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.

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.

More of Same Old....

That is:

• Rental Price Reductions
• Mortgage rates going up
• Prices falling in both Edmonton and Calgary(Link updated)
  
• Inventory still rising
• Loonie holding on to 31 year highs.
• Squabbling on a less worse indicator of real estate prices.
• Builders still building as if it were 2005 and King Ralph had not sent the prosperity cheques yet.
  

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.

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'.

Alberta Realities

This is my 100^th post. Over six months ago, when I started this blog, things were very different from what they are now. Real Estate myths that were firmly entrenched in the psyche of masses, though not completely debunked, but the faith in them has been somewhat shaken. My prediction is that Alberta real estate will become a questionable investment for the masses before the year 2008 is over. Not unlike what’s happening in the US.

Not only is the inventory in both Edmonton and Calgary at all time highs, but the sales volumes are at multi year lows for this time of the year. And while this is happening, there’s a possibility of significant pullback in investment by the industry. They could be bluffing given that their profits have increased over 3 folds in the last 10 years. Or they could be serious, but are merely trying to pin a political reason on spending cuts they would have made in any case.

As mentioned several months ago and repeated by a reader in the previous thread, I believe that for the average Albertan, the prosperity has been primarily due to real estate wealth. Yes, no oil or natural gas money for the masses. Perhaps a job in the oil patch for a few, but for majority, it’s just the boom due to real estate price escalation, not unlike any other bubble city of North America.

How else could one explain, real falling wages in these times? Despite all the hype of high wages in Alberta, the average wage has fallen in the last six years. "Despite the boom Alberta has become the province with the highest percentage of employed clients visiting food banks." Perhaps, they are all spending a good chunk of their money on housing costs.
The other day a friend was looking for a house for rent. The current tenants were leaving Alberta for greener pastures. Where to? Windsor, Ontario. Go figure. They say everything is so expensive here. And of course, the winter isn’t exactly a joke.

Here’s a summary of some of the reasons why I think this bust will be a lot worse than a lot of people think at this point.

-Massive run up in the values in the last 2 years causing significant deviation from long term average values for prairie cities.

-Extreme speculation in real estate market fueled by global credit bubble.

-No geographical constraints on expansion of any major city in Alberta.

-Significant disconnect between renal rates and carrying costs. Most properties are selling for 200 to 300 times the monthly rent.

-Dramatic erosion in affordability due to stagnant incomes and surge in prices.

-Global liquidity crunch making lenders more careful about who they lend the money to.

I think the primary reason anyone would want to live in Calgary or Edmonton is economic. If wages are stagnant, quality of living is poor, infrastructure is dilapidated, hospitals are full and real estate costs are lower only than in Vancouver, why would anyone want to move here? Or those who are already living here would want to continue to live here? Alberta became and still is a play ground of real estate speculators, a lot of whom are about to learn a pretty painful but much needed lesson.

A lot of people are often surprised when the boom becomes bust. This boom will be no different.

Weekend Open Thread

Thanks to all of you for a wonderful week of useful discussion, informative links in the backdrop of a changed real estate market in Alberta.
Some thoughts for the weekend:

• The rental market has changed so much that the nouveau 'landlords' are now calling potential tenants for viewings. This is based on first hand experience. Apparently, the 'investors' can't sell or rent these properties. And remember, these are still great times for Alberta, at least on paper.
  
• Despite that, fewer people are moving to Alberta and net migration to the province has been way below levels seen last year. Yet, they are still building in both Edmonton and Calgary as if tens of thousands of people will be moving here every month.
  
• An interesting theory challenging 'peak oil'.
  
• Inventory continues to climb. Comfree in Edmonton has stagnated at around 3100, while MLS continues to grow and is now reaching around 9800. Calgary is pretty much the same with over 12,000 properties for sale.
  
• It still makes no sense to buy. Typical properties are selling(or not selling but on sale for!) for 250 to 300 times monthly rents. This is despite the 'massive' increases in rent and other positive factors in Alberta.
  
• If you go back just six months and what were discussing here, or to Calgary Contrarian site before that, you'll find that it's playing out pretty much as we had all expected. It's a classic bubble in Alberta, although a more fragile one, as compared to the one in say Vancouver. And it is not unexpected. Prices went up by over 100% in so many cases in less than 2 years. And now when they are falling, a lot of people are shocked. Expect this shock to multiply several folds when the January/Spring/Summer turnaround does not arrive.
  
• Why do people call the bears as pessimists? While reading comments on Sheldon's blog, I was characterized as a pessimist. Why is that the case. Is hoping for lower prices being a pessimist. We all are very happy when we experience a drop in prices of things we might buy. As per the Austrian school, prices of goods and services should fall in an economy where sound monetary policy is in place and productivity is improving. Yet, we continue to experience modest central bank created inflation in normal times. But in times such as these, when real estate or other bubbles are created to fuel the economies by injection of consumer spending and debt, the masses are actually robbed of their wealth, with very few people actually even realizing the bigger story. They are too busy participating in the buccaneering of cheap debt, flipping and making money using their 'investing talent'. On the human side of it, a lot of families are still cramped in 30 year old townhouses and they would love to move to better places that are more affordable. Hoping that they can get a better place to live in- Is that pessimissm?
  
• Have a wonderful weekend everyone!
  

What's happening to the rental market?

Of course, other than the still strongly perceived rental shortage in Edmonton and Calgary.
I keep a good look at the number of rental listings on both craigslist and rentboard.ca.
Rentboard used to have fewer than 100 listings for Edmonton just until a couple of months ago. Today, that number is over 170. Craigslist had about 40 new rental listings for Edmonton alone just today. Yes, in a single day. This does not prove anything statistically, but clearly, there's a lot of product in the market right now.
Of course, none of this should be unexpected to anyone who knows how this story played out below the 49th parallel, especially in the bubble states of Florida, Arizona etc. Based on the current Edmonton MLS inventory of over 9600 and comfree of around 3100, we have almost 13000 properties for sale. And the desperation is rising, as this 'investor' will take any offer- buy or sell. Perhaps, he or she did not really crunch any numbers before buying this property? Was this bought for cashflow purposes? for retirement? More like- "real estate always goes up and since everyone was buying, I said, what the heck?"
Add to the existing inventory of above 12 or 13k in both Edmonton and Calgary, the roughly equal number of properties that are still under construction, and what do we get? We could have the reintroduction of rental incentives and falling rents. The nouveau 'landlords' have to pay their fifth mortgage one way or the other. Something to partially offset their mortgage costs will be better than nothing.
But of course, this could all turn out wrong, and someone will clear this inventory off very quickly.
But here's the dumb question of the day: If a city in Alberta has over 20,000 properties for sale and most of them are vacant, how many new comers/migrants/immigrants does it take to clear off the inventory? And how many years will it take to do so? And will the builders stop building anything new during that time?