Entries from May 2009 ↓

No risk

security1

This is the final instalment in a trilogy about thick people. Today it is Don’s inlaws. Not only do they rag on him for just trying to protect them, but they show what fine sheeple they are. They deserve to be fleeced. And likely will.

First, some context. So far this week I have given you a mess of reasons why the near-term future (next few years) of residential real estate in Canada is mush. These range from fiscal and monetary policy to the implications of our new Third World-style deficit to rampant personal debt to demographics to our manufacturing disaster to the simple fact we are in a recession which will be longer and deeper than the sheeple think.

This means the current little housing tempest needs to be put in context. It’s as dangerous as it is delusional. A dinky price reduction has been tarted up by an historic (but temporary ) slide in mortgage rates, hyped by realtors and bloated by the media, and then sold to the herd as proof real estate is back! Buy now, the flock’s told, or lose out forever. And at the heart of this crud is one flawed tenet: Real estate goes up forever. It wants to go up, and in the absence of any reason not to, it will continue to rise.

Of course, this is not so. Housing markets ascend and fall like others. And the evidence is substantial we are nearing the end of a generational climb in the value of real assets, done in by the irresponsible swilling of debt, widespread speculation by untalented homeowners, a massive age wave, unavoidable energy crunch and a realization that what people will need in the years to come is money, not stuff.

Anyway, back to Don. He sent me this:

So yesterday I stumble on to your site and read backwards in time a few months through your blog.  The reason that I was actually looking for your site is that my sister has done the “move up” in house.  At first I was cool with this because I figure you sell an over priced house to buy another slightly bigger over priced house, you don’t lose too much.  It’s a nice older neighborhood that they love and they actually could use a bigger house and the new house is really nice — not your McMansion type.  They’re going from a $250,000ish to $350,000ish  and it’s a good neighborhood.  That house last year was listed at $479,000 (they claim).  I’m thinking in the back of my mind that if they wait another year they’ll be going from a $200,000 to a $250,000 house, but the neighborhood is important to them so to me that makes some sense.  It all seems reasonable and they can easily afford it.

Here’s where the story turns and why you need a disclaimer on your site.  They tell me that they’re going to keep their original house and rent it out.  Lots of people are doing this and it’s a great investment.  We’re talking about this at a family dinner with Mom and Dad (even worse they’re my Inlaws) and I suggest that it’s a bad idea to have two depreciating houses right now.  I even temper my argument with a why not sell now and take a wait and see approach with all this turmoil right now.  I figure after reading your blog, I’ve got some decent logical arguments to back up my point.  I really felt like I had a pretty iron clad case to make.

You’d think I’d said the dumbest thing a human has ever uttered.  These are smart, educated people and they just laid into me for saying something so stupid.  I wished I hadn’t brought it up.  And the funny thing is, it was all the exact same BS that you mention time and time again.  Houses never fall in value.  Real estate is the best investment.  Then they bashed me because I invest in Mutual Funds and how have I done with them.  Then I suggested that house prices have been dropping for two years already so how could they argue they never drop, and they turned that around on me by saying that’s exactly why you need to buy right now because they’re so CHEAP.  Frankly, I gave up.  But I still feel badly because I know they’re making a mistake and they’re very reasonable people that I care about.

Anyway, you should post a warning to newbies like me so we can at least be aware of the vitreous and hatred that our reasonable suggestions might get.  You are a brave man for getting up in front of people and talking about this stuff.  I’m just going to keep my mouth shut from now on.

Don, baby, I feel for ya. The forces of denial, self-interest and (especially) sheeple greed are formidable. Call it Bre-X, tulip bulbs, bullion, Pet.com or a raised bungalow, some lessons are simply never learned. Some thick people think financial diversification means buying two of the same thing, while others believe a long-term economic trend is anything which happened well before lunch.

So, zip it. Houses come and go, but remember – you’ve only got one family.

In this case, sadly.

Pucker

pig1

Headlines you couldn’t have imagined six months ago:

GM hits bankruptcy!

Canada lays $50 billion egg!

Bidding wars in Toronto!

.

My last post covered the salient points of why the real estate decline is not, as you are being told, kaput. Yeah, I know this runs counter to public opinion and observed facts. I know realtors and realtors disguised as not-realtors have made comments here that a crush of newbie buyers in recent weeks is proof housing’s on a roll again. That would mean, in their world, homes will continue to rise in value without end.

This is scaring the crap out of people who lust for houses. Like Rick.

Garth what is going on in this housing market? Been holding off buying a home for the past three years in the GTA as average home prices do not match average incomes. Been fighting with the wife as she wanted to buy in years ago and now it seems we will never get that chance. People are losing their jobs, companies are shutting down and/or going bankrupt (Chrysler,GM) . Working hours/days have been cut for many and even wages have been cut. I’ve seen people who really have no business buying into this market are jumping head first. Is the economy in a bust or a boom? I’m losing my mind here and I need some understanding on what is happening. Don’t know what to tell my wife now as this madness doesn’t want to end. Feel lost and really down.

Okay, Rick, pour her a drink and come over here and talk to me. Mano-a-mano, dude.

You are absolutely right on both counts – all around us are signs the economy is in tough shape, job loss is mounting, corporate profits have evaporated and people’s finances suck. But at the same time, cheap interest rates and media hype have convinced lots of folks it’s the time to buy. Why? Because, like you, they fear if they don’t do it now, they’ll never own a home since prices are going sonic.

You ask if the economy’s in boom or bust. Are you serious? We’ve lost over 200,000 jobs this year and more than 640,000 people are on the dole. The car business is moribund and our manufacturing sector is on life support. The country’s finances are disintegrating faster than anyone could imagined, while personal debt has ballooned. Nobody’s hiring and salaries are going down. How can that be a boom?

The only “evidence” you or anyone else has seen of a rebounding economy is in the real estate market, where the lowest rates ever have increased affordability, started a minor stampede of buyers, and created a group delusion. Those cheap loans have done exactly what politicians hoped they would – slap lipstick on a pig, and make you horny.

Face it, Ricardo, the only reason you’d ever want to buy a house in the middle of a recession (which is where we are), is because it’s so cheap you cannot resist. That’s what’s happening in California, Nevada and Florida, where homes are 50% to 70% less costly than they were in 2005. In fact, the average house price across all of the US is now at 2002 levels. So, some smart vultures are doing what you’d expect.

But in Canada, prices are little changed yet from their bubblicious levels of late 2007. Sellers are still greedy. Realtors still cocky. And now they’re being supported by the media (desperate for a recovery to save its own butt ) and government (terrified of a deflationary spiral). So, guys like you have trouble seeing through the makeup to the porker underneath.

Hey, do what you want, dude. But be aware there are major dangers to a home buy in 2009.

These interest rates have only one direction in which to go, while most incomes continue to fall. Not a good combo. Runaway government deficits mean higher taxes in the years to come. The recovery, when it does come, will probably be called a ‘jobless’ one –since it will take years for corporate profits and expansion plans to return. And nobody, as far as I can see, has done anything about reducing the debt which got us into this mess. In fact, this little housing orgy is just padding it.

Add it all up, and I’d say houses should be significantly cheaper in two years than they are now. So, if you listen to your wife and buy, you could be blessed with rising mortgage payments and falling equity.

But at least you’ll stop fighting. Forever.

____________________________________________________________

In the news

flaherty-evil Fat deficit equals years of tax hikes, austerity

US mortgage default rate hits a record