Entries from September 2008 ↓

Dead cat bounce

As you may have noted, the US seems willling to gamble $500 billion (yeah, new billions) on a rescue of the American financial sector. That suddenly made the recent selloff in the stock market, in the way of the demise of Bears, Lehman and Merrill, look totally overdone. So, Friday was a buyfest with markets surging, as fear switched to greed faster than a Wall Street trader can change his shorts.

Alas, it was but a dead cat bounce, since the fundamentals of a debt tidal wave in North American canot be fixed overnight. Nonetheless, this could cause a reciprocal uptick – at least for a few days, or weeks – in the real estate market, humans being what they are. Should be interesting, since the long-term arrows are still pointing down.

The article below is from today’s Globe, and will hopefully serve as a reminder that the Canadian housing market is only starting to undergo a correction. The cats here are totally ripe. — Garth

Let the seller beware

(Globe and Mail, September 19, 3008)

When Heidi Samuda listed her three-bedroom townhouse in Vancouver for sale last month at $829,000, she thought it might take a couple of weeks to sell.

But the property still hasn’t sold and Ms. Samuda has dropped the price to $799,000.

“When I listed I think things had just sort of started to shift,” Ms. Samuda said Thursday.

She’s confident she’ll get her price, but she’s also trying to remain calm in the midst of a slumping real estate market that’s now being sideswiped by turmoil in the financial sector. “I think it’s just a matter of not freaking out,” she said.

The property market has been slowing for months across much of Canada and the recent turmoil in the financial sector could slow things even more. Banks are toughening lending practices, fewer discounts are being offered on posted mortgage rates and several players have pulled out altogether.

Back in January, real estate sales were still so hot that one big lender sent more than 100 mortgage brokers to Paradise Island in the Bahamas for a three-day trip at the island’s exclusive Atlantis resort. All bets are off for a similar trip next year.

Already the number of companies jostling for customers is shrinking.

In July, General Electric Co. became the latest in a series of niche lenders to announce it would stop taking residential mortgage applications in Canada, joining PMI Group Inc.

For many borrowers, the days of getting quick approval are over.

“If you have bad credit, no down payment and a good job, you can’t get a mortgage in Canada any more,” said Alex Haditaghi, chief executive officer of mortgagebrokers.com., a Toronto-area mortgage broker. “Two years ago you could say ‘Let me work on it,’ and one of the alternative lenders would have done it for you.”

Such is the new landscape of the housing market as listings surge, sales plunge, prices cool – and the final sparks fizzle out on one of the country’s strongest-ever residential real estate booms.

Vancouver is the latest housing market to show dramatic signs of weakening. The number of listings in that city has doubled from a year ago while sales have been cut in half. It’s also taking up to three times as long to sell. “Deals that were going through last year aren’t going through this year,” said Ian Martin who runs Erealty.ca, an online Vancouver realtor.

Added Lorne Goldman, a broker of residential and commercial real estate in the city: “As one [commercial property] lender said to me, ‘If a deal has hair on it, we don’t look at it.’”

The Calgary market has given ample warning of the slowdown that was to come.

During the peak of its housing boom early last year, most homes were subject to bidding wars and selling at well above the asking price in less than two weeks, said Jim Sparrow, real estate agent at Calgary-based Keller Williams Realty.

Now prices have drifted 10 per cent lower, the average time on the market is 52 days, and sellers are being told to price their properties competitively or face the prospect of not finding anyone who even wants to peek inside the door.

“I’m being brutally honest with my clients. The reality is there are fewer buyers out there, and the only way to attract an offer is to have a property that is competitively priced,” Mr. Sparrow said.

In the past 14 days, 1,903 new listings have hit the Calgary market and during that time there have been 1,637 price reductions, according to information on Mr. Sparrow’s website. There were 802 sales.

Despite much lower interest rates than two decades ago, Canadian home prices still look to be at their most overvalued since 1991, according to a report by David Wolf, a Toronto-based economist at Merrill Lynch & Co.

Since his report came out last month Canadian housing market fundamentals such as permits, sales and building starts have deteriorated more rapidly than he had anticipated, he said in an interview. Add in the crisis in the U.S. financial markets and things could get even shakier, he said.

While it’s tough to see the market slow, most Canadians are still well ahead in terms of their home values, said Gary Siegle, regional manager for Alberta and south Saskatchewan at mortgage broker Invis.

It’s people who bought in cities like Calgary at the peak last year, either for capital gains or with a “now or never” attitude, that may now be struggling, he added.

Here we go again

While I said recently I would not get political (much) on this blog, I will now change that for a few paras. The prime minister is totally wrong to start priming the real estate pump, like he did this week.

The Conservatives, in the heat of an election campaign, unveiled a new plan to give a tax credit to first-time homebuyers on up to $5,000 worth of closing costs. The plan is aimed at wiping away up to 15% of those costs, to a maximum of $750, and will be phased in over four years. The cost of this to taxpayers will be $200 million.

Why is this a stupid idea from an economic, financial and societal point of view?

Duh.

This is from the same people who brought you the Canadian subprime, a.k.a. the 0/40 mortgage. That had the effect of turning a strong housing market into a frothy bubblette which was destined to explode with the same dire consequences we saw in the United States. Both financial ‘reforms’ were attempts to paper over a slowing economy with more consumer debt – debt which young buyers walked in to gladly, star-struck by the thought of having their own home, and prodded on by their lawmakers.

In fact, we already have far too much coddling of homeowners. Consider that Americans can write off mortgage interest and local taxes against income. Consider that Canadians can pocket all of the gains they make, totally free of capital gains tax. Consider that we allow dewey young kids to buy $500,000 homes with just $25,000 down, and yet experienced 50-year-old investors cannot margin their blue chip investment portfolios to the same extent.

And now the government is proposing to pay a chunk of your closing costs? Give me a break.

This is yet another example of government screwing up the marketplace, damming the natural forces of supply and demand and making the ultimate correction far worse. This is the same fuzzy vote-sucking logic  which led to the traumatic collapse of Lehman and Merrill and (almost) AIG this week on Wall Street. Politicians created the conditions under which bad business practices flourished, then panicked and fretted and dabbled when the crap hit the fan.

We don’t need housing stimulus right now. We need housing cleansing. We still have excessive expectations in the system which have to be wrung out. We still have average families who cannot afford average homes. We have supply exploding and demand contracting, which is the necessary purge for a market that went terminally obese on greed and speculation and Mike Holmes fantasy. We still have idiot young couple buying homes they do not need and cannot justify, complete with debt they’ll never repay.

Sorry, but Mr. Harper’s hard hat is obviously too tight. And you know I love the guy.