May192014
The housing bubble is bursting in China, now what?
Analysts pointed to a massive housing bubble in China for many years, but property prices haven’t crashed… until now.
Anyone who talks about housing bubbles these days is immediately labeled a “doom and gloomer.” It’s a familiar refrain, often heaped on people like me who predicted a housing bust in the United States when few wanted to believe it was possible.
Here in America, the bubble deniers — and Never forget the bulls and bubble deniers were completely and totally wrong — the bubble deniers succumb to their optimism bias and comforted themselves with fallacies and wishful thinking, even past the point where denying the obvious was no longer operative.
The same is true in China.
First, let’s review some of the evidence of a housing bubble in China.
The City of the Dead: The ghostly Chinese town filled with luxury properties that nobody lives in
By Travelmail Reporter, Published: 09:47 EST, 22 April 2014 | Updated: 04:16 EST, 23 April 2014
Locals call it ‘The City of the Dead’, a ghostly urban landscape with no residents to fill it.
More than 100 villas stand empty after they were built six years ago for locals in the Chinese city of Beihai, in the Guangxi Zhuang Autonomous Region.
They were built to cater to a new rising class of wealthy people who, it was hoped, would invest in real estate and snap up the properties, many of which are priced at over three million yuan (£285,900).
£285,900 is about $500,000.
Chinese citizens are not allowed to invest overseas, so there has been a real boom in real estate as people look for safe havens for their wealth.
In a bid to cater to those wanting to invest in property, entire cities have been built complete with skyscrapers, shopping malls, highways and parks. But they are often devoid of residents and turn into soulless ‘dead zones’ due to their distance from important economic centres.
Some workers, who can earn as little as $2 (£1.18) a day, have invested savings from up to to three generations of one family just to buy the properties, but can’t make use of them as they are too far from key city centres, meaning they are left with no residents at all.
Work needed: Further investment will soon be needed on the properties to maintain them as they have been standing empty for six years
Unfinished: The properties look perfect from the outside, but are unfinished inside as investors are simply holding onto properties to wait for a profit
Most hope the growth in property values will make the investment worth the risk, despite being unable to afford to live the houses they have invested in, however, observers believe China is over-building, which could cause a housing bubble of vacant properties.
thers say that the modernization of China is ‘the greatest urbanisation story the world has ever seen’, and that ghost towns like this one will soon become ‘thriving metropolitan areas’.
That remains to be seen. Six years on and with not a soul living in them, the villas will soon need more money spent on them to protect them from the elements.
The construction industry not only employs hundreds of thousands of Chinese, but it has displaced hundreds of thousands of others who have been forced off their land and homes to make way for construction projects.
‘It’s a madness – homes built to stand empty!’ said one local who lives in a wooden shack.
In America during the housing bubble, our homebuilders responded to false demand signals and built large numbers of McMansions in places like Beaumont or Palmdale. It was a mis-allocation of resources that put the wrong houses in the wrong place at the wrong time.
We built $500,000 houses for a local population making about $40,000 a year. In China, they built $500,000 houses in areas where the local population lives in shanties on $3,180 a year, so take our bubble and multiply the problem by 12, and you start to understand what’s been going on in China over the last two decades.
China’s Great Property Boom May Be Coming to a Desperate End
Michael Schuman, Chengcheng Jiang, May 15, 2014
Analysts have warned for years that China is in the midst of a gargantuan property bubble and the inevitable reckoning may have finally arrived as massive oversupply and a tightening of credit appears to be crushing the market—with consequences for the global economy
You know a property market is in trouble when developers stage long-jump contests to attract buyers. That’s what happened earlier this month in the eastern city of Nanjing. Looking to sell apartments in a new residential complex, a local newspaper reported that agents from the developer, Rongsheng Group, lined up potential customers behind a queue and asked them to leap forward. Those who jumped the farthest got the biggest rebates — up to $1,600.
Bridging the Wealth GapChinese Journalist Arrested Amid Crackdown for Tiananmen AnniversaryIllinois Man is Third U.S. MERS Infection, CDC Says NBC NewsMen Charged With Toppling Ancient Rock Formation Avoid Jail Time Huffington PostComet Outlives Predictions Weather.com
Chinese newspapers these days are riddled with such tales of desperation. On May 9 in the central Chinese city of Changsha, pretty girls were enlisted to hand out 50,000 tea eggs to lure people into a housing fair. Developers in Shenzhen and Fuzhou are offering to sell apartments with no down payment. In Hangzhou in April, two real estate agents competing for buyers got into such a vicious fistfight that the police had to intervene.
The problem in China is valuation: when the benchmark for valuation is only comparable sales, which it is in China and in our own residential real estate market, then each sale represents a higher comparable value justifying an even larger loan. There is no tether to real, underlying value as determined by cashflow. That makes for a dangerously unstable market because loan payments are not backed by rent. If a few borrowers become insolvent, the entire system crashes.
Are we witnessing the end of China’s great property boom? For years now, some analysts have warned China was in the midst of a gargantuan property bubble, ready to burst at any moment, with dire consequences. But Chinese real estate defied the naysayers and continued to soar. Both developers and customers, bypassing restrictions imposed by policymakers to constrain the industry, continued to build, invest and propel prices higher.
Now, though, the inevitable reckoning may have finally arrived. Massive oversupply combined with a tightening of credit orchestrated by the government appears to be crushing the market.
Falling apartment prices spell bad news for China’s economy. Real estate is one of the main drivers of China’s growth, with property investment accounting for 16% of GDP by Nomura’s calculations. A downturn could dash hopes for a recovery of the world’s second largest economy, already suffering through its worst slowdown in more than a decade, and the impact would be felt across the world.
So what is going to happen? Will China’s housing bust turn foreign buyers into desperate sellers? Our own real estate market has enjoyed some influx of Chinese investment; I know because I live in a rental owned by a Chinese investor. I recently asked, Are the Chinese buying California homes in large numbers? The answer is: not really. In August of 2013, the OC Register published Foreign investors buying homes in O.C, and they reported that foreign buyers represent between 5% and 7% of the housing market.
But what happens if that 5% to 7% become sellers instead of buyers? What if the pretenders who borrowed their way to prosperity (yes, some Chinese did this too), what if they need the money to make debt-service payments?
[listing mls=”NP14101788″]
I’m so glad I don’t have to live in the sad little shanty featured here. Somebody shoveled $100K or more into improvements to make it ALMOST, but not quite, as nice as the Chicago condo I paid less than $100K for last year.
Except my condo has much better architecture and tons more charm. And it’s probably just as close to the beach, about a mile or so.
And you don’t have to make $200K a year to afford it.
you have beaches in chicago? hehe
Yes, we have beaches in Chicago, very near me.
They just aren’t very inviting in the winter.
The 7,400 sq ft lot size and year round nice weather would be the difference then.
Even for a Southern California cheerleader, the pricing on this house is a complete joke. You can charge that much on the other side of Newport Blvd. where the homes feed into Mariners elementary and Newport Harbor High and where “WTF pricing” is fairly commonplace, but on the Westside of Costa Mesa??? Good luck.
I lived down the street from this home for a few years, it’s a fairly safe neighborhood but it’s definitely a working class area with a lot of English as a second language residents. Moreover, 19th street is fairly heavily trafficked – if I were shopping for a home in this area, I would discount the homes located on 19th by 3-5%, simply because of traffic.
I’m an infrequent poster, but a daily reader of this site and I will go on record as saying this house won’t sell for within 100,000 of asking price. Even at 500k, it’s overpriced by about 20%, but there may be a greater fool out there who will pay close to that amount. The greed in this asking price is just astonishing
Thanks for commenting and providing your insight.
You may not understand the appeal. Long ago, like way back in the 90s when I was just out of school, it was possible to get a home south of 19th between Tustin Ave and Irvine Ave in the 100s. Now, you are lucky to get anything on a quiet street for less than 1M. The nice homes are running from 1.1M to 1.6M. What happened? The area is adjacent to NB.
Now, we have west side CM near the new Banning Ranch development in NB. Close to the ocean. What do you think will happen to prices in that Costa Mesa area when it is adjacent to an area full of multi-million dollar homes. You got it. Big price jump. But, it will take a number of years for Banning ranch to get built up. Long term money is being plowed into that area … looking for the next costa mesa area running up because it is adjacent to NB.
good luck gentrifying west side CM once everyone realizes the economy is not recovering. all this investor money will vanish. the soup kitchens, dope addicts, pawn shops, and 55 corridor motels represent pent up blight.
You may be right that West Side Costa Mesa will look a more the East side in 10-15 years time. I don’t have a crystal ball and if you just look at the geography and ignore the socio-economic factors, it certainly is a pretty good location.
But don’t try to pretend like $577/sq foot is realistic, even for a premier lot (which due to the location on 19th, I would argue this is not). I may be willing to “bet on the come” for an up and coming neighborhood, but this listing price is asking me to pay like the West Side has already made it, which we both know isn’t true.
Side note, when I lived in the area, it was off 19th and Maple, in a townhome development owned by Gary Watts. Former readers of the IHB will remember him. The year was 2009 and he had bought the complex with dreams of selling the units for 400k-450k each. Then the real estate bubble burst, and he couldn’t move a unit to save his life. Out of 16, I think he had sold 2 total units in a year, and had begun renting them out of necessity. I don’t know what became of him, or whether he still holds those units. If he was able to weather the storm for the next 4-5 years, I imagine he would have done quite well eventually. Despite all the flak he took for being a hopeless real estate shill (and rightfully so, in my opinion), he was actually a really nice guy and a good landlord.
Hey I know this!
My husband and I went to go see one of these town homes, which he was selling in the 450k range. He said he was selling them off as the leases expired. I think it was either his last one, or he had just 1 or 2 more to sell. We really liked the townhouse, but we wanted a garage for storage and if I’m thinking of the same development, it only had covered parking, but it was direct access. I remember he told us the whole story of the development and I was thinking, wow this guy seems very nice and honest.
Yep, those were the same units. They were very nicely remodeled, but I have a feeling I would have eventually grown weary climbing all the stairs in those tri-plexes. Eventually, I put a beer fridge down on the living room level because I was tired climbing the stairs every time I left my drink in the kitchen!
I question whether proximity to Newport Beach alone is really the driver for higher prices on eastside Costa Mesa. My guess is that the real appreciation driver has been zoning into the Newport Beach schools, specifically Newport Harbor. New Banning Ranch development won’t affect where westside Costa Mesa properties are zoned. Kids living in Banning ranch will be zoned into Newport Elementary, Ensign, and Newport Harbor. If a new elementary school is needed, there is already reserved NMUSD space at the end of 16th and Whittier, already zoned into Newport Elementary.
Some appreciation happened on eastside Costa Mesa when East 17th was cleaned up, but I think selling people on a top high school for their kids is more valuable than new coffee shops.
Of course, the closer one gets to the beach, generally prices do go higher – except for west Costa Mesa where the neighborhood gets progressively lower income towards the light industrial zones right outside the West Newport Beach condos along Superior. I expect there will be a small bump in housing values if Banning Ranch starts west side gentrification (already starting with a replacement of Detroit Bar), but that process will take many years. And STILL west Costa Mesa residents will not have access to Newport Beach schools.
Economic Bubbles are cheating!
Economic Bubble is the primary reason why we had an economic depression!
Economic Bubbles defer productivity gains!
Economic Bubbles enhance the foolish!
Economic bubbles steal from future generations!
Economic Bubble is the reason why the entire western world is going to have another economic depression!
I can only hope that the ones most responsible for this economic bubble will be held accountable in public opinion, in the courts and possibly at the guilloti n e … well, maybe that’s a little extreme.
I had a reader email me this article over the weekend. It’s the most amazing example of the results of bubbles and economic distortions I’ve ever seen.
Where the World’s Unsold Cars Go To Die
http://jalopnik.com/that-zero-hedge-article-on-unsold-cars-is-bullshit-1578124255
I’m really interested on what the real story and numbers on inventory are. It does look like some of the ZH article is BS, but I’d like to see a good explanation on how new vehicles sold can be skyrocketing at the same time we are hitting record highs for age of vehicles registered on the road.
I don’t think the article is BS.
I remember Paul Krugman writing that we should go bury a bunch of money deep in mines and pay people to go dig it up. Isn’t this really the same kind of economic thinking? It’s only when you see the acres and acres of cars, and emotionally digest the gross misappropriation of resources that you begin to see something is deeply flawed in modern economic thought.
After reading the article pugy linked to, I see that this article is BS. As the blogger who refutes it noted, the article appeals to our need to understand what’s wrong with the economy. We suspend our disbelief because the nonsense is presented with assurance and plausibility. It’s a bit like the great UFO stories and movies from the 80s and 90s. If you want to believe, this article gives you something to grab on to.
channel stuff now = bigger bailout later.
the precedence has already been set. TBTF
From the author of the second article:
“I just keep re-reading this and wondering how any sane, intelligent person could believe it.”
I was thinking something similar. How does an educated person read the typical ZeroHedge article and fall for it? It’s hard to believe, and yet I’ve seen awgee and el O post links to ZH articles many, many times as if they were posting to a credible source. One time I called awgee out on all the inconsistencies in an article that he posted and he completely lost it.
awgee says:
December 18, 2013 at 2:08 pm
Sorry Larry, but Mellow Ruse, you are a moron. You have absolutley no clue as to what I “buy in to” and yet you go spouting off as if you know anything about me let alone what I think about the particulars of the article. The FACT is that while discussing these numbers at work, I was skeptical of 100% accuracy and said so. But I do understand the overall point of the article and understand the importance of the numbers without letting one or two or three inaccuracies get in the way of seeing the truth. Again, Mellow Ruse, you are a moron.
Specifically to this article, what is wrong about it?
Why are so many cars parked in these locations?
Are the photos fake?
Are that many cars awaiting transport and delivery?
Is it inconceivable that car manufacturers overproduced and now have a buildup of inventory?
Some of the photos used are five years old, the jalopnik author mentioned. I think the Dodge Durangos picture specifically that hasn’t been produced since 2009.
So this was the inventory from the depths of the recession in 2008 and 2009?
That sounds more plausible. You would think five years later that automakers would have adjusted their production schedules to what they could reasonably expect to sell.
Some of the photos could be one year old, some could be five or ten. I don’t know why car manufacturers ship and store in the manner they do, but I have seen new car parks for as long as I can remember, especially at the ports. They fill them up, and they empty them. Who knows?
ZH gets attacked/discredited by the TPTB/bankers/establishment/status-quo on a regular basis. Very telling.
I can only assume that the faith you continue to place in ZeroHedge is a big reason for how wrong you’ve been on gold. Their epic failure in predicting gold prices is well-documented:
http://www.zerohedge.com/news/imminent-25-trillion-debt-ceiling-hike-will-unleash-gold-price-surge-1950-and-higher
Hogwash!
ZH quote from the piece: ”A simple correlation rule of thumb allows us to predict that gold will be at $1,950 by the end of the year IF IT RETAINS ITS CLOSE CORRELATION TO THE DEBT CEILING”
Tip: to build credibility… read the piece (instead of just the headline) you’re linking-to in its entirety before you comment/spin on it. 😉
its easy to discredit ZH when the population believes the temporary ZIRP recovery as sustainable. This means you Mellow Ruse
There is no way a company would intentionally over-produce this many cars. Why are there so many cars sitting there? Ask the companies. Some one ought to know. There are a whole lot of corporation-hating, hungry writers out there looking to win a Pulitzer, and yet no one has broken the story. Why not? Because it isn’t true?
Car manufacturers work like any other manufacturer, they get orders from their dealers every month based on dealer sales. The car manufacturer takes those orders and adjust their production rates. With automated production lines, that literally never stop, they just change the speed the cars move. If the slow down persists for long enough, they will take down parallel lines.
There is always a chance of overproduction in which case the company wants to get the cars off their books to improve their tax situation. They are likely to wholesale the cars in that situation to cover the manufacturing costs. Any exec that continues to overproduce quarter after quarter will be looking for a new job/career. It’s not that hard to read sales demand. Since execs value their own jobs over the workers, who do you think gets cut when the stock price goes south from EPS shortfalls?
The best way to keep prices high is to cut supply, not increase it. The best way to keep profits high is to sell your product at the highest price without impacting volume: not making cars you don’t intend to sell. Thankfully Paul Krugman doesn’t run a car company. If he did, the shareholders would can him damn quick.
Basically Zero Hedge is claiming that car companies are intentionally overproducing cars to avert a global depression.
How exactly does this play out? Does the Board of Directors of Ford get together and say: “I know our production demand is for three million cars this year, but we need to produce 4 million to keep the economy moving. We’re not going make any profit this year, you can forget about bonuses, and we’ll all probably lose our jobs, but it’s the right thing to do.” Hogwash.
Keep in mind, the global sales were 82.8 million vehicles in 2013 (a new record, up 4.2% from 2012). So a miss of 1% is 800,000 cars. A miss of 0.1% is 80,000 cars.
Zero Hedge isn’t a real reporter. He sees a picture and makes stuff up. If he had any sense of humor, maybe he could work for The Onion.
http://www.cnbc.com/id/101321938
My main issue was that a bunch of photos with no context proves absolutely nothing. They simply did a google search and made up a story to go along with some photos, that upon further examination turned out to be 5 years old.
The blog that pugy linked to does an excellent job of breaking down the ZH inaccuracies.
LOL!! dude, you’re soooo transparent.
Did you even bother to read the intro in the piece?? Evidently NOT, for if you had, you would know that this was not a ZH piece.
ZH intro:
In the past several years, one of the topics covered in detail on these pages has been the surge in such gimmicks designed to disguise lack of demand and end customer sales, used extensively by US automotive manufacturers, better known as “channel stuffing”, of which General Motors is particularly guilty and whose inventory at dealer lots just hit a new record high. But did you know that when it comes to flat or declining sales and stagnant end demand, channel stuffing is merely the beginning?
Presenting…
Where the World’s Unsold Cars Go To Die(courtesy of Vincent Lewis’ Unsold Cars)
Facts are obstinate.
I don’t find the article very credible. It looks like whoever wrote it did no fact checking on why manufacturers ship and store cars in the manner they do. The author made some rather shortsighted assumptions.
Zerohedge is not one writer, and neither is Tyler Durden.
http://en.wikipedia.org/wiki/Zero_Hedge
The inside financial knowledge displayed by “Tyler Durden” is nothing short of phenomenal, and is a craw in the belly of the financial world and the main stream financial media, and Zerohedge has more credibility within the financial world than the MSM. But, like everything else that is written, it is probably better to be skeptical rather than assume than whatever is written or said is correct.
When I look at those photos is see DEFLATION.
This story further illustrates that despite the world NOT running at complete capacity, there’s still not enough demand to absorb these automobiles. The slack in US employment is very high, creating more pressure on wages.
Deflation forces are growing is strength.
Of course you do.
How will Fannie and Freddie fix our housing troubles?
Well, the very, very long-running debate surrounding the fate of mortgage finance giants Fannie Mae and Freddie Mac is shaping up to become even more, ahem, entertaining.
On the one hand: the Senate Banking Committee finally, narrowly okayed a bill that (if passed as written) would simply replace both Fannie and Freddie with a new entity. It’s a complete restructuring of the mortgage finance infrastructure. The goal is to get private entities – instead of the government – take a greater portion of any losses in any future real estate market meltdown. In theory, that means that future crises won’t destroy the quasi-governmental mortgage agencies like the most recent one did.
On the other hand, Melvin Watt, the overseer of the two agencies, announced a new strategy for Fannie and Freddie. In his vision, Fannie and Freddie need to be prepared to serve as the central pillars of home loan lending, just as they do today.
Watt has gone further still, trying to offset the impact that higher interest rates and tougher lending standards are having on the mortgage market by loosening the rules that since the crisis and up until now required banks to buy back troubled loans. Here’s how it works: when Fannie and Freddie acquire a loan from the likes of Citigroup or JP Morgan, they will now be OK if customers have two delinquent payments in the first three years. After that, Fannie and Freddie will force those original lenders to take the bad loan back onto their books.
Which vision of the new Fannie Mae and Freddie Mac will triumph?
It matters. In the runup to the 2007/2008 real estate maelstrom and the financial crisis that followed hard on its heels – and from which we’re still struggling to recover – the two agencies played a key role. Just what that role was, how significant it was and what now needs to be done with Fannie and Freddie to prevent a repeat performance depends on who you’re talking to and on what side of the political aisle they sit.
That’s because of the oddball status of Fannie and Freddie as quasi-governmental agencies. After nearly collapsing during the crisis, they are being run entirely under the aegis of the government, but before that they operated as private companies under the government’s wing. They fulfilled the government’s goal of expanding home ownership: buying mortgages from banks, they helped create a dynamic, liquid secondary mortgage market that encouraged those banks to go off and issue still more loans, and Americans to borrow still more – until the entire mechanism ran off the tracks. As long as Fannie and Freddie, with the implied government backing, were present as buyers, it was assumed that nothing could go too terribly wrong.
We saw how that turned out.
“Problems cannot be solved by the same rationale that created them.”
Albert Einstein
The Fed created the last bubble by lower interest rates and they created this bubble with even lower interest rates. Maybe the real bubble is at the FED. Than there is no need to end the FED, the FED will eventually end itself.
Not only do they create bubbles, they pop ’em too …
ie., it only took ~ +175bps to pop the last bubble….
FFR feb2 2005 2.50%
FFR Dec13 2005 4.25%
http://research.stlouisfed.org/fredgraph.png?width=630&height=378&range=Max&id=FEDFUNDS
The Fed is not the first US central bank, and it will probably not be the last, and the same can be said of the USD.
“I didn’t fail the test, I just found 100 ways to do it wrong.”
Benjamin Franklin.
The clearest sign of bad forecasting is projecting optimism with absolutely no data to back it up.
NAr Delivers Spin and Bullshit for 2015 Forecast
The good thing about economic recovery, even when it’s not living up to expectations, is that forecasters always remain optimistic for tomorrow.
Despite many beginning-of-the-year predictions about spring growth in the housing market falling flat, and despite a still chugging economy that changes its mind quarter-to-quarter, economists at the National Association of Realtors and other industry groups expect an uptick in the economy and housing market through next year.
The key to the NAR’s optimism, as expressed by the organization’s chief economist, Lawrence Yun, earlier this week, is a hefty pent-up demand for houses coupled with expectations of job growth—which itself has been more feeble than anticipated. “When you look at the jobs-to-population ratio, the current period is weaker than it was from the late 1990s through 2007,” Yun said. “This explains why Main Street America does not fully feel the recovery.”
Yun’s comments echo those in a report released Thursday by Fitch Ratings and Oxford Analytica that looks at the unusual pattern of recovery the U.S. is facing in the wake of its latest major recession. However, although the U.S. GDP and overall economy have occasionally fluctuated quarter-to-quarter these past few years, Yun said that there are no fresh signs of recession for Q2, which could grow about 3 percent.
A major key to housing growth, of course, is job growth. The U.S. overall has recovered nearly all of the eight million jobs lost to the Great Recession and, according to Yun, employment is expected to grow 1.6 percent this year and 1.9 percent next. Similarly, the GDP is on course to grow 2.2 percent this year and about 2.9 percent in 2015.
Eric Belsky, managing director of the JointCenter for Housing Studies at Harvard University, said that growth in the stock market and the recovery in housing, along with pent-up demand, are major factors driving the economy right now, leading economists like Yun and Belsky to suggest that housing will improve, just not on the schedule many other economists had expected.
These people have no shame.
Why is Mr. Yun not held to the same responsibilities (and liabilities) as a stock analyst, or broker or registered rep? Why is the man not forced to follow FINRA rules and regulations? After all, he represents an highly speculative industry and is making recommendations.
I wrote a post recently asking Can realtor’s credibility fall to less than zero? Lawrence Yun is working to create a lower credibility level than David Lareah — and that’s hard to do.
Lobbying expenditures 1998-2014
#4(top 10 spenders) National Assn of Realtors: $265,549,856
http://www.opensecrets.org/lobby/top.php?showYear=a&indexType=s
Zillow’s Stan Humphries: “things could, and maybe should, be a lot worse”
A new survey from Zillow finds real estate and investment experts are divided on the likely culprits behind affordability concerns in the market.
In a survey of 106 economists, real estate experts, and investment and market strategists, Zillow found a slight majority—28 percent—pinned the most blame for declining affordability on stagnant income growth across the country, even as the rest of the economy has moved in a generally positive direction.
At the same time, the number of respondents pointing to “abnormally high rates of home price and rent appreciation” as the main problem was only slightly smaller at 27 percent.
The third most commonly cited answer, following close with 21 percent of responses, was the “abnormally low supply of homes currently available for sale or rent” due to a lack of sellers coming into the market and low rates of new home construction.
Still, given the host of issues hampering the housing market, “one could probably make the case that things could, and maybe should, be a lot worse,” said Dr. Stan Humphries, chief economist for Zillow, noting that tight credit also presents a problem of its own.
“We’re certainly in a better spot than we were just a couple years ago, but the housing market remains far from anyone’s definition of ‘normal,'” Humphries said. “It will take years for these issues to either be adequately addressed through policy, or to naturally work themselves out of the market.”
While affordability conditions are still generally favorable as a result of historically low mortgage rates, cost is becoming a more serious problem for homebuyers in a number of metros, including some of California’s largest markets, Zillow reported in a recent study.
The survey also turned up concerns about price growth inflating a new bubble if it continues at such a high pace. Those who say price spikes are the root behind affordability problems were most likely to express worries of a bubble, with 90 percent saying there is moderate to high risk—if one isn’t already inflating.
On average, panelists in the survey forecast nationwide home value appreciation of 4.4 percent through the end of 2014, nearly a point above the historical average of 3.6 percent. Growth next year is expected to fall to 3.8 percent, dropping again in 2016 to 3.4 percent.
Predictions ranged from a low of 3.2 percent this year to a high of 5.8 percent.
“After narrowing over the past year, in this quarter, the spread between the forecasts of the most optimistic and pessimistic groups not only expanded, but widened by a degree we have not seen in the four-year history of this survey,” said Terry Loebs, founder of Pulsenomics, which conducts the quarterly survey for Zillow. “Time will tell whether Washington’s unfolding plan to expand mortgage credit will have a durable, positive impact on home values, housing confidence, and market expectations.”
People can’t afford houses, so there is an affordability problem. Next question?
I’m trying to be funny — my 30-something cousin is hopeful because she’s got a call-back for a job doing housekeeping at a hotel, with training to work the front desk, though there isn’t an opening at the front desk. If we don’t laugh, we’d all be crying.
Larry,
Ive been following your blog for about one year now. I love this website and I am grateful for your blogs.
Today I read that you rent from a chinese investor. May I ask why is it that you still rent? If you saw the bottom in 2012, was there a reason why you didnt buy then?
On a separate note, I saw another of your blogs saying that Shevvy will give back anything over 1.5% on new housing. What is the typical return on new housing? Is it 3% or 2.5%? Is it dependent on each development?
Thanks
In 2011 and 2012, I was not in a position to buy. It was extremely difficult to qualify without W2 income (it still is), and my verifiable income was not high enough to buy the home I wanted. Plus, I was spending all my down payment money buying homes in Las Vegas.
In hindsight, it is easy to see the bottom. However, trying to play bottom timer is nothing but gambling. The smart money waits till it appears the corner has been turned, even if the market is 10% up from the bottom. That reduces the chance of losing money if prices just keep falling.
I just laugh when someone beats their chest about buying at the bottom. That is a fools gamble. What you don’t hear about are those that tried buying on the way down, just to watch prices keep falling.
The way to play a real estate downturn is, watch for the corner turn before buying. Also, have a game plan as to which zip codes you are going after once the bottom is clearly in. That is how smart money plays the game.
People who buy value usually buy early and watch the resale value of their investment fall. I started buying houses in Las Vegas in 2010 believing prices wouldn’t bottom for another 3 to 5 years. I knew it would take a long time to acquire a large number of houses, so trying to time the bottom was not an option. I wasn’t worried about the potential for the properties to fall in value further because I was buying for the cashflow. I wouldn’t have cared if prices were still down there — in fact, I wish the prices were lower because I would buy more.
Well, you are surely the smart money, a point of which you remind us every day.
LMAO!
http://www.zerohedge.com/sites/default/files/images/user5/imageroot/2014/05/20140519_sffed_0.png
Well the middle class has been plucked clean by .gov and 1%. It shows central planning does work. It’s about time we go banana if we haven’t already.
If that chart is accurate, it says more than a million words about what will happen if the Fed stops buying treasuries.
“That makes for a dangerously unstable market because loan payments are not backed by rent. If a few borrowers become insolvent, the entire system crashes.”
It’s not just the fact that home prices aren’t comparable to rental values in the area, it’s how many homes have to be rented vs how many renters can afford to rent them RIGHT NOW. Comparable rents are based on a certain vacancy rate. In times of distress vacancy rates rise and rents plummet to compensate. Those places in China with 100% vacancy rates are hosed. There is no rental market at all. To have a rental market, you need jobs.
Also, we keep hearing how they aren’t making any more land in California, so housing prices are high. And yet, China, which has 1.3B people has enough land to build entire cities with zero residents. How can we ever believe that California has a land shortage? A stroke of the pen would change all that.
There is, currently, no shortage of land in CA or US for that matter. However, not many want to live in extreme hot, humid or cold area so they will stick to the [west] coast and thus coastal areas will always be in shortage and carry a hefty premium. I believe the gentrification of coastal cities will continues. Better start buying that investment property in Compton I guess.
Every year we hear about all the fires raging across Southern California. These fires aren’t in subdivisions, they’re in wilderness areas. If California were that built-out, we wouldn’t have these fires, would we?
Don’t get me wrong, I like the wilderness. But denying that it’s there while the sky is filled with ash, is only something an ostrich would do.
It’s a matter of zoning and land use. New developments can be zoned next to the the wilderness, hillside area because, guess what, some people like to live there and the builders love to build it there because it’s big money. Is it safe? Of course not, but that is the lifestyle that they chose. Some like to live next to open space and they go down to city hall to make sure that only certain developments can be built in a semi wilderness area. Do all of them understand the risks? No. And the developers will never spill any potential risks out to them as well. It’s madness but then it’s California where some “chose” to live next to danger. It adds to the excitement of home ownership especially when there are streams of mud sliding down your street and/or fires racing on the hills behind the backyard ready to jump over the fence at any moment notice.
Southern California is built out, not because of space, but because of access to water. Denying that there is not enough water to supply more houses while droughts become the norm, is only …, well you know the rest.
[…] Most real estate in China has no cashflow. Rent is very low relative to the cost, and many speculators don’t bother renting the properties out. China’s ghost cities are well documented. […]