Sooner Or Later, This Bubble Is Going To Burst

A weekend topic starting with WSB-TV in Georgia. “Felicia Seamon’s home for the holidays is stuck in limbo after the property she rents was foreclosed on. However, she only learned about the foreclosure after paying rent for months and resigning her lease in early October. The family also picked the home from Landa Properties because it owns dozens of properties throughout the Atlanta metro area. According to property records, Landa had 14 Newton County homes foreclosed on June 4, months before they signed Felicia and her husband for another lease. ‘I can say this is pretty definitely civil fraud. If Landa is leasing out a property it no longer owns, that is definitely, civil fraud,’ Real estate Attorney Rick Alembik said. He says these types of moves from landlords are not unusual, especially for some out-of-state groups using properties as pure investments.”

From WGME. “The typical home in Maine was unaffordable to 79 percent of households across the state last year, according to a Maine Development Foundation report released this week. The MDF says this 2023 data is the ‘continuation of a troubling trend,’ but realtors say those figures don’t reflect the nuances in today’s market, which has since cooled significantly. ‘You really started to see inventory coming online earlier this spring,’ said Melanie Trott, broker-owner of the Rockland-based Midcoast Realty Group. ‘It’s bringing prices down, which is helping offset the higher interest rates. Is it affordable? It’s affordable to more, but I wouldn’t say affordable to most. It’s definitely improving.'”

“Tom Landry, a broker with Benchmark Real Estate of Portland, went as far as to say this winter will finally be a buyer’s market in Maine as more inventory comes online. He’s seen that homes across the state are sitting on the market for longer and sellers are slashing unreasonable prices. ‘Right now, it is shifting to much more of a balanced market. The data always lags what we see with boots on the ground,’ Landry said. ‘Buyers are patient. They don’t participate in that first week of bidding wars.’ A starter home that Landry listed in pricey Boothbay Harbor this month is still on the market, and even saw a $7,000 price reduction. He also listed a single-family home in Portland this month and cut its price by $60,000. At that price, it would have been snapped up quickly last year, he said. But Landry has only held one showing on it.”

From CBS Miami. “As South Florida home prices and costs of living soar, many families are choosing to rent instead of buying. Samuel Andrade, a Doral resident with a growing family, explained the tough financial reality younger professionals face, even with high-paying jobs. ‘I could stretch myself thin and buy a home, but at what cost? I’d own a house but afford nothing else. Renting and saving seems like the smarter choice,’ Andrade said. Realtor Ashley Cusack agrees this trend is growing. ‘We’re seeing Miami-Dade inventory up 42.5%, and I think we’ll need lower interest rates or price adjustments to reignite home sales,’ Cusack said. Condo owners are also bracing for changes. Starting in January, new regulations will require 10% reserves and mandatory structural inspections for buildings, likely leading to higher assessments and HOA fees. Miami-Dade condo inventory has already surged 84%.”

The Los Angeles Times. “Los Angeles Mayor Karen Bass, who is trying to combat one of the nation’s largest homelessness crises, said she is eager to work with the incoming administration, and believes she and Trump can find common ground in housing the city’s estimated 46,000 homeless people. The sense of disorder created by open drug use and street camping has prompted an increasing number of cities to crack down on homeless people with more laws that allow removing and arresting them. Even liberal politicians such as California Gov. Gavin Newsom have begun ordering more aggressive tactics to clear encampments. ‘We know from years and years of evidence that requiring somebody to get well, get sober, before they can access housing just means more people are going to fall down on that journey before they get back into housing,’ said Alex Visotzky, senior California policy advisor for the National Alliance to End Homelessness.”

The Real Deal on Washington. “Goodman Real Estate has sued Seattle for allegedly blocking its ability to successfully operate an affordable apartment building by forcing it to take in criminals and roommates. An affiliate of the locally based investor filed the 41-page complaint, alleging the city ‘destroyed’ its chances of sustainably running the historic Addison on Fourth building at 308 Fourth Avenue South, in the Chinatown-International District, the Puget Sound Business Journal reported. The city passed several ordinances between 2018 and 2022 the company alleges hurt its business model, including a Fair Chance Housing Ordinance that requires landlords to accept residents with criminal backgrounds, or who may ‘pose a threat to others.’ Other recent measures include a ‘winter eviction ban,’ a ‘COVID-19 eviction ban’ and a ‘roommate ordinance” requiring landlords to accept additional roommates and immediate family members as tenants within existing rental agreements, according to the complaint.”

From Mises.org. “Commercial real estate continues to suffer despite. The pain is especially apparent in the so-called ‘CRE-CLO’ bond market. CRE-CLO bonds are packaged commercial real estate mortgages comprising short-term floating rate loans. These bridge loans were recently, and most notably, used to facilitate the biggest apartment investment bubble in history, but were also used in financing other commercial real estate sectors including office, retail, hotel, industrial, and self-storage. Despite attempts by lenders to extend and pretend—kicking the can down the road in the short term to avoid defaults until the Federal Reserve lowers rates enough to bail them out—their delusions of reprieve may be fading fast.”

“While astounding, this level of distress will come as no surprise to veterans of the apartment market. In the 2020-22 period, bridge loans of this variety were ubiquitous above a certain minimum loan size. And, because of the extreme and reckless nature of money printing undertaken by the Federal Reserve during this time—when interest rates were effectively zero—lenders underwrote property acquisitions with a 1.0x debt service coverage ratio (‘DSCR’), meaning the initial net operating income of the property was projected to just cover interest payments, with nothing left over.”

From Bloomberg. “A Federal Reserve pandemic program aimed at supporting mid-size businesses is now having the opposite effect on some of them, burying them in high interest rates and balloon payments and leading to layoffs at companies struggling to stay afloat. The central bank designed the Main Street Lending Program to help businesses that were generally too big to apply for forgivable loans through the Paycheck Protection Program and too small to tap US capital markets. The program, which marked the Fed’s first effort to systematically support American businesses in such a way since the Great Depression, ultimately made 1,830 adjustable-rate loans ranging in size from $100,000 to $300 million. The challenges of implementing the brand-new program and the burden it has become for many of its borrowers raises questions about whether it’ll remain in the Fed’s crisis toolbox. ‘I’d be very surprised if they did this type of program again,’ said Eric Rosengren, former president of the Boston Fed, which runs Main Street.”

“Tejune Kang’s marketing company, Atypical Digital, faithfully made interest payments on its $3.5 million loan, even as they surged from $11,000 a month to $25,000. But he couldn’t keep up when the first balloon payment came due last year. Though Kang was able to get a six-month extension, the $65,000 combined monthly interest and principal bill was still too much. ‘It feels like — did I take money from the devil? What did I sign up for?’ Kang said. ‘It’s a tough situation.'”

Organized Crime and Reporting Project. “There was an important real estate deal simmering. But it wasn’t going as planned. Alleged mob boss Angelo Figliomeni and a Toronto-area developer were wrestling with how to handle investors who appeared to be backing out of a $30-million development deal, according to police notes on a wiretapped July 2019 phone conversation between the two. They appeared to have a strategy for handling the situation. According to investigators’ synopsis of the call, the developer told Figliomeni, ‘You know we have a way we can f@ck them. I’ll wait even until we get the $2 million…Then I’ll say f@ck you.’ Figliomeni made no objection, saying: ‘This is for me and you to know right?'”

“Figliomeni’s conversation with the developer was among thousands of calls wiretapped by police as they probed what investigators alleged was a powerful and dangerous Canadian faction of Italy’s ’Ndrangheta mafia, involved in illegal gambling and loan sharking in and around Toronto. Just two weeks after this wiretapped call, Figliomeni and eight associates were arrested, with police alleging the group had laundered more than $70 million Canadian (US$51 million) through casinos ‘in only a few short years.'”

“According to experts, weak enforcement of such legislation in the real estate sector is just one of several factors that has made Toronto’s property market a magnet for dirty money in recent years. The opportunity to hide behind anonymous ownership structures is another. ‘If you’ve got $1 million cash, you don’t have a lot of options. [Real estate is] a place where you can live, [and] you can easily hide ownership through beneficial owners,’ said Stephen Schneider, a criminology professor at St. Mary’s University in Nova Scotia and author of Iced: The Story of Organized Crime in Canada. ‘You can co-mingle the proceeds of crime as a rental revenue,’ he added. ‘It’s multipurpose for both making money and hiding money.'”

From The Week. “Britain’s ‘expensive, cramped and ageing housing stock offers the worst value for money of any advanced economy,’ according to a new analysis from an influential think tank. The findings are likely to ‘inflame an already heated debate’ about housing and planning in the run-up to the next general election. Both the Conservatives and Labour are seeking to ‘win over younger voters struggling with sky-high rents,’ said the Financial Times. There are a ‘multitude of culprits’ for the failure of housing supply to keep up with demand, said Jeremy Warner in The Telegraph. But ‘the biggest cause of the lot’ is immigration, said Warner. Since the turn of the century, three million homes have been built in England, but the population has grown by around eight million, ‘nearly all of it immigration.'”

ABC News in Australia. “When Neil Cornish was a young boy in the 1950s, he and three friends built a model village in the backyard. For fun, the boys started trading homes between them for pretend coins. Over two years, the village grew larger and larger, and the young owners became more aspirational. Then one day, the four boys decided to introduce more ‘coins’ into the system. Suddenly everything became too expensive, the game wasn’t fun anymore, and the town was abandoned. ‘It seemed just to deflate the whole thing,’ Neil says. Now in his late 70s, Neil wonders if the game was prophetic.”

“It was the mid-1970s, and Jenny and Neil were newlyweds looking for a place to grow their family. The first home they looked at was a beautiful little house in Mulgrave, in Melbourne’s south-east. The pair bought the home 1974 for $24,975, after spending 19 months saving their $5,000 deposit. That same property (after some renovations) is now valued at $1 million, according to CoreLogic — an ‘incredible’ price, Jenny says, for a small home. ‘We should have kept it,’ Neil jokes.”

“By mid-2024, CoreLogic’s model found the average Australian household was spending half of their income on home loan repayments when they bought a median-priced home, and it took them just over 10.5 years to save a 20 per cent deposit. Thinking back on how he and his friends ruined their childhood game by flooding the toy village with coins, Neil wonders if the same mistake has been made in the real world. ‘You could argue that’s what’s happening at the moment, that sooner or later, this bubble is going to burst,’ he says.”

“Independent economist Saul Eslake says while simplistic, Neil’s toy village reflects exactly what’s happened. ‘We’ve got 60 years of evidence that shows anything that allows Australians to pay more for housing than they would be able to otherwise results in more expensive housing, not in more people owning that housing.'”

Korea JoongAng Daily. “Ahead of Trump’s second term, the Korean economy is experiencing a tsunami of high interest rates, high exchange rates and high prices. Though Trumponomics triggered the two tsunamis. it is not their root cause. The fundamental cause behind them is that the Korean economy is a ‘house built with debts.’ During the Moon Jae-in administration, apartment prices in Seoul and the metropolitan area soared two to three times. As housing prices showed signs of falling in the second half of 2022, the Yoon Suk Yeol administration started offering various policy loans to help lift housing prices.”

“As a result, home prices in Seoul and the metropolitan area have surged again this year with household debt rising sharply. As 79 percent of household assets are tied to real estate, household debt accounts for 149 percent of disposable income. Over 80 percent of new household debt this year is mortgage loans. Due to excessive household debt, spending power has weakened. As most of household assets are concentrated in real estate, there’s little room to invest in stocks. As a result, companies with difficulty in financing cannot invest in future projects, darkening the growth potential of our economy.”

“The government must acknowledge the crisis and make drastic policy changes. We must start by removing the real estate bubble and reducing household debt. Only then, consumption will pick up — and stock price value-up will be possible. That will increase investment and create more quality jobs.”