What readers are saying about Money Road

There are 17,600 listings in Vegas. This condo: $50K.

Spoke with a 35-year-old father in Toronto this week who is hell-bent to buy a house. In Florida.

“I’ve totally given up in this city,” he told me. “The only affordable houses are so far out they have moose in the back yard.”

Truth is, the average T.O. house is now $471,958. The average SFH is north of $500,000 and overall prices are ahead 18% in a year. In the mid-town hood where this guy works, even a two-income family like his, making over $200,000, feels priced out.

But in Florida, where he works a month or two a year as part of his sales territory, you can snatch a three-bedroom home with granite and stainless on a quarter acre lot for $80,000 US. He is sorely tempted.

Of course, I told him about the downsides. No mortgage possible. Insuring a remote location. Rampant property taxes. Federal and state withholding taxes on sale proceeds. Maintenance. Security. Taxes on rental income. There are definitely issues to consider when salivating over an affordable property with a 100% chance of doubling in price over the next few years.

And let’s not forget to ask the question: Why are houses that were worth $325,000 five years ago now selling for eighty grand?

The most poignant answer is that people don’t want them. As I keep saying, real estate is the most emotional of assets. It’s why a piece of 1950s crap in Vancouver can sell for $1.1 million while an opulent mansion on millionaire’s row in Detroit fetches less than half that amount. It’s why land values in parts of California are off 70% while house prices in Winterpeg are ahead 16%. A house is worth what people think it is.

This much seems self-evident: Canadian real estate is as over-valued as US real estate is under-valued. So it would seem to make sense to sell here and buy there, as a form of homeowner’s arbitrage – despite the hassles in America.

Speaking of which, they continue. Which might suggest even more bargains are on the way in Florida, Arizona, California, Michigan and Nevada.

On Friday Barack Obama flew that big blue plane into Las Vegas, where he announced $1.5 billion in even more government largess to help those states with their unbridled foreclosure and negative equity crises. The aim is to try and use federal money to keep people in their homes by modifying home loans or just giving them cash. The logic is that house prices will continue to fall so long as hundreds more homes become vacant each week, erasing precious middle class equity.

In Nevada, by the way, 65% of homes are under water, with the real estate worth less than the financing. This is not solely because the owners bought with nothing down or took subprime mortgages, but rather it’s the consequence of a housing market falling in price by over 40% in the four years after it rose an equal amount.

Kinda like Toronto. Without the moral superiority.

Without a doubt, US property is cheap. But it will probably get cheaper later in 2010. Some think the bottom may not come until 2012 – six years after the market peaked. It’s a lesson worth noting for a couple of obvious reasons. (a) The ‘intrinsic’ value real estate holds is nebulous. This is an emotional asset whose value can plunge as fast as a horny golfer’s rep. (b) The crash in property values can be no crash at all, but a surprise. And then a relentlessly grinding descent turning a house into a wealth trap.

Hopefully we’ll escape. Although I can’t imagine why.

What comes next? Hear Garth speak in these cities...

Toronto ON, Thursday Feb. 25, 7 pm, Scarborough Chapters.

Langley BC, Saturday Feb. 27, 2 pm, Coast Hotel

London ON, Tuesday March 9, 7 pm, North London Chapters

Kitchener ON, Wednesday March 10, 7 pm, Kitchener Chapters

Kelowna BC, Saturday March 13, 2 pm, Ramada Hotel

Calgary AB, Wednesday March 31, 7 pm, Register here.