The Housing Bubble

It’s Friday desk clearing time for this blogger. “Martin O’Connor, Toll Brothers’ chief financial officer, said the company expects to build between 3,750 and 4,300 homes this year, ranging in price from $595,000 to $630,000. The development builder said New Jersey and New York remain among their strongest markets. Robert Toll, executive chairman of Toll Brothers, said that a pent-up demand for housing and a limited supply are driving up the market. ‘After seven years of trepidation, buyers are re-entering the housing market,’ he said, adding that a recent rise in mortgage rates ‘is moving buyers off the fence, as if a ‘price increase soon’ sign were (turned) on. It adds a sense of urgency.’”

“Manhattan is in the throes of a boom in ultra high-end condos that has drawn wealthy people from around the globe and shattered previous sales records. At the forefront of the trend is a brand-new glass skyscraper called One57. Buyers have signed up to pay tens of millions of dollars each for apartments there – many without setting foot in the building, which is still unfinished. For some purchasers, the building already appears to be a good investment. Elizabeth Sample, a broker who has sold two apartments in One57, said that one of her clients bought a half-floor condo there about nine months ago.”

“‘He is a very, very wealthy guy, who just wanted a place to park the money,’ she said. Since the contract was signed, she said, the price on similar apartments went up by almost $4-million.”

“The new Huntington Beach home development, called Brightwater, will begin the release of their first phase of homes in a neighborhood called Capri this Saturday and potential home buyers are already lining up. So far, 11 families have been camping out for one week, in hopes of purchasing a home by the beach that starts in the $800,000s. The homes will be sold to pre-qualified buyers on a first-come, first-served basis.”

“Daniel Creswell’s house in northeast Raleigh sat on the market for nine months until late last month, when a deep-pocketed buyer arrived seemingly from another era. Creswell had bought the property back in April at a foreclosure auction for $162,500. After fielding low offers for months, the mystery buyer offered $210,000, or $10,000 below his asking price. Creswell eventually agreed to a price of $213,000, or $1,000 more than the home originally sold for in 2002. In addition to paying cash, the buyer paid the closing costs and the cost of the home inspection.”

“‘They didn’t ask us to fix anything, either, they just bought it,’ said Creswell, a pastor at a Wake Forest church who has flipped six houses since the market crashed in 2008.”

“The dream buyer is American Homes 4 Rent, a Malibu, Calif., company that since late December has paid nearly $13.3 million in cash for 81 houses in Wake County, according to property records. Some experts are worried about investors such as American Homes 4 Rent moving into the Triangle. ‘I think that this influx of institutional capital into the residential market is creating a bubble within the housing bust,’ said Mark Vitner, a Wells Fargo economist in Charlotte. ‘It will end once the investors that are putting money into the funds come to realize that there are much lower-risk ways to earn the returns that they’re seeking. If they decide to unload these properties, that will open up another can of worms,’ Vitner said. ‘We just don’t know where it goes.’”

“Queues of investors have formed outside the offices of major real estate developers in the past several months, in scenes that recall the emirate’s boom days before 2008, when money poured into Dubai property from around the world. Some investors among the roughly 100 lining up earlier this month at the downtown headquarters of Emaar Properties, the emirate’s biggest developer, were veterans of the last boom. ‘There is the same excitement in the air…People are buying anything that’s being offered by Emaar,’ said one Pakistani investor, who did not wish to be identified because he did not want to draw attention to his operations.”

“‘Hurray for Ghost Cities,’ writes the economist and veteran China-watcher Jonathan Anderson in a recent note. His point is that by investing in ‘ghost cities’ to underpin growth, China saved itself from even more unwise overinvestment in areas that could have done lasting damage to the economy. ‘Lesson learned: If you’re going to waste capital best to waste it completely, where it will do the least damage to everyone else,’ writes Mr. Anderson. Or, to put it another way, he offers: ‘Why truly crap investment projects help ’save’ China.’”

“Was the threat of a housing bubble the reason Bank of Israel Governor Stanley Fischer decided Monday to keep March’s nominal interest rate at 1.75%? According to most analysts, the answer is yes. Most analysts believe the potential housing bubble is a source of great concern for the governor and note that his recent decision dovetails with the drastic measures aimed at tempering activity in the mortgage market, announced last week by Fischer and the Supervisor of the Banks at the Finance Ministry.”

“Over the past five years, housing prices climbed by a total of 73.5%. Israelis borrowed more than 4 billion shekels ($1.07 billion) through new mortgages this month, an all-time high for February.”

“Want to sell your house? Then you’d better listen to Shaynna Blaze. The renowned interior designer is a judge on The Block and a presenter on Selling Houses Australia. Q: Do a lot of owners have inflated expectations of what their houses are worth?’

“A: That is half the problem before we even get there. When we start making improvements, people think ‘it’s worth even more now’. It wasn’t worth what they thought it was in the first place. It would have sold already if it was worth that.”

“Do you remember the housing slump? You probably don’t if you live in the London Borough of Kensington and Chelsea, where house prices last year rose by 13.4% according to the Land Registry. First-time home buyers are finding loans much easier to get, so that 12% more first-time purchases were completed last year according to the Council of Mortgage Lenders, and one in five of the buyers borrowed 90% or more. This is what the politicians want, but at what point should the regulators start to worry that the lenders are rebuilding the mountain of risk that led to the pre-2007 bubble?”

“Are the Bank and the Treasury simply being reckless again? Who would stop the development of a new and even more potentially dangerous bubble? Discipline is in short supply. This month, the House of Commons Public Accounts Committee published a rather scathing annual report on the Treasury, describing initiatives such as quantitative easing and the Funding for Lending Scheme as ‘a series of expensive experiments indemnified with taxpayer’s money’. The report added: ‘The Treasury could not explain how the success or failure of the FLS could be judged.’”

“If the purpose of the FLS were to pump up house prices it would be easy to understand why the Treasury’s civil servants were not very forthcoming.”

“Just as financial markets are getting comfortable with the low-interest-rate environment and expanding money supply, the minutes from the last US Federal Open Market Committee meeting on February 5 shows that several members ‘expressed some concerns about the potential costs and risk arising from further assets purchase’, with some acknowledging that additional buying ‘could foster market behaviour that could undermine financial stability.’”

“As liquidity has been flooding the financial markets, yields have been going lower and lower. To generate a meaningful yield, investors have been forced to take on more risk by investing in lower-rated credit assets or higher-risk asset classes. Prices of assets such as equities, bonds, land, and high-yield and leverage loans are at a historical high.”

“The best case the Fed can hope for is an orderly unwinding of its balance sheet. However, if the rise is a volatile one, it could derail the economic recovery. Excessive risk-taking and high leverage may trigger another round of financial instability. Whatever happens, it will sure be an interesting time for investors worldwide, as this is uncharted territory and no textbook can predict how it will play out.”

“There’s no doubt that investor-buyers became a big part of business in Charter Pointe. In 2005, more than a third of the development’s nearly 340 homes were investor-owned. Shaun Tracy, a ReMax real estate agent in Boise, played a role in that rush to buy. ‘I knew how much I could rent these homes for, so I started telling investors about it,’ he says. The tipping point came not long after he sold two houses to a buyer in San Diego. ‘Suddenly, I started getting calls from people,’ he remembers. ‘People from Florida were calling. Arizona. And they’d never even been to Boise, ever. In their life.’”

“Of the hundreds of homes in Charter Pointe, one belongs to Scott and Tara Arellano. They hoped to live on a street with other young families. This was in early 2005. For $188,000, they could buy the smallest house on a street of big homes. They could afford that. They signed a 30-year fixed-rate mortgage, and moved in by the end of the year. These days, if you pay Charter Pointe a visit, you’ll spot ‘for rent’ signs. Here and there are houses that don’t appear occupied.”

“Looking back, Arellano thinks he was naïve. Now, he and his wife, Tara, are tied to an underwater mortgage. They could walk away, but the idea of a strategic foreclosure doesn’t sit right. Neither does renting out their home, as others have done. Prices are coming back, Arellano observes. For now, their plan is to wait. ‘We came in thinking conventionally,’ Scott Arellano explains. ‘Like, ‘We’re going to actually live in our property.’ But I think so many people were thinking in terms of paper value. As I come home from work, every single day, I think about it. I think about what a disappointment it’s become.’”