New Geography

Tag: real estate

  • A Toronto Condo Bubble?

    Toronto has experienced a virtual explosion in high rise condominium construction in recent years, especially in the downtown area. According to Bloomberg, Toronto has the largest number of high-rise condominium towers under construction in the world.

    However concerns are being expressed that the market may be saturated and that a housing bubble is developing. The Toronto Starreports that new condominium sales declined 55 percent in the first quarter of 2013, compared to last year.

    At the same time, a huge number of new condominium units is under construction in Toronto. According to The Star, 57,000 units were being built during the first quarter. The first quarter build rate is reported as the largest rate ever. For their part, builders have scaled back plans for new towers

    Who is Buying?

    In an article entitled, “Toronto Condo Investors Under Water,” the Toronto Condo Bubble|Toronto Housing Bubble website (subtitled Largest Housing Bubble Except for Vancouver of Course) asked:  “… if condo living is the way of the future, then why is it that the majority of people who buy condos never actually live in them?”

    The question was in the context of a report by Scotiabank that between 45% and 60% of Toronto condominium purchasers were investors, rather than people who actually intended to live in the housing.

    Single Family Housing in Toronto: The Holy Grail

    At the same time, The Star points to indicators that the single family housing market retains considerable strength. Part of the reason is that this most desired type of housing is made far more difficult to build as a result of provincial land-use policies (urban containment, including the Toronto "greenbelt").According to The Star, "That’s made detached homes, in particular, the coveted Holy Grail of housing."

    Despite the explosion in condominium units, Statistics Canada data indicates that 71 percent of net new occupied housing in the Toronto metropolitan area was detached between 2006 and 2011.

    These market dynamics, rising detached house prices relative to incomes and heightened speculation are predictable outcomes of urban containment (land rationing) policies.

  • Second Thoughts on the Condo Market

    Mega-builder Larry Murren, whose company (MGM Mirage) opened the “largest privately funded construction project in U.S. history” told WSJ (the Wall Street Journal Magazine) that if he had to do it all over again, he would reconsider the condo-residential component of the project. “We would have built about half of those units” at the new $8.5 billion “City Center” development.

    The less than stellar performance condominium sales in the project was reported by the Las Vegas Review Journal, which indicated that only 78 of the project’s approximately 675 condominium units have sold. MGM Mirage is not alone in this plight. The Review Journal further notes that Las Vegas has a reports a 250 month or nearly 21 year supply of unsold condominium units. This means that some of today’s unsold units could still be on the market for parents in a suburban Las Vegas house to move to when their newborn heads off to college. These numbers qualify Las Vegas for finals of the Condo Bust World Cup, against other strong competitors Miami and Dubai.

    Murren credits a mixed-use symposium as the inspiration for City Center. Murren would not be the first developer to have been smitten by over-promotion of condominium market prospects. However the balance of Center City (shopping, entertainment, hotels and casinos) appears to be doing far better than the condominium element.

    Second thoughts have been occuring to a number of additional central city condominium developers around the nation as the central city condominium market continues its meltdown. The most recent evidence comes with condo auctions in the cores of Baltimore, St. Petersburg and Boston.

    In Baltimore, Pier Homes at Harborview has scheduled an auction of new units with minimum bids discounted from 55% to 75% below list prices. This means that the minimum bid, the Baltimore Sun indicates that only half of the units (completed two years ago) have been sold.

    In St. Petersburg, units in the 36-story Signature Place condominium tower were auctioned last month, with average bid prices 50% off the previous list prices. The Boston Globe indicates that “another” condo/loft auction is to occur in that city on June 26, with minimum bid prices up to 60% off list.

    The extraordinary risk of the central city condominium market was summarized by Larry Murphy, a Las Vegas real estate analyst: “It takes two to three years to build a high-rise project, and it can’t be done in phases like a new-home subdivision. All of the units have to be built at once.” He further noted that “Most of the units are sold within the first three months of completion. After that, sales drop off dramatically.” These inherent complexities of the condominium market will not be solved by mixed use seminars.

  • Commercial Real Estate Bust of 2010

    Coming soon to a market near you: a bust in commercial real estate that will make the subprime mortgage crisis look like a picnic. The other shoe drops in 2010.

    Federal Deposit Insurance Corporation Chairman Sheila Bair told a Senate committee on October 14 that commercial real estate loan losses between now and the end of 2010 pose the most significant risk to U.S. financial institutions. Although you can’t read it online, on October 7, 2009 Wall Street Journal reporters Lingling Wei and Maurice Tamman (Eastern edition, pg. C.1, Fed Frets About Commercial Real Estate) reported on a presentation prepared by an Atlanta Fed real-estate expert who is worried “about the banking industry’s commercial real-estate exposure.”

    Since July, the Federal Reserve has been pumping billions of dollars into commercial-mortgage-backed securities (CMBS, same things as the residential-MBS I’ve written about before in this space, only for shopping malls instead of houses). To accomplish this, the Fed uses the Term Asset-Backed Securities Loan Facility or TALF program. It is one of several alphabet-soup programs the Fed is using to pass a couple of trillion dollars to the stock market through private corporations (not just regulated banking institutions). For example, between March and July 2009, Harley-Davidson Inc. and other non-banks raised $65 billion in sales of bonds backed by everything from motorcycle loans to credit card debt. The Fed made $35 billion in TALF loans to investors buying those securities, which sparked a market rally. That market rally, however, is not in the commercial real estate market – it’s in the securities market. Since its inception, TALF has put between $2 billion and $11 billion per month into the securities market.

    TALF lends money to anyone willing to buy CMBS (or student loans, car loans, etc.). The Fed reasons that, as long as banks can move loans off their books by repackaging and selling them as bonds, they will make more loans. So they justify giving money to non-banks to buy the bonds because the money will go to the banks. Get it?

    Unfortunately, as vacancy rates rise, banks are increasingly reluctant to make new commercial real estate loans. This is obviously the case since Office of Thrift Supervision deputy director Timothy Ward told Congress this week that they will be issuing guidelines on doing loan workouts. A loan work out is what industry experts call “extend and pretend” – extend the terms and pretend like they are paying you. CRE loans, furthermore, are shorter in duration than home mortgages – typically 5 years instead of 30 years. That means a lot of loans will be coming due before the economy picks up enough to fill all those offices with rent-paying businesses. The value of commercial mortgages at least 60 days behind on payments jumped sevenfold in September – to $22.4 billion – or almost 4 percent of all commercial mortgages repackaged and sold as bonds. That’s about the same as the 90 day past-due rate seen for all residential mortgages (including those not sold off by the banks) in the first quarter of 2009.

    As of October 14, 2009, the TALF balance is $43.2 billion and growing. From what we are hearing now, it may not be enough.

  • One Homeowner, Two Mortgage Holders, No Lien!

    I’ve been following this for a while and writing about it on NewGeography.com since March – not all mortgage-backed securities (MBS) are actually backed by mortgages. So when the homeowner goes into bankruptcy, there’s no way for the MBS holder to prove a lien on the house and the judge awards the bondholder bupkus. In April, a bankruptcy judge in California wrote that as many as one-third of all MBS didn’t have mortgages. No “M” in the “BS,” as I like to put it!

    Well, this story just gets better and better. It turns out that even when the MBS has an actual mortgage underneath it, the same mortgage is backing more than one security. Last week I talked to Matt Taibbi, who wrote in Rolling Stone magazine (The Great American Bubble Machine) that 58 percent of an MBS issued by Goldman Sachs had nothing but a list of zip codes where the mortgages should have been. He told me about a lawyer in Florida who has a list of cases where two MBS holders showed up at the bankruptcy proceedings, both claiming that they owned the same mortgage. You can expect to read more on that here as the story develops.

    Then it gets worse! Gretchen Morgenson reported in the New York Times on Sunday that there are about 60 million mortgages registered with the Mortgage Electronic Registration System (MERS) to keep track of who owns which loans and which MBS. Problem was that MERS, created by Fannie Mae, Freddie Mac and the mortgage industry, thought they were too good to have to register liens against land at the county level – real estate 101 for any sober realtor. The Kansas Supreme Court has now ruled that changes in mortgage ownership registered with MERS – and not registered with the local land authority – have no legal standing.

    Don’t forget – MBS are the junk that Treasury Secretary Geithner wants purchase with tax-payer dollars; and Federal Reserve Chairman Ben Bernanke committed $1.25 trillion of freshly-printed dollars to buy up out of the marketplace this year. Here’s the math made easy – the median house costs $177,000, figure an 80% mortgage, times 60 million mortgages: it looks like $8.5 trillion worth of mortgages could have no real estate underneath them! If the repo man comes knocking on your door, remember these four words: Show Me The Paper!