Canwest Global: Buy Now!

CanWest Global reported on the Calgary housing market.

Oops, that was Canwest stock price. 45 cents.

The story is here somewhere I'm not saavy enough to embed or link it. Go find it.

Reporter:

...falling prices and lower interest rates are creating a perfect storm for homebuyers. As Vindu Surri reports some lenders are even sweetening the deal to help you cash-in on the cooling economy

....

Mortgage guy:

"..Its almost like a free downpayment, where the lender actually supplies the borrower with the downpayment for the mortgage. Interest rates just a slight bit higher maybe 1 point 1 and a half points higher than normal and that downpaymnet is forgivable after 5 years."

...

Reporter

The free downpayment is unlike the zero downpaymnet which was eliminated last year.

Adding 1 to 1.5 to the rate over 5 years will end up costing 5.0-7.5% (neglecting compunding interest) so assuming the downpayment is 5% it is certainly not free.

Also the mortgage broker in the story reminded us of a very important fact

Canada Mortgage and Housing and there are some other mortgage insurance institutions that will protect the lender if someone defaults on their mortgage.

Looks like mortgage originators are able to shift the risks of "innovative" mortgage products. hmmm... sound familiar? Volker had it right (paraphrased) The best innovation in the world of finance was the automatic teller.

Inside the Meltdown

PBS Frontline has a documentary about the financial crisis.

Inside the Meltdown

Inconvenient Stats

Another terrible article from the Calgary Herald. Resale market gathers strength.

Maybe it was the weather, maybe it was wanting to start the new year on an optimistic note, or maybe people were just being spontaneous.

Whatever the reason, as January moved along there seemed to be more open house signs popping up around the city -- and "for sale" signs with "sold" stickers slapped on them.

By the end of the month, January was slightly stronger for sales than December.

There is a predictable seasonal trend with real estate sales. Past years have followed this pattern where sales in January increase over December. Even in weakening markets, such as 2008, sales increase in January. Single family sales from Mike's stats:
Dec'07 846
Jan'08 1083

Dec'08 449
Jan'09 550

The Calgary Real Estate Board says 550 single-detached homes inside the city limits changed hands in January, up from 449 in December.

As well, 225 condominiums were sold, 20 more than the previous month.

Outside the city in the rural communities, sales in January reached 148, up from 113 for December.

"Indeed, it is a tough market (for sellers), but I'm pleased to see sales picking up over December," says CREB president Bonnie Wegerich. "Although numbers are down from January 2008, we are seeing increased activity and more interest from buyers."

Ron Stanners, a past-president for the board and broker/owner of Max-Well South Star Realty, says activity among realtors in his office picked up in January by about 55 per cent from December.

"Sales are up, that's a good sign," he says.

Note that all the sales comparisons are made to last month.

"And the flow of listings has slowed. I think a large number of investors have sold or rented their properties, which is one of the issues that has been affecting the market."

The number of new single-detached resale home listings added to the market last month totalled 2,068, down from 3,023 for the same month a year ago--with the comparative month-end inventories almost unchanged at about 4,000.

The condo inventory also held steady at near 1,900.

"While there's still a good selection of homes to choose from, we are seeing a slow but steady decrease in our inventory," says Wegerich. "As the inventory is reduced, we will see a return to a more stable market."

It is disingenuous to compare sales to last month but inventory and listings to last year. New listings for single family homes from CREB are below showing a large but seasonal monthly increase this January.

Dec'07 984
Jan'08 3023

Dec'08 836
Jan'09 2068

Stanners has been in the business long enough to know there will always be ups and downs, particularly in the Calgary marketplace.

"This market is not that bad -- price declines were minimal from December," says Stanners.

For January, the board reports the average price at $413,049,down from$417,398 in December. The condo average slipped to $270,940, declining from $274,919.

Now we are back to monthly comparisons. Below are average prices from CREB (SFH/Condo)

Dec'07 444,769 / 304,719
Jan'08 455,297 / 311,232

Dec'08 417,398 / 274,919
Jan'09 413,049 / 270,940

But Stanners says that because 2006 and 2007 were so volatile, it's difficult to make comparisons.

He says that 2004 and 2005 were "good years" and compared to them, the 2008 market was only about 20 per cent off.

Here he is comparing the total sales in 2008 to previous years. Using this measure sales are down 27% from 2005 and only 13% from 2004. Source CMHC Housing Market Outlook.

2004: 26,511
2005: 31,569
2006: 33,027
2007: 32,176
2008: 23,136

However, it is worth noting that the market suffered a further deterioration in sales since fall of 2008. Sales this January are down 45% from 2005 levels (Source Mike Fotiou). Also it's not difficult to make comparisons to 2006 and 2007. Watch me. (SFH January sales)

2005: 1002
2006: 1445
2007: 1497
2008: 1083
2009: 550

Sales are down 62% from 2006 and 63% from 2007 levels.

From a financial aspect, Stanners also says buyers should be getting into the market sooner than later.

"If you bought a home today and the price dropped 10 per cent in the next year and mortgage rates went up one per cent, it would still cost you less to buy today -- and you'd have the home paid off a year earlier," he says.

This is false. Lets compare two buyers with 25 year amortizations.

Buyer A

Price $300,000

Down $30,000

Initial Balance $270,000

Initial Rate 4.5%

Payment $1494.38

Buyer B

Price $270,000

Down $30,000

Initial Balance $240,000

Initial Rate 5.5%

Payment $1464.94

For this example assume Buyer A buys immediately and takes out a 5-year fixed and Buyer B waits one year and then takes a 4-year fixed rate (for convenience inthis example). After 5 years both buyers will have similar financing options so we can focus on the outstanding mortgage balance after 5 years and the cost of payments. I will neglect the first year of payments as one buyer would be renting and the other owning and also assume buyer B did not save any additional funds for downpaymnet. The results are below after 5 years (using RBC mortgage calculator):

Buyer A

Total Payments: $71,730 (ignoring year 1)

Outstanding Balance: $237,050

Buyer B

Total Payments: $70,317 (ignoring year 1)

Outstanding Balance: $219,818

The difference would even be greater if renting was cheaper than owning and if buyer B saved for a downpayment in the first year. After this term buyer B could potentially change the amortization time and pay off the mortgage sooner.

Update: Mike Fotiou had made a very similar mortgage comparison here.

The real estate boom and Alberta Avenue

This post will look back near the peak of the Edmonton real estate market. These articles discuss how rising prices will cause a troubled neighborhood to "gentrify" but not acknowledge the risks involved. Also note how this neighborhood is sold in these articles as a normal alternative for potential homebuyers.

Consider the CBC article from March 13, 2007 Home buyers making over Alberta Avenue

Edmonton's housing boom is transforming an area around 118th Avenue in the northeast that has long been one of the poorer parts of the city.

...

Real estate agent Tom Gariano has sold homes in the Alberta Avenue area for 30 years. He says it's one of the few areas in Edmonton where you can still buy a house for under $300,000.

"It's becoming more and more owner occupied rather than rental. People are starting to buy and fix them."

Typical of the time the risks were not mentioned and instead the article relied on misguided optimism. We should not forget that the boom in Alberta real estate was a rare period of time that is unlikely to occur again in the near future.

Another article from Sept 3, 2007 featured a couple who bought a Alberta Avenue home in 2006 to fix and flip. Young homebuyers eye older neighborhoods.

They’ve also become part of a trend during Alberta’s insatiable housing boom, as young home buyers and older neighbourhoods have been finding each other.

A realtor took them to a rickety two-storey house with boarded-up windows, no bathroom and the lingering smell of human waste. Needles were scattered all over the basement floor and there were remnants of a grow-op.

The place had one big advantage, though — they could afford it.

...

Tom Gariano, who has been selling homes in the area for 32 years, says it’s mostly young, first-time buyers who are moving in.

“Even though the average price (of Edmonton homes) has increased drastically, it’s still one of the most affordable areas in the city.”

As a result, Gariano says, the neighbourhood is experiencing a renaissance as people settle in with families. “People are starting to look after each other.”

...
They plan to “upgrade” next month and buy a $450,000 home, hostel and campground near a ski resort in British Columbia.
....

Polley and Feddes, who admit they knew almost nothing about real estate before they bought their fixer-upper, say time is of the essence if they want their labour to pay off. For them, this means selling and moving on.

Polley confesses that although the mountain property they plan to buy is gorgeous, relatively inexpensive and an ideal location for their outdoorsy dispositions, she can’t help but think about its profit potential.

“You start to think of it more as investment.”

I am not against informed risk taking and revitilizing neighboorhoods. However this type of activity is far from a sure thing and only in the environment of the past boom would this be considered normal for first time buyers.

Quotes

Our government will be looking for ways to get you to spend money to stimulate the economy and they will be spending your tax dollars to stimulate the economy, so be a good Canadian and buy a home!!

Richard, Red Deer realtor

For a $300,000 home, a family would need an annual income of slightly less than $50,000. Monthly principal and interest payments would be $887 and $1,330 respectively. "At Jayman, we have lowered prices substantially as we move through our excess inventory," he says.

"We are selling home at close to cost and below replacement value," says Westman.

Jay Westment, President of Jayman

CHIP

You have seen the ads "Wouldn't it be nice..."

These are ads for seniors to borrow money using their home as collateral. It is a loan.

I noticed in their ad the used phrases such as "receive tax free cash" or "home income plan" more often than "mortgage", "debt" and ""loan". So I had a look at their website.

On the front page there are the following terms:

"Home income plan"

"How much money could I get?"

"The CHIP Home Income Plan allows you to unlock the value in your home."

"how much of your home's value you can access and what the future equity of your home may be."

"Unlock the value in your home and enjoy life on your terms."

"Get up to 40% of the value in your home in tax-free cash with no payments required for as long as you live in your home."
to their credit "payments" were mentioned here - BearClaw

The word "debt" does appear on the front page

“We didn’t want to sell the family home where we’d raised our seven children. But we were short on cash for living expenses. With our CHIP Home Income Plan, our debts are gone and so is our stress!”

The information stating that this is a reverse mortgage is available on this site. I find it interesting that it is marketed as income and as accessing, getting and unlocking cash.

They also have a future equity calculator. The options available for yearly home appreciation are 2, 4 and 6%. The one selected by default is 4%. By estimating long term appreciation the mortgage amount can grow over time as no payments are made.

One example is a couple aged 70 can borrow $148,495 from their mortgage-free $500,000 home. When they are 90 they will owe $644,339 on their home which is estimated would be worth $1,095,562 (with the default 4% appreciation). The column showing outstanding mortgage balance is labeled "CHIP". The rightmost column is labeled "Net equity" and with this example reaches $451,223 at age 90.

The bottom

From the EREB January report

“Nobody rings a bell when prices hit the bottom,” said Charlie Ponde, president of the REALTORS® Association of Edmonton. “The bottom is evident only after several months of rising prices. One month does not make a trend but the market is certainly welcoming to home buyers.” He pointed to the lowest interest rates in years, the large selection of homes available and recently announced economic stimulus packages as reasons for the increasing market activity. The amount of RRSP savings that can be applied to a first-time home purchase was increased from $20,000 to $25,000 and a tax rebate for home renovation expenses were announced in the recent federal budget. Both measures will encourage home buyers.

I actually don't have any problem with the new president. I just wanted to throw in my two cents.

Really, so what if a buyer misses the bottom? Unless the market goes back to the extereme appreciation of the boom in the near future, which I suspect is unlikely. Generally real estate will move slowly and buyers can make their decision on other factors besides price swings. If you biggest motivation for buying is you worry about appreciation in the near future then forget it. People should buy because they want good value and are comfortable with the property and the price.

What is happening now isn't the result of buyers acting irrationally but a correction of the distorted economy that had existed in the boom.

Calgary Inventory

From the Calgary Real Estate Board

"While there's still a good selection of homes to choose from, we are seeing a slow but steady decrease in our inventory," remarked Wegerich. "As the inventory is reduced we will see a return to a more stable market."

Total inventory has increased by 4.5% over last year from 8820 to 9225.
Total inventory has increased by 4.2% over last month from 8854 to 9225.

In Alberta, January is a winter month

From the Calgary Sun article Calgary home price remain stable

December usually is a month of slow sales as people focus on Christmas.

Inclement weather and poor driving conditions had further driven sales below normal levels.

Apparently in December 2007, with almost twice the sales as this year, Santa canceled Christmas. All of a sudden this January the city of Calgary experienced a certain weather event called "snow", resulting in a roughly 40% sales drop from 2008. How about that?

What about the title "prices remain stable"? That is news to me.

Making the numbers look good

I had a look at the presentation the Edmonton Economic Development Corporation gave to Edmonton Realtors earlier this month.

Edmonton's Economic Future 2009

Slide 7

"Drop in house prices, but increase in MLS sales
(year over year)"

False: Sales dropped 15% from 20,544 in 2007 down to 17,371 in 2008.


Slide 11

Shows cumulative GDP growth starting in 1989. Note that all the lines shoot up soon after 2009 in an optimistic forecast but there is no line indicating when real data ends and cheer leading begins.

Slide 15

There is a table with the following information.

"Major Projects
Alberta Major Projects - 2009
(millions $)

Total Alberta Major
Projects
$270,727

Alberta Oil and Gas $7,882
Alberta Oilsands $163,203
Projects delayed $98,600

Value of projects
remaining
$172,127"

The information comes from the Alberta government website. In this presentation it is listed as "Major Projects 2009". From the source they describe these numbers

This Inventory lists projects in Alberta, valued at $5 million or greater, that have recently been completed, are currently under construction, or are proposed to start construction within two years. Not all projects over this threshold are listed, due to reasons of confidentiality and/or due to information not being available at the time of printing.

The numbers themselves are impressive so in the presentation they go. Everyone knows that projects have been "delayed" so it would need to appear that they have accounted for it. Why does the title say 2009 projects? Why didn't they account for projects completed or nearing completion as well?

An article came out today Upgrader Alley projects toppling like dominoes.

But at BA Energy's construction site, giant vessels now lay strewn about a windswept field like toppled dominoes, half-buried in snow.

Costing more than half-a-billion dollars to build, the specially designed technological marvels were transported from far-off places such as South Korea and left here to rust.

The only upgrade moving forward going into 2009 is Shell Scotford. In the list of major projects this one accounts for 22 billion dollars with this description

Proposed for 2009 - 2012 (phase 1). Four additional upgrading trains. Application filed July 2007. Estimated cost range $22B to $27B.

As we have seen there is a big difference between phase I of a 22 billion dollars being proposed for the next 3 years compared to all the 22 billion dollars being included in 2009.

But the numbers look nice.

Slide 23

Shows GDP numbers, estimates and forecast, from the Conference Board of Canada.

Shows Edmonton at 1.8% this year and a optimistic 2.4% in 2009. This has been a moving target. Last year the Conference Board had forecast 4% growth in Edmonton for 2008. Source.