Thursday, July 23, 2009

So, The Recession Is Over Already?

The Bank of Canada says today that the recession is over! Wow, that was quick. I can't see the future, but I certainly see parallels with the past. Take number 11 from the following quotes from the Great Depression for example (source: Colin J. Seymour, June 2001,

Chart locations are an approximate indication only

  1. "We will not have any more crashes in our time."
    - John Maynard Keynes in 1927
  2. "I cannot help but raise a dissenting voice to statements that we are living in a fool's paradise, and that prosperity in this country must necessarily diminish and recede in the near future."
    - E. H. H. Simmons, President, New York Stock Exchange, January 12, 1928

    "There will be no interruption of our permanent prosperity."
    - Myron E. Forbes, President, Pierce Arrow Motor Car Co., January 12, 1928

  3. "No Congress of the United States ever assembled, on surveying the state of the Union, has met with a more pleasing prospect than that which appears at the present time. In the domestic field there is tranquility and contentment...and the highest record of years of prosperity. In the foreign field there is peace, the goodwill which comes from mutual understanding."
    - Calvin Coolidge December 4, 1928
  4. "There may be a recession in stock prices, but not anything in the nature of a crash."
    - Irving Fisher, leading U.S. economist , New York Times, Sept. 5, 1929
  5. "Stock prices have reached what looks like a permanently high plateau. I do not feel there will be soon if ever a 50 or 60 point break from present levels, such as (bears) have predicted. I expect to see the stock market a good deal higher within a few months."
    - Irving Fisher, Ph.D. in economics, Oct. 17, 1929

    "This crash is not going to have much effect on business."
    - Arthur Reynolds, Chairman of Continental Illinois Bank of Chicago, October 24, 1929

    "There will be no repetition of the break of yesterday... I have no fear of another comparable decline."
    - Arthur W. Loasby (President of the Equitable Trust Company), quoted in NYT, Friday, October 25, 1929

    "We feel that fundamentally Wall Street is sound, and that for people who can afford to pay for them outright, good stocks are cheap at these prices."
    - Goodbody and Company market-letter quoted in The New York Times, Friday, October 25, 1929

  6. "This is the time to buy stocks. This is the time to recall the words of the late J. P. Morgan... that any man who is bearish on America will go broke. Within a few days there is likely to be a bear panic rather than a bull panic. Many of the low prices as a result of this hysterical selling are not likely to be reached again in many years."
    - R. W. McNeel, market analyst, as quoted in the New York Herald Tribune, October 30, 1929

    "Buying of sound, seasoned issues now will not be regretted"
    - E. A. Pearce market letter quoted in the New York Herald Tribune, October 30, 1929

    "Some pretty intelligent people are now buying stocks... Unless we are to have a panic -- which no one seriously believes, stocks have hit bottom."
    - R. W. McNeal, financial analyst in October 1929

  7. "The decline is in paper values, not in tangible goods and services...America is now in the eighth year of prosperity as commercially defined. The former great periods of prosperity in America averaged eleven years. On this basis we now have three more years to go before the tailspin."
    - Stuart Chase (American economist and author), NY Herald Tribune, November 1, 1929

    "Hysteria has now disappeared from Wall Street."
    - The Times of London, November 2, 1929

    "The Wall Street crash doesn't mean that there will be any general or serious business depression... For six years American business has been diverting a substantial part of its attention, its energies and its resources on the speculative game... Now that irrelevant, alien and hazardous adventure is over. Business has come home again, back to its job, providentially unscathed, sound in wind and limb, financially stronger than ever before."
    - Business Week, November 2, 1929

    "...despite its severity, we believe that the slump in stock prices will prove an intermediate movement and not the precursor of a business depression such as would entail prolonged further liquidation..."
    - Harvard Economic Society (HES), November 2, 1929

  8. "... a serious depression seems improbable; [we expect] recovery of business next spring, with further improvement in the fall."
    - HES, November 10, 1929

    "The end of the decline of the Stock Market will probably not be long, only a few more days at most."
    - Irving Fisher, Professor of Economics at Yale University, November 14, 1929

    "In most of the cities and towns of this country, this Wall Street panic will have no effect."
    - Paul Block (President of the Block newspaper chain), editorial, November 15, 1929

    "Financial storm definitely passed."
    - Bernard Baruch, cablegram to Winston Churchill, November 15, 1929

  9. "I see nothing in the present situation that is either menacing or warrants pessimism... I have every confidence that there will be a revival of activity in the spring, and that during this coming year the country will make steady progress."
    - Andrew W. Mellon, U.S. Secretary of the Treasury December 31, 1929

    "I am convinced that through these measures we have reestablished confidence."
    - Herbert Hoover, December 1929

    "[1930 will be] a splendid employment year."
    - U.S. Dept. of Labor, New Year's Forecast, December 1929

  10. "For the immediate future, at least, the outlook (stocks) is bright."
    - Irving Fisher, Ph.D. in Economics, in early 1930
  11. "...there are indications that the severest phase of the recession is over..."
    - Harvard Economic Society (HES) Jan 18, 1930
  12. "There is nothing in the situation to be disturbed about."
    - Secretary of the Treasury Andrew Mellon, Feb 1930
  13. "The spring of 1930 marks the end of a period of grave concern...American business is steadily coming back to a normal level of prosperity."
    - Julius Barnes, head of Hoover's National Business Survey Conference, Mar 16, 1930

    "... the outlook continues favorable..."
    - HES Mar 29, 1930

  14. "... the outlook is favorable..."
    - HES Apr 19, 1930
  15. "While the crash only took place six months ago, I am convinced we have now passed through the worst -- and with continued unity of effort we shall rapidly recover. There has been no significant bank or industrial failure. That danger, too, is safely behind us."
    - Herbert Hoover, President of the United States, May 1, 1930

    " May or June the spring recovery forecast in our letters of last December and November should clearly be apparent..."
    - HES May 17, 1930

    "Gentleman, you have come sixty days too late. The depression is over."
    - Herbert Hoover, responding to a delegation requesting a public works program to help speed the recovery, June 1930

  16. "... irregular and conflicting movements of business should soon give way to a sustained recovery..."
    - HES June 28, 1930
  17. "... the present depression has about spent its force..."
    - HES, Aug 30, 1930
  18. "We are now near the end of the declining phase of the depression."
    - HES Nov 15, 1930
  19. "Stabilization at [present] levels is clearly possible."
    - HES Oct 31, 1931
  20. "All safe deposit boxes in banks or financial institutions have been sealed... and may only be opened in the presence of an agent of the I.R.S."
    - President F.D. Roosevelt, 1933

Tuesday, July 14, 2009

May and June 2009: The Flock Thickens!

The good old days of the real estate boom/bubble is back in the Greater Toronto Area. Buyers are flocking back into the housing market in a frenzy, bringing back multiple and unconditional offers. Sellers are laughing all the way to the bank.

The recession is far from over with unemployment continuing to climb, and yet there are plenty of cheap money (low interest rates), talk of green shoots, and "better-than-expect" news, to tempt buyers into making the leap, either thinking prices can only rise, or that they will sell for a quick profit.

Flippers are back too! Properties are being snapped up, spruced up and sold for thousands more. There was one case where some guy bought a tiny semi-detached in the film district for $280k, finished the basement, slapped on some cosmetics, and resold privately for $410k! A fool is born every minute.

Let's look at some of the charts...

New Power of Sale Listings

Despite the frenzy, the number of new power of sale listings remain at a somewhat elevated level, compared to the past couple of years, although in absolute terms, two hundred or so new power of sale listings pales in comparison to the over ten thousand homes sold in June.

Firm Sales Minus Conditional Sales

This chart measures the difference between the number of homes that have sold firm and the number of homes that have sold conditionally. The idea is: if the gap between the number of firm and conditional sales is large, this implies many buyers are willing to buy properties without conditions, and therefore the market is a sellers' market. On the other hand, if the gap is small, few buyers are willing to buy properties without conditions, indicating a buyers' market.

The chart below shows that the gap has widened, after reaching very low levels between December 2008 and February 2009. The market has become a sellers' market once again.

However, the overall trend of the gap in firm and conditional sales is still going down - that is the sellers' market has been losing steam, with a brief and pronounced buyers' market back in the winter of 2008.

Deals Fallen Through

A deal falling through means an aborted transaction (e.g. buyer had cold feet). Since peaking in November 2008, the deals fallen through has dropped back to the norm of the past couple of years. Of note, is the up-tick of fallen through deals in June.

The second half of 2009 should be interesting!

Saturday, May 9, 2009

April 2009: Recession? What Recession?

Looking at the charts for the Greater Toronto Area real estate market, it's hard to believe that we are in a recession.  Following a surprising strong March, the month of April followed suit.  Sales in the GTA reached 8,107 transactions (31.4% more than last month but 7.5% fewer than the same month last year), while the average price stood at $385,641 (6.5% more than last month but 3.3% less than the same month last year).  While buyers once again snapped up properties at close to or over asking in bidding wars, the mood this year is markedly different that prior years.  Conditions on offers during multiple offer situations are not frowned on as they were prior years. Nonetheless, as we will discuss with the charts to follow, more buyers are once again willing to put in unconditional offers, than the months following the collapse last fall.

Now to the charts...

The first chart is my favorite because it shows price in relation to sales.  The price-to-sales ratio give us a sense of whether prices are supported by the number of transactions, based on a historical view of the ratio.  The chart shows that during the past five years, the price-to-sales ratio has ranged between 40 and 80, more of less, oscillating with the seasons.   In December 2008, the ratio spiked up to 140, an indication that prices were not sustainable based on the level of sales, when compared to the prior five years.  Since then, the ratio has dropped back down to the more "normal" range.

A number of people have asked what the relevance is of this chart.  Some of them argue that inventory (the number of active properties currently on the market for sale) is what matters more.  Inventory reports do show the supply side of the supply-demand equation, but they do not give us an easy number to gauge whether prices are supported by underlying market conditions.  The demand side of the equation is similar - there are no reliable reports of the number of buyers on the market.  Any reports that do exist are based on surveys of a sample population (such as the surveys put out occasionally by the major real estate brokerages).  Such demand-side reports should be taken with a grain of salt.  The  price-to-sales ratio, on the other hand, gives us a good measure for the current health of the market, when compared to prior periods of time.

The next two charts show that the gap between conditional and firm sales have widen.  

Prudent buyers typically place conditions on offers to purchase so that the proper due diligence is achieved, such as getting approval from a lender for a mortgage or getting a satisfactory home inspection report or getting a termite inspection or ensuring insurance can be obtained at a reasonable cost, etc., etc.  However, in a hot market, in the face of competition from multiple offers, some buyers choose to forgo conditions in order to maximize their chances of being winning bet. (After a few unsuccesful attempts, the psychology of some buyers becomes that of winning at all costs, resulting in prices many thousands of dollars above the sellers' asking prices in addition to unconditional offers).

With the number of sales constant in a particular month, counting the number of transactions that were sold conditionally in the month and comparing it to the total number of firm transactions in the month, gives us a sense of whether buyers were, in general, more or less willing to put in offers on properties without conditions.

The gap between conditional and firm sales has once again widened in April 2009, after a brief severe narrowing in December 2008.  This means more buyers are once again willing to purchase properties without conditions.  Nonetheless, the gap is smaller than the past two years, meaning fewer buyers are willing to purchase properties unconditionally, on an a year-over-year basis.  This is a sign that the market is more of a buyers' market than prior years.  However, it is a weak buyers' market.  I would expect the gap to be negligible in a strong buyers' market, since I would expect buyers to put in offers with conditions even if they don't need the conditions, in order to maximize their bargaining power.  I suspect the gap will never be zero because some buyers would continue to use offers with no conditions whatsoever as a negotiating tactic to get better terms on price, closing date, etc.

The next two charts show the level of deals that have fallen through (i.e. transactions which were canceled due buyers backing away or unable to fulfill conditions, such as not being to get financing).  This lowered level is an indication of lessened buyer fear and an improved credit market.

The following chart shows that fewer listed properties are being delisted due to expiration, suspension or termination.  This has dropped markedly from last fall and winter.  This is an indication that fewer properties are sitting unsold.

The next chart is interesting.  It shows that the number of new power of sale listings that came on the MLS in the GTA, is at the highest point, comparing to the months of the past two years.  Having said that, the number of active power of sale listings as of May 9, 2009 stands at 322.  This is in stark contrast to last month's number of 4,293.  This is an indication that buyers are snapping up power of sale properties at an incredibly high rate.