When The Crisis Comes, Who Will Pay For It?
It’s Friday desk clearing time for this blogger. “A 2008 Senate report, titled ‘A Good House is Hard to Find’, found that ‘the average house price in the capital cities is now equivalent to over seven years of average earnings; up from three in the 1950s to the early 1980s.’ As the commodity boom begins to deflate, business has put immense pressure on the Reserve Bank of Australia to lower official interest rates. Major party politicians have been urging it to do it, as have right-wing unionists, as well as the big banks and mortgage brokers. In September, the Australian Prudential Regulation Authority said the big banks and financial firms ‘have begun to unwind the more conservative housing lending standards that they had imposed during the early phases of the global financial crisis.’ Similar rises in debt have emerged in other nations, such as Canada.”
“The Australian Treasury would have us believe we can just transfer out of the commodity boom into a debt-fuelled property bubble with no real consequences. Yet that disastrous path has been trodden too many times before. There may be short-term profits for big capital in the rush from commodities into property. But for the rest of us it will mean higher house prices, more debt and a financial system that risks collapse under the weight of unpayable debt. As it is in Europe now, the question is: When the crisis comes, who will be made to pay for it?”
“Federal Reserve Chairman Ben S. Bernanke said the Fed will take action to speed growth and a rebound in a housing market. Bernanke said housing-finance authorities have taken steps to ‘remove barriers to the flow of mortgage credit.’ ‘Overly tight lending standards may now be preventing creditworthy borrowers from buying homes,’ he said.”
“The housing market is sizzling again, fueled in part by record-low interest rates and fewer foreclosed properties. Robert Meadows took us on a tour of West L.A.: ‘It’s booming. People are having seven to 15 multiple offers on every house that is on the market. Over my shoulder, we have a house that was listed for $1.1 million. It sold like that. And then we relisted it for 1.4 [million] and it sold instantly, like that. The first day, we had a hundred people come through the house — a hundred people! I mean I could not keep the people from coming into the house.’”
“Deborah Cavallaro is a ‘flipper.’ She’s flipped four homes in the past year, including this one. Cavallaro: ‘One of them was on West 48th street, I purchased that property for $115,000 and then we sold it about six months later for $268,000.’”
“Phil Gilboy of TLC investments has bought over thirty homes in the past two years. This is his latest flip. It’s a home in Westwood he and his investors picked up for $1.3 million. He’ll soon put it back on the market for over $2 million. After investing a few hundred thousand on remodeling, his company is expecting to make a nice return. Gilboy: ‘This should be $455,000 profit on this property.’”
“It’s one thing to jump on the bandwagon when things are getting better, it’s quite another to jump off of it when everyone around you, not to mention your own company’s earnings, would seem to confirm that sentiment. But that’s just what Donald J. Tomnitz, CEO of D.R. Horton, the nation’s largest homebuilder by volume did. ‘I still don’t see a lot of jobs being created,’ he told an earnings conference call.”
“Until about five years ago, the Folks were living comfortably with their two children outside Boise, Idaho. They owned a home. Chris made a good living as a self-employed flooring installer. Once Boise-area home prices collapsed, though, the Folks’ lifestyle did, too. Work dried up for Chris. Amanda quit college. And they moved to Montana to be closer to her family. The family’s credit is shot. They blew through nearly $30,000 in savings, mainly on mortgage payments. Attorneys tell them their only way out is bankruptcy protection.”
“The Folks can’t afford to save for retirement. They struggle to cover $1,280 in monthly rent. Gasoline expenses sometimes hit $600 a month to fuel Chris’ van, so he can reach out-of-town flooring jobs. ‘Everything I worked so hard for is just slipping away,’ Chris Folk says. ‘It just feels so far away to get back to where we were.’”
“Amanda Folk is ’scared to death’ she won’t find a job to repay $25,000 in student loans. She hasn’t returned to their Idaho house in two years; she can’t bear it. Vandals have broken in. A former neighbor has taken to mowing the lawn. The couple is reluctant to rent the house for fear that their lender would end up with whatever money they collected. They’re seeking a smaller place to rent. But they don’t want to move far. Their daughter has cycled through four elementary schools in the past few years.”
“‘The hardest part is the psychological part of it,’ Amanda Folk says. ‘Our kids don’t have any sense of security. My daughter still asks, ‘Are we going to be here next year?’”
“William and Heather Sirotak have spent the last five years dealing with cancer, grief and job loss. They are living in a $117-a-night hotel suite with a 10-year-old who is terrified of change. And that credit card will max out by Thanksgiving. In 2008 William lost his construction job in the collapse of the housing market. The Sirotaks were forced to refinance to pay for Heather’s hysterectomy — a $36,000 bill — and, they concede, quit making monthly payments on the 3,600-square-foot home with the saltwater pool.”
“Accounts differ dramatically about which side balked when short-sale offers were available on the Alameda house that would have allowed the Sirotaks to escape their $650,000 debt. And if the Oregon Legislature has ordered foreclosure mediation, the banks have little or no incentive to participate. Why should they, Heather Sirotak asks, when redevelopers will scoop up foreclosures on the courthouse steps, boot the distressed homeowners to the curb, and quickly flip the properties: ‘This generates new optimized mortgages for a new crop of chumps.’”
“A new report says Metro Detroit’s foreclosure crisis is improving. RealtyTrac says mortgage defaults across the Tri-Counties plunged 52-percent in October, compared to last year. But Rachael Saltmarshall, President of the Detroit Association of Realtors, is among those refuting the relevance of those numbers. The reality, Saltmarshall said, is that the Metro Detroit area remains littered with thousands of technically bank-owned but abandoned, homes in disrepair. ‘They haven’t done anything with the properties,’ she said. ‘They haven’t started foreclosure proceedings, boarded that property up — they’re just kind of in purgatory.’”
“The dire shortage of houses for sale in the Auckland market has desperate buyers going door-to-door pleading with homeowners to sell, as short supply has pushed prices up to record levels. Auckland couple Kate Sutton and Oliver Mannion have asked agents to use their names in personal letters to homeowners to try to secure their first home. The couple have been house-hunting for seven months, have looked at 150 homes and have been outbid at four auctions. But even with a good deposit and a budget of between $600,000 and $700,000, the desperate couple are still flatting in an Onehunga property Sutton and her brother own.”
“Sellers appeared happy to mislead potential buyers to take advantage of the shortage. ‘We looked at one house that was advertised as three- or four-bedroom, and we get there and one room is a laundry with a single bed in it and the other is a sleepout outside. It was nice but a room outside is not suitable for a family,’ Mannion said.”
“That house, in the Auckland suburb of Penrose, went for $817,000 - $200,000 over the recent valuation.”
“The couple had noticed price jumps in the past six months and they have had to increase their budget in the hope of securing a home. Personalised letters, which used the couple’s names and family details, dropped in letterboxes by real-estate agents in areas they liked, were their latest attempt to find a home. ‘We are kicking ourselves we didn’t buy six months ago because houses that would have gone for $650,000 are now going for $700,000,’ Sutton said. ‘We are hoping that approach may work, that someone will come forward and we can finally get into a family home,’ Sutton said.”
“Why are some economists prattling on about the rampant housing market in Auckland with medium sale prices nudging $600,000? Here is why: A country becomes richer by increasing its production of actual goods and services. This is measured by Gross Domestic Product. This ultimately determines average incomes in a country. New Zealand’s GDP is increasing at the pace of a three-legged turtle.”
“The sale of an existing house represents a transfer of assets between the buyer and seller. There is no new physical output or incomes or employment generated except for real estate agents and bankers. Housing inflation in New Zealand over the past decade has largely been matched by increases in private debt, much of it borrowed from overseas. We have used overseas money to bid up our own house prices. There is no increase in New Zealand’s ability to service this debt through this process.”
“Some of the housing inflation has been attributed to wealthy overseas buyers. This may be the case, but they are not contributing to increased output or incomes in New Zealand or this would have shown up in our GDP figures. Young people wishing to buy a first home are forced to take on a massive debt which reduces their ability to save and invest. Parents may fund their offspring into a first home but this still represents a loss of funds that could have been used to grow our economy.”
“Individuals can get rich by buying and selling houses but a nation cannot. In such a situation a housing market resembles a giant game of pass the parcel hosted by a very profitable banking sector. There is no net gain to our country, just more debt and higher house prices. In most cases they are the same houses they were 20 years ago.”
“Real estate bubbles can last for many, many years. They are self-reinforcing. The ultimate cost to a society is far greater than that of a sharemarket crash because of the massive debt hangover and the impact on the real economy in lower output, employment and incomes. This is why some economists are ringing alarm bells.”
“We have used overseas money to bid up our own house prices.”
Welcome to the club!
“Real estate bubbles can last for many, many years. They are self-reinforcing.”
Does ’self-reinforcing’ include the use of massive government intervention to prop up a bubble?
If not, then why is massive government intervention in place to prop up the U.S. real estate bubble? Why not stand clear and let the bubble ’self-reinforce,’ sans subsidy?
I think he means prices go up because they’ve been going up.
We’re getting into so dangerous territory here, IMO.
‘Inland Empire economist John Husing is looking closely at statistics that show 37.1 percent of foreclosed homes did not go back to the banks, but were sold directly to investors. That share was just 19.3 percent in October 2010. The absentee buyer pool is now at 30.3 percent, up from 12.7 percent before the housing bubble burst in 2007, he said.’
‘Taken together, Husing said absentee ownership and significant investment buying will have a dramatic impact on neighborhoods and home values. Christopher Thornberg, founder of Beacon Economics, said he’s monitoring price escalation. Housing cost is the single largest line item in the household budget, he said, and the budgets of many homebuyers are stretched thin. “If prices get too expensive, too fast, it won’t be a good thing.”
http://www.pe.com/business/business-headlines/20121114-real-estate-no-fall-for-october.ece
Here’s some self-reinforcing:
‘Real estate investors - an increasingly potent force in the Bay Area market during the housing downturn - are rushing to lock up deals before rising home prices wipe out their chances for profits. ‘There is a tsunami of money coming into the market, billions of dollars to buy distressed single-family homes,” said Jeff Lerman, a San Rafael real estate lawyer, speaking about the national landscape. “The window of opportunity is rapidly closing (as prices rise).”
‘California doesn’t have large cash flow; it’s more of an appreciation play,” said Kathy Fettke, CEO of Real Wealth Network, a Walnut Creek real-estate investment club. Her club usually steers members to lower-cost markets, but recently recommended buying California homes between $150,000 and $300,000.’
http://www.sfgate.com/realestate/article/Investors-rushing-into-real-estate-deals-4026281.php#ixzz2CP0rXPQE
Are incomes up in California? Do unemployment numbers support this idea that prices will rise indefinitely? Or is this mania thinking? And is Bernanke happy now that houses are getting flipped in California for several hundred thousand more?
A lot of negative press was aimed at Greenspan for being asleep at the wheel. How do we take the current Fed policies of printing money and actively, publicly encouraging a bubble?
Here is what scares me about what could happen to CA home prices vis-a-vis Fed policy:
The backdrop:
1. We have a low homeownership rate here (lots of renters), combined with a high number of jobs per existing housing unit (1 job per 1 housing unit, vs. 0.8 to 1 in FL, AZ for example), and low physical vacancy rate. If sentiment shifts into mania mode, I BELIEVE (unprovable statement coming) that there is a lot of income in the hands of renters that could be used to buy a home. Evidence of this is simply that the rents that I’m seeing get paid on rental homes could MORE than pay a mortgage and all costs of ownership.
2. Starting at a point of low vacancy (pre-bubble vacancy rates), we are currently building approximately 50k housing units per year, and in the last 12 months added 260k jobs. With low vacancy rates (ie. not a lot of excess empty housing units), and shrinking numbers of non-current loans (I’ve posted on this frequently), unemployment rate is less relevant at this point…what matters is physical housing units relative to number of jobs, and we aren’t building enough new units to keep up with the current job growth.
3. The fuel to allow a broad swath of people to buy is easy and cheap money. Low down payment FHA loans, VA loans, Fannie/Freddie, etc. at sub-4% rates. Even jumbo loans for good borrowers are at sub-4%, even without government backing.
Here is the big risk, IMHO.
CA (as well as AZ) is ahead of the curve in terms of getting rid of distressed housing. Lots of judicial states are behind the curve. The lag based on the data could be 2 years or longer behind the curve. Dealing with foreclosures will be a drag on economies in judicial states (depresses home prices, which depresses new building, which depresses construction jobs, depressed consumer confidence, and actual home values, etc.) for longer than places like CA.
If there was a Reserve Bank for each state, you would see each state have rates rise at different times based on the economic activity in those particular states. If CA/AZ overheated soon in the cycle, all else equal, you might see these hypothetical state reserve banks raise rates to cool things off.
However, we don’t have individual reserve banks for each state. We have a Federal Reserve Bank, which will act based on the entire country. There is a real potential that the fuel of low interest rates is available for WAY too long in CA.
This POTENTIAL scenario said another way: the Fed spiked the punch bowl. Non-judicial states (like CA) are going to be arriving to the party much earlier than judicial states. The Fed doesn’t have the ability to unspike the bowl for some states, but not others, nor kick the states out of the party. So, even though CA may be completely trashed, with lampshade on it’s head, the Fed will keep serving, since judicial states would have barely loosened their tie.
CA Housing Bubble 2.0.
So your thesis is exactly like the EU where when rates are too low for Germany and The Netherlands, they are at the same time too high for Spain, Portugal, Italy and Greece.
Geeez… time to load up the boat with CA Real Estate! Last one in is a rotten egg!
Kind of…except I think they will be too low for all in the US, but WAY too low for some places for too long…the economy is being distorted through ZIRP, leading to investments that are too risky for the returns.
Off topic but what do you think of high end coastal real estate in California? Will it zoom up? Or will the 13.3% income tax rate sending too many of the “rich” packing for Incline Village, NV?
I have no idea. I personally don’t think it’ll zoom up, mainly because I never thought it really fell that hard, but I’ll probably be proven wrong–there seems to be a never-ending stream of people with unfathomable amounts of money who are willing to pay what it takes to have their place at Pebble Beach.
Incline is nice, but it’s isolated, and people who want to live by the beach will still live by the beach. It is very tempting to say that you want to leave, but as an attorney we use once said, every time he thinks about moving, he thinks of the next two places he’d want to live, and they are both in CA.
On a percentage basis, I think the places that are most suited to move up are the places that fell the hardest…more inland locations, especially those within striking distance of the job centers.
The other point to make is that with the forever printing of dollars, one potential (likely) effect is the weakening of the dollar against commodities and other currencies (unless their central banks outprint us). What this means is foreigners who may have their wealth in stronger currencies, or generate their wealth via stripping the land of resources, may have more dollars to spend.
In that case, world class locations in the US could see values rise more than we would all think, including world class cities, and along the coasts.
Pebble Beach, San Francisco, NYC, etc.
I do appreciate the analysis, Rental Watch. It’s obvious that you have mastered the topic.
“In that case, world class locations in the US could see values rise more than we would all think, including world class cities, and along the coasts.
Pebble Beach, San Francisco, NYC, etc.”
It’s all up to the Fed to decide on how much future dollar debauchery is warranted to prop up nominal U.S. asset prices (housing, stocks, etc).
That Moral Hazard is a bitch!
“How do we take the current Fed policies of printing money and actively, publicly encouraging a bubble?”
Looks to me like they are ALL IN.
“Looks to me like they are ALL IN.”
+1 And, like it or not, we have their back.
At least in Silicon Valley, the economy is booming and home prices are increasing as a result. A year ago, my townhouse listed on Zillow for $410,000. A month ago, it listed for $454,000 and I sold it for $446,000.
The current housing market is a feeding frenzy of speculators, and people have learned nothing from the past. The get-rich-quick-buying-houses mentality is still as pervasive as ever. It’s troubling for many reasons, but with Bernanke complaining that the lending is not loose enough, I am horrified.
‘with Bernanke complaining that the lending is not loose enough’
Not only that, lending is completely nuts! First time buyers can get close to zero down. With the various HARP plans, FB’s can refi practically unlimited LTV. And get this; it’s no appraisal, no documentation of income. That’s worse than 2005!
Nobody is talking about this in the media. Am I the only one who can find flipper hedge funds run wild in California? Canadians buying sight unseen in Arizona, using HELOC money to do it? Then connect a few dots; Chinese pouring billions (apparently laundering money, which is why they don’t care what they pay) into New Zealand, Canada, California and Australia. Look at any housing article in Taiwan, Singapore, Malaysia, Hong Kong, and they mention Chinese speculators buying everything in sight. Commercial, residential and now farm land.
IMO, this is gonna be big. And I don’t care if you and me are the only ones that know it, because Bernanke is running this thing off the cliff, and there will be opportunity in this disaster. More so for those aware.
That’s what is so jaw-dropping- that Bernanke is complaining about lending being tight when people can buy houses without two nickels to rub together. His policies are despicable.
Another thing is this misperception that prices are too low and need to “recover.” Since when is a $375k, half acre piece of dirt too cheap? I see these prices all over the place. This stuff is nutty. I feel like I am living in the twilight zone.
Also, I was checking Craigslist in an area I am familiar with, and many of these recent speculative purchases are showing up as rentals with prices $300+ more per month than the going rate. It’s really disturbing.
“And I don’t care if you and me are the only ones that know it, because Bernanke is running this thing off the cliff, and there will be opportunity in this disaster.”
Does Bernanke realize that Bernanke is driving the bus off the monetary cliff?
“It’s really disturbing.”
Relax. Take a blue pill. Go shopping.
He’ll be long gone before the policy chickens come home to roost.
Incidentally, there are plenty of people who are openly critical. It’s just hard to get past the wall of noise.
And yes, I agree, we shall see worse than 2008. Just not yet. Not for quite a bit actually.
I’d go long the pre-show popcorn at this point. Save some stomach room for the real popcorn which comes a lot later.
I begin to suspect that the primary modus operandi for many political leaders, including Federal Reserve Chairmen, is to spike the mania punchbowl while they are in office, leaving the omnishambles of economic collapse for their successor.
And it’s not even the distant past, like the Depression. It was five years ago. I’m not as sanguine as Ben about opportunities when this comes crashing down for the second time, because I expect an epic political convulsion and I’m not sure what comes out of it.
Is this article taken from back in 2005?
ME CONFUSED!
“How do we take the current Fed policies of printing money and actively, publicly encouraging a bubble?”
If the
PresidentFed does it, it’s legal.“The rating for the Inland region — which is on par with the national average — means home ownership still is slightly less attainable than it was one year ago. But it remains far more achievable than it was in 2005 and 2006 if you have a job, kept a solid FICO credit score and can squeeze past a trunk-load of investors packing cash.”
Any savings realized from buying “value” out in the Inland Empire are eventually exhausted in transportation costs getting to where the jobs are located. And then there are the real suckers who opt for the high desert. That daily climb up the 15 over the Cajon pass sucks the fuel and wears out a car’s drive-train like there’s no tomorrow.
Welcome to the club ??
The How Much A Month Club….
“When the crisis comes, who will be made to pay for it?”
Uhh, the crisis has already come. Extraordinarily high housing prices are the crisis. Crashing prices are the relief. Yet, governments the world over will fight to the bitter end to saddle citizens with the burden of unpayable debt.
My take is that it’s not just housing. The crisis is TOO MUCH DEBT. That includes housing, but everywhere else on the National balance sheet.
The political solution is to post bigger deficits to provide more cash to the Banksters and the politically connected group of grifters.
The answer is the Citizens and Taxpayers ALWAYS pay via the Federal Reserve money printing schemes.
The Federal Reserve is a Banking Cartel, supported by the U.S. Government that allows BAD debts to be put no the U.S. Taxpayers ledger.
This is how the “rich get richer”. They would be POOR if they markets dictated the result of BAD investments, but Crony Capitalism is the reason d’etre of the Federal Reserve Bankster operations.
Kill the FED and the Politicians would not have any deficits to “fix”. If you couldn’t print money from nothing, then we would be forced to living within our means. Borrowing would be based on actual “savings” and interest rates would reflect risk.
So long as the FED exists, the gap between rich and poor will only continue to grow, and it won’t be the 1%, it will be the .001% vs. the rest of us.
Borrowing would be based on actual “savings” and interest rates would reflect risk.
That’s so 1970s. You’re silly. Is this part of your comedy act? It’s a good one. I almost fell off my chair.
Geez, I’ve gotta go. I’ve got a pain in my abdomen now and I’ll have to use the ER, since health insurance is only for people with good jobs today. Urgh, ahhh, ouch.
Well, whatever you want to call it, something is coming. Consider this; years after the so-called global financial crisis, New Zealand, Australia, China, (most of Asia, actually) India and Canada are at or near all time high house prices.
Here’s a report from Singapore with some interesting comments:
‘Speaking in Parliament today, Mr Khaw said the yearly Resale Price Index (RPI) growth has gone down from 14.1 per cent in 2010 to 10.7 per cent last year. And in the first nine months of this year, the figure stood at 3.9 per cent. He said a number of property cooling measures that had been implemented will take some time to work through the market. These include the “huge supply” of new housing units which will only be available over the next two to three years.’
The comments:
‘Wei Liang Sim
It is a Catch-22 situation - They dare not really let prices fall for fear of the “90%” getting angry, but in reality there is also a groundswell of discontent with the “ridiculous” prices. Especially amongst the young, whose salaries have not risen in line. If you think about it, should prices fall, you as a homeowner would be no worse off. Your aspiration to upgrade would likely have fallen in line so it would still be viable. You’d still have a roof over your head, provided you did your homework and did not treat your shelter as short term investment.’
‘The ones who would REALLY hurt are the speculators, and quitters. To them, I say, high gains = high risk and there ain’t no free lunch. But of these 2 segments, I’d hit the quitters first. Easy solution - exit tax and capital gains tax. All those PR, who buy and sell HDB, take CPF and leave? You’ll see them think twice before playing up the prices. That will FREEZE the market. Do they dare? I think not, not till they’ve milked us a bit more and an election is drawing near.’
‘Narayan Venkataraman
The word “stabilising” is so often used nowadays that it is quite misleading. The fact is prices continue to rise, there is no indication of a decline in prices and neither will all the cooling measures have any affect on the prices. Whatever the Govt has done until now has had no effect in bringing prices down. So the question is - Was there any real intent in reducing prices? It can be argued now the true intent of all the past measures would have been to retard the prices from going out of control but allow it to keep rising at a moderate pace of 3-5% from the ridiculous levels it is right now. By 2015 when major volumes will be completed, the prices would have risen by atleast another 15% from the present obscene range… Why cant people understand that 90% of Singapore DO NOT want the property prices to fall and we are all in this mess collectively and no owner wishes to see his property value dip…’
http://www.todayonline.com/Singapore/EDC121114-0000179/HDB-resale-market-showing-signs-of-stabilising–Khaw
‘The resemblance between the current Chinese economic bubble and the great Japanese bubble of the 1980s is close enough to suggest that the hangover may be just as great in China when the bubble finally bursts. Two decades later Japan is still unable to get its economy growing again, but its political system has survived because it is democratic, and because the level of corruption is relatively low.’
‘The Chinese regime’s lack of democratic legitimacy and its manifest corruption make it very vulnerable in such a situation. The economic misery would be compounded by massive civil unrest, and it might even end Communist rule.’
‘Not all of the 2,987 members of the National People’s Congress, China’s rubber-stamp legislature, are rich — but the richest 70 of them, according to the Hurun Report, a magazine best known for its “China Rich List”, have a combined net worth of $85 billion.’
‘Virtually nobody believes in the old Communist ideology any more: “Socialism with Chinese characteristics” is only another way of saying “capitalism plus authoritarianism.” The Party’s power survives because it has been able to deliver steadily rising living standards for most people, and because it has been fairly successful in persuading them that the only alternative to its rule is chaos.’
‘This is not a stable situation. No capitalist economy can avoid an occasional recession, but that kind of cyclical decline in jobs and incomes is dangerous for a system whose credibility depends on providing continuous growth. The Chinese regime has been very good at postponing the inevitable — it escaped the 2008 recession by massive public spending — but at some point in the relatively near future, there will be a major recession in China.’
‘Most of the senior people in the Party will be well aware of this, but they seem incapable of doing anything about it.’
http://www.japantimes.co.jp/text/eo20121105gd.html
“The Folks can’t afford to save for retirement…”
That’s funny. What makes the Folks think they are ever going to be able to retire?
The reality is that most people in the US will never be able to afford to retire.
Most people will never even get out of debt.
Interesting thought. As the debt holders die off, what happens to the debt?
If young people learn from the mistakes of their elders and don’t acquire debt, will that eventually bankrupt the banks?
The assets on which the debt was secured is sold, and as much of the debt as possible is repaid.
If the assets are not sufficient to repay the debt, the bank takes it in the shorts.
You mean the bond holders. Might be a bank. Might be soemone else. Very unlikely to be the bank that originated the loan.
Yes, whoever holds the debt would take it in the shorts if the collateral is insufficient.
Here’s what puzzles me about tradesmen with crippling mortgage debt:
Construction is basically an apprenticeship, and older master tradesmen have presumably been through the cycle of plentiful work and none at all numerous times in their careers. I’ve never met a contractor who’s not acutely aware of these extreme ups and downs, and can’t imagine a mentor who doesn’t pass this knowledge on to his journeymen.
Moreover, tradesmen generally have to travel to job sites all over the state to get and keep work. This is also well-known and mitigates against taking on a mortgage. “I didn’t know” is not a valid excuse for people involved in the construction trades.
So how come so many got stuck?
Recent v/s traditional.
Also, not all are analytical. Plus, this time is different. For a second time apparently in less than a decade.
“Plus, this time is different.”
Well of course it is, because now housing has bottomed out.
Apparently not all have read the Fed’s White Paper on housing stimulus just yet.
GARY SHILLING: Here’s Why There’s No Housing Recovery And Prices Will Collapse Another 20%
Matthew Boesler | Sep. 19, 2012, 5:18 PM
Everyone thinks the housing market in the U.S. looks like it’s starting to bottom.
Famed economist Gary Shilling is not one of them—you could call him notably bearish on housing.
In fact, he expects prices to drop another 20 percent from here and doesn’t think we will see a bottom in the market for another several years.
The main reasons Shilling is so pessimistic: There is a huge supply of excess inventory not being accounted for, and prices still have not fallen to anywhere near long-term historical averages.
…
1. The supply is not uniformly spread throughout the US. Some places have too little, some people have too much. Unlike other products, houses are hard to move from where there are too many to where there are too few…
2. I think the inflation adjusted graph is highly flawed, which is the basis for his claim of 20% further fall. The way CPI has been calculated has changed over the years, most notably starting in the early 80’s. If it was measured the same way as the decades before, it would show much higher readings today, significantly changing what the graph would look like over the prior three decades.
Look up Shadowstats.com, and ask yourself what the graph would look like if the SAME way of calculating CPI was used for the past 30 years than was used for the 30+ years before 1980.
VERY different…
It’s like saying people are getting taller over time, but not disclosing that the length of the inch changed in the middle of the time series.
“Unlike other products, houses are hard to move from where there are too many to where there are too few…”
It’s far easier for the occupants to relocate than for the houses.
Gotta have jobs for that. And will you relocate people’s close family as well?
No chance that they can retire, at all.
Might want to gamble it all on another house. There’s always bankruptcy later.
The current house market reminds me of the scene on TV shows, where the paramedics show up, give the patient an epinephrine injection, hit the flat lined patient with the defib, the heat beats for 5-6 times, then flat lines again.
The krill are still dying. The whales still won’t admit that maybe overfishing isn’t such a good idea.
“Federal Reserve Chairman Ben S. Bernanke said the Fed will take action to speed growth and a rebound in a housing market. Bernanke said housing-finance authorities have taken steps to ‘remove barriers to the flow of mortgage credit.’ ‘Overly tight lending standards may now be preventing creditworthy borrowers from buying homes,’ he said.”
“Ve haf vays of making you borrow ze money.” — Ben Bernanke
Regarding New Zealand, like most other third world kleptocratic/socialist countries, it is really two places, the metropolis vs everywhere else. Auckland truly is in a speculative frenzy with house prices at all time highs. Some of this is foreign investors securing their residency. The other aspect is “Silent Generation” Kiwis (born before 1945) trading houses with each other in their role as slumlords to this country’s urban welfare underclass. I recently walked by a real estate auction, of the around 100+ people present, all looked to be white people aged over 70. They do not pay capital gains tax on their investment homes, and can live high off of HELOC money as they drive prices up by selling to each other. Down payments are 5%.
In the rest of the country, prices are substantially down from 2007. All places other than Auckland have population loss through out migration. Any rural population growth would be from the wombs of our army of welfare mothers. Prices for vacation homes and building sections in remote areas (far from jobs) are still collapsed, in some cases less than half of peak value.
While a crappy moldy leaky house on an 1/8th acre section in Auckland is $600,000+ (if you can get one in a bidding war), a couple of hours away a modern 4/2 on 20 acres of grazing complete with tractor shed, water tanks, ponds, orchard, and fencing had been listed for months at $500,000. Both prices make sense. The Auckland house can cash flow if stuffed with what they call “section 8s” in the US. The country house is good for raising beef and lamb, but would not earn enough to pay the mortgage, so no takers.
I recently walked by a real estate auction, of the around 100+ people present, all looked to be white people aged over 70. They do not pay capital gains tax on their investment homes, and can live high off of HELOC money as they drive prices up by selling to each other.
And to be crass… they know that they won’t be around long enough to pay back that HELOC money. Surely any bank would figure this out and not lend to them. Who is lending to them? Does New Zealand have a Fannie/Freddie?
Hi Oxide,
The lenders are mainly the “big four” Australian banks. They got through the last financial crisis fine, so no government lending needed. If the (much larger) Australian bubble ever pops, the banks will be toast, and require a TARP type program. Once again, the oldies get a free ride, as it will be their children and grandchildren who get to spend decades paying for the banker bailouts.
While a crappy moldy leaky house on an 1/8th acre section in Auckland is $600,000+ (if you can get one in a bidding war), a couple of hours away a modern 4/2 on 20 acres of grazing complete with tractor shed, water tanks, ponds, orchard, and fencing had been listed for months at $500,000.
The country house is good for raising beef and lamb, but would not earn enough to pay the mortgage, so no takers.
Sorry to burst your bubble but the logical conclusion to be drawn from the two statements is that BOTH prices make no sense whatsoever.
While the country house looks good relative to the first, it’s quite clear that it’s overvalued in absolute terms. There are no farmers with a spare $500K sitting around raising friskly little lambs for the dinner table.
You’re deluded by the debt illusion. Sorry to bust your chops.
Great post, BTW. Best I’ve seen in months.
The Siroteks in the Portland story are getting SLAMMED in the comments. They get all due credit for adopting their two grandchildren. But at the same time, it looks like they were serial refinancers who cashed out about $280K to “remodel” the home for a preemie grandson who passed away before he reached the age of 5-6. And they plastered pix of their home on Facebook. But they were bankrupted by a $36K medical bill.
I can’t say I have a lot of sympathy for them… yes it’s a bad situation but IMO it doesn’t merit the sob factor. The commenters are placing their sympathy right where they should: on the surviving 10-year old granddaughter.
“Sellers appeared happy to mislead potential buyers to take advantage of the shortage. ‘We looked at one house that was advertised as three- or four-bedroom, and we get there and one room is a laundry with a single bed in it and the other is a sleepout outside. It was nice but a room outside is not suitable for a family,’ Mannion said.”
_______________________/
I saw things like this when I first looked to rent a house back in 2006. One owner was building a wooden partition right across the middle of a bedroom, so the property could be advertised as four bedrooms rather than tree. Another recently had turned the garage into a bedroom; the dark blue paint on the concrete floor was intended to obscure the oil stains but the room still smelled like a garage.
So just ask yourself why the desperate marketing illusion to sell, huh?
Obvious, no?
“One owner was building a wooden partition right across the middle of a bedroom, so the property could be advertised as four bedrooms rather than three.”
We have an extra wall in our rental for that very reason. Works for us…kids don’t need mega-sized bedrooms, anyway.
And then there are sad stories like my colleague at work, whose spouse built and built some more onto their modest home, to gussy it up as a bigger, more desirable home.
When they sold it, turns out it was about $500K less desirable than they thought it was.
“seven to 15 multiple offers”
That’s a lot of multiple offers
“The dire shortage of houses for sale in the Auckland market has desperate buyers going door-to-door pleading with homeowners to sell”
Can you picture someone coming to your door and pleading with you to sell your house? That’s funny
And what exactly makes somebody a desperate buyer? Are they currently homeless?
“And what exactly makes somebody a desperate buyer?”
If they are willing to sign a contract that requires them to come back and feed the squirrels…
And what exactly makes somebody a desperate buyer? Are they currently homeless?
Seriously.
This just sounds like newspaper-hooey to me. “Buy now or be priced out forever” in a different guise.
I doubt it’s even true. Just carnival barking.
“This is Robert. He’s a Realtor. He drives back roads, boulevards and side streets scoping for deals. And this is Dan. He’s a family guy looking for new digs. And these are the flippers, Phil and Deborah. And they are all competing to find homes in L.A. Flags are waving and signs are hanging all over Southern California.”
Fighting over scraps of meat out in the street.
“Federal Reserve Chairman Ben S. Bernanke said the Fed will take action to speed growth and a rebound in a housing market facing obstacles ranging from too- tight lending rules to racial discrimination.”
New fed mandate: racial discrimination.
So what’s wrong with this picture?
- incomes aren’t going anywhere
- we still have millions more housing units than we need
- investors scratching for yield expect to make big returns in the SFH rental market
You know what’s really funny? This scenario is also happening in Lima Peru - on a smaller scale but still. What’s fueling it? Double digit credit growth. Just be careful if you are long Peruvian equities - especially financials. Same for bonds.
Jim:
Fed policy in combination with China’s building boom has inflated international commodity prices. Peru is a commodity exporter and their export revenues have increased dramatically during the past decade. They also have been relative well behaved (as opposed to Venezuela, Argentina, Ecuador, and other Bolivarian revolutionary nations) and Peru has joined Mexico, Colombia and Chile in signing free trade agreements with North America, Europe, and Pacific Rim countries from Asia. As a result they are considered a safe haven by global investors, and money has flowed to its appreciating local currency (the New Sol) in larger amounts that there are assets in the country to park all that trade and investment money coming to Perú. The housing bubble you mention is absolutely true, of course. But this is just a mirror image of the declining value of the U.S. dollar brought deliberately by Ben Bernanke. The main mistake Peruvians are making is that the middle and upper middle class is borrowing at a faster rate that all this new money is coming into the country — to pay for new homes, new cars, expensive private schools, mobile phones, etc. etc. and if a Paul Volker ever again attempts to reverse the decline of the dollar, raise rates and mops up the excess global dollar liquidity, all these happy borrowers will find themselves like the Mediterraneans in between too much debt and a tight economy.