Thursday, March 05, 2009

Latest Real Estate Figures for Victoria

On Monday the Victoria Real Estate Board released the latest figures on real estate sales in the region. They are spinning it as positively as they can by saying February has a big increase from January, but that always happens.

Victoria Stats and Trends has some good information on the stats. He shows us that there is a 10 month inventory of currently available. Anything more than a seven month inventory depresses prices. At 10 months inventory the market should drop by about 2%. I suspect we will reach a 15 month supply by the late spring which should mean a 3% per month fall in price.

The blog HouseHuntVictoria has also covered the new data - a long set of comments worth looking through.

Roger Needs has some very good analysis of the data in a graphical manner here. He also has this nice graph showing long term house prices in the US.

All of them do a good job of looking at the data and the picture is clear, the local market is in freefall. Historical February sales have been the median month of the year. February has also been close to average number of sales as well. Both of these facts point to about 4500 sales in 2009.

The massive drop off in sales means there will be problem for all the real estate agents, we have about 1300 in the region and can support a maximum of 750. There are hundreds of real estate agents that will be looking for new work.

Real Estate agents also have a new problem, they are carrying a lot of stock and less than 10% of it is moving each month. They need to spend more money on advertising to get the houses sold making their overhead higher which means they need to sell more units.

I expect at least a third of the real estate offices in this region to close by the mid fall of this year.

The total value of sales in February is another stat that people should note. In February all sales totaled only $171 million. Other than this last fall and winter, these are the lowest monthly figures in years.

We are now at spring 2007 prices for houses and look like we will see sale prices in the summer be equal to the prices in the spring of 2006. By September prices will have fallen 25% from the peak. This means that people that bought after the spring of 2006 will now own a house worth less than what they paid for it. It gets worse.

The fall and winter are always bad for selling and even in good years will typically show a small decline from the peak on July 1st. This fall we will see an even more dramatic drop in prices as people are forces to sell or have their houses foreclosed on.

By the end of 2009 we should see average house prices in this region drop to about $375 000 to $400 000. On December 31st people in Victoria will be living houses that are of comparable value to December 31st 2004.

Someone that sold a house for $500 000 in May of 2006 that they had bought in 2001 for $250 000 with a $240 000 mortgage realistically had an equity after everything was said and done of about $250 000. Say they used this to buy a $750 000 bigger house with a $500 000 mortgage. Where will they be on December 31st?

They will still owe about $475 000 but have a house worth $600 000. They managed to turn their equity of $250 000 into an equity of $125 000.

Let us move the dates of the scenario to spring of 2007. The house sells for $550 000 and they net an equity of $300 000. They now buy a house for $850 000 and a mortgage of $550 000. December 31 2009 they still owe $535 000 and have a house worth $600 000 - net equity of $65 000. They have lost a huge amount of equity and are not a high risk mortgage because they do not have enough equity. When they renew their mortgage, they will have to pay more.

The equity loss for the family is $235 000 in two and half years, about $90 000 per year. This family could have rented for the same 30 months a very nice house for under $100 000 and have $200 000 in the bank

So where will the market stop? I am not certain, but an average price in the region of $350 000 is completely with the realm of reasonable. If one uses a compound rate over the the ten years that is 50% higher than the rate of inflation, the 2000 average price adjusted for 2010 would be $340 000.

Prices will stabilize when the total units on the market is down to a six month supply. I do not see that happening before the winter of 2010/11.
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