Surviving the RE bust.
It seems like just a year ago the US media was filled with positive stories about the housing market boom. It seemed like all you had to do was buy a house or a condo in a hot US market and you’d be on the road to riches. It’s looking so much gloomier now.
MSNBC has their top business stories of 2006, with the housing slump coming in at #2 (just after Wall Street surges).
CNN Money has an investors guide for 2007 with 6 strategies to survive the housing bust where they predict that 2007 will be bad, but 2008 will be worse.
“Last year the question was whether the housing boom would slow down. Now its how bad will it get.”
1) Sellers: lower your expectations.
“As painful as it might be to realize that your house isn’t worth what you thought, asking too much in a slow market is a mistake. “Trying to get last year’s price is wishful thinking,” says Hessam Nadji, managing director with real estate advisory firm Marcus & Millichap. “Often you’re unable to sell your house, which compounds itself, and you keep chasing the market down.”
2) Buyers: Drive a hard bargain.
“North of Sacramento, Pulte Homes recently agreed to part with a 2,700-square-foot four-bedroom home for almost 18 percent off the $497,000 list price, plus an additional $8,500 in credits. “I’ve never seen anything like it,” says Lance Pagel, the realtor on the deal. “I recently point-blank asked one developer’s agent what incentives she was offering, and she point-blank answered $80,000.”
3) Consider renting.
“Economist John Talbott, author of Sell Now!, applauds the notion of renting in a market like this – even if it isn’t part of the classic American dream of owning your own home. “Maybe you don’t live to the same standards, but don’t worry about it,” he says. “If we’re talking about the chance to bank $1 million, that’s real money.”
4) Step away from the exotic mortgage.
“ARMs have traditionally been the province of wealthy and sophisticated homebuyers. During the boom, however, banks went after anyone with a wallet. As a result, a lot of homeowners out there are living under a roof they soon won’t be able to afford.”
5) shop for a rate drop.
“In 2003 the mortgage industry originated $3.8 trillion worth of loans, according to the Mortgage Bankers Association. Next year it will hand out an estimated $2.1 trillion. “That’s nearly a 50 percent drop in volume, which means there’s tremendous pressure on company earnings,” says Doug Duncan, chief economist with the MBA. “They’re going to negotiate to get your business.”
6) Keep an eye on your equity.
“The good news, of course, is that reckless spending has kept the American economy chugging. But it has also saddled many American families with some major debt, which is particularly dangerous in a declining real estate market.”
December 27th, 2006 at 11:41 pm
Why is the west coast getting the most negative forecast from that CNN money article? And how come they report it as if the entire country of the USA is in a housing market collapse?
Isn’t it much narrowly focused than that?
December 27th, 2006 at 11:31 pm
Or, as automation becomes more refined, as my previous example, it would be just as cheap for a robot to make widgets in an industrial park 10 miles away from a Walmart in Seattle as it would be to make widgets Shanghai.
Automation is nothing new. While Western productivity blows away that of China in the aggregate, do not assume that their manufacturing infrastructure is manual. The benefits of vertical integration are not remotely large enough to overcome the cost structures related to manufacturing.
Second, let’s not get blinded by nationalistic aspects and assume that it is nation versus. That nice water proof hiking jacket may have been designed in Oregon, manufactured in China by a factory that is co-owned by an American company. The raw materials may be produced through licensed technology in Malaysia in a plant owned by a Canadian company, which in turn is 25% owner by Ontario Teachers. And so on.
I agree that vertical integration would be most likely to occur in a resource rich but poor country with a skilled work force. South America is a good candidate, but the latter may be a problem. The movements towards leftist government cause them to try to shoehorn in integration, but that is probably a misguided misallocation of resources. Russia? So geographically large as to make the concept of vertical integration all but meaningless. The manufacturing base in China may be a lot closer to the resource extraction points than the Russian industrial heartland.
Totally agreed, though, that China may be in for a world of hurt.
December 27th, 2006 at 10:14 pm
Freako, Fair questions, I was thinking in terms of vertical integration in places such as Brazil where they could mine aluminum and instead of sending ingots to China the Brazilians themselves could extrude the aluminum and further make widgets to export to Walmart type retailers, and by-pass China altogether.
Or, as automation becomes more refined, as my previous example, it would be just as cheap for a robot to make widgets in an industrial park 10 miles away from a Walmart in Seattle as it would be to make widgets Shanghai.
In summary, I think China’s current low wage, low cost, advantage will be challenged by advances in technology by many of its current customers.
December 27th, 2006 at 9:27 pm
Oops, forgot one.
5. Exchange rates: Again, what do exchange rates have to with it. If the Yuan goes down, raw materials become more expensive locally in China, but then Chinese goods become cheaper. Since we are mostly interested in the value added manufacturing occuring in China, I don’t see exchange rates having any impact on China’s access to competitively priced raw materials.
December 27th, 2006 at 9:23 pm
Languge, trade barriers, exchange rates, efficiencies realized by raw material producers engaging in vertical and horizontal integration,just to name a few.
1. What does language have to do with buying resources in the open market?
2. What do trade barriers have to do with raw materials costs?
3. I can see a case for vertical integration, but seriously where do you see it? Generally countries who are rich in resources are not great places to manufacture and vice versa. For example, Canada has ample resources and a some manufacture. Where is the vertical integration. Japan has manufacturing but no resources. Saudi Arabia has ample resources but little manufacturing. Russia is loaded with resources, but not a great producer of manufactured goods. Where is this vertical integration which will put China at a competitive disadvantage.
4. Horizontal integration. I am having trouble seeing how it applies to resource pricing. Banking or retailing perhaps. But raw materials and production???
December 27th, 2006 at 9:06 pm
“Chinese” is actually about 6 different languages which are as distinct as French, Italian, etc.
Yes, but unlike, say Europe, they mostly share written language. Do not underestimate the significance of this fact. Second, the central government is in my ways potent to act in ways that would make any Western world leader red with envy. But that is not to say that central authority extends into every nook and cranny. Local corruption and related discontent is definitely a problem.
December 27th, 2006 at 8:55 pm
“Chinese” is actually about 6 different languages which are as distinct as French, Italian, etc.
Exactly. See link for details:
http://tinyurl.com/yk7gny
December 27th, 2006 at 8:52 pm
Remember, Chinese people living in those regions were once from China.
Texas was once Mexico. So what?
Now, what is China missing from these 2 places?
You tell us; you’re the one who made the claim it would be an easy transition. Don’t offer facile rhetorical questions as some kind of answer.
December 27th, 2006 at 8:43 pm
Citizens of Taiwan and China speak the same language (Mandarin dialect) whereas, citizens of Hong Kong speaks the Cantonese dialect
Gross oversimplification. There are many more Cantonese speakers in China proper than in HK. Mandarin is the native tongue of about 1/2 of the Chinese, although most know it as a second language to some degree.
“Chinese” is actually about 6 different languages which are as distinct as French, Italian, etc.
There is also a division in Taiwan between the Mandarin speakers (post 1949) and the Taiwanese (Fujian) speakers (earlier), although most of the latter can speak Mandarin as well.
December 27th, 2006 at 8:19 pm
China facile hype said…
The China factor is overplayed. Low cost producers can only cut the cost of production to a point.
Currently, most of the stuff I buy is made in China. Who knows, in the near future if North Korea opens up like China does, things may well then be made there!?!
December 27th, 2006 at 7:50 pm
Betamax,
So why haven’t they sold them to their own already? It’s easy to say, harder to happen when most people there are still 3rd-world poor,
You only need to see how Taiwan and Hong Kong are doing compared to China. Remember, Chinese people living in those regions were once from China.
Now, what is China missing from these 2 places?
December 27th, 2006 at 6:41 pm
realestatenevergoesdown said…
The China “miracle†is an old black and white movie, in a loop re-run.
That’s because, many many moons ago, there was only 1 China. After that, they were split into 3. The Republic of China, Taiwan and Hong Kong. You were probably seeing 3 re-runs, but they are not the same. Hong Kong was annexed to the British for 99 years as repatriation for the Opium war.
Taiwan was created because, Cheng Kai Shek’s army and supporters got booted out by the People’s Army in a civil war.
For many years, the wealth from China actually came from Hong Kong. HK was then used as a primary gateway for trades into China before the handover in 1997 and so did Taiwan. Nowadays, Shanghai is gradually replacing its place. It’s not too surprising that foreigners confuse Hong Kong or Taiwan as China, since after all we refer to them as Chinese or Canadians who came from there as Canadians of Chinese heritage.
Hong Kong is now the territory of China, whereas Taiwan is still not. Citizens of Taiwan and China speak the same language (Mandarin dialect) whereas, citizens of Hong Kong speaks the Cantonese dialect. Also, in respect to China, foreigners will refer to only 1 China eventhough past glories were those made with the help of Hong Kong and Taiwanese business men (Li Ka Sheng comes to mind). This is because China does not like people to refer the other sides other than itself and it always made itself clear to world leaders.
Kind of childish I think.
December 27th, 2006 at 5:59 pm
Freako:
Why? Logistical reasons?
Languge, trade barriers, exchange rates, efficiencies realized by raw material producers engaging in vertical and horizontal integration,just to name a few.
December 27th, 2006 at 4:21 pm
“
But the other countries will have cheaper raw material costs.”
Why? Logistical reasons? Other than for transportation factors, the location of resource extraction need not be the location of processing need not be the location of manufacturing finished goods.
December 27th, 2006 at 3:33 pm
Forgive me, but I’m starting to get sick of china this, china that. This is not directed at the posters on this blog, but at everyone who thinks that china is going to save us from our profligacy.
For the last few years, more debt has equaled more wealth. Take out the largest loan you can on the nicest house in the best neighborhood and YOU WILL BE RICH. We are the US of the north, a debtor province with absolutely no industry. A negative savings rate is not sustainable- who is going to bail these people out? We rely on Asian investment to keep this charade going and when the music stops it’s going to hurt us all.
December 27th, 2006 at 2:52 pm
There is still an untapped consumer market in China. If China can’t sell toys to Americans in mass numbers, then they’ll start selling them to their own.
So why haven’t they sold them to their own already? It’s easy to say, harder to happen when most people there are still 3rd-world poor, and those with disposable income have yet to convert to the financial profligacy of Western culture. Less sure of a brighter tomorrow than Canadian/US consumers, they remain inveterate savers who disdain personal debt. That situation is unlikely to change any time soon – especially if they see a downturn in the US.
December 27th, 2006 at 2:52 pm
The China factor is overplayed. Low cost producers can only cut the cost of production to a point.
China will do fine for a while yet, but eventually a robot producing door hinges, in an industrial park in Russia, Brazil, Peru, or Mexico, can produce door hinges, and underwear, just as cheaply as a robot in China.
But the other countries will have cheaper raw material costs.
(yes the tooling can be switched very easily to produce underwear or door hinges, depending on demand)
December 27th, 2006 at 2:35 pm
When kids say, they won’t get a good Christmas present, it means they didn’t get what they want.
I think this kind of misses the original point, and that is (as I see it) how do you get rich buying multiple houses in this environment? You need to sell to get money out, or you need to rent to get cashflow. Prices in vancouver are dropping right now, which means it may be a looong time before you can ever sell for a profit if you buy in at todays prices.
At the same time rents right now wont cover a standard mortgage with 25% down. If you’re rental income isn’t covering your mortgage you’re losing money, not gaining it.
December 27th, 2006 at 2:30 pm
But most importantly, we are the California of the North.
Do you think so? Unfortunately parts of california are predicted to have some of the biggest drop in values over the next couple of years.
December 27th, 2006 at 12:38 pm
vanman, freako, thanks for the China discussion.
Do you guys know ted.com yet? Some great brief talks (3-20minutes) on various topics, global demographics/economics included. Try the ‘tedtalks’ link.
December 27th, 2006 at 12:34 pm
The China “miracle†is an old black and white movie, in a loop re-run.
If you can get an outdated mutual fund guide like Gordon Pape’s Guide, you will see that just before the big correction, some of the Asian mutual funds had gone up as much as 800% , and the Pros reasoned it had nowhere to go but up, China this and China that, and Canada has the natural resources it needed and on and on the spin went.
December 27th, 2006 at 11:51 am
im glad prices are back to normal now its been krazy the past years. i see alot of 4sale prices now and it feels good.
December 27th, 2006 at 10:07 am
Vanman, I like your excellent grasp of the big picture in your posts.
I have a similar views, but differ in some respects.
Paraphrasing your post:
1. Manufacturing of consumer goods is outsourced to Asia.
2. The retail environment became much more competitive once Walmart entered the scene, forcing wide reaching price concessions.
3. The price pressure led to consumers demanding the latest in order to keep up (for perspective, my parent’s first color TV was used for 30 years, 15 as a primary TV).
4. Chinese labour and factory owners AND resource extractors worldwide depend on continued U.S. consumption.
,,, (skipping a few)
5. In the long term, the Chinese domestic market will increase demand for consumer goods, and therefore raw materials.
Nice chain of events. I don’t think the cause and effect between the events is as clear as you state. Offshore production of consumer goods has been occurring on an increasingly large scale for 40 years, going from one low cost producer to another. China is just the latest.
Don’t know if the advent of margin pushers like Walmart (and Dell etc) was inevitable, but in either case it definitely heated up the competitive retail landscape.
I don’t think that the competitive landscape is the cause of disposable consumerism. More likely an indirect result of. Consumerism and status consciousness are not new qualities. I think the culprit is simply the pace of technological advancement, which brings about rapid obscelescence. Up until a few years ago, there was little practical reason to upgrade TV’s, especially if you didn’t mind the cosmetic tells (such as wood panelling) that you are behind the curve.
Back to China. Many are amazed at the rapid growth of Chinese GDP and productivity. Still, per capita it is slightly ahead of Samoa and the Philipines. In other words, a fraction of that of the Western World. It is still mostly a peasant agrarian society. Of course, that is a source of growth potential. Not very hard to grow your economy when you build factories with Western technology and staff them with ex-peasant farmers. However, I think that there are limits to the amount of consumer goods the West can consume. You can lower the wage component of prices but the raw materials will only get worse. And the logistics aspects must be hitting a wall fairly soon. How much more efficient can Walmart get? Thus, Western demand can and WILL be saturated. A housing related recession would speed this up. Thus China’s growth is limited by demand for consumer goods. I think they are in the process of picking the low hanging fruit. I think productivity growth above and beyond manufacturing will be much much harder to come by. One does not move from an agrarian society to Western style productivity in one generation. At least not without serious growing pains. A recession will be much harder to cope with for the Chinese than the west. It is new to them, and right now they are riding on unbridled optimism. In either case, as I have mentioned before, if the growth continues unabated, there will be trouble in the country side. If it slows, there will be trouble in the cities. The work force which left the country side for manufacturing jobs are not going back. Can the social welfare net (if one exists) cope with mass layoffs? Can the country cope with social unrest on a large scale?
December 27th, 2006 at 7:35 am
“I Love Canada” — Well, I do too..
The problem is, we are influenced by foreign factors that are beyond our control. Prices are paid for what the market can bear. Currently, the housing market may face a slight to severe correction, depending upon many factors. As demonstrated in Thailand, Hong Kong and in Japan, when things turn sour, prices do fall. What I fear that this time could be quite interesting than in the past is that, China is involved. In the decades earlier, most of the consumer products manufacturing were done in the domestic market (be it in the US and Canada). When companies started off-shoring products to Asia, they meant to keep increasing profits by improving shareholder’s returns while maintaining price. That all changed when discounters like Wal-Mart started demanding that those prices go down, and down they did thus ushering the era of commodity consumer products. Visit your local BestBuy and you’ll see what I mean.
This poses 2 problems. One, consumer now treats any consumer products as disposables, so with disposables they expect a lower price next year. And usually, they will get their wish. Second, it imposes a mantra that a consumer needs to keep spending money to keep up with the jones. It’s not even a question of need anymore, but rather than wanting one because your friend or neighbor got one. You can even make a need at Boxing day just because prices are so good. Good for sales, but bad for increasing debt.
To achieve this, they recruit cheap Chinese labour. Did you know that our Canadian mining stocks in 2006 made a significant increase price wise due to the Chinese’s veracious appetite for raw materials? And why do they need it for?
You guessed it. To make consumer products and to sell to whom?? To Americans no doubt and then us. But mainly Americans. If Americans stop or even slow down their consuming habits (signs showed they are since preliminary Christmas Xmas sales seem to fall below that of Black Friday), will China suffer? Maybe in the short term, but since they are a developing country with people who aren’t still exposed to consumerism yet, they will rebound and continue on.
We, on the other hand, are a financial and resource based industries. The financials alone account for 30% of the TSE. Only about 1 to 2% of that accounts for the S&P 500 and that’s from AIG (American International Group). AIG is an insurer.
So, we really depend on 2 things. Loaning money to make money and selling raw materials to others.
It really doesn’t take a rocket scientist to figure out that once demand ceased, and the economy slows and currency starts to behave erratically, foreigners will be the first to jump. Remember that foreigns need to factor not only the RE price, but also the cost of foreign exchange. If both goes down, they will get hit with a double whammy. These guys aren’t stupid — they’ve done it before, so when they smell smoke coming from the Hindenburg, they’ll slap on their parachutes and jump. This time will be different. We now have the internet and this media tends to propagate bad news faster than the speed of light, through news and blogs thus inciting more “FEAR”
However, the good news is. There is still an untapped consumer market in China. If China can’t sell toys to Americans in mass numbers, then they’ll start selling them to their own. Which means, we’ll benefit from that in the future. So yes, I’m sure that there will be another housing boom after this bust. When? Who knows?
December 27th, 2006 at 6:51 am
Garth,
Have you seen the movie “Borat” where in one scene in the subway, he asked the guy sitting what’s his name. He replied — my name is “mind you own business!”.
That’s right. What you’ve heard on the bus is probably just 1/4 of what the girl was telling her friend. If you heard the whole entire story, you might have a differing opinion. I deduce that you don’t have kids. Kids are very expensive items to have, especially during Christmas. Kids’ wants are always more expensive then your wants. While you can wait and shop for the cheapest price, kids do not have that concept yet, since they haven’t earned a living to appreciate how difficult it can be to make good money in this city and pay expensive rent here. The girl is probably still living with her parents.
When kids say, they won’t get a good Christmas present, it means they didn’t get what they want. Maybe an overpriced $1000-2000 Playstation 3 or expensive LV bag that she had always wanted.
December 27th, 2006 at 1:06 am
I was on the bus last week and heard the following conversation.
Girl 1: My parents said I won’t get very good Christmas presents this year because they don’t have any money.
Girl 2: Why don’t they have any money?
Girl 1: They just bought their fourth house.
Girl 2: Wow, they go through a lot of houses. Why didn’t they like the old one?
Girl 1: No, they don’t sell the old ones. They keep buying new ones. They buy them and then make money by renting them out.
Question from me: If they make money by renting out all these houses they are buying, why as a result do they have LESS money for buying Christmas presents?
December 26th, 2006 at 10:21 pm
I LOVE CANADA(positive)
Why we are being disscuss always something “those issue that brings prices down”is their any negetive campain going on to hunt down canadian real estate Authenticity requested for proof vancouver condo could be just a site that belongs to USA hey I never know man millions people’s purchased condo’s and house’s since last year who is always scaring them if we can not give value to our own city then who is going to respect.Lets sing a song Vancouver is worlds best…..
December 26th, 2006 at 10:09 pm
I’m just wondering when we’ll see the last of the house flipping shows. Maybe they can replace them with a show on bankrupt RE gurus.
December 26th, 2006 at 9:18 pm
“I have a better idea, why don’t we ask Aaron and Rob to post them on their blog.
They are in the giving spirit as of late, and providing shelter for people is their calling.”
What about a grossly overpriced flipper condo in New West?
December 26th, 2006 at 4:48 pm
PS OT: annon 1:40, please try to be nice to Gumpy, he thinks I am you.
I had trouble signing in so went anonymous.
Gumpy is confused about a lot things.
December 26th, 2006 at 3:58 pm
“Maybe I should locate these foreign-owned vacant homes and pass out flyers on Hastings St. announcing where they are. Why waste a good roof?”
Good one.
I have a better idea, why don’t we ask Aaron and Rob to post them on their blog.
They are in the giving spirit as of late, and providing shelter for people is their calling.
PS OT: annon 1:40, please try to be nice to Gumpy, he thinks I am you.
December 26th, 2006 at 3:47 pm
There are definetly a few “over-excited locals”. Some of the listings I looked into were sellers that have already bought new homes. They are holding, or will soon to be holding two mortgages. It won’t be a fun spring if they can’t sell their existing homes.
I have a feeling that there are quite a few Canadians caught in this scenario. More than we may think.
December 26th, 2006 at 2:56 pm
I wonder how much those vacant ‘vacation’ homes have to do with foreign speculators and how much they have to do with over-excited locals.
I know a doctor that bought an old house on a major street in kits for 1.5 million. It was originally four rental suites and needs a lot of work to convert back into a SFH. It’s been vacant for the last six months while he tries to sell his current house for the large increase he was counting on, but he’s just not getting the interest he thought he would.
Nobody is buying his house for what he’s asking and he can’t afford to start the major renovations on the new house until he’s sold the first one.
He’s not having the greatest christmas break right now.
December 26th, 2006 at 2:11 pm
Come on guys, we all know that Canada is shielded from any Housing Decline in the US because the CMHC says so.
I am currently looking for a new house in Kelowna and there are a lot of vacant homes up for sale right now. There were 3 in just a couple of blocks. Town Homes, SFH, etc.
I think there has been a lot of speculative buying going on there. They will be the first to drop come next Year.
December 26th, 2006 at 1:59 pm
Vacation homes in Coquitlam and Port Moody? BWAHAHAHA You made my day.
Maybe I should locate these foreign-owned vacant homes and pass out flyers on Hastings St. announcing where they are. Why waste a good roof?
December 26th, 2006 at 1:40 pm
I had Christmas dinner with my sister, a realtor. She claimed that foreign buyers were keeping real estate prices up and would continue to do so. Later, she acknowledged that these foreign buyers must be buying properties in Port Moody and Coquitlam as “vacation homes” because she noticed that many such houses in these new subdivisions remained vacant after being bought.
I was naturally surprised to learn that the Port Moody – Coquitlam area had become a vacation destination.
Those foreign specuvestors (and locals with them) buying houses there for $800+k are going to lose their shirts.
December 26th, 2006 at 1:08 pm
The news from the USA doesn’t apply to us. We are land locked; we have Asian students, the ocean and mountains. But most importantly, we are the California of the North. If my receptionist new of this blog she would be able to explain it better herself.