April 2009 newsletter

Shots
across the
bow

Is this the time to buy?

Getting at the truth

It was Mark Twain who popularized the saying that there are "lies, damn lies, and statistics," although I doubt that he was referring to predictions about where the current real estate market is headed. However, I think he might well have been.

Within the media's focus on gloom and doom, there are reports that house sales during the months before and after Christmas were among the slowest in the preceding ten years. Worse still, there are forecasts that the bottom of the market has yet to be reached. These opinions -- and those to the left and right of them -- exist despite a consensus that Canada wasn't going to be affected, at least to any significant degree, by the meltdown in the U.S.

So much for vain hopes (mine included!), eh?

Indeed, whether my enthusiasm for the intentions and capabilities of the Obama administration is justified or not, there's a growing realization (not to mention a widespread concern) that things are going to get worse before they get better. We aren't faced with any ordinary downturn, let alone one that can be overcome quickly or easily. The figures keep changing -- both up and down -- almost by the week. It's become difficult to decide whether we're being lied to or not. Perhaps the truth is too evasive to be apparent. Maybe all we can do is to simply wait and see.

Only time will tell

In my last newsletter, I advised caution regarding blithe acceptance of the prices that sellers and their listing agents are asking. Rightly or wrongly, I pointed out that there was a chance that the value could drop shortly after a purchase was made.

I don't feel any need to apologize for this advice, even if an offer that is much lower than the asking price is going to be met with an extreme reaction. You at least owe it to yourself to not overpay, especially if the view that we haven't yet reached the bottom of the market is correct -- and no one quite knows whether this is already the case or when it will be.

Given the present uncertainty -- and perhaps I should refer to it as the volatility -- of the market, I must admit that, like many other people, I have only my instincts to guide me (and my buyer clients). However, I'd much rather be safe than sorry and look for the seller to settle for what they can get instead of insisting on what they want. In any case, there's good enough reason to think that the seller can carry the price difference on to whatever they subsequently wish to buy. Indeed, there's a real likelihood that they can negotiate an equivalent drop in price if they are able to make a firm offer (i.e. one that isn't conditional on the sale of their own place) once they've accepted what my client is willing to pay.

Whatever the truth, though, it's no stretch of imagination to decide that the current market favours its buyers far more than its sellers.

Casting caution aside

Taking the foregoing observations into account -- and they come down to an unclear indication of where the market is headed, as well as an above average chance of a widening gap between asking and selling prices -- I'm inclined to think that this is, nevertheless, as good a time as any to go house hunting. In fact, it may even be one of the better/best times to do so.

There are several factors that support this point of view, the main ones being as follows:

*** Low interest rates

One measure of how the real estate industry is hurting is evident in the availability of mortgages that haven't been seen in most of our lifetimes. A four percent interest rate is the highest you can expect nowadays, and the odds are that you can get it down to three percent and lower. Moreover, in the U.S. and the U.K. the federal bank rate has been lowered to as little as one percent -- and, if our own economic recovery becomes too prolonged, we may see the Bank of Canada following suit.

Perhaps the underlying reason is that, in the circumstances, bankers are prepared to settle for something instead of nothing, but there's no doubt that government willingness to prime pump the economy is also at the back of it.

Still, as the market starts to turn around -- which it will inevitably do -- rates will no doubt go back up, if only when renewals become due. In the meantime, though, you can have a clear conscience about taking advantage of what you are being offered.

*** An absence of showings and offers

Today's would-be sellers need a lot of patience, just as listing agents are having their own tested. A rush of showings and never mind a flood of offers may be triggered -- if at all -- by curiosity rather than an interest among serious buyers. In numerous locations -- including our own -- sales have in fact dropped by as much as 30% from what they were a year ago.

One consequence is a greater hesitation on the part of sellers about listing at all. What's the point in putting a house on the market when the time to get it sold is likely to be longer than it used to be -- or ends up with a major reduction in asking price as the only way to find a buyer?

By extension, this implies that there's room to negotiate in a great many cases. If buyers are few and far between, a serious offer is unlikely to be dismissed out of hand, regardless of how far below the listed price it may be.

Your conscience can be clear on this point as well. Let the seller tell you what they'll accept. Don't presuppose that you'll be shown the back of his or her hand.

Of course, as the market recovers -- as it's bound to eventually do -- prices will start to become more realistic, and whether this leads to reductions or increases in the figures that sellers are presently looking for doesn't matter too much. If you're ready to buy now, I reckon that you've more chance to strike a deal today than you will tomorrow.

*** Enough choices

Although the market now favours its buyers, there's a sufficient selection being offered to most of them. Some sellers have abandoned the idea of getting their places sold, but -- to further argue my main point -- this reflects the odds against getting their prices rather than seeing a SOLD sticker added to their lawn sign.

Different house ages, styles and sizes have always varied in number, price point, and location, but the mix in the current MLS database is neither less nor more that it usually is. Bungalows, backsplits, sidesplits, and two or one-and-a-half stories, as well as the likes of semis and condos, not to mention old and new residences are all there for the looking as much as they normally are. The one factor that separates them is the seriousness and motivation of people who want to get them sold.

At the same time, it's worth noting that there's an increased willingness to both consider and accept SOPP offers (which depend on the sale of the buyer's property), a condition that historically has been viewed unfavourably by numerous sellers, not to mention their listing agents.

Perhaps, as with the banks, the thinking is that something is better than nothing, but a consequence is some reluctance among agents to show buyers a house that has a SOPP offer in place. (The incorporated escape clause [i.e. 48 hours or so in which the original buyer has to "put up or shut up" in the face of an alternative acceptable/accepted offer] creates the possibility of neither offer getting closed -- a situation that has hitherto been generally considered ill-advised but is now felt to be less of a risk than it was.)

In any case, if you're in a financial position to "bump" the SOPP offer (i.e. you're able or confident enough to make a firm offer), you can not only add to your "to be seen" list, but also be received with open arms instead of any back handing -- and never mind that you're looking for a lower price.

Onwards and upwards/downwards

All told, my advice to any prospective buyer is to take the risk of paying more than a property may become worth in the near future. Any offer can -- and I'll maintain should -- anticipate a drop in prices, especially when it may be the only one a seller has seen so far.

However, if the efforts to turn the economy around include a reduction in listing prices, this will, at most, be a somewhat temporary situation. Once things get better, even if they get worse in the interim, a long term loss of value can be considered no more than a remote possibility. As the last several decades have unquestionably proven, prices always rise over the long haul.

Among the differing opinions as to how long the shortage of sales is going to last, the consensus goes no further than the next two or three years. Thus, provided you're not into buying something for the short term, the market will soon enough move above whatever you end up paying. Meanwhile, you'll have managed to take advantage of the market as it is -- and be ahead of those who deem it more sensible to wait until it recovers. By then, needless to say, prices will have gone back up and sellers are going to be far less patient than they are right now.

It would be pleasant to say that all these prognostications are based on unmistakable facts. But they aren't -- anymore than anyone else is able to exactly point to the truth regarding the present market and what's to become of it.

The most I can claim is that, ha, ha, I've never (knowingly) lied to you before!!

Duncan Pollock, Real Estate Broker,
427 Gate Street, Niagara-on-the-Lake,
Ontario, Canada L0S 1J0
Tel: 905-468-3154 Fax: 905-468-3812
Cellular: 905-704-9037
email: duncanpollock@sympatico.ca
Note: E-mail address changed as above on Nov 3 2007

website: http://www.duncanpollock.com

PS. One of my web pages provides a list of the other newsletters I've sent out. If you choose to go to it, you can click on any title to bring up its full text.
PPS. I've recently been invited and encouraged to create a second website, one that deals with my approach to the industrial, commercial, and investment real estate market. You can reach it, if you're so inclined, at http://www.iciniagara.com.

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