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Inventory Zenith March 3, 2009

Posted by DustinRJay in Calgary real estate, mortgages, supply and demand, Uncategorized, US real estate.
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As discussed in a previous post, leading indicators at that time had pointed to the balance of inventory tipping towards excess demand in the near term.  That has now happened, and year over year inventory is down 7% in Calgary.

The following graph illustrates a potential medium term price point.  It is based on two points wherein inventory was dropping on a year over year basis.  Prices dramatically above these points may lead to excess supply, and prices below have tended to lead to excess demand.

Inventory Zenith

[click above for larger view]

Also noteworthy is:

  • Wave of speculators in 2006 & 2007 resale market now appears to be over and unlikely to be a source of supply for some time.
  • Calgary single family home construction was the lowest since 1995 in 2008 and the low level of housing starts is expected to continue into 2009.  This is lower than demographic growth and therefore resale inventory appears poised to continue siphoning off from it’s current high levels.
  • Drop in interest rates is likely having an impact on inventory.  As interest rates drop, the yield spread between rent and mortgage rates improves thus increasing affordability and relative investment value.  Some investors and homeowners may choose to delist if they believe their is more value in renting, or that the resale market is likely selling at a bigger discount to the new home construction market.   New construction inventory may not be able to be supplied at the current price point.  Note:  Buyers need to run various budget scenarios to determine the risk of rising interest rates.
  • Mortgage arrears in Alberta, while expected to rise, are at cyclical averages.  Mike Fotiou, at First Place Realty, lists approximately 2.3% of inventory on the market as a foreclosure or judicial sale.  This contrasts to the situation in the United States where 45% of sales are distressed properties.  Canadian banks had argued that only 5.4% of Canadian mortgage market originations were nonconforming, compared to 33% of the market in the US was subprime and Alt-A.  To date, the reduced exposure to shady loan origination practices in Canada appears to have largely insulated our housing market from the same level of credit defaults.  As in the US, the extent of credit defaults will not be fully understood until house prices find a bottom.  As year over year inventory is already dropping, this does not seem to be a large source of supply.
  • Absorption rate is a source of imperfect information that may results in real estate mispricing.  For instance, the absorption rate was 3.1 at the peak of the market in July 2007 and could have been perceived as a ‘good time to buy’  or ‘balanced market.’  However, year over year inventory increases were greater than 100% at the time and should have been an extremely strong indication that the market was about to correct.  I think that absorption rate provides a good estimation of how the market will behave in the near term.  However, a comparison of year over year inventory changes may provide a better estimate of how the market will behave in the medium term.

Sources: Bob Truman – First Place Realty, Mike Fotiou -First Place Realty, CREB, CIBC, Bloomberg

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Comments»

1. Jessie - March 3, 2009

Pretty graph, and that’s about it. I read this blog for quite sometime, and always felt it provided a good overview of what was happening without some of the excesses of the doom and gloomers on the other local blogs. However I have to say that you have seriously disassociated yourself from reality with your latest graph – what the hell is that? My 6 year old daughter could’ve come up with this make believe nonsense.

http://www.math.yorku.ca/SCS/Gallery/lie-factor.html

2. Section 31 - March 3, 2009

I don’t quite understand why a droping inventory indicates an increase in demand? I think a more realistic scenerio is that supply has droped due to low demand.

Regarding the interest rates, they do nothing to increase demand on the buyers side, the only ones whom can take advantage of this either have variable mortgages or are stacked with equity anyways. The banks aren’t going to be lending out to Sally and Joe first time home buyer at 2.5% with a measily 20K down. Banks are risk averse. With housing prices showing no real sign of a turn around, I don’t think they are going to be giving out more marginal loans.

I mean come one people. Name one city on the planet whos economy is waivering, whos country is in a recession, unemployment rising,
and yet… Miraculously, home prices are set to rebound by summer?

3. BradBender - March 3, 2009

I really can’t see housing prices rebounding anytime soon. If anything they’re more likely to plummet than ever before. People haven’t started losing their jobs yet, but that’s coming.

I’ve been to several builders and I almost laugh aloud when they show me their prices or give some Realtor sales-pitch, or peddle what a “great deal this is”. Sometimes I truly wonder if they’re drunk?

Take a look at some of the listings in the USA. For $150,000k CDN you can own a 2600sq/ft house in Houston. Watch “Property Virgin’s” on TLC and first-time buyers are picking up an acreage outside Portland Oregon for $250k USD. Townhomes in California that were $550,000 in 2006 are going for $120,000. What the Hell is so amazing about Calgary (or Canada) that any rational home-buyer would be willing to pay triple! It’s not like Calgary is Hong-Kong or something. Land here is worthless. The value just isn’t there. And in 2005 houses were $250,000 and they weren’t selling like the hottest deal of the century. I think the age of easy-credit has numbed everyone’s sense of just how much $415,000 really is.

Maybe hyper-inflation will kick in… either that or the dollar amount will come down.

4. bubu - March 3, 2009

wake up my friend….

5. Anonymous - March 3, 2009

I think this graph is great – it’s likely a great representation of how Calgary will fare in coming months..great job as usual Radley.

6. Real Estate Link RoundUp - March 3rd 2009 | Chris Davies - March 3, 2009

[…] Radley and Jared both posted good articles about the inventory levels in Cow-Town, and the impact that’s having on the market. I think it’s the premature strength Don talked about in January. (It’s the little peak in the middle of the W) It’s still good to see some reality going on though. […]

7. Anonymous - March 6, 2009

Your comments on the absorption rate vs. inventory levels, ie. which is the better indicator needs a little more thought. Looking at inventory levels you see the trend, ie. a continued increase in inventory and an eventual top. If you looked at absorption rate, as a trend, it was falling and falling, signalling an eventual top. Absorption rate was a counter indicator.

Also, inventory is really a poor number to watch in isolation, without context. I’ve seen people post here before, explaining that inventories fall for many reasons, including seller capitulation. Sales is a stronger stat to be watching, as has been explained in previous posts.

8. Anonymous - March 7, 2009

House prices are still dropping and I dont see it changing low interest rates or not. We may see a slight increase in sales and yes some may buy based on low interest, but they had better lock in for as long as they can since interest rates will eventually rise. When they do, expect a bloodbath in the housing market since even slight increases in interest rates on a ~400k mortgage will raise payment levels beyond what people can afford. It could be a year or two away but it will happen, it has to.

9. Chris - March 8, 2009

I agree with you Radley. There is starting to be more stability in the market (relatively speaking). I’m not sure we’ve found bottom yet, but from my perspective (an Edmonton investor actively buying) now is a great time to get in. I don’t plan on ‘getting out’ for at least five years, so I’m just fine with where we are.


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