What a Difference 5 Years Can Make

Time Magazine cover stories are marvelous contrary indicators.

Time Magazine cover from June 13, 2005.

Time Magazine cover from September 6, 2010.

Underwater, but Will They Leave the Pool? NY Times

http://www.nytimes.com/2010/01/24/business/economy/24view.html

Economic View
Underwater, but Will They Leave the Pool?
By RICHARD H. THALER
Published: January 24, 2010
Even if they owe more on their mortgages than their homes are worth, many people feel obligated to repay their loans. But what if those borrowers walked away?

Vancouver - Decline From Peak

Here is Vancouver's decline in house prices plotted in comparison to US cities since their respective price declines began. The Case Shiller indices track sales pairs much like the Teranet methodology and have been shown to be the most accurate house price tracking methodology.

Case Shiller data is as of April 2009 - data released June 30.
Vancouver REBGV data is as of June 2009 - data released July 3.
Vancouver Teranet data is as of April 2009 - data released June 19.



Dallas, Charlotte and Denver are 20 months into correction mode compared with Detroit, Boston, and San Diego which are over 40 months into the correction. In comparison, Vancouver is only 9 (Teranet) months or 14 months (REBGV) into its correction.

Time will tell if the latest uptick in prices has staying power but I would hazard a guess that we haven't seen the end of price declines. If we are 40 months from peak and we haven't decreased from current levels by then I will count myself as being wrong. Until then, I'll watch and wait.

The Spring Bounce

We have been hearing reports about Vancouver house prices stabilising in recent months. Are we at bottom or is this a bear market rally, the so-called "spring bounce"? The Pope put up an interesting graph of Sacramento house prices, where there were two such spring bounces before a regression to more price drops. It appears there are other markets that have exhibited a temporary bounce up in sales before returning to falling prices. Below is a graph of some notable American markets' prices:


Cities with some semblance of a bounce include: Seattle, Portland, San Diego, and San Francisco. Cities that did not have a spring bounce include: Miami and Phoenix. Note Vancouver's bounce looks sharp because we are using the benchmark where the other cities use the Case-Shiller HPI, which averages 3 months' worth of data.

There is no credible evidence to make me believe we are NOT witnessing a "spring bounce". The fundamentals point to lower prices and, while Vancouver may not see as meteoric a fall as did Miami, I am expecting more price weakness in the second half of 2009.

Money Hole: Pros and Cons

In The Know: Should The Government Stop Dumping Money Into A Giant Hole?

Canadian Banking - Up for Discussion

Video here. http://www.cnbc.com/id/15840232?video=926680705

TORONTO, Nov 12 (Reuters) - Canadian banks should be able to get through the financial crisis without relying on the kind of government aid that is being deployed to financial institutions in other countries, Toronto-Dominion Bank's top executive said on Wednesday. While the Canadian government just announced an increase in the size of its bank mortgage buyback program -- boosting the program to C$75 billion from C$25 billion -- the federal government is actually making money on that program, TD Bank President and Chief Executive Ed Clark said.

"This is a pretty good deal from the government's point of view," since it gets paid to buy mortgages from banks that a government agency has already guaranteed, he said. Canadian banks, with strong balance sheets and healthy mortgages on their books, are using the government buyback program to fund themselves at rates comparable with, or better than, what banks elsewhere in the world can get, he said. Clark was speaking at a financial conference in New York organized by Merrill Lynch.

"We would like to get through this crisis without government bailouts, there have been no bailouts of the Canadian banking system," Clark said. TD, which has grown substantially in the United States through acquisitions in recent years, does not have to make another U.S. purchase to fulfill its business objectives, he said. The bank acquired New Jersey-based Commerce Bancorp earlier this year, and privatized TD Banknorth in 2007.

"We can grow organically, if you take a look at the average bank in the U.S. and strip out acquisitions, it's not obvious that there's a lot of organic growth there," Clark said. But TD, Canada's second largest bank, would consider U.S. acqusitions if certain conditions were met -- that is, if a potential deal were in its existing East Coast footprint, if it were cheaper to buy than build out its branch network, and if it involved minimal asset risk.

"You're not going to see us suddenly move up the risk curve in this environment," Clark said. He also said it seems "inevitable" that a U.S. recession will spread to Canada, where the bank's loan book is more retail oriented. TD expects provisions for credit losses to rise in the next few years, but from a low base, Clark said.

Canada faces housing bust: Shiller

Jacqueline Thorpe, Financial Post Published: Wednesday, October 01, 2008

The Canadian housing market could face a similar housing bust to the United States, particularly in more bubbly markets as Vancouver and Calgary, said Robert Shiller, the University of Yale professor who predicted both the 1990s stock market boom and bust and the US housing slump.

Mr. Shiller, co-founder of the S&P Case/Shiller Home Price Index, said psychology is the primary driver of bubbles and it appears that Canada has been caught up with home buying fever just as the United States and other countries around the world.

Asked whether that meant Canada could face a similar bust Mr. Shiller said: "Yes, especially in places that went up a lot like Vancouver and Calgary. I don't think Toronto has been quite as extreme."

Mr. Shiller said there was a natural connection between the United States and Canada.

"I would be surprised that the bubble that appeared in the United States and elsewhere didn't appear in Canada," he said in an interview with the Financial Post. "It's psychology, I think that drives it.

Mr. Shiller, whose book Irrational Exuberance came out in March 2000 just as the tech bubble peaked, said it was essential for the U.S. government to pass a financial bailout, though he believes the United States is facing a "severe recession," regardless.

"I'm concerned problems are deeper than can be handled by the bailout but that doesn't mean the bailout doesn't do some good," he said.

He said a bailout might help restore some confidence to the stressed financial system.

"What creates a crisis is a lack of confidence," he said.

He said the housing crisis was primarily a policy failure by U.S. authorities.

The U.S. government was "totally blind" to it, regulators failed to monitor the mortgage industry properly and the U.S. Federal Reserve had very low interest rates at a time of the greatest housing bubble of all time.

While homeowners should take some personal responsibility for the debacle, they were being goaded into the fevour by an establishment that endlessly pushed an ownership society.

"They were doing what was considered right at the time," Mr. Shiller said.

Mr. Shiller said human nature seems to predispose people to spectacular excess, fanned by a voracious news media.

"Until we had newsapers and other media we had no bublbles, he said.

While ups and downs in the market can lead to creative destruction the current housing crisis has morphed into a system problem.

"The problem is that perfectly good firms are in trouble," he told the Financial Post in an interview at the Ontario Economic Summit.

A bailout may not be palatable, government assistance is required when the system fails.

The trick is to reduce conditions that fan bubbles.

In his current book, "The Subprime Solution," Mr. Shiller proposes several measures to reduce bubble conditions in the housing market including better information for prospective buyers and broader markets that trade risk better, such as the housing futures he has developed on the Chicago Mercantile Exchange.

There should also be new retail products such as "continuous workout mortgages," that go up and down with the value of the home equity and mortgage equity insurance.

Mr. Shiller, who would not give a precise forecast on the outlook for U.S. home prices, nevertheless said futures markets are predicting more price declines of 10% or more. His Case/Shiller index earlier this week showed home prices down 16.3% year-over-year this summer.

He expects things to get worse for the U.S. economy in the short-term.

"We're going to have a severe recession, most likely," he said. How quickly the economy recovers depends on policy.

"Unfortunately the bailout has hit a snag," he said. "There is resentment of rich Wall Street people. I am worried that the sense of trust, in confidence of each other is being damaged."

Mr. Shiller said he does not have another bubble in his sights as the U.S. economy will be "damaged for years."

"The housing bubble was of record proportions," he said. "Maybe the next big bubble will be your children's or grandchildrens...The excitement we had in the 1990s and in 2000 in the housing market is a fragile thing and it won't come back for some time."

US Financials Falling Like Dominoes

Sept. 14 (Bloomberg) -- Lehman Brothers Holdings Inc. prepared to file for bankruptcy after Barclays Plc and Bank of America Corp. abandoned talks to buy the U.S. securities firm and Wall Street prepared for its possible liquidation.

Lehman and its lawyers are getting ready to file the documents for bankruptcy protection tonight, said a person with direct knowledge of the firm's plans. A final decision hasn't been made, though none of the other options being considered appeared likely, the person said, declining to be identified because the discussions haven't been made public.

Sept. 14 (Bloomberg) -- Bank of America Corp. agreed to buy Merrill Lynch & Co. for about $44 billion, a person with knowledge of the deal said, after shares of the third-biggest U.S. securities firm fell by more than 35 percent last week and smaller rival Lehman Brothers Holdings Inc. neared bankruptcy.

Bank of America and Merrill reached a deal in principle, according to the person, who declined to be identified because the deliberations were private. A final merger agreement hasn't been signed yet, the person said. The boards of Merrill and Bank of America approved the transaction this evening, the Wall Street Journal reported, citing unidentified people familiar with the matter.

Sept. 14 (Bloomberg) -- American International Group Inc., the insurer struggling to avoid credit downgrades, is seeking a $40 billion bridge loan from the Federal Reserve as it tries to sell assets, the New York Times reported.

The insurer has turned down a private-equity investment because it would have meant handing over control of the company, the Wall Street Journal said on its Web site, citing unnamed people. AIG may get access to the Fed's borrowing window in an ``extreme liquidity scare,'' Citigroup Inc. analyst Joshua Shanker said in a Sept. 12 research note.

TD Economics - The US Housing Market

HIGHLIGHTS

• U.S. home construction shows signs of life
• Global inflation and growth woes remain

In the 1980s, economist and Nobel laureate Amartya Sen found that famines tend to happen not because of a lack of food, but because of obstacles preventing those in need from acquiring the existing stores of food. This juxtaposition is center stage across the globe right now – an ongoing famine for liquidity in many financial and housing sectors versus the flood of petro-liquidity driving consumer and producer inflation higher worldwide. We have liquidity in spades, just not in the sectors that welcome it or need it most.

Why so serious?
Remember April and May? The leaves were returning. The flowers were blooming. The credit crunch was over. Well, the spring fling is over and markets have come to the realization – which incidentally has been TD Economics base case scenario all along – that the credit crunch will continue to slowly bleed for some time. While the market roller coaster saw increasing optimism early this week, apparently markets forgot that the U.S. housing market remains in shambles. There is some light. For the first time since the spring of 2007, the 3-month trend in new home sales and starts is positive. New home construction is what is captured in GDP measures of residential investment, and this same signal preceded rebounds in U.S. residential investment in each of the last three downturns. Existing home sales, on the other hand, make up the majority of the U.S. housing stock and mortgage market, and sales there dropped another 2.6% M/M in June and are down over 15% over last year. Critically, at this current pace of sales, it would take over 11 months to sell the inventory of unsold homes already on the market. And this doesn’t include other homes dumped on the market in coming months through foreclosure or voluntary sales. In the second quarter, one in every 171 U.S. households was foreclosed on – with Nevada showing a staggering one in 43 households and California one in every 65.

This is the heart of the liquidity famine. As more homes are dumped on the market, home prices fall further, driving further mortgages underwater, leading to further foreclosures, further homes dumped on the market, and further home price declines. Lather. Rinse. Repeat. At some point, lower prices will entice buyers into the market, but not until the expectation for further declines recedes. Why buy today when you can buy next year for 10% less? In the meantime, liquidity in the housing market is nonexistent. This feeds directly into the current dilemma for the financial sector. The smaller and more regional the bank, the more exposed to the mortgage market. Real estate loans account for 1/3 of all assets of U.S. commercial banks – over ½ of all assets for banks with total assets less than $1 billion – and nearly 2/3 of assets of savings and loans. This puts these institutions in a vise, and those like Fannie and Freddie that have bought or underwritten about half of all these mortgages in a bind. As a result, commercial banks’ average daily borrowing of $16 billion from the Fed’s emergency lending programs last week was the highest ever.

So the issue becomes what can be done to get that liquidity flowing again? In a perfect world, we’d let the market work itself out. Prices would fall to the point that buyers would move in, and larger banks would recapitalize by attracting investors. But current regulations limit the ability of buyout firms to move into the banking sector – an issue the Federal Reserve is reportedly trying to address – while large foreign investors that bought into large banks earlier have since lost money on their investments and may be once bitten, twice shy. The bill moving through the U.S. Congress right now hopes to help stop the self-fulfilling prophesies of doom, gloom, and liquidity vacuum. The government would increase its debt ceiling by about $800bn – about half of which could cover the expected 2008 federal deficit and the other half would be there just in case. This “just in case” would help cover, among other things, the federal government insuring approximately $300bn in mortgage debt belonging to 400,000 American households who will refinance their subprime loans into 30-year fixed-rate mortgages, $4bn in federal transfers to the states, and the ability of the U.S. Treasury to buy stock in Fannie and Freddie up to the federal debt ceiling. As banks continue to struggle, these two institutions are key to helping the U.S. mortgage market grind on. While not ideal, a government backstop may be just what is needed to avoid their failure and the vicious cycle in the mortgage market. Earlier this week, the Congressional Budget Office estimated the cost of the Fannie and Freddie rescue plan at $25bn. As with most of the estimates placed on the cost of credit crunch, this seems likely to creep higher, but is still much lower than the cost of doing nothing. In the worst case scenario – or even just the next incremental step because let’s be honest, there isn’t much of a difference between the first step off the cliff and the second – the costs to the Federal government could be ten times higher.

A horse with no name
The current U.S. predicament is core inflation and GDP growth both running at about a 2.5% pace over last year. For those unlucky few who need to buy gas and food on a regular basis, total inflation is running at twice that pace. Still, this is well short of the near 15% pace of core inflation and 1% Y/Y contraction in U.S. GDP in 1980 that saw the invention of the moniker “stagflation.” Nor are there signs inflation will come unhinged in the U.S. to that extent so the “stag” part is much more likely than the “flation.” Similarly in Canada, headline inflation is now running at twice the pace of core inflation (3.1% vs. 1.5%). In fact, on a global scale, the most likely scenario is further stagnation in advanced economies and further inflation for emerging markets, with very few of either seeing both on a sustained basis. The U.S. consumer is quickly running out of stimulus checks to spend. In Canada, retail sales for May showed an ongoing sharp deceleration in everything not being bought at a gas station. In Europe, surveys of the manufacturing and service sectors showed sharper than expected decelerations in Q2. The U.K. economy posted its weakest quarterly GDP growth rate in three years in 2008Q2 and is likely to contract before the year is out. And, the pace of exports from Japan and Hong Kong saw precipitous declines in June. So growth is likely to slow in these regions and exert a downward pressure on domestic inflation.
On the other hand, broad-based emerging market resilience and inflation worries remain. The pace of inflation-adjusted retail sales in China is the highest in 12 years. Korea’s economic expansion stayed constant in Q2 while inflation remains at a 10-year high. And across the EM universe (or at least averaging 57 EMs), inflation has accelerated from a 5% pace in June 2007 to 12% in June 2008. So while Malaysia this week hiked interest rates for the first time since 2006, and Brazil surprised markets with a larger than expected rate hike, the average pace of inflation across EMs is rising faster than the average interest rate. This is pushing down real interest rates and helping to fuel both faster growth and inflation in these markets. The same is not occurring in advanced economies, with average real rates still above zero in the G-7.
So in the immortal words of the modern philosopher Axl Rose, “Where do we go now?” Sluggish economic growth in advanced economies is likely to keep a lid on growth prospects in EMs, but not unbearably so. Inflation in EMs is likely to place upward pressure on advanced economy inflation, but not uncontrollably so. And we are likely to see more mirages in the desert before we finally find paradise and bring balanced liquidity back to the global economy.

Richard Kelly, Senior Economist416-982-2559

F Mac

Watch CBS Videos Online

US Mortgage Bailout

Fannie Plan a `Disaster' to Rogers; Goldman Says Sell (Update2)
By Carol Massar and Eric Martin

July 14 (Bloomberg) -- The U.S. Treasury Department's plan to shore up Fannie Mae and Freddie Mac is an ``unmitigated disaster'' and the largest U.S. mortgage lenders are ``basically insolvent,'' according to investor Jim Rogers.

Taxpayers will be saddled with debt if Congress approves U.S. Treasury Secretary Henry Paulson's request for the authority to buy unlimited stakes in and lend to Fannie Mae and Freddie Mac, Rogers said in a Bloomberg Television interview. Goldman Sachs Group Inc. analyst Daniel Zimmerman predicted the mortgage finance companies' shares may fall another 35 percent.

``I don't know where these guys get the audacity to take our money, taxpayer money, and buy stock in Fannie Mae,'' Rogers, 65, said in an interview from Singapore. ``So we're going to bail out everybody else in the world. And it ruins the Federal Reserve's balance sheet and it makes the dollar more vulnerable and it increases inflation.''

The chairman of Rogers Holdings, who in April 2006 correctly predicted oil would reach $100 a barrel and gold $1,000 an ounce, also said the commodities bull market has a ``long way to go'' and advised buying agricultural commodities.

Rogers, a former partner of hedge fund manager George Soros, predicted the start of the commodities rally in 1999 and started buying Chinese stocks in the same year. He traveled the world by motorcycle and car in the 1990s researching investment ideas for his books, which include ``Adventure Capitalist'' and ``Hot Commodities.''

Stocks Rise
Fannie Mae and Freddie Mac each surged more than 20 percent in pre-market trading today after Paulson moved to stem a collapse in confidence in the two companies that purchase or finance almost half of the $12 trillion in U.S. home loans.

``These companies were going to go bankrupt if they hadn't stepped in to do something, and they should've gone bankrupt with all of the mistakes they've made,'' Rogers said. ``What's going to happen when you Band-Aid and put some Band-Aids on it for another year or two or three? What's going to happen three years from now when the situation's much, much, much worse?''

Freddie Mac rose 22 cents, or 2.8 percent, to $7.97 at 10:13 a.m. in New York Stock Exchange trading, while Fannie Mae rose 73 cents, or 7.1 percent, to $10.98. Paulson's proposal, which the Treasury anticipates will be incorporated into an existing congressional bill and approved this week, signals a shift toward an explicit guarantee of Fannie Mae and Freddie Mac debt.
The Federal Reserve separately authorized the firms to borrow directly from the central bank.
Last Week's Slump

Washington-based Fannie Mae slid 45 percent last week, while McLean, Virginia-based Freddie Mac sank 47 percent on concern they may require a bailout that would wipe out shareholders.
Former St. Louis Federal Reserve President William Poole last week said in an interview that Freddie Mac is technically insolvent under fair value accounting, which measure a company's net worth if it had to liquidate all its assets to repay liabilities. Poole said Fannie Mae may also become insolvent this quarter.

Goldman's Zimmerman said today the U.S. government's plan to rescue Fannie Mae and Freddie Mac won't benefit shareholders. He lowered his share-price estimate for Fannie Mae to $7 from $18 and for Freddie Mac to $5 from $17.

Rogers said he had not covered his so-called short positions in Fannie Mae and would increase his bet if it were to rally. Short sellers borrow stock and then sell it in an effort to profit by repurchasing the securities later at a lower price and returning them to the holder.

The U.S. economy is in a recession, possibly the worst since World War II, Rogers said.
``They're ruining what has been one of the greatest economies in the world,'' Rogers said. Bernanke and Paulson ``are bailing out their friends on Wall Street but there are 300 million Americans that are going to have to pay for this.''

Is it time to buy stocks yet?

The major stock indices around the world have all come down a great deal in the past year and may be offering better investment opportunities now than 1 year ago.

I can't say whether stock prices will go up or down but as a student of market history I am interested in what the past can teach us. Have a look at this chart which tracks the Price to Earnings ratio of the 500 largest companies in the United States from 1950 to 2008. The index levels are significantly lower now and accordingly the P/E ratio is also lower now.


The US markets were down another 10% during June and more so far during July. Worry about the economy and the financial system is on every news channel and there are very few bright spots. Corporate earnings are expected to be under pressure over the next 12 to 24 months as it is likely that the US is in recession and the hangover from falling house prices bites into corporate profits. This will affect the 'E' part of the P/E ratio for the next while. Stock prices are also forward looking and are already pricing in the prospect of lower profits.

Personally, I have a long time horizon and I'm always buying as part of a systematic investment plan but I'm much happier buying today than 1 year ago.

Vancouver's Next - Watch Out!

This post is brought to you by a real estate crash near you and the letter "L" which stands for Losses, as in large equity losses in real estate.


Your average Sesame Street watcher could understand what the lines on this graph mean and why Vancouver is likely to folow the pattern set so clearly by cities like San Francisco, Los Angeles, Seattle, or Portland.



This chart is courtesy of Seattle Bubble Blog.

Let us, for argument's sake, say that the Vancouver House Price Index peaked in March 2008 and that our market will follow a similar trajectory to Los Angeles. One year from now house prices will be at 92% of their current value. This means that your average $500,000 townhouse will be worth $460,000. This is a potential savings of over $3,000 per month just for waiting on a very important purchase. Can you afford to lose $3,000 per month?

Let's go out another year from there and see where our $500,000 townhouse is now. 24 months from peak in a place like San Diego would mean that our $500,000 townhouse is now worth $420,000 which translates into a loss of $80,000 or just over $3,000 per month for two years straight and prices are not finished coming down yet.

I don't know about you but paying $3,000 per month in mortgage payments on a place that is losing value at a $3,000 per month clip means that you are 'spending' $6,000 per month for housing - that is an expensive house.

Case-Shiller Index

NEW YORK (Reuters) - Prices of existing U.S. single-family homes slumped in January, with 16 of 20 regions measured posting record annual declines, according to the Standard & Poor's/Case-Shiller home price index reported on Tuesday.

The composite month-over-month index of 20 metropolitan areas fell 2.4 percent to 180.65 from December, bringing the measure down 10.7 percent from a year earlier and 12.5 percent from its July 2006 peak.

"It shows that the housing correction is still under way," said Michelle Meyer, an economist at Lehman Brothers in New York. "The weakness is not contained to the bubble areas."
Home prices in Las Vegas and Miami fell the most of any region, at 19.3 percent year-over-year, while Phoenix, San Diego and Los Angeles also suffered double-digit drops.

S&P said its composite month-over-month index of 10 metropolitan areas fell 2.3 percent to 196.06 for an 11.4 percent year-over-year drop.

Keep this in mind - until home prices stop declining there will be no end to the financial crisis.

Bubblier than the Bubbliest

Well why not celebrate. Vancouver is the number 2 bubbliest of the bubbly cities in North America and the only one that is yet to pop. At an index value of 276 versus the peak index value for Miami of 279 why not celebrate since Vancouver real estate values will never fall and we will surely have rising prices for another 100 years thus taking over the top spot in short order and retaining that spot for eternity. Champagne will flow in the streets and we will pave them with gold because our real estate will be so precious that the very wealthiest of the wealthy will be the only ones to afford homes in Vancouver.

The fact that Miami prices have fallen 20% since that peak should in no way concern us because you know Vancouver has invincibility to financial turmoil and is a safe haven from all of those messy recessions and credit problems. Just ignore the developments going into receivership and the rampant speculation on pre-sale condos. Just ignore the rapidly growing inventory of unsold existing and new homes. Just ignore the collapse of the forestry, tourism and film industries. Don't worry . . . nothing to see here.


The index is normalized for the US$ / CAN$ exchange rate and is set to an index value of 100 in the year 2000. US prices are from the Case Shiller index values and Vancouver prices are from the REBGV Nominal House Price Index. Click on the chart to make it bigger.

US Home Prices

This chart is brought to you by the Mess That Greenspan Made and the S&P Case Shiller Index.



My goodness the prices just keep getting lower and lower. Let's just file this one under "You Ain't Seen Nothin' Yet."

Miami - wow. Los Angeles - whew - I'm feeling dizzy. Every single market is declining and many have just started but those steep curves for LA and Miami are something to behold.

Oh how I remember the days when the US housing bubble bloggers were being lambasted for saying that house prices were going to fall - many critics said it couldn't happen and that their area was different. Sweet vindication of their point of view only soured by the knowledge that real families are being financially ruined as we speak.

Coming soon to a city near you.

Negative Equity - Coming Soon to a Home Near You

Third of recent buyers owe more than home's value: report

Tue Feb 12, 9:48 AM ET

More than 30 percent of U.S. homeowners who bought in the last two years owe more on their mortgage than their house is currently worth, a housing market research company said on Tuesday.

The housing market peaked in most U.S. markets in the last two years. Of home buyers in 2006, 39 percent of those with a median 10 percent down payment now have negative home equity similar to 30 percent of those who purchased in 2007, said online company Zillow in its quarterly home value report.

Overall, only 3 percent of those who purchased in 2003, and less than 1 percent of all homes in the United States regardless of when they were purchased, have negative equity. At the same time, U.S. home prices fell 3 percent last year from 2006. Condos and single-family residence values dropped 7.4 percent and 5.5 percent, respectively, the report said.

Nationwide in last three months of 2007, all home types fell 3.3 percent from the third quarter and 3 percent year-over-year. "With consecutive declines over the past five quarters, we haven't seen the housing market bottom yet, and it may very well get worse before things get better," said Stan Humphries, Zillow vice president of data and analytics.

"Even many markets that have been largely insulated from recent declines, like some in the Pacific Northwest, reported notable value declines in the fourth quarter," he added. Home values overall fell in the fourth quarter of 2007, to around $224,890, while condominiums posted the largest year-over-year drop, down 7.4 percent to around $229,017.

The fourth-quarter Zillow report taps data for the nation and 125 metro markets, covering 67 million homes. (Reporting by Chris Sanders; Editing by Jonathan Oatis)

Robert Shiller Video

This video was posted over at Calculated Risk and I figured I would add it for your viewing pleasure here.

Home price drop hits a new record low

The S&P Case/Shiller report shows the biggest year-over-year price decline on record.

By Les Christie, CNNMoney.com staff writer
January 29 2008: 10:19 AM EST

NEW YORK (CNNMoney.com) -- The housing market is only getting worse, according to the latest report from S&P Case/Shiller released Tuesday.

Home prices were down 8.4 percent in November compared with last year in its 10-city index, a record low. The 20-city index also fell 7.7 percent.

The Case/Shiller report compares same-home sale prices. The industry considers it to be one of the most accurate snapshots of housing prices. Previously, the largest year-over-year decline on record was 6.3 percent in April 1991. The November report marked the 11th consecutive month of negative returns for the index, and twenty-four months of decelerating returns.

Cities in trouble

"We reached another grim milestone in the housing market in November," said Robert Shiller, Chief Economist at MacroMarkets LLC and co-creator the index in a statement. "Not only did the 10-city composite index post another record low in its annual growth rate, but 13 of the 20 metro areas, each with data back to 1991, did the same." The worst hit market of the 20 metro areas covered was Miami, where the median home fell a whopping 15.1 percent in value. San Diego prices also fell steeply, down 13.4 percent. Las Vegas was off 13.2 percent and Detroit by 13 percent. Three cities did emerge with higher prices compared with 12 months ago: Prices rose 2.9 percent in Charlotte, N.C., 1.8 percent in Seattle and 1.3 percent in Portland, Ore. But even these markets have turned down over the last three months. Indeed, every city in the index recorded at least three consecutive months of falling prices through November.

The three biggest U.S. cities also recorded year-over-year declines; New York was down 4.8 percent, Los Angeles 11.9 percent and Chicago 3.9 percent. The losses in Los Angeles accelerated in November; that city recorded the largest month-over-month drop of any index city, 3.6 percent.

Tuesday's report came in the wake of many other surveys indicating that the housing market is getting worse. Foreclosure filings and the risks of future foreclosures were both up sharply; the number of new homes sold plunged more steeply than any year on record; and the pace of existing home sales fell to their lowest level in 27 years.

Wealthy People Can Be Stupid Too

This is a perfect story illustrating why the housing market problems are not a "subprime" problem as is commonly argued in the media. This is a poor interpretation of the problems that are occuring. The correct thesis is that homes were overvalued and lenders were far too willing to lend way above traditional multiples of incomes or property values. This is, unfortunately coming soon to a neighbourhood near you. This story rings so true of the Vancouver area - a facade of wealth and a chronic over-extension of family and personal finances.

From Reuters (emphasis mine):

By Nick Carey HINSDALE, Illinois (Reuters) - A house in this wealthy Chicago suburb is far beyond the reach of most Americans. Unfortunately, Hinsdale may also now be too expensive for some of the people who already live here.

"There is a section of the population here that over-extended themselves to buy here and then keep up the facade of wealth," said Sharon Sodikoff, a broker associate at local real estate agency Prudential Homelife Realty. " In the next year or so they'll be forced out in dribs and drabs."

With a picturesque little downtown area and large, expensive houses -- according to the Headrick-Wagner Consulting Group, the average home sale price here in the 12 months to September 30, 2007, was around $1.15 million -- Hinsdale seems a world away from the housing slowdown that may have brought the U.S. economy to the brink of a recession.

But even here, far from the housing crisis' epicenter, high earners with good credit may be heading for trouble as their adjustable rate mortgages (ARMs) adjust beyond their means, local real estate agents and others say. In a normal housing market they'd be able to sell, but now they are stuck.

"The next wave of problems will come from prime borrowers who bought too much house or borrowed too much against it," said Michael van Zalingen, director of home ownership services at Neighborhood Housing Services of Chicago. A "prime" borrower is one with good credit.
Real estate agents warn that some high-income borrowers have already been forced to sell or leave their homes and more will follow. Especially those who used their homes as ATMs, withdrawing cash via home equity loans.

"For those who utilized home equity loans for five to ten years to finance their lifestyle, the chickens are coming home to roost," said Chicago-based real estate agent Marki Lemons.

There are also signs some lenders are warily eyeing "prime" borrowers. Tom Kelly, spokesman for Chase Home Lending, a unit of JPMorgan Chase & Co, said the company raised its reserves for possible home equity loan loss for subprime and prime borrowers by $635 million in the second and third quarters last year.

"The concern is people who have borrowed a large percentage of the equity (in their homes)," Kelly said. "Now the value of their homes is falling and they can't refinance."
"Some just stop paying and walk away," he added.

SHORT SALE

Getting into property during the boom was easy, with mortgages freely available for no money down.

Then came the subprime crisis and the credit crunch, slowing the market, pushing prices down and home inventories up. In Hinsdale, for instance, the supply of homes on the market rose to more than 17 months in early October from less than 6 months in January 2006. While it's apparently a buyers' market, Lawrence Yun, chief economist at trade group the National Association of REALTORS, says high-end borrowers are put off by the high interest rates now applied to so-called "jumbo" mortgages, those for $417,000 or more.

"Potential buyers say 'no way am I buying at that price,'" Yun said. "If people can't enter the market, this slows everything down and puts pressure on foreclosures."

If some borrowers can't get into the market, there are others who can't sell to get out. Home owners who bought recently with no money down are the ones most likely to abandon a property when they fall behind on the mortgage.

"I've seen people who bought less than a year ago and have no equity in their homes simply walking away with no regard for the consequences," said Genie Birch, a real estate agent at Chicago-based Koenig & Strey GMAC who covers the city's wealthier districts.

Real estate agents say speculative investors who bought to make a profit are also walking away as the rents they charge fall behind the mortgage payments as their adjustable-rate mortgages readjust.

The home owners who find it harder to walk away are those who took out large home equity loans before prices started falling and now owe far more than their home is worth.

"It's difficult for home owners in that situation to sell as they'll still be left owing money," said Dave Hanna, managing partner of Prudential Preferred CRE, which owns Prudential Homelife Realty in Hindsale.

Unlike subprime borrowers, however, wealthy home owners are more likely to try to cut a deal with their lender, rather than end up in foreclosure. The alternative solution available to them is to opt for a short sale.

Under a short sale agreement, the borrower sells below the mortgage value and the lender writes off the difference. The lender gets less than originally anticipated, but is not stuck with a foreclosed property. The borrower's credit rating is damaged, but not as badly as if they had lost the home.

"You won't see many foreclosed homes here because that would involve public embarrassment," Prudential Homelife Realty's Sodikoff said. "But they will call their realtor and get them to quietly broker a deal to get out of their homes."