The Housing Bubble

It’s Friday desk clearing time for this blogger. “As the sizzle returns to South Florida’s housing market, many homes are getting multiple offers, a result of strong demand from first-time buyers and investors and a shortage of available homes. A few months ago, a lender instructed veteran West Palm Beach broker Douglas Rill to list a run-down home near West Palm Beach for less than $40,000. The home, with no kitchen appliances and a bad roof, drew 22 offers and finally sold for nearly $53,000. It was shown more than 70 times. ‘The front door was about to fall off,’ Rill said.”

“Florida’s foreclosure courts have made almost no progress in clearing an overwhelming backlog of cases from their dockets despite a $4 million stipend awarded by lawmakers this year. As of Oct. 31, there were 377,272 pending foreclosures in Florida’s 20 circuit courts, a net reduction of just 435 cases since the money became available in July. Judges say new foreclosure filings have nearly outpaced the number of cases they’ve been able to close. Palm Beach County Circuit Court Senior Judge Howard Harrison routinely hears cases that are lingering from the early days of the real estate bust. Last week, suburban West Palm Beach homeowner Allan Salman was in Harrison’s courtroom asking him to cancel a foreclosure auction on Salman’s home. The sale was scheduled for the next day.”

“‘This is a 2007 case,’ Harrison said, looking up from the dais with a head shake. Salman, who has wrangled over loan mods and short sales with his bank since it filed for foreclosure five years ago, said he was close to finalizing a deed-in-lieu of foreclosure with his bank, but needed more time. ‘I’m sorry, sir, motion denied,’ Harrison ordered.”

“But he had a plan B. Salman filed for bankruptcy the same day, a maneuver confirmed by bankruptcy court records and one that puts a temporary freeze on the foreclosure. ‘If one court doesn’t work, go to the next,’ Salman said.”

“About 50 demonstrators gathered Thursday night to say Gov. Chris Christie hasn’t done nearly enough to help those losing their houses to foreclosures. They chanted ‘Get the money out the door, give the money back,’ and sang parodies of Christmas Carols, such as the ‘12 Months of Default.’”

“One protestor, Grace Alexander, told those gathered Bank of America was looking to foreclose on her home. ‘I don’t want anyone to feel embarrassed. Don’t feel embarrassed. Don’t feel ashamed,’ she said. ‘This is not our fault. Let’s blame all the banks.’ And she warned: ‘I don’t think they want me on the streets, because I’ll be one bad little woman.’”

“Last July, non-judicial foreclosures in the state all but disappeared. Some loan servicers have begun taking debtors to court. But others seem to be taking a ‘wait-and-see’ approach. For Clair Klock of Corbett, the timing couldn’t have been much worse. He and his wife agreed to take out a loan on behalf of a family member. The plan was that the family member would eventually refinance. That was in 2006. When the recession hit, Klock and his wife, who are in their 60’s and 70’s, found themselves with a second mortgage on a house that was worth less than the amount of the loan. He’s stopped making the payments. Now he just wants the servicer to foreclose, take the house and be done with it. But so far, that hasn’t happened.”

“Klock explained, ‘I just want to get that off my desk and not have to think about it. And that’s my frustration that we just can’t have closure on it and move on.’”

“As Klock waits to see what happens with his property, so too are thousands of other Oregonians at risk of foreclosure. John Helmick is the president of Eugene-based Gorilla Capital, a company that invests in foreclosed properties and also tracks foreclosure data. His data show since this summer non-judicial foreclosures — that’s foreclosures processed outside the courts — are down about 90 percent though much of the state. Helmick said, ‘This isn’t a small shift. This is a paradigm shift.’”

“As many as one in seven families across America with Federal Housing Administration-backed mortgages will lose their homes to foreclosure in coming years, according to a landmark study by a former executive VP and chief credit officer at Fannie Mae. Edward J. Pinto’s study focused on previously unavailable mortgage, credit and other financial data at the zip code level for 2.4 million mortgages insured by FHA during 2009 and 2010. The study thus examined three-fourths of the 3.45 million loans insured by FHA during those two years.”

“‘Across the country, 9,000 zip codes with a median family income below the metro area median have projected foreclosure rates equal to or greater than 10 percent. These zips have an average projected foreclosure rate of 15 percent and account for 44 percent of all FHA loans in the low- and moderate-income zips,’ Pinto said.”

“The coming surge in foreclosures is not unknown to federal officials, according to Pinto. Projections by FHA last year found that 9.6 percent, or about 330,000, of the mortgages it insured during 2009 and 2010 ‘will ultimately be foreclosed upon or otherwise result in a claim against FHA’s insurance fund,’ he said. The current rate of foreclosure on such mortgages is 19 times higher than it was in 1954. ‘This is not your great-grandmother’s FHA,’ Pinto said.”

“Burnaby is the third-most expensive market in Canada to buy a home after Vancouver and Richmond, according to a study by Coldwell Banker Real Estate. Richmond’s market is more influenced by Asian buyers, specifically those from overseas. But Arthur Ng, manager of Coldwell Banker Westburn Realty, said those buyers aren’t just investors and speculators. ‘That’s what the misconception is. I wouldn’t call it an investment … Their kids are going to school [here] so they buy properties for them and they have plans to retire here, and many of them have come to retire here. Of course the prices now are so high there so that’s why now they’re coming to Burnaby.’”

“In recent months, after the study period, Ng said his company’s Burnaby list prices (as opposed to sale prices) have dropped by five to eight per cent. ‘People are realizing that, the market’s slowing down, if I need to sell I need to adjust my price in order to get some activity on it,’ Ng said. ‘But by no means are we seeing a fire sale.’”

“In 2008 and 2009, local real estate prices dropped by 20 to 25 per cent ‘but it came back like wildfire within nine months. That was a global collapse, we’re not in a global collapse now,’ he said.”

“Prices of repossessed Spanish homes offloaded by lenders this year tumbled 65 per cent as a million new properties remain unsold and buyers find it more difficult to get mortgages, according to Fitch Ratings. The price decline is relative to the value of the property when the loans were made and is more than double the drop in real estate values recorded in government data. That compares with a 45 per cent slump in Portuguese repossessed house values.”

“Spain’s property market is hampered by the country falling into its second recession in three years and struggling with Europe’s highest unemployment rate of 25 per cent. ‘Fitch believes that the factors weighing on the Spanish residential property market will continue to deteriorate,’ Madrid-based analysts Carlos Massip and Juan David Garcia wrote in the report. ‘The gap between original valuation and the sale price is a reflection of a distressed mortgage market, characterised by high borrower indebtedness, constrained affordability’ and ‘falling property prices,’ they wrote.”

“The price of residential apartments in Wenzhou, Zhejiang province, slumped 18.03 percent in the third quarter compared with the same period last year, according to the latest figures. ‘Compared with the housing price for 2009 and 2010, when it rose to the peak of about 60,000 yuan per square meter for certain luxurious apartments, the average price of those is now about 35,000 yuan, a decrease of nearly 50 percent,’ said Ding Yi, a developer of luxury homes in Wenzhou. Ding added that the cooling property market in Wenzhou had severely affected the average price of residences after investors drove them up over the past two years.”

“‘Demand for new apartments was quite low for the whole year although prices dropped rapidly,’ said Zheng Jian, a salesman at a property agency in Wenzhou. Zheng added that the previous price of certain luxurious properties had been hyped up to the top by the investors and is now slowly heading to the bottom.”

“At the end of 1989, Japan’s bubble economy burst and its economic miracle came to an abrupt end. Over the course of 20 years, what appeared to be ‘unstoppable’ economic growth proved to be anything but. Today, China, in some ways, appears to be closer to following Japan than to sustaining its own economic miracle. The Japanese bubble, and its aftermath, was the result of a series of domestic financial and economic imbalances, many of which China faces today—to varying if not greater degrees.”

“Most significantly, China’s banking system mirrors Japan’s from the mid-1980s until Japan’s bubble burst. Chinese banks, repeating the experience of their Japanese counterparts, have overseen a fourfold increase in total loan growth in less than a decade, driven mostly by property-related loans. System-wide reliance on real estate as collateral may be particularly pernicious given the meteoric rise of property prices in China and the central role real estate bubbles have played in recent financial and economic crises.”

“Real-estate bubbles have been one of, if not the, common denominator of every financial crisis over the past 20 years, from the US savings and loan crisis and the Japan bubble, to the Asian Financial Crisis in 1997 and the most recent global financial crisis in the US and Europe.”

“In response to increasingly misallocated investments, Chinese banks have been ‘ever-greening’ or rolling over loans as they come due for many years to avoid recognizing a growing non-performing loan problem. Both Japanese and Chinese banks became ‘masters’ at using off-balance sheet techniques to hide their most risky loans.”

“The Japanese experience illustrates quite powerfully the inexorable requirement that imbalances be corrected. The question is not ‘if’ but ‘when’ and ‘what degree of control will leaders have over the rebalancing process?’ Either Chinese leaders face the challenge head on and implement the policies necessary to rebalance the economy or continue to ‘pretend and extend’ until the system collapses under its own weight. If leaders continue to ‘kick the can down the road,’ the imbalance bubble will burst.”

“Central banks should be prepared to take the heat out of debt-fuelled asset price bubbles, rather than relying on lower interest rates to ‘clean up’ the mess after a bust, Reserve Bank governor Glenn Stevens has said. ‘I would have thought that by this point we have to conclude that simply expecting to clean up after the credit boom is not sufficient any more,’ Mr Stevens said. ‘The mess might be so large that monetary policy ends up not being able to do the job when the time comes.”’

“Property assets were especially significant because they tended to be leveraged, meaning booms and busts were felt across the financial system and economy, he said. The comments come amid growing concerns the ultra-low interest rates overseas could be sowing the seeds of the next global asset bubble. Few believe Australia’s housing market is at risk of forming a bubble, but Mr Stevens said holding interest rates at very low levels in order to revive an economy ‘might leave its own toxic consequences.’”