Saturday, February 23, 2008

Where do we go from here?

Last year housing prices kept on marching upwards despite rising inventory. The trend continued until the middle of summer when prices stopped climbing- the basic supply and demand variables starting to take their toll.

Are we seeing a repetition of this pattern? Perhaps we are. Despite sharply higher inventory, the commonly tracked average/median prices have been inching upwards. But it’s not unexpected and most certainly not unseen in other bubble markets, especially south of the border. Prices continued climbing upwards even as inventory continued to balloon in places like Phoenix, San Diego and of course Florida. The commonly given reason for this phenomenon is the smaller number of transactions occurring at the lower end of the market, thus pushing both median and average numbers higher. It certainly sound plausible.

We are close to the end of February and sales are off by around 40 per cent as compared to last year. Sales are certainly running slower than they were in 2006 or 2005. Yet the inventory in both Calgary and Edmonton is nearing all time highs. And this is February only. What will happen when we are past the peak selling season but not the peak listing season. That is how high will the inventory be in September of October? Can we say 15000 in Calgary and Edmonton, excluding the sale by owner listings?

If we were to hit that number, then it would be a massive glut of listings that would be chasing a small pool of buyers. 19000 listings (15000 plus about 4000 in sales by owner) for cities of size of Edmonton and Calgary (around 1 million population each) would mean roughly a house for sale for every 50 people. That’s right. 1 house for Sale for every 50 people. Is it going to happen? Of course, predicting future is fraught with perils but just observing the seasonal rise in listings along with the sheer number of projects that are completing in this time frame makes it likely that we’ll hit these numbers or go beyond.

The important question that we must ask is- why are so few sellers stepping ahead to buy? Have we run out of demand? With Alberta’s economy still perceived to be the strongest in North America, why are we not seeing another mad rush to get into the market? Have people recognized that the prices have further to fall? Is it because the massive surge in demands were simply 'borrowed' from pool of buyers who were not yet ready to buy but bought in any case using creative financing and 40 year amortizations (subprime anyone)?

You would expect the mainstream media to ask some of these questions. Instead, they are busy regurgitating the press releases of realtors who tout the ‘wonderful investment’ that Alberta real estate has been. Too bad that masses don’t seem to understand the difference between ‘has been’ and ‘will be’ when it comes to investing (or any other trends really). Alberta was a great investment when you could buy ‘condos’ in apartment building for less than $20k a piece around 10 years ago. Of course, talking of real estate was considered asinine by the masses at that time. As late as 2005, you could pay a reasonable 100 to 125 times rent and buy almost any property across the province. And then, the craziest escalation in prices began. The same $20k condos were 'refurbished' and sold for over $200k to the believers of 'buy now or be priced out forever' crowd.

On this blog, we try to venture into the territory where the mainstream media hazards not to. For their bread and butter comes from the advertisers who rely so much on keeping the prices high and transaction volume higher still. The fundamentals haven’t changed much. We have rapidly rising inventory and falling sales as compared to levels attained in last several years.

Typical properties in both Edmonton and Calgary have fallen by at least $50k since last summer. The bubble is deflating right in front of our eyes but a lot of people are still claiming that it’s all rosy. They can’t afford to say anything otherwise.

First time buyers should exercise caution and do their research- is buying at this time really the best thing? Could you save $50k, $100k or even more if you waited for a year or two?

Here's a quick poll for the projected peak inventory of 2008:

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