Wednesday, October 31, 2007

I became a landlord thanks to the CMHC!

I'm like totally a savvy investor! All i had to do was pick a crib and post the goods on the craiglists. CMHC hooked me up with the money stash.

I gots me some deposit and the rents right away. I just can't wait until the "equity" starts rolling in.

The ladies dig it when I tell them about my bizness. Sweeeeeeet!

Tuesday, October 30, 2007

Home or Lottery Ticket?

I took this in front of a condo conversion in March. Hopefully this stage of the real estate cycle has passed and one day people will buy condos and houses for the shelter they provide.

Monday, October 29, 2007

Foward Looking Statements

A Calgary REALTOR posted about what to expect in terms of appreciation:

A client recently asked me about the Royalty Review, the current flat and depreciating market, and why I think prices will continue to increase in Calgary.

Here's my response.

In 2006 prices increased 37%

In 2007 ... to date ... prices have increased 24%. (Isn't this amazing ... the media is only speaking about the drop in prices.)

In 2008 prices WILL increase 12 + %.


I am concerned about the certainty in the uppercase WILL and that this was directed to a client. Consider that the REALTOR gains a commission for persuading a buyer but loses nothing if the forward looking statement turns out to be incorrect.

Fun video (course language): Always Be Closing

Saturday, October 27, 2007

Builder Incentives and Arbitrary Pricing

A home builder is offering the following incentives in an advertisement found in the Edmonton Journal:
  • 3.95% 3-year fixed mortgage
  • No payments until May 2008
They value these incentives at $37,317 Based on the following:
  • sales price of $519900
  • 10% down, 40 year amortization
  • compared to a rate of 6.05%.
With a $52,000 down payment and ignoring the months effected by the incentives, the monthly payment would be $2,566*. For 40 years!

What happens if we lower the price and reduce the amortization to 30 years?
  • sales price of $482,583 (original price - incentive value)
  • same $52,00 down payment
  • 30 year amortization
  • Rate of 6.05%.
The monthly payment would be $2,575. Virtually the same as above. Bottom line is a lower price is much more useful to the consumer than incentives. In this example a person could use the estimated cash value of the incentive to pay off the mortgage 10 years sooner.

Why use incentives then? With prices being arbitrarily high the psychological effect of incentives valued at $37,317 is greater than a price decrease. On paper the difference between $519,900 and $482,583 does not get as much attention. Also the incentive may cost the builder less than the estimated value in the ad.

*using TD's mortgage calculator.

Thursday, October 25, 2007

"GIT-R-DONE" with non-conforming loans

"GIT-R-DONE" summarizes the attitude mortgage brokers have getting people into non-conforming loans in Edmonton. This article in the Edmonton Real Estate weekly goes over many of the available options with these products. It describes these options as blessings for the consumer without any cautions to the drawbacks. There is also the attitude that any form of ownership is superior to renting:

Rents have also escalated dramatically and rental units are scarce, leaving tenants discouraged and financially strained, looking for a better way to put a roof over their heads but hoping to stay in Edmonton.
How to stay in Edmonton without renting?

"GIT-R-DONE" with higher debt service ratios:
non-conforming lenders, available primarily through mortgage brokers, may allow as much as 50% of the monthly income to be used for both housing and consumer debt.

"GIT-R-DONE" with creative and non-legal income:

Some examples of acceptable income are self-employed income, as little as one day in business, part-time employment, overtime earnings and even non-declared tips. Other commonly used income includes GST cheques, child tax, child support and alimony payments (both court-ordered and not), pensions, foster parent income, workers’ compensation payments and even rental income from a roommate or illegal basement suite.

"GIT-R-DONE" with whatever this means:

In some cases non-taxable income received can be grossed up by as much as 25% to help qualify for the mortgage.

"GIT-R-DONE" with longer amortization:

Another way to improve the chances of qualifying for a mortgage is by stretching the repayment period out over a longer amortization period, as much as 40 years.

Just be sure to "GIT-R-DONE":

Don’t talk yourself out of trying to buy because you think you can’t qualify with today’s prices. With the hundreds of mortgage products available to borrowers today through a mortgage broker, the odds are certainly in your favour!

Update: I thought i was being original but there appears to be a Git-r-done mortgage shop already open for business.

Wednesday, October 24, 2007

CMHC opens up the money spigot

CMHC just introduced 100% financing for 1 and 2 unit rental properties. Also 90% financing for 3-4 unit properties. See product announcement

What is amazing about this loan insurance is the premium they charge- 7.25% for 100% financing. This will get tacked onto the loan amount so in essence you are borrowing 107.25%. This is available in combination with other products such as 40-year amortization, self-employed and new to Canada programs.

Lets assume an investor took a 100% loan amortized over 40 years for a full duplex costing 500K. Adding the 7.25% premium of $36,250 the investor takes a loan for 536,250. Using an amortization table it would take over 10 years just to pay the premium! I assumed an interest rate of 7% and first payment Jan 2008.

Year Loan Balance Yearly Interest Paid Yearly Principal Paid Total Interest
2008 533,718.19 37,457.29 2,531.81 37,457.29
2009 531,003.36 37,274.27 2,714.83 74,731.57
2010 528,092.27 37,078.01 2,911.09 111,809.58
2011 524,970.74 36,867.57 3,121.53 148,677.15
2012 521,623.55 36,641.92 3,347.19 185,319.07
2013 518,034.40 36,399.95 3,589.16 221,719.02
2014 514,185.78 36,140.49 3,848.62 257,859.50
2015 510,058.95 35,862.27 4,126.83 293,721.77
2016 505,633.79 35,563.94 4,425.16 329,285.72
2017 500,888.73 35,244.05 4,745.06 364,529.76
2018 495,800.66 34,901.03 5,088.08 399,430.79

The funny thing is the renters of this property would be expected to pay security deposit and one months rent to a landlord with absolutely no stake whatsoever.

Edmonton Comfree Mystery Stats

On the Comfree monthly reports there was something called the "Sold to Listing Ratio". For Edmonton in August this was 58%. Looking at the report I have no idea where this comes from.

New Listings = 788
Sales = 237
Total inventory = 2927
Sales/New Lisitngs = 30%
Month of Inventory = 12.3 months
That sounds a lot worse than 58% sold to listing ratio! Also worse the 45 days on market stat they used.

In September this stat was changed to "Sales Success" and was 50%. It remains mysterious:

New Listings =613
Sales = 201

Sales/New Lisitngs = 0.328 = 32.8%
Total inventory = 3423
Month of Inventory = 17 months

Wow! 17 months of inventory at current sales with Comfree. Thats a meaningful stat.

Edmonton Monthly Reports

A side note:
It costs $699 to list on Comfree in Alberta but only $399 in Australia! After currency conversion thats $350 CAN.

Monday, October 22, 2007

Combination Income Loans

There is an article in the Edmonton Real Estate Weekly magazine regarding combination income loans. This loan is for people who overlook the following from Revenue Canada when filing taxes:

If you received tips through your employment and they are not included on your T4 slip, report them on line 104 of your return.

The article clearly describes how this type of tax oversight can be problematic when applying for a conventional mortgage.

However, it is very unlikely that most individuals who are paid in tips or cash declare their entire income on their annual taxes, so right out of the gate this method of qualifying has a number of possible ways to go wrong.

The solution:

Because of these increasing obstacles, a number of non-conventional lenders are recognizing this growing problem and offering employees alternatives beyond just that of declaring more income to the tax man.

It is interesting that Revenue Canada and the law are considered to be "obstacles". The article also warns of the dangers to wait until you can prove your income:

As we have seen in Edmonton, house prices can change dramatically over a period of two years, making it a potentially costly decision to wait until you have the perfect income documents to show the bank before you get into the real estate market.

Sunday, October 21, 2007

Calgary Real Estate Board - Balanced Market

Below are three charts showing absorption rates from the CREB monthly reports. The absorption rate is the number of months it would take to clear inventory assuming sales remain constant.

Absorption rate = Total inventory/monthly sales

Here is the July report. Note the blue band indicating a balanced market. Between 2-3.5 months inventory.
In the August report the absorption rate just exceeds the balanced market. The blue band has been moved up slightlyt 2.1-3.6.
For September the absorption rate heads up as sales decline and inventory increases. As this value goes way outside the balanced market range the label is conveniently moved up.

Blogger paranoia or a deliberate move by the CREB?

Source CREB statistics: here

Edmonton Real Estate Board June 2007 press release

The EREB modified their June 2007 press release on their website without any information of what correction was made.

Here is the statement as it was initially released on EREB website.
Sales remained strong as buyers took advantage of a wider selection of homes available. At the midpoint for the year 13,282 residential properties have been sold through the MLS® valued at almost $4.5 billion. That is 1,712 more properties than the same time last year. Single month sales in June were up 20% from last month and 15% from June 2006.
Which is still found at the end of the second paragraph at Real Estate Weekly:

The new version has the bold text removed and is found here. Note how it was removed instead of being replaced with the accurate information:

Single month sales in June were down 20% from last month and up 1% from June 2006.

MLS Rent vs Buy Calculator

The MLS rent vs. buy mortgage calculator has a fault in which it will always advise to buy. The most blatant error is it does not correctly calculate the amount saved by renting. This calculator can be found when viewing listings on the MLS.

Consider the following example:
Monthly payment $3000
Annual property tax $2000

Annual Increase in home value 0%
Down Payment $10000
Interest Rate 6%
Monthly rent $1000
Year comparison 10

You should Buy!

It looks like you should Buy based on the assumptions you have given us.

Why? If you buy for $452842.14 (the maximum you would qualify for) you will pay down your mortgage of $442842.14 by $105493.48 over 10 year(s) with your Principal and Interest payments of $2833.33 per month, plus your property will increase in value by $0 for a total investment growth of $105493.48.

This total is greater than your total investment growth from renting, which is approximately $40328.31 after 10 year(s). This was calculated by growing the monthly savings from renting ($2000.00) plus your current downpayment of $10000.00 at a standard after-tax rate of 4% per annum.

The main problem is in the amount saved each month renting. Even if this money is stuffed underneath your mattress it would add up to $240,000. Substantially more than the 40K determined by the calculator.

Thanks to poster lukecs from Alberta Bubble Blog for finding this.

Note: Even with $10/month rent it still returns the same result.