The Housing Bubble

It’s Friday desk clearing time for this blogger. “Starts of new houses in the Dallas-Fort Worth area were up almost 48 percent from the fourth quarter of 2011. The number of new homes on the market in North Texas is at its lowest point in 14 years. Where have all the doubters gone? Until recently, whenever I’d write about signs of a turnaround in the troubled housing market, there were always a few magpies squawking about how things were really getting no better. Of course, the gains are not across the board. They never are. I recently heard from a Frisco homeowner who says his house is still worth about $40,000 less than what he paid for it in 2007, just before the recession hit.”

“‘We are upside down in our mortgage and really do not see our value going up anytime soon,’ he wrote. ‘We also have a house that is abandoned right down the street, so I think things are not as optimistic as you see it.’ Certainly they aren’t for this guy. And about 11 percent of North Texans with a home loan still owe more than their house is worth.”

“Real estate agent Alan Castillo recently listed a client’s fixer-upper in Granada Hills for $278,250. It was only 1,600 square feet — but it drew 128 offers, most of them in cash. The final selling price, after all of 10 days on the market? $377,872. ‘I was very surprised,’ said Castillo.”

“While that particular transaction may be an extreme example, it reflects a Southern California housing market that is emerging from the late 2000s crash. For 2013, real estate experts say it’s time to get ready for a new normal, or, perhaps more accurately, a new abnormal.”

“Florida led the nation in foreclosure activity last year, and Orlando had the second-biggest increase in foreclosure filings among the state’s major metro areas, according to a new report. The Orlando area had a 64 percent increase in filings during a year. The news comes as Orlando homeowners and real-estate professionals were celebrating a year that had ended with a small increase in the number of existing-home sales and double-digit percentage increase in prices. ‘The [foreclosure] filings that we see now are really not connected to the market, because they’re not going to get on the market for two years,’ said John Tuccillo, chief economist for Florida Realtors.”

“Francisco Molina, a struggling south Orange County homeowner, said Central Florida would not be besieged by foreclosures if lenders were more willing to modify their mortgages. Molina put $180,000 down on his four-bedroom home when he bought it in 2005 at the height of the homebuying frenzy. But since 2009 he has been trying unsuccessfully to get the lender to reconfigure his monthly loan payments so he can better afford them. ‘I have waited and waited and waited for them to approve it,’ the rental-car employee said.”

“A sagging economy and a lousy housing market have made leaving Arizona more popular than moving to it in recent years, a leading moving company’s statistics show. Here’s a Q&A on the migration issue with Marshall Vest, a University of Arizona economist who has tracked population data for many years.: Q. Why are more people moving out of Arizona than moving in? A. If you go back to 2003-05, there were several hundred more in-moves than out-moves in Arizona. In 2004, the difference was 845, which was the peak. What has changed since then is that the number of in-movers has dropped off significantly - the number of people who moved into Arizona for 2012 was only 53.5 percent of what it was in 2004. Out-movers have also declined, but only by 26 percent.”

“Q. Why are they both declining? A. It’s due to the decline in mobility that we’ve seen nationwide - it has to do with economics. People typically don’t move during recession periods because of the uncertainty about jobs. But on top of that you have negative equity positions for many peoples’ homes. Their homes are underwater because they owe more on the mortgages than the homes are worth. As many as half of mortgage holders in this and surrounding states that send us the preponderance of our immigrants - they have not been able to sell their homes. Therefore, they are unable to move.”

“So far it’s looking like a soft landing for Canada’s housing market, analysts, economists and realtors generally agree, despite the fact home sales were down 17.4 per cent in December over a year earlier. According to the CREA figures, almost every major Canadian city saw double-digit sales declines. With a typical house in Toronto now costing about seven times median income, and a staggering 10 times median income in Vancouver, the cooling of the market should allow wages to start to catch up, says Bank of Montreal economist Sal Guatieri.”

“‘If we do see the spring market roaring back, in some ways we would be comforted, but I think we’d be more worried about the possibility of a bubble and that could trigger a further tightening of mortgage rules which could hit as interest rates do start to move up over the next few years,’ he said.”

“Housing analyst Ben Rabidoux thinks it’s too early to know if Vancouver and Toronto can avoid hard landings and substantial price declines, given baby boomers aren’t driving sales in big numbers anymore and the new mortgage rules have knocked buyers out of the market. ‘It’s a soft landing at this point, but if we continue to see sales trends (downward) like this, it will impact prices. A soft landing and a crash both start the same way.’”

“Britain’s biggest house builder is in rude health. In a trading update on Wednesday Barratt Developments said pre-tax profits in the first six months should more than double to £45m. Contrast this with 2008 when the company almost went bust. But through the goodwill and economic sense of the taxpayer, via Gordon Brown’s office in the Treasury, Barratt was saved. The government told the banks to lay off indebted businesses, especially property firms (to save the housing market). It also came up with a £1bn lending scheme and grants for the building industry.”

“It wasn’t the only one. Hundreds of building firms eased their way back to health with government cash. The banks are doing the same, namely rescuing their old business models and executive bonuses with profits built on taxpayer support and overcharging customers. It seems governments of all colours believe the only way to kickstart the economy is to allow the institutions that made most of the profits in the boom – the banks and property developers – to get back on their feet with free money from the taxpayer so they can rip off their customers again.”

“It’s the same old problem and probably means another property/banking crash is coming down the track sooner than we think.”

“According to figures from the Beijing Municipal Commission of Housing and Urban-Rural Development, 260,000 flats (excluding government-subsidized ones) were sold in 2012, surging 67 percent compared to 2011. Figures from the Shanghai Urban Construction and Communications Commission showed that in December 2012, 1.1 million square meters of commercial apartments were sold, the highest number in 23 months. As transaction volume expands, property and land prices were also growing. Property developers are increasingly enthusiastic about bidding for land. For example, in land auctions held in Beijing in December 2012, land prices hit a new record high.”

“Independent economist Xie Guozhong thinks a recent recovery in the real estate market is not a true rebound, but the beginning of another bubble. ‘Sell your empty houses as soon as possible,’ he writes in his blog.”

“The re-emerging frenzy in the housing market indicates the housing regulations, which have been in place for years, have failed to achieve the expected results. It also shows there has been no fundamental change in the housing market’s speculative nature. Recent reports of the monetary authorities and the Chinese Academy of Social Sciences both say high housing prices have already seriously affected ordinary people’s livelihood and undermined their capability to buy a house. The excessively high proportion of income that ordinary people have to set aside to buy a house forces them to drastically cut their consumption in other fields, which is not good for the overall economy.”

“Skyrocketing housing prices have yielded considerable profits to developers, speculators and local governments. No wonder, some people’s wealth has increased at an astonishing pace within a few years. But the drastic rise in some people’s wealth and local governments’ fiscal revenues that a booming housing market has caused mean others, especially lower-income homebuyers, have to dig deeper into their pockets.”

“The pursuit of higher profits has prompted some people to channel various kinds of social resources into the housing market over the past decade, which is tantamount to hijacking the national economy to benefit the housing sector. The realty-dependent economic model has seriously hampered China’s efforts to change its industrial structure and transform its economic development strategy. It has also resulted in a series of social issues, ranging from serious uneven income distribution to corruption and hatred for the rich.”

“If the housing bubble continues to expand with the same momentum it has done in the past decade, the consequences will be devastating when it bursts. It would cause banking and financial crises - even economic and social crises cannot be ruled out. And if such a thing happens, it will push China into a decades-long economic recession, akin to what happened to Japan after its housing bubble burst in the 1980s.”

“In an article published in Your Investment Property’s sister publication Australian Broker last week, it was noted that the decline in home prices has already showed signs of slowing down, with some industry commentators pointing to recent RBA rate cuts as likely to ‘continue to feed through to the economy and have an impact, particularly on housing.’ But the Herald Sun’s National Economics editor, Jessica Irvine, says investors shouldn’t be swayed by trend.”

“‘To claim housing affordability has dramatically improved is kind of like saying today is stinking hot, so winter will never happen again. Interest rates move in cycles and the historical average for mortgage rates is about 7.5%,’ Irvine said. Irvine says housing in Australia remains expensive and says we ‘only have ourselves to blame.’ ‘A lucky generation of older Australians grew wealthier as house prices rose. But they did so at the expense of their children.’”