Entries from March 2013 ↓

Now or never

maturity

A year ago this week scores of people lined up outside a sales trailer in a distant GTA burb to buy million-dollar houses. They jostled and competed for lots which were $190,000 more than companion ones had been a year earlier. Some people had been there all night, running back to warm up for a while in the idling Audi or BMW.

On average, buyers spent $1,000,000 in less than ten minutes. The developer cleared $80 million in sales in a day.

Said this blog’s correspondent: “This is clearly out of control and people bought these houses in a matter of minutes! It’s almost like they have a fear that no other opportunity will exist to buy a home and it’s now or never.”

riot

It was early April, 2012. You could still buy a seven-figure home with 5% down and get government mortgage insurance on a 30-year amortization. The entire GTA housing market was on steroids. In March a stunning 9,690 properties changed hands, up 8% from 2011 with the average price rising 10%. Bidding wars were everywhere, in all price ranges. It was the pinnacle moment for Canadian real estate, in Toronto as in Vancouver, Halifax, Montreal and the prairie cities.

This week we’ll get the latest numbers. Looks like sales in Toronto could be lower by about 25%, based on mid-month numbers. Listings are scarce and action in the hottest part of the market – between $700,000 and a million – has pushed the average price higher by about $30,000. Condos are a wasteland, thanks to F’s murdering of long mortgages, and action above $1,000,000 is anemic, since buyers now have to cough up 20% plus closing costs. Mortgages are still cheap, but the thrill’s gone. We’re entering an entirely new era of investing.

In Vancouver, realtor Sam Wyatt is telling his clients (mostly high-end sellers) to face reality; “The trend since the run-up after the credit crisis has been declining sales volumes in which both the high and low seasons (Spring and Winter) have generally seen progressively fewer sales each year.”

Despite weak listings and cheap financing (you can still get 2.74% five-year money), months of inventory continue to swell. “The bottom line continues to be that prices are falling.  The Real Estate Board of Greater Vancouver’s Westside detached home HPI index is down over 10% from its high point last Spring.  By end of summer I expect this to have fallen another 10%.”

In Halifax sales are down 28%. In Montreal, a 22% drop. In Saskatoon, down 12%. Victoria, off 18%. Vancouver, 29% lower. Only Alberta’s bucking the trend, even as that economy weakens with commodity prices.

In short, the housing correction progresses, but far too slowly for Patrick.

“I’m a blog reader and huge fan. We live in Vancouver and are both almost 30. We’re tired of renting and waiting for the market to hit the bottom. Okay, I get all the stuff you keep telling us about falling sales and yadda, yadda. But this sucks waiting. Tell us when to buy, Garth!”

Well, Pat, houses will get cheaper but not necessarily more affordable in places like Vancouver or 416. Sure, a 30% haircut in Van SFHs is possible by the time we hit the bottom of the trough (it won’t be this year), but that’ll still leave them languishing in the $700,000 range. Meanwhile mortgage rates are not (repeat, not) staying at current levels forever, nor are 30-year loans coming back.

This means buyers need to have about $50,000 to close on the average detached, and an income of $130,000 just to carry the place. But the average household income in Vancouver is currently $68,000. This suggests unless the skies fill again with Airbuses full of horny HAM, real estate in Vancouver is in for a long, secular decline.

In fact, it might already be happening in Victoria, Canada’s other hotbed of real estate delusion. Look at this:

chart

- House Hunt Victoria blog

As I mentioned a few days ago, a lot of younger people are beginning to understand they may never own. Royal LePage’s latest self-serving survey  found 72% of people born between 1980 and 1994 think they’ll be reamed out of home ownership. About half of them blame F’s tighter mortgage rules and want them eased. LePage, of course, agrees.

Ironically, though, it’s cheap money, lax lending, lack of oversight and the fact people without money could buy houses that have propelled real estate values higher. A generation ago (when the Boomers still had hormones and hair) a 5% downpayment was unimaginable and mortgages were 11%. But, houses cost less than $100,000.

We’re on the path back down. But, Patrick, you’re not entitled to real estate. If you can’t afford it in Van, move to Hope. If buying a house takes 90% of your after-tax income, you’re a fool to even consider it. Why trade youth for debt, when you can rent?

Meanwhile in the million-dollar moose pastures of subarctic GTA, ample proof the parents are equally smitten. Some things, we refuse to learn. Now or never.

Renaissance

rebirth

Buying individual stocks is a crap shoot, but the market itself is the best leading indicator around. Every investor should know what I’m about to detail.

Lately it’s been flashing green, having regained all ground lost in 2008-9, and starting to make new highs. Some people, who make their kids wear helmets and use turn signals in parking lots, worry about this. But you shouldn’t.

In case you hadn’t heard, the Dow had gained 11.25% this year and 10.9% in the last twelve months. The S&P 500 is up 10% this year and almost 12% since last March. The NASDAQ has improved 8% in 2013 and 5% in a year. The laggard TSX is ahead 2.5% in the last 90 days, while the Nikkei in Japan has given investors 19.2% this year and 23% over the past year.

These numbers are spectacular, of course. Too bad most Canadians have missed them. Eighty per cent of TFSAs are in cash or cash equivalents, and we have more money in GICs than any other single asset. These days the banks are paying 1.75% on a five-year GIC, which helps explain why most people are screwed. No wonder a Scotiabank survey just found that 64% of people “couldn’t afford” to make an RRSP contribution this year.

Also sad: Seventy per cent of people who do invest have 100% of their money in Canadian assets. Did you notice what the TSX did compared to, say, the S&P? Duh. How can we be so parochial as to not diversify?

But the point of this Easter bunny post is to explain why stock markets are doing what they’re doing. It’s not just speculation, government money-printing, greed, manipulation or high-frequency trading feeding this advance (as all the doomers we keep in this blog’s basement believe). In a word, it’s growth. In another, recovery. Markets will surely correct after one of the best starts to any year on record, but it will likely be temporary. In fact, US markets are still trading about 10% below the long-term average when measured in current corporate profits. That suggests more to come. Lots more.

At the heart of this is the US economy, so massive, diverse and powerful it has the power to eclipse European gasbagging, dictate conditions in China or drag people out of their own wretched decisions. That renaissance would occur was never in doubt, which is why I told you long ago not to bet against America. I hope you followed my suggestions. Or that you start.

Here’s why. A sampling of the latest hard news:

  • The American economy is 70% comprised of consumer spending. That spending just climbed by the most in five months, reflecting more jobs and confidence.
  • In fact consumer confidence has scored the biggest advance on record, exceeding all expectations. “Consumers discounted the administration’s warning about economic catastrophe following the cuts in federal spending, and consumers have renewed their expectations that job gains will accelerate in the months ahead,” Bloomberg reported.
  • Consumers say they feel the best about their personal finances since back in January of 2008.
  • One reason: jobs. Payrolls grew in 42 states in February and the unemployment rate declined in 22. Employers hired 236,000 people in a month.
  • Texas alone found 80,600 new jobs, the biggest increase in 31 years.
  • House prices in 20 American cities jumped an average of 8.1% in the last year, the biggest year-over-year advance since the real estate bubble in 2006. Property values climbed a full 1% in December alone.
  • Sales of newly-built houses are the best in four years, thanks to record low mortgage rates and more jobs. This is the best two-month showing since the late summer of 2008, and is creating significant jobs for builders, home-reno retailers and furniture stores.
  • And corporate profits have been robustly growing.
  • Reports Bloomberg: U.S. corporations’ after-tax profits have grown by 171% under Obama, more than under any president since World War II, and are now at their highest level relative to the size of the economy since the government began keeping records in 1947. Profits are more than twice as high as their peak during President Ronald Reagan’s administration and more than 50% greater than during the late-1990s Internet boom, measured by the size of the economy.
  • More meaningful, more than 66% of corporations have surpassed their sales estimates.

What this means: Companies are making lots of money not by laying people off and getting efficient but by selling more stuff to confident consumers happy about their job prospects, whose houses and investments are rising in value. This is called “recovery.” It is real. It’s sustainable.

Sure, it’s come at a cost. Government has spent trillions rekindling this growth after an epic blow-off. The overhang of debt will take a generation to reduce and keep growth below where it would normally be. There’ll be structural unemployment, a growing disparity of wealth, and North America’s demographics are negative.

So it’s not the 1950s.

But neither is it 2008. Not a prelude to another fall, but the steady and earned ascent from the last one. Those who understand this, who are careful to have balance and diversity, who see the tectonic shift from real assets to financial ones, will  be rewarded. Already are. Courage.