The Housing Bubble

It’s Friday desk clearing time for this blogger. “A rise in short-term interest rates by the Federal Reserve in two weeks wouldn’t snuff out the housing recovery, Fidelity Investments fixed-income portfolio manager Bill Irving said. ‘I would say the Fed already started tightening monetary policy 2½ years ago, with the taper [of QE ], which tightened financial conditions, raised the value of the dollar, [and] hurt the manufacturing sector,’ Irving said on CNBC. Many Fed critics have been arguing for some time that ultra-low rates are no longer need because the crisis is over. But one fact is almost universally accepted, Irving said: ‘Very accommodative monetary policy has certainly been supportive of risk assets, including equities and probably home prices as well. That’s part of the Fed’s playbook,’ he said.”

“Fannie Mae is making it easier to get a mortgage, especially for creditworthy borrowers with low and moderate incomes. It’s called the HomeReady mortgage program, and here’s how it works. Buyers can put as little as 3 percent down on the house, with expanded rules regarding the source of the payment. But here’s the real kicker. HomeReady will consider incomes from others planning to live in the house without being a borrower on the loan. This means, if you live with parents, siblings, working children or maybe a roommate, as long as they make 30 percent of the household income, Fannie will include their money to help you qualify for a loan. Also, non-occupants of the home can add further income to the mortgage. Perhaps parents living elsewhere but willing to help pay the loan.”

“St. Thomas Real Estate Program director Herb Tousley says he doesn’t believe the relaxed restirctions on this new loan will create another housing bubble where homeowners borrow over their heads. ‘I think the key to this is they are going to do it with creditworthy borrowers. They may change the criteria to qualify a little bit but I don’t think they are going to borrow to anybody. It’s not going to be like 2006, 2007 where you didn’t need any documentation, you didn’t have anything, and I don’t see them go down that road again,’ said Tousley.”

“Quicken Loans, the third biggest mortgage lender in the U.S., is considering backing away from a government program that provided critical support to the housing market during the financial crisis, the latest in an exodus of big lenders from the program. The departure of the biggest lenders from the U.S. Federal Housing Administration program, which helps first-time homebuyers, could translate into big losses for taxpayers during the next housing downturn, analysts said.”

“Quicken along with JPMorgan Chase & Co, Bank of America Corp and Wells Fargo & Co - all of the top four mortgage lenders in the United States – are tussling with the FHA over how the agency deals with loans that sour. Current fights over the FHA could have a big effect over how the agency weathers the next housing crisis. The smaller lenders that now make up most of the FHA’s client base may struggle to stay solvent whenever the next housing downturn comes. The DOJ lawsuit says that the lender submitted hundreds of loans for FHA insurance that it knew did not meet the agency’s standards, and Quicken’s problems were more serious than simple typos. It accused Quicken of having a ‘culture that elevated profits over compliance.’”

“A Justice Department spokeswoman would not address the Quicken lawsuit, but said via email that ‘the conduct that the government has pursued reflects clear, systematic, and knowing violations of meaningful and substantive FHA requirements.’”

“Prices for luxury homes posted their first drop since 2012, suggesting the top of the market may be getting too rich even for the rich. According to Redfin, prices for luxury homes — defined as the top 5 percent of each of the 600-plus U.S. markets it measures — fell an average 2.2 percent in the third quarter compared to the same period last year. Redfin’s chief economist, Nela Richardson, said that with inventory tighter, many high-end sellers have become ‘unrealistic’ about prices. ‘The luxury market was the first to recover from the housing downturn, and now it’s a bellwether of slowing price growth for the rest of the market,’ Richardson said. ‘Sales at the top end of the market continue to soar, but prices are downshifting.’”

“The biggest discount on a dollar basis during the quarter was the $12 million price cut on a home in Belvedere, California, which first listed for $27.5 million; it ended up selling for $15.5 million. A home in Occidental, California, ranked second, listing for $21.5 million and selling for $11 million.”

“Resale home sales in Calgary declined for a 12th consecutive month in November, falling 29 per cent from a year ago to 1,263 transactions — the worst November numbers since 2010. The average sale price dropped for the 11th straight month, to $460,859, off 5.1 per cent from November 2014, according to the Calgary Real Estate Board. The average November sale price hasn’t been that low since 2008.”

“New listings grew by 4.7 per cent to 2,180 while active listings were up 31 per cent, to 5,316, from November 2014. ‘Inventory levels essentially haven’t been easing when we typically start to see them come down a bit,’ said Ann-Marie Lurie, CREB’s chief economist. ‘What it’s done essentially is kept the month of supply elevated and it’s pushing us really into that buyer’s market territory and that’s causing some further price declines. And those price declines are really occurring across the board.’”

“Lurie said the biggest sales decline occurred in the apartment sector which was down 40 per cent from a year ago, while the average sale price dipped by close to seven per cent.”

“Hundreds of thousands of homes across the UK are unoccupied, despite widespread concern about a housing shortage. Why would someone own a property and leave it vacant? Islington Council complains that, as of this July, 42% of the building’s units still had no registered voters living in them. The authority blames a phenomenon known as ‘buy-to-leave’, where rich investors, often from abroad, purchase property and leave it empty, not bothering to collect rent money while adding to the nation’s housing shortage. Despite widespread anxiety about a shortage of housing supply, there are 610,123 empty homes in England, according to the government. Of these, 205,821 have been unoccupied for six months or more, the official definition of ‘long-term’ emptiness. In September last year, Scotland had 31,884 long-term empty properties. In Wales, 23,171 were empty for six months of more during 2014-15, the Welsh Government says.”

“‘The number of potential homes affected by buy-to-leave isn’t huge in a city the size of London, with a housing stock of several million,’ says property expert Henry Pryor, who says investors leaving flats empty are in fact being highly calculating. The costs of letting, including wear and tear and administration, can outweigh any money taken from rent, he says. ‘But as a percentage of new-built properties, the ones intended to help deal with the housing crisis, they account for quite a significant percentage. It’s about whether property is regarded as a home or an asset.’”

“While the property market in Malaysia is now very quiet, with Malaysians taking a wait-and-see approach, there is still high demand for all types of property, said Siva Shanker, immediate past president of the Malaysian Institute of Estate Agents. Mr Siva warned that finding a tenant may be difficult, as demand for residential rentals is going down, especially for condos. ‘Landlords can expect a 30 to 40 per cent drop in rentals compared to what they originally expected for residential property such as apartments, high-end condos and shoe-box units,’ he said. ‘Investors must decide if they can wait it out for tenants and if they are able to service their loans.’”

“There is one solid conclusion to be drawn from this week’s data. Sydney’s auction clearance rate is way down – it’s dropped to 56.3 per cent from a much healthier 70.6 per cent a year ago. If any bubble is bursting, it’s there. In the meantime, gross rental yields in most capitals are at historic lows – many hovering around 3 per cent. And crash or no crash, you’d have to ask many investors what they’re doing holding a risky asset for a 3 per cent yield, when many housing investments offer very small or even negative capital returns in the years ahead.”

“The answer in previous years was that they were there for the negative-gearing profits – healthy rebates from the tax man, and even healthier capital gains. Well, in the absence of capital gains, negative gearing has a different name. It’s called losing money.”

“Debt clearing manager China Huarong Asset Management and China Reinsurance are among several state-owned giants to brave Hong Kong’s lackluster IPO market in October with offerings worth a combined $4.5 billion - the largest deals since China’s equity rally in June. A prevailing view is that China’s slowdown presents opportunities for debt clearing companies like Huarong. ‘It’s a buyers’ market for non-performing loans now,’ said Harry Hu, credit analyst at Standard & Poor’s, as banks are willing to sell distressed assets to these companies at a discount.”

“NPLs of China’s banking sector reached 1.8 trillion yuan in June, up nearly a third from a year ago, according to the country’s banking regulator.”