Tuesday, April 29, 2008

Vancouver's Next - Watch Out!

This post is brought to you by a real estate crash near you and the letter "L" which stands for Losses, as in large equity losses in real estate.

Your average Sesame Street watcher could understand what the lines on this graph mean and why Vancouver is likely to folow the pattern set so clearly by cities like San Francisco, Los Angeles, Seattle, or Portland.

This chart is courtesy of Seattle Bubble Blog.

Let us, for argument's sake, say that the Vancouver House Price Index peaked in March 2008 and that our market will follow a similar trajectory to Los Angeles. One year from now house prices will be at 92% of their current value. This means that your average $500,000 townhouse will be worth $460,000. This is a potential savings of over $3,000 per month just for waiting on a very important purchase. Can you afford to lose $3,000 per month?

Let's go out another year from there and see where our $500,000 townhouse is now. 24 months from peak in a place like San Diego would mean that our $500,000 townhouse is now worth $420,000 which translates into a loss of $80,000 or just over $3,000 per month for two years straight and prices are not finished coming down yet.

I don't know about you but paying $3,000 per month in mortgage payments on a place that is losing value at a $3,000 per month clip means that you are 'spending' $6,000 per month for housing - that is an expensive house.

Sunday, April 27, 2008

A Letter to My Landlord

Dear Landlord,

I want to express how much I appreciate what you do for me and my family. We purchase housing from you at a reasonable cost and this housing meets my family's needs on a month to month basis.

I know you may see me as a lowly tenant who can't afford to purchase a home and is relagated to the unwashed renting masses for eternity. Little do you know that I could easily purchase the home you rent to me but I won't because it would cost me nearly double what I pay to you every month. Our arrangement allows me to save a very significant sum of money every single month.

This is the reason I am writing this letter as I truly do appreciate the ability you give my family to rent for less than what it would cost us to purchase the same property. I know this is a sacrifice for you because the rent I pay you doesn't even cover your costs, including the interest you pay on the mortgage, strata fees, and property taxes. All of this in addition to the hassle and work that goes along with being a landlord as well as the potential for large costs like special assessments or appliance replacement.

I don't known why you do it but thank you for your service to my family.


Mohican, Mrs. Mohican, and Baby Mohican

Wednesday, April 23, 2008

Pent Up Supply

CMHC released the March data last week and it looks like this:

We are well into unprecedented territory for units currently under construction in the Vancouver area at 27,000. This is enough housing under construction to house nearly 60,000 people which is enough to handle two entire years of population growth of the Vancouver Census Metro Area.

It also looks like the rolling 12 months of starts number may reach record levels this year too.

The past few months of numbers are really messing with my head right now because I don't understand how developers are starting construction on so many projects while not completing much. Starts were 1353 in March and Completions were only 890. This has been going on for quite some time now and it is clearly unsustainable and the hangover from this overbuild is going to be absolutely massive.

If we were to follow some of the previous boom bust cycles we would have seen the starts line fall below and stay below the completions line in early 2007 but the boom was extended for whatever reason and developers are starting way too many projects now.

I find it very telling that the units under construction number has always, in previous cycles, remained below the number of starts and completions but we have been moving into highly uncharted territory for quite some time now. I am certain that the bust portion of the cycle will be 'uncharted' as well.

Tuesday, April 22, 2008

US Existing Home Sales and the Vancouver Housing Market

The National Association of Realtors released the existing home sales and inventory numbers earlier today and I wanted to bring some attention to it. Additionally I want to draw a paralell between what has happened in the US housing market and what is likely to happen in the Vancouver housing market.

Please read the full analysis of the release here at Calculated Risk.

The main chart I want to draw your attention to is the Months of Inventory chart.

The REBGV has been fluctuating in the 3 to 6 months of inventory level for the past 3 years and has witnessed rising real estate prices during this time. Quality adjusted US real estate prices peaked in the later part of 2005 and began their descent in earnest during the summer of 2006. By my estimation we are tracking exactly 2 years behind the US market.

In order for us to see price decreases we need to have over 6 months of inventory for a sustained period of time. The higher the inventory goes the faster the price drops will be. Keep an eye on Paul B's site for inventory updates for the REBGV. I will post Fraser Valley stats here at the beginning of each month. Fraser Valley is already over 7 months of inventory.

What Warren thinks...

With Wall Street in chaos, Fortune naturally went to Omaha looking for wisdom. Warren Buffett talks about the economy, the credit crisis, Bear Stearns, and more.

By Nicholas Varchaver,

(Fortune Magazine) -- If Berkshire Hathaway's annual meeting, scheduled for May 3 this year, is known as the Woodstock of Capitalism, then perhaps this is the equivalent of Bob Dylan playing a private show in his own house: Some 15 times a year Berkshire CEO Warren Buffett invites a group of business students for an intensive day of learning. The students tour one or two of the company's businesses and then proceed to Berkshire (BRKA, Fortune 500) headquarters in downtown Omaha, where Buffett opens the floor to two hours of questions and answers. Later everyone repairs to one of his favorite restaurants, where he treats them to lunch and root beer floats. Finally, each student gets the chance to pose for a photo with Buffett.
In early April the megabillionaire hosted 150 students from the University of Pennsylvania's Wharton School (which Buffett attended) and offered Fortune the rare opportunity to sit in as he expounded on everything from the Bear Stearns (BSC, Fortune 500) bailout to the prognosis for the economy to whether he'd rather be CEO of GE (GE, Fortune 500) - or a paperboy. What follows are edited excerpts from his question-and-answer session with the students, his lunchtime chat with the Whartonites over chicken parmigiana at Piccolo Pete's, and an interview with Fortune in his office.

Buffett began by welcoming the students with an array of Coca-Cola products. ("Berkshire owns a little over 8% of Coke, so we get the profit on one out of 12 cans. I don't care whether you drink it, but just open the cans, if you will.") He then plunged into weightier matters:
Before we start in on questions, I would like to tell you about one thing going on recently. It may have some meaning to you if you're still being taught efficient-market theory, which was standard procedure 25 years ago. But we've had a recent illustration of why the theory is misguided. In the past seven or eight or nine weeks, Berkshire has built up a position in auction-rate securities [bonds whose interest rates are periodically reset at auction; for more, see box on page 74] of about $4 billion. And what we have seen there is really quite phenomenal. Every day we get bid lists. The fascinating thing is that on these bid lists, frequently the same credit will appear more than once.

Here's one from yesterday. We bid on this particular issue - this happens to be Citizens Insurance, which is a creature of the state of Florida. It was set up to take care of hurricane insurance, and it's backed by premium taxes, and if they have a big hurricane and the fund becomes inadequate, they raise the premium taxes. There's nothing wrong with the credit. So we bid on three different Citizens securities that day. We got one bid at an 11.33% interest rate. One that we didn't buy went for 9.87%, and one went for 6.0%. It's the same bond, the same time, the same dealer. And a big issue. This is not some little anomaly, as they like to say in academic circles every time they find something that disagrees with their theory.
So wild things happen in the markets. And the markets have not gotten more rational over the years. They've become more followed. But when people panic, when fear takes over, or when greed takes over, people react just as irrationally as they have in the past.

Do you think the U.S. financial markets are losing their competitive edge? And what's the right balance between confidence-inspiring standards and ...
... between regulation and the Wild West? Well, I don't think we're losing our edge. I mean, there are costs to Sarbanes-Oxley, some of which are wasted. But they're not huge relative to the $20 trillion in total market value. I think we've got fabulous capital markets in this country, and they get screwed up often enough to make them even more fabulous. I mean, you don't want a capital market that functions perfectly if you're in my business. People continue to do foolish things no matter what the regulation is, and they always will. There are significant limits to what regulation can accomplish. As a dramatic illustration, take two of the biggest accounting disasters in the past ten years: Freddie Mac and Fannie Mae. We're talking billions and billions of dollars of misstatements at both places.

Now, these are two incredibly important institutions. I mean, they accounted for over 40% of the mortgage flow a few years back. Right now I think they're up to 70%. They're quasi-governmental in nature. So the government set up an organization called OFHEO. I'm not sure what all the letters stand for. [Note to Warren: They stand for Office of Federal Housing Enterprise Oversight.] But if you go to OFHEO's website, you'll find that its purpose was to just watch over these two companies. OFHEO had 200 employees. Their job was simply to look at two companies and say, "Are these guys behaving like they're supposed to?" And of course what happened were two of the greatest accounting misstatements in history while these 200 people had their jobs. It's incredible. I mean, two for two!

It's very, very, very hard to regulate people. If I were appointed a new regulator - if you gave me 100 of the smartest people you can imagine to work for me, and every day I got the positions from the biggest institutions, all their derivative positions, all their stock positions and currency positions, I wouldn't be able to tell you how they were doing. It's very, very hard to regulate when you get into very complex instruments where you've got hundreds of counterparties. The counterparty behavior and risk was a big part of why the Treasury and the Fed felt that they had to move in over a weekend at Bear Stearns. And I think they were right to do it, incidentally. Nobody knew what would be unleashed when you had thousands of counterparties with, I read someplace, contracts with a $14 trillion notional value. Those people would have tried to unwind all those contracts if there had been a bankruptcy. What that would have done to the markets, what that would have done to other counterparties in turn - it gets very, very complicated. So regulating is an important part of the system. The efficacy of it is really tough.

At Piccolo Pete's, where he has dined with everyone from Microsoft's Bill Gates to the New York Yankees' Alex Rodriguez, Buffett sat at a table with 12 Whartonites and bantered over many topics.

How do you feel about the election?
Way before they both filed, I told Hillary that I would support her if she ran, and I told Barack I would support him if he ran. So I am now a political bigamist. But I feel either would be great. And actually, I feel that if a Republican wins, John McCain would be the one I would prefer. I think we've got three unusually good candidates this time.
They're all moderate in their approach.
Well, the one we don't know for sure about is Barack. On the other hand, he has the chance to be the most transformational too.

I know you had a paper route. Was that your first job?
Well, I worked for my grandfather, which was really tough, in the [family] grocery store. But if you gave me the choice of being CEO of General Electric or IBM or General Motors, you name it, or delivering papers, I would deliver papers. I would. I enjoyed doing that. I can think about what I want to think. I don't have to do anything I don't want to do. It might be wonderful to be head of GE, and Jeff Immelt is a friend of mine. And he's a great guy. But think of all the things he has to do whether he wants to do them or not.

How do you get your ideas?
I just read. I read all day. I mean, we put $500 million in PetroChina. All I did was read the annual report. [Editor's note: Berkshire purchased the shares five years ago and sold them in 2007 for $4 billion.]

What advice would you give to someone who is not a professional investor? Where should they put their money?
Well, if they're not going to be an active investor - and very few should try to do that - then they should just stay with index funds. Any low-cost index fund. And they should buy it over time. They're not going to be able to pick the right price and the right time. What they want to do is avoid the wrong price and wrong stock. You just make sure you own a piece of American business, and you don't buy all at one time.

When Buffett said he was ready to pose for photographs, all 150 students stampeded out of the room within seconds and formed a massive line. For the next half hour, each one took his or her turn with Buffett, often in hammy poses (wrestling for his wallet was a favorite). Then, as he started to leave, a 77-year-old's version of A Hard Day's Night ensued, with a pack of 30 students trailing him to his gold Cadillac. Once free, he drove this Fortune writer back to his office and continued fielding questions.

How does the current turmoil stack up against past crises?
Well, that's hard to say. Every one has so many variables in it. But there's no question that this time there's extreme leveraging and in some cases the extreme prices of residential housing or buyouts. You've got $20 trillion of residential real estate and you've got $11 trillion of mortgages, and a lot of that does not have a problem, but a lot of it does. In 2006 you had $330 billion of cash taken out in mortgage refinancings in the United States. That's a hell of a lot - I mean, we talk about having $150 billion of stimulus now, but that was $330 billion of stimulus. And that's just from prime mortgages. That's not from subprime mortgages. So leveraging up was one hell of a stimulus for the economy.

If that was one hell of a stimulus, do you think the $150 billion government stimulus plan will make an impact?
Well, it's $150 billion more than we'd have otherwise. But it's not like we haven't had stimulus. And then the simultaneous, more or less, LBO boom, which was called private equity this time. The abuses keep coming back - and the terms got terrible and all that. You've got a banking system that's hung up with lots of that. You've got a mortgage industry that's deleveraging, and it's going to be painful.

The scenario you're describing suggests we're a long way from turning a corner.
I think so. I mean, it seems everybody says it'll be short and shallow, but it looks like it's just the opposite. You know, deleveraging by its nature takes a lot of time, a lot of pain. And the consequences kind of roll through in different ways. Now, I don't invest a dime based on macro forecasts, so I don't think people should sell stocks because of that. I also don't think they should buy stocks because of that.

Your OFHEO example implies you're not too optimistic about regulation.
Finance has gotten so complex, with so much interdependency. I argued with Alan Greenspan some about this at [Washington Post chairman] Don Graham's dinner. He would say that you've spread risk throughout the world by all these instruments, and now you didn't have it all concentrated in your banks. But what you've done is you've interconnected the solvency of institutions to a degree that probably nobody anticipated. And it's very hard to evaluate. If Bear Stearns had not had a derivatives book, my guess is the Fed wouldn't have had to do what it did.

Do you find it striking that banks keep looking into their investments and not knowing what they have?
I read a few prospectuses for residential-mortgage-backed securities - mortgages, thousands of mortgages backing them, and then those all tranched into maybe 30 slices. You create a CDO by taking one of the lower tranches of that one and 50 others like it. Now if you're going to understand that CDO, you've got 50-times-300 pages to read, it's 15,000. If you take one of the lower tranches of the CDO and take 50 of those and create a CDO squared, you're now up to 750,000 pages to read to understand one security. I mean, it can't be done. When you start buying tranches of other instruments, nobody knows what the hell they're doing. It's ridiculous. And of course, you took a lower tranche of a mortgage-backed security and did 100 of those and thought you were diversifying risk. Hell, they're all subject to the same thing. I mean, it may be a little different whether they're in California or Nebraska, but the idea that this is uncorrelated risk and therefore you can take the CDO and call the top 50% of it super-senior - it isn't super-senior or anything. It's a bunch of juniors all put together. And the juniors all correlate.

If big financial institutions don't seem to know what's in their portfolios, how will investors ever know when it's safe?
They can't, they can't. They've got to, in effect, try to read the DNA of the people running the companies. But I say that in any large financial organization, the CEO has to be the chief risk officer. I'm the chief risk officer at Berkshire. I think I know my limits in terms of how much I can sort of process. And the worst thing you can have is models and spreadsheets. I mean, at Salomon, they had all these models, and you know, they fell apart.

What should we say to investors now?
The answer is you don't want investors to think that what they read today is important in terms of their investment strategy. Their investment strategy should factor in that (a) if you knew what was going to happen in the economy, you still wouldn't necessarily know what was going to happen in the stock market. And (b) they can't pick stocks that are better than average. Stocks are a good thing to own over time. There's only two things you can do wrong: You can buy the wrong ones, and you can buy or sell them at the wrong time. And the truth is you never need to sell them, basically. But they could buy a cross section of American industry, and if a cross section of American industry doesn't work, certainly trying to pick the little beauties here and there isn't going to work either. Then they just have to worry about getting greedy. You know, I always say you should get greedy when others are fearful and fearful when others are greedy. But that's too much to expect. Of course, you shouldn't get greedy when others get greedy and fearful when others get fearful. At a minimum, try to stay away from that.
By your rule, now seems like a good time to be greedy. People are pretty fearful.

You're right. They are going in that direction. That's why stocks are cheaper. Stocks are a better buy today than they were a year ago. Or three years ago.

But you're still bullish about the U.S. for the long term?
The American economy is going to do fine. But it won't do fine every year and every week and every month. I mean, if you don't believe that, forget about buying stocks anyway. But it stands to reason. I mean, we get more productive every year, you know. It's a positive-sum game, long term. And the only way an investor can get killed is by high fees or by trying to outsmart the market.

Friday, April 18, 2008

Behind the Food-Price Riots

From the Wall Street Journal: By VINCENT REINHART, April 18, 2008

With a dramatic rise in the prices of foodstuffs, riots have flared up in dozens of hotspots around the world. Panicky politicians are responding with precisely the wrong policies, including production subsidies and trade controls.

The problem is clear enough: According to the International Monetary Fund, food and beverage prices have risen 60% in the past three years, and more than doubled since 2001. Even in the U.S., increases in the food-price component of producer- and consumer-price indexes over the last 12 months have been in the neighborhood of 5%.

What is going on? We can discern four forces at work today pushing up food prices – forces that were also at work in the 1970s, the last time food prices increased so rapidly on a sustained basis:

- Monetary policy in overdrive. Consider the real federal funds rate – that is, the nominal funds rate less inflation. A low real fed funds rate both encourages interest-rate sensitive spending, such as business investment, and discourages global investors from supporting the dollar on foreign exchange markets. At 2.25%, the nominal fed funds rate is now below the prevailing rate of consumer price inflation.

The last time the real fed funds rate was negative for a prolonged period was the mid-1970s. This was also a period when overstimulated demand pushed food prices up and the dollar depreciated sharply. In the end, economic growth suffered as well. Remember stagflation?

- Exchange-rate arrangements in disarray. The 1970s were also noted for turmoil in exchange markets, following the breakdown of the Bretton Woods system. The schism today is that some exchange rates move too little and others too much.

The exchange rates that are moving too little are those of emerging market economies and oil producers. China, India, Korea and Taiwan, and key oil producers such as Saudi Arabia, have been preventing their exchange rates from appreciating significantly by rapidly accumulating international reserves.

They've also effectively adopted the monetary policy of the Federal Reserve by keeping their domestic interest rates close to the fed funds rate. That way, no interest-rate wedge opens between their markets and our own that would otherwise put pressure on their exchange rate. As a consequence, they are following an accommodative monetary policy strategy totally unsuited to their already overheated domestic economies. Higher inflation has followed.

With exchange-rate movements capped by policy makers in so many parts of the world, the burden of adjustment falls more heavily on the nations that allow their currencies to float freely, such as Canada, those in the Euro area, and Japan. The depreciation of the dollar against these currencies is yet another reminder of the 1970s. As a result of these exchange-rate changes, the purchasing power of these regions for any internationally traded good denominated in dollars has gone up. Hence, it is no accident that the dollar price of food is up sharply.

- Unsound market interventions. Policy makers flailed about in the 1970s, enacting environmental legislation without due deference to the costs imposed on industry. They also tried to impede market forces with gasoline rationing and a brief flirtation with outright price controls.

This time round, our government has been force-feeding the inefficient production of ethanol. The result: Corn prices have more than doubled over the past three years, adding to price pressures on commodities that are close substitutes, or which use corn as an input to production.
Meanwhile, policy makers in emerging market economies have bent under the weight of popular unrest to raise food subsidies. This strains their budgets. They are also imposing restraints on exports, thereby losing gains from trade.

- Oil prices on the rise. The lines stretching around filling stations in the 1970s should remind us that large energy-price increases are disruptive. And we have had a large one: Crude prices have more than quadrupled since 2001. Any industry dependent on energy will feel those cost pressures, and modern agriculture, with its oil-based fertilizers and large machinery, is no exception.

But there is an important difference between our troubles today and those of the 1970s. In that decade, aggregate supply sagged as oil producers scaled back production and anchovies disappeared off the coast of Peru. The 2000s have been about demand expansion. Millions of workers in China, India and Vietnam, among others, have joined the world trading system. Beginning from a point close to subsistence, most of their additional income is being spent on food. Thus, the price of food relative to other goods and services has risen.

The good news is that producers respond to relative prices, although it can take some time. Already, the acreage in which corn is planted in the United States is back to levels of the 1940s. More of a production response should follow in other areas as well.

Challenges abound as supply catches up with higher global demand. The Federal Reserve has to be sensitive not to stoke inflation pressures, and to monitor inflation expectations closely. The subsidies proffered to corn producers have to be trimmed, in part to set a new standard for emerging market economies to emulate. And the gains from an open trading system have to be protected to keep our economy efficient.

Mr. Reinhart, a resident scholar at the American Enterprise Institute, was director of the Division of Monetary Affairs at the Federal Reserve.

Here is a Canadian perspective on inflation.

Wednesday, April 16, 2008

Outside In

The spin continues - from the Chilliwack Area Real Estate Board:

Average residential prices continue to rise in Chilliwack region

Total MLS® sales activity showed an increase in most categories this March in the area served by the Chilliwack and District Real Estate Board, according to statistics released by the Board.The Board's MLS® system recorded $75,388,928 worth of sales this March. That's a two per cent increase from Februarys' total, and a decrease of 17 per cent from the total in March 2007.

A total of 222 properties traded hands through the Board's MLS® system in March 2008, which is six per cent higher than the total from February and 29 per cent fewer than in March 2007.“

Average residential price continues to be the story this month,” said Board President Trude Kafka. “Properties are selling at prices that are six per cent higher this month than they were last.”

The total value of home sales recorded through the Chilliwack and District Real Estate Board's MLS® system this March was $69,463,410 – which is even with Februarys' total, and 18 per cent lower than March 2007.In all, 206 homes were sold through the Board's MLS® system this March. That's six per cent less than in February, and 29 per cent less than last March.The average price of homes sold through the Board's MLS® system this March was $319,503, which is one per cent more than Februarys' average and 13 per cent higher than the average from March 2007. The Board cautions that the average residential price is a useful figure only for establishing trends and comparisons over a period of time. It does not indicate an actual price for a home due to the wide selection of housing available in the area.

A total of 521 new residential listings were added to the Board's MLS® system this March, an 18 per cent jump from February 2008. As the month came to an end, there were 1,484 active residential listings on the Board's MLS® system.

The Chilliwack and District Real Estate Board is an association of 283 REALTORS® that provides services to and sets standards for members. The Chilliwack and District Real Estate Board serves Chilliwack, Agassiz, Hope, Boston Bar and Harrison.

From www.cadreb.com.

The story is that there are a total of 2043 pieces of real estate for sale in the CADREB area and only 222 of them sold during March for 9.2 total months of inventory. There were 606 new listings during the month for a sell / list ratio of 0.36.

Saturday, April 12, 2008

It's Starting

Real estate inventory is now ballooning in all major Canadian housing markets. Most notably inventory is skyrocketing in Greater Vancouver, where many so called experts have said that the market won't have a price correction. The not so far away Fraser Valley market is already saturated with over 7 months of inventory and the inventory keeps hemmoraging through the normally strong spring selling season.

The few lonely voices that have been predicting this exact scenario are being vindicated in their own eyes but villified as doomsayers by others. Many real estate industry pundits are touting this new market as a 'balanced' one but this one doomsayer says 'balanced' is just another word for on the way to the real estate apocalypse.

Mohican thinks that it is becoming pretty conclusive that 2008 is the year the real estate market will enter a prolonged buyers market and prices will moderate from this point on for several years. I fully expect that urban condos, where the price to earnings ratio has hit astronomical levels above 30, prices will correct to bring P/E levels to the 10 to 15 range. This means that prices in urban condos will correct by 30%+.

Suburban markets where the price to earnings ratio has not reached such lofty heights will likely see less of a correction but a hefty price reduction nonetheless. Price decreases ranging from 15-25% will be common in markets from Pitt Meadows to Langley to Chilliwack. Wherever rents cannot sustain the purchase price, we will see prices correct to the level that rents can sustain them.

Mohican's advice at this point in time is do the math. Figure out what a property is worth and don't pay any more than that. If you must shop for real estate, make lowball offers that make sense using this formula.

{Fair Price} = [1/{Five Year Fixed Mortgage Rate}] * [{Annual Rent} - {Property Taxes + Maintenance}]

For example:

A townhouse rents for $1500 per month has maintenance of $150 per month and property taxes of $150 per month. The five year fixed mortgage rate is approximately 5.9% right now.

{Fair Price} = [1/0.059] * [{1500 * 12} - {150 * 12 + 150 * 12}]
{Fair Price} = [17] * [18000 - 3600]
{Fair Price} = $244,800

Have fun and don't get robbed.

Sunday, April 06, 2008

REBGV Chart Extravaganza

This was a lot of work so I'm going to take a few days break and let this data sink in for a bit. Cheers. Thanks to Paulb and realtylink.org for the data. The charts show data from the Real Estate Board of Greater Vancouver including sales, listings and more.

This last chart is interesting because it indicates that we should see negative price changes once inventory reaches the 5.5 to 6 months level.

Saturday, April 05, 2008

Van Housing Blogger Guest Post

The reknowned VHB sent the following to me a couple days ago and it's in keeping with the theme of the past couple posts.

This graph shows the inventory at the end of each month divided by the number of sales. The idea is to give an indicator of how many months of inventory there is, at the current pace of sales. For months like January (high listings, few sales) and December (few listings, some sales) the measure is a little wonky, but it is still interesting.
In the Fraser Valley, we have seen numbers in the 6 to 7 range. For the REBGV, we have now hit 4. As Mohican's excellent analysis has shown, we shouldn't expect much in the way of price decreases until we hit 7 or so months of inventory. So, we're not there yet.

Notice the growing gap between the 2007 and the 2008 lines. Not much difference in January; bigger difference in March. It will be interesting to see where this goes.

Data come from two sources. First, the REBGV was disclosing their total inventory in their 'blurb' on the cover of their monthly package for awhile in 2006-07. But, they stopped now. So, for the other months, I got the month end inventory from PaulB. I thank him for that. There are a lot of gaps in the graph, however, since I don't have the month-end inventory back to 2005.


Vancouver Housing Blog

UPDATE: Here is an updated chart thanks to PaulB's data. Thanks Paul.

Thursday, April 03, 2008

FVREB Long Term Sales to Listings Ratio

Here is a great chart I received from 'steveb' over at Real Estate Talks. Thank you.

The chart shows the Sales to Active Listings Ratio (green) and the Average Price of a home in the Fraser Valley Real Estate Board area from 1979 to 2006.

We can clearly see that obvious supply and demand relationships are in place in regards to the price movement of real estate. When the sales / listings ratio drops below the 0.2 area, the price pressure is zero to negative. A sales / listings ratio of 0.17 is equivalent to 6 months of inventory.
There have been a few points in past real estate cycles where the sales / listings ratio dropped below 0.1 and this was obviously highly negative for prices. A sales / listings ratio of 0.1 is equivalent to 10 months of inventory.

As per the previous post, we are at 7.1 months of inventory right now, which is the equivalent of a sales / listings ratio of 0.14. If we look on the chart for similar occasions we find that the mid-1980s and late 1990s were sustained periods of high supply and low demand at those type of levels.

The extreme peak for inventory during the 1981 correction was 0.06 or approximately 16 months of inventory. This supply / demand situation resulted in a >30% negative price adjustment over less than 12 months. The other previous corrections saw sales / listings ratios of 0.075 or 13 months of inventory. Some of these corrections saw sharp drops in prices upwards of 20%.

Here is some more recent data.

Wednesday, April 02, 2008

FVREB March 2008

In March, selection reached a 10-year high on the Fraser Valley Real Estate Board’s Multiple Listing Service (MLS®), with the number of active listings reaching 9,361, an increase of 27 per cent compared to the 7,351 listings available during the same month last year. The previous March that offered as much or greater inventory was in 1998, when Fraser Valley had 10,148 active listings. The total number of sales processed through Fraser Valley’s MLS® in March was 1,315, a decrease of 25 per cent compared to March 2007 when 1,743 sales were processed. The number of new listings in March also decreased slightly with the Board receiving 3,277 compared to 3,369 new listings received during the same month last year, a decrease of 3 per cent.

In March, average Fraser Valley home prices continued to increase in the strong single digits for detached and townhomes and remained in the double digits for condominiums.

Kelvin Neufeld, president of the Fraser Valley Real Estate Board explains, “With a significant increase in product and properties taking longer to sell, we have a more competitive market for sellers in the Fraser Valley right now, yet enough demand to keep prices trending upwards. “Our advice is that to sell your home this spring, work with your REALTOR® to ensure it’s priced correctly because buyers are taking a careful look at the broader range of homes available on the MLS®.”

In March, it took almost four days longer on average to sell a Fraser Valley detached home, 50.7 days compared to the 46.9 days during March of last year. Apartments took almost eight days longer to sell with the average days to sell in March at 47.3 compared to 39.4 during the same month last year and townhomes saw the smallest increase in average days to sell, increasing 1.8 days, going from 33.6 in March 2007 to 35.4 days last month.

The price of a single-family detached home in March averaged $550,259, an 8.1 per cent increase in one year. The average price in March 2007 was $509,197. The average price of a Fraser Valley townhouse in March was $346,949, an increase of 8.6 per cent compared to last year’s average price of $319,592. Average apartment prices in the Fraser Valley increased by 13.6 per cent compared to last year. In March 2007, they averaged $203,874 compared to $231,669 last month.

If sales don't pick up soon we could see some really serious price declines here and quickly too. I foresee negative year over year price changes by July if things stay on the current trend.