Much talk this week likely spurred on by Mark Carney and his proclamation that the recession is over.  Many clients and business partners have asked me whether this can be true or if he has another agenda.  Certainly the contrarians out there like Garth Turner and his blog dogs have taken particular exception to Mr. Carney’s words.

Today I read an economic summary from Avery Shenfeld which I thought was interesting and topical to this ongoing debate as to whether we are in a recovery.

He essentially believes that whether we are in a recovery or not depends on who you are.  For instance if you are a stock market investor then the recovery is when you are starting to get your money back, and that happened essentially in March.  With typical corrections obviously still to come the investor will still see gains continue for some time.  This makes sense from another perspective as historically stock markets are a leading indicator of both entering and exiting a recession.

However, if you are an economist, and this is where Mr. Carney is, then you will not call a recovery until positive GDP growth starts to happen, and not just for one quarter but that there is a trend.  In the US it is largely accepted that we will cross that line this summer.  Before the contrarians out there jump on this saying it is impossible to see growth absent of any real increase in demand, you must factor in that the first half of this year so massive cuts to production, which resulted in significant depleted inventories.  Even with marginal demand increase there will be marginal positive growth.  Canada will see growth then as US company ramp up stocking the shelves and warehouses then Canadian exporters will see their order basket fill up.

Finally, according to Shenfeld the average Joe Canadian will not declare we are in a recovery until they start getting their jobs back. Shenfeld then goes on to predict that this is a longer road then we would like.  Even if GDP growth bounces back as we predicted above.  He contends that US and Canadian consumers are still licking their wounds from earlier wealth losses and will take some time to unlock their wallets.  As well businesses are horading cash instead of buying equipment etc.

Although I agree with Shenfeld technically, I disagree that consumers, as a whole, will take longer to get out and feel confident again.  Employment participation, especially in Alberta where it tops the nation, is still very high and even if unemployment sadly tops 9% nationally there is still a significant number of people employed.  Secondly, as Avery’s colleague Benjamin Tal pointed out in his recent road show across the country in this nasty recession we saw an interesting but significant difference from any previous recession and that is the number of business bankruptcies were barely a blip and the significant number of women in the workforce.

His theory was that in past recessions unemployment was more damaging as employers “went out of business” in this recession most just were “laid off”.  Therefore the hypotheses suggests that it will be easier for businesses to callback their employees then it would be to start the business all over again.

The theory behind more women in the workforce this time around was that in many situations when one spouse lost their job the other was still working, which although difficult made it manageable for many people to weather the storm, and thus will make it quicker for them to rebound.

There is a silver lining in Shenfelds theory if you want to believe it.  If the recovery takes longer to grab hold of the average Joe, then count on more government stimulus to prod them, and for certain a delay in interest rate hikes from the bank of Canada.  Mr. Carney can NOT hike rates until the average Canadian is out spending again.  This bodes well for the real estate market, and particularly in Alberta.  Why?  because of the blessing in Western Canada of natural resources which will be the number one demand item in the global recovery.

Comments?

I have been reading Garth Turners blog for quite some time and today I actually got a brief glimpse at what it is like to monitor comments from rude, ignorant, people who largely are so far in the extreme of their ideas they are not prepared to listen to others views.  Garth, seriously dude, hats off.

Anyway although I may not agree with many of Garth Turners views, or his motives, which I am actually not sure what they are beyond selling books, I try to keep my rebuttals respectful, so here we go again.

The most recurring cheap shot was that I was lieing when I discussed the base of our Inflation Hedge Mortgage Strategy which is to protect people from future payment shock of certain higher interest rates in the future.

In the video here are the

ASSUMPTIONS:

Purchase Price: $450,000

Down payment: $45,000 (10%)

Mortgage Insurance: $8,100 (2%)

Amortization: 25 Years

Term: Five Years

Starting Interest Rate Today: 4.39%

Here are the FACTS:

Mortgage Payment Today = $2,261.20

Balance at the end of the term = $362,885.07

THEREFORE to calculate the payments at the END of five years you would take the NEW balance of $362,885.07 and do a new schedule based on 20 years remaining.

New payment at the start of YEAR 6 = $3,366.26

Difference in payments between the Year 6 payment and the year one payment (payment shock) = $920.89

By the way if the client takes our Inflation Hedge Mortgage Strategy they would owe $288,892.47 after five years and have ZERO payment shock. That is a saving of $73,992.60 over five years.

Please Note: This is corrected math from what was presented in the video. I said in the video that it was approximately $600 and that was incorrect.

Our philosophy is to ensure that people who are going to buy a home do it responsibly and understand all the financial repercussions they are facing.  We design a mortgage strategy that will fit into their overall financial wellness, particularly ensuring that they can truly afford the house they are contemplating and to protect them against inflation, which will lead to higher interest rates in the future and the dreaded payment shock. Garth Turner’s job is to tell people not to buy homes, my job is to ensure those that are going to, do it carefully and with a well thought out plan.

This morning I had my first Live broadcast for the Mortgage and Real Estate Show for my good friends at Royal Lepage Foothills Real Estate here in Calgary.

Today’s topics include a discussion around all this negative talk on the blogosphere, particularly led by the likes of Garth Turner about an impending housing shock, when people buying homes today have to renew their mortgages in five years time, you will be shocked at the results.

As well we have a discussion about the effect the recovery will have on Calgary Real Estate and the Calgary mortgage market.

Another month of the data has come and once again we see many positive signs that are of course ignored by mainstream media.  Are we at the bottom of the Calgary real estate market?  Watch and see….

CREB April Analysis from Greg Williamson on Vimeo.

Cash-back mortgages are starting to get a lot of attention again lately, likely due to the fact that the rate can be as low as 5.75%.The question “is this a good a deal” gets asked to us a lot.  The answer lies in the same place it always does, in the MATH.Let say you are getting a $250,000 mortgage with a 5% cash back or $12,500.  The rate for a non-cash back mortgage is 4.19% today.Therefore if you take a cash back mortgage your interest cost for the next five years is: $67,543Your interest cost over five years without a cash back is: $48,804.So, your interest cost in five years of your cash-back is $18,739. Is this a good deal?Well we should look at why you were taking the cash-back mortgage in the first place.  Knowing what you know now could there really be ANY reason you would take this expensive cash?  The only reason I think you would use a cash-back mortgage would be for the down payment.  Gasp, yes it’s true you can still get 100% financing. Anyway, the logic behind using it for down payment is that when compared with renting the cost of the additional interest will still be better then the rent money you just throw away, PROVIDED you have full confidence that the housing market is near the bottom and rising…hint, according to the statistics it is.