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.