[Eug]

Originally Posted by turtle777 

See,s like you guys already had your crash in the early 90s. 37% is quite a bit.

Yup. A friend's family bought in the late 80s. Ouch.

P.S. Here's a graph for the US:



There was also a crash in the US at the same time as the one you mention in Canada. However, it was more severe in Canada.

The rate of increase for the post 1997 bubble in the US is shocking though. Wowsers.

[turtle777]

I haven't seen a graph like that yet.

Absolutely nuts.

-t

[Gator Lager]

if you want to see how bad it is in your area. go to yahoo and select
real estate, then select foreclosures and enter your zip code.

[Eug]

Originally Posted by Gator Lager 

if you want to see how bad it is in your area. go to yahoo and select
real estate, then select foreclosures and enter your zip code.

Link for the lazy

P.S. You can buy a $5 million foreclosure in Beverly Hills if you want.

Originally Posted by turtle777 

I haven't seen a graph like that yet.

Absolutely nuts.

If we choose to start the graph at post-WWI, then it would seem that the trend for reasonable pricing in the next couple of years should be closer to the $140000 range, which would mean a 30% price drop from 2006 peaks.

[Don Pickett]

Originally Posted by Eug 

If we choose to start the graph at post-WWI, then it would seem that the trend for reasonable pricing in the next couple of years should be closer to the $140000 range, which would mean a 30% price drop from 2006 peaks.

A roughly 30% drop puts us about back where prices were before the bubble. So, expect a roughly 30% drop when this thing is all over.

[Shaddim]

I hope it drops another 20-30%, I'd really like a beach house on Tybee Island.

[Eug]

Home Resales Rose 2.9% Last Month As Median Price Dropped 8.2%

Existing-home sales climbed for the first time in seven months during February as buyers took advantage of sharply falling prices.

Home resales rose to a 5.03 million annual rate, a 2.9% increase from January's unrevised 4.89 million annual pace, the National Association of Realtors said Monday. The last time sales increased was July.

Sales year over year were down 24% from February 2007.

NAR economist Lawrence Yun was encouraged by the 2.9% sales gain. "We're not expecting a notable gain in existing-home sales until the second half of this year, but the improvement is another sign that the market is stabilizing," Mr. Yun said.

The February resales level was above Wall Street expectations of a 4.85 million sales rate for previously owned homes.

Inventories of homes decreased 3.0% at the end of February to 4.03 million available for sale, which represented a 9.6-month supply at the current sales pace. There was a 10.2-month supply at the end of January, revised from a previously estimated 10.3 months.

Regionally, existing-home sales in February rose 2.5% in the Midwest, 11.3% in the Northeast, and 2.1% in the South. Demand fell 1.1% in the West.

[Don Pickett]

Originally Posted by Shaddim 

I hope it drops another 20-30%, I'd really like a beach house on Tybee Island.

Although prices will probably drop 30% nationally, how much the median price drops in a given area will depend on how inflated the values were in that area. Fr'instance, I wouldn't be surprised to see the bottom literally drop out of the market in Miami, as Miami was one of the crazier markets out there. New York probably won't see such a plunge because of the large number of renters.

[torsoboy]

Originally Posted by Don Pickett 

A roughly 30% drop puts us about back where prices were before the bubble. So, expect a roughly 30% drop when this thing is all over.

Why do you think that the bubble started at 140k (on this graph) when that is quite a bit higher than ever before? It seems like if we think of the bubble as starting at even the *peaks* of the previous bubbles it would be closer to $125k (37.5% descrease).

[Don Pickett]

Originally Posted by torsoboy 

Why do you think that the bubble started at 140k (on this graph) when that is quite a bit higher than ever before? It seems like if we think of the bubble as starting at even the *peaks* of the previous bubbles it would be closer to $125k (37.5% descrease).

Actually, I was lazy and didn't communicate clearly. I picked about $140K as a rough guess of where house prices would be if there had been relatively sane price appreciation from the bottom of the last dip. But, like I said, it's a rough guess, so it could be $130K, or it could be $145K.

[Eug]

Originally Posted by Don Pickett 

Actually, I was lazy and didn't communicate clearly. I picked about $140K as a rough guess of where house prices would be if there had been relatively sane price appreciation from the bottom of the last dip. But, like I said, it's a rough guess, so it could be $130K, or it could be $145K.

I'd agree with that.

I was thinking 130-140. 140 was me just being a little on the optimistic side.
140 would mean a 30% drop from peak, and 130 would mean a 35% drop from peak.

I would be surprised if it dropped to the 120 mark, unless inflation hits hard.

[turtle777]

Originally Posted by Eug 

I would be surprised if it dropped to the 120 mark, unless inflation hits hard.

What inflation ?
We're headed for DEFLATION. Money will get scarce, prices will DROP. The housing market is the first sign, other things to follow.

So we're dealing with TWO effects:
1) Housing prices falling back to normal level
2) Housing prices falling further due to deflation

-t

[peeb]

Depends - I think we're looking at a highly regionalized housing situation in the next few decades. House prices in desirable areas will stay high, those in less desirable places the bubble will burst. I think we're seeing the beginning of the end of 'national house price trends'.

[olePigeon]

Originally Posted by turtle777 

What inflation ?

I think he's referring to the devaluing of the the US dollar. Overpriced homes and no money to buy them will (your deflation) will result in lower-cost homes.

I'm waiting a few years. I never imagined I'd own a home in the Bay Area, but if prices keep dropping, it's a possibility. Pretty exciting. I always thought I'd have to move out of the Bay Area to own a home, or even out of California.

[turtle777]

Originally Posted by olePigeon 

I think he's referring to the devaluing of the the US dollar.

Maybe, but devaluation of the Dollar != inflation.

At least not necessarily.

-t

[Eug]

Originally Posted by turtle777 

Maybe, but devaluation of the Dollar != inflation.

At least not necessarily.

That's true too.

However, even the Chinese Yuan is not really pegged to the US buck anymore, so there is upwards pressure on the prices of goods in the US if the US buck continues to drop.

Anyway, AAPL closed up today 6.26, to $139.53. Nice: +4.7% for the day.

[Eug]

Sad but true.

"This may be the most overanticipated and overanalyzed downturn in history," Fisher said. "One prominent CEO told me the only situation that's received more intense analysis than the housing market was the birth of Brad Pitt and Angelina Jolie's baby. "



BTW, the peak was July 2006, and since then, the prices have dropped 15%.

[turtle777]

Originally Posted by Eug 

Sad but true.

"This may be the most overanticipated and overanalyzed downturn in history," Fisher said. "

Tis true.

But IMO, this downturn is also different from others we had before.

My prediction is that the downturn will not be as severe (extreme) as others before, but will take longer to be overcome.

-t

[PER3]

Just curious after looking at the above graph—

Prices have tripled in Moscow since 2004 in a market where there is almost no credit, and people don't see it as a bubble.

Now you pay $200,000 for an average 500 square foot (50 m2) apartment in the suburbs.

How can things be so different—even given the current sub-prime crisis—when average per capita GDP is ~$46,000 in the US, and ~$14,600 (double this for Moscow) in Russia?

What's going on?

Is the US about to finally "get buried" (according to a mistranslation of Krushchev)?

(Not meaning to hijack—just that sometimes comparisons can be productive.)



Moscow average prices in dollar/square metre vs. time

(divide by 10 for dollar/square foot)

[Don Pickett]

Originally Posted by turtle777 

Tis true.

But IMO, this downturn is also different from others we had before.

My prediction is that the downturn will not be as severe (extreme) as others before, but will take longer to be overcome.

-t

I think this one may be much worse. As a country we are in much worse financial shape than we have been in any bubble since the Depression. The amount of government debt alone is enough to scare the pants off of any decent economist. Add to the the amount of personal debt held by Americans, the weak dollar (which looks like it's finally starting to lose its role as the world's reserve currency), stagnant wages, and rising inflation and you have an economic perfect storm we haven't seen in a while. Usually, when economic downturns happen, people can fall back on savings or cut expenses. But, in a time when most Americans are in debt rather than having money saved, and when the job market is the weakest its been since WWII, there isn't any net under a lot of people.

Analogously, it's the fifteenth round of the fight, and the U.S. economy is punched out. Now, I'm not predicting that things will be horrible. But I'm saying that many of the economic factors which often mitigate downturns are weak or absent right now.

[Eug]

Originally Posted by PER3 

Just curious after looking at the above graph—

Prices have tripled in Moscow since 2004 in a market where there is almost no credit, and people don't see it as a bubble.

Now you pay $200,000 for an average 500 square foot (50 m2) apartment in the suburbs.

How can things be so different—even given the current sub-prime crisis—when average per capita GDP is ~$46,000 in the US, and ~$14,600 (double this for Moscow) in Russia?

What's going on?

I presume that much of the price increase in Russia is because people actually need to live in the places they buy, and there is limited housing, and people are paying for a large chunk of their homes with their family savings. IOW, the very fact that there is very little credit available makes it more likely that the pricing is actually related to real demand (in a time when people are starting to make more money).

A lot the US real estate's bubble was based on bad lending practices. People with zero collateral (besides the house itself) getting 100% loans with low teaser rates, and then trying to flip the house.

I don't know the market there, but I wouldn't be surprised is there is some speculative component in some parts of the real estate market. However, it's quite plausible because of the above reasons that the speculative component there is much, much smaller than in the US in 2006.

[Eug]

Big banks say: Rules? We don't need no stinkin' rules!

At meetings tomorrow in Washington, finance ministers and central bankers from the Group of Seven are expected to endorse recommendations by an international group of finance and regulatory officials on how to avoid a repeat of the credit crisis now seizing financial markets.

Proposals by the Financial Stability Forum include a call for banking supervisors to improve guidelines for how banks plan for cash shortages and a suggestion that banks be forced to publish their exposure to risk from complex securities, such as those that are backed by risky subprime mortgages.

The banking industry, which is facing losses approaching $1-trillion (U.S.), says policy makers risk introducing rules that are too burdensome.

“We think that it would be completely wrong now to jump to some premature regulatory measures, and that's why we are taking the initiative and doing whatever is necessary to demonstrate that we can do a better job within the industry,” Josef Ackermann, the IIF's chairman and the head of Deutsche Bank AG, told reporters in Frankfurt.

But policy makers are not likely to let go of their own role. Finance Minister Jim Flaherty predicted yesterday that his colleagues in the Group of Seven would endorse most of the 65 recommendations in the report by the Financial Stability Forum that describes what caused credit markets to seize and what could be done to avoid a repeat.

IMO, at this time it's a little hard to believe in the banks' ability to self-regulate... However, the governments could very well screw things up too.

[Eug]

The Canadian perspective:

Canadian housing boom over, but no bust on the horizon: CMHC, Scotiabank - Yahoo! Canada Finance

Canada's cooling real-estate sector is slowly moving toward a more balanced market, but there won't be any bust like that seen in the U.S. following the subprime mortgage crisis, Scotiabank economist Adrienne Warren said Thursday following the release of several housing reports.

In Alberta, "we've seen sales fall off more sharply than in some other areas of the country because of high housing prices. We've also seen a significant flood of new listings and new home building."

Looking at other markets, though, across the country, said Warren, "most of your major urban centres are still modestly sellers, but not as much as they were in recent years. We're moving towards more balance."

That's why, she said "we're moving from 10 per cent (price) increases, which is a buyers market, to five per cent increases which would be a slight sellers market."

Said Warren, "by 2009 nationally you'll be in a balanced market, where prices are growing in line with inflation."

"At the end of the day, we predict a soft landing for the Canadian housing market, with somewhat lower sales and construction, and a period of relatively flat inflation-adjusted home prices."

Dugan pointed to strong economic fundamentals such as employment levels, rising incomes and low mortgage rates as providing solid foundations for residential housing this year.

The CMHC forecast sees average home prices rising 5.1 per cent this year and 3.3 per cent in 2009, after average annual increases of about 10 per cent from 2002 to 2007.

So far, "we haven't seen any rise in defaults on mortgage payments," she said. "Canadian household finances are still quite sound, job markets are quite strong, wage growth has been quite strong."

Mostly it is the affordability issue that has seen some potential homebuyers seeking out less costly ways of getting into the market, she said.

"We've definitely seen a shift towards the condominium market which is more affordable," and changes in mortgage product mixes by financial institutions such as "less down, longer amortization periods to make it more affordable."

On the interest rate front, she said, "we do expect that the Bank of Canada is probably going to lower interest rates a little bit more over the next couple of months." That should also help support the housing market. [Eug's note: I saw a posted fixed 5-year mortgage rate of 4.99% this week. That's the first time I've seen a posted rate under 5% in a long time in Canada.]

CMHC says prices of existing houses will rise this year by 9.3 per cent in B.C., 3.6 per cent in Alberta, 26.1 per cent in Saskatchewan, 13.5 per cent in Manitoba, 3.5 per cent in Ontario, 4.7 per cent in Quebec, four per cent in New Brunswick, five per cent in Nova Scotia, three per cent in Prince Edward Island and 10.5 per cent in Newfoundland and Labrador.

---

We'll see if this turns out to be true, but I think the key indicator here is the lack of increase of foreclosures in Canada. Even with the mild economic downturn (due to bad conditions in the US), the mortgage industry here remains solid.

[Love Calm Quiet]

Funny how this thread was started in July 2006...

If only some investment bankers and federal regulation-policy folks had been noticing it and acting on the *possibility* instead of waiting till we now have to try to dig ourselves out of this hole

[scottiB]

Excellent and entertaining episode ofThis American Life on the credit crisis.

[Eug]

So, have we hit bottom yet?

So. California home sales surge 22% - May. 19, 2008

The monthly increase of 22% in the six-county region is well above the average gain of only 1.2% from March to April since DataQuick began keeping statistics in 1988.

Homes under $500,000 accounted for two-thirds of the monthly gain, DataQuick said. Riverside County, which the firm calls the "epicenter" of foreclosures and price declines in Southern California, posted the region's only annual sales increase, its first in two years.

April's median home price in Southern California was $385,000, down 24% from $505,000 in April 2007.

Despite the sales surge since March, April sales were down 19% from 19,269 in the same period last year, marking the weakest April tally since 1995, DataQuick said.

Maybe we have hit (close to) bottom for residential homes, especially as mortgage rates remain low. I don't know what one can get in most places in the US, but in Canada, it's 4.99% for a 5-year fixed mortgage. However...

Construction away from housing could be next bust - May. 16, 2008

Nonresidential construction, which includes office buildings and retail centers, hotels and institutions such as schools, hospitals or government buildings, remained strong through much of 2007.

But a combination of the economic slowdown and tighter credit appears to be putting the brakes on nonresidential projects. Even if work continues on those projects already underway, there are signs that the pipeline of new construction is about to dry up.

"The trend is much weaker," said Kenneth Simonson, the chief economist for the Associated General Contractors of America, the trade group for contractors outside of single-family home construction. "My conversations with contractors show they're still quite busy. But their order books are shrinking and they're quite worried."

A slowdown in the entire construction market would be bad news for the economy. Investment in nonresidential buildings added an average of $250 billion to the economy every year since 1990. A downturn is also expected to lead to the loss of many well-paying jobs in the months ahead.

[Eug]

We in Toronto now have advertisements for South Beach, FL real estate. Weird. Americans aren't buying, but Canadians are.

TheStar.com | Athome | March break, price break

"With the strength of our loonie and new-home prices in Florida so depressed, it's the perfect time for Canadians to buy a home down here," Johnston said during a recent trip to Fort Myers. "We'll never see these conditions again in my lifetime," says Johnston, immediate past-president of the Ontario Home Builders' Association.

"Eventually this glut of new homes will be absorbed and prices will rebound strongly. Canadians can buy homes in southern Florida that they couldn't afford two years ago and won't be able to buy two years from now."

I was just in Miami a few weeks ago actually. I was shocked at how low some of the pricing was. Beach front property was available for way, way less than lake front property here. My GF's parents have been hit by this, as they own a house in FL. They wanted to sell a while back, but are holding off because the local prices dropped something like 30%.

[olePigeon]

I'm thinking of calling my folks to see if there's a way to work out buying a home. California's too expensive, but it's not going to get any cheaper now. If anything, just to sell the house 6 to 10 years from now.

[Don Pickett]

Originally Posted by Eug 

So, have we hit bottom yet?

So. California home sales surge 22% - May. 19, 2008

Nope. That's predatory buying by the misinformed. Most of those homes will be back on the market within the next two years at less that the purchase price.

[torsoboy]

Originally Posted by olePigeon 

I'm thinking of calling my folks to see if there's a way to work out buying a home. California's too expensive, but it's not going to get any cheaper now. If anything, just to sell the house 6 to 10 years from now.

It will still get cheaper. Hold out another 6-12 months.

[Eug]

Originally Posted by torsoboy 

It will still get cheaper. Hold out another 6-12 months.

reportonbusiness.com: U.S. house prices continue to tumble

The Standard & Poor's/Case-Shiller home price index of 20 cities released Tuesday fell by 15.3 percent in April versus last year. That marks the largest drop since its inception in 2000 and the first time all 20 metro areas posted annual declines.

Prices nationwide are at levels not seen since August 2004.

Bloomberg.com: S&P/Case-Shiller Home Prices Fell 15.3% in April

Home prices decreased 1.4 percent in April from a month earlier after a 2.2 percent decline in March, the report showed. The figures aren't adjusted for seasonal effects, so economists prefer to focus on year-over-year changes instead of month to month.

All of the 20 cities in the index showed a year-over-year decrease in prices for April, led by a 27 percent drop in both Las Vegas and Miami. Charlotte, North Carolina, showed a decline for the first time.

One bright spot in the report was that more cities showed a gain in prices in April compared with the previous month. Houses in eight areas rose in value, compared with just two in March. Month-over-month gains were led by Cleveland and Dallas.

Originally Posted by Eug 

The Canadian perspective:

Canadian housing boom over, but no bust on the horizon: CMHC, Scotiabank - Yahoo! Canada Finance

reportonbusiness.com: Soft landing seen for Canada's housing market

Sheryl Kennedy, the central bank's deputy governor, said Canada's financial prudence has helped it sidestep the sharp home price declines being experienced in countries including the U.S., Britain and Spain.

“The Canadian housing market does not appear to be characterized by excess supply at this time,” she said in the text of a speech delivered yesterday in Banff, Alta. “The proportion of unoccupied, newly built dwellings in most cities remains below historical averages, suggesting that a major widespread reversal in house prices is unlikely in the near term.”

In the past decade, prices of existing homes in Canada have risen by about 55 per cent, while new-home prices have risen by about 27 per cent. As one of the country's largest housing booms loses steam, most economists are forecasting a small increase in prices this year that will keep pace with the central bank's 2-per-cent target for inflation.

[Eug]

Well, prices in Canada have now dropped. Not a lot in most places (a few %), but nonetheless they've dropped.

Last year I told friends that if the housing market in Canada dropped by around 10%, I'd be fine with that, esp. since I paid well under asking price. However, a drop of 20% would be more concerning to me. It also depends on the locale. In certain areas the price increases have been gradual and more justifiable in terms of local economics, but in other areas the prices have skyrocketed for unexplainable reasons (Vancouver), or have skyrocketed for explainable reasons that weren't sustainable (Alberta, which is rich in oil).

So far there seems to be a difference in the type of drop though. Here it seems to be more of a supply and demand thing. Prices are dropping because listings are increasing, and there is general concern about the economy, but foreclosures remain extremely low. In the US a large chunk of the drop is directly related to high increases in the foreclosure rates.

OTOH, if the prices continue to drop, to say the 15%+ range, I could see the foreclosure rate increasing here too. People with low equity in their homes might be willing to simply walk away from their mortgages, like they've done in the US.

I think the key is the next two years. The banking crisis in the US... which is now spilling over into Canada certainly can't help, because it overtightens the real estate lending market. Furthermore, the Canadian economy is heavily dependent upon the US economy, and if the US economy goes into recession than Canada's is at risk of recession as well.

Perhaps a 15% drop would represent a reasonable correction. However, a 30%+ drop would lead to a crisis here as well. Hopefully the more conservative lending and credit review policies here have prevented that.

P.S. Just how much have prices fallen in the US anyway? 5-35%, depending on the area?

[ShortcutToMoncton]

This summer I became an "investor" (with my significant other) in a condo purchase in Toronto, haha! Building is underway and expected move-in is about February 2010 I believe.

I am slightly nervous I must say. It was certainly an anticipatory buy, since both of us are students; but we figured out we could make the downpayments (with some help), and we'll both be making decent money before or around when legal fees and payments start coming due.

The place is in a semi-emerging neighbourhood (Bathurst/St. Clair), which is always good for future resale, and it seems like we got a solid deal; ideally, we'd probably like it to be a "first home" type thing, but renting could be an option as well. It was definitely a bit of a risk though, so we're both keeping our fingers crossed that the economy/housing market in Toronto doesn't go totally tits up.....

greg

[The Godfather]

Wonder how many of the people who walk away from their upside down mortgages do so because they can't afford the monthly payments, or because they don't see the value of paying more for a low-valued house. In any case, they are a big part of the reason why the banks have lost so much money.
I have to profoundly thank all those renters who didn't jump into a toxic loan in the boom times. You are a true hero because if you got a house and defaulted, this hole we are all in would be twice as deep.

[mrtew]

Not to mention the people who only took out a mortgage for a $200,000 house even though their agent said they were approved for $375,000!

[Eug]

Originally Posted by ShortcutToMoncton 

This summer I became an "investor" (with my significant other) in a condo purchase in Toronto, haha! Building is underway and expected move-in is about February 2010 I believe.

I am slightly nervous I must say. It was certainly an anticipatory buy, since both of us are students; but we figured out we could make the downpayments (with some help), and we'll both be making decent money before or around when legal fees and payments start coming due.

The place is in a semi-emerging neighbourhood (Bathurst/St. Clair), which is always good for future resale, and it seems like we got a solid deal; ideally, we'd probably like it to be a "first home" type thing, but renting could be an option as well. It was definitely a bit of a risk though, so we're both keeping our fingers crossed that the economy/housing market in Toronto doesn't go totally tits up.....

Congrats! I remember when I got my first condo. Home Depot becomes your best friend.

Note:

1) It's gonna cost you more than you might think, so make sure you have a nice cushion. Various fees, etc. and rent! Yes, you will be "renting" your condo for a few months before the deed is transferred to you.
2) Don't count on the move-in date being anywhere near accurate. Mine was delayed many, many months, partially because the cement truck guys went on strike.

As for the potential downturn, I was quite worried when I bought my house last year. The warning signs of the end of the housing boom in Canada were starting to show, and I didn't want to be buying at a peak. Ultimately, I decided to go through with it anyway, cuz it was an extremely unique house that fit what I wanted, it was a modern build (less than 10 years old), it has a great big yard (which is unusual in TO), and they were willing to accept significantly less than asking price. So even if TO home prices dropped 10% it wouldn't bother me much, and of course I didn't have pay that stupid land transfer tax either. Furthermore, even if there is a significant correction (more than 15%) it won't affect my ability or desire to keep the place. For me it will just be an annoying paper loss. OTOH, I got more than I was expecting from selling my previous home last year, so at least it partially evens out.

In any case, the warning signs were correct, although some of the drop is due to the new land transfer tax:

http://www.torontorealestateboard.co...8/nr100308.htm

“We remain concerned about the Land Transfer Tax in the City of Toronto,” said Ms. O’Neill.

In the 905 Region, the 3,878 sales recorded last month were within three per cent of September 2007’s 4,012 transactions, and within two per cent of September 2006’s 3,942 sales. Sales in this region increased two per cent between September 2006 and September 2007.

From a year-to-date perspective, the GTA resale housing market has declined 14 per cent from the 73,827 transactions recorded a year ago. To date, there have been 63,595 sales through the TorontoMLS system this year. In the City of Toronto year-to-date sales have declined 16 per cent from last year’s figure of 30,059 to 25,257 transactions this year. In the 905 Region year-todate sales have declined 12 per cent. So far this year there have been 38,338 sales in the 905 Region compared to 43,768 last year. Prices throughout the GTA however, have remained fairly stable. At $368,549, the average price of a GTA home in September has declined three per cent from $380,132 recorded a year ago.

In the City of Toronto, the current average price of $393,647 declined six per cent from the September 2007 average of $420,182. Compared to the September 2006 average of $371,682 though, prices in Toronto for September 2008 have increased six per cent.

In the 905 Region, the average price of $352,071, increased marginally from the $351,641 recorded in September 2007, and was up five per cent from 2006 September average of $333,818.

---

It's interesting to note that outside the City of Toronto in the 905, prices were flat (up 0.1%). However, inside the City of Toronto prices dropped 6% in September. I suspect that a 1/4th of that 6% drop is directly due to the new Toronto land transfer tax. However that still leaves a significant component due to general market forces.

The question is how long and how this will last. The fundamentals here are good, unlike some of the harder hit places in the US (eg. new developments in Florida), but spillover from the poor economy in the US will definitely not help things.

[ShortcutToMoncton]

Yeah, we're expecting delays; we actually bought into the project late – the couple had a 2-bed, 2-bath and decided to upgrade to a den when they found out she was pregnant, so it worked out okay. My girl's parents have already bought into the project a couple years ago in pre-development, so that was handy in that we had a good source of info about the place, and the ability to compare how much more we were paying and what they were trying to stick us with, haha.

So Feb 2010 is already a twice- or three-times delayed figure, but at this point construction has started (you can see it on the corner!); permit delays are always a source of frustration, so it seems that we're at least past that as of right now.

greg

[Eug]

The carnage was impressive in the last few months on the stock market.

However, the good news is now the mortgage rates are at record lows. Americans are getting 30-year fixed rate mortgages at under 5%, and Canadians are getting 5-year fixed rate mortgages at under 4% now. Bernanke's $300 billion treasury buyout announcement this week wreaked havoc on bond yields, and fixed mortgage rates dropped significantly after that. The 5.55% Canadian "posted" 5-year fixed rate is the lowest since record keeping began on these in 1970, and real rates for those with good credit is usually at least 1.3% lower than the posted rate.

While credit is extremely tight for those with poor credit, banks are falling over themselves to do business with those with good credit. People are getting their existing mortgages refinanced at hugely lower rates, often with minimal penalty charges.

Furthermore, the US fed rate is now 0-0.25% (whatever that means), and the Bank of Canada rate is 0.5%. With a bank prime rate of 2.5%, I have friends (in Canada) who are now paying only 1.7% for their variable rate mortgages (since they locked-in way back when prime - 0.8% mortgages still existed).

Toronto housing prices have dropped in the 5%+ range YOY and it's a buyer's market, but these low rates are really starting to entice people. It's not just those existing homeowners refinancing, but new first time buyers are now kicking the tires again here in Canada. Yeah, prices may drop more over the course of the year, but then again, interest rates might increase again then too. It will be interesting to see what the spring and summer numbers will be this year. Yeah, they'll be a LOT lower than last year, but IMO more so for unit sales numbers than actual sale prices.

If rates do increase starting later on this year, I suspect they may still remain relatively low historically even a year from now, so people like ShortcutToMoncton will still get a pretty good deal in Feb. 2010... assuming the house actually does get built by then. Those who are buying now though are benefitting from record lows.

[mrtew]

Originally Posted by Eug 

...Americans are getting 30-year fixed rate mortgages at under 5%, and Canadians are getting 5-year fixed rate mortgages at under 4% now. ...

Can you explain the Canadian 5-year mortgages. I freaked out when I moved here and found that's pretty much all that's available here and really made me worry about what happens over the long term but was assured that's the way it's done here and it works out great. But obviously I'm still worried and even more now that I've seen what can happen when people sign up for stuff they barely understand!

[ShortcutToMoncton]

Yeah, but of course now you've got to balance the goods and bads of such low rates; bank lenders are far less willing to give "great deals" than they were when the rates were much higher. So you might get the same old problem that when the rates go back up (and of course they will), mortgages given today won't look near as good as mortgages given even a year ago.

My girl has a decent job at one of the major banks so luckily she has some solid insight into lending practices at the moment. Building construction is still going on, but with the way things are now we wouldn't be upset at all if the condo was delayed....

greg

[turtle777]

LOL, 5 year fixed rates, I'd never sign up for this in the current environment.
The 30 year fixed is about the only positive thing in the US housing market.

We're gonna get huge inflation, only a fixed rate is gonna protect you from your interest payments going through the roof.

-t

[Eug]

Originally Posted by mrtew 

Can you explain the Canadian 5-year mortgages. I freaked out when I moved here and found that's pretty much all that's available here and really made me worry about what happens over the long term but was assured that's the way it's done here and it works out great. But obviously I'm still worried and even more now that I've seen what can happen when people sign up for stuff they barely understand!

Originally Posted by turtle777 

LOL, 5 year fixed rates, I'd never sign up for this in the current environment.
The 30 year fixed is about the only positive thing in the US housing market.

We're gonna get huge inflation, only a fixed rate is gonna protect you from your interest payments going through the roof.

You can get a 10-year fixed rate mortgage here, but the rate is higher than the US 15-year mortgage rates. The advertised rate for a 10-year fixed is 5.25%, luckily from a large bank with pretty flexible pre-payment options. In the US, a 15-year is a little under 5% I believe. (That 5.25% 10-year rate is from Scotiabank, which is the 9th largest bank in North America.)

People in Canada tend to get the 5-year fixed rates, because that's where most of the deals are. Canadian lenders design their numbers around that. Remember, in Canada, the advertised 5-year fixed rate is only 4.25%, and some people are actually getting 5-year fixed mortgages for under 3.9%, although those are usually ones that are less flexible in terms of penalty-free pre-payment options than offered by the big banks. One of the things in the US is that since those longer-term fixed-rate mortgages are significantly higher cost, there is supposedly a higher percentage of people who actually end up just going with variable rate mortgages statistically. In Canada, the proportion of people choosing fixed-rate mortgages is higher compared to the US, but the terms are much shorter.

In my case shorter fixed terms have suited me fine. I have little use for a 30-year mortgage anyway, because my home would be paid off long before that, so I'd rather not pay the interest premium while still keeping the security of a fixed-rate mortgage. Even if the rate is 7.5% when I need to renew, I'll be fine. Of course, if it hits 15% then that won't be good. Who knows though. Just a little while back turtle was very worried about deflation. Now turtle is very worried about inflation. I suspect the reality will be somewhere in between. Probably inflation, but probably not as bad as the sky-is-falling types are claiming it will be.

Originally Posted by ShortcutToMoncton 

Yeah, but of course now you've got to balance the goods and bads of such low rates; bank lenders are far less willing to give "great deals" than they were when the rates were much higher. So you might get the same old problem that when the rates go back up (and of course they will), mortgages given today won't look near as good as mortgages given even a year ago.

My girl has a decent job at one of the major banks so luckily she has some solid insight into lending practices at the moment. Building construction is still going on, but with the way things are now we wouldn't be upset at all if the condo was delayed....

That's not true... if your credit is good. From what I gather, if you have a bad credit score, it's now hard to get any credit at all, even at a high interest rate. If you have an OK but not great credit score, you may not get some of the deals you got before. However, if you have a good credit score, there are awesome deals out there. The banks are fighting for business among customers with good credit scores. IOW, many lenders have nearly closed the doors completely to high risk customers, but are bending over backwards to deal with low risk customers. The good deals people got years ago are just as good now... with lower interest to boot... except now it's really just limited to that pool of customers that are good credit risks.

EDIT:

ShortcutToMoncton, I lie. In the Canadian context, people are still getting awesome deals with fixed-rate mortgages as mentioned above, but the big difference is with the variable rate mortgages. Good deals on variable rate mortgages no longer exist. In the past, it was common for someone to get a prime minus 0.8% variable rate mortgage, but this was when the prime rate was around say 6%. Now that the prime rate is only 2.5%, the best you can do is prime plus 0.5%, which gives an effective rate of 3%. That's still way better than 4.25%, but I suspect it's not going to last long. In the meantime, my friends who locked into those prime minus 0.8% rates are laughing all the way to the bank. They currently pay 1.7%. With rates like that, there is basically no incentive to lock-in to a fixed-rate mortgage. The prime rate would have to hit 5.05% before they'd be paying the same interest, and right now the prime rate is less than half of that. BTW, here is a rough table comparing the prime rate (which variable rate mortgages are based) vs. 5-year fixed-rate mortgages. As of last week, a "good" rate for a 5-year fixed was 4.29%, whereas this week it's closer to 4%.

[villalobos]

I know that hindsight is 20/20, but rereading the first pages of this thread is quite amazing.... I was on the market in 2006, but decided to wait out because I thought prices were too high and had to come down (preices doulbing in 5 years is just not sustainable). Bought at the end of 2007 (and should have waited some more but oh well...).

Some people in this thread ("real estate never go down") were/are very shortsighted.

[turtle777]

Originally Posted by what_the_heck 

[Oct 26, 2006, 10:11 PM]
Woohoo. If you buy now, you'll bite your ass later.

-t

I love being right

-t

[Eug]

Originally Posted by Eug in March 2008 

As I mentioned before, I bought a house last summer. I kept on waiting for indications of a crash in Canada, and the indications just never came. So finally, I just bit the bullet and bought. (How's that for alliteration?)

The house was not cheap, but since then housing prices in Toronto have continued their rise. So, even if the rate of price increases slow dramatically, and in 5 years price drops up to 20% start, I'm not going to be suffering too badly. (As I've mentioned before though, the market up here isn't anywhere near as screwed up as in the US, so we can't be sure a big drop is necessarily coming any time soon.)



Looking at the numbers though, I do expect prices here to start to least stagnate somewhat within a few years.

P.S. Even though I was a buyer, I did benefit from the price increases over the past several years. Why, cuz I had purchased a condo many years ago, when the home prices were well under that blue trend line. Furthermore, the downtown condo market is probably the hottest, so I got good coin from selling the place, which of course helped out for the house purchase.

I also find it interesting that housing prices still haven't hit 1989 levels here (after correcting for inflation). Yeah, house prices are expensive now, but not that expensive when taking that graph into account. There is "only" about a 10% premium on housing prices compared to what they should be, assuming that blue trend line is actually in the right ballpark in terms of accuracy.

So, partially based on this, and partially because price increases have been much more moderate in Toronto as compared to places like Vancouver or Calgary, I've been telling people I expect up to a 10% drop in home prices from 2007 levels in the 416 region of Toronto. That would put things at about 2005-2006 levels.

Early 2008 was the peak, and year-over-year prices in Toronto have dropped about 5% since then, which puts things right at about those 2007 levels. Thus, continuing forward, I would expect things to drop up to another 10%, or possibly even 15% if you factor in more of an overshoot.

I'd be OK with that as I was prepared for something like that to happen when I bought in 2007. Actually, that's one reason I refused to get involved with bidding wars as a buyer, but I do admit the bidding wars helped me and my GF greatly as sellers.

However, I must admit if Toronto prices dropped by another 20% or more from 2007 levels, I'd be annoyed.

I guess the good news is the rock bottom interest rates. It seems that now that the banks are weeding out the poorer risk applicants, they're a bit short on customers. So, to compensate, they're almost falling over themselves to provide good deals to those with good credit records. Many people have been able to renegotiate their existing mortgages with rates much, much lower than before, with only minimal penalties. So, if you're in Canada with a mortgage, definitely go speak with your bank, competing banks, and maybe a mortgage broker as well. I personally was able to drop a full percentage point off my mortgage rate, and the total penalty was actually less than 1 month's interest to do it. (They originally wanted something like 6 months' interest to break the contract, but came way down with a bit of firm negotiating.) That works out to a huge savings over the course of the 5-year term.

For first time home buyers in Toronto, while interest rates are attractive, it couldn't hurt too much to wait a bit either. I don't see interest rates climbing significantly until 2010, and like I said you could see lower prices in early 2010. That said, if you find a good deal on a home and it's precisely the type of place you were looking for, then it might make sense to buy, if it's your primary residence and you plan on staying there an extended period of time. I wouldn't say the same thing for cities like Vancouver though, because I expect the price drops to be larger. I wouldn't say the same thing for speculators anywhere in the country either.

[Phileas]

A friend of mine is a Realtor, operating mostly in the Bloor/Bathurst/King/Roncies area. She reports houses in the $350,000 to $450,000 bracket selling almost immediately, but no bidding wars. According to her more expensive properties take longer to sell, but are selling.

We just sold out place out in the country, for close to what we paid for it two years ago - took about four months to get an offer out there. We're planning on purchasing an investment property downtown and wanted to reduce our debt and get cash into savings.

We'll be having a chat with out bank next week, talking about lowering our rate.

[Eug]

Originally Posted by Phileas 

A friend of mine is a Realtor, operating mostly in the Bloor/Bathurst/King/Roncies area. She reports houses in the $350,000 to $450,000 bracket selling almost immediately, but no bidding wars. According to her more expensive properties take longer to sell, but are selling.

Sounds about right. However, those bidding wars really can make a big difference to price averages. For example, I sold my place in 2007 for 7% over asking in a bidding war. My GF sold her place for 8% over asking in a bidding war. Both were on the same day. I felt both our listed prices were close to fair market value (for the time), although realistically they were probably about 2% underpriced (in order to attract foot traffic to our open houses). Take off that 2% and that means we got about 5% more than we were actually hoping for.

We just sold out place out in the country, for close to what we paid for it two years ago - took about four months to get an offer out there. We're planning on purchasing an investment property downtown and wanted to reduce our debt and get cash into savings.

Hmmm... Hope you do well, but there is risk that the prices will continue to drop for a while. It's not so bad when you're actually living in the place, but if you're speculating on leverage, it can be problematic unless you're prepared to keep it for the long haul.

We'll be having a chat with out bank next week, talking about lowering our rate.

Good luck. I suspect they'll try first to get you to agree to a blend-and-extend, but if you're lucky you may be able to get a much lower rate than that, with not too much penalty. Even if you can't there are banks now like CIBC which are offering 2% cash back for rates at around 4.05-4.25% (5-year fixed). That 2% will cover most penalties from breaking mortgage contract from another bank.

[Eug]

As of today, ING Direct has an advertised 5-year fixed-rate of 3.95%. While you won't get that from CIBC with 2% cash back, it would be a good bargaining tool with your bank. 3.95% is now the going advertised rate, with unadvertised non-cash back rates at big banks going below 3.8%. (It's > 4% if you want the 2% cash back from CIBC to cover your penalty, but that's great too.)

Wowsers. Unprecedented interest rates these days.

[mrtew]

So if I wanted to get a 20 or 30 year fixed rate what would it be at CIBC? Or is that even possible?

[Eug]

Originally Posted by mrtew 

So if I wanted to get a 20 or 30 year fixed rate what would it be at CIBC? Or is that even possible?

Most banks don't have those. Mostly they're up to about 10 years, although occasionally you might see longer term mortgages.

However, just about nobody in Canada gets mortgages that long, because the rates usually suck. For example, Scotiabank is advertising a 5.25% rate for a 10-year fixed rate mortgage. That's not terrible, but compared to US 15-year rates, that's not very good either. OTOH, their 5-year fixed rate is 4.15% (and people can get lower rates with some negotiation).

That's an enormous rate difference. The entire fixed-rate mortgage market in Canada is built around 3-5 year terms.

As for the amortization period though, that can be up to 35 years. However, I recommend thinking very hard about getting a mortgage if you have to resort to a 35-year amortization period. If your finances are such that you can handle a 25-year amortization, but you get a 35-year amortization to give yourself some breathing room, then that's fine as long as you're willing to make interim extra prepayments. However, if you can only at best afford a 35-year amortization, then you're really stretching yourself thin.

With a 35-year amortization and a 5-year term, you could really be in trouble if the rates spike in 5 years. This a real possibility, as all these stimulus packages could lead to increased inflation at that time. For example:

$250000 mortgage, 25-year amortization, 5-year fixed 4.15% = Monthly payments $1335.46, with $218199.89 remaining after 5 years

$250000 mortgage, 35-year amortization, 5-year fixed 4.15% = Monthly payments $1124.18, with $232248.00 remaining after 5 years.

That's a $14000+ difference in mortgage principal remaining after 5 years. That extra $14000 can make a noticeable difference in monthly payments when you renew, and if the interest rate is very high at that time (like 9%+), it could be enough to push your finances over the edge (even if you decide to extend your amortization period again to 35 years).