Entries from June 2009 ↓

Rules

rules21

Hi Garth,

I am starting a family, and have been reading your blog for over two years. I continue to rent and save as much money as possible as per your advice. I have two people to thank for that. You, and the person who referred me to your blog.

I have another friend who is about to make a huge mistake and buy a house. He and his wife have a young child and want to enter the real estate market at the worst time in history. I understand that you might not want to reiterate the same key points over and over again on your blog, but I think a “Back to Basics: why NOT to buy a house” would be helpful for a few new readers.

My friend just walked by my desk and said “I think I found a pretty good house”

– Want to help a friend from ruining his life

On Friday my latest house deal closed. This time I was a seller. In the last five months I have sold two and bought one. At the moment I own a couple more. You might realize why I chuckle when told I’m a property bear or simply a doomer. In fact, I love the stuff.

There are many reasons to buy and own real estate, and I think I’ve lived them all. Investment. Emotional refuge. Shelter. Capital gains. Convenience. Social statement. Wealth. Architectural rescue. Income. Whimsy.

Real estate is like any other asset, which means there’s a time to buy and a time to unload to a greater fool. At the same time, it’s unlike most assets, since it seduces and tricks us. We think home ownership is synonymous with security, when it can epitomize risk. Too many of us have blindly placed our entire financial future in one piece of earth, and confused debt with equity.

My books, and this blog, speak in an unvarnished fashion about real estate – which is why so many people cannot stand me. Usually they make a living from selling or financing houses, or have gambled everything on a home and fear I’ll talk the market down.

Whatever. I just make my opinions known, to be heeded or ignored. Meanwhile I’ll go on following my own personal rules. Here are a few you might want your buddy to know.

(1) It’s a really bad idea to have more than half your net worth in your house. Personally, at my stage of life (between the quick & the dead) I’d never have real estate as an asset class (including my principal residence) amount to more than 40% of my money. A home can be disastrously illiquid or equity turn negative, making this more of a wealth trap than any stock, bond, commodity or fund.

(2) Never buy real estate in a bubble. You will pay too much. You’ll buy too fast. You’ll rush a key decision. Bad deal.

(3) Debt’s to be paid off, not rented. That’s why 35-year amortizations are nuts. If you can only swing home ownership with an unrepayable loan, why bother?

(4) If you don’t have money, don’t buy a house. No-money-down purchases are for losers. This is extreme leverage which can be a few bad headlines away from financial ruin.

(5) Be ready for rising rates. Nobody alive today has seen mortgage rates this low, which means you cannot expect them to last. The cost of money will at least double over the next five years, wiping out a large measure of affordability and playing hell with your resale.

(6) Realize the structural threats to real estate have not been this great since the 1930s. To rising mortgage rates add a massive aging population of house-heavy Boomers, rapidly ballooning energy costs, the ugly effects of climate change, a giant shift in real estate tastes, stubborn unemployment, deflating family incomes, deficit-fuelled tax hikes, and peak oil. The burbs have little future.

(7) Buy real estate to make money, but don’t confuse a house with a home. It makes perfect sense to rent shelter. Most people in the developed world do exactly that.

(8) The financial goal is not to have a giant house making people think you’re wealthy. It’s to be wealthy. Diversify. Kill debt. Constantly reap your capital gains. Reduce risk.

(9) The only reason to buy real estate in a recession is if you can be a vulture. That’s why US markets are moving again, after prices have fallen by half in the South and the West. In Canada, no such declines yet, and no reason to swoop. Wait.

(10) Be a contrarian. Works for me.

Sigh

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Well, enough about bating poor realtors. Let’s whisk now to the Wet Coast of this great country where some truly devastating personal tragedies are being quietly played out, one tormented household at a time.

I know it’s hard to witness naked suffering, yet there may be lessons for us all. Let’s hope so. Some good must emerge from such loss.

Dear Garth,

I am confused and here’s my hard-luck story: At the beginning of this year, after watching prices fall during the latter half of 2008, I made a decision to sell our house and wait out the market, thinking prices would fall even lower. I had never really liked our home (in Vancouver—I moved in with my husband five years ago) and wanted to start over with a home of our own. Well, of course, no one predicted that just after I sold my house, mortgage rates would drop significantly leading house prices to shoot up. So, now I’m sad because I know if I had waited another four months, I could likely have banked an extra $50,000—of after tax dollars! But hindsight is everything, so I try not to lament this loss.

On the plus side, as a renter, I now have an extra $800,000 with which to, a) invest at about 1.5%; or b) troll the real estate listings ready to pounce on the off-chance that prices continue on their upward trajectory. It is also challenging to talk about this with anyone I know. I’ve given up saying I think prices might not hold their value. Every person I mention this to looks at me like I’m totally, ridiculously stupid and the longer prices increase, the more I am prone to believe it myself.

But every few days I hear about a friend, colleague or friend-of-friend being laid off or I read something new and interesting about China, or I contemplate the real estate situation in the US, and I can’t believe that prices are going to continue upward. It does not make sense! No matter how many lemmings (sheeple) there are. But maybe our government will intercede at every step of the way to ensure that house prices don’t lose their value—or that no one defaults on a mortgage. If Obama can give upwards of $8,000 to families who can’t pay their mortgages, I’m sure we can also generously provide Canadian taxpayers’ dollars to those who buy what they can’t afford.

So today I find myself eyeing a lovely renovated, post-and-beam home for a mere $900,000 and thinking that maybe it is good value. Garth, help me back on track…there’s no one I can turn to…

Yours most sincerely,

On the edge in Vancouver

Hey, I told you this was ugly.  A special Vancouver kinda tragedy – profound remorse at not being able to screw another fifty grand out of a greater fool for a house which in any other city would have trouble finding a buyer for half the price.

Anyway, OTEIV has asked, and so shall we answer. A few points to chew on:

First, anyone who tries to time the stock market is called not a bear or a bull, but a pig. Same with real estate. And you qualify, babe. Just thank your few remaining lucky stars you bailed out of Van homeownership that close to the peak of the market. Thousands to come would trade places in a heartbeat.

Second, get new friends. Anyone who thinks real estate prices in Vancouver will rise in next couple of years as rates increase and the economy stumbles should not be allowed to handle money.

Third, what the hell is wrong with having no property, no debt, and $800,000 in cash? As for investing it at 1.5%, send it to me and I’ll give you 2% (and then reinvest it in bank preferred shares for 7%).

Fourth, we all know the reasons real estate prices cannot and will not continue to rise without end: Chronic unemployment, collapse of tourism, forestry and manufacturing, an energy shock, higher interest rates, climate change and water licking at the gold floor of Hotel Van, disintegrating Boomers, government debt binge and a simple inability of average families to afford average houses. And what are the reasons houses will appreciate anyway? Oink, oink.

Finally, get out of town before you spend 900 large on anything.  Especially a property you don’t need. You’re confusing investing (to satisfy your greed) with social status (house lust). It’s like driving the Sea-to-Sky with twelve shooters in ya, girl.

It won’t end well. Bacon bits.