January 27, 2015

Everyone Thought The Movie Would Never End

A report from the South China Morning Post. “Offshore bond sales by mainland property developers have stalled in January as rising investor fears of a flurry of debt defaults have junked one of the usually busiest months of the year for real estate issuance. With an estimated US$10 billion in offshore debt falling due for repayment this year and next, a bad January bodes ill for the ability of developers to refinance huge foreign borrowings. ‘Offshore refinancing will become more difficult and expensive for mainland developers this year and weaker players will suffer even more,’ Christopher Yip, a director of corporate ratings at S&P in Hong Kong, told the South China Morning Post.”

“Defaults by Kaisa Group Holdings are the main reason why investors are spooked. It was then that offshore investors realised that they ranked behind everyone else in the queue for repayment after onshore creditors asked for court protection to freeze Kaisa’s assets on the mainland. Specialist onshore financing vehicles had already launched a total of more than 10 products that extended 2.5 billion yuan in credit to Kaisa. Some of those products are due for repayment later this month and analysts expect the firm to struggle to make good on its obligations.”

“‘Trust defaults will blow up in the future given the sluggish property market,’ said specialist trust financing consulting firm Use-Trust Studio in a report.”

From Bloomberg on China. “After more than a decade of curbing the currency’s gains to help turn the nation into a manufacturing colossus, there are signs the People’s Bank of China is now propping up the yuan to stem an exodus of capital that’s threatening the economy. A key barometer of foreign-exchange flows on the central bank’s balance sheet, known as its yuan positions, fell 128.9 billion yuan ($21 billion) in December from a month earlier, the most since 2003, PBOC data show. China’s foreign-exchange reserves dropped to $3.84 trillion as of December, from an all-time high of $3.99 trillion in June.”

“Goldman Sachs Group Inc. says China’s official errors and omissions data point to a record $63 billion leaving the country in the third quarter of 2014. Bank of America Corp. estimates $120 billion of capital flowed out of China in the final quarter of last year. ‘Everyone thought the movie would never end, and suddenly it ended, so everyone is hurrying to leave,’ Kevin Lai, an economist at Daiwa Capital Markets in Hong Kong, said by phone. ‘The authorities need to think of a way to keep the audience in the theater’ as the economy slows, he said.”

“City Developments Ltd., Singapore’s second-biggest developer, warned last year that the local housing market may face ‘fire sales’ and mortgage defaults due to falling rents, especially for high-end homes. Rental prices of residential properties fell by 3 percent last year, URA data show. After five years of price gains, values are falling and defaults are rising. ‘Some of the properties in the auction are those where the owner has multiple properties and he can’t rent them,’ said Grace Ng, deputy managing director at broker Colliers International in Singapore.”

From Tribune India. “Karnal is among the cities in Haryana that have been in the grip of a severe slowdown in the realty sector for over two years now. There has been a significant drop in demand here and according to market watchers there has virtually been no sale-purchase in the city and its vicinity in one of the worst slowdowns so far. End users as well as investors have remained reluctant to enter the real estate market because of the paucity of funds, say local property experts.”

“Property prices have fallen by almost 30 to 40 per cent in most of the areas of the district. ‘I had purchased a plot in CHD City for Rs20,000 per sq yd in 2011. But now the price of the same has dropped and is between Rs13000 and Rs15000 per sq yard,’ says Vir Vikram Kumar, former president of Karnal Property Dealers’ Association. ‘But even this significant correction in the market has not brought back buyers here.’”

The Calgary Herald in Canada. “Unstable oil prices have created an unclear picture for what the city’s housing market will bring in 2015, say industry members. On the resale side, the Calgary Real Estate Board expects sales to ease by four per cent in 2015 and price growth of 1.5 per cent. Industry veteran Wendy Jabusch says she expects a slower stretch in 2015, adding the pull-back makes sense.”

“‘I think we are going to see the industry take a little bit of a pause, level off a bit and that’s perfectly fine,’ says Jabusch, Brookfield Residential’s VP of Calgary Homes. ‘What was happening over the course of these last couple of years is not sustainable. The run-up on prices, you just can’t keep increasing like that.’”

The Herald Scotland. “North Sea oil may be in decline but it is still central to the economic projections of the Scottish and UK governments. in conversation with those not employed in the oil industry, I note a surprising schadenfreude towards the current situation. While such a reaction is probably misguided, it is understandable. The presence of the oil industry has made Aberdeen an almost impossibly expensive place to live for those without oil-sector salaries. The cost of living, housing in particular, has been a major cause of the recruitment crisis in the health and education sectors.”

“The industry-wide inflated salaries are the principal cause of sky-high living costs. An acquaintance working as a contractor recently bemoaned a reduction in his day rate. It was hard to avoid responding, ‘welcome to my world.’ particularly as it wasn’t so long ago that he let me know that the rate was more than a £1,000.”

“The downturn in the price is an opportunity for the industry to take a close look at its costs. Some companies have already started the process with interesting side effects. The attendance at one company’s Christmas bash was way down on previous years. It wasn’t hard to find the reason: employees had to pay for their tickets and the bar was no longer free. Welcome to the real world.”

Bits Bucket for January 27, 2015

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January 26, 2015

Nowhere Near The Frenzy

The Detroit Free Press reports from Michigan. “Recently disclosed e-mails and documents give the clearest evidence yet that high-level banking officials pushed subprime mortgage loans knowing some Detroiters couldn’t pay them. The new documents were revealed in a potential class action by African-American Detroit homeowners against Morgan Stanley, one of the nation’s largest Wall Street investment firms. In e-mails in the 2004-07 period, Morgan Stanley staffers referred to the mortgages as ‘a bunch of scaaaarrryyyy loans!!!!!!,’ ‘crap,’ and ‘like a trash novel.’ In an internal memo dated April 14, 2006, Steven Shapiro, head of the firm’s trading desk, predicted a growing problem with mortgage foreclosures: ‘We should expect … a good percentage of the borrowers going into extended delinquency/liquidation.’”

“The following January, Shapiro e-mailed officials at New Century, asking, ‘What is going on with these loans??????????’ A New Century executive e-mailed back, ‘You mean besides borrowers who apparently don’t have the money to make their mortgage payments? (Sorry to be flip …)’”

The Washington Post. “African Americans for decades flocked to Prince George’s County to be part of a phenomenon that has been rare in American history: a community that grew more upscale as it became more black. In the early 2000s, home prices soared — some well beyond $1 million — allowing many African Americans to build the kind of wealth their elders could only imagine. But today, the nation’s highest-income majority-black county stands out for a different reason — its residents have lost far more wealth than families in neighboring, majority-white suburbs. And while every one of these surrounding counties is enjoying a strong rebound in housing prices and their economies, Prince George’s is lagging far behind, and local economists say a full recovery appears unlikely anytime soon.”

“Denise Watson bought a two-bedroom townhome in the Villages of Marlborough in 2005. She saw the home, which cost $315,000, as a good first step to building some equity as the years wound down on her 24-year Air Force career. But now the investment she thought would help her build wealth has left her nearly $100,000 in the hole. The dizzying downturn and weak recovery have caused many of her neighbors to simply walk away even as Watson and her husband have made every mortgage payment. ‘I feel stuck, which hurts after you have worked so hard and done everything that society says you are supposed to do to grab your piece of the American Dream,’ she said. ‘I would never have thought that in all my years this would happen.’”

The Advertiser in Louisiana. “Oil service giants Schlumberger, Halliburton and Baker Hughes — they all have a significant presence in Louisiana — recently announced layoffs. Although oil prices have plunged aplenty over the past six months, today’s oil business problems are light years away from what they were in Lafayette in the 1980s. Tom Hebert, who chairs the Young Professionals of LAGCOE, recalled those rough days as a young child. ‘As a kid in the early ’80s, everyone had a Cadillac in the driveway and a brand new house. It was similar to the time of the last few years,’ he said.”

The Dallas Morning News in Texas. “The big run-up in apartment building may run out of steam this year. Apartment construction across the country has more than tripled since 2009. Last year developers started more than 350,000 multifamily housing units nationwide. Analysts say that apartment construction increases should dwindle in the next two years. And a slowdown in Texas’ economy could play a part. In North Texas at the end of the year, more than 30,000 apartments were being built in the Dallas-Fort Worth area compared with about 26,000 single-family home starts in the area in 2014.”

“In Houston the dramatic fall in oil prices and layoffs by energy firms are reducing development. Houston-based apartment architect Sanford Steinberg said he’s already seeing the impact of the energy sector pullback. ‘Projects are being put on hold,’ Steinberg said. ‘They are not killing the project but putting them on hold. In the last few years we have been going crazy building multifamily housing, not just in Houston but all over the country,’ he said. ‘I worry about the multifamily sector overbuilding. It’s the one residential sector that has the greatest access to credit. There is a history of builders building more because they can get credit than because they can fill up the units.’”

The Bend Bulletin in Oregon. “Foreclosure filings dropped 58 percent in Deschutes County last year, according to figures from the county. Oregon’s foreclosure process has delayed a full recovery in the housing market, John Helmick, Gorilla Capital CEO, said in a news release earlier this month. He expects about 600 new foreclosures to be filed monthly in the first half of this year in the counties tracked by Gorilla, which buys foreclosed homes, redevelops and sells them. Changes made to state foreclosure laws over two legislative sessions led to the delayed recovery, he said.”

“Each change, however, brought the foreclosure process to a crawl. As the housing industry adapted to the new rules, the process ramped up again, Helmick said in the interview. ‘It’s like resetting the ceiling fan,’ he said. ‘Turn it off. Wait for it to stop. Then start it on again.’”

“In Deschutes County, nonjudicial foreclosure filings — called notices of default — doubled year over year, from 67 in 2013 to 134 last year. Lynne McConnell, associate director of HomeSource at NeighborImpact, said her agency continues to see homeowners seeking foreclosure counseling. ‘I believe there were eight new cases the week of New Year’s alone,’ she said. She attributed the decline in Deschutes County filings overall to rising home values in Bend, where homeowners behind on their mortgages may now sell their homes at a price that allows them to satisfy that debt. That advantage, she said, has yet to reach beyond the city. ‘That’s very localized to Bend,’ she said. ‘It hasn’t reached the outlying areas, which are still under water. The banks are still catching up on their filings, I think.’”

From Westside Today in California. “As we began 2015, the number of homes available for sale in Brentwood was not as low as it was a year ago. However, there are only 50 homes on the market, which is the same supply as at the beginning of 2013. Due to the high demand for Brentwood houses especially under $2 million, the median $3.7 million list price is almost unbelievably 70 percent higher than it was two years ago, and 23 percent higher than one year ago.”

“A number of factors have contributed to this continuing lower supply. One is that some owners who have been leasing their home rather than selling in the down market have not yet made them available for purchase. Another factor is that the level of purchasing by investors has continued to increase through 2014, putting pressure on the market in many Brentwood and other Westside neighborhoods. Additionally, banks own only a few Brentwood homes, which have not yet been listed for sale. Also, 20 local homes are either in pre-foreclosure stages or already have had bank auction dates scheduled.”

The Sun Sentinel in Florida. “Home prices in Broward and Palm Beach counties leveled out in 2014 but still finished the year on an upswing. Prices surged following the downturn but have cooled since then. Marisa DiLenge, a Broward agent with Better Homes & Gardens, said the market remains steady, but it’s nowhere near the frenzy of 2013 and early 2014. ‘The values are still there, the phone is still ringing, buyers are still coming out, but I’m not getting the offers I normally get,’ she said.”

Bits Bucket for January 26, 2015

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January 25, 2015

Once You Start Deflating A Bubble…

This is a weekend topic on the effects of Fannie Mae, Freddie Mac, the Federal Reserve’s bond ownership and deflation. From the CBO’s report, WARNING PDF. “Outlays increased for several major categories of spending: Outlays rose for the each of the three largest mandatory programs: Medicare,by $18 billion (or 15 percent), primarily because ofa large payment made to prescription drug plans in November 2014 to account for unanticipated spending increases in calendar year 2014; Medicaid, by $16 billion (or 23 percent), largely because some of the provisions of the Affordable Care Act did not take effect until January 2014; and Social Security benefits,by $9 billion (or 4 percent).”

“Much of the increase in spending occurred because payments to the Treasury from the
government-sponsored enterprises Fannie Mae and Freddie Macwere $32 billion less in December 2014 than they were in December 2013, when Freddie Mac made a one time payment of about $24 billion after a revaluation of certain tax assets significantly increased its net worth. (Those payments are recorded in the budget as offsetting receipts—that is, as negative outlays.)”

“Net Outlays for GSEs: Actual, FY 2014 -39 billions.”

The American Enterprise Institute. “The Fed’s $3.5T QE purchases have generated almost half a trillion dollars for the US Treasury since 2009. On its $4+ trillion portfolio of fixed-income securities, the Fed earned an average interest rate of about 3%, which generated the $116 billion of interest income last year for the Fed. To provide context for that amount of interest income, consider that all nearly 7,000 FDIC-insured US banks together earned only $116 billion in net income during the first three quarters of 2014, and will probably end up with about $155 billion in net income for the whole year.”

“After accounting for operating expenses and other costs (currency issue, interest expenses, dividends, etc.), the Fed paid ‘residual earnings’ to the US Treasury last year of $98.7 billion. That annual Fed distribution to the Treasury was the largest ever, and brings the total amount distributed since QE started in 2008 to almost half a trillion dollars — $469 billion in the six years from 2009 to 2014.”

“That was a point made today by the WSJ in its staff editorial ‘The Fed Cash Machine,’ which pointed out that QE has made the Fed’s annual distribution of ‘residual earnings’ a significant revenue source for the US Treasury: ‘For perspective, the entire federal budget deficit for fiscal 2014, which ended in September, was $483 billion. Without the Fed’s windfall, it would have been nearly $100 billion more. Corporate income tax revenue in 2014 was $321 billion, so the Fed turned over nearly 30% of the amount provided by every American corporation.’”

“Treasury is spending the Fed’s windfall, naturally, which means that when the QE boom ends the country will have to spend that much less or find the revenue somewhere else. The danger is that politicians are getting used to the money, which is one more reason for the Fed to begin winding down its balance sheet sooner rather than later.”

“Bottom Line: While the record transfer of almost $100 billion from the Fed to Treasury last year has gotten some media attention, what hasn’t been reported, except by the WSJ today is this: The monetary expansions known as QE1, QE2, and QE3 ended up being a gigantic transfer of wealth from the private sector to the public sector. By ‘acquiring’ almost $3.5 trillion in assets with a ‘magic checkbook’ that were previously held largely by private investors and the private sector, those trillions of dollars in Treasury and MBS securities, along with the billions of dollars in interest income those securities generate, got transferred to the Fed, which has then transferred almost half a trillion dollars in residual interest earnings to the US Treasury in the last six years.”

“Q: Is that fair/accurate to describe QE1, QE2 and QE3 — as monetary policies that ultimately transferred billions of dollars in private wealth to the US Treasury via the Fed? Or is it more accurate to describe it as printing money to finance the government’s budget deficit disguised to look like monetary policy, since the bond holders got paid for their securities? (Thanks to Jeff Dorfman for help with that second description.)’

“Update 1: Or here’s how Jon Murphy describes it in an email: ‘The Fed is just printing money and giving it to the Treasury but ‘laundering’ it through bonds.’ Update 2: Another way to think of the Fed’s $3.5 trillion acquisition of assets through QE1, QE2 and QE3 is to view the Fed as the ‘world’s largest hedge fund’ — see posts by Scott Grannis here and here for details.”

From Money Week. “Merryn Somerset Webb interviews Paul Hodges about the global economy’s ‘Great Unwinding’, and how Britain’s house prices could halve. Merryn: ‘Paul, when we last spoke you predicted a fall in oil price –you said that you thought the oil price would fall from $80 to $50 by the end of last year, and at the end of last year you were saying you thought it would be down at $50 in the first half of this year, so you’ve already been proven very, very right. Can we just talk briefly about what the basis was for that forecast?’”

“Paul Hodges: ‘Yes, it’s what we call the ‘great unwinding’ of policymaker stimulus that if you look at where we’ve been since our last interview here two years ago, central banks have pumped more and more money into the economy. As a result, we’ve had a sugar high, really, where financial markets just go up in a straight line. In China, people got the idea that somehow suddenly China had become middle class, and so there was this enormous demand and there was free money from the Fed and the Bank of England, so everything looked wonderful.’”

“‘It was a complete and utter charade from beginning to end. There has never been, since 2009, a single moment anywhere in the world where there was a supply shortage, a customer didn’t get the oil, the petrol, or anything else that they wanted, but it was all built on wishful thinking from the central banks. They were saying, ‘We can create demand by printing money.’ The problem is, if you look at the markets, the futures market, where the financial players took the money from the central banks and they went into the… They wanted a store of value, because every pension fund in the world knew that Ben Bernanke and Janet Yellen wanted to devalue the dollar. As a result of wanting to devalue the dollar, pension funds looked for a store of value. That, of course, was oil, because everybody uses it, very large market, and it’s priced in dollars.’”

“‘What you saw, instead of financial players and physical players – the oil companies, people like us who buy to use for transport and for heating and so on – instead of a balance of one-to-one, you’ve suddenly got six times as many financial players going into the market. What happens? Of course, the price rises and goes from $30 at the end of 2008 up to $120, because you can’t print oil in the way that you print money.’”

“Once you start deflating a bubble, it doesn’t go slowly, it bursts. This is what you saw happening in July and August. That was why we made the call in the middle of August, we said, ‘The oil price is now going to collapse, and the obvious logical corollary of that is the dollar is going to go very high indeed,’ and we’ve seen that – the oil price down 50%, the dollar up over 10%. The dollar going up 10% may not immediately, if you’re thinking in pounds and so on, become very important, but it’s absolutely critical because you’ve got $6trn or $7trn of debt in the emerging economies all tied to the dollar, all thinking, ‘We borrowed at 1%. Aren’t we clever?’”

“It was 1% then, but now it’s 1% plus 12% increased value of the dollar, so you’re going to see bankruptcies all over the emerging economies – and, of course, you’re going to see bankruptcies all over the States because people have spent $1trn.”

“It’s terrible, this word ‘trillion’. Before 2009 I didn’t know what the word ‘trillion’ was. I used to think billions were rather a lot.”

“Merryn: ‘So, bankruptcies in the US connected to the huge infrastructure spending in the energy sector?’ Paul Hodges: ‘Yes. The US economy is now riding for a fall. We don’t know how big it is, but if you look at jobs growth since 2009, it’s all – and I mean ALL, with capital letters – being tied into the oil and gas exploration bubble, so all the rest has not moved at all. If you look at the housing recovery, such as it’s been – it’s been 600,000 to one million, which sounds good, but when you’re coming down from two million it’s not so good – that 400,000, most of that new house building has been in Texas in the oil belt, because I was in Houston summer last year; 10,000 people a month were coming into Houston, so you’re building a lot of houses.’”

“Merryn: ‘So, the USA economic recovery has been very heavily leveraged to the shale boom, which in turn was caused by very low interest rates in QE.’ Paul Hodges: ‘Yes.’”

“Merryn: ‘So, as that reverses, we can only expect the US economic recovery to just disappear?’ Paul Hodges: ‘My view of it all is the Fed is actually irrelevant here, that the real action is over in China, that the Fed could do maybe a $10trn final blast, but would the new Congress actually allow that to happen? It’s an interesting question. I don’t know the answer, I just raise the question, but if you look at what’s happening in China, you see that the property market taxes… Property taxes paid last year in China fell 30%. That’s a pretty big downturn in one year.’”

“Merryn: ‘Final question: is it possible for a deflationary environment to persist when central banks can print as much money as they like and shovel it into the economy in a variety of different ways?’ Paul Hodges: ‘People have to want to spend, and if you don’t need to buy anything and if you are fairly cautious about knowing exactly how long you might live, then it’s quite difficult, I think, to encourage people to spend. The central banks, the economists, work on this theory, which was fine at the time – Modigliani’s theory – which said that we all know how long we’re going to live and therefore we consciously make a decision to hold back on consumption today so that we have something left for the future.’”

“‘That was fine if we were all dying at 50 because you weren’t holding back very much, you were just getting more money as you got… But if you’re living to 80 or 90, say, how long are we – you and I – going to live? We don’t know, so probably, if we’re sensible, we’re going to err on the side of caution.’”

“Merryn: ‘This is our worry – that they could. They have the ability to do so; anyone can create inflation if they really want to.’ Paul Hodges: ‘Yes, but what I hope is that common sense prevails and that we abandon these out-dated economic theories. Milton Friedman came along and he said that inflation was ‘Always and everywhere’ – and monetary – but he’s wrong, of course; he’s completely wrong. He was working during the baby boom in the States. The States had a 50% increase in the number of babies being born over an 18-year period. Of course there was massive demand, of course there was no supply…Friedman confused cause and effect.’”

“We’ve had six years, let’s face it, six years of central banks believing that Friedman was right and saying, ‘If we put out enough money, then we will end up with inflation. Sorry about that.’ Could we have some common sense on this which says, ‘If you’ve got an older population, you’re not going to want to spend,’ and could we please, instead of being negative about all these older people, could we not celebrate this and say, ‘Isn’t it wonderful that our society has achieved this?’ Does it really matter if we have GDP? Let’s face it, before 1929, which isn’t very long ago, nobody measured GDP, so for thousands of years people were pretty happy and getting by without thinking about…’”

Bits Bucket for January 25, 2015

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January 24, 2015

Bits Bucket for January 24, 2015

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January 23, 2015

A Bubble Means Price Increases For Nothing

It’s Friday desk clearing time for this blogger. “Last week, Lawrence Yun, chief economist for the National Association of Realtors, made an appearance before real estate professionals gathered for a meeting of the Greater Tampa Association of Realtors. He offered plenty of food for thought about the housing market’s condition. ‘The bottom line is that we have encountered some degree of recovery. I think we will continue the recovery over the next two to three years, and then subsequently, the recovery may well change into expansion,’ said Yun. ‘Now, you are just trying to get back to the prior principal in terms of prices. It may take an additional two to three years to get to where it had been in 2005-2006.’”

“Are you in the market to buy a new home? That’s a question many people would have laughed at just a few years ago. But more people are emerging from the housing purgatory created by the Great Recession. A recent report released by the University of Central Florida shows the median home price for a house in Florida peaked in 2006 at around $258,000. The current median home price in the state is $177,000. ‘You don’t need perfect credit,’ said Matthew Wilson, president of the Flagler County Association of Realtors. ‘If there’s a little bit of a hiccup in your credit, the lenders are looking over, you know, looking past some of that.’”

“Lake County’s housing markets ended the year with mixed results as the volume of home sales continue to slow, according to the Lake County Multiple Listing Service. The median price of a Lake County home decreased 18.72 percent from November’s median price of $187,000 to $152,000 in December and was up 0.33 percent from $151,500 recorded in December 2013. Closed escrow sales of homes in Lake County totaled a 53 units in December, according to the MLS. Sales in December were down 3.64 percent from 55 in November and down 31.17 percent from 77 in December 2013. This is the slowest December in more than four years.”

“According to California Association of Realtor’s newest housing market indicator measuring sales-to-list price ratio, multiple bid offers for properties has waned, and properties are again generally selling below the list price. ‘2014 saw a return to a near normal housing market, with sales moving at a moderate pace and home price appreciation growing at more sustainable levels,’ said C.A.R. Chief Economist Leslie Appleton-Young. ‘Home prices have stabilized over the past year, which is positive news for buyers who have been putting off their home search until prices leveled off.’”

“Sharply declining oil prices in the past few months are taking a toll on home building in West Texas, the chairman of the nation’s largest home builder said. Donald R. Horton, who founded D.R. Horton in 1991, said banks in Midland-Odessa have ‘backed off’ the small home-building companies there. But in other Texas cities where the economy also relies heavily on the oil industry, he said, the impact hasn’t been as great. Horton said his company and one other firm are now the only ones building homes in Midland-Odessa. ‘Has the number of buyers slowed down there? Yes. But the builders have slowed way down,’ he said. ‘I can tell you, so far in Houston, we haven’t seen any issues.’”

“Low oil prices are having an effect on the economy in the province and the drop below 50 bucks a barrel could also be having an effect on Calgary’s condo market. Compared to the same time last year, sales are down by a third, the number of units listed has nearly doubled and the average price is down almost nine percent. Anna Husted, says for her it’s the right time to buy. ‘I’m feeling really excited about being a first time home buyer and getting my first condo so it’s just kind of coincidence that I’ve been buying at this time with the falling oil prices and the rise in listings, I guess, so it’s a good thing for me, because there’s lots of places on the market and prices are down,’ said Husted.”

“Gilson Porto began his career as a real estate agent seven years ago when Brazil’s property market was booming due to increasing wages and easier credit. But starting in 2013, business began to slow along with the country’s economy. ‘A few years ago people would come into this office and ready to buy. Now they just come to ask prices, to look around. Those willing to lower their prices are getting to sell their property, but those who are not flexible are really not doing business,’ Porto said.”

“When real estate prices were rising steeply, there were fears of a bubble in the making. But analysts said this recent gradual devaluation suggested that is not the case. The market was heated because for the first time many Brazilians had the means to buy property, experts said. ‘We don’t have a bubble. A bubble means a lot of increases in prices for nothing. You had real reasons for the expansion of the prices in Brazil. After this, we have to reduce, to put the prices in their correct level as a matter of fact,’ finance professor Fabio Gallo said.”

“Precisely the same factors that plunged Ireland into its housing crisis last decade are now in play in New Zealand and could spark a big correction, says a leading Auckland fund manager. Milford Asset Management executive director Brian Gaynor said house prices might come down ‘10, 15, 20 or even 25 per cent’ and he cited the former Celtic Tiger as a warning. ‘The first thing is the role of the media,’ he said. ‘House prices are one of the sensations. The media played a huge role in Ireland in record prices - the best suburbs to buy, highlighting people who had bought and three months later made huge gains of 20 or 25 per cent or more. It’s a mirror image of the same thing here. It has a huge influence because we do have this massive herd instinct.’”

“The head of Europe’s bailout fund, Klaus Regling, said cheap money and the country’s lust for property allowed a ‘blind spot’ to develop into a financial meltdown. Mr Regling said these factors were ‘ominous’ for a country that never experienced a property crash. The German economist, who carried out an investigation into the Irish financial crisis, said it was ’striking’ how many people had invested in property. ‘Unfortunately, it’s hard not to overstate the impact of this cultural attitude,’ he said. ‘Property acquisition, as a topic, was almost a national obsession, though not something we could easily quantify in hard data.’”

“He added: ‘The buyers all presumed the price of property could only go up … People bought apartments for their children who were still in school because they thought once they got out of school, university and start a job they would not be able to afford a house.’”

“Trinity College Professor Philip Lane told the inquiry the construction boom ‘obscured the underlying deterioration in fundamentals’ needed to properly run a banking system. Prof Lane said recessions in other countries prior to the worldwide credit crunch had been relatively brief. He said this led to a situation where bankers misperceived the collective risk. Prof Lane said that when bankers are making the same decisions ‘you get a systemic problem.’”

“William White, former chief economist to the Bank for International Settlements - the bank of central banks - and currently an advisor to German Chancellor Angela Merkel, said the global elastic has been stretched even further than it was in 2008 on the eve of the Great Recession. The excesses have reached almost every corner of the globe. ‘We are holding a tiger by the tail,’ he said. ‘Sovereign bond yields haven’t been so low since the ‘Black Plague’: how much more bang can you get for your buck?’ he told The Telegraph before the World Economic Forum in Davos. ‘QE is not going to help at all.’”

“Under his guidance, the BIS annual reports over the three years before the Lehman crisis were a rising crescendo of alarm calls at a time when other global watchdogs were asleep. His legendary report in June 2008 openly discussed whether the world was on the cusp of events that might prove as dangerous and intractable as the Great Depression, as it indeed it was. The authorities kept having to push rates lower with the trough of each cycle, building up ever greater imbalances, in an ineluctable descent to the ‘zero bound,’ where monetary levers stop working properly.”

“He deplores the rush to QE as an ‘unthinking fashion.’ Those who argue that the US and the UK are growing faster than Europe because they carried out QE early are confusing ‘correlation with causality.’ ‘The Anglo-Saxon pioneers have yet to pay the price. There are serious side-effects building up and we don’t know what will happen when they try to reverse what they have done.’ The painful irony is that central banks may have brought about exactly what they most feared by trying to keep growth buoyant at all costs, he argues, and not allowing productivity gains to drive down prices gently as occurred in episodes of the 19th century. ‘They have created so much debt that they may have turned a good deflation into a bad deflation after all.’”

Bits Bucket for January 23, 2015

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January 22, 2015

The Past Two Years Was Not Reality

The Bismark Tribune reports from North Dakota. “Members of the Bismarck-Mandan Board of Realtors say the community’s housing market is less frantic than it was two years ago. Previously, Kristin Oban, president of the Bismarck-Mandan Board of Realtors, may have called clients in the morning when a home came on the market. By noon, there were usually three to five offers on the house and many times the offers were higher than the listing price. She said sellers are still getting 99 percent of their listing price but multiple-offer situations are back to a normal pace. For homes in the higher price range, $400,000 or more, Oban said sales prices have not been as high as they previously were. ‘It may not be the news sellers want to hear, but it is good for our market,’ she said.”

The Teton Valley News in Idaho. “After a public hearing, the Teton County Planning and Zoning Commission voted unanimously to give approval for a new 26-lot subdivision in the northern part of Teton County. Randy Blough of Harmony Designs, who designed Cutthroat Creek, said he realizes that the county still has many empty subdivisions left over from the housing boom. ‘We acknowledge there are many vacant lots, there’s no doubt about that,’ he said. ‘If a lot of those subdivisions were designed in this type of way, [the county] wouldn’t be in the [situation] we’re in now.’”

From Miami Today in Florida. “Miami-Dade County is home to a growing number of condominiums, most of which are held by absentee owners. Of the nearly 352,000 condominium units in the county, 37%, or 130,000, had a homestead exemption, according to the Miami-Dade Property Appraiser’s 2014 preliminary tax rolls released mid-year.”

“‘A condo is effectively a big lock box in the sky. That’s really what they are,’ said Peter Zalewski, principal of real estate consultancy CraneSpotters. ‘If I am from Latin America and I bring $100,000 and put it in a lock box. I am not making anything. I’m actually losing because of inflation. So instead of taking money [to the bank], these Latin American investors are saying, ‘I could just put it in a condo, make a very small return and hope that once I put this money out and re-sell, I make money.’”

From Bloomberg. “Manhattan real estate agent Lisa Gustin listed a four-bedroom Tribeca loft for $7.45 million in October, expecting a quick sale. Instead, she cut the price this month by $550,000. ‘I thought for sure a foreign buyer would come in,’ said Gustin, who is still marketing the 3,800-square-foot (353-square-meter) apartmen. ‘So many new condos are coming up right now. They’ve been building them for the past few years and now they’re really hurting the resales.’”

“On the Los Angeles MLS, there were 3,198 homes with asking prices greater than $2 million at the end of 2014, up 17 percent from a year earlier, according to Partners Trust, a Beverly Hills, California-based brokerage. The number of homes priced at more than $5 million, including new and existing properties, jumped 27 percent to 546. ‘They’re shooting themselves in the foot,’ said Roger Perry, a broker-associate with Rodeo Realty in Beverly Hills. ‘Everyone’s trying to get a piece of that luxury pie.’”

“The luxury sales frenzy since 2012 was caused by a limited inventory after the global property rout all but shut down construction for almost three years, according to Leonard Steinberg, president of brokerage Urban Compass. Now that buyers have more options, deals will progress at a more ‘normal’ speed — about two to four years to sell out a building, he said. ‘Some people will get a little panicky because things are not selling as fast,’ Steinberg said. ‘But what we experienced over the past two years was not reality. That was a moment in a century.’”

The Australian. “Residential real estate agents could be forgiven for upgrading their BMWs or putting a new-model Porsche Cayenne Turbo on order after the year they’ve had. However, mining towns fared far worse, prices in the Queensland ­resources outpost of Mackay taking hits of nearly 38 per cent in the September quarter. Western Australia’s resources regions also suffered. There is a growing belief that there could be a cooling in the residential property market.”

“Melbourne-based buyers’ advocate David Morrell believes illegal foreign investment has driven up prices. He says, this will be a year of ‘price compression.’ The market has hit its top and is on the way down. Prices are cooling in the prestige sector and this tends to filter down to cheaper property. ‘The top end is the first to fly and it is the first to fall. You could almost pick it — after Melbourne Cup weekend it has cooled right off,’’ he says. ‘We’d be walking into places with $3m to spend and come out spending in the twos. It’s all about confidence. In the last three weeks before Christmas, it was buyers’ nirvana. My clients aren’t saying they don’t want to buy property this year, but they are saying that they aren’t going to pay high prices. ­Prices will really get put under the pump.’”

From AFP via Yahoo. “China’s property market is no longer ‘red hot but deep cold.’ elites gathered at the Davos forum heard Wednesday, as fears grow that a real estate slump could accentuate slowing growth in the giant Asian economy. ‘China’s urbanisation-led growth is almost coming to an end. Very little money is going into buying new land and building new buildings because so many buildings have been built,’ said Zhang Xin, chief executive and co-founder of real estate giant SOHO China. ‘Real estate has moved from red hot to deep cold. This is the cold, cold sector of the economy. No money wants to go into real estate,’ Zhang said.”

Bits Bucket for January 22, 2015

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January 21, 2015

A High-Flying Market Has Caught A Serious Chill

A report from the Canadian Mortgage Broker News. “A major Canadian Bank believes the housing boom in one of Canada’s most bullish markets will start to cool this year — but to what degree? ‘While the GTA housing market has shown few signs of slowing this year, one thing remains certain: Housing booms don’t last forever,’ TD Bank wrote in a special report, entitled GTA Housing Boom Masks Growing Structural Challenges. ‘The million-dollar questions are: When and to what extent will the downswing take place? TD Economics’ baseline GTA housing forecast is a tale of headwinds and tailwinds, with the former likely to win out and cool the market beginning in 2015.’”

“The condo market is expected to lead the way toward a correction, with 60,000 new units expected to be built in the next few years. TD estimates that the market will be oversupplied by 25,000 units. ‘The impact of increased supply of condo rental units is expected to only partially offset by rising rental demand,’ the report states. ‘In this environment, the cost of condos will likely exceed what an investor can earn on the rent.’”

The Star Phoenix. “It could be a buyer’s market in 2015 for those looking to purchase a house. ‘We have a year ahead of us where there is going to be a lot of selection for buyers and demand is going to soften somewhat,’ says Norm Fisher, broker/owner of Royal LePage Vidorra in Saskatoon. ‘Through 2014 inventories were higher than they have been for five years. (And) we come into 2015 even higher. Our inventory is about 25 per cent above the five-year average.’”

“Fisher doesn’t see Saskatoon as having a housing bubble ready to burst. ‘The definition of a bubble would be rapid increases (in prices) over a short period of time followed by a burst,’ he said. ‘It has been five years since we have really seen rapid increases in our market.’”

The Canadian Press. “The Calgary housing market is cooling fast. The number of homes trading hands has plunged 37 per cent compared to the first two weeks of January 2014, while the number of active listings surged 64 per percent. ‘Calgary’s high-flying housing market has caught a serious chill,’ Sal Guatieri, senior economist at Bank of Montreal, said. The price drop ‘is likely the start of a correction,’ the economist said.”

“Until very recently, Calgary’s housing market was the top performing in the country alongside Toronto and Vancouver. Plunging oil prices have worked quickly to cool things down, however. ‘More pain lies ahead,’ Guatieri said of the Alberta real estate market, noting pending sales in the province’s biggest city are also down 53 per cent year over year. ‘Ouch.’”

From CTV News. “The oil boomtown of Fort McMurray, Alta., is trying to keep its spirits up as crude prices drop. Many of the city’s 76,000 people work in the oil sands. And with crude prices plummeting from more than $100 a barrel in June to less than $50 now, residents are nervous about what the future holds. ‘Everybody’s scared for their jobs,’ said Michael Provencher, a haul truck driver with a private contractor hired by the big oil companies in Fort Mac. ‘For right now, we were told we’re okay. But in a month from now, we don’t know.’”

“McMurray Gospel Assembly Pastor Robert Parmenter, who has lived in the community for 31 years, says the community has been through this boom-and-bust cycle before. In the past, Parmenter even saw people walk away from their homes and turn them over to the bank when times got tough. ‘There is a few people selling right now before it gets worse, not thinking that it’s going to come back up,’ said Parmenter.”

“Although Fort Mac hasn’t reached that point yet, already-high house prices are said to be dipping. For instance, a 1,400-square foot house listed at $739,000 — an average price for the city — has dropped from an original listing price of $759,000 last summer.”

From The Tyee. “Low-Rent Mansion Living? In Vancouver? Really? Yes, really. Groups of frustrated renters are snapping up urban acreages, and spend less on housing than the rest of us. Erik Paulsson and his roommates pay an average of just $750 a month, substantially below the average $1,000-plus one-bedroom rent in the city. But they’ve managed to drive costs down by moving into an abode that is anything but ‘humble.’ Their 7,500-square-foot, six-bedroom Spanish-style mansion, built in 1931 and nestled on nearly an acre of land overlooking the Fraser River, is valued at $5,063,000, according to municipal records.”

“As Paulsson prepares a French press of coffee, for perspective I note that the laundry room adjoining his kitchen is roughly the size of my own bachelor apartment. ‘There’s lots of big houses, including mansions, for rent,’ he explains. This one happens to be a big property bought by an overseas Chinese development corporation. ‘I don’t know if they’re waiting to flip it, sell it or develop it.’”

“‘You have the whole phenomenon of absentee landlords and offshore owners,’ explains roommate Jeet-Kei Leung. ‘Which has led to all these large homes being left empty… They’re empty because they’re hard to rent.’”