So, there has been a lot of conflicting information in the media recently from recession talk, financial markets and strength of banks, and the housing market. This has made it very difficult to come up with any kind of game plan in order to prosper in these changing times. I think it is very important that we take a step back and look at the broader picture so that we can position ourselves to reduce any unnecessary risks and take advantage of the opportunities that are beginning to emerge.
Today I want to talk about our current housing market. We recently came through a period of very rapid growth that was fueled by easy money which led to over speculation and a large increase in supply. To put it very simply housing prices are a product of supply and demand. Through 2007 and 2008 supplies continued to increase as demand fell due to credit tightening and fear in the financial markets. The natural result was for house prices to decline. So we sit back and ask ourselves how long this retraction will last and where do we go from here?
It is very difficult to say with any certainty how long this retraction will last. However, we can look at the facts and begin to develop a longer term outlook. First we should take a look at the state of the housing market in the US. Whatever happens in the US seems to happen here 18-24 months later. Overall there has been a downturn in house prices over the past 3 years in the US, however, the major price declines are mainly occurring in the areas that experienced major price increases in the preceding years. I am talking about the sunbelt, Florida, Arizona, Nevada, and California. These areas became very attractive for people to purchase vacation homes when it was so easy to refinance their principle residence, pick up a beautiful vacation property and live the good life. It seemed to be a no brainer, make easy money on real estate without having to do any work and spend time in the sun, how could you go wrong? If it seems to good to be true it probably is. I am always very cautious of situations where I can get something for nothing. Well, the time came when everyone that could obtain a mortgage and buy one or multiple homes did and there was no longer a large supply of buyers. Guess what happened? Demand dropped and supply was still increasing. This began to put a lot of pressure on house prices and prices began to fall. As prices fell, many people began to sell, the only problem was that now the rest of the world did not want to invest in US mortgages and the US no longer had a supply of money to lend on real estate. Even the people that wanted to buy could not get financing and the market began to drop even faster. The sunbelt has been the hardest hit because many of the homes were second homes and these were the first to go as people tried to hang onto their principle residences. This created the current situation in much of the sunbelt where there are more homes than there are people. Many cities have seen more than a 50% decrease in property values over the past 2 years. It appears now that the markets in the sun belt are finding a bottom and house prices have come down to levels that are now affordable based on local income levels.
Now, we have seen market declines here in Alberta. However, what are the chances that we will experience similar declines to those in the sun belt? Especially when we did experience very rapid price increases recently. In my opinion a price decline on a scale similar to that of the US sun belt is very unlikely for our market. Here are a few reasons why. The number of second (vacation) homes in our market place does not even come close in comparison with that of the sun belt. Canadian credit standards are higher and qualifications on our mortgages are more strict. It is much more difficult to walk away from a home in Canada than it is in the US. New construction on homes here as declined significantly recently. Income and employment levels are still good here.
We have already experienced a 15-20% decline in home prices here since the peak of 2007. We may experience more declines however, it is not very likely that our decline will be on the same scale to that of the US. It is very likely that prices will firm up through the spring and summer and we will have to keep a close eye on inventory levels as we approach fall to see if any further declines will occur. We have recently seen an increase in sales in lower priced homes and this is great news because this starts the chain of peole moving up. So we should see more sales in the mid and upper ranges in coming weeks.
So what should you do? If you are in the market to purchase a home with an outlook of holding onto it for 2 years or more then I say go ahead, buy now and enjoy your home. House prices will rise again, especially since the governments are increasing the money supply at such large rates, inflation will be a huge side effect of recent monetary actions, and this will be great for home owners as prices will very likely increase. If you are looking to get into a home and turn it over in the next 6 months to 1 year, I would be very cautious. In my opinion in order to flip a home in today's market you would need to purchase it significantly below fair market value to insure a profit, nobody likes to work for nothing. So take your time and find the right deal, they are out there but you will need to be patient. The good thing is that most of the flippers are gone, so those of you that are left do not have the same amount of competition.
Keep your eyes open. There will be many opportunities presenting themselves. The key is to be able to recognize the opportunity, act on it, and enjoy the results.
Have a great day!