May 28, 2016

Bubbles Burst At The End Of Euphoria

A weekend topic on manias starting with Maclean’s written by Bob Thompson. “Every 20 years or so, investor dementia sets in. Memories are wiped clean, allowing individuals to make the same mistakes over and over again. It doesn’t matter if it is real estate markets, stock markets, commodity markets, or tulip markets. They are all the same. Why? Because markets are a reflection of people, and people are hard-wired to have emotional instincts that don’t change. It starts with something actually changing, a new development. There is a valid game changer that starts the boom, and lots of people question whether the valuations of whatever asset we happen to be discussing are overvalued. The underlying asset continues to go up however, seemingly proving the disbelievers wrong.”

“Market bubbles don’t pop during this phase, when there are rational buyers and disbelievers. Bubbles burst, and people’s financial lives are destroyed at the end of the next phase: euphoria. During this phase, caution is thrown to the wind, people’s hard-wired desire to ‘not want to miss out’ comes into full play: ‘I have to get in now, my next-door neighbour is making money and I am not.’”

“During this phase, even the smartest believe that we are in a ‘new paradigm’ and the old ways of valuing things are thrown out. Whatever the asset is, it becomes too expensive for the average investor, which is especially true of real estate. Prices go up, people panic to buy more and they outbid each other in an orgy of greed. Amazingly even the experts begin to extrapolate out recent trends well into the future.”

“Even so-called experts get sucked in during the euphoria stage when all the news is good. That is another absolutely necessary component of any bubble: there is no bad news. The problem is that massive amounts of debt are created in any bubble, and at the end, the market gets crushed under its own weight.”

“Politicians are generally oblivious to the bubble as it is happening, or at least do very little to get in the way of it. After the fact, however, when the catastrophic collapse happens, another necessary component is the blame game. Nobody ever blames themselves for getting caught up in euphoria, which always seems so obvious after the fact. People look to blame someone else for the collapse, pressing politicians and regulators to make an example of someone and to regulate something. Some messenger gets shot, and everyone is happy, and the politicians get to be reactive and the saviours of future generations.”

“Are there irregularities going on right now in the real estate market? Of course there are. Is there some form of fraudulent activities going on or at least a massaging of the truth? The answer is most likely—it is a necessary component of the bubble, an effect of the euphoria. It is also a natural progression of the underlying asset, in this case real estate, which has become too expensive for the consumer to buy. In a competitive system, people will find creative ways to finance the boom.”

An piece by Michael Pento. “It shouldn’t be hard to understand that nearly 90 months of ZIRP has regenerated the equity and real estate bubbles that first pushed the global economy off a cliff back in 2007. In fact, the Fed’s unprecedented foray with interest rate manipulation has caused these assets to become far more detached from underlying fundamentals than they were prior to the start of the Great Recession.”

“The reemergence of equity and bond bubbles are being debated in the financial media. But what is less known to investors is the massive amount of forced hot air that has been blown into the commercial real estate market. For example, commercial real estate prices have increased by double digits for the past six years, according to The National Council of Real Estate Investment Fiduciaries. Also, according to the Real Estate research firm Green Street Advisors, commercial property prices now exceed the 2007 prior peak by 24% overall.”

“And in cities such as Manhattan, preferred office buildings and apartment complexes are 60% higher than what existed during the previous housing bubble. Of course, such lofty values have driven National Retail cap rates down to the subbasement of history, at just 6.5%. But this Fed induced famine has caused yield-starved investors to embrace low income streams in the hopes if they ignore this current bubble it won’t pop in the same manner as it did eight years ago.”

“It should be self-evident that eight years’ worth of unprecedented money printing and interest rate manipulations have caused the greatest distortion of asset prices in history. Therefore, the inevitable conclusion is for an unprecedented economic contraction to occur once the party inevitably comes to a close.”

From Bloomberg by Prashant Gopal. “Miami’s crop of new condo towers, built with big deposits from Latin American buyers and lots of marketing glitz, are opening with many owners heading for the exits. A third of the units in some newly built high-rises are back on the market, though most are listed for more than their owners paid in the pre-construction phase. At the current sales pace, it would take 29 months to sell the 3,397 condominiums available in the downtown area, according to South Florida development tracker CraneSpotters.”

“Some are offering homes at a loss as demand cools. Condo purchases from January through April slid 25 percent from a year earlier, while the average price fell 6 percent on a per-square-foot basis, CraneSpotters data show. ‘The problem is that investors are no longer buying, and now they’re going to be looking to sell,’ said Jack McCabe, a housing consultant based in Deerfield Beach, Florida. ‘And what buyers are going to replace those other than vulture buyers looking for deals?’”

“After several price cuts, one Brazilian owner at Related Group’s new Icon Bay tower is offering his two-bedroom condo for $539,000, 7 percent less than he paid in July. It’s now one of 100 listings in the 299-unit building. ‘We are now the most affordable unit in Icon,’ said listing agent Anthony Giuffrida of Elite International Realty. ‘To sell it quick, you have to put it at the right price.’”

“The strong rental market is giving many would-be sellers the opportunity to cover their costs. But there’s also a flood of new, professionally managed apartments under construction. And apartment vacancies in the downtown Miami area rose to 11.8 percent in the first quarter, double the rate two years earlier, according to property-data provider Reis Inc.”

“‘The ticking time bomb is based on rental rates,’ said Peter Zalewski, owner of CraneSpotters. ‘When some of the foreign investors sitting on the sidelines have to dig into their pockets and subsidize renters, that’s the fuse that will lead to a correction.’”

“Of 14 new Miami towers from downtown to Sunny Isles, the share of resale listings ranged from about 7 percent at MyBrickell tower to about 40 percent at 400 Sunny Isles, according to a report this month by Andrew Stearns, founder of, which provides residential mortgages for foreign nationals. A healthy building should have no more than about 10 percent of its units up for resale at any given time, Zalewski said.’The concern is we’re in a price-discovery phase, and the prices people are trying to get for their condos is a lot higher than the market will bear,’ said Stearns. ‘That may signal a coming price correction.’”

Real Real Estate and How to Profit

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May 27, 2016

There’s A Crater Under Every Bubble

Its Friday desk clearing time for this blogger. “With a dire housing crunch squeezing out full-time residents, the Point Reyes Station Village Association and the Community Land Trust of West Marin held a forum to assess the damage and discuss solutions. Startling facts and anecdotes were on hand to illustrate the impacts of a rapidly depleting housing stock, which has tumbled as record-breaking crowds of visitors to West Marin’s natural attractions shack up in vacation rentals. In Marshall, less than a third of the houses are occupied full-time, according to resident and dairy rancher Albert Straus. He slammed county officials for not enforcing zoning rules for Marshall, where zoning is not meant to encourage people ‘to make profits from short-term rentals and business out of permanent residences,’ he said.”

“Land trusts need money to purchase homes dedicated to low-income housing in perpetuity. Rachel Ginis, a panelist and founder of the Corte Madera-based housing nonprofit Lilypad Homes, suggested that money could come from broadening the county’s transient occupancy tax—which levies a monthly fee on registered vacation-rental operators—to include more casual AirBnB-style rentals. ‘People have a bad habit of buying second, third and fourth homes,’ said Ms. Ginis. ‘If they can afford those homes, they can afford a vacancy tax.’”

“Is Airbnb a casual home-sharing service or a commercial rental business posing serious competition for South Florida hotels? Several Miami Beach residents, too, have spoken out against Airbnb. ‘It is so pervasive,’ said Philip Berry, the board president of a 25-unit condo building south of Lincoln Road. ‘I can point out at least 20 buildings in a secure four-block area where this is occurring.’”

“China’s efforts to stem capital flowing out of the country so its economy, and currency, stabilize, may dampen the fast-and-furious pace of investment in U.S. real estate. But as a new report from the Asia Society and Rosen Consulting Group predicts, China’s controls on this capital outflow only stand to temporarily slow — and will hardly stop — the tide of cash streaming to U.S. real estate.”

“The rich are buying homes and luxury apartments, but they’re also investing in funds and partnerships that are buying into commercial projects. There are also uncounted smaller real estate investment projects funded by individuals who pool investors together to buy, say, a handful of budget hotels or several apartment units in a high-rise. ‘That’s going on way below the radar of what can be specifically tracked down and quantified and also from what most people see going on,’ says Arthur Margon, partner at Rosen Consulting Group and an author of the report.”

“Half of central Melbourne’s new apartments are being built and bought by off-shore investors, as the city grapples with what one development industry figure has labelled an ‘unprecedented level of supply.’ And he warned that a slowdown in the property market meant it was harder to sell apartments, and tougher for developers to get a final settlement out of buyers. It has led a prominent housing academic to question whether the city’s apartment boom was being driven by investors who needed a high-end product to park money rather than addressing housing affordability.”

“Melbourne University housing expert Kate Shaw said these investors were ‘generating enormous upward pressure on prices.’ ‘Much of the increase in central city housing supply is high-end investment product – not housing that meets local demand,’ Dr Shaw, an urban geographer, said. ‘How much of this investment stock is fully occupied? Most research suggests very little.’ Dr Shaw said new inner city apartments were failing simultaneously on three fronts: they were not making housing more affordable, not meeting local housing needs, and not curbing urban sprawl. ‘So why exactly are we building them?’ she asked.”

“Standing nearly 600ft high and boasting 50 storeys, it is hard to miss 1 St George Wharf. There are only eight buildings taller in the whole of Britain. It’s the country’s tallest residential skyscraper. There can be no doubt this huge cylindrical edifice is a symbol of how Britain is changing — and, in particular, how successive governments have been far keener to embrace foreign millions than to worry about the interests of their own citizens.”

“Yesterday it was reported in the Guardian newspaper that almost two-thirds of the tower’s 214 apartments are owned by foreigners, and furthermore, by foreigners who seldom bother to live in them. Indeed, these apartments, which have been sold from £600,000 to a staggering £51 million, cannot really be considered homes. They are, above all, investment opportunities for the world’s super-rich, towering over a city which has a notorious shortage of affordable housing. And — surprise, surprise — what also emerged yesterday is that a quarter of the apartments have been bought by companies registered in offshore tax havens.”

“For St George Wharf, the statistics are damning. No fewer than 62 per cent of the 210 apartments where the title deeds are available are believed to be in foreign ownership. Out of a total of 214, no one is registered to vote in the UK in 184 of them.”

“It is a sign of the times that some of my local estate agents don’t look like estate agents. There are no pictures of houses in the windows. Instead, there are arrangements of twigs and some desks. Presumably, one goes into them just to hang out and chat about buying a house in this gallery-type environment. No one needs, I suppose, to see any images. House buying is an abstract concept for so many these days.”

“The air of unreality about these hip house floggers is entirely fitting. House prices are unreal. Ridiculous. Every day there are stories about the insanity of our current housing crisis, but it goes on and on. We laugh at images of what are basically cupboards for sale or rent. We cry or sigh with identification at the tales of young folk who can never really leave home. Except that some are not so young. Fortysomethings are having to move back in with their parents after marital bust-ups or because they no longer manage their own housing costs, the so-called ‘doomerang generation.”

“What does it now mean to be an adult if the old markers of adulthood become out of reach? Levels of home ownership are in decline. We now have a fully fledged caste system delineated by property. This is happening in the US, too. Wages for under-30s are going down.”

“Factors such as delinquencies from the long-struggling oil sector and emerging evidence of weakness in overheated housing markets are placing the Canadian economy at significant risk of a major downturn, according to an analysis. In particular, bad debts from the energy sector and increased competition from online counterparts are forcing Canadian banks to downsize and even retreat altogether from at-risk markets.”

“Writing for CBC News, Don Pittis noted that while the Bank of Canada’s interest rates are still showing an optimistic view of the economy’s prospects, signs of eventual trouble are gradually popping up. ‘The painful bankruptcy of Canadian home builder Urbancorp and pressure for governments to intervene in what many are calling an affordability crisis have some commentators worried that Canadian real estate is at a peak,’ Pittis explained. ‘Despite evidence that real estate is a major driver of jobs and the economy, ominous warnings are easy to dismiss because they have been offered so often. This time, however, we have real evidence that markets outside Vancouver and Toronto have begun to weaken,’ he added.”

“Most worryingly, BoC Governor Stephen Poloz himself said that Canadian real estate is not all that it seems, Pittis noted. ‘There’s a crater under every bubble,’ the analysis quoted the BoC Governor as saying.”

“While artisans prefer Ubud in Bali’s central foothills, serious surfers turn to ‘the Bukit’ to find the waves. Here on Bali’s southern tip, cliffside homes overlooking the ocean go for $3 million to $8 million. It’s only minutes from some of the island’s most famous surfing spots. While prices have been rising steadily since 2004, the real-estate market is in the midst of a correction, as fewer properties have sold since the speculative market rush that ended in 2014, says Eugene Shivnan, a local real-estate agent at Exotiq Property. Upscale homes start at $500,000, though smaller condos can be purchased for around $200,000.”

“Currently on the market for $5.5 million: a cliffside, six-bedroom property that overlooks the Indian Ocean and includes an infinity-edge pool, a large living and dining room and marble floors. ‘Now it’s become a buyers’ market and there are too many listings,’ says Neil Power, owner of real-estate firm Xclusive Property.”

“Leasing activity in Dubai’s residential market tailed off towards the end of the first quarter as landlords proved more willing to negotiate on rents to keep existing tenants in place, according to a report from Asteco Property Consultants. At Jumeirah Lakes Towers, for instance, rents declined by 6 per cent quarter-on-quarter and 12 per cent year-on-year by the end of March. Asteco said that luxury apartments have proven hardest to let and remain vacant for longest, despite significant year-on-year rental declines.”

“Meanwhile, sale prices for apartments remain 5 per cent lower year-on-year, with luxury units experiencing the steepest declines – Jumeirah Beach Residences properties are 18 per cent cheaper than in the first quarter of last year, while Palm Jumeirah homes have fallen in value by 11 per cent and Dubai Marina by 10 per cent.”

“‘People are being more budget-conscious,’ said Julia Knibbs, the UAE associate director of research and consultancy at Asteco. ‘Landlords are realising how important it is to retain tenants rather than risk having a vacant unit and then later having to reduce the rent anyway.’”

May 26, 2016

A Pagoda Of Cards

The Atlanta Journal Constitution reports from Georgia. “To afford an average apartment, low-wage earners in Atlanta must work many hours of overtime or else live with other wage-earners, according to a national advocacy group. Georgia is not even one of the more expensive states, in fact it ranks 27th – pretty much in the middle of the pack, according to the report, released by the National Low Income Housing Coalition. In no state – not even those with higher minimum wages – can a minimum wage renter afford the average two-bedroom apartment working just 40 hours a week. ‘In many counties of the metro Atlanta region, affordable apartment complexes and small but solid houses are being torn down to make way for luxury housing and more retail, while the average wage-earner is priced out,’ said Kate Little, chief executive of Georgia group.”

“The report concluded that a ‘modest, two-bedroom apartment’ at fair market rent and utilities would cost $949 a month in metro Atlanta. To afford that, renters need to earn $18.25 per hour, or about $37,960 a year, the report said. In metro Atlanta, the median wage – meaning half of wage earners are above and half below – is $17.47 an hour. Among the lower 48, the most costly state is California, where a worker needs $28.59 an hour to afford an average two-bedroom apartment, according to the housing report.”

From Michigan Live. “Realtor Dale Stuckey says he was floored last month when he got 38 offers on a home listed for $105,000 on the Northwest Side. ‘We had it on the market for one or two days,’ said Stuckey, whose buyers are waiting to close on an offer that was 10 percent over the asking price. Another listing for $175,000 in the Northview School District ended up getting 10 offers at $10,000 over the asking price, said Stuckey, president of the Grand Rapids Association of Realtors.”

“‘The panic mode is there from a buyers’ standpoint,’ said Stuckey. ‘You get people writing offers sight unseen, you’re getting offers now without inspections.’”

The Associated Press. “Stiffer competition among real estate agents also makes it harder to make money, especially since the improvement in the economy has made selling real estate more appealing to people in search of work. Membership in the National Association of Realtors totaled 1.17 million at the end of April, up from the post-collapse low of nearly 1 million in 2012. The Realtors had 1.36 million members in 2006, the year that the housing market began its crash.”

“‘Everyone was dropping out of the business in 2008. Now we’re flooded with real estate agents without a lot of inventory,’ says Janine Acquafredda, a broker with House N Key Realty in Brooklyn, New York.”

“Acquafredda’s sales over the past year are down about 25 percent from the previous year. In addition to a shortage of available homes, she sees fewer buyers with deep pockets from other countries who are able to put cash down and finalize a deal quickly. One reason: the stock market drop in China, where the Shanghai Stock Exchange’s major index is down 45 percent since June. ‘The business is just not as much fun as it used to be,’ Acquafredda says.”

The Ledger in Florida. “Florida’s economy continues to outpace the rest of the nation, but another recession is on its way, University of Central Florida economist Sean Snaith said. ‘It’s time to start talking about the next recession,’ Snaith said. ‘We will have a recession. I don’t know when exactly, but we’re going to have one.’”

“The current recovery already has lasted longer than most — the last upswing after a recession ended in six years, he said. But for many Americans, this expansion has not delivered prosperity, he said. GDP growth, the measure of output of the economy, has averaged 2.1 percent, compared with a historic average of 3.5 percent. ‘This has really been a lackluster recovery, to say the least,’ he said. ‘Wage and salary growth has been stuck in the 2.3 to 2.4 percent range for some time. Usually at this point in a recovery, we see wage and salary growth at 4.5 to 5 percent.’”

“The weak economies of other nations also are weighing down the U.S., representing what he called ‘the greatest threat to the current expansion we are currently in.’ ‘The Chinese economy is a pagoda of cards that will come down at some point,’ he said. So, Snaith warned the audience, put the next recession on their radar. ‘More likely the next recession will be triggered by some sort of global shock rather than something internally, not by a housing bubble or a dot-com bubble like in previous recessions,’ he said.”

The Press of Atlantic City in New Jersey. “Homes sold faster all over South Jersey last month, with the number of closed deals up sharply in most of the region from April 2015. Atlantic County led the way with an increase of almost 27 percent in completed sales of single-family homes over the year before, but prices continued to drop in the county, according to data from the New Jersey Association of Realtors. The median price of a single home fell to $168,500 this April, down more than 12 percent from last year.”

“‘Typically in Cape May County shore towns … we’re seeing steady numbers. People are buying, they’re coming down and looking at stuff and pulling the trigger,’ said Damon Bready, of ReMax at the Shore, who handles listings in several of those shore towns and on the Atlantic County mainland. ‘The majority in Atlantic County are (bank-owned) or short sales. They’re distressed.’”

NPR News on Massachusetts. “In 2005, Guillermo Galindo and his wife bought their house in Revere, Mass., for $450,000. They put about 5 percent down and ended up with a manageable monthly mortgage payment of about $2,000. He worked delivering medical supplies, and they got monthly payments from a family who rented the unit on the second floor. Galindo and his wife lived there for a few years with their baby daughter, and life felt pretty stable.”

“But that security began to crumble in 2008, when his employer started cutting his hours. The interest rate on his adjustable mortgage started creeping up. Then, he lost more income from his second floor tenants. Eventually, the young woman’s husband abandoned her and the baby. ‘At the end she was just was left alone and she stopped paying rent,’ he says.”

“He wouldn’t kick her out, but that meant Galindo was now really struggling to make his mortgage payments. Around the same time, he found out that his home had lost a huge amount of its value, about 50 percent, so he got in touch with his bank hoping to work out a deal. ‘They asked for more papers, I send them all. It was back and forth, back and forth, until they said they couldn’t help me, that the price was that. And they couldn’t do anything,’ he says.”

“His life savings were wrapped up in this house, and that’s where he wanted to raise his daughter. He kept talking with the bank, trying to figure out how to stay. Eventually they sent him a letter saying they were foreclosing. He fought it for another five months and finally said, fine, take it. They gave him $3,000 and he handed over the keys.”

“Galindo rents an apartment. His credit rating is still in the tank because of the foreclosure. And they don’t have any money for a down payment, so buying another house is not an option right now, and might not be for a long time.”

May 25, 2016

Everybody’s Dream Started To Scare Everybody

The Richland Source reports from Ohio. “An unusual, but optimistic trend is unfolding in the Richland County housing market, much different than years past. ‘It looks like what’s happened is there are so many buyers in the market that as soon as a home is put on the market, it’s taken,’ said Rich McCleery of Coldwell Banker Mattox McCleery Realtors. ‘It’s crazy what’s happening. I think people are seeing they need to get on the bandwagon and purchase a home before prices go higher.’”

“Jerry Holden of The Holden Agency, as well as Peter Haring of Haring Realty, have also noticed that if homes are reasonably priced, it’s not long before one or more offers are made. ‘Right now we have less than a two-month supply of homes on the market in Lucas,’ Haring said. Lexington is another area where demand is greater than supply. ‘That’s probably where we have the biggest shortage right now, and that’s for anything under $300,000,’ Haring said. ‘I’ve never seen a real estate market like the one we’re having now.’”

11 Alive on Georgia. “Luxury apartment buildings are taking over Atlanta. Nearly a 900 percent increase between 2012 and 2015 in the number of high-end high rise buildings according to a study by Rent Café. The question is, is the luxury market inching toward over-saturation and how are middle-income people supposed to live in a city of rising rents? ‘We have all of the housing being built for a tiny portion of the population,’ said John O’Callaghan, President and CEO of Atlanta Neighborhood Development Partnership.”

The Real Deal on New York. “The Real Deal counted it up, and the pessimists are right: Modern aristocrats’ appetite for en suite lap pools, members-only pet spas and penthouse views of New Jersey really seems to be on the wane. Luxury sales volume is down a stomach-churning 25 percent in the first 20 weeks of 2016 compared to the same period last year. Major developers such JDS Development and the Chetrit Group have either halted sales plans for marquee skyscrapers packed with luxury condos, or scrapped them altogether. Some condo builders are lowering their planned sellout prices, while others are aggressively cutting asks, notably on penthouse units, a StreetEasy analysis found in April.”

“Other developers say the slowdown in the luxury market is mostly about perception, blaming the press for sullying the mood. ‘There’s no liquidity issue, there’s a mood issue,’ said Michael Shvo, who’s in the planning stages of a high-rise condo at 125 Greenwich Street. ‘The only thing wrong with the market is an oversupply of overpriced, average apartments. Those are in buildings that should not have been built and they’ll suffer.’”

The Valley News in Vermont. “It’s generally accepted that the Upper Valley is sheltered from severe economic headwinds by the presence of two large, stable employers. Nevertheless, a trio of stories in the business section of this week’s Sunday Valley News served as a useful reminder that despite its good fortune, the Upper Valley economy does not operate in splendid isolation. The third story discussed home sales, which are in the doldrums, according to a biannual report sponsored by the Upper Valley Housing Coalition.”

“It found falling sales prices for existing homes during the first quarter, along with shrinking inventory (although there were also some bright spots, including that homes were selling more quickly). One of the authors of the report, Ned Redpath, owner of Coldwell, Banker Redpath & Co., pointed to stagnating middle-class wages as one possible reason: It’s hard for people to put aside enough for a down payment. ‘Everybody says the economy is strong, but it’s nowhere near as strong as they say it is,’ Redpath said.”

The Guardian on Texas. “Shawn Baker had an entrepreneurial epiphany years ago when she saw a group of young people outside a concert venue throwing junk out of a truck and pulverizing the trash with a bat. It looked fun. She wondered: could there be a way of monetizing our appetite for mindless destruction? She put the idea on hold. Then oil tumbled below $50 a barrel and in May 2015, after more than 20 years at the same company, the 45-year-old was let go from her job along with a quarter of her colleagues. ‘It was devastating. I had never been laid off or fired or anything,’ she said.”

“Baker now had spare time, little prospect of quickly finding another role in the energy industry, and a hunch that thousands of others could be sharing her sense of frustration. So she returned to her idea and started Tantrums LLC, one of a growing number of ‘rage rooms’ in America where her frustrated clients come and blow off steam with the help of a baseball bat and some inanimate objects.”

“The city’s economy is far more diverse and resilient than during the oil bust of the 1980s, but Houston is nevertheless feeling the hit of the slump. New high-end apartment complexes built to appeal to now-departed expats are so empty they are offering perks such as rent-free months, Apple watches and cruises, according to the latest economic report from the Greater Houston Partnership, which anticipates the city’s unemployment rate will soon rise above the national level.”

NPR News on Nevada. “For 26 years, Brian Burns watched Vegas grow. He saw the desert dirt roads transformed by construction projects. The land was available and cheap. By 2004, housing prices soared. Burns and his then wife had bought into the dream. They lived in a huge house he estimates was 3,500 square feet. ‘There were parts of the house you never even saw – that’s how big it was,’ he says.”

“When a realtor friend convinced him to sell, he was blown away by the profit he turned. ‘That house that I bought for $250,000, my friend sold for $645,000 three years later,’ he says. ‘I had never had remotely that much money in my life. Probably never had more than $10,000 to $15,000 in the bank before. And I took $40 out one time and I showed my friend my ATM receipt and it said $228,000 balance. And we just looked at each other and laughed, it was ridiculous. I didn’t know what to do with it.’”

“He decided to keep it in the bank and buy another, smaller house in a brand-new development in the town of Henderson, Nev. Sure, the tan, stucco tract-style housing didn’t have a whole lot of charm, but Burns didn’t care. He convinced some of his friends to buy other houses in the neighborhood. He had cash in the bank, excellent credit, and he put no money down.”

“‘I think everybody’s dream, when you are a normal person — not super rich, not super poor — is that your home is kind of your biggest asset,’ Burns says, ‘that you feel like, ‘I’m going to play by the rules, I’m going to pay my mortgage, it’s just going to continue to increase in value.’ Maybe not by leaps and bounds, but by no means should it be worth a third of what you paid for it. And it started to scare everybody.’”

“He found out that the house he bought for $320,000 was now worth only $140,000. At the same time, his work as a graphic designer was drying up. Eventually, he chose to stop paying his mortgage. He didn’t feel good about it. He could have used his savings to keep paying his mortgage payments, but he thought that was a bad idea. The decision destroyed Burns’ credit, he let the bank take his house and he moved to Oregon to start over again. ‘The analogy I use back then is, I’m not going to pay Mercedes prices for a Kia. Why would I pay $320,000 for a house that’s never going to be worth that?’”

“Today, Brian Burns is back in Las Vegas, where he rents an apartment with his fiancée. They feel really gun-shy about buying anything, mainly because it doesn’t seem like the housing crisis is over in Vegas. Roughly 20 percent of homeowners are still underwater there, and it doesn’t look like a recovery. ‘I drive up into suburbia, and there are streets still of empty houses. No curtains, no nothing, weeds in the yard,’ Burns says. ‘There are still a lot of empty houses in this town.’”

May 24, 2016

A Good Many Of These Have Been Bought By Investors

The Sydney Morning Herald reports from Australia. “In the hyperactive world of online Chinese property forums, prospective buyers swap tips on real estate trends. But the talk on Australia-focused chat threads have been tinged with one worry after another. Chief among those worries are the increasing difficulty to get large amounts of cash out of China, and a crackdown from the big four Australian banks on loans obtained based on overseas income. ‘I bought an off-the-plan apartment and now the settlement date is getting close. My agent and loan planner told me that banks now are not accepting loan applications with overseas income,’ asked one poster on Tigtag. ‘They also say I need to make a face-to-face interview if I apply for loan. I’m now back in China so I’ll have to authorise an agent to manage the handover [in Australia]. So they suggest I sell the property before settlement. Is this right?’”

“Wang Peng, general manager of overseas-focused Chinese property group UNME, says the tightening of rules aimed at foreign buyers were being interpreted by Chinese buyers as a potential signal of more to come. The crackdown on loans substantiated by overseas income has the greatest potential to impact all but the wealthiest of Chinese buyers, says Wang, who owns investment properties in Australia himself. He says many buyers had bought off-the-plan properties but are now scrambling to find alternative loans before settlement, often forced to pay higher downpayments. ‘This is the most disadvantageous part to overseas investors. The impact is quite big and very direct.’”

From MarketWatch on China. “The slumping property markets in many Chinese cities are generating one kind of boom: in legal disputes. Even as the beleaguered property market shows signs of inching out of a two-year property downturn, some home buyers have begun suing property developers over facilities advertised at the time of purchase that were never built. Developers, meanwhile, are taking local governments to court for refunds of money spent to buy land when prices were soaring.”

“In Yuyao, a small city south of Shanghai, a group of nine home buyers last year sued state-owned Poly Property Group Co., alleging false advertising. Home prices have been falling in Yuyao, according to local residents and property developers. The plaintiffs said Poly failed to build a shopping mall, theater, school and other amenities included in the marketing for Poly Jordan International. Initially, the company offered a settlement that included 50,000 yuan in cash and a parking lot, but the plaintiffs declined. ‘We’ve tried to talk to the developer many times to resolve this but they never offered fair compensation,’ said Zheng Zhixin, one of the plaintiffs, who bought an apartment in 2012. ‘Litigation appears the only way left.’”

The Financial Express in India. “Inventories of luxury apartments in Mumbai remain high with real estate watchers counting close to 2,300 unsold apartments across the city. Each of these spacious apartments is priced at a minimum of Rs 10 crore taking the total value of the flats to an estimated Rs 23,000 crore. According to data sourced from PropEquity, the unsold inventory in projects coming up in just the five micro markets of tony south Mumbai — Lower Parel, Mahalaxmi, Mumbai Central, Prabhadevi and Parel, stands at a staggering 928 apartments.”

“Because unsold inventory is in advanced stages of construction, some of it commands a premium to the launch price. The value of unsold inventory in these five micro-markets could be in the range of R10,000 crore, if one assumes they’re between 4,000 sq ft and 7,000 sq ft, and fetch the current market price. Ashutosh Limaye, head (research), JLL India believes sales of these top-end homes could be ‘just about okay’ over the next three to four quarters. However, as he points out, ‘a good many of these have been bought by investors.’ That means these may remain unoccupied for a long time.”

From Gulf News on Dubai. “Dubai’s high-end apartment rentals are facing extreme duress, with the number of enquiries recording a marked decline in March. Landlords with units in upscale high-rises in Downtown, Business Bay and those on Shaikh Zayed Road are reacting by dropping rents or being forced to leave their units vacant for longer, according to a new update from Asteco.”

“‘On SZ Road where rents for a two-bed might have been Dh160,000-Dh190,00, landlords are being forced to bring it down if they need to retain the tenant,’ said Julia Knibbs, Associate Director – Research & Consultancy at Asteco Property Management. ‘A similar trend is happening in Business Bay, though maybe not to a similar extent. Wherever a tenancy contract is deemed as too expensive, tenants are demanding a downgrade. And in most instances they are getting it.’”

From Fulham SW6 in the UK. “Fulham’s property market continued to cool off in the frosty first three months of 2016, with prices falling and the volume of sales down - mainly due to the lack of flats changing hands. The overall average price fell by a modest 2.9% from £1,124,412 between October and December to £1,078,996 between January and March. Terraced houses also fell by 2.9% from £1,742, 138 in the previous quarter to £1,642,130. The average flat price however fell from £813,530 to £694,086 - a drop of 14.3%.”

“Also alarming for local agents was the reduction in the number of sales - down by almost a half from 230 to 126. And again flats and apartments were hardest hit, down from 153 to 74. This slowdown seems surprising, since there are two large developments in Fulham with apartments for sale. The top of the market also remained slow withthe highest priced sale so far this year is a six bedroom house on Broomhouse Road which went £3,010,000 - having previously been on the market for £3,350,000.”

“Josh Woodfin of local estate agent Brik, says the slowdown has a number of reasons: ‘Many wealthy overseas buyers have been deterred by high house prices in London, a weak eurozone economy and the fact that the pound has strengthened significantly against the euro in the past year, making it even more expensive for many Europeans to buy property in the English capital.’”

The Daily Mail in the UK. “For those of us stuck in the mundane world of mortgages and rent, it’s hard to feel sorry for them, but spare a thought for celebrities trying — and failing — to sell their homes. Palatial pads that would once have been snapped up within days are lingering on the market for months at a time, forcing sellers to slash the asking price. Shirley Valentine star Tom Conti has reduced the asking price for his house to £15million, from £17.5million. Meanwhile Ricky Gervais has reduced his from £7.7million to £6.9million.”

“Many thought that former Take That star Robbie Williams had overpaid when he bought his seven-bedroom, eight-bathroom Wiltshire manor house for £8million in 2008. Only 18 months after buying it, he tried to sell for £7.5million — and it’s been on and off the market ever since. In 2013, it had an asking price of £5.5million. Now it’s believed to be quietly for sale again at the same price — a hefty loss on what he paid.”

“Former hell-raiser Noel Gallagher’s pretty West London home — on the market since last October — is now on the market for £11.5million, down from £13.5million. He has three other properties, but wants to ‘upgrade’. The Oasis singer has complained that the home is proving hard to shift in the current market, saying: ‘If there are any wealthy Russians reading this story, give me a call, please.’”

May 23, 2016

The Bubble Is Losing Its Air

A report from the Oregonian. “For the first time in recent memory, the number of closed and pending home sales in the Portland area saw an annual decline, according to the April Regional Multiple Listing Service’s monthly report. With the housing market on a tear, the report had become predictable from last summer into this spring – the number of closed and pending sales for a given month was either the most since before the recession, or the most of all time. But the 2,611 closed sales in April marked a 4.5 percent drop from the same month last year, and pending sales fell from 3,613 in 2015 to 3,076 this year.”

“The median reached $350,000 last month, the point at which half of homes are more and half are less; in April 2015, the median was barely above $300,000. Homes in desirable areas often receive double-digit numbers of offers. ‘The buyer who did win the bid may have a Monday-morning headache crunching the numbers on how much they just paid,’ said Israel Hill, a managing broker at John L. Scott Real Estate specializing in Northeast Portland.”

The San Mateo Daily Journal in California. “The residential real estate market typically heats over the summer, but after years of a sizzling home sales industry along the Peninsula, some local money lenders are sensing a cooldown on the horizon. Uncertainty regarding the sustainability of the ongoing economic boom has caused more to put their house up for sale, for fear of missing the chance to strike while the market remains hot, according to some lenders.”

“‘I think a lot of people are starting to realize that if you are going to sell something, do it before it drops,’ said Rich Wachter, of Wachter Investments in Burlingame. Homes for sale are staying on the market longer, bidding is not as competitive as it has been and inventory numbers, though low, are gradually creeping up, according to Wachter, who identified the trends as potential signs of an industry turning. ‘I just think that I see a softening in the market,’ he said.”

“Ted Yamagishi, a broker with Spinner Mortgage in San Mateo, expressed a similar sentiment. ‘The bubble is losing its air,’ he said. ‘I think it is at an all-time high.’”

The Naples Daily News in Florida. “In real estate, slowdowns require quick thinking. And that’s just what real estate agents and homebuilders are doing as Southwest Florida’s housing market rounds the curve from hot to not-so. Matt Lane, managing broker of William Raveis Realty LLC in Naples, said his firm leaves no stone unturned in its marketing. Yet one of the brokerage’s most effective tools, he said, is also one of its simplest — an emailed sheet that sorts local data into ‘changes favoring buyers’ and ‘changes favoring sellers.’ ‘Data doesn’t lie, and when a market slows, the best content to market is the facts,’ he said.”

“Fahada Saad, an agent with Premier Sotheby’s International Realty in Naples, has used creative marketing techniques over the years. But ultimately, she said, all of the promotional tools in the world can’t make up for the one thing that sells a home the quickest: A seller who sets a realistic price. ‘The market is contracting, and for what we have in our inventory now, we just need to be super sharp on pricing,’ she said.”

The Odessa American in Texas. “Odessa home sales increased modestly in April while prices continued to fall, reflecting a more balanced market, a report by the Odessa Board of Realtors found. April home sales increased 2 percent from the same month of 2015 to 115 homes sold. Median home prices fell by 3 percent to $165,000 from the same period. Meanwhile, the board reported Odessa’s monthly housing inventory climbed to 5.1 months of inventory in April, 2.3 months more than the same month of last year. The Real Estate Center at Texas A&M University considers 6.5 months of inventory a balanced market.”

“Homes spent an average 58 days on the market in April, a week longer than April 2015. In the same time frame, active listings increased 63 percent to 473. ‘Although we are seeing a slight down turn in the housing market, indicators continue to point to a more balanced market,’ Tommie McClane, president of the Odessa Board of Realtors, said in a news release.”

The Inland Valley Daily Bulletin in California. “It’s a scene out of the Great Recession: A half-built housing tract serves as a modern-day ghost town, dreams of both the developer and future residents dashed, dust accumulating, imaginary voices echoing in the unfinished structures. Except this is not 2008-09. This is today, a post-recession real estate market many describe as hot. And this is Claremont, dubbed the ‘best suburb’ in the West by Sunset magazine.”

“At Towne Avenue and Base Line Road sits more than a skeleton of what was supposed to become a 95-unit town home project on a former strawberry patch. Like abandoned projects in the desert during the Great Recession, infrastructure has been laid and the first buildings are almost complete — on the outside. In February, the council learned that construction came to a stop. Claremont Director of Community Development Brian Desatnik reported the developer — Newport Beach-based William Lyon Homes, a longtime builder with 19 other projects currently for sale in Southern California — needed 60 days to reaccess the market. With time up, Desatnik said he still hears the same in recent communication from the developer.”

“‘It was a shame,’ said Mayor Sam Pedroza. He finds it especially surprising coming from a builder so ‘well-known and established.’ He acknowledged the market maybe be oversaturated with that type of high-density product.”

May 21, 2016

An Imbalance That Works In Favor Of Special Interest Groups

A weekend look at housing supply and demand starting with the Lincoln County Journal. “We keep hearing how low inventory is in today’s housing market, but why is that the case? New Construction– Though housing starts were up 12.4 percent in 2015’s first quarter, homebuilders are constructing new single-family homes at a 680,000 annual rate, which is roughly 400,000 units below historic averages. So all builders have to do is up their construction and our inventory problems will be solved, right? Well…not necessarily.”

“The relatively low rate of new construction is a common target of industry analysts (NAR has especially harped on that point), but we think the problem is more insidious than that, and for a number of reasons. For one, new construction has responded to consumer demand and shifted towards multifamily developments in a major way, with 90 percent of those units being intended for rentals; so new construction is higher, but it’s not as top-heavy for single family as it used to be.”

“Two, the vacancy rate for new single-family homes remains historically high, so builders are keeping their construction numbers in check (indeed, some have argued that today’s level of construction is even too high).”

“And three, the new construction that does make its way to the market, on both the buying and renting side, is intended almost solely for more affluent consumers (and is therefore unaffordable to most consumers). Why? Simply, builders are limiting their products for safer terrain, aka the more affluent consumers who can absolutely buy what they are offering. So yes, new construction is low by historic standards, but for very precise (and deliberate) reasons.”

“Exclusionary Inventory – Finally, even when housing inventory has increased, it has not done so in an equal manner. In the first seven months of 2014, housing inventory jumped 18.5 percent over 2013; yet, according to a Redfin study of that increase, those gains were exclusively for higher-priced listings. So while the inventory of homes priced $549,800 and above rose 15.6 percent, the inventory for homes priced $227,500 and below fell 15.7 percent.”

From Quartz. “Across the country a wave of dual-income couples and down-sizing baby-boomers are skipping home ownership and choosing apartment living instead. Meanwhile, other renters—who have a median household income less than half that of homeowners—are finding that fewer and fewer homes fit their budget. Developers have responded by flooding the market with new apartments—nearly 250,000 were completed in 2015 alone.”

“However, those who hope the building boom will provide shelter for the huddled masses are in for a nasty surprise: Three out of every four new apartment buildings are luxury designs targeted at high-end renters. Housing data compiled by RentCafe, a rental search company, track completion of all new apartment buildings with 50 or more units. These buildings are graded based on presentation and amenities. The top two grades are classified as ‘luxury,’ indicating that they are primarily targeted at those who choose to rent, even though they could afford to buy. Last year there were 895 such buildings completed in the US, up 134% from 2012.”

From Bloomberg. “Central banks may be partially to blame for the misperception that economic conditions will be materially better than they are now when inflation is higher, contends Citigroup Inc. Global Head of G10 FX Strategy Steven Englander. To the extent that this true, it probably has much to do with the increased emphasis the Fed has placed on the wealth effect as part of the transition mechanism by which unconventional accommodation boosted activity when policy rates approached zero.”

“Asset price inflation, improving Americans’ aggregate net wealth in the process, has been an explicit goal of Fed policy.”

“This combination of low interest rates and large-scale asset purchases laid a solid foundation for the improvement of household balance sheets that occurred during the recovery. But it can’t do much to spur a higher trend rate for real growth. ‘It may be more accurate to say that the economy at 2 percent inflation will be as good as it gets, but as-good-as-it-gets may be very mediocre,’ Englander concludes. ‘Expectations of currency strength and asset market stability are likely exaggerated as well.’”

The American Enterprise Institute. “If anything, this election cycle has revealed the anger and frustration on both sides of the aisle with an economic and political system that many view as rigged. Maybe nowhere more so than in the housing finance ’system’ do the people have a point. After all, the deck is stacked against low- and moderate-income borrowers due to to rent-seeking behavior of special interest groups such as the National Association of Realtors (NAR), which government loan guarantee agencies and regulators are all too willing to accommodate.”

“The resulting loans enable borrowers to buy more expensive homes than they can truly afford, typically through minimal downpayments, underpriced mortgage insurance, or monthly payments too high in comparison to the borrower’s income. These various forms of excessive leverage continually set the little guy up for failure.”

“The fundamental problem in today’s government-centric housing finance system is a supply-demand imbalance that works in favor of homeowners who see their assets appreciate faster than wages and inflation. According to S&P/Case-Shiller, house prices are now over 30% higher than four years ago.”

“Who else benefits from higher prices? Realtors. That is why the NAR, whose sole mission is to ‘help its members become more profitable and successful,’ keeps pushing for even more demand against a constrained supply, which will ultimately drive prices even higher and make commission checks even fatter.”

“Who benefits from more demand? The Federal Housing Administration (FHA) — which is in the business of providing loans to primarily lower-income borrowers — was able to overcome its chronic funding shortfall by expanding demand through a mortgage premium cut that not only drew in new borrowers by providing them with more leverage, but also poached from other agencies.”

From Reuters. “Conventional wisdom maintains that the bubble in UK home prices is due to inadequate supply. Conventional wisdom is wrong. Despite tough British planning laws, the shortage of housing across the country is not acute. Overvaluation is largely the result of ultra-low interest rates. London property prices have also been boosted by foreign capital inflows. Low interest rates may be with us for a while. Global capital flows, however, are prone to sudden reversals.”

“A better explanation for high house prices is that interest rates are incredibly low. Over the last 15 years, falling interest rates have reduced the cost of buying a house with borrowed money. Land and home prices have climbed. This all suggests that Britain’s housing crisis is largely the consequence of the extreme affordability of mortgages. This conclusion is confirmed by the behavior of other housing markets around the world where interest rates are also at abnormally low levels.”

The New Zealand Herald. “Government ministers seldom lose an opportunity to lambast Auckland Council, as Housing Minister Nick Smith did again at the weekend, for inhibiting residential development in and around the city. It is convenient for the Government to attribute the price of houses entirely to a lack of supply because it enables it to avoid taking effective action to reduce demand for investment homes. It is an argument that makes the Government popular with home owners who have already invested heavily in multiple houses, for it not only relieves them of effective taxation but promises to supply Auckland with many more potential investment properties.”

“The pace of house price rises cannot be slowed just by building more houses, particularly more ‘affordable’ houses. Those are exactly the stock investors are looking for. The cheaper the house for its location, the better the likely capital gain. There is no limit to the demand for speculative property in and around Auckland, and making more land and housing available will only add more fuel to the fire.”

“Obviously Auckland’s projected population growth requires a much greater rate of house building than we have yet seen. But the problem does require a multi-pronged solution. Whatever the source of the demand for Auckland houses, it will remain insatiable if the Government pretends it is purely a problem of supply.”

May 20, 2016

They’ve Had It Way Too Good For Way Too Long

It’s Friday desk clearing time for this blogger. “The median price of a single-family home in Santa Clara County hit seven figures for the first time last month: $1 million on the button. Prices grew even dizzier in San Mateo County, where the $1.2 million average matched the previous record, set in May 2015. Two years ago, Eugene Jong and his wife, Linda moved from their San Jose townhouse to a single-family home in Los Gatos. He watched as San Jose prices kept rising. Then in April, he pulled the trigger, listing the 1,250-square-foot townhouse for $599,950. The townhouse drew 15 offers over the asking price and sold in seven days for $665,000.”

“Alain Pinel agent Mark Wong, who negotiated the sale, said it was a matter of good timing: If Jong had delayed and listed his townhouse in May, his fortunes might now be up in the air — at least in part because the amount of inventory is ‘creeping up’ and softening competition. ‘The market is shifting right now,’ Wong said. ‘The market is really mixed. Some people are getting multiple offers, some are getting no buyers. Just in one month, the market has changed a lot.’”

“You might think the sky was falling with all the hullabaloo over a 6-month moratorium on student apartment construction. But the temporary halt may be wiser than some people think. Two years ago, Bruce, Jon, and Nathan Odle published a 14-page report that painted a grim picture of college enrollment and student housing. The family — Columbia’s leading student apartment developers — predicted ‘obsolete, distressed properties’ in just 4-8 years. Yet student housing construction in Columbia has continued, even accelerated.”

“Jon Odle made these pessimistic prognostications when his family cancelled a 1,200-unit student apartment at Discovery Ridge. The student housing market, they told the Tribune, was overbuilt. ‘It’s institutional investors chasing higher return and having no knowledge’ of whether the Columbia ’student housing market’s economics are imbalanced,’ Odle said. ‘The market is more about flipping than looking at market dynamics,’ he added. ‘Anybody from out of town can come in and fill up [their apartment project] and sell it…one month after finishing. It’s a terrible deal for a college town like Columbia because they don’t care how healthy the market is, if the market’s in equilibrium or not.’”

“A newly built Sunny Isles Beach project may be telling of the state of the luxury market’s health. In August, Key International completed 400 Sunny Isles, a 230-unit luxury condo development, and by March the developer had sold nearly all of its units for a combined $206 million. Now, a surge of resale inventory has hit the market: 37 percent of 230 units are listed for sale for a combined listing volume of $119 million.”

“And 400 Sunny Isles is not the only newly completed project with significant listings. At Mansions at Acqualina, 14 units of 86, or 16 percent, are on the market for a combined $137 million. At Regalia, 11 units of 39, or 28 percent, are available for sale for a combined $146 million. Overall in Miami’s luxury condo market, inventory was up 55 percent at the end of April 2016 compared to a year earlier,Ron Shuffield, president of EWM Realty International said. Sales of luxury condos, defined as $1 million and up, were down 24 percent during that same period. At a commercial real estate summit in New York last week, developer Steve Witkoff, who owns a hotel in South Beach, commented on the Miami market: ‘Miami is a brewing storm,’ he said, ‘and it’s going to get even worse out there.’”

“New data from Wyoming Workforce Services shows Natrona County had the largest employment drop for any metropolitan area in the country for the month of March. The housing market has taken a big hit too. The median home price is now about 190 thousand dollars. One year ago it was 215 thousand. Realtor Gary Bryan with Broker One Real Estate said ‘Because of the economy its taking houses a little longer to sell. So I’m not seeing that more people are selling their house per say than they were a year ago. But it might be taking a little bit longer for that house to sell.’”

“The oil bust is spreading to the broader Houston economy, suggesting at least two years of job losses, sluggish growth, and softening home sales before the region sees a rebound, according to a new forecast from the University of Houston. The forecast by economist Bill Gilmer, is considerably darker than projections made just six months ago, when it looked like the oil crash would bottom out in 2015. Instead, prices and production continued their free-fall, nearing the proportions of the epic oil bust of the 1980s and rippling into retail, restaurants, real estate and other sectors supported by the wages, salaries and spending of the local energy industry, the forecast said.”

“The headline number: a projected 40,000 net jobs lost in Houston through 2017. ‘I hope you didn’t come looking for a lot of good news today,’ Gilmer told the audience of about 800 business people downtown. The intensity of the crash has been unprecedented, Gilmer said. In the 1980s the number of rigs in operation plunged 82 percent over four years; this time, the rig count has plunged nearly that much - 79 percent - but in just two years. ‘This has come harder and faster than anything we have ever seen before, in terms of damage to the American oil industry,’ said Gilmer.”

“As the economic contagion spreads through Aberdeen, so do the anecdotes of its fall from one of the richest cities in the UK to a city in crisis. Tales of oil executives queuing up for food banks or to sell their Rolexes to overwhelmed pawn brokers are breathlessly repeated by cab drivers. One tells of how financed sports cars are being abandoned in dealership forecourts overnight by those unable to keep up with payments.”

“According to rating agency Moody’s mortgage arrears in Aberdeen have spiralled to double the national level and could rise further. One estate agent who quickly asks not to be named says: ‘They’ve just had it way too good for way too long. Rent keeps falling but we still have people who aren’t able to pay. A lot of landlords depend on their rental income, which is a lot lower now than it was. A two bed flat in some of the better parts would have been about £1,300 before the downturn but you’d only get £900 now.’”

“Prestige rents are under pressure in a number of blue-chip suburbs across the capital city markets, according to CoreLogic RP Data. Beach and harbourside Sydney suburbs like Tamarama, Dover Heights and McMahons Point all recorded falls of more than 20 per cent in median asking house rent, while in Point Piper, unit rents fell 13 per cent to $950 a week. In Melbourne, the inner eastern suburb of Kew recorded a 11 per cent fall in asking rents to $720 a week, while in Perth’s most prestigious suburb of Peppermint Grove, asking rents for houses fell 33 per cent over the past year to $1250 a week.”

“In Peppermint Grove, Joseph Rooney, property manager at William Porteous Properties International, said rents were down 15-20 per cent due to a drop in demand from foreign expats following retrenchments at companies like Shell and Chevron. ‘A lot of people are not moving and instead hammering down their rental price. We’re advising clients to accept a lower rent rather than face the possibility of a property sitting vacant for two months,’ he said.”

“Long the golden privilege of the Hong Kong-based finance and banking crowd in Asia, the days of guaranteed housing allowances fat enough to rent a 4,000-square-foot harbor-view home on the Peak or a townhouse in exclusive Repulse Bay for HK$300,000 ($38,650) a month are gone. And it’s putting a damper on the luxury rental market.”

“The downsizing trend is occurring against the backdrop of Hong Kong’s biggest property correction since the severe acute respiratory syndrome, or SARS, epidemic of 2003. After climbing 370 percent until their September peak, housing prices have since fallen about 14 percent. After more than a decade of steady rental increases, luxury landlords are now looking at reductions of as much as 30 percent for properties at the very top of the market, said Walker Lam, director of the Hong Kong market at Landscope Christie’s International Real Estate. ‘It’s humbling times,’ said Joanne Lee, associate director of research and advisory for Hong Kong at property agency Colliers International Group Inc.”

“The man behind China’s tallest tower has a message for developers scrambling to erect skyscrapers across the country: Less is more. At an awards ceremon for tall buildings in China, the general manager at Shanghai Tower Construction & Development Co. sounded a downbeat note, appealing to his peers to think twice about planning another skyscraper.”

“‘The biggest challenge facing China is how to build fewer skyscrapers,’ Gu Jianping said during a panel discussion. ‘A tall tower surely has huge costs and rents would be high. Would there be demand for such a tower? If there is no market, the building will become a ghost tower, or you will have to cut rents, meaning it will fall short of your investment,’ Mr. Gu said.”

“As prices continue to soar in Vancouver’s infamous real estate market, a bold new solution has emerged to cool down a crisis that is driving young people deep into debt and forcing thousands of families to flee. But Vancouver-based economist Marc Lee says the key question is whether elected officials have the political will to fix the sizzling market. The city’s housing market is broken, he said bluntly after releasing his new report on tackling its housing affordability crisis. Yet as far as the author is concerned, the real heart of the issue is overcoming vested interests in real estate and property development industries.”

“‘My sense is that Premier Clark is not interested in really addressing affordable housing, or maybe she wants to appear to be addressing it,’ Lee, who does research for the Canadian Centre for Policy Alternatives (CCPA), told National Observer. ‘All of the things they’ve been saying in terms of wanting to preserve the windfall gains that have occurred in the property market suggest that they’re not serious about affordable housing.’”

“Since 2005, real estate boards, associations, and corporations have donated more than $360,000 to the BC Liberals, while real estate property and development groups have donated a whopping $2.8 million. Premier Christy Clark’s own party fundraiser is Bob Rennie, owner of Vancouver’s largest real estate market firm, whose company has shelled out over $250,000 to her party in the last six years alone.”

May 19, 2016

A Combo Of Falling Prices And Unrealistic Expectations

NBC 26 reports from Wisconsin. “Home sales for the first quarter of 2016 are the best we’ve seen in nearly ten years. Inventory of homes for sale is down and that means the prices are rising. But many are prepared to shell out some extra cash in this market for the right home. ‘Our neighbors across the street just sold their house and it hadn’t even been listed and they sold it above asking price,’ says Monica Merriman of Green Bay.”

“At Keller Williams Realty they’re selling nearly 30 percent of their homes in less than five days right now. And while sale prices have risen nearly 20 percent in just three years many are finding out the inventory of homes available, has dropped 20 percent over that time period as well. Housing experts predict that sales will continue to be strong throughout the summer. That is, just as long as interest rates remain low.”

From Mid-Missouri Public Radio. “Multi-family housing development downtown will be put on hold after the Columbia City Council adopted an ordinance imposing an administrative delay on approvals. The bill, which passed with a vote of 5-2 after just over an hour and a half of tense discussion and public comment, was specifically designed to target the rapidly growing number of luxury student housing complexes.”

“‘I just think the council…needs to be very concerned that we’re not inadvertently contributing to this luxury student housing bubble,’ Mayor Brian Treece said, citing concerns over declining student enrollment and issues filling some existing spaces. ‘The reality is no one makes money, whether it’s the university with their dormitories or private sector housing, when these facilities are only 80 percent occupied.’”

The Miami New Times in Florida. “New data suggests Miami’s average rental rates have already begun to dip and may experience even further drops. Abodo found that the average rent for a one-bedroom apartment in Miami fell 3 percent between April and May. It was the eighth-largest dip of any market in the nation. Another report, from Andrew Stearns of Stat Funding (via Curbed Miami), also points to the possibility of tumbling rents.”

“That means buyers who scooped up apartments for investment properties may have a difficult time flipping them for a profit, so they may put the units on the rental market instead. ‘Rents will likely tumble as preconstruction buyers unwilling to take losses on their condos flood the rental market with new units,’ the report reads. But those owners may have a hard time finding anyone to pay top-market rents for those units, meaning that some who ‘choose to rent their units will have to rent for an operating loss… resulting in negative carry/negative cash flow.’”

The Observer in New York. “No one wants to be the bearer of bad news, but for brokers it’s sometimes part of the job description. Right now is one of those times, as real estate pros laboring in the fields of New York’s highest end find themselves, in many cases, contending with a combo of falling prices and unrealistic expectations. Most sellers are willing to be flexible, said Miron Properties agent Robert Halperin. ‘I’m not really wrestling anyone [about pricing] right now,’ he said. ‘For instance, I have a townhouse listing on 55th Street between Park and Madison, and we have adjusted pricing over the past few months. But it’s just about having patience, keeping everyone informed and acknowledging that there is a slowdown. You can’t pretend like it hasn’t happened.’”

“Then again, maybe you can. Citi Habitats broker Victoria Rong Kennedy said that some of her clients are still taking a ‘wait and see’ approach. ‘They want to see how bad it can get before they really drop their price,’ she said.”

The Springfield News-Sun in Ohio. “The number of foreclosed homes in Clark County sold at sheriff’s sales is at the lowest in a decade. Although the numbers are down, Tina Koumoutsos, executive director of the Neighborhood Housing Partnership of greater Springfield said they are still significantly higher than numbers the community saw before the most recent housing collapse. Since the housing bubble burst in 2008, banks had been holding on to properties, buying them back at sheriff’s sales to not lose money from defaulted mortgages, said Koumoutsos.”

“‘One of the things that we’ve seen happen is when the bank gets these houses back, they could sit on them for years,’ she said.”

Reuters on North Dakota. “More than 80,000 people poured into North Dakota, looking to stake their future on the fracking economy. The state’s Bakken oil patch, centered here in Williston, was a magnet for oil workers, business investors and job-hungry folks. That future has evaporated. Those who haven’t packed up and left the Bakken are facing a new reality of smaller budgets, fewer residents and the physical detritus of a building boom that left behind hundreds of empty apartments.”

“In downtown Williston, near the strip club, a $15 million building with retail, residential and office space opened last March. All of the retail spots and more than half of the apartments sit empty. ‘It seems like people are on the fence, waiting,’ said Paul Russo, a vice president at The Renaissance Cos. The developer named the property Renaissance on Main, thinking it would serve as a symbol of western North Dakota’s rebirth.”

“Instead, it has become a monument to the overbuilding that continues in a region quickly losing residents. The 900 apartment units under construction today in Williston will soon join the more than 10,000 already built since the boom began in 2009, according to a study from THK Associates, an architecture firm. ‘No one has any money to spend here anymore,’ said an exotic dancer at Williston’s Heartbreakers strip club. She estimated that tips had gone down more than 60 percent since last fall. One recent evening, Heartbreakers attracted only three customers. Since then, the club’s owner has closed Heartbreakers and is planning to reopen the venue in coming days as Williston’s first gay bar.”

May 18, 2016

Buyers That Can Panic Alongside Everyone Else

A report from the Agence France-Presse. “Chinese nationals have become the largest foreign buyers of US property after pouring billions into the market in search of safe offshore assets, according to a study. A huge surge in Chinese buying of both residential and commercial real estate last year took their five-year investment total to more than $110bn, according to the study from the Asia Society and Rosen Consulting Group. And despite a slowdown due to Beijing’s subsequent clampdown on capital outflows, the figure for the second half of this decade is likely to double to $218bn, the study said. ‘What makes China different and noteworthy is the combination of the high volume of investment (and) the breadth of its participation across all real estate categories,’ including a ’somewhat unique entry into residential purchases,’ the study said.”

“The authors of the study said their numbers, based on public and real estate industry data, understate the total. They necessarily miss purchases made by front companies and trusts that do not identify the sources of the funds. Geographically, Chinese buyers are concentrated in the most expensive markets: New York, Los Angeles, San Francisco and Seattle. Property in Chicago, Miami and Las Vegas is also popular. That focus means they pay well above the average US home price: last year, Chinese buyers paid on average about $832,000 per home in the United States, compared with the average for all foreign purchases of $499,600.”

From Maclean’s in Canada. “The cash flowing out of China into assets around the world has hit tsunami proportions, driven by fears of a slowing economy and a declining currency. Estimates peg the amount Chinese investors and companies moved out of the country last year at nearly $1 trillion, up more than sevenfold from 2014. A survey of 150 agents in China by Investorist, an Australian company that markets international properties online, found the vast majority of would-be Chinese purchasers, nearly 90 per cent, have a budget between $500,000 and $1 million—not unlike many Canadians who are seeking to buy a home in Vancouver or Toronto these days.”

“‘The majority of Chinese buyers are families that can afford an investment property and possibly a second one,’ says Jon Ellis, the company’s founder. ‘These are mom-and-pop investors who might own a car dealership or a bakery.’ Moreover, the report found that most Chinese seeking to buy overseas ‘wish to use leverage where possible,’ which may also have something to do with the need to circumvent Beijing’s $50,000-per-year limit on foreign transactions.”

“It all points to a group of foreign buyers that, while large and motivated, remain financially mortal, and can therefore be expected to panic alongside everyone else if Canada’s housing market begins to falter. And, as foreign money continues to flood both Toronto and Vancouver, there’s plenty of evidence of ultra-sketchy, speculative behavior that’s not limited to offshore buyers.”

“‘If the flow starts in a clandestine way there is no way to regulate it at the other end,’ says David Mulroney, former Canadian ambassador to China, adding that every time he spoke to university students in China he was asked whether it was true Canada is a haven for Chinese fraudsters. ‘We have no idea where the money is coming from, how it was sourced—all of it contributes to an alarming lack of awareness in the local real estate markets,’ says Mulroney.”

From News Limited in Australia. “Is the golden age of Australia’s Chinese property boom coming to an end? The buying frenzy that has seen local residents priced out of the market by foreign investors appears to be slowing, as a toughened stance from the banks and regulators takes effect. RT Edgar Toorak director Jeremy Fox told Chinese demand in the top end of the Melbourne market had ‘completely dropped off.’”

“He recently lost a deal on a $12 million six-bedroom mansion at 9 Whernside Ave, Toorak, after the would-be buyer was unable to tick all the required boxes. ‘We had an agreement on price subject to FIRB approval and getting their money out of China, and that’s been the stopping point,’ he said.”

“This time last year, Mr Fox said, one-third of the properties he sold went to Chinese nationals. This month, not a single sale needed FIRB approval. ‘We’ve sold 22 properties this month and only one’s been to Chinese — and that was local, not overseas,’ Mr Fox said. ‘It’s been a combination of everything: getting money out of China, banks cracking down, the FIRB rules and application fee, the stamp duty increase. The whole thing’s just come together in the perfect storm.’”

The Hampstead & Highgate Express in the UK. “A developer advertising price reductions on a luxury development in Maida Vale? No you haven’t entered a parallel universe, just the north London property market in 2016. ‘You can thank global economics, Brexit jitters, Panama, stamp duty hikes, market corrections and the rest – for making your dream home that much more affordable,’ reads the advert, an admission that is disarming in its rarity.”

“Billed as ‘the best value brand new houses in Inner London,’ the eight properties in a gated development have been reduced from around £1.4 million according to Philip Green at Goldschmidt & Howland, to £1.295 million. This developer’s declaration is refreshing but their struggles are par for the course. More than one third of properties in Hampstead sold in the first quarter of this year achieved a sale price that was more than 10 per cent lower than the initial asking price, despite a surge in transactions.”

“And yet the number of ‘luxury’ new builds in some stage of planning or construction in inner London has risen by more than 40 per cent in 18 months, according to figures from buying agency Property Vision. The research found there are 19,000 units currently under construction across prime London postcodes compared with 13,400 units when the same survey was carried out 18 months ago. It offered a conservative estimate of 26,133 new ‘prime’ London units coming to market over the next few years compared to only 4,870 units sold for £700,000 or more on the second hand market in 2015.”

“‘The gap between the pipeline of new stock and the annual second-hand market in the wider area is large – very large,’ said Charlie Ellingworth, director at Property Vision. ‘The word ‘Prime’ has become overused in recent years, alongside ‘iconic’. As the market adjusts their real meaning will become apparent and those who believed the developers’ hyperbole may wish they had taken more time – and advice.’”

The Real Deal. “The Chinese investors buying up swaths of U.S. real estate may not always know what they’re doing, according to some real estate experts. ‘I’ve been surprised by the lack of sophistication of some Chinese institutional investors,’ John Liang, Xinyuan Real Estate’s managing director of U.S. operations, said during a panel on Chinese real estate investment at the Asia Society. Some are even missing the ‘basic finance 101 concept of risk and reward,’ he said.”

“The reason? Real estate in China is basically ‘a manufacturing business,’ he said — one builds, sells, and makes a profit. ‘The U.S. is way past that,’ he said, referring to the complexity of the trade here, with its myriad of regulations and financial gymnastics. ‘It’s a little ahead of what the Chinese are used to.’”

“Liang’s statements come amid complaints by some local players that demand from Chinese investors have pushed New York prices to unrealistic levels. Some of Liang’s fellow panelists, who included Wendy Cai-Lee of East West Bank, Beth Fisher of Corcoran Sunshine, Kai-yan Lee of Vanke USA Holdings and Arthur Margon of Rosen Consulting Group, agreed with his assessment that there remains a lack of knowledge among even the most active Chinese investors.”

“‘You do wonder what the underwriting criteria is with some of these purchases,’ Fisher said. ‘As a broker, you assume that they see into the future in ways that we sometimes don’t see, but it is a tad concerning on the supply side.’”

From Bloomberg. “A custom-built home in the heart of California’s Silicon Valley had its price cut by $500,000 last week after sitting on the market since the end of March — a move that would’ve been almost unfathomable a year ago and a signal that frenzied demand has peaked. The six-bedroom, five-bath house in Palo Alto is now listed for $7.5 million. It joins a growing inventory of high-end homes in the area that are taking longer to sell.”

“It’s a departure from recent years, when newly minted millionaires from tech initial public offerings raced against buyers from China to scoop up anemic inventory. ‘The seemingly inexhaustible well of very high-end buyers has proven exhaustible after all,’ said Dean Wehrli, a senior vice president at John Burns. ‘The peak is behind us, and that’s becoming clearer and clearer to builders and buyers.’”

May 17, 2016

The Higher-End Rental Market Will Be Tested

A report from Crain’s Cleveland Business in Ohio. “In downtown Cleveland and University Circle, a bevy of new apartment buildings and rehabs of former offices to dwellings have come online, and more are on the way. Consider the last six weeks of insanity: Developers have rolled out more than 1,500 suites in a region where 200 units was the norm until the apartment boom began and pushed the figure to 750 suites a year since 2014, according to Marcus & Millichap statistics. Moreover, in projects that are further along, at least that many suites will hit the market by 2018. Just one, Flats at East Bank, has been built from the ground up in the last 10 years.”

“The profusion of downtown housing projects the past decade has also helped hike rents to $1.61 a square foot late last year from $1.10 in late 2010 — an increase of 47% while rents in Cleveland and Cuyahoga County remained flat. Some projects such as the Schofield, The 9 and the Flats at East Bank have surpassed $2 a square foot, the level developers believe they need to make a go of construction in addition to the continued conversion of old office space to swanky apartments. The questions politicos, civic leaders, lenders, real estate developers and others ask are, ‘When will the market soften?’ and ‘Which project will get stuck with more suites than it can sell?’”

The Alabama Media Group. “Birmingham had the highest increase in apartment rents higher than $1,500 per month of any of the eight southern cities in a new study. All eight cities in the Federal Reserve Bank of Atlanta study - Birmingham, Atlanta, Jacksonville, Memphis, Miami, Nashville, Orlando and Tampa - saw declines in the supply of rental units priced between $500 and $750 monthly from 2010 until 2014. All except Tampa saw decreases in units under $500 monthly.”

“Each city also saw an increase of units that cost more than $1,500 monthly - but Birmingham had the biggest increase. It’s likely that that increase has gone up even more since then, with the recent opening of luxury apartment complexes within city limits. It’s also likely to keep increasing - several more luxury projects are in the works. Birmingham is seeing a massive influx of luxury rental units, often celebrated for bringing investment to the city and continuing urban renewal. But incomes aren’t necessarily keeping up with rising rents - 58.5 percent of all renter households in Birmingham spent more than 30 percent of their income on rent in 2014, up from 55.9 percent in 2010, according to the study.”

The Tennessean. “Howe Garden Apartments in East Nashville has been in the news — I mean for something besides last fall’s double homicide. This January, Middle Farms Capital bought the property as part of a $54.5 million deal spanning nine apartment complexes in five cities. Investors like Middle Farms are buying up what few affordable rental properties remain in Nashville, slapping on some new countertops, and doubling the rent. Under Howe Garden’s new owners, renovated units start at $1,099 per month for a one bedroom. About a month ago tenants were paying as little as $524 per month.”

“Nashville is in a crisis. As of December, average rent in this city has risen to $1,246 per month. Income rose 20 percent between 2000 and 2015, but the cost of a home rose 103 percent in that same time. There’s no reasonable relationship between local wages and local rent anymore, and it’s getting worse.”

Vegas Inc in Nevada. “Amid a national apartment boom, Southern Nevada’s multifamily market has bounced back from the recession faster than other segments of the real estate industry. Property pros, however, expect rent growth to slow and vacancies to tick higher, amid questions over the depth of Las Vegas’ renter pool and whether investors are building too many higher-end projects.”

“About 3,000 new apartments hit the local market last year, and 4,500 are expected this year. That’s up from a low of about 370 in 2013, according to Las Vegas broker Spencer Ballif, a senior vice president with CBRE Group. According to Reis, in the first quarter alone, U.S. developers brought to market more than 42,000 units, the highest first-quarter tally since at least 1999. Ballif noted that Las Vegas’ workforce has grown faster than other metro areas’ but said the depth of the higher-end rental market ‘will be tested,’ adding: ‘We’re probably overcooking it a little bit.’”

“Broker Patrick Sauter, managing partner of NAI Vegas, said nearly all developers were ‘building basically the same product,’ going after the same customer base and targeting the valley’s same two submarkets. He figures there ‘might be a little bit of a glut’ of new projects and that rent-growth could slow. Investors, meanwhile, are paying top dollar for these and other rental properties.”

The Colorado Real Estate Journal. “The Denver multifamily property values continuing their current inexorable climb. Simply put, apartment permits are well above the norm – recently averaging 9,500 per year versus the long-term demand of 5,500 units per year. The overbuilding in apartments is being (temporarily) absorbed by millennials who are forced to defer their entry-level home purchase. However, we expect this artificial demand to reverse within the next two to five years as the millennials gain increasing access to mortgage financing.”

“In the meantime, for the next two to three years, apartment developers will enjoy an Indian Summer that they will later come to regret. The fact is, Denver apartment deliveries are continuing well above trend – some analysts are projecting nearly 10,000 new units per year for the next two years. Unfortunately, the great return recently enjoyed by apartment developers and buyers has created a sense of complacency. Capital is abundant and it is likely to drive more serious overbuilding. If developers stop building, the negative downturn is likely to be modest. Unfortunately – given the nature of developers – this is possible, but not likely.”

“It is our estimate that there will probably be a recession in 2019 – give or take one or two years. While this recession likely will be a garden-variety recession, it will have devastating consequences on apartments because it is likely to appear precisely at the time of peak overbuilding of apartments. Vacancies will spike, rents will plummet and values will decline. We are calling this unfortunate confluence a ‘negative trifecta’ for apartments.”

“We are, in fact, guided by defined metrics, allowing us to predict with considerable accuracy the coming cycle downturn. The combination of higher vacancy and lower rents stresses apartment cash flows breaching construction loan covenants. It is the appearance of distressed sales that causes a severe downturn in apartment values. We are not sure that such a downturn will occur in Denver, but we are watching the metrics carefully.”

“We are continuing to build selectively. We still like the transit-oriented and the senior-oriented apartment market niches. Otherwise, in Colorado, we have taken the precaution to sell our three other apartment projects.”