Friday, January 16, 2009

Every crash starts as a correction

"While Canada's housing market is anticipated to continue to move through a period of adjustment over the next six months, we should expect modestly lower home prices, not a U.S.-style collapse, which was brought on by a structural failure of the entire American credit system," said Phil Soper, president and chief executive of Royal LePage Real Estate Services…We are well into this inevitable cyclical correction."
-Royal Lepage, January 2009

"This report serves as yet another reminder that the Canadian housing market is squarely on the path of correction," TD Securities economics strategist Millan Mulraine stated in a note.
-January 2009

My thought:
When does a correction become a crash?

Unless you are dealing with a 1987 one-day 22% crash, at the start of any crash, you are likely to have pundits calling it a correction. Basically, every crash starts as a correction.

Throughout 2008, there were so-called experts calling the stock market drop, prior to September, a correction. Especially in May and August, when the stock market gave a false start. The same thing happened in 2006 with the US housing market.

"We've been anticipating a price correction and now it's here. The price drop
has stopped the bleeding for housing sales. We think the housing market has
now
hit bottom."
David Lereah, National Association of Realtor (US), September 26, 2006.
In early 2008, all the real estate bulls kept saying that housing prices would increase about 5% after years of double digit gains (moderation). Last winter, when prices start dropping, it was the snow in Toronto!

“Snowfall in Toronto made it tough to show prospective buyers, and tough to
process a listing,” said CREA President Ann Bosley. “It was one of the toughest
months (February) ever weatherwise for REALTORS® in Toronto.” (March 2008)
The MLS® residential average price is forecast to rise 5.3 per cent in 2008 and
afurther 4.2 per cent next year, pushing prices to new heights.
CREA, May
2008

Now these same clowns who didn’t see any of this coming, are telling us that this is just a regular correction. Royal Lepage is even resorting to using the word “inevitable” even though I don’t recall seeing any mention of its inevitability last year.

This is not a cyclical correction. You do not get US GDP going to -4% or -5% in a healthy correction (as is in Q4 2008). You don’t get 50% stock market drops worldwide on cyclical corrections. You do not have the biggest recession in a generation (and maybe longer) in a cyclical correction. You do not have trillions of dollars of write-offs in a cyclical correction. You do not have the nationalization of the worldwide banking sector in a cyclical correction. But I digress…

This is what I wrote back in March 2008:

What happens if we get a full bear market, falling commodity prices, higher
unemployment and a US and Canadian recession, as I expect? Just remember, the
CREA or CMHC will never tell you that the real estate market is overvalued. They
will never tell you that house prices will fall.

That statement was mostly correct, except that now that the damage is so severe, that even CREA and CMHC are saying that house prices will fall, but only modestly and only due to the inevitable correction.

I’m not sure who decides what is a crash and what is a correction…

I believe a real estate correction would be defined as a modest pullback in prices (up to 10% and the majority of the gains in the prior boom are preserved) and then prices go on to reach new highs in a few years.

There would be a gray area between 10% to 15% but once you get to 15%+, you are in crash territory. Also, it would take a decade or more for prices to go to new highs in nominal terms (in real terms, after deflation, it would likely taken longer if ever).

In my opinion, we are already entering the gray area, and this bust has only started. By mid 2009, I would expect so see the correction word vanishing.

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