Archive for January, 2011

CREDIT CRISIS

Good to recall the incident that started this particular snowball effect we are still living in.

After viewing this consider that the Alt-A and Option ARM’s that are going to re-set over the next two years.

Combine this with the many Commercial properties that are coming up for renewal over the same period and the only conclusion that is rational is that prices are going to decline. Again.

No point in arguing the issues, only in what to do about it.

Expect another 10-33% drop in residential value, possibly a 66% drop in Office, Industrial and Retail property with an anticipated 20-45% drop in Multi-Family residential.

Many will argue that the residential values will not drop so much. I respond that in certain markets, yes there will be possibly no drop. As a whole the North American (yes Canada included) market is facing a financial chasm larger than ever before.

1) falling SFR prices and values will make it cheaper to own someone else’s foreclosed house, therefore downward pressure on the rental market.
2) wiping out the retail marketplace, the internet for commerce is a factor that cannot be ignored.
3) with 1/3 less in their numbers, those who come after the baby boomers will not have the same volume to buy the homes and businesses that will be coming onto the marketplace in ever greater numbers … this alone accounts for a 33% drop (if not more) in all asset values.

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OIL price upward pressure

There is a continued pressure UP on oil.

Jim Rogers, co-founder of George Soros’ Quantum Fund tells the BBC ‘the world is running out of reserves of oil’

There are certainly supply pressures, the rapid upward price pressure is coming more from the vast SUPPLY of US money that has been hitting the market in the past few months.

When there is twice as much money printed out there to use to buy things then the price of the things must double, just to keep pace. The pains of Quantitative Easing are only now starting to come home to roost.

This is true across all spectrum of goods. Food will be a huge one next.

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Canadian Mortgage Changes announced … expect more downside risk.

Canadian Government announces new rules for mortgages in Canada. The headlines all scream “this will keep values up” and “we are doing this to protect Canadian housing”. This double-speak is truly worthy of an Orwellian nightmare.

The Canada Mortgage and Housing Corporation (CMHC) is very much like a combined Fannie Mae and Freddy Mac all in one. This means that the Canadian taxpayers have been on the hook for HUGE downside risks. The Canadian Government is simply pushing more risk to the bankers. The 85% maximum combined with a shorter 30 year amortization maximum will cut out the marginal homeowners and the 5 year qualification requirements will smash the investor speculators.

Expect a price drop now.

Moreover the numbers of people who will examine the situation of paying MORE than their home is worth to the bankers that will happily continue to accept such payments is likely to increase. Why pay for a mortgage that is worth 110% of the homes value? Do you think that the value will return soon? How about ‘in time’ for the refinancing?

The long-term view for house prices is at best ‘stable’, more likely it will drop.

Canadian Residential Home Prices 1988-2010

Canadian Residential Home Prices 1988-2010

This chart shows house prices since the last ‘bubble’ in 1988. Any Canadian investor or home owner that recalls that time period, where it took 7 years to just get back even may want to reconsider getting into any real estate deals right now. The ‘toppiness’ of this market is displaying a classic *Double Top* from a technical analysis point of view. There are some who are saying that this market top, when it drops (not if), will take up to 17 years to recover … I argue if ever!

The demographics are what is at the heart of this fall off a cliff … once the boomers move out from their 3-5 bedroom homes there are at best only 1/2 as many people even in a condition to want to buy those homes. Pretty location, great work opportunities and overall conditions of life will mean FAR MORE in the future than any historical trend line.

So if you discount that argument, simply use technical analysis, the double top indicates the top, the bottom in 1988, this means that a 33% drop is to be expected. However since no market will perform exactly on the line the drop will most likely be 60% or more. With a price drop like that NO, I repeat NO banks will be taking on risk of loans like that. Nor does CMHC want to take on the backstopping of those anticipated losses.

For all those mortgage brokers in Canada that are still shouting “we are different” in Canada, please make a call to your US counterparts and ask them about the lending conditions change in 2008, if you can find any still in the business.

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The Games We Play

Since we believe more of what we see than we hear … here is a little ‘game’ video about the debt mess that has been created…

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