Lost our way

One day last week, a realtor named Chad tried to talk a couple named Darryl and Amy into buying a $500,000 condo in Calgary.

His coup de grace was a poetic email, which came to this climax:

“Don’t do like I did, I DIDN’T buy when I was in my twenties because I swore the market was going to go down, Instead I paid roughly $60,000 in rent (calculating at an average $500/month because I had roommates at times) Instead of buying my first home for $72,000 I bought it 10 years later for $160,000 losing $60k on rent plus $88k on appreciation. If I had not bought then I would have paid (at minimum) another $60k in rent for a total of $120k in rent over 20 years (which is really not reasonable, it would be nearly double that) and this house most recently sold for $275k which is another $115k in appreciation on top.

RECAP: RENT 20 Years – Loss of $120,000 OWN : Appreciate $203,000 and have paid off house worth $275 and spent roughly $120,000 (same amount as renting) leaves me ahead by $170,000 but even if it hadn’t appreciated in those last 10 years at all I would still have been ahead by $40k instead of behind by $120k.”

Meanwhile a blog dog from Calgary was posting this message here:

“This is how BAD the USA market is. My grandma built a small house in FL in 1989 for $50K. At the peak in 2006 it was worth $120K. It was appraised for $43K yesterday.

She has made no money on it… She has no savings and lives off Social Security…sad. With inflation, she would have been better off sticking her money in a savings account. I am honestly glad all this has happened. My generation, Generation Y, hopefully has learned something from it all.”

This juxtaposition is critical to understanding the age in which we live and how off course society has strayed. The realtor appeals to greed, holding out the prospect of large gains that come without working or adding to the economy, but merely by possessing a property. The blogger appeals to fear, citing a relative who may have bought the real estate dream but has reaped the nightmare of a growthless asset.

The realtor takes a past experience from an inflationary time of expansion, and mindlessly grafts it on a future which may be anything but. The blogger uses an extreme example of a USA housing collapse which is unique since the Great Depression and draws from it generational wisdom.

The realtor glosses over the extremely high costs of acquiring and selling real estate, the staggering interest charges of carrying it and gives endless appreciation as a fact. The blogger ignores the fact her grandma has lived for twenty years in a house which cost her $50,000, of which she can get $43,000 back.

We have lost our way by turning shelter into a business, and judging each other by where we live. We stereotype. Condo dweller, or suburbanite. McMansion or bung. Owner or renter. And by allowing real estate values to race madly higher in good times – as greed kicks in – we simply set the scene for lost equity and busted marriages on the way back down.

There sure is enough heartache to the south of us to last a while. Yesterday I told you about an historic drop in the sales of existing homes. Now new home sales have crashed to 1960s levels. Sales are down by a third form last year and off 80% from the bubbly days of 2005. It’s a dose of negativity showing the American economy is growing stone cold, and all the boost housing construction normally brings will be many years off.

It also shows more GenYers are staying put at home, instead of getting married and buying houses. Why? No jobs. And without more economic activity from, say, house sales, there’s no reason to expect more jobs. This is akin to the statement I gave you here yesterday regarding existing home sales: why buy now if you know that prices will be lower next month? It is the essence of deflation – and you know where that can lead.

By the way, a Canadian report today rightly said house sales here may be falling, but the costs of home ownership are not. “As a result, housing affordability in Canada, which has been deteriorating over the past decade, will continue to decline during the next two years.”

My last post told you what I believe lies in store for real estate. And I told you to look elsewhere to build your wealth and avoid danger. Today you have far more evidence this is true, and so long as this most emotional of assets is ruled by our animal spirits, the danger will increase. I found it interesting that last weekend major US media were running stories on how owning real estate is no longer the path to financial security. In fact, it may be the highway to hell.

Has anyone told Calgary?