Saskatoon real estate: Week in review (June 22-26 2009)

Hey Norm,

Back in the day when house sales increased so did apartment vacancies, of course that was before condos, conversions, speculation, etc. If houses and condos continue to sell reasonably well what effect do you think this will have on the rental market?

It appears that although sales are quiet acceptable most re-listings are at a lower price. Do you see sales and lower price momentum continuing?

Norm,

I agree with you on your overpriced inventory comment.

In my evaluation of properties, I look at the assessment value vs the asking price. Any asking price that is double or greater than the assessed value seems to getting relisted. Properties that are a multiple in a range between 1.2 – 1.35 are getting sold quickly.

Saw one of you latest listings with a decent multiple of 1.4. I think you priced it well. Betcha it will sell too.

L.oki, that was not a cryptic comment, and I don’t see what you don’t understand. Of course a house (or anything) is worth what someone will pay for it, but realistic pricing guarantees a faster sale (or any sale!) moreso than one that is unrealistic.

Take a glass of lemonade. If I offer to sell it at 25 cents, I’m going to have a lot of customers. If I offer to sell it at 25 dollars then I only need 1/100th as many customers … but I probably won’t even get that amount because I have priced it unrealistically.

(Okay, assuming fixed costs, I’m probably making waaaaay more than 100x profit on a $25 glass of lemonade, but I’m simplifying the math for the sake of an example.)

The city does tax-based assessments according to rules and formulae. Using that rule-based assessment as a yardstick, houses at a given multiple are selling well, but higher than that they are not selling well and have to be relisted at a lower price in order to find a buyer at all.

At least, that’s what I understood Steven to say. Hope I’m right.

Apropos of this week’s numbers: Wow. Monster week. Could see from the twitters that it was going to be big, but that’s impressive numbers. Of course, in any set of data there will be anomalous clumpings, and my belief is that this week was unrealistically high just as the Mar 6 downward spike was unrealistically low… but we’ll see how things play out over the rest of the summer and (as you commented, Norm) the pre-approvals at low rates work their way through the system.

5-year fixed mortgages are now a full percentage point higher at ING (4.5 vs. 3.5), meaning that the person who could ‘afford’ to borrow $300k last month can only carry $271k now for the same payment. Gotta think that’s going to see a slowdown of prices once nobody has that 3.5% rate on their pre-approval any more.

“I’m guessing sales will be reasonably strong, at least until pre-approvals at the lowest rates work their way through the system”
no doubt, 110 sales is phenomenal. Effects of the global recession are making their impact here, so confidence will effect sales going forward. I still do not see rates doubling or tripling like others think because of inflation in the near future.
Another deflation article
http://globaleconomicanalysis.blogspot.com/2009/06/embrace-deflation-its-cure-not-problem.html

Armoth,
the next boom or bubble will be to do with global warming and carbon credits trading. It may make the housing and commodity bubbles pale. I will post about this later.

Wow Bookrat

You clearly understood my comment. The lemonade example was a very good simple explanation.

I like tax assessment values as a non-bias price base. The values see the house for what it is and takes out any emotional factor. I can visualize what the inside of a house looks like based on this multiple. My benchmark expectations are as follows

multiple = 1; boarded up house
multiple = 1.25; dated, battered rental
multiple = 1.5; dated, owner occupied
multiple = 1.75; modern, well maintained, owner occupied
multiple = 2; Rehabbed, fully renovated, staged

So if I come across a house with a 1.75 multiple that is fully renovated and modern; that is a steal of a deal. However, if a house works out to be a 2 and its all boarded up – that ain’t no deal. I’ve seen multiples as high as 10; and for such a value there better be a fully staged newly built house when I go look at it.

Steve, just out of curiosity, for the multiple as high as 10, was that just for the land assessment — or was it really priced that excessively?

Bookrat, “Take a glass of lemonade. If I offer to sell it at 25 cents, I’m going to have a lot of customers. If I offer to sell it at 25 dollars then I only need 1/100th as many customers … but I probably won’t even get that amount because I have priced it unrealistically.” Good analogy. So why is it with thousands of lemonade stands people are still paying upwards of $25 dollars a glass…? Is there a housing drought/heat wave that we’re unaware of?

“As two working professionals with no kids, I think it is ridiculous that we can’t afford a home in the province that we have chosen to be loyal to.”

“Hey, maybe we’ll even wait 8-10 years and pay cash…”

Your going to save hundreds of thousands in cash in 8 years but you can’t afford a house today? Call me crazy, but something doesn’t add up.

The lemonade analogy is not perfect, because theoretically you want to sell lots of lemonade to lots of customers, and because you would theoretically want repeat business… but it’s good for making an illustration.

Nobody says that housing in Saskatoon is overpriced by a factor of 100 … or even a factor of 10. I think that even the most bearish bear would agree with a bottoming-out correction of about 50% of peak values to put things back to ‘about right’, so at most things are overpriced by a factor of two.

So now you’ve got lemonade priced between twenty-five cents and fifty cents… and that seems more reasonable to understand why people might by the pricier lemonade. Or think of a higher-cost item, like a good suit: easy to find one store that’ll sell you a suit for $300, and another that will charge you $900. Why does the second store charge three times as much … and why will people pay it? (I won’t even answer that – I think everyone here knows why.) Same thing applies to houses, only on a larger scale.

If you only have one item to sell (e.g. a house, or a car, or a boat, or some other big-ticket item) then you want to price it so that exactly one person thinks that’s a good price, and is willing to pay it. If you price it too high, you risk nobody biting; if you price it too low, you ‘risk’ having too many people interested — a sign that you could have gotten more from the sale. Of course, with RE, the ‘too low’ can be counteracted somewhat if you have multiple bidders, but it’s still a consideration. In general, people value ‘losing what they have’ about twice as highly as ‘gaining something they don’t have’ … so the ‘loss’ of the high price of their house hurts people more than the ‘gain’ of a sale.

(I learned the above from a very good book I’m reading called Nudge, which is all about how and why people make decisions, and potential ways that choice architects can use a nudge to move people in one direction or the other. (A choice architect is someone whose job it is to arrange choices for another group of people; this can be anything, from cafeteria food to pension plans to the order in which candidates appears on the ballot.) These nudges can be for the benefit of the architect (e.g. a salesman) OR for the benefit of the person making the choice… depending on the architect’s underlying motivation. It’s a good read, and reminds me again that (most) people are not rational creatures in how they make decisions … even about huge, life-altering things.)

Jason

For the home with a multiple of 10. It was a newly built house in a core neighbourhood. That gives me the picture of a boarded up house being torn down to build new. But that opens a whole new can of worms though. Cause if you buy a 2×4 and haul it to Pleasant Hill; it depreciates by 50%. Haul it to Briarwood and it appreciates 25%. Building a new house in Pleasant Hill should not fetch the same price as in Briarwood even thought the cost of materials and labour is the same. (I don’t mean to pick on Pleasant Hill; using it only cause the majority misconceive it as an undesirable hood)

Norm,

I don’t see a problem with the methodology. I use it a little more broadly to determine if I should put my money on deals in Regina or Winnipeg. Boarded up homes in wpg have a multiple < 1. I've seen boarded up homes here at a multiple of 2 and are not moving. The method is basically a scale of 1 – 2, and where is the asking price sitting on that scale. Something asking for a 2 multiple better be really nice, and something boarded up should be down below 1. It an arbitrary judgemental scale that doesn't hear the sizzle being put into property by a salesperson. The valuation system is different and that is all a part of the marketplace.

Bookrat,

I really like how you have the market psychology factors covered.

cyn_d, I echo your sentiments. And forget about significant appreciation; how about the realistic prospect that it will at least hold its value as opposed to dropping in price? I think your 8-10 year plan is sound and well though-out — don’t let anyone else tell you otherwise if you feel this is the best route for you! (my wife and I rented for close to 8 years before buying our first place as well) And what if we see a housing crash/correction of an additional 15%+? I know, I know… it’ll never happen here…

Financial caution, please
http://tinyurl.com/lqx52w
“Caution, not immediate gratification, should be the mantra for buyers looking to buy their first home, warns a senior macro economist for the BMO Financial Group. It’s easy, but financially dangerous to be mortgaged to the hilt based on today’s ultra-low teaser interest rates… Mortgage rates are going to increase by two to three per cent over the next two to four years, edging back up to the more normal lending rates of six to seven per cent…”

This means there could be financial trouble for a young couple or a single buyer already pressed to cobble together financing for a home.

Mark/Jason

Thanks for your comments.

Mark, you said, “800 a month rent would translate into a 150,000 mortgage these days.” For curiousity sake, I did a search for condos/townhouses btwn $100-200K (with A/C) and found 3 results. Not much pickin’s in that price range. (A search btwn $200-300 came back with 52)

I guess that is part of my point also. People buy condos b/c they are (suppose to be) more affordable than houses, they don’t need the space (which, you are correct, we do not), and would prefer to be maintenance free. But paying over $200K for a condo is not much incentive for us to buy either. You need to spend around the $250 range to get the “average” condo and then have the fees on top of it. Pretty close to the cost of owning a home IMO.

Mark, I understand your comment in comparing renting small space vs large space. It would be nice to have more than 800 sq ft of living space (not to mention a garage or basement!), but I can not justify borrowing a quarter mil to do so. Taking out a $150K loan is definitely more affordable as you suggested, but our $175K wouldn’t buy anything worth living in.

Jason,

Just for kicks, let’s assume rent increases and house value increases over ten years at the rate of inflation, which unless you expect a further correction (which I know you do, but there’s no guarantee), is a fair assumption. Prices may go flat or down for the next four years, but then jump at 4 or 5 percent for a couple years, etc. Anyway, let’s assume 2 percent inflation, fairly tame, over ten years. Condo at year 9, or year 11, or whatever, is now worth 40 or 50 thousand more too. And let’s compare apples and apples – if they need a three bedroom or want one, let’s compare that rent. And rent rising at 2 percent, or 30 dollars extra a year, a full 300 higher in that last year…. anyway, some people might need that extra bedroom, and if they do, they’ll be paying for it with higher rent, beyond the montly increases, than your scenario. It doesn’t sound like C’ynd is in that situation though. So if you can’t find something to buy, without having to ‘buy up’, it makes it harder to compare.

Mark, my point was that today’s homebuyers typically buy what they want as opposed to what they need, or can afford. Which in many instances means upgrading over and above what was once previously owned or rented. If we were talking the same level of payments amortized over 25 years (instead of 35 or 40), I’d be a big proponent for home ownership.

It’s not as hard to downsize as one thinks, and believe it or not, we really don’t need as much crap as we tend to accumulate. We have basements and garages for storage of said junk (driveways are for parking vehicles instead, in the finest of Canadian traditions).

Whatever economic scenario you believe in, there’s almost none that guarantee any increase in housing prices in the foreseeable future. Further recession? Deflation, higher unemployment, lower wages and subsequently lower housing prices. Economic recovery? High inflation leading to even higher interest rates, causing affordability to plummet, resulting in waves of foreclosures, underwater homeowners and falling housing prices.

“High inflation leading to…falling housing prices”

That would be an interesting development. Not sure how that is economically possible…but anywho…

“how is it possible for interest rates to be going up”

So far, that has been the case, Jason. Bond yields are down pretty significantly this week, though (2.47), well under the spike we saw early this month. It’s not impossible that interest rates may stay low for longer than we think. I agree it’s just a matter of time before they increase more than most expect, but it may not be soon.

Ever so slightly- I’ve got no links but I’ve heard a few lenders have reduced their rates by 0.05%. My point is only that whatever your reasons for buying might be, one shouldn’t operate out of fear of interest rates shooting up in the near term. In fact, if interest rates *only* are making or breaking your decision on whether to buy or not right now, you might want to think about it some more. I completely agree with you that focusing only on the projected monthly payment at these rates is asking for trouble, but I’d hate to see people operating out of the fear that they’re going to “get priced out forever” again due to the imminent prospect of interest rates getting out of hand.

Thank you for those links, btw- they’re very interesting.

“when we’re still seeing an economic contraction and widespread deflation? Yet this is exactly what’s happening”

Didn’t we just have reports last week stating Canada still had inflation, though mild, not deflation. We don’t have ‘widespread deflation’, yet that is exactly what you just said we had! Stop fear mongering. In fact, you yourself last week linked to a report saying how the canadian numbers soon to come out would show deflation. However, when the actual numbers came out a few days later and didn’t show deflation, you didn’t link that news. Figured you wouldn’t. So I did. Same news site, same data, but you like deflation news and when it doesn’t pan out, you don’t follow up. We do not have ‘widespread deflation’, not yet at least, so stick to the facts. Feel free to argue that we have asset deflation, or commodity deflation, but that was last fall and winter, both real estate prices and oil prices have also been rising the past few months.

Mark, “fear mongering: one who spreads the (ideology) of fear through propaganda to fulfill a concealed agenda.” You also forgot “doomsayer: a person disposed to predicting catastrophe, disaster, etc.”, “apocalyptic: portending future disaster, devastation and doom”, “pessimism: the tendency to expect misfortune or the worst outcome in any circumstances; practice of looking on the dark side of things” and “negative: lacking positive or constructive features”. I’m sure I’ve left several out; please feel free to expand on this list.

One could also argue that I’m just a “realist: a person who accepts the world as it literally is and deals with it accordingly.”

Here’s another one to consider, though: “slumlord: a derogatory term for landlords, generally absentee landlords, who attempt to maximize profit by minimizing spending on property maintenance, often in deteriorating neighborhoods. They may need to charge lower than market rent to tenants. Severe housing shortages allow slumlords to charge higher rents. It is not uncommon for slumlords to buy property with little or no down payment, and also to receive rent in cash to avoid disclosing it for tax purposes, providing lucrative short term income. A slumlord may also hope that his property will eventually be purchased by government for more than it is worth as a part of urban renewal, or by investors as the neighborhood becomes gentrified. Some slumlords are more interested in profit acquired through property flipping, a form of speculation, rather than rental income…” (full Wiki definition here)

You have your opinions, and I’m certainly entitled to mine. If you want to debate the finer merits of my points, please do so without the ‘labels’ and the rhetoric. I’ve shown you the courtesy and respect of not openly slamming you personally, and would appreciate the same.

Jason,

Kind of hypocritical of you to be preaching deflation on the one hand, and then higher interest rates when the argument suits you. If you think there’s deflation ahead, don’t go around saying interest rates are headed up, it makes you lose credibility.

George,

My view of the second stimulus package is that it should be positive for the stock market, no? What it does is put a floor under the economic destruction which contributes to business confidence. Without some kind of stimulus it’s hard to imagine just how bad things can get. When people think that things are bad but the government will keep it from going to zero, they are still willing to make some form of investment and hiring which further limits the damage. At least that’s how the theory goes.

I don’t personally see an actual bankruptcy happenning in California. Now they are certainly effectively bankrupt but my view is that Obama will drum up some more cash to keep them afloat. A statewise bankruptcy would be just too devastating to the bond market right now. I don’t have much evidence to back this up, just my gut feel.

Based on the recent strength in the US dollar (over the past year) and the decent appetite for US debt, it looks to me like the US will get away with things, at least one more time.

Peter,
it could be possible to see higher interest rates with deflation. The reason for that would be because of the all time high levels of debt and uncertainty. The bond market has already mentioned that. But I really do not see that happening. I would bet the farm on that not happening.

If there is a second stimulus, it means that the first one did not work as told to the public and the markets would reflect that. Retesting the March lows soon? But then another climb.

Obama is in a tough position with California. Doing nothing could mean bankruptcy for the State, and with other States, cities and counties following suit. A deflationary spiral would follow. Bailing California out, would also mean bailing out the other places as well. How much bailing out can they do? The Trillion dollar elephant in the room credit card debt is soon to follow. He is in a damned if you do and damned if you don’t position. Worst case scenario is that this mess wrecks more in the markets than the banks last fall. Best case scenario is that Mickey Mouse will not be feeling very good for a few years.

Steven, the concept of housing being hyperinflated is not exactly a popular topic for discussion, so yeah, I was trying to be somewhat subtle… there are still many who believe that current housing prices are justified, and many in this group have an ulterior motive. It was the same scenario for me, except it was in Arizona. Sad and yet strangely ironic to see the same pattern of behavior repeated again here.
……….

George, “The reason for that would be because of the all time high levels of debt and uncertainty.” Are we not approaching (if not already there?) record consumer or household debt? I would agree that the US is in far worse shape economically, and things do seem to be getting desperate – but as our largest trading partner, at least some of this will have a direct adverse effect on our economy. You mention the trillion dollar credit card elephant in the room; he already has company in the form of the trillion dollar commercial real estate hippo and the trillion and a half dollar Alt-A gorilla. If we reach the point where a second stimulus is needed, would we even have the financial capability at that point without having to pay an extremely high rate of interest on the borrowing? At the end of the day, do people not realize that all of this money does eventually have to be paid back…?

“Here’s another one to consider, though: “slumlord:”

and this has to do with what? i renovate most houses i buy, houses that need renovation. quite the opposite of a slumlord actually. if you still want to call me that, you’re expressing more of a prejudice against a neighbourhood, not the way I do business. so if you’re going to attack me personally, you should probably have a better idea what you’re attacking. why not stick to the point.

you said there was ‘widespread deflation’. there hasn’t been. end of story. Next month may be different, but not yet.

Jason

“Kind of a winning a pyrrhic point, wouldn’t you say?”

I think not. Negligible inflation is not widespread deflation. Also, the same CPI report points out that bulk of the weakness was on year over year comparisons in energy. Without energy, it was up + 2.3 percent. Right now we are comparing current energy with peak energy of last summer. This is very temporary. As the next few months unfold, we’ll be comparing the weaker energy prices of fall and winter with what will probably similar prices to now.

“How much bailing out can they do? ”

Japanese goverment debt is 180% of GDP, to 80% in the US. I think they can do a LOT more bailing out. Don’t forget that with control of the printing press they can do whatever they want. Of course a side effect could be currency devaluation and subsequent inflation but that would actually benefit the US from a trade perspective. Before everyone beats me over the head with this, I am just saying what I think the government will do and what I think they will get away with in the short term, not something I by any means advocate.

http://www.businessinsider.com/japan-gdp-drops-catastrophic-13-2009-2

Further to the CA discussion:
California starts issuing IOU’s to vendors and local agencies tomorrow.

How likely is default with this state? Consider that unemployment there is currently pegged at over 11% and that for the three major metro areas in CA, home prices are off 43% from the peak reached three years ago. This is a *big* issue: if California was a country it would have the eighth largest GDP in the world.

Happy Canada Day, folks.