Bob Truman, First Place Realty

It’s looking like SFH inventory will be 5,000+ at month end. At least, it’s on pace for 5,200.

Pending sales seem to be struggling to stay above 400.

The last time we saw a great build up of inventory it went something like this…

A look back at 2008:

Jan -> Feb ~ +24%

Feb -> Mar ~ +19%

Mar -> Apr ~ +15%

Apr -> May ~ +3% (finally peaking at 7,099)

and this time we have…

Jan -> Feb ~ +24%

Feb -> Mar ~ +29%

Mar -> Apr ~ +30% (estimated)

Of course it doesn’t mean much, but if past history is a guide, we could still have 2 more months of ‘post peak inventory growth’ (assuming this month is the peak) and assuming a 5% drop for the next months thereafter it would look something like this…

Apr -> May + ~25% , bringing us to 6,500 SFH

May -> June + ~20%, bringing us to 7,800 SFH

June -> July + 3%, bringing us to 8,034 SFH

Of course that’s all just crystal ball material.

I'll guess that yes, we have seen the highest prices for the year.  On March 29, RBC (and other big banks) raised their 5 year fixed rate by 0.6%, and this appears to be the tipping point in the market.  

Since March 29, Average SFH price, Average Condo price, Median SFH price, Median Condo price, SFH price/sq ft, Condo price/sq ft, SFH sales/day, condo sales/day, average pending sales, number of pending sales and median pending sales have all declined (and the average of the last 5 days is lower than the average of the last 20 days).  

The absorption rate is nearing a "buyers market" threshold and is trending quickly in that direction.  The ratio of new listings to sales to new listings is less than 50% (and has been for over 3 months). In short, prices are declining right now.  

Since drastic rises in inventory preceded the previous Alberta price drops, there is quite a bit of evidence that this isn't just a 15-20 day negative blip in prices.

For prices to start rising again, something will need to happen to shift either the supply curve or the demand curve.  

Off of the top of my head, I can't think of any factors that will reduce the housing supply (a factor that is positive for prices).  While foreclosures are a small percentage of the overall supply, rising interest rates and higher than average unemployment will increase supply.  Default rates are rising.  Regardless, with a huge influx of properties listed, it is hard to imagine a tight level of supply over the short to medium term.

On the other hand, every demand based factor looks like it will depress prices.  Mortgage rates will only be rising over the next year.  New rules will reduce levels of real estate speculation.  Net migration is negative.  Wage growth has slowed significantly.  Finally, the tone in almost all news sources has shifted drastically from being bullish to bearish.  When the consensus opinion changes from "buy now or you will be priced out of the market" to "it's probably best to wait because prices rose a bit too far too fast" you are probably already two steps down the road of a price correction.

The best time to buy any investment is when it's price is below its value and the price trend is positive.  The worst time to buy something is when the price is above its value and the price trend is negative.  The long-term correlation between wages, inflation and real estate prices in Alberta is amazingly strong.  I can't think of anything that has recently broken this long-term and established relationship, so I will assume that the correlation still holds, so real estate is overvalued right now.  Since prices have finally turned, I imagine there will be plenty of people trying to abandon ship.

I think only a drastic shift in our economy will reverse the trend before we are back in line with fundamentals.  Unfortunately, our economy is dependent on the price of oil and gas.  The influx of shale-gas throughout north america has served as a cap on gas prices, and this cap doesn't look like it will disappear anytime soon.  Looking at oil, prices also appear to be above fundamentals, and this has caused extreme excess inventory.  Oil prices are probably headed down, but even if they don't go down, the likelihood of a drastic increase necessary to drastically alter our economy in a positive manner is remote.

I guess there is always the possibility of political/CMHC intervention or some other unforeseen factor that could tip the price equation in a positive manner, but it would need to be a huge factor to outweigh all of the negative factors I see above.

Then again, maybe I'm just trying to justify selling my house and moving my family into a rental unit while prices come back.  I guess only time will tell if my timing was great, or if I was seeing a mirage.  Part of me hopes I'm wrong, because a collapse in the housing market will have a ripple effect throughout the economy, and it won't be a pleasant ride.  If it happens, we won't last more than 6 months before the talk of the day is "double dip recession."

Mabus

Thanks for your post Mabus.  I totally agree with you're analysis of the present RE/economic situation.  Three new "For Sale" signs have popped up on our street in the past week and I expect to see more by the end of this week.  Most of my neighbours purchased with minimum down payments and it would not take much of a correction to put them into a negative equity situation.  My wife and I are considering listing our house in the next couple of weeks and seeing if we can get out before things really slow down.  We will be leaving the city (Edmonton) in two years anyway and I believe it makes more financial sense to sell now and rent rather than ride this down.  I don't know why I didn't list a month or two ago.....that would have been the smart thing to do.  

High inventory could be tricky. I have neighbours and friends who have listed their houses and they say they'll only sell for the right price. So, how did they figure the right price? Well, they took comparable houses which sold recently, added $50k-$100k on top of that and listed. If it sells for the money they want great, if not they won't sell.

High inventory does not necessarily mean all the listed houses are in some sort of financial distress and they all need to lower the price to sell.

Prices are going to come down, no doubt about it, but the $1bil question is: by how much? I personally know of two realtors who sold their houses in Nov 2008, for whatever they could get for it at the time. Same idea, they thought the market will crash, wait it out and buy back at a great discount. We all know that did not happened, but it could have. It is all about one's perception of how things are going to develop down the road and the impact on their particular situation.

Problem is, there are just too many unknowns involved, in order to allow for an educated decision.

Is it the price going to go down %10? Then selling now and buying back 1 or 2 years down the road is not really going to make a big difference if one takes into consideration the costs involved.

Mabus, if you wait to see many million dollars houses sold in the coming days, then you will understand the avg.price is just a piece of cake to improve. hehe, the re-industry will just stand still, no matter how you predict.

Hi Bob, can you please comment on how the average price per square foot is calculated above?  Is it the total square footage sold divided by the total value of all homes, or is is the average of the price per square foot for the individual units?  Your numbers tell a bit of a different story than the ones here:

http://www.findcalgary.com/

I know that a single multi-million dollar home can drastically alter the stats depending on which calculation method is used.  Given that I cannot verify your statistics or the ones above, I'm at your mercy.  If the average size of the houses sold is staying the same and average prices are declining, then average price per square foot must also be declining, or there is a statistical weighting problem.  

Great site Bob.  Thanks again for all of the quick replies and great information.

Mabus

Mabus:

A nicely thought out commentary but you don't leave any room for improvement in the fundamentals. True that unemployment is high but we are at the bottom of the cycle. Wage growth is also likely to pick up in the coming years. Lastly the population of Alberta is actually still increasing about 2% annually despite the interprovincial migration you mention. Personal bankruptcies are declining year on year now.

80 dollar oil is actually pretty good, hence all the billions of dollars in the oilsands announced last month. Oil and gas jobs actually added a lot to Alberta employment numbers in March.

True that Nat Gas is never going to get high again, but rigs drilling are up 100% year on year now.

I don't think we'll see fundamental economic improvements work their way into the RE market for at least a year. Spence if you are guessing 2 years out you should consider that a lot of things can change in that period of time...

Thanks Bob for the clarification on your SP/SF calculation method.  Jimmy, yes, it is probably a bit premature to be predicting doom and gloom for the Alberta economy.  I guess I just automatically assume that huge spikes in inventories represent an imbalance in the supply/demand equations and signal an upcoming drop in prices - much like a shortage of inventories signals an upcoming rise in prices.  Seeing oil and real estate inventories high makes me fearful that both will drop at the same time.  I'm not sure what percentage of our economy is based on Real Estate plus Oil and Gas, but I'm guessing it's significant, and problems in these two sectors at the same time would be nasty.  It's probably not the most likely scenario, but it's a situation I'd rather be on the sidelines for.

I was basically thrown into the "bears" camp a couple of weeks ago.  I went down to Houston for the weekend to visit a friend that just relocated from Alberta.  In Houston, they have not seen the drop in real estate that has been seen elsewhere, but my friend could still have a mansion built for less than $300,000.  His neighbor is trying to sell his house for $325,000.  Here is a link:

http://www.realestate.com/TX/Spring/30828810--E-SUNDANCE-CIR-Spring-TX-77382-home-for-sale.aspx

Now maybe it makes sense to someone why my friend can build a 5 bedroom 3500 square foot home in an affluent suburb of a major US city but we can't do it here with similar availability of land.  In short, I basically said, things are going to come back to earth in Calgary sooner or later.  I said - if you can build this for $300,000, then eventually you will be able to do something similar in Canada. Maybe it costs 50% more for labour and materials, but if you can build it for $500,000, then how is someone else going to be able to sell a similar house for $250,000 to $500,000 more.  And this is a house in a market that hasn't dropped much - look in the nice Phoenix suburbs and you can find gems for less than $200,000.

Maybe it's become a self fulfilling prophecy - I'm looking for data to validate my belief that prices will drop, and I find and present the data that suits my arguments.

I guess only time will tell if I was searching for data to validate my incorrect story or if the data was clearly telling a simple story that anyone with a bit of time could figure out.  Only time will tell.

Mabus

Mabus

You forgot one very important fact! Alberta doesn't have an unlimited supply of cheap labour like Texas.  On average Alberta construction workers/trades people make an above average income, unlike the average construction worker/trade person in Texas which on average makes well below the average wage, which is extremely low by Alberta standards already.   Ask yourself why that is? Well the answer is just south of the Texas border.  What they have that Alberta doesn't is a country of desperate workers who are willing to for almost nothing.  Your trying to compare apples and oranges. As a business owner I only wish I had access to cheap labour like they have in Texas.  But we don't, in Alberta we actually have to pay people a fair wage for work performed, again, unlike Texas were they can take advantage of desperate people to make a buck.

Making the rounds on the blogs today,

http://www.cbc.ca/thecurrent/2010/04/april-19-2010.html

^^^ Pt 2: Housing Bubble - Danielle Park interviews CREA’s Gregory Klump.

Klump falls apart when he has to stop reading from his script.

Skip ahead to the best apart at minute 9:00

Klump: "As interest rates rise, days-on-market rise, inventories rise, sellers on the other hand hold out for peak price. (And) so the spread between bid/ask prices rises, agreements aren’t reached, and as a result there is a sharp drop in the number of units sold."

And then Klump says, "but not a decline in pricing."

Makes sense!

Then at around 11:30 you can hear him really start to stumble as the interviewer starts asking questions.

Then Danielle is brought into the conversation at the 14 minute mark.

Hi DaBull,

Yes, I agree that labour is more expensive here, but I also think the labour costs for home builders will decrease over the coming year with our current unemployment rate.  There are too many home builders looking for work.  

That said, the labour component of our new housing prices is a small component of the overall costs compared to land and materials.  It just makes no sense to me that 5 years ago I was able to build a 1300 sf house for $189,000, and now the same house costs $375,000.  Labour and commodity prices haven't doubled over the last 5 years.  The major price component is crazy land prices.  Given that we live in an area with an abundance of land (like Texas), isn't it only a matter of time before land prices fall back in line with fundamentals?  It makes no sense to me how much it costs for a small wedge of land with enough space to build a house 1 m away from each neighbor and still be a 30 minute drive from downtown.

Assuming our labour market is different, but commodity prices and land prices are governed by the same economic factors, is a 300% difference in price justifiable?  Maybe it is, but I can picture a scenario where we are able to build that house in Canada for $500,000 - 50% more than they can do it for in Texas.  If we can figure out a way to build it for $500,000, it's going to be tough to sell many of the current homes for current prices.

Mabus

Mabus

**Labour and commodity prices haven't doubled over the last 5 years.**

In Alberta, they have.  Land almost tripled, material cost doubled and up to 2008 labour more than doubled but now due to the recession it's come down, but still almost double.  

Sure there is lots of land, but that's not the problem.  The problem is the cost to service it.  Servicing costs have gone through the roof in the last 5 years and the City no longer subsidizes it. Now the developer has to pay the full shot and that cost is passed on the end buyer.  Urban sprawl isn't cheap anymore, like it was even 5 years ago.

Also think about this, they don't have to worry about things freezing up in Texas.  What do think that alone adds to the cost of land servicing, little alone construction costs?  Again apple and oranges.  

Mabus you are correct about the oil inventories climbing and declining demand in OECD/ the USA.

Unfortunately oil prices detached from simple US inventory numbers long ago and now are based purely on speculation about future demand growth from developing countries and BRICs. China is now the world's biggest buyer of cars and their oil demand is going to increase faster than the US is decreasing at some point.

Many weeks oil inventories go up as well as prices.

It's no longer current supply and demand but future supply and demand that matters.

I agree with your point about RE inventory. There's an obvious link between increasing inventory and decreasing prices there. Seasonally adjusted prices have actually been lukewarm and declining over the last few months.

CM it's weird that the realtor economist didn't link high inventory with low prices but I remember many of the bears such as yourself didn't link low inventory with high prices last year

;0)

@Jimmy: Fair enough!  We all have our biased view, even economists.  And I'm pretty sure the average blogger's predictions turn out to be correct about as often as a trained economist.

One tidbit for today, 5 year bond yields just took a relatively big jump...

http://www.bloomberg.com/apps/quote?ticker=GCAN5YR%3AIND

Could be a few more mortgage rate increases coming down the pipe.

Bob's top post asked if we've reached our peak for the year - it would be great to hear a few other opinions.  I've already shared mine, and I'm sure everyone is getting sick of reading my posts, so this will be my last one for a while unless a new hot topic presents itself.

Here are a few closing thoughts.  It is always valid to say someone is comparing apples to oranges when it comes to real estate.  Every property is unique and so is every location.  I'm also a fan of analogies, which by definition are trying to compare apples to oranges.  I just hope some of my apples to oranges comparisons are correct.

Jimmy, I agree that short term prices are determined more by speculation than supply and demand in our currency and commodity exchanges, but that doesn't mean that the fundamentals aren't still valid.  My investment philosophy is to establish fundamentals, then wait for the technical analysis to present the same buy/sell signal as you would see watching only the fundamentals.  Sell when we are overvalued and the technical analysis shows a negative trend - buy when we are undervalued and the technicals show a positive trend.  Yes, I will miss out on some great profits and take some losses, as prices can deviate from the fundamentals for extremely long periods of time, but it is a way to manage risk, and as long as you accurately manage your risk, you don't need to be right more than 70% of the time to see savings grow at a reasonable pace.  I'm not saying to sell oil, but I'm not buying.  I have never posted here before last month because real estate may have been overvalued in my mind, but the technical analysis was still presenting buy signals.  I believe that has changed, so I believe that now is a great time to sell.

Since I love analogies, I'm going to draw one last analogy and it will be between real estate and the automobile industry post-911.  The fundamentals said that after 911, people should buy less cars.  Productivity took a big hit, savings took a hit when the stock market crashed, and unemployment started to rise.  The auto makers responded with 0% financing.  This shifted forward demand.  The problem is that if a policy change isn't sustainable, then when the policy is reversed, you shift the demand back out - essentially just delaying the inevitable drop in demand, and ultimately prices.  Interest rate decreases and policy changes have done the same thing to real estate, pulling forward approximately 5% of the population, but I don't believe that these changes will be permanent, so I expect an upcoming reduction in prices as ownership returns to sustainable levels.

The key thing that changed for me was the short term technical trends.  I spoke a bit about some of the broader trends, but I think the key ones are that there are the ~90,000 full time employment positions have been lost over the last 18 months in our province.  Many of those positions related to oil and gas exploration activity, and I can't see them returning anytime soon.  Rigs have gone to neighboring provinces and utilization rates have dropped.  Corporate profits are down, and wage growth has stagnated (at least in the engineering and scientific fields I'm part of).

How we get back in line with fundamentals is anyone's guess.  Maybe prices stay within a narrow trading range for years as wages catch up with prices.  Maybe they plunge.  As long as the technical indicators show that prices are falling and the fundamentals say that median prices aren't holding their traditional relationship with median incomes, I'll be sitting on the sidelines.

I would love to hear some opposing analysis though where people are willing to state their predictions and justify them.

Mabus

Off Topic but anyone following the Loonie? Those dirt cheap real estate prices down south are even cheaper. Wow!!!!

I agree that Calgary prices have probably peaked for this year. Exactly what will happen next seems like a real conundrum to me. I hope we won't see another real estate crash. I *hope* we will see fairly stable inventory and prices, a balanced market, but who knows!

Rising interest rates and more restrictive buying requirements will put a downward pressure on housing prices, that seems clear enough. I am not sure what the high Canadian dollar vs. USD means or how long that will last.

On a large scale, most people seem to believe that we are seeing an overall transition from The US to China as the world's main economic engine. What could this mean for us in li'l ol' Calgary? It suggests an increasing appetite for all manner of petrochemicals in the foreseeable future...