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Cash rich move in as big mortgages hit brick wall

Usually, the typical American readers of the FT, at least as we and our marketing folders picture them, can feel pretty good about their lot in life. A mid-six figure income, professional employment, probably with a solid, or, at least, bailed-out financial services company, perhaps modest charitable contributions, children in grossly overpriced schools, learning contempt for their parent’s occupations. What’s not to feel smug about?

Lately, though, Median Readers may have begun to notice something unpleasant about their place in the Great Chain of Being, post Lehman. When they wake up in the morning, they find they can’t move. As in move to a new or bigger house or apartment. The middle-middle of the US public, let’s say a unionised maintenance worker for the local electric utility, can get a government guaranteed or supported mortgage for a new house in an Iowa suburb that might cost $100,000 to $250,000. For that homebuyer, prices have come down, and, in that price category, home sales were up by nearly 19 per cent in February over the year-earlier level. Both ends of the political spectrum are dedicated to making sure that sort of buyer-voter can get a mortgage with a 5 per cent down payment, as long as the monthly payments on the Wal Mart card have been kept current.

A few links up the chain of being, our Median Readers in Manhattan will have noticed more Italians and Brazilians crowding the sidewalks of Tribeca and the Upper East Side and getting more attention for their expatriated millions in the private banking departments. They are paying cash, not arranging mortgages, for the three-bedroom condos close to the competitive schools. A few more links up, there are the children of Russian and Ukrainian oligarchs, partying away in eight-figure penthouses, while back home Daddy makes sure the jet is always fuelled and ready to go.

The data on high-end housing are not that good, since the data samples are small, concentrated in a few neighbourhoods in a small number of cities. For example, the National Association of Realtors monthly survey of existing home sales showed “$1m plus” houses nationwide increasing by 3.7 per cent in February, the smallest increase of any price range. Since $1m will not buy you the average two-bedroom condo in Manhattan, that is not very illuminating about the upper end of the market, which, in any event, is only about 1.4 per cent of all houses sold in the US.

The upper middle income Median Reader can blame their forced immobility on two categories of Other: Republicans, who last year made sure that the maximum size of federally supported mortgages was cut from $729,000 to $625,500, and, in Manhattan and Miami, foreigners discreetly establishing a yacht anchorage in the New World.

That $625,500 limit makes a big difference to the Median Reader family in New York, San Francisco, San Diego, and Palm Beach, particularly post Lehman. It pushes them into the “jumbo”, or “non-conforming” mortgage market. In a more conservative world, that means instead of 10 per cent or 15 per cent down payments, they need to come up with 30 per cent down payments, and meet credit standards that probably could not be met by the institutions that employ them.

Furthermore, that jumbo market is a lot less liquid than it was. Four or five years ago, it was possible for jumbo mortgages to be packaged up, securitised, and sold off to trusting sovereign wealth funds. No more. The jumbo mortgages extended now must, effectively, remain on the books of the banks that underwrite them. In addition to the lower loan-to-value ratios, they cost at least an additional 40-50 basis points more than the federally supported mortgages for which our union worker qualifies. Fees are higher, and delays more common, thanks in part to the burdens on banks’ compliance departments from all those settlements with past borrowers and state attorneys general.

Jonathan Miller, of Miller-Samuels, a major independent New York-and-suburbs real estate appraisal firm, says: “The greatest impact is from (buyers of) just under $2m to $3.5m. My take is the younger couple from the financial services sector, who used to put down 10 per cent to get their new place, that is a thing of the past. They are challenged to put off their purchase for two or three years, and the problem with that is the rapidly rising cost of the rental market.”

Even with the down payment in hand, Median Reader must contend with cash-flush foreigners who need no mortgages. Anecdotally, Mr Miller says he believes the “base case” share of foreign buyers in Manhattan is around 15 per cent. For the past several years, scanning the clients for his appraisal business, that is up to 40 per cent, or higher for the most expensive properties. “At the very high end, for the past six months, we have been seeing a lot of Russians. There have been quite a few Europeans for the past couple of years as well.”

Brazilians have also been major buyers, along with Chinese picking up modestly sized properties. New York, let alone the rest of the US, is not going to match London for flight capital-bought housing. But it is getting closer. The foreign money that employs a lot of New Yorkers is keeping more of them in expensive rentals.

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