Sunday, June 24, 2007

Inventory Update




Well last week saw a sizeable increase in inventory.

On a personal note, the wife and I are very seriously thinking about selling and renting. It is really starting to make a lot of sense for our lifestyle and financially right now. Renting is sooooo much cheaper (30-50%) than buying and we really would like a larger space but can't justify the price and the sacrifices that would go with that price.

33 comments:

Rantenki said...

You should! I used to live in Langley, and sold my condo for about double what I bought it for (in 2003). My wife and I are waiting things out in North Vancouver in a suite that costs significantly less than our condo per month, and is at the base of Mt. Seymour (we mountain bike a lot).

We don't regret our decision for a moment, and after any significant correction, we have a nice nest egg to put down on a nicer place, whenever that finally happens.

freako said...

It is a gambler, but if we (bears) are correct, you may be able to trade your townhome for a nice house, if you don't mind sitting out and renting for a couple. No guarantees of course, but don't see any other endings to this story.

Raine said...

Take a good look at the rental market first, and make sure you can find something you like. Took us (family of two adults, two pets and a child) 4 months to find something suitable. Anything even half way decent was snatched up in hours. LOTS of places out there that are old, scary, and don't have dish washers!

rentah said...

Renting can be a real inconvenience, it has been for me & mine recently (all fine now), but I also don't see how this can end without substantial price carnage.
So, mohican, you're probably about to make one of your rare gambles (with the odds stacked heavily in your favour).
FTR, I'm quite comfortable being 'short' RE, as it'll clearly cycle in our favour.

A poster named 'fish' over at rc's gave a very good summary of the market on the Friday thread (and he/she has, of course, been ignored).
One point fish made that I can't recall us having discussed anywhere before was that the upper end of the market may hold up better because "the rich still have plenty of money".
In our prior discussions (VHB, condo, here, RET) we've talked about price compression/decompression and about how ALL price levels of the markets in the past have shown similar declines in prior downturns.
But, one development in recent years has been changing wealth distribution (the rich-getting-richer; esp in US, but I suspect here too).
So, as a consequence of that, will we will see more resilience in the high end come the crash?

mohican said...

re- price compression / decompression

I would expect, during the coming downturn in real estate prices, that, in percentage terms, condos will drop more than single family homes for the reasons rentah has mentioned plus I would expect the exact opposite phenomenon in the downturn as in the uptrend.

Score another reason for me to sell and rent.

On the note about gambling, I don't really feel as if I would be "gambling" as you put it but making a sound financial decision. Assuming moving to a larger place is the right decision, then the next decision becomes 1) where do we move and 2) what is our budget and finally 3) what is the BEST use of that budget.

In regards to where, I am pretty set on living within a 10 minute or less drive to work and walking distance to grocery shopping. Those are non-negotiable. This narrows down the search somewhat but does not exclude some very reasonable places.

The next decision is budget, this again is fairly easy. We live on one income - mine - and we are committed to spending no more than 30% on total shelter costs and less is better. This gives us a number to work with as a maximum.

Let's assume for a moment that I could spend $2000 / month on total shelter costs.

For buying I need to think about property taxes $200 / month, strata fees / maintenance $200 / month and interest costs of $1300 / month for a total sunk cost / month of $1900. This leaves $100 / month for principal paydown and we are at the maximum of my budget.

For renting a similar place the cost would be $1400 / month and I can now save $600 / month toward my next place or for whatever reason with the only risk being that prices rise faster than my savings rate.

exvancouverite said...

Personally, I'm sick and tired of renting.

Then I read things like BIS warns of Great Depression dangers from credit spree and then I get real skeerd about taking on a mountain of debt.

If I owned a place clear title, I'd keep it. But holding a big mortgage right now does not look appealing, imho.

Warren said...

Another thing to think about if you rent is when you plan to re-join the owners club. Don't think "oh this will just be for 12, 18, 24 months". It could be 6-8 years before things return to a level where you will feel comfortable buying. Are you prepared to accept that possibility?

I'm with exvancouverite. I do own a place (rental prop) free and clear. I think about selling, but that would be a large tax hit. I know it will drop in value, but hopefully my rental income will continue to be a steady flow of cash. I rent for my own shelter now, and have no plans to change that, its just not realistic to double my housing budget.

freako said...

"One point fish made that I can't recall us having discussed anywhere before was that the upper end of the market may hold up better because "the rich still have plenty of money".

I'd argue that the high end of the market will hold up better because it didn't go up as much. It didn't go up as much because:

1. The owners of these have nowhere to trade up to, so little reason to sell.

2. Related to price compression, it is not uncommon for a blue collar worker to push affordability well past 50% of pre tax income, but quite another for a senior partner in a law firm making $600K.

3. Customers of high end real estate are also subject to endless wants but relatively finite wealth. They want the best bank for the buck. People don't become wealthy by being ignorant, so they are more likely to understand the poor value offered by overpriced RE, and thus reluctant to overpay.

freako said...

"On the note about gambling, I don't really feel as if I would be "gambling" as you put it but making a sound financial decision."

The gamble is of course that real prices keep climbing indefinitely, pricing you out of more and more markets. In my mind it is a gamble in that there is no guarantee that it won't happen. Maybe you would prefer the term "calculated risk".

"I'm with exvancouverite. I do own a place (rental prop) free and clear. I think about selling, but that would be a large tax hit. I know it will drop in value, but hopefully my rental income will continue to be a steady flow of cash. "

That I don't undertand. Since you are taxed far below 100%, you'd be much much better off selling if you expect prices to go down. Heck, putting the proceeds in a savings account will earn you a better return than the rental income. I cannot see one valid reason for still owning an investment property if you expect prices to come down.

mohican said...

I agree freako - a calculated risk indeed. There is a possibility and a risk that real estate prices could continue to climb indefinitely and I will be priced out forever. This possibility is so remote in my view that I am willing to take that risk. It still doesn't really change my decision either since I'm already effectively 'priced out' now.

The current yield on rental property is so low and the risks are so high that it is a very poor investment for the level of risk involved.

Warren said...

That I don't undertand. Since you are taxed far below 100%, you'd be much much better off selling if you expect prices to go down. Heck, putting the proceeds in a savings account will earn you a better return than the rental income. I cannot see one valid reason for still owning an investment property if you expect prices to come down.

Sure I'm taxed below 100%, but we're still talking tens of thousands of dollars in taxes. I've written down portions to reduce taxes in previous years, so I'm paying capital gains plus capital cost recapture or whatever they call it, specifically because I did not plan to sell. I'm already in a high bracket, so its going to be a big hit.

The rental income is about 10% pre-tax of my initial investment. Should I be basing returns on its current value? Probably, but its not that simple.

I expect prices to go down, but that's why I'm not buying more RE. I'm keeping my property as insurance. Its safe to say it will never go below my original purchase price.

Maybe I just hate taxes more than rational people.

FUDGEBOYZ said...

Hey mohican how should I allocate what percentage of income I use for expenses? And how much should I be saving for future home purchase?

FUDGEBOYZ said...

I am waiting for the market to decline but the longer I have been waiting the bigger the house I'll need.

rentah said...

"I cannot see one valid reason for still owning an investment property if you expect prices to come down."

One could possibly argue that the property could remain a hedge against unforseen circumstances in which prices do not correct.

patriotz said...

I'd argue that the high end of the market will hold up better because it didn't go up as much

Yes but let's be clear what we're talking about - that's the stock priced > $1 million pre-bubble, not $1 million now. That's where the real money lives.

The upper-middle class neighbourhoods like WPG which are about a mil now took a beating in 1981 and I'm betting they'll take a beating again. Lots of leveraged speculation and recession-vulnerable incomes.

jesse said...

"Sure I'm taxed below 100%, but we're still talking tens of thousands of dollars in taxes. I've written down portions to reduce taxes in previous years, so I'm paying capital gains plus capital cost recapture or whatever they call it, specifically because I did not plan to sell. I'm already in a high bracket, so its going to be a big hit.

If you are planning on not working for one year I agree it would make more sense to sell then. Your take is interesting as lots of other people out there, right or wrong, are thinking the same thing. Personally I'd rather take a capital gain of $100K and pay $25K in taxes than take a capital gain of $50K and pay $12.5K in taxes. But it sounds like your case is a bit more complex so maybe it does make sense to wait a bit longer.

What you should be asking yourself is what else you would do with your money if it weren't in a property and if that return is better than what you're getting now (I assume you're around 2-3% net of equity). Also remember how you're taxed on rental income compared to other investment vehicles out there.

jesse said...

mohican, if you do plan to rent you should be prepared to move every so often. Also finding a good place with a good landlord takes time so be patient. I would argue it takes on average 30-40 hours of time to find a good rental. I would also sign a lease and try to renew annualy (don't go month-month) if you are happy with the arrangement. It helps a bit if you have kids in school to ensure consistency in the school year.

Remember the so-called "control premium" on ownership exists for tangible reasons, not just speculation.

Inwonderment said...

Interesting headline in the June 22 FV Real Estate Weekly.

"Listing pick up speed across Fraser Valley"

"Fraser Valley home buyers have a much larger selection to choose from after a rush of new lsiting of homes for sale hit the market in May. New listings increased by 34 per cent compared to the same month last year taking the number of active listing in May to 8,381, an increase of 52 per cent compared to May of 2006, reports the FVRE Board."

"new listingsm at 3,691 was the second highest influx of new inventory record of FVB multiple listinng Services"

In my travels around the valley a lot more inventory is coming to market in the next few months. The next little while should tell where prices are going. Sometimes it feels like the 1980's all over again especially when the average peice of house in Mission in $373,769, up 20% over May 2006.

freako said...

"Yes but let's be clear what we're talking about - that's the stock priced > $1 million pre-bubble, not $1 million now. "

That was exactly what I was talking about.

Many posters have anecdotally noted the price compression. I feel like I am buying a Slurpee at 7-11. For a few cents more, I get a much better deal. In the case of RE it is a few tens of thousands, but same idea. WPG exempted of course.

If you look on the east side, for example, there are lots of crappy places in the 600K's (and I mean crappy), but for another $150K or so, there are some places that should go for twice as much. Clearly we are hitting serious affordability concerns in this market segment at around the $750-800K range. As mentioned, I consider such compression anomalies PROOF of a bubble. There are valid reasons why relative pricing should break down.

freako said...

"there are some places that should go for twice as much."

And by twice as much, I mean of course twice as much as the crappy place.

freako said...

"Renting can be a real inconvenience, it has been for me & mine recently (all fine now), but I also don't see how this can end without substantial price carnage. "

The lack of quality rentals is puzzling. We have discussed it, and there are some plausible explanations, but overall, they don't satisfy me.

"This possibility is so remote in my view that I am willing to take that risk."

I think it is slim to none, but I can't bet my life on it. As I noted before, this is one of the paradoxes I see as causing this bubble. To many people, the risk of being priced out is perceived as a much worse fate than overpaying. Therefore, many will buy even if they are almost certain that it is a bubble. That allows it to get that much bigger.

Honestly, I think the key to ending this madness lies in the banks getting nervous. Owner's will never bidding prices up as long as they are able to raise more money and pay more. Nor can those who should know better, the investor class. I can almost guarantee you that the risk management departments are prepping some powerpoints for the boys upstairs as we speak. Even with 25% down, there is danger. CMHC is of course offering insurance on your dime, so don't expect much there. An interesting one to watch is Genworth. What the heck are they doing? It's not like they don't havent had a major subprime shakeup back home. As I mentioned in the past, a buddy of mine sold his company to GE, and during the transition, every major deal had to be vetted by Welch himself. Maybe that was a fallout of the Enron scandal, and things are more relaxed now? Anyhow, I'd keep an eye on Genworth for clues as to lender cold feet.

freako said...

Speaking of inventory, check out this U.S. national chart of inventory and months of inventory (care of calculated risk)

link

9 months of inventory and counting. If the denominator (sales) fall further, the months of inventory will explode. How long until sellers capitulate (and I mean capitulate) on price? What if we get a "music has stopped" panic like rush for the exits? I mean, some of these guys are trapped by the slowing market. They are as yet unawares, blissfully expecting the get a price in the ball park of ask. If nothing else, the flood of foreclosures will send prices down. And as we know, the reported median is grossly overstating prices. When the sales mix returns to normal, the median prices will collapse, and even the NAR will have to admit as much.

Patiently Waiting said...

We've had a horrible experience with our current rental. We wanted to do some significant saving so we settled for a basement suite in a so-so neighbourhood. The balance sheet looks great but it was a big mistake. We have crazy and inconsiderate upstairs tenants along with a negligent landlord. We are moving to a more expensive place at the end of this month after learning our lesson. We won't really be saving anymore. Oh well.

I think one of the first groups to go down in flames during a recession will be the nouveau riche. They probably have more debt to income than blue collar workers and less stable income. A working class family will do whatever work is necessary to make ends meet. Maintaining your image on the Westside is super expensive and you don't want to be seen scrubbing toilets.

el bbub said...

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Jim said...

As I posted on another thread I just bought a house in West point Grey. No curb appeal so it went below asking and well below "curb appealed comps". Takes real guts to buy in the face of this market. I will talk to you in a year after about a $100k reno and let you know how I did. I currently have a couple of revenue houses in the GVRD which I am also keeping. Gulp!

el bbub said...

Freako what do you think of iTulips return to the mean pattern predictions? Link

Would also be interesting to know if that bubble life chart correlates with Vancouver's prices

freako said...

"Takes real guts to buy in the face of this market."

So you are calling yourself brave?

freako said...
This comment has been removed by the author.
freako said...

Freako what do you think of iTulips return to the mean pattern predictions? Link

Your link is messed.

As for iTulip, not sure exactly what they story is. Did somebody buy the iTulip brand and try to profit from it?

I only browsed iTulip occasionally, but generally liked what I rea. But then I came across Jansen's article on debt and cars and what have you, and swore never to visit again. Besides, the website is seriously cluttered.

exvancouverite said...

"Takes real guts to buy in the face of this market."

So you are calling yourself brave?


I'd have to go along with Freako's question ... is this 'brave'?

I'm looking for an adjective, but not sure that 'brave' fits the bill.

rentah said...

jim: to follow on regarding the westside house purchase you mentioned on the other thread and above:

I rent on the westside.
Last house was at 1:533 rent/price ratio.
Current house 1:400.
Your figures work out to 1:273, so your rent comparison figure may be higher than current market rents. (You mentioned that the house cost 1300K and that comps rent for $4750 per month).

Regardless, you're talking about being into this house for:
1300K purchase,
plus 120K (renos),
plus carrying for a year (say 80K),
plus transfer fees
plus agent's fees (?)
plus property taxes
minus rent if you're actually crazy enough to live there through the renos.

So this house will have cost you well over 1500K by the point of next sale, and you say that the current comps are selling for about that.
This isn't just a lot of work, it's also a large bet on market direction.

el bbub said...

freako

Pardon mua, here it is: Housing price regions cascade.

WoodenHorse said...

Freako,

What was it about the debt for cars article that bugged you so much that you swore off the site?