Entries from July 2011 ↓

Don’t bet against America

Well, so much for Debtageddon. At least for this week. Dow futures jumped the better part of 200 points Sunday night. Gold fell twenty bucks. Oil gained a dollar and a half. It was all so predictable – except to the tin foil set who wasted millions of brain cells and a week on this blog telling us the world as we knew it was about to end.

America is insolvent, bankrupt, done like dinner – that was the chant as fools mistook a political crisis for an economic one. That the richest nation on earth with the planet’s biggest economy would be unable to meet its bills was a joke. If the US has a giant problem, it’s not that it spends too much, but taxes too little. Anyone not blinded by ideology or poisoned by gold can figure that one out.

I sure hope nobody reading this pathetic, disposable blog shorted the market for Monday morning, or loaded up on bullion at a Scotiabank branch Friday. If you did, bend over. Like I said, never bet against America.

Now, let’s take a moment and update on a couple of characters we’ve met here. Like Wendy, who was being urged by her realtor and mortgage broker friends to retain a rural rental property, borrow against it, then use that as a down payment on a property which would be 80% mortgaged. In other words, 100% financing – for a single mom.

“This,” says Wendy, “is the response I got from the mortgage broker when I told her I wanted to put a pause on the refinance of my acreage, any thoughts on what she is saying?

Hi Wendy, I’m no financial planner but if you track market conditions and predictions like we do then you could see that the market is predicted to stay stable in 2011 and boom in 2012 and 2013 similar to what we saw in 2006-2007.  These are stats right on CMHC’s (Canadian Mortgage and Housing Canada) the governments web site.

I think you need to find a new financial planner. — Lisa

Whoa, Wendy, where have you been? Did nobody tell you there was a real estate boom coming? I mean, this is straight from the mouths of the only horses who matter – CMHC and “the government.” Thank god we have local mortgage brokers who are tuned into market conditions, tracking predictions and all the other hard stuff. Otherwise we might think these flatlining prices, job losses, mounting debts and stagnant incomes actually meant something.

Wendy. Babe. Never talk to Lisa again, okay?

Now, here’s Andrew who dumped his fortune into a condo in Vancouver because, as you know, real estate prices only go up. He starred in a posting here some months ago in which I might have called him bad names. Happily, he’s found Redemption. Praise be, brother Andy!

Hi Garth: I thought I’d update you, and the blog on my story from April. I did get around to listing my condo in June, and finally signed the selling papers 2 days ago. It was listed for 7 weeks. There was only 1 offer that I finally took about $13k under asking including giving concessions for 2 upcoming special assessments totalling $8k over the next 5 years.

Asking: $379k, Offer: $366k

After I paid this year’s assessment, and realtor fees: Yikes.

All in all, a very distasteful experience… I am now totally debt free and it feels awesome. My g/f and I moved into a swank waterfront condo where the condo fees are $400/month and rising.
I want to thank you for providing an alternative to the common real estate mumbo-jumbo, and saving me from even further losses in the future. All the best, Andrew

Well, in case you missed the news, Vancouver real estate’s officially topped, and has begum the greasy slide back to that dark, sad place we call ‘the mean.’ Post-riot Chinese money is ebbing, locals are emasculated by debt, the BC economy’s stalled and there simply are not enough idiots left to put down two million for a stucco-over-wood eyesore on a ‘premium flat’ lot the rest of the country would find suitable for an unscheduled whiz.

How do I know this?

Ha. It’s Mesozoic. I read all about it on Craigslist.

Unconventional Offer for Adventurous Home Owner (Vancouver)

Date: 2011-06-26, 8:16PM PDT
Reply to: [email protected] [Errors when replying to ads?]

This offer is not for everyone. Those of you who have saved every penny for most of your life to afford a down payment and currently work around the clock to make mortgage payments, I commend you on your efforts, but this post is not for you.

Do you own more than one property? Do you have so many rental homes with no mortgage payments, yet you still feel unfulfilled? Tired of your illegal tenants whining that there are rats in the walls? Have you always wanted your own dinosaur? Now is your chance my friend.

In exchange for one of your properties, I will be your personal dinosaur for one year. I will be at your beck and call, 24 hours a day, wearing a dinosaur costume. The type of dinosaur is negotiable. I can babysit your children (references upon request), scare the mailman, wash dishes, entertain and impress your guests, and much more. (No sex stuff though, sorry.) I will make realistic dinosaur sounds, eat what the particular dinosaur eats and maybe even sit on a fake dinosaur egg, if you are so inclined. I am well educated, fluent in English and French (as well as dinosaur), can play several musical instruments and have no criminal record or outstanding warrants.

All this and more. This is the only way you will ever have your pet dinosaur, and the only way I will ever be able to acquire a house in Vancouver.
Serious offers only please.

Thank you.

Consequences

When he was zipped and steady, Bill Clinton thought everybody should buy a house. In 1994 America made a commitment get home ownership levels from 64% up to 70% of the population. In that year governments and banks started to undo lending requirements, working especially hard to shove more low-income people into mortgages.

It worked. By the end of 2004, with George W. Bush pumping ‘the ownership society’ and subprime lending in full flower, 69.2% of all Americans owned a house. Of course, this came with record levels of debt. So when the pool of new buyers ran out and cheap interest rates rose the next year, housing imploded.

You know the rest of the story.

This week came news the ownership rate has plunged back to 1998 levels – under 66%. It’s now forecast it will sink to 62% by 2015, or where it was 30 years ago. Of course, all the debt remains. It’s why there are 18.7 million vacant homes (two million of them are for sale), and why more than a quarter of all families have negative equity, owing more than they owe,  unable to sell.

Sales of existing homes are on track to hit 1997 levels. New home sales are slumping. Incredibly, half of all the 3.8 million houses now on the market in America are empty.

What does this tell us?

Hmmm. Lots, in a country where flagrant pro-real estate policies have resulted in a 70% ownership level and world-class piles of steamy fresh debt.

A dramatic increase in the number of people buying houses without a dramatic increase in income is doomed to fail. Just a matter of time. As you may have noticed from Friday’s news, the Canadian economy contracted last month – which is the opposite of growing. A few months of that is called a recession, which means fewer jobs and less money to go around. This is not good.

So why have house prices risen here with so many people herding to buy?

Simple. We did what the Yanks did under Clinton and Bush. We dropped interest rates to emergency levels (as the US did after Nine Eleven), and kept them there far too long. Low rates meant people could borrow more money, then spend more. So real estate values shot higher – all on the back of debt.

Second, we lowered lending standards. Mortgage amortizations lengthened and down payments shrank. Zero-down home purchases became common, and today our big ‘conservative’ banks will even spot you the money to buy. We have no-doc mortgages for the self-employed, 125% mortgages for everyone, while the feds encourage lending to people with no money by wiping away banks’ risk.

So now the average down payment is just 7%, two-thirds of all new condos in Toronto are going to speculators, it takes 70% of a family’s income to carry the average house in Vancouver and we’ve passed $1 trillion in mortgage debt. But, praise be, we hit 70%.

There’s no doubt where all this is going. By keeping rates low, expanding the reach of federal mortgage backing, raising tax-free RRSP withdrawal limits for home purchases and subsidizing first-timers’ closing costs, the Harper government is just like Clinton’s, but without the bodily fluids and all those endorphins. And where’s the fun in that?

The basic flaw: not everyone should have a house. Shelter may be a human right. Granite counter tops aren’t.

As the world holds together with gossamer threads tonight, contemplating what could be, it’s worth remembering how we got here.

Are you ready?