Juggling Dynamite

TRREB is Canada’s biggest real estate board, covering the Greater Toronto Area (area codes 416 and 905, as shown below), which has the largest population concentration in Canada. TRREB just posted April numbers (here); year over year, single-family home sales were down 22%, and condo sales were down 30%.
An hour or so in each direction of metro Toronto—places that saw the largest buying frenzy during the ultra-low rate era, 2019-2022—average sale prices are down more than 20% year over year. New listings are leaping daily, and some sellers are starting to panic.

Even so, the median GTA selling price of $950k remains a ludicrous 11x the median household income of about 80k. As a reminder, the long-term affordable home price-to-income ratio, commonly called the “median multiple,” is a key indicator of housing affordability. Historically, a ratio of 3x or less has been considered affordable–meaning a median home price three times the median household income (see here). After home prices tanked in the early 1990s, the Canadian national median price hovered around 3 to 4 times the median household income for about a decade.

Many people erroneously believed that home prices only went up and did not realize that housing bubbles typically end with significant price declines that do not recover for many years. Unfortunately, many ill-informed decisions were made as the financially blind led the financially blind and unaware.

Real estate is the most widely owned and leveraged asset, so housing downturns have historically led to the most painful economic contractions. This is a huge macro theme with reverberations yet to unfold.

What do we make of this? What happens next? Ron is one of the few who has actually gone through this disaster before, in 1990. Here is a direct video link.

Yesterday, the US Federal Reserve held its policy rate steady at 4.25%–4.50%, as Chair Jerome Powell admitted he doesn’t know whether rising inflation or surging unemployment will hit hardest.

In the meantime, indebted businesses and consumers feel the pressure of interest rates near multi-decade highs.

A larger share of student loan balances are past due now than before the pandemic forbearance began (below since 2017, courtesy of The Daily Shot), and the Trump administration resumed collection efforts on Monday after a roughly five-year hiatus. See: Trump administration to garnish wages of 5.3 million defaulted student loan borrowers this summer.As US 30-year fixed mortgage rates hover around 6.76%, new US home sales have fallen to 2019 levels, and existing home sales to a 14-year low.Canadian real estate boards report that home resales fell significantly in April from a year ago in most markets (blue below with new listings in yellow). The MLS Home Price Index fell again in several markets, including the Toronto region, Hamilton, Kitchener-Waterloo, Cambridge, Vancouver and Fraser Valley—extending months-long negative streaks. Even the Calgary index recorded its first year-over-year decline in five years. See RBC: Canada’s housing markets crack.Many people alive today did not think that home prices could go down. They also erroneously believe that central banks will not ‘let’ stock markets fall. The truth is that central banks do not have the power to bail out a world full of reckless and wilfully blind financial decisions, especially with asset prices still at uneconomically high levels and revenues in retreat.

DDB offered lucid updates on the many moving parts yesterday. Worth a listen.

 Danielle DiMartino Booth, CEO of QI Research and former Fed advisor, joins Jeremy Szafron to break down why she believes the Fed is missing clear signs of recession and a credit crunch already hitting Main Street. Here is a direct video link.

QI Research CEO and chief strategist Danielle DiMartino Booth discusses China’s stimulus plan and the Federal Reserve’s interest rate strategy on ‘Making Money.’ Here is a direct video link.

China’s economy showed signs of damage from the trade war in April, with a drop in export orders and the weakest production at the country’s factories in more than a year. See, Beijing doesn’t want America to see its trade war pain

Here is a direct video link.

The impacts are evident in America, too.

Port of Los Angeles Executive Director Gene Seroka says the volume of imports are falling. He expects a soft year ahead and he’s worried about the impact on dockworkers and truckers. He’s on “Bloomberg Surveillance.” Here is a direct video link.