The Mortgage Bubble

Don sent in the link to this commentary on the mortgage market in the US and [the economy in] Canada.  Dave Rosenberg points out that there are some strange things happening in the spread between treasury bond yields and mortgage rates.

Once again, this Houdini recovery has involved a situation where mortgage rates have plunged and yet Treasury bond yields have been rising — 30-year fixed rate mortgages have fallen to 4.93% and are sitting are record-tight spreads over long Treasury bonds (see Chart 7). Historically, the average spread is 150bps and this differential is now 20bps. This is remarkable and our concern is that investors who may be exposed to mortgages are at serious risk because there is a considerable chance that these rates will be moving higher over the intermediate term — notwithstanding continued support from Uncle Sam’s pocketbook.

Investors must be reminded time and again that mortgages are callable, Treasuries are not; and we are now in a situation where net of fees, which average 70bps, anyone buying mortgage paper today is receiving a rate that is less than what the borrower is paying, How nutty is that?

He also comments specifically on the health of the Canadian housing economy:

All of a sudden, the Canadian economic data are coming a tad below expectations, including the 0.4% MoM advance in December retail sales, which just came up short from recouping the 0.5% decline the month before (revised from down 0.3%). Excluding autos, sales are running at a 2.1 % annual rate over the past three months, which can only be described as tepid in view of all the rampant monetary and fiscal stimulus percolating through the system.

Not only that, but the supply response in the Canadian housing market is beginning to, at the margin, alter the inventory balance. The number of new listings surged 4.0% in January and has risen sharply now in three of the past four months. After outpacing new listings over 90% of the time between January and October of 2009, sales has now lagged in each of the past two months and this has taken the sales-to-listing ratio down to 0.614x from 0.634x in December and the nearby October high of 0.683x (and now stands at its lowest level in eight months). Pricing is sure to follow suit. Better buying opportunities lie ahead for the fence-sitters, in our view.

David Rosenberg is the Chief Economist and Strategist at wealth management firm Gluskin Sheff.  Read the rest at Mish’s Global Economic Analysis.

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Poor

1. Canada Mortgage and Housing Corporation (CMHC) has been insuring 0% down 40 year mortgages in recent years pouring gasoline on a housing market that was already on fire. Vancouver has become one of the most unaffordable cities in the world as a result of CMHC’s leadership in insuring speculative mortgages. 2. Economic fundamental do not justify house price increases in the last ten years. House prices have gone up an average of 9% a year which is far in excess of 3% growth in incomes and 2% increase in employment. 3. Mortgage debt ballooned from $431 billion in 2000 to $871 billion in 2008. This means in 2008 every man, women, and child in this country owed over $27,000 in residential mortgages. This is 60% more than the national debt for which each Canadian is on the hook. 4.… Read more »

SD92129

@patriotz:

Did you actually check out that book/link that you gave a reference to?

Are You Missing the Real Estate Boom?: The Boom Will Not Bust and Why Property Values Will Continue to Climb Through the End of the Decade – And How to Profit From Them

Some of the reviews are quite entertaining. Thanks.

Starving Artist

No more home reno credit? I guess that means no FTB credit either, like they have in Australia (where income-to-debt is around 150% now… sound familiar?). Cons are turning off the stimulus spigot. Too politically volatile to run up huge deficits I guess. I've heard the argument many times "sure interest rates are at zero, but there are other bullets in the gun". Sure looks like they are putting it in the holster.

March 4 is going to be interesting.

2 things bears don't seem to understand….

1. Past performance is not necessarily indicative of future results

2. Mortgage rates are set by the bond market

Anonymous

@logic

yups … also add in this

' Budget won't extend home renovation tax credit '
http://www.theglobeandmail.com/report-on-business

logic

45 – yoy, and compared in this case to the flood of listings in Jan 09 when prices were tumbling.

bestplaceonmeth

@catfood_gourmet: 1999 – Anonymous douchebag says: Bear arrogance is hilarious. You’ve been wrong for how long now little bears? 5 years or more that’s how long. You keep putting down bulls saying how wrong they are and you claim to have facts to back up your claims a crash is just around the corner. The INTERNET boom continues to this day and yet you still talk like your some expert. In fact many of you even make fun of REAL experts who actually know something about economics. 2010 – Anonymous douchebag says: Bear arrogance is hilarious. You’ve been wrong for how long now little bears? 5 years or more that’s how long. You keep putting down bulls saying how wrong they are and you claim to have facts to back up your claims a crash is just around the corner.… Read more »

bestplaceonmeth

@Supraboy:

Do you realize what it means if interest rates need to be kept at zero indefinatley?

I means we're in a fucking Depression.

No matter what interest rates do, it's LOSE/LOSE for real estate cheerleaders.

Kiss your sorry asses goodbye.

Anonymous

Few listings mean tight spring market: Re/Max

The spring housing market in Canada will likely see more heated bidding wars as an active January led to a steep drop in active listings in most parts of the country, a new report said Wednesday.

Rest of the story: http://www.cbc.ca/canada/british-columbia/story/2

stagnate

drachen says:

Six months or a year ago it would have been a dicey call but with inventory spiking faster than even ‘08, same price levels and government pulling back on it’s interventionist strategies you’d be a fool to bet against a crash this time around

well, that's a bit assumptious. the government might actually increase its interventionist strategies. inventory is in better shape now- less condos coming down the completion pipe and a larger population. need to keep your feet moving, the only certainty is increasing uncertainty.

arit

Mr Jones, If you examine carefully at the posts of the bears/bulls here, you will notice that they differ substantially in context! The bulls try to convince the bears that they (bears) are wrong. The bears (usually, usually) do NOT try to convince the bulls that they (bulls) are wrong. The bears are here to re assure each other that they are not crazy. Most bears suspected something is fishy and found this site where other people feel the same. So when the bulls say "Buy now", "If you don't buy you'll be priced out forever", "Only losers don't buy", "stupid renters pay my bills", the bears DON'T reply "It's a mistake bulls, please don't buy". We say "Buy three and tell your husband to buy three too!". So please, Mr Jones, Loud Speaker (I am not including Dave as… Read more »

patriotz

@Mr. Jones:

At best you have a very vague, high level prediction which is about as useless as saying “we’re all going to die someday”. Interesting, but completely useless.

Wrong.

With the bears, it's not about "when", it's about "how much".

If I think the market is going to drop, say, 40% from today, and that price point is reached at any time in the future, I win. And anyone who bought at a higher price loses.

The bears only have to be right once. The bulls have to be right all the time.

Yalie

"It could be this year, it could be next year, it could be in 5 years. No one here is concerned with being right or wrong."

Not true – I am really looking forward to telling people I told you so and wiping off some smug smiles….

And I bet most bears are looking forward to their day of glory, just as most bulls have really enjoyed being right for many many years

Drachen

@Mr. Jones:

Actually, late in the game you can predict when. Most people called it here in '08 and only government intervention saved the market. I am calling now as the second peak and I think a lot of people would agree. Six months or a year ago it would have been a dicey call but with inventory spiking faster than even '08, same price levels and government pulling back on it's interventionist strategies you'd be a fool to bet against a crash this time around.

Drachen

@Mr. Jones:

Most bulls didn't call the dip in '08 therefore most bulls are wrong by your logic too. Predicting the timing is nearly impossible with such a complicated system, but predicting a future trend is relatively easy if you put in the effort.

Fundamental analysis, Warren Buffet's system for analysing the markets is the best way. Thirty seven billion dollars can't all be wrong can they?

chumpdawg

@ Mr Jones

The bears here are not calling a date when they think the market will or will not crash. What we are saying is we think the increase in home prices is unsustainable and anything that is unsustainable must eventually stop.

It could be this year, it could be next year, it could be in 5 years. No one here is concerned with being right or wrong.

But what I think is irrefutable is that bubbles follow predictable patterns (study Kindelberg's Panics, Manias and Crashes) which I notice in Vancouver today.

I think

Beyond right and wrong, there is a field. I'll meet you there.

chumpdawg

@ catfood gourmet

You ever hear the story of the man who jumped off a skyscraper?

Mr. Jones

, What you don't seem to get that is if bears keep saying every 10 minutes that the sun is just about to rise from the moment it sets until 12 hours later, you're not really going to convince many people that you have a good understanding of what makes the sun rise. At best you have a very vague, high level prediction which is about as useless as saying "we're all going to die someday". Interesting, but completely useless.

You can stomp your feet and protest and say, "NO, but my analysis is based on sound facts and analysis" and you may one day be proven right, but by then everyone has stopped listening. So either suck it up and admit you can't predict WHEN anything will happen or just wait quietly and then say "I told you so".

domus

@M-:

Thanks a lot for the clarification, I really appreciate it.

This confirms my suspicions: even private reinsurers are just middle men between the government of Canada and mortgagees. They carry no risk but take a cut of the proceedings. This has to end! It is just plain crazy!

Write to your MPs, MLAs, whoever. Let them know that CMHC practices are bordering insanity and giving free handouts to banks, insurers and RE speculators. This is truly unbelievable…

Drachen

@catfood_gourmet: "You’ve been wrong for how long now" This has got to be the most common bull fallacy. If the sun is not shining it does not disprove the thesis that the sun will eventually rise. Saying, "The market is overvalued and will correct." is the same, by any standard the market is overvalued and therefore unless there has been a change in the fundamental nature of economics that the world has seen since the dawn of civilization it will correct. Since no bull has ever been able to point to any factor or series of factors that should put Vancouver real estate outside of the entire world history of economics any logical person would have to see that the Bear argument is simply correct. There is no debate to be had until a worthy Bull argument is forwarded. Slinging… Read more »

patriotz

@catfood_gourmet:

The real estate boom continues to this day and yet you still talk like your some expert.

Do a Google on the above quote and one of the first hits is this:

http://www.amazon.com/Are-Missing-Real-Estate-Boo

Seriously.

catfood_gourmet

Bear arrogance is hilarious. You've been wrong for how long now little bears? 5 years or more that's how long. You keep putting down bulls saying how wrong they are and you claim to have facts to back up your claims a crash is just around the corner. The real estate boom continues to this day and yet you still talk like your some expert. In fact many of you even make fun of REAL experts who actually know something about economics.

patriotz

@crabman:

FYI, citizenship is not a requirement for owning Canadian RE. In fact, not even residency is a requirement.

Actually some provinces (I know PEI for sure) have restrictions on non-resident ownership of rural or coastal land. I don't think any province has restrictions on urban RE, and BC has no restrictions at all.

This is one reason why there is no "right to own property" in the Charter of Rights BTW.

Supraboy

NEW YORK: Global stocks rose and the US dollar fell on Wednesday after Federal Reserve Chairman Ben Bernanke reaffirmed his commitment to keep US interest rates at exceptionally low levels for an extended period.

Watch Canada follow suit and keep rates low. Governments don't have balls to raise rates. It's all talk and no show.

patriotz

@bubble boy:

FYI: I am a darkie that ur talking about.

Well I'm a dual citizen, so I guess that makes us even.

patriotz

@XXX: As a NON RACIST I can tell you that there are many kids who attend westside private schools who’s daddy’s do not live or pay taxes here. The issue of evasion of taxation on overseas income has nothing to do with citizenship. Tax obligation in Canada is based on deemed residency, not citizenship in Canada or any other country. Someone in the situation you have described is a deemed resident. That is if the kids are permanent residents of Canada rather than just on student visas. There are a lot of the latter you know. I suspect the only part of the housing market that is skewed is the higher end westside properties. Well now we know you're really out of touch. My question for all the "foreign money is pushing up RE prices" types – how come then… Read more »