In the heat of summer real estate market running out of steam

Real Estate
In these dog days of summer when most of the news has been focused on either fallout from the current mid east crisis or the prospects and pending results of what the Fed does on Tuesday, in fact other than in energy and a bit in the precious metals, most markets have been treading water awaiting outcomes in both arenas. However, just to divert this morning, especially as the real estate market starts to cool in a lot of Canada, even including red hot Alberta, this cartoon in the Vancouver Sun caught our eye the other day.  It serves to point out how when a market starts to feed on itself, and is on the verge of at least a major correction if not a downright crash in some highly speculative areas, we can see valuations start to get a bit to the silly side. 

In the U.S. there is a huge pending problem as ARMS (adjustable rate mortgages,similar to our variable rate or sub-prime mortgages) are now being revalued at the new interest rates. Homebuyers that got into the market when interest rates in the U.S. were at 50+ year lows are now coming to anniversary dates on their ARMS mortgages and a lot of families are finding that they just cannot afford the new payment schedule. Three years ago a short term ARMS mortgage was available for just about anyone who applied, good credit risk or not, at about 4%. To renew today, after 17 Fed hikes in a row, the same mortgage is about 7%. 

For too many new home buyers, or those that remortgaged at exceptionally low rates and spent the proceeds, the payment difference could end up in a default, with foreclosures and homes put up for resale. Add to that the number of spec and recreational projects thrown at the market that are now starting to back up big time as the economic winds change, and the unsold or pending inventory is starting to mount in a scary fashion.

In central Canada the market has already shown signs of getting long in the tooth with a preponderance of "For Sale" signs growing every day. Anecdotally, even here on the booming west coast we see more and more houses on the market, and although sales are still robust, the backup of inventory is starting to appear here also. Speculative markets such as Phoenix, San Francisco and South Florida are already showing ominous signs of the bubble exploding, whereas here in Canada we hope that we will just see some air come out of the real estate balloon and not a downright popping of the U.S. style real estate bubble.