Dog Days of Summer

As we travel through the dog days of summer, the real estate debate is entering an interesting stage.

Real estate sales have dropped off dramatically. August will be the third consecutive month where sales totals are among the lowest in over a decade. In the case of August 2010, sales will probably be the second or third lowest in the last 15 years.

But sales totals are merely a signpost. The real measure of the market is value. Is the market collapsing in value?

So far there are minor reductions. So far others have not followed the lead of Bob Rennie with 40% reductions in asking price.

In the great bull/bear debate, the doomsayers have long called for a massive correction on par with what has been witnessed in most of the rest of the western world. My own belief is a minimum correction of 40% for houses and 50% for condos, with a correction on the line of 60/70 far more likely. But that correction won't be as immediate or as dramatic as we have seen in many places in the United States.

And the comparative slo-motion unfolding our bubble saga is making R/E watching very interesting.

Mainstream media is starting to pick up on the story which has the effect of reinforcing that there is a potential downturn ahead. The end result: crucial buyer confidence evaporates.

The R/E machine has tried trotting out the P/R fluff articles which promote the 'buying opportunities' in the market. But the campaign has failed miserably. Sales continue to crater.

The dearth in sales has started to create some panic amongst realtors. A commission based professions, no sales mean no income. As we mentioned earlier this month, a colleague's condo sale only completed because both agents (representing the buyer and the seller) agreed to take a 50% reduction in their commissions. But even this drastic move is not enough and it appears there is genuine concern with some Realtors.

Around the blogosphere, significant attention has been paid to this BC realtor who posted a letter he sent to his MP on his facebook page.

In an attempt to lobby against the recent change in mortgage qualifying regulations, the Realtor notes that the market in his area is "completely dead. I have 140+ listings from new houses at $140,000 in Port Renfrew (even though it is Port Renfrew, I should be getting 100's of calls across Canada to find out where Renfrew is. Nothing). Brand new houses in Sooke, down to $299,900 from $399,900, no calls. The market has dried up all due to financing... Last month there were 300 home sales on the Lower Vancouver Island with 4700+ listings. One of the worst ratios ever."

Our Realtor friend can also see the writing on the wall for the future. Stagnating sales will lead to a severe reduction in prices and when that comes - lookout.

"I talked to 7-10 mortgage brokers and many agents while I was at the Victoria Real Estate Board golf tournament and everyone is scared. Hundreds of foreclosures coming, about 75% of the home owners could not qualify to buy their own houses (especially with suite). So what happens when their term of mortgage is up and the banks need them to re qualify? They are doomed."

Of course this sort of panic doesn't to much to inspire that all important buyer confidence. If realtors are laying out a scenario of collapsing prices and looming foreclosures, why buy?

This prompted head R/E cheerleader, Cameron Muir of the British Columbia Real Estate Association, to come out with this OpEd piece in Vancouver's two daily papers on the weekend.

Dismissing the concerns, Muir admonishes all the naysayers to "get real". Muir stresses we merely need to wait for the world economy to recover. In the meantime he hits on all the stereotypes that so many cling to in the Vancouver market. BC's population in growing (they will buy keeping demand high), the largest component of that population growth is immigration from wealthy foreigners - particularly from China (they can afford the high prices), and the worldwide downturn hasn't hit our real estate values yet so West Coast households are on relatively solid financial footings.

In other words, it's different here so don't worry.

But will our preferred destination status by wealthy migrants underpin the housing market and keep it inflated at levels that make Vancouver the most unaffordable city in North America for the people who live here?

Can a steady stream of the world's wealthy come in fast enough to replace those who live here as homeowners?

Because if sales stall and prices begin to fall, that 'solid financial foothold' will crumble like a dry cookie.

As we have already noted, this scenario will almost certainly play out when interest rates rise again. When they do, our market is going to be crushed.

But even without the rise in interest rates, our market has stalled (stats for the month will show prices are starting to fall). As our realtor friend on facebook noted, the current mortgage regulations already have a significant number of current homeowners in a bind. Their mortgages only work if calculations permit suite income.

People who live here simply can't carry their home mortgage on their own.

Thus, even with the lowest five year mortgage rates in history, the market stagnates because buyers aren't entering the market.

Meanwhile sellers, believing we will see a repeat of 2008 where financial stimulus resuscitated the market back into a buying frenzy after a 10% correction, wait and refuse to lower their selling prices significantly.

Will the market rebound in the fall? Or will the dog days of August stretch into winter and spring?

I suspect that September will drag on in the same manner as June, July and August with buyers and sellers maintaining their current viewpoints and prices continuing their slow descent.click here to listen to Laurel (magri) Archer talk about working as an escort/prostitute.
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Email: village_whisperer@live.ca

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The Slow Melt will continue.

I get asked this all the time.

If the Bank of Canada is getting ready to regularly raise rates, doesn't that mean the economy is turning around and the worst has past?

No.

The problem is, the worst has not past.

And the reason is simple: debt. Massive amounts of debt.

The last 50 years have given rise to the biggest credit bubble in human history. And we are still in the early days of watching it collapse.

This is what many do not understand... or simply do not want to accept.

Our government tried to temporarily stave off the effects of this reckoning with the belief that buffering against the worldwide firestorm would allow us to bridge the gap to a world wide recovery.

But that recovery isn't materializing.

As David Rosenberg notes in today's Globe and Mail, we got a pause in initial phase of the 2008 collapse with a spectacular bear market rally in the final eight months of 2009 and early 2010. But we are now rolling back into a period of pronounced economic weakness, with contraction in gross domestic product likely to soon follow the stagnant economic conditions of the current quarter.

There is simply too much debt overhanging household balance sheets and the process of balance sheet repair is still in its infancy (particularly here in Canada).

"We are a long way off this deleveraging phase from running its course, both in magnitude and duration. If history is any guide, these transition periods to the next sustainable bull market and economic expansion typically last seven years."

Rosenberg observes that government has expended tremendous resources to cushion the blow but now we will see first hand what happens when policy stimulus and a mini-inventory cycle fade in a credit contraction: stagnation in the third quarter followed by renewed economic contraction in the fourth quarter.

We are in an extraordinary period of economic and financial history. We have seen an almost 80% rally in the stock market since the financial crisis. The last time that happened was in the early 1930s. That event was followed by gut-wrenching spasms to the downside.

With economic recovery not gaining traction in 2010, the parallels to 1930/31 are eerily similar.

For Vancouver real estate it means the slow melt will continue. With no worldwide economic recovery; there is nothing to drive a resurgence in real estate.

But, as mentioned yesterday, sellers are not prepared (by a long shot) to accept the changing realities of the market. Therefore we will see more and more listings pulled from the real estate market as those sellers (who have the financial means to do so) will attempt to outwait the stagnating market.

But less listings will not change the economic condition. Thus prices will continue to decline even with less listings out there.

Real estate this autumn will primarily showcase the four D's: death, debt, divorce and displacement. These are the forces which will push sellers to actually sell at market rates in the current stagnating climate.

And to entice buyers, sellers will have to cut asking prices.

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Email: village_whisperer@live.ca

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Please read disclaimer at bottom of blog.