Saturday, October 20, 2012

What bottoms look like.

Well it's 200 comment time again...

But first, kudos to new poster lolatengo for pointing out that the sales/new listings ratio was incorrectly stated in the last update.  The sales/new list in the second week dropped from 38% to 34%.  This is actually highly unusual, since sales/new listings generally starts off low and increases throughout the month (since the beginning of the month brings a flood of relists).  Have we ever had a decrease from the first to second week of a month?

Back to market bottoms.  After almost buying a house a few weeks back (had an accepted offer), we've changed our minds and decided to move and rent a house for another year or so.  This is for several reasons:
  1. The houses in our price range still weren't quite what we would want to live in for the long term (15+ years).  
  2. Hard to swallow dropping half a million on a place and still needing to spend tens of thousands on repairs with the associated disruption/stress.
  3. Market is increasingly weak, so the chances of it being advantageous to wait are high.  According to Roger's rent vs buy calculator, if it stays flat, we break approximately even and can afford a better place in a year.  If it declines we save whatever the decline was.
Of course one thing to consider is how long the correction will last.  A common argument is that timing the market is impossible, and if you wait too long you'll miss the chance and have to buy when the market is recovering and competition is fierce.   

So what about past corrections?
  • 90s - 5.5 years from peak to trough, during which time conditions were favourable for buyers with lots of selection.  It took 7.5 years for nominal prices to regain their previous peak.   
  • 80s - The decline was cliff-like and lasted 4 years.  Again it took 7 years for nominal prices to regain their peak (11 until real prices caught up!).  
  • 70s - 4 year peak to trough until the bubble of the 80s started.
Our peak was in early 2010, so I think we can safely assume that our correction has at least 2 more years, and likely more after that.  I'm not worried about missing the boat anytime soon.  (By the way, for those who like to look at prices as flat since mid 2007, and thus would define our correction as already 5 years old, by that measure the 90s correction was over 8 years long).

As for timing the exact bottom, it certainly doesn't seem like there the MOI will give us any sort of predictable head's up.  When the market decides to recover, MOI falls off a cliff and prices start rising.
Victoria MOI and SFH Median for 90s market bottom (click to enlarge)
King County (Seattle) MOI and SFH Median for their market bottom
It is likely much more useful to look at affordability measures to gauge approximately how much longer a correction will continue for.  

Extra graph:  Sales to new listings ratio from 1990 to 2012.  Note that in the last 2 years we've seen the lowest sustained sales/new listings ratio in 20 years.  Crazy extrapolation:  More people than ever are listing but not able to sell.  We're building up pent up selling demand.





66 comments:

patriotz said...

According to Roger's rent vs buy calculator, if it stays flat, we break approximately even and can afford a better place in a year. If it declines we save whatever the decline was.

This implies that for your target property ownership costs are about the same as renting, which sounds unlikely. Could you tell us what the property would sell and rent for today?

Also the median price seems to have exaggerated the bounce from the bottom for Seattle (which it often does in the short term). The aggregate C-S fell 34% nominal off peak and is now about 27% off peak.

Note that yours truly uber bear is predicting 25% nominal off peak for Victoria.

Again thank you for the fine graphs.

totoro victoria said...

Well, congrats on the decision Leo. Must be a relief not to be on the fence for a bit.

For what is is worth in predictive backup power, I agree with you on your views of market conditions. Your graphs are great.

Based on current economic conditions and interest rates I don't see the market rising - despite the CMHC quarterly report saying it is likely that prices will rise a bit in 2013. I also don't see them falling steeply.

Rising listings and fewer sales affects consumer confidence. Local consumer confidence is also affected by all those stories out there about Vancouver's market stalling.

A drop in consumer confidence will likely gradually affect prices and what some sellers will accept for their properties after they have been on the market for a time.

Thank you to Victoria and A Simple Man for the well wishes. We are now experiencing the "stress and disruption of a move". I'm trying to keep the perspective that it is forced decluttering, but I'll be happy when we are fully set up. I appreciate the offer to help A Simple Man, but we've finally reached the stage in life where we hire movers :)

Also, all the comments on PCS changed my mind on signing up. I feel better knowing that it is not taking advantage given that I may buy a property that is listed by a realtor.

As an interesting aside, a friend just relocated here from Regina. She had bought a condo in Regina for $399 000 in January and sold it last week for $510 000. Yes, $100 000 plus in ten months. Had no idea they had an economic boom and housing shortage going on right now.

Finally, Patriotz, may I suggest you change your id to "uber bear"?

a simple man said...

I was kind of afraid to look at the images accompanying this post.

Totoro - I am an bit of an ox, so I am always invited to all my friends' moving "parties". I actually love moving day, so much excitement setting up a new home - lots of work, but I always go to sleep with a smile on my face (rarely on a set-up bed). Moved a lot of times in the past six years - five houses. Moving is an art, especially with as many kids as we have.

Leo S said...

This implies that for your target property ownership costs are about the same as renting, which sounds unlikely.

$1850 rent, $550,000 house (well, house was cheaper but I'm adding the cost of the immediately necessary repairs to purchase price).
We're renting almost the exact place that we would have bought, so it's very comparable. To be conservative I put in very low returns for our down payment into the calculator (1.5%). Future price stays the same, interest rate stays the same.

dasmo said...

Great graphs as usual. I think it's allways a good idea to be methodical with a huge and risky move such as buying a house. It's the oldest sales method in the book to create a sense of urgency. In reality it was only about three or four out of the last twenty where it actually was urgent. When I bought in 2003 I had to laugh when an agent told me to hurry because " he was signing deals on the hoods of cars". Don't let hype cloud your judgement...

Leo S said...

@simpleman I was kind of afraid to look at the images accompanying this post.

This might not be the best post to google...

I actually love moving day, so much excitement setting up a new home - lots of work, but I always go to sleep with a smile on my face (rarely on a set-up bed).

Yeah! Moving is supposed to be stressful, but I like it. Sure some of it is annoying (changing addresses), but I enjoy going through my things and throwing out/donating the stuff that I haven't used since the last move, and then the excitement of being in a new and better place and back to a neighbourhood that we prefer. First time living in a house, so I'm looking forward to having a garage and not having to go down to the storage lockers for everything.

Leo S said...

When I bought in 2003 I had to laugh when an agent told me to hurry because " he was signing deals on the hoods of cars"

May well have been true back then...

patriotz said...

$1850 rent, $550,000 house

Even at 3% your capital costs alone almost equal rental value.

That's a price/rent of over 300, every market in the US (including Seattle which hasn't come down as much as some) is below 200 AFAIK.

Price/rent 107 in New York City

DavidL said...

@Leo S

That $550K house will cost you another $450 per month in TIM: property Taxes, house Insurance, and basic Maintenance. Was this factored into your decision?

DavidL said...

Basic maintenance costs about $175/month and covers things like flooring, furnace/heat, water tank, any fixed appliances, minimal paint to exterior or interior ... the things that you might call the landlord to fix.

Leo S said...

That $550K house will cost you another $450 per month in TIM: property Taxes, house Insurance, and basic Maintenance. Was this factored into your decision?

I am using Roger's wait/buy tool. It takes all this into account.

The breaking even happens if prices in a year or two are still exactly what they are now. I fully expect prices to decline, but I've been looking at this long enough to have a healthy uncertainty about what will happen, so I wanted to make sure that even if prices don't decline we wouldn't be making a mistake by waiting.

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

LeoS

You live in the same house while the home owner shoulders all the risk. Renting is coming back into vogue.

http://www.theglobeandmail.com/globe-investor/personal-finance/mortgages/downsizing-to-condoland-why-its-best-to-rent-not-own/article4619669/

In terms of prices falling. My significant other and I have a competition to find the lowest price to assessed ratio. Here are some current leaders...

78%
http://www.realtor.ca/propertyDetails.aspx?propertyId=12524928&PidKey=2058744996

64%
http://www.realtor.ca/propertyDetails.aspx?propertyId=12517147&PidKey=-153699243

Sure these are fixer uppers but then the assessed values are insane.

Marko said...

Use your equity to buy investment properties ->

http://www.youtube.com/watch?v=Xk1Ie-AFLIQ&feature=g-all-u

Leo S said...

Brilliant. I like how there was not a word lost about return on investment. Who cares as long as the rent "probably" covers the payments on the investment properties. Everyone knows there are no other costs to owning a home.

Ohwell the nice real estate professionals said it was a good idea. Cash flow schmash flow, 3 properties is better than 1.

koozdra said...

Investing advice from a realtor and a mortgage broker.

Never ask a barber if you need a haircut.

DavidL said...

@koozdra

Gotta love the graffiti on the second home in North Saanich (MLS 316012). I'm guessing that it has been vacant for a long time.

DavidL said...

Re: Marco's Youtube video link

Tony Joe and the power of leveraging! Note that the purchaser has been paying fairly high interest rates in 2003 (4.6%) and also when renewing in 2008 (5.65%). The owner has paid much more interest than was needed, suggesting that either they didn't have good credit or that the featured mortgage broker was not doing her job.

I know this for fact - as my variable interest has fluctuated between 1.45% and 4.40% over the past 10 years, and is currently 2.40%. This means that I currently pay 3.25% less than this mortgage holder, such that I have paid off much more principal.

Introvert said...

My significant other and I have a competition to find the lowest price to assessed ratio.

Do you guys have lives?

DavidL said...

@Introvert

Some people collect stamps, others watch birds - while you, Koozdra + partner, and I examine the real estate market and post to HHV! ;-)

MC said...

Gotta love the graffiti on the second home in North Saanich (MLS 316012).

"Realtors read court supplements"

Yikes...I wonder what they say?!

DavidL said...

@MC

I gather that there is an "Order for Conduct of Sale" for this property. By this stage, the owner is typically a year or more in arrears. I'm sure other bloggers can explain further - as I'm no expert.

See page 10 in: http://resources.lss.bc.ca/pdfs/pubs/Cant-Pay-Your-Mortgage-eng.pdf

Leo S said...

Do you guys have lives?

I like how you've spent way more time on this site than koozdra and yet he apparently doesn't have a life...

Chris said...

@ MArko's video

She should buy 5 of those250,000 dollar condos with her 268k equity takeout (50k down on each condo) like the video suggested she could. That way she can lose another $3500 per month ($700 on each condo), to add to the $700 per month extra she's paying on the home equity takeout to fund the condos.

Math per condo:
Mort pay - 900
Strata fee - 250
Prop tax - 170
Extra R&M - 100
Manage fee - 80
Vacancy allow - 50
Opport cost - 150 (3%+ from investing the 250k)

= 1700 costs - 1000 rent = 700 per month negative on each condo

Then to top it off, she loses another ~$10,000 per unit in selling costs a year from now, when she wakes up to the negative cash flow. Not to mention at least another 5% decline in value, or $12,500 per unit upon selling. Grand total loss of $162,900+ in one year, assuming she's able to quickly pass the falling knife. Listening to realtor & mort broker videos telling you it's a "great investment," priceless.

totoro victoria said...

I agree, that video is really, really, misleading.

1. no mention made that the HELOC interest is now tax deductible (good thing)

2. no mention made of what happens if interest rates rise on HELOC and mortgages upon renewal (bad thing and somewhat likely to occur within 5 years)

3. no mention made of risk of declining property values (bad thing and likely to occur within five years). instead the enormous past gains on the home are highlighted...

4. no proper analysis of costs of ownership vs. rents - almost impossible to have a cash flow positive house in Victoria at today's prices without a suite

Introvert said...

My significant other and I have a competition to find the lowest price to assessed ratio.

My significant other and I have a competition to find the most houses with beige exteriors on MLS. So far I'm winning with 347.

a simple man said...
This comment has been removed by the author.
EagerBuyer(Not) said...

Those with less than 20% down are getting squeezed by mortgage rule changes.

Click here for story

To me this explains why the median and average price are not falling more rapidly. There are fewer sales at the low end. But FTB's are the base of the pyramid. Without them the move up market will wither and sales in all price brackets will cool. Just takes time....

Just Jack said...

As Tony Joe said at the end of the video. It's all about net worth.

If the person, in 2008, used their home equity as a down payment for either 2 homes or 3 condominiums what improvement has been made in their net worth?

If that person woke up, this morning and said, "Sell everything!" Would their net worth be more or less if they had bought their investment properties after 2008?

And that is the crux of the difference between bears and bulls. The bulls say. "look it worked for me in 2003" And the bears say "but it won't work today"

koozdra said...

Introvert's bitterness will now be directly proportional to the decline of his/her home value.

Introvert said...

Introvert's bitterness will now be directly proportional to the decline of his/her home value.

How much has Saanich East declined? Beats me. Imagine my bitterness were I to live in Sooke!

koozdra, why don't you get back to doing what you do best: posting millions of links to MLS listings.

lolatengo said...

Thank you for the personal welcome. I'm a math and grammar nazi, for the record! But I usually keep it to myself.

StalJ said...

Re: Youtube posted above.

Here’s a fun quiz.
Which canuck property would you choose to invest your $270,000 home equity - Option Youtube or Option Z? As the realtor showed, you can buy $1,340,000 worth of property with your home equity.

Option Youtube is 2 Victoria houses as per realtor video:

http://www.realtor.ca/propertyDetails.aspx?propertyId=12420098&PidKey=731492535
“Currently being used as a legal up and down duplex”

http://www.realtor.ca/propertyDetails.aspx?propertyId=12146793&PidKey=-1534167416
“Lower level with recent second kitchen”

Total $1,330,000
4 suites
Estimated monthly rent $5000
City vacancy rate 3-4%

Option Z is 2 buildings:

http://www.icx.ca/propertyDetails.aspx?propertyId=12404292&PidKey=-414875795
“Significant renovations have been completed”

Total $1,350,000
23 suites
Estimated monthly rent $20,000
City vacancy rate 1-2%

Bonus question: Do you think the realtor would really put his money where his mouth is and choose Option Y for himself?

totoro victoria said...

I think you make a good point. For purely investment purposes there are better places to make money in Canada than Victoria.

Of course, you'd have to factor in property management costs and want to enter this kind of investment in the first place.

Wilshire said...

LeoS,

Do you have the ability to delete posts or is that restricted to HHV?

The personal attacks are really starting to detract from this blog.

a simple man said...

Thank you for the personal welcome. I'm a math and grammar nazi, for the record! But I usually keep it to myself.

As am I, as my job depends on me being so. However, on a blog that I type out quickly between tasks, it is nice to let loose a little. I think people get the intent of postings even if there is the occasional grammatical or spelling error. I know there are a lot of posts I hit publish and immediately see a mistake, but have no way of correcting.

Let's all drop any personal jabs and stick to the topic - yes?

koozdra said...

http://www.cbc.ca/thehouse/past-episodes/2012/10/20/ontario-liberals-call-a-time-out/

9:40 in Jim Flaherty says that we were running the risk of having a Spanish, Irish, United States boom that would go bust but carefully states that we have avoided it.

Will Canada be the first country to engineer a soft landing?

a simple man said...

F is the same minister that said we would not be a victim of the 2008 recession and was on the helm when Canadian banks were silently bailed out for $111 Billion thereafter, while he was trumpeting all around the world about how our banks were different and how everyone should listen to their fiscal advice. I am sure there is much we do not know, yet.

Excuse me if I don't feel like I can believe everything that comes out of his mouth.

Leo S said...

Do you have the ability to delete posts or is that restricted to HHV?

I do not. I only have submission rights for articles.

Keep it civil everyone...

Alexandrahere said...

Flaherty: "Canada has done enough to cool the houseing market." Maybe (a big maybe) people will have to take full responsibility for their actions in terms of buying real estate from now on.

Alexandrahere said...

gulp: "housing"

patriotz said...

For purely investment purposes there are better places to make money in Canada than Victoria.

Which is why prices in Victoria will have to go down. The smart money will go somewhere else.

CFA Joe said...

Leveraging is a great concept in theory. But in reality nobody borrows at the bottom of a market, when you are supposed to. People tend to borrow and magnify gains only after a market run up (equities, bonds, RE take your pick). Leveraging at the top of a market is too common and often results in magnified losses. People should have leverage into RE 10+ years ago when it was a dog with fleas and into equities in Mar 09. The reality is hardly anybody does because most are too fearful. As Buffet says, "Be greedy when people are fearful and be fearful when people are greedy." I think Mr. Joe is one of the latter. When RE smells like equities in Mar 09, I will be buying (again).

patriotz said...

But in reality nobody borrows at the bottom of a market, when you are supposed to.

Well of course somebody does.

Like me.

a simple man said...

A recent sale on westdowne - can anyone tell me how much it sold for?

I feel so helpless.

Leo S said...

@simple man Your sales disappear from PCS immediately now? Sounds like it's time to get a different account.

a simple man said...

I am not sure when it disappeared, but it is not there now am I know it sold.

Knowledge is power.

I guarantee if we were in a market like two years ago when houses were selling in bidding wars above asking all the time, we would have full access to all the data. Now that the market is turning hard, seems like it is awfully hard for me to get the basic data.

JustWatching said...

a simple man,

If you gave us an MLS number or an address it would be easier to look up the sold price.

As it stands we don't have much to go on...

a simple man said...

2986 Westdowne

MLS 313541

thanks

Unknown said...

Westdowne sold Sept 14th for

$810,000

Assessment : $773,000

a simple man said...

thanks, Unknown.

Leo S said...

@simple man. My PCS still shows all the regular data. Maybe it's just not updated yet but might be worth requesting a different account from another realtor.

dasmo said...

Yowza! No a sign of collapse there.

Marko said...

Monday, October 22, 2012 8:00am

MTD October
2012 2011
Net Unconditional Sales: 242 483
New Listings: 714 1,086
Active Listings: 4,622 4,687

Please Note
Left Column: stats so far this month
Right Column: stats for the entire month from last year

Marko said...

SFH MTD average = 622k
SFH MTD median = 516.5k

Condos are taking a trashing this month so far:

Condo MTD average = 279k
Condo MTD median = 256k

a simple man said...

thanks Marko - median is holding, sales volume low. 76 sales last week - I don't follow weekly volumes much, but that seems very low.

DavidL said...

The number of new listings appear to be "on target" to match last year, while the sales volume is down about 25% to reach ~350 sales by the end of the month.

omc said...

LeoS

I certainly don't see any reason for you to hurry. The only thing I would worry about is if a house you want, in the area you want, for a price you see as reasonable comes available. There is an argument here for further tightening for the mortgage market, as the market could be expected to return after 3 - 6 months because of continuing ultra low rates. I personally believe this to be true. Our market "returning" is as you say a halibut, and not the increases that have been tracking on the national market.

So the risks to you are that this could be a buying opportunity where you could get a low ball in vs the possibility of further price drops.

Leo S said...

I certainly don't see any reason for you to hurry. The only thing I would worry about is if a house you want, in the area you want, for a price you see as reasonable comes available.

For sure. We didn't walk away from our offer because of the potential of future price declines. We walked away because after thinking about it in more detail it wasn't quite the space we wanted/needed.

There is an argument here for further tightening for the mortgage market, as the market could be expected to return after 3 - 6 months because of continuing ultra low rates. I personally believe this to be true.

This could very well be. Currently we are in a pretty serious buyer's market because of the overhang from the changes. I wouldn't be surprised if it balances out a bit in 6 months once people have adjusted to the changes. We really should be seeing some price drops by that time though. I can't imagine Victoria sustaining these levels of MOI with stable prices.

a simple man said...

Good to see you back, omc. If even for a brief visit.

Alexandrahere said...

Good Morning all....here are my stats for 15-21 Oct, 2012:

SFH, minimum 2 beds & 2 baths, priced between $375K & $775K in the areas of Vic,OB,Esq,SE&SW.

Sold: 16
Avg Price: $528K
Med Price: $527K

Within the same criteria, in the previous two years:

18-24 Oct 2010: Sold 11, Avg $547K
17-23 Oct 2011: Sold 20, Avg $547K

So average price this year in the same week is down $19K.

No houses sold in Gordon Head, Mount Doug or Lambrick Park areas last week and only 2 have sold in the past three weeks with available inventory of approximately 44.

Eight out of the 16 sold went for below BC Assessment and 8 had disclosed secondary suites.

For condos and townhomes, pretty well in the same areas, min 2 beds & 2 baths, priced between $248K & $550K, my pcs shows only four sales, one each in Esq,Vic,Vic West and SE. The avg price was $351K and med price was $373K. Three out of the four went for below B.C. Assessment. Only one townhouse sold for $403K.

info said...

This time the housing market will not suddenly and magically rebound the way it did in 2009. Do any of you remember the crash of 2008-2009? It took dramatic, unprecedented, emergency intervention to turn that around. There will be no intervention of that sort this time.

If you are thinking of buying a property in Victoria, wait it out for at least 2 years and let the majority of the correction/crash play out, this time without intervention.

The big picture for Canadian real estate over the next number of years is the tightening of credit and falling prices.

Kui said...

The house price may be going down in the next 5-7 years, slowly. The question is when you turn over 35s, how many 7 years you will have in your life?

Another simple fact, most home owners will not undersell their houses unless they cannot financially afford it. If that happens, it basically means the Canadian economy crashes, and how can you guarantee that you will be financially better than others that time?

a simple man said...

The house price may be going down in the next 5-7 years, slowly.

Rapidly for the next yr or so, and thwen slowly for 3-5 more years.

The question is when you turn over 35s, how many 7 years you will have in your life?

In Canada, on average, about 6.5 more 7-year spans. Would you rather overpay for those seven years than save money and rent to buy a better place when prices correct?

Another simple fact, most home owners will not undersell their houses unless they cannot financially afford it.

Exactly. no-one wants to sell their house at a loss, although it is happening today in Victoria.

If that happens, it basically means the Canadian economy crashes, and how can you guarantee that you will be financially better than others that time?

Because you bought the largest purchase of your life in a trough, not at a peak.

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