Stealth Speculators & Shadow Inventory – “I am an owner who is again thinking of selling. A 10-30% hit I could handle. Any greater than that and I will regret not cashing out.”

There has been much discussion this week about debt, and about the likely effects of probable upcoming stricter mortgage criteria and rising interest rates on the Canadian housing market. Those are obviously important factors, and a tightening of finance may well be the precipitant that finally breaks this hardy camel’s back.

But, when it comes to the main engine that will accelerate a crash; the factor that will turn a shallow pullback into a dizzying plunge; we have long been most impressed by the effect of ‘shadow’ inventory. We believe that there are many Vancouver owners who are ‘stealth’ speculators, meaning that they have bought or are holding properties purely because prices have been rising. We suspect that a very large number of these properties, including personal residences, will come into the market in attempts at locking in profits or minimizing losses. With dropping prices, the reason for holding will disappear. Waves of inventory will cause prices to drop well beyond that which the consensus deems possible. There is the very real possibility that the selling will reach panic intensity.

Bulls who currently point to apparent unlimited demand and limited supply are not taking into account the dynamic nature of both supply and demand. When prices start their decline in earnest, both will change profoundly. This can happen very quickly.
Speculative demand (largely local) will disappear. Why buy a cash flow negative property in a price dropping environment? Why overextend to pay 10 times your annual income for a home that is dropping in price?
Supply will become plentiful. It will only take a small percentage of owners, perhaps just 4-6%, to decide to try and cash in at the same time for the market to crash.
Only a very small percentage of bubble participants get out with profits.

‘vancouverowner’ [RE Talks 14 Dec 2010 10:21pm] writes -

“As an owner sitting on a significant cushion (greater than 50%), I am again thinking of selling. I’m comfortable and my payments are virtually nil (tenants in the basement) but a capital gains hit will annoy me (at the least!) if we get hit as hard as the States has (and they look like they are in for another leg down). 10-30% I can handle. Any greater than that and I will regret not cashing out.”

This anecdote is extremely valuable as, we believe, it reflects the kind of thinking that is going on in the minds of many Vancouver owners. Some are getting wind of the possibility of price pullbacks, they are considering the possible effects of such pullbacks, and they are weighing their strategies. Do I wait or sell? If I don’t sell, at what point would I sell? How much of my paper profit could I stand to watch disappear? If we get to 30% off, how do I know it won’t hit 50%, 60% off? Shall I stay or shall I go?
Note that this owner is not somebody who is distressed. They are comfortable from the financing perspective. But they have a speculative component to their reason for holding their property, and that makes them a potential seller in the face of a downturn.
There are no karma points for riding markets up and down.
-vreaa

6 responses to “Stealth Speculators & Shadow Inventory – “I am an owner who is again thinking of selling. A 10-30% hit I could handle. Any greater than that and I will regret not cashing out.”

  1. Great stuff, VREAA! You’re bang on!

  2. I’ve got a friend who bought a few years ago (a few months before the 2008 peak), with a 25% down payment. She stretched to get in, and works three jobs (one FT two PT) to keep up with the payments. She could sell now and (after realtor fees) keep profits of $20-30K.

    I’ve strongly recommended that she sell, as it would allow her to make positive steps towards achieving her dream job– running her own small business. If she were to sell, she’s got enough of a capital cushion to leave her three jobs and rent for a couple of years while:
    1) getting the necessary training,
    2) buying an existing business, or enough to build one from scratch, and
    3) bringing the business to good profitability.

    But she won’t sell now, because she bought to make money, and $20-30K net is not enough money to compensate for working three jobs for three years to keep up with the payments. She bought to make money, after all, and she’s not planning on selling until there’s enough money made.

    Her purchase was mostly speculative. I wonder, if prices drop, at what point she’ll throw in the towel, or if she’ll buckle up for the ride and accept the loss of a decade of hard work saving for her down payment…

    • I’ve got another friend that bought in 2007 to make money. Their condo’s value is such that after realtor fees, they’d break even with their purchase cost. They’re strongly considering selling and renting– they bought to make money, but they’ve accepted that they’re not going to make money in the current market, and they’re thankful that if they *decided* to, they could sell and “not lose”.

    • For smaller values, Realtor fees and closing costs are deadly to the psyche because they come all at once. Interest is easier to ignore because it’s an ongoing expense and directly (and confusingly) compared to “throwing away money” renting. The one-time sales fees have no such equivalent in Rentersville.

      Owner-occupiers flipping properties invariably leads to them sitting down with a pad and paper when they think about selling, doing a bit of math including the sales fees (that weren’t even on their radars when they bought), looking at the number at the bottom and stating, “Oh.”

    • If this were California two years ago, your friend would most likely buckle down, certain that the market will recover in 3 years, at the worst. Since Canada doesn’t seem to have learned much from watching the States in this, that still may be her reaction.

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