Wednesday, June 3, 2009

Now that May is gone...what next?

As we all know housing prices have been stabilising for the past three months.

They were in free-fall in October with no bids and a 20 MOI at one stage. Now prices have ticked up from last month (though still down 10% YOY) and inventory has dropped YOY and MOI is around 4.

Larry Yatkowsky has a quick summary here:

Is that it? Are we off to the races again?

Everyone has their view, but I for one doubt it.

What we have had for the last three months is the coming together of several factors:

1) The irresponsible financial entities around the world have been pulled out of near collapse by the infusion of Hundreds of Billion of dollars of US and European tax-payers money.

2) Interest rates around the world have been slashed to near zero to try and prop up assets. We have the lowest mortgage rates on record.

3) Commodities have got a bid, admittedly from catastrophic levels (especially oil, gold and copper), and that has helped mining and oil producers. However natural gas for which provide the Province a huge % of it's revenue has continued to drop.

4) We had the normal seasonal bounce in sales that occurs in spring.

Now it gets interesting. I think the fun on economic front has just started. The US is losing 500,000 jobs a month! We are their largest trading partner. We will continue to get hit. Interest rates have been ticking up here and in the US, a trend which I hope reverses soon or our collective goose is cooked. Weak demand and higher interest rates would be disastrous.

I expect the recession to start biting deeper soon. I don't want that, but I cannot believe that we skate so close to world-wide economic collapse and then are back to normal a few months later. There are huge swaths of debt that cannot be repaid, on anything from Commercial RE to Machinery.

Employment is likely going to be weak for some time. The job-buying program of both the US and Canadian governments have still to have any appreciable affect. Meanwhile they are all sinking into deeper deficits. Pretty soon we will get Provincial and Federal cut-backs to try and contain these deficits, at the same time as they will talking about job creation.

So, I see this as a brief interlude. I could be wrong of course, and if I see strength in the economy returning over the next few months and housing to continue strong, I will reconsider my views.


  1. Interest rates have been ticking up here and in the US, a trend which I hope reverses soon or our collective goose is cooked.
    That sounds rather like a "if wishes were horses" line. There is too much un-repayable debt in the system. It WILL be worked out, whether by default or by inflation I wish I knew. If inflation, interest rates will rise. If default, interest rates will rise; lenders must protect themselves. The only way rates can stay low is if permagrowth resumes, and central banks worldwide continue to flood the system with money. Peak oil may have a thing or two to say about the first! Job losses show no sign of abating, a decrease in the rate of increase is not enough. And the effects of the recession are now starting to hit, otherwise sound businesses with the strength to hang on waiting for a turnaround are starting to hurt. At first it was just the obviously unsound ones hit, but it is now spreading.

    You said all this in your post, of course. I'm just not sure how you can think that rates have any hope of staying this low, barring Zimbabwe-style monetary policy and complete nationalization of our banking system, which I sincerely hope we aren't in for.

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  3. Alex. IMVHO rates are not going up because of inflation fears, but because the fear in the market is receding.

    I know that sounds couter-intuitive. But during the height of the panic, short-term US treasury notes actually dropped for a brief period to 'negative' rates. IE people were paying more to buy them than they would get back (with interest added) on maturity. They just wanted to be out of bank accounts and into the safest instrument available.

    As the fear has receded, investors have left tresuries and moved into equities, corporate debt etc.

    Yes there is a lot of jaw-boning about the huge US debt. However if we get fear in the market again, everyone will be lining up to buy treasuries, like they did today.

    BTW today Ontario's debt was put on negtaive credit watch.

    I will post on an investor's opinion on where the 'missing inventory' went, this week-end if I get the time.

  4. Will this trigger the 2nd wave of our global economic crisis?

  5. "I could be wrong of course,........"

    You could be, but I doubt it very much.

  6. Hi Fish,
    I think you might be assuming that (like same old, same old)int rates will be determined by central banks based on inflation. But you need to realize that this strategy can only succeed if central banks can convince the private sector to buy into their game, and it just ain't workin this time.

    Mortgage rates have to compete with all other debt vehicles, and the fact that bond yields have been shhoting up since January, tells us that lenders are refusing to accept risk. The FED has already blown it's bundle to fight the recession and is now out of ammo.

    Sure, the FED may eventuall be able to resume it's influence, but in the meantime I think int rates will continue to grow at a scary pace, well before the economy can support any price and wage inflation....and that does not bode well for the housing market.

  7. Macho- i have to say, i think it is the opposite. yes there is a lot of Fed debt being piled on, but the reason the rates have been going up so far (note 'so far') is due to decreased fear.

    That's right. As folks unwound the 'fear trade' of long treasuries and piled into equities (up 30-40% since the March lows), so rates have gone up.

    if it was from too much supply, then corporate rates should have gone up too. but they didn't the spread between corporate bonds and treasuries have been dropping.

    What now?

    Well If I had to guess, and it is only a guess. We will see more weakness and rates stabilise around here.

    i don't see a much higher spike in rates until inflation rears it's head. No sign of that yet, with sales, and everything from Toyotas to Furniture at 0% credit.

  8. I just feel like posting idiot statement after idiot statement just for the fun of it….

    like…. Re will fall right off a cliff on July 1st cause I said so…

    or….listings will sky rocket on Aug 22nd based on my contacts…

    Seriously though. Is there any real, tangible, rational reason why real estate is doing what its doing here in the lower mainland despite what is happening in the greater economy?

  9. Anon- because most people still have jobs and old habits die hard and interest rates are at historic lows.

    The bears on the net and those of my aquaintances have reached a new depth of despair after the elation of fall, so maybe we are at another near term top :).

    The fact is that RE went up 100% over the last 6-7 years and in the space of several months, we erased 20% of that rise (100 to 200 minus 12%) so of course we should get a bounce, unless we are heading for armageddon.

    I find it interesting that friends and realtors I know started saying in Nov, when the banks were teetering- how obviously stupid it now was to pay $700K for a small town-house.

    The RE emporer lost his clothes.

    Now, it's like it never happened! They have forgotten how quickly things could turn again and think that the 10% drop now means it's a 'deal'.

    I'm not biting.

  10. Interest Rates has just gone up again!!

    TD just increased their 5 year fixed by 0.40%

    Assuming the banks all move their 5-year posted rates to 5.85%, that will amount to a 0.60% increase in the last nine days.

  11. oops, here is the link

  12. Hey Fish. My friend just bought a place. Its listing expired in the Fall, but his realtor did some legwork contacting the owners of expired listings. They took his first offer on the place. So anecdotally, I think we have a lot of listings that were pulled but the owners are still wishing to sell, but have for some reason not yet bothered to relist. In the case of this particular listing the owners expressed disgust at the extreme lowballs they were receiving in the Fall and simply didn't want to deal with it anymore. Or that's the story I heard.

    So I suspect that there is plenty of stealth inventory. But what will move it into the active inventory category? A rise in interest rates? Or are we going to have to wait a decade for ultimate capitulation with these properties to appear on MLS at market price ?

  13. Well Panda, I was going to devote a post to this subject, but may as well continue the discussion here.

    I think you are right. Where did all the inventory go? well a lot of it was specuvestors IMVHO.

    They were looking at the stress, very negative carrying costs and a rapid drop in their investments. "get me out" they screamed to their realtors.

    Then interest rates came tumbling down, the market firmed up and complacency set in. The carrying costs decined and RE stabilised, so why sell at a loss when soon it will come raoring back. Off the market they went.

    I think they will be back. Once rates drift higher, the market settles down again, the Olympic tax bills come due...then we may see them rushing for the exits again.

    Remember all IMVHO.

  14. Yeah, that makes sense and your explanation is consistent with my friend's property. It was an investment property. I don't know how long they were holding, but they were looking for what I consider an unrealistically big payday and with absurdly low interest rates they were prepared to wait a while.

    I guess in the end they still did rather well and decided to take the offer and close the books on their RE investment.

  15. Where did all the inventory go? Well it's still there, as you alluded, only a lot of would-be sellers have jumped back on the speculative bandwagon.

    We all know how this story ends.

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