Category Archives: Housing Market

NAR Cites “Housing Emergency” as Starts Unexpectedly Dive 5.5 Percent: NAR “Befuddled”

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The second-quarter economic report misery continues in a major way today with housing starts and permits unexpectedly falling.

The Econoday consensus was was for starts to rise 4.35%. Instead, starts fell 5.5%. Adding insult to injury, April was revised lower by 1.37 percentage points making the consensus estimate off by an amazing 11.22 percentage points.

The bad economic news keeps building, this time in the housing sector. Housing starts fell an unexpected 5.5 percent in May to a far lower-than-expected annualized rate of 1.092 million with permits likewise very weak, down 4.9 percent to a 1.168 million rate.

All components show declines with single-family starts down 3.9 percent to a 794,000 rate and permits down 1.9 percent to 779,000. Multi-family starts fell 9.7 percent to 298,000 with permits down 10.4 percent to 389,000. Total completions did rise 5.6 percent to a 1.164 million rate, which adds supply to a thin market, but homes under construction slipped 0.7 percent to 1.067 million.

Adding to the bad news are downward revisions to starts including April which is now at 1.156 vs an initial 1.172 million. Looking at the quarter-to-quarter comparison, starts have averaged 1.124 million so far in the second quarter, down a very sizable 9.2 percent from 1.238 million in the second quarter. Permits, at an average of 1.198 million, are down 4.9 percent.

Residential investment looks to be yet another negative for second-quarter GDP.

Housing Emergency?

Mortgage News Dailly has some amusing comments by Lawrence Yun, the National Association of Realtors chief economist, in its report Drop in Housing Starts Could Intensify Inventory Issues.

The negative report prompted the following statement from the National Association of Realtor’s Chief Economist Lawrence Yun. “Housing shortages look to intensify and may well turn into a housing emergency if the discrepancy between housing demand and housing supply widens further. The falling housing starts and housing permits in May are befuddling given the lack of homes for sale and the quick pace of selling a newly-constructed homes. Meanwhile, job creations of a consistent 2 million a year will push up housing demand further. One thing that moving up is the housing costs for consumers: higher home prices and higher rents.”

NAR “Befuddled”

Yun is befuddled. That’s hardly surprising given that it does not take much to befuddle economists.

Let me clear up the confusion:

  • People cannot afford homes so they are not buying them.
  • Builders will not purposely build homes to sell at a loss.
  • The alleged demand for new homes is imaginary.

Such analysis is beyond the scope of most economists, so I am happy to help out.

By Mike “Mish” Shedlock

Will Millennials Ever Become A Generation Of Homeowners?

BofA Has A Troubling Answer

America’s biggest as of 2016 generation, the Millennials, has a heavy burden on its collective 150 million shoulders: its task is to not only step in as a buyer of stocks once the baby boomers begin selling in bulk, but to also provide the much needed support pillar for the recovery of the US housing market. In fact, there have been countless “bullish” housing market theories built upon the premise that sooner or later tens of millions of young American adults will emerge from their parents’ basements, start a household, and buy a house.

So far that theory has not been validated. One simple reason is that Millennials simply can’t afford to buy a house. As we reported last week, a study from Apartment List showed that nearly 70% of young American adults, those aged 18 to 34 years old, said they have saved less than $1,000 for a down payment. This is similar to what a recent GoBanking Survey found last year, according to which 72% of “young millennials”- those between 18 and 24 years old – had $1,000 in their savings accounts and 31% have $0; a sliver (8%) have over $10,000 saved. Of the “older millennials”, those between 25 and 34, 67% had less than $1,000 in their savings accounts, 33% have nothing at all, and 15% had over $10,000.

So does that mean that Millennials can simply be written off as a potential generation of homeowners, and if so, what are the implications for the broader housing market?

That’s the question BofA economist Michelle Meyer asked on Friday, although she phrased it in the proper context: “Is it [still] cool to buy a home.

To our surprise, Meyer found that while the home ownership rate among young adults has plunged to a record low, helping to explain the slow recovery in single family home building, and confirming empirical observations that Millennials have largely been a ‘renter’ generation, by Bank of America’s calculations, the Millennial generation can afford to buy a home – at least in terms of making the monthly payments. While we – and many others would dispute that – BofA does make some other interesting observations, namely that lifestyle changes, including delayed marriage and child rearing, have led to fewer homeowners and a tendency to live close to city centers. Well, if it’s not money it’s clearly something else. Let’s dig in.

First, here is BofA on a rather trivial, if critical topic: “the importance of the youth”

In order to understand the future of the housing stock, it helps to get a grasp on the growth in population, which is a function of immigration and the rate of births/deaths. The Census Bureau is projecting population growth of 0.8% annually over the next decade and 0.7%, on average, through 2036, showing continued slowing from the 0.9% average last decade. Perhaps even more important, however, is the age composition, with a particular focus on young adults who are the drivers of household formation. There are currently 75 million individuals considered to be Millennials, making up the largest generation. The average age is 27.5, implying that there is a large cohort of young adults coming to age (Chart 1). In theory, this should underpin growth in home ownership. But, it is complicated – we have to understand the ability of Millennials to afford housing and the desire to become homeowners vs. renters.

https://i2.wp.com/www.zerohedge.com/sites/default/files/images/user5/imageroot/2017/06/04/bofa%20Mil%201_0.jpg

Can they afford to buy?

The first question to ask is whether the younger generation can afford to buy a home. We turn to the National Association of Realtors (NAR) affordability index which is a ratio between median family income and the qualifying income for a mortgage as a function of median existing single-family home prices and mortgage rates. According to this measure, homeownership is still very affordable relative to history. What about for young adults? Following the NAR’s methodology, we compute an affordability measure for the 25-34 year old age cohort using median household income data from the Census Bureau. Our computed index only goes to 2015 given data limitations, but we extrapolate forward (Chart 2). We find that housing is still affordable for young adults, although not to the extent it is for the overall population. The gap in affordability between the overall population and young adults has widened over the years. That said, the affordability index for young adults is still above the historical average for the aggregate, implying that housing is generally affordable.

So what seems to be the problem? One obstacle is being able to make the downpayment. The NAR measure assumes a 20% down payment, which is a high hurdle for young adults– remember that the bulk of the current 25-34 year old cohort started their careers during the financial crisis and early stages of the recovery, when the economy and labor market were fragile. Plugging in a lower down payment of 10% and the situation looks worse due to increased principal and interest payments. With a 10% downpayment, the index would be at 125.2 in 2015, which is 11% lower than the standard 25-34 year old index and 25% lower than the broad NAR index.

Another challenge is the ability to take on a mortgage loan given high student debt. According to the NY Fed’s credit panel, total outstanding student debt has reached $1.3 trillion, a substantial increase from the $260bn level in 2004. According to the NAR’s Generational Report, nearly 50% of homebuyers under the age of 36 noted that student debt delayed their home purchase, making it harder to afford the downpayment. And, of course, there is the challenge from tighter credit standards which has made it more difficult to achieve homeownership.

But do they want to buy?

Addressing whether Millennials can afford to buy is only one part of the story. We need to understand if they actually want to buy. The homeownership rate has tumbled at a faster rate for 25-34 year olds than for other generations which we do not think can be explained by affordability metrics (Chart 3). We think it also owes to lifestyle changes. Maybe there is something to the stories about Millennials preferring to spend money on avocado toast instead of their home?

https://i1.wp.com/www.zerohedge.com/sites/default/files/images/user5/imageroot/2017/06/04/bofa%20Mil%202.jpg

The shopping cart of young adults

Using data from the Consumer Expenditure Survey, we can look at the evolution of the consumer basket over time for those aged 24-35 (Table 1). Relative to the peak of the housing bubble in 2004, there has been a decline in the share of dollars spent on owned shelter and an increase in spending on renting. It also seems that this age group is spending more on healthcare and household operations, which include services paid to keep their household running efficiently (think cleaning). This has come at the expense of spending on apparel, transportation and groceries. The young adult in 2004 has a difference shopping cart than one today.

The single life

The change in spending patterns could reflect the fact that young adults are not only less likely to be homeowners, but they are less likely to be married or even live independently. Instead, this age group is living with parents or other relatives more than in the past (Chart 4). This adjustment in living arrangements has been ongoing for years but the Great Recession seemed to have speed up the trend. Today only 55% of those aged 25-34 live with a spouse/partner compared to over 80% in 1967. Life events such as getting married or having children are typical triggers to buying a home. The longer this age group lives with parents or independently, the more home ownership will be delayed.

https://i0.wp.com/www.zerohedge.com/sites/default/files/images/user5/imageroot/2017/06/04/bofa%20mil%203.jpg

City slickers

We have also seen a shift toward urban centers and away from rural areas over the years. This goes hand-in-hand with a decline in home ownership for young adults. Interestingly the share of young adults living in the suburbs has been fairly steady at around 41% (Chart 5). Moreover, it appears that there is a flocking toward the major cities, specifically in the city centers which are close to transit, workplaces and restaurants. City centers typically have more rental properties than the suburbs. But we also see greater home sales close to city centers than in the past. According to BuildZoom, new home sales within 5 miles of the centers of the 10 most densely cities have exceeded 2000 levels but if you go another 10 miles out, sales are about 50% below 2000 levels.

There are both cyclical and secular forces behind the drop in the home ownership rate for young adults. While young adults can generally afford housing, there are other constraints including the ability to make a large enough down payment and tighter credit standards. Lifestyle changes are partly to blame.

BofA’ troubling conclusion: “These dynamics won’t change in the medium-term which should translate to a lower equilibrium pace for single family housing starts.”

Source: ZeroHedge

 

 

Pending Home Sales Decline Again, Index Below 2016 Level

The pending home sales index, an estimate of existing home sales, has accurately provided the direction of the monthly home resale reports.

The survey is down for the second month, providing further evidence of a housing slowdown.

The Econoday consensus estimate was for the index to rise 0.5%. Instead, the pending home sales index declined 1.3%.

“Spring sales data have not been favorable for the housing sector. Pending home sales are down for a second straight month, 1.3 percent lower in April to an index of 109.8 which is 3.3 percent below this time last year. This index tracks contract signings for resales and the results point to weakness for final sales in May and June. Final resales contracted in April as did new home sales while the month’s housing starts were also weak. Spring is the big season for housing and these are not the results of a sector that will be leading the 2017 economy.”

Pending Home Sales Fall Below 2016 Levels:

https://mishgea.files.wordpress.com/2017/05/pending-home-sales-2017-05-31.png?w=625

Mortgage News Daily reports Pending Home Sales Fall Below 2016 Levels.

Pending home sales had been expected to rise slightly in April after declining 0.8 percent in March. Instead, the National Association of Realtors’® (NAR’s) Pending Home Sale Index (PHSI) slumped for the second straight month, dropping 1.3 percent. The PHSI, based on contracts signed for existing home purchases, fell from 111.3 (revised from 111.4) in March to 109.8.

The April dip put the Index 3.3 percent below its level in April 2016. This was the first year-over-year decline since last December and the largest since the Index fell 7.1 percent in June 2014.

Lawrence Yun, NAR chief economist, said the fading contract activity in the normally active spring market is due to significantly weak supply levels. These, in turn, are spurring deteriorating affordability conditions. “Much of the country for the second straight month saw a pullback in pending sales as the rate of new listings continues to lag the quicker pace of homes coming off the market,” he said. “Realtors are indicating that foot traffic is higher than a year ago, but it’s obviously not translating to more sales.”

Yun added, “Prospective buyers are feeling the double whammy this spring of inventory that’s down 9.0 percent from a year ago and price appreciation that’s much faster than any rise they’ve likely seen in their income.”

The economist sees little evidence that the record low levels of inventory will improve anytime soon. Homebuilding activity remains below the necessary levels and too few homeowners are listing their home for sale.

“The unloading of single-family homes purchased by real estate investors during the downturn for rental purposes would also go a long way in helping relieve these inventory shortages,” said Yun. “To date, there are no indications investors are ready to sell. However, they should be mindful of the fact that rental demand will soften as the overall population of young adults starts to shrink in roughly five years.”

NAR expects that existing home sales will increase about 3.5 percent from 2016 to 5.64 million units and the national median existing-home price is expected to increase around 5 percent. In 2016, existing sales increased 3.8 percent and prices rose 5.1 percent.

The decline of sales was nearly nationwide in scope and all four regions are now running lower index numbers than the previous April. The West was the only region enjoying a month-over-main gain. The PHSI in the Northeast decreased 1.7 percent to an index of 97.2, now 0.6 percent lower than the previous April. In the Midwest, the index fell 4.7 percent to 104.4, a decline of 6.1 percent year-over-year.

Supply Issue?

In addition to the decline this month, the Pending Home Sales Index for March was revised lower, from -0.8 % to -0.9 %. The second quarter recovery thesis is dying on the vine.

Once again Yun blames supply. And once again Yun is wrong. If supply was triple and prices remained the same, sales would not be skyrocketing.

Of course, if supply tripled and sales did not soar, prices would drop. That is the real issue. Prices are above what buyers can afford to pay.

Although the number of resales is well below the bubble years, the median price isn’t.

Median Home Prices 1963-Present:

https://mishgea.files.wordpress.com/2017/05/median-home-prices-1963-present.png?w=768&h=266

More Trapped Home Buyers:

New home sales are recorded at signing. Existing home sales are recorded at closing.

Thus, the March report has negative implications for April and May, while the April report has negative implications for resales in May and June.

Looking ahead, existing home buyers in the last two to three years overpaid. In some areas, notably California, home buyers overpaid dramatically.

Another round of trapped home buyers unable to sell their homes is right around the corner.

For further discussion, please see Investigating Trends in Median Home Prices: When Did Price Acceleration Start?

By Mike “Mish” Shedlock

The Fat Lady Is Singing… What To Do About It

Summary

  • The peak in credit and lending is behind us.
  • Banks have sharply pulled back on lending and have been tightening lending standards.
  • Banks are saying they see less demand so why are people saying demand is strong?

Overview

We live in a credit driven economy. Most know this to be the case. Individuals and corporations borrow money from banks for homes, cars, real estate projects and other investments. The availability for credit is perhaps the most important driver of economic growth, aside from income growth. Without credit, the economy grinds to a halt. It is not a surprise that banks have a desire to lend money when times are good and pull back lending when times are tough. This seems logical but when times are tough for consumers is exactly when they need credit to push forward with new marginal consumption.

Much of my research lately has been outlining the peak in the economic cycle that occurred in 2015. Many people misconstrue this for an imminent recession call or a stock market crash prediction when that simply is not the case.

The economy follows a sine curve. It peaks and troughs and for the most part follows a nice cyclical wave. Recessions occur when growth is negative but the “peak” of the cycle occurs well before the recession. They are not simultaneous events.

The sine wave below may help illustrate my point:

The most important point to understand is the elapsed time between the peak and the recession, where we live today.

Many confuse the “peak” of the cycle with the end of the cycle when in fact, across all economic cycles, the peak occurred about ~2 years prior to the recession. After the peak of the cycle is in, growth does continue, albeit at a slower pace. It is a dangerous assumption to make when critics of this analysis say we are still growing when we are growing at an ever slowing pace. When growth goes from 3% to -2%, let’s say, it has to hit 2%, 1%, 0%, etc. in the middle. That deceleration is what occurs between the peak and the recession.

There is a large population of investors and analysts that simply look at the nominal growth rate and say 2% is still okay, without regarding that the growth has gone from 3% to 2.5% to 2% and now lower.

The time to prepare for the end of the economic cycle is after the peak in the cycle has been established. The good news, like I said before, is you typically have two years after the peak to prepare yourself.

Preparing yourself does not mean buying canned foods and building a bunker as many raging bulls like to straw-man even the smallest critics into a “doom and gloom” scenario.

Preparing yourself in my view involves reducing equity exposure, raising cash, and increasing defensive exposure.

The good news is that you can still ride the gains of the lasting bull market with an asset allocation that is slightly more defensive. You may slightly under perform the last year or two of the bull market but if offered a scenario in which you gained 3% instead of 10% in the last year of the bull market and then gained another 3% instead of -10% in the following year, I would hope you’d pick the pair of 3% because that in fact leaves you with more money.

In a raging bull market some cannot stomach “leaving” that 7% (these are clearly arbitrary numbers used to make a point) on the table.

For the rest of the piece, I will use the banking loan growth and the banking surveys to prove the peak of the credit cycle is in and we are in a period of decelerating growth, falling down the back of the sine wave as I pointed out above. The recession is in sight despite how hard many want to avoid it.

I will also at the end run through the portfolio I began to recommend on May 1st that will prepare you for slowing growth but also allows you to share in the upside should the market continue higher.

So far, that portfolio is actually outperforming the S&P 500 with a negative correlation and lower volatility. I will go through this at the end.

The Peak in Credit is Behind Us, The Fat Lady is Singing

For the analysis of the credit peak, I will use two main economic reports. First is the “Assets and Liabilities of Commercial Banks” published by the Board of Governors of the Federal Reserve and the second is the Senior Loan Officer Survey also published by the Board of Governors of the Federal Reserve.

Assets and Liabilities

The “Assets and Liabilities” report is a weekly aggregate balance sheet for all commercial banks in the United States. The release also breaks down several banking groups. The most interesting part of the report is the breakdown of loan group in which you can see auto loans, real estate loans, consumer loans and much more.

Most importantly, this is hard data and not subject to sentiment, feeling or bias. Banks are either growing their loan books at a faster pace or a slower pace. This is perhaps one of the biggest economic signals. Banks would experience lower demand or credit issues and tighten up their loan books before that lack of credit leaks into the economy in the form of lower growth.

The following data from the Assets and Liabilities report will indicate just how much banks have reeled in their lending and prove the peak in credit growth is long gone.

All Commercial & Industrial Loans:

This is exactly as it sounds; all loans banks make, the broadest measure of credit availability. This is an aggregation of all the loans made by all the commercial banks in the survey. Currently this report aggregates 875 domestically chartered banks and foreign related institutions.

https://static.seekingalpha.com/uploads/2017/5/18/48075864-14951195627556932.png

Rarely do I look at any data series in nominal terms, not year over year that is, but this chart does show the peaks in total credit fairly clearly. Credit rises week after week without ever slowing down. The only times when there was a pause, drop, or large deceleration in credit creation was during times of economic distress. Banks are fairly smart and they won’t lend if risk is too high, uncertainty is too great or credit quality is too low.

Many will speculate on the reason for a drop off in bank lending but the reason truthfully isn’t that important.

The growth rate in total credit shows you exactly when the fat lady began to sing on loan growth.

The question is not whether credit growth has peaked, that is clear. Credit growth is also never negative without a recession and we are getting dangerously close to that. If the prevailing sentiment is that demand is high, why are banks pulling back lending at a record pace?

The rate of the drop in credit growth has been accelerating. Some may point to the current administration and the uncertainty surrounding policy changes but I would push back and say that growth peaked and was falling since 2015, far before this political scenario.

It is very critical to look at the above loan growth chart in the context of the sine curve at the beginning of this piece. If negative growth is a sign of recession, I think you’d be crazy not to shift defensive. Don’t sell all stocks, just know where you are in the cycle.

This is the broadest measure of all credit, so what is the specific sector that is causing the aggregate loan growth to plummet.

The context of the cycle is clear in the above chart so for all the specific loan sectors going forward I will focus on this cycle only from 2009 through today. The report is also on a weekly basis. If a data series does not start from 2009 or prior, that is because that is all the data available as some series began in 2014.

Real Estate Loans:

Credit growth in the real estate sector peaked later than overall credit but has certainly registered its highest growth of the cycle.

Real estate clearly does well in times of credit expansion and less so during times of credit growth contraction.

Mapping home price growth from the Case-Shiller Home Price Index over real estate loan growth should highlight the importance of credit growth for real estate and the dangers of disregarding its rollover.

Not surprisingly, there is a high correlation between real estate loan growth and home price growth. Just briefly skipping ahead (will return to this) the Senior Loan officer survey also shows that banks are claiming lower demand for real estate loans; mortgages and more specifically, commercial real estate.

(Federal Reserve)

(Federal Reserve)

It is hard to overstate the importance of this, specifically the commercial real estate demand. People claim “demand is booming” or something of the sort but banks, the ones who actually make the loans, are claiming demand for real estate loans is the weakest since just before the last housing crisis. Again, not making that call but this drop in loan growth and demand is telling a far different story than those who claim demand is through the roof.

Consumer Loans: Credit Cards:

Consumer loan growth in the credit card space are following trend with the rest of loan growth, still growing but decelerating and months past peak.

With credit card growth rolling over, in order to keep up with the same consumption, consumers need to spend their income. The problem is income growth is falling as well.

Total real aggregate income is near its lowest level of the cycle.

With loan growth slowing and income growth slowing, where is the marginal consumption going to come from? With this data in hand, it should not some as a surprise that GDP growth has gone from 2% to 1% and sub 1% as of the latest Q1 reading.

What are banks saying about consumer demand?

(Federal Reserve)

Across all categories banks are reporting weaker demand. Again, where is the strong demand that everyone keeps talking about? It is not showing up in loan growth data or in banking demand surveys.

I will reiterate this point continually; loans are still growing and income is still growing but at a slower pace and past peak pace. This should put into context where we are in the broader economic cycle.

Auto Loans:

Unfortunately, the auto loan data started in 2015 so there is no previous cycle to use for comparison. Nevertheless, the peak in auto loan growth occurred in the summer of 2016, and like other credit, has been declining to its lowest level of the cycle.

Not much more needs to be discussed on auto loans that is not widely covered in the media. Subprime auto loans and sky-high inventories are a massive issue. In fact, auto inventories are the highest they’ve been since the Great Recession.

(BEA, FRED)

The goal here is not to predict a subprime auto loan issue but rather to point out yet another area of growth that is slowing to its lowest level of the cycle.

Commercial Real Estate:

While the peak in commercial real estate loan growth is in as well, the peak occurred later than the aggregate index. CRE loan growth topped out in 2016 while the aggregate loan growth peaked closer to the beginning of 2015.

As I pointed out above, banks are sending a serious warning sign on the commercial real estate market.

The senior loan survey shows a triple threat of warning signs from the banks. They are claiming falling demand, tighter lending standards and uncertainty about future prices.

Weakening demand:

Tightening Standards:

The following is an excerpt from the senior loan survey on commercial real estate:

A warning from the banks.

The fat lady has been singing on credit growth…So what do you do?

How To Prepare

On May 1st, I put out a recommended portfolio that the average investor can follow. The portfolio is a take on Ray Dalio’s All Weather portfolio.

I strongly believe peak growth is behind us, and when that happens, growth decelerates until the eventual recession. I am not in the game of predicting the exact date of the next recession.

I do not want to be long the market or short the market per se.

The best way to phrase my positioning is I want to be long growth slowing.

The portfolio I recommended (and will continue to update and change asset allocation on a weekly basis. Follow my SA page for continued updates) was the following:

(All analysis on this portfolio is from the time of recommendation, May 1st, to the time of this writing on May 18).

I use SCHD in my analysis as I mentioned I would choose this over SPY for additional safety but either one is fine.

Since the recommendation, the portfolio is up an excess of 0.96% above the S&P 500 with under 2/3 the volatility and a negative correlation.

The weighted beta of this portfolio, given the asset allocations above, is 0.02. This portfolio is nearly exactly market neutral and has a yield of around 2.5%, above the S&P 500. This portfolio protects you in all scenarios. If the stock market continues to rise, your portfolio should rise just slightly and you should continue to clip a nice coupon.

Should the market fall, the bond allocation will provide safety and stability to the portfolio. A portfolio like this allows you to weather the bumpy ride, stay invested, and continue to clip a dividend yield.

Of course, this is not an exact science and past performance is no indication of future results. Also, those who chose to follow a defensive, yet still net long, portfolio such as the one above can replace SPY or SCHD with their favorite basket of stocks. The reason I chose the ETF was for simplicity.

The percentages above are what I feel are best for the current environment we are in. It will allow me to share partially in the upside while mitigating my downside. At the end of the day, the most important thing is to protect capital.

If you want more equity beta, reduce TLT exposure and raise SPY exposure (or your favorite stocks).

This portfolio is the best way in my opinion to not be long, not be short, but be neutral and long growth slowing.

I will continue to update this portfolio and rotate asset allocation as the economic data changes and my positioning becomes more bullish or bearish.

Disclosure:I/we have no positions in any stocks mentioned, but may initiate a long position in TLT, GLD, IEF over the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

By Eric Basmajian | Seeking Alpha

 

Vancouver House For Sale: Only 2,099 Bitcoin

https://s17-us2.ixquick.com/cgi-bin/serveimage?url=https%3A%2F%2Fi.ytimg.com%2Fvi%2F2_FlE-3g8C0%2Fmaxresdefault.jpg&sp=ece4171b1dbc1501fe05f47645f9b770

In February 2016 we explained, correctly in retrospect, that the reason behind the unprecedented surge in Vancouver home prices was the seemingly constant flood of “hot Chinese money” desperate to park itself as far away from China’s banking system, and into offshore real-estate. This is how we laid out the stylized sequence of events that culminated with Vancouver home prices surging by over 20%:

  1. Chinese investors smuggled out millions in embezzled cash, hot money or perfectly legal funds, bypassing the $50,000/year limit in legal capital outflows.
  2. They make “all cash” purchases, usually sight unseen, using third parties intermediaries to preserve their anonymity, or directly in person, in cities like Vancouver, New York, London or San Francisco.
  3. The house becomes a new “Swiss bank account”, providing the promise of an anonymous store of value and retaining the cash equivalent value of the original capital outflow.
  4. Then the owners disappear, never to be heard from or seen again.

Separately, in mid-2015, when bitcoin was still trading in the low $200s, we also predicted that in an attempt to bypass China’s increasingly more draconian capital controls, Chinese oligarchs and ordinary savers would increasingly turn to what at the time was a largely unregulated medium of exchange: bitcoin.

we would not be surprised to see another push higher in the value of bitcoin: it was earlier this summer when the digital currency, which can bypass capital controls and national borders with the click of a button, surged on Grexit concerns and fears a Drachma return would crush the savings of an entire nation. Since then, BTC has dropped (in no small part as a result of the previously documented “forking” with Bitcoin XT), however if a few hundred million Chinese decide that the time has come to use bitcoin as the capital controls bypassing currency of choice, and decide to invest even a tiny fraction of the $22 trillion in Chinese deposits in bitcoin (whose total market cap at last check was just over $3 billion), sit back and watch as we witness the second coming of the bitcoin bubble, one which could make the previous all time highs in the digital currency, seems like a low print.

With one bitcoin now going for roughly $1,800 – and with the PBOC repeatedly cracking down on all forms of bitcoin cross-border flow – this prediction also turned out to be right.

So putting the two together, at least one enterprising Canadian homeowner has decided to make life for potential Chinese buyers especially easy, and in a posting on the Hong Kong edition of Craigslist, has listed a relatively modest Vancouver house for the price of 2,099 bitcoin.

https://i1.wp.com/www.zerohedge.com/sites/default/files/images/user5/imageroot/2017/05/12/vancouver%20house%20craigs_0.jpg

At today’s exchange rate of US$1,737 for one bitcoin, the US dollar equivalent price is roughly $3.6 million or C$4.9 million. So what does nearly five million Canadian dollars buy enterprising Chinese investors who are willing to pay up for the convenience of bypassing currency conversion into Canadian dollars altogether? This:

https://i0.wp.com/www.zerohedge.com/sites/default/files/images/user5/imageroot/2017/05/12/00E0E_gnzeuLmeD2K_600x450.jpg

https://i1.wp.com/www.zerohedge.com/sites/default/files/images/user5/imageroot/2017/05/12/00000_kM7OIBuDw1h_600x450.jpg

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Source: ZeroHedge

Writing Love Letters, Bidding $100,000 Extra: Buying a Home In Southern California Is Insane

Jobs and wages are on the rise. Buyers are newly urgent, fearful an era of cheap money is ending. And to top it off, there simply aren’t enough homes listed for sale. As a result, bidding wars are common and prices are rising during the popular spring buying season. A report out Tuesday from CoreLogic shows the Southern California median home price jumped 7.1% in March from a year earlier, hitting $480,000 in the six-county area. And despite low inventory, sales rose 7.8%.

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A pitched battle

When Elizabeth Rodriguez and her husband realized that the market was white-hot in the Northeast L.A. burbs where they wanted to raise their three children, they devised a strategy.

The couple, who moved from the Bay Area for Rodriguez’s husband’s director job, began writing a “love letter” to sellers describing how much they wanted the house. And then they bid over asking — way, way over asking.

In one case, they offered $102,000 above the $798,000 list price for a three-bedroom Spanish-style home in Mount Washington. The house sold to someone else for $985,000.

“After that I was like, this is insane,” said the 35-year-old mother of three.

The couple bid on 11 homes, she said, before they finally purchased a three-bedroom in the hills of Glassell Park listed at $799,900. To seal the deal, they again bid about $100,000 over asking, this time before an open house was held.

“It was a crazy process,” Rodriguez said. “I’m glad we are on the other side of it.”

For developers, crazy times are good — especially in areas where few new homes are being built.

Last weekend, builder Planet Home Living held a grand opening for a Silver Lake 10-home subdivision built on small lots. Before any prospective buyers showed up, six of the $1-million houses were already in escrow after the Newport Beach firm contacted people who signed a list of interested buyers.

“Four hundred people on an interest list, that’s a lot for 10 homes,” said the company’s chief executive, Michael Marini. “Anything in L.A. that we build, it sells out immediately.”

The buying frenzy isn’t limited to Los Angeles either.

Agents across the region reported heavy demand, even in the Inland Empire, which since the housing bust has recovered more slowly than areas near the coast.

Chino Hills agent Derek Oie said he and others are taking advantage by marketing open houses as a one-time-only event, in a bid to create even more of an auction atmosphere.

At one house in Eastvale he brought a client to earlier this year, 100 people showed up.

“We showed up and literally cars were parked up and down the whole cul-de-sac,” he said.

By Andrew Khouri | Los Angeles Times

“It’s Just Crazy” (Again): 2-Bedroom Los Angeles House Sells For 40% Above Asking

Two days ago we looked at the latest troubling development in US home price trends: a new bubble appears to be emerging in all the “usual suspect” places. As we noted on Thursday, “home prices in markets that bubbled over back in 2006/2007, like Las Vegas and San Francisco, got cut in half in 2009 but have since doubled again of their lows.  Meanwhile, markets like Denver and Dallas that didn’t participate as much in the 2007 mania are now surging to all-time highs, with Dallas prices up 55% over the past 5 years.”

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The Wall Street Journal added that some of the home buying behaviors of consumers, like paying prices well above appraisal values and waiving home inspections, are starting to be eerily reminiscent of 2006:

In some markets, bidding wars are breaking out. Agents said some buyers are kicking in extra cash when properties don’t appraise for the asking price, and some are waiving their right to home inspections.

It can’t be sustained,” said David Berson, chief economist at Nationwide Insurance and a former chief economist at mortgage giant Fannie Mae, referring to the frenzied buying. “It can’t go on forever.”

Other signs of overexuberance have emerged, including surging levels of licensed Realtors all chasing a quick buck.

The number of licensed Realtors has jumped by nearly 25% since 2012, hitting a nine-year high in 2016 and sitting just 9% below the peak in 2006, according to real-estate consultant John Burns. In Denver, homes are selling briskly. The median number of days that homes spent on the market declined to eight in the first three months of the year from 61 in 2012, according to Redfin. Home prices rose 8.5% in Denver over the year ended in February, according to Case-Shiller.

Nicki Thompson, an agent in Denver, said she recently had a listing that was on the market for two weekends at $1.2 million and she received multiple all-cash offers above the listing price. 

“It’s just crazy,” she said.

And for a practical example of just how crazy it truly is, take this renovated 2-bedroom, 1,948 sq. ft house first built in 1951 in the Eagle Rock section of Los Angeles, which was listed in mid-March for $699,000, was estimated by Redfin at $780,000, and sold yesterday for $980,888 (more than $500/sq foot) and 40% above asking, just over a month after it was first listed.

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Maybe it was the house’s profile “description that unleashed the buying frenzy:

In the 1960s-80s drums played on some of the most famous pop songs known (Good Vibrations, Mrs. Robinson, A Little Less Conversation, to name a few) were built in this garage in our beloved Eagle Rock. A. F. Blaemire and his wife, Kirsten, filled this home with music and creativity for decades, and now it’s ready for its next inspired owner! With freshly refinished hardwood floors and repainted interior, 5208 Monte Bonito is a blank canvas with great potential. The rooms are bright and spacious, including a downstairs recreation room perfect for a jam room, art studio, den (or all of the above!). The two-car garage has direct access to the house and an additional storage room. The back yard has plenty of space for entertaining and gardening – there is already an avocado tree, an orange tree, and a pitaya to get you started! Views of the Eagle Rock from the master bedroom, and sunset views from the front porch make this the ideal setting to call home.

Then again, maybe not.

So what do you get for just under a million in LA these days? Not much: two bedrooms, less than two bathrooms, a 2 car garage, a decorative fireplace, a rec room, and a 7,195 sq foot lot.

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Here are some photos showing what a “million dollar house” looks like in the latest US housing bubble.

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Source: Zerohedge