Monthly Archives: April 2011

Open Reply to Rusty – “Just because you perceive a bubble does not make it so. Bubbles are only identified after they’ve burst.”

Rusty at VREAA 30 April 2011 8:47am -
“vreaa,
Just because you perceive a bubble does not make it so.
Bubbles are only identified after they’ve burst.
Or do you define a bubble as a real estate market where you personally cannot afford to buy?
What is your “pre burst” definition?”

—–

Dear Rusty

Thanks for your question.

It is a myth that “Bubbles are only identified after they’ve burst”. The myth is propagated by those directly or indirectly benefiting from the bubble, and also by vested interests in postions of responsibility, who could make a difference, but decline from so doing. An example of this is Alan Greenspan keeping monetary policy too loose through the tech and US housing bubbles, claiming that you can’t identify a bubble in advance. Greenspan is simply wrong on this point, and many observers saw those bubbles for what they were during the process of them being inflated. Yet, we still hear this myth perpetuated (as in your bold claim). This is closely related to the ‘hoocoodanode’ responses you’ll get from various players after a bubble inevitably bursts. It’s also a way of those guilty of policies and actions that perpetuate bubbles to claim innocence after the fact.

A speculative bubble can most definitely be identified while it is inflating. Such a bubble occurs when prices of any asset lose contact with fundamental values of the asset and start rising higher and higher simply because they are rising higher and higher. All buyers in such a market buy with the expectation of higher prices, some buying solely for the expected higher prices.
Almost all bubbles are supported by fallacious arguments citing ‘reasons’ for differences between bubble price and fundamental value. For instance, during the tech bubble, we heard the argument that P/Es of 1000 were merited because “we’ll be able to sell to everybody” (neglecting to take into account the fact that everybody else will be able to sell to everybody, too).
Bubbles are also facilitated by large quantities of easily available cheap capital.
They are all versions of Ponzi schemes, where, essentially, the late-comers are left holding the bag after prices collapse, and the only players who profit are those who get out early enough (surprisingly few), and those who sell ‘shovels to the prospectors’ (brokers; some developers, some in construction, etc).
All bubbles deflate, no exception (If you can think of any, let us know). Prices return to levels that make sense according to fundamentals. In fact, as we see now happening already in some areas of the US housing market, they often drop well below fundamental value, and may remain depressed for the better part of a generation. Bubbles are very, very destructive to a community, both through the terrible misallocation of human effort & resources on the way up, and through the tragic financial, social, and psychological consequences of the aftermath.

In Vancouver currently, median housing prices are about ten times median income, and rental yields are extremely low, much lower than one would expect even at current low interest rates. Thus, prices are far, far removed from those merited by fundamental value. By our calculations, prices are 2 or 3 times fair value, meaning that we’d expect price drops of well over 50% when the bubble deflates. But people continue to buy believing that prices are only going to go up (or, a slightly different version, that prices couldn’t possibly drop by more than 5% or 10%, before continuing higher). Higher and higher prices are ‘supported’ by fallacious arguments (“we’re running out of land/best place on earth/never-ending demand/foreign buyers”). Capital is very freely available, along with low deposits, long amortization periods, and government loan insurance.
By all measures, we are in a massive speculative bubble. Massive in terms of both the percentage of citizens involved, and the size of the overvaluations. This is not an opinion, it is a fact.

You have suggested that we may define ‘bubble’ as a market in which we, vreaa, cannot afford to buy. That is a fair thought for you to have. We could claim that this information it is neither here nor there to this discussion, but it is fair for you to know if we’re just ‘talking our book’. So, we’ll share with you that we can indeed ‘afford’ to buy, even at current prices, and definitely by all Vancouver standards. But we choose not to, because of the massive disconnect between price and fundamental value; because of the RE bubble. There is a very small minority of prospective buyers in this position in Vancouver. It is never easy to be on the wrong side of a bubble, but what else can you do but call it as you see it?

Say we had to reframe your statement to read: “Bubbles are only identified by the vast majority after they’ve burst.”
That we’d agree with. By definition, once even a minority start bailing, the bubble bursts. We haven’t reached this point yet in Vancouver’s remarkable market, but we will get there, and after we do, there will be a very broad consensus that we have indeed been through a very large bubble.

regards,
vreaa

“I would be content with a house like this. My dream has been shattered.”

unicas at RE Talks 26 Apr 2011 9:24pm“I will be content with a house like this, doesn’t have to be in Vancouver. This is the kind of upper middle class housing we expect to see in most parts of North of America. My dream has been shattered.”

4,351 sqft SFH; 0.46 acre lot; built 2006
Ask Price: $479,999
Price/sqft: $110/sqft
On market 180+ days
MLS/ID: 11490706
Shady Shores, Texas, 76208
[Median household income: $94,746 - ed.]

The Froogle Scott Chronicles: Mortgaging Our Souls In Paradise – Part 9c: So You Want to Buy a House and Fix It Up? Thirty Suggestions for Survival

Part 9c: So You Want to Buy a House and Fix It Up? Thirty Suggestions for Survival

[30 suggestions over 10 sub parts, starting with Part 9a. -ed.]

8. Water — the enemy

Remember this mantra: Water is a house’s worst enemy. — Tom Silva, This Old House

Vancouver was carved out of a temperate rainforest. The forest is gone, but the rain is still here. It’s what keeps everything green and allows the remaining trees to grow large, but it also represents a constant assault on the integrity of houses. The frequency and duration of rain in Vancouver is the real problem for houses and wood-frame condos, rather than the total amount of rainfall. Instead of intermittent cloudbursts that dump a lot of water in a short time before the sun reappears, drying out everything, rain in Vancouver tends to be an all-day or all-week affair. Drizzly, misty, fine rain alternating with overcast skies means that buildings can stay damp for long periods of time, which coupled with mild temperatures is exactly what promotes mould growth and rot.

One way of looking at a house is as a water-resisting structure, or perhaps more accurately, a water-management system. Most of us would think first about the roof, but in some ways roofs aren’t the main problem. They’re specifically designed to resist and shed water, and if properly built and maintained, do their job well. Problems that do arise tend to be with roof penetrations for vents, chimneys, or skylights, and improperly installed or poorly maintained flashing and caulking. But everything’s exposed, so finding and fixing problems is usually straightforward.

If you’re buying a house, one thing to be cautious about is a roof with insufficient overhang — the part of the roof that extends beyond the house wall. Overhangs are important because they prevent water from rain and roof runoff saturating house walls and potentially working its way into the house. Deep overhangs are best. Anything less than a foot won’t be that effective, and even a foot isn’t that much. A roof with little or no overhang may once have had one, but poor maintenance of the roof allowed the edges to rot, and instead of repairing the damage, someone doing a quick roofing job just buzzed away the rot with a saw and re-roofed what was left. Be cautious about buying a house with a compromised or missing roof overhang. In subsequent years water may have penetrated the walls, and rot may have spread through the sheathing and framing. At the very least, rebuilding a roof overhang should be one of the first things you do.

Less straightforward are problems associated with water penetration through walls, through concrete foundations, and around windows and doors — the elements that along with the roof make up the building envelope. One of the veteran house builders who worked on our reno maintained that flawed building envelope design was at the root of the leaky condo crisis. A number of years ago, the BC building code and the Vancouver building by-law were amended to require that all new construction incorporate a vapour barrier on the inside of exterior walls — typically a layer of heavy poly between the drywall and the studs and insulation. The idea was to improve heat retention and energy efficiency, and protect the cavities of exterior walls from condensation, by preventing water vapour from warm interiors meeting cold exterior air inside the wall. However, no change was made to the code regarding the outside of exterior walls. A typical assembly remained wood siding or stucco over a single layer of black building paper over plywood or OSB sheathing. The result was that any water that made its way into a wall from outside, because of a leak, or wind-driven rain, or was present in the wall framing materials during the construction process, now became trapped behind the vapour barrier. Walls could no longer dry to the inside, and given the Vancouver climate, drying to the outside might not happen for days at a time. The veteran builder likened the results to “leaving wet salad in a polythene bag.” It’s why the exterior walls of thirty-year-old condos might be rotting, whereas wood-frame apartment buildings built in the 1940s or 1950s, or hundred-year-old houses, with plenty of air movement through walls that can dry to both the inside and the outside, might be virtually rot-free. (Although being dry because of draftiness isn’t really a solution.)

Once government and industry realized the problem, they came up with the response: the rainscreen, the missing half of the wall assembly equation. A rainscreen is a drainage and air drying layer immediately beneath the exterior siding that cuts off the passageway for water, and drains any buildup to ground. Drainage mat against concrete foundation walls is another development that serves the same purpose — cut off the seepage of water through the foundation and move it to ground. Several other factors contributed to condos rotting in coastal BC, including California-style architecture (flat roofs, no roof overhangs, architectural adornment) inappropriate for the climate. And I’ve omitted some of the more esoteric building science details, because I don’t yet fully understand them. However, sealing up the inside of exterior walls without considering the outside was probably the most egregious of various design issues.

If you’re house hunting, be alert for signs that water is causing problems for a structure. Check the exterior closely for spongy-looking areas, flaking or bubbling paint, or crumbling stucco. Understand that vinyl siding may be have been installed over the original wood or stucco siding, covering up evidence of rot. In preparation for a sale, a house may have been freshly painted, hiding signs of water incursion. Inside, look for water staining on walls, dark, discoloured bottom corners, and tiny black dots of mould. Again, take into consideration a recent paint job. Pay special attention to the basement or lowest level of the house. Spend lots of time there. Breathe in deeply while walking throughout. Does it smell musty or damp? Trust your nose. Put your hands on the walls, especially below the foundation line, where drywall may cover concrete. Does the drywall feel firm and dry, or damp with a hint of softness? If the basement is unfinished, look for white powdery marks on the concrete. This is efflorescence, the salts left from water that has seeped through the foundation and evaporated. It’s not critical if you intend to leave a basement unfinished, but a problem if you intend to finish a basement, potentially trapping moisture that had previously been able to evaporate. If possible, tour a house during a rainy period, when any signs of water incursion are likely to be most noticeable. One of the reasons the peak house selling season is during the months of good weather is that the various symptoms associated with a leaky building envelope are going to be much less noticeable. Lastly, make sure that as part of a thorough home inspection, the inspector goes over the house with a moisture meter.

If it becomes apparent that a house has been losing the battle with water? Flee.

[Further resources/reading, general]

“Weathering the storm”, The Vancouver Courier, no date.

[Further resources/reading, advanced]

“Understanding Vapor Barriers”. Building Science Corporation, 24 Oct, 2006.

9. Find a good home inspector

While learning the basics about a house’s systems is a good idea for any home buyer or homeowner, most people don’t have the time or the inclination to truly delve into the hundreds of details that these systems represent. And even if you do learn a lot from books, or other sources, it’s not the same as years of experience gained scrutinizing the inner workings of hundreds of houses. For that kind of expertise you need a good home inspector, or some other kind of knowledgeable construction industry professional.

During the height of the bidding war frenzy that gripped the Vancouver real estate market in the mid 2000s (with sporadic outbreaks ongoing), it was common to hear of people putting in over-asking offers without any subjects. In a more normal market, a typical subject would be the requirement of passing a home inspection. Incredibly, during this abnormal market, formulating a competitive bid might require that you waive the right to look closely at the most expensive thing you were ever likely to buy. Step in to a massive financial commitment, and do it blind. Foregoing a home inspection is risky behaviour, to put it mildly. It’s rolling the dice, with ten of thousands of dollars, or more, potentially riding on the outcome. In the subsequent years, some of these buyers will have discovered they’ve been burned. Basement walls full of mould, foundations crumbling, whole sections of house frame or roofs rotted out, failing building envelopes, plumbing and wiring systems at the end of their lives, plugged or non-existent drainage, even major structural deficiencies associated with unpermitted work. Big dollars to fix, and after spending those dollars, the house still looks the same on the surface. The stove is still harvest gold, the toilet’s still blue (which may be cool, depending on your aesthetic, but doesn’t do much for resale value), and 1970s paneling still prevails. You don’t feel any closer to achieving your vision for the house, but a big chunk of your budget is already spent. A good home inspection can save you a lot of grief by alerting you to expensive liabilities in advance, allowing you to make a more informed purchase decision, or avoid some purchases altogether.

Unfortunately, the story that’s been emerging in the last couple of years is that there are a lot of incompetent or even unethical inspectors operating. In Ontario, what regulation there has been of inspectors is toothless. British Columbia has only recently started qualifying and licensing inspectors (as of 31 March 2009), which means that previously anyone could hang out their shingle and call themselves a home inspector. And the barrier to entry may still not be that high.

Generally speaking, you shouldn’t use an inspector recommended by a realtor. Either the listing realtor, or the buyer’s realtor. Realtors on both ends of a sale only make money when they close a deal. Deals get closed when subjects such as home inspections are removed from offers to purchase. Home inspectors who find lots of problems with houses are themselves a problem for realtors who want to close deals and get paid their commission. As a buyer, if the problems are legitimate, those are the inspectors you want. Some realtors may be inclined to recommend a ‘realtor-friendly’ inspector with a reputation for passing houses that another inspector might fail. You need to ask yourself which inspector is likely to best serve your interests.

That said, when I asked a realtor during our house hunting in 2003 about a well-known local home inspector, he was scathing. In this realtor’s opinion, this inspector manufactured reasons for failing houses in order to generate additional business for himself. According to the realtor, he’d fail two or three houses, collecting his inspection fee on each one, before finally passing a house for a client.

As well, realtors who are interested in repeat business, good word of mouth, or surviving as realtors once a real estate boom has run its course, know better than to make a quick and easy sale by foisting a piece of junk on an unsuspecting buyer. You need to know whether the realtor you’re dealing with is ethical, or a quick-buck artist who’ll be closing up shop once the easy money is gone.

It’s hard to know where the truth lies. Do your homework. The time and effort required to find a competent, ethical home inspector is time and effort very well spent. And do it early, well in advance of any offer to purchase. Rushing to find an inspector while the clock is ticking on an offer makes it less likely you’ll find a good one.

[Further resources/reading]

Inspecting a House: A Guide for Buyers, Owners, and Renovators
, by Alan Carson and Robert Dunlop. Toronto: Stoddart, 1999.

The Holmes Inspection: Everything You Need to Know before You Buy or Sell your Home, by Mike Holmes. Toronto: Collins, 2008.

“Think you’re safe from problems when you buy a new home? Think again”, CBC Marketplace, 9 Jan, 2009
“Can you trust your home inspector?”, CBC Marketplace, 8 Jan, 2010

“Homeowners out thousands despite warranty”, CBC News, 16 Nov, 2010.

—–
Coming soon: Part 9d: So You Want to Buy a House and Fix It Up? Thirty Suggestions for Survival – Suggestions 10 – 13.
Part 9 subsections are posted every Tuesday and Friday.
Read them all before you dig up the foundations. -ed.

“He asked: “Why haven’t you bought in this hot market? Banks are practically giving money away for free.” It turns out that he has a no-money down NINJA mortgage.”

bubbly at VREAA 26 Apr 2011 11:07am“This morning, I talked to this guy, let’s call him Joe, [who I've known] for a few months. He has been living in his house for some time now and I always assumed that his parents paid for it.
Today, Joe asked me why I haven’t bought in this hot market. I told him that I think that the market is overpriced and I don’t want to go too deep in debt. He asked “Why not, banks are practically giving money away for free”. I asked him to elaborate and it turns out that he has a no-money down NINJA mortgage! Here in our best place in Galaxy, where banking is supposed to be sound. And as if that was not enough, the bank gave him more than what he actually paid for the house – for “renovations”. Since he is a NINJA, I assume that he is using this “extra” money to pay his monthly payments. This is just a speculation on my part, but I can’t see any other way how this scheme could work.”

On The Other Hand – After The Plunge, Nobody Wants To Buy

From ‘Americans Shun Cheapest Homes in 40 Years as Ownership Fades’, bloomberg.com, 19 Apr 2011 -
“Victoria Pauli signed a one-year lease last week to stay in her rental home in Fair Oaks, California. She had considered buying in the area, where property prices have slumped 57 percent since a 2005 peak.
In the end, she decided it wasn’t worth it.
“I know people who have watched their home values get cut in half, and I know people who are losing their homes,” said Pauli, 31, who works as a property manager for a real estate company. “It’s part of the American dream to want to own your own home, and I used to feel that way, but now I tell myself: Be careful what you wish for.”
The most affordable real estate in a generation is failing to lure buyers as Americans like Pauli sour on the idea of home ownership. At the end of 2010, the fourth year of the housing collapse, the share of people who said a home was a safe investment dropped to 64 percent from 70 percent in the first quarter. The December figure was the lowest in a survey that goes back to 2003, when it was 83 percent.
“The magnitude of the housing crash caused permanent changes in the way some people view home ownership,” said Michael Lea, a finance professor at San Diego State University. “Even as the economy improves, there are some who will never buy a home because their confidence in real estate is gone.”

So:
Sky-rocketing prices -> “Where do I line-up to sign?”
After the plunge -> “Sorry, not worth it..”
Amazing, eh? Aren’t we humans fascinating?
Not only because this happens once (which would be fascinating enough), but because this happens time and again, in all markets, during and after all speculative manias. Groups have no memory.
- vreaa

Things Change In Victoria – 200 days on market; Ask price drop from $1.8M to $1.3M; Nobody biting

Slow Learner at greaterfool.ca 21 Apr 2011 12:26am -
“Things look like they are cooling fast in Victoria. Seafront place down the street from our (rented) home, an ordinary 20-year old house with the original appliances, faded carpet, and a bad roof. It has been up for sale for over 200 days, started at 1.8 million, which was high for last summer but seemed possible as real estate was white-hot then.
Walked through a couple of weeks ago, lonely realtor was friendly, and slightly desperate. The price was down to 1.3 million, no bites. Seems insane, dropped the price half a million dollars, HALF A MILLION DOLLARS, rather than do some basic upgrades to make it more presentable. Shows contempt for the buyers, trouble is , nobody is biting. Sellers are out of step.”

The RE market in Victoria has softened with a 17.5 per cent drop in the number of sales in March 2011 compared with March 2010 and the dollar volume off 21.8 per cent. Prices are down 2.8%. [timescolonist.com, 19 Apr 2011].
The article contains some informative quotes regarding how buyers start to act in a flat to falling market. Excerpts:
“Carol Crabb, president elect of the Victoria Real Estate Board, said locally there was no one factor affecting monthly statistics. Instead, she noted several factors – confusion over the harmonized sales tax, interest rates and changing borrowing rules – likely played a role.
“Personally, I’m finding in working with my buyers that there’s so much selection out there they are taking their time to make a decision. Having 4,100 listings in a market the size of Victoria is a lot,” she said. That will likely mean flat growth for the next few months at least. “There’s nothing to push prices up because there’s so many properties and there’s nothing to push buyers into making a decision as there’s lots to choose from and lots of time to make decisions.”

PostCardsFromTheBlastRadius #5 – The Okanagan Bust – CrewMan#6 – WhenTheWriterDoesn’tGiveYouAName… & “NewRules!” for ‘NowSelling’…

I’ll bet you thought Nemesis was kidding when he told you there was a development in the HillBillyRiviera that proudly boasted “Lavish” not “Luxury” ‘ResidentialCondos (is there any other kind?) in its promotional signage.  Well, “Ha! Ha! I say to to you!”  Because here it is.  Atypically, the Developer and or their marketing team neglected to ‘name’ this project – opting instead merely to refer to it by its street address.  Now, Nemesis doesn’t know much about the business of property development – but when it comes to ‘story development’???  Let’s just say that if a writer doesn’t think it’s worth assigning a name to a character; that character is normatively ‘toast’ well before the conclusion of ‘ActOne’.  As in the fabled ‘CrewMan#6‘ of any early StarTrek episode (see also Sam RockWell in GalaxyQuest!)…

In the splendid tradition of BillMaher’s, “NewRules” (and the EponymousCondoHype! of YVR BloggingHall ‘O Fame) – Nemesis proposes a ‘NewRule’ of his own for developer’s project signage…  1. When you’ve been flogging it for more than 3 months… all references to “NowSelling” must be eradicated.

Oh yes, 240 WadeWest, to the best of Nemesis’ occasionally faulty recollection, has been in ‘NowSelling!’ mode for well over 2 years…

Now, “Don’tTouchThatDial!”  DearReaders… for a VREAA/Nemesis RoyalConnubialDoubleHeader! is coming to a certain ExistentialistsEssential&Quintessential YVR RE BlogNearYou!… ThisFriday!…
FeaturePresentation: ” ‘RegalRidge’ Meets Harry&TheEricksons!”  And!  A BonusTreat (or is that TrickOrTreat?) FollowUp, Boyz ‘N Girlz with Sunday’s FeaturePresentation:  “TheAtlantisVernon! – AddamsFamilyValues or KeepingUpWithTheMunsters?”  So,StayTuned!

—–
Photos and commentary for the ‘BlastRadius’ series by ‘Nemesis’.
[Images Ⓒ​2011 ‘Nemesis’ – All Rights Reserved]

[Readers (including ‘Fred’) who are perturbed, flabberghasted, demoralized, infuriated, or overwhelmed by Nemesis’ ‘BlastRadius Series’, are, of course, welcome to simply skip these posts.
We will point out, however, that, in extraordinary times, people are driven to produce extraordinary things. And, also, that it is not unusual for that which is closest to the truth to come disguised in words of bizarre jest. – vreaa
]