Vancouver Condo Info

Condohype just sent in this link to the main story in todays New York Times: Mortgage crisis spreads beyond sub-prime. This story will be of interest to anyone who believes that our local economy is affected by the US, our largest trading partner.

As home prices fall and banks tighten lending standards, people with good, or prime, credit histories are falling behind on their payments for home loans, auto loans and credit cards at a quickening pace, according to industry data and economists.

Chip posted this link to a government of canada site in the previous thread which I believe neatly ties into why US economy stories relate to Vancouver real estate prices:

Canada’s economy is less than a tenth of the US economy and it is highly dependent on the US economy. Eighty-five percent of Canadian exports are destined for the US and about fifty-nine percent of its imports come from the US.

Looks like the FBI is checking up on the whole sub-prime debacle:

America’s Federal Bureau of Investigation is investigating senior banking executives for insider dealing and fraud as part of a criminal inquiry into the sub-prime crisis, the agent leading the inquiry said yesterday.

Neil Power, the head of the FBI’s economic crimes unit, is heading the most far-reaching criminal investigation into the practices of the mortgage industry since it began to melt down last year, after years of increasingly lax lending finally fed through into an increase in defaults on home loans.

The FBI is investigating every level of the conspiracy that it believes perpetuated the housing boom and ultimately resulted in millions of Americans losing their houses, investment banks losing billions of dollars and the chief executives of Citigroup, Merrill Lynch, Bear Stearns and UBS resigning.

Some pretty strong language there: ‘economic crimes’, ‘conspiracy’, etc.  How much responsibility do lenders have for the housing bubble and crash in the US?  How much more conservative are lenders in BC?

Hat-tip to scullboy for the link.

Interesting commentary in MSN’s money central site:

With the 10-year U.S. Treasury bond yielding below 4% and 30-year mortgages available at 5.1%, there isnt a housing bubble

Mind you, I’m not saying that U.S. consumers don’t have too much debt, or that the U.S. economy isn’t dangerously dependent on the housing sector for growth, or that all the money sloshing around the globe isn’t encouraging dangerous speculation.

But those are different problems from the one getting all the headline attention at the moment.

It’s just that, for all the teeth-gnashing and pundit-moralizing, we really don’t have a housing bubble that’s anywhere near bursting. Current 10-year interest rates are just too low. And I certainly don’t see interest rates rising enough in the next year or so to burst a bubble, either.

..Interesting because it was published in June of 2005, right about the peak of the US market. Since that time prices and sales have dropped by record amounts and foreclosures have gone up 79%.

To make that monthly debt burden onerous enough to trigger a burst in a housing bubble, you have to look for a big drop in family income so that while monthly debt payments remain the same, they take up a bigger chunk of a diminished family income.

Huh. And yet mysteriously prices peaked in 2005 and started falling without a big drop in family income. Very strange!

The other trigger would be a big increase in interest rates that would push the monthly debt burden up on average and would strike especially hard at those home buyers who used an adjustable or no-interest mortgage to buy more house than they could really afford.

This trigger was also a no-show. There was no big increase in interest rates, but for some reason the buyers stopped showing up. Can housing markets collapse under their own weight? And if there is no housing bubble what happened in the USA?

Well, as the saying goes, prediction is hard, especially when its about the future!

update: On the local market front, Ella points out this article in 24hours that shows buying in Vancouver may make more sense than renting as long as you use some very questionable math, disregard half the numbers and base the rest of the figures on silly assumptions.

I’m submitting the title of this post for the understatement of the year award. The United States of America is the worlds largest economy and Canada’s largest trading partner. With recent US job data not looking so hot, problems in the credit market and a housing slump that has left vacant eyesore properties in the hands of banks, 2008 is not looking like a really great year for the US economy.

Bank of Canada governer David Dodge commented earlier today on the potential fallout for the Canadian economy:

“The downside risks to Canada from slower U.S. growth in the first half of 2008 are probably greater than we estimated in October,” he told reporters on the sidelines of a meeting of the Bank for International Settlements in Basel, Switzerland.

The big question is how bad those downside risks turn out to be. If the US enters a recession (or is already in one) will Canada be able to avoid the same fate? What sectors of the economy are likely to thrive, where will we hurt and what happens to our super-hot housing market? It’s shaping up to be an interesting year.

Here’s a feel-good story for the holiday season. People that bought at the peak of the market in Santa Cruz California are finding that slumping property values have reduced the amount of property tax they pay!

The single father, 41, bought his two-bedroom, two-bath condo on Everson Drive near Neary Lagoon Park at the beginning of 2006. He paid $575,000.

Because his purchase date came at the height of the market and condos have proved particularly vulnerable to the slip, Muller later realized his home value had fallen.

“I got my property tax bill and felt there was a discrepancy between what I owed and what the market has done,” he said.

So in September Muller wrote the county. He claimed his condo, which had a listed value of $586,000 in January, was now worth $568,000.

It turns out, he was right — and then some. Last week, he got a call from Hazelton’s staff saying the new value of his home was $550,000. That will save him $300 to $400 a year in taxes, he figures.

Lose $25,000 in property value and get free money, $300 or $400 dollars for the year is a nice little extra windfall!

Foreclosures are running so thick in Stockton California that a real estate broker has started a tour bus service to bring prospective buyers to view foreclosed homes. If you’re interested in touring the foreclosed homes of Stockton you can sign up at RepoHomeTour.com

As expected the Fed just cut interest rates to try to stem problems in the US housing market:

Faced with a widening mortgage crisis, the Federal Reserve Tuesday cut a key interest rate for the third time in three months.

“Incoming information suggests that economic growth is slowing, reflecting the intensification of the housing correction and some softening in business and consumer spending. Moreover, strains in financial markets have increased in recent weeks. Today’s action, combined with the policy actions taken earlier, should help promote moderate growth over time,” the central bank said in a statement released with the announcement.

Story on MSNBC.

Many analysts believe the current quarter and the early part of next year will represent the period of maximum danger for a possible recession.

“I think a full-blown recession can be avoided but just barely,” said David Jones, chief economist at DMJ Advisors. He predicted that the Fed will follow up with three more rate cuts at its first three meetings of 2008.

Who wants a brand new house for 40% less than its book value? Welcome to the slumping American housing market.

Lenar Corp has agreed to shift 11,000 properties to Morgan Stanley for 40% less than book value to get them off their balance sheets:

“The deal was done on the last day of the company’s fiscal year, partially in an effort to generate tax-loss carry backs,” said Eric Landry, a Morningstar Inc. analyst. “The fact that it closed so late [9:30 p.m. on the last day] in the year and was priced at only 40% of book value may indicate just how eager Lennar is to slim down its balance sheet — and the degree to which it will go to do so.”

While details remained sketchy on Monday, a multimillion-dollar deal to shift 11,000 properties off the books of the nation’s largest home builder raised concern among analysts that the mortgage meltdown was continuing to spread.

Quite a headline ain’t it? Don’t blame me, blame MSNBC: Mortgage meltdown’s nightmare scenario.

Some 2 million homeowners hold $600 billion of subprime adjustable-rate mortgage loans, known as ARMs, that are due to reset at higher amounts during the next eight months. Subprime loans are those made to people with poor credit. Not all these mortgages are in trouble, but homeowners who default or fall behind on payments could cause an economic shock of a type never seen before.

Some of the nation’s leading economic minds lay out a scenario that is frightening. Not only would the next wave of the mortgage crisis force people out of their homes, it might also spiral throughout the economy.

The already severe housing slump would be exacerbated by even more empty homes on the market, causing prices to plunge by up to 40 percent in once-hot real estate spots such as California, Nevada and Florida. Builders like Chicago’s Neumann Homes, which filed for bankruptcy protection this month, could go under. The top 10 global banks, which repackage loans into exotic securities such as collateralized debt obligations, or CDOs, could suffer far greater write-offs than the $75 billion already taken this year.

There’s an article in todays New York Times about the way dropping home prices are affecting consumer spending - its an interesting look at the way the boom and bust cycle works on ‘positive feedback loops’ which aren’t always positive. When house prices are increasing people spend more money and will take on extra debt to buy more ‘investment’ property thereby driving high prices higher. When the peak has been hit this effect is reversed. Dropping house prices eliminate the ‘ATM effect’ of home equity withdrawals removing a large portion of discretionary spending from the economy. Less spending means less income thereby driving dropping house prices lower.

Mr. Whittey once seemed an unlikely member of that cohort. A sales manager at a flooring and tile company, he exudes the unflappable air of someone raised amid the easy money of the casino world. Until recently, he and his wife regularly embarked on shopping sprees of $1,000 and up.

He bought a 21-foot boat and two flat-screen televisions for their home. He sold his old truck and bought a new one, he said, “just ’cause I didn’t like the color.” Mr. Whittey could live in such fashion because his company was making good money and his house was appreciating.

But today, the value of his own home, which reached $500,000, has fallen and a separate investment property he bought seems likely to fetch far less than the $580,000 he owes the bank. His commissions have diminished, so his income is down. His neighbor recently fell behind on house payments, prompting the bank to foreclose. Anxiety reigns.

“We used to go out to eat three or four nights a week,” Mr. Whittey said. “Now, we don’t go out at all.”