The Housing Bubble

‘Not everyone wants to live in Silicon Valley. Americans are starting to leave the techie hub faster than they’re arriving, a new study says. The region lost more than 7,500 residents to other parts of the U.S. last year, the first time Silicon Valley has lost more U.S. residents than it has gained since 2011, according to the Silicon Valley Competitiveness and Innovation Project.’

‘Although the pool of workers is still growing, due to a large influx of highly educated foreign-born workers, the departure of homegrown talent points to weaknesses in the region’s ability to sustain its population, particularly with affordable housing.’

‘A slowdown in the tech sector has started to hit companies and workers in Silicon Valley and San Francisco. Venture capital money is harder to come by. More than a dozen companies have announced layoffs, including Yahoo Inc., Twitter Inc. and Zenefits and other companies are closing money-losing projects.’

“People are leaving for a mix of reasons, but some might be getting opportunities in other regions where they can pay less for housing,” said John Melville, co-chief executive of Collaborative Economics Inc., the firm that produced the study.’

‘Revere Beach, long-sufferer of chronic bad economic timing, is again the target of a comeback — one that developers hope will stick this time. On the same Revere beachfront parcel where a developer failed to build a multimillion-dollar condo building, a new team has taken over with a scaled-back proposal for 234 luxury rental apartments.’

‘Weston-based Baystone Development purchased the 2.14-acre site on Revere Beach Boulevard for $4.5 million in September from a Connecticut lender that took possession of the property through foreclosure in 2011. Launched a decade ago, the original development, known as The Ocean Club, was an ambitious upmarket remake of Revere Beach’s working-class ethos: a 12-story resort-style condominium complex where the high-end units would be priced above $1 million. Its developer even managed to secure a $3.25 million deposit on a penthouse unit before the housing bubble burst, and the project never broke ground.’

‘Seaside development ground to a halt in Revere during the housing crisis, a repeat of what happened there during the previous real estate bust in the late 1980s. “It’s a blighted [site]; nothing is built there. This will help out the area, without question,” said City Councilor Robert J. Haas Jr., a former Revere mayor. “The Ocean Club was supposed to be a spectacular building, and it never materialized.”

‘Lake Park doesn’t fit the image that many people likely have of a neighborhood in eastern Winston-Salem needing help. It has houses valued at well over $200,000, and the houses often boast architectural features like stucco and brick, along with stonework on the front.’

‘But Lake Park is in need of help nonetheless, its developer says, because while it represents an effort to create higher-quality housing that isn’t common on that side of town, the sale of lots has stagnated and a city loan made in the 1990s has come due.’

“From the beginning, we had a major problem in the issue of the appraising of the houses,” said developer Jose Isasi. “The issue was always the same: the houses are not appreciating in value. People say, ‘Why should I spend ‘x’ number of dollars building a house if it is going to be worth less?’ I did not make money; I lost money.”

‘There are 2.8 million empty homes in France. According to the French national statistical office, Insee, at the end of 2015 there were 2,880,000 empty homes in France, equivalent to 8.2% of the total housing stock. That compares with 1,992,000 empty homes in 2005, or 6.3% of the total stock, an increase of 45% in 10 years. Around half the empty homes are apartments, with the remainder individual houses.’

‘Currently I reside in a beach resort town similar to Pattaya, only in the United States. As of last month there was an estimated six months of real estate inventory. What that means is that if no new property came on the market for the next six months, we’d run out of condos and houses to sell.’

‘More buyers than sellers … this is a classic example of a “seller’s market” … or at least it is supposed to be. But, because so many owners bought into the market at its peak in the early 2000s, they are still insolvent. While prices have returned heartily in the past couple of years, many would-be sellers are reluctant to put their property on the market. To use another real estate buzz phrase … they are still “upside down”. Not only can they not achieve any capital gain, they wouldn’t even recover their initial investment.’

‘So, while the situation looks and smells like a “seller’s market”, we have the ironic phenomenon of a “seller’s market” with no sellers. The result is a stagnation waiting for prices to rise.’

‘No buyers: Flip the property coin over and you’ll discover the situation you have in Pattaya. The amount of real estate inventory in that little slice of paradise needs to be measured in years, not months.’

‘Even though developers have restricted the number of new launches in the first half of the year, some 18,000 units remain for sale from the 68,400 that were launched between 2011 and H1 2015. So, with more sellers than buyers, this should define a classic “buyer’s market”. Too many sellers chasing too few buyers … bargain hunters and property vultures should be out in force … but they’re not.’

‘We have a “buyer’s market” with no buyers!’

‘In the example of the seller’s market, we know why there aren’t enough sellers; namely the aftermath of a recent recession. But what fly-in-the-ointment variable is stalling Pattaya’s buyer’s market? Where have all the buyers gone?’

‘China’s housing market is recovering, but unevenly. First-tier cities, including Beijing, Shanghai and Shenzhen, have seen a real estate boom in the first two months of the year, with housing inventory dropping after the government issued a series of policies aimed at clearing the property glut across the country.’

‘New home prices in January increased about 52.7 percent year-on-year in Shenzhen, followed by Shanghai (21.4 percent) and Beijing (11.3 percent).’

‘It is inappropriate to overstate the supply glut, though, because different methods can be used to measure the country’s commercial housing inventory. China has less than 720 million square meters of unsold commercial residential buildings that have finished construction.’

‘The total undeveloped real estate land, on the other hand, is more than 366 million sq m, which roughly equals 1 billion sq m of commercial housing. The designed buildings, if all of them finish construction, could be sold in 10 months or so.’

‘Among all the indexes, the 720 million sq m of commercial residential buildings should best describe China’s unsold housing inventory-housing units that are complete. Vacant houses and apartments, therefore, can be deemed as redundancies, not as part of the inventory.’

‘In fact, it is usually “non-existing” homes-those under construction which most urban Chinese families are inclined to purchase.’

“Home flipping can push prices artificially higher, especially in markets with the tightest inventory.”

Home flipping makes my Zillow numbers look good and these nifty Zillow numbers translate to growing equity and growing equity translates to growing wealth - my growing wealth.

So … what’s not to like?

“‘When home flipping numbers go up, it is usually an indication that the housing market is in trouble’”

Say, what?

‘Downtown Miami’s once overheated condo market will continue cooling off this year, according to a new report from the Downtown Development Authority.’

‘The Annual Residential Market Study Update, prepared by Integra Realty Resources, found that sales activity last year dipped substantially when compared to the growth seen in 2014. Combine that with a glut of condos in the pipeline — 28,893 units in total, up 5,619 units from the last year — and downtown Miami’s condo market is bound to lose the pace it gained over the past two years.’

‘Part of that slowdown is already evident in the reservations section of the condo pipeline. Units taking contracts or reservations fell by 42 percent at the beginning of 2016. Most of that dip is thanks to pre-construction reservations, which fell to only 207 units from the 1,598 seen last year.’

‘Another byproduct of slower sales: developers whose projects were less than 80 percent sold lowered prices for units by 5 percent to 15 percent. Even South Florida’s most prolific condo builder, the Related Group, has lowered deposits on several of its downtown projects.’

‘The reason downtown Miami is losing its steam is because foreign investment, a major driver for the market, has fallen off due to worsening global economies.’

‘The Brazilian real, for example, lost roughly 41 percent of its purchasing power in U.S. dollars last year compared to 2014. Today, a Brazilian real is worth 25 U.S. cents. Those figures were mirrored in other countries like Colombia, Argentina and Russia.’

‘That affected pre-construction sales in particular, according to the report, as new projects saw activity fall as much as 50 percent.

‘An interesting note from the report is that units currently under construction are cheaper on average than those still in pre-construction. It costs $615 per square foot on average to buy a unit under construction, compared to $706 per foot at a project that hasn’t broken ground yet.’

“The over-arching theme at the conclusion of 2015 was that presale activity, traffic, and contract sales were not nearly as strong as the close of 2014,” the report said. “As forecast during our periodic market updates, this forced some projects back to the drawing boards or off-line temporarily, and the overall result by year-end 2015 was that the total number of projects taking reservations and in contracts shrunk by 42% year over year.”

‘Matchmaker Renessa Rios, owner of MatchDateLove, said she sees similarities between the dating scene and house hunting. “These houses are kind of being courted by these buyers,” she explained.’

‘With sellers receiving multiple offers and bidding wars, potential homeowners are doing what they can to stand out to get their dream home. Some buyers — like Tess Jones — are writing their own love letters, this time to home sellers. “We are a family of three and so excited to purchase your condominium,” Jones wrote last year. “I tried to really give them a view into who we were,” she said.’

‘It seemed to work. Jones’ family moved into the condo last year. Some real estate brokers are recommending this to buyers. “Telling the sellers, here’s who we are and here’s why we love your property, what’s wrong with that?,” asked E.J. Bowlds of Coldwell Banker Bain on Mercer Island. “Maybe it makes a difference.”

‘Foreclosures are going up in Greater Washington — with Prince George’s and Montgomery counties leading the way. Prince George’s County has seen a jump in completed foreclosures — houses that were foreclosed upon and went through the entire process — over the last few years. In 2012, there were 1,091 completed foreclosures in the county, but that number has steadily grown to 1,934 in 2015, according to data provided to the Washington Business Journal by housing data firm RealtyTrac.’

‘In 2006, the median home value for the D.C. metro was about $430,000 but fell to about $305,000 in 2011, according to real estate firm Zillow. Home values across the metro area have still not fully recovered and are holding around $357,000.’

‘The increase in foreclosures is most likely the aftereffects of the housing crisis, said Daren Blomquist, the vice president of RealtyTrac. He said Maryland took a far more proactive approach during that time and instituted a number of programs to prevent or delay foreclosures.’

“While this did help many homeowners avoid foreclosure, it also just delayed the inevitable for a certain segment,” Blomquist said. “It was just a temporary delay.”

‘Calgary’s real-estate market continues to show signs of stress with lower sales, listings and benchmark prices in February, even as the average price climbed.’

‘In its monthly housing summary, CREB numbers show the average price for a home in the city rose 2.7 per cent, to $472,529. But the average appeared to be pulled higher by an increase in the number of luxury homes sold in February — 38 homes fetched more than $1 million in February 2016, a 52 per cent increase from a year earlier, when 25 $1-million-plus homes were sold.’

“Slow sales and elevated housing inventory has resulted in further price declines,” CREB chief economist Ann-Marie Lurie said in a statement. “Given the current economic environment, it is no surprise that consumer confidence and housing demand is being impacted.”

“The high volume of inventory that we’re seeing has pushed sellers to be more realistic about their pricing expectations and the amount of time their properties may be on the market,” CREB president Cliff Stevenson said in a statement.’

‘Insane. That’s how Jonathan Tepper, chief executive officer at research firm Variant Perception, described Australia’s housing sector in a word, painting the picture of a market that’s strikingly similar to that of the U.S. prior to the financial crisis.’

‘A local 60 Minutes segment that aired on Sunday titled “Home Groans” chronicled some of the eye-popping events in the nation’s real estate market, with amateurs owning (and under water on) multiple homes with no tenants, interest-only loans increasing in prominence, price-to-income ratios at elevated levels, and home auctions attended by the community and captured for the small screen.’

‘While most discussions of frothy housing markets focus on the low cost of credit (and central banks’ role in that), the ability to access credit is arguably more important. A borrower may be willing to take on a dangerous amount of leverage to be part of a seemingly can’t-miss opportunity.’

‘China’s monetary policies have encouraged investors to pour money into real estate, inflating prices in cities such as Beijing, Shanghai and Shenzhen and increasing the risk that bubbles could form, central bank policy adviser Bai Chongen said in an interview.’

‘At the same time, smaller property markets are struggling with excess inventory, making it difficult to craft a unified policy response and requiring careful coordination with fiscal measures, he said. “I can’t say whether there are bubbles right now, but we’re worried about such a problem,” said Bai, an economics professor at Tsinghua University in Beijing. Government goals to cut oversupply in smaller cities and controlling the bubble in bigger ones “are contradictory,” he said.’

‘Bai said previous policy measures to encourage people to buy homes included reducing down payments and loosening restrictions on purchases in certain locations. “Interest rates have gone down a lot, and it would certainly boost asset prices in tier-one cities, but that doesn’t help tier-three or four cities with their overly high inventories,” he said.’

The overhang of excess housing supply continues. While new construction is running at about 10.5 million units a year, demand is for less than 8 million units per year, according to an analysis by Bloomberg Intelligence analyst Fielding Chen in Hong Kong.’

“There won’t be new investment in tier 3 and 4 cities,” Bai said. “And there shouldn’t be any new investment — there’s already so much in inventory.”

‘Forever blowing bubbles, Chinese investors pump Shanghai property’

‘Frenzied property buying in Shanghai has set alarm bells ringing that a new bubble is forming, just months after China’s frothy stock markets crashed, raising fears about a replay of the real estate bust that has hit the country’s growth since 2012. The property revival has coincided with investors’ abrupt loss of faith in China’s share markets, which had soared 150 percent in the year to mid-2015, only to give up fourth fifths of those gains since the summer.’

“The (property) market seems crazy again. I have no idea why it’s crazy, but it should be the right time to buy,” said Wang Zhongcai, a 50-year-old clerk, who was queuing, among many others, to register ownership of a small investment apartment he had bought.’

‘As developers poured money into new builds and unrelated companies set up property arms, residential housing development as a share of economic output tripled in a decade, until government measures to cool the market ended the frenzy.’

‘Chastened by the impact of that bust, which left a huge stock of unsold apartments across China and hammered industries supplying construction materials, Beijing has for the last 18 months been trying to soften the blow, cutting interest rates, downpayment requirements and property transaction taxes.’

“First-tier cities have a more sophisticated environment (for speculation). Investors see room for prices to rise because there’s a lot of demand yet limited supply,” said Clement Luk, chief executive officer for eastern China at realtor Centaline. He added that Shenzhen, a booming major city in southwest China, was blazing the trail for Shanghai.’

“People think since Shenzhen has gone up 50 to 60 percent last year while Shanghai was up only 20 percent, it should be now Shanghai’s turn.”

‘But the history of China’s booms and busts and Beijing’s efforts to cap the highs and cushion the lows has made some investors wary that what goes up too fast comes down as speedily. “This rally is too crazy,” said a property agent who gave his last name as Xu. “I own three units in Shanghai and I’m planning to sell them. I think a chill wind is blowing to the first-tier city, and I worry that the government will implement cooling measure soon.”

‘Much like the sun, the financialization of the economy has provided an endless stream of fuel for growth, Janus Capital Bill Gross said in his latest outlook letter. Unlike the sun, though, which has a good five billion years left in it, the finance economy’s fuel is just about spent. The move into the black hole of negative rates might just be the final act, Mr. Gross added.’

“Instead of historically generating economic growth via a wealth effect and its trickle-down effect on the real economy, negative investment rates and the expansion of central bank balance sheets via quantitative easing are creating negative effects,” he wrote. Negative rates threaten bank profits as well as any business models that depend upon 7-8% annual returns on assets. He’s talking mainly about insurance companies and pension funds, a topic he’s hit on a number of times. “And the damage extends to all savers; households worldwide that saved/invested money for college, retirement or for medical bills. They have been damaged, and only now are becoming aware of it.”

Negative rates are “an enigma to almost all global investors,” he says, that undermine the basic architecture of the financial markets. “But central bankers seem ever intent on going lower, ignorant in my view of the harm being done to a classical economic model that has driven prosperity – until it reached a negative interest rate dead end and could drive no more.”

‘Mr. Gross takes note of the “somewhat suspicious uniform attack on high denomination bills,” the sudden crop of arguments against the $100 U.S. bill or the €500 euro. Why might that be? “ It appears that the one remaining escape hatch for ordinary citizens is being closed,” he wrote. “The cashless society which appears over the horizon may come sooner than the demise of the penny.” If actually banning cash doesn’t do the trick, the central bankers might be forced into literal “helicopter” drops of money.’

“Can any/all of these policy alternatives save the system?” he asked. “We shall find out, but current evidence of the past seven years’ experience would support only a D+ report card grade. Barely passing. As an investor though – and as a citizen in this election year – you should be aware that our finance based economic system which like the sun has provided life and productive growth for a long, long time – is running out of fuel and that its remaining time span is something less than 5 billion years.”

‘Nothing. Nobody’s come to look at it … Nobody’s called. I’m not really sure (why),’ Tina Jackson said of the two-storey, three-bedroom Westview house, which she and her husband bought in 2008 for $350,000 and listed for $399,000 on Feb. 1.’

‘The Jacksons are not the only people in Saskatoon struggling to sell their homes. ‘I know some people that are listing their houses under market value just to sell it, and they’re going to lose money,’ Jackson said, adding that while she and her husband have already slashed their asking price by $10,000, they haven’t considered selling at a loss or boosting the property’s appeal with expensive improvements. ‘Hanging tight for right now,’ she said. ‘I’m sure we’ll have to consider another price drop at some point, but (we’re) not ready for that quite yet.’

Golly Tina, you must be heartbroken. Sure the economy is in the tank, but can’t these greedy buyers just choke up the 50 grand of profit you are hanging tight for?

‘Nothing. Nobody’s come to look at it … Nobody’s called’

‘I’m not really sure (why)’

Miami, FL Housing Market Caves; Prices Crater 5% YoY As Declines Spread Statewide

http://www.zillow.com/miami-fl/home-values/

‘The market starts in the so-called nerve centre of Australia, being Sydney, and it works its way until yield compression gets to a point that it’s not worth playing; then they move north to Queensland and then eventually they cross the Nullarbor,’ Jenkins said, referring to the flat desert plain that west-bound travellers cross to reach Western Australia’

Sounds like he’s describing a swarm of locusts or a weather system.

‘An aversion to risk in the global bond markets has caused new CMBS issuance to slow down significantly in early 2016. ‘There’s no stability in the market, it’s just so hard for people to price loans,’ said Kellogg Gaines, a managing director at JLL. ‘It’s hard to take the dive and commit to doing a loan that may lose money within a few weeks.’

Hardly sounds like a safe deposit box. This article is the most in depth I’ve ever seen from the Real Deal. Lots of good input from those interviewed.

‘One agency provides credit up to 20 percent of their deposit without any collateral. The money was raised through peer-to-peer lending investments that promise 8 to 12 percent annualized return’

I can just see the smashed furniture and home-made banners when these investors get the news.

Regarding what we discussed yesterday about the corrupt people running Mexico:

‘The drug lord Joaquín “El Chapo” Guzmán bankrolled the election of senior Mexico politicians and twice secretly entered the United States to visit relatives, according to his eldest daughter. Rosa Isela Guzmán Ortiz said that shortly after an interview with Hollywood star Sean Penn last year, her father dodged a massive manhunt with the complicity of corrupt Mexican officials and evaded US border controls to sneak into California – despite being one of the world’s most wanted fugitives.’

‘She also accused senior Mexican politicians of accepting donations from El Chapo when they ran for office, and said that in return officials turned a blind eye to his escapes from prison. “My dad is not a criminal. The government is guilty,” she told the Guardian.’

‘Guzmán Ortiz, 39, made the claims in a series of interviews which she said were given in consultation with her father. El Chapo was recaptured in January after seven months on the run, and sent back to the Altiplano security jail near Mexico – the same prison from which he escaped in July 2015 through a tunnel which opened into his shower stall.’

‘The second breakout was widely seen as an especially humiliating blow to the government of President Enrique Peña Nieto, but according to his daughter, senior officials had already given the green light for the escape. “My dad’s escape was an agreement,” she said.’

‘Guzmán Ortiz said her father crossed the border in late 2015 to visit relatives and to view her home, a five-bedroom house with a large garden which he bought for her and her four children. She granted the interview on condition its location not be disclosed. “My dad deposited the money in a bank account with a lawyer and a while after he came to see the house, his house. He came twice.”

‘El Chapo’s luck finally ran out in January, when he was cornered in the coastal town of Los Mochis. The daughter attributed her father’s capture to a betrayal by senior Mexican officials and politicians. “If there’s a pact, they don’t respect it. Now that they catch him they say he’s a criminal, a killer. But they didn’t say that when they asked for money for their campaigns. They’re hypocrites.”