Sunday, March 14, 2010

Advice

I write fairly frequently here and usually fairly generally. I bring the perspective of a first time waiting to buy in a buyers' market to any discussion of the housing market. Many readers here already have or currently do own(ed) homes. I'm turning to all of you today for this discussion.

Recently I've been receiving e-mails asking for advice on specific situations related to home buying and selling. I'm very reluctant to comment on these, I'm not a pro, have very little in the way of "real world" buying and selling experience, and I'm not a financial professional either. To put it bluntly, you should immediately dismiss anything with the appearance of advice on this blog as biased, unprofessional and unsolicited.

But it's fun to play with scenarios, no?

So let's do some of that now. Here's the situation:

Condo owner (family, 1 school-age child) with no mortgage and a current market value nearing $300K.

Pros: paid off, very convenient location to work and school

Cons: Getting small for family, want to be in a house, see the market falling soon

The question: should we sell our condo and rent our next home while waiting for the market to correct and then buy a house?

This is the classic sell high, buy low strategy question.

My initial thoughts were sure, why not? Put your money where your "mouth" is and act according to your beliefs/convictions about the market. But that is terrible advice. We need to crunch some numbers, right?

Now it gets really complicated. Where to rent, what to rent, how much to pay, for how long - these factors all eat into the sell high, buy low "profit."

The owners mentioned they'd be OK with renting a townhouse. I've made some assumptions here: namely that renting a 3 bedroom townhouse will cost about $1700/month, the owners would prefer to maintain their location or move to a neighbourhood where they maintain similar proximity to work/school and that if they are OK with renting a townhouse for a couple or three years, they will be OK with owning and living in it for 7 or 10.

There are a few townhouses for rent in Victoria right now. Not many, but I suspect the new demand isn't high for these kinds of rentals. There are also a few townhouses for sale in Victoria right now. Again not many, but enough to know that these folks won't likely get caught having to spend more than they'd want on one. I capped my search at $400K.

I'm assuming that the owned condo sells in the next 30 days and nets the family a minimum $250K after all fees etc are paid.

In the interest of brevity, let's say the family's options are:
  1. Sell the condo and rent a townhouse ($1700/month) while waiting for a buyer's market (let's say 20% price correction in median SFH home price $561K - 20% = $448K)
  2. Sell the condo and buy the townhouse (let's say $400K purchase price, $150K mortgage at 3.8% 5-year fixed 25 year amortization = $782 + $200 strata + $125 ppt = rounded up to $1200 to get an even number and include some maintenance $)
  3. Stay in the condo, wait until they feel the market has dropped far enough then sell the condo and buy their house [25% condo price drop ($210K), 20% SFH price drop ($448K) new mortgage of $225K]
What would you do? We don't know if prices will drop to 20% or 40% or not at all. We don't know how long it will take prices to fall to these levels either. We don't know what the cost of borrowing money then will be. It gets very hard to calculate hard and opportunity costs in this scenario because of the unknown variables.

When we get specific, we see exactly why there isn't a flood of listings by sellers looking to cash out at the peak and waiting to buy in the next trough. Personally, I'd be thinking about cashing out and moving to a city with a median house price of $250K so that I could pay cash for my "forever home." But that's just me. What would you do in this situation?

36 comments:

Bubble 'n Fizz(le) said...

Personally, I'd be thinking about cashing out and moving to a city with a median house price of $250K so that I could pay cash for my "forever home."

Sure, just quit your job and move to somewhere economically depressed enough that houses are 250K. BTW, how does a $300K paid-off condo only net $250K? Good thing you're not advising people--they'd be better off asking the local street bum what to do.

Animal Spirit said...

trolls are back!

Inglishmagor said...

Even for us non professionals and arm chair observers it's a question that you can only answer in a risk analysis kind of way.

I'm saving and not buying because I wasn't ready to purchase before 2004. If I had a place I owned I'd put stability first. Stay put in a bought asset and save the extra money I'd end up spending on mid term rent. Put $1,000 per month into a separate account and call it rent to yourself. If the market takes another year to come down you can pay yourself $12,000.

When it comes to timing who could say. If it crashes in under 1 year you would have been better off to sell now. If it takes longer than a year paying yourself the rent will cover any losses from not selling now.

With a family to worry about the squabbles over not enough room are far better than the ones over not enough money.

If only everything crashed to the point where my 2 cents were worth something.

HouseHuntVictoria said...

Wow B&F, thanks for all your constructive help.

Would you call London, Ontario economically depressed?

How about Halifax? Or Saint John's?

What about Ottawa?

*troll feeding over*

Just Jack said...

Animal Spirit said "trolls are back". No, just disgruntled home debtors.

I am hearing from a lot more friends who bought within the last 3 years how unhappy or worried they are about their purchases.

They will discuss the downside for awhile, look depressed and worried and then shake their heads and come up with some I will be saved by renting it out or some such justification.

S2

Reid said...

From my experience I would not buy another property unless you plan to stay in it for at least five and ideally ten years as transaction costs are too high. So if they see the townhouse as only a stepping stone to a SFH, then do not buy the townhouse.

If they really want a SFH and can stay in the condo for a couple more years then I would stay, save and wait until market conditions are better aligned for them.

The same advice goes to someone buying an entry level home, unless prices are low (certainly not now) do not buy the house if you plan to sell in a few years to move up the property ladder. In my experience it costs between $30k to $50k typcially to sell and buy which can represent up to 10% of value - too expensive.

As HHV suggests, ideally buy your forever house and stay there. If you cannot afford it, look to move somewhere you can.

Leo S said...

I'd stay put as long as the space restrictions aren't too onerous.

Save your ass off, you should be able to with no mortgage, and ride the valuations down a bit. If your condo is paid off, then you have likely owned it for a while, and thus have ridden the train up. So you won't be losing any "real" money on the way down (real as in "you worked for it"). I know many people feel differently, but I'm much less attached to money that just materialized like that in an appreciating housing market, than money I actually put time in for.

When you're ready to buy a house, buy it. When you're already in the housing market, its level is less important than when you're just getting in. Wait until the space causes real family issues, then move up.

Trying to time the market with your primary residence is pointless. Yes, maybe you will be up a few tens of thousands, but maybe you will be down, and certainly it will be a big disruption for your family, and lots of moving hassle. You have to ask yourself if that's really worth it. I suspect being a young family with a paid off condo, you're not that tight for money that you have to gamble with your home.

Just Jack said...

You have to know more about the people. What level of risk they are willing to take. Are they risk takers or risk adverse. Are they willing to rent a town home and see prices continue to increase? How old are they? Are they financially secure?. Is there only asset real estate?

But in a nutshell. If your young and your only asset is real estate, even if the real estate market continues to increase, it would be better to get out of real estate, rent and improve your financial portfolio, RRSP and TFSA's. The affect of compounding, when started at an early age, is one of the biggest steps step to being financially secure. You can't get your youth back. You can at any time buy real estate.

A bird in the hand is worth two in the bush.
Better to have $250,000 in cash than $250,000 in home equity.

The bigger they are - the harder they fall.
The higher the market goes - the bigger the fall will be.



There better off talking with several financial planners that have different points of view, and then making their choice.

HouseHuntVictoria said...

Just Jack,

Moving will cost them, staying put is the cheapest option. They can diversify quicker by not moving, either renting or buying.

I completely agree about seeking professional financial planning advice.

maniac78 said...

I'd move up to a forever house no question about it. You could probably make it happen and end up with a mortgage of about 250k which at today's rates is way less than rent even on a 15 year amortization. Yeah sure the market might tank later but who really cares if you plan on staying in your home for the long term anyway?

bullbear said...
This comment has been removed by the author.
bullbear said...

Surprising how quickly BC, AB, SK sales/list ratios are shifting (..i don’t follow Eastern).

http://agentwill.com/weekly-stats/

Looks like we’re fairly synchronized with US, UK`s double-dip this time..

http://www.telegraph.co.uk/finance/economics/houseprices/7442568/House-prices-on-verge-of-double-dip.html

think said...

Well, the trend continues, enjoy the numbers...

sales 146
new listings 371
total listings 3453

sell/list ratio 39%

Interesting to note that sales to date for March are 308 - if this trend continues we will have less sales than in Feb. Also note that total listings is growing steadily. Overall, sales continue to be at best "typical" and maybe even showing signs of weakening and the new listings just keep piling on. A sell/list ratio of 39% is solid bear. Enjoy and lets hope it keeps going :) This market correction is so overdue, glad it is here now!

Just Jack said...

I think this is more about risk and missed opportunities. If they don't have any RRSP's, then the tax rebates are going to be significant. How about a RESP for the little one.

$250,000 in cash can provide a lot of financial security for the years to come. Real estate should be in their portfolio, but if they loaded up their RRSP's and the market corrected, they could give themselves a self directed mortgage on their next home.

So, you would have to play a worse case scenario if you sold and rented assuming that real estate continued to increase forever.

They would be fully loaded up in their RRSP's
They would be fully loaded up in their TFSA's
They child would have an RESP plan

And they would be renting until, they had maxed out enough in their RRSP's to give themselves a mortgage.

It would be pretty cool to have all of this done by your mid 30's with another 35 years of compounding interest to go. Having the money working for you. It would be like adding another income to your family.

My way of thinking, is that this is an opportunity that has never existed before. To sell an asset that will develop a future income stream and security.

But, the asset isn't gone. A home can be bought at any time with 5 percent down. In the event that we have a US style meltdown that opportunity to develop a future income stream may never be present again.

HachiRoku said...

I know it's only anecdotal evidence but driving around town this weekend with my wife we noticed a marked increase in for sale signs which seems to confirm the listings numbers from Think.

Just Jack said...

I dusted off the bike this weekend and took a tour through the Garden City and saw a lot of RE signs too. A lot of them were in Oak Bay which were up for sale the last time I went biking. Which was a couple months and several pounds ago.

jesse said...

I would never give advice to someone to temporarily rent if their primary objective is to speculate on future lower prices. If their lifestyle allows that renting, say, a house or townhouse is equivalent to owning a condo, I would sell now. If renting is considered inferior for whatever reason I would stay put and buy a larger place when prices are lower (ensuring they are actually saving for a larger down payment in lieu of a mortgage).

Double-Agent said...

Think - You are a true bear and these charts are for you!

Sales and New Listings slow down last week

Active listings jumped last week

Expect lots more listings in the future

Double-Agent said...

Last year was an unusual year because we had the economic meltdown and interest rates dropped like a stone.

This year is beginning to look like 2008 all over again. Sales and active listings in Feb. 2010 are at Feb. 2008 levels and climbing fast just like 2008. More new listings every week just like in 2008.

Sales, active and new listings - pdf

What about prices? Average prices peaked in Dec. 2009 and have been falling for two months.

Average Prices in Greater Victoria - pdf

Next month the new CMHC qualification rules kick in and economists are predicting interest rates will start rising in June. Active listings will keep rising until September like they do every year.

Get ready to stick a fork in the RE market. Its almost done!

Just Jack said...

I don't think there is anything wrong with giving someone your opinion or advice. I think it is better for people to read different points of view and then weigh the issues and make their own informed choice.

The only bad advice that I have ever had in my life is no advice. Maybe its different today, in this age of zero accountability where people need to blame someone else for their own failings. When following the pack is safer and more important, than making your own path.

Right or wrong I made my own path and sure I made big mistakes, but these are my mistakes and I own them.

think said...

Thanks for the graphs Double-Agent, you and I certainly see things the same way ;)

JustWaiting said...

Financial Post reports:

Pricey real estate points to faster rise in Canadian rates

Baribeau argues that Canada’s financial regulators are enjoying a brief moment of glory before the reality of a housing bubble hits. As she points out, home prices in this country have reached levels that appear remarkably similar to the bubble peaks in the U.S. housing disaster. “If prices fall (as they did in the U.S. before the crisis) Canadians stand to face the kind of pain that Americans and Europeans have been facing over the past year, just with a time lag.”

Financial Times of London article:

Carney on eating Canadian asset cake

Canada isn’t just alone in avoiding a bail-out of big banks, it’s also one of the few countries that hasn’t seen a major decline in housing prices. And it’s not because the country avoided the bubble in the first place - Canadian home prices are now approaching the levels US home prices saw at their highs.

JustWaiting said...

Follow up post.

The International IMF published an interesting and informative article called "Housing Prices: More Room to Fall?"

You can read it by clicking here

Canada sticks out like a sore thumb. Take a look at these charts.

House price changes worldwide

House price-rent & House price-income ratio

If Canada is due for a correction what about bubbly BC with the highest house prices in the country?

Just Janice said...

Sell. Rent. Buy later (when the numbers make sense).

No decision in this scenario is 'free', all involve costs (some are better known as opportunity costs), some involve lower costs than others. Further nothing in this scenario is risk free.

If they sell now and put the money in the bank, that money earns interest ($275,000 after commissions, etc. @ 3% = $687.50 per month). That amount should be deducted from the amount you would pay in rent, as its money you get by selling and earning interest on the money. Conversely, if they stay put, it's part of the cost of owning and should be added to their monthly costs. They also pay property taxes (est. $100 per month) and condo fees (est. $200 per month). Therefore the 'rent' associated with this 'paid for' home is probably $987.50 per month...assuming no price depreciation.

If the condo market corrects by 25% you can add to that an additional $75,000 in cost. That's a heck of a lot of 'rent' to pay for staying put and instead of having $275,000 to put towards the next place, they'd likely only have $200,000.

Renting has certainty associated with it. The costs of renting over the next year are certain, as are the benefits. What is uncertain is what the market will do in the interim with respect to interest rates and prices. What is also certain is that his present place is too small. So he can either buy in to the market even more at an even greater risk in the event of a correction, or he can rent.

At the end of the day though he needs to make up his mind about what is best for him. If I were in the same shoes, I'd sell, find a place I could like to rent for a while (do the math on the rental versus ownership costs in terms of 'opportunity costs' and other ownership costs - ie. property taxes, opportunity costs on downpayment, maintenance) and be happy.

omc said...


Some more bear scat

kunwak said...

Just Janice,

you did not mention taxes in your calculation. They would affect the income stream from the money in the bank, no?

caveat emptor said...

If they want the house really badly (i.e. feel they will greatly benefit from the INTANGIBLES of home ownership) and won’t be stretching hugely to buy it, then buy the damn thing and stop hanging around bear blogs ;-) This is especially true if they have very secure jobs and/or are very sure they want to live in Victoria for a long time. Inflation will probably skate their house purchase on-side (in nominal terms) over the long haul.

If they have to stretch to buy the place they want they would be better off waiting a few years in their current situation if it isn’t intolerable. Save money aggressively. Their condo value could fall, but likely the house they want will fall proportionally which will still produce a savings (the house falls same % but more $ since it is probably twice as expensive).

If they sell they face immediate transaction costs, they also face a crappy investment environment for their $ in the short term. GICs are currently pathetic as are bonds. Stock market returns should be adequate over the long term. But over the short term (1-5 years) it wouldn’t make sense to put their proceeds in the stock market if they are waiting to jump back into housing. The scenario that caused a rapid plunge in Victoria home prices could also cause a plunge in the stock markets. That said if they value flexibility and mobility maybe the selling and renting option makes sense. Also if they use that cash to top up RRSPs, TFSAs, RESPs etc they will be more financially secure than the vast majority of Canadians. If they sell, they should sell because they are sold on the benefits of renting (flexibility, mobility, diversifying their assets, etc.)

My worry about selling ONLY to take advantage of the coming plunge in house prices is that the “plunge” might be in slow motion and might last years. The “plunge” might even just consist of stagnant prices for ten years so that house prices fall in real terms, but hardly at all in nominal price. Or the “plunge” could happen soon and be a true plunge of 20 to 50%. Even if housing prices do plunge there is no guarantee they buy the bottom. So they are unlikely to get the full theoretical benefit of their strategy. Finally, selling JUST to wait for the plunge makes them heavily invested in one possible evolution of the housing market. That adds one worry that they probably don’t need.

How’s that for an ambiguous answer ;-)

JustWaiting said...

OMC,

Thanks for the link to that article. I see it is now online at the Times Colonist - click here

Canada's hot housing market now cooling off

Should be in tomorrow's paper. A local article by Darren or Carla may appear later this week. This is what bears like to read...

"Time will tell how normal the market becomes, but I think there are pretty clear signs that some self-correcting mechanisms are starting to take over and lead to a calmer market, compared to what we saw in late 2009," said Douglas Porter, deputy chief economist at BMO Capital Markets.

January and February are generally not considered great months in the real estate industry, as potential buyers put off house shopping until the weather improves. Still, Porter said each month's data are crucial, and he recalled that weak sales in the early winter of 2008 foreshadowed a downturn in real estate that year.

wsxwhx701 said...
This comment has been removed by a blog administrator.
Inglishmagor said...

I'm curious if others have the same glimmer of hope I do. I've been lurking on this blog for a few years now waiting for the downward trend to start.

Last year I finally saw the end to the market as fundamentals came home to roost and the housing market hit a wall. With everywhere else in the world going through tough times I didn't think our government would throw more fuel on the fire... then the interest rates dropped to the lowest level in our history.

Fast forward to the present and I think something major has changed. It looks like the government isn't going to topple the housing bubble on its own, but has stepped away from it refusing to help it any further.

So... in a very long winded way, I feel some hope. The upward market appears to have run out of it's own steam and for the first time I can't see anyone around who will throw more coal into the burner. Even if it finds a few more miles of track, does anyone see an external source on real estates side?

patriotz said...

Financial Post reports:

Pricey real estate points to faster rise in Canadian rates


Notice that the Financial Post talks a different line from the TC, Sun, etc. although all are owned by Canwest?

Reason is the FP is marketed to people who actually know something about finance and are not a bunch of dupes like the readers of the local papers.

Robert Reynolds - GBA said...

From Mish

Canadian credit bubble in pictures

Yowza those are some steep graphs.

PainInThe said...

"Sure, just quit your job and move to somewhere economically depressed enough that houses are 250K." - B&F (Bull and Fake)

Just for your information, there are plenty of places in the US where nothing is "economically depressed" save real estate values where $250k can get you what would cost well over a million here. There are millions of people still working in Las Vegas, Phoenix, and Southern California with good well-paying jobs.

Just because you and a group of fools accept ridiculous bubble prices far above what average people can afford doesn't mean they are representative of a good economy, or that they're going to last.

Once again, you merely reveal your elitist conceit.

PainInThe said...

Make that "Bull and Flatulent"

WiseInvestor70 said...

Has anybody seen the amount of properties coming out for rent in websites like craiglist and kijiji lately, I would say we will see a huge correction in rentals in the next 2 months

PainInThe said...

Yep... I've been predicting that on here for years. Goes hand in hand with folks fleeing after the "Olympic bounce" turned out to be the "olympic SPLAT".