Friday, November 15, 2013

How to Better Understand the Housing Market – Part 2

By Ben Myers
SVP, Research & Analytics

I hope you had a chance to check out Part 1 of this post and familiarized yourself with some of the data sources and experts in the housing market. I have a few more tips for you on your path to better understanding the real estate market. The inspiration for these tips were some of the uninformed comments I’ve read on housing related newspaper articles online in recent years. One must be able to comprehend these three tips and get past their underlying misconceptions on the path to housing enlightenment!

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Tip #3 – It’s more complicated than Economics 101.
If you are reading this, you are probably more enlightened than the folks that comment on online news stories at 2 am, but I see this comment in some form or fashion on a regular basis, this is an actual quote I pulled from an article talking about the recent resale housing results, “Sales are down, but pricing is up, somebody is lying”.

As most of you were taught in your high school or first year economics class, when demand of a good or service goes down, prices go down for that good or service, and the opposite applies as well. In many cases this is accurate, but often it is not. When the number of resale transactions decrease, you need to check to see if the number of resale listings decreased as well – demand might be down, but supply might be down even more. The relationship between supply and demand in the resale housing market is best captured by looking at the sales-to-listings ratio (total resale units traded during a specific period, divided by the total number of listings during that period, expressed as a percentage); this ratio will be a better indicator of price movement than sales alone would be. There will always be short-term fluctuations in demand and the sales-to-listings ratio, so look at long-term trends before making any assessment of the housing market.

In addition to monitoring the level of transactions and the sales-to-listings ratio, one has to keep in mind that supply can vary because of wide-ranging sales strategies by sellers. There are plenty of people that are not really that interesting in selling their home, realize it is worth about $400,000, but list it for $440,000 anyways, just in case that one uninformed buyer comes along. They let the listing sit for four or five months and eventually let their realtor off the hook and pull the listing. Some investors list the unit for sale and for rent at the same time, setting either the price or the rental rate above market depending on their preferred outcome, and wait to see who is interested. Supply could decrease because of new mortgage rules, increase because of an upcoming land transfer tax change, decrease because of bad news out of the US, increase because several condominium apartment projects complete in the same week, etc, etc, etc.

Knowing the basics can only take you so far, but remember the price vs supply/demand relationship is not cut and dry. Look at the sales-to-listings ratio, look at the average or median ‘days on market’ (the duration of time it took for the unit to sell), and the ‘percent of list’ (how much the seller got in relation to how much they asked for), and do those three things using both short term and long term data samples. To top it all off, sometimes the market is up and down, and up and down, and there is no trend – that is an answer!

Tip #4 – Whether or Not you Like a Certain Type of Home has No Influence on the Housing Market.
I’m always surprised at how many times I see the comment “I would never live in a tiny glass box in the sky downtown, the condo market is doomed”. I’ve also heard the opposite argument that without new highways, these sprawling suburban communities located miles from employment will be traps for the middle-class, stuck in traffic and drowning in car repair costs, lost time at home, and skyrocketing gas prices – the suburbs will fill up with the poor, priced out of the fully gentrified city. Neither of these dystopian futures is likely to take place.

According to CMHC, there were 148,548 condominium apartment units completed between 2000 and 2012 in the Toronto CMA. Trust me, condominiums are here to stay. Downtown Toronto is not going to become a condo ghetto and CityPlace is not the next St. James Town. Has downtown New York become a ghetto, has downtown Chicago? No, both are extremely desirable global destinations for business and tourism and so is Toronto, the sooner everyone accepts that fact, the happier we’ll all be. You may never want to live in a high-rise apartment, because of congestion, condo fees, smog, noisy neighbours, or any one of the thousands of actual and perceived issued with high-density living, but it is the present and future of housing in Toronto and will continue to make money for unit investors, equity investors, developers, brokers, mortgage lenders, construction lenders and many more. Better to get on the fast moving train, than get run over trying to stop it.

Perhaps you hate the giant SUV driving, styrofoam cup using, electricity wasting, McMansion living suburban soccer mom sprawlers. This type of living is not doomed either, developers will continue to build farther out as families desire single-family living. The inner-suburbs will create their own downtowns (like Vaughan, Richmond Hill and Markham), create larger and more diverse office and employment nodes, and add to and improve on public transit.

There are plenty of folks who hate Apple products, would never use them, and think people are crazy that do use them, but they realize that the stock is not going to crash. Feelings and numbers must be kept separate. Let’s say there are 225,000 people living in those 148,548 condominium apartments I mentioned earlier, if we could survey those folks and 50% or more hated high-rise living and are looking to flock to the suburbs as soon as they can, then perhaps I would entertain the potential for a condo market crash – but I’m sure this is not the case. Don’t rely on anecdotal evidence, or your buddy Steve who hates it downtown, or your girlfriends’ friend Janet who’s new suburban community is riddled with crime. The desirability of a neighourhood can ultimately be determined by the value of the homes, and neither grouping has witnessed a decline.

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Tip #5 – The Sale of One Overpriced Home is not a “Sign” of Impending Doom for the Housing Market
Tips four and five go with one another, but this attitude is pretty prevalent among folks out there. People like to post pictures of dilapidated homes, which might be across the street from an adult bookstore, a former crack house, or a smelly fish market, that sold for $767,000 or $965,000 or $1.6 million. However, a single sale or even a group of sales at what you might think is overvalued, is not a sign, or an indication, or a turning point in the market. It is of no consequence to the market if you can get two mansions in Windsor for that price, or three condominiums in Uxbridge, or a place with a butler and a four car garage downtown Detroit, because that is not where these people live, not where they work, not where their relatives are, or their friends, or their church, or their community services, etc.

Whether you would want to live there, or you think they didn’t get enough for what they paid for (which might be true) is not an indication of trouble in the market. It is impossible to know their motivations, financial situation, or employment situation of each and every buyer. Is the movie business in trouble because Adam Sandler made $37 million this year, he is much more overvalued than a Leslieville two bedroom semi if you ask me? A piece of burnt toast that looked like Jesus sold on E-Bay for $28,000 and a Honus Wagner baseball card sold or $2.8 million; is the collectables market about to tank? Value is very much subjective, and changes pretty drastically based on your income, and the things most important to you.

If MPAC produced a report that showed the sale of properties in comparison to their assessed value say every quarter going back 25 years and you showed me in Q3-2013 that 85% of the sales were greater than the assessed value, and the average gap between the assessed value and the sale price was 32%, and both were record highs, than I would listen to the argument for overvalue in the market. However, this report is not being prepared currently and very rarely have we seen prices in the Toronto market increase over 10% in year-over-year comparisons.

A very important element of this tip is “Sample Size”, the smaller the sample of homes you are looking at, the greater the chance for skewed results. When looking at just one home, that presents the greatest opportunity for a sample size error. Please be cognizant of the size of the sample of homes you are evaluating, look both at the median and average values. Make your case more by the numbers, and less by the pictures of those homes.

These are the rookie mistakes and common fallacies that are prevalent in the analysis of housing markets today, so don’t fall for them. Go right to the original data source, think for yourself and think outside the box, realize that housing markets are more complicated than sales up = prices up or supply up = prices down, don’t let your feelings about a product type interfere with the analysis of its value or its impact on the overall market, and be conscious of sample size, don’t let a single sale disrupt or influence your view on the market. Do not insert yourself into the analysis! It doesn’t matter if you like the area, like the product type, like the home finishes, and it especially doesn’t matter if you can or cannot afford that home.

For the full article and how this effects Ottawa Real estate, to read from Ben Myers, please click here

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