Entries from September 2011 ↓

Driving along Bath road about 10 minutes west of Kingston, Lori couldn’t believe her eyes. “In all my 46 years,” she says, “I have never seen a sign like this.” But there it was. Bold as a Lady Gaga bra.

“I’d noticed this McMansion on the water for sale a year ago. A very large for sale sign was placed above the wall to get everyone’s attention. It got my attention this week for sure. With a price reduction like that, I am sure the agent is passing it off as a steal of a deal. A greater fool has yet to come along. Imagine that! But it is different here, right?”

  Let’s hope so, because in some places, when you have to cut the price of your McMansion by $1,000,000, or close to 40% of the asking price, it might suggest the place was built by someone with far more money than taste. But, check it out. This spread has just as much class as exploding nipples.

Speaking of failed seductions, the Fed just choked with its the latest stimulus plan. Ben Bernanke would have been better showering in Axe body spray and rolling in personal lubricant, because the markets balked.

In case you missed it, the American central bank announced it’ll sell hundreds of billions of short-term bonds to buy longer ones. So what? It’s intended to help drop interest rates a little more and encourage borrowing, this goosing the flaccid US economy. Ben also said he’ll pump vast sums of dollars into mortgage-backed securities, so struggling homeowners can have even cheaper home loans, guaranteed for 30 years.

The response? Stocks tanked. Gold tanked. Bond yields tanked. The US dollar leapt and the loonie crashed under par. Investors scrambled into fixed income and the greenback, looking for cover.

The reason: The Fed was downright gloomy in its analysis of current conditions. No hope for improvement on the horizon for either houses or jobs. And until more Americans get back to work, there’s little hope real estate values will rebound, staving off millions of new foreclosures and billions in negative equity. This is called ‘upgrading the downside risks’. As far as investors were concerned, it all but confirmed Washington expects a recession.

Meanwhile, I hope you just got a 4% raise. No? Well, too bad, because inflation’s back. Ottawa now figures it is 3.1%, thanks to gas and the cost of KD. This means we now have rising consumer costs and a slowing economy – not good news for real estate, as people pay more to live and yet worry about the stability of their employment. It also confirms anyone with GICs, savings accounts or those hilariously-named high interest deposits  losing money by saving money. Oh yes, and you have to pay tax on 100% of the interest.

So, let’s summarize. US recession likely, recovery distant. Jobs and houses there at risk. Our biggest client laid low. Markets pissed. Canada slowing. Living costs rising. Debt swelling. Prospects dimming.

And realtors, posing as normal people, come to this blog to say housing will rock higher because financial markets are volatile? Do they actually believe people will continue to borrow to buy homes at nosebleed prices amid scary economic news just because mortgage rates are where they were six months ago? That rabid young couples will ignore the growing threats and dive into fat home loans with little or nothing down because all their little FB friends are? That people in Calgary will be saved by oil, or the next Air Ham flight will disgorge fresh horny millionaires at YVR?

Yeah, they do.

So, danger grows. And remember, it was not the gyrations on stock markets, greedy unethical bankers, loose regs or political failure that leveled America. It happened after far too many people believed the same thing at the same time, and worshiped at the same altar. Then the real estate god turned on them.

And now, the entertainment portion of this pathetic blog. Here’s Peter. He wants your advice. Be gentle.

Garth: I have been reading your blog for the last few months and absolutely love it.  I would so appreciate feedback from your viewing community and yourself.  In case you are interested in posting this for me I would appreciate it.

My wife Daniella and I moved from Toronto in 2000 to New York to have a go at working on Wall Street.  After 9/11 I put $100,000 in life savings into gold and silver when they traded at $300 and $4.00 respectively.  The bullion has been sitting in a safe in London and is worth over $600,000 today in USD.

We sat out the housing boom in the US b/c things looked pretty crazy here way overpriced.  As the boom began to turn into a bust in around 2007 we slowly deployed our savings and began investing in Real Estate.  First purchase was the condo we live in in New York paid $800,000 cash and now it’s worth $650,000 (not so good – but we LOVE this place and want to hang on to it use when we retire in about 20 years – the rent it will earn will carry all expenses).  Last year we took $300,000 of equity out of the condo and purchased a rental in a town about 1 hour away.  The total purchase price was $535,000 and it has totally held its value – we used $250,000 in mortgage financing for it.  The rental on it is very high it produces $3,600 per month which covers all expenses including the cost of both mortgages.

This year we really pulled the trigger.  Two five unit student housing in South Carolina at $240,000 a piece.  We used $60,000 downpayments for each and mortgage financing for the balance.  Again – both properties produce huge positive cash flow.  Next we bought 3 multi unit properties in another city in the south (which I cannot share b/c it’s getting hard to scoop these deals).  Each property was in the $150,000 range and each one produces around $2,000 per month revenue – easily covering all of the expenses including of course financing.

Our plan is to keep buying these income properties until Fannie Mae refuses to sponsor them.  The rule here stateside is that a family can have no more than 10 mortgages underwritten by Fannie Mae.  Right now we are up to 7 – want to purchase 3 more income properties.  The deals are sort of mind boggling in a way.  The properties that we are picking up RENOVATED for $150,000 sold for $380,000 during the height of the housing bubble.  We are going to get our US Citizenship to minimize the adverse tax consequences for Canadians owning real estate in the US.

Our plan is to move back to Toronto in 2 years or so.  I would like to sock away enough money to buy a tear down in Toronto and then start cashing in the bullion and use the proceeds to get our place fixed up.  I have recently started looking at property values in Toronto and it’s shocking to see what’s happened since we left in 2000.  I am wondering if Toronto will see price declines in the order of magnitude of some of the properties in cities that we have been investing in here in the US.

I know that there will be a reaction when your readers read my story “Whhoaa this dude is nuts – 10 mortgages !!! what’s he thinking”.  I can assure you – I am a very conservative sort.  We waited until we saw the beginnings of the collapse in real estate here before we began buying.  I have a good income since I am a Wall Street survivor.  We make over $400,000 per year and I’ve had the same job living in the same place for 10 years so banks are happy to lend to us.

I need to know what to do with the Toronto plan.  How long do we wait.  My ideal property is a $500,000 fixer upper detached home in a nice area of Toronto with excellent schools – I am told that nothing like this exists.  As mentioned we have over $500,000 worth of bullion – I would cash it in to renovate.  I am told that $400,000 can raise the dead in terms of renovating a place.  When I tell my Toronto friends that I would like to pick up a $500,000 fixer upper in the Beaches (which I understand you have now renamed The Beach – terrible rename)… they laugh at me.  I am told that I can only find the home I am looking for by paying at least $1mil.

I would appreciate any advice here – do you think my plan to move back in 2 to 3 years will coincide with a slide in Toronto home pricing?  By how much?  I am willing to wait it out and sit tight.  Ideally I would like to invest like a vulture in Toronto in the same way I am doing down here in the US.

I LOVE YOUR BLOG
Peter (and Daniella)

Tom’s a lucky guy, even though he says he lives in a ‘wasteland burb’ of godless Toronto. “I got turned onto your blog by a colleague of mine and must say it’s a bit of an eye-opener.  Ever the skeptic, however, I’ve been scratching my head over your predictions that higher interest rates could doom those of us with high debt ratios.”

Tom’s mortgage is $350,000 and he figures the house is worth $700,000 (paid $550,000 for it ‘a couple of years ago.’). His household income is $175,000 and the mortgage costs two grand a month on a fixed-five-year mortgage of 3.5%.

“Now let me assume a bad scenario – interest rates skyrocket to 10%. My biweekly payments increase by $600 biweekly, or approximately $1200 monthly.  End of the world?  Not really.  At our income, there are other sacrifices we could make – less frequent new cars, cut back vacations, etc., but in no way would it make us default on our mortgage.  Perhaps I’m living in a relatively sheltered area, but my coworkers are mostly in the same boat – most have combined family incomes of $150k-$250k and own homes valued between $500k and $800k.”

“It’s highly unlikely that rates would go as high as 10%, but even if they did, I couldn’t see a debt load of 150%, or even 200% in my case, become a real estate armageddon…  That said, I do realize that the economy may suffer as a result of less money finding its way to other areas (like those cars and vacations I mentioned), but if that happened, the rates would come down again, equalizing the whole story.. What am I missing?”

This is called the isolation effect. It’s when people feel they’re isolated from external factors by their own smarts, good fortune or unique circumstances. It explains why people in expensive houses keep on spending. Why a million delusional people in Vancouver think it’s different there. It’s why the affluent American middle class never bothered jumping off the Titanic when they had a chance. And it’s why so many commuters in $700,000 GTA houses will be so surprised.

Tom makes the mistake of thinking the only risk of rising interest rates in his hood is that legions of people would default on their mortgages, go under power of sale proceedings and screw up the resale market. This comes from equating what happened in the US to the Canadian scene. But a wave of foreclosures is not in the cards, no matter what happens to rates.

Of course Tom won’t quit paying his mortgage even if his monthly costs more than double. As he rightly says, he’ll just adjust his spending habits – and stop buying new cars or going on trips. Him and nine million other households. This causes consumer spending to slide, which is not sexy news in a country where 66% of the economy depends on it.

So, that leads to job loss. But already the unemployment rate is over 7% – which is just 2% away from the disaster now unfolding in the US. Fewer people working has a direct impact on even more spending, and it doesn’t take long for a vicious cycle to emerge. Consumer confidence takes a hit, and folks feeling less secure about the future are not prime candidates for real estate purchases.

So if rates did rise, housing would fall. Sales first, prices next. As sales volumes diminish and values stumble, more people decide to list their homes (it always happens), hoping to catch the top of the receding wave.

So, Wasteland Tom, the danger isn’t that you couldn’t afford a mortgage rate hike. You can. It’s not that the big-house folks around you would default. They won’t. The danger which higher rates would pose is to the value of your property in a slacking market. You’d be surprised how fast that $700,000 pile of bricks can once again be worth $550,000. Or less. Your loss of net worth would be $150,000 or more.

This is why a third of all US families with houses and mortgages are now under water. They continue to make their mortgage payments and carry on – because there’s no choice. Housing values fell so precipitously there’s no buyer willing to pay more than they owe, which means they’re trapped in an illiquid property.

But, of course, this can’t happen here, right? We’re isolated.

And it won’t. At least, not because mortgage rates go to 10%.

But that’s not the threat. In case you missed the news, Tommy, the IMF this week warns that Canada is part of a dangerous world. Unemployment next year will go up, and growth down. Even Brother Carney just upped the odds of a US recession. And every major bank economist is forecasting a tough 2012 for people with the bulk of their net worth in a house. Listings are rising and in some large or prime markets (Victoria, swaths of the GTA, SW Ontario, the Okanagan, Annapolis Valley) streets are littered with weathering For Sale signs.

So, rich guy, it matters not how much your house is worth, how upscale the neighbourhood nor how many BMWs are parked on Brussels block-encrusted driveways. It’s irrelevant whether you can pay your mortgage twice over or not. You can’t beat the market. The value of your home will be determined by others, not you. It is the buyers who always end up setting prices, not the owners or the sellers.

You think you’re isolated? Then why read this pathetic blog?

Punked.