Entries from July 2013 ↓

Failure to launch


She’s 58. He’s 62. The thing in the basement is 26.

“Steve’s a good kid,” mom says, “and he definitely tries to help around the house.” Dad sees it differently. “He contributes nothing, and expects a boatload. I’m giving him one more year.” So, next summer, Mars and Venus will clash up there on the main floor. I’m betting Steve stays.

One US study says adult children at home – about 23 million of them, up a staggering 18% in the last decade – are seriously holding back house sales. Household formation is down, because fewer twentysomethings get married these days, having extended adolescence and dependency. In fact, it’s estimated the crash and fallout of 08-9 has kept about 2.4 million of them from moving out, renting or buying.

And they like it. Seventy-eight per cent of the basement dwellers say they’re cool being at home. No news to Steve’s dad. “When I was his age I’d been working for five years and had a wife and a crappy house and no money. Not only am I paying for his food, I just bought his insurance and I pay for his car. It’s ridiculous.”

“But,” mom says, “how’s he ever going to get a good job without being able to drive to interviews? And he’s only been out of school a year. Why are we pushing?”

The conversation took place in my office some days ago, and degraded fast. It was supposed to be a session to review their retirement preparedness, but it ended up being all about Steve. No wonder. The little moocher is sucking off his parents’ net worth at one helluva clip. If it weren’t for him, there’d be a thousand more a month to invest, instead of seeing it go for food and car payments. Worse, they’d have sold the real estate by now, downsized into a condo and have at least $400,000 to invest. It’s money desperately needed, since their printing business is now marginal, and they have no pensions.

Without those funds, I told them, they’ll be in tough shape. Especially if they miss this window of opportunity to bail from that suburban house before the lights start going out in 905.

The latest federal stats (2011) paint an amazing picture. Almost 43% of all twentysomethings in Canada live with their parents. Over 63% of all guys 20 to 24 are still at home. A quarter of the moochers returned to the nest after initially leaving. And the problem of basement-dwellers seems most acute in Ontario.

Parents, despite their own financial messes, can’t say no.  A recent Environics survey found 43% allow their adult offspring to live at home rent-free. A third, like Steve’s dad, are paying for major purchases like cars and computers. And 20% are picking up their kids’ credit card payments – about the same number who told researchers they would “consider putting their own security in jeopardy to help out.”

They’re already doing a fine job of it.

Yeah, yeah, youth unemployment may be 14% today – double the national average – but the financial crisis brewing for millions of Boomer parents is massive. Over 70% don’t have corporate pensions to look forward to. Rock-bottom interest rates and investing ignorance have punished many. Household debt’s at a record level. More people are retiring with mortgages than at any time in history. RRSP contributions have cratered in the past decade. Wage gains are trailing inflation, so every year there’s less to put away. Life expectancy is shooting higher. And now the one asset everybody gambled on – real estate – is facing a decidedly troubled future.

It was the perfect Boomer storm, even before these wrinklies found out they have career children. For Steve’s parents, supporting him and his lifestyle is a burden they can scarcely meet. The odds the kid will pay them back once he finds work are zero. That’s about the same as his parents ever being frank and honest with their son about their finances. Steve will keep sucking. They’ll keep dodging.

When they left my office, Venus cared more about Steve than fate. Mars decided the fight wasn’t worth it. The choice they’ve made will swell their own risk far in excess of the amount it decreases their son’s. Financially, it’s indefensible. The kid should go. He’ll find a way to survive. A 62-year-old guy in a dying small business, not so much.

As for Steve, I’m sure he has no clue. Parents are eternal. They live on air. You take from them. They don’t mind.

In twenty years I wonder if he’ll look at his runaway taxes, and connect the dots.

Open for offers


We’ll let blog dog Linda start today’s offering. “You want realtor porn?” she emailed me. “Well I have some for you.

“I was surfing the movies on my Telus OnDemand and I came across a XXX movie called “Hot Property Hos”.  Summary:  ‘Some girls are willing to do anything for a sale!  The hot agents at Pearl Realty soon learn that the more they open their legs the more sales they close.’

“Is art imitating life or is life soon to imitate art?  I laughed so hard that I wanted to share it on your blog, but I don’t want your underage fans to see this (and I know you have a few).”

Too late now, Linda. And don’t worry about the kids. Four hundred moldy renters just Googled ‘Pearl Realty.’

* * *

Speaking of delusional people, a recent BMO survey found a third of all first-time homebuyers expect mortgage rates to be exactly what they are now in 2018. That’s amusing, of course, after what happened in June – when merely the expectation of less US central bank stimulus spending blew up the bond market and goosed five-year mortgages three times. More of that’s coming, along with repeated increases in Bank of Canada rates over the coming years.

The big worry F & the Peckerettes have is that legions of people who bought with 5% down in the past three years will be completely unprepared for the return of normal rates. This worries the mortgage brokers, too. In fact the industry’s online journal, Canadian Mortgage Trends, has published a mortgage stress test calculator that clients can use to see how screwed they might be as 3% mortgage rates go the way of Mike Duffy or Pamela Wallin.

Meanwhile the brokers are offering a few tips for minimizing payment shock. Included is the obvious strategy of locking into a five or 10-year fixed-rate mortgage now, while they’re still relatively cheap. You can also increase monthly payments slightly, for a big positive impact down the road. For example, hiking them by just 2% a year pays off a mortgage eight years sooner. Weekly payments have a similar impact. By paying weekly instead of monthly you make the equivalent of one extra payment a year, and hack years off the pay-back time.

More dubious choices include locking into the longest amortization possible (you can still get 35-years on a non-insured mortgage), but making monthly payments based on a shorter am. So, if you have a variable mortgage and rates balloon, there’s wiggle room. Or, you can trigger one of those idiotic take-a-payment-holiday schemes some of the banks offer. That has the same effect as lengthening your am – but remember each missed payment is added to your principal amount and itself amortized, which means you get to pay it back at least twice.

The best strategy, of course, is to sell your real estate when prices are still high and rates low, then buy in again when rates increase and houses are cheaper. If you don’t think that will ever happen, you must live in Calgary. We will light a candle for you.

By the way, you can find the mortgage stress test calculator here.

*  * *

Remember two years ago when this pathetic blog yammered away about investing in US real estate? At the time the usual America haters, doomers and metalheads swarmed on to say southern properties would collapse further in value along with the country itself, and I’m full of crap. I may be. But I was also right.

The price of resale houses across the States is rising now 1% a month on average. Yes, valuations are still 20% below those of 2005, but that’s a big hike from the bottom (negative 32%). Some markets, especially in the Northeast, are being rocked by bidding wars and soaring offers as the economy clearly rebounds.

The latest news is about new houses. While sales of new-builds have collapsed 40% in Toronto, for example, they jumped 8.3% last month across the US to the highest level since 2008. Yes, they’re still running below levels of five years ago, but they’ve swelled 38% in the past year, while prices are up 7.4%.

The average price for a brand-new SFH in America is now $249,000. In the GTA it’s $644,427.

Three guesses why we have the lowest sales on record.