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Searching for the Bottom of the Real Estate Market...

...Is Like Chasing a Pot of Gold at the End of the Rainbow

By Andrew Zsolt, Broker of Record for Coldwell Banker Terrequity Realty

In May 2009, we saw a dramatic increase in the number of transactions in the GTA, with the Toronto Real Estate Board selling over 9,589 homes (versus 9,411 sales in May 2008). For the first time in over 16 months, we have had a month-over-month increase (i.e. May 2009 versus May 2008) in the number of properties sold in the GTA. For a comparison chart of May 2009 and May 2008, please click here. So, for those who are “looking for the bottom of the market” it looks like you have missed it.

A better question to ask is whether it is advisable – or even realistic - to wait for the bottom of the real estate market in the first place. Too frequently, homebuyers think that buying a home is like investing in the stock market. These buyers think they can apply the same investment techniques they would use when buying stock in a publicly-traded company. The real estate market is dramatically different than the stock market and I believe that a homebuyer will never really find the bottom of the market for a number of reasons, including:

1. Problems in defining which market and its stage in the cycle;
2. Differences in homes that look the same;
3. The ability of one transaction to “make” a new price level for an entire real estate market;
4. Delays in tracking resale results

The first reason is the difficulty in identifying exactly which market you are talking about. Stocks of any public Canadian corporation trading on the TSX have a defined market, which exists regardless of where the purchaser or company reside. This is not the case in real estate. When someone says they are waiting for the bottom of the real estate market, which market are they talking about? For example, the resale market in the GTA, the freehold market in the City of Toronto, the townhouse properties in Don Mills, a condo building downtown, or maybe a quiet cul de sac in Rosedale where the houses never go up for sale? Each of these markets operates independently of the overall cycles presented monthly by the Toronto Real Estate Board (TREB).

Every unique market has its own supply and demand characteristics. This can result in various neighbourhoods, even if near one another, being in different stages of the typical real estate cycle. These cycles are unique to each market and may result in higher or lower pricing at different times. Your dream house in High Park may have sold last year at the dream price, while a comparable house in the Kingsway may not sell at a similar price until next year.

The message is simple: all real estate is local and responds to the supply and demand condition that exists at that time in that local market. You must specifically define which market you are targeting before you can anticipate if the prices are going up or down. This is one of the biggest obstacles that prevents a homebuyer from accurately determining whether this is “the bottom of the market” - they must first define which market they are referring to!

The second reason it is difficult to find the bottom of the market is that no two resale properties are alike. Unlike the common shares of RBC, for example, which have identical attributes and features, each home is usually different than its neighbour, and in more than one way - even if they look the same from the exterior. Some houses are larger, some have recently been renovated, some have different size lots, some have basements, some are well maintained, and some are not. These features make it very difficult to compare properties on the same street, let alone different parts of the same community or city. If you are looking at two similar houses on the same street, in other words, a very specific market, then the question to ask yourself is: is the cheaper one a better deal? Maybe not.

The third reason why it is difficult to find the bottom of the market is that one individual homebuyer can “make” a real estate market when they enter into a real estate transaction. If a homeowner sells their property for an unusual price, regardless of their reasons for doing so, they tend to influence the prices of homes in the surrounding area. Given the inventory of available listings in a specific neighbourhood, combined with the seller’s motivation, the purchaser may be able to purchase a property at a price which is significantly lower than the prices typically commanded in that area. One transaction could potentially create a new bottom of the market for an entire street.

The final reason why a homebuyer can never really predict the bottom of the market is the problem of timing. Fluctuating interest rates and prices of properties can make it sometimes difficult to identify a clear trend in a given month. Nonetheless, the trend may be very apparent with the benefit of hindsight when the buyer is looking back at the last four months or last four years in succession. This is why it is not uncommon for buyer to lament, “I wish I bought 4 months ago.”

If it is that difficult to find the bottom of the market, what should the homebuyer do? Firstly, homebuyers should stop looking for the bottom of the market and starting looking for good value in the neighbourhood they actually want to live in. This can happen in a buyer or sellers market.

 

Posted on Thursday, June 25, 2009 at 10:30AM by Registered CommenterElaine | CommentsPost a Comment

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