Entries from June 2012 ↓

Don’t

Want to start a brawl on this pathetic blog? Just type the words, ‘Don’t bet against America.’ Go have a few Mooseheads. And wait. It never takes long.

Most Canadians believe what most people coming here are convinced of. The US is in decline, a fact ‘proven’ by millions on food stamps, more millions out of work, evisceration of the middle class, outsourcing of jobs, record public debt and the systematic enrichment of the overlord class. Like Oprah. And Al Gore. Jamie Dimon. Nancy Pelosi. And Springsteen.

There’s been no better symbol of the American descent than the death of the American dream. Yup, home ownership. So the fact there are 16 million vacant homes in the States and a quarter of all families are under water, owing more than they own, or that $6 trillion in equity was lost when real estate gave up about 35% of its value, is all the proof most of us need. US dumb. Canada different. The people to the south earned their misery. We, however, deserve our bounty.

But this is the beer talking. I wouldn’t get too smug.

Yesterday I outlined a bit of what a hard landing looks like – a scenario which seems increasingly likely given what Ottawa did last week, and the recent wobbling of key markets like Vancouver. All it will take in coming months is for interest rates to start normalizing, and anyone who bought a house in 2011 could regret it until 2020. Meanwhile, I have said for a year that smart people (who understand the process) would be wise to do this: Sell Canada and buy America.

Here’s Bruce, thinking of exactly that.

“Hi Garth I’ve found your blog to be insightful and surely an eye opener. Few weeks back you said you’ll be writing more on the prospects of US real estate. I’m seriously considering investing their particularly in Atlanta and Houston. However, what deters me, is the skeleton foreclosure inventory that is yet to hit the markets, and that it’s an election year. Can you please provide your thoughts in your next writing? I’m sure a lot of Canadians will benefit :) Please and thank you.”

As addicts will know, I have touched on this topic several times. Besides my abiding belief the US will bite all the doomers in the butt, I’ve cautioned inexperienced investors about diving into Phoenix or Miami or Seattle without knowing the pitfalls. Most Canadians won’t get financing. You have to worry about title. File two tax returns if you tenant. Pay cap gains tax when you sell. In addition you need hurricane insurance in Florida and a protective sniper in parts of Atlanta. Plus a management company to find renters without records. And the border? Any pissed-off USCBP officer can refuse you entry, for any reason. Like trying to enter America in a Kia.

Despite these and other problems, the pull of cheap real estate is infectious to many. Especially when gasbag Canadian prices are destined to deflate. So, would it not make sense to reduce your exposure to property here (likely to fall) and shift that net worth into American real estate (certain to rise)?

As a tenet of financial theory, you bet. And especially now, when evidence is building Yankee housing just bounced off the bottom.

Don’t believe me? Hmm. Explain this. Pending home sales in the States shot ahead almost 6% in May. There are bidding wars for properties under $200,000 (which is $30,000 above the current US average) in places like Phoenix, where one realtor recently fielded 40 offers on a single listing. Prices have jumped 12% in Seattle, 11% in Tampa and 8% in San Diego and Miami, according to the latest Case-Shiller home price index.

In fact, said Shiller, that price appreciation is escalating rapidly. Since April values in San Franscisco are ahead at an annual rate of 16%, and in Phoenix it’s 26%. This is happening just months after affordability levels for American real estate reached the highest levels in history – the combination of historic low mortgage rates and an unprecedented six-year collapse in prices. Meanwhile, the US population continues to grow (America accepts more immigrants every year than all other countries combined), and so does demand for shelter as people do human stuff like get married, have babies and crave granite.

The key factor is confidence. It’s coming back as jobs do. By one estimate (Vancouver economist Doug Smyth) a little more than 80% of the 8.4 million jobs lost in the GFC have now been restored or (more likely) replaced. In San Francisco, for example, 12,400 professional jobs (mostly tech-related) were added in the past year alone. As a result, housing starts which have languished in the 400,000-per-year range are forecast to balloon to 1.3 million.

So is the financial storm over? Hardly. The US has a massive debt to reconcile. It’ll take years and years of incremental growth to inch its way back to the day when being middle class means being hopeful.

Sure, there’s shadow inventory to hit the market still, which should keep prices from rebounding too spectacularly. Obama has to win again, but (like it or not) that’s already in the bag. And maybe it’s time we measured America not against Heaven, but against a country where shopping malls collapse and body parts are mailed to the prime minister.

Just sayin’. Don’t bet against America.

Hard landing

On October 19th, 1987 I was a dashing daily newspaper editor and succulent columnist, writing for a hot little Toronto tab. I walked over to the Dow Jones teletype machine in my office where the signal bell was ringing madly in a robotic version of cardiac arrest. The market was crashing.

No, not a 2012-style candyass crash where people keel over with a 5% dip. This was epochal. By the end of the session the Dow had lost 22.6% of its value. To this day it remains the greatest single drubbing in financial history. I walked through the newsroom to the babe who ran the paper’s clipping ad photo library and ordered up all the pix we had of the Great Depression.

But things recovered. Sort of. No depression. However two years later the housing market, then at a record, bubbly, frothy high, started to wobble. Interest rates edged up, and panicked newbie buyers lined up overnight to snap houses, lest they be priced out forever. Three years later condo sales had plunged and speculators were apoplectic. Four years later we were in the midst of recession which jacked up the jobless and punished real estate so mercilessly prices wouldn’t recover for more than a decade in Toronto and elsewhere. In fact it was not until the mid-2000s that the average house was once again worth what it had been in 1988.

That was a hard landing.

Well, it’s now been a little more than three years since financial markets laid the last egg. On March 9th, 2009, we hit bottom, as the Dow finished a tortuous 55% decline that spanked those poor people with lots of equity mutual funds in their RRSPs. This also took place when real estate in Canada was at a high water mark and house lust was everywhere. Ironically, the catalyst for the crash was the detritus of the American housing market, then falling into tatters.

Financial markets have recovered that loss, housing stumbled briefly then continued to bloat, while confidence has not been so lucky. This time we also avoided a deflationary depression, but it came at a cost. Emergency interest rates ushered in to avoid disaster spawned a credit bubble and record levels of household debt. After being burned on their ill-bought funds, people flocked to housing, pushing prices to historic highs even as the economy languished and wages swamped.

So here we are. GDP growth is anemic. Inflation outstrips salary increases. Four in ten families have trouble paying their bills. And 70% of us own homes upon which we have placed $1.2 trillion in mortgages. Our major trading partners are also struggling, and oil (Canada’s biggest export) has recently lost 30% of its value. At least we still have RIM. Oh, wait…

This is a crash landing. In the making.

Could Canada enter a recession five years after markets tanked, as happened in 1987? I have no idea, but apparently F and the Ps took the possibility seriously enough to make all those changes last week. As I said at the time, the coordinated actions were an attempt to bring about a soft landing for real estate, and avoid something like the quick, sharp and economy-murdering 20% drop in house prices that poisoned the early 90s.

Will it work? Was it enough? Too much?

The giant credit rating agency Moody’s says fuhgeddaboudit. We’re cooked.

In a report written by analysts William Burn and Andriy Stepanyants, Moody’s claims that F’s attempts were too little, too late. They come after household debt levels have already raced off the chart, leaving homeowners (remember that’s seven in ten of us) with very little financial flexibility. That means if interest rates move higher, debt servicing becomes tortuous. Also if the economy slows and recession appears, few families can cope with job loss since making the monthly is already a struggle.

Their conclusion: hard landing.

How serious is this? Apparently enough to have caused two of the major chartered banks to ask F to double the minimum downpayment for buying a home, even knowing that would stop the real estate market dead in its tracks, throttling their mortgage business. But the elfin god said no. And you know why.

If Moody’s is right, it happens anyway.

This coming long weekend’s expected to see a flurry of quick sales as panicked newbie buyers rush to beat the looming July 9th deadline, and lock into long, fat home loans.

Apparently nothing ever changes.