I was talking with a coworker yesterday, a guy who sadly is in the middle of a marital break up. Until the marital home is sold however, he's stuck living with his soon to be ex-wife, and to be fair...she with him.
The conversation quickly turned to the economy when "Bob", (not his real name) stated his intention to buy back into the market once everything is settled.
Bob's house is probably about 2,200 square feet with a lot of extras. Its in a tony little subdivision of a Toronto suburb. The master bedroom is huge, its about 20 feet long with a built in gas fireplace at one end with room enough for a small couch and chair. Back in 2008 or even 2007 I could see there being bidding wars for this type of property, but not now. He and his wife have already dropped their asking price twice in just two months. They started out asking for over $300K and are now down to just below $290K. Even with the price drops though, no offers yet. They're constantly scoping the market and positioning themselves as the least expensive home compared against similar properties in their area....the problem now is that there's no movement with any of the homes in their area of similar value.
Being conservative Bob figures he and his wife should walk away with somewhere around $40K, (worst case) each once the house is sold and all the expenses associated with closing and the divorce are paid. He then told me he's going to look to buy something small for around $200K in the same general area, which he's figures he'll be able to carry with a mortgage cost of around $800 per month....using 20K for a down payment.
I couldn't help but asking ..."ARE YOU NUTS"!!!
What economic indicator out there is pointing to a market recovery anytime soon? Even with interest rates at all time historical lows housing prices are falling, albeit tepidly. The real estate industry has been doing a full court press in an effort to convince people that "now is the time to buy", and yet even with all their advertising, prices are nudging south.
And that's why Bob is looking to jump right back in, because he's afraid that prices will start climbing and that he'll be left behind. Pfffffffffffft, I highly doubt it!!!
Back in the 1980's, the last time there was a serious correction in real estate prices...home values dropped about 25%. That was when the majority of baby boomers were in their late 20s and early 30s, poised to start driving the economy with home and car purchases, and a never ending wave of conspicuous consumption. And they did, it took a while...about 7 years, but real estate recovered to previous levels and kept moving higher.
I asked Bob what his rush was...
It took about 7 years for the RE market to rebound in the 80s, and things were much better then. There wasn't the threat of 'Peak Oil', the point at which demand will outstrip oil producers ability to supply the market. Deficits were not uncommon, but you weren't seeing projections of $50 billion in one year, and that's only Enron Jim Flaherty's latest guess. And mortgage rates were at all time highs, with only one realistic direction in which to head...down, which meant affordability would increase.
Contrast that with today. Gas is selling for around $1 a litre again, taking money out of people's pockets that could be spent on other things. Record deficits today mean higher taxes tomorrow, so that's more dinero being siphoned out of the consumer's pocket. And interest rates are at or near their lowest points in history, which means the only direction left to go is up...meaning decreasing affordability as rates climb.
And Bob is thinking about buying into a market like this? One which by every reasonable measure is poised to collapse???
Don't get the idea that Bob is stupid...he's no PHD certainly, but he does have a university education. He's just a normal guy who is subject to all the noise in the marketplace, and all that noise is urging people to dive in right now. Its eerily similar to the way investors were convinced that they HAD TO HAVE some Nortel in their portfolios back when it was trading over $100 per share on the TSX. Anyone dumb enough to shun Nortel was going to be missing out big time and would be kicking themselves when analyst predictions of $180 to $200 a share came to fruition.
Like the brokerage industry, real estate is a multi billion dollar industry in this country. There is an abundance of supply on the market right now, so we're seeing the main stream media being used like cheap $10 crack whores to lead the lambs to slaughter.
Houses, like stocks, are commodities. And in the market place, where commodities are bought and sold, the number one motivator which gets people to buy or sell is fear. When the market is climbing higher and higher people jump in because they're afraid of missing the boat. Likewise when markets start tanking, investors bail because they're afraid they're going to lose it all. People bought Nortel at $100 and higher because they were afraid of missing out on big profits. They sold down around a buck when there was talk in the media about NT going bankrupt and being liquidated.
Of course there's a huge difference between a house and a stock, you can't live in your shares of Nortel.
Bob's plan is to put about 20K down on his 200K home, which would leave him with a 180K mortgage. But if all the indicators pointing to a major correction in housing values comes to pass, and there's no reason to think they won't....then he will very quickly find himself under water, owing more on the home than what its worth. Couple that with the certainty that his borrowing costs are going to be on the increase and you have a recipe for financial suicide.
Why not take the 20K down payment and invest in a tax free savings account, in year five a GIC TSFA from the major banks is quoting an interest rate of 8% right now. Or if there's unused RRSP room stash it there and reap some big tax savings. Then, when the market gets flooded with people unable to afford their homes in a climate of rising interest rates, higher energy costs and an increased tax bill...dive back in.
Bob said he'll think about it...but I just know the media whores are going to get him.
The conversation quickly turned to the economy when "Bob", (not his real name) stated his intention to buy back into the market once everything is settled.
Bob's house is probably about 2,200 square feet with a lot of extras. Its in a tony little subdivision of a Toronto suburb. The master bedroom is huge, its about 20 feet long with a built in gas fireplace at one end with room enough for a small couch and chair. Back in 2008 or even 2007 I could see there being bidding wars for this type of property, but not now. He and his wife have already dropped their asking price twice in just two months. They started out asking for over $300K and are now down to just below $290K. Even with the price drops though, no offers yet. They're constantly scoping the market and positioning themselves as the least expensive home compared against similar properties in their area....the problem now is that there's no movement with any of the homes in their area of similar value.
Being conservative Bob figures he and his wife should walk away with somewhere around $40K, (worst case) each once the house is sold and all the expenses associated with closing and the divorce are paid. He then told me he's going to look to buy something small for around $200K in the same general area, which he's figures he'll be able to carry with a mortgage cost of around $800 per month....using 20K for a down payment.
I couldn't help but asking ..."ARE YOU NUTS"!!!
What economic indicator out there is pointing to a market recovery anytime soon? Even with interest rates at all time historical lows housing prices are falling, albeit tepidly. The real estate industry has been doing a full court press in an effort to convince people that "now is the time to buy", and yet even with all their advertising, prices are nudging south.
And that's why Bob is looking to jump right back in, because he's afraid that prices will start climbing and that he'll be left behind. Pfffffffffffft, I highly doubt it!!!
Back in the 1980's, the last time there was a serious correction in real estate prices...home values dropped about 25%. That was when the majority of baby boomers were in their late 20s and early 30s, poised to start driving the economy with home and car purchases, and a never ending wave of conspicuous consumption. And they did, it took a while...about 7 years, but real estate recovered to previous levels and kept moving higher.
I asked Bob what his rush was...
It took about 7 years for the RE market to rebound in the 80s, and things were much better then. There wasn't the threat of 'Peak Oil', the point at which demand will outstrip oil producers ability to supply the market. Deficits were not uncommon, but you weren't seeing projections of $50 billion in one year, and that's only Enron Jim Flaherty's latest guess. And mortgage rates were at all time highs, with only one realistic direction in which to head...down, which meant affordability would increase.
Contrast that with today. Gas is selling for around $1 a litre again, taking money out of people's pockets that could be spent on other things. Record deficits today mean higher taxes tomorrow, so that's more dinero being siphoned out of the consumer's pocket. And interest rates are at or near their lowest points in history, which means the only direction left to go is up...meaning decreasing affordability as rates climb.
And Bob is thinking about buying into a market like this? One which by every reasonable measure is poised to collapse???
Don't get the idea that Bob is stupid...he's no PHD certainly, but he does have a university education. He's just a normal guy who is subject to all the noise in the marketplace, and all that noise is urging people to dive in right now. Its eerily similar to the way investors were convinced that they HAD TO HAVE some Nortel in their portfolios back when it was trading over $100 per share on the TSX. Anyone dumb enough to shun Nortel was going to be missing out big time and would be kicking themselves when analyst predictions of $180 to $200 a share came to fruition.
Like the brokerage industry, real estate is a multi billion dollar industry in this country. There is an abundance of supply on the market right now, so we're seeing the main stream media being used like cheap $10 crack whores to lead the lambs to slaughter.
Houses, like stocks, are commodities. And in the market place, where commodities are bought and sold, the number one motivator which gets people to buy or sell is fear. When the market is climbing higher and higher people jump in because they're afraid of missing the boat. Likewise when markets start tanking, investors bail because they're afraid they're going to lose it all. People bought Nortel at $100 and higher because they were afraid of missing out on big profits. They sold down around a buck when there was talk in the media about NT going bankrupt and being liquidated.
Of course there's a huge difference between a house and a stock, you can't live in your shares of Nortel.
Bob's plan is to put about 20K down on his 200K home, which would leave him with a 180K mortgage. But if all the indicators pointing to a major correction in housing values comes to pass, and there's no reason to think they won't....then he will very quickly find himself under water, owing more on the home than what its worth. Couple that with the certainty that his borrowing costs are going to be on the increase and you have a recipe for financial suicide.
Why not take the 20K down payment and invest in a tax free savings account, in year five a GIC TSFA from the major banks is quoting an interest rate of 8% right now. Or if there's unused RRSP room stash it there and reap some big tax savings. Then, when the market gets flooded with people unable to afford their homes in a climate of rising interest rates, higher energy costs and an increased tax bill...dive back in.
Bob said he'll think about it...but I just know the media whores are going to get him.
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