China's real estate bubble more overvalued than US in 2006

How do you say "tiiiiimber" in Mandarin?

The story of the real estate bubble in China isn't that much different than the bubble in the US during the Bush years. The government in both cases helped feed the bubble. What should be troubling for China is that the real estate market is now a critical chunk of the overall rise in GDP. (Again, not unlike the US before the bubble burst.) China's economy and to an even greater extent its stability is relying heavily on the high GDP growth rates. Those numbers are never sustainable but the consequences of a hard crash in China are much different than in the west.

The ruling government of China certainly knows that China has never in its long history had a peaceful transition, so this will be a very tense time once it starts. Americans gripe, Europeans march and in China, they revolt. Ten thousand years of history can teach us a few lessons and give us an idea what is ahead. CNNMoney on one analysis of the giant real estate bubble in China:

What amazed Aliber was the chasm between the prices of the apartments and the rents they fetched. A typical $600,000 unit brought a landlord less than $1000 a month in rent after expenses (assuming no mortgage). It wasn't the rental yields that attracted investors, it was the huge price appreciation, averaging from 20% to 30% from 2008 until last year. Rents -- the cost of living in the unit -- exercise a sort of gravitational pull on prices. That's because people won't pay far more to own a home than to rent a similar one, unless they think prices will keep soaring -- a view that's a sure sign of casino mentality, and never lasts. In China, prices in the frothiest markets are fifty or sixty time rents. That's the case with the example we discussed above, where the price is $600,000, and the rent is $12000, a ratio of 50-to-1. The 50 to 60 multiple is far above the level in most U.S. markets at the height of the bubble in 2006; in those heady days, a multiple of 40 was considered giant. So how far do China's prices need to fall so that the cost of owning is reasonably close to the level of rents? Aliber reckons that the rental yield on apartments will eventually go from less than 2% to 5%, or even a bit higher.

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Real estate flippers had larger role in crisis than previously thought

The article from MSNBC is interesting, but it's not accurate to say that flippers are "largely to blame for the recession." Clearly they were important and apparently more important than experts thought, but let's put the primary blame for this recession where it belongs, with the financial industry. That's the industry that lobbied Washington to scrap the rules that worked for decades. Liar loans weren't created by buyers. They were created by the financial industry so they could sell more trash and get commissions and fees.

Buyers, especially flippers, deserve their fair share of blame, but to ignore the structural changes in the system that happened due to specific policies is dishonest. Those structural changes did happen thanks to Washington with high approval by both parties. As much as the political class would like to ignore that reality, it's the way it is.

Researchers with the Federal Reserve Bank of New York found that investors who used low-down-payment, subprime credit to purchase multiple residential properties helped inflate home prices and are largely to blame for the recession. The researchers said their findings focused on an "undocumented" dimension of the housing market crisis that had been previously overlooked as officials focused on how to contain the financial crisis, not what caused it.

More than a third of all U.S. home mortgages granted in 2006 went to people who already owned at least one house, according to the report. In Arizona, California, Florida and Nevada, where average home prices more than doubled from 2000 to 2006, investors made up nearly half of all mortgage-backed purchases during the housing bubble. Buyers owning three or more properties represented the fastest-growing segment of homeowners during that time.

"This may have allowed the bubble to inflate further, which caused millions of owner-occupants to pay more if they wanted to buy a home for their family," the researchers noted.

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More bubble signs emerging in Chinese real estate market

And by "bubble" they mean "bursting bubble" in this case. It's almost eleven minutes long but it's an interesting discussion about some of the problems in the Chinese real estate market. Many have come to accept that there are problems ahead with the Chinese market but Chanos digs into some of the most troubling statistics. While we think of China as an exporting country (which they do) 70% of the Chinese economy is driven by construction. Once that grinds to a halt - which it is starting to do - the problem starts.

Towards the end they also talk about the similarities between the state guided economy of Japan in the 1980's and China today. Typically state-driven bubbles are ugly when they burst. Read the rest of this post...

Housing prices are finally moving back up (albeit slowly)

Prices in January 2000 represent 100 in the graphic below (the graphic shows relatives prices today). So the higher the number attached to the city, the higher its home prices as compared to January of 2000. More on PBS's site. Interestingly, DC has the highest prices as compared to its prices in 2000, which goes along with recent reports that home prices were increasing in DC but nowhere else.

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On the ground in China’s ghost cities

The ghost cities gained notice late last year but the views were from satellites. This gives an interesting view from the ground. Read the rest of this post...

Multiple bubbles bursting in China

Brace yourself for this ride because it's going to be bumpy. I'm less convinced that the property bubble bursting in China won't have an impact on Americans, but that's only one of perhaps three bubbles bursting. It's an interesting read and not too long so click through to get more including the end which has some eye popping statistics. Read the rest of this post...

Google Maps shows potentially massive housing bubble in China

For those who continue to stand firm in their belief that the Chinese real estate market can grow for years, they may want to review the photos inside the link. Empty town after empty town is now on display via Google Maps. Since the communists took over, China has repeated the same mistake over and over, which is to oversell numbers. If they don't, punishment was assured. When local government officials oversold actual farm production during the Cultural Revolution, the result was famine and death. If the story behind these photos is a massive real estate bubble, the government will be lucky to survive. History cuts both ways and in China's long and impressive history, peaceful transition from one regime to another has never been part of the process. Read the rest of this post...

Economist: China's real estate bubble bursting, will hit banks

If this analysis turns out to be accurate - and there is every reason to believe that bubble, like others, will burst - China is going to be facing one of it's most significant challenges in decades. There has been regular political dissent and protests but with a growing economy there was always plenty of money to throw around at the problems. This time it may not be as easy. What makes any analysis complicated is that China is so secretive about the details inside the banking system. Some still believe that there is limited credit bubble risk but that assumes the government story about real estate being paid in cash is accurate. Bubbles eventually always burst.

China's property market is beginning a collapse that will hit the banking system, Kenneth Rogoff of Harvard University told Bloomberg Television.

Property transactions have dropped and prices are stagnating in the wake of steps in recent months by the central government to cool the market.

Xu Shaoshi, minister of land and resources, said at the weekend that he expected prices to start falling within a few months.

"You're starting to see that collapse in property and it's going to hit the banking system," Rogoff, a former chief economist at the International Monetary Fund, told the agency.

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China property market 'more than [just] a bubble problem'

Despite previous talk about how this market could only go up (something that everyone in the US also used to hear) reality is starting to sneak in to the discussion. A collapse would be ugly in so many ways.

The problems in China’s housing market are more severe than those in the US before the financial crisis because they combine a potential bubble with the risk of social discontent, according to an adviser to the Chinese central bank.

Li Daokui, a professor at Tsinghua University and a member of the Chinese central bank’s monetary policy committee, said recent government measures to cool the property market needed to be part of a long-term push to bring high housing prices under control.

He added that there were still signs that the economy was overheating and recommended modest increases in interest rates and the level of the currency.

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Is the US a consequence-free society?

Whether Bush or Obama, the end result is very much the same. Billions upon billions were wiped out yet somehow nobody is in jail. One year after the Lehman failure and three after the subprime bubble burst, no executives have been charged. Talking with schoolchildren about responsibility is great but actions would be much better. Asking those involved in the crisis to work through the crisis sounds like wishful thinking. CNBC on the "one year since Lehman" questions:

One year after the collapse of Lehman, the bailout of AIG, and the near-implosion of the U.S. financial system, not a single Wall Street CEO has been called to account by criminal authorities. Some are starting to ask why.

"Investors expect to see the feds prosecuting top executives who committed securities fraud and misled investors," said New York attorney Jacob Zamansky, who represents investors in various claims against Wall Street firms.

And from CNNMoney, what has happened since the real estate bubble popped.

Three years after the housing bubble popped, federal prosecutors have yet to bring a case against the executives whose firms took part in some of the worst excesses of the subprime mortgage market.

It's not like there's a shortage of abuses to investigate. The landscape is littered with the wreckage of financial institutions that crashed under the weight of bad loans, costing shareholders and taxpayers billions of dollars.

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Commercial real estate hit hard in first half

In addition to the continuing problems in housing, this can't be good for anyone.

U.S. commercial real estate market values fell by more than 17 percent in the first half of the year, outstripping their decline for all of 2008, according to the Investment Property Databank (IPD).

Last year, values fell 12.2 percent, according to the report released Friday.

U.S. commercial real estate values in the first half of 2009 fell more steeply than UK values, said IPD, which analyzes commercial real estate data in global major markets.

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Property bubble building in China

So far during this global recession, Beijing has moved quickly to pump billions into the economy to keep it flowing. Their rescue plan was focused on modifying the export based economy into an inward looking economy while the global recession passes. To a large degree it's worked. Exports are down, obviously, but the government has managed to keep growth at a relatively high level though maybe not as high as required to keep up with the always heavy influx of new workers. Their own stimulus may be running out of gas and it's highly probably they will need to act again because it's wishful thinking to believe Western consumers will come back in the near term. China has the money to invest internally but still, it's a stress and a radical change from the export bubble economy.

With that background, now China may be looking at yet another bubble. A real estate bubble which of course, means problems for banks as well. Facing one bubble is challenging enough but another?

Wei Jianing, a senior researcher at the State Council Development & Research Centre, was quoted as saying that nearly half of China's newly created liquidity has been circulating in the financial system instead of flowing into the real economy to support growth, thus pushing up asset prices.

"There have already appeared some new early indications of asset price bubbles in China," Wei was quoted as telling a conference.

The newspaper also quoted Cheng Siwei, an influential former Chinese lawmaker, as saying that about 2.4 trillion yuan ($351 billion) of new lending in the first quarter of this year was used for investment purposes, including stock and property investment.

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Commercial real estate on precipice

Let's hope Geithner's stress tests took this into consideration along with the credit card defaults and the rapidly increasing housing foreclosure rates. If history is a guide, then all of this was probably negotiated out of the tests because real world problems have consistently been ignored or undervalued during this recession. The next banking meltdown?

Delinquency rates and defaults on office and retail buildings and hotels have more than doubled in just six months. For apartments and industrial buildings, the rates have increased more than 80 percent, according to Reis Inc.

While homeowners are defaulting at almost four times the rate of commercial landlords, the sudden spike in late payments has many industry insiders worried about the collateral threat to the economy and financial system. Nearly $73 billion worth of commercial real estate loans are in some level of financial distress, according to Real Capital Analytics.

The risk to the economy is unknown, but likely underestimated in the government's stress test of 19 major banks. The results released last week projected that should the recession worsen, the losses from commercial real estate loans could hit $53 billion, or 8.5 percent of their overall loan losses over the next two years.

"Likely underestimated." Shocking. In other words the stress tests were part of yet another big lie. Nobody likes being lied to repeatedly. Especially when the lie involves giving a free ride to the overpaid scam artists from Wall Street. Geithner is obviously never going to change from siding with Wall Street over the American public so the Paulson plan will continue as long as he sticks around. Read the rest of this post...

Bad news continues with US housing report

But sure, let's allow the GOP to dictate the stimulus debate since they did such a heckuva job getting us here in the first place. Even today, the GOP is unable to admit they blew it. CNNMoney:

The report, from Zillow.com, a real estate Web site, revealed that with foreclosures soaring, nearly 20% of the nation's home sales in 2008 were of bank-repossessed properties. Another 11% were short sales, in which homeowners owed more in mortgage debt than their homes were worth.

Madera, Calif., had the highest percentage of these distressed sales: 54.6% of all transactions there were foreclosed homes, and another 3.4% were short sales.

In Merced, Calif., 53.4% of sales were foreclosures and 4.8% were short sales. In nearby Stockton, 51.1% were foreclosures and 5.4% were short sales.

"As more markets turn down and markets that were already down go deeper, the pace at which value is being erased from the U.S. housing stock is rapidly increasing," said Stan Humphries, Zillow's vice president in charge of data and analytics.

"More value [was] wiped out in the fourth quarter of 2008 than was eliminated in all of 2007," he said.

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Real estate market even worse off?

There continue to be too many surprises and too many new problems. Until the dust settles for at least a quarter, things will only get worse.

Housing might be in worse shape than we think.

There is probably even more excess housing inventory gumming up the market than current statistics indicate, thanks to a wave of foreclosures that has yet to hit the market.

The problem: Many foreclosed homes and other distressed properties that are now owned by banks have yet to be listed for sale. The volume of this so-called 'ghost inventory' could be substantial enough to depress already steeply falling prices when it does go on the market.

"That's not good news," said Pat Newport, an analyst with IHS Global Insight. "[Excess] inventory is the biggest problem in housing these days, and it leads to lower housing prices, which leads to more foreclosures."

RealtyTrac, the online marketer of foreclosed properties, recently discovered that it has far more foreclosed properties listed in its database, which the company compiles using courthouse records, than there are listed in the multiple listing services (MLS) maintained by real estate agents.

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Commercial real estate pointing towards crisis

How many more shoes are there still to drop? The commercial real estate market was quite similar to private real estate except the numbers are much larger and payment terms much shorter. Who wants to bet their bailout will be easier than the bailout for homeowners?

Hotels in Tucson, Ariz., and Hilton Head, S.C., also are about to default on their mortgages.

That pace is expected to quicken. The number of late payments and defaults will double, if not triple, by the end of next year, according to analysts from Fitch Ratings Ltd., which evaluates companies' credit.

"We're probably in the first inning of the commercial mortgage problem," said Scott Tross, a real estate lawyer with Herrick Feinstein in New Jersey.

That's bad news for more than just property owners. When businesses go dark, employees lose jobs. Towns lose tax revenue. School budgets and social services feel the pinch.

Companies have survived plenty of downturns, but economists see this one playing out like never before. In the past, when businesses hit rough patches, owners negotiated with banks or refinanced their loans.

But many banks no longer hold the loans they made. Over the past decade, banks have increasingly bundled mortgages and sold them to investors. Pension funds, insurance companies, and hedge funds bought the seemingly safe securities and are now bracing for losses that could ripple through the financial system.

"It's a toxic drug and nobody knows how bad it's going to be," said Paul Miller, an analyst with Friedman, Billings, Ramsey, who was among the first to sound alarm bells in the residential market.

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Whistleblower claims UBS overcharged real estate funds

Phil Gramm's company makes the news in a not-so-good way yet again. Via MarketWatch:

Swiss bank UBS has been accused by a former employee of charging inflated fees for a real estate fund that it ran, according to a report published Monday. Bloomberg said that Richard Trusz, previously managing director at UBS Realty Investors LLC, said in a court filing that he argued with his bosses about returning the fees. Trusz is suing UBS for wrongful termination under Connecticut's so-called whistleblower law. The lawsuit said UBS Trumbull Property Fund, a private real estate investment trust, inflated property valuations by as much as $100 million in late 2007 and early 2008. Higher valuations on the underlying properties would increase the fees that UBS could charge its clients -- the fund charges 0.6% to just under 1% of assets, said Bloomberg. UBS denied the charges, reported Bloomberg.

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Home values decline for 7 straight quarters

The Republican policies speak for themselves, again.

Home values in the United States posted their seventh consecutive quarterly decline, with nearly one-third of Americans who sold in the past year losing money, real estate website Zillow.com said Wednesday.

Home values fell 9.7 percent year-over-year in the third quarter to a Zillow Home Value Index of $202,966, according to the third quarter Zillow Real Estate Market Reports, which encompass 163 metropolitan areas.

Home values have dropped a total 12.8 percent since the market peaked in 2006.

Year-over-year declines in the second quarter were 8.8 percent, indicating that price drops continued to accelerate in the third quarter, the reports showed.

The continued declines in value are causing more homeowners to sell their homes for less than the original purchase price.

Over the past 12 months, 30.2 percent of homes sold were sold for a loss, up from 23.7 percent at the end of the second quarter.

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JPMorgan temporarily stops foreclsures

Are they being nice or just plain practical?

JPMorgan Chase the nation's largest bank and one of its biggest mortgage lenders, temporarily halted foreclosures Friday and offered to renegotiate a swathe of mortgages.

The global credit crisis, which began with subprime mortgages, increasingly appears to be affecting a wider range of consumer loans and, according to a report published by First American CoreLogic Friday, nearly one in five U.S. mortgage borrowers now owes more on the loan than their home is worth.

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Q3 foreclosure filings way up

Just imagine what will happen when the unemployment rate increases. AP:

The number of homeowners ensnared in the foreclosure crisis grew by more than 70 percent in the third quarter of this year compared with the same period in 2007, according to data released Thursday.

Nationwide, nearly 766,000 homes received at least one foreclosure-related notice from July through September, up 71 percent from a year earlier, said foreclosure listing service RealtyTrac Inc.

By the end of the year, RealtyTrac expects more than a million bank-owned properties to have piled up on the market, representing around a third of all properties for sale in the U.S.

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