Oilberta?!

One of our frequent commenters, Two-Thirds, offered up a couple local real estate folklore that he'd like to see tackled... his wish being my command, here is the first, the relationship between oil prices and real estate prices in Edmonton.

Those that have been reading this blog for awhile have already seen graphs of Edmonton's historical prices several times, so we'll start with a look at historical oil prices instead. For this post I'll be using a spot index of West Texas Intermediate Crude... that seems to be the most commonly cited oil price, so should be a good standard.

To give you a better idea of the prices, here is the inflation adjusted price, and in Canadian dollars. As you can see from the graph, oil prices can be pretty volatile and undergo some very big swings, quickly.

It only goes back to 1971, this is because that is as far back as I could obtain exchange rates for... but that's okay, since as you can see from the prior graph, prices were pretty much stagnant before the '73 Oil Crisis, and Edmonton house prices were also pretty stable up to that point anyway.

It's also good because creating these graphs over such long periods makes my year old iMac behave like a 486 trying to run Quake.

Now here is a look at how oil prices chart against Edmonton's residential average price going back to 1971. We can see they have somewhat similar patterns, but it doesn't appear that Edmonton's real estate prices are nearly as reactive to oil prices as some may think. It is hard to say though, as real estate is something of a lagging market, not nearly as reactive as the oil market.

Realistically it takes time for the benefits of higher oil prices to makes its way through the economy. It takes months, if not years, for new projects to get off the ground, and the money from that to circulate.

So, when looking at the first boom in the 70's, it could be argued that the rise in prices was, at least in part, due to the big spike in oil prices in January 1974. That delayed reaction could also explain why there was no apparent effect on real estate prices after the further spike in '80 when prices briefly eclipsed $120/barrel (2009 dollars) then started shooting back down.

Also as oil prices started to move up in the late 90's, real estate prices again started to creep up by the early 00's... but real estate also started to decline while oil prices were still rocketing up too.

To counter that though, we can also see that real estate prices were declining during a period when oil prices, while dropping, were still well above what they were in the mid 70's when they may have triggered the boom. Of course there were external factors at play at that time, like the NEP, which effect would be extremely difficult to quantify.

Then there is the big drop around 1986 when the price of oil plunged over 60%, and stayed there... while real estate prices seemed to have no effect, delayed or otherwise.

So, what's it all mean? Hard to say, I guess one can see in those graphs what they wish.

To take a more statistical approach, we can take a look at the correlation between the two... this actually yields a seemingly remarkable result... a positive correlation of 0.68 since 1971. Anyone familiar with the measure knows that actually indicates a significant relationship.

But there could be many different factors at play, so to get an idea of what kind of correlation is normal I decided to also run the numbers against a control city that isn't generally associated with oil and therefore one would not expect to find such a correlation... in this case, Toronto.

I only have the full numbers for Toronto going back to 1995, so to compare apples-to-apples as best as possible, I re-ran the number for Edmonton over the same period. Here are the graphs of those.

If you were shocked by the high correlation between Edmonton prices and oil prices earlier, you haven't seen anything yet. Edmonton from 1995 to now is an astounding 0.87. Seems like that would make the relationship a slam dunk!

Not quite it seems. Sit down for this one. Toronto during the same period had an even higher correlation with oil prices... 0.89.

The two are very close, and this stays true (though in lower correlations) for the periods of the last 10 years and the last 5 years, inflation adjusted and nominal. Even figuring in moving averages with terms as long at 3 years to account for lagging reactions, there just doesn't appear to be substantial differences between the two cities.

So, while a high positive correlation remains, I think that this finding of a non-oil and gas market having as high or higher correlations would pretty much refutes an actual relationship between oil prices and housing prices in Edmonton. Home prices here appear no more linked to oil prices then other cities in Canada.

To look at it from another angle, there is an equal correlation between real estate prices in Edmonton and Toronto, as their with between Toronto and oil prices. Though this should not be surprising since both also had similar correlations with oil.

In any case, I would have to conclude any kind of relationship between real estate prices and oil prices is anecdotal at best. It looks to be a spurious relationship caused by some lurking variable(s), and likely present in most if not all Canadian markets.

As is often said in statistics, correlation does not imply causation.

It seems that the real driver of real estate prices has probably more to do with the overall financial markets of which oil is a part of, or perhaps the economy as a whole... which would at least in part explain Toronto having just as high a correlation.

And just for shits and giggles, here is a little measure I derived... basically it's how many barrels of oil it would take to buy an "average residence" in Edmonton at the market rates.

As we can see, this can be very volatile, with values anywhere from 2,500 all the way to 6,500 not being unusual over the last two decades. The median since 1971 has been 3,835 barrels, with a standard deviation of 1,270 barrels. Such a large range again would make me question any kind of hard relationship between oil price and house price, even figuring in real estate being a lagging indicator.

So in conclusion, while I'm sure oil prices have an overall economic impact on our fair city, of which housing prices would be a part of, from the data I've ran I see no tangible evidence of a direct causal relationship between oil and home prices. Any implication of such a relationship appears to be spurious. So, in the absence of any otherwise compelling evidence, this one is...

Record number of Albertans in mortgage arrears

The real estate bulls out there will say I'm being sensational... and I'll say, gee thanks! I always thought I was pretty good, but sensational?! Really?! I mean, I've been working out, and my girlfriend has told me I'm the best she's ever had... but I've told her the same thing... and lets just say I know for a fact at least one of us is lying. Not saying which one of us though.

Where was I? Oh yeah, sensationalizing. Okay, yes, yes my title is somewhat sensationalized... but it is also true, and if the pushers out there can cherry pick figures, why not I?!

By now I'm sure you're all wondering what I'm rambling about, so, lets get on with the show. Today the Canadian Bankers Association released their January numbers of Canadians in arrears on their mortgages, complete with provincial breakdowns.

As the title implies, as of January, there are more Albertans in arrears on their mortgages then anytime since they started recording such things. A graph of that can be found here:

As of January, 2,168 Albertans were three months or more behind in their mortgages. The first time it has eclipsed the 2,000 mark. The previous high water mark February 1997 when it was 1,835, and that number stood until December last.

As you can see, during the boom the number took a big dive, bottoming out in May of 2007 at just 649... since the market has cooled though, the number or those in arrears has skyrocketed up more then three-fold, increasing by more than 100 per month through 2008.

Now, some will argue it's not really fair to compare straight numbers because the population has swelled greatly, as has the number of mortgages outstanding... and I agree. I just wanted to justify my "sensational" title... now we'll get on to a better measure, the ratio of mortgages in arrears to the total number of mortgages.

So yeah, by this measure things aren't so bad... yet anyway. Currently we are sitting at 0.45% of mortgages being in arrears. Slightly above the long term average of 0.37%, but well below the previous high of 0.69% in February 2007.

What should be troubling is that this number is rising quite rapidly, having bottomed out at 0.14% in June of 2007, and increasing every month since, and more then doubling since a year prior.

Some may blame the recent downturn in the economy for this, but remember, the stock markets and oil didn't plunge until autumn of 2008... and this measure is only of those at least three months in arrears as of January. So the effects of that shouldn't really be seen yet.

We should also remember all the layoffs that started hitting in the new year, piled up quickly, and continue to... the number of those in arrears is bound to really take off as for savings erode and EI benefits start to expire. When the full effects of that is felt this figure could very well surpass those heights reached in 1997.

Rising numbers of those in arrears will obviously increase the number of foreclosures, and should those start hitting the market en masse its going to put even more downward pressure on prices. This is an emerging issue, and something that will be very interesting to track over the next couple years.

For those curious, here is how Alberta stacked up against the national average:

Alberta was in the same range as the rest of the country, especially since 1995. Since 1990 the national average has been 0.42%, while Alberta came in at 0.37% as mentioned earlier. Also interesting to note that the rate has started to increase nationally over the last six months, and currently stand at 0.36%.

For an idea of how the rest of the provinces stacked up, here is the chart for western Canada.

Here we can see the western provinces have been pretty close for the last decade. It is interesting to see how much of an outlier Saskatchewan was during the early 90's. Since 1990 B.C. has had the lowest average in the nation at 0.32%, Alberta was second. Saskatchewan (0.54%) and Manitoba (0.49%) on the other hand were on the opposite end of the spectrum.

Here is the eastern half of the country. Quebec is a bit more erratic then the rest, but nothing like Saskatchewan. The average for Ontario was 0.41%, Quebec was 0.49%, and the Atlantic provinces come in at 0.41%.

Incomes and Interest Rates

I had been wanting to do this for while, but could never find a solid set of data regarding historical incomes in Edmonton... but late last night I finally stumbled upon a Statcan report that was my dream come true.

So today I'm going to take a look at incomes, interest rates and prices over the last 30 or so years here in Edmonton. This may get a bit long and be a bit graph heavy, but their are a lot of different angles to look at, but I'm going to try to narrow things down as best as possible.

To get things rolling lets take a look at this graph (like all the graphs, you can click on the image to get a view of a larger version).

Here we see the median and average economic family incomes for Edmonton from 1976 through 2006 in nominal dollars. A fairly steady, gentle curve up as time goes on. We'll also note the average always is proportionately higher then the median, but that they track very similar patterns. As I've mentioned before, I think median is the more reflective stat, so we'll be using it rather then the average.

Now the same graph adjusted for inflation (2009 dollars).

It's striking how relatively flat earnings have been over the last 30 years. It's also interesting to note this chart picks up in 1976, during the run up of the last big housing boom in Edmonton (as discussed in this entry) and ends in 2006, effectively the run up of the current boom.

Unlike home values which has seen a small growth above inflation, earnings have experienced negligible growth above inflation. You may be asking yourself how we can afford to be paying more for homes when earnings are stagnant... that ties into this next graph.

This graph shows the values of average interest rates on mortgages (5 year terms) in Canada since 1962. As you can see, they have been very volatile and have a huge range. We can also see that historically we're currently at very low levels... even lower still when you consider todays rates are not represented in the graph (though it is worth noting that in the early-60's, rates then were in around 7%).

To get back to the earlier question of why we can afford to pay more for homes when earning effectively earning the same income... it's because interest rates are historically low. As you can see from the graph we're well below the long term trendline, and have been to varying degrees for most of the last 15 years.

It's also interesting to note the contrast of interest rates during the last housing bubble to the current one. The last one saw prices increase then hold from about '73 to '81... a period when interest rates were climbing. Significantly. Rates were already trending up leading into it, then went from about 10% in '73 to as high as 22% in '81.

Numbers like that are unheard of today, credit cards aren't even into the 20's! Prices were rocketing up, even when the cost of borrowing was doing the same... compare that to our current bubble when the cost of borrowing was a relatively paltry 6-7%.

Now that we have the interest rates and the prices, we can figure out what income it would take to qualify for a conventional mortgage (25 year amortization) using the 32% Gross Debt Service Ratio (but ignoring taxes and heating costs, so effectively people would actually have to earn more, but for the purposes of this example they're ignored).

This is unadjusted for inflation. We can clearly see the two bubbles, when the income required for financing blows WAY past the median family income of the city. This was also for Single-Family Homes, the same graph for residential average can be viewed here.

It's interesting that both bubbles appear roughly similar in that graph, but when we adjust for inflation...

Suddenly that boom in the late 70's-early 80's looks massive.... and that big spike it almost entirely due to the staggering increase in interest rates, as prices relative to inflation had largely plateaued from '76 to '81. Rising interest kept putting more and more downward pressure on prices, and eventually prices gave as affordability disappeared.

In any case, as we can see, eventually prices got back in line with earnings (interest rates coming down also contributing to that) and stayed relatively close for about 20 years or so... until the current bubble took off. It should be noted, the income data is not as current as the real estate prices, hence they cut out two years early.

Another factor to take a quite look at is interest rates and inflation rates... here is a little graph of that (these are yearly averages unlike the earlier graph of interest rates, which were monthly).

Not surprisingly, they track together. Like interest rates were much higher during the last boom, so was inflation. This revelation also reveals that lowering interest rates would have cushioned the fall during the last bust... so even if you overpaid at least you're going to see your payments decrease in the future and inflation would be bringing up incomes thus improving affordability at higher prices. This is in stark contrast to where we find ourselves now when the prime rate is already effectively at rock bottom and inflation is minimal if not negative.

Since the 90's economic policies have been trying to minimize inflation, trying to keep it 1-2% a year when possible... contrast this to the last bubble when inflation was anywhere from 6-12% annually. So, while inflation could go back up to those levels, it would also cause interest rates to go up and these effects would largely offset each other.

Which begs the question, what happens this time?

It's a good question... because prices are still out of line, interest rates are effectively as low as they can go and inflation currently is negligible (and some are even speculating we may see some deflation)... in this situation, prices are the only thing that can give.

Even in the event of inflation because of all the printing of money, interest rates will inevitably also increase... which will still leave prices as needing to make up most of the difference and financially destroy most who bought during the boom when their mortgage comes up for renewal or are on variable rate. It seems there is going to be no cushion for falling home prices as they get back in line with earnings.

Ultimately it's really hard to say what's exactly going to happen in the long run, other then eventually prices and incomes will get back in line... how, is anyones guess, because the global financial crisis largely being uncharted waters.

In the short term though, real estate prices only appear to have one way to go. Down.

If not now, when?

I don't want those that read this blog to think I'm against buying real estate... I'm all for it, I just don't think it's a good idea to buy now.

If I had not been looking to buy last summer, I would have never dived into the numbers and ultimately started this blog. Up until then I pretty much accepted the idioms that real estate only goes up, and after seeing prices go so high, watching them come back down suddenly made them seem affordable.

Then you roll back the time frame a few years and, holy shit, you realize we're ridiculously out of line with historical means... and then you start thinking there must be something more to the story... and for those who have been reading this blog for any length of time, you will have noticed I've been trying to tell it.

So, for those of you who were like me, my advice is this... wait.

Don't try to time the bottom. It can't be done without exposing yourself to extra risk and requiring a great deal of luck. The bottom will not be apparent until six months to a year later, maybe even more depending on how volatile the economy remains.

As they say in the investment world, don't try to catch a falling knife. These prices are falling for a reason, there is not going to be another big run up immediately after bottoming out. The potential downside of prices continuing to drop is far greater then the small upside that would be realized from hitting the bottom perfectly.

This is just my take, but as a first-time buyer I'd rather pay a little bit more and know I'm buying an appreciating asset, then risk prices dropping another 50K, losing my down-payment and being trapped in the purgatory of negative equity for a decade.

Those that bought in 2007 are already there, I have several friends that took the plunge and they're definitely taking a bath. It's not a situation you want to find yourself in.

Speaking to those other potential first-time buyers out there, it is all about price and buying into an appreciating market.

The price you enter the market at will be felt throughout the rest of your life. No matter how successful those that entered during the bubble will be in future endeavours, their finances will never be as good as they could have been. That's why bubbles are so dangerous, as much wealth as they may create, people tend to over-do it during the up-tick, and by time things have came back down to Earth more wealth is destroyed then was ever created.

The reason price at entry is so important is that all your future moves on the property ladder will be relative, you'll be trading up based on the equity built up over time. That's why being in negative equity is such a sticky situation, cause when you owe the bank more then what your house would sell for, even if prices of bigger places come down to a point you'd qualify to buy them, you're not going anywhere.

You'll probably buy bigger homes, probably carry bigger mortgages, but you'll never made a more important decision then when to enter the market. And generally it's pretty safe, for 20 years before 2005 it was probably fairly safe to buy-in at any time in there... but then we entered the bubble, and as people have been finding out, it's now a very dangerous game.

Beyond that, most first-timers are not buying places they intend to stay in for every long. Often it smaller condo's and town-homes and as they progress through life those are not enough to accommodate significant others and kids. These developments are coming hard and fast at those in their late 20's - early 30's, so often they only hold that initial property for only 2-5 years before trading up.

If you're taking a 25 year mortgage on the place, you're not making up much equity. After three years you'll be lucky to have made up enough to cover your agent commissions and closing costs. After five years, you'll have maybe that +5% (and god forbid you have one of those 30- or 35-year mortgages). So you need to make sure your home is appreciating.

To give you an example of how bad things can go, lets look at someone who bought an average-ish condo two years ago and is looking to sell. In spring of '07 the "average" condo was going for ~$265,000, and lets say that person was smart enough to have 5% down and a 25 year amortization at 6% (the going rate at the time). So lets say they put ~$15,000 down, and finance the rest.

After two years they've made up $10,000 (actually closer to $9,200, but I like round numbers)... so they have $25,000 in equity, right?!

No. Problem is now the market rate for that condo is $227,000... and they still owe the bank $240,000.

They're underwater for over ten grand, and we haven't even factored in moving costs, realtor commissions and closing costs which is probably another 15 grand... and this was a person smart enough to have a down payment and not take a longer term.

If that person took a 0/40, that person would still owes that bank over $260,000, assuming they didn't take the interest-only plan, which they might as well have for all they would have saved.

This is why I'm of the opinion that it's really irrelevant how much someone thinks their house is worth, or how much equity they think they have in it. The only number that matters is how much you owe on it... everything else is trivial.

I'm also of the opinion that if you can't pay it off in 20 years you probably can't afford it... and if you can't pay it off in 25, you definitely can't afford it.

Anyway, end of rant.

Of course for the majority out there, they already have bought, and for those of you looking to trade up or down, it's probably not a terrible time to buy actually, selection will never be better... just make sure you have the sold your old place before you even think of committing to another.

Like I mentioned before, for these people the property ladder is all relative... so if they overpay for their new place it really isn't as big a deal since odds are someone overpaid for their place proportionately.

Though, if you're looking to upgrade in a big way I might suggest holding off on that... cause if you're living in a place worth $300,000, and looking at something worth $800,000, waiting until we're closer to the bottom would be well worth it. All percent declines are not equal when it comes to nominal dollars, if the market goes down 10% sure your selling price would drop 30K, but your buying price would drop 80K... 50K is a pretty nice return for sitting on your wallet... and assuming we return to the mean, our drop will be a lot more then 10%.

And don't get scared by the prospect of interest rates rising... because interest rates going up, forces prices down. What should scare you is the prospect of buying in at inflated prices and todays ultra-low interest rates... cause in five years you'd have little equity and the mortgage will be coming up for renewal, and if rates are high then, at that point you're screwed.

So, long story slightly longer... here is what I'd look for to indicate the market is coming back into balance.

• Prices have stabilized for six months or more
• Absorption Rate consistently below 4
  
• Active Inventory consistently in the 3,500-4,500 range
• Sales consistently in the 1000-1500 per month range during non-spring month

If I had to guess a price range, I'd say look for detached home median prices to be $250,000 or less, and the residential average $210,000 or less. Now, this is highly speculative, but if I saw prices go appreciably below those, I wouldn't be surprised if we overshot the landing and might see a small bounce back to the long-term mean... but I kind of think we'll just sort of level off around there and prices will remain fairly stagnant for quite a while afterwords.

As I said before, my advice is wait.

We're a long way from any of that happening in my estimation, so I advise taking some time now to learn about the market.

There is tons of inventory, so you'll never get a better chance to see just what's out there. Look around, you don't need to buy. Go to open houses, or take a weekday afternoon off and tour a bunch of places. Learn what you like and dislike, and decide what you really want so that when it comes time to buy you're going to make the right decision.

The "subprime" dilemma

The Globe and Mail article from yesterday got me thinking about our subprime mortgage situation in Canada.

Some people say it's just as bad as in the US, but they aren't talking about truly subprime as much as they are about effectively non-prime or non-conventional lending

On the other extreme, a lot of people had been saying we don't have them here, so, it was only a US problem.

That isn't true, we had, and still do have them. Now, it is important to note that they were not as common here, at least so far as the quote, unquote, subprimes went. As the article mentioned, in the US during their run-up they made up about 22% of the all mortgages, whereas here in 2007 they only made up about 7%.

I've spent a couple days digging for numbers online, and haven't been able to come up with much if any hard numbers on those subprime loans. As good as I could find was in that article was their quoting Benjamin Tal as saying their were about 85,000 of them in 2006... and this would jive with the aforementioned 7% figure and CMHC reporting there were 1,220,765 mortgages issued in 2006.

So, as far as an apples-to-apples comparison goes, "subprimes" were only about one-third as prevalent north of the border, as they were south of the border.

The problem in Canada was that we had several other "innovations" that were efffectively doing the same thing... they just kept lowering the bar and caused a rapid expanding of the pool of potential buyers.

At the beginning of 2006 in Canada, to buy a home one had to be able to (a) pay it off in 25 years or less, and (b) have at least a 5% downpayment.

In March of 2006 it was decided you could take 30 years, and you could borrow that 5%, so effectively you no longer needed a downpayment.

By June, you could take 35 years, and pay interest-only for the first 10.

And in November of 2006, the coup-de-grâce, the 40 year amortization was introduced.

So, over the course of nine months, the lending standards had went from requiring you to have 5% down and pay your home off in 25 years... to requiring zero-down, you can take up to 40 years to pay it off, and you don't even have to put a dime toward equity for ten years.

And those 40 year amortizations were some kind of popular too. TD Bank, Deputy chief economist, Craig Alexander in an April 2008 interview said that by a year after their being introduction, 37% of all new mortgages issued were 40 year, as were 9% of outstanding mortgages.

Even more telling, he quipped,

"About 60 per cent of first-time buyers are opting for a 40-year mortgage"

So 60% of first-time buyers we either borrowing more then they would have qualified for, or would not have qualified for a mortgage, in 2005.

Needless to say, the buyers pool was increased just a tad by these lending innovations.

As you probably know, late last year the government axed those 40-year amortizations and re-introduced the need for 5% down after seeing the negative effects the lax standards produced during their two year run.

While it was certainly not the only contributing factor to the run up in prices we saw here in Edmonton, and really all across Western Canada, they definitely added fuel to the fire.

The timing certainly looks suspiciously similar to the time frame of the price explosion here in Edmonton, but as I've said before, there were many factors in that perfect storm... though I still think it's safe to say we quite likely wouldn't have reached the extreme heights we did had lending standards not been eased like they were.

That's not to say the US didn't have 40 year amortization, they actually brought them in first back in '05 IIRC... and they still do offer them. Though they didn't seem to quite catch on the way they did up here.

While clearly not a perfect comparable to subprimes, I don't think it's a stretch to label them as non-conventional... another non-conventional comparison other for 40 year mortgages, are the Alt-A mortgages in the US. For the unfamiliar, Alt-A's are kind of in the middle ground, they aren't quite as bad as subprime, but aren't quite as good as prime. Subprimes not quite as ugly sister, if you will. So, something of an apt comparison to our 40 year mortgages.

Alt-A's often get lumped in with subprimes since that's the word most are familiar with, but we are starting to hear more and more about them as some are expecting they are the next time-bomb to go off in the US housing crisis.

Last year Alt-A's made up 67% of the non-prime mortgages in circulation, or about 10% of all mortgage debt. During the peak of the US housing boom, Alt-A's made up 15.4% and 17.7% of all new loans made in 2005 and 2006 respectively. At the same time, subprimes made up 21.6% and 21.7% in those years.

Collectively, Alt-A's and subprimes accounted for 37.0% and 39.4% of all loans made in 2005 and 2006... sounding eerily familiar to that figure cited for the marketshare of 40 year mortgages a year ago?

COUGH** 37% **COUGH

So, a subprime by any other name may not be a subprime... but I don't think it's much of a stretch to say we had eerily similar figures when it came to non-prime or non-conventional lending during our respective booms.

Stuff... and more stuff

Figured I'd point out some of the stories making the rounds.

- The February employment numbers are out, and they are dismal. 23,700 jobs lost just in Alberta, leaving unemployment at it's highest rate is almost six years. 82,600 lost across the country. The federal and provincial governments seem almost in denial as their cheerleading efforts are quickly exposed as just that.

This will just apply that much more downward pressure on housing prices, as increasing numbers of people with homes will be forced into default, and the consumer confidence of even those looking will be effected. Fewer people looking to buy, and in all likely hood, more looking to sell.

- An interesting article in the Globe and Mail, Canada's dirty subprime secret. They were here, and prominent... and we're not just talking about effective subprime lending like zero-down/40 year amortizations offered by the main banks.

- A series of small articles also appears in the Toronto Star today. Nothing earth-shattering, but perhaps worth noting as we're starting to see more and more of this being reported rather then just the industry shilling we've been getting regularly fed of late.

- RE/MAX issues a press release saying it's time to, surprise surprise.... buy, buy, buy. Seemingly based on anecdotal at best "reports"... the big papers of course ran with it as if it was actual news rather then the blatant marketing ploy it was... I guess if you plaster your name all over their tv and print media outlets, eventually they just throw you a free-be.

As the Vancouver Condo Info site points out, these very same kinds of reports were all too common south of the border in the early days of decline of what would become their housing crisis.

- Not to be outdone, Royal LePage and their resident mouthpiece Phil Soper were all over the news telling all that would listen that the housing slump is already half over, prices and sales will start rebounding by next year and you should go out and buy, buy, buy.

Of course these are the same guys that said, "Canada's housing market in 2008 should continue to thrive," and continued to deny a slowdown of any kind until just recently, when he said it was just Alberta's problem... now apparently it's a national phenomenon and has been going on since the third quarter of'07, which begs the question why it took them until now to notice. Of course we know the answer to that.

It is interesting to watch their time table for recovery continue to expand... in 2008 there were no problems what-so-ever... then a couple months ago it was all going to be over by summer, 6 months tops... now it's next year....

- LATE ADDITION - Looks like Marc "We Don't Do Spin" Carney is already backing off the Bank of Canada's laughable outlook made a month ago.

Are agents feeling the pinch?

So tomorrow is Friday the 13th... and if that doesn't scare you, just wait until the Feds announce the latest employment numbers tomorrow. Very ouch, I'm sure.

Today I'm going to take a quick look at an angle of the real estate industry that doesn't often get much attention from we outsiders... the agents and their commissions.

Oh sure, many may curse them out for whatever reason, some think the commissions are too high, or don't like that the buyer is represented by someone with a vested interest in a higher price, or find it odd that they trademarked their job title and insist it be capitalized.

I don't know, I always just kind of figured it is what it is, but the capitalization thing seems kind of pretentious... but I guess you have to have some way of distinguishing REALTORS® from, say, Sandwich Artists®.

Whatever, I'm not going to get into all that. What I'm going to look at is how the bubble has effected their industry from an overall personnel and revenue perspective.

One interesting little nugget in the monthly sales pitch press release that most probably overlook is their little blurb at the bottom. This month it reads:

The REALTORS® Association of Edmonton (Edmonton Real Estate Board), founded in 1927, is a professional association of 3,148 Brokers and Associates in the greater Edmonton area. The Association administers the Multiple Listing Service®, provides professional education to its members and enforces a strict Code of Ethics and Standards of Business Practice. The Association also advertises property listings and publishes consumer information on the Internet at REALTOR.ca (formerly mls.ca), as well as in the Real Estate Weekly and on their web site at rewedmonton.ca. The Association supports charities involving shelter and the homeless through the REALTORS® Community Foundation (RCF).

While at first glance it looks like just another disclaimer, or some small print... it actually includes a kind of interesting little factoid, that there are 3,148 agents in the city. They've been including that for several years now, and while it occasionally is a rounded figure, or blatantly copy and pasted from a prior years draft without bothering to update the tally, it gives a ballpark figure and when compiled actually reveals some interesting stuff.

Here we see that their ranks swelled in recent years. No surprise there. Between '01 and '08 their numbers grew by over 1,200 bodies, or about 59%. Also no surprise that with the market cooling we've seen a few leave recently, 133 to date according to their figures.

It is interesting to note that their membership was growing quite steadily even before the bubble really got going, and while it certainly picked up come '06 and '07, there actually wasn't an explosion of new recruits.

From this data we can derive all sorts of (perhaps) interesting little figures when comparing it with their other stats.

Here we see the number of sales in a month, and the estimated commission per agent in that month. As we can clearly see, the seasonality in the sales is even further amplified in the estimated commission stat. According to these figures they earn 2-3x as much in any given May, then they do that December... 2007 in particular the difference was 3.6.

So if you think sellers are getting horny for Spring to arrive, you haven't seen the inside of a real estate brokerage... and if you have, you probably needed a stick to get them off your leg.

And for those curious, no I didn't just simply just calculate the commission by using the 7%/3% formula on that months average price, as sales <$100,000 would skew such numbers. I actually ran the numbers through about a dozen different calculations to account for sales by price range, et al in an effort to account for all the different variables. So while this number is not exact, I think it is a very good estimate. After all, ultimately there is no way of knowing the exact number without knowing the specifics of every transaction since there are instances of reduced commissions, etc. While that graph gives an excellent example of seasonality, and shows an overall trend reminiscent of the bubble, it doesn't really offer a relatable finding for those of us outside the industry. So for that, we'll use this chart.

This is a moving average of the estimated accumulated commissions an agent would earn over one year. As you can see, this one definitely does reflect the housing bubble.

Bear in mind, this is not before tax income. They have to pay all their expenses out of that... vehicle, gas, cell phone, incidentals, and then there is the multitude of memberships fees and licences they have to pay to their brokerage and organizations like the EREB, AREA, and CREA.

This is also just an "average" and there is a whole lot of range of income in that profession. The Terry Paranych's of the world are still going to be making obscene amounts of money, though perhaps not as obscene as in 2007... while many that just went into that line of work in the last couple years or are part-timers, and haven't really established themselves, are really going to be seeing a difference and feeling the downturn.

Those newcomers will also quite likely be the first ones to leave and find other lines of work. Which will provide something of a necessary purging of excess agents.

Those in the middle, which make up the majority, should be able to weather the storm. Though their support staffs will likely get cut back from their peak levels, this is also necessary since the work level just isn't there to justify them.

As far as things have fallen in the last two years, the commission per agent figure is still at almost $70,000. A very healthy level when looked at from a long term perspective. So while things certainly aren't as good as they were in 2007, they still appear pretty good on the whole.

So for those established agents out there I wouldn't think they're feeling the pinch just yet.

That could of course change. If over the remainder of 2009 sales remain about 20% lower then 2008 and the number of agents stays the same, even if prices don't go down any further... by December that commission per agent figure will drop to ~$55,000, which would be lower then it had been anytime in the least eight years.

So if this sales slump continues through '09, we'll start seeing agents getting very antsy... and if it continues into, if not through, 2010, I imagine we'll see a fairly significant thinning of the ranks. But for now, I think it's mainly just the part-timers and the johnny-come-lately's that are feeling the pinch.

Signed, Kevin DOCTOR OF BLOGONOMICS®^TM©

A Contemporary Story - Update

Some of you may recall my writing about the situation of a couple friends of mine two months back. Figured I should do an update with Spring fast approaching and all.

Anyway, now it's been five months, four price drops, one re-listing and they still can't even get so much as a low-ball offer on their place. Then again, winter does not do this already awful location any favours... off a loop, off a loop, off yet another loop on a hill no less... THEN down a long narrow alley.

It's no joy to drive to this place at the best of times, but when there is snow, forget about it. The already narrow roads are that much narrower with the snowbanks which are never cleared since that's the only place people can park, then add packed snow and ice to the mix. You get the picture... and as I described the place in the first entry...

... frankly their townhouse isn't all that desirable. It's in one of those developments where everyone is practically on top of each other, poorly and cheaply built, no view of anything other then the next buildings on either side, and a "yard" that is smaller then my Volkswagen. It's the kind of yuppie ghetto that will pockmark the city and eventually become de facto low income housing, a sad reminder of the housing boom and bust.

They've now dropped their price to $260K, which if that was what they started at back in October they may have had a punchers chance, but now they're just riding the market further down. They're priced in the ballpark with the other listings in the area, but none of them are selling either and most are offering at least an extra bathroom, if not a bedroom... so even if there is a greater fool or two floating around they are not going to catch them.

It's not like nothing in the city is selling. Sure sales are way down, but every week I peruse the new listings and make note of those that are well priced for the market... and if they look decent and are priced about 10-15% below the comparables, they sell, often within a month even.

So there is hope, and I imagine if they'd bite the bullet and drop their price down to $230K, they could probably sell it quick for close to asking. I guess it's hard to imagine just giving away thirty grand out of your back pocket, which would effectively be what slashing their price like that would be doing... of course they've effectively already done it once with all the token cuts over the last five months.

Trouble is that it's just a matter of time before someone in their complex does it themselves and at that point the bar is reset that low for everyone, and then they'd have to come in below the new standard to get a sale. It might hurt the ego in the short term, but in situations like this the first mover often ends up the best off for it.

They still are in an equity position to do it too, they paid $200K for it, and while their equity still isn't enough to cover their realtors commission, they can still make a solid 10% profit... which isn't bad considering they've only held it for about two years. Anywhere but in a bubble that's a very solid return on real estate.

They're holding out hope Spring will be their saviour. I don't think they're the only ones.

Problem is they're still no where near market value, and not only is the market prices going down by $100-$200 everyday, but they're still having to go out of pocket for all the carrying costs on a house no one is living in.

In the five months it's been on the market they've paid over $8,000 in mortgage, strata and taxes... only of which about $1,300 ended up being equity. And that's not even mentioning the utility costs, none of which are covered in their strata fee... then there are the unquantifiable, like the mental and emotional stress the situation has caused.

So they're out of pocket several thousand dollars, five months of their lives, and are still no closer to getting rid of the place. Perhaps the ultimate irony is they're paying all these expenses based on the expectation of getting their price... when in reality they're just doubling up on their losses as it's a declining market and the longer they holdout, the less they'll ultimately get.

It's not just the selling costs one must consider when trying to sell their home, but the carrying costs... especially when it's sitting vacant.

A Tale of Two Cities

Calgary and Edmonton, two cities of similar sizes, linked together by geography, politics, and a healthy dislike of each other. In many ways it's inevitable they'd be compared.

One's a little bit more country, the other a little bit more rock 'n' roll... one's a little more white collar, the other a little more blue collar...one's sports teams win a lot of championships, the others, um, well, they wear a lot of red... but it's not all bad down South, after all, they have chinooks, so they do have something going for them! ;)

I kid, I kid. Calgary's a pretty good town.

Anyway, with two cities quite similar in demographics, geography and governance, they should provide an interesting comparison for home prices. So lets get on with it.

As you can see here, the actual price of homes in our cities have followed very similar patterns over the years. Though it should be noted Calgary has had higher prices over the last 25 years, we'll be touching on that later. Overall they track about the same, booming at the same time, declining at the same times. That really shouldn't surprise any anyone, their economies are very closely tied.

Here's a look at the same graph adjusted for inflation:

Obviously just reaffirms the above. Also as we discussed in the prior entry, those that bought during at the peak of the boom during the late 70's-early 80's took about 25 years for the value of their homes to return to the price they paid for them when inflation is accounted for.

One interesting observation is that during that prior boom it was also Edmonton that started seeing prices decline before Calgary did. Coincidentally, the same was also true during the current bubble.

In the comments discussion in the last entry, someone brought up a similar inflation adjusted graph done on a Calgary specific blog about a year ago. They conversation concerned the best-fit line in that graph, finding annual 1.2% growth above inflation in Calgary vs. my using a line showing 1.8% growth above inflation in Edmonton.

Just to clarify, those two plots were not of the same thing, and should not be compared as such. His was a purely statistical measure, whereas mine was looking more to mimic a long-term trend and was based more on intuition. Both have their strengths, though a statistician would probably argue that my number might as well have been pulled from my rear-end.

In any case, just so we can compare apples-to-apples I'll do best-fit trendlines for both cities based on current numbers and 2009 dollars.

This is Calgary, 1973-current. In red is the inflation adjusted price, and in black a best-fit exponential trendline. According to this, over that period Calgary experienced a 1.33% annual yield beyond inflation (also perhaps of interest, it tells us the residential average has about $100,00 to drop before it reaches the long term trend).

Here is the same graph for Edmonton, over the same period. According to that, Edmonton only experienced 0.6% annual growth beyond inflation... less then half what Calgary did, and quite low in general. Though, as mentioned in the Calgary blog, not unprecedented, as mentioned there over 345 years the actual growth above inflation there was a mere 0.2% annually.

One issue with this kind of measure is that it can change significantly just by adjusting the period. To give you an example of that, and since I have data for Edmonton going back to '62, here is a graph of prices and both the '73-current trendline, and a '62-current trendline.

Here we can easily see the contrast. The '73-current line is almost flat, whereas the '62-current line shows appears much steeper (relatively speaking), coming in with 1.45% annual growth above inflation. It's really quite a significant difference.

This of course begs the question, which one is right?

The answer is... who knows, they're just numbers.

As any good statistician could tell you, you can probably make the numbers tell you whatever you want to hear. The numbers are a conversation piece and you can certainly make an argument with them, but going forward they aren't proof of anything.

Thus, I still kind of like my old arbitrary graph here...

Pretty, ain't it?! And as different as the measures are, they all seem to be telling us that residential average should be heading toward the $200,000 mark.

Anywho, so another topic bandied around in the prior entries discussion was the ratio of prices between Edmonton and Calgary. As noted earlier, while the two cities follow very similar patterns, Calgary has experienced consistently higher prices for a good while.

Here we see the Calgary price relative to the Edmonton price since 1973 (Edmonton's prices =100%, Calgary's price plotted).

Until the early 80's the two were pretty close, then as the oil boom ended, as we noted earlier, Edmonton declined faster and we saw the first extended separation, but eventually the bust hit Calgary prices as well and they were again about even between the two for a few years.

After 1985 though Calgary pulled ahead, and has stayed there ever since. Trended about 20% above through the mid-to-late '90's when it shot up to about +40% (getting as high as +51% at times)... but then cooled back down into the 20's (but did briefly spike back to +51% )... and has since cooled further, and is not back at levels not seen since the mid-90's.

Lately we've been seeing Calgary at around +15-to-20% above Edmonton in the last few months. Depending on the period, the overall average is a bit different. If you include everything right back to '73, Calgary is 21% higher (median 20%)... but over the last 20 years, they have been 27% higher (median 26%).

So, to make a long story short... I'd say Calgary prices we should generally expect be about 20-25% higher on any given month.

On a side note, this is actually a bit out of line with affordability, while Calgary does have a higher median household income, it's only about a 10% difference currently. So we may see the margin narrow a bit in the years to come.

Oh yeah, and some more good news for our friends from the South. I heard they're planning on remodelling the Saddledome... it'll be perfect in every way... except for one thing... the seats will still face the ice!

Enjoy your Monday!

Historical Prices and Inflation

I had been meaning to do this one for awhile, but never got around to doing all the number crunching... hopefully you guys will find this entry interesting, cause it took a fair bit of work.

As you have likely deduced, that is a graph of the historical average residential price from January 1962 right through February '09. Looks rather dull until 2006 when suddenly things went crazy. Prior peaks and troughs look quite gradual, and the big boom/bust in the late '70's early 80's doesn't seem so big.

But when we adjust for inflation...

That tells a bit of a different story, eh?

For those curious, I used the Bank of Canada's inflation calculator, and did all the calculations in 2009 dollars, since that's what we're dealing with today.

As you can see from that graph, when adjusting for inflation, those that bought at the peak of the prior bubble, didn't recover their initial investment for 25-30 years... coincidentally just after the current boom really kicked in.

That's some very unsettling news for those first time buyers that bought in in the last two years. Also a reality check for all the young people who thought real estate never goes down... it can, has, and has done it right here in Edmonton.

The late '70's bubble was a bit of a different beast then the current one. The run up took about 5 years... things levelled off for about 5 years.... then declined for about 5 years. Quite gradual compared to the relatively explosive run up from January '06 through mid '07... then the decline started almost immediately.

I plan on doing a comparison of the two bubbles later, so I'll move on to something else. But there is a lot interesting stuff in there.

Here we see the inflation adjusted prices, against a curve of anticipated prices assuming 1.8% growth above inflation. The 1.8% figure is somewhat arbitrary, I just took the prices from 1962 and 2005 and calculated the annual growth, since it seemed the market was reasonably balanced in both years. The curve also nicely dissects the other one, so I'd say it's a plausible figure to go with.

In any case, we can see that the peaks and troughs always return to the anticipated curve. The bubbles far exceed the line, while the troughs tend to follow it a bit closer. It's interesting to note that the largest trough (late 90's through early 00's) was not so much caused by dropping prices, but instead by stagnant ones.

This is a behaviour that I wouldn't be surprised to see repeat itself once our current bubble has returned to Earth.

What should be a very startling observation from that graph for first time buyers is that even as far as prices have already fallen, they're still ~$100,000 higher then the anticipated curve. That's a rather scary prospective fall, and surprised even me when I first noticed it.

Here is one more graph just for a little bit more food-for-thought.

This one is just something of a melding of the aforementioned. This is the actual unadjusted average residential price from graph one, plotted against the anticipated curve from graph three with prices adjusted for their times.

You'll notice the anticipated curve in this case isn't nearly as smooth as in the prior graph, that's because inflation varies from year to year, and that curve is of inflation + 1.8%.

Again, because the numbers are unadjusted for inflation, everything appears muted compared to the adjusted figures. So, while the current bubble looks quite extreme currently, should we have another boom in 30 or 40 years our current one will look much less extreme, and the one from the 70's probably won't even register.

Anywho, hope you found this somewhat interesting and could follow along. I was just hoping to convey that looking at raw numbers can be misleading over a long time span, and thus how important it is to account for inflation.

It's quite sobering to realize that those who bought during the peak of the last bubble took at least 25 years to see their property values recover to what they paid for them when accounting for inflation. It should also serve as a warning to those looking to buy into the current market, as prices are still well above historical measures.

February numbers are in

The EREB announced their monthly tallies for February today, after a little bounce last month prices again took a tumble.

The big stories would probably be the divergence of condo and townhome prices. Condos had actually defied gravity for a couple months, took a huge fall of 4.9% from January. They are also down over $37,347 (14.1%) from a year ago, and $45,054 (16.6%) the peak.

Townhomes were the exception to the rule, actually having it's second straight very strong month, up $9,958 (3.3% from January). They are also up $14,400 (4.9%) from last February, though it should be noted that last February's figure was abnormally low, and townhomes are prone to a bit more pronounced variations because of their smaller sample size (only about 5% of the total marketplace). In any case, their prices are higher then they were at any point last winter.

Here is a look at the rest of the picture. I'm continuing the tweak this presentation as I go along, so the appearance of these has evolved a bit month to month. I've put the three most pertinent numbers (IMNSHO) up top for your viewing pleasure.

Sales = 1,075
Since February '07 = -43.0% (-811)
Since last February = -15.5% (-212)
Since last month = +47.3% (+345)

Active Listings = 7,097
Since February '07 = +234.8% (+4,977)
Since last February = -14.3% (-1,187)
Since last month = +8.0% (+524)

Single Family Homes Median= $335,000
Since peak (May '07) = -16.3% (-$65,000)
Since last February = -9.4% (-$34,900)
Since six months ago = -5.0% (-$17,500)
Since last month = +1.5% (+$5,000)

Residential = $308,970
Since peak (July '07) = -12.9% (-$45,748)
Since last February = -8.7% (-$29,377)
Since six months ago = -6.1% (-$20,237)
Since last month = -2.5% (-$8,079)

Single Family Homes = $347,309
Since peak (May '07) = -18.5% (-$78,719)
Since last February = -9.1% (-$34,656)
Since six months ago = -5.9% (-$21,881)
Since last month = -1.5% (-$5,380)

Condos = $226,857
Since peak (July '07) = -16.6% (-$45,054)
Since last February = -14.1% (-$37,347)
Since six months ago = -9.6% (-$24,191)
Since last month = -4.9% (-$11,678)

Townhouses = $309,180
Since peak (Oct '07) = -16.0% (-$58,784)
Since last February = +4.9% (+$14,400)
Since six months ago = -2.0% (-$6,260)
Since last month = +3.3% (+$9,958)

Other then townhome prices, no other surprises here, averages were down significantly year-over-year for everything else (though SFH median did post a small gain in the face of the decline in average SFH price). The pumpers have been left with little more then month-over-month comparisons to make their headlines... which left them with only sales to tout from February.

Though sales did accomplish, or rather avoid, one rather dubious distinction. After decades worst November's, Decemeber's and January's, they did manage to avoid doing it last month. February '09 was only the second worst February since Y2K, coming in a whole 13 sales above the February '00 tally.

Calgary and Edmonton kind of swapped places from a month ago, as last month prices inched up in Edmonton while falling down South. This month the opposite was true, as prices rose slightly in Calgary, while Edmonton sunk. This is of course in month-over-month figures, as year-over-year both were well into the red.

I guess one thing that could be a light at the end of the tunnel for the real estate bulls out there, is that active listings are down 1,187 units from a year ago. Though it's still well above even the high water mark for pre-boom levels, and with sales being low that still leaves a big glut, and an absorption rate above six.

Mortgages - The myth of acceleration

This is the first in something of an intermittent series I'm going to do on mortgages. Despite often being a persons single biggest monthly expense, all too often people really do not understand how they work. And since I also get all geeked up doing this sort of stuff... behold.

I sometimes hear people talking about how much faster and cheaper they're paying off their mortgage by going to accelerated weekly or bi-weekly payments... this isn't really true. What they're really doing is just increasing how much they pay in a month.

They basically work by taking what a person typically pays in a month, lets say $2000 (to use a nice round number), and if one wants to pay bi-weekly, they'd just start paying $1000 every two weeks ($2000/2) or $500 every week ($2000/4).

Then, instead of paying $24,000 a year ($2000 x 12), they are paying $26,000 ($1000 x 26 or $500 x 52). So yes, it would be paid off sooner, and they would save a little on interest.... but the same thing can be accomplished just by upping one's payments to $2167 per month though, which is effectively what they'd be paying anyway.

You're not really gaining anything by changing the number of payments. To take a look at just how little one saves on interest, lets use $200,000 over 25 years, at 6% example. That could be paid off for $1288.60 per month, or $297.12 per week.

Over the course of one year a person would save a grand total of.... $12.79.

Slightly over a dollar a month. Which, if you're on a automatic withdrawal, by all means, go weekly, it'll earn you a free lunch once a year.

But if you're doing the old school method of mailing in or dropping off a cheque at the bank, it's really not worth your time.... between postage, time and/or gas you will probably end up going out of pocket.

Another thing to consider is your monthly budgeting. If you're not carrying a decent balance and depending on your work pay schedule on the months you have to make an extra payment could obviously lead to some headaches.

So, in conclusion, there is little to be gained by going to weekly or bi-weekly payments that can't be accomplished by merely increasing your monthly payment... which, if you can afford it, is a good idea regardless of your circumstances.