Thursday, March 26, 2009

Real Estate Fever!

Real estate fever – really?

We hear you can buy a house in Windsor Ontario for $25,000 to $30,000. We hear that 40% of Windsor’s houses that were sold last month sold for under $100,000. It seems that there is a small part of Canada that has the same depressed house prices as our American cousins. Pierre Elliott Trudeau was right: when the America sneezes, Canada catches a cold. March 2009 sees America suffering from real estate pneumonia and Canadian just now getting the sniffles. Will Torontonians or Calgarians be able to buy houses for under $100,000 some day?

The very thought of such a steep drop in house prices sends chills through the bones of Canadian home owners – especially those with big mortgages. “Yes, it happened in the USA, but it could never happen here. And the Windsor situation is the exception, not the rule!”

In his book, Beyond the Bull, Ken Norquay points out that the human animal uses the most primitive bestial parts of his brain when dealing with money matters. We use our herd instinct to do what everyone else does just when we should be thinking independently. We use our “deer-in-the-headlights” fear instinct to “fight, flight or freeze” when we should be calmly executing our pre-determined investment plan. And now we wonder what instincts homeowners will apply to the current decline in house prices.

So far, Canadian realtors are acting like ostriches with their heads in the sand. They are in denial. “What’s happening south of the border cannot happen here.” And who can blame them? Their job is to help Canadians buy and sell their houses. Realtors do best in rising markets. When house prices go up, they do well. Commissions are good, mortgage brokerage fees are good, and the customers are happy. In times like these, it’s easy to find sellers but more difficult to find buyers. It’s no wonder Canadian realtors don’t want to face the reality of this downturn. They prefer the scramble of speculative activity associated with rising prices.

What about Canadian homeowners? What should they be thinking?

If they were getting a cold, they’d take zinc and vitamin C and get plenty of sleep. But what should you do if you think the price of your house might drop under $100,000? Sell it and rent? Scale down: sell your big house, buy a smaller house? Ride out the storm? What should you do if you are at risk of losing your job and not being able to afford your mortgage payments? Tricky, isn’t it? What is the intelligent thing to do?

For guidance in this question, we encourage you to objectively assess your position as a homeowner and mortgagor. Did you buy a too-big house because you wanted more exposure to a red-hot rising real estate market? Did you take a too-big mortgage because you wanted to leverage your exposure to rising house prices? Now that prices are not going up, are these “too big” decisions still valid? If house prices are going down, maybe you should have a “too small” house. Or maybe you should have only a small mortgage. If the times have changed, we should change with them.

For further guidance, look at the stock market. Most of today’s buy and hold investors have noticed that the 10-year rate of return on equity mutual funds is negative. They are wishing they had sold out 10 years ago. Or even one year ago! But they believed the mutual funds salesman’s line: “Stocks go up over the long term.”

Could that be happening in real estate now?

This is not a good time for speculation in Canadian real estate. Check in with your common sense: are you stretched out in a “too big” real estate situation? What will happen to you if Windsor prices spread to other areas of Canada?

Ken Norquay, CMT
Chief Market Strategist,
CastleMoore Inc

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