The Housing Bubble

A report from the Star Tribune in Minnesota. “Mike Petefish already has the planter hooked up to his tractor in his farm yard, staged next to field cultivators and semis that can haul massive fertilizer tanks and large bins with conveyor belts called seed tenders. Petefish, who farms 5,000 acres near Claremont in south-central Minnesota, is ready to plant. But mixed with excitement as a new growing season approaches is anxiety about whether he will end up in the red at the end of the year. Soybean prices have dropped by one-third since 2013 and corn prices are down by nearly half, well below the cost of ­production.”

“‘People can withstand a year or two of losses, but this could be the third year in a row for some farmers,’ Petefish said. ‘I see this as the tipping year.’”

“University of Minnesota Extension researchers reported recently that more than 30 percent of Minnesota crop and livestock producers lost money in 2016. Federal estimates show that average net farm incomes have fallen by nearly half since their peak in 2013, the largest four-year drop in 40 years. February was the busiest month in 10 years for filings at the Farmer-Lender Mediation Program at the University of Minnesota Extension, which helps producers work through financial roadblocks with their bankers.”

“Tighter credit also has brought subtle changes in the real estate market, he said, with fewer farmers able or willing to purchase farmland from retiring producers. ‘A few years ago, every piece of land capable of producing a crop was long gone before you even heard it was available,’ Petefish said. ‘Now there’s rental ground available and some land for sale.’”

“The majority of farmers have been able to figure out financing for this cropping season, said Tom Slunecka, CEO of the Minnesota Soybean Research & Promotion Council, but it hasn’t been easy. ‘Things are really getting tough out there,’ he said. ‘If the prices for commodities stay stagnant, we’ll see a lot of farms go under next year. This year there are a few, and it’s extremely disheartening.’”

The Cavalier County Extra in North Dakota. “The report released in a January survey commissioned by the North Dakota Department of Trust Lands was another indication of just how badly the North Dakota agricultural community has been hit by the recent slump in agriculture. Andrew Swenson, NDSU Extension Service farm management specialist, derived regional and state average cropland values and rents from the published results of the county-level survey.”

“After three years of declining land values, Swenson believes that the land market still is adjusting in the aftermath of an 11-year period, from 2003 through 2013, when cropland values averaged an annual increase of 15 percent, the strongest sustained run-up in cropland values during the past 100 years. ‘Producers are in a dangerous financial environment because crop prices have dropped faster than production costs,’ says Swenson. ‘Agriculture is a competitive industry, and during several years of strong crop prices, which peaked in 2012, producers were willing and able to spend more on production inputs, including land.’”

“He adds, ‘On average, this resulted in a doubling of production costs per acre over an eight-year period, from 2004 to 2012. Overall production costs peaked in the 2013 to 2014 time frame and have been declining but not fast enough to project profits.’”

The Kearney Hub in Nebraska. “There is a lot of truth in the saying that the value of land, or anything else, is what someone is willing to pay. For ag land, who that someone might be depends on how the property fits with an existing farm or ranch operation, whether additional labor and equipment might be required, a prospective buyer’s debt load and/or cash flow, whether more than one buyer is interested, and, most of all in Nebraska, the market price of corn.”

“From Feb. 1, 2015, to Feb. 1, 2016, average land values for all ag land classes surveyed dropped by about 4 percent, to a Nebraska average of $3,115 per acre. The combined average ag land value in the south region, which includes Gosper, Phelps, Kearney, Harlan and Franklin counties, was $4,255 per acre, a decline of 8 percent from 2015. For center-pivot irrigated cropland, the average was $7,240 per acre, a decline of 12 percent.”

“A February report from the Federal Reserve Bank of Kansas City’s Ag Credit Survey says the average change in farmland values in Nebraska from the peak third quarter of 2013 to the fourth quarter of 2016 was a decline of 17 percent. Jim Jansen said ag land rent rates peaked in 2014-2015. ‘It’s healthy to see changes in land that reflects current economic conditions, but the quick ups and downs are not good,’ said Jansen, who is part of the Extension Risk Management Education North Central Center.”

From Feedstuffs. “Farmers in most areas of the Federal Reserve Bank’s Ninth District of the U.S. saw good yields in 2016, and for another year, those strong harvests should offset some of the effect of continued low crop prices, according to a new report from the Federal Reserve Bank of Minneapolis, Minn. Lenders responding to the Minneapolis Fed’s fourth-quarter (January) agricultural credit conditions survey reported that farm incomes and capital spending continued to decrease.”

“‘Falling incomes also led to decreased loan repayment rates, while loan demand, renewals and extensions increased,’ the report noted.”

“Dallas Tonsager, board chairman and chief executive officer of the Farm Credit Administration, recently testified before the House Agriculture Committee that, while the Farm Credit System banks and associations are ’safe and sound,’ there are concerns surrounding the farm economy.”

“‘In the farm economy, debt-to-asset levels are rising, while net farm income is declining. Interest rates, while still low, have begun to rise, and crop prices are expected to remain weak through (fiscal) 2017,’ he said. ‘These factors are causing the value of Midwestern farmland to slip. Prices in the protein and dairy sectors are also weak. As a result, the credit quality of the system’s loan portfolio has declined slightly.’”

“‘Most customers are coming in with earned net worth losses and reductions in working capital. We’re doing consolidations and restructures on several,’ a South Dakota lender noted.”

A report from CBC News in Canada. “Toronto’s real estate market ‘defies all odds,’ but government officials should proceed cautiously when deciding how to cool it down, says a real estate agent. ‘To be honest, I just hope they really think about it and go slow, with a very relaxed approach,’ said Dan Cooper, an agent with Royal LePage and CEO of Dan Cooper Group in Oakville, Ont. Cooper said there is a need to ‘relax’ the Toronto market but not to ‘wreck’ it. He said media coverage in the last few weeks has created what he called negative spin and has prompted new listings. ‘Today, my group, we’re putting on 13 listings. I have a lot of people who aren’t even thinking of selling but they’re selling because they want to take advantage of the market. They’re scared. The tables are turning already.’”

“Danyelle Boily, a real estate agent with Bosley Real Estate in Toronto, said she is telling clients simply to offer as much they can, given their budgets. ‘We don’t know how to advise anymore. We just know that you have to go as high as you can, and if you’re out, you’re out,’ she said. ‘That’s just the way it is. There’s no rule of thumb anymore.’”

“Cooper, who has worked in the business for 26 years, said it’s a ‘different game’ than years ago. ‘If you have a buyer who wants a property, they have go in at list or above, no conditions, certified cheque, probably double what the vendor is looking for,’ he said. ‘It’s all about the seller. It’s a true seller’s market.’”

“The Toronto market has been startling, with the average sale in the Greater Toronto Area skyrocketing last month to $916,567. That’s up 33.2 per cent from a year ago.”

The London Free Press. “London’s red-hot housing market meant realtor Angela Wilson couldn’t take a holiday on Good Friday. She and her business partner, her mother, Linda, were at a Riverside Drive model home before noon, ready to meet potential buyers. And in London, there are more buyers than ever, so many there aren’t enough homes to meet demand. ‘It’s crazy,’ Angela Wilson said. ‘It’s something we’ve never experienced before.’”

“Bidding wars, lineups to see new housing subdivisions and record prices in most city neighbourhoods are becoming routine in the once-stagnant, reasonable London market that seems finally to be catching up to the rest of Canada. Weary would-be Toronto-area homebuyers unable to afford the astronomical prices are only part of the story in what Jim Smith, president of the London St. Thomas Association of Realtors, said is more than just a bubble. For too long, he said, London prices have lagged, but with huge price hikes in Toronto, property values are inching up here.”

“There are reports of houses going for $20,000 to $30,000 above asking prices. But bidding wars drive prices to $60,000 or $70,000 above the asking price also are taking place. One high-end home sold for more than $200,000 more than the asking price to top $1-million.”

“More out-of-town realtors are starting to come to London, mostly from the Toronto area, applying for access to lockboxes to show London properties. Forty-one have contacted the association office in the last two weeks, and ‘that’s just the tip of the iceberg,’ Smith said. Hot markets also are reported in London’s bedroom communities. ‘I’ve heard stories in St. Thomas where people are lining up to go through the open houses and then they’re just taking bids at 6 o’clock,’ Smith said. ‘You talk to a lot of veteran agents and they will tell you they’ve never seen anything like this before,’ said Smith, who’s been a realtor for 25 years.”

“Realtor Diane Lajoie with Sutton Select Realty said she’s heard of young buyers making offers on six or seven properties — as many as 13 offers — without making a deal. She’s heard of properties getting as many as 21 offers. ‘We’ve never seen anything like this,’ Lajoie said. ‘We’ve been in busy markets before but this is really unprecedented. It’s happening at every level, in every part of town.’”

“The sales boom can be partially linked to a more connected world in which buyers can move to London and work online. But there are others who are retiring in Toronto and cashing out on their real estate to come here ‘with a mittful of money in their pocket,’ Smith said. Bank appraisers aren’t balking at the price increases and are ’seeing the value’ to approve mortgages, he said.”

From CTV News. “Many buyers and sellers are waiting to see what will come of Tuesday’s scheduled meeting between Finance Minister Bill Morneau, Ontario Finance Minister Charles Sousa and Toronto Mayor John Tory, who are expected to discuss ways to rein in Toronto’s hot housing market. Real estate agent Josie Stern says the market appears to be cooling. ‘A little bit of air has been let out of the bubble,’ she says.”

“Sellers who’ve bought new homes are rushing to list their old property, she adds, but many are not getting the high bids seen a month ago. ‘We’re finding that a lot of people are leaving the city,’ says Stern, who estimates that about a third of her 35 sales this year involved sellers either downsizing to condos or moving to more affordable markets. ‘It’s empty-nesters, it’s (couples with) babies, it’s all kinds of people that are doing this.’”

“It’s a story Vancouver real estate agent Melissa Wu knows well. Years of record-setting sales saw Vancouver homeowners cash out for smaller markets with more space. But that changed after the B.C. government introduced a 15 per cent foreign buyers’ tax last summer, which Wu says especially soured interest in west Vancouver luxury homes priced at more than $4 million.”

“Her recent sales included a $2-million get for a century-old home owned by a retired couple. Their plan is to downsize to an older condo costing less than $500,000. The rest of the proceeds will go to their kids and retirement fund. She says the sale was a record high for the neighbourhood, but it took an agonizing three weeks to secure — longer than it would have last year, she says. She advises Toronto homeowners thinking of selling to take advantage while they can. ‘There’s always a shift coming in,’ she says of this hot market. ‘Sell before it corrects.’”

“Stern would like to see a crackdown on real estate speculators in Toronto, citing one buyer who bought 15 properties in the last two years. And she cautions those tempted to cash out that there’s always a risk the market won’t co-operate. ‘People have been asking themselves that question since the year 2000: Should I sell? Should I cash out? And there have been people who have cashed out and have regretted it because they’ve seen what the market has (done) — they’ve never been able to rebuy the houses that they’ve sold.’”