California homebuyers making up to $211,000 annually will be able to receive a 20% down payment, and all closing costs, at a 0% interest rate.
Tag Archives: California
California Is Now Castrating Children From All 50 States Without Parental Consent
California Democrats recently passed SB-107, which allows all American children to access destructive transgender surgeries without parental consent. What is their end game? (source)
Greg Reese explains how. Laura Logan explains why…
Just Days After Phasing Out New Gas Cars, California Says “Avoid Charging EVs” Amid Grid Emergency
Shortly after 1800ET, just as Californians begin to head home for the day, the California Independent System Operator issued a level-1 energy emergency alert shortly after tapping all its available power supplies. Despite earlier warnings to reduce usage, Californians – in all their self-righteous virtue – decided to charge their EV anyway, pushing demand above capacity.
California to Ban Sale of New Gas-Powered Cars – All Electric Vehicles in Next Decade
(Cristina Laila) California on Thursday is expected to ban the sale of gas-powered vehicles by 2035.
CA To Charge Landowners For Their Own Water
(Bob Unruh) California has announced to landowners that they now are going to be billed for the water they take out of their own wells, on their own land.
3rd Look at Local Housing Markets in June, Sales Down Sharply, Inventory “Surged”
Today, in the Calculated Risk Real Estate Newsletter: 3rd Look at Local Housing Markets in June, Sales Down Sharply, Inventory “Surged”
A brief excerpt: Continue reading
California Agrees To Extend Eviction Ban, Cover Back Rent & Utilities Through September
(Louis Hansen) Gov. Gavin Newsom and legislative leaders announced a package today to extend the eviction moratorium through September and streamline an aid program to pay landlords 100% of unpaid rent.
Monarch, the last California Grizzly Bear in captivity
Watch Food Delivery Robot Sidestep Homeless Man In Los Angeles
White privilege? A person of pallor is so low on the totem pole of L.A. streets that even a food delivery robot avoids him.
CAR on California July Housing: Sales up 6% YoY, Active Listings down 48% YoY
The CAR reported: California housing recovery continues in July as median home price sets another record high, C.A.R. reports
California’s housing market continued to recover as home sales climbed to their highest level in more than two and a half years in July, while setting another record-high median home price, the CALIFORNIA ASSOCIATION OF REALTORS® (C.A.R.) said today.
Closed escrow sales of existing, single-family detached homes in California totaled a seasonally adjusted annualized rate of 437,890 units in July, according to information collected by C.A.R. from more than 90 local REALTOR® associations and MLSs statewide. The statewide annualized sales figure represents what would be the total number of homes sold during 2020 if sales maintained the July pace throughout the year. It is adjusted to account for seasonal factors that typically influence home sales.
July’s sales total climbed above the 400,000 level for the first time since February 2020, before the COVID-19 crisis depressed the housing market, and was the highest level in more than two and a half years. July sales rose 28.8 percent from 339,910 in June and were up 6.4 percent from a year ago, when 411,630 homes were sold on an annualized basis. July marked the first time in five months that home sales posted an annual gain.
Housing inventory continued to trend downward on a year-over-year basis, with active listings falling more than 25 percent for the eighth consecutive month. The year-over-year 48 percent decline was the biggest drop in active listings since January 2013. The continued recovery in closed escrow sales, combined with a sharp drop in active listings, led to a plunge in the Unsold Inventory Index (UII) to 2.1 months in July, down from 3.2 months a year ago. The index indicates the number of months it would take to sell the supply of homes on the market at the current rate of sales. The July UII was the lowest level since November 2004.
CR Note: Existing home sales are reported when the transaction closes, so this was mostly for contracts signed in May and June. Sales-to-date, through July, are down 10% compared to the same period in 2019.
California Is Teetering On The Edge Of Financial Ruin Again
For years, it had been speculated that California’s state-wide model of heavy regulation, expensive education, high taxes and bloated spending would eventually drive the state into financial ruin, according to a new Bloomberg Opinion piece. Over the last 15 years, the state also has had to deal with widespread blackouts and an unemployment rate that ballooned to 12% after the financial crisis.
After deficits exploded under Governor Schwarzenegger, the state eventually got back on track. Under Governor Jerry Brown, the state raised taxes again (surprise) and bumped up its sales tax. These tax hikes, combined with a recovery in housing and in the stock market, helped swing the state’s budget back into the black.
But now, the symptoms of larger problems in California are bubbling to the surface yet again. For instance, the recent “planned blackouts” by power provider PG&E to try and prevent wildfires are indicative of a crumbling energy infrastructure across the state.
Losses from recent wildfires in California have been “staggering”, totaling upwards of $400 billion in 2018. This figure represents about 1/7th of the state’s total GDP and is comprised of health costs, lost property, lost jobs and asset prices falling. It also takes into account migration out of the state.
PG&E has said that the “safety” blackouts will continue, which means that the state isn’t going to have reliable year-round electricity. This will inevitably take its toll on property values and slow migration inflows into the state.
While wildfires rage across the state, another issue is plaguing California: homelessness. The state’s homeless population has increased by 5.3% from 2010 to 2018. California is already home to almost half of the country’s homeless. We have documented, at length, the homelessness issues in areas like San Francisco, where the epidemic is reaching a fever pitch.
At the same time, government pension costs are rising across the state; faster in California than in the rest of the nation. The cost saving measures being put in place to offset this problem are degrading the state’s education system.
And so, the inevitable has happened: people are leaving the state.
In fact, a recent paper by economists Joshua Rauh and Ryan Shyu found that out-migration of top-bracket taxpayers accelerated after the state’s 2012 income tax hike.
“Among top-bracket California taxpayers, outward migration and behavioral responses by stayers together eroded 45.2% of the windfall tax revenues from the reform,” the paper’s abstract says.
With Democrats back in the saddle, holding a super majority in the state, California seems doomed to repeat its dysfunctional history from the early 2000’s. Making matters worse, an initiative called Proposition 13 is making it difficult for California to alleviate its burdens by raising property taxes, the op-ed notes:
But California’s political system is making it hard to respond to these pressures. Thanks to a 1978 ballot initiative called Proposition 13, California cities have stringent limits on raising revenue from local property taxes. That forces the state to provide many services, financing them with hefty income taxes. Those are inherently more unreliable than property taxes, since wealthy taxpayers can move away (while property can’t move), and since California’s income taxes fluctuate a lot because they depend so much on the profits residents earn on volatile stock prices.
“Proposition 13 must be repealed, and property taxes raised,” the piece continues, in order for the state to avoid what it calls another “dark path”. It also suggests that the state legislature pass bills to allow greater housing density and more construction throughout the state.
Only time will tell whether these proposed solutions, if implemented, would even work. But one thing is for sure: if California doesn’t do something soon, the state could become (further) living proof that creating a liberal utopia by hiking taxes and adding regulation is nothing more than a pipe dream, if not a full blown recipe for exactly how to drive an economy into the ground.
Contrast with SoCal, early 1950’s…
Orange County California Q1 Home Sales Off To Coldest Start Since Great Recession
Welcome to the Land of… Jumbo mortgages and All-cash! Aka, Orange County, home of surfing legend (and Realtor) Bob “The Greek” Bolen.
But Orange County has just experienced their slowest start to a year in terms of home sales since The Great Recession.
And home prices in Orange County are falling despite mortgage rate declines.
Now Ain’t that a kick in the head!
Is This A Solution To California’s Housing Crisis, Or Threat To Single Family Homes?
Could this be the end of single-family zoning in California?
Changes to the comprehensive housing measure Senate Bill 50 – already hotly debated – allow property owners broad rights to turn single-family homes and vacant lots into two-, three- and four-unit homes and apartments.
C.A.R. Report: California Housing Market Sputtered In November
California Association Of Realtors Report, Absent Seasonal Adjustments
– Existing, single-family home sales totaled 381,400 in November on a seasonally adjusted annualized rate, down 3.9 percent from October and down 13.4 percent from November 2017.
– November’s statewide median home price was $554,760, down 3.0 percent from October and up 1.5 percent from November 2017.
– Statewide active listings rose for the eighth straight month, increasing 31 percent from the previous year.
– The statewide Unsold Inventory Index was 3.7 months in November, up from 3.6 months in October.
– As of November, year-to-date sales were down 4.6 percent.
LOS ANGELES (Dec. 18) – California home sales remained on a downward trend for the seventh consecutive month in November as prospective buyers continued to wait out the market, according to the CALIFORNIA ASSOCIATION OF REALTORS® (C.A.R.).
Closed escrow sales of existing, single-family detached homes in California totaled a seasonally adjusted annualized rate of 381,400 units in November, according to information collected by C.A.R. from more than 90 local REALTOR® associations and MLS’ statewide. The statewide annualized sales figure represents what would be the total number of homes sold during 2018 if sales maintained the November pace throughout the year. It is adjusted to account for seasonal factors that typically influence home sales.
November’s sales figure was down 3.9 percent from the revised 397,060 level in October and down 13.4 percent from home sales in November 2017 of a revised 440,340. November marked the fourth month in a row that sales were below 400,000.
“While many home buyers continue to sit on the sidelines, serious buyers who are in a position to purchase should take advantage of this window of opportunity,” said C.A.R. President Jared Martin. “Now that interest rates have pulled back, home prices have tapered, and inventory has improved, home buyers’ prospects of getting into a home are more positive.”
The statewide median home price declined to $554,760 in November. The November statewide median price was down 3.0 percent from $572,000 in October and up 1.5 percent from a revised $546,820 in November 2017.
“The slowdown in price growth is occurring throughout the state, including regions that have strong economic fundamentals such as the San Francisco Bay Area,” said C.A.R. Senior Vice President and Chief Economist Leslie Appleton-Young. “The deceleration in home price appreciation should be a welcome sign for potential buyers who have struggled in recent years against low inventory and rapidly rising home prices.”
Other key points from C.A.R.’s November 2018 resale housing report include:
- On a region wide, non-seasonally adjusted basis, sales dropped double-digits on a year-over-year basis in the San Francisco Bay Area, the Central Coast, and the Southern California regions, while the Central Valley region experienced a relatively small sales dip of 3.9 percent.
- Forty-one of the 51 counties reported by C.A.R. posted a sales decline in November with an average year-over-year sales decline of 16.8 percent. Twenty-six counties recorded double-digit sales drops on an annual basis.
- Sales for the San Francisco Bay Area as a whole fell 11.5 percent from a year ago. All nine Bay Area counties recorded annual sales decreases, with Marin, San Francisco, San Mateo, and Sonoma counties posting double-digit annual declines.
- The Los Angeles Metro region posted a year-over-year sales drop of 10.1 percent, as home sales fell 11.2 percent in Los Angeles County and 14.4 percent in Orange County.
- Home sales in the Inland Empire decreased 6.7 percent from a year ago as Riverside and San Bernardino counties posted annual sales declines of 9.0 percent and 3.2 percent, respectively.
- Home prices in the San Francisco Bay Area are no longer climbing at the double-digit pace that occurred throughout much of this year. On a year-over-year basis, the Bay Area median price ticked up 0.6 percent from November 2017. While home prices in Marin, San Francisco, San Mateo, and Santa Clara counties continued to remain above $1 million, all but San Mateo County recorded a year-over-year price decline.
- Statewide active listings rose for the eighth consecutive month after nearly three straight years of declines, increasing 31 percent from the previous year. November’s listings increase was the largest since April 2014.
- The unsold inventory index, which is a ratio of inventory over sales, increased year-to-year from 2.9 months in November 2017 to 3.7 months in November 2018. The index measures the number of months it would take to sell the supply of homes on the market at the current sales rate.
- The median number of days it took to sell a California single-family home edged up from 22 days in November 2017 to 28 days in November 2018.
- C.A.R.’s statewide sales price-to-list-price ratio* declined from a year ago at 98.9 percent in November 2017 to 97.9 percent in November 2018.
- The average statewide price per square foot** for an existing, single-family home statewide was $282 in November 2018, up from $277 in November 2017.
- The 30-year, fixed-mortgage interest rate averaged 4.87 percent in November, up from 3.92 percent in November 2017, according to Freddie Mac. The five-year, adjustable mortgage interest rate also increased in November to an average of 4.11 percent from 3.24 from November 2017.
Key Graphics (click links to open):
- Calif. historical existing home sales.
- Calif. historical median home price.
- Year-over-year sales by price segment.
- Unsold inventory index of single-family homes.
Note: The County MLS median price and sales data in the tables are generated from a survey of more than 90 associations of REALTORS® throughout the state and represent statistics of existing single-family detached homes only. County sales data are not adjusted to account for seasonal factors that can influence home sales. Movements in sales prices should not be interpreted as changes in the cost of a standard home. The median price is where half sold for more and half sold for less; medians are more typical than average prices, which are skewed by a relatively small share of transactions at either the lower-end or the upper-end. Median prices can be influenced by changes in cost, as well as changes in the characteristics and the size of homes sold. The change in median prices should not be construed as actual price changes in specific homes.
*Sales-to-list price ratio is an indicator that reflects the negotiation power of home buyers and home sellers under current market conditions. The ratio is calculated by dividing the final sales price of a property by its last list price and is expressed as a percentage. A sales-to-list ratio with 100 percent or above suggests that the property sold for more than the list price, and a ratio below 100 percent indicates that the price sold below the asking price.
**Price per square foot is a measure commonly used by real estate agents and brokers to determine how much a square foot of space a buyer will pay for a property. It is calculated as the sale price of the home divided by the number of finished square feet. C.A.R. currently tracks price-per-square foot statistics for 50 counties.
Leading the way…® in California real estate for more than 110 years, the CALIFORNIA ASSOCIATION OF REALTORS® (www.car.org) is one of the largest state trade organizations in the United States with more than 190,000 members dedicated to the advancement of professionalism in real estate. C.A.R. is headquartered in Los Angeles.
# # #
November 2018 County Sales and Price Activity
(Regional and condo sales data not seasonally adjusted)
|November 2018||Median Sold Price of Existing Single-Family Homes||Sales|
|Price MTM% Chg||Price YTY% Chg||Sales MTM% Chg||Sales YTY% Chg|
|Calif. Single-family home||$554,760||$572,000||$546,820||-3.0%||1.5%||-3.9%||-13.4%|
|Los Angeles Metro Area||$512,000||$516,000||$500,500||-0.8%||2.3%||-14.0%||-10.1%|
|San Francisco Bay Area||$905,000||$958,800||$900,000||r||-5.6%||0.6%||-12.7%||-11.5%|
|San Francisco Bay Area|
|San Luis Obispo||$624,000||$586,000||$615,000||6.5%||1.5%||-14.4%||-17.5%|
|Other Calif. Counties|
r = revised
NA = not available
November 2018 County Unsold Inventory and Days on Market
(Regional and condo sales data not seasonally adjusted)
|November 2018||Unsold Inventory Index||Median Time on Market|
|State/Region/County||Nov. 2018||Oct. 2018||Nov. 2017||Nov. 2018||Oct. 2018||Nov. 2017|
|Calif. Single-family home||3.7||3.6||2.9||28.0||26.0||22.0|
|Los Angeles Metro Area||4.2||4.0||3.3||32.0||30.0||27.0|
|San Francisco Bay Area||2.3||2.5||1.5||23.0||19.0||15.0|
|San Francisco Bay Area|
|San Luis Obispo||4.6||4.3||3.7||40.0||29.0||30.0|
|Other Counties in California|
r = revised
NA = not available
Proposal To Split California Into Three States Earns Spot On November Ballot
California’s 168-year run as a single entity, hugging the continent’s edge for hundreds of miles and sprawling east across mountains and desert, could come to an end next year — as a controversial plan to split the Golden State into three new jurisdictions qualified Tuesday for the Nov. 6 ballot.
If a majority of voters who cast ballots agree, a long and contentious process would begin for three separate states to take the place of California, with one primarily centered around Los Angeles and the other two divvying up the counties to the north and south. Completion of the radical plan — far from certain, given its many hurdles at judicial, state and federal levels — would make history.
It would be the first division of an existing U.S. state since the creation of West Virginia in 1863.
“Three states will get us better infrastructure, better education and lower taxes,” Tim Draper, the Silicon Valley billionaire venture capitalist who sponsored the ballot measure, said in an email to The Times last summer when he formally submitted the proposal. “States will be more accountable to us and can cooperate and compete for citizens.”
Jerry Brown Forbids Landlords from Cooperating with ICE to Deport Illegal Aliens
California Gov. Jerry Brown signed a pair of new laws Thursday designed to protect illegal alien tenants from being threatened with deportation by making it illegal for landlords to report a tenant’s immigration status to Immigrations Customs Enforcement (ICE).
The bills were part of a package of laws pushed by the Democrat majority and signed by Brown ostensibly to protect illegal aliens from any increased enforcement measures under theTrump administration.
According to the Los Angeles Times,
One proposal by Assemblyman David Chiu (D-San Francisco) would bar landlords from disclosing information about immigration status in order to intimidate, harass or evict tenants without following proper procedures. It also would allow immigrant tenants to file civil claims against their landlords if they do.
Another bill by Assembly Majority Leader Ian Calderon (D-Whittier) would ensure that no state office or entity in California could compel a landlord to obtain and disclose information on a tenant’s immigration status.
The rationale behind the latest package of bills protecting illegal aliens, according to the Sacramento Bee, is fear of enforcement by ICE under President Trump, and fear that unscrupulous landlords might use a tenant’s illegal status to harass, intimidate or abuse them.
Chiu argues that tenants should not have to “live in fear” because they’re immigrants or refugees. He cited the legal uncertainty over young immigrants who were brought to the country illegally but have been educated here and hold down jobs as one of several reasons for the legislation.
“Trump’s escalating war on immigrants is ripping apart families and mass deportations could be our new reality,” Chiu said recently.
“This bill will deter the small minority of landlords who unscrupulously take advantage of the real or perceived immigration status of their tenants to engage in abusive acts.”
With the package of bills signed into law Thursday—including SB54 making California a “Sanctuary State” for criminal aliens— California Democrats have kept their word to put the interests of illegal aliens first, ahead of legal, law-abiding California citizens.
Required Pension Contributions of California Cities Will Double in Five Years says Policy Institute: Quadruple is More Likely
The California Policy Center estimates Required Pension Contributions Will Nearly Double in 5 Years. I claim it will be much worse.
In the fiscal year beginning in July, local payments to the California Public Employees’ Retirement System will total $5.3 billion and rise to $9.8 billion in fiscal 2023, according to the right-leaning group that examines public pensions.
The increase reflects Calpers’ decision in December to roll back the expected rate of return on its investments. That means the system’s 3,000 cities, counties, school districts and other public agencies will have to put more taxpayer money into the fund because they can’t count as heavily on anticipated investment income to cover future benefit checks.
Including the costs paid by cities and counties that run their own systems, the fiscal 2018 tab will be at least $13 billion to meet retirement obligations for public workers, according to the analysis, which is based on actuarial reports and audited financial statements.
Barring any changes to pensions, “several California cities and counties will find themselves forced to slash other spending,” the group wrote in its report. “The less fortunate will simply be unable to pay the bills they receive from Calpers or their local retirement system.”
Quadruple is More Likely
The California Policy Center Report details 20 cities and counties reporting pension contribution-to-revenue ratios exceeding 10%. San Rafael, San Jose, and Santa Barbara County head the list at 18.29%, 13.49%, and 13.06% respectively.
The report “reflects the impact of CalPERS’ recent decision to change the rate at which it discounts future liabilities from 7.5% to 7%“.
A plan assumption of 7.0% is not going to happen. Returns are more likely to be negative than to hit 7% a year for the next five years.
As in 2000 and again in 2007, investors believe the stock market is flashing an all clear signal. It isn’t.
GMO 7-Year Expected Returns
*The chart represents local, real return forecasts for several asset classes and not for any GMO fund or strategy. These forecasts are forward‐looking statements based upon the reasonable beliefs of GMO and are not a guarantee of future performance. Forward‐looking statements speak only as of the date they are made, and GMO assumes no duty to and does not undertake to update forward looking statements. Forward‐looking statements are subject to numerous assumptions, risks, and uncertainties, which change over time. Actual results may differ materially from those anticipated in forward‐looking statements. U.S. inflation is assumed to mean revert to long‐term inflation of 2.2% over 15 years.
GMO forecasts seven years of negative real returns. Allowing for 2.2% inflation, nominal returns are expected to be negative for seven full years.
Even +3.0% returns would wreck pension plans, most of which assume six to seven percent returns.
If we see the kinds of returns I expect, even quadruple contributions will not come close to matching the actuarial needs.
California Renter Apocalypse
The rise in rents and home prices is adding additional pressure to the bottom line of most California families. Home prices have been rising steadily for a few years largely driven by low inventory, little construction thanks to NIMBYism, and foreign money flowing into certain markets. But even areas that don’t have foreign demand are seeing prices jump all the while household incomes are stagnant. Yet that growth has hit a wall in 2016, largely because of financial turmoil. We’ve seen a big jump in the financial markets from 2009. Those big investor bets on real estate are paying off as rents continue to move up. For a place like California where net home ownership has fallen in the last decade, a growing list of new renter households is a good thing so long as you own a rental.
The problem of course is that household incomes are not moving up and more money is being siphoned off into an unproductive asset class, a house. Let us look at the changing dynamics in California households.
Many people would like to buy but simply cannot because their wages do not justify current prices for glorious crap shacks. In San Francisco even high paid tech workers can’t afford to pay $1.2 million for your typical Barbie house in a rundown neighborhood. So with little inventory investors and foreign money shift the price momentum. With the stock market moving up nonstop from 2009 there was plenty of wealth injected back into real estate. The last few months are showing cracks in that foundation.
It is still easy to get a mortgage if you have the income to back it up. You now see the resurrection of no money down mortgages. In the end however the number of renter households is up in a big way in California and home ownership is down:
So what we see is that since 2007 we’ve added more than 680,000 renter households but have lost 161,000 owner occupied households. At the same time the population is increasing. When it comes to raw numbers, people are opting to rent for whatever reason. Also, just because the population increases doesn’t mean people are adding new renter households. You have 2.3 million grown adults living at home with mom and dad enjoying Taco Tuesdays in their old room filled with Nirvana and Dr. Dre posters.
And yes, with little construction and unable to buy, many are renting and rents have jumped up in a big way in 2015:
This has slowed down dramatically in 2016. It is hard to envision this pace going on if a reversal in the economy hits (which it always does as the business cycle does its usual thing).
Home ownership rate in a steep decline
In the LA/OC area home prices are up 37 percent in the last three years:
Of course there are no accompanying income gains. If you look at the stock market, the unemployment rate, and real estate values you would expect the public to be happy this 2016 election year. To the contrary, outlier momentum is massive because people realize the system is rigged and are trying to fight back. Watch the Big Short for a trip down memory lane and you’ll realize nothing has really changed since then. The house humping pundits think they found some new secret here. It is timing like buying Apple or Amazon stock at the right time. What I’ve seen is that many that bought no longer can afford their property in a matter of 3 years! Some shop at the dollar store while the new buyers are either foreign money or dual income DINKs (which will take a big hit to their income once those kids start popping out). $2,000 a month per kid daycare in the Bay Area is common.
If this was such a simple decision then the home ownership rate would be soaring. Yet the home ownership rate is doing this:
In the end a $700,000 crap shack is still a crap shack. That $1.2 million piece of junk in San Francisco is still junk. And you better make sure you can carry that housing nut for 30 years. For tech workers, mobility is key so renting serves more as an option on housing versus renting the place from the bank for 30 years. Make no mistake, in most of the US buying a home makes total sense. In California, the massive drop in the home ownership rate shows a different story. And that story is the middle class is disappearing.
California Home Sales Make Comeback in December, After Slower November
According to the California Association of Realtors, California existing home sales rebounded in December 2015, after new loan disclosure rules delayed closings in November 2015.
U.S. home sales exceeded the 400,000-unit level in December after falling short in November. Closed escrow sales of existing, single-family detached homes in California totaled a seasonally adjusted annualized rate of 405,530 units in December, according to information collected by C.A.R.
The statewide sales figure represents what would be the total number of homes sold during 2015 if sales maintained the December pace throughout the year. It is adjusted to account for seasonal factors that typically influence home sales.
For 2015 as a whole, a preliminary figure of 407,060 single-family homes closed escrow in California, up 6.4 percent from a revised 382,720 in 2014.
The December figure was up 9.6 percent from the revised 370,070 level in November and up 10.7 percent compared with home sales in December 2014 of a revised 366,460. The month-to-month increase in sales was the largest since January 2011, and the year-to-year increase was the largest since July 2015.
“As we speculated, sales that were delayed in November because of The Consumer Financial Protection Bureau’s new loan disclosure rules closed in December instead, which led to the greatest monthly sales increase in nearly five years,” said C.A.R. President Ziggy Zicarelli. “Sales increased across the board in all price segments in December, but improvement in the sub-$500,000 market was more pronounced as many homes affected by the new loan disclosures were priced under the conforming loan limit.”
The median price of an existing, single-family detached California home rose 2.6 percent in December to $489,310 from $477,060 in November. December’s median price was 8.0 percent higher than the revised $453,270 recorded in December 2014. The median sales price is the point at which half of homes sold for more and half sold for less; it is influenced by the types of homes selling as well as a general change in values. The year-to-year price gain was the largest since August 2014.
“In line with our forecast, California’s housing market experienced strong sales and price growth throughout last year, with the median price increasing 6.2 percent for the year as a whole to reach $474,420 in 2015,” said C.A.R. Vice President and Chief Economist Leslie Appleton-Young. “Looking forward, we expect the foundation for the housing market to remain strong throughout the year, with moderate increases in home sales and prices, but headwinds of tight housing supply and low affordability will remain a challenge.”
Other key points from C.A.R.’s December 2015 resale housing report include:
- While more sales closed in December, the number of active listings continued to drop from both the previous month and year. Active listings at the statewide level dropped 11.7 percent from November and decreased 7.9 percent from December 2014. At the regional level, total active listings continued to decline from the previous year in Southern California, Central Valley, and the San Francisco Bay Area, dropping 9.6 percent, 7.6 percent, and 5.2 percent, respectively.
- The sharp increase in sales in December and fewer listings combined to tighten the available supply of homes on the market. C.A.R.’s Unsold Inventory Index fell to 2.8 months in December from 4.2 months in November. The index stood at 3.2 months in December 2014. The index indicates the number of months needed to sell the supply of homes on the market at the current sales rate. A six- to seven-month supply is considered typical in a normal market.
- The median number of days it took to sell a single-family home increased in December to 39.5 days, compared with 37.5 days in November and 44.1 days in December 2014.
- According to C.A.R.’s newest housing market indicator, which measures the sales-to-list price ratio*, properties are generally selling below the list price, except in the San Francisco Bay Area, where a lack of homes for sale is pushing sales prices higher than original asking prices. The statewide measure suggests that homes sold at a median of 97.9 percent of the list price in December, up from 97.2 percent at the same time last year. The Bay Area is the only region where homes are selling above original list prices due to constrained supply with a ratio of 100.7 percent in December, up from 100 percent a year ago.
- The average price per square foot** for an existing, single-family home was $230 in December 2015, up from $222 in December 2014.
- San Francisco continued to have the highest price per square foot in December at $749/sq. ft., followed by San Mateo ($715/sq. ft.), and Santa Clara ($568/sq. ft.). The three counties with the lowest price per square foot in December were Siskiyou ($107/sq. ft.), Tulare ($123/sq. ft.), and Merced ($124/sq. ft.).
- Mortgage rates inched up in December, with the 30-year, fixed-mortgage interest rate averaging 3.96 percent, up from 3.94 percent in November and up from 3.86 percent in December 2014, according to Freddie Mac. Adjustable-mortgage interest rates also edged up, averaging 2.66 percent in December, up from 2.63 percent in November and up from 2.40 percent in December 2014.
FHA 203(k) Home Improvement Loan
Planning to buy a fixer-upper, or make improvements to your existing home? The FHA 203k loan may be your perfect home improvement loan.
In combining your construction loan and your mortgage into a single home loan, the 203k loan program limits your loan closing costs and simplifies the home renovation process.
FHA 203k mortgages are available in California in loan amounts of up to $625,500.
About FHA Mortgages
The Federal Housing Administration (FHA) is a federal agency which is more than 80 years old. It was formed as part of the National Housing Act of 1934 with the stated mission of making homes affordable.
Prior to the FHA, home buyers were typically required to make down payments of fifty percent or more; and were required to repay loans in full within five years of closing.
The FHA and its loan programs changed all that.
The agency launched a mortgage insurance program through which it would protect the nation’s lenders against “bad loans”.
In order to receive such insurance, lenders were required to confirm that loans met FHA minimum standards which included verifications of employment; credit history reviews; and, satisfactory home appraisals.
These minimum standards came to be known as the FHA mortgage guidelines and, for loans which met guidelines, banks were granted permission to offer loan terms which put home ownership within reach for U.S. buyers.
Today, the FHA loan remains among the most forgiving and favorable of today’s home loan programs.
FHA mortgages require down payments of just 3.5 percent; make concessions for borrowers with low credit scores; and provide access to low mortgage rates.
The FHA has insured more than 34 million mortgages since its inception.
What Is The FHA 203k Construction Loan?
The FHA 203k loan is the agency’s specialized home construction loan.
Available to both buyers and refinancing households, the 203k loan combines the traditional “home improvement” loan with a standard FHA mortgage, allowing mortgage borrowers to borrow their costs of construction.
The FHA 203k Loan Comes In Two Varieties.
The first type of 203k loan is the Streamlined 203k. The Streamlined 203k loan is for less extensive projects and cost are limited to $35,000. The other 203k loan type is the “standard” 203k.
The standard 203k loan is meant for projects requiring structural changes to home including moving walls, replacing plumbing, or anything else which may prohibit you from living in the home while construction is underway.
There are no loan size limits with the standard 203k but there is a $5,000 minimum loan size.
The FHA says there are three ways you can use the program.
1. You can use the FHA 203k loan to purchase a home on a plot of land, then repair it
2. You can use the FHA 203k loan to purchase a home on another plot of land, move it to a new plot of land, then repair it
3. You can use the FHA 203k loan to refinance an existing home, then repair it
All proceeds from the mortgage must be spent on home improvement. You may not use the 203k loan for “cash out” or any other purpose. Furthermore, the 203k mortgage may only be used on single-family homes; or homes of fewer than 4 units.
You may use the FHA 203k to convert a building of more than four units to a home of 4 units or fewer. The program is available for homes which will be owner-occupied only.
203k Loan Eligibility Standards
The 203k loan is an FHA-backed home loan, and follows the eligibility standards of a standard FHA mortgage.
For example, borrowers are expected to document their annual income via federal tax returns and to show a debt-to-income ratio within program limits. Borrowers must also be U.S. citizens or legal residents of the United States.
And, while there is no specific credit score required in order to qualify for the 203k rehab loan, most mortgage lenders will enforce a minimum 580 FICO.
Like all FHA loans, the minimum down payment requirement on a 203k rehab loan is 3.5 percent and FHA 203k homeowners can borrow up to their local FHA loan size limit, which reaches $625,500 in higher-cost areas including Los Angeles, New York City, New York; and, San Francisco.
Furthermore, 203k loans are available as fixed-rate or adjustable-rate loans; and loan sizes may exceed a home’s after-improvement value by as much as 10%. for borrowers with a recent bankruptcy, short sale or foreclosure; and the FHA’s Energy Efficiency Mortgage program.
What Repairs Does The 203k Loan Allow?
The FHA is broad with the types of repairs permitted with a 203k loan. However, depending on the nature of the repairs, borrowers may be required to use the “standard” 203k home loan as compared to the simpler, faster Streamlined 203k.
The FHA lists several repair types which require the standard 203k:
• Relocation of loan-bearing walls
• Adding new rooms to a home
• Landscaping of a property
• Repairing structural damage to a home
• Total repairs exceeding $35,000
For most other home improvement projects, borrowers should look to the FHA Streamlined 203k . The FHA Streamlined 203k requires less paperwork as compared to a standard 203k and can be a simpler loan to manage.
A partial list of projects well-suited for the Streamlined 203k program include :
• HVAC repair or replacement
• Roof repair or replacement
• Home accessibility improvements for disabled persons
• Minor remodeling, which does not require structural repair
• Basement finishing, which does not require structural repair
• Exterior patio or porch addition, repair or replacement
Borrowers can also use the Streamlined 203k loan for window and siding replacement; interior and exterior painting; and, home weatherization.
For today’s home buyers, the FHA 203k loan can be a terrific way to finance home construction and repairs.
‘Most Expensive’ Mansion Listing In U.S., Palazzo di Amore Cut Price By $46 Million
US Home Sales Surge In June To Fastest Pace In 8-Plus Years
WASHINGTON (AP) — Americans bought homes in June at the fastest rate in over eight years, pushing prices to record highs as buyer demand has eclipsed the availability of houses on the market.
The National Association of Realtors said Wednesday that sales of existing homes climbed 3.2 percent last month to a seasonally adjusted annual rate of 5.49 million, the highest rate since February 2007. Sales have jumped 9.6 percent over the past 12 months, while the number of listings has risen just 0.4 percent.
Median home prices climbed 6.5 percent over the past 12 months to $236,400, the highest level reported by the Realtors not adjusted for inflation.
Home-buying has recently surged as more buyers are flooding into the real estate market. Robust hiring over the past 21 months and an economic recovery now in its sixth year have enabled more Americans to set aside money for a down payment. But the rising demand has failed to draw more sellers into the market, causing tight inventories and escalating prices that could cap sales growth.
“The recent pace can’t be sustained, but it points clearly to upside potential,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics.
A mere five months’ supply of homes was on the market in June, compared to 5.5 months a year ago and an average of six months in a healthy market.
Some markets are barely adding any listings. The condominium market in Massachusetts contains just 1.8 months’ supply, according to a Federal Reserve report this month. The majority of real estate agents in the Atlanta Fed region – which ranges from Alabama to Florida- said that inventories were flat or falling over the past year.
Some of the recent sales burst appears to come from the prospect of low mortgage rates beginning to rise as the Federal Reserve considers raising a key interest rate from its near-zero level later this year. That possibility is prompting buyers to finalize sales before higher rates make borrowing costs prohibitively expensive, noted Daren Blomquist, a vice president at RealtyTrac, a housing analytics firm.
The premiums that the Federal Housing Administration charges to insure mortgages are also lower this year, further fueling buying activity, Blomquist said.
It’s also possible that home buyers are checking the market for listings more aggressively, making it possible for them to act fast with offers despite the lack of new inventory.
“Buyers can more quickly be alerted of new listings and also more conveniently access real estate data to help them pre-search a potential purchase before they even step foot in the property,” Blomquist said. “That may mean we don’t need such a large supply of inventory to feed growing sales.”
Properties typically sold last month in 34 days, the shortest time since the Realtors began tracking the figure in May 2011. There were fewer all-cash, individual investor and distressed home sales in the market, as more traditional buyers have returned.
Sales improved in all four geographical regions: Northeast, Midwest, South and West.
Still, the limited supplies could eventually prove to be a drag on sales growth in the coming months.
Ever rising home values are stretching the budgets of first-time buyers and owners looking to upgrade. As homes become less affordable, the current demand will likely taper off.
Home prices have increased nearly four times faster than wages, as average hourly earnings have risen just 2 percent over the past 12 months to $24.95 an hour, according to the Labor Department.
Some buyers are also bristling at the few available options on the market. Tony Smith, a Charlotte, North Carolina real estate broker, said some renters shopping for homes are now choosing instead to re-sign their leases and wait until a better selection of properties comes onto the market.
New construction has yet to satisfy rising demand, as builders are increasingly focused on the growing rental market.
Approved building permits rose increased 7.4 percent to an annual rate of 1.34 million in June, the highest level since July 2007, the Commerce Department said last week. Almost all of the gains came for apartment complexes, while permits for houses last month rose only 0.9 percent.
The share of Americans owning homes has fallen this year to a seasonally adjusted 63.8 percent, the lowest level since 1989.
Real estate had until recently lagged much of the six-year rebound from the recession, hobbled by the wave of foreclosures that came after the burst housing bubble.
But the job market found new traction in early 2014. Employers added 3.1 million jobs last year and are on pace to add 2.5 million jobs this year. As millions more Americans have found work, their new paychecks are increasingly going to housing, both in terms of renting and owning.
Low mortgage rates have also helped, although rates are now starting to climb to levels that could slow buying activity.
Average 30-year fixed rates were 4.09 percent last week, according to the mortgage giant Freddie Mac. The average has risen from a 52-week low of 3.59 percent.
Southern California Home Sales Soar in June
The Southern California housing market, known for its dramatic swings, is settling into a more normal, healthy pattern.
Home sales are up. All-cash and investor purchases are down. And home prices are rising at a more sustainable pace than in the last few years.
Economists said those factors put the regional housing market on a path for growth that won’t wash away in a tsunami of foreclosures and ruined credit scores.
“The healing continues,” said Stuart Gabriel, director of UCLA’s Ziman Center for Real Estate.
On Thursday, fresh evidence of that trend emerged in a report from CoreLogic. Home sales posted a sizable 18.1% pop in June from a year earlier, while the median price rose 5.7% from June 2014 to $442,000, the real estate data firm said.
The sales increase, the largest in nearly three years, put the number of sales just 9.6% below average, CoreLogic said. A year ago, sales were nearly 24% below average.
Notably, it appears more families are entering the market as the economy improves. Although still elevated in comparison to long-term averages, the share of absentee buyers — mostly investors — slid to 21.1%, the lowest percentage since April 2010, CoreLogic said.
“This is the real recovery,” Christopher Thornberg, founding partner of Beacon Economics, said of a market where increasingly buyers actually want to live in the houses they purchase. “The last was the investor recovery.”
Sustained job growth has given more people the confidence to buy houses, CoreLogic analyst Andrew LePage said. California added a robust 54,200 jobs in May, one of the strongest showings in the last year.
The housing market improvement extends nationally, with sales of previously owned homes up in May to the highest pace in nearly six years, partly because more first-time buyers entered the market, according to data from the National Assn. of Realtors.
One factor driving deals is an expected decision from the Federal Reserve to raise its short-term interest rate later this year, real estate agents say.
In response, families rushed to lock in historically low rates this spring, agents say. CoreLogic’s sales figures represent closed deals, meaning most went into escrow during May.
Leslie Appleton-Young, chief economist for the California Association of Realtors, cautioned that the market still has too few homes for sale and that prices have risen to a point where many can’t afford a house.
Unless that changes, sales are unlikely to reach levels in line with historical norms, she said.
“I am not saying the housing market isn’t robust,” she said.
“I think housing affordability is a big issue…The biggest problem is losing millennials to places like Denver and Austin and Seattle.”
For now, deals are on the rise and people are paying more.
Sales and prices climbed in all six south land counties: Los Angeles, Orange, Riverside, San Bernardino, San Diego and Ventura. In Orange County, the median price rose 4.9% from a year earlier to $629,500.
In Los Angeles County, prices climbed 8.7% to $500,000.
NAR Releases Mid-2015 U.S. Economic and Housing Forecast
According to the National Association of Realtors (NAR), the U.S. housing market will continue its gradual pace of recovery as more home buyers enter a tight housing market for the balance of 2015, being nudged by rising mortgage rates and improving consumer confidence.
NAR’s chef economist Lawrence Yun has released the following observations for the US economy at large, and for the U.S. housing market specifically:
The U.S. Economy
- GDP growth was slightly negative in the first quarter but will pick up in the second half. For the year as whole, GDP will expand at 2.1 percent. Not bad but not great. A slow hum.
- Consumer spending will open up because of lower gasoline prices. Personal consumption expenditure grew at 2.1 percent rate in the first quarter. Look for 3 percent growth rate in the second half.
- Auto sales dropped a bit in the first quarter because of heavy snow, but will ramp up nicely in the second half.
- Spending for household furnishing and equipment has been solid, growing 6 percent in the first quarter after clocking 6 percent in the prior. Recovering housing sector is the big reason for the nice numbers.
- Spending at restaurants was flat. That is why retail vacancy rates are not notching down.
- Online shopping is up solidly. That is why industrial and warehouse vacancy rates are coming down.
- Spending for health care grew at 5 percent in the first quarter, marking two consecutive quarters of fast growth. The Affordable Care Act has expanded health care demand. The important question for the future is will the supply of new doctors and nurses expand to meet this rising demand or will it lead to medical care shortage?
- Business spending was flat in the first quarter but will surely rise because of large cash holdings and high profits.
- Spending for business equipment rose by 3 percent in the first quarter. Positive and good, but nothing to shout about.
- Spending for business structures (building of office and retail shops, for example) fell by 18 percent. The freezing first-quarter weather halted some construction. This just means pent-up construction activity in the second half.
- In the past small business start-ups spent and invested. It was not uncommon to experience double-digit growth rates for 3 years running for business equipment. Not happening now. But business spending will inevitably grow because of much improved business financial conditions of lower debt and more profits and rising GDP.
- What has been missing is the “animal spirit” of entrepreneurship. The number of small business start-ups remains surprisingly low at this phase of economic expansion.
- Residential construction spending increased 6 percent in the first quarter. Housing starts are rising and therefore this component will pick up even at a faster pace in the second half.
- Government spending fell by 1 percent. At the federal level, non-defense spending grew by 2 percent, while national defense spending fell by 1 percent. At the state and local level, spending fell by 1 percent.
- The federal government is still running a deficit. Even though it is spending more than what it takes in from tax revenue, the overall deficit level has been falling to a sustainable level. It would be ideal to run a surplus, but a falling deficit nonetheless does provide the possibility of less severe sequestration.
- U.S. government finances are ugly. Interestingly though, they are less ugly than other countries. That is why the U.S. dollar has been strengthening against most other major currencies. It’s like finding the least dirty shirt from a laundry basket.
- Imports have been rising while exports have been falling. The strong dollar makes it so. Imports grew by 7 percent while exports fell by 6 percent. The net exports (at minus $548 billion) were the worst in seven years. Fortunately, with the West Coast longshoremen back at work, the foreign trade situation will not worsen, which means it will help GDP growth.
- All in all, GDP will growth by 2.5 to 3 percent in the second half. That translates into jobs. A total of 2.5 million net new jobs are likely to be created this year.
- Unemployment insurance filings have been rising in oil-producing states of Texas and North Dakota.
- Unemployment insurance filings for the country as a whole have been falling, which implies lower level of fresh layoffs and factory closings. That assures continuing solid job growth in the second half of the year.
- We have to acknowledge that not all is fine with the labor market. The part-time jobs remain elevated and wage growth remains sluggish with only 2 percent annual growth. There are signs of tightening labor supply and the bidding up of wages. Wages are to rise by 3 percent by early next year. The total income of the country and the total number of jobs are on the rise.
The U.S. Housing Market Mid-2015 Trends
- Existing home sales in May hit the highest mark since 2009, when there had been a homebuyer tax credit … remember, buy a home and get $8,000 from Uncle Sam. This tax credit is no longer available but the improving economy is providing the necessary incentive and financial capacity to buy. Meanwhile new home sales hit a seven-year high and housing permits to build new homes hit an eight-year high. Pending contracts to buy existing homes hit a nine-year high.
- Buyers are coming back in force. One factor for the recent surge could have been due to the rising mortgage rates. As nearly always happens, the initial phase of rising rates nudges people to make decision now rather than wait later when the rates could be higher still.
- The first-time buyers are scooping up properties with 32 percent of all buyers being as such compared to only 27 percent one year ago. A lower fee on FHA mortgages is helping.
- Investors are slowly stepping out. The high home prices are making the rate of return numbers less attractive.
- Buyers are back. What about sellers? Inventory remains low by historical standards in most markets. In places like Denver and Seattle, where a very strong job growth is the norm, the inventory condition is just unreal – less than one month supply.
- The principal reason for the inventory shortage is the cumulative impact of homebuilders not being in the market for well over five years. Homebuilders typically put up 1.5 million new homes annually. Here’s what they did from 2009 to 2014:
- 1.0 million
- Where is 1.5 million? Maybe by 2017.
- Building activity for apartments has largely come back to normal. The cumulative shortage is on the ownership side.
- Builders will construct more homes. By 1.1 million in 2015 and 1.4 million in 2016. New home sales will follow this trend. This rising trend will steadily relieve housing shortage.
- There is no massive shadow inventory that can disrupt the market. The number of distressed home sales has been steadily falling – now accounting for only 10 percent of all transactions. It will fall further in the upcoming months. There is simply far fewer mortgages in the serious delinquent stage (of not being current for 3 or more months). In fact, if one specializes in foreclosure or short sales, it is time to change the business model.
- In the meantime, there is still a housing shortage. The consequence is a stronger than normal home price growth. Home price gains are beating wage-income growths by at least three or four times in most markets. Few things in the world could be more frustrating and demoralizing than for renters to start a savings program but only to witness home prices and down payment requirements blowing past them by.
- Housing affordability is falling. Home prices rising too fast is one reason. The other reason is due to rising mortgage rates. Cash-buys have been coming down so rates will count for more in the future.
- The Federal Reserve will be raising short-term rates soon. September is a maybe, but it’s more likely to be in October. The Fed will also signal the continual raising of rates over the next two years. This sentiment has already pushed up mortgage rates. They are bound to rise further, particularly if inflation surprises on the upside.
- Inflation is likely to surprise on the upside. The influence of low gasoline prices in bringing down the overall consumer price inflation to essentially zero in recent months will be short-lasting. By November, the influence of low gasoline prices will no longer be there because it was in November of last year when the oil prices began their plunge. That is, by November, the year-over-year change in gasoline price will be neutral (and no longer big negative). Other items will then make their mark on inflation. Watch the rents. It’s already rising at near 8-year high with a 3.5 percent growth rate. The overall CPI inflation could cross the red line of above 3 percent by early next year. The bond market will not like it and the yields on all long-term borrowing will rise.
- Mortgage rates at 4.3% to 4.5% by the year end and easily surpassing 5% by the year end of 2016.
- The rising mortgage rates initially rush buyers to decide but a sustained rise will choke off as to who can qualify for a mortgage. Fortunately, there are few compensating factors to rising rates.
- Credit scores are not properly aligned with expected default rate. New scoring methodology is being tested and will be implemented. In short, credit scores will get boosted for many individuals after the new change.
- FHA mortgage premium has come down a notch thereby saving money for consumers. By the end of the year, FHA program will show healthier finances. That means, there could be additional reduction to premiums in 2016. Not certain, but plausible.
- Fannie and Freddie are owned by the taxpayers. And they are raking-in huge profits as mortgages have not been defaulting over the past several years. The very high profit is partly reflecting too-tight credit with no risk taking. There is a possibility to back a greater number of lower down payment mortgages to credit worthy borrowers without taking on much risk. In short, mortgage approvals should modestly improve next year.
- Portfolio lending and private mortgage-backed securities are slowly reviving. Why not? Mortgages are not defaulting and there is fat cash reserves held by financial institutions. Less conventional mortgages will therefore be more widely available.
- Improving credit available at a time of likely rising interest rates is highly welcome. Many would-be first-time buyers have been more focused about getting a mortgage (even at a higher rate) than with low rates.
- All in all, existing and new home sales will be rising. Combined, there will be 5.8 million home sales in 2015, up 7 percent from last year. Note the sales total will still be 25 percent below the decade ago level during the bubble year. Home prices will be rising at 7 percent. For the industry, the business revenue will be rising by 14 percent in 2015. The revenue growth in 2016 will be additional 7 to 10 percent.
Not Buying a Home Could Cost You $65,000 a Year
Renters are missing out on savings in most metros
Not buying a home right now will cost you, because home prices and interest rates are going to rise. Many renters would like to own, but they can’t afford down payments or don’t qualify for mortgages. Those two conclusions, drawn from separate reports released this week, sum up the housing market dilemma for many young professionals: Buyers get more for their money than renters—but most renters can’t afford to enter the home buying market.
The chart below comes from data published today by realtor.com that estimates the financial benefits of buying a home based on projected increases in mortgage rates and home prices in local housing markets. Specifically, it shows the amount that buyers gain, over a 30-year period, over renters in the country’s largest metropolitan areas.
The penalties for waiting to buy tend to be greater in smaller metro areas, especially in California. For example, the estimated cost of waiting one year was $61,805 in San Jose and $65,780 in Santa Cruz. Over the course of 30 years, homeowners save more than $1 million in Santa Cruz, the largest amount of any U.S. city.
To compile those numbers, realtor.com compared median home prices and the cost of renting a three-bedroom home in 382 local markets, then factored in estimates for transaction costs, price appreciation, future mortgage rates, and interest earned on any money renters saved when it was cheaper to rent.
In other words, researchers went to a lot of trouble to quantify something that renters intuitively know: They would probably be better off if they could come up with the money to buy. Eighty-one percent of renters said they would prefer to own but can’t afford it, according to a new report on Americans’ economic well-being published by the Federal Reserve.
Not all markets favor buyers over renters. In Dallas, the benefit of buying was about $800 over 30 years, according to realtor.com’s model, which expects price appreciation to regress to historical norms. In many popular markets, though, there are greater benefits to owning.
“It shouldn’t be a surprise that the places where you can have the highest reward over time also have the highest prices,” said Jonathan Smoke, chief economist for realtor.com. “It’s not true that if you’re a median-income household, that you can’t find a home that’s affordable, but in places like San Jose and Santa Cruz, less than 10 percent of inventory would be affordable.”
Or as Logan Mohtashami, a senior loan officer at AMC Lending Group in Irvine, Calif., told Bloomberg Radio this week: “The rich have no problem buying homes.”
Junk-Rated Oil & Gas Companies in a “Liquidity Death Spiral”
On the face of it, the oil price appears to be stabilizing. What a precarious balance it is, however.
Behind the facade of stability, the re-balancing triggered by the price collapse has yet to run its course, and it might be overly optimistic to expect it to proceed smoothly. Steep drops in the US rig count have been a key driver of the price rebound. Yet US supply so far shows precious little sign of slowing down. Quite to the contrary, it continues to defy expectations.
So said the International Energy Agency in its Oil Market Report on Friday. West Texas Intermediate plunged over 4% to $45 a barrel.
The boom in US oil production will continue “to defy expectations” and wreak havoc on the price of oil until the power behind the boom dries up: money borrowed from yield-chasing investors driven to near insanity by the Fed’s interest rate repression. But that money isn’t drying up yet – except at the margins.
Companies have raked in 14% more money from high-grade bond sales so far this year than over the same period in 2014, according to LCD. And in 2014 at this time, they were 27% ahead of the same period in 2013. You get the idea.
Even energy companies got to top off their money reservoirs. Among high-grade issuers over just the last few days were BP Capital, Valero Energy, Sempra Energy, Noble, and Helmerich & Payne. They’re all furiously bringing in liquidity before it gets more expensive.
In the junk-bond market, bond-fund managers are chasing yield with gusto. Last week alone, pro-forma junk bond issuance “ballooned to $16.48 billion, the largest weekly tally in two years,” the LCD HY Weekly reported. Year-to-date, $79.2 billion in junk bonds have been sold, 36% more than in the same period last year.
But despite this drunken investor enthusiasm, the bottom of the energy sector – junk-rated smaller companies – is falling out.
Standard & Poor’s rates 170 bond issuers that are engaged in oil and gas exploration & production, oil field services, and contract drilling. Of them, 81% are junk rated – many of them deep junk. The oil bust is now picking off the smaller junk-rated companies, one after the other, three of them so far in March.
On March 3, offshore oil-and-gas contractor CalDive that in 2013 still had 1,550 employees filed for bankruptcy. It’s focused on maintaining offshore production platforms. But some projects were suspended last year, and lenders shut off the spigot.
On March 8, Dune Energy filed for bankruptcy in Austin, TX, after its merger with Eos Petro collapsed. It listed $144 million in debt. Dune said that it received $10 million Debtor in Possession financing, on the condition that the company puts itself up for auction.
On March 9, BPZ Resources traipsed to the courthouse in Houston to file for bankruptcy, four days after I’d written about its travails; it had skipped a $60 million payment to its bondholders [read… “Default Monday”: Oil & Gas Companies Face Their Creditors].
And more companies are “in the pipeline to be restructured,” LCD reported. They all face the same issues: low oil and gas prices, newly skittish bond investors, and banks that have their eyes riveted on the revolving lines of credit with which these companies fund their capital expenditures. Being forever cash-flow negative, these companies periodically issue bonds and use the proceeds to pay down their revolver when it approaches the limit. In many cases, the bank uses the value of the company’s oil and gas reserves to determine that limit.
If the prices of oil and gas are high, those reserves have a high value. It those prices plunge, the borrowing base for their revolving lines of credit plunges. S&P Capital IQ explained it this way in its report, “Waiting for the Spring… Will it Recoil”:
Typically, banks do their credit facility redeterminations in April and November with one random redetermination if needed. With oil prices plummeting, we expect banks to lower their price decks, which will then lead to lower reserves and thus, reduced borrowing-base availability.
April is coming up soon. These companies would then have to issue bonds to pay down their credit lines. But with bond fund managers losing their appetite for junk-rated oil & gas bonds, and with shares nearly worthless, these companies are blocked from the capital markets and can neither pay back the banks nor fund their cash-flow negative operations. For many companies, according to S&P Capital IQ, these redeterminations of their credit facilities could lead to a “liquidity death spiral.”
Alan Holtz, Managing Director in AlixPartners’ Turnaround and Restructuring group told LCD in an interview:
We are already starting to see companies that on the one hand are trying to work out their operational problems and are looking for financing or a way out through the capital markets, while on the other hand are preparing for the events of contingency planning or bankruptcy.
Look at BPZ Resources. It wasn’t able to raise more money and ended up filing for bankruptcy. “I think that is going to be a pattern for many other companies out there as well,” Holtz said.
When it trickled out on Tuesday that Hercules Offshore, which I last wrote about on March 3, had retained Lazard to explore options for its capital structure, its bonds plunged as low as 28 cents on the dollar. By Friday, its stock closed at $0.41 a share.
When Midstates Petroleum announced that it had hired an interim CEO and put a restructuring specialist on its board of directors, its bonds got knocked down, and its shares plummeted 33% during the week, closing at $0.77 a share on Friday.
When news emerged that Walter Energy hired legal counsel Paul Weiss to explore restructuring options, its first-lien notes – whose investors thought they’d see a reasonable recovery in case of bankruptcy – dropped to 64.5 cents on the dollar by Thursday. Its stock plunged 63% during the week to close at $0.33 a share on Friday.
Numerous other oil and gas companies are heading down that path as the oil bust is working its way from smaller more vulnerable companies to larger ones. In the process, stockholders get wiped out. Bondholders get to fight with other creditors over the scraps. But restructuring firms are licking their chops, after a Fed-induced dry spell that had lasted for years.
Investors Crushed as US Natural Gas Drillers Blow Up
The Fed speaks, the dollar crashes. The dollar was ripe. The entire world had been bullish on it. Down nearly 3% against the euro, before recovering some. The biggest drop since March 2009. Everything else jumped. Stocks, Treasuries, gold, even oil.
West Texas Intermediate had been experiencing its biggest weekly plunge since January, trading at just above $42 a barrel, a new low in the current oil bust. When the Fed released its magic words, WTI soared to $45.34 a barrel before re-sagging some. Even natural gas rose 1.8%. Energy related bonds had been drowning in red ink; they too rose when oil roared higher. It was one heck of a party.
But it was too late for some players mired in the oil and gas bust where the series of Chapter 11 bankruptcy filings continues. Next in line was Quicksilver Resources.
It had focused on producing natural gas. Natural gas was where the fracking boom got started. Fracking has a special characteristic. After a well is fracked, it produces a terrific surge of hydrocarbons during first few months, and particularly on the first day. Many drillers used the first-day production numbers, which some of them enhanced in various ways, in their investor materials. Investors drooled and threw more money at these companies that then drilled this money into the ground.
But the impressive initial production soon declines sharply. Two years later, only a fraction is coming out of the ground. So these companies had to drill more just to cover up the decline rates, and in order to drill more, they needed to borrow more money, and it triggered a junk-rated energy boom on Wall Street.
At the time, the price of natural gas was soaring. It hit $13 per million Btu at the Henry Hub in June 2008. About 1,600 rigs were drilling for gas. It was the game in town. And Wall Street firms were greasing it with other people’s money. Production soared. And the US became the largest gas producer in the world.
But then the price began to plunge. It recovered a little after the Financial Crisis but re-plunged during the gas “glut.” By April 2012, natural gas had crashed 85% from June 2008, to $1.92/mmBtu. With the exception of a few short periods, it has remained below $4/mmBtu – trading at $2.91/mmBtu today.
Throughout, gas drillers had to go back to Wall Street to borrow more money to feed the fracking orgy. They were cash-flow negative. They lost money on wells that produced mostly dry gas. Yet they kept up the charade. They aced investor presentations with fancy charts. They raved about new technologies that were performing miracles and bringing down costs. The theme was that they would make their investors rich at these gas prices.
The saving grace was that oil and natural-gas liquids, which were selling for much higher prices, also occur in many shale plays along with dry gas. So drillers began to emphasize that they were drilling for liquids, not dry gas, and they tried to switch production to liquids-rich plays. In that vein, Quicksilver ventured into the oil-rich Permian Basin in Texas. But it was too little, too late for the amount of borrowed money it had already burned through over the years by fracking for gas below cost.
During the terrible years of 2011 and 2012, drillers began reclassifying gas rigs as rigs drilling for oil. It was a judgement call, since most wells produce both. The gas rig count plummeted further, and the oil rig count skyrocketed by about the same amount. But gas production has continued to rise since, even as the gas rig count has continued to drop. On Friday, the rig count was down to 257 gas rigs, the lowest since March 1993, down 84% from its peak in 2008.
Quicksilver’s bankruptcy is a consequence of this fracking environment. It listed $2.35 billion in debts. That’s what is left from its borrowing binge that covered its negative cash flows. It listed only $1.21 billion in assets. The rest has gone up in smoke.
Its shares are worthless. Stockholders got wiped out. Creditors get to fight over the scraps.
Its leveraged loan was holding up better: the $625 million covenant-lite second-lien term loan traded at 56 cents on the dollar this morning, according to S&P Capital IQ LCD. But its junk bonds have gotten eviscerated over time. Its 9.125% senior notes due 2019 traded at 17.6 cents on the dollar; its 7.125% subordinated notes due 2016 traded at around 2 cents on the dollar.
Among its creditors, according to the Star Telegram: the Wilmington Trust National Association ($361.6 million), Delaware Trust Co. ($332.6 million), US Bank National Association ($312.7 million), and several pipeline companies, including Oasis Pipeline and Energy Transfer Fuel.
Last year, it hired restructuring advisers. On February 17, it announced that it would not make a $13.6 million interest payment on its senior notes and invoked the possibility of filing for Chapter 11. It said it would use its 30-day grace period to haggle with its creditors over the “company’s options.”
Now, those 30 days are up. But there were no other “viable options,” the company said in the statement. Its Canadian subsidiary was not included in the bankruptcy filing; it reached a forbearance agreement with its first lien secured lenders and has some breathing room until June 16.
Quicksilver isn’t alone in its travails. Samson Resources and other natural gas drillers are stuck neck-deep in the same frack mud.
A group of private equity firms, led by KKR, had acquired Samson in 2011 for $7.2 billion. Since then, Samson has lost $3 billion. It too hired restructuring advisers to deal with its $3.75 billion in debt. On March 2, Moody’s downgraded Samson to Caa3, pointing at “chronically low natural gas prices,” “suddenly weaker crude oil prices,” the “stressed liquidity position,” and delays in asset sales. It invoked the possibility of “a debt restructuring” and “a high risk of default.”
But maybe not just yet. The New York Post reported today that, according to sources, a JPMorgan-led group, which holds a $1 billion revolving line of credit, is granting Samson a waiver for an expected covenant breach. This would avert default for the moment. Under the deal, the group will reduce the size of the revolver. Last year, the same JPMorgan-led group already reduced the credit line from $1.8 billion to $1 billion and waived a covenant breach.
By curtailing access to funding, they’re driving Samson deeper into what S&P Capital IQ called the “liquidity death spiral.” According to the New York Post’s sources, in August the company has to make an interest payment to its more junior creditors, “and may run out of money later this year.”
Industry soothsayers claimed vociferously over the years that natural gas drillers can make money at these prices due to new technologies and efficiencies. They said this to attract more money. But Quicksilver along with Samson Resources and others are proof that these drillers had been drilling below the cost of production for years. And they’d been bleeding every step along the way. A business model that lasts only as long as new investors are willing to bail out old investors.
But it was the crash in the price of “liquids” that made investors finally squeamish, and they began to look beyond the hype. In doing so, they’re triggering the very bloodletting amongst each other that ever more new money had delayed for years. Only now, it’s a lot more expensive for them than it would have been three years ago. While the companies will get through it in restructured form, investors get crushed.
Airbnb And Other Short-Term Rentals Worsen Housing Shortage, Critics Say
The last time he advertised one of his apartments, longtime Los Feliz landlord Andre LaFlamme got a request he’d never seen before.
A man wanted to rent LaFlamme’s 245-square-foot bachelor unit with hardwood floors for $875 a month, then list it himself on Airbnb.
“Thanks but no thanks,” LaFlamme told the prospective tenant. “You’ve got to be kidding me.”
But he understood why: More money might be made renting to tourists a few days at a time than to a local for 12 months or more.
As short-term rental websites such as Airbnb explode in popularity in Southern California, a growing number of homeowners and landlords are caving to the economics. A study released Wednesday from Los Angeles Alliance for a New Economy, a labor-backed advocacy group, estimates that more than 7,000 houses and apartments have been taken off the rental market in metro Los Angeles for use as short-term rentals. In parts of tourist-friendly neighborhoods such as Venice and Hollywood, Airbnb listings account for 4% or more of all housing units, according to a Times analysis of data from Airbnb’s website.
That’s worsening a housing shortage that already makes Los Angeles one of the least affordable places to rent in the country.
“In places where vacancy is already limited and rents are already squeezing people out, this is exacerbating the problem,” said Roy Samaan, a policy analyst who wrote the alliance’s report. “There aren’t 1,000 units to give in Venice or Hollywood.”
Fast-growing Airbnb and others like it say they help cash-strapped Angelenos earn a little extra money. Airbnb estimates that 82% of its 4,500 L.A. hosts are “primary residents” of the homes they list, and that nearly half use the proceeds to help pay their rent or mortgage. And the effect on the broader housing market is so small that it’s all but irrelevant, said Tom Davidoff, a housing economist at the University of British Columbia whom Airbnb hired to study its impact.
“Over the lifetime of a lease, rents maybe go up 1.5%,” he said. “That’s peanuts relative to the increases we’ve seen in housing costs in a lot of places.”
But there are growing signs of professionalization of the short-term rental world, from property-manager middlemen like the one who e-mailed LaFlamme to Airbnb “hosts” who list dozens of properties on the site. The Los Angeles Alliance study estimates that 35% of Airbnb revenue in Southern California comes from people who list more than one unit.
“I don’t think anyone would begrudge someone renting out a spare bedroom,” Samaan said. “But there’s a whole cottage industry that’s springing up around this.”
City Council member Mike Bonin, whose coastal district includes Venice, and Council President Herb Wesson want to study how these rentals have affected the city. No regulations have been drafted, and Bonin said the council would seek extensive community input. Current rules bar short-term rentals in many residential areas of the city, but critics say they’re rarely enforced.
As city officials craft new ones, they’ll certainly be hearing from Airbnb and its allies. Last year, the company spent more than $100,000 lobbying City Hall and released a study touting its economic impact in L.A. — more than $200 million in spending by guests, supporting an estimated 2,600 jobs. A group representing short-term rental hosts has made the rounds of City Council offices as well.
This industry “needs to be regulated and regulated the right way,” said Sebastian de Kleer, co-founder of the Los Angeles Short Term Rental Alliance and owner of a Venice-based vacation rental company. “For a lot of people, this is a very new issue.”
Neighborhood groups are sure to weigh in too, especially in Venice.
The beach neighborhood has the highest concentration of Airbnb listings in all of metro Los Angeles. Data collected by Beyond Pricing, a San Francisco-based start-up that helps short-term rental hosts optimize pricing, show that in census tracts along Venice Beach and Abbott-Kinney Boulevard, Airbnb listings accounted for 6% to 7% of all housing units — about 10 times the countywide average.
A letter last fall from the Venice Neighborhood Council to city officials estimated that the number of short-term rental listings in the area had tripled in a year, citing a “Gold Rush mentality” among investors looking for a piece of the action. That’s hurting local renters, said Steve Clare, executive director of Venice Community Housing.
“Short-term rentals are really taking over a significant portion of the rental housing market in our community,” Clare said. “It’s going to further escalate rents, and take affordable housing out of Venice.”
Along the Venice boardwalk, a number of apartment buildings now advertise short-term rentals, and houses on the city’s famed “walk streets” routinely show up in searches on Airbnb. Even several blocks inland, at Lincoln Place Apartments — a 696-unit, newly renovated complex that includes a pool, gym and other tourist-friendly amenities — Roman Barrett recently counted more than 40 listings on Airbnb and other sites. Barrett, who moved out over the issue, said Airbnb effectively drives up the rent. He paid $2,700 a month for a one-bedroom; now he’s looking farther east for something he can afford.
“It’s making places like Santa Monica and Venice totally priced out. Silver Lake is impossible. I’m looking in Koreatown right now,” Barrett said. “They need to make a law about this.”
A new law of some sort is the goal at City Hall. New York, San Francisco and Portland, Ore., have crafted regulations to govern taxes, zoning and length of stay in short-term rentals, and Airbnb says it’s glad to help in that process here.
“It’s time for all of us to work together on some sensible solutions that let people share the home in which they live and contribute to their community,” spokesman Christopher Nulty said in a statement Tuesday.
Will Youngblood, the man who e-mailed LaFlamme about managing his apartment in Los Feliz, says he’d also appreciate clearer rules and an easier way to pay occupancy taxes.
Youngblood runs five Airbnb apartments, mostly in Hollywood. A former celebrity assistant, he’s been doing this for two years; it’s a full-time job. Most of Youngblood’s clients own their homes but travel a lot or live elsewhere. One, he rents and lists full time. He’s been looking around for another.
“I’m honest about what I do,” he said. “Some [landlords] are like, ‘That’s insane. No way.’ Other people say, ‘We’d love that.'”
If the city decides it doesn’t like what he’s doing, Youngblood said, he’ll go do something else. But for now, he said, it’s a good way to make some cash and meet interesting people.
But he won’t meet LaFlamme. The longtime landlord concedes he “might be old-fashioned,” but he just doesn’t like the idea of strangers traipsing through his apartments. He prefers good, long-term tenants, and in L.A.’s red-hot rental market he has no problem finding them.
“I almost find it painful to rent things these days,” he said. “There’s so much demand and so many people who are qualified and nice people who I have to turn away.”
For that apartment in Los Feliz, LaFlamme said, he found a tenant in less than 24 hours.
25 Percent of all U.S. Foreclosures Are Zombie Homes
RealtyTrac’s Q1 2015 Zombie Foreclosure Report, found that as of the end of January 2015, 142,462 homes actively in the foreclosure process had been vacated by the homeowners prior to the bank repossessing the property, representing 25 percent of all active foreclosures.
The total number of zombie foreclosures was down 6 percent from a year ago, but the 25 percent share of total foreclosures represented by zombies was up from 21 percent a year ago.
“While the number of vacated zombie foreclosures is down from a year ago, they represent an increasing share of all foreclosures because they tend to be the problem cases still stuck in the pipeline,” said Daren Blomquist vice president at RealtyTrac. “Additionally, the states where overall foreclosure activity has been increasing over the past year — counter to the national trend — tend to be states with a longer foreclosure process more susceptible to the zombie problem.”
“In states with a bloated foreclosure process, the increase in zombie foreclosures is actually a good sign that banks and courts are finally moving forward with a resolution on these properties that may have been sitting in foreclosure limbo for years,” Blomquist continued. “In many markets there is plenty of demand from buyers and investors to snatch up these distressed properties as soon as they become available to purchase.”
Florida, New Jersey, New York have most zombie foreclosures
Despite a 35 percent decrease in zombie foreclosures compared to a year ago, Florida had the highest number of any state with 35,903 — down from 54,908 in the first quarter of 2014. Zombie foreclosures accounted for 26 percent of all foreclosures in Florida.
Zombie foreclosures increased 109 percent from a year ago in New Jersey, and the state posted the second highest total of any state with 17,983 — 23 percent of all properties in foreclosure.
New York zombie foreclosures increased 54 percent from a year ago to 16,777, the third highest state total and representing 19 percent of all residential properties in foreclosure.
Illinois had 9,358 zombie foreclosures at the end of January, down 40 percent from a year ago but still the fourth highest state total, while California had 7,370 zombie foreclosures at the end of January, up 24 percent from a year ago and the fifth highest state total.
“We are now in the final cycle of the foreclosure crisis cleanup, in which we are witnessing a large final wave of walkaways,” said Mark Hughes, Chief Operating Officer at First Team Real Estate, covering the Southern California market. “This has created an uptick in vacated or ‘zombie’ foreclosures and the intrinsic neighborhood issues most of them create.
“A much longer recovery, a largely veiled underemployment issue, and growing examples of faster bad debt forgiveness have most likely fueled this last wave of owners who have finally just walked away from their American dream,” Hughes added.
Other states among the top 10 for most zombie foreclosures were Ohio (7,360), Indiana (5,217), Pennsylvania (4,937), Maryland (3,363) and North Carolina (3,177).
“Rising home prices in Ohio are motivating lending servicers to commence foreclosure actions more quickly and with fewer workout options offered to delinquent homeowners, creating immediate vacancies earlier in the foreclosure process,” said Michael Mahon, executive vice president at HER Realtors, covering the Ohio housing markets of Cincinnati, Dayton and Columbus. “Delinquent homeowners need to understand how prices have increased in recent months, and how this increase in equity may provide positive options for them to avoid foreclosure.”
Metros with most zombie foreclosures: New York, Miami, Chicago, Tampa and Philadelphia. The greater New York metro area had by far the highest number of zombie foreclosures of any metropolitan statistical area nationwide, with 19,177 — 17 percent of all properties in foreclosure and up 73 percent from a year ago.
Zombie foreclosures decreased from a year ago in Miami, Chicago and Tampa, but the three metros still posted the second, third and fourth highest number of zombie foreclosures among metro areas nationwide: Miami had 9,580 zombie foreclosures,19 percent of all foreclosures but down 34 percent from a year ago; Chicago had 8,384 zombie foreclosures, 21 percent of all foreclosures but down 35 percent from a year ago; and Tampa had 7,838 zombie foreclosures, 34 percent of all foreclosures but down 25 percent from a year ago.
Zombie foreclosures increased 53 percent from a year ago in the Philadelphia metro area, giving it the fifth highest number of any metro nationwide in the first quarter of 2015. There were 7,554 zombie foreclosures in the Philadelphia metro area as of the end of January, 27 percent of all foreclosures.
Other metro areas among the top 10 for most zombie foreclosures were Orlando (3,718), Jacksonville, Florida (2,368), Los Angeles (2,074), Las Vegas (1,832), and Baltimore, Maryland (1,722).
Metros with highest share of zombie foreclosures: St. Louis, Portland, Las Vegas
Among metro areas with a population of 200,000 or more and at least 500 zombie foreclosures as of the end of January, those with the highest share of zombie foreclosures as a percentage of all foreclosures were St. Louis (51 percent), Portland (40 percent) and Las Vegas (36 percent).
Metros with biggest increase in zombie foreclosures: Atlantic City, Trenton, New York
Among metro areas with a population of 200,000 or more and at least 500 zombie foreclosures as of the end of January, those with the biggest year-over-year increase in zombie foreclosures were Atlantic City, New Jersey (up 133 percent), Trenton-Ewing, New Jersey (up 110 percent), and New York (up 73 percent).
Dreaming Big: Americans Still Yearning for Larger Homes
43% of adults would prefer homes bigger than where they currently live, but attitudes differ by age. Baby boomers would prefer to upsize rather than downsize by only a small margin, while the gap among millennials is much wider, with GenXers falling in between. Would-be downsizers outnumber upsizers only among households living in the largest homes.
Last year, we found that Baby Boomers were especially unlikely to live in multi-unit housing. At the same time, we noted that the share of seniors living in multi-unit housing rather than single-family homes has been shrinking for decades. These findings got us thinking about how the generations vary in house-size preference. So we surveyed over 2000 people at the end of last year to figure out if boomers have different house-size preferences than their younger counterparts. And that led us to ask: What size homes do Americans really want?
Most Americans are not living in the size home they want
As a whole, Americans are living in a world of mismatch – only 40% of our respondents said they are living in the size home that’s ideal. Furthermore, over 43% answered that the size of their ideal residence is somewhat or much larger than their current digs. Only 16% told us that their ideal residence is smaller than their existing home. However, these overall figures mask what is going on within different generations.
It’s natural to think that baby boomers are the generation most likely to downsize. After all, their nests are emptying and they may move when they retire. As it turns out though, more boomers would prefer to live in a larger home than a smaller one: 21% said their ideal residence is smaller than their current home, while 26% wanted a larger home – a 5-percentage-point difference. Clearly, boomers don’t feel a massive yearn to downsize. On the contrary, just over half (53%) said they’re already living in their ideally sized home. Nonetheless, members of this generation are more likely to want to downsize than millennials and GenXers.
In fact, those younger generations want some elbow room. First, the millennials. They’re looking to move on up by a big margin: just over 60% told us their ideal residence is larger than where they live now – the largest proportion among the generations in our sample. By contrast, only a little over 13% of millennials said they’d rather have a smaller home than their existing one – which is also the smallest among the generations in our sample. The results are clear: millennials are much more likely to want to upsize than downsize.
The next generation up the ladder, the GenXers, are hitting their peak earning years and many in this group may be in a position to trade up. Many aren’t living in their ideally sized home. Just 38% said where they live now is dream sized. Nearly a majority (48%) said their dream home is larger, while only 14% of GenXers would rather have a smaller home. This is the generation that bore the brunt of the foreclosure crisis. So, some of this mismatch could be because a significant number of GenXers lost homes during the housing bust and may now be living in smaller-than-desired quarters. But a much more probable reason is that many GenXers are in their peak child-rearing years. With kids bouncing off the walls, the place may be feeling a tad crowded.
Even the groups that seem ripe for downsizing don’t want smaller homes
Of course, age doesn’t tell the whole story about why people might want to downsize. It could be that certain kinds of households, – such as those without children, and living in the suburbs or in affordable areas – might be more likely to live in larger homes than they need. But our survey shows that households in these categories are about twice as likely to want a larger than a smaller home. For those with kids especially, the desire to upsize is strong: 39% preferred a larger home versus 18% who liked a smaller home. For those living in the suburbs, the disparity is even greater – 42% to 16%. And even among those living in the most affordable zip codes, where ideally-sized homes might be within the budgets of households, 40% of our respondents preferred larger homes versus 20% who said smaller.
Are all households more likely to upsize than downsize?
At this point you might be asking, “Are there any types of households that want to downsize?” The answer is yes. But only one kind of household falls into this category – those living in homes larger than 3,200 square feet. Of this group, 26% wanted to downsize versus 25% that wanted to upsize – a slight difference. But, when we looked overall at survey responses based on the size of current residence, households wanting a larger home kicked up as current home size went down. We can see this clearly when we divide households into six groups based on the size of the home they’re living in now. Among households living in 2,600-3,200 square foot homes, 37% prefer a larger home versus 16% a smaller home; in 2,000–2,600 square foot homes, its 34% to 18%; 38% to 18% in 1,400–2,000 square foot homes; 55% to 13% in 800–1,400 square foot homes; and 66% to 13% in homes less than 800 square feet. This makes intuitive sense. Those living in the biggest homes are most likely to have gotten a home larger than their ideal size. And those in the smallest homes are probably the ones feeling most squeezed.
The responses to our survey show significantly more demand for larger homes than for smaller ones. But the reality, of course, is that households must make tradeoffs between things like accessibility, amenities, and affordability when choosing what size homes to get. The “ideal” sized home for most Americans may be larger than where they’re living now. But that spacious dream home may not be practical. As result, the mismatch between what Americans say they want and what best suits their circumstances may persist.
Texas Home Buyers Are Better Off Than National Average
Home buyers in Texas are older, more likely to be married and make more money than the national averages, according to the March 2015 Texas Home buyers and Sellers Report from the Texas Association of Realtors.
The study shows that between July 2013 and June 2014 median household income for Texas home buyers increased 5.9 percent year-over-year compared with a national increase of only 1.4 percent. However, the percentage of first-time home buyers in Texas fell 4 points to 29 percent, compared to a 5 percent decline nationally to 33 percent.
Home buyers in Texas are also two years older compared to the previous period, edging up to 45 years of age, and 72 percent of home buyers are married, compared to 65 percent nationally.
Texans are also buying larger and newer homes than other buyers across the U.S. In Texas, the typical three-bedroom, two-bathroom home had 2,100 square feet and was built in 2002, compared to the typical national home built in 1993 with 1,870 square feet.
Forty-seven percent of first-time home buyers in Texas said that finding the right property was the most difficult step in buying a home, as did 48 percent of repeat home buyers.
For Texans selling homes, 21 percent said that the reason for selling was because of job relocation, followed by 16 percent who said that their home was too small. The median household income for a Texas home seller was $120,800, compared with a national media income of $96,700 among home sellers.
Texas home buyers (overall): July 2013 – June 2014
- Median household income: +5.9% to $97,500
- Percent of homes bought that were new: 28% (-1% from July 2012 – June
- Percentage of first-time home buyers: 29% (-4% from July 2012 – June
- Age of typical home buyer: 45 years old (+2 years from July 2012 – June 2013)
- Average age of first-time home buyer: 32 years old (+1 year from July
- 2012 – June 2013)
- Average age of repeat home buyer: 50 years old (unchanged from July 2012 – June 2013)
- Median household income for first-time home buyers: +5.8% to $72,000 (compared to July 2012 – June 2013)
- Median household income for repeat home buyers: -8.9% to $97,500 (compared to July 2012 – June 2013)
- Percent of married home buyers: 72% (+1% from July 2012 – June 2013)
- New homes purchased: 28% (-2% from July 2012 – June 2013)
- Median household income for home sellers: $120,800
- Age of average home seller: 49 years
National home buyers (overall): June 2013 – July 2014
- Median household income: +1.4% to $84,500
- Percent of homes bought that were new: 16% (constant from July 2012 – June 2013)
- Percentage of first-time home buyers: 33% (-5% from July 2012 – June 2013)
- Age of typical home buyer: 44 years old (+2 years from July 2012 – June
- Average age of first-time home buyer: 31 years old (unchanged from July
- 2012 – June 2013)
- Average age of repeat home buyer: 53 years old (+1 year from July 2012 – June 2013)
- Median household income for first-time home buyers: +2.3% to $68,300 (compared to July 2012 – June 2013)
- Median household income for repeat home buyers: -1% to $95,000 (compared to July 2012 – June 2013)
- Percent of married home buyers: 65% (-1% from July 2012 – June 2013)
- New homes purchased: 16% (unchanged from July 2012 – June 2013)
- Median household income for home sellers: $96,700
- Age of average home seller: 54 years
Housing Industry Frets About the Next Brick to Drop
Stephen Schwarzman, CEO and co-founder of Blackstone Group, the world’s largest private-equity firm with $290 billion in assets under management, made $690 million for 2014 via a mix of dividends, compensation, and fund payouts, according to a regulatory filing. A 50% raise from last year.
The PE firm’s subsidiary Invitation Homes, doped with nearly free money the Fed’s policies have made available to Wall Street, has become America’s number one mega-landlord in the span of three years by buying up 46,000 vacant single-family homes in 14 metro areas, initially at a rate of $100 million per week, now reduced to $35 million per week.
As of September 30, Invitation Homes had $8.7 billion worth of homes on its balance sheet, followed by American Homes 4 Rent ($5.5 billion), Colony Financial ($3.4 billion), and Waypoint ($2.6 billion). Those are the top four. Countless smaller investors also jumped into the fray. Together they scooped up several hundred thousand single-family houses.
A “bet on America,” is what Schwarzman called the splurge two years ago.
The bet was to buy vacant homes out of foreclosure, outbidding potential homeowners who’d actually live in them, but who were hobbled by their need for mortgages in cash-only auctions. The PE firms were initially focused only on a handful of cities. Each wave of these concentrated purchases ratcheted up the prices of all other homes through the multiplier effect.
Homeowners at the time loved it as the price of their home re-soared. The effect rippled across the country and added about $7 trillion to homeowners’ wealth since 2011, doubling equity to $14 trillion.
But it pulled the rug out from under first-time buyers. Now, only the ludicrously low Fed-engineered interest rates allow regular people – the lucky ones – to buy a home at all. The rest are renting, in a world where rents are ballooning and wages are stagnating.
Thanks to the ratchet effect, whereby each PE firm helped drive up prices for the others, the top four landlords booked a 23% gain on equity so far, with Invitation Homes alone showing $523 million in gains, according to RealtyTrac. The “bet on America” has been an awesome ride.
But now what? PE firms need to exit their investments. It’s their business model. With home prices in certain markets exceeding the crazy bubble prices of 2006, it’s a great time to cash out. RealtyTrac VP Daren Blomquist told American Banker that small batches of investor-owned properties have already started to show up in the listings, and some investors might be preparing for larger liquidations.
“It is a very big concern for real estate professionals,” he said. “They are asking what the impact will be if investors liquidate directly onto the market.”
But larger firms might not dump these houses on the market unless they have to. American Banker reported that Blackstone will likely cash out of Invitation Homes by spinning it off to the public, according to “bankers close to the Industry.”
After less than two years in this business, Ellington Management Group exited by selling its portfolio of 900 houses to American Homes 4 Rent for a 26% premium over cost, after giving up on its earlier idea of an IPO. In July, Beazer Pre-Owned Rental Homes had exited the business by selling its 1,300 houses to American Homes 4 Rent, at the time still flush with cash from its IPO a year earlier.
Such portfolio sales maintain the homes as rentals. But smaller firms are more likely to cash out by putting their houses on the market, Blomquist said. And they have already started the process.
Now the industry is fretting that liquidations by investors could unravel the easy Fed-engineered gains of the last few years. Sure, it would help first-time buyers and perhaps put a halt to the plunging home ownership rates in the US [The American Dream Dissipates at Record Pace].
But the industry wants prices to rise. Period.
When large landlords start putting thousands of homes up for sale, it could get messy. It would leave tenants scrambling to find alternatives, and some might get stranded. A forest of for-sale signs would re-pop up in the very neighborhoods that these landlords had targeted during the buying binge. Each wave of selling would have the reverse ratchet effect. And the industry’s dream of forever rising prices would be threatened.
“What kind of impact will these large investors have on our communities?” wondered Rep. Mark Takano, D-California, in an email to American Banker. He represents Riverside in the Inland Empire, east of Los Angeles. During the housing bust, home prices in the area plunged. But recently, they have re-soared to where Fitch now considers Riverside the third-most overvalued metropolitan area in the US. So Takano fretted that “large sell-offs by investors will weaken our housing recovery in the very same communities, like mine, that were decimated by the sub prime mortgage crisis.”
PE firms have tried to exit via IPOs – which kept these houses in the rental market.
Silver Bay Realty Trust went public in December 2012 at $18.50 a share. On Friday, shares closed at $16.16, down 12.6% from their IPO price.
American Residential Properties went public in May 2013 at $21 a share, a price not seen since. “Although people look at this as a new industry, there’s really nothing new about renting single-family homes,” CEO Stephen Schmitz told Bloomberg at the time. “What’s new is that it’s being aggregated, we’re introducing professional management and we’re raising institutional capital.” Shares closed at $17.34 on Friday, down 17.4% from their IPO price.
American Homes 4 Rent went public in August 2013 at $16 a share. On Friday, shares closed at $16.69, barely above their IPO price. These performances occurred during a euphoric stock market!
So exiting this “bet on America,” as Schwarzman had put it so eloquently, by selling overpriced shares to the public is getting complicated. No doubt, Blackstone, as omnipotent as it is, will be able to pull off the IPO of Invitation Homes, regardless of what kind of bath investors end up taking on it.
Lesser firms might not be so lucky. If they can’t find a buyer like American Homes 4 Rent that is publicly traded and doesn’t mind overpaying, they’ll have to exit by selling their houses into the market.
But there’s a difference between homeowners who live in their homes and investors: when homeowners sell, they usually buy another home to live in. Investors cash out of the market. This is what the industry dreads. Investors were quick to jump in and inflated prices. But if they liquidate their holdings at these high prices, regular folks might not materialize in large enough numbers to buy tens of thousands of perhaps run-down single-family homes. And then, getting out of the “bet on America” would turn into a real mess.
Affordable Housing Plan Slaps Fee on California Property Owners
by Phil Hall
The speaker of California’s State Assembly is seeking to raise new funds for affordable housing development by adding a new $75 fee to the costs of recording real estate documents.
Toni Atkins, a San Diego Democrat, stated that the new fee would be a permanent addition to the state’s line-up of fees and taxes and would apply to all real estate documents except those related to home sales. Atkins conspicuously avoided citing the $75 figure in a press statement issued by her office, only briefly identifying it as a “small fee” while insisting that she had broad support for the plan.
“The permanent funding source, which earned overwhelming support from California’s business community, will generate hundreds of millions annually for affordable housing and leverage billions of dollars more in federal, local, and bank investment,” Atkins said. “This plan will reap benefits for education, healthcare and public safety as well. The outcomes sought in other sectors improve when housing instability is addressed.”
Atkins added that her plan should add between $300 million to $720 million a year for the state’s affordable housing endeavors. But Atkins isn’t completely focused on collecting revenue: She is simultaneously proposing that developers offering low-income housing should receive $370 million in tax credits, up from the current level of $70 million.
This is the third time that a $75 real estate transaction fee has been proposed in the state legislature. Earlier efforts were put forward in 2012 and 2013, but failed to gained traction. Previously, opponents to the proposal argued that transactions involving multiple documents would be burdened with excess costs because the fee applies on a per-document basis and not a per-transaction basis.
One of the main opponents of Atkins’ proposal, Jon Coupal, president of the Howard Jarvis Taxpayers Association, told the San Francisco Chronicle that the speaker was playing word games by insisting this was merely a fee and that she was penalizing property owners to finance a problem that they did not create.
“It’s clearly a tax, not a fee,” said Coupal. “There is not a nexus between the fee payer and the public need being addressed. It’s not like charging a polluter a fee for the pollution they caused. It’s a revenue that is totally divorced from the so-called need for affordable housing.”
Study: Government’s Control of Land Is Hurting Oil Production, Job Growth
by Ben Smith
Current government regulations imposed by the Bureau of Land Management are harming energy production and holding back the U.S. economy, a new study reveals.
“While federally owned lands are also full of energy potential, a bureaucratic regulatory regime has mismanaged land use for decades,” write The Heritage Foundation’s Katie Tubb and Nicolas Loris.
The report focuses on the Federal Lands Freedom Act, introduced by Rep. Diane Black, R-Tenn., and Sen. James Inhofe, R-Okla. It is designed to empower states to regain control of their lands from the federal government in order to pursue their own energy goals. That is a challenge in an oil-rich state like Colorado.
“We need to streamline the process as there are very real consequences to poor [or nonexistent] management,” Tubb, a Heritage research associate, told The Daily Signal.
“Empowering the states is the best solution. The people who benefit have a say and can share in the benefits. If there are consequences, they can address them locally with state and local governments that are much more responsive to elections and budgets than the federal government.”
Emphasizing the need to streamline the process, Tubb pointed to the findings in the new report.
“The Bureau of Land Management estimates that it took an average of 227 days simply to complete a drill application,” Tubb said.
That’s more than the average of 154 days in 2005 and more than seven times the state average of 30 days, according to the report.
The report blames this increase in the application process on the drop in drilling on federal lands.
“Since 2009,” Tubb and Loris write, “oil production on federal lands has fallen by nine percent, even as production on state and private lands has increased by 61 percent over the same period.”
Despite almost “43 percent of crude oil coming from federal lands,” government-owned lands have seen a 13-point drop in oil production, from 36 percent to 23 percent.
The report also examines the recent oil-related job boom.
“Job creation in the oil and gas industry bucked the slow economic recovery and grew by 40 percent from 2007 to 2012, in comparison to one percent in the private sector over the same period,” according to the report.
That boom has had a big impact on jobs.
“Energy-abundant states like Colorado and Alaska would stand to benefit tremendously. We’ve seen oil and natural gas production increase substantially in Colorado over the past eight years, bringing jobs and economic activity to the state,” said Loris, an economist who is Heritage’s Herbert and Joyce Morgan fellow.
Tubb cautioned that any change will happen slowly. “The federal government likely will not release the land that easily.”
Loris agreed, noting the long-running debate about the Arctic National Wildlife Refuge.
“It was no surprise that the Alaskan delegation was up in arms when the administration proposed to permanently put ANWR off limits to energy exploration,” Loris told The Daily Signal. “Many in the Alaskan delegation and Alaskan natives, including village of Kaktovik—the only town in the coastal plain of ANWR, support energy development.”
“We are putting power to the people,” Tubb concluded.
How The Baltic Dry Index Predicted 3 Market Crashes: Will It Do It Again?
- The BDI as a precursor to three different stock market corrections.
- Is it really causation or is it correlation?
- A look at the current level of the index as it hits new lows.
by Jonathan Fishman
The Baltic Dry Index, usually referred to as the BDI, is making historical lows in recent weeks, almost every week.
The index is a composition of four sub-indexes that follow shipping freight rates. Each of the four sub-indexes follows a different ship size category and the BDI mixes them all together to get a sense of global shipping freight rates.
The index follows dry bulk shipping rates, which represent the trade of various raw materials: iron, cement, copper, etc.
The main argument for looking at the Baltic Dry Index as an economic indicator is that end demand for those raw materials is tightly tied to economic activity. If demand for those raw materials is weak, one of the first places that will be evident is in shipping prices.
The supply of ships is not very flexible, so changes to the index are more likely to be caused by changes in demand.
Let’s first look at the three cases where the Baltic Dry Index predicted a stock market crash, as well as a recession.
1986 – The Baltic Dry Index Hits Its first All-time Low.
In late 1986, the newly formed BDI (which replaced an older index) hit its first all-time low.
Other than predicting the late 80s-early 90s recession itself, the index was a precursor to the 1987 stock market crash.
1999 – The Baltic Dry Index Takes a Dive
In 1999, the BDI hit a 12-year low. After a short recovery, it almost hit that low point again two years later. The index was predicting the recession of the early 2000s and the dot-com market crash.
2008 – The Sharpest Decline in The History of the BDI
In 2008, the BDI almost hit its all-time low from 1986 in a free fall from around 11,000 points to around 780.
You already know what happened next. The 2008 stock market crash and a long recession that many parts of the global economy is still trying to get out of.
Is It Real Causation?
One of the pitfalls that affects many investors is to confuse correlation and causation. Just because two metrics seem to behave in a certain relationship, doesn’t tell us if A caused B or vice versa.
When trying to navigate your portfolio ahead, correctly making the distinction between causation and correlation is crucial.
Without doing so, you can find yourself selling when there is no reason to, or buying when you should be selling.
So let’s think critically about the BDI.
Is it the BDI itself that predicts stock market crashes? Is it a magical omen of things to come?
My view is that no. The BDI is not sufficient to determine if a stock market crash is coming or not. That said, the index does tells us many important things about the global economy.
Each and every time the BDI hit its lows, it predicted a real-world recession. That is no surprise as the index follows a fundamental precursor, which is shipping rates. It’s very intuitive; as manufacturers see demand for end products start to slow down, they start to wind-down production and inventory, which immediately affects their orders for raw materials.
Manufacturers are the ultimate indicator to follow, because they are the ones that see end demand most closely and have the best sense of where it’s going.
But does an economic slowdown necessarily bring about a full-blown market crash?
Only if the stock market valuation is not reflecting that coming economic downturn. When these two conditions align, chances are a sharp market correction is around the corner.
2010-2015 – The BDI Hits All-time Low, Again
In recent weeks, the BDI has hit an all-time low that is even lower than the 1986 low point. That comes after a few years of depressed prices.
What does that tell us?
- The global economy, excluding the U.S., is still struggling. Numerous signs for that are the strengthening dollar, the crisis in Russia and Eastern Europe, a slowdown in China, and new uncertainties concerning Greece.
- The U.S. is almost the sole bright spot in the landscape of the global economy, although it’s starting to be affected by the global turmoil. A strong dollar hits exporters and lower oil prices hit the American oil industry hard.
Looking at stock prices, we are at the peak of a 6-year long bull market, although earnings seem to be at all-time highs as well.
What the BDI might tell us is that the disconnect between the global economy’s struggle and great American business performance across the board might be coming to an end.
More than that, China could be a significant reason for why the index has taken such a dive, as serious slowdowns on the real-estate market in China and tremendous real estate inventory accumulation are disrupting the imports of steel, cement and other raw materials.
The BDI tells us that a global economic slowdown is well underway. The source of that downturn seems to be outside of the U.S., and is more concentrated in China and the E.U.
The performance of the U.S. economy can’t be disconnected from the global economy for too long.
The BDI is a precursor for recessions, not stock market crashes. It’s not a sufficient condition to base a decision upon, but it’s one you can’t afford to ignore.
Going forward, this is a time to make sure you know the companies you invest in inside and out, and make sure end demand for their products is bound for continued growth and success despite overall headwinds.
We Live In An Era Of Dangerous Imbalances
by Tyler Durden
The intervention by the world’s central banks has resulted in today’s bizarro financial markets, where “bad news is good” because it may lead to more (sorry, moar) thin-air stimulus to goose asset prices even higher.
The result is a world addicted to debt and the phony stimulus now essential to sustaining it. In the process, a tremendous wealth gap has been created, one still expanding at an exponential rate.
History is very clear what happens with dangerous imbalances like this. They correct painfully. Through class warfare. Through currency crises. Through wealth destruction.
Is that really the path we want? Because we’re for sure headed for it.
Increasing Rent Costs Present a Challenge to Aspiring Homeowners
by Tory Barringer
Fast-rising rents have made it difficult for many Americans to save up a down payment for a home purchase—and experts say that problem is unlikely to go away any time soon.
Late last year, real estate firm Zillow reported that renters living in the United States paid a cumulative $441 billion in rents throughout 2014, a nearly 5 percent annual increase spurred by rising numbers of renters and climbing prices. Last month, the company said that its own Rent Index increased 3.3 percent year-over-year, accelerating from 2013 even as home price growth slows down.
Results from a more recent survey conducted by Zillow and Pulsenomics suggest that rent prices will continue to be a problem for the aspiring homeowner for years to come.
Out of more than 100 real estate experts surveyed, 51 percent said they expect rental affordability won’t improve for at least another two years, Zillow reported Friday. Another 33 percent were a little more optimistic, calling for a deceleration in rental price increases sometime in the next one to two years.
Only five percent said they expect affordability conditions to improve for renters within the next year.
Despite the challenge that rising rents presents to home ownership throughout the country, more than half—52 percent of respondents—said the market should be allowed to correct the problem on its own, without government intervention.
“Solving the rental affordability crisis in this country will require a lot of innovative thinking and hard work, and that has to start at the local level, not the federal level,” said Zillow’s chief economist, Stan Humphries. “Housing markets in general and rental dynamics in particular are uniquely local and demand local, market-driven policies. Uncle Sam can certainly do a lot, but I worry we’ve become too accustomed to automatically seeking federal assistance for housing issues big and small, instead of trusting markets to correct themselves and without waiting to see the impact of decisions made at a broader local level.”
On the topic of government involvement in housing matters: The survey also asked respondents about last month’s reduction in annual mortgage insurance premiums for loans backed by the Federal Housing Administration (FHA). The Obama administration has projected that the cuts will help as many as 250,000 new homeowners make their first purchase.
The panelists were lukewarm on the change: While two-thirds of those with an opinion said they think the changes could be “somewhat effective in making homeownership more accessible and affordable,” just less than half said the new initiatives are unwise and potentially risky to taxpayers.
Finally, the survey polled panelists on their predictions for U.S. home values this year. As a whole, the group predicted values will rise 4.4 percent in 2015 to a median value of $187,040, with projections ranging from a low of 3.1 percent to a high of 5.5 percent.
“During the past year, expectations for annual home value appreciation over the long run have remained flat, despite lower mortgage rates,” said Terry Loebs, founder of Pulsenomics. “Regarding the near-term outlook, there is a clear consensus among the experts that the positive momentum in U.S. home prices will continue to slow this year.”
On average, panelists said they expect median home values will pass their precession peak ($196,400) by May 2017.
Global Capital Will Continue to Flow into Real Estate in 2015
By Michael Gerrity
ISA report states that different regions of the world will be growing at different speeds in 2015, investors need to prepare their portfolios for world where interest rates begin to rise more quickly in some parts than others.
Jacques Gordon, LaSalle’s Global Head of Research and Strategy said, “Where we are in the real estate cycle is one of the most commonly asked questions of real estate investment managers and with good reason. Investors are concerned about what might happen if capital markets turn away from property. Timing strategies are difficult to apply to a relatively illiquid asset class like real estate. Nevertheless, adjusting portfolios as assets and markets move through their respective cycles can improve performance by enhancing returns and reducing risk.”ISA Investor Advice Includes:
- Diversify their holdings across a number of countries that are in different stages of the capital market cycle.
- Anticipate different interest rate environments by allocating to real estate assets with income streams that keep pace with rising inflation or debt costs in growing economies like the U.K or the U.S. Also, focus on high quality properties and locations in markets where growth/interest rates will stay “lower for longer”, such as Japan or Western Europe.
- Invest in secular trends, rather than cyclical ones, that will be less exposed to a downturn. The ISA found that investments linked to Demographics, Technology and Urbanization (DTU) – first identified last year – are likely to be key in helping investors to identify such trends.
- Continue to place a high emphasis on sustainability factors, like energy efficiency and recycling, when buying, improving and operating buildings. Tenants and the capital markets will be paying much more attention to environmental standards in the years ahead.
Gordon also noted that markets around the world are at very different stages in terms of market fundamentals and capital markets, and hence future performance. Thus, it makes sense to have an investment program that takes advantage of real estate cycles. Examples of cycle-sensitive strategies include: Harvesting gains and selling properties in frothy capital markets, taking advantage of higher levels of leasing/rental growth in growth markets, and focusing on locations/sectors that are positioned to qualify as mainstream “core” assets in a few years.
Other themes for 2015 identified by the ISA include:
- Money is likely to continue to flow into real estate as long as the yields on property continue to offer a premium to investment-grade bonds.
- The debt markets are also embracing real estate, although lending is not yet as aggressive as it was during the peak of the credit bubble.
- Taken together, this is likely to keep pushing prices up, while continuing to lower the expected future returns on real estate.
- It could also lead to an escalation in new development. After many years of low levels of new construction in nearly all G-20 countries, most major markets can easily absorb moderate additions to inventory without creating an oversupply problem.
Key Trends in The United States
Overall, North America is in a good position for 2015 with healthy real estate markets and economic growth. Despite global headwinds, the U.S. economy and real estate markets will improve at a faster pace over the next three years, a welcome trend after five years of below average recovery. Capital flows to real estate will remain very strong next year, with overall real estate transaction levels close to or surpassing the pre-recession peak. Both equity and debt will be plentiful, and lenders will become increasingly aggressive in deploying capital.
In addition, occupancy rates will continue to improve for industrial, retail and most notably office in 2015. However, occupancy rates will be stable in the apartment sector as new supply matches demand, while rental rates in select markets such as San Francisco, New York City and Portland will outpace the national average.
The Investment Strategy Annual also predicts that many firms will be willing to pay higher rents in 2015 for properties located in Central Business Districts, because these locations greatly improve the ability to recruit talented Millennials. Moreover, E-commerce will continue to take market share in the retail sector, although new fashion trends, convenience, services, and out-of-home dining will keep the best shopping centers full and able to raise rents. Urban retail will continue to outperform due to strong tenant demand and little new supply.
Key Trends in Canada
The Investment Strategy Annual predicts that Canada’s near-term economic growth in 2015 will trail the United States, yet remain ahead of most other G7 countries. While slower global growth could impact demand in Canada’s resources sector, improvement in the U.S. economy will benefit Canada in the form of stronger export volumes in 2015 and beyond. Private consumption is forecast to grow more slowly in 2015 given elevated housing prices and high household debt levels. Stronger business investment and government expenditures should partially offset this.
Growth in the Alberta oil sands will slow in 2015 as oil prices face downward pressure and U.S. production escalates. However, traditional oil and gas drilling is re-emerging as fracking technology improves and pipeline expansion delays have been alleviated by significant growth in rail transport. Consequently, economic growth and real estate demand in cities in Western Canada will continue to outpace the nation.
In addition, e-commerce adoption will continue to grow as a share of overall retail trade and drive further changes among retailers and distribution chains in Canada. Retailers with a proven, established e-commerce platform will grow at the expense of those with less efficient or no models.
Key Trends in Mexico
Given its close links to the U.S., Mexico’s economy should outperform many other emerging markets in 2015 and beyond. Economic growth should accelerate in 2015, led by export-oriented manufacturing. In addition, the negative effects of the 2014 tax reforms will fade out and the government will implement a more expansive fiscal policy for large infrastructure projects.
Inaccurate Zillow ‘Zestimates’ A Source Of Conflict Over Home Prices
When “CBS This Morning” co-host Norah O’Donnell asked the chief executive of Zillow recently about the accuracy of the website’s automated property value estimates — known as Zestimates — she touched on one of the most sensitive perception gaps in American real estate.
Zillow is the most popular online real estate information site, with 73 million unique visitors in December. Along with active listings of properties for sale, it also provides information on houses that are not on the market. You can enter the address or general location in a database of millions of homes and probably pull up key information — square footage, lot size, number of bedrooms and baths, photos, taxes — plus a Zestimate.
Shoppers, sellers and buyers routinely quote Zestimates to realty agents — and to one another — as gauges of market value. If a house for sale has a Zestimate of $350,000, a buyer might challenge the sellers’ list price of $425,000. Or a seller might demand to know from potential listing brokers why they say a property should sell for just $595,000 when Zillow has it at $685,000.
Disparities like these are daily occurrences and, in the words of one realty agent who posted on the industry blog ActiveRain, they are “the bane of my existence.” Consumers often take Zestimates “as gospel,” said Tim Freund, an agent with Dilbeck Real Estate in Westlake Village. If either the buyer or the seller won’t budge off Zillow’s estimated value, he told me, “that will kill a deal.”
Back to the question posed by O’Donnell: Are Zestimates accurate? And if they’re off the mark, how far off? Zillow CEO Spencer Rascoff answered that they’re “a good starting point” but that nationwide Zestimates have a “median error rate” of about 8%.
Whoa. That sounds high. On a $500,000 house, that would be a $40,000 disparity — a lot of money on the table — and could create problems. But here’s something Rascoff was not asked about: Localized median error rates on Zestimates sometimes far exceed the national median, which raises the odds that sellers and buyers will have conflicts over pricing. Though it’s not prominently featured on the website, at the bottom of Zillow’s home page in small type is the word “Zestimates.” This section provides helpful background information along with valuation error rates by state and county — some of which are stunners.
For example, in New York County — Manhattan — the median valuation error rate is 19.9%. In Brooklyn, it’s 12.9%. In Somerset County, Md., the rate is an astounding 42%. In some rural counties in California, error rates range as high as 26%. In San Francisco it’s 11.6%. With a median home value of $1,000,800 in San Francisco, according to Zillow estimates as of December, a median error rate at this level translates into a price disparity of $116,093.
Some real estate agents have done their own studies of accuracy levels of Zillow in their local markets.
Last July, Robert Earl, an agent with Choice Homes Team in the Charlottesville, Va., area, examined selling prices and Zestimates of all 21 homes sold that month in the nearby community of Lake Monticello. On 17 sales Zillow overestimated values, including two houses that sold for 61% below the Zestimate.
In Carlsbad, Calif., Jeff Dowler, an agent with Solutions Real Estate, did a similar analysis on sales in two ZIP Codes. He found that Zestimates came in below the selling price 70% of the time, with disparities ranging as high as $70,000. In 25% of the sales, Zestimates were higher than the contract price. In 95% of the cases, he said, “Zestimates were wrong. That does not inspire a lot of confidence, at least not for me.” In a second ZIP Code, Dowler found that 100% of Zestimates were inaccurate and that disparities were as large as $190,000.
So what do you do now that you’ve got the scoop on Zestimate accuracy? Most important, take Rascoff’s advice: Look at them as no more than starting points in pricing discussions with the real authorities on local real estate values — experienced agents and appraisers. Zestimates are hardly gospel — often far from it.
firstname.lastname@example.org Distributed by Washington Post Writers Group.
Millennials Are Finally Entering The Home Buying Market
First-time buyers Kellen and Ben Goldsmith are shown in their new town home, which they purchased for $620,000 in Seattle’s Eastlake neighborhood. (Ken Lambert / Tribune News Service. Authored by Kenneth R. Harney
Call them the prodigal millennials: Statistical measures and anecdotal reports suggest that young couples and singles in their late 20s and early 30s have begun making a belated entry into the home-buying market, pushed by mortgage rates in the mid-3% range, government efforts to ease credit requirements and deep frustrations at having to pay rising rents without creating equity.
Listen to Kathleen Hart, who just bought a condo unit with her husband, Devin Wall, that looks out on the Columbia River in Wenatchee, Wash.: “We were just tired of renting, tired of sharing with roommates and not having a place of our own. Finally the numbers added up.”
Erin Beasley and her fiance closed on a condo in the Capitol Hill area of Washington, D.C., in January. “With the way rents kept on going,” she said, “we realized it was time” after five years as tenants. “With renting, at some point you get really tired of it — you want to own, be able to make changes” that suit you, not some landlord.
Hart and Beasley are part of the leading edge of the massive millennial demographic bulge that has been missing in action on home buying since the end of the Great Recession. Instead of representing the 38% to 40% of purchases that real estate industry economists say would have been expected for first-timers, they’ve lagged behind in market share, sometimes by as much as 10 percentage points. But new signs are emerging that hint that maybe the conditions finally are right for them to shop and buy:
• Redfin, a national real estate brokerage, said that first-time buyers accounted for 57% of home tours conducted by its agents mid-month — the highest rate in recent years. Home-purchase education class requests, typically dominated by first-timers, jumped 27% in January over a year earlier. “I think it is significant,” Redfin chief economist Nela Richardson said. “They are sticking a toe in the water.”
• The Campbell/Inside Mortgage Finance HousingPulse Tracking Survey, which monthly polls 2,000 realty agents nationwide, reported that first-time buyer activity has started to increase much earlier than is typical seasonally. First-timers accounted for 36.3% of home purchases in December, according to the survey.
• Anecdotal reports from realty brokers around the country also point to exceptional activity in the last few weeks. Gary Kassan, an agent with Pinnacle Estate Properties in the Los Angeles area, says nearly half of his current clients are first-time buyers. Martha Floyd, an agent with McEnearney Associates Inc. Realtors in McLean, Va., said she is working with “an unusually high” number of young, first-time buyers. “I think there are green shoots here,” she said, especially in contrast with a year ago.
Assuming these early impressions could point to a trend, what’s driving the action? The decline in interest rates, high rents and sheer pent-up demand play major roles.
But there are other factors that could be at work. In the last few weeks, key sources of financing for entry-level buyers — the Federal Housing Administration and giant investors Fannie Mae and Freddie Mac — have announced consumer-friendly improvements to their rules. The FHA cut its punitively high upfront mortgage insurance premiums and Fannie and Freddie reduced minimum down payments to 3% from 5%.
Price increases on homes also have moderated in many areas, improving affordability. Plus many younger buyers have discovered the wide spectrum of special financing assistance programs open to them through state and local housing agencies.
Hart and her husband made use of one of the Washington State Housing Finance Commission’s buyer assistance programs, which provides second-mortgage loans with zero interest rates to help with down payments and closing costs. Dozens of state agencies across the country offer help for first-timers, often with generous qualifying income limits.
Bottom line: Nobody knows yet whether or how long the uptick in first-time buyer activity will last, but there’s no question that market conditions are encouraging. It just might be the right time.
email@example.com Distributed by Washington Post Writers Group. Copyright © 2015, LA Times
Millions of Boomerang Buyers Poised to Re-Enter Housing Market
According to RealtyTrac, the first wave of 7.3 million homeowners who lost their home to foreclosure or short sale during the foreclosure crisis are now past the seven-year window they conservatively need to repair their credit and qualify to buy a home as we begin 2015.
In addition, more waves of these potential boomerang buyers will be moving past that seven-year window over the next eight years corresponding to the eight years of above-normal foreclosure activity from 2007 to 2014.
“The housing crisis certainly hit home the fact that home ownership is not for everyone, but those burned during the crisis should not immediately throw the baby out with the bathwater when it comes to their second chance at home ownership,” said Chris Pollinger, senior vice president of sales at First Team Real Estate, covering the Southern California market which has more than 260,000 potential boomerang buyers. “Home ownership done responsibly is still one of the best disciplined wealth-building strategies, and there is much more data available for home buyers than there was five years ago to help them make an informed decision about a home purchase.”
- Nearly 7.3 million potential boomerang buyers nationwide will be in a position to buy again from a credit repair perspective over the next eight years.
- Markets with the most potential boomerang buyers over the next eight years among metropolitan statistical areas with a population of at least 250,000.
- Markets with the highest rate of potential boomerang buyers as a percentage of total housing units over the next eight years among metro areas with at least 250,000 people.
- Markets most likely to see the boomerang buyers materialize are those where there are a high percentage of housing units lost to foreclosure but where current home prices are still affordable for median income earners and where the population of Gen Xers and Baby Boomers — the two generations most likely to be boomerang buyers — have held steady or increased during the Great Recession.
- There were 22 metros among those with at least 250,000 people where this trifecta of market conditions is in place, making these metros the most likely nationwide to see a large number of boomerang buyers materialize in 2015 and beyond.
The Most Expensive Billionaire Homes In The World
by Erin Carlyle
Jana Partners founder Barry Rosenstein recently purchased an East Hampton estate for $147 million, setting a new record for the most expensive home ever purchased in the United States. But compared to other homes owned by FORBES billionaires around the world, that price tag was a relative bargain.
Case in point: less than two weeks ago, Reuters broke the news that a penthouse at prestigious One Hyde Park in London’s tony Knightsbridge neighborhood had sold for $237 million, setting a new world record for the priciest apartment sale ever. Although the buyer remains unknown, the purchaser is an Eastern European, reports Reuters. Given the cash involved, the new owner is also very likely a FORBES billionaire. (In 2011, Ukraine’s richest man, billionaire Rinat Ahkmetov, paid $221 million for a penthouse in the same development. At the time, that was the most expensive apartment sale ever.)
Throughout the global economic crisis and recovery, the super-wealthy have been putting their money into the comparative safe haven of real estate. “After years on the outskirts of asset allocation, property is starting to move into the prime investment arena traditionally occupied by stocks and bonds,” says the Candy GPS (Global Prime Sector) Report, produced by Deutsche Asset & Wealth Management with research from Savills. As demand for real estate pushes property values up the world over, the price tags of homes already owned by the super rich also increase. Last year when we combed through property records to identify some of the most expensive homes owned by members of the FORBES Billionaires List, many estates fell well below the $100 million mark. This year, when we repeated the same exercise, only six of the top 20 most expensive homes owned by billionaires were priced less than $100 million–and several are valued at more than twice that figure.
The title of the most outrageously expensive property in the world still belongs to Mukesh Ambani’s Antilia in Mumbai, India. The 27-story, 400,000-square-foot skyscraper home–which is named after a mythical island in the Atlantic–includes six stories of underground parking, three helicopter pads, and reportedly requires a staff of 600 to keep it running. Construction costs for Antilia have been reported at a range of $1 billion to $2 billion. To put that into perspective, 7 World Trade Center, the 52-story tower that stands just north of Ground Zero in Manhattan with 1.7 million square feet of office space, cost a reported $2 billion to build.
In second place is Lily Safra’s Villa Leopolda, in Villefranche-sur-mer, France. The estate is reportedly one of several waterside homes that King Leopold II of Belgium built for his many mistresses. Set on 20 acres, the massive home was valued at 500 million euros ($750 million at the time), when Russian billionaire Mikhail Prokhorov tried to buy it in 2008. Prokhorov eventually backed out of deal, losing his 50 million euro deposit.
The third-most expensive billionaire home–and the most expensive in the United States–has to be Fair Field, Ira Rennert’s Sagaponack, N.Y., enclave. Although Rennert built the property and it has never traded hands, the local assessor’s office peg its value at about $248.5 million in its latest (2014) tentative tax assessment. Since no Hamptons estate has ever sold for so much (Rosenstein’s recent $147 million buy set both the Hamptons and U.S. record), it’s hard to know if the home would really ever fetch such a sum. In the meantime, the property taxes on Rennert’s 29-bedroom, 39-bath estate have got to be monstrous. (Larry Ellison’s 23-acre Japanese-style estate in Woodside, Calif. enjoys the opposite situation: the home reportedly cost $200 million to build, but was assessed at just over $73.2 million in 2013. Nice property tax break.)
As 2014 continues, the list of outrageously-priced homes owned by billionaires is stacking up. Although the market cooled off a bit in in 2013, with no properties trading hands above the $100 million mark (2011 and 2012 both saw $100 million transactions), 2014 has kicked off with a bang. London set a new record, and three homes have sold for more than $100 million so far this year in the U.S. alone.
Just weeks before Rosenstein (who is not on the FORBES Billionaires List) snapped up the East Hampton estate formerly belonging to investment manager Christopher Browne in a private deal, an unknown buyer purchased Connecticut’s Copper Beech Farm for $120 million from timber tycoon John Rudey–at the time the most expensive home sale ever in the United States. Set on 50 acres of Greenwich waterfront, the estate includes a 13,519-square-foot main house with 12 bedrooms, seven full baths and two half baths and a wood-paneled library. Also included: a solarium, a wine cellar, and a three-story-high, wood-paneled foyer. David Ogilvy, the agent who brokered the sale, tells FORBES the buyer plans to keep the home intact rather than tear it down (a common tactic among the rich). We’d bet money that individual is a billionaire.
At the end of March, the Los Angeles Times broke the news that Suzanne Saperstein had sold her expansive Holmby Hills estate, Fleur de Lys, for $102 million. That property, too, went to an unknown buyer. Although the property tax bill will be mailed to a law firm that shares an address with the Milken Institute, a Milken spokesperson told FORBES that neither Michael Milken nor his Institute are the buyer.
The latest sales continue the ongoing trend of billionaires and $100-million-plus property buys. In November 2012, Softbank billionaire Masayoshi Son, of Japan, snapped up a Woodside, Calif., estate for $117.5 million. Russian venture capitalist Yuri Milner purchasing $100 million on a property in Los Altos Hills (paying 100% more than its market value, according to tax assessors) in 2011. In 2007, billionaire fund manager Ron Baron paid $103 million for 52 undeveloped waterfront acres in New York’s East Hampton–and that was before construction costs. With properties like Dallas’ $135 million Crespi-Hicks Estate and the $90 million Carolwood Estate still on the market, more news is sure to come down the road.
1. Antilia, Mumbai, India
Owner: Mukesh Ambani, net worth $23.9 billion
Value: upward of $1 billion
The twenty-seven story, 400,000-square foot skyscraper residence, named after a mythical island in the Atlantic, has six underground levels of parking, three helicopter pads, a ‘health’ level, and reportedly requires about 600 staff to run it. It is the world’s most expensive home far and away with construction costs topping $1 billion.
2. Villa Leopolda, Villefranche-sur-mer, France
Owner: Lily Safra, net worth $1.3 billion
Purchase Price: 500 million euro ($750 million at the time) in 2008
King Leopold II reportedly built a series of waterside homes for his many mistresses. This 20-acre estate was valued at 500 million euros in 2008, when Russian billionaire Mikhail Prokhorov attempted to buy it. He eventually pulled out of the deal, forfeiting a 50 million euro deposit.
3. Fair Field, Sagaponack, N.Y.
Owner: Ira Rennert, net worth $6 billion
Property value: about $248.5 million, according to 2014 tentative tax assessment
The industrial billionaire’s hulking 29-bedroom, 39-bath Hamptons compound has not one, but three swimming pools, plus its own power plant on premises.
7. Ellison Estate, Woodside, Calif.
Owner: Larry Ellison, net worth $51.4 billion
Value: estimated $200 million to construct
The Oracle founder, arguably the world’s most avid collector of real estate, built his 23-acre Japanese-style estate in 2004 with 10 buildings, a man made lake, a tea house, a bath house and a koi pond. The property is was assessed at $73.2 million in 2013.
10. Xanadu 2.0, Seattle, Wash.
Owner: Bill Gates, net worth $77.5 billion
Market Value: $120.5C million, 2014 tax assessment
The high-tech Lake Washington complex owned by the world’s second-richest man boasts a pool with an underwater music system, a 2,500- square foot gym and a library with domed reading room.
11. Copper Beech Farm, Greenwich, Conn.
Sale Price: $120 million in April 2014
The property, originally listed for $190 million in May 2013, dropped to $140 million in September 2013 before selling in April 2014. Copper Beech Farm boasts a 13,519-square-foot main house with 12 bedrooms, seven full baths and two half baths and a wood-paneled library. Additional selling points: a solarium, a wine cellar, and a three-story-high, wood-paneled foyer. It was previously owned by timber tycoon John Rudey.
12. Mountain Home Road, Woodside, Calif.
Owner: Masayoshi Son, net worth $17.3 billion
Purchase Price: $117.5 million in 2012
The most expensive home sale on record includes a 9,000-square foot neoclassical house, a 1,117-square foot colonnaded pool house, a detached library, a “retreat” building, a swimming pool, a tennis court and formal gardens.
13. Further Lane de Menil, East Hampton, N.Y.
Owner: Ron Baron, net worth $1.9 billion
Purchase Price: $103 million in 2007
The investment guru snapped up more than 50 acres of undeveloped oceanfront Hamptons land during the market’s height with the intention of constructing his own home.
14. Fleur de Lys, Holmby Hills, Calif.
Purchase Price: $102 million in March 2014
The 50,000-square-foot estate known as Fleur de Lys is the most expensive home ever sold in Los Angeles County. Suzanne Saperstein, ex-wife of Metro Networks founder David Saperstein, is the seller but the buyer remains unknown. However, tax bills for the property are mailed to a law firm at the same address as the Milken Institute.
15. Silicon Valley Mansion, Los Altos Hills, Calif.
Owner: Yuri Milner, net worth $1.7 billion
Purchase Price: $100 million in 2011
Bought as a secondary home, the Facebook investor broke records with the purchase of a French chateaux-inspired limestone abode that touts indoor and outdoor pools, a ballroom and second-floor living areas that gaze out on San Francisco Bay.
16. Maison de L’Amitie, Palm Beach, Fla.
Owner: Dmitry Rybolovlev, net worth $8.8 billion
Purchase Price: $95 million in 2008
Originally listed for $125 million, the sprawling oceanfront 60,000-square foot compound, bought from real estate billionaire Donald Trump, includes diamond and gold fixtures and a garage with space for nearly 50 cars.
17. Promised Land, Montecito, Calif.
Owner: Oprah Winfrey, net worth $2.9 billion
Market Value: $90.3 million, according to 2014 tax assessment
Purchased in 2001 for nearly $52 million, the media queen’s 23,000-square-foot Georgian-style manse sits on more than 40 acres, boasting a tea house, more than 600 rose bushes and an upscale outhouse.
Click here for the entire top 20 list for 2014
Housing Price Gains Slow For 9th Straight Month, Says S&P/Case-Shiller
by Erin Carlyle
Growth in home sales prices continued to slow across the nation in September, marking nine straight months of deceleration, data from S&P/Case-Shiller showed Tuesday.
U.S. single-family home prices gained just 4.8% (on a seasonally-adjusted basis) over prices one year earlier, down from a 5.1% annual increase in August, the S&P/Case-Shiller National Home Price Index shows. The measure covers all nine Census divisions. Significantly, September also marked the first month that the National Index decreased (by 0.1%) on a month-over-month basis since November 2013.
“The overall trend in home price increases continues to slow down,” says David M. Blitzer, chairman of the Index Committee at S&P Dow Jones Indices. “The only region showing any sustained strength is the Southeast led by Florida; price gains are also evident in Atlanta and Charlotte.”
Price gains have been steadily slowing since December after a streak of double-digit annual price increases in late 2013 and early 2014. Eighteen of the 20 cities Case-Shiller tracks reported slower annual price gains in September than in August, with Charlotte and Dallas the only cities where annual price gains increased. Miami (10.3%) was the only city to report double-digit annual price gains.
The chart above depicts the annual returns of the U.S. National, the 10-City Composite and the 20-City Composite Home Price Indices. The S&P/Case-Shiller U.S. National Home Price Index, which covers all nine U.S. census divisions, recorded a 4.8% annual gain in September 2014. The 10- and 20-City Composites posted year-over-year increases of 4.8% and 4.9%, compared to 5.5% and 5.6% in August.
National Index, year-over-year change in prices (seasonally adjusted):
June 2013: 9.2%
July 2013: 9.7%
August 2013: 10.2%
September 2013: 10.7%
October 2013: 10.9%
November 2013: 10.8%
December 2013: 10.8%
January 2014: 10.5%
February 2014: 10.2%
March 2014: 9.0%
April 2014: 8.0%
May 2014: 7.1%
June 2014: 6.3%
July 2014: 5.6%
August 2014: 5.1%
September 2014: 4.8%
“Other housing statistics paint a mixed to slightly positive picture,” Blitzer said. “Housing starts held above one million at annual rates on gains in single family homes, sales of existing homes are gaining, builders’ sentiment is improving, foreclosures continue to be worked off and mortgage default rates are at precrisis levels. With the economy looking better than a year ago, the housing outlook for 2015 is stable to slightly better.”
Blitzer is referring to a report last week that showed housing starts (groundbreakings on new homes) down 2.8% in October, but still at a stronger pace than one year earlier. What’s more, single-family starts showed a 4.2% increase over the prior month. Also, in October existing (or previously-owned) home sales hit their fastest pace in more than one year. (Both reports are one month ahead of the S&P/Case-Shiller report, the industry standard but unfortunately with a two-month lag time.) Taken together, the data suggest that the rapid price gains seen late last year and in the first part of this year are mostly behind us.
“The days of double-digit home value appreciation continue to rapidly fade away as more inventory comes on line, and the market is becoming more balanced between buyers and sellers,” said Stan Humphries, Zillow’s chief economist. “Like a perfectly prepared Thanksgiving turkey, it’s important for things to cool off a bit in the housing market, because too-fast appreciation risks burning both buyers and sellers. In this more sedate environment, buyers can take more time to find the right deal for them, and sellers can rest assured they won’t be left without a seat at the table when they turn around and become buyers. This slowdown is a critical step on the road back to a normal housing market, and as we approach the end of 2014, the housing market has plenty to be thankful for.”
As of September 2014, average home prices across the U.S. are back to their spring 2005 levels for the National Index (which covers 70% of the U.S. housing market), while both the 10-City and 20-City Composites are back to their autumn 2004 levels. For the city Composite indices, prices are still off their mid-summer 2006 peaks by about 15% to 17%. Prices have bounced back from their March 2012 lows by 28.8% and 29.6% for the 10-City and 20-City composites.
S&P/Case-Shiller is now releasing its National Home Price Index each month. Previously, it was published quarterly, while the 10-City and 20-City Composites were published monthly. The “July” numbers above for the National Index above reflect a roll-up of data for the three-month average of May, June and July prices.
And the state where richest people live is…
A new survey lists the states with the highest number of ultra rich
Which U.S. state has the wealthiest residents of them all? It’s the home state of Facebook Chief Executive Mark Zuckerberg but not America’s richest man, Bill Gates, who lives in the state of Washington.
California is the state with the highest number of ultra wealthy individuals, according to a report from private wealth consultancy Wealth-X. There are 13,445 ultrahigh-net-worth individuals — defined as those with $30 million and above in net assets — based in the Golden State, up 6% on a year-over-year basis. They’re mostly located in San Francisco (5,460 people) and Los Angeles (5,135). In fact, California’s population of ultra wealthy individuals is larger than the ultrawealthy population in the entirety of the United Kingdom (11,510).
Other states are experiencing a super-rich surge. New York was No. 2 on the list, with 9,530 ultrahigh-net-worth individuals in 2014, up 6% in the last year, and — perhaps unsurprisingly — 8,655, or 91%, of them were based in New York City. The population of people with $30 million or more rose 14% on a year-over-year basis to 80 in North Dakota, which is currently experiencing an energy oil boom. Florida’s ultrahigh-net-worth population increased by more than 10%, adding almost 500 new individuals to 4,710 in 2014 due to strong growth in the state’s financial and real-estate sectors.
Luxury Home Sales Are Surging In Southern California
by Tim Logan
By most measures, the housing market these days is a bit sluggish. Prices are flat. Sales are drooping. A lot of people are priced out.
But not everyone. The high end is hopping.
Luxury home sales in Southern California are hitting levels not seen in decades. The number of homes bought for $2 million or more in recent months is the highest on record. Sales worth $10 million or more are on pace this year to double their number from the heights of the housing bubble.
“It’s pretty mind-blowing, to be honest,” said Cindy Ambuehl, an agent with the Partners Trust in Brentwood. “The luxury market has been completely on fire.”
Low interest rates, a strong stock market and waves of cash sloshing in from overseas are boosting demand for high-dollar homes. A record 1,436 homes worth $2 million or more were sold in the six-county Southland in the second quarter, according to CoreLogic DataQuick.
In the more recent third quarter, 1,431 were sold. That was up 14% from the third quarter of 2013, and well ahead of any three-month period in the housing bubble years of the mid-2000s. This comes even as the broader market has plateaued, with prices in the Southland still about one-fifth below their pre-crash highs and sales at less than two-thirds their 2005 pace.
It reflects a housing market that is now moving at two speeds, said Selma Hepp, senior economist for the California Assn. of Realtors. Fast for the high end, sluggish for the rest.
“It’s just a completely different story between the two segments of the market,” she said. “Those who are doing well are doing really well.”
between now and a decade ago is that the world is smaller, said Drew Fenton, an agent who specializes in high-end homes at Hilton & Hyland in Beverly Hills. Wealthy international buyers are scooping up second homes, investment properties and safe havens for their cash. And it’s easier for them to scout — and travel — the world to do so.
“Everything’s just more global now,” he said. Ten years ago “it was much harder to reach those people and they didn’t travel as much.”
Now they are, and so are the agents who cater to them. Sandra Miller, a broker at Volker & Engels in Santa Monica, last week was jet-lagged from a trip to London, where she met with nearly two dozen brokerages that represent high-end buyers. At the end of the month, she’s off to Kuwait. Every week, she has a conference call with international agents.
The South land scores points with these buyers for its weather, its glamor and a population diverse enough that nearly any transplant can feel at home. And despite its reputation as one of the nation’s least-affordable housing markets, Los Angeles can look like a steal compared with other high-end havens.
“We talk to private wealth managers around the world who think California is a very good market right now,” Miller said. “Compared to New York or London, L.A. real estate is a bargain.”
But it’s not just foreign money that’s heating up the high end.
A surging stock market has boosted portfolios for domestic buyers in recent years, especially for those who have money to invest. Low interest rates have made mortgages cheap. And banks — still risk-averse — are offering lower rates and better terms to deep-pocketed borrowers than to cash-strapped first-time buyers. Meanwhile, wealthier households have seen their incomes grow faster than average in recent years.
Builders are recognizing this. Aliso Viejo based home builder New Home Co. has several developments underway in Orange County targeting high-end buyers, including 6,700 square-foot five-bedroom homes in Irvine and ocean-view condos in Newport Beach.
Sales have been brisk, said Joan Marcus Colvin, New Home’s senior vice president of sales, marketing and design, especially at that Newport condo building, the Meridian, where 34 units have sold since February, at an average price of nearly $3 million. That’s without even having a model home to show customers — the site is still under heavy construction. Renderings and drone shots of the views are all that’s offered.
“It’s quite a testament to the strength of the high end of the market,” Colvin said. “These were bought sight unseen. We couldn’t even stand people there and show them it.”
But it’s the first new home development in Newport Center in a quarter-century, Colvin said, so there’s demand. And income growth has been strong in coastal Orange County, minting new buyers for high-dollar homes. The same trend is happening in places less associated with luxury than Fashion Island.
High-end home sales are surging in “Silicon Beach,” too, with tech entrepreneurs and Bay Area transplants scooping up multimillion-dollar homes in Santa Monica, Venice and Marina del Rey. Many of the buyers work in the area, said Miller, and prefer walkable neighborhoods, relatively close to work, to the traditional hubs of Westside glitz.
“These people don’t want to commute an hour and a half to Beverly Hills, which is a whole 13 miles away,” Miller said.
Then there’s the formerly sleepy South Bay. The average sales price in Manhattan Beach through the first nine months of the year topped $2.2 million, said Barry Sulpor at Shorewood Realtors. That’s up from $1.85 million in the same period last year. Even empty lots in the beach town’s “Tree Section” are going for $1.3 million.
“That’s just lot value,” Sulpor said. “And as you get closer to the beach it goes up from there.”
Prices have been climbing so fast that even fairly recent buyers say they’re lucky they got in when they did. About 18 months ago, Ray Ahn and his wife bought a place half a block from the beach, a pocket listing that was never widely marketed. Before the purchase even closed, the house’s appraised value started climbing. And of the eight or so houses that neighbor Ahn’s, three have gotten high-end remodels since he moved in.
“I probably wouldn’t be able to buy here today,” said Ahn, who works for an investment firm in downtown Los Angeles.
But to live by the beach, he said, it’s worth it. So did Daphna Oyserman. She and her husband — professors who relocated from the University of Michigan to USC — spent $2.2 million in January for a house just a few blocks from the sand. They expected to pay a premium to live in a nice beach town, Oyserman said, and they did. But, although their house is “half the size at three times the price” of what they owned in Ann Arbor, Mich., Manhattan Beach offers amenities Michigan can’t.
“We thought, if we’re moving to L.A., we’d like to enjoy it,” she said. “In the morning I go for a run on the beach. When we go to sleep we can hear the ocean.”
These well-heeled professionals have played a big part in the South Bay’s surge, said Sulpor, along with those in the tech industry who prefer a more laid-back scene than Santa Monica and a growing cadre of professional athletes. Then there are young buyers who walk in with trust funds or family money.
“A lot of folks in their 20s and 30s are coming in and taking properties off the table at $3 million or $4 million,” Sulpor said. “Sometimes all-cash.”
Ambuehl said her luxury buyers also are starting to skew younger. Among her clients, tech entrepreneurs and other wealthy shoppers in their 20s and 30s are gradually replacing baby boomers, who often weren’t as young when they earned enough to afford a big-ticket house. They’re looking for different kinds of homes — often with more outdoor space — and in different neighborhoods. And, she predicts, they’ll be driving up the high end of the market for a long time.
“You’ve got 70 million baby boomers. You also have 70 million Gen Yers. They are a huge part of our buyer pool,” she said. “It’s a market we have to pay attention to.”
The Cruel Injustice of the Fed’s Bubbles in Housing
As the generational war heats up, we should all remember the source of all the bubbles and all the policies that could only result in generational poverty: The Federal Reserve.
Federal Reserve chair Janet Yellen recently treated the nation to an astonishing lecture on the solution to rising wealth inequality–according to Yellen, low-income households should save capital and buy assets such as stocks and housing.
It’s difficult to know which is more insulting: her oily sanctimony or her callous disregard for facts. What Yellen and the rest of the Fed Mafia have done is inflate bubbles in credit and assets that have made housing unaffordable to all but the wealthiest households.
Fed policy has been especially destructive to young households: not only is it difficult to save capital when your income is declining in real terms, housing has soared out of reach as the direct consequence of Fed policies.
Two charts reflect this reality. The first is of median household income, the second is the Case-Shiller Index of housing prices for the San Francisco Bay Area.
I have marked the wage chart with the actual price of a modest 900 square foot suburban house in the S.F. Bay Area whose price history mirrors the Case-Shiller Index, with one difference: this house (and many others) are actually worth more now than they were at the top of the national bubble in 2006-7.
But that is a mere quibble. The main point is that housing exploded from 3 times median income to 12 times median income as a direct result of Fed policies. Lowering interest rates doesn’t make assets any more affordable–it pushes them higher.
The only winners in the housing bubble are those who bought in 1998 or earlier. The extraordinary gains reaped since the late 1990s have not been available to younger households. The popping of the housing bubble did lower prices from nosebleed heights, but in most locales price did not return to 1996 levels.
As a multiple of real (inflation-adjusted) income, in many areas housing is more expensive than it was at the top of the 2006 bubble.
While Yellen and the rest of the Fed Mafia have been enormously successful in blowing bubbles that crash with devastating consequences, they failed to move the needle on household income. Median income has actually declined since 2000.
Inflating asset bubbles shovels unearned gains into the pockets of those who own assets prior to the bubble, but it inflates those assets out of reach of those who don’t own assets–for example, people who were too young to buy assets at pre-bubble prices.
Inflating housing out of reach of young households as a matter of Fed policy isn’t simply unjust–it’s cruel. Fed policies designed to goose asset valuations as a theater-of-the-absurd measure of “prosperity” overlooked that it is only the older generations who bought all these assets at pre-bubble prices who have gained.
In the good old days, a 20% down payment was standard. How long will it take a young family to save $130,000 for a $650,000 house? How much of their income will be squandered in interest and property taxes for the privilege of owning a bubblicious-priced house?
If we scrape away the toxic sludge of sanctimony and misrepresentation from Yellen’s absurd lecture, we divine her true message: if you want a house, make sure you’re born to rich parents who bought at pre-bubble prices.
As the generational war heats up, we should all remember the source of all the bubbles and all the policies that could only result in generational poverty: The Federal Reserve.
Consistency Is What Drives Your Success
I was out on the West Coast recently delivering a sales workshop for a group of about 40 loan originators. Our mission was to explore ideas for capitalizing on the summer home buying season and discover ways to increase their purchase loan application volume.
Early in the session, I handed out colored index cards and asked the participants to record their answers to this question: If a mortgage originator is serious about growing his or her purchase loan business over the next few months, what are three things he or she should be doing?
Everyone wrote down their best ideas, and I collected the cards so we could see their advice.
As you might imagine, we ended up with a lot of reoccurring themes and ideas. Overall, here are the top five suggestions they offered:
1. Work hard; put in the hours it takes.
2. Get out and see your Realtor and business partners.
3. Contact your database with cards and letters asking for referrals.
4. Attend local events and talk to people who might be in the market to buy.
5. Follow up on your pre-approvals, your leads and the contacts you make.
What do you notice about this list? There is nothing new! In all 40 index cards I collected, there was not a single suggestion that was original, earth-shattering or eye-popping. And that is exactly the point I wanted to make to that group and to you today: there is nothing new about success.
There are mortgage originators in the market today with 15 to 20 loans in their pipelines. There are originators closing $5 million a month and more.
Are they doing anything special? Absolutely not. Do they have “secrets” and strategies most others have never considered? Far from it. High producers and top performers have come to terms with the most important lesson about success—that success in this business is primarily caused by one enormously important factor: consistency.
Taking our cue from the list above, let’s apply this rule:
1. It’s not about working hard every so often, it’s about working a full eight- to nine-hour day, every day, five days a week. There’s no coming in late and no blowing out early on Friday afternoon. You can’t take two-hour lunch breaks and run personal errands on work time. You have to work hard at your job and put in a full day, every single day. Consistently.
2. It’s not about getting out to see your Realtor and other business partners when you can, when you are caught up, or when you feel like it. It’s about getting out to visit your Realtor and business partners every week, week after week. Consistently.
3. It’s not about contacting your database with an arbitrary email at accidental intervals. It’s about having a pre-determined marketing plan to contact your database with cards, letters and phone calls on an ongoing monthly basis. Consistently.
4. It’s not about attending a local community, networking or industry event once every few months or on the off-chance when the opportunity arises. It’s about getting out of the office once or twice a week to meet new people, make new contacts and generate potential prospects. Consistently.
5. It’s not about following up on your leads and pre-approvals when you get time (after you’ve read all your emails or once you have combed through your loan files for the 10th time today). It’s about following up on potential leads, referrals and pre-approvals every single day. Consistently.
“Success is not sexy,” a very successful loan originator once told me. “Success comes from doing the simple, basic, mundane things you need to do day after day after day.” His recommendation is right on.
Too many mortgage originators today are searching for that magic pill that will make them more successful without having to exert much effort. Guess what; it doesn’t exist. There is no easy road to success in this business—never has been, never will be. Success is the end result of doing the right things consistently over a long period of time.
As we discovered at my sales seminar, most of the loan originators in attendance knew what to do and most were doing all the right things.
But for many, their production volume wasn’t where they wanted it to be because they weren’t doing what they needed to do consistently. They were working hard, but not every day. They were connecting with their Realtors, but not all that often.
They were building and marketing a database, but only when they had time to get around to it. They were engaged in some networking events, but maybe only once every few months.
And they were following up on their pre-approvals and prospects in a haphazard, random sort of way.
Does that also describe how you are running your business right now? If so, perhaps the most effective strategy to growing your purchase loan business over the summer home buying season has less to do with adding new activities and more to do with doing what you are already doing, but with more (wait for it…) consistency.
You have a tremendous opportunity ahead of you over the upcoming months. Activity is picking up, buyers are out there looking at properties, homes are selling, and mortgages are being made.
If you are consistent in doing what you need to do you’ll score a lot of opportunities, take a lot of applications, help a lot of people, close a lot of loans, and make a lot of money. Isn’t that what this business is all about?
Doug Smith is a nationally known industry speaker, author and sales trainer. For more information, please visit http://www.DougSmithOnline.com or call Douglas Smith & Associates at 877-430-2329.
OPEC Forecasts $110 Nominal Price Through End Of This Decade:
OPEC’s World Oil Outlook And Pivot To Asia
- OPEC published its recent global oil market outlook, which offers a slightly different and instructional viewpoint.
- OPEC sees its share of crude oil/liquids production reducing in light of increases in U.S. and Canada production.
- OPEC also indicates a pivot toward Asia, where it sees the greatest demand for its primary exports in the future.
In perusing through OPEC’s recently released “World Oil Outlook,” several viewpoints are noteworthy. According to OPEC, demand grows mainly from developing countries and U.S. supply slows its run up after 2019. After 2019, OPEC begins to pick up the slack, supplying its products more readily. In OPEC’s view, Asia becomes a center of gravity given global population growth, up nearly 2 billion by 2040, and economic prosperity. The world economy grows by 260% versus that of 2013 on a purchasing power parity basis.
During the period 2013-2040, OPEC says oil demand is expected to increase by just over 21 million barrels per day (mb/d), reaching 111.1 mb/d by 2040. Developing countries alone will account for growth of 28 mb/d and demand in the OECD will fall by over 7 mb/d (p.1). On the supply side, “in the long-term, OPEC will supply the majority of the additional required barrels, with the OPEC liquids supply forecast increasing by over 13 mb/d in the Reference Case from 2020-2040,” they offer (p.1). OPEC shaved off 0.5 million barrels from their last year’s forecast to 2035. Asian oil demand accounts for 71% of the growth of oil demand.
Morgan Stanley pulled out the following items:
The oil cartel released its World Oil Outlook last week, showing OPEC crude production falling to 29.5 million barrels per day in 2015 and 28.5 million barrels per day in 2016. This year’s average of 30 million barrels per day has helped flood the market and push oil prices to multi-year lows.
In the period to 2019, this chart illustrates where the barrels will flow:
With regard to price, OPEC acknowledges that the marginal cost to supply barrels continues to be a factor in expectations in the medium and long term. This sentiment has been echoed by other E&P CEOs in various communiques this year. OPEC forecasts a nominal price of $110 to the end of this decade:
On this evidence, a similar price assumption is made for the OPEC Reference Basket (ORB) price in the Reference Case compared to that presented in the WOO 2013: a constant nominal price of $110/b is assumed for the rest of the decade, corresponding to a small decline in real values.
Real values are assumed to approach $100/b in 2013 prices by 2035, with a slight further increase to $102/b by 2040. Nominal prices reach $124/b by 2025 and $177/b by 2040. These values are not to be taken as targets, according to OPEC. They acknowledge the challenge of predicting the world economy as well as non-OPEC supply. The Energy Information Administration (EIA) forecast a price for Brent averaging over $101 in 2015 and West Texas Intermediate (WTI) of over $94 as of their October 7th forecast. (This will have likely changed as of November 12th after the steep declines of October are weighed into their equations.) WTI averaged around the $97 range for 2013 and 2014. Importantly, U.S. supply may ratchet down slightly (green broken line) in response to price declines, if they continue.
It’s also the cars, globally
In 2013, OPEC says gasoline and diesel engines comprised 97% of the passenger cars total in 2013, and will hold 92% of the road in 2040. The diesel share for autos rises from 14% in 2013 to 21% in 2040. Basically, the number of cars buzzing on roads doubles from now to 2040. And 68% of the increase in cars comes from developing countries. China comprises the lion’s share of car volume growing by more than 470 million between 2011-2040, followed by India, then OPEC members will attribute 110 million new cars on the road. These increases assume levels similar to advanced economy (OECD) car volumes of the 1990s. In spite of efficiency and fuel economy, oil use per vehicle is expected to decline by 2.2%.
Commercial vehicles gain 300 million by 2040 from about 200 million in 2011. There are now more commercial vehicles in developing countries than developed.
U.S. Supply and OPEC
According to OPEC, U.S. and Canada supply increases through the period to 2019, the medium term. After 2017, they believe U.S. supply tempers from 1.2 million barrels of tight oil increases between 2013 and 2014 to 0.4 million in 2015, and less incremental increases thereafter. This acknowledges shale oil’s contribution to supply, with other supply sources declining, i.e., conventional and offshore.
The amount of OPEC crude required will fall from just over 30 mb/d in 2013 to 28.2 mb/d in 2017, and will start to rise again in 2018. By 2019, OPEC crude supply, at 28.7 mb/d, is still lower than in 2013.
However, the OPEC requirements are expected to ramp back up after 2019. By 2040, they expect to be supplying the world with 39 mb/d, a 9 million barrel/d increase from 2013. OPEC’s global share of crude oil supply is then 36%, above 2013 levels of about 30%. A select few firms like Pioneer Natural Resources (NYSE:PXD), Occidental Petroleum (NYSE:OXY), Chevron (NYSE:CVX) and even small-cap RSP Permian (NYSE:RSPP) are staying the course on shale oil production in the Permian for the present. After the first of the year, they will evaluate the price environment.
How does this outlook by OPEC inform the future? From the appearances in its forecasts, OPEC has slightly lower production in the medium term (to 2019), a decline of 1.3 million b/d in 2019 from the 2014 production of 30 million b/d. Thus, the main lever for an increase in prices for oil markets is for OPEC to restrict production, or encourage other members to keep to the current quota of 30 million b/d. Better economic indicators also could help. However, Saudi Arabia, the swing producer, has shown interest in maintaining its market share vis-à-vis the price cuts it has offered China, first, and then the U.S. more recently.
The global state of crude oil and liquids and prices has fundamentally changed with the addition of tight oil or shale oil, particularly from the U.S. While demand particulars have dominated the price regime recently, the upcoming decisions by OPEC at the late November meeting will have an influence on price expectations. In an environment of softer perceived demand now because of global economics and in the future because of non-OPEC supply, it would seem rational for OPEC to indicate some type of discipline among members’ production.
Source: OPEC “2014 World Oil Outlook,” mainly from the executive summary.
The Next Housing Crisis May Be Sooner Than You Think
How we could fall into another housing crisis before we’ve fully pulled out of the 2008 one.
When it comes to housing, sometimes it seems we never learn. Just when America appeared to be recovering from the last housing crisis—the trigger, in many ways, for 2008’s grand financial meltdown and the beginning of a three-year recession—another one may be looming on the horizon.
There are at several big red flags.
For one, the housing market never truly recovered from the recession. Trulia Chief Economist Jed Kolko points out that, while the third quarter of 2014 saw improvement in a number of housing key barometers, none have returned to normal, pre-recession levels. Existing home sales are now 80 percent of the way back to normal, while home prices are stuck at 75 percent back, remaining undervalued by 3.4 percent. More troubling, new construction is less than halfway (49 percent) back to normal. Kolko also notes that the fundamental building blocks of the economy, including employment levels, income and household formation, have also been slow to improve. “In this recovery, jobs and housing can’t get what they need from each other,” he writes.
Americans are spending more than 33 percent of their income on housing.
Second, Americans continue to overspend on housing. Even as the economy drags itself out of its recession, a spate of reports show that families are having a harder and harder time paying for housing. Part of the problem is that Americans continue to want more space in bigger homes, and not just in the suburbs but in urban areas, as well. Americans more than 33 percent of their income on housing in 2013, up nearly 13 percent from two decades ago, according to newly released data from the Bureau of Labor Statistics (BLS). The graph below plots the trend by age.
Over-spending on housing is far worse in some places than others; the housing market and its recovery remain highly uneven. Another BLS report released last month showed that households in Washington, D.C., spent nearly twice as much on housing ($17,603) as those in Cleveland, Ohio ($9,061). The chart below, from the BLS report, shows average annual expenses on housing related items:
The result, of course, is that more and more American households, especially middle- and working-class people, are having a harder time affording housing. This is particularly the case in reviving urban centers, as more affluent, highly educated and creative-class workers snap up the best spaces, particularly those along convenient transit, pushing the service and working class further out.
Last but certainly not least, the rate of home ownership continues to fall, and dramatically. Home ownership has reached its lowest level in two decades—64.4 percent (as of the third quarter of 2014). Here’s the data, from the U.S. Census Bureau:
Home ownership currently hovers from the mid-50 to low-60 percent range in some of the most highly productive and innovative metros in this country—places like San Francisco, New York, and Los Angeles. This range seems “to provide the flexibility of rental and ownership options required for a fast-paced, rapidly changing knowledge economy. Widespread home ownership is no longer the key to a thriving economy,” I’ve written.
What we are going through is much more than a generational shift or simple lifestyle change. It’s a deep economic shift—I’ve called it the Great Reset. It entails a shift away from the economic system, population patterns and geographic layout of the old suburban growth model, which was deeply connected to old industrial economy, toward a new kind of denser, more urban growth more in line with today’s knowledge economy. We remain in the early stages of this reset. If history is any guide, the complete shift will take a generation or so.
It’s time to impose stricter underwriting standards and encourage the dense, mixed-use, more flexible housing options that the knowledge economy requires.
The upshot, as the Nobel Prize winner Edmund Phelps has written, is that it is time for Americans to get over their house passion. The new knowledge economy requires we spend less on housing and cars, and more on education, human capital and innovation—exactly those inputs that fuel the new economic and social system.
But we’re not moving in that direction; in fact, we appear to be going the other way. This past weekend, Peter J. Wallison pointed out in a New York Times op-ed that federal regulators moved back off tougher mortgage-underwriting standards brought on by 2010’s Dodd-Frank Act and instead relaxed them. Regulators are hoping to encourage more home ownership, but they’re essentially recreating the conditions that led to 2008’s crash.
Wallison notes that this amounts to “underwriting the next housing crisis.” He’s right: It’s time to impose stricter underwriting standards and encourage the dense, mixed-use, more flexible housing options that the knowledge economy requires.
During the depression and after World War II, this country’s leaders pioneered a series of purposeful and ultimately game-changing polices that set in motion the old suburban growth model, helping propel the industrial economy and creating a middle class of workers and owners. Now that our economy has changed again, we need to do the same for the denser urban growth model, creating more flexible housing system that can help bolster today’s economy.
Dream housing for new economy workers?
Energy Workforce Projected To Grow 39% Through 2022
The dramatic resurgence of the oil industry over the past few years has been a notable factor in the national economic recovery. Production levels have reached totals not seen since the late 1980s and continue to increase, and rig counts are in the 1,900 range. While prices have dipped recently, it will take more than that to markedly slow the level of activity. Cycles are inevitable, but activity is forecast to remain at relatively high levels.
An outgrowth of oil and gas activity strength is a need for additional workers. At the same time, the industry workforce is aging, and shortages are likely to emerge in key fields ranging from petroleum engineers to experienced drilling crews. I was recently asked to comment on the topic at a gathering of energy workforce professionals. Because the industry is so important to many parts of Texas, it’s an issue with relevance to future prosperity.
Although direct employment in the energy industry is a small percentage of total jobs in the state, the work is often well paying. Moreover, the ripple effects through the economy of this high value-added industry are large, especially in areas which have a substantial concentration of support services.
Employment in oil and gas extraction has expanded rapidly, up from 119,800 in January 2004 to 213,500 in September 2014. Strong demand for key occupations is evidenced by the high salaries; for example, median pay was $130,280 for petroleum engineers in 2012 according to the Bureau of Labor Statistics (BLS).
Due to expansion in the industry alone, the BLS estimates employment growth of 39 percent through 2022 for petroleum engineers, which comprised 11 percent of total employment in oil and gas extraction in 2012. Other key categories (such as geoscientists, wellhead pumpers, and roustabouts) are also expected to see employment gains exceeding 15 percent. In high-activity regions, shortages are emerging in secondary fields such as welders, electricians, and truck drivers.
The fact that the industry workforce is aging is widely recognized. The cyclical nature of the energy industry contributes to uneven entry into fields such as petroleum engineering and others which support oil and gas activity. For example, the current surge has pushed up wages, and enrollment in related fields has increased sharply. Past downturns, however, led to relatively low enrollments, and therefore relatively lower numbers of workers in some age cohorts. The loss of the large baby boom generation of experienced workers to retirement will affect all industries. This problem is compounded in the energy sector because of the long stagnation of the industry in the 1980s and 1990s resulting in a generation of workers with little incentive to enter the industry. As a result, the projected need for workers due to replacement is particularly high for key fields.
The BLS estimates that 9,800 petroleum engineers (25.5 percent of the total) working in 2012 will need to be replaced by 2022 because they retire or permanently leave the field. Replacement rates are also projected to be high for other crucial occupations including petroleum pump system operators, refinery operators, and gaugers (37.1 percent); derrick, rotary drill, and service unit operators, oil, gas, and mining (40.4 percent).
Putting together the needs from industry expansion and replacement, most critical occupations will require new workers equal to 40 percent or more of the current employment levels. The total need for petroleum engineers is estimated to equal approximately 64.5 percent of the current workforce. Clearly, it will be a major challenge to deal with this rapid turnover.
Potential solutions which have been attempted or discussed present problems, and it will require cooperative efforts between the industry and higher education and training institutions to adequately deal with future workforce shortages. Universities have had problems filling open teaching positions, because private-sector jobs are more lucrative for qualified candidates. Given budget constraints and other considerations, it is not feasible for universities to compete on the basis of salary. Without additional teaching and research staff, it will be difficult to continue to expand enrollment while maintaining education quality. At the same time, high-paying jobs are enticing students into the workforce, and fewer are entering doctoral programs.
Another option which has been suggested is for engineers who are experienced in the workplace to spend some of their time teaching. However, busy companies are naturally resistant to allowing employees to take time away from their regular duties. Innovative training and associate degree and certification programs blending classroom and hands-on experience show promise for helping deal with current and potential shortages in support occupations. Such programs can prepare students for well-paying technical jobs in the industry. Encouraging experienced professionals to work past retirement, using flexible hours and locations to appeal to Millennials, and other innovative approaches must be part of the mix, as well as encouraging the entry of females into the field (only 20 percent of the current workforce is female, but over 40 percent of the new entries).
Industry observers have long been aware of the coming “changing of the guard” in the oil and gas business. We are now approaching the crucial time period for ensuring the availability of the workers needed to fill future jobs. Cooperative efforts between the industry and higher education/training institutions will likely be required, and it’s time to act.
$195 Million ‘Palazzo di Amore’ Is America’s New Most Expensive Home For Sale
by Erin Carlyle, Forbes staff.
Billionaire real estate investor Jeff Greene’s massive Palazzo di Amore in Beverly Hills hit the market today for $195 million, making it America’s new most expensive home for sale.
Set on 25 acres overlooking Los Angeles about five to seven minutes by car to Rodeo Drive, the estate includes a 35,000-square-foot main home plus a 15,000-square-foot entertainment center and a separate guest home, containing a total of 12 bedrooms and 23 bathrooms across the various structures. The massive Mediterranean-style spread also comes with a working vineyard that produces six types of wine. Joyce Rey and Stacy Gottula, both of Coldwell Banker Previews International, are the listing agents.
Building the Palazzo was a seven-and-a-half-year labor of love for Greene. In 2007 the real estate investor, who has a net worth of $3 billion, according to Forbes, purchased the home out of bankruptcy proceedings from the previous owners–a Middle Eastern businessman and his wife–paying a reported $35 million. “I have no logical explanation for why we spent the next seven-and-a-half years building this house,” Greene told Forbes. “But that’s the world of building very detailed custom homes.”
Greene hired mega-mansion builder Mohamed Hadid to do the lion’s share of the design, but remained intimately involved in nearly every decision (along with his wife), pouring in tens of millions to complete the estate. (Finishing touches were just put on last month.) At one point, a Peruvian woodcarver was on site for four months to hand-carve the fireplace mantels, Greene says.
Because the property was purchased out of bankrutpcy, Greene got the deed but not the house plans, he says. The partially-finished palazzo had no driveways, so Greene and Hadid had to design and build one. Same for the swimming pool. The land also came with a curious concrete foundation with nothing on it. At first, Greene and his wife planned to tear it out. Then they changed course to: ”Let’s just build an entertainment complex,” Greene says. Today, that space houses a bowling alley, a 50-seat private screening room, and a ballroom with a DJ booth and a revolving dance floor
Palazzo di Amore would make the ideal setting for some grand entertaining. The first floor of the main house features a chef’s kitchen with a commercial size walk-in refrigerator, plus a secondary staff kitchen, butler’s pantry, two staff rooms, a three-car attached garage and two private offices with separate entry. The living room, dining room, breakfast room, game room, office and family room all open onto grounds that face a waterfall set into the hillside. A separate guest house brings the total livable square footage to 53,000. And the property features garage parking for 27 cars and can accommodate up to 150 cars on site.
Plus, what better way to impress all these hypothetical guests than with your own private wine? When Greene purchased the land in 2007, the vineyards were producing grapes but hadn’t yet been turned into wine. So the billionaire hired three full-time people to turn make the vineyards productive. Now, “Beverly Hills Vineyards” produces between 350 and 500 cases a year of six varietals: Sangiovese, Syrah, Cabernet, Merlot, Rose, and Sauvignon Blanc. “We drink it all the time,” Greene says.
The estate also features facilities for showing off that home-grown wine, with a 3,000-bottle wine cellar as well as a tasting room in the main house; as well as lower-level space for an additional 10,000 bottles (plus barrels) in a temperature-controlled room, flanked by an additional tasting room.
Of course, the home would also make a fabulous private retreat. The private living space on the second floor of the main home contains two wings, one with a guest suite and the 5,000-square-foot master suite, with hand-carved fireplace mantel, Juliet balconies, and his-and-hers baths. The ‘his’ bath features a Turkish-style spa with hand-painted wood panels, a fireplace, and floor-to-ceiling Moroccan tiles. On the opposite wing, there are four additional bedroom suites, including one VIP suite with silk-upholstered walls and a full kitchen. The grounds surrounding the home contain a 128-foot reflecting pool and fountain. Also, a swimming pool, a spa, a barbecue area and a tennis court.
The massive Mediterranean-style spread was originally designed by architect Bob Ray Offenhauser and designer Alberto Pinto. Rey, the listing agent, says she expects the home to sell to a foreign buyer, since all the Los Angeles area homes over $50 million sold this year have gone to foreigners.
To date, the most expensive home sold in the U.S. is the $147 million East Hampton spread picked up by Jana Partners founder Barry Rosenstein earlier this year. The record-setting price tag is based on nation-wide sales of major properties priced around $100 million, Rey says. She cited Copper Beech Farm, the $120 million Greenwich, Conn., property that sold earlier this year, as well as the penthouse at One57, the new luxury condominium towers in Midtown Manhattan, that billionaire Bill Ackman and a group of investors reportedly purchased for north of $90 million. “None of those properties had the land, the amenities that we’re offering here,” Rey says.
As for Greene, who lives in Florida and has a home in Malibu and another house in the Hamptons, he’s simply ready to move on with his life. ”I’m a control freak, and that’s why these projects aren’t good for me,” he says. “It’s just too many years, too long. But hopefully the buyer will come along who will appreciate the fruits of our labor.”
Today’s Hottest Trend In Residential Real Estate
The practice of multigenerational housing has been on the rise the past few years, and now experts are saying that it is adding value to properties.
In a recent Wall Street Journal article, several couples across the country are quoted saying that instead of downsizing to a new home, they are choosing to live with their adult children.
This is what many families across the country are doing for both a “peace of mind” and for “higher property values.”
“For both domestic and foreign buyers, the hottest amenity in real estate these days is an in-law unit, an apartment carved out of an existing home or a stand-alone dwelling built on the homeowners’ property,” writes Katy McLaughlin of the WSJ. “While the adult children get the peace of mind of having mom and dad nearby, real-estate agents say the in-law accommodations are adding value to their homes.”
And how much more are these homes worth? In an analysis by Zillow, the homes with this type of living accommodations were priced about 60 percent higher than regular single-family homes.
Local builders are noticing the trend, too. Horsham based Toll Brothers are building more communities that include both large, single-family homes and smaller homes for empty nesters, the company’s chief marketing officer, Kira Sterling, told the WSJ.
Single Family Construction Expected to Boom in 2015
Kenny DeLaGarza, a building inspector for the city of Midland, at a 600-home Betenbough development.
Single-family home construction is expected to increase 26 percent in 2015, the National Association of Home Builders reported Oct. 31. NAHB expects single-family production to total 802,000 units next year and reach 1.1 million by 2016.
Economists participating in the NAHB’s 2014 Fall Construction Forecast Webinar said that a growing economy, increased household formation, low interest rates and pent-up demand should help drive the market next year. They also said they expect continued growth in multifamily starts given the nation’s rental demand.
The NAHB called the 2000-03 period a benchmark for normal housing activity; during those years, single-family production averaged 1.3 million units a year. The organization said it expects single-family starts to be at 90 percent of normal by the fourth quarter 2016.
NAHB Chief Economist David Crowe said multifamily starts currently are at normal production levels and are projected to increase 15 percent to 365,000 by the end of the year and hold steady into next year.
The NAHB Remodeling Market Index also showed increased activity, although it’s expected to be down 3.4 percent compared to last year because of sluggish activity in the first quarter 2014. Remodeling activity will continue to increase gradually in 2015 and 2016.
Moody’s Analytics Chief Economist Mark Zandi told the NAHB that he expects an undersupply of housing given increasing job growth. Currently, the nation’s supply stands at just over 1 million units annually, well below what’s considered normal; in a normal year, there should be demand for 1.7 million units.
Zandi noted that increasing housing stock by 700,000 units should help meet demand and create 2.1 million jobs. He also noted that things should level off by the end of 2017, when mortgage rates probably will rise to around 6 percent.
“The housing market will be fine because of better employment, higher wages and solid economic growth, which will trump the effect of higher mortgage rates,” Zandi told the NAHB.
Robert Denk, NAHB assistant vice president for forecasting and analysis, said that he expects housing recovery to vary by state and region, noting that states with higher levels of payroll employment or labor market recovery are associated with healthier housing markets
States with the healthiest job growth include Louisiana, Montana, North Dakota, Texas and Wyoming, as well as farm belt states like Iowa.
Meanwhile Alabama, Arizona, Nevada, New Jersey, New Mexico and Rhode Island continue to have weaker markets.
Number of U.S. First-Time Homebuyers Plummets
by National Mortgage Professional Magazine
Despite an improving job market and low interest rates, the share of first-time homebuyers fell to its lowest point in nearly three decades and is preventing a healthier housing market from reaching its full potential, according to an annual survey released by the National Association of Realtors (NAR). The survey additionally found that an overwhelming majority of buyers search for homes online and then purchase their home through a real estate agent.
The 2014 NAR Profile of Home Buyers and Sellers continues a long-running series of large national NAR surveys evaluating the demographics, preferences, motivations, plans and experiences of recent home buyers and sellers; the series dates back to 1981. Results are representative of owner-occupants and do not include investors or vacation homes.
The long-term average in this survey, dating back to 1981, shows that four out of 10 purchases are from first-time home buyers. In this year’s survey, the share of first-time home buyers dropped five percentage points from a year ago to 33 percent, representing the lowest share since 1987 (30 percent).
“Rising rents and repaying student loan debt makes saving for a down payment more difficult, especially for young adults who’ve experienced limited job prospects and flat wage growth since entering the workforce,” said Lawrence Yun, NAR chief economist. “Adding more bumps in the road, is that those finally in a position to buy have had to overcome low inventory levels in their price range, competition from investors, tight credit conditions and high mortgage insurance premiums.”
Yun added, “Stronger job growth should eventually support higher wages, but nearly half (47 percent) of first-time buyers in this year’s survey (43 percent in 2013) said the mortgage application and approval process was much more or somewhat more difficult than expected. Less stringent credit standards and mortgage insurance premiums commensurate with current buyer risk profiles are needed to boost first-time buyer participation, especially with interest rates likely rising in upcoming years.”
The household composition of buyers responding to the survey was mostly unchanged from a year ago. Sixty-five percent of buyers were married couples, 16 percent single women, nine percent single men and eight percent unmarried couples.
In 2009, 60 percent of buyers were married, 21 percent were single women, 10 percent single men and 8 percent unmarried couples. Thirteen percent of survey respondents were multi-generational households, including adult children, parents and/or grandparents.
The median age of first-time buyers was 31, unchanged from the last two years, and the median income was $68,300 ($67,400 in 2013). The typical first-time buyer purchased a 1,570 square-foot home costing $169,000, while the typical repeat buyer was 53 years old and earned $95,000. Repeat buyers purchased a median 2,030-square foot home costing $240,000.
When asked about the primary reason for purchasing, 53 percent of first-time buyers cited a desire to own a home of their own. For repeat buyers, 12 percent had a job-related move, 11 percent wanted a home in a better area, and another 10 percent said they wanted a larger home. Responses for other reasons were in the single digits.
According to the survey, 79 percent of recent buyers said their home is a good investment, and 40 percent believe it’s better than stocks.
Financing the purchase
Nearly nine out of 10 buyers (88 percent) financed their purchase. Younger buyers were more likely to finance (97 percent) compared to buyers aged 65 years and older (64 percent). The median down payment ranged from six percent for first-time buyers to 13 percent for repeat buyers. Among 23 percent of first-time buyers who said saving for a down payment was difficult, more than half (57 percent) said student loans delayed saving, up from 54 percent a year ago.
In addition to tapping into their own savings (81 percent), first-time homebuyers used a variety of outside resources for their loan downpayment. Twenty-six percent received a gift from a friend or relative—most likely their parents—and six percent received a loan from a relative or friend. Ten percent of buyers sold stocks or bonds and tapped into a 401(k) fund.
Ninety-three percent of entry-level buyers chose a fixed-rate mortgage, with 35 percent financing their purchase with a low-down payment Federal Housing Administration-backed mortgage (39 percent in 2013), and nine percent using the Veterans Affairs loan program with no downpayment requirements.
“FHA premiums are too high in relation to default rates and have likely dissuaded some prospective first-time buyers from entering the market,” said Yun. “To put it in perspective, 56 percent of first-time buyers used a FHA loan in 2010. The current high mortgage insurance added to their monthly payment is likely causing some young adults to forgo taking out a loan.”
Buyers used a wide variety of resources in searching for a home, with the Internet (92 percent) and real estate agents (87 percent) leading the way. Other noteworthy results included mobile or tablet applications (50 percent), mobile or tablet search engines (48 percent), yard signs (48 percent) and open houses (44 percent).
According to NAR President Steve Brown, co-owner of Irongate, Inc., Realtors® in Dayton, Ohio, although more buyers used the Internet as the first step of their search than any other option (43 percent), the Internet hasn’t replaced the real estate agent’s role in a transaction.
“Ninety percent of home buyers who searched for homes online ended up purchasing their home through an agent,” Brown said. “In fact, buyers who used the Internet were more likely to purchase their home through an agent than those who didn’t (67 percent). Realtors are not only the source of online real estate data, they also use their unparalleled local market knowledge and resources to close the deal for buyers and sellers.”
When buyers were asked where they first learned about the home they purchased, 43 percent said the Internet (unchanged from last year, but up from 36 percent in 2009); 33 percent from a real estate agent; 9 percent a yard sign or open house; six percent from a friend, neighbor or relative; five percent from home builders; three percent directly from the seller; and one percent a print or newspaper ad.
Likely highlighting the low inventory levels seen earlier in 2014, buyers visited 10 homes and typically found the one they eventually purchased two weeks quicker than last year (10 weeks compared to 12 in 2013). Overall, 89 percent were satisfied with the buying process.
First-time home buyers plan to stay in their home for 10 years and repeat buyers plan to hold their property for 15 years; sellers in this year’s survey had been in their previous home for a median of 10 years.
The biggest factors influencing neighborhood choice were quality of the neighborhood (69 percent), convenience to jobs (52 percent), overall affordability of homes (47 percent), and convenience to family and friends (43 percent). Other factors with relatively high responses included convenience to shopping (31 percent), quality of the school district (30 percent), neighborhood design (28 percent) and convenience to entertainment or leisure activities (25 percent).
This year’s survey also highlighted the significant role transportation costs and “green” features have in the purchase decision process. Seventy percent of buyers said transportation costs were important, while 86 percent said heating and cooling costs were important. Over two-thirds said energy efficient appliances and lighting were important (68 and 66 percent, respectively).
Seventy-nine percent of respondents purchased a detached single-family home, eight percent a townhouse or row house, 8 percent a condo and six percent some other kind of housing. First-time home buyers were slightly more likely (10 percent) to purchase a townhouse or a condo than repeat buyers (seven percent). The typical home had three bedrooms and two bathrooms.
The majority of buyers surveyed purchased in a suburb or subdivision (50 percent). The remaining bought in a small town (20 percent), urban area (16 percent), rural area (11 percent) or resort/recreation area (three percent). Buyers’ median distance from their previous residence was 12 miles.
Characteristics of sellers
The typical seller over the past year was 54 years old (53 in 2013; 46 in 2009), was married (74 percent), had a household income of $96,700, and was in their home for 10 years before selling—a new high for tenure in home. Seventeen percent of sellers wanted to sell earlier but were stalled because their home had been worth less than their mortgage (13 percent in 2013).
“Faster price appreciation this past year finally allowed more previously stuck homeowners with little or no equity the ability to sell after waiting the last few years,” Yun said.
Sellers realized a median equity gain of $30,100 ($25,000 in 2013)—a 17 percent increase (13 percent last year) over the original purchase price. Sellers who owned a home for one year to five years typically reported higher gains than those who owned a home for six to 10 years, underlining the price swings since the recession.
The median time on the market for recently sold homes dropped to four weeks in this year’s report compared to five weeks last year, indicating tight inventory in many local markets. Sellers moved a median distance of 20 miles and approximately 71 percent moved to a larger or comparably sized home.
A combined 60 percent of responding sellers found a real estate agent through a referral by a friend, neighbor or relative, or used their agent from a previous transaction. Eighty-three percent are likely to use the agent again or recommend to others.
For the past three years, 88 percent of sellers have sold with the assistance of an agent and only nine percent of sales have been for-sale-by-owner, or FSBO sales.
For-sale-by-owner transactions accounted for 9 percent of sales, unchanged from a year ago and matching the record lows set in 2010 and 2012; the record high was 20 percent in 1987. The share of homes sold without professional representation has trended lower since reaching a cyclical peak of 18 percent in 1997.
Factoring out private sales between parties who knew each other in advance, the actual number of homes sold on the open market without professional assistance was 5 percent. The most difficult tasks reported by FSBOs are getting the right price, selling within the length of time planned, preparing or fixing up the home for sale, and understanding and completing paperwork.
NAR mailed a 127-question survey in July 2014 using a random sample weighted to be representative of sales on a geographic basis. A total of 6,572 responses were received from primary residence buyers. After accounting for undeliverable questionnaires, the survey had an adjusted response rate of 9.4 percent. The recent home buyers had to have purchased a home between July of 2013 and June of 2014. Because of rounding and omissions for space, percentage distributions for some findings may not add up to 100 percent. All information is characteristic of the 12-month period ending in June 2014 with the exception of income data, which are for 2013.
Update: The FBI Is Looking Into American Realty Capital Properties
About: American Realty Capital Properties Inc (ARCP) by Albert Alfonso
- According to a Reuters report, the FBI has opened a criminal probe of American Realty Capital Properties.
- This follows the disclosure of accounting errors by the company.
- This investigation is in addition to a SEC inquiry.
American Realty Capital Properties (NASDAQ:ARCP) just cannot catch a break. Reuters reported that the Federal Bureau of Investigation has opened a criminal investigation into ARCP, according to their sources. The FBI is conducting the investigation along with prosecutors from U.S. Attorney Preet Bharara’s office in New York, according to the Reuters report.
This news comes just days after the company announced a series of accounting errors which had been intentionally not corrected and thus concealed from the public. The amount of money involved, roughly $9.24 million GAAP and $13.60 million AFFO, was relatively small. However, these accounting errors resulted in the resignation of two senior executives, chief financial officer, Brian Block, and chief accounting officer, Lisa McAlister.
Shares of ARCP were trading for as low as $7.85 each on Wednesday, before recovering to $10 per share after CEO David Kay held fairly well received conference call explaining what happened. In the call, Mr. Kay stressed that ARCP’s key metrics were sound. He reaffirmed that the dividend policy will not change, noting that the operating metrics were not impacted and that the NAV is unchanged at $13.25. Nevertheless, the stock continued to fall, closing the week at below $9 per share. In total, ARCP’s stock has fallen 30% since news of the accounting errors first arose, wiping out $4 billion in market value.
This is quite the shocking development. Not only is the FBI looking into ARCP, but also the Securities and Exchange Commission, which announced its own investigation of the accounting errors late last week. Furthermore, the company was placed on CreditWatch with negative implications by S&P, which risks putting the credit rating into junk territory.
As I noted in my earlier article, accounting issues equal an automatic sell in my book. I sold most of my ARCP holdings on Wednesday, though I still kept some shares, opting instead to sell calls on the remaining position. I now lament that choice as I fear the stock can fall further. An FBI criminal probe is no small matter and represents a clear material risk. What an absolute disaster.
Update: American Realty Capital Properties: The Turmoil Is Only Getting Worse
- ARCP sent shock waves through the analyst community last week after the REIT said its financials should no longer be relied upon and said goodbye to the CFO and CAO.
- ARCP is now also attracting heat from the FBI.
- In addition, RCS Capital Corporation cancels Cole Capital transaction.
Investors in American Realty Capital Properties (NASDAQ:ARCP) need to demonstrate that they have nerves of steel at the moment. After the company reported that it overstated its AFFO last week, and that its Chief Financial Officer and Chief Accounting Officer departed as a result of the accounting scandal, more bad news are seeing the light of day.
First of all, as various news outlets reported, the Federal Bureau of Investigation is putting up some additional heat on ARCP. As Reuters reported:
(Reuters) – U.S. authorities have opened a criminal probe of American Realty Capital Properties in the wake of the real estate investment trust’s disclosure that it had uncovered accounting errors, two sources familiar with the matter said on Friday.
The Federal Bureau of Investigation is conducting the investigation along with prosecutors from U.S. Attorney Preet Bharara’s office in New York, the sources said. Further details of the probe could not be learned.
The involvement of the New York U.S. Attorney’s office is particularly bad news as Preet Bharara takes a tough stance with companies that break the law or push its limits too far. While the criminal probe certainly is bad news and comes in addition to the involvement of the SEC, something else caused massive irritation among ARCP shareholders today: The Cole Capital deal with RCS Capital Corporation (NYSE: RCAP) is in real danger.
According to ARCP’s latest (and angry) press release:
In the middle of the night, we received a letter from RCS Capital Corporation purporting to terminate the equity purchase agreement, dated September 30, 2014, between RCS and an affiliate of ARCP. As we informed RCS orally and in writing over the weekend, RCS has no right and there is absolutely no basis for RCS to terminate the agreement. Therefore, RCS’s attempt to terminate the agreement constitutes a breach of the agreement. In addition, we believe that RCS’s unilateral public announcement is a violation of its agreement with ARCP. The independent members of the ARCP Board of Directors and ARCP management are evaluating all alternatives under the agreement and with respect to the Cole Capital® business, generally. ARCP management and the independent members of the ARCP Board of Directors are committed to doing what is in the best interests of ARCP stockholders and its business, including Cole Capital.
That’s right. Since the FBI now has its fingers in the pie, and the SEC, management at RCS Capital has informed ARCP that it is terminating the deal. Whatever side you are one, you’ve got to admit: American Realty Capital Properties is just falling apart.
The once mighty real estate investment trust has lost a staggering 36% of its market capitalization since shares closed at $12.38 on October 28, 2014, which is a tough pill to swallow for those investors who pledged allegiance to American Realty Capital Properties, despite the turbulence that erupted a week ago.
Shares of American Realty Capital Properties are trading extremely weakly today in light of the new information, and I continue to see further downside potential for this REIT in the near term.
It seems as if all the forces of the universe are conspiring to bring American Realty Capital Properties down to its knees, and an investment in this REIT is not recommendable at the moment.
The American Realty Capital Properties’ story has gotten significantly worse today: In addition to two of the most important executives abruptly leaving the company amid an accounting scandal, the SEC and the FBI are investigating the company, lawyers are very likely going to hit ARCP with litigation, and the latest transaction is in the process of collapsing.
Bulls must either have nerves of steel or clinging to hope. In any case, ARCP’s prospects have gotten much worse today, and I continue to expect further downside potential driven by litigation concerns, potential fines and extremely negative investor sentiment.
American Realty Capital Comes Clean, And I Feel Dirty
by Adam Aloisi
- American Realty Capital’s restatement has created rampant volatility in a stock already under the gun.
- Why I decided to sell half of my position in the company.
- Important portfolio takeaways for investors of all kinds.
This is one of the tougher articles I’ve written for Seeking Alpha. Asset allocation and portfolio strategy for income investors has been my focal point of writing over the past three years. I’ve always been of the opinion that talking about how to fish trumps simply giving someone fish to chew on.
Still, I mention equity-income stocks all the time in articles, but it’s rare that I write focus articles. On October third, I wrote, “American Realty Capital Properties: 30% Total Return Next Year“. Less than a month later, I find that post in an inverse position, with American Realty Capital (NASDAQ:ARCP) having dropped around 30% in market value.
First, I will tell readers that I sold a bit more than half of my position as a result of ARCP’s restatement, and still retain shares. However, it is now one of my smallest income portfolio positions and one that I have lost a majority of my conviction in. ARCP, in my mind, has transitioned from being a higher-risk investment into now becoming day-trader fodder, and at least for the near term, highly speculative. I would have been all over this thing during my trading days, but having become more conservative today with less portfolio churn, it has little room in my portfolio.
I considered all options here. I thought about increasing my position, extinguishing it altogether, selling put options at attractive premiums, or potentially doing nothing. Being so supportive of this story over the past year, I was mostly disappointed that I had to put any thought into the matter at all. For a variety of reasons, I came to the conclusion that halving the position — taking a loss, which I needed to do anyway for taxes — was a prudent near-term choice. I will revisit the decision in a month, and could conceivably buy back those shares once wash sale rules have passed.
Though selling during a period of fear and volatility is not typically in my playbook, following this restatement, I have lost confidence in this story. If you follow me, you know that I certainly identified the elevated risk that ARCP brought to real estate investors. Over the past six months, here are some comments that I made in regard to ARCP in several articles:
If you invest in ARCP today, you should expect the unexpected.
Given all the deals and potential for a misstep, there is heightened risk in owning ARCP.
But with the baggage it continues to drag along with it…..it may not necessarily be appropriate for more conservative investors
I do not consider the stock a table pounding buy.
I even compared Nick Schorsch to Monty Hall from “Let’s Make A Deal,” following the Red Lobster purchase and flip-flop on the strip mall IPO-then-sale.
As the year wore on, however, my convictions rose, since the company did not materially change its guidance to investors, despite all the acquisition activity. I figured if there were a stumble, it would have been disclosed earlier this year as the various acquisitions had time to be absorbed into operations.
While there was much criticism over the Cole quasi-divestiture to RCS and lowered guidance, I remained resolute, thinking there wasn’t another buyer, and this at least got Cole out from under the ARCP umbrella.
Of course as we now know, some financial disclosures were not to be relied upon and guidance should have been changed. If there were not so much other controversy with regard to this company, I doubt the stock would have tanked as much as it has. When you have a managerial crisis of confidence already in place and make a restatement announcement, you create panic. If we take this on face value, it does not appear to be a huge restatement, but taken in totality, this is a monumental, perhaps insurmountable, credibility problem. It’s now all aboard for the ambulance-chasing lawyers.
At this point I have decided that it is in my best interest to rip the towel in half and throw it in. I see it as a hedge against further deterioration in this story that I would not necessarily rule out given the loose management style that I and every ARCP investor knew existed.
We’re not talking about some low level accounting bean counter or paper pusher that seems to have perpetrated this; we’re talking about CFO Brian Block, assumedly someone that David Kay and Nick Schorsch had drinks with regularly. So when Kay defended the culture at ARCP on the conference call by uttering, “We don’t have bad people, we had some bad judgment there,” forgive me if I now wonder if he really has a clue how good, sweet, and honest his executives and rank-and-file workers really are. Although the restatements appear isolated to this year’s AFFO, we’ll have to see if anything turns up in 2013. While I’d like to give this company the benefit of the doubt once again, I’m finding myself staring at a slippery slope of hope that another shoe will not drop.
Still, I did not jettison the entire position because these are emotional times, and the glass-is-half-full part of me says the market is overreacting. We are, keep in mind, still talking about a high-quality portfolio of real estate, not a biotech company whose sole drug was deemed inefficacious by the FDA. In the end, however, I had to make a decision for my own portfolio that I deemed appropriate. This was it.
Meanwhile, I would not criticize nor blame someone for selling out here and moving on to more stable pastures. Fellow REIT writer Brad Thomas apparently has. On the flip side, I could see the more adventurous or those with continued conviction buying in now or upping exposure. The “right” thing to do for many investors may be to simply hold through the volatility. As I opined in a past article on ARCP:
But with the considerable sentiment overhang and “show me” attitude of the market, it could take some time and a strong stomach to see it through.
The sentiment “overhang” has basically become something much worse. And at this point I wouldn’t even want to predict how much time it could take for a rebound. Your stomach constitution will need to be stronger than I first suspected.
I’ve had more than one reader tell me that the various risks I identified made them conclude that ARCP was not a stock they should own. And given what has happened here, at least for the near-term, that was obviously a prudent decision. We must all come to personal conclusions as to how much risk we are willing to take to attain income and capital growth goals.
For investors of all types, the most important thing to take away from this near-term “disaster” is that diversification and limiting position size is critical. If ARCP amounted to a couple of percent, or less, of a portfolio, the stock’s tank may not be all that impacting. If it was a more concentrated portion of the overall pie, it becomes a more painful near-term event and makes various portfolio maneuver decisions more challenging to come to.
In the end, portfolio management is a personal endeavor that amounts to an inexact science. Whether you think what I’ve done with my ARCP position is right or not is not really all important. The more important thing is whether you are comfortable with the personal portfolio decisions you make or not, why you make them, and whether they are right for your situation.
I’ve used the word “I” more than I normally would in an article. This one was indeed about me and owning up to putting wholesale trust in a management team that apparently I shouldn’t have. And it was a about a decision I really didn’t want to make as a result. Unfortunately, we have to take the bad with the good in the investment world, brush ourselves off, move on, and continue to make personal decisions that are right for our portfolios.
BofA Banker Arrested In Hong Kong For Double Murder Of Two Prostitutes
Rurick Jutting, a Cambridge University graduate, has been named as the suspect of the double murder
by Tyler Durden
The excesses of 1980s New York investment banking as captured best (and with just a dose of hyperbole) by Bret Easton Ellis’s American Psycho may be long gone in the US, but they certainly are alive and well in other banking meccas, such as the one place where every financier wants to work these days (thanks to the Chinese government making it rain credit): Hong Kong. It is here that yesterday a 29-year-old British banker, Rurik Jutting, a Cambridge University grad and current Bank of America Merrill Lynch, former Barclays employee, was arrested in connection with the grisly murder of two prostitutes. One of the two victims had been hidden in a suitcase on a balcony, while the other, a foreign woman of between 25 and 30, was found lying inside the apartment with wounds to her neck and buttocks, the police said in a statement.
A spokesman for Bank of America Merrill Lynch told Reuters on Sunday that the U.S. bank had, until recently, an employee bearing the same name as a man Hong Kong media have described as the chief suspect in the double murder case. Bank of America Merrill Lynch would not give more details nor clarify when the person had left the bank.
Britain’s Foreign Office in London said on Saturday a British national had been arrested in Hong Kong, without specifying the nature of any suspected crime.
The details of the crime are straight out of American Psycho 2: the Hong Kong Sequel. One of the murdered women was aged between 25 and 30 and had cut wounds to her neck and buttock, according to a police statement. The second woman’s body, also with neck injuries, was discovered in a suitcase on the apartment’s balcony, the police said. A knife was seized at the scene.
According to the WSJ, the arrested suspect, who called police to the apartment in the early hours of Nov. 1, was until recently a Hong Kong-based employee of Bank of America Merrill Lynch.
Filings with Hong Kong’s securities regulator show that the suspect was an employee with the bank as recently as Oct. 31.The man had called police in the early hours of Saturday and asked them to investigate the case, police said.
Hong Kong’s Apple Daily newspaper said the suspect had taken about 2,000 photographs and some video footage of the victims after the killings including close-ups of their wounds. Local media said the two women were prostitutes.
The apartment where the bodies were found is on the 31st floor in a building popular with financial professionals, where average rents are about HK$30,000 (nearly $4,000) a month.
According to the Telegraph the suspect, who had previously worked at Barclays from 2008 until 2010 before moving to BofA, and specifically its Hong Kong office in July last year, had apparently vanished from his workplace a week ago. It has also been reported that he resigned from his post days before news of the murders emerged.
And as usual in situations like these, the UK’s Daily Mail has the granular details. It reports that the British banker arrested on suspicion of a double murder in Hong Kong has been identified as 29-year-old Rurik Jutting.
Mr Jutting, who attended Cambridge University, is being held by police after the bodies of two prostitutes were discovered in his up-market apartment in the early hours of yesterday morning.
Officers found the women, thought to be a 25-year-old from Indonesia and a 30-year-old from the Philippines, after Mr Jutting allegedly called police to the address, which is located near the city’s red light district. The naked body of the Filipina victim, who had suffered a series of knife wounds, was found inside the 31st-floor apartment in J Residence – a development of exclusive properties in the city’s Wan Chai district that are popular with young expatriate executives.
The second woman was reportedly discovered naked and partially decapitated in a suitcase on the balcony of the apartment. She is believed to have been tied up and to have been left there for around a week.
Sex toys and cocaine were also reportedly found, along with a knife which was seized by officers.
Mr Jutting’s phone is today being examined by police in a bid to identify possible further victims, according to the South China Morning Post.
It is understood that photos of the woman who was found in the suitcase, apparently taken after she died, were among roughly 2,000 that officers found on the device.
Mr Jutting attended Winchester College, an independent boys school in Hampshire, before continuing his studies in history and law at Pembroke College, Cambridge, where he became secretary of the history society.
He appears to have worked at Barclays in London between 2008 and 2010, when he took a job with Bank of America Merrill Lynch. He was moved to the bank’s Hong Kong office in July last year.
A spokesman for Bank of America Merrill Lynch confirmed that it had previously employed a man by the same name but would not give more details nor clarify when the person had left the bank.
CCTV footage from the apartment block, located near Hong Kong’s red light district, showed the banker and the Filipina woman returning to the 31st floor shortly after midnight local time yesterday.
He allegedly called police to his home at 3.42am, shortly after the woman he was seen with is believed to have been killed.
She was found with two wounds to her neck and her throat had been slashed. She was pronounced dead at the scene.
The body on the balcony, wrapped in a carpet and inside a black suitcase, which measured about three feet by 18 inches, was not found by police until eight hours later.
A police source quoted by the South China Morning Post said: ‘She was nearly decapitated and her hands and legs were bound with ropes. ‘She was naked and wrapped in a towel before being stuffed into the suitcase. Her passport was found at the scene.’
Wan Chai, the district where the apartment is located, is known for its bustling nightclub scene of ‘girly bars,’ popular with expatriate men and staffed by sex workers from South East Asia. Police have today been contacting nearby bars in an attempt to find out more about the background of the two murdered women.
One resident in the 40-storey block, where most of the residents are expatriates, said he had noticed an unusual smell in recent days. He told the South China Morning Post that there had been ‘a stink in the building like a dead animal’.
And just like that, the worst excesses of the “peak banking” days from 1980, when sad scenes like these were a frequent occurrence, are back.
Government workers remove the body of a woman who was found dead at a flat in Hong Kong’s Wan chai district in the early hours of this morning. A British man was been arrested in connection with the murders.
A second victim was found stuffed inside a suitcase on the balcony of the residential flat in Hong Kong
The 40-storey J Residence is reportedly a high-end development favored by junior expatriate bankers
Bank Of America Psycho Killer Was Busy Helping Hedge Funds Avoid Taxes During His Business Hours
The most bizarre story of the weekend was that of Bank of America’s 29-year-old banker Rurik Jutting, who shortly after allegedly killing two prostitutes (and stuffing one in a suitcase), called the cops on himself and effectively admitted to the crime having left a quite clear autoreply email message, namely “For urgent inquiries, or indeed any inquiries, please contact someone who is not an insane psychopath. For escalation please contact God, though suspect the devil will have custody. [Last line only really worked if I had followed through..]”
But while his attempt to imitate Patrick Bateman did not go unnoticed, even if it will be promptly forgotten until the next grotesquely insane banker shocks the world for another 15 minutes, the question that has remained unanswered is what did young Master Jutting do when not chopping women up.
The answer, as the WSJ has revealed, is just as unsavory: “he had been part of a Bank of America team that specialized in tax-minimization trades that are under scrutiny from prosecutors, regulators, tax collectors and the bank’s own compliance department, according to people familiar with the matter and documents reviewed by The Wall Street Journal.”
Basically, when not acting as a homicidal psychopath, Jutting was facilitating full-blown tax evasion, just the activity that every developed, and thus broke, government around the globe is desperately cracking down on, and why every single Swiss bank is non-grata in the US and may be arrested immediately upon arrival on US soil.
Mr. Jutting, a U.K. native and a competitive poker player, worked in Bank of America Merrill Lynch’s Structured Equity Finance and Trading group, first in London and then in Hong Kong, according to these people and regulatory filings. Mr. Jutting resigned from the bank sometime before Oct. 27, which police say was the date of the first murder, according to a person familiar with the matter.
The trading group, known as SEFT, employs about three dozen people globally, one of these people said. It helps hedge funds and other clients manage their stock portfolios, often through the use of derivatives, according to the people and internal bank documents.
Mr. Jutting joined Bank of America in 2010 and worked three years in its London office, the bank’s hub for dividend-arbitrage trades, the people familiar with the matter say. He moved to Bank of America’s Hong Kong office in July 2013.
Ironic, because it was just this summer that a Congressional panel headed by Carl Levin was tearing foreign banks Deutsche Bank and Barclays a new one for providing structures such as MAPS and COLT, which did precisely this: give clients a derivative-based means of avoiding taxation (as described in “How Rentec Made More Than 34 Billion In Profits Since 1998 “Fictional Derivatives“).
As it turns out not only did a US-based bank – Bank of America – have an entire group dedicated to precisely the same type of hedge fund, and other Ultra High Net Worth, clients tax evasion advice, but it also housed a homicidal psychopath.
Perhaps if instead Levin had been grandstanding and seeking to punish foreign banks, he had cracked down on everyone who was providing this service, Jutting’s group would have been disbanded long ago, and two innocent lives could have been saved, instead allowing the alleged cocaine-snorting murderer to engage in far more wholesome, banker-approrpriate activities:
During his time in Asia, Mr. Jutting’s pastimes apparently included gambling. In a Sept. 14 Facebook post, he boasted of winning thousands of dollars playing poker at a tournament in the Philippines. He signed off the post: “God I love Manila.” The comment drew eight “likes.”
Alas one will never know “what if.”
But we are certain that with none other than America’s most prominent bank, the one carrying its name, has now been busted for aiding and abetting hedge fund tax evasion around the globe, it will get the same treatment as evil foreign banks Barclays and Deutsche Bank, right Carl Levin?
Americans Pay More For Slower Internet
When it comes to Internet speeds, the U.S. lags behind much of the developed world.
That’s one of the conclusions from a new report by the Open Technology Institute at the New America Foundation, which looked at the cost and speed of Internet access in two dozen cities around the world.
Clocking in at the top of the list was Seoul, South Korea, where Internet users can get ultra-fast connections of roughly 1000 megabits per second for just $30 a month. The same speeds can be found in Hong Kong and Tokyo for $37 and $39 per month, respectively.
For comparison’s sake, the average U.S. connection speed stood at 9.8 megabits per second as of late last year, according to Akamai Technologies.
Residents of New York, Los Angeles and Washington, D.C. can get 500-megabit connections thanks to Verizon, though they come at a cost of $300 a month.
There are a few cities in the U.S. where you can find 1000-megabit connections. Chattanooga, Tenn., and Lafayette, La. have community-owned fiber networks, and Google has deployed a fiber network in Kansas City. High-speed Internet users in Chattanooga and Kansas City pay $70, while in Lafayette, it’s $110.
The problem with fiber networks is that they’re hugely expensive to install and maintain, requiring operators to lay new wiring underground and link it to individual homes. Many smaller countries with higher population density have faster average speeds than the United States.
“Especially in the U.S., many of the improved plans are at the higher speed tiers, which generally are the most expensive plans available,” the report says. “The lower speed packages—which are often more affordable for the average consumer—have not seen as much of an improvement.”
Google is exploring plans to bring high-speed fiber networks to a handful of other cities, and AT&T has also built them out in a few places, but it will be a long time before 1000-megabit speeds are an option for most Americans.
BLS: Midland Texas Again Posts Third Lowest Jobless Rate In Nation
For the second straight month, Midland posted the third lowest unemployment rate in the nation, according to figures released Wednesday by the Bureau of Labor Statistics.
Bismarck, North Dakota, topped the list for the fourth straight month with a jobless rate of 2.1 percent. Fargo, North Dakota, was second at 2.3. Midland and Logan, Utah, tied for third at 2.6.
A total of 10 metropolitan statistical areas around the nation posted unemployment rates of 3.0 percent or lower. Midland was the lone MSA in Texas at or below 3.0.
Midland again ranked near the top of the list of MSAs in the nation when it came to percentage gain in employment. Midland’s 6.4 percent growth ranked second to Muncie, Indiana (8.9 percent). In September, Midland showed a work force 100,100, an increase of nearly 5,000 from September 2013.
The following are the lowest unemployment rates in the nation during the month of September, according to the Bureau of Labor Statistics.
Bismarck, North Dakota 2.1
Fargo, North Dakota 2.3
Logan, Utah 2.6
Sioux Falls, South Dakota 2.7
Grand Forks, North Dakota 2.8
Lincoln, Nebraska 2.8
Mankato, Minnesota 2.9
Rapid City, South Dakota 2.9
Billings, Montana 3.0
Lowest rates from August
Bismarck, North Dakota 2.2, Fargo North Dakota 2.4; Midland 2.8. Also: Odessa 3.4
Bismarck, North Dakota, 2.4; Sioux Falls, South Dakota, 2.7; Fargo, North Dakota, 2.8; Midland 2.9. Also: Odessa 3.6
Bismarck, North Dakota, 2.6, Midland 2.9, Fargo, North Dakota, 3.0. Also: Odessa 3.6
Bismarck, North Dakota, 2.2, Fargo, North Dakota, 2.5, Logan, Utah, 2.5, Midland 2.6. Also: Odessa 3.2
Midland 2.3, Logan, Utah 2.5, Bismarck, North Dakota 2.6, Ames, Iowa 2.7. Also: Odessa 2.9
Midland 2.7, Houma-Bayou Cane-Thibodaux, La. 3.1, Bismarck, N.D. 3.1, Odessa 3.3, Fargo, N.D. 3.3, Ames, Iowa 3.3, Burlington, Vt. 3.3
Houma-Bayou Cane-Thibodaux, La. 2.8; Midland 3.0; Lafayette, La. 3.1
Midland 2.9; Logan, Utah 3.3; Bismarck, N.D. 3.4
Bismarck, N.D. 2.8; Logan, Utah 2.8; Midland 2.8
OCWEN Fakes foreclosure Notices To Steal Homes – Downgrade Putting RMBS at Risk
If you really would rather own the property than the note, take a few lessons in fraud from Owen Financial Corp. According to allegations from New York’s financial regulator, Benjamin Lawsky, the lender sent “thousands” of foreclosure “warnings” to borrowers months after the window of time had lapsed during which they could have saved their homes. Lawskey alleges that many of the letters were even back-dated to give the impression that they had been sent in a timely fashion. “In many cases, borrowers received a letter denying a mortgage loan modification, and the letter was dated more than 30 days prior to the date that Ocwen mailed the letter.”
The correspondence gave borrowers 30 days from the date of the denial letter to appeal, but the borrowers received the letters after more than 30 days had passed. The issue is not a small one, either. Lawskey says that a mortgage servicing review at Ocwen revealed “more than 7,000” back-dated letters.”
In addition to the letters, Ocwen only sent correspondence concerning default cures after the cure date for delinquent borrowers had passed and ignored employee concerns that “letter-dating processes were inaccurate and misrepresented the severity of the problem.” While Lawskey accused Ocwen of cultivating a “culture that disregards the needs of struggling borrowers,” Ocwen itself blamed “software errors” for the improperly-dated letters. This is just the latest in a series of troubles for the Atlanta-based mortgage servicer; The company was also part the foreclosure fraud settlement with 49 of 50 state attorneys general and recently agreed to reduce many borrowers’ loan balances by $2 billion total.
Most people do not realize that Ocwen, although the fourth-largest mortgage servicer in the country, is not actually a bank. The company specializes specifically in servicing high-risk mortgages, such as subprime mortgages. At the start of 2014, it managed $106 billion in subprime loans. Ocwen has only acknowledged that 283 New York borrowers actually received improperly dated letters, but did announce publicly in response to Lawskey’s letter that it is “investigating two other cases” and cooperating with the New York financial regulator.
WHAT WE THINK: While it’s tempting to think that this is part of an overarching conspiracy to steal homes in a state (and, when possible, a certain enormous city) where real estate is scarce, in reality the truth of the matter could be even more disturbing: Ocwen and its employees just plain didn’t care. There was a huge, problematic error that could have prevented homeowners from keeping their homes, but the loan servicer had already written off the homeowners as losers in the mortgage game. A company that services high-risk loans likely has a jaded view of borrowers, but that does not mean that the entire culture of the company should be based on ignoring borrowers’ rights and the vast majority of borrowers who want to keep their homes and pay their loans. Sure, if you took out a mortgage then you have the obligation to pay even if you don’t like the terms anymore. On the other side of the coin, however, your mortgage servicer has the obligation to treat you like someone who will fulfill their obligations rather than rigging the process so that you are doomed to fail.
Do you think Lawskey is right about Ocwen’s “culture?” What should be done to remedy this situation so that note investors and homeowners come out of it okay?
Thank you for reading the Bryan Ellis Investing Letter!
Your comments and questions are welcomed below.
Ocwen posts open letter and apology to borrowers
Pledges independent investigation and rectification
October 27, 2014 10:37AM
Ocwen Financial (OCN) has taken a beating after the New York Department of Financial Services sent a letter to the company on Oct. 21 alleging that the company had been backdating letters to borrowers, and now Ocwen is posting an open letter to homeowners.
Ocwen CEO Ron Faris writes to its clients explaining what happened and what steps the company is taking to investigate the issue, identify any problems, and rectify the situation.
Click here to read the full text of the letter.
“At Ocwen, we take our mission of helping struggling borrowers very seriously, and if you received one of these incorrectly-dated letters, we apologize. I am writing to clarify what happened, to explain the actions we have taken to address it, and to commit to ensuring that no borrower suffers as a result of our mistakes,” he writes.
“Historically letters were dated when the decision was made to create the letter versus when the letter was actually created. In most instances, the gap between these dates was three days or less,” Faris writes. “In certain instances, however, there was a significant gap between the date on the face of the letter and the date it was actually generated.”
Faris says that Ocwen is investigating all correspondence to determine whether any of it has been inadvertently misdated; how this happened in the first place; and why it took so long to fix it. He notes that Ocwen is hiring an independent firm to conduct the investigation, and that it will use its advisory council comprised of 15 nationally recognized community advocates and housing counselors.
“We apologize to all borrowers who received misdated letters. We believe that our backup checks and controls have prevented any borrowers from experiencing a foreclosure as a result of letter-dating errors. We will confirm this with rigorous testing and the verification of the independent firm,” Faris writes. “It is worth noting that under our current process, no borrower goes through a foreclosure without a thorough review of his or her loan file by a second set of eyes. We accept appeals for modification denials whenever we receive them and will not begin foreclosure proceedings or complete a foreclosure that is underway without first addressing the appeal.”
Faris ends by saying that Ocwen is committed to keeping borrowers in their homes.
“Having potentially caused inadvertent harm to struggling borrowers is particularly painful to us because we work so hard to help them keep their homes and improve their financial situations. We recognize our mistake. We are doing everything in our power to make things right for any borrowers who were harmed as a result of misdated letters and to ensure that this does not happen again,” he writes.
Last week the fallout from the “Lawsky event” – so called because of NYDFS Superintendent Benjamin Lawsky – came hard and fast.
Compass Point downgraded Ocwen affiliate Home Loan Servicing Solutions (HLSS) from Buy to Neutral with a price target of $18.
Meanwhile, Moody’s Investors Service downgraded Ocwen Loan Servicing LLC’s servicer quality assessments as a primary servicer of subprime residential mortgage loans to SQ3 from SQ3+ and as a special servicer of residential mortgage loans to SQ3 from SQ3+.
Standard & Poor’s Ratings Services lowered its long-term issuer credit rating to ‘B’ from ‘B+’ on Ocwen on Wednesday and the outlook is negative.
Ocwen Writes Open Letter to Homeowners Concerning Letter Dating Issues
October 24, 2014
In recent days you may have heard about an investigation by the New York Department of Financial Services’ (DFS) into letters Ocwen sent to borrowers which were inadvertently misdated. At Ocwen, we take our mission of helping struggling borrowers very seriously, and if you received one of these incorrectly-dated letters, we apologize. I am writing to clarify what happened, to explain the actions we have taken to address it, and to commit to ensuring that no borrower suffers as a result of our mistakes.
Historically letters were dated when the decision was made to create the letter versus when the letter was actually created. In most instances, the gap between these dates was three days or less. In certain instances, however, there was a significant gap between the date on the face of the letter and the date it was actually generated.
What We Are Doing
We are continuing to investigate all correspondence to determine whether any of it has been inadvertently misdated; how this happened in the first place; and why it took us so long to fix it. At the end of this exhaustive investigation, we want to be absolutely certain that we have fixed every problem with our letters. We are hiring an independent firm to investigate and to help us ensure that all necessary fixes have been made.
Ocwen has an advisory council made up of fifteen nationally recognized community advocates and housing counsellors. The council was created to improve our borrower outreach to keep more people in their homes. We will engage with council members to get additional guidance on making things right for any borrowers who may have been affected in any way by this error.
We apologize to all borrowers who received misdated letters. We believe that our backup checks and controls have prevented any borrowers from experiencing a foreclosure as a result of letter-dating errors. We will confirm this with rigorous testing and the verification of the independent firm. It is worth noting that under our current process, no borrower goes through a foreclosure without a thorough review of his or her loan file by a second set of eyes. We accept appeals for modification denials whenever we receive them and will not begin foreclosure proceedings or complete a foreclosure that is underway without first addressing the appeal.
In addition to these efforts we are committed to cooperating with DFS and all regulatory agencies.
We Are Committed to Keeping Borrowers in Their Homes
Having potentially caused inadvertent harm to struggling borrowers is particularly painful to us because we work so hard to help them keep their homes and improve their financial situations. We recognize our mistake. We are doing everything in our power to make things right for any borrowers who were harmed as a result of misdated letters and to ensure that this does not happen again. We remain deeply committed to keeping borrowers in their homes because we believe it is the right thing to do and a win/win for all of our stakeholders.
We will be in further communication with you on this matter.
Ocwen Downgrade Puts RMBS at Risk
Moody’s and S&P downgraded Ocwen’s servicer quality rating last week after the New York Department of Financial Services made “backdating” allegations. Barclays says the downgrades could put some RMBS at risk of a servicer-driven default.
Home Ownership Rate Since 2005
by Wolf Richter
The quintessential ingredient in the stew that makes up a thriving housing market has been evaporating in America. And a recent phenomenon has taken over: private equity firms, REITs, and other Wall-Street funded institutional investors have plowed the nearly free money the Fed has graciously made available to them since 2008 into tens of thousands of vacant single-family homes to rent them out. And an apartment building boom has offered alternatives too.
Since the Fed has done its handiwork, institutional investors have driven up home prices and pushed them out of reach for many first-time buyers, and these potential first-time buyers are now renting homes from investors instead. Given the high home prices, in many cases it may be a better deal. And apartments are often centrally located, rather than in some distant suburb, cutting transportation time and expenses, and allowing people to live where the urban excitement is. Millennials have figured it out too, as America is gradually converting to a country of renters.
So in its inexorable manner, home ownership has continued to slide in the third quarter, according to the Commerce Department. Seasonally adjusted, the rate dropped to 64.3% from 64.7 in the prior quarter. It was the lowest rate since Q4 1994 (not seasonally adjusted, the rate dropped to 64.4%, the lowest since Q1 1995).
This is what that relentless slide looks like:
Home ownership since 2008 dropped across all age groups. But the largest drops occurred in the youngest age groups. In the under-35 age group, where first-time buyers are typically concentrated, home ownership has plunged from 41.3% in 2008 to 36.0%; and in the 35-44 age group, from 66.7% to 59.1%, with a drop of over a full percentage point just in the last quarter – by far the steepest.
Home ownership, however, didn’t peak at the end of the last housing bubble just before the financial crisis, but in 2004 when it reached 69.2%. Already during the housing bubble, speculative buying drove prices beyond the reach of many potential buyers who were still clinging by their fingernails to the status of the American middle class … unless lenders pushed them into liar loans, a convenient solution many lenders perfected to an art.
It was during these early stages of the housing bubble that the concept of “home” transitioned from a place where people lived and thrived or fought with each other and dealt with onerous expenses and responsibilities to a highly leveraged asset for speculators inebriated with optimism, an asset to be flipped willy-nilly and laddered ad infinitum with endless amounts of cheaply borrowed money. And for some, including the Fed it seems, that has become the next American dream.
Despite low and skidding home ownership rates, home prices have been skyrocketing in recent years, and new home prices have reached ever more unaffordable all-time highs.
Assisted-Living Complexes for Young People
One of the most surprising developments in the aftermath of the housing crisis is the sharp rise in apartment building construction. Evidently post-recession Americans would rather rent apartments than buy new houses.
When I noticed this trend, I wanted to see what was behind the numbers.
Is it possible Americans are giving up on the idea of home ownership, the very staple of the American dream? Now that would be a good story.
What I found was less extreme but still interesting: The American dream appears merely to be on hold.
Economists told me that many potential home buyers can’t get a down payment together because the recession forced them to chip away at their savings. Others have credit stains from foreclosures that will keep them out of the mortgage market for several years.
More surprisingly, it turns out that the millennial generation is a driving force behind the rental boom. Young adults who would have been prime candidates for first-time home ownership are busy delaying everything that has to do with becoming a grown-up. Many even still live at home, but some data shows they are slowly beginning to branch out and find their own lodgings — in rental apartments.
A quick Internet search for new apartment complexes suggests that developers across the country are seizing on this trend and doing all they can to appeal to millennials. To get a better idea of what was happening, I arranged a tour of a new apartment complex in suburban Washington that is meant to cater to the generation.
What I found made me wish I was 25 again. Scented lobbies crammed with funky antiques that led to roof decks with outdoor theaters and fire pits. The complex I visited offered Zumba classes, wine tastings, virtual golf and celebrity chefs who stop by to offer cooking lessons.
“It’s like an assisted-living facility for young people,” the photographer accompanying me said.
Economists believe that the young people currently filling up high-amenity rental apartments will eventually buy homes, and every young person I spoke with confirmed that this, in fact, was the plan. So what happens to the modern complexes when the 20-somethings start to buy homes? It’s tempting to envision ghost towns of metal and pipe wood structures with tumbleweeds blowing through the lobbies. But I’m sure developers will rehabilitate them for a new demographic looking for a renter’s lifestyle.
Hillary: “Business Does Not Create Jobs”, Washington Does
by Tyler Durden
We have a very serious problem with Hillary. I was asked years ago to review Hillary’s Commodity Trading to explain what went on. Effectively, they did trades and simply put winners in her account and the losers in her lawyer’s. This way she gets money that is laundered through the markets – something that would get her 25 years today. People forget, but Hillary was really President – not Bill. Just 4 days after taking office, Hillary was given the authority to start a task force for healthcare reform. The problem was, her vision was unbelievable. The costs upon business were oppressive so much so that not even the Democrats could support her. When asked how was a small business mom and pop going to pay for healthcare she said “if they could not afford it they should not be in business.” From that moment on, my respect for her collapsed. She revealed herself as a real Marxist. Now, that she can taste the power of Washington, and I dare say she will not be a yes person as Obama and Bush seem to be, therein lies the real danger. Giving her the power of dictator, which is the power of executive orders, I think I have to leave the USA just to be safe. Hillary has stated when she ran the White House before regarding her idea of healthcare, “We can’t afford to have that money go to the private sector. The money has to go to the federal government because the federal government will spend that money better than the private sector will spend it.” When has that ever happened?
Hillary believes in government at the expense of the people. I do not say this lightly, because here she goes again. She just appeared at a Boston rally for Democrat gubernatorial candidate Martha Coakley on Friday. She was off the hook and amazingly told the crowd gathered at the Park Plaza Hotel not to listen to anybody who says that “businesses create jobs.” “Don’t let anybody tell you it’s corporations and businesses that create jobs,” Clinton said. “You know that old theory, ‘trickle-down economics,’” she continued. “That has been tried, that has failed. It has failed rather spectacularly.” “You know, one of the things my husband says when people say ‘Well, what did you bring to Washington,’ he said, ‘Well, I brought arithmetic,” Hillary said.
I wrote an Op-Ed for the Wall Street Journal on Clinton’s Balanced Budget. It was smoke and mirrors. Long-term interest rates were sharply higher than short-term. Clinton shifted the national debt to save interest expenditures. He also inherited a up-cycle in the economy that always produces more taxes. Yet she sees no problem with the math of perpetually borrowing. Perhaps she would get to the point of being unable to sell debt and just confiscate all wealth since government knows better.
* * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * *
Here’s a shocker or is it? Take the quiz and then check your answers at the bottom. Then take action!!!
And, no, the answers to these questions aren’t all “Barack Obama”!
1) “We’re going to take things away from you on behalf
of the common good.”
A. Karl Marx
B. Adolph Hitler
C. Joseph Stalin
D. Barack Obama
E. None of the above
2) “It’s time for a new beginning, for an end to government
of the few, by the few, and for the few…… And to replace it
with shared responsibility, for shared prosperity.”
C. Idi Amin
D. Barack Obama
E. None of the above
3) “(We)…..can’t just let business as usual go on, and that
means something has to be taken away from some people.”
A. Nikita Khrushchev
B. Joseph Goebbels
C. Boris Yeltsin
D. Barack Obama
E. None of the above
4) “We have to build a political consensus and that requires
people to give up a little bit of their own … in order to create
this common ground.”
A. Mao Tse Tung
B. Hugo Chavez
C. Kim Jong II
D. Barack Obama
E. None of the above
5) “I certainly think the free-market has failed.”
A. Karl Marx
D. Barack Obama
E. None of the above
6) “I think it’s time to send a clear message to what
has become the most profitable sector in (the) entire
economy that they are being watched.”
C. Saddam Hussein
D. Barack Obama
E. None of the above
and the answers are ~~~~~~~~~~~~~
(1) E. None of the above. Statement was made by Hillary Clinton 6/29/2004
(2) E. None of the above. Statement was made by Hillary Clinton 5/29/2007
(3) E. None of the above. Statement was made by Hillary Clinton 6/4/2007
(4) E. None of the above. Statement was made by Hillary Clinton 6/4/2007
(5) E. None of the above. Statement was made by Hillary Clinton 6/4/2007
(6) E. None of the above. Statement was made by Hillary Clinton 9/2/2005
Want to know something scary? She may be the next POTUS.
FHA Is Set To Return To Anti-House-Flipping Restrictions
House flippers buy run-down properties, fix them up and resell them quickly at a higher price. Above, a home under renovation in Amsterdam, N.Y. (Mike Groll / Associated Press)
Can you still do a short-term house flip using federally insured, low-down payment mortgage money? That’s an important question for buyers, sellers, investors and realty agents who’ve taken part in a nationwide wave of renovations and quick resales using Federal Housing Administration-backed loans during the last four years.
The answer is yes: You can still flip and finance short term. But get your rehabs done soon. The federal agency whose policy change in 2010 made tens of thousands of quick flips possible — and helped large numbers of first-time and minority buyers with moderate incomes acquire a home — is about to shut down the program, FHA officials confirmed to me.
In an effort to stimulate repairs and sales in neighborhoods hard hit by the mortgage crisis and recession, the FHA waived its standard prohibition against financing short-term house flips. Before the policy change, if you were an investor or property rehab specialist, you had to own a house for at least 90 days before reselling — flipping it — to a new buyer at a higher price using FHA financing. Under the waiver of the rule, you could buy a house, fix it up and resell it as quickly as possible to a buyer using an FHA mortgage — provided that you followed guidelines designed to protect consumers from being ripped off with hyper-inflated prices and shoddy construction.
Since then, according to FHA estimates, about 102,000 homes have been renovated and resold using the waiver. The reason for the upcoming termination: The program has done its job, stimulated billions of dollars of investments, stabilized prices and provided homes for families who were often newcomers to ownership.
However, even though the waiver program has functioned well, officials say, inherent dangers exist when there are no minimum ownership periods for flippers. In the 1990s, the FHA witnessed this firsthand when teams of con artists began buying run-down houses, slapped a little paint on the exterior and resold them within days — using fraudulent appraisals — for hyper-inflated prices and profits. Their buyers, who obtained FHA-backed mortgages, often couldn’t afford the payments and defaulted. Sometimes the buyers were themselves part of the scam and never made any payments on their loans — leaving the FHA, a government-owned insurer, with steep losses.
For these reasons, officials say, it’s time to revert to the more restrictive anti-quick-flip rules that prevailed before the waiver: The 90-day standard will come back into effect after Dec. 31.
But not everybody thinks that’s a great idea. Clem Ziroli Jr., president of First Mortgage Corp., an FHA lender in Ontario, says reversion to the 90-day rule will hurt moderate-income buyers who found the program helpful in opening the door to home ownership.
“The sad part,” Ziroli said in an email, “is the majority of these properties were improved and [located] in underserved areas. Having a rehabilitated house available to these borrowers” helped them acquire houses that had been in poor physical shape but now were repaired, inspected and safe to occupy.
Paul Skeens, president of Colonial Mortgage in Waldorf, Md., and an active rehab investor in the suburbs outside Washington, D.C., said the upcoming policy change will cost him money and inevitably raise the prices of the homes he sells after completing repairs and improvements. Efficient renovators, Skeens told me in an interview, can substantially improve a house within 45 days, at which point the property is ready to list and resell. By extending the mandatory ownership period to 90 days, the FHA will increase Skeens’ holding costs — financing expenses, taxes, maintenance and utilities — all of which will need to be added onto the price to a new buyer.
Paul Wylie, a member of an investor group in the Los Angeles area, says he sees “more harm than good by not extending the waiver. There are protections built into the program that have served [the FHA] well,” he said in an email. If the government reimposes the 90-day requirement, “it will harm those [buyers] that FHA intends to help” with its 3.5% minimum-down-payment loans. “Investors will adapt and sell to non-FHA-financed buyers. Entry-level consumers will be harmed unnecessarily.”
Bottom line: Whether fix-up investors like it or not, the FHA seems dead set on reverting to its pre-bust flipping restrictions. Financing will still be available, but selling prices of the end product — rehabbed houses for moderate-income buyers — are almost certain to be more expensive.
firstname.lastname@example.org. Distributed by Washington Post Writers Group. Copyright © 2014, Los Angeles Times
8 Major Reasons Why The Current Low Oil Price Is Not Here To Stay
- The slump in the oil price is primarily a result of extreme short positioning, a headline-driven anxiety and overblown fears about the global economy.
- This is a temporary dip and the oil markets will recover significantly by H1 2015.
- Now is the time to pick the gold nuggets out of the ashes and wait to see them shine again.
- Nevertheless, the sky is not blue for several energy companies and the drop of the oil price will spell serious trouble for the heavily indebted oil producers.
Introduction: It has been a very tough market out there over the last weeks. And the energy stocks have been hit the hardest over the last five months, given that most of them have returned back to their H2 2013 levels while many have dropped even lower down to their H1 2013 levels.
But one of my favorite quotes is Napoleon’s definition of a military genius: “The man who can do the average thing when all those around him are going crazy.” To me, you don’t have to be a genius to do well in investing. You just have to not go crazy when everyone else is.
In my view, this slump of the energy stocks is a deja-vu situation, that reminded me of the natural gas frenzy back in early 2014, when some fellow newsletter editors and opinion makers with appearances on the media (i.e. CNBC, Bloomberg) were calling for $8 and $10 per MMbtu, trapping many investors on the wrong side of the trade. In contrast, I wrote a heavily bearish article on natural gas in February 2014, when it was at $6.2/MMbtu, presenting twelve reasons why that sky high price was a temporary anomaly and would plunge very soon. I also put my money where my mouth was and bought both bearish ETFs (NYSEARCA:DGAZ) and (NYSEARCA:KOLD), as shown in the disclosure of that bearish article. Thanks to these ETFs, my profits from shorting the natural gas were quick and significant.
This slump of the energy stocks also reminded me of those analysts and investors who were calling for $120/bbl and $150/bbl in H1 2014. Even T. Boone Pickens, founder of BP Capital Management, told CNBC in June 2014 that if Iraq’s oil supply goes offline, crude prices could hit $150-$200 a barrel.
But people often go to the extremes because this is the human nature. But shrewd investors must exploit this inherent weakness of human nature to make easy money, because factory work has never been easy.
Let The Charts And The Facts Speak For Themselves
The chart for the bullish ETF (NYSEARCA:BNO) that tracks Brent is illustrated below:
And the charts for the bullish ETFs (NYSEARCA:USO), (NYSEARCA:DBO) and (NYSEARCA:OIL) that track WTI are below:
For the risky investors, there is the leveraged bullish ETF (NYSEARCA:UCO), as illustrated below:
It is clear that these ETFs have returned back to their early 2011 levels amid fears for oversupply and global economy worries. Nevertheless, the recent growth data from the major global economies do not look bad at all.
In China, things look really good. The Chinese economy grew 7.3% in Q3 2014, which is way far from a hard-landing scenario that some analysts had predicted, and more importantly the Chinese authorities seem to be ready to step in with major stimulus measures such as interest rate cuts, if needed. Let’s see some more details about the Chinese economy:
1) Exports rose 15.3% in September from a year earlier, beating a median forecast in a Reuters poll for a rise of 11.8% and quickening from August’s 9.4% rise.
2) Imports rose 7% in terms of value, compared with a Reuters estimate for a 2.7% fall.
3) Iron ore imports rebounded to the second highest this year and monthly crude oil imports rose to the second highest on record.
4) China posted a trade surplus of $31.0 billion in September, down from $49.8 billion in August.
Beyond the encouraging growth data coming from China (the second largest oil consumer worldwide), the US economy grew at a surprising 4.6% rate in Q2 2014, which is the fastest pace in more than two years.
Meanwhile, the Indian economy picked up steam and rebounded to a 5.7% rate in Q2 2014 from 4.6% in Q1, led by a sharp recovery in industrial growth and gradual improvement in services. And after overtaking Japan as the world’s third-biggest crude oil importer in 2013, India will also become the world’s largest oil importer by 2020, according to the US Energy Information Administration (EIA).
The weakness in Europe remains, but this is nothing new over the last years. And there is a good chance Europe will announce new economic policies to boost the economy over the next months. For instance and based on the latest news, the European Central Bank is considering buying corporate bonds, which is seen as helping banks free up more of their balance sheets for lending.
All in all, and considering the recent growth data from the three biggest oil consumers worldwide, I get the impression that the global economy is in a better shape than it was in early 2011. On top of that, EIA forecasts that WTI and Brent will average $94.58 and $101.67 respectively in 2015, and obviously I do not have any substantial reasons to disagree with this estimate.
The Reasons To Be Bullish On Oil Now
When it comes to investing, timing matters. In other words, a lucrative investment results from a great entry price. And based on the current price, I am bullish on oil for the following reasons:
1) Expiration of the oil contracts: They expired last Thursday and the shorts closed their bearish positions and locked their profits.
2) Restrictions on US oil exports: Over the past three years, the average price of WTI oil has been $13 per barrel cheaper than the international benchmark, Brent crude. That gives large consumers of oil such as refiners and chemical companies a big cost advantage over foreign rivals and has helped the U.S. become the world’s top exporter of refined oil products.
Given that the restrictions on US oil exports do not seem to be lifted anytime soon, the shale oil produced in the US will not be exported to impact the international supply/demand and lower Brent price in the short-to-medium term.
3) The weakening of the U.S. dollar: The U.S. dollar rose significantly against the Euro over the last months because of a potential interest rate hike.
However, U.S. retail sales declined in September 2014 and prices paid by businesses also fell. Another report showed that both ISM indices weakened in September 2014, although the overall economic growth remained very strong in Q3 2014.
The ISM manufacturing survey showed that the reading fell back from 59.0 in August 2014 to 56.6 in September 2014. The composite non-manufacturing index dropped back as well, moving down from 59.6 in August 2014 to 58.6 in September 2014.
Source: Pictet Bank website
These reports coupled with a weak growth in Europe and a potential slowdown in China could hurt U.S. exports, which could in turn put some pressure on the U.S. economy.
These are reasons for caution and will most likely deepen concerns at the U.S. Federal Reserve. A rate hike too soon could cause problems to the fragile U.S. economy which is gradually recovering. “If foreign growth is weaker than anticipated, the consequences for the U.S. economy could lead the Fed to remove accommodation more slowly than otherwise,” the U.S. central bank’s vice chairman, Stanley Fischer, said.
That being said, the US Federal Reserve will most likely defer to hike the interest rate planned to begin in H1 2015. A delay in expected interest rate hikes will soften the dollar over the next months, which will lift pressure off the oil price and will push Brent higher.
4) OPEC’s decision to cut supply in November 2014: Many OPEC members need the price of oil to rise significantly from the current levels to keep their house in fiscal order. If Brent remains at $85-$90, these countries will either be forced to borrow more to cover the shortfall in oil tax revenues or cut their promises to their citizens. However, tapping bond markets for financing is very expensive for the vast majority of the OPEC members, given their high geopolitical risk. As such, a cut on promises and social welfare programs is not out of the question, which will likely result in protests, social unrest and a new “Arab Spring-like” revolution in some of these countries.
This is why both Iran and Venezuela are calling for an urgent OPEC meeting, given that Venezuela needs a price of $121/bbl, according to Deutsche Bank, making it one of the highest break-even prices in OPEC. Venezuela is suffering rampant inflation which is currently around 50%, and the government currency controls have created a booming black currency market, leading to severe shortages in the shops.
Bahrain, Oman and Nigeria have not called for an urgent OPEC meeting yet, although they need between $100/bbl and $136/bbl to meet their budgeted levels. Qatar and UAE also belong to this group, although hydrocarbon revenues in Qatar and UAE account for close to 60% of the total revenues of the countries, while in Kuwait, the figure is close to 93%.
The Gulf producers such as the UAE, Qatar and Kuwait are more resilient than Venezuela or Iran to the drop of the oil price because they have amassed considerable foreign currency reserves, which means that they could run deficits for a few years, if necessary. However, other OPEC members such as Iran, Iraq and Nigeria, with greater domestic budgetary demands because of their large population sizes in relation to their oil revenues, have less room to maneuver to fund their budgets.
And now let’s see what is going on with Saudi Arabia. Saudi Arabia is too reliant on oil, with oil accounting for 80% of export revenue and 90% of the country’s budget revenue. Obviously, Saudi Arabia is not a well-diversified economy to withstand low Brent prices for many months, although the country’s existing sovereign wealth fund, SAMA Foreign Holdings, run by the country’s central bank, consisting mainly of oil surpluses, is the world’s third-largest, with assets totaling 737.6 billion US dollars.
This is why Prince Alwaleed bin Talal, billionaire investor and chairman of Kingdom Holding, said back in 2013: “It’s dangerous that our income is 92% dependent on oil revenue alone. If the price of oil decline was to decline to $78 a barrel there will be a gap in our budget and we will either have to borrow or tap our reserves. Saudi Arabia has SAR2.5 trillion in external reserves and unfortunately the return on this is 1 to 1.5%. We are still a nation that depends on the oil and this is wrong and dangerous. Saudi Arabia’s economic dependence on oil and lack of a diverse revenue stream makes the country vulnerable to oil shocks.”
And here are some additional key factors that the oil investors need to know about Saudi Arabia to place their bets accordingly:
a) Saudi Arabia’s most high-profile billionaire and foreign investor, Prince Alwaleed bin Talal, has launched an extraordinary attack on the country’s oil minister for allowing prices to fall. In a recent letter in Arabic addressed to ministers and posted on his website, Prince Alwaleed described the idea of the kingdom tolerating lower prices below $100 per barrel as potentially “catastrophic” for the economy of the desert kingdom. The letter is a significant attack on Saudi’s highly respected 79-year-old oil minister Ali bin Ibrahim Al-Naimi who has the most powerful voice within the OPEC.
b) Back in June 2014, Saudi Arabia was preparing to launch its first sovereign wealth fund to manage budget surpluses from a rise in crude prices estimated at hundreds of billions of dollars. The fund would be tasked with investing state reserves to “assure the kingdom’s financial stability,” Shura Council financial affairs committee Saad Mareq told Saudi daily Asharq Al-Awsat back then. The newspaper said the fund would start with capital representing 30% of budgetary surpluses accumulated over the years in the kingdom. The thing is that Saudi Arabia is not going to have any surpluses if Brent remains below $90/bbl for months.
c) Saudi Arabia took immediate action in late 2011 and early 2012, under the fear of contagion and the destabilisation of Gulf monarchies. Saudi Arabia funded those emergency measures, thanks to Brent which was much higher than $100/bbl back then. It would be difficult for Saudi Arabia to fund these billion dollar initiatives if Brent remained at $85-$90 for long.
d) Saudi Arabia and the US currently have a common enemy which is called ISIS. Moreover, the American presence in the kingdom’s oil production has been dominant for decades, given that U.S. petroleum engineers and geologists developed the kingdom’s oil industry throughout the 1940s, 1950s and 1960s.
From a political perspective, the U.S. has had a discreet military presence since 1950s and the two countries were close allies throughout the Cold War in order to prevent the communists from expanding to the Middle East. The two countries were also allies throughout the Iran-Iraq war and the Gulf War.
5) Geopolitical Risk: Right now, Brent price carries a zero risk premium. Nevertheless, the geopolitical risk in the major OPEC exporters (i.e. Nigeria, Algeria, Libya, South Sudan, Iraq, Iran) is highly volatile, and several things can change overnight, leading to an elevated level of geopolitical risk anytime.
For instance, the Levant has a new bogeyman. ISIS, the Islamic State of Iraq, emerged from the chaos of the Syrian civil war and has swept across Iraq, making huge territorial gains. Abu Bakr al-Baghdadi, the group’s figurehead, has claimed that its goal is to establish a Caliphate across the whole of the Levant and that Jordan is next in line.
At least 435 people have been killed in Iraq in car and suicide bombings since the beginning of the month, with an uptick in the number of these attacks since the beginning of September 2014, according to Iraq Body Count, a monitoring group tracking civilian deaths. Most of those attacks occurred in Baghdad and are the work of Islamic State militants. According to the latest news, ISIS fighters are now encamped on the outskirts of Baghdad, and appear to be able to target important installations with relative ease.
Furthermore, Libya is on the brink of a new civil war and finding a peaceful solution to the ongoing Libyan crisis will not be easy. According to the latest news, Sudan and Egypt agreed to coordinate efforts to achieve stability in Libya through supporting state institutions, primarily the military who is fighting against Islamic militants. It remains to be see how effective these actions will be.
On top of that, the social unrest in Nigeria is going on. Nigeria’s army and Boko Haram militants have engaged in a fierce gun battle in the north-eastern Borno state, reportedly leaving scores dead on either side. Several thousand people have been killed since Boko Haram launched its insurgency in 2009, seeking to create an Islamic state in the mainly Muslim north of Nigeria.
6) Seasonality And Production Disruptions: Given that winter is coming in the Northern Hemisphere, the global oil demand will most likely rise effective November 2014.
Also, U.S. refineries enter planned seasonal maintenance from September to October every year as the federal government requires different mixtures in the summer and winter to minimize environmental damage. They transition to winter-grade fuel from summer-grade fuels. U.S. crude oil refinery inputs averaged 15.2 million bopd during the week ending October 17. Input levels were 113,000 bopd less than the previous week’s average. Actually, the week ending October 17 was the eighth week in a row of declines in crude oil runs, and these rates were the lowest since March 2014. After all and given that the refineries demand less crude during this period of the year, the price of WTI remains depressed.
On top of that, the production disruptions primarily in the North Sea and the Gulf of Mexico are not out of the question during the winter months. Even Saudi Arabia currently faces production disruptions. For instance, production was halted just a few days ago for environmental reasons at the Saudi-Kuwait Khafji oilfield, which has output of 280,000 to 300,000 bopd.
7) Sentiment: To me, the recent sell off in BNO is overdone and mostly speculative. To me, the recent sell-off is primarily a result of a headline-fueled anxiety and bearish sentiment.
8) Jobs versus Russia: According to Olga Kryshtanovskaya, a sociologist studying the country’s elite at the Russian Academy of Sciences in Moscow, top Kremlin officials said after the annexation of Crimea that they expected the U.S. to artificially push oil prices down in collaboration with Saudi Arabia in order to damage Russia.
And Russia is stuck with being a resource-based economy and the cheap oil chokes the Russian economy, putting pressure on Vladimir Putin’s regime, which is overwhelmingly reliant on energy, with oil and gas accounting for 70% of its revenues. This is an indisputable fact.
The current oil price is less than the $104/bbl on average written into the 2014 Russian budget. As linked above, the Russian budget will fall into deficit next year if Brent is less than $104/bbl, according to the Russian investment bank Sberbank CIB. At $90/bbl, Russia will have a shortfall of 1.2% of gross domestic product. Against a backdrop of falling revenue, finance minister Anton Siluanov warned last week that the country’s ambitious plans to raise defense spending had become unaffordable.
Meanwhile, a low oil price is also helping U.S. consumers in the short term. However, WTI has always been priced in relation to Brent, so the current low price of WTI is actually putting pressure on the US consumers in the midterm, given that the number one Job Creating industry in the US (shale oil) will collapse and many companies will lay off thousands of people over the next few months. The producers will cut back their growth plans significantly, and the explorers cannot fund the development of their discoveries. This is another indisputable fact too.
For instance, sliding global oil prices put projects under heavy pressure, executives at Chevron (NYSE:CVX) and Statoil (NYSE:STO) told an oil industry conference in Venezuela. Statoil Venezuela official Luisa Cipollitti said at the conference that mega-projects globally are under threat, and estimates that more than half the world’s biggest 163 oil projects require a $120 Brent price for crude.
Actually, even before the recent fall of the oil price, the oil companies had been cutting back on significant spending, in a move towards capital discipline. And they had been making changes that improve the economies of shale, like drilling multiple wells from a single pad and drilling longer horizontal wells, because the “fracking party” was very expensive. Therefore, the drop of the oil price just made things much worse, because:
a) Shale Oil: Back in July 2014, Goldman Sachs estimated that U.S. shale producers needed $85/bbl to break even.
b) Offshore Oil Discoveries: Aside Petr’s (NYSE: PBR) pre-salt discoveries in Brazil, Kosmos Energy’s (NYSE: KOS) Jubilee oilfield in Ghana and Jonas Sverdrup oilfield in Norway, there have not been any oil discoveries offshore that move the needle over the last decade, while depleting North Sea fields have resulted in rising costs and falling production.
The pre-salt hype offshore Namibia and offshore Angola has faded after multiple dry or sub-commercial wells in the area, while several major players have failed to unlock new big oil resources in the Arctic Ocean. For instance, Shell abandoned its plans in the offshore Alaskan Arctic, and Statoil is preparing to drill a final exploration well in the Barents Sea this year after disappointing results in its efforts to unlock Arctic resources.
Meanwhile, the average breakeven cost for the Top 400 offshore projects currently is approximately $80/bbl (Brent), as illustrated below:
Source: Kosmos Energy website
c) Oil sands: The Canadian oil sands have an average breakeven cost that ranges between $65/bbl (old projects) and $100/bbl (new projects).
In fact, the Canadian Energy Research Institute forecasts that new mined bitumen projects requires US$100 per barrel to breakeven, whereas new SAGD projects need US$85 per barrel. And only one in four new Canadian oil projects could be vulnerable if oil prices fall below US$80 per barrel for an extended period of time, according to the International Energy Agency.
“Given that the low-bearing fruit have already been developed, the next wave of oil sands project are coming from areas where geology might not be as uniform,” said Dinara Millington, senior vice president at the Canadian Energy Research Institute.
So it is not surprising that Suncor Energy (NYSE:SU) announced a billion-dollar cut for the rest of the year even though the company raised its oil price forecast. Also, Suncor took a $718-million charge related to a decision to shelve the Joslyn oilsands mine, which would have been operated by the Canadian unit of France’s Total (NYSE:TOT). The partners decided the project would not be economically feasible in today’s environment.
As linked above, others such as Athabasca Oil (OTCPK: ATHOF), PennWest Exploration (NYSE: PWE), Talisman Energy (NYSE: TLM) and Sunshine Oil Sands (OTC: SUNYF) are also cutting back due to a mix of internal corporate issues and project uncertainty. Cenovus Energy (NYSE:CVE) is also facing cost pressures at its Foster Creek oil sands facility.
And as linked above: “Oil sands are economically challenging in terms of returns,” said Jeff Lyons, a partner at Deloitte Canada. “Cost escalation is causing oil sands participants to rethink the economics of projects. That’s why you’re not seeing a lot of new capital flowing into oil sands.”
After all, helping the US consumer spend more on cute clothes today does not make any sense, when he does not have a job tomorrow. Helping the US consumer drive down the street and spend more at a fancy restaurant today does not make any sense, if he is unemployed tomorrow.
Moreover, Putin managed to avoid mass unemployment during the 2008 financial crisis, when the price of oil dropped further and faster than currently. If Russia faces an extended slump now, Putin’s handling of the last crisis could serve as a template.
In short, I believe that the U.S. will not let everything collapse that easily just because the Saudis woke up one day and do not want to pump less. I believe that the U.S. economy has more things to lose (i.e. jobs) than to win (i.e. hurt Russia or help the US consumer in the short term), in case the current low WTI price remains for months.
I am not saying that an investor can take the plunge lightly, given that the weaker oil prices squeeze profitability. Also, I am not saying that Brent will return back to $110/bbl overnight. I am just saying that the slump of the oil price is primarily a result from extreme short positioning and overblown fears about the global economy.
To me, this is a temporary dip and I believe that oil markets will recover significantly by the first half of 2015. This is why, I bought BNO at an average price of $33.15 last Thursday, and I will add if BNO drops down to $30. My investment horizon is 6-8 months.
Nevertheless, all fingers are not the same. All energy companies are not the same either. The rising tide lifted many of the leveraged duds over the last two years. Some will regain quickly their lost ground, some will keep falling and some will cover only half of the lost ground.
I am saying this because the drop of the oil price will spell serious trouble for a lot of oil producers, many of whom are laden with debt. I do believe that too much credit has been extended too fast amid America’s shale boom, and a wave of bankruptcy that spreads across the oil patch will not surprise me. On the debt front, here is some indicative data according to Bloomberg:
1) Speculative-grade bond deals from energy companies have made up at least 16% of total junk issuance in the U.S. the past two years as the firms piled on debt to fund exploration projects. Typically the average since 2002 has been 11%.
2) Junk bonds issued by energy companies, which have made up a record 17% of the $294 billion of high-yield debt sold in the U.S. this year, have on average lost more than 4% of their market value since issuance.
3) Hercules Offshore’s (NASDAQ:HERO) $300 million of 6.75% notes due in 2022 plunged to 57 cents a few days ago after being issued at par, with the yield climbing to 17.2%.
4) In July 2014, Aubrey McClendon’s American Energy Partners LP tapped the market for unsecured debt to fund exploration projects in the Permian Basin. Moody’s Investors Service graded the bonds Caa1, which is a level seven steps below investment-grade and indicative of “very high credit risk.” The yield on the company’s $650 million of 7.125% notes maturing in November 2020 reached 11.4% a couple of days ago, as the price plunged to 81.5 cents on the dollar, according to Trace, the Financial Industry Regulatory Authority’s bond-price reporting system.
Due to this debt pile, I have been very bearish on several energy companies like Halcon Resources (NYSE:HK), Goodrich Petroleum (NYSE:GDP), Vantage Drilling (NYSEMKT: VTG), Midstates Petroleum (NYSE: MPO), SandRidge Energy (NYSE:SD), Quicksilver Resources (NYSE: KWK) and Magnum Hunter Resources (NYSE:MHR). All these companies have returned back to their H1 2013 levels or even lower, as shown at their charts.
But thanks also to this correction of the market, a shrewd investor can separate the wheat from the chaff and pick only the winners. The shrewd investor currently has the unique opportunity to back up the truck on the best energy stocks in town. This is the time to pick the gold nuggets out of the ashes and wait to see them shine again. On that front, I recommended Petroamerica Oil (OTCPK: PTAXF) which currently is the cheapest oil-weighted producer worldwide with a pristine balance sheet.
Last but not least, I am watching closely the situation in Russia. With economic growth slipping close to zero, Russia is reeling from sanctions by the U.S. and the European Union. The sanctions are having an across-the-board impact, resulting in a worsening investment climate, rising capital flight and a slide in the ruble which is at a record low. And things in Russia have deteriorated lately due to the slump of the oil price.
Obviously, this is the perfect storm and the current situation in Russia reminds me of the situation in Egypt back in 2013. Those investors who bought the bullish ETF (NYSEARCA: EGPT) at approximately $40 in late 2013, have been rewarded handsomely over the last twelve months because EGPT currently lies at $66. Therefore, I will be watching closely both the fluctuations of the oil price and several other moving parts that I am not going to disclose now, in order to find the best entry price for the Russian ETFs (NYSEARCA: RSX) and (NYSEARCA:RUSL) over the next months.
The Boom-and-bust Fed’s Rental Society
Now, as during World War II and up to 1951, the US Federal Reserve practiced what is now called quantitative easing (QE). Then, as now, nominal interest rates were low and the real ones negative: The Fed’s policy did not so much induce investments as it allowed the government to accumulate debts, and prevent default.
Marriner Eccles, the Fed chairman during the 1940s, stated explicitly that “we agreed with the Treasury at the time of the war [that the low rates were] the basis upon which the Federal Reserve would assure the Government financing” – the Fed thus carrying out fiscal policy. Real wages stagnated then as now, and global savings poured into the US.
With the centrally controlled war economy, there was no sacrifice buying Treasuries. Extensive price controls, whose administration was gradually dismantled after 1948 only, did not induce investments. Citizens backed this war, and consumer oriented production was not a priority. Black markets thrived, and the real inflation was significantly higher than the official one computed from the controlled prices.
Still, even the official cumulative rate of inflation was 70% between 1940-7. Yet interest rates during those years hovered around 0.5% for three-months Treasuries and 2.5% for the 30-year ones – similar to today’s.
When the Allies won the War, there were many unknowns, among them the future of Europe, Russia, Asia, and there was much uncertainty about domestic policies in the US too: how fast the US’s centralized “war economy” would be dismantled being one of them. As noted, the dismantling started in 1948, but the Fed gained independence and ceased carrying out fiscal policy in 1951 only.
Mark Twain said history rhymes but does not repeat itself. Though now the West is not fighting wars on the scale of World War II, there is uncertainty again in Southeast Asia and the Middle East, in Europe, in Russia and in Latin America. Savings continue to pour in the US, into Treasuries in particular, much criticism of US fiscal and monetary policies notwithstanding.
In the land of the blind, the one-eyed person – the US – committing fewer mistakes and expected to correct them faster than other countries, can still do reasonably. And although domestically, the US is not as much subject to wage and price controls as it was during and after World War II, large sectors, such as education and health, among others, are subject to direct and indirect controls by an ever more complex bureaucracy, the regulatory and fiscal environment, both domestic and international is uncertain, whether linked to climate, corporate taxes, what differential tax rates would be labeled “state aid”, and others.
Many societies are in the midst of unprecedented experiments, with no model of society being perceived as clearly worth emulation.
In such uncertain worlds, the best thing investors can do is be prepared for mobility – be nimble and able to become “liquid” on moments’ notice. This means investing in deeper bond and stock markets, but even in them for shorter periods of time – “renting” them, rather than buying into the businesses underlying them, and less so in immobile assets. Among the consequence of such actions are low velocity of money (with less confidence, money flows more slowly) and less capital spending, in “immobile assets” in particular.
As to in- and outflows to gold, its price fluctuations post-crisis suggest that its main feature is being a global reserve currency, a substitute to the dollar. As the euro’s and the yen’s credibility to be reserve currencies first weakened since 2008, and the yuan, a communist party-ruled country’s currency is not fit to play such role, by 2011 the dollar’s dominant status as reserve currency even strengthened.
First the price of gold rose steadily from US$600 per ounce in 2005 to $1,900 in 2011, dropping to $1,200 these days. And much sound and fury notwithstanding, the exchange rate between the dollar, euro and yen are now exactly where they were in 2005, with the price of an ounce of gold doubling since.
The stagnant real wages in Main Street’s immobile sectors are consistent with the rising stock prices and low interest rates. Not only are investors less willing to deploy capital in relatively illiquid assets, but also that critical mass of talented people, I often call the “vital few”, has been moving toward the occupations of the “mobile” sector, such as technology, finance and media.
Such moves put caps on wages within the immobile sectors. Just as “stars” quitting a talented team in sports lower the compensation of teammates left behind, so is the case when “stars” in business or technology make their moves away from the “immobile” sectors. Add to these the impact due to heightened competition of tens of millions of “ordinary talents” from around the world, and the stagnant wages in the US’s immobile sectors are not surprising.
This is one respect in which our world differs from the one of post-World War II, when talent poured into the US’s “immobile” sectors, freed from the constraints of the war economy. It differs too in terms of rising inequality of wealth. The Western populations were young then, hungry to restore normalcy, and able to do that in the dozen Western countries only, the rest of the world having closed behind dictatorial curtains.
This is not the case now: the West’s aging boomers and its poorer segments saw the evaporation of equities in homes and increased uncertainty about their pensions in 2008. They went into capital preservation mode with Treasuries, not stocks. At the age of 50-55 and above, people cannot risk their capital, as they do not have time and opportunities to recoup.
However, those for whom losing more would not significantly alter their standards of living did put the money back in stock markets after the crisis. As markets recovered after 2008, wealth disparities increased. This did not happen after World War II; even though stock markets did well, they were in their infancy then. Even in 1952, only 6.5 million Americans owned common stock (about 4% of the US population then). The hoarding during the war did not find its outlet after its end in stock markets, as happened since 2008 for the relatively well to do.
The parallels in terms of monetary and fiscal policies between World War II and today, and the non-parallels in terms of demography and global trade, shed light on the major trends since the crisis: there are no “conundrums.” This does not mean that solutions are straightforward or can be done unilaterally. The post -World War II world needed Bretton-Woods, and today agreement to stabilize currencies is needed too.
This has not been done. Instead central banks have improvised, though there is no proof that central banks can do well much more than keep an eye on stable prices. The recent improvised venturing into undefined “financial stability”, undefined “cooperation” and “coordination”, and the Fed carrying out, as during World War II, fiscal rather than monetary policy, add to fiscal, regulatory and foreign policy uncertainties, all punish long-term investments and drive money into liquid ones, and society becoming a “rental”, one, with shortened horizons.
Jumps in stock prices with each announcement that the Fed will continue with its present policies and favor devaluation (as Stan Fisher, vice chairman of the Fed just advocated) – does not suggest that things are on the right track, but quite the opposite, that the Fed has not solved any problem, and neither has Washington dealt with fundamentals. Instead, with devaluations, they have avoided domestic fiscal and regulatory adjustments – and hope for the resulting increased exports, that is, relying on other countries making policy adjustments.
Reuven Brenner holds the Repap Chair at McGill University’s Desautels Faculty of Management. The article draws on his Force of Finance (2002).
(Copyright 2014 Reuven Brenner)
Why Are Chinese Millionaires Buying Mansions in an L.A. Suburb?
by Karen Weise
“Oh, hey! How ya’ doin’?” Raleigh Ornelas hollers, leaning out the window of his spotless white pickup truck. He’s recognized the man across the street, a developer standing in front of a Tuscan-style mansion under construction. “Where have you been hiding at? I call you, you don’t call me.”
Ornelas is an informal broker in Arcadia, Calif., a Los Angeles suburb at the foot of the San Gabriel mountains. He’s been keeping an eye out for the builder, an Asian man with a slight comb-over who goes by Mark. Ornelas has found two older homeowners who’ve finally agreed to sell their properties, and he knows that Mark, like all developers here, needs land on which to build mansions for an influx of rich clients from mainland China.
Ornelas rattles off addresses on a nearby street. “Three-eleven, that guy, he’s wack,” he says, shaking his head. “He wants 2.8.” He means million dollars. “And then 354, they want $2 million.”
The lot is 17,000 square feet. “Seventeen for 2 mil?” Mark asks, incredulous.
“I know,” Ornelas says. “They’re going crazy.”
A year ago the property would have gone for $1.3 million, but Arcadia is booming. Residents have become used to postcards offering immediate, all-cash deals for their property and watching as 8,000-square-foot homes go up next door to their modest split levels. For buyers from mainland China, Arcadia offers excellent schools, large lots with lenient building codes, and a place to park their money beyond the reach of the Chinese government.
The city, population 57,600, projects that about 150 older homes—53 percent more than normal—will be torn down this year and replaced with mansions. The deals happen fast and are rarely listed publicly. Often, the first indication that a megahouse is coming next door is when the lawn turns brown. That means the neighbor has stopped watering and green construction netting is about to go up.
Damon Casarez for Bloomberg Businessweek.
This flood of money, arriving from China despite strict currency controls, has helped the city build a $20 million high school performing arts center and the local Mercedes dealership expand. “Thank God for them coming over here,” says Peggy Fong Chen, a broker in Arcadia for many years. “They saved our recession.” The new residents are from China’s rising millionaire class—entrepreneurs who’ve made fortunes building railroads in Tibet, converting bioenergy in Beijing, and developing real estate in Chongqing. One co-owner of a $6.5 million house is a 19-year-old college student, the daughter of the chief executive of a company the state controls.
Arcadia is a concentrated version of what’s happening across the U.S. The Hurun Report, a magazine in Shanghai about China’s wealthy elite, estimates that almost two-thirds of the country’s millionaires have already emigrated or plan to do so. They’re scooping up homes from Seattle to New York, buying luxury goods on Fifth Avenue, and paying full freight to send their kids to U.S. colleges. Chinese nationals hold roughly $660 billion in personal wealth offshore, according to Boston Consulting Group, and the National Association of Realtors says $22 billion of that was spent in the past year acquiring U.S. homes. Arcadia has become a hotbed of the buying binge in the past several years, and long-standing residents are torn—giddy at the rising property values but worried about how they’re transforming their town. And they’re increasingly nervous about what would happen to the local economy if the deluge of Chinese cash were to end.
Back on the street corner, Ornelas and Mark agree to meet for coffee to discuss other deals. Before he drives away, Ornelas asks if the developer wants to speak with a reporter. Mark declines, saying he tries to keep a low profile. “See?” Ornelas says as he pulls away, leaning toward the passenger seat and raising his eyebrows. “Everything’s hush-hush here in Arcadia.”
For almost a century after its founding in 1903, Arcadia was white and conservative. In the late 1930s more than 90 percent of the city’s property owners signed agreements, circulated by the Chamber of Commerce, to sell only to white buyers. Its Santa Anita racetrack held about 19,000 Japanese Americans as they were relocated to internment camps during World War II. In the early 1980s an influx of immigrants from Taiwan arrived, drawn in large part to the great public schools. A second wave came from Hong Kong after the 1989 Tiananmen Square protests. The city’s Asian population grew from 4 percent in 1980 to 59 percent in 2010. There were tensions at first—a letter in a local newspaper praised a proposed ban on non-English storefronts, writing, “Please leave your Asian signs in the old country and get Americanized.” Over time, the new residents got involved in civic life, joining the Rotary Club, entering local government, and opening businesses such as Din Tai Fung Dumpling House, a Taiwanese restaurant tucked in the corner of a strip mall.
Arcadia has no real downtown, only low-rise commercial stretches lined with real estate offices and boba tea shops; Din Tai Fung is the closest thing there is to a central hub. Hostesses with walkie-talkies manage the hourlong wait of people clamoring for plump soup dumplings and pork buns. It was here, a decade ago, that Ornelas broke into Chinese real estate. Leaving lunch one day, he spotted a Ferrari parked outside. “Boy, that’s a beautiful car,” he said. The owner was Chinese and asked Ornelas if he wanted to take it for a drive. Ornelas squeezed in and took a quick spin. As he returned, a white man walked by and made a racial slur about the owner.
“I said, ‘Leave the guy alone,’ ” Ornelas recalls. The talk escalated into a fistfight, which ended badly for the heckler. Ornelas is a Vietnam veteran who spent years bare-knuckle boxing for cash while working as a longshoreman. “The Chinese guy goes, ‘I’m a stranger. Why did you stick up for me?’ I said, ‘We’re all equal in this world, man.’ ” After that, Ornelas says, “I just met people from him, and then I got into different developers.”
“Obviously if your house isn’t feng shui-friendly, it’s like we’re not even going to have a conversation”
Ornelas matches them up with sellers. He swings by garage sales to chat up owners, and as he drives Arcadia’s streets, he looks for signs a homeowner may need money. On a blistering hot day in July, he goes scouting through the city’s foothills. “The roof is popping in that one there,” he says, pointing to an older ranch house. “This one, they put a new roof on, but the house is in bad shape.” Ornelas stops at a corner lot, where a property is under construction. “Look at how big that house is,” he says. “Ooof. Gigantic.”
As Ornelas tells it, last year the real estate website Zillow (Z) had estimated the property’s value at $1.2 million when he, on behalf of a developer, offered the owner $1.5 million. The owner’s brother, who worked in law enforcement, called Ornelas to ask if he was laundering money. “I told him, ‘That’s what the house is worth to me,’ you know? And he kind of investigated to see if it was dirty money. Everything was on the uppity-up, so he sold it to us.” Where Ornelas’s tales can be checked against public records, they stand up—Zillow did make the lower estimate, the house did sell for $1.5 million, and the owner’s brother is a sergeant with the county sheriff’s department. (The lawman didn’t respond to a request for comment.)
Next, Ornelas drives over to one in a string of construction sites in the city’s Upper Rancho neighborhood, where large lots line curving streets shaded by gracious oak trees. At the site, buzz saws blare, and stacks of plywood lie on a concrete foundation. Richard Smith, the sun-tanned owner of a construction company working on seven homes in Arcadia, walks over to talk shop. Smith is building the 11,000-square-foot home for a developer who expects to sell it, he says, for $8 million to $9 million. Smith grew up in Arcadia, and his company has only Asian clients. They have certain preferences. “Obviously, if your house isn’t feng shui-friendly, it’s like we’re not even going to have a conversation,” he says. That means minding the number of stairs, the directions rooms face, and how materials line up. “And understanding the value of water, that’s probably one of my key strengths,” he says. “If you go to any successful businessman in China, or even here, they generally will have a picture of water behind their desk.” He whips out his phone and swipes to photos of a project with a waterfall cascading off the top of a gazebo and into a backyard pool.
Photograph by Damon Casarez for Bloomberg Businessweek
Smith says many of the newest buyers in Arcadia don’t speak English. “They’ve just come here,” he says. “They’re on that EB—what’s it called?” He means the EB-5 visas that the U.S. grants to foreigners who plow at least $500,000 into American development projects. Congress created the program in 1990 to spur investment, and demand for the visas has grown recently. This year, for the first time, the government gave away the annual allocation of 10,000 visas before the year was over, with Chinese nationals snapping up 85 percent. Brokers in the area say it’s the most common way buyers are coming to town. “Once they obtain residency, they want to bring their family over and get the United States education,” says real estate agent Ricky Seow. “They can start a new life in California.”
Taillights whiz by as 19-year-old Cheng Qianrong heads east along the freeway that runs from Los Angeles International Airport toward Arcadia, in a video she posts in June to her 22,000 Instagram followers. Later that night she stands in a marble kitchen, points a gold iPhone at a mirror, and, with a hip to the side, snaps a picture of her reflection, writing, “I’m finally home.
A sophomore studying business at the University of Oregon, Cheng, who goes by Heli in the U.S., is a minor social media celebrity in China. In selfies, her long, straight hair and wide-eyed gaze make her look younger than she is. Her followers express awe for her style and gush at photos of her enjoying a smoothie; posing with stuffed animals; and smiling with a birthday cake made to look like a stack of Tiffany boxes.
In late 2013, Cheng and her mother, Wang Jun, bought a 9,000-square-foot house with a pool and spa in Arcadia for $6.5 million. According to an L.A. property filing, Wang’s husband is Cheng Qingtao. He’s CEO of China Huayang Economic & Trade Group, one of the first state-owned companies set up by the central government, which still owns a majority stake. Heli’s two-story chateau-style home is only a few miles from one owned by her aunt, who’s married to Cheng’s older brother, Cheng Qingbo. Qingbo was the first private owner of railroads in China and, by 2013, was the country’s 257th-richest person, worth an estimated $1.06 billion, Hurun says. In June, Shanghai police arrested Qingbo for allegedly duping people into investments, including a project that, China Business News says, didn’t exist.
For most Arcadians, it would be hard to know if Heli owned the house next door. A member of one homeowners association estimates that about 20 percent of the new purchases sit empty, and for those who don’t speak Mandarin, language barriers have made it hard to share more than a wave with neighbors. For many sales, public records provide no way to understand who the new owners are. A recorded deed may show just an English transliteration of a buyer’s name, with no signature. Some public documents provide small clues: a second address in a luxury condo near Tiananmen Square; a seal if a document has been notarized at the U.S. Embassy in Guangzhou; a husband who relinquishes rights to the land to his wife; or a signature in Chinese characters.
Chinese nationals hold $660 billion in personal wealth offshore; they spent $22 billion on U.S. homes in the past year
Some of those clues match up with public documents in China. A mile north of the Chengs, Fu Youhong and Zhang Jian, a couple who founded a pharmaceutical distributor in China before starting a business converting agricultural waste into energy, bought a $3.5 million home advertised as a “spectacular brand-new French Normandy Estate.” Pesticide manufacturer Huifeng International USA got into the boom early, in 2012, and for $3.4 million bought a house with a grand circular staircase and Swedish sauna. The company says the property is used as an office for its trading business and not as a personal home. And a $3.2 million property in one of Arcadia’s rare gated communities was sold to a woman from Guangzhou named Zeng Fang, who runs a network of immigration sites, one of which, baby-usa.net, tells Chinese mothers they can deliver babies at Arcadia Methodist Hospital.
A few miles south, another new house, this one with Tuscan styling and Moorish window treatments, sold last year to a woman named Jin Liping. Her husband, Du Jianming, is the owner of one of China’s largest private builders of steel structures. His company has built bridges in Shanghai and connecting railways on the Tibetan Plateau. His wife bought the 8,000-square-foot house in Arcadia for $4.8 million in September 2013, around the same time the couple faced financial pressures at home. They lost three lawsuits in China related to unpaid loans, but their home in California looks in peak condition, with little red ribbons tied around the topiary by the front door.
A goldenrod-yellow house on South 6th Avenue belongs to Tao Weisheng and Du Xiaojuan, who develop homes and run hotels in Chongqing. Tao is known in China for collecting calligraphy and paintings—and for reportedly paying bribes to bureaucrats. According to state-run media, in 2004, Tao and a business partner paid a local official’s gambling debt at a Macau casino. The official had given them a land certificate they needed for a loan. In 2010 the court found the official guilty of taking a bribe and gave him a suspended death sentence. The prosecutor didn’t charge Tao and his partner. The homeowners or their representatives declined to comment or did not respond to interview requests.
Lately, groups of Chinese investors have pooled their money to buy Arcadian homes, which often aren’t occupied. More than 400 residents showed up at a community meeting with the police department this spring, in part concerned about a spate of burglaries targeting empty mansions. When there are leaks or other problems with a property, even the city struggles to identify who’s responsible. “Who do we contact? Where do we contact them?” says Jim Kasama, the community development administrator for the city’s building department. “Sometimes it’s not that easy.”
Arcadia is on track to bring in record revenue this year. In the fiscal year ended in June, fees from building permits and development reached $7.9 million, a 72 percent increase from the previous year. Its quiet streets are busy with gardeners blowing leaves and laborers laying roofs. This summer, the high school updated its gym and cafeteria. For a generation of older homeowners, the boom has created one hell of a nest egg. The Great Recession hit many retirees hard, but now they’ve sold and moved to cheaper places a few miles away. As Smith, the contractor, says, “They still live close, but they’ve got 2 million bucks in their bank account.”
With so many homes vacant and language barriers prevalent, distrust is building. There are strange rumors—local officials on the take; bridal studios as fronts for massage parlors—and stranger truths. Just steps from the Arcadia police station, a local TV news reporter uncovered a hotel being used for birth tourism. A member of one homeowners association says a developer told the local board at various meetings that three separate homes he was building were all for his own family. When the board called him on it, he said his wife couldn’t decide which one she wanted.
“The growth we’re experiencing isn’t typical,” Kasama says. “It’s not like we have new subdivisions. It’s the houses that are growing.” The city’s homeowners associations can do only so much—three years ago, the city changed a regulation that limits their ability to cap the size of houses.
Neighborhood disputes are getting intense. Dong Chang, a local dermatologist who told the Rotary Club that he left Taiwan in the early 1970s with “two bags of rice and a frying pan,” is suing the developer building a mansion next door for cutting down an old oak tree on his property. He’s seeking about $280,000, saying the harm was “intentional, fraudulent, oppressive, malicious, and despicably done.”
Courtesy City of Arcadia
Then there’s the cannon incident. That battle went down on West Las Flores Avenue, on a block with a mix of older homes and newer construction, including a house owned by David Tran, the Huy Fong sriracha magnate. A family moved into a new home in 2008 and flanked the front walkway with two waist-high lion statues, the “fu dogs” that guard imperial Chinese palaces. A few years later, a developer named Ricky Tang began building his own home across the street. Tang didn’t care for the lions, but their owners refused to remove them. In January 2011, according to city records, Tang mounted two replica cannons on top of a construction trailer in the front of his lot, aiming back at the lions. A red sign reading “Cannon against dogs” in Chinese hung from each cannon. “The neighbor across the street took offense,” Kasama says. “He felt they looked threatening.” Soon a city-owned Prius pulled up, lights flashing, with an official entreating Tang to take down the weaponry. He acquiesced after a month of haggling. Tang didn’t respond to a request for comment.
Mary Garzio, a widow who’s Tang’s neighbor, calls him “a very nice man.” She says he’s been wooing her to sell her 73-year-old house for $3 million in cash. He brings over fruit and says she can live rent-free until she gets settled elsewhere. “He says, ‘You’re a good neighbor, Mary. I don’t want you to leave, but I want your home.’ ”
Arcadia’s Chinese buyers may have made their wealth in different ways, but they face a common problem: getting their cash to America. China controls the flow of its currency, restricting residents from converting more than $50,000 in yuan into foreign denominations each year. At that pace it would take half a lifetime for a couple to buy a $4 million home.
Jeff Needham, a senior vice president at HSBC (HSBC), says it’s most common for buyers to transfer money from personal or business accounts they already have in Hong Kong, which doesn’t impose caps. “In most of our buyer situations, they have funds outside China already that they have accumulated over years,” he says, adding that the bank verifies the source of the funds.
It’s trickier for those without accounts in Hong Kong. Chen Ping, a local broker, says there’s a common workaround. “We call it ‘head-count wiring,’ ” she says. Buyers line up other people—friends, family, or, if need be, paid strangers—to each transfer a share. “I once had a customer who bought a $1.9 million house in Arcadia who said, ‘Not a problem. I have more than enough head counts,’ ” Chen says. Many buyers have legitimate ways to wire the funds, says broker Imy Dulake, but “there is no way we can have this much cash coming in legally.”
When they can’t get enough money through, property records show many get mortgages to buy the homes, often putting at least 40 percent down. Others buy with all cash and later take out home-equity loans, freeing up funds for other investments in the U.S. without going through the rigmarole of getting money across the Pacific again. Dozens of Chinese homeowners in Arcadia have loans from HSBC and East West Bancorp (EWBC), both of which have branches in China. HSBC’s Needham says the bank gives “premier” clients a discounted rate, and it can underwrite loans in the U.S. based on international credit scores and assets overseas. East West didn’t respond to requests for comment.
Even as they fret about their town, longtime Arcadians worry about a sudden end to the money. What happens if the U.S. limits visas, the Chinese government clamps down, or the émigrés pick another place to park their cash? “How high we go, we can’t foresee, because we never know the policy changes,” real estate agent Seow says. This summer, after an exposé on China Central Television, the Bank of China ended a government program that quietly let some customers convert an unlimited amount of yuan into dollars and transfer it overseas. And President Xi Jinping’s anticorruption campaign has raised the specter of a larger slowdown. “I was in escrow on a property before this crackdown, and oh my God, they could not get their money out” of China, broker Dulake says. The sale fell through.
Stig Hedlund lives on the block with the cannons, in a house built in 1937 by his grandfather, a civil engineer who laid out many of the city’s roads when everything was still alfalfa fields. Now Hedlund is wondering if he should leave. He’s received nice offers for his house, like when a broker and a couple drove up his driveway unannounced in a black Mercedes one Sunday morning; the broker knocked on the front door, saying the couple wanted to buy his home. He’d like to wait until his last son graduates from college, but he fears his “five-year plan” will make him miss the boom. When he reads news about recent protests in Hong Kong, he wonders how China’s response will ripple across the mainland. “If a communist government starts putting the kibosh, isn’t it more incentive to get money out of the country?” he asks. Or would a crackdown mean he blows his chance to sell? It’s a question central to Arcadia’s gardeners and construction workers, the car salesmen and the boba tea makers, who all rely on the money surging out of China. For now, Hedlund figures he can wait a little longer. He hears Ornelas just brokered a sale down the street for $2.8 million.
US Home Prices Are Rolling Over (in one Chart)
The numerous outfits that attempt to measure home price levels and movements in the US all come up with different numbers, and often frustratingly so, in part because they measure different things. Some measure actual cities, others measure the often multi-county area of the entire metroplex. So the absolute price levels differ, and timing may differ as well, but the movements are roughly the same.
The chart by the Atlanta Fed overlays three of the major real estate data series – the Federal Housing Finance Agency’s House Price Index, the CoreLogic National House Price Index, and the S&P/Case Shiller Home Price Index (20-city). And one thing is now abundantly clear:
Year over year, home-price increases are fading from crazy double digit gains last year toward….?
Note the great housing bubble that the Greenspan Fed instigated with its cheap-money policies that then led to the financial crisis. It was followed by a hangover.
And the show repeats itself:
The ephemeral bump in home prices in 2010 and 2011 was a result of federal and state stimulus money (via tax credits) for home buyers. It was followed by a hangover.
The hefty home price increases of 2012 and 2013 were nourished by investors, including large Wall Street firms with access to nearly free money that QE and ZIRP made available to them. They plowed billions every month into the buy-to-rent scheme. When prices soared past where it made sense for them, they pulled back. And now the hangover has set in.
There is no instance in recent history when home prices soared like this beyond the reach of actual home buyers, then landed softly on a plateau to somehow let incomes catch up with them. Despite the well-honed assurances by the industry, there is no plateau when home prices are inflated by outside forces. When these forces peter out, the hangover sets in.
How long the current hangover will last and how far prices have to drop before demand re-materializes even as interest rates are likely to be nudged up remains a guessing game. So far, prices are still up on a national basis year over year. But in some areas, price changes have started to go negative on a monthly basis. And the trend has been relentless.
Someday perhaps, governments and central banks will figure out that every stimulus and money-printing binge is followed by a hangover. And when that hangover gets painful, suddenly there are new screams for more stimulus and another money-printing binge, regardless of what will come as a result of it, or after it fades.
Texas and Colorado Triumph as Havens for First-Time Homebuyers
By Phil Hall
As the Labor Day weekend marked the unofficial end to summer, the latest mortgage application data reaffirmed a continuing sense of stagnation. But while many mortgage professionals view the fall months as a prime season for new housing activity, one key concern arises on whether first-time home buyers will be able to participate in the market. In a recent survey, it seemed that Texas and Colorado have taken the lead as the nation’s top states for attracting first-time home buyers.
First, let’s consider how summer wrapped in housing. According to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Application Survey for the week ending Aug. 29, the Market Composite Index increased 0.2 percent on a seasonally adjusted basis, but decreased one percent on an unadjusted basis from one week earlier. The seasonally adjusted Purchase Index decreased two percent from one week earlier, while the unadjusted Purchase Index decreased four percent compared with the previous week and was 12 percent lower than the same week one year ago.
In comparison, the Refinance Index increased one percent from the previous week and the refinance share of mortgage activity increased to 57 percent of total applications, the highest level since March 2014, from 56 percent the previous week.
The challenge of attracting first-time home buyers to the market has perplexed many across the industry, especially in view of the macroeconomic challenges that impact the U.S. population. However, there are certain slices of the national picture that appear to be enjoying much more first-time home buyer activity than others.
In a survey recently released by WalletHub, 11 of the top 20 markets considered to be the best for first-time homebuyers are located in Texas, while six of the top 20 markets can be found in Colorado. Oklahoma ranked at number one (with Broken Arrow) and number three (with Norman).
On the flip side, the 20 markets considered to be the least-friendly for first-time homebuyers were divided primarily between California, New Jersey, Connecticut and Massachusetts. The city of Richmond, Calif., ranked dead last on WalletHub’s list, which covered 300 local markets, while California cities monopolized the bottom-five rungs for both lowest housing affordability and highest price to rent ratio (Santa Barbara came in dead last in both categories). The one area where California outpaced the rest of the nation came in lowest property crime rate per capita, with Mission Viejo taking the first spot; Miami Beach had the highest property crime rate per capita.
Richie Bernardo, a WalletHub financial writer who presented the data, noted that the determination for these finds were based on a variety of factors, ranging from housing-related factors (including affordability, price to rent ratios, real estate taxes and home price appreciation) and standard of living considerations (including median annual income rates, property crime statistics and home energy costs).
“Those markets at the top of the list tend to have the highest incomes and lowest costs of living,” said Bernardo, adding that the inclusion of non-housing data was included to provide “a well-rounded perspective” on the national picture.
For Texas-focused mortgage professionals, the Lone Star State’s dominance came as no surprise.
“Texas has a thriving economy,” said Mark Greco, president of Austin-based 360 Mortgage Group LLC. “Gov. Rick Perry did an incredible job in getting the word out about how great Texas is. In terms of land mass, the state has a tremendous amount of potential for builders. There is also no state income tax–and we have a huge amount of people moving into Texas from California. Compared to California, Texas is a bargain.”
Greco added that he has been a witness to the bold expansion of the Texas residential markets. “I’ve been here pretty much all of my life,” Greco continued. “I’ve seen Austin grow from 350,000 to just under two million people. A lot of corporations have moved here, and a lot of young talent that commerce has attracted to Austin and central Texas.”
Greco noted, with a laugh, that there was one downside to this boom.
“From an economic perspective, there has been great growth–but from a personal perspective, I wish everyone would get off the road so we would have less traffic,” noted Greco.
Todd Potter, senior vice president and national sales manager for Houston-based Envoy Mortgage, observed that the ethnic and racial demographics in Texas are also helping to encourage first-time home buyers.
“In looking at statistics from the MBA, the minority home ownership percentage has been growing at a much faster pace than other segments of the marketplace,” said Potter. “The MBA projects that about 40 percent of the mortgage market by the end of 2020. Texas, of course, is north of Mexico, and the pride of home ownership for the Hispanic population is very strong. I wouldn’t think that New England or the Northeast or the upper-Northwest would see that sort of growth.”
As for the Colorado market, Erick Strobel, owner and operator of Johnstown, Colo.-based Strobel Financial LLC, was not the least bit surprised by its strong showing in the WalletHub top 20.
“Colorado cities have scored well as the best places to live and best markets for first-time homebuyers as a result of job opportunities, family safety, beauty, space to build and moderate weather,” Strobel said. “As a resident for 30 years, I can say it has been an ideal place to raise a family and own a home. Opportunity continues to be available through the many universities, biotech companies, Denver International Airport and military bases. Families here take refuge in healthy lifestyles, organic foods and beautiful places to visit. The big secret is the weather–moderate winters, and mild, mostly sunny, days convince people to stay.”
However, the WalletHub list had a couple of anomalies: Detroit ranked first for lowest price to rent ratio and second for highest housing affordability, but last for lowest median home price appreciation. Honolulu ranked first for lowest real estate tax rate, but came in last for highest total home energy costs.
$22 Billion in California Homes Sold to Chinese All-Cash Buyers; “Beginning of Title Wave” says NAR Chief Economist
Author: Mike Shedlock
Real estate is well back in bubble territory in some places, notably California. It won’t end any differently this time for the buyers, but at least banks will not be on the hook for all of the loans.
All cash buyers from China are bidding up the price of mansions, defined as anything with two stories.
Bloomberg reports Chinese Cash-Bearing Buyers Drive U.S. Foreign Sales Jump.
Henry Nunez, a real estate agent in Arcadia, California, met with so many homebuyers from China that he bought a Mandarin-English translation app for his phone.
The $1.99 purchase paid off last month, when he sold a five-bedroom home with crystal chandeliers, marble floors and two kitchens, one designed for smoky wok cooking. The buyers were a Chinese couple who paid $3.5 million in cash.
Buyers from Greater China, including people from Hong Kong and Taiwan, spent $22 billion on U.S. homes in the year through March, up 72 percent from the same period in 2013 and more than any other nationality, the National Association of Realtors said yesterday in its annual report on foreign home purchases. That’s 24 cents of every dollar spent by international homebuyers, according to the survey of 3,547 real estate agents.
Chinese buyers paid a median of $523,148 per transaction, compared with a U.S. median price of $199,575 for existing-home sales. While Canadians bought more houses than the Chinese, they spent less — a median of $212,500 per residence, for a total of $13.8 billion.
Chinese bought 32 percent of homes sold to foreign buyers in the state, double the share sold to Canadians, according to an April survey by the California Association of Realtors. About 70 percent of international buyers pay cash, the survey showed.
Buyers from China are driving up prices and fueling new construction in Southern California areas such as Arcadia, a city of about 57,500 people with top-rated schools, a large Chinese immigrant community and an array of Chinese restaurants and markets.
The median home price in Arcadia’s 91006 ZIP code was $1.28 million in May, up 18.5 percent from a year earlier, according to research firm DataQuick.
“About 90 percent of my buyers are from China,” said Peggy Fong Chen, a broker with Re/Max Holdings Inc., who sold 80 homes in Arcadia last year. “They want new construction. They want two levels. In China, it is considered a mansion if it has two levels.”
Chinese investors are moving into development in Arcadia, Chen said. They are buying lots with homes built in the 1970s and ’80s, tearing them down and erecting sprawling houses like the one Nunez sold for $3.5 million, which has a double-height entry hall and wood-paneled library.
“Local people really cannot afford these most of the time,” Chen said.
Buyers from China and Asian-Americans purchased about 80 percent of the 47 houses sold at Tri Pointe Homes Inc.’s Arcadia at Stonegate community in Irvine, about 40 miles southeast of Los Angeles, according to Tom Mitchell, president of the Irvine-based builder.
Almost half of the buyers paid cash for houses in the development, at prices starting at $1.16 million, he said. The company has been surprised by how word travels among overseas buyers.
“A Chinese national bought one of our houses at Arcadia in Irvine after reading about it on a blog,” Tri Pointe CEO Doug Bauer said in a telephone interview. “It was a Chinese blog. We couldn’t even read it.”
The share of money arriving from China is likely to keep growing, according to Lawrence Yun, chief economist for the Realtors.
“It’s just the beginning of a tidal wave,” he said in a telephone interview.
Overseas buyers are changing Arcadia, according to Nunez, 55, who has lived in the city since he was 6 years old.
“You drive every street and there are three or four new houses being built,” he said. “It’s just incredible, the demand.”
“Beginning of Tidal Wave”
Lawrence Yun, is Chief Economist and Senior Vice President of Research for the National Association of Realtors.
As for the “beginning”, I seem to recall similar statements from the NAR made in 2005. Of course, when you are dealing with the NAR, no matter when or where, there’s “never been a better time to buy than now.”
Nonsensical statements marked the peak of housing insanity in 2005.
Please recall that disgraced former NAR chief economist, David Lereah timed the exact peak in the the housing bubble with his book Why the Real Estate Boom Will Not Bust – And How You Can Profit from It.
The reviews are hilarious.
Today’s Raison d’être
Today’s Raison d’être from the NAR is the “It’s just the beginning of a tidal wave.” Yeah, right. Beginning of the end of the echo bubble is more like it.
Implosion of Housing Bubble 2 Hits Six Cities In The West
Source: Testosterone Pit
“Homes in more than 1,000 cities and towns nationwide either already are, or soon will be, more expensive than ever,” Zillow reported gleefully the other day. “National home values have climbed year-over-year for 21 consecutive months, a steady march upward….”
Glorious recovery. Our phenomenal housing bubble that, when it blew up spectacularly, helped topple our financial system, threw the economy into the Great Recession, caused millions of jobs to evaporate, and made people swear up and down: never-ever again another housing bubble.
Steps in the Fed, and trillions of dollars get printed and handed to Wall Street, and asset prices become airborne, and Wall Street jumps into the housing market and buys up hundreds of thousands of vacant single-family homes, drives up prices, and armed with free money, shoves aside first-time buyers and others who would actually live in these homes, and turned them instead into rental units. Now in over 1,000 cities, prices are, or soon will be, as high as they were at the peak of the last housing bubble.
The difference? Last time, all that craziness was called a “bubble” with hindsight. This time, it’s called a “housing recovery.”
The result of this, as Zillow called it, “remarkable milestone”: real buyers who intend to live in these homes are falling by the wayside. Every week for months, mortgages to purchase homes have been between 10% and 15% below the same week in the prior year. In the latest week, they dropped 21%, the worst week I remember seeing. The number of refis has plunged even more, but that only ate into bank income statements and caused thousands of people to get laid off. Purchase mortgages, when they drop, decimate home sales.
Real Americans, rather than Wall Street, have been priced out of the housing market. Inflation has eaten into their wages. Many people can only find part-time work. Mortgage interest has risen from ridiculously low to just historically low [ Hot Air Hisses Out Of Housing Bubble 2.0: Even Two Middle-Class Incomes Aren’t Enough Anymore To Buy A Median Home].
So the rate of homeownership in the first quarter, after ticking up last year and triggering bouts of false hope, fell to 64.8%. The lowest level since 1995! It had peaked in Q2 2004 at 69.2%, a sign that even as the prior housing bubble was gaining steam, regular folks were already priced out of the market. This ugly trajectory is the face of the “housing recovery” sans Wall Street:
And now history has become a Fed-induced rerun. It started in six until recently white-hot housing markets in Arizona and California – Phoenix, Ventura, Riverside, L.A., Sacramento, and San Diego – where home prices have skyrocketed to the point where few people can afford them. Electronic real-estate broker Redfin, which covers 19 metro areas around the country, explained the impact of “the double whammy” – rising prices and mortgage rates – this way:
Someone who purchased a $350,000 home in Riverside in March 2013 with a 20 percent down payment and a 30-year fixed rate of 3.4% would have a monthly mortgage payment of $1,241. But with prices up 19.6%, the same home would now cost $418,600. At the current mortgage rate of 4.33%, the monthly mortgage payment on that home is now $1,663, a 34% jump from a year ago.
And even a year ago, a family with two median incomes had to stretch to buy that house. Now, in these six markets, sales are plunging and inventories of houses for sale are soaring. A deadly mix.
In Phoenix, inventories were up 42.7% in March from prior year, but sales were down 17.4%. So sellers slashed prices to get rid of these homes. In Phoenix, the hardest hit of the bunch, 45% of the sellers cut their prices. That’s how it starts. Haven’t we been there before? For instance, at the beginning of the prior housing-bubble implosion? This is what that debacle looks like:
It didn’t look quite this terrible in 11 of the other markets that Redfin tracks: Austin, Baltimore, Boston, Chicago, Long Island, Philadelphia, Portland, San Francisco, San Jose, Seattle, and Washington, D.C. (due to “data anomalies,” Denver and Las Vegas were not included). Sales were still down, but so were inventories. When the last housing bubble imploded, it didn’t happen all at once across the country. In some cities, home prices peaked in early 2006; in San Francisco, they peaked in November 2007.
And what happened to the Wall Street investors who whipped the market into frenzy by deploying the Fed’s free money? Soaring prices are “eroding investor profit potential,” Redfin points out, and many have pulled back. As of year-end 2013, the percentage of investor purchases in these six markets dropped to 10.6% from 15.6% a year earlier. And since then, they’ve dropped even more. Easy come, easy go.
“Housing affordability is really taking a bite out of the market,” is how the chief economist for the California Association of Realtors explained the March home sales fiasco. “We haven’t seen this issue since 2007.” And so, the benchmarks established during the terrible implosion of the prior housing bubble are suddenly reappearing.
California Dominates Top 10 Sellers’ Housing Markets
Source: Reverse Mortgage Daily
Five of the nation’s top 10 sellers’ markets are located in California, while all of the top buyers’ markets are located in Midwest and Eastern metros as the housing market increasingly becomes localized.
San Jose, San Francisco, Los Angeles, Riverside, and Sacramento are among the top sellers’ markets according to the February Zillow Real Estate Market Reports, accompanied by San Antonio, Seattle, Denver, D.C., and Dallas-Forth Worth.
It’s more of a buyer’s market on the other side of the country, where there’s less competition and more room for bargaining on prices in metros such as Cleveland, Philadelphia, Tampa, Chicago, and Pittsburgh.
“The real estate data in markets on both coasts are telling markedly different stories. Relatively strong job markets in the West are helping spur robust demand, which is being met with limited supply, causing rapid home value appreciation and giving sellers an edge,” said Zillow Chief Economist Dr. Stan Humphries. ”In the East, housing markets are appreciating a bit more slowly, and homes are staying on the market longer, which helps give buyers the upper hand.”
Buyers in sellers’ markets can expect tight inventory, more competition, and a greater sense of urgency, he continued.
Home values rose to $169,200 in February, Zillow’s Home Value Index indicates, up 5.6% year-over-year, and are expected to rise another 3% through next February. However, national home values stayed almost flat from January to February, while monthly and annual home value appreciation slowed to their lowest paces in months.
“As we put the housing recession further in the rear-view mirror, the broad-based dynamics that applied during those days, when all markets were reacting similarly to nationwide economic conditions, are fading,” Humphries said. “Real estate has always been local, and as the spring market gains momentum, this old adage will only become more pronounced.”
Southern California Housing Lost It’s Momentum In January
Source: LA Times
Southern California home buyers continue to turn their backs on an expensive market with few houses for sale.
Home prices fell 3.8% in January compared with December, though the median price remained up sharply compared with January of last year, research firm DataQuick reported Wednesday. The price decline, coupled with falling sales, revealed a market that has lost momentum after an explosive price run-up in the first half of 2013.
“Buyers are not overpaying,” said Broker Derek Oie, owner of Century 21 the Oie Group in the Inland Empire. “They know the market has changed.”
January’s median home price, $380,000, is the lowest since May. The year-over-year gain — prices rose 18.4% since January 2013 — is the smallest increase since November 2012.
In the six-county Southland, 14,471 new and resale condos and houses changed hands last month, a three-year low for a January, signaling that high prices and tight inventory have handcuffed buyers. Sales were 9.9% below January 2013 levels and have now fallen year-over-year for four consecutive months.
“The pause is related to a deterioration in affordability,” said Stuart Gabriel, director of UCLA’s Ziman Center for Real Estate. “The urgency to buy has essentially evaporated.”
The price decline from December isn’t unusual; the market typically slows in the winter months. But this year’s decline was slightly sharper than normal, DataQuick said. Investors usually play a larger role in the marketplace this time of year as families pull back. That can drop the median price because investors often seek lower-priced homes.
The median price is the point at which half of homes sell for less and half for more.
Absentee buyers — mostly investors and some second-home purchasers — bought a slightly higher share of homes last month: 27.5%, compared with 27.2% in December.
Prices soared early last year as investors and families rushed to buy homes they viewed as bargains. But the demand pushed prices up quickly, forcing many buyers out of the market.
In last year’s fourth quarter, only 32% of California’s potential home buyers could reasonably afford a median-priced home, the California Assn. of Realtors said Wednesday. That was unchanged from the previous quarter, but down from 48% in the fourth quarter of 2012.
The spring home-buying season should provide clearer insight into the direction of demand and prices.
DataQuick President John Walsh said two big questions hang over the market: Will sellers list more homes to cash in on recent price appreciation? And if inventory does expand, how much pent-up demand is left?
“Unfortunately, we’ll probably have to wait until spring for the answers,” Walsh said in a statement.
Some agents, especially those in wealthier neighborhoods, say they’ve already noticed a shift.
“The moment the clock hit January, it was like a starting gun went off,” South Bay real estate agent David Keller said. “We are all busy.”
Sales in the lower end of the market continued to decline in January, while sales in more affluent neighborhoods rose. The number of homes that sold for $800,000 or more jumped 36.7% compared with a year earlier.
But overall sales fell, as lower-priced neighborhoods remain stymied by low inventory and weak income growth. Even though prices have risen considerably in these areas, many homeowners saw big drops in their home’s value during the housing crash. So listings remain limited because many homeowners still owe more on their mortgages than their homes are worth.
Real estate agent Leo Nordine said he’s seen the disparity across his coverage area of South Los Angeles and the South Bay, with far more demand in upper-class neighborhoods.
“Everywhere else is really weak,” he said.