Housing Bubble
Posted by John Draper | Filed under In the News, Take Control
There’s quite a debate raging in the media, and at the lunch table, about where housing prices are going. While they were approaching their peak, I tried to warn people that what goes up, must come down. I also stressed (and was often rebuked severely) the fact that a zero down, 40 year mortgage was a Really, Really Stupid Idea. I was assured that it was the only way for people to get into the market, and that I was being an old stick-in-the-mud. Appreciation would carry the day. When the downpayment was raised to 5% and the maximum amortization shortened to 35, the Feds patted themselves on the back and said what a good job they’d done. Hey, they were the ones who had introduced the Really, Really Stupid Idea in the first place! What better way to keep the economy STRONG than to let people believe there were no barriers to home-ownership.
We’ve seen housing pricing fall in Canada by 5% over a year ago. We won’t even talk about the U.S.; it’s just toooo depressing. Now Meryll Lynch is saying that Canada’s housing market is in for a severe beating.
Scotiabank says it’ll be a steady decline. This from the Smarty Pants who touted the Great Idea of leveraging out homes 100%. Hmmmm.
The Globe and Mail ran an article that listing a b’zillion reasons why we won’t experience what the U.S. has: we’re less exposed, we have better lending policies, and myriad others. Sounds like the hero cheering himself up to me.
As someone who sees people’s budgets all the time I know there are lots of people out there with way more house than they can reasonably afford. If your housing costs exceed 35% of your net income, where are you going to find the money to pay for gas, by your kids some food, pay down your debt (and, believe me, there’s plenty of debt) AND save? But people who wanted to believe that they could get something for nothing — that they could own a home without doing any of the hard work involved in saving a downpayment — barralled ahead and listened to the Idiots who said, “The Fundamentals Have Changed” (in a booming baratone.)
Now the experts, in an attempt to avert a panic that would have housing sales go deeply into the tank, are suggesting that here in Canada, we’re okie dokie. Tell that to the guys who have already lost their jobs because plants are closing this way and that. And tell it to the ill-advised Believers who bought the story they could afford a home that pushed their budgets past a reasonable limit. Come time to renew them thar mortgages, we’re going to have a more than a few homeowners walking the plank.
The TRUTH is that we haven’t had a stong economy. We’ve had an economy buoyed by the fact that we’re spending money we haven’t yet earned. Yup, we’ve been using credit to gas up our economic machine and the fuel is running out fast. We’ve never had any experience with the kind of decline in purchasing — a major economic driver — we’ll see when people stop spending on credit. Restaurant sales are already down as people stay home to eat. Car sales are in the tank, and many car companies are out of the business of leasing because they just can’t make it work anymore. Can home-renovation shops, big-screen-tv sales, and new housing builds be far behind?
It’s time to stop trying to make things sound better. Things are down-right UGLY. The thing we need to do is to recognize the mistakes we’ve made and take our best shot at protecting ourselves and planning for the future. This We-Can-Have-It-All-At-The-Same-Time crap has to stop.
We can have it all… but not ALL at the same time. We have to make choices.
If we want to own a home, we have to stop spending all our money on STUFF and save enough to make sure that home is safely ours, and not subject to the winds of economic change. That means saving a good downpayment. It means having our closing costs in an account so we’re not adding them to our mortgage. It means buying a home we can afford, instead of one that’s too big, too fancy, too too.
If we want to be debt free — so many of us say we do, just as we’re handing over some perfectly good debt-repayment moolah for a new pair of shoes — we have to make choices. We can set the goal and then work our buns off to make it so. Or we can PRETEND we want to be debt free, whine about how hard it is to get out of debt, and then head off on a cruise.
If we want to have an emergency fund, we have to choose to save rather than spend. And we won’t ever successfully build an emergency fund by trying to trick ourselves into saving. Rounding up at buck a shot just isn’t going to get y’all there, my friends. It has to be a conscious decision to take money out of cash flow and set it aside for the time when there is no cash flowing.
You can listen to all the fear mongers and panic. You can listen to all the guys saying, “It isn’t really so bad” and ignore what’s going on around you. Or you can be a grown up and recognize that there are some basic rules you just shouldn’t break:
know how much money you have to work with, to the penny
don’t spend more money than you make (you’ll need a budget to track your spending)
if you need more money to make IT happen (whatever IT may be), then get another job, get a better job, find a way to Make More Money
take care of the What Ifs: have an emergency fund, some insurance, and your estate plan in order
save at least 10% of your net income
No rocket-science there, right? Just some Plain Ole Common Sense. (Where did our Common Sense go?)
Money, like life, isn’t just about where we are RIGHT NOW. It’s about the big picture. In life you can have a shitty day, a crappy month, even a horrible year. And the economy is just the same. If you ignore The Right Thing to Do and panic, or convince yourself that it will all be fine and you can just keep on truckin’ as you have been, then you’re thinking too small.
And if you’re dumb enough to buy the crap that everything is fine, just fine, then you’re a SUCKER! Things aren’t fine. Things are crappy, and getting crappier. But it won’t always be thus. You’re being tested. Will you PASS or FAIL?
BTW, one of the biggest signs in the U.S. that things were ass-backwards was the fact that people were paying their credit card bills, but not their mortgages. I blogged about this back in March. A total anomoly that the Smarty Pants running the show ignored. If we see people in Canada choosing to make their minimum payments on their credit cards while they negotiate away a mortgage payment or two, then you’ll know we’re in REALLY BIG TROUBLE!
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October 1, 2008 at 5:47 am
Gail – you tell it like it is. Reality sets in.
October 1, 2008 at 7:49 am
THANK YOU!! I have been trying to tell people that Canada is not exempt. The same bad habits WILL translate into the same mess. I’m forwarding this blog to everyone who believes in that imaginary bubble of protection over the entire country. But at the moment, I’m going downstairs to MAKE my chai tea latte. (*maybe I can start selling them to my coworkers for extra cash during this DEPRESSION!*)
October 1, 2008 at 8:48 am
Wow— wish my sister in law would read this. I’m sick tired of all the complaining… about how hard everyone works and saves.
Recently I had to up the balance on the credit card (from $5000 to $10000) for my husbands Electrical business (materials) which is a secondary job that he is “building”…I had to say what our mortgage payments were a month…. we pay $1700 for our modest farm house not near a major city…the lady on the other end of the line wasn’t sure if she could help us. I had to explain we paid that much by choice- Oh she said….no problem then!?
October 1, 2008 at 9:06 am
I don’t have much concern over someone with no down payment, a forty year mortgage and no equity losing their house. Frankly, they never had it in the first place. They weren’t homeowners, they were renters.
October 1, 2008 at 9:47 am
Yup reality has set in and Canadians are waking up…at least we all hope and pray they are….there is a small city near where I live that will soon be going in the toilet due to all the manufacturing jobs that have and will be lost in a 6 month period! What are these workers going to do then?
Also I wanted to comment Gail on your comment on common sense because did we ever really have it? I don’t believe there is common sense because we all grow up being taught different things as subjective common sense depending on what your family/parents were like. We all grow up in different households with various knowledge bases so that is why there is no such thing as common sense:] It isn’t common to everyone if we do not all get taught the same thing…especially since many were never taught basics in financing especially in school systems..I am not saying this as an excuse for people but we need to be realistic about how every one of us grew up with a completely different set of values as the next person…hence common sense is not common knowledge at all:]
October 1, 2008 at 10:57 am
Mikey — you are so right!!!!
I see these huge houses in my neighborhood, the boats, the cars, and the toys, and I wonder how they can afford it… well, they can’t. I have almost paid off my beautiful bungalow and have no debt other than my one car and my mortgage. Here’s the difference — I CAN SLEEP AT NIGHT!!! My travel (two trips are year) are done on CASH.
Here’s a question, when Gail says that the housing costs should only be 1/3 of your net income, does she mean the mortage only or all the other things that go with running a house (like heat, lights, taxes, propane, etc).
Yah, one of my pet peeves is the “no common sense” gene that is missing from most people.
October 1, 2008 at 11:04 am
In reply to what Sarah says about being brought up in different environments — I totally agree, but sometimes that’s not the case.
I am frugal, I enjoy life but on cash only, and I am planning to retire at age 55 (minimum) due to my financial planning (and spending habits).
My brother on the other hand, has declared bankrupcy twice, spends like there is no tomorrow, and does not know how to handle money or financial decisions … he wants it, he gets it, whether he can afford it or not.
I have talked to my Mom about this… how can two siblings who were brought up in the same environment, same era, be so totally different when it comes to money?
October 1, 2008 at 11:15 am
Dianne – the 35% includes all costs for your home – including the mortgage payment, insurance, condo fees, home maintenance repairs, property taxes…etc. All those ‘hidden’ costs of home ownership.
Great post Gail – love love love it!
October 1, 2008 at 11:24 am
This is exactly why I’m saving hard for a down payment. I am not buying a house until I have 20% of a $160,000 house saved, and that’s mostly because I don’t want to pay the bank’s mortgage insurance. Thankfully, it looks like a $160,000 home might actually exist by the time I’m ready to buy.
This might be a nightmare for those 40 year mortgage people, but for people just entering the housing market, it’s a dream.
October 1, 2008 at 11:28 am
Good for you Kati! And not to capitalize on someone else’s loss, but you can probably get a really good deal on one of the many homes that will get repossessed from someone doing a 40-yr mortgage who can’t afford it anyway.
October 1, 2008 at 11:37 am
I could not agree more that we are headed towards a crisis that will test all of our financial decisions that we have made over the last 5-6 years. However, we are ones that did take advantage of the no down payment when it first came out in 2002…(student loans, wedding loans made it impossible for us to save enough) the difference is that we didn’t over extend ourselves with our first mortgage, and made sure our mortgage payments were the same as our rent…. in 2006 we sold that house and had a huge amount of equity… we used that equity to pay off the rest of our debts, and put 25% down on our current house that we love and can afford!
bottom line is without that no down payment, we would still be renting – but i can understand why so many people are against it
Cheers Gail! – your show has saved us in so many ways…..
October 1, 2008 at 11:46 am
I live in California and when my parents bought a house about 2 1/2 years ago the lender couldn’t understand why they wanted to put 20% down on the house. Since then anything they have done to the house has been all cash. As to Kati’s comment above about someone else’s misfortune helping her goal in finding a house, it is reality here. I bought a house in a shortsale about a month ago (finally, it took about 4-1/2 after I made the offer) for 55% of what the previous owner had the house mortgaged for. When I talked with my lender regarding the mortgage we discussed how much I was willing to pay for the mortgage, insurance and taxes. The reality is the market is adjusting itself to where the prices belong. Something a friend told me was “Your house isn’t worth anything untill you sell it”.
October 1, 2008 at 12:33 pm
Wonderful article, Gail. Here in Calgary people have been suffering from a serious case of “affluenza” for the past few years. I think a lot of them are starting to get a reality check. Those stock options they thought were so grand are not looking so fabulous lately. Many of them are too young to remember the late ’80’s.
I heard a segment this morning on the financial news that some (if not all) of the credit cards companies are going to be cutting people’s limits. $10K limits will drop to $5K, $5K to $1K, etc. I would love to read your thoughts on this.
I consider hubs & I lucky that we bought our home before prices started their major increases (2003), we bought well under what we could have been approved for, and when we renewed this year we (voluntarily) increased our payments.
October 1, 2008 at 12:45 pm
When I looked at housing prices over the past few years I was wondering, “How could I ever afford that?” That’s because I was thinking with a hefty downpayment in mind – the people driving up the prices were those willing to pay anything as long as they could get a giant home loan.
October 1, 2008 at 12:58 pm
I think the homeowners who don’t have a grasp on cost are the ones who received help for their downpayment or had parents co-sign. If you need this help there clue #1 that you can’t afford it!
They can’t handle the payments because they take hand-outs from parents and don’t know the value of a dollar simply because they didn’t earn it.
I see a ton of younger people who have the biggest house, trendiest furnishings, biggest vehicles, etc, just merely because they feel they’re entitled and they have money still from parents. They want to come across as the Joneses but you can see they scramble to watch that every bill is paid on time and are super-stressed.
What happened to modesty? It seems the majority are either extremely frugal or extremely extravagant.
October 1, 2008 at 1:17 pm
Gail, great post as always, but I had to laugh when I got to this part:
“The thing we need to do is to recognize the mistakes we’ve made and take our best shot at protecting ourselves and planning for the future. This We-Can-Have-It-All-At-The-Same-Time crap has to stop.
We can have it all… but not ALL at the same time. We have to make choices.”
Only because, yesterday I started my own blog, entitled “Making up for Past Mistakes,” for those exact same reasons. We want more, but realize we won’t get it the way we’ve been going…we have to work hard to clean up our acts, then start fresh and make the RIGHT choices!
Thanks for the advice that you’ve put out there, you’ve helped me get off to a good start.
October 1, 2008 at 1:45 pm
Absolutely wonderful post, the banks & people need to re-think how we think, feel & use money asap.
October 1, 2008 at 2:02 pm
While I agree that alot of people were very careless getting in over their heads over the last few years; I don’t know if it was all of the people simply buying a home without a down payment or a 40 year mortgage that drove up the prices. I think the whole “flip” a house had a lot to do with this. Tons of people wanted easy money by buying some run down house and doing some maintenance on it and then selling it for a fortune making sometimes $100k for a couple of months work. Some people had no choice but to pay the prices to have somewhere to live with their family when they moved to where the work was as there was a complete shortage of rental spaces in certain areas.
So I think the whole flip generation has had an impact on our housing prices as well.
October 1, 2008 at 2:23 pm
heard you on the radio this morning Gail – great as always. As much as I know we need that $700 billion bailout, sometimes I think that the we & the financial industry need to be accountable for our free spending ways…
October 1, 2008 at 2:33 pm
What a great topic!
Debbie is right when she says that Calgary has a severe case of “affluenza”. I work in the oil patch, have since the mid-80’s, and I can remember $10 a gallon oil and what it was like to go years without a raise. Bonuses & stock options were for the mucky-mucks, not for us regular Joes.
The last several years have been very prosperous in the energy industry in Alberta and anyone who is about 35 or under has lived the life of yearly bonuses, stock options, big raises and plentiful jobs. Many of the people I work with have big, new houses, new cars, expensive trips, the latest toys & gadgets.
They would not be happy settling for a house like my 1140 sq foot, 30-year-old bungalow that I paid $100K for 12 years ago and paid off recently. They had to have the 2000+ sq foot home on the golf course or in a newer neighborhood with a more prestigious address. I’ve worked with several people who claimed they had mortgage payments of over $2000 a month….I just can’t imagine!
What will happen to these folks when the down turn comes, how will they cope? At least, like one person has already said, I can sleep at night knowing I won’t have to sell my home unless I want to, not because I can’t afford it. Our home might be humble, but it’s ours, and no one can take it away!
October 1, 2008 at 3:23 pm
We are very lucky as we bought our modest 3 bedroom semi in 1985 for 82.5 We had to put down 25% Very difficult at the time. We have raised 3 teenage daughters in this 3 bedroom 1 bathroom house. Everyone says we should have moved and bought bigger. We did not and now are mortgage free while everyone else has huge mortgages. The good thing is we wont have to downsize cause weve lived downsized since day 1.
I cross my fingers and hope others will not loose their home.
Again Gail Love your show and cant wait for the new episodes to start on october 8
October 1, 2008 at 3:45 pm
To answer a previous question – the 35% refers to ALL costs associated with owning a home – including mortgage payment, insurance, taxes, condo fees, maintenance…etc.
Great post once again Gail! My only frustration…all I would like is a simple, modest home (a bungalow would be a dream)…but in my neck of the woods starter homes (including townhouses and condos) are unaffordable…even for a family who makes a 6 figure income. Sigh – guess it’s all about patience at this time…and relief that we didn’t fall for the “0/40 hurry now cause prices will rise” sales pitch!
October 1, 2008 at 7:55 pm
Personally I never have liked big houses. A well designed small house can actually feel larger than a mid size house that is poorly designed. I grew up in a 1300 sq ft house and it felt huge. Occassionally it would have been nice to have an additional room but we didn’t need it. The house I just bought is about 1100 sq ft which is plenty. Another problem with a bigger house is that you have to clean it. Also if you have a smaller house there is also less space to put junk.
October 1, 2008 at 8:04 pm
I used to own an investment property in downtown Toronto that I was renting mostly through a free advertising on a Craigslist. Finding good tenants was very easy back then (from 1998 to 2007). I sold it in Dec 2007 for a very good price, without the real estate agent and it took less than 20 days.
How the things have changed over the last 9 months.
I checked the Craigslist yesterday just to see if I made the right decision to sell, and indeed I did.
Where there were maybe 20+ ads offering the condos for rent, now there are dozens upon dozens of them..Some of them read “for rent or for sale”, so obviously, people are already stuck with properties they can neither unload nor profitably rent out.
Wow, that must be really scary, when you have to pay 2 mortgages – one on your own house and another one on your rental..Just want to wish everyone the best of luck in these uncertain times..
October 1, 2008 at 10:03 pm
I remember when we bought our house just as we got married. I owned a condo, the sale of which paid for the wedding and the bulk of our down payment on this house. We felt good that we chose NOT to buy at the maximum purchase price the bank offered, although other people balked at us not buying bigger. We were glad because we weren’t left house poor. We’ve accumulated some debt now and are refocusing to pay it off (thanks for the inspiration, Gail & responders!). Everywhere we look we see people of the same age and income level in serious debt situations with no plan. Thankfully we have a plan!
October 1, 2008 at 10:57 pm
Gail,
Don’t worry, the American government is here to bail out the banks! Just like you said, the banks overextended everyone and now all that credit is going bad so the banks are tightening up on lending and it’s tanking the economy. No problem, the US government is going to spend $700 Billion of taxpayer money to buy up all that bad debt from the banks so that they’ll ease up on lending. This way, the credit keeps flowing and so does that falsely inflated world economy!
October 2, 2008 at 11:20 am
FINALLY!
someone (GAIL) has said in plain english what we all need to hear.
thank you thank you thank you.