Wednesday, May 27, 2009

Are we nearing the tipping point for Real Estate?


There's a whirlwind of pertinent news out there right now and it makes me wonder if we are at the tipping point for Real Estate, both in Canada and here in the Village on the Edge of the Rainforest.

The real estate pollyanna's are all agog at the recent sales data which has prompted the British Columbia Real Estate Association to declare that plunging prices in B.C.'s residential real estate market are levelling off.

"The majority of the decline in home prices has already occurred," said association chief economist Cameron Muir, in a report released on Tuesday. "Balanced markets are emerging in Victoria, Vancouver and the Fraser Valley. There's now little downward pressure on home prices in these areas."

Prices have stabilized because of increased demand, with seasonally adjusted home sales raising over the past three months, according to Muir. "First-time buyers were largely absent in the late fall and winter, making it more difficult for move-up buyers to sell their current homes. The chain of ownership is now being oiled."

The chain of ownership is being oiled alright, but is that chain about to fall off the drive shaft?

There have been some interesting posts over on the real estate discussion board 'Real Estate Talks'. One particular contributor, who takes great glee in dissing all bearish viewpoints, has made some interesting observations of late. He has noted several times now that, "My buddies in the business tell me that a lot of seller's are tapped out of equity in the properties that they are selling. Many of the mortgages are very close to the selling prices, ie: no equity left. Although there are a lot of first time buyers purchasing these properties, the Seller's don't have the equity to buy 'up' or buy 'down'. So maybe what we'll see is the prices at the bottom end of the market strong, but quite a weakening in the mid level prices."

And it buyer's fail to move up, Muir's optomism of recovery will fail. And its not just Muir's optomism riding on this.

The federal government has slashed interest rates in a desperate attempt to stave off both a plunging economy and plunging real estate values. That - and a highly manipulative campaign to drive first-time buyers into the market - is what is driving the current sales spurt.

For the government, this is crucial.

We have seen in the United States how much real estate values are interconnected to the financial system. The goverment is desperate to stem the collapse and forestall the decline in hopes that the 'Immaculate Recovery' will occur in the meantime and resuscitate both land values and the economy.

But beyond stemming the collapse, ominous signs of catasophe are looming on the horizon.

Statistics Canada released it's latest survey yesterday and B.C. just recorded the fastest increase in the number of employment insurance beneficiaries since comparable data was first recorded in 1997.

More critically, Economists say the new numbers show a Canadian economy that is shrinking at a pace most Canadians have never experienced with joblessness having become a central element of the downturn.

So what do we have here?

Unemployment is dramatically rising, the economy is shrinking and home sellers (who see the writing on the wall) are dumping real estate holdings at a price the gives them little or no equity after paying off their mortgage just so they can get the debt burden off their back.

Those sellers can see what is coming. And what's coming has been playing out in the financial markets over the past week.

Sales of US Treasuries fell for a fourth consecutive day, pushing 10-year note yields to a six-month high, amid concern record U.S. debt sales will overwhelm investor demand as the economy begins to show signs of stability.

Yields on long-dated U.S. debt are now in nose bleed territory, the return on the benchmark ten-year Treasury now careening quickly toward the once unthinkable "four percent" level as detailed in this report at Bloomberg.

Why is this important? Because yields on Treasury notes are the benchmark which sets the prime rate used for lending by Banks.

Noted investment advisor Marc Faber has been moved by these developments to strongly suggest the U.S. economy is on the cust of entering “hyperinflation” (see the bloomberg story here).

While Faber's views may be a little extreme, there is no doubt we will see much, much higher inflation when the U.S. Federal Reserve embarks on its campaign to normalize interest rates. It must withdrawal all the recently printed money in a manner that will not squash a nascent economic recovery, making high inflation is unavoidable.

And high inflation means high interest rates.

That will kill off the first-time entry buyers, eliminate any 'move-up' buyers, and send Real Estate values plummeting downward again.

And that's before all those who currently hold mortgages start having to renew at the dramatically higher mortgage rates.

Anyone care to wager how many of those first-time buyers, who jumped into the market with those all time low rates because it made home ownership affordable, will be able to renew next year at a 5% higher rate?

There is a very ugly nexus forming in the coming months and it is going to take a miracle to avoid it.

The tipping point is very near.



No comments:

Post a Comment