A SEASON OF CHANGE

October 8, 2010

 

There is change in the air, and unfortunately, it isn’t just the fall weather settling in. There is a change in the level of optimism that most of us were starting to feel last fall and through the early part of the spring. Last year, we had weathered the “Crash of ‘08”, and we survived. Actually, they were telling us, we made out better than anyone else in the world... and perhaps we did. Aside from our investments taking a hit, (though a lot of it has already been recovered), and our real estate having lost some of the ENORMOUS gains it had made in the past few years, we were relatively unscathed. Most of us still had jobs, our health, and from the people I polled, people were still going to restaurants, taking vacations, and not “cutting back”. We were OK! And we were prepared to make some of those big ticket purchases like major appliances, home renovations, automobiles and real estate. We carried this optimism into the spring of 2010.

 

But then, something changed. The Federal Government sent a clear message that they did not want to see the free market run wild in real estate. They set out a new batch of rules that made it harder to qualify for a mortgage. It even became more difficult to qualify to refinance the mortgage that you had been faithfully repaying without the slightest hint of a late payment for the last 5 years. Then came the HST, and the confusion that still exists. (Personally, I am not sure that Mr. Van der Zalm’s good intentions are not creating a bigger problem for us than he is trying to solve.) We’ve seen interest rate hikes, 3 of them since April, and finally news that perhaps some of the predictions about the economic recovery were a tad overoptimistic, and that the recovery wasn’t going as quickly as once believed.

 

OK! We get it... we are still in a slowdown, or that is what they want us to believe. But, are we really? Or is it that few of us are cannot look past the last few years and remember what “normal” is. Can’t we just look back to 2004 – 2008 and just say  “Wasn’t that a Party!” Will we get to a point where we can admit that 15% - 20% growth in real estate is NOT normal? Will we ever reach a point where we can see that, despite what the media keeps trying daily to ram down our throats, that things are still pretty good.

 

In BC, we are awaiting the September employment figures. Did you know that in August we were a mere 2000 jobs below the ALL TIME record number of people working in BC (set in August 2008), and they are optimistic that the September numbers will beat that. Imagine... more people ARE working in BC than ever before. Forget the UNEMPLOYMENT figures... they will only depress you, and we all know, a pretty good number of people that are part of those unemployment figures have no intention of working. More people are working in BC right now than ever before. That is good news.

 

      Dow Graph           

 

 

The graph above shows the Dow Jones Average since October  of 2008. The crash we all remember was in September and the market clearly hit bottom in March ‘09, but we have gained back a lot of the ground we lost from the bottoming out. The Dow bottomed at around 6500, and today is back around the 11,000 mark. To me, those are pretty remarkable gains in an 18 month period. Considering it took 5 years to climb from 6500 to 11,000 the first time, the less than 18 months it took to gain that amount this time is a sign of strength.

 

In the same token, while we have lost ground in the local real estate market has taken a hit. Basically, we lost the gains were made in ’07 & ’08. Prices are currently in the range of early to mid 2007. The problem today is we have a ton of inventory, in all categories and price ranges. The gloom and doom we have been hearing in the media lately has buyers uneasy, and they are not in any hurry. They are predicting prices to drop. They are shopping for deals. Plain and simple.

 

The situation we are seeing today is typical of any free market competitive system. It is entirely about supply and demand. We have high supply, low demand. There is only one place for prices to go, and no one can change that. The market will do what it wants to do, and will find its own level. Unless something or someone intervenes, we will see downward pressure on prices.

 

There are a couple of solutions. First, we need to get the homes off the market that do not NEED to be sold. Sellers in this market who are not willing to be realistic about where the market is heading are not part of the solution, but rather part of the problem. With loads of choice, buyers do not feel the need to decide... they will wait for something new, or something to come down in price. Like most sellers right now, they don’t NEED to buy... they would like to buy, and there is a huge difference. Buyers that need to buy will find the best home to meet their needs and budget. Buyers who want to buy will wait for the PERFECT home to meet their needs, and then work to get the best price. The huge amount of inventory is a seller’s biggest enemy. The solutions are reduce the price to a number that “the market” feels is good value, or take it off and wait until the selling climate is more conducive to bringing a higher price.

 

Housing prices will probably take a another hit over the winter. Expect that. It would not surprise me if it dropped another 5-10% before starting to rebound. We have already seen the signs. The key to selling a home in the next 4 - 6 months will be price. Period. If a home is priced well, it will sell. In the last 3 months, we have sold more than 200 properties in the Central Okanagan monthly. While these numbers are extremely low, there are still homes being sold. The problem is, with approximately 5,000 listings, that means we are selling 4% of the inventory. Sellers have to ask themselves, if they were a buyer, would they think (honestly) that their home is in the top 5-10% of the homes in its class. If not, it probably explains why they are not getting showings, let alone offers. In the same vein, if sellers are not willing to do this, they would be better served taking their home off the market, renting it, or changing plans to move, and waiting until the market comes back.

 

One caution though... many other sellers will be doing the same. When the market heats up again, there will be a backlog of homes coming back on the market. If demand increases, so will prices, which will force even more homes into the market, and we will be back in the same loop. Lots of inventory means falling prices... Low inventory means increasing prices. Economics 101.

 

It is impossible to time the bottom or the top of a cycle perfectly. It takes 4-6 months worth of data to know we have reached a peak or valley in the stats. That said, for both buyers and sellers in this market, it is very likely that prices will moderate within 5 – 10% (+/- )of where they are right now. There is nothing on the horizon that suggests we will see a cataclysmic bottoming out in the market. There is nothing to suggest that the double-digit increases we say in the mid 2000’s will re-occur. The buyers and sellers that understand this will be in a position to take advantage of a market that is full of potential, at a time when interest rates are about as low as they can go. (I just refinanced my home, and got a 5 year fixed rate for 3.59%.) There are deals out there, and at the finance rates, some very attractive opportunities.

 

Sellers... in a word, get it sold or take it off the market. Sellers speculating and hoping to get “the big number” are plugging things up. Their homes are being used as comparisons to make the case for homes that really are great deals. Most of the people that are viewing homes right now have no intention of buying... they are doing research. If a home has been on the market for more than 30 days, and has not received an offer, it is priced too high. Neither consumers nor their REALTORS® are seeing the value. You don’t want to be a Seller in a Buyer’s Market... you want to be a Buyer. The sooner you get your home sold, or converted into a revenue stream, the sooner you can become a Buyer, and catch this market before it starts going up again. Buyers are the ones having fun right now.

 

Buyers... realize this is a terrific time to buy. This is like the perfect storm. You have selection, motivated sellers, low interest rates, and few multiple offers. Understand that the PERFECT home does not exist. If you have genuine intent, you should be able to find a great home at a great price. I had a colleague tell me this week that they showed 40 homes to his buyers last week, and was showing them 40 more this week. (To be honest, I am shocked... I am not sure how anyone can keep things straight after seeing that many homes). That is just too many. Do your homework in advance. The right home is out there. Be specific about what you NEED, and what you would like. Looking at dozens of homes will only serve to muddy the waters. Ideally, if you have done the preparation, you will only need to look at 6-8 homes before you buy.

 

Finally, stop thinking about your homes as an investment vehicle, but rather the place you want to be every day. If you focus more on the home, and finding the things you need and want in that home, you will have a better chance of getting it, and getting a great deal. No matter when you buy, there will always be another home come on the market. No matter how informed you are, you are not likely to hit the peak, either when buying or selling. You may be close, but you need to be plain lucky to hit it exactly.  Do your due diligence, research the areas, get your financing in order, know what you NEED, and what you would like (the two are not the same), and go find a great home. Buy one that has location, and is saleable. Buy one that has been on the market for a short time. Chances are, if the current owners are having a hard time selling, you will too. (Sellers need to note this too... there are lots of  questions asked when buyers see a property on the market for a long time.) Again... it is about price. Price it right, and it will sell. Price it right, and the buyers will find you.

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