The Housing Bubble

A weekend topic on lending and the housing bubble. The Visalia Times Delta”A new working paper by Wharton economists Fernando Ferreira and Joseph Gyourko, the authors argue that the idea that subprime lending triggered the crisis is misguided. That paper looks at foreclosure data from 1997 through 2012 and finds that while foreclosure activity started first in the subprime market, the foreclosure activity in the prime market quickly outnumbered the number of subprime foreclosures.”

“While subprime borrowers default at a higher rate than prime borrowers, Ferreira said in an interview with Fortune that the data shows that the foreclosures crisis would have happened even in the absence of such risky lending. ‘People have this idea that subprime took over, but that’s far from the truth,’ Ferreira said.”

“The vast majority of mortgages in the U.S. were still given to prime borrowers, which means that the real estate bubble was a phenomenon fueled mostly by creditworthy borrowers buying and selling homes they simply thought would not ever decrease in value.”

The Olympian. “June was a good month for the Thurston County housing market. It was so good, in fact, that the 455 single-family residences that sold last month were the most in June in nine years, according to Northwest Multiple Listing Service data. The county housing market has improved, largely spurred by historically low mortgage interest rates — a 30-year mortgage is around 4 percent — and lower inventory levels, which have helped drive prices higher.”

“The lack of inventory also has led to instances where buyers compete for the same house with multiple offers, and some have taken more drastic steps, such as waiving the need for an inspection to get that house, said Windermere Olympia owner Steve Garrett. ‘That harkens back to the days when we had a real estate bubble,’ Garrett said.”

“The big difference is that lending remains cautious, though it has eased a bit since the recession, he said.”

From Bloomberg. “Canada’s fastest pace of multiple-unit projects in almost three years led a surprise gain in housing starts for June, another sign of what the central bank dubs a side effect of cutting interest rates in a time of record consumer debt. The beginning of work on projects such as condominiums and apartments rose 3.7 per cent to 130,933 units, Ottawa-based Canada Mortgage & Housing Corp. said Thursday. That type of work has surged 53 per cent since February, the month after Bank of Canada Governor Stephen Poloz made a surprise rate cut.”

“Poloz may lower his benchmark rate again next week to 0.5 per cent after recent indicators showed unexpected declines in economic output and non-energy exports. The governor last week likened his January cut to ’surgery to avoid death’ and said the controversial move that risked stoking household debt ‘must be subordinate’ to the bigger economic dangers.”

“Poloz and Finance Minister Joe Oliver have said there is no housing bubble in Canada, even as condominium prices and construction in Toronto and Vancouver have swelled. The Bank of Canada said June 11 a crash in housing prices that are overvalued by as much as 30 per cent remains the biggest risk to the country’s financial system. Two days ago the Toronto Real Estate Board said home sales rallied to a record for the third-straight month and the average price of a detached house in the core surged 14 per cent to $1.05 million.”

“‘The momentum in the housing market through the spring and into the summer is undeniable,’ said David Tulk, chief Canada macro strategist at Toronto-Dominion Bank’s TD Securities unit. ‘While the issue of household leverage remains a concern, it is secondary to growth fears and the very real risk of a technical recession in the first half of 2015.’”

Crain’s Cleveland Business. “As the economy expands, unemployment continues to fall and inflation improves to projected stable levels, Janet Yellen, chair of the Federal Reserve Bank, reinforced the Fed’s message that a federal rate hike could come later this year. Regarding factors that could stymie economic growth, Yellen said business owners and managers ‘remain cautious’ and haven’t significantly increased capital expenditures despite ‘brighter prospects for consumer spending.’”

“A second factor could be housing, she said, pointing out that residential construction has remained ‘quite soft’ despite growth in national home prices and home sales. ‘Many households still find it difficult to obtain mortgage credit, but, more generally, the weak job market and slow wage gains in recent years appear to have induced people to double-up on housing,’ Yellen said, citing the increasing numbers of young adults living with their parents.”

“‘The biggest challenge I think the Federal Reserve faces is making sure that we have a strong enough and resilient enough financial system that is well enough regulated and supervised, that we do not have another financial crisis in the lifetimes of anyone in this room — and hopefully not the lifetimes of our children either,’ she said.”

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It’s Friday desk clearing time for this blogger. “China’s stock market bubble is undergoing an epic deflation — and few U.S. industries have as big a stake in the potential economic damage as the tech sector that powers Silicon Valley. Peninsula-based agent Ken DeLeon said that ‘a client who’s building a new home in Palo Alto just texted me this morning. They had their pre-approved plans but wanted to know should they just sell the lot and not build their new home. They’re worried that this steep drop in Chinese equities will impact the value of new construction,’ DeLeon said.”

“Pleasanton-based agent Andrew Greenwell said the volume of overseas investments hinges ‘on Chinese regulations and laws,’ which have been tightening amid the rising economic concerns. ‘You can only get $50,000 a head out of Mainland China, so a lot of people wire money from Hong Kong. And if they clamp down on the amount of money getting wired out of Hong Kong, things could change.’”

“The Chinese share market rout is making Chinese investors more cautious and a small number will have to sell their properties in Australia because of share market losses, real estate agents say. Michael Pallier, principal at Sydney Sothebys International Realty, said one of his clients who bought a new apartment in Sydney had lost money on the Chinese share market. ‘She was young, she hadn’t seen a share market crash before, she was hoping the price would continue to go up of the shares and she made a poor judgement call and she now as a result of that is in some trouble,’ Mr Pallier said.”

“China’s stock market crash has already bled into the iron ore price, and it could have flow-on effects into Australia’s credit-fuelled housing market, economists have warned. Lindsay David of LF Economics has argued the impact of the Chinese crash on the Australian housing market could be twofold. ‘As the Chinese economy starts to deteriorate so will the bank accounts of many Chinese, restricting their ability to purchase real estate overseas,’ he said.”

“Of broader concern, however, are the macroeconomic implications. Mr David believes the iron ore price has much further to crash, which could in turn scare the wholesale lending community overseas lending to Australian banks for home financing. ‘House prices in Australia are dependent on debt growth, and if there’s no credit out there, house prices will begin to fall.’”

“‘The risk from Chinese equities markets is clearly impacting commodities markets,’ IG Markets strategist Evan Lucas said in a note on ‘commodities contagion.’ ‘Iron ore has just logged its worst trading day on record. The steel price in China is now cheaper per tonne than cabbage.’”

“After years of watching Vancouver housing prices climb, driven in part by Chinese investment, Eveline Xia came to a painful realization: Despite having a Master’s degree and solid career prospects, she might never be able to afford a home in the city where she grew up. So the 29-year-old grabbed a marking pen, hand lettered a sign listing her credentials, snapped a selfie, and posted it to Twitter under the hashtag #DontHave1million. ‘Average, hardworking Canadian residents are being forced to compete for housing with the global wealthy,’ said Xia, who immigrated to Canada from China as child. ‘People here are getting angry.’”

“In interviews, five real estate agents who primarily sell homes on Vancouver’s exclusive west side estimated that between 50 per cent and 80 per cent of their clients have financial ties to mainland China. Residents also have questions about the source of Chinese money being invested in Vancouver property, a concern that came to the fore last year when a prominent developer in the city, Michael Ching Mo Yeung, was named as one of the top 100 fugitives wanted by China as part of ‘Operation Skynet’.”

“The Saskatoon Region Association of Realtors warns prices are expected to flatten and drop in the city, thanks partly to a ballooning number of listings. Analysts say the market is soft due to a slowing economy anchored down by lower oil prices. Others say the market is just dropping to a realistic level. ‘House prices went up way more than they ought to have, given the size of the city. Now we’re entering a period of realism,’ says Daphne Taras, dean of the Edwards School of Business at the University of Saskatchewan.”

“The price of an average three-bed semi in Dublin has fallen by up to 7pc in the first indication that Central Bank lending restrictions are cooling the market. Real Estate Alliance (REA) CEO Philip Farrell said: ‘What we are seeing on the ground is a slowdown in interest in the traditional professional properties, as couples find that raising an €80,000 deposit for a €400,000 home is simply beyond their means. The rules were brought in to take the heat out of the market, and they have done that.’”

“According to a new Trulia study, it will take the average Bay Area college grad approximately 29 years to save 20% down for a typically priced home. For those prospective buyers with no degree, forget it. By this study’s calculations, that 20% down savings is impossible for millennials who didn’t earn a college degree. Trulia says, ‘Our study calculates how many years it will take a millennial (young adult aged 25-30) to save a 20% down payment in the 100 largest U.S. metros assuming that home prices and incomes will increase over time – with and without a college degree.’”

“Would-be homebuyers who were forced out of the market by short sales and foreclosures are trickling back in again, but that hasn’t resulted in stable prices, according to real estate experts. The median list price for existing homes in the greater Bakersfield area was $260,000 last month, up 6.1 percent from June of last year but down 0.4 percent from May, according to the Preliminary Crabtree Report, produced monthly by Gary Crabtree of Affiliated Appraisers. Sale prices have been bouncing all over the place, with no clear trajectory, Crabtree said. ‘That indicates to me that there’s not a lot of confidence in the pricing,’ he said.”

“He’s not pleased that lending standards are relaxing, worried another real estate bubble could be forming. ‘I don’t think we’ll see anything like we did before, but history does have a way of repeating itself,’ he said.”

“Investors always seem to be watchful of and enamored by the Federal Reserve, as though it possessed magical powers to restore a moribund economy or cool an overheated one. However, the Federal Reserve has a long and sordid history of miscalculations and misguided policy decisions. ‘The Fed has inadvertently helped create some of the biggest bubbles and trigger the most serious market declines,’ said James Stack, a market historian and publisher of InvesTech Research.”

“In other words, investors should not be under the delusion that current Fed chief Janet Yellen or her predecessors know with any precision when to raise or lower rates. More often than not, they screw it up. The first example Stack cited involved the 1987 ‘Black Monday’ crash, which occurred on Oct. 19, 1987. The Dow Jones industrial average dropped 22.6 percent (508 points) in a single trading day — the largest one-day percentage decline ever.”

“A second example involved the tech bubble of the late 1990s and subsequent market crash in March 2000. Greenspan was still at the helm of the Federal Reserve leading into this debacle. More than three years before the bubble burst, Greenspan at least seemed troubled by the high stock valuations. But he failed to do anything about the market frenzy, and he continued the Fed’s ‘easy money’ policy for another three years, even cutting rates again in 1998 after the collapse of the Long-Term Capital Management hedge fund. Ultimately, the Nasdaq lost 78 percent of its value.”

“A third example came as the housing bubble took flight in the early 2000s, again propelled by the Fed’s easy money policy. Following the collapse of the tech bubble, within 12 months the Fed cut short-term rates from 6 percent to 1.5 percent, and they were held too low for too long as housing prices skyrocketed. ‘The Fed fanned the flames of the housing bubble,’ Stack said. ‘By 2004, we were well into an economic recovery, but the Fed held rates at 50-year lows.’”

“During the height of the housing frenzy in 2006, newly appointed Fed Chairman Ben Bernanke said housing prices reflected a strong economy and he ‘doubted there would be a national decline in prices.’ He was wrong. Today, the Federal Reserve again is trying to extricate itself from an artificially low interest rate environment. The so-called Fed funds rate has been held near zero for six years.”

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KVUE reports from Texas. “You don’t have to drive far to get a feel for Austin’s hot housing market. But you may have to drive far to find something you can afford. ‘We tell our people you drive until you qualify,’ said Jonathan Stilley, who works with Private Label Realty and is an Austin Board of Realtor board member.”

“Four of the hottest housing markets in the country are right here in Texas. Austin is among them with nearly 160 people moving here every day. The Llaga family relocated from Massachusetts last year. They’re now house hunting. ‘It’s really expensive in Boston,’ said Chris Llaga. ‘I know this sounds awful, but relative to the rest of the country, it’s affordable.’”

Bloomberg on Washington. “Retired baseball pitcher Jamie Moyer sold his seven-bedroom Tudor mansion in Seattle, complete with a batting cage and saltwater pool, to a Chinese couple for $3.2 million in September. The new owners promptly rented it out to a group of Amazon employees. ‘We will be like San Francisco in five years,’ said Lili Shang, the Realogics/Sotheby’s International Realty agent who represented the buyers of Moyer’s house. ‘It’s a new era.’”

KDVR in Colorado. “Denver’s housing market saw another record-setting month with the average residential home selling for $377,550 in June, but realtors say the market may finally be easing up. The Denver Metro Association of Realtors says for the first time in a while home buyers are starting to go under contract without competing offers and price reductions are beginning to make their way to the market. Some good news though for buyers looking in the $400,000 to $1 million range as realtors say that market seems to be facing a cool down.”

“‘It feels as though it went from 24 hours, 48 hours on the market to two weeks on the market which is relatively still a short period of time but at the same time its more time than what other people have been used to,’ said Realtor Susan Chong.”

The Santa Cruz Sentinel in California. “For Santa Cruz County homeowners, it’s good news. For prospective buyers, not so much. In May, the median price — the midpoint of 183 sales — was $700,000, up from $675,000 a year ago, according to Gary Gangnes of Real Options Realty, who tracks the numbers. The median was $749,000 in March and $755,000 in April. The priciest house in Watsonville is 62 Avocet Circle, a 4,000-square foot home in the Pajaro Dunes development, where the asking price has been lowered to $3 million. The description on MLSListings.com proclaims: ‘Massive rental income opportunity.’”

From NewJersey.com. “And you think it hurt when you had to knock $10,000 off the price of your home. There are a handful of homes around New Jersey that despite architectural pedigree, high-end craftsmanship, over-the-top finishes, extravagant amenities and location, location, location, just can’t seem to sell at any price — involving a minimum of seven digits, that is. These homes have been on the market for at least two years (or on and off the market for as long as a decade); they cost at least $5 million; and their prices have been slashed by at least 25 percent.”

“Three of the homes on the list have cut their asking price in half. The most expensive house on the list — indeed, the most expensive house on the market in New Jersey — has dropped $19 million from its initial asking price. (Yes, you read that right.) The home in Alpine is now a mere $49 million. Take out your tiniest violin and take a look inside N.J.’s ten most hard-to-sell luxury homes.”

Vegas Inc. in Nevada. “Las Vegas’ resale housing market picked up the pace last month with rising sales and prices, although the number of ignored listings also kept climbing, a new report shows. There were 7,432 single-family homes on the market but without offers by the end of June, up 4 percent from both May and last June. Greater Las Vegas Association of Realtors President Keith Lynam said it’s good for local homeowners ‘when prices are appreciating at a healthy pace like this and more homes are selling.’ And although there are ‘too many abandoned homes’ in the area, ‘we see signs that banks may finally be doing more to address this issue,’ he said.”

“Lenders have been ramping up foreclosures in Southern Nevada, seizing homes that in many cases likely have been in default — and possibly empty and in disrepair — for a long time. Creditors repossessed 677 homes in the Las Vegas area in May, the third consecutive month-to-month increase and the highest monthly tally in more than 2 1/2 years, according to RealtyTrac.”

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Mortgage Broker News reports from Canada. “Brokers are wary about the high level of HELOCs in Canada, and the long-term effect they could have on household debt. ‘I think HELOCs are detrimental to the housing market; people are running themselves up in debt and at least with a mortgage you pay it down,’ Gary Green of Mortgage Plus told MortgageBrokerNews.ca. ‘With a HELOC, though, you can just keep running the credit up.’”

“Canadian outstanding debt currently sits at $266 billion, according to RBC, a chunk of that in home equity lines of credit. According to CAAMP’s most recent figures, 22 per cent of Canadians have a home equity line of credit. ‘It’s like turning your house into an ATM,’ chartered accountant and personal finance author David Trahair told the CBC. ‘If you’ve got a house, especially in Toronto with these insane values, you can borrow an incredible amount of money against the house.’”

The Financial Post. “The Greek debt crisis washed up in Alberta Monday, as a flight away from risky assets knocked US$4.40 off oil prices, putting additional pressure on the province’s already-battered oil industry and on oil-dependent provincial government finances. Another oil price retreat would be dire for the Alberta-based industry, which has been on a strict spending diet for the past seven months, resulting in widespread layoffs, project cancellations and investment cuts. ‘We’re getting our summer correction and I don’t know where it will stop,’ said Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Mass. ‘We could soon be looking at $50-a-barrel ceiling for WTI.’”

The Canadian Press. “With oil prices drifting closer to US$50, energy executives in downtown Calgary are trying to stay positive. When crude was above US$100, the Fort McMurray, Alta., region saw enormous cost inflation. Nowadays, overtime costs are down ‘quite significantly’ as Syncrude has shifted around schedules. Companies that provide drilling and other services to oil and gas producers have been hit particularly hard in the downturn. Dale Dusterhoft, CEO of Trican Well Service said the sector can look forward to an oil price of US$75 or US$80 a few years from now. ‘So running a low cost operation’s going to be paramount to being successful there because there isn’t going to be that much extra money floating around.’”

From MetroNews. “A string of houses on the Cambie corridor targeted by squatters, vandalism and theft after being left empty by developers waiting for redevelopment has prompted one city councillor to call for action. Green Party Coun. Adriane Carr will ask council this week to immediately address the problem of unoccupied and vacant houses. In her motion, Carr states that neighbours’ security, safety and quality of life has been threatened by the unkempt properties that attract everything from critters to crime.”

“She also questioned whether the city can force developers to either rent out their properties or provide additional security if they intend to sit on empty houses for a long time while waiting for the right opportunity to start construction. The idea of renting out vacant homes has gained traction recently as affordable housing advocates search for ways to find people decent homes in a city where vacancy rates hover around 0.5 per cent.”

From Global News. “Fariba Hatami was among the first customers to buy a pre-construction, low-rise Mississauga condominium in 2012. For $473,000 she says she was promised an unobstructed view. Now, Hatami faces a giant jumble of natural gas pipes and valves a few metres from her windows and balcony door. The school teacher and yoga instructor says she was charged a ‘premium’ by the sales representative for the corner unit, which is just under 1,000 square feet in size.”

“Customers who buy pre-construction condominium units can’t be sure if they’ll have utility services nearby, or in full view, until the project nears completion. Purchase agreements give developers the right to make changes to the project as they see fit, often without advance warning to consumers. VANDYK refuses to give Hatami the option to cancel her purchase agreement because of the unexpected arrival of the natural gas pipe structure. The builder also declined to offer another unsold unit in the development, or to reduce the price of Hatami’s unit in any way.”

“She also says real estate agents have told her the resale value of the unit will be diminished because of the natural gas pipe structure. Domenic Zita, president of VANDYK Commercial, disagrees. He says his company is ‘working with Hatami’ and will create landscaping around the structure to improve her view. But Hatami doesn’t believe it will make any difference. ‘If this is a good thing, why don’t they take it back and sell it for more?’”

The Globe and Mail. “The story of the speculative boom and bust in Canada’s vacation real estate industry reads much like that of the housing bubble south of the border. In the early and mid-2000s, easy credit, a seemingly insatiable demand for real estate investments and Canada’s growing renown as a vacation destination inspired developers and investors to flock to resort communities with dreams of building vacation paradises, many of them offering thousands of homes built around expensive golf courses, ski hills and marinas.”

“With its reputation for million-dollar cottages owned by Hollywood celebrities and the Toronto business elite, Muskoka was a prime target. ‘Before the market turned, we didn’t have to do any work,’ says Muskoka-area realtor Heather Scott. ‘We were more order takers than we were helping people buy and sell properties. We were just writing deals.’”

“Peter Freed purchased 850 acres of wilderness near Gravenhurst from five different owners to create Muskoka Bay, a community of up to 1,000 luxury cabins along an 18-hole golf course. ‘If I knew what I knew today and I was starting from scratch, I wouldn’t do it,’ he says. ‘So when you look at a market with something that has never worked, I guess you have to ask yourself why you did it in the first place.’”

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WFAA reports from Texas. “In the past four years, homes in Dallas-Fort Worth have gone from a median sale price of $149,000 to $215,000. ‘If you do not want to pay top dollar or over top dollar, now is not the time to buy. You are going to pay a pretty penny to own a property in D-FW,’ said Leah Slaughter, owner of OmniKey Realty. She hasn’t seen values and demand like this at any other time since she started her business in 2006. ‘We surpassed 2006 prices a few years ago, so everything here is uncharted,’ she said.”

“Ashley Franson is ready to put her Wylie home up for sale… again. Originally she put it up last October, but then decided to wait. A little more than half a year later, realtors and appraisers are telling her its value has gone up substantially. ‘Probably about $20,000,’ Franson said. She plans to sell and then become a renter. ‘It’s almost like the stock market,’ she said. ‘You try to time it.’”

The Denver Post in Colorado. “Buyers purchased a record $2.15 billion worth of homes and condos in the metro Denver area last month, but the frenzied pace seen earlier in the year is fading, according to a report Monday from the Denver Metro Association of Realtors. One sign of tempering is that sellers are seeing fewer offers above list price for the hottest segment of the market, homes priced between $150,000 to $350,000. Whereas a seller might have waited knowing that four or five strong offers above the list price might come in, now they are motivated to seal the deal once one or two show up, said Anthony Rael, chairman of the market trends committee of the Denver Metro Association of Realtors.”

“‘There is a general feeling that things are cooling,’ said Rael. ‘Things have been at such a frenzied pace, any sort of slow down is noticeable.’”

KOUW in Washington. “The Seattle-area housing market could use an injection of inventory. It’s on a tear right now, fueled by high demand and low supply, and hooked on low-interest rates.And there is a potential supply of lower-priced homes in the region. Those are the 4,300 foreclosed homes from Everett to Tacoma that are now owned by banks. But these houses are just sitting around. ‘It’s not uncommon for us to see houses that have been in foreclosure for five, six years, where the banks haven’t done anything,’ said Jim Melgard, who works for a real estate company that buys houses at county auctions.”

“On a recent evening, investors met at Caliber Real Estate on the Eastside. There they scoured the market for cheap houses to flip. Zack Lazo was the agent in charge on this particular night. But Lazo said investors are running out of neighborhoods. ‘It’s getting really hard to buy something that’s low enough to justify buying it and still being able to eke out some sort of profit,’ he said.”

The Pryor Daily Times in Oklahoma. “The high-demand of housing in Pryor has been the subject of many conversations by city leaders in recent months. Mayor Jimmy Tramel said despite the high numbers, he doesn’t believe Pryor has a housing shortage. ‘This is just a bubble. People in transit are coming here for work, so they’ll live here until the work is done. In five or so years when the work is complete, if we’ve built apartment complexes, we’ll have a lot of vacancies,’ he said.”

“Tramel said some people have come to him with an interest in building apartment complexes, but nothing is in the works. ‘They aren’t inclined to do it because of a lack of permanency, it isn’t a good investment,’ he said. He said property in Pryor fills up fast but a recent housing survey didn’t indicate a problem. Tramel said, ‘That housing survey was very clear, there’s no shortage of housing in Pryor Creek.’”

The Intelligencer in Ohio. “Largely due to the housing demand created by oil and natural gas industry workers, new hotels and apartment complexes continue popping up in Belmont County. ‘People wonder what will happen five or six years from now when the gas rush is over. I don’t have the answer to that,’ Eugene Householder, director of tourism in Belmont County, said when asked if the county may find itself with a glut of abandoned buildings when the boom ends. ‘Clearly, Belmont County is changing rapidly.’”

The Daily Herald in Illinois. “A pair of suburban real estate developers are among six defendants indicted by a federal grand jury on allegations they devised and participated in scheme that cost banks and mortgage lenders $16 million and left condo buyers with loans they could not afford, authorities said. The scheme, federal prosecutors said, revolved around the marketing and sale of condominiums at the 50-acre The Woods at Countryside development in Palatine. The indictment says they enticed prospective condo buyers with unsustainable financial incentives, such as down payment refunds and up to three years’ worth of mortgage payments, maintenance costs and property tax payments.”

“As a result of the scheme, the indictment states, banks and mortgage lenders unwittingly funded risky, speculative property investment deals on unfavorable terms to unqualified borrowers who defaulted on their loans and were unable or unwilling to repay them. the first six months of 2010, 98 condos there fell into foreclosure — nearly half of all the units that had been sold and a quarter of all the foreclosures in Palatine during that time. ‘It’s been a very unfortunate situation for the people who bought in there, because of the dishonest way things had been done,’ said Village Manager Reid Ottesen. Finally this should allow people there to begin moving forward.’”

From Reveal News. “Five years after the financial crisis crested with the bankruptcy of Lehman Bros. Holdings Inc., top executives from the biggest subprime lenders are back in the game. Many are developing new loans that target borrowers with low credit scores and small down payments, pushing the limits of tighter lending standards that have prevailed since the crisis. Andy Pollock rode the last subprime mortgage wave to the top, then got out as the industry collapsed and took the U.S. economy with it. Today, he’s back in business.”

“Pollock was president and CEO of First Franklin, a subprime lender whose risky loans to vulnerable consumers hastened the downfall of Merrill Lynch. ‘Old habits die hard, especially when there’s no incentive to do things differently,’ says Rachel Steinmetz, a senior underwriter-turned-whistle-blower who worked at subprime lender GreenPoint Mortgage, later bought by Capital One, until June 2006. ‘The same shenanigans are going on again because the same people are controlling the industry,’ says Steinmetz, who stays in contact with former colleagues.”

“‘That toxic business model is still out there,’ says Susan Wachter, a real estate finance professor at the University of Pennsylvania’s Wharton School, and it’s being exploited by the same people who ‘were feeding toxic mortgages into the system’ during what she calls ‘the 2007 frenzy.’ The conclusion seems obvious to Brenda Fore, who is fighting to take back the house in which she spent her adult life. ‘If it’s being built by the fellows who screwed it up last time, you’re going to have the same result,’ she says. ‘The system was dysfunctional before, so its offspring are going to be dysfunctional as well.’”

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The Orange County Register reports from California. “Sometimes it seems to be increasingly China’s world, and we just happen to live in it. Yet, a funny thing has happened on the way to global domination – the Chinese are coming here with their money, and, often, with their families. Rather than seeing China as the land of opportunity, more Chinese have been establishing homes in America, particularly in California, where they account for roughly one-third of foreign homebuyers. I witnessed this recently while house hunting. Stonegate, a new Irvine development we looked at, had price tags well over $1 million, beautiful floor plans and well-designed amenities – and, essentially, no yards. Upward of 80 percent of buyers in the new Arcadia development, according to a report in Bloomberg, are overseas Chinese.”

“U.S. China Real Estate Association President Bill Seto has expressed concerns ‘that the Chinese are pricing the middle class, and even some wealthy Americans, out of certain markets, especially when it comes to housing.’ Dependence on Chinese investors also holds some perils. As occurred when Japan’s firms sold off many of their real estate investments in the 1990s, changes in China’s economy, which is slowing and facing major corrections in its stock and property markets, could depress real estate prices and slow the flood of investment. In a U.S. economy already suffering from slow growth, deindustrialization and an ever mounting tsunami of regulation, the loss of stimulus from China could be a devastating.”

The Epoch Times. “Chinese have poured a lot of hot money into Canada’s real estate market in recent years. This has sharply pushed up prices and forced many locals out of the housing market in Canada’s major cities. Take my colleague Mike, for example. He’s a systems management engineer in my department, with an annual income of about $70,000 to $80,000 Canadian dollars, more than double the average income of his peers. Mike is married with two children. Three years ago he bought a big house. You’d think that he’s a happy man. But recently Mike seemed depressed. I finally let go of my Chinese trait of being reserved and asked him if something was wrong. He glared at me and said: ‘It’s all because of you Chinese!’”

“I was taken aback and asked him to explain. That’s how I found out that Mike has serious financial worries. When Mike bought his house, the market was already extremely high and quite unaffordable. The average home price in Toronto was over four times his and his wife’s combined annual income. So his financial situation has been tight. Then his wife was laid off a year ago. After six months she found another job, but with a big pay cut. Their household income had dropped quite a bit, and after paying all their monthly bills—mortgage, insurance, property taxes, car loans, and other living expenses—they ended up with a shortage of several hundred dollars every month.”

“‘Home prices in Toronto are inflated because of you,’ he went on. ‘We cannot afford them! My parents are retired. They planned to spend their remaining years in their old home. But the value of their house has gone up and property taxes have also increased. They could not afford it anymore, so they had to sell and move far away to a small town in Ontario.’ ‘Our present living standard is all caused by you Chinese,’ Mike added.”

“I was not happy listening to Mike. It never occurred to me that we Chinese look so bad in the eyes of the local people. But I did not say anything as I felt that Mike must be very frustrated to be saying these harsh words. Later, when I thought it over, I came to see Mike’s point. Home price have gone out of control in places where Chinese people have settled in recent years, such as New York, San Francisco, Los Angeles, Vancouver, Toronto, Sydney, Melbourne, etc. Despite the global economic downturn, Chinese people are still buying houses while Westerners are unable to afford a house.”

The Australian. “We go to the weekend with tiny Greece once again at centre stage, but with the ‘elephant in the room’ — indeed, in all of our rooms — China, jostling for the spotlight. Greece matters most to Greeks — there, here and everywhere — and then to Europe more generally. For the other 6.5 billion people on the planet, apart from market gyrations? Not so much. With China it works the other way. The middle kingdom matters big time for all 7 billion-plus of us on the planet; and it matters supersized big time for the 25 million-odd of us down under, including our Greek component.”

“We’ve been in the process of discovering just how much China matters for us as its growth rate has stepped down from 10 per cent plus to the 7 per cent, which is something of a line in the sand for everyone — there, here and everywhere. In essence, a 7 per cent growth rate brings — brought? — to an end the ‘boom’ part of ‘resources boom.’ With a sustained 7 per cent China growth rate, we would keep the resources development that’s occurred, but we’d get no more.”

“This is a very strange time for a property market boom or ‘bubble,’ when we are waiting for a global financial implosion; and if that doesn’t get us, perhaps the big China (grizzly, not Panda) bear will. The reason is that it’s not really a ‘property market’ boom but a ‘love for assets in the time of choleric low interest rates’ story. With tens of trillions of dollars of global investor money, supplanted by trillions of ‘free’ central bank liquidity, there’s a desperate global search for either or both yield and assets.”

“In our case, this demand has been further leveraged by Asian and especially Chinese ‘flight to safety — and perhaps profit’ buying of both new and second-hand property. A Melbourne or Sydney property that’s risen from $2.2 million a year ago to $3m today almost hasn’t risen in cost at all for such overseas buyers — while its appeal is significantly greater now than then. Indeed the very slowing of China’s growth rate will spur greater outflows from the Middle Kingdom.”

“What we don’t seem to understand is that we are embarked on the mother-of-all asset sales. Let’s hope we don’t look back on it as also the mother-of-all fire sales.”

From Bloomberg. “It sounded like a good idea at the time: encourage growth in China’s stock market as a way for companies to raise capital. And if that paid down some of the nation’s record debt load in the process, so much the better. The problem: promoting a market where retail investors dominate daily trading left policy makers vulnerable to swings in sentiment that are tough to control.”

“‘It’s too early to call a crisis, but the butterfly wing has swung and ripple effects are expected,’ said Zhou Hao, a Shanghai-based economist at Australia & New Zealand Banking Group Ltd. Zhou said the stock price plunge may spread to cause interbank liquidity strains, and banks may become more cautious in lending to firms with large exposure to equities.”

“‘It’s still unknown how much and how widely bank money is involved in the unofficial margin trading,’ said Chen Xingdong, head of macroeconomic research at BNP Paribas SA in Beijing. ‘It’s an unprecedented situation in China’s stock market history. A stock market bubble was partly inflated by the visible hand, and then the bubble burst, causing panic.’”

News.com.au on China. “The empty streets of new-age cities in China have been attracting international curiosity for years. Any train ride along the eastern side of the country will expose hundreds of these unfilled settlements. A few hours from the mega metropolis of Shanghai, one such city is raising eyebrows. Not just for its empty towers but also for its very familiar style. It’s Tianducheng — a prime example of an urban development that’s failing spectacularly.”

“Nothing could have prepared me for the eeriness that I found inside. But perhaps the most poignant moment of my trip came at midafternoon on my fourth day in the city, when I found myself strolling down what looked to be the famed Champs Élysées. Weaving between manicured hedges and sprawling fountains, the iconic Eiffel Tower soared ahead in the distance. Parisian facades rose high on both sides of the boulevard.”

“Unfortunately, high real estate prices and a change in economic growth have resulted in few visitors — or residents. Original plans had an expected capacity of 10,000 residents, but today the town’s population is around 10 per cent of that. The streets are unoccupied, shop fronts have been boarded up, iron railings are rusted over and that famous fountain is bone dry.”

“The skies remain grey most of the year from the heavy pollution drifting in from factories in the surrounding area. The only time you will see a hive of activity is at the end of the day, when construction workers finish their shifts. The park that surrounds their Eiffel Tower is littered with trash and overgrown with weeds. The odd cow wanders across the fields while security guards sleep in the shadow of the tower. Basketball courts are covered in dirt, with no one around to use them. One corner of the park holds the worker’s quarters.”

“The sanitary and living standards are appalling, but no-one complains for fear of losing their employment opportunities on the adjacent building sites. On their Champs Élysées, the situation is only marginally better. No water flows through the canals and business doors are bolted shut. There’s no money to be made from this fake Parisian city. No flocks of tourists and no romantic movies being filmed beneath the Eiffel Tower. Just more money being spent on new residences that no one can afford or would even want.”