Monday, September 20, 2010

Monday market update

Numbers courtesy of VREB via Marko Juras.

2010 (2009 September monthly totals in brackets)
Net Unconditional Sales: 185 (776)
New Listings: 779 (1,129)
Active Listings: 4,214 (3,419)

There are nine business days left in the month. Will sales volumes hit 300?

Prices are falling quickly, although the average price as reported by VREB will likely show a monthly increase in September from August.

Here's a snap shot of price action in September, again courtesy of Marko.

Price Original = $643,469
Price List = $630,605
Price Sold = $606,730

Sellers are accepting offers, on average, 6% below their original price.

I'd be curious to know what average days on market is now: 61 says Marko. Correct me if I'm wrong, but that seems to be around a 100% increase from one year ago - I was wrong, as per Marko, 51 DOM was average September 2009.

35 comments:

omc said...

Wow, go away for a week and the market really goes for a poop.

First thing I did when I got back was check this site for the numbers, thanks for that.

Marko said...

Average days on market is 61

Jack said...

That means that the projected is 313 sales for the month which means a 60% drop in sales YOY.

This also means that MOI should still be 12+ at month's end.

Marko said...

When I search last years SFD sales average days on market was 51.

Marko said...

Last year for all of September that is.

Marko said...

I don't think days on market is a good indication. Well priced properties will sell in any market.

Problem is people are re-listing. So you could have a property on the market for 90 days, re-list it, and it gets sold in 5 days the DOM will be 5 days for that home.

Jack said...

Good point Marco.

Another example is a house that is on the market for 6 months at a price nobody would ever pay, then gets reduced to a sellable price and sells in 2 weeks. The DOM is around 200 but it should really only be 14.

The actual stat needs retooling I think to something like "Days on Market at last list price" or something to that effect. But then places that reduced only $1000 would restart at 0.

Most stats have things wrong with them. Take MOI for example. Suppose there are 100 houses for sale and 10 houses sell every month. It appears that MOI is 10 and it is a poor market. But what if 50 sellers have houses listed for sale at unreasonable prices and they will never sell? What you actually have are 10 buyers fighting over 50 properties and not 100 properties so the actual MOI is 5 and not 10.

jesse said...

Sales with low DoM should be, in general, a reasonable indication of the "market setpoint," especially for lower priced listings in falling low-volume markets.

In rising markets, low DoM sales would seem to be intuitively less indicative of market price.

Higher priced luxury stuff is probably all over the map regardless.

Robert Reynolds - GBA said...

Mohican at

http://housing-analysis.blogspot.com

has a good model of price change vs. Months of Inventory.


graph

This graph is based on the Fraser Valley, but I think that is a "fairly" comparable market to Victoria.

So based on Mo's analysis if we are at 12 MOI as Jack says, then we should be seeing a price decline of approximately 1% per month.

If DOM is 61 as Marko says, and accepted offers are on average 6% below asking than prices are declining faster than the model predicts. Victoria RE prices are dropping at 3 times the rate Mo's Model predicts at 3% per month. A rate which the model would predict should only occur with 23 months of inventory.

/pretending to be a statsguy

Robert Reynolds - GBA said...

I have, in the past, looked at real estate as a potential investment. Not a buy and hold speculative investment, but buy and rent to produce income.

I have looked at a number of properties over the years, mostly triplexes or larger, and very few if any ever provide a decent ROI. This has much to do with how out of whack Victoria prices are with rents. If I am going to take on that much leverage, and that much extra work being a landlord I want at least a 6% ROI improving as debt is paid down.

I found a property recently which almost fits the bill.

MLS 282920

is a heritage designated (low property tax, high maintenance cost) fourplex with a detached "cottage". It consists of 3 batch, 1 one bed, and a 1 bed+den cottage.

The idea goes I would live in the cottage, and the rest of the house would be rented out. Approximate revenue, $31,740/y (100% occupancy). Assume you do some haggling and get the price down to $650,000 that is a Gross ROI of 4.8%

Not too shabby, not net 6% but still not bad.

Assuming $600,000 in mortgage @ 3.75% for 5 year term, 25 year am. (dunno if 20% down would apply as I would live on the property) that is $36,900 in mortgage payments for the year. Add another 4K for taxes, and say 6K for maintenance/opportunity cost/other and the property is cash flow negative by about $15K a year.

I already pay $1300 a month in rent for a suite in a large house, in a similar neighborhood, so assuming all goes well I am basically in the same dollar position as renting.

Difference being I would have a second job managing the building and tenants. I take on a lot of risk for capital projects (roof, reno's etc.) as well as exposure to changes in interest rates yadda yadda.

Upside, in 25 years when the property is paid off, I have 50% of my retirement income paid for. I can leverage off the property, or develop it later on. The property might appreciate in value as well.

So lots of good and bad, but this is the first property in 3 years that has been close to making sense assuming I am willing to take the risk.

I don't plan on buying it as I expect better deals down the road. but still not bad all around.

I am not sure how income taxes/capital gains would impact the picture. My thinking is to incorporate a RE holding Co. and treat the property as a business. You loose the capital gains exemption on primary residence, but gain a lot of other tax breaks inside the corp. Also, I am not hunting for a big capital gain, income is the goal.

Just Jack said...

4.8% is not your return on investment. You haven't deducted your operating expenses. You still have to deduct things like insurance, taxes, water, garbage collection, gas, oil, business license, maintenance, accounting. Depending on the buildings mechanics and state of repair (or disrepair) a minimum of $15,000 in expenses - but probably closer to $20,000.

Rents look to be a full market rate, so I would build in a vacancy rate for suite turn over of 3%. Its in a high demand area for rentals, but there is a lot of turn over in the area so there is always suites to rent.

Gross Income $46,140
Less Vacancy 1,384
Less Expenses 20,000

Net Income $24,756 or basically the cost to paint the exterior of the building.

Rate of Return on list price 3.6% on $650,000 its 3.8%. On $600,000 its 4% before inflation. Not much fat there to build a reserve for replacing or repairing things.

Its also a legal non conforming property, so if it is significantly damaged you can't build five suites and you can't build that size of home again. If the converted garage/cottage is burnt - good bye to the income you can't rebuild.

And the above ground area of the home is small with a 1000 feet in the main, some 700 up and 700 in the basement. So the improvements or the land is nothing to write home about and that just leaves the income stream.

I think you can get a better rate of return in the bond market than 3.6% and without the initial purchase costs.

The property sold six years ago for $523,000 and a decade ago for $245,000. Prices are up 52 and 144 percent since it sold last. This suggest that the current owner got suckered by the income stream and did not think of the building and ended up overpaying because, like you said, it probably is worth closer to $600K or $250 per finished square foot. Which is about the same price as a house - and why not - because isn't that what it really is - a house, because it's not an investment grade property. I mean someone working part time at a gas station makes more money than this property does.

Marko said...

I was just talking to one of my neighbours this morning and he is looking to buy a smaller cash cow (home with a suite) within walking distance of his personal home here in Fernwood.

His rationale is he is young and retired (early 50s), on a fixed income, and has about 300k in cash and his property is paid off. He is worried about inflation eating into his fixed retirement income over time and would like to buy something in the next 2 years ~ he is willing to wait for the right deal.

I thought that was interesting.

Returns on triplexes and cash cows seem to be much better in less desirable areas, implying that people price in appreciation into revenue properties as well not just the return.

Just Jack said...

You're rate of return should be better in Esquimalt rather than Oak Bay, to compensate for the greater risk, higher vacancy, bad debt and some really creepy renters.

As for appreciation, you may think Oak Bay appreciates more than Esquimalt, but it doesn't. The percentages are the same its just bigger numbers. Anyway, appreciation should not form part of your investment strategy. The potential for higher rents or reduced costs, that should - but not appreciation.

In otherwords, leave the BS out of it and give me the bottom line.

Marko said...

"You're rate of return should be better in Esquimalt rather than Oak Bay, to compensate for the greater risk, higher vacancy, bad debt and some really creepy renters."

I was thinking more along the lines of Fairfield versus Fernwood. In both areas you can get solid renters; however, the triplex on Moss street will have a much lower return.

But yes, you make a very valid point.

bullbear said...

Robert,

Completely agree with Just Jack. And your turnover on batch’s would drive you nuts. Landlords consistently underestimate expenses, especially utilities & vacancy when analyzing older multi’s. I’d never settle for such a low ROI for that kind of rate risk and headache - certainly never live anywhere near it (ie. the backyard cottage). Far better off to continue renting and buy in higher potential growth areas like Calgary with professional management. That’s where you might achieve 6+% ROI’s and maintain your sanity.

Just Jack said...

Moss Street has a lower rate of return, because the market value is higher, not because it appreciates any faster than Fernwood.

Forget that its a triplex, think of it as a house. There is very little difference between the value as a triplex and that of a same size house in the same area. Because the net income from the property is crap. So, in the case of Fernwood, the property might gross $40,000 a year. If it were a house it would cost $550,000. As a triplex its $600,000. All your doing is buying yourself a job.

Marko said...

"Moss Street has a lower rate of return, because the market value is higher, not because it appreciates any faster than Fernwood."

Why would market value of a triplex be higher on Moss than in Fernwood given rents are the same and the property is not development potential? Hypothetically the investor is not living at the triplex so he or she is not willing to pay extra for the area.

Percentage wise appreciation has been relatively close in most areas; however, I think this will change going foward. If you have a triplex walking distance to downtown I think this is going to be a big plus in the next 10 to 15 years.

DavidL said...

@ Robert Reynolds - GBA

Someone has to ask ;-)

Why the rush to invest when prices are falling? Let's say that you are approved for a 600K mortgage and that selling prices go down 10% within the next year. (That is, a similarly valued rental property would only require a $540K mortgage a year from now.) Wouldn't you want to save some money and wait until the "bottom" of the market? In the meantime, your down payment could earn interest in a "safe" investment.

Just Jack said...

Well Marko

Mostly because triplexes are just houses with suites or mortgage helpers. The person lives in one and rents out the other two. The highest value of the property is in home ownership rather than as a going concern. Now if it was a 20 suite apartment building on a small lot, that would be an investment grade property where the income was more important than the location. But, if it were on a big lot, then it would have development potential for stratas and then the location might be more important than the income stream.

Over the last decade, the greatest run up in prices since Moses parted the red sea thereby creating the first subdivision of real estate, appreciation in different areas of the city have remained the same

What ever would make that change 15 years from now. If it hasn't happened by now - it ain't gonna happen. And besides, being closer to downtown does not mean prices are higher. Do you really want to live/rent or buy around Pandora and Quadra? The homeless and their shopping carts are up in Fernwood now, where will they be in 15 years?

Marko said...

"If it hasn't happened by now - it ain't gonna happen."

$3/litre gasoline still has not happened here either.

mrmike said...

Coast capital is offering a program called blend and extend.
Anyone know the cons of this?
thx.

DavidL said...

@Marko wrote: $3/litre gasoline still has not happened here either.

Aren't you are comparing apples and oranges ...

There are finite amounts of gasoline/crude oil and consumption increases every year. Unless you know something that I don't, real estate consumption is dropping and it is renewable (teardown/rebuild).

DavidL said...

@mrmike wrote: Coast Capital is offering a program called blend and extend.

You may find these links useful:
[1] http://www.canadamortgage.com/articles/learning.cfm?DocID=24
[2] http://www.ratesupermarket.ca/best_mortgage_rates/

mrmike said...

@ DavidL.
So this might be a good option.
My wife thinks so.
Back in oct 08 when the sky was falling we locked in at 4% 5 yr fixed.
Now if we blend and extend we pay $100 fee and get 3.59%
This seems to good to be true?

DavidL said...

@mrmike

I'm reluctant to suggest mortgage advice, as I don't feel I'm qualified.

Regarding my own mortgage ... over the past 8 years I have saved significantly with a closed variable rate mortgage. For five years I paid prime - 0.8% (in June this was 1.45%) and renewed in July at prime - 0.6% (currently 2.4%).

You may find these articles useful:
[1] http://www.canadianmortgagetrends.com/canadian_mortgage_trends/2010/03/ideas-for-choosing-between-a-fixed-and-variable-rate.html
[2] http://www.canadianmortgagetrends.com/canadian_mortgage_trends/2009/02/fixed-or-variable-updated-perspectives.html

mrmike said...

@ DavidL
Thank you so much for your advice.
Bit of a rant here...

I am a tradesmen, journeyman carpenter to be exact, and I can feel it, like a 6th sense...you can almost smell it in the air, that jobs will be slim to none in the coming months.

I was just a kid in the 80's but saw what a recession can do.
My Dad was a builder.
I want to be prepared.

We bought our home back in 99, still owe around 200k to the banksters.
2800 sq/ft shack on 10,000 sq/ft lot in westshore (stones throw from canwest mall).

I threw in a basement suite, rented for a few years...but i hate tenants and gave that up.
(but can always go back).

I see hard times coming,If this blend and extend will give me another 5 yrs fixed rate at only 3.59% This would be very good for us.

I have a wife and two young boys. my only objective is to sustain until things rebound and the jobs come back...if ever.

I could go split firewood and make my mortgage\bill payments.
But anything to lighten the load would be very useful...like this blend and extend, its only $100 fee at coast capital.

I feel very sorry for the over extended young families.

Robert Reynolds - GBA said...

Just Jack said...

4.8% is not your return on investment. You haven't deducted your operating expenses.


That is why I said 4.8% Gross not Net. Net return is essentially zero

bullbear said...

your turnover on batch’s would drive you nuts.


Agreed as well, why I referred to it as taking on a second job.

DavidL said...

Why the rush to invest when prices are falling?


No rush, I don't plan to buy it as i said in the post. I was more showing that this is the first property of this type i have seen in 3 years which is almost a decent investment. I fully expect there to be better deals out there shortly. I have only found one other property that would produce a decent ROI in the last 3 years so this might be the beginning of the turning of the tide.

Reid said...

mrmike, I think you cannot go wrong with locking in for five years at that rate today. Peace of mind you get from knowing your rate is fixed for five years is well worth it if you have concerns about future income levels.

Your comments about work in construction are consistent with a community rep I met last week in the North Okanagan. She told me that construction and renovations have basically come to a standstill there about three months ago. She says there are a large number of people in town (Vernon's economy is heavily dependant on construction) who are very concerned about cash flow and meeting their financial obligations. She says the concern is as high as it was in late 2008. The real estate market has also died there since April, but prices are much further off their highs than we have see here in Victoria.

jesse said...

"I feel very sorry for the over extended young families."

I feel sorry they took such big risks with investment without realizing it. I'm all for personal responsibility but there is some culpability with the older generation not instilling financial common sense into their now adult children.

And many are effectively sharing the burden with their children. This is done by underwriting loans, help with mortgage payments and downpayments, daycare, renovation help; the list goes on. For those who haven't yet done much for their mortgage-indebted children, what will they feel if prices fall significantly? Did they in their wisdom warn against taking on too much debt or did they encourage it or tacitly approve by sitting idly by? That's one helluva guilt to carry into retirement!

On the plus side, it might bring families closer together :)

Just Jack said...

I know you called it a gross return on investment. It seems like your trying to do two things in one equation. There is no such thing as a gross return on income they way you have done it. What your most likely thinking of is a gross income multiplier which is the market value divided by the gross income less vacancy and bad debt. Which is the inverse of what you're doing. The GRM is a quick and easy to understand way to compare one property to another - its not a ROI. But its like using a meat cleaver to remove someone's appendix. It will work, but it ain't pretty and the patient usually dies. Good for the first pass through a list of properties to weed out the winners from the losers.

If you insist on doing it your way, other investors have no idea what you are talking about. And now you can't compare one ROI to another ROI.

The GRM works fine as long as your property has similar types of expenses that are paid by the owner. It fails when you compare a property where the tenants pay the utilities to one where the landlord pays some or all of the utilities or some physical aspect of the property is out of whack with the others. That's why you would use NET income before debt servicing.

Otherwise, you are overstating your ROI. Which is okay if its for you personally doing the investing but if you are trying to entice investors then you are either misleading your investors or incompetent. Which are two things you don't want on your resume.

All said and done. A lot of the ROI's I see advertise are wrong. That's why you shouldn't trust them. Always get the income and expense statements for the last couple of years. And go through them to see if the owner is excluding or minimizing the expenses to make the net look better than it is, and if the vendor has deferred repairs. Any type of repair that is needed in the next five years should be fully deducted from the asking price. Anything over five years is most likely normal wear and tear that you can build up a reserve over time.

And check the rents - to see if they are too low or too high. This is probably the NUMBER ONE item that will make a property a good investment. If you can economically remodel the suites and get a significantly higher rent, you are way ahead of the game. There are a ton of other ways too.

bullbear said...

..to add to Just Jack's great points, we looked at a 20-suiter once where the owner understated the util's by more than $1000/mth and overstated the rents by almost $3000/mth (went door-to-door to get true rents). We still ended up buying it since the cap rate remained over 10% and it had great capital appreciation potential at the time - transitional area & condo conversion potential. Anyway, yeah you always gotta do your homework on both income & expense side to reveal the 'real' ROI.

Robert Reynolds - GBA said...

Just Jack

All good points.

Mr.4AM said...

2011 = Is when the oldest babyboomers start to retire, and then that trend will carry on for another... 19 YEARS!

Considering a significant percentage of Canadians have no retirement savings, considering older people will be strapped for cash and not need or want larger homes (just wait till inflationary forces start to really rear their ugly heads); one of their key alternatives is to sell and downsize (there's other less popular options too - see link below).

When that happens, guess what that's going to do to housing prices? For a more in depth BabyBoomer story on the impact of housing demographics with charts & details, ZH provided a good read today.

Mr.4AM

omc said...

More bear scat to soften the market

Alexandrahere said...

Check out 1337 Tolmie...original asking price $869K now asking $699K.

This is a really neat house. I saw it when it was brand new. They have looked after it well. The main kitchen cabinets and flooring.... (I remember that flooring) are original.

I remember the one thing I didn't like was the master bedroom was on the top level and was accessed from the kitchen.

This house at that price has not held it's value when I compare it to others that are similar and that have a spectacular view right in town.