The Mortgage Bankers Association is reporting that nearly one in ten households with mortgages are at least one payment behind.  That is a record, my friends. And it certainly means we cannot believe house prices have permanently stabilized.

The New York Times says:

The delinquency figure, and a corresponding rise in the number of those losing their homes to foreclosure, was expected to be bad. Nevertheless, the figures underlined the level of stress on a large segment of the country, a situation that could snuff out the modest recovery in home prices over the last few months and impede any economic rebound.

Unless foreclosure modification efforts begin succeeding on a permanent basis — which many analysts say they think is unlikely — millions more foreclosed homes will come to market.

Translation: there are a lot writedowns in residential real estate still coming. This is one reason bank credit is not going up significantly despite zero interest rates. Remember when I wrote about “extend and pretend?” This is the kind of thing that is holding up bank balance sheets. The article I wrote in October on short sales in North County San Diego highlights the issues involved. But at some point banks will have to take the hit (unless house prices magically go up to near previous levels – what everyone except renters wants).

Ivy Zelman has the same sinking feeling I do here; we don’t think house prices are necessarily heading up permanently. She even throws in a mixed metaphor to get her point across. She says:

I’ve been pretty bearish on this big ugly pig stuck in the python and this cements my view that home prices are going back down.

Look, the fake recovery is now in full swing.  But I expect the recovery to hit a brick wall by 2011, if not earlier. While the proximate cause of my concern is the likelihood of increased taxes and/or reduced spending by the Obama Administration, it is jobs that concern me. See Calculated Risk’s post showing the correlation between unemployment and mortgage delinquency and you see the connection. The fact is we have a record number of foreclosures and that is a direct result of rising unemployment. Unemployed people don’t have any money, so they don’t pay mortgages. It’s as simple as that.

The interesting bit about the New York Times article was this:

The number of loans insured by the Federal Housing Administration that are at least one month past due rose to 14.4 percent in the third quarter, from 12.9 percent last year. An additional 3.3 percent of F.H.A. loans are in foreclosure.

The fact is the F.H.A is the next Fannie Mae. If you’re looking and wondering where the next bailout will be, take a good look at the F.H.A. Not only is this agency guaranteeing hugely delinquent loans, but the Economic Stimulus Act of 2008 doubled the maximum loan that it could insure to $729,750 in order to cover jumbo mortgages common in cities like New York, San Francisco or D.C.. The purpose was to give liquidity to the frozen jumbo market in high-cost cities.  However, the net effect is that the F.H.A was expanding at exactly the time when loan quality was falling. There will be significantly more losses as delinquencies mount.

To make matters worse, the F.H.A. has an abysmally low 0.53% insurance reserve ratio – that’s the lowest ever. Yes, this ratio includes expected future losses, but you don’t have to be a rocket scientist to know any downside wipes these guys out. And that means more taxpayer money will be forthcoming.

Is this a pretty picture? No. But, is this what is going to happen? Of course it is.  So when the bailouts come because the foreclosures begin again in earnest and politicians start saying, “who could have known?” you will have every right to be disgusted.

Related posts:

• UK home prices fall in June
• A Home Price Firewall
• Can I borrow the full amount and an extra 25% too?
• Foreclosures hit a record in April
• Extend and pretend and the growing divide between delinquencies and foreclosures

Hat tip Barry Ritholtz

Related posts:

• Hugh Hendry: China – The Emperor has no clothes
• Jon Stewart’s indictment of CNBC
• Which homebuilder will go bankrupt next?
• National City is on probation
• Circuit City as canary in the coalmine for commercial real estate

The latest data from the S&P/Case-Shiller house price indices shows house prices increasing in 17 of 20 major residential markets. The overall composite index are up for the fourth month in a row but year-over-year comparisons still show a double-digit decline in prices. A snapshot of the data is provided below.

The three lagging markets are Charlotte, Las Vegas and Cleveland. Otherwise house prices appear to have stabilized at 2003 levels, which in real terms is quite a loss of wealth. As the summer selling season is now over, we will soon begin to get a better indication of how permanent this price plateau is.

Source

S&P/Case-Shiller Home Price Indices – Standard & Poor’s

Related posts:

• Case-Shiller: U.S. home prices up for third month in July
• Case-Shiller shows a further decline in prices
• Case-Shiller: House prices up for second month
• Case-Shiller: Price increases in 14 of 20 markets
• Case-Shiller Home Price index shows a 17% fall

Three years ago, MetLife agreed to sell the community of Stuyvesant Town (Peter Cooper Village) to Tishman Speyer and BlackRock for the exorbitant sum of $5.4 billion at the top the market. That deal has now gone completely pear-shaped and bankruptcy is expected soon in another bizarre chapter in the history of one of the most iconic 20th century planned communities in America.

Brief History of Stuyvesant Town

Stuyvesant Town was born in controversy. The Stuyvesant Town Wikipedia entry gives a fairly even-handed description of the events surrounding its development (more history found in the NYTimes article from 2006 second in the links at the bottom).

Due to a housing crisis building since the Depression, Stuyvesant Town was already being planned as a post-war housing project in 1942-43, some years before the war’s end. Provision was made that the rental applications of veterans would have selection priority.

Stuyvesant Town was controversial from the beginning. It was championed by Parks Commissioner Robert Moses, who, at the behest of Mayor La Guardia, sought "to induce insurance companies and savings banks to enter the field of large-scale slum clearance" (Moses, Letter to The New York Times, June 3, 1943). It was enabled by various state laws and amendments which permitted private companies to enter what was previously a public field of action. The new public-private partnership, and the contract entered between the city and the developer, the Metropolitan Life Insurance Company, were the source of much debate.

Among the issues at stake were use of the power of eminent domain for private purposes; the reversion of public streets and land, such as public school property, to private ownership; the 25-year tax exemption granted by the contract; and the rights of the company to discriminate in selecting tenants.

When the $50 million Stuyvesant Town plan was approved by the City Planning Commission on May 20, 1943 by a five to one vote, discrimination against African Americans was already a significant topic of debate.

Let’s call this redlining. Just as an addendum to this factoid on the ignoble beginnings, I should also add that Robert Moses  used his coercive power as Triborough head on slum clearances throughout New York City to make way for progress in the form of roads, bridges, and development (see the eponymous mid-70s book, “The Power Broker” for more – a true testament to coercive power in an advanced democracy). Another notable slum clearance of a similar nature was the Park West Village which went up in the Bloomingdale District of Manhattan just west of Central Park. Thousands were displaced in these actions and while Stuyvesant Town is a notable architectural achievement, Park West Village is not a wonder of post-War architectural design.

The bubble and the end of rent control

But Stuyvesant Town eventually thrived and developed a vibrant community of renters. When Tishman Speyer and BlackRock took over the days of below-market rents were over as the companies needed to get market prices to finance the enormous debt used to purchase Peter Cooper Village. See last year’s NYTimes article “Renters Forced Out of Stuyvesant Town” for more. However, this move was blocked on Thursday in court and now the New York Times is reporting that Stuyvesant Town is about to go bust.

Despite all the wailing and celebrating by opposing parties, it may be years before landlords and tenants in New York City know the full impact of a decision by the state’s highest court on Thursday that the owners of two major residential complexes improperly charged market-rate rents for thousands of apartments.

The New York Court of Appeals ruled that the owners of Stuyvesant Town and Peter Cooper Village, adjoining complexes in Manhattan with 11,227 apartments, improperly raised rents and deregulated 4,400 apartments while receiving special tax breaks from the city.

Landlords immediately criticized the decision, saying its impact would throw thousands of building owners who did the same thing into financial distress. At the same time, tenants looked forward to rent rebates going back years and damages worth tens of thousands of dollars.

But lawyers on both sides of the issue said on Friday that it could take years of litigation to determine if the owners of Stuyvesant Town and other landlords must repay tenants for years of rent overcharges, or simply adhere to the court’s decision from now on.

By that time, this property will be bust because there is no way this top of the market purchase is affordable with rent control and under anything but the the best of economic circumstances. All of the top of the market mistakes are eventually going to come a cropper. Consider this in that vein.

Other Sources

The Upscaling of Stuyvesant Town – NYTimes, 28 Jan 2001

Megadeal: Inside a New York Real Estate Coup – NYTimes, 31 Dec 2006

Big Landlord Found to Have Wrongly Raised Rents – NYTimes, 6 Mar 2009

Related posts:

• Circuit City as canary in the coalmine for commercial real estate
• Manhattan real estate now getting decimated
• Banks can do ‘You Walk Away’ too
• Looking for a bottom in Manhattan real estate
• Muncipalities can tear up contracts

There is mounting evidence that bubbles are forming again everywhere across the globe as easy money makes itself felt in asset prices. The latest evidence comes from Sweden where Europe’s lowest home loan rates have pushed up the price of residential property.

At issue is the extremely loose monetary policy in Sweden that is an outgrowth of both recession in Sweden and a massive exposure by Swedish banks to the Baltics which are presently in depression. Sweden’s central bank, the Riksbank, has cut interest rates to near zero and is charging banks interest to keep reserves on deposit. Meanwhile, the bank has also embarked on a policy of quantitative easing in order to get credit flowing again.

In my July post, “Sweden: negative interest rates and quantitative easing,” when Sweden went negative on interest rates, I wrote:

Pretty aggressive plan, if you ask me. Will it work, though?

Well, first of all, most every major central bank in the world, certainly the biggest: the Americans, the Eurozone, the British, the Swiss, and the Japanese, have rates near zero and are printing money.  The world is awash in money and the incentive to borrow is huge.  So, is the Swedish announcement qualitatively different?  On some level, it is not.  Nevertheless, it is the most aggressive policy and the fact that they are charging negative interest rates for deposits is unprecedented.  This does make events in Sweden something to watch.

So, if you have been watching, what you have seen is a financial sector which is still critically weak – so much so that the federal government has been having secret meetings with the banks to get together a game plan in a worst-case scenario in Latvia, the worst of the lot in the Baltics.

But, even so, while the real economy is in recession, one has to conclude that the aggressively expansionary policy by Sweden’s central bank is reflating asset prices in a major way. Experts are now sounding the alarm as house prices hit new highs.

Below is a translation of yesterday’s Dagens Nyheter article reporting on the warning.

Experts warn: Sweden risks housing bubble

Europe’s cheapest home loans, tax cuts and a continued housing shortage. These are some of the reasons house prices are rising to new record highs in Sweden – right in the middle of a raging recession. Now a growing number of experts warn of a new housing bubble.

Swedish mortgage customers are sitting pretty. The Riksbank’s key interest rate of  0.25 percent is unique in Europe. By comparison, the corresponding rate is 1.25 percent in Norway and Denmark, 1.0 percent in the euro area and 0.5 percent in Britain.

Variable interest rates in Sweden are currently about 1.6 percent. As DN Economics related a couple of weeks ago, short-term rates are 2-3 percentage points higher in countries such as Denmark, Germany and Britain.

Swedish low-cost mortgages are the main cause of the housing rally. House prices fell sharply after investment bank Lehman Brothers’ bankruptcy caused the financial crisis in September last year. But since the start of the year, they have risen again. Prices of flats are now 5 percent higher than a year ago. And house prices have gone up 2 percent.

Reduced income tax and the abolished property tax have also contributed to the housing rally. Likewise concerning the shortage of housing.

In 2008, there was construction of 21 500 apartments in Sweden, which was considered low. This year, new construction is expected to decline by one third, according to Swedish Construction Federation.

Six months ago many experts warned that rising unemployment could lead to falling prices in the housing market. Now they are warning of a housing bubble instead.  Nordea Chief Economist Annika Winsth has repeatedly warned of inflated prices, and SEB’s CEO Annika Falkengren said recently that she felt that both house prices and the stock market have risen too fast in the past year.

In its monetary policy report last Thursday, the Riksbank wrote, "there is evidence that house prices at present are slightly above the level that is sustainable". It also speaks to the dangers of "over-optimistic expectations about interest rates" and "more expansive lending".

Despite the warnings the banks’ barometers tell of housing prices that will continue to rise in Sweden for many months to come.

I see this ending in a very bad way.

Source

Experter varnar: Sverige riskerar bostadsbubbla – Dagens Nyheter

Related posts:

• Property more overvalued in Sweden than in US
• Denmark: the latest victim of falling house prices
• Estonia and Latvia: headed for the rails
• House prices in the U.K. up for first time since Oct 2007
• Nationwide: UK house prices down 14.6%

We received word today from the British government that GDP in the UK contracted for a record sixth quarter in Q3 2009. I like Neil Hume’s headline on this one, “GDP shock flop.”  If you were listening to the

BBC’s Wake Up to Money

Bloomberg puts the right spin on things:

Britain’s failure to escape the worst recession since World War II may force the Bank of England to increase its bond-purchase plan next month, economists said.

Seven months after Governor Mervyn King’s central bank started a 175 billion-pound ($287 billion) program to rescue the economy, the Office for National Statistics said today gross domestic product unexpectedly shrank 0.4 percent in the third quarter. None of the 33 economists surveyed by Bloomberg predicted a contraction.

“Having pumped in so much money and still seeing a decline in GDP is damaging from a perspective of confidence and expectations for recovery,” said Stephen King, chief global economist at HSBC Holdings Plc, in an interview with Bloomberg Television today. “They’ll be thinking very hard about whether to extend quantitative easing. They need to do something to show they care about the economy.”

Britain is still mired in recession even after pledges of about one trillion pounds in stimulus and banking aid from the Bank of England and Prime Minister Gordon Brown. King, whose push to expand bond purchases to 200 billion pounds in August was defeated, may win more support at the next Bank of England decision on Nov. 5.

The yield on the two-year gilt declined 6 basis points to 0.88 percent after the GDP report. The 10-year gilt yield slipped 3 basis points to 3.67 percent.

I would add that Sterling is getting crushed in the foreign exchange market – even against a weak US Dollar.

So, riddle me this: if the economy is so bad, why are house prices in London at an all-time high?  The explanation I came up with on Monday was that this is the natural  response to easy money when the economy has a large output gap – namely asset price inflation.  And this is certainly helping to pad bonuses in the City of London, a contributing factor to the increase in residential property prices in London.

Meanwhile, in the rest of Britain, the only thing keeping the country from economic freefall is budget-busting government stimulus. The Telegraph’s Angela Monaghan has a good article out today showing the emergency measures still in place including record low interest rates, quantitative easing, sales tax cuts, and the car scrappage scheme, not to mention the government’s backstops in the financial services industry. Where this leads is anyone’s guess at this point.

What should be clear, however, is that now is not a good time to tout a need for people to “tolerate the inequality as a way to achieve greater prosperity for all” as Lord Griffiths has done. He only brings greater scrutiny onto the financial sector. I found this statement particularly unconvincing:

I believe that we should be thinking about the medium-term common good, not the short-term common good … We should not, therefore, be ashamed of offering compensation in an internationally competitive market which ensures the bank businesses here and employs British people

This is an argument for good times, not recession – and even then one must question whether large bonuses in the financial sector are truly in the medium-term common good.

Related posts:

• London house prices at an all-time high
• Random Musing: London house prices
• French economy contracted in Q2
• Recession ‘95% likely’ in Britain
• Recession nears in New Zealand

Jim the Realtor is back with a bunch of foreclosures, REOs and short sales on the market in North County San Diego.  Some of these places look pretty nice.  In this particular video, the property is in Carmel Valley and on the market for $1.249 million. It is interesting for a couple of reasons.

The guy in the house has been on the foreclosure roles for a long time.  Apparently, he ran up loans 15% over the original amount, which suggests he may have been using the house price as an ATM when prices were going up. But now he is making partial payments to avoid being foreclosed.  The interesting thing is that by making a partial payment, the owner can get off the foreclosure roles and stay in his home.. until he misses another payment, which in this case has happened several times.

This is called “extend and pretend” otherwise known as “delay and pray.” Banks love this because they don’t have to write down the value of the loan immediately and the owner is looking for an exit strategy that doesn’t put him out on the street. It’s all good, right?

Obviously, the inventory levels would be a lot higher if short sales like these were foreclosed.

Another interesting factoid is that this place got multiple offers over list – and we’re talking cash buyers here. Jim’s prospective buyer came in with 50% down as well – and lost.  Jim calls this a “feeding frenzy.”

Clearly, record-low interest rates are doing the trick to reflate house prices in San Diego, a canary in the coalmine for the rest of the country (they led on the way up the first time and on the way down). This reflation is exactly why you delay and pray. For this particular seller it worked out as well as it could.

Related posts:

• Extend and pretend and the growing divide between delinquencies and foreclosures
• Cruising foreclosures, REO and short sales with Jim the Realtor
• Banks can do ‘You Walk Away’ too
• Manhattan Q2 Apartment Sales down 22%
• Case-Shiller Index: Less bad, but three markets cut in half

Further proof that the reflationary efforts of policy makers is taking hold comes from London in the form of record high house prices.  The Guardian reports:

Property asking prices in London have broken through the record high set in November 2007 as the drought of homes for sale around the country continues to distort the market. New research out today shows that the average asking price in London jumped 6.5% to £461,157 in the four weeks to 10 October, sailing through the high of £412,731 set in November two years ago.

The survey by the property website Rightmove also shows that asking prices in England and Wales are now higher than a year ago, after climbing 2.8% in the past month.

Back in March, when the global economy was flat on its back, I suspected that policy makers saw only one way out of this mess: another asset bubble.

Their efforts point in four directions:

1. Increase asset prices. If the assets on the balance sheets of banks are falling, then why not buy them at higher prices and stop the bloodletting? This is the purpose of the TALF, Obama’s mortgage relief program and the original purpose of the TARP.
2. Increase asset prices. If assets on the balance sheet are falling, why not eliminate the accounting rules that are making them fall? Get rid of marking-to-market. This is the purpose of the newly proposed FASB accounting rule change.
3. Increase asset prices. If asset prices on the balance sheet are falling, why not reduce interest rates so that the debt payments which are crushing debtors ability to finance those assets are reduced? This is why short-term interest rates are near zero.
4. Increase asset prices. If asset prices on the balance sheet are falling, why not create Public-Private partnerships to buy up those assets at prices which reflect their longer-term value? This is what Geithner’s Capital Assistance Program is designed to do.

So I lied, there is only one direction the government is headed: increase asset prices (or, at least keep them from falling). Read White House Economic Advisor Larry Summers’ recent prepared remarks to see what I mean. (Summers on How to Deal With a ‘Rarer Kind of Recession’ – WSJ)

The same was certainly true in Britain as well. With share prices up well over 50% and property again at a new high in London, the government has succeeded beyond anyone’s wildest dreams.

Mind you, the real economy is still in a shambles, with manufacturing taking the slowdown especially hard.  But, the employment market is not nearly as dire and the economy seems to be leaving recession.

Things are a lot better in the City than in the real world because the increase in asset prices is a huge boon for the banks. Expect bankers in the City to reap the benefits in the form of record pay packages this year.

Unfortunately, if you are a renter looking to get onto the property ladder, it is going to be rough sledding.

Related posts:

• Random Musing: London house prices
• If the UK economy is still in recession, why are London house prices hitting new records?
• Nationwide: U.K. house prices down 16.6%
• US Home prices down 16% over last year
• Denmark’s house prices fall

The following post is from Stratfor via John Mauldin, who is a Best-Selling author and recognized financial expert. He is also editor of the free Thoughts From the Frontline that goes to over 1 million readers each week. For more information on John or his FREE weekly economic letter go to: http://www.frontlinethoughts.com/learnmore.

I think you will find this post reminiscent of Hugh Hendry’s YouTube video which I highlighted in July.

Today I offer you an insightful look at China’s real estate market – a "burgeoning bubble" that deserves a close eye as the possibility for breaking increases. Remember the chaos in Japan after their own housing dreamscape got violently yanked back to earth? As investors, we have to recognize opportunities – and know what to avoid. With a global economic crisis – and now surging housing prices in China – investors in any global market need to keep watch on political and economic developments around the world.

Today’s analysis comes courtesy my friends at STRATFOR, a global intelligence company. They provide unique and on-the-money analysis and forecasts on all things global, essential for any alternative investment strategy. They’ve got a free newsletter as well, for which I encourage you to sign up by clicking here – so you’re not limited to my caprice.

John Mauldin
Editor, Outside the Box

The China Files (Special Project): Real Estate

October 13, 2009 | 1149 GMT

Summary

The real estate market in China, particularly the residential side, is a burgeoning bubble that is growing bigger and more breakable by the day. Land and housing prices were already rising steadily when Beijing’s stimulus package hit the sector in early 2009. Now prices are surging, with developers, bureaucrats and investors cashing in while urban Chinese – once encouraged to invest in home ownership by the central government – become less and less able to buy.

Editor’s Note: This analysis is part of a series that explores China’s industry, finance and statistics.

Related Special Topic Page – The China Files (Special Project)

PDF Version: Click here to download a PDF of this report

On Sept. 10, China Overseas Land and Investment, a Hong Kong-listed company and a subsidiary of state-owned China State Construction Engineering Corp., purchased a prime piece of real estate in the Putuo district in downtown Shanghai. The company paid 7.006 billion yuan ($1.026 billion) for the undeveloped property, which will amount to an average of 22,409.3 yuan ($3,283.9) per square meter of floor space (just in land costs) once the designed residential building is constructed.

The purchase created China’s newest "land king," a term for the real estate developer who pays the highest price for a piece of real estate during a land auction. And 7.006 billion yuan was the highest price ever paid for a piece of Chinese real estate for any purpose – residential or commercial. The milestone is a result of an increasingly intense competition for land in major cities that began early in the year, when Beijing began distributing stimulus money to various industries – including the real estate sector – to sustain the economy. As a result, land prices have soared throughout China. And with increasing speculative investment in residential real estate, the market faces a surging bubble that jeopardizes the country’s long-term economic development.

Since 1998, real estate investment in China has accounted for more than 10 percent of the country’s gross domestic product (GDP), compared to only 3 percent to 5 percent in the United States. Such investment is also closely associated with many other industries, such as construction and finance, and it provides an abundance of jobs. Therefore, it is seen as a critical pillar of China’s economy and enjoys favorable policies from the government and state-owned banks (more than 70 percent of real estate investment in China comes from bank loans). At the same time, real estate developers, local government officials and investors have escalated housing prices across the country by acquiring massive land holdings, limiting the supply and inflating prices, creating a real estate bubble that is not sustainable in the long run.

The bubble has grown mainly on the residential side of the market, where there is more demand and higher profits to be made. However, while fewer developers and investors have been chasing nonresidential projects, Beijing’s 4 trillion yuan ($586 billion) stimulus package in early 2009 has generated more interest and activity in the commercial side. Indeed, there are signs that commercial real estate may also be headed for a bubble, and STRATFOR will be watching the situation closely.

Origins of the Bubble

Since 1978, China’s pace of urbanization has increased dramatically, with the number of middle-size and large cities (those having nonagricultural populations of more than 200,000) growing rapidly. Beginning in 1985, economic reforms implemented in urban areas to make China’s planned economy more market-oriented added even more momentum to the real estate boom, with real estate investment increasing by 71 percent by 1987. The government’s macroeconomic policy of monetary belt-tightening helped cool this overheated market, which was further tempered by the government’s continuing to provide housing for state employees (fu li fen fang, or "welfare housing").

However, when the state significantly cut back on its welfare housing program in 1998, the Chinese perception of personal property changed, and this would have an important impact on the real estate sector. The government began this privatization process by making a private dwelling a "commodity" and granting the purchaser the right to own a newly built house for 70 years. (Likewise, the developer who buys the property on which residential or commercial buildings are to be constructed may own that property for 70 years.) Home ownership in China could now be a sound financial investment.

Thus, the residential real estate market would boom in almost every urban area in China – and particularly in the "first-tier" and "second-tier" cities (only Beijing, Shenzhen, Guangzhou and Shanghai are in the first tier, with more than 20 cities, and mostly provincial capitals or coastal ports are in the second tier). But rising land prices would eventually put housing prices out of reach for the general public. In Dongguan, a coastal second-tier city in Guangdong province, land prices averaged 4,957 yuan ($726.42) per square meter in 2007, a more than 500 percent increase from 2003, while personal disposable income increased 24 percent during the same period (from 20,526 yuan [$3,008] to 27,025 yuan [$3,960] per year).

A 2006 survey conducted by the National Development and Reform Commission showed that the average ratio between housing prices and income was approaching 12:1 in many large and middle-size cities in China (in Beijing it had reached 27:1). Twelve to one is significantly higher than the World Bank’s suggested affordability ratio of 5:1 and the United Nations’ 3:1. The problem was compounded by the fact that, of the more than 80 percent of Chinese who owned their own homes in urban areas (generally considered cities with populations of more than 20,000), 54.1 percent were making monthly mortgage payments that constituted 20 percent to 50 percent of their monthly incomes.

The Recovery Bubble

Following a temporary drop toward the end of 2007, land prices rose steadily, then began surging again with Beijing’s stimulus package and a flood of easy credit in 2009. With much of this money flowing into the real estate sector, major beneficiaries included large state-owned enterprises (SOEs) involved in speculative real estate and housing investment, contributing to the inflating bubble. Among the 10 highest-priced land purchases in major cities in the first half of 2009, 60 percent went to SOEs.

Paradoxically, as the global financial crisis continues, China sees little choice but to loosen its monetary policy even further, fearing the opposite would curtail economic growth and result in massive unemployment, which could lead to social instability. Beijing knows that one of the country’s underlying economic problems continues to be an overheated real estate market, but it also knows that the real long-term solution – limiting the flow of cash and credit – could have dire socio-economic ramifications. Meanwhile, real estate developers, government officials and investors continue to speculate on real estate, raising land and housing prices.

As housing prices continue to rise, a parallel trend is manifesting itself – rising vacancy rates in urban areas. A 2009 report by the Shanghai Yiju Real Estate Research Institute revealed that, by the end of 2008, the average vacancy rate for "commodity housing" (as opposed to welfare housing) in Beijing was 16.64 percent, and vacancies reached as high as 30 percent in some districts. Most of these vacant houses, however, are not unsold ones. They have been purchased by investors as speculative investments. While there are fewer and fewer ordinary people who can afford to buy houses, there is still excessive demand for investment housing – pressure that continues to drive up the prices.

This closed loop in the Chinese real estate market is facilitated by the country’s political and bureaucratic system. In China, all land is initially owned by the state, and local governments have the sole authority to sell it. And income from property taxes and land sales are a primary source of revenue for local jurisdictions. According to estimates by the State Council’s Development and Research Center, tax revenue from the land in some jurisdictions accounts for 40 percent of the local budget. Moreover, net income from land sales accounts for more than 60 percent of the local governments’ extra-budgetary revenue. The soft budget and lack of accountability to the people reinforces the local governments’ incentive to expand their real estate investments without much concern for cost or impact on public services.

Economic performance also is the prime prerequisite for bureaucratic advancement, which gives local officials the incentive to generate as much revenue as possible through land auctions. And this generally involves a level of collusion – and corruption – among government officials, real estate developers and investors.

One typical strategy is for a developer to buy a big chunk of urban land from the local government but leave the land undeveloped, or build on only a small portion of it, thereby keeping the housing supply limited. Despite various state policies to lower land prices in order to make homes more affordable, local government officials and real estate developers control the land auctions. When a lower sale price is dictated from above, it is easy enough for the local sponsors to officially deem the auction a failure. Even when the developer does build houses on the property, a speculative investor, working hand in hand with the developer and government officials, can bribe both parties to ensure that he can buy all the houses at a low volume price and keep them off the market, thereby maintaining a limited supply and high prices.

Another factor that enters the equation is a cultural one. The Chinese people generally prefer to buy new houses, as opposed to renting homes or buying secondary houses in which people have already lived. Indeed, in urban areas, marriage proposals often include a promise to buy a new commodity house. As a result, the secondary housing market remains very small in comparison (due also to fewer available bank loans for lived-in houses and the complicated process involved in transferring ownership).

All of these factors contribute to the burgeoning real estate bubble – and make it difficult to predict when that bubble will burst. With 70 percent of real estate investment in China coming from bank loans, a dramatic drop in land values could send shock waves throughout the economy. There are already signs of decline. In Shenzhen, one of China’s first-tier cities, real estate prices have been dropping for the past two years (30 percent for housing), and many developers and speculators have suffered great losses. The threat looms in other large cities such as Beijing and Shanghai and may be emerging in many second-tier cities as well.

Given the current global economy and the economic balancing act it must maintain domestically, Beijing has few good choices. It must keep enough cash flowing to maintain economic growth and social stability in the short term while tightening credit to avoid a tsunami of bad loans and a market collapse over the long term. Certainly, Beijing does not want to face the kind of collapse in the housing market that Japan experienced in the 1990s, which triggered a financial crisis and more than a decade of economic malaise.

But in China’s real estate, as in most sectors of this vast and complex land, implementing and enforcing prudent regulation has never been an easy task.

Related posts:

• Chinese stock market bubble inflating
• Spain: who is responsible for the property bubble?
• Beijing starts a ‘Buy China’ policy
• China is now on the same bubble path as Japan post-1987 crash
• Manhattan Q2 Apartment Sales down 22%

The most recent data from the widely-followed S&P/Case-Shiller Home Price Indices was made available today. These data from July show house prices in the U.S. increasing for the third month in a row, suggesting that house prices have stabilized. Moreover, the trend was broad-based with only Seattle and Las Vegas showing house price declines in July amongst the top 20 metro areas.

Overall, U.S. house prices are at 2003 levels even before adjusting for inflation. Moreover, as housing is quite seasonal, we will need to see evidence that this trends holds through the slower winter months as well. The Composite-10 Index of the largest U.S. metro areas is still down 12.7% from a year earlier, while the Composite-20 index is down 13.2%.

Related posts:

• US Home prices down 16% over last year
• Case-Shiller: home prices fall even further
• Case-Shiller Home Price index shows a 17% fall
• Case-Shiller: House prices up for second month
• Case-Shiller shows further improvement in U.S. house prices

Nationwide released data from its August 2009 house price index showing that house prices rose 1.6% from the previous month.  This is the fourth consecutive month in which house prices have risen in the UK, bringing the year-on-year change to –2.7%.

Martin Gahbauer, Nationwide’s Chief Economist, said low interest rates are behind the recent rise (emphasis added):

“The exceptionally low level of interest rates offers some explanation for why house prices have not repeated the very sharp falls of 2008. There are two main channels through which the low level of interest rates has impacted the housing market. First, mortgage payments for existing homeowners – especially those with tracker or standard variable rate loans – have been reduced substantially. Before the MPC began cutting rates, the average interest and principal payment per mortgage holder represented about 38% of the average post-tax labour income. Following the steep cuts in base rate, this has fallen to just 28% of post-tax income, despite historically high levels of outstanding mortgage debt. The fall in debt servicing costs has meant that fewer homeowners are under immediate financial pressure to sell than might have been expected in a recessionary economic background with rising unemployment. Partly as a result, fewer second-hand properties have come onto the market than is normally the case in recessions, which has contributed to moving the balance of supply and demand more in favour of sellers over the course of 2009.

In addition to limiting the supply of second-hand homes, lower interest rates have also had an impact on the demand side. Even though house prices remain high relative to earnings, the fall in interest rates has improved the affordability of mortgages for those looking to buy a home. This helps to explain the strong rise in new buyer enquiries reported by estate agents for most of 2009. Although not all of these enquiries are turning into sales, house purchase transactions have continued to slowly increase from the record lows reached in late 2008.”

Obviously, this leaves open to question what will happen when interest rates rise.  Certainly, by that time, the economy will be on sounder footing and the financial pressure to sell will be less.

The rise in residential property prices in the UK does show the market has housing stabilised.  Definitive confirmation would come in the winter when the market is less buoyant.  For now, it seems the worst is over.

House price bounce extends into August – Nationwide

Related posts:

• UK house prices up for third time in fourth month
• Nationwide: U.K. house prices down 17.6% in year to Februay
• Nationwide: UK house prices up strongly for third month
• Nationwide: UK house prices down 15.9% from last year
• Nationwide: U.K. house prices down 16.6%

The data from the S&P/Case-Shiller Home Price Indices for June 2009 were released at 9AM ET, showing that house prices in the US increased for the second consecutive month.  Last month marked the first month since July 2006 that prices rose in the US. While prices should rise during the spring and summer, the most buoyant period for residential property, the rise in prices does mark a break with the three-year downward trend.

Moreover, fully 18 of 20 markets in the index showed a rise in prices, demonstrating that the trend is broad-based.  Only Las Vegas and Detroit saw declining overall prices in June.  Nevertheless, on a year-over-year basis prices still are off by a considerable margin, 15.1% for the Composite-10 index and 15.4% for the Composite-20 index. Moreover, the continued weakness is the jobs picture necessarily means that the wave of foreclosures which has contributed to inventory is far from over.

Overall, the data have to be seen as positive – another sign that the residential property market in the US is stabilizing.

Related posts:

• Case-Shiller: U.S. home prices up for third month in July
• Case-Shiller: home prices fall even further
• Case-Shiller Index: Less bad, but three markets cut in half
• Case-Shiller: green shoots, yes but pretty grim nonetheless
• Case-Shiller shows further improvement in U.S. house prices

UK house prices have now risen for three months consecutively and four months in five according to statistics released by Nationwide Building Society this morning. The rise for July was a very robust 1.3% month-on-month, which translates into almost 17% on an annualized basis. Clearly, housing is doing very well during this summer selling season.

While prices could still fall during the slower Fall and Winter time frame, the recent rise in prices is beginning to look like a bottoming.  To be sure, prices are still down 6.2% year-on-year, but the index is within striking distance of the October and November 2008 figures, suggesting we may move into positive year-on-year territory if this trend holds through to Fall.

Nationwide’s Chief Economist Martin Gahbauer had this to say about the figures (emphasis added):

The price of a typical house rose for the third consecutive month in July, increasing by 1.3% on a seasonally adjusted basis. The 3 month on 3 month rate of change – generally a smoother indicator of the near term trend – rose from 1.0% in June to 2.6% in July, the highest level since February 2007. House prices are still 6.2% lower than 12 months ago, but this represents another sharp improvement from the 9.3% year-on-year decline in June. Even if prices were to remain unchanged for the rest of 2009, the year-on-year rate would continue to improve since prices were falling very sharply in the second half of last year. For the first seven months of 2009 as a whole, prices have risen by a cumulative 1.3%, suggesting there is now a reasonable chance that prices could end the year slightly higher than where they started. Only a few months ago, such an outcome would have appeared unthinkable.

I should also note that mortgage applications have been increasing strongly, evidence that first time home buyers are coming back to the market.  This underlying demand may be buoying prices.

Overall, the data cannot be seen as anything but bullish.

Source

House prices up for third month in a row – Nationwide website

Related posts:

• Nationwide: U.K. house prices resume their descent
• Nationwide: U.K. house prices down 16.6%
• Nationwide: UK house prices down 14.6%
• UK house prices fell another 1.7%, now down 12.4% annually
• Nationwide: UK house prices rise for fourth month

Yesterday, I mentioned that the housing data, while generally positive (the first uptick nationally in 34 months), contained some negative news due to seasonality.

The crux of the problem lies in the strong tendency for house prices to increase in the spring and summer because that is when demand for housing is greatest. Add in the fact that we have seen some distortions due to a rise in distressed sales in higher-income brackets due to the jumbo loan market meltdown.  All of this means that one month’s data should be taken with a large grain of salt.

Nevertheless, the increase is the first uptick in prices nationally for some 3 years and it is broad-based.  This has to be recognized.

For my part, I don’t like seasonal-adjustments because it adds in statistical noise.  My preference is to look at trends via movements in year-on-year rates of change.  And the trend here shows a clear plateauing.  In January, year-on-year changes were 19.0%.  Since then, the year-on-year changes have become progressively less negative.  The change is now 17.1% year-on-year.

Does this mean house prices have hit bottom?  Hardly, year-on-year declines are still massive at 17.1%. And the graph clearly shows the change in direction is rather slow.  But, it does mean that house prices are bottoming because we have seen a trend in year-on-year changes from January through May that looks likely to continue into the present day.  If this trend (of less negative data) holds for a few more months, say through September or October’s data, you could say that the housing market has stabilized.  By next summer, the year-on-year numbers would be positive.

But, it is early days yet.  At a a minimum, I would like to see the next few months data.  However, the ultimate confirmation will come through the Winter 2010 data from a far less buoyant time of year. And this won’t be released until next Spring.

I should add that we are talking about nominal prices here, not inflation-adjusted prices where we could see declines for much longer.

Related posts:

• Case-Shiller: U.S. home prices up for third month in July
• Case Shiller points to a grim U.S. housing market
• Case-Shiller offers up another depressing spectacle in U.S. housing
• Case-Shiller Index: Less bad, but three markets cut in half
• Case-Shiller: green shoots, yes but pretty grim nonetheless

The S&P/Case-Shiller Home Price Indices for May 2009 were released today and the data showed a marked contrast to previous months. Fully 14 of 20 markets showed an increase in home prices in that month, making it the first time since July 2006 that the overall index has risen month-to-month. On a year-over-year basis, home prices are down 17.1% in the Composite-20 markets.

Clearly, we are seeing a bottoming in US house prices, just as we have done in UK house prices.  While the stock market is down this morning and analysts remain cautious despite this news, these data can only add to what is looking like a more favorable picture for residential real estate in the US.  Just yesterday, the new homes data showed similarly positive news. Analysts were cautious then as well. If we string together a few months of similar numbers, this would in all likelihood signal a bottoming of house prices in the US.

However, it bears remembering that we are in the heavy spring/summer selling season (seasonally adjusted pries are down – see spreadsheet), so things could look very different come Winter.

Source

S&P/Case-Shiller Home Price Indices – S&P Website

Related posts:

• Case-Shiller Home Price index shows a 17% fall
• Case-Shiller shows further improvement in U.S. house prices
• Case-Shiller: House prices up for second month
• Case-Shiller: U.S. home prices up for third month in July
• Case-Shiller Index: Less bad, but three markets cut in half

This is an astonishing video in China with Hugh Hendry, the money manager who is bearish on China who I profiled earlier this month.  In it, he shows us building after building after building – all of them massive and all of them empty.  And you see yet dozens of others still in construction in the background. Who is going to pay for all of this stuff?

Breathtaking.  Hat tip Ravin.

Related posts:

• Hugh Hendry: “China is Santa Claus”
• China’s empty city: the emperor really has no clothes
• Huge property bubble in China
• Stephen Roach sees a W-shaped recovery for China
• China is now America’s largest creditor

When we saw the Case-Shiller data for April on Tuesday, I noted that New York was the most overpriced metro area in the Composite-20 as prices there were still 70% above January 2000 levels.  This is changing fast.  Bloomberg reports:

Manhattan apartment prices dropped for the first time since 2002 in the second quarter as the collapse of Lehman Brothers Holdings Inc. and Bear Stearns Cos. caught up to property owners in the nation’s most expensive urban market.

The median price fell 18.5 percent from a year earlier to $835,700, New York appraiser Miller Samuel Inc. and broker Prudential Douglas Elliman Real Estate said today. The number of sales plunged by half, the most since Miller Samuel began keeping data in 1989.

“The standstill that existed after Lehman Brothers has been broken, and it was the sellers that cried uncle,” Pamela Liebman, chief executive officer of New York-based property broker the Corcoran Group, said in an interview.

Values are falling broadly in Manhattan for the first time in the almost four-year U.S. housing recession, with declines now seen in co-operatives and condominiums of every size and price. Private-sector employment in the city dropped by 91,200 jobs, or 2.8 percent, in the 12 months through May as Wall Street losses and asset writedowns topped $1.4 trillion.

The price of studio apartments declined 16 percent from a year ago to a median of $405,000, according to Miller Samuel. One-bedrooms dropped 17 percent to $650,000 and two-bedrooms fell 23 percent to $1.27 million. Three-bedroom units fell 37 percent to $2.35 million and four-bedrooms plummeted 47 percent to a median of $3.92 million.

The Miller Samuel-Prudential data reflect for the first time what sellers have known for at least six months: The way to lure a buyer in the current market is to cut your price.

The article goes on to mention jumbo lending and the crash of the high end market in Manhattan due to restrictive lending on jumbo mortgages, which are not Fannie and Freddie-eligible.

Below is a video at Bloomberg News reporting and discussing the details of this same report.  This is the first quarter where every segment in Manhattan saw price declines.

Related posts:

• Manhattan Q2 Apartment Sales down 22%
• Looking for a bottom in Manhattan real estate
• Manhattan real estate in freefall
• US GDP shrinks 0.3% in Q3
• U.S. CPI: Lowest since 1954 – deflation here we come

The S&P/Case Shiller Home Price Indices for April 2009 were released today.  The Composite-10 and Composite-20 indices showed a 18.0% and 18.1% decline respectively, making the data less bad than in the previous month.  Nevertheless, there is still considerable weakness, particularly in former bubble cities like Phoenix, Las Vegas, and Miami.  There, prices have been cut in half, with Phoenix now down 54.1% from the peak, Las Vegas down 52.1% and Miami down 48.1%.

Yet, this month does mark a large shift in directionality with 8 markets showing increased prices from March to April. The most inflated market now showing price upticks is Washington, where there was a large surge, perhaps due to the change in Administration. In fact, Washington D.C. is now the second most expensive market relative to prices at the beginning of this decade, with prices having risen a full 67% despite a 33% decline in values. New York is the most expensive market by this measure, prices having risen over 70%. However, prices in the NY area are now falling.

I should note that these data are from April. If the trend holds, we would expect to see more markets shifting to price rises in May and June.  What is striking is that most of the bubble markets are still in decline: Phoenix, LA, San Diego, Miami, Tampa, and Boston.  However, San Francisco has turned up, as has Washington. And many non-bubble markets are now seeing house price appreciation.

In the UK, price appreciation started in March and has continued to the most recent survey (see post here).  If the U.S. is following the same pattern, it suggests price declines are now moderating. To the degree that Washington, a market which is still very overpriced, leads the upturn in prices, one can see this as a sign that government largesse bears a large responsibility for the change in trend.

Related posts:

• Case-Shiller Time Machine
• Case-Shiller shows a further decline in prices
• Case-Shiller shows home price plunge
• Case-Shiller Home Price index shows a 17% fall
• Case-Shiller: home prices fall even further

On the same day that the worst economic growth numbers in the U.K. in 51 years, we also get some news that the British economy may be stabilising. Well, at least house prices seem to be stabilising as Nationwide reported a 0.9% increase in house prices in UK June.  That is the third rise in four months and takes the annual decline to only 9.3% over June of 2008.

Nationwide Chief Economist Martin Gahbauer notes that the 3-month average house price change is up for the first time in eighteen months.

The three month on three month rate of change – a smoother indicator of the short-term price trend – turned positive for the first time since December 2007 to stand at 0.9%, up from -0.4% in May. If the pattern of price movements seen in the first half of the year is repeated over the second half, then prices could show only a small single digit fall for 2009 as a whole. This would represent a stark shift from trends seen at the turn of the year, when most indicators were pointing to a repeat of the large declines seen in 2008.

Part of the reason prices have stabilised is the huge shadow inventory that has been taken off the market as prices declined, reducing residential property inventory.  How long this lasts is anyone’s guess.  But Gahbauer is cautious.

While it is encouraging to see that prices are no longer seeing steep falls, there are still many obstacles in the way of a genuine and sustainable price recovery. To begin with, abnormally low supply levels are unlikely to last forever, as the recent price increases should make previously hesitant sellers feel more confident about marketing their properties. Additional supply is also likely to come from homeowners who see their financial position impacted by higher unemployment and lower incomes. With the stock of property available for sale likely to eventually increase, house purchase demand will need to rise more convincingly from current levels to prevent a possible relapse in price levels.

Part of the reason that Gahbauer is awaiting further evidence has to do with the high cost of housing relative to income in the UK.  We are still at levels unseen in the last 25 years, suggesting that house prices are still too high.

Nevertheless, three months in four is a good counter-trend to be taken seriously. To the degree this data is confirmed by the Halifax when it reports, we should start to consider that the U.K. is the first of the large housing bubble markets (Spain, the U.S., Ireland and the U.K.) to stabilise.

Source
House Price Rise Continued in June – Nationwide

Related posts:

• Nationwide: UK house prices rise for fourth month
• Nationwide: UK house prices up strongly for third month
• Nationwide: U.K. house prices rise for second time in three months
• Nationwide: U.K. house prices resume their descent
• UK house prices up again in September

Actually, I lied.  He really is not that bullish at all.  But he does sound relatively upbeat by comparison to 5 months ago.

I have seen Whitney Tilson of T2 Partners a lot in the media of late.  The two most recent appearances are with Tech Ticker where he talked about house prices and with the Financial Times, where he had a wide-ranging conversation with Aline van Duyn.  I have already linked to the Tech Ticker piece in our newsfeed. So I would like to highlight the conversation with the Financial Times.

Below are the three links to the videos of the conversation.  (Note: Tilson is a major investor in Berkshire Hathaway, the firm controlled by Warren Buffett.  He used to be short the financials.  He was pretty bearish in December. Watch the Bloomberg video to see what I mean.)

Tilson is a value investor who doesn’t think we are halfway through the unwinding of this debt bubble.  While I would characterize him as a proponent of the ‘fake recovery’ meme, I believe he is too fundamental an investor to invest in that recovery.  He sounds very cautious about what is coming down the pike for banks and the deleveraging of this debt bubble, but he does share my view that big banks will probably be able to see the eventual writedowns through as they will happen over a much longer time horizon.

• Whitney Tilson on Buffett and derivatives

“Whitney Tilson, managing partner of T2 Partners and well-known as a value investor and shareholder of Warren Buffett’s Berkshire Hathaway, discusses the recent pressures on the share price of Warren Buffett’s Berkshire Hathaway. Berkshire Hathaway shares are Mr Tilson’s fund’s biggest position. The huge increase in spreads on Berkshire Hathaway, which were the equivalent of those often quoted for highly distressed companies, followed the need of counterparties to hedge exposure to future payments they were due to receive from Berkshire Hathaway. The costs became so high that the original contracts were renegotiated in Berkshire’s favour. The wider CDS spreads – the result of technical factors – contributed to the decision by Moody’s Investors’ Services to cut Berkshire Hathaway’s triple A credit rating. Mr Tilson supports regulators’ plans to shift the CDS market to centralised clearing and for more disclosure about CDS positions.”

• Whitney Tilson on “panic buying” rally

“Whitney Tilson, managing partner of T2 Partners and well-known as a value investor and shareholder of Warren Buffett’s Berkshire Hathaway, says it is difficult to be a value investor when the behaviour of other investors is so panicky. Recent panic selling has now been replaced with panic buying of the same stocks. The recent economic indicators which have been interpreted as signaling a potential bottoming of the US housing market are merely reflective of seasonal factors. Foreclosures, on which there has been a moratorium, will start increasing again. “That’s going to continue to pressure home prices for, we guess, at least another year, and I think a lot of investors are looking at some short-term data and not quite seeing that we’ve got a ways to go on this,” Mr Tilson says.”

• Whitney Tilson  on mortgage losses

“Whitney Tilson, managing partner of T2 Partners and well-known as a value investor and shareholder of Warren Buffett’s Berkshire Hathaway, expects another wave of losses in the US mortgage market. As described in his new book New Mortgage Meltdown, he says the first wave of losses – which have reached over $1,300bn – was concentrated on mortgage-backed securities owned by banks and financial institutions. The second wave will hit mortgages still held on banks’ balance sheets, and losses end up being double or triple the current figure. With such losses looming, he says the strong rally, particularly in the financial sector, is “overdone”.”

Other sources

T2’s Tilson Short Sells Wells Fargo, Bank of America: Dec 2008 – Bloomberg

T2’s Tilson Selling Short Wells Fargo, Bank of America: Video – Bloomberg (video here)

Related posts:

• Whitney Tilson: "A pullback of some sort is likely"
• Subprime, Alt-A Delinquencies Rise
• Bill Miller and Meredith Whitney: The Bull and the Bear
• Even Buffett hit by higher funding costs
• Goldman partners get margin calls

If you thought house prices were about to show some price gains, think again.  The Case-Shiller Home Price Index for March 2009 was released this morning and it paints a fairly grim picture.  The Composite-10 index shows an18.6% decline in prices over the last year, while the Composite-20 registered a 18.7% drop in that time.  Both figures reflect numbers using the non seasonally-adjusted data series.  Two markets, Denver and Charlotte, saw price upticks from February to March. This is encouraging as no market in the Composite-20 has seen a price uptick in any month since Lehman went bust in late September.

So what does this mean for the housing market going forward?  If you look at bubble cities like Phoenix, Miami, Las Vegas, and the whole of California, it means a huge loss in tax revenue.  It is no surprise that California is nearly bankrupt.  Given the outsized importance of Phoenix and Las Vegas in their states and the need to balance state budgets, you should expect some major cuts in services in both of those states as well.

But, the continued price decline will become important as the Spring and Summer selling season has begun.  Now is the time when most transactions occur. With prices still declining, those with unaffordable mortgages in negative equity will have to seek foreclosure as they often cannot sell and they will be unable to refinance.  This is increasingly going to be Option ARM type buyers in the prime mortgage class as subprime has already been decimated.

As far as home builders are concerned, their is still too much inventory.  They are going to have to cut back building investment even more and this is going to be a drag on GDP in Q2 and Q3.  As the home selling season progresses, watch the unsold home inventory as a harbinger for price developments.  If inventories build in the prime selling season, we are going to see more price cuts come fall and that will increase market distress and reduce the tax base even more.  However, if inventories are worked off, we may see the pace of price declines slow.

At present, prices are of 33.1% from their high in the Composite –10 and 32.2% in the Composite-20.  A fifty percent peak-to-trough decline in house prices nationally is not out of the question.

Related posts:

• Case-Shiller Index: Less bad, but three markets cut in half
• Case-Shiller shows further improvement in U.S. house prices
• Case-Shiller Home Price index shows a 17% fall
• Case-Shiller: home prices fall even further
• Case-Shiller: U.S. home prices up for third month in July

When you think about property, you should really be looking at its worth as the present value of future cash flow streams.  This is true for residential, commercial, rental or travel property.  One reason is that property is fungible, meaning what is a owner-occupied primary residence ca just as easily be a rental accommodation. It might even be a Bed & Breakfast.  What is a hotel today can always become a condo, like New York City’s Plaza Hotel.  An apartment building can become a condo conversion as well.  It is this fungibility that creates an arbitrage opportunity when one property market gets out of whack with the others as the residential property market did.

Now that residential property is coming back to earth, it is increasingly apparent that other markets like commercial real estate (CRE) were also bid up to unsustainable levels.  Hotels are another area of excess where there is going to be a lot of pain.  Witness this recent post from Calculated Risk:

“OK, so now it’s official. The first quarter of 2009 experienced the worst year-over-year revenue per available room drop in the U.S. lodging industry’s organized history.”
Jeff Higley: Catching up on hotel topics

Note: RevPAR is Revenue per available room – a key measure in the hotel industry.

From HotelNewsNow.com: STR reports U.S. data for week ending 2 May

In year-over-year measurements, the industry’s occupancy fell 11.6 percent to end the week at 55.7 percent. Average daily rate dropped 8.6 percent to finish the week at US$99.42. Revenue per available room for the week decreased 19.1 percent to finish at US$55.33.

Along those lines, I caught a story in today’s New York Times which suggests hotel owners are cutting back on renovations in order to meet their cash flow needs.  The Times article has this to say:

A $6 million renovation of the hotel was supposed to be completed earlier this year. But Personality Hotels, which owns the Vertigo, formerly known as the York, and six other hotels in San Francisco, decided to save money by leaving part of the building untouched.

Yvonne Lembi-Detert, the president of Personality Hotels, said that she had already bought everything needed, from tiles to TVs, to complete the transformation of the hotel’s 97 rooms. But the one thing she doesn’t have right now is enough money.

All over the country, hotels are halting or postponing renovations in numbers not seen since 2001, when the terrorist attacks led to a retrenchment in the travel industry, according to Chad Crandell, the president of Capital Hotel Management. This time, the cause is a decline in revenue — both occupancy and room rates are down in most cities — coupled with the difficulty of obtaining credit.

For hotel owners, “the name of the game is capital preservation,” said David Loeb, an analyst with Robert W. Baird & Company in Milwaukee.

Most large hotel companies, Mr. Loeb said, “have ratcheted down their capital plans, to focus only on life safety kinds of concerns.” Companies want to have cash reserves, “in case things get worse for the industry,” he said.

“If they started something, they’re going to finish it,” he added. “But we’re seeing very little optional spending.”

If this doesn’t sound familiar, it should.  There have been lots of stories about homeowners cutting back on repairs and maintenance in order to make their mortgage payments.  This was one of the problems with stretching to buy ‘as big a house as you can,’ the conventional wisdom in the bubble years.  Owning comes with lots of hidden expenses.

The long and short of this is two-fold.  First, we should expect the cost cutting to continue unabated in terms of non-residential property investment – and this includes the travel & leisure sector as well as commercial real estate. Obviously, this will be a drag on GDP.  Investment levels at least thirty percent below today’s investments are not an unreasonable expectation as I argued in a recent post (see the section on fixed investment). Second, a lack of maintenance has negative social implications.  Whole neighbourhoods will fall into disrepair in the American exurbs and in the inner city, increasing crime and violence there.  When all is said and done, many Americans are going to find renting a more palatable option than they have in this past decade.  In my view, that’s a good thing. As people start renting, over time the great property arbitrage of this past decade will cease to exist.  Rental and purchase prices will come into line, making real estate an interesting market again. Until then, expect continued writedowns in residential property and many more writedowns now from travel & leisure-oriented firms as well as CRE-oriented REITs.

For more on the social aspects of renting versus buying, see an April article from the Economist called “Shelter, or burden?”

Related posts:

• Hotels: Starwood faces black hole
• Manhattan real estate now getting decimated
• Folks trade down and shift to house parties to get a buzz
• Case-Shiller: House prices up for second month
• Cruising foreclosures, REO and short sales with Jim the Realtor

This video seems to be making the rounds. I saw it over at Calculated Risk first. The video shows new homes in Victorville, CA, just south of LA, being destroyed because it costs more for the banks to keep them up than to demolish them. That’s one way to pare the housing inventory glut.

Related posts:

• More on California Housing data
• The irony of falling prices and first-time homebuyers
• Case-Shiller shows a further decline in prices
• Nationwide: U.K. house prices down 17.6% in year to Februay

After a blip in the data last month, Nationwide is reporting that U.K. house prices have resumed their fall.  However, for the second month in a row, the annual price fall has slowed.  In March, the fall was 15.7%. This month we see only 15.0% compared to prices in April 2008.

Fionnuala Earley, the Nationwide’s Chief Economist had this to say about the data:

“The price of a typical house fell by 0.4% in April. This reverses some of the rise seen in March, but is in line with our expectations, given the current economic conditions. April’s decline leaves the average price of a typical house at £151,861, down 15% from 12 months ago. The 3-month on 3-month rate of change, generally a smoother indicator of the short-term trend in prices, improved to -3.1% in April from -4.1% in March”

For the U.K., we have seen a reversion to the mean. House prices in the U.K. have now fallen to their longer-term trend. But, prices, especially in cities like London and in the southeast more generally remain out of reach for many first-time buyers. As a result, there is still more downside to come.

Source
House prices fall slightly in April – Nationwide

Related posts:

• Nationwide: U.K. house prices rise for second time in three months
• Nationwide: UK house prices up strongly for third month
• House prices in the U.K. up for first time since Oct 2007
• Nationwide: UK house prices down 15.9% from last year
• Nationwide: UK house prices down 14.6%

You might find some analysts looking for some green shoots in the just released Case-Shiller Home Price Index.  For instance, the year-on-year change in house prices showed a slower decline in the latest month (February) than in the previous release.

So, this report is better for homeowners than the last one which I surveyed in a post titled,”Case-Shiller offers up another depressing spectacle in U.S. housing.” But it is certainly nothing to write home about. Here are a few statistics.

• The Composite-10 index is down 18.8% and the Composite-20 index is down 18.6% in the last year.
• The Composite-10 index is down 31.6% and the Composite-20 index is down 30.7% peak-to-trough.
• Pheonix is the worst city with declines of 50.8% peak-to-trough and 35.2% year on year.
• Dallas is the best city with declines of 11.1% peak-to-trough and 4.5% year on year.
• Detroit is the city with the largest number of months since we last saw prices this low. Prices were last this low in Mar. 1996.
• Seattle and Charlotte are the cities with the fewest number of months since we last saw prices this low. Prices were last this low in Jun. 2005.
• The markets most vulnerable i.e. with the highest index values are, in order: New York, Washington, LA, and Miami.

And, remember, home prices increases are still at levels inconsistent with the rise in inflation or rent over the last decade. So, for renters looking to jump in, we are really not there yet and that suggests that we have a way’s to go to bottom – maybe even to declines in excess of 50% nationwide (something I thought unlikely last year).  The good news, of course, is that when we do bottom, prices will be much more affordable for those who did not participate in the bubble and are looking to buy for the first time.

So, in sum, there are some green shoots here, yes, but, the residential property market in the U.S. is still pretty grim.

Sources
S&P/Case-Shiller Home Price Indices – S&P Website

Related posts:

• Case-Shiller Home Price index shows a 17% fall
• US Home prices down 16% over last year
• Case-Shiller: home prices fall even further
• Case Shiller points to a grim U.S. housing market
• Case-Shiller index: Across the board declines in U.S. housing