So we see the unbelievable what appears to be the deal of the century when JP Morgan bought legendary Bear Stearns for the paltry sum of $2 per share, more then 90% off the Friday close.  This may not be the last one.

Then we see the Fed drop the fed rate by .75% (some analysts had predicted it might fall a full percentage point).  The projection seems to be that they will drop another .75% at each of their next two decision dates to settle in around .75%…WOW.  In Canada it is an absolute certainty that we will see our Bank Rate drop .50% in the next meeting and likely .50% in each of the following two meetings.  That is welcome news more home owners in a variable rate mortgage, you didn’t panic and lock in late last year did you?

Affordability of real estate in Calgary will be good and should help keep our market stable and hopefully avoid a continued drop in value.

JOHN’S VERY HAZY CRYSTAL BALL

Wow, what a market in Calgary!!!

Here’s a quick recap, current status and projections into 2009. 2006 saw our available inventory drop to unprecedented levels, with as few as 1100 listings versus a typical balanced market number of 5000 properties. The year experienced levels of fury, multiple offers and value growth of almost 50%, By year end listing inventories reached over 7000 and continued into 2007.

2007 had mixed results, specifically values increased on average 8% however listing inventories continued to escalate to as many as 11,000 thus offering buyers considerable selection. The good news was that demand continued to be relatively steady.

2008 is experiencing a mix of both previous years. Inventory levels are once again approaching 11,000 properties, however sales are falling proportionately. In fact since 2007 listing inventory is up 37% which demand (sales) is down 35% – not the way you want to see the figures but it is the reality. Buyers are being more selective than ever and unless they have any urgency they are simply waiting to pounce on their “perfect” home. It’s really the converse of 2006 where countless buyers were chasing the one available home escalating its value to unforeseen levels, now we have countless sellers chasing the market down to a value level to attract the one potential serious seller that is lurking above and ready to pounce. This situation is precipitated by the fact that approximately 40% of all single family homes and about 50% of condominiums are VACANT. Why you may ask, well it’s due to one of a number of reasons – many investors from cities beyond (read Toronto) purchased homes to be built from builders and hoped to make a financial killing. Second we had numerous Calgarians who approached builders to build their dream home and given the 8 to 15 month construction timeline were going to live in their “old” home until such time that the new one was available. We also have our illustrious builders who decided to keep inventory off of the available homes list until the sites were totally finished. Their thought was that values would only be higher at the end of construction that selling during the build stage and found themselves caught with a pile of unsold inventory.

For condos it’s even simpler. We have countless of real estate kingpin wanna-be’s who invested in all the new projects with the sole intention of a quick flip. Many made a good buck during the 2006 explosion of values but those who entered at the tail end (read fall of 2006 and during 2007) are now taking possession of their units and finding that there are countless other identical units for sale in their same building let alone in the same community or area. Due to the large availability of units my description regarding the many (sellers) chasing the few (buyers) are creating a dog eat dog environment with values falling like a rock. An example of this is a buyer who purchased in an excellent complex in December 2006 at 635k$. It just listed at 565k$, quite the “haircut” but given the plethora of available inventory is a necessary price. On the single family side, we were recently involved in a transaction where our buyer acquired a brand new home in a spectacular location, backing onto a large park, west facing, fully developed walkout – originally priced at 995K$ and we acquired it at 875K$ – again quite the “haircut” for the seller.

Regardless, the situation for any Calgary seller is to lead the pack from a pricing standpoint, otherwise they will be mixed with the total inventory and have no true distinction leaving the buyer with every option to consider. In my opinion there are 30% of properties that qualify for the balance of available homes and these are the owners who are holding out for 2006 values. Good luck, their day will return if they are willing to wait 15 to 36 months, otherwise it is a futile experience for them.

The economic dynamics continue to be bright for both Calgary and Alberta and when coupled with the Canadian outlook will allow us to keep our heads above water, unlike our friends in the U.S. We have seen the bank of Canada rate fall 75 basis points thus far and anticipate a further 25 points on April 22 with as much as another 50 to 75 basis points before the end of the year. As long as the banks follow through and reduce the prime rates and subsequently variable interest rates, this should help stimulate buyers to re-enter the market. Due to the increase in bond rates, you will find that fixed term mortgage rates will rise as the year progresses, a phenomenon that we have seen before, namely variable rates dropping and long term fixed rates increasing. My suggestion is NOT to lock your mortgage rates yet, take advantage of the falling variable rates, they have historically proven to be the best choice over the long term.  

Canadian GDP, employment and inflation all appear in check. Calgary’s unemployment rate at below 3% is the lowest in the country and exemplifies the need for additional qualified adults throughout all sectors of the workforce. Given the more favorable housing values as well as availability of rental properties should prove attractive to individuals considering relocating to our world. Sticker shock will still be the order of the day, but when you can stock shelves, serve coffee or flip burgers starting at $14 per hour, countless jobs paying $25 to $30 per hour going unfilled, and numerous mid and senior positions available throughout all sectors will all result in many interprovincial moves. The local buying public have applied the brakes as they felt that values were going to plummet, well they did marginally adjust downwards, but I believe that history will show that we have reached the bottom, will observe a relatively flat market for the balance of 2008 and have a 2009 average value increase in the order of 5 to 8%. Many buyers will look back and kick themselves for not taking advantage of  today’s “rock bottom” pricing on many excellent homes. we do not have a liquidity crisis, we will not see an increase in foreclosures nor delinquent payments. Calgarians are readjusting to our new order and coming to the realization that life continues to be very healthy, vibrant and when they consider their options in the former centre of the universe (Toronto) or elsewhere, they love it here, tell all their friends to relocate here and maintain the vibrant, youthful and entrepreneurial nature that we observe daily. Oil is north of $100, touching $110 (really should be between $75 and $85/bbl) and natural gas is now trading in the $10 range with no indications of falling any time soon. This resurgence in drilling activity, profitability and subsequent employment needs will continue to propel Calgary, Alberta and Western Canada to the forefront of world investment. Yes we are in turbulent times, but not those experienced by falling values rather those observed when growth, optimism and surging levels of business are inevitable.

Until next time……

John Hripko, a Calgary Real Estate Agent who I think is one of the best there is has allowed me to reprint his latest client newsletter, entertaining and accurate:

JOHN’S VERY HAZY CRYSTAL BALL Wow, what a market in Calgary!!!   Here’s a quick recap, current status and projections into 2009. 2006 saw our available inventory drop to unprecedented levels, with as few as 1100 listings versus a typical balanced market number of 5000 properties. The year experienced levels of fury, multiple offers and value growth of almost 50%, By year end listing inventories reached over 7000 and continued into 2007.

2007 had mixed results, specifically values increased on average 8% however listing inventories continued to escalate to as many as 11,000 thus offering buyers considerable selection. The good news was that demand continued to be relatively steady.   2008 is experiencing a mix of both previous years. Inventory levels are once again approaching 11,000 properties, however sales are falling proportionately. In fact since 2007 listing inventory is up 37% which demand (sales) is down 35% – not the way you want to see the figures but it is the reality. Buyers are being more selective than ever and unless they have any urgency they are simply waiting to pounce on their “perfect” home. It’s really the converse of 2006 where countless buyers were chasing the one available home escalating its value to unforeseen levels, now we have countless sellers chasing the market down to a value level to attract the one potential serious seller that is lurking above and ready to pounce. This situation is precipitated by the fact that approximately 40% of all single family homes and about 50% of condominiums are VACANT. Why you may ask, well it’s due to one of a number of reasons – many investors from cities beyond (read Toronto) purchased homes to be built from builders and hoped to make a financial killing. Second we had numerous Calgarians who approached builders to build their dream home and given the 8 to 15 month construction timeline were going to live in their “old” home until such time that the new one was available. We also have our illustrious builders who decided to keep inventory off of the available homes list until the sites were totally finished. Their thought was that values would only be higher at the end of construction that selling during the build stage and found themselves caught with a pile of unsold inventory.   For condos it’s even simpler. We have countless of real estate kingpin wanna-be’s who invested in all the new projects with the sole intention of a quick flip. Many made a good buck during the 2006 explosion of values but those who entered at the tail end (read fall of 2006 and during 2007) are now taking possession of their units and finding that there are countless other identical units for sale in their same building let alone in the same community or area. Due to the large availability of units my description regarding the many (sellers) chasing the few (buyers) are creating a dog eat dog environment with values falling like a rock. An example of this is a buyer who purchased in an excellent complex in December 2006 at 635k$. It just listed at 565k$, quite the “haircut” but given the plethora of available inventory is a necessary price. On the single family side, we were recently involved in a transaction where our buyer acquired a brand new home in a spectacular location, backing onto a large park, west facing, fully developed walkout – originally priced at 995K$ and we acquired it at 875K$ – again quite the “haircut” for the seller.   Regardless, the situation for any Calgary seller is to lead the pack from a pricing standpoint, otherwise they will be mixed with the total inventory and have no true distinction leaving the buyer with every option to consider. In my opinion there are 30% of properties that qualify for the balance of available homes and these are the owners who are holding out for 2006 values. Good luck, their day will return if they are willing to wait 15 to 36 months, otherwise it is a futile experience for them.   The economic dynamics continue to be bright for both Calgary and Alberta and when coupled with the Canadian outlook will allow us to keep our heads above water, unlike our friends in the U.S. We have seen the bank of Canada rate fall 75 basis points thus far and anticipate a further 25 points on April 22 with as much as another 50 to 75 basis points before the end of the year. As long as the banks follow through and reduce the prime rates and subsequently variable interest rates, this should help stimulate buyers to re-enter the market. Due to the increase in bond rates, you will find that fixed term mortgage rates will rise as the year progresses, a phenomenon that we have seen before, namely variable rates dropping and long term fixed rates increasing. My suggestion is NOT to lock your mortgage rates yet, take advantage of the falling variable rates, they have historically proven to be the best choice over the long term.     Canadian GDP, employment and inflation all appear in check. Calgary’s unemployment rate at below 3% is the lowest in the country and exemplifies the need for additional qualified adults throughout all sectors of the workforce. Given the more favorable housing values as well as availability of rental properties should prove attractive to individuals considering relocating to our world. Sticker shock will still be the order of the day, but when you can stock shelves, serve coffee or flip burgers starting at $14 per hour, countless jobs paying $25 to $30 per hour going unfilled, and numerous mid and senior positions available throughout all sectors will all result in many interprovincial moves. The local buying public have applied the brakes as they felt that values were going to plummet, well they did marginally adjust downwards, but I believe that history will show that we have reached the bottom, will observe a relatively flat market for the balance of 2008 and have a 2009 average value increase in the order of 5 to 8%. Many buyers will look back and kick themselves for not taking advantage of  today’s “rock bottom” pricing on many excellent homes. we do not have a liquidity crisis, we will not see an increase in foreclosures nor delinquent payments. Calgarians are readjusting to our new order and coming to the realization that life continues to be very healthy, vibrant and when they consider their options in the former centre of the universe (Toronto) or elsewhere, they love it here, tell all their friends to relocate here and maintain the vibrant, youthful and entrepreneurial nature that we observe daily. Oil is north of $100, touching $110 (really should be between $75 and $85/bbl) and natural gas is now trading in the $10 range with no indications of falling any time soon. This resurgence in drilling activity, profitability and subsequent employment needs will continue to propel Calgary, Alberta and Western Canada to the forefront of world investment. Yes we are in turbulent times, but not those experienced by falling values rather those observed when growth, optimism and surging levels of business are inevitable.   Until next time……

So we see the unbelievable what appears to be the deal of the century when JP Morgan bought legendary Bear Stearns for the paltry sum of $2 per share, more then 90% off the Friday close.  This may not be the last one.

Then we see the Fed drop the fed rate by .75% (some analysts had predicted it might fall a full percentage point).  The projection seems to be that they will drop another .75% at each of their next two decision dates to settle in around .75%…WOW.  In Canada it is an absolute certainty that we will see our Bank Rate drop .50% in the next meeting and likely .50% in each of the following two meetings.  That is welcome news more home owners in a variable rate mortgage, you didn’t panic and lock in late last year did you?

Affordability of real estate in Calgary will be good and should help keep our market stable and hopefully avoid a continued drop in value.

There was a story in Saturday’s Calgary herald with the Headline “Alberta housing market may be cooling”.  RBC economics has said it’s premature to get concerned but we should be on watch for further negative developments.  I think that is too wish washy really…take a stance tell us which way it will go, stop hedging your bets.

They say that the average price of a home fell 4.3% in the last quarter of 2007 versus the third quarter. They say later in the article that the average price of a two story home is still 63% higher then 2 years ago.  How significant then at this point is a 4.3 % drop from one quarter to another?

Affordability for real estate in Alberta peaked last year and was the only place in Canada that had a gain in affordability bolstered by a small drop in price and solid income gains of 5% last year. Incidentally I think affordability will increase in 2008 as well because of significantly reduced mortgage rates, a likely modest drop in prices and income gains yet again in Canada’s hottest economy.

Now for 2008.  As I have reported earlier this week it certainly does look precarious this year, but compared to what?  If we are going to continually compare to the last two years I think this is likely not a good idea, because we would be comparing to a crazy overheated market.  Besides, let’s say prices drop 5-10% this year, this is probably good.  First it will bring affordability up and coupled with lower mortgage rates will bring more buyers into the market.  Second as owners prior to 3 years ago, look at your bigger picture.   You are still way up.  For those of you who bought at the peak of the peak, it’s ok don’t sweat it, you only lose money if you sell.  Just hold as 2009, and beyond looks very balanced as soon as we get through 2008 and all these lousy vacant listings.

Liberal MP and well known financial author Garth Turner recently wrote an article sounding the alarm on the Canadian Real Estate industry.  He is actually predicting negative amortization (where you owe more on your house then what it is worth) in Canada within the next 18 to 24 months.

Strong words?  Yes. Better question is he right?  Well let’s look at his main argument.  He says that the bulk of the recent boom in Real Estate in the past couple of years is because of 40 year amortizations.  Of course by taking a 40 year amortization you get VERY little principal reduction for the first long part of your mortgage.  That is right.

Consider this, if you put 5% down on a property and then add back the CMHC premium you are essentially 100% financing your home from the day you move in you have no equity.  Now consider the possibility that the real estate market drops 10-15% in the next year or so, which is a real possibility in some regions of Canada, bingo you have negative amortization.  So on that he is right it could certainly happen to many borrowers in Canada.

However, let’s look at the flipside, someone I respect highly recently said to me “people need to stop overly worrying about their paper loss and only worry about their real losses”.  This is true, let’s remember that a mortgage is a long term commitment, and therefore your home as shelter is obviously necessary and is also a long term investment.  As long as you are not a speculator or flipper then you can ride out this storm and long term you will be fine.  This situation still beats out renting in my opinion.

I have to say a couple things that Mr. Turner had in his article was grossly inaccurate, and makes me wonder why some as accomplished as he is did not do more fact checking.

1. “Canadian Mortgage lenders are no longer discounting mortgage rates”

Not True.  Canadian banks are absolutely still discounting rates, they are however artificially pushing rates higher by increasing their spreads over the past six months as I have reported before.

2.  “Shaky lending practices that coloured the US Sub prime crisis are now creeping into Canada”

This is ludicrous, Canadian sub prime mortgage business is basically over, there are basically no lenders left, and those that are have significantly tightened up their underwriting standards, and that is the facts from the street Garth.

I copied this response to a blog on National Post from an unknown source because it was so good.  Well worth the read.  By the way I have proven that buying your principal residence, even with zero down and 40 years still outperforms renting.

Garth Turner, a man who knows how to sell books at the right time, regardless of the content is back at it again.  Many of you, except those who followed his advice have thus forgotten the 1998 book by Garth Turner “The Strategy: a Homeowner’s Guide To Wealth Creation”, in which he advocated regular investors borrow against the value in their homes and invest, using leverage in an attempt to create wealth and tax deductions.  

This strategy assumes increasing home values, increasing stock market values, continuing deductibility of interest and sustainable payments. One wonders how many of these investors were able to continue this program after 2000 to 2002?

That was a few years back.  Now he suggests that that was all wrong and it’s time to “get out”.  What if you’re the people now caught with a lower valued property, interest payments you may not be able to afford and market values or invested assets, down %15 or more? Easy to say get out, but it was Garth’s advice that got people into this mess to start with.

According to a 2002 Globe and Mail report, ” Duff Young recalls speaking at a seminar in October, 1997, “and the financial adviser who hired me had previously used Garth Turner. He said he’d had excellent results, which meant he earned a ton of commissions. Turner had proposed leveraged purchases of mutual funds, using home equity as security to borrow the money.”

It would be very interesting to hear from those who did follow Garth’s advice before and see what the results had been.

End result is that nobody, nobody, has any predictive ability in any sense, in any market, yet for some reason Canadians all rush out to buy the books, fill the seminars and do the dance.  As Canadian investors we must STOP this gambling addiction.

Four Pillars asked a good question- “If Garth Turner has sold his house?”  The answer would say more about the man than the concept.

This is not to say anything negative about Garth Turner, his job is to write and sell books and he does that very well, but his job is NOT to create wealth for anyone but himself and his publishers.  We Canadians must become more discriminatory in our investment ways to weed out good advice for us and bad.  Every single study bar none has conclusively shown that moving from one asset class to another, or attempting to predict markets, or time markets, or beat markets is a fruitless endeavor, but Canadians keep searching for a holy grail of investing which does not exist- take a lesson from the now wealthiest man on the planet, who has every year stated that the majority of investors should follow passive, diverse program of investing- “A very low-cost index is going to beat a majority of the amateur-managed money or professionally-managed money.”

Keep costs low, avoid fads and realize that even in times like this, capitalism works.

Liberal MP and well known financial author Garth Turner recently wrote an article sounding the alarm on the Canadian Real Estate industry.  He is actually predicting negative amortization (where you owe more on your house then what it is worth) in Canada within the next 18 to 24 months.

Strong words?  Yes. Better question is he right?  Well let’s look at his main argument.  He says that the bulk of the recent boom in Real Estate in the past couple of years is because of 40 year amortizations.  Of course by taking a 40 year amortization you get VERY little principal reduction for the first long part of your mortgage.  That is right.

Consider this, if you put 5% down on a property and then add back the CMHC premium you are essentially 100% financing your home from the day you move in you have no equity.  Now consider the possibility that the real estate market drops 10-15% in the next year or so, which is a real possibility in some regions of Canada, bingo you have negative amortization.  So on that he is right it could certainly happen to many borrowers in Canada.

However, let’s look at the flipside, someone I respect highly recently said to me “people need to stop overly worrying about their paper loss and only worry about their real losses”.  This is true, let’s remember that a mortgage is a long term commitment, and therefore your home as shelter is obviously necessary and is also a long term investment.  As long as you are not a speculator or flipper then you can ride out this storm and long term you will be fine.  This situation still beats out renting in my opinion.

I have to say a couple things that Mr. Turner had in his article was grossly inaccurate, and makes me wonder why some as accomplished as he is did not do more fact checking.

1. “Canadian Mortgage lenders are no longer discounting mortgage rates”

Not True.  Canadian banks are absolutely still discounting rates, they are however artificially pushing rates higher by increasing their spreads over the past six months as I have reported before.

2.  “Shaky lending practices that coloured the US Sub prime crisis are now creeping into Canada”

This is ludicrous, Canadian sub prime mortgage business is basically over, there are basically no lenders left, and those that are have significantly tightened up their underwriting standards, and that is the facts from the street Garth.

The more I think about the US federal reserve continually dumping liquidity into the market and strong arming all the other central banks around the globe, including Canada, to do the same I keep thinking that it is just like popping champagne and passing around bottles of Crown Royal at an AA meeting.

Let’s not forget that this whole problem was started by Greenspan’s low interest rate policy, that led to “creative” new investment vehicles that were trying to bring higher returns to investors.  Then let’s talk about the US mortgage lenders who advanced very large loans to loads of high risk borrowers whose capacity for repayment of even the majority of the amounts lent was, at best, highly questionable.

So what is the answer of the current Fed chairman in the eyes of this debacle?  Let’s just try and keep the party going.  Admittedly I have mixed feelings whether this stance is the right one or not, but there is a part of me who says that if you keep enabling these guys on wall street then they never kick their habit.

If history is any guide, an army of trigger-happy traders will now start punting around in as many esoteric, exotic derivative deals as they can lay their hands on. A recipe for more trouble.

And by failing to encourage banks to ‘mark-to-market’, i.e. to value their polluted loan portfolios at anything like a realistic level, the Fed plan just puts off the Day of judgment.

Because have no doubt, for the giant hedge fund into which the United States has morphed, that cathartic day is on the way.