CIBC World Markets at CIBC World Markets Real Estate Equities Conference - Final.

Original Source: FD (FAIR DISCLOSURE) WIRE

JEFF RUBIN, CHIEF STRATEGIST AND ECONOMIST, CIBC WORLD MARKETS: Well, thank you, Jerry, and welcome everyone to be 13th I guess annual real estate conference. I think I have been speaking at most of them if not all of them. Today's topic of course is going to start off looking at what is happening in the US real estate market and the US economy.

But I guess the one thing that is of note here in Canada and indeed around the world is that you can throw out all of the previous benchmarks between global resource markets and the US economy and you can throw those benchmarks out the window because the world has certainly changed. I guess the greatest evidence of that is just to look at where the Canadian dollar is right now when the US economy is in recession and that is your testament to just how much things have changed over the last couple of cycles.

Well let me just briefly review the developments in the United States. What we are seeing right now is that the level of unsold homes in the US is broadly equivalent to a year's housing starts which have fallen to about one million units. So, I don't think it is a great and bold forecast to go further and say that there is going to continue to be downward pressure on US housing prices until we get a better balance between supply and demand and that is probably also going to mean that the level of US housing starts is going to continue to decline as it has for the last couple of years.

Of course, what we are noticing is that at least in the sub prime mortgage market that declines in housing prices create negative home equity. Our forecast is for a cumulative decline from the July '06 peak in housing prices using the Case-Shiller price index which isn't a perfect price index but it is the one that financial markets have seized upon.

We are looking for about a 20% cumulative decline. Right now we are at about 11% and at a 20% cumulative decline, roughly 50% of sub prime mortgage holders would have negative home equity. Certainly, the '06 vintage is what would concern us the most. We are probably looking at default rates on the '06 vintage getting upwards of around 40% but not nearly that high for some of the other vintages. And looking at an average of all the existing vintages out there we are probably looking at about a 30% default rate. Right now we are just a little bit north of 20%.

So by most metrics we are anywhere between 55 to 60% halfway through. As I say our model which relates negative home equity to default is predicting 20% price decline, 30% default rate. And if we look at what that actually means in terms of losses it means roughly -- lastly not roughly [Bennie] has got it down to the nearest millionth but $314 million asset write-down, not all of it in sub prime; some in Alt-A, some in other exotics and indeed a small slice of prime mortgage would actually be in default given the price decline but we're talking about $314 billion of which we are now roughly around $200 billion; so more than halfway through.

What of course happened is that it's not just of real estate issue anymore, it is a recession and it now looks like the US will contract in the first and second quarters of this year. The fourth quarter of last year was barely flat and who knows with revisions might become negative as well. There are both pluses and minuses to the US recession.

I think a plus is insofar as the real estate market is concerned that it has provided a powerful impetus for officials to intervene, both non-elected officials like the Federal Reserve Board which is now going to extraordinary lengths, lengths that we haven't seen since the 1930s to pump liquidity into the economy and maybe more importantly down the road we're now hearing from both the Democrats and Republicans a fiscal bailout to mortgage holders a la the S&L bailout of the late 1980s.

So a lot of measures are going to be directed towards re-liquefying this market. I said the Federal Reserve Board has gone to extraordinary lengths. This is term option and discount window lending. That tiny little blip that you might see was September 11 where you see today is over $60 billion of liquidity injected into the system. This is far beyond the normal parameters of what the Fed does and particularly of interest is that the Fed is taking a liquid mortgage-backed securities as collateral for a lot of this financing, something that it typically would normally not too.

We will see what the quid pro quo for this extraordinary support will be. It will probably result in a re-regulation of US financial markets which will be the price of taxpayer support and probably a bigger regulatory role for the Fed. If the S&L crisis of 1988 is any benchmark and it's probably as good a benchmark as we are going to find, that involved a 200 -- in today's dollars -- a $200 billion bailout at the taxpayers expense. The $314 billion in losses would certainly be within the range of that kind of accommodation.

Now, what is interesting about this particularly from a Canadian perspective and indeed from the perspective of resource producers around the world, is how little difference all of this means. If you look at the CRB which is probably the most widely watched measure of commodity strength although certainly not a perfect measurement, it is at or near record highs and that is not normally the position of the CRB or commodity prices when the …