Entries from May 2013 ↓

Smoky hole


For two years Darren and his hot young wife prowled the shady streets of mid-town Toronto for a house in the $900,000 range.

Despite a combined income of over $200,000, plus $225,000 in savings and the threat of Lysistrata, he couldn’t quite pull the trigger. A few weeks ago he wrote me: “I couldn’t get by this sinking feeling that there was something fishy going on in the market. I spent hours with spreadsheets trying to justify a million dollar house, as that was what people I knew with similar incomes were doing. But I can’t get past the numbers.”

Buying a fixer-upper (what nine bills gets in that hood) would mean burning through 90% of their savings, tight cash flow and no saving for retirement (or anything else). Darren wrote me and asked if it made more sense to buy in a demand area like that, or rent and invest the cash. That was one easy question to answer – and I did.

Well Darren & the babe have finally made a choice. I’ll share that with you in a moment.

First, growing evidence the soft landing that F & the peckerettes were so hoping for is in a hard dive. Even in secondary markets, where things are supposed to be sleepy and stable, the air’s coming out of the housing gasbag in a deafening whoosh. Housing sales in Halifax in the months of February, March and April have declined by 31%, 35% and 29.2% respectively. In Sherbrooke the plop last month was 29.3%. In fact in 24 or 28 Canadian urban markets, sales were down substantially – spanning the country.

In the canyons of Toronto, where teeming hordes of hipster metrosexuals on Vespas live in forests of condos with de rigeur glass balconies and cement ceilings, all is not well. Realtors report sales during the first half of May were flaccid (661 units sold, a 13.6% drop), but in the last two weeks, they’ve collapsed. By this time next week we shall know.

And did you hear about CMHC?

The federal agency which ponies up insurance to cover high-ratio, high-risk mortgages a year ago was barely able to keep up with the demand from bankers and brokers, and perilously close to bumping up against its $600-billion limit. In the first three months of 2012 these guys wrote $19 billion in insurance on new loans. But a year later, crickets. A decline of 56.8%. And the number of properties insured fell 54%, from over 114,000 to just 52,000.

Now contrast this stark fact – a drop in housing demand by half – with what the realtors have been telling folks. For example, here’s Toronto Real Estate Board president Ann Hannah:

“Despite the headwinds we have experienced in the housing market this year, April sales came in quite strong in comparison to last year.  As we move through the spring and into the second half of 2013, the demand for home ownership should continue to firm-up relative to last year. It has been almost a year since the federal government enacted stricter mortgage lending guidelines. It is realistic to surmise that some households, who originally put their decision to purchase on hold, are once again looking to buy.”

Nice manipulating, Ann, but it doesn’t seem to be working. When the feds, the bank regulator and CMHC all toughened up rules a year ago – which realtors said would have little market impact – the effect was dramatic, coming during a time of speculative excess. Some observers, like Scotiabank head egg Derek Holt, think the timing couldn’t have been worse. “Those markets likely would have cooled on their own through an exhaustion factor,” he says. “Now the consequences are only just emerging by way of the magnified risks of a hard landing.”

Yup. The smoky hole with the tailfin sticking out, as I’ve been telling you to look out for. And while that doesn’t mean a Phoenix-style, OMG-70%-crash, it’ll certainly be enough to wipe out the equity of new buyers and the retirement plans of many Boomers. Even having house prices flatline for a few years while mortgage rates tick higher and houses get illiquid will put countless families into a financial vise – and that’d be a best-case scenario.

So, why would smart people not choose diversification, balance, liquidity and freedom?

Darren did. And no sex strike.

I just wanted to send you a quick update to let you know that thanks to your blog my wife and I just signed a 1 year lease in a BEAUTIFUL townhouse in an ideal location! I used all the stories and principals from your blog to make a great case for renting, and you know what… it worked!!

Thanks again for reading and responding to my email, it made a world of difference to me.

I know you said ditch the spreadsheet… but alas I could never do that. I’ve attached the spreadsheet that I used to help bolster my argument. It is fairly simple, but I found it effective to help quantify my decision. Feel free to send this to anyone who, like me, likes to play with numbers.

Well, dude, it’s a nasty piece of work. To break even on that house over a decade, it shows, would take a 50% increase in value – and no mortgage rate increase. Like that’s gonna happen.

Download here.

Of men & bonds


Days ago I told you that five-year, fixed rate closed bank mortgages would be going up. That’s just happened. The hike ain’t much – about a tenth of a point – but rest assured there’s more to come. You can imagine the result, coming as this does during the biggest real estate slow-walking event since we all nearly croaked in 2009.

This has nothing to do with the Bank of Canada. However, dudes Poloz and Carney made it clear this week the next rate move by the Big Bank will be up, not down. That may not happen for a year (at the outside), but when it does, those people left with variable-rate loans will wish they’d spent less time watching Global.

That this would occur was never in doubt. First, the feds are appalled at the debt orgy which their low rates unleashed. The notion of conservative little beavers eschewing carnal pleasures so they could store their nuts (I’m now strangely aroused) was always at the core of monetary policy. These guys actually thought families would employ the cheapest money ever to pay off high-rate debt, or trash mortgages.

Instead, we’ve pigged out on the stuff. The credit bubble is now way more worrisome than the housing bubble, simply because it takes a lot longer to get out of debt than sell a house. And households devoting more and more of their income to servicing loans have less to spend on important things, like cheap TVs from China and Korean Imitation Automobiles. So the more credit’s extended, the longer the GDP numbers will suck.

So, the Bank of Canada will never lower its rate. Period.

However, this has nothing to do with five-year mortgages sprouting. For that, blame bonds. As mentioned earlier this week, US 10-year Treasuries (the global benchmark bonds) are having the worst time in two years with prices falling and yields spiking to 2013 highs. The same is happening in Canada. The 5-year GoC bond yield has pushed through a three-month high, and is up about a third of a point.

Why? Because of the stuff I’ve just detailed (which doomers hate me for). The US economy is steadily resurging; equity markets have been on a tear; the American housing market is making a sustained comeback; and investors are no longer happy hiding their cash in bonds where yields are lower than Mike Duffy’s credibility. So heaps of money are moving out of bonds and into stocks. As the world improves, appetite for risk (and return) grows.

To hold bonds, conversely, investors demand higher yields. So, up they go.

This is not a temporary event. Of course, yields and prices will fluctuate continuously (like stock markets), but the trends are clear. America recovers. Corporate profits satisfy. Global growth staggers back. Consumers spend more. The storm abates. Equities rise. Bonds fall.

And because banks finance five-year mortgages with five-year bonds, there’ll be a steady drum beat of little rate hikes over the months to come. Nothing dramatic. But the outcome is clear. Come August you will really, really, really wish you’d listed that condo in April.

Speaking of market timing and death by home, let’s revisit GTA-area realtor Ross Kay, whose bold prediction that house horniness has just died got a lot of people excited. You may recall that he has a ‘real estate engagement’ index that pinpointed May 19th as the day the market expired, and that interest has now declined 73% from its peak last April.

If he’s correct (and he claims a 200% five-year record of accuracy), this will show up in MLS sales number in July and August. You can just imagine the impact that will have on an already-wobbly situation. It’d undoubtedly set the scene for a dive in prices.

But what is the ‘engagement’ index? “Here’s a partial list,” he tells me. “It includes an inventory of homes for sale, open house attendance, home showing statistics, MLS (online) listing views, national media headlines, plus blog traffic.”

“My only interest in going public with the index was because I had to assist clients through the 1990 to 1995 market after the great run of the late 80’s.  It is a learning experience when a grown man is crying at a kitchen table and all you can do is save his family from losing another $10,000 if he waits another month.

“Today after 13 years of good market and the rash influx of the majority of real estate agents, who have no experience going from a runaway market to an absolute collapse, there is simply too much unethical advice being spouted by groups/individuals that Canadians believe protecting them.”

As this blog has shown many times, real estate boards lie. They revise sales stats without disclosure, for example, then create Frankenumbers to mask market changes. Corporate media outlets are untrustworthy. They do little research or fact-checking, and run ads as editorial. Banks deceive. They tell borrowers how to miss mortgage payments then punish them, and create false ads. Is it any wonder people are cynical?

“Interesting aside.” Adds Kay. “I was shocked to see the number of views coming from IPs attached to financial services corporations viewing my site in the last 24 hours.  It appears any claims the industry does not read Greater Fool are unsubstantiated as you were the first place the index was ever publicly released.”

Don’t say that. Makes me feel so… mainstream. Yuck.