Foreclosed $51 Million "Billionaire"s Row" Penthouse Sells At A 30% Discount

Kola Aluko’s posh penthouse apartment in One57, one of Manhattan’s most expensive luxury towers, has finally sold after months of delays in what New York realtors agree is the most expensive residential foreclosure in city history.

The sale price - a paltry $36 million - suggests that the stress seen in the ultra-high-end real estate market in New York City has only worsened as buyers brace for a glut of new luxury buildings coming online in the coming years.

The buyer of unit 97, one of five bidders aside from the bank, wouldn’t answer questions, and his name wasn’t immediately available. Aluko purchased the building through shell companies. Recently, his assets have been seized by authorities in several countries as he’s wanted for bribing officials to receive lucrative contracts with his country’s state-owned oil company, Bloomberg reported.

Aluko bought the 6,240-square-foot (580-square-meter) residence in December 2014 for $50.9 million, according to New York City records. The sale yielded a compound annual return of about minus 11%.

And in September 2015, he took out an unusually large mortgage with an unusually short term: one year. The $35.3 million mortgage was obtained from Luxembourg-based lender Banque Havilland SA. The full payment of the loan was due one year later, according to court documents filed in connection with the foreclosure. The borrower failed to repay, and now Banque Havilland has forced a sale to recoup its funds.

“It’s probably the most-expensive foreclosure we’ve ever seen in luxury development,” said Donna Olshan, president of high-end Manhattan brokerage Olshan Realty Inc. “I don’t know of a foreclosure that’s larger than that."

WSJ reported in August that luxury condos in Billionaires’ Row have faced steep discounts as building owners have struggled to find buyers.

An analysis of condominium records shows the average discount on nine contracts signed at the Baccarat in 2016 was 22% below the peak asking prices of 2014, when the market was red hot. These include the sprawling 7,300-square-foot penthouse plus terrace that sold in June 2016 for $42.6 million, soon after the asking price was from $60 million to $54 million. Overall that amounted to a 29% price reduction.

One57 went on the market in 2011, and as of August there were still five units for sale. As we’ve previously reported, foreclosure proceedings were started in January. An auction scheduled for July was delayed after a creditor claimed Aluko owed it about $83 million for gasoline and jet fuel.
 

Long-Term Mortgage Delinquencies Seriously Under-Reported

Authored by Mike Shedlock via MishTalk.com,

Keith Jurow, a real estate analyst and author of the Capital Preservation Real Estate Report, pinged me a few days ago with his analysis that suggests long-term mortgage delinquencies are seriously under-reported.

Hi Mish,

I thought you might be interested in the important clarification I just received from my contact at the NY State Dept. of Financial Services.

A few weeks ago, I sent you the latest update (attached again) of pre-foreclosure notices sent to delinquent homeowners in NYC and LI. I had noticed that 80% were listed as delinquent for less than 60 days. I asked my contact why that percentage was so high when he had been telling me for several years that over 40% of these notices were repeat notices – sent to long-term delinquents.

His response was that for repeat notices, the mortgage servicers often provided the same information as on the original notice. For example, if a repeat notice was sent two years after the initial one, the length of delinquency was not changed from that first one. That was why a second notice where the borrower might be three years delinquent could show a delinquency of 60 days.

This clarification confirmed my belief that many – if not most – of the borrowers were now delinquent for several years.

Keith Jurow

New York Loan Delinquencies

Out of 65,523 loans, a whopping 52,218 supposedly fall into the 60-days or less delinquent bucket.

90-Day Pre-foreclosure Notices Filed with the NY Department of Financial Services

100% of those 65,523 delinquencies generated a 90-day pre-foreclosure notice.

Case closed.

Housing Bubble 2.0: Here Are The Zip Codes Where 1 In 4 Home Sales Are Flips

ATTOM Data Solutions today released its Q2 2017 U.S. Home Flipping Report which reveals that residential home flippers, the same speculative crew that nearly blew up the entire global financial system in 2008, are now making more money than ever.  In fact, in 2Q the average flipped house generated gross profits of $67,516 which is well above the $60,000 peak previously set back in 2005.

The report also shows an average gross flipping profit of $67,516 for homes flipped in the second quarter, representing a 48.4 percent return on investment (ROI) for flippers — down from 49.0 percent in the previous quarter and down from 49.6 percent in Q2 2016 to the lowest level since Q3 2015. After peaking at 51.1 percent in Q3 2016, average gross flipping ROI nationwide has decreased for three consecutive quarters.

“Home flippers are employing a number of strategies to give them an edge in the increasingly competitive environment where flipping yields are being compressed,” said Daren Blomquist, senior vice president at ATTOM Data Solutions. “Many flippers are gravitating toward lower-priced areas where discounted purchases are more readily available — often due to foreclosure or some other type of distress. Many of those lower-priced areas also have strong rental markets, giving flippers a consistent pipeline of demand from buy-and-hold investors looking for turnkey rentals.

“In markets where distressed discounts have largely dried up, flippers are showing more willingness to leverage financing when acquiring properties, often purchasing closer to full market value and then relying more heavily on price appreciation to fuel their flipping profits,” Blomquist added.

So where are flippers earning the highest returns these days?  Attom says that lower cost states like Pennsylvania, Louisiana and Ohio seem offer the most attractive returns while cities in the flipping paradise of California are only managing to generate lackluster mid-20% returns on their investment.

Homes flipped in Pennsylvania yielded the highest average gross flipping ROI nationwide in Q2 2017 (103.1 percent), followed by Louisiana (100.0 percent), Ohio (88.9 percent), New Jersey (81.7 percent), and the District of Columbia (81.2 percent).

Among 101 metropolitan statistical areas analyzed in the report, those with the highest average gross flipping ROI were Pittsburgh, Pennsylvania (146.6 percent); Baton Rouge, Louisiana (120.3 percent); Philadelphia, Pennsylvania (114.0 percent); Harrisburg, Pennsylvania (103.3 percent); and Cleveland, Ohio (101.8 percent).

Metro areas with the lowest average gross flipping returns in Q2 2017 were Honolulu, Hawaii (17.8 percent); Boise, Idaho (23.5 percent); Austin, Texas (26.0 percent); San Jose, California (27.0 percent); and San Francisco, California (27.1 percent).

Of course, capital tends to follow out-sized returns which is presumable why 1 in 4 homes sold in the following zip codes are now flowing through speculative flippers.

Meanwhile, here are the other markets around the country where flipping is also heating up.

Counter to the national trend, 54 metropolitan statistical areas — 53 percent of the 101 metro areas analyzed in the report — posted a year-over-year increase in home flipping rates in the second quarter, led by Baton Rouge, Louisiana (up 72 percent); Rochester, New York (up 39 percent); Daphne-Fairhope-Foley, Alabama (up 29 percent); New York (up 24 percent); and Modesto, California (up 24 percent).

Other markets where the Q2 2017 home flipping rate increased at least 10 percent from a year ago included Birmingham, Alabama (up 22 percent); Grand Rapids, Michigan (up 20 percent); Dallas-Fort Worth, Texas (up 13 percent); Oklahoma City, Oklahoma (up 12 percent); St. Louis (up 11 percent); Providence, Rhode Island (up 11 percent); and Cincinnati, Ohio (up 10 percent).

All that said, flipping isn"t always easy in every market.  Take Denver, for example, where real estate investor Paul Schemmel said it became so difficult to flip houses at a profit that he had to "evolve" his business strategy...so now he just pays full price for existing homes, bulldozes them and builds brand new mcmansions.  Genius plan, if we understand it correctly.

“I’ve constantly evolved to make money in the Denver market,” said Schemmel, who said he has flipped hundreds of homes since 2008 but was finding it harder to compete in the conventional home flipping arena. “Why don’t I just buy at full price, scrape the lot and build a new house. … And then I started making money again. I don’t even rehab any more. I demolish and I build a new home. … I can pay full price for a property, but my competition cannot.”

Of course, you should not worry at all that flipped homes are increasingly being financed with mortgages...

More than 35 percent of homes flipped in Q2 2017 were purchased by the flipper with financing, up from 33.2 percent in the previous quarter and up from 32.3 percent a year ago to the highest level since Q3 2008 — a nearly nine-year high.

The estimated total dollar volume of financing for homes flipped in the second quarter was $4.4 billion, up from $3.9 billion in the previous quarter and up from $3.4 billion a year ago to the highest level since Q3 2007 — a nearly 10-year high.

Among 101 metropolitan statistical areas analyzed in the report, those with the highest percentage of Q2 2017 home flips purchased with financing by the flipper were Colorado Springs, Colorado (68.4 percent); Denver, Colorado (56.1 percent); Boston, Massachusetts (53.3 percent); Providence, Rhode Island (51.7 percent); and San Diego, California (49.0 percent).

“Across California the gross dollar profits available for property flips remains one of the highest in the country; however low market inventories, increases in home prices, and decreasing home affordability have decreased the number of opportunities available to secure prospective properties to invest,” said Michael Mahon, president at First Team Real Estate, covering the Southern California housing market.

....we"re sure that flippers and their banks fully learned their lesson back in 2008.

Tesla Stock Slumps After "Terrible Bond" New Issue Tanks

Tesla stock prices has almost erased all of its post-earnings gains as the company"s recently issued $1.8 billion junk bond is tumbling...

TSLA stocks is giving back its post-record-cash-burn gains...

As the newly issued junk bonds are suddenly coming face to face with this ugliness...

As MarketWatch reports, the 5.3% notes due 2025 are now trading as high as 5.75% yield (with the risk spread blowing out from 330 to around 370bps)

AllianceBernstein’s Distenfeld said investors are still starving for income in a low-interest rate, low-yielding world, and said it is important to be patient -- and disciplined -- in this market.

“Tesla was an aggressive deal for a company that is not expected to be cash-flow positive for years,” said Gershon Distenfeld, head of credit at asset manager AllianceBernstein.

 

 “At just over 5%, it is not a great risk return,” he said.

“There are companies coming to market that shouldn’t be issuing at all, so you have to watch out,” he said.

“The same is happening in the bank loan market, people are afraid of rising rates and enamored of floating-rate debt, so underwriting quality is changing.”

This seemed to sum things up perfectly though...

“Anyone who looks at a lot of high-yield bonds would expect more robust protection against future debt,” Valerie Potenza, head of high-yield research at Xtract Research, a sister company of Debtwire, told MarketWatch ahead of the sale.

“We think it’s a terrible bond, but people seem blinded by the Tesla story.”

Blinded indeed...

The Amazon Effect: Retail Bankruptcies Surge 110% In First Half Of The Year

As Amazon flirts with a $500 billion market cap, letting Jeff Bezos try on the title of world"s richest man on for size if only for a few hours, for Amazon"s competitors it"s "everything must go" day everyday, as the bad news in the retail sector continue to pile up with the latest Fitch report that the default rate for distressed retailers spiked again in July.

According to the rating agency, the trailing 12-month high-yield default rate among U.S. retailers rose to 2.9% in mid-July from 1.8% at the end of June, after J. Crew completed a $566 million distressed-debt exchange. Meanwhile, with the shale sector flooded with Wall Street"s easy money, the overall high-yield default rate tumbled to 1.9% in the same period from 2.2% at the end of June as $4.7 billion of defaulted debt - mostly in the energy sector - rolled out of the default universe.

In a note, Fitch levfin sr. director Eric Rosenthal, said that “even with energy prices languishing in the mid $40s, a likely iHeart bankruptcy and retail remaining the sector of concern, the broader default environment remains benign."

He"s right: after the energy sector dominated bankruptcies in the first half of 2016, accounting for 21% of Chapter 11 cases, in H1 2017 the worst two sectors for bankruptcies are financials and consumer discretionary.

And if recent trends are an indication, the latter will only get worse as Fitch expects Claire’s, Sears Holdings and Nine West all to default by the end of the year, pushing the default rate to 9%. "The timing on Sears and Claire’s is more uncertain, and our retail forecast would end the year at 5% absent these filings," Rosenthal wrote.

Putting the retail sector woes in context, Reorg First Day has calculated that retail bankruptcies soared 110% in the first half from the year-earlier period, accounting for $6 billion in debt.

The list includes name brands such as Gymboree, Payless, rue 21 and the Limited, all of which cited the Amazon affect as a contributor to their downfall.

“Many retailers have echoed the familiar cries of those that filed before them—the proliferation of online shopping, rapidly deteriorating brick-and-mortar retail, the rise of fast fashion, hefty lease obligations and shifting consumer preferences,” Reorg First Day said in a midyear review.

While it is far from empirically, and certainly scientifically established, every incremental retail bankruptcy should add approximately $5-10 billion to AMZN"s market cap, further cementing Jeff Bezos as the world"s richest monopolist man.

New York's "Billionaires Row" Suffers Biggest Foreclosure In History

In the latest sign that NYC’s ultra-high end property market is on the verge of imploding after a wave of overly aggressive development, another luxury condo at Manhattan’s One57 tower, a member of “Billionaire’s Row,” a group of high-end towers clustered along the southern edge of Central Park, has gone into foreclosure - the second in the span of a month.

The 6,240-square-foot (580-square-meter) full-floor penthouse in question, One57’s Apartment 79, sold for $50.9 million in December 2014, making it the eighth-priciest in the building.

“It’s probably the most-expensive foreclosure we’ve ever seen in luxury development,” said Donna Olshan, president of high-end Manhattan brokerage Olshan Realty Inc. “I don’t know of a foreclosure that’s larger than that.”

According to Bloomberg, the shell company that purchased the property took out an unusually large mortgage and promised to repay in full a year later.

In September 2015, the company took out a $35.3 million mortgage from lender Banque Havilland SA, based in Luxembourg. The full payment of the loan was due one year later, according to court documents filed in connection with the foreclosure.

The borrower failed to repay, and now Banque Havilland is forcing a sale to recoup the funds, plus interest.

And, in what’s become a strong contender for the “no sh*t” quote of the day, a spokeswoman for Extell Developments, the developer that built One57, said there" s a lesson to be learned from this unfortunate situation.

“This shows that too much leverage is probably not wise,” Anna LaPorte, an Extell spokeswoman, said of the most recent default.

A June 14 auction was scheduled for a 56th-floor apartment at the same tower. That condo was purchased in July 2015 for $21.4 million. Public records have yet to reveal any transfer of ownership for that property.

Investors across the NYC property spectrum should take note; prices in Manhattan and Brooklyn have risen so quickly they’ve effectively pushed marginal buyers out of the market and forced renters to devote a greater share of their income to housing. Today, more than 30% of Americans pay half their income in rent - the highest percentage in decades.

And with more investors in the city concentrating on luxury properties, some ultra-luxury buildings like One57 are struggling with unsustainable vacancy rates of nearly 40%.

Until last month, no apartments on Billionaires’ Row, which also includes 432 Park Ave., had been subject to a foreclosure auction, according to PropertyShark. The loss of a Manhattan residential property to creditors is a rare event, regardless of the unit"s price-tag: Only 27 new residential foreclosures in the borough in the first quarter.

Could this be the start of a trend? We think so. Which leads us to our next question: How, exactly, does one short the luxury real-estate market?

We also look forward to The Left deciding that a probe into this transaction is warranted, just in case it was some complex way to transfer Russian funds to Trump... (only half-kidding).

Warning: the Oil Crash Is Just Days Away From Triggering a Debt Crisis

The Oil collapse is about to trigger a crisis in junk bonds.

Oil has been going straight down for weeks now. As we write this, black gold is below $43 a barrel, down 16% from its levels a month ago.

“So what?” you might ask, “Oil experiences similar drops all the time. Why is this important?”

This is important, because the high yield, or junk bond market is closely associated with Oil prices. And if Oil continues to collapse we’re going to start seeing some serious contagion risks in high yield credit.

And you know what asset class tracks High Yield Credit or Junk Bonds?

Stocks…

A Crash is coming…

And smart investors will use it to make literal fortunes from it.

We offer a FREE investment report outlining when the market will collapse as well as what investments will pay out massive returns to investors when this happens. It"s called Stock Market Crash Survival Guide.

We made 1,000 copies to the general public.

As I write this, only 79 are left.

To pick up one of the last remaining copies…

CLICK HERE!

Best Regards

Graham Summers

Chief Market Strategist

Phoenix Capital Research

Home-Flippers Reliance On Leverage Rises To Highest Level In 9 Years

In the latest sign that the US housing market has peaked after an astounding post-crisis run-up, a report by ATTOM Data Solutions showed that the number of homes flipped by speculators fell to its lowest level in two years.

The report showed that 43,615 single family homes and condos were flipped nationwide during the first quarter of 2017, the lowest number since the first quarter of 2015.

However, even as the number of flipped homes has fallen, their share of total real-estate transactions has actually risen. During the first quarter, they accounted for 6.7% of all transactions, up from 5.8% in the fourth quarter of 2016, and unchanged from the same period a year earlier.

“The business of financing for home flippers continued to grow in the first quarter of 2017 even as the home flipping rate plateaued compared to a year ago and average home flipping returns decreased for the second consecutive quarter,” said Daren Blomquist, senior vice president at ATTOM Data Solutions.

“Home flippers financed an estimated $3.5 billion in purchases for homes flipped during the quarter, up from $3.3 billion in the previous quarter and up from $2.4 billion a year ago to the highest level since the fourth quarter of 2007 — a more than nine-year high.”

The explosion in home valuations in urban markets like Brooklyn, Washington D.C. and San Francisco has inspired real-estate speculators to search for the next big score, with the highest percentage of home flips completed with the aid of outside financing occurring in Colorado Springs, Colorado (69.3 percent); Denver, Colorado (54.8 percent); Seattle, Washington (51.6 percent); Boston, Massachusetts (51.3 percent); and Providence, Rhode Island (47.3 percent).

Matthew Gardner, chief economist at Windermere Real Estate noted that escalating home prices in Seattle forced flippers to rely on financing their purchases.

“Seattle has such a high number of flippers who are financing their purchases relative to the U.S. as a whole due to escalating home prices in our region. The decision to finance is proof that these flippers believe the risks of financing are low due to our booming housing market,” Gardner said in a statement.

Other markets where more than 40 percent of home flips completed in Q1 2017 were originally purchased by the speculator using financing included San Diego, California (46.3 percent); Minneapolis-St. Paul, Minnesota (46.2 percent); Phoenix, Arizona (44.1 percent); San Francisco, California (43.0 percent); and Washington, D.C. (40.5 percent).

“With low interest rates, and available lenders willing to provide non-owner occupied loans, we are seeing many of our investors across Southern California take advantage of leverage financing when participating in housing flips,” said Michael Mahon, president at First Team Real Estate, who covers the Southern California housing market.

The areas where home flipping constituted the highest share of all real-estate transactions was Washington, DC, with a rate of 10.7%, followed by Nevada (9.8 percent); Alabama (9.0 percent); Tennessee (8.9 percent); Maryland (8.5 percent); and Missouri (8.0 percent).

Among 85 metropolitan statistical areas with at least 90 single family and condo home flips completed in Q1 2017, those with the highest home flipping rate were Memphis, Tennessee (15.1 percent); York-Hanover, Pennsylvania (12.5 percent); Fresno, California (11.1 percent); Birmingham, Alabama (10.3 percent); and Las Vegas, Nevada (10.0 percent). Nationwide, the average return for flipped homes fell for the second straight quarter: The average gross flipping profit translated to an average 47.4 percent gross return for homes flipped in Q1 2017, down from an average 49.0 percent gross flipping ROI in Q4 2016 and an average 48.5 percent gross flipping ROI in Q1 2016.

The markets with the highest home-flipping returns were Pittsburgh, PA (141.8 percent); Allentown, Pennsylvania (122.2 percent); Cleveland, Ohio (118.6 percent); Philadelphia, Pennsylvania (111.7 percent); and Baltimore, Maryland (106.0 percent).

The median size of homes flipped in Q1 2017 shrunk to 1,402 square feet – the smallest median square footage going back to Q1 2000, the earliest quarter for which data are available.
That’s down from a median 1,409 square feet in the previous quarter, and 1,428 square feet a year ago.

The median year of construction for homes flipped in Q1 2017 was 1978, the same as in the previous quarter but down from a median of 1981 for homes flipped in Q1 2016.

ATTOM defines home flipping as "an arms-length sale of a property for the second time within a 12-month period."

$100 Increase In Monthly Mortgage Payment Would Sink 75% Of Canadian Homeowners

According to a new survey from Manulife Bank, nearly 75% of Canadian homeowners would have difficulty paying their mortgage every month if their payments increased by as little as 10%.  And, given that the average house in Canada costs roughly $200,000 and carries a monthly mortgage payment of $1,000, that means that most Canadians couldn"t incur and $100 hike in their monthly mortgage payments without possibly going under.  Per CBC:

The bank polled 2,098 homeowners — between the ages of 20 to 69 with household incomes of $50,000 or higher — online in the first two weeks of February.

Fourteen per cent of respondents to Manulife"s survey said they wouldn"t be able to withstand any increase in their monthly payments, while 38 per cent of those polled said they could withstand a payment hike of between one and five per cent before having difficulty. An additional 20 per cent said they could stomach a hike of between six and 10 per cent before feeling the pinch.

Add it all up, and that means 72 per cent of homeowners polled couldn"t withstand a hike of just 10 per cent from their current record lows.

Of course, such a huge sensitivity to small budget fluctuations isn"t a great sign when we"re in the midst of record-low interest rates and about to enter a period of sustained hikes.

"What these people don"t realize is that we"re at record low interest rates today," said Rick Lunny, president and CEO of Manulife Bank.

If mortgage rates increase by as little as one percentage point, some borrowers could be facing a hike of 10 per cent on their monthly bills. A bigger mortgage rate hike would bring more pain.

Meanwhile, 45% of millennials in the same survey said they had to borrow money from their parents to purchase their home and 25% admitted they have no savings.

Well, at least Americans aren"t the only ones that have no idea how to save.

"It's Just Crazy" (Again): 2-Bedroom LA House Sells 40% Above Asking

Two days ago we looked at the latest troubling development in US home price trends: a new bubble appears to be emerging in all the "usual suspect" places. As we noted on Thursday, "home prices in markets that bubbled over back in 2006/2007, like Las Vegas and San Francisco, got cut in half in 2009 but have since doubled again of their lows.  Meanwhile, markets like Denver and Dallas that didn"t participate as much in the 2007 mania are now surging to all-time highs, with Dallas prices up 55% over the past 5 years."

The Wall Street Journal added that some of the home buying behaviors of consumers, like paying prices well above appraisal values and waiving home inspections, are starting to be eerily reminiscent of 2006:

In some markets, bidding wars are breaking out. Agents said some buyers are kicking in extra cash when properties don’t appraise for the asking price, and some are waiving their right to home inspections.

“It can’t be sustained,” said David Berson, chief economist at Nationwide Insurance and a former chief economist at mortgage giant Fannie Mae, referring to the frenzied buying. “It can’t go on forever.”

Other signs of overexuberance have emerged, including surging levels of licensed Realtors all chasing a quick buck.

The number of licensed Realtors has jumped by nearly 25% since 2012, hitting a nine-year high in 2016 and sitting just 9% below the peak in 2006, according to real-estate consultant John Burns. In Denver, homes are selling briskly. The median number of days that homes spent on the market declined to eight in the first three months of the year from 61 in 2012, according to Redfin. Home prices rose 8.5% in Denver over the year ended in February, according to Case-Shiller.

Nicki Thompson, an agent in Denver, said she recently had a listing that was on the market for two weekends at $1.2 million and she received multiple all-cash offers above the listing price. 

“It’s just crazy,” she said.

And for a practical example of just how crazy it truly is, take this renovated 2-bedroom, 1,948 sq. ft house first built in 1951 in the Eagle Rock section of Los Angeles, which was listed in mid-March for $699,000, was estimated by Redfin at $780,000, and sold yesterday for $980,888 (more than $500/sq foot) and 40% above asking, just over a month after it was first listed.

Maybe it was the house"s profile "description" that unleashed the buying frenzy:

In the 1960s-80s drums played on some of the most famous pop songs known (Good Vibrations, Mrs. Robinson, A Little Less Conversation, to name a few) were built in this garage in our beloved Eagle Rock. A. F. Blaemire and his wife, Kirsten, filled this home with music and creativity for decades, and now it"s ready for its next inspired owner! With freshly refinished hardwood floors and repainted interior, 5208 Monte Bonito is a blank canvas with great potential. The rooms are bright and spacious, including a downstairs recreation room perfect for a jam room, art studio, den (or all of the above!). The two-car garage has direct access to the house and an additional storage room. The back yard has plenty of space for entertaining and gardening - there is already an avocado tree, an orange tree, and a pitaya to get you started! Views of the Eagle Rock from the master bedroom, and sunset views from the front porch make this the ideal setting to call home.

Then again, maybe not.

So what do you get for just under a million in LA these days? Not much: two bedrooms, less than two bathrooms, a 2 car garage, a decorative fireplace, a rec room, and a 7,195 sq foot lot.

Here are some photos showing what a "million dollar house" looks like in the latest US housing bubble.

Exposing Who's Behind Surging Subprime Delinquencies (Hint: Rhymes With 'Perennials')

For months now we"ve been writing about the mysteriously rising subprime delinquencies afflicting auto ABS structures despite repeated confirmations from the Fed and equity markets that "everything is awesome" (see "Auto Bubble Burst Begins As Subprime Delinquencies Soar To 2009 Levels" and "Signs Of An Auto Bubble: Soaring Delinquencies In These 266 Subprime ABS Deals Can"t Be Good" for a couple of recent examples).  Shockingly, as confirmed by the chart below from UBS strategist Matthew Mish, 2016 vintage subprime auto ABS structures are even underperforming 2007/2008 vintage securitizations.

Now, Mish is back with more survey data explaining the who/what/when/where/why"s of spiking loan delinquencies. 

Ironically, survey results suggest that households making over $100,000 per year are 2.5x more likely to default on loan payments over the next 12 months than those making under $40,000...because making more money just means you can afford more debt, right?

First, the survey evidence suggests the rise in consumer default perceptions has occurred primarily in the middle and upper household incomes cohort. And those consumers concerned with missing a payment are highest in the upper income category (household incomes of $100k+). In particular, the most elevated readings occur at the lower ends of the middle and higher income categories (i.e., 50-74k and 100-149k, respectively.

Of course, the most "shocking" results of the survey suggest that our precious snowflake millennials are over 5x more likely to default than folks aged 45 and above.  That said, we suspect that many of those defaults may come from student loan debt...which is totally bogus because higher education should be "totes free", right?

In another shocking discovery, people with the most debt were also found to be most at risk of default...who knew?

Oddly, however, households who reported being able to cover their monthly expenses were more at risk of default than households burning through cash each month...sounds like these folks have picked up some valuable lessons from Tesla on how to burn through cash without defaulting...

Finally, this last chart was intended to shed light on why certain households are more likely to default but, in the end, the "no specific reason" category dominated responses leading UBS to conclude that people are just far more comfortable defaulting on debt, in general, in the post-crisis era.

This mosaic seems quite consistent with the reported concerns earlier around limited positive cash flow (income vs expenses) and the broader reality that real median wage growth has been largely non-existent in recent years (and for several decades) despite rising debt levels. However, the most commonly cited reason continues to be "no specific reason". While difficult to prove decisively other survey results on the millennial generation specifically seem to be consistent with the thesis that US consumer willingness to default (or the lack of stigma associated with bankruptcy) may have increased further in the post-crisis era.

To summarize the UBS survey results, increasing delinquencies are being driven by millennials who graduated college with massive student debt balances, but were making decent money so they levered up even more to buy a house (or 2), a couple of cars and a timeshare.  That said, now that the earnings growth they expected has failed to materialize, their sense of entitlement has taken over and they"ve decided to socialize their debt burdens while completely ignoring the stigmas associated with such actions.

Home-Flipping Profits Just Hit An All Time High: These 10 States Offer The Highest Return Potential

That most distinct remnant of the 2006 housing bubble - home flipping - is not only back, it is more profitable than ever.

According to a new report by ATTOM Data Solutions and RealtyTrac,193,009 single family homes and condos were flipped — defined as sold in an arms-length transfer for the second time within a 12-month period — in 2016, up 3.1% from 2015 to the highest level since 2006, when 276,067 single family homes and condos were flipped.

Home flips in 2016 accounted for 5.7% of all single family home and condos sales during the year, up from 5.5 percent in 2015 to a three-year high but still well below the peak in 2005, when 338,207 single family homes and condos were flipped representing 8.2% of all sales.

The report also shows that 126,256 entities — including both individuals and institutions — flipped homes in 2016, up less than 1 percent from 2015 to the highest number since 2007, when 143,266 entities flipped properties.

Meanwhile, the share of flipped homes that were purchased by the flipper with financing increased to an eight-year high of 31.5% in 2016 while the median age of homes flipped increased to 37 years — a new high going back to 2000, as far back as data is available — and the median square footage of homes flipped decreased to 1422 — a new record low going back to 2000.

"Home flipping was hot in 2016, fueled by low inventory of homes in sellable or rentable condition along with a flood of capital — both foreign and domestic — searching for the returns and stability available with U.S. real estate,” said Daren Blomquist, senior vice president at ATTOM Data Solutions. “The combination of more home flips and a greater share of financing for flip purchases resulted in a 19 percent jump in the estimated dollar volume of financing for home flip purchases, up to $12.2 billion for the flips completed in 2016 — a nine-year high.”

“Investors in search of flipping returns are increasingly willing to move to secondary and tertiary housing markets and neighborhoods with older, smaller properties that are available at a deeper discount,” Blomquist continued. “Given that many of these markets are more affordable, we are also seeing a higher share of the flipped homes sold to FHA buyers, with that share reaching a four-year high of 19.6 percent in 2016.”

Perhaps what is most interesting in the 2016 data, is that homes flipped last year, sold for a median price of $189,900, a gross flipping profit of $62,624 above the median purchase price of $127,276 and representing a gross flipping return on investment (ROI) of 49.2%.  Both the gross flipping dollar amount and ROI were the highest going back to 2000, the earliest home flipping data is available for this report.

Among 117 metropolitan statistical areas with at least 250 home flips in 2016, there were 11 with an average gross flipping profit of $100,000 or more in 2016: San Jose, California ($145,750); Boston, Massachusetts ($140,000); San Francisco, California ($140,000); New York, New York ($127,250); Los Angeles, California ($127,000); San Diego, California ($111,000); Oxnard-Thousand Oaks-Ventura, California ($105,000); Seattle, Washington ($102,000); Vallejo-Fairfield, California ($101,000); Baltimore, Maryland ($100,500); and Washington, D.C. ($100,000).

“Our strong wage growth is still supporting rising home prices, which when combined with the historically low number of homes for sale in Seattle, gives home flippers substantial returns on their investments,” said Matthew Gardner, chief economist at Windermere Real Estate, covering the Seattle market. “I believe flipping serves as a negative for any housing market because it further erodes housing affordability, but if there’s a demand for it in the market, it’s a trend we will continue to see.”

Highest gross flipping returns in Pennsylvania, Ohio and Louisiana metros

Among the 117 metro areas analyzed in the report, those with the highest gross flipping ROI were East Stroudsburg, Pennsylvania (241.5 percent); Pittsburgh, Pennsylvania (130.0 percent); Cleveland, Ohio (116.2 percent); Philadelphia, Pennsylvania (107.1 percent); Toledo, Ohio (102.0 percent); and New Orleans, Louisiana (101.2 percent).

Along with Pittsburgh, Cleveland, Philadelphia and New Orleans, other metro areas with a population of at least 1 million and a gross flipping ROI in 2016 of 75 percent or higher were Baltimore (96.6 percent); Cincinnati (87.2 percent); Buffalo (85.8 percent); Rochester (76.2 percent); Oklahoma City (76.1 percent); Chicago (75.9 percent); Jacksonville, Florida (75.8 percent); Memphis, Tennessee (75.6 percent); and Grand Rapids, Michigan (75.0 percent).

Highest home flipping rates in Tennessee, California and Florida metros

Among 117 metropolitan statistical areas with at least 250 home flips in 2016, those with the highest home flipping rate as a percentage of all home sales were Memphis, Tennessee (11.7 percent); Clarksville, Tennessee (10.1 percent); Visalia-Porterville, California (10.1 percent); Tampa-St. Petersburg, Florida (9.9 percent); and Deltona-Daytona Beach-Ormond Beach, Florida (9.9 percent).

Along with Memphis and Tampa-St. Petersburg, other metro areas with a population of at least 1 million and a 2016 home flipping rate of at least 7 percent were Las Vegas (9.2 percent); Miami (8.8 percent); Orlando (8.3 percent); Phoenix (8.0 percent); New Orleans (7.9 percent); Jacksonville, Florida (7.7 percent); Virginia Beach (7.6 percent); Baltimore (7.4 percent); Birmingham (7.4 percent); St. Louis (7.1 percent); and Nashville (7.1 percent).

Biggest increase in home flipping rates in Pennsylvania, Nebraska, and New York metros

Among 117 metropolitan statistical areas with at least 250 home flips in 2016, those with the biggest year-over-year increase in the home flipping rate were Reading, Pennsylvania (38.8 percent); Lincoln, Nebraska (38.6 percent); East Stroudsburg, Pennsylvania (36.6 percent); Rochester, New York (31.8 percent); and Allentown, Pennsylvania (29.3 percent).

Along with Rochester, other metro areas with a population of at least 1 million and an annual increasing in home flipping rate of at least 10 percent were New Orleans (up 26.5 percent); San Antonio (up 25.2 percent); Dallas (up 20.9 percent); Boston (up 16.4 percent); New York (up 16.0 percent); Columbus, Ohio (up 14.6 percent); Oklahoma City (up 13.8 percent); Philadelphia (up 11.6 percent); Cincinnati (up 11.5 percent); Grand Rapids, Michigan (up 11.3 percent); Charlotte (up 10.5 percent); Kansas City (up 10.4 percent); and Cleveland (up 10.2 percent).

39 zip codes where at least one in five home sales was a flip in 2016

Among 5,625 U.S. zip codes with at least 10 homes flipped in 2016, there were 39 zip codes where at least 20 percent of all home sales during the year were home flips, including zip codes in Texas, Tennessee, Florida, California, Ohio, Virginia, Pennsylvania, Missouri, Washington, the District of Columbia, Maryland, New York and New Jersey.

In the Los Angeles metro area, which accounted for six of the 39 zip codes with a home flipping rate of at least 20 percent in 2016, the best opportunity for flipping is in lower-priced neighborhoods with properties that need significant repairs, according to Brett Chotkevys, co-founder of Helpful Home Solution, which flips properties in Los Angeles and other parts of Southern California.

“We do pretty much a full gut on the houses we buy. Most of those we buy are pretty nasty … they’re falling down, there are druggies living there,” said Chotkevys, noting that a typical rehab for his LosAngeles flips will run $40,000 to $50,000, and it’s not “inconceivable” for him to spend six figures on a Los Angeles fix-and-flip. “We like south central (Los Angeles) a little bit more. The barrier to entry is lower. We can pick up properties in the 200s. … There are normal people not making gobs of money that can afford to buy these houses.

“With us being where we are in the cycle, and us being very near the top, we’re not buying any big properties, anything close to a million, and trying to flip those,” Chotkevys added.

* * *

Finally, for those who may be looking to get in the game, even at this late stage, the following infographic lays out the 10 states that have the highest "flipping" gross return on investment. 

Auto Lending Update - Someone Please Explain How This Is Not A Bubble

Experian recently released their Q4 2016 Automotive Finance Market update which includes a lot of statistics that seem to confirm our frequently documented concerns about the sustainability of the current level of annual auto sales (see here, here and here for our recent notes on the topic).

First, there is the staggering growth of auto loans outstanding.  It should be readily apparent to almost anyone that a 21% expansion in credit issuance over the course of just two years likely implies there has been at least some degradation in underwriting standards.

But you don"t have to speculate as Experian lays out the facts...and, sure enough, the outstanding loan balances of "Deep Subprime" borrowers have increased by double the amount of any other bucket, other than the plain "Subprime" folks, of course.

Of course, an impaired credit profile has, in no way, hampered America"s entitled consumers" demand for driving around in style as average subprime loan balances actually exceed "Super Prime."

But don"t worry, those subprime borrowers can "afford" those loans because they simply offset higher interest costs with stretched out terms...

...which keeps there average monthly payments low.

But, despite all the financial engineering, a look at 60-day auto delinquencies around the country may imply that the auto party is slowly coming to an end.

But sure, auto sales should be perfectly sustainable around 18mm per year...