And sales crash.
Naples, Florida, a wealthy beach town on the Gulf of Mexico, known for its golf courses and high-end shopping, and a favorite hangout for Canadian snowbirds trying to escape their cold winters, has a problem:
Pending home sales in the first quarter plunged 23% from a year ago, according to the Naples Area Board of Realtors. Closed sales plunged 19%. Overall inventory soared 33%. In the two mid-price ranges from $300,000 to $1 million, inventory soared about 42%!
But sellers haven’t gotten the memo yet: even as sales crash and as unsold inventories pile up, the median closing price rose 8%.
That’s how housing busts start out. Buyers lose interest at these prices and evaporate, while sellers go into denial. As prices still rise, volume collapses. When sellers begin accepting the new reality, or when they’re forced to sell, then prices are getting slashed until enough buyers materialize.
A similar scenario began playing out last year in the broader vacation home market. Vacation-home sales in the US plunged 19% in 2015 year-over-year, to an estimated 920,000 units, according to the National Association of Realtors. Chief Economist Lawrence Yun blamed a laundry list of things that included “economic uncertainty,” a “presidential election that might lead to restrictions in economic commerce in the future,” if Trump has his way, with potentially worrisome consequences for Canadians, such as “visa restrictions,” and this gem of a reason:
“The turbulence that hit the financial markets the second half of the year likely seized some would-be buyers’ available cash.”
But even as sales volume of vacation homes plunged, the median sales price skyrocketed 28% to $192,000. The report: “Many of the metro areas with the strongest price appreciation in 2015 were in the South — the most popular destination for vacation buyers – and particularly in several Florida markets.”
Nearly half of all vacation homes sold in the US last year were in the South. And that’s where Canadian snowbirds like to warm up over the winter. But they’re smart: They’re taking profits and are cashing out at the peak of the housing market, just when the US dollar appears to have peaked against the loonie as well – a dual opportunity to profit that is just too good to pass up.
If a Canadian household bought a home in Florida a few years ago for $200,000 when the Canadian dollar was at near parity to the US dollar, they paid about C$200,000 for the house. And now if they can sell the house for US$300,000 after fees, they end up with C$378,000 at today’s exchange rate. They pocketed a 90% gain, partly on house price appreciation, and partly on US dollar appreciation. That’s a big bundle of cash to spend over a cold winter in Canada.
And that’s exactly what’s happening, according to a Bloomberg report in the Globe and Mail:
Canadians who collected Sunbelt bargains during the housing crash have shifted from buying to selling. They’re locking in gains from years of soaring values that are even sweeter because the US dollar in the past five years has jumped about a third against their home currency.
And this comes at the worst possible time for the vacation-home market and specifically for the markets where snowbirds like to hang out, such as Naples.
These sellers know that housing markets become illiquid as soon as buyers wait for lower prices. Suddenly you cannot sell the home for anywhere near where you thought you could just a little while ago. No one is even looking at it. And it starts the downward spiral. To get out, you have to get out early.
There’s another financial element: The costs of maintaining a vacation home in the US for people who earn their money in another currency, such as maintenance costs, homeowners’ association fees, property taxes, and the like. As the US dollar has soared against the loonie over the past several years, those US-dollar-based expenses translated into loonies have soared along with the exchange rate.
“The Canadian way is you use common sense,” Carol Bezaire, VP of tax and estate planning at Mackenzie Investments in Toronto, told Bloomberg. “If you made a profit, how much do you need to make before you decide to pull out? You get the money out and get it working somewhere else.”
Folks from the Eurozone, whose currency also plunged against the dollar, are seeing similar opportunities. As are others. Foreign homeowners with one foot in another market are free to unload a home in the US and retreat. They can act quickly. Americans cannot do that with their primary home. They have to live somewhere, and they’re essentially stuck. That’s why the vacation home market is a canary in the overall housing market: it shows symptoms first.
Few housing markets are crazier than San Francisco’s. But what had to happen is starting to happen: a phenomenal building boom is causing a condo glut that will reach dizzying proportions as new condo towers are completed. And now the dynamics of the market have reversed. Read… San Francisco’s Epic Condo Bubble Bursts
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So much yes to all of this. It’s why I just sold my second home in March. Time to get out of dodge while I could make some money.
I am part of some nation wide agent groups on Facebook and I often see posts about multiple offers, escalations etc. – basically what I’m dealing with here in DC. But I click the poster’s profile and I’m stunned to see they are in a small town, not a major metro area where there is at least somewhat consistent demand. This bubble is everywhere. It has hit every town, first and second home market.
Question is – when it deflates/pops, does it repeat 2006 and leave no one unscathed or will it just hit the less populated areas?
The article cited at the bottom of the article above pretty much answered your question Melissa..including the comments of course. http://wolfstreet.com/2016/04/08/san-francisco-condo-bubble-deflates-condo-glut-construction-boom/
Inflation is an increase in the money supply, not an increase in purchasing power. The answer to high prices is high prices. The answer to low prices is low prices. When supply goes down or demand goes up, prices go up. When supply goes up or demand goes down, prices go down. Unemployment is at 23%………………………………………
unless banks, responding to Fed instructions, are holding houses from the market in incredibly large numbers, thereby eliminating the free market forces’ no longer to be found in this economy impact on pricing. No mark to market artificial rationing supply thus fraudulently supporting bubble price levels. Happening all along main street america
Saw ad on Baltimore craigslist from landscape contractor seeking multiple teams with equipment capable of mowing 20 to 30 lawns per day to handle contractor’s contract with financial entities to maintain the appearance of the “hundreds” of foreclosed properties in Baltimore DC areas. And this is “Rome” not the “fringe”
It’s already hitting San Francisco. During the last bubble, SF was one of the last big cities to peak (Nov 2007) before prices imploded. This time around, it may be among the first.
A goodly portion of those dollars from “Snow Birds” are finding their way to Canada’s south-west coast, helping to fuel an ongoing construction boom that has spread out from Vancouver’s too high price market.
For sale signs appear and just as quickly a ‘sold’ sticker is slapped on it. This area of the Pacific north-west has a very mild climate, which the snow birds are attracted to along with boomers who have downsized and are now looking for their sunset home.
The credit bubble is reaching ever higher proportions. It is now epic.
The global financial system instability has become acute. As a case in point, the Nikkei has just dropped an eye watering 1000 points, as the USDJPY plunged to a 108 handle. Gold and silver have caught an updraft.
Aren’t those lucky canucks going to be paying some kind of hefty withholding tax to the IRS?
The proceeds you speak of are funneled directly to the world’s largest employer.
Yes, this all makes sense from a Canadian POV. However, for the broader US housing market some perspective is needed. The peak year for US housing construction was, I believe, 1972 when a bit more than 2 million homes ad apartments were built. We almost reached 2 million in 2006 but have been far below those levels in the intervening years and since 2006, well below 1 million. The total US population has grown by a third since 1972 and, given the natural decay and loss of existing housing stock combined with some determined efforts in our older cities to bulldoze derelict properties there really isn’t a ‘surplus’ of housing.
@ Outlookingin,
We are seeing a big trend on mid/north Vancouver Island. Big money floods into Vancouver. Vancouver refugees cash out and buy 2X the house on the Island and pocket a huge profit. Construction of new homes is very robust…vibrant. I would assume that many folks that leave the US vacation belt will also find their way here. Also, folks from down Island are also moving further up as Victoria, even Nanaimo housing is way over-priced.
My in-laws used to spend 6 months of the year in Mexico, (wealthy retired fisherman and astute property investor). As they aged they would spend time in Arizona as opposed to Mexico. Now approaching 80, they have decided to remain at home year round. The motorhome is for sale.
Moving trends are interesting, but if you want primo property you have to get there first; before the trend sets in. In my rural valley we are now seeing a surge of new buyers, many from Alberta. They made their money, invested it safely, and pulled the pin as the downturn hit. A few brighter folks bought their places several years ago. When I drive around rural areas down-Island on my MC I see new palatial estates with engineered ponds, lovely grounds, and a few horses or beef in the fields. Gentlemen farmers….money no object. As I write this I am looking out on our river. Soon, it will be time to fish halibut, prawns, and salmon. Our place will never be for sale in our lifetime and I am 60. I hope our kids keep it in the family for their vacation home when we are gone. Today is a ‘shorts and tee shirt day’. No bugs, either.
One question I have is about the size of newly constructed houses? I have many friends in the construction business. I am seeing these ‘refugees’ building new, but often building 2 and 3 story monstrosities….the dated kind of building that will allow people to say, “That home was built in 2010, see the big posts, the shingle gables, the 3 floors”? These people are in their 60s, even 70s. When I see these new houses I always think, ‘stairs and cleaning’. They will sure make nice apartments for their kids!
The problem is exacerbated here in the Palm Springs area where a large chunk of Canadian home buyers are from Alberta–now in an energy induced depression. As they say, one of the first things to go when times get rough is the second home. Prices haven’t dropped here yet–but inventory is definitely starting to soar.
In 2010, while sitting in a real estate office in Florida, I overheard a conversation between two real estate agents. The competitor agent, a French speaking Canadian, was bringing in a big envelope stuffed with offers for their foreclosure listings. The Canadian said she had buyers for anything they had under $100K. During 2009 and 2010 Canadians bought a lot of Florida real estate, all at the bottom of the market.
When I started reading about the economy going bad in Canada, on this blog, I knew the Canadians in Florida would begin dumping properties. In the last two years the south Florida real estate market was very hot. I think it ended at the beginning of this year.
Frankly, Florida living has gone downhill since the financial crisis. There are not that many “cool” things to do or places to go because the general economy can’t support it. Going to Miami is like walking into a third world country. People would repeat a popular joke, that the they loved going to Miami because it was so close to the United States.
What is the RE market like on Marco Island?
Did that have a boom or not?
Don’t know the area. But I know of people that left Naples during the financial crisis, for work on the east cost of FL, and could never go back, no work.
Thanks, before we decided to move to Oz, there were two areas in the USA we were looking at: Honolulu, Hawaii and the other was Marco Island, Florida………………
Inventory soaring is a key indicator, but given the tight mortgage underwriting and cash purchases in the last 5 years, we probably won’t see a plunge like I’m 2008.
A correction, yes. A slow bleed as prices edge downward.
I just heard that Intel was laying off a lot of people in the northwest.
With the surging USD and record low CDN dollar, it was a once in a generation opportunity for big profits.
My hunch is the Fed will manipulate interest rates and lending practices to keep the bubble going longer. The loose lending practices of last decade have not returned but are on a shelf to be brought back incrementally as needed. Of course, each real estate market is different, so region to region variations will happen.
Need to summons up another batch of Chinese Oligarchs, visualize helicopters dropping colorized leaflets and approved green card applications……….
This is the peak of the US real estate market? Really? There are no certainties in markets, but, I’d really like to know if now (April 2016) is the peak or not. In my neighborhood, in Sacramento, real estate sales are quick and full price. I just read that rents are increasing at a rate of 8% a year. Mobile Home University just emailed this morning saying Denver mobile home spaces(!) were renting for $700 to $1100 a month. Is this a crazy world or not? Normally I gauge “underpriced” and “overpriced” real estate by cap rates. Cap rates are low (equals less yield) now. Still, prices seem to elevate. This doesn’t seem rational. I sold, in 2006, real estate that subsequently “crashed” 25%, and is now worth twice as much as what I received. Maybe this is a world in which we should just hold and wait out the ups and downs.
Real estate markets are local. Some are skidding, others are not. Once enough local markets are skidding it shows up in the national averages.
When the prior housing bubble imploded, the national peak was June 2006. But some local markets had peaked in 2005. San Francisco didn’t peak until Nov 2007. But now, SF has already peaked. We’re facing a phenomenal condo glut here, which is getting worse by the day.
So stay tuned and be patient. These things take years to play out on a national scale (as the last one did).
Canucks were also the biggest buyers of RE in the state of Hawaii (my AO) the past several years. I figured they were buying up the southwest US as well but hadn’t seen any articles until this one. There will be some deals in the next several years as this unwinds
Run, don’t walk to the nearest exits. Chinese and Canadians are first in line…
Well folks, I live in South Florida. A city just west of Fort Lauderdale and I tell you as someone who keeps an eye on RE that prices are down and have been coming down since Sept/Oct. 2015. My market is considerer “Warm” by Zillow, but it feels chilly to me. 2 house on my cul de sack are for sale, 1 has been for 8 months with no buyers around. Further East in Fort Lauderdale zip code 33308 (upper middle class) the market is “Cool” and cooling fast. We have a combination of issues. 1) Market has been booming for the past 2 years with now an over supply of Condos, especially in MIA. 2) South America, especially Brazil is in deep trouble, not to mention Venezuela. 3) European and Russian buyers are gone. 4) The strong dollar has pushed away buyers, so who’s left?. The locals. With the Monthly (BLS) jobs report indicating more waiters and bar tenders than anything else being hired, should we be surprised…. No. The reality is were living on borrowed time. When the former Dallas Fed came out last month and said all the multiples of QE created a “Wealth Effect” you know this is trouble. He went on to say it would “take some time” for this to be absorbed into the economy. No doubt, it could be a really long time.
Anyway, I hope I’m wrong since I’m in the middle of the RE downturn again but, you gotta live somewhere.
We moved away from your area a couple of months ago and the house I use to rent is still listed on zillow as available. We were already paying a lot of rent and they raised it 7%. We had to go. I think the renters are topped out there and will be leaving, just like we did. I expect the big landlords there to crash because the incomes in the area have been falling for a long time.
Agree, we did the same when our old pain in the ass landlord was greedy and now his home is sitting vacant for the past year even after he finally ended up lowering rent over 10% from what we were paying. Thers no jobs to support their retell prices and feed your family. You have a bunch of delusional landlords thinking they will get 100% their mortgages when in fact they will start learning they carrying cost are exact opposite of what the realtors are selling them on.
“Canary in the US Housing Market: Canadian Snowbirds Cash Out”
Hmmm. Should be re-titled “Canadian Snowbirds Cash Out”
You did a great job of describing why the Canadians are selling based upon the wide spread between the US vs CAD dollars.
Hence the scenario you illuminated might more aptly be coined as a groundhog or chipmunk, perhaps even a squirrel for the US housing market.
Don’t see this as a harbinger for anything but Canadians selling.
A new pardigm is upon us, housing will soar for years to come. Loan standards will just get lower and lower and lower. Chinese buyers will pick up the slack where US buyers faulter, Syrian refugees will be given homes gratis the US govt,– the scenarios supporting an endless rise are multiplying.
I think when the big corporate landlords crash, all those houses will convert to section 8 housing. Incomes are going down and rents keep going up, you can see the storm coming. The govt will probably make the section 8 subsidy big enough to cover all those bonds funding the rape of Americans.
Giant snakes sunning in your hedge don’t help either.
i sold too early i suppose in May 2014 but i would rather be a year early than a day late İ believe the housing market is way overpriced based on salaries and will deflate from here notice i didnt say collapse
I live in North Florida and rent after perceiving a market cooling last autumn. That opinion backed up at the time with real estate agents commenting that the phones hadn’t been ringing.
I’ve noticed the uptick in for sale signs dotting the lawns and if I want to buy there are many choices. Takes a while for these things to sort out.
Uh wait a minute, your Canadian premise needs to include the following.
http://www.bdo.ca/en/Library/Services/Tax/Documents/Tax-Bulletins/US-Estate-Tax-Issues-for-Canadians.pdf
Death and taxes ― two sure things in life. Did you know that even if you’re resident in Canada when you die, if you own U.S. property ― perhaps a vacation home in Florida, a ski chalet in Idaho or U.S. securities ― you may be subject to U.S. estate tax?