Even for a real estate agent, you have to feel for the guy. Living on the knife’s edge of commission-only can sometimes be a bitch. Too much credit card debt racked between deals. Spouse with HGTV expectations. And a market crumbling beneath your feet.
It’s been a big few months for Jeffrey. Finally sold his own house after six months of showings. Wife left. Moved in with parents. Trashing career.
And all this came as a shock because where Jeffrey works – the Lower Mainland of BC – real estate’s supposed to only go up. So he wonders, is this a blip? Or has everybody been lying to him?
He wrote me yesterday: “After reading today’s blog, I can’t help but think that history always repeats itself. What were the major causes of the 1980’s high interest rates. Did prices really plummet and were realtors in the same boat then looking for deals to do as they are today? I’d be curious to see a pattern here with history as from what I always understood the real estate cycle happened every 9 years.”
Good questions. Is history being recycled? Are we repeating past boobs? What’s it tell us about what comes next?
Well, as you know, oil hit $100 a barrel Thursday and Libya’s descending into civil war. Gas prices are already reacting, as will food. Airlines are panicked. And if oil stays at this level for the rest of the year, inflation will mushroom, interest rates will rise and we could teeter back into recession. If gasoline increases much more, the carmakers will be back in the soup line. If interest rates stay elevated, real estate tanks sooner.
If Libyan oil capacity is shut down completely by war, then some believe oil will hit $200. If that happens, we’re back knocking on the door of 2008. You remember two-and-a-half years ago, right? That was when we were trading squirrel brownie recipes and debating what kind of tuna and rifles to buy. It’s when the real estate market fell off a cliff – only to be rescued in 2009 by emergency interest rates. It’s when people with equity mutual funds needed defibrillators or Viagra, and people with big mortgages, lines of credit and credit card balances swore they’d change their ways. It’s when we came close to the edge of the financial abyss and everybody feared for their job.
Is that where we’re headed?
Nah, I doubt it. But the possibility exists. I’d put it at maybe 25%.
More likely will be the scenario that Jeff heard about from his great-grandfather who lived back in the Eighties and had a punk rock band, too much hair and a thing for Debbie Harry. Steadily creeping inflation led to higher mortgage rates, but at the same time real estate prices snaked up based on a widespread belief anyone who didn’t buy would be shut out of the market forever. So, they bought. Orgiastically. Condo towers sprouted all over Toronto. Bidding wars erupted. Houses closed multiple times on the same day, since speckers had sold their signed offers – to others who did the same.
By 1989 house values hit the highest point ever and almost overnight it became obvious that combined with rising interest rates, this was a Greater Fool moment. The needle of human emotion swung from Greed to Fear in the space of only weeks. Buyers evaporated. Speculators were nailed. Sellers were shocked. Realtors unemployed. And prices plummeted. In fact, in the GTA, it would ultimately take 14 years for people who bought the average home in 1989 to get their money back.
Could this happen again? You bet. Sooner than we get $200 oil.
But this time it would be worse. Today we have armies of virgins who bought in the last two years with little or nothing down, and massive mortgages. A price correction would sweep them underwater. Today we’ve generationally low mortgage rates – the only reason real estate has flourished. A rate hike, even modest, will make their fat home loans unaffordable. Today we have nine million disgusting old Boomers with most of their wealth in a home – the same people who fueled the housing boom of the Eighties. When they cash out, look out. Today we have a fragile economy, record household debt, bankrupt governments and too many people out of work. A real estate plop ain’t gonna help.
So Jeff, yes and no.
There are similarities, like public delusion, numbnuts governments and an inflationary shock. But this time we’re already out there. On the edge. It’s the age of 5/35, house porn and instant gratification. Credit’s cheap and plentiful. Risk is so yesterday.