Entries from July 2008 ↓

Four years?

US home prices drop by steepest rate ever

Breaking real estate news, here

The following is CREA’s latest reporting on market conditions. As ‘devastating’ as the industry might find this, it’s just a pale shadow of the current situation. The information contained in this is up to seven months old. And let’s not forget that in the first few months of 2008 the pumpers at Re/Max and Royal LePage were calling for another great year. Since then, listings have soared and sales tanked, and the price correction so evident to every family trying to sell a home at this moment is just starting to show on current stats.

Of course, there are other factors to consider:

  • The soaring cost of energy as gas prices hit historic highs in recent weeks, sucking off investor cash flow and making everybody feel less wealthy.
  • The rising burden of mortgage payments as home loan rates rise.
  • The end of the 40-year mortgage, plus the demise of zero-down and liar loans.
  • And, above all, market psychology, since it is now apparent to everyone, even CREA, that this market has turned skanky.

What lies ahead? As I have said, a 15% decline in the national average selling price from the 2007 peak will be with us by this time next year, and possibly sooner. Some markets which have already sustained a 10% – 12% drop are on their way to 30%. Sales activity will slide further until we may see a stunning 30%-40% in deals from 2007 levels. This will lead to a sad but inevitable exodus from the real estate industry as agents look for other work. Worse hit will be the trades, as the pace of new home construction tumbles and homebuilders shift into survival mode.

At this point it’s tough to forecast duration, but let’s remember that in eight weeks we will mark the third anniversary of the American real estate collapse, which seems to have at least a year yet to run. Could Canadians be in for four years of this? It is entirely conceivable, in which case media stories like the one below will make realtors all mushy with remembrance.

OTTAWA — Canada’s red-hot housing market cooled considerably in the first half of this year, with sales recorded by the Canadian Real Estate Association slumping by 13.1 per cent from the same period last year. The real estate group said Monday that new listings of homes for sale on the Multiple Listing Service jumped 9.1 per cent to 518,270 units in the first six months – a record high – while sale prices rose a tepid 3.6 per cent following the double digit increases of the recent past.

Unit sales were down in all provinces except Newfoundland, with British Columbia, Alberta and Prince Edward Island experiencing a fall-off in sales topping 20 per cent. The numbers are indicative of a housing market that is trending downward after several strong years, particularly last year, said association president Calvin Lindberg.

“In essence, Canada’s housing market has pulled back from the record-setting pace set in 2007, but in most provinces it continues at or near sales levels set in the years before that,” said Mr. Lindberg. “The increase in housing prices is also pulling back from the record-setting pace of last year, but we have yet to see any of the price contractions that have impacted the housing market in the United States,” he added.

Mr. Lindberg noted that 251,550 units were sold through the multiple listing service in the January-June period, the fifth consecutive year sales have topped a quarter million. Most of the decline this year occurred in February, after which activity has held steady, said the association.

Chief economist Gregory Klump added that the market appears to be cooling evenly between rural, urban and suburban markets. “There is no statistical evidence to date that shows increases in energy prices are prompting Canadians to re-locate,” he said.

The association’s latest report confirms previous indicators, including from CREA, that point to a slowing but not collapsing housing market in Canada. In a survey of Canada’s 25 largest markets earlier this month, CREA reported that prices had retreated by 0.4 per cent in June from the previous year.

Perfect storm

‘Few concerns’ in Calgary

At the moment, 8,400 more families go into foreclosure every day in the States. It is estimated that for each one of those foreclosures, neighbourhood property values fall 1% in a single day. Last year 1,500,000 families lost their homes, and mortgage defaults caused panic in global financial markets.

To stem the collapse, lawmakers have raised the debt ceiling of the US by $800 billion, and are on the verge of approving homeowner relief that could cost $100 billion. Fears are, however, it will have little effect.

In Canada, the average price of a house in both Edmonton and Calgary has declined by over $42,000. Home sales are down 43% in Vancouver. And a guy in PEI tells us the cottage he sold for $89,000 last summer is now on the market for $45,000. In one of the wealthiest enclaves of Toronto, the Kingsway, a home listed at $1.9 million found no buyers, even at $1.7 million, and then at $1.5 million, before the owners gave up. In Woodbridge, local realtors say there are properties which have been shown more than a hundred times, yet no offers. A year ago, they’d have fetched more than the asking price.

This week the chief economist of the Export Development Corporation said these are “dark times” for our exporters. “I’m not one to paint a rosy picture at all,” added Peter Hall. He thinks exports of consumer goods will crash this year by 18%, and more next year, the victim of rising commodity prices, the US financial and housing crisis, and the high Canadian dollar.

The Bank of Canada’s now forecasting inflation of something more than 4%, after the dramatic increase announced this week. Gasoline costs have jumped over 26%, and food prices are up by a third. It means interest rates will likely be increasing soon, jacking mortgage payments, just around the time the federal government ban on 40-year amortizations and zero-down home payments deflates the housing market. By the way, CIBC raised mortgages rates on Thursday.

I could go on. As few as 90 and as many as 300 US banks are expected to fail this year. One, perhaps, two major car companies could declare bankruptcy. The Fannie Mae and Freddie Mac bailout may not work, causing the mother of all budget problems in Washington, just as the Presidential election unfolds. As the Canadian exporting numbers and the job losses in Oakville show, our economy is being dramatically affected by these realities. There are families wondering tonight what the hell they’re going to do now after that third shift failed. There are more than 60,000 families across Canada trying to sell their houses. There are companies quietly failing each hour. As I drove through a number of southern Ontario cities in recent days, my eye could not help but see empty stores on main street and vacant units in the industrial park.

Sadly, the market declines I foresaw nine months ago when I wrote my latest book are starting to occur. The depths are yet to be known. My earlier forecast of a general 15% drop in the national average sale price may end up being too optimistic. In any case, billions in net worth are about to evaporate, just as the stock market bears come out, energy prices soar, Ottawa falls into deficit and interest rates rise.

The perfect storm.

In coming days, I will review some of the shelters from it.