Wednesday, October 24, 2007

When houses don't sell

A friend of mine in the US Midwest bought a house at the peak a couple of years ago, paying close to $300k for a 2500 sq feet home in an excellent location in his city ( contrast that with where we are in Alberta right now ). They are doing pretty well, making combined income of $150k or so. They made a good down payment of around $100k when they bought their house. But of late, my friend hasn't been very happy with his job and says that he sees limited growth prospects with his current employer. Of course, in our past conversations, I've suggested that he relocate to another location for better prospects. He says he would want to do that, but just can't. Why?
Because his house wouldn't sell.

There you have it. The love affair with housing having all but ended in the US, house ownership is again becoming a 'lifestyle' decision . This is not an unfamiliar story to me. I've known several long time Edmonton residents who tried to get out of this place on a few occasions in the past (mid 90s) but couldn't. Why? Their house wouldn't sell.

Now when they say their house wouldn't sell, they really mean that it wouldn't sell for the price they paid for it or perhaps 20% less or more depending on the stage of the real estate cycle.
My friend can probably sell his house for around $250k right now, but that would wipe half of the down payment he made. And he must get an exceptionally good job offer at another place to really compensate for this loss. I doubt he's going to find that so easy.
I don't quite know why he bought this big a house when they really are a DINKS family. These guys are fiscally very savvy and easily save several thousand dollars after paying all their expenses. So the question of ownership brining forced savings is not applicable to them.
I think a lot of people buy houses simply because it has become the 'normal' thing to do. That is people expect that you'll buy a house when you make good money and can afford a down payment. Of course, I never agreed with this approach as it misses out on so many other fundamental factors like:
  • What are your long term goals? Are you working towards them? Is buying an expensive house going to prevent you from fulfilling these goals?
  • Do you like what you are doing work wise? That is do you really like the work you are doing and will be willing to do it for the next 20, 30 or 40 years (depending on the size of the mortgage), primarily for the sake of paying your mortgage?
  • Do you really like the place where you are buying? Or is it just because of the job that you are buying a house? What if you get a better offer at another place? That is, how strong are your ties to the place where you are buying?
  • Does it make senses to buy economically? Is renting a better option? What's the Price/Earning for the property you are planning to buy.
  • Are you comfortable in paying an amount almost equal to the cost of the house over a 25 year period to a bank in interest that did nothing more than creating money out of thin air?
  • Why are we buying a house? Is it for social status? Is it because everyone else in our peer group has? Have we considered all the associated costs?
Of course, people need to ask tens of other questions before going on to make the biggest purchase of their lives. It's funny a lot of people will 'waste' hundreds of hours of their lives clipping coupons and chasing 'better deals' for insignificant purchases but not get fully educated when spending hundreds of thousands of dollars on buying a home. It's sad, but true.
I know at least half a dozen people who have bought during last year or two in Edmonton and Calgary. I suspect they are likely to be long term residents of this province.

Thursday, October 18, 2007

The Lull before the storm

The financial crisis of last several months has apparently been tamed by the collective intervention of central banks. There is little fear, at least on the north of the 49th parallel. Everything appears to be in control. Except, for some candid admissions by the Canadian central bank that our big boys are facing credit squeeze. May be it's to build a case for clipping the wings of the soaring loonie and helping exporters by potentially reducing interest rates in the coming months.
Back in the world of real estate, Inventory is still piling up in both Edmonton and Calgary, despite hundred of listing expirations every week. Edmonton MLS listing count is just a couple of hundred shy of 10,000. Comfree has close to 3200.
The number of rentals is steadily rising too, and rental incentives are back, at least sporadically if not as a rule. Barring some major financial or geopolitical event, I don't expect a panic outbreak in the next month or two. It's possible that something dramatic happens and people get afraid, but this invincibility of real estate investment paradigm was built over a long period of time, at least in Alberta. If prices do not fall for ten consecutive years (1997 to present), it's hard to argue with Pavlovs that the eleventh year can indeed be very different.
A lots of hopes are hanging on January/spring/summer/{your favorite month} market turnaround. And why not? Oil is making record highs and there hasn't been any major investment curtailment announced by any company due to proposed royalty revisions.

So if the fundamental story is intact, wouldn't the prices resume their ascend to infinity pretty soon? The only problem is that the fundamental theory itself is fundamentally flawed. Yes, oil sands did play a small part. But that's about it. Easy credit, rampant speculation and the global housing mania were the bigger factors in driving up the prices. As and when the public mood changes related to these, the level of oil sands investment incoming to Alberta will be irrelevant. Sometimes it is just astonishing to see the asking prices for very ordinary shoe boxes in Edmonton selling for over $400k. What fundamentals dictate that prices of such houses be so high in area of such vast expanse and copious raw materials? Alas, there are none.
So come the 'favorite month of rebound' and the rebound does not occur, I expect a lot of 'forced landlords' to try and find an exit. May be it will be too late then.
Remainder of 2007 may yet be the best time to sell Alberta real estate for a very long time.

Finally, thanks again for wonderful discussion, information exchange and useful links. I'll be posting more frequently once my work load eases off somewhat.

Thursday, October 11, 2007

More of Same Old....

That is:
So what do all these suggest? Even though there's a realization that the market has changed, the hopes for a turnaround have not vanished. Yet.
That's why a lot of people are still renting out their 'second' or 'investment' properties for short term. In short, the waiting game is in play in Alberta and it is slowly going to cool down the fervency that once was the hallmark of Alberta real estate 'investors'.
Other than that, Seattle, the last bastion of 'real estate always goes up' (in the US) witnessed the first YOY drop and a significant drop in MOM prices in September.

Sorry for the long delay since last post;things have been super crazy at work.

Wednesday, October 3, 2007

Beyond Reason-It's a matter of faith now

I'll not get into the details of numbers of Edmonton or Calgary as they have already been discussed at Bob Truman's and Sheldon's blogs.
I am quite astonished to see the 'shouting match' going on between 'bitter renters' and the happy and prosperous flippers and investors on Shelodon's blog. We now have almost 4 months of data related to Edmonton and each month getting progressively worse than the previous.
Consider the following picture of Edmonton over the last few months:
Tsunami of inventory first hit Edmonton in June, followed by rapid increases in July and August. September still brought close to 1000 properties to the market, though the rate of inventory increase clearly slowed. The median and average prices have been falling across the board all this time. Sales volumes are down to historic lows. Last month was around 50% slower than September 2006 for Sales volume.
Inflow of people has reduced to Edmonton and far fewer people are coming to Alberta recently. Housing construction is still at multi year high and over 15,000 properties will be added within a year's time. Lending standards are tightening. Loonie is trading at near all time highs making a significant dent in industry and government inflows. Industry is threatening with significant investment withdrawals from Alberta if the royalty changes are implemented.
Yet, there are 'bulls' and 'investors' who fervently believe that this will have no impact on real estate price. After the current 'little correction' is over, prices will resume the normal ascend of 5 to 8% come January. Why? How?
The answer is in faith. A lot of sellers have this same belief, that's why a lot of them want short term rentals to carry them through to next spring when this 'correction' will be over. The only question all these sellers need to consider is: What if that does not happen?
What if the price decline accelerates after every month of waiting? What is there's an external economic shock?
If you are a buyer, consider this bull scenario- If the bulls are saying that the prices will rise only 5 to 8% from here on, what's the hurry to buy. By next spring prices will have merely (if at all) recovered to the levels last seen in May this year.
On the other hand, if you go beyond their belief and see what the macro numbers and the real estate fundamentals are telling you, this is probably the worst time to buy. If the prices fall another 10% by next spring, and more after the spring turn around does not materialize, how much will you lose? Especially considering the great rental deals that are available right now.

Finally, why does one argue with a real estate agent about the time to buy? "It's always a great time to buy and build equity." So what if equity is negative for the first 10 years of your 'ownership'.
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