The Housing Bubble

The Midland Reporter Telegram reports from Texas. “The Midland-Odessa area and the Permian Basin have enjoyed economic expansion for 12 years or more, with remarkable growth coming in the last five years, said Karr Ingham, the Amarillo economist who prepares the index for Security Bank and the Midland Development Corp. And while Midland-Odessa may no longer lead or be among the nation’s leaders in job growth, wage growth or per-capita gross domestic product, ‘it will still be true the region and metro area have outperformed the state, national, and other metro area economies over a long period of time, and that is not about to be undone over the course of the coming cyclical contraction,’ he said.”

“Ingham said the area is still early in the down cycle. ‘Not everything has turned yet,’ he said, pointing to still-strong employment numbers. ‘I don’t want to be bearer of bad news, but I want to be the bearer of realistic news,’ he said.”

“Existing home sales dropped 25.7 percent to 150, compared to 202 in February 2014. The average sales price of $222,164 was down only 1.4 percent from last February’s average of $225,403. Ingham said that continued high housing prices, combined with concern about job security, led to the decline in housing sales. ‘At these prices, even when things were fabulous, there wasn’t as big an appetite for a house at those price levels,’ he said.”

The Star Tribune in Minnesota. “Low oil prices are siphoning thousands of jobs from the vast, wind-swept fields of North Dakota, where not long ago workers could all but name their wage, but had to stand in line to get housing. ‘It’s becoming a more normal market,’ said Kent Roers, a Twin Cities investor who recently pulled the plug on an apartment building in western North Dakota and has been scouting for projects closer to home, including Rochester.”

“A year ago, apartments were renting as fast they could build them in a market where rents can exceed $2,200 for a 700-square-foot unit. But with oil money drying up, there’s no guarantee of that anymore. ‘And people are price-sensitive,’ said Kent Roers. ‘They’re looking at specials and deals.’”

The Globe and Mail in Canada. “If Tasha Ptasinski had put her Calgary condo on the market last year before oil prices crashed, she would have come out farther ahead. ‘I bought it almost exactly two years ago for $310,000,’ the occupational therapist says, describing the 1,100-square-foot unit she owns in the city’s southwest. ‘I’m now hoping to sell it because I’m getting married and my fiancé owns a house. I was hoping to sell it for $399,000, but we’ve only had three showings in a week and a half, so now I’m looking at dropping the price by $10,000. I was hoping to list it for $20,000 more but it has been on the market for more than three months and it hasn’t moved.’”

“It’s not much better for Ola Malik as a prospective buyer either. ‘I’m looking to buy a smaller residential home in Marda Loop [also in south Calgary],’ says Mr. Malik, a 44-year-old lawyer who is looking to sell his duplex in the city’s Altadore neighbourhood and move closer to downtown. ‘The problem with buying is that there’s a lot of inventory right now. You see a lot of homes for sale, and while they’re at reductions of 10 per cent, if you’re selling your house to buy one you also have to take a hit.’”

“One thing keeping the market moving even with low oil prices and layoffs is record low mortgage rates. ‘It’s basically free money,’ says Calgary real estate agent Marc Doll.”

News.com in Australia. “A mining bust in the heart of Queensland has wreaked havoc on the housing market, with some homes selling for less than the land value. Queensland towns at the coal face of the mining downturn have seen median house prices tumble by up to 37 per cent for each of the past two years, with some houses on the market for a third of what their owners paid for them. The downturn has been worst in central Queensland’s Isaac shire, which includes Moranbah and Dysart, but places such as Emerald, Mackay and Mount Isa have also taken a hammering, according to research by Simon Pressley, of Propertyology.”

“‘A typical house was worth $580,000 in December 2012 and has since declined in value to $237,500 over the next two years (a decline of 36 per cent per annum),’ he said.”

From Perth Now in Australia. “Despite the ‘green shoots’ of recovery in some suburbs within the Mandurah-Murray region, these two council areas have suffered the most loss-making resales in the last quarter, to the tune of more than $6.6 million. According to the quarterly CoreLogic-RP Data Pain and Gain report for the 2014 December quarter, 5.5 per cent of resold homes across Perth were sold for less than the previous purchased price — compared to 5.4 per cent the previous quarter, and 4.1 per cent a year earlier. The highest proportion of loss-making resales occurred in the Mandurah (15.3 per cent) and Murray (14 per cent) council areas.”

“On a national level, Mackay in Queensland recorded the most loss-making resales at 34.7 per cent, and outback WA came tenth on the top ten list at 21.3 per cent. CoreLogic-RP Data research analyst Cameron Kusher said some of this could be because of the large number of investors who buy into the unit market. ‘If people need to exit a property quickly and if they have got a house and an investment unit they are more likely to exit that unit at a loss than exit that house,’ Mr Kusher said.”

Xinhua on China. “China is likely to see its first deposit payment default of publicly issued bonds as a company in the restaurant sector faces a sharp capital shortage for an imminent payment. The Cloud Live Technology Group Co., Ltd., formerly Beijing Xiangeqing Group, which primarily provides Hunan, Guangxi and Guangdong cuisines, announced on Thursday that it has a shortfall of 241 million yuan (39.3 million U.S. dollars) to pay deposits and interests of its corporate bonds due on April 7.”

“The company suspended trading in its Shanghai-listed shares on Tuesday and will continue the suspension if it fails to pay the due amount on April 7, at which point it will have set a significant first for China’s corporate bond market. Analysts said the default would be a precedent-setting case for market discipline in China’s corporate bond market, where investors have long assumed the government would never allow a default.”

“Further bailouts or so-called ‘rigid repayments,’ may whet bond investors’ appetite for riskier credit, encouraging them to lend money at artificially low rates to weak companies. A default, on the other hand, is likely to push up the yield rate of lower-rated credit bonds, adding more downward pressure to the bond market as it grapples with money outflow due to a rallying stock market and inflation expectations, according to Fan Wei, a senior analyst with Hongyuan Securities.”

“The analyst dismissed claims that the case could be China’s ‘Bear Stearns moment,’ a reference to the New York-based investment bank whose collapse preluded the global financial crisis. There will be no large-scale corporate bonds defaults causing systemic financial risks, according to Fan.”

The Wall Street Journal. “China announced its bank deposit insurance plan this week after 21 years of discussion. The plan aims to strengthen the nation’s creaky financial architecture and encourage banks and depositors to better evaluate risk by erasing the idea that Beijing will always step in to rescue financial institutions on the brink of failure. But economists say getting banks to stop believing in that implicit guarantee could be tough.”

“One reason many Chinese believe their government will bail out struggling institutions is that it has repeatedly done so in the past in order to safeguard stability in the one-party state. ‘In fact, the word ‘implicit guarantee’ has been widely used in almost all investment products in China, including the risky shadow banking trust products,’ OCBC Bank wrote in a research report. This has undermined market discipline and ‘created the wrong impression that Chinese banks will never go bankrupt,’ it added.”

“Even assuming these other building blocks are put in place, there’s still the knotty problem of how to let a financial institution fail – the best way to encourage people to start factoring risk into their decisions — without sparking fear, contagion and bank runs. ‘Even the U.S. hasn’t figured out how to avoid systemic risk,’ said Gan Jie, a finance professor at the Cheung Kong Graduate School of Business. ‘And in China, things are 10 times more complicated.’”