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 Jan 30 2012 monthly update ~ Realty Bubble Monitor

Click here  (members only) for the 2012-2011-2010-2009-2008 archive of these 2 charts

April 30 2012 delayed FreeVenue public release of Jan 30th MemberVenue guidance ~ Over the past 90 days, the avg/median home price fell $400/week in Canada, £200/week in the UK, $200/week in Australia and $100/week in the USA.  The USA realty bubble been in "over-correction mode" since Sept/2010.  Thus, its annual median home price ended 2011 actually 5% ($8,000) below the long-term Price/Family-Income ratio trend.  In turn, Australia, Canada & the UK face a prolonged stifling of economic activity due to the assault on disposable incomes by the weight of home mortgages and rent.  When one adds in the burden of cumulative high petroleum costs, the fundamentals are in place for Technical Recessions in all three jurisdictions.

Families most at risk are in the UK where the avg home is overpriced by 120%.  The Australian median home is currently 81% overpriced.  Canada's housing bubble finally burst in June 2011.  The avg Canadian home is 32% overpriced and valued at 2.2 x's its American counterpart.  As such, the Canadian economy saw monthly contractions in February, April, May & November and the TRENDLines Recession Indicator currently projects sub 3% GDP thru to its 2017Q4 horizon.

The Conservative Federal Gov't & Bank of Canada talking points have been blaming the Japanese earthquake, EURO troubles & Justin Bieber for the ailing domestic economy, but CMHC is clearly at fault for this situation.  Canada was the last G-20 nation to fall into Recession in 2008 and the first one out ... not by clever fiscal/monetary policy but because CMHC was enabling the domestic realty bubble by condoning 5% minimum downpayments for its high-ratio mortgage insurance coverage.  As such, the housing bubble financed Canada's false good fortune.  The present economic downturn is solely a "made-in-Canada" malaise and was foretold in this venue as far back as March 24 2010.

It is scandalous the measure continues in place and Canadian taxpayers are clearly at risk.  CMHC expects the Canadian taxpayer will bailout any major insurance losses it incurs as was done in the USA with FannieMae & FreddieMac.  If there is any sense of accountability in Ottawa, look for heads to roll at CMHC.  Why?  The following was CMHC's response to my on-going analysis in their Q3 Financial Statement release (2011/11/29):  "At the moment, there is little evidence of a significant over-valuation in the Canadian housing market overall, although some centres warrant close monitoring. CMHC expects housing markets to stabilize next year, and house prices to grow modestly going forward."  (scroll to see wall of shame below)

 Canada's Realty Bubble a record $87k in 2011 ... over double USA counterpart

The Canadian avg home price detached from the long-term Price/Family-Income ratio of 2.7 way back in 2002.  The onset of record low interest rates shortly thereafter enabled consumers to buy more expensive homes w/o increasing their mortgage payments.  Subsequent irrational exuberance swept the P/FI ratio to an unsustainable bubble high of 3.6 in 2011.

The year-to-date annualized price of $361k is 32% ($87k) above the trend line and a record 120% premium over the $164k American counterpart.  As shown by trajectory in chart#1 and assuming a 2011 Peak, it is probable new highs will not be set 'til 2019.  Using monthly data, last month's $348k avg national price is down $29k (-8%) from the $377k record high back in May 2011.  Home prices fell by $400/week over the last 90 days.

 Australia's Realty Bubble declines $12k to $184k in 2011

Australia's median home price detached from the long-term Price/Family-Income ratio of 2.1 way back in 1997.  The onset of record low interest rates shortly thereafter enabled consumers to buy more expensive homes w/o increasing their mortgage payments.  Subsequent irrational exuberance swept the P/FI ratio to an unsustainable bubble high of 4.8 in 2007.

The year-to-date annual median price for 2011 is $411k.  2007 is considered the Bubble Peak as Price in that year was 128% ($241k) above the P/FI ratio trend.  The same metric infers median price should be only $227k this year.  As shown by trajectory in the chart, it is probable new highs for median Home Price will not be set 'til 2027.  In summary, the Australian realty bubble was $184k (81%) over trend & 3.8 P/FI ratio in December 2011.  Using monthly data, last month's $405k median national price is down $25k (6%) from the $430k high back in 2007.  Home prices fell by $200/week over the last 90 days.

  UK's Realty Bubble declines £2k to £90k in 2011 ... UK Homes overpriced by 120%

The UK average home price detached from the long-term Price/Family-Income ratio of 1.9 way back in 1997.  The onset of record low interest rates shortly thereafter enabled consumers to buy more expensive homes w/o increasing their mortgage payments.  Subsequent irrational exuberance swept the P/FI ratio to an unsustainable bubble high of 4.9 in 2007.

When the annual price peaked in 2007 @ £181k, it was £111k (157%) above the trend line.  As shown by trajectory in chart#1, it is probable that new highs will not be set 'til 2056.  In summary, the UK realty bubble was £90k (120% over trend & 4.2 P/FI ratio) in December.  Using monthly data, last month's £165 avg national price is down £21k (11%) from the £186 high back in October 2007.  Home prices fell by £200/week over the last 90 days.

 USA's Realty Bubble declines $14k in 2011 (overshot by $8k) ... New Home Price down $2k & attains Equilibrium

 New Homes:  Record low interest rates coming out of the 2001 Recession enabled consumers to buy more expensive New Homes w/o increasing their mortgage payments.  Pro home-ownership incentives plus the pent-up demand caused median price to quickly detach from the long term Price/Family-Income ratio of 2.6 in 2002.  As slack lending guidelines and outright fraud became entrenched, irrational exuberance took the P/FI ratio to an unsustainable high of 3.1 in 2005.  Annual median price rose to $241k in 2005.  Despite still rising for two more years, I consider 2005 as the Bubble Peak as the 2005 price was a record 26% ($50k) above the trend line.

As seen in chart#2 above, the year-to-date annual New Home Price ($226k) is $0k below the 2011 target of $226k.  More importantly with regards to the economic recovery, annualized seasonally adjusted (SAAR) unit sales had recovered to 408K by Aug 2009 from the 336k low in January of that year.  Sales plunged to a troubling five-decade low of 278k pace in the August 2010 pause, but had recovered (17%) to a 324k pace last month.  To add context however, the build pace during the 2005 high was 1.4 million units/yr.  As shown by the chart trajectory, it is unlikely the New Home median price will set new annual highs 'til 2015.  In summary, the USA New Home realty bubble was $0k (0%) below trend & 2.6 P/FI ratio in December 2011.  Using monthly data, last month's $217k median price was $13k (6%) above the 7-yr low in Oct/2010, but is still $46k (17%) below the all time high of $263k back in March 2007.  New Home prices fell by $0/week over the last 90 days.

 Existing Homes:  Record low interest rates coming out of the 2001 Recession enabled consumers to buy more expensive Existing Homes w/o increasing their mortgage payments.  Pro home-ownership incentives added to pent-up demand caused median price to quickly detach from the long-term Price/Family-Income ratio of 2.0 starting in Y2k.  As slack lending guidelines and outright fraud became entrenched, irrational exuberance took the P/FI ratio to an unsustainable bubble high of 2.8 in 2005.  The annual median price rose to $219k in 2005.  Despite still rising for another year, 2005 is considered the bubble peak as the 2005 price was a record 34% ($74k) above the trend line.  It had appeared a correction was virtually complete by January 2009, but a new low in February 2011 made it apparent median price was exhibiting a classic "return to the mean".

As seen in the charts above, this year's median Existing Home Price ($164k) is $8k below the 2011 target of $172k.  More importantly with regards to the economic recovery, (SAAR) unit sales had quickly improved 19% from the January 2009 sub-trough, but then relapsed to a multi-decade low during the general July 2010 pause.  Unit sales have since rebounded 40%.  To add context however, the last month's sales pace of 4.61 million units/yr is far below the 5.4 mu/yr pace in late 2009.  As shown by trajectory in the chart, it is probable new annual highs for Existing Home median price will not be set 'til 2021.  In summary, the USA Existing Home Realty Bubble was $8k (-5%) below trend & 1.9 P/FI ratio in December 2011.  Using monthly data, last month's $165k median price was $8k (5%) above the recent 9-yr low in Feb/2011, but is still down $64k (-28%) from the all time high of $229k back in June 2007.  At its worst point, home price had crashed 32% to $156k.  Home prices fell by $100/week over the last 90 days.

USA Backgrounder (rev 2010/10/29) ~ In May 2008, TrendLines Research published guidance that the correction of the USA Housing Bubble would neither be as drastic as forecasts painted by self-appointed pundits, nor would it be the non-event as rationalized by voices in the media openly declaring the USA housing market was not in a bubble,  Our scenarios predicted the collapse would only be as severe as needed to return the USA's median Existing & New Home Prices to their Price/2-earner Family Income ratio trend lines.

Shortly thereafter (2008/11/18), McDoomer Nouriel Roubini was predicting a 40% collapse in housing prices and that 1,400 banks would "go bust in 2009".  Well, he was out by 1,260 on the latter call, and to date, existing home prices have declined only 28%.  A growingly tabloid-style mainstream media seems obsessed with extreme positions.

Following a long time commitment to Home Price/Family Income ratios to measure real estate bubbles, our first publicly available effort illustrated Existing Homes were inflated by $74k (51%) at the bubble's crest.  Based on our experience with the Canadian Real Estate Bubble of the 90's, we speculated prices would decline 'til at least 2017, and there would be no new American highs set 'til 2029.  But to our amazement, the classic "return to the mean" did not even come close to mirroring the Canada episode, and the correction for both New & Existing Homes was virtually complete by January 2009.  It was no coincidence the economic Recovery commenced the following month ... long before any fiscal stimulus cheques.

While waiting for the realty sector (and general economy) to correct (recover) completely, we had been awaiting four bottoms.  The first two were Existing Home transactions/month & Existing Home Median Prices.  Done ... January & January (2009) respectively.  The remaining pair were New Home monthly sales & Prices.  Done ... January & March (2009) respectively.  An increase in monthly transactions was important to the Economy 'cuz it brings on increased revenues via purchases of furnishings, appliances, landscaping/gardening,  With respect to New Homes, rising sales also mean "jobs".

The passing of the bottom of Prices for both categories is important 'cuz the subsequent apparent increase in "wealth effect" affects consumer demand and durable goods sales.  As the economic Recovery took hold, New Home Price rebounded 10% within 20 weeks of the March 2009 low.  Existing Home sales rose 27% from the January 2009 bottom by the following July.

A return to the mean is both natural and necessary for economic stability.  In the early 80's & 90's, we twice saw the Fed raise rates to embattle the Inflation cycle.  An upward effect on mortgage rates left less Disposable Income for consumers to spend on holidays, clothing, durable goods, etc ... and Recessions ensued.  The purpose was to quell overheating economies.  And it worked.

Due to winterization costs, Canadians spend an average 2.7 x's 2-earner Family Income for their residences, compared to a 1.9 factor in the USA.  Analysis reveals avg Home Price in both nations detached from the home price/family income ratio trend line after 1999 (see charts) along with avg New Home Price.  Lower interest rates made upgrade purchases almost painless.  Then irrational exuberance set in...

In 2001 the Fed lowered interest rates to draw the Economy out of its Technical Recession.  Many consumers, recently burned by the Dotcom fiasco, began to invest heavily in Real Estate rather than the volatile, collapsing Stock Market.  Low interest rates enabled the purchase of more expensive homes for the same monthly servicing cost, even w/o an increase in Family Income ... and housing inflated.  At the same time, new sub-prime mortgages flourished, compounded by rampant fraud by buyers, mtg brokers, appraisers, lawyers, lenders, mtg aggregators, investment banks and bond rating agencies.  Artificial Demand was greater than Supply, and the Realty Bubble was under way.  As Existing Home Prices attained levels of 2.8 x's Median Family Income, it was all to clear that irrational exuberance was fuelling the frenzy.

The USA norm for Median Existing Home Price is only 1.9x's the  median of 2-earner Family Income.  With extraordinarily higher prices, many families were drawing from their Disposable Income to pay higher monthly mortgage payments.  This left less funds for family budget spending on holidays, clothing, durable goods, vehicles, etc.  Coming out of the Recession, mortgage interest rates began to rise.  Add to the fray the higher energy costs for transportation and heating fuel that was in play, and we had the recipe for a Severe Recession.  The Fed recognized this scenario unfolding and attempted a succession of lower Interest Rates to keep the Economy humming ... but alas, could not avert negative GDP.

The realty correction plunge was unexpectedly swift ... much faster than we originally forecast, and resulted in a return to the trend line in January 2009 using monthly data.  It is no accident that the Severe Recession came to an abrupt end in July ... prior to delivery of the first fiscal policy stimulus cheques.  Nasty real estate & mortgage practices caused the economic contraction, and the return to norms also helped in getting out of the downturn by restoring Confidence.  The financial liquidity crisis & record petroleum costs were just a shove over the edge.

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