The Unconditional Blog

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Archive for the ‘Buying / Selling a home’ Category

8

Hold or Fold – a single example of the madness of the US housing market

Posted on: October 9th, 2009 | Filed in Buying / Selling a home, International, Money Matters

istock_000005422577xsmallImagine listening to talkback radio purely on the subject of real estate – in some ways this is what a recent podcast episode of The Real Estate Guys felt like – as they provided advice to a questioner who was severely “underwater“.

For reference The Real Estate Guys radio show is a US syndicated programme which through the marvels of iTunes you can listen to via podcasting wherever and whenever you like. It is a weekly show on all things to do with property, primarily based around real estate investing. It provides some great insight, discussion and ideas – thoroughly recommend!

Anyway the question the  team were challenged with on this past week’s show “Ask the Real Estate Guys” was as they highlighted, not atypical of many properties in the US.

Mr & Mrs A had bought an investment property a couple of years ago in “an up and coming” satellite town of Merced, California. They were employed earning a reasonable salary and owned their family home with a good degree of  equity presumably not in Merced. This investment property had presumably been an opportunistic purchase to support their retirement income.

The investment property cost them US$198,000 and they bought it with a $190,000 mortgage. It has been rented out, however the rent falls short of the mortgage payments by US$400 per month – Ok’ish when the depreciation is taken into consideration – right?

NO ….Merced is unfortunately as described by Business Week as “Ghost Town”, USA and the property is now worth around $110,000. As the Business Week article states the median price in Merced in 2007 was US$230,440 and in 2008 it had fallen by 38%  to just US$144,000.

So the question asked by Mr & Mrs A to the Real Estate Guys was “what should they do?” – hold or fold. Stick with this devalued investment and the hope that in time it may be worth more than they paid for it, or foreclose and live with the repercussions on their credit score (and let the lender take the hit – this is California after all!).

The team provided guidance for the alternatives.

HOLD and based on 4% annual appreciation after 18 years and a US$4,800 per annum loss, then the net proceeds of sale in 2027 might just pay off the mortgage!

or.. try and finance someone into the house based on a sale and lease back deal based on the good mortgage that the owners had

or.. try and negotiate a short sale with the lender and in so doing mitigate the negative credit impact.

Whilst the team was not there to definitively advise the owners, there was a clear view that the best option was to FOLD – foreclose on the property. Hand back the keys and the title to the property- walk away not owing  a $. All that would eventuate, would be a negative credit rating. Something that could be rectified in time (c. 5 years).

However what I thought was very telling was the comment that in the context of this issue with the bad credit rating – if ever in the future they were to be asked about it “you could always say – but that was 2008/9 – remember how bad things were in that recession – everyone was falling over!!

I find this a salutary example of the double whammy of the US housing disaster – houses that should never have been built, in areas with no demand – sold to people, who should never have taken the risk – financed by debt that was fictitious – then the debt was on-sold to people who were hoodwinked. Then when the house of cards collapses everyone runs for cover – leaving ultimately the government, and thereby by default all tax payers to pick up the pieces. Unfortunately the ripples from this debacle have washed up on most shores of the world and ultimately we all end up paying.

2

New perspective on the NZ property market

Posted on: September 25th, 2009 | Filed in Buying / Selling a home

I am a firm believer that a picture or chart is far better at explaining trends and activity than any spreadsheet of data. It was this thinking that lead me to put together this unusual pictorial representation of the NZ property market shown below:

NZ residential property market 1993 - 2009 sales & median pricing

The chart tracks annualised residential property sales along the horizontal axis matched to median house prices on the vertical axis. The data points represents the track of monthly intersection of these two metrics to produce this interesting snake!

The chart very clearly shows the distinct difference between the NZ residential market during the 1990’s as compared to this decade – the volatility of sales volumes and median prices is so significant to see. Equally the scale of volume decline between 2007 and 2009 represents more than twice the movement than anytime prior to 2002.

Of equal note is the current head of the “snake” as it heads upwards indicating recent price strengthening as volume sales gradually pull back from the lows at the start of this year, however they currently represent a sales level still on a 12 month moving average basis below the start of the data in 1993 and the lowest point of the fall in the first few years of this decade.

By way of a comparison the same chart of median price to volume sales for the US is seen here below. I am grateful to the research division of the National Association of Realtors in the US who presented this data and in so doing prompted me to create just such a chart for the NZ market.

US residential property market - 1993 to 2009 average price & sales volumes

12

Mortgagee sales – far from dark clouds on the NZ property market

Posted on: September 23rd, 2009 | Filed in Buying / Selling a home

Whilst the statistic released by Terralink on mortgagee sales is bleak news for those at the sharp end of loosing their homes, the NZ picture is a far different picture from that experienced in the US – the home of foreclosures!

Terralink reported that in the month of June; 289 registered sales of land and property were as a result of a finance company or bank selling the property following the borrower defaulting on the loan agreement. This is the highest single month ever and now represents just under 5% of all homes sold in the month. However when compared to the the US where the proportion of all homes sold that have been foreclosed (mortgagee sales) over the past year have been over 40%, NZ is suffering nothing like the same fall out.

In the US the foreclosure problem has been the catalyst of the collapse of property prices which is still running at close to 20% year on year decline, and currently around 30% lower than the peak of the market over 2 years ago. Compare that to NZ where the current national property price is now less than 3% below below the peak of October 2007.

In the US the property market has got trapped over the past 2 years in a doom loop scenario, a situation that they are only just getting out of.

foreclosure-doom-loop-usa

The flood of foreclosed houses coming onto the market as prices have fallen leaving homeowners financially underwater had in itself further depressed prices leading to more homeowners defaulting.

Compare this to NZ where firstly the scale of mortgagee sales is far lower and therefore consequentially has less impact on the overall market stock of properties for sale. Additionally there have been enough bargain hunters to ensure mortgagee sales have moved through the market efficiently without flooding the market and consequentially further depressing prices.

nz-mortgagee-cycle

This “natural clearing” of the mortgagee market can be well represented in the chart below which tracks mortgagee property listings on the website over the past 33 months and reflects the rise in early 2008 with a tailing off through 2009 to date.

NZ mortgagee property listings to Sep 2009 - realestate.co.nz

7

Where is the NZ Property Market heading in 2010?

Posted on: September 21st, 2009 | Filed in Buying / Selling a home, Other interesting reads:

I was invited to participate in the American Chamber of Commerce presentation event on “How to ensure business success in 2010” today with co-presenters Shamubeel Eaqub from the NZIER, Lindy Shuttleworth from M&C Saatchi Retail and Grant Osborne from First Rate.

The title for the session on property was “Where is the NZ property market heading; commercial and residential – lessons from lead indicators”. The presentation slide show is viewable below:

The key pointers from the presentation would be best be summarised as follows:

Historically the key indicators as to the property market lag market activity anywhere up to 4 months after decision making has occured – the web now provides far more equivalent “real time” information – supply and demand data is within 30 days

  1. Property prices as measured by median price have seen recent rebounds – currently 5% up on a year ago (August)
  2. Based on inflation adjusted prices the current median price represents at worst a 7% decline from mid 2007 prices
  3. Sales volumes are returning, however they still represent historical lows especially when assessed against the total number of dwellings
  4. Current sales volumes would have to increase by a further 50% to return to the long term (20 yr) average of sales based on the % of all dwellings being sold per year (6.2%)
  5. The supply side of the market is beginning to respond to the increased market activity – early indication for September show a significant rise from August (in line with seasonal pick up)
  6. Inventory levels still weak in major metropolitan areas – nationally 33 weeks of inventory
  7. Property searching at all time high – the demand indicator of property website traffic is recording unseasonal highs as buyers actively analyse the market
  8. New property listings show as yet no inflated expectations of price increases

Taking all of these indicators into account and then add some more macro economic indicators and trends and you have some idea of the future of the property market.

A very key issue of the shortage of new properties being built; added to which is the constraints on building contractors as tighter regulations pervades the industry. A further issue is another potential exodus of builders to Australia as that country begins to address an equally large housing shortage. All of these factors point to property prices edging upwards over the next year or two – not a bubble, but enough demand exceeding supply to drive up prices as the economy gets into gear.

I am indebted to Tony Alexander for his insight this week into the very real impact of new build market and the potential trade shortage.

4

Ultimate lifestyle resort in the Bay of Islands

Posted on: September 20th, 2009 | Filed in Architecture & Construction, Buying / Selling a home

eagles-nestThis has to be one of New Zealand’s premier private resort retreats – Eagles Nest; and it’s for sale!

I try to avoid using the blog to showcase property, but sometime I feel that a property deserves the attention. This is just such a property. A property that can without question be called “one in a million”. A property NZ can be proud of – a great export earner as the majority of guest I suspect would be from overseas, many experiencing NZ for the first time – what an experience!

You will need more than a lotto win to secure this resort which comprises 5 separate villas. The property is nestled high above Russell and has some of the most spectacular views across the beautiful bays and inlets that make up the Bay of Islands.

There are not many times a property like this comes up for sale and to have it featured on the website is kind of special. The task of selling it will not be easy for the team at Browns Sotheby’s but with the significant international traffic to the website from the US, UK and Australia the property is sure to recieve extensive coverage.

7

Australian housing market boosted by incentive scheme

Posted on: September 19th, 2009 | Filed in Buying / Selling a home, International

australian-homes-for-saleAustralian homebuyers – specifically first time home buyers have leapt on the incentive to get into their first home.

In the 10 months to the end of July more than 137,000 houses were purchased aided by the combintaion of both state and feral support with an incentive of between A$14,000 and A$21,000 – that would equate to a Federal funding of in excess of A$2.4bn.

There is no doubt that this incentive has underpinned the property market on the other side of the Tasman where sales were reported last week as being up 32% in a year. The June quarter saw 130,000 sales.

What is really interesting is the Australian perspective on this bouyant property market stimulated by this government stimulus package – this is the quote from the Housing Minister Tanya Plibersek:

“A strong housing market is critical for underpinning confidence and supporting jobs in the Australian economy as we battle the worst global recession in 75 years.”

A somewhat different perspective from that expressed by the Reserve Bank Governor here in NZ.

0

Tracking mortgagee property listings

Posted on: September 7th, 2009 | Filed in Buying / Selling a home

The latest set of data on the property market shows what have consistently been called the “green shoots” of a recovery with stronger sales as reported by Barfoot & Thompson last week and QV today.

However despite these indicators there is still a flow of properties coming onto the market as a consequence of repossessions as the fall out from the recession and growing unemployment.

The recorded sales of mortgagee properties as measured and tracked by Terralink International and reported on Zoodle shows that the peak has yet to be reached with 289 sales in the month of June of this year, up 195% on a year ago.

Mortgagee property listings have been tracked now on the site over the past 18 months and as can be seen from the chart below the peak of the inventory levels would be seen to be behind us. As of today there are just over 300 property listings (excluding sections) on the market being marketed as mortgagee auctions or mortgagee tenders. The peak of the market over the past 18 months has topped over 400 such listings, with as recently as May of this year seeing this peak.

Mortgagee listings realestate.co.nz

Measuring the number of mortgagee properties actively being marketed at any one time provides one view, however given the urgent need to clear mortgagee property as a function of the lenders wishing to clear the debt liability, the number of new listings coming onto the market does provide a clearer lead-indicator of the health of this segment of the market.

The chart below tracks the number of new mortgagee listings added to the website by month since the beginning of 2007 – measured as a % of all new listings.

New listings of mortgagee properties added each month sicne Jan 2007 - realestate.co.nz

As can be seen the flow onto the market continues to rise and given the erratic movement of the past 2 months it is not clear that a peak has been reached as yet. Having said that the fact is that the number of mortgagee properties listed each month still represents less than 2.5% of all new listings or put another way less than 1 property in every 40 is a mortgagee sale.

18

Newspapers big losers as property searchers stampede online

Posted on: August 25th, 2009 | Filed in Buying / Selling a home, Online marketing, Website searching

Each year around this time there is heated anticipation for the release of the annual Nielsen Real Estate Market Report. This comprehensive survey of property buyers and sellers has become a seminal guidebook to the trends in real estate as it has been undertaken in each of the past 4 years.

The survey (which is undertaken through an online survey) covers many aspects of consumer behaviour, attitudes and awareness of the industry and each year new insights and critical trends emerge.

This year one chart from the amongst one hundred pages of the report leaped out and said in a confident and striking manner – LOOK AT ME!

A total of 1,206 people were asked the question:

Thinking about the different media and other things that you consult for the purpose of researching real estate, how useful do you perceive the following?

The respondents were shown a list of 14 sources of real estate information – everything from TV and real estate office window displays to magazines, newspapers and the web, in all their different forms. The respondents were then asked to rate each by how useful they though each was. The chart below compares the 2 major competing media – newspapers and specialist real estate websites.

Nielsen Online real estate market report 2009 - usefulness of media

The results are staggering with 95% of people saying that specialist real estate websites were “useful or very useful” as compared to just 49% for newspapers – taking the judgement of “very useful”; less than 1 in 10 judged newspapers as “very useful”, whereas with specialist real estate websites 2 out of 3 judged them “very useful”.

Evaluating all of the 14 media options as to how many had been consulted in the past week equally startling trends emerged, comparing this year to last year.

Nielsen Online real estate market report 2009 - media consulted last week

Right up at the top of the list is specialist real estate websites; up from 69% last year to 78% this year. Other web options of company websites and search engines showed growth at 63% and 38% respectively.

However the print versions of real estate saw significant declines. Specialist magazines remain relevant although falling from 55% to just 46%. Local newspapers fell from 49% to 40% and then far behind was national / metropolitan newspapers down from 43% last year to just 31% this year – this means that now less than a third of all property researchers surveyed consulted metropolitan newspapers in the past week.

These figures are in some ways not that alarming as the rise in traffic to real estate websites has been enormous over the past few years, however despite this and despite the behaviour of buyers and sellers in using the web as the primary means of researching real estate – the real estate industry still has a love affair with printed publications, demonstrated by the colossal scale of investment of vendors money in print media, with so little relatively being placed in online media advertising of property.

I can’t help recounting a moment sitting just last month listening to a panel discussion at the Inman Connect Conference in San Francisco. I was not surprised. Nor were any of my fellow participants. One after another real estate agents shared their approach to marketing-about both marketing of themselves and of their clients’ properties. Not one of them mentioned newspapers. There are some agents in NZ who share this ethos and maybe in time we will see more; however I think the onus may need to come from property sellers to share their view on the appropriateness of online vs. offline when it comes to vendor-paid-marketing.

Update 25 September : pdf copies of these charts are downloadable here – Usefulness of different media and used in the last week.

0

Interest in residential sections on the rise

Posted on: August 18th, 2009 | Filed in Architecture & Construction, Buying / Selling a home

The news of the real estate market today seems to have centred around residential sections.

Harcourts CEO Bryan Thomson said “anecdotal feedback from around the real estate group indicated the level of buyer interest in residential sections had risen notably in recent months, in part because of a shortage of houses for sale“.

Well I can comfirm that supporting anecdotal feedback is hard facts – the statistics from the website of realestate.co.nz confirm there has been a lift in interest in residential sections. Counter to seasonal slowing of buyer interest the viewings for these sections has picked up since the beginning of April, over the past 6 weeks well over 6,000 unique visitors have been actively reviewing and researching sections.

Residential sections web traffic realestate.co.nz Aug 09

The key thing to consider in regard to sections is that almost every one of those unique visitors is reviewing the content of the listings with an serious interest as the content (unlike homes for sale) is not the most inspiring as sections are more about what the land holds for the future, than what it looks like today.

queenstown-section-aug-09One extreme exception to this rule is this amazing section I came across on the edge of Lake Wakatipu beside Queenstown, for here if you have a cool $6,000,000 you can build what could be the ultimate property in a world class location. It may only be just under 3 hectares (of course that is a staggering $2m per hectare or around $203 per square metre!) but what a location, what a view!!

0

The Housing Market Conundrum

Posted on: August 16th, 2009 | Filed in Buying / Selling a home

university-of-aucklandLast Thursday I was invited to particpate in a seminar at the University of Auckland Business School. The semniar was organised by the Property Department and featured presentations by Kieran Trass and myself as well as participative discussion from Bernard Hickey and James Young (Senior Lecturer and Director Real Estate Research Unit).

The seminar was suitably titled “The Housing Market Conundrum”. The abstracts of the presentations by Kieran and myself are detailed below as is my full online presentation.

Kieran predicts that the market hasn’t yet reached it’s ‘bottom’ and is unlikely to ‘bottom out’ until 2010 at the earliest, or it could take until as long as 2013 if interest rates rise by more than a few % p.a. in the next year or two and/or if unemployment tests the 10% level. Of course the ‘wild card’ is the positive level of net migration which could reach as high as 30,000 per annum within the next 2 years, and if so, this would lead to a rapid rebound in property prices. After a long-running property market boom, all indications are that New Zealand is facing at least half a decade of slow or declining values. This trend is mirrored in most countries across the globe. In addition to his views about the current housing market and future predictions, he will provide an update of where the property market is cyclically now and why, based on his methodology for assessing the property cycles progression.

Alistair argues that property is more than a financial instrument and the expectation that property demand and consequentially property prices are directly related to affordability and yield performance metric are too simplistic. The analysis of the current comprehensive key indicators of the NZ property market all point to a stabilisation – the extremes of fluctuations witnessed in paralleled markets of the UK and US are not the trend indictors of the market for NZ. Whilst there is no such thing as absolute certainty in predicting property markets the future looks brighter – however it is still too early to put on those shades just yet!

The summation of the presentation is based around the greater accessibility of rich data on the market. The key components of which are highlighting a steady market – one far from being bouyant or on the edge of a further dive. The judgement of Bernard Hickey was that although he would wish to see the forecast of Kieran Trass come true his view with another steep dive in prices of the order of 10%, the more likley sceanrio is that the market will sustain a period which will be steady and pretty unexciting!

By way of biography here are the details of the 3 speakers:

Kieran Trass has worked in property for two decades as an investor, financier and advisor. He runs his own property investment group of companies, Hybrid Group, specialising in residential real estate investment. Kieran was a founding committee member of the Auckland Property Investors’ Association in 1994 and is a past secretary of the New Zealand Property Investors’ Federation. Commencing his career in the finance industry in 1981 Kieran has worked for many financial institutions including Citibank N.A., Westpac (in New Zealand and Australia), Nathan Finance and UDC Finance. He has spent some years specifically studying the property market and has made some startling observations on the predictability of the real estate cycle. Kieran is the author of ‘Grow Rich with the Property Cycle’, ‘An Insider’s Guide to Real Estate Hot Spots’ and the newly published book ‘The Housing Bubble’.

Bernard Hickey is a graduate of Massey University and worked as a financial journalist with Reuters in Wellington, Canberra, Sydney, London and Singapore. Bernard returned to New Zealand in 2004 after 10 years abroad. He then edited the Dominion Post’s Business section and ran online businesses for Telecom and Fairfax. In January 2008 he assumed the role of the managing editor of interest.co.nz, a free and independent website aimed at borrowers and investors. Bernard is a prominent commentator on radio, television and in newspapers on a range of economic and financial issues, including interest rates, monetary policy, financial markets and fiscal policy.

James Young has an active research agenda with interests in housing markets, real estate development, real estate finance, and behavioural real estate. His current research interests are in the application of game theory to real estate development, including real options. He has published in several refereed academic journals and presented many papers at academic conferences. James has an extensive background in international real estate development consulting and policy analysis, running his own consulting firm since 1995. He has worked in an advisory capacity to several real estate industry bodies and government agencies in areas such as affordable housing, urban regeneration, and industrial development. He holds a B.A. (Hons.) from the University of Arkansas and a MBA from Michigan State University.

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