Tuesday, May 8, 2007

Mortgage Madness Redux

Back in April, we had a good discussion of the mortgage mania that has grasped both consumers and financial institutions alike. It seems as though the MSM has caught on too. Which can only be a good thing for the bears, if you ask me.

Some highlights of the article:
Anyway you look at it, the Canadian mortgage industry is starting to look a bit more like its U.S. counterpart.
Nonetheless, for many less-than-solvent folks, getting a mortgage is not the challenge it once was.

big international players like AIG United Guaranty have moved in, the first of many American insurers and lenders anxious to keep billions of dollars flowing into the residential housing market.

To fuel the engine, some lenders structured these loans in ways that would only work if housing prices kept increasing dramatically – which they haven't. Add to that... low or even no down payment deals, and bonuses to offset closing costs, and you've got too many borrowers moving into new houses they really can't afford.

The growth of sub-prime mortgages is only part of the changes though, many of which are being driven by non-traditional players. Mortgage brokers, once considered lenders of last resort, are writing more and more of the business, for instance.

Although trade organizations like CAAMP seem quite serious about upgrading industry skills, provincial regulation of mortgage brokers is still bit of a patchwork – so tread carefully if you're planning to enlist their help
When I read how unlike our mortgage market place is compared to the US, it is always the same people quoted: the mortgage industry. I am a big fan of the open marketplace. I am also a big fan of self-regulated markets. Generally I believe they work, especially during hard times. It is always on the upswing that we read about the abuses. Though I am not suggesting that any abuses are taking place right now, I still believe it is important to analyze the source of our information.

When CAAMP says that sub-prime lending is only 5% of the total mortgage business in Canada, we have no real reason to doubt them. But there were 1.86 Million self-employed people in Canada back in 2001. Arbitrarily categorizing self-employed individuals into the sub-prime category seems suspicious to me; because self-employed people made up 8.6% of the total workforce in 2001. This issue could be explained by suggesting that it's just a case of lazy reporting on either my part or that of the reporters in MSM.

Another related story: The reno bug is putting many in financial straits


Anonymous said...

From today's Vancouver Sun:

"$2.96 billion in building permits granted

Derrick Penner, Vancouver Sun
Published: Tuesday, May 08, 2007

March building permit applications in B.C. jumped more than they had dropped in February.

Builders took out almost $1.1 billion in permits in March, 25.5-per-cent more than the $837 million they took out during a blustery February, which represented a substantial decline, Statistics Canada reported Monday.

And for the first quarter of 2007, builders were granted $2.96 billion worth of permits, about 16-per-cent more than during the same period of 2006.

Helmut Pastrick, chief economist for Credit Union Central B.C., said the increasing value of building permits also reflects inflation in the cost of construction, but even after factoring that in, "there is certainly more real [construction activity, [and] certainly on the non-residential side."

Most of the building begun during the first quarter of 2007 was residential, with the $1.93 billion in permits issued accounting for 65 per cent of the total.

The $1.03 billion in permits for commercial buildings, factories and schools accounted for 35 per cent.

Housing starts, Pastrick said, appear to have hit a peak and are beginning to slip. "Non-residential is still on an upturn," Pastrick added. "It's demand driven."

"Office vacancy rates are low, retail space rental rates are rising [along with] other commercial leases, hence that will induce more investment and more [commercial-building] space being created."

Statistics Canada reported that while residential permit values were up in B.C., permits for single-family homes were down slightly. Carol Frketich, Canada Mortgage and Housing Corp.'s regional economist, said single-detached starts were down 41 per cent in Vancouver, compared with the first part of 2006."


Anonymous said...

Hey stormy, are you offering up too much info. to be outed or does that not worry you. I only ask because you are posting anon. At least, I think it is you. If not, my mistake:)


Vicguy said...

"Housing starts, Pastrick said, appear to have hit a peak and are beginning to slip."

"Carol Frketich, Canada Mortgage and Housing Corp.'s regional economist, said single-detached starts were down 41 per cent in Vancouver, compared with the first part of 2006."

Music to my ears, I don't buy the higher costs are causing builders to back off, they know the market is saturated and the smart ones are backing off. Lumber prices are way down and that is a big part of the cost.

As far as that article goes on reno madness I found in 2 houses I owned that unless you completely gutted an old house and turned it into something everyone went "wow" ,that all the average fix ups like new kitchen and new floors usually does not have any effect on your final sale price in an average to slow market. In a hot market it may get you the sale quicker then the guy down the street but most agents list the price by what the neighborhood is selling for,not how much you put into it.

I put in a $20,000 reno of the kitchen,plus all new carpets, lino and paint and done in very good taste and when I sold a couple years later it made no difference in the sale price cause most of the neighbors had done the same and I never recovered one cent. Just a heads up to those thinking you get what you put into it back in your pocket, those TV shows are mostly BS.

greg said...

CMHC has already noted in their March report a big drop in single family home starts, with a corresponding jump in condo/townhouse starts balancing things out.

Sounds to me that people who are betting with real money (developers) expect the people who are moving here and want to buy new are more likely looking for second homes or the downsizing into condos - can you say retirement market!

It remains to be seen if this pull-back will prevent an oversupply of single family homes from happening.

The trend over the last two years shows otherwise, with an increasing inventory of single family homes while prices continue to rise.

Either months of inventory of single family homes starts to drop soon, or prices will have to eventually start to drop.

I doubt the trend of rising single family home prices can survive two real estate seasons in which not everything listed sells - by a wide margin.

My $.02.

Anonymous said...

I know a couple of very well known high end builders who have stopped buying real estate.

greg said...

In April, over 200 apartments and townhouses were started in Victoria itself. How many single family homes? Only one.

Anonymous said...

From today's Times-Colonist:

"U.S. home price slide predicted to steepen

Published: Wednesday, May 09, 2007

BOSTON - U.S. home price declines this year are going to be steeper than earlier forecast because of the drop in sub-prime mortgage lending and the adoption of stricter lending standards, the National Association of Realtors said.

The 2007 median price for an existing home likely will drop one per cent to $219,800 US from 2006, the Chicago-based association said.

The median price for new homes is projected to fall $100 to $246,400, the first decline since 1991.

Sales of previously owned homes, 85 per cent of the market, will probably total 6.29 million this year, the group said, less than the 6.34 million it called for on April 11.

New-home sales probably will fall to 864,000, lower than the 904,000 in the month-ago forecast."


Anonymous said...

From today's Vancouver Sun:

"Labour shortage cools housing starts

Builders are taking more time on existing projects, leading to an overall slowdown in building

Gerry Bellett, Vancouver Sun
Published: Wednesday, May 09, 2007

B.C. housing starts cooled off during the first four months of this year by falling 11 per cent below last year's pace to 10,091 units, Canada Mortgage and Housing Corp. reported Tuesday.

CMHC said Greater Vancouver starts dipped even more, dropping 22 per cent during the same period to 5,757 units.

But CMHC analyst Robyn Adamache said homebuyer demand remains strong -- despite moderating housing starts and house sales -- and expects 2007 house construction activity will end the year near 2006 levels. She said labour shortages have forced builders to take more time on existing projects.

Greater Vancouver Home Builders Association CEO Peter Simpson said he was not too concerned with the CMHC findings and also expects this year's total of new homes built in the Lower Mainland will be close to those built last year.

"We knew the figures for the first five months of last year were exceptionally strong and we told the media not to get too excited because they would moderate during the year," Simpson said.

"And that's what happened. Five months does not a year make. We ended the year where we had predicted at 18,700 housing starts. This year we'll be a little down at somewhere around the mid-18,000 mark."

Simpson said the number of new housing units built in the GVRD peaked in 2004 at 19,435. Since then the industry has been on a plateau with an average of about 18,800 units being built in 2005 and 2006.

"We have to compare this to the 8,200 units built in 2000," he said.

Jake Friesen, vice-president of the Pacific Region of Qualico Developments, said the reason for the drop in single family housing starts in the Lower Mainland was related to the lack of skilled tradesmen and a shortage of building land.

"I was reading a story in The Vancouver Sun today which quoted a furniture manufacturer talking about how he has to turn away orders just because he can't produce. We're not that different. We basically can't deliver. Our company has taken an approach that we will not sell more than six months in advance simply because of the tight labour market compounded by a lack of land.

"If someone walks in today and says 'I need a house' I'll have to say that's a wonderful idea and I'm glad you want one because we're in the business of supplying houses, but we've pre-sold everything for the next six months, therefore the land we do have we're not offering for sale because of our policy," Friesen said.

The demand for new homes was still strong, he said, but if we tell "someone you can have a home by Aug. 1, it's good to keep your promise."

Qualico builds an average of 175 homes a year in the Surrey, Pitt Meadows and Langley areas.

Friesen said he would much sooner have today's problems than than "those times when there was plenty of labour and plenty of land but fewer orders."

Analysts agreed Tuesday that housing construction across Canada is slowly cooling, but not enough to warrant worries of a U.S.-style housing collapse or to end the Bank of Canada's concerns that rising housing prices could fuel inflation.

Home construction starts slipped one per cent last month to a seasonally adjusted annual pace of 211,900 from 214,000 in March, and were down 6.6 per cent from a year earlier, CMHC said.

Analysts noted the decline was fairly widespread, with starts decreasing in six of 10 provinces, the exceptions being Ontario, Saskatchewan, Prince Edward Island and Nova Scotia.

"Canada's housing market is slowly starting to cool down as rising home prices eat into affordability," said BMO Capital Markets economist Sal Guatieri, adding that housing construction will act as a slight drag on overall economic growth in the spring quarter.

But "the cooling in housing is also insufficient to allay the Bank of Canada's concern that this area of the economy poses an upside risk to the inflation outlook," he added"