Bearish Buyers: Capitulation, Of Sorts – “Yeah, if there was ever a clearer signal of the top of the market. I’m also the guy who enters the shortest cashier line-up at the grocery store but still manages to exit after everyone in the longer ones.”

Bear capitulation occurs when a long term RE bear gives in and buys.
Yelling “That’s it, I’ve had enough, this market is absolutely crazy, I resign myself to renting for life!” doesn’t count. Also, leaving Vancouver may seem like capitulation but it isn’t. The bear has to give in and buy. One of the laws of bubblology states that the bubble is over when the very last bear that is going to buy throws themselves on the frenzied pyre of the market and is consumed in the flames. When that happens, we can get on with the crash, already.
Here are two (rare) anecdotes of bear capitulation, but they are both ‘qualified’ capitulations, and we thus don’t present them as evidence of a top. Our brief comment follows at the end of this post.
We don’t see very many stories of bear capitulation: if you know any, please send them along. – vreaa

Lost Soul gave an account of their purchase on two threads at RE Talks, 8 Mar 2011 and 25 Mar 2011. Excerpts from Lost Soul’s comments:
“This loooooong time bear likely will be an owner soon (accepted offer).
Please don’t categorize me as a bull. I’m buying with the expectation that we will take a financial hit for it.
We didn’t all of a sudden grow horns and start snorting. But something did grow and popped out after nine months and we needed more space. It’s not all about money. 😉
Could we have just found a bigger rental? — I suppose, but we just wanted a place to settle into and be able to do what we wanted with it without worrying about what the landlord would think.
Do we think this is a wise *financial* decision? — not a chance — this is pure consumption in our view. If by some bizarre happenstance the value of our place goes up 50% in the next year, we will not all of a sudden start crowing about how we were so brilliant to buy.
What if the market gets halved? — Bring it on! The loss on this purchase of course will be unpleasant but it also means that the next place we buy will have dropped twice as much in absolute dollars so net we’d still be ahead (if not by so much as not purchasing at all now). And ‘No’, the loss on the current place would not wipe out our dp for the next one — contrary to the beliefs of some here, bears are not necessarily on welfare living in their parents’ basement.
(Still) My advice to others: *We* are fortunate to have the savings and income to pull this off. If *you* are purchasing a place you’re not happy to live in for the next 35 years and buying it means Kraft Dinners, you might as well wait and pray for a crash — the “buy small and climb the property ladder” approach isn’t going to work.”

[In response to a comment “Lost Soul Buying…”] “Yeah, if there was ever a clearer signal of the top of the market. I’m also the guy who enters the shortest cashier line-up at the grocery store but still manages to exit after everyone in the longer ones.”

And a related story from enki at RE Talks 26 Mar 2011 8:47pm“I totally sympathize; I am a longstanding bear (and still am), and finally bought a townhome in Abby in August [2010]. I didn’t want to buy, but I was tired of waiting, and wanted some stability. Living across the street from some very good mountain biking didn’t hurt either. I bought the cheapest thing I could tolerate, and resigned myself to losing some equity while keeping my wife.”

These stories don’t really qualify as complete capitulation, as the protagonists remain mentally bearish, and actually anticipate a drop in prices. In complete capitulation the bear overextends themselves as much as other current buyers, and emerges from the experience as a born-again bull.
The anecdotes above are perhaps best seen as stories of ‘partial capitulation’. They are of interest, because, for a prospective buyer, the ‘partial buy’ and ‘renting’ are both compromises, but with different inconveniences.
For the record, we don’t think ‘partial buying’ is a good idea. Moving up during a crash may be more challenging than one expects. – vreaa

[Update: An exchange on 29 Mar 2011 between posters at RE Talks turns ugly, and Lost Soul confirms they paid cash for the above deal. Screen caps here and here.]

35 responses to “Bearish Buyers: Capitulation, Of Sorts – “Yeah, if there was ever a clearer signal of the top of the market. I’m also the guy who enters the shortest cashier line-up at the grocery store but still manages to exit after everyone in the longer ones.”

  1. These are both examples of the overwhelming pressure put on people who ordinarily are “all about the numbers” but capitulate to keep their family life sane.

    Stability can be wrought through long term leases and cooperatives. My bet is that both were deemed unacceptable because they
    are still signs of financial inferiority.

  2. For those of us less fortunate souls who have to work to generate income, only one thing about home ownership keeps me up at night: Income (Job) security.

  3. Oops, I forgot the ‘albatross’ factor should mobility be needed for career reasons.

  4. Now that some bears capitulate to keep the family life ‘sane’, let’s hope that if/when prices drop drastically and they lost a big chunk of equity, will the family life get ‘insane’ again?

    • It would be exceptionally tricky to be in a relationship where you and your significant other are on opposite sides of the RE-belief-divide.
      The most important thing in order to preserve ‘sanity’ is to hammer out a consensus position, and then agree to stick with that and together weather the consequences, regardless.

  5. The loss on this purchase of course will be unpleasant but it also means that the next place we buy will have dropped twice as much in absolute dollars so net we’d still be ahead

    This is so stupid, I do not even know where to begin. Does this capitulation involve loss of reasoning faculties and math skills too?

    • Yeah, that sentence jumped out at me too. I’m not even sure what it means.

    • Correct. In a bifurcated market the ‘low-end’ (both housing types and locations) could collapse without a proportionally equivalent concomitant or ‘comorbid’ decline in their target/’ideal’ property type/location. This is already occurring in the greater LML.

      • Ornamental Tepee Usury

        most of my social circle is still renting (early 30s) – a friend is moving to 6th and arbutus – to get them to sign the lease the landlord dropped the rent $50 a month, FWIW. (yeah yeah 50 a month, woopdee doo)

      • Ornamental Tepee Usury

        here’s a sane family/insane family story

        friend is a cook, girlfriend is an esthetician?

        the usual pressure from the other half to buy a house buy a house buy a house everyone else is doing it etc.

        about 8 months ago his parents apprehensively lent him what i can only assume is a huge chunk of their nest egg – $100k – in order to buy HER parent’s second property – a SFH in port moody. he sort of mumbled something about his parents not being so sure, etc. and that they were unhappy that her parents basically wanted market value for it.

        he even told me that if i (me) didn’t buy in now, too, i would never be able to afford it. at this point alarm bells are going off in my head..

        needless to say, i kept my mouth shut – though as a friend i feel obligated to say anything to avert this mess, i know that attempting to explain the whole situation would be like eating 1000 meals in one sitting, so … also, what i’ve learned thus far into my 30s is that you don’t say SHIT to your buddy’s wife/girlfriend – seldom is the male granted any actual autonomy any more.

        i think the situation benefits her and her family more than him and his family, in the long run.

    • Actually, it makes sense to me (the argument, not the strategy).
      Example: ‘Lost Soul’ ultimately wants to live in ‘target’ property that is currently selling for $1M, but they compromise and buy a $500K one instead.
      Housing prices halve [BTW, Nem, we believe that, in the end, all sectors of the market will have fallen by roughly the same percentages: this is what happened in prior Vanc busts].
      Thus, the property they bought has dropped by $250K, but their target property has dropped by $500K. They sell the $250K property, and buy the target property for the reduced price of $500K.
      Yes, they took a $250K bath on the cheaper property, but they end up with the ‘2011 $1M’ property for the cost of $750K [$500K purchase plus $250K loss].
      As ‘Lost Soul’ puts it “net we’d still be ahead”. They are correct.

      FTR, we are not recommending partial capitulation for the broad reason we stated above. (“Moving up during a crash may be more challenging than one expects.”) Many specific reasons: Your property may become illiquid; your investments may ‘crash’ too; your income may be compromised; ownership of the cheaper property may be more expensive than you think; etc; etc.
      If you are a prospective buyer who thinks we are in a massive bubble, it is better to rent.

      • The partial buying argument assumes buying with full purchase price.
        Any leverage will likely have the ‘partial’ buyer ‘completely’ wiped out with a 50% price drop, and thus unable to move up (or in any direction, for that matter).

      • But how does the argument make sense? If they financed, 50% drop (or any significant drop) will wipe out their equity, and they will be underwater. If they bought with cash (or nearly), the drop will have consumed their savings, because price drops absorb equity first, debt remains. In either case they would have lost money, and will have less to put down on their “ideal” house, vs had they just not bought to begin with. Had they waited, they would have bought the $1MM house for $500k, not $750k. Meanwhile, I doubt rent will cost them $250k, and they will be earning interest/dividends/capital gains on their invested savings, while not paying property taxes or two sets of real estate transaction fees.

      • Devore -> Agree, best for them to have waited.
        But if this plays out with a 50% drop, Lost Soul will buy the $1M house for $750K. It sounds like it wasn’t a leveraged buy.

    • Can you imagine the intra-family stresses when the market crashes. One half of the in-laws sitting with all the cash that the other half of the in-laws lost.

  6. Enki and his townhouse in Abby would do well imho. You don’t wait until you can afford a Ferrari to buy a car , a diamond ring to get married.. usw, so why would one wait for the dream house to drop in price significantly before buying.
    Years ago, several people were advising a homeowner to sell off her mid-$200k-ish condo in RET! The same must be going through pent-up feeling of denial that now clouded their judgment.

    • 4SlicesofCheese

      I rent a 2 br ground level suite on Nanaimo. That has been renovated, all utilities incl, for 800 (increased by 50 last month) and takes me under 20 mins to get to work in Yaletown.
      No granite or stainless though, oh well cant have everything.

      • Ornamental Tepee Usury

        he who laughs last, laughs last 😉

        let’s get our umbrellas ready for the inevitable showers of tears heading our way..

  7. I have been reading blogs like this and waiting for prices to correct for about four years now. In the meantime, I got married and had a baby so we have outgrown our one-bedroom apartment. We are now looking to rent a two-bedroom and it is completely demoralizing and depressing.

    You guys keep asserting it is better and cheaper to rent in the current Vancouver market, but have you looked around for a rental lately? People want $1800/month for a basement suite. Or they’ll advertise a place as two bedrooms but, oh, that’s because they put a door on the living room and you could put a bed in there so, ta da! Two bedrooms.

    This afternoon I saw an 800-square-foot place on a busy west side street that they want $2100/month for and you can feel the laminate flooring buckle underfoot in hallway. It has a balcony with a view so I guess they figure that makes the price worth it. This morning I saw a complete and utter dump with no closets and a broken window in the hall for $1900. I used to live in NYC and these are NYC prices, and let me tell you, Vancouver is a lovely place but it’s no New York City.

    So now I’m another bear thinking of buying, because we can’t seem to find anything decent for less than $2400/month and for those prices you might as well buy. And I’m also feeling like I’m a pretty stupid bear because I may as well have just sucked it up and bought four years ago in the first place.

    • Having seen so many family squabbles, I’m with you on this one. The older folks will say, why could you not settle for a cond0/apartment in the meantime and wait for the madness subsides. “A bird in hand is better than two in the bush.”
      There are the smart ones who sounded like they are the authorities themselves versus the industry.Vancouver in no “Gurney Drive”. If it is, we have a much serious problem on hand according to wikileaks.

    • Ornamental Tepee Usury

      you have to stop checking out suites being rented out by sleazeballs.

      i pay 600 for my 2 bedroom suite.

    • I can relate. Been looking for a 2 bedroom since before the Olympics, figured would have to wait until after for rents to come down. They have a tiny bit, but in the end still couldn’t justify paying the rent on a nice two bedroom in an area we like. So we settled on renting a 1 bedroom + den for now knowing that we will have to move again in a few years if we start a family. We’ll see what happens.

    • I wanted to add… the pinnacle of our frustrating search was probably when we looked at a 2 bdrm in Fairview. It was a clean and well maintained suite, but was on the main floor of an older building, dated kitchen, bars on one of the bedroom windows, not a whole lot of natural light, smelled like mold. So yeah, not too interested in renting there but the kicker was that it was also listed for sale in the mid 700s. I don’t really follow prices so not sure if that was in line or what, but it was depressing to see how much a crappy 2bdrm I wouldn’t even want to live in would cost.

      • Ornamental Tepee Usury

        it’s not depressing – you didn’t have to buy it.

        the problem with our culture is that if we can’t afford something, instead of really analyzing the INTRINSIC value of the object, and realizing how overpriced said object actually is, we get depressed that we can’t afford it.

        i don’t get depressed that i can’t afford a house, because i know that i don’t want to pay 30k for a new roof, or 5k for new appliances or 10k for a driveway, or $80 an hour to a plumber anytime something breaks.

        and i certainly don’t want to pay some asshole realtor their 7% commission or whatever bullshit rate they charge.

    • Where are you looking exactly? I see 2BR places for around $2-2.5K that are nice.

      Still, it’s worth a look from time to time to see the true costs of rentals in the city. Maybe it provides some clues why people keep buying…

    • Where are you looking? Do you know how to negotiate? I just signed a $2,500/month lease for a newly renovated house (2,400 square feet) on a quiet street near King Edward and Cambie. The “investor” paid well over $1 million for it. I have the entire house. You do the math.

  8. four years ago? you must have read VHB blog!
    lesson learned: dont listen to people that cannot even manage themselves.

  9. Actually I’m seeing a lot of furnished and “luxury” rentals on craigslist these days. Is unfurnished passe?

    • Ornamental Tepee Usury

      well you need to have a place to stay while you’re visiting from Shanghai to go on the real estate helicopter tours.

    • What, no ‘lavish’? ;)…

      ‘Nemesis’ is currently renting a new, previously unoccupied 1300 ft.sq. 2BR/2BA sub-penthouse with wall to wall granite/steel, private wine cellar, 2 gyms, pool, billiards, library, wine tasting lounge, storage, and 1Parking… for under 1500PCM (admittedly, in the HillBillyRiviera). The 2BR/3Ba 1700 Ft.Sq. penthouse above has been on the market since completion and has dropped from 1.7M to it’s current ask of 1.2M (and is assessed at 995K)… There are currently 10 similar rentals on offer in the FortressOfSolitude (all unexpected, ‘amateur’ landlords) – and approx 5 suites remaining from the original developer’s inventory which (2 years after completion) have yet to sell… Last year marked the building’s first foreclosure – and more are expected to follow as cash-flow negative speculators are forcibly ‘disinvested’…

      And there it is.

      • Oh yes, I nearly forgot, 40,000ft.sq.+ landscaped gardens (including roof top terrace with fountain/reflecting pool and putting green)…

      • …and two saunas + year round HotTub… There, I think that’s it.

  10. We rent in NEw West. It’s a brand new 2 bedroom, 2 bath condo with all the new finishes and a big balcony facing the Quay for 1400 a month. I feel your frustration though as we really want to own our place but at 800 sq ft and 450,000 dollars even this nice place is overpriced in our eyes.

    We’ve been hearing about a house price correction for years but now I’m starting to feel like we watched a buying opportunity just slip away. When is this bubble suppose to burst?

    • Flogging a Dead Horse

      there is no scheduled time frame – if there was, we’d all be rich.

      “the market can stay irrational longer than you can stay solvent.”

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