Days ago I told you there are eleven indicators I track to signal where the real estate market is headed. A few are yellow. Most, red. This leads me to the conclusion all sane people should take cover. The American middle class experience comes.
If you have any illusions what this means, watch last night’s Sixty Minutes report called “The 99ers”. It profiles professional people (like a $200,000 personnel manager and a $70,000 office manager) who have been out of work a year or two, and are descending into the financial abyss. It also explains clearly why US housing plunges still.
And there, but for the grace of God, go us.
Actually, the big guy has precious little to do with what’s in the cards for most Canadians.
After all, if we failed to learn anything over the past four years watching the USA self-destruct, and then walked the same path, why should we expect a different outcome? As I’ve said so often, our leaders also dropped rates to nothing, reduced lending standards, lied about the economy and purposefully engendered house lust. Canadians borrowed their brains out, bought beyond their means and got caught up in a Bre-X, Nortel, dot-com-like frenzy. When real estate prices advanced by double digits in the middle of a job-killing recession we all should have seen the outcome. Now it’s at hand.
There is no good end to this story. Except for those who understand what unfolds over the next years, and act on that knowledge. When the property market withers, a stunning 20% of our country’s GDP will be at risk – which is far bigger than the entire manufacturing sector. If you think we have job and debt and social problems now, just wait.
I mean, if you knew that within a few years your major investment would lose much of its value while your debt remained, completely erasing your family’s entire net worth – would you act? If not, why not? And what if you then lost your job?
We have watched that play out in America. We’ve been warned. I’m doing it again now.
As I mentioned on the weekend, one of my 11 indicators is media sentiment. It will turn negative towards real estate over the coming months, and it will have an effect. The fact the Globe published these two charts, showing the twin peaks of housing prices and household debt is an indication. They should show every responsible family that we’re nearing the cliff.
With record debt, structural unemployment, an aging population, our major trading partner on its knees and rising taxes what will save real estate? If you have the bulk of your net worth in a house, what will save you? If this letter’s any indication, not much:
“My wife I have been following your blog for a few years now and went to your presentation. We have even read your book. Everything you have talked about makes sense and has come true or looks like it will. I realize that we are in the start of a real estate bubble and yes our home values will fall. For some of us however selling, moving and renting is not an option. We have kids that are in high school, like where we live and are at the point in our lives where stability is very important. Selling our house may make financial sense but is completely idiotic from a family lifestyle standpoint. Leaving ourselves to the whims of a landlord who may want to sell the house you are renting (because he reads your blog) exposes a family to upheaval and turmoil. If everyone wanted to rent who would own property? So I think the working middle class with kids in their 30′s and 40′s still makes our country revolve and is its engine and will always be. It would take a lot of money for me to sell my house right now and even if it falls by 50% in the next five years I am not sure it would be worth it. Your home should not be like a stock; bought low and sold high. For most of us its a place to live, to raise your family, set some roots and become part of a community. Sounds corny but the value in this is worth more than money.
“Having said that, guess if you are in too deep then sell your house now. I do intent to follow your other investment advise. Thanks.”
See what I mean? This is the mainstream middle class view. And it comes from a person who has been exposed to all the alarmist things I’ve had to say – in books, in person, online. But none of my economic, financial or strategic arguments can hold a candle to this guy’s overwhelmingly nastiest possible outcome: upsetting his family’s lifestyle.
Of course, his points against taking cover are justifications for inaction. Landlords are capricious. Real estate’s good for the economy. It costs money to sell. Houses are emotional assets, not financial ones. Family roots trump money.
And all that may actually be true. But I’d wager a family in Pennsylvania that knew what was coming and had the chance in 2006 to harvest a capital gain selling their home before the storm hit, trashing debt while retaining precious retirement assets and college funds (and choices) would have jumped.
Strikes me the best possible thing a parent can do for a family is protect it. The worst thing is confusing wants with needs.
Obviously most people will never listen to me. They won’t move their net worth from a house into a balanced collection of liquid financial assets that pay to own. They won’t wriggle out of debt or avoid taxes. They won’t take pre-emptive action to protect those they love. Even if they know trouble’s coming.
It’s just too… disruptive.
