Frothy February

Here's your February market update, MLS numbers courtesy of the VREB via Marko Juras. These numbers are for the Victoria Real Estate Board's reporting area, including Sooke, Shawnigan Lake and the Gulf Islands. These numbers are not the official February totals, which should be released late morning March 1, 2011.

UPDATE: I've updated the numbers below with the official data wherever possible.

Month to date February 2011, last week's numbers in (brackets)
Net Unconditional Sales: 488 (315) +
New Listings: 1,276 (919) +  357
Active Listings: 3,714 (3,526) +188
Sales to new listings ratio: 38% (34%)
Sales to active listings ratio: 13% or 7.6 MOI approximated (8% or 8 MOI approximated)

February 2010 totals 
Net Unconditional Sales: 621
New Listings: 1,460
Active Listings: 3,280
Sales to new listings ratio: 42.5%
Sales to active listings ratio:  19% or 5.3 MOI

Two things stand out for me in these numbers:

1. Prices won't be falling in February. Despite a significant drop in sales volume (25% or more), the lack of new listings volume doesn't put enough pressure on the marketplace for noticeable price drops, yet, though it's definitely building.
2. Sales built consistently as the weeks of February went by. Especially in the entry level SFH category. This is in harmony with what we expected considering the coming mortgage rule changes. I expect this category of housing sales to be short lived into March. 

If this was the sales flurry that all the pundits predicted would be brought forward by the CMHC mortgage rule changes, then the bears have dodged a bullet. You can expect the usual suspects to be absolutely ecstatic in the media tomorrow, but the truth is these numbers have to be disappointing for everyone. Sales volume is down, but the listings volume is down too, almost one for one.

That said, it's obvious from our weekly updates that sales volumes didn't meet expectations and the "mad rush" to get in before the 5% down 35 year amortization buyer crowd became priced out forever was short and underwhelming (but not over yet).

FURTHER UPDATE(s) yes I've since added to this...
The spin doctors are in high gear over at the VREB and they didn't even blame the weather.  Apparently, the sales volume drop can be explained by saying something that isn't true:

Fimrite added that although February’s sales were below the sales totals for February of a year ago, the beginning of 2010 was marked by an unusually strong market that softened as the year progressed .

2010 wasn't "unusually strong" it was actually normal. See for yourself:

Here's the truth:

Percent changes YOY
Net Unconditional Sales: - 22%
New Listings: -23%
Active Listings: + 13%

Percent changes MOM
Net Unconditional Sales: + 31%
New Listings: + 8%
Active Listings: + 12%

Listings aren't jumping very fast for this time of year. I think it's safe to say potential sellers aren't showing a marked increase in confidence in the market right now. OMC in comments says we're experiencing normal new listings volumes for this time of year. When I use the 2010 experience as "normal" we're not, but when you dig back a few years, it's obvious we are. 4500 total active listings by the end of April is definitely within sight, and that's high volume.

This line of spin we're being force-fed that low sales volume is indeed normal isn't even true when you go digging back to the 1990s. Take a look:

When looking at these numbers we need to realize that the number of dwellings and the number of people have grown exponentially in Victoria since then. Obviously the market in Victoria in the early 1990s was very hot, even when we compare it to the 2002-2007 period of craziness. It was actually more active, but those sales represent higher per-capita and per-dwelling sales activity than current numbers do. In other words, 488 sales in February 2011 is a substantial drop in market activity from 488ish sales in 1996.  

Fighting a losing battle? Skip a payment.

Perma-bulls in the real estate world often use snippets of anecdotes to counter the data-driven arguments of the real estate bears who say current price levels are not supported by fundamentals.

One of the key points the bulls often fixate on is usually expressed in the form of a question with a barely passable answer attached:

"If Canadians are so stretched financially and can barely afford their homes, why aren't mortgage arrears showing up higher than they are? After all mortgage arrears are still lower than they were in the early 1990s and our Canadian financial institutions are prudent."

It's this kind of rhetoric that makes the real-estate-always-goes-up crowd breathe heavy on their finger nails before polishing them against their designer shirts in gleeful gloat mode because at this point, in their own minds, they've won the argument.  

"It doesn't matter what your data tells you, my data tells me this time it's different. And that's a fact."

Unfortunately, and you knew this was coming, that "data" provided as the bull's argument knock out punch, ignores the financial reality: it's only through mortgage product innovation that mortgage arrears aren't at record highs, despite the fact they're already double what they were just a few short years ago:

From 2006-2008, it was the 40 year amortization that allowed more over-extended Canadians to avoid falling behind. The government eliminated new origination's of 40 year mortgages in October 2008, but the banks found a way to allow the effects of them to continue: can't afford the increase in payments? Skip one. Every year. For as long as your term allows.

In 2010, the mortgage market was tightened ever so slightly by requiring CMHC-insured mortgages to be qualified at the discounted five year rate. You qualify for slightly less money, but you still have the flexibility of the 35 year amortization at the discounted variable rate to over-extend yourself into real estate financial Armageddon. The "prudent" banks are only too happy to oblige you because your mortgage is insured by the CMHC and they're turning around and selling these loans into the mortgage backed securities market faster than they're writing them anyway. In other words, the banks have zero risk in this game.  

In 2011, just 20 short days away from today, the CMHC will stop insuring 35 year amortized loans. The banks have already found their solution to this little issue, it's been working for them for a few years now: let Canadians skip a payment and roll the interest back into the principle. It's a little accounting trick that nets the debt holder more money as long as the mortgage doesn't default--Sh&t it's as close to a win-win-win as the Canadian mortgage game can generate: debtors don't have to pay their debts on time, banks don't have to default on the loans and the pension funds that eat up the MBSs being sold by the CMHC don't see any risk to their investments as long as the tax payers keep backstopping this prudent smoke and mirrors financial practice.

This skip-a-payment thing is offered by almost everyone in the mortgage game. If a household exercises this option once a year, as most mortgage contracts allow them to do, for a full five year term, it has the same effect on lowering payments as a five year extended amortization. So yeah, the 40 year amortization still exists. After March 18, 2011, the 35 year amortization will still exist. Just not in name. Case in point:

Current mortgage payment: $1500
Skip-a-payment proceeds: $1500
New "effective" mortgage payment: $1375

30 year amortization of $310,000 mortgage at 4.2%: $1500
35 year amortization of $310,000 mortgage at 4.2%: $1400

The more I become aware of what the banks do, precisely because there are few economic consequences to them thanks to Mr and Mrs Canadian taxpayer, the more I believe there is only one solution to this problem: privatize the CMHC. Prudent Canadian financial institutions my a$$.

Who's making the cake?

There's something like 1300ish REALTORS® in Victoria. Less than 1% of them are advertising "commission sharing" online, some are offering other discounts to get clients, and then there's a bunch of 'em (who make up a small percentage of the total) who wake up in the morning and climb out from under their cash-stuffed silk duvets.

In 2010, not a great year but not a bad one either in the big scheme of sales volume, $2,794,122,181 worth of real estate changed hands in the VREB MLS®. It's not easy to calculate total sales commissions on this number because we don't know the commission structures of each deal and we do know they would not have been uniform. I've seen 5% as average commission on individual deals before, but it's not accurate, for example:

Average home price: $600,000
Commission: $6,000 + $15,000 = $21,000 (6% on first $100K + 3% on >$100K)
5% = $30,000

So we won't assume that 5% of the two billion seven hundred ninety four million one hundred twenty two thousand one hundred and eighty one dollars went to REALTORS®.

I'm in a giving mood. Let's be generous to the industry today and guesstimate that the total commissions collected added up to just 2.5% of total sales volume (I wouldn't be surprised if it was closer to 3% in fact). That means there was very likely $83,823,665.43 in commissions for the region's 1300 collectors to divvy up for an average $64,479.74 pre-tax, pre-expenses income. The industry is an expensive one to participate in: you've got heavy desk fees at the big-boy brokerages, Lexus leases, Gucci watches, Armani suits, Jimmy Choo shoes and Luis Vuitton leather listing binders to pay for if you want to project success. I'd be surprised if the average REALTOR® didn't spend half that $65,000ish on expenses related to securing their real estate riches dreams.

Makes you wonder why anyone would spend the $10,000+ to study up, buy insurance and have a 6-month expenses float to break into the business doesn't it? (Probably why a great many would-be agent goes into it part-time).

Real estate trading services is, despite the fact the industry has been colluding on commissions charging what the market will bear, a very competitive business. It's a dog eat dog world out there and we all know there's some big dogs in this little town. The VREB showers recognition on the big dogs each year and sales managers in the brokerages try to motivate as many of their little dogs into the big dog pit as possible.

You've seen the recognition program, the MLS® Gold, Silver and Bronze Awards, I'm sure. Every agent ever to win one is sure to plaster it across their cross-armed-leaning-up-against-the-wall-coolly, hipster vinyl photo on the back of the #14 bus to remind you they're far superior to their peers--"Use me, more people do!"

So what are the thresholds? Well, they change from year to year. It's not about hitting a firm dollar target, it's about measuring sales volumes against the performance of the group. They do it in percentage brackets. Magically, the 2010 brackets appear for us here:

Final Gold Threshold: $6,075,500 (top 10%)
Final Silver Threshold: $4,079,500 (top 20%)
Final Bronze Threshold: $2,827,625 (top 30%)

What do these numbers mean in terms of commissions collected? Again, it's tough to say with absolute certainty, but here's the best guess:

Gold: $200,000 +
Silver: $140,000 +
Bronze: $100,000 +

These numbers were calculated assuming standard commission rates of 6% on first $100,000 and 3% on > $100,000. The majority of the deals aren't double ended, and sales revenue is credited based on commission-able earnings meaning if the average home sells for $600,000 generating $21,000 in commission split equally ($10,500) then each REALTOR® is credited with $300,000 in sales revenue towards the MLS® Awards.

A REALTOR® has to get in on about 9.5 average-priced SFH deals per year to be a bronze winner. I'm going to stop there because the deals done are too diverse to make an even remotely accurate average assessment of deal volume. But I'll leave you with this thought: It's highly likely the taxable income of a bronze winner is somewhere between 60% and 70% of the estimated commissions collected. This means that its likely the top 30% of Victoria's REALTORS® get in on enough deals to earn what I calculated as the "average" above.

There's an old adage in the sales world: 20% of the players take home 80% of the cake. It appears this may be true in the local real estate market.

Raindrops and roses

It's snowing Victoria, in February, after Ground Hog Day, when the daffodils are just set to bloom. Twitter is all abuzz with the #YYJ #Snowpocalypse. And Cameron Muir "forecasts" home sales will rise in Victoria this year by 7% over 2010 sales volumes.

What a leap of logic that is!

Let's see:

• Harder to get a mortgage? For some folks this is true. More accurately though is the mortgage you can get in March will be more expensive than the one you can get today (although I'm hearing that some banks aren't doing 35 year amortizations on new approvals already, just honouring pre-approvals at 35 year ams).
• Interest rates a-rising? Most certainly they're trending that way, albeit only slightly right now.
• Sales volumes a-slumping already? Most definitely: January sales volume was down 19% YOY and February looks like it'll be down anywhere from 20% to 30% YOY. Remember sales were supposed to be pulled forward into the first two months of this year because of mortgage rule changes. If they're not jumping now, how does anyone see them jumping later? 

I bet you dollars to donuts the local rag gives old Cameron a free pass on his economic forecast wishful thinking. UPDATE (Bet won, H/T to LeoS for link, please don't click it, you'll regret visiting that dirty rag). It must be nice to live in a world where you can make sh&t up and never get called on it by the folks whose job is to weed through the bullsh$t (I'm looking at you news media).

Prediction: Cameron Muir and the BCREA will revise their forecast in April, down, and the media will give them another pass.  

Stuck in the middle: the Victoria townhouse experience

I've often thought that townhouses have the potential to be Victoria's perfect property for a fair number of people. As time goes on, I'd think more people would be attracted to townhome living. No shared hallways, very little yard work, affordable "full size" homes without the need to suite your house out, certainly these are a few advantages for busy working couples/families and early retirees?

The trouble with Victoria townhomes, especially at the entry level price point, is they're typically old, typically on busy streets or near busy highways, typically have high maintenance/strata fees and typically have restrictive strata councils that make them less appealing than buying an entry-level duplex or house with a suite. Oh, and they're almost always extremely overpriced--I'd say more so than any other product on the market today.

I checked out a couple of open houses the other weekend. The house had a 1 bedroom suite in it, and a smallish 3 bedroom 1 bathroom main living area for the owner to occupy. It will likely fetch around $450,000 when it sells, assuming no structural or significant cosmetic work is necessary (I didn't see evidence of either). I also looked at a townhouse listed for close to $350,000. Both neighbourhoods were comparable, but the townhouse actually had the location advantage.

Let me do a little first time buyer comparison here: assuming a 5% down, 30 year amortization mortgage at 3.49% for a 5 year term.

House
Price = $450,000
Mortgage = $422,500
Monthly payment = $1889
Suite rental income = $800
Taxes + maintenance/month = $300
Total cost to own = $1400/month estimated

Townhouse
Price = $350,000
Mortgage = $332,500
Monthly payment = $1487
Taxes + maintenance = $400 (est $125 tax, $275 strata)
Total cost to own = $1887 estimated

Currently, townhouse owners, and the few people buying them at the entry level, believe you should pay a premium to own a place with no direct claim to land and little ability to influence financial decisions directly affecting your monthly budget (for example, increases in maintenance fees, special assessments for parking lots, siding, roofs etc). It's no wonder then why those townhouse owners trying to sell are having an especially hard time right now.

Here's January's townhouse market snapshot:

Total sales: 38
New listings: 132
Total active listings: 297
Sales to new listings ratio: 29%
Sales to active listings ratio: 13%
Days to sell: 80 (up 116% from January 2010)
Average price: $445,628
Median price: $418,050
Price change year over year: -2%
Price change month over month: flat
Months of inventory: 7.8

• 42% of all townhomes sold for under $400,000
• Victoria/Vic West recorded 10 townhome sales (current listings volume make this 5 MOI)
• Saanich East, Sidney and Central Saanich were the townhouse buying municipalities of 2nd choice, with 6 each
• SE MOI is about 7, Sidney MOI is about 3.5 and CS MOI is about 3.
• Saanich West is a different story altogether, recording only 2 sales and having around 20 properties listed making the MOI about 10
• Langford and Colwood combined had 2 sales, with almost 80 properties on the market right now, they're showing a bare-mountainous MOI of 40. And they're still building out there!

It's a strange market for sure, these Victoria town homes. I desperately want you available listings to be more appealing, but your insane asking prices relative to your demand and your entry level duplex and SFH competition I just can't get past. Lucky for you, all you have to do to make yourself more appealing is recognize that dropping your asking price by 20% or more will bring the buyers shopping for condos and entry level single family homes straight into your empty open houses. 

Can we get to 500?

This is panic buying month. The news media tells us so (Times Colonist link warning). With mortgage rule changes less than 30 days away, those buyers desperate to use the 35 year amortization should be out snatching up properties as if they're not making any more land. Coupled with creeping interest rate rises, you'd think the feeding frenzy on homes in the provincial capital would be incredible right now. But it's not. In fact, it's far from a feeding frenzy out there. It's down right eery how quiet the local market is.

Here's your Monday market update, MLS numbers courtesy of the VREB via Marko Juras. These numbers are for the Victoria Real Estate Board's reporting area, including Sooke, Shawnigan Lake and the Gulf Islands.
 
Month to date February 2011, last week's numbers in (brackets)
Net Unconditional Sales: 315 (195)  + 120
New Listings: 919 (637) +  282
Active Listings: 3,526 (3,435) + 91
Sales to new listings ratio: 34% (30%)
Sales to active listings ratio: 9% or 8 MOI approximated (6% or 8.8 MOI approximated)

February 2010 totals 
Net Unconditional Sales: 621
New Listings: 1,460
Active Listings: 3,280
Sales to new listings ratio: 42.5%
Sales to active listings ratio:  19% or 5.3 MOI

We've been averaging about 105 sales per week this month. If the trend continues, we'll hit 440 sales in February 2011. The last time we had February sales this low was near the bottom of the mini-crash in 2008/2009. We don't have the listings volumes and the sky-is-falling-consumer-sentiment now that we had then, so prices are much stickier and "the deals," if you can call any individual sales that right now, aren't nearly as good as they were.

Keep in mind that everyone agrees the mortgage rule changes are pulling buyers forward, not scaring them away. If this turns out to be true, this foreshadows a dismal spring shaping into a potentially troubled year in the local Victoria real estate market. It would seem potential sellers agree with this outlook: they're not listing their homes at a normal rate. That said, no one should claim current inventory of over 3500 available units for sale is anything other than untypically high volume, perhaps 20% higher than what was the February normal for much of the past decade.    

Albertans move to the West Shore?

Apparently they do. Case in point, "The Browns" who started asking some area-specific questions about Langford, Colwood and Metchosin.

Here's the map:

The boxes are rough approximations of the three municipalities in the West Shore. I know the Westhills development has a 20 year plan to put more people into tighter spaces than Victoria has ever seen, all the while calling those spaces "single family homes." They'll soon overwhelm that blue box. The red box is a mix of old and new. For the most part, that east end of the west shore is the most "affordable," if you call paying $450,000 for an 1800 square foot BC box built in the 1970s and likely painted once between then and now affordable. The new housing units in this area are nice, no question. But I do question the quality of anything built in the last 5-7 years in the Victoria area. I've heard too many horror stories not to question.

I can't say anything bad about Metchosin. If I didn't have to do anything other than get up and work my land, this would be the place I'd do it in Victoria. Back when I was a teenager, we used to have the occasional friend who'd start dating a Metchosin girl. We'd call voyages to pick her up on Friday nights "road trips" and they almost always included a stop for gas at least once. Of course, back then, there weren't such things as "highway overpasses" and "expressways" to "speed up" the traffic flow. Nope, the trip took 45 minutes round trip, not each way like it does these days. At least the cars are more efficient nowadays.

All kidding aside, we city folk like to poke fun at Langfordians. We have to, we pay way more to live. Or do we? Let's look at the numbers for West Shore single family homes shall we?

January 2011

	Average Price	6 month avg	Median price
Langford	$489,956	$516,134	$447,500
Colwood	$433,813	$525,669	$416,250
Metchosin	$798,475	$604,608	$677,000

From first glance the numbers look good for Metchosin and not so much for Langford and Colwood. Of course, average and median numbers tend to get skewed by abnormally low sales volumes, so we should dig a bit deeper:

• 4 single family homes sold in Metchosin in January 2011
• 1 was "luxury" priced somewhere in between $1.25M and $1.5M
• 1 sold for a "good deal" at under $600,000 
• 1 was exceptionally fire-sold at under $450,000
• Colwood doubled up on Metchosin and moved 8 SFH properties
• The highest priced Colwood home sold for less than $700,000
• The other 7 SFHs sold for under $500,000
• 1 sold for under $350,000, talk about a value!
• Langford smacked its Westshore neighbours in the sales ring: 23 SFHs sold in January
• 15 of those sold for less than $500,000, but more than $350,000
• 6 of the rest sold between $500,000 and $650,000
• And the last 2, tried as they might, couldn't get more than $800,000 when they changed owners

It's really tough to give you sales ratios because the VREB doesn't provide localized listings volume, preferring to keep the active and new listings breakdown to their region as a whole. But I've craftily used the REALTOR.ca website to give you a rough approximation of what the numbers could have been. Here's the active SFH listings as of today on the web:

To be generous, and err on the side of caution, let's "assume" the month end listings volume in the three areas was 250 SFHs. Metchosin obviously has a fraction of the other two, the prices listed above seem to point to this as well. I'll give you the data combining all three areas:

Total active listings = 250 (questionable assumption)
Total sales = 35
Months of Inventory = 7.15
Sales to active listings = 14%

As far as neighbourhoods go, I'll admit bias. I grew up on the other side of Victoria and have been taught to avoid Westshore living and it's inherent commute to get anywhere lifestyle. Every time we visit Costco, which I'll admit is getting less and less because of the traffic volume, I question why so many people choose to live in an area that hasn't had too many non-strata homes built in the last decade. I'd wager few "choose" to move from the east side of town to the west. I'll bet household finances dictate the move for locals heading west. And I'll bet that a good portion of people coming from away buy homes in the Westshore because it reminds them of what they're used to back home.

If you've lived in Edmonton or Calgary, outside of the core, you'll feel right at home in Langford, with it's box stores, chain restaurants and houses built with five feet between them. But you'll soon come to loathe the drive into town, wondering why the heck there's traffic lights in the middle of what feels like the Crowfoot or the Whitemud. Yes, it really is like that.