Four years old, two storey, three bedroom, two bath, 2,400 square feet – all for $64,000. Nice. “We recently purchased a home in Phoenix Arizona,” Crystal writes me, “and wanted to open a business and relocate there from Canada,” she says, “but it did not turn out this way.” And the real estate wasn’t so hot, either – despite scooping a property for a fraction of its former worth. Now it’s worth $61,000, and falling. Crystal just learned about deflation.
“It costs us about $5,000 a year just to maintain,” she says, “so what should we do? Keep the house, try to find renters and sell later? Or sell immediately, preferably to another Canadian, like baby boomer retirees? How soon do you think the Phoenix real estate market will pick back up?”
Of course, the house costs them more than five grand. There’s also the $64,000 cash they put down (plus closing costs), which could be earning five thousand – which means Phoenix is eating close to $1,000 a month, factoring in a trip a year to check on things. Trouble is, there are lots of perfectly fine houses for rent in that city for less than a grand a month, and good tenants are tough to find. Renting will also mean having to file an annual US tax return, and being nailed for any cash flow surplus. Bummer.
And it all seemed like a no-brainer. Just buy a cheap house online.
As I’ve said before, as a long-term strategy, sell Canada-buy America works. We’re inflated, They’re deflated. Both markets have only one direction in which to go. In Canada we fork over about 40% of our earnings to feed houses (it’s70% in Vancouver). In the US now, that number has withered to 13.1% of median family income. We have 70% home ownership, and rising. They are at 66% and falling. We think it’s different here. And so did they.
I said yesterday the US housing market is one of the external factors you need to pay attention to. Its continuing crisis is a potential trigger for continent-wide deflation. Cascading real estate values not only rob American consumers of their wealth, and diminish that country’s appetite for our goods, but also provide us with an example of what can happen when you put your faith in a house.
As I also said, if we do stagger through a deflationary episode the losers will include people with big mortgages and little equity, and those with stock-laden investment portfolios. The winners will be folks who loaded up on bonds and, of course, renters. Liquidity will be worshiped. Debt will kill ya.
Yes, exactly. This is the nightmare scenario for the Canadian middle class – those folks who have drunk the Royal Re/Max Kool-Aid, pigged out on 3% mortgages and turned their RRSPs into granite countertops. We now have more household debt than the hedonist Yanks. The average downpayment is a weensy little 7%. Most new mortgages taken out (at least until two weeks ago) were for 35-years – which means homeowners rent money instead of build equity. We spend what we earn (at least). We pay more taxes than the Americans. Our houses cost twice as much. Guess who’s in the deflationary crosshairs?
I know, I know. Everyone says a ‘US-style’ housing dump won’t happen here. And that’s probably correct. I seriously doubt there will be neighbourhoods anywhere in which houses lose 80% of their value, as they’ve done in some Phoenix hoods. And it’s unlikely we’ll hear realtors in Calgary or Kelowna or Toronto say something like this (uttered this week by an insider in Fort Lauderdale): “If there weren’t vultures out there, you’d have a city of dead carcasses. It’s like the circle of life.”
But that’s not the point. A mild 15% correction in Canadian house values, and a protracted recovery, would finish off more of your friends and relatives than bubonic plague. They’ve borrowed to the max, saved diddly, have no cash reserves and can only afford their homes because of mortgage rates which are the lowest in recorded history. In short, the Canadian middle class has taken one mama of a gamble that from here to eternity it’ll be wall-to-wall inflation. For this strategy to work, houses must increase every year. Yet for that to happen, so do incomes. And have you scored a raise lately?
Exactly. This is what worries me. Should worry you, too. Especially if you’re a hormonal virgin or a crusty Boomer with a two-acre family room.
Now, how about Crystal? Is poor Phoenix ready for a fabled rebirth out of its own ashes? Or, just nicely cooked?
Well, this week’s news is that house prices in 18 or 20 major US cities have plopped again, led by a 9.1% collapse in – you guessed it – Phoenix. The betting is now that housing will soon be in a double-dip recession, with values hitting new lows. Foreclosures are expected to rise 20% in 2011. All gains in real estate values since 2001 (ten years ago) have now been erased. New homes are selling at 2003 prices. Resales, at an average of $156,100, are at 2002 levels. Construction is at a 50-year low.
So, Crystal, your strategy’s obvious. If you can’t wait five years, snare a Canadian. I hear they’re horny.
