A report from Bloomberg. “Zillow has essentially dived into the house-flipping business, offering to quickly take properties off sellers’ hands. And in the process it’s helping pull Wall Street even deeper into the $2 trillion U.S. housing market. In August, Zillow raised $450 million from a bond backed by homes it’s bought but not yet sold. The offering was modeled on the loan facilities that car dealerships use to finance floor models. The offering was over subscribed and Zillow is now in the process of selling another $700 million in bonds.”
“More such offerings are almost certainly coming. Zillow is one of a growing field of tech companies, often known as iBuyers, who are taking advantage of the surge in investor demand to fund purchases of houses. As the mortgage meltdown of 2007-2010 showed in the extreme, the mix of housing, easy money, and new forms of financing can be combustible. ‘We could very quickly be talking about more than $100 billion in debt,’ says Tomasz Piskorski, a professor of real estate finance at Columbia Business School, speaking of the companies as a group. ‘What happens to the iBuyers when home prices drop? You could imagine a situation where they have a big inventory of homes, and they aren’t able to repay their debt.’”
From Mortgage Professional America. “Brokers consulted by MPA have expressed concerns about the housing market after mortgage rates rose sharply last week – with fears there could be more increases on the way. Philadelphia-based broker Paul Kwon said clients had been decidedly jittery following the news. The broker said: ‘We never like sudden increases – we like to see gradual ones. So, we had a bit of a bloodbath day yesterday with the bond market getting hit hard. In my 20 years, I’ve seen it three times and usually it’s due to very dramatic economic news, but yesterday there was a little bit of a panic, with the Fed saying that they wanted to do some tapering.’”
“Patrick Stoy, owner-broker of Wilmington-based MC Mortgage Group, said the rate hike meant brokers would have to readjust to new market conditions. He was relatively philosophical about the rate hike, however. ‘I’ve been doing this for 22 years and this is what it boils down to – rates float down like a feather, but they shoot up like a rocket. After the initial news is over, things will settle. We’ve all known (the rate rise) was coming, it’s just the pace of how things are moving.’”
The Reno Gazette Journal in Nevada. “Markets typically don’t turn on a dime. It is usually at least a few months after the fact before we can say with any certainty that a market has changed direction. Nevertheless, it appears that the residential real estate market in the Reno-Sparks area has begun to stabilize just a bit. It appears the market is coming back into balance. Rising prices encouraged some sellers to put their homes on the market. During August nearly 720 homes were listed for sale, and about 550 transactions were closed.”
“As buyers have a greater choice of homes, they are feeling less pressure to make offers above sellers’ listing prices so they can win bidding wars. In the past couple of months median prices have risen far more slowly than they did earlier this year.”
The Honolulu Star Advertiser in Hawaii. “The rules for short-term rentals are looking at a drastic change—increasing the minimum number of days that a property can be rented without a special permit to 180 from 30. When Kate Bliss and her husband were looking to buy their home in St. Louis Heights, they realized that even their combined incomes made it financially difficult. ‘I don’t think they really thought about … what a deleterious effect they would have on people who rely on this,’ she said. ‘My husband and I can’t afford our mortgage without renting these places out.’”
The New York Post. “The Mandarin Oriental Hotel at Columbus Circle, one of the city’s premier luxury lodging establishments, is quietly up for sale, Realty Check has learned. The offering for the 248-rooms-and-suites hotel towering over Central Park comes as the state of the city’s hotel industry has been likened to a ‘depression’ by the American Hotel and Lodging Association.”
“Hotel Association of New York president Vijay Dandapani, noting that ‘foreign owners have their own issues’ beyond the situation in New York, wouldn’t speculate on a possible price. But he cast the Mandarin Oriental offering in the context of the overall hotel situation, which he described as ‘bleak.’ ‘Every single hotel went from a cash-flow crisis to a liquidity crisis to a solvency crisis,’ he said.”
The Los Angeles Times in California. “It’s hard to grasp the enormity of ‘The One.’ Viewed from a drone, the white marble structure once marketed for $500 million looks every bit the fortress towering over the scattered dwellings of a village. Of course, those diminutive quarters are themselves mansions that climb the hills of Bel-Air, houses that are multiple times smaller than the 105,000-square-foot behemoth hovering above them.”
“That such a giga-mansion could be built says much about the asymmetrical excesses of our age — in which the struggle for housing plays out in the valleys as spec homes that only a minute fraction of the world can afford rise above them. It’s also a testament to the will of an obsessive developer driven to build the most extravagant mansion he could imagine — which he now finds slipping through his fingers as he battles a hard-nosed money lender who’s in for more than $100 million on the project.”
“The home has taken a major price cut. It is now going on sale for $225 million. ‘I never called the house The One. I called it The Eleven,’ quips Bel-Air resident Fred Rosen, referring to a well-known chapter of the Bankruptcy Code that does not apply to the house. ‘It was only a matter of time before it was going there.’”
The Daily Mail Australia. “Australians hoping to buy a house and break into the property market could soon have a harder time getting a loan. Both Treasurer Josh Frydenberg and the country’s best known mortgage broker have hinted that tougher rules are looming. As prices surge at an ‘insane’ pace, John Symond – the founder of Aussie Home Loans – warned banks could voluntarily introduce stricter lending rules. There would be winners and losers if such a crackdown was to happen.”
“‘You cannot have a housing market where values are going up by 15 per cent, 20 per cent every year – that’s insane,’ Mr Symond said. Even with a 20 per cent deposit, an average full-time worker paying off a typical Australian home, valued at $666,514, would be on the verge of having a risky debt-to-income ratio of six – a level that concerns APRA.”
“Digital Finance Analytics’s Martin North said banks were more likely to be approving loans with a debt-to-income ratio of eight. ‘That really is too high on any measure even with low interest rates because you’ve still got to pay back the debt,’ he said. ‘The average incomes have not gone anywhere over the last few years. The concern is that people are going to get in over their heads.’”
The Globe and Mail. “As Chinese property behemoth Evergrande tumbles toward a financial precipice, financial institutions around the world are falling all over themselves to assure us that their exposure to a teetering Chinese real estate market is minimal, that this isn’t about to snowball into a global problem. Which, history cautions, is a pretty good time to start to worry. Massive financial failures have a way of snowballing. This probably is a global problem.”
“‘There likely will be financial contagion within China,’ economist David Rosenberg said. ‘This event exposed the depths of the property and debt bubble in China, which is in the process of bursting.’ And what a huge bubble it is. The real estate sector has swelled to take a dominant role in China’s economy, accounting for 29 per cent of gross domestic product. ‘It is hard to see how a significant slowdown in the Chinese economy can be avoided, even if banking problems were contained,’ Harvard University economist Kenneth Rogoff wrote.”
From Channel News Asia. “Anger about the missed payments on the Evergrande funds bubbled over this month as some investors vented on social media while others trekked to Evergrande’s glass-tower headquarters. There they were greeted by a dozen police officers and security guards in riot gear brandishing plastic shields. One investor, Mr Wang, had been in Shenzhen for two days, saying he could not bear to tell his elderly parents what had happened. He did not care about the interest payments and was just hoping to get his 100,000 yuan investment back.”
“When asked about the company’s repayment options, including discounted properties or deferred cash over 30 months, Wang just muttered along with his friend: ‘It’s a fraud.’”
From Mises.org. “The bankruptcy of the Chinese real estate company Evergrande is much more than a ‘Chinese Lehman.’ Lehman Brothers was much more diversified than Evergrande and better capitalized. In fact, the total assets of Evergrande that are on the brink of bankruptcy outnumber the entire subprime bubble of the United States.”
“The problem with Evergrande is that it is not an anecdote, but a symptom of a model based on leveraged growth and seeking to inflate GDP at any cost with ghost cities, unused infrastructure, and wild construction. The indebtedness chain model of Evergrande is not uncommon in China. Many Chinese companies follow the ‘running to stand still’ strategy of piling on ever-increasing debt to compensate for poor cash flow generation and weak margins.”
“Many promoters get into massive debt to build a promotion that either is not sold or is left with many unsold units, then refinance that debt by adding more credit for new projects using unsaleable or already leveraged assets as collateral.”
“Evergrande is much more dangerous than it seems: All the ‘Keynesian’ solutions that you are hearing these days have already been implemented. Massive liquidity injections, low interest rates, full implicit and explicit support from the Chinese government … Let’s not forget that Evergrande was the largest issuer of commercial paper in China, $32 billion issued in 2020, a 390 percent increase from 2015, according to Reuters.”
“The problem with China is that the entire economy is a huge indebted model that needs almost ten units of debt to generate one unit of GDP, three times more than a decade ago, and all this catastrophe was already more than evident months ago. With total debt of 300 percent debt to GDP according to the Institute of International Finance, China is not the strong economy swimming in with cash that it was a couple of decades ago.”
“The market assumed that because it is China, the government was going to hide these risks. Even worse, the Evergrande collapse only shows a dangerous reality in several Chinese sectors: excessive indebtedness without real income or assets to support it.”
“This episode comes at the worst possible time, after the government has launched a massive crackdown on large companies. International investors are already concerned about corporate governance and intervention in China and now the fears of credit contagion make the risk even worse. Evergrande is not an anecdote, it is a symptom.”