Sunday, December 30, 2007

Pace of decline in home prices sets a record

An article collection by Vancouver Home Mortgage.

James R. Hagerty and Kelly Evans on 28 Dec 2007 posted in the Wall Street Journal:

A deepening slump in the housing market threatens to damp consumer spending.

"A closely watched gauge of U.S. home prices shows they are falling sharply across most of the nation, as a deepening slump in the housing market threatens to damp consumer spending.

Home prices in 10 major metropolitan areas in October were down 6.7% from a year earlier, according to the S&P/Case-Shiller home-price indexes, released yesterday by credit-rating firm Standard & Poor's. That exceeded the previous record year-to-year decline of 6.3% in April 1991, when the economy was emerging from a recession. (See a PDF summary of the report.)

New statistics from the Census Bureau, meanwhile, indicate a slowdown in the number of Americans moving to states that led the housing boom, including Nevada, Florida and Arizona.

The silver lining behind the latest home-price data is that they signal the market is making what most economists see as a necessary adjustment, dragging home prices back into closer alignment with Americans' ability to pay. The market is working its way "back to reality," says David Seiders, chief economist of the National Association of Home Builders. He thinks house prices will bottom out by early 2009".

Click here to read the full article...

Tuesday, December 11, 2007

Straight Talk on the Mortgage Mess from an Insider

An article collection by Vancouver Home Mortgage:

Here is an interesting article by Herb Greenberg posted Dec 06, 2007 on Market Watch from DOWJONES.

Even before this mortgage mess started, one person who kept emailing me over and over saying that this is going to get real bad. He kept saying this was beyond sub-prime, beyond low FICO scores, beyond Alt-A and beyond the imagination of most pundits, politicians and the press. When I asked him why somebody from inside the industry would be so emphatically sounding the siren, he said, “Someobody’s got to warn people.”

Since then, I’ve kept up an active dialog with Mark Hanson, a 20-year veteran of the mortgage industry, who has spent most of his career in the wholesale and correspondent residential arena — primarily on the West Coast. He lives in the Bay Area. So far he has been pretty much on target as the situation has unfolded. I should point out that, based on his knowledge of the industry, he has been short a number of mortgage-related stocks.

His current thoughts, which I urge you to read:

The Government and the market are trying to boil this down to a ’sub-prime’ thing, especially with all constant talk of ‘resets’. But sub-prime loans were only a small piece of the mortgage mess. And sub-prime loans are not the only ones with resets. What we are experiencing should be called ‘The Mortgage Meltdown’ because many different exotic loan types are imploding currently belonging to what lenders considered ‘qualified’ or ‘prime’ borrowers. This will continue to worsen over the next few of years. When ‘prime’ loans begin to explode to a degree large enough to catch national attention, the ratings agencies will jump on board and we will have ‘Round 2′. It is not that far away.

Since 2003, when lending first started becoming extremely lax, a small percentage of the loans were true sub-prime fixed or arms. But sub-prime is what is being focused upon to draw attention away from the fact the lenders and Wall Street banks made all loans too easy to attain for everyone. They can explain away the reason sub-prime loans are imploding due to the weakness of the borrower.

How will they explain foreclosures in wealthy cities across the nation involving borrowers with 750 scores when their loan adjusts higher or terms change overnight because they reached their maximum negative potential on a neg-am Pay Option ARM for instance?

Sub-prime aren’t the only kind of loans imploding. Second mortgages, hybrid intermediate-term ARMS, and the soon-to-be infamous Pay Option ARM are also feeling substantial pressure. The latter three loan types mostly were considered ‘prime’ so they are being overlooked, but will haunt the financial markets for years to come. Versions of these loans were made available to sub-prime borrowers of course, but the vast majority were considered ‘prime’ or Alt-A. The caveat is that the differentiation between Prime and ALT-A got smaller and smaller over the years until finally in late 2005/2006 there was virtually no difference in program type or rate.

The bailout we are hearing about for sub-prime borrowers will be the first of many. Sub-prime only represents about 25% of the problem loans out there. What about the second mortgages sitting behind the sub-prime first, for instance? Most have seconds. Why aren’t they bailing those out too? Those rates have risen dramatically over the past few years as the Prime jumped from 4% to 8.25% recently. seconds are primarily based upon the prime rate. One can argue that many sub-prime first mortgages on their own were not a problem for the borrowers but the added burden of the second put on the property many times after-the-fact was too much for the borrower.

Most sub-prime loans in existence are refinances not purchase-money loans. This means that more than likely they pulled cash out of their home, bought things and are now going under. Perhaps the loan they hold now is their third or forth in the past couple years. Why are bad borrowers, who cannot stop going to the home-ATM getting bailed out?

The Government says they are going to use the credit score as one of the determining factors. But we have learned over the past year that credit scores are not a good predictor of future ability to repay. This is because over the past five years you could refi your way into a great score. Every time you were going broke and did not have money to pay bills, you pulled cash out of your home by refinancing your first mortgage or upping your second. You pay all your bills, buy some new clothes, take a vacation and your score goes up!

The ’second mortgage implosion’, ‘Pay-Option implosion’ and ‘Hybrid Intermediate-term ARM implosion’ are all happening simultaneously and about to heat up drastically. Second mortgage liens were done by nearly every large bank in the nation and really heated up in 2005, as first mortgage rates started rising and nobody could benefit from refinancing. This was a way to keep the mortgage money flowing. Second mortgages to 100% of the homes value with no income or asset documentation were among the best sellers at CITI, Wells, WAMU, Chase, National City and Countrywide. We now know these are worthless especially since values have indeed dropped and those who maxed out their liens with a 100% purchase or refi of a second now owe much more than their property is worth.

How are the banks going to get this junk second mortgage paper off their books? Moody’s is expecting a 15% default rate among ‘prime’ second mortgages. Just think the default rate in lower quality such as sub-prime. These assets will need to be sold for pennies on the dollar to free up capacity for new vintage paper or borrowers allowed to pay 50 cents on the dollar, for instance, to buy back their note.

The latter is probably where the ’second mortgage implosion’ will end up going. Why sell the loan for 10 cents on the dollar when you can get 25 to 50 cents from the borrower and lower their total outstanding liens on the property at the same time, getting them ‘right’ in the home again? Wells Fargo recently said they owned $84 billion of this worthless paper. That is a lot of seconds at an average of $100,000 a piece. Already, many lenders are locking up the second lines of credit and not allowing borrowers to pull the remaining open available credit to stop the bleeding. Second mortgages are defaulting at an amazing pace and it is picking up every month.

The ‘Pay-Option ARM implosion’ will carry on for a couple of years. In my opinion, this implosion will dwarf the ’sub-prime implosion’ because it cuts across all borrower types and all home values. Some of the most affluent areas in California contain the most Option ARMs due to the ability to buy a $1 million home with payments of a few thousand dollars per month. Wamu, Countrywide, Wachovia, IndyMac, Downey and Bear Stearns were/are among the largest Option ARM lenders. Option ARMs are literally worthless with no bids found for many months for these assets. These assets are almost guaranteed to blow up. 75% of Option ARM borrowers make the minimum monthly payment. Eighty percent-plus are stated income/asset. Average combined loan-to-value are at or above 90%. The majority done in the past few years have second mortgages behind them.

The clue to who will blow up first is each lenders ‘max neg potential’ allowance, which differs. The higher the allowance, the longer until the borrower gets the letter saying ‘you have reached your 110%, 115%, 125% etc maximum negative of your original loans balance so you cannot accrue any more negative and must pay a minimum of the interest only (or fully indexed payment in some cases). This payment rate could be as much as three times greater. They cannot refinance, of course, because the programs do not exist any longer to any great degree, the borrowers cannot qualify for other more conventional financing or values have dropped too much.

Also, the vast majority have second mortgages behind them putting them in a seriously upside down position in their home. If the first mortgage is at 115%, the second mortgage in many cases is at 100% at the time of origination — and values have dropped 10%-15% in states like California — many home owners could be upside down 20% minimum. This is a prime example of why these loans remain ‘no bid’ and will never have a bid. These also will require a workout. The big difference between these and sub-prime loans is at least with sub-prime loans, outstanding principal balances do not grow at a rate of up to 7% per year. Not considering every Option ARM a sub-prime loan is a mistake.

The 3/1, 5/1, 7/1 and 10/1 hybrid interest-only ARMS will reset in droves beginning now. These are loans that are fixed at a low introductory interest only rate for three, five, seven or 10 years — then turn into a fully indexed payment rate that adjusts annually thereafter. They first got really popular in 2003. Wells Fargo led the pack in these but many people have them. The resets first began with the 3/1 last year.

The 5/1 was the most popular by far, so those start to reset heavily in 2008. These were considered ‘prime’ but Wells and many others would do 95%-100% to $1 million at a 620 score with nearly as low of a rate as if you had a 750 score. No income or asset versions of this loan were available at a negligible bump in fee. This does not sound too ‘prime’ to me. These loans were mostly Jumbo in higher priced states such as California.

Values are down and these are interest only loans, therefore, many are severely underwater even without negative-amortization on this loan type. They were qualified at a 50% debt-to-income ratio, leaving only 50% of a borrower’s income to pay taxes, all other bills and live their lives. These loans put the borrower in the grave the day they signed their loan docs especially without major appreciation. These loans will not perform as poorly overall as sub-prime, seconds or Option ARMs but they are a perfect example of what is still considered ‘prime’ that is at risk. Eighty-eight percent of Thornburg’s portfolio is this very loan type for example.

One final thought. How can any of this get repaired unless home values stabilize? And how will that happen? In Northern California, a household income of $90,000 per year could legitimately pay the minimum monthly payment on an Option ARM on a million home for the past several years. Most Option ARMs allowed zero to 5% down. Therefore, given the average income of the Bay Area, most families could buy that million dollar home. A home seller had a vast pool of available buyers.

Now, with all the exotic programs gone, a household income of $175,000 is needed to buy that same home, which is about 10% of the Bay Area households. And, inventories are up 500%. So, in a nutshell we have 90% fewer qualified buyers for five-times the number of homes. To get housing moving again in Northern California, either all the exotic programs must come back, everyone must get a 100% raise or home prices have to fall 50%. None, except the last sound remotely possible.

What I am telling you is not speculation. I sold BILLIONs of these very loans over the past five years. I saw the borrowers we considered ‘prime’. I always wondered ‘what WILL happen when these things adjust is values don’t go up 10% per year’.

Now we’re finding out. If you made it all the way to the bottom, you can see why I decided to run this. Feel free to post thoughts below. Mark will likely be personally responding to any comments.

Save & Share: Facebook | | Digg this
Trackback URL:

Tuesday, November 20, 2007

US Credit Crisis - It's A Mess!

Here are two interesting articles by Diane Francis in today's (Nov 20, 2007) Financial Post...

- Sub-Prime Scandal: New Catastrophe Around the Corner

- Subprime Mortgage and Debt Fraud: Worse than Enron and Bre-X

Meanwhile, MSNBC's reported "Foreclosures hit some cities harder than others" and expected the coming rise in home foreclosures is expected to drag down property values by some $223 billion.

Sunday, October 14, 2007

August 2007 Housing Index for Greater Vancouver

According to the Greater Vancouver Real Estate Board's August 2007 report on house prices and sale activities, the demand for housing continue to be positive. The average sale prices for apartments, townhouses and detached homes are:

Apartments: $367,944
Townhouses: $446,577
Detach homes: $726,067

With the average Greater Vancouver household income at $63,300, home buyers are squeezed out of the home ownership market. Or, they are forced to buy the most affordable apartments as shelters for their families.

While Vancouver house prices are consistent with pricing trends for the above types of dwelling, there is a market disconnect with "affordability" and "average prices" in other major Canadian Cities. If you take a look at the various charts as presented by Brian Ripley here, you'll find that Vancouver home owners are bearing a much heavier cost in home ownership.

Our average detached home prices are twice as much as that in Calgary and Edmonton and Toronto detached home prices are only around 40% of that in Vancouver. Ottawa and Montreal prices are at about one-third the price in Vancouver, have the most affordable detached homes in the country.

House prices are subjected to the economic law of supply and demand. We have a high housing prices situation in Vancouver for a long time.

We must find out why there are such disparity in home prices, and what can be done about it. The provincial Government in BC should be the first to be questioned on their housing policy for limiting the supply of "land" for housing.

Is the Agriculture Land Reserve that control vast urban land parcels still relevant in serving the well being of British Colombians? Urban town planners are urging for better utilization of land resources. Farming for agriculture lands bordering the city centers is not the best and highest use of these land parcels.

Until there are urgency and agreement by the Governments taking action to ease the land supply problem, the critical housing affordability problem in Vancouver will not be solved.

Tuesday, October 2, 2007


Another collection of housing market report by Vancouver
Home Mortgage:

Click on this link to read the full report by Royal Lepage
Real Estate Services.

Unlike the U.S. housing market, the housing sentiment in
Canada is strong and there are no signs of any slowing
down in the demand for housing and price gain across the

Sunday, September 9, 2007

Articles submitted - September 09, 2007

Welcome to the September 9, 2007 edition of real estate investment.

Matt Hanson presents Credit Card Fraud - How to Protect Yourself posted at The Credit & Credit Card Blog, saying, "As technology has increased, so has credit card fraud. There are some simple steps that you can take to help protect yourself from credit card fraud."

Chris Russell presents Working Hard Does Not Produce Success posted at Productivity Planner, saying, "Yes, we work hard to be successful, but we also have to choose to be successful. It is a decision. It is a conscious effort. It takes mental discipline. It is a deliberate mindset."

Home Financing

Matthew Paulson presents 7 Ways to Avoid a Foreclosure posted at Getting Green.

Sagar Satapathy presents The Broke Handyman’s Box of Blueprints: 100 Free Plans to Build Home Furniture posted at Credit Card Lowdown.

Pushpa Sathish presents Top 10 Movies to Watch Before Remodeling Your Home posted at Homeowners Insurance Lowdown.

Ryan Russell presents Finding A Fix: 10 Tips For Resolving Financial Disputes posted at My Money Thinks, saying, "Over the past 20 years I have learned a lot about disputing issues with creditors and banks. Learn from my experiences, and start getting what you deserve when financial institutions cross the line."

Steve Faber presents - How to Sell Your House Fast and Keep More Money in Your Pocket posted at DebtBlog.

Millionaire Mommy Next Door presents 14 Ways To Improve Your Credit Score posted at Millionaire Mommy Next Door, saying, "Over the course of a 30 year mortgage term, I'd pay a whopping $357,873 less than you might, simply because I've established a good credit score."


Pam Johnson presents Renting Tips posted at Roofable, saying, "With the Buyer’s market we’re currently working through, there are many homeowners who can’t sell their houses and for one reason or another are forced to become landlords."

Dax Desai presents The Power of Self-Directed IRA’s posted at Dax Desai, saying, "Explains the power of self-directed IRA's and how to set one up."

Real estate investment

Laura presents 10 Home Selling Alternatives to Hiring a Real Estate Agent posted at Mortgage Lowdown.

That concludes this edition. Submit your blog article to the next edition of real estate investment using our carnival submission form. Past posts and future hosts can be found on our blog carnival index page.

Technorati tags: , .

Saturday, September 1, 2007

US Housing Crisis that Greenspan Built

A blog posting by Vancouver Home Mortgage:

It was reported in The Financial Post on Sept 01,2007 in an article "Ultra-low Fed rates stoked housing boom: Taylor"

The bursting of the tech bubble and September 11/2001 terrorist attack on World Trade Center has resulted in Greenspan aggressively cutting interest rates and holding them too low for too long. The asset inflation had resulted in the US housing boom built with too much liquidity and un-regulated mortgage lending. With the collapse of the housing market, US home owners lost billions of dollars in their property asset values all over the US. And, the bottom is not in sight yet!

The recent injection of liquidity by the US and the likely reduction in interest rates will not solve the current problem on US housing deflation. The correction in house prices will take many years to unwind until consumer confidence returns to the market.

The housing problem in the US was explained superbly by the blog posting by Dr. Housing Bubble on the housing and real estate problem in Los Angeles.

The 2001-2006 US housing bubble, built on low interest rates and loose lending regulations is now too big a problem for the US government to solve. The bad mortgage papers created and the financial ramification will take many years to be sorted out. Meanwhile, the US housing recession will likely spill over and result in the contraction of the US economy.

The housing deflation will continue until house prices are once again supported by market fundamentals. The equilibrium is reached when the cost of renting (which currently costs around 50% of owning) is about the same as owning a home and making the monthly mortgage payment. This may take many years for it to happen.

Presently, with dropping house prices, many home owners are having mortgages equal or exceeding their house values. Although a financial crisis may be averted for home owners with option mortgages through the support of the US government, the cycle of declining house prices is already in motion. The US housing recession will affect the general economy as the loss of consumer confidence/dwindling wealth effect will depress consumer spending.

Canada's real estate and housing market will be affected when economic growth in the US is slowing down. There are already signs that the demand for housing is slowing down. The Edmonton market is now facing declining sales and house prices leveling off. Many homes were reported to be sold with large price reductions from the listed prices.

Monday, August 27, 2007

Articles submitted - August 25, 2007

Welcome to the August 25, 2007 edition of real estate investment.

Bryan C. Fleming presents Buying into a Down Stock Market posted at Bryan C. Fleming, saying, "Did you ever think of playing the stock market? Why not just watch me loose all my money instead. In this artile I talk about buying into a down stock market. Yes, it's just like gambling... only legal!"

Eric Hudin presents Protecting Your Finances and Assets Offshore posted at My Estate Planning Career Blog, saying, "If you’re self employed, you’re affluent, you’re married, you have direct clients, business partners or you’re just concerned that you’re overpaying your taxes, there’s a strong possibility that you should be protecting your finances and assets offshore."

Allen Taylor presents What is a Charitable Trust? posted at Investing World Today, saying, "A charitable trust is designed to create a path whereby your assets may be converted into a life long stream of income and not a source of governmental revenue though taxes. Your taxes are lowered, what you pay now is lessened and what your heirs or your children pay will be lessened too when the time comes to pay estate taxes."

Tim Ramsey presents You Are Not Alone In The World Of Debt posted at My Debt Relief Blog, saying, "The first seven years of the “new millennium”, has seen the birth of more millionaires than every prior generation, but also created a generation more in debt that any generation that has come before."

Eric Stanley presents The Lure of Low Interest Rates posted at Personal Finance Blog Articles, saying, "Many of the financial decisions people make today are completely based on the current level of interest rates and have little consideration of long-term impact. Rates are so low it just makes sense to refinance or purchase now. We might as well do it or buy it now while rates are so low. Everyone has some debt no big deal rates are low."

Thomas Humes presents Baron Five-Step Action Plan for Building Wealth posted at Wealth Building World, saying, "It is important to learn disciplined strategies of sound money management, investing, and business administration. The more you learn about these areas, the more confident you will be in selecting advisors, making investments, and handling your business and financial affairs. You can easily move forward on your journey to financial success by taking these five simple actions-"

Home Financing

Ryan presents The Dirty Dozen Credit Card Traps posted at Care on Credit, saying, "Overview of the hidden traps in the terms and conditions for your credit cards. Learn how creditors juice you for extra dollars, and how to evaluate credit cards when you are trying to decide which one is right for you."

Matthew Paulson presents How to Qualify for Mortgage without a Credit Score posted at Getting Green.

housing bubble

Ian Welsh presents Reaping What You Sow: Hedge Fund and Housing Bubble Edition posted at The Agonist, saying, "To understand what's happening to the US housing and financial markets right now you need to understand the past policy decisions by the Fed and the Bush administration."

Ian Welsh presents How Bad Will the Housing Bubble Hangover Be? posted at The Agonist, saying, "Parallels with the Japanese housing bubble suggest the housing market will be in for years and years of pain."

Real estate investment

Johnny Wednesday presents Renting vs. Buying Real Estate posted at Johnny Wednesday.

Logan Flatt, CFA presents You Don't Own Real Estate. Real Estate Owns You. posted at, saying, "Many Americans believe that real estate can do no wrong as an asset class upon which they can build wealth. I disagree. Building wealth through real estate depends on your ability to distinguish among the three types of real estate ownership – investment, speculative, and personal. If you don’t know the differences, you may soon discover that you don’t own real estate, real estate owns you."

That concludes this edition. Submit your blog article to the next edition of real estate investment using our carnival submission form. Past posts and future hosts can be found on our blog carnival index page.

Technorati tags: , .

Saturday, August 18, 2007

Articles: Real estate and mortgage investment

A Blog hosted by Vancouver Home Mortgage:

Welcome to the August 18, 2007 edition of real estate and mortgage investment.


John Crenshaw presents Top 3 Reasons Mortgage Rate Shopping Will Kill You posted at Truthful Lending dot Com, saying, "It's will cause yourself nothing but pain by shopping for a mortgage based on rate alone. Read on to find out what I mean."

Larry Russell presents The Biggest Personal Finance Story of the Past 30 Years (Part 2) posted at THE SKILLED INVESTOR Blog, saying, "The biggest personal finance story of the past 30 years has been the dramatic growth of the market capitalization of financial services firms within the U.S. equity markets. The reason that this is so important to your personal finances is pretty straightforward. Simply put, most individuals pay far too much for financial products and services. Their continuing over payments show up in the increasing value of financial services company stocks. People have paid far too much for years, and the industry's excessive charges have been increasing for years."

edithyeung presents The Money Series – Steps to Create Passive Income posted at Edith Yeung.Com: Dream. Think. Act..


Warren Wong presents How To Pick A Good Stock posted at Personal Development for INTJs, saying, "Do you know how to pick a good stock? Here's how to find a good long term investment!"

real estate

Amanda Harris presents Colorado Real Estate posted at Pajama Mommy.

real estate investment

Chris presents Why it doesn't necessarily pay off to buy your own house in the US, Australia or Europe posted at nomad4ever.

That concludes this edition. Submit your blog article to the next edition of real estate and mortgage investment using our carnival submission form. Past posts and future hosts can be found on our blog carnival index page.

Technorati tags: , .

Sunday, August 12, 2007

Will US$323B injection cure market flu?

As I see it by Vancouver home Mortgage:

Published: Saturday, August 11, 2007 by Paul Vieira, Financial Post

The International Monetary Fund said the global financial market turmoil and related credit crunch should be "manageable."

In recent days rates on the overnight market had climbed well above targets set by central banks.

The widespread credit crunch is the result of mounting defaults in the U.S. subprime mortgage market, where individuals with higher-risk credit ratings are able to obtain financing for home purchases. This spilled over to banks and investment funds, which had exposure to this market.

Click here to read the full report.

There are great concerns by the world financial markets that the credit sqeeze and lack of liquidity as a result of mounting U.S. subprime mortgage defaults may result in widespread economic slowdown.

The market is concerned that the U.S. subprime mortgage meltdown will spread to the general economy. As reported by Newsweek Business article A Widening Credit Squeeze? is spilling over to America’s credit-card debt.

The danger in the credit crunch and shifting of credit usage bu consumers to high interest credit cards will have a significant impact on consumer spending. And with consumer spending accounting for about 72 percent of gross domestic product, any slowdown in spending could have a big impact on the U.S. and Canada.

In view of this week's worldwide market turmoil, market analysts are giving it a even chance that Bank of Canada governor, David Dodge, would defer raising interest rates next month.

Hopefully, the credit crunch in the world financial markets will ease off, and the U.S. subprime woes will be contained. And,the excesses in the housing and mortgage markets will be resolved over time.

Thursday, August 2, 2007

Who will be hurt?

In today's Financial Post, Reuters Published: Thursday, August 02, 2007 reported "Canadian, U.S. banks face limited subprime shocks"

NEW YORK -- U.S. and Canadian banks face limited exposure to subprime mortgage losses and future rating downgrades, bond rating company DBRS said on Thursday.

Healthy earnings should insulate financial institutions, DBRS analysts said on a conference call.

"We do not expect wholesale downgrades of banks with exposure to subprime."

Brenda Lum, who covers Canadian banks for DBRS, reiterated remarks made in a report on Wednesday that said Canada's five largest banks also face limited losses from their exposure to U.S. subprime loans.

"There are no credit rating implications for the five largest Canadian banks," Lum said.

But, home owners who bought their homes recently will not be so lucky. The reason being these home owners paid a lot more for their homes than those that bought their homes a few years earlier. Many home owners in the U.S are already facing serious problems with deteriorating house values and higher mortgage payments.

In Canada, we will not be immuned to the price correction when the housing market turn south. It's not unreasonable to expect prices to correct 15% to 20% considering house prices have gone up almost 100% over the past 6 years.

In the hot housing markets in Vancouver, Victoria, Calgary and Edmonton. there are not much up-side potential in house prices continuing to increase without a correction. The down-side risk could be devastating for many home buyers who only bought their homes in the recent months.

It's already in the news that there are likely to be another interest rate hike in September, possibly follow by another one before the end of 2007.

You are welcome to post your comments here.

Wednesday, August 1, 2007

Markets in meltdown

Growing housing crisis fraying consumers' nerves; sales plunge and credit turmoil spark stocks rout

Jacqueline Thorpe, Financial Post

Published: Friday, July 27, 2007

"We have had the most pronounced credit market cycle in U.S. economic history," said David Rosenberg, chief North American economist at Merrill Lynch. "It has powered the bull market in equities and the prosperity in the economy. Sales of new homes plummeted 6.6% in June to an annual rate of 834,000. That followed news on Wednesday that existing-home sales dropped 3.8% to 5.73-million units.

The figures, combined with ongoing turmoil in the credit market, led to a global stock market rout. The Dow Jones industrial average fell 2.3%, or 311.50 points. The United States now has 4.73 million houses on the block, an inventory of a near-record 7.5 months, said Michael Gregory, senior economist at BMO Capital Markets.

The oversupply in the condo market in Miami is now so intense that Mark Zandi, chief economist at Moody's Economy. Consumer confidence is lower now than in the months immediately preceding each of the previous two recessions, Mr. Rosenberg said.
With more than half the mortgage equity withdrawal from the housing boom going toward purchases of big-ticket items, sales activity is bound to slow as prices fall.

"One of the key things that has driven consumer spending all along has been mortgage equity withdrawal," Mr. Gregory said.

Credit conditions for consumers are only likely to get tighter as a whole wave of mortgages are reset at higher rates.

Meanwhile, the credit woes in the subprime market are causing credit conditions to tighten in the corporate world. Mr. Rosenberg notes there has been a 100-basis point widening in the spread between high-yield bonds and government debt and the pain is starting to spread to better quality credit.

Financial sector gave early warning

David Berman, Financial Post Published: Friday, July 27, 2007:

The stock market is convulsing this week on a bad diet of defaulting subprime mortgages, postponed debt offerings and a sudden shift in investor sentiment. The collection of mostly Canadian banks and insurance companies has been selling off over the past couple of months, foreshadowing the mess hitting the current market and giving investors their first glimpse of a battered sector within a roaring bull market.

The S&P/TSX financials index hit a peak in mid-May, when the mergers-and-acquisitions boom was in full swing, private-equity buyouts were a snap to finance with high-yield bonds, the Bank of Canada looked as though it had put interest rates on hold and some observers thought the U.S. housing market was near a bottom -- all of which are fine conditions for bank stocks.

Now, investors are growing increasingly concerned about the credit markets and rising interest rates, months after these concerns first affected bank stocks.
After yesterday's stock market bash-up -- its third wallop in the past four days -- the financial index is under water this year with a loss of 0.7% and is 6.5% below its peak. In particular, Canadian Imperial Bank of Commerce shares are down 13.5% from their highs and Royal Bank of Canada shares are down 9.3%. Meanwhile, the rest of the S&P/TSX composite index is up 7.3% this year and is just 5.5% off its record high.

Financial stocks are not far behind over the same period.

Yes, investors are concerned over the extent to which Canadian banks are exposed to the deteriorating U.S. housing market, but early indications point to a rather limited exposure.

The way the market is headed, that buying opportunity may arrive considerably sooner.

Tuesday, July 31, 2007

Vancouver Real Estate Bubble?

A blog posting by Vancouver Home Mortgage:

In today's Financial Post article
"Longer mortgages ease pain"
, Garry Marr quoted a report by Derek Holt, assistant chief economist with RBC. There are some issues mentioned on the report that are worth commenting:

"The recent trend to extend mortgage repayment plans to 40 years from 25 years has made consumers less sensitive to interest rate hikes"

"The housing cycle is being extended by new government policy - a reference to the Canadian Government's mortgage insurance rule by reducing the 25% down payment requirement to 20% this year"

The report attributed the changes in "driving up housing prices because consumers can deal with what Mr. Holt calls "down payment shock" by increasing the amortization period.

The above changes are exasperating the housing affordability situation (especially in Western Canadian cities) from bad to worse. While the above lending policy changes help in making home ownership easier, they are fueling demand and higher price gains on all housing units. But, I suspect these are not the main reasons why people are buying.

The real estate frenzy especially for Western Canadian cities like Vancouver, Victoria, Calgary and Edmonton is all consuming. Canadian home owners are happy with the huge price gains in their house values over the past 5 years. Many more people are encouraged to jump in for fear of loosing out as housing reports from real estate experts and economists are predicting another 7% to 8% price gain for the next 2 years?

Another point cited in the RBC report that "the changes in the borrowing practices in Canada have made the Canadian housing market less likely to implode as it has in the United States" is missing the point. It's the lending practices and not the borrowing practices in Canada that save us from facing a similar housing melt-down like the U.S.

The US housing markets are different from Canada in 2 major lending areas:

Firstly, the US sub-prime and "exotic" Variable Option mortgages as reported are as high as 25% of US mortgage origination. In Canada, the sub-prime lending hardly exceed 5% of all mortgages for the past 3 years.

Secondly, mortgage interest payment in the U.S is deductable as an expense, and this encourages more speculative buying and house price escalation in the U.S.

The housing implosion in the U.S. is due to many such option mortgages facing interest rate resets resulting in many home owners not able to afford the new mortgage payments. The housing price collapse in the U.S. is accelerated by tightened lending standards, and difficulties in home refinancing due to house prices worth less than the mortgages owing.

The Canadian housing cycle will take its course and unwind itself to a level when rental return and housing affordability are in balance. There is a disconnect between the average Canadian household income and average housing cost. As it is now, there is a "madness of crowd" mentality that if one is not jumping in to buy a home, or 2 or 3 (for speculation), they will miss the boat.

We, in Canada are faced with the following problems:

1) over-valued house prices - similar to the U.S.
2) major problem with housing affordability - maybe worse than the U.S.
3) over-supply of housing inventory (not apparent now)
4) bullish crowd mentality on real estate - people think we are different from U.S.
5) an economy exporting 80% to the U.S. - danger of economy contraction
6) Canadian loonie approaching parity with US$ - not through productivity gain

What are your thoughts?

Wednesday, July 25, 2007

Vancouver housing bubble: Will it burst or just deflate?

A blog posting by Vancouver Home Mortgage :

With the Bank of Canada raising interest rates and Canadian Banks offering more attractive saving rates to consumers, investors will be tempted to move their real estate investments to safer savings account and GIC investments.

The Bank of Nova Scotia is advertising a 4.85%* on a 24-month GIC. The offer is only available until August 04. There are minimum deposit of $1,000 required and the GIC is non-redeemable.

ICICI Bank offers a more flexible deal, offering 4.5% on C$ deposits and 5.0% on US$ deposits on the bank’s HiSAVE Savings Account. There is no minimum deposit required and interest is calculated the daily balance and paid monthly!

The Canadian housing market is faced with:

* Rising Interest Rates
* Severe affordability problem
* Rising dollar impacting the manufacturing and resource sectors
* Softening in oil and gas prices
* Increasing new and resale home inventory
* Distinct possibility of US recession

These are negative forces that could topple the unrealistic real estate markets in Greater Vancouver, Fraser Valley of BC, Calgary and Edmonton.

What are your thoughts?

Sunday, July 22, 2007

Is there a housing bubble in Vancouver?

A blog posting by Vancouver Home Mortgage:

The U.S. housing market has been on a downward slide for the past 1.5 years. More troubles on sub-prime mortgage problems and foreclosures are being reported every month. Each month, there are more bad news that home builders are slashing prices to unload their inventories. The housing problem in the U.S. as reported by many economists is nowhere near to hitting the bottom yet!

On the contrary, Canada real estate across all the provinces are reported to continue their upward march to new record house prices. House prices are now double what they were 5 years ago!

Are we in Canada so different from the U.S.? Or, is it a matter of time that we will face the same problem with downward spiral in home prices.

If you are looking at buying a condo, townhouse of a detached home, are you buying at the top or near the top of the market?

What's so different in Vancouver that you have to pay twice as much as a similar condo in Toronto? Why home buyers in Vancouver are still chasing the housing market?

What are your thoughts? You are welcome to post your comments here.