Fantastic Hopes

Spring is here, at least in the real estate context. But the spring hasn’t quite sprung sales wise. Inventory continues to pile up and the pace of new construction is still frantic.
The bulls claim that everything is perfectly fine except for a little ‘inventory problem.’ If only we could get rid of the excessive homes, things will be all fine.
This is not unlike the problems in the US. If only they could get rid of excessive inventory in Phoenix, Miami, California and pretty much most of the US, there will not be a housing crisis.
But the more fundamental questions are never raised, at least in the ‘bull’ or even realist camps. Why do we have such excessive levels of inventory? Did we over build based on speculator driven demand? Did we build assuming tremendous rises in rent? Did we over build based on an unending supply of greater fools? Did ‘investors’ buy properties without really having any understanding of the real estate market and valuations?
It shouldn’t require a lot of effort to figure out answers to these questions.
There was a massive run up in prices in Alberta real estate between Fall 2005 and Summer 2007. This had very little to do with the fundamental factors-‘Alberta Advantage’, oil prices, investments in projects, strong economy, job growth etc. It had almost everything to do with two things- tremendous speculation and easy credit.
The spring is here but the rebound has not arrived. So one of the bulls’ wishes has not been granted by the real estate gods. The next strong wish for the bulls is that the inevitable-a significant drop in prices- will be deferred permanently.
Right now, the mood is still very positive in Alberta. It’s keeping expectations and hopes high for most sellers. I know at least half a dozen ‘landlords of greed’ (including our current landlord), who have chosen not to list their properties this year and decided to rent out their properties, even at the cost of several hundred dollars a month out of their pockets. The reason- expectation of prices recovering to spring 2007 levels. Given a choice between selling their properties for big profits-an easy $100k over original purchase prices-or waiting for this ‘price recovery’ and renting out in the mean time, they are choosing the option of subsidizing the renters in the expectations that the prices will rebound to the all time highs again.
What they don’t realize is the possibility that in real terms prices may never rise to those levels again. Nominally yes, but in real terms, those prices may have been the all time high. Not unlike the loonie touching 1.10 to the US dollar. Not saying it can’t happen again, but anyone who had the opportunity to sell Canadian dollar at that point and did not will have to wait for a long time before the opportunity arises again. Perhaps 97 or 98 cents won’t look too bad for the loonie if we take a long term perspective. The Spring 2007 Alberta real estate prices horse has left the barn and is not coming back.
The match is now on between the fantastic hopes of the sellers and the patience of buyers. Assuming no external shock, slowly and steadily the weight of inventory will bring down the prices. If there's an external shock (lending issues with banks, severe recession, environmental issues with oil sands, commodity price collapse), things will get ugly.
In the meantime, all the bitter renters out there should take advantage of the ‘landlords of greed’ and let them subsidize your rent for at least a year. Patience is an under rated virtue and will be rewarded.

We are almost settled in our new place and postings should become a little more frequent.

Weekend Open Thread

It isn't Friday yet but we are crazy busy getting ready for our move. I've been meaning to do some posts but didn't have the time. Here's a compressed version of some items of interest that would normally require a full individual post of their own.

- Very early in January, we questioned "Where are the buyers? And the answer given was- they are all sitting in front of their fire places and hiding from the cold weather. That weather is largely gone but the buyers haven't come yet. The question therefore merits repetition. Where are the buyers? It's end of March and so far sales are off by more than 40 percent YOY and barely equal to the Feb 2008 levels. Is this the turn around everyone was counting on? Is rest of the buying season going to be different?

- The more things change, the more they remain the same. Perhaps, the Calgary Builder Association president needs to be given an introduction to the large write offs builders south of the border have had to take due to 'land banking.' But out here, protected by the 'Canadian shield', ridiculous prices paid for land by Calgary builders is touted as one of the reasons why Calgary prices are unlikely to fall. Of course, rising land prices should be one of the primary reasons for rising housing prices in the middle of prairies with unlimited land for hundreds of kilometers in all four directions. But common sense is the first casualty in a mania.

20 months Supply of Condos in Calgary
- I don't know the extent to which Genworth's balance sheet contains toxic sub prime garbage, but they are trying their best to deny that there's any bubble in Calgary condo market. We all know that there's no bubble after all, right. There are only 3000 condos for sale in Calgary and the market has just experienced its first YOY decline in a long time. And there are only 9000 condos under construction in Calgary as of January 2008 as per CMHC Feb 2008 report for Calgary. At the current rate of sales of very optimistic 600 per month, there will be supply of at least 20 months. That's right, there's no bubble. The more important question that everyone should be asking is- just how many 40 year subprime mortgages has Genworth doled out to those making the best investments of their lives. It is quite pathetic that main stream media refuses to do any homework before rehashing the propaganda from the Real Estate marketing machine. It's especially pathetic given the recent happening south of the border. One would expect that if someone is denying that there's a bubble, someone would do some research. But the party must go on otherwise there will be a problem in the food chain.

40 months Supply of Condos in Edmonton
Edmonton is in even worse shape with over 9500 units under construction as of Jan 2008 (as per CMHC Feb 2008 Edmonton report) and current inventory of around 3000. At the current sales of around 300 per month, there will be more than 3 years of supply. But there are no bubbles.

Everyone have a great weekend!

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: