Bailout Plan To Affect Calgary Housing In Future? You can Count On It.
Priced For Perfection?
Graphs
his letter is going to be much longer than our usual effort because of the large number of graphs but, before we get to those, we’d like to dwell for awhile on the 700 Billion Dollar U.S. Economic Rescue Package, a.k.a. Bank Bailout Plan which was just enacted by the U.S. government. Then, we’d like to ponder, just for a bit, on the future ramifications which these actions may have on the Calgary real estate market so strap in, it may be a bumpy ride. First of all, it is generally accepted that this initial plan will have to be followed by yet another set, or even sets, of cash infusions before “The Mess” is cleaned up. As to how much, some say perhaps another 1.3 trillion but, truth is, they are just guesses and the fact is it could be somewhat less or a lot more. And that is just the U.S. You can look for the same sort of actions by governments around the globe, for as we all know, “Sub-Prime” and the derivatives thereof have infected nearly every financial institution in the world. Second, it should be understood that this problem, which took years to unfold will take years to cure and finally, we should all believe Ben Bernanke when he says The Fed will do “whatever it takes” to solve the crisis. What does that mean? It seems clear to us: Huge injections of cash into The System and yes, much lower short term interest rates. How much lower? We hear 1 point lower by 2009 and our best guess after that is at least another half point lower by year’s end, 2009. That would put short term U.S. rates (Fed Funds) at 0.5 percent. estate market and Main Street is quite another matter though, and nothing we see so far will stop the tidal wave of foreclosures from continuing for at least another 12 – 18 months and nothing is going to stop a good recession from invading the overall U.S. economy. In short, U.S. unemployment is going to rise, credit card defaults will likely rise to uncomfortable levels, a few hundred more small to medium sized banks are going to fail and business failures will increase precipitously. It’s what happens in recessions. Oh yes, we forgot to mention it before but that recession will work its way North of the border. Count on it. Problem is…we have not had a good one in quite some time and most folks are now too young to remember or too old to care so, psychologically…it’s going to feel a lot worse than it perhaps will be.
A luxury apt that is budget priced for a timely sale. Sparkling clean, vacant and ready for you. Very hip building renovations. Covered parking. Granite counters. Glass vessel sink. Stainless steel fridge. Granite counters. Countertop/Instant Heat halogen range. Millwork includes 6 in. baseboards, headers over all doors, along with plinth blocks. Banks of cupboards and ensuite laundry with European style W/D. Strong condo assoc. The location is central & superior. Close to McLeod Tr, + Elbow Dr. + Glenmore Tr. so you can get anywhere, So much for the financial system and Wall Street. The U.S. real anytime. For lots more in the way of pictures, check out our website at www.calgaryhome.com.
Best Available Mortgage Rates:*
1 Yr. 3 Yr. 5 Yr. 4.80 % 5.35 % 5.45 %
So much for the U.S. As for Alberta and Calgary in particular, it 7 Yr. - 6.20% seems obvious to us that a slowing U.S. economy will lower the 10 Yr. - 6.25 % demand for energy (not to mention those planes, trains and automo- Var. - 4.75% biles). If so, think lower oil and gas prices. How low? That’s anybody’s guess to be sure but, as of today, ours is $65 - $70 a barrel Current Prime: 4.75% for oil and 6 bucks or so for natural gas. Think layoffs; perhaps not * All rates are as of Oct. 6th. a lot in Alberta but some nonetheless. Think sluggish real estate markets; perhaps not lower price- Click to Con’t.
For sound advice on financing, we suggest you call our broker, Mary Priestner at MCI (Mortgage Connection Inc.). She’s got a lifetime of experience, is sharp as a tack and...she never charges a fee. You may reach her at 229-3390.
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wise but, sluggish nonetheless. Think lower interest rates. Can you think of a recession when rates did not fall? This one will be no different, so we would look for our chartered bank prime to be down to at least 3 percent before it’s over. Mortgage rates are a bit tougher to predict though because that market is securitized and, because of “The Mess”, mortgage backed securities have become harder to sell; even here, so it remains an open question as to how much lower mortgage rates can go. Our guess right now is for the discounted 5 year fixed rate to hit 4.5% at some point. Now comes the fun part: When we think about drastically lower interest rates and the massive amounts of what is essentially “new money” now being printed by central banks the world over, our fear is that, sooner or later, this cash is going to, and in no particular order: a) grossly devalue paper money, b) stoke the fires of inflation to unacceptable levels, c) inflate hard assets such as commodities, gold and real estate to unsustainable levels and d) cause the bond market to reverse course and quickly raise longer term interest rates…a lot. If we’re right, in say 3, 4 or 5 years from now, we could be staring down the barrel at a major crash in the value of Calgary real estate (see Priced for Perfection?). We hope our fears our misplaced and, while our For Sale signs are still in the garage, our antennae are now raised for signs of what may well turn out to be…The Unintended Consequences and Aftermath of the U.S. subprime debacle and bailout thereof.
140 U.S. $ Per Barrel
South Hill Mobile Home Park
PAD #63, 950 SQ. FT., ASKING $110,000
This three bedroom mobile is super clean and it’s vacant for your immediate possession! Kids are allowed is this city owned and quiet park and pets are allowed too - with approval of the manager. Comes with all appliances. Pad rent = $475 a month and we hear this park rents out very well so if you’re looking for an investment that will throw off some income this may be a good one for you.
138.93
Crude Oil Monthly Average (W.T.I.)
120
100
80
65.63
60
54.57
40
20
19.39
0 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
Now, this is one scary chart! From $54 to $134 in LESS in 18 months. In our humble opinion, this is a very unstable situation and regardless of the so-called financial crisis, oil prices clearly have to come down to earth before they can start on their fu-
ture march to new highs. As we are fond of saying, we wait with bated breath for the bottom and, we think, the quick turnaround, as the commodity story still has legs Click for Pg. 3 and emerging markets are still going strong.
PRICED FOR PERFECTION?
9.0 Price - as a multiple of Income
Income/Price Ratio
8.0
7.0
6.0
5.0
4.0
3.0
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2.0 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07
90
We were updating our stats this past week and, for some reason, we chose to take a long look at an old indicator we’ve been ignoring for some time; namely, the Price to Income Multiplier. It’s a real simple thing in that the Average MLS Price is divided by, in our case, the Average Taxable Income per taxpayer in the City of Calgary. We’ve been ignoring it because as prices have risen and the indicator has reached all time highs, the offset has been interest rates which have, as we all know, been going down for lo’ these many years. Therefore, affordability has remained, for the most part, rather benign. However, it began to dawn on us last week that gee, perhaps this party’s coming to an end, so we decided to dust off a few of our lesser used indicators to help give us a clue to the future if, as we suspect, interest rates start to rise in the not too distant future.
What we found is this: Calgary’s Real Estate Market is now selling 80 at nearly 7 times income. The long term average, going back to 70 1967 is 4.45 times income; which is ok, as long as interest rates are low and/or incomes are rising 60 rapidly. Trouble is, incomes usually only rise quickly when un51.85 50 derlying inflation rates are high 44.38 and, when inflation is rampant interest rates always rise. Any40 Long Term Average way, in our Affordability graph, Long Term Average which tracks the percentage of 30 income that is required to service 26.85 a conventional mortgage on the 24.28 20 so called average priced home, we find that today, that number (39.80%) is at the high end of the 10 long term average range. However, take a look at where that 0 percentage was in the 1970s be67 70 73 76 79 82 85 88 91 94 97 00 03 06 fore the great inflationary wave swamped the market less than a decade later. Our point here is that in 1973, affordability, which was extraordinarily good, gave the market lots of wiggle room for prices to rise and/or mortgage rates to increase which, as we all know now, they both did in grand style. Today though, is a different matter and, while it is too early to predict, the warning flag is waving because, with affordability already on the high side of “normal”, there is much less “wiggle room” for prices to rise or rates to increase. Problem is, we think the odds of both occurring sooner rather than later are now quite high and therefore we also think the odds of a subsequent crash have also heightened; not now to be sure but lets just say, within the foreseeable future. When will we know it’s near? That’s easy. Oil and gas prices will spike to new highs. Calgary real estate prices will soar, and interest rates will start to climb…fast. So stay tuned, the world is changing fast and the uninformed are likely Click for Pg. 4 to be blindsided by the tide of events that are likely to soon unfold.
80.59
Percentage of Taxable Income
Mortgage Payment to Income Ratio (Affordability)
Thousands
510
Average Price (MLS)
460
$488K
$447K
410
360
310
260 $232K 210
160 $142K 110
60
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10 71 74 77 80 83 86 89 92 95 98 01 04 07 10
250
Reductions/Sales Ratio
This quarterly chart, which measures reductions in asking prices as a percentage of sales is also rather dismal - as you can see. What it’s telling us is that reductions in asking prices have been swamping sales activity by more than 2 to 1. Normally, this ratio should fluctuate between 50 & 100 percent. The one cheerie thought though is that this ratio can change rapidly and gosh - we sure hope it does...and soon too!
200
150
100
50
Click for Pg. 5
0 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
3 No. sales per 1,000 l ti
Residential Sales Activity Per 1,000 Pop'n - Monthly
2
LONG TERM AVERAGE RANGE
1
When you hear that sales activity has remained constant this year, it’s not really true because, even though nominal sales have remained so, they have actually been dropping like a stone since July 2007, when looked at in relation to population.
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0 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
180 180
PERCENT PERCENT
170 170
Top 5% Price Differential Top 5% Price Differential
168 168
160 160
This chart measure the percentage difference in price between the top 5% of all MLS sales and the broad overall average. Notice that the peaks come at market tops and this last one of 168 was a real doozy! However, now that it is back down to 119, we now have some reason to believe that the end of this market decline may be near.
150 150
140 140
LONG TERM AVERAGE DIFFERENTIAL
130 130
120 120
119 119 113 113
110 110
Click for Pg. 6
100 100 86 86 87 87 88 88 89 89 90 90 91 91 92 92 93 93 94 94 95 95 96 96 97 97 98 98 99 99 00 00 01 01 02 02 03 03 04 04 05 05 06 06 07 07 08 08
20
Percent
Average 5 Year Term "Posted" Mortgage Rates
18 Prior to 1967, mortgages were written with a 25 year term. The rates shown here reflect this fact.
16
14
12
10
8
6
4
Although the 5 year has been going against us of late, we still expect rates to come down again for awhile, for no other reason than bond rates will soon come down because of the ongoing financial mess worldwide and sooner or later, the MBS market should come back into line with other rates once things settle down a bit.
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2
0 5152 55 60 65 70 75 80 85 90 95 00 05
10
Morrow's Short Term Index of Leading Indicators
NOTE: When the Index exceeds +5 expect a strong market with rising prices.
5
0
NOTE: When the index is between +5 and - 5 the market will be relatively stable.
-5
The Index flashed its first “sell” or warning signal of this correction last October (a bit late for our liking) and since then has been pretty much in minus 5 territory, but - hope springs eternal for a return to +5... which we know will occur at some point. Count on it!
-10 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99
NOTE: When the Index exceeds -5 expect a weak market and falling prices.
Click for Pg. 7
00 01 02 03 04 05 06 07 08
The Morrow's Risk Index
10
Low Market Risk Above +5
5
Market Bottom
0
Average Market Risk (+/- 5)
-5
Market Top
Market Top -10 67 69 71 73 75 77 79 81 83 85 87 89 91
See Below
93 95 97 99 01
Elevated Risk Under -5
03
05
07
09
We’ve been trying, for some time now, to devise an accurate Risk Assessment Model and gee willickers...I think we may have stumbled onto something! Now sure, we’ve got our Leading Index and, while it has been fairly accurate in the past, this past year or so it has not. Darn!
So, with thinking caps on and many trials and tribulations, this is what we came up with and, without going into a long winded explanation it takes inflation, income, interest rates and the kitchen sink, then implies a rate of return to all of these numbers and….by using long term averages, either a positive or negative number results. Anyway, we think it’s a rather “elegant” solution to the risk question and we throw it out there for your consideration.
Finally, and before we leave you, please remember: Most folks don’t buy or sell real estate based on what is happening to price. Sometimes they do so because of what is happening to job...but mostly, they buy or sell based upon what is happening to life. You know...too many kids, kids left home, hate the neighbour, love the neighbour and moved in with same, new job, etc., etc. So if you’re leery right now...don’t be. It is not the end of the world and yes, “this too shall pass”.
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