A Bubble By Any Other Name…

Don’t call it a bubble, it’s a balloon. Unlike the US housing market crash, Canada’s housing market is expected to deflate slowly rather than pop, according to BMO chief economist Sherry Cooper.

However, as economic analyst Ben Rabidoux tweeted, “Interestingly, the same analogy used by David Lereah describing US real estate market in ’05”

In an interview aired on November 29, 2005, NAR’s then chief economist David Lereah had some eerily similar thoughts on the US housing market.  Below are some highlights:

DAVID LEREAH: Well, first, most of the news has been softening in the housing sector. It’s beginning to slow down. The boom is — has peaked and we’re starting to see some slowing.

INTERVIEWER: Was there ever such a thing as a housing bubble?

DAVID LEREAH: I don’t like to use the word “bubble” because bubbles burst.

INTERVIEWER: Exactly.

DAVID LEREAH: Balloons don’t burst. You can put air in a balloon and it can expand or you can deflate a balloon, where air comes out. So if you’re looking at different metro markets around this country that got real hot over the last four years, I like to use the imagery of balloons because they’re getting hot. You’re putting more air into those balloons. The prices are going up. But now air can come out of the balloon rather than the balloon popping.

INTERVIEWER: So we’re hearing a hissing sound rather than a pop.

DAVID LEREAH: I think that’s probably the best analogy to use right now.

You can read or watch the entire interview here

Do you think there are enough similarities to warrant a degree of cautiousness?

3 responses to “A Bubble By Any Other Name…

  1. Some breaking news regarding Sherry Cooper’s “solid” CMHC

    Financial Post
    January 31, 2012

    CMHC backing fewer loans

    Canada Mortgage and Housing Corp. is cutting back on mortgages it insures as the Crown corporation edges closer to a $600-billion cap imposed on it by the federal government, the Financial Post has learned.

    Financial institutions are required to have mortgage-default insurance when a consumer has less than 20% equity. However, the banks have been seeking insurance on loans with even high downpayments – something not required by law – so they can securitize those bulk lending loans, thereby getting them off their balance sheets and reducing their capital requirements. In those cases in which the loans to value is less than 80%, the bank pays the insurance charge instead of the consumer.

    “One of the things that has got them [to the limit] faster than expected is they are doing a lot of conventional insurance for lenders,” said one source. Just three years ago, CMHC had $450-billion in loans it was backstopping and had to go to the government to get that increased to $600-billion.

    “I think as a taxpayer you should care. The policy question is why should the Canadian taxpayer take that type of meltdown risk within CMHC,” the source said.

    Read the entire article here

    The article also had this quote from an unnamed source:

    With mortgage defaults well below 1%, some might argue the risk to CMHC is negligible.”If you look at what is backing [CMHC’s] guarantee, it should be more than enough to cover any downturn in the market,” said one banking source, who asked not to be identified, about CMHC’s cash reserves.

    Would it surprise you to know that the delinquency rate for Fannie Mae in 2007 was 0.64%? See the comparison between CMHC and Fannie Mae here

  2. Pingback: A Bubble By Any Other Name…

  3. Hi Mike, always enjoy your blog entries and your editorial choices!:)
    Don’t forget the memorable souffle analogy: housing will deflate slowly, gently like a souffle as per this forcaster (January, 2007). Oh the memories…..

    “CALIFORNIA: some economists such as Sean Snaith, a consultant with the Stockton-based Business Forecasting Center at University of the Pacific, say the fallout from the housing slump, as well as the slump’s extent, has been overplayed by economists

    “It was not a housing bubble, but a housing souffle,” Snaith said. “If some of the key ingredients in the souffle were missing, it would go flat. But it was not a bubble.”

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