Entries from May 2008 ↓

Tulips and tract homes

Luxury home prices are faltering.

Four lessons of Mania

NEW YORK (MarketWatch) — Speculative bubbles, such as those in real estate and dot-com stocks, have happened through history.

The tulip mania that bloomed in 1630s Holland showed the way. And while a lot has been written about bubbles recently, the phenomenon is hardly new. Nor is the analysis. I’d like to cite an account of the most celebrated mania of all — the Dutch tulip mania of the 1630s. English-born Dutch historian Mike Dash’s “Tulipomania” is a nice 230-page summer beach read examining manias and how they run their course. It’s hard not to think of the recent real estate boom — or the dot-com stock bubble — as you read “Tulipomania.” Some things change, some stay the same.

The story in a nutshell The tulip originated in the mountains of central Asia and made its way west into the Ottoman Empire as a prized object of the sultans, arriving in Holland as a gift in trade in the 1560s. A virus (they didn’t know that then) created rare and exotic variations. These prized bulbs were sought by connoisseurs of the wealthy merchant class. The tulip trade had begun. Gradually the so-called “artisan” class — the early Dutch equivalent of the working class — saw the tulip trade as a way to make money. They jumped in as the original “florists” — dealers buying and selling flowers, often sight unseen and with no personal use or interest.

Prices went crazy in 1636 to early 1637. A single exotic bulb went for 5,200 guilders — about 21 years’ salary for a carpenter. With no direct trigger, prices suddenly broke in February 1637. Buying interest evaporated and prices plummeted some 95% in a few months. Some things never change Fast forward 370 years to the similarities:

1. Investible income. The Dutch “Golden Age,” built on dominance of world trade, produced one of the earliest middle classes. Prosperity brought investible income to the “artisan” class of carpenters, weavers, cobblers and smiths, who saw tulips as a way to invest for extra income — and saw others making lots of easy money.

2. “Flipping.” Florists — traders — bought and sold tulips sight unseen for a quick profit, often in the same day.

3. The mundane became the prize too. As traders saw fortunes made on high-end product, they bid up prices for ordinary stuff too, called vodderij by the Dutch — just as the can’t-miss real estate mentality spread to ordinary homes in ordinary subdivisions.

4. Largely unregulated market. There was a code of ethics among traders, but little outside regulation or accountability. Like the mortgage industry?

But homes aren’t tulips Differences: 1. Intrinsic value. Homes have value as a place to live, enough said. And it’s tangible and measurable against something else — like other real estate and other investments.

2. Little else to spend money on. No Ferraris in 1630s Holland and Rembrandt wasn’t dead yet, so there wasn’t much to invest in besides tulips. Not true today.

3. Tavern trade. Tulips were bought and sold in smoky, beer-sodden taverns of the day — not a public exchange or with professional assistance as in real estate.

4. 95% drop in value in three months. We’re not seeing that today. Good thing. Lessons learned Unless you’re an unfortunate homeowner, real estate or construction worker, or in the financial industry tied to the mortgage crisis, the boom and bust in real estate probably isn’t as severe. For that we can be thankful.

Still, important lessons bloom forth about manias and investing in general: 1. Focus on fundamentals. If prices are increasing, understand why. Is demand real? Are supply constraints or competitive advantages lasting and real? Could real estate prices really grow and stay at 7-10 times annual income or 30 times annual rent? Are market participants real or in the market to buy, sell, flip, and speculate?

2. Watch for “vodderij.” When everything starts to go up, look out. Like overbuilt, dime-a-dozen condos and tract homes or broken Internet businesses with no future.

3. Don’t invest in something just because you see others making money. Self explanatory.

4. Don’t wait for the tide to go out. Don’t be the last to sell, and don’t be greedy. Before or after reading “Tulipomania,” I also suggest the Wikipedia entry “United States housing bubble.” Find a nice chair, dab on the sunscreen, and learn to avoid the next mania.

Albertans scramble to list homes

Yale economist Robert Shiller’s famous 120-year charting of American house prices, updated for the impact of the ongoing correction.

Cdn house prices drop for 1st time in 12 years

A sign of the cooling housing market in Alberta was evident in numbers released by the Canadian Real Estate Association showing the average MLS sales price in the province in April declined compared with a year ago — the first year-over-year monthly decline since July 1996.

The CREA report said the average sale price in Alberta was $353,515 last month for all residential properties — a decrease of 1.7 per cent from the $359,640 registered in April 2007.

The number of sales throughout the province also fell by 23.2 per cent — 7,803 units in April 2007 to 5,996 in April 2008 — while new listings soared by 25 per cent — 14,017 last month compared with 11,213 a year ago.

“What’s happening in Alberta is that listings are on a very strong up trend and at the same time sales are returning to more typical levels,” said Gregory Klump, CREA’s chief economist.

“The market in Alberta was tightest toward the end of 2005 and it’s becoming more balanced since then. That coincided with the increase in listings. And at the same time, because price reacts with a lag to the tightness of the market, average price increases peaked for the province in close to mid-2006 and they’ve become smaller ever since.” The province is following a general trend being experienced in Calgary as well with falling sales, stabilized prices and increasing listings, said Lai Sing Louie, senior market analyst in Calgary for Canada Mortgage and Housing Corp.

“The one market where there’s still a lot of price strength is in Fort McMurray (Wood Buffalo region). If you look up there, that real estate market still seems to be rising there,” he said.

Louie said the CMHC’s provincial forecast for 2008 is for prices to rise by 3.6 per cent to an average of $369,000 from $356,235 in 2007. In that forecast, the Calgary region is expected to see a price increase of 3.6 per cent to $429,000 ($414,000 in 2007), while the Edmonton region’s increase will be 3.4 per cent to $350,000 from $338,636 last year.

However, the Wood Buffalo region is forecast to see a 15 per cent hike in the average MLS sale price to $530,000 from $460,768 in 2007.

Nationally, the CREA report said the average MLS sales price rose by four per cent last month — the smallest year-over-year price increase in more than six years — to $317,619 from $305,499 in April 2007.

Across the country, sales dropped by 6.2 per cent compared with a year ago (52,385 units to 49,114), while new listings increased by 20.3 per cent (82,501 units to 99,248).

“The reason you’ve got a month-over-month decline (in Alberta average prices) is that the sales price in April last year was extraordinarily high,” said Klump. “It has come back just a little bit but it has stabilized.”

Year-over-year change in average price peaked in about mid-2006 in the province and it’s been declining ever since. April’s decline was the first monthly year-over-year decline since July 1996 when the average price fell by one per cent in Alberta.

CREA said the number of new listings for homes for sale on MLS in Canada reached its highest level ever in April. Two new properties were listed for sale for every home that sold through the MLS system, said the national organization.

“This price trend is in line with the association’s projections for the balance of 2008,” said CREA president Calvin Lindberg. “Price increases are now maintaining at levels that are historically more consistent with the Canadian real estate market.

“There are more listings on the market which means more choice for the buyers. That also means sellers have to pay more attention to how they price their home.”

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