Canada's Housing Bubble

Apr 25, 2010 Mark Milke Calgary Herald

Taxi drivers are endless sources of stories, sometimes exaggerated but always entertaining. But in the case of the U.S. housing collapse -- now in its fourth straight year, embellishment is hardly necessary. There is a rich vein of information on the greed, bubbles and on the price puncturing in which similarities can only be found during the period when Franklin D. Roosevelt occupied the White House.

On the narratives though, my cab driver, an East Indian immigrant who moved to Miami 25 years ago and within three years bought his three-bedroom house for $41,000, relayed the story of a Canadian woman who came to Florida this year in search of real estate bargains. What she found was not quite at the level of two-plus decades ago, but U.S. real estate prices are a steal compared to 2006. In the case of the Canadian, after being taxied around by the cabbie for a day she made an offer on a three-bedroom condominium. It was worth $650,000 at the peak of the Florida (and U.S.) housing bubble. The bank offered it to her for $230,000; she refused and counter-offered with $180,000. The bank accepted. The taxi driver swears the condo, on the beach, will be worth a million bucks in five years.

Such stories might seem apocryphal but for the fact the newspapers are full of them over the last several years, and personal observations and statistics back it all up. Visit the coastal areas of the United States -- I was in California two weeks ago and in Florida now -- and a surface look might lead one to believe the Great Recession is over, and that the U.S. is in recovery mode. But a second look will reveal plenty of for-sale signs even in affluent areas but with fewer takers than could normally be expected.

Thus, in a New York Times article earlier this month, Robert Shiller, cocreator of the S&P/Case-Shiller home price index, advised Americans "not to bet the farm" on a housing recovery. He cited the end of the Federal Reserve program of buying more than $1 trillion of mortgage-backed securities in March, and the expiring of an $8,000 federal tax credit for first-time home buyers expires in April, both of which will mean less financial sugar for the American housing market.

This past week, Shiller told a radio station that some indicators have stabilized in the past few weeks and thus his bearish case has weakened "a bit." But a bit is hardly a reversal. The statistics seem to weigh against a reversal and such facts should call into question how durable is the recovery.

Such facts include a massive inventory overhang.

Drill down into statistics and Shiller's caution seems justified.

While real estate sales and prices are up in a few areas of the United States compared to last year, it's doubtful that trend is anything but temporary or local.

That might be why 160 U.S. banks are expected to go under this year; up from 140 banks that were shut down in 2009.

On the second-look theory, consider Los Angeles. It is the third-worst American market in which to try to sell a home because of a supply glut. More surprising is Denver, less affected by the housing bubble but which is second as the worst place to sell a house this year. According to Forbes, which compiled the index, 42,000 homes are for sale in the Rocky Mountain city.

That's a 27 per cent increase in supply from last year -- hardly a harbinger of a durable recovery in housing. Milwaukee's the worst American city in which to sell a house, with a 47 per cent increase in unsold homes now compared to 2009.

And there are more supply issues to come as foreclosures push more homes on to the market. In the first three months of this year, a record number of U.S. homes were foreclosed upon -- 35 per cent more than in the first quarter of 2009.

Nevada, Arizona, Florida and California have the worst foreclosure rates. In Nevada, one out of every 33 houses is in foreclosure. That compares to one out of every 49 Arizona homes, Florida with a one-to-57 ratio, and California with one foreclosure for every 69 homes.

For Canadians, where our economy is still intimately tied to what's happening down here, the American housing market is sending a message: Look out below, the U.S. recovery is not a sure bet.