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:


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.