Wednesday, November 30, 2011

Property Market Turning Sour in China

Bloomberg posted an article today about Chinese apartment/home buyers who are demonstrating against their landlords/developers as prices are falling:
On Nov. 19, Deng faced off a ring of security guards three rows deep wearing camouflage and carrying shields as he joined more than 100 homeowners rallying in front of the development’s sales office. His transformation from newlywed to street protester came after China Vanke Co. slashed prices for future buyers at the Qinglinjing complex, erasing about 20 percent of the value of his three-bedroom unit overnight.
The story goes on to explain how Deng's parents contributed their savings and Deng's boss provided a loan so that he could meet the 30% minimum down payment on the apartment.  He was only able to contribute 4% of the down payment himself.

The article also tells the story of Zuo Hangxai,who "became a home owner after losing patience waiting for years for prices to come down. She recalled the frenzied scene when she picked her apartment in the same development as agents crowded around urging her to buy and then clapped and congratulated when she nodded agreement."

Evil Developers and Buyers Remorse
While I will contend that even in Zuo Hangxai's case, the people now protesting were willing buyers, the Chinese market has experienced a super-bubble which was aided by the developers.  Developers near major cities had worked with the government to remove people from their current homes in order to demolish them and build massive complexes.  There were many stories and videos about these cases a few years ago.  Unlike here in the US, where there's a more rigid legal process for trying to evict someone, many of the Chinese who fought back would leave their homes for work and return to a pile of rubble.

Without a home, these people become buyers, and perhaps end up buying from the companies who destroyed their homes.

On the other side, China's super bubble was largely driven by rising demand and rising home prices, which led to price appreciation and speculation to an extreme degree.  Many middle class families were priced out of even modest new homes and apartments because of the rampant speculation.  Developers were happy to build more units knowing they could get a great price, and incremental buyers were happy to pay because they expected to flip the unit at a substantial profit.

As we experienced here in the US, eventually the music stops and some are left without a chair.

For the US, housing prices topped out sometime in mid-2006.  More than five years later, our housing market still hasn't recovered.  Anyone who bought near the top probably felt like demonstrating back in '07 and '08.  I would suppose the reality of the situation has sunk in at this point - those who bought at the top, for whatever reason, may never recoup their "investment".

For Deng and Zuo, I think the worst is yet to come.  The same Bloomberg article says that the home ownership rate in China is 87.8% compared to 66.3% in the US.  That is a staggering difference and is very bad news for current home owners.

In the US, that means as prices fall, 33.7% of the population could conceivably enter the market and buy a home.  In China, that number is 12.2%.  Roughly one in ten people are not homeowners!  Who do the other nine of ten sell their home to?

I don't know all of the socio-economic reasons behind such a high rate of homeownership, but the article does give a few hints:
Deng had moved to Shanghai three years earlier from a small city in the north to be closer to a girl he met in college. When talk turned to marriage, his girlfriend insisted they buy an apartment first, he said. “At my age, I should get married and I should have my own home whether or not I can afford it so that I can be the same as my classmates,” Deng said.
#1 - China's One Child Policy which led to infrantricide towards female newborns, has led to a massive imbalance in the sexes.  If you are a young adult male in China, looking for a wife, you've got some darn stiff competition and need to prove your worth (buy a home).  See also - China: Too Many Men.
#2 - China's burgeoning middle class also comes with "Keeping up with the Joneses" syndrome we know well in the US.  Deng feels like he should own a home whether or not he can afford it so that he can fit in and also get a wife.

Financial Crisis Looming
China's centrally managed economy may be able to weather the oncoming property bust better than we could here in the US.  Bear Stearns, Lehman, and other major financial firms collapsed or nearly did because of their exposure to the US housing market and because there were at least some rules they couldn't avoid (such as marking down investments to current market prices).  The US government then took steps that were clearly anti-capitalism and maybe illegal to prevent the situation from getting worse.

In China, I would suspect the government will be much quicker to support firms and the economy and can more easily re-write the rules.  If the Industrial and Commercial Bank of China found one day it was insolvent, the government could more easily make direct loans, rework the bank's lines of credit, or restrict withdrawals.

Given what seems to be massive over-development in China, I can't imagine this ending well.

Sunday, November 20, 2011

Project - Dining Table

Mission accomplished!

I wrote back on October 30th that I was building a dining table which needed to be ready for Thanksgiving. It took right around three weeks, but today the table moved into the house and was assembled. We even ate our first meal at the table tonight!

Here she is in all her glory:

Project Plan
I held onto the different receipts from Home Depot so that I could tally up the costs.

I went to the 'dimensional lumber' section for the wood this time and picked out boards made of Douglas Fir.  The boards are more often used in framing for a house rather than the furniture inside of it, but with a good lot of sanding, they can look really good.  The total cost for all the wood was around $60.  The real difficulty was that these boards have lots of imperfections after being run through the different machines at the mill.  They often have ink stamps on them too.  Since I wanted to stain the project rather than paint it, this required extra effort.  The various nicks and other imperfections that I couldn't  sand out generally added to the 'character' of the table.

I used Minwax Polyshades, which is a stain and polyurethane finish all in one.  The color we chose was Mission Oak.

For assembly, I used my Kreg Jig for all joints.  Again, the Kreg Jig was really what inspired me to get going in creating pieces out of wood as it is a simple but good looking way to join wood.

Including wood, screws, stain, wiping rags, sand paper, rubber gloves, brushes, steel wool, and various other items, the total bill came out to just under $150.  I'm really pleased to have a great looking dining table for that price.

Quick Step-by-Step
After buying all the wood, I took it home and began making all the requisite cuts.
All the boards

I was so excited to get going on this project that I made a stupid mistake right away.  The table top required five long boards, but I cut six.  That screwed up another piece I needed to cut, because now I had already divided that board into one too long piece and one too short piece.  So, I had to go back to HD to buy another board.  Not terrible, but a waste of $7.
All cut up
I think the most important part early on was to cut the legs correctly.  If you screw this up, even slightly, you won't know how the table sits until close to the end.  This I found out the hard way.  I really focused on making sure the base of the boards on the legs were even on the bottom, but I left the tops with some variation.  The best thing you can do is to stack several boards and cut them at the same time. 

After all the cuts were made, I drilled endless holes with my Kreg Jig.  Knowing this project was going to be heavy itself and having to support weight, I erred on the side of drilling too many holes for extra joints.  As you are preparing to drill the holes, you need to picture the final project and decide which boards will go where, which side will face up/down, etc.  I really enjoyed this part - deciding which were my favorites and assembling them in my head.  I think the smarter move would have been to fully plan this out before I started making cuts.  As I mentioned above, when using wood that isn't S4S (squared 4-sides - meaning it is completely smooth and looks good on all sides), you'll find blemishes that will force you to maybe hide an ugly side of a board. 

I assembled the long boards into the table top and added a perpendicular board at the end
Table top almost done
The one breadboard (the perpendicular board) pictured above was perfectly flush, but the other side had one board that was short by maybe 3/8".  I then had to take my circular saw and cut off 3/8" from the assembled table top to ensure the other breadboard would attach and be flush.  This threw off a lot of the dimensions of the table, so I now had to make adjustments to the plan.

I next assembled the two legs and the frame separately.  The tabletop itself was already heavy and I began to realize how much of a pain it would be to put this all together myself.

Next came seemingly endless sanding.  I'd read online, and now recommend myself, that you either sand before you begin assembling, or sand once you have a few boards together.  By doing so, you'll make it a lot easier on yourself if you only have to maneuver a single or a few boards rather than an entire tabletop.  I used a hand sander as well as an electric finishing sander.  Sanding by hand was strenuous, but worked a lot better than the electric sander.  I started with 60 grit paper to sand off the real rough spots or ink markings.  Then I moved down to 120 followed by 220 grit paper to get the project ready for staining.
Frame laid out
I then finished assembling the pieces to leave me with a table top + frame and two legs.  The legs wouldn't be attached until I was done and the project was in the house.

This was my first attempt at staining and it could have gone a lot more smoothly.  I watched a few videos on YouTube about staining and decided I would use a rag with stain to apply the stain to the wood.  Staining is different from painting and I wish I understood that better when I started.  Your job is to apply the stain to the wood, let it soak into the pores, then wipe away the excess.  I used a cloth soaked in stain to apply the stain, which is a fine method, but what I didn't do was wipe off the excess as soon as I should have.  This led to some splotching.  For my next project, I will apply with a brush and use the cloth for wiping.

After the first layer of stain was on, the project needed to sit for 6 hours.  Following that, I sanded the entire project again using 000 steel wool.  This helps even out the stain and opens the pores up again to accept more stain.  I next gave the project a second coat.

The Minwax can says that two coats are recommended.  If you want to make the project darker, you can add subsequent coats after you hit it with the 000 steel wool, which I did.
Final stain
The project was pretty much done - I thought.

Today, my brother came over and provided the other set of hands needed to move the table into the house and flip it to attach the legs / flip it back upright.

Unfortunately, once attached, the table had some wobble to it.  This was really caused by two things - 1) the top of the legs weren't 100% even and 2) I focused on making sure the table top was flat, but the underside was a bit uneven.

After a lot of passes with the level, I realized that even if the legs were 100% even, the way they attached to the tabletop could leave them still uneven.  So, I feel like I cheated, but I ended up attaching adjustable feet to the bottoms of the legs.  I knew I'd be adding something underneath in order to protect our wood floors anyway, so why not kill two birds?

With the adjustable feet attached, the table is now steady and sturdy.  We ordered sushi and everyone ate at the table.

What's Next
For Thanksgiving, the six attendees will either sit on the two red chairs we own or on folding chairs.  Soon after though, I am going to try and build four wooden chairs and a long bench to match the table. Should be fun!

Thursday, November 10, 2011

Making progress!

Ready for a final sanding, then on to staining.

Friday, November 4, 2011

Mortgage Forgiveness?

Bloomberg published an article today citing investors, funds, and economists who think principal balances should be reduced to help embattled homeowners

Greg Lippmann, of subprime shorting fame (more on him in a moment) says:
Principal reductions are necessary to help ameliorate the housing crisis. The step will also lower losses on loans underlying mortgage bonds
Who the heck is Greg Lippmann
Greg Lippmann worked for Deutsche Bank as was a key figure among those who made millions or billions by shorting subprime mortgages.  A client of his (forget the name at the moment, which is kind of the point) realized that these subprime mortgage bonds weren't worth the paper they were written on and got Deutsche Bank and others to help him position his investments to benefit from the housing bubble bursting.  Lippmann, realizing the opportunity, then brought the idea to others, including John Paulson who ended up as perhaps the face of the "brilliant" investors as he personally made billions of dollars.  I just gave you the quick summary of the book The Big Short by Michael Lewis - spoiler alert.

So Greg thinks he's got a good idea to help mortgage holders and investors in mortgage bonds, and several funds and economists agree with him.

Who would benefit and who would lose
I think the ship has long sailed on the opportunity for Washington to punish Wall Street on this.  Some of Washington's actions in 2008 and 2009 may have actually done some good - TARP being one of them - but that was in the heat of the crisis.  Laws and capitalism could be set aside to avoid a massive meltdown.  So while #OccupyWallStreet is still raging, I don't think DC has the power to force the banks to write down loans.

One major complicating factor that everyone hopefully remembers from a two years ago is that these evil bankers don't actually hold the loans themselves.  My mortgage is a great example - we used a mortgage broker who priced a loan for us based on what he saw in the market making sure he could sell the loan and make a profit for himself.  So our mortgage was originally funded by the broker's company and the investors who back it.  Within a month, as planned, they sold that loan to Chase.  Every month, we will write a check to Chase.  But chances are that Chase won't hold onto that mortgage for 30 years.  Instead, they'll likely pool our mortgage with many others and sell it to investors.  These investors could be Greg Lippmann's fund LibreMax Capital, or the California Public Employees Retirement System (CALPERS), among others.

My check then goes to Chase as the servicer, who pools all the monthly checks together, and distributes the funds to the investors such as CALPERS.

If, somehow Washington decreed that my mortgage principal should be reduced by 20%, the winner would be me, my mortgage broker and Chase would feel no effect, and CALPERS would be the loser.  This would be a transfer of wealth from CALPERS to me - probably not the intended goal.

How to select mortgages to reduce
You clearly can't reduce ALL mortgages by any amount that would be meaningful enough to solve any problems.  Washington also hasn't grown enough wherein you could reduce mortgages on a case-by-case basis.  Therefore, the program would have to be broad enough to be meaningful to the country and the economy / housing market, but have some parameters.

One would be whether you've defaulted or not.  If you've defaulted, that's a pretty good indication that you've hit rough times and could use help.  Is it because you bought your house at the top and have too much debt?  Is it because you lost your job?  Have you defaulted on a 2nd vacation home in Miami that you bought on speculation?

The government could also look at loan to value.  The difficulty here is what is the "value" part of the equation?  Is it based on the appraisal done when you purchased the house - are these appraisals of any use if they are 15 years old or if they told you your one bedroom shack was worth $2 million in 2006?  Or maybe to apply for this process you'd need to get a new appraisal.  Fun.

What would be the end benefit
Individual homeowners would have lower monthly payments and have money to save or spend (the government surely wants you to spend).  Some homes would be saved from foreclosure, which would help the housing market.

My suggestion
Leave it be.  Again, many are suffering because of the housing crisis, but I don't think the government should be getting involved in private transactions and trying to bail out those who made a bad investment.

If a homeowner was defrauded into paying too much for a home, or buying a home they couldn't afford, they should go through the courts individually.

The solution, in my mind, is time - it is going to take years for the housing market to work through the inventory of foreclosed homes which will keep prices depressed.

Tuesday, November 1, 2011

For Sale - Update

The winter months are approaching and home sale activity will decline.  I understand this better now - when it was warm, driving around and looking at houses was fun.  If I were still in the market today to buy a home, I'd be less enthusiastic.  With houses and lawns blanketed in snow, there's less to see.

I've read too that families look to move in the spring and summer so that their children can be settled and enrolled in their new school for the fall.

Our sale process has been moving slowly.  It took much longer than expected to get the listing up and we've had limited interest in seeing the house so far.

The housing market remains weak as I've detailed in other posts.  With mortgage rates low, it may be a very good time to buy.  As a seller though, your house is up against many others that have been on the market longer as well as short sales and foreclosures.

If you don't NEED to sell, maybe you shouldn't be trying to.

We are thinking about refinancing the mortgage to tap into the substantial equity.  This way, we'd have cash on hand to deal with any repairs or renovations necessary to help move the house.  As long as we can sell for a price above the new mortgage, it'd kind of be like a cash advance.