Aug182016
The flow of Chinese buyers in Irvine slows to a trickle
A rising US dollar makes Irvine homes much more expensive for Chinese buyers, and capital controls makes it much more difficult to move money out of China for those inclined to do so.
Many Chinese investors consider Irvine, California, a safe haven where they can store their wealth far from the controlling hands of Chinese government officials. As a result of this perception, Chinese investors buy a significant number of homes in Irvine — anecdotally, Chinese Nationals buy 80% of properties in some new home communities. In fact, Irvine homebuilders depend on Chinese buyers to purchase their overpriced houses, which becomes a problem when this flow of money dries up.
Chinese capital is an unstable source of investment, and it could reverse course in a moment based on policy changes in China. Investment capital from wealthy individuals in China is hot money escaping an unstable market, subject to the policy whims of an unpredictable totalitarian government.
Rather than abruptly cut off the flow of capital, so far Chinese officials have allowed the Yuan to devalue to make US real estate more expensive and slow the outflow. Last year I stated new home sales in Irvine would be the canary in the coal mine, a sensitive indicator for the flow of Chinese capital. Any decline in sales or increase in incentives is indicative of a slowing inflow.
Although sales volumes are weakening now, it’s not clear if this is merely a seasonal effect, or if it’s a sign of a change in the flow of Chinese money. Now, we have evidence that perhaps the flow of money from China is slowing.
Builder pricing
When prices decline in Irvine — and prices fell in Irvine on two previous occasions — like most smart homebuilders, the Irvine Company responds by first increasing incentives to drive sales while maintaining the illusion of firm pricing. Once a homebuilder starts lowering their prices, deflationary psychology sets in, and buyers lose all sense of urgency and sales crater — an outcome the Irvine Company is eager to avoid.
If conditions deteriorate to the point that the illusion can no longer be maintained, the Irvine Company typically shuts down its operations for a year or so, then they hit the reset button and start selling again at lower prices — whatever price the market will bear. However, the Irvine Company is no longer the only game in town. Five Points Communities will probably follow the Irvine Company’s lead, but if they felt more pressure to sell, they might continue building and push prices lower, just like Lennar did in Columbus Grove back in 2007 and 2008.
Homebuilders try to match their production to sales. If they produce too little, delivery dates get extended too far out into the future, and buyers refuse to wait, so sales fall. If they produce too much, they end up with standing inventory, with a carry cost, and they often must increase incentives to sell them.
The Irvine Company calls standing inventory Quick Move-In Residences. In the ordinary course of business, the Irvine Company rarely has any Quick Move-In Residences. When they do, it’s a sign that sales did not keep pace with earlier projections.
If this standing inventory stands too long, the Irvine Company will increase incentives to sell. Since lowering prices is a kiss of death to sales, the Irvine Company will increase incentives to the point of absurdity if necessary to move the product. Absurd incentive packages and offerings is a sign of desperation, and a sign that Chinese money is not flowing into Irvine like it once was.
Earn $75,000 Co-Op on Quick Move-In Homes at Trevi
The Irvine Company just reached out to the brokerage community to help them sell their standing inventory. Ordinarily, the Irvine Company caps the sales incentives they offer agents on their higher priced homes. Now they are offering a $75,000 co-op fee to any agent who brings them a buyer. That’s more than most agents make in a year. Dramatically increasing this incentive is a sign they are desperate to sell homes — and it’s a sign the flow of Chinese capital is slowing.
Perhaps this is a stealth way for them to lower the price. Any buyer who works with us is provided a rebate on the amount over 1.5% of the sales price (See: New home rebates at Orchard Hills in Irvine). At that rate we would refund well over half the incentive back to buyers on most Trevi homes.
So why is the Irvine Company doing this?
It isn’t because sales are great.
[listing mls=”PW16181380″]
Median home price slips to $640,000 as sales decline in July
The local housing market cooled a bit in July, with prices and sales both dropping from previous months.
But low mortgage rates, a limited number of homes for sale, and strong demand are keeping the market humming through the slower summer months, market watchers say.
The median price of an Orange County home – or price at the midpoint of all sales – was $640,000 in July, down $15,000 from June’s revised median but up 4.1 percent from the July 2015 median, housing data firm CoreLogic reported Wednesday.
July marked the 51st straight month of year-over-year price gains, a streak that saw the median climb $220,000, or 52 percent.
Still, last month’s price fell from May and June’s record-high prices, dropping $5,000 below the pre-recession high of $645,000 set in June 2007.
Sales also fell last month to 3,301 transactions, a 10.4 percent year-over-year drop.
However, the bulk of that decline was due to a “quirk of the calendar,” said CoreLogic analyst Andrew LePage. July had five weekends and two fewer business days than July 2015.
Had there been just two more days of business last month, the year-over-year sales decline would have been just 1.5 percent.
LePage attributed last month’s market cooling to buyers’ resistance to prices hitting four-year highs, a lack of homes for sale, and tight credit.
Summer slowdown
Sales and price drops are the norm for this time of year, when home shopping typically takes a back seat to vacations, beach trips and getting the kids ready for school.
Orange County home prices have dropped from June to July in 17 of the past 29 years and risen in just nine of those years, CoreLogic figures show. Sales fell in 23 of the past 29 years.
“Kids are going back to school a week or two weeks ago. That’s crazy,” said agent William Soto of Harcourts Prime Properties in Aliso Viejo. “I’m starting to see a slowdown right now. Not surprising.”
July closings amounted to “a pause” that appears to be turning around in recent weeks, observed market watcher Steve Thomas, author of the bi-monthly Reports On Housing market inventory report.
“It was strange. It was transitioning into a summer market … and now it bounced back,” Thomas said.
[Personally, I find the realtor spin rather humorous. They want to stoke the market no matter the truth of the market.]
However, the bulk of that decline was due to a “quirk of the calendar,” said CoreLogic analyst Andrew LePage. July had five weekends and two fewer business days than July 2015.
This is true, but the flip side is that August is picking up two extra business days. I wonder if they will attribute any sales bounce to a “quirk in the calendar” or if that only applies to down months.
And you’ve gotta love this statement: “Kids are going back to school a week or two weeks ago. That’s crazy” Yeah, wow! That’s never happened before. Oh wait.. Kids go back to school every year at this time.
Fed not likely to increase interest rates “until December or later”
The only people surprised by this are the Pollyanna bulls and the few who believed them.
There are only three meetings left this year for the Federal Open Market Committee, and the likelihood they’ll raise interest rates above current levels looks slim, judging by the latest meeting minutes released on Wednesday.
National Association of Federal Credit Unions Chief Economist Curt Long explained that the FOMC minutes continue to reflect divisions within the committee.
“The constant refrain of ‘data dependency’ from Fed officials loses its meaning when there is no consensus on what the data means, much less which policy course is warranted,” said Long.
“Nevertheless, it seems safe to say that many of the committee’s fears were alleviated with the strong June jobs report and by Brexit’s lack of impact on financial markets,” he said. “With inflationary pressures yet to emerge, the Fed seems happy to play the waiting game as far as rate normalization is concerned.”
Long concluded that as a result, they “anticipate no rate hike until December or later.”
Genworth Mortgage Insurance Chief Economist Tian Liu also noted that today’s release of the FOMC minutes came after the strong job market report in July and diminished volatility in the financial market.
“We believe the FOMC will continue to pay close attention to incoming economic data, especially the August jobs report. For the 30-year mortgage rate, the pace of future rate increases is more important than the timing of the next rate increase, and today’s minute does not indicate an acceleration.”
Looks like prices will be on steroids again in early 2017.
Low-cost 3D-printed shelter being built from clay and straw
http://img.gizmag.com/3d-printed-clay-straw-house-wasp-8.jpg
Last year we reported on Big Delta, a massive 3D printer that showed promise as a means of creating cheap housing by using low-cost materials like mud and clay as a building material. The firm behind it, Italy’s WASP (World’s Advanced Saving Project), appears to be making good on that promise, and has almost completed building a new shelter that’s cost just €48 (about US$55) so far.
Right off the bat it’s important to note that even when the shelter is successfully completed, it will be very basic indeed, essentially comprising the walls, door, and roof. Still, to people around the world in dire straits, such as refugees or victims of natural disaster, a basic roof over their heads could mean the difference between life and death.
So far, WASP has 3D-printed a 270 cm (106 in) high and 5m (16 ft) diameter structure predominantly made from clay and straw, with some lime used too.
Fannie Mae: Economic rebound on the way for second half of 2016
The perennial optimists are at it again.
Despite the disappointing economic growth in the second quarter, the remainder of the year will bring a rebound, Fannie Mae predicted in its August 2016 Economic and Housing Outlook.
Business investment is struggling, therefore it will be consumer spending that drives the economic growth in the third quarter, the outlook states.
“Second quarter growth was a disappointment, but consumer spending appears solid heading into Q3, and we expect inventory investment to balance out after a surprising drawdown in Q2,” Fannie Mae Chief Economist Doug Duncan said.
“Credit expansion, combined with improving labor market conditions and strengthening household balance sheets, should continue to support consumers, who will likely be the primary driver of growth again in the second half of the year,” Duncan said.
The higher than expected July jobs report shows consumers could benefit from improvement in their incomes and the strengthening hiring trend.
This will likely support a more sustainable pace of inventory accumulation and help soothe concerns over the health of businesses, which face lackluster profits and pulled back on capital expenditures, the report stated.
“The positive July jobs report may encourage some Federal Open Market Committee members to argue for a Fed rate hike at the September meeting. However, we remain convinced that the Fed will hold the target rate steady this year given global uncertainties and anemic output growth,” Duncan said.
“Although much of the financial volatility from Brexit has subsided, long-term Treasury yields continue to face downward pressure and we expect them to remain low for some time,” he said.
There are only three meetings left this year for the FOMC, and the likelihood they’ll raise interest rates above current levels looks slim, judging by the latest meeting minutes released on Wednesday.
“Housing market fundamentals remain a mixed bag,” Duncan said. “During the second quarter of 2016, both new and existing home sales rose to expansion highs, while single-family starts pulled back, remaining historically low for an expansion.”
Double speak here: The economy is so great that the Fed won’t be raising rates for the rest of the year.
Exactly!
The economy is so strong, dynamic, and the plebs are making so much money the fed has to maintain emergency monetary accommodation.
The “consumer” to the rescue……pfft.
That shark was jumped a number of years ago, when I first heard some economist state that “we are now in a consumer-driven economy”.
Dial that back a bit. Said “consumer” has to get their money someplace. Such as providing goods and services. You can slide by deriving your dough from HELOCs and capital gains, but at some point that carousel stops and we get back to goods and services from my hoary old econ texts of the early 80s.
North Korea’s Answer To Missed Construction Deadlines? Crystal Meth
In the United States, doing crystal meth on the job will get you fired. In North Korea? It’s just part of the job, especially if you’re in the construction trade, where project managers in Pyongyang are reportedly encouraging employees to catch a bad case of meth mouth, as long as it results in high-rises going up more quickly. Radio Free Asia reports (via Archinect) that project managers at a large building site in the North Korean capital are “openly supplying their exhausted workforce with power methamphetamines called ‘ice.'”
Radio Free Asia’s report is anonymously sourced, so should be taken with a grain of salt. But as Breaking Bad fans will know, “ice” is a highly purified form of crystal meth. Why would you give construction workers meth? Side effects include hyperactivity and increased movement, so theoretically, if you could keep it to that alone, workers on meth might be able to finish their work faster. Unfortunately, other side effects include diarrhea, blurred vision, and dizziness—not exactly symptoms you want to encourage when your workers are going to be walking the girders of 70-story-tall apartment complexes.
Apparently, though, this was a trade-off that Pyongyang project managers were willing to make. At stake is the on-time construction of Ryomyung Street, sometimes called Pyonghattan, a massive initiative by the North Korean government to open up to 60 new buildings as a symbolic rebuke to international sanctions relating to the regime’s ongoing nuclear weapon tests. Although “hundreds of thousands of workers” have allegedly been brought in to complete the initiative, it looks as if officials will be hard-pressed to finish the work before the cold season starts later this year.
According to Radio Free Asia, the North Korean government is now aware of the use of methamphetamines at its construction sites. “Investigators are warning construction workers that they will be severely punished for further incidents of this kind,” RFA’s anonymous source told them.
Would you want to live in a highrise built by construction workers on meth? How about a hotel? I wonder if they are giving meth to the architects, supervisors, engineers and others involved in the process. Pretty soon the whole country will be on it.
I don’t know about meth. I DO know about speed. Mother’s Little Helper and all that. You get a lot done and are pretty focused in doing so….but after a few days u crash hard on the weekends.
I just read that the whole German Wehrmacht was on speed during Barbarossa. It sure worked for a while. If I was a general I’d consider putting it in my troops’ MREs.
Gives new meaning to the term ‘tweaker project’.
The Visible Hand: The Role of Government in China’s Long-Awaited Industrial Revolution
China’s economic transformation has astonished the world. Even as recently as 20 years ago, few would have predicted China’s dominance as a regional industrial power, let alone a global superpower. In merely one generation’s time, China has created more productive forces than have the past 5,000 years of its previous dynasties and transformed from an impoverished China is undergoing its long-awaited industrial revolution. There is no shortage of commentary and opinion on this dramatic period, but few have attempted to provide a coherent, in-depth, political economic framework that explains the fundamental mechanisms behind China’s rapid industrialization. This article reviews the New Stage Theory of economic development put forth by Wen (2016a). It illuminates the critical sequence of developmental stages since the reforms enacted by Deng Xiaoping in 1978: namely, small-scale commercialized agricultural production, proto-industrialization in the countryside, a formal industrial revolution based on mass production of labor-intensive light consumer goods, a sustainable “industrial trinity” boom in energy/motive power/infrastructure, and a second industrial revolution involving the mass production of heavy industrial goods. This developmental sequence follows essentially the same pattern as Great Britain’s Industrial Revolution, despite sharp differences in political and institutional conditions. One of the key conclusions exemplified by China’s economic rise is that the extent of industrialization is limited by the extent of the market. One of the key strategies behind the creation and nurturing of a continually growing market in China is based on this premise: The free market is a public good that is very costly for nations to create and support. Market creation requires a powerful “mercantilist” state and the correct sequence of developmental stages; China has been successfully accomplishing its industrialization through these stages, backed by measured, targeted reforms and direct participation from its central and local governments.
https://research.stlouisfed.org/wp/2016/2016-016.pdf
Another Chinese safe haven adjusting.
http://www.zerohedge.com/news/2016-08-18/vancouver-housing-market-implodes-average-home-price-plunges-20-1-month-market-devas
Still very early but this is a sign of changes.
They must have expected the inflow of money to slow after implementing such a large new tax. Perhaps if tl is right, this money will flow into OC.
I just love how ZeroHedge uses 3 weeks of data to declare a housing crash.
OC is in a great spot. LA, SD, and SF county have new reporting requirements on all cash transactions. But, not OC. More foreign all cash purchases headed this way. This real estate run has legs.
I imagine that real estate agents will be happy to hear that, particularly if they can make $75,000 by referring this hoard of all-cash buyers to the promised land.
Trevi is THE most expensive new home development in Irvine – “mid-$2Ms.” I’d be more comfortable using this as anecdotal evidence of a slowdown if it were accompanied by examples of slow sales at lower price points in new Irvine developments.
Trevi is in Orchard Hills Village I, where other developments continue to sell well. La Vita was a wild success, despite being $1.5M++ homes on shared motor-courts. Capella has been a roller coaster, but is finishing its final lots. Messina and Amelia have sold well too.
https://www.villagesofirvine.com/villages-neighborhoods/orchard-hills/orchard-hills-registration/?utm_source=google&utm_medium=cpc&utm_campaign=fy+2015_villages+of+irvine_022715_brand_targeted&utm_term=orchard+hills+homes+exact
Beacon Park struggled initially, but seems to be selling well now, if available inventory on price sheets is a reliable indication. Many Beacon Park developments have resorted to sales incentives though.
When sales depend on foreign all-cash buyers, I would expect sales to deteriorate at the top first. Perhaps the weakness won’t move down the property ladder, but the Irvine Company obviously isn’t selling their high-end properties as fast as they anticipated.
It’s crazy how things have changed in Irvine. I remember going to the Spectrum in Jr High and HS, there was not much else to do there. Obviously they built and they build on all that open land on those hills by the toll roads. It was so boring, my friends and I were excited when the Block finally opened.
If you see Irvine from a helicopter, it looks like the IE, just closer to the coast. It’s just as hot as Corona there when you live way inland. It has a lot to do with UCI, if the rich foreign kids can’t get into UCLA or UC Berkeley , they settle for UCI and their parents buy a condo or home as a consolidation gift.
Come on over to Orchard Hills one weekend and drive around. You won’t have IE visions then. There are a few 909er raised trucks around, but those all belong to the folks building the houses or landscaping, not the residents. 😉
Aren’t they all gated communities at this point? I was down there to watch a movie 2 months ago, I was sharing to my wife how the Spectrum has changed and the culture as well. I hate cookie cutter and lack of land that you get but no doubt it’s a safe city and great schools for kids.
On the downtown we are really look at La Canada/La Cresenta, Yorba Linda, or Orange. I would like parts of Irvine but the commute would be rough, I would have to change jobs and I’m not looking to do that.
The primary reason we bought in Irvine is because both of our offices are in Irvine. I like some of the options in south OC, Orange, Yorba Linda, etc., but the commute is a dealbreaker.
Irvine was pretty nice back in the ’90s, but the advent of high density development has really brought it down. Some of the older neighborhoods are still nice, but I would not want to own anything in the newer developments built over the past 20 years.
Those newer Irvine areas are real slums, eh?
I just happen to value things like a backyard for my kids to play in, a front yard to mingle with the neighbors and relax, abundant parking for friends and family, and sufficient space between houses for privacy. Irvine seems to have abandoned these amenities in favor of pocket parks.
Well, compared to the way some of the Chinese live in 50 story high rises, with no back yard; a small back yard, and homes close enough your neighbors can hear you fart in is an upgrade.
The homes themselves are beautiful but most of the actual neighborhoods remind me of the IE.
The Trevi development is across the street from me, which likely explains Redfin’s valuation algorithms estimating my house ~$500K too high.
If you didn’t have kids, would you cash out on that $500k? Wait and buy later? I know I would but when you have roots and kids in schools, money is not as important.
If I didn’t have kids or a wife, I’d live in something a fraction of the cost – 1,000 sq ft condo somewhere decent?
Same, but then you would miss out on the OC housewives lifestyle lol.
We lived in Manhattan beach in a home for 6 months after we were married. 50 yards from the water, the owner converted the home to a split level. We had the top, other tenant had the bottom. I wouldn’t have moved if kids were not in the plans. I can’t imagine what the landlord charges in rent now but it was a good deal back then.
Bloomberg blog: Fannie, Freddie headed for trouble
Fannie Mae and Freddie Mac are both headed for trouble Washington and Wall Street battle over their ownership, according to a blog by Joe Light for Bloomberg.
As a matter of fact, on January 1, 2018 these government-sponsored enterprises will officially run out of capital under the current terms of their bailout, the article states. At that point taxpayers would shoulder any losses.
From the article:
Granted, few people are predicting a disaster like the one in 2008, when the GSEs had to be thrown a $187.5 billion federal lifeline. But eight years later, people still don’t agree on what to do with these wards of the state. In Washington and on Wall Street, the fight over Fannie and Freddie drags on.
Despite the fact that both of the government-sponsored enterprises turned in profitable second quarters, Fannie Mae and Freddie Mac would both need bailouts if the worldwide economy crumbled, a report from the Federal Housing Finance Agency shows.
The problem? Though there has been much talk on the subject, politicians have yet to move on a decision.
From the article:
But to the GSEs’ critics, the real issue is that policy makers have yet to come up with a long-term plan. Republicans want to kill the quasi-governmental companies. Democrats have floated the idea of merging them. Hedge fund managers like Richard Perry have gone to court to claw back dividends swept up by the Treasury.
And so one of the thorniest financial questions of the early 2000s — what role, if any, should the federal government play in America’s $10 trillion mortgage market — will now fall to the next president. So far, neither Hillary Clinton nor Donald Trump have seized on the issue.
Unlike last time, they are no longer loading up on Subprime securities and the loans written since the crash have high underwriting standards and MI companies absorbing the first 20% of losses on their high LTV loans.
I think my new “go to” line when presented with facts inconsistent with supporting my argument, will be “Says who?” And I’ll just keep repeating it. 🙂
I owned a house in a new development in Irvine for 10+ years. I recently sold it.
Over the years the influx of Asian buyers was startling. One of my neighbors was an Asian student at UCI. His father bought the house for him (~$750K), as well as two brand new cars: an eggshell blue Maserati and a BMW 7-Series.
One of my other neighbors sold his house to some Asians. Groups of Asian students would hang out on the balcony smoking and spitting on the driveway below, playing soccer in the street at 6AM, and making out in the bushes beneath our windows. Truly bizarre.
A good friend of mine is a successful RE broker in Irvine. She tells me that the Chinese consider Irvine the “head of the dragon” for future settlement.
It’s sad to watch our communities being colonized in this way, and no one says or does anything about it.
No doubt there’s this element. The question is, where are the “perfect neighborhoods” and what exactly defines “perfect”? Cities/neighborhoods are like Presidential candidates. They’re all flawed. You pick the least flawed fitting your desires the best.