over time, as the investors get out, and these investors are going for the long-term; three, four, five years, eventually people will buy them.’”

“If the real estate bubble bursts, it is sure to turn China’s rising middle class against the government. Recently outraged apartment owners organized a demonstration in downtown Shanghai, protesting the decline in the value of their property. Wang Jiang, 28, points to a nearly complete apartment block in Anting, one of the city’s suburbs. The software company manager bought an apartment on the 16th floor of the building for €138,000 in early September. It was a steep price for 82 square meters (883 square feet). But Wang was determined to get in on the boom. He didn’t even take the time to view the housing complex before he bought the apartment. Where else, after all, should he have invested his assets, if not in real estate?”

“Wang’s apartment isn’t even finished yet, but he no longer feels any joy about moving in — not now that the real estate company is offering similar apartments in the same complex for about 20 percent less. Wang feels he was deceived about his apartment’s resale value. ‘What are they thinking?’ he demands. ‘Surely they can’t just erase a portion of my assets?’”

“There are many similarities between the over-confidence in Japanese equities in the 1980s, the over-confidence in technology stocks in the 1990s, and the prevailing attitude to China in recent years. In each case investors mistook a phase in a cycle for an enduring trend. Investors persuaded themselves that the fundamentals were so favourable that prices would continue to rise.”

“In other words, they extrapolated the recent past into an ever more favourable future. In short, they believed that ‘this time it’s different’.”

“We reported that 50 per cent of China’s gross domestic product (GDP) consists of investment. We pointed out that China had built a number of brand spanking new ghost cities, with virtually no residents. I recently heard further anecdotal evidence of over-building, in a report by a traveller in north-west China, driving for hours on a six-lane highway and hardly seeing another car. If large road building is seen as evidence of a healthy China, then we would be twice as impressed if this highway was expanded to 12 lanes. Never mind that no one uses it.”

“Q: I have a problem. My property was appraised about five years ago for 50 percent more than what it’s worth now, according to the local assessor’s value. I’ve listed the home for sale significantly below that number over the last year and I’ve had many lookers but no great offers. I’ve made every improvement or change suggested by my real estate agent, but the most recent offer was 30 percent less than my listing price. Would it be possible to take a look at what’s viewable on the web and maybe spot some serious defect or drawback that’s causing lookers to back off and not even consider making an offer?”

“A: The market is rather interesting these days, but not in a good way. From an emotional perspective, chasing the market down is one of the hardest things you can do. You might find that you have lowered the price on your home, but that each time you listed your home for less, you were behind the current market. So each successive price decline was not sufficient to push you ahead of local market conditions.”

“We have a home in our neighborhood that was listed for $900,000 when the market was at its peak. But at that point the home was overpriced and there were many lookers but no buyers. As the housing market deteriorated, the owners reduced the price, but never enough to entice buyers that had become accustomed to other homes in the market that were priced lower.”

“Today, that same home is listed for around $550,000 with few people taking a look at it. You can buy a bigger home in better condition in a better location for that price or less. You may be in a similar situation.”

“About 50 people descended on a Riverside home today to move an evicted resident back into a property that he lost to foreclosure, which he blamed on a bank’s refusal to negotiate with him on a modified mortgage. ‘I don’t know if this is gonna work,’ said Art de los Santos, who was kicked out of the single- story house in July.”

“He and other supporters of a ‘National Reoccupy Homes Day’ event forced their way into the vacant residence carrying in furniture, including a cabinet, chairs and flat-screen television. ‘I support him. He’s standing up for his rights. Good for him,’ said Lida Cingmars, whose house abuts the former de los Santos property. Cingmars’ property is also in default and on the verge of repossession. She said she may be forced to leave with her family in a month. ‘The greed of investors caused this to happen,’ Cingmars told CNS. ‘The bank should have considered his situation. Look at what’s happening to people.’”

“Asked whether de los Santos’ claim to the property is valid even if he cannot repay his mortgage, Joseph McCoy, with Occupy L.A., shrugged and said, ‘Each homeowner has to decide if what’s going on is right.’”

“More consumers are choosing to pay credit card debts while letting the mortgage slip, helping push credit card delinquencies to their lowest point in 17 years, TransUnion said. Historically, Americans protected their house payment and were more apt to be delinquent on credit card payments, said Charlie Wise, the company’s director of research and consulting. But crashing home values and desperation have caused that to flip since 2008.”

“Consumers are making tough choices based on which asset gives them what they need in tough times. ‘Consumers are protecting their credit cards. It gives them financial flexibility,’ Wise said.”

“Americans’ wealth last summer suffered its biggest quarterly loss in more than two years as stocks, pension funds and home values lost value. Household wealth, or net worth, is the value of assets like homes, bank accounts and stocks, minus debts like mortgages and credit cards. Home equity is the biggest source of wealth for most Americans. Last quarter, home values slipped 0.6 percent. Total values fell to $16.1 trillion, down from nearly $21 trillion in 2007, before the recession began.”

“The report found that household debt declined at an annual rate of 1.25 percent from the previous quarter. The main reason was a decline in mortgage debt, which has fallen for 14 straight quarters. But the drop is deceiving. Mortgage debt is declining mainly because so many Americans are defaulting on payments and losing their homes to foreclosure — not just because people are paying off loans.”

“Massachusetts Attorney General Martha Coakley sued five of the biggest banks in the country – including Bank of America, JPMorgan and Wells Fargo – for alleged foreclosure fraud. For an update on what’s going and to get context on the Coakley suit, I spoke to Alan White, a visiting professor at Tulane law school who has written widely on the foreclosure crisis.”

“Q: A recent study by the Center for Responsible Lending found that we may be only halfway through the foreclosure crisis. Can you give us a status update on how bad things are right now? A: We have this $10 trillion problem. Total outstanding mortgages in the U.S. on houses went from $4 trillion to $10 trillion – it almost tripled – in the decade before the crisis. Since 2007, mortgage debt has barely dropped. While home prices have dropped by 30 percent, the amount we owe on our houses has only dropped by 5 percent.”

“There are 6 or 7 million homes where people are behind on their mortgages or in foreclosure. That’s triple to quadruple any kind of levels we’ve seen since the Great Depression. The foreclosure process is slow, and the process of working out loans one by one in our retail system has been painfully slow. We’re still foreclosing about a million more houses a year. So I think the logic of the Center for Responsible Lending report was right: When you look at all these numbers – the number of people who are behind, the rate at which we’re foreclosing on houses, and the rate at which people are being given alternatives to foreclosure, we’re looking at another five to 10 years of this.”

“When Martha Coakley went rogue last week, she came off as the AG who was done playing games with the big, bad banks. The oddest thing about the complaint is it fails to pinpoint a sensible motive for all of this allegedly heinous behavior. Banks are not in a rush to take back homes from borrowers. Foreclosure is not a profitable pursuit, and banks often don’t know what to do with the homes once they’ve taken them back. I hope the banks work out a deal with the AGs that helps keep even more people in their homes while not making those who have diligently kept current with their mortgages feel like suckers.”

“It was never hard to miss the ‘Young Building’, but now that Habitat for Humanity’s transformation of the former Sunrise Trailer Park project has begun next door it really stands out. The Charlottesville factory was destroyed by a fire in 1920, but the office building survived. It would become a residence and then a rental property for many years. Today, it’s own by Jeff Grosfeld.”

“Grosfeld says he has no immediate plans for the property, which he’s mostly using for storage, and is just ‘waiting for the right time’ to fix it up or sell it. He says that Habitat offered to buy the property, which is assessed at $171,700, but didn’t offer him very much. ‘I didn’t want to just give it away,’ says Grosfeld.”