Entries from April 2011 ↓

OK, I’m sorry. Over the past year I have talked way too much about horny people, KY Jelly, appealing bosoms and chiseled butts. Like mine. This has horrified some people, led more than one realtor to call me depraved, steamed up far too many screens, and made reading this pathetic blog a fireable offence in offices run by moralistic weenies.

Some have said this undermines my message, whatever that is. Others only bookmark this site when they have their special underwear on. In any case, there is a reason.

An oft topic is real estate, as you know. And it’s the only asset class that’s scientifically proven to stir the same loins and arouse the same juices as that first roll in the sack. This then – desire, want, attraction, obsession – is how we got house porn. Just like the other porn, it’s now fed by a massive industry of books, magazines, videos, web sites and TV shows. And it’s getting worse.

This brings me to Patricia. In the case of her and hubby, house lust turned into Debbie Does Dallas:

Hi Garth, I have a bit of a doozy for you.  I read your column everyday and hoping you might be able to shed some light on my messy situation. My husband and I are in our mid thirties, no kids and own 2 homes in the Lower Mainland, just sold both in the past 2 weeks.  First one sold for $570K, amount owing $380K.  Second one, primary residence sold for $860K, amount owing $600K.  We have secured a rental and planning to live debt free for a while (kind of).

We also are slumlords in Dallas TX.  We purchased 320 apartment units in 2008 with a downpayment of $800K ($560K of it borrowed money from a Canadian bank – oh how easy it was to get the money), US loan of 6 million.  These were supposed to be cash flowing in the neighborhood of 10-15K per month.  Long story short, there was a foreclosure and we now only own 58 units, losing approx $300K on the units foreclosed.  The current 58 units are comprised of 2 separate low-income Hispanic apartment complexes. The first one is worth about $700K and has $470K owing on a traditional US bank 30 year mortgage.  The second is worth about $775K and has $525K owing, financed by the previous owner at 7% interest only.  These buildings both pay for themselves, but there is no cash flow.

I am wondering what to do with the $425K or so I am going to have when my 2 Lower Mainland sales complete in about a month.  Like I said, I do owe about $560K to a Canadian bank which right now is locked in at 2.7% for another year with a monthly payment of $2,600.  Our plan was to take that $425K and pay down the $560K. Messy I know, right? Advice?”

First, a gut check on US real estate. House prices fell another 3% in February, the seventh monthly drop, and have now gone into a double dip. The first dip was exactly two years ago, followed a year of gains – thanks to government stimulus (Obama paid people to buy houses) – and things are freefalling once again. Prices nationwide are down 32% from the peak in May of 2006. Phoenix is down 56%. Miami off 42%.

Over 11 million homes are valued at less than their mortgages. Another 2.4 million families have less than 5% equity. Almost half the houses for sale are distressed.

So, two sets of people were crushed. Those who bought at any point in the last two years of the bull market. And those who thought the bottom had arrived two years later. Apparently the real vulture feast is only just beginning. In fact, there’s a self-reinforcing negative cycle taking place, as more distraught property sales drag down average prices, leading to more people who must sell. It’s unknown when this will finally stop. By the way, the same thing is starting to happen in Britain. Spain. Greece. Portugal. Probably Australia. Housing is now so Hugh Hefner.

This likely means Patty would have a helluva time bailing on her Hispanic apartments in Dallas. But if she walks, she leaves $430,000 in equity on the table. Worse, she owes $560,000 in Canada, where banks have long arms and longer memories. So, it makes sense to pay down the Canadian borrowing with the house proceeds and cut the debt to about $140,000. Poof. Her house equity is gone. In fact, everything’s pretty much vanished.

But this is not about lusty Canadians ravaging foreigners. It’s a cautionary tale.

Yesterday we all mused on the possibility of an NDP-led government in Canada. Might happen. Might not. More certain is rising interest rates, absolutely by the 20th of July. Already happening are falling sales in most major markets. Down, in fact, for the better part of a year. Prices are now unraveling in the Okanagan, great swaths of Ontario and everywhere in cottage country. Unemployment is stuck. No new factories are opening. Middle-class families are tapped out. Mortgage rules are tighter. Bond yields are increasing, with mortgages next.

And look at what the media is saying (“Houses bought today have questionable investment value.”). Every week the horny stuff this hormonal blog has poked for the past three years is turning into news copy. Housing’s no longer a worthy asset. It’s just sex. But the price of getting satisfied has never been higher.

So remember my guidelines. The rule of 90. Diversification. Liquidity.

But mostly, stay zipped.

There’s a point where politics intersects with your money. We crossed it last night. In case you missed it, the latest polling shows that seven days from now Jack Layton will be prime minister.

Well, almost. Here’s the scenario, according to Ekos Research – Harper 131, Layton 100, Ignatieff 62, Duceppe 14. To govern with a reduced minority, the Conservatives would need the support of either the Libs or the Dippers, since the Blocheads are now a spent force. But, of course, Stephen Harper’s already had a five-year-long chance, so kiss that goodbye.

Infinitely more likely, Iggy eats his ego in return for Liberal cabinet seats in an NDP-led government. The guy with the stick and the stache gets the corner office on the third floor of Centre Block.

A month ago this was unthinkable. A week ago it was merely absurd. But in the wake of abysmal, bereft-of-testosterone, wooden campaigns by the main parties, Layton suddenly smells like the only choice for a lot of people. Especially in Quebec, where separatism’s fini.

But credit where it’s due. Jack Layton, recovering from hip surgery and prostate cancer, has looked like a prizefighter compared to his opponents. He’s connected with younger voters by knowing what a hashtag is, run a far superior campaign to Ignatieff’s and is now benefiting immensely from being the target of attack ads from both the Libs and the Cons. Besides, he’s the little guy – just perfect for a pissy nation.

But what would a Layton-led government do to the economy, housing, jobs and the markets?

Well, here is the NDP platform. As of 8 pm last night, it’s required reading. The Dippers plan to increase federal spending by $9 billion in the first year, then $12 billion and up to almost $15 billion by 2014-5. Big ticket items would include giving $1 billion to small businesses that create jobs, another billion to family caregivers, a billion for childcare, $700 million in removing federal taxes off home energy, $1.3 billion extra for education, and a host of other initiatives.

The green agenda would cost $3.5 billion extra in the first year, and be paid for entirely by a cap-and-trade system. This imposes a tax on emissions, through establishing emission limits by industry. Companies which achieve or exceed targets can sell credits to those who don’t. So, you either comply with stricter pollution guidelines, or you buy your way out of them. This is expected to raise $3.6 billion in year one and $7.4 billion in 2014.

Of course, those cap-and-trade billions have to come from somewhere. That’s corporate earnings. Economists think that will gut job creation. Market watchers think it’ll suck off earnings and crash stock prices. Environmentalists say, thank God. Or Jack. Whatever.

As for those non-green expenditures of $9 billion and up, the NDP would pay for them in two major ways: Raise corporate taxes to 19.5% (that’s an increase of about 18% from current levels), plus end subsidies to oil producers. Together those would bring Ottawa another $8 billion.

Of course, people in the Alberta patch will tell you it would virtually shut down the oil sands. Combined with the emission targets on existing heavy oil producers, they say, it would be lights out for companies like Suncor. At least then this blog would be spared emails from 30-year-old engineers making $170,000 a year in desperate Fort Mac.

So, in summary, the Dippers have promised – if elected government – to spend about $13 billion a year more than now, and to pay for it with $12.6 billion in new taxes in 2011-12, rising to $15 billion in taxes by 2014-5.

Now if this is what most people want, that’s what they’ll get. I’m not being judgmental, because both the Libs and the Cons have let people down dramatically, not only in this campaign but over the last two do-nothing years.

But Prime Minister Jack Layton, even tempered a bit with Liberal partners, would send a signal to the world that Canada has flipped. At a time when governments are trying to cut spending, unshackle business investment, tackle obese deficits, lower taxes and desperately create jobs, we’d suddenly turn into a giant Denmark with too many beavers. And Tims.

Likely results: a big drop in the dollar and a big jump in interest rates. Alberta could be a wilderness park while Ottawa could swell to be a province. And just imagine how all those house-horny Chinese in BC would feel about escaping communism to enter Laytonism.

Oh, and we could all stop bitching and moaning about the date of the real estate bust.

It’s Monday.