Note: If there’s an article I’ve written for you in the last year that’s genuinely essential for you to read, it’s this one. I trust it will benefit you if you make the time.
Around a month ago I began seeing Realtors’ Instagram/Facebook/TikTok/SnapChat/Twitter/Etc. accounts all start blowing up with, ‘ThE mARkEt iS ShiFTiNg!’ posts – I made a couple myself. We were right, the data supports it, but I’ve been asked multiple times by clients and friends, ‘what does that actually mean?’ I’m going to answer that question below, along with why it might be happening.
First though, is the market really ‘shifting’? What do I mean by ‘the data supports it?’
1. Inventory Is Up, Big Time.
According to the Fraser Valley Real Estate Board, “[The Board] received 3,742 new listings in February, an increase of 75.3 per cent compared to January… The previous highest February for new listings was 3,283 in 2016.” Picking Langley, where we do around 40% of our business, as an example we climbed from 75 single family homes listed in December, to 86 listed in January, to 206 listed in February – February 2021 saw only 159 homes listed. The attached market was even more stark, with 13 in December, 36 in January, and 115 in February – with only 69 listed in February 2021.
2. Buyer Demand Is Also Up, But Not Keeping Pace.
Using another example of a marketplace we’re familiar with, the Abbotsford detached market saw an increase of 153% in inventory, but only an increase of 57% in sales – so inventory is climbing around 3 times higher than its absorption rate. Attached was even more pronounced, that’s condos and townhomes, with inventory boosting 151% compared to sales creeping just 23%; that’s a big spread.
3. Sales Ratios Are Therefore Falling.
If you’re familiar with our SnapStats reports, which all of our clients are, then you’ll remember that the sales ratio follows a basic formula: “sales for the month ÷ active listings (inventory) = the % of homes selling.” This handy little tool gives us the ‘market speed’. Let’s see the shift in some of our detached markets below from January to February:
Chilliwack: 90% > 70%
Surrey: 55% > 36%
Mission: 66% > 47%
Now, not every marketplace saw a drop in sales ratio, and that’s why we provide SnapStats for our clients – there is no ‘the market’, there are hundreds all functioning at once; BUT, the trend is established across the region as a whole. The overall sales ratio across the whole Fraser Valley dropped from 75% of homes selling to 57% of homes selling between January and February.
“So, What Does That Actually MEAN?!”
This is the question you’re here to have answered, how does this translate to boots on the ground experience. I’ll share some examples, noting that not every transaction will look like these, but they are becoming more common.
Example A – Fewer Showings > Fewer Offers > Lower Prices.
Tuesday evenings have become ‘offer presentation evenings’ for the last two years. This is generally what happens in strong sellers’ markets in the Lower Mainland & Fraser Valley; to try to drive multiple offers the offers are delayed until Monday or Tuesday evening. We’ve become accustomed to this strategy leading to over five, ten, fifteen, or even twenty offers. Inevitably in that environment someone swings for the fences, driving prices much higher.
This was not our experience with our latest listing. We hit the market mid-week (as we always do); we marketed it expertly (as we always do); we priced it wisely (you get the idea); and yet Saturday morning rolled around and we had zero showing requests… zero. It wasn’t just us, we were hearing the same from agents across multiple cities. It wasn’t a holiday weekend, it hadn’t snowed, we weren’t in lockdown, there was just so much more inventory that the buyers were getting pickier and were spread across more properties.
Over the weekend we managed to drive four showings through though, which landed two offers on Tuesday evening (two more than many listings – ‘goose egg’ was the most common text I got from other agents on Tuesday). The dynamic shift was pronounced. A month ago, the seller had all the cards, ‘these are our dates; we expect no subjects; have your deposit in hand; swing for the fences on price.’ Tuesday night required a proper negotiation.
We managed to wrap up the negotiations on a subject free offer just after midnight, and required the seller’s agent to drive from Vancouver to Surrey to pick-up the deposit, but our eventual sale price was lower than we would have expected two weeks ago. With that said, the sale price was also higher than we expected six weeks ago. Because we had purchased with conservative numbers in mind our clients were entirely satisfied, but if we hadn’t been on top of the market shift they could have been in trouble.
Long story short on prices, we’re seeing a pullback from February prices, but they’re not dipping below November/December prices. You can’t exactly call that a ‘crash’, or even a ‘correction’, this ‘shift’ looks more like a ‘softening’ from a market which was violently out of control.
Example B – Bully Offers Are Back.
What are we seeing on the buy side? In the last month we’ve had success with two ‘bully offers’. A ‘bully offer’ is an offer submitted before the above discussed offer presentation date. We always prepare our buyers in advance, including providing them with all available documents even before we see the property, that’s so if they fall in love with a place and it ticks all their boxes we will be able to draft a competitive and safe offer within an hour or two.
One month ago there was zero chance we’d be successful with a bully offer, every seller was waiting for their offer presentation date to try to drive multiples and land that buyer who was sick of losing, leading to offers often hundreds of thousands above asking. One of our buyers suggested a bully offer price of $1.5m, and I said I thought $1.45m would be enough to entice the sellers – it was. Another, just last night, asked what we thought on price and we managed to get an offer accepted at list price; we haven’t seen that often in well over a year.
Example C – Subjects Are Making A Return.
That second bully offer, last night’s, even had subjects! Remember those? The listing agent wasn’t entirely prepared with all the documentation, so we didn’t feel safe submitting the offer subject free; we included a document review subject, but we also accompanied it with a financing subject and a home inspection subject. I’ve not been on a home inspection in over a year!
We’ve become so used to having to do all of our due diligence in advance, and we still will in case we need to write subject free on competitive properties, but having subjects sure is nice to slow down the pace a little and give our buyers some time to really consider whether this is the right home for them.
Example D – ‘Buy Before Sell’ Or ‘Sell Before Buy’.
‘Pick your poison’ is a phrase I commonly used when discussing transaction order with clients. I told them, ‘as much as we will manage the stress levels, there is inevitably going to be time pressure on either your purchase-side or your sale-side.’ The last two years have been a no brainer, the pressure was on the purchase-side, buying a home was immensely challenging. Once we’d secured your next home though, selling was a relatively bolted down process and we’d know we could expect multiple offers and a strong price.
Now, however, the shift in the market doesn’t guarantee the sale of your home within one week. Putting the pressure on the sale side; not many people can carry two mortgages. As a result, some of our clients are choosing to sell first, discovering what’s in their wallet for their purchase, and then taking advantage of the increased inventory to find their next home.
Of course, we’ll outline which transaction order makes sense for each of our clients, but the fact this is even a conversation is another example of what the market shift looks like practically for our clients.
Alright, Why Is This Happening?
1. Buyers’ and Sellers’ Expectations.
I can’t remember a time in my real estate career where buyers expectations and sellers expectations have been so far apart. With such extreme price movement upward in the last two years sellers have become used to always selling for more than their neighbour down the street. In fact, if they didn’t ‘beat’ Mr. & Mrs. Jones by tens of thousands of dollars we saw some sellers choose to terminate their listings altogether to hang on for more money – not ours, thankfully, ours are always fully informed of a market value sale price.
Some sellers are still functioning with that mentality, wanting last month’s prices for their home. That would require last month’s market, and as we’ve seen above, that’s simply not the case. Conversely, many buyers want next month’s prices, expecting that prices may continue to pull back slightly.
This gap between buyers’ and sellers’ expectations is palpable in negotiations; with the sellers’ agents pointing at last month’s comparable sales and the buyers’ agents waving the current sales ratios around.
2. Seasonality.
The reality is that the real estate market works in cycles, certainly an annual cycle, and some argue for multi-year cycles as well. I recently ran our data for 2018 through 2022 and was able to compare the percentage of our transactions on a month to month basis. Over a four year period January saw only 3% of our total annual transactions on average, February saw a climb to 11%, and by May it’s at 16%.
There is definitely some of that seasonality at play here, on the annual level, but there is also the pent-up demand for a home sale. The last two years have seen record low levels of inventory at least in part due to the global health situation (I won’t say the word so I don’t end up in your junk mail or censored on social media) and the responses to it. Eventually people need to make a move; whether it be due to a change in work situation; children’s school catchments; shifting relational dynamics; or a multitude of other reasons. As a result, we are entering cyclical short-term and long-term increases in inventory.
3. Sellers Cashing In.
Many sellers have watched their properties appreciate and appreciate over the last two years, they’ve held on because often they’ve been making more money from holding real estate than from their occupations. That’s understandable! Now that the market shift is underway though, they’re deciding to sell, trusting that they have ‘timed the top’. With any investment ‘timing the top’ is very difficult, and this ‘top’ certainly isn’t the mid/long-term peak, but we do understand why many investors in particular are reducing their leverage, especially due to our next point:
4. Interest Rates.
Earlier this month The Bank of Canada increased the overnight rate from 0.25% to 0.5%, already I know some of you are snoozing off, but let me explain how this influences our markets. It’s not that a slight increase makes a huge difference in monthly payments for most mortgage holders, really this has a marginal impact primarily on variable rate holders. What it does do is signal that The Bank of Canada may finally begin increasing interest rates to combat inflation. Because most real estate buyers are stress tested significantly above prime the majority of homeowners should be able to handle this; but for those that have leveraged themselves to the hilt it may cause some to reduce their exposure.
5. Families Leaving The Lower Mainland, British Columbia, & Canada.
Just last night I got another email, ‘we’re looking to sell our home to move to…’. I’m receiving at least one or two of those emails weekly, with larger properties in rural British Columbia attracting some while others are moving to other Provinces (primarily Alberta) and even other countries (the United States being most popular, with Texas, Florida, and Arizona benefiting most from the influx).
The reasoning for many of these families varies, and whether or not you’d consider this yourself it is something we’re keeping an eye on as it relates to inventory levels across the Lower Mainland.
“Well, What Does All This Mean For Me?”
If you’ve made it this far, I commend you for taking the time and want to reward that investment with a few practical potential responses dependent on your circumstances:
‘I’m happy where I am, Dave, and I can pay my bills comfortably.’ – Fantastic. Congratulations. Let us know if anything changes, but we hope for your sake that it doesn’t!
‘I’m looking to make an upsize move this year’. – Now is the time for us to begin discussing that. The market speed of what you have to sell and what you would like to buy will influence our timeline.
‘I’m looking to make a downsize move this year.’ – In most cases this means that we should move quickly to hit the market. Complete our seller and buyer typeforms as soon as you can and we’ll immediately get to work.
‘I’m a first-time buyer.’ – Condos are still quite hot, generally they trail the larger homes, so we’ll still need to be incredibly prepared. If we can find an opportunity to save you money or get you subjects, we absolutely will!
‘I’m wondering about my real estate portfolio.’ – Let’s look at it as a whole. I recently had a client sell all of his real estate and we’re about to help him make a move with his principal residence. This benefits him from a tax standpoint, allowed him to reduce exposure to interest rate hikes, permitted him to make the move to a home that meets all of his needs, and gave him a little time to work out how best to balance his investment portfolio.
The Sky Is Not Falling
With all this said, and in conclusion, this is just a shift. The market is not collapsing, it is cooling back to levels that still can’t even be called ‘balanced.’ It remains a sellers’ market in the vast majority of our marketplaces, there are just more opportunities opening up for a more reasonable real estate experience – that’s going to suit many of you that have been on the sidelines for the last two years.
If you’d like to discuss how any of the above may impact you and your real estate goals, don’t hesitate to reach out by replying to this email. We can take everything from there. You could skip the email even and move directly to our home seller and home buyer typeforms, just click the links.
At the very least we’d recommend you take a look at the latest SnapStats, which are only just an email away, as they are every month.
I trust this deeper diver has been beneficial for each of you, please feel free to share with anyone else you think would benefit. If you have any questions at all you know how to reach us!
Kindly,
David Smith & The Team