Cart Before The Horse?

Are you doing things backwards?

It would seem that the common conception is that when we want to sell our house we plan on what we need or want for our house and then set our asking price accordingly.

Are we not putting the cart before the horse here?

So lets say you own a horse. Not just any horse. A big old handsome horse. A horse that the Budweiser Horses would be jealous of. The kinda horse that the lady horses would want to date. Here is the problem. You need to sell it. It would seem that your brother has a love of football and gambling and has racked up some bills. You got a call and if you don't raise $10,000 "Vinnie" is going to take your horse to the glue factory (if only it was that no good brother). In order to avoid the sticky situation looming you have decided it might be wise to sell your horse, parlaying it into enough cash to cover your delinquent brother's debt. So you put up the ad for your horse at $10,000 on Horsetopia.com and hope for the best.

Problem is that the only other "Budweiser" horse you can find is going for much less ($2,500). Now given this horse is a gelding and nowhere near the horse that yours is, a difference is expected but the $7,500 price gap is not working in your favour. Had you done your homework you would have found out that your horse's market value is only $5,000.

It would seem this situation is common place in the real estate market. How are you going to price your home? Let's hope you price it right...before your horse runs off to the circus...


M

Why Would You Buy A Home?

The question comes up often. Most people fall into the purchase column because that is what we do, right. We go to school, get a job, rent an apartment, save up some money, buy a house, buy another one, maybe one or four more, then we rent again, move into a "home", then we die. Life in Canada.

So does it make sense to buy a home? Their are plenty of people on either side of this argument. On the purchase side their are countless realtors, mortgage brokers, bankers, etc. Against the home purchase plenty of economists and investment people. The loudest voice against purchase seems to be Garth Turner. He is far from shy about exposing people "talking out their ass" about purchasing.

Let's look at the basic math as it sits today to see if Garth is right.
Here is a rental townhouse in the north end of Cambridge that is available for $1,350 per month. Cost to rent this home for the year would be $16,200. Lets look at this over the 25 years it would take to purchase a home because we know that you pay more interest at the front and less at the end. Assuming that rent will not go up (err on the side of caution) the cost of renting this home for 25 years would be $405,000. WOW. What would it cost you to purchase?

We recently had a comparable home in the same area sell. It sold for $240,000. Again erring on the side of caution let's assume your mortgage was at 6% over the 25 years (although it is 3.79% today I would think it will go up over the next 25 years). So calculating this with 5% down ($12,000) your mortgage would be $228,000. With monthly payments of $1,458.76 your annual costs are $17,505.12 (a little more than renting) and the total paid over the 25 years is $437,627.41. $32,627.41 more than rent, right? Wrong. You still have the equity in the home. When you take away the $240,000 in equity (again not looking at inflation) total cost of the home was $197,627.41.

The only other thing to consider is the $12,000 you put out as a deposit and the $100 or so a month you saved in the rent situation. Let's assume that money was invested to see if it evens out. Investing the $12,000 deposit plus $100 a month at 6% (equal to the mortgage amount to be fair) works out to $123,225.53. Subtract that from the cost of rent and your cost to rent was $281,774.47, or $84,147.06 more than buying a home over 25 years.

So I will leave it to you whether you will buy or rent. Whatever you do don't get pushed into anything you are not ready for. Specially if it seems like Dr. Suess is the one doing the pushing...


M

New Year, Old Problems?

How do we figure out the last piece of the puzzle?

Last year turned out to be a fairly strong year for real estate (even after the doom and gloom of the "Next Great Depression"). With any good year there are still problems that exist. When we are sitting on a strong real estate market what inevitably happens is people get caught up in the dollars and feel their home is worth way more than what the market is willing to pay.

The stats for 2009 show KW had their second best year in home sales. But what do the rest of the numbers tell us? Let's have a look.

For the Waterloo Wellington area MLS sales in 2007 were 13,093 based on 19,573 listings. These means that 66.89% of the homes listed sold. 2/3 of all homes listed sold, a very strong year and a seller's market for sure. This means that as a seller you were in a stronger position than a buyer as decidedly more people were selling than not selling.

2008 showed a reverse of this seller's market. MLS sales for 2008 were 11,573 based on 20,292 listings. Less solds and more listings, not looking good. The List to Sell Ratio dropped to 57.03%. Still not a bad ratio but an adjustment of 10% year over year effects the market. This is a common occurrence after a strong market as more and more people jump in to "ride the wave" and get their piece. People see what their neighbour got and then proceed to ask more for their house (and this continues to perpetuate). As the market price pushes up buyers either become more cautious or they just can't afford the costs of ownership.

Which way did 2009 go? I still don't have the Dec numbers in but Jan-Nov show 11,325 MLS sales (sure to be above 2008) based on 18,811 listings (expected to be under 2008). So as it sits the List to Sell Ratio has increased vs. 2008 but is still well under 2007 at 60.20% (Jan - Nov).

So where does this leave us in 2010? What is the piece of the puzzle to keep a strong housing market? I believe that the increase in 2009 is directly related to the lowered mortgage rates we saw. If these rates continue through 2010 then we will see a slight increase over 2009 as the first few months of last year we were still getting our feet under us. If the rates move up with any swiftness we will see a quick spike as those approved under the lower rates will make rash buying decisions and then a stall in the market slowing sales.

All in all our 2010 looks like it should be OK. Could be worse, we could live in the US...


M