Season of Hope, again

The warm weather of last few weeks along with the ferocious rallies in equities markets worldwide has germinated what had almost disappeared by the middle of March. Optimism is back, and not lest due to the President who got elected on the message of hope. Optimism and hope are very powerful emotions, especially when there isn't much else available. And they were on vivid display and action during the last month and a half. The calls of 'the bottom' have been getting more vociferous, even if more cantankerous for us. 

So what if the world buccaneered in an orgy of debt for 25 years, the  magic potion of more debt by the Fed and the treasury cured all the problems in less than 18 months. The credit bubble will unwind in just as short a time and everything will begin their ascent to the end of the universe again. Oil will rise again, and so will other commodity prices. Alberta will blossom again, and this time Fort Mcmurray trailers will sell for $1 million. 

And how can we forget the major upswing in home sales across Canada? After all, sales in March have been higher than in Feb and those in April will probably be higher than in March. Notwithstanding the fact that this is as much of certainty as the average temperature going up in these months as compared to previous ones. But since this is the season of hope, no one is supposed to question such basics. 

But hope, like greed is a very powerful emotion. It clouds judgement. It diminishes the capabilities of mind to contemplate simple 'what if' scenarios. Not the ones that reinforce your perspective using selective data from the last few years.  Scenarios such as- what would happen to Alberta if oil goes back again to sub $30 level for a long time. Or if natural gas goes below  $3. Yeah, but we were told that oil  will never go below $80. 

I was looking at the new MLS site the  other day. For some reason, I did not hate it as much as I hated it the first time I used it. I almost liked it a little bit. If we forget the average and median prices for a moment, I think we are back to the levels last seen in April  2006 for many of the property types I used to track. A starter shoe box in Edmonton North is down to around $275k, and unlike in April 2006, there won't be multiple bids raising the price but some aggressive buyers who will ask for 5 to 10 % discount. It's the same story in Calgary. In Calgary, the homes that were selling for(at least  listed for $430k) are now going for around $340k, plus the  possible discount. 

These are not pretty numbers and have got to hurt those who have bought in  the last three years.  For most of these people, they haven't paid more than 5% of their mortgage and  are clearly in the red after accounting for the closing costs etc.

But these are all inconvenient facts. Facts that have the potential to dash hope and cause despair. And anger, frustration and grief. And that is to be avoided at all costs, no matter what the reality. So, the alternate reality world in which only good news happens, and is reported must be created and cherished. 

Credit bubble unwind, global deflation, falling employment, falling commodity prices, falling aggregate demand, falling real estate prices, exorbitant prices for shoe boxes, tapped out consumers, massive over capacity, end of 40 year mortgages, heavy over consumption and subsequent lower corporate profits are mere distractions. The world has changed with hope. We can wish the recession away if have strong will power. If we want to it strongly enough. Like the Russian comrades who could wish the fall of the Soviet Union just by believing in the alternate reality.  

But we know how that ended.  

Weekend Canadian Delusion Edition

• This morning while perusing some Canadian news, I come across a headline "Home Depot buys its way out of project." Sure, bad times mean such decision are likely. But this is what I find instead as an explanation:
  

"Home Depot's decision is further proof some Canadian retailers are paying a high price for the economic woes south of the border, some observers said.

"They're (Home Depot Canada) definitely getting pressure from their U.S. parent just because things are so bad in the U.S.," said Michael McLarney, editor and publisher of the Canadian online home improvement retail magazine, Hardlines.

Are these guys for real? Don't they still see any problems with Canadian economy? When will they admit Canada is for twice the pain as the US.

• Continuing on the topic of bigger pain, I think Canada experienced two bubbles while most other first world economies (Except say Australia and New Zealand) experienced just one. Our first bubble was the housing bubble and our second bubble was the commodity bubble. Which is why we are likely to be hit twice as hard in terms of falling employment exacerbated by falling commodity prices leading to further problems with the housing market.
  
• The symptoms of deflation are here in Canada: "Canadian consumer prices fell a third consecutive month for only the second time since 1931 as energy prices plunged, giving policy makers room to lower interest rates to revive the world’s eighth-largest economy." They still believe in the infallibility of the central bankers and their ability to cut rates and force the economy out of the mess. The falling loonie will give some encouragement to Canadian 'inflationists' but purely Canadian items such as housing and wages will continue to fall further. A friend of mine in IT recruitment said that she has change a sea change in the attitude of lot of job seekers since November.
• Your thoughts?
  

The Joys of Economic Modeling

A physicist, an engineer and an economist go for a job interview. The interviewer, not in a mood to use lots of his gray cells, asks a simple question to each of the candidate. He asks, “What is the sum of 2 and 2?”
The physicist snaps immediately: exactly 4.
The engineer thinks for a while and says, 4 with may be 2 per cent margin of error.
Then comes the economist's turn. When asked the same question, he responds, “What do you want it to be?”

So goes the old joke about the nature of dismal science. Forecasting of any type is inherently risky, but when it is applied in the realm of social sciences it can be self serving.

Of course, this perambulatory text was required before trying to question some of the “research” published by the UBC school of Business.
There are generally very few problems with the models used in forecasting or in pricing based models. The models are generally borrowed from the domain of physical sciences and the underlying "math" of these models is solid. The problems are usually with the assumptions behind these models.
No wonder, it was the contribution of similar simplistic and infallible modeling that has left the US financial system almost bankrupt. Stupid is as stupid does. Especially when making important assumptions.
Most financial institutions priced their mortgage securities based on the assumption that real estate always goes up. And they gently added an appreciation factor of 4 or 5 per cent in all their calculations. Of course, prices go up, until they don’t.
And that’s precisely the mechanism you use to come out with ridiculous statements such as Vancouver being over priced by a mere 11 per cent and Edmonton actually being under priced by 8 per cent as mentioned in this study.
Vancouver, is the mother of all bubbles and we’ll see how far it’s going to fall when everything is said and done.
But this whole paper is just a glorified buy versus rent calculator designed to appeal to authority. There’s nothing interesting there- just a simple formula with unreliable data, with no references to data collection techniques or sample space. We don't know for example, how many data points were analyzed when collecting rent information. How many ads were actually verified for accuracy on craigslist or Kijiji? Did they actually call the advertisers? Did they negotiate the rates? One would expect some rigour or explanation on data collection when an academic paper is published.
But this study isn't meant for publication in a peer reviewed journal. It's designed to get the greatest of all fools who have somehow managed to so far resist the temptation to buy.
Rather than wasting 20 minutes or so on this paper, prospective buyers will be better served if they use this intuitive and simple buy versus rent calculator from NYT.

The Real Estate complex in this country knows that things are falling apart pretty much all across the Canada and they are trying their level best to contain the impending crisis. This "academic work" is too feeble an attempt and unlikely to convince anyone but severely delusional.

Season of Denial

Public mood has changed somewhat due to the extreme volatility in the markets and the consequent measures by the central banks.
And you are less likely to be ridiculed if you talk about the irrational real estate prices in Alberta.
Yet, the general response to Alberta real estate boom is that of denial. No, it can't happen here. We are different. There's no sub prime exposure here. Our economy is rock solid. Oil prices will not fall. Massive investment is being put into our province. We are cheaper than Fort McMurray or Vancouver. Calgary is the Energy super power.
Still, all these and a multitude of other responses reflect an important shift-from ridicule to denial. People can now at least 'imagine' the possibility of serious price declines. And the possibility of such declines that is contemplated in private is denied in public.
Anyone who has been around Alberta for a long time knows the true worth of this place. And how some of the properties that sell for $400k would not fetch even $125k a few years ago.

As I've mentioned (like so many others here and elsewhere), energy boom is just one little story that made the real estate mania more palatable to the masses. The real reason for the boom was the period of easy credit that lasted way longer than it should have. That season of credit expansion has come to an end as hedge funds and big banks scramble to meet their immediate cash needs. Almost anything is possible in this world, but I don't really expect a repeat of stories like those of my flipper friend who bought 11 properties with a $70k income. In fact, he has at least 3 properties in the market (others are still under construction) with $10 to $15k chopped off the prices. Still no takers. I doubt that he's going to be able to sell those properties unless he does something drastic like chopping of the prices by $50k to $75k.
Inventory is continuing to pile up in both Edmonton and Calgary. Edmonton now has 8400 properties in MLS and 2800 in Comfree. That's close to 11,200 properties for sale in a city of less than 1 million.
Calgary has 8000 properties in MLS and around 2000 in Welist. This is happening while the Sales are falling and we are past the peak selling season.
And let's not forget the 'true deniers', who know for sure that things will suddenly brighten up as the plains of Alberta welcome the first coat of snow.
Sales are slow because the sellers have unrealistic price expectations. As the credit market tightens, it will be progressively harder for first time buyers and upgraders to obtain the gazillion thousand loans on median wage. Prices are going to fall, it's just a matter of time.

The rental market has changed as well. There are about 30 to 40% more ads on craigslist rentals for both Edmonton and Calgary. Rentboard has also shown a similar increase. I occasionally put out ads for rental properties in Edmonton and Calgary and I still get responses for ads that were placed over a month ago. Why are they not able to rent properties? The rents are too high.

So both landlords and owners have very high expectations of what their properties in Alberta are worth. They could be right, but I doubt that. There are vacant properties-waiting for good renters and good buyers. I don't think Alberta is churning out jobs to sustain either the rental or real estate prices.
As flippers and speculators find it harder and harder to sell their properties and the season of denial fully blossoms, a lot of them will try to rent their properties. Pretty soon, there will be some competition for good, quality renters resulting in lower rents.
Of course, this is all based on the best case scenario-that oil prices stay high, economy remains robust and there is no global financial upheaval. If something bad happens, well.....
On a different note, our traffic has been increasing almost everyday. We now get close to 700 visitors every day. Thanks for your continued support and effort.

And finally, one little note to our dear friend Al Bundy from Bob Truman's site. You have not been banned from this site. Nobody has ever been or will be banned. Nor do I delete any comments. I used to do that until a month ago for inappropriate language, but I don't do it anymore.

Inventory Rising....and desperation begining

What do you make out of a Realtor press release that begins like this:
"Pessimistic market watchers are peering into the future for any sign of a market slowdown in Edmonton. According to the REALTORS® Association of Edmonton the market remains buoyant with a billion dollars worth of residential sales in May."

So is this the denial stage. Already? And going by the tenor of comments and the ad hominem attacks, it is looking like that. But I'll try to be very rational here. And look at the numbers and fundamentals. And may be an occasional shot at humor.

Let's look at the numbers. First Edmonton.
Inventory seems to have increased quite a bit. We are now close to 5000 on MLS alone. The Sales to listings has fallen to 59%. And the rule of thumb is that anywhere between in 40 to 60% is now a neutral market.
On comfree, there are over 1600 properties listed. And it looks like things are not moving at all in the comfree world.
Just to put things into perspective, last May there were only 1847 properties listed on MLS while comfree had 774.

Now to Calgary. There was quite a bit of stuff added onto the market last month. There are now around 6400 properties on sale on MLS alone. Add around 2000 from comfree and WeList and we have some choice. The Sales were actually down by 2% from last May. The sales to listings ratio is now below 60%, making Calgary a neutral buyer.
So are we at an inflexion point? May be. But you can never underestimate the 'buying power' of masses in a mania.
I'll further crunch these numbers in coming days.

p.s. Texas population increased by 12.7% between 2000 and 2006.
Alberta population increased by 10.6% between 2001 and 2006.
So you see, Texas should have seen even bigger boom than Alberta. Yeah, it's another failed attempt at humor from my side.

Update: As usual, the MSM cheerleaders are out in full swing. Obviously, they will be the last ones to see the import of rise in inventory and how things are sitting for much longer. I wonder why does anyone complain about the existence of this blog when all that anyone sees out there is roads to riches and the housing boom that will take the prices to infinity.