Entries from August 2008 ↓

MSM view: ‘No need to panic, folks!’

Imagine you bought a house two years ago for $330,000, need to sell, and yet the real estate agent tells you to list at $275,000 if you hope to find a buyer. Finally, one comes along, but offers just $170,000. You agonize over accepting it, then learn the potential buyer’s bank balked at financing the deal, saying the price was too high.

This is a true story, from Riverside, California. Here’s another, from Cape Coral, Florida, where a guy who paid $147,000 for a home in 2003, then renovated it, received an appraisal of $279,000 two years ago. Recently, as he came to sell, he received another appraisal, for $140,000. It’s listed now for $129,900, and he can’t unload it.

This is one reason the Canadian prime minister is desperate to have an election. He’s got smart people around him. They know what’s coming.

In the last 12 months, for the first time ever, 25% of all the people in the US who sold their houses got less than they paid for them. Not less than they were worth during the bubble – not a loss of inflated paper, greedy profits – but an actual sucking off of their net worth. In some communities, more than 60% of all sellers are taking an absolute loss. In fact in one town, a suburb of San Francisco, of those people who bought a home two years ago, the average unsupported mortgage debt is $171,00 – that’s $171,000 more than their houses are worth.

Can’t happen here, you say?

Well, I’ve heard that before. When I published my cautionary book on the subject five months ago I was told it was impossible for housing sales in Canada to crash in 2008. They have. And when that happened, the experts and economists said, okay, but prices will hold. But they haven’t.

This week’s numbers show that for the first time in a decade, home prices are going down – first in Calgary and Edmonton, then in Vancouver and by this time next month, in Toronto. Coming later this year will be Winnipeg, Saskatoon and Regina. In fact, prices on average in every community will be falling between 5% and 20%, according to several bank economists. The trouble is, those same guys said six months ago price declines were not in the cards. Period.

This leads me and a couple of others brave enough to say it (like David Wolf, of Merrill Lynch Canada), that home values will be lower next year by between 15% and 50%, depending on the community.

Thousands of buyers who got into real estate since about 2005 will be under water. Those young couples who took forty-year mortgages and made zero downpayments will be financially screwed, unable to sell their houses without a loss of tens of thousands of dollars and at the mercy of a rapidly slowing economy, higher energy costs and dwindling job prospects.

This is the nightmare government scenario. Just look south to see the damage this can do to a country, and an administration.

A real estate meltdown and industrial desertification of Ontario (especially) and Quebec, where all the votes are. Citizens pissed that Ottawa told them last year the economy was “solid as the Canadian Shield,” refusing to lower their income taxes, spending all the budget surplus, doing nothing effective to help the auto sector, and encouraging consumer debt with a 2% GST cut and those damned 40-year mortgages which walked so many young kids into so much debt on houses which are now fast deflating.

You may think I am an alarmist to say once again: Look south and see the future. But I’m not the only one who knows that a version of this will be unfolding in Canada next year.

The Canadian middle class largely believes the myth its leaders have woven. But the odds grow daily the next election could be the first one hijacked by a house.

News: Alberta leads way in national housing plop

‘Hundreds of millions’ at risk in Calgary

Toronto home values ‘sink into the red’

The trend lines are irrefutable for those who care to look. Canada is in the early grip of the same real estate malaise which has decimated the American middle class. With luck, we will be spared the full force of this financial hurricane, but it’s simply impossible to tell. And some people are doing their damnedest to keep the truth from spreading.

To me, it’s simple. After seven years of non-stop real estate gains, our residential market reached an unsustainable crest in the last days of 2007. It was clear 2008 would bring falling sales, falling prices, idle construction sites and abandoned condo developments. This was even before the feds pulled the plug on those 40/0 mortgages which had helped turn a boom into a bubble. And while our own subprimes had to be eliminated, doing so at this time (October 15 is the midnight hour), will simply turn a correction into a freefall.

Real estate in our major cities is overvalued. No, not against the benchmark set by London, Hong Kong or Manhattan, but rather when measured against what Canadians can afford. The US real estate bubble burst with a messy vengeance when it took almost four times the average household income to buy the average home. The irrationality of this was masked for a while by a banking industry which lowered the bar for mortgage approvals – until having actual money, or even income, was irrelevant.

This is what our governments allowed to happen in Canada. Zero down payment, kids? No prob. No proof of income, self-employed dude? No prob. Can’t make traditional monthly payments on that McMansion you don’t need? No prob.

By the beginning of this year, we’d passed that affordability threshold in Canada, and were poised for a fall. In Calgary and Edmonton, as in Toronto, it took almost five times income to buy a home. In Vancouver, seven times. As a previous posting here forecast, this means a correction in values of between 15% and 50%, depending on city.

Sadly, though, many won’t get the message, and end up being the greater fools – the last ones into a market which is destined to fall hard and long. The reason is our MSM is still being pumped full of real estate bravado and wishful thinking, masquerading as news. Despite the obvious winds outside, the housing pumpers & dumpers continue to tell consumers it’s a great time to buy, and the housing market has already touched bottom.

This is eerily similar to what Americans heard in the early months of 2006. Many of those who listened, and bought, were set up for financial disaster. Will the same happen here?

Looks like it. Check this out. Or this. Or many other pieces being published by the Canadian Real Estate Association, the Toronto Real Estate Board, or the Gregory Klumps, Phil Sopers or Ed Jensens of this world. They have a job to do, I guess, and some good points to make. But what they say should hardly be the stuff reporters listen to. This is a time for realistic caution, least we see a herd of unsuspecting lemmings go over the cliff. The inevitable result of that will be a market decline much harder to climb back out of.

So, forget net population migration numbers, the price of oil, trade figures or even mortgage rates. The determining factors in the marketplace now are consumer confidence and investor psychology. Lame denials will do nothing but make the inevitable more shocking.