China's Real Estate Bubble Begins to Bursts

Late yesterday China released its April economic data and here’s the tale it tells of the property sector is of concern. New starts contracted 15% year on year (vs. -21.9% in March), property sales fell 14.3% year on year (vs. -7.5% in March); and land sales (by area) fell 20.5% year on year (vs. -16.9% in March). This chart is from Society Generale:

The greater risk to China lies in the pervasive consequences of any property bust. Property investment has grown to account for about 13 per cent of gross domestic product, roughly double the US share at the height of the bubble in 2007. Add related sectors, such as steel, cement and other construction materials, and the figure is closer to 16 per cent. The broadly defined property sector accounts for about a third of fixed-asset investment, which Beijing is supposed to be subordinating to the target of economic rebalancing in favour of household consumption.

…The reason things look different today is the realisation of chronic oversupply. As the property slowdown has kicked in, housing starts, completions and sales have turned markedly lower, especially outside the principal cities. Inventories of unsold homes in Beijing are reported to have risen from seven to 12 months’ supply in the year to April. But when it comes to homes under construction and total sales, the bulk is in “tier two” cities, where the overhang of unsold homes has risen to about 15 months; and in tier three and four cities, where it is about 24 months.

…If activity levels and prices weaken further, Beijing’s resolve not to respond with traditional stimulus programmes is unlikely to hold. We should expect a potpourri that might include: extra spending on infrastructure and environment programmes; faster urbanisation in inland and western provinces; some relaxation on restraints on homebuying, such as mortgage deposits; and, ultimately, new monetary easing.

Cash Is King In Today's Real Estate Market

One in three buyers of U.S. homes is paying cash, a record high number, according to data made available to McClatchy. The trend is being driven by retiring baby boomers and rich investors, who unlike most first-time buyers can bypass tighter lending requirements to pay cash. They now rule the roost, composing record percentages of residential home sales.


It’s meant the field is closed off for conventional purchasers in some hot markets, but in others it’s meant forward momentum for the struggling housing sector. All-cash sales as a percentage of residential real estate sales stood at 33 percent from January to March this year. That’s up from 31 percent for all of 2013 and 2011 and 29 percent for 2012. These are the highest percentages since the National Association of Realtors started collecting the data in 2008. Before that, it estimated that cash buyers historically represented less than 10 percent of all sales.


The group analyzed state-level numbers on behalf of McClatchy, and it found that states such as Florida, South Carolina and Wyoming had outsized cash sales during the first quarter of 2014.
The rising cash sales come despite a drop in one of the main draws for cash purchases: financially distressed properties sold through foreclosures or at a loss to the banks.


“What is surprising is how cash continued to remain high even though distressed property sales are declining. Distress sales invited all the cash purchases,” said Lawrence Yun, the chief economist for the Realtors’ group. Distressed home sales declined from 26 percent of the national market in 2012 to 17 percent in 2013 to 15 percent over the first three months of 2014. It means that even as the housing market heals and conventional sales return, all-cash purchases remain a big chunk of residential sales.


Yun points to a couple of trends that are driving the boom in cash purchases, trends that fall into the broader debate about rising income inequality in the United States. One driver appears to be wealthy investors, foreign and domestic, diversifying into real estate. Another is baby boomers selling homes that were paid off and retiring elsewhere with the proceeds, purchasing homes.


“Trade-downs are certainly a reason,” Yun said. “The five-year bull run on the stock market is also helping the upper-end households,” he added, noting many are diversifying out of stocks after several years of big gains. That’s in line with what 41-year veteran Sandra Schede has been seeing.
“The rates (of return) are so low for putting their money into the bank or investments at this time that it makes much more sense to purchase real estate using cash,” said Schede, the incoming president of the Connecticut Association of Realtors.


“The rental market is really strong right now, so it gives them a better return over a short period of time.”Boomers are buying the higher-priced properties with cash, while investors tend to buy below the midpoint price.

Read more here: http://www.newsobserver.com/2014/05/08/3843062/now-more-than-ever-cash-is-king.html?sp=/99/104/#storylink=cpy

California Real Estate Bubble Watch on High Alert

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An influx of foreign buyers and Internet money could be creating conditions for another bubble in California's housing market, says one real estate expert.

Kathy Fettke, CEO and co-founder of The Real Wealth Network, told J.D. Hayworth and John Bachman on "America's Forum" on Newsmax TV that she is "concerned" by what she is seeing in California's real estate market.

"In California, for sure, Chinese buyers have been active," Fettke said. "We see that they have been looking for a safe place to put their money because they're seeing that they're in a bubble actually in China and are trying to get their money out.

"It's dangerous because this kind of 'I'll take it as is, top dollar, over asking price, bidding war,' is back in California full-on. We just saw people make an offer on a tear-down. Literally the foundation was completely rotted, the home was rotted, and the buyers came in as is, all cash.

"There is [also] massive job growth in California. We have bounced back, and as a result we've got these young Internet millionaires who are buying real estate and it looks cheap to them and they don't understand the investment," she said Tuesday.

Fettke said that with the exception of pockets like Modesto and Stockton, "the California market is now above the average population's ability to buy."

"It's very sad," she said.

Fettke added that the three factors to monitor when investing in real estate are the strength of the job market, the level of population growth, and affordability.

"More important than ever, you've got to know what you're doing," Fettke said. "I, of course, am a firm believer that you can build tremendous wealth in real estate if you do it right, if you buy right. We should have learned by now that you can also lose your fortune if you do it wrong."

Investing in Real Estate: Risks VS Rewards

With limited knowledge that the real estate market has tanked over the last several years, you might be hesitant to pull the trigger to make what should be an excellent investment today. With some fortitude and patience, today is likely the best opportunity you’ll have in your lifetime to make a hefty profit from a real estate investment.

Generally, your options are to either rent out your investment or flip it. This article focuses on flipping properties. Consider Your Risks Adjustable rate mortgages were a huge problem in the real estate melt down a few years ago. Still, today some investors are going back to adjustable mortgages as a less expensive source of finances for flipping properties. Adjustable rate mortgages are being advertised as low as 2.6%.

However, the national average for adjustable mortgages is hovering around 4.2% at this time. There are two general categories of adjustable mortgages. Each comes with its own risk and reward. Each adjustable mortgage is attached to a third party index that determines the current interest rate. Also, each adjustable mortgage has a margin above the index that must also be paid.

One general category is tied to an index that moves slowly, meaning your interest rate will go up or down slowly. However, the margin that you pay above the index will be higher. The other general category attaches the adjustable mortgage to an index that fluctuates much more often, commonly on a monthly basis. The reward is that the margin paid above the index is less. The risk is that your payment fluctuates much more.

Because your reward is reflected in the risk you take, be aware of some of the traps these adjustable rate mortgages come with:

·         Your payment could go up (a lot) even if interest rates don’t go up very much.

·         Your payment may not go down much even when interest rates go down.

·         There are several scenarios built into these loans where you end up owing more than you borrowed even when you make all of the payments on time.

·         Adjustable mortgages often have a built in penalty if you pay them off early – not good when you are flipping houses.

Consider a 15 Year Fixed I think you can be sure that the super low adjustable mortgage rate will have built in advantages for the lender. They will make their money one way or another. Your financing decision needs to be made based on how much you can afford to pay each month. Besides an adjustable mortgage, you want to consider a 30 year fixed mortgage and a 15 year fixed mortgage. The 30 year fixed mortgage will have lower payment because it is spread out over a longer time period.

However, 15 year fixed mortgages have a lower interest rate than both adjustable mortgage rates and 30 year mortgages. This makes the 15 year mortgage the most attractive if you can afford the higher monthly payment. Today’s 30 year mortgages are averaging around 4.85%. Your monthly payment will be around $528 (not including insurance and property tax). If you can complete the flip in six months, the total interest you’ll pay is $2,417.48. Today, the national average for 15 year fixed mortgages is about 3.98%. Going with this loan gives you a monthly payment of about $739 (not including insurance and property tax).

If you complete this flip in six months, the total interest you pay is $1,969.66. That’s a $ 447.82 savings over the 30 year mortgage. Flipping houses is a business and you should be looking to cut expenses anywhere you can. With average 15 year mortgages lower than the average adjustable mortgage and with a lower risk, the 15 year mortgage looks the most attractive today. However, read the fine print of any mortgage carefully so you understand the risk to reward equation. 

California Real Estate: Not So Distressed

Vastly improved home prices over the past five years have changed the landscape of California's distressed housing market, which is now just a fraction of what it was during the Great Recession, the California Association of Realtors said today.

In January 2009, 69.5 percent of all homes sold in California were distressed, which includes short sales and real estate-owned properties, REOs. Five years later, that figure has shrunk to 15.6 percent, CAR said in a statement.

REOs comprised 60 percent of all sales in January 2009, while short sales made up 9.1 percent of all sales but rose to as high as 25.6 percent in January 2012. Short sales currently make up 9.2 percent of all sales, according to CAR. During the same time period, California's median home price has soared more than 64 percent from $249,960 in January 2009 to $410,990 in January 2014.

"The dramatic drop in the share of distressed sales throughout the state reflects a market that is fully transitioning from the housing downturn," said CAR President Kevin Brown. "Significant home price appreciation over the past five years has lifted the market value of many underwater homes, and as a result, many homeowners have gained significant equity in their homes, resulting in fewer short sales and foreclosures." The statewide share of equity sales hit a high of 86.4 percent in November 2013 and has been above 80 percent for the past seven months.

In some of the hardest hit California counties, the distressed market in January 2009 was 93.6 percent in Stanislaus County, 93 percent in San Joaquin County, 89.5 percent in San Benito County, 86.1 percent in Kern County, 85.6 percent in Sacramento County, 84.2 percent in Fresno County, and 83.6 percent in Monterey County.

The distressed market now has shrunk to 24.8 percent in Stanislaus, 25.1 percent in San Joaquin, 17.5 percent in San Benito, 18.4 percent in Kern, 19.9 percent in Sacramento, 26.3 percent in Fresno, and 16.9 percent in Monterey counties, CAR said.

Rising Rents Hurting California's Affordability

A combination of rising rents and falling government aid for affordable housing has dealt a blow to California's lower-income residents, according to a new study.Nearly 1 million extremely-low-income California households lack affordable, habitable homes, a need most pronounced in Southern California, a report released Tuesday found.


The foreclosure crisis displaced many homeowners, driving up demand and prices in the rental market. As the crisis eased over the last year, the housing recovery sent home prices soaring.

Incomes have failed to keep pace. The state's median rent rose more than 20% from 2000 to 2012, while median incomes fell 8%, the report from the California Housing Partnership Corp. said.


Meanwhile, state and federal funding for below-market housing plunged 79% over the last five years, the study said. “It’s creating a rapid change in our housing stock -- away from providing affordable, low-income housing toward housing the rich,” said Matt Schwartz, president of the California Housing Partnership.


Diminished government funds have reduced the production of new affordable units, stalling projects, he said. "It has dramatically lowered the number of developments that can proceed," Schwartz said.
Particularly hurtful, the study said, was the loss of redevelopment funds after local redevelopment agencies shut down two years ago. The agencies, which kept a portion of local property taxes, generated about $1 billion annually for affordable housing across California, but the state shuttered them to help ease its budget crisis.


The nonprofit, created by state lawmakers to preserve affordable units, proposed several policy recommendations to ease housing burdens for Californians, including an immediate injection of dollars from the general fund to focus on housing those at-risk of homelessness because of rising rents.


The report also urged passage of a bill that would create a permanent state source for affordable housing funding. The bill, SB-391, would impose additional fees on recorded real estate documents, except for those involved in a sale. Last year, the state Senate passed the bill and it is currently in the Assembly. The bill has drawn opposition from the California Assn. of Realtors.


“In a state where housing affordability is low, the last thing government should do is to enact an arbitrary new real estate tax on real estate recordings,” the Realtors group said in a statement. “The call for renewed support for affordable housing is laudable, but Senate Bill 391 is the wrong approach.”


The shortage of affordable units for very low-income Californians is especially pronounced in Southern California, despite the region’s relative affordability compared to the tech-flush San Francisco Bay Area. Schwartz said he didn’t know the reasons behind the disparity, but said a greater number of lower-income residents in the Southland could play a role.


There were 19 affordable units available per every 100 extremely-low-income renter households in Los Angeles County, the study said, citing an analysis of five-year Census Bureau estimates from 2006 to 2010. In San Francisco, there were 37. Orange and San Diego counties each had 18 available affordable units for every 100 poor households.


If the current trends continue, Schwartz said it would be devastating for lower-income households and California as a whole."At some point we are going to run out of available, low-income workers because no one is going to have a place to live," he said.

Monterey County Real Estate Market Returns to the Fundamentals

While December data show home prices in Monterey County blew past 2012 levels, month-to-month figures show a definite slowing, bringing back some degree of normalcy in the real-estate market, according to area Realtors and data released Monday from CoreLogic prices were flat, even decreasing by 0.1 percent in December 2013 compared to November 2013. Some degree of braking is a positive trend, because hyperinflation in prices would be unsustainable over time and could lead to another home-price “bubble” similar to the one that burst in 2007-2008, economists and real-estate experts say.

“We simply couldn’t keep going at this rate,” said Sandy Haney, the chief executive officer of the Monterey County Association of Realtors. In fact, the number of home sales statewide fell for the fifth straight month in December, according to the California Association of Realtors.

The economics of real-estate trends are complex; there are many factors that influence both home prices and the number of home sales. Leading the pressure locally is the limited inventory of homes sales. Leading the pressure locally is the limited inventory of homes in Monterey County. A decreasing supply with a constant demand equals rising prices.


For example, at the end of November in Monterey County, the inventory stood at a little under 850 homes. A month later the inventory was down to 717 with the total number of sales remaining basically flat. The median price – half sold for more, half sold for less – stood at $469,900 at the end of December. A month earlier it was $422,000.


“Homes under $300,000 are flying off the shelf,” she said. “On one of these homes we had 11 offers.”
The reason sales in the higher end are slower and much more active in the lower range is the result of several influences, experts say. Interest rates have begun to edge back up, making larger mortgages more expensive. Also, a bevy of new laws that took effect Jan. 1 have collectively clamped down on loan requirements lenders must now follow. Qualifying for a larger mortgage is far more difficult today than in 2007.

In a normal market we are transitioning back into – a homeowner would build equity in her home and then sell it to move up to a more expensive property she’s been eyeing, Haney said. But when the market collapsed in 2008, so much equity was lost – trillions of dollars nationally – that prospective sellers either don’t have enough equity built back up or they are gun-shy about making the move.

“There is a lot of caution in the market,” Haney said. “The sellers that have been through the [2008] market and didn’t lose their homes are still uncertain if the time is right to move up.”
Exacerbating the inventory problem is the falling number of so-called distressed sales, including short sales and sales of foreclosed homes. After six years, the number of foreclosures is falling dramatically as they continue to work their way through and out of the market.

That’s also a reason area Realtors are forecasting a transition period in 2014 – moving from an unstable, irrational and unsustainable market to one that is governed by the basics and fundamentals.