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Thursday, April 30, 2009

The Real Estate Bear Market Trap

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It was a leisure Wednesday morning, dear reader, and your faithful scribe was enjoying breakfast at the local White Spot, the requisite Pacific Press rags at arm's reach.

The solitude was not to last.

Tossed at me was the above pictured Canadian Business Magazine, it's cover trumpeting that current real estate conditions constitute the "buying opportunity of a lifetime!"

Fuel for the fire was one of the aforementioned P.P. rag's spread open to an article announcing that 'Vancouver house prices slide for the eighth straight month'.

According to the Teranet-National Bank House Price Index, Vancouver's house prices slid in February for the eighth straight month to rest 10.2 per cent below their peak.

"Well...?", a close friend asked in an accusatory tone. "Are you prepared to admit that now is a good time to buy?"

Ignorance, as they say, is bliss.

The stock market has a name for the current real estate condition... it's called the Bear Market Trap.

A Bear Market is when stocks undergo a protracted period of severe declines. The trap occurs when a short period of rising prices reverses the bearish trend and carries on long enough to convince a large number of people to be sucked into plunging headlong into the market. In reality, the market has only head-faked a reversal. Suddenly, and without warning, it crashes again.

As we have already detailed on this blog, Canada is shedding jobs at a faster rate than the United States. The Bank of Canada is embarking on a program of quantative easing just like the US and UK. Household debt is at it's highest levels in history, equal to what it is in the United States.

The American economy has crashed by a stunning 6.2% in the last quarter while ours has crashed by 7.3%. On average our American cousins were spending six times their incomes for houses at the height of the bubble. In Vancouver we have been spending 10 times our incomes. The American housing collapse has been underway for 4 years, ours for a mere 11 months.

Yet the real estate pollyanna's continue to insist that conditions in Canada are so much better than the United States that our housing collapse is now over in record time compared to the USA.

Dear Reader, do not get sucked into this malarky.

Our economic conditions currently are, at best, just as bad as those in America.

Central bank interest rates are at zero, prime rates the lowest in living memory, and there is an appearance of affordability which is temporarily driving values up.

What we are seeing is the classic stock bear market trap transposed to the real estate milieu.

Don't be one of those sucked into it.

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Email: village_whisperer@live.ca

Wednesday, April 29, 2009

Is the new autoworker accord creating a death spiral for all Pension Plans?

Laurel Magri: lying, deceptive, manipulative whore.

As the GM/Chrysler saga plays out, is the death knell sounding for pension plans?

When bankruptcy for Chrysler was first being discussed, GM brought the issue of pension to the forefront through a restructuring plan they submitted to the Canadian Federal and Ontario provincial governments. GM said that it was being crippled by pension payments and it was crucial they be relieved on those responsibilities.

Suddenly the subject of pensions for members of the Canadian Auto Workers - and who pays for them - became a hot-button topic and a toxic issue for politicians.

Angry constituents complained bitterly that they did not want to see taxpayers' money used to absorb the autoworker's pensions should the companies collapse.

As part of the recent autoworker negotiations, Canadian auto workers made a historic concession to pay into their own pensions. Newly hired Canadian autoworkers will now contribute $1 for every hour worked or about $1,700 a year.

CAW president Ken Lewenza rationalized the move in an interview saying that newly hired members of the United Auto Workers in Detroit will have no pensions. The CAW needed to act to maintain Canada's competitive position.

Meanwhile the New York Times reports that the plight of carmakers could upset all pensions.

Stating that the US goverment is considering taking over the pension plans of General Motors and Chrysler, the Times noted that for hundreds of thousands of retired auto workers a federal pension takeover would mean sharply reduced benefits.

Pension experts predict that a US government takeover of those giant pension plans could accelerate the decline of other traditional pension plans as the move will spur other auto companies and all types of manufacturers to abandon such benefits for competitive reasons.

“If one of these companies solves its pension problem by shunting it off to the federal government, then for competitive reasons the others have to do the same thing,” said Zvi Bodie, a professor of finance at the Boston University School of Management and longtime observer of the government’s pension insurance system.

“That is the death spiral,” said Bodie.

"Not only would Ford have reason to opt out of the expense of maintaining a pension plan, but so would Toyota and Honda, which also have pension plans at their American plants", said Teresa Ghilarducci, a professor of economics at the New School for Social Research.

In Canada, the wolves are already gathering at the pension door. Ontario Premier Dalton McGuinty says Ontario doesn't have the resources to put more money into its pension safety net (which is the government vehicle that bails out private pension plans that fail).

Yet, Ontariio has all the resources necessary for to protect and support public service (and MPP) pension plans.

Those public service plans, like GM and Chrysler's private sector plans, are also under stress from shortfalls. But they are 100% funded from tax revenue. It seems a double standard that public sector pensions are 100% per cent protected against shortfalls, while private-sector pensioners can be thrown to the wolves.

How long before the private sector pension death spiral brings down the public plans too?

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Email: village_whisperer@live.ca

Tuesday, April 28, 2009

Black Monday?

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What an awful day it was on the employment front yesterday.

General Motors, the once proud auto manufacturer who used to sell and build roughly one out of every three new vehicles in Canada, now forecasts its market share will fall to 17%

To compensate GM plans to slash it's Canadian workforce from over 10,300 to a mere 4,400 factory workers. Meanwhile some 310 dealers now selling GM cars will be asked to shut their doors permanently in communities coast to coast.

"This does mark a bit of a watershed," said Doug Porter, economist for BMO Capital Markets. "I think it's a tragedy for the Canadian economy to some extent. GM was a huge employer. And one that paid relatively high wages... It's decline has gone hand in hand with some diminishing of the Ontario economy."

In a spinoff, Magna International is laying off about 725 employees at its biggest plant in the country. The company announced this morning that Formet Industries, a manufacturing division of Magna International Inc.'s Cosma unit, will cut production and jobs dramatically at its St. Thomas plant next month because of the slide in demand for North American trucks.

The reduction represents more than half of the Magna plant's workforce.

It's a dark day indeed for the Canadian autoworker, parts manufacturer or dealership employee.

So much for the "Built to Last... Built to Love" campaign.

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Email: village_whisperer@live.ca

Monday, April 27, 2009

Real Estate as a way to make money: Are attitudes changing?

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Your dilligent scribe did a double take while perusing an interesting article in the Toronto Star on the weekend.

In a piece titled 'Real estate realities: To buy or not to buy...', the Star debated the issue.

Noting that interest rates are at the lowest they've been in more than 50 years and with home and condo prices in decline for the first time since 1996, the paper cited how many potential first-time buyers are viewing this as their best chance to buy into an otherwise unaffordable market.

One first-time buyer, Ren Ramkhelawan, is profiled. In 2007 Ramkhelawan had actually negotiated the purchase of a 500-square-foot condo for $222,000. But he backed out because he felt it was too small.

A year later, the economy had tanked, taking the condo market with it. He's now the proud new owner of a 700-square-foot, $227,000 condo.

But Ramkhelawan doesn't see himself living in the condo for more than three years, when he plans to flip it and make a profit.

At which point the Toronto Star notes, "Problem is, many in the realty business argue Ramkhelawan and others are banking on returns from a world that no longer exists."

Say Whaaaa?????

Let me tell you dear reader... I almost fell out of my chair when I read this. When was the last time you heard that type of a phrase from anyone in the realty business?

"Everyone wants to flip houses and condos like pancakes,"says Greg Stanley, a mortgage broker. "Maybe we should have a change of view, thinking that a house is actually a home like they did in the old days. Back then, if you bought a house and sold it, it would be the same price. No one expected the houses to go up in value; they only expected to pay them off."

Wow.

There's nothing wrong with that. I'm just stunned to see the Star (a paper highly dependant on developer advertising revenue like the Vancouver Sun) come out and print that kind of admission.

The article winds up noting, "Industry Canada's office of consumer affairs has a calculator that helps you determine whether you should rent or buy. The results may surprise you as, in some cases, those who rent and invest the money they would have otherwise thrown into their mortgage come out on top in the long-term."

Bingo! I've long argued that fact myself, especially with the current state of the stock market & economy. There is far greater opportunity for wealth creation in avenues other than real estate right now.

It's another sign of the times when you start to see this sort of commentary in newspapers like the Toronto Star, dear reader.

Another sign of the times.

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Email: village_whisperer@live.ca

Sunday, April 26, 2009

Why the housing collapse could be worse for Canadians

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So far, at least, Canada has not suffered the same devesating housing collapse as have our American cousins.

But as we have cautioned more than once on this blog, Vancouver is only 11 months into this collapse. The USA is 4 years into the process. And the precipitous drop in value over the first 11 months for Vancouver Real Estate is steeper than virtually all American cities in their first 11 months.

The fact that our real estate is loosing value at a faster rate than US cities is not the only concern we should have.

According to a new survey hyped yesterday by the local media, Canadians - particularly Vancouverites - have more than two-thirds more equity in their home than Americans.

This is supposed to be positive, reassuring news because it suggests we are less likely to default and trigger a wave of foreclosures which will crush the housing market.

The study for the Canadian Association of Accredited Mortgage Professionals shows Canadian homeowners have, on average, 72% equity in their house, compared with 43% for Americans. "It is a very positive part of the Canadian housing story," said Jim Murphy, chief executive of Toronto-based CAAMP. "Canadians pay down their mortgages. Canadians are just more conservative than Americans."

And despite the drop in prices in the Canadians marketplace, the report notes that only 2% of Canadian mortgage holders currently have negative equity.

But while Murphy (and our local media) hype these virtues as something good for the individual and collective well-being of Canadians, it could also be a catastrophic poison pill.

Their rosy outlook pre-suposes housing will not drop any further than it already has.

It all comes down to having faith that Canada will be able to keep the housing bubble from deflating further. At the current levels, so the theory goes, the strong Canadian equity position will prevent the cascading waves of mortgage defaults that sank the American market.

Just one problem.

11 months into their collapse, 75% of Americans were also in a strong equity position. That position evaporated when housing values collapsed.

If the Vancouver housing bubble does burst to pre-2002 levels (as we predicted it must in our 'Anatomy of a Bubble' post), then thousands of Vancouverites will see their personal fortunes (and retirement funds) vitrually wiped out.

The vast amount of Canadians have little or no actual retirement savings. More than 80% are counting on the value of their homes to fund their retirement. So while Canadians currently have dramatically more equity in their homes than Americans, that so called 'equity' is entirely dependant on housing values remaining exactly where they are.

If housing prices drop, Presto Chango!... that equity is gone.

And since Canadians don't have anything else to fall back on, a significant housing collapse could be far more devestating to Canadians than to Americans.

It's curious that Murphy cannot see the seeds for further collapse within his own survey.

Murphy attempts to accentuate the positive in his data by noting that the study also found that Canadians have dramatically reduced the amount of equity they are taking out of their home. A year ago 22% of Canadians had accessed the equity in their home through measures such as lines of credit. Today that number is down to 15%.

"This speaks to the whole thing about people belt-tightening," said Mr. Murphy.

Meanwhile, about the only new risk Canadians seem to be taking on is longer amortizations. While 83% of Canadians have an amortizations of 25 years or less, the number with 30-year and 35-year amortizations is rising. In the past six months, 46% of new mortgages have been for amortization of more than 25 years.

"I don't think it's a worry because [Canadians] are paying down their mortgages," said Will Dunning, chief economist with CAAMP.

Earth to Jim & Will... that half full glass of yours is half empty and draining fast. Don't you see the problem here?

Our governments are gambling all of their efforts on jump starting the economy by plunging our country into generational debt in a futile strategy that needs us to go back to spending like drunken sailors.

Yet your survey shows we are cutting back and saving like never before. Canadians simply won't re-mortgage their homes to carry on with the reckless spending ways of the past because they are petrified about their homes and the economy.

It also shows that Canadians have been taking out longer and longer term mortgages. That's because everything younger and middle-aged Canadians have is tied up in the value of their house. 30, 35 and 40 year mortgages is the only way they could make it work and they went 'all-in' with that mortgage.

We have put all of our eggs in one basket.

And because we are tightening up on individual spending, government stimulus plans are destined to fail.

And the failure of the stimulus plans mean more collapsing businesses, more lost jobs, more bankruptcies, more missed mortgage payments... and more foreclosures.

That means lower and lower housing prices.

The end result? A new survey in three years that shows we are in deep doo-doo because that superior Canadian equity position is gone.

The real estate stakes for individual Canadians are far higher than for individual Americans.

And if values do, in fact, continue to collapse... most of us are screwed.

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Email: village_whisperer@live.ca

Saturday, April 25, 2009

"Deja Vu - all over again"

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What's the next big financial disaster looming on the horizon in the United States?

Today's phrase that pays is 'corporate-style subprime loans'.

In 2006 we started to hear about loans that went to borrowers who might never before have been allowed to borrow. When they found repayment difficult, they were permitted to refinance their loans, generating fees for the lenders and postponing the ultimate reckoning.

Then the credit markets turned and both the borrowers and lenders were in deep trouble.

So it went with the subprime mortgage crisis. And so it is now going with corporate loans and bonds. It appears that defaults on leveraged loans and corporate bonds will soon rise to levels not seen since the Great Depression.

If that does happen, a wave of corporate bankruptcies will deal another blow to the American economy, and present the Obama administration with more painful decisions about possible bailouts — bailouts that could be made directly or indirectly by persuading bailed-out banks to make loans that might not seem wise to the bankers.

Oh... the tangled web we are weaving.

Calculations by Moody's Investors Service show that as of the beginning of April, a record 27 percent of speculative-grade debt issuers had a rating on their senior debt ranging from Caa down to C. These are the lowest rungs of credit quality — rungs that once rendered a borrower ineligible for a loan.

The default rate on leveraged loans and speculative grade bonds is rising rapidly. “We expect the default rate to get to the range of 14 percent by the end of the year,” said Kenneth Emery, a senior vice president of Moody's. That compares to peak default rates of 10 to 12 percent during the last two recessions, in 1991 and 2001.

That could turn out to be an optimistic forecast. Edward I. Altman, a finance professor at New York University says he thinks the rate will probably be in the range of 13 to 15 percent, but could go as high as 19 percent this year. If the recession continues into 2010, he fears that year could see a comparable default rate.

How did we get into this mess? The story is remarkably similar to the tale of subprime mortgages. Lenders who were making money by putting the loans into pools became more and more eager to make loans, and less and less concerned about their quality.

The way the loan securitization market developed, the most profitable loans to make were those rated B or even B-minus, levels of debt below the old standard for most junk bonds. There was a market for some Caa paper, even though such loans historically often landed in default.

Borrowers who ran into problems could refinance their debt, creating new rounds of fees for the banks making the loans and obscuring the problems with credit. And with the economy booming, there were not that many problems anyway.

The secret to all this was the collateralized loan obligation, or C.L.O. As with mortgage securities, the rating agency models figured that 70 percent of the money that went into financing single-B rated loans could be financed with AAA-rated paper.

As time went on, the big banks making the leveraged loans became more and more competitive, figuring the secret to profits was in making the loans and securitizing them — not necessarily getting them paid back. It was financial alchemy, but the AAA-rated paper was popular with buyers like banks and insurance companies, whose capital rules treated such securities as virtually risk-free. They wanted more such paper, and the big banks obliged.

“C.L.O.’s bought about two-thirds of corporate loans from 2004 to 2007,” said David Preston, a structured products analyst at Wachovia Securities. But there are now no new C.L.O.’s being created, and many of the old ones may soon be barred from reinvesting repayments in new loans — in part because so many existing loans are being downgraded by the rating agencies.

The loans were the corporate equivalent of the now-notorious pay-option mortgage loans, where the borrower could choose to pay only a fraction of the interest, adding the rest to the amount he owed.

It all sounds absurd now. But at the time, any bank that refused to lower standards on mortgage loans or on corporate loans risked plunging profits as all the business went to competitors. That might not have happened if regulators had been willing to step in, as some of them wanted to do.

Defaults are now rising because of the recession, but the news could get even worse. Unlike most mortgages, leveraged loans and junk bonds are not scheduled to be gradually paid off over the life of the loan. Instead, they come due and must be refinanced. Moody’s reports that leveraged companies need to refinance $26 billion in loans this year, $44 billion in 2010 and $120 billion in 2011. If credit markets remain tight, we could see lots of defaults even among companies that are doing well enough to make their interest payments.

When the subprime mortgage crisis burst into public view in 2007, government officials were slow to understand that the problem was much broader than the mortgage market. As it happens, the mortgage problem helped to bring on a recession, which is making the coming crisis in corporate loans — not to mention in commercial real estate loans — that much worse.

What was it that Yogi Berra said? "It's deja vu all over again!"

It's another reason to believe that the current stock market rally is nothing more than a bear market trap.

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Email: village_whisperer@live.ca

Friday, April 24, 2009

Bank Failure Friday and the 'real' name of the Stanley Cup

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UPDATE: Bankd Failure #29 - First Bank of Idaho, Fsb, Ketchum, Idaho
UPDATE: Bank Failure #28 - First Bank of Beverly Hills, Calabasas, California
UPDATE: Bank Failure #27 - Michigan Heritage Bank, Farmington Hills
UPDATE: Bank Failure #26 - American Southern Bank, Kennesaw, Georgia
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Not too long ago our Prime Minister said, "there won't be an economic recovery until the U.S. financial system is repaired." So we dutifully scrutinize US banking developments with keen interest.

As faithful readers of this blog know, bank failures in the United States always seemed to be delayed until late on Friday afternoons. This has prompted many blogs to jokingly refer to fridays as 'Bank Failure Friday'.

So far 2009 is off to a record breaking year with 25 failures to date.

We wait with eager anticipation for today's carnage. Updates from the FDIC as they come in. We will post them in red as updates at the top of the post.

Meanwhile you will have noticed the 'Canuck Stanley Cup Countdown' which now occupies the upper right corner of the blog. The Village on the Edge of the Rainforest erupted into ecstatic joy last Tuesday as the hometown Canucks eliminated the Saint Louis Blues 4 games to 0. The Canucks are now through round 1 and patiently await their next opponent.

With the hockey theme in mind, I offer faithful readers a bit of hockey trivia you can stump your friends with.

The holy grail of hockey is the Stanley Cup. But did you know that 'Stanley Cup' is a nickname for the silver chalice?

T'is true.

Nowhere on the famous trophy do the words 'Stanley Cup' appear. Hockey's ultimate prize was donated by Lord Stanley, Earl of Preston, when he was Govenor General of the Dominion of Canada - and he did not name the Cup after himself. Instead he gave the trophy it's own unique name which is engraved on it for all to see.

If you look on the famous silver rose bowl you will find the actual name of the Cup. Click on the image below to read it for yourself.

And raise a pint for the Whisperer when you win the bar bet on this timely Canadiana trivia question.



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Email: village_whisperer@live.ca

Thursday, April 23, 2009

The Looming Mortgage Concern

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In yesterdays post about the Anatomy of a Bubble, we mentioned that a crucial component to a return to rising real estate prices would be the availability of cheap, plentiful debt. And since debt loads are at historic extremes, what conditions will enable trillions more in debt to be issued to buy inflated housing?

The answer, of course, is that those conditions won't occur. Real estate values will continue their decline as the current wave of bottom fishers discouvers that these current prices (almost 15% down from peak) aren't the bottom of the market.

That's when the next domino in the collapse will fall: mortgage defaults by current property owners.

Sounding the alarm on this is the Canadian Association of Accredited Mortgage Professionals who released a report today that warns "Canadian mortgage holders are facing significant challenges, with an uncertain job market increasing the risk of mortgage defaults in the months ahead."

In a survey down by the Association, eight per cent of Canadian mortgage holders, representing some 425,000 home owners, indicated that being able to make a mortgage payment is currently an issue or concern. Meanwhile, another 18 per cent of respondents – "a surprisingly large share" – reported that either they themselves or a primary earner in their household had lost a job in the past six months.

And rising unemployment is the chief concern of the Association. "The greatest risk facing the Canadian mortgage market is job loss," says Will Dunning, chief economist for the association and author of the report.

While Dunning stresses that Canadians are in much better shape than their U.S. counterparts (U.S. households have less equity in their homes than Canadians, at 43 per cent versus 72 per cent), there are still about 2% of Canadians report negative equity in their homes (where the value of the mortgage is greater than the value of the home).

Another 8 per cent have less than 10 per cent equity, says the report.

"Negative equity becomes a more risky factor when households have difficulty making current payments or lose a job," says Dunning. "Without equity, households are unable to raise funds by borrowing against the home or selling the property, and they have reduced options for refinancing."

Then comes the kicker from the report.

If house prices were to fall further, there would be an increase in the number of home owners with negative equity, a situation many U.S. consumers now find themselves in. And if mortgage holders with negative equity were to lose jobs, "There would be a more substantial rise in the extent of mortgage affordability problems and possibly defaults," warns Dunning.

As we have already reported on this blog, BC has been hammered by the biggest wave of unemployment in the country. The prospect for the spring and summer is for the trend to intesify. The forestry industry has a lot of pain still to come, the tourism industry is going to be smacked hard this summer, the construction industry is in a steep downward spiral and the 'Olympic Bounce' will not materialize without a dramatic turn in the world economy.

The report says optomistically that the debt loads are largely sustainable, as long as Canadians don't continue to see substantial job losses and as long as house prices don't continue to decline.

But if they do, you can see how conditions are aligning themselves to intensify and accelerate the collapse.


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Email: village_whisperer@live.ca

Wednesday, April 22, 2009

Have we hit bottom? Anatomy of a Bubble

(click on image to enlarge)

Anatomy of a bubble was posted on Charles Hugh Smith's blog and is very interesting so I have condensed and reposted it here. There are more graphs on his site if you are interested.

The big real estate debate in Vancouver right now is, "have we hit bottom? Is now the time to buy?"

Interestingly, no one refutes the fact that we have been in a housing bubble anymore. What people now deny is the fact it is going to continue to burst in spectacular fashion.

And so, with that in mind...

Anatomy of a Bubble

No model can predict the timing, highs or lows of any bubble, but all bubbles - be they real estate, stock market or whatever - tend to follow a pattern traced in human psychology:

1. As euphoria grabs hold, prices rise in a steep ascent to a point at which "everyone" believes there is no end to the trend.

2. The initial descent from the bubble peak is a "shock" which leaves the bubble mentality intact, i.e. the Bull Market in tulip bulbs, real estate, tech stocks, etc. is only suffering a standard retracement/indigestion; the trend higher is still in place.

[which is where we are in Vancouver right now. People are arguing that prices are only suffering a retracement and the upswing in prices will return shortly]

3. In housing, this psychology is embedded in such chestnuts as "they're not making any more land," "real estate always rises over time," "population growth means demand for housing will always rise," "the house is the foundation of middle class wealth appreciation," and so on.

4. At some point speculators who were left out of the initial explosive rise jump in because "prices are a real bargain now."

5. This buying pushes demand above supply briefly, and prices start rising again.

[which is what we are seeing in Vancouver with historic low interest rates and a decline, after 11 months, of over $121,000 in the benchmark price for SFHs]

6. But the realities beneath price action have changed, and this bargain-hunting burst soon fades as demand falters, supply rises and prices renew their descent.

7. Speculators and investors' memory of the tremendous profits made on the way up remain firmly embedded, forming an "investment memory" which locks them into the view that the upward trend will resume at some point. This drives wave after wave of bottom fishing in which speculators buy into an apparent bottom only to be disappointed and see that false bottom wiped out by a renewal of the downtrend.

8. At some point, all the bottom fishers have expended their capital and prices retrace to the pre-bubble levels, or even lower. This is what can be called "the real bottom."

[which in Vancouver Real Estate will probably be pre-2002 ($375,000), down from last years high of approx $910,000]

9. But the memory of past glories still remains in the minds of speculators/investors, and so a subdued uptrend starts as "hope springs eternal" buying kicks in.

10. Eventually this institutional/cultural "memory of an uptrend" fades as the "recovery" in prices fails. The truisms which fed the brief bubble and long post-bubble decline and recovery--that tech stocks were the future, real estate only goes up, the South Seas is the epic investment of all time, etc. are repudiated and lose favor. This is the ultimate bottom.

Can a 10-year bubble reach this "ultimate bottom" in a mere 11 months? History suggests not.

Vancouver's real estate market still has a long way to decline, years not months, with many minor bounces upward along the way.

Remember... it has only been 11 months since the market started to decline. In the United States it has been over four years. This bubble pattern has played out in every American city and Vancouver's drop in the first 11 months outpaces all but 2 or 3 US cities in their first year of collapse.

More importantly the economy has shifted dramatically. Add in the following financial factors that control real estate valuations and you cannot help but conclude the price declines will resume. These factors include:

1. Extreme bubble valuations must eventually retrace to the starting point, and in many cases they drop below the starting point.

Vancouver's real estate bubble started to inflate just prior to 2002. The benchmark price at that time was approx $375,000. We have come nowhere close to retracing to the starting point yet.

2. Housing and real estate are based on the availability of cheap, plentiful debt. As economy-wide debt loads are at historic extremes, it is prudent to ask what conditions will enable trillions more in debt to be issued to buy inflated housing.

3. As the Federal government borrows billions of dollars (in the USA, trillions of dollars) on the open market to fund its mega-stimulus-bailout debts, then the government is competing with private borrowers for a dwindling pool of capital/savings. That will drive up rates, making mortgages more expensive. And since prices drop as rates rise, this global push on interest rates is a profound headwind for housing prices globally.

4. Paying a mortgage requires steady income, which for most citizens means a steady job. Rapidly rising unemployment reduces the pool of potential buyers and adds to the inventory as those losing their incomes also lose their homes. (And BC is leading the nation in job losses with greater losses a certainty).

In short: with the national and household balance sheets at historic extremes of indebtedness it is difficult to see what fundamental financial foundation exists for higher housing prices.

The only conclusion to be drawn is that those currently buying "at bargain prices" will very likely be disappointed as prices renew their downtrend in the near future.

And Vancouver's bubble still has a long, significant ways to go in its downward deflation.


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Email: village_whisperer@live.ca

Tuesday, April 21, 2009

The Four Horsemen of Economic Doom

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The stock market goes up for a while, and then it takes a hard hit down. Some say the worst is over, others predict more pain to come. And the US President? Obama says there are “glimmers of hope.”

Have things really changed for the better?

Here are four analysts who correctly forecast the subprime and housing collapse. What do they think you should do in these uncertain times?

1. Mark Kiesel (managing director of Pimco in Newport Beach, Calif.)

Mr. Kiesel made a name for himself because he warned early on about the housing bubble. He was so worried that he sold his house in May 2006 and began to rent, instead.

Despite today’s upturn in optimism, he said, it’s too early to get into stocks.

What does he recommend? Get into select high-quality bonds.

The reason? The yield spread between investment-grade corporate bonds and US Treasuries are “at or near their widest levels in decades, and in some sectors they are approaching the widest since the Great Depression,” he wrote in a report to investors last week.

“Typically, when you come out of a recession and you get this recovery, the trade actually to do is to go into equities,” he said in an interview. “But what we think is different this time is that the economy is deleveraging and we’re also going through reregulation as well as deglobalization. So there’s secular change going on in the marketplace that makes it, in our opinion, more risky.”

So he’s dipping a “toe – and a leg” in high-quality bonds in selected areas, such as “national champion” banks (receiving cheap government money to restart lending), regulated pipeline and utility companies, and noncyclical industries like telecom and healthcare.

By the way, he’s still renting, because home prices have another 10 percent to fall in the United States. “By next year, you should really be in a position to want to start to make some offers.”

2. Nouriel Roubini (economist at New York University and chairman of RGE Monitor)

Mr. Roubini’s position illustrates how easy it is to get typecast. He has been gloomy about the US economy for so long (he predicted the coming of the recession in a prescient 2006 speech to the International Monetary Fund) that he’s become known as Dr. Doom. So when he was interviewed on CNBC last month, saying that there was light at the end of the tunnel, some took it as a big sign of change.

It wasn’t. Mr. Roubini had argued for months the contraction would slow this year and that recovery would occur in 2010, although it would be so weak that it would still feel like recession.

“I am not a perma-bear and will be the first to call for a sustained economic recovery and recovery of the financial markets when I see one,” he wrote in a post last Tuesday. It’s just that while the economy is no longer in a free fall as it was at the end of 2008, “we are still in the middle of a severe U-shaped recession that will last much longer than what is expected by the current consensus.”

His recommendation? Stay on the sidelines. Today’s rally should be viewed skeptically because earnings will remain weak as the economy keeps contracting this year and enters a weak recovery in 2010 (annual growth under 1 percent).

3. Peter Schiff (president of Euro Pacific Capital)

Mr. Schiff is a YouTube hero. In 2006, while analysts were blithely saying that the economy was strong, he warned about the real estate bubble and the overleveraged state of the economy. (Watch the scorn and bemusement of his fellow analysts here and here.)

Having called it right once, he now foresees a period of intensifying inflation as the Chinese and other creditors begin to lose confidence in the dollar and sell their dollar reserves.

His recommendation? Run, don’t walk, from the dollar. By pumping in trillions of dollars to prop up the current economy, the Obama administration is creating an even bigger problem that will cause hyperinflation and drive down the value of the dollar, he said in an interview. “As a nation, we go deeper into debt. What we need to do is get out of debt. We need to let the phony economy contract.”

“They’re not going to be the bankers for all this stuff,” he said in the interview. “Four years from now we could end up owing them $3 trillion. So [from their perspective], better to take a loss on $1 trillion than to take $3 trillion. You can hear the rumblings.”

Not everyone believes Schiff is right in this second call. But China and Russia have called for a new world currency to replace the dollar.

4. David Tice (chief equity strategist for bear markets at Federated Investors)

Mr. Tice warned of the housing bubble and rising debt in a March 2007 letter to investors. His view hasn’t changed much since then.

“We are as profoundly negative as we ever have been,” he said in an interview. “We have several more legs down in a secular bear market. Unfortunately, there’s a lot more pain to go because this is the big kahuna that we have deferred for a long time. The excesses and the imbalances [in the economy] have not yet been wrung out.”

His recommendation? Be defensive.

He counsels investors to stay with hard assets, such as gold, or stick with safe Treasuries, which currently yield next to nothing. In this era, “we have to think of return of principle rather than return on principle,” he said in an interview. But he also sees some good values in very safe, high-yield equities, such as natural gas trusts and utilities stocks with a big yield.

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So there you go... the opinions of four prominent forecasters who correctly saw the market crash and housing bubble before they occurred.

IMHO, more worthwile opinions than the talking heads on TV who never saw the crash coming.

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Email: village_whisperer@live.ca

Monday, April 20, 2009

Signs of the Times on Oak Street

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It is now 11 months since the bubble began to burst in Vancouver. The benchmark price for a SFH has collapsed over $121,000, a drop of over $10,000 a month. Think of it, that's a decline that is greater than the average yearly income of most lower mainland families.

Vancouver is curently dropping faster than many of the most bubbly American cities in their first year of collapse.

A quick drive down Oak Street in Vancouver these days gives you a glimpse of the changing face of Vancouver Real Estate. As soon as you come off the Oak Street Bridge (which connects Vancouver to the suburbs of Richmond and Delta), you immediatly come across this poster child of desperation (click on image above to enlarge).

If you look closely you see this building has nine seperate 'for sale' signs plaster around it. And that's after the developer had previously taken down two of them!

It isn't the greatest location either. You have virtually no yard (all you get is what you see in the front) and the view? You look out onto the escalating ramp of one of the busiest bridges in the City. Hopefully the townhomes are soundproof, unless you consider the gentle lullabye of the Detroit River outside a selling feature to insomniacs.

..............,.............. (click on image to enlarge)
The asking price...

Who said you had to go to California to visit Disneyland?

Further north, at about W. 43rd Ave is the Carrington. The site's original developer went belly up last year at the start of the collapse. At the time the story got a lot of media attention as the developer had to cancel his contract with pre-sale buyers and give them their deposits back.

..............,.............. (click on image to enlarge)
Another developer bought the empty site and build these condos. Recently these banners were festooned around the site. Clearly sales are not going well...


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Email: village_whisperer@live.ca

Sunday, April 19, 2009

Wells Farce-Co?

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At the beginning of last week I made a post about how Wells Fargo Bank had stunned the world by proclaiming it had just finished its most profitable quarter ever. Stock market investors jumped on the news with blind faith and the bank's stock soared. What sent Wells shares soaring was a three-page press release in which the San Francisco-based bank said it expected to report first-quarter net income of about $3 billion. Wells disclosed few details of what was in that figure. And by pushing the stock up 32 percent that day to $19.61, investors sent a clear message: They didn’t care.

As I said, we will watch the Fargo situation unfold with interest as questions were being raised about the Banks optimistic appraisal of it's financial situation.

On April 22nd the company will be releasing its first-quarter results and the flurry of speculation is intensifying.

We already talked about how Wells’s earnings may have gotten a boost from an accounting maneuver, since banned, that it used last year as part of its $12.5 billion purchase of Wachovia Corp. Specifically, Wells carried over a $7.5 billion loan-loss allowance from Wachovia’s balance sheet onto its own books.

Once it took control of the reserve from Wachovia, Wells was free to start dipping into it to absorb new credit losses on all sorts of loans, including loans Wells had originated itself.

It appears to be a very deceiving slight of hand. Had Wells completed its purchase of Wachovia on Dec. 31, it wouldn’t have been allowed to carry over the allowance had it completed the acquisition a day later. On Jan. 1, new rules by the Financial Accounting Standards Board took effect prohibiting such transfers. A Wells spokeswoman, Janis Smith, declined to comment.

As if that were not enough, other interesting tidbits are now coming out.

The most closely watched measure of a bank’s capital these days is a bare-bones metric called tangible common equity. While the term doesn’t have a standardized definition under generally accepted accounting principles, it typically means a company’s shareholder equity, excluding preferred stock and intangible assets, such as goodwill leftover from past acquisitions.

Measured this way, Wells had $13.5 billion of tangible common equity as of Dec. 31, or 1.1 percent of tangible assets. Yet in a March 6 press release, Wells said its year-end tangible common equity was $36 billion. Wells didn’t say how it arrived at that figure.

Even more disturbing is Wells’s Dec. 31 balance sheet. On it is a $109.8 billion line item called “other assets.” What’s in that number? For that breakdown, you need to go to a footnote in Wells’s financial statements. And here’s where it gets comical.

The footnote says the largest component was a $44.2 billion bucket that Wells labeled as “other.” Yes, that’s right: The biggest portion of “other assets” was “other.” And what did this include? The disclosure didn’t say.

That $44.2 billion is more than Wells’s tangible common equity, and no one knows what it is comprised of.

The more information that comes out, the more disconcerting the stability of the bank appears.

Watch for Fargo stock to drop like a rock when complete financial statements come out.

And with it could go investor confidence in the latest market rally.

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Email: village_whisperer@live.ca

Friday, April 17, 2009

Updates From the FDIC

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Bank Failure #24: American Sterling Bank, Sugar Creek, Missouri

Bank Failure #25: Great Basin Bank of Nevada, Elko, Nevada


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Email: village_whisperer@live.ca

The Bad News Hit Parade Continues...

Housing and the Economy are the main items in the news that grab our attention on this Bank Failure Friday (updates from the FDIC as they come in).

Royal Bank came out with it's latest Housing Trends and Affordability Report. Many news outlets reported on the story with the headline "Home Ownership Got More Affordable at end of 2008", but that was highly misleading if you didn't read the report.

Regarding British Columbia:

  • Housing markets remain under heavy downward pressure in British Columbia. With the sharp rise in unemployment since last summer worrying households in the province, demand is generally weak and falls well short of available supply. This is sustaining the declining trend in prices for both existing and new homes. Nonetheless, there are signs that the situation might be close to stabilizing. After falling precipitously since hitting nearly record high levels in 2007, sales of existing homes appeared to have found a floor in the closing months of 2008 and the first two in 2009 – although at historically depressed levels. This, in part, might reflect a notable improvement in affordability, which removes a thorn in the B.C. markets’ side that emerged in the aftermath of the boom. From the end of 2007 to the end of 2008, RBC’s affordability measures in the province improved between 4.1 and 6.3 percentage points, depending on the housing type. Still, the restoration process has much further to go as measures remain significantly worse than historical averages.

Regarding Vancouver:

  • To say that things continue to be tough in the Vancouver housing market would be an understatement. A small up-tick in existing home sales since December has brought only cold comfort after the collapse of more than 60% in the preceding 15 months. Prices are down 4% to 9% from peak – or more than 30% if no account is made for the changing mix of housing types being sold – and still sliding. Pricing power remains firmly in the hands of buyers with the sales-to-new listings ratio at historical lows, indicating an enormous imbalance and suggesting that prices will likely correct further in the months ahead. Despite the price decline to date and the break on mortgage rates in the past year, the cost of homeownership in Vancouver is still exorbitant both in absolute terms and relative to income or rent. As families in the area worry increasingly about dwindling job prospects, poor affordability will continue to weigh on the market.

Meanwhile news on the Economy continues to create conditions that will drive real estate prices down in BC.

Montreal based forestry giant AbitibiBowater filed for bankruptcy protection in the United States as sales of newsprint have collapsed. 4,000 workers are out of work in Ontario and BC mills have been dealt another blow.

Meanwhile stats are out on the number of bankruptcies in February. Across Canada filings jumped by 22.1% from a year earlier and 13.1% higher than in January. But bankruptcies were up 67.4% year-over-year in Alberta and 44.8% in B.C.

The Alberta number is significant because the Okanagan is driven by Albertans with summer property there.

The dominos continue to fall in advance of the collapse of the summer tourism season. It doesn't take a degree in rocket science to understand why.

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Email: village_whisperer@live.ca


Thursday, April 16, 2009

Why the stimulus is failing

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A few weeks ago we profiled a speech given by Peter Schiff on the economy and the current steps being taken by the United States. Schiff concluded with a belief that North America would be best served by embracing the recession. He also issued a caution about what might happen if China stops supporting US Treasury Bill sales.

Debate on the best response to the economic crisis rages on in the US and around the world. The broad consensus is that we are mired in a Great Recession with a presumption that a depression is a distinct possibility.

Our poll-driven politicians, be they American, British or Canadian, hold to a myopic view that is fixated on a resumption of economic growth to address the crisis. Leading that charge is the United States. The American Federal Reserve wants to get credit flowing again to American consumers who are still vastly overextended, especially in mortgage markets. The US Congress wants to stop the bleeding in the housing market -- irrespective of the persistent imbalance between supply and demand. And the White House wants consumers to start spending again -- to avoid the perceived pitfalls of the “paradox of thrift” brought about by too much saving.

In Canada the Federal & Provincial goverments, along with the Bank of Canada, are working to a similar end.

Put it together and it all smacks of a dangerous sense of déjà vu. We are promoting a false recovery by kick-starting overextended, saving-short Canadian and American consumers to borrow once again by leveraging their major asset… their home.

But the efforts of our governments are coming up short because, it appears, Canadian and American consumer aren’t co-operating.

In the US, the personal saving rate has risen from 0.8 percent to 4.2 percent in the past six months alone, and is on its way to a new post-bubble equilibrium which will probably balance out in the 7.5 percent to 10 percent zone.

This is the essence of the macro disconnect that is now shaping post-crisis policies of governments around the world: The global economy has become overly dependent on one consumer – the North American one.

Yet, like it or not, this source of growth will be severely impaired for years to come through a necessary rebalancing of the North American economy. It isn’t the path the Canadian and American governments want to follow, but it is the path consumers are barrelling headlong down.

And before long this retrenchment by the North American consumer will start to serve as a wake-up call for other nations to fill the void by stimulating their own consumers.

A globalized world is going to move from one consumer to many.

And in the process it is going to put the current symbiotic relationship between the creditor (mainly China) and the debtor (the U.S.) in jeopardy.

Peter Schiff warned that one of these days China was going to start realizing this.

And despite the best efforts of the Canadian, American and British governments, North American consumers are going to ensure China gets that message lound and clear.

Are you prepared for the ramifications of that realization?

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Email: village_whisperer@live.ca

Wednesday, April 15, 2009

The US Economy & BC Real Estate

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The US Labor Department released its Consumer Price Index for March and U.S. consumer prices fell again triggering the first recorded 12-month drop since 1955.

"The numbers speak to an economy that is in deep recession, but we're no longer in the shock mode of staggering numbers that speak to a serious slide lower in terms of macroeconomic activity," said Peter Kenny, managing director at Knight Equity Markets in Jersey City, New Jersey.

It is the manifestation of what is driving the US Federal Reserve to print Trillions of dollars in stimulus money. Deflation has gripped America.

Deflation is a broad-based decline in prices that can undercut an economy by leading consumers to hold off purchases in the hopes of even lower prices.

And when US consumers hold off on spending, it doesn't take a fortune teller to predict what it means for BC.

Unless BC suddenly finds new ways to advance its economy, it will slow to a crawl, unemployment will remain high, trade surpluses will become deficits, and reduced government revenue will make it increasingly difficult for the provincial government to balance the books.

Tourism will tank this summer, the mining industry will suck wind, and the forestry industry will be watching trees grow bigger and taller.

It also means no American and European buyers to descend on Vancouver to fuel an Olympic Real Estate bounce.

The average single family house price in Vancouver is now down 14.2% from it's peak. It could well be down 25% by the end of the year.

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Email: village_whisperer@live.ca

The Debt Star

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A more detailed post later today. In the meantime I enjoyed this...
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(Click on image to enlarge)


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Email: village_whisperer@live.ca

Tuesday, April 14, 2009

Riddle me this...

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Spend some time last week ruminating with one of this blog's faithful readers about the stock market soaring on word that the US Bank 'Wells Fargo' had projected a surprising $3 Billion first quarter profit.

Howard Atkins, chief financial officer for Wells Fargo, said in the release, "Business momentum in the quarter reflected strength in our traditional banking businesses, strong capital markets activities, and exceptionally strong mortgage banking results — $100 billion in mortgage originations, with a 41 percent increase in the unclosed application pipeline to $100 billion at quarter end, an indication of strong second quarter mortgage originations.”

Uh-huh.

Market investors seized on the news. And since so many pundits have identified the stabalizing of US Banks as a key condition of restoring prosperity to the North American economy; the news was significant.

But you can colour me a skeptic.

Aforementioned faithful reader had a chuckle over my pensive reaction. But it seems my doubt may not have been completely misplaced.

I came across a report today on Housing Wire that suggests that as much as nearly one-third of the bank’s first quarter earnings may be nothing more than an accounting maneuver.

Apparently the jump in earnings pertains to FAS 160, an accounting rule first announced in 2007 that became effective on January 1, 2009. The rule addresses accounting for minority interests, and mandates that the ownership interests in subsidiaries held by parties other than the parent corporation be clearly identified and presented as equity for the purpose of consolidated reports.

The effect of the new accounting rule allows certain liabilities to ‘jump over’ to the asset book as non-cash transactions via paid-in capital, thereby rolling directly into earnings and boosting reported equity.

In the case of Wells Fargo, the bank found itself with up to $824m it could use this quarter as an accounting gain to earnings.

Now... even if HousingWire’s Teri Buhl is correct... that still leaves more than $2 billion in profit. But even that remaining profit margin may not survive scrutiny.

Further investigation has lead critics to query the status of a large number of bad loans at Wachovia, the diversified, wholly owned financial services subsidiary that Wells Fargo recently acquired. What happened to them?

In it's announced earnings, Wells Fargo gave no details on delinquency trends or Wachovia’s credit losses.

Now there is rampant speculation that the timing of the merger has obscured these losses through purchase accounting adjustments.

So while this anomaly is being investigated investors are being cautioned to remember that what Wells Fargo has released is merely a quarterly statement. Quarterly statements are not audited (only annual reports undergo a full audit).

And what is the significance of all of this?

Well... under normal circumstances such accounting games within corporate PR announcements raise nary an eyebrow with the general public.

But in these tenuous times, the stock market received a huge boost on the Wells Fargo first quarter profit announcement. And the announcement has played a crucial part in bolstering the confidence of the public in the governments efforts to resusictate the economy.

These are times of strained public confidence and trust in both Wall Street and the Banking Community. I suspect that if this so called 'profit' turns out to be an accounting slight-of-hand, there may be a severe public counter-reaction.

And that counter-reaction could trigger another round of significant losses on Wall Street.

We will watch with great interest as this unfolds.

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Email: village_whisperer@live.ca

Monday, April 13, 2009

Despair

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It's Easter Monday today.

For some it's a holiday. For others, another working day.

For me... I spent the wee hours of the morning in thankful reflection. Parked across the street from a GM dealership, I wondered how those working for, and connected to, General Motors are feeling today?

To them there is only one thought... Survival.

Sunday's news from the New York Times made Easter somewhat less than happy for the extended car maker family.

The U.S. Treasury Department is directing General Motors to lay the groundwork for a bankruptcy filing by a June 1 deadline. The goal is to prepare for a fast “surgical” bankruptcy according to those initmate with the details of the plan.

In the United States one potential scenario would be to create a new company that would buy the “good” assets of G.M. almost immediately after the carmaker files for bankruptcy. One potential outcome would have the “good G.M.” enter and exit bankruptcy protection in as little as two weeks.

But that is the United States. What about Canada?

Well... that's where things get 'sticky'.

There is a profound difference in Canadian law compared with U.S. law on this issue. In Canada companies can't bust unions through bankruptcy.

In the United States, insolvencies can be used to end high-cost union contracts if certain procedures are followed. In Canada, however, such contracts survive insolvency and extend to successor employers who emerge from the ashes of a defunct company.

Moreover, a union collective bargaining agreement can also apply to any company that simply buys equipment, even if it's moved to a different location and possibly even if it's used for different purposes.

So, in the United States, you can impose a "cram down" and use the threat of bankruptcy to force unions to accept a deal. Here, that's a tactic that doesn't fly and the presence of a collective bargaining agreement makes it more complex when restructuring a company.

And while judges have broad powers under insolvency law in Canada, even they can't set aside union contracts to facilitate a restructuring.

The successor-rights issue is going to be a major stumbling block in Canada and is going to affect the dynamic of negotiations in restructuring. The worst case scenario is that GM can't effectively reorganize in Canada and because of those union obligations, nobody will buy the plants or the equipment.

The end result is that plants in Canada are mothballed and the equipment shipped outside the reach of the union's CBA, such as overseas or to a lower-cost jurisdiction. (Labour laws apply only to the province they cover.)

Rick Orzy, an insolvency lawyer at Bennett Jones in Toronto, often advises lenders in insolvencies. In a recent National Post interview he said the successor rights also affect valuations and financing. He tells lenders that if they lend to a company with a union and the company defaults and they have to collect on the loan by selling the company or its assets, the buyer is then subject to the CBA and the liabilities that go with it. "The price you are going to get as a result of the law is less."

Alison Narod, an employment lawyer at Farris, Vaughan, Wills & Murphy in Vancouver, said a CBA "is always an issue because of the effect it has on costs or running the business and any restrictions there may be on running the business. Typically, parties have to address that in cutting their deal. Some unions are practical and will be more concerned about preserving jobs if they are convinced that the employer is in a tight financial spot," she added.

For the GM factories in Ontario, the parts manufacturers that support them and the dealerships all across the country these are extraordinary, uncertain times where even the best options can only be described as 'bleak'.

So on this Easter Monday my thoughts go out to all the little guys caught in the middle of this power play.

The uncertainty and angst must be gut-wrenching, at best.

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Email: village_whisperer@live.ca

Friday, April 10, 2009

Job Losses Will Be The Story of 2009

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UPDATE: Bank Failure Friday

Bank Failure #22: Cape Fear Bank in Wilmington, N.C.
Bank Failure #23: New Frontier Bank of Greeley, Colo.

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Way back in September, Vancouverites smugly looked out at the evolving economic crisis spreading across the United States with a bit of bemusment. We 'tsk-tsked' the subprime mortgage mess. It was an American problem and we were not directly affected.

When the stock market crashed, we shrugged our shoulders. Canada was economically sound and BC was even better off than the rest of the country.

The attitude bordered on arrogance.

From a July 22, 2008 Vancouver Sun article:

Finance Minister Colin Hansen looked The Vancouver Sun's editorial board in the eye late last week and maintained that, despite all the economic gloom and doom that's going around these days, the B.C. economy is doing pretty well.

From a October 20th, 2008 CTV story:

Finance Minister Colin Hansen introduced his Liberal government's economic relief package in the legislature, saying the province will avoid recession. "None of the leading economists that I have heard from have indicated a forecast of a recession," Hansen said. "Relatively speaking, British Columbia is doing remarkably well."

Oh how the times have changed.

The StatsCan data now puts B.C. at the epicentre of a massive Canadian recession. Gone is the talk of no provincial budget deficits. And the Real Estate industry - its folding in on itself.

For hidden in the job loss numbers is the real impact of what is happening.

Last month, the B.C. economy shed 22,600 jobs. But those numbers hide the full measure of the drastic downturn in B.C.'s construction/real estate sector.

The were actually job gains last month. B.C.'s service sector (the accommodation and food services sector) saw employment grow by 7,200 jobs.

7,200 jobs gained!!!

And these job ADDITIONS disguise the profound devestation that hit the Real Estate sector.

Last month not only did 16,000 construction jobs disappear; but there were 8,500 lost positions in the financial, insurance, real estate and leasing sectors - the support system for the housing industry. And the tally in those areas alone is greater than the overall number of net lost positions in the B.C. economy.

For any newly unemployed journeyman or real estate agent who has been longing to become a waiter, that's great news.

For anyone else, it's a sign of an economy that is shedding high-paying, full-time work for low-wage, part-time employment.

With the American and European economy in full retreat, look for BC's service sector industry to take in on the chin this summer. Which means the job loss hit parade will continue throughout the spring/summer months.

And as we have said before, people who substitute low paying part time jobs for high paying full time ones... and people without jobs... well they simply can't pay mortgages or buy new condos.

The blueprint for fall and winter in BC Real Estate is being drawn now. And it doesn't look pretty.

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Email: village_whisperer@live.ca

Thursday, April 9, 2009

March Job Losses to be Announced Today

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UPDATE: Jobless rate hits 7 year high.

61,000 fulltime jobs announced as lost in March,
BC saw steepest job losses - 23,000 jobs,
8% unemployment,
Over 357,000 jobs lost in last 5 months, the largest five-month plunge since the deep 1982 recession.
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Statistics Canada will release the March employment data at 7 a.m. eastern time today. And the figures will not be pretty.

Canada has been shedding jobs at a faster rate than the United States and that trend did not abate over the last month. It will be the fifth straight month of job losses and the outlook for the summer is no better.

"I expect the numbers will continue to be worse over the next several months," Finance Minister Jim Flaherty told reporters in Oshawa on Wednesday. "I expect tomorrow's numbers to be not encouraging. When we lose jobs, it takes a long time to turn that around."

The median forecast of analysts surveyed by Reuters is for the economy to shed 55,000 jobs in March and for the unemployment rate to rise to 8% from 7.7% in February.

Personally I predict a much worse result and anticipate the statistics will show that the economy shed 60,000 - 80,000 jobs in March, up to 80% higher than the 'median forecast of analysts'. Look for the Canadian dollar to take a hit as well.

Look for the situation in BC to be particularly poor. And the impact to start catching up on Real Estate by the end of summer.

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The numbers by Province are now in. BC lost 23,000 full time jobs, Alberta lost 15,000 & Ontario lost 11,000.

The numbers for British Columbia are even more devestating when you consider that BC's population is 4,419,974. Ontario's population is 12,986,857.

BC had more than twice as many full time job losses as Ontario, but has one-third the population of Ontario.

On a per capita basis, BC was devestated last month. And all signs point to the trend continuing through April.

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Email: village_whisperer@live.ca

Wednesday, April 8, 2009

TD Bank Report: Canadian Housing Overpriced & Overbuilt

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In an April 7th, 2009 special report the TD Bank declares that Canada has been in a real estate boom from 2002 - 2008.

TD says that this boom was "a time of unsustainable price increases."

During this boom "affordability eroded severely over the last two years demonstrating an unsustainable disconect between house prices and incomes that was due for a correction."

"The steep erosion of affordability and the persistance of increases in house prices signal that speculation fueled this inflation. In a self-fueling spiral, expectation of higher prices were in turn driving prices even higher... The excess was most exagerated in the past three years."

The report goes on to make a foreboding statement which has particular relevance for Vancouver and echos what we have already said on this blog. The report notes, "over the long term, housing cannot exceed what households are able and willing to pay to live somewhere. House prices are necessarily tied to incomes. As well house prices are anchored by rental rates."

The Vancouver housing market has been in violation of those basic fundamentals for several years now. It means Vancouver is still severely overpriced and headed for a massive crash.

The report suggests an outlook for real estate that forcasts a potential of "seven years of hardship".

Looking at each province in Canada we read that "affordability in British Columbia has generally been the worst in the country and deteriorated even further during the past two years. Some of this deterioration in affordability can be explained by the settlement of retiree or immigrant households who have substantial wealth but not necessarily high current incomes. Nonetheless, during 2007 and 2008, resale houses in B.C. were over-valued relative to long-run fundamentals by at least 7%."

The report paints a very negative future for the condo market saying, "similar to Toronto, the Vancouver condo market may face a deeper structural weakness. The resale market already having deteriorated sharply, and, given the historically high number of multiples under construction, a surge of unsold condos is likely yet-to-come."

The report predicts a looming glut of over 4,000 new condos on the market for sale.

Adding to the woes in Vancouver will be the absence of Asian buyers. "As Asian markets are walloped, offshore owners may choose to liquidate (their) assets."

The prospect for 2009 in BC? "We project that the average house price will fall by approximately 15% relative to its current level over the course of 2009."

There were moderating comments in the report. The authors (Grant Bishop, Economist & Pascal Gauthier, Economist) do not expect the Canadian market to crash as hard as the US market, at least not yet. Nothwithstanding it is an astonishing report from the Banking Industry which has, until recently, been very bullish on real estate.

With the comments of Bank of Montreal's chief economist yesterday and this report from the TD Bank... one thing is crystal clear. The Banking Industry is rapidly abandoning the R/E shill bandwagon.

And since the Banks have consistently under forecast the collapse of the economy and the collapse of the real estate industy in the past... I think it is a safe bet that thier latest assessments continue to fall short in predicting what is coming.

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Email: village_whisperer@live.ca

Tuesday, April 7, 2009

Bank of Montreal Chief Economist 'Bearish' on Real Estate

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Sherry Cooper is the Chief Economist for the Bank of Montreal Capital Markets. And at a time when cheerleaders from the Banking and Real Estate Industry are heralding a bottom of the market and a great time to make a real estate purchase, Cooper is singing an entirely different tune.

Last week in a roundtable discussion on Real Estate in Toronto, BMO’s Chief Economist painted a very bleak picture of the real estate industry.

She looks at the devastation that has occurred around the world in the financial markets and is predicting that real estate is about to be decimated in a similar matter. “This isn’t over. It’s going to be worse before it gets better,” says Cooper.

“I think many Canadians are still in denial and that there’s a lot of la-la-land still around. There are whole swaths of upper-income people that have lost, as they say, 50 per cent, 60 percent of their wealth, and their jobs are at risk. They’re deer in the headlights. The last thing they are going to do is make an important residence decision.”

Cooper is so bearish on the current real estate scene that when asked what advice she would give her own son right now she says, “I’d tell him to wait before making any kind of a purchase."

When it was suggested that the worst of it is behind us and that now is a great time to buy, Cooper was adamant, “the fact of the matter is the world is in the midst of a crisis the likes of which (none of us) has ever seen in our lives. It isn’t the crisis in Canada that it is in the rest of the world and it isn’t the crisis immediately in the housing market that having 19% or 26% interest rates was. But it is going to get worse”

And why are prices going to deteriorate beyond the looming prospect of 26% interest rates?

“Our unemployment rate has been decreasing at a rate that has never been seen before. Retail sales, just in January, have fallen at a rate that’s never been seen before and layoffs are mounting in Canada.”

Cooper is astonished at the decline in the Canadian economy. “It’s way worse than what we expected, way worse.”

And while the real estate shills in Toronto and Vancouver are calling the bottom of the market - with an imminent turnaround - Cooper completely disagrees.

“Many Canadians, economically, are seriously in trouble,” she said. And until house prices and mortgages come down to match household incomes, Cooper predicts a very stagnant real estate market.

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Email: village_whisperer@live.ca

Monday, April 6, 2009

More Condo Developers Filing for Bankruptcy

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Real estate sales may be up from the number of sales in February but they're still well below last year's levels which has caused a spike in the number of condominium developers seeking creditor protection and/or going into receivership.

One of the appointed receivers for these failed developers, Bowra Group, has been involved in 12 seperate developments that are either in receivership or are struggling and have sought creditor protection.

“I think it’s just a sign of the economy. The forest industry has been in trouble for some time and has its casualties, and the real estate industry has been challenged for a while now,” Bowra group president David Bowra said in an interview with the Vancouver Sun today.

Across the Lower Mainland more and more developments are running out of money and being forced to have a receiver appointed. The receiver finishes the building and gets the best price it can for the units.

Others seek creditor protection, asking the court for time to get their financial houses in order before the lender comes knocking.

As we noted last week, there are currently 2,391 unabsorbed housing units on the market in the Lower Mainland with another 25,907 under construction.

Look for more and more developers to go under as the year moves along.

Sunday, April 5, 2009

Kingsford the Piglet

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It's Sunday. No gloom and doom today. Instead we bring you Kingsford the Piglet who stays home, goes wee, wee... but thankfully avoids the market.



Kingsford Goes to the Beach - video powered by Metacafe

Saturday, April 4, 2009

The significance of the alternate lenders failing

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Yesterday we talked about how 12 alternate mortgage lenders were unable to secure funding with the credit collapse. Now they were unable to renew over 25,000 Canadian mortgages as they came due.

The 12 alternate lenders have gone to Ottawa to ask for financial assistance warning that - despite the fact all 25,000 Canadian homeowners have never missed a mortgage payment - the companies would have to begin initiating foreclosure proceedings against homeowners because the company was unable to find new money to lend to them.

These 25,000 Canadian homeowners were lenders who had been unable to secure loans through the traditional banks due to income or credit histories.

This story is just the start of what is coming. The fact of the matter is that Canada hasn't begun to feel the impact of housing crisis yet. This has lead many to smugly believe that Canada will not feel the same effects as the United States.

They are wrong.

The process in Canada is just getting underway. The depreciation in Canadian Real Estate didn't get started until one year ago, March 2008.

In the United States, the process has been playing out for several years. It started in 2005 and, contary to popular opinion, it didn't start with the subprime crisis. What started the problems was a MINOR collapse of about 10-15% in the value of real estate in several of the bubbly cities in Florida and California.

When mortgages came up for renewal in those cities in 2006, a calvalcade of foreclosures was triggered because those with subprime arrangements couldn't renew their mortgages in their underwater condition (the market value of their house was worth significantly less than the remaining mortgage amount).

This put even more downward pressure on real estate values. When regular homeowners with non-subprime mortgages went to renew, they couldn't. They were also too far underwater with the market value of their property.

This forced even more foreclosures and a massive domino process then devestated property values.

But it took a year before the problem even surfaced and another two years to play out after that. That same process is now starting in Canada.

Prices started to slide in March 2008. It takes about a year for risky mortgages to start to reveal themselves as they come up for renewal. Yesterday's post outlined that, not only do similar risky mortgages exist in Canada, but they are about to be placed in a foreclosure position.

It's playing out here exactly as it did in the United States.

The current price drops we have experienced from March 2008 until March 2009 have been caused by the collapse of the worldwide economy - not mortgage problems.

That collapse took away the wealthy Americans, Europeans and Asians and forced them to liquidate their Vancouver properties. This caused a drop in real estate values which, in turn, took the ever rising market out from underneath the local speculators... further exacerbating the price drops.

Until now the only mortgage-related stories we have seen are speculators unable to secure mortages for pre-sales contracts, placing them in defaut of their pre-sale contracts.

Only later this year will we really begin to see the real impact of mortgage issues on our real estate scene.

It won't become visible until later this summer/fall as the absence of these alternative mortgage suppliers leads to a further drop in real estate prices of another 5-10%.

Then the next mortgage domino will fall.

The 0/40 crowd and the 5% down group of home buyers who bought in 2004, 2005 and 2006 will surface. Most took out five year mortgages with the traditional banks. Those mortgages are coming up for renewal starting later this year.

Unless real estate values start re-inflating dramatically, these people will be in a serious underwater position of 15%-25% with their outstanding mortgage compared to the market value of their home.

TD, Royal, Scotia, BMO and CIBC will not renew their mortgages while they are in that kind of underwater state.

You simply cannot walk into a bank and receive a $600,000 mortgage on a property with a market value today of $480,000 (20% less). It doesn't matter that you have a spotless five year mortgage history of never missing a payment - it's just not going to happen.

And with the evaporation of the alternate mortgage lenders, it means Canadians won't have another avenue of securing a mortgage renewal after being denied by the regular Canadian banks.

This is exactly the way it played out in the United States between 2005 - 2009.

And now it is starting to play out here.