October 16, 2014

When You Have A Lot Of Flippers, That’s A Bubble

The Toronto Star reports on Canada. “Canada’s housing market is in Goldilocks mode — not too hot and not too cold, except in Toronto and Calgary which are ‘bucking the trend of moderation’ now taking hold in major cities from Halifax to Montreal and Winnipeg, says a quarterly house price survey from Royal LePage. Low interest rates and an improving U.S. and Canadian economy are expected to buoy the housing market, says Royal LePage president Phil Soper. ‘Further, early indicators, such as declines in the number of new listings in some key cities, suggest that as demand slows, so shall supply, further protecting Canadian homeowners’ primary investment.’”

The Leader Post. “Average prices for single-family homes in Regina have fallen seven to eight per cent during the past year, according to the Royal LePage house price survey. The average price for standard two-storey homes decreased 6.9 per cent to $346,450 and detached bungalows decreased by 7.9 per cent to $307,250, the report said. Mike Duggleby, managing partner with Royal LePage Regina Realty said the Regina market is taking a breather after seven years of unprecedented price appreciation.”

“The inventory levels available on the market right now are approximately 40 per cent higher than usual, which has created a supply-demand imbalance and pushed home prices down,’ Duggleby said. ‘Strong unit sales this quarter have not been enough to support previous price levels.’”

The Ottawa Sun. “It’s a smorgasbord of a real-estate market as Ottawa enters its fall housing season, especially when it comes to first-time homebuyers. But one thing’s for certain, the number of units being sold shows a declining trend. In September, 5,139 units were sold, down from 7,172 in August. ‘In Ottawa, the demographics aren’t there to afford them,’ said Marnie Bennett, broker at Bennett Property Shop Reality. ‘So if I was the owner of a large property with a very big lot, I would start selling it now.’”

From Reuters. “While Toronto’s housing boom rolls on, some of the housing itself is falling apart. Glass panels have been falling off newly built Toronto condos. New buildings suffer from water leaks and poor insulation, making them ill-suited to Canadian weather. Real estate brokers are dealing mostly with 10-year investors who want to buy from a blueprint, double their equity during the five years of construction, and enjoy rental income and price appreciation for five more years before selling and investing again elsewhere.”

“‘It’s all about timing. We advise most clients to get out before that five-year mark,’ said Roy Bhandari of Sage Real Estate, which notched nearly C$50 million in Toronto condo sales in 2013, with clients typically from China, Eastern Europe, or the Middle East. ‘It’s the magic number because after five years the warranties are expired.’”

The Globe and Mail. “The CEO of a U.S. luxury home builder says his company considered expanding into Toronto’s condo market but was scared off by the high number of investors buying real estate in the city. Toll Brothers Inc. ’snooped around’ in the city about three years ago, but was concerned that 60 to 70 per cent of condo buyers didn’t plan to live in their homes, said CEO Douglas Yearley. ‘We’re always looking for new places to grow, but the level of investment, and not just foreign investment, is what concerned us,’ Mr. Yearley said. ‘We saw a lot of people buying with no intention of living there – they just planned to flip. When you have a lot of flippers, that’s when a bubble comes.’”

From MoneySense. “Solo-dwellers, as they are called, are top of mind for urban planners, explains Brian Jackson, Vancouver’s general manager of planning and development. That’s because almost 30% of Canadian homes have just one person living in them, according to 2011 census figures — a number that’s more than doubled since 1971. On a recent trip to Vancouver, I had the pleasure of talking to a few solo-dweller condo-owners—all of whom had independently bought into the thriving Vancouver market when interest rates were really low.”

“Unfortunately all three of these condo owners were still in the process of building their careers—a process that was forcing them to sell their units so they could pursue promotions. Despite their low monthly mortgage payments and good, sizeable initial downpayment, each solo-dwellers was faced with the prospect of losing money on the sale of their unit.”

The Financial Post. “It might be hard to convince some Canadians the end of the housing boom is near based on new statistics from the Canadian Real Estate Association which show prices still rising. But the growing consensus, even in the face of record valuations for homes in Canada’s three most expensive cities, is that prices will flatten out — a thesis even supported by one of Canada’s largest real estate companies. David Madani, an economist with Canada Economics who has called for a major correction, wonders whether some consumers are even prepared for a flat market let alone one that is falling.”

“‘What concerns me is some buyers seems to have this view that prices can only go up,’ says Mr. Madani. ‘People feel it’s a one-way bet. A lot of younger people seem to think that if they don’t get in now on the home ownership ladder, they’ll miss out. Some of these people will come to regret this decision. In the more expensive markets, it’s almost like a capitulation where they say ‘If I don’t buy now, I’ll never own a home.’ This is what happens in a housing bubble.’”

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Comment by John B.
2014-10-16 04:00:36

Wait, the same housing boom has ended two years ago and led to a price moderation of the price of housing in both biggest Canadian markets - Toronto and Vancouver. What is happening now with strong sales increases and money pouring to the overpriced housing market is out of any predictability. One thing is clear - house flippers are doing great right now. Bidding wars are still happening and those who bought during the price drop two years ago are making a lot of money right now.

Comment by Housing Analyst
2014-10-16 05:59:32

Apparently youre not looking at the data. Demand is falling and the notion of “bidding wars” is laughable.

Comment by John B.
2014-10-16 06:50:29

I know only one thing - the housing market is absolutely unpredictable. I’m skeptical about the housing prices falling too much over the next couple of months. The demand is what it is, but once more, there are many sellers who just sit tight and wait till they get the offer they want.

I would not dare to make my own conclusion about decades to come. This is apparently the difference between us.

Comment by Housing Analyst
2014-10-16 06:54:41

it’s only unpredictable to those who don’t know what they’re doing. If you’ve been a reader here for very long you know full well that current asking prices of resale housing is 300% higher than long-term trend and 2x construction cost (lot, labor, materials and profit).

Read, study, learn.

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Comment by Shillow
2014-10-16 07:04:35

Where’d this shill come from?

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Comment by Housing Analyst
2014-10-16 07:07:12

Same liar, different packaging.

Comment by scdave
2014-10-16 07:08:30

Where’d this shill come from ??

He is in the mirror looking at you…

Comment by Shillow
2014-10-16 10:34:14

Quick to defend shills = shill.

“The demand is what it is, but once more, there are many sellers who just sit tight and wait till they get the offer they want.”

That is why the number of price reductions is skyrocketing.

Comment by Whac-A-Bubble™
2014-10-16 07:59:32

“…there are many sellers who just sit tight and wait till they get the offer they want.”

I took a look at that in San Diego a couple of years back. I discovered there were sellers how had just sat tight in some cases for upwards of 60 months (5 years) with no offers.

It is true that an owner has the prerogative to list their home at a high enough price so that it will stay on the market indefinitely.

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Comment by Blue Skye
2014-10-16 08:03:26

Some people can afford to sit and incubate their little nest. Others will have to move out of necessity. The market is set by those who must clear rather than pretend.

Comment by Whac-A-Bubble™
2014-10-16 08:06:05

Don’t overlook all the pretenders who were enabled to incubate their nests by government-sponsored low-rate refinancing. Those who didn’t qualify for this program pay for it in terms of higher rents and purchase prices.

Comment by cactus
2014-10-16 08:14:33

The average rate for a 30-year fixed mortgage dropped to 3.97 percent”

so much for rising interest rates

Comment by Shillow
2014-10-16 10:57:06

What happens to demand when you take flippers and “investors” out of the market because they can no longer make a quick buck or outsized profits?

What happens to prices when 30+ percent of the demand goes bye-bye?

Pretending the housing market is just made up of people looking to buy a house to live in doesn’t make it so. Pretending those internet startups in the late 90s-2000 would some day be viable didn’t make that so either.

Comment by Overbanked
2014-10-16 14:21:38

I know only one thing - if I have absolutely no clue as to whether an investment is going to increase or decrease in the short term I’m not going to use leverage to purchase it.

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Comment by rms
2014-10-16 19:49:29

“I know only one thing - the housing market is absolutely unpredictable.”

It’s definitely not based on economic fundamentals.

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Comment by Ben Jones
2014-10-16 20:50:33

So Amazing Russ is looking to get banned. Noted and written down on my desk.

Comment by Neuromance
2014-10-16 07:14:08

The country has allowed the financialization of housing, and has encouraged speculation in it. This has been lucrative for flippers, certainly - at least while the music plays (not so much for residents for whom the net result is higher taxes).

As with any speculative frenzy which is reliant on greater fools to buy the asset at a higher price, the key to profit is not being the greatest fool. Hold on too long and you’re left holding the bag.

Granted, if one is a big enough player, with government or central bank connections, the losses can be socialized onto the population, allowing you to keep the profit, but this does not describe most retail flippers.

Comment by Housing Analyst
2014-10-16 04:59:18

The message to those clinging to depreciating houses in Canada is the same as it is to the US….

“Get what you can get for your house now because it’s going to be much less tomorrow for decades to come.”

Comment by Blue Skye
2014-10-16 06:04:13

Not long ago I paid $1.03 at the currency exchange for $CAN. Now it is $0.88. Canadians aren’t getting raises any more than their cousins here in the US. The commodities boom is rolling over and their currency with it. About 12 years ago I paid $0.70 on the $CAN and bought a nice Kevlar canoe. We’ll see where this thing goes, eh.

Those condo speculators are already losing their shirts with a 15% drop in the Loonie.

Comment by Prime_Is_Contained
2014-10-16 07:12:27

Not long ago I paid $1.03 at the currency exchange for $CAN. Now it is $0.88.

So the ones who hedged their own currency by buying US RE may not come out as badly as we predicted, if their currency loses value faster than their US RE!

In other words, even fools sometimes get lucky…

Comment by bink
2014-10-16 08:05:03

Or they’ll lose money even faster as the market drops in the US.

Comment by Blue Skye
2014-10-16 08:08:14

Sure, they’ll be fine as long as Phoenix and Miami hold up! They would have been even finer if they never HELOCed the Canadian Bubble house to make “investments”. Making a profit doesn’t pencil out in either case at this point.

Comment by Housing Analyst
2014-10-16 07:13:18

Hang onto every dollar you have and stay out of debt while this thing unwinds. It’s a long way down from here and you’re going to need every penny.

Comment by Ben Jones
2014-10-16 07:31:52

I was just thinking about the quandary of global non-growth, suppressed interest rates/asset buying by central banks and various government interventions in markets. It occurred to me that what has been going on can be viewed as impounding vast sections of the economy into a black-hole. Take the GSE’s. What was once a big part of the economy, providing jobs and profits has been swallowed up. Now housing loans, with their profits or losses, disappear into the governments red ink. The MBS, which once provided income for pension funds and the like, now disappear into the Fed’s balance sheet. In the past, even when companies lost money, or shrank, that provided opportunity for competitors. All that is gone from the economy. With no innovation driven by profit motives, the whole sector has stagnated. Profits no longer fund pensions. Banks have laid off loan originators, with no sign of jobs returning.

The interest rates; I recently saw a “high-yield” CD at 1%. How much interest income has disappeared into the black-hole? A trillion maybe? And we all know that trillion would have been multiplied in the real economy. But it’s gone, and will continue to be missing.

Most of us know about the Japanese lost decades. But why were they lost? Could it be because they carved out badly performing trillions of the economy and put it in moth-balls? This theory would explain why more and more moth-balling, black-hole policies result in more of the same.

One problem I’ve mentioned before is we are stuck in a 1970’s-80’s understanding of central banks. The conventional thinking was, they cut interest rates, the economy does better. When it would over-heat, raise rates. They were limited in money creation; too much would spark inflation. Now, low interest rates don’t spark the economy. Money creation doesn’t make wages go up. I remember years ago, the word stagflation was created to describe a new way of seeing the grater economy. When was the last time we had any new terms or thinking about fiat currency and the role of these policies? And this even as old truisms have been abandoned; such as the Fed doesn’t set long term interest rates. When was the last time you heard that? Or that the Fed doesn’t monetize debt?

We’ve got to break out of this outdated type of economics.

Comment by Ben Jones
2014-10-16 07:42:07

Here’s an example:

‘Mike Kelly, director of U.S. real estate commingled Funds at J.P. Morgan Asset Management, agreed there was no bubble. “It’s certainly a competitive market,” he said, but noted that real estate remains attractive compared to other asset classes.’

“When we look at the spread between the 10-year Treasury, which today is around 2 percent, and a 6 percent (investor rate of returns) on a very good quality piece of real estate, we think that spread is attractive,” Kelly said.’

‘Low interest rates can both hurt and help the market, according to Kelly. On one hand, they help assure relatively lost financing costs. “When you’re able to lock in those long-term rates … we feel pretty good about it,” he said.’

‘But that same easy money can lead to excessive risk. “When rates get so low coupled with a market where someone is able to use 75 or 80 percent leverage, it makes it very hard to compete when only borrowing 50 percent or buying something free and clear,” Kelly said.’

So office buildings and strip malls and apartments that used to yield 8, 9 or 10%, yield 6%. Gone, into the black hole of central bank policy. Consider how much this adds up to across the entire economy. Not to mention the hazards of encouraging debt-based risk taking.

Comment by Prime_Is_Contained
2014-10-16 08:49:03

So office buildings and strip malls and apartments that used to yield 8, 9 or 10%, yield 6%.

Do they even yield that? Think of all the ones that are currently empty… Hmmm. What do the better-yielding ones yield when they actually have to compete with the non-yielding ones, currently apparently held off the market by their owners, possibly to avoid recognizing their losses?

Comment by Ben Jones
2014-10-16 09:08:17

‘apparently held off the market by their owners’

Let’s pair a hypothetical situation with a real one. I posted recently an article stating there is a 45% commercial vacancy rate in Glendale Arizona. Why would those owners tolerate such a situation? Could it be that a 55% occupancy of, say, a strip mall, is still a better return than a 2% treasury bond? And maybe that complex is even owned by the Fed itself. Not concerned with a profit, the Fed is content to sit on this empty property gleefully content it is fighting deflation.

But wouldn’t local businesses benefit from lower rents? Wouldn’t that encourage new business to emerge or expand? Either reason for leaving these units vacant actually depresses the economy; actually increasing deflationary pressures. And to the extent developers are encouraged to add to supply by the artificially low rates, you get more of the same. Seems like a dead end scenario.

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Comment by X-GSfixr
2014-10-16 12:11:11

I’ve seen commercial property sit vacant for 10 years.

Obviously, the cost of selling is higher than the cost of holding the property.

If you bought a house in the early 90s or before in Flyover, didn’t HELOC, and your property taxes are low, you can just park it for a long time. Or rent it out cheap to the kids/grandkids.

Comment by rms
2014-10-16 21:59:19

“I’ve seen commercial property sit vacant for 10 years.”

I’ve wondered about these huge malls with an anchor store or two closed. You know they’re hurting when management allows these “hotdog-carts” selling useless baubles to sit right in the lanes of walking traffic; so cheesy IMHO.

Comment by Whac-A-Bubble™
2014-10-16 08:01:14

“It occurred to me that what has been going on can be viewed as impounding vast sections of the economy into a black-hole.”

Yep. It’s a deadwater Ownership Society economy we have.

Comment by Whac-A-Bubble™
2014-10-16 08:04:25

“One problem I’ve mentioned before is we are stuck in a 1970’s-80’s understanding of central banks. The conventional thinking was, they cut interest rates, the economy does better. When it would over-heat, raise rates. They were limited in money creation; too much would spark inflation. Now, low interest rates don’t spark the economy. Money creation doesn’t make wages go up.”

Once the central bank is pushing on a string, monetary policy no longer works according to the textbook model.

Comment by Neuromance
2014-10-16 08:09:04

One problem I see is that the economic models are assumed to be totally accurate instead of wild approximations.

It’s like the physics joke: “Assume a perfect sphere in a vacuum.” It has nothing to do with how an airplane will perform in a storm. But in economics the “assumed perfect sphere in a vacuum” is taken as an accurate description of the airplane in a storm, and predictions are made, very solemnly, from that model.

This is the sense that I get from reading discussions from economic policy makers. It’s good to be data driven, but when the conclusions stop passing the smell test / giggle test, it’s time to re-evaluate.

Bottom line: if policy makers encourage destructive behavior, they get more of it.

Bottom line 2: We want to believe that policy makers are well-meaning technocrats acting for the good of society, with no interest in their own personal gain (at least this is what we’re told). But there seem to be so many inconsistencies when looking at the policies that result:

• For example, in Maryland, they talk a huge game about helping the poor, being the bluest state in the union. But when they need revenue, they raised the sales tax, a regressive tax, and instituted gambling, which disproportionately harms those with poor economic skills.

• On a national level, we see that the big donors are protected from prosecution and the economic consequences of their decisions. The costs are pushed on the rest of the population.

What one then realizes is that the lens which doesn’t yield inconsistences, which provides the clearest image, is simple cronyism. Crony capitalism. Disconcerting, but there it is.

Comment by Blue Skye
2014-10-16 08:15:56

“We’ve got to break out…”

I don’t think we will break out because of forward thinking. A new model will come after we “break down”. What that looks like and how to avoid the snapback concerns me.

Comment by cactus
2014-10-16 08:19:14

Most of us know about the Japanese lost decades. But why were they lost? Could it be because they carved out badly performing trillions of the economy and put it in moth-balls? This theory would explain why more and more moth-balling, black-hole policies result in more of the same.”

Good point. I assume government is protecting friends and family at the expensive of the greater economy ? Or more likely their own jobs.

Comment by taxpayers
2014-10-16 08:32:51

why not embrace deflation w/o gov intervention

1921 comes to mind

Comment by Ben Jones
2014-10-16 11:26:39

Rut-roh Draghi:

‘Borrowing costs for some of the euro zone’s most highly indebted southern states shot higher on Thursday, as fears of slowing economic growth wounded confidence that the European Central Bank could avert another debt crisis in the bloc.’

‘Interest rate strategists said investors could increasingly start to question whether the ECB would resort to its ultimate policy weapon for averting a crisis - buying government bonds.’

“It’s early days … but if the market loses faith in what monetary policy can do to fend off falling global growth and the risk of deflation, then it could become a much more serious issue,” KBC rate strategist Mathias van der Jeugt said.’

‘There is also a debate in Europe’s top court over whether the ECB’s promise to buy euro zone government bonds if this were needed to save the euro would breach of its mandate and amount to direct monetary financing of governments. If the challenges made by German lawmakers are upheld, it would probably torpedo an ECB programme to buy government bonds that investors are depending on.’

“The ECB only has one card left to play and it doesn’t look imminent,” said one government bonds trader.’


Comment by Doom
2014-10-16 13:10:35

Stock market was so crazy today, no fundamentals exist, a non voting Fed member says one thing and all heck breaks loose.

Housing same thing, RE state agents tell sellers all is great they hold out for higher prices, and buyers agents tell buyers, now is the time to buy, the market is terriable.

Nobody really wants to see the Elephant in the room?

Comment by Housing Analyst
2014-10-16 14:23:26

With asking prices 300% higher than long term trend, of course the market is “terrible”. And that’s not going to change until prices fall back to early 190d level.

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