Sunday Funnies - November 15th, 2009

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Eeny Meeny Miney Moe

A couple of days ago we talked about the next gold rush, a result of a loss of confidence in America, it's deficit and the dollar.

But don't get us wrong... the dollar could rally. If it does it will spell disaster for the stock market. And make no mistake, a dollar rally could seriously damage stocks and commodities.

Believe it or not tho... a dollar rally would be a minor development compared to what might happen in the Bond and Currency markets.

As of 2008, the world stock market was roughly $36 trillion in size.

In contrast, bonds were $67 trillion and forex (currency) turns over $3.2 trillion per day -- ten times the daily volume of every stock market in the world.

Them's big numbers.

We bring this up because there are some analysts who are looking at three different gloom and doom scenarios that lie on the horizon. The respected website Seeking Alpha profiled them this week. Let's check them out...

(1) Stock Market Collapse Part 2

Some analysts believe there will be a rise in the US dollar as the economic recovery fails to take hold. Worldwide capital would begain 'a flight to the safety of US Treasuries' which would boost the US dollar. Such a development would force all those people shorting the US dollar to sell stocks to pay off their shorts and stocks would collapse (again). US Treasuries would rise, solvency issues would again take hold as China et al would still be willing to buy US debt for safety's sake, even at low interest rates.

(2) Currency Crisis

The second possible scenario is that stocks continue to rally. The Dollar breaks it support barriers and the flight from the dollar intensifies and hyper-inflation hits the US. In this case China et al would dump Treasuries en masse, in effect kicking the dollar to the curb.

(3) Sovereign Nation Crisis

Under this scenario stocks AND bonds collapse. Interest rates soar destroying the US economy and all big banks implode as deriviaties ignite a chain reaction. Under this scenario capital would begin a full fledged flight from the US and the United States would default on its debt.

Suffice it to say, a crisis in stocks would be the lesser of three crises.

It's interesting to note that in the second quarter the Federal Reserve accounted for nearly half (49%) of all Treasury purchases (that's called either quantitative easing, the cranking up of the printing press, or monetizing the debt).

During the same time period, foreign investors (China, Japan etc.) decreased their purchases of US debt by 40%.

In simple terms, foreign investors are not interested in buying US Treasuries at current yields (with the 30-year yielding 4.4% and the Dollar losing 15% in value this year alone).

Now, to get higher yields you need bond prices to fall. The Fed’s Quantitative Easing program (in which the Fed bought Treasuries to artificially create demand) just ended... so Seeking Alpha correctly suggests we’re about to find out what the bond market really thinks of US debt without life support.

If demand is so low that Treasuries break their 20-plus year trend-line, then S.A. suggests we may be heading for Crisis #2 or Crisis #3.

The interesting thing is almost all analysts believe that sooner - rather than later - another crisis is coming.

It's just a question of which one and when.

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Good News... We've been 'saved'!

Did you hear the news?

We've been SAVED!

According to the annual Emerging Trends in Real Estate 2010 report released by PricewaterhouseCoopers and the Urban Land Institute, "Canadian real estate investors were saved from overleveraging" by conservative banking practices and stricter regulation that kept lending in check.

This, we are told, has enabled Canada to largely elude the real estate collapse suffered by Americans.

Riiight.

Of course there is no mention that massive numbers of Americans had to deal with something that Canadians have yet to face: mortgage resets at dramatically higher interest rates.

Many Americans had mortgages with low, low 'teaser' rates. When property values dipped and they attempted to renegotiate a new mortgage with a new 'teaser' rate, they were denied because the drop in home values left them 'underwater'. Failing to renegotiate trigger resets with a 10-12% interest rate. Defaults created a domino effect that cascaded out of control.

In Canada our 'salvation' (we call it a 'delay' in the day of reckoning) is wholely attributable to ultra low interest rates and a government insured credit market.

The Bank of Canada has already admitted to a real estate bubble in Canada and Mark Carney, head of the BOC, has threatened to manipulate the mortgage market if borrowers don’t come to their senses.

According to BNN, Canadian mortgage credit was 74% of disposable income in 2004. Now it is 96%. More significantly Canada's debt to income ratio is now 140%, up from 131% last year.

The greatest concern is that Canada's home buyers are partying now and risking a catasrphic hangover in 5 years when morgages have to be renewed at higher rates... at time when all these ultra low rates will be seen as nothing more than 'teaser' rates that sucked so many people in to huge mortgages which they will not be able to support when rates return to historic norms.

Apparently, however, none of this should concern you.

You have been 'saved'.

Just remember that this rosy picture of 'salvation' portrayed by the Emerging Trends report is derived from interviews with and surveys of more than 900 of the real estate industry's leading real estate experts (including investors, developers, lenders, brokers and consultants)

Translation: all those people who, earlier this year, were frantic to restore 'consumer confidence' in real estate have now come out with a glowing report telling you that we have been 'saved' from overleveraging yourselves... ergo you can feel confident about continuing to buy real estate.

Saved? As the subtitle in the image above says... heaven help us.

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A new gold rush?

Back on October 30th we profiled Jim Sinclair, perhaps the most successful commodities trader of all time and a frequent CNN and CNBC commentator.

Sinclair is one of those with grave concerns about the US dollar and is an uber gold-bug. He had suggested that the most recent G20 meeting on November 7th was going to be significant.

Specifically BRIC nations wanted to see assurances that quantitative easing would be ending and that the United States would moving to bring it's massive deficit under control. If that didn't happen,

If this didn't happen Sinclair predicted you would start to see moves undertaken by China, Brazil, India and Russia that would start a greater slide in the value of the US dollar.

So... what happened?

The G20 came out with a full bore commitment to "maintain support for the recovery until it is assured." That means more deficit spending and easy monetary policy around the world. Terrance Corcoran of the Financial Post calls this the "G20's greatest ever roll of the economic dice".

The immediate impact saw the US dollar drop some more. To the right you will notice that we have added a US Dollar index graph from kitco. It has long been held that the 75.0 mark on the index was a dangerously low point for the dollar. Yesterday the index dropped to 74.8 and is now hovering back around 75 again.

Meanwhile it caused a jump in the price of gold to record setting highs of over $1,120 an ounce.

Today, analysts on CNN and BNN were predicting gold to reach $1200 before the end of next month.

(For the record, Sinclair believes gold will bump up to $1224, plateau briefly, bump up to $1278, plateau briefly, bump up to $1650 and after that shoot up to the $5000+ predicted by Martin Armstrong. It's interesting to note that Armstrong argues that gold is NOT a hedge for inflation [it performs that role very poorly] but that gold is a hedge against the mismanagement of the state - which at this time and place is the United States with it's world's reserve currency status).

Ever since the United States went off the gold standard in 1971, gold bugs have long speculated that the United States has attempted to manipulate and hold down the price of gold. Whenever gold has been rising, the US or the IMF would flood the market with sales of tons of gold and water down the price.

The reason? The bugs believe the United States wants gold dismissed as an instrument of monetary value. In it's place the US would prefer to see nations (and individuals/companies) plunk their money into US Treasuries.

Earlier this year the IMF pre-announced sales of 400 tons of gold. The belief was that this would hit the market and cause the gold price to plummet. The speculation was that the only nation interested would be China and that they would simply snatch up the first offering of 200 tons.

But in a surprise turn of events, India bought those 200 tons one month after it went on the market (a record quick sale) and it is appears they sold US Treasuries in order to do it.

This has had a stunning impact on the market.

It is no secret that many emerging countries want to buy the IMF gold in order to raise their status in the community of nations and diversify their holdings out of the declining US dollar.

Sri Lanka joined the cast of nations seeking a safe haven and bought gold for their reserves in the open market. Both the India and Sri Lanka purchases were at prices above $1,000 per ounce.

The purchase raises India’s gold holdings to 6% of their reserves from 4%. China’s gold percentage to total reserves is lower than India’s.

It seems that a trend has started where many other nations will buy up any gold offered by the IMF or other central banks at market prices, and shy away from the purchase of US Treasuries.

If they do, analysts expect the price of gold to rise much higher to accommodate a rise to 10% in India and China’s gold reserves. China mines a great deal of gold internally. If they decide to hold their domestic production to add to their reserves as Chinese financial figures have suggested they do, we could see gold move to much higher prices.

And as more money moves toward gold, there are less funds available for US Treasuries.

Yet another sign that significantly higher yields are going to have to appear at some point.

And higher yields on US Treasuries mean higher mortgage rates for the average homeowner.

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In the 11th month, On the 11th day, At the 11th hour...

European hostilities officially paused at 11 am on the 11th of November 1918 after the German government accepted the terms of armistice given them by the allied forces. The following year the cease fire was made permanent with the signing of the Treaty of Versailles, but it is the 11th of the 11th that has become the symbolic time of peace.

The 11th of November was originally called Armistice Day, but was changed to Remembrance Day after World War II as a gesture to commemorate all who have given their lives serving our great country.

They shall grow not old as we that are left grow old.
Age shall not weary them, nor the years condemn
At the going down of the sun and in the morning
We will remember them.

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Today and tomorrow we pause to remember the names of those who have given their lives serving Canada these past 12 months

Robert John Wilson, Warrent Officer
38
5 December, 2008

Mark Robert McLaren, Corporal
23
5 December, 2008

Demetrios Diplaros, Private
24
5 December, 2008

Thomas James Hamilton, Corporal
26
13 December 2008

Justin Peter Jones, Private
21
13 December 2008

John Michael Roy Curwin, Private
26
13 December 2008

Michael Bruce Freeman, Private
26
26 December 2008

Gaetan Joseph Roberge, Warrent Officer
45
27 December 2008

Gregory John Kruse, Sergeant
40
27 December 2008

Brian Richard Good, Corporal
42
7 January 2009

Sean David Greenfield, Sapper
25
31 January 2009

Dennis Raymond Brown, Warrant Officer
38
4 March 2009

Dany Oliver Fortin, Corporal
29
4 March 2009

Kenneth O'Quinn, Corporal
25
4 March 2009

Marc Diab, Trooper
22
8 March 2009

Scott Vernelli, Master Corporal
28
20 March 2009

Tyler Crooks, Corporal
24
20 March 2009

Jack Bouthillier, Trooper
20
20 March 2009

Corey Joseph Hayes, Trooper
22
20 March 2009

Karine Blais, Trooper
21
13 April 2009

Michelle Mendes, Major
30
24 April 2009

Alexandre Péloquin, Private
20
8 June 2009

Martin Dubé, Corporal
35
14 June 2009

Nicholas Bulger, Corporal
30
3 July 2009

Charles-Philippe Michaud, Master Corporal
28
4 July 2009

Pat Audet, Master Corporal
38
7 July 2009

Martin Joannette, Corporal
25
7 July 2009

Sébastien Courcy, Private
26
16 July 2009

Christian Bobbitt, Corporal
23
2 August 2009

Matthieu Allard, Sapper
21
2 August 2009

Yannick Pépin, Major
36
6 September 2009

Jean-Francois Drouin, Corporal
31
6 September 2009

Patrick Lormand, Private
21
14 September 2009

Jonathan Couturier, Private
23
17 September 2009

Justin Garrett Boyes, Lieutenant
26
28 October 2009

Steven Marshall, Private
24
30 October 2009

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Reality Check

Reality Check. The second in our month long series taking a peak of housing in the Golden State of California where many believe you are getting a preview of what's in store for British California... err Columbia.

5312 Hirsch Cir, Elk Grove, CA

First up this week is this 2,650 sq. ft. 5 bedroom/3 bath detached home sitting on a 5,793 square feet of land. The actual listing can be seen here.

Another beautiful home.

On January 14th, 2005 this house sold for $468,000 (see database record here). On August 23rd, 2007 it resold for $590,000 (see here).

On August 8th, 2009 it was listed for $275,000.

On September 5th, 2009 it was relisted for $265,000.

That's a total drop of 56.8% from their original purchase price. And it will sell for lower than that.


9749 Ashstone Way , Elk Grove, CA

Next up is this 3,172 sq. ft. 5 bedroom/3.5 bath home on a 7,144 square foot lot built in 2003. You can see the current listing here.

According to the database, this home last sold on September 12th, 2006 for $649,000 - happy days, for this was when expectations held that your home would increase 15-20% a year.

It has been listed for sale 8 times since then. The current asking price is only $325,000.

That's a current loss of 49.9% from the original purchase price. And it hasn't sold yet.

When these homes were last purchased, buyers couldn't fathom the fate that has now befallen them. Their mindset was identical to those buying in Vancouver in 2009.

They would do well to heed this quote...

"Vancouver’s record housing sales and prices are not sustainable because interest rates have nowhere to go but up." - BCREA Chief Economist Cameron Muir November 5th, 2009

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Sunday Funnies - November 8th, 2009

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Look for "preview of what's to come" feature later today.
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Disconnect

The Village on the Edge of the Rainforest is the poster child amongst Canadian cities for disconnect.

The most poignant example can be seen from the corner of Hastings and Main. Looking north, towards the homes nestled on the side of Grouse Mountain, you gaze upon Canada's wealthiest postal code.

It's about a 15 minute drive (at nighttime) from where you are standing. And where you are standing is at the heart of Canada's poorest postal code.

Joining that chasm is the stunning disjoint between Real Estate values and our economy.

Beyond all expectations, Vancouver’s housing market is hitting record sales activities and prices late in 2009.

Against that backdrop Statistics Canada released its labour report for October and advised that the nation lost 43,000 jobs.

This clawed back most of the increases in employment that occurred in August (+27,000) and September (+31,000).

Nationally this serious round of recessionary job cuts began a year ago, in October 2008, much later than in most other countries. So far the total number of job losses has added up to 400,000. Slightly more than half of those have come in manufacturing.

In B.C. the bloodletting continues. Another 13,000 jobs vanished last month and most were in manufacturing, education and the trades. The Wet Coast jobless rate now jumps to 8.3% from 7.4% and clearly shows our province is still in grip of the recession.

There are three stages of employment declines undertaken by firms in an economic downturn: 1) initial panic layoffs; 2) “hanging on for dear life” layoffs; and 3) re-positioning for the future layoffs. The final stage is what will predominate for the next several months.

And after February that 'repositioning' will intensify as job losses shoot up when all those people who are working for, and around, VANOC are devoid of a raison d'etre.

But our housing market chugs on as if incomes were being fueled by boom times. Normally Real estate is closely tied to the labour markets, incomes, lending/rates, credit, supply/demand, confidence, etc - but the closest tie is always with the economy and labour markets.

But that tie, in Lotusland, has been severed.

Stimulus and government agencies are allowing people without money to buy homes. CMHC has removed the risk from lenders so that mortgages are available to those who, in other times, wouldn't get them. And the bubble builds ever so dangerously higher.

How long can that disconnect continue? Even the most ardent Real Estate bulls are starting to speak out. Yesterday it was BCREA's Cameron Muir who admits we will have "the slowest recovery we’ve ever seen coming out of a recession."

And it was Muir who said it best; "it's irrational exuberance and it cannot last."

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A Real Estate Carol?

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CMHC UPDATE: Financial Post Editorial - CMHC Needs to Review Policies

Cameron Muir is the chief economist for the British Columbia Real Estate Association and is someone we have criticised on numerous occasions for his overly optimistic assessments of real estate in BC.

Throughout 2008, Muir seemed to be taking a page from Prime Minister Harper's playbook and endlessly denied the economy was heading for recession and that housing values might decline.

And when they did, Muir still seemed to understate events.

So we were taken aback to read the comments he made yesterday to the Kamloops Homebuilders’ Conference as reported in the Kamloops Daily News.

Muir told the conference that Vancouver’s record housing sales and prices are "not sustainable because interest rates have nowhere to go but up."

Say wha???

Muir noted that last year’s credit crisis helped affordability across B.C. through a combination of lower housing prices and lower mortgage rates. But the same sudden increase in affordability on the Left Coast caused a frantic amount of activity once fear from the crisis wore off. But that activity cannot last, Muir argued, calling it “irrational exuberance.”

(We call it an even more dangerous bubble than we had before the crisis, but we're good with his assessment)

And what does the coming year hold in store for us?

“We have high prices, affordability limits and [then we will] inject higher interest rates.”

And the outlook for the Canadian economy?

“This will be the slowest recovery we’ve ever seen coming out of a recession,” Muir said.

So what will all this mean for real estate?

Those rebounded prices and higher mortgage rates will combine with a slow recovering economy and it will mean the days of double-digit housing price increases are over, Muir argued.

“How high can prices go before consumers reach a limit on what they can pay?” asked Muir.

Muir said he expects the prime rate to rise from today’s 2.25 to a more than double rate of 4.75 in 2010.

Whoa!

Today's posted rate for five year mortgages at RBC is 5.74% (with a special offer of 4.44%). An increase of 2.50% would boost that 'special' rate to almost 7%, the stated rate would jump to 8.24%.

Hmmm... wasn't the 'doomsday' rate cited by those mortgage brokers in our post on Wednesday set at 8%?

It makes you wonder if Muir didn't get the 'Sunshine, Lollipop and Rainbows' memo sent out by CMHC on the bright future for real estate in 2010. Michael Levy got it.

For Muir, this is the equivalent of having been visited by three spirits and the ghost of Jacob 'Van-Housing-Blogger' the night before the conference.

All that remains now is to see if Muir maintains his penchant for dramatically understating what is coming.

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Refreshing?

You've read endlessly on this blog about how the members of our little Rainforest Roundtable think there are serious looming hazards involving real estate here on the left coast of Canada.

Incredibly not everyone shares our opinion.

Today... one of those divergent voices.

Michael Levy is the owner of Border Gold, a gold and silver business started in 1968 in Vancouver. Michael is also a financial expert in currencies and commodities and is often called up to act as a business analyst for radio station CKNW/980, the CORUS Radio Network and makes frequent appearances on both CTV and Global TV.

Yesterday he provided an interview on HoweStreet.com, a website compendium of business news and commentary. The interview was titled, "A Great Time To Buy a Home in Vancouver". If you would like to download this audio file of the entire interview, right click this link and select "save", "save as" or "save file as" (depending upon your browser).

The key excerpts are as follows:

• The interviewer asked for Levy's comments on the US Federal Reserve’s decision to keep the central bank rate at zero for the foreseeable future...
  
  Levy: "The American economy is running 100% on stimulus right now. Until you see the private sector get in, then you are not going to see interest rates go up. Right now, interest rates are staying down."
  
  On Real Estate, Levy was asked what he saw coming ahead for Vancouver and the GVRD...
  
  Levy: "Oh... I think it’s gonna be good because there is real demand here. ‘Real’… real demand in real estate and with ‘real’ demand you get prices going up. This is not a bubble here.. but now, you’re going to get prices pulling back, November, you know, the last part of this month, into December, January. But that’s cyclical. But there’s actual demand and if you don’t think or if one doesn’t think that the Olympics are going to put a new face again on Vancouver – then take another look. It might not happen immediately but its also going to be very attractive to people who continue to move here, for businesses who relocate here, for tourists to come here, for conventions to come to our new trade and convention centre, for Whistler on the new sea to sky highway. We’re going to see real estate continue perking. Now that doesn’t mean it’s going to keep going up like it has in the past four or five months. That was a pretty good move back up, but its going to be a healthy market in my mind."
  
  Interviewer: If you were standing in front of the graduating class at BCIT this month and they asked you for a couple of sentences on money advice advice, what would you be telling young people right now?
  
  Levy: "That to pool their resources and go out and buy something in real estate, in other words I don’t think you should be waiting around. If you’ve got a partner or a friend, a husband or a wife and you’re living together and both have jobs and you’ve got very little or no debt then you can get into a condominium at a very reasonable price and because of interest rates where they are, I’d start into the real estate market. In other words I would start to own because you can’t step up until you own and I think you have to bite the bullet and own real estate."
  
  Interviewer: If you could be visual with us here at howestreet.com, Mr. Levy, you would notice that you would be standing on one side of the gunnel here at the ship and you would have quite a few people glaring at you from the other side, but boy it is sure refreshing to hear somebody talking so upbeat.
  

There you have it. Refreshing and upbeat.

What could possibly go wrong?

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Pass the Salt!

Yesterday shortly after I commented that, in the CHMC world, there is never an outlook that isn't sunshine, lollipops and rainbows - the Financial Post echoed the sentiment: CMHC forecasts are best taken with a large grain of salt.

• "What do we find so beguiling? Must be the gentle mix of fact and whimsy. No matter what the situation, a CMHC forecast is always soothing, always positive, always upbeat about real estate."

Speaking of beguiling, did you get a chance to check out this link posted by a faithful reader in the comments section yesterday?

We are treated to 'the good news' about cheap money from a couple of mortgage brokers. Even better, this website has been cited as "first and foremost an up-to-date source of unbiased mortgage advice and industry trends."

The good news offered is in response to media stories about the Bank of Canada's warnings about interest rates. Thus, "13 reasons why low rates and current lending guidelines might not be a disaster in the making."

In one, the Company insists that anyone who receives a 5% down/35 year amortization mortgage "are getting them because they’re well qualified. It’s that simple." (Presumably Mark Carney can cancel his upcoming study).

Then they promptly follow that up with an assertion that some of those 'qualified' borrows aren't actually qualified (huh?). They tell us, "as a side note: The frequency of lender “exceptions” (lenders overlooking guidelines) are nowhere near where they were pre-August 2007."

Didn't they just say anyone who receives the 5/35 mortgage is qualified, "it's that simple"?

The other 13 'points' reference dubious data, but the one that stands out most is the last in which we "suppose a doomsday scenario unfolds and rates rise 4% (to say, 8% on a 5-year fixed). If the average household income is $61,800 today, and the mortgage is $250,000, that would necessitate a $10,400 pre-tax income jump in five years to pay the extra debt service. That’s just over 3% annual wage growth—not an unreasonable earnings growth assumption."

No worries, right?

Well, not exactly.

First off, are we to understand that doomsday for these guys is interest rates rising to 8%?

You're joking. Even the Bank of Canada is telling Canadians to expect interest rates to go back to normal... and normal for the last 20 years is 8.25%

And who among those who bought a single family home in the Lower Mainland in the past three years (where where the average detached home is selling for $914,000) has a mortgage of only $250,000?

The whole article gives new meaning to the phrase 'skewed analysis viewed through rose-coloured glasses'.

And since we're on the topic of reality checks, Australia announced yesterday that they are raising interest rates for the second consecutive month with the central bank raising their key rate 17% in the last 60 days.

Higher rates are coming. Bank of Canada Governor Carney knows it, which is why he has been sounding alarm bells the last few months.

And one only has to look at US Government debt to see the scope of the pressures that loom on the horizon.

America must roll over $3.4 trillion in debt over the next four years. This $3.4 trillion does not include any additional borrowing that may be required for other government programs (wars, healthcare, wars, school lunches). Unless the US rediscovers fiscal prudence, annual deficits of $1.4 trillion mean the United States faces the prospect of having to find $9 trillion to fund it's budgets.

There are only so many savings available to borrow, after all. And the competition for capital is going to force rates up to late 1970s levels.

And what will happen if America can't find anyone willing to finance its deficits?

One of the luxuries of issuing debts in the currency you happen to also print currency is that you can print money to pay for them. Technically the Fed can create new money to buy debt issued by the Treasury, funding deficits ad infinitum.

Which is why so many people are fretting about the United States monetizing the debt and why gold hit $1,084 an ounce yesterday (at the time this was written, gold had hit $1,092 on the kitco 24 hour chart).

You have to laugh at the idea that 8% interest rates are a doomsday scenario.

In 1975, an 8% five year mortgage rate would have been considered ridiculously cheap and it's not hard to see how that will be the case again before too long.

Seems to me we need more than a simple grain of salt to take with these 'don't worry, be happy' rationalizations.

Pass the shaker and pour it on, baby.

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CMHC Housing Outlook 2010

CMHC has come out with their housing outlook for 2010 (you can see it here).

In a nutshell they say housing activity and prices will pick up next year as demand grows. The average listed price will increase to $312,950 this year and rise further to $324,500 in 2010, with British Columbia continuing as the most expensive place to live. The average MLS home price in BC will increase modestly from $452,000 in 2009 to $460,000 in 2010 (a price point that includes apartments and condos).

A forecast for continued growth - what a surprise.

Of course this is the group that, at the start of 2008 never saw any downturn in the market despite all the havoc happening in the United States (see 2008's first quarter report here).

Now we can cut them some slack for 2008. The entire government had their head in the sand at the start of the year as Harper, Flaherty et al were saying that, despite what was happening in the US, no recession was coming to Canada and absolutely no deficit would be incurred. The Bank of Canada was repeating those themes.

But this year... this year we have the Governor of Canada threatening to intervene in the real estate market and "influence financial institutions that issue mortgages, both through regulation and pressure, including the ability to change the terms of mortgage insurance."

You get the impression that, in the CHMC world, there is never an outlook that isn't sunshine, lollipops and rainbows.

In a follow up to our new Sunday Feature for November previewing what is to come in our real estate market by looking at the current California experience (see here), there was this piece by Bloomberg today titled Real Estate Price Plunge Makes U.S. Homeownership Perilous Path

• Kajal and Vishal Dharod paid $559,000 in 2006 for a new four-bedroom house built in Rancho Cucamonga, California. Today, it’s worth about $360,000.
  
  “We don’t know how we can come back from a loss like that,” said Kajal Dharod, 29, a first-time homeowner with a $4,200-a-month mortgage. “Buying the house was a mistake.”
  
  American homeownership, once considered a path to wealth, is now leading to disillusionment.

“Buying the house was a mistake.” Remember that phrase, it will become the catchphrase for everyone who bought in 2009 when it comes time to renew those mortgages in 2014.

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Opportunity

Vancouver's sales numbers for October are out and the average price has pushed higher yet again. Graph above comes from Larry Yatkowsky's website. Click on image above to enlarge.

We have almost reached the previous highs and it's interesting to see how the latest numbers are casting despair amongst those who have been expecting a correction in the Lower Mainland Real Estate market.

Some have speculated that the Vancouver market and it's numbers may be the first to prove the 'bubble pattern' incorrect. That 'pattern' would be the playing out of the bubble lifecycle graph which represents the way all bubbles have corrected themselves in the past (click on image to enlarge).

The Rainforest Roundtable was discussing this very issue last night. We would humbly suggest the bubble lifecycle theory is correct, it's the assumption that the Vancouver market had reached it's peak that was incorrect.

Don't get the wrong impression though - our market is in a bubble and it will burst.

The current rise is attributable to one thing and one thing only: government intervention.

Anytime central banks intervene and pump billions or trillions of dollars into the financial system, a bubble is created that must eventually deflate.

Rather than allow the market to correct itself and clear away the worst excesses of the boom period, North American governments have colluded to create another bubble.

By attempting to cushion our economy from the worst shocks of last year's financial collapse, the Bank of Canada and CMHC have ensured that the ultimate correction of this mess will be more severe than it should have been.

As US Senator Ron Paul noted yesterday, "as the housing market fails to return to any sense of normalcy, commercial real estate begins to collapse and manufacturers produce goods that cannot be purchased by debt-strapped consumers, the economy will falter... government intervention cannot lead to economic growth."

The rationalizations for why the economy is recovering will intensify, as will the delusions that BC (and Canada) will not be affected. We will hear the same sort of platitudes we heard last year when we were Canada and BC would not suffer from the recession in the US and that we would not fall into deficit spending).

What we have is a false recovery. I agree completely with Ron Paul who said, "I am reminded of the outlook in 1930, when the experts were certain that the worst of the Depression was over and that recovery was just around the corner. The economy and stock market seemed to be recovering, and there was optimism that the recession, like many of those before it, would be over in a year or less. Instead, the interventionist policies of Hoover and Roosevelt caused the Depression to worsen, and the Dow Jones industrial average did not recover to 1929 levels until 1954. I fear that our stimulus and bailout programs have already done too much to prevent the economy from recovering in a natural manner and will result in yet another asset bubble."

We are in the eye of the economic hurricane that stated last year. And this is a great thing for Canada and the Lower Mainland. It represents an unbelievable reprieve.

The bubble lifecycle WILL play itself out. But after the freezing up of the real estate market last November, Canadians have been given an astounding opportunity to recognize what is coming and prepare.

And that is a good thing. What more could you ask for?

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Email: village_whisperer@live.ca
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New Sunday Feature: A Preview of what's to come? (Sunday Funnies below this post)

Thought we'd start a new Sunday feature in addition to Sunday Funnies and try it for the month of November.

Now you all know our position on the future of real estate in BC: bursting bubble, multiple foreclosures and a flood of listings on the market.

That exact scenario already plays itself out before our eyes in California.

So let's take a peak at the impact of this reality on some homes in the Golden State...

12701 Cadence Ct, Wilton, CA, 95693

First up is this 4,850 square foot, 5 bedroom and 3.5 bath gem sitting on over 3 acres of land. The actual listing can be seen here. A few pictures for you (more pictures are available if you follow the link to the listing)...

It's a beautiful home, no?

Now the fun part.

On November 7th, 2005 this house sold for $1,051,000 (see database record here). Two years later the owners tried to sell it for a $350,000 profit - they couldn't.

The house is still on the market, in fact it has been listed 7 separate times in an attempt to move it - each new listing bringing with it a new, desperate price reduction.

Originally listed June 30th, 2007 for $1,399,000.
Then on August 18th, 2007 for $1,299,000.
November 17th, 2007 for $1,380,000.
December 15th, 2007 for $1,300,000.
February 16th, 2008 for $975,000.
April 19th, 2008 for $725,000.
June 14th, 2008 for $699,000.
August 2nd, 2008 for $599,999.
November 22nd, 2008 for $579,999.

And now on the market for only $499,999.

That's a total drop of 64.3% from their original asking price and a current loss of 52.4% from their original purchase price.

And it hasn't sold yet.

3209 Mike Waldron Dr, Sacramento, CA, 95835

Next up is this 3,565 square foot 5 bedroom 4.5 bath home on 7,144 square foot lot. You can see the current listing (with 10 pictures) here.

According to the database, this home sold on December 16th, 2005 for $768,500.

It was originally listed on July 21st, 2007 for $639,000.
Then on November 22nd, 2008 for $430,000.

It's now on the market for only $390,000.

That's a total drop of 39% from their original asking price and a current loss of 49.3% from their original purchase price.

And it hasn't sold yet.

And there are thousands more like this. A portent of things to come here? Next Sunday we'll profile some more.

And now on to the Sunday Funnies...

Sunday Funnies November 1, 2009

(Click on image to enlarge)

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Email: village_whisperer@live.ca
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Please read disclaimer at bottom of blog.

Have a Happy and Safe Hallowe'en

For those who would like some reading...

Further evidence our concerns about real estate, CMHC and a looming collapse are finally going mainstream. From yesterday's Globe and Mail, 'Easy credit, soaring prices raise new housing fears'.

• "Canadians are buying homes at a blistering pace, binging on new debt. But all that cheap money can come at a high cost... Central bankers in the U.S. and elsewhere [have] indicated in recent months that once they decide it's time to begin raising interest rates, they may do so at a faster pace than consumers and investors are used to... [Meanwhile] novice buyers are jumping into surging real estate markets in Vancouver, Calgary and Toronto with little understanding that the value of the asset they covet can disintegrate."

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Email: village_whisperer@live.ca
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Please read disclaimer at bottom of blog.