The Housing Bubble

It’s Friday desk clearing time for this blogger. “Some 1.7 million borrowers have missed several payments on mortgages backed by the U.S. government, the inspectors general of the Federal Housing Finance Agency and Department of Housing and Urban Development said in a joint report. ‘Not only are current REO inventory levels elevated … they may rise over the next several years depending on the number of shadow inventory properties that are ultimately foreclosed on,’ the report stated.”

“Fannie Mae, Freddie Mac and the Federal Housing Administration are backing about nine out of every ten new home loans. Fannie Mae and Freddie Mac owned about 158,000 REO properties at the end of September 2012, while HUD had about 37,000. The report said the shadow inventory, which is made up of loans that have been delinquent for at least 90 days, is more than seven times the inventory of REOs that Fannie Mae, Freddie Mac and HUD currently own. ‘Even a fraction of the shadow inventory falling into foreclosure could considerably swell … inventories of REO properties,’ the report warned.”

“Half a decade since the housing bust, many foreclosures are showing their age. A quarter of cases now in Hillsborough court are at least 3 years old. Pinellas and Pasco courts had nearly 29,000 pending foreclosures by April, more even than a year ago, showing judges were unable to clear old cases quicker than new ones piled on, state court data show. And half of Hillsborough courts’ 24,000 pending foreclosures are more than 2 years old. Florida courts expect another 680,000 foreclosures within a few years.”

“So who’s keeping Florida’s more than 350,000 pending foreclosures in court? Judges largely blame the banks. Slowed foreclosures benefit the banks, lawyers add, because they appear more solvent than if all bad loans were foreclosed at once. As Georgetown law professor Adam Levitin wrote in November, ‘The game plan has always been to run the clock.’”

“Chuck Munson, assistant attorney general in the Office of Consumer Protection, said calls to the Montana Attorney General’s Office for help fighting foreclosure haven’t slowed. ‘After the investigation in the fall of 2010 that led to the settlement, our complaints went from almost nothing to a spike, and our spike has been consistent ever since,’ Munson said.”

“Munson said the office receives several calls a week from homeowners looking for help. On one particular day, he said, the office was swamped with 39 calls. In one case, a family faced foreclosure after missing just three payments. In another case, a Flathead Valley homeowner hadn’t received any foreclosure notice, even after missing 49 monthly payments. ‘It’s hard to predict when an entity is going to file a notice required to move forward with a foreclosure,’ Munson said.”

“The median price in King County has increased by double digits over a year ago every month since October and has returned to August 2008 levels. Glenn Crellin, of the Runstad Center for Real Estate Studies at the University of Washington, said banks are holding onto foreclosed homes. ‘There seems to be a big number of properties in the hands of lending institutions that haven’t been put on the market with the shadow inventory,’ Crellin said.”

“Meaghan Frisbee and her husband are trying to decide between adding a second floor to their house in Phinney Ridge or moving. They’ve seen 20 homes in the last month. ‘All the houses are getting snapped up,’ said Frisbee, cradling her 3-month-old daughter in her arms. ‘It’s hard to find a house.’”

“Arizona and Nevada are the two states that saw the biggest housing boom, bust and apparent rebound. Housing sales are going up, but home ownership is plummeting. This is the natural fallout of the trend of investors — not first-time homeowners — buying up all the houses. According to a recent Sonoran Institute report, some 16 million homes were built in the U.S. between 2000 and 2010, but the nation only added 11 million households. Meaning there’s at least five million empty homes sitting around out there. Meanwhile, many of the West’s towns are plagued by a chronic affordable housing crisis.”

“And yet, despite all those empty homes, we’ve started building new ones again. Is this really a good idea? In any case, there’s little reason to expect the current upswing to continue for long. Hope for a real housing recovery is about as empty as all those houses sitting vacant out there.”

“Ever talked to an average Chinese citizen about living in China? If you haven’t, here is a spoiler: one of the most common complaints will likely be the ever-growing price of apartments. According to a story reported by Chinese magazine Caixin, 64.5 million urban electricity meters registered zero consumption over a recent six-month period, which ‘led to a theory that China has enough empty apartments to house 200 million people,’ basically the population of the three largest countries in Europe. The author suggested that, ‘even if China’s stock of empty flats is only half that recent estimate of 64.5 million, it would still be equivalent to 20 percent of all urban households. That’s higher than Taiwan’s vacancy rate at the peak of its bubble [in 1980s].’”

“According to a 2012 study by the IMF, ‘the real-estate-dependent construction industry, which accounts for 7 per cent of GDP, creates significant final demand in other domestic sectors [..] As a result, a decline in real estate investment has the potential to disrupt the production chain throughout China’s economy, and with that a potential for external spillover to G20 trading partners.’ So, if the next time you speak with Chinese acquaintances they do not mention rising property prices, it may not be all good news: they may have shifted attention to a deteriorating jobs market.”

“By the end of March, the total number of unsold housing units in Vietnam was 20 percent higher that than the ministry recorded at the end of last year. That is a total of 33,850 available units. The increase has confused analysts as very few new property projects were completed during the time period. In March, Hanoi city authorities even placed a yearlong moratorium on new housing projects. Vu Xuan Thien, deputy head of the ministry’s housing and property market management unit, said last year’s statistics did not reflect the true depth of the despair the beleaguered market finds itself in.”

“The end-2012 statistics did not include a number of property projects that are under development but not yet completed, he said, stopping short of confirming that this year’s statistics were measured differently. The empty units figures could have been ‘much higher,’ he said.”

“The latest abundance of condo incentives in Metro Vancouver might be good for purchasers, but experts say it will only hurt the industry in the long term. Andrey Pavlov, a finance and real estate professor at SFU, says consumers get used to things like one-day blow out sales which will only make it harder for developers to sell inventory. ‘Incentives and sales work to a very limited extent because people expect them all the time and more and more.’”

“Pavlov explains it will likely chill an already cooling industry and the overwhelming number of sales popping up is a sign of desperation. ‘Developers are reluctant to reduce regular prices because it puts their financing in jeopardy so they do sales instead.’”

“With reference to the abandoned building projects in Dubai, I’d like to warn people that if you have a mortgage and the bank has already paid some of the money upfront to the property dealer, it doesn’t matter whether the property exists or not. You still have to repay the money to the bank, but don’t expect any money back from the property company. In other words, like me, you could find yourself having to pay for a property that doesn’t exist before you leave.”

“The property company (probably worth billions of dollars!) is not obliged to pay money back to the investor, but the investor has to pay the bank for some Dubai air. - A very angry and disillusioned investor, Dubai.”

“Last September, one of the original institutional investors in the housing-to-rent strategy, multi-billion hedge fund Och-Ziff called it quits on the landlord business. Today, another one of the original ‘big boys’ has called it curtains: CEO Bruce Rose of Carrington’s assessment of the market? ‘There’s a lot of — bluntly — stupid money that jumped into the trade without any infrastructure, without any real capabilities and a kind of build-it-as-you-go mentality that we think is somewhat irresponsible.’”

“As a reminder, the REO-to-Rental subsidized investment program, which led to an epic surge in demand for multi-family housing, i.e., rental, units was, together with offshore investors parking their cash in the US for safekeeping (taking advantage of the NAR’s anti-money laundering check exemptions) and the big banks Foreclosure Stuffing, the key reason for the recent, stimulus-fuelled and quite transitory bounce in house prices in assorted markets.”

“Everyone now knows where the incremental ‘bubble’ demand for housing has come from: not from the distressed end user of thes properties, for whom the disconnect between real income and new home sales has never been wider: it was all large institutions who invested OPM, and chased any upward moving price with the fervor of a rabid dog.”

“But all things come to an end: Carrington may start buying rental homes again when other large investors decide to sell after learning they can’t make returns that justify the prices they paid, Rose said: ‘We’ll sit back in the weeds for a while and wait for a couple of blowups’. If the Chairman is serious about tapering, or even hinting of tightening at some point in the future, those blowups won’t take too long. And so will the blowup in the illusion that the housing market is ‘recovering’ on anything more than yet another cheap-money fuelled bubble afforded to a select few who now have no choice but to ‘hot potato’ properties amongst each other first on the way up, and soon, going down.”