A report from CNBC. “The Federal Reserve now owns more than a third of the agency mortgage-backed securities, or MBS market. At the start of 2019, the Fed held $1.6 trillion in agency MBS. It tapered that down to $1.37 trillion by mid-March of 2020. Then, when the economy and housing market were suddenly in Covid free fall, the central bank began buying more again. As of last week, the Fed held $2.2 trillion of agency MBS. ‘They’ve continued on autopilot. I don’t think there’s been any discussion within the Fed. The Fed is just afraid to change because they don’t want it to be seen as a form of taking their foot off the pedal,’ said Peter Boockvar, chief investment officer at Bleakley Advisory Group.”
From Market Watch. “Wall Street’s comeback story in U.S. housing finance has hinged on lending to self-employed borrowers and others who don’t quite fit the mold. It financed millions of homes in recent years using alternative forms of documentation to gauge a borrower’s ability to afford a mortgage. But the small but important corner of housing finance referred to as the ‘non-qualified mortgage’ (non-QM) segment has impairments that remain stubbornly high when compared with the rest of the U.S. housing market.”
“‘You really have self-employed borrowers struggling from day one,’ said Vadim Verkhoglyad, an analyst at dv01, of the pandemic setting off a deluge of late payments and loan modifications. ‘Investor loans struggle because so many tenants aren’t paying rent,’ he said of another key area of stress.”
“Therein lies the hitch of the non-QM borrower, someone with good credit akin to Wall Street’s ‘Alt-A’ category, before standards collapsed in the run-up to the 2008 global financial crisis. ‘It’s like a jungle,’ said Caroline Chen, a senior research analyst at Income Research + Management in Boston, about the hodgepodge of loan types and borrowers in the non-QM group. ‘They all have some story behind them. Some are self-employed borrowers who can’t provide full documentation,’ Chen said, referring to the standard two years of W2s and tax returns often required for a conventional mortgage, as well as other proof of income, assets and debts.”
From WTBW in South Carolina. “Eric Michaels has owned his property at Grand Strand Resorts III since 2006. Michaels says he’s been leasing the home since 2010. Michaels said the tenant’s lease ended in January, but are still living in the home rent free. His bank is offering forbearance on his loan, but says if the back pay isn’t paid in full by September, he could lose the property. Michaels said other landlords are in similar situations. ‘I think in the long haul it’s going to cause more foreclosures and financial duress,’ Michaels said.”
From ABC 7 New York. “Some small landlords on Long Island are facing foreclosure and bankruptcy due to non-payment of rent from their tenants during the pandemic, Eyewitness News has learned. ‘The people that are being hurt are these mom and pop landlords,’ said Long Island real estate attorney John Lynch. ‘I have clients who now can’t pay their mortgages and are in danger of being foreclosed upon.’”
“In June 2019, Louis DiPasquale, of Westhampton Beach, rented out the home he bought for his son in Sound Beach because his son was being deployed with the Army to Cuba. DiPasquale said the last full rent payment he received from the tenant was in January 2020. He said the tenant paid only $1,100 of the $2,150 rent in February. He moved to evict her in March 2020, but the courts closed due to the pandemic.”
“DiPasquale said he is out $32,000. His son is back from deployment and can’t return to the house. ‘My son would be homeless right now if he couldn’t come live with us,’ he said. ‘I just want my house back.’”
The Davis Vanguard in California. “Someone shared with me a CoStar Analytics report that looked at Davis’ retail vacancy rate compared to the Sacramento average. It shows the retail vacancy rate, which had been under 4 percent from 2012 until 2017, soaring to over 8 percent—the first time it passed the regional average in at least a decade. ‘Apartment vacancies in Davis have similarly soared to an all-time high, indicating students have opted to live with family, cohabitate with friends, or live in a more cost-effective area. Davis’ apartment market is easily the most expensive in Sacramento,’ they note.”
From ABC on California. “Vacant office space in San Francisco has skyrocketed during the coronavirus pandemic. Now, there’s a question of whether or not some of that available space can or should be converted into residential units. The San Francisco Chronicle reports the amount of office space up for lease in the city now could fill 11 Salesforce Towers. That’s compounded by recent plummeting rents on residential units in the city and across the Bay Area. New data from rental listings website Zumper shows median rent for a one-bedroom unit in San Francisco is down 24% from a year ago, though it is still the highest in the U.S. among big cities.”
“Rent also has fallen 20% year over year in San Jose and about 18% in Oakland. Other Silicon Valley cities such as Sunnyvale (-32%), Santa Clara (-29%) and Redwood City (-29%) are seeing even larger declines.”
The West Island Blog in Canada. “An amazing promotion listing an apartment near Concordia University’s downtown Montreal is among outstanding adverts that stood out on the Rentals.ca website. According to Paul Danison, the website content director, the promotion offered tickets for sky diving, free helicopter rides, and a two-month free rent. The Rentals.ca team says that the incentives started six months ago and include rentals in Montreal and Toronto.”
“Danison says that the landlord’s time is over, and it is now the tenant’s market. ‘It used to be a pretty market where the landlords were in control, its tenants’ market right now, and landlords are competing for the best tenants.’”
The New Straits Times on Malaysia. “Since 2019, the property market has been flooded with auction units spanning from Kuala Lumpur to Johor Baru. According to property agents, 4,000 to 6,000 units of properties are flooding the market every year. Some units still fail to be sold off despite five or six rounds of price reduction. I came across one apartment in Puchong, Selangor, that went through almost 10 rounds of price reduction before it could be sold off.”
“To put this into perspective, every reduction usually amounts to 10 per cent off the previous price. The heaviest consequence is faced by property owners, whose dream-come-true moment of purchasing a new property ends in a nightmare. Additionally, the number of auctions is not just high, but has surged to a new level, turning individual purchasers’ nightmare into a nationwide one.”
“I say so because property purchase is typically the biggest life decision for most people. As such, a wrong decision will definitely entail consequences severe enough to ruin one’s family and even nation. Worse still, property transactions are gearing base, meaning that almost all transactions are sealed via bank borrowing by the purchaser. Therefore, a plunge in property prices not only erodes owners’ wealth, but pushes the borrower into limbo as well. If momentum builds in this direction, banks will encounter plenty of non-performing loans, jeopardising their balance sheet.”
“A few years ago, a young individual (A), in his 30s, bought a luxury apartment unit at a staggering price of RM900,000 for 775 sq ft — approximately RM1,161.29 per square foot. This pricing rate in Cyberjaya is shocking, but what is even more alarming is that there were many more properties launched at the time with such prices. Purchasers were still bullish in their outlook despite sky-rocketing prices. Unsurprisingly, these property purchasers’ bullish stance has turned into a catastrophe, particularly in the last two years. To illustrate, A had secured a loan for RM800,000, equivalent to approximately a RM4,000 monthly loan installment.”
“However, the market rental price could only stretch up to RM1,500 a month for that unit. Expectedly, after three years, A was unable to serve the loan commitment. In 2020, A’s unit was auctioned off at a mere RM265,000. In conclusion, A did not just lose the apartment unit through the forced auction sale, but has also slumped into outstanding debt of around RM500,000 that will impact his life. Certainly, this case depicts only the tip of the gargantuan iceberg that is the property market.”
“Two questions stand out in my mind. How were developers possibly allowed to sell at outrageous prices? How did banks allow such high valuations?”
From Good Returns New Zealand. “BNZ chief economist Stephen Toplis says it should come as no surprise the Government’s patience has been exhausted and a full attack on prices is underway. ‘Whether the measures will have the desired impact or not is neither here nor there. If this set of policies fails then more will be introduced as the Government cannot be seen to fail. The Government has now fully exposed its intention to do what it takes in terms of moderating house price inflation. It will almost certainly win in the end.’”
“In contrast, the fundamentals of true demand and supply have actually been going the ‘wrong way,’ says Toplis. Thanks to Covid, population growth has plummeted alongside the slump in net migration. The increase in demand for housing is way less than expected. Even when borders do reopen it is unlikely the shortfall in demand generated will be quickly reversed, he says.”
“‘But while true demand has been much less than anticipated the pace of housing construction has accelerated beyond expectations,’ he says. ‘Right now, one new house is probably being built for every one person increase in population. This is clearly not sustainable.’”
“The risk is that no government, or central bank for that matter, has ever been able to fine tune an asset market so the balance of risk is that a decent correction in prices occurs. For all but new buyers this matters little as it will simply reverse some of the recent exceptional capital gains.”
“Independent economist Tony Alexander says from a new investor’s point of view before the new policies it meant if buying a property delivering $20,000 per annum in rent, financed with debt costing $15,000 in interest, then ignoring all other costs, taxable income would have been $5,000. The tax bill would be $1,650 at 33% and the investment would be cash flow positive.”
“Now, tax will be levied on the entire $20,000 of revenue delivering a tax bill of $6,600. The tax bill goes up $4,950 and the property is now cash flow negative. ‘The returns to investing in residential property have altered – not just for the 24% of people purchasing investment property with a mortgage, but many of the 12% who pay cash. They would pay cash having raised debt on other properties they own in many instances. That debt will eventually be affected,’ says Alexander.”
“To put the coming price declines of uncertain magnitude in context – prices in February on average were ahead 25% from May and 21% from a year earlier. If prices on average now fall 10%, they will go back to where they were in October. If they fall 5%, they will be back to where they were in the first few days of February and 15% takes them back to August last year.”
“The possibility of a substantial correction is multiplied, says Toplis, if the potential oversupply diagnosis and new policies have a substantial negative impact on sentiment. ‘House prices will come under significant pressure if everyone heads for the exit at the same time.’”