In Mississauga this holiday weekend, Jasmine will be at her husband. Nothing new here. It’s a same old, same old argument. She worries about stuff. He thinks she’s a helicopter. Relax, woman, he says. It’ll all work out.
But during the final days of summer, 2011, some people aren’t so sure. Can’t really blame them. There are whiffs of autumnal fear in the air. The latest jobs report sucked, showing zero employment growth in the US last month, and raising worries recession may return. That knocked 250 points off the Dow and by the end of Friday had the yield on US ten-year bonds below 2%. Once again investors piled into the safety of the fixed income market, driving prices higher and crunching yields lower.
This came just a day or so after news the Canadian economy is also stuck in the mud, the economy now officially in neutral. That has observers, like my pal David Rosenberg, calling for a global slowdown as America “turns into one giant soft patch.” According to him, the next season is recession.
Meanwhile we heard from a few realtor boards in Canada, and the news was sure mixed. Calgary prices continue to slump (four months in a row now), making a lie of the claim housing prices follow oil. In Vancouver, sales are running below their long-term average while listings have started to mushroom. In Toronto, as you know, the average price of a detached home plunged $123,000 in a month.
Draw your own conclusions. I have. Sounds like Jasmine’s working on hers:
Dear Garth: I can’t tell you how riveted I’ve been to your blog since I happened on it by accident (thankfully). I’ve been combing through your blog entries and your book, as fast as I can looking for a similar situation to mine. So far without luck.
House purchased 18years ago for 260K. If sold today, likely 650K. We have a 300K HELOC with 140K outstanding with non-investments and, truth be told, were renos, and we pay interest only at prime. The whole Purpose was to invest, however we were so paranoid about trusting someone with our money, we never got started. Yes, I know, stupid.
Three kids 21,14,&10 (with oldest son failure to launch)
I would sell in a heartbeat however hubby afraid of renting (unheard of) and kids displaced. Husband’s income 90k , I’m a stay at home mom. He & I are early 50’s.
My husband wants me to present him a case study. Can you help me win? Regards, Jasmine
A case study? You may end up being one – a good example of how not to invest. It sounds like you have few, if any, liquid assets, which I’ll assume is why you haven’t yet paid off the loan for the renos. Of course this home equity loan does not have tax-deductible interest, since you poured the money into your house instead of investing. Like you said, stupid.
So, if the house constitutes the bulk of your net worth and you’re in your fifties – and we’re likely at the top of the real estate price mountain – what possible scenarios lie ahead? What action should you take?
If every economist in Canada and elsewhere is wrong, if interest rates never rise, robust growth resumes and aliens bring new jobs and rising household incomes, then the housing market will continue to advance, and your equity grow. Good news. You’re saved.
However, if our major trading partner contracts, the economy sputters and indebted families stop buying new cars and iPads, all bets are off. Since 65% of our GDP depends on consumer spending, it only takes a few months before the effects are felt – and housing starts to freeze. We’ve already reached the point of absurdity, when a McMansion in an upscale burb of an affluent city like Nashville sells for exactly 50% of what fools pay in Mississauga. As I boringly point out every day, this will not last.
Now, Jazz, imagine you sold, paid off the equity loan and walked away with $500,000. While I don’t recommend this, if the whole thing were invested in a collection of bank preferred shares – with fixed dividend payments and proven market stability – you’d have an income of about $2,200 a month. Add in what you now shell out for property tax, insurance, maintenance and HELOC repayments, and you can probably rent a better house, and still have $500,000 in liquid wealth.
If Rosenberg’s recession arrives, if the economy starts shedding jobs and opportunities, if the local real estate market turns illiquid or a mess of confused Boomers like you realize they need income more than they need a house, well, you dodged that bullet. Remember, the last time properties plopped in the GTA it took 15 years for them to recover. And you’re not 30 anymore.
Houses are not retirement plans. At some point, almost everybody needs to cash out. You can wait until you have no choice, and risk being vultched. Or you can deal now, and find a greater fool.
One more thing. Rent a smaller house. Launch the kid.