A Catalyst For Unforeseen Consequences
Readers suggested a topic on the global housing bubble. “I remember in 2008, 9 and 10 it was fascinating to read how the Chinese, Brazilian, Canadian and Australian housing markets were impervious to the fact the US housing market was tanking badly. Values in those countries were still headed north. Now that those countries’ markets appear to be tanking, will it have any effect on the US housing market recovery? Or is it likely the US market will putter along without much impact from outside its own borders?”
A reply, “Meditate on how much equity California households were liberating to reinvest it in housing markets further inland leading up to the 2008 meltdown. Then think hard about the so-called “all cash” investors from China; was the cash really free, or was it a spillover of an excess of Chinese leverage into the U.S. housing market?”
One said, “Overseas markets tanking may affect coastal high priced areas like silly valley. Probably won’t do much for Flyover.”
The Wall Street Journal. “Over the last two weeks, several major investment houses have published reports exploring the idea of a hard economic landing in China. They include ‘We don’t expect it to happen’ caveats. But what if it did happen? Would the rest of the world tank as well?”
“A catalyst for this concern has been the end of America’s easy-money policies, which buoyed emerging-market economies. The gradual end of the Fed credit flood has sparked concerns that developing countries with high fiscal and trade deficits, excess credit growth, currency risks and other problems could face a liquidity crisis, leading to a broad loss of confidence.”
“‘Given that China is the largest emerging economy in the world and has contributed more than 25% to global GDP growth since 2010, a sharp slowdown or deleveraging in China will likely affect everyone and every market,’ UBS said in its ‘How Might a China Hard Landing Affect the World’ report.”
“The third way that a hard landing in China would affect the world is through market contagion, when a loss of confidence spreads with unforeseen consequences. The Asian financial crisis in 1997, sparked by seemingly inconsequential devaluations in Thailand and the Philippines, drew in economies with supposedly sound fundamentals, including Singapore and Hong Kong. ‘You often hear people say emerging markets are a worry,’ UBS economist Tao Wang said. ‘They could be bearish on China and bullish somewhere else. If you’re really bearish on China, though, I’m not sure you can be bullish on anywhere else.’”
Same game, different players.
Meditate on when FASB 157 is reinstituted. Until then nothing has ended.
“Meditate on when FASB 157 is reinstituted. Until then nothing has ended.”
+1 Agreed.
“Extend and Pretend”
http://www.zerohedge.com/article/guest-post-extend-and-pretend-where-are-we-after-one-year-suspension-fasb-rules
Yup. It’s all BS until then.
If the banks are going to be allowed to continue marking their “assets” to fantasy, then I want to get a $500k mortgage against a $250k house. Fair’s fair.
I wonder what happens if these Chinese (and other foreign) “Investors” have to start liquidating their real estate holdings in the US and elsewhere due to bad times at home? Hmmmm, it could add some momentum to the snowbal as it heads downhill.
Here in Toronto, I know loads of unemployed who can’t find any work. Yet, people still keep paying ridiculous amounts for houses and condos.
So many hipsters are taking on 500K mortgages because according to their current salaries, they can afford the mortgage. What they forget, especially those working in creative fields, is that there’s a high likelihood that their incomes will drop significantly after they turn 45. People don’t want to hire balding, grey-haired creative directors or copywriters. You can still try to dress young and hip,however, you can only fool people for so long.
When the housing bubble crashes, their mortgage rates increase and the hipsters find themselves earning half of what they’re making right now, what are they going to do?
I’d love to see the rehire after age 50 salary numbers- I’m betting the average haircut is 30% or more
we know 70% plus since 08 are part time.
“Here in Toronto, I know loads of unemployed who can’t find any work. Yet, people still keep paying ridiculous amounts for houses and condos.”
Look at the four “big-payment” items that functional people find tough to avoid: housing, transportation, upper education and health care. Amazingly these four industries are no longer able to function in the context of a free-market, e.g., where savers buy bonds, and borrowers repay with interest. The risk of default is now almost certain, so government has become the ultimate guarantor. So even with median income growth stagnant for years the price of assets continues to rise with lobbied credit availability.
Apparently this economic model is endorsed by senators everywhere.
Apparently this economic model is endorsed by senators everywhere.
It sure is, which is why even in third world cesspools housing costs 30x or more than the average white collar annual wage.
Public trans is 75% subba dubbadized
So many hipsters are taking on 500K mortgages because according to their current salaries, they can afford the mortgage.
In my world it’s hip to buy treasury bills, series I bonds, and precious metals bullion coins. It’s hip to not go out and get bombed, but to work out 90 minutes in the early mornings. It’s hip to drive an economy car and wear blue jeans. Dull is my thing. It makes the conventional “hipsters” laugh at me but somehow an old generation of hipsters stopped being hip and a new generation started. The old one that stopped now has a lot of obesity among their ranks, expensive divorces, upside down mortgages lack of jobs and they just want to escape from all these problems that it once was hip to acquire.
In my world also, it’s hip to rent cheap while the “hipsters” pay $500,000 plus interest.
expensive divorces
FWIW, from what I have seen, the current generation of hipsters aren’t into marriage. I think they’re more into pump-n-dump (at least the guys).
hey’re more into pump-n-dump (at least the guys) ??
And the girls also…At least around here….They don’t want the baggage of a permanent guy…Particularly a permanent guy that has the body & looks but lacks any gumption…
They just use him & lose him…
Yup, Can Bubble, you’re right. People think it’s ridiculous that they might be earning less in the future, rather than more. The reality is that most people will earn less at 45 than they did at 30. The only people who earn increasingly more money as they age are the executive-management types, and that isn’t for everyone. It takes a lot of political smarmyism, and at least a small dose of sociopathy.
If you’re an engineer, artist, office manager, factory worker, etc, then you should plan on decreasing opportunity as soon as the hairs go gray.
then you should plan on decreasing opportunity as soon as the hairs go gray ??
Technology & cheap oversea’s labor has no age discrimination….
But human resources and hiring managers do.
Gov workers are doing great. The Nov of a fb pension is just beuno
All the more reason to be self employed.
“All the more reason to be self employed.”
Unfortunately we now have the Affordable Care Act.
Wall Street Landlords Buy Bad Loans for Cheaper Homes
Wall Street-backed landlords are showing a greater appetite for bad mortgages as a source for cheap property as the supply of foreclosed homes declines while housing prices continue to climb.
Full story
http://www.bloomberg.com/news/2014-02-21/wall-street-landlords-buy-bad-loans-for-cheaper-homes-mortgages.html
I wouldn’t be so sure about that.
http://www.movoto.com/san-diego-ca/market-trends/#city=&time=5Y&metric=Median%20%24%2Fsqft&type=0
the idea of a hard economic landing in China. They include ‘We don’t expect it to happen’ caveats. But what if it did happen? Would the rest of the world tank as well ??
I have posted his opinion in the past and he suggest that if China GDP falls below 7% then there will be big trouble ahead..Read his Bio…Its pretty impressive and when he speaks you tend to listen;
https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=4&cad=rja&ved=0CEAQqQIwAw&url=http%3A%2F%2Fwww.nytimes.com%2F2014%2F02%2F18%2Fbusiness%2Feconomy%2Fnobel-winners-frank-advice-to-chinas-leadership.html&ei=-tEIU4jhK8ShogSY5oHYAQ&usg=AFQjCNHa1YP7z8UCI37RMFSfTcs4Q9raKg&sig2=X668W2qNcCBO0_69XnaUSQ&bvm=bv.61725948,d.cGU
I think it’s a chicken-or-the-egg scenario. If China’s GDP decreases, then it might be because they are receiving fewer orders for manufactured goods from the rest of the world. So the decrease could be the effect, not the cause, the trouble.
When you see price to income ratios in other countries, you realize that the bubble is even worse overseas. It’s pure insanity.
Which simply means the cascading defaults will be global.
The US won’t escape.
There are two components to 1) Excessive repayable debt and 2) Unrepayable debt. And they are the borrower and the lender/debt-owner.
So, regarding the Chinese excessive leverage - IF the policy of central bank sequestering of debt actually works, with minimal negative side effects, then China could bail out its lenders/debt-owners with few side effects. That takes care of component 2.
However, component one still exists - the drag on the populace. And there’s little that can be done about that without stoking inflation. And inflation can easily cause social unrest and remove politicians and top decision makers. It has in the past, in the US.
However, the first policy is fraught with moral hazard, which then inevitably creates distortions and inefficiences which will continue to grow. As the head of the Indian central bank said, “Ironically, the lesson friom the Great Depression - that letting the banks go under is not a good idea - has been so well absorbed by the Fed that it is played for a patsy by the banks.”
Rajan said that in 2010. Imagine how much tightly bound the central bank and banks and the big donors are today.
One could always just bail out bank depositors through an FDIC-like program. That would save everyone who didn’t participate in the bender, while allowing the rest to have their hangover.
My understanding is that a lot of the borrowing that goes on to buy real estate in China is inter-family loans, since there are limits on how much banks will lend (relatively low leverage from financial institutions, high leverage if you count the money borrowed from rich uncle Larry).
It is unclear to me how this dynamic will unwind, but it is clear to me that it probably won’t unwind the same as if it were all leverage from financial institutions.
They can’t buy the land.
1) Blythe Masters, inventor of the credit default swap, and implicated in various other sketchy manipulations (electricity and metals), was to be appointed to the Commodity Futures Trading Commission advisory committee.
2) A partner in a top law firm which specializes in defending financial firms was appointed was the co-chief of enforcement at the SEC, which is supposed to enforce rules against financial firms. Now, he is leaving that position to go back to his original law firm. Forget about the obvious conflict of interest in this appointment, William K. Black called him the “SEC’s anti-enforcer.”
My question is: Who is appointing these people and what does that say about the regulatory environment in government right now? It sounds like a complete and utter farce. They’re not even trying to maintain appearances much less actually carry out effective regulation.
Who appoints them? Why, the Thrive Eighty-Five, of course. They are the Anasazi. We are the other.
What is the Chinese zodiac for this year - Bear, bull, or donkey?
This is the year of the wood horse. I guess that’s like a donkey. I read about it on horoscope dott commie. Something about teamwork, etc. This it the year when the donkeys of the world will work together to pull their debt weight!
http://www.realtor.com/realestateandhomes-detail/161-Avenida-Florencia_San-Clemente_CA_92672_M15056-88635
Look at the rents then calculate the mortgage payment. Don’t forget the taxes.
What? Stop spreading propaganda and bad-mouthing California real estate. The person who buys this duplex is smart.
Net operating income: $43,610 ($3,634 mo)
Monthly mortgage payment with 20% down on a 30-year fixed rate (assuming you qualify for the lowest-possible rate): $6,329
What’s the problem? If the landlord can’t produce the additional $2,695/mo to cover the mortgage, then the landlord is a SCHMUCK and a loser.
Hahahah. As a tenant, I have no problemo with that particular distortion. As long as I can rent something for less than half the cost of buying it, then I will!
I would also like to know why this particular listing fails to identify each line item that is an “expense”. Other listings for multifamily identify everything. There is $x for tax, maintenance, utilities, managment, etc. The mortgage payment is never included as an expense, since it’s a separate deal that the buyer negotiates with a bank, and has nothing to do with the property itself.
Is the California seller attempting to dupe a first-time “investor” into thinking that the mortgage payment is included already as an expense, and that the net income is cash-flow positive? Would an honest realtoR even list such a property with inadequate information like that? If I were a potential RE investor with no experience, I would make sure to enlist someone with knowledge to help me out. One would think that it’s illegal for realtoRs and sellers to omit pertinent information from a listing, but it’s not.
Monthly mortgage payment with 20% down on a 30-year fixed rate (assuming you qualify for the lowest-possible rate): $6,329
????
Show me your math please….
One would think that it’s illegal for realtoRs and sellers to omit pertinent information from a listing, but it’s not ??
I looked at the listing…All the information is there…You are just not interpreting it accurately…
scdave:
To see the math, click the “Payment Options” tab. And no, all the information is not there. I have looked at dozens of these listings. This one is missing a bunch of stuff.
For an example of a listing with complete information, see here:
http://www.realtor.com/realestateandhomes-detail/6315-N-16Th-St-Unit-101_Phoenix_AZ_85016_M15842-51692?row=1
You will notice that it lists out the cost of management, maintenance, etc. I don’t know why they have a line for “other”. It says how much each unit rents for and gives the vacancy assumptions. This makes it possible for a potential buyer to quickly check that the seller is doing the math right, so they know whether it’s even worth their time to look at the property.
To see the math, click the “Payment Options” tab ??
30 year @ 4.5% = $4846./Mo
No, it’s the big number right above the bar on the chart. The one that includes estimated property taxes, insurance, and HOA fees. If those expenses were already itemized as “expenses”, then you wouldn’t want to count them twice. Unfortunately, they are not itemized, so how would you know?
Besides, that’s still a negative cash flow!
Yes but in your post you were using NOI against the monthly nut including expenses…It was misleading to someone who is not familiar with investment jargon and what NOI means…I immediately spotted it;
“Net operating income: $43,610 ($3,634 mo)
Monthly mortgage payment with 20% down on a 30-year fixed rate (assuming you qualify for the lowest-possible rate): $6,329
Since you used NOI and quoted the loan terms it would appear you were comparing PITI with the NOI…
Gross Scheduled Income: $61560
Total Expenses: $17950
Expenses are @ 29% of gross…Gas & Electric are tenant responsibility…Water is landlord…On the surface the suggested expenses appear light..Taxes & Insurance will eat about $16,000. of the estimated…The remaining $2,000. would cover the water…Management in these small units is almost always owner…Also, 20% down in any strong market never pencils…Takes 30% +….
scdave:
You are doing exactly what the seller wanted. You are assuming that everything is included in the unitemized expenses. I submit that if the seller were on the up-and-up, then he would itemize everything, as that is standard.
And they are itemizing when they give you a expense total…Just not telling you line item where the expenses are going…If you have enough experience, or have a broker that does, they need not tell me what they are on a property this size…I can estimate them with my own knowledge…
Besides, through due diligence process we get to the nitty-gritty anyway…Like I told you, the estimated expenses are low or better said they are not all inclusive…I know that by experience…
But that really does not go to what started our conversation…You were comparing NOI to total monthly payment including expenses and that is not appropriate…It made it appear that there was a $2700. monthly negative to a layman…
scdave:
I can estimate it too, but then what’s the point in having the seller disclose the information? By definition, “itemization” is when you list each expense and each source of income individually. One has not “itemized” by giving the total number from the bottom line only.
A buyer should not waste time with due diligence if the seller has already cast himself in a shady light by omitting the standard itemized income and expenses from his listing. Since the seller has given me no reason to believe otherwise, I am going to work under the assumption that he’s hiding something. There is no other explanation. The best-case scenario is that the cash flow is only negative by $1,200/mo. The most likely scenario is that it’s negative by $2,700/mo. The worst-case scenario is that the seller is underestimating maintenance or vacancies (not itemized, once again), and it’s even more negative than that.
But beyond the numbers, there is this little indication of a mania. This listing would not be online if someone in the picture were not a maniac. It’s either the seller, the realtoR, the buyer, or a combination of the three.
the Chinese, Brazilian, Canadian and Australian housing markets were impervious to the fact the US housing market was tanking badly. Values in those countries were still headed north. Now that those countries’ markets appear to be tanking
The Brazilian housing market is not “tanking”. (Yet?) I think prices rose about 9-13% last year.
And if one bought here in 08 and “values” have tripled, what would constitute “tanking”?
Whats the cost of a decent house around your area now Rio…??
Just check the DC MLS shultzie.
Whats the cost of a decent house around your area now Rio…??
Numbers are fuzzy in Brazil but according to O Globo newspaper, the median price for a 3 bedroom apartment around me is about US $800,000. It’s gotten insane. Houses are more but there is no data because there are so few. That 3 Bdroom apartment would rent for about US $3,300 a month. What is interesting is that the median price on a 4 bedroom apartment jumps to about US $1,200,000. 400K more for one bedroom? I don’t get it but here’s a listing of one on a decent street in a decent area. The Condo fee alone is about $625 a month on that listing. A “condo” street fee on a house is a fraction of that usually.
http://www.zap.com.br/imoveis/oferta/Apartamento-Padrao-4-quartos-venda-RIO-DE-JANEIRO-COPACABANA-RUA-JULIO-DE-CASTILHOS/ID-5413970
Here’s a nice 3 bedroom with a veranda for about US $800K.
http://www.zap.com.br/imoveis/SuperDestaque/Apartamento-Padrao-3-quartos-venda-RIO-DE-JANEIRO-COPACABANA-R-CONSTANTE-RAMOS/ID-5466738
Chit…No view on the first one…..
Wow…Ouch….$800,000. for that place…I did like the outdoor living area though…Interesting looking through the Pic’s…Was at the international home builders show a few weeks ago…There were a couple of vendors from brazil…Hot Portuguese gal…All those small appliances & fixtures were there…I guess its all about maximizing space but still being functional…
Thanks for the info Rio…
Thanks for the info Rio…
You’re welcome.
I’m going for a bike ride at the beach! I’ll go past this Rio streetcam at about 4:40-4:45 on a white mtn bike with black saddlebags. I’ll wear a white shirt and black ball cap. I’ll wave!
http://www.vejoaovivo.com.br/rj/rio-de-janeiro/rua-bolivar-42-copacabana.html
I’ll go past this Rio streetcam at about 4:40-4:45
EAstern standard time, about 10 min from now.
It’s “go time” !
“Here’s a nice 3 bedroom with a veranda for about US $800K.”
The top of that fence in #2 doesn’t look “California safe.” A “minority at risk” individual could get hurt on that thing.
‘San Diego’s available supply of existing, single-family detached homes for resale rose in January, while the median price fell slightly, according to the California Association of Realtors.’
‘The available supply of existing, single-family detached homes increased to 5.2 months in January, up from 3.6 months in December and 4.1 months in January 2013. Resales in January fell 22.7 percent from December and 21.9 percent from January 2013.’
This just in:
‘China’s stocks fell, sending a gauge of real-estate shares to the biggest loss in eight months, on concern banks have tightened lending to the property industry.’
‘China Vanke Co. and Poly Real Estate Group Co., the nation’s two biggest developers, plunged more than 7 percent after the Shanghai Securities News reported Industrial Bank Co. and other banks have curbed lending to the property sector and some related industries such as steel and cement. China’s property market is an integral part of the economy and a slowdown would further dent growth, said Wei Wei, an analyst at West China Securities Co. in Shanghai.’
“Property prices are at a high level now and the industry may enter a correction period,” Wei said. “Given the fact that the property industry is a pillar of China’s economy, growth will lose steam once the industry suffers. That’s also bad for global growth.”
‘The reason for the pullback seems tied to new-home-price data released at the market open. On the face of it, the data weren’t so bearish, with average prices up 0.4% in January for a 9% gain from the year-earlier period.’
‘But Andrew Sullivan of Kim Eng Securities sees other factors at work: “Whilst China property prices continue to rise, the market is watching the tightening and the start of discounting as being the driver as the Shanghai press [is] reporting tightening of loans by the banks.”
‘He adds: “Our man in Shanghai was out visiting sites recently, and he tells me that projects are starting to cut prices,” while tightening liquidity is also hurting the sector.’
‘Among the losers, China Overseas Land is down 3.8%, China Resources Land is off 5.5%, and Agile Property is taking a punishing 8.3% sell-down.’
‘China’s giant pile of copper is inflating its credit bubble’
‘China’s import data surprised many today when it revealed that its traders bought 397,459 tonnes (438,124 tons) of refined copper in January, just shy of the record 406,937 tonnes imported in December 2011, and up 63.5% on January 2012.’
‘Weird, given that industrial activity appears to be contracting. And really weird, given that copper stockpiles in Shanghai hit a nine-month high. In fact, as FT Alphaville reports quoting Citi, if you count other port cities such as Guangzhou, Ningbo and Rizhao, there could be as much as 1 million tonnes of refined copper sitting in China’s bonded warehouses right now.’
‘But Chinese copper demand is often about financing, not fundamentals. Banks commonly accept copper contracts and inventories as a basis for extending credit. As we reported a year ago, copper-backed credit often surges when money gets tight. And the possibility that Chinese credit conditions could cause a reversal in this trade—as may now be starting to happen with steel—is scary, considering that China currently consumes around 45% of the world’s copper.’
‘How does all that work? In the simplest terms, investors use offshore-bought copper, kept in tax- and duty-free bonded warehouses, as a collateral for a 180-day letter of credit, a short-term loan, from a bank. They then invest these funds in high-yielding wealth management products (WMPs) or other assets, liquidating in time to pay back the LC. Similarly, traders can also use a global copper purchase contract as a way of taking out loans in dollars, which are then changed into yuan to invest in WMPs.’
‘About 40% of the 100m tonnes of iron ore at China’s ports have been put up by steel traders as collateral for loans. Loans banks are now calling in.’
‘The price of iron ore weakened on Friday $122.40 a tonne after bouncing off a seven month low of $120 a tonne earlier in February. The steelmaking raw material remains down 8.8% since the start of the year according to data supplied by The Steel Index.’
‘The softening in the price this year comes despite China’s steelmakers importing a record 86.84 million tonnes in January, up 18% on December and more than 21 million tonnes higher than January 2013.’
‘The latest China Iron & Steel Association data showed output at the country’s blast furnaces fell to under 1.96 million tonnes per day from last year’s torrid pace which peaked at 2.21 million tonnes. China is responsible for 48% of global steel output.’
‘Steelmakers are cutting back on production as Shanghai rebar futures – the most actively traded steel future – fall to near record lows. Given the mismatch, stockpiles at the country’s major ports keep growing, topping 107 million tonnes last week, the highest level since researcher Mysteel began compiling the data in March 2010.’
‘The stockpiled iron ore is not being put to industrial use, but because of tight credit conditions inside China the ore is being used as collateral to secure loans. About 40% of the iron ore at China’s ports are part of finance deals, Mysteel Research estimates.’
“The risk comes when metal prices fall by a large magnitude within a short time, driving down the value of the collateral,” Yang Changhua, a researcher with Beijing Antaike Information Development Co., tells Bloomberg:
“Borrowers, forced by their bankers to repay loans or to top up collateral, will have to sell the metals, sinking market prices even further and begetting a vicious cycle.”
‘Xinhua reports about one-third of China’s 200,000 steel trading firms could collapse as the loan crisis deepens. Loans to the industry peaked around 200 billion yuan or nearly $33 billion following China’s economic stimulus program in 2008 following the global financial crisis.’
‘The growing number of lawsuits against steel traders have exposed flaws in the almost $600 billion government plan. “Steel traders went on a borrowing binge between 2009 and 2011 fuelled by the stimulus. Then a lot of them used the loans to invest in real estate and the stock market,” Liu Xinwei, a steel industry analyst with Shandong-based consultancy Sublime China Information, told the Global Times last week.’
Gosh, this is starting to look like it might be unsustainable.
‘Chinese new-home price growth slowed in January for the first time in a year, according to new government data, in the strongest sign yet that lending limits and an oversupply of housing in some cities are reining in a year of surging prices.’
“The oversupply situation has a greater bearing on slowing down the property market this year. The current liquidity tightness is unlikely to last into the second half, because economic growth isn’t that great,” said Nicole Wong, a property analyst at CLSA. “Property price growth this year will decelerate, and in some cities, there will be price cuts.”
‘In Hangzhou, real-estate developer DoThink Group last week cut prices by 12.2% at its North Sea Park project to 15,800 yuan ($2,592) per square meter from 18,000 yuan.’