Thursday, July 23, 2009

So, The Recession Is Over Already?

The Bank of Canada says today that the recession is over! Wow, that was quick. I can't see the future, but I certainly see parallels with the past. Take number 11 from the following quotes from the Great Depression for example (source: Colin J. Seymour, June 2001, http://www.gold-eagle.com/editorials_01/seymour062001.html):


Chart locations are an approximate indication only

  1. "We will not have any more crashes in our time."
    - John Maynard Keynes in 1927
  2. "I cannot help but raise a dissenting voice to statements that we are living in a fool's paradise, and that prosperity in this country must necessarily diminish and recede in the near future."
    - E. H. H. Simmons, President, New York Stock Exchange, January 12, 1928

    "There will be no interruption of our permanent prosperity."
    - Myron E. Forbes, President, Pierce Arrow Motor Car Co., January 12, 1928

  3. "No Congress of the United States ever assembled, on surveying the state of the Union, has met with a more pleasing prospect than that which appears at the present time. In the domestic field there is tranquility and contentment...and the highest record of years of prosperity. In the foreign field there is peace, the goodwill which comes from mutual understanding."
    - Calvin Coolidge December 4, 1928
  4. "There may be a recession in stock prices, but not anything in the nature of a crash."
    - Irving Fisher, leading U.S. economist , New York Times, Sept. 5, 1929
  5. "Stock prices have reached what looks like a permanently high plateau. I do not feel there will be soon if ever a 50 or 60 point break from present levels, such as (bears) have predicted. I expect to see the stock market a good deal higher within a few months."
    - Irving Fisher, Ph.D. in economics, Oct. 17, 1929

    "This crash is not going to have much effect on business."
    - Arthur Reynolds, Chairman of Continental Illinois Bank of Chicago, October 24, 1929

    "There will be no repetition of the break of yesterday... I have no fear of another comparable decline."
    - Arthur W. Loasby (President of the Equitable Trust Company), quoted in NYT, Friday, October 25, 1929

    "We feel that fundamentally Wall Street is sound, and that for people who can afford to pay for them outright, good stocks are cheap at these prices."
    - Goodbody and Company market-letter quoted in The New York Times, Friday, October 25, 1929

  6. "This is the time to buy stocks. This is the time to recall the words of the late J. P. Morgan... that any man who is bearish on America will go broke. Within a few days there is likely to be a bear panic rather than a bull panic. Many of the low prices as a result of this hysterical selling are not likely to be reached again in many years."
    - R. W. McNeel, market analyst, as quoted in the New York Herald Tribune, October 30, 1929

    "Buying of sound, seasoned issues now will not be regretted"
    - E. A. Pearce market letter quoted in the New York Herald Tribune, October 30, 1929

    "Some pretty intelligent people are now buying stocks... Unless we are to have a panic -- which no one seriously believes, stocks have hit bottom."
    - R. W. McNeal, financial analyst in October 1929

  7. "The decline is in paper values, not in tangible goods and services...America is now in the eighth year of prosperity as commercially defined. The former great periods of prosperity in America averaged eleven years. On this basis we now have three more years to go before the tailspin."
    - Stuart Chase (American economist and author), NY Herald Tribune, November 1, 1929

    "Hysteria has now disappeared from Wall Street."
    - The Times of London, November 2, 1929

    "The Wall Street crash doesn't mean that there will be any general or serious business depression... For six years American business has been diverting a substantial part of its attention, its energies and its resources on the speculative game... Now that irrelevant, alien and hazardous adventure is over. Business has come home again, back to its job, providentially unscathed, sound in wind and limb, financially stronger than ever before."
    - Business Week, November 2, 1929

    "...despite its severity, we believe that the slump in stock prices will prove an intermediate movement and not the precursor of a business depression such as would entail prolonged further liquidation..."
    - Harvard Economic Society (HES), November 2, 1929

  8. "... a serious depression seems improbable; [we expect] recovery of business next spring, with further improvement in the fall."
    - HES, November 10, 1929

    "The end of the decline of the Stock Market will probably not be long, only a few more days at most."
    - Irving Fisher, Professor of Economics at Yale University, November 14, 1929

    "In most of the cities and towns of this country, this Wall Street panic will have no effect."
    - Paul Block (President of the Block newspaper chain), editorial, November 15, 1929

    "Financial storm definitely passed."
    - Bernard Baruch, cablegram to Winston Churchill, November 15, 1929

  9. "I see nothing in the present situation that is either menacing or warrants pessimism... I have every confidence that there will be a revival of activity in the spring, and that during this coming year the country will make steady progress."
    - Andrew W. Mellon, U.S. Secretary of the Treasury December 31, 1929

    "I am convinced that through these measures we have reestablished confidence."
    - Herbert Hoover, December 1929

    "[1930 will be] a splendid employment year."
    - U.S. Dept. of Labor, New Year's Forecast, December 1929

  10. "For the immediate future, at least, the outlook (stocks) is bright."
    - Irving Fisher, Ph.D. in Economics, in early 1930
  11. "...there are indications that the severest phase of the recession is over..."
    - Harvard Economic Society (HES) Jan 18, 1930
  12. "There is nothing in the situation to be disturbed about."
    - Secretary of the Treasury Andrew Mellon, Feb 1930
  13. "The spring of 1930 marks the end of a period of grave concern...American business is steadily coming back to a normal level of prosperity."
    - Julius Barnes, head of Hoover's National Business Survey Conference, Mar 16, 1930

    "... the outlook continues favorable..."
    - HES Mar 29, 1930

  14. "... the outlook is favorable..."
    - HES Apr 19, 1930
  15. "While the crash only took place six months ago, I am convinced we have now passed through the worst -- and with continued unity of effort we shall rapidly recover. There has been no significant bank or industrial failure. That danger, too, is safely behind us."
    - Herbert Hoover, President of the United States, May 1, 1930

    "...by May or June the spring recovery forecast in our letters of last December and November should clearly be apparent..."
    - HES May 17, 1930

    "Gentleman, you have come sixty days too late. The depression is over."
    - Herbert Hoover, responding to a delegation requesting a public works program to help speed the recovery, June 1930

  16. "... irregular and conflicting movements of business should soon give way to a sustained recovery..."
    - HES June 28, 1930
  17. "... the present depression has about spent its force..."
    - HES, Aug 30, 1930
  18. "We are now near the end of the declining phase of the depression."
    - HES Nov 15, 1930
  19. "Stabilization at [present] levels is clearly possible."
    - HES Oct 31, 1931
  20. "All safe deposit boxes in banks or financial institutions have been sealed... and may only be opened in the presence of an agent of the I.R.S."
    - President F.D. Roosevelt, 1933

Tuesday, July 14, 2009

May and June 2009: The Flock Thickens!

The good old days of the real estate boom/bubble is back in the Greater Toronto Area. Buyers are flocking back into the housing market in a frenzy, bringing back multiple and unconditional offers. Sellers are laughing all the way to the bank.




The recession is far from over with unemployment continuing to climb, and yet there are plenty of cheap money (low interest rates), talk of green shoots, and "better-than-expect" news, to tempt buyers into making the leap, either thinking prices can only rise, or that they will sell for a quick profit.




Flippers are back too! Properties are being snapped up, spruced up and sold for thousands more. There was one case where some guy bought a tiny semi-detached in the film district for $280k, finished the basement, slapped on some cosmetics, and resold privately for $410k! A fool is born every minute.



Let's look at some of the charts...



New Power of Sale Listings


Despite the frenzy, the number of new power of sale listings remain at a somewhat elevated level, compared to the past couple of years, although in absolute terms, two hundred or so new power of sale listings pales in comparison to the over ten thousand homes sold in June.





Firm Sales Minus Conditional Sales


This chart measures the difference between the number of homes that have sold firm and the number of homes that have sold conditionally. The idea is: if the gap between the number of firm and conditional sales is large, this implies many buyers are willing to buy properties without conditions, and therefore the market is a sellers' market. On the other hand, if the gap is small, few buyers are willing to buy properties without conditions, indicating a buyers' market.


The chart below shows that the gap has widened, after reaching very low levels between December 2008 and February 2009. The market has become a sellers' market once again.


However, the overall trend of the gap in firm and conditional sales is still going down - that is the sellers' market has been losing steam, with a brief and pronounced buyers' market back in the winter of 2008.


Deals Fallen Through

A deal falling through means an aborted transaction (e.g. buyer had cold feet). Since peaking in November 2008, the deals fallen through has dropped back to the norm of the past couple of years. Of note, is the up-tick of fallen through deals in June.



The second half of 2009 should be interesting!

Saturday, May 9, 2009

April 2009: Recession? What Recession?

Looking at the charts for the Greater Toronto Area real estate market, it's hard to believe that we are in a recession.  Following a surprising strong March, the month of April followed suit.  Sales in the GTA reached 8,107 transactions (31.4% more than last month but 7.5% fewer than the same month last year), while the average price stood at $385,641 (6.5% more than last month but 3.3% less than the same month last year).  While buyers once again snapped up properties at close to or over asking in bidding wars, the mood this year is markedly different that prior years.  Conditions on offers during multiple offer situations are not frowned on as they were prior years. Nonetheless, as we will discuss with the charts to follow, more buyers are once again willing to put in unconditional offers, than the months following the collapse last fall.

Now to the charts...

The first chart is my favorite because it shows price in relation to sales.  The price-to-sales ratio give us a sense of whether prices are supported by the number of transactions, based on a historical view of the ratio.  The chart shows that during the past five years, the price-to-sales ratio has ranged between 40 and 80, more of less, oscillating with the seasons.   In December 2008, the ratio spiked up to 140, an indication that prices were not sustainable based on the level of sales, when compared to the prior five years.  Since then, the ratio has dropped back down to the more "normal" range.

A number of people have asked what the relevance is of this chart.  Some of them argue that inventory (the number of active properties currently on the market for sale) is what matters more.  Inventory reports do show the supply side of the supply-demand equation, but they do not give us an easy number to gauge whether prices are supported by underlying market conditions.  The demand side of the equation is similar - there are no reliable reports of the number of buyers on the market.  Any reports that do exist are based on surveys of a sample population (such as the surveys put out occasionally by the major real estate brokerages).  Such demand-side reports should be taken with a grain of salt.  The  price-to-sales ratio, on the other hand, gives us a good measure for the current health of the market, when compared to prior periods of time.


The next two charts show that the gap between conditional and firm sales have widen.  

Prudent buyers typically place conditions on offers to purchase so that the proper due diligence is achieved, such as getting approval from a lender for a mortgage or getting a satisfactory home inspection report or getting a termite inspection or ensuring insurance can be obtained at a reasonable cost, etc., etc.  However, in a hot market, in the face of competition from multiple offers, some buyers choose to forgo conditions in order to maximize their chances of being winning bet. (After a few unsuccesful attempts, the psychology of some buyers becomes that of winning at all costs, resulting in prices many thousands of dollars above the sellers' asking prices in addition to unconditional offers).

With the number of sales constant in a particular month, counting the number of transactions that were sold conditionally in the month and comparing it to the total number of firm transactions in the month, gives us a sense of whether buyers were, in general, more or less willing to put in offers on properties without conditions.

The gap between conditional and firm sales has once again widened in April 2009, after a brief severe narrowing in December 2008.  This means more buyers are once again willing to purchase properties without conditions.  Nonetheless, the gap is smaller than the past two years, meaning fewer buyers are willing to purchase properties unconditionally, on an a year-over-year basis.  This is a sign that the market is more of a buyers' market than prior years.  However, it is a weak buyers' market.  I would expect the gap to be negligible in a strong buyers' market, since I would expect buyers to put in offers with conditions even if they don't need the conditions, in order to maximize their bargaining power.  I suspect the gap will never be zero because some buyers would continue to use offers with no conditions whatsoever as a negotiating tactic to get better terms on price, closing date, etc.



The next two charts show the level of deals that have fallen through (i.e. transactions which were canceled due buyers backing away or unable to fulfill conditions, such as not being to get financing).  This lowered level is an indication of lessened buyer fear and an improved credit market.





The following chart shows that fewer listed properties are being delisted due to expiration, suspension or termination.  This has dropped markedly from last fall and winter.  This is an indication that fewer properties are sitting unsold.

The next chart is interesting.  It shows that the number of new power of sale listings that came on the MLS in the GTA, is at the highest point, comparing to the months of the past two years.  Having said that, the number of active power of sale listings as of May 9, 2009 stands at 322.  This is in stark contrast to last month's number of 4,293.  This is an indication that buyers are snapping up power of sale properties at an incredibly high rate.

Thursday, April 9, 2009

March 2009: Green Shoots?

Please refer here for all updated charts for this discussion: http://sites.google.com/site/torontorealestatecharts/



March 2009 saw a flurry of activity in the Greater Toronto Area real estate market. Sales shot up to 6171 less than the March 2008 figure of 6631 by 460 transactions or 6.9%, but more than the February 2009 figure of 4120, an increase of 49.8%.

Firm vs. Conditional Sales

More buyers seemed to be willing to put offers on properties with no conditions, as demonstrated by the following graphs:










The firm sales out-numbered conditional sales by 2539 in March - this compares to 541 in February and 3008 in March 2008. The widened gap in March is an indication that more buyers were willing to put offers on properties without conditions.

Deals Fallen Through

Fewer transactions failed in March, as shown in these charts:

Expired, Suspended and Terminated Listings

In March, the number of listings that went off the market because of expiration, suspension or termination was 6130 - an increase of 11.3% from February's number of 5507. This seems to indicate that there was more turn over in listings as sellers adjust to the market.

New Power of Sale Listings

Even amidst signs of life, the number of new power of sale listings in March 2009 remained at an elevated level of 219. This elevated level has been maintained for the past three months now. As of April 9, there is a total of 377 power of listings in the GTA, slightly less than the reading of 389 on March 4. This is an indication that buyers are buying power of sale properties at a faster rate than they are coming on the market.

Price-to-Sales Ratio

The price-to-sales ratio is an indication of how maintainable prices are based on the level of sales. A high ratio would indicate that either prices are expensive or sales are low (i.e. lowered demand). A low ratio would indicate that prices are inexpensive or sales are high (i.e. heightened demand). In March, the ratio dropped significantly due to a spike in the number of sales. The ratio is still higher than prior years.

Thursday, March 12, 2009

February 2009 - Back to Normal? Kind of...



Life seems to have come back to the real estate market in the Greater Toronto Area (GTA) in February 2009. Although year-over-year sales were down 31.5%, the number of listings which were either suspended or terminated by the sellers or which had expired, came back down to a normal range.







The price-to-sales ratio decreased sizeably, because sales increased significantly from January 2009 (by 54.3%), although prices also edged up slightly to $361,305 (an increase of 5.14% month-over-month but a decrease of 5.43% year-over-year). For a full discussion of the price-to-sales ratio, please see this prior post: http://thenumberstheydontpublish.blogspot.com/2009/02/gta-still-too-expensive.html




Meanwhile, the gap between firm sales and conditional sales continue to narrow, indicating fewer buyers are willing to put in unconditional offers. For a full description of this, please see this prior post: http://thenumberstheydontpublish.blogspot.com/2009/02/gap-between-firm-and-conditional-sales.html








After spiking in November, it appears that the number of transactions that fell through has somewhat stabilized, although it did increase slight from January, and is general higher than most of last year. This may be an indication that the credit market has eased.









Wednesday, March 4, 2009

GTA Power of Sales Update

The number of new power of sale listings in the Greater Toronto Area in February 2009 decreased slightly from January 2009, but is still at a much higher level than average. Compared to February 2008, which had 123 new power of sale listings, February 2009, saw an increase of almost 71% in the number of new power of sale listings to 210.

In total, there are currently 389 power of listings available in the GTA.



Tuesday, February 17, 2009

Gap Between Firm and Conditional Sales Widened in January

As discussed in previous posts, any prudent buyer who comtemplates purchasing a property should place the appropriate conditions on the offer, to ensure the appropriate due diligence has been taken. Typical conditions would include getting the appropriate morgage or a satisfactory inspection report on the property. In a slow market, buyers may even put a condition on the offer requiring the sale of their own property before firming up the purchase. (Many other conditions are in the buyer's arsenal, such as termite inspections, getting insurance, etc.).

In the past couple of years however, the market in the Greater Toronto Area has been so overheated that buyers have chosen to bypass conditions altogether in the face of competition from multiple offers. The offer goes straight from being just an offer to a firm sale once accepted by the seller.

An interesting trend to look at is the relation between the number of conditional sales to the number of firm sales.

In a strong sellers' market, one would expect the number of firm sales to be much greater than the number of conditional sales - an indication that buyers are forgoing conditions in order to win in a multiple offer situation.

In a strong buyers' market, one would expect the number of firm sales to be much fewer than the number of conditional sales - an indication that more buyers are putting conditions on offers and fewer buyers are going through with the purchase, and walking away from conditional offers.

The charts below show the relationship between conditional sales and firm sales. The number of condition sales for each month are tallied from the first of the month to the last of the month, while the number of firm sales are tallied from the 7th of each month to the 7th of the next month.

Why the seventh?

The rationale is that conditions typically run for five days, and I hear that realtors in Toronto normally don't update the status of the sale from conditional to firm immediately, either because the office is too busy or because they want the extra couple of days of free advertising. On sites like realtor.ca, a property is no longer searchable if it is sold firm.

Since the rule is that brokerages must change the status within two days, two more days are added to the five days of a typical conditional period to get the firm sales number by querying from the 7th of the month to the 7th of the next month. This is not exact science since some conditions run for more than five days and some offices change the status earlier or later than two days, but it's better than counting from the first of the month as long as the same methodology is used for every month.

The first chart shows both the number of firm sales and the number of conditional sales. We can see from this chart that both lines track each other pretty well. However, the subtle thing to notice is the gap between the firm sales line and the conditional sales line.

The second chart shows the difference or gap between the firm sales and conditional sales numbers. We can see that there seems to be seasonality in the gap - that is, in the colder months the market seems to be more of a buyers' market (smaller gap; fewer unconditional offers) than the warmer months. We can also see that the gap is trending down for the past two years. Fewer and fewer buyers are willing to put unconditional offers.

What continues to be surprising is that the gap is still positive even for the past few months, even with all the negative psychology in the market. This indicates that there are still more firm sales than conditional sales (i.e. there are still buyers who are placing unconditional offers).

The gap for January 2009 widen to 1023 from 514 in December 2008 for the entire GTA. Though this would indicate that the market was somewhat more active in January than December, the gap was still very low compared to the past couple of years. For example, the gap in April 2007 was 4757, likely due to the prevalence of bidding wars at that time, where to win a property a buyer pretty much had to put in a unconditional offer and in many cases, over the asking price.

The market is very quickly becoming a buyers' market but not quite there yet. In a full-blown buyers' market, I would expect the gap to go negative (i.e. only a portion of conditional sales go firm as few to no buyers would be brave enough to place an unconditional offer on a property). Furthermore, I would expect more buyers to jump ship, walking away from one conditional offer to put in an offer on a newly listed, better priced property.



Friday, February 13, 2009

GTA Powers of Sale Continue to Rise

In January 2009, the number of new power of sale listings that went on the MLS, in the Greater Toronto Area, was 218. These are new contracts to list properties for sale that the bank have taken over. The number is an increase of 29% from the prior month, December 2008, which had 169 new power of sale listings, and an increase of 32% from the same month a year ago, January 2008.

As of today (February 13, 2009), there are 415 active GTA power of sale listings on the MLS in total, of which 95 were newly added in the month of February.

With more and more job losses, I would expect the number of home owners who can no longer pay their mortgage to go up. I suspect many of them will try to sell the home themselves first in the spring market. Many will fail, resulting in an increase in delinquencies and therefore an increase in the number of properties that will go into power of sale.


Saturday, February 7, 2009

GTA Still Too Expensive

In January 2009, the average price of a home in the GTA declined to $343,632, while sales stood at 2,670 units, slightly above the December 2008 number of 2577. That price at this number of sales is still too expensive. The chart below shows the average price in relation to sales. We can see in the past six years, the price-to-sales ratio is quite regular and has seasonality to it, peaking in the winter months and bottoming in the summer months. This winter is no different but at 1.75 times what it has been in prior years. This points to the fact that prices are still too expensive in the GTA, given the dismal sales numbers.



In response to the comment about why this shows prices are still too high, here's my response:

If you looked at how the ratio spiked between November 2008 to January 2009, does that not tell you something is wrong, compared to the prior months? Perhaps this graph will help:

http://thenumberstheydontpublish.blogspot.com/2009/01/annual-gta-price-to-sales-1966-2009.html

This is a yearly graph of the same ratio, going back to 1966. In particular, look at the period around the 1990 timeframe. The ratio spiked significantly and then came back down to a "normal" range around 1996. It still remained higher than the period before the spike but it did come down. This year (2009) seems to shaping up to be like the 1988-1990 period.

The motivation for the price-to-sales ratio is to show the current price is supported by the underlying number of sales. One instance of the ratio does not reveal much but when compared to a series of such ratios over time, we can see whether there is any abnormality.

Common sense would tell us that if not many of something is selling (as shown by the low number of sales), the price of that something must come down. If by some miracle, the number of sales spikes over then next few months back to what they were in the past six years, then we would expect prices to remain high or even go up. Unfortunately, with all the job losses and a tanking economy, the number of sales will remain relatively low This will inevitably cause those who want to sell to reduce prices if they want to attract buyers, in a market where fewer people are actually willing to buy.




Monday, February 2, 2009

GTA Expired, Suspended and Terminated Listings

The first line in chart below shows the number of listings in the Greater Toronto Area (GTA) that expired, were suspended or were terminated in the past couple of years. We can see that the line has definitely been trending up. In other words, properties are more and more difficult to sell.

The second line in the graph shows expired listings only. What's interesting to note is that the slope of the expired plus suspended plus terminated line is slightly steeper than the slope of the expired only line. This is an indication that sellers and/or their agents have been taking properties off the market and possibly relisting rather than simply letting them expire on their own.

The high level of properties that have either expired or been taken off the market could be indication that the spring market will see a high volume of listings come on the market.


Friday, January 23, 2009

Gap Between Firm & Conditional Sales Continues to Narrow

As discussed in a previous post, any prudent buyer who comtemplates purchasing a property should place the appropriate conditions on the offer, to ensure the appropriate due diligence has been taken. Typical conditions would include getting the appropriate morgage or a satisfactory inspection report on the property. In a slow market, buyers may even put a condition on the offer requiring the sale of their own property before firming up the purchase. (Many other conditions are in the buyer's arsenal, such as termite inspections, getting insurance, etc.).

In the past couple of years however, the market in the Greater Toronto Area has been so overheated that buyers have chosen to bypass conditions altogether in the face of competition from multiple offers. The offer goes straight from being just an offer to a firm sale once accepted by the seller.

An interesting trend to look at is the relation between the number of conditional sales to the number of firm sales.

In a strong sellers' market, one would expect the number of firm sales to be much greater than the number of conditional sales - an indication that buyers are forgoing conditions in order to win in a multiple offer situation.

In a strong buyers' market, one would expect the number of firm sales to be much fewer than the number of conditional sales - an indication that more buyers are putting conditions on offers and fewer buyers are going through with the purchase, and walking away from conditional offers.



The charts above show the relationship between conditional sales and firm sales. The number of condition sales for each month are tallied from the first of the month to the last of the month, while the number of firm sales are tallied from the 7th of each month to the 7th of the next month.
Why?
The reason is that conditions typically run for five days, and I hear that realtors in Toronto normally don't update the status of the sale from conditional to firm immediately, either because the office is too busy or because they want the extra couple of days of free advertising. On sites like realtor.ca, a property is no longer searchable if it is sold firm.
Since the rule is that brokerages must change the status within two days, two more days are added to the five days of a typical conditional period to get the firm sales number by querying from the 7th of the month to the 7th of the next month. This is not exact science since some conditions run for more than five days and some offices change the status earlier or later than two days, but it's better than counting from the first of the month as long as the same methodology is used for every month.
The first chart shows both the number of firm sales and the number of conditional sales. We can see from this chart that both lines track each other pretty well. However, the subtle thing to notice is the gap between the firm sales line and the conditional sales line.
The second chart shows the difference or gap between the firm sales and conditional sales numbers. We can see that there seems to be seasonality in the gap - that is, in the colder months the market seems to be more of a buyers' market (smaller gap; fewer unconditional offers) than the warmer months. We can also see that the gap is trending down for the past two years. Fewer and fewer buyers are willing to put unconditional offers.
What continues to be surprising is that the gap is still positive even for the past couple of months, indicating that there are still more firm sales than conditional sales (i.e. there are still buyers who are placing unconditional offers), although the gap for December 2008 was only 514 for the entire GTA.
This tells me that the market is very quickly becoming a buyers' market but not quite there yet. In a full-blown buyers' market, I would expect the gap to go negative (i.e. only a portion of conditional sales go firm as few to no buyers would be crazy enough to place an unconditional offer on a property). Furthermore, I would expect more buyers to jump ship, walking away from one conditional offer to put in an offer on a newly listed, better property.

Wednesday, January 21, 2009

GTA Power of Sales Continue to Trend Up

In this entry, we'll revisit the situation in "power of sale" listings in the Greater Toronto Area (GTA). While "foreclosure" is a term commonly used in the U.S., in Canada, it is called "power of sale". A power of sale is the sale of a property by the lender, be it a bank, financial company or other individual.

In this post, we'll examine four charts:

  • GTA Power of Sale Listings by Month, 2007-2008
  • GTA Power of Sale Listings by Major Bank, 2007
  • GTA Power of Sale Listings by Major Bank, 2008
  • GTA Power of Sale Listings by Major Bank, 2007 vs. 2008


  • GTA Power of Sale Listings by Month, 2007-2008

    This chart shows the number of monthly new contracts to list properties on the MLS as power of sale in the GTA. The numbers are counted by looking at seller names whereby the name contains either "bank", "financial" or any of the major bank's short and long names. For example, if Royal Bank lists a property as a power of sale, the seller name is either listed as "Royal Bank" or RBC. This is not exact science since the seller name(s) for some non-power-of-sale listings contain the word "bank", but it's good enough to give us a sense of where things are going.
    We can see from the chart that, though the situation isn't alarming quite yet, the trend in power of sales listings is slowly trending up for the past couple of years. It will be interesting to see how this chart takes shape in the coming months.

    GTA Power of Sale Listings by Major Bank, 2007

    This chart shows the break down of power of sale listings by banks, for the period between January-December 2007. We can see that Royal Bank has the highest proportion of the power of sale listings - not surprising since it is the largest bank in Canada.


    GTA Power of Sale Listings by Major Bank, 2008

    This chart shows the break down of power of sale listings by banks, for the period between January-Decmeber 2008. What is interesting to note is that, in 2008, the proportion of power of sale listings for the other major banks increased, while Royal Bank's proportion decreased.


    GTA Power of Sale Listings by Major Bank, 2007 vs. 2008

    The following chart shows how much each major bank's share of the power of sale listings changed between 2007 and 2008. We can see that TD Bank and CIBC saw their share of power of sale listings increase the most.


    Monday, January 19, 2009

    Fewer Speculators in December?

    Here's an update to the "Deals Fallen Through" charts that I posted previous, with Decmeber 2008 numbers. Between September and November 2008, the number of transactions (deals) that buyers walked away in the GTA shot up. However, in December, fewer buyers walked away. I wonder if it was simply due to the festive season or perhaps there were fewer speculators, since those who have to go through with a purchase in this environment must have to buy for whatever reason.

    For the first half of January 2009, the number of deals that have fallen through so far is 29.

    The first chart shows the trend in the number of deals that have fallen through for the past two years.




    The second chart shows the number of deals buyers walked away from, as a percentage of sales.


    Friday, January 16, 2009

    Annual GTA Price-To-Sales 1966-2009



    Let's have a look at price in relation to sales since 1966. We can see the extreme spike during the previous real estate crash (around 1989) - it was not until 1996 that the ratio got back down to a reasonable range (near the trendline). In 2008, the ratio ticked up again. It will be interesting to see what happens in 2009. If the sales and price trends continue the way they behaved the past three months or so (let's say sales down 40% and price down 8%), the projected ratio would shoot up as shown. If this does happen, it would resemble the 1989 portion of the chart again.

    Thursday, January 15, 2009

    GTA Price-To-Sales Ratio: Straight From An Inconvenient Truth

    In this entry, we'll examine the Price-To-Sales ratio between January 2005 to December 2008 for the Greater Toronto Area. The chart below is produced by taking the average price for a particular month and dividing by the total sales for that month. A small ratio indicates an active market and a large ration indicates a slow market.

    During the boom years, we can see that, even as prices went up, sales kept pace to produce a chart that shows the fairly regular ups and downs in the ratio due to seasonality. The ratio has been largely range-bound between 40 in the hot months and 80 in the cold months, until December 2008, when it shot up to 140!

    This is unsustainable and has to come back down to earth - either sales have to go back up or prices have to come down further or both. If the dismal sales figures for the past three months are any indication, my bet is that prices will have to come down further, a lot further. I believe to a lot of people, that is an inconvenient truth!



    Monday, January 12, 2009

    Borrowing from Technical Analysis: GTA Home Prices About to Cross Below EMA

    With the release of new numbers by the Toronto Real Estate Board for 2008, I decided to borrow from a commonly used technical analysis metric for stocks, called the Exponential Moving Average or "EMA", and applied it to the average price of single-family homes in the GTA over the past forty plus years. A moving average takes the average of the prices for the past N periods and plots it on the graph against the current period's price. The Exponential Moving Average gives more weight to recent changes.

    Moving averages provide a good comparison of current prices to the trend and is one of many indicators used to form an opinion as to whether an equity is overpriced or underpriced. A very simplified rule of thumb is: if the current price moves below the EMA sell and wait until the current price moves back above the EMA; then buy. This is a VERY simplistic rule of thumb and is not perfect, especially for volatile stocks, since it can produce false signals.

    For real estate, the EMA could be a good indicator to use since prices are not as volatile as stocks (i.e. don't move up and down as frequently) and the future trend is somewhat easier to predict.

    For the chart below, I used a three-year EMA to provide the trend as it seems to nicely model the up-trends and down-trends in average prices for single-family homes in the GTA.


    As we can see, the average prices for the years between 1966 and 1989 were above the EMA, and would indicate that this period was a safe period to hold real estate, though prices did get crazy between 1985 and 1989. Between 1990 and 1995 average prices remained below the EMA, indicating a bad time to be holding real estate. From 1996 until 2008, the average prices remained above the EMA - once again, a safe period to be in real estate.

    However, as we enter 2009, we seem to be on the cusp of another downtrend, if the last four months of 2008 is any indication, with prices falling as much as 10% and sales falling as much as 50%, compared to 2007 on a month-to-month basis. One would expect the average price for 2009 to once again fall below the EMA and will likely stay below for some time - not a great time to be holding real estate for the next little while (not until the average price touches or moves back above the EMA).

    As mentioned earlier, the EMA is a very simplistic indicator but it can give a general rule of thumb as to when to hold real estate and when not to hold real estate.