Entries from February 2009 ↓

News: US home prices sink to 2003 level, click here

A blog reader sent me proof some people are planning ahead.

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After I wrote the post below, the Globe published this interview with economist and author Niall Ferguson. His book The Ascent of Money, which I am just finishing, is one of the best texts I have ever read. Ferguson’s  knowledge and perspective is profound, which makes his comment on the  situation – “There will be blood” – so unsettling. He looks at our current descent internationally and says, expect violence. — Garth

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Well, it’s closer.

The stock market now sits at 1997 levels, which shows the last three months have been a Sucker’s Market, like the one in April of 1930 . The market then, as you know, went on to lose 89% of its value (see the chart below). Will that happen again?

As I predicted here, the US is moving to nationalize the banks, starting with giant Citibank, and beginning with a 40% stake. This will not end well.

As I also sadly prophesized, the Canadian real estate meltdown is now mainstream. A year after casting me as a fool for saying housing was doomed, Maclean’s magazine this week has a cover story suggesting home prices will not recover for a decade. (If we’re lucky.)

Commodity prices, led by oil, are going nowhere. Canadian retail sales have just fallen off a cliff. The car guys are going down and 2009 will (as forecast here) end up as the year the jobs vanished. I talked to a Bay Street smartie on Monday afternoon – a guy who has lived through three recessions and five crashes. “Never seen this,” he said. “It’s a natural disaster unfolding in slow-mo.”

At the heart is failed expectation. Homeowners expected the housing plop to be over by April. Alberta expected oil to be back at a hundred bucks. Traders expected last November would be the nadir. Car companies expected sales to resume. Billions expected Obama to fix it.

Government stimulus is so miniscule, even in its trillions, it cannot repair the global financial cleansing. Over two decades of excessive consumption, a credit romp, irresponsible lending, greed, corporate immorality and a borrowing binge cannot be repaired in a handful of months or by a single president, even if he is a rock star.

The next few months are unknown, but will not be easy. In this context, my mailbag is brimming. Today a question from Rob in BC about commercial real estate:

My question is, “do you think under any circumstances it may be a reasonable time to purchase a commercial property”? I have been a successful furniture retailer in the lower mainland the last 20 years. I have always rented our place of business and have now found a better location with a price reduced 25% from last year. I can buy the building for less than I could rent something similar for. I’m thinking serious inflation may start to develop next year and a large mortgage would get easier to pay as time goes on. I have no debts, personal or business and have substantial savings to cushion against potential future losses. My big concern is and that our sales, and our competitors also, have almost halved in comparison with the same period last year. I’ve never seen such a rapid decrease in traffic and sales in such a short amount of time since being in business. I’m certain none of us are profitable on a monthly basis at the moment and unless business picks up there will be store closings. Is it possible the pendulum swung too far in the good times and it’s now gone the other direction too far as well? If consumer confidence would just improve a little and not get worse still I know I could return to profitability. It can’t stay this slow for any length of time can it? I can’t imagine how retailers would stay in business. Your thoughts on the likelihood of consumer confidence increasing even slightly within six to twelve months would be much appreciated.

Rob, pal, have you not answered your own question?

When people stop buying houses, they stop needing furniture. You’re in a death industry, and the sales decline and losses you’ve just seen will be the new normal for the next several years. You’ll need those savings just to keep the power on.

So why walk into a pile of debt to buy a commercial property destined to decline further in value? The next giant domino to come crashing down will be commercial real estate, as plazas, big box developers and entire malls slide into insolvency. We’re on the cusp of a massive wave of store closings, from some of the best-known boxes to countless locally-owned retailers like you.

There’ll be no significant inflation next year. No rebound in house values. No surge in oil prices. No lessening of mortgage debt as the cost of living starts to rise again. This is a serious deflationary environment which will see countless months – perhaps years – of dropping wages, falling real estate appraisals, crashing car prices, vanishing corporate profits and eroding jobs.

You say you have no debts and substantial savings?

Turn out the lights, Rob. Flip the ‘Open’ sign.

Go pet your cash. It’s your best friend.

To enlarge, right-click chart and select 'View Image'

As you might imagine, I am nicely buried in letters each day. This one I’ll share. File it under ‘remorse.’ Luke in Toronto asks me, “Am I ruined?”

I have never felt so down…i don’t know what to do…your blogs are making me depressed more and more. I didn’t buy your book, so you tell me how I can prepare.  My situation is this, early 30 year old male..married with baby…current house could have sold for $375k last april 08….have a mortgage of $180k…bought a new house to be built mid 2010 (probably later as delays usually happen)..will have to sell current house Spring 2010.

Only debt I have is Mortgage of $180k…and now $25k credit line that I had to use to put down for my new home deposit ($50k was the total deposit on a $580k home, had cash for the rest).  Was going to pay the credit line with the money i made from selling my current home next spring.

I make $70k and my wife makes $85k…we work in the ad business on the agency side (media buyers).  For now we feel secure..work load is there…but you never know…as you mention every day

So now you know everything about me….am I ruined?…cause I feel like i should jump out the window with all this bad news i hear.  It hasn’t hit me…but you and everyone else says it will.

I mean, I thought I was in good shape….but reading your blogs and every freakin pessemistic news story out there is making me think if I was dirt poor/broke/living on the sreets that it would still get worse for me!.  I know I’m young but I feel like all this pessimistic information is like we’ve entered a apocolypse!!!.  I find it very hard to get up and be excited.  My family and I have our health…but is that all we’re going to have?.  Every day I read your website and toronto star website…and I just eats me inside and depresses me.

Is there any optimisim out there for me to cling hope on to (other than my families health)

Well, Luke, let’s review. You have a house that was worth $375,000 almost a year ago, which means (charitably) you might get $350,000 for it now on a good day. (In April of 2010, who knows?) That gives you $170,000 in equity, or $140,000 after you repay the money you borrowed for a down payment on the new house, and the commission.

That little palace you bought for $580,000 will cost $594,500 with land transfer tax. Less the downpayment ($50,000) and the proceeds from your existing home ($140,000), you’ll have a mortgage of about $405,000, with monthly payments (at current low levels) of $2,250. To carry that, plus property taxes, you should have an income of $90,000.

So, Luke, you are not screwed. Not unless (a) you lose your job, or (b) you keep your job and she leaves you, or (c) the real estate market continues to decline for the next year, or (d) the ad business goes to hell and you both lose your employment, or (e) the builder folds and your deposit is pffft, or (f) you simply can’t find a buyer a year from now, or (g) you freak, rob a liquor store, fight with the cops and bleed out in a culvert.

But make no mistake, pal, you’ve rolled the dice.

There has to be a damn good reason to more than double your debt, as there must be a compelling explanation why you need to spend $594,000 on a house in a city with an average price of $370,000. And why would you purchase a home that doesn’t exist yet? Buying from a brochure is stupid in the best of times, but during an economy like this it’s worse.

How, at the tender age of 30, could you be so willing to give up the financial position you’ve achieved? Trading $170,000 in equity for $405,000 in debt? It’s still just a house, bucko, and there’s no guarantee it will appreciate by a dime over the next decade.

And don’t tell me she made ya do it.

If she did, send photos.

For current  blog, “Day from hell“, go here.

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