An Unbelievable Money Machine
It’s Friday desk clearing time for this blogger. “Maybe it’s the strength of the loonie, the increasing value of their principal residences or the lure of still deeply discounted housing, but Canadians love the United States — especially the Sun Belt — where we remain the No. 1 foreign buyer of property. Richard Levert, a 57-year-old from Sudbury, Ont.,, is one of those who pulled the trigger on a recent deal by upgrading his vacation home. He bought a two-bedroom, two-bathroom condo in the Naples-area in 1997, but this past June he decided to upgrade to a villa, which has about 2,000 square feet. ‘I am above water [on the 1997 property],’ says Mr. Levert, who is now selling that unit to pay for his new purchase.”
“‘I also have a piece of property [in nearby Cape Coral] I’ve never developed. It’s just a lot,’ he says of the land purchased in 2005. ‘It’s just an investment,’ says Mr. Levert, ‘it hasn’t gone too well. That one I’m under water on.’”
“Buyers from China, assisted by a surge of new real estate professionals catering to their needs, are plunking down growing piles of cash for properties in Mercer Island, West Bellevue and Kirkland. ‘For a lot of Chinese, especially businessmen, they are being smart and want to have an escape plan,’ said Nelson Lee, partner at a Seattle firm that has developed a specialty in helping Chinese people obtain what are known as EB-5 visas, which offer affluent foreign investors a shortcut to legal residency.”
“‘So if things implode or get a little crazy,’ Lee said, ‘they can legally and swiftly move here and be safe and have their families with them and live a comfortable life.’”
“Sean Shi, left a 14-year career as a Microsoft software developer to focus on selling Puget Sound-area homes, in the $700,000 to $3 million range, to people from China. The Chinese stock market isn’t regulated to U.S. standards, China’s urban real estate market is considered overheated and Chinese people aren’t allowed to buy overseas securities. ‘There is a lot of extra money in China right now,’ he said, ‘but there is no secure or comfortable way to invest in China.’”
“For the nouveau riche in China with a portfolio of real estate assets, there is a certain appeal about buying overseas property. There are no limitations from banks on home loans, the returns are stable, ownership is permanent and some countries even throw in a package deal for a citizenship with purchase. But a big investment return always comes with high risk.”
“Indeed, there are many stories from affluent Chinese who purchased properties in the United States or Europe but are then confronted with massive tax bills and high maintenance fees. Wang Min, owner of a textile company in Guangdong province in South China, bought an 80-square-meter apartment in Houston, Texas, for $100,000 two years ago. He thought he could just sit on it and count the dollars as it appreciated in price. But he quickly discovered there was a lot more to do after the down payment.”
“‘It’s harder than you think to invest in the US real estate market,’ he says. ‘Apart from the payment of the house, there are so many invisible costs like monthly management fees, garbage fees and property tax every year, so basically you earn very little because you have to use the rent to cover those expenditures.’”
“Melbourne’s property market has posted its weakest performance in nearly a generation as home prices continue to fall despite deep interest rate cuts. ‘The interest rate cuts have probably shielded the market somewhat from bigger falls over the last year, but I think Melbourne will continue to be one of the weakest performing markets in the country,’ said RP Data analyst Cameron Kusher. ”I wouldn’t be surprised to see values fall again over the next year.”’
“The prediction will be welcome news for buyers but a bitter pill for home owners, who saw prices soar nearly 37 per cent in 2009-10. That boom, fuelled by record low interest rates and the generous first home buyer grants on offer during the global financial crisis, is being blamed for the serious affordability problem in the city. ”Prices have gotten too high in Melbourne and it hasn’t taken its medicine yet,’ Mr Kusher said.”
“The number of households that spent more than 30 percent of their income on rent or housing increased 11 percent in four years, said Linda Gyimoty, executive director of United Way of Ocean County. In Ocean County alone, there was a 154 percent increase in children receiving food stamps between 2007 and 2011 while the population of children grew by about 6 percent over four years, she said. The county group provided services to more than 120,000 Ocean County individuals through a United Way funded program last year, Gyimoty said, noting that’s about 1 of every 5 residents.”
“Census data from 2011 showed one-third of children here live in families considered low-income, said Cecilia Zalkind, executive director for Advocates of Children in New Jersey. A low-income family has four or fewer people living off $44,000 per year, she said. Fifteen percent are living at or below the poverty level, measured at $22,000 a year for a family of four, Zalkind said. ‘That’s pretty shocking in New Jersey, especially considering housing is so high,’ she said.”
“Forbes recently ran an article by William Baldwin titled ‘Do You Live in a Death Spiral State?’ In the article, Baldwin calls states with declining economies Death Spiral States. He correctly included California among his Death Spiral States, a result of decades of bad policy decisions. Then, he gives real estate advice and that’s where he gets it wrong. And I quote: ‘If your career takes you to Los Angeles or Chicago, don’t buy a house. Rent.’”
“California is not most places, though, and there are lots of reasons to move to California if you don’t have a job. There are even more reasons if you don’t need a job. Real estate will do just fine in large regions of California, even without a vibrant economy. People want to live here, and some can afford it. Why not? It’s as good as it gets. As long as that’s true, real estate prices will not reflect the economy. I own a home. I’m not selling.”
“Are prices accelerating too quickly, leading up to another potential housing bubble? Michael Lea, director of the Corky McMillin Center for Real Estate at San Diego State University: Although San Diego housing prices have been rising smartly over the past year, I do not believe there is another bubble in the making. A bubble has characteristics not present in the current environment. Prices are not significantly above fundamental values. There is not excessive media and cocktail hour speculation about house prices. We have not seen a relaxation in lending standards that fuels a bubble. And there is still a significant shadow inventory that can hit the market and depress prices in the future. San Diego house prices are still high on a national basis but hardly in bubble territory.”
“Clemente Casillas, broker and president at South County Real Estate in Chula Vista: Yes, it is unsustainable. Investors with cash are coming in, making it hard for regular buyers. In turn, buyers are now starting to pay above appraised value just to get a property, creating an artificial bubble. For a stable recovery, not only do we need more jobs, we also need better-paying jobs. Controlling the market by holding down interest rates is not a good thing because you create internal factors that are not market driven but politically driven.”
“Finance Minister Jim Flaherty has recently floated privatization of the government-owned Canada Mortgage and Housing Corp. CMHC has a mandate to promote home ownership and, among other functions, provide insurance against defaults by borrowers on their mortgages. Mr. Flaherty thinks mortgage insurance is a business ‘that we’re in that we don’t need to be in.’”
“But fully privatizing mortgage insurance is wrong. The risks from housing to the whole economy and ultimate government guarantee are exactly why CMHC needs to stay government-owned. If Canadians can learn anything from recent U.S. experience, it should be that housing markets affect the economy as a whole. When a housing bubble bursts, the shockwave blows through the financial system. Central banks have a limited tool kit of relatively blunt instruments to curb excesses and restore balance. Government intervention in mortgage borrowing is necessary to restrain bubbles in advance.”
“A home is most families’ major asset (and a mortgage their largest debt), so home values shape how families borrow, consume and save. How many baby boomers have you heard say that their home is their pension? Housing prices don’t just ebb and flow with economic ups and downs. To take one economist’s phrase, ‘housing IS the business cycle.’”
“Bank of America’s mortgage origination’s plunged by 37 percent to $21.3 billion in the third quarter from a year earlier, according to newsletter Inside Mortgage Finance. Once the largest home lender, the Charlotte, N.C.-based bank has slumped to fourth, Inside Mortgage Finance data show, after it closed a business that bought debt marketed by third-party firms. Residential mortgage lending at Citigroup dropped 5 percent. Citigroup, which said in February it would stop using brokers to originate mortgages, this quarter fell below Quicken Loans, to sixth in the newsletter’s rankings.”
“‘We continue to believe that mortgages represent the greatest risk to any major bank balance sheet and a number of headwinds remain,’ Chief Financial Officer John Gerspach said in an April call with investors. The firm continues to reduce what Gerspach and CEO Mike Corbat describe as ‘non-core’ assets at Citi Holdings, which contains $95 billion of U.S. mortgages.”
“‘Loans have never been safer, they’ve never been more profitable,’ said Scott Simon, the mortgage head at Pacific Investment Management Co., manager of the world’s largest bond fund. ‘Bank of America is the biggest mystery to us. Now I get that they got their faces torn off. But this is a different environment.’”
“‘How does it get more ‘core?’ Simon said. ‘If you’re Wells Fargo, you sell six products to the average person who has a mortgage with you. It’s unbelievable. It’s a money machine.’”
“‘It’s harder than you think to invest in the US real estate market,’ he says. ‘Apart from the payment of the house, there are so many invisible costs like monthly management fees, garbage fees and property tax every year, so basically you earn very little because you have to use the rent to cover those expenditures.’”
Once it dawns on these fly-by-night foreign investors that their all-cash purchases don’t pencil out as buy-and-hold assets, I expect them to cut their losses and run in droves.
From the same article:
‘Sarah Wu, 36, who works in the wine industry, says she has been long interested in a residential compound in a small village in the south of France but doesn’t want to get a jump on the market too quickly because many of her friends have failed on their investments in overseas properties.’
Other than gambling, I can hardly think of an easier way to lose money than foreign property “investments.” And reading the first piece on the Canadian guy, it’s tough not to draw the conclusion that some of the alleged housing recovery in this country is foreigners buying and selling American houses to each other. How screwed up is that?
What I don’t get is, why is the U.S. federal government actively running a behind-the-scenes policy to prop up the value of foreign real estate investor’s all-cash property purchases? Doesn’t this amount to handing money to foreigners?
Don’t worry. We’ll bomb them later.
Don’t worry. We’ll bomb them later.
+1 Or worse, we’ll make ‘em buy treasury bonds.
And another thing. Last week while walking my dog I watched as a car with two obviously Asian occupants drove a grid pattern in my neighborhood, slowing down at each house for sale. Maybe they’re U.S. citizens from Tampa. But maybe they are people like Sarah Wu’s friends.
I haven’t even gotten in to the McMansion offensive that is underway. After a four-year hiatus, the housebuilders are tearing down everything in sight.
This has been going on for some time. The summer before last, I was golfing near Lake Tahoe when I noticed one of the oddest things: A Chinese man lurking around, looking into the back of houses along a fairway. He looked completely out of place. It was very strange.
Had dinner with a friend who just returned from Shanghai. She told me that thousands of empty apartment rows still stand empty while the folks who are (still)) building them as “make work” projects live in adjacent slums.
The building boom there has been going on for nearly twenty years now. Maybe it’s finally a good time to buy in PRC?
“He thought he could just sit on it and count the dollars as it appreciated in price. But he quickly discovered there was a lot more to do after the down payment.”
Are they surprised by the property taxes? Or do they think that western cities are not cesspools like the ones back home because of magic?
Also love how they figured that appreciation is guaranteed. Still, there is the safe haven factor involved. They know that there’s a good chance they might want get out of Chinese Dodge. I suspect they will become pickier about where they buy.
Also thought it was interesting that the Chinese-American guy quit his job at Microsoft to sell high end houses to big bucks (non wannabe) mainland Chinese. I suppose they want to brag to their friends in Beijing that they have a house in the same nabe as Bill Gates (on Mercer Island)
My question.
If things go bad in China and they want to get out and come to their “home” in America…
Will they be able to do that?
Get a non-tourist visa? Get a green card? Get permission from the Chinese government to leave? Etc.
Refugee status is pretty easy to get with a lawyer.
The trick will be getting out of China. Never underestimate the power of a bribe. Give the border guard enough moolah and he’ll let you out.
As for getting into the US, that’s what anchor babies are for.
Refugees with $100,000 - $3,000,000 PAID IN CASH houses in America.
We have come a long way…
‘PAID IN CASH’
Not always, apparently.
‘For the nouveau riche in China with a portfolio of real estate assets, there is a certain appeal about buying overseas property. There are no limitations from banks on home loans’
‘Wang Min bought an 80-square-meter apartment in Houston, Texas, for $100,000 two years ago… But he quickly discovered there was a lot more to do after the down payment.’
Much like here, the posers need to borrow money.
“…the posers need to borrow money.”
And when they default on their loans, somebody else will be left holding the bag.
Borrowed money is what is driving this insanity. Credit is king. Just don’t tell Combo…
Easy lending is what drove the credit bubble that popped in 2006.
I listened to a bunch of AEA talks today on the causes of the financial crisis and housing bubble, and there was no mention whatsoever of crazy easy subprime lending as a causal factor. You’d think these people were clueless about the lending insanity that led up to the housing bubble collapse.
Wang Min, owner of a textile company in Guangdong province in South China, bought an 80-square-meter apartment in Houston, Texas, for $100,000 two years ago.
” there are so many invisible costs like monthly management fees, garbage fees and property tax every year, so basically you earn very little because you have to use the rent to cover those expenditures.’”
No Sh!t Sherlock. Maybe now you understand why Americans have to choose the cheap crappy T-shirts made in yourtextile company in Guandong province.
Who wants to live in China? It is worth the cost, no matter the price. How many American are looking to buy a home in China?
I know of Americans who purchase commercial RE in China as investment property.
Most all of the investment in Guangzhou and Shanghai is foreign and massive (Like infrastructure and sky-scaper massive.) These free trade zones are hugely more cosmopolitan than most Americans would like to believe.
“The number of households that spent more than 30 percent of their income on rent or housing increased 11 percent in four years, said Linda Gyimoty, executive director of United Way of Ocean County. In Ocean County alone, there was a 154 percent increase in children receiving food stamps between 2007 and 2011 while the population of children grew by about 6 percent over four years, she said. The county group provided services to more than 120,000 Ocean County individuals through a United Way funded program last year, Gyimoty said, noting that’s about 1 of every 5 residents.”
High housing prices are great for the economy!
In Ocean County alone, there was a 154 percent increase in children receiving food stamps between 2007 and 2011
Was it because housing became more expensive or because people became poorer?
“High housing prices are great for the economy!”
Prices are never good or bad in and of themselves. They’re useful when they reflect the relative value of diverse goods and services and serve as a medium of exchange.
Low price, high price… shouldn’t matter unless the overarching system is f’ed. Which is the case here and now.
I’d argue that it matters when the price of housing and the means for households to pay for them (meaning paying off the principle balance, not the monthly) diverges.
‘ Prices are not significantly above fundamental values.’
Clearly you haven’t any idea what you’re talking about considering prices are still inflated by 80% and at grossly overpriced levels of 2004……. and falling.
“Although San Diego housing prices have been rising smartly over the past year, I do not believe there is another bubble in the making. A bubble has characteristics not present in the current environment. Prices are not significantly above fundamental values. There is not excessive media and cocktail hour speculation about house prices. We have not seen a relaxation in lending standards that fuels a bubble. And there is still a significant shadow inventory that can hit the market and depress prices in the future. San Diego house prices are still high on a national basis but hardly in bubble territory.”
Bubble talk (again!)…
Even MORE bubble talk.
Even if you don’t have a job - it is a great place to buy RE….
And it is different here…
“California is not most places, though, and there are lots of reasons to move to California if you don’t have a job. There are even more reasons if you don’t need a job. Real estate will do just fine in large regions of California, even without a vibrant economy. People want to live here, and some can afford it. Why not? It’s as good as it gets. As long as that’s true, real estate prices will not reflect the economy. I own a home. I’m not selling.”
That might be the paragraph of the year, and it’s only January 4. I had to read it twice just to believe someone would write such a thing.
Looks like a cut-and-paste from a Realtor™ marketing blurb of 2005 vintage.
Yep, denying there is a bubble is practically a guarantee that there is a bubble. Of course, metro San Diego hasn’t been affordable in decades, it seems like its in a permabubble, with occasional breaks.
Hey, everyone wants to live in “America’s Finest City”, right?
My impression is that it depends. The low end of San Diego County’s market was hammered by the subprime crisis, and SFR prices in some areas dipped below $100K to reflect it.
By contrast, high-end areas dropped in price, but not nearly as much, remaining very high by historic norms relative to median incomes in the same areas.
and SFR prices in some areas dipped below $100K to reflect it.
Like in Spring Valley?
“Clemente Casillas, broker and president at South County Real Estate in Chula Vista: Yes, it is unsustainable. Investors with cash are coming in, making it hard for regular buyers. In turn, buyers are now starting to pay above appraised value just to get a property, creating an artificial bubble. For a stable recovery, not only do we need more jobs, we also need better-paying jobs. Controlling the market by holding down interest rates is not a good thing because you create internal factors that are not market driven but politically driven.”
Uh-oh! Looks like the REIC has a rogue truth-teller in its midst. Better yank Clemente’s real estate license before he/she tells the truth again.
And of course investors are a fickle bunch…if it’s RE now, they can easily move on to another type of investment if they don’t get the return they’re looking for. For those regular buyers dependent on 3.5% FHA down payments and artificially low interest rates, good luck, especially with the chatter about capping deductions.
It does feel like the bottom calling is especially loud these days.
Clemente Casillas must have children of his own.
Clemente Casillas for FED Chairman!
“At a time when the recovery is still very weak, individual tax increases and also these cuts on social services would really make it much more difficult for ALICE (Asset Limited, Income Constrained and Employed) and other families to be able to survive, in other cases, to maintain their toe-hold in the middle class,” he said.
I guess I don’t have a clue when it comes to “middle-class” ranking, which I previously associated with asset ownership, access to savings and some money smarts.
So does California Prop13 apply to non-citizens?
This is a state that gives “resident” tuition rates to illegals.
Only “illegals” who have graduated from California high schools in the top 12% of the student population. Frankly, THESE are the smart, ambitious kids I want in our universities. I’d far rather pay my portion of the $23 million subsidy to them than the $500M+ plus we spend every year incarcerating their citizen classmates who end up in our prison system.
And they’re still paying 18K+ a year to go to a UC, so it’s not like they’re getting a free ride.
Yes.
I had a discussion with an attorney relative that Prop 13 should only apply to those where CA was their state of residence (if you’re paying the income tax freight, you can get the benefit). She said that such a thing would violate the equal protection clause of the constitution.
Making prop 13 apply only to property taxes on primary residences however would be OK…
Oxide, I was driving through Takoma Park last night and saw a cr*ppy condo conversion like the one you mention. It was called Takoma Overlook and it was one of the saddest things I’ve seen in a while. There’s a massive sign out front on New Hampshire Avenue that says “FHA Approved!! Final phase!!” and lists some way-too-high price range ($200-400k for what appear to be utterly hideous and small apartments)
hmmmm, they don’t look so bad on the website. http://www.takomaoverlook.com/index.php
However, notice how they use a stylized drawing on the website. The building does NOT look like that when I drive by in the mornings. The exterior is old and dillapidated.
And when the website mentions that the condos are “customizable”, I’m willing to bet that isn’t included in the price at all.
I looked at this on google map (street view) and this is just an old apartment converted. I live in Silver Spring, MD and never consider living in this area. The area is a dump filled with illegals. No thanks.
This was my impression as well. I stopped at the Shopper’s in at the edge of Silver Spring/Takoma Park on the way home from work last night. Based on the retail outlets in that area, plus the general vibe (major corridor from MD into DC… very busy) I don’t think it would be a very nice place to live. I could see renting there for a few yrs because of its proximity to NW DC and jobs, but I don’t get buying there.They can dress it up however they want, but it’s a bad deal. It will “crater!!!”
“FHA Approved!! Final phase!!”
Heck, a GSA condo looks better than their idea of an office cubicle.
The US of A………”Promised Land” for the worldwide Criminal Global Elite/Robber Baron class.
I guess we need to modify the poem on the Statue of Liberty….
Give me your White collar criminals, your indicted;
Your Hedge Fund and Bank managers yearning to breathe free..
The “producers” of your top 1%
Send these, the indicted, the house-arrested
He who has the gold, gets an open door!”
Tell me about it. We are to white-collar financial criminals like South America was to fugitive Nazis after WWII.
It looks like 2006 all over again. My cousin from Chicago just left our home after a holiday visit and all he told his wife “sell the Chicago house I want a different life” (In Arizona).
He looked at homes way out of his budget but all he could say was” I will find a way to buy, I got to have dry weather and high ceilings?”
I told him scale it down a little and look for houses you can afford but no because of 3% mortages he wants to shoot the works.
Folks no matter what anybody tells you there are still people out there wanting to get in trouble so list your property high the nonsense is alive and well again?
tell him to visit AZ ( Phoenix I am guessing ) July 4th
“Sean Shi, left a 14-year career as a Microsoft software developer to focus on selling Puget Sound-area homes, in the $700,000 to $3 million range, to people from China. The Chinese stock market isn’t regulated to U.S. standards, China’s urban real estate market is considered overheated and Chinese people aren’t allowed to buy overseas securities. ‘There is a lot of extra money in China right now,’ he said, ‘but there is no secure or comfortable way to invest in China.’”
And people wonder where all Ben Bernakes money printing went