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Saturday, January 31, 2009

January 2009 Real Estate stats...

Last November the R/E Pollyanna's began putting the full court press on those home owners who did not HAVE to sell. Their plan? Encourage them to let their listings expire ("relist in spirng" they were told) and this would result in an artificial reduction in inventory.

The plan... reduce inventory, create demand, increase sales, halt the decline in housing prices.

January is the first month to really test the results.

This months sales in Greater Vancouver were 764 v. 1,819 from January 2008. That's a 58% drop in sales from this time last year.

Inventory reached 15,066 listings, resulting in a 51% increase in inventory from this time last year.

A 60% drop in sales and a 50% increase in inventory.

The best stat to watch is Months of Inventory (MOI). This figure illustrates the strength (or lack thereof) of the market best of all. Last January (2008) the MOI sat at 5.5 months (your house, on average, would take 5.5 months to sell if priced like other comparable homes).

This month? The MOI is sitting at 20 months, almost two years.

Unless sales spike dramatically in February and March, April is shaping up to brutal.

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Bank Failure Friday


In an earlier post we chronicled how the concept of nationalizing the banks in the United States is gaining credence in some political circles.

It may interest you to know that in 2008 there were 28 Bank failures in the US of A.

That trend has only accelerated in 2009.

Curiously... these failures are always announced late on Friday afternoons. In many blog circles Friday has jokingly become 'Bank Failure Friday'.

So we jump on the bandwagon and, in the interest of keeping our finger on the pulse of the strenght of the American Financial Sector, we bring you the latest instalments in 'Bank Failure Friday'. Prior to this week there have been three bank failures in 2009.

2009 Bank Failure #4

From the FDIC: FDIC Approves the Payout of the Insured Deposits of MagnetBank, Salt Lake City, Utah

The Federal Deposit Insurance Corporation (FDIC) approved the payout of the insured deposits of MagnetBank, Salt Lake City, Utah. The bank was closed today by the Utah Department of Financial Institutions and the FDIC was named receiver.

After an extensive marketing process, the FDIC was unable to find another financial institution to take over the banking operations of MagnetBank. ...

MagnetBank, as of December 2, 2008, had total assets of $292.9 million and total deposits of $282.8 million. It is estimated that the bank did not have any uninsured funds.

MagnetBank is the fourth FDIC-insured institution to fail this year and the first in Utah since Bank of Ephraim, was closed on June 25, 2004.

2009 Bank Failure #5

From the FDIC: Bank of Essex, Tappahannock, Virginia, Acquires All the Deposits of Suburban Federal Savings Bank, Crofton, Maryland

Suburban Federal Savings Bank, Crofton, Maryland, was closed today by the Office of Thrift Supervision, and the Federal Deposit Insurance Corporation (FDIC) was named receiver. To protect the depositors, the FDIC entered into a purchase and assumption agreement with Bank of Essex, Tappahannock, Virginia, to assume all of the deposits of Suburban Federal.

As of September 30, 2008, Suburban Federal had total assets of approximately $360 million and total deposits of $302 million. In addition to assuming all of the failed bank's deposits, Bank of Essex agreed to purchase approximately $348 million in assets at a discount of $45 million. The FDIC will retain the remaining assets for later disposition.

The FDIC estimates that the cost to the Deposit Insurance Fund will be $126 million. Bank of Essex's acquisition of all deposits was the "least costly" resolution for the FDIC's Deposit Insurance Fund compared to alternatives. Suburban Federal is the fifth bank to fail in the nation this year. The last bank to be closed in Maryland was Second National Federal Savings Bank, Salisbury, on December 4, 1992.

2009 Bank Failure #6

from the FDIC: CenterState Bank Acquires All the Deposits of Ocala National Bank, Ocala, Florida

Ocala National Bank, Ocala, Florida, was closed today by the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation (FDIC) was named receiver. To protect the depositors, the FDIC entered into a purchase and assumption agreement with CenterState Bank of Florida, Winter Haven, Florida, to assume all of the deposits of the Ocala National Bank.

As of December 31, 2008, Ocala National Bank had total assets of $223.5 million and total deposits of $205.2 million. In addition to assuming all of the failed bank's deposits for a premium of 1.7 percent, CenterState agreed to purchase approximately $23.5 million in assets. The FDIC will retain the remaining assets for later disposition.

The transaction is the least costly resolution option, and the FDIC estimates the cost to its Deposit Insurance Fund will be $99.6 million. Ocala National is the sixth FDIC-insured institution to be closed this year. Ocala National Bank is the first bank to fail in Florida since Freedom Bank, Bradenton, on October 31, 2008.

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Wednesday, January 28, 2009

How overpriced is Vancouver? (Part 2)


Real Estate Pollyanna's continue to bafflegab on the state of housing prices in Vancouver.

Two days ago, Royal LePage Realty released another manifesto that challenges credibility. Their latest claim? "The tumultuous times that characterized the end of 2008 are not anticipated to define 2009."

And what leads them to make such a claim? Anxious potential buyers looking for guidence in these tulmultous times are offered these tidbits from a January 26th, 2009 press release:

"As consumer confidence levels begin to creep upwards, the country's solid economic fundamentals should lead to a recovery in the housing market. With consumer confidence in tatters, many were reticent about making any large purchases. However, waiting on the sidelines during the normally slow winter market is one thing, sitting out the seasonally busy spring market is quite a different story. Activity levels should rise as the year progresses."

Presumabley Royal LePage will now shift into overdrive to poke and prode the consumer to regain that confidence. As part of that initiative, LePage released the results of a poll it commissioned.

A recent poll commissioned by Royal LePage found that almost half (49%) of Canadians surveyed agree that the economic stimulus measures anticipated as part of tomorrow’s Canadian federal budget announcement will have a positive impact on Canada’s real estate market. Political actions taking place south of the border are also likely to buoy the country’s economic conditions, as the poll found that 82 per cent of Canadians agree that the inauguration of Barack Obama will have a positive impact on consumer confidence in Canada.

So is LePage correct? Is Vancouver's Real Estate market poised to take off like a rocket with restored consumer confidence? Are the recent 'dips' in prices a temporary anomaly representing an outstanding opportunity to purchase undervalued Real Estate at bargain levels?

Not according to a recent survey of worldwide cities. In the fifth annual Demographia International Housing Affordability Survey, Vancouver is ranked as the world' fourth most unaffordable city. Vancouver actually falls into the category of "severely unaffordable" with highly overvalued prices (despite the recent 'dips').

The New York-based Demographia report, released in Canada by the Frontier Centre for Public Policy, looked at third-quarter 2008 data in 265 metropolitan markets, including Australia, Canada, the Republic of Ireland, New Zealand, the United Kingdom and the United States and defines affordable home prices as three times a city’s median income or less.

Vancouver fell behind Gold Coast in Australia, at No. 3, Honolulu, Hawaii, at No. 2, and Australia’s Sunshine Coast, which is in top spot on the least affordable list.

It was factors like these that lead one of the world's foremost economists, Yale economics professor Robert Shiller, to state in 2005 that "Vancouver is the most bubbly city in the world" and that "a violent correction is imminent".

Yesterday the Canadian government, a Conservative Canadian Government who only two months ago pledged they would NEVER go into deficit spending, released a massive deficit budget in order to combat rising fears that the economy is slipping into Depression conditions.

A great time to buy?

Seems to me the R/E Pollyanna's have their heads shrouded in the same fog that has engulfed Vancouver these past two weeks.

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Sunday, January 25, 2009

"There's a sucker born every minute" - P.T. Barnum

Read the news and the writing is right there for all Canadians to see.

Plunging consumer spending, the loss of almost 150,000 full-time jobs in the last 60 days, the crash in commodity prices, collapsing corporate profits, the bankruptcy of Nortel, diving home equity and a deterioration of national finances which is without precedent.

Our Canadian government will spend at least $64 billion more than it takes in over the next two years and we will have gone from a $12 billion surplus to a $32 billion deficit in only three years. All this debt means looming inflation later. We saw this in the 1970s. Once this mess is over you can be guaranteed that the carrying costs of your mortgage will double.

And yet the barrage from the Real Estate Pollyanna's continues.

Today we hear from Bob Rennie, the city's most famous realtor, who on Friday said that mortgage rates, which have dipped below five per cent, making it a great time to buy.

"I think there's some really good buys out there," he said. "You've got to look at interest rates, and take advantage of them." The financial and corporate blowouts will be done by next September, he predicted, arguing that developers have reacted quickly to the downturn and are now eager for an upturn.

"Supply is really going to quickly show that the tap's been turned off," said Rennie. "I think we'll come out of this in 2010." For sellers, Rennie suggested that it's better to sit tight.

Chiming in to this orgy of optomism last Friday was Cameron Muir, chief economist with the B.C. Real Estate Association. "I expect that, while the economy is going to be weaker in 2009, real-estate sales will be higher than 2008. While we've seen prices decline, the rate of decline has been slowing. If that trend continues, home prices should firm up over the next couple of months." Muir said the oversupply of available homes is pushing prices downward, but that could redress in the spring, paving the way for higher home prices.

The disturbing thing is that real estate’s is the biggest thing most people buy. Consumers need and merit professional guidance.

Are these so called 'experts' providing that? Or is it nothing but a shylock's mea non-culpa?

Hear no evil, see no evil, speak no evil.

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Saturday, January 24, 2009

Concept of U.S. Bank Nationalization Gathering Support


A stunning topic is slowly gathering steam in the United States and it's very discussion is bound to send shockwaves through the financial community in the coming weeks.

Investors beware: U.S. banks may be nationalized.

As losses mount for U.S. banks, concerns that the banking sector could prove to be insolvent are raising alarm bells. Investors are being warned that they should not rule out full nationalization of banks, a move that would result in complete loss of equity capital for those with a stake in any U.S. bank.

Back in October, the IMF estimated, in its Global Financial Stability Report, that bank losses on a global basis were roughly $750-billion out of a total pool of US$12.37-trillion in outstanding unsecuritized loans. As a rough estimate, U.S. banks account for half of those losses.

Since October, as economies worsen, loan losses have increased dramatically. Economist Nouriel Roubini predicts U.S. banks to ultimately suffer losses of US $1.1-trillion on outstanding pools of loans.

In response, President Obama's economics team will likely unveil its plan for creating an "aggregator bank" for purchasing "illiquid assets" from banks.

Recall that markets for many of these securities are illiquid and price discovery is difficult. Eventually this bank would sell off these assets as liquidity improved and prices hopefully rebounded.

It is now being suggested in some U.S. economic circles that this model would work even better under a scenario of bank nationalization as was the case in Sweden in the 1990s.

Various financial blogs and websites are begining to raise the alarm over this possible development and the topic was even discussed yesterday in Canada's Financial Post newspaper.

Look for jittery investors to start dumping stock en mass next week when the markets open, raising fears of a modern day rush on the banks.

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Friday, January 23, 2009

Hurry, Hurry, Hurry! Step Right Up!


As we saw in the last post, Warren Buffet - the Oracle of Wall Street - believes there are tough times ahead for the economy. He cautions against thinking things will turn around in the next six months and that there is not going to be some magical transformation to change the economy. As for all the money government is pumping into the economy, well... that isn’t necessarily going to produce anything dramatic in the short term at all.

Now enter the Real Estate Pollyanna's.

Today we bring you Royal LePage and their forecast for 2009. What is their take on the economic firestorm currently engulfing the world?

Why... all this negativity is just an 'emotional reaction' on the part of consumers.

From their report:

Emotional reaction to recent economic and political instability did much to dampen consumer confidence during the latter part of 2008, causing a marked slowdown in house sales activity. However, as a more rational understanding of the issues gains ground, together with a wide range of announced corrective measures, consumer confidence is anticipated to recover, prompting real estate activity to pick up once again in the latter half of 2009. Further, Canada in 2009 enjoys a stronger economic foundation than most countries and that should temper the housing market correction. The combination of low inflation, reasonable employment levels and improving housing affordability, driven in part by low mortgage rates, are anticipated to stimulate demand in the coming months.

Canadians have been confused and justifiably skeptical of the efforts of the worlds' central banks and governments to combat the global economic crisis. There is broad belief, however, that Canada's financial house is in better shape than many peer countries, particularly the U.S. While the federal and most provincial governments have been slow to implement economic stimulus packages, they enjoy broad public support in principle. Together with the actions taken by the Bank of Canada, the positive impact on consumer confidence stemming from infrastructure spending announcements and other stimulus programs is expected to be significant.

We believe that the Canadian economy will struggle early in 2009, but that conditions will progress continually throughout the year. Improving credit markets, the stimulative impact from a weaker Canadian dollar, together with the implementation of large fiscal stimulus initiatives, set the stage for a return to growth in the second half of 2009.


So there you have it. Warren Buffet insists the money government is pumping into the ecnonomy is not going to produce anything dramatic in the next six months. Meanwhile Royal Lepage insists that the positive impact from all this government stimulus will be significant once consumers develop a 'rational understanding' of the situation.

In the early 1900s, snake-oil salesmen became infamous as husters always trying to sell you something of no value by preying on the simple minded and the easily manipulated.

The dichotomy between Warren Buffet and Royal Lepage is laid bare.

Which side do you think has your best interests at heart, and which side do you think is trying to manipulate your outlook?



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Thursday, January 22, 2009

Short term analysis for the economy: Warren Buffet


Warren Buffet, American investor, businessman, philanthropist and one of the world's most successful investors, offered these comments on the short term outlook for the economy this evening in a PBS Interview on Nightly Business Report. The interviewer was Susie Gharib.

SUSIE GHARIB, ANCHOR, NIGHTLY BUSINESS REPORT: Are we overly optimistic about what President Obama can do?

WARREN BUFFETT, CHAIRMAN, BERKSHIRE HATHAWAY: Well I think if you think that he can turn things around in a month or three months or six months and there’s going to be some magical transformation since he took office on the 20th that can’t happen and wouldn’t happen. So you don’t want to get into Superman-type expectations.

SG: But I know that during the election that you were one of his economic advisors, what were you telling him?

WB: I was telling him business was going to be awful during the election period and that we were coming up in November to a terrible economic scene which would be even worse probably when he got inaugurated. So far I’ve been either lucky or right on that.

SG: What’s the most important thing you think he needs to fix?

WB: Well the most important thing to fix right now is the economy. We have a business slowdown particularly after October 1st it was sort of on a glide path downward up til roughly October 1st and then it went into a real nosedive. In fact in September I said we were in an economic Pearl Harbor and I’ve never used that phrase before. So he really has a tough economic situation and that’s his number one job.

SG: But when you look at the economy, what do you think is the most important thing he needs to fix in the economy?

WB: Well we’ve had to get the credit system partially fixed in order for the economy to have a chance of starting to turn around. But there’s no magic bullet on this. They’re going to throw everything from the government they can in. As I said, the Treasury is going all in, the Fed and they have to and that isn’t necessarily going to produce anything dramatic in the short term at all.

SG: There is considerable debate as you know about whether President Obama is taking the right steps so we don’t get in this kind of economic mess again, where do you stand on that debate?

WB: Well I don’t think the worry right now should be about the next one, the worry should be about the present one. Let’s get this fire out and then we’ll figure out fire prevention for the future. But really the important thing to do now is to figure out how we get the American economy restarted and that’s not going to be easy and its not going to be soon, but its going to get done.

SG: But there is debate about whether there should be fiscal stimulus, whether tax cuts work or not. There is all of this academic debate among economists. What do you think? Is that the right way to go with stimulus and tax cuts?

WB: The answer is nobody knows. The economists don’t know. All you know is you throw everything at it and whether it’s more effective if you’re fighting a fire to be concentrating the water flow on this part or that part. You’re going to use every weapon you have in fighting it. And people, they do not know exactly what the effects are. Economists like to talk about it, but in the end they’ve been very, very wrong and most of them in recent years on this. We don’t know the perfect answers on it. What we do know is to stand by and do nothing is a terrible mistake or to follow Hoover-like policies would be a mistake and we don’t know how effective in the short run this will be and how quickly things will right themselves.

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So there you have it. The leading authority on the economy and investing in the United States very frankly states that no one knows how to correct the financial situation and that only one thing is for certain: the end is nowhere in sight for the short term, particularly for the rest of 2009.


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Through the Looking Glass


Consumer confidence is so important for the Real Estate market and it has many asking what is the portent for our economy in the near future?

The US financial crisis has now spread across the globe. Years of easy credit created massive asset bubbles in the housing and financial services sectors. There has been too much exuberant leverage, not enough regulation; too strong a belief in asset-based prosperity, too little common sense that prices could go down as well as up; excessive “me first” greed, and too little concern for the burden of future generations.

There have been four bad bear markets in the last 100 years and while conventional wisdome suggests that investors “ride out the storm”, this may prove to be a poor strategy for everyone but the youngest of investors.

Bull and bear markets tend to move in cycles lasting for about 20 years. The Dow's 1929 peak was not surpassed until 1953 (24 years later), the Dow's 1968 peak was not surpassed until 1982 (14 years later) and the Japanese NIKKEI is down 80% from its peak of 44,000 in 1989. As of this writing, the Dow is at the same level that it was at the beginning of 1999 and the storm has only just begun.

And the greatest fear is that at the back end of this current crisis is a scenario that will send inflation soaring, wreaking havoc on even the most conservative investor's portfolio.

As defaults and foreclosures intensify and house prices continue to decline, the recession will get worse and the credit crisis will be amplified by the $1.2 quadrillion of derivatives that have been created. This will require increasingly larger government rescue and bailout attempts. What's worse, this influx of money is certain to have unintended consequences that are both long-term and very damaging. Although trillions of dollars in bailouts have already been issued, they will take time to work through the system, and lawmakers and economists admit there is no guarantee that they will work.

Currently, we are in the midst of a liquidity crisis brought on by the bursting of two asset bubbles. But the real danger is that the liquidity issue could become a full-blown insolvency crisis if credit is not made available in time to re-liquefy the system.

As a result of this crisis, we are entering a phase in the easing of monetary policy that has already taken real interest rates below zero when the real inflation rate is taken into account.

Most economists agree that inflation arises when the central banks increase the money supply in excess of the rate of GDP growth. For many years, the world's central banks have been doing just that. The fact is, global expansion in money supply has been depreciating all currencies, not just US dollars. The law of supply and demand is inescapable. If too many dollars chase too few goods, those goods must rise in price. Inflation always decreases real wealth by eroding purchasing power.

In the US, the Fed and Treasury are already pumping out vast amounts of public money to “liquefy” the banking system, and US money growth is now running at close to 14%, well above the official GDP rate of 3-4%. This year alone the total money supply, as measured by M3, has already increased by over $1 trillion. This doesn't include the announced bailouts.

Another $1.6 trillion was potentially added to the government's exposure when the Fed recently announced they would begin buying secured and unsecured commercial paper (short-term loans for business). This is a historic first; it did not occur even in the midst of the Great Depression.

After a big run-up, commodity prices have pulled back as recession fears begin to spread. While no one can call the bottom or knows if we are heading for a mild or a deep recession, the consensus is for a global slowdown with rising unemployment.

When we start to come out of this mess, longer term, inflationary pressures will start to rise as the newly printed money works its way into the system. In addition, due to the decline in global oil production coupled with rising demand from China, India, Russia and Brazil, oil prices will resume their surge. As oil is used in the manufacturing of most products as well as agriculture, mining and transportation, rising oil prices will lead to increases in most commodities and finished products.

Meanwhile, all the money that was printed and borrowed to try and liquefy the system will escalate prices, leading to an inflationary recession. The worst of all possible worlds is declining purchasing power combined with high unemployment and rising prices.

This is 1970s-style stagflation.

But because inflation numbers have been understated for years, and money supply is set to increase at unprecedented rates, this time it could intensify into a hyperinflationary depression.

In the early 1980s, the actual interest rates for Lower Mainland families was 22% (prime was 19.5%).

A return to inflation will result in sky high mortgage interest rates once again. Even if interest rates ONLY soared to 15%, the result will devestate housing prices.

Consider... in order to have the same monthly payment on a $650,000 dollar mortgage at todays five year fixed rate of 4.79%, the mortgage amount at 15% would have to drop to $250,000.

As we come out of this recession, virtually every economist insists that rapid inflation is unavoidable.

And that $650,000 house will HAVE to fall to at least $250,000 if anyone can even hope to afford to buy it.

If you knew that the $650,000 house you were thinking of buying today would only be able to fetch you $250,000 5-7 years from now, would you buy it?

Not a chance in hell.

And that's why Real Estate sales will plummet and fall off the charts this year.

Only a fool would assume such a large mortgage with these economic storm clouds on the horizon.

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Saturday, January 17, 2009

Contrary to popular opinion... subprime was NOT the spark that started the crash in the USA

I had a deluge of email regarding my last post when I said, "Subprime did not cause the housing collapse… Subprime simply got caught up in a declining market and – like a wave of dominos – intensified the reaction".

Quite a few people took issue with this. But the subprime sterotype is a viewpoint that has been incorrectly perpetuated.

Subprime loans were never the problem. They were just an early warning signal about shoddy and predatory lending practices. It was falling demand in relation to relatively high levels of supply that triggered a modest drop in house price in bubbly cities such as San Diego and Miami.

When modestly lower prices combined with higher reset rates on the exotic mortgages, it triggered a substantial wave of foreclosures. Suddenly a bloated housing inventory started to overwhelm itself.

And as it did, it gathered steam engulfing those who did not have these exotic mortgages.

A Washington Post analysis of available data shows that many borrowers ensnared in the evolving mortgage mess do not fit neatly into the stereotypes that surfaced by early 2007 when delinquency rates shot up.

They didn't have subprime loans, they weren't borrowers with shaky credit or without enough cash for a down payment.

Instead they were solid working families with good credit who had cash for a downpayment... and they had been caught in a declining market. They are 'underwater' with their mortgages (owe more on their house than what it is now worth because it's value has plumetted) and are seeing their jobs vanish in a crashing economy.

The reality is that the wave of subprime delinquencies has crested.

But by October 2008, for the first time, the number of prime mortgages in delinquency exceeded the subprime loans in danger of default.

Our so-called experts in Vancouver look southward with smug indignation and claim the US scenario will not be repeated here because our banking system does not permit subprime loans.

But I will say it again, subprime did not trigger the US collapse. It was merely a secondary domino that got caught up in the collapse of bubble conditions.

Those in trouble in the United States are not, primarily, lower-income borrowers. The foreclosure crisis has become a wave, afflicting neighborhoods of every stripe -- but particularly communities created by the boom itself.

And that is the vortex into which Vancouver is now being sucked. The absence of subprime mortgages has nothing to do with it. But for some reason our 'experts' cannot - or will not - see this.

The collapse in the States was precipitated by a modest drop in housing prices.

In the first half of 2008, Vancouver began to experience that 'modest drop in housing prices'.

The crash of the stock market and the collapsing world economy is our second domino which is accelerating the conditions created by that drop.

The absence of an overheated market for speculators, the absence of wealthy offshore and US buyers, the absence of local income levels to support the bubble conditions in the Lower Mainland... all of these factors are subsequent domino's which are triggering an acceleration of the collapse.

The failure of our 'experts' to recognize these conditions is why so many Vancouverites are flabbergast at what is happening in our real estate market.

Chris Evans, VP of Onni Group, made this comment when announcing his company's slashing of prices by 40% in a massive liquidation of unsold Condos: “No one could never have imagined the real estate market would drop as much as this.”

Umm, sorry Chris. A lot of people could - and did imagine this drop. And they imagine a drop even greater than what we have already seen.

It's just that our so called 'experts' refuse to realistically analyze what is happening both here and in the United States. They want to pretend that the absence of subprime inoculates us from any reprecussions.

They are wrong.

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Thursday, January 15, 2009

Why the Vancouver market is going to crash!

A great many people in Vancouver have rationalized that Lotusland will escape the damaging real estate carnage that exists in the United States because we do not have the same subprime fiasco triggering massive foreclosures in our markets.

Comforted by this, most Vancouverites cannot fathom how our market could possibly collapse like it is in the US.

But while it is true that exotic lending (ie., non-traditional mortgages), lax underwriting and easy credit never became as significant a force in Canada as it was in the US, the mistake we are making here in Vancouver is to believe this insulates us from what is occurring in the US.

While exotic subprime lending may have helped to create the bubble in the United States; it wasn’t what caused prices to initially fall.

Prices in America started to fall in early 2006 when some potential US homebuyers concluded that home prices were becoming fundamentally overvalued. As a result, falling demand in relation to relatively high levels of supply triggered a modest drop in house price in bubbly cities such as San Diego and Miami.

This was phase 1 of the price correction in the United States.

Had house prices actually continued to rise, many subprime mortgages could have been reset at higher rates without much damage. After all, the whole subprime mortgage industry was predicated on rising home prices.

But when falling demand in relation to relatively high levels of supply triggered a modest drop in housing prices... it started a domino effect that has been catastrophic.

Modestly lower prices, along with higher reset rates on the exotic mortgages resulted in a substantial wave of foreclosures. Suddenly a bloated housing inventory started to overwhelm itself.

It was this conjunction that reinforced downward pressure on house prices and created what analyst are now calling Phase 2 of the U.S. correction - where the annual rate of price declines intensified to as much as 30% in some US cities by 2008.

And this triggered the worldwide financial crisis.

Subprime did not cause the housing collapse… Subprime simply got caught up in a declining market and – like a wave of dominos – intensified the reaction.

And it is this intensified reaction that is now racing towards Vancouver like a massive economic Tsunami.

The root cause of the US collapse, a cause which PRECEDED subprime, is what now threatens to engulf Vancouver. And just like in the US, the root cause will create a domino effect.

In our case subprime will not be the second domino to fall. That second domino will be the collapsing economy.

The Vancouver Real Estate market has seen substantially higher valuations relative to their respective histories than has any other city in Canada. Rampant speculation has driven our market.

House prices in BC, which historically averaged around 9X income, shot up to just over 14X in the last few years. Theoretically BC would need to see a cumulative 38% rise in per capita disposable income to put house prices back to historic valuation levels. When you consider that it previously took about 10 years for income in our province to grow by this amount – that simply isn’t going to happen.

Moreover, with worldwide economic conditions weakening dramatically, incomes in BC simply aren’t going to rise.

So what is the only alternative?

Prices will correct by coming down. And given that our market has been dominated by a large speculative component, and given that a good portion of those speculators have been offshore and US wealth - speculators who have become victims of the falling economy; it can only mean that the adjustments will occur at a far faster rate than other overvalued markets have seen.

All that is left to currently sustain the Vancouver market are Vancouverites. And the market is severely overpriced for the average family income level.

The absense of a subprime fiasco will not permit Vancouver to escape the Tsunami heading our way. When you connect the dots, the reasonable person can only conclude that we are heading for a significant real estate crash for our own local reasons.

The question is not ‘will the market drop’

The question is ‘how far will it drop’.

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How overpriced is Vancouver? (Part 1)

According to Onni Development Group, who plan to liquidate 375 condo units, it's overpriced by as much as 40%. See CBC story here

Could this be the spark that ignites an all-out springtime war between developers?



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Wednesday, January 14, 2009

Vancouverites start to ask: Is it really a bubble?


Homeowners in the Village on the Edge of the Rainforest are incredulous. Is it really a bubble?

Many of us find ourselves desperately rationalizing that the current market ‘downturn’ is just a temporary phase… that very soon the upswing will return and ‘asset appreciation’ will be the norm once again.

But many are increasingly fearful that the 'shorterm downturn' may be, in fact, a bubble.

A Bubble, as we have all learned, is a run up in prices going beyond anything that reasonable economic calculation can justify.

But here in Lotusland, we tell ourselves “we are different". Home prices here are not ‘unreasonable’, “my home is really worth this much”.

Or so we rationalize.

But increasingly there is a fear that maybe… just maybe… the naysayers are right. That it might just be possible that the last 9 years have been an irrational bubble.

Do you remember the dot.com bubble?

That was a speculative stock market bubble covering roughly 1995–2001 (with a climax on March 10, 2000 with the NASDAQ peaking at 5132.52) during which stock markets in Western nations saw their value increase rapidly from growth in the new Internet sector and related fields. The period was marked by the founding (and, in many cases, spectacular failure) of a group of new Internet-based companies commonly referred to as dot-coms. A combination of rapidly increasing stock prices, individual speculation in stocks, and widely available venture capital created an exuberant environment in which many of these businesses dismissed standard business models, focusing on increasing market share at the expense of the bottom line

If high tech firms had made unprecedented profits and paid out unprecedented dividends, maybe unprecedented tech stock prices would have been justified.

But they didn’t… and the bubble had a spectacular burst.

And now there is a creeping realization that today's home prices aren’t just a recession in the making, but are actually a bubble that has burst and that real estate prices - from from taking a momentary dip - are actually beginning a dramatic slide downward.

Vancouvertites are being forced to ask themselvers some basic questions they have never taken the time to ponder. Have the dramatic surge in prices over the last decade been a reflection of true value? Or are they completely disconnected from the fundamentals that have historically ruled the real estate market?

Let’s face it, if the cost of building new houses had doubled over the last 10 years, maybe it would make sense for the price of old homes to double too.

But they didn’t and it doesn’t.

What we actually have is a horrible glut of speculation that has ignored the fundamental disconnect between wages and home prices. Speculation that has been rationalized by a booming economy and geography.

All that people have heard about the last 10 years is that the boomers are aging, that new technologies have created new paradigms, that China and India have changed things forever, that everyone wants to live in Vancouver and that money will endlessly flow into Vancouver.

In short… that this time it is different.

Next time someone tells you this time is different; tell them “no, it probably isn’t.”

What we really have is a dangerous disconnect between home prices and the basic fundamentals that typically rule the housing market.

In the next few posts we will take a look at those fundamentals, the underlying stresses on our market and then ask the hard, uncomfortable questions… Is our market going to crash? And if it is, how overpriced is it?

The answers are not pretty.

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Send your comments via email to village_whisperer@live.ca

Sunday, January 11, 2009

Fortress Vancouver?


The last 9 years have been witness to unprecedented growth in the Real Estate Industry.

In many ways, it was like a dream. Boom, Boom, Boom!

And far from being immune, Vancouver got caught up – like most of the North American real estate obsessed public - in the exuberance of its own self-appreciation.

And we rationalized:

• Vancouver is one of the world’s three most beautiful cities,
• Overseas money is supporting a market local wages cannot,
• Limited geography (mountains to the north, ocean to the west, more mountains to the further east and the USA border to the south) are creating a land shortage,
• Immigration and job growth will continue unabated,
• Vancouver’s population will double by 2015
• The Olympics are creating an even greater demand and construction will grow, grow, grow.

It was Real Estate nirvana.

Condos sold like hotcakes to home buyers and speculators alike because we believed we couldn’t lose. After all… real estate only goes up, the world wants to live here, it is suicide NOT to buy.

One North Vancouver Realtor was even compelled to state publically that, “We’re really bulletproof for our lifetimes and beyond.”

And it is this unbridled optomism, so eerily reminiscent of the 1920s in the lead up to the Great Depression, that buffered so many from the Real Estate/Economic carnage being played out in the United States in 2007 to mid 2008.

Local ‘experts’ were adament, as late as July 2008, that “there is no indication, at this point, of any kind of substantial decline in prices.”

And now people watch, trance-like, waiting to wake up from a dream.

It can’t be happening, we tell ourselves. It’s a momentary dip… wait four or five months and things will rebound.

And so most of us wait, hoping for the momentary aberration to pass.

But with each passing day it is increasingly evident this may be bigger than most of the local real estate 'experts' originally thought.

Cracks are appearing in the façade that is Fortress Vancouver and people are, just now, starting to fear the shining city on the hill may be losing it's impenetrable lustre.

Wednesday, January 7, 2009

Not just bears... but... Angry Bears!


In the last post we hilighted Ozzie Jurock's take on the coming year: 2009.

Deried by Lower Mainland Bears as pollyanish, it really is not surprising. Ozzie is, after all, a salesman. And as as the past president of Royal LePage (Res.) in charge of over 7000 salespeople... Ozzie is simply unable to disasociate himself from what comes naturally; being a sales force motivator.

And while his message is as simple as it is timeless: take lemons and make lemonaide. The eternal mantra of all salesmen has taken on a very dark side these past few years.

Within the R/E Bear community there is more than just a backlash to the salesman's mantra.

There are bears... but then there are the Angry Bears.

Angry Bears are furious with what has happened within the Real Estate Community and this mantra of positism. And that anger is palpatable.

So why are some Bears so angry?

'Positism' is fine for your frontline salesman. But some Bears feel that there is certain level of the Industry... and of government and media... who have abrogated their duty and responsibility to society.

Dangerous conditions developed over the last eight years with nary of word of warning from those who should have been guarding the best interests of Vancouverites (and Canadians). It is this abrogation of responsibility that infuriates so many Angry Bears.

One of the leading Canadian Angry Bears is former Member of Parliament Garth Turner. Garth has been beating the real estate warning drum for some time on his website http://www.greaterfool.ca/

A recent post best sumarizes this anger. In 'the gospel of Phil', Garth profiles Phil Soper, President & CEO Royal LePage Real Estate Services Ltd.

Garth notes that exactly one year ago, when the US housing market was in distress, and warning signs were popping up everywhere that serious Real Estate problems were on the horizon for Canadians, the intrepid Phil Sopher was issuing his assessment of the coming storm.

Did Sopher warn young Canadian couples across the Dominion to take heed and caution?

Did he caution them against moving into houses with no downpayment, caution against buying Vancouver condos that were the price of whole blocks in other Canadian cities, caution them against assuming 40-year mortgages that several times the average family income to buy a house?

Did he caution them to tread carefully before committing to such a precarious financial position with an unprecedented modern storm brewing south of the 49th parallel?

Nope.

As Garth notes, twelve months ago the guy in charge of the real estate mega-marketer Royal LePage issued a 2008 forecast which said:

“After experiencing an exceptional year characterized by strong average house price appreciation and record breaking unit sales, the momentum from 2007 is anticipated to carry over and position Canada’s real estate market for steady, yet moderate growth in 2008, according to the Royal LePage 2008 Market Survey Forecast released today.

“Canada’s housing market in 2008 should continue to thrive on a balanced diet of strong economic fundamentals, including high levels of employment, resilient consumer confidence, modest levels of inflation and the relatively low cost of borrowing money,” said Phil Soper, president and chief executive of Royal LePage Real Estate Services. “Canada is currently enjoying one of the longest housing market expansions in history; however, as we move into 2008 it is anticipated that slowly eroding affordability will cause demand to ease, allowing the market to move toward balanced conditions, with lower levels of price appreciation, and fewer homes trading hands.”


The Angry Bears are furious that those Canadians looking for “expert” opinion were spoon-fed 'positism' masquerading as expert, guiding advice. How many Canadians were duped by the rhetoric exhorting them to 'get into the market' before they would be left behind?

How many read reports like Phil's and then went and bought a home? How many are now trapped with zero-down, 40-year mortgages? How many became, as Garth says, "the last sucker into a market which should have been condemned"?

Garth Turner goes on to note, "Of course in the intervening months, real estate sales have collapsed by up to 70% in some cities, and prices have fallen precipitously in the country’s largest markets. Listings have ballooned, multiple offers are a memory, houses are sitting without offers month after month and the economy has deteriorated in a way that has the prime minister musing about a possible depression. Our major trading partner and the world’s biggest economy is in tatters even after trillions have been spent, interest rates are on the way to zero and Chinese leaders are freaked out about layoffs and deflation.

So, what does Phil Soper say now? That he’s sorry? That he regrets pumping the market when he was supposed to be a leader?"


The answer, of course, is no.

In this year's report Soper - like Ozzie Jurock - continues the mantra of positism and dismisses impending economic turmoil as two looming bad financial quarters, and then it’s back to eternally rising housing prices by the beginning of April.

In a nutshell this is what so infuriates so many of the Bears. They decry this abrogation of reponsibility by the Real Estate Pollyana's to safeguard the best interests of Canadians... all in the name of protecting a massive Real Estate Ponzi game.

And that's why they are so Angry.

Sunday, January 4, 2009

The first 2009 salvo from the Pollyanna R/E Promoters

Ozzie Jurock is a Real Estate fixture in BC known for his weekly appearances on Global TV's noon news hour to discuss local real estate.

http://www.jurock.com/

Self promoted as one of Canada's leading business motivators, his investor outlook conferences attract audiences of over 500 attendees. Jurock served as the past president of Royal LePage (Res.) in charge of over 7000 salespeople, the past chairman of NRS Block Bros. as well as managed real estate companies in Taiwan, Hongkong and Tokyo. He has served on the boards of the BC Real Estate Council, the Vancouver Real Estate Board, the UBC Real Estate Research Bureau and the Quality Council of BC among others.

In true salesman motivator fashion, he has issued his assessment of R/E for 2009. Here it is...

=================================

Will We Be Fine In 2009?


What a crazy year. What a mad 6 months, an outlandish September to October. Oil soaring to $147, then crashing to $37. Stocks on average down 45% or more, the whole world seemingly a’flame.

We keep saying that markets become the stories people tell about them. Until the year 2000 people talked around the water cooler, things - both scary and positive - stayed local. After 2000 the ‘talking’ changed. The Internet, Youtube, pod casts, blogs and all conspired to take our ‘market stories’ worldwide in an instant. Collectively we were able to feel euphoric, when we read good news and then collectively we were able to feel really scared - fast. BNNitis and CNNitis took over. We have a world cowering in fear - regurgitating endlessly the bad news … we fear auto downturns in Germany, coal miners striking in Brazil, oil sheiks needing 100 dollar a barrel to survive, British banks down. My god, Hong Kong is down, oh Africa is in a drought, oh, oh, oh, … and all that before we get to work. The negative comes easy and stays longer … and fear is more powerful than euphoria. The positive is neve r reported - worldwide - so is it any wonder that we collectively cower in fear. … when we should rejoice in that we are here in Canada today. I am telling you today - for myself:

Enough is enough!

We have to work on the positive. The fact remains that the best market remains between your own ears. We CAN be contrarian, we do NOT have to watch the ongoing barrage of bad news nor listen to people that have been wrong all year anyhow. It is a fact that stock markets historically returned within 2 years after collapses, it is a fact that your cash flow property still does - well - cash flow. Facts: That our shopping centres are full, that our unemployment rate stands at 5.4% and our huge capital investments and strong inward migration are for real. We KNOW, that we have come through some tough times before and that - in the end - it is how we feel ourselves that is the most important. Stop listening and worse stop REPEATING the negative stuff. In 2009, when someone asks: “How are you?” Say: “Wonderful”. It is the truth anyhow, we do live in paradise. When someone says how is y our business, say: “Great, never better!” Get positive. You attract what you think about.

In a world of “The Secret”, everyone professes to understand the “Law of attraction”, but few will act on the message. We understand, but we do not do. Or actually we talk negative - regurgitate the world’s calamities, we express little hope and we do not realize that the Law of Attraction is working! It gets you more of the same!

Say: “ENOUGH IS ENOUGH!”

I assure you this 18th of December that those of us that look for the positive, that stretch towards the good … that reach for a better thought and reflect a positive strong attitude WILL attract a fantastic 2009. Don’t follow the negative crowd. Switch them off.

Get rid of negative people … Like attracts like … birds of a feather flock together. Stay with positive people … and if you feel depressed and can’t feel positive right away, well, don’t wallow, get mad … mad is better than depressed. Then after mad, you feel frustrated - good … that is better than being mad … and after frustrated there comes a shrug and a get into an ‘action feeling’. (It is a fact that 80% of what we worry about never happens anyway.) Then … a giggle … and after that the positive: “Yeah, I know that me and mine will have a wonderful future. To everyone that depends on me I will reflect a positive outlook.” Do it!

Major Point: So yes, it starts right here, right now. In your own mind. Here are some other facts:

1. Stock markets have crashed and recovered a dozen times … they always recovered … yet when in the collapse, there seemed no end in sight. This one will recover too. Good.

2. There will be great demand for real estate. Already in the US we have a huge increase in distressed sales. Once they are gone, market will continue to rise. Opportunity will make some rich. Good.

3. Oil and gas prices are down, putting about $7 billion in Canadian pockets next year. Good.

4. There will be a dozen deals of a lifetime. I.e. a 3-year-old $60,000 (lease return) American SUV will go for under $20,000. Good.

5. Food costs will be cheaper. Good.

6. The bad companies, the bad products, the overbuilt real estate condo areas will all continue to be cleared out or crash and burn. Good, they should.

7. As investors we will not so readily trust someone else to manage our money. We will do some learning and not get scammed as easily. Good.

8. Lousy securities and fad products will not be tolerated or trusted and will die. AAA ratings will be checked. Good.

9. More stock investors will come to real estate. Good.

10. 30-year money in the US and 5-year money in Canada will be around 4.5% next spring. Good.

You make your own list. Try this: Whenever someone talks about how bad the economy is, ask him or her how she is doing. 80% of the time, people tell me, that they themselves are actually doing quite well … but they hear someone is not or may not be in future.

Be a contrarian: Love your life, love your family, love your community, love your country … and in the process become more of a human being than a human doing.

Yes, 2009 will be fine.

Thursday, January 1, 2009

Happy New Year

Ahh... another new year dawns. Welcome to my newest blog.

These are my whispers from the Village on the Edge of the Rainforest. Invariably they are whispers about the future of Real Estate in these turbulent times.

And while the topic is now debated openly (the need to whisper the dark and dirty looming secret no longer necessary), I welcome you to drop in on my thoughts and comments for the coming year.

I think you will agree, 2008 was quite the year.

The battle between the so-called 'Real Estate Death Watch' doomsayers and the pollyanna R/E promoters reached a cresendo with the brutal crash of the Stock Market in September/October.

After a year of trading insults and slugging it out in the trenches, it is now clear to the ordinary Joe that the Bloggers were prescient as they correctly diagnosed looming market madness. So self-evident, in fact, that several of the 'doomsayers' have pulled up stakes and closed their blogs... their purpose fulfilled; only the play-by-play of the collapse remaining.

But 'History' has not ended and a fascinating cascade of events is yet to unfold.

The Bears and Bulls of the Vancouver Market are gearing up, after their holiday break, for another round of cogitation to influence the hearts and minds of the Vancouver house buyer/seller.

Join me as we prepare to witness the unfolding story.

We truly do live in interesting times.