Saturday, August 28, 2010

The Most Obscure Stat Award

This article in the Calgary Herald is just bizarre - "Condos on the market for less time"

The number of condominiums listed for sale on the Calgary Real Estate Board's MLS system during July totalled 890, down from 918 for the same month last year.

But on a year-to-date basis, the 7,967 new listings this year are nearly 22 per cent higher than for the same seven-month period in 2009.

On average, though, people are taking less time to make the buying decision. This year, the average length of stay on the market is 44 days compared to 53 a year ago.

Overall, the condo segment of the 2010 edition of the resale market is seeing lower sales, higher listings, and slightly - prices.

After reviewing the data the main story is that condos are not on the market as long? Really? Even with sales down 44% and inventory up 55% from the same time last year? Remember DOM only applies to properties that have sold and does not include the amount of time if it has been unsuccessfully listed in the past.

The figure mentioned in the article is the year to date days on market. Looking only at the month of July this number increased to 51 from 50 the same time last year.

Saturday, August 21, 2010

Real estate downturn hits the economy

The strong economic recovery highlighted in this post has stalled. I assumed a reversal in housing activity to slow down the entire economy but still remain in positive growth. That is now being tested with negative results showing up in some key reports.

Leading indicators (July 2010)

The composite leading index slowed to a 0.4% increase in July, after a gain of 0.7% in June. Most of the slowdown originated in the household sector, where three components fell. None of the seven other components decreased.

Jobs (July 2010)

The number of workers in the education sector was down by 65,000 in July. The large drop in educational services in July was spread across several occupation groups, including educational assistants, teachers and administrators in primary and secondary schools as well as custodial staff.

In July, employment decreased in finance, insurance, real estate and leasing (-30,000), bringing employment in this industry back to its July 2009 level.

(I expect next months report to be better because the loss of 65,000 educational jobs is unlikely to be repeated)

GDP (May 2010)

Sales of existing homes fell significantly in several parts of the country in May, resulting in an 11.3% decrease in the output of real estate agents and brokers. This marked the fifth consecutive monthly decline in this industry.

The question is whether this is leading to a double dip recession or just a slowing in the rate of growth.

Monday, August 16, 2010

Why have subprime at all?

This troubleshooter video shows the dangers of subprime mortgages in Canada. A couple bought at the peak of the market in Wetaskawin with a 0 down 40 year mortgage from Wells Fargo. They are no longer operating in Canada and the uninsured mortgage was difficult to renew with other lenders.

One thing that caught my attention is that they were offered a mortgage for 10.75% by another lender at renewal. That's almost triple a discount 5 year rate! Is there any value in a loan like that? These loans exist for new borrowers as well, like this couple's original purchase, and they typically have these higher rates. One aspect of these loans is the longer amortizations which I covered in a previous post.

But it's not just longer amortizations. These predatory subprime lenders charge a significant premium on interest rates. With higher interest rates less money goes towards principal repayment, even with constant amortization. Consider the charts below which illustrates mortgage balance outstanding over time at various interest rates amortized over 25 years.

Looking at the first five years shows the pace of principal reduction over the initial term. With a 3.75% rate the $300,000 balance is reduced over $40,000 while at 10.75% it is reduced by less than $17,000. So not only are subprime borrowers paying an extreme amount in monthly payments, the higher rates makes it impossible to tackle the balance. With the buy to rent calculations so marginal even with low rates what is the benefit of homeowership under these conditions?

Answer: None. It's a trap.

Thursday, August 5, 2010

Edmonton July Stats: Sales remain slow

Preliminary numbers showed a drop in sales as expected for this time of year. However that leaves us about the same as June where sales were terrible. I added the final numbers to the chart as well.

Seasonally adjusted sales are at a similar rate as the worst six months of the financial crisis. I estimated July sales to be 1378, or 6.5% higher than the preliminary number.

New listings fell as in July and inventory declined from 9,406 to 8,892. This can be expected but the decrease was more pronounced than usual for the month.

Sales to new listings ratio remains low but improved slightly due to the decrease in listings. The market conditions are beginning to show up in price with the SFH median falling to $360,000, down $10,000 from May.

Monday, August 2, 2010

False Certainty

This condo ad represents a low in marketing with a self-serving view on future appreciation. (emphasis mine).
When our prices return to 2007 levels (and the rebound is just starting)- your equity appreciation should be at least $25,000! This gain on your principal residence will be tax free.
It is troubling because the choice of words implies a certainty which has no basis. Not only is there a false certainty it also wrongly describes the current market as the 2009 rebound ended 8 months ago.

Calgary Stats: Sales Remain at "Scorched Earth", Listings Fall

While the market has been struggling all year it is now reflected in mainstream market sentiment. This is due to price drops showing up, terrible year over year sales comparisons and high inventory.

Sales fell as expected in July and remain close to the "Scorched Earth" benchmark. A rate similar to the worst six months of the financial crisis.

Listings fell dramatically in July and are now down 8% YOY.

The sales to new listings ratio recovered somewhat with the large drop in new listings. Unless sales rate improves the reduced number of new listings will only slow down the pace of price decreases as the ratio remains below 50%.

Raw data from Bob Truman's Old Criteria page.
Initial explanation of seasonally adjusted data and benchmarks and seasonally adjusted sales to new listing ratio.