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The Market Has Turned Against Indebted Speculators

It’s Friday desk clearing time for this blogger. “The housing market in Houston and across the country has been on a tear in recent years. Several recent reports from the government, analysts and real estate companies are starting to suggest that the market might have reached its peak. Sean Cerelli, a real estate agent at Connect Realty, said he has seen higher mortgage rates affecting sales of homes listed for more than $400,000. ‘I’m noticing are houses over that amount are usually staying on the market longer,’ he said. ‘And I’m seeing more price decreases.'”

“There was a pronounced drop in the number of homes for sale in Northern Virginia in September, and prices may be showing signs of topping out. The number of sales across the Northern Virginia region almost universally fell in September, with sales in Arlington County down 12 percent from a year ago, sales in Fairfax County down 15 percent and sales in Loudoun County down 23 percent, according to Long & Foster Real Estate.”

“Prices in Arlington and Alexandria were 2 percent lower than a year ago. ‘We are getting to the point where we are going to have affordability challenges,’ said Larry Foster, president of Long & Foster Real Estate.”

“The Hamptons real estate industry was brimming with optimism for the third quarter back in July. The hope was that a spate of closings was going to happen over the course of July, August and September. But that didn’t happen. Looking at the last decade in New York City, Judi Desiderio, the CEO of Town & Country Real Estate speculates that developers overbuilt on the high-end in the Big Apple.”

“‘We never follow national trends,’ Ms. Desiderio said. ‘But we are umbilically connected to Wall Street and run in patterns with Manhattan.'”

“A recent survey showed almost half of British Columbians are feeling the effect of rate hikes, and two-in-five are worried about financial trouble if they go higher. Thanks to government intervention, prices on some homes have been dropping. If buyers can’t afford to pay more, prices could drop even further.”

“‘I think they’re starting to see that there’s an increase here or an increase there,’ said MNP’s Grant Bazian. ‘They’re thinking, ‘How am I going to be able to afford this?'”

“The top end of Melbourne’s property market has borne the brunt of the city’s recent property price downturn, which experts say has more time to run. Areas with the steepest falls were concentrated in affluent eastern suburbs and most of the price drops were in suburbs with medians above $1 million.”

“Carlton, Toorak, Armadale, South Yarra and Caulfield North were hit the hardest, with price falls ranging from 20 per cent in Carlton and Toorak, to 11 per cent in Caulfield North.”

“Declan Fay and partner Juanita Pope are on the hunt again. And this time the can see a difference, Mr Fay said. ‘We’ve noticed a big change in agents. They’ve got a bit more desperate,’ he said. ‘[On Wednesday] we got four calls from agents pleading with us to come to auctions.'”

“New flats have been quickly rolling off the Hong Kong assembly line, recording a 30 per cent jump in the completion rate in the July-to-September period, adding pressure on developers to speed up sales ahead of an expected vacancy tax to deter hoarding.”

“On Thursday, Chuang’s China Investment got a chilly reception from prospective buyers, selling only 35 per cent of 175 units offered at The Esplanade in Tuen Mun. ‘Competition for buyers will further escalate because developers are getting impatient to cash in on their projects as market sentiment continues to sour,’ said Derek Chan, head of research at Ricacorp Properties. ‘Developers are under pressure to price their units at competitive prices if they want to sell fast,’ Chan said.”

“For the last two decades, property speculation in China has been a one-way bet. Take 57-year-old Shanghai businessman Tai Pei, for example. Having watched the Chinese real estate market grow for many years, he too was tempted to grab a slice of the incredible profits from the country’s massive construction boom.”

“Tai bought three downtown apartments in China’s commercial capital and made almost 10 million yuan (€1.27 million, $1.44 million) profit when he sold two of them sometime later.”

“At the beginning of this month, however, the developer of the apartment block where his third property is located suddenly dropped the price by a third, due to enquiries drying up. The abrupt change of fortune prompted many existing owners to protest outside the sales office, demanding compensation.”

“‘Clearly the developer pushed up the price [of the flats] to cheat people when they already had plans to reduce them,’ Tai told DW.”

“The property protests have not been limited to Shanghai and, in some instances, have even turned violent. In Xiamen, in China’s southeastern Fuijian province, anger spilled out on the streets after the price of one luxury villa was cut by 2 million yuan, having sold for more than 5 million a year earlier.”

“Property protests are becoming so regular in China that a new term has emerged on social media. ‘Fang Nao’ literally means property trouble-making. Indebted Chinese property speculators, however, can’t necessary count on much public support, now that the real estate market has turned against them. ‘The price goes up, you are happy. The price goes down, you make trouble,’ wrote one person on Chinese social media platform Weibo.

“Others were angry that speculators had caused a massive affordability issue for ordinary Chinese people trying to buy their first property. ‘It’s exactly these people who buy properties to speculate that have created the property bubble,’ another user wrote.”

“An editorial for the website Sina Finance, meanwhile, accused property speculators of violating ‘the spirit of contracts’ by protesting. ‘After many years of a property bubble that has made many people rich, those [speculators] should realize that the period where property prices only went up and never the other way, is over.'”

This Post Has 46 Comments
  1. ‘Clearly the developer pushed up the price [of the flats] to cheat people when they already had plans to reduce them’

    I realize customs vary greatly Tai, but have you tried stamping your little feet ?

  2. ‘The Hamptons real estate industry was brimming with optimism for the third quarter back in July. The hope was that a spate of closings was going to happen over the course of July, August and September. But that didn’t happen’

    Well you’ve only been getting your asses kicked for over 2 years.

    1. Remember, this is when ALL buyers came together and decided to go on a three month vacation, this during the peak of RE purchasing. They came back but forgot to purchase I’m guessing. We always got next year, just sit tight you hopeful greedy sellers, your shacks are worth millions, right?

  3. ‘An editorial for the website Sina Finance, meanwhile, accused property speculators of violating ‘the spirit of contracts’ by protesting. ‘After many years of a property bubble that has made many people rich, those [speculators] should realize that the period where property prices only went up and never the other way, is over.’

    So I guess a multi-trillion $ QE commodity boom is out of the question?

  4. “Property protests are becoming so regular in China that a new term has emerged on social media. ‘Fang Nao’ literally means property trouble-making.

    Is there a Chinese term for “schlonged speculator”?

  5. “Others were angry that speculators had caused a massive affordability issue for ordinary Chinese people trying to buy their first property. ‘It’s exactly these people who buy properties to speculate that have created the property bubble,’ another user wrote.”

    Exactly. I’m going to thoroughly enjoy watching the speculators who made housing unaffordable for the prudent and fiscally responsible get their heads handed to them.

    1. I visited my nephew in Kunming, Yunnan, China this year. He rented us an AirBnB condo. There were 30 condo towers, 28 stoies, 12 units/floor, built 10-years ago.

      Over 10,000 units. There should have been 20,000+ people and a morning commuter rush. Nothing. As I watched the complex over the week it became apparent over 65% of the units were empty. Investors owned them as safe deposit box so. Very curious.

  6. The Wall Street Journal
    Markets
    Foreign Buying of U.S. Treasurys Softens, Unsettling Financial Markets
    Investor pullback has fueled a bond selloff and shaken a nine-year-long rally in stocks
    By Daniel Kruger and Ira Iosebashvili
    Updated Oct. 23, 2018 4:42 p.m. ET

    Overseas investors, traders and central bankers are buying fewer Treasurys, a potential turning point for a $15 trillion market at the center of global finance and economics.

    Foreigners increased their holdings of Treasurys by $78 billion in the first eight months of 2018. That is just over half of what they bought during the same period last year and accounts for a much smaller share of Treasury issuance, as the government steps up the size of regular bond auctions to fill a growing U.S. budget gap.

    To Read the Full Story Subscribe

  7. “…anger spilled out on the streets after the price of one luxury villa was cut by 2 million yuan, having sold for more than 5 million a year earlier.”

    That’s a 40% haircut. Whoever bought at the top price got schlonged. No wonder there’s a whole lot of foot stamping going on.

    1. a 40% haircut

      That’s only the beginning. Cheap and easy credit creates zombie speculators everywhere. Building and buying useless things with borrowed money that cannot be repaid.

  8. Prisoner’s dilemma games seldom end well for either player.

    Trump’s trade war is not behind China’s stock market slump
    BY Tom Holland
    27 Oct 2018
    Markets in the US and China have been primarily propelled by domestic drivers. Likewise, the fall in China’s shares stems from Beijing’s campaign to crack down on the shadow financial system

    Steep falls in global stock markets over the past few weeks have raised fears that escalating international trade conflict could trigger an October crash reminiscent of those in 1929, 1987 and 2008, when the United States’ equity market plunged by 25 per cent in a matter of days. But while the risk of an even steeper sell-off cannot be dismissed entirely, the US-China trade war will not be to blame.

    All through this summer, American investors and businesspeople were confident the US would emerge the victor in its trade war with China. As evidence their optimism was justified, many pointed to the relative performance of the US and Chinese stock markets. In the six months or so after US President Donald Trump first ordered officials to impose import tariffs on goods from China, US stock prices rose by 10 per cent.

    Over the same period, the broad Chinese market fell 15 per cent. And the Shenzhen A-share market, which better represents the sort of private-sector exporters and technology companies likely to be most affected by US tariffs, slumped 20 per cent.

    This marked divergence, argued many American investors, reflected the relative strength of the US economy, and the fragility of Chinese corporate earnings and growth in the face of US tariffs.

    Over the last month, their confidence has taken a severe knock. Since the beginning of October the benchmark US S&P 500 index has slumped by 7.5 per cent, roughly in line with the fall over the same period in the Chinese stock market. This suggests investors may be beginning to conclude that the US economy is also vulnerable to trade-war escalation.

  9. U.S. Homeowners Staying Put as Mortgage Rates Lock Them In

    excerpt:

    The median length of time Americans have owned their homes rose to a record of more than eight years in the third quarter, according to ATTOM Data Solutions. That’s up from 4.5 years when the recession ended in June 2009.

    With mortgage costs on the rise, moving will be “even less appealing as homeowners may not want to give up their rock-bottom interest rate to buy a new home at the now-higher rates,”

    1. I am not leaving my low interest rate loan anytime soon. My rate is at 3.25%, so the interest is $900/mon and the principal reduction is $800/month. I cant think of a better scenario, except to be debt free.
      However, I did get a 10-year fixed rate in 2012 because it was 0.5% cheaper than a 30-year fixed rate. In 2022, my rate goes to a floater (2.25% over 1-Yr LIBOR at 3.0% today or 5.25% total, with an 8.25% cap). However, I will have saved $20,000 in interest payments and reduced the principal by $90,000. Rates would have to go to 6% before my payment went up, using a NEW 30-year amortization. If my payment adjusted today, it would go from $1,700 at 3.25% to $2,600 at 5.25% (using the remaining 20-year amortization).

      Wow, that is only 4 years away. I am glad I decided to post my situation as I have some planning to do and some action to take. Double payments, here I come! Notwithstanding my first line above, maybe I WILL move in about 4 years!

      1. “However, I will have saved $20,000 in interest payments and reduced the principal by $90,000.”

        What if the property value dropped by over $110,000?

        1. I suppose that is a risk too, but right now that value is about $300,000 over what I paid to BofA in 2010. You and I have a bet on the “Zillow Value” in 2020….
          Comment by Professor Bear
          2015-12-18 08:08:37
          I predict your house will be worth less in five years than it is today, even according to Zillow.

          Note: Zillow Value on Dec. 1, 2015 = $701,000
          Note: Zillow Value on May. 1, 2018 = $743,000
          Note: Zillow Value on Oct. 27, 2018 = $746,554

          It is pretty clear the market is not crazy here (the foothills above Sacramento), with moderate appreciation over the last 3 years (about 2% annually since December 2015). I will also say listings are up about 50% I am sure the days on the market are longer. I guess we will see in 2 more years if it is worth more or less than $700,000.

          1. It’s way too early to say what prices will be in a couple of years, but this time truly is different, as a global real estate correction is already underway after the Fed barely started taking away the punchbowl and while the economy is in overdrive and firing on all cylinders. The current expansion is already long in the tooth, and thanks to suppressing rates so low for so long, the Fed has little ammunition to fight the recession which is likely to occur when this boom ends. Despite the Bernanke precedent to bail out real estate speculators, it seems doubtful the Trump Fed would follow suit in case housing prices returned to affordable levels.

            Good luck to you!

          2. with moderate “…appreciation over the last 3 years (about 2% annually since December 2015).”

            Those kind of investment returns don’t cut it when risk-free, maintenance-free 5-year Treasury yields are nearing 3%.

    2. A rising rate environment will trap recent buyers in their underwater-mortgage-financed homes until the next recession begins. At that point many will stamp their little feet and walk away rather than sticking with a deeply underwater mortgage.

      1. Yes but he is using leverage right? So if he is 20% down and the value of the real estate is appreciating at 2% he is getting 10% on his principle right? Throw in lots of other confounding factors, what would it cost to rent an equivalent dwelling, tax deductibility, tax free capital gains. I don’t get the sense that folks that bought in 2012 are yet at risk. Folks who bought in 2017 should be nervous. This bubble isn’t driven by crap loans like the last one I don’t hear anything about NINJA loans, or 125% loans that kind of madness seems absent this go around. That said per Zillow and the interest rates if I had to buy my dwelling today my mortgage would be 3X which is out of the question, and frankly I am surprised that anyone would pay that it is way better to rent at the moment.

          1. I have a conventional loan. My LTV is 45%. I bought the property from BofA with an FHA loan using 3.5% down in 2010. We refinanced the second year after purchase into a conventional loan, because the property had increased so much. My loan to original cost is 84%.

            $15,000 down has turned into over $300,000 in equity in 8 years. This has been the best deal of my lifetime.

        1. Folks who bought in 2017 should be nervous.

          Prices doubled in a very short time for no apparent reason John. Once home debtors start to panic the train isn’t likely to stop at the 2012 station. Even that would require another gargantuan credit expansion like China.

  10. Wanted to let folks know that I’ve ported over all the JoshuaTree extension functionality I intend to for now. A few things have been left out — speak up if you feel they’re necessary/worth moving over. Here’s the features that are available:
    * Displays the number of new/unread comments in each post summary
    * Hilights new comments so they’re easily identifiable
    * Adds a toolbar for jumping forward/backward to the next new comment
    * Ability to ignore(automatically collapse) posts from specified users
    * Adds text formatting buttons to the comment authoring environment (bold, italics, links, etc)
    * Auto-quote of selected text (select text in a comment, click ‘reply’ and the selected text automatically will be quoted in your comment
    * Checks for unclosed HTML tags when posting a comment

    The still-missing functionality is a preview of your comment, and throttling of posting comments for you prolific commenters out there.

    Again, the links:

    JoshuaTree Extension for Chrome
    JoshuaTree Extension for Firefox

    1. Ugh, didn’t get the formatting right there. Maybe ‘preview’ is warranted 🙂

      As always, if you use/find the extension helpful, send some yellenbucks Ben’s way to keep the doors open here. The extension is offered for free, but useless without this blog 🙂

    2. I can post w/o the Joshua Tree Extension, but appreciate the convenience it provides. I don’t claim the other features are necessary, but I would use them if they were available. Thank you for your generous service.

          1. Yeah, looked at a couple of the main files. A little more complex than I was expecting, more files, etc. But I could probably figure it out. Just don’t get hit :-).

          2. A little more complex than I was expecting,

            Happy to give an overview if you’re interested. Hit me up on email — happy to describe the structure. It’s not too complex overall

  11. Is $5 trillion alot?

    The global selloff has erased $5 trillion from stock and bond markets in October
    By Sue Chang
    Published: Oct 26, 2018 5:41 p.m. ET
    Pressure on the Fed to reassess monetary policy is mounting, Deutsche Bank says
    What’s a few trillion gone from investors’ portfolios?

    The recent stampede by investors has erased about $5 trillion in value from global stock and bond markets in October alone. But that shouldn’t be severe enough to affect the economy, for now, according to economists at Deutsche Bank.

    Still, unless the markets regain their footing soon, the pressure for the Federal Reserve to reassess their monetary policy will continue to mount, they said.

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