The Housing Bubble

It’s Friday desk clearing time for this blogger. “Homeowner Natalie Wong may never know for sure why her Bridle Path area home didn’t sell by auction as hoped on Sunday. About three hours into the auction, which also featured a selection of high-end handbags, jewelry, rugs and artwork, auctioneer Kashif Khan asked if there were any bidders in the crowd who were willing to offer at least $5 million for the property. No one responded. ‘I’m not upset because I was never really expecting anything,’ Wong said. ‘You have to try something different.’”

“‘This house is perfect for that first-time home buyer because it is move-in ready,’ says Mike Delrose about 32 Hermon St. in Belmont, Mass. Delrose is a realtor and gave us a tour of a three-bedroom Cape that’s been on the market a month. In typically pricey Belmont, the single woman selling the house has reduced the selling price from $550,000 to $525,000.”

“Delrose is advising his seller to keep her home on the market into the winter for serious buyers coming back into the market. He says a lot of people have had a look at this house already. Meanwhile, the owner is waiting for that first offer. But, as Mike Delrose noted as he showed us the master bedroom, prices are still dipping slightly, confusing potential sellers. ‘You know, the market’s getting better, but it’s not happening quick,’ he says.”

“Here was Chas Kaufmann’s life before the Great Recession: $28,000 in restaurant tabs in a year, cruises, house parties with fireworks. His Mr. Gutter business was booming in the Pennsylvania Poconos. The Hummer is gone, and he drives a 2005 pickup. He and his wife use space heaters in their elegant house and leave parts of it cold. Now: ‘We mainly shop at Sam’s Club and portion out our meals. We spend $4 to $5 a night on eating.’”

“Kaufmann saw it coming in the gutter trade, specifically when he started noticing that nearly all of his customers’ checks were drawn on home equity credit lines. ‘How long do you think this is going to last?’ he recalled asking his wife. ‘People were buying clothes, putting in in-ground pools, putting gutters up where they didn’t need to be replaced. I was putting gutters up when people didn’t need gutters. I would tell them. But they wanted to change the colors. You ride by those houses now and they either have three feet of grass or the windows are boarded up.’”

“Minnesota’s home prices are still too low for some homeowners who had hoped to sell by now. Nearly a quarter of homeowners are underwater on their mortgages, meaning they owe more than their homes are worth, according to CoreLogic. David Shuler and his wife bought a townhome in Golden Valley in 2006 for just over $300,000. In 2009, they took advantage of the downturn and bought a single family home in Bloomington. Shuler said they can’t sell the townhome — it’s probably worth a third less now. He and his wife are renting it out, but he said they probably won’t come out ahead in the end.”

“‘I think we kind of knew this could have happened,’ Shuler said. ‘I don’t think housing is something people are going to look at as an investment going forward.’”

“A new report by RealtyTrac reveals that California cities had the seven highest metro foreclosure rates in the nation during the third quarter, despite heavy declines in all of those communities from a year ago. The Riverside-San Bernardino-Ontario area ranked highest among large metro areas. David Tovar, a Realtor in Hacienda Heights, said he’s still seeing a lot of foreclosures. And a significant number of those properties are being snatched up by investors.”

“Tovar said banks learned the hard way that putting all of the foreclosed properties on the market at once would bring overall prices down too much. ‘They figured, let’s portion them out for a while,’ he said.”

“Several experts are looking for metro Phoenix home prices to climb more than 10 percent annually during the next three years. ‘I would say that in the next five to seven years, we will see (home) prices back to levels we saw in 2005,’ said Matt Widdows, CEO of Arizona’s largest residential-real-estate brokerage, HomeSmart. ‘Many (Phoenix-area) homes dropped to one-third of their value in 2005, and I have no doubt that we will be right back to those levels.’”

“An unknown for the housing market is what the handful of large investors who are buying thousands of homes in metro Phoenix plan to do with them. If they decide to sell around the same time, the supply of homes could jump, dampening prices. Industry experts said that’s unlikely to happen, at least in the short term.”

“We can only hope that Adelaide Brighton managing director Mark Chellew was being conservative when he suggested last week that residential property booms in Australia were a thing of the past. Housing is a central plank to Australia’s long-term economic success.”

“At its October meeting the Reserve Bank of Australia decided to cut interest rates by 25 basis points. The big unknown from all this is whether the much-maligned housing industry is able to fill the void on the economic horizon. The argument this time around is that Australian households are simply too indebted to plunge into another housing cycle.”

“There are three fundamental ways of increasing housing affordability. First, house prices could drop significantly. This is a disastrous result because it creates financial pressures on the entire financial community. Second, wages could skyrocket, producing unacceptable increases in inflation. Finally, interest rates could fall, reducing the cost of borrowing. This is the most acceptable path, and the only one the RBA has control over. One year into a rate-cutting cycle, housing in Australia is the most affordable in eight years, but there are only tentative signs that this tactic to raise housing from its slumber is working. The broader community is now conditioned to the process of our banks passing on only about 75 per cent of the RBA cuts to customers. This may mean the RBA just has to keep cutting until there are signs housing is affordable.”

“The various quantitative easings (QEs) and other stimulus programs created by the US Federal Reserve together with the loose monetary policy in just about every country have had a much broader effect than finally reviving the anemic US market. Global central banks’ policy of encouraging asset appreciation has pushed stocks, currencies and real estate markets sharply higher.”

“Real estate markets in many countries have risen dramatically in the past few years, some to levels that are neither rational nor sane. In Hong Kong house prices have doubled and have been labelled ’seriously disconnected’ from the slowing economy by a high government official. Singapore’s real estate has also risen by 56% from 2009.”

“In China house prices have risen over 250% since 2009. Brazil is another hot market. Real estate markets have risen 90% since 2009. Prices are also high in India where prices have also risen over 250% in the past ten years.”

“The US housing bubble was created by a rise of about 85% in six years from 2000 to 2006. After that the market fell 36%. According to the International Monetary Fund (IMF), home prices are still falling in 25 countries of the 54 tracked by the IMF. Leading the way was Ireland followed by the usual suspects: Greece, Portugal and Spain.”

“William White was the head of research at the Bank of Canada, before leading research departments at the Bank for International Settlements and the OECD. The essence of White’s latest paper, Ultra-Easy Monetary Policy and the Law of Unintended Consequences, is that central banks should call a ceasefire, not due to a lack of ammunition, but because the bombardment from easy-money policies is causing more ‘friendly fire’ casualties to their own troops than it is inflicting on the enemy.”

“The undesirable effects of ultra-easy monetary policy are aptly summarized: ‘They create malinvestments in the real economy, threaten the health of financial institutions and the functioning of financial markets, constrain the ‘independent’ pursuit of price stability by central banks, encourage governments to refrain from confronting sovereign-debt problems in a timely way, and redistribute income and wages in a highly regressive fashion.’”

“The distorting effects of persistently low interest rates can be seen in everyday life. They threaten the health of financial institutions by encouraging over-investment in markets like housing in Canada, which could go sour, and cause investment income to plummet. Low interest rates prevent the destruction of poor investments needed to free up resources. Low interest rates encourage governments to go massively into debt, as we are seeing in the U.S. and Europe. They penalize savers and investors in growth companies, while rewarding debtors and investors in staid dividend-paying companies, the very opposite of the incentives that economics says maximize long-term growth.”

“White’s conclusion is that policy-makers, and ultimately society, should tolerate more slowdowns or even mild recessions.”

“A friend in Beijing was planning his wedding when his fiancee broke up with him because, despite his best efforts, he failed to buy an apartment for them. My friend is a teacher who makes decent money. He shared an advertisement slogan from a real estate company with me: ‘Marriage without housing is sexual harassment.’ ‘Whenever I saw it on the subway or on a bill board, I was sweating and hoping my fiancee didn’t see it. Now I know she did,’ he said.’

“Another friend in Shanghai is planning her divorce. She is studying for her PhD and has no job. Her husband has been the sole breadwinner in the family. But she proposed the divorce. While she is mourning her failed marriage, she said she is not worried about making ends meet as a single mom for a three-year-old. ‘I bought this apartment before the marriage. So it will still be mine afterward. I have property,’ she said.”

“And then, there is my cousin Xiang, who has a new baby. Xiang makes 6,000 yuan ($960) per month. He is thinking of buying an apartment in a neighborhood that has a good school. It will cost 1 million yuan ($160,000). His savings, plus the maximum mortgage he could get from the bank, won’t cover half of the price. He has to borrow 600,000 yuan through high interest rate private loans.”

“When he laid out these figures to me, I was shocked. It sounds like the perfect formula for a foreclosure train crash. But he said: ‘I have to. I don’t want to fail my son. I want to give him the best education possible.’”

“An overheated real estate market can easily drive people to make insane decisions. People seem to have even invented a new value system where housing is the new gold standard. Morality, like the advertising slogan, love, like the aborted wedding, probability of survival, like the divorcee weighing her future, parenting, like the plight of the desperate young father, and even the value of money itself are all measured against the new values.”

“Under such a system, housing is largely considered a fountain of pleasure. But in reality, it is more a source of gloom. Those who don’t have it are haunted by the high prices and those who do by the possibility of a bubble bursting. Double unhappiness.”