Welcome to the balanced market

We have moved from a rapidly descending market to one where a bid has appeared for listings.

MOI is in the 5-6 range. Some of the huge drops from list/sell have disappeared and most sold prices I see are coming in near (within 5-15%) the ask price.

This was to be expected. Record low mortgage rates have brought the cost of owning, even at inflated prices, closer to renting, as I showed you in the renting v owning post earlier this month.

As the market strengthens, it then panics those who sat out the long run-up, with the thought that the drop we just had may be it! and we will now embark on a new round of price rises.

I think this current blip will take out the buyers who had been sitting waiting for the smallest drop to get in. Then the driver will be the economic situation once again. On that score things are not a lot better. We had stopped falling as fast, but things are far from a rebound or even stability yet, with huge job cuts continuing in the US and Canada. And we will now have to see what transpires with this swine flu.

This darned disease is another brake on the velocity of money, and an economic damper, when we can least afford it.

I posted before that I thought the market would be stable until June and would then resume it's downward pressure. Lets see if my guess was right and let us hope that the RE market is the only thing we have to worry about.

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From Mohican's post http://housing-analysis.blogspot.com/2009/04/teranet-house-price-index.html Vancouver's Housing index is at 135, with 100 being the 2005 price. So we are now 35% over 2005 prices now. Toronto is already down to 106.

I would be very surprised if that's IT for us and we don't get nearer 100. However, as mentioned, we may have price stability for a few months. Then reality rears it's ugly head again.

I suspect the economy and the Olympics have buried any chance of a budget surplus or even a balanced budget for the foreseeable future, so don't expect the Provincial government to be able to bail anyone out.

The Financial Crisis is Over!

The stockmarket is on the up and up. The RE market is roaring back with list/sell ratios moving up and MOI down to 5 months and change.

How things have changed! A few months ago, the world was coming to end, banks were in trouble and big companies were on the verge of bankruptcy.

Now the world is a beautiful place.

Except...while the banks are US and European banks are making money on their day to day operations they still have more enormous write downs ahead of them, and big companies like Chrysler and GM are still on the verge of bankruptcy and have their heads kept above water by massive and regular infusions of tax-payer money.

The companies that are still making money are doing so by cutting costs and laying workers off. This is not the stuff of rebounds. It is an interlude in my opinion.

We have driven off a financial cliff and thanks to the enormous and unprecedented intervention of Governments and Central banks across the world, we have a small parachute to cushion the fall. However fall we must.

Nevertheless the mood has shifted slightly more to the positive and that is reflected in increased economic activity. It also helps having a President across the border who is trying to hit the crisis from several angles (which he didn't cause BTW) instead of having a moron who says.."economics was never my strong point".

So we should expect this little stabilisation to continue a little longer, maybe one month or maybe three or four. The same shills who DID NOT see this financial crisis coming will now tell you with a straight face that it is OVER!

There are many of us on the blogsphere who did see this coming- as a result of the excesses. Yes we were early, but as any economist will tell you foretelling the what and the when requires religious capabilities.

And most of us don't think it is over, though are glad that we have this interlude (who wants a total collapse and food lines and street violence- not I).

Another nice post from Matt on the new social trend of frugality:

http://futronomics.blogspot.com/2009/04/against-empirical-analysis.html

Have a good week-end

When to buy...if at all?

Everyone has their own reasons and timing to buy or not.

However if you were a potential buyer and didn't have to worry about moving during the middle of a school year or other issues...when is the best time to buy?

Spring..when there is more inventory, Summer...when sellers are getting more anxious..or Fall when only the desperate are left on the market and buyers have withdrawn for the year?

Tough one.

I had coffee with a seasoned RE investor today and asked him what he suggested. "Wait until after the Olympics. Any time after that should work". Was what he said.

Like me he thinks the Olympics was an unnecessary waste of time and effort. Vancouver never needed to be 'put on the map'. All it did was add kerosene to the speculative fire.

Just imagine how many bubbles we had running concurrently in our city..

1) We had the world wide real estate bubble, pumped up by low interest rates and lax lending.

2) We had the commodity bubble with copper, oil, zinc, natural gas and odd stuff like molybdenum hitting the stratosphere. The result was the venture exchange went flying and money poured into Vancouver penny stocks enriching their promoters.

3) We had the huge build out for the Olympics, competing for labour with condo builders.

And now all these bubbles are popping sequentially. There is every reason to believe that the Olympics will be an excellent and colourful spectacle, which will make us very proud to be Canadian and Vancouverites (BC-ites really, since the whole Province is going to be paying for this) and then leave us with a very big hang-over and a bill which we cannot afford.

So his advice to me was wait until all the fanfare and excitement has passed and there is nothing left to prop up RE.

What about interest rates? I asked him.

"If the market gets worried about inflation, then 5 year fixed rates could start heading up. That will certainly weaken the market further. However, one year variable mortgages (which is more closely related to the BOC rate) should remain low for a long time."

He could be wrong of course, we could have hoards of Finns and Swedes coming over after the big O to snap up our RE. Or we could be in the middle of a big inflationary boom this time next year, which would send up both long and short mortgage rates.

It works for me though, since I just signed a lease to take me past the Olympics.

Weekend Wanderings

I headed around a few open houses on the North Shore on Sunday.

Fair amount of traffic, though less than two weeks when I last ventured out.

At one house I had an interesting conversation with the realtor. He informed me on entry that the house was now listed below the current market price.

"Well why hasn't it sold then?" I asked.

"It will. We have a lot of interest".

"Market price is what a buyer like me or another fool is willing to pay".

"Well, it is priced significantly below assessed value too."

I then gave my assessed value talk, which I have posted previously. Assessed prices have been frozen by the Provincial Government because prices are falling. The last thing they want is for the municipalities to be inundated with appeals as comparables drop in price. It just means the taxable amount would have to be raised or services cut.

So these assessed values are what the local government (hardly a wise judge of value as we can se from the Millenium Olympic debacle) guesstimates what the worth of a property was between 2007-2008 at the very tippy top of the market!

Since then we have had a financial crisis which has vaporized banks and trillions of dollars and has caused a tsunami of unemployment to spread across the world. How on earth can it be used as any yard-stick for measuring value?

The realtor agreed. It then became apparent that this was what the seller needed to get out at break-even since they had bought a few years ago and put quite a bit of money into renovations.

So that is how selling prices are decided..based on market value (lets guess what someone would pay for this), assessed value (which if the government hadn't frozen it, would be 10-15% less in any case) and what the seller 'needs' to get.

What I am trying to say, is if you still thinking of buying in this little spring bounce, at least judge for yourself what you think the property is worth (how about replacement cost) and what you can afford, and if your number is a lot lower than the list price. Go with yours!

This also illustrates how difficult it can be for realtors. Often it is the seller who is delusional and thinks their home is worth much more than it is and the unfortunate realtor is then left trying to defend the price to buyers.

Calm down bears

OK I see my last post caused some bear angst.

Yes, buying and renting are coming closer due to dropping prices and low interest rates.

However buy/rent comparisons are just one factor and even though logically it SHOULD be one of the main drivers of price, we do not live in a logical world and therefore it is not.

Let me explain

Generally speaking people prefer to own than rent. There are many reasons and I have listed some of them in my previous post. So buying should have a small premium over renting.

However as we all know this premium reached crazy levels over the last few years. Bears noticed this and it had been mentioned by me, VHB, Freako, Mohican and the many other housing bear bloggers.

Why buy something when you can rent it for almost half the price!

What we forgot is that most people are not logical or analytical. When they see something running up in price they jump on board, fundamentals be damned. That is exactly the same reason why a stock can sell for a price/earnings ratio of 10 one day and 15 the next month, even when fundamentals are unchanged.

Things have flipped the other way now. The asset is dropping in price, instability and job uncertainty reigns. The risk has moved from missing the RE band-wagon to falling off it and getting bones broken. So, as Jesse said in the comments section, buying should be at least balanced and probably cheaper than renting, since there is less risk in renting than buying right now.

Previously you could over-extend and buy, and then if you needed to repair the water heater or roof, you would get an appraisal which would show your property up X% and would get an home equity loan and off you go.

Now with prices dropping, you will have trouble getting that extra money and may have to sell. Throw in an illness, job loss, divorce or other life calamity and the house is in foreclosure.

So by buying you are taking on a lot more risk.

As I said In good times people prefer to buy. In bad times, they have to rent.

Also one more point, the buy/sell comparison only works, because you are paying down the debt and are 'forced to build equity'. However as bonuses, and then wages drop people will have trouble meeting their primary obligations never mind putting aside equity.

Also building equity in a dropping asset is a losing proposition.

It is exactly the same as cost-averaging into the stock market for the last 10 years. If you had put $10,000 of your savings on the first day of trading into the fasting growing US companies in the US - the Nasdaq- you would now be down nearly 40%. So much for building equity.

So am I buying now?- No. I am expecting the cost of owning to drop BELOW the cost of renting.

...and I am expecting rents to drop too, as jobs disappear. So both should come down. However there will blips up, on the way down.

However that is just my opinion, and like all bears I have been wrong for a long time, and have vindication is not as sweet when you have to wait half a decade to be proven right.

What happened earlier this year was the near complete collapse of the capitalist system. It took the irresponsible central bankers who did NOTHING while the bubble expanded -an enormous amount of money, zero interest rates (near enough) and huge bail-outs to prevent implosion.

However, in less than a year we have gone from full employment to rapidly increasing unemployment around the world. SO is this over? I don't think so. I think we have an interlude while folks enjoy and adjust to the new lower interest rates and then we realise that a bubble of this magnitude will take more than half a year and a quick, contained drop in RE to end it.

Feeling better bears? :)

Here it is...

OK - here are some buy/rent comparisons. The results may surprise you. My conclusions at the end will surprise you even more.

They are just random cases I found on the net, and I have applied my less than perfect analysis to them.

I read some posters state that a house should sell for 200X it's rent or some such simplistic formula.

In fact the relationship between renting and buying is very complex, and there is no 'right formula', it all depends on what is happening to housing and the economy. I will explain this all at the bottom.

Assumptions:

I have used the ING 5 year fixed @ 3.9%.

Some folks will compare mortgage payments with rent. However some of the mortgage payment is used to pay down the debt. This is a way of 'forced saving'. Over time the debt will diminish, however over time, rents generally go up. So I have put down the amount the debt is reduced for the first year of the mortgage as an indication. I think this gives you a fairer comparison. (I am a fair bear after all)

I have assumed a 20% down-payment +/- for rounding.

I may have played down the costs of owning. A new roof would set you back many thousands, as would any significant repairs.

Lets look at a few examples:

1) Small Condo in Coal Harbour:

# 807 555 JERVIS ST, Coal Harbour, Vancouver West, $358,000.00
HARBOUR SIDE PARK. Located in prestigious Coal Harbour just steps from Stanley Park, Marina and best downtown living. Updated kitchen/bathroom w/granite countertop. Hdwd flr. 1 parking/2 storage. Rent $1300/mth.

Rental cost: $15,600 a year

To buy:

Assume 20% down ($70,000)

Lost opportunity @ 1% = 700 a year

Mortgage on $288,000 = $18,000 a year

Strata fees = $2444

Repairs = $500

Taxes = $1200

Total = $22,844

In the above example nearly $7000 would be applied to reduce the loan. So there is no significant difference between the two.

2) Port Coquitlam home:

Rental: http://vancouver.en.craigslist.ca/apa/1124662280.html

2100sf. house on an 8100sf. lot with 4 bedroom and 2.5 bath. House is like new with hardwood floors, granite counter top, island kitchen, vaulted formal living room, two gas fireplaces, master bedroom with ensuite bathroom, attached garage, and alarm system. Fenced back yard with large inground saltwater pool, sunken deluxe hot tub, garden shed/pool house, garden area, nicely landscaped with stamped concrete patio. To keep the yard beautiful the property has inground irrigation system. House is on a no thru road 1 min. walk to bus stop, close to park and school. 5 min. from Home Depot. Available June1, but flexible. No smoking and no pets please. Reference a must. $2100 +util

For Sale Comparison few doors down: V757487 $532,000

Rental cost: $25,200 a year

Owning with $100,000 down.

Lost opportunity on D/P = $1000

Maintenance etc= $2000

Mortgage on $432,000 = $27,120

Taxes (estimated) = $2200

Total = $32,300

However $10,000 of that will reduce the debt.

3) Large Luxury House in West Vancouver:

This http://www.manderrealestate.com/7.html rental would cost

$41,880 a year.

To buy something equivalent look at 1265 INGLEWOOD AV, Ambleside, West Vancouver, (V724242) $1,288,000. Same area, though the rental property has a view. The property for sale is assessed at $1,127,000 and last year's taxes were $4241. (source: https://ecom.westvancouver.net/tempestlive/WebInquiry/frames.cfm)

So:

Lost opportunity on D/P $200,000 x 1% = $2000

Mortgage on $1088,000 = $68,300 a year

Maintenance. Roof/yard work/painting etc = $2000 a year

Total = $72,300 a year.

However $26,000 of this is applied to the reduce the loan. So the difference is not that much.

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Ok now for the chat:

As you can see, once we account for the amount which is used to pay down the debt, the cost of renting and buying are remarkably close. This has not been the usual case in Vancouver. There has been a premium to buying due to several reasons:

1) Due to limited land, population growth and inflation, property has trended up, leading to capital appreciation.

2) This capital appreciation is a tax-free gain and as such was regarded by financial planners as one of the best ways of accumulating wealth tax free.

3) When you rent -there are many tangible costs such as moving expenses and intangible ones such as being at the whim of your landlord for lease renewals and the anxiety of frequent moves, stability for schooling, neighbours etc.

Because of these, renting has been cheaper than buying for as long as I can remember. However as the lunatic boom of the last few years got going and everyone wanted to get on the capital appreciation band-wagon this difference expanded to 100% or more is some cases.

So how did we end up near even now?

1) Prices have dropped

2) Mortgage rates are at remarkably low rates.

3) The 'lost opportunity' on the down-payment is very low (unless you can time the stock-market)

So is this the time to buy?

There is no magic formula for when to buy. The most important factors are the mortgage interest rates and the state of the economy.

The fact that rent/buy costs are so close, is a sign of how unusual (and potentially bad) our current situation is. If things weren't bad- interest rates would not be so low, and yet house prices are dropping even though it costs as much or less to buy than rent.

If you expect rents to drop, prices to drop, no bonus or worse no job-do you buy- whatever the comparisons?? No!

It is the current uncertainty that is causing the rent/buy parameters to get so close. While it has stimulated some demand, I would expect the uncertainty to trump it very soon...perhaps this summer.

I expect that by the time this is all over we will see rents and prices fall further and just as a pendulum swung too far to one side, it will then swing too far to the other side and there will be a period when it will be CHEAPER to buy than rent! A complete repudiation of the bubble we just had.

However this is just may opinion, and worth as much or as little as anyone's. Opinions welcome..

Ok happy readers..

So far, from the poll...it seems more people couldn't be bothered than contacted their MP.

The rest of you think politicians wont listen to your concerns? Really? Well you are probably right!

But if we are silent, then don't complain when they spend our tax money on propping up these monopolies.

You all know how politics work; they try $150 Million first. If the outcry from the public is manageable then they will send more money...much more.

If they want to support Canadian program content...who commissions the most Canadian content?..THE CBC! so why are they taking the knife to the CBC?

Anyway I have made it really easy for you:

Step one:

Click Here http://www2.parl.gc.ca/Parlinfo/Compilations/HouseOfCommons/MemberByPostalCode.aspx?Menu=HOC

...and put in your post code

Step two:

Click on your MP's e-mail address. Write your concerns about the governments plan to pay out millions to the big media companies. Make sure you put your correct name down and ask for a reply.

Step three:

There is no step three! It's that easy.

I know most of you are bored with this subject. But this is incredibly important. A democracy works if there is a free press. We have had a media shackled by the views of a family or corporation, now it will get even get worse if the government decides who should survive and who should not.

Lets make our voice heard.

I will be working on my big post comparing buying v renting. You may be surprised by the results. I will need some encouragement to crunch the numbers. If you e-mail your MP, tell me in the comments section and I will get this post out quicker.

BTW $150 Million = 2000 low income housing units = 4000 folks off the streets.