And the band played on...

Some days the mind wanders... you ponder such things as, if the Canwest media outlets pumped their own stock as much as they did real estate maybe their shares wouldn't be trading at three for a dollar four for a dollar.

Okay, that was a low blow... but from the looks of it we may not have much time left to take shots at them.

Yeah, okay, that was another.... I just can't stop myself!

Anywho, on Tuesday we got another rosy article from the Edmonton Journal telling us that not only is it a great time to buy, but that Edmonton was still the best place in North America to invest in residential real estate. This time the source of the sunshine was REIN president, Don Campbell.

I know a lot of people don't like speculators, but I don't have any issue with the REIN or anyone else who figures they can make a fast buck on real estate, or anything else for that matter. I'm a libertarian, so as far as I'm concerned, to each their own, just don't come looking for help if it blows up in your face.

Back to the point, it really isn't news that real estate investors would be bullish no matter the situation... but I feel like taking a look at some of his quotes and offering my two cents.

So is Edmonton still the best place to invest in residential real estate?

"Absolutely, it is," he said Monday during a visit to Edmonton from Vancouver. "There's no way the world can continue to afford $30 and $40 oil."

I suppose that could turn out to be true, granted I'm not sure one would want to invest in real estate anywhere in North America at the moment. I imagine oil will rebound sooner or later, but even at the heights it did reach, incomes did not get anywhere near the levels that would be needed to make prices sustainable. Oil prices certainly contributed to the boom, but there were several other equally important factors, easy credit and rampant speculation to name two of the major ones.

Things were pretty closed to balanced before things went crazy, so even with the impressive 30% gain in household income experienced, the doubling of house prices was just not sustainable. Even should incomes hold steady through the worldwide recession, real estate still have a long way to fall before getting back to affordable levels.

"Eventually, within 18 or 24 months, we're going to see the market come back to something that's more normal."

On that we can agree... though I suspect we have drastically different opinions of what constitutes "normal."

He said that Edmonton will top the list for the next five to 10 years, and with mortgage rates "ridiculously low" and likely to drop further, savvy investors could look like geniuses several years from now.

Heck, they look like one already if they sold in 2007, and kept the proceeds out of the stock market... thought I'm suspecting that's not what he was getting at. I'll try to remember to revisit this one in a year or two from now.... the schadenfreude would likely be well aged by then.

"We need to be cognizant that there are an awful lot of new condos coming onto the market, not just in Edmonton, but in Calgary and Vancouver. Please don't line up to buy a piece of property."

I hate to make it sound like he gave no decent advice, and on this topic I agree with him wholeheartedly. Between construction and conversions the city's condo market is overbuilt in a big way... and there are still thousands more in the pipeline that will be completed in the next year.

Condo's are going to witness the biggest drop in prices and will quite likely stay there even after other building types start recovering. So you definitely want to be very careful before entering into that market. Don't get sucked into buying on spec or any kind of bidding wars.

The Bust all a-'Twitter'

Seems we have a fair number of readers on Twitter that are linking to us, so I figured I'd give you all another way to follow the blog.

http://twitter.com/edmontonbust

I'm thinking of using it to link to various news stories and other blogs of interest that I might not get to covering in detail... so hopefully it should be a good supplement to my more long winded entries here.

So feel free to share with the world you thoughts, reactions, praise, disdain here, there and everywhere.

The shocking truth about the value of your home

Had actually written another entry for today, but came across this article from Macleans, and decided to do a write up on it instead.

I highly recommend everyone take the time to read it in full, as it is a very interesting piece and gives some great insights on the inner workings of all these forecasts coming from the various real estate outlets.

It also discusses a few other subjects I've been noting here, including the National Bank / Teranet HPI and Case Shiller.

I guess what struck me is that this is the first real main stream article to really take the real estate industry to task for their so called "forecasts" and statistics, and in many cases just flat out calls them out.

It is really quite damning that the leading economist that they spoke to would only give his honest assessment on the condition of anonymity.

“There’s clearly a lot of spin,” he says. Even the CMHC, which promotes home ownership and depends on home sales to sell mortgage insurance, has an interest in seeing the market prosper. “There is quite a lot of uncertainty regarding the market in general right now, and there are too few uninterested parties who are giving any sort of reasonable analysis on that outlook.”

It pretty much tells you everything you need to know about the integrity of these forecasts when the sales pitch takes priority over silly little things like accuracy. The 'economists' these outlets trot out are little more then paid mouthpieces, merely using their degrees in a thinly veiled attempt to lend credibility to bogus forecasts.

It's basically shill or gtfo, and even if you shill there is no guarantee you don't end up like David Lereah. Robert Shiller summed up their motivations nicely in this passage;

“The predictions from those guys are very biased,” he says. “They know that in a declining market, the volume of sales falls dramatically and real estate agents lose their jobs. So they don’t want to say anything that could be seen as contributing to a falling market. If their economist predicted a decline in the market—and then it happens—that’s deadly. The guy would have to watch out for his life.”

It's scary that people are making decisions involving their long-term financial health when practically all the sources have a common vested interest... and for the most part these 'forecasts' and 'industry experts' go unquestioned by the media because they are dependent on the industry for their advertising dollars.

In any case, it's nice to see these kind of stories are starting to get out there, and in the coming months I imagine we'll be seeing many more as prices continue to decline. I recommend all of you take the time to read the entire thing, it's really an excellent article.

Forecasts '09 - Part 3 - CHMC

The CMHC pumped out their latest forecast this past week. Cutting through the b.s. and bravado, here's the pertinent Edmonton prognostications, tabular form for your viewing pleasure.

        2008        2009    Projected     2010
       Actual     Forecast    +/- %     Forecast
------------------------------------------------------
Price     $332,852    $315,000    -5.4%    $325,000
------------------------------------------------------
Sales       17,369      16,000    -7.9%      17,000
------------------------------------------------------
Vacancy       2.4%        3.5%    +0.9%
------------------------------------------------------
Avg Rent    $1,034      $1,070    +3.5%
------------------------------------------------------

A little rosy in my not so humble opinion, as prices already are in that $315,000 territory, and February doesn't appear to be shaping up to be delivering any increases. The numbers are conceivable I suppose, though I'd be completely stunned to see rents go up, especially when they're even acknowledging the increased vacancy rate. We've already been seeing 10-20% cuts as well as 'free months' and other promotions from the big players in the rental game.

The Edmonton Journal pumped this so-called recovery, front page of the Friday 'Business' section no less. Though I suppose one shouldn't be surprised considering the Homes and New Condos sections posing as legitimate, when they're really just de-facto paid advertisements. Seems all to many of these so called experts are merely those with a vested interest in selling real estate. Sadly we've seen this increasingly across all fronts and media though, legitimate journalism has increasingly taken a back seat to the advertisers

Anyway, for some context here is a look at CMHC's forecast issued this time last year, against how it actually played out.

        2007        2008        2008
       Actual     Forecast     Actual   Difference
------------------------------------------------------
Price     $338,636    $355,000    $332,582    -6.7%
------------------------------------------------------
Sales       20,427      19,250      17,369   -10.8%
------------------------------------------------------
Vacancy       1.5%        2.0%        2.4%    -0.4%
------------------------------------------------------
Avg Rent      $958      $1,050      $1,034    -1.4%
------------------------------------------------------

They did pretty well on the rental front, but were off in a big way on the resale market. Seems they're suffering from the same fallacy as most others in the sector and believing that the run up was the result of an efficient market and not just a bubble caused by easy credit and over-consumption.

I guess we'll find out in the next 24 months.

More Odds and Ends

Don't really feel like running numbers today, and there were a lot of housing relevant stories coming out this week, so we'll look at those.

• Mike Fotiou wrote up an interesting piece on the CREA forecast for 2009, and their past fortunetelling exploits. Their predictions for Alberta are not going to make sellers any more hopeful... an 8.9% price decrease AND 19.1% fall in sales. And this is from the real estate pumpers. I don't recall seeing any Edmonton specific predictions from the CREA yet, but I'd have to think it'd be right in line with their provincial guesstimates... or as Mike jokingly pointed out, in light of their rather rosy predictions for Calgary released last month, could be far worse... though I suspect there was little consideration for the numbers they pulled out of their ass last month, when they yanked them out this month.

• Statscan released their latest New Housing Price Index for December, no surprise there, we're down 8.2 points from last year. By far the biggest decline in the country, almost double the next closest (statistically and geographically), Calgary at 4.3. I should probably run their figures next time I do a piece on new construction, so stay tuned for that.

• A couple interesting stories out of Calgary that also ring true for us up here. First, an article about the effect of falling resale values on mortgage default rates. More and more people are finding themselves upside down in negative equity, some are saying it's the worst they've seen in 25, which not so coincidently is when the last big boom ended. Scary thing is we're just getting our feet wet this time around, I have a feeling this is going to become a very big issue in the next couple years.

• The other article was about the increasing number of vacant new condos hitting the market. With builders and speculators all heavily diving into these entry-level homes, when the market finally hit it's critical mass, suddenly the bubble kind of burst on demand and we're finding the cities significantly overbuilt... and still with plenty heading down the pipeline. This is of course leaving developers unable to find buyers, and speculators unable to unload or even rent out their properties.

• Then we also have the news about unemployment drastically rising. While maybe not directly effecting housing, when people are unsure about their jobs, or losing them, they are not going to be buying houses. Which also kind of ties into the prior two articles mentioned, because with a significant number of developments still under construction but very few new starts to replace those jobs upon completion. That's only going to swell the ranks of the unemployed, take more potential buyers out of the market, and increase mortgage defaults.

So, to make a long story short, there is a whole lot of downward pressure on prices at the moment.

Oh yeah, and happy Friday the 13th, you have just over 12 hours left to dump your significant other... or I suppose you could just get them something nice, it's up to you.

Lies, Damn Lies, and Statistics

When I first started looking at the litany of stats released every month by the various outlets, it was kind of overwhelming. There are dozens of different measures, examining things from just as many angles. Even with my background in accounting and statistics, it was kind of wild.

But as I've worked with the numbers, and seen how they interact, I've found an increasingly select few stats that are actually relevant... and conversely, a growing list that are not worth the paper they're printed on. So today I figured I'd take a quick look at the more commonly reported stats, and offer my takes on which are the wheat, and which are the chaff.

I of course reserve the right to later change my mind and completely contradict this post, when or if it becomes convenient.

Good Stats

Median Price - This I find to be the most accurate reflection of what the "average home" is worth. I don't want to bore you with the mathematics of it, but if you follow this link you can read up on just how medians are found, if you don't already know.

Sales - A very straight forward measure, and tells you just how many units are sold.

Active Inventory/Listings - Another straight forward measure. As its name suggests, it tells you how many properties are listed at any given time. Not always widely reported here in Edmonton, but it can always be found in the Quarterly Stats packages on the EREB site.

Between those three stats alone you can get a very good overall picture of what is going on in the real estate market.

Occasionally Interesting Stats

Average Prices - Probably the most widely reported stats, unfortunately I don't think it's as good a measure as median prices. I feel this way because it can be skewed a bit. For example, if in February there are 999 homes sold for $300,000 each, and one sold for $5,000,000, we end up with an average price of 304,700. So while the number might not be way off, you can see the potential for a couple high end sales to really throw off the number, especially since sales in that category can be somewhat sporadic. That's why I prefer the median figure because I think it gives a more accurate idea of what the "average home" is worth, rather then the "average of all homes." Though because, at least here in Edmonton, they only give average prices for condos and townhouses and not the medians, it is unfortunately the only figure available, thus it is a necessary evil to discuss them.

Days on the Market - I was tempted to put this one in the "Completely Useless" pile, but I decided not to. My problem with this stat is the way re-listings restart their clocks once they expire, which obviously will skew the data, especially in times like now when we have large inventories and a lot of expiring listings. Though, while their figures are muted, they do seem to give an idea of the general health of a market.

Completely Useless Stats

New Listings - We hear a lot about this number, and some people just love it, using it in all kinds of ratios and such... but I think it's as useless as tits on a bull. Because of the way re-listings are included, it's a totally bogus stat. If you want an idea of how inventory is tracking, just keep an eye on active listings and sales, that'll give you a much better idea of what's out there.

In conclusion, in my not so humble opinion, if you keep your eye on median price, sales and active inventory over time, you should have a pretty good idea of what is going on in the market. Most of the rest of the numbers are just static, but if you want to know how the condo and townhouse prices are doing, those average prices can be used as something of a jumping off point.

Doom and Gloom?

It seems a lot of realtor blogs out there like to label anyone that doesn't encourage everyone to run out and buy a house as purveyors of "Doom and Gloom." Seemingly we are advising everyone to just give up, stock up on ammo, and start working on recipes for rock soup and roadkill.

I can't speak for the rest, but I don't see doom. What I do see is a return to 2005 or so, or even 2005+20%, to figure in the time value of money. Real estate prices going down isn't even gloom for that matter... well, other then for those that bought in the last three years. It's not until prices get back to affordable levels that the sector as a whole will get back on track and sales recover. Great gains can be made during a bubble so long as one remembers it's a bubble, it's only when one mistakes a bubble for the norm that they get in trouble.

Sure, they'll be some gloomy days in our near future. After all, we've only just gotten our feet wet in this worldwide recession/depression ("re-pression" anyone?!), but that goes far beyond real estate.

And 2005 wasn't so bad! As I recall it, it was actually pretty good. Optimism was high in Edmonton, business was good, money was flowing, Russell Crowe was throwing phones at concierges, no one had heard of Joe the Plumber, and I was dating this tasty little number from Mexico City. Things were good. I mean, things were really good, that girl was wild!

Okay, okay, back on topic.

Why 2005? Well, that was really the last time real estate prices were still in line with historical values and household incomes. Things started to go crazy in 2006, and didn't slow down well into 2007. For the last year and a half we've seen prices slowly make their way back down, and there is still a long way to go.

But for those that bought in 2005 or earlier, which is the vast majority, you really have nothing to worry about (as long as you didn't treat your home equity like an ATM during the boom that is). You'll end up just as well off as you were just a few short years ago.

Unless interest rates suddenly jump into the double digits I don't see property values overshooting that landing by any appreciable margin. And looking at the long term rates banks are offering, they don't seem to be indicating such hikes will be coming... but if they do, yeah, you might want to grab those guns and start working on that rock soup.

For the renters out there, it's time to start playing hardball with your landlords. Vacancies are rising and rents are dropping. With more and more "accidental landlords" emerging every month, you're just gaining more leverage.

For the landlords, if you were established before the boom you should be just fine too. If you could make a go of it before, you should have no problems adjusting now... and lets remember, you made off like bandits during the boom, so you're good to go!

Some will tell you that downturns are all bad news, but busts are actually necessary and healthy for the economy in the long run. Like any business cycle, there will be winners. Those with money in hand, hold the power, and are going to be able to profit from this cycle. Unfortunately there will also be losers though, and those that got themselves over-leveraged during the boom are going to have a very rough time of it.

As long as we've had financial systems, we've had booms and busts. While neither is particularly healthy by themselves, they do seem inherent, inherently human in fact. The presence of one requires the presence of the other. No matter how many we've had in the past, and lessons we've learnt, one day we will again repeat the cycle.

When that next boom comes, we will again tell ourselves that this time it's different, this time we're different... but the results will be the same. A bust is just a necessary remedy for a boom. So even though those with a vested interest in the current bubble keep urging you to spend, spend, spend... all you'd be doing is trying to re-inflate that artificial bubble. We can't spend ourselves out of a recession we've spent ourselves into, we would just making the underlying problem worse (in this case, debt), and making the ultimate fall that much further.

Much like removing a band-aid, sometimes it's just best to just suck it up and get it over with. There are some gloomy days ahead as we recover from our little consumer orgy, but there are many more bright days ahead of those. We'll learn from our mistakes and get on with living. Just like things turned out to be not as good as they seemed during the boom... things aren't as bad as they may look during the bust.

We weren't the first to go through it, and we won't be the last. There is no doom, we're just heading back to where we should have been all along. No better, no worse.

It'll take a couple years to get there, and there will be some tough times along the way, but we'll get there. So just keep your head up and soldier on... and fellas, if you can, get yourselves a girl from Mexico City, seriously, you'll thank me!

Where do they go?

Those that follow the stats released by their local real estate boards may have noticed that their inventories don't seem to add up.

For example, at the end of December in Edmonton there were 6,316 units in inventory. Then in January there were 2,443 new listings, and 730 sales. Doing the quick math, 6,316 + 2,443 - 730 = 8,029, one would expect they'd have 8,029 units in inventory at the end of the month... but they only had 6,573.

So where did those 1,456 units go? Well, simple answer is they most likely expired, or were otherwise cancelled or withdrawn. When people sign on with a realtor to list their place, it can be for any term, many are for three or six months, but some can be for years. If that time passes without the property being sold, the listing expires and it's up to the prospective sellers whether they want to re-list or not.

And getting back to the January totals, the truth is that in all likelihood there weren't even 8,029 properties involved. As many would be counted twice in that figure if they expired and re-listed in the same month.

While the exact numbers aren't included in the EREB stat packs, they are not hard to calculate since we have all the other relevant information. On another site ran by a local realtor they include such figures in their weekly updates. As you can see from charting out their figures there is always a big flood of expired listings at the end of every month.

So obviously most people sign on to list until the last day, or last business day of any given month. We can also see that come calendar year end there is an even bigger spike, probably just cause its a more significant date. While the spikes during the spring are a bit lower... probably a combination of the increased sales as well as people wanting to make sure they're listed through the traditionally hotter sales season.

While that graph nicely shows the monthly cycle, it doesn't really do anything to show a historical context of our current position. For that I'll graph out the monthly totals for the last eight years.

If you've been following this blog, you may have noticed that the pattern followed by the Expired/Cancelled Listings is actually quite similar to that of inventory over this period. Which shouldn't be surprising though, since obviously with increased inventory, you're going to have more listings expiring, or corresponding decreases.

As you can see, during the boom sales rose and very few listings expired. Then as soon the market cooled, the number of expired listings quickly escalated, and much like inventory, reached record levels. Now the troughs remain at levels that the peaks didn't even reach while the market was balanced. We now average over twice as many listings reaching their expirations as we traditionally did.

Another somewhat related stat is that of Days on Market, which is a measure of the average days a listing stays on the market before selling. I've charted that out here.

A correlation between D.O.M. and Expired Listing appears quite positive. Not surprising, during the boom D.O.M. were at record lows. A couple months in the first half of '06 they reached their absolute low of 19. Now it has rebounded and is setting records at the opposite end of the spectrum, hitting 68 just last month.

Trouble is that with the number of expired listings being as high as they are, they may be further skewing the D.O.M. stat. Many units that expire get immediately re-listed, new MLS numbers and the clock starts over, so when/if they finally do sell the number is much lower then it actually should be. Thus the average D.O.M. may actually be significantly higher then they already are.

In any case, we can see from the elevated numbers of expired listings that there are still a whole lot more people looking to sell then are listed in active inventory. Whether they immediately re-list, or hold off for a few months, they're out there and we're a long way from supply and demand coming into balance.

January numbers are in

The EREB hasn't put the January numbers up on their site yet, but the Journal had an article quoting most of the pertinent numbers for January, so I'll work with those, and when the EREB put up the full set I'll include those then.

EDIT: They updated their site the next morning, so here is a complete run down

Sales = 730
Since peak (May '07) = -74.3% (-2,109)
Since last January = -40.5% (-497)
Since six months ago = -59.1% (-1054)
Since last month = +20.1% (+122)

Residential = $317,049
Since peak (July '07) = -10.6% (-$37,669)
Since last January = -4.5% (-$15,002)
Since six months ago = -5.4% (-$18,051)
Since last month = +2.0% (+$6,075)

Single Family Homes = $352,689
Since peak (May '07) = -17.2% (-$73,339)
Since last January = -7.1% (-$26,878)
Since six months ago = -7.0% (-$26,535)
Since last month = +0.2% (+$819)

Condos = $238,535
Since peak (July '07) = -12.3% (-$33,373)
Since last January = -7.5% (-$19,421)
Since six months ago = -6.0% (-$15,315)
Since last month = +1.8% (+$4,249)

Townhouses = $299,222
Since peak (Oct '07) = -18.7% (-$68,742)
Since last January = -0.8% (-$2,534)
Since six months ago = -5.6% (-$17,610)
Since last month = +2.2% (+$6,329)

Year over year though prices were down for all categories though, to the tune of 7% or more for condos and single family homes. Edmonton actually had prices creep up slightly across the board from December, with the exception of median price for SFH's, which remained the same.

The big story carries over from last month though, that being the dismal sales totals, worst January tally since the 90's, third worst monthly since the turn of the century (December last being the worst, and December '00 coming in second).

Inventory also nudged up a bit as expected, now at 6,573 and the average days on the market continues to reach new heights, now at 68. So even the few that are selling, are not selling fast.

Seems at least in Edmonton sellers are holding to their guns price wise a bit more then our neighbours to the south, as in Calgary prices were down from December, but they shared Edmonton's dismal sales numbers.

The Journal also had another article today about the rental market... worth a quick look, but remember Mah is something of a pusher when it comes to anything real estate, so take his articles with a grain of salt.

New Construction

Thought I'd take a quick look at the new construction stats for Edmonton today, as CMHC released their latest report last Friday. Lots of good stuff in there, but I'm only going to look at a handful of numbers from Table I... starts, unabsorbed units and under construction units to be exact.

Here is how those graph out over the last few years...

There has been a lot of talk recently about the drop in housing starts in the city, and rightly so as they are at the lowest levels experienced in at least seven years, and only about 1/3 to 1/2 of what they usually are. Starts were cooling throughout '08, and it appears that will continue well into, if not right through '09.

The number of unabsorbed units are also growing, but are well within historical norms. What may be a bit alarming is the number of units still in process. While the number of under construction units have fallen drastically since peaking in late '07, they are still above pre-boom levels... there is obviously no shortage of housing already available in the city already, so with 11,409 still coming down the pipe, the glut is only going to grow.

While we should expect to see unabsorbed inventory continue to climb, I expect a great many of these units were already bought on spec, so with the obvious downturn it'll be interesting to see how many people start walking out on their deposits, as has began to happen in Vancouver.

I also would not be surprised to see the dilemma of "accidental landlords" become something of an epidemic... as there is already a great deal of vacant listings on MLS coupled with the very low resale levels, a lot of these owners will be stuck with either renting them out of going through foreclosure.

Beyond the housing situation, one has to expect the layoffs in construction to keep on coming, as more and more projects are finishing, new starts are no longer keeping up. Good news for homeowners looking to get small jobs done though, should be no problem finding someone to do those jobs now, unlike a year ago when you couldn't even get someone to return your calls.