Entries from November 2011 ↓

Angry, impoverished young snots who come to this pathetic blog to Boomer-bait should buy some shares in HEQ. It’s the perfect play. Hopefully make some serious coin by investing in a company specializing in turning greedy Boomer wealth into steaming piles of debt, erasing decades of mortgage payments, and giving all those wrinkly losers what they deserve for thinking they can coast through retirement while their offspring groan under the crushing tax load supporting them.

This is the ticker symbol for HomeQ Corporation (trading at $6.25), the outfit which owns HomEquity Bank, which is a Schedule 1 Canadian bank specializing in hollowing out Baby Boomers. This is done via the bank’s only product, the Canadian Home Income Plan, which you might know as ‘CHIP’, flogged for years by its wrinkly pitchman, Gordon Pape.

CHIP, of course, is where you go to get a reverse mortgage, roughly the financial equivalent of bending over in a biker bar. You really don’t want to go there.

The topic’s newsworthy this week after some media attention, in light of HomeEquity’s stunning 87% increase in reverse mortgages and as the housing market clearly begins its descent amid an economy losing steam and a world full of risk. As I have been prattling on about for years, the people most in danger are those at or nearing retirement, who foolishly have the bulk of their net worth in a house. Which sadly describes a majority of the 9-million-strong Boomer cohort.

Houses are turning illiquid, which was the point of yesterday’s post. Every month that passes brings more illiquidity as buyers retreat. This is a bitch if you are, say, 60 years old and have a paid-for $800,000 house you can’t sell, and a tenth as much in RSPs or your TFSA. With retirement looming, and 70% of people without any kind of corporate pension, it means many years of KD lie ahead.

After all, CPP/OAS isn’t enough to live on. Actually, it will only pay the property tax, insurance, utilities and maintenance on the average Boomer particleboard McMansion. You still need gas, food, ammo and Viagra. That takes actual money, so 25 or 30 years in retirement could require hundreds of thousands (better, a mill or two). Worse, you could end up with your Boomer butt in an institution. if the current epidemic of dementia strikes. I well remember what $6,000-per-month to care for my father (Alzheimer’s) did to my mother’s finances.

So here comes Pape and CHIP bank. Get a reverse mortgage, they say. Untap that equity and spend it to finance your life. Never pay the money back. Never be taxed on it. Just call now, and find instant redemption for saving or investing nothing, escaping the fate you richly deserve.

It’s alluring, of course.

Old people can borrow against the equity in their homes and receive the money in a lump sum or as income. The maximum take-out of 50% of the real estate’s value, and because it comes as a loan against your principal residence, there’s no tax. The mortgage need not be repaid until some foggy day in the future when you finally find a buyer for the place, or you croak. And if the real estate market crashes and burns, with the value of your home cascading more than 50%, you will not be liable for the difference. (Like you care, if you’re dead.)

Okay, that’s the good part. Now the rest.

Setting up a reverse mortgage is not cheap, and will cost between $2,000 and $3,000. The interest rate on the mortgage you take ain’t cheap, either. Currently it’s 4.75% for a VRM or just a hair under 6% for a locked-in five-year term. Over the next few years, of course, those will be increasing as interest rates normalize.

The worst news is that this is a mortgage. It accumulates interest as ferociously as a traditional home loan. Except here, because you are making no payments, the interest building up is added to the principal amount, so every year you pay interest on a rapidly expanding pile of debt. The HomEquity people tsk-tsk at this concern, saying the heap of indebtedness will be offset by the relentless rise in the value of your home (they’re fond of saying it should be about 6% per year).

Of course, that was then. This is now. And now is worse. We’ll dodge a big bullet if real estate values flatline for the next decade, but in most markets there is a substantial reduction ahead. That, combined with the exponential expansion of the CHIP borrowing, is a slaughterer of net worth. There could be many retired folks snorfling off 50% of their equity, only to see home prices plop enough to eventually suck off every single dollar of value.

This is why a reverse mortgage is toxic. Unless you die. Then it’s all good.

Your estate pays Mr. Pape back. Your Boomer-hating, leeching offspring heirs get nothing.

It’s the perfect strategy, as I’ve said before, if you hate your children. That’s why they need stock.

So here’s my day. Sat for an hour across from a guy who’s been selling real estate for a quarter of a century in the same place. Muskoka’s always been the preferred playground for those in the nation’s largest city who can afford monied leisure, and Sammy’s been catering to them. “I used to make two hundred a year,” he says. But kiss that off.

Sales have tanked, and the average price is down  “at least 15%. There are more powers-of-sale (foreclosures) than I have ever seen in my career,” Sammy tells me. “And nobody is being given a true picture of what’s happening.”

He works for one of the biggest real estate outfits in the nation – you know, the guys who are always pumping out reports with headlines like ‘Stage is set for one of the best recreational property markets in years.’ But it’s crap, Sammy whispers. “A few big sales and the average numbers jump to the point of being meaningless. They know it. I know it. They just hope everyone else doesn’t get it.”

Two hours later the tech finished servicing the standby power generating equipment at the Bunker. (Big outage last week had the plant running all night on its emergency gas reservoirs.) He started talking about the amazing real estate deal he’d just scored in an upscale commuter town twenty minutes to the east, on the northern border of the GTA.

Century brick home, thick with oak trim, on a huge lot just steps from Main Street shops, restaurants and theatre. “Bought it for a song from some mortgage company,” he crowed, “in a power of sale. Previous owners walked. Sure, needs work, but that’s nothing for me. I couldn’t believe what they let this thing go for.”

But the grin ended there. He’d bought firm, then listed his own house, expecting a quick sale in a market that’s been buzzing for years. But nothing. “No showings,” he said. “Hell, the phone hasn’t even rung once. I’m starting to worry. I don’t need two houses.”

Jasmine doesn’t want one at all. She sold her Mississauga home with all that equity in it almost two months ago, so she and her husband could trade real estate wealth for actual money. “It’s a dream,” she’d told me. “Finally, some independence, investments paying my rent and the freedom to travel or do whatever we want. Now I know what all those mortgage payments were for.”

Her voice was anything but confident when she rang me today in the truck, looking for guidance. Turns out the people who bought their home, without conditions, had a house of their own to sell – also in densely-populated Mississauga. A few days before closing, Jazz was told there are no buyers for their buyers. No offers. No nibbles. In the space of two months, the market’s turned. What was beyond believing sixty days ago has become real. And while she has every right to sue for damages after closing day comes and goes with no ink, it’s a massive complication.

One day. Three people who’ll never meet. One story.

For a painful eternity this blog’s been bleating on about our housing market’s foundation of debt and duct tape. In the absence of robust economic growth, rising wages and lots more jobs, real estate values cannot continue to rise. Forget cheap money or horny foreigners. Those factors may lubricate slack markets, but they cannot fuel an endless ascent. Besides, rates will inevitably rise, and even China’s in the throes of a real estate bust.

Recall the news of recent days. The Bank of Canada says the economy will barely grow (0.8%) this quarter. We lost 72,000 full-time jobs last month. And on Thursday Stats Can told us wages are falling – down last month after a year of being flat. In fact, at about 1%, wage growth is less than half the rate of inflation, as we crawl back to 2009 levels.

So what’s the incentive for families who are falling behind, with record debt levels and stressed out over jobs, to go property hunting after getting sexed-up on four hours of HGTV? Is it any wonder the market’s shriveling after a decade of near-uninterrupted, unbridled house lust?

The Economist thinks not. The influential mag this week points out our real estate is “uncomfortably overvalued,” that prices are too high by 25% and (along with financial deadbeats France and Belgium), it “looks more overvalued than in America at the peak of its bubble.” Worse, Canadians (it adds) have more debt relative to income than US families ever did.

Granted, there was a time two years ago when this degenerate blog’s warnings attracted only people who dig latrines and eat bugs. But it never was a voice of doom. Far from it. The message has been as simple as it’s been repetitious. The era of the house is done. Chuck the old icon. The new god is liquidity. The antichrist is debt.

Understand this, and it’s all good.