Canada’s Real Estate Bubble Is About To Burst

Canadian home sales fell the most in five years last month. That didn’t stop an increase in prices, which were up 18 percent nationwide from a year earlier. When you consider that most houses are leveraged assets, this represents huge gains for homeowners.

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While leverage can help boost performance on the way up, it becomes very dangerous on the way down. Leverage can turn even the best investments into poor ones when things go wrong, as losses are amplified. Equity can get wiped out pretty quickly on an overleveraged asset.

Canadian real estate has been on fire for years. The housing price data there has made the U.S. real estate market during the boom of the mid-2000s look mild.

The Federal Reserve Bank of Dallas puts out a global housing price index for more than 20 countries every quarter. Using this data, I looked at the real house price index data for Canada and compared it with the same data in the U.S. going back to 1975.

Here’s this relationship from 1975 through the end of 2005:

 

Although there were some divergences in the early and late 1980s, both housing markets essentially ended up in the same place after 30 years. Now let’s add in the most recent data to see how things have unfolded since:

 

An enormous divergence occurred in 2006, when U.S. housing prices really began to soften, while Canadian price barely skipped a beat. This makes any differences in the past look like blips. The rise in Canadian real estate prices has been relentless.

The U.S. housing market peaked in late 2006. Since then, based on this index, U.S. housing prices are still down almost 13 percent from their peak through the end of 2016. In that same time frame, Canadian housing prices are up 56 percent.

To recap: On a real basis, Canadian housing prices experienced a much smaller, shorter decrease in prices during the financial crisis and a much larger, longer increase in prices during the recovery. When you couple this unfathomable rise in housing prices with near-record high household debt-to-income ratios, the Canadian housing bubble starts to look scary should the tide turn.

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The reason homeowners in Canada should be worried is because housing is typically not a great long-term investment. Housing expert and historian Robert Shiller explains:

Here is a harsh truth about homeownership: Over the long haul, it’s hard for homes to compete with the stock market in real appreciation. That’s because companies whose shares are traded on a stock exchange retain a good share of their earnings to plow back into the business. The business should grow and its real stock price should also grow through time — unless the company makes poor decisions, as some certainly do.

By contrast, real home prices should decline with time, except to the extent that households shell out some money and plow back some of their incomes into maintenance and improvements, because homes wear out and go out of style.

The problem is that the home-buying experience is fraught with emotion. People rarely think about the characteristics of real estate as an investment when putting down roots and making the biggest purchase of their life. Once the herd mentality sets in these things take on a life of their own. In downtown Toronto, the average sale price of a detached home this spring was $1.2 million.

No one knows when insanity like this will come to an end. Bubbles are like an avalanche. The longer they build up, the worse they will be when they eventually destabilize.

The same is true of financial markets. No one really knows when or why bubbles come to an end, but eventually people come to their senses and the music stops. U.S. homeowners understand all too well what can happen to the economy when the housing market destabilizes. The timing is impossible to predict, but Canadians should be on avalanche alert.

To contact the author of this story: Ben Carlson at [email protected] 

Originally published here.

 

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Altisource Now Owns Over 10,000 Homes

Two years ago, Altisource Residential’s portfolio of single-family rental homes checked in at 777 homes. Now, thanks to a new deal with Amherst Holdings, Altisource’s SFR portfolio is more than 10,000 homes.

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The growth started back in November 2015 when Altisource nearly tripled its portfolio in a deal with Invitation Homes, acquiring 1,314 single-family rental homes for $111.4 million. That acquisition pushed Altisource’s portfolio to more than 2,500.

At the time, the company said that it planned to continue growing its single-family rental portfolio, establishing a target of 25,000 homes.

The company continued on that path last year, pushing its portfolio to more than 8,000 homes in a massive deal with Amherst Holdings.

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On Thursday, Altisource announced a new deal with Amherst, and thanks to that deal Altisource’s portfolio of single-family rentals now checks in at more than 10,000 properties.

Earlier this year, Altisource and Amherst reached a deal that would allow the company to acquire up to 3,500 single-family rental properties from “entities sponsored by Amherst Holdings.”

The first phase of that deal included Altisource acquiring 757 “stabilized rental properties” from Amherst for an aggregate purchase price of $106.5 million.

In this next phase of the deal, Altisource acquired an additional 751 single-family rental properties Amherst for an aggregate purchase price of $117 million.

That purchase increases Altisource’s portfolio to more than 10,000 homes.

According to Altisource, the company received seller financing of 75% of the purchase price pursuant to a loan agreement with a term of up to five years and a floating interest rate of one-month LIBOR plus a fixed spread of 2.3%.

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Additionally, Altisource retained the current property manager for the portfolio, Main Street Renewal.

“We are excited to continue our partnership with Altisource Residential to deliver portfolios of professionally managed single family rental properties with strong cash flow,” Drew Flahive, president of the Amherst single family residential platform, said in a release. “Amherst is committed to investing significant capital in this asset class as single-family rental properties continue to demonstrate strong performance momentum and institutional investor interest in this asset class continues to rise.”

In a separate release, Altisource also noted that in the month of May, it completed its anticipated sale of 2,104 non-performing loans with an unpaid principal balance of $517 million.

That sale leaves approximately 450 non-performing loans in its portfolio, which are expected to be sold in the third quarter.

Of the deals, Altisource CEO George Ellison said: “The completion of these important acquisition and disposition transactions mark the continued successful achievement of targeted milestones in our strategic growth plan.”

Originally published here.

 

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HUD Secretary Carson Says We Need To Build More Homes

Ben Carson, the U.S. Department of Housing and Urban Development secretary, hosted a question and answer session on the meaning of homeownership in America, which he broadcasted through Facebook live.

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Carson explained that, while homeownership is still part of the American dream due to the stability and security it brings, it must be done in a responsible manner. Carson cautioned against falling into a cycle like the 2006 and 2007 era, where Americans were ushered into a home they couldn’t afford.

The HUD secretary pointed out that one of the greatest obstacles to homeownership today is saving up for a down payment as home prices increase at a faster pace due to low inventory levels than the median income.

And in order to slow the rapidly rising home prices, Carson agreed more newly built homes are needed on the market. He explained that in order to allow homebuilders to thrive, the government needs to scale back on regulation.

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In fact, when speaking on regulation, and what it does to entrepreneurs and the economy, Carson commented, “what a bunch of garbage.”

One question pointed out the difficulty Millennials face when entering the housing market due to little cash reserve, low wages and high student debt, asking if perhaps homeownership isn’t for everyone. Carson agreed homeownership is not for everyone, however he insisted that the obstacles mentioned should not be the cause preventing homeownership.

Fannie Mae recently lowered its debt-to-income ratio, which Carson should attract many Millennials. He also pointed out new programs in the loan market which allow homebuyers to roll their student debt into their mortgage.

And in order to help overcome these barriers, the HUD secretary said the Federal Housing Finance Agency is currently in the process of lowering the condominium from a 50% homeownership requirement to 30%, providing the first step into homeownership.

HUD Secretary Carson explained homeownership is for the long-haul, it takes time to achieve and potential homeowners need to get rid of the idea of immediate gratification.

Originally published here.

 

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Zillow And Redfin Prepare To Do Battle (Redfin to raise $100 mil)

Online real estate broker Redfin is preparing to sell shares to the public, filing on Friday to raise up to $100 million. Goldman Sachs is leading the IPO for Seattle-based Redfin, which specializes in buying and selling homes and uses a mobile app to do tasks like schedule home tours and suggest listings.

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Revenue in 2016 jumped 43 percent to $267.2 million from $187.3 million a year earlier. The company’s net loss narrowed to $22.5 million from $30.2 million. Redfin calls itself a “technology-powered real estate broker.” It’s the human element that leads to a gross margin of 31 percent, much lower than most big internet companies.

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“In an age when the technology economy is increasingly divided from the rest of the world,” the filing says, “we have hired our own real estate agents, not as a disposable labor force, but as partners in this business, with a salary, health-care benefits and the opportunity to earn stock options.”

Technology investors like Madrona Ventures, Greylock Partners, Draper Fisher Jurvetson and T. Rowe Price backed Redfin, which was created in 2004.

Redfin CEO Glenn Kelman, who joined in 2006, told CNBC in May that the company’s sales were being limited by historically low inventories of homes.

“We’re going to be fine in terms of market share, but I think the overall industry for the first time is seeing sales volume really limited by the inventory crunch,” Kelman said.

Zillow, another major player in online real estate, is located just up the road in Seattle. Zillow is more than three times the size of Redfin by revenue and is valued at about $9 billion.

— CNBC’s Diana Olick contributed to this report. Originally published here.

 

 

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