The Housing Bubble

It’s Friday desk clearing time for this blogger. “Parents investing in ‘kiddie condos’ for their university level children is not a new phenomenon. But when a developer launched a 58-unit condo development in the university town of Waterloo, Ont., in January, most of the purchasers weren’t coddling parents. Buyers, mostly investors, snapped up all the units of Sage Condos — starting at $359,900 for 1,800 square feet — in four days. Nathaniel Lipkus, a Toronto lawyer, said he bought a three-bedroom unit as a passive investment.”

“‘The reason why I like it is because I thought it was really, really neatly packaged and right now, it’s hard to find a market that you feel good investing in,’ said the lawyer. ‘It’s hard to say yes to the stock market when it’s so volatile. It’s hard to say yes to real estate, per se, because everybody talks about a bubble.’”

“Investors are snapping up property near a proposed $45 billion business zone in the Chinese boom town of Shenzhen, betting that the government’s plans to further open its capital markets with a ‘mini-Hong Kong’ will spur real estate values. Dananshan Ziyuan, a block of town houses advertised online as ‘having immeasurable future appreciation potential,’ has villas on sale for up to 100 million yuan, a saleswoman surnamed Li told Reuters.”

“Some of the most expensive homes in the block cost 236,406 yuan ($37,100) per square metre, compared with the $27,200 per square metre for a luxury unit in Paris, or $23,300 per square metre in New York’s Manhattan district in 2011, according to data from Knight Frank. ($1 = 6.3729 Chinese yuan).”

“‘It’s too early to decide whether it will become a bubble,’ said Raymond So, Dean of School of Business at Hang Seng Management College, when asked if Qianhai would disappoint.”

“Some market watchers, however, are skeptical. ‘The Qianhai concept and government tie may have played into the share price surge, but solely investing in the concept is irrational,’ said a Shenzhen-based analyst who declined to be named.”

“My basis for claiming this to be a bubble is a principle I have used for many years: if it looks like a bubble, it is a bubble – failing manifest evidence to the contrary. This principle is as an antidote to the ‘this time it’s different’ claims, which emerge in every asset bubble. As a current example of these claims, there are those who argue that the current level of property prices is justified by Australia’s alleged ‘housing shortage.’”

“The average number of persons per house is currently lower than at almost any period in our history – that is, the number of properties per person is unprecedentedly high. It escapes me how this can be reconciled with a view that there is a housing shortage.”

“A thesis by Nigel Stapleton refers to a multi-century study of house prices in Amsterdam, which suggests that over almost 350 years there was no rising trend in real house prices in that city. These long-term studies suggest that the trend to rising real house prices through much of the developed world over the past three or four decades has been atypical. This may be a shock to the many individuals who have geared into property as a home or an investment, confident that strong growth in house prices will make their investment profitable.”

“Arizona’s once-hot economy was heavily reliant on construction and housing, industries that are making slow gains but are challenged by labor and land prices, experts said. Homebuilders are being constrained because there are not enough workers and available cheap land, said Mike Orr. ‘It is a bit of a standoff at the moment,’ Orr said. ‘Unless homebuilders assume home prices will go up, it is hard for them to make the projects work out at current land prices.’”

“The Detroit Eviction Defense Coalition, affiliated with the Occupy Detroit movement, held a rally to support Detroit homeowner Jennifer Britt, who faces eviction after a lengthy legal battle. Britt’s husband died in 2006, and she lost her job in 2008. Despite that, Britt says she exhausted her savings making mortgage payments to Flagstar Bank until the money ran out—even though they wouldn’t acknowledge her as the mortgage holder.”

“Britt says government-backed mortgage giant Fannie Mae now holds her mortgage, and they’ve also refused her repeated requests for a loan modification. According to activists, Fannie Mae also rejected a community group’s offer to buy Britt’s home for its assessed value of roughly $12,000. The original home loan was for $121,000.”

“‘I continued paying the mortgage, hoping something would give and work out,’ Britt said. ‘Unfortunately, it didn’t. The money ran out, I stopped paying.’”

“In California, new foreclosure starts were off by slightly less than one percent compared to last month, but the number of properties actually sold at auction is down 13.4 percent as compared to May and almost 50 percent as compared to a year ago. San Diego County, however, is not yet seeing the same declines as the rest of the state. New foreclosures here are up 7.5 percent over May and 6.25 percent over June 2011. Banks, however, are still slow to foreclose, with the average property going to sale last month having been in default for over 300 days.”

“‘California Governor Jerry Brown signed into law the Homeowner Bill of Rights, an anti-foreclosure package which naively thinks that slowing foreclosures will benefit homeowners and the economy by leaving those owners stuck in their prison of debt,’ says Sean O’Toole, CEO of ForeclosureRadar.”

“Jonathan Dieguez is the founder of the privately-owned real estate investment firm, Absolute Capital Homes, has responded to the new California proposal with a press statement, in which he notes that the only way to revitalize the real estate market is to free it from the numerous distressed properties that currently clutter it. Slowing or stopping foreclosures would only have the opposite effect, Dieguez says.”

“‘When will this real estate market bottom and home prices stabilize?’ continues the Absolute Capital Homes statement. ‘I believe we’ll hit a bottom when the unemployment rate drops to under 8 percent, the Federal Reserve begins to raise interest rates, we see a sizeable increase in consumer confidence and personal income, and a dramatic decrease in non-performing assets held by financial institutions (toxic or shadow inventory).’”

“CoreLogic’s Home Price Index, which includes distressed sales, posted the largest year-over-year spring price gain in the last 25 years. But CoreLogic senior economist Sam Khater has serious questions about how long the phenomenon can last. Negative equity ‘is keeping many potential sellers out of the market, which keeps a lid on inventory.’ That, combined with a reduced flow of bank-owned properties, ‘has led to much tighter market conditions for lower prices properties, particularly in the hardest hit markets.’”

“‘Given the economy’s tendency to exhibit Sisyphean traits, lack of income growth, and the amount of shadow inventory still in the wings which could replenish the flow of distressed sales, it will be difficult for prices to sustain their recent rate of acceleration,’ Khater wrote. ‘But for the moment, at least, there is some positive news about negative equity’s impact on price increases in some markets.’”

“For the first time in three years, Toronto’s sizzling housing market is showing signs of cooling, bringing a sigh of relief to David Fleming and other Canadian real estate agents who feared the market boom was getting out of control. ‘It is a balanced market right now, where you don’t have to make a decision with a gun to your head,’ said Fleming. He said the bidding wars of the past few years have evolved into mere skirmishes among prospective buyers.”

“Fleming said Toronto house hunters should just be grateful for the respite in rising prices in what, 2008 aside, has been a 19-year bull market. ‘Buyers should also take this and run with it. They’ve got an opportunity to be able to choose and not have to bid against seven other people,’ Fleming said.”

“In North Brunswick, Jerry McNee said he’s seen signs of increased buying activity in the last year, and in the last few months: One house got four offers and the owner opted not to sell, while a pre-foreclosure sold for $485,000 in a week. McNee, who runs an auto-body business, is working on selling an investment property and is in the process of selling his own home to someone attracted by the investment property. His home is going for around $500,000 before he even had a chance to list it on the market.”

“Now he’s doing his part to loosen up the market by reducing the completely renovated, four bedroom investment property from $591,000 to $515,000. ‘I started at a much higher price than I should have, and that’s why it’s been sitting,’ McNee said. ‘I guess everybody’s looking for a deal right now and that’s what they’re expecting. A majority of the people walking in are looking for that steal.’”