January 27, 2009
by Eugene Pilato, Broker of Record
Century21 TODAY REALTY LTD.

Recessionary Fears Spur Reluctance, Resistance and Retreat from all quarters

The Result: Missed Opportunities
Buyers become spectators waiting for the big turn-around, sellers raise their defenses, agents withdraw into turtle shells, lenders damn up their shores and the media dispenses Kool-Aid for everyone to drink. If it sounds like a confusing mixture of metaphors, it is.

Anyone who suggests no problem exists would be in denial. However, to overstate the problem is irresponsible.

However, there are two sides to every reality.

·         If, as predicted, unemployment in Canada rises to 8% or more, 92% (plus or minus) of the work force will continue to work.

·         Since 2003, the average home price in Niagara has gone up 35%. If the average price were to drop by 10%, the highest prediction to date, that would still represent a net gain of 25%.

Buyer Reluctance
As in most recessions, loss of confidence is a symptom of buyer reluctance. Negative emotions of doubt, fear and uncertainty set in and buyers put off making decisions. They sit on the sidelines watching and waiting for home prices to bottom out. According to Dale Orr, Managing Director of HIS Global Insight, “Consumer confidence sits at its lowest level in more than a quarter century.” 

If loss of confidence is a symptom, what are the causes?
1) A main cause is the negative media, with its daily scaremongering tactics. They spread depressing news like a virus and create a pandemic of fear. It’s not that the numbers they report are wrong; it’s the imbalance in reporting.
2) The mortgage meltdown in the U.S. remains the primary culprit, along with free-wheeling lending practices, Wall Street greed and lack of government oversight.
3) Human behaviour as reflected by the herd instinct takes part of the blame as well. 

Other Causes of Buyer Reluctance
4) Buyer Inability also fuels Buyer Reluctance. There is no question. A higher percentage of people are out of work today, about 6.6% in Canada as of January 2009. Others are afraid they may be losing their jobs, and unemployment is expected to rise between 7 and 8% for 2009. These percentages characterize an inability to buy. To underscore the point, lenders simply won’t lend to the unemployed or to those who work in market sectors where jobs are at risk.
Unemployment and people at risk of losing jobs are taken out of the home-buying market. They simply cannot buy without the income to borrow. This too fuels reluctance in others, creating a spill over effect that further reduces the buyer pool and the number of sales by more than the number reflective of the unemployment rate.

“It’s still a far cry from the last two recessions”
According to a Toronto Star report by Julian Beltrame of The Canadian Press (Dec. 24, 2008): “While the jobless rise in 2009 will hurt, it's still a far cry from the last two recessions. Unemployment hit 13 per cent in the 1980-81 decline…. In the early 1990s the recession…pushed the jobless rate to 10 per cent”.

Expert Predictions Vary
Experts agree that home prices will drop but disagree by how much. One predicts 3% nationally, another 10% and still another between 5 and 10%. One prediction estimates home prices in the Hamilton/Niagara areas to drop by 4%. The number of home sales has been estimated to drop by an additional 3.5%. Predictions can feel like looking into a murky crystal ball and their accuracy is arguable.
People look for evidence that the market has bottomed out before they get back into the game. Yet once that happens, pent-up demand will inspire buyer activity and cause prices and the number of sales to once again rise, in spite of how many people are unemployed.

So here’s the thing
People who buy near the bottom of the market usually end up getting some great deals. Those who buy just past the bottom also end up with great deals. Too many, stuck in a spectator mindset and filled with residual doubt, wait too long and miss the opportunity.

Fear, regardless of the market is the main motivator
Today, as in past down times, fear of paying too much in a market that anticipates a drop in prices discourages buying.       
In the hot seller’s market of the last number of years, people bought and competed for homes without concern for paying too much. The fear of missing out in a market where demand outstripped supply induced buying and easy money.

There was also the illusion and misplaced confidence that prices would always rise.
Many buyers, lenders and agents bought into the false confidence that prices would always rise and fear of losing out. Yet the saying that “history leaves clues” holds true. The late 80’s saw soaring prices and frenzied buying, until the recession of the early 90’s hit. Prices dropped, then slowly inched up and didn’t catch up to 1989 prices until around 2000.

What goes up will come down and vise versa, representing market swings in the short term. Yet long term, home prices have historically gone up and have tended to keep up with the rate of inflation. As an example and using the Consumer Price Index as an index for inflation, “The CPI from 1975 to 2005 using Statistics Canada’s information corresponds to an increase in value of 3.79.” (Source:  [Ottawa] Capital Ward Council Tax Assessment Study and Proposal)

Home ownership continues to be a long term investment.

 

Number of Sales

In Niagara, the number of sales in 2008 represented 88.06% of the number of sales in 2007. If predictions prove out that sales will drop by 3.5%, the number of sales in 2009 will represent approximately 85% of the number in 2007.

The chart below shows the number of sales year over year since 2003 for single family homes.


(Source of numbers: MLS Reports)

Chart %'ages (+/-) represent difference in number of sales from previous year.                                               

2008 represents 88.06% of no. of sales in 2007                                   

Average no. of sales from 2003 through 2007 = 5,833
(No. of sales in 2008 equals 87.89% of average no. of sales in previous 5 years)                                  

5) Seller resistance causes disconnect with buyers adding to buyer reluctance
Many sellers continue to be attached to out-of-date peak pricing and refuse to accept market realities. Those who continue to overprice their properties, treat selling as a lottery—hoping to win when some unsuspecting buyer from the big city comes along.
In some Niagara markets prices are in the minus category. In others, prices have shown modest gains.

Seller resistance to lower the price creates disconnect with buyers that causes fewer homes to sell.  In 2008, 48% of homes listed sold. That is a 17.2% drop from the previous year at 58%.

For a ‘meeting of the minds’ between buyer and seller, the seller’s mind has to be more proactive to make the connection. 

 

There’s been a positive yet downward curve in average price increases since 2003

Increases in Average Price for Single Family Homes in Niagara since 2003

Year

2003

To 2004

To 2005

To 2006

To 2007

To 2008

Avg. Price

    $155,872

$172,835

$187,317

$199,995

$208,671

$210,924

 

% Change

 

 

+10.88%

+8.38%

+6.77%

+4.34%

+1.08%

Total Increase

 

 

 

 

 

+35.3%

 

The chart shows a total average price increase in the last 5 years of 35.3%. The increase, year after year, reduces steadily. Yet too often sellers expect windfall profits of 10 -20% and more beyond the market trend, as reflected by their asking prices. Now that’s a seller disconnect and a seller resistance to recognize market realities. 

6) Buyer reluctance causes disconnect with sellers.
Some buyers fail to recognize that market prices, for the most part, have remained positive. This may be attributed to a combination of elements:
(1) the daily negative sound bites we here,
(2) lack of market knowledge,
(3) fear of overpaying,
(4) a belief that the market is ripe for a steal,
(5) a don’t confuse me with the facts mentality,
(6) plus other incompatible perceptions.

That’s not to say that the market in Niagara may or may not be heading into negative numbers. Predictions for a price correction range from 3%, 5% and 10%. Locally a 4% drop has been predicted.   

Some buyers are looking for a steal.
Some buyers, in an effort to buy a steal, are submitting incredibly low offers. The MLS sale to list price is averaging 96% on homes sold. Needless to say, sellers are not biting at such unreasonable offers.    

7) Agents Retreat
Agents allow themselves to be influenced by the negative reactions of buyers and sellers to the pessimistic news churned out by the media on a daily basis.
1. Instead of talking to more people daily to generate potential customers, they tend to retreat from this all important sales function. Buyers and sellers with a need to buy or sell can be found in any market. 
2. Instead of arming themselves with solid and objective market information that paints a bigger, more rounded picture of market conditions and its realities, they give in to the media mantra, waiting and hoping the market will change. Yet buyers and sellers want and need balanced advice, provided it is not self-serving. 
3. Instead of playing offense, taking a more aggressive, “down-to-business” approach, many continue to be stuck in the seller’s market of the last few years, when buyers were much more proactive. In the meantime they lament the dire condition of the economy.   

Agents play an even more important role in aiding buyers and sellers make well informed decisions.
1. Agents are in the front lines and are, therefore, better informed and able to give buyers and sellers complete market information that lessens the impact of negativity. Sales continue to be made because buyers and sellers continue to have buying and selling needs.
2. They have a responsibility to their clients, the industry, the brokerage and themselves to understand the market professionally, objectively and realistically. They carry the added duty of communicating market realities, despite any discomfort it might create with clients.

Agents can help to unravel the web of disconnect and help create market stability.

Seller’s Agents
Agents need to work diligently toward getting seller’s to listen to the realities of the market. The number of sales in 2008 was down by 11.9% compared to 2007 and down 9.3% compared to 2006.  They need to provide the service of pricing properties realistically and not candy coat the price to win the seller’s favour and the listing. Not doing so contributes to buyer reluctance and seller reluctance and helps to foster disconnect in the market.

Sellers are entitled to the truth, regardless of whether they want to hear it. As well, Sellers with a need to sell need to listen. Otherwise they will end up with even less than market price down the road.

As well, all bids must be analyzed and taken seriously. If a home is overpriced, a fair offer may seem unacceptable to the Seller. The listing agent has a fiduciary duty to make every effort to communicate and give evidence of the fairness of the offer to the seller. Otherwise, the seller runs the risk of selling for less than market value later and kicking himself for having passed up on a good offer.

A home can be market priced and a buyer will make a low offer. Instead of ignoring or flatly refusing the offer, the agent should promote a counter offer. Often you don’t know the seriousness of a buyer until his second response. The buyer’s initial offer may amount to merely testing the waters.

Buyer’s Agents
A buyer’s agent also has a fiduciary duty to educate the buyer with sound market information and to make promote offers that are reflective of market conditions. Outlandishly low offers are made when a buyer is ill informed. They only create resentment from sellers and too often foil what could have turned into a fair deal for both parties. The better informed the buyer the more realistic an offer tends to be. Catering to a buyer’s misconceptions of value serves no one, including the buyer.    

A good agent is an asset in any market, especially markets in which uncertainty exists.

8)      Lender Reluctance or Improved Criteria
Lenders have somewhat tightened up on home-buying lending policies and such measures do demonstrate reluctance to greater risk.
Here’s an example from CMHC.
1. CMHC now insures mortgages with as little as 5% down instead of 0 down.
2. The minimum credit score for a CMHC insured mortgagor was raised to 620, with exceptions for borrowers who pose a low risk of default.
4. Mortgage amortization was reduced to 35 year maximums versus 40 years.
5. Loan documentation standards have tightened.
Such modest tightening of residential mortgage rules has eliminated some buyers from the market, contributing to fewer sales.  The guidelines represent a modest tightening of residential mortgage lending rules. Though they have taken some people out of the market, they should be welcome changes. They stand for sound lending practices that will help stabilize market conditions long term. 
 
A greater reluctance to lend is directed more to controlling some of the looser practices of the past few years with respect to home buying, especially the lending practices of secondary lenders.

To offset tightened lending rules, extremely low mortgage rates save thousands for buyers and improve affordability, allowing more people with job stability and good credit to buy. Currently mortgage rates are as low as 4.39% for a five-year, fixed rate mortgage.  As well, today borrowers can stabilize their payments with up to 10-year fixed-rate mortgages.

Reluctance to lend is more concentrated in commercial lending. This has a negative effect on employment and contributes to predictions of unemployment for 2009.    

Reluctance equals lost opportunities

With the exception of a modest tightening of residential mortgages, reluctance in all other segments serves to create uncertainty, indecision, fear and lost opportunities. Lack of liquidity, especially in commercial lending, buyer reluctance based mostly on misinformation, seller reluctance to face market realities and agent reluctance to take a proactive and balanced approach to their responsibilities all create a stressed and friction-filled market that saps people’s confidence.  

In spite of all this, once again, sales will continue to occur and well-informed consumers and agents will continue to find buying and selling opportunities.

Additional Notes:

1.       Prices will only fall so far then some astute buyer takes action. That’s what is happening now. 

2.       "Everybody is now waiting for conformation we're at the bottom and if you can get a week or two of really strong markets, there will be a piling on phenomenon and people won't be able to wait to get back in." (Dale Orr, managing director of IHS Global Insight).

3.       Gutsy buyers will get some good deals. Good luck to buyers who wait, trying to time the bottom of the market.

4.       Buyers who plan their purchase with reality-based thinking that real estate is a long term, wealth-building investment through sound leveraging, modest long-term appreciation, mortgage paydown and low mortgage rates always win. They also get to live in and enjoy their investment sooner.   

5.        There will be a price point at which more buyers come back to the market and the smart ones will do so first. With attractive prices, buyers won’t be able to resist.

6.       It’s ironic that everyone wants to buy a home when the value is climbing but everyone runs as values dip to attractive buying levels.

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