The Story Hasn't Changed - - - Yet

Why the housing slump isn't over yet - By Charles Zentay at thinkinvest.blogspot.com
Bold is mine.

For years, I bored my friends with talk that housing was in for a downturn. No one believed me, and people urged me to buy in before I was shut out of the market. Despite the obvious slowdown in housing, I continue to sing the same tune. I've been doing a lot of reading this weekend about the housing market, and I've concluded that we still have a long way to go before housing reaches bottom. I have been on this soapbox since early-2005 and although the market has not changed in Vancouver yet I still maintain that the market is headed for a drastic downturn. The longer we go without a correction the bigger the correction will be.

Why? The main reason is that in spite of all the whining and moaning about the housing slowdown, prices haven't come down that much (maybe 10%) and affordability is still very low by historical standards.

Here are some other reasons to be wary of housing:
- There is a ton supply out there (supply is at a record, and 2x its normal rate over the last several years). It has just skyrocketed and it is not going down. This is becoming true in our local markets just as it was in the United States.
- Affordability for new home buyers is still at lows.- More people own houses than ever before (meaning fewer buyers out there). Vancouver has THE WORST affordability in North America.
- The Fed will have trouble lowering interest rates in the face of $85 oil and a Euro of 1.42. Can you say INFLATION?
- Credit standards are tightening, meaning fewer mortgages and therefore fewer buyers. This is also true in the Vancouver market although to a lesser extent.
- A large amount of ARMs are still resetting, with a tremendous amount due to reset in the second half of 2008. ARM resets are leading to more foreclosures, and therefore even more supply. British Columbia has the highest product adoption of variable rate mortgages in Canada, with many mortgagees having a negative amortization now.
- Homebuilders are under enormous pressure with debt coming due and therefore will be willing to dramatically lower their prices. Vancouver has a tremendous amount of new home supply coming available in the next 12 - 24 months and demand that is drying up. Developers will cut prices when they realize that nobody is buying.
- The economy seems to be softening, with economists raising the chances of a recession. If you think that the Vancouver economy can sustain itself and is immune to external shocks you are deeply deluded. The high CDN$ is hurting exports (lumber, manufactured goods, technology, etc), film-making (Hollywood north anyone), and tourism (the supposed golden egg of 2010).
- Cap Rates (the income from rents) are still very low, making housing an unattractive investment. Duh! Real estate is about the worst investment possible right now - if you don't believe me get a calculator, paper and pencil and DO THE MATH.
- All of the above is leading to a change in the mentality towards housing. It is going from something people want to own to something to be wary of. This change in attitude towards housing can take a long time to set in and have a tremendously negative effect on pricing. Apparently Vancouverites are still in lala-land when it comes to this psychology shift but it will come swift and sure.

Frankly, the only bright spot I see in housing is that the weak dollar is leading to more foreign buying of U.S. real estate (in places like New York), but the effect of this buying is minimal compared to the other negatives. I just don't see other positives.I think owners are stubborn and resistant to lower prices. Therefore, the market is not correcting itself quickly. The slowdown is likely to last several years.

Until Cap Rates are higher than Mortgages Rates (meaning it actually pays to be a landlord), I think the market will continue to head down. Unfortunately, we're not even close to having attractive Cap Rates. I wouldn't be surprised if a major homebuilder declares bankruptcy in the next 6-12 months. I also wouldn't be surprised if homebuilders and banks start to move to more aggressively clear inventory, which will lead to big price declines. Look for this to happen in our area in 18-24 months.