The Housing Bubble

It’s Friday desk clearing time for this blogger. “The Obama administration has little fear of ’shadow inventory.’ Shadow inventory is the spooky name the real estate industry gives to a secret supply of homes on bank books or headed into foreclosure. In a meeting with Los Angeles Times editors and reporters, Shaun Donovan, secretary of Housing and Urban Development, said the volume of distressed and lender-owned homes was down at Fannie Mae, Freddie Mac, the Federal Housing Administration (which is part of HUD) and in bank portfolios. With an improving market, the worst appears to be over, he added. ‘It’s hard to see where these properties are hiding,’ Donovan said.”

“The vacant, fire-damaged house on Maryland Street in northeast Rochester is wasting away. Neighbor David Samuel L’Bron calls it the ‘animal house’ because of the raccoon family that lives there and greets him nightly. Other than that, and the group that gathers out back for dice games, he pays it no mind.”

“But it has the city’s attention. One in five Rochester houses that have gone into mortgage foreclosure the past two years are vacant today, according to the city. And of those that are vacant, two in three are not being maintained. Many of the vacant houses in mortgage foreclosure are in relatively good condition. But city officials suspect some banks are stalling the foreclosure process, wanting a buyer lined up before a judgment puts them on the hook for property maintenance.”

“‘We need to probe into the banks, and see what is holding these up,’ said city Corporation Counsel Robert Bergin. ‘We’ve pushed some, and it takes a lot of effort to do that.’”

“Locally, there’s been rumblings for months that the Obama administration is manipulating the housing market to make it appear more stable than it actually is. Redding agent Curt Largent said, ‘We had a conference call with one of the banks that told us they did not expect the actual foreclosure process to pick up until late in the year, which in my opinion is code for after the election.’”

“Shasta County Association Board President Doug Juenke is convinced the administration is putting pressure on the banks to slow the pace of foreclosures, and reiterated this to me an email. ‘Of the eight or so REO (foreclosure) agents I spoke to locally and out of the state, three were 100 percent adamant that the administration was manipulating the housing market to make it appear more stable for the run-up to the election.’”

“Some 46 percent of younger homeowners are underwater, a much higher rate than with older mortgage holders. Zillow chief economist Stan Humphries notes that younger buyers tend to have bought their homes more recently, just as the housing market was falling apart. ‘Many of these young homebuyers may have been purchasing a [Federal Housing Administration] mortgage with a 3.5 percent down payment, for example,’ he said. ‘It doesn’t take much of a drop in home prices to put a homeowner with a 3.5 percent down payment underwater.’”

“There is a silver lining for younger homeowners, though. ‘The younger homeowners are in shallow water relative to their older cohorts,’ Humphries said. ‘And you’re seeing higher delinquency rates with older homeowners.’”

“Low interest rates have created a class of ’serial refinancers’ and given them new opportunities to spend their freed up cash. Refis, as they’re known, have changed the face of Ellen Sandler’s Chevy Chase, Md., neighborhood. Over the years, savings enabled Sandler to double the size of her house and remodel it a few times. ‘I have neighbors who are also doubling the size of their house,’ she says.”

“Shelley Hall, who lives in Brea, Calif., has refinanced four times. But she says she’s careful about bringing up the subject. ‘I don’t mention refinancing to some of my friends, because if they bought in the last couple of years, they’re either underwater or they just don’t have enough equity to do it,’ she says.”

“Rising home prices are often welcomed as a sign of a country’s economic health and vigor. But in New Zealand, concern is growing that prices have risen so high they are instead an economic anchor, sucking resources from those who can afford a home and prompting those who can’t to consider moving overseas. Economic commentator Bernard Hickey said young families who want to buy homes are delaying decisions like having children, while those who have purchased recently have saddled themselves with so much mortgage debt they are less willing to take on entrepreneurial risks, like starting a business. He said that in turn stifles the country’s productivity and dynamism.”

“‘Because interest rates are low, and house prices are not falling, people feel justified in borrowing more than they can afford,’ said Hickey.”

“Craig Ebert, a senior economist at the Bank of New Zealand, says there’s a more fundamental problem: interest rates are too low. ‘We’ve become highly dependent on low rates,’ he said. ‘This is the problem that got the world into this predicament.’”

“Chief Minister Paul Henderson has defended Labor’s My New Home scheme after economists from the Reserve Bank of Australia warned about no-deposit home loans. The RBA economists say borrowers should have to fund part of their property themselves to help prevent housing booms and busts, and reduce the risk of defaulting. Mr Henderson says the My New Home scheme is needed to get homes built in the Territory and precautions will be taken before loans are approved.”

“‘I make no apologies in stepping in where the market has failed, and the market is failing Territorians,’ he said. ‘We will not be lending money to people who can’t afford to repay those loans.’”

“In a sign of weakness in the holiday-home market, the rate of mortgage arrears has continued to rise in key beachside areas in New South Wales and Queensland, according to Fitch Ratings. The figures, collected in March, showed arrears rates rose in several suburbs around the Gold Coast including Surfers Paradise and Tweed Heads, and the report said there was ‘no sign of stabilisation’ in the area. Prices of units in Cairns have fallen 22.2 per cent from their peak, while units on Victoria’s Surf Coast have lost 6.8 per cent.”

“On the Gold Coast, for instance, Fitch analyst James Zanesi said many of the borrowers who were falling behind on their repayments were investors, rather than owner-occupiers. ‘When house prices are going down you might have a borrower who is trying to hold onto a home because they don’t want to make a loss.”’

“Hard on the heels of The Economist Research Unit’s just naming this British Columbia metropolis one of the world’s three best cities to live — just behind Melbourne and Vienna — comes word from the provincial government that ‘young people are fleeing B.C. in big numbers,’ as one daily’s headline put it.”

“This is happening just as Vancouver’s red-hot housing market — easily the priciest in Canada — is finally starting to cool, with sales stagnant and prices finally starting to drop a bit. The price of an average single-family detached home is still hovering around C$800,000. For some, home prices here just weren’t dropping fast enough. The chief economist for Central Credit Union 1, confirmed that B.C.’s out-migration ’seems to be accelerating.”

“Every time I visit here, which is often, more and more ‘For Sale’ signs have popped up in front of Vancouver homes and condos. I’ve seen this movie before — in pricey Sonoma County where my wife and I sold our home and decamped to a town in Washington state just south of B.C. We’re California ‘equity refugees.’”

“I don’t think Vancouver has the same kind of housing bubble California and the U.S. had. For one thing, this city’s seen, and is still seeing, a huge wave of cash coming in from China, boosting home values. Many of the homes bought by Chinese immigrants here are second homes. ‘They’re insurance policies for wealthy Chinese in case things in China turn south,’ a Vancouver realtor told me recently. ‘Some of them are vacation homes, and sit empty. They’re seen as insurance policies for a rainy day.’”

“While it’s true this makes B.C.’s housing market reliant on the Chinese economy, many of those homes bought by Chinese were bought with hard cash. Still, many keep insisting Vancouver has a housing bubble that’s about to burst.”

“Speculators in the housing sector from Wenzhou, Zhejiang province, are likely to be weeded out of the market by the ongoing changes in housing regulations. But close attention needs to be paid for a possible chain effect, says an article in Guangzhou Daily. Excerpts: As a dominating force in the real estate market for the past 10 years, speculators from Wenzhou have played a leading role in creating the housing bubble.”

“But it’s necessary to be alert against any possible financial risks that could be triggered by the huge losses these speculators suffer when they are forced out of the market. The speculators’ capital structure shows 70 percent of their funds come from borrowings, including bank loans and private loans with usurious interest rates. In fact, more than 50 percent of their funds are borrowed by mortgaging houses. Such a weak capital chain and the strict rules the government has imposed have already forced some speculators into insolvency.”

“This year, many speculators from Wenzhou have defaulted on their loans, increasing the rate of non-performing loans for local banks. The rate was 2.69 percent at the end of June, more than seven times that in the same month last year. If the market for speculative funds collapses, it could increase the security risks of banks that give housing loans, which is about 11.32 trillion yuan ($1.78 trillion) across the country.”

“The combination of a property price bubble, demographic changes and rapid loan growth heightens the chance a country will face a financial crisis, a Bank of Japan deputy governor said. Kiyohiko Nishimura noted that there were similarities between Japan’s asset-price bubble of the 1990s and the U.S. housing market bubble of the 2000s. ‘If a demographic change, a property price bubble, and a steep increase in loans coincide, then a financial crisis seems more likely. And China is now entering the ‘danger zone,’ he said, according to the text of his speech.”

“His speech, titled ‘How to detect and respond to property bubbles: challenges for policy-makers,’ analyzed in theoretical context the historical trends of asset bubbles. Nishimura also said policymakers themselves sometimes sow the seeds of property bubbles by nourishing overly optimistic expectations about the economy among the public.”

“‘It is extremely difficult to persuade people who (want to) believe ‘this time is different’ and are convinced they are now on the foothills of eternal prosperity, just as long as their path is not blocked by some stupid policymaker,’ he said.”