Entries from December 2013 ↓

Tapering

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Other than Justin Bieber saying yesterday, “I’m probably gonna quit music,” the best thing about this week is tapering. Yeah, baby.

In case you missed it waiting in line at Costco to buy a gross of Cottonelle for your Armageddon shelter, the US central bank announced Wednesday afternoon it will gradually end the stimulus spending it’s been engaged in for the past three years. I told you it would happen, while all the Depends-wearing doomers, bullion-lickers, Bitcoiners and America-haters who gather here to trade weapons said it would not. Ever.

Tapering means exactly what it says. The Fed will slowly turn off the gush of stimulus spending which has seen it soak up $85 billion a month in government securities and mortgage instruments. This doesn’t mean it will raise interest rates in general (that won’t happen until way more jobs are created), but it does mean bond yields will rise over time and bond prices fall.

As a result of the announcement, stocks went wild. The Dow added 300 points and soared to the highest level ever. Why? Because the tapering thingy is now known, and it’s not so scary. The Fed’s proven it can take the foot off the gas without crashing into the ditch. Now instead of worrying that every piece of good economic news would bring Fed action closer, investors can see positive reports for what they are – evidence the US recovery continues.

And it does. Housing starts are roaring ahead. Housing prices up 13% in a year. Two hundred thousand new jobs a month. Corporate profits exceeding expectations. GDP numbers rosier than forecast. Jobless claims dropping. Consumer confidence rising. It all points to more growth, more bottom-line corporate revenue, and more gravy for investors.

As this pathetic blog has stressed for a long, long time: the States is recovering and we’re blowing. If you don’t think real estate plays a huge part in this, you belong back in the personal tissue aisle.

While Americans have been reducing personal debt, dropping exposure to residential real estate and rebuilding a whacked economy, Canadians have been busy building condos, selling each other inflated homes, amassing epic levels of indebtedness and worshiping real estate until it represents more of the economy than manufacturing or the entire energy sector. Our output is no longer growing, layoffs are big news and the latest job numbers suck. As we all discussed last week, deflation now seems as likely as inflation. That would be bubonic for houses.

So today the average property here costs twice that of the typical US digs. Worse, they have 30-year mortgages with fixed rates. We have to renew at least every five years. And this tapering business means your next renewal is 100% guaranteed to be higher.

Here’s why. By spending obscene amounts of money every month buying bonds and related assets, the Fed created a honking big demand for debt, driving bond prices higher and bond yields lower (they move in opposite directions). With bonds paying diddly, money flowed to securities with a sweeter return, like dividend-paying stocks. So, we got record high bonds and record high equities at the same time.

Tapering means the bond-buying will eventually end (by the close of 2014, perhaps), which will see those prices fall and yields increase. So long as the US recovery continues and corporate profits match, stocks should avoid any 2008-style decline (but temporary corrections will certainly occur).

Higher yields in the debt market are lethal for Canadian real estate, because that’s where the bankers fund their fixed-rate mortgages. And what have Canadians done over the past few years in anticipation of this? Right. Over 80% now have fixed-rate home loans, which will be coming up for renewal at enhanced levels over the next few years. Their only defence then will be to go variable-rate and take the risk of higher costs after 2015 – which is a certainty.

Meanwhile, guess what robust stock markets and rising bond yields mean? You bet. Way better places to put money than in gaseous, wobbly, hormonal residential real estate. The Fed’s move – removing uncertainty, restoring some balance, validating the recovery and doing it without shock – may have set the stage for another leg higher in a bull market now four years old. Why would anyone buy a spec condo at a time like this? Hell, why would you buy one at all?

It was a big day. First of many.

Knockoffs

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At great personal risk, I write for a final time about do-it-yourself house sellers. Normally I’d ignore the topic as I try to do with people who shop at Costco or buy Kias, but recent comments that I trash FSBOs because I love Royal LePage are simply over the top.

Houses cost a lot. Too much. So why would you ever buy one without adequate representation and protection? It sure won’t save you any money, and could well cost you dearly. It’s just a nutty idea embraced by the kind of iconoclastic, anti-establishment, rebel, antisocial, outcast, regulator-snubbing, tight cheapskates who populate this pathetic blog.

So, herewith, ten reasons FSBO sucks:

(1) If you’re a do-it-yourself seller, never expect Chuck the ace local Re/Max guy with a listing down the block to bring a client over. It ain’t gonna happen, since he stands to get nothing from you but a fight and a sneer or, at best, a token payment. So what, you say? So your property isn’t exposed directly to the primary target market – people ready to buy, now, on your street. As a result, you’ll probably end up selling for less, and save yourself nothing.

(2) Most people hate dealing with FSBOs because they are, by their very nature, cheap, smug, misguided and almost always inexperienced vendors. The prime motivation for self-selling is to save money by avoiding a real estate commission. That should mean that FSBO listings are always priced 5% below comparable MLS offerings. But, of course, that never happens. In fact, most FSBOs are marketed above fair value because the flip side of cheap is greed. Buy from such a seller, and get ‘em both.

(3) Buyers hate FSBOs because they utterly lack perspective. Unlike a real estate agent who is in and out of candidate properties all days, the self-lubricating seller knows only his or her house intimately, but will not hesitate to insist it’s far superior than every other one in the hood. Nothing a FSBO tells you is actually credible.

(4) Buyers hate dealing with FSBOs because it’s not easy. There’s no receptionist to take your call, no appointment desk to schedule a showing, and no guarantee you can see it when convenient. Plus there  will be no agent to include two or three other comparable listings during your tour, giving perspective and balance.

(5) Experienced buyers shun FSBOs because they understand the importance of market research, which no DIYer is ever going to provide. A buyer dealing with a competent agent will have access to detailed comps not only for the street and the area, but for similar-type homes in the region. You need to understand not just recent selling prices, but days-on-market, price adjustments and overall market value trends. A good agent will also tell you what external factors influence a property’s price, like proximity to shopping, or a parking lot, or transit, a multi-residential building, or a roadway that might not look busy when you first see it. Local knowledge is critical. Expect every FSBO to lie.

(6) Buyers hate FSBOs because the negotiation process can be emotional, difficult and personal. Sitting across the kitchen table arguing about price, closing date, inclusions and conditions is as much fun as a divorce. An agent gives you distance and leverage, and will almost always save the buyer money.

(7) Buyers can expose themselves financially and legally with FSBOs since most of them are first-time sellers with an amazingly thin grasp of real estate law. Agents using pre-lawyered, authorized purchase and sale agreements and trust accounts offer protection against the loss of deposits prior to closing, adequate escape in the event of a failed home inspection and the correct wording of conditional clauses that can let you walk. For example, most FSBOs have no idea of the difference between a vendor’s warranty and a condition. Making a deal subject to lawyering could force you through this distasteful process twice.

(8) Cheap people apparently don’t value their privacy or safety. Sticking a FSBO sign on your front lawn is an invitation to any thief, con artist or pervert who might be looking for someone to loot, identity-steal or assault. Opening your home to some guy you know nothing about, who merely expreses an interest in ‘looking around’ could be the day your life changes. Do you really want your wife conducting a showing while you’re at work? Are you a complete idiot?

(9) Buyers take on more risk dealing with a FSBO. If a deal goes bad after closing there’s no listing agent or brokerage to seek redress from. No mechanism for appeal, since it was a private, unbrokered contract. The seller may be gone in a flash, in which case pray you picked the right lawyer and bought enough of the correct title insurance.

(10) Cheap, unprofessional, self-serving, naïve folks who think they can line their pockets with even more capital gains tax-free profits. Are these the kind of people you want to haggle with, hand over thousands (or tens of thousands) in the form of a deposit, and then hope closing day actually happens after you’ve already sold your home or arranged financing?

If so, you deserve each other.

Note to Ross Kay fans: Your latest CREA-bashing, moaning and slashing is here.