Entries from March 2014 ↓

Rick’s house

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Rick’s a Yank living in Calgary. He reads this blog, looks around, and shakes his head at the déjà vu of it all. Here is his story. — Garth

In the lusty days of 2006’s housing boom, we were living in Charlotte, North Carolina: a fairly progressive variant of the Southern town, replete with too many churches, not enough decent bars, and far, far too many banks. That last suited me: I am a Technology Project Manager, and Banks have been my bread and butter.

In 2006 I was 44 (American), my wife 46 (Canadian), 2 kids at home. I was working steadily, and we were flush. So we decided to lose pretty much all our senses and buy a house. Why not? The media told us a “bubble” was years off (they’d been saying “bubble” for a year and a half or more).

FAILURE #1: We went to see a mortgage broker.

Our guy “George” was normal, rumpled, spoke plainly, and had us at hello. “Charlotte,” he said “has never had a meteoric rise in prices, so even if there is the bubble they talk about, we won’t lose much value. Even then, we can’t lose much, and if you are buying for five, maybe seven years before you move we’ll recover and you’ll make money. It’s all good.”

He got us approved for a $700,000 loan on what was inexpertly named a “jumbo, non-conforming” loan. We were smart. Way smarter than him. Smarter than you, too. We set our limit at $250-$275K. See how smart?

FAILURE #2: The New Build.

“North Carolina’s #1 builder for 5 years in a row!” Yessir, Shea Homes was indeed #1 in North Carolina, and had the provenance: articles published by local papers about the great design, superb build quality, and sky-high customer approval ratings. All fabricated, but who knew? We went to the “design center” and picked tile, hardwood, granite, told them to build the laundry room right here, don’t build the 5th bedroom, Berber carpet upstairs including the bonus room. Our house was so much nicer than yours, you should be ashamed.

We moved in, painted, showed off pics on Facebook, over-decorated at Christmas, and realized we could easily make the payments, including the ones they didn’t talk about like insurance, property taxes (2.2% in Charlotte, based upon 70% of the selling price), and still put money away for retirement on one salary. We are so much smarter than everyone.

In 2007, weird things happened. Things like a global collapse of the banking industry. We refi’d. got our interest down, and reduced our payment. We were so smart and had it made, while everyone in Las Vegas with a $400,000 home couldn’t sell them for $150,000.  Life was good. Until The Phone Call.

At five months of unemployment, I started to realize Cramer was maybe slightly wrong. I started to realize my mortgage banker George, who had disappeared from the face of the planet, had been a little optimistic. We had the house listed, but we owed all of the $260,000 we originally paid so we needed to sell for WAY more than $260,000 to cover costs. Oops.

Seven realtors told us we were good for $225,000, maybe.

At eight months, we were good for $210,000. Still no job. At eight months we also ran out of money. I called the bank and said we’d start failing payments. And no, my family had no money: my mother’s 1600 square foot falling-apart Southern California rancher was no longer worth $1.1 million. It was only worth $700K.

At about 14 months: a.) I got a job (at another bank!) earning 70% of what I was originally earning, b.) we abandoned the house. As we left the bank said: “If you give us $25,000 we will give you your original mortgage back, from the date of signing.”

We moved to a rental across town just before the drop-dead date. Better to hope for a short sale than pay $285,000 or so for a house that was tracking to sell at perhaps $200,000. Or so we thought.

We got three offers. Two were simply declined by the bank: $260,000 loans are not forgiven with $180,000 and $185,000 offers. The last offer prior to a total foreclosure was $195,000. There was much rejoicing. The bank said “yes!!! We’ll take this!!! This is PLENTY of money! Buuuut…you need to get a personal loan through us for $45,000 for us to accept the deal to make up for some of the shortfall.”

And so we lost our house. 2 years of payments, plus about $40,000 of up-front money. Gone. North Carolina is a “recourse” state in the US. This means lenders can sue foreclosed customers to reclaim any lost monies on the failed loan. They take a $250,000 home, short sell it for $175,000, and sue the previous owners for $75,000 plus fees.

The house eventually became an REO property; “Real Estate Owned”. It also eventually sold. For $167,000.

Here it is, sitting on a street littered with other foreclosures:

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We aren’t on the market for a house any time soon. Notably, we moved to Calgary to be with family, where our rent is as high as our mortgage was, but if things go Garth-ward, we’re going to have reduced rent sometime mid-2015. She finished school and is earning a hell of a lot of money, and I am between contracts but slated to start up again (at a bank!) in June, so I am a stay at home dad until Canadian immigration catches up with my paperwork and I can work locally, rather than remotely

Hey, maybe someday we will buy. Maybe not, but given my tale of woe above, the Canadian “it can’t happen here” mantra rings in my ears like a freaking shotgun blast to the head. If we find a distressed property that has been reduced, we’ll swoop in like vultures and pick it up for a song. I’d have given anything (other than $45,000) to have that short sale go through, rather than the foreclosure. Someone will have a little place in central BC that they’ll surrender for a song, and we can retire there.

Things we’ll never do:

1.)    Trust a bank.
2.)    Trust a builder.
3.)    Trust a realtor.
4.)    Trust ANY news outlet that says “housing is rocking right now!”

So there you go. Big fan, Pathetic Blog Guy.

The empty middle

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On Monday night Patrick snapped the picture below outside the liquor store in Aurora, an affluent exurb of Toronto. It speaks for itself. The pursuit of wealth, without money. Own a home, even when you lack the resources. In our entitled times, why not? Everyone else is doing it.

He adds this:

Just this past weekend I observed dozens of miserable people shivering in minus 15 outside a sales office. In 2002 I paid 286k for my detached 4bdr, here in Aurora. Took a few weeks to decide, and at least six trips to a sales office before signing on the dotted line. Today these folks are ready to pay 686k for the same average 4bdr on a lot two-thirds the size of of mine, with a decision made before they saw the floor plans.

It will take me well over a year to kill off the remaining $26k of my mortgage, and then I’ll remain with a 12-year-old box of pressed cornflakes. I can’t fathom living in a 25-year-old house made out of Popsicle sticks, and having another $120k and 5 years of mortgage remaining. The delusion runs deep in this country. Stay strong, we need you.

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Real estate prices go up, but incomes don’t. So we borrow. “Homes for Sales $0.00 Down Payment” is a marker of our attitude towards debt. The common wisdom’s simple – buy by whatever means. House values will keep swelling. Everybody ends up making money.

The sentiment runs deep now, as it did in the States before the music died. It doesn’t matter what you owe, it’s what you own. After all, everybody can drive by and ogle your property. Nobody sees the loan.

Until everybody sees the consequences, that is.

Oakville is a wealthy place. Four times the number of affluent people live there as in the rest of the GTA, and its main street, from Trafalgar Road to the river, has always been lined with boutiques catering to those who think malls are where your employees shop. Just what you’d expect in a place where the average house costs almost $750,000, and homes of historic significant are three times that.

But all that is changing. Empty storefronts now mar the boulevard, and retailers are so pinched they’ve taken to moaning to the media, decrying what a soft economy is doing to the seemingly affluent.

“They’re cashed out. We call it ‘maxed’,” says Greg McKinnon, owner of The Running Company. “They’re paying $2,000 a month for the Beamer and the Land Rover in the driveway, they have million-dollar mortgages and $50,000 in landscaping. There’s not a lot of money left over.” Julia Hanna is an executive member of the Oakville Chamber of Commerce and the past chair. She also owns a downtown Oakville restaurant. “I’ve been a business owner in downtown Oakville for 30 years. I’ve never seen it this bad. Never.”

It’s a phenomenon now well known in the States, called ‘wealthy hand-to-mouth households.’ They have lots of stuff (houses, cars, clothes), but little liquid wealth. As a study by the Brookings Panel on Economic Activity pointed out, these folks consume their cash flow just getting by, in activities adding nothing to their wealth or security. “The wealthy hand-to-mouth, therefore, behave in many respects like households with little or no net worth, yet they escape standard definitions and empirical measurements based on the distribution of net worth.”

The authors (two of them Princeton economists) looked at the impoverished rich in Canada as well as the US, Australia and Europe and found that someone who is living “hand-to-mouth” is twice as likely to be middle class as poor. The house, in other words, is sucking them dry. No wonder the shops on Oakville’s Lakeshore strip are drying up with them.

And as an article The Atlantic pointed out, it’s those couples trying to buy their way into what they perceive as a good school district who are the biggest ticking time bomb. “Couples can only afford the mortgage with both their salaries, so they’ll get in trouble if either of them loses their job. But even if everything goes right, they’ll still be cash-poor for a long time. They’ll probably have to use most of their savings on the down payment, and use a big part of their income on the mortgage payments. In other words, the wealthy hand-to-mouth are parents overextending themselves to get their kids into the best schools possible…”

Of course, you can see this any day for yourself. Wander an upscale street in the GTA or Vancouver some night after dusk, when the view through windows is ideal. Check out the furniture.

The Princeton guys have a key point: the hand-to-mouth rich are completely vulnerable to economic shocks. Ironically, more than the poor. So imagine what happens if the economy softens or rates rise or asset values (houses) decline.

Yup. More stores gone. Jobs, too. Soon, houses listed in distress.

Then the modest, and the debtless, shall inherit the earth.