Fixed Fee Realty?

The concept of a fee-for-service Realty agency has been thrown around a lot but the old commission-based model still seems to be the only game in town. I happened to pick up a copy of this week's Business in Vancouver newspaper and find this article on the last page:

Auto advocate does the legwork for car-buyers (subscription; if you want to read the whole thing, find a copy or pay the subscription fee)

I will quote from the article so as to make my point:

After working in auto sales for years, - something he admits he wasn't very good at -- [Rob] Fournier decided to launch Burnaby-based Cornerstone Concepts in 2007 and took it full time in February 2008

The purpose: to act as an advocate between members of the vehicle-buying public and new, used and private car dealers.

Sounds like a Realtor but for cars. Perhaps he's an... Autotor? Actually he's not. There are places around that will act as brokers shopping for a car but here Rob's business model, or at least how he spins it, is a bit different:

While similar to car brokering services, Cornerstone Concepts does not accept money from dealerships for bringing in potential buyers or making sales on vehicles, according to Fournier. "We are completely unbiased."

Fournier charges $700 for finding new cars for his clients and $850 for used cars, including taxes. His fee covers vehicles priced from about $5,000 to $90,000. The used-car fee also includes CarProof, a vehicle history reprot, a BCAA mechanical inspection as well as a BCAA membership

So he's not really like a Realtor at all. He gets a fixed fee and makes a fixed amount ensuring he can match a car with the client. The way Fournier is selling his business is that he exclusively focuses on his clients' best interests without being induced to work for a buyer-paid commission.

I don't know how Fournier's company's sales are doing but I can see a definite business case for such a service. He purports to be grossing six figures on an annualised basis. His business is operating on his clients trusting his expertise and honesty, something to be honest I see generally lacking in the real estate business.

So for all Realtors out there looking for a tangential journey in the real estate world, such a parallel client-focused fee-for-service business could generate some noise, especially in a few years when some more tentative clients start looking to buy property again. The key, of course, is experience and trust, the latter is hard to gain but very easy to lose.

Personal Finance and Buying a Home

Something that I haven't quite got my head around is how so many (thousands per month) people can seemingly 'afford' to purchase homes in the Vancouver area considering the prices at which local homes seem to be sold at. Greater Vancouver benchmark for all dwelling types is just about $520,000 as of June 2009.

Let's look at a sample first time home buyer.

Let's imagine John and Jenny want to get started on the property ladder after getting married last year. They have saved $10,000 over the past couple years and they have about $25,000 in their RRSP accounts which they intend to use toward a property purchase under the Home Buyer's Plan. Jenny's parents have offered to help them purchase their first home as well with an extra $20,000 'loan' to be used toward a down payment that may never need to be paid back. They don't have any credit card debt but are making payments of a combined $900 per month on two car loans which have 3 years left on them. Combined down payment = $55,000.

John makes $60,000 per year working in the technology field and his job prospects are very good given his education and work experience. Jenny works in sales and her income has averaged $50,000 per year over the past two years. Although she does okay at work, her job prospects are sketchy as the company she works for has seen business drop off considerably and has laid off a few people in the last few months. Gross Annual Income = $110,000. Net Monthly Cashflow = $6,000.

They are wondering what they are able to afford (apparently they don't have a budget) so they go talk to a mortgage broker about their situation. The mortgage broker punches some numbers into the computer and comes up with a preapproval amount of $430,000. John and Jenny are amazed, they wonder what they have done to make the bank love them so much! This pre-approval emboldens them.

They call up a realtor and begin looking at homes in the $400,000 to $500,000 price range. The realtor shows them several condos and a few townhouses which meet their criteria and they settle on a nice townhouse and make an offer for $450,000 which is accepted and the deal is drawn up.

John and Jenny put $45,000 down by using the parent's money and withdrawing from their RRSP accounts under the Home Buyer's Plan. They have paid CMHC and legal fees of $9,000 which gets added to their mortgage so they owe a total of $414,000 and they have decided to amortize over 35 years (they will be 65 when it is finally paid off if they stick to the original plan with the original rate) with a 5 year term and a rate of 4.5%. They will be making principal and interest payment of $1,950 per month, they have added life insurance to the mortgage ($50) and are paying property tax monthly with their mortgage payment ($200). They now get to pay strata fees of $200 per month as well.

Let's have a look at John and Jenny's monthly budget.

John and Jenny's total monthly obligations are:

Mortgage - $1,950

Life Insurance - $50

Taxes - $200

Strata - $200

Car Payments - $900

Food - $600

Fuel - $400

Home and Auto Insurance - $400

Telephone/Internet/Cable - $300

Clothing/Other/Misc - $300

Entertainment/Vacations - $500

RRSP contributions - $200

Total = $6,000

This couple can have a 'reasonable' lifestyle based on these numbers but let's look a little closer. Let's test this for several common risks:

Death - The mortgage is life insured, the survivor would be financially okay so long as the life insurance remains in place.

Divorce - They are in bad financial shape if this happens. Neither one of the two could afford the townhouse if they split up and the townhouse would need to be sold quickly.

Children - They are in bad financial shape if they have kids. Not only would they have extra monthly expenses, which they don't have room for in the budget, they would also have less income for a period of time as it is typical for the mother to take some time off work after giving birth. Even if mom went back to work there are daycare costs, which are not small.

Job Loss - They are a financial disaster if one of the two loses employment of any extended period of time. They would be forced to make some significant life changes and likely sell the home.

Interest Rate Rise at Renewal - If interest rates rise by 100-200 basis points they would be extremely rough financial shape. Unless they had an increase in income, they would likely be forced to re-amortize the mortgage and/or make other lifestyle changes. If rates increased more than 200 basis points, they would not be able to maintain their current lifestyle in any shape or form.

1) 100 basis point rise to 5.5%, maintain original amortization, payments rise to $2180 / month

2) 200 basis point rise to 6.5%, maintain original amortization, payments rise to $2420 / month

3) 300 basis point rise to 7.5%, maintain original amortization, payments rise to $2670 / month

Time - This is the most insidious risk of all and the least recognized. As a financial planner, I see many people who have put themselves into this type of scenario and they manage to muddle through life, manage to pay off a modest home by retirement and save a very modest sum of money. They retire at 65 and have a fairly low standard of living since they have no real significant savings and no pensions. If none of the above risks occured and they both managed to work a full career, get regular raises, contribute to CPP, receive OAS and have some modest RRIF withdrawals, they would make it through life without severe financial hardship but as a debt slave. The bank would have made over $400,000 from them in interest payments and they would have never saved much. They would live month to month their entire life and financial freedom would be a mere dream as they play the lottery each week hoping their number is drawn.

The reality is that the risks noted above are very real and for John and Jenny's situation to work out they need everything to work perfect, with no hitches, glitches or problems. This seems unlikely to me. It would be far better for them financially to leave themselves more room in their monthly budget so that they could:

1) Live / survive with only one income

2) Maintain mortgage amortization if interest rates rise

3) Speed up mortgage pay down by making extra payments as they receive raises if things work out well.

4) Increase their personal savings to RRSP and/or TFSA to ensure they have money for the unexpected and for retirement.

There are only two ways for John and Jenny to make the above work in a sustainable manner:

1) Continue renting and saving aggressively

2) Buy a much cheaper home and aggressively pay down the mortgage

What are your thoughts? Do you know John and Jenny? I do.

Teranet House Price Index for May 2009

JULY 2009

A monthly rise in the composite index Canadian home prices in May were down 6.9% from a year earlier, according to the Teranet-National Bank National Composite House Price Index™. It was the sixth consecutive 12-month decline. The index is now down 8.9% from its peak of last August. However, its run of eight straight monthly declines ended in May with a 0.7% rise from April. Teranet – National Bank National Composite House Price Index™ Contact Us For general enquiries: simon.cote@tres.bnc.ca For licenses covering all index-linked products, please contact: Simon Côté simon.cote@tres.bnc.ca 514 879-5379 Website www.housepriceindex.ca

Of the six constituent metropolitan-area indices, four showed monthly rises in May - Halifax (1.3%), Montreal (1.5%), Toronto (2.0%) and Ottawa (0.7%). For both Halifax and Montreal it was a third consecutive monthly increase. The Ottawa monthly rise came after six consecutive declines, the Toronto monthly rise after eight consecutive declines. Calgary and Vancouver continued to correct downward in May, each showing an 11th straight monthly decline. Four of the six city indices were down from a year earlier - Vancouver (−11.8%), Calgary (−12.2%), Toronto (−6.5%) and Ottawa (−0.1%). Montreal stands apart as the only market that has yet to show a 12-month decline. Halifax has shown 12-month declines in only two months, February and March 2009. Calgary prices have been correcting since August 2007 and are now down 15.2% from their peak of that month. The Calgary index has shown monthly declines in 18 of the 21 months posted since then, including 11 months in a row from last July through May. The 11 straight monthly declines of the Vancouver index have left it down 12.0% from peak. Toronto is 9.6% below its peak of last August. Ottawa is down 4.2% from its October peak. Halifax is almost back to its peak of last November. Montreal is already back to its peak of last September. Teranet – National Bank House Price Index™ The historical data of the Teranet – National Bank House Price Index™ is available at www.housepriceindex.ca. Metropolitan area Index level May 2009 % change m/m % change y/y From peak Peak Date Calgary 148.62 -2.2 % -12.2 % -15.2% August 2007 Halifax 121.42 1.3 % 1.0 % -0.4% November 2008 Montreal 122.60 1.5 % 2.3 % 0.0% May 2009 Ottawa 113.29 0.7 % -0.6 % -4.2% October 2008 Toronto 106.05 2.0 % -6.5 % -9.6% August 2008 Vancouver 132.53 -0.1 % -11.8 % -12.0% June 2008 National Composite 120.05 0.7 % -6.9 % -8.2% August 2008 The Teranet–National Bank House Price Index™ is estimated by tracking observed or registered home prices over time using data collected from public land registries. All dwellings that have been sold at least twice are considered in the calculation of the index. This is known as the repeat sales method; a complete description of the method is given at www.housepriceindex.ca The Teranet–National Bank House Price Index™ is an independently developed representation of average home price changes in six metropolitan areas: Ottawa, Toronto, Calgary, Vancouver, Montreal and Halifax. The national composite index is the weighted average of the six metropolitan areas. The weights are based on aggregate value of dwellings as retrieved from the 2006 Statistics Canada Census. According to that census1, the aggregate value of occupied dwellings in the metropolitan areas covered by the indices was $1.168 trillion, or 53% of the Canadian aggregate value of $2.207 trillion. All indices have a base value of 100 in June 2005. For example, an index value of 130 means that home prices have increased 30% since June 2005. By: Marc Pinsonneault Senior Economist Economy & Strategy Team National Bank Financial Group Teranet - National Bank House Price Index™ thanks the author for their special collaboration on this report. 1 Value of Dwelling for the Owner-occupied Non-farm, Non-reserve Private Dwellings of Canada.

Case-Shiller House Price Seasonal Adjustment and Comparison to Stress Tests

Case-Shiller House Price Seasonal Adjustment and Comparison to Stress Tests

Have a look at this excellent post on Calculated Risk which looks at seasonality in real estate prices. Very interesting.

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Vancouver June 2009 CMHC Data

Good afternoon, it has been so nice outside, I haven't made the time to do much posting lately. CMHC released data for June on the national housing market and here are the numbers for Vancouver.

Starts were 571 for June. Down quite a bit from the heyday levels.

Completions were very high in June at 2049. It seems completions are speeding up prior to the Olympics and as resources are shifted from starting new projects to completing existing projects.

The number of completed but unabsorbed units was over 2,500 compared with last June at under 1,400.

The number of units under construction has dropped precipitously from over 27,000 units in March 2008 to 19,700 now. By all accounts, construction employment is falling rapidly with the less experienced and less skilled workers getting let go. This upcoming winter could be especially grim for construction employment prospects. We will see if that translates into further real estate market weakness.




I like to add the long perspective from time to time. Here is the CMHC data from 1958.


As an aside but still relevant, rentingsucks provided a link in the comments to a great article on CMHC that I thought was well laid out with some great data and some interesting conclusions. Here it is: http://americacanada.blogspot.com/