Scotiabank Issues Brutally Pessimistic Report on Real Estate

Adrienne Warren is a Senior Economist and Manager at Scotiabank, holds a PhD in Economics from York University and specializes in forecasting the Canadian and U.S. economies for Scotiabank.

On February 25th, two days after the Urban Development Institute held a confab with local real estate ‘industry leaders’ to tell everyone that we really do not have a housing recession in BC and Canada; Warren has issued a damning report titled the "Deepening Downturn in North American Real Estate Activity".

Her scathing analysis confirms that we, in Vancouver, are still in for some serious downhill declines in real estate values.

From the reports “Residential Outlook — Canada” section:

1. There was a double-digit decline in single-family homes, with most of falloff in B.C. and Alberta.
2. There was rising unsold inventory, falling new home prices, greater resale competition and reduced credit availability. All of whichl contributed to the slowdown.
3. Housing starts have tumbled to an eight-year low and resale activity has cooled even more forcefully, and MLS sales volumes fell 17% last year. When combined with a rise in new listings, the Real Estate market was saturated with product.

The outlook for 2009 was just as bleak.

1. Housing starts are forecast to fall below longer-term replacement demand with declines across all provinces and in both multi- and single-family segments.
2. There will be another 15-20% decline in the volume of resales and a further 10% drop in average prices.
3. Centres with the largest supply-demand imbalance, including Vancouver, Sudbury and Calgary, have relatively greater downside price risk.

All in all it was a bleak assessment of the market from a sector who normally produces positive outlooks to drive business.

Two days earlier the speakers at the Urban Development Institute tried to convince anyone who would listen that the problem with the Vancouver Real Estate Market downturn had to do with "a serious loss of consumer confidence”.

They are right.

Is there any consumer who has still has confidence in the malarky Rennie, Muir et al are spouting?

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A Financial Benchmark with the DOW; Can Cameron Read?; and... don't forget... it's 'Bank Failure Friday'

UPDATE: Bank Failure #14: Silver Falls Bank, Silverton, Orgeon (details below)

UPDATE: 6:00pm EDT and no word from the FDIC - a week without a failure perhaps?

UPDATE: DOW rallies after dropping to 7,257.75. Closes down only -100.28 at 7,365.67

Another week goes by and we watch developments in the economy with keen interest.

Yesterday the DOW closed at 7,465.95, a six year low.

In 2002, the lowest level that the Dow hit was 7,286.27.

If the market breaks down below that 2002 level, the DOW will have fallen back to 1997 levels, making it a lost decade for DOW investors (not counting dividends).

It brings to mind former US Federal Reserve Board Chairman Alan Greenspan's speech of December 5, 1996. Speaking to the American Enterprise Institute during the stock market boom of the 1990s, Greenspan made his infamous 'irrational exuberance' comment.

“ [...] Clearly, sustained low inflation implies less uncertainty about the future, and lower risk premiums imply higher prices of stocks and other earning assets. We can see that in the inverse relationship exhibited by price/earnings ratios and the rate of inflation in the past. But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade? [...] ”

The phrase was interpreted by financial pundits as a typically cryptic warning that the market might be overvalued.

And where was the DOW on December 5, 1996? It closed that day at 6,437.

Twelve years later the market may well be on it's way to wiping out those years of 'irrational exuberance' and all the years that came afterwards.

If it does, is a DOW of 5,000 out of the question?

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Can Cameron Read?

Two days ago we profiled BCREA's Chief Economist Cameron Muir's incredulous statements that now is a great time to buy real estate in Vancouver.

I wonder if Cameron read the front page of Wednesday's Washington Post newspaper?

"Markets around the world plunged Tuesday as evidence mounted that the global economic crisis is worsening. Japan is suffering it's worse downturn in 35 years. The British economy is facing it's sharpest decline in 30 years. Germany is slumping at it's worse pace in 20 years. Meanwhile the job market in the United States, at the epic-centre of the world downturn, is at it's worse in decades. And emerging economies are contracting at a pace few had predicted just months ago. Even China, whose economy is still growing at 6.8% annual pace is grappling and grasping with vast numbers of the unemployed, raising fears of unrest. The sharpness of the global showdown has alarmed economists who see no obvious engine for recovery. Most Western developed economies are going to see the deepest downturn they have seen in a number of decades, in some cases, possibly, since the Second World War."

Last night, while talking to Professor Nouriel Roubini, Mark Zandi chief economist for economy.com, and Fred Mishkin (ex-Fed Governor, Professor Columbia University), Charlie Rose called it 'scary stuff'.

Yet Cameron Muir calls it a great time to buy.

Okie Dokie!

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Bank Failure Friday

As faithful readers know, we start off Friday's watching to see if it is once again Bank Failure Friday.

Bank failures in the US always seemed to be delayed until late on Friday afternoons, prompting Friday to be jokingly referred to as 'Bank Failure Friday' in many economic blogs.

2009 is off to a record breaking year with four more failures last Friday. That brings the year's total to 13.

(In 2008, 25 banks failed. In 2007, three failed. None failed in 2005 or 2006.)

We wait with eager anticipation for today's carnage... updates as they come in, check back late this afternoon.

Click here for our previous post: "US Bank Failures - Why We Care".


Bank Failure #14: Silver Falls Bank, Silverton, Oregon

From the FDIC: Citizens Bank, Corvallis, Oregon, Assumes All of the Deposits of Silver Falls Bank, Silverton, Oregon

Silver Falls Bank, Silverton, Oregon, was closed today by the Oregon Department of Consumer and Business Services, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. To protect the depositors, the FDIC entered into a purchase and assumption agreement with Citizens Bank, Corvallis, Oregon, to assume all of the deposits of Silver Falls Bank.

The FDIC estimates that the cost to the Deposit Insurance Fund will be $50 million. The Citizens Bank acquisition of all the deposits of Silver Falls Bank was the "least costly" resolution for the FDIC's Deposit Insurance Fund compared to alternatives. Silver Falls Bank is the fourteenth bank to fail in the nation this year. The last bank to fail in Oregon was Pinnacle Bank, Beaverton, on February 13, 2009.


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Opportunity Lost

The CREA, the BCREA, and the VREA are all missing out on a huge opportunity.

The winds of change are blowing and rather than seize the moment, they blithely wallow in a misbegotten strategy.

For the past 10 years Real Estate agents have hooked their cart to the Real Estate seller. Signing up listings has been all important because even if another agent actually sells the house, you get a share of the commission. And the house would sell, often within days.

It was so easy within that milieu. Pump up the seller, push him to list the home at ‘market rates’ (often higher than he had envisioned when deciding to sell) and then have buyers compete with each other to offer a final sale price higher than the original asking price.

And it is within that model that the CREA, BCREA and VREA now mire themselves.

These associations continue to focus on the seller as the best way to represent and assist their members. An in catering to the seller, Associations steadfastly insist real estate values will not fall in Vancouver.

Marketing strategies (ie. Press releases) are built around this premise. ‘Consumer Confidence’ becomes the issue and strengthening that confidence becomes the goal.

When real estate agents take on buyers as clients, the focus is the seller and building confidence in the buyer to make the purchase is the primary tactic.

And so buyers are told, ‘the market will not fall much further’, ‘the seller will not come down in price’.

It is the easy path and whole strategies are developed to create urgency and overcome buyer reluctance. Persuade the buyer to meet the seller’s price, close the deal, earn the easy commission.

The problem is… the whole industry has shifted. And the Associations dither while opportunity is lost.

The paradigm shift from seller to buyer means that the buyer is now the primary customer and focus. In this type of market, amassing listings is a recipe for disaster. The cost, and maintenance, required in a stagnant seller’s market for a mass amount of listings is the road to ruin for an agent.

Instead… it is the buyer who now is the main focus. Finding buyers, with financing in place and prepared to buy, is far more valuable than signing sellers to listing agreements.

And the opportunity offered to those agents who recognize this is profound.

In today’s real estate market, the Buyer has all of the power. Finally in the real estate industry, the customer is king! The real estate agent who understands it is the Buyer who must be catered to, not the Seller will have a horde of customers beating a path to his door.

And as an agent for your customer (the buyer) you must be absolutely merciless on the Seller. In this market, successful buyer agents don’t ever become concerned with what the listing agent or seller needs, wants or even show a modicum of concern for their situation.

When you go to a “going out of business sale” at a retail outlet do you care why they are going out of business? Of course not, you buy that couch and haggle for the best price and walk out of the store with the best deal you could possibly make.

Did it matter to you that the store took 40 cents on the dollar? Nope.

And it is the same in today’s real estate market.

Recognizing this, Associations like the CREA, BCREA and the VREA should be coming out with the reports and economic assessments which serve to meet the needs of the most important component of today’s market… the buyer.

Rather than engage in a war on ‘consumer confidence’ and spend fruitless attempts at convincing buyers that the economy is not as bad as the layoffs, cutbacks, politicians and media reports say they are… Associations must recognize what is happening and respond.

Like Macy - with his department store Santa who responded to the needs of the buyer, not to the needs of the seller – the first agents to recognize this and shift their tactics will own the market.

And in catering to their agents needs, Associations can then turn their reports to truthfully explain to Sellers the reality of the housing market.

At the moment though, it seems it will take more than a 'miracle on real estate street' to see this happen.

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B.C. Real Estate Association implores you to buy, buy, buy!!!

Sticking to it's theme that damanged consumer confidence is the only stumbling block to a return to a vibrant market, the BC Real Estate Association has released it's latest volley to poke, prode and cajole buyers into making those purchases.

In a story published February 17th, 2009 in the Vancouver Sun (Home sales volume plunges 61 per cent … so is this a good time to buy?: Real estate investors on the hunt for deals, economist says), Cameron Muir - BCREA's chief economist - makes yet another appeal.

From the Vancouver Sun article:

With home sales — and prices — dropping in B.C., is now a good time to invest in real estate?

The B.C. Real Estate Association says it just might be, pointing to a large drop in carrying costs for an investment property today compared to a year ago.

“It doesn’t matter what the market is doing, I don’t say whether or not it’s a good time to buy,” association chief economist Cameron Muir said in an interview Monday. “That being said, I would suspect investors are actively looking in the marketplace for bargains. If you compare today vs. a year ago, investing in real estate is more attractive than it was then.”

Muir made the comment after the release of an association housing survey Monday that concluded the residential sales dollar volume on B.C.’s Multiple Listing Service declined 61 per cent to $873 million in January, compared to the same month in 2008 when sales totalled $2.25 billion. In the Metro Vancouver region, the sales volume was down 62 per cent over the same period, to $413 million from $1.09 billion in January 2008.

Muir — who said he also believes sales activity in the province will pick up in the spring because of improving affordability resulting from lower mortgage rates and home prices — cited a typical mortgage payment for a property in January 2009 compared to January 2008.

He said the benchmark price for a two-bedroom condo in Metro Vancouver was $334,602 in January, 11.5 per cent less than the $378,336 the same condo would have sold for 12 months earlier. A typical posted five-year fixed-term mortgage stood at 5.79 per cent in January, much lower than a similar mortgage rate of 7.39 per cent the previous January.

Therefore, he said, a condo with a 10-per-cent down payment (on a 25-year amortization) would have resulted in a monthly mortgage payment of $1,890 this January, nearly $600 less than the January 2008 mortgage payment of $2,468 (property taxes, maintenance fees and mortgage insurance fees not included).

On top of that, he said, there’s upward pressure on rents with the same two-bedroom condo renting in October 2008 for about $1,507 a month — a five-per-cent increase from October 2007.

“For both investors and home buyers, your mortgage payment would be several hundred dollars less than a year ago,” said Muir, who noted that investors have so far not been very active since the economic downturn started last year. “As an investor, the cash flow from the rent will more closely match your mortgage payment on the property.”

The BCREA survey also showed that residential unit sales fell 57 per cent to 2,115 units during the same period.

The average price on the MLS in B.C. was $412,934 in January, down nine per cent from the same month last year, the survey noted.

Muir said that home sales were sluggish in January, reflecting an overall malaise in consumer confidence and a weaker provincial economy.

Muir said that first-time buyers are especially affected by the economic news and are holding back because of a lack of confidence. “Demand from first-time buyers has been off significantly. First-time home buyers tend to be younger and not have years of experience in their occupations. Therefore, they have more concerns around job security. They’re more vulnerable to layoffs.”

Despite that, he said, the BCREA expects sales to rise this spring because of greater affordability and lower interest rates.

Muir noted that realtors are reporting increased activity from buyers over the past three weeks, but that it hasn’t yet materialized in sales statistics. “By all accounts, there’s increased interest. There’s more showings and more buyers kicking tires.”

Tomorrow our comments on this latest BCREA treatsie.

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