June 25, 2017

A Lemming Effect

A report from the Denver Post in Colorado. “Resort-style outdoor pools with cabanas. Yoga studios with on-demand classes. Bicycle repair stations and dog spas. Movie theaters and game rooms. Amenities like these have all but come to be expected when a new apartment building opens in Denver. Some real estate experts warn that developers are creating a glut of luxury properties. ‘The market is overbuilt,’ said Jay Rollins, managing principal of JCR Capital, a Denver-based real estate private equity firm that’s active in the apartment realm. ‘The most important thing to remember in the luxury market is the deals that are coming out of the ground, those were born two years ago,’ he said. ‘It was something of a lemming effect. Denver got really hot nationally very quickly and then everyone jumped in and tried to buy every piece of land and build a luxury apartment property.’”

“Downtown apartment vacancy rates have practically doubled over the past few years, said Cary Bruteig, principal at Apartment Appraisers & Consultants in Denver. In the first quarter, vacancy was about 8 percent, up from 4.34 percent at the end of 2014. ‘We are building them a little faster than we can fill them up,’ Bruteig said.”

From The Oklahoman. “Brookwood Village, Oklahoma’s largest apartment complex, fetched a high price — $60.5 million, or $53,635 per unit — even with rent concessions peppering the Oklahoma City apartment market, signaling weakness. However, any weakness in the metro-area market is limited to pockets of oversupply that are beginning to stabilize, said Tim McKay, who handled the sale. Further, he said, federal incentives supporting workforce housing make it easier for multifamily investors to borrow money, and at easier terms, than for other kinds of investment property.”

“‘Brookwood’s location — and the fact that it is quality, workforce housing — drove investor demand, particularly with the opportunity for its value-add potential and upside in rents,’ McKay said.”

“Construction needs to pause in the especially active areas for the market to return to balance, said broker Mike Buhl of Norman-based Commercial Realty Resources Co., who tracks the south side especially closely. ‘While it comes down to what is being built and where it is being built, speculation remains that developers will keep building product and adding inventory,’ Buhl said. ‘The amount of new construction coming to the market without some kind of slowdown does seem a bit aggressive in my opinion.’”

The Associated Press. “State budget cuts are putting stress on public universities, some of which are resorting to renting out empty dorm rooms to earn cash amid tight financial circumstances. The University of Missouri, one of the biggest football schools in the state, will rent out dorms this fall for visitors who want to stay to see the team play. The starting rate for a ‘furnished two-bedroom suite with four single beds’ is $120 per night plus tax, according to the school’s website. The plea for extra cash at the University of Missouri comes amid declining enrollment and a decrease in finances.”

“Missouri is not the only state where universities are tightening their belts. In Illinois, where Moody’s downgraded the credit ratings of five public universities to junk level amid an ongoing two-year budget impasse, the University of Illinois at Chicago offers guest housing in residences ‘intended for short-term stays by those other than UIC students’ for rates as low as $100 per night for a one bedroom apartment.”

“Other universities in the state, like SIU Carbondale, will seek to capitalize on the solar eclipse weekend in August by making dorm rooms available for rent. SIU Carbondale says it is in a remarkably good location to witness the event.”

The Real Deal on Florida. “Former Miami Heat basketball player Glen Rice sold a downtown Miami condo for less than he paid just weeks before it was scheduled to be sold at a foreclosure auction. Rice sold a two-bedroom, 27th-floor unit at the Neo Vertika condominium that he owned with his ex-wife for $310,000. He purchased the condo in 2006 for $317,000. He had lowered the asking price almost monthly since listing the condo for sale about two years ago for $460,000.”

“GossipExtra reported M&T Bank began to foreclose on a $250,000 mortgage secured by Rice’s condo, claiming that he stopped making payments. In addition, the condo owners association at Neo Vertika claimed Rice stopped paying a monthly association fee of $675.50 more than two years ago. Rice has been in poor financial condition because he has lost a fortune on bad investments and went through a costly divorce from his ex-wife Cristy, a former star on the reality TV show ‘Real Housewives of Miami.’”

From Bloomberg on New York. “Another luxury condo at Manhattan’s One57 is scheduled for a foreclosure auction — the second time in a month that a property seizure is being sought at the Billionaires’ Row tower following a mortgage default. And it might be the biggest in New York City residential history. The owner of the condo, a shell company listed in public records as One57 79 Inc., bought the 6,240-square-foot residence in December 2014 for $50.9 million, according to New York City records.”

“In September 2015, the company took out a $35.3 million mortgage from lender Banque Havilland SA, based in Luxembourg. The full payment of the loan was due one year later, according to court documents filed in connection with the foreclosure. The borrower failed to repay, and now Banque Havilland is forcing a sale to recoup the funds, plus interest.”

“Built by Extell Development Co., One57 has stood as a symbol of Manhattan’s luxury-development boom — and eventual slowdown. The tower, which broke ground in 2009, drew investors willing to pay large sums for lavish residences they rarely live in, and inspired other developers to build similar offerings, creating an effective ‘Billionaires’ Row’ along West 57th Street.”

“Last month, a June 14 auction was scheduled for a 56th-floor apartment at the same tower. The condo was purchased in July 2015 for $21.4 million. Public records have yet to reveal any transfer of ownership for that property. ‘This shows that too much leverage is probably not wise,’ Anna LaPorte, an Extell spokeswoman, said of the most recent default.”

June 24, 2017

Lost In A Keynesian Puzzle Palace

A weekend topic starting with Bloomberg. “Robert Litan and Ian Hathaway, writing in Harvard Business Review, surmised that many American entrepreneurs are no longer looking for ways to produce more useful stuff, and are instead looking for new techniques for extracting money from each other and from the government. In other words, crony capitalism may be slowly cannibalizing productive capitalism. Litan and Hathaway draw on an argument by the late economist William Baumol, who warned of the possibility that entrepreneurs could turn their energies toward useless rent-seeking.”

“As examples, Baumol cited historical cases of business people who found novel ways to sue their competitors out of existence. Litan and Hathaway, noting a slowdown in U.S. entrepreneurship, fear that something similar might be happening today. If big companies are using new and creative ways to crush the competition, it’s bad news for economic dynamism.”

“So which companies are sucking rents out of the productive economy? Litan and Hathaway don’t point fingers, but it’s easy to make an educated guess. In an influential 2014 paper, Thomas Philippon speculated that financial industry profits and salaries rose spectacularly since 1980 because banks, securities firms and fund-management companies found new methods for extracting rent.”

From David Stockman. “The American people are being brought to ruin by three institutions that are mortal threats to liberty and prosperity. To wit, the Federal Reserve, the military/industrial/surveillance complex and a sinecured Congress that is burying unborn generations in debt — even as it sanctimoniously presumes that it is doing god’s work by servicing the beltway racketeers who keep it perpetually in office.”

“On the latter score, it is worth reminding once again. An incumbent House member standing for reelection has a smaller chance of losing his seat than did a Politburo member during the heyday of the post-war Soviet Union.”

“Perhaps by the looks of today’s sea of red, the whopper told by Yellen during her presser yesterday may finally be sinking in. Our clueless Keynesian school marm not only falsely claimed ‘mission accomplished’ and that the US economy is heading for the promised land of permanent full employment and unprecedented prosperity. She also claimed that the Fed would soon begin normalizing its balance sheet to the tune of $50 billion per month of bond holdings runoff (i.e. effectively bond sales) — ultimately shrinking its holdings by more than $2 trillion — and that there would be nary a negative ripple effect thereupon.”

“As we will soon document further, the first part of Yellen’s proclamation is a risible lie. But the real whopper was her assurance that the Fed’s balance sheet normalization would be of no more moment than ‘watching paint dry’ on a wall.”

“The fact, is when there are no new breadwinner jobs, there is no gain in living standards or real prosperity. Indeed, Janet Yellen is lost in a Keynesian puzzle palace — and that is extremely bad news for the casino punters who still refuse to acknowledge the obvious.”

From Professional Adviser. “Société Générale’s bearish analyst Albert Edwards has said the ‘unelected and unaccountable’ central bankers who caused the global financial crisis will be - and ’should be’ - the next casualty of the current political landscape. Edwards said central bankers would be ’sacrificed at the altar’ as political turmoil continues to shows no sign of waning.”

“He said: ‘There is no recognition at all by central bankers that it may well be their own easy money and zero interest rate policies that are actually causing the stagnation in growth while at the same time wealth inequality surges to intolerable heights. Yellen et al will inevitably be sacrificed at the altar of political expediency as citizen rage explodes. And if I am right and it is clear for all to see that the central banks have caused yet another global financial crisis (GFC), of 2008 proportions, I personally believe central banks deserve to lose their independence.’”

“Edwards said the next financial crash as a result of another global asset bubble bursting is ‘inevitable’ and politicians will once again look for a scapegoat, like they did with the bankers in 2008. He went on to criticise central banks’ policy of quantitative easing, saying it had only created further bubbles.”

“‘The problem in creating asset bubbles to try and reflate the economy is that when the asset bubble bursts and blows up the economy, you are more likely to get the very deflation outturn that you were seeking to avoid in the first place. Even after the GFC these dudes simply have not learnt that loose money policies to blow asset price bubbles is a catastrophic policy destined to end in failure.’”

From Rupert Hargreaves. “The problem with market bubbles is they are hard to spot. Even for those investors who have experienced market booms and busts in the past, market bubbles can creep up on them as there is really no definitive way of predicting them. This collection of quotes from some of history’s greatest investors, policymakers and economists discusses market bubbles and how to prepare for them.”

“‘Fear and euphoria are dominant forces, and fear is many multiples the size of euphoria. Bubbles go up very slowly as euphoria builds. Then fear hits, and it comes down very sharply. When I started to look at that, I was sort of intellectually shocked. Contagion is the critical phenomenon which causes the thing to fall apart.’ — Alan Greenspan.”

“‘Investment bubbles and high animal spirits do not materialize out of thin air. They need extremely favorable economic fundamentals together with free and easy, cheap credit, and they need it for at least two or three years. Importantly, they also need serial pleasant surprises in such critical variables as global GNP growth. Bubbles have quite a few things in common, but housing bubbles have a spectacular thing in common, and that is every one of them is considered unique and different.’ — Jeremy Grantham.”

June 23, 2017

People Knew It Wouldn’t Last Forever

It’s Friday desk clearing time for this blogger. “A hedge fund proposal for freeing Fannie Mae and Freddie Mac from U.S. control is poised to face stiff opposition from investors who say it risks wrecking the mortgage-bond market. The Moelis & Co. blueprint calls for raising tens of billions of dollars in capital for the mortgage-finance companies. The plan, released earlier this month, would also limit the amount of federal money available to offset any Fannie and Freddie losses to $150 billion. ‘I don’t think you could sell virtually any of this debt overseas if it wasn’t government-guaranteed,’ said Scott Simon, who until 2013 managed billions of dollars in mortgage-backed securities for Pacific Investment Management Co. Some of his former foreign clients would have reacted to a limited backstop by asking him to ’sell it all,’ he said.”

“Government-insured Federal Housing Administration (FHA) loans accounted for nearly 8 percent of Bay Area home purchase loans in May, down from 8.6 percent in April and from 10 percent a year ago. Low-down-payment FHA loans accounted for a substantially higher share of home purchase loans in the more affordable stretches of the Bay Area, like Solano County, which had the highest FHA share in May — at 20.8 percent. Contra Costa County was second.”

“The sharpest jump in home sales between April and May was in Napa County, where they rose more than 40 percent. The average home there sold for $622,250 in May, a drop of .4 percent compared to April. In fact, prices fell between April and May in most of the Bay Area, with Solano County’s 1 percent increase being one of only three areas where prices rose.”

“San Francisco ‘is a tale of several markets,’ Coldwell Banker agent Joel Goodrich said. While Pacific Heights, Russian Hill, Noe Valley and the Mission remain strong, ‘the big inventory of new South of Market condos’ is putting pressure on older condos. The website SocketSite highlighted a Hayes Valley condo and a high-end home in Cow Hollow that just sold for roughly the same price they fetched in 2014.”

“Although recent data indicates home sales are declining in the GTA and Greater Golden Horseshoe Area, it does appear that more inventory is hitting the market and that prices are finally coming down. ‘In March, there were 1,566 listings in Mississauga,’ says Alex Ocsai, a Broker/Owner with Royal LePage Meadowtowne Realty. ‘Now, there are 2,592 homes on the market. There are 65 per cent more listings than there were in March. Hitting the high prices in March stimulated a lot of that, people knew it wouldn’t last forever.’”

“Landlords’ confidence has fallen as investors face the prospect of higher tax costs and weakening house prices, according to Kent Reliance research. The lender’s latest Buy to Let Britain report found 41 per cent of landlords are confident about prospects for their portfolios, down from 44 per cent in the previous quarter and 67 per cent three years ago. OneSavings Bank chief executive Andy Golding says: ‘A perfect storm of weakening house prices, higher taxes and lending restrictions have knocked investors’ confidence.’”

“Hong Kong’s K&K Property is among the developers feeling the effect of softening sales. Eager buyers snapped up units in K&K’s upcoming Victoria Skye luxury residential project when the first batches of apartments were put on sale starting late last month. But the developer managed to transact only 80 out of 206 units offered in the most recent round of sales, despite some 2,300 prospective buyers registering their interest.”

“Some observers are predicting a further drop-off in sales this year, driven by an unusually large influx of new housing supply. ‘Developers will offer their projects at competitive prices in view of more than 10,000 new flats available for pre-sale in the second half,’ Louis Chan Wing-kit, vice chairman at local agency Centaline Property told the South China Morning Post.”

“In Beijing, sales of so-called serviced apartments nearly tripled last year to more than 4 million square meters (43 million square feet), accounting for a third of all residential sales, up from just 13 percent in 2015. But sales there collapsed in April, down more than 98 percent year-on-year, while unit prices fell 31 percent in May, the E-House data shows. Developers in Shanghai have suspended sales of all related developments, property agents said. ‘Some cities over-planned their office supply; by converting some of this into apartments would have helped ease the glut,’ said Stanley Ching, head of Citic Capital’s real estate group.”

“Buyer’s remorse has resulted in two house sales falling through on the same day in Melbourne’s north-west, with the buyers ‘disappearing’ overseas. The St Albans buyers chose to give up the small deposit they paid on auction day last month rather than proceed with the sales. Both contracts have been rescinded. Henderson & Ball Lawyers partner Justin Lawrence said there were cases of buyer’s remorse from time to time, but it appeared to be occurring more than in the past.”

“‘I think the market in a lot of areas is barrelling on so hard that people are really being swept along by the process, and just going ‘did I really agree to pay $2 million for that vacant block of land?’ Mr Lawrence said. ‘And they wake up Sunday morning, and they think ‘oh my goodness’ or — as we’ve seen a couple of times — they go home and they speak to their spouse, and their spouse says ‘what do you mean you paid that much?’”

“The $100 billion city rising from the sea next to Singapore has hit a roadblock: China’s capital controls. Subsidized junkets that flew in prospective buyers to development sites in the southern Malaysian state of Johor have dwindled. And some buyers who paid deposits for yet-to-be-built homes are considering canceling their purchases.”

“‘I feel I’m on the horns of a dilemma,’ said Michelle Gao, who paid about 600,000 yuan ($87,825) toward the 1.2 million yuan cost of a two-bedroom apartment at Country Garden Holdings Co.’s vast Forest City development. ‘If the project relies so much on Chinese buyers like me, how on earth are they able to sell in future? Will the construction ever finish?’”

“Few projects are likely to be affected as much as the Chinese-financed developments in Johor, some of which had relied on mainland customers for as much as 90 percent of sales. Six Chinese buyers interviewed for this story said they paid a 10 percent down-payment to Country Garden in showrooms in China by swiping debit or credit cards or using payment services like Alipay. They said the property agents are now telling them they need to go to Hong Kong, Singapore, Malaysia or Macau to swipe their cards to pay the balance of installments, or wire funds to Country Garden’s overseas accounts.”

“Many are worried that would still make them liable under China’s foreign exchange rules. This month, the Chinese government said domestic banks will have to provide daily reports of clients’ overseas transactions of more than 1,000 yuan. ‘I was told it can still be done from Hong Kong, but I’m just scared now,’ said buyer Elaine Xiao. ‘I don’t know what punishment I may get.’ A buyer whose family name is Yu said she doesn’t intend to pay the next installment on her apartment when it comes due this month. She said her agent advised her to swipe her credit card in Hong Kong to get around the rules. ‘I asked the sales agent will you take responsibility when I’m blacklisted in China?’”

“The glut of properties being built in Johor has also affected local developers, Petaling Jaya-based Tropicana Corp. is giving a 25 percent rebate. Yu, the buyer from Guangzhou, worries that the thousands of apartments still to be built at Forest City will be hard to sell without Chinese buyers. ‘My home is still in the ocean,’ Yu said. ‘Locals will not buy homes with prices double the local rate. Without enough residents from China, everything will change.’”

June 22, 2017

Everyone Talks About Oversupply

A report from the Charlotte Observer in North Carolina. “Tenants are signing leases for three new uptown apartment towers, the latest in a wave that’s flooding the market with luxury units commanding the highest rents in the city. The avalanche of apartments means developers need to find renters for hundreds of freshly built units, a new test for the ongoing apartment boom. The gleaming towers feature top-of-the-line amenities that weren’t common even in high-end condominiums before the recession: Rooftop pools, spas for washing pets, package rooms with refrigerated storage for meal-delivery services. Jim Borders, CEO of SkyHouse Uptown’s co-developer Novare Group, said the building’s first tower is nearly fully leased while the second is about 20 percent leased. He said worries about oversupply downtown have become common in many of the markets in which Novare Group is building apartments, from Denver to Nashville.”

“‘Every single one of them, everyone talks about oversupply,’ said Borders.”

From Builder Online. “NAHB Eye on Housing’s Carmel Ford reports that completions of non-subsidized, unfurnished, rental apartments in buildings with 5 or more units totaled to 73,300 in the fourth quarter of 2016, which is about 9% higher than completions in the fourth quarter of 2015 (67,300). The absorption rate (the share of apartments rented within three months after completion) was noticeably lower at 48% in the fourth quarter of 2016. In the fourth quarter of 2015, it was 55% and has not been below 50% since the fourth quarter of 2009.”

From Bisnow on Texas. “As the urban core densifies more this cycle than ever before, the submarkets surrounding Downtown Dallas become more attractive to multifamily developers. Two of those submarkets — Uptown and East Dallas — have more units under construction than any others. High-end developments are leasing well, anything from 15 to 20 units a month in both submarkets, according to CoStar. ‘But we’re starting to see higher concessions. What was one month [free rent when signing] last year is 1.5 or two months this year,’ CoStar Group Senior Market Analyst of DFW David Kahn said.”

“Meanwhile the newer Uptown submarket is making more of a luxury play. Kahn’s only concern with the healthy market is communities renting units for $3/SF. ‘Until The Taylor delivered around $2.50/SF in 2014 and Brady delivered around $3/SF in 2015, we never saw that. Now we’re basically about to quadruple the amount of high rents in this small area in a couple of years.’”

The Sacramento Bee in California. “Six out of the seven least affordable metropolitan areas across the U.S. are in California. They are Los Angeles, San Francisco, San Jose, San Diego, Riverside and Sacramento. ‘It’s getting harder and harder to live here,’ said David Shulman, a senior economist for the Anderson Forecast. ‘The state is running out of people who can afford the $3,500 per-month rents so those prices are beginning to fall…but if you look at the one-bedrooms for $1,500, those rents are continuing to go up.’”

From Bloomberg on New York. “Donald Trump’s office properties aren’t bringing in as much cash as banks that loaned him money had expected. The buildings — 40 Wall Street, Trump Tower, and 1290 Avenue of the Americas, a tower in which Trump holds a 30 percent stake — are victims of a changing New York office market, where gleaming new skyscrapers are attracting tenants and demand for space in vintage properties is falling.”

“‘We’re in the biggest development pipeline in Manhattan since the 1980s,’ said Keith DeCoster, director of real estate analytics at Savills Studley. ‘Older buildings — circa 1980s, 1990s — are having a tougher time competing.’”

The Real Deal on Florida. “When the development firm lead by condo king Jorge Pérez hit the brakes on Auberge Residences Miami, a three-tower, luxury project planned for Miami’s Arts & Entertainment District, South Florida’s real estate community took notice. When the king lays off the gas, that doesn’t usually bode well for others.”

“Q: Do you think that slow and steady is the new normal for South Florida? A: I would think that we will always be a city of bumps and highs, a little bit like a roller coaster. At heart, developers are cowboys. They like the business, and we try to control them, but I don’t have control. The good part about Miami is this huge international demand. The bad part about Miami is every time they [foreign buyers] come in, we also have developers coming in from Colombia and Argentina and they have these projects and we say, ‘Are they kidding? They don’t know the market.’”

“‘I’m not going to throw anyone under the bus, but you’re seeing some projects [where] I’m saying, ‘Even in a good market, these should not be developed. It does not make sense,’ and we’ll get some of those.’”

June 21, 2017

How Communities Became Commodities

A report from Bloomberg on Brazil. “Brazilian banks are wrestling with a growing pile of assets they’d rather not own: at least 13.8 billion reais ($4.2 billion) of cars, real estate, equipment and other collateral seized when borrowers defaulted on their loans. The total surged 42 percent in the first quarter from a year earlier at eight of the nation’s biggest lenders as fallout from the worst recession in Brazil’s history continues to weigh on banks’ finances, according to the companies’ financial statements.”

“‘With more time, banks can now hold off on selling those assets until they manage to get a better price,” Eric Barreto, a professor at Sao Paulo business schools Insper and M2M Saber, said in an interview. ‘But in the event of a liquidity crisis like we had at the end of 2008, those banks with a lot of real estate assets may face troubles.’”

From Postmedia News on Canada. “Alberta’s boom and bust economy has left Calgary with record numbers of newly built homes and condos that sit vacant as a massive stockpile of housing goes up for sale at the end of a recession. More than 2,000 new housing units were unoccupied in the Calgary area last month, the biggest inventory on record, driven largely by construction of apartment-style condos, according to the Canada Mortgage and Housing Corp.”

“Many of the residential developments causing the glut broke ground in 2014, which marked the end of a boom with a dramatic slide in oil prices, triggering a prolonged recession. Todd Hirsch, chief economist at ATB Financial, said the major housing glut shows ‘we’re not ‘quite out of the woods’ after a bruising recession.”

From CNBC on Israel. “Israel will hold a lottery starting Saturday night to sell 15,000 apartments at reduced prices under a program to help ease starters into the housing market. One prominent critic of government policy on the subject warns that such measures at a time when prices are already showing signs of falling can lead to a rout in the market.”

“‘They take steps to curb the market but if the market is starting to fall, it will exacerbate the fall,’ says Elli Kraizberg of Barl Ilan university’s Graduate School of Business Administration. ‘Now when you find that the market is starting to fall, to prevent a 30 percent fall in the market, they should take steps that are the opposite of what they’re doing.’”

From Newsday. “President Robert Mugabe has stopped renting a luxury property in an opulent United Arab Emirates suburb, a top government official confirmed. While Mugabe’s spokesperson, George Charamba told the Sunday Times that the Zanu PF leader had been renting the property, in 2015 it was reported that First Lady Grace Mugabe had bought a house in the same neighbourhood for around $1 million, according to a Dubai estate agent, who claimed to have sold her the property.”

“The estate agent, who claimed he sold the Emirates Hills house to Grace, told the Sunday Times ‘anyone with a pile of cash could buy a villa in Dubai in no time, with few questions asked.’ ‘If you’ve got money in the bank, you can do a money transfer. If the money is in cash, which means it’s not legit, we have to find other means. But it’s not a problem,’ the agent was quoted saying.”

“Other famous residents of Emirates Hills include Asif Ali Zardari, husband of assassinated former Pakistani President Benazir Bhutto, who in 2004 was jailed eight years for shady arms deals and money laundering, and former Thai Prime Minister Thaksin Shinawatra, deposed by the military in 2006 before being charged with tax evasion in absentia.”

From Open Democracy on the UK. “This isn’t a story about the Grenfell Tower disaster. The causes of that are complex, and we don’t yet know them all. But it is the story of what’s happening to the homes and lives of ordinary people in London. It’s a story about how communities became commodities. And as criminal money pumps ever more air into the London housing bubble, driving up the prices in generally expensive areas, it’s no wonder that, to some, the relative value of the lives of the ordinary people who live there seem to diminish by comparison.”

“Writer Roberto Saviano is well-known world-wide as the leading expert in the Calambrian mafia. Saviano has written about crime in Italy and about international drug money. Of all of the places he’s researched, he holds particular contempt for one. Speaking last year, Saviano said: ‘If I asked you what is the most corrupt place on Earth, you might tell me, well it’s Afghanistan, maybe Greece, Nigeria, the South of Italy and I will tell you it’s the UK.’”

The Dhaka Tribune on India. “According to a rough estimate of industry insider, on average prices of flats have seen 25% to 30% fall in the last couple of years after the bubble burst in 2012. A large reason for the drop in sales in recent years was that prices had remained artificially high in the decade and half before that because of the unregulated use of ‘black money’. Policy Research Institute of Bangladesh executive director Ahsan H Mansur said that ‘Huge black money invested in the property business was one of the reasons behind the creation of housing bubble for the last few years, and it was bound to burst sooner or later.’”

“Seeking anonymity, an economist said that a huge amount of black money is still being pump into housing sector. He argued that prices of flat remains high and beyond the reach of people only for allowing black money in the sector. According to law, untaxed money holders can legalise the money through construction or purchase of residential buildings or apartments by paying a 10% tax. Despite the criticism surrounding the opportunity to whiten black money, the Real Estate and Housing Association of Bangladesh wants investment of black money in the sector without questions being raised about its source.”

“The realtor platform claim that the number of unsold flats still remain above 10,000.”

The South China Morning Post. “The market has cooled sharply since March 17, when Beijing’s municipal authorities tightened rules such that those who had paid off previous mortgages would no longer be classified as first-time buyers. In addition, new caps on mortgage lending meant second home buyers had to put up a minimum payment of 80 per cent. A majority of prospective buyers were priced out due to the higher purchasing threshold.”

“Housing agents say transactions have slowed dramatically as sellers are reluctant to compromise much on price while buyers are sitting on the sideline waiting for bigger bargains. Meanwhile, more than 80 per cent of Beijing owners are reducing their asking prices, while just three months ago, 80 per cent were raising prices, according to property agent Homelink. In a reversal from three months ago, when home prices were rising regardless of layout, design, and building age, buyers now have a lot more negotiating power.”

From Your Investment Property on Australia. “Mainland Chinese investors are turning their backs on the Australian property market due to a series of measures designed to cool one of the world’s hottest real estate markets. This dip in foreign investment heightens the risk of a damaging correction in house prices. The federal and state governments’ latest moves targeting foreign investors mirrors similar measures imposed in other favoured destinations of Chinese investors, including Vancouver, Singapore, and Hong Kong. However, there are fears that our governments’ latest measures could push an already unstable market over the edge.”

“Sutono Pratiknya, a Sydney-based property sales consultant, said the new measures have sent a clear signal that overseas investors are no longer welcome. ‘We used to do five property tours a month, picking up a dozen investors from the airport and showing them our latest offering. Now, there’s nothing,’ Pratiknya said.”

“‘The fact is that a lot of developments hinge on foreign investment,’ said David Bare, the NSW executive director at the Housing Industry Association. ‘Applying these measures when the market is starting to cool is going to have a much greater effect than it might’ve 12 or 18 months ago.’”

June 20, 2017

Waiting For The Rescue Boat

A report from Bizwest on Colorado. “In the Boulder Valley, we are beginning to see the two largest residential market segments (in terms of price) act as two different market with two different sets of rules. On one hand, we have what I’ll call the ‘Upper Market,’ which I’m defining as homes priced at $1 million and above (which currently go up to $5,995,000). You’ll note that I’m not calling this the ‘Luxury Market,’ both because the average home in Boulder is currently over $1 million and because many of the homes in this segment would not fit the definition of ‘luxury.’ On the other hand is the ‘Lower Market,’ which is comprised of any homes below $1 million. While the Boulder Valley is generally described as being in a seller’s market, the Upper Market shows strong signs of being a buyer’s market.”

“As of the close of the first quarter, there were 11.3 months’ of inventory in the Upper Market. If you are a buyer in the Upper Market, it means you likely have a little more time to consider your options and are more likely to be able to buy a home for less than its asking price.”

From Maui Now in Hawaii. “Maui Now sat down with realtor Lee Potts of Aloha Group Maui and KW Island Living to discuss the current Maui real estate market. Maui Now: Is the current Maui market a buyers or sellers market?”

“Lee Potts: If you go to homes that are for sale over $700K, there were 48 sales last month and there’s 405 homes for sale above $700K. That’s enough inventory to last for over eight and a half months, that makes it more of a buyers market. If you jump up a little higher, which is not uncommon here on Maui, to $1.5 million there were only 15 sales but we have 215 homes for sale so that very much is a buyers market above $1.5 million.”

The Greensboro Reflector in North Carolina. “Current data indicates that the supply is dwindling in lower to mid-price ranges, good news for those sellers, but increasing as prices increase, according to data supplied by Mike Aldridge of Aldridge and Southerland Realtors. ‘There’s only a one month supply of houses between $100,000 and $150,000 and a three-month supply of houses between $155,000 and $175,000,’ Aldridge said. ‘It only reaches a balanced supply when the price reaches $250,000 to $350,000. Really, anything below $400,000 is looking really good for sellers.’ Above that price, supplies increase between 12-24 months, Aldridge’s data indicated.”

“Home prices are adjusting upward somewhat but not yet to pre-recession levels, Charles Manning, president of the Greenville-Pitt Association of Realtors acknowledged. ‘People who have been sitting on the (selling) fence now are hearing that the market is picking up and they’re beginning to feel like they’d better get their home on the market,’ Manning said. ‘A great many are still upside down (a condition where the equity value of a property is less than the outstanding loan balance) and they can’t sell. That explains some of the current financing issues some people are facing.’”

The Killeen Daily Herald in Texas. “Almost 67 percent of all new foreclosures in Bell County in 2016 were tied to the Veterans Affairs home loan, a federally guaranteed, zero percent down mortgage for qualified veterans and active-duty soldiers. Due to the favorable terms of the loans — more than 57 percent of new purchasers in the Fort Hood area market used one in 2016 — service members, often unknowingly, take on a Catch-22 loan in looking for a way to grow their wealth.”

“Brian Adams, a real-estate agent with StarPointe Realty in Killeen said the Fort Hood area market is unique due to a high number of foreclosures on Veterans Affairs home loans. ‘Because of the 100 percent financing and the fact that most buyers finance the VA funding fee into the loan, it literally means that buyers with the VA loan are underwater from Day 1, usually by a few thousand dollars,’ Adams said. ‘Many soldiers’ financial situations change, they find that they bought more house than they could keep up with, and find that they can’t sell it without bringing a lot of money to the table.’”

From Mansion Global on Florida. “Both developers and buyers are taking a wait-and-see approach to the launch of new developments in Miami. For developments that have broken ground and are moving forward, between 60% and 100% of the units have been sold, said Edgardo Defortuna, CEO of Fortune International Group, a real estate development. For Miami projects that have launched sales but not broken ground, ’sales are slow, with few exceptions,’ he said. ‘They’re waiting for the rescue boat to come in and lift them out of the water,’ Mr. Defortuna said.”

The Real Deal on New York. “On this week’s episode of ‘Million Dollar Listing New York,’ our three heroes give us an exercise in stress management. With 25 Mercer in the rearview mirror, Fredrik is reaching for new heights — literally — at 45 West 22nd Street, an 83-unit condo tower in the Flatiron District. He’s beckoned by the building’s developer, Bruce Eichner, who bestows on him $400 million in unsold listings.”

“Though it doesn’t seem like Lorber is especially ecstatic when he finds out Fredrik has agreed to Eichner’s pricing structure. Perhaps he should have said no and ran for the hills? Nevertheless, Fredrik embarks on his quest to make Papa Lorber proud. He focuses on selling the $20 million apartment before he pushes the pricier units on the higher floors. Lorber unexpectedly turns up during the sales soiree, and reminds Fredrik of all those ridiculously priced pads that he needed to sell, like yesterday. This tower may too tall for even Fredrik to climb.”

“Shortly after the first home sells, Ryan meets with David, the seller of the 17-foot-wide townhouse, to convince him lower the asking price. He uses the $9.47 million townhouse — yep, the one that ruffled David’s feathers last episode — as a comp for the neighborhood. Even if the current price is a bit high, he should’ve known this would upset David, seeing as he was bothered by Ryan talking a similar listing on the same street. But rather than budging on the asking price, David decides to take the townhouse off the market.”

“‘That’s not reducing the price — that’s the opposite,’ Ryan says. ‘Now there’s no price!’”

June 19, 2017

Thinking Of It As A Gold Mine

A report from the St Catharines Standard in Canada. “After more than a year of soaring real estate values in Niagara, ‘the feeding frenzy is slowing down,’ says St. Catharines realtor Randy Mulder. Although the region’s real estate market has yet to be hit as hard as the GTA, he said the impact of measures introduced by the provincial government to rein-in escalating house prices will eventually trickle down to Niagara. Brock University business accounting professor Feyez Elayan said home values in Niagara are catching up after decades of being undervalued, which may help protect them from fluctuations in the market.”

“‘People are starting to figure out the value of the Niagara region,’ he said, referring to amenities and events that make the region a desirable place to live. ‘We are sitting on a gold mine. The prices will come down and settle, let me put it that way. But it’s not going to go back to the previous level.’”

From News.com.au. “The picturesque city of Vancouver took inspiration from Australia by clamping down on foreign buyers purchasing existing homes in the seaside city. But unlike Australia, Canada has no restriction on foreigners buying real estate — and in a country where property taxes are very low, that was driving prices skywards. So, in August last year, Vancouver’s provincial authority, British Columbia, the equivalent of our state governments, moved. From January 2016 to January 2017 house prices in Vancouver fell 18.9 per cent.”

“While foreign investment is often demonised as contributing to Australia’s escalating house prices, the University of Sydney’s senior lecturer in urbanism, Dallas Rogers, said it has been far easier for foreigners to invest in Canada than it has in Australia, hence why the new measures in Vancouver have had such an impact. On the opposite side of the country, Toronto is now also looking at introducing similar measures.”

“In Australia, he said, the major problem is the evolution of property as a means to make money, rather than as simply a place to live. ‘It comes down to the way we think about homes and the way we are still thinking about homes,’ he said. ‘From about World War II we’ve had this changing view of a house as a place to live and to raise a family, to, increasingly, thinking of it as a source of capital.’”

The Vancouver Sun. “Massive and risky home loans are increasing in number across Metro Vancouver, while mortgage fraud cases are also on the rise, connected to the growth of so-called ’shadow banking,’ a Postmedia investigation shows. The trend of increasingly risky loans underlying Metro Vancouver’s high home prices is illustrated by Bank of Canada figures that show the rapid growth since 2014 of large mortgages made to people with relatively low incomes.”

“There is also evidence of growing links between shadow banks and traditional banks, according to the Bank of Canada’s June 2017 report, as people borrow large amounts from shadow lenders to use as down payments in order to qualify for lower-interest loans from federally regulated banks. Shadow lenders identified by Postmedia through a review of B.C. civil court filings, lending documents and regulatory filings, include mortgage investment corporations, hedge funds, and private lenders such as realtors, crowdfunding companies, real estate lawyers and mortgage brokers.”

“For Hilliard MacBeth, an Alberta-based author and wealth manager, the Bank of Canada loan risk statistics and the related growth of shadow banking in Vancouver and Toronto herald a crisis. ‘These properties in Vancouver are so expensive that you need people either laundering money or loan fraud or people borrowing such large amounts of money that should never be allowed, in order to keep it going,’ MacBeth said. ‘If everyone is reporting their incomes honestly in Vancouver, there is no way that housing prices can stay where they are.’”

“Postmedia’s review of Ficom enforcement hearings shows an increase in the number of alleged mortgage fraud cases in B.C., mostly linked to private mortgage lenders and mortgage brokers. ‘We have experienced an increase in mortgage broker complaints in the last few years,’ Chris Carter, acting registrar of mortgage brokers, confirmed. ‘About a third of our investigations relate to application fraud.’”

“As a result of the flood of money pouring from Mainland China into Vancouver real estate in recent years, some financial experts say they believe Canadian banks are directly exposed to shadow lending in China and the risks of so-called ‘ghost collateral’ — meaning collateral that may not exist or is used continuously to secure loans for multiple borrowers. Postmedia confirmed that Canadian banks are allowed by the federal regulator, the Office of the Superintendent of Financial Institutions, to accept collateral from China to secure real estate mortgages in B.C.”

“One U.S. hedge fund manager, who did not want to be identified, said: ‘We all know that the ghost collateral is a huge deal, and we all know that the shadow banking and other Chinese influence in Vancouver is profound. The issue it that the ghost collateral ends up re-hypothecated and laundered. So by the time it shows up in Vancouver, it will likely just look like a rich Chinese cash buyer with a suitcase of money.’”

From Macleans. “A year after getting married, Alex Taylor and Rachel Tuttle decided it was time to buy a home and start a family. But soon after starting the hunt in 2015, their hopes were dashed. Detached homes were averaging $1.2 million, and even though Taylor and Tuttle qualified for a mortgage, they would have faced steep monthly payments of $4,000. They adjusted their expectations and set their sights on a townhouse on the outskirts of the city. Still, the cost was too high. ‘It felt very risky to put that much of your savings into one investment,”’ says Tuttle.”

“Taylor is tired of talking about the issue. ‘I know it’s mean to say and I know it would hurt those of our friends who completely over-extended themselves,’ he says, ‘but honestly, we’re praying for a crash.’”

“He’s not the only one. In May, sales dropped 20 per cent compared to the year before in the Greater Toronto Area while active listings surged 42.9 per cent from a record low. Those are the kinds of numbers that cause indebted homeowners to sweat, but serve as a balm for those on the sidelines in Toronto: like Taylor in B.C., many now openly cheer for the market to collapse.”

“The Financial Consumer Agency of Canada found the number of households with a HELOC and a mortgage against their home has increased nearly 40 per cent since 2011, prompting commissioner Lucie Tedesco to caution this month the trend ‘may lead Canadians to use their homes as ATMs.’ Last year, Canadians withdrew $12.8 billion in home equity to fund renovations, according to Scotiabank Economics, and another $3.6 billion for ‘other’ purposes.”

“‘A lot of people have these totally unsustainable lifestyles they’re only able to pull off because, by doing nothing but sit on their ass, their net worth goes up by a few grand every month,’ says Toronto resident Phillip Mendonça-Vieira. ‘I don’t think there’s anyone who doesn’t own property who’s not secretly, like, ‘F–k you, guys. This is unsustainable.’”

From The Tyee. “You’ve heard it a million times. The reason so few of us can afford Vancouver is because there aren’t enough new homes being built. This is the version of reality that real estate industry leaders and their political allies want us to believe. But an investigation of the industry by The Tyee has revealed reality to be much more complex.”

“Over the past six months I spoke at length with financial analysts, economists, industry consultants, realtors and many others to learn the true causes of Vancouver’s housing crisis and who is profiting from it. They were in broad agreement that real estate is at the centre of a massive realignment between our society’s rich and poor — and one that few leaders in the industry seem willing to publicly acknowledge.”

“Real estate has historically been a local industry. The people who buy and sell a city’s homes tended to live in that city. Yet that all began to change a decade or so ago. And one of the major reasons for it is a big shift in our global financial system. It’s a complicated subject. But what you need to know is that the global capital investors use to invest in things is growing much faster than the actual economy. There is so much capital, investors don’t know what to do with it all.”

“Desperate for quick financial returns, many investors are pouring this capital into real estate, turning local markets into global investment opportunities. One of the results, according to trackers such as Bain & Company, is ’skyrocketing home prices.’”

“The real estate industry is aware social mobility is declining. Its leaders know there is huge demand for cheaper homes. But they prefer to profit from income inequality rather than doing anything about it. That’s one takeaway from a major real estate industry trends report produced by PwC and the Urban Land Institute. ‘The middle class has been hollowing out,’ it concluded.”

“With land prices going up in big cities, the industry is increasingly focused on building luxury homes for wealthy people. Not everyone thinks it’s a wise strategy. ‘Time will tell if that’s going to come back to haunt us,’ said one CEO. ‘Not everybody makes $75,000 to $100,000 a year.’”

June 18, 2017

It Was A Pretty Good Story About A Lack Of Supply

A report from the South Bend Tribune. “The sun beat down on a recent weekday as crews worked to level 29 acres of land for The Reserve, a new 390-unit luxury apartment complex. Watermark Residential, a developer out of Indianapolis, announced the project in September, when it filed to annex the property into the city of Mishawaka and rezone it from agricultural to residential. The Reserve is among a slew of new projects as the local rental market rebounds from an extended down period, with developers projected to add 2,000 new units to the market by the end of next year — compared with just 205 the previous four years.”

“Compared with other urban markets, South Bend has lagged in new apartment construction over the past few years, with only a few hundred units added from 2013 to 2016, and zero in 2014 and 2015. ‘I think what you’re seeing across most of country right now is oversupply. We like the schools up there, and we like the fact that it’s close to new retail,’ David Englert, director of acquisitions for Watermark, said. ‘And then up until recently, it was a pretty good story about a lack of supply of new apartments being delivered.’”

“The problem is particularly acute at the high end of the market, Englert said, characterized by upscale, single-family-style developments with pools, fitness centers, lounges, game rooms, rooftop terraces, dog parks or walks and other amenities. ‘That’s the market that virtually everybody whose building now, that’s the market they’re going after,’ said Michael Zink, senior vice president of multi-housing with South Bend-based Bradley Co.”

From Crain’s Chicago Business. “Building booms often end badly, especially those—like in the student housing sector—that have stretched out for several years. While a few college towns where Core Spaces doesn’t operate, such as Baton Rouge, La., and College Station, Texas, are getting overbuilt, the U.S. market remains healthy overall, says Taylor Gunn, a student housing analyst at Axiometrics. Developers are expected to complete 47,122 off-campus student-housing beds around the country in 2017, roughly equal to the last two years, and down from more than 62,000 the two years before that, according to Axiometrics.”

“Marc Lifshin’s company, Core Spaces, develops buildings with golf simulators, spas with plunge pools and tanning beds, and in-room hot tubs. As student housing developers have tried to one-up each other with amenities, some observers have questioned the focus on luxury, grumbling that college has become a country club for rich kids.”

“A Core Spaces project in Madison, Wis., includes a band room and ice rink in the winter. This year, Core Spaces will wrap up a second development in Madison and one in Seattle. Projects in Ann Arbor, Mich., Tuscaloosa, Ala., Minneapolis and other towns are on tap for 2018. ‘This is kind of the third inning of student housing right now,’ says Lifshin. ‘I don’t think we’re close to the peak yet.’”

From Costar. “The senior housing sector saw elevated expansion levels of new units in the first quarter of 2017, with the additional new inventory offsetting otherwise healthy levels of absorption, according to Tim Komosa, an economist manager for Fannie Mae. A combination of high levels of new construction and unexpected interruptions in demand have resulted in Houston, Las Vegas and San Antonio having the lowest occupancy rates among the large metros for seniors housing. Total absorption for seniors housing declined from the recent record levels. Annual rent growth for seniors housing declined from its recent peak.”

“‘Given the robust supply that segment has seen in the past five years, this (lower) level of occupancy is likely just a result of slightly too much supply in a short period,’ Komosa said.”

The Anchorage Daily News in Alaska. “Anchorage’s typically tight rental market is loosening. Vacancies are up and rents are down compared to last year, with some landlords even offering one month free on a year lease and other incentives. In Carolyn DeYoung’s experience, some property owners are still adjusting to the new reality of the rental market. ‘I’ve had to call more than one owner to say ‘OK, they (the prospective renter) will pay $1,500 not $1,600 a month, because they can rent the same thing down the street,’ said DeYoung, who has worked in the industry for 18 years.”

The Real Deal on Florida. “Demand remains robust for rental housing in Miami and the rest of South Florida, among residents and real estate investors alike. But despite the area’s population and employment growth, some market watchers say South Florida’s extended, postrecession rise in monthly rents could slow or stop if overbuilding floods the market with units. ‘Luxury rents are going to start coming down as more and more individual investors put their condos on the market to rent,’ said Joe Lubeck, CEO of Robbins Electra, which owns and manages about 23,000 units in multifamily developments in Florida, Georgia, Maryland, North Carolina, Texas and Virginia.”

“‘That probably will be most problematic in Miami, but we’ll also be seeing it in all the major metropolitan areas, because so many of the new condominiums are being bought to rent out,’ Lubeck says.”

“Rents at less luxurious locations in South Florida are bumping up against their upper limits, too, said Mike Pappas, president of South Florida residential brokerage firms Keyes Company and Illustrated Properties. ‘There’s no question there has been a skyrocketing of rents in the last five years that has peaked,’ Pappas said. ‘We’re starting to see rental prices wane, or at least pause.’”

The Washington Post. “Richard Florida is rethinking things. Since publishing the best-selling book The Rise of the Creative Class in 2002, Florida has used his considerable speaking and writing heft to push mayors, urban planners and company executives to cater to tech-savvy young professionals. His argument, in short, was that to save themselves from postindustrial ruin, cities needed to attract the best young talent in computer programming, engineering, finance, media and the arts so their towns could build economies based upon the venture capital and start-up companies the new workforce would produce.”

“Often taking a cue from Florida’s mantra, real estate developers dialed up hip but tiny apartments designed for creative millennials and outfitted them with coffee bars, gyms, pool tables, bocce courts, pool decks and fire pits. Somewhere along the way, however, Florida realized that the workers he so cajoled were eating their cities alive.”

“‘I think, to be honest, I and others didn’t realize the contradictory effect,’ Florida said in April at a panel discussion. He said he realizes now that prompting creative types to cluster in small areas clearly drove living costs to such heights that low-income and often middle-income households have been forced elsewhere, creating a divide.”

“As inequality has deepened in top cities, writers on class and poverty have begun to take sharper aim at Florida’s theory, calling the ‘creative class’ a fallacy and a failed experiment, not because he was wrong that investing in cities would help draw the creative class but because he argued that doing so would benefit cities at large. So although he still champions investments in urban areas, at the panel event Florida said the criticism had made a mark.”

“‘To be seen as the neoliberal devil, foisting gentrification on cities, is not a situation I like to be seen in,’ he said.”

June 17, 2017

Moral Hazard, Easy Money And Cheap Credit

A weekend topic starting with the Star Tribune. “Prices for houses are generally back to where they were during the housing bubble that preceded the financial crisis a decade ago. What’s worse, flipping is back. That is the speculative practice of buying houses hoping to quickly sell for a gain. One report this spring said there hasn’t been this much flipping since 2006 — more or less the frenzied peak of the last housing boom. Neel Kashkari of the Minneapolis Federal Reserve seems oblivious to all this, at least according to critics knocking Kashkari’s recent essay about asset bubbles and what the Fed ought to do about them. Kashkari’s entirely sensible answer: not much.”

“And he made an even better point, that, even if the Fed did have something smart to do, it’s highly unlikely anyone at the Fed managed to correctly spot an asset bubble forming in the first place. As for the U.S. housing bubble alarmists of 2017, there’s far more to proving a case of irrationally overvalued housing prices than pointing out that the Case-Shiller housing price index has climbed above 2006 levels.”

“And it appears Kashkari agrees. ‘I appreciate [you] responding to my essay,’ he responded via Twitter to a blog arguing that spotting bubbles isn’t difficult at all. ‘If so easy to spot bubbles, why tell us? Launch [hedge fund] and short ’em. Make trillions. No? Just talk then.’”

From KCRA in California. “The average Sacramento County home is on the market for just eight days before selling, SAR’s Tony Vicari said. It’s really all about supply and demand, Kellie Swayne of Dunnigan Realtors said. ‘Right now, California’s real estate is hot, hot, hot,’ Swayne said. ‘With so little supply out there we’ve got lots of buyers in the market. We’ve got multiple offers most of the time.’”

“But with prices on the rise, some wonder if Sacramento’s housing bubble could one day crash as it did in 2008. Swayne said conditions are different now because inventories are so low. ‘For right now, there’s no end in sight in Sacramento, and frankly across the state, for relieving of more inventory on the market,’ Swayne said. ‘When that happens maybe we can start talking about a bubble.’”

The Business News Network in Canada. “In the almost 12 months since Finance Minister Bill Morneau announced his working group on housing, Ottawa has made it harder for Canadians to get an insured mortgage through more stringent stress tests. In the meantime, B.C. and Ontario have pulled policy levers – most notably taking aim at foreign investors with a 15 per cent tax.”

“BMO Capital Markets Senior Economist Sal Guatieri says the time for policy tinkering has passed. ‘Time to take out the heavy artillery: higher interest rates,’ Guatieri wrote in a note to clients. ‘The ball is now firmly in the Bank of Canada’s court.’”

The Border Mail in Australia. “It is almost exactly 10 years since the financial world began a wobble that would swing into what we now know as the global financial crisis. Today, the scars of the global financial crisis remain. There have been trillions of dollars in losses. And in a world of subpar economic growth, even optimists are downbeat about whether the economic medicine has been taken.”

“Let’s start with the question of debt. Lord Adair Turner, who chaired the UK Financial Services Authority between 2008 and 2013 and helped redesign global banking, says the world since has not addressed this root cause of the crisis and that means it’s at risk of another one. Lord Turner says the world is suffering from ‘irrational exuberance’ and ‘debt overhang.’”

“‘There’s been no deleveraging,’ Lord Turner says. ‘Once you’ve got too much debt in the economy … it’s incredibly difficult to get rid of it. If you say, ‘I’m going to write it off’, your banks go bankrupt … if you try get rid of it by people paying down that debt … the attempt to pay it back is what drives the economy into recession.’”

“To avoid that, interest rates then fall, and that simply encourages more borrowing, he says.”

“The team at LF Economics - a research firm founded by Lindsay David and Philip Soos - have also been sounding strong warnings of a crash. David says, ‘I don’t believe there is another mortgage market globally where a banking system leveraged their household sector as much as ours is without a systemic collapse.’ He says Australia’s debt profile has a strong resemblance to Ireland’s debt profile in the lead-up to the GFC, whereby public debt levels by global standards were relatively low but household debt is extremely high.”

“‘The mistake we have made in Australia’s is that we essentially copied Ireland’s pre-GFC paper wealth creation model by allowing banks to over-lend and engage in Ponzi finance,’ Mr David says. ‘That is, lending ever-larger amounts of mortgage debt to owner-occupiers and investors to increase leverage and outbid other speculators.’”

From Bloomberg. “The architects of U.S. monetary policy at the Federal Reserve should be happy. They’ve succeeded beyond their own expectations in bringing down the unemployment rate without triggering an outburst of inflation. Stock indexes are near record highs, and interest rates remain low. On June 14, the Federal Open Market Committee voted as expected to raise the federal funds rate a quarter point, to a range of 1 percent to 1.25 percent. It said it expects inflation to rise to its 2 percent target ‘over the medium term.’”

“For Fed Chair Janet Yellen and company, the central mystery continues to be why ­inflation remains below 2 percent despite unemployment having dropped to just 4.3 percent in May. Those who set interest rates are in the awkward position of not understanding how things got so good—and are therefore confused about what to do next.”

“The risks could simply be hidden. If rates get much higher, borrowers who took on too much debt during the long period of abundant credit may have trouble making payments or refinancing, says Christopher Whalen, chairman of Whalen Global Advisors Inc. He says the Fed should have begun tightening credit several years ago but can’t do so now without triggering a wave of defaults. ‘I think they’re stuck,’ he says. ‘They’ve boxed themselves in.’”

The Real Deal. “In May, commercial real estate mortgage borrowers paid off maturing loans at a slower rate, according to Morningstar Credit Ratings LLC. In 2007, borrowers took out 10-year loans that were repackaged into commercial mortgage backed securities. This partially explains the uptick in the number of unpaid and delinquent loans, the Wall Street Journal reported. About $9.4 billion was unpaid from about 790 loans that came due last month.”

“The real estate market has been preparing to deal with a wall of 10-year maturities, and last month there was an increase in borrowers that either failed to repay their debts or defaulted on monthly payments. ‘It’s all because of the riskier nature of the loans originated 10 years ago,’ Steve Jellinek, a Morningstar vice president told the newspaper. ‘Today, with more conservative lending standards, they can’t get refinancing.’”

“Nearly 18 percent of commercial mortgage securities loans that reached maturity in the past 12 months were delinquent. From June 2015 to April 2016, the average was about 10 percent.”

From the Independent Institute by Alvaro Vargas Llosa. “Moral hazard, easy money and cheap credit have never produced good results. History is littered with examples of financial disaster brought about by monetary manipulation originating in central banks and then spreading to other parts of the system. One would think that the 2007/08 credit crisis, whose effects have not quite withered away, would teach politicians, central bankers, corporations and consumers something about the causes of credit crunches and meltdowns.”

“Think again. The world’s four largest central banks have pumped more than $9 trillion into the system since the last financial crisis and brought about a world of absurdly low and even negative interest rates. The incentives generated by these policies and their effects—moral hazard, easy money, cheap credit—will lead, at some point, to the bursting of new bubbles.”

“However, those consumer credit markets are the ones already signaling distress, so we better pay some attention. These symptoms point to risks not dissimilar in nature to what was happening before the housing-related financial meltdown. Banks are beginning to reduce outstanding corporate lending for the first time since that crisis, a very significant reversing of the trend. Standard and Poor’s downgraded 1,088 companies in the United States last year, and analysts are predicting a wave of junk-debt defaults, perhaps encompassing one in every four high-yield debt issuing companies.”

“One can never tell exactly when a bubble will burst or which corner of the financial system will be the epicenter of the earthquake. But if and when these looming bubbles explode, the main culprit will be the irresponsible policies that were supposed to prevent future bubbles and that created the perfect storm of moral hazard, easy money, and cheap credit once again.”

June 16, 2017

What Was Happening Before The Recession

It’s Friday desk clearing time for this blogger. “A new report from RealtyAustin shows for the first time ever, the average price for single family homes in the Austin area is nearly $400,000, up 9.6 percent from May 2016. After a long search first time home buyer Caitlin Intrator remains optimistic. ‘I do think the growth will continue, so when I hear that number I think, Yes! Can I just get in today? So tomorrow I can start reaping the benefits.’”

“David Arbit, director of research and economics for the Minneapolis Association of Realtors, said we’re not in a housing bubble. ‘Typically in bubbles, you have easy money, where if basically if you fog a mirror, you can get a mortgage,’ Arbit said. ‘And we don’t really have that anymore.’”

“They were all the rage — then the scourge — of the housing boom and bust. Now they’re back, big time: home mortgages that require tiny or zero down payments from buyers. Several major lenders are offering loans with 1 percent down, and now a large national mortgage company has gone all the way, requiring absolutely nothing down.”

“Movement Mortgage, a top-10 retail home lender, has just introduced a financing option that provides eligible first-time buyers with a nonrepayable grant of up to 3 percent. This allows applicants to qualify for a 97 percent loan-to-value-ratio conventional mortgage — essentially zero from the buyers, 3 percent from Movement. Duke Walker, branch manager for Movement for the Washington area, told me that although the program is brand-new, it’s already ‘going great guns.’ Movement is hardly the only player in this arena.”

“Many San Diegans would like to own a home in the region they work in, but they often struggle with the large down payment. Gearing up for a new generation of buyers, San Diego-based Guild Mortgage has launched a 1 percent down payment mortgage that has some of the easiest debt requirements on the market. Other lenders — Quicken Loans, Guaranteed Rate, United Wholesale Mortgage — have 1 percent down programs, but Guild Mortgage allows the borrower to have the most debt and allows for more sources of income, said an analysis by HousingWire.”

“Norm Miller, real estate finance lecturer at the University of San Diego, said 1 percent down payment programs ignore a lesson from the housing crash: Not having a high amount of equity in a home can be asking for trouble. He said a buyer who overpays for a property by 5 percent, but only pays 1 percent down, could quickly find themselves with negative equity. ‘That’s not an unrealistic scenario,’ he said, noting data from 2005 to 2008 that showed it happening frequently. ‘It’s déjà vu all over again.’”

“Miller said that adjustable rate mortgages weren’t the only factor in the crash, but also dropping home values. Defaults don’t typically happen if a borrower’s home has positive equity, he said. When the value of a home drops, that’s a big factor in defaulting — no matter what type of loan. ‘The system is not set up to stop people from overpaying,’ Miller said.”

“San Francisco, which had the greatest uptick in home values in recent years, now has the weakest market out of the nation’s top 100 metropolitan areas, with annual prices falling for the first time since 2011. ‘We are seeing an increasing number of engineers who don’t want to live in this state of uncertainty. They are opting to go back home to India or China, or they are looking to work in Canada,’ said Mike Grandinetti, chief marketing and corporate strategy officer at Reduxio, an IT firm based in Silicon Valley.”

“For more than 20 years, Mark Eilers, managing director of land services for Colliers International in Tampa, has been helping clients buy and sell land. Q: With prices for residential real estate rising so much, there’s concern that we might be headed for another housing bust. Do you see signs that commercial real estate in general is slowing down or even facing a bust like that in 2007-08? A: (Lenders) are much more methodical in underwriting than they were back then, and they are underwriting more intelligently. Now things have slowed done and people on all sides are being more careful, the lenders, the developers, everybody.”

“Q: Are any types of development cooling? A: Multi- family (apartments). The lending market is tightening up so it’s putting pressure on getting deals done even if they find land. Right now lenders are a bit wary. Are we going to be oversaturated in West Shore, for example, with all the top-dollar rents? How deep is the renting pool? Downtown Tampa is the same way. It’s all predicated on the fact that because land is so expensive, rents have to be really high and (lenders) are concerned, do we have enough business to rent at $2 a square foot? Historically in Tampa, an apartment complex built in 1985 in Carrollwood is getting $1, maybe $1.30.”

“CoreLogic’s latest report places Connecticut’s negative equity share, or percentage of mortgaged homes in which the loan amount is higher than what the home is currently worth, at 9.9 percent — the fifth-highest total nationally. Nevada has the highest negative equity share, at 12.4 percent. Florida, Illinois and New Jersey rounded out the top five. ‘I’m not surprised if that were the case,’ said Michael Barbaro, president of the Connecticut Association of Realtors. ‘I can tell you that what I’ve witnessed is a lot of sellers or would-be sellers that just don’t have the equity to sell.’”

“Barbaro said the fact that millions of people are still underwater shouldn’t be surprising considering what was happening in the lending world before the recession. ‘Prior to the crash, there was a prevalence of high-ratio loans, such as 100 percent financing,’ he said. ‘In addition to the fact that they purchased at the height of the market, (homeowners) didn’t have a lot of equity to begin with.’”

“Searches for ‘overgrown,’ ‘debris’ and ‘dilapidated’ in the Public Eye email inbox yield countless reports of rundown homes in South Jersey. Despite a four-year turnaround in the housing market and an optimistic outlook from officials, Atlantic County still has one of the nation’s highest foreclosure rates. Homes remain vacant years after the recession. While auctions and investors have helped remedy the problem in many towns, residents still notice homes falling into disrepair, with no one seeming to handle the problem.”

“One Egg Harbor Township resident who contacted Public Eye said he’s taken the first step in getting a neglected foreclosed home addressed. The concerned resident said the committee helped him get as far as identifying who currently owns the property, Ditech Home Loans, to which notice has been given. But there has been no response from the Florida-based company.”

“A last-ditch effort may be to look into home and garden show casting calls. A quick scan of the TV seems to suggest the newest reality-show trend is home renovations, and Atlantic County could provide a handful of house-flipper series a season’s-worth of shows.”

June 15, 2017

Sellers Were Thinking This Is Their Lottery

A report from the Toronto Star in Canada. “When it comes to Toronto real estate, there are roughly two kinds of people: those who own a home in the city and fear (or vehemently doubt) that a crash is upon us, and those who don’t own a home in the city and pray with all their might that a crash is upon us. Those who did pull themselves up with little help made big sacrifices and big, complex, plans, along the way. For example, Sarah Larbi, a 33-year-old Toronto native who owns six houses with her common-law partner — one in Oakville, where the couple lives, and five in Brantford, which she rents out for $1,300 to $1,500 a month. She has been saving aggressively for several years to amass what is essentially a suburban empire.”

“Even though Larbi is presumably the last person to shy away from big risks, she isn’t willing to take an investment risk on Toronto real estate. ‘If I buy a house (in Toronto) and it’s a million dollars, let’s say, then you’ve got to make $10,000 a month (in rent) or something insane in order to make any money at the end,’ she says. ‘For me it doesn’t make sense because I’d have to do high, high management, like Airbnb, to even break even.Larbi’s advice? If you have an appetite for risk, consider investing in a property outside Toronto, where prices are cheaper, ‘and maybe you’ll be able to use the equity to buy something (in Toronto) later.’”

From Metro News. “Between 15,000 and 28,000 homes in Toronto sit empty amid the housing crisis, according to a new staff report exploring the possibility of a vacant-homes tax. City staff tried to determine the number of units held purely as investments. They arrived at their figure by looking at Toronto Hydro data on addresses where electricity and water hadn’t been used in a year. A City of Vancouver study using similar methods pegged the number of empty homes there at 10,800.”

“Cherise Burda, executive director of the Ryerson City Building Institute, is encouraged Toronto has taken this first step toward a tax that would incentivize people to rent out vacant homes. However, she believes the real number of empty units is much larger, as the new report doesn’t take into account places where hydro isn’t even hooked up. ‘We need to be building housing for our population, not for speculation,’ she said.”

From Better Dwelling. “Toronto real estate had a sudden surge last year, and we’re finally starting to get a better picture of what happened. New statistics released by the Toronto Real Estate Board (TREB) once again confirm everyone didn’t just wake up to a shortage of land overnight. Instead it appears that speculators saw a gold rush, adding pressure to prices that sent emotional buyers into a bidding frenzy.”

“A surprising number of properties in the city of Toronto have been bought and sold in less than a year. In 2016, TREB said it was ‘less than 5%’ but stopped short of giving a number. In just the first five months of 2017 however, it accounted for 7% of transactions. TREB called this ‘a very small share,’ but to give it context it’s about twice as large as Toronto’s luxury market. Also probably worth noting here that Toronto’s luxury market is considered one of the hottest in the world. In case you didn’t catch that, 7% of the properties that were sold *this year* were bought less than 12 months ago – right around when prices started taking off.”

“Sure, some might be informal landlords, but the cap rates don’t make economic sense. If you’re not familiar with the term, that means home prices in Toronto can’t be made up with rental income in an efficient way. Most purchases return around 2% in rental income, which means you’ll lose money on a mortgage annually. Meanwhile listings are soaring, as people try to exit. Toronto needs to continue building to prevent an actual housing crisis in the future, but if you still think land became scarce in Toronto overnight, good luck with that.”

The Globe and Mail. “Celebrations are still breaking out in houses and condos around the Toronto area as sellers stare down a real estate market decline that has extended from May into June. But while some clinch a deal at the price they were hoping for, less fortunate sellers have been hit severely by the shift in market dynamics. In Durham Region, east of Toronto, agent Shawn Lackie of Coldwell Banker-R.M.R Real Estate, says the overheated market of the early spring raised the expectations of sellers to unrealistic heights. ‘What it really did was throw a whole lot of gas on the fire for sellers – thinking they were going to cash in because this is their lottery.’”

“But listings suddenly surged after Ontario introduced policies in April aimed at cooling the housing market. Mr. Lackie recalls that listings had been trickling out and suddenly there were 138 new listings in one day. The following day there were another 85 by midafternoon. ‘Now, buyers have eight, 10, 14 different houses to look at.’”

“He’s also seen a lot of stress heaped on owners who signed a firm deal for another property, then delayed putting their existing home on the market in the hope of getting an even higher price later in the spring. This year, the strategy backfired for some. ‘It’s dangerous as hell, but people were running ahead and doing it,’ he says. ‘If you buy and sell in the same market, you’re going to be affected by all of the same factors. But they got cute. They’re the ones who have been bitten.’”

The Saskatoon Star Phoenix. “The pace of residential construction in Saskatoon fell off sharply in the first five months of the year, driven downward by a collapse in the number of new multi-family buildings under development, according to new data from the country’s mortgage insurer, the Canada Mortgage and Housing Corp. The city’s apartment market is a different story. Vacancy rates remain well above the historic high of 10.3 per cent reported by the CMHC last November. Experts have said up to 18 per cent of the city’s apartments could be empty.”

The Financial Post. “Naheed Nenshi was first elected mayor of Calgary in 2010 when the iconic Bow tower was rising to re-top the city’s skyline, new companies were opening their doors, established ones were expanding and luxury retailers were setting up shop. Office vacancy in the city’s bustling core was so tight, ‘You couldn’t get space downtown for love or money,’ Nenshi recalled.”

“To fill the gap, skyscrapers were rapidly built — 10 million square feet between 2007 and 2016 — all underpinned by confidence in the future of Alberta’s oilsands and a business-friendly climate. But the expansion of Calgary’s commercial core, home to Canada’s second-largest concentration of head offices after Toronto, came to an abrupt halt when oil prices collapsed in late 2014. The fallout worsened as new governments muscled in with policies to accelerate the transition to green energy.”

“Massive layoffs, bankruptcies, consolidation and an efficiency drive at the oil and gas survivors reduced the downtown workforce by 40,000. Put another way, one in four Calgary office workers — and their workspaces — were no longer needed. Both Barclay Street Real Estate and Avison Young put the vacancy rate at 24 per cent, but it’s closer to 30 per cent for older buildings and projected to rise to 27 per cent later this year and remain high in 2018.”

“It’s estimated there is 13 to 14 million square feet of vacant space within Calgary’s striking cluster of glass towers. That’s equivalent to all the office space in downtown Vancouver. Many skyscrapers have completely empty floors. In others, just a handful of people occupy space where hundreds used to toil. ‘We went from essentially zero to almost 30 per cent (vacancy) in about 18 months,’ Nenshi said. ‘I love roller coasters, but this is too much.’”

From CTV News Vancouver. “B.C.’s anti-gang task force has arrested nine people following a year-long investigation into illegal gaming houses, money laundering, loan sharking and kidnapping. The Combined Forces Special Enforcement Unit said the criminal network behind the various operations has national and international ties, including to mainland China.”

“The probe was launched in May 2016 and ultimately led police to six different homes, which turned up ‘arge amounts of cash and bank drafts, drug paraphernalia, suitcases, cellphones, computers and other related material,’ the CFSEU said in a news release.”

From The Province. “Li Zhao, who is accused of murdering Chinese businessman Gang Yuan, has filed a claim in B.C. Supreme Court seeking a one-third share of the Yuan estate’s profits from the sale of 47 Saskatchewan farm properties. Zhao claims he and Yuan were in a joint-venture to develop Saskatchewan farmland, according to documents filed with the court last month.”

“A deal planned by Yuan’s company to sell the properties in Saskatchewan was near completion, Zhao’s claim states, when Yuan was found shot and cut into 100 pieces in his West Vancouver mansion on May 2, 2015. Zhao, 56, has pleaded not guilty to the second-degree murder of Yuan, 42.”

“In his criminal trial, a judge ruled this week that Zhao’s confession to West Vancouver police is admissible. The court heard that Zhao told police he and Yuan were in business together in an agricultural company and were having legal problems with the company. Zhao told police that following an argument with Yuan, who lived in his British Properties home with Zhao and Zhao’s wife, he fatally shot the victim and cut up his corpse with a saw.”

“While Zhao’s criminal trial continues, a number of civil claims are underway in B.C. courts, as Yuan’s relatives in China and Vancouver battle over his Canadian assets, including Saskatchewan farms and luxury properties in Vancouver, estimated to be worth about $50 million in 2015. In addition to his Canadian fortune, Yuan had mining interests in China. And according to a 2015 court verdict in southwestern China, Yuan was linked to a government corruption and bribery scandal that led to a 19-year jail term for an official named Yunye Lin.”

June 14, 2017

The Declines Could Signal Saturation Of The Market

A report from AZ Big Media in Arizona. “Phoenix renters caught a slight break in May, as average rents decreased slightly from the high reached in April, according to Axiometrics. Some moderation in the market can be expected given the recent drop in job growth. Meanwhile, levels of new supply are high, with 7,076 new units identified for 2017 delivery. ‘Phoenix’s current rent growth rate might not have been impressive a year ago, but the overall moderation of the apartment market places it among the strongest performing metros in the nation,’ said Jay Denton, vice president of analytics for Axiometrics. ‘However, occupancy is trending downward, which may limit the ability for strong rent increases later in the year.’”

From Boston Agent Magazine in Massachusetts. “Boston might be the third most expensive housing market in the country, but average rent prices in the area have actually begun to trend downward. According to a recent RENTCafé report, Boston has now been closely following a nationwide trend. It turns out apartment construction rates have actually been booming all over the country. And Boston is no exception. According to Yardi Matrix senior analyst Doug Ressler, this growth doesn’t appear to be slowing down anytime soon. It also means good news for those who hope to rent in some of the country’s historically pricey markets.”

“‘Renters have much reason to be optimistic,’ Ressler said in the report. ‘After a long period of incessant rent increases, rents are finally slowing down — even in some of the country’s higher-rent cities, like San Francisco and New York. Even if demand for apartment living is still robust, rent growth will continue to taper off in the coming months, mainly prompted by the record number of new apartments entering the country’s tightest markets.’”

The Longview News Journal in Texas. “Longview apartment rents continued to drop in May, according to a new monthly survey from Apartment List. The declines could signal saturation of the market, said Karen Holt, housing navigator with Community Healthcore in Longview. Rents apparently are dropping in the Longview area because newer and higher-end properties are making it tougher for older properties to attract tenants, Holt said.”

“‘So they are seeing a decline in occupancy,’ she said. ‘Therefore, they have to adjust their rent.’”

“Holt said renters should not have to pay more than 30 percent of their income toward housing. The area median household income is between $56,000 and $57,000 a year. Using $650 as a hypothetical monthly rent, Holt said a tenant would have to earn $12.52 an hour to avoid paying more than 30 percent of his or her income. ‘Wages are going to have to go up or the properties are going to have to lower the rent a little bit,’ she said.”

The Jewish Voice New York. “Luxury apartments are dropping in price. Robby Browne of the Corcoran Group found this out the hard way when he had to drop the price of the two-bedroom condo at 15 Central Park West which he owned that he was typically able to rent out for $18,500 a month. According to him, whenever a lease was about to expire, tenants and agents would be clamoring to rent the apartment, and he never had a problem finding someone new to move in. Now, with the current real estate market, he not only had to refurbish the apartment, but he had to drop the rent down to $16,250 a month.”

“As he put it, ‘I thought, ‘Be sensible, Robby, the rental market is down. Put it on at a price that will work. I don’t like missing a month.’”

“After a huge increase in rented condos that led many investors to become landlords, there’s now a huge quantity of extremely high priced condo units available on the open market. Tenants are finding themselves able to get sweet deals in terms of rent thanks to downturns in the real estate market, where landlords are finding themselves having to drop rents to find tenants. Since 2015, the high-end rental market decreased 10%-15% according to Robby Browne.”

“According to Dorothy Somekh, who works with Halstead Property, the real estate market will remain ’soft’ until apartments currently without renters are finally rented out. She states, ‘The people who are going to rent [to tenants] are the ones that are going to make adjustments quickly.’ Jordan Sachs with Bold New York. He stays, ‘Our clients on the rental market are getting 20 percent off on some of these apartments. You’re dealing directly with an owner, not a professional landlord. All he wants is cash flow, and every day the apartment sits vacant is affecting his return on investment.’”

“One can find a plethora of expensive condos and other rentals in places like Tribecca and Chelsea in Manhattan which have long been attractive to real estate developers. But with the closure of many new developments just in the last year, these same rentals are now on the open market. As Jordan Sachs put it, ‘We’re seeing a flood of apartments $40,000 and higher.’”