The Housing Bubble

It’s Friday desk clearing time for this blogger. “In recent years, residential real estate sales have glowed even brighter for buyers from overseas. Some see it as fulfilling their dream to take a bite of the Big Apple; others buy here to add to their property portfolio; while still others purchase apartments for their (lucky) college-age children. Whatever the buying motive may be, the trend has turned Manhattan into a recession-proof real estate island. Foreign buyers today hail from pretty much every country you can think of, but Irish and Middle Eastern buyers are still making a big dent, with Asian and Latin American purchasers gaining quick ground.”

“According to Wei Min Tan, founder of Castle Avenue Group within Manhattan-based Rutenberg Realty, upwards of 50 percent of his clients are foreign. ‘Luxury condos here are about $1,500 per square-foot,’ Tan points out. ‘In Hong Kong, it would be $2,000. In London, it would be $3,500. You have to compare similar kinds of cities. In the U.S., Manhattan is the most expensive, but globally it’s cheap.’”

“Canuck investors trolling for foreclosure buys in the U.S. are increasingly moving their search from the MLS to the auction block, an effort to get a jump on a dwindling number of properties in many U.S. markets. Those auctions often take place once a month and see investors square off against each other but also a slew of prospective homebuyers looking to snatch up a deal. The investors, Canadian or otherwise, are no exception. ‘More and more Canadians, and other investors looking for property in Arizona, Florida and Nevada, are going to the real estate auctions in order to find properties,’ Lance Livingston, with Smart Arizona Foreclosures, told CREW at last weekend’s Investor Forum Toronto.”

“During a discussion with the Globe and Mail’s editorial board, Finance Minister Jim Flaherty acknowledged that Ottawa doesn’t have a good grasp on the amount of foreign money in the Canadian housing market. ‘It’s mainly anecdotal, so I don’t have a statistical grasp of it, no,’ he said, adding that he hears about lots of people in emerging economies paying cash for condos in Toronto and Vancouver.”

“Real estate agents have tales about foreign investors scooping up literally dozens of condo units at one time. Bank of Montreal chief economist Sherry Cooper said in a note Friday that, while Toronto’s condo boom still pales in comparison to what’s happened in Spain or the U.S., lessons must be learned from those experiences. And one of those lessons? The role of foreign investment. ‘For nearly a decade starting in 1999, house prices exploded in Spain as both domestic buyers, and more notably, foreign buyers poured money into residential real estate,’ Ms. Cooper wrote. ‘Europeans, Russians and others were using the Costa del Sol as their vacation hideaway and condo building in all parts of Spain exploded.’”

“The Spanish real estate bust is the biggest test to date for European authorities with Spain’s economy almost twice that of Greece, Portugal and Ireland combined. Spain and Ireland are ‘very similar,’ said Angel Mas, president of European mortgage insurance at Genworth Financial Inc., in an interview in Madrid. ‘They had never experienced this cheap credit, same as here. And they experienced a construction boom that at the beginning was out of necessity, but they couldn’t stop it.’”

“In Ireland, they’re moving toward acceptance. The first auction of one of 2,000 unfinished housing estates takes place tomorrow in central Dublin, with sales expected to fetch cents on the euro, showing the Irish may be closer to the end than the beginning.”

“In the stages of death of a real estate boom, Spain is still in denial. Developers continue to build even with 2 million homes vacant around the country, new airports that never saw a single flight being mothballed, and property appraisers and banks reporting values have fallen only about 22%, said Jesus Encinar, co- founder of Spain’s largest property website, who estimates the real decline is probably at least twice that.”

“Miguel Angel Garcia Nieto, mayor of Avila for the past decade, disagrees that his city has been overbuilt. ‘When we approved the first urban plan back in 1998 there was an unprecedented demand for homes,’ Nieto said. ‘Yes, there is oversupply at the moment because of the financial crisis and everyone’s gone back home to live with their parents, but it’s not because there is lack of demand. When the economy gets back on track I am confident the supply will be absorbed.’”

“The Australian Taxation Office (ATO) has released its Taxation Statistics for the 2009-10 financial year, which once again revealed that Australia is a nation of loss-making landlords. Of the 1,751,679 property investors recorded by the ATO in 2009-10, 63% or 1,110,922 were ‘negatively geared,’ meaning that holding costs (eg, interest payments, maintenance, and other costs) outweighed income from rents.”

“Of these negatively geared investors, nearly three-quarters earned less than $80,000 in 2009-10, and the average loss was $9132 per negatively geared investor, or $176 per week. Not only are investment property holdings In Australia concentrated in lower-to-middle income groups, but also older age cohorts.”

“Negative gearing is only attractive as a tax minimisation strategy when there is labour income to offset rental losses against. However, once an investor enters retirement and ceases working, they lose the ability to offset losses for taxation purposes.”

“People across the United States have seen their tax bills increase due to the housing bust. On federal tax returns, claims for the mortgage interest deduction dropped by 14 percent, from 2007 to 2009, IRS data show. For 2010, preliminary data indicate that use of the write-off fell an additional 7.2 percent. ‘I was shocked about how much I owed,’ says Stephen Buckman, who had to pay the Internal Revenue Service $1,500 when he filed his 2011 taxes. In December 2010, a bank foreclosed on his Phoenix townhouse, which had plunged in value to $50,000 from the $196,000 he paid in 2006.”

“With signs of a housing recovery just beginning to materialize, one thing has economists and real estate professionals looking over their shoulders: a massive backlog of foreclosed properties. The vast majority of repossessed Portland-area homes aren’t up for sale. Instead, more than 80 percent of them are off the market, many vacant and developing maintenance problems that might ultimately take a toll on their resale value if and when they do sell.”

“This at a time when the Portland market is in an inventory crisis. Sellers don’t want to put their home on the market at what could prove to be the low point for prices. Brokers say their supply is drying up. ‘My goodness, we would sell the daylights out of these properties right now,’ said Don McCredie, a principal broker with Realty Trust Group in Lake Oswego.”

“The fact that all those foreclosed properties are still there unsold looms over the market. Builders and sellers are ‘trying to figure out if, at some point in the future, a batch of foreclosed condos and foreclosed homes are going to be put back on the market,’ said Gerard Mildner, director of the Center for Real Estate at Portland State University. ‘That puts either prices down or rents down, or both.’”

“Kathy Lane envisioned a picturesque neighborhood with tree-lined streets when she moved to FishHawk Ranch in 2004. These days, she stares at an eyesore. Two doors away, the back yard of an abandoned home overflows with trash; rain pours in open windows; weeds have overgrown the lawn. The pool, filled with black muck, draws swarms of bugs. The house on Lane’s street in Lithia went into foreclosure in 2008 and has been vacant for more than a year. Aurora Loan Services had set an auction for February but canceled it. It’s an oft-repeated pattern.”

“Lane is baffled by the banks’ inaction. ‘Every day you expect a poltergeist,’ she said. ‘We have to live here.’”

“Leonard J. Mankin, a Clearwater-based law firm, represents hundreds of associations across Florida. Attorney Brandon Mullis has asked a judge to sanction U.S. Bank and to force the sale of a home in Valencia Gardens. It is now common, he said, for banks to cancel auctions seven or eight times in many foreclosure cases. Anthony DiMarco, Florida Bankers Association executive VP, said lenders are overwhelmed with thousands of foreclosures and aren’t cancelling sales to skirt maintenance and assessments. ‘They are trying to move cases forward,’ he said. ‘We’d rather keep people in homes.’”

“While foreclosures have declined in recent months, activity in greater Redding remains stubbornly high. Filings in Redding dropped 16 percent in the first quarter compared with the previous quarter and were down 11 percent from a year ago. Like many other Realtors, Wayne Martin of Windermere NorCal Properties in Redding, believes banks continue to monitor the flows of their foreclosure portfolios, being careful not to release too many repossessed homes to the market.”

“‘I think possibly that the federal government and banks have some type of agreement to hold back to create a seller’s market,’ Martin said.”

“A central Virginia real estate company released its own housing report for the first quarter that covers Charlottesville and the central Virginia region. In Charlottesville, the Nest Realty report shows home sales in the first quarter up more than 50 percent from the same time last year. Other realtors note that cash buyers indicate an improving market. Denise Ramey of Roy Wheeler Realty Company said, ‘We saw a 30 percent increase in cash buyers. That’s typically a leading edge indicator that investors are thinking prices are going to start increasing.’”

“The Nest Realty report shows the average price tag on a home is down across central Virginia as well. Jim Duncan of Nest Realty said, ‘Median sale prices are down about 4 percent, which really isn’t that much when we’ve been talking over the last several years in double digit decreases in median price.’”