Saskatoon real estate: Week in review (May 11-15 2009)

Hi Norm,

I was just wondering if you see much evidence in the current market, where entry level properties are in relatively higher demand, for the concept that people are selling their entry level properties and moving up to larger or higher priced properties where there is not as much demand? Do you see that type of market activity more than previously at this point?

Just wondering.

Since the bears are all MIA. I thought I’d hop on hear and say hi. Great post Norm. Hope you had a great long weekend! Looks like the market is on firm ground.

As a “bear”, I admit I am quite surprised at the market activity – sales-wise. Charts indicate, however, a marked difference in prices YOY. It may be the case where lower interest rates, and a reduction of price have motivated some to move into the market, or upgrade their current holding.

I, for one, will not be purchasing as of yet unless a really good deal can be found. I still believe this market has a correction to come; it just may take longer than I expected. When average income can afford the average house, then I may be more inclined to lock myself in. We’re slightly off that mark right now.

CREA predicts prices of homes in saskatchewan are expected to fall for the next couple years due to high inventory.

http://tinyurl.com/qaysc3

Last week was a good sales week, however it was only the second week this year that surpassed last year. On a downward slide their will always be brief and sporadic rises which leads many to think or hope we have turned the corner. With prices lower, interest rates lower, and a huge selection there will be people who view now as a pretty good time to buy, however the future should provide lower prices, larger selection and higher interest rates. For the person who thinks prices are heading lower here is some ammunition, oil, gas, uranium, and potash, these commodity prices, stock valuations, and volumes are all sliding, housing starts are way way down, we are coming off huge price gains, listings are high and one would sense they are inching higher rather then falling slightly, traditionally we are getting closer to a slower sales time of year, wage price gains likely have slowed or stopped and unemployment has risen, there really is no catalyst to suggest higher home prices are returning, only the past momentum of our commodity boom is keeping us rolling along albeit quite a bit slower and slowing from last years pace. The tech boom now seems like ancient history, in 2000 the Nasdaq hit a record high of 5500 later when it fell to 3500 people said it was the buying opportunity of a lifetime, today the Nasdaq closed at 1734. Now I’m in no way suggesting the Saskatoon housing market is the Nasdaq, but like any boom, if you remember there was just so many reasons why a person should buy now before prices went higher, and now there is just so many reasons to stay in denial. One week does not make a market, which I believe will be proven out in the months to follow.

Hey Norm,

2007 and 2008 saw some steep price increases. By digging into the archives is it possible to see the last two times there was significant appreciation in home prices over a relatively short period of time, say three years or less. And when these spikes ended what did the market do in the subsequent years to follow. Perhaps subsequent years to follow is self explanatory, “prices remained kinda flat untill the next housing boom”.

I found it somewhat interesting that CMHC said that Saskatoon home sales should fall to about 3,000 home sales this year the same amount sold in 2004. It appears that 2005 and 2006 are no longer the measuring benchmarks for sales as I had predicted in an earlier blog. Now the question is did 2003 have more or less sales then 2004, if it had less, then I guess we should see comparisons to 2003 in the not to distant future. If ‘03 had more sales then ‘04 then of course ‘04 will be the measuring stick for some time to come. If anybody in the future does use ‘03 comparisons for positive spin, I just don’t think anybody is going to buy into it.

Recently I have seen some interesting listings, after a closer look, they have some major negatives and only look reasonable when compared to 2008 prices. When compared with oh let’s say CMHC, there now using 2004 comparisons for sales, if you use 2004 comparable sale prices RUN!!!

As one of the bears, I’m not afraid to speak up again.

As Norm can back me up (should anyone try to call me on it), I wanted to sell my house into the peak last July (partially because I believed it WAS the peak)but personal circumstances prevented it. I would sell into this rising market now, except that those circumstances still prevail. But I DO expect to be selling within the next six months, so I hope that the current reinflation can last that long.

But when I sell, I will not be purchasing something else. As far as I am concerned, this is a dead-cat bounce. The current reinflation of prices is driven almost exclusively by cheap financing. The BOC rate is at its lowest level EVER, and can not go anywhere but up. Convential 5 year mortgages are down at least 1.5% since the run-up period, and > 2% since the peak. That means that you can qualify for $285k under today’s rates, but would have only qualified for $240k a year ago. That’s a huge difference, and for people who look only at the short term — e.g. ‘how much is coming out of my bank account every month’ and not ‘how much is this house really worth’ — then it appears as though they can ‘afford’ a lot more house for the same payment.

But one thing about being at the lowest interest rates in recorded history: unless the bank is going to start paying you to borrow money, things have nowhere to go but up. Once the cost of mortgages returns to anything approaching a reasonable historical level (which I believe will come within 18 months at the outside), houses prices will HAVE to come down, as people will simply not be able to afford the carrying costs. At that point, sales will drop again, as will prices.

So if you are selling, the current conditions are a godsend. (As long as you’re not trying to sell a $500k+ house — those still aren’t moving well, with > 12MO inventory.) If you’re trying to buy, however, then the current conditions are a trap for the foolish and short-sighted. Since I consider myself neither, I am looking forward to the time that I can lock in my profits and get out of the home-ownership game for at least a couple of years.

I’ve come across a few boomers who are selling to head to the coast or to Ontario to retire.

Latest Greater Fool blog/rant post talks about the flood of boomers getting ready to retire and yank the equity out of their homes while they still can.

Norm, is there much on the sale side from people looking to retire/downsize/move away?

Thanks

You know, Jason, there has been one particular sale in my area which I thought was more than passingly odd. Within two blocks of each other, there was a brand-spanking new, all the bells and whistles spec-type build, and a fairly run-down looking 1950’s FSBO type thing, that went for about the same price. They had the same number of bedrooms, and square footage was not that far off. This just astounded me. I guess the potential for competition only happens if everyone does their research, hmm?

I’d also like to push this along (from Charles Hugh Smith), as it probably has a little something for everyone. It is, admittedly, US-centric.:

Is Buying a House Catching a Falling Knife or a Practically Foolproof Inflation Hedge?

http://tinyurl.com/ygsa6j

Norm, these were just some firsthand observations/revelations this week in chatting with different developers at various open houses in Stonebridge (my new “adopted” area). I looked at the spec sheets for several houses that were listed for between $450k-$480k last year and now selling for around $322-$337k (lot inclusive). So that’s a conservative drop of about $120k or about 25%. These weren’t the typical ‘cookie-cutter’ row-house developments, either: 3-bedroom, mid-size, 2-car attached, partial landscaping and good locations (crescents and cul-de-sacs). I was pleasantly surprised (and somewhat taken aback) by how much new home construction had come down in price, to be perfectly honest. I think the drop on higher-end construction is even higher.

Crikey, I’ve seen this on a few occasions, but usually it was between a bungalow and a two-storey (where the mobility factor came into play). Otherwise, unless there was a veritable ‘Garden of Eden’ with the landscaping, the logic of passing up on a newer home with warranty escapes me (I think it’s a sad commentary when people spend more time shopping for their new car than they do their new home).

Interesting article on The Greater Fool today re: GM dealership closures and the continued effect deflation will have on the economy, ie: less disposable income, debts become harder to pay down, housing prices continue to decline, etc. Good call a few weeks ago on this, George. Apparently we’re down to just 0.4% inflation (sorry, couldn’t find the source) and the BoC is considering reducing or eliminating the 2% inflation target by 2011 (http://www.financialpost.com/news-sectors/story.html?id=1616137).

L.oki, yes, that’s what was relayed to me. I think it really depends on how much deviation there is from the original blueprints and any degree of customization (landscaping, basement development, etc.), but 5-months is probably a good working number.

“They’d rather pay a fortune for something 110 years old.”

Norm, are you accusing character homes of being overpriced, or character home buyers of being foolish with the purse strings around these used-up old relics? I couldn’t tell

Hey Heather,

Actually, the FSBO property I was referring to up the thread was a post-WWII cookie-cutter type house (nothing special, IMHO). I’d be willing to pay more for a well-loved, nicely landscaped, architecturally unique 110-year old-house than a new one any day.

Having recently moved from one of the older character neighborhoods, they’re not necessarily better (or all they’re cracked up to be) than some of the newer areas – although at first glance they do initially seem more appealing.

The lush, ancient and extensive vegetation has been exchanged for significantly less landscaping and vast dirt plans (I’m on the fence on whether I prefer blowing dirt and tumbleweed to two additional seasons of seeds and leafs; the dirt and tumbleweed do to tend to take care of themselves eventually, though).

Non-existent parking, high-traffic areas and badly maintained streets give way to wide, sweeping lanes with hassle-free parking (although in typical Saskatchewan fashion, no one actually has room in their garages to park here). Pets? No more 24×7 yapping dogs or households with upwards of 40 cats. And let’s not forget the bane of these older neighborhoods: pigeons, aka: flying rats. On the other hand, we may see a bumper crop of gophers this year.

Student littering and garbage is on-par with developers and trades, although it seems flyers are a nuisance anywhere. Lockboxes are just as effective as door-to-door mail delivery, with the added advantage that they offer a convenient mailbox. That and mail is still delivered even when your sidewalk is covered in 3 feet of snow.

One of the most noticeable changes has been the reduction in the audible noise level. Aside from the odd ongoing construction project, that is. There’s something to be said for peace and quiet. The close proximity of various mini-malls and big box outlets are actually quite convenient – offering a wide variety of essential products and services; nothing beats being able to avoid downtown, any of the main arteries or bridges during rush-hour traffic, either.

So another wave of amateur speculators… should be interesting with higher vacancy rates, especially if we see rental rates drop in the future. And a new bumper crop of first-time homebuyers that have little if any disposable income to offset any future interest rate increases. Should present a few buying opportunities in 3-5 years as well. It’s sounding more and more as though 2010 will be the starting point for better buying opportunities.

Bookrat, what happens if interest rates CAN’T be raised?

I think raising interest rates by very much in the next couple of years probably just isn’t an option. As Norm points out, most people are pretty much maxed out for what they can borrow. Not only that, but even small increases in interest rates will translate to a big change in your monthly payment when rates are this low, vs. when rates have been higher (e.g., going from 3% to 4% has a bigger impact [33% higher interest payment] than going from 12% to 13% [8.3% greater interest payment]) We’ve also been allowed to borrow a lot more principal than we could have done at higher rates.

Raising interest rates would just be pushing the ‘reset’ button on the whole lending meltdown. I think the policy makers’ hands might be tied for a while yet; perhaps that’s part of the reason we saw that unprecedented pledge not to raise rates until next year; they know they can’t. I’m betting any increases we see in rates will be small and gradual.

So, if the governments can’t sell all their bonds, what’s next? Do they start printing money?

Heather, yes, I would agree that “in theory” the government can’t raise interest rates (because that would tend to further tank the economy and fuel deflation, which is what they’re trying to avoid at all costs). However, as Bookrat has so aptly pointed out – the government’s continued need to fund deficit spending may give them little choice in the matter. It’s either higher interest rates or higher income taxes and reductions in services (again); take your pick. Either way it doesn’t bode well.

StonebridgeBuyer, we found that lot pricing and selection was fairly consistent amongst developers. Where the cost of construction deviated (±$/sqft) this was definitely influenced by the quality of construction. Prices as a whole can and do vary further depending on what area of Stonebridge you’re looking at, as there are different requirements within the development itself for minimum square footage, type of home, exterior finishes, etc. A lot of the spec sheets we looked at were noticeable less ($100k+ or more) than listed last year, and build times were about half (5-6 months).

Myself, having a prime location is key, first and foremost. The initial difference for a more desirable property (ie: cul-de-sac, backing green space) is always offset in the long-run in the form of higher residuals (being highly sought after, they tend to hold their values more).

You’re definitely correct that there is an active willingness to “deal”, and I think incentives on upgrades, basement development and landscaping are certainly worth consideration because they can be financed in the initial purchase and will probably cost less than individually contracting them down the road. The general impression I got from builders is that this level of development and construction is now “normal”, and something they all readily welcome (logistically last year must have been an absolute nightmare!)

Very nicely put, Bookrat. QE is like a very short-acting drug that does nothing to relive the underlying pathology. What is it that the CB’s think they are doing? Perhaps they think they can print money without fear of inflationary repercussions because the rest of the world prints money to try to make sure the US dollar stays strong, so that not only can they continue to export to the US, but also to make sure the stockpiles of paper money the US paid them for gluttonous prior consumption continue to be “worth” something. If this current pattern continues, I just can’t see that the US will either be able to pay the staggering interest payments due on it’s massive debts or continue to con other economies into believing the dollar has any value worth trading anything for.

Perhaps you’ve seen this already (Zero Hedge):

http://tinyurl.com/ra8jk4

Quote :”The rush for near duration is accelerating as investors are running away from the 10 year like a herd of rabid buffaloes. If this continues it will destroy any plans for providing cheap 30 year mortgages.”

STONEBRIDGE BUILDER / Jason:

Interesting discussion. We are also looking at building and location is the most important factor for us. We have been able to “bargain” into the price finishing part of the basement and finishing the garage, in addition we were able to get a bigger, better lot this past month for the same price that we had previously negotiated for a smaller lot. So, builders are moving somewhat.

As to the discussion about moving out of an older established area – there are definately things we will miss (biking to the swimming pool, library with our kids, a massive backyard). Our family has grown and we “needed” a bigger home. We have renovated our first home and weren’t interested in doing that level of work again. If we could have found a character home in the same price range in an established area that didn’t need a tonne of work – we probably would have taken it – but after a year of looking we have decided to build.

We have friends who built during the height of the boom and boy do I feel sorry for them.

On another note: Interesting article about dealing with global economic issues:

Does it really matter what the economy does if you have budgetted and planned well?

http://gailvazoxlade.com/blog/

In all this talk of the government having to raise rates, keep in mind, that is bond rates, which affects fixed long term mortgages. Variable rates are based on prime, the Fed’s fixed rate to other banks, and that can stay low as long as the Fed wants it too, with only inflation to caution it the other way, should they want to worry about the inflation. So for everyone on a variable rate mortgage, these rising bond rates won’t mean anything, unless, of course, they want to lock in.

Jason, low interest rates haven’t had the effect gov’t have wanted? Lol. Based on what. It’s been what, two or three months of low interest rates, and as far as I can tell, things are looking at lot rosier than people were thinking back at Christmas. A freefall of sorts has been stopped, or slowed substantially. That probably has nothing to do with low interest rates, probably your normal cyclical business cycle, but if anything, gov’t’s have to be pretty pleased with the past few months on all fronts, equity markets, retail sales etc.

I’m with Nix on the inflation. I think it’s going to run at a decent clip over the next 1-5 years, wiping out a lot of debt, but leaving hard assets like houses poised to follow the inflation up as wages catch up down the road.

As far as investment buyers out there, I’m still doing it, and yes, various banks will give you money to buy five to ten houses on an average salary if the places cash flow themselves. Why wouldn’t they? They appraise them and look at market rent. It’s far safer then giving someone 200,000 to open a restaurant for god’s sake. That’s a huge gamble. A cash flowing house, not so much. I make a very average salary, but provided I can come up with a downpayment, banks will happily let me buy and rent property.