Saturday, April 18, 2009

The Spring Bounce

We have been hearing reports about Vancouver house prices stabilising in recent months. Are we at bottom or is this a bear market rally, the so-called "spring bounce"? The Pope put up an interesting graph of Sacramento house prices, where there were two such spring bounces before a regression to more price drops. It appears there are other markets that have exhibited a temporary bounce up in sales before returning to falling prices. Below is a graph of some notable American markets' prices:


Cities with some semblance of a bounce include: Seattle, Portland, San Diego, and San Francisco. Cities that did not have a spring bounce include: Miami and Phoenix. Note Vancouver's bounce looks sharp because we are using the benchmark where the other cities use the Case-Shiller HPI, which averages 3 months' worth of data.

There is no credible evidence to make me believe we are NOT witnessing a "spring bounce". The fundamentals point to lower prices and, while Vancouver may not see as meteoric a fall as did Miami, I am expecting more price weakness in the second half of 2009.

36 comments:

Al said...

I come for the graphs and stats, I stay for the insight. Thank you for your contribution.
MMMMM... Hard data..

RentingSucks said...

It's still a little bit frustrating. I'm afraid that even though we still need to have affordability in line with incomes that we're on the slow painful path to get there. That's really crappy. How long should one wait for this to happen? Anybody else thinking of packing in in and moving? I was born here but 5 more years of waiting is not very palatable.

Strategic Voter said...

Interesting that the Spring Bounce is seen more strongly in cities where there is a winter. I guess there's no bounce in Miami or Phoenix because there's no Spring there.

JimTan said...

Hmmm!

Analogies are comforting. But, they don't predict the future.

Seattle and Portland began their RE downturn when the overall economy tanked. Now, there are signs that the economy is bottoming. Is it not possible that they will limit their losses relative to Miami and Las Vegas?

I see no evidence that their RE will fall for 34 months like San Diego, or by 40% in price like the others.

mohican said...

jimtan - I think you like to see what you want to see. You are correct that we can't predict the future. There is no 'evidence' until it actually happens by definition of course so you won't know that the real estate market has corrected until it has corrected.

I don't see your point as being terribly helpful to that young family trying to buy some reasonable accomodation. It is still unaffordable and will likely be unaffordable until prices come down another 20-30%. Even then, vancouver will still have among the highest real estate prices in North America.

jesse said...

"I see no evidence that their RE will fall for 34 months like San Diego, or by 40% in price like the others."In hindsight, what evidence was there in 2005 in San Diego that prices were too high? While there are differences between SD and Vancouver, there are definite similarities as well.

Fish10 said...

The economy is not bottoming. The rate of decline is dropping.

There is a big difference.

Mohican- once again you have proven why this is the best Vancouver RE blog on the net

igor said...

The Canadian economy will be contracting further for at least next 4 quarters based on the precedents set in previous recessions and tight lending situation: LinkThe wave of buyer interest usually peaks around April according to Google Trends traffic volume on mls.ca website: LinkThe Sacramento County is good proxy warning of the steep drop in prices ahead for Vancouver RE in the next 2 years.

macho slob said...

I never thought I'd see the day when someone would look for EVIDENCE to predict the future, espeially when they're too blind to see it in hindsight.

Stockmarkets may have bottomed, but they have a habit of doing so way before any sings that the economy is bottoming.

TUTAN said...

Predicting the future has been always quite difficult. Trying to apply experience from past situations to interpret current events is always the bigger source of error, simply because history never repeats itself however similar the facts appear to be.

Right now there are several factors that make any reference to the past even more irrelevant. We human societies are exploring uncharted territory.

Here is a short list of my reasons to support this point of view:

1) This "thing" (recession, depression, mess, chose your favorite noun) is global both in geographical extension and cross-sector reach (extraction, manufacturing and services).

2) The amount of "debt" officially accepted worldwide is, at least, 10 times bigger than the global GDP. Even an aggressive repayment schedule will take more than 50 years to clear it and that is excluding new loans required to run this "debt" based economy.

3) The "solution" almost universally adopted by the authorities has been to "create" more money, possibly as false as the previous one that caused this mess in the first place. Good luck with this.

I do not believe that every single person in charge of these actions is a moron, simply because is the easiest thing to believe, but that there is another reason(s) for this crisis to have unfolded.

One reasonabe candidate is the lurking of "peak oil" around the corner. Since the first oil "crisis" in the seventies every single attemp to curve the increase in oil consupmtion by manipulating the prices has proven ephemeral and utterly uneffective. This global crisis has been so far much better to that end.

My two cents, and thanks for this good blog!

TUTAN said...

Correction:
"..the bigger source of error.."
must read
".. the biggest source of error.."

milo said...

Cities with some semblance of a bounce include: Seattle, Portland, San Diego, and San Francisco. The above 4 US cities have more Asians moving there, same as Vancouver BC. New immigrants planning to buy after 2010 were compelled to buy in the last 2 months because of pressure from their banks and mortgage brokers.

JimTan said...
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JimTan said...

"I don't see your point as being terribly helpful to that young family trying to buy some reasonable accomodation."

Huh!

What has that got to do with analytical validity?

Anyway, remember this. 65% in BC are now home owners. Leaving out the transients, indigent and professional renters; homeowners outnumber new buyers by 3 to 1. What is there to be gained by a substantial price fall? Any gain by a new buyer will be offset 3x by a loss among existing home owners.

buff_butler said...

"What is there to be gained by a substantial price fall?"

Not all of those ~65% don't use their house as an ATM and would be generally unaffected by a downturn in prices. Say we were to assume prices were to double again from now what good would it do? Sure some existing RE owners would probably use their equity to double down however the marginal class of society (that 35%) would still have the same affordability base so rent yeild would go down even further aka not sustainable. Currently rental yeild barely covers interest which means people were buying simply on speculation. So a drop in prices hurts the marginal owner but helps both the regular investor and first time buyer. Also your math is wrong... 65% ~ 1/3 therefore homeowners outnumber buyers 2 to 1.

Lastly though the mechanics of the economy don't care about the greater good...

mohican said...

What is there to be gained by a substantial price fall?

Plenty to be gained by more reasonable real estate prices - economic growth for one. Many companies do not locate here because of our high real estate prices and many talented people choose not to move here for this very reason. This leads to an overwhelming mediocrity of talent, innovation, and thought among our greater population over time as the bright and young leave for greener pastures where there is more opportunity, money and a more financially sustainable way of life.

Anecdotally, I was speaking with a local lawyer recently and she was bemoaning the lack of opportunity in Vancouver for talented lawyers. This holds true for many other professions.

Aside from a natural geographic advantage, Vancouver does not have a lot going for it. This advantage can be outweighed by other factors if they get large enough. Witness the cruise industry leaving town because of high costs and burdensome bureaucratic policies.

Conversely, I ask, besides higher consumption by existing overleveraged homeowners, what is there to be gained by higher home prices? What may be lost?

JimTan said...

“Also your math is wrong... 65% ~ 1/3 therefore homeowners outnumber buyers 2 to 1.”

Actually, I said 'Leaving out the transients, indigent and professional renters; homeowners outnumber new buyers by 3 to 1.'

Thanks for your contribution.

patriotz said...

I guess there's no bounce in Miami or Phoenix because there's no Spring there........
I think it has a lot more to do with the massive oversupply in those two markets.

Conversely, I ask, besides higher consumption by existing overleveraged homeowners, what is there to be gained by higher home prices?.......
Living beyond one's means is a loss long term, not a gain. Inflated house prices are only a gain for those who sell, and that gain is at the expense of the buyer.

Stockmarkets may have bottomed, but they have a habit of doing so way before any sings that the economy is bottoming........
The stock market bottomed in the fall of 1932 as I recall.

mohican said...

Living beyond one's means is a loss long term, not a gain. Inflated house prices are only a gain for those who sell, and that gain is at the expense of the buyer.

That is obvious, sarcasm doesn't come through well via blog comments! I was trying to point out that there is no advantage since the idea of levering up and spending like crazy is really stupid and is obviously unsustainable.

jesse said...

Leveraging is not a problem if doing so produces real economic benefit. A housing bubble does not provide a real economic benefit unless incomes and rents catch up. Capital poured into unproductive assets is a net drain on the local economy in the long run.

mohican said...

Capital poured into unproductive assets is a net drain on the local economy in the long run.

Ding, ding, ding, jesse wins the painfully ovbious but not commonly recognized fact award! :-)

All of the recent 'investment' into housing could have gone to actual productivity improving items like new machinery, software, computers, infrastructure, etc. Our society is not better off for the current panopoly of granite countertops but would be much better off if there were more MRI machines or faster transit, or more energy efficient equipment, etc.

yaa said...

would be much better off if there were more MRI machines or faster transit, or more energy efficient equipment, etc.funny you mention MRIs... the hospital in richmond is raising money for one now. my wife said to me recently, "you mean they don't have one?!?" she's from japan, were even small clinics have their own MRIs. christ, even the clinic around the corner from her parents' house has one. and, you could fit that whole clinic easily inside the emergency ward at richmond hospital with room to spare...

i view the past 5 years or so as a total waste of our time. and i'm not even talking from the standpoint of a renter/owner/whatever. i'm talking from the standpoint of someone who owns a company that deals with companies worldwide. think i'm hiring right now? nope, quite the opposite. profit this year? yeah, right. gov't coming to help me out? not a chance. however, i can 100% deduct any computer purchases this year. with what money i'm supposed to buy these computers, i'm not sure. ;)

so, now i'm working twice as long as before. growth won't happen for at least another year. and it will probably take a couple years after that to get back to the levels we were at a few years ago... i chose this path, so i'm OK with it, but i hate it when people talk to me about real estate and how great it is...

the sad net effect of all this is that other people's greed has resulted in me spending less time with my family. and to put it bluntly, that just plain sucks. i think everybody would rather spend a weekend afternoon in the park with their kids instead of sitting in front of a computer trying to figure out how to cut another 20% from expenditures...

patriotz said...

Capital poured into unproductive assets is a net drain on the local economy in the long run.You mean Dubai isn't going to work? Hoocudanode.

Dubai + rain = Florida.
Dubai + mountains = Arizona, Nevada.
Dubia + mountains + rain = BC. :-)

Ice said...

Well Well it's Mr. JimTan again refuting every factual point and macro economics drivers which supports a downward trend in housing prices.

One wonder why he continues to visit this blog with his ill conceived skepticism despite every well thought out fact based commentary which Mohican and Jesse publishes.

Must be a worried speculator or agent mmmm?

Ice said...

Hey JimmyTan,

http://www.chpc.biz/Major_Cities_Chart.htm

Work your skeptical magic on this.

You see that speculative driven big slope upwards from 2001.

The pendulum quickly swung up and must come quickly down. It's called reversion to the mean.

Noz said...

Vancouver is FAR FAR FAR too overpriced...and this is coming from someone who lives in LA and would like to live in Vancouver.

People who think Vancouver pricing is not going lower or shouldn't go lower are crazy. It's safe to say that the average salary in BC is far lower than LA and yet the prices are higher.

Who in their right mind thinks that makes the BC home prices justifiably high?

JimTan said...

“Who in their right mind thinks that makes the BC home prices justifiably high?”

The overwhelming majority of home owners aren't selling. People are not cashing out and renting/migrating. The overwhelming majority of investors aren't in a hurry to sell because of low low interest rates. Fact!

Prices would fall by 50% (like in the States) if there are a very large number of determined sellers. The situation is not that severe in Vancouver. According to Mohican, the inventory situation is back to normal this spring. Fact!.

Who's buying? You can see the response from the sell-out of Beasley and Flo. There are many new buyers and migrants. Mortgage rates are low. There are enough people who want to own. They can still get loans for 90% mortgage.

The starting price is $250k for the Beasley. Is that affordable for an urban professional? Bus drivers earn $60k before overtime.

Pianoexcellence tells us that he just sold his Abbotsford townhouse for only 6% off the peak. Fact!

How affordable is Vancouver?

Ice has a link to a chart at Canadian Housing Price Charts Blog. Vancouver looks ripe for a correction. But, it has looked that way since 2004. So, the chart doesn't tell us anything new about the future.

Instead, it was the final peak of commodity prices and the TSX that turned Vancouver RE prices. Are any of those factors incorporated into the CHPC chart?

CHPC says that a 80% mortgage requires an income of $9,732 per month for a detached house. That may be true. But, the majority of people buying a $650k home are upgrading. So, what is the cash % for new buyers of detached houses? Do you know?

I'm trying to educate the denizens of this forum in analysis and critical thinking. You have to be careful about faulty thinking that hides behind a mass of data.

What I see is a typical troll forum with the usual amount of group think and people bashing. I am aware of only one person who has the potential to think it through and follow up with research.

Noz said...
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Noz said...

The overwhelming majority of home owners aren't selling. People are not cashing out and renting/migrating. The overwhelming majority of investors aren't in a hurry to sell because of low low interest rates. Fact!SO WHAT? That doesn't answer my question. Where is the money coming from to afford such expensive real estate on salaries that are lower than cities with equivalent or even less RE prices? Very simple question.

Prices would fall by 50% (like in the States) if there are a very large number of determined sellers. The situation is not that severe in Vancouver. According to Mohican, the inventory situation is back to normal this spring. Fact!.Fact? People can't sell because few can buy. And sellers can't sell because they'll lose their shirts. Again...where is the money going to come from especially when job losses are accumulating?

Also, changes in inventory have nothing to do with one particular situation. Changes in inventory can be from many factors...not all of which are positive like you think.

Who's buying? You can see the response from the sell-out of Beasley and Flo. There are many new buyers and migrants. Mortgage rates are low. There are enough people who want to own. They can still get loans for 90% mortgage.

The starting price is $250k for the Beasley. Is that affordable for an urban professional? Bus drivers earn $60k before overtime.
Ah...so I see...you need to work overtime to buy a home...what a heart-warming proposition. An a hour's drive from Van with no traffic? Geez...that's nice. Well I guess it's closer than Beasley right? Or am I thinking of the wrong Beasley that's 7 hours away? Probably..my bad.

What's the average income in BC? Who lives in Beasley? What class of people? Who's willing to trek out there everyday? You?

Pianoexcellence tells us that he just sold his Abbotsford townhouse for only 6% off the peak. Fact!Fact? I can give you about 100 others who didn't...FACT.

CHPC says that a 80% mortgage requires an income of $9,732 per month for a detached house. That may be true. But, the majority of people buying a $650k home are upgrading. So, what is the cash % for new buyers of detached houses? Do you know?
No do YOU??? So what if they are upgrading. They still need to make enough money to buy the next home since it also went up right? So almost $10K per month required. About $120K per year.....WHAT was the average salary in BC again? I can't hear you. Please speak up.

I'm trying to educate the denizens of this forum in analysis and critical thinking. You have to be careful about faulty thinking that hides behind a mass of data.Educate yourself first and foremost. What faulty thinking? That prices got too high and people cant' afford RE anymore? And prices need to come down so people can afford it again because they don't make enough to support their ludicrously high mortgages?

I'll tell you what....since you think it's such a good deal, I'll come to Vancouver, I'll rent from YOU for a 1/3 of the mortgage and you carry the rest. Since you think it's a good deal and a money making proposition, you won't break a sweat since you'll make your money back no problem. How about it?

What I see is a typical troll forum with the usual amount of group think and people bashing. I am aware of only one person who has the potential to think it through and follow up with research.What I see is a blind as a bat spokesman who is in serious denial about the housing market. In case you didn't notice, this issue is affecting most countries...not just the US or Canada. Get your head out of your sand and stop thinking "you're different" up there. You're not...wake up call.

By the way....what was the average income in BC again? I'll wait for your response and see how you spin the ratio of income to affordability in areas where people actually want to live and not in areas where they "sell-out" because people think they'll be priced out forever.

I thought people up North had more sense than the idiots down here in the US....I guess not.

yaa said...

if you ignore a troll, they will go away. feed them, and they will grow.

Ice said...

LOL LOL Just luv JimmyTan's retort. So simplistic. So short sighted. So selective. So very uninformed. So enable to see the forest through the trees.

Just like an amateur RE agent or a greater fool home buyer.

Well researched, logical and contrarian points are welcome.

Go ahead buy or sell RE to your hearts content. But please just don't pollute this forum with nonsense. There are plenty of forums for cheerleading!

Ice said...

Noz,

The problem is most people can't interpolate and extrapolate data conceptionally.

The average layman can only see as far as his nose. Hence JimmyTan is next to impossible to argue with as his decision based approach is based on now.

Mr. Tan cannot or will not accept that the current uptick is another injection of cheap rate stimulus which got entire world in trouble the 1st place.

It's just prolonging the enevitable pain. Like what happen to the global stock market. The market should have burst long ago but George Bush/Greenspan gave it a cocaine cheap Interest rate injection to mask the underlying fundamental structural economic problems.

JimmyTan doesn't realize there is a broader negative implication coming down the pipe. Unemployment, Deflation and Higher Taxes and then hyper inflation in 3-5 years.

Ice said...

If you haven't noticed JimmyTan tactical arguements and selected facts to support his points are eerily like a RE agent. Cheap interest rates, Immigrant Money, Vancouver is different etc.

I've heard this exact same arguement in the prior boom and bust cycles in RE and Stock Market. It took 9 years for this to boom and he thinks that a bust should occur in an instant.

Throughout history in any market cycle bust there is an initial steep decline followed by gestation periods due to gov't tactics to ease the downward pain ...which fuels a series of upward blips and rallies (Dead Cat bounces) to eventual rapid decline.

jesse said...

"The overwhelming majority of home owners aren't selling. People are not cashing out and renting/migrating."And so it was ere 1999. And 1989. And 1979. I encourage readers to familiarise themselves with the concept of "marginal pricing".

I always remember my favourite comment on this blog where someone threatened, tongue in cheek, to remove his listing from the market and re-list 10% higher next year. Buyers must have been quaking in their boots.

Ice said...

http://www40.statcan.gc.ca/l01/cst01/famil107a-eng.htm

Median Family Income across major cities in Canada.

Vancouver $62,000
Avg Canadian Savings Rate = 2.5%
http://www.chtv.com/ch/cheknews/story.html?id=1491787

So ask yourself how does local workforce afford to purchase a home or condo at 5-10x their income? It's called over leveraging with cheap credit and no savings.

I know personally know professionals who purchased million dollar homes and squeaking by pay cheque to pay cheque and maxing their line of credit and cc to live the "life style"

A recipe for disaster with rising unemployment and deflationary pressures.

But hey JimmyTang can't see the oncoming train wreck because the greater fools see "cheap deals" during this easily predictable spring bounce.


Unemployment Rates by Province, February and March 2009:

Province: February / March

Newfoundland & Labrador: 15.1 / 14.7
Prince Edward Island: 9.6 / 8.9
Nova Scotia: 8.8 / 8.9
New Brunswick: 8.8 / 9.5
Quebec: 7.9 / 8.3
Ontario: 8.7 / 8.7
Manitoba: 4.8 / 5.1
Saskatchewan: 4.7 / 4.7
Alberta: 5.4 / 5.8
British Columbia: 6.7 / 7.4

Arwen said...

@Ice, thanks for the stats. One of the things that really adds to that is that according to Stats Can that's the median census *family* income, and so these folks are likely going to be going for a two bedroom or higher (although a family of single parent and single child may get into a one bedroom) - so that 62K is mainly aimed at the *two bedroom* market for first time homebuyers.

I still haven't gotten an answer from anyone (and I've been asking) on the square footage of the benchmark condo, but that matters to those family income/starter "home" ratios.