As real estate associates we are asked to evaluate properties on a regular basis. We look at recent comparable listings and sales and deduce an approximate value. The problem with value is that it is a very personal quantity – I may see the value in having a pool in an Edmonton backyard as -$20,000 (since that’s what it will take to fill it in and re-landscape) while someone else may see it as +$20,000.
By definition "market value" is what a willing and reasonable buyer will pay a willing and reasonable seller.
Last week a handwritten book of fairy tales by J.K. Rowling was auctioned off. Its expected value was about $100,000, and it sold for nearly $4,000,000. Is the book worth $100k or a million? I wouldn’t pay $10k for it, but Amazon.com paid $4 million, so at that time it was worth $4 million. Looking back if I’d known Amazon would pay $4 million, then I’d have paid a lot more than $10k to buy it and turn around and sell it to Amazon (brings a new meaning to flipping through a book eh?).
Anyway, part of what made the book worth $4 million, was the number of people who wanted the book. Can you see the correlation to Edmonton’s housing market last year? There were 5-10 buyers for every house on the market, so prices (and values) went up. Competition from buyers raises prices, competition from sellers lowers prices.
If a book is worth $4 million, what’s a house worth??? It’s worth whatever someone is willing to pay for it, and someone is willing to accept for it. There are a lot of home owners in Edmonton right now who are not willing to accept what buyers are willing to pay. There are also plenty of buyers not willing to pay the seller’s asking price or close to it. Right now, it seems that those sellers who have lowered their expectations somewhat are the ones who are successfully selling.
In the end some people say the value of a home in Edmonton is a fairytale, and some say it’s a fairytale worth buying into. Even properties sold during the tight seller’s market saw many buyers not willing to pay the highest price. One thing I do know for certain, is that it would be a fairytale if everyone agreed about property values in Edmonton.
I’m working on a deal to have JK Rowling come to Edmonton and build a house.
Based on the sale of that book, I’m predicting a 5-6 billion dollar profit.
Just for everyone’s information, all the proceeds of that sale went to Charity. I’m not saying that neccessarily skews the value of the book, but should at least be considered.
“All proceeds from the sale will go to the Children’s Voice, a charity Rowling co-founded in 2005 to help vulnerable children across Europe.”
Reuters New York
Your comparing a discretionary item that only billionaires can afford, with houses that shelter us and keep us warm.
I’m sorry, but when I buy a house, I’m looking for value. Not resale potential.
Speculators should be jailed. They’ve driven up this market and made it unaffordable for new home buyers.
I beleive realtors are to blame too. Not every realtor, but realtors in general. They have pumped up the market like Wall Street Day Traders
It has affected rents, and now some senior citizens in my apartment are getting put on the street or are forced to live with their kids, as their rents got jacked up to $1000 per month.
I price a house based on what I think are ‘fair’ rental yields.
Fundamental value of a Calgary two bedroom condo:
Calgary October 2007 rent for a two bedroom condo was $1089/mo. Assuming a measly $250 for condo monthly upkeep, taxes and utilities is a monthly earnings of $839. Since a long term bond can yield 5-5.75% with no risk, a rental property should yield at least that. Assuming a ‘fair’ rate of return of 5% then that property would be worth $839*12/.05 ~ $200,000. Since Condo average price is $312,710 condo prices are overvalued by roughly 36% in Calgary.
Price drops of 25ish% are reasonable to bring prices in line with rental incomes.
Timing of the price drops all depends on the failure mode of buyer’s confidence. Some possible triggers might be:
1)Slowdown in oil patch due to low commodity prices
2)Glut of inventory
3)Outward migration due to highest rent in country
4)Canadian recession
5)CMHC failure
6)Change in American energy policies
7)Downbeat Barron’s article
I am sure there are more possible triggers that could happen to return house prices to fundamentals. We have record levels of multi family housing currently being built, so I think next summer has the capacity to become another 10%+ correction.
To me, a house has to provide utility for it have value. But, even art prices have bubbles as shown by this index of resale sales pairs.
http://imgpublic.artprice.com/pdf/agi.xls
I have a very important question (that may be actually a statement?):
Last month, EREB stats revealed that in its territory, home resales in value went down by 5,2% comparatively to october.
Now does this mean:
a. On average, homes that sold were of lesser value compared to homes which sold in October, or
b. that a home that sold for $400K in october could be resold for $380K a month later?
If the answer is a., this would explain that tons of lesser value homes sold versus more expensive homes. If we sold 1300 homes that they were all in the $275-$300K price range, it would be a statistical misrepresentation of sales. Of course the average would drop…
Which begs the following: Let’s say that 1000 high paid business executives were transferred to Edmonton during the month of December and all bought $600K homes in December. Next month EREB will state that the market went up by radically compared to November. You guys see what I mean? Aren’t monthly stats vague and misleading? Or at least very LOOSELY open for interpretation one way or another?
it’s fine to have seperate stats for condos, SFH, townhomes, acrerages, etc but distinct stats should also be taken for percentage of homes over $1million that sold and down by $200K slices. Could be revealing…
Also that would alleviate stupid headlines that claim that the market is crashing and only scares off buyers.
Just a thought…
I like how Sara defines “market value”. When we were looking, our agent kept showing us homes with hot tubs. I can’t think of anything more disgusting than taking a bath with all my adult buddies. Obviously, the agent liked hot tubs.
In todays market, though, just not sure how many sellers are “reasonable”. Most think they live in a house worth way more than its’ real value.
The lag between the psychology of what the seller ‘thinks’ the home is worth and the real price correction will take some time. And it probably should take some time, otherwise we’d have a real panic situation. Could be why a 1% forecast is so non-commital….don’t want to send the wrong message and put the market into hysteria.
Housing has been treated like a commodity. Something to be ‘day traded’. You build, you flip. You renovate, you flip.
You pump up the ‘housing stock’ through propaganda, fear, panic and urgency, you sell.
What ever happened to buying a ‘home’, as opposed to just a house.
A house is a sacred thing. It’s where you unwind and relax. It is your sanctuary after a tiresome day at work. It is where you raise children. Where you invite friends over. Where you celebrate birthdays. It becomes a part of you.
Too many people forget that.
I hope the government and CMHC work out a new ‘set of rules’ to keep speculators out of the market, by banning ‘no money down’ mortgages, or mortgages with 40 year amortizations.
You should not be able to take on another mortgage. period.
While forecasts are just that consider this. Net migration is forecast to be down in Alberta. OK that sounds bad right. Wrong! Alberta will still have one of the highest net migration rates in Canada. Despite this most Real Estate forecast for Alberta are still 4-9% for next year. Are all these forecasters full of it or what? Since Ontario is forecast to gain 3-4% next and their economy is struggling it seems that 4-9% in Alberta is quite reasonable. Even BC and Saskatchewan are forecast to have decent gains. Now forecasts can be wrong but what if net migration is higher than they expect? With Ontario really struggling right now I would bet on higher net migration myself? We’ll see what happens next year.
What were inventory “forecasts” for ’07?
Yes, forecasts can be wrong, and most times they are. Your “what if” scenario is another rabbit out of a hat, just like the forecasts. Can play “what if” all day….at the end of it, I have to sell in a saturated market.
CMHC is probably bankrupt IMHO…….
CARIOCA:
CMHC cannot go bankrupt as is it a federal government agency.
JIM_S:
As per forecasts…. whoever can come up and venture in forecasts based on past patterns, good luck!!!
One thing is sure: in May 07 prices were way up and then listings went way up. I wonder what would have happened if listings stayed down where they were.
By the way in Castlewood, there are over 30 listings and a fair chunk of those listings are brand new and have driveways full of snow and no footprints!!!
Ray – you are right about average prices – they can be midleading. That is why you should also consider median prices – this will give you a more accurate picture. The media loves to make any ‘noise’ they can and as you probably know – people love to read/hear doom and gloom instead of positive/upbeat.
“In fact, Albertans have an extremely negative outlook on their housing market, which
has skyrocketed in recent months. Nearly nine-in-ten from Alberta (88%) think homes in their neighbourhood are overpriced, and a similar number of Alberta homeowners (89%) say they could not afford a down payment on their home as presently valued.”
http://www.angusreidstrategies.com/uploads/pages/pdfs/2007.07.09%20Housing%20Press%20Release.pdf
That survey data is from when prices were peaking?
http://www.melcor.ca/community/edmonton/mactaggart/
Not sure about you but when 50′ x 100′ lots cost at least $179,000 don’t expect new home prices to come down much more. This looks to me like just another normal subdivision to me. If lots don’t sell then inventory will shrink until they do. I suspect fixed rate mortgages will also drop slightly in the new year which can’t hurt things.
Anon, why is it “if lots don’t sell then inventory will shrink until they do?”
Shouldn’t it be the other way around? If something don’t sell, the inventory will go up.
And does it occur to you that the value of the lots would also change?
The stock of Melcor has already plummeted 40% since the height of this summer. That pretty much reflects how investors view the valuation of its land inventory.
Anon said “this looks to me like just another normal subdivision to me.”
Are you kidding? Do you even live in Edmonton?
Mactaggart Mains is one of the most prestigious sub-divisions in Edmonton. It’s very close the multi-million dollar Uplands and the Magrath Summit area. But of course, $179k can buy you nothing now. Prepare to pay at least $280k for a lot.
Anon,
If Ontario gains, BC gains, SK gains, AB gains, who loses?
Maritime economies are recovering and I’ve sure heard of a lot of maritimers and newfoundlanders moving home or planning to do so.
Not every province can keep growing through in-migration. And if AB is counting on international migration, AB is in trouble. It’s a long, hard road for new Canadians in terms of skill matching, training, recognition of training, and overcoming prejudice.
Something in the scenario you’ve described has to give.
Ray…..
If liabilities exceed assets that is what is defined as being bankrupt…..our own government can go bankrupt if all of our debt is called…….CMHC can also go bankrupt.
In fact….I´d bet that their exposure as a result of the sudden depreciation in the Alberta market has them underwater in the tens of billions…..and when defaults start as things change for the worse, they will get calls from the banks that they have underwritten mortgages for……and when the borrowers go banko….there is nothing left.
Why do you think that they have not issued stock ????? It would be shorted big time. Seems even a basic grasp of economics is beyond you.
Carioca Canuck,
Government won’t go bankrupt. One of the U of A PhD told me about this. Government can ask for more tax if they need to.
Hi Guys,
I have been an avid reader on this forum, never posted though but this time I need some advice. I just got a job at Fort Mac and Wifey and I are wondering if our best bet would be to rent or to buy. Any indicators on the trends in the Fort Mac real estate market, has it been declining or increasing? All angles appreciated.
RENT
You will have to live in squalor, but thats the price you have to pay to earn that 100 or so thousand dollars.
There is no value in those $700,000 homes. Just based on supply and demand economics.
And I am afraid when the oil industry is taxed by Kyoto or the Federal Liberals (when they get into power) or if companies start to pull out, that same $700,000 will be worth half of what it is, when people start leaving Fort Mac in droves.
IMHO
Carioca,
CMHC has been raking in mad cash the last few years and their fees are very generous. The recent 0 down for investment properties seems crazy but i’d guess that the loans they made 2002-2006 are more than enough to buffer against this.
Don’t get me wrong i think CMHC is continually getting more risky but the high % fees and previous years loans will keep them afloat. Oh and the bank of Canada and the taxpayer will be there just in case.
Dave, no one here ever said that the Government of Canada would go bankrupt.
We are talking about CMHC, a profitable mortgage underwriter initiated by the government. But it’s no government by itself.
Anon;
Where do you come up with these notions? Are you 17 years old?
You obviously know nothing about developing land for subdivision. If lot prices are high, it’s due to a few reasons:
1) Offsite levies charged by the municipality where the land is located, meant to offset increases in road use, etc.., the total amount determined by number of lots to be developed and density
2) Servicing charges to get the roads, sewer, power and gas installed BEFORE the first lot can be sold and transferred (for 100% of the price).
3) Municipal servicing standards; ie: Does the municipality want 8 inches of asphalt, or 4? Do they want storm sewer, or overland drainage? Is sanitary sewer gravity feed or pumped? Curb and gutter? Sidewalks with boulevard or nothing?
These are all costs that go into the land to be developed, and have NOTHING to do with current house prices. Developed lots derive their price from other available lots on the market (supply) and the costs associated with development.
Developers are historically the last to adjust prices during a downturn in the market, as they’ve had to commit money and labour to development based on previous months (or sometimes years) cost structure. Since costs the last 2 years have been high, expect lot prices to stay high, as the developer will try everything to recoup the most out of the investment.
That’s why you see so many new homes sitting empty. Their prices are out of whack with reality and will be dropping even more then they have. Forget the $10,000 furniture give aways or the new V4 cars. Try dropping the price 50 grand for a start.
I propose we put all frequenters of this blog in a house and film a new season of the reality show “big brother” entitled “Big Brother Home Edition”.
Sara can be head of the household, because she is good at challenges (Like pretending there is no impending bubble burst).
Sheldon is not allowed in the house, because while in there he will dupe some impressionable home buyer into purchasing it for 50% over its market value.
Thus selling it underneath our noses for an unfair market price, and the show will subsequently be cancelled before it even begins.
Picasso can be the unruly house guest who everyone evicts first. Although he means well, he always rambles incoherently and tries to draw real estate and housing charts on the wall with crayons.
Caraioca Canuck can be the house guest that always goes into the green room and vents to the private camera on how ridiculous the other housemates ideas are (how they all beleive prices are going to go up).
For a new spin on the show,
everytime the house’s market value goes up, one member of the household get’s evicted
How about a long term (12 months) vote counter on following questions:
1. Housing prices will go down
2. Housing will stay still
3. Housing will go up at inflation rate.
4. Listings will go down
5. listings will remain same.
6. Economy/employment will be stable
7. Economy/employment will go down.
8. Oil/gas will plummet, etc.
And put your pseudos up for i.d. purposes…
Or start some hockey type pool!!!
It’s like… the “Great Edmonton Real Estate Pool”
Pick you questions from 1 to 5. Winner in 12 months get to brag and the others get to zip it shut.
It’s such a dog eat dog world. Funny how someone reselling a concert or hockey ticket for profit is a scalper and jerk and only makes $20.00, yet a house flipper can walk away with tens or hundreds of thousands of dollars of some young couples money putting them in debt for 35 years and expects to be called an investor.
Posted by: Jack | December 18, 2007 at 08:55 AM
I beleive realtors are to blame too. Not every realtor, but realtors in general. They have pumped up the market like Wall Street Day Traders
——-
That’s patently untrue and you know it. Realtors don’t make the real estate market. It’s buyers and sellers that dictate prices, not realtors. Realtors provide a specialized service, just like doctors, accountants or lawyers.
You can’t blame Realtors for property prices, just like you can not blame doctors for higher medical costs.
Yes, there are realtors who oblige the sellers with a high listing price ( so they can get the listing). But I think it has more to do with greedy and un-realistic sellers. I see sellers who purchased their homes in 2006 for 240K and now want Realtors to list the same house for 500K in this market. These sellers are living in another world.
But guess what, these houses will never sell. The Realtors who list at high prices are wasting both their own time and more importantly they’re wasting the sellers time AND money.It’s better to price the property properly today than follow the market and finally sell it much lower tomorrow.
Lastly, I trade the futures market for a living. Day traders couldn’t “pump” the stock market even if their lives depended on it.
Where are you getting all these incorrect ideas from?
I think I have been flagged as a bad ombry. Some reason I am being censored.
I tried posting a message earlier, and I kept getting the message that my post has been flagged as spam, anyone else get that?
I think telling buyers that they will be ‘priced out of the market forever’ if they dont buy at these inflated prices
Is by definition ‘pumping up the market’.
Correct me if I’m wrong.
But realtors facilitate and advise buyers and sellers.
They market themselves as ‘providers of latest market information’.
They do pump up the market.
Your living in a dream world if you beleive otherwise.
It has happened to me twice when I made two successful offers on houses in calgary and saskatoon. I was told to ‘buy now, or never see these kind of prices ever again’
However, upon greater reflection on how my realtors represented my interests as a buyer, I refused to remove all my conditions.
I’m not saying Sheldon and Sara operate like this. I’m saying realtors in general.
I have never dealt with Sheldon or Sara.
Yogi….I got it too. Not sure what’s happening.
RE: Realtors pumping up the market…
What!!!! Agents don’t influence the market??? Get real!
What, then, do you call the recent minimization of this market down turn? Would you call 8,000+ listings a ‘balanced’ market, as Pratt does? Would you call 58 DOM ‘stability’? Would the largest one month decline in average house price in 14 years be a ‘corrected’ market? These types of press releases are totally aimed at influencing the market.
Agents pump it up on the rise, and are in denial when it falls. RE agents are salespeople….they have a significant influence.
Their livlihood depends on making a sale, the clients’ needs are secondary.
This just in:
The world’s biggest company PETROCHINA is deciding to invest hundreds of BILLIONS into the oilsands.
In secret meetings with Stelmach at the Chinese consulate here in Edmonton, PetroChina execs admitted that their oil exploration ventures in Sudan Nigeria, etc is way too dangerous in such hostile countries. They went on stating that Alberta is safe and business friendly.
The big thing behind this is the U.S. recession. They want to buy all the oil going south in a bid to be an emerged superpower and to also get rid of Indian competition in the oil sectors.
And… concurrently, PetroChina execs are in Caracas talking to Chavez in order to pull a same deal after being awarded secret submarine bases there for the PLA navy!!!
Last year, PetroChina pulled the same scam in Iran and Tajikistan!!!
They are ready to bully ENCANA out of Fort Mac and the Chinese will finance a divided highway and railway to Fort Mac. They also want to do a pipeline to Prince Rupert, or at least invest in another similar project. i.e. the shipping container center by the Int’l airport.
They are ready to settle thousands of workers into work camps and send their families in Lamont where a huge residential development is under way.
BTW, this will be headlines in a few days, wait for it. I am not disclosing my sources.
WOW!!! So much for an Edmonton bust!!!
This news alone will add at least $20,000
to our RE prices in a big hurry!!!!
Say, by mid January.
ray, why are you so desperate? Lack of confidence about dumping your property next spring?
PetroChina, the world’s biggest company? Give me a break.
The production and reserve size of PetroChina is about 1/3 of Exxon. The so called “biggest” come from its valuation in the Chinese stock market. But,
1) You cannot exchange Chinese RMB to USD at any bank (Chinese state owned banks included). So the Chinese stock holders can only play with other Chinese. There is no way of getting the claimed equivalence in USD.
2) PetroChina is 70% state-owned. A relatively small amount of cash is enough to move the stock price. And since the state ownership will persist, no, you don’t actually own part of the company, as there is theoretically no way that you can influence the decision making.
Anyway, so many billions of dollars coming to this province as investment, on top of the, already existing ones, that in a few years time the cheapest fixer-upper house
will cost more than $500,000 here in the city, believe it or not.
Wow..
Perfect correlation. ‘It’s worth whatever someone is willing to pay for it’ that’s true. I wish people would be less intimidated in regards to studying the ‘economic real estate denominators’ before buying or selling their house. Well, that’s a pretty fancy word but in reality it really isn’t (supply & demand–> Jk Rowling= amazon $4m!)
Your market is pretty much the same as ours right now actually: http://renohomeblog.com
^ First of all Ian, don’t spam your blog on someone elses. That’s lame.
Second, Nevada is not the same market as what Alberta is experiencing.
Third, I don’t take any credence in anyone who posts bible verses on their blog and relates it to real estate.
Fourth, you state that you’ve lost $50k (and counting) in real estate. Obviously, you aren’t good at what you do.
Good day.
“Over the third quarter, Alberta recorded a net interprovincial migration outflow estimated at 3,300 people. The last time the province recorded a net outflow to other jurisdictions occurred in the fourth quarter of 1994.”
http://www.statcan.ca/Daily/English/071219/d071219b.htm
Hey Exodus, why don’t you finish the rest of the quote in the article:
“Thanks to strong natural growth and net international migration, Alberta’s population is still increasing”
Karl,
It wouldn’t matter if PetroChina was talking about “trillions” of dollars. Don’t you see that there are other limitations? Not everyone works in O/G. In my opinion, the trickle-down effect that has had the greatest impact on Albertans as a whole has been our high inflation. This level of inflation has become the Alberta Disadvantage. In spite of low taxes, some people have left to parts of the country with lower costs of living. Some companies have left Alberta to places where they can secure a more cost-effective labour force. 6% inflation has a serious negative effect as it pushes out people (and business) who aren’t making the big O/G dollars. Regardless of the financial investment, if you physically don’t have the people – there are negative effects. Without people to live in all of the houses that are being built right now, prices cannot enter the stratosphere.
Karl, it is reasonable to expect increased investment should create more jobs and higher wages – congratulations – but consider the whole picture. Announcement of investments does not equal higher house costs if our economy is already at capacity.
People are leaving Alberta for the first time since 1994, and your answer is well people are still having babies. Well babies can’t buy houses. And if people keep selling their house to move elsewhere, who will be able to buy them at these prices?
This just in…..
Warren Buffet sold his equity stake out of PetroChina last year.
When one of the most respected and market saavy investment billionaires on the globe makes a move to get out of something, perhaps Ray & Karl should take some advice.
But then again, they believe RE prices will rise, so at least their consistent.
Anyone care to watch the “Toxic Alberta” series on the oilsands?
http://www.vbs.tv/toxic/alberta.php
What an eye opener!
Calgary mortgage applications for Dec 2007:
http://www.canequity.com/alberta/graphs/calgary-mortgage-history.gif
Everyone on here can make their own assumptions on the data.
So with inventories so high and mortgage applications so low.
How is the inventory going to decrease any time soon?
desperation
petrochina pulls out of oil sands projects, tinyurl.com/294ytw, dec/07, petrochina pulls out of oilsands pipeline, tinyurl.com/294ytw
now its lies
tinyurl.com/ypddfa
Yogi, you haven’t been banned. Something in one of your comments must have gotten you on Typepad’s spam watch list.
How does a little article about “value” end up with so many angry comments? Come on people…where’s your holiday spirit?
“So with inventories so high and mortgage applications so low.”
Good point – I agreed.
“So with inventories so high and mortgage applications so low.”
Good point – I agreed.
Alberta has a lot of jobs when the other places have no job.
People from other places will resign their jobs and come to Alberta because the housing here is so affordable.
Jobless people from other places will come here to get the jobs and will bring their gold to buy a lot of houses. Because they could not find jobs in their own places, they should be rich enough to buy $400,000 houses.
Rich people who can buy $1M house will come to Alberta to buy houses because they do not like to see Sun, Sea, Warm weather, etc. anymore.
My logic should be right. Alberta housing will fly in the sky.
Please wake up.
I moved to this city ten years ago from Vancouver because the houses were cheap. I do not understand why newcomers would like to come here if they cannot afford the houses. They can find better jobs here. Better job is everything?
I talked to some of my friends in Vancouver. They have jobs. They cannot find better jobs in Alberta. But, they are not interested in coming to Alberta. They told me that they should come 10 yrs ago when the houses were cheap.
Alberta is the best and Alberta was the best. Is “Today Alberta with costly housing” better than “10 yrs ago Alberta”?
Look at this one:
http://www.canequity.com/alberta/graphs/edmonton-mortgage-history.gif
I would argue that the huge number of mortgage applications for Edmonton throughout ’07 is the reason why we have this glut of inventory. Tons of investors.
So here is what I can decipher:
1) We have an unusually large inventory of homes for sale, of which only a small percentage are being sold;
2) We had in Nov an unusually large number of cancelled / terminated listings;
3) The CanEquity graph shows a surge of mortgage app’s for ’06 & ’07.
So now how can prices rise? If anything, that mortgage chart gives me MORE cynicism about 08…..I have never said it before, but man, if that ain’t a bubble waiting to happen, then what is?
Record number of mortgage applications concurrent with record inventories!!!!!
OUCH.
Dave said….´People from other places will resign their jobs and come to Alberta because the housing here is so affordable´
Reality is a ruthless master……
Define affordable please……two people making $90K a year is the rough average income in Calgary and Edmonton is lower IIRC…….after putting down $100K (if you got $100K that is) you need to service $300K of mortgage debt and associated housing costs after tax, which is around $36K per year in this example.
After tax $90K nets you about $48K…..two people cannot live on $12K a year….let alone buy and operate a car….and all the other associated expenses of life……like beer and popcorn !!
Define affordable please…..
Carioca Canuck,
I am on your side. If you guys think 1st half of my comment does not make any sense, how people think the price will go up?
That’s why I told people “Please wake up.”
“Alberta has a lot of jobs when the other places have no job.” Does it make any sense?
O.k some readers say, that Edmonton is still overpriced and people can not qualify for mortgages now, when we are at $325.000 on average in prices, than how could they qualified back earlier this year for $450.000+ properties and in much larger numbers? MLS completed 2000+ sales a month vs. 1000+ now.
Are we earning less now, than 6 months ago?
Are we getting laid off in large numbers?
So how can you be not qualified for a lower mortgage now?
Jim_s
It is not a bubble waiting to happen, because in today’s Alberta
and let’s just talk about Edmonton,
we all have a job and we are not about to sell for any price.
We can hold on to our properties for as long as we need to.
And that is one of the reasons that, despite the large inventories, prices remained relatively high.
Sure, prices retreated a little bit, but very few people actually sell forcefully.
Because simply they can keep continue holding on to their properties.
And as long as the economy strong, it will stay that way.
And it will remain strong for a while, hard to say for how many years, but for awhile.
JOBS JOBS JOBS JOBS JOBS.
All the bulls are harping about the abundance of jobs in Alberta like it’ll be their saving grace.
Don’t people get it?
If you’re making 70k a month for example and you have no savings at the end of the month after food, bills and mortgage payments – then what is the point?
A job means NOTHING if you can’t have a decent quality of life.
That’s why people are moving out away from Alberta, the most expensive province to live in!
Karl Ray
Agreed.
For one thing those CanEquity Graphs only count CanEquity online mortgages applications, not all mortgages for Edmonton. Second, the reason so many people are using Mortgage brokers these days is that a Mortgage Brokers can get a better rate and it doesn’t cost the borrower anything for the service. Granted a Mortgage Broker can get people with very good credit/assets exotic mortgages like those in the US (but they’ll charge you big time for that service). But if you think that average joe/jill can get one of those exotic mortgages, good luck with that.
For those of you that don’t know what a Mortgage Broker is, they are people who know the in’s and out’s of the mortgage business, but just like any service supplier, shop around, ask questions and double check before you commit to anything.
PS: Initially Radly77 posted a link to that CanEquity graph on another blog, so here is the link to the whole webpage instead of just one graph, tells a slighly different story than Radly77 was eluding to.
http://www.canequity.com/alberta/edmonton-mortgages.htm
Karl,
Look up “monetary policy” on Wikipedia. The mortgage that you qualify for is not strictly fixed upon your gross monthly income. It is also based on whether the banking system is in an expansionary mode or contractionary mode. In the past twelve months, we have had high inflation in Canada and the sub-prime crisis is directly related to errors made by expansionary idiots in the U.S. (and elsewhere). There is no doubt that banks are in a “less-expansionary” mode now – and that means you likely qualify for less money even though your salary hasn’t changed.
I have a friend who is a journeyman carpenter. He made a lot of money between Aug 2006 and March 2007 buying properties, fixing them up and re-selling them. He was able to do this because the bank threw all kinds of money his way. He knew in March that it was time to get out of the market because the banks significantly reduced the credit he was eligible for. He may be a higher risk because he is a contractor rather than salary – but the only factor that changed over time was the bank’s attitude. The banks are scared right now – CIBC announced another huge writedown (which demonstrates that the credit crisis is a global crisis). If banks are realizing that they have over-exposed themselves – you ought to realize that there will be less credit (and less buyers) in the near future. Even if it doesn’t affect you, it probably has affected others.
this blog is useless…
can’t even submit a decent remark without it being labelled “spam”.
shood i speek like bad leters to make coment stik?
Agree with you, Jeff.
Karl – you’ve assumed in your theory of “we can all just hold on to our properties” that everyone only owns 1 home, hasn’t signed a deal with a builder (and has 2 mortgages), and hasn’t bought a bunch of homes to flip.
The Rebuttal:
1) Only counts Canequity mortgages: True, but it seems to be a large enough sample size to support that mortgage applications are down. 20% YoY decline in residential sales seems to confirm that. CanEquity is a popular mortgage broker.
2) Increasing prevalent use of mortgage brokers: Still doesn’t explain why applications are down so much even on a seasonal basis and even adjusted for December not being finished. Applications still seem to be down significantly.
As a corollary, negative interprovincial migration should imply negative jobs growth. This report from Alberta Employment, Immigration and Industry seems to confirm that.
http://employment.alberta.ca/documents/LMI/LMI-LFS_1107_public_package.pdf
October 2007 Jobs = 1,971,900
November 2007 Jobs = 1,962,700
Oct\Nov 2007 Jobs Lost = 9,200
Your a marked man Jim cause your not a bull.
Sara or Sheldon
to who whoever wrote the above article…
Comparing houses with collectors item; do not tell that some postage stamp got sold for 400,000 and we lousy edmontonians are not buying a real card board house for 400k.
If realtors are so confident of the prices to go up, then why not each of the realtor buy one each…there will certainly be more than 10,000 realtors here.
Your articles have always been very informative, please keep your unbiased stance, I think we all like you for that.
Edmonton at the bottom
For next year, it is predicted that Edmonton will record the lowest growth (1%) in housing prices among major Canadian cities in Canada. This is from a recent Royal LePage report. Ithink it will likely record a 8% decline.
Edmonton recorded a 5-6% drop in one month (October-November) alone. The number of houses on the market (MLS and Comfree) is about 13,000 still.
You do the math – There are 1 million residents in Edmonton and surrounding areas. That makes for about 200,000 owned homes/apartments. 13,000 homes on sale means, one in every 15 on sale. probably lower. That’s rediculous. Edmonton will probably hit the bottom in June when home sellers find out that there are no buyers still – they have allbeen swallowed up in the last two years.
People moving out into Sask des not make life any easier for sellers.
Just wondering where Alberta Advantage is nowadays?
Edmonton and Calgary headed towards a housing slump.
Financial Post reports that consumer sentiment is headed towards a massive slump in Alberta. http://www.financialpost.com/story.html?id=183977
The confidence is at 125 after peaking at 150. Among oil and gas companies, it’s at 111 from a high of 157. “Todd Hirsch, senior economist at ATB Financial, said the trend has been down for nine straight quarters” reports FP.
Am I still considered Comment Spam on this site because I am not posting overly-optimistic comments about a dead real estate market??
What is the point of this blog now if you are filtering out one side of the perspective?
I admit that some people on here were getting out of hand, but I don’t believe that I would be considered one…
I see my comment went through…I used another email address, maybe I just don’t understand comment spam.
I’m glad I get to post again
Sara and Sheldon, I made one comment maybe you found offensive, awhile back and I am on spam watch list? How can Picasso make racist remarks, and others trash others, and I get put on a list. Explain that to me.
I have one point out the continuation of people moving to Regina and Saskatoon. Regina in particular will see less people moving there because on certain house comparable are not much different then Edmonton. Yes house average and median prices are lower, how many 20,000-100,000 houses are there to scew (forgive spelling) the stats. You look at a 2 story house for 400,000 in Edmonton, it is probably worth 350,000 in Regina or Saskatoon. So if I have a choice to go back to lower paying jobs in Saskatchewan or pay more for housing the choice is made for me, unless I want to live in North Central Regina. Saskatoon is going to reach a plateau within six months, and Regina within the year. The one thing about Regina is that a decent house is hard to find, because people have been buying up properties like crazy. There are less properties in Regina for sale then in Stony Plain and Spruce Grove. If there will be a correction of mythical proportion, I would bet my cookies on Saskatchewan. I wish I speculated there 2 years ago.
***RESPONSE***Sara’s answered your post a couple of times regarding type pads issues. It honestly takes a lot to be blocked here. Only one person 64corvette who now masqurades as Picasso has been blocked. I guess Nothing is for life though and I’m not interested in controlling opinions or sentiments. But if someone (this is not directed at you Yogi) thinks they can dump a load a crap on this blog and towards other people then we’ll do something about it. So post away. You haven’t been blocked. I haven’t even considered it. So Don’t worry be happy.
Sheldon and Sara, I tried to post a response to being flagged, but since your filter will not allow it then I got to say you loose credibility as being objective, and I was a big time supporter of this blog. By flagging posts it shows that you don’t want challenging posts, and your continuation to do so to me is discouraging. Sad thing was that in one of the posts I was actually apologizing. I will say this about the Alberta Bubble blog, they may remove real offensive posts, but I am 150 percent sure anything I ever posted would make it on that blog. Continue to do this and others will get frustrated cause they see your forum as not open to differing viewpoints. I don’t get it. Your loss in way.
Radly77
Look at Stats-Can numbers, http://www40.statcan.ca/l01/cst01/labr66j.htm it’s wierd, seems 7300 more men where employed while 14400 less woman where employed. Also there was a gain of 2000 full-time jobs and 16200 less part-time jobs. Wonder what kind of jobs those were????
Sorry 4200 new full-time jobs.
Those of you whose posts are getting flagged as spam – don’t jump to the conclusion that you’re getting censored or blocked. The most likely explanation is that your writing has too many “spamish” phrases, and/or the spam filtering software is malfunctioning. Sara has already posted to this effect.
I have always heard it was common for women to choose having a baby during the winter than the summer. Perhaps, the drop in the women numbers is due to more women carrying a child?
I also find it odd that the YoY growth rate for men is over 3 times that for women. It seems the boom has not been received equally across gender lines (which is unfortunate).
Hey Bob, do you really think Edmonton homes will drop from 300k to 100k? Seriously? Are you mad about something and just want to be super negative? Well as I have never made any claims to be an expert on RE, but if prices dropped that much, E town would instantly become the most affordable big city in Canada and everyone would try to move here and the cycle would just start all over again right? I think realistly we will probable end up somewhere between piccasso and ray. Growth, but very slow and steady. Isn’t that what is best for everyone. Renters who want to buy can actually save up a deposit instead of falling behind the price rise every month like we saw in 06. I am still trying to stay neutral in the fighting on this site but the “doomers” are starting to sound like broken records!!! How about prove your statements so we who want to learn can do some real research. PLEASE!!!
The negative guy named bob is really “sqiddly” from the alberta bubble blog. He’s a moron. He’s been fingerprinted by his distinctive spelling and language style. Be very wary of anything he says because his facts and data have repeatedly been proven incorrect. Just to illustrate his poor judgement, he thinks picasso(brent on the other blog) is smart.
wawoo… cant believe this blog is so hot!
Wow, I never knew I had such a following. Maybe I should start a Bear Fan Club. lol
Great site.
I especially like the EREB and CMHC forecasts and what actually happened. They are so far off they look stupid.
http://albertarealestatewatch.blogspot.com/
If Sheldon or Sarah block you, it won’t say that you’re blocked due to spam when you attempt to comment.
Typepad (the host of the blog) is just incorrectly identifying you as spam due to the frequency of your posting or posting under different email/names with the same IP address.
Dave…..OK I understand what happened……wish someone on the other side would answer that question thought.
I was flagged for “comment spam”
Well it may be time to blog somewhere else?
No, Jim_s, I mean, if I want to sell my property, I will, but not necessarily for the price you offer
or I just do not sell it for now.
Say, I list my house for $400,000 ( I think, that’s the right price )
and you come to my house and offer $355,000 because ( you think that’s the right price ) than I might just not sell it right now.
After all, who says, what’s the right price?
If I’m not willing to sell for less, than you are not going to get it for less. Typically RE prices go down, when the local economy takes a sharp down turn and many people not able to finance their home anymore, so they sell for whatever price they can get, but it’s not the case here, in the city
and that’s why, no one can explain the decline in RE prices.
Yes, maybe the affordability went down a bit, but no major changes and so it should not be any major correction in RE prices.
Karl:
I’ll give you $225K right now, sight unseen. I’ll even let you take the couch, if you want.
This downturn in RE is explainable….that’s what you’re not getting. It is due to:
1) Tons of RE investors, bought homes and condos from ’04 to ’07 on speculation and greed;
2) Huge amount of “upward” movement in the market, people building or buying bigger homes, now have to unload the first residence;
3) Large amount of people in Alberta (around 12% according to CanEquity) refinanced their homes in ’07, presumably to borrow more money. So if they’ve leveraged themselves against their home and it’s value starts to drop, these people are almost forced to sell, otherwise, insolvency.
karl,
If i’m not willing to pay more for your house you aren’t selling it for more either.
There was no major changes for Joe Average that suddenly made his house worth 150% more in 2.5 years either.
You think it’s all because of some tar pit hundreds of miles away that 99% of the people of Alberta have never even seen that caused this 150% increase.
To funny! It was a spec run that has come to an end. Sa la vee, the parties over!
I think the party has just begun.
Once people like Karl accept the obvious, there will be opportunities and deals like we haven’t seen since ’82. One of the more prominent RE agents in the city told me that he made more money during the ’82 RE crisis than during any other period of major market appreciation.
When people become desperate, greed leaves and is replaced with panic. And agents can smell it!
Price’s would have to fall a long long ways to grab my interest. It’s just an expensive, ugly, cold and dirty looking place. Those aren’t features that attract my eye.
Please look at this news before you say
Edmonton is good good good.
People will come come come.
House price is up up up.
http://www.canada.com/edmontonjournal/news/business/story.html?id=4112b2ec-618f-40c7-ba66-d2e1669693b3&k=12944
Great blog, Sheldon. Good comments from all sides of the fence. I think it’s a good idea to screen the comments or it will deteriorate into pettiness and insults and become irrelevant like the Alberta Bubble Blog.
Breaking News from The Globe and Mail
MBIA reveals mortgage exposure, shares plunge
Reuters
Thursday, December 20, 2007
NEW YORK — MBIA Inc., the world’s largest bond insurer, says it has guaranteed $8.1-billion (U.S.) of the riskiest mortgage securities, imperilling its entire net worth and sending its shares plunging 25 per cent.
The company said that it had guaranteed $30.6-billion of complex mortgage securities in total. The disclosure threatens to set off a chain reaction that could lead to larger writedowns at Wall Street banks.
“We are shocked that management withheld this information for as long as it did,” Morgan Stanley said.
“This new disclosure completely changes our view of MBIA being a ‘more conservative underwriter’ relative to Ambac,” the second-largest bond insurer, said a Morgan Stanley report co-written by analysts Ken Zerbe and Yoana Koleva.
MBIA’s stock fell to a 13-year low in its biggest one-day decline ever, bringing its total drop this year to more than 70 per cent. The stock, which last traded at $20.42, hit a record high in January.
The cost to insure MBIA bonds also soared to new records.
http://tinyurl.com/yut5eu
Thanks for your comments, piccaso and Jim_s.
But at the end of the day, isn’t it
better to own a property (or more, of course) that worth that much more in the long term?
When you retire or simply want to move to another city, what would you rather have??
a.) two houses in Edmonton, each estimated at $430,000 and possible more;
b.) two houses in Edmonton, each estimated $150,000 in value and dropping,
If you choose option “a” ,than you are a wealthy man;
If you choose “b” you have a measly $300,000 total wealth and a very limited opportunity to move anywhere or retire or open a business etc.
So, when you talk about wanting very cheap prices here in Edmonton,
than, essentially, you reduce this place to a town status, at least, in RE values, whereas we are a city
of a million people (o.k, this number includes every village and small town all the way to Red Deer) so I’d like to see comparative prices with other similar size cities and not with towns with the population of 47.000.
piccaso1881
That news would not effect us at all, since it’s thousand of miles away….just like the tar pit, you mentioned earlier…..it has no effect at all.
karl,
“so I’d like to see comparative prices with other similar size cities and not with towns with the population of 47.000.”
Funny you should ask. Check out the most recent item here:
http://albertarealestatewatch.blogspot.com/
Scroll
Scroll
Scroll
Got my button on the scrollllllll.
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…
…
Still scrolling…
Funny, looking at the list:
Houston-Baytown-Sugar Land TX $155,800
Dallas-Fort Worth-Arlington TX $146,800
Texas has nice hot weather and also has Oil and Gas as well.
There is no way that Calgary and Edmonton rank that much higher than R/E in Texas.
The argument that Alberta has Oil and Gas etc has no merit when compared to similar states in the US such as Texas which has a greater population density and better weather to boot.
If people don’t think this is a bubble in Alberta then I think that maybe God has given up on mankind.
It’s the end of the world.
Well, I guess I only have myself to blame for this – I should’ve locked in an interest rate.
In spite of recent prime rate reductions, the 5-year mortgage rate at my bank went up again today.
http://www.cbc.ca/money/story/2007/12/20/mortgages.html
Sellers: Be advised that this small change to lending rates means that I qualify for about $8,000 less than I did yesterday – please adjust your selling prices accordingly.
Karl:
To be quite honest, I’d rather have option B, because it would probably take me 15 less years to pay the house off, not to mention save the additional interest paid out to banks.
I don’t look at my home as my source of wealth, because I, along with 1,000,000 other Edmontonians, need a place to sleep every night. The people that are getting ahead in the world are not the ones that have the biggest homes and biggest mortgages, it is those that have modest homes that are paid off, using their disposable income to invest in other higher yield instruments.
If you look at your home as a source of wealth, then you need to be comparing yourself to the homeless and not your neighbor, as your neighbor is just as “house rich” as you.
I don’t look at a house as a piggy bank. It is a place where I go to spend time with my beautiful family, where I invite friends over for a BBQ, and where I unwind and ponder the greed in this market.
When I retire, my home is not in my retirement equation, because I know I will also need a place to live at that time. When I die, my home is not in my spiritual equation, because God told me not to bring anything
karl,
No, maybe not a direct effect but it’s a global effect that continues to get worse and an overpriced market like Alberta is definitley not immune to it.
Jim_s,
You are absolutely right about everything in your post and I must agree, a home is a shelter on the first place, but as everything else, it has a price to it and for many people, that’s the only real value in their hands, no cash or stock or jewellery, so price can be important, when time to sell.
Yet, others has so much money, they buy a second or third house as investment. RE prices have the tendency to go up over time, if – for no other reason- just because the population growth.
Not much can be done about it.
You mention greed, of course, greed present everywhere in life and not just real estate.
Lets say, I feel sorry for the next guy, so I price my house at 2005 level and list it tomorrow.
Nice, beautiful home for sale for
$195,000.
Some one will buy it immediately.
So you feel, you helped someone to a nice place to live , you did not make any money, not a penny, so you really feel good about yourself.
Then, next day , you see, the house you just sold, is up for sale for $395,000.
I’m not greedy, but he became greedy. How can you remove this from real life?
piccaso1881,
No, the tar oil sand will protect us and help prices remain high.
I wish this blog had the option where the user could choose to ignore certain posters. Some people who post here come off like idiots and are a waste of time for me.
Your living in dreamland karl. Your relying on that tar pit to be the fix way to much.
Karl:
Greed can’t be removed from anything. But I do know this:
When anything in nature or the world is out of balance, nature fights back for balance. Working day and night landed a friend of mine in a wheel-chair…..he didn’t see that he needed to slow down. Going extreme in one mode caused nature to force him into the extreme other mode, as he would not listen to indicators.
When the market goes so gung-ho in one direction, as it has, it has to at some point balance. The degree of balance adjustment is directly correlated to the degree of unbalance in the first place.
If you look at Edm, house prices went absolutely nuts thru ’06. Why? What was so great here that pushed them up? Did costs rise 2 times? Did lumber go up 2X? Did shingles, rugs, drywall, etc…
Edm. is a market completely out of balance, and is now correcting. I feel it was due to investors, speculators, and upwardly mobile people building new homes that, over ’05 and ’06, limited supply and drove (apparent) prices up. Now we have ample supply – where will prices achieve balance?
I’m not a bubble dude….I hate seeing or livinig through bubble episodes.
But you have to ask yourself a very straight forward question: If prices went up so high so rapid, what on earth would make that continue? Worse yet, we have all kinds of economic indicators showing us the opposite WILL occur.
If we all left our “wealth” perception out of the home and didn’t look at it as a piggy bank for refinancing our credit cards, I’m sure most people wouldn’t care about house value…..we’d all more or less have a lot with a house on it, aside from geography differences. The home became our personal bank over the last few years during the rapid (global) market appreciation, and over the next few years some will feel real pain when the numbers don’t add up. Again, balance has to come.
It’s the high income, hyper consumption way of the Western world that puts us in these extreme market fluctuations.
Posted by: I want a home | December 19, 2007 at 05:55 AM
I think telling buyers that they will be ‘priced out of the market forever’ if they dont buy at these inflated prices
Is by definition ‘pumping up the market’.
Correct me if I’m wrong.
Posted by: I want a home | December 19, 2007 at 05:55 AM
But realtors facilitate and advise buyers and sellers.
They market themselves as ‘providers of latest market information’.
They do pump up the market.
Your living in a dream world if you beleive otherwise.
—————-
Are there dishonest realtors like there are boiler room stock brokers? you bet there are. Whenever money is concerned, quite a few individuals forget common decency and morality. Unlike other professions, it’s very easy to get a real estate license. Until recently, you didn’t even need a high school diploma to get licensed.
There are however many very educated and very good Realtors who do provide well informed and accurate advice. Many of them don’t advertise since they’re too busy working with referrals. If you want a good Realtor, instead of picking the Realtor with the glossiest magazine ad, or one who has his/her face plastered on every wall, try getting referrals from friends who are satisfied with their experience with a Realtor.
And lastly, why is it that when prices were going up, twenty somethings mortgaged to the hilt and flipping houses like there was no tomorrow were all hailed as “geniuses”.
Now that the market is getting back to reality, all of a sudden it’s the Realtors fault for “letting” them buy these houses to flip.
At the end of the day, it’s your money. If you can’t take a few minutes out of your “busy” schedule to do some research, well….
Frank,
If a realtor told you back in 2004-2005, that you go right ahead and buy something right now, because you will be priced out of the market -now- a few years later you can see,
that realtor was right, because prices doubled in that period of time.
So if you decided not to buy back than, for an average of $200,000 ( because you thought it’s too much money for a house )now you are priced out of the market.
So, your realtor was RIGHT.
When has a realtor told you NOT to buy, Karl?
Doesn’t matter if the market is going up or down, they still get to skim a piece of your hard earned asset.
People are going to lose there life savings on buying a house when prices drop. Everyone knows that most people can’t afford to buy the house they live in.
I think, noone can be sure, what the future holds, but if a realtor tells you today, that you do not buy, because prices will go down soon and ( for any reason ) they happen to go up, or remain the same, then in a few month time you phone your realtor and say “That’s not, what you told me! You are incompetent! I’ll go to someone else, who knows what he/she is doing!! etc”
to express your anger/dissapointment.
That might be the reason, they do not encourage you to delay a transaction, hoping in further price decreases.
Anon,
I respect your opinions. Though I’m respectfully disagreeing with three of it.
1. Whenever I post a link back to my site i make sure that it makes sense to do it. I correlate it to our real estate market.
2. I never said that Alberta was experiencing the same market as Nevada.. ‘Your market is pretty much the same as ours right now’
This was relating to Sheldon or Sara’s post:
“There are a lot of home owners in Edmonton right now who are not willing to accept what buyers are willing to pay. There are also plenty of buyers not willing to pay the seller’s asking price or close to it. Right now, it seems that those sellers who have lowered their expectations somewhat are the ones who are successfully selling.”
3. I respect your not having credence for putting bible verses in our blog. ‘To each is own.’ I’m not the type who forces my belief in people. That post with a bible verse
was just something I wanted to share based from personal experience. I wanted them to catch a glimpse of who I am and what i go through. After all it’s a blog right.
4. Again, I respect your opinion of: ‘Obviously, you aren’t good at what you do.’ But faintly disagrees with your basis (because I lost $50,000 and counting.. in the reno real estate market).
Trial and error my friend is the arguably the greatest factor in basically every monumental success our planet has ever achieved.
Joshua,
Why everyone so worried about prices dropping in this place?
Or, is the situation the same every city in this country?
Like tomorrow you go to Toronto or Winnipeg and start worry about the RE prices to drop, or it’s just here, in Edmonton?
karl,
Maybe this sub prime situation is a tad closer to home.
http://www.tinyurl.com/2rp8t2
Or this one karl….
Coventree faces possible sale or wind-up
JOHN PARTRIDGE
Globe and Mail Update
December 21, 2007 at 2:55 PM EST
Coventree Inc., the structured finance firm at the epicentre of Canada’s contribution to the global credit crunch, has reported heavy losses for fiscal 2007 and says it may have to be sold or wound up because its key capital markets business unit is no longer viable.
The Toronto company, the largest single sponsor of non-bank asset-backed commercial paper, disclosed Friday morning that it lost $7.4-million or 45 cents a share in the year ended Sept. 30, excluding the results of various special investment vehicles, known as variable interest entities, that it sponsors.
This compared with a profit of $30.1-million or $1.87 a share in fiscal 2006, and came on revenue that rose slightly to about $81.2-million from about $80.7-million.
Coventree warned in a news release that whatever happens to efforts by a financial industry investor committee to restructure $30.1-billion in currently frozen ABCP – about $16-billion of which it sponsored – its capital markets unit, which has historically generated the “vast majority” of the company’s revenue, is no longer viable and therefore will receive no additional investment.
Coventree faces a sale or wind up after special committee finds its capital markets division is not viable
A special committee of the board of directors is continuing to review prospects for the overall company, Coventree said, and indicated that the picture is not bright.
“Overall, strategic options for the company will be highly dependent upon the outcome of any investor committee restructuring proposal and could involve, among other things, a sale, merger or other transaction involving the company or parts of the company, or potentially the orderly wind-up of the company’s operations,” it said.
Coventree also warned that, in the meantime, “there can be no assurance that [its] revenue will continue to be sufficient to cover the costs of continuing to support the restructuring efforts of the investors committee and to perform its responsibilities as administrator of the [ABCP] conduits sponsored by Coventree and others.”
The firm’s already crushed shares again fell sharply on the Toronto Stock Exchange Friday in response to the company’s revelations. The shares, which hit a high of $16.30 in July, not long before the crisis broke, fell 27 cents or more than 28 per cent by mid afternoon to trade at 69 cents.
The ABCP investor committee, led by lawyer Purdy Crawford, missed a deadline last Friday to announce a detailed restructuring proposal.
However, it is now set to release a proposal by the end of January that will outline the terms of its plan to exchange the troubled ABCP into tradeable but longer-term notes. The proposal will also reveal some of the currently secret information about the nature and value of the mortgages, leases and other assets on which the paper is based.
Coventree attributed its losses primarily to unusual charges totalling $25.3-million (before tax). These related to asset write-offs and restructuring charges triggered by the disruption of the non-bank ABCP market, increased operating expenses flowing from an expansion of its business before the crisis struck, as well as an $8.2-million unrealized loss on the value of its investment in Xceed Mortgage Corp.
The collapse of the modern day banking system
By Mike Whitney
Online Journal Contributing Writer
Dec 18, 2007, 01:05
Stocks fell sharply last week on news of accelerating inflation which will limit the Federal Reserves ability to continue cutting interest rates.
Last Tuesday the Dow Jones Industrials tumbled 294 points following the Fed’s announcement of a quarter point cut to the Fed Funds rate. On Friday, the Dow dipped another 178 points when government figures showed consumer prices had risen 0.8 percent last month after a 0.3 percent gain in October. The stock market is now lurching downward into a “primary bear market.”
There has been a steady deterioration in retail sales, commercial real estate, and the transports. The financial industry is going through a major retrenchment, losing more than 25 per cent in aggregate capitalization since July. The real estate market is collapsing. California Gov. Arnold Schwarzenegger announced on Friday that he will declare a “fiscal emergency” in January and ask for more power to deal with the $14 billion budget shortfall from the meltdown in subprime lending.
Economists are beginning to publicly acknowledge what many market analysts have suspected for months; the nation’s economy is going into a tailspin.
Morgan Stanley’s Asia Chairman, Stephen Roach, made this observation in a New York Times op-ed on Sunday: “This recession will be deeper than the shallow contraction earlier in this decade. The dot-com-led downturn was set off by a collapse in business capital spending, which at its peak in 2000 accounted for only 13 percent of the country’s gross domestic product. The current recession is all about the coming capitulation of the American consumer — whose spending now accounts for a record 72 percent of G.D.P.”
Most people have no idea how grave the present situation is or the disaster the country will face if trillions of dollars of over-leveraged bonds and equities begin to unwind. There’s a widespread belief that the stewards of the system — Bernanke and Paulson — can somehow steer the economy through this “rough patch” into calm waters. But they cannot, and the presumption shows a basic misunderstanding of how markets work. The Fed has no magical powers and will not allow itself to be crushed by standing in the path of a market avalanche. As foreclosures and bankruptcies increase; stocks will crash and the Fed will step aside to safety.
In the last few weeks, Bernanke and Paulson have tried a number of strategies that have failed. Paulson concocted a plan to help the major investment banks consolidate and repackage their nonperforming mortgage-backed junk into a “Super SIV” to give them another chance to unload their bad investments on the public. The plan was nothing more than a public relations ploy which has already been abandoned by most of the key participants. Paulson’s involvement is a real black eye for the Dept. of the Treasury. It makes it look as if he’s willing to dupe investors as long as it helps his d Wall Street buddies.
Paulson also put together an “industry friendly” rate freeze that is supposed to help struggling homeowners avoid foreclosure. But the plan falls well short of providing any meaningful aid to the estimated 3.5 million homeowners who are facing the prospect of defaulting on their loans if they don’t get government assistance. Recent estimates by industry experts say that Paulson’s plan will only help 140,000 mortgage holders, leaving millions of others to fend for themselves. Paulson has proved over and over that he is just not up to the task of confronting an economic challenge of this magnitude head-on.
Fed chief Bernanke hasn’t done much better than Paulson. His three-quarter point cut to the Fed’s Funds rate hasn’t lowered interest rates on mortgages, stimulated greater home sales, stabilized the stock market or helped banks deal with their massive debt-load. It’s been a flop from start to finish. All it’s done is weaken the dollar and trigger a wave of inflation. In fact, government figures now show energy prices are rising at 18.1 per cent annually. Bernanke is apparently following Lenin’s supposed injunction though there’s no conclusive evidence he actually said it — that “the best way to destroy the Capitalist System is to debauch the currency.”
On Wednesday, the Federal Reserve initiated a “coordinated effort” with the Bank of Canada, the Bank of England, the European Central Bank, and the Swiss National Bank to address the “elevated pressures in short-term funding of the markets.” The Fed issued a statement that “it will make up to $24 billion available to the European Central Bank (ECB) and Swiss National Bank to increase the supply of dollars in Europe.” [Bloomberg] The Fed will also add as much as $40 billion, via auctions, to increase cash in the U.S. Bernanke is trying to loosen the knot that has tightened Libor (London Interbank Offered Rate) rates in England and reduced lending between banks. The slowdown is hobbling growth and could send the world into a recessionary spiral.
Bernanke’s “master plan” is little more than a cash giveaway to sinking banks. It has scant chance of succeeding. The Fed is offering $.85 on the dollar for mortgage-backed securities (MBSs) and collateralized debt obligations (CDOs) that sold last week in the E*Trade liquidation for $.27 on the dollar. At the same time, the Fed has promised to keep the identities of the banks that are borrowing these emergency funds secret from the public. The Fed is conducting its business like a bookie.
Unfortunately, the Fed bailout has achieved nothing. Libor rates — which are presently at seven-year highs — have not come down at all. This is causing growing concern among the leaders of the central banks around the world, but there’s really nothing they can do about it. The banks are hoarding cash to meet their capital requirements. They are trying to compensate for the loss of value to their (mortgage-backed) assets by increasing their reserves. At the same time, the system is clogged with trillions of dollars of bad paper which has brought lending to a halt. The huge injections of liquidity from the Fed have done nothing to improve lending or lower interbank rates. It’s been a flop. The market is driving interest rates now. If the situation persists, the stock market will crash.
Staring into the abyss
One of Britain’s leading economists, Peter Spencer, issued a warning on Saturday: “The Government must suspend a set of key banking regulations at the heart of the current financial crisis or risk seeing the economy spiral towards a future that could make 1929 look like a walk in the park.”
Spencer is right. The banks don’t have the money to loan to businesses or consumers because they’re trying to raise more cash to meet their capital requirements on assets that continue to be downgraded. (The Fed may pay $.85 on the dollar, but investors are unwilling to pay anything at all.) Spencer correctly assumes that the reason the banks have stopped lending is not because they “distrust” other banks, but because they are capital-strapped from all their “off balance” sheets shenanigans. If the Basel regulations aren’t modified, money markets will remain frozen, GDP will shrink, and there’ll be a wave of bank closings.
Spencer said: “The Bank is staring into the abyss. The Financial Services Authority must go round and check that all banks are solvent, and then it should cut the Basel capital requirement level from 8pc to about 6pc.” [Call to Relax Basel Banking Rules, UK Telegraph]
Spencer confirms what we already knew; the banks are seriously under-capitalized and will come under growing pressure as hundreds of billions of dollars of mortgage-backed securities (MBSs) and collateralized debt obligations (CDOs) continue to lose value and have to be propped up with additional capital. The banks simply don’t have the resources and there’s going to be a day of reckoning.
Pimco’s Bill Gross put it like this: “What we are witnessing is essentially the breakdown of our modern day banking system.” Gross is right, but he only covers a small portion of the problem.
The economist Ludwig von Mises was more succinct in his analysis: “There is no means of avoiding the final collapse of a boom brought on by credit expansion. The question is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.”
The basic problem originated with the Federal Reserve when former Fed chief Alan Greenspan lowered interest rates below the rate of inflation for 31 months straight, which pumped trillions of dollars of low interest credit into the financial system and ignited a speculative frenzy in real estate. Greenspan has spent a great deal of time lately trying to avoid any blame for the catastrophe he created. He is a first-rate “buck passer.” In last Wednesday’s Wall Street Journal, Greenspan scribbled out a 1,500-word defense of his actions as head of the Federal Reserve, pointing the finger at everything from China’s “low cost workforce” to “the fall of the Berlin Wall.” The essay was typical Greenspan gibberish. In his trademark opaque language; Greenspan tiptoes through the well-documented facts of his tenure as Fed chief to absolve himself of any personal responsibility for the ensuing disaster.
Greenspan’s apologia is a masterpiece of circuitous logic, deliberate evasion and utter denial of reality. He says, “I do not doubt that a low U.S. federal-funds rate in response to the dot-com crash, and especially the 1 per cent rate set in mid-2003 to counter potential deflation, lowered interest rates on adjustable-rate mortgages (ARMs) and may have contributed to the rise in U.S. home prices. In my judgment, however, the impact on demand for homes financed with ARMs was not major.”
“Not major”? — 3.5 million potential foreclosures, 11-month inventory backlog, plummeting home prices, an entire industry in terminal distress pulling down the global economy is not major?
But Greenspan is partially correct. The troubles in housing cannot be entirely attributed to the Fed’s “cheap credit” monetary policies. They were also nursed along by a Doctrine of Deregulation which has permeated US capital markets since the Reagan era. Greenspan’s views on how markets should function were — to a great extent — shaped by this non-interventionist/non-supervisory ideology which has created enormous equity bubbles and imbalances. The former Fed chief’s support for adjustable rate mortgages (ARMs) and subprime lending shows that Greenspan thought of himself as more of a cheerleader for the big market players than an impartial referee whose job was to monitor reckless or unethical behavior.
Greenspan also adds this revealing bit of information in his article, “The value of equities traded on the world’s major stock exchanges has risen to more than $50 trillion, double what it was in 2002. Sharply rising home prices erupted into major housing bubbles worldwide, Japan and Germany (for differing reasons) being the only principal exceptions.” ["The Roots of the Mortgage Crisis," Alan Greenspan, Wall Street Journal]
This admission proves Greenspan’s culpability. If he knew that stock prices had doubled their value in just three years, then he also knew that equities had not risen due to increases in productivity or demand.(market forces) The only reasonable explanation for the asset inflation, therefore, was monetary policy. As his own mentor, Milton Friedman, famously stated, “Inflation is always and everywhere a monetary phenomenon.” Any capable economist would have known that the explosion in housing and equities prices was a sign of uneven inflation. Now that the bubble has popped, inflation is spreading like mad through the entire economy.
Greenspan is a very sharp man. It is crazy to think he didn’t know what was going on. This is basic economic theory. Of course he knew why stocks and housing prices were skyrocketing. He was the one who put the dominoes in motion with the help of his printing press.
But Greenspan’s low interest credit is only part of the equation. The other part has to do with way that the markets have been transformed by “structured finance.”
What’s so destructive about structured finance is that it allows the banks to create credit “out of thin air,” stripping the Fed of its role as controller of the money supply. David Roache explains how this works in an excerpt from his book, “New Monetarism,” which appeared in the Wall Street Journal: “The reason for the exponential growth in credit, but not in broad money, was simply that banks didn’t keep their loans on their books any more — and only loans on bank balance sheets get counted as money. Now, as soon as banks made a loan, they ‘securitized’ it and moved it off their balance sheet.
“There were two ways of doing this. One was to sell the securitized loan as a bond. The other was ‘synthetic’ securitization: for example, using derivatives to get rid of the default risk (with credit default swaps) and lock in the interest rate due on the loan (with interest-rate swaps). Both forms of securitization meant that the lending bank was free to make new loans without using up any of its lending capacity once its existing loans had been ‘securitized.’
“So, to redefine liquidity under what I call New Monetarism, one must add, to the traditional definition of broad money, all the credit being created and moved off banks’ balance sheets and onto the balance sheets of nonbank financial intermediaries. This new form of liquidity changed the very nature of the credit beast. What now determined credit growth was risk appetite: the readiness of companies and individuals to run their businesses with higher levels of debt.”
The banks have been creating trillions of dollars of credit (by originating mortgage-backed securities, collateralized debt obligations and asset-backed commercial paper) without maintaining the proportional capital reserves to back them up. That explains why the banks were so eager to provide mortgages to millions of loan applicants who had no documentation, no income, no collateral and a bad credit history. They believed there was no risk, because they were making enormous profits without tying up any of their capital. It was, quite literally, money for nothing.
Now, unfortunately, the mechanism for generating new loans (and fees) has broken down. The main sources of bank revenue have either been seriously curtailed or dried up entirely. (Mortgage-backed) commercial paper (ABCP), one such source of revenue, has decreased by a full third (or $400 billion) in just 17 weeks. Also, the securitization of mortgage-backed securities is DOA. The market for MBSs and CDOs and other complex bonds has followed the Pterodactyl into the history books. The same is true of structured investment vehicles (SIVs) and other “off balance-sheet” swindles, which have either gone under entirely or are presently withering with every savage downgrade in mortgage-backed bonds. The mighty juggernaut that was grinding out the hefty profits (“structured investments”) has suddenly reversed and is crushing everything in its path.
The banks don’t have the reserves to cover their downgraded assets and the Federal Reserve cannot simply “monetize” their bad bets. There’s no way out. There are bound to be bankruptcies and bank runs. “Structured finance” has usurped the Fed’s authority to create new credit and handed it over to the banks.
Now everyone will pay the price.
Investors have lost their appetite for risk and are steering clear of anything connected to real estate or mortgage-backed bonds. That means that an estimated $3 trillion of securitized debt (CDOs, MBSs and ASCP) will come crashing to earth, delivering a violent blow to the economy.
It’s not just the banks that will take a beating. As Professor Nouriel Roubini points out, the broker dealers, the investment banks, money market funds, hedge funds and mortgage lenders are in the crosshairs as well.
“Non-bank institutions do not have direct access to the Fed and other central banks liquidity support and they are now at risk of a liquidity run as their liabilities are short term while many of their assets are longer term and illiquid; so the risk of something equivalent to a bank run for non-bank financial institutions is now rising. And there is no chance that depository institutions will re-lend to these to these non-banks the funds borrowed by central banks as these banks have severe liquidity problems themselves and they do not trust their non-bank counterparties. So now monetary policy is totally impotent in dealing with the liquidity problems and the risks of runs on liquid liabilities of a large fraction of the financial system.” [Nouriel Roubini's Global EconoMonitor]
As the downgrades on CDOs and MBSs continue to accelerate, there’ll likely be a frantic “flight to cash” by investors, just like the recent surge into US Treasuries. This could well be followed by a series of spectacular bank and non-bank defaults. The trillions of dollars of “virtual capital” that were miraculously created through securitzation when the market was buoyed-along by optimism will vanish in a flash when the market is driven by fear. In fact, the equity bubble has already been punctured and the process is well underway.
Mike Whitney lives in Washington state. He can be reached at fergiewhitney@msn.com.
http://www.oilweek.com/news.asp?ID=13188
The Edmonton correction is almost over. Ooh Aah I’m in denial. I’ll save the naysayers from having to respond. I’ll seek help soon. No really I’m sick very sick.
Saskatoon may be pegged as more expensive than Edmonton in the next RBC affordability index. The Saskatchewan Advantage is gone and what… you say BC costs more than Alberta too? Oh what am I going to do? Guess I’ll move out East and start flipping burgers.
I find it interesting that in recent years I hear more and more global economic analysts comparing Alberta to Dubai. I read countless stories on Alberta’s great economic future. Yes here and there someone cuts a few hundred million in spending but there is billions of new spending to take the place. Some oil companies say they are cutting spending because of Royalties but in reality are really increasing it quietly.
Alberta is doomed!!! It only has the best economy in this half of the world. Quit trying to convince everyone the sky is falling. It doesn’t take much brains to realize that it isn’t. The herd mentality has been bearish on Edmonton lately but the herd is changing direction very soon and when it does you don’t want to get trampled. I’m not calling for huge price increases but not a decline. Just my thoughts.
When 85% of your exports go south, you better look south to see what’s about to happen here. We are not immune, we are just delayed as we are delayed in everything that happens or any new gadget to hit the market. Same ol story.
piccaso1881
I’m telling you, don’t go back to the USA, it’s much better here, no deficit around here, no price bubble, no subprime, home prices stable ( medium for SFH $370,000 on Bob Truman’s site, condo $240,000 ), no loss, no headache,
nothing to worry about.
Just like we were delayed in the housing boom, we are delayed in the housing bust.
I can’t even come close to making the kind of coin up here that I make down there and my expenses are half the cost to boot. It’s a no brainer.
Oh ya, it’s a hec of a lot warmer and nicer too!
I like the median price here:
http://www.bobtruman.com/Edmonton_SFH_stats/page_1918017.html
Oh Piccaso, I hope you never leave this blog. When I feel bad I just read your posts and I can’t help but chuckle. If real estate is only worth buying in warm climates then explain New York. It gets cold and dirty there in the winter time. Try to buy an affordable condo or home there. Sooner or later, us Albertans are going to have to realize that homes are not going to be cheap like they used to be ever again. This slow down we have right now is like a gift from God to get a last chance good deal before prices get back onto a even climb. We have had the big run that we won’t see for a decade or so but homes under $200k? Get real. I still maintain that the problems of Alberta is a labour shortage. We need people. People to buy the homes and fill these various jobs. Now Piccaso, if you could get a job in Florida for the same money you make here and you hate it here, then you are lying about something cause eveyone knows you would be ga ga ga gone!!! Don’t forget to write or send a post card for your new $69k condo on the beach in Miami! P.S. say hi to Shaq for me.
Edmonton sales have dived. Only 375 sales in the last 20 days of December 2007 compared to 1261 sales in May 2007. Year over year sales are down trememdously.
It is imperative that the vacant properties be taken off the market before the housing situation in Edmonton even begins to recover.
This is going to get a lot worse before it gets better.
car,
Same money? Try a lot higher bud. It’s Xmas and my TN Visa needs renewed that’s why I’m back. I’ll be blowing this hyper inflated frozen snow bank of a town come Jan 6th.
This slow down is a last chance to get in the Edmonton market? Why would you want in? You sound like a realtor. To funny!
Unfortunately Radley77, aka, Joshua and about half a dozen aliases we had to delete your comment under someone elses name. I have enjoyed some of your posts but I can’t condone that type behaviour. I don’t want to have to police this type of behaviour but unfortunatley you have left me no choice.
Sheldon
Picasso, your a sucker for punishment. I had a friend like you, where it did not matter how bad you kicked the crap out of him, he came back because his ego was inflated. Sometimes a battle is lost, spare yourself, please. I actually appreciate your post on an article by Mike Whitney. It was only thing you posted that was of value, because you didn’t write it. Congrats, keep posting other people work, it shows me that your not illiterate.
Picasso, why would you call me a realtor? I don’t call you names! Believe me I am not a realtor. I want into the RE market cause I live here and want to live here. I hate rent so you know, gotta buy. I noticed you ignored my question about cold frozen snow bank New York. Berlin Germany gets very cold in the winter too, think it is cheap RE there? It’s OK though, I understand where you are coming from, I just don’t buy into your theories, thats all. I like your wierd sense of humor too, keeps us all on edge. I was wondering what you can make so much money doing in a place that is going into the toilet economically over in Florida? Do you do repossessions? Ya, maybe you will be busy then! You sure sound like a hypocrite when you say Edmonton sucks and Florida is great even though you admit the States is in for a big time slow down. Is this how you have invested through your life, chasing a recession? Good luck with that. Maybe you will really show us how smart you are when you move into your Ford P.U. Come on, you think I’m funny too right! P.S. You like me don’t you?
I don’t dislike anybody car. I’m actually very easy going guy. I just kill time on these sites and enjoy being a thorn in the bulls side.
I’m a telecom engineer and the work is plentiful in the U.S.
Albeit it isn’t like Canada where you have 2 main players being Telus and Bell.
You can’t compare Edmonton to New York or Berlin, come on bud. Your comparing hicksville to world class cities.
New York and Berlin can get dumped on with snow and cold but the next day it’s melting. In Edmonton your in a friggen ice cube 6 months a year. It’s the most northern city of any size in the western hemisphere.
Florida is made up of people from other places and 80% of them are from N.Y.
Not including Miami of course, your in the minority crowd if you don’t have black hair and speak English.
Picasso, your quite right it is not a fair comparison but what is? Edmonton and Calgary? That is tainted just cause they are in the same province experiencing the same thing. Anyways, I was just making the point that weather doesn’t really have much to do with RE prices. The economic weather sure does though. I just think you have under estimated E town a little. Maybe it is just cause you’ve been here so long. If you live or move to Florida eventually you will find big fault with that place too right?! Edmonton or where ever you live is what ever you make of it. It can suck if you want it to or it can be great if you think about it. I agree with you about hating the cold but hey, thats why we install heaters and live on the South side of town, close to YEG!!! I think you and I completely disagree on alot of issues here but I do appreciate your posts. Nothing ever offends me and I love to debate anything. Realistically, Edmonton will become a more international big city and lose it’s hicksville status and mentality. That is why a person who wants to buy here should really buy smart, not cheap, but smart. Good locations, well built and attractive homes/condos. The speculators just threw everything out of wack. Time will bring everything back to sanity. It’s like water, it has been sloshing around for so long now, no one knows where it will find equilibrium. When you get to Florida send me an address so I can come visit you and share some beer debating anything else you choose.
Hey Picasso, whats the point of this comment…
“Not including Miami of course, your in the minority crowd if you don’t have black hair and speak English.”
What does this have to do with real estate? Stick to posting other people work, you look smarter when you do.