Big Sky Dreaming

May 20, 2011


For the past two weeks, I have been buried in the snow-clad mountains of Big Sky Montana, huddled with a thousand or so government officials from the 21-member APEC region discussing trade liberalization. For light relief, I decided to take a peak at the state of the residential property market in this affluent community of 1,400 homes at the heart of one the US’s largest and most exclusive ski resorts.For the past two weeks, I have been buried in the snow-clad mountains of Big Sky Montana, huddled with a thousand or so government officials from the 21-member APEC region discussing trade liberalization. For light relief, I decided to take a peak at the state of the residential property market in this affluent community of 1,400 homes at the heart of one the US’s largest and most exclusive ski resorts.

For me, there are particular reasons for this eccentric behavior: the global economy cannot credibly recover until the US economy begins to recover, and the US economy cannot begin to recover until its property market hits bottom and begins to stabilise. Without a semblance of property market recovery, home-owners cannot resume spending with any confidence, and banks are still unable to draw a line under the losses they are going to have to recognize on their devastated mortgage loan portfolios.

Of course, the picture for the US as a whole remains unremittingly awful. Banks have been forced to foreclose on over 7 million properties as home-owners have walked away from houses buried in negative equity. Property experts predict a further 2 million homes will join this foreclosure mountain before the end of the year. On average, property prices are around 40% below their ridiculous peaks in 2007, with forecasts that many still have a further 20% to fall.

But what about Big Sky nestling high under the spectacular 11,000ft Lone Peak here in snow-bound Montana, hide-away playground to the likes of Microsoft’s Bill Gates, whose 1,500 homes have an average value of almost US$1m thanks to flamboyant investments made in the early part of the past decade? According to Ernie Hall, owner of Big Sky Properties, the Big Sky market has felt pain similar to that elsewhere in the US. Modest condominiums selling at the beginning of the decade for US$150,000 rose to US$300,000 or more at the giddy peak of the market, only to tumble back to US$100,000 last year. Extravagant lodges initially sold for US$2m rose to US$5-6m before collapsing to US$1.5m or less.
But for Ernie, the good news is that a handful of sales in the past four months suggest that Big Sky has found the bottom of its particular market. He believes the history books will show the first quarter of 2011 to mark the bottom of the great recession of 2008.

Sadly, Big Sky may be a bit ahead of the game. Nationa l data suggest that property prices in general continue to fall, with more foreclosures than sales, and with banks’ forced sales pushing property prices steadily further down. A survey by the Californian property group Trulia reported last month that just 10% of Americans believe their property market will recover this year, with 27% predicting it might begin to recover in 2012, and 58% expecting no recovery until2013 or after. Trulia says that sellers using their Trulia.com home listings service have slashed US$24 billion from their asking prices over the past year, while nationwide, more than US$250 billion in property wealth has been stripped from US home owners since 2008.
According to the chief executive of another leading property group, RealtyTrac: “The nation’s housing market continued to languish in the first quarter.. Weak demand, declining home prices and the lack of credit availability are weighing heavily on the market.”

In short, the message from Big Sky and elsewhere in the US is that we are still going to have to wait a year – maybe three – before we can look to the US to provide any locomotive force to the global trading economy. And as the “quantitative easing” era comes to an end, and interest rates begin to creep upwards in response to inflationary signals, Asia’s exports can expect steadily tougher prospects. China’s almost-miraculous dynamic effect on exports from the rest of Asia can only take us so far, given the awkward reality that its economy is barely one tenth the size of the US economy.

This ought to mean that our own property markets in Hong Kong have to be ballooning on borrowed time. Even small increases in interest rates are likely to make mortgage repayment costs sharply more painful.

But perhaps this is a good thing. For many ordinary Hong Kong families, prices have risen far beyond their reach, with powerfully demoralizing effects. Many have spent life-savings on mouse-box apartments of 390 sq ft or less – hardly enough to create a home, and shamefully tiny compared with average homes for our compatriots living in Shenzhen, Dongguan or Shanghai. A modest reversal that made apartments more affordable for our ordinary families would reduce greatly the mounting social unease in our community, and provide firmer foundations for the thousands of families for whom their home is the only real wealth they can rely on.

Our own lessons after the crash of 1997, alongside the painful lessons now being felt across the US – even in wealthy pockets like Big Sky – ought surely to teach us that bubbles cannot last, and can only cause pain. More than most, the residents of Big Sky should know: their picturesque community lives just an hour from the volcanic and volatile Yellowstone National Park, whose vast caldera is now rising at 6cm a year, and which plunged the world into an ice-age when it last exploded 640,000 years ago. This surely provides a sobering perspective: with a Yellowstone eruption now more than 20,000 years overdue, what bets on the value of Bill Gates’ home – or Microsoft’s business - in another 10,000 years time? I suppose some things are just too big to worry about.

 

* The translated Chinese version was published in Ming Pao on May 20, 2011.For me, there are particular reasons for this eccentric behavior: the global economy cannot credibly recover until the US economy begins to recover, and the US economy cannot begin to recover until its property market hits bottom and begins to stabilise. Without a semblance of property market recovery, home-owners cannot resume spending with any confidence, and banks are still unable to draw a line under the losses they are going to have to recognize on their devastated mortgage loan portf

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