Friday, April 27, 2007

Prophetic Thoughts (or pathetic thoughts!)

After my brain was prodded by a discussion today at Chipman's blog on Months of Inventory, I did some MS Excel divination on the current real estate market numbers. To recap, as of March 31, we are seeing slower sales than last year, we are seeing a big increase in listings, and prices at all time highs.

For some historical context, in 2 of the last 3 previous real estate market downturns, we have seen new price highs in the first quarter of the year and subsequent declines, which are often sharp declines. The 3rd market decline saw a price peak in the second quarter.

In previous analysis, we have seen a very strong negative correlation (-0.81) between Months of Inventory and Quarterly Price changes when looking at the Fraser Valley Real Estate Board market statistics and I believe that this correlation can be helpful to predict future market price movements.

That said, I will go on record at this point and say that we are at the market top right now. Prices will not be this high again for at least 5 years and probably longer. The reason I say this, in addition to the reasons above, is that my "months of inventory price prediction tool" in MS Excel says so! I will explain.

To explain the tool briefly, I have made some assumptions about the sales rate and the listings rate which I think are fair, considering the trend today, and then, given the correlation, I have extrapolated quarterly price changes from there. Sales, I believe, will stay at a rate approximately -10% and -20% below 2006 levels (I used -10% for my tool). Active listings will increase throughout the year until October (this is in line with previous years and I have made sure to use fairly conservative numbers in the tool, in line with the current listings growth trend). This chart illustrates my assumptions. Months of inventory will be flat until June and then skyrocket to 9 to 10 months of inventory by year end. Surprisingly, this is with 'normal' seasonal changes starting from our current point.

The tool I have created says that we will likely see YOY price decreases in the Fraser Valley in August 2007. The tool also also suggests that by December YOY prices will be down 8-12% from December 2006. This will only be the beginning and prices will likely decrease a further 12-15% from the top after the end of the year through 2008. That said, it is difficult to say what will happen further than 6-8 months out though with any degree of certainty.

Will I be right on, close, or way off? Who can know? We will see. What do you think?

16 comments:

-\/- said...

Thanks Mohican. Good work!

It makes a lot of sense to me. the 15% drop by december 2007 is bold, but reasonable.

I think we are in for a big one!

El Hombre said...

I think you have a peak when your average size lot in the Burnaby North area is going for $520,000.00. As per previous discussions who is going to buy that and then build a 2000 plus sq/ft house at $200 sq/ft?

M- said...

Most interesting! I assume that you used the linear inventory prediction from last Friday's chart. I didn't realize how remarkable the current trend was-- I've been estimating a flattening of prices this year, followed by relatively-small nominal declines for the next 2-3 years.

mohican said...

You are correct M-, I used the trend indicated in the Rob Chipman inventory stats and applied it to the Fraser Valley stats. It is possible that we could have flat prices this year but the correlation indicates price declines.

Paul said...

Nice work on the graph! I would be surprised if prices dropped as fast as you predict.

tulip-Mania2 said...

Mohican,as usual, excellent work.
But I think there is a lot more inventory than the available industry stats show.

And more coming, look at the crane littered sky frm here to Hope.

I also think, we might be underestimating how much future demand has been sucked up during the frenzy.

Tick Tock, Tick Tock

mohican said...

tulip - I've often wondered about the vacant and unlisted inventory but there are no hard stats to go by.

paul - I won't be surprised if prices drop as fast as I'm suggesting but I also won't be surprised if they don't. Social psychology mystifies me so I wouldn't be surprised if the prediction doesn't come true. The range of possibilities is very high but given my assumptions about inventory and sales, I don't see how price declines are avoidable at this point.

We will see. It will be an interesting show and we have the best seats.

-\/- said...

Mohican,

are you going to post the weekend inventory figures?

freako said...

"tulip - I've often wondered about the vacant and unlisted inventory but there are no hard stats to go by."

As I have pointed out in the past, I think we have pent up supply. As we all know, there is "natural" supply from people who no longer need a home (whether retiree or cash flow investor). I speculate that many who would normally sell are holding off as long as prices are rising. Why sell an asset that appreciates at double digits? Hence pent up supply. All that is needed is to turn the corner. And of course, the opposite is occuring on the demand side, borrowing from the future. Once supply from the past fails to hook up with demand that is in the future, the sh*t will hit the fan.

freako said...

I know its totally arbitrary, but since I have watched the market for some time, it feels like a milestone. Phoenix just crossed 60K of inventory.

http://tinyurl.com/2zobyk

They were at 10,000 less than 2 years ago. At twice the pop of Vancouver, that would be like Vancouver going to 30K.

mohican said...

Pheonix was the bubbliest of the bubbly and so is Vancouver. 30k inventory by next fall is extremely likely.

talus said...

Great job Mohican!

I agree fully with the call on the top. Over here in Victoria I'm seeing 5-10% price reductions right now on the homes people really want to move. On average that is a 25K to 50K savings.

This market is like pushing a snowball up a hill. At some point it just gets to big and rolls back on you.

Wait for it! The fun is just beginning.

talus said...

freako...

I like Housing Tracker for stats.

I'm certain I saw the Phoenix market down to just 2000-3000 listings at the peak of the spending spree.

Right now a median Phoenix home is down 13% from it's peak in September 2005. That is right... those buying today could have saved $50,000 had they waited just 1 1/2 years.

The western US market is crumbling from the outside edges inward.

This is great to watch. Kind of like a soap opera. You can go away for a few weeks and then just sit down and watch one episode and your all caught up again.

freako said...

"This market is like pushing a snowball up a hill. At some point it just gets to big and rolls back on you."

Agree. One of my old analogies was that of smaller and smaller people pushing a bigger and bigger ball up a steeper and steeper hill. Once momentum runs out, there will be a Wiley Coyote moment and then freefall.

Paul said...

Freako, you do have some great analogies, LOL.

This spring we have not had a hot market. We have had a healthy clip of listings and moderate sales. Watching Mohicans projected inventory exceed estimates so early (Re: chart) is very interesting. Looks like we may hit 16k listings sooner than later.

M- said...

Paul: this spring has been a hot market. Maybe not as hot as last spring, or the spring before, but it's still hot. Inventory is moderately up over last year, but it's still tight, and sales are down, but not by much.

A few weeks ago, my wife and I sold our Kitsilano townhouse for 21% over the 2007 assessment in less than a week. Lots of people viewed our place, and we had 3 qualified offers, all over asking.

Now, if you're looking at the trends, things are bearish. The inventory increases seem to be accelerating. Sales are still strong, places are still selling very quickly and over-list, but this is happening less and less. Anecdotally, realtors are finding that "subject to financing" is a dangerous clause-- lenders seem to be tightening their standards. People are noticing more "For Sale" signs popping up all over.

People are still giddy about being paper millionaires, but there's a suspicion that something's not right, that it can't continue this way.