Foreigners with bucks snap up bargains as land hits cyclic lows
A MorganChase memo pushes cheating but the cycle turns regardless
We trim and append six 2008 articles: (1) “Chase mortgage memo pushes 'Cheats & Tricks': The bank says it never backed the strategies, which detail how to get an iffy loan approved” by Jeff Manning, the Oregonian, March 27; (2) “Snapping up US homes: Overseas investors set to pounce on troubled markets, seeking bargains” by Lew Sichelman, CBS MarketWatch, April 10; (3) “Housing starts plunge to a 17-year low: Pace of building new homes down 36.5% on year-over-year basis” by Greg Robb, MarketWatch, April 16; (4) “Biofuels Worsening Hunger and Global Warming--So Yank the Subsidies!” by Kimberly Ann Elliott, Center for Global Development, posted April 14; (5) “Existing home sales fall 2% March; prices tumble” by Stephanie Armour, USA Today; and (6) “New-home sales sink 8.5% to 17-year low: Despite huge price declines, inventory on market rises to 27-year high” by Rex Nutting, MarketWatch, April 24.
by Jeffery J. Smith, April 2008The media would have you believe three falsehoods. One, tricky lenders caused the fall in housing prices. Two, it’s housing prices falling when actually it’s the price of land, i.e., locations. And three, there is no land-price cycle, whereas the fall in prices is part of a pattern now centuries old and at most, the subprime crisis was a mere catalyst. It’s hard to escape the message you hear on the radio or read in a newspaper unless you turn to sites like this.
Manning: A memo from JPMorgan Chase provides a rare glimpse into the mentality that fueled the mortgage crisis. The memo's title: "Zippy Cheats & Tricks." It is a primer on how to get risky mortgage loans approved by Zippy, Chase's in-house automated loan underwriting system. Just inflate the borrowers' income or otherwise falsify their loan application. During the boom, it was common for lenders and brokers to get paid more for risky subprime loans because the higher-interest loans fetched a higher price on Wall Street.
Chase, the nation's second-largest bank, originates mortgage loans itself but also operates a wholesale arm that underwrites and funds loans brought to them by a network of mortgage brokers. At the end of 2007, Chase admitted losing $1.3 billion in nonperforming mortgages.
JJS: Expect more losses to come. As banks sell foreclosed homes, savvy investors seek bargains, especially foreigners who’re doubly lucky, given the shrunken dollar augmenting their own currency's purchasing power.
Sichelman: In the past year, nearly one in five American agents has sold a home to an international client. Most purchasers come from Mexico, Great Britain, and Canada. A third of all foreign buyers hail from Europe. Deals are found in Nevada, California and Florida. There foreclosure filings are three times the national average.
Robb: Housing starts plunged in March to the lowest level in 17 years (1991 March). Compared with a year ago March, starts were down 36.5% and building permits 40.9%. The consumer price index rose 0.3% in March, for a 3.7% annualized rate.
JJS: These data (above and below) fit neatly in the land-price cycle which averages 18 years. By this time in the next 18-year cycle, given present inflation, prices would have doubled. Costly food both at home and abroad has spurred a major DC-based reform group to echo our call for abolishing agri-biz subsidies.
Elliott: Science magazine suggests that when land-use changes are taken into account, production of corn-based ethanol actually leads to a net increase in greenhouse gas emissions. Responding to high prices and congressional subsidies, farmers are restoring production on environmentally sensitive land that had been protected under a land conservation program. Similarly, the diversion of cropland from food to fuel will lead to even more grasslands being plowed up or forests cut down to meet both the growing demand for ethanol and food. One study estimates that, over a 30-year horizon, corn-based ethanol doubles the level of greenhouse gas emissions relative to gasoline. Continuing to subsidize and promote the use of food crops for fuel is simply unconscionable.
JJS: Those subsidies also inflate farmland prices, putting farms out of reach of young farmers and exaggerating the boom/bust cycle.
Armour: Sales of existing single-family homes and condos dropped 2% in March from February and remain 19% below the level of March last year. The median price of an existing home sank 7.7% to $200,700 from 2007 March. That was the second-biggest year-over-year price decline following a record 8.4% drop in February. The records go back to 1999.
Nutting: Sales of new homes are down 36.6% compared with a year ago and are down 62% from the peak in 2007 July. The figures overstate the number of sales because they don't account for canceled sales, which have ballooned. The supply of homes on the market rose to 11 months, the most in 27 years. Median sales prices for new-homes have fallen 13.3% in the past year to $227,600, the biggest decline in 38 years. Average sales prices are down 11.3% to $292,200, the biggest drop since the record book begins in 1963.
JJS: You ain’t seen nothing yet. If you want an unbeatable bargain, wait another year or more. In some regions, prices will fall by 50%, to half of their peak back in 2006.
Jeffery J. Smith runs the Forum on Geonomics.
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