Bits Bucket for June 2, 2014
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The Housing Bubble
Examining the home price boom and its effect on owners, lenders, regulators, realtors and the economy as a whole.
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Name:Ben Jones
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Been out of the loop for a while dealing with other issues, but back in Shanghai now. Nothing new to report so far, I’m getting used to everything to where I don’t notice it any more. But I’ll try to see if anybody says anything about the economy here doing anything unusual.
If you are feeling courageous, why not ask around whether anyone has seen the latest Economist article about the Chinese real estate market?
This one:
China’s property market
End of the golden era
China’s property market is cooling off, at long last
May 31st 2014 | SHANGHAI | From the print edition
AFTER years of talking up China’s gravity-defying property markets, local land kings are now singing a darker tune. On May 26th Yu Liang, the president of Vanke, China’s biggest developer, declared that the “golden era” in which “everybody makes money out of property is gone.” That came on the heels of comments by Pan Shiyi, the boss of Soho China, another property firm, likening the country’s real-estate sector to the Titanic: “It will soon hit an iceberg.”
Official data show the country’s property market is indeed coming down to earth. During the first four months of this year, the value of residential sales fell by nearly 10% versus a year ago, and construction activity on new homes fell by a quarter. The decline on a month-to-month basis is even more striking (see chart).
Why is the market losing steam? One explanation is that there is too much building going on. Until recently this argument was dismissed by property bulls, who pointed to wave upon wave of rural migrants moving to cities and soaking up supply. Gavekal Dragonomics, a consultancy, estimates that China has been at or near its sustainable level of “peak supply” of housing for many months.
Cooling demand is another culprit. Despite a cultural affinity for property—no bachelor can hope to win over a desirable bride if he does not own a home—it seems that punters may now be ready to put off their purchases. After years of double-digit growth, the economy is slowing. More importantly, recent price cuts of a third or more being offered by developers in some markets have started to worry would-be buyers. These bargains are now available in wealthy coastal cities and not just in smaller cities in the boondocks.
…
The entire economy is based on keeping the price of an ipad at $500.
Ghost cities as jobs programs, we followed a similar path, but our ghost cities are spread out as shadow inventory. Just pretend it isn’t there until the next bail out.
It’s 2008 in Shanghai! Who said time travel isn’t possible?
Carl will never notice it, though.
Notice what? The property market? Probably true. Once in a while I hear people talk, but not much.
This WSJ article might be an interesting conversation starter:
June 2, 2014, 3:04 a.m. EDT
China army official blasts U.S. ‘provocative challenge’
By Chun Han Wong, Julian E. Barnes and Jeremy Page
China asserted a bold vision of itself as the pre-eminent power in East Asia, sparring with the U.S. at a meeting of the world’s top defense officials and inflaming tensions with its less-powerful neighbors.
Beijing’s stepped-up rhetoric illustrated its view that U.S. power in the region is waning even as China’s more-aggressive approach appears to be bringing other nations together to counter its growing military and economic sway.
At the Shangri-La Dialogue in Singapore over the weekend, a top Chinese military official issued an unusually robust riposte to U.S. Defense Secretary Chuck Hagel, who criticized China’s “destabilizing, unilateral actions” in the South China Sea, including deploying an oil-drilling platform in disputed waters, among other moves.
Lt. Gen. Wang Guanzhong, the Chinese military’s deputy chief of general staff, fired back on Sunday, saying Mr. Hagel’s speech was “full of hegemony, full of words of threat and intimidation,” and part of “a provocative challenge against China.”
Other Chinese officials at the meeting were similarly blunt in their assessment of the U.S.
“The Americans are making very, very important strategic mistakes right now,” Maj. Gen. Zhu Chenghu said in an interview. “If you take China as an enemy, China will absolutely become the enemy of the U.S.,” he said.
He went on to tell a Chinese-language broadcaster that U.S. power was declining.
The Japanese manufacturer Roland DG has replaced it’s assembly line with single-person stalls call a D-Shop, inspired by Japanese noodle stands. The D-Shop can produce a wider variety of products in lower quantities than an assembly line.
China is feeling increasingly comfortable with the idea that it is Asia’s top power, or at least should be treated as an equal of the U.S., and it is engaging in displays to show that the U.S. can do little or nothing to stop it despite America’s greater military firepower, according to several experts.
“China is very significantly upping the ante here,” said Hugh White, a professor of strategic studies at the Australian National University. “What we’re seeing is a steady and sharp increase in the overtones of the strategic rivalry.”
…
The ChiComs should be careful about what they want. Being the world’s cop, or even just Asia’s cop is an expensive and unpleasant task, one that quickly makes you very unpopular. I think that their past approach of winning third world friends by paving roads, building power plants and drilling wells for them, as opposed to opening local military bases, is the way to win friends.
China no like US. Be enemy instead of trading partner. HURT america!
Maybe it will be different in China, but once the deflationary spiral hit in Japan, it lasted for over two decades.
Opinion 6/01/2014 @ 1:10PM
China In Deflationary Spiral, New Stimulus Looks Ineffective
Gordon G. Chang, Contributor
The latest price data for China shows the economy has entered a period of deflation, a situation sharply at odds with the official claim of growth in the high single digits. Robust growth, especially over long periods of time, is often associated with inflation.
The National Bureau of Statistics announced that the consumer price index for April increased by 1.8% year-on-year, well below the target of 3.5%, while the producer price index, measuring factory gate prices, declined 2.0%.
China is clearly in a period of falling prices. Not only is the decline in the PPI in excess of the increase in the CPI, the increasing CPI measures a much smaller portion of the economy—consumption is about 35% to 36% of gross domestic product—than the declining PPI—manufacturing was pegged at 44.9% of GDP in Q1.
Beijing’s consumer price data has often been criticized as underestimating inflation, but that does not appear to be the case now. The real “tell” is the import number. In April, imports were up an anemic 0.8% from the same month in 2013. The number would have been negative had there not been significant stockpiling of oil, copper, and other commodities. Because consumption was weak, it is unlikely that Beijing’s CPI increase for April was understated to any significant degree.
And what are the prospects for the future? Capital Economics says the fall in vegetable inflation “is likely to be short-lived” and suggests we need not worry about weak prices, but weak prices may be reflective of long-term trends. As Anne Stevenson-Yang of J Capital Research in Beijing pointed out in an April 28 note, food consumption in China last year was flat to negative in almost all categories.
Since then, growth has evidently slowed, and this suggests food consumption will not push prices upward. Moreover, residential property price declines, evident throughout the country except the big coastal cities, are bound to depress the CPI for some time. In short, there will be little or no upward push on the CPI.
As for manufacturing, April was the 26th-consecutive month of falling factory gate prices. Capital Economics says the declining PPI is the result of “weakness in global commodity prices rather than industry-wide overcapacity.” That could be true, but the fall in commodity prices is largely the result of the weakness in China.
Manufacturing is obviously going through a bad patch. May will probably end up as the fifth-straight month of contraction in the HSBC Purchasing Managers’ Index. That’s not a good sign because factories are normally running at full tilt during the month. This year, the economy is showing no great bounce after the country’s long Lunar New Year break. The skid in construction starts in the first four months of this year, for instance, will eventually take its toll on output as builders need substantially less cement, steel, and wallboard. Therefore, in coming months we should not expect upward price pull from busy factories.
So what are Beijing’s planners doing to prevent a period of soft prices from becoming a deflationary death spiral? At the moment, they have evidently abandoned any plans they had for structural reform because reform of that sort would substantially depress economic output. Now, they have evidently opted for another round of Chinese-style pump-priming, this time along the lines of the “mini-stimulus” announced by Premier Li Keqiang on April 2.
…
A tour of China’s ghost towns
by Rob Schmitz
Monday, June 2, 2014 - 14:26
Rob Schmitz/Marketplace
An empty residential complex in the city of Kangbashi, Inner Mongolia. The city, part of the region known as Ordos, is built for a population the size of Pittsburgh’s, but for years has sat empty. It’s one of China’s many “ghost towns” built by ambitious local governments eager to report high GDP growth by any means necessary.
For the past three decades, China’s growth model has been anchored in building big projects: highways, bullet trains, and real estate. And that’s left hundreds of cities across China, nearly empty – ill-conceived projects built for the sole purpose of boosting GDP growth.
As part of Marketplace’s stage performance in the beltway “How I learned to stop worrying and love the numbers,” China Correspondent Rob Schmitz will take audience members on a tour of China’s ghost towns, ghost malls, and ghost suburbs, delving into the numbers that explain how a land of 1.4 billion people can have so much empty real estate.
…
“…built by ambitious local governments eager to report high GDP growth by any means necessary.”
Real estate construction for the sole purpose of reporting high GDP growth = BROKEN WINDOW ECONOMICS! And the situation is destined to get much worse in a couple of decades when these empty towers start to literally fall to the earth.
“Ghost Towns” in China
A glimpse into China’s most famed “ghost cities”
China has laid out an ambitious plan to transform 250 million people from the countryside into city dwellers in the next 20 years. Its push for urbanization has encouraged local governments and developers to build skyscrapers and residential complexes, many under the belief of “build it and they will come”. However, the construction spree has left soaring debt, creating insolvency risks for local governments and inflating the country’s real estate bubble. By China’s official account, China’s local governments owed $ 1.8 trillion of debt by the end of June 2013, about a third of China’s GDP. A CLSA report says China is “addicted to debt”.
…
Enjoy the authentic beef chow ho fun.
Hmm…I wonder if they have dim sum restaurants in China?
They do…at least where foreigners congregate. Everywhere else they probably just call it “food”.
home prices are justified cause the economy is recovering.
Just look at the stock market and you’ll know its true.
I love it how companies are floating bonds to buy their stocks so the earnings per share looks better that reality.
Earnings reported in earnings / share
Lower the number of shares and boom your earnings / share increases
look at the revenue at a lot of these companies and they haven’t grown at all.
Its bogus fraud.
Reminiscent of holding homes off the market so the prices will increase.
Or throwing away perfectly good ripe fruit in order to increase the value of sales.
I’ve been following my nabe on Zillow. On the low end (which is NOT low compared to the rest of the country), houses are going Pending after only one small (3%) price cut. One house in particular just went Pending for its original asking price. More foreclosures are starting to show up too, but at wishing prices.
“…houses are going Pending after only one small (3%) price cut.”
Does it matter where the list price started relative to market value?
I don’t know what number I should use for Market Value, but all the Pendings seem to sell at about same proportion above the tax assessment, whether it’s the low, middle, or high end housing.
In all the price ranges, people are willing to tolerate the 1970s wallpaper/flooring/windows to pay a “fair” (?) price, even in the high-end houses where Grandma Finally Died.
And buyers seem willing to overpay for an HD reno. It’s easier to finance a flip renovation via price than it is to come up with the reno cash on your own.
Aren’t you in suburban MD? If you don’t mind me asking, which neighborhood are you looking at?
My wife and I have been keeping an eye on several different areas: Olney (where we currently live), North Kensington, Colesville and Columbia are currently in the mix for several various reasons. I’ve noticed price drops on few but for the most part people are holding steady. Most still have the “I’m not gonna give it away” attitude. (This fall is gonna be VERY interesting around here!)
I know of a guy who owns a 50yo mobile home in a poor but white neighborhood of Phx. It’s on a 1/4 acre lot. It used to be rented at $300/mo, but he is now putting it on the market for $100k. I am beginning to think that this is the explanation for the sudden shortage of rentals in Phx. Dreamers and their wishing prices.
What was all that nonsense Joey was saying the other day about becoming a slumlord by buying houses from his Stealtor buddies who deliberately kept them off the market or turned down buyers so they could funnel them to him instead?
I thought he was a lawyer, or was that just all playing around until he went into Daddy’s business?
Wait … is Joey still posting on this board? I lost track of his name some time ago.
My BLB screen name is quite tricky…
???
He is a Lawaltor?
Or a SlumLier?
Liawyer and harpsichordist.
Father-in-law’s business. He had to get wifey to supplement his own natural talents.
Why more and more Americans are renting cars instead of buying them
By Matt Phillips 4 hours ago
“Roughly a quarter of the new cars purchased in the US during the first quarter of 2014 were leased, the highest since 2000…
…back in 2002, the share of new Ford, GM, Hyundai and Kia cars that were leased rather than bought was negligible. Now it’s 20% or more, according to J.D. Power & Associates data…
…leasing has become quite a bit cheaper than buying, at least in terms of the monthly payments. [$115/month less]
…some argue that this is part of a permanent cultural shift away from the idea of ownership and towards a more sharing- and leasing-based economy….[especially for Millenials, who came of age on the internet, so they’re also the ones most likely to use services only the internet makes possible: services like Spotify, Netflix, Zipcar, or Airbnb]
…But over the next few years, a lot of the people who’ve leased cars for the first time will be bringing them back to dealerships. And that’s when they’ll discover the downside of leasing, as dealers attempt to ding them for excessive mileage and wear-and-tear— some of the reasons why experts say owning is still the better financial bet over the long term.”
http://qz.com/214922/why-more-and-more-americans-are-leasing-cars-instead-of-buying-them/#
——————–
That would explain why I’ve been seeing ALOT of hip new cars with paper plates. So should we expect a glut of leased/used cars in the next three years?
When I worked engineering contracts on the east coast I would rent cars all the weeks I was there: Baltimore, Tampa. Always drove a newish car. Occasionally got a Mustang. Those were my favorites. I had a Mustang once and would take it on a weekend drive from New Tampa to Sarasota (Siesta Key Beach) on the smooth, wide, uncrowded I-75. And with classic rock all the way!
…leasing has become quite a bit cheaper than buying, at least in terms of the monthly payments. [$115/month less]
Or a fancier car for the same price.
That would explain why I’ve been seeing ALOT of hip new cars with paper plates. So should we expect a glut of leased/used cars in the next three years?
Probably. The renters always have the option of buying the car at the end of the lease. I suspect that for most the allure of a new car will be too hard to resist.
FWIW, I remember that a lot of people leased cars back in 80’s and 90’s. This is hardly new.
“So should we expect a glut of leased/used cars in the next three years?”
I sure HOPE so. I’ll be due for an upgrade by then and right now used car prices are STILL TO HIGH.
…some argue that this is part of a permanent cultural shift away from the idea of ownership and towards a more sharing- and leasing-based economy….[especially for Millenials, who came of age on the internet, so they’re also the ones most likely to use services only the internet makes possible: services like Spotify, Netflix, Zipcar, or Airbnb]
I think the true test here would be the numbers of people using zipcar and other simular services in urban areas. Leasing and parking that heap is expensive compared to renting cars in urban zones.
My parents were talking about this yesterday. They historically have owned their cars (usually purchased used, and they usually drove them into the ground). Their current car is a nearly 10-year old Prius (which I think they bought new). They will also drive it into the ground.
But, when thinking about a new car vs. lease, they are thinking it will be easier to just pay the lease payment and hand the keys back at the end of the term…why bother parting will all that cash?
It’s because people think about their costs on a per-month basis instead of looking at the TOTAL cash outlay.
If you pay cash for a reliable midsize car and drive reasonable mileage (no clown car commuting 50+ miles/day), you do pretty well on resale 6 or 8 years later. (Even better if you hold onto it for 10 years.)
I bought a new car last year. At the time, they were advertising a lease deal too. At first blush, it looked like a good idea. You had to click through a few pages to learn that the lease requires an additional up-front payment, not just the monthly. They call it a “down payment”, but that makes no sense in terms of a lease. Each time the lease expires on the car, you have to sign a new lease and make a new down payment, or else buy a car, or stop driving.
Once you factor in the cost of the down payment, the purchase price turns out to be much cheaper than the leasing price (even with maintenance, etc). This is especially true for people with good credit, since I got 0% interest and 0% down (5 year plan).
This is why the poor can never get ahead. People who aren’t poor have a hard time understanding how even a tiny cash outlay now can save more cash later.
I keep hearkening back to AZ Slim’s comments about how in Africa, people can only afford single-packet soap and shampoo. If the people had even a little cash, they could buy an economy size bottle and pay much less per wash. Over time they could save up enough for a few chickens or a water buffalo and get ahead that way. But they can only afford the cash for one wash at a time, and so they lose out on saving. We aren’t far from that in America, where people are buying 3.6 oz cans of tuna at the dollar store.
I think there is a big difference between the impoverished and the spendthrift poor. In the US, poor is subsidized at $20,000 a year. These people can figure out how to buy a bottle of soap.
Math illiteracy knows no income boundaries. Living one’s life in debt is like paying too much for soap by the packet. Ironic.
And that subsidy, through multiple generations now has destroyed work ethic and encouraged the magical thinking that all will be provided.
“Math illiteracy knows no income boundaries. Living one’s life in debt is like paying too much for soap by the packet. Ironic.”
+1 Understanding the concept of the time value of money typically requires the last stage of cognitive development, formal operations.
I told you, albacore tuna 99 cents for the regular size can. At CVS, a dang drug store.
The people in Africa are poor because their rulers are dictators who rob them blind and treat them like animals. Sounds a lot like somewhere else.
Read it and weep, boys!
http://www.marketwatch.com/story/when-selling-hardwood-floor-beats-carpet-2014-06-02
Clip clop across those hardwood floors and fix me a sandwich.
But make sure she wraps her hooves in booties first. Don’t want scratches on that nice floor of yours. Could cause a crater.
Fetch me a beer
No, but I will fetch you a Realtor who can help.
Because living in a rental will never feel like a real home.
Realtors will fetch me beers now? Cool.
I guess they have to do something to pass the time…
Always wondered what use buyer’s agents were, besides being overpaid chauffeurs. This fetch-a-beer thingy helps a wee bit, but still have quite a ways to go, I think.
Cheetos. PRONTO!
Rent was due yesterday, and will be the first of the month every day for the rest of your life.
“Rent was due yesterday, and will be the first of the month every day for the rest of your life.”
No problem hoaxster. Rent automatically comes out of my bank account. My bond interest automatically goes into my bank account. My bond income pays my rent. So that I can go and play while homemakers must slave away at maintenance.
capiche?
“No problem hoaxster. “
…and my apartment I rent feels like a real home. Nice and cozy
Bill, I know in my heart that any day now you’ll meet the woman of your dreams and want to stop living the life of a wanderer, and the best way you’ll realize your true love for each other is when you buy a home together.
Or maybe they’ll just travel together!
Sorry honey, I know misery loves company, but he’s just not your type.
“Bill, I know in my heart that any day now you’ll meet the woman of your dreams and want to stop living the life of a wanderer, and the best way you’ll realize your true love for each other is when you buy a home together.”
“God ain’t made a man that could stand up to the power that lays between a woman’s thighs. You see, the hold that little cooter has on a man’s life is unbreakable. It can bring a strong man to his knees.” -Prentice Ritter, about why he lives on the range.
You might fall in love in as renters, but you won’t stay in love as renters.
Talk to a reputable Realtor first, then get pre-qualified for a mortgage from your local bank, get approved, and then propose to her.
Proposing and getting married can be a chaotic time in life, that’s why you should let a licensed Realtor help make all those post-wedding decisions for you.
And a beer too. Now get a move on woman!
‘Talk to a reputable realtor first’
Finding a great gal that will rent with you for life is way easier than finding a reputable realtor…
“the woman of your dreams…”
Renting is ALWAYS cheaper. One of the nice things about being a renter is that you don’t always have to be “home” doing maintenance.
You’re all a bunch of sour grapes, but when you’re ready to take the plunge, remember that there is a Realtor who can help.
Listen to your Realtor.
Believe your Realtor.
And consider yourself privileged, to even know a fraction of what Realtors know.
Your Realtor will decide what’s best for you.
“Bill, I know in my heart that any day now you’ll meet the woman of your dreams and want to stop living the life of a wanderer, and the best way you’ll realize your true love for each other is when you buy a home together.”
I just walked past her this evening. And said nothing. She’s long gone now and I won’t see her again.
Next!
Amy,
You and your bedraggled crew of working girls are depreciating, just like the shacks you peddle.
Sandwich!
The house I looked at this weekend needs _everything_ and has a cracked foundation/leaky basement. Still worth looking for these crapshacks in the 50-70k price range. Sometimes you find one that is simply ugly with a bad floorplan.
The block this house is on is very nice–almost all owner occ, very nicely kept houses, all 50s era brick/block construction. When I was there, people were out having morning coffee on their porches or trimming their hedges. It’s a real shame they have a festering POS down the end of their block. They’re casualties of the housing bubble, even 5-6 years after it burst.
The stock market is up today. y?
as long as the big boys want it up it will go up. when they have enough greater fools on board something unexpected will happen and mom and pop are left holding the bag again.
lather , rinse, repeat
we are getting close to the rinse stage.
Is it time to push the button?
Sectors that have done the best this year in order (in my Vanguard account) are
1. REITs
2. High Yield long term corporate bonds
3. Emergiing markets
4. Tax managed large company blend
5. International developed markets
6. S&P 500
7. Small company growth stocks - this was the best performer for five to ten years but it’s my admiral, which started less than 5 years so I can only guess.
Ten years rankings and their average annual percentage gain each year
over the last TEN years:
1. Vanguard Emerging Markets Investor shares - 10.53%
(I own admiral shares, but it’s less than 10 years old)
2. Vanguard Small Cap Growth Index Investors shares - 10.37%
(I have the Admiral version, which is less than 10 years old)
3. Vanguard REIT investor shares Index fund - 10.36%
4. International Developed markets (DODFX) - 9.73%
5. Tax managed Capital Appreciation (VTCLX) Admiral - 8.19%
6. Vanguard S&P 500 Admiral - 7.66%
7. Vanguard S&P 500 investor shares - 7.55%
8. Vanguard Long Term Investment Grade corporate Bond 7.29%
So you see the sectors are changing. Small companies were king and now are dull. High yield corporate bonds were dull and now are king. REITs and Emerging Markets are also still king.
tj always gets the last word … always!
how old are you? about 11 years old? you act like it.
I had an interesting request tonight. A friend of mine had to do an “emergency appraisal,” at which point I became his wife’s and son’s ride home from the HS play.
I guess the market must be going crazy out here in SD nowadays?