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The Housing Bubble Blog: Sellers Who Want to Do Deals Need to Add on Another Layer of Discount

August 26, 2020

By Ben Jones

It’s Friday desk clearing time for this blogger. “Mortgage delinquencies showed their sharpest rise in the history of the Mortgage Bankers Association’s delinquency survey. ‘There is no way to sugarcoat a 32.9 percent drop in GDP during the second quarter,’ said Marina Walsh, vice president of industry analysis at the Mortgage Bankers Association. ‘Certain homeowners, particularly those with FHA loans, will continue to be impacted by this crisis, and delinquencies are likely to stay at elevated levels for the foreseeable future.'”

“There is a much smaller pool of lenders willing to offer jumbo loans. Craig Turley, owner of AZ Mortgage Broker in Phoenix, said his stable of jumbo-loan wholesalers has shrunk to one-third the size it was in February. Anthony Bird, owner of Riverbank Finance, a mortgage broker in Grand Rapids, Mich. said his roster of jumbo lenders is down by 80%. The MBA’s Mortgage Credit Availability Index, a formula designed to gauge access to a variety of mortgage products, shows consumer access to jumbo loans was 60% lower in July than it was the year prior.”

“The private equity firm behind a $1 billion real estate portfolio in Brooklyn and Miami said its investments in two big projects have been wiped out — and one critic is blaming a pair of 20-somethings who were trusted with the company checkbook. JZ Capital Partners recently wrote down to zero its stakes on a Downtown Brooklyn development site and a portfolio of properties in Miami’s Design District, the company’s annual report shows.”

“‘In the case of two substantial investments, Fulton Mall and Design District, the markdowns at the property level were sufficient to extinguish the company’s entire equity in these properties,’ the report disclosed last month.”

“The Covid-19 crisis has delivered a stunning gut-punch to the New York City luxury real-estate market, applying downward pressure at a rate that surpasses both the 2008 financial crisis and the period immediately following the 9/11 terrorist attacks. In the West Chelsea district, a recently built ultra high-end boutique condominium known as the Getty slashed prices for its remaining units by as much as 46%.”

“The crisis comes at a time when sales and prices in the luxury market were already under pressure. ‘It’s not like New York City is all of a sudden on sale. New York has been on sale for the past 24 months,’ said Tal Alexander, a luxury agent with Douglas Elliman. ‘Sellers who are motivated and want to do deals need to add on another layer of discount.'”

“A Seattle condo located at Four Seasons Private Residences just sold for nearly $4M less than its 2019 price of $9.995M.”

“One sector of Dallas housing that’s seeing a recent rise in listings is downtown-area condominiums. Almost five dozen luxury condo units — mostly in high-rise buildings — have hit the market in the last few months in downtown and Uptown. Real estate agents say the surge in condo tower listings is due to everything from potential high resale values to worries about the pandemic. ‘Some people who thought they needed a second or third home have changed their minds and put them on the market,’ said agent Kyle Crews of Allie Beth Allman & Associates.”

“This corner of downtown Houston, once a thriving hub of commerce and culture, has become a shadow of its former self. The food hall crowds are gone. The taxis are nowhere to be found. And the restaurants that are still open are struggling to hang on. Occupancy in downtown’s luxury apartment buildings has fallen as new properties open, and those landlords are trying to lure tenants with virtual showings, self-guided tours and rent specials.”

“‘You’ve got to understand,’ said Tilman Fertitta, who owns Vic & Anthony’s, the high-end steakhouse near Minute Maid Park, ‘downtown is dead. There’s nobody in the buildings.'”

“If the economy takes a further beating, the real estate market could as well. Jeff Anderson, a Long Beach real estate agent, said he’s starting to see the market go in different directions, with rising inventory and falling prices in the downtown Long Beach condo market, as well as expensive neighborhoods by the beach in the eastern part of the city. Richard Green, director of the USC Lusk Center for Real Estate, wonders how long the current upswing can continue because, with the economy the way it is, ‘we are going to run out of people who still have jobs who can buy houses.'”

“Heather Presha, a real estate agent who specializes in South Los Angeles, said she’s now getting more inquiries from homeowners wondering if they should cash out now, fearful the market will tank and they’ll lose their sizable equity. One of those owners, she said, is expecting to get laid off from his job in the film industry. ‘He wants to liquidate and move to the mountains,’ Presha said.”

“With as many as one in five homeowners deferring mortgage payments due to COVID-19, banks need to act now to avoid a crisis among borrowers in Canada, says a mortgage industry spokesperson. Paul Taylor, CEO of Mortgage Professionals Canada, added there have been warnings the percentage of homeowners seeking deferrals could climb to 20%. Many homeowners may find themselves perched precariously on a financial cliff. ‘The general expectation is that these families will be forced to sell their homes, and that this influx of housing inventory to the market will create price softening as more housing options are made available to buyers,’ Taylor said.”

“The Lagos State Government has asked allottees of the various public housing estates who are yet to complete the payments on their allocated homes to do so or forfeit their rights over the housing units as stipulated in their letters of allocation. ‘Government’s revenue has been greatly affected by defaulters in some of our existing estates. Many have failed to pay up their outstanding in spite of government’s magnanimity in extending the period of grace beyond the statutory 90 days,’ said Permanent Secretary, Ministry of Housing, Mr Wasiu Akewusola.”

“Ho Chi Minh City landlords have been forced to lower rents further with the second wave of Covid-19 hitting demand. Minh in District 1 has so far lowered the rents for her two apartments by 30 percent to $900 a month each. In July, when foreigners could not come to Vietnam due to the pandemic, she had to lease it to locals who pay even less. ‘The longer the pandemic goes on, the more damage it will cause to me because I have bank debts to pay.'”

“Another landlord, Trieu in District 7, cut rents for his three properties by 15 percent after the first wave, and by another 10 percent this month. ‘I myself have to repay banks VND25 million ($1,080) a month.’ Tai, a broker, said rents in District 4 have dropped by 30-35 percent since the beginning of the year, explaining that many people renting properties there were tourists or businessmen with short-term needs who have left.”

“Vo Huynh Tuan Kiet, associate director of residential project marketing at real estate firm CBRE, forecast rents would continue to fall until the end of the year since there is also an abundance of supply.”

“Price cuts were recorded in local property market, with a luxury residential site at 20 Perkins Road in Jardine’s Lookout changing hands for HK$850 million, a 40 percent drop from a recent peak. The average price totaled over HK$82,000 if calculated based on a gross floor area of 10,256 sq ft. In comparison, a house on the same road in 2018 changed hands at an average price of HK$145,000 per sq ft.”

“A real estate business report published by Chinese social media platform Weibo on Aug. 9 revealed that the poorest city in Sichuan Province is struggling with completing many unfinished projects, leading to the waste of thousands of acres of fertile farmland and loss of billions of funds. According to the report, in Bazhong city alone, 40 percent of local projects ended before the construction took place, like the Andersen Fairy Tale Theme Park; and 50 percent of projects ended half-way, like the Panxing Logistics Industrial Park.”

“Unfinished projects are scattered all over China. Apartment complexes, industrial parks, commercial office buildings, image projects, etc., were abandoned due to debt and lack of funds. Some projects been abandoned for more than a decade, leaving unfinished construction sites in ruin. Some analysts said that in this case, developers will definitely pass on the cost to the housing market, and buyers will eventually pay for it. In other words, the over-reliance on land finances pushes up housing prices, but the real economy is weak and land use efficiency is low. As a consequence, the real estate bubble could burst.”

“It is often forgotten that one of the keys to Scott Morrison’s narrow victory at the last election was his fight against the ALP’s proposed crackdown on negative gearing. Particularly in the key states of Queensland and Western Australia, voters were very keen to hang on to negative gearing – a process by which landlords are able to offset losses on a property against their total income. The old saying of being careful what you wish for applies to the electoral enthusiasm for negative gearing, with the COVID-19 pandemic having a particularly brutal effect on the widely employed strategy.”

“As the name suggests, negative gearing means the landlord/investor has negative cash flow – the cost of providing their rental property in interest, rates and other costs is significantly greater than their rental income. While that all seems on the surface to be an exercise in financial foolishness, the really big upside in negative gearing is that the value of the property is rising over time. Like so many other aspects of society, COVID-19 has turned this exercise in financial sophistry completely on its head – and not in a good way.”

“The latest figures show that Australian taxpayers were claiming $13 billion a year in negative gearing – a number that looks set to keep growing. Nowhere is this being played out more than in the big Australian cities of Sydney and Melbourne where vacancy rates on rental properties continue to rise, property valuations are falling and rents are falling fast.”

“Sure, negative gearing landlords are still getting to pay lower tax bills as the gap between what they pay in interest and what they get in rent widens alarmingly as rental income falls but the financial ‘fizz’ provided by rising property prices has also turned negative – and in this exercise, two negatives most definitely do not produce a positive. For those who have had a bad pandemic, the prospect of selling out at a loss to end the pain of rising cash losses might be the only alternative.”

The original article can be found here.