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Yesterday’s WSJ had an article about Canada’s Housing market. (Housing Rebound in Canada Spurs Talk of a New Bubble). The article noted that “Average home prices in Canada have risen 23% from their trough in January 2009. Home-sales volumes are up 70% over the same period . . . Canada’s housing recovery has been so rapid that some here are worrying about a bubble.”

But to call it a rebound misses the point. As the Cleveland Fed pointed out, Canada’s housing market never went bust — there was a sales dip, but nothing like the US. And prices have continued to go higher to the point where the Journal is now discussing them in terms of bubbliciousness.

Why is that?

There are a variety of reasons why Canada’s market held up better than that in the US, but I boil it down to the big four:

1) Lending Standards: Were increasingly non-existent in the US from 2001-07. On the other hand, Canada never had the non-bank lenders that abdicated these standards en masse. There was no “Lend-to-Securitize” business model in Canada.

2) Mortgage Insurance: Mortgage with less than 20% down payment are considered a high LTV ratio (This was 25% previously). Mortgage insurance is required. Over 80% of Canada’s homes have what was commonly known as PMI in the US.

3) Full Recourse Mortgages — you can walk away from the house, but not the mortgage debt. Makes quite a difference in the way borrowers behave.

4) Single Regulator, Lack of Regulatory Capture: The hodge podge of Federal and State regulators encourages forum shopping; it also masks much of the massive lobbying effort by US banks and investment houses. Lobbying dollars don’t seem to be nearly as pernicous or corrupting Noprth of the border.

The Cleveland Fed also noted that subprime mortgages accounted for a fifth of all US mortgages originated between 2004–2006. In Canada, the subprime market share was roughly 5% percent in 2006—compared to 22% percent in the U.S. And the Canadian never expanded significantly into the wackier exotic mortgage products — IOs, Neg Ams, Piggy Backs, etc. (interest-only and negative-amortizations grew rapidly in the U.S. from 2003 to 2006).

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US vs Canada Delinquency Rates

US vs Canada Home Prices

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Sources:

Housing Rebound in Canada Spurs Talk of a New Bubble
PHRED DVORAK 
WSJ, Feb 8, 2010
http://online.wsj.com/article/SB10001424052748703808904575025100730017666.html

Why Didn’t Canada’s Housing Market Go Bust?
James MacGee  
The Federal Reserve Bank of Cleveland 12.02.09
http://www.clevelandfed.org/research/commentary/2009/0909.cfm

What Toronto can teach New York and London
Chrystia Freeland
FT, January 29 2010 
http://www.ft.com/cms/s/2/db2b340a-0a1b-11df-8b23-00144feabdc0.html

Additional Sources:
Nobody’s saviour
TARA PERKINS 
The Globe and Mail, Apr. 20, 2009  
http://www.theglobeandmail.com/report-on-business/article1138040.ece

Homeownership Rate Falls Back to Pre-Boom Level (Economix)
http://economix.blogs.nytimes.com/2010/02/02/homeownership-rate-falls-back-to-pre-boom-level/

Jumbo Mortgage ‘Serious Delinquencies’ Rise to 9.6%
Jody Shenn
Bloomberg, Feb. 8 2010
http://www.bloomberg.com/apps/news?pid=20601110&sid=at0fpRHaUHhE

I don’t recall where this is from, but it seems appropriate today:

Some reads to start the week:

• Alan Greenspan fights back (Fortune)  Four years after leaving the Fed as the Greatest Central Banker Ever, the longest-serving chairman, the Maestro, Alan Greenspan is the designated goat.

• Dorfman: Buy Stock Now to Ride Second Stage of Bull Market (Bloomberg)

• The perils of economic populism (The New Yorker)

• What I Learned From Hank Paulson’s Book (Real Time Economics) I don’t know about Wessell, but I learned that when the going got tough, Paulson prays. A lot. Personally, I prefer rigorous analytical thinking to prayer, but that’s because I have a bias towards rationality in the public sphere.

• Water From Air Machine Providing Clean Water to Doctors, Nurses and Patients at Port-au-Prince, Haiti Hospital (Yahoo)

• The State of the Internet (Focus)

What are you reading?

Last week, we discussed the issue of where there was a greater chance of a bubble: Stocks or Bonds?

This week, we look at a possible end to the Secular Bull Market in bonds:

Charts via Ron Griess of The Chart Store

See also: Taleb: ‘Every Human’ Should Short U.S. Treasuries

Last week, FT Alphaville noted that PIIGS was becoming an “unkosher” acronym at Barclays Capital.

The oft amusing Jim Bianco suggests that instead of using the phrases PIIGS, we give these acronyms a try:

* DEBT – Dubai EU Brazil Turkey
* SICK – Spain Iceland Columbia Kazakhstan
* DUMP – Dubai Ukraine Mexico Portugal
* PUKE – Portugal UK EU
* STUPID – Spain Turkey UK Portugal Italy Dubai

Here are 10 of the most informative charts I’ve seen regarding Friday’s NFP:

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Click for bigger (and in some cases, ginormous) charts

No Job Gains for a Decade

Bianco Research

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Percentage Job Loss form Recession Start

Chart of the Day

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Cumulative Job Losses

Bianco Research

Read the rest of this entry »

Via Visual Economics, we learn Its Google’s planet — we just live on it:

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http://www.visualeconomics.com/2010-02-03-planet-google-from-philosophies-to-market-shares/

There is a huge front page article in the NYT discussing what we already know — that AIG extracted billions from AIG before ($5.9B) and after ($12.9B)their collapse.

We know that Goldie got paid 100 cents on the dollar post-bailout.But what insured party gets to set their own valuation of losses? According to the article, GS nabbed closer to 300 cents on the dollar pre-collapse of losses.

AIG balked, but the matter never seemed to be settled.

Lucky for Goldman we didn’t do an official reorg for this. Consider what the judge would have rightfully done in what should have been a very complex bankruptcy instead of a smash and grab.

Here’s the TImes:

“By July 2007, when Goldman demanded its first payment from A.I.G. — $1.8 billion — the investment bank had already taken trading positions that would pay out if the mortgage market weakened, according to seven former Goldman employees.

Still, Goldman’s initial call surprised A.I.G. officials, according to three A.I.G. employees with direct knowledge of the situation. The insurer put up $450 million on Aug. 10, 2007, to appease Goldman, but A.I.G. remained resistant in the following months and, according to internal messages, was convinced that Goldman was also pushing other trading partners to ask A.I.G. for payments . . .

Later that month, Mr. Cassano noted in another e-mail message that Goldman’s demands for payment were becoming problematic. “The overhang of the margin call from the perceived righteous Goldman Sachs has impacted everyone’s judgment,” he wrote to five employees in his division.

By the end of November 2007, Goldman was holding $2 billion in cash from A.I.G. when the insurer notified Goldman that it was disputing the firm’s calculations and seeking a return of $1.56 billion. Goldman refused, the documents show.”

Now, AIG’s claims that it was Goldman that forced them into collapse, that “the payment demands were a major contributor to A.I.G.’s downfall,” are sheer nonsense. AIG wrote 3 trillion dollars worth of derivatives with precisely ZERO held in reserve. A drunk driver who drives off the road might as well blame the guy who planted those trees 50 years earlier. Given AIG’s massive mortgage exposure, they were going down anyway. GS just happened to be the one who made the opposite bet. In this zero sum game, AIG’s losses were GS profits.

Be sure to click on the graphic to see the full timeline . . .
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Source:
Testy Conflict With Goldman Helped Push A.I.G. to Edge
Gretchen Morgenson and Louise Story
NYT February 6, 2010
http://www.nytimes.com/2010/02/07/business/07goldman.html

OK, that’s an exaggeration — they appear to have done a short sale, not a walk-away.

Ironic Hypocritical Headline of the Day:

Mortgage Bankers Association Sells Headquarters at Big Loss (WSJ)

CoStar Group buys downtown Washington building for $41.3 million, far below the $79 million the trade group said it paid in 2007

Didn’t the National Association of Realtors do something similar last year?

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UPDATE February 8, 2010, 1:54pm

A friend writes to remind me teh MBA CEO is a hypocrite:

Courson, the CEO, was big on underwater borrowers’ responsibility to continue paying on their loans if they could afford to do so.

“What about the message they will send to their family and their kids and their friends by defaulting?’ he said in a late-2009 interview.

- Debtor’s Dilemma: Pay the Mortgage or Walk Away (WSJ)

This chart, via Ron Griess of The Chart Store,  seems to be plateauing at a very high level: