The Shunning

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Eleven million people live in our largest three cities. The latest housing numbers are now in for each. Sales last month in Toronto were down 17.5%. In Montreal they tanked 19%. In Vancouver, a 28.6% collapse. When was the last time this happened? Try never.

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In all three markets, however, realtors say average prices are ahead of the same month a year ago, which is true. But not for long. Because in real estate, as with financial markets and seduction, momentum matters.

On Monday, while I was yakking on a live radio interview about condos in Montreal, the news came down that unit sales there had plunged 20% while the number of listings surged 23%. That compared to a 25.1% crash in GTA condo sales, and a 17.8% rise in overall listings. In Vancouver there was a remarkably similar 25% reduction in condo deals, with just 750 changing hands.

What do these numbers mean?

Trouble, says Pacifica Partners. This echoes what this blog has been bleating on about for months. Prices tell us where we have been. Sales indicate where we’re going.

“The drastic slowdown in sales volume in some Canadian markets has important impacts on future pricing,” say the Van-based real estate analysts. “This is because a slowdown in home sales can create a build in unsold housing inventory as we are seeing in various regional markets.  As with any consumer good, in order to liquidate excess inventory back to a long term average, the price of the goods must be reduced. Essentially, homes have to be put on bargain pricing to entice buying and reduce inventory.”

The real build-up in inventory will begin happening in about 90 days, as pent-up sales demand floods over local markets and co-mingles with all those scared, virginal condomaniacs already trying to escape last year’s bad decision. Look for total listings to shoot higher as vendors cross their fingers and toes, and hope there are greater fools left.

As stock watchers will also tell you, a few trades in a thin market can have a big influence on valuations. Ditto for houses. After all, what does the realtor dude do first when he comes over and you ask him how to price your home? He trots out the comparables. It matters not if properties down the street sold in a bidding war last April or a falling market last month – recent pricing determines future pricing for an entire market. Now that month-over-month values are eroding on the back of declining sales, buyers are in control. It’s exactly, as Pacifica says, what happened in the US.

“What we glean from this is that the surge in US home prices leading up to the 2006 housing crisis was on the back of increasing sales volume. Alternatively, the severe drops in US home prices occurred during periods of shrinking sales volume.  Effectively, US home prices dropped on a housing liquidity drought in which home prices for the entire market were determined by a shrinking number of transactions at lower and lower prices.  The US home sellers who refused to budge on price themselves, had their homes forcibly re-valued by the market through lower priced comparable sales.”

Right again. Sellers who don’t understand momentum and liquidity, and the night-school realtors they engage to list too high are doomed in the spring that’s coming. The meme is out there that real estate’s stuttering and prices are correcting back to historic trend lines. Listings not immediately perceived as offering realistic value will be shunned, sitting and devaluing for months while other properties are snapped up.

The pace of falling prices will be determined by how many houses hit the market, since all other big factors – like mortgage rates and lending regs – will be essentially unchanged. Without a doubt, lots of sellers will see this downward momentum and decide to wait for better conditions.

God help them.

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avatarGarth Turner - The Greater Fool posted Monday, December 10th, 2012.

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