Leading the nation... at falling behind

The latest mortgage arrears numbers were released today, and once again they are up. Through August the rate sits at 0.65%... getting ever closer to the modern day high of 0.69% from February 1997. As these numbers are two months old now, in all likelihood we're already at or past that mark now, but we won't know for sure until the numbers are officially out... so for now:

Month-over-month the number was up from 0.62% in July, and year-over-year from 0.30% last August. Alberta continues to widen it's lead in regards to highest rate in the nation, as the month-over-month increases too have been the largest in the country.

As we can see, we're also well above the long-term average and showing no sign of slowing... and with the interest rate shock no doubt awaiting those that bought into the market at the recent all-time low rates, we haven't seen anything yet.

Haven't graphed out the national numbers in awhile, so figured it'd be a good time to do that again. Here are the western provinces. They've all been tracking up this year, no surprise given the recession, but none nearly to the degree Alberta has... though I have a hunch B.C. soon will be charting a very similar path as their bubble deflates, and ultimately will could even dwarf us.

Saskatchewan and Manitoba enjoy the opposite end of the spectrum with by far the lowest rates in the country, 0.25% and 0.27% respectively. Saskatchewan could later has issues as they had a bit of a bubble form there last year, so time will tell for them, but Manitoba appears relatively safe as their market has remained very stable.

Now the east, and national average for good measure. They have actually all been fairly stable the last six months, creeping up just slightly. Quebec has held their 0.35% rate for the fifth consecutive month, while Ontario held at 0.43 for the fourth straight month. The Atlantic region also held from July at 0.48%.

Nationally, the rate continues it's slow steady climb, now at 0.43%... up from 0.42% in July, 0.38% six months ago, and 0.28% a year ago. Largely due to increases in Alberta and BC, though Ontario was also accelerating last year.

Exchange Rate

Was hoping to do an update on the latest arrears figures, but it doesn't look like they'll be released today... so, instead I'll do a post on something I kind of touched on in the last post, and is more a general interest/macroeconomic issue, exchange rates.

Obviously for we Canucks, the big'uns is the United States, and here is a look at how much one Canadian dollar is worth in US dollars going back to 1950. These are the monthly averages of the noon spot-prices for those wondering.

Up until it's collapse in 1971, the Bretton Woods system controlled international currencies, but unlike most, Canada's dollar was allowed to "float" until 1962. At that point you can see a very distinctive flattening as it then had a "fixed" value.

In 1970 the dollar was again allowed to float, this in an effort to tide inflation, at which point it's value relative to the US dollar started to climb (probably at least in part due to Nixon Shock). Soon thereafter Bretton Woods collapsed, and the value of the Canadian dollar has been floating ever since.

For much of the time the value floated up until 1976, the value of the dollar was usually above par with the US dollar, but after November 1976 the Canadian dollar weakened significantly and would not again reach par for over thirty years (September of 2007).

So, it's been a volatile last thirty years for the Canadian dollar relative to it's US counterpart, no time more then the last six. Obviously this kind of movement, particularly upwards, will play havoc with much of our economy, especially export and tourism sectors.

I also took a look at the daily stats, so for those trivia buffs out there the all-time record high for the Canadian dollar is trading at $1.1030, reached November 7th, 2007... the all-time low appears to have been $0.6179, reached on January 21, 2002. So, both relatively recent, particularly the high.

For curiosities sake, I also graphed out a few other international currencies. Mainly for my interest, but some others may find this stuff interesting, if for no other reason then to gain a historical context for what the dollar has been worth around the world. Starting with the Euro and UK Pound.

Here we have the Yen, it's obviously increased in value significantly over the last sixty years, but it's been relatively stable for the last twenty or so years... even before the onset of the "Lost Decade."

Finally we'll do the peso, just so our other NAFTA partner doesn't feel left out, and with increased globalization Mexico is becoming increasingly relevant. The dollars value has been rising relative to the peso, or conversely, the peso has been losing value, on a whole for the last fifteen years. This would obviously be advantageous to Mexico as they have become an attractive option for manufacturing goods for the rest of North America.

Precious Metals

With the recent rally in gold, we've been hearing a lot about precious metals. Actually ever since the financial meltdown last year the gold bugs out there has been much more boisterous... so I've finally broke down and prepared a post on gold and silver. This is another one that's not particularly about real estate prices, but I will throw in a tie-in towards the end.

Here is a graph of the historical gold price per ounce, nominal prices in US and Canadian dollars, and in inflation adjusted Canadian dollars. Many investors generally look at precious metals as an inflation hedge, but it is prone to bubbles of it's own... obviously as was witnessed in the early 80's and is evidenced in the inflation adjusted figures.

For those thinking about buying gold you should take note of the tail end of this graph and that while gold has just recently reached it's all time (nominal) high in US dollars, in Canadian dollars it actually peaked in the winter here and is a fair bit below that price currently.

So, if you're thinking of putting money into gold, don't just trade blindly based on what it's value is in US dollars, you need to figure in the exchange rate into your calculations.

Here we have the same graph for silver, charts similar though it's spike in 1980 was even more severe. Ignoring that, we can see that like gold, overtime it tends to hold it's value without much if any appreciation, but is trending up the last few years.

For those interested in such things, here is a graph of the relationship between gold and silver prices. We can see the ratio has gone as high as 97.3 and as low as 17.2. Since 1971 the average has been 55.7, with a standard deviation of 18.1.

Finally we'll do that tie-in with real estate, just for shits and giggles. This is a graph of the number of ounces of gold it would take to buy the "Average Residence" in Edmonton. There has been a fair bit of fluctuation, particularly in the 70's. Over the period presented, the average has been 272, median 261 and standard deviation 101. So our current situation is right around normal, but it got as high as into the 500's in 2007.

Interesting to note, the huge gold spike in 1980 coincided with the prior real estate bubble. While housing prices had somewhat plateaued from '77-'82, the ratio plunged from north of 550, to less then 100.

Lastly, the same graph for silver. Average was 14,660, median 14,721 and standard deviation 5,723. In this case we're currently well above the long term mean, and it's interesting to look at the differences in pattern/scale of some of the movements between gold and silver with this measure.

So, take it for what it's worth. Like any of the other commodity analysis' I did earlier, any relationship with real estate appears anecdotal at best, but I included it because it's been requested often. What I take from looking at this data is that like other assets, beware of bubbles, and be sure to figure in the exchange rate should you start putting your money into any investments.

ComFree update

I did a post on ComFree back in the spring, and figured it would be a good time to do an update on them after the eventful summer real estate experienced. Compare how they fared to the conventional resale market. So, without further ado...

The prices look to have trended up, as with the rest of the resale market. The overall average for whatever reason appears extremely volatile some months, but I think it's just been misstatements of their stats, as that measure now has to be derived from their other numbers. So take it for what it's worth.

Here we're looking at sales and market share. On the sales front, even though they've improved steadily month-over-month, we can see they're still down noticeably down year-over-year, and obviously WAY below what they were in 2006/2007.

So, while the rest of the resale market put up some record months thus summer, ComFree is still struggling, and losing market share on the whole. They have been trending up the last few months though, and as far as For-Sale-By-Owner outfits go, ComFree in Edmonton is probably the envy of many.

Finally we'll touch on inventory. The big glut that formed in 2007 really catches our eye, and there was an equally big shedding of inventory last. Though as we noted earlier, sales were historically low last year, so the decline was no doubt due to a wave of delistings. The inventory level has returned to roughly the level it was at in 2006, though with sales levels lower, the absorption rate is higher.

In conclusion, it doesn't appear the summer has been as good for ComFree as it has for the rest of the resale market, but they do appear to be stabalizing. It's also worth remembering that these guys get paid up front regardless of whether the properties sell, so sales are not nearly as important to them as for traditional agents that get paid on the back end.

Interest rates and defaults

Continuing our consumer debt series, and today we'll take a look at how interest rates play into things. So lets jump right in and start with interest rates and bankruptcies.

Here I've overlayed interest rate and the national and provincial bankruptcy rates. What we can take from this graph is that the gradually decreasing interest rates haven't had any noticeable impact on bankruptcy rates. The one thing that does stand out is the dramatic spike in interest rates in 1994/1995, which coincided with the start of a more gradual spike in bankruptcy rates which eventually topped out in 1997.

It's hard to say if, or how much, of a causal relationship may exist between these happenings, but as we discussed in my last post, people are increasingly likely to default on loans early in their terms, particularly when the rates charged are high. So the rise in bankruptcy rate could be a remnant of people taking on debt during the interest rate spike... or it could be nothing. Worth noting anyway.

Moving on, now we'll hit on interest rates and mortgage arrears. This data goes back one more year, and here we can see there was an additional spike in interest rates in 1991... and like the bankruptcy rate, we can again see an arrears spike lagging, and topping out about two years after the interest rates did.

Again this could be a coincidence, but such a relationship would seem rather intuitive and seems to show abrupt interest rate spikes may contribute to later spikes in loan defaults. The slow decline of interest rates don't appear to have a major effect, but rapid increases do seem to be a noticeable driver.

So, obviously in our current low rate environment this could spell trouble ahead as rates are almost assuredly to rise at least back to more historical norms. That graph is also another reminder of just how historical norms have been and how fortunate borrowers have had it for the last decade. 7.5% appears quite moderate over the last 20 years (and if we went back 30 it would look even better), but if we suddenly found ourselves in that situation tomorrow, havoc would be wreaked, and not just on the real estate market.

Finally, cause I have the data and went to the trouble of making the graph, we'll take a look at interest rates and average bankruptcy deficiency We hit on this last week, but for a quick and dirty explanation, deficiency is the surplus of liabilities over assets upon filing for bankruptcy.

This data goes back much further, all the way to 1976 and the series was annual. Obviously what catches everyone's eye is the big spike there in the early 80's. Seems there were a whole lot of bankruptcies that included foreclosures during that spike, especially in Alberta.

Beyond that period there doesn't appear to be as much a relationship between the measures as the ones we've discussed earlier. But as I discussed last week, most of the time the majority of bankruptcies do not include foreclosures, so that isn't surprising. While we don't have foreclosure numbers going back to the early 80's, the deficiency measure would seem to indicate there were a whole lot of them.

Anyway, hope you guys found this interesting, a little macroeconomic food-for-though to chew on this weekend. Take it for what it's worth.

Anatomy of a foreclosure

Spent most of yesterday sorting through my database full of info... updating, upgrading and quite a bit of deleting. Long over due as it was a colossal mess, and I needed a refresher over what I had. It was good and got a ton of ideas about things I could cover... and which in all likelihood will be forgotten by time I can get around to it.

And in that spirit, I'm doing a post on something I just randomly stumbled upon while surfing archive.org today. Found a old page that was once from the foreclosurescanada.com site and thought it would make an interesting topic.

It's just basic information on 88 foreclosures in Edmonton and Calgary from a couple week of July, 2003. Amount owing, original mortgage amount, month issued and interest rate. Figured it made a nice little random sample to examine, and even better, it's from a period when the market was far more balanced then what it's been like the last four or five years.

We can test some axioms, and see where it leads. In articles and interviews I've heard it stated that most foreclosures occur in the few years of the loan. So, lets start there:

Seems that claim holds up, at least as far as our block sample goes. Over 60% of those foreclosures had occurred within three years... over 75% within five... and 95% by year ten.

We can also see that most occur in the second year in particular, over 1/4 in fact. Years one and three are the next highest at around 16-17%... from there it seems the general trend it that the longer the mortgage is held, the less likely it is to default.

Those that looked at the linked page may have noticed that a few of those had some rather extreme interest rates, as high as 20%... obviously not made to prime borrowers. So, I also ran the numbers again for rates less-than-or-equal-to 10% just for shits and giggles and so we can see what it looks like for move conventional loans.

Pretty much looks the same, except years one and two are slightly lower, and the rest slightly higher. Not really a surprise, as obviously people taking those elevated rates are higher risk and the rates themselves make the vicious circle complete.

Of the 12 that had the >10% rates, four were foreclosed upon within a year... six in the second year... and the remaining two in the third year. Typically these were smaller loans, often under $25,000, so presumably second mortgages, but a couple were over $50,000.

Now we'll look at a slightly different angle, this is how much is owing relative to the original loan at the point of foreclosure... or more accurately, how much has been paid off. By far the highest range here are those that actually owe more then their original loan... almost 40% (also did this graph for loans with interest rates at or below 10%)

The incident rate quickly drops to about 24% of foreclosures for those that have paid back between 0-5%. In this sample almost 2/3 foreclosures involved borrowers with less then 5% of their loan paid off. Oddly the rate plummets in the 5-10% range, then bounces back up, but I'd chalk that up to it being a small sample. If we had a larger sample the curve would probably be much smoother.

In any case, we can see that the less principle one has repaid, the more likely they are to fall into foreclosure... or conversely, the more principle one has repaid, the less likely they are to fall into foreclosure.

This would obviously jive with our findings earlier in this post... and as one should expect, those defaulting early in their mortgages life would in all likelihood have repaid less principle.

While I wouldn't take any of these stats as gospel, as this was just a random block sample, at least it was a fair sized one and the results appear as one would expect intuitively. Anyway, I thought it was interesting to analyse, hopefully you feel found it interesting to some degree.

Bankruptcies

Hope everyone enjoy their Thanksgiving long weekends, and filled up with turkey and complex carbohydrates.

In the comments section of last weeks post on consumer debt someone referenced these stats on bankruptcies/insolvencies in Canada. I managed to find their historical bankruptcy numbers, but not the proposal and total insolvency stats (insolvencies = bankruptcies + proposals).

So, we'll take a look at the bankruptcy numbers today, and rather then do one monster post I'll just do a series and in coming days and weeks I'll do further comparisons between consumer debt, bankruptcies and foreclosures.

Rather then just quoting the hard figures, most of these measures have been derived to give a better historical context. This is a figure of the number of consumer bankruptcies per 1,000 people in Alberta for any given year. Also included the long term average and median figures for comparative purposes, and a projection of what the 2009 figure will be based on the numbers through August and long-term seasonality.

As we can see, through 2008 we were still in the average range overall, but actually quite low when compared to the prior 20 years (given the shift there must have been some kind of change in measurement and/or legislation around 1990). During the boom period we saw bankruptcy figures fall, but are expected to spike back up this year to pre-boom levels.

It is also interesting to look at the historical figures. For example, we've talked here often about the early 80's recession and have heard the stories about the devastation felt by residential real estate. We can see bankruptcies did double from the boom days in the 70's to the bust in the early 80's... but the rate stayed constant right through the rest of the 80's, no discernible spike as one might expect.

Then in the early 90's we see the rate climb from 1.0 to 2.25... this also coincided with a recession (though minor compared to a decade earlier), but curiously in the mid 90's the rate took off again and topped out above 3.5 after the recession had already played itself out.

From what we know about home prices, they had a significant drop in the early 80's, and minor one in the early 90's, but were stagnant in the mid-90's. So, it would seem any relationship between consumer bankruptcies and real estate is probably not closely tied to bankruptcy rate.

Just some food for thought, here is the year-over-year change in bankruptcy rate. Interesting to note that based on our current pace, 2009 will have the highest increase ever. No small feat considering it was not exactly low going in. While probably not directly effecting real estate, it is a rather damning statistic for the Alberta economy as a whole.

Beyond just the number of bankruptcies, the stats also include sets on the assets, liabilities and deficiencies (assets less liabilities). I adjusted all these for inflation (2009 dollars) for comparative purposes and then divided that number by the number of bankruptcies to get a 'per bankruptcy' figure.

Here we can really see the effects of the early 80's recession. While the rate was not so high, there was a HUGE difference in the sums of money per bankruptcy, and that's likely a sign there there were a lot more foreclosures involved... where as it appears in most years the vast majority of bankruptcies involve those that do no own real estate.

When it topped out in 1984 there was an (inflation adjusted) average of about $237,000 worth of liabilities (very close to the inflation adjusted average real estate price at the peak of that boom, coincidence?!), to only about $60,000 worth of assets. The figures at play between 1982 and 1986 completely dwarfs any figures before or since.

Here is another graph that somewhat combines the two prior. It overlays the rate over the average deficiency (I included nominal and real dollars just so you can see for yourselves the effects of inflation).

Here we can see that the sums involved are really not related to the number of people defaulting. Through from 1991-2001 despite the rate being at all time highs, the average person who filed for bankruptcy was less then $10,000 in the hole.

So we can fairly safely conclude that in those years that vast majority of those going bankrupt were not home owners, or in any danger of becoming one, so the rate itself is probably of little value in predicting foreclosure rates.

What is a better indicator of foreclosure trouble is the sums involved.

The 80's were remembered as disastrous, and the deficiencies witnessed then reflected that. We had a slight hiccup in the early 90's, and we can see a corresponding blip in 1990. The more people that are foreclosed upon, the higher the numbers will skew.

That we have been tracking upwards the last few years could be a warning of things to come, but as we've discussed here, the levels of non-mortgage debt carried have also taken off of late too, so we must take that into the equation.

It will be interesting to see what the numbers end up looking like in 2009, as I could not do any projection for the deficiencies and that is the number we're most interested in for our purposes.

Consumer debt

I got my Wild Cherry Diet Pepsi, and I got my Black Jack gum here, and I got that feeling... mmm that familiar feeling that something rank is going down up there. Yeah, I can smell it. I can almost taste it.

Summer is gone and it's fucking snowing again!

Alright, so you can't really smell snow. Give me a break, I'm working on a theme here!

Anyway, as you may have deduced by that I'd done as many posts in the five days as I had in the prior month, my little month from hell has ended and I now have more time to dedicate to the all important business of blogging.

Today I think we have a really interesting one, not so much directly related to housing, but moreso to the greater socio-economic front... that being, consumer/household debt.

Statcan has some good data sets on such things, here is a link to the one I used. Actually that one is slightly more up-to-date then the set I used, it's up to October where as the data I used was only up to May... but one was free (thanks in no small part to the university never deactivating my database access even years after convocation), whereas the other costs $43, which would effectively increase this blogs budget infinitely, and would provide essentially no perceptible difference. I digress.

Actually that data only gives you the total debt, I then divided that by the population at any given time (available here), to come to a per capita level of credit which would be more relatable. Could have also done it on a per household basis, but I could only find one data set for that and it only went back to 1997. It would just be a function of per capita anyway though, so it's all the same.

As I'm sure you noticed, there are three lines. The green one in the middle is mortgage debt, relating to the purchase of residential housing. The yellow line, is consumer debt, things like credit cards, lines of credit, automobile loads, etc. Finally there is the blue line which they call "Household Credit," which is the sum of mortgage and consumer debt.

The above graph is of nominal values. As those of you who follow the blog knows, nominal values are not terribly useful when talking about long term comparisons, so lets adjust it for inflation.

There, that's better... and a little bit scary. As we've discussed before incomes have been fairly flat for the last 30 years when adjusting for inflation, so to see household debt has increased 3x in the last 25 years since the last big boom/bust cycle.

This isn't all together surprising, as we have also discussed how real estate prices have increased faster then the rate of inflation throughout recent history anyway, and residential mortgage debt makes up the majority of total household debt.

What is more alarming is how consumer debt has taken off, particularly in the last 15 years, where it appears to be growing exponentially. Like mortgage debt, this is no doubt linked to the decline of interest rates over the last 25 years.

The current recession has done nothing to quell Canadians thirst for debt, as they continue to rack it up at a record pace thanks to the rock bottom rates we've seen the last six months, even while Americans have pulled back at the same time.

The question now is that rates have for all intents and purposes reached their absolute bottom, they must now go up. The degree to which that will happen is yet to be seen, but once it happens it will contract the levels people are capable of carrying... which would have a devastating effect on not just real estate values, but the economy as a whole.

Here is a look at a bit of a different angle of the numbers, this the year-over-year change. Much more volatile, but we can also see, the forms of debt tend to track together. When consumer debt spikes or dives, so does mortgage debt, to different degrees but strikingly similar patterns.

We also know the last big decline in real estate values came in the early 80's, and we can see the mother of all troughs. Such a decline in not only mortgage debt, but also consumer debt would obviously have a major impact on the economy, and this would seem to be consistent with has been happening in the United States the last couple years after their housing bubble popped.

So, one would expect that if the same were to happen here in Canada, we would see a big contraction in not just mortgage debt, but also consumer debt, which currently stands at record levels and an extended period of relatively high year-over-year growth.

Exactly what is to come is difficult to say, but there is no doubt that if interest rates were to return to historical norms it could spell big trouble considering the level of debt carried by Canadians.

So, until next time, just look inside yourself and you'll see me waving up at you... naked... wearing only a cock ring.

Price ranges revisited

A few months back I touched on price ranges/sales mix, and as the last quarterly number just came out I figured it would be a good time to revisit the subject and see what is selling and how it's changing.

Like the last time around, this measure is of the proportion of sales any price range accounts for, so makes no differentiation for how many are sold.

It's interesting to note the change from the June '09 numbers September '09 (these are of monthly tallies, not quarterly, though I will try to do those one day). We're seeing an increase in activity at the extremes of the market (<200K and >400K), and shrinking in the middle.

While 200K-to-400K still make up the lions share of sales, at a combined 59.6%, this is actually significantly below where it had been the prior year when it made up between 66.2%-to-67.4%.

While shifts in market are not unusual, which the chart nicely shows... what is curious is how both extremes are showing increases. Typically you'd expect it be one or the other.

Obviously in the last six months in particular we've seen a drastic change in interest rates, which has a massive effect on housing prices. This could explain the strength in the 400K+ ranges, as long as rates are low it greatly increases the amount a person is capable of qualifying to finance. Those looking to buy can get a lot more house for the same monthly payment.

What is more unexpected was the increase at the low end, back to the levels seen in the fall/winter. As I'm previously hypothesized I suspect this could be a signal of the return of speculators to the market, as they largely operate in the lower price ranges.

As per what the future holds, that's still anyone's guess as it seems more then ever the financial world is a complete crap shoot... and things will only get more rocky if the governments of the world turn the stimulus taps off, and the true effects of the downturn are felt.

About the only thing that is a general consensus is that it's going to take years to sort out.

September numbers are in....

The September numbers were released today, and after a cooling in August sales held in September. Up slightly from month-over-month and down slightly year-over-year. So, interest rates are continuing to spur spending, which is fine as long as the status quo remains.

On the price front, averages were up a couple ticks across the board, while SFH median held. So, we were continuing to see increasing action in the higher price ranges. In the next week or so I'm hoping to do another update on the sales mix for the price ranges.

As I mentioned earlier, we're also starting to see YoY increases by this time last year prices started dropping, and interest rates this year have proved to be a game changer and created a sense of affordability which has led to a price rebound. Time will tell how sustainable these gains really are.

With the seasonal decline in inventory starting to hit and sales holding, absorption rate went down slightly from August to 3.54 from 3.85. Still in the buyers range, but there seems to be a lot of disparity between different sectors. Certain types of property sell very well, but others are very slow.

As always, here are the hard goods:

Sales = 1,704
Since two years ago = +635% (+662)
Since one year ago = -1.4% (-25)
Since last month = +1.9% (+31)

Active Listings = 6,032
Since two years ago = -39.2% (-3,886)
Since one year ago = -31.5% (-2,776)
Since last month = -6.4% (-413)

Single Family Homes Median= $349,900
Since peak (May '07) = -12.5% (-$50,100)
Since one year ago = +1.3% (+$4,400)
Since six months ago = +4.8% (+$15,900)
Since last month = -0.0% (-$100)

Residential Average = $327,235
Since peak (July '07) = -7.7% (-$27,483)
Since one year ago = +0.7% (+$2,330)
Since six months ago = +5.9% (+$18,203)
Since last month = +2.8% (+$8,914)

Single Family Homes Average = $371,947
Since peak (May '07) = -12.7% (-$54,081)
Since one year ago = +2.7% (+$9,850)
Since six months ago = +6.4% (+$22,231)
Since last month = +1.4% (+$5,159)

Condo Average = $245,546
Since peak (July '07) = -9.7% (-$26,362)
Since one year ago = -2.7% (-$6,687)
Since six months ago = +6.5% (+$15,077)
Since last month = +1.5% (+$3,511)

Townhome Average = $299,964
Since peak (Oct '07) = -18.5% (-$68,000)
Since one year ago = -5.0% (-$15,726)
Since six months ago = +8.4% (+$23,188)
Since last month = +2.0% (+$5,957)