Wealthy Zip Codes Making a Comeback

The majority of U.S. cities are still feeling the pain of the houses crisis. However, as I predicted in a previous entry, market recovery in opulent regions should be faster. My forecast proved to be accurate. According to a CNNMoney article, over the last year, “million-dollar-plus” home sales have jumped roughly 19%. For example, “San Jose, Calif., had the biggest market for million-dollar homes, with a 27.4% spike in sales last year”. Unfortunately, this good fortune does not apply to the majority of this country’s population— homes sales (and prices for that matter) in cities such as Las Vegas and Florida are still falling

The reason for this jump in upscale home sales is actually quite simple. Rich people are returning to their old spending habits and are more confident in their ability to splurge. Not surprisingly, spending on homes has gone up. After all, real estate is also a good long-term investment— especially at a time when prices are relatively cheap. 

Automated Parking is Coming to L.A.

You heard me right— automated parking! Until recently, I never even knew this even existed. However, according to the blog Curbed L.A these parking structures of the future are becoming more and more popular. To my surprise, there’s already one in Hollywood. I think this is a great idea. The company responsible for such a great invention is Sky Park. Aside from costing less to build than subterranean parking, there are many other benefits.

One is a more efficient use of space. Since ramps don’t have to be built, cars can be parked close together. This system benefits the environment. This is because cars aren’t left running indoors where fumes can build up. Compared to traditional parking structures, automated parking is also much safer. When cars are parked they are inaccessible to would be thieves. As if that’s not great enough, this system reduces long-term costs since attendants and large amounts of concrete (which is becoming more and more expensive every year) wont be needed. Even simple things like lights, cleaning systems can all be eliminated. Sky Park is even expandable!           

R.E.O. Properties Reach their Highest Point Yet

The number of R.E.O. properties has reached a peak of 2.2 million. Bank owned properties (R.E.O.) are a huge part of the current real estate market and make up a large percentage of sales. Although the number of foreclosures sales has been increasing, so too have the number of foreclosures— according to Realtor Magazine, 33% month over month. Not surprisingly, the 2 states that lead the pack are Florida and Nevada. Like I said in one of my previous entries, roughly one in every one in every seventy-six homes is bank owned.

I think these statistics make it clear that we are nowhere near market recovery. A sharp increase in R.E.O. sales is not enough (most buyers are speculative investors hoping to get a retune in a few years). For the market the rebound, the number of foreclosures must go down. People must pay their mortgages on time and in full.        

The Chinese Super-Bubble

Jim Chanos, founder of investment company Kynikos Associates, said that, “China’s on an economic treadmill to hell… They may very well become Dubai times 1000.” As I reported in a previous entry, Dubai is in the midst of its own real estate crisis, one that makes ours look relatively small. $263 billion worth of projects have been cancelled or put on hold; and property values have fallen more than 60%. Some of you may be asking yourself: compared to Dubai, can the situation in China actually be worse? The fact of the matter is that China’s real estate bubble makes Dubai’s look trivial. As if that’s not bead enough, the Asian super-bubble is still growing. Its explosion will likely lead to a massive economic meltdown.

The Chinese bubble’s rapid growth can be attributed to several things. The first reason boils down to poor lending practices. For years, the government kept interest rates unusually low— at around 5.3%. This stimulated the economy and made GDP go up. Little did finance officials know that their efforts to improve the economy would lead to its likely demise. According to Jim Quinn, the author of an article titled Why the China Miracle is Really a Debt- Financed Bubble, “bubbles can only form when monetary policy and/or fiscal policy is extremely loose”. A great example of this— and its consequences— is the American subprime mortgage crisis. Here in the U.S, many people criticize Alan Greenspan for precipitating the U.S. real estate crash “with his 1% interest rates in the early 2000’s”. Now imagine implementing Greenspan’s tactic on an exponentially larger scale— Chinese banks got into this predicament by giving out huge loans with very low interest rates to people who cannot pay them back. Sound familiar? If the outcome of the situation in China even slightly resembles what happened here in America, a massive market crash is almost inevitable!   

Another cause of the Chinese real estate bubble is shady lending. Although government- regulated, most banks gave out many more loans than they were legally permitted. Recent estimates by Fitch Ratings on The Market Oracle suggest that banks lent out about 30% more money— informally of course— in 2010 than the government limit of 7.5 trillion Yuan. A substantial amount of this money was invested in real estate, making the bubble grow. Just like in the U.S, getting a loan in China was far too easy. Common sense and logical thinking were superseded by greed. Amazingly, this all occurred while the government was trying to put such lending practices to an end.

An additional explanation for the Chinese real estate bubble is unsustainable market growth. It’s impossible for the market to grow at such a rapid pace and it’s just a matter of time before it begins to nosedive. The statistics are mind- boggling. According to an article titled “China’s Housing Bubble”, six years ago home prices averaged just 500 Yuan per square meter. That number has skyrocketed to roughly 8000 Yuan. That’s an increase of 1600%! Compare this to the United States where prices only increased about 120% (and look at the chaos that ensued). Such a drastic difference in growth rates puts things into perspective— China is an economic time bomb. Since the market for real estate is cyclical, it’s obvious that such a rapid level of growth will be short lived.    

The main cause of the real estate bubble is a huge oversupply of expensive homes. Government investment in real estate spurred a construction boom in 2007— and it still hasn’t stopped. The Chinese skyline is dotted with what seems like hundreds of cranes.

This dramatic oversupply can be explained by a few things. One is overbuilding. Even in a country this large, the supply of homes drastically exceeds the demand. According to The Market Oracle, there are sixty- four million vacant homes and apartments in China— enough to house 15% of the country’s entire population or 200 million people! As I stated in one of my previous blog entries, there are 18.3 million vacancies in the United States— yes, that’s a huge number— but compared to the Asian Superpower it’s drop-in-the-bucket. Overbuilding isn’t even confined to large cities. Ghost towns have sprung up all across the country, the most famous of which is Kangbashi— 90% of homes there are empty.

Considering this, some of you may be wondering why developers continue building— the answer: speculation. Rich speculators buy these units and, in hopes of future profit keep them in great condition, but refuse to rent them out. These investors are convinced that the government won’t allow prices to fall; so they keep buying homes at an alarming rate, creating a demand that’s at best artificial. This explains why even though vacancies are rising, prices are still falling.

One last reason for this oversupply of homes is market distortion. This mainly stems from speculative investors’ greedy tactics. One reason why vacancies are still rising is because— at today's prices— the majority of the Chinese population cant afford a home. A study conducted last year by The Chinese Academy of Social Sciences found that a typical property costs 8.8 times the average national income. According to The Beijing University of Technology, this figure can be as high as twenty two times the average income in cities such as Beijing. Compare this to five times the average American’s income of around $52,000. Keep in mind, the daily wage of many Chinese citizens is roughly a single dollar. In a country where so many people are poor, demand for such expensive homes is practically nonexistent. Unless prices drop to acceptable levels, vacancies will continue to go up.

Luckily, the Chinese government finally realized that they have a major problem on their hands—sixty-four million vacancies must have been an eye- opener! In an article titled Be Afraid— Very Afraid: China’s Bubble is Set to Blow, Alain Sherter states that Chinese leaders have started to “tighten lending standards and raise interest rates to cool the real estate market”. I don’t think this will be anywhere near enough. It’s too late for the Chinese economy to be rescued; it’s in too deep of a hole. Also, this country’s complicated banking system makes it very difficult for soon-to-go-bankrupt companies and lending institutions to be bailed out. Sherter agrees since he thinks real estate bubbles, especially one this large, can’t be popped so easily. As of April 14 2011, Moody’s Investors Service (a very reputable financial research agency) even reduced China’s “property sector rating from stable to negative”. Most people, including myself, are convinced that the market for real estate in China is on a dangerous path. I think this country its way to an unparalleled economic disaster.

A ghost town in mainland China

An Analysis of the U.S. Housing Market

According to zillow.com, property values in cities like Las Vegas have fallen as much as 60%. This alarming decrease in prices can be attributed to a jump in delinquencies because of poor lending practices and the explosion of the housing bubble. Other causes of this disastrous crash are a ten-year appreciation run from 1997 to 2007 that was bound to end, as well as high unemployment.   

Via Mary Umberger, Steve Harney compares the surplus of stockpiled foreclosed homes to water built up behind a dam. Property values follow the basic rules of supply and demand, so when those homes enter the market later this year, prices will drop five to eight percent. Therefore, Harney thinks, it’s best to sell.

I originally thought home prices would rise. But Harney’s argument changed my mind. For the most part, I agree that home prices will continue to fall. Austin Anderson, a market analyst and professor at the University of Southern California, also predicts that the same will happen in extremely distressed areas such as southeast Michigan and southern Florida. This is because banks are expected to sell the stockpile of three to four million homes in these regions, but were unsure if values would increase or decrease in 2009 and 2010 and refused. Just like their approach to giving out loans— where borrowers must meet strict standards to even qualify— this strategy of holding on to properties is very conservative.

Another reason why people think home prices will decrease has to do with the high number of vacancies. In one of my previous entries, I discussed how this also contributes to the oversupply. Currently, the number of vacancies in the United States exceeds 18.3 million. Banks own three to four million of these, while the remainder are privately owned. The U.S. housing surplus will continue to go up as long as vacancies increase. 

This glut of homes for sale drives prices down. This conclusion is supported by not only the blogging community, but also the theory of supply and demand. For example, the author of a blog entry on monevator.com predicts that home prices will fall as much as 10%. Morgan Brennan, a writer for Forbes, also agrees when she states that “2011 will witness further price declines.” A CNN Money article titled “Home Prices Near 2009 Lows— and May Fall More” also shares a similar view. 

The market will also recover slowly because the demand for homes is currently stagnant. This is another reason for “rock- bottom” home prices. Currently, the demand for homes trails the supply.

This lack of demand can mainly be attributed to two things. One is that consumers expect home prices to decrease further. A Gallup poll conducted earlier this year shows that about 27% of Americans agree with Harney and expect home prices to fall. Hoping to get a better deal in the future, most people— even those that can afford it— have avoided purchasing a house.

Another explanation is shockingly high unemployment. Many people who could not make their mortgage payments and were evicted are currently unemployed and will take a while to find a steady job. As of April 2011, The Bureau of Labor and Statistics calculated that the national unemployment rate was 8.8%. For the market to rebound, the number of jobs created will have to be higher.

Although Harney’s reasoning is well thought out, I do have one criticism. When compared to very distressed areas, I think that home prices in wealthier parts of the country, such as west Los Angeles, San Francisco, and Orange County, will recover faster. This is not to say that these pricey communities have not been adversely affected. After all, I reported in a previous blog entry that celebrities such as Nicholas Cage and Allen Iverson have even been foreclosed on.  

Fewer foreclosed homes, those being sold for a fraction of what they were worth years ago, are located in these opulent regions. As the number of foreclosures in a community rises, neighboring properties suffer. These toxic properties have a spillover effect on homes nearby, making their value go down. According to RealtyTrac, just one in every 786 homes in San Francisco received a foreclosure filing. Compare this to Las Vegas where one in every 76 homes is bank-owned. The relationship between the number of foreclosures in a region and property values is clear— depreciation rates in areas with many foreclosures are higher. This smaller supply of distressed homes will make the economic recovery in upscale parts of the country stronger.

Home prices in affluent parts of the country will also go up at a faster rate because of the logic behind supply and demand. Rich people with money to spend on real estate— those that prefer to live in upscale districts— create a demand for homes there. As the economy slowly heals itself, more and more middle to upper class professionals will see their incomes return to “pre-recession” levels. This will allow them to return to their old, more lavish spending habits. Spending on expensive homes in certain parts of the country will increase, strengthening demand.

I think Harney’s prediction about the direction of home prices makes a lot of sense. With so many houses waiting to be sold, not to mention a lack of demand, I’m not surprised that our view is widely shared.

Some of the most distinguished names in real estate also predict that home prices will drastically decrease. One person is the father of the Case Shiller Index: Robert Shiller. He stated in an interview with the Wall Street Journal that “there is a substantial risk of homes prices falling another 15%, 20%, or 25%.” These numbers have not been heard of since The Great Depression—prices fell 25.9 percent between 1928 and 1933 compared to over 26% in today’s market (zillow)! 

 

Plans for the University Village

As a USC student, the University Village (UV) is a common sight. However, it’s seen better days and is in desperate need of a remodel. This view is widely shared. Luckily, plans are in place to completely revamp the center. The man behind it all: USC alumni Rick Caruso (the developer responsible for lavish projects such as The Grove and The Americana). Expected to open in at least 6 years, the final project is supposed to embody the typical “Caruso look”—a mall with a Mediterranean flare.

According to a statement by university planners, the project will cost over 1 billion dollars, create roughly 12,600 jobs, and provide housing for over 5,000 students; and that’s just the start. Several retail stores, a super market, and movie theatre will be located on the “mixed-use” site. Additional academic space is even in the plans.          

         I think remodeling the dilapidated UV is a great idea. After all USC is short on student housing and can always use the additional sales revenue. The jobs created from both construction and daily operations should also help Los Angeles locals who are currently unemployed. Furthermore, this development will create an expected 3.8 million dollars annually in tax revenue.