Tuesday, April 3, 2007

April Fools Came Late?

Have to say that the only word that describes my feelings after reading this is shock. Is this a joke? I guess not.

Looking at our end of the market, I wouldn't have predicted this at all. We've been seeing very little activity, and numerous price changes downward. My only explanation for the increase in average and median prices is maybe this is the last push by the flippers to not get caught with their pants around their ankles.

It would make sense that anyone who has purchased and updated their properties in the past 12-18 months would likely get more. If there is increased product on the market and more competition between places, then the nicer ones should go first one can assume. Maybe that's what happened in March?

There were more listings and more sales. This is normal after the winter slowdown. VT says the first quarter score has the bulls running away with the game thus far. My bears are a third period team playing the wrong game on the wrong field apparently.

Maybe we'll rethink the whole rent and wait this one out... OK, that's just my shocked emotions talking, but seriously, my gut feels pretty sick about this one.

Here's a serious question that demands a serious answer (and I ask all the bears that read this to really take an analytical look at our bearishness): are we fooling ourselves? Could it be that our wishful thinking has deluded us into believing that the downward correction is coming a lot sooner than it is? I'm not saying there will be no correction, but it apparently isn't coming anytime soon. After all, September 2006 - January 2007 looked pretty flat, even showing some slight declines in certain price ranges/neighbourhoods; it would seem like that 'trend' died in February.

24 comments:

VictoriaREBear said...

I really hate to say this, but it may not be until around 2012 that we really see a decline in Victoria real estate values. There seems to be such a deeply entrenched belief in the strength of the housing market on the part of EVERYONE in this town, coupled with the phenomenal availability of unbelievably large amounts of money at ridiculously low (yet amazingly stable) interest rates, that the euphoria seems to be unbreakable. Add to that the utter disregard that people of all demographic groups, from the twentysomething condo flippers to the goldrush grannies, have for risk and debt, plus the "golden decade" gov't propaganda stream supported by the West's "economic miracle" fueled by oil revenues, and the whole juggernaut seems unstoppable. I have been an incredulous bear since 1998, when I thought prices were way too high already, but I confess to being on the edge of throwing in the towel, cashing in everything I own including RRSPs and just buying some damn thing with a humongous mortgage. Please, someone slap me!

hhv said...

SLAP! and another little slap to make it sting... :)

greg said...

hhv -

don't worry, the spin is not that good for VREB.

After all, there are a thousand more properties on the market now than there were last year; last year there were about 500 more properties on the market than the year before - yet sales remain quite similar - that is a lot of frustration for sellers who list but can't move their places.

At present, there is around 3 months supply of sfh, and the listings will only increase as the summer wears on and the sales slow down.

Look for listed properties to break the 4,000 barrier by August.

It is only a matter of time now. First time buyers have been squeezed out of the lower end housing market now for a few years. Prices are up, sales are dropping relative to listings....

The whole house of cards will start tumbling by the fall - you will see a rout by next spring.

Don't forget, they didn't see what was coming in 1981 either - it's the definition of a bubble, by the time the general public realize they paid too much, it's too late to do anything about it.

If you wait until 2009, you should see some real bargains.

Anonymous said...

I am not going to throw in the towel yet (although I will still refuse to buy until all sense returns. I'm getting stubborn) until after we see the numbers at the end of June 2007. My husband says those are the numbers that will really tell us what is going on.
I'm thinking though we won't see any big drops until 2008 but boy I hope I'm wrong.
This March it seems that a lot of people still believe that prices here will never go down and you have to get in now or else you will never get in. I do think that a lot of this is the trade up market still as FTBs are pretty much priced out.

S2

VictoriaREBear said...

SLAP!

Ahhh yes, just what I needed. Now, back to Ben Jones' blog, where I can read all the about the escalating subprime credit implosion and ensuing recession that will, of course, have no effect whatsoever on BC (har har).

JMK said...

This March it seems that a lot of people still believe that prices here will never go down and you have to get in now or else you will never get in.

You don't need to make the assumption that prices will rise indefinitely to decide buying is better than renting. I certainly didn't, and I suspect I'm not the only one who ran the numbers and bought rationally.

Here is how I look at it: buying because you are afraid of being permanantly priced out is as irrational as not buying because you are sure there will be 20-30% reductions. They are two extremes of what can possibly happen. To my thinking, you should bet on the average over time and do the cost-benefit analysis based on that.

Right now we are about 13% higher than the historic trend for Victoria from 1978-2001, so it probably pays to be cautious. I sure wouldn't get a high-ratio mortgage, and over-extend myself. If it was me and things were tight I'd save my money, rent cheaply, and buy when I had a bigger nest egg and the market had settled a bit.

Anonymous said...

jmk

Someone told me once that the best time to buy is when you can afford it so yes, if the numbers have been run and it is reasonable to buy at this time then that is an okay thing for some people to do.

We ran the numbers and it makes sense for us to rent for a while longer. We are doing so well renting that buying right now, even though we could afford to, just doesn't make financial sense.

Also, I can't stand the junk that is out there for the price we are willing to pay.

S2

greg said...

jmk-

You don't need to make the assumption that prices will rise indefinitely to decide buying is better than renting. I certainly didn't, and I suspect I'm not the only one who ran the numbers and bought rationally.

Here is how I look at it: buying because you are afraid of being permanantly priced out is as irrational as not buying because you are sure there will be 20-30% reductions.


Come on, that's just nonsense. In the interest of full disclosure, did you buy in the last year or 10 years ago?

Do you think you would choose to buy now if you could time a lower price, like say 3 years ago?

Based on what you are saying, waiting is not worth it because there is no certainty of 20-30% price cuts in the near future.

Come on, if you rent for 1 year and prices drop 10%, on the median family home the buyer just saved around $50,000.

Every activity of the local market is showing we are reaching a top - slightly higher prices on lower volume, increasing inventory - there have been 2 significant corrections in the last 3 decades - an average of one per decade, and there's only 3 years left this decade after a 7 year bull run - why not wait another year or two for the next correction - it has to be only a few years away?

Waiting a year or two and saving 10% or more on the current prices is just a no-brainer -most people couldn't possibly save equivalent downpayments in those two years.

Not only that, by waiting and sitting on the sidelines, renters help ensure that the market will rise no further.

Anonymous said...

People I talk to complain about how high the prices are but when you tell them that if people would stop paying these prices they would go down they don't believe you and then put an over-inflated offer down on an over-inflated house. Arrgh.

S2

Vicguy said...

"People I talk to complain about how high the prices are but when you tell them that if people would stop paying these prices they would go down they don't believe you and then put an over-inflated offer down on an over-inflated house. Arrgh.

S2 "


As I posted on the VicBlog, these are the same people who will try to scam you down 75% at a garage sale on what they know is a valuable little item, but when it comes to buying real estate they throw all common sense out the window, scared to dare make a low ball offer and offend anyone and even line up around the block overnight to buy something you can't actually see for 2 years til it's built, in other words total insanity and it is going to end very ugly.

I am hearing alot of business commentary on how corporate USA is tightening the purse strings and starting to lay off people from Circuit City to CITI Bank,that spells nothing but expected corporate losses and tightening spending huge. There has been the highest insider selling since the tech boom in 2000,housing still reeling huge and we have a recession in the making if we are not in one already which means Canada's economy will get whacked big time and follow suit like David Dodge has stated and in the aftermath everyone will look around and say " hey why didn't you tell us ? ".

victoriabear, I am going to take you out behind the woodshed if you don't smarten up ! put down that cheque book right now ! LOL

Aleks said...

My decision to not buy is based on the financials rather than an expectation about what the market is going to do in the next couple of years. I absolutely do expect a correction, however the reason I'm renting is that I can save $1000+ per month doing so. If prices keep going up, that doesn't make me think "I was wrong, I should buy now before they go up more," it makes me think that renting is an even more cost effective decision. For every year that the bubble strings itself out, that's an extra $12,000 for my down payment.

VictoriaREBear said...

"victoriabear, I am going to take you out behind the woodshed if you don't smarten up ! put down that cheque book right now ! LOL"

Heh heh. Not to worry vicguy. The thought of cashing in my total net worth plus a $300,000 mortgage just to buy something semi-decent (not even waterfront) makes every sphincter I have go into spasm. It's just that I can't fathom the mania and abrogation of common sense that seems to have whipped up a frenzy in the minds of 90 percent of this town's population. Mind you, last night I hauled out my dogeared copy of "Extraordinary Popular Delusions and the Madness of Crowds" and re-read the chapter on the Dutch tulip mania. For all we poke fun at it nowadays, the degree to which it became embedded into the society and economy of the time was truly staggering (for example, the Ministry of Finance was renamed the Ministry of Tulips). Well worth reading if you can get a copy of the book.

JMK said...

Hi Greg,

Waiting a year or two and saving 10% or more on the current prices is just a no-brainer -most people couldn't possibly save equivalent downpayments in those two years.

We just closed on our first place on Friday. As I've stated before, I am trying to let folks here understand my thinking as to why, even understanding the market is somewhat higher than average, we decided to buy anyway.

You seem to be missing the salient point that for your $500k home you are going to shell out $24k a year in rent (at least). The simplest way to look at it is that you need the market to perform -5% for every year you wait it out and rent. You rent this year and the market stays flat, you need it to drop 10% the next year. If it only drops 5%, you need to wait another year. Adnaseum.

So yes, if the market drops by 10% over the next year, I will have made a mistake. I bought close to median, so it will cost me close to $26k (on paper). If the market performs better than -5% I'll essentially come out ahead (on paper). If it performs, over the time I own the home, at the historic rate then I'll definitely come out ahead - way ahead.

The real calculation requires you to take into account opportunity costs - i.e. the money you'd have made investing the downpayment and the difference between your rent and mortgage. Run it through a spreadsheet. Make sure you don't choose a volatile investment like stocks for your return on that, or you could be waiting a long time for your downpayment to reappear. You also must incorporate the fact that rents go up with inflation (at least).

I'm not trying to convince anyone of anything. There could indeed be a large enough correction to buy you that $600k place of your dreams for $400k. I just don't think it is very likely.

Aleks said...

Your logic is faulty. You're only applying a tiny portion of that $24k to the principle, the rest is going to the bank and is functionally the same as rent. Ergo, ignoring price changes and opportunity costs, you only come out ahead by buying if the difference between the cost of renting and owning (mortgage + property tax + maintenance) is less than the amount applied to the principle. That's not even remotely true for any of the places I've looked at.

greg said...

aleks -

of course you are right. I wonder why jmk bothers spending time here as a new buyer who thinks nothing of jumping in at median at the highwater point of the market and discounts any drop in the foreseeable future. Not only that, but he basically is encouraging others to do the same.

Sounds like a realtor trying to spin the local market to the public to me.

You are right about the interest versus rent connection.

Property only needs to go down about 2% to come out ahead by continuing to rent and then buying in a year, not the 10% he is talking about.

And if prices do drop more than 2%, if you pay even 5% less, and amortize that amount over 25 years, ouch, you are saving a lot more than $25,000 by waiting a year.

Besides which, if jmk put his $200,000 or so downpayment in the bank at 4%, he definitely comes out ahead by continuing to rent, at very little risk on the upside.....

There are all kinds of valid reasons for buying now, the main one being "I have lots of money and I don't care about buying at a peak or in a valley", but unless that is your financial situation now, it would be irresponsible to let jmk advocate for current purchases without a rebuttal.

Me, I'm waiting until fall 2008, personally...

greg said...

aleks -

jmk is also conveniently leaving out the cost of property taxes and maintenance, and assuming people pay rents equivalent to mortgages in Victoria.

Rents are paid with incomes, not amortized over 25 years, and while they may go up, they can't go up past what the market can afford.

While jmk may only be paying around $2000-$2250/month for his mortgage, the actual cost of that property without a big downpayment is more like $3,250 per month - find me houses in Fernwood that rent for that amount, I will be very surprised.

hhv said...

As a first-time buyer, I want to hear both sides of this market: people who are buying included.

I think that having diverse view points is good and we can learn from them, even if it's learning what not to do.

As with all things market related, there is no sure fire way to beat the market. If there was, we'd all be doing it.

I agree with jmk's assessment that if you can afford to buy now, and can afford to weather the storms both emotionally and financially, then there is nothing wrong with buying now. We can't, so we won't.

If we look realistically at this market, it's both hyper-inflated and still going up. It may prove to correct back to today's levels after another increase. While it's fun to predict what will happen, I don't think it's realistic for anyone to claim predictions as fact (not that that is going on in this post).

I'm big on free speech, and am happy to have people post whatever they want in comments sections of this blog. I don't want to police it as much as I equally don't want people to be run off for their view points. I'd ask that everyone apply the golden rule to their posts please.

Aleks said...

The only thing of value in jmk's post is the suggestion to make a spreadsheet and run the numbers yourself. There are also buy vs rent calculators on the net that will do the calculations for you, but they assume a steady rise in home prices. When I did it a year or so ago, it came out that I would only be better off buying if I lived in the condo for 10 years. And that was assuming prices rose about 3% annually (iirc). If you look at affordability and price:rent ratios, a crash is very likely sometime in the next 10 years. Even just a correction of 15% would wipe out most of your equity and push the break-even date out to 15 or 20 years.

And that's if you stay in the same place for the whole time. I was looking at condos because I can't afford a house, but I have no intention of living in one for the next 20 years. If you factor in the vig on real estate transactions, there's pretty much no way you come out ahead.

Vicguy said...

"Make sure you don't choose a volatile investment like stocks for your return on that, or you could be waiting a long time for your downpayment to reappear."

Oh I see, we're supposed to be only caluclating any alternative to ownership by putting it in a GIC only to make a comparison,yet your real estate numbers are derived from "voataile" real estate markets that can fluctuate just as a stock does ? No blue chips with a dividend like Shaw stock or a solid mining stock ? Give me a break, you want it both ways, just as you hand pick your years for price gains.
I have agree with Greg,sounding more like an RE agent.

JMK said...

Hi Aleks,

You're only applying a tiny portion of that $24k to the principle,

You pay financing costs whether you buy today or in a couple of years. Including them in the cost-benefit analysis of buying today vs tomorrow doesn't really get you very far.

The easiest way I can see to look at it is this: we are currently 13% inflated from the historical curve. By buying now, I pay a $65k premium on a $500k place, if the market corrects overnight. If the market corrects in one year (i.e. loses 13%-6.3%=-6.7%), then I'm out $33.5k-24k on rent for that year, for $9.5k loss. If it corrects in two years, which means it stays flat for that time, then I'm ahead $48k. I can afford the risk of a 9.5k loss to avoid a $48k loss.

Now, if it overcorrects, and does so quickly (a bubble pop) then clearly I stand to lose a lot of money on paper and will be constrained to hold my property for a while and will feel some level of remorse for buying now. I simply feel the likelihood of the market dropping 10% in the next year is pretty low.

JMK said...

Oh I see, we're supposed to be only caluclating any alternative to ownership by putting it in a GIC only to make a comparison,yet your real estate numbers are derived from "voataile" real estate markets that can fluctuate just as a stock does ?

No, you can of course use whatever investments you want. You just have to make sure the time horizon you want to buy a property on is commensurate with the volatility of your stock. I certainly wouldn't know how to pick a "solid mining stock" that was gauranteed not to lose money over the next two or three years if I sat out a housing cycle.

Similarly with real-estate. It would be really silly to buy if you knew you had to sell in less than 5-10 years. When I quote the 6.3% number, that is averaged over 23 years. During any 5 year period you could do considerably better or worse than that. Over 10 years, the worst you could time things was for a 3% year-over-year gain.

just as you hand pick your years for price gains.I have agree with Greg,sounding more like an RE agent.

Again, I'm not a real-estate agent. I'm also not an expert on economics, or the real-estate market. I'm just trying to explain how I came about my decision. Please let me know when I've hand-picked my years for price gains. If you have better years to chose (I chose 1978-2001 to not include the current run-up) I'd be happy to have a factual discussion.

greg said...

aleks -

jmk didn't even bother to include property taxes in his explanation.

Nor did he answer the points we made earlier about the fact his house at around $500,000 is eating up about $3250 + taxes + maintenance per month in lost opportunity, when compared to rent, which is probably less than half that expensive, compared to the total investment involved.

You can't compare the mortgage payment to the rent when calculating the lost opportunity, because when renting, the typical renter has not tied up his downpayment and equity in a single investment - the house - that portion of the equation, if the renter has a downpayment, is free to be invested.

If the renter has now downpayment, they are not part of these scenarios anyway.

As far as the $24,000 per year for rent, a quick search of craigslist for 3 bedroom houses shows quite a lot for rent for under $2,000 per month, in all areas of Victoria.

I respect what HHV is saying about keeping the discussion civil, but if jmk is trying to make economic arguments in favour of buying now, while expressing his belief housing markets are unlikely to decline 10%, and adding that renters are losing out financially unless there is a crash, that's just not a logical argument.

At present prices, without a crash, there is no way that renting is more expensive then buying.

If a renter is disciplined enough to put the 100s or 1000s per month into savings or other solid investments, they come out ahead in the short term to medium term.

In the long run, arguments that this strategy loses out all rest on the assumption that asset inflation will continue to provide uninterrupted gains.

Never mind that in the long term, the housing industry could be slumping for all kinds of demographic reasons?

Don't believe that is possible? Look at the Schiller housing chart for US prices between the 1890 and 1950s.

Paper gains in housing are not worth anything until a person sells his house - and not everyone will be smart enough to do that at the proper time in the future.

Investment income, on the other hand, is money in the bank.

Aleks said...

"You pay financing costs whether you buy today or in a couple of years. Including them in the cost-benefit analysis of buying today vs tomorrow doesn't really get you very far."
I'm really not sure what point you're trying to make. My point is that if you rent for a year you will have a higher net worth at the end than if you buy now. Whether you decide to buy in a year is immaterial because you have more money for a down payment and can either get a shorter term or lower monthly payments. The money I'm saving by renting is effectively going directly on the principle of the mortgage I will eventually have. If the price:rent ratio stays out of whack long enough, I will presumably be able to buy a house with cash.

JMK said...

Hi Aleks,

I'm really not sure what point you're trying to make. My point is that if you rent for a year you will have a higher net worth at the end than if you buy now.

Your point is true for the first year of almost any mortgage, for the reason you state above - so much of your payment the first few years goes towards interest. By that logic, no one would ever get a mortgage. However, as you note above, in 10 years you will come out ahead. Thats the whole advantage of buying - not making money the first years so you lock your housing costs in at today's dollars and save money later.

If the price:rent ratio stays out of whack long enough, I will presumably be able to buy a house with cash.

Yes, but if after 10 years you are ahead buying, you presumably should have bought, no? Or did I misunderstand your previous post?

Here is how to do the comparison: run the numbers for your net worth in 10 years if you buy today. Then rerun the numbers for your net worth in 10 years if you pay rent for a year and then own for 9. The difference is how much you'll need the housing market to drop to have made waiting profitable. If its positive, then you definitely should rent this year.