Canary In The U.S. Housing Market: Canadian Snowbirds Cash Out

Includes: IYR, REM, XLRE
by: Wolf Richter

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".