Kids with huge mortgages:be happy. Debt-free parents: worry

[This blog. I'm sure I read that a post a year was all it took to get a huge readership. Turns out it was once a day. I'm going to try one more time to get closer to once-a-"something closer to a day than a year". What better way to restart than an attempt to scare the bejeebies out of some of you? ...]

This article recently appeared in the Globe "Is it the right time to sell..."

For the better part of a decade, Lee and I have been unhelpfully telling people that all we know is that we don't know, and that a real estate market correction, while inevitable, is a crapshoot in terms of the all-important "when?" and "how big?".

If you haven't heard the rant at all or recently, it goes like this: On any given day I can find a well-researched article in the Report On Business by a very smart respected expert that clearly proves the market is going to crash ... now.  And about 3 pages before or after is an equally well researched article by a very smart respected expert proving that everything is fine ... relax.

Six or seven years ago I would have advised caution; I was not totally stupid or totally disrespected and I did have some middling expertise, and I was totally wrong.

Our current thinking is that whatever happens, whenever it happens, will be fairly gentle -- maybe a flattening rather than an actual fall.  But I could be wrong again ... the most worrisome point being that a lot of those smart experts now agree with that theory.

So why is this latest article worthy of note?  It suggests the same story:  real estate goes up and down over time, but over time the overall direction is up. It suggests there has to be a correction and maybe soon, but if you hang on you'll be fine.

But the author touches on an interpretation that I haven't seen talked about much, and which somewhat counters a fear that is being talked about all the time.

Younger folk are taking on massive amounts of debt to get into what may be a too-hot market. Danger Danger Danger!  Well, so long as they can handle an increase in interest rates without losing the house they will be fine in a few years, maybe a decade.  Hang tough and let that price curve get back to its historic upward run.

Meanwhile their baby-boomer parents think life is golden.  They bought a house back in the day for what is now their credit card limit. Now it's worth one or two zillion dollars. Once the last kid leaves for the last time and retirement is imminent, they can cash in on the 4 bedroom detached, buy the nice two bedroom condo and live the good life on the equity that is now a huge gob of cash in their investment accounts.

Financial planning types occasionally scare the crap out of their clients by noting the massive difference that a bust/boom in the first few years of retirement can make to the whole rest of your life.  A 10 or 15% drop in the value of your finances in the first year or two can be hard or impossible to replace if you aren't careful.

The point: If the equity of your house is important to your retirement years, you might want to lock that in rather than just waiting until your hips hurt and you don't like the stairs anymore.

Think about it as a regular investment. If you invested half your savings in a stock (Apple or Blackberry, take your pick based on your optimistic/pessimistic tendencies) and it doubled in a few years and you were getting close to retirement, would you hang on to it or take some profits and diversify a bit?

If that home equity is just gravy to pay for an extra cruise each year, then continue as you were and move whenever you are ready.  But if it is key to your envisioned lifestyle, manage it as the important financial asset that it is.

UPDATE: And CBC hopped onto this issue, but with a bit of an emphasis on Halifax and some other markets that may have already peaked and a few senior owners having an "uh-oh" moment.

"Yes, but ..." : Toronto Life edition, part 1 (of several, I suspect)

I'm back. Again.  Sorry about that.  As of the last post we were preparing to move.  Work busy-ness, the move and a pair of truly nasty summer colds put the blog on the black blurner for a while.

But as I was pondering the next post, along came the September 2012 issue of Toronto Life with the cover story "House Wars".  Under the headline ... "Too many buyers. Not enough houses. Extreme tales from the real estate market"

Weeeeellllll, this ought to be good for a whole string of posts.

Sure enough, here I go.  And I haven't even read the article yet.  The "Editor's Letter" lays out the tale of a couple who bought a house in 1972 and just sold it for over $1.4 million (and yeah, a whole bunch over list price).  Bandits.  Baby boomers cash in. Young'uns can't afford a cardboard box under the Gardiner.

I'm not saying these folks didn't do well.  They did.

But let's come at it a little differently and maybe suggest they did just that ... "well".  Not outrageously, or insanely. Just "well".

In the example, the buyers picked up a dump in a very untrendy neighbourhood.

So, their location means they took a risk.  Risk-takers deserve a little higher return when their risks work out (because they will get creamed when they don't).  Just keep that in mind.

And they have spent piles of cash restoring, renovating to bring the place up to snuff.  Without knowing what they did or when, I have just pretended they paid $50,000 in the first place.

Their annual rate of return on their investment: 8.5%.  That may still sound pretty awesome, but don't forget that this is an average and includes periods where inflation was double-digit (and mortgages were going at 18%).  One source I checked (actually I googled it and only checked one source that looked pretty credible) suggested a representative stock market purchase would have returned over 11% for that 40 year run.

Actually, that's a good idea. Let's take inflation out.  If I've done the math right, their "real" return after inflation now comes out to a little over 4%.

Finally, I note that the editor says the sale discussed will "play a big part in funding their retirement".  Probably true ... IF they rent or downsize or move to a lower-priced market (good deals in Welland these days).

I'm not suggesting the market hasn't been nerve-tingly hot.  For quite a few years, many wise folk have been wondering when it will slow, settle, correct, crash, whatever.  It hasn't done it yet. It may. It may not.  But I'll also bet that when I post this and head back to the actual article I'm going to find stories that are a whole lot less dramatic than their headlines (and our resulting emotions and outbursts) initially suggest.

Prices: Up? Down? Sideways?

I know. I'm always writing "expert" opinions that amount to "Beats me".  In these times, that seems to be what our expertise amounts to: "We know enough to know that we don't know".  Might make that our new slogan.

This Globe and Mail piece, despite the headline, seems to capture it well.  The Royal Bank report triggering the article takes an "on balance everything nets out and we're ok" position.  If I had to pick, this is probably the position I would take. 

But there remains a part of me that worries that I am just be averaging out more extreme possibilities.  If one doctor says you're fine and will live to 100, and another says you are terminally ill and will be gone at 50, it is not smart to decide that it all means you will live to 75 ... "on average".

The article leads with the Royal report.  But it also notes other predictions that are all currently on the table from knowledgable experts.  One group predicts a 25% slide in housing prices due to bubble indicators, rising rates and high personal debt. (disturbingly, our own financial advisor loiters around some of this thinking)

Another industry group predicts continued price increases in a healthy market and economy.

The Royal decides that an improving economy will balance rising rates and we just chug along about where we are now.  What do you think?

Uh-oh! ?

As usual I am confused and uncertain enough to be unable to fall in behind either the doomsayers or "everything-is-fine" types with respect to real estate, the economy, exchange rates, pretty much everything.

Generally speaking, everybody is probably partially right. It's the timing that is the rub.

However, here is an interesting little factoid. Today, Thursday, March 25, 2010 in our core business area there were 48 agent open houses for new listings. That is two or three times as many as we would normally expect. Why?.

As usual, I don't know. But here are some possibilities.
• Interest rates are going up soon due to creeping inflation. This will slow the market so everybody is putting their house on the market now to beat the slump. If you buy this one and you need to sell soon, best get your abode on the market NOW. If you buy this one and are looking to buy soon, you might risk waiting a while for the market to slow down. And/or, you should re-double your market-watching -- a big increase in "supply" (new listings) should, all by itself, put a little more balance in the market and could reduce the multiple-offer craziness.

• People THINK interest rates are going up soon ...blah blah. This one could be self-fulfilling. Or not.

• The weather was nice for a few days. Typically, the big rush to market would happen closer to, or just after, Easter. But much like the "winter" slowdown, a significant factor is whether people "decide" that Spring (or Winter) has arrived.

• Some other reason. What do you think?

In any case, it was a huge number and it has us paying attention to see what other signals might appear.

P.S. If you are buying, we are selling. Our new listing is priced at only $389.900 and is well-renovated and a stroll to absolutely everything in and around the Beach. If this sounds interesting, off you go to www.drop.io/AshlandAve

Bubbles

Suddenly the papers are full of bubble talk. Is there or is there not a Canadian housing bubble?

If you only read the headlines, you may think there is one.

Read the entire articles and the likely conclusion is "probably not, but we're not sure".

I don't have an answer. For quite a while, I have been concerned that the boom has been based on low interest rates and not yet supported by the economy. Our thinking was that if the economy perked up before interest rates start up, we'll be ok. If not, there will be a correction of some sort.

This seems to be what the media, banks, etc are suddenly worried about.

And the question about the economic recovery seems to be a similar debate ... Have we bottomed out? On the way up? Or another dip to come?

So I don't claim to have the answer, and I do claim nobody else has the answer. Doesn't mean I wont try to tell you what to do!
Actually, I'll mostly tell you what NOT to do.

Don't set yourself up by buying at your max price with hardly any down payment with a variable mortgage and think you'll move at a big profit in two years.

If you have enough down payment to withstand a short-term price correction; AND your income can handle an increase in payments (or your current payment schedule is attached to a fixed rate); AND you can stay in the house for a few years to ride out a correction, you should be fine.

Another "don't". Don't go hide in the basement solely because there MIGHT be a correction. If you are confident that this is a top, maybe you should hold off.

But if you aren't sure, and it turns out there is no bubble, your house might be more expensive when you come up for air.