Wednesday, March 31, 2010

Your house’s last hurrah: setting up the top

The final upsurge of the 1996 to 2010 real estate boom is at hand. Sometimes history repeats itself. Readers who are investing (speculating?) in the real estate market should review this carefully . . .

In February, I wrote an article describing how the 1987 stock market crash set up the 1989 real estate market top ( ― Friday, February 5, 2010.) House prices declined from 1989 to 1996. Tough times.

Then I pointed out that the 2008 stock market crash seemed to have been followed by an identical series of financial events and wondered if perhaps a real estate market top is at hand.

What Happened the First Time
1. After the 1987 stock market crash, many investors became fed up with the stock market. They turned to real estate for something more stable, less risky.
2. The 1987 crash was followed by a US ‘Savings and Loan’ crisis. (In the USA. they refer to trust companies as ‘savings and loan’ companies.) And that crisis was followed by a junk bond crisis. Those crises triggered a huge drop in interest rates, including mortgage rates.
3. These two factors caused an increase in both volume of sales and house prices.
4. In late 1988/early 1989, there was an up-tick in interest rates, including mortgage rates. This triggered a rush to buy houses, which resulted in an even greater flurry of home sales and house price increases.
5. In April 1989, a hush settled over the Canadian real estate industry. The top of the cycle had arrived.
6. House prices dropped and did not start up again until 1996. The world’s biggest real estate company, the Reichmann brothers’ Olympia and York, went broke. Construction was stopped on the monolithic office tower between Bay and Yonge Streets in Toronto (just south of The Bay); the unfinished building stood there for years. The game was over. It took seven years for the real estate down trend to stabilize.

What’s Happening This Time?
1. Many investors were fed up with the stock market after the 2008-09 crash, when market averages dropped 50% in only nine months. Many disgruntled investors turned to real estate for something more wholesome, less risky.
2. The stock market crash was followed by a world banking crisis, a crisis in corporate America, and the continuation of the US sub-prime mortgage crisis. These crises triggered a massive drop in interest rates, including mortgage rates.
3. These two factors combined to create a flurry of real estate activity. Volume of sales is up and prices are up. (Reference: Toronto Real Estate Board, February 2010)

The 1987 crash sequence led to a top in real estate in 1989. I wonder if the 2008 crash sequence is setting up a top in real estate prices now.

The Trigger Has Been Pulled
In 1988-89, the first up-tick in mortgage rates triggered the last surge of home buying. And when that surge of buying ended, the top was in. Earlier this week (March 29, 2010), Canadian banks announced up-ticks in their mortgage rates.

What to Expect
If this pattern is repeated, we should see a surge in home sales starting right now. Buyers who had been holding off will rush into the housing market. Volume of home sales and house prices will rise dramatically in April and May 2010. And once that buying spree is over, house prices will start to fall: the game will be over.

We hear that mortgage bankers are run off their feet this week, locking in today’s mortgage rates for 5 years because borrowers are worried that this is the beginning of many mortgage rate increases. It’s like a financial feeding frenzy to lock in these low rates now.

What to do about it
If you are an owner of investment real estate, you should sell to the surge of buying that lies immediately ahead. If the market does drop, as it did in the early 1990s, investors with lots of cash will be poised to buy at the bottom.

If you have been thinking of selling your too-large house and buying a smaller one, do it now. If you are more venturesome, you might consider selling now and renting for a few years.

If you are an ordinary homeowner who lives in the right size of house for your needs, there is nothing for you to do. You watched the price of your house rise these past 14 years, and now you’ll see it fall for a while. It’s all the same. Home is home, regardless of what you think it’s worth.

How long will Canadian house prices continue to go up when American house prices are going down? My guess: 90 days more. Then the game will be over.

In my book, Beyond the Bull, I talk about what it takes to become a better investor. One of the five keys is knowing when to sell. Another key is learning from your own experience (remember 1989 to 1996?). Another key is learning from the experience of others (think about our American cousins now or the Reichmann brothers in the early 1990s.).

To order your copy of Beyond the Bull and the Five Levels of Investor Consciousness CD, or to sign up for Ken’s free monthly webinar, visit (Bullmanship Code = SS32). Contact Ken directly at

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