Are stubborn sellers killing the real estate crash?
Garry Marr | Jan 12, 2013 7:00 AM ET | Last Updated: Jan 11, 2013 2:40 PM ET
So you’re sitting on the real estate fence, not buying at what many consider ridiculously high prices — the product of a 14-year boom that has only seen one mild pullback during the recession in 2008.
Like many others, Toronto public relations manager Megan Vickell is sitting on the real estate sidelines dreaming of bargains to come.
What direction are home prices headed? Depends on who you ask
After a dropoff in sales, the debate over the future of Canada’s housing market has come down to an argument over how much prices will pull back
The 28-year-old has never owned a property and is hoping to scoop up a discounted Toronto condo when prices fall off today’s frothy record highs.
“I’m waiting for that bubble to pop that everybody is talking about so I’m not sitting there owning a condo in the city that later everybody else has for a much cheaper price,” said Ms. Vickell. “I mean look at everything that’s being built, who is going to live in all those? There’s lots of beautiful spots out there.”
You can’t blame her for wanting to wait. Research firm Urbanation Inc. says Toronto’s average condo prices climbed to as high as $407 per square foot in 2012, a sharp rise from the $229 per square foot fetched in the first quarter of 2003.
The picture is not much different nationally. The average sale price across the country was $364,260 over the first 11 months of 2012, according to the Canadian Real Estate Association. Compare that to beginning of this boom when the average sale price across the country was $158,303 in 1999.
But what if the crash never comes?
House prices fall in 10 of Canada’s 11 major markets for first time since 2009
Urbanation says condo prices dropped 3% in Toronto in the fourth quarter from the previous quarter and Canada-wide home prices were down 0.8% in November from a year ago. But, so far, that’s about it.
The one thing missing from the market, for all those people looking for a crash, is a catalyst or an event that will force people to reduce their asking prices. Before this housing market burns up in flames, it needs some type of spark.
I’m waiting for that bubble to pop that everybody is talking about
And, if you talk to some people, that key event — two that come to mind are a spike in interest rates or job losses — is not happening any time soon.
“Crashes don’t just happen in a vacuum, you need a trigger,” says Benjamin Tal, deputy chief economist with CIBC World Markets. “I can’t point to any crisis in the history of crashes that didn’t have a trigger.”
In the United States, the trigger proved to be a sub-prime market and the expiry of teaser rates that jumped as much four percentage points on some mortgages. Overnight, people couldn’t afford their homes.
“If you have a gradual increase in the rates this doesn’t happen,” says the economist, who predicts a decline in prices but only in the 5% to 10% range. The real estate industry is on the same page, continually calling for a soft landing.
What has people like Ms. Vickell excited and looking for a major decline in prices is the massive drop off in sales activity in some major markets. Nationally, sales were down almost 12% in November from a year ago. Vancouver remains the leading example where sales were down 22.7% in 2012 from a year earlier.
So you’re sitting on the sidelines, not buying at what many consider ridiculously high prices — the product of a 14-year boom that has only seen one mild pullback during the recession in 2008. But what if sellers simply refuse to lower their price, something that has happened so far in the markets where sales are drying up very fast. What’s next?
“I think stagnation is a good word for what will happen, it’s what we saw in the market from 1992 to 1997,” says Mr. Tal.
Peter J. Thompson/National PostMegan Vickell, who is waiting for the condo market to ease before purchasing, stands in front of condos on Toronto’s Yonge Street near Eglinton, Thursday January 10, 2013.
The CREA stats show the market nationally — albeit real estate can be a very regional story — did not move all that much in the 1990s before it took off in 1999. There were some corrections in the 5% range on a yearly basis but average prices from a bottoming out of $142,091 in 1990 had climbed to $154,768 by 1997 — an 8% increase that is paltry by today’s standards for such a long period.
“We are going to see a correction and the question is ‘what will emerge from that,’” said Mr. Tal. “The scenario is the market will not be strong, it will be stagnant.”
In this scenario, instead of people of people selling in a panic, they pull their homes off the market, waiting for a better day, refusing to sell at distressed prices. New listings and active listings will start to shrink.
“In the U.S., you had to sell your house because you were delinquent. If you tell me tomorrow the unemployment rate [in Canada] will jump to 12%, we will have a crisis,” said Mr. Tal.
People are not forced to sell, they are staying with their price
Don Lawby, chief executive of the Century 21 Canada, and a charter member of the club that doesn’t see home prices dropping anytime soon, can’t see any desperation from sellers.
“The economy continues to be okay, people have jobs, interest rates are low,” said Mr. Lawby. “Historically, anytime when prices dropped it was tied to high unemployment and interest rates. It’s not the case today, people are not forced to sell, they are staying with their price.”
Still, Ms. Vickell’s patience may pay off. Even Mr. Lawby concedes that the condo sector may be hit. Developers who already have buildings under construction may be forced to scale down projects or lower prices on unsold units.
“They are going to be throwing in packages to sell,” says Mr. Lawby. “But the average homeowner, without an economic event, they have no need to sell.”
David Madani, Canada economist with Capital Economics, takes a more extreme view, predicting a price-drop of 25% in the next year or two across the country. Rapidly flagging sales are a sure sign his prediction will come to fruition, he says.
“We have to tell our clients ‘you don’t necessarily need a trigger.’ You reach a threshold point where people get afraid, where valuations have lost touch with fundamentals,” he says, adding there is a standoff between buyers and sellers before any crash. “Sellers eventually realize the market has shifted beneath them and they capitulate and drop their asking price.”
But Mr. Madani’s calls for a crash are being largely drowned out by the real estate industry’s steady calls for a soft landing.
Gregory Klump, chief economist with CREA, says history supports the notion that some sort of major event is needed to create a housing market collapse.
“In the late 1980s, it was a case of a spike in interest rates, in late 2008 and early 2009 it was a massive layoff,” said Mr. Klump. “You need a massive and extended economic shock and none of that is in the forecast.”
In the interim, people waiting for a decline a major decline in price will have to keep waiting, says Mr. Klump. Only time will tell if it ever materializes.
Statistics: Posted by yoda — Sun Jan 13, 2013 11:52 am
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How To Cripple the Real Estate Market in Five Easy Steps
March 19, 2012
Central Planning has crippled the real estate market to "save" their core constituency, the banks.
If you were head of Central Planning (howdy, Ben!) and were tasked with crippling the real estate market, here’s what you would recommend.
1. Choke the market and banking sector with zombie banks. Central Planning creates zombie banks in one easy step: it allows insolvent banks to mark their impaired "real estate owned" to fantasy rather than to market. This enables the banks to survive in a deathless state, propped up by free money from the Federal Reserve and lax regulations that enable fantasy accounting and all sorts of off-balance sheet trickery.
Zombie banks have no incentive to auction off their holdings of real estate with defaulted, underwater or otherwise impaired mortgages, for having the market discover the price of these properties would immediately reveal the insolvency of the bank as properties it held on its books at (say) $400,000 were actually only worth $200,000. Since the mortgage is (say) $350,000, then the bank would be forced to recognize a $150,000 loss (actually more with transaction fees, repair of the derelict property, etc.).
If the bank’s entire portfolio of phantom-value properties was auctioned off or its price discovered by the market, the bank would be declared insolvent and closed.
So instead the zombie banks’ impaired properties clog the market, unlisted, unsold, indefinitely held off the market until unicorns arrive and valuations return to bubblicious 2006 levels where the bank can unload them with no loss.
Since those valuations haven’t arrived, millions of properties are being held off the market. This "shadow inventory" is well-known (tens of thousands of people are living rent and mortgage-free in homes that the banks have yet to even put in the foreclosure pipeline), so no one has any confidence that "the bottom is in." Confidence cannot be restored until the market clears the inventory and a real bottom is established.
This destruction of confidence undermines the entire market. Zombie banks create zombie valuations. Who can say valuations won’t decline once the shadow inventory finally hits the market?
Keeping zombie banks alive via bogus valuations and shadow inventory of derelict and defaulted homes has another consequence: banks themselves cannot be confident that prices won’t decline further, so it makes no sense for them to put capital at risk by issuing mortgages on real estate.
2. Have the central bank (the Federal Reserve) buy up $1 trillion in toxic, impaired mortgages. If these mortgages were such a great deal, then why didn’t private buyers snap them up? Exactly: they were fetid garbage no private buyer would touch except at steep discounts that would have sent the banks into insolvency. (That isn’t allowed in crony-capitalist State-run economies.)
The market was thus denied the opportunity to discover the price of all this mortgage debt, and this effectively destroyed the private market for mortgages. Literally 99% of all mortgages in the U.S. are guaranteed by the Central State. Suppressing market price discovery works just as well in the mortgage market as it does in the housing market.
3. Lower the rate that banks can borrow from the Fed to zero, and then pay the banks interest on all funds deposited at the Fed. I wish we had this option, don’t you? We could borrow $1 billion from the Fed at zero interest, then deposit the $1 billion with the Fed and skim risk-free interest.
But the real-estate effect of ZIRP (zero-interest rate policy) is to lower the mortgage rate to such a low level that it makes no sense to take on the risks and unknowns of real estate valuations for such a paltry return. After all, what if the bank loans $300,000 on a $400,000 home, the value subsequently drops to $300,000 and the buyer defaults? The bank will lose capital it can’t afford to lose dumping the property at auction.
Better to avoid the mortgage market altogether by refusing most applicants as risks–and given the high debt levels of most households, they may indeed be poor risks.
4. Try to prop up the housing market by giving poor credit risk buyers loans with only 3% down. This generates a new pool of ready buyers, but since the government is guaranteeing the loan, qualifying is easy and the buyers only have a few thousand dollars of skin in the game. This means defaulting is not very painful, especially if it takes the lender a few years to foreclose on the property.
The net effect of subsidizing poor credit risks to buy houses is that another pool of uncertainty is created, as these buyers are defaulting in droves, dumping inventory that had just been cleared back on the market. (The default rates of FHA loans is skyrocketing, and now the taxpayers will have to bail out the FHA.)
This is what happens when you try to prop up the market with unqualified buyers and 3% down mortgages–those buyers bail out in huge numbers and the homes return to the inventory. The clearing of inventory was as phantom as the real estate valuations on the banks’ balance sheet.
5. Load young people up with the equivalent of a mortgage in student loans. That insures that the majority of potential new homebuyers won’t be qualified to buy a house–they’re already indentured to the banks for student loans. Those fortunate few who get good-paying jobs will qualify for a mortgage when they’re getting grey hair; most will never qualify, having been buried by impossible-to-default student loans.
OK,let’s see how our Organs of Central Planning are doing: check, check, check, check, check: a perfect score! they’re doing everything possible to cripple the real estate market.
Do they care? Of course not; the only goal is to keep the zombie banks alive, regardless of the cost to the nation. Great work, Ben, Barack, Timmy and the rest of the gang at Central Planning: thanks to your policies, the real estate market will never clear and therefore it can never be restored to health.
Statistics: Posted by yoda — Mon Mar 19, 2012 12:36 am
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How Rick Santorum got a $2 million Virginia estate
bySteve Contorno Examiner Staff Writer
The home of Republican presidential candidate Rick Santorum is seen Wednesday in Great Falls, Va. (Graeme Jennings/Examiner)
Rick Santorum built his presidential candidacy on the premise that he is very different than wealthy, establishment front-runner Mitt Romney, that he is someone who has faced the plights of the average American. Among the hardships Santorum claims to share is an underwater mortgage, the kind that’s forcing millions from their homes.
"The value of my house is a fraction of what it was when I bought it," the former U.S. senator from Pennsylvania recently told Michigan supporters.
But the Republican presidential contender’s housing situation is quite unlike the one so many other Americans actually face, according to experts and documents obtained by The Washington Examiner.
Santorum bought his $2 million, five-acre home in the tony Washington suburb of Great Falls, Va., in August 2007 through a trust in a deal aided by a high-profile tax lawyer who serves as an officer for one of the largest homebuilders in the country.
Tax assessments show a nearly 25 percent drop in the house’s value since its peak in early 2008 just after Santorum purchased it. Yet, while most underwater homeowners can’t get refinancing needed to save their homes, Santorum got several new loans at reasonable rates over the years. And while millions already lost their homes or risk that daunting prospect, Santorum faces no such threat.
There was nothing illegal about how Santorum bought his house, but, as Benjamin Leigh, a top real estate lawyer in Northern Virginia, put it: "It’s not what Main Street does."
"What he did fits the bill for a Washington power type," Leigh said.
Santorum’s Virginia home is actually one of two he owns. The other is in Pennsylvania, though political critics have long complained that he doesn’t live there and keeps it only to maintain residency in an area he once represented in Congress. His family lived in Leesburg, Va., while he served in the Senate.
Santorum bought the Great Falls house in 2007 after losing a re-election bid in Pennsylvania. But rather than buy it outright, as average homeowners do, Santorum got help from a top officer of one of the nation’s largest homebuilders, James Sack of NVR Inc., to set up a special trust that actually bought the home.
While trusts are common estate planning tools that help protect family property, Virginia real estate experts said Santorum’s Creamcup Trust served mainly to hide the fact that Santorum was buying a bigger home just outside the Washington Beltway even though he no longer served in Congress.
"That’s somebody not wanting to be transparent," said Gant Redmon, a real estate lawyer in Northern Virginia.
The Santorum campaign would not comment on his housing situation. Spokeswoman Alice Stewart said no voter had brought up the issue to the campaign and questioned why it was a story. Sack, the attorney who helped set up the trust, did not return phone calls.
But documents show that the Creamcup Trust, named for the privately owned street on which the home is located, took out the $1.5 million mortgage on the 4,900-square-foot house in 2007, just as a national housing bubble was about to pop. The use of the trust hides from public view who put up the hundreds of thousands of dollars that the Santorums needed as a down payment, though the couple sold another home in Leesburg before buying the Great Falls house. Santorum and his wife, Karen, also took out a $200,000 loan from the same bank that granted the Creamcup Trust a mortgage, repaying it just a year later.
Two years after buying the house, which features an 800-square-foot outdoor swimming pool and a 704-square-foot basement rec room, the Creamcup Trust in 2009 transferred the property to Santorum and for the first time his name appeared on the deed. The $1.5 million mortgage taken out by the trust was paid off, though not until a year later.
Though tax assessments show that the house declined in value by nearly 25 percent, Santorum was able to secure a nearly $1 million, 30-year mortgage in February 2010, records show. Within the year, he secured a second loan at a more favorable 4 percent interest rate and paid off the first loan, according to records.
The house’s value is still higher than what Santorum owes on it, which means it’s probably not underwater in the same sense as the 11 million Americans whose homes are worth less than what they owe, experts said. It’s those people, not Santorum, who risk losing their homes.
"The bank might foreclose. They might try to sell. They’re going to have to bring money to the table," Leigh said. "What happens with most people is they’re going to give the keys to [the] lender."
Santorum’s strategy: Be average
Former Sen. Rick Santorum has sustained his presidential campaign by besting Mitt Romney among working class, conservative voters, who feel an affinity for the former Pennsylvania senator that they don’t feel for Romney, the party’s front-runner. Santorum courts those voters with speeches peppered with stories of a childhood in blue-collar Pennsylvania and a coal-mining grandfather whose "hands dug freedom for me." He talks about how leaving a lucrative job to run for president forced his family to start "spending down our savings" just as three of their seven kids are preparing to enter college. And he pledges to create new working-class jobs in manufacturing. That appeal to average Americans paid off on Super Tuesday, when Santorum won three states and nearly stole Ohio from Romney. Polls showed that Santorum’s strength came from voters who earned less than $100,000 a year, a group that made up nearly 70 percent of the Ohio electorate, and those who describe themselves as very conservative. And that gap only widened in Southern states like Tennessee and Oklahoma, where Santorum dominated.
Statistics: Posted by yoda — Fri Mar 09, 2012 9:37 am
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I’d like to make a statement about the growing crisis in the Americas. It’s time for justice. It’s time for liberty. It’s time to end the ludicrous and archaic commitment to colonialist ideology. It’s time Sean Penn handed his Malibu estate back to the Mexicans.
Sean Penn pretends to be a friend of the developing world, but really he is not. To be fair, his recent call for the Falkland Islands to be returned to Argentina was an admirable strike against capitalist imperialism. Moreover, I and the entire North Korean press corps cheered him on when he flew to Iraq to parley with Saddam Hussein, or when he spoke about Hugo Chavez in such glowing terms. But there have always been hints that his sympathy isn’t really with the workers at all. Aside from that time that he spent 32 days in prison for hitting an extra, his net worth of an estimated $150 million is a bit of a giveaway.
His continued occupation of Malibu is an unacceptable mockery of national self-determination. The Mexicans owned that stretch of real estate well into the early 19th century and it was stolen by the Americans in a naked act of imperialist aggression. America’s claim over Malibu is tenuous and rooted in patriarchy. Sean Penn’s house is a mocking reminder of that brute chauvinism, with its high white walls and spacious interiors. Its swimming pool is an insult to the honour of the Mexican people.
Now, I know that some will say that the Mexicans never actually lived on Sean Penn’s estate. But how many of them have worked there? Think of the maids, the cleaners, the butlers, the pool boys, the cooks, the gardeners. Think of the sweat that has dripped pouring Martinis, or the blood that was spilt pruning the roses. Truly, Sean Penn’s estate is part of Aztlan.
If diplomatic discussions break down, who could blame Mexico for resorting to military action to reclaim Mr Penn’s estate? Not I. Some might say that it would be an act without legal sanction or genuine historical cause. But that’s not the point. The people of Mexico want Sean Penn’s estate, so they should have it. Because stealing stuff from the rightful owners is the only way to combat colonialism
Statistics: Posted by yoda — Wed Feb 15, 2012 7:02 am
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