Fraser Valley Real Estate - April 2010

Here are the charts:

Active listings are increasing at the same pace as 2008.


Sales are still brisk but May could mark a turning point as it did in 2008.


Months of inventory is at the high side of normal and looks to be matching 2008. It will take a drop in sales to get to the extremely elevated levels of market distress we saw in 2008.



Correlation between MOI and price changes is extremely robust and we should be looking for price decreases through the summer if normal seasonal patterns hold up.

REBGV Sales Tank, Inventory Balloons, and Prices Fall at an Annualized -17.91%

Well, this is it, the market is officially done like dinner.

The REBGV released their monthly price, sales, and inventory statistics for July 2008 and here it is on the down low.

Active Listings are at an unprecedented level.

Sales are at an abysmal level.


The number of months of inventory is sky high representing the inability of buyers and sellers to come to a quick agreement on the value of properties in the area.

Prices have fallen for two straight months now and are rapidly retreating to year ago levels as the few sellers who must sell drop their prices and buyers who have the means are agreeing to these lower price levels.

I was truly amazed at how quickly inventory levels have grown this year and I was wondering if the tight correlation between months of inventory and price changes would continue during a down market. It is continuing and seems to be an amazingly accurate representation of the effect of high MOI on price change.

Look out bottom here we come

I've enjoyed reading some of the recent comments. Thank you for participating.

I'm off for a few days so here is an open topic post to discuss the turning of Vancouver's housing market.

None of the so called experts have declared it yet but the Greater Vancouver real estate market is definitively over the hump with sales plunging, listings skyrocketing and its all downhill from here. Just wait until we get some momentum behind us.

Where will the market bottom?
Will we overshoot to the downside?
Will fundamental values be restored?
What is fundamental value?
How long will this process take?
What lessons can we learn from other bubbles bursting around the world?

I heard an anecdote yesterday of a developer who is trying to unload the last few condo units in a decent project but they just aren't selling at the asking prices. The developer is currently asking $365,000 but would accept $275,000. My question is - if they want to get rid of it so bad, why don't they just drop the ask price? Oh, I know, greed. They'd like to see if there is another greater fool out there who doesn't have the cajones to go in with a ridiculous lowball offer. If you are buying right now make ridiculous lowball offers. Developers and long term owners have a lot of margin to work with so they may surprise you and accept.

mohican out.

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.

Generational Housing Bubble?

I have commented before that there is good evidence to lead me to believe that the current run up in housing is not just a cyclical real estate price pattern but also a generational pattern that perhaps began in the mid-70s or 80s.

Here is a really interesting paper discussing this possibility.

Some highlights:

The giant baby boom generation born between 1946 and 1964 has been a dominant force in the housing market for decades. This group has always provided the largest age cohorts, and has created a surge in demand as it passed through each stage of the life cycle. As its members entered into home buying in the 1970s, gentrification in cities and construction of starter homes in suburbs increased. Their subsequent march into middle age was accompanied by rising earnings and larger expenditures for move-up housing. Looking ahead to the coming decade, the boomers will retire, relocate, and eventually withdraw from the housing market.

Given the potential effects of so many of these changes happening in a limited period of time, communities should consider how best to plan this transition. Communities in the United States face an historic tipping point. After decades of stability, we expect the ratio of seniors to working-age residents to grow abruptly, increasing by roughly 30% in each of the next two decades.

We also expect that this change will make many more homes available for sale than there are buyers for them. The exit of the baby boomers from homeownership could have effects as significant as their entry, though with different consequences.

Sellers of existing homes provide 85% of the annual supply of homes sold, and home sales are
driven by the aging of the population since seniors are net home sellers. The ratio of seniors to working-age residents will increase by 67% over the next two decades; thus we anticipate the end of a generational housing bubble. We also find that younger generations face an affordability barrier created by the recent housing price boom. With proper foresight, planners could mitigate what otherwise could be significant consequences of these projections.

We argue that the United States is currently experiencing a short-term housing market bubble that is nested within a longer-term, generational housing bubble of greater magnitude. The recent housing price boom has been remarkably strong. From 2000 to 2005, the median sales price reported by the National Association of Realtors rose 48.6% nationwide, and in some areas, such as California, the median sales price rose 117.1%. Only in 2007 did prices begin to slip in particular metropolitan areas and nationwide. This price run-up had a two-edged effect that substantially increased the home equity of existing homeowners while at the same time making housing less affordable for would-be home buyers. The result is a sharply increased generation gap, with the baby boomers largely gaining, while members of younger generations face higher affordability hurdles.

October FVREB Stats

Fraser Valley Real Estate Board statistics are out. Analysis to come later. Here is the press release.

(Surrey, BC) – Fraser Valley’s real estate market remained balanced in October, showing increases on the Multiple Listing Service® (MLS®) in listings, sales and average home prices. The total number of sales processed through the MLS® in October was 1,464, an increase of 14 per cent compared to the same month last year when 1,287 sales were processed.

New listings increased by 12 per cent compared to the same month last year with 3,124 new listings in October taking the number of active listings to 8,712, an increase of 17 per cent compared to the 7,438 active listings in October of 2006.

“It’s been seven years since Fraser Valley buyers had this much inventory to choose from,” says Jim McCaughan, president of the Fraser Valley Real Estate Board. “REALTORS® are able to show their clients more properties and as a result, we’re noticing a gradual increase in the length of time homes are on the market.”

In October, the average number of days to sell a detached home in the Fraser Valley was 52 days, an increase of 10 days compared to the same month last year. It took an average 8 days longer to sell an apartment last month, 47.4 days compared to 38.7 days in October 2006.

Townhouses on the other hand took less time to sell in October with the average days to sell at 33 compared to 35 in October 2006. Jim McCaughan explains, “Townhouses are becoming more popular on both ends of the buying spectrum. They’re more affordable for families getting into the market and empty-nesters are opting to downsize to an attached home as a lifestyle choice.”

The price of a single-family detached home in October averaged $517,087, a 6.1 per cent increase in one year. The average price in October 2006 was $487,238. The average price of a Fraser Valley townhouse in October was $329,991, an increase of 9.5 per cent compared to last year’s average price of $301,496. Average apartment prices in the Fraser Valley increased by 17.5 per cent compared to last year. In October 2006, they averaged $193,466 compared to $227,358 last month.

Scotiabank Gets Religion

Well, well, one of the big banks finally put out a report that says what many of us has known for quite some time - houses are too expensive for most people and the situation is unsustainable.

Here is the report.

Here are some quotable quotes:

"There is little doubt that current trends are unsustainable. The current housing boom is now the longest of the post-war era (going on nine years) and has seen one of the largest cumulative real price gains (more than 60%). Builders have become more cautious as mortgage rates drift up and cost pressures mount, but total housing starts are still well above annual household formation levels of around 180,000.

Moreover, there is growing evidence of overvaluation in home prices in some parts of the country — a precursor to a period of softening conditions. To identify which domestic markets may be more vulnerable, we have calculated the percentage deviation of real house prices from their long-term trend. While a relatively simple benchmark, it nonetheless provides an indication of current valuations relative to historical norms. Our analysis looks at 15 major markets across the country for which comparable data are available."

"Nevertheless, the further domestic home prices climb above underlying economic fundamentals, the greater the risk of an eventual correction. The 1976 and 1989 housing peaks were both followed by some adjustment in real prices. In the past, this adjustment has normally occurred though a period of inflation erosion as opposed to nominal price declines."

They also gave specific overvaluation numbers for each of the 15 major cities in Canada with Vancouver being 13% overvalued compared to some long term trend which I don't quite understand yet. I'll have to give it a more thorough read when I get the time.

In all the report is fairly balanced and is by no means a doom and gloom report. It takes national view and stays away from commenting too much on certain markets.

Tipping Point? and the Long View for Discussion this Long Weekend

The above chart represents the price of a Greater Vancouver Single Family Home adjusted for quality and inflation from 1975 to present. The chart clearly shows periods of wild price appreciation and periods of price declines. The average is indicated by the black trend line representing a rough 'fundamental' value for homes in the market. If values were to retreat to the black line either through price declines or high inflation it would bring the price of a benchmark home down nearly 25%. In past price declines, the benchmark has lost value bringing it far below the trend line.

The question for the weekend is:

In recognition that bubbles are inflated and deflated with psychology, have we reached the sociological tipping point in Vancouver surrounding our lurid affair with real estate values? Have we now recognized the error of our ways and are now contemplating confession? Will we look up to realize we have been staring in the mirror while the world falls apart around us? Are we ready to atone for our bubble misdeeds? The hard work in paying off that 40 year, 100% financed Whalley condo looks pretty unappealing at this point.

Case in point, I heard the 'business analyst' Michael Levy on CKNW radio this morning say that we will have a real estate correction in Canada. Previous to this reference I have not heard, aside from Victor Adair, any of the local business talking heads mention this as a possibility.

More abnormally, I also heard the sportscaster Neil McRae reference a 'so-called bubble in real estate' when discussing BC Lion's Lui Pasaglia decision to leave sports and help in his family's development company, which is developing some properties in Port Coquitlam. The station obviously has some vested interests as nearly every commercial aired on CKNW is for real estate or mortgage products.

I'll be glad when we can hear other commercials again!