Entries from June 2011 ↓

Over the last thirty days just under 500,000 people came to this blog and looked at stuff 796,000 times. That’s about 16,000 visitors a day, of which 99% know enough to read, shut up and move on. Smart. That way they avoid being contaminated by BPOE or having Smoking Man throw up on them.

Others – that elusive 1% – choose to leave a comment. Most are respectful. Many insightful.  Some brilliant. Some pitiful. A few I sell to adult web sites and offshore pet food manufacturers. But things get most interesting when I offer a prize, as happened last weekend.

The question I posed: do you think the housing market in Canada will correct and, if so, by how much? The incredibly valuable swag was my current book, Money Road, – five copies to five bloggers who somehow distinguished themselves with their responses. As you may have noticed, there were well over 300 entries, which shows how many people possess no friends. (I rent.)

The comments were of a particularly erudite nature, I thought. Judging was tougher than when I was an MP and had to pick two winners from 28 entries in a baby contest in my riding. By then end of that, 26 families had decided not to vote for me.

Anyway, here are the runners-up:

mark
Dutch 4505
OnlyTheBankersLaugh
Lisa
Raincouver
Cendrine
American Werewolf
itanic
Cato
totalchaos
JamesKitchener
Queen City Renter
Maxx
Dorf
Shanks
Mid-Ontario
49
Tomahawk, and
Mr Buyer

Honourable mentions include:

terces – who might have won, but pissed me off by asking for an iPad2 instead of a book, and
Raj – who sucked up so much I had to shower.

And the winners of an autographed, personalized book with my DNA on the envelope are:
UVZ, for presenting the only cogent mathematical argument for price declines.
Samsora, for telling us how studying rodents and turtles forecasts house prices.
CraigM, because he showed how a comment on a financial blog can attract hot women.
Utopia, because he made me want to sleep, and that was good, and…
Cow Man who, in a couple of sentences spoke the truth as only a wizened bovine kisser can.

I will send you books as soon as the dedicated public servants at the post office are legislated back to work, and when you forward me your address (to [email protected]).

Now, on the topic of what happens to real estate, yesterday I said this:

Houses will surely become one of the worst-performing asset classes of this decade. The residue of this post-crash era will be mountainous debt and a mangled middle class. And to think it all can be avoided, with five simple actions.

Actually there are more than five, and I will cover many of these concrete actions in the days to come. But let’s start with this:

Get out, and rent: If you’ve been thinking about selling, do it. If you have a big unrealized capital gain in your home, get it out. Take advantage of a unique time when greater fools still abound, and yet there’s a paucity of listings. Sell to a buyer who will let you stay on as a renter for a year or two. Or sell with a long close, like six months. Or just bail and rent, and let some dumbass REIN guy subsidize you. The time for buying will come.

List low: As the media grows darker about real estate, the perception spreads that sellers will take ‘less than the market.’ So why not play that game? List thousands (or tens of thousands) below what a buyer might expect. Set a time for offers, and wait. Chances are multiple bidders will show up, and the final price will bear no relation to the asking. If that doesn’t work, hire some good lawn Asians.

Lock in: The rummies on this pathetic blog claiming interest rates will never rise are wrong. Brother Carney will be jacking these suckers as soon as he can get away with it, and mortgage rates will tick higher over the next few years until they are normalized. If you bought a house in the last three years with a VRM, this will really suck. So, lock in. There are still bankers who will give you a fiver for south of four. Come 2015, that will melt hearts.

Suck equity: If you decide to stay in your paid-for house, despite the storm which might howl outside, why not put it to work? Rates are still near historic lows while house valuations are at all-time highs. Therefore removing some of your equity in the form of a HELOC and investing it in a portfolio suited to your risk tolerance, can be a winning move. Your equity actually pays you money and writing off the loan interest drops your tax bill.

Diversify: The one thing that will crush the unsuspecting in a housing rout is no Plan B. That real estate values will fall is a given. So why do people over 55 have an average of 77% of their wealth in one house? How can virgin buyers justify 100% of what they have in a single asset? The fact both young and old make the same house-horny mistakes should tell you the coming adjustment will be painful, and to avoid it you need money in multiple assets at the same time. Take 90 and deduct your age to determine the percentage of your net worth that should be maxed in a house.

Or, wait for the next contest.

Three days ago, on the 56th floor of a downtown Toronto tower, three dozen people waited expectantly for the CEO to stand and speak. It was a private event. They were about to hear from the guy who runs a major Canadian bank, which shall remain nameless but really likes burgundy.

“It was interesting to say the least,” says our blog mole, “and here is almost an exact quote…

“If I was to show you a chart of outstanding residential mortgages in this country, which were about 600 billion a few years ago, and now stand at over a trillion, you would swear you were looking at the growth of U.S residential mortgages before the crash.”

Just to refresh your memory, here is what has happened to American house prices since peaking in the summer, five years ago.

Of course, nobody expects this to happen in Canada, right? And maybe it won’t. But as I’ve oft said, we don’t need a US-style housing dump to have lasting consequences. Even a mild 15% correction is enough to put hundreds of thousands of people underwater.

BTW, folks in Britain also thought they were immune from a US-style plop. This week came news that 80% of those UK homeowners who bought since 2006 can’t sell. Why? Their houses are worth less than their mortgages.

Anyway, flash to Ottawa. Brother Mark Carney had another whiz into the wind this week, saying risks to the economy are now “elevated” because too many homeowners won’t be able to manage their debt loan once rates start to rise. And that could cause merry hell here, as it did to the south.

Or as he so pithily put it: “The growing vulnerability of this sector increases the risk that a shock to economic conditions would be transmitted to the broader financial system via a deterioration in the credit quality of household loans.” And that is exactly what that bank boss was referring to on Monday – Bay Street is preparing for a real estate crap storm, even while Main Street keeps borrowing.

But, of course, real estate’s local. The bust has already started to spread in some communities, while others are still pummeled by those greater fools. We have two live reports:

“I am a transit operator for BC Transit in Victoria. I can’t wait to see the real estate numbers for June. I drive set routes and so I see all the for sale signs popping up. I drive by hundreds of homes for sale and have seen 2 sell! I think F’s moves to stem the tide of lemmings (newbies) throwing themselves into the real estate market here has had an effect. Unfortunately, my friends thought I was crazy when I said we were in the final phase of a RE bubble. Many drank the Kool-Aid. One poor couple over bought and then decided to have a child. Well their child turned out to be twins! They put their place on the market soon after their blessed arrival and it sits languishing after 2 price drops. They think they are $50,000 under water if they sell at their new asking price. Sad thing is they haven’t factored in the cost of selling the place or moving costs.”

But in Toronto – at least some hot, sweaty parts of it – the virgins of leverage just won’t quit. Yesterday I told you about Drew’s buddy who moved from Vancouver, went house-hunting, and promptly found himself caught behind enemy lines in a brutal bidding war.

Drew gives this update:

“Here’s the follow up report from my friend who escaped Vanloser…

1.  Agent just called… Final tally was 15 offers. Probably won’t know until tomorrow what the house went for, but we expect 100k over asking price. So I said SCREW IT and just rented a house instead.
2. Ok, so got an email from my agent this morning. The accepted offer was $120k over asking. Someone obviously got caught up in the emotion of it all and seriously overpaid.. crazy!

“Maybe he read your blog, or maybe I just have smarter friends than I thought.”

How do you know when the end stages of a market are at hand? I’d say wild swings like this are a tip-off, as the emotional pendulum careens from greed to fear. Some markets are cooling faster than Justin Bieber while others flame. In places like the Oakangan sellers can’t give properties away, while in pockets like Lesleyville desperate young buyers are waiving both home inspections and financing clauses, so they can buy shacks with SS and GC tops.

So, let’s summarize: Bay Street’s convinced homeowners will blow themselves up, and is stocking tunafish. Mark Carney warns of elevated risks and too many horny house buyers two weeks running. Buyers in hot markets grow more reckless while in others they vanish. Meanwhile in countries most like us, real estate’s achieved the popular status of gonorrhea.

Houses will surely become one of the worst-performing asset classes of this decade. The residue of this post-crash era will be mountainous debt and a mangled middle class. And to think it all can be avoided, with five simple actions.

That, and the winners of our weekend contest, tomorrow. Get your hair done.