Entries from June 2008 ↓

Heavy days ahead

Stocks tumble on a barrage of bad news.

No longer seller’s market, says bank. Duh.

One day last week I did a radio show with two perky hosts in Vancouver on the topic of real estate. Once we went off air, one of them told me about the woman who cuts his hair – a middle-income, working stiff who, with her similarly-employed boyfriend, lusts after a home.

So, they went to the bank and got pre-approved for a mortgage, but with one major condition. The banker warned them they wouldn’t be able to borrow more than $900,000. But for that, they can buy an average-priced bungalow in Van.

So, this post is for all the hairdressers out there in the Lower Mainland. It’s for the young couples in the Xburbs around Toronto and Calgary (that’s where GenXers go to buy McMansions). It’s for the people with 40-year mortgages financing places in which they have no equity. It’s for those who think there’s actually a reason to shell out more in bank payments, taxes and condo fees than in rent for exactly the same residence. It’s for the Boomers who have trophy houses and no actual money. It’s for those still impressed with granite countertops. It’s for those who haven’t heard the news.

The economy grows ever weaker. Oil at $130 and gas at $1.40 will have a serious effect on everything over the coming months. The new cost of energy saps cash flow and consumer confidence. It is a death knell to the sale of suburban houses on distant crescents and cul-de-sacs. It is killing off export, tourist, automotive and manufacturing jobs.

At the same time, the world’s greatest consumer economy, and our biggest partner, is on the skids. Consumer confidence plunged last month as costs surged, employment fell and real estate collapsed. Home prices have declined for 16 months in a row, and are now 15% below levels of a year ago – and that’s a national average. Properties in some cities have given up a third, or 40%, of their worth since last summer. This has been utterly devastating to the middle class, which is the engine of economic growth.

Consumption is now contracting at the withering rate of 3% a year, despite $100 billion in government cash rebate cheques which have been flowing out of Washington. When that money runs out, economists may be running for cover. Americans have not had this bleak a view of the future since such surveys began almost a half century ago.

In Canada, the real estate bedrock is also cracking. Over 67,000 families listed their homes for sale last month, a 7% increase, despite a massive 17% decline in real estate sales nation-wide. More listings, fewer sales. This means the next big news you hear – three or four months from now – will be US-style price reductions. In some cities, some suburbs, it is already happening. The energy and jobs crisis is just serving to accelerate the process.

In this context, here are some thoughts:

  • If prices do fall, even a modest 10%, then recent buyers could find their mortgages exceed the value of their homes. This will be especially true of those who purchased with little or nothing down.
  • People with homes to sell, especially retirees who need to cash out, should expect the process to take months, perhaps a year or more. The days of multiple offers and quick sales in all but the most demand neighbourhoods, are over.
  • If listing, be realistic. The worst thing possible right now is to misprice the home, ask too much, then have it languish on the market forcing multiple price reductions. In that scenario, you will probably sell for less than market value.
  • If you are a first-time buyer, steer clear of zero-down real estate. Despite what the condo salesguy or the builder says, this is akin to buying stocks on 100% margin. You are going to lose.
  • Also eschew those 40-year mortgages. They reduce monthly payments a bit, and let you leverage up more debt and buy more house for the same income. But they magnify total repayable debt and add almost nothing each month to your equity.
  • Don’t listen to Phil Soper or Gregory Klump or any other of those so-called real estate media experts. While nice guys, they and the bank economists all are in the business of talking up the market and encouraging people to buy, whatever the conditions. Trust me, this is selling time, not buying time.
  • Debt kills. Especially when asset values are falling, the economy is losing altitude, jobs are hard to find and willing buyers even scarcer. Never before have Canadians had so much mortgage or household debt, and less in savings. More than 80% of all our net worth is in real estate which – in a word – is scary.
  • Therefore, if you have a mortgage, work at making it smaller. Prepayments and VRMs help, but weekly-pay mortgages are the best tool in the shed for shortening the amortization and lopping off interest.
  • If you decide to sell, be aggressive. This will mean lowballing the price to gain a quick sale before things get really messy. It’ll mean being willing to take back a mortgage for a year or two. It means painting the house and making it impeccable, along with staging it, working with an experienced agent, using MLS, setting up a sales web site for your property and, above all, not trying to sell it yourself.
  • And if you are a flipper who bought five units in a condo building scheduled to be completed in 2010, God rest your soul.


And Canada? Bank (surprise) says no crash: here