Tuesday, September 18, 2007

US Housing Market Pain = Better TV

The Primer: Today's News on the US Housing Market:
According to Bloomberg news, " The total number of U.S. foreclosure filings, including defaults, scheduled auctions and bank repossessions, rose 115 percent to a 243,947 in August from a year earlier, the highest ever in the RealtyTrac study that goes back to 2005. " The turmoil in the US housing market was also mentioned by the Federal Reserve as a reason for their 50 basis point cut today: They said that the "tightening of credit conditions has the potential to intensify the housing correction and to restrain economic growth.'' Although I would like to discuss the implications of these events on the Canadian economy, I want to boost my ratings by talking about the long list "Flip that House"-type TV show (I think a number of my readers are addicted - they may not like what is coming).

Good grief, I have come to hate those crazy 'Flip this broken house' , 'Turn a dump into fast money', ' Anyone can reno to fast money' type shows. Yes, in hot real estate markets prices do rise and if you go 43 weeks over budget prices might rise, if you might find someone desparate to take on too much debt. But now: the world has changed and this will become the rarity rather than the rule in the US.

O'yes, even I was almost convinced into thinking flipping is for everyone, I even had the a hammer in my hand with a crazed look in my eyes. And then, I woke-up: when you buy a house, you pay the highest price on the market. It reminds me of the commercial when the guy buys a painting at auction and then tries to sell it to the same group of people he out bid for it. So, thinking that you are the only person that can rip out some carpet, slap down some hardwood and think that someone will pay you thousands to do it is madness. When you pour money into a house you will, generally, get you money back (especially for bathroom and kitchen renos) - let me say that again: get your money back - not make $100K in 12 weeks.

The events in the US housing market will lead to changes in lending practices. Risky consumers will have to work harder to borrow money. Prices will come back in line with fundamentals (wages, employment rates, etc.). And, I hope, when these TV shows start showing people loosing money or keeping the house because they can't quickly resell them, we all be reminded that flipping a house is hard work, it is risky, and not forever one. Most importantly, I hope we get some better programing.


Francis Wooby said...

So to bring all this into practical terms, would my family benefit from waiting to buy a house in Ottawa? Will prices go down at all? If so, when do you think this might happen? As usual, I'm looking to benefit from other people's failures.

Matthew said...

Most successful house flippers aren't buying houses on the market, they are bidding on foreclosed houses at auctions that are difficult to get into.

Canadian Economist said...

FW: I will not tell you how you benefit from people's failures. But if your real estate agent wants to knock on a neighbour's doors get the dirt (divorce)that is fine with me. I don't know a lot about the Ottawa market, but the health of its biggest employer may give you some insight. If you find an area you like, a real estate agent can give you the list price and final sale price of all the houses in that area over the last few years, this could be helpful.

matthew: why would sellers shut people out of auctions? More people could mean a higher selling price (more demand). How is it in their advantage to do so?

Matthew said...

Have you ever seen the ads for foreclosure auctions? They are tiny posted in strange parts of the newspaper. The auctions are held in the middle of the day and you have to be pre-approved to attend. IE you have to have the cash in a format that you can hand over within minutes of placing your bid. The city doesn't care about profit so long as it greater then what they are owed.

Canadian Economist said...

Here is TD Economics' view on the Ottawa market:

No slack in Ottawa

"Continuing our trek eastward, we find that the nation’s capital housing starts have surprised on the upside. Up by almost 8% year-to-date, they will likely be lower in the second half of this year. As in many other markets, multiple units are largely responsible for the overall increase in starts. Meanwhile, the resale market remains strong, with home affordability still decent but price gains that outpace inflation. Here again, a relatively better affordability for condos has translated into a tighter market and larger price gains for that segment, and vice-versa for single-detached homes.

Better affordability across the river in Gatineau continues to result in a number of workers attached to Ottawa choosing to reside in Qu├ębec, which dampens Ottawa’s local housing demand. As the net difference – prices and taxes considered – between the two markets narrows, this trend is likely to abate but could last a while longer as such adjustments take a fair bit of time.

After cooling since 2002, our forecast still suggests a slight pickup in home price appreciation, mostly driven by the recent pace of sales versus that of listings. Following the vigorous job creation year that was 2006, employment is expected to decline by close to 2% this year before picking back up in 2008. Even if public sector employment prospects remain limited, private sector job creation is likely to improve in 2008."