Markets / Economy

WSJ – Daily Shot: Goldman Sachs – Rise and Fall of New Technology – Share Price Performance 9/27

Real Estate

CNBC – Stop sugarcoating the housing market: Economist warns that buyers face increasing troubles – Diana Olick 9/26

• “From a broad view, the U.S. housing market looks very healthy. Demand is high, employment and wages are growing, and mortgage rates are low.”
• “But the nation’s housing market is assuredly unhealthy; in fact, it is increasingly mismatched with today’s buyers. While the big numbers don’t lie, they don’t tell the real truth about the affordability and availability of U.S. housing for the bulk of would-be buyers.”
• “First, several reports out this week point to both continued heat in home values as well as pushback from homebuyers. Prices remain nearly 6% higher than they were a year ago, nationally, with some local markets seeing double-digit annual price gains. Those prices are being driven by a severe lack of supply at the low end of the market, which is where the most demand exists. That means lower-priced homes are seeing bigger price gains than higher-priced homes because of the competition.”
• “At the same time, sales are falling, again, because there are too few homes on the low end, and the homes that are available are very expensive.”
• “‘It sets up a situation in which the housing market looks largely healthy from a 50,000-foot view, but on the ground, the situation is much different, especially for younger, first-time buyers and/or buyers of more modest means,’ wrote Svenja Gudell, chief economist at Zillow in a response to the latest home-price data. ‘Supply is low in general, but half of what is available to buy is priced in the top one-third of the market.'”
• “Supply on the low end is tight because during the housing crash investors large and small bought hundreds of thousands of foreclosed properties and turned them into rentals. There are currently 8 million more renter-occupied homes than there were in 2007, the peak of the housing boom, according to the U.S. Census.“
• “Investors could take the opportunity of high prices and high demand to sell these properties, but today’s high rents offer them better returns.”
• “Low supply of homes for sale might also seem like a great opportunity for the nation’s homebuilders. Yes, they went through an epic housing crash, but they have since consolidated market share and righted their balance sheets. Homebuilders are simply not building enough inexpensive houses that the market needs.”
• “Builders say they would like to build more affordable homes but cannot because the math doesn’t work. The costs of land, labor, materials and regulatory compliance are just too high. In addition, younger homebuyers want to live closer to urban areas, not in the far-out exurbs, where builder costs are far lower.”
• “‘It’s time we stopped sugarcoating the truth with this data — the simple fact is that we are severely underproducing housing in this country, relative both to basic demographics and currently high demand from buyers,’ wrote Gudell, who notes that inventory is stuck at roughly mid-1990s levels, but the country has grown by more than 60 million people since then. ‘Buying conditions, in theory, are great right now: Jobs and incomes are growing, and rock-bottom mortgage interest rates are helping keep financing costs low. What’s missing from the equation is a lack of homes actually available to buy at a price point that’s reasonable for most buyers.'”
• “The trouble is, even though the market is woefully mismatched, home prices will not come down as long as there are some buyers out there willing and able to spend more and more money for less and less house.”
• “So, what does all this mean for the economy and personal wealth? It means the renter nation will persist and fewer Americans will be able to save and grow their money in a home. It also means rents will continue to rise due to high demand, leaving more Americans with less disposable income to spend.”

China

WSJ – Chinese Developers Face Debt Reckoning After Boom – Dominique Fong 9/27

• “A wave of local-currency debt coming due next year alongside new stricter lending rules are bearing down on China’s developers and posing a risk to the country’s economy.”
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• “Meanwhile, many yuan bondholders have the option to demand early repayment starting next year and increasingly in 2019 and 2020. The scenario could force a wave of asset sales and deprive developers of cash to build new projects, leading to a further potential deterioration in their finances, credit analysts say.”
• “Developers also are likely to pay more dearly for debt after home prices slowed for three straight months this summer, save a few small cities. Last year, only about 25% of developers paid 6% or higher for their yuan bonds, according to Wind. This year the ratio is more than 33%. Credit analysts expect that to climb further.”
• “Since many loans use property as collateral, declines in value could exacerbate any chain of defaults for yuan bonds, bank loans and China’s informal, lightly-regulated lending sector, potentially infecting China’s financial system.”
• “’The wall of bonds is just one symptom of the whole problem,’ said Anne Stevenson-Yang, founder of J Capital Research.”
• “Smaller developers are particularly vulnerable because of their high debt loads, experts say. For example, the net debt of state-backed Yunnan Metropolitan Real Estate Development Co. is 57 times earnings before interest and taxes, according to research firm Granite Peak Advisory. The ratio is 37 times for Fuzhou-based commercial real-estate developer Tahoe Group Co., and more than 23 times for Shanghai-based Yango Group Co.”
• “In comparison, the leverage for all mainland-listed developers is 6.4 times, and 4 times for all Chinese companies excluding financial institutions, according to Granite Peak Advisory.”
• “Most developers have adequate liquidity if they can’t refinance debt and must repay bonds in full with cash next year, Moody’s says. But their ability to do so is weakening. Rated developers’ cash was 1.6 times short-term debt coverage, compared with 2 times last year, S&P Global Ratings says.”

South America

FT – Venezuelan politicians seek refuge abroad – John Paul Rathbone and Gideon Long 9/26

• “Exiled mayor David Smolansky says country has moved closer to a totalitarian regime.”