A sure sign of spring

This spring has been predictable (even though I underestimated the volume of sales and the lack of new listings). Sales increased, both volumes and prices, as they typically do every spring. But after a dismal fourth quarter 2008 and first two months of 2009, the True Real Estate Believers™ banged the bottom drum loud.

With a little help from the Bank of Canada and the short-term-only view so prevalent in our peers, many people are buying the drum beat--both literally and figuratively. I think you'd be hard pressed to find someone not actively researching real estate who thinks prices will drop further this year, even though they're being warned by the CREA, BCREA and CMHC.

Last fall, I hardly conversed with friends about the state of the local market. Most of them own, and while few had bought in the past two years, all were not happy with the contraction in prices. I simply didn't want to awaken the anxiety they may have been feeling. Today, a totally different story, except it's friends and family doing the talking:

"See, I told you prices don't really go down, and if they do, they don't fall far."

"We will soon be returning to normal price increases, everyone wants to live in Victoria."

"You should have bought in February, you'd be up right now."

"You're missing out on the lowest interest rates in history. Why do you keep throwing money away on rent?"

These statements speak volumes about our collective inability to see the big picture and recognize just how close to the edge we first time buyers would be if we took the advice of homeowners today. Here's the single most inescapable truth about the real estate market:

1. New entrants dictate the state of the market

This is why all of the focus is on attracting first time buyers into the market. This market needs the "green shoots" or it will wither. The trouble is, regardless of how many new bulbs it plants, this market is teetering on the edge of drought.

Last May, all was well in Victoria. Business was booming, people were earning and everywhere was hiring. Our economy was diversified and isolated at the same time. We were different, we had government and military and construction and technology. Yet prices fell. And no one, nowhere in the media, even attempted to accurately explain why. It was just that "first time buyer's were sitting on the fence."

But prices dropped because we'd reached an affordability limit for FTBers. Interest rates nearing 6% made it near-impossible for many first-timers to get into the market. But people were still employed, the outlook was still "Canada will avoid recession" and our real estate market didn't suffer the same fundamental weaknesses found around the world.

Then October happened. Stock markets crashed and the 0 down 40 year amortization mortgage disappeared in Canada. Nothing sold in November, December and January. We were told we were in the midst of a confidence crisis but our fundamentals were strong. Until they weren't, and government stopped hiring and contracting out, then started talking about 4 day work weeks, and construction starts stopped, and technology companies dependent on government contracts started worrying.

Then interest rates plunged for two months, along with inflation and consumer spending, until the attractiveness of cheap credit outweighed the realization of "I can't afford all this debt I have." Home prices had dropped (though not in the entry-level SFH segment) and first time buyers got off the fence. They bought in March and again in April. May 2009 looks like it will surpass the sales volumes of May 2008. But inventory remains stable, it's not going down. And that is a problem. Every time a house is sold, another one comes on the market. Sure, some really great homes are attracting multiple offers, but the majority of places are taking time to sell and are only selling if they were priced with a sharp pencil. And that is why prices are "stable" and not rising.

So far this year we've seen prices bounce in a range of 5% which is exactly what prices tend to do in Victoria between months. Yet some of the industry talking heads are calling bottom, usually carefully couched in a question: "with so many sales and stabilizing prices, have we hit bottom?"

Three months of sales data is usually a good indicator of a trend in real estate. May numbers will be out in just over a week's time. I suspect we will see prices increased over April along with sales being higher than May 2008. The beating of the True Real Estate Believer™ drum will be deafening. But will the trend continue into June and July?