Different Kind of Spring Rush in 2008?

Spring is finally upon us and with 11 days to go before the end of March 2008, it seems that this year’s highly anticipated “spring rush” will be different. Sales are decimated, new listings and overall inventory are ballooning out of control.

From a historical trend, the start of spring has been associated with an increase (frantic, for boom years) in real estate market activity, resulting in skyrocketing prices. Since the snow has melted, the real estate market can carry on (we never got that much snow in Calgary so I don’t know what we can blame the dismal sales on)! Interesting to note, the month of March represented the annual peak in sales activity. So if you’re a seller, you’re highest probability of selling your property is this month. In March 2007, there were 2272 SFH sales and 1026 condo sales. In March 2006, there were 2049 SFH sales and 995 condo sales. The month of March is important as it sets up the market for the next 2-3 months when market activity is the highest during the year.

To get a better idea as to what direction the market will be heading in the near future we can employ simplistic supply-demand economics.

Demand
Sales activity in the Calgary real estate market has been eroding since last year. Sales are down 30%-40%. If demand in March is low, the precedent will be set for the rest of the year.

SFH March 2008 Sales (MTD): 886 / 1601 (projected)
SFH March 2007 Sales: 2272
SFH March 2006 Sales: 2049
___
Condo March 2008 Sales (MTD): 350 / 625 (projected)
Condo March 2007 Sales: 1026
Condo March 2006 Sales: 995

In addition, the following news stories which ran in MSM illustrates just how unaffordable Alberta housing is. The super-perma optimistic public sentiment is definitely turning. The once persistent pursuit (hype) of owning a house has been rescinded, as reality sets in. Simply put, buyers are realising that housing is too expensive and not sustainable by current income(s).

• Albertans Less Eager to Buy Homes
• Affordability for housing has dropped to 18 year low,
• Housing Affordability is an Oxymoron
• Resource Boom Can’t Last Forever
• Canada begins tracking U.S. into slump
• Update: Calgary’s Resale Market Suffers Deepest Decline

Supply
Supply levels for both SFH and Condos itself evident. Inventory is at all time record highs so early in the year. It’s scary to anticipate how much inventory will be on the market by the end of 2008. The following statistics do not include other supply sources such as welist.com or comfree, etc.

SFH March 2008 Inventory (MTD): 5691 / 6351 (projected)
SFH March 2007 Inventory: 2340
SFH March 2006 Inventory: 1166
___
Condo March 2008 Inventory (MTD): 2685 / 2960 (projected)
Condo March 2007 Inventory: 726
Condo March 2006 Inventory: 1,028
(source: findcalgary.ca)

Price
Prices have remained stagnant since last month. Analyzing prices in these current market conditions would not allow someone to truly understand the market. As mentioned already on other real estate blogs, one reason why SFH prices have stayed stagnant over the past months is due to the tapering of variance in sales mix. The sales mix is evident if we analyze the communities with highest sales activity in Calgary:

Zone A/B Feb 12-Mar 6 Top 5 Communities in Sales:
1. Coventry Hills
2. Tuscany
3. Taradale
4. Martindale
5. Panorama Hills

Zone C/D Feb 12-Mar 6 Top 5 Communities in Sales:
1. Bridlewood
2. Evergreen
3. Cranston
4. McKenzie Lake/McKenzie Town
5. Cranston
(source: creb)

What do all these 10 communities have in common? They are all new communities in Calgary. All these new communities have similar property product line, with mid to upper tier housing units. This confirms that presently, majority of buyers in the Calgary market are moving up, into bigger houses (in newer communities) which cost more money on an overvalued basis. This will keep average and median within a stagnant range.

Economics 101, with lower demand and higher inventory, prices will have to retract to achieve market equilibrium.

With March sales being dismal compared to other years, this sets the stage for the next remaining months of the highly anticipated “spring rush” in Calgary. Every seller in this city has been waiting for this “phenomenon.” If March is any indication as to what is to come then this year’s ”spring rush” will be weak at best. Interesting to note is that demand has returned to almost pre-boom levels. Yet inventory is at all time record highs and asking prices are still way too high. The ball is now in the sellers court. Buyers aren’t buying anymore. The have nothing to lose. With each passing day, their savings accounts grow. On the other hand, the carrying costs for sellers holding multiple mortgages will be a continuing financial burden.

Will this instalment of the “spring rush” prove disappointing for sellers? Where do we go from here? Or will this spring actually be the catalyst for a major price correction in Calgary?

Bubble Community Watch: Panorama Hills

Panorama Hills

February 12 – March 6 2008 Sales and Average Sale Price (SFH)
Sales: 16
Average Sales Price: $531,546
Active SFH Listings (March 15 2008): 112
(Source: creb, mls.ca)

A formal comparison or statistical analysis cannot be made because the listings statistic is off 9 days. But just ”eyeballing” the dismal “spring sales” numbers and volume of listings, it looks like sellers will be required to substantially reduce asking prices in this community to trigger a sale. In estimation, Panorama Hills has the worst SFH sales-to-list ratio in Zone A. Will this community be the first to fall? Only time will tell. 

Serfdom Life

Ben Bernanke, Chairman of the US Federal Reserve may be ready to cut interest rates again in hopes of keeping the US economy afloat in recessionary waters. In addition to cutting rates, banks are pumping liquidity into the financial markets. A consequence of these actions results in the value of the US currency approaching third-world status. With the weak dollar, crude futures are used as a hedge against the decreasing value of the greenback. Hence, the price of oil has inflated to record levels creating yet another bubble. This time it’s a resources bubble. The lowering of interest rates in conjunction with the liquidity inundation will result in one thing: high levels of inflation. Augmented inflation can only be adjusted back to equilibrium by implementing higher interest rates. Interest rates cannot stay this low forever. When the US Federal Reserve raises interest rates in the future to reign in inflation, the Bank of Canada will follow suit.

If you’re a Calgary home owner who bought during the last two years amidst bubble economics, you are not cheering for Ben Bernanke. The more interest rates are cut, the higher interest rates will have to rise in the future to correct the current economic mess. Any consequential increase in mortgage rates would spell financial disaster for many owners who have recently paid for bubble properties, especially when home values decrease. Most first time home buyers who opted for 40 year mortgages (or other creative mortgage vehicles) should be worried, as they were “tricked” into affordability a la subprime. The general rule of thumb for real estate affordability is 25% down for 25 years (single income preferred).

Initially, low interest rates, a hyped up real estate market and a false sense of affordability sucked up many home buyers. As debts accumulate/increase far beyond salary capabilities, a life of financial serfdom becomes life itself. It’s the perfect trap, a life of constant running and sprinting on the financial treadmill with no ability to get off.

Have a good weekend everyone!

Garth Turner, He Gets it Too.

Garth Turner (Canada’s version of Peter Schiff?), Halton Member of Parliament, businessman, and real estate investor shares his opinions that Canada (Calgary as well) is not immune from the subprime crisis.

The must-read article brings home what bubble bloggers have been discussing over the past years about the hyper-overvalued real estate market in Canada. Overextended young buyers, double income requirements, 40 year mortgages, 0%-5% down-payments, assumables, etc. are all elements endeavouring to sustain the unsustainable. Some common marketing-machine driven real estate myths from the article:

1.) Unlike stocks, real estate is a riskless investment.
2.) Houses [always] appreciate
3.) Canadian lenders are more conservative [than U.S. subprime lenders]
4.) Industry experts are worth heeding
5.) You need some place to live anyway
6.) A house is a great investment
7.) Better to be an owner than renter
8.) Rising markets are normal
9.) Real estate profits are tax-free
10.) Canada is different
11.) Alberta is different

The addition of #11 (in relation to #2 on the list) to the list is a colloquial misconception in the province of Alberta. The hollow validation that because Alberta possesses energy resources, paying half a million dollars for an average house in Calgary is  justifiable. It is not.

Garth, who is also a best-selling author recently published his new book “Greater Fool,” which examines real estate and personal finances in today’s fragile global economic state.

In addition, his new blog is also now open for business, GreaterFool.ca.

Condo Market is Soon to be Toast

Recently, I’ve noticed on blogs moderated by realtors, that talk and hype has been focused (sustained) purely on the SFH market.

But what they fail to acknowledge (perhaps denial?) is that the Calgary condo market is on the cusp of self destruction. The condo market is symbolized as the most affordable entry point into the real estate market. There should be market activity. But where is it? If you examine the market closely, it is stalling, weak and ready to crumble. Once the condo market falls, the effects will ultimately cascade into the SFH market (or will simultaneous combustion occur?).

Initially, we can examine inventory levels. We currently have 2313 active listings for condos in Calgary. That is only 16 listings away from the all time high of listings on October 2007 (2329). We should easily be surpassing that mark earlier this week. 

Secondly, condo sales are down 38% compared to last year. Currently, 2008 sales are stalling and flat lining:              

Feb 2008: 562
Jan 2008: 454
—
Feb 2007: 895
Jan 2007: 736

Thirdly, current condo prices are also stalling and flat lining as well. We no longer see the massive month to month price increases we saw in 2007:                                                                                                                                                  

Feb 2008 Median Price: $295,000 Average Price: $311,812
Jan 2008 Median Price: $290,000 Average Price: $311,232
—
Feb 2007 Median Price: $280,800 Average Price: $301,812
Jan 2007 Median Price: $267,500 Average Price: $287,299

In addition, the sales list ratio is plunging into the abyss as compared with 2007 statistics.                                                

Feb 2008: 45%
Jan 2008: 32%
—
Feb 2007: 101%
Jan 2007: 73%

Lastly, the February 2008 DOM statistic has barely moved from January 2008 DOM. DOM is not generally a good indicator to use when deciphering market conditions and direction, but for fun I thought I’d throw in the comparison as realtors use DOM as smoke and mirrors. Notice the difference from 2007 to now, when DOM a year ago was under a month.

Feb 2008: 45
Jan 2008: 48
—
Feb 2007: 28
Jan 2007: 39

We are witnessing a contraction in demand and super dilation of inventory for condominium units in Calgary. This contraction in demand may also be affecting the SFH market, resulting in a tapered variance in the sales mix. This would explain why the SFH market is seeing higher prices when inventory is high and sales are low.

New condo developments such as Arriva, Xenex on 12th, Nuera, Centro 733, Stonecroft, London London, Colors and so many others have been on the market for over a year and have not sold out.

With so much inventory right now, the sky will be the limit this year. It’s going to be a challenge for flippers to maintain their list prices at the current levels. If they maintain their denial, they’ll be priced out of the market forever – literally in terms of being able to sell their condo.

The days of a $300,000K+ 700 sq foot 1 bedroom condo are soon to be over.