The Calgarian Contrarian

US readers have now identified Calgary as a bonified Bubble-town

2006-05-30T20:12:00.000-06:00

Thanks to the reader who pointed out this article to me.

The comments are spectacular.

Away

2006-05-30T05:44:00.000-06:00

I'll be out of town for the next couple of days so probably my next post will be on Friday. For those of you in need of further bubble news, check out these terrific links on the right. Most are updated daily.

Huge Price Increases and Market Psychology

2006-05-29T08:29:00.000-06:00

This article in the Calgary sun does a pretty good job explaining the current housing market here. Prices are up over 45% year over year and inventories remain at record lows. Average time that homes are on the market is 14 days.

I continue to believe that the current scenario of rapid price increases actually increases demand further exasperating the situation. In a "normal" market, price increases depress demand. It's economics 101. In a bubble market, the psychology is different. The faster the prices rise, the more potential buyers panic and say "I have to buy now! Or I'll never be able to afford it!" And then they go out and get in bidding wars for less than ideal homes at very expensive prices.

The reality is that for many of these buyers, they can't afford it now, but the bank is lending them lots and lots of money. In fact, the greater the turnover of homes there is in this market, the greater the transfer of ownership goes from the populations equity to the banks equity.

Many readers continue to ask me when do I think this craziness will end. I unfortunately don't have a crystal ball with a date on it. All I can point out is that we are lucky in that there are many other markets in North America that have gone through similar price increases over the past few years. That is why I continue to provide links to articles in other areas to try to give local readers some perspective that:
a. This won't go on forever
b. It will end when people least expect it to.
c. The people who buy within one or two years of the top are the ones who get the most screwed with negative equity in their homes (assuming they leveraged themselves to buy)

If you want an excellent predictor of timing, continue to follow the inventory situation. I update my charts about once or twice a month on this site. You can also follow it daily on www.creb.com This site shows the total inventory of unsold homes in Calgary. It is not a perfect stat because it only takes into account homes sold on the mls, but I think its a good proxy to understand the current market conditions. Right now we are just below 2000 active listings, which is extremely low by historical standards. If you see that number start to climb back to "normal" levels of between 5000-6000 you can expect prices to slow down or even begin to drop slightly. As the number goes much above that level, you should see prices begin to decline. That is the pattern we have seen in many US cities. Once a bubble market exhausts itself, there is a rapid climb in inventory levels, followed by prices beginning to decline.

Stay tuned!

What does the downside of a bubble look like?

2006-05-28T08:40:00.000-06:00

Check out this article about communities in Florida. I'm afraid that real estate prices move much like other investments. In other words, the trend is your friend until it is no longer the trend. When prices rise swiftly, momentum carries them higher, as panicked buyers increasingly bid up prices. This momentum works in reverse once the top is reached. Buyers stay on the sidelines waiting for prices to drop even lower. Also, as prices drop, more and more sellers enter the market as investors try to unload their properties before prices drop even further, thus contributing to even greater downside momentum.

We see this occurring in many US markets that were very red hot as late as 6 months ago.

Standoff in Florida

2006-05-27T11:19:00.000-06:00

Check out this article

Toronto Condos

2006-05-26T10:55:00.000-06:00

Wow. This article in the Toronto Star explains that more condos are being built in Toronto than Miami or New York. Crazy.

The article goes on to say that the new condos in Downtown Toronto are selling now for around $324 per sq foot. This compares with new downtown Calgary condos, many of which are selling for over $374 or $400 per sqare foot.

It is difficult to make comparisons because the Toronto figure is an average of many more buildings. I do not have the comparable statistics for Calgary. Does anyone know the price per sq foot stats for new Calgary condos?

Exposing Commonly Held Myths

2006-05-25T09:31:00.000-06:00

Many readers ask me why I spend time focusing on other markets, providing links to their housing markets. Aren't all markets local in scope, and largely unrelated?

Of course housing markets are local. The reason I spend time with other markets is to help shed light onto many of the myths I hear on a daily basis where I live. I find that because other markets have been through huge housing booms over the past few years, we can learn something from them, and what happens as a boom winds down.

Here are some of the myths that I attempt to expose by showing examples from other markets.

1. House prices can go up or stay flat, but cannot decline.
2. Housing booms are traditionally followed by soft landings, or periods of modest price increases.
3. An area with a strong economy and job growth cannot experience price declines.
4. As long as it is cheaper than Vancouver, prices in Calgary cannot drop.
5. It is “different” this time. The old rules of economics and asset bubbles do not apply.
6. You can’t lose buy buying a property. It is the safest and best investment in the world.

All of these arguments were and are heard regularly in many of the boom markets of the past few years, San Diego, Miami, Boston, Sacramento, Las Vegas, Phoenix, Vancouver, Sydney, Shanghai, Minneapolis, and many others.

The purpose of showing what is going on in many of these markets is to educate us as to the myths. When investors/ home buyers begin to realize that there is risk involved in purchasing a house with debt, they might be more rational in measuring the risk/reward and making better decisions.

Phoenix, hard or soft landing?

2006-05-24T23:24:00.000-06:00

“Marshall Vest, a University of Arizona economist, agreed that Tucson’s housing market has cooled off considerably. ‘Things are slowing down for sure,’ he said. ‘The number of houses sold are coming off their peaks, and prices are leveling off. The median price of homes in Tucson has been steady for about six months.”

“While Tucson’s housing market is cooling, the market in Phoenix is in the deep freeze. KB Homes and Fulton Homes have each laid off workers in the Valley of the Sun, where the inventory of unsold homes is piling up. Vest said housing prices in Phoenix are tumbling. He said median home prices in the capital city have fallen from a high of $350,000 to about $300,000.”

“‘The frenzy is gone,’ Vest said. ‘The scramble to buy and get in on the action is gone. Investors and speculators have retreated from the market.’”

Click here for the full article

US new home sales for April

2006-05-24T08:50:00.000-06:00

The numbers for the US new home sales are out for April. Sales jumped 4.9% from March, but inventories of new unsold home rose to record levels, and median prices dropped over 7% since March.

An interesting sidenote, CNBC claims that prices rose last month, but most other news sources are claiming they fell. Interesting thing is the spin. Prices are up 0.9% from April 2005, so some articles claim that prices are rising (YoY). This is misleading. Prices have peaked last summer/fall and have declined month over month for the past few months. I guess it takes 12 months of price drops for CNBC to call a top.

Here are some links to today's stories:

Associated Press

The Arizona Republic

MoneyWeek

CNBC

Unbiased Media?

2006-05-23T10:20:00.000-06:00

One of the largest problems in the US that helped inflate the housing bubble was lack of objective and contrarian reporting from the press. Most of the press merely acted as cheerleaders for the boom, giving the masses comfort that their real estate investments, at any price, could not go sour.

Now that we are in the midst of a similar run-up in house prices in Vancouver, Calgary, Toronto... Do any readers know of any Canadian press that is giving a balanced view of the real estate market?
Is our press merely acting as cheerleaders also?

Sacramento Inventory

2006-05-22T09:40:00.000-06:00

I believe that if you want to predict the timing of a precipitous drop in real estate prices, you have to watch the inventory levels. During the boom since 2001 in the US, there has been a significant drop in inventories of homes for sale. Usually what happens when a market is at or near its peak, inventories skyrocket. Look at this chart from Sacramento: A long decline causing massive price increases, followed by a huge unexpected spike in inventories at the top of the market. Now we are beginning to see price declines in that market.

I think its very useful to follow inventories in Calgary. Right now, we are at an all time low. Once we pass the peak of the market (3-9 months after the peak), you should see a sudden and significant rise in inventories as every investor tries to sell before the market drops.

The Growl of a Housing Bear

2006-05-21T23:29:00.000-06:00

Read this article in Business Week. It is an interview with John Talbott. He wrote an excellent book examining the worldwide housing bubble called "Sell Now! The End of the Housing Bubble".

I read the book last month and it has some superb analytics for those who are interested in learning and being exposed the evidence of housing cycles with lots of good examples of past speculative bubbles going bust.

You can see his book at Amazon. Click here.

Flippers in Florida

2006-05-21T08:18:00.000-06:00

This article is a good warning about the risks of trying to flip pre-construction housing.

Calgary Price Update

2006-05-20T09:36:00.000-06:00

Just a quick update on Calgary prices as of May 20, 2006. Average price this month is $356,198 according to the Calgary Real Estate Board. This includes Single Family, Condos, and Mobile Homes. Inventories are still extremely low at 1,892; around 30% of historical norms.

At this pace, Calgary will be the most expensive place to live on earth by 2008. Possible? I think not.

Is it possible to learn from others?

2006-05-19T09:22:00.000-06:00

I recommend you read this article. Phoenix had the largest percent increase in prices of any city last year (>35%). Now cancellations are skyrocketing and builders are laying people off. What a difference a year can make.

Main Stream Media about 6 months late

2006-05-19T06:56:00.000-06:00

The mainstream Calgary press is beginning to report on what those of us who live here have known for many months, the average person cannot afford the average home.

This article is in the Calgary Sun.

It is actually more accurate to say that most Calgarians could never afford the average home, it's the banks that are buying most of them. What the article should say is that even the banks, who will generally loan any amount to anyone for a mortgage, are now beginning to resist gigantic loans for crappy, low quality, and bad location properties for some of the masses. Hence the newspapers say that people can no longer afford to buy a home. What they mean is that people are no longer easily able to borrow enough to buy a home.

I wonder if the lending industry will begin to get creative as they have in the US and begin offering "exotic" loans to get people into homes that they will never be able to pay off?

It's not different this time.

2006-05-18T08:00:00.000-06:00

This is an excellent article predicting the coming national housing bust in the US.

This article in the Boston Herald shows on a micro level what is happening as their bubble is deflating.

This article in Reuters describes how single family home prices are dropping in Massachusetts.

On a related note, a wise man once told me that "each generation of bubble investors claim it's different this time. While the bubble may be different (stocks / real estate / tulips) the stupidity of the masses never changes."

I very strongly recommend you to read the full Wikipedia's definition of an economic bubble. Here is an excerpt:

"An economic bubble (sometimes referred to as a "speculative bubble") occurs when speculation in a commodity or asset class causes the price to increase, thus producing more speculation. The price of the good then reaches absurd levels (that no longer reflect utility of usage and purchasing power) and the bubble is usually followed by a sudden drop in prices, known as a crash or a bubble burst. Both the boom and bust phases of the bubble are examples of a positive feedback mechanism, in contrasts to the negative feedback mechanism that determines the equilibrium price under normal market circumstances. Prices in an economic bubble can fluctuate chaotically, and become impossible to predict from supply and demand alone.

"Economic bubbles are generally considered to have a negative impact on the economy because they cause misallocation of resources into non-optimal uses. In addition, the crash which usually follows an economic bubble can destroy a large amount of wealth and cause continuing economic malaise as was the case of the Great Depression in the 1930s for much of the world and the 1990s for Japan."

How Do You Know It’s a Bubble?

2006-05-17T08:32:00.000-06:00

Many readers have asked me something along the lines of “In Calgary, the energy sector is booming and creating huge demand for housing, so why isn’t the run-up in prices justified by fundamentals rather that it being a bubble?”

It is an excellent question. First of all, it’s important to note that financial bubbles always begin with fundamental price rises. It is perfectly normal for the Calgary real estate prices to rise with population and economic growth. The real question is that do the price rises continue at a reasonable pace due to the fundamentals, or do they increase at a much more frantic pace, due to frenzied and irrational behavior on the part of both buyers and sellers.

In a “rational” market, basic economic theory will hold, as prices are higher, demand drops and supply rises. When one goes to the supermarket to buy lettuce for $1, and then something happens the next time you go and the price is $3, a rational shopper may say, “I’m not buying this lettuce today, I’ll buy a different type of lettuce or perhaps something else entirely.” In other words, a higher price reduces demand. Lots of people will by a Chocolate bar for $1, but not many will buy that same chocolate bar for $6

In a bubble market, this doesn’t happen. The higher the prices rise (and faster), you see an INCREASE in demand. The fear of missing out overwhelms any other logical argument about price. It is clearly a greater fool situation, where the buyer will pay (or borrow) any amount, simply because he believes that a greater fool will come along and pay more.

So the question is, are we in a normal and rational market, or a bubble market? Prices are up about 45% in Calgary since 2 years ago, and just think how many people you know are clamoring to buy real estate that weren’t two years ago. Demand is much higher now than it was 2 years ago, even at much higher prices.

We see this phenomenon unfolding all over the US. As prices rose, demand rose. Now in many cities, prices are beginning to fall and demand is disappearing. In a “rational” market, demand should increase when prices fall. Not in bubble markets. My belief is that once the market exhausts itself and prices flatten, a huge portion of the demand disappears, both potential buyers who are no longer panicking, and also speculators who cannot make a quick buck flipping.

If you believe that we are in a bubble, the true question is how long can it last? Unfortunately, I don’t have a great answer. Because bubble markets are inherently irrational, one cannot predict rationally the time they will end. If the US market is any example, they usually last longer than one would expect possible, and they just collapse, when one least expects it, usually due to first time home buyers being completely shut out of the market at certain price levels.

Hottest US markets in past 5 years are now seeing start of Price Declines

2006-05-16T11:25:00.000-06:00

This article captures the mood in some South Florida counties that are beginning to experience price declines.

This article explains how sellers in Reno, Nevada are dropping their prices by 25% and still getting no offers.

What can I say, there are many Canadians who don't believe its possible for real estate prices to decline. They cannot picture a future at all different from today's market. All you have to do is pay attention to what is going on in other cities of the world. It's not rocket science, just open your eyes.

US home prices are in decline

2006-05-15T13:19:00.000-06:00

The NAR confirmed today what many of us watching the US market already new. Home prices nationwide declined in Q1 2006 by 3% since Q4-2005. Check out this article.

Inventories

2006-05-15T10:28:00.000-06:00

This chart shows the inventory of unsold homes in Calgary over the past 6 years. There has been a startling drop since the summer of 2005. I believe this coincides with the panic in the market. That is the point where house shoppers saw prices increase weekly and starting major bidding wars for homes, and waiving conditions such as home inspections in order to buy. That momentum has fed on itself since, causing a massive drop in inventories as buyers are bidding on homes the day they are listed, and sellers are withholding from the market waiting for future higher prices before listing.

In a normal functioning market, high prices would lead to an increase in sellers. However in a rapidly rising price market, there is a perceived advantage by sellers to hold off of listing, waiting for even greater market increases in the future.

I wonder if there are many people who want to sell their homes but are waiting to take advantage of "guaranteed" higher future prices??

Real vs Nominal Prices

2006-05-14T22:39:00.000-06:00

A few responders have asked for the Calgary price graph in both Real and nominal terms. This graph shows prices in nominal as well as fixed 1992 dollars. You can see the rapid acceleration in prices far exceeds the level of general inflation.

In other news, there is an excellent article here about what is going on now in many California markets. The once hottest markets in the US have been cooling at a very rapid pace.

Reality from the Front - There is still more land!

2006-05-14T21:49:00.000-06:00

I just returned from a weekend up in Northwestern Alberta. Every time I leave Calgary by car or plane I am still struck by an amazing picture.... There is lots of land.

Unlike many cities in bubble land, Calgary is not constrained in any direction. In fact, one could imagine building suburbs out for hundreds of kms in each direction before coming into physical constraints.

This, of course, is juxtaposed with much of the recent panic in Calgary's housing market. The common theme amongst the masses is that "you'd better buy now, or else you will never be able to afford a house again!!!" I believe the current run-up in prices is due to supply constraints being overwhelmed by a surge in demand. Much of the demand is driven by panic.

One acquaintance who works for one of the large home builders here told me that they have 25 years of land ready to be developed, but constraints like the number of workers were the problem. The interesting thing to me is the age-old short run vs. long run in economics at work here. The huge demand for housing is short run in the sense that when the panic ends, much of the demand will be reduced. Market psychology can change over-night. Whereas the supply problems will alleviate over the longer run (more workers can come over the next few years, more builders can enter the market and expand...) There is certainly no constraint over land.

Lots of people ask me, when will this insanity end? I don't have the answer. All we can look at is other cities and see what happens. If the US is a fair example, it looks as though the crazy markets eventually run out of steam, and then you see rapid increase in inventories over a short period of 6-9 months, and that's when panic selling sets in.

Another possibility is that the coming US recession will cause a worldwide recession, weakening energy demand and therefore prices. Should prices drop rapidly, Calgary could see an absolute bloodbath in real estate. Most "experts" dismiss this notion but I believe it is likely should a world-wide recession occur.

Stories from the front.

2006-05-12T08:36:00.000-06:00

This story from San Francisco illistrates some issues that arrise when a very hot housing market cools off.
This story is an excellent anecdode for those who claim that house prices cannot drop.

I will be away for a few days, so my next posting will be after the 16th.

Introduction

2006-05-11T18:20:00.000-06:00

I've had numerous requests to restart this blog, which has been inactive for the past number of years.

We are living in interesting times. From an economic point of view, the world may be witnessing the largest and most widespread asset bubble in its history. Real housing prices have expanded to unsustainable levels in many parts of the world, driven largely by cheap money from irresponsible central banks, reckless lenders, and the irrational psychology that certain investments are risk-free and can only move up.

Historically, most asset bubbles begin with an economically rational reason for increasing prices, but then get taken over by speculators taking advantage of momentum, and finally by the masses piling into a particular asset driving up values quickly and beyond any rational valuation. This continues as long as a "greater fool" will always be willing to pay more for the asset.

Most asset bubbles historically have 2 common elements:
1. They go on much longer that anyone could rationally expect and
2. They always end when one least expects it, causing tremendous pain for the greatest fools when the market finally exhausts itself.

Previous asset bubbles include the Dutch tulip bubble of the 16th Century, the US railroad bubble of the 1870s, the stock market of the 1920s, and the technology bubble of the late 1990s.

When most asset bubbles burst, a recession follows. What is unique about the technology bubble bursting was that the world's central banks led by the US Federal Reserve flooded the financial system with easy money via low interest rates. This money largely found its way into housing markets worldwide, driving up values. Easy profits by home owners caused much of the population to pile into the real estate market hand over fist, driving values up further. This was aided by a financial industry creating more and more exotic and dangerous mortgage products to allow the masses to purchase homes at ever increasing values.

Evidence is now growing that in many of the hottest markets, the jig is finally up. I hope this blog can provide interesting evidence and opinions as to what is actually occurring, as well as follow this bubble's evolution in my hometown of Calgary.