The Good, the Bad and the Ugly

To stay on top of thing I have decided to pick a few stats each week regarding the Alberta economy. From the Alberta Finance Weekly update. These are not the most recent updates just ones that caught my attention.

The good.

In the labour market hourly wages have not shown any signs of weakness. Hourly wages in Alberta are up 4.5% this February year over year. I think high wages for the majority of people that remained employed in Alberta and record low interest rates are contributing factors to improving conditions in the real estate market over the last couple months.

The Bad.

Retail sales are down 6.3% in January. This is notable because there has been an expansion in the amount of retail space over the past few years, so I would guess that the downturn would feel worse than this in terms of same store sales.

The Ugly.

The number of rigs drilled is down 43.9% this Febraury comapred to last year. This is comparing to 2008 which the industry never recovered fully from the beating it took in 2007.

Friday the 13th - Fear Mongering edition

Some highlights from today's Labour Force Survey.

23, 700 jobs lost this month in Alberta
28,000 full time lost with a gain of 4,200 part time jobs
Unemployment rose 1.0% this month and 1.8% over last year.

Last month the Edmonton Real Estate Blog linked to a post from Chris Davies highlighting that only 200 jobs were lost in January in Alberta, which showed a contrast between Alberta and eastern Canada.

However now looking back over three months it appears that the January report did not indicate any sort of trend as the month previous and this month's numbers show a more rapidly deteriorating job market.

Report Month total / full-time / part-time
December -15,800/-19,900/+4,100
January 3,300/-200/3,600
February -23,700/-28,000/4,200

Report %unemployed
November 3.4%
December 4.1%
January 4.4%
February 5.4%

Lower Prices

Regarding the Calgary Herald Article Entry-level buyers now driving Calgary's home sales

The report said that in Calgary improved affordability levels are bringing first-time buyers into the residential real estate market. Close to 60 per cent of year-to-date sales have taken place in the under $400,000 price point - a 20 per cent increase over last year.

My first impression is that a higher percentage of lower priced homes are selling because prices have fallen. At the risk of being painfully obvious I am going to go over an example. Suppose three homes sold in February 2008 at $300/sqft.

1. 1000sqft $300,000
2. 1500sqft $450,000
3. 2000sqft $600,000

In February 2009 three identical homes sold at $250/sqft

1. 1000sqft $250,000
2. 1500sqft $375,000
3. 2000sqft $500,000

In 2008 only one house sold for under $400,000 while in 2009 there were two simply because prices have fallen.

In addition I would like to add some context and insight to a related comment from Bob Truman's What's New page

Mar 5
SFH sales are down 29% over the past 30 days, but for homes priced at $400,000 or less, sales are actually 11% higher than they were last year. With an absorption rate of 3.1, homes in this price range are no longer considered to be a buyer's market but have now moved into balanced market conditions.

The sales price/list price ratio is about 95% so on average a home that sells for $400,000 would most likely be listed around $420,000. Homes listed in the $400,000-$420,000 are not included in the above absorption rate calculation. Also, I would assume the homes that actually sell are priced more competitively than those that do not. The above absorption rate does not include some of the homes that have a list price over $400,000 where the seller has an unrealistic expectation of the market. The problem with the above metric is it uses the listed price of inventory and the sales price of homes that have actually sold.

I do recognize that lower priced inventory sells more quickly, but I believe this has been true historically and does not reflect a new trend in the market.

**March 14th Update and Correction

I made an assumption that the sold price was used in the above calculation which is not the case. As Bob Truman points out:

The absorption rate is based only on list prices, just as it clearly states on the Table. If sales prices were used, the absorption rate would be lower.

The stat is more accurate than I had alluded to. You know what they say about assumptions. So in this case you can disregard my "context and insight"...
**

I will comment on the jobs report soon...

Don Campbell - From the Vault

Campbell said he expects Edmonton home prices generally to rise nine per cent in 2008 and 12 per cent in 2009. Homes that benefit from transportation improvements will outperform the market by an additional 10 to 20 per cent, he said. "When people look for a property to purchase, be it their primary residence or an investment property, they take into consideration affordability, commute times and commute costs," Campbell said.

November 14, 2007
Don Campbell
Transit effect a boon to homeowners

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.