Monday, March 16, 2009

Dead cat bounce

After months of disastrous reports, the February report was not a disaster. CREA reported that February home sales declined by only 9.2% YoY, a nice improvement over the -11.3% from January. Sales volume actually picked up from January's depressed levels.

Is the sign of a turn? Or is the typical dead cat bounce?

I suspect the latter. Anecdotally, it appears that many potential buyers are getting excited about falling interest rates. They are salivating at the “low” payments that these lower rates are promising. What these buyers fail to consider is that the real cost of interest has never been higher. To borrow at 4% to finance an asset that is declining at 9% a year represents a real interest rate of 13%.

Also, I went back and checked and it appears that back in February 2008, the YoY increase dropped to 5.7% from 9.7% in January 2008. That was the famous “It snowed too much in February!” month. February 2009’s decline was measuring against a very weak number. Also, in an ironic twist to CREA’s blame the weather approach last February, this February’s sales must have benefited from a relatively mild February in Central Canada versus a cold January. In addition, the snowfall in Toronto was quite moderate. Notice, no mention of the weather when it is a positive.

Therefore, this improvement is not as impressive as it seems at first glance. The sharp decline back in February of 2008 moderated a little bit as the March 2008 YoY only dropped to +4.8% while April 2008 YoY dropped to +4%. This means that the YoY comparisons for March and April will not be as easy to beat in March and April of 2009.

I suspect that this moderation will only last another month and that once this wave of buyers finishes, another leg down will begin. This is actually a very dangerous bounce. If it were a stock market rally, I would short it, since it is analogous to the bottom callers who proclaimed every dip in 2007 and 2008 as a buying opportunity. Once these bottom callers are proved wrong, there may be a big vacuum that shows itself towards mid-year.

5 of the 6 NHL markets are now negative as Ottawa has joined the slump. Montreal remains positive surprisingly.

Fearless predictions:
-March is also a decent report (the rate of decline stabilizes in the high single digits) and the bottom callers will start. Remember the same phenomenon happened in the US housing market back in 2007.
-By April, we are back to negative double digits again

Since we are on the topic of February 2008, let me just end with a paragraph from that entry almost exactly a year ago:

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.


g k said...

CREA forecasts that prices will indeed fall in 2009 and so does CMHC, so I call shenanigans on your last comment.
Also, the avg. price didn't start declining until June 2008. Even if avg. price holds steady (unlikely), the year-over-year avg. price comparison will swell until October (average price has held pretty much stable sinced then).

exx said...

According to most Realtors in Vancouver, this *IS* the bottom. I expect the real bottom will hit when no Vancouver realtor wants to make such absurd claims.

A coworker from Montreal is in our office for training this month, and he happened to bring up RE. He was quickly peppered with "This is the best time to buy!" knee-jerk responses from a few of my colleagues. After they left, he asked me about the prices. When I showed him, he could not for the life of him understand how they could be so brainwashed. $792,000 average SFH price, down from $920K, but up from ~$400K in 2003 and now was the time to buy?! 900sqft condo's for $400K in the suburbs ?! It was quite entertaining to see his reaction.

I warned him to be careful around here when talking about RE. It is without a doubt a religion.

Adil Burney said...

to g k:

Point taken. I made that comment in March 2008, to mean that they will not tell you ahead of time that prices will ultimately fall. Once they started to plummet, they were forced to acknowledge this.

Also, it is difficult to conclude on average price since month to month comparisons are difficult and are notoriously hard to seasonally adjust

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