Tuesday, March 20, 2007

Free For All

It's a free-for-all kind of day today.

We could discuss:

Inflation - it's up
Federal Budget - spending is up, taxes are down (kinda)
Housing - it's silly - inventory is rising, sales are declining
Markets - ambivalent

You lead the way.


22 comments:

scoop said...

What will Bernanke say tomorrow:

Some problems in subprime lending, but it shouldn't affect the broader housing market...

House prices have declined a bit but are stabilizing...

Inflation is high but not out of control...

I'm calm, I'm sleeping fine, you be calm too. Please.

Freako said...

Nice graph, Mohican. I think we are about to see a U.S. style build up. Prices? In the U.S. a year of huge inventory only caused a low single digit declines. However, it took sellers (and buyers) a while to realize that the gig was up. Vancouver's sellers may learned a thing or two from the fiasco down south. Or maybe not.

It feels as we are herding a very dumb cow. Subtle clues are ignored. Obvious fundamental facts are ignored. This cow may keep going until there is absolutely nowhere to go but back (down).

Even in the U.S., it is puzzling. The builders and materials suppliers took their medicine last May, as soon as the writing was on the wall. But why oh why didn't the subprime get hit until now? Obviously the dot connection skills leave something to be desired. And when subprime got hit, a big rush of analysis which deem that it will be "contained". The same analysis also goes by the assumption that prices will be flat in 2007. I don't think they even see the dots, so how could they possibly connect them. How could this industry have become so myopic and non-forward looking?

Freako said...

Also from the graph, I can see that the buildup over the second half of last year is what kept prices in check. Of course, it could be the other way around. Feel like adding sales to the same chart?

Also appears that there wasn't enough early inventory to meet the early spring rush, and caused the monstrous appreciation for February. That could go either way. It could be a continuing trend, or a temporary pop that will fizzle out. I imagine that those still in the market after all these years have gotten really tired of being outbid, so they made unconditional offers early. Are there more of these people, or was that it?

OnTheIsle said...

"I think we are about to see a U.S. style build up. "

I agree freako,I sense a real change in the air this past 2 weeks and I think what smart ones are left who were in it to make money and get out at some point are listing their places now. The debates have really heated up on the blogs too, a real bull defiance but a real bear case made with facts to back it up.

I posted on the Van Condo board a link to a CNN article about the Alt A's being the next wolf in the closet,people who have good credit but have screwed up and over extended themselves. Tell me there aren't any in Canada in the same boat cause I know a few.

My girlfriend has Good Morning America on every morn and can't help but overhear just about every day a segment on foreclosures and how you can profit from them or the family that just got foreclosed on and the damage it has done to peoples lives. There has to be some psychological effect creaping into this madness here that BC is immune. I think the rug is being pulled out from under this market as we speak.

OnTheIsle said...

Forgot to mention,even the perception and TV talk that interest rates "might" go up will be very telling over the next few weeks. Will the buyers back off ? or will they feel pressured to buy by their agents ? Will a quarter point be enough to scare them off ? How about 2 or 3 more of them ?

The BMO analyst on BNN admitted he was caught totally off gaurd by todays inflation numbers and I expect to see the interst rate hike story to really snowball here.
Things are starting to get real interesting.

Jesse said...

"I imagine that those still in the market after all these years have gotten really tired of being outbid, so they made unconditional offers early. "

Anecdotally, this happened to one couple I know. They were burned 2 years in a row not buying a place before the spring price increases. They are also very good straight-line extrapolators using 2 data points. But they can afford the place they bought and waiting until next year looked very scary to them.

mohican said...

freako - great comments and I added the sales data to the chart - extrapolate what you will!

We know the supply side is coming into the picture and now we just have to see if the demand drops off. Psychology, US events, interest rates, unemployment, lending restrictions can all play a part on the demand side and it is a little trickier to figure out. We have front row seats and a great program to read while we wait for the story to unfold.

Jesse said...

"Will a quarter point be enough to scare them off?"

I think tighter lending standards will kill the market more than small rate increases. Rates going up by 50bps is only hundreds of dollars per month. Usually people can scrimp for that if pressed into a corner. Read some of the US blogs about how mortgage approvals were cut out below the knees even when rates barely budged.

Freako said...

"Psychology, US events, interest rates, unemployment, lending restrictions can all play a part on the demand side and it is a little trickier to figure out."

LIke I said, there is absolutely no dot connection going on. A good bubble popping analogy is musical chairs. Usually in game, the participants like to stay as close o the chairs as possible, ready to pounce on an instant. Our present case seems more like this: Music stops. People keep walking. One guy realizes that it stops and is thinking about what to do. The people behind him shove him. One mans sits down. The others keep walking wondering what his problem is. Another sits down. People keep walking. Another and another and another. And they keep walking. The last guy, the one without a chair, is still walking, wondering why everyone is sitting down. Anyhow, that's how it feels. Then again, the music hasn't stopped yet, but there is absolutely no anticipation.

Freako said...

"I think tighter lending standards will kill the market more than small rate increases. Rates going up by 50bps is only hundreds of dollars per month."

At our affordability levels, definitely. Marginal pricing as always. Being denied a loan, takes a buyer right out of the market. The few hundred dollars a month payment increase that a 50 point hike will cause merely puts a lid on how much they can borrow.

I know very little about our subprime market, but surely CMCH will keep insuring as per their mandate?

Freako said...

Thanks for the chart update. Clearly the inventory build up in late 2006 was caused by falling sales rather than a listings glut.

So why did sales fall? One would suspect affordability wall. But then why the Feb 07 surge? As suggested, maybe a concerted effort by a small cohort of previously denied home buyers who jumped the gate with juicy bids. If so, sales should taper soon, and relatively sharp price drops in the next few months, perhaps yoy price drops by June as I had expected.

OnTheIsle said...

"I think tighter lending standards will kill the market more than small rate increases. Rates going up by 50bps is only hundreds of dollars per month."

At our affordability levels, definitely. Marginal pricing as always. Being denied a loan, takes a buyer right out of the market. The few hundred dollars a month payment increase that a 50 point hike will cause merely puts a lid on how much they can borrow.
-----------------------------

So what happens in this scenario. You own a home with a big honkin mortgage and when renewal time comes up this year and your up a couple of points and several hundred bucks or more extra are required per month. You know if you scrimp and scrape you can just make it by but due to brand new tightened lending regulations by our always friendly bankers they say sorry you don't qualify and your house is in a hard to sell crap neighborhood ? Lending rules are rules regardless wether you are already owning or not right ?

Jesse said...

"Lending rules are rules regardless wether you are already owning or not right?"

Rules are rules but there is also sunk cost. The lender has an interest in maximising return, so they try to collect anything from the defaulted borrower (through collection agencies, refi or foreclose). Damned if you do, damned if you don't.

I think when line items transfer to the other side of the ledger there is a fundamental shift in behaviour and we could be witnessing this now in the US. I think the last thing these lenders will do is take on more perceived liabilities.

rentah said...

Thanks for the discussion, all.

As you brought up the stock markets, mohican, here's my two cents worth:

Get ready for another string of very significant down days, starting any day now.
Emerging markets, TSX, Dow, Nasdaq will plunge.
It's almost as if the recent jolt didn't happen.
Complacency has returned as evidenced by volatility indices rapidly (too rapidly) returning to lows.
There is no fear out there.

This seems to me to be closely related to freako's guy without a chair, wandering around without noticing his predicament.

rentah said...

mohican:
Thanks for posting the VIX graph.
Keep in mind that the VIX spikes to 50 when there is fear in the marketplace (near bottoms).

Freako said...

"This seems to me to be closely related to freako's guy without a chair, wandering around without noticing his predicament. "

The problem is that ostensible the music hasn't stopped. Not our music anyways.

How about a forest fire analogy. You see a fire in the distance. But it is not here, so you go about your business. It gets closer, but it is not here, so you go about your businesses. A mouse, squirrel and a racoon come running by. Slightly concerned you turn on the radio, where Ranger Lereah assures you that the fire has reached maximum size, so you go about your business. A deer, moose and a bear go running by. On the radio, Ranger Lereah announces that the fire has again reached maximum size. Ranger Lereah and every animal in the forest come stampeding by. Lereah shouts that the fire has now been contained, so you go about your business. Finally the fire comes roaring in and surrounds you in a flash. Slapping at the flames singing your ass, you humbly yell "fire" while looking for the government rescue helicopter. Since none is forthcoming, you lie down and wait for the fire to burn itself out. Weren't you told that "fires always burn out"?

rentah said...

Wow, freako, I could feel the flames and smell the smoke!


That one deserves a spot up there in the Vanc Housing Bubble Metaphor Hall of Fame.
---
Yup, the band plays on.
Tops are low frequency events, and here we are watching for them every minute of every day.
But one has to do something, right?

mohican said...

freako - love those metaphors

I like the musical chairs metaphor - we are playing musical chairs - everyone else doesn't know what they are playing. Most think they are playing 'pin the tail on the donkey' and are blindly wandering the room, getting in other's way and poking them to utter annoyance - they are deaf so they don't even hear the music. Other people are playing 'pinata' and are blindly and wildly swinging sticks around hitting people at random wondering why the damn music is so loud. Everytime they hit someone they think they are being successful but they are just really ignorant.

Here we are bubblewatching slowly walking around the circle of chairs and trying not to get our head taken off or poked by some blind ignorant soul.

The masses wander the room blindfolded with little pins wondering if they are close to the donkey. Sometimes they get wacked by the 'pinata' players and some of the people playing musical chairs are yelling at them but they can't hear or see so it just frustrates the musical chairs players.

The real estate agents, mortgage brokers, developers, etc are the pinata players. They have a big stick and they know they can hurt people but they are blind and ignorant. They don't know they are hurting people since they think they are being successful at the game.

rentah said...

So!

The FED changes the language by a few words such that they seem to now have a more dovish bias, the markets rocket upward at this news, and the VIX spikes down to 11.23.
A frenzied outbreak of complacency!

(Don't expect it to last).

OnTheIsle said...

By the sounds of the commentary this is a one day wonder and most likely will be the high for the year. The housing decline is not going away anytime soon. Even a comparison by a trader that this is a dot.com repeat and the loan debacle will be the straw that breaks the back,.... so any bulls better enjoy today while the can.

Could be a good time to buy some calls on the VIX in the next day or so once the enthusiasm subsides.

Freako said...

OT This just in: As per Bubble Tracking Blog, Phoenix shot up to a new inventory record, 56,053. Fourteen months ago, it was at 32,512. Being that this is the first day of spring, there is plenty of time for additional inventory. Where will it stop? 60K? 65K? What will happen to prices? Foreclosures?

Jesse said...

If we're onto analogies, here's one.

Dude notices a growth on his back. He convinces himself there is nothing to worry about; he's had them before and they have gone away on their own. Two weeks later the growth is bigger. Dude knows there is something wrong but it isn't affecting his life and nobody else is complaining. He knows he needs to go to the doctor but there is still a chance it will be OK. A month later dude has a sharp pain. OK, now he is worrying. He knows he is likely going to get very sick very soon but he doesn't want to know the truth. Eventually his wife convinces him to go see a doctor and after some tests the doctor says it's a cancer. Dude wants a second opinion, and a third, then a fourth. He is still in denial. And, hey, doctors have been wrong before so it could still be OK.

Right now in the US a doctor has diagnosed the tumor. Dude is still in denial. He will need more doctors and maybe an emergency trip to the hospital to ultimately convince him otherwise.

In Canada there is a growth, but it could still go away if dude ignores it.