Monday, March 30, 2009

March predictions

Victoria's Truth has a good analysis of what to expect in March 2009 sales numbers.

Here are my thoughts, some of which repeat Prairie Boy's:
  1. SFH average and median sales price and volume numbers will be up month over month
  2. Condo average and median sales price and volume numbers will be up month over month
  3. SFH average and median sales price and volume numbers will be down year over year
  4. Condo average and median sales price and volume numbers will be down year over year
  5. The VREB and the TC will have a "frank" public discussion about how this spring is demonstrating that Victoria is different, that we are insulated, and that first time buyers are taking advantage of the combination of never-before-seen interest rates and the considerable price "discounts" from last year to get into the market.
If PB's prediction of an increase in median price to $515K comes true, then maybe it is the FTBer frenzy that is propping up this market; after all, when a FTBer buys an entry level property, it allows the previous owner to move up into the next level, which is considerably cheaper and could represent good value to those buyers who are still having success unloading their over-priced crap onto those who should know better. If there's been an increase in sales in the $600K plus range, in my mind at least, this is because there is still strong sales volume in the $450K-$600K range.

Regardless of whatever happens this week, the longterm downward price trend will return this year, and we'll see the inevitable correction to the inflation trend line and beyond, as we always have in every other market correction in Victoria real estate history.

Sunday, March 22, 2009

SFH price to rent comparison

It is really hard to come up with a fundamental price to rent comparison for Victoria single family homes. There just is not enough available complete house rental stock; I think there are lots of homes rented, but chances are these homes are long term tenanted and rented for significantly less than today's advertised Craigslist price.

The best I can come up with is a price per square foot comparison based on the Fernwood neighbourhood. I chose Fernwood because it is the most affordable Victoria-proper neighbourhood for both rent and own scenarios.

I used a ten-unit rental average to produce an approximate price per square foot rental metric of $1. I stress that this is an approximate number. Some places had asking prices closer to $1.40/SF while the larger home/suite rentals were in some cases as low as $0.80/SF.

To calculate the ownership metric I've used:
  • a 5 percent down, 35 year amortization and 4 percent interest rates to calculate the SFH price per square foot metric. I'm in no way advocating the use of these toxic products, I believe I am simply recognizing that this is the default mortgage right now being used by first-time buyers making the switch from rent to own.
  • a median Fernwood home price of $475K
  • an annual tax bill of $2200
  • an 1 percent per year ($4400) maintenance calculation
Here's what I get:
  • Mortgage = $1940 per month
  • Taxes = $125/month after FTB tax grants
  • Maintenance = $350 per month
Total ownership costs = $2415

The average square footage of the properties in this neighbourhood is close to 1800SF, so that is the number I've used to calculate the price per square foot ownership cost of $1.34.

Keep in mind these are per month numbers. After having done this calculation, crudely at best by my own admission, I can understand why FTBers with the ability to qualify for mortgages high enough to get them into these properties think they aren't overpaying or think that owning makes sense over renting at these prices. Especially if they can find some suite rental income in the property they buy. It's for this reason that I see strong sales to listings ratios in this market segment.

The only thing that hasn't happened to these types of properties is a listings spike. I don't think we're going to see it either. The only way that the median priced listings will rise in Victoria proper, IMHO, is higher priced homes will have to drop their prices far enough to compete with these types of homes. The ownership vs rent costs in Victoria SFH is just too close to encourage current owners to sell and then rent.

Perhaps it is impatience, but I am beginning to think that entry-level SFH prices will not drop to the significant extent required to drive median prices below the $400K mark, at least not this year. Perhaps it will require several years, maybe even longer, before this occurs and will happen slowly enough, and be neutralized by inflation, that the entry-level price doesn't seem to drop at all. I still think we're in for a 35% total price correction market-wide, but I'm beginning to think that this will really be driven by the high end, and that the low end will fair better in price drops because of the high rents Victoria commands.

We're really starting to seriously consider looking elsewhere for a better quality of life. I love this city, but if we want to live the way we want to live, have the careers we want to have, save for retirement and rainy days like we think we must, and have a small family, up-island and the major prairie cities are looking more and more attractive everyday.

Sunday, March 15, 2009

Condo Floption

I wonder if the sales team and developers at Reflections in Langford are feeling a little gloomy this morning? Yesterday was supposed to be their MAC Marketing MomentTM. They were supposed to be beating the competition to drop units off the graph of available inventory (thanks for these great graphs Roger!):

They were supposed to be quickly liquidating the remaining forty units of inventory in their building and going after the presale buyers for damages. Word on the street is 15 units were snapped up. 15 of 40. That's 37.5%. Not a good outcome for a one-day only liquidation auction that admittedly the sales team had hoped would move 20-30 units.

"From our perspective, we would be very happy to sell 20 to 30 units," says Khoo.

And that may be just the right medicine for a developer looking for money and buyers looking for a good deal.

Turns out the snake oil wasn't medicine at all. CTV, after fawning all over the auction on Friday, ran this piece of real news on Saturday, questioning the true "deal" that was offered:

Tsur Somerville of the Sauder School of Business had some reservations about the so-called auction.

"What if they were 20 per cent above the market and now they're just gotten down to where the market was?" he said.

Brilliant. Now you ask. After 15 buyers took the bait and clearly overpaid for the units they bought, you have to wonder why, if the deals were too good to be true and all that, in a city that typically sees over 100 condo sales every month, only 15 buyers jumped on this great opportunity to "save" themselves $100K? The answer is simple really: even with the discounts, these units still are overpriced compared to the market.

Reflections isn't the only condo development offering these "insane" price drops either. The buildings up at Bear Mountain are "deeply discounted," so are a few other condo developments in the Goldstream/Jacklin neighbourhood advertising "cheaper than rent" financing options. The trouble with these marketing strategies lies with the grade 4 math needed to debunk them.

I'm encouraged by this bit of bad news really. I had completely expected the unsuspecting first time buyers, who we are told are propping up this market, to snatch up these deals. Maybe they're smarter than the media after all?

We can likely take three positives from this weekend's failed experiment:
  1. Maybe mortgage lenders are making it harder for people to get pre-approved for condos right now,
  2. Maybe the first time buyers are finally starting to see the light in the condo market, and
  3. Maybe the media is starting to question this whole sad affair a bit more quickly.
Now if only the FTBers would start realizing that a fixer-upper home with a suite listed for $400K is overpriced, we can finally see the last card knocked over in this precarious market.

Monday, March 9, 2009

The Warren Buffet way

I'm a huge fan of Buffet. I like Warren's way with stocks. I like Jimmy's way with good-times. And I especially enjoy the all-you-can-eat way; Oh yes, I did just bring that cheese to this post.

Warren's getting a lot of press today, like he does pretty much anytime he agrees to an interview. And he should.

This is what he said in October last year (and certainly it wasn't the first time we've heard it):
A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful.
He went on to sink personal money into US equities--mainly energy and water utilities, railroads and food companies--putting his money where his mouth is.

This is what Warren had to say yesterday:
Warren Buffett said yesterday that the US economy had “fallen off a cliff”, describing the current crisis as “an economic Pearl Harbor” as concern spread about the US Administration’s fitful attempts to halt the collapse of the American banking sector.
It's fallen off a cliff, and not only has the economy slowed down a lot, people have really changed their behavior like nothing I've ever seen.
And so it is. Warren's advice is right: Buck the trend; there is money to be made by doing the opposite of what everyone else is doing. Warren's advice doesn't stop there though. He also doesn't invest in companies or industries he doesn't understand, and he doesn't invest in companies with management he doesn't trust. There's actually a whole bunch of rules he has. Some of which I'm adapting below and hoping you'll add to in comments.

Let's face it bears, no matter how hard we might try (and I'd like to point out to you all that I really could care less whether anyone buys a home tomorrow or not), people are buying houses right now and there is nothing we can do about it. Nor should we. But in the spirit of giving, and in the off chance that a prospective Victoria first time buyer stumbles upon this little site, here's some adapted Buffet rules that I think will help you avoid the potential long-term pain that may await some of the more think-less-act-now kind of first time buyers out there:
  1. Buy real estate cheap: Be a value investor. Calculate fundamental value for a home--examine what similar homes rent for and don't bank on the market value of a home in the future. Look for a home priced as close to rent parity as possible (think $600-$650 per bedroom)--you won't find much, if any, and what you find won't last long in this market.
  2. Hold for life: If you must buy now, only buy a home you know you can live in for a long time. If you're considering a 1-bed downtown condo with your fiance and you're planning on having a child in the next two years and know you will want to have a house then, find a way to buy the house today. And no, a 2-bed condo is not the same thing. It takes a very special kind of a family to make a go if it in less than 1000 square feet of communal living next door to a retired couple who prefers silence after 7pm, below two students and their boyfriends who think Wednesday evening is the new Friday night, and above a night shift worker who needs daytime for sleeping.
  3. Be frugal: Instead of reaching financially to own a home, find a home that is appropriate for the long-term, that is priced below your means. I know this seems contradictory to the rule above, and it is, I still think renting is the best way to go right now, but if you "just have to buy" right now, risk as little money as possible, and make sure you can sock away a few extra dollars in a non-real estate savings vehicle each month.
  4. Don't depend on others to say you're right: This is perhaps the most important rule. Despite the downturn and uncertainty over the future, the dominant belief in Victoria is "You can't go wrong with owning your own home." This is especially true if you're talking to someone who: owns a home they are trying to sell; is selling a home on behalf of someone else; sells products and services that help people buy a home; or bought their current home back when the average price was less than half of what it is today (for the record, that was 2001). If you have even an inclining of doubt, listen to your gut, not the voice of anyone else.
The last post here debunked the buyer's market push marketing found in the MSM advertorials (see below). If you are a first time home buyer, and you're looking to buy a home (see point 2 above), you're likely competing, yes there really is competition, for any well-priced home in today's market that is "affordable" for the first timers. It's true there are "deals" out there; but mostly for boomers who have been in the market for decades and for those that believe April 2008 prices are soon to be upon us again.

The most recent upswing in the market lasted 10 years (prices rose, albeit slowly for the first 4 years, from 1998 to 2008 on a YOY basis). In the crash of the 1980s, it took 6 years for prices to rebound to their previous peak (built over 4 years and dropped over 4). In the correction of 1990s, prices dropped slowly for 6 years and in the 7th "recovered" to their 1994 peak (built over 6 years and dropped over 6, not adjusted for inflation of course).

Why is this time any different? Why will prices not fall further and not take longer than 5 years to rebound like in the previous cycles? Why will prices not keep falling over the same length of time as they rose (10 years) like they did in the two previous cycles? <-- click to see Roger's graph UPDATED.

The global economy has not seen an economic downturn like this one since the Great Depression. You can afford to wait. If you're a first timer thinking about buying today, you may be best served to ask "can I afford not to wait?"

Thursday, March 5, 2009

Buyer's market de-mistified

We're hearing lots of talk in the MSM these days about Victoria being a "buyer's market." Of course, as usual, most of the talk doesn't ever tell us what a buyer's market does to real estate prices: instead the talk focuses on the Now: buy now, prices have already dropped and probably won't keep dropping much more, who knows when it will end, if you don't buy now you will have missed the boat and you will kick yourself?

InvestorWords defines a buyer's market as: A market which has more sellers than buyers. Low prices result from this excess of supply over demand. also called soft market. opposite of seller's market. The emphasis is mine. Here's what it looks like graphically, not using local numbers:

In the real estate statistical world, a buyer's market is usually 6 months of inventory (MOI) or more. Obviously the larger the number beyond six, the more soft the market is and the more price pressure there will be in the market. It is important to remember that price pressure requires time: in many cases, 6 months or more for a home seller to feel considerable pressure to drop their prices.

Contrast that with 4 MOI or less being a seller's market. The lower the MOI number, the more upwards price pressure and the more bidding wars we should see. It should also be noted that in a seller's market, time windows are much shorter. In other words, it takes a lot less time to sell a house, so the momentum of price pressure is much steeper.

It's generally accepted that 4-6 MOI is a neutral or flat market. In this type of market, prices rise very gradually or stay flat.

The MSM is telling us a buyer's market is a first time buyer's market
. I'll tell you the statistical recognition of the end of a buyer's market is a first time buyer's market. Downwards price pressure will have exhausted itself by then and while total product may be less (as in less choice) it will still be normal and you will still be able to find a decent place at a price you can afford.

Here's what a buyer's market looks like locally, using local numbers graphed by Roger:

Current MOI for all property types is approaching 10. The sales to new listing ratio was 1:3 in February 2009 (for every home sold, 3 came on the market), clearly no shrinking of inventory, so no sign of shifting momentum away from a buyer's market to a neutral one.

Here's the catch FTBers: we're being told that this buyer's market is a FTBer's market. IT IS NOT YET. At least not in single family homes. A quick, rude, count of my PCS listings (houses priced under $425K with a suite or suite potential, the low-end of the market) had an MOI count of under 5. Inventory is selling very close to asking and usually above assessed value. Unless it's got problems, in which case it's not selling or is being hit hard.

All of the price pressure in the Victoria market is concentrated in SFH price $550K and above and throughout the condo market regardless of product or its location.

If you are in the market for a SFH priced $450K or less, you are not buying in a buyer's market, you are competing for a product with the most demand right now and will likely not get the kinds of deals being "smoked and mirrored" out in the MSM and industry speak right now.

You can afford to be patient. As the $550K SFH that isn't selling starts competing with the product that is selling at $450K, we can expect to see a rise in MOI throughout the FTBer end of the SFH market and then you can re-run the numbers to see which way inventory and sales are heading in order to better time your purchasing decisions.

Further homework: check out CondoHype's piece on buy vs rent and PR math.

Monday, March 2, 2009

February 2009 VREB stats

Found here.

Real estate sales rebounded in February with a substantial increase over January. A total of 403 homes and other properties sold in February through the Victoria Real Estate Board’s Multiple Listing Service® (MLS®) up 63 per cent from the 247 sales in January. There were 619 sales in February of last year. Prices for single family homes and condominiums, meantime, rose slightly. There were 3,844 properties available for sale at the end of February. That represents a 16 per cent increase compared to February of last year and a modest increase from the 3,678 properties available for sale at the end of January.

Victoria Real Estate Board President, Chris Markham, says the dramatic increase in sales is a very positive sign. "The big increase in sales over January is very good news and shows us that despite the widespread economic uncertainty we still have a vibrant local housing market." Markham added that although last month’s sales were still well below the figures for February of last year, it’s important to remember that the early part of 2008 was still marked by an exceptionally strong market. "It was not until the latter part of last year that we saw significant declines in the number of sales," noted Markham.

Markham added that overall continuing stability in prices last month is also welcome news. "The average prices for single family homes and condominiums rose last month while prices for townhomes dipped slightly." The average price for single family homes sold in Greater Victoria last month was $542,396, up from $526,148 in January. The six-month average was $544,357 while the median price was $485,250. The overall average price for condominiums was $286,985 last month up from $259,742 in January. The average for the last six months was $293,775. The median price for condominiums in February was $250,000. The average price of all townhomes sold last month was $381,383 down from $393,982 in January. The six month average was $398,036 while the median price in February was substantially lower at $360,000.

MLS® sales last month included 223 single family homes, 109 condominiums, 47 townhomes and seven manufactured homes.
Comment highlight:
Nick said,

These folks are shameless. If they were on the Titanic watching first class passengers fleeing on lifeboats, they'd be selling the steerage passengers on their prospects of moving up to a nicer room.
True, Nick. Nothing new in these numbers and nothing unexpected. UPDATE: Just spin, and quotes that don't tell the true story and mislead buyers and sellers alike to make decisions in this market based on less than full, complete and accurately compared information. Thankfully, readers of HHV have the good chap Roger and his analysis to rely on, like this: