300th Post and I'm at Housing Bubble Ground Zero

Happy 300 posts and nearly 300,000 visitors!

I sat back today and assessed how my personal housing situation has changed in the past few years. My wife and I bought a condo in 2004 for a reasonable price that made our mortgage payments plus strata and property taxes less than the cost of renting. We were happy with our purchase and paid down our mortgage quickly, starting with a 15 year amortization and making double payments until we sold the unit last August for nearly double what we paid.

Needless to say we were happy with the profits and would have gladly purchased a reasonable townhouse to accomodate our growing family but no such suitable unit was found after a fairly extensive search.

We are now renting a larger condo in a brand new smaller building and we enjoy our location close to work and amenities. Our cost of renting this unit is half the cost of purchasing on a monthly basis and we are socking away our savings for an even larger down payment once we find a suitable home at a reasonable price. This extra monthly savings combined with the earnings from our extracted home equity is very substantial by any account and make these renters quite satisfied with our lowly renting status!

Now I find myself at Vancouver Housing Bubble Ground Zero

The building we live in has 32 units and currently 20 of these units are listed on the MLS website. Yes, that is right, no typo - 2/3rds of the units in our building, including the one we rent are for sale at this very moment. My landlord was hoping for quick profits by flipping this condo and realizing no quick sale he franticly sought a renter to help cover his costs while trying to sell the unit. His asking rent was ridiculous but was easily bid down by 25% with some fairly convincing arguments and some stiff competition.

The parking garage is empty and we have watched the poor realtors hold open houses all spring long with no traffic and no bids. Reluctantly the sellers lower their prices by $2000 and $4000 at a time but still no takers. Nobody realizes the game is over yet and there are a declining supply of greater fools to buy mediocre houses at inflated prices.

I am happy with my spectator status. It is going to get real interesting so grab some popcorn and a cold pop!

Ubergeek Post - On Price Changes and Months of Inventory in GVREB

Thanks to mohican’s previous work finding correlations between months of inventory and %changes in GVREB benchmark price, I was inspired to take it to the next step. This post concentrates on mohican’s and my further analysis to attempt to find an even better fit of months of inventory to changes in price and, as you will see, a weak but plausible predictor of future price movements. A word of warning this post is a bit technical and geeky, but not enough so (in my opinion) that it will be difficult to understand.

Optimising a Better Fit

The first step is to expand the previous quarter-over-quarter (QOQ) and month-over-month (MOM) price changes versus months of inventory (MOI) scatter plots to include other time intervals and determine if there are other intervals with higher correlation coefficients than MOM and QOQ. This is simply done by computing “XMOXM” % changes in price, from 1 month to 12 months (YOY), and calculating and graphing the correlation coefficient. When this is done we can find the 4MO4M correlation is strongest, with a coefficient of -0.83, slightly better than the QOQ (3MO3M) coefficient of -0.78. Part of the reason the coefficient is weak is due to the variance in MOI in off season periods (December and January). The correlation can be improved significantly by taking the 3 month moving average of MOI. The resulting correlation coefficients are plotted below:

One can see here that the HOH (6MO6M) % change values have the highest correlation with the 3 month moving average of MOI. Plotting on the scatter plot gives a better idea of how the correlation matches a true linear regression:

Plotting HOH price changes and MOI 3 month MA allows us to “predict” a HOH price change in May of 1.4%±1.8% based upon % price change being dependent upon MOI:

The above analysis gives a slightly more certain result of price movements compared to the QOQ and MOM versus non-averaged MOI linear regressions.

Into the Future

The same method can be further expanded by performing cross correlations on the data. Here we experimented with various MOI moving averages but, as you will see, having an unfiltered MOI produces some neat results. The %XMOXM change in price is cross-correlated with raw MOI. The results are displayed in the contour graph:

One can see that 4MO4M % change is a maxima at an offset of 0 months, as expected. But notice a correlation maxima at -3 months offset at 9MO9M. The cool thing here is that we are effectively finding a correlation of current MOI with 9MO9M price changes 3 months into the future. The graph below better illustrates the relationship:

And versus time:

One can see the relationship is not as strong as the HOH-MOI correlation. However this level of accuracy is approximately the same as the QOQ plot versus MOI. The reason MOI must be raw is that any averaging will intuitively reduce the ability to predict farther into the future. Further work around using seasonal adjustments to produce better fitting is possible but I am neither versed in seasonal adjustment techniques nor do I want to fiddle with the data as it stands too much, no knock against Statscan or NAR implied.

Limitations

We should note a few things about the analysis and data used here:

• Data is taken only from January 2005, well into the current price boom, meaning whatever memes that were driving prices over this period (interest rates, speculative behaviour, supply, etc.) are from the past 3+ years only. It is important to realise that the behaviours and events governing price changes may significantly change if prices start falling, meaning the correlation may become weaker in this case.
• It goes without saying this is merely a curve fitting exercise. There is some certainty that the % change prices, are to some degree, dependent upon MOI but it should not be taken as fact.

Other Tidbits

Interestingly I tried adding an inflation factor to the benchmark price and the data became less correlated. Draw your own conclusions here. mohican did a quick fit to FVREB data and got similar results. Further work could be done examining US markets (using CS HPI) to see how such analayis compares especially after 2 years of falling prices.

Fama and French Speak

Watch this interview with Eugene Fama. http://www.dfacanada.com/library/videos/thinkers_fama/

Watch this interview with Kenneth French.
http://www.dfacanada.com/library/videos/thinkers_french/

Enlightening.

REBGV Area Officially in Bear Mode

Well it is mid May and the real estate market is supposed to be sizzling with sales and what is that sound I hear at your local open house. . . . .




. . . . . . .




- - - crickets chirping - - - -




. . . . . . .




In the formerly red hot Vancouver housing market, the inventory of homes for sale is piling up like empty pizza boxes at a teenage boy's birthday party. The rich immigrants and Albertans are not buying them all, locals can't afford them and the wannabe sellers are having to reduce their prices.

It only took a few months longer than the outlying FVREB area but the inventory of resale homes officially hit 26 weeks or 6 months of inventory this past week (as per Paul B's numbers) and that officially puts the Vancouver housing market into bear mode. Look for further price declines and listen for the cry of the wailing speculator - which sounds a lot like crickets chirping at an open house except louder.



The supply-demand relationships at work here should make price declines a virtual certainty through the summer, fall, and winter of 2008 based on seasonal real estate inventory patterns.

Of course if the seasonal pattern doesn't hold this year we could see a different result.

Mortgage / Housing Trends in Canada

I read the Spring report from the Canadian Association of Mortgage Professionals last night and I have a few comments to come later.

Here is the report on the www.caamp.org website.

What pops out at you?