The Housing Bubble

It’s Friday desk clearing time for this blogger. “It used to be that Chinese buyers who purchased property in New York did so because the city’s durable real estate market was both a reliable and potentially lucrative investment. Now, however, affluent Chinese buyers are more likely to seek out Big Apple properties as a way to hang on to their wealth, according to real estate brokers. Kevin Brown of Sotheby’s International Realty and partner Nikki Field decided to focus on China when the US real estate market softened in the wake of the financial crisis in 2008. They visit the Chinese mainland a few times each year to host events and meet potential buyers.”

“One of their first Chinese clients, a mainland woman who now lives in Hong Kong, bought a $6.5 million apartment at One57, a midtown Manhattan tower that, at 90 stories, will be the city’s tallest residential building upon completion. ‘She wasn’t concerned about the rate of return,’ Brown said. ‘She told us she wants her daughter to attend Columbia University and she would like an apartment in midtown Manhattan. When we talked about her daughter afterward, I realized she is only 2 years old.’”

“After years on life support, signs of life are now beginning to show in the Oregon housing market, according to a new University of Oregon report on the state of the economy. ‘I can only judge by my own business but we’re as busy as we’ve ever ever been.’ said Eugene contractor David Smith. Reporter Tom Adams asked David Smith, ‘What’s the difference? What explains this trend?’ Smith replied, ‘I think people are just sensing a recovery. I think they’re sensing that … you know, I better do it now while interest rates are still low.’”

“Ashland has a surplus of houses that are unaffordable to most residents and not enough moderately priced houses and rental apartments to meet people’s needs, according to a city of Ashland draft Housing Needs Analysis. The study found that only 22 percent of houses for sale in Ashland cost less than $279,300. A household would have to earn $75,000 to buy a house priced at $285,000 — the average price for houses that sold in Ashland in 2011, the analysis said. But a majority of Ashland households — 76.2 percent — earn less than $75,000 per year.”

“The median household income in Ashland is $40,140, lower than the rest of Jackson County, Oregon and the nation, according to the analysis. The analysis showed that 63 percent of Ashland renters pay more than 30 percent of their income for housing. That’s up from 2000, when 53 percent of Ashland renters were burdened by housing costs. Households are considered financially burdened by housing costs when those costs exceed 30 percent of their income, according to U.S. Department of Housing and Urban Development.”

“With today’s release of RealtyTrac’s September foreclosure activity report you will see headlines claiming that we just saw a 5 year low - but that’s at the national level. Meanwhile, all you have to do is look at the long term chart below for Chicago foreclosure activity and you can see that it’s anything but a 5 year low. For 9 months straight now the foreclosure activity has been higher than the previous year.”

“Illinois also has the distinction of having the fourth longest average time to complete a foreclosure at 673 days. So Illinois homeowners living under the specter of foreclosure can live in their homes for free for a long time. Crain’s was able to construct this nifty graph from additional data obtained from RealtyTrac. You can click on it to go to the original graph. Note how the processing time just keeps getting worse.”

“As Daren Blomquist, VP at RealtyTrac, points out: ‘It was a little surprising that the national time to foreclose kept going up even though we’re seeing nationwide foreclosures decrease. It does make me wonder if there’s still some kind of hidden distress out there that the banks have not yet dealt with in some of these states.’”

“Despite a slowdown in foreclosures and signs of an uptick in prices, the overall housing market has fundamental problems that could take decades to undo. Corporate and government help has been unable to drain the economic and bureaucratic swamp that has left 59 percent of mortgages here underwater. Those were two of the underlying messages from a foreclosure workshop Monday in Las Vegas City Hall.”

“The most troubling portion of the event was a presentation by Jeremy Aguero of the economics research firm Applied Analysis. According to data that Aguero compiled, there are ominous signs on the horizon for the Southern Nevada housing market. Full recovery from the crash that sapped $20 billion in equity from the region, Aguero said, ‘is not going to be measured in years, it is going to be measured in decades.’”

“Among the numbers indicating that recovery will be a rocky path is the percentage of adjustable rate mortgages, ARMs, in the state. According to Aguero’s presentation, 18.2 percent of Nevada mortgages are ARMs compared with 12.1 percent nationwide. That is a problem because it makes Nevada, and Las Vegas in particular, especially vulnerable to the machinations of national and international monetary policy. ‘If the interest rates start ticking up, this would create a whole new problem,’ Aguero said.”

“Marshall Vest of the Eller College of Management at the University of Arizona, said the current demand for homes is not coming from people moving here. What is driving the market, he said, is coming from investors. ‘Some real estate investment trusts have been in here buying up properties with the idea of renting those properties out,’ Vest said during a meeting at the Capitol of the state’s Finance Advisory Committee. But that, he said, cannot continue forever.”

“‘As soon as they’ve parked all of the money they have raised, there’s a source of housing that’s going to go away,’ he explained. And there is not yet the internal demand to ‘take up the slack.’”

“Jim Rounds of Elliott Pollack and Associates underlined the role of investors. In normal times, he said, about 10 percent of all home purchases are for cash. The most recent figures for the Phoenix area, which he tracks, are in the 40 percent range. Rounds, also a member of the Finance Advisory Committee, also foresees a time when investors are not snapping up Arizona properties. But unlike Vest, he does not see it as a matter of these investment trusts running out of money to buy homes.”

“‘It’s them finding additional investment opportunities that are yielding a higher return than hanging onto these homes,’ he said. ‘And as you see this steady increase in prices, you’re going to start to see opportunities for them to liquidate,’ Rounds continued. And that will lead to an increase in the supply of available homes.”

“He said that if prices keep increasing at current rates, ‘you will see a mini bubble.’ The question, of course, is how much higher things can go — and how much can they fall. He said prices already are up 20 to 30 percent from where they bottomed off a year or so ago. ‘If you go up another 20 percent, we’re looking at a 50 percent increase over a short period of time,’ he said, a figure which is even more remarkable when population growth is in the 1 percent a year range.”

“‘That bubble hits, you see us go down maybe half way,’ Rounds said. But he said that while the size of a drop might seem large, it’s not inconsistent with what has been a historical trend in Arizona. ‘People get excited,’ he said. ‘You have a little bubble. You fall back down.’”

“Vest agreed that the 20 to 30 percent price increases of the past year are temporary. ‘The best that you can expect would be low to mid single digit increases at some point in the future,’ he said. And what of a possible price drop? ‘I would hope not,’ Vest responded, if for no other reason than the rising housing prices have had a beneficial effect on the psychology of consumers and their belief that things are turning around. ‘It’s very healthy for the market,’ he said. ‘And I would hope that housing prices don’t turn south, again, and destroy all that confidence.’”

“Construction is going strong in Metro Vancouver, even though home resale prices are dropping slightly and sales activity is significantly below historical levels. Scott Brown, senior VP of residential project marketing at Colliers International said investors are becoming more selective — choosing properties close to SkyTrain stations or in just the right location — whereas in 2007, investors were not selective because all properties were expected to increase in value.”

“‘The west side was particularly hot last year, and was driven by media stories about foreign buying,’ Brown said. ‘The values that were set by that foreign buying would be relatively high, compared to two years ago, but the question is will that hold or will it soften? No one knows and it still depends to a degree on whether the foreign buying continues.’”

“He said foreign buyers are willing to pay more for premium properties, partly because of their wealth and partly because of their perception of what a property is worth. ‘If you’re living in a market where a starter home is a million and a half and you can never own single-family, but you can walk in here and buy a home near downtown with a yard for $3 million, that sounds cheap to them, whereas to a local person that is a lot of money still,’ Brown said.”

“Chinese investors are making their presence felt in all aspects of New Zealand real estate. Real estate agent Graham Wall had two deals to sell Mission Bay houses to Chinese buyers and he went to Shanghai in the winter to drum up further interest. Chinese buyers wanted luxury properties, could afford them and appreciated Auckland’s best suburbs with big waterfront views and proximity to the city, he said.”

“‘Why we are getting record prices for Auckland, Hawkes Bay and Queenstown houses is that people outside New Zealand can see its worth,’ he said.”

“Yesterday, Credit Suisse announced that in terms of median wealth, Australians are the richest in the world. Yet, survey after survey shows that households remain dour about our prospects at best, and downright economically depressed at worst. And here’s is why. A big gap has opened up between the economic reality that Australians know and the one that is constantly described for them by our economic elite.”

“There’s a well kept secret in the psychology profession about depression. In many orthodox notions of melancholia, the remedy is considered to be to train the sufferer to ‘think positive.’ But the secret is this: in many cases thinking positive only treats the symptoms of depression. Real depression is a manifestation of unexpressed emotion, usually anger, arising from past trauma. So being told over and again to cheer up by a therapist, by a support network, by yourself, only buries that unexpressed emotion further, making it grow.”

“Right now, that is where we are economically. Despite their apparent wealth, Australians know that they’ve been through an economic trauma. Beneath the glossy veneer, folks know in their bones that there is no going back to the boom years when money flowed from every local house and superannuation account on a conveyor belt.”

“Yet despite this deep knowledge, which craves acknowledgment, and is the ashes of the phoenix from which a rebirth of national energy could spring, the pop-psychologists of our national elite spend all of their energy doing their utmost to bury it. Generally under the banner of a kind of thin Keynesian notion of keeping up our ‘animal spirits,’ the government, the Reserve Bank, our most respected media commentators, in unison give us a chorus of ‘it’s all good’”

“Among our leadership class, no reference is ever made to the fact that the old order of economic wealth creation has passed, nor that our economic performance per head is the worst it’s been for decades. Instead, we’re subjected to a ceaseless chorus of ‘buck-up.’ that China will save us, and that we’re better off than the Joneses.”

“We do not need cliches about consumer caution or endless Chinese booms. We need to build savings. We need to promote that saving into productive investment. We need more entrepreneurial flair to build the businesses to invest in. We need to celebrate individual empowerment through investment in education. In short, we need a liberal vision for the country beyond hoping that China will save us. Until we get that, the old order will not only whither, it will suck the life from the new.”