The Housing Bubble

It’s Friday desk clearing time for this blogger. “Scott Mednick recently bought a fixer-upper home in Mission Viejo for $389,000. After investing $60,000 on renovations, he sold it for $545,000 — netting nearly $100,000. When prices and sales were slow, from 2007 to 2009, would-be investors were hesitant to jump into a market they didn’t understand, said Mednick, president of the Orange County Investors Club, an education and networking group for real estate investors. ‘Now I think there’s a frenzy that’s going on,’ he said.”

“The frenzy has brought new interest in home flippers as celebrities, after earlier TV reality shows featuring them went the way of the housing market. More and more beginning investors, he said, will jump into the market as prices continue to rise. ‘But there will be a point when it gets so hot that a lot of the big investors will be pulling back,’ Mednick said. For now, flipping is back on investors’ radar screen — and the TV screen, He said. ‘It never occurred to me that flipping a house is part of pop culture,’ He said. ‘That’s crazy to me.’”

“While Anthony Simmons was a linebacker for the Seattle Seahawks a decade ago, he also flipped houses in Las Vegas. He had no real estate expertise but became enmeshed in the frenzy of the go-go years, buying and selling 10 houses in five years. Then came the crash and the near destruction of Las Vegas’ economy. Now housing prices are soaring again, but Simmons is wary of the surge. ‘We’ve been there before, and it didn’t turn out too well,’ said Simmons.”

“(Land) prices in some neighborhoods have jumped from $175,000 an acre to $400,000 in recent months. ‘Anyone who thinks that isn’t a bubble, I don’t know what they’re looking at,’ Smith said.”

“An ongoing slump in the real estate market is accounted for by the unwillingness of landlords and developers to reduce prices, according to some brokers, while others see it as a sign that Lebanon has so far averted a bursting housing bubble. ‘It has been more than a year since Gulf investors and most expats exited the market,’ said John Eid, the owner of Locus Real Estate Consulting. ‘What makes things worse is that landlords rarely agree to reduce prices. They still want to make [extremely high] profits when there’s no demand for it. They can still get handsome earnings if they cut prices by 20 percent,’ he added.”

“Some 72 percent of residential projects in Beirut completed over the course of 2012 – amounting to 217 apartments with a market value of $400 million – were unsold as of June this year, according to a recent study by Ramco.”

“The spectre of a real estate bubble bursting in Switzerland is a prominent worry for the Swiss National Bank, which cannot easily resort to an interest rate hike to rein in lending because that would clash with its efforts to restrain the value of the Swiss franc. Instead, the Swiss government has imposed additional capital rules on mortgage lenders. ‘In the absence of a sustained cool-down, however, the risk of a price bubble is likely to increase again in the coming quarters,’ UBS economists Claudio Saputelli and Matthias Holzhey said in a statement. ‘This is because the market is at the peak of a price cycle that has lasted 15 years now, and overall is showing clear signs of overvaluation.’”

“In Norway, where property prices have doubled in about 10 years sending household debt to a record, the debate over whether the housing market is in the grip of a bubble is now splitting the nation as a rally in home prices has ebbed. Prime Minister Jens Stoltenberg argues that instead of worrying about regulating mortgages, Norway needs to make sure citizens can get the credit they need to buy homes. ‘A lot of young people who are finishing university and getting well-paid jobs still have a problem getting a bank loan for a house,’ she said. ‘We think that’s too strict.’”

“Purchases of residential land in the Toronto area were down 51 per cent in the first six months of 2013, according to RealNet Canada, while sales of new high- and low-rise homes fell 34 per cent. Residential land sales were down 30 per cent and 52 per cent in Vancouver and Calgary, respectively. ‘This is definitely a major slowdown’ that will persist ‘for some time,’ Richard Vilner, RealNet’s research manager for GTA commercial real estate, told CBC News. ‘It’s not going to turn around in the third quarter. There’s not going to be a major correction back to the high-flying land acquisitions of 2011 or the first half of 2012 because there’s still a huge amount of inventory to sell off.’”

“A financial crisis triggered by falling coal prices is brewing in Shenmu County, in the northwestern province of Shaanxi. Construction projects have been halted, universal health care has run into payment problems and many private bankers have disappeared in the last few months, all indications that another story of legendary development is now just a bubble bursting. Speculation in coal mines became something of a fad. A mine worth 200,000 yuan in 2002 went for as much as 4 billion yuan last year, Yang said. Many buyers had no interest in production. Flipping mines was their game.”

“Shenmu’s property market has taken a rollercoaster ride along with the coal boom over the last six years. The average price per square meter for a flat was 3,000 yuan in 2007. By last year this had risen to 200,000 yuan. ‘Construction never stopped in Shenmu,’ said Zhang Zhongmin, a real estate agent. However, since April housing prices have dropped significantly and many apartments have been seized from bankrupt owners. The streets of Shenmu are now dotted with half-finished buildings because work was halted.”

“Wang Heping, a real estate developer behind many projects in Shenmu, died suddenly in a hotel in Ordos, in the northern region of Inner Mongolia, in June. His employees say he died owing them as much as 10 million yuan. In December, Zhang, known as the Gold King in Shenmu, disappeared with 4 billion yuan. Before the dust settled from Zhang’s disappearance, several other businessmen had fled. Soon, pawnshops were closing en masse. One pawnshop owner had loaned out 500 million yuan: 200 million yuan from his own pocket and 300 million from 10 others. The money went to his cousin, uncle and two other friends. All have disappeared.”

“He is careful not to panic the people who lent him money. He guards his words carefully, and drives his luxury car around town every day to signal that all is well. But of course it isn’t. The pawnshop owner has hired a 10-man team to head to Xi’an, the capital of Shaanxi, to collect the money owed him.”

“As first-time homebuyers, Harrison and Heather Tanksley played it safe. They scraped together a down payment. They insisted on a fixed interest rate. They chose a modestly priced townhouse at the western edge of Brighton, in a new neighborhood near the South Platte River. When an avalanche of foreclosures swept through Platte River Ranch, burying many of their neighbors, the Tanksleys kept making their mortgage payments, month after month, year after year.”

“Yet today, ‘we’re basically upside down after making 13 years of mortgage payments,’ Harrison Tanksley said. ‘I would just like to get the mortgage paid off. If I walk away net zero, I’m happy with that.’”

“Although the foreclosure crisis has eased in Colorado neighborhoods such as Platte River Ranch, the economic damage has not. Many houses in this neighborhood, including the Tanksleys’, are now valued by the county assessor at 20 percent to 30 percent below prices paid more than a decade ago. Michelle Desantiago purchased her house for $155,000. She filed for bankruptcy four years ago in an attempt to stave off foreclosure and keep her home but is on the verge of giving up. The assessor values her house at $127,239.”

“‘So in seven years I haven’t paid a dime on the house,’ she said. ‘I don’t know how else to say it: My spirit’s broken. Whatever happens happens.’”

“In 2002, when prices were climbing, Micheal and Nora Hess bought a two-story house for $181,900. When they moved to another house in Brighton a decade later, they learned how much they had lost. ‘The value went down almost in half,’ Micheal Hess said. ‘The thing that really hurt us, we weren’t able to sell the home.’”

“Treasury Secretary Gabriel Makhlouf has warned in a wide-ranging speech about the lessons from the Global Financial Crisis (GFC) that asset bubbles can be damaging for the wider economy and policymakers shouldn’t ignore them. Makhlouf was speaking as the Reserve Bank is putting the final touches on its new ’speed limit’ for high Loan to Value Ratio (LVR) mortgages and as Prime Minister John Key has ramped up comments about the risk of a asset bubble bursting in the Auckland housing market.”

“‘What the GFC did bring home to us was the damage that large booms and busts in asset prices such as housing can inflict on the financial system and the wider economy,’ Makhlouf told a luncheon in Auckland. ‘It raised questions about the ability of monetary policy alone to respond to the collapse of an asset bubble.’ Models used by central banks, Treasuries and other policy makers before the GFC had failed to take into account the dangers of such debt-fuelled bubbles blowing up and then bursting through the financial system and into the rest of the economy, he said.”

“Policymakers had thought financial markets were not crucial for economic cycles and that bubbles were hard to spot in advance or deflate easily, he said. ‘We know now that this thinking was flawed. Asset prices can grow much faster than can be justified by fundamentals, especially when the supply of credit and the appetite for taking on debt are rising sharply and investors are keen to maximise their returns by taking on more risk,’ he said. ‘When prices correct, the fallout on the financial system and the impact on the rest of the economy can be substantial, and can take many years to resolve.’”

“Makhlouf said in the speech the GFC should have taught economists to be humble about previous claims of the end of depressions and banking crises. ‘History does repeat itself and excessive growth in debt – whether by governments or households – is one sure sign of trouble ahead.’”