Juggling Dynamite

Today we received the latest instalment in the S&P Case Shiller Index. For the month of April, the 10-City Composite posted a new record low of -16.3%, and the 20-City Composite recorded a record low of -15.3%.

No one should be surprised that the cities that experienced the greatest gains in the latest real estate boom were the biggest losers. Las Vegas and Miami share the dubious distinction of being the weakest markets over the past 12 months returning -26.8% and -26.7% respectively. We should recall that these markets had some of the fastest growth in the 2004/2005 period, with annual growth rates of more than 53% and 32%.
Let’s look at the real-life math of these numbers:
If one bought a house in Las Vegas (or another hot area) in 2004 for $700,000, then by 2005 it may have been appraised at an unbelievable $1,071,000 (being up 53% in 12 months). If one had been able to sell the house at that price, it was an awesome profit in a short time.
However many were encouraged by this anomalous experience to increase their mortgage and borrow against this notional market value in order to invest in more properties or pay for other things. Others were enticed to buy properties near the 2005 peak. Others did not sell because they liked their house, or believed that it was a good “long-term' investment. Today the same house might be valued at the 700,000 paid for it in 2004. If you had increased the mortgage anywhere towards the peak notional property value, today you very likely owe more than your house is now worth.
For those that had the misfortune of buying in late to the mania, the house they paid 1 million for a couple of years ago, might be worth $780,000 today. But here is the real problem. The latest report was only to April. We know prices have continued to drop since then. Current trends and over-supply suggest prices will continue to fall for months to come.
I can only imagine the hell people are going through with this. It is not surprising that today’s consumer confidence report for June showed consumer sentiment and expectations at an all time record low.

Ms. Park was the Guest Portfolio Manager on BNN Wednesday June 25 at 920 am on Market Lookahead. You are able to see the clip on their web here for a limited time.

Given my post yesterday I was a little heartened today to see the results of a recent survey showing financial consumers (at least in the US) may be finallly waking up:
“U.S. consumers are more skeptical than ever that financial services companies have their best interests at heart, according to a survey released on Monday.
The survey of 5,000 consumers, conducted by Forrester Research Inc, ranks major financial service providers according to the perception of how important clients' financial interests are to a company.
It found A.G. Edwards, a brokerage unit of Wachovia Corp (WB.N: Quote, Profile, Research, Stock Buzz), and other troubled companies such as American International Group Inc (AIG.N: Quote, Profile, Research, Stock Buzz) and National City Corp (NCC.N: Quote, Profile, Research, Stock Buzz), to be among the biggest losers of their customers' faith.
“The subprime mortgage crisis, sagging stock markets and falling rates of return on everything from savings accounts to real estate have left consumer feeling less confident,” said Bill Doyle, a Forrester analyst.
In Juggling Dynamite I liken the financial sales firms to very profitable drug pushers in our society. So far at least, Canadian consumers still seem to be asleep in la la land loving their banks/broker/dealers. Time will tell if they too may begin to wake up. I guess it depends on how many Canadians suffer big financial losses over the course of the present down cycle in real estate and financial markets this time. Stay tuned.