Wednesday, June 17, 2009

500 Posts and Housing Market Indicators

Well this represents the 500th post on this blog. This blog was started out of a personal and occupational interest in finance and real estate. I was concerned with the price of real estate and the detrimental effects that unsustainably high house prices would have on the economy, personal finances, and my own personal life. This blog has been meeting my needs for an analytical outlet and a research topic area that is not well understood by many people in the finance profession. I hope you all find it interesting, I know that I do. I recently have especially appreciated collaborating with others on many posts and topics.

In the vein of thinking about the direction of the housing market, I stumbled across some data that I've had sitting on my computer for some time that I found quite interesting but have never posted for some reason. The data comes from http://www.macromarkets.com/ - who started and continue to operate the housing market futures trading on the CME.



So, let's talk about what these indicators mean to us in Vancouver. If we start with the premise that there should be no significant differences between the correlations in US markets and Vancouver, we can use the correlation data above to make some informed observations about the local market and perhaps on the future direction of the market. I think this is a fair assumption given that it makes reasonable sense to see correlations between housing starts, construction spending, unemployment and house prices.

For the record:
  • Construction spending is way down in Vancouver at the moment.
  • Housing supply is elevated but much lower than last year.
  • Mortgage applications are not tracked officially on a local level but anecdotally they are up from last year.
  • Housing starts are way down from last year.
  • Building permits are also way down.
  • New home sales are low but higher than last year.
  • Median rent is high in Vancouver compared to other Canadian cities.
  • Personal income is falling right now.
  • The unemployment rate is rising.

Now what do you think?

20 comments:

kcf said...

My concern is that although you start with the premise that, "there should be no significant differences between US markets and Vancouver", I am not so sure about this. I would argue that many of your stats show that the Vancouver market acts very differently to the US market and therefore this makes it very hard to compare the two.

I am very surprised by the rash of new home sales in N. Van (many with multiple offers) and I can only hope it's just the spring bounce.

Tony Danza said...

I hadn't heard that unemployment is falling, is this a typo?

mohican said...

sorry about the typo there!

alexcanuck said...

What! Unemployment is falling? I'd better rush out and buy before I'm priced out forever.
Oh, wait, it's just the thought police, is it?
Awfully convenient typo, Mohican. Have you considered a tin foil hat to prevent the psychotropic rays from controlling your typing and keeping you unaware of it?

(Joking of course, I don't need conspiracies when good old greed and incompetence explain the crisis just fine. But that is a hilarious site)

mohican said...

I have this tendency to use a negative word when describing negative things even though the word is inaccurate. Ah well, my brain doesn't work as good as it used to - pre-children.

I like that site too - not the first time I've seen it - tinfoil hats are all the rage.

Back on topic, any thoughts on the correlation matrix posted?

It seems to me that we are in for another big drop in real estate prices if the correlations noted prove true in Vancouver.

david said...

I think most people here agree that prices will fall sometime in the future, the real question now is when and by how much.

I was pretty surprised by the size of the spring bounce, but i guess most people dont do their reasearch and just watch the news. So many times I have heard people say "the news says prices are on the rise" and just blindly accept it. They figure the news is unbiased and reports the facts, when really they get numbers from real estate companies who have a vested interest in seeing lots of people buy real estate. All I have to do is explain this and most people then question their previous view, just because I (with nothing to back me up) said so.

Prices will inevitably fall back to somewhat reasonable levels, but those prices are largly controlled by uneducated buyers who will believe anything they are told. Who knows it could take a rash of foreclosures to set everyone straight, though i hope it is not the case as that doesnt really help anyone.

Prices rose at incredible rates simply because people thought prices would go up, so the only way they will go down is if people are forced to sell, or if people think prices will go down.

david said...
This comment has been removed by the author.
barbor62 said...

David,

Interesting comments- and, in my opinion accurate.

I- like you- don't want to see a plethora of foreclosures. However, from what I have seen, most people don't voluntarily stop spending or incurring debt. No. Only an external force such as not being able to meet their monthly obligations can change their behaviour.

And as long as the Government is willing to underwrite mortgages: the banks will, more or less, approve anyone. Why would they care?

So, what will stop it?

If the economy gets better, interest rates will probably rise. And, if the economy get worse, there will be more job losses.

Either your monthly obligations increase- or you lose your job.
From what I can see, no matter what happens, highly leveraged people are going to get squeezed.

So why commit yourself to repaying an enormous debt, secured by an asset that is selling only 10% below its all time high, during the worst recession in 50 years?

I'm serious. I can't see the up- side.

Does anyone know the accurate progression of events during the crash of the early 80? Not the folklore of "interest rates were 20%, that can't happen now". Maybe not. But don't forget mortgages are 10X larger now than they were then- elasticity matters. Particularly, in relationship to monthly cash outflow.

barbor62 said...

David,

Interesting comments- and, in my opinion accurate.

I- like you- don't want to see a plethora of foreclosures. However, from what I have seen, most people don't voluntarily stop spending or incurring debt. No. Only an external force such as not being able to meet their monthly obligations can change their behaviour.

And as long as the Government is willing to underwrite mortgages: the banks will, more or less, approve anyone. Why would they care?

So, what will stop it?

If the economy gets better, interest rates will probably rise. And, if the economy get worse, there will be more job losses.

Either your monthly obligations increase- or you lose your job.
From what I can see, no matter what happens, highly leveraged people are going to get squeezed.

So why commit yourself to repaying an enormous debt, secured by an asset that is selling only 10% below its all time high, during the worst recession in 50 years?

I'm serious. I can't see the up- side.

Does anyone know the accurate progression of events during the crash of the early 80? Not the folklore of "interest rates were 20%, that can't happen now". Maybe not. But don't forget mortgages are 10X larger now than they were then- elasticity matters. Particularly, in relationship to monthly cash outflow.

chadmpnp said...

I simply don't see how we're not going to avoid massive inflation in North America, which will translate into higher asset prices, including real estate. Regardless of all the other terrible fundamentals I think inflation may rule the day and actually lead to higher real estate prices or at least flat prices.

jesse said...

"Regardless of all the other terrible fundamentals I think inflation may rule the day and actually lead to higher real estate prices"

Higher inflation means assets like real estate are discounted because the cost of capital increases by more than inflation increases, if inflation is not believed to be contained.

If you think inflation will increase the value of your property, buy in Zimbabwe. I hear a typical property is into the millions of trillions. The gains there make Vancouver real estate look like it gained close to 0. Forgive me: I won't bother posting the Zimbabwe vs. Vancouver chart because Vancouver gains would be a flat line compared to the Zimbabwe stuff.

chadmpnp said...

I agree with you Jesse but I don't see how that matters if Vancouver is your home. Nominal real estate values really don't matter if you eventually want to buy a home here because regardless of why real estate prices have gone up, the bottom line is they have gone up and if inflation really gets out of hand, then you will be completely priced out of the market. I care less about why the prices go up, I care that the prices go up. I am not a speculator, I am looking for a home, I obviously want the most bang for my buck and given the potential for much higher rates and high, even potentially hyper-inflation in the future, I actually believe now may be a good time to buy.

jesse said...

"if inflation really gets out of hand, then you will be completely priced out of the market"

I disagree 100%. If inflation goes up, so do wages and rents. Rental yields remain unchanged should house prices inflate along with everything else. I don't know how many readers are old enough to remember the monthly salary adjustments for inflation that were common in the late '70s.

The real kicker is going to be interest rates rising much more than inflation rises if the inflation genie is let out of the bottle. For the record I don't think this will happen. I do think long rates will increase significantly higher than they are today, even if inflation is still within the BoC's target, but that could be a few years off. I also don't think high rates are necessary for prices to fall.

I wish you luck if you are to buy. Personally, the rental yields I see make Vancouver real estate a poor value investment and I can get way better, and more liquid, returns elsewhere.

chadmpnp said...

Jesse,

Your opinions are respected and I am only 24 and am no real estate expert. My point is even though I want this to be a good investment, and I don't want to lose money, I have an option to pay $1400 a month in rent for a nice place and pay $1400 a month in mortgage payments with $40,000 down in a place I really like as well. I'm thinking of this as a home more than an investment, but at the same time I want this to be a very good investment. I'm really struggling with this decision but the rates are quite enticing now, and if they look like they will skyrocket, I'll just lock in. Like I said, I'm having sleepless nights trying to figure out what to do.

alexcanuck said...

chadmpnp:
Learn a whole bunch more about what inflation is and isn't before you buy, if you want to know what you're getting into.
Don't listen to the Realtors. They have a direct financial interest in you buying. A good Realtor is a big help in deciding WHAT to buy, but DO NOT USE THEM in deciding IF to buy. They make nothing if you don't buy. They WANT you to buy, and can't help it.
This is probably the most important decision of your life. Second only to marriage? And possibly more important with respect to your retirement prospects. A long way off for you, but that makes the impact all the greater. Compound interest works both ways.
Take some time, say 40 hours? One weeks work?
Research from many sources.
Some google searches;
Peak Credit. (We are probably at a historic peak in terms of amount and availability of credit.)
Speculative bubble: (What a chart of Vancouver RE looks like)
I admit to being a biased source, I firmly believe now is a terrible time to buy in Vancouver. I have done extensive research before I came to this conclusion. I believe it so strongly that we sold our (paid in full) place and are now renting very happily and waiting.

chadmpnp said...

Alex,

What makes you think I'm listening to a real estate agent? I've followed this site for a very long time. I know what a speculative bubble is, I know what peak credit is, believe me. I have also done research on the correlation between housing prices and inflation. Every single article I read is that Canadian real estate historically is a terrific inflation hedge, so if you have data or statistics that prove that wrong, please post, until then I will assume real estate prices will rise nominally because of inflation.

jesse said...

"Every single article I read is that Canadian real estate historically is a terrific inflation hedge"

Hi chadmpnp, it's worth asking why real estate is an inflation hedge in the first place. A lot of these (Canadian) finance blogs are touting real estate as an "inflation hedge" usually put in words like "generally" and "has been shown to be" and the such. I have read none that really get to why real estate is a hedge in the first place.

RE is an "inflation hedge" because its income stream from rents generally increases with inflation. When the income it generates is not sustainable -- i.e. prices are high compared to rents -- it means prices are being driven by something other than its income: speculation. In this condition the "inflation hedge" concept doesn't make sense unless you can plausibly justify incomes increasing to compensate for the high prices.

alexcanuck said...
This comment has been removed by the author.
JimTan said...

Mohican,

The information isn't useful since you don't have a model. For example, which statistic is a leading indicator if you lag prices by six months?

Moreover, Personal income has no correlation with price (0.03) over ten years. But, is correlated (0.87) over one year (dud).

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