August 31, 2012

Turning The Fiasco From Bad To Worse

It’s Friday desk clearing time for this blogger. “As Vancouver’s real estate market cools, losses on the troubled Olympic Village development could soar above $225-million unless condo king Bob Rennie quickly drops prices on unsold units that have languished on the market for too long. That’s the view of developer and architect Michael Geller, who suggests flawed pricing and weak marketing is turning the fiasco on False Creek from bad to worse. ‘The problem with arm chair gossip that the Michael Gellers of the world have, is they don’t sit in the board room with the decision makers and the stake holders … and we have fine-tuned the pricing all the way through,’ Rennie said. ‘People come to town and say it is a bubble, but what do they know? When you look at how conservative the banks are in Canada … banking has really restricted (housing) supply.’”

“‘I think Bob’s problem with me is that no one else is saying he’s not the condo king or even the condo prince,’ Geller said. ‘A lot of people in the real estate community are saying this project shouldn’t be taking years to sell out.’ In interviews with The Province, Geller said he fears the city will be unable to sell many of the remaining condos at current prices, as Vancouver’s real estate market seems to have peaked ‘a year ago when there was a lot of fervour from Asian buyers.’”

“A mortgage broker in Nelson Bay, the most mortgage delinquent suburb in Australia, agrees the blame on its unenviable record rests with impulsive holidaymakers. Local broker Ben Eick says holidaymakers bought a slew of properties in 2005 and 2006 gambling on prices going up. ‘[They thought] these places would keep appreciating … and of course what they’ve done since then is depreciate. And that’s where they’ve come unstuck.’”

“Imagine a brand new city built for 18 million people—yet only 4.5 million live there. Imagine another city built for 1 million—but only 25,000 people call it home. Picture 20 more such cities and no people. And the building continues. Only in the ‘economic miracle’ that is China could this be possible. Yet, sometimes supposed ‘miracles’ turn out to be little more than sleight of hand.”

“China’s massive real-estate boom has now eclipsed that of Japan during the 1980s. Construction spending in China hit a whopping 12 percent of gross domestic product last year. In Japan it peaked out at 10 percent. Everyone knows what happened in Japan next. Stocks and real estate fell by 75 percent and still haven’t recovered.”

“To put China’s property boom in perspective, in coastal regions the average house costs 18 times the median salary in those regions. In America, the equivalent would be expecting someone making $60,000 to purchase a $1.1 million house. In other words, it is not the typical Chinese person buying all the newly constructed homes. It is wealthy speculators who can borrow cheap money from the banks. China is still dangerously dependent on exports for the lion’s share of its wealth. Over half of its gdp comes from selling products abroad. And herein is the pin that may bust China’s bubble.”

“As an example of how interconnected the global economy is, international real estate stocks are hoping Federal Reserve Chairman Ben Bernanke will initiate stronger economic stimulus measures when he speaks this Friday at the economic policy summit in Jackson Hole. Xinyuan Real Estate, a Chinese home builder, and Gafisa SA, a Brazilian home builder, have both rallied in 2012. Traders are betting on a fresh round of quantitative easing or some similar policy initiative.”

“But Gafisa and Xinyuan Real Estate need strong local economies. The entire international real estate sector does: low interest rates can only do so much. For that, demand from the U.S. must be strong so the export sector in China and Brazil can provide the jobs needed for workers to buy homes.”

“Connecticut, for 25 years the state with the highest per capita income in the U.S., is now leading the nation in home-price declines as Wall Street trims jobs and bonuses that had driven multimillion-dollar property sales. Jeffrey Weisz put his five-bedroom house on five acres in New Canaan up for sale five months ago for $1.2 million. While prospective buyers came to ‘kick the tires,’ he received only one offer, which fell through because the borrower didn’t qualify for a mortgage. He said his neighbor has had three offers fall through because of financing problems.”

“‘I don’t think they have the wherewithal to put down down payments,’ he said.”

“According to banking and real estate insiders, Las Vegas real estate is about to take another big hit, and it could delay the recovery for years to come. Realtor Jared Jones,who the Wall Street Journal named the 4th most productive agent in the nation in 2011, is so convinced prices are going to drop here, that he’s selling some of his own investment properties now before prices decline. ‘A lot of experts that are watching the default data are saying there are 70,000 homes that are in some type of default status,’ Jones said.”

“The Charlotte Regional Realtor Association’s monthly report for July shows gains in both home sales and prices. That being said, we still have a major problem. One-third of Charlotte area homeowners owe more than their homes are worth. Jack Wilson is one of them, and his case is so bad, he’s thought of letting it go.”

“‘It’s very difficult,’ he says. ‘I have thought about doing strategic default and just relinquishing my property as it’s just not a good investment any more for me, because I’m so underwater.’”

“Zillow says the Charlotte metro area is underwater by $6.9 billion.”

“‘Occupy” protestors have taken up residence outside one family’s home in Van Nuys hoping to save them from eviction. A ‘tent city’ has sprung up for what Occupy San Fernando organizers are calling an ‘occuparty.’ They are there in support of the Hernandez family, who tells KTLA they have lived in the neighborhood for about seven years. About four years ago, their mortgage adjusted and went from $3,900 per month to more than $4,500 per month. That’s when they started fighting to keep their home.”

“‘This has happened to millions of families across the country,’ said Ulises Hernandez who lives in the foreclosed home.’

“There’s good news and bad news to be found in the latest research regarding the effect of foreclosed homes on neighborhood property values. The upside is the financial dents that distressed properties make on nearby home sales aren’t nearly as deep as thought in some previous studies. In fact, they are ‘economically small,’ according to the working paper from the Federal Reserve Bank of Atlanta.”

“But here’s the rub. Researchers also found that homeowners are wrong to start worrying about a decline in their own property’s value when a nearby home goes into foreclosure. Actually, their home values start to slip when the neighbors start skipping mortgage payments, months before the home officially enters foreclosure.”

“Because of that finding, the study’s four authors, two from Federal Reserve banks and two from Fannie Mae, argue that policies adopted to stretch the amount of time a home is in foreclosure don’t necessarily benefit borrowers but they do cost society.”

“The researchers also used their results to suggest that various policies that allow homeowners to linger in serious delinquency and foreclosure exacerbate the costs to nearby homeowners and communities. In the Chicago area, it takes an average of more than 600 days for a distressed home to move from initial default notice to bank-owned.”

“Most Aussies think housing is an economic driver. But it’s not. Housing is consumption. Housing, along with other consumption (such as food, fuel, clothing, etc.) is the reward for productive labour. So for the central bank to claim that residential building will fill the void left by the end of the resources boom is just barmy. Thanks to the fractional reserve banking system, banks can use $10 of deposits to lend $90 to borrowers. It’s not the $10 deposited in the bank that filters through the economy, it’s the $90 created by the banks from thin air that filters through the economy.”

“Or put another way, the $60 billion of exports to China doesn’t mean a $60 billion benefit to the Australian economy…it means there’s a $600 billion benefit to the Australian economy. The money flows in from China, it goes into bank accounts, and then the banks leverage this to create new loans. It explains why the Australian housing market was strong despite crashes elsewhere in the world.”

“But as anyone who knows about leverage will tell you, leverage is a double-edged sword. It magnifies returns when the market goes your way, but it magnifies losses when the market goes against you. In this case, even if exports to China only fell to $50 billion, it wouldn’t mean a $10 billion hit to the Australian economy. Because of the leverage used by the banks to drive up credit, it would actually be a $100 billion hit to the economy.”

“So for anyone to think that housing will boom once the resources boom ends, they’re in for a rude awakening. The fact is, contrary to what the brains trust at the RBA may think, far from leading the Australian economy to recovery, housing will be the worst investment to own when the resources boom finally end.”




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31 Comments »

Comment by Cantankerous Intellectual Bomb Thrower©
2012-08-31 06:34:55

“…losses on the troubled Olympic Village development could soar above $225-million unless condo king Bob Rennie quickly drops prices on unsold units that have languished on the market for too long. That’s the view of developer and architect Michael Geller, who suggests flawed pricing and weak marketing is turning the fiasco on False Creek from bad to worse.”

Where are the all-cash Chinese investors when you need them?

Comment by Cantankerous Intellectual Bomb Thrower©
2012-08-31 16:02:27

“In America, the equivalent would be expecting someone making $60,000 to purchase a $1.1 million house.”

Coastal California bubble pricing, circa 2005.

“In other words, it is not the typical Chinese person buying all the newly constructed homes. It is wealthy speculators who can borrow cheap money from the banks.”

I guess they don’t have a coastal strawberry farming industry in China like we have in California?

Comment by rms
2012-08-31 21:50:32

“I guess they don’t have a coastal strawberry farming industry in China like we have in California?”

+1 You really should have your own MSM column.

 
 
 
Comment by Pimp Watch
2012-08-31 07:19:43

Realtor Jared Jones,who the Wall Street Journal named the 4th most productive agent in the nation in 2011, is so convinced prices are going to drop here, that he’s selling some of his own investment properties now before prices decline. ‘A lot of experts that are watching the default data are saying there are 70,000 homes that are in some type of default status,’ Jones said.”

Yes sir. Jones is one realtor that doesn’t have head firmly planted up ass.

Comment by snake charmer
2012-08-31 09:00:43

Why does our culture feel the need to rank everything? I once had a co-worker who bragged that his car stereo had been installed by the “number two guy in the Southeast for car stereos.” I guess we rank realtors now too.

Comment by Pimp Watch
2012-08-31 09:09:41

heh.. I always laugh at the clown who invokes silliness like “they’re highly rated!”

Comment by snake charmer
2012-08-31 11:25:16

Belief in ratings puts a lot of power in the hands of those who do the rating. And if we’ve learned any lesson at all over the last decade, it’s that such persons often have a conflict of interest. Or else their judgment is really not that good. Or both. Sometimes I think all the trust in the world, starting with that developed by American institutions over more than a century, has been monetized and sold. But it was sold for a lie.

(Comments wont nest below this level)
 
 
 
Comment by Cantankerous Intellectual Bomb Thrower©
2012-08-31 16:07:07

My wife recently crossed paths with one of the most successful Realtors™ in our area. He knocked on our door once last year and struck up a conversation with me. He is the first Realtor™ not to dismiss my bearish outlook out of hand.

Well I guess I made an impression, as he told my wife that he remembered our conversation, and that his current view was that more price declines are in store for the San Diego market. I also heard this recently from an appraiser friend of ours.

Makes me glad we are not in the market and have no desire to buy a home at the moment…

Comment by rms
2012-08-31 22:05:53

“Well I guess I made an impression, as he told my wife that he remembered our conversation, and that his current view was that more price declines are in store for the San Diego market. I also heard this recently from an appraiser friend of ours.”

At least you haven’t been ostracized for seditious honesty.

 
Comment by nickpapageorgio
2012-08-31 22:31:46

I love the business cards with:

Multimillion Dollar Producer
Presidents Round Table
Top Producing Agent
Gold Club Member
etc.

 
 
 
Comment by Ben Jones
2012-08-31 07:33:03

‘Genworth — which earns revenue from selling mortgage insurance — notes that rising prices for single-detached homes are driving first-time buyers to condos, but retirees also continue to prop up demand. It suggests that the population is expected to grow in all eight cities studied over the next few years, while employment growth and low interest rates should also support the market.’

“This data corroborates our view that the demand for condos in Canada, particularly at the price-point we insure, is well supported by our economy and our population,” said Brian Hurley, chairman and CEO of Genworth Canada. ‘For those seeking to own a home affordably in urban centres, condos remain a good option.’

‘Melbourne, where home prices have fallen more than in any other major Australian city, may see further declines as a record number of new developments approved in the boom years hit the market. ‘New construction will keep a lid on any major recovery’ in Melbourne, said Louis Christopher, managing director of Sydney-based property advisory firm SQM Research. ‘There are also a lot of foreign investors in the marketplace. This makes it potentially volatile, and, if they want to get out, it could be problematic.’

‘Far East Consortium Ltd. (35), based in Hong Kong, is developing a A$1 billion ($1 billion), 2,600-apartment complex in the city center, about 2 kilometers (1.2 miles) from the Rod Laver Arena, where the Australian Open tennis championships are played. Malaysia’s SP Setia Bhd (SPSB) is building almost 800 apartments in two towers close to Melbourne’s 134-year-old Queen Victoria Market, also in the city center. SP Setia sold 70 percent of the first building in Malaysia and about half of the second tower to buyers in Malaysia, Singapore, China and elsewhere in Asia, Choong Kai Wai, the company’s Australian chief executive officer, said in a telephone interview from Melbourne. It will begin marketing a second development in South Yarra, a riverside Melbourne suburb, this year, targeting mostly local buyers, he said.’

‘Federal Housing and Homelessness Minister Brendan O’Connor has ruled out changes to negative gearing for property owners in the face of a housing affordability crisis. Speaking to reporters in Perth on Friday, where he had met with state counterparts at a COAG meeting on housing and homelessness, Mr O’Connor said more needed to be done fast to promote housing affordability. However, removing tax incentives for speculators was not an option.’

‘Eighteen per cent of people who use homeless services are under the age of 10,’ he said. ‘We have too many women and children sleeping in cars.’

Comment by In Colorado
2012-08-31 07:56:31

‘Eighteen per cent of people who use homeless services are under the age of 10,’ he said. ‘We have too many women and children sleeping in cars.’

So the streets in Oz aren’t paved with gold after all.

 
Comment by AmazingRuss
2012-08-31 08:30:16

‘We have too many women and children sleeping in cars.’

Why is this a bad thing? They’re smaller, and sleep more comfortably in a car than men do.

Comment by Bobby
2012-08-31 12:48:37

I guess you have to infer that they would rather have it be 100 % men who sleep in cars; I wonder if they would care if 100% of men slept in cars?

 
 
 
Comment by In Colorado
2012-08-31 07:54:03

As an example of how interconnected the global economy is, international real estate stocks are hoping Federal Reserve Chairman Ben Bernanke will initiate stronger economic stimulus measures when he speaks this Friday at the economic policy summit in Jackson Hole.

So now they want QE, even though it will devalue their USD based assets?

So much for decoupling from the American “consumer”. This should put to bed any doubts that our “trading partners” will continue to finance our deficits. Accepting, correction, clamoring for another QE is a sign of their desperation.

What a crazy world. It’s utterly dependent on broke Americans spending money they don’t have to buy stuff they don’t need or could make themselves.

Comment by snake charmer
2012-08-31 09:07:16

I agree with your summation. But statements like the one quoted bother me for a different reason. I don’t like it when our media ascribe human emotions and qualities to assets and economic constructs. A share of stock cannot “hope.” Nor can markets “cheer” or “be disappointed.” Only actual people can feel and do those things. Of course, all of this is happening at a time when actual people are being dehumanized.

Comment by 2banana
2012-08-31 09:11:57

How do I know you are not a robo-blogger response?

 
 
Comment by Cantankerous Intellectual Bomb Thrower©
2012-08-31 16:08:41

“So now they want QE, even though it will devalue their USD based assets?”

I’d guess this group is narrowly focused on nominal valuations, which tend to go up with a weaker dollar.

 
 
Comment by barnaby33
2012-08-31 09:08:39

Colorado, the people selling RE want currency devaluation. It forces others to buy more RE. I’m guessing its not a universal sentiment. Especially when so much of China’s economy is based around selling US stuff.

Comment by In Colorado
2012-08-31 10:19:19

Hmmm … other than making it cheaper for foreign “investors” I don’t see how a devaluation would help. For one thing it makes imported goods (like oil) more expensive, leaving less money to spend on a house.

 
 
Comment by 2banana
2012-08-31 09:10:21

Wow - four years without paying your mortgage and still living in “your” house. Let me do that math on that - $216,000 YOU HAVE NOT PAID.

For a house you SIGNED a contract called a mortgage.

And now you have OWS helping you out

Life is good for the free sh*t army. Very good.

Oh - and they are victims.

——————

They are there in support of the Hernandez family, who tells KTLA they have lived in the neighborhood for about seven years. About four years ago, their mortgage adjusted and went from $3,900 per month to more than $4,500 per month. That’s when they started fighting to keep their home.”

About four years ago, their mortgage adjusted and went from $3,900 per month to more than $4,500 per month.

That’s when they started fighting to keep their home, and their fight became an “Occupy fight.”

Comment by In Colorado
2012-08-31 10:21:33

Let us not forget that the only reason they haven’t been evicted is because the bank allows it. But as predicted, the free will eventually end and there will be wailing and gnashing of teeth.

Comment by In Colorado
2012-08-31 10:23:20

the free lunch - I need to proof before posting

 
 
 
Comment by Ben Jones
2012-08-31 10:40:35

BTW, here’s what the ‘condo king’ had to say about me and the HBB:

http://www.youtube.com/watch?v=JKfWHevR3RU

Comment by Arizona Slim
2012-08-31 10:44:38

Uh-oh! We’re in trouble now…

 
Comment by snake charmer
2012-08-31 11:51:17

Pretty smug. He started his talk by saying he was “breaking in a new act,” and there were periodic nervous laughs from his audience, so there’s almost a comedy club aspect to this.

This guy lives in perhaps the biggest bubble city in the world, and he can’t see it. For those interested, the trashing of Ben happens around the 5:30 mark.

 
Comment by oxide
2012-08-31 17:08:34

I watched about three minutes of this, from 5:30 to 8:30. He talks about his different demographics, but nowhere does he speak to actual jobs. How are the baby boomers going to afford all these universally designed condos so they can age in place? Presumably, by selling their SFH to… whom? The non-existant baby-making generation, as he put it?

 
Comment by Muggy (I, Boner Renter)
2012-08-31 18:15:08

Bwwaaahahahahahahahahahaaahahahahahahah

Keep up the good work, Ben. I am thankful to be sharing my time on Earth with you and the rest of the crew here.

I ran Robert Rennie through the Anagram server and got these results:

Borne Renter, I
RE Beer Rot Inn
Bro, RE, enter In
I, Boner Renter
Error Beet Inn

It’s a freaking miracle. Christmas in August! I’m going to buy a crapshack motel in rural Florida and name it the Error Beet Inn.

My logo will be a drunk vegetable, wrapped in a Canadian flag, playing drums.

 
Comment by Lemming with an innertube
2012-09-01 07:17:20

i actually felt bad (and/or embarassed) for the guy when he announced that units were selling for over $1100/sf! how can he even say that with a straight face?

i accidentally caught the tail end of the diy network’s “sweat equity” and the married couple reno’ed the backyard and the realtor proclaimed that they had “made $10k” from the reno. mind you, they aren’t selling anytime soon. the cost of the reno……. drumroll…. $9885! why do most of these shows come out of canada?

Comment by Lemming with an innertube
2012-09-01 07:20:50

oops! meant to say that the “value” went from $805k to $815k. it was a simple ranch style house.

 
 
 
Comment by rms
2012-08-31 22:20:06

From the Aussie piece: “Thanks to the fractional reserve banking system, banks can use $10 of deposits to lend $90 to borrowers. It’s not the $10 deposited in the bank that filters through the economy, it’s the $90 created by the banks from thin air that filters through the economy.”

Yo, Darrell?

 
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