Real Talk!

Financial markets were reeling yesterday as fallout from subprime mortgages continued to wreak havoc in the United States.

The TSX fell more than 500 points, reacting to news of the Lehman bankruptcy in the U.S., AIG’s liquidity crisis and Merrill Lynch’s takeover.

Canada's 5-year bond soared on Monday- & in turn, its yield dropped 27 basis points (0.27%). There hasn’t been a yield drop like that in over 10 years. Historically, plunging bond yields are good news for mortgage rates.

To me, in the big picture, this seems a little insane… like some kind of insurance policy for Canada…but I guess wiser folks than I have things in hand.

The Bank of Canada issued a statement stating it was "closely monitoring global market developments" and that it would "provide liquidity as required to support the stability of the Canadian financial system and the functioning of financial markets."

Apparently, this responsible and measured approach by the Government is certain to ensure Canada’s housing market remains strong and to reduce the risk of a U.S.-style housing bubble developing.

HUH? Wait a minute…

Isn’t that just what the U.S. Federal Reserve is doing?

Sigh.

Isn’t it time we took it on the chin? How else can we dig out of this train wreck?

You might find some comfort in the fact that pretty well every economist in the country is certain that Canadian banks aren’t at risk because they are well financed and haven’t engaged in risky, subprime lending practices like the States.

At the root of the U.S. crisis, they say are simple household mortgages and the problem is that when house prices started to drop in ’07, lenders began offering subprime mortgage rates for a short period, with implemental increases after a year or two…

Unfortunately, rates when up, but home values did not and an extraordinary number of highly leveraged homeowners defaulted. The resulting glut of homes on the market (yes, the old laws of supply and demand) created an increased downward pressure on home prices…

and viola, more people began to default.

&

Mortgages weren’t the only security to falter… Mortgages were packaged into securities that were sold to investors, to raise more funds to lend. Things got really messed up when these newly created mortgage securities were repackaged into new and more complicated instruments- with names like collateralized debt obligations (CDOs) and credit default swaps (CDSs)

"These were exotic financial instruments, and nobody really knows what they're worth," says BMO Capital Markets chief economist, Sherry Cooper. "And the markets are reluctant to trade them. And the problem with these products is they are not transparent, so they are hard to value."

"So what was worth, say, 60 cents on the dollar is now worth 20 cents on the dollar," she said. "And if there is no bid, it's not worth anything - even though some day it may be."

Hmmmm, the U.S. problem has probably been developing for the last five years or more.

Cooper says they need the market to figure out the value of the securities and how much companies holding them are worth. And until that happens "there are going to be further bank failures and there is going to be continued disruption. The longer this goes on, the more nervous the market becomes about it.”

BUT here, in the Great White North "koo-roo-koo-koo-koo-koo-koo-koo"…

Canadian Real Estate Association President, Calvin Lindberg, reminds us that the Canadian housing market is "stable". He says that in 2007, nearly 300,000 individuals or families bought a home for the first time.

"The Canadian market fundamentals are still solid, and mortgage rates are still at near record low levels," he says. "The challenge is for sellers to price their home to meet the local market realities, and for buyers to realize there is no real estate bubble that will burst and send prices to new lows."

"There are and there will be difficulties in the world economy, (but) at the same time Canada is not in the same situation as the United States," Prime Minister Stephen Harper said on the campaign trail yesterday.

“The housing, government and financial sectors all have solid economic fundamentals, as does the Canadian economy,” says Harper.

Harper also announced a proposed tax credit for first-time homebuyers that would be “phased” in over four years, over the course of a Conservative government mandate.

He said that closing costs often mean people "have to choose between going beyond your budget or postponing your dream” adding that, "It will make home ownership more affordable, and it will help to create jobs."

The proposed tax credit will apply to fees things like land transfer taxes, inspection fees, appraisal fees, and legal fees- a list of eligible costs would be drafted after consultation with realtors, consumer groups, provinces and the Canada Mortgage and Housing Corporation.

The experts seem to agree, if real estate values begin to fall in Canada- it will only be because of growing uncertainty and tighter money.

Ya think?

A study, released earlier this month, by Tsur Somerville (professor at the Sauder School of Business, University of BC) found that housing prices in some Canadian cities were overpriced. Places like Regina, Winnipeg, Ottawa and Montreal would have to drop as much as 20 per cent to be in balance. The study showed that only Toronto and Edmonton house prices were not overvalued in the first half of 2008.

"The boom in the housing markets may be over, but just because homes are overpriced doesn't mean the market will plunge to equilibrium", Sommerville said.

"Toronto housing prices are not out of line because they have not had the explosive growth of other cities," says Sommerville. "Some cities look way out of line when you run the numbers, but Toronto is bang on."

"This report underscores the current shift in the Canadian housing market as the tone of activity moves slightly closer to a buyer's market," said Millan Mulraine, economist at TD Securities.

Ah… there it is again… I’ve heard that term a lot lately: BUYER’S Market

& that means only one thing… Five years from now, you don’t want to regret not taking the plunge. It’s time to buy property! RIGHT NOW.

For a while now, you Ontario Buyers have been playing “wait and see”…but the jig is up!

Don’t forget… over the next decade, more 1947-1964 baby boom move into retirement age, more folks will be leaving the workforce and moving away from urban living centres. Rural, retirement, property is likely to be even more “in demand”.

Now here’s the hot tip of the week… if you are planning to borrow, ie/ obtain a mortgage… you need to understand that lenders are being cautious. That’s not a bad thing. But…

Borrowing buyers must prepare. You need to talk to your lender BEFORE YOU BUY. Talk to a lender you know and trust… or one that is recommended by someone you know and trust. Lending institutions are constantly changing their practices and criteria…

& don’t get fooled by being “pre-qualified” by a lender. Pre-qualification is not an exact science and it isn’t a guarantee that you’ll get your financing. More than ever, you will need to give your mortgage lender time to process your application.

Being “pre-qualified” means spending a few minutes on the phone with a lender who will ask you a few questions and give you a ballpark for your budget. The way to make the strongest and safest offer today is to get "pre-approved".

Pre-approval means all pertinent personal information has been checked and verified by the lender. You are actually APPROVED for the loan and the only loose end is that property you choose will have to be approved, too. This usually means simply obtaining an appraisal on the property.

All-in-all, the borrowing process may anywhere from a few days to a few weeks. It depends on your situation.

Isn't it nice to be reminded that every cloud has a silver lining?