A report from the Washington Post. “Months before the bank posted a foreclosure warning on the front door of the home that Sunya Musawwir has owned for 30 years, the D.C. government told her they would take care of everything: late penalties, fees, whatever it cost to bring her up to date on her mortgage. Nearly a year later, Musawwir said, she has not received a dime from the program. The amount she owes the bank, meanwhile, has nearly doubled. ‘If I don’t get the help that this program is promising, I’m really screwed,’ Musawwir said.”
From Pro Publica. “For many Somali families in Minnesota, the barriers to home ownership have long seemed insurmountable. Roughly three years ago, a handful of ending firms began offering an ‘interest free’ way to buy a home. Word spread fast. The seeming solution came in the form of a short document with three boldfaced words at the top: ‘Contract For Deed.’ But seller financing, as it is also known, lacks key protections for the buyer.”
“Many buyers mistakenly believe if they make the monthly payment stipulated in their contracts, they will successfully pay off the home by the end of the contract term. But those payments may only add up to a portion of the price of the home, and the buyer is expected to make up the difference with a lump-sum payment, known as a balloon, or by refinancing the loan. One of those buyers was a long-haul truck driver who for years had rented an apartment in a Minneapolis suburb.”
“This summer the trucker purchased a spacious home in an outer-ring suburb south of Minneapolis. But just two months later, he said, the contract had already become unmanageable. His family is at risk of losing not only the house, but about $100,000 they have paid, including a hefty down payment. He said he never understood the disadvantages and quirks of the contract for deed. Now, it’s too late to get out of it. ‘It’s really scary,’ he said. ‘To be honest, you’re sleeping right there and you can’t think of it as if it’s your house.’”
Bisnow New York. “Interest rates and recession talk are playing out in New York’s multifamily market. Woody Victor, a principal at lobbyist Capalino added a lot of businesses are ‘blowing up’ – with several deals falling over because they are no longer financially viable. ‘If 2008 was the real estate crisis, 2022 or 2023, is the crisis of white-collar, high-tech jobs,’ Housie CEO Hemant Chavan said. ‘It affects the luxury rental market, and it’s affecting the market trends … The other indicator that I think is concerning is Facebook backing out from their office leases.’”
Tech Explore on Washington. “The string of layoff announcements by Amazon and other Seattle-area tech employers has many asking whether the tech industry is bound for a major correction and even more job cuts in coming months. In fact, that correction may already be underway. October’s tech losses didn’t include all of the roughly 12,500 layoffs recently announced or reported at Amazon, Meta, Convoy, Zillow, Redfin and other tech firms. October’s losses also don’t include any of the contractor positions eliminated during that period, said ESD economist Paul Turek.”
“All told, Washington looks set to lose as many as 18,000 tech or tech-related jobs over barely two months. That’s more than the state lost in the dot-com bust of 2001-03, when many overvalued online startups collapsed and thousands of workers found themselves without jobs.”
Bisnow National. “The amount of office space available for sublease is reaching record highs as tech companies, facing a cold winter, mount aggressive layoff campaigns. A record 212M SF of office space is available on the sublease market, according to CoStar data. Tech companies have placed more than 30M SF of offices on the sublease market, according to CBRE, triple the amount they listed in 2019. ‘Downsizing is much more of a threat than work-from-home,’ Nicholas Bloom, an economics professor at Stanford University, told the WSJ.”
The Sun Sentinel. “According to Zillow, Mondays could be the best time to try and get a home with a price cut as 18% of listings have a price drop on that day in South Florida, based on historical trends. ‘We are getting to the point where most of the activity is happening on the weekends as far as showings,’ Jeff Grant, realtor with The Jeff Grant Team in Palm Beach Gardens. ‘If you go through a weekend and there are no showings, that is a good indication that you probably need to cut the price.’”
“‘The main cause of that is that sellers are holding on to what their neighbors got six or eight months ago,’ said Ryan Greenblatt, broker associate with Lang Realty in Boca Raton. ‘There’s no official timeline. If you are not getting showings in about three or four weeks, then it’s time to have a conversation.’”
From Fortune. “When a buttoned-up Fed economist says the U.S. housing market has entered into a “difficult [housing correction”], it’d be wise to believe them. When it comes from the lips of Fed Chair Jerome Powell, it’s more of a warning. Powell is right: Not only does housing activity continue to plummet, but U.S. home prices are falling for the first-time since 2012. Markets like Austin and Reno are down 10.2% and 8.4%, respectively. It didn’t take long for Bay Area techies in 2020 to realize their newfound remote freedoms, coupled with historically low mortgage rates, made the pandemic the perfect time to buy in ‘Zoomtowns’ like Boise.”
“The correction is so sharp that Boise—which saw its year-over-year rate peak at 47% between July 2020 and July 2021—has already gone negative in 2022 on a year-over-year basis. Indeed, Boise home prices are down 7.1% since its 2022 peak, and down 4.3% on a year-over-year basis.”
The Denver Gazette. “American Financing Company, a mortgage loan broker with an office in Aurora, announced it plans to lay off almost 200 Denver-area employees by Dec. 23, according to the Colorado Secretary of State’s website. The layoffs are due to ‘unforeseeable business circumstances’ causing a reduction in sales according to the WARN notice, which requires large employers to provide a notice to employees 60 days prior to any layoffs with some exceptions. In this case, employees received reduced notices due to the speed and extent of sales declining in the second half of October, according to American Financing. The layoffs represent more than half of the company’s workforce.”
The Los Angeles Times in California. “A developer who tricked more than 160 would-be buyers into giving her at least $26 million in down payments for condos at a Coachella resort she never built was sentenced Monday to 20 years in prison. Ruixue ‘Serena’ Shi, 38, used the stolen money to pay for luxury cars, worldwide travel and a high-fashion wardrobe, court records show. Most of the buyers were Chinese citizens who believed California real estate was a safe investment, and some of them lost their life savings, prosecutors said. Prosecutors had initially sought just under 16 years in prison, but after Shi tried to back out of her plea deal, they increased their recommendation to 20 years.”
The Globe and Mail. “At least two of Canada’s largest mortgage lenders allow borrowers to shift a portion of their interest costs onto the principal owed on their mortgages, helping them cope with the impact of soaring interest rates. The variable-rate products from Toronto-Dominion Bank and Canadian Imperial Bank of Commerce are not new but they’re being put to the test in this rising rate environment. With interest rates up 3.5 percentage points so far this year, borrowers are at risk of falling behind on their interest payments and increasing the amount of their original loan.”
“But TD and CIBC allow the size of the original loan amount – the mortgage principal – to grow in some circumstances. For example, consider a homeowner who made a 5-per-cent down payment on a $500,000 property. With deferred interest added back to their mortgage, their loan is allowed to grow to up to $498,750. That is 105 per cent of the original mortgage of $475,000. (And that’s assuming the borrower hasn’t folded the CMHC insurance premium into their mortgage, which would add another 4 per cent to the loan amount.) At the same time, if that property has faced the typical 10-per-cent price drop that has occurred so far this year nationwide, that property is now worth $450,000.”
“The fact that CMHC rules allow for balances on insured mortgages to grow past the original amount raises questions, said Ben Rabidoux, founder of market-research firm North Cove Advisors. ‘Is that prudent?’ Mr. Rabidoux asked, saying CMHC is a ‘manager of risk on behalf of Canadian taxpayers’ in the housing market. If interest rates at renewal time are higher than the contract rates the borrowers originally signed up for, that will also push up the mortgage payment. And if their loans were allowed to grow during the mortgage term, these borrowers will have a higher mortgage principal to pay down over a shorter period of time. ‘That’s going to be a really nasty dynamic,’ Mr. Rabidoux said.”
From Reuters. “Official property records show that Sam Bankman-Fried’s FTX, his parents, and top executives at the failed cryptocurrency exchange have purchased at least 19 properties worth nearly $121 million in the Bahamas. over the past two years. Most of FTX’s purchases were luxury beachfront homes, including seven condominiums in an expensive resort community called Albany, costing nearly $72 million. The bonds show that this property, which was purchased by one of the units of FTX, was to be used as ‘accommodation for key employees’ of the company. Reuters was unable to determine who lived in the apartments.”
“Documentation for another home with beach access in Old Fort Bay—a gated community once home to a British colonial fort built in the 18th century to protect against pirates—shows Bankman Fried’s parents and Stanford law professors Joseph Bankman and Barbara Fried as signatories. One document, dated June 15, said the property would be used as a ‘vacation home.’”
“When asked by Reuters why the couple decided to buy a vacation home in the Bahamas and how it was paid for — whether with cash, a mortgage, or by a third party like FTX — a spokesperson for Professors said only that Bankman and Fried were trying to return the property to FTX. ‘Since before the bankruptcy proceedings, Mr. Bankman and Ms. Freed have been seeking to return the bond to the company and await further instructions,’ the spokesperson said, declining to go into further detail.”
“The FTX headquarters is now unoccupied, with furniture pushed up against some of the windows. Its banners have been removed. The $4.5 million plot of land is also empty. A security guard said the staff had not returned to the headquarters after he left earlier this month.”
From InnovationAus. “Months ago (in April), as the rise in the CPI was starting to get underway, the InnovationAus editor asked me; ‘Why is any sign of wage or consumer price inflation stamped on immediately by governments, while asset price inflation is considered virtuous?’ His interest wasn’t just in housing but also in startup valuations in the tech sector, saying; ‘Isn’t the VC market being flooded with $$ as the super funds go in search of yield? That the established VCs raising record-sized funds has less to do with the Australian ecosystem becoming ‘more innovative’ or in any way more attractive and more to do with zero/near-zero interest rates and the fact that the place is awash with money.”
“However, the real valuation isn’t always what matters. Just as in a housing boom, buyers flood the market for fear of missing out (FOMO), so investors will put away their concerns and accept a valuation because someone else is already investing at that value. So the roundabout keeps spinning if investor A accepts the valuation because they understand investor B will invest and therefore accepts the valuation. In reality, investor B only accepts the valuation because they think investor A will accept and therefore accept the valuation.”
“Governments don’t act to stop these bubbles from occurring for several reasons. The first is that they have very limited tools to deal with them, especially now that so much financing is by knowledgeable investors who can thoroughly investigate the businesses. Second, most policymakers only know neoclassical or orthodox economics, which teaches them that the market always determines the right price, especially when the purchaser is informed and rational.”
“Finally, any action to stop a bubble bursts a bubble; while bursting it later might be messy, having it happen on your successor’s watch is much better. However, underlying some of the worst excesses are some other characteristics of the third age of capitalism. Managerial capitalism has been replaced with ‘financial capitalism’. Creating value by financial machinations alone cannot be sustained forever; it will end on its own accord. However, while the economy is dominated by platform companies, where value is far more than the capital invested, there is a steady flow of new excess cash to be fed into financial machinations.”
“For example, suppose you book the integration costs (or in WorldCom’s case a write-down of the acquired assets) in the first quarter after the acquisition. In that case, you make the growth rate after the purchase look better than it really is. Like a Ponzi scheme, this works for as long as you can keep it going, but eventually, you run out of acquisition targets. Other tweaks, like not accurately reflecting the level of doubtful debts in the provisions, can also help sell the growth story.”
“But nothing sells the growth story more than the idea of growing demand. Here, WorldCom had a great story to tell: the internet’s capacity was doubling every hundred days. Throughout this period, one analyst, Andrew Odlyzko, reported that the doubling claim was simply inaccurate. In a reflective piece following the telco crash of 2002, he summarised both the actual data and where the claims had been made.”
“He concluded: ‘There are several lessons to be drawn from the myth of astronomical Internet traffic growth. One is that almost all people are innumerate, lacking the ability to handle even simple quantitative reasoning, and in particular to appreciate the power of compound interest. Another one is that people are extremely credulous, especially when the message they hear confirms their personal or business dreams (as the Internet growth myth did, by offering the prospects of huge growth in telecom and effortless riches for participants in the game). They are not willing to examine contrary evidence, and overlook glaring implausibilities and inconsistencies in what they hear.’”
“‘Finally, myths are very persistent, since respectable financial analysts and reporters were still writing about ‘Internet traffic doubling every 100 days’ as late as 2002.’ The moral of this story (and the reason it is covered in so much detail) is that bad ideas are often remarkably difficult to discredit, even when there is extensive evidence against them.”