Economists are running out of superlatives to describe the rebound in Canada's housing market, in which sales are up 60 per cent from earlier this year.

"The speed and magnitude of the rebound in sales activity" is "remarkable," says the Canadian Real Estate Association (CREA). Association president Dale Ripplinger says, "The difference in the resale housing market now, compared to the beginning of the year, is night and day …"

"The Lazarus-like rise in sales has halted the slide in prices – say, whatever did happen to the meltdown in Canadian housing anyway?" asks Douglas Porter, deputy chief economist at BMO Capital Markets.

"The turnaround in Canadian housing this year might be the single most surprising turnabout we've seen in any economic indicator I can think of. The extent of it is nothing short of amazing," Porter says.

Like Porter, most economists were caught by surprise, and most of them have had to revise their real estate forecasts for this year. CREA predicted in May that MLS sales in Canada would drop by 14.7 per cent this year compared to 2008. Now, it says sales will decline by just 0.4 per cent. The association says prices will rise by 1.5 per cent this year.

Canada Mortgage and Housing Corp. (CMHC) also has a revised forecast, and is calling for a small drop in sales activity and sales.

In the Toronto market, economist Will Dunning says, "For the past three months, resale activity has been much stronger than I had been expecting, and the sales rate has been raised very substantially." He boosted his forecast from 62,100 to 83,000.

In Vancouver, "resale activity has staged one of the most spectacular comebacks in Canadian real estate history," says RBC senior economist Robert Hogue in the Housing Trends and Affordability report. "From their lowest levels in about 19 years at the end of 2008, sales of existing homes more than tripled by July to levels just shy of peaks reached before the downturn."

So what happened? Why is housing leading Canada's economic recovery?

"Low interest rates are boosting sales by returning homebuyers to the market who moved to the sidelines last year," says Gregory Klump, CREA's chief economist. "Buyers are also shifting purchase decisions forward as they take advantage of attractive interest rates now before financing costs increase."

RBC reports that housing affordability improved in Canada for the fifth consecutive quarter during the second quarter this year, driven down by low interest rates and dropping prices.

With prices and activity down early this year, many vendors decided to take their homes off the market until the situation improved. That created a shortage of listings, and thanks to the law of supply and demand, stopped the slide in prices. In August, it's been reported that 14 per cent of listings in the Toronto market had multiple offers submitted.

"Yes, Virginia, it's a sellers' market again," says Porter. "The biggest, priciest, and previously hardest hit markets are the very cities that are now rebounding most rapidly."

Now, the economists are over their shock and are throwing cold water on the idea that the market can continue to expand at this rate. Klump says that since buyers moved their purchases ahead to take advantage of low mortgage rates, next year will see a more stable market.

"The strong pace seen in the second quarter of this year reflects, in part, activity that was delayed in the previous two quarters and is not likely to be sustained," says CMHC. "The level of sales will move back to be closer in line with improving economic conditions."

Toronto economist Dunning agrees. "I think the sales rate will erode rapidly in the next few months. The stronger resale market has arrested the drop in values seen earlier this year. But, if sales slow to the extent I expect, the price recovery may be just about finished."

Only Porter at BMO Capital Markets seems to be hedging his bets in predicting the boom times are over. "Record-low borrowing costs and the mounting sense that the worst of the economic storm has passed are the key ingredients in the remarkable turnaround," he says. "We keep saying that further gains will be harder to come by, but the market keeps churning out those gains."

One of the functions of a homeowner association (HOA) is to enforce certain rules and covenants. It's good to periodically review old practices to confirm that your HOA runs an effective rules enforcement program.

Generally, it is the board's fiduciary duty to enforce the rules. But the board has some latitude when and what to enforce based on judgment. The key is for the board not to be capricious, selective or arbitrary in how it handles enforcement. It is impractical to expect that a board can maintain absolute vigilance and catch every rule violation. Instead, the board should react appropriately when informed of a violation by a reliable source.

Here is a list of the typical remedies available to enforce rules:

1. Impose a Fine. This power is typically derived from the governing documents. A fine can be monetary or a suspension of privileges (like pool or clubhouse). Monetary fines can be escalating (like $5/day until cured). Suspension of privileges is only effective if the member actually uses the amenities.

2. Impose a Lien. If a fine is not paid, the HOA usually has the right to file a lien against a member's HOA property. This may not immediately get the fine paid but in most cases, the threat of filing a lien alone will. The HOA is entitled to attorney, collection and related fees as well which will increase the amount owed. This is also a great incentive to getting the fine paid early.

3. Use the Court. The HOA is always represented by an attorney since these courts have rules and procedures which only lawyers understand. Court litigation is expensive and should not be undertaken lightly. Make sure the expense and effort fits the crime. We've all read about emotion and money squandered on “matters of principle”. The board has the power to compromise when it's in the financial interest of the HOA.

4. Self-Help. The HOA can often self-help by correcting the violation directly. Examples include hauling a junk vehicle and cleaning up an overgrown lot. Rather than ratcheting up collection costs, it sometimes makes sense to take action and bill the offender. Collecting the bill may require legal action but at least the offending issue is dealt with. If self-help is contemplated, make sure to keep copies of all correspondence that warns of remedies available to the HOA and take photos for the record.

5. Mediation. Mediation can be very cost effective and less confrontational way to cure a violation when a member has dug in their heels. Mediators are trained in the art of compromise. Many jurisdications provide mediation services in the public interest that is free or inexpensive.

6. Use the Police. All municipalities have ordinances against nuisance conduct, inoperable vehicles, disorderly conduct, disturbing the peace, etc. The HOA is not responsible for every violation. Sometimes the police are better able to deal with it, especially when violence and substance abuse is involved. Let your tax dollars work for you.

7. Use a Manager. Enforcing rules on neighbors is one of the two best reasons to hire a property manager who does this professionally (the other reason is collecting money from neighbors). Managers are granted authority to identify, notify and fine. Being a third party helps since managers are less prone to favoritism.

Rules, either hate them or love them but they're with us to stay. Figure out which ones you really need, get rid of the rest and enforce the ones that remain.

Contract activity for pending home sales has risen for six straight months, a pattern not seen in the history of the index since it began in 2001, according to the National Association of REALTORS®.

The Pending Home Sales Index, a forward-looking indicator based on contracts signed in July, increased 3.2 percent to 97.6 from a reading of 94.6 in June. It is 12 percent higher than July 2008 when it was 87.1. The index is at the highest level since June 2007, when it was 100.7.

Affordability at Record High

Lawrence Yun, NAR chief economist, says the housing market momentum has clearly turned for the better.

“The recovery is broad-based across many parts of the country. Housing affordability has been at record highs this year with the added stimulus of a first-time buyer tax credit,” he says.

“Other buyers are taking advantage of low home values before prices turn higher," Yun says. "Nationally, the typical mortgage payment now takes less than 25 percent of a middle-income family’s monthly income to buy a median priced home, with payment percentages so far in 2009 being the lowest on record dating back to 1970. As long as home buyers stay within their budget, mortgage payments will be very manageable."

First-Time Buyers

NAR estimates that about 1.8 to 2 million first-time buyers will take advantage of the $8,000 tax credit this year, with approximately 350,000 additional sales that would not have taken place without the credit. Buyers have little time to act because they must complete the transaction by Nov. 30 to qualify for the credit. Unless extended, contracts signed but not completed by that date will not be eligible – it is taking approximately two months to complete home sales in the current market.

By Region

• Northeast: The Pending Home Sales Index declined 3 percent to 78.8 in July but is 4.7 percent higher than July 2008.
• Midwest: The index slipped 2 percent to 88.1 but is 8.1 percent above a year ago.
• South: Pending home sales activity rose 3.1 percent to an index of 103.8 in July and is 12 percent above July 2008.
• West: The index jumped 12.1 percent to 112.5 and is 20 percent above a year ago.

"Keep the Momentum Going"

NAR President Charles McMillan says Congress needs to keep the momentum going.

“Even with a good recovery taking place, the market is not yet back to normal. With a gradual absorption of inventory, we are on the cusp of a general stabilization in home prices,” he says. “To ensure that housing has a broad stimulus to the overall economy and stays on sound footing, we’re encouraging Congress to extend the tax credit into 2010, and to expand it to all buyers of primary residences. The faster we stabilize home prices, the fewer families will face foreclosure and the quicker credit can be extended to other sectors of the economy.”

NAR’s Housing Affordability Index stood at 158.5 in July, below the peak set in April but is still 36 percentage points higher than a year ago. The HAI is a broad measure of housing affordability using consistent values and assumptions over time, which examines the relationship between home prices, mortgage interest rates, and family income.

Yun expects existing-home sales to rise through the fourth quarter.

“Unless the tax credit is extended, no one should be surprised to see home sales drop in the first quarter of next year,” he says. “However, the fundamentals of the housing market and the economy are trending up, and we expect home sales to generally pick up in the second quarter of 2010. The buyer psychology may be shifting from, ‘Why buy now when I can purchase later?’ to ‘I don’t want to miss out on a recovery.’”

This year, home prices fell in the nation’s most exclusive neighborhoods.

In Alpine, N.J., which tops Forbes’ magazine’s list of America’s 500 Most Expensive ZIP Codes, home prices declined 23 percent in the last year.

Overall, asking prices in the ZIP codes on Forbes’ list dropped an average of 7 percent. Prices are only rising in a few areas. For instance, on New York’s Upper West Side, ZIP code 10023, prices rose 4 percent in the last year.

Forbes’ list was compiled by Altos Research, a real estate data collection and research firm that tracks about 90 percent of all real estate transactions.

Based on Altos’ figures, here are the country’s 10 most-expensive ZIP codes and the median home prices there:

1. 07620, Alpine, N.J., Median Home Price: $4,139,041
2. 94027, Atherton, Calif.: $3,849,133
3. 10014, New York, N.Y.: $3,521,514
4. 91008, Duarte, Calif.: $3,444,773
5. 90210, Beverly Hills, Calif.: $3,367,167
6. 92067, Rancho Santa Fe, Calif.: $3,362,493
7. 93108, Santa Barbara, Calif.: $3,284,652
8. 94024, Los Altos Hills, Calif.: median unavailable
9. 10065, New York, N.Y.: $3,176,534
10. 07926, Brookside, N.J.: $3,121,115

For most homeowners, foreclosure is like a fatal illness that starts with losing control of their finances and ends with a sickening feeling when the bank finally seizes the property. Post-foreclosure, a homeowner's credit rating gets trashed and he can be in financial purgatory for years, making it nearly impossible to buy or rent property.

But while foreclosure typically spells disaster for homeowners, for some New York City investors it may actually be a good business decision.

Indeed, foreclosure doesn't have to be a money-losing proposition, especially for the small-time investor who borrowed money to buy townhouses or condominiums, according to Augustine Diji, a Manhattan-based lawyer who helps investors drag out the foreclosure process for as long as possible.

A depreciating real estate market and adjustable-rate mortgage resets have changed the equation for many of Diji's clients, who include a tenured college professor as well as a restaurant owner. Instead of making mortgage payments, these investors are voluntarily choosing to go into default, sometimes before they are in dire straits financially, and pocketing all the rental income they can.

It is not just investors who are walking away from their financial obligations.

The crash in real estate values is prompting a significant number of property owners in general to make "strategic" decisions to default on their mortgages, according to a recent study by the University of Chicago's Booth School of Business and Northwestern University's Kellogg School of Management. The study found that 26 percent of mortgage defaults were by homeowners who had money to continue making payments, but had chosen to not to.

But investors have much less incentive to hang onto their properties.

For many investors with properties that are about to be underwater, it doesn't make sense to continue making mortgage payments, said Diji, who is generally able to buy his clients an extra year in foreclosure before the banks finally seize the property.

"The smart people say this is a great way of getting equity from a property," he said. "Because you cannot refinance it, you can never sell it, it is depreciating, and it is going to be upside-down at some point -- so you just take the cash flow and let the bank eat the loss."

While low-income homebuyers in New York City dominate the foreclosure rolls, many well-heeled investors in condos and small multi-unit rental buildings are joining their ranks. Lis pendens, or preliminary foreclosure notices, were filed on 194 non-owner-occupied condos in the five boroughs in the first two quarters of 2009. That was 23 percent of the total citywide lis pendens, according to PropertyShark.

For townhouses, there were 806 lis pendens notices filed for non-owner-occupied two- to four-family dwellings in the first two quarters of 2009, 14 percent of the total citywide.

In contrast to many of the homeowners facing foreclosure who simply cannot afford their mortgage payments, a lot of investors in default are still flush.

One of Diji's clients has one four-family and two three-family rental properties that he purchased, each for about 10 percent down. The client, Diji said, has already taken out at least half a million dollars in equity out of his buildings by refinancing them. And although all of his rental properties are currently performing with profit, the investor has stopped making his mortgage payments and hopes to clear more than $200,000 after he is served with foreclosure papers.

"He has the type of mortgage where every single payment goes to interest, so it is not as though he is going to see some equity anytime soon," Diji said. "The mortgages all have adjustable-rate features, which means that they will go up at some point. He is not concerned about credit because he wants cash. And the only way that he can get cash is not to make any more mortgage payments, collect all the income and bank it. He wants to do it as long as he can, and that is where I come in."

Diji said another of his clients makes at least $500,000 a year, but since he is nearing retirement, he has decided to cut his losses.

"He doesn't want to keep these humongous payments of $11,000 a month -- who does?" Diji said. "The interesting thing about this person, and I have quite a few clients [approaching retirement], is that their perspective is, 'I cannot afford to throw away my cash and hope the market goes up. I have to retire, and this doesn't make sense for me.' "

Going into foreclosure and stripping a property for all it's worth is not a new strategy, said Joshua Stein, chair of the education committee of the Mortgage Bankers Association of New York and a partner in the real estate practice group of Latham & Watkins.

"It is a famous technique for small-time real estate investors," Stein said. "You know you are going to lose the property, so ... you put as much in your pocket as you can."

During the last real estate downturn in the early 1990s, many investors were going into default and milking their properties for all the available cash.

Back then investors were able to shield themselves from personal liability through special types of partnerships. But since that financial debacle, the banks have taken steps to protect themselves on big commercial deals.

Typically substantial commercial deals involve "nonrecourse carve-outs," where banks require that an individual sign an agreement that makes him liable in the event the partnership or limited liability company pulls money out of the property or damages the property.

In riskier deals, banks often require a "lockbox," where the tenants make rent payments directly into an account controlled by the bank, and funds first get applied to paying building expenses and debt service, after which the balance goes to the owner. In the most extreme lockbox, the owner doesn't get to touch any money until all the obligations have been paid.

However, lockboxes and nonrecourse carve-outs will often not be required in smaller deals, Stein said.

Further, in many cases investors may own their properties under the name of a limited liability company. Stein said if the investor has an LLC, "nobody has any obligations on the note except for the LLC itself, and if you own the LLC and know you will soon lose the building, you can distribute all the money out at the end of the month and you make sure that the money is artificially high, because you are not paying anything that you should be paying."

Even in situations where the investor's name is on the mortgage document, chances are the investor will still be able to walk away with the cash, explained Stein.

Stein said lenders generally have the perspective: "I notice this guy got six months of rental income, say $5,000 a month. How likely am I to go hire a lawyer to chase this guy and file a lawsuit?"

When investors stop making their mortgage payments, they often stop paying building expenses as well and allow their property to fall into disrepair, he added.

Still, Diji said many of his clients are simply inexperienced investors who got caught up in the real estate euphoria of the past decade.

"In Manhattan, especially, people were buying because it was the gold train and brokers were pushing, 'Buy this second property pied-à-terre and have cash flow all day long -- and you can flip it because it is worth all this money.' "

He said some of them fell victim to option adjustable-rate mortgages, a financial product that savvy speculators have used with success but which for the first-time investor was like a novice driver getting into a racecar.

And going into foreclosure is a tough decision for many investors.

"You have to have a thick skin," said Diji. "We have it built into our (psyches) -- 'I made a deal to pay, and it is wrong not to pay,' " he said. "That type of moral thing, you are going to have to get over.

"You have to do what the banks are doing," he said. "The banks have terrible credit, they have no money, but they are essentially leveraging everything and getting free money."

Ultimately, it's the banks that stand to lose money on over-leveraged properties that go into foreclosure.

Stein said, "If you are the borrower and your lender did not impose a lockbox or a recourse carve-out guarantee, and if your property is not throwing off enough income, then you say to yourself, 'Why not do what the law lets me do?' Take the money and run."

Mortgage delinquencies will continue to rise and set records the rest of this year in California, according to projections to be released today by TransUnion, one of the three big U.S. credit-reporting companies.

The good news from TransUnion's number-crunching is that, even in the tarnished Golden State, the trend may finally reverse itself by the middle of next year.

Before that can happen, lenders must first work through scads of backed-up problem loans clogging their pipelines, F.J. Guarrera, vice president for banking at the Chicago data analyzer, said in an interview Monday.

So in the immediate future the percentage of California home loans that are delinquent at least 60 days or are in foreclosure is projected to skyrocket to more than 14% by year's end from 9.7% as of June 30, TransUnion said.

In the region including Los Angeles, Orange, Ventura, Riverside and San Bernardino counties, the delinquency rate also was expected to hit 14% at the end of the year, up from 10.7% as of June 30.

"We think that's about as bad as it's going to get," Guarrera said.

California's overall economic picture is worse than that of the country as a whole. The unemployment rate was 11.9% in July compared with the nation's 9.4%. What's more, the whipsaw of home prices from the housing boom and bust was exaggerated in California, leaving more borrowers than average "underwater," or owing more than their homes are worth.

It's no surprise, then, that the state's mortgage woes are far greater than the nation's. At the end of June, 5.8% of home loans nationally were late 60 days or more, a percentage TransUnion expects to rise to 6.9% by the end of this year.

The TransUnion data reinforce a report last week from the Mortgage Bankers Assn. on the new records being set for problem home loans. But the credit-reporting company had more specific regional numbers than the national trade group.

In particular, the situation and the outlook in the Inland Empire are "kind of staggering," Guarrera said.

As of June 30, 14.9% of residential mortgages in San Bernardino County were at least 60 days late. And in Riverside County, where boom-era home building reached a frenzied peak, 16.5% of home loans were at least 60 days past due.

By comparison, at the end of the first quarter of 2007, Riverside County's delinquency rate was 2.6% and San Bernardino County's, 2.3%.

The normal national rate for these delinquencies is 1.6% to 2%, Guarrera said.

Although California will struggle for the rest of the year, the outlook nationally is brightening a bit, he said. For example, Ohio, a Rust Belt state where foreclosures surged long before those in California, recorded a lower delinquency rate in the second quarter with 4.57% of loans in the problem category, down from 4.79% the previous quarter.