Blessed by the Potato

First off, a series of disclaimers.

1. I’m sick at the moment with a nasty hacking chest cold and I just chipped another tooth, so I’ll be looking at another stupid thousand-dollar crown in the near future. I didn’t even bite down on a tic-tac or anything like that: it was just that an old filling was starting to come apart, and I lost part of the tooth as the decay got in and there was only a small bit of natural, healthy enamel left holding the back quarter on. So it would be fair to say that I’m a little grouchy at the moment, so take anything you find offensive in the rant with that in mind.

2. Wayfare has accused me of wanting a housing crash and moreover of wanting reasons to delay buying a home for a few more years and having a case of confirmation bias where I seek out evidence and articles that support a crash coming to Canada. Likewise, I accuse her of the same thing, of wanting to fulfil the dream of homeownership right now so badly that she ignores the doom-and-gloomers and focuses on anything that indicates that now is the best time to buy (or better yet, that January 2010 will be). I hope that the downturn will be quick, like ripping off a bandaid, and that we’ll be back to decent values by then, but I fear it’ll take a few years, like it has in the States. Of course, our respective confirmation biases don’t really help the discussion one way or the other, but it’s important to acknowledge that I do look at the data with an eye to how that housing downturn is coming along.

3. I’ve ranted a few times before about the real estate market, so some of this may seem like a repeat. Hey, what can I say, I just don’t have that much new material, and it’s not that fast-moving a market.

On to the rant, which is really a series of interconnected mini-rants.

Rant #1: the Rent vs Buy rant. I talked a bit about the rent vs. buy calculations before, and discussed the merits of the two ways of finding shelter. In a comment at Bad Money Advice this was put even more plainly: you can rent your dwelling from your landlord, or rent the money for your dwelling from the bank. Anyhow, after talking with a few people (homeowners or hopeful homeowners) about how renting is not blindly throwing your money away some of them came back somewhat vehemently with two points: that you need to own so you can have control over the property, and the forced savings. For the latter a real-world example was used of several people (no one I know closely) who are unable to save unless forced to by a mortgage. Even though they knew owning would cost more than renting (thus depriving them of money they so love to spend) they would rather own because then they build equity. Now this is unfortunately the fault of the CMHC and zero-down mortgages, but someone who can’t save doesn’t need a house, they need help. Whether it’s a shrink or an inappropriately starchy friend with a calculator and some graphing paper, a mortgage is not the answer. For the near term, for the good times they will build equity by having to pay down that mortgage, but that isn’t enough. And, it puts them at risk: if they lose their job and can’t pay the mortgage and have no other savings they could get foreclosed on, lose their house, and their life savings along with it! Whereas someone with actual savings would just dip into that to pay the rent…

The other reason for needing to buy, to personalize your space, is way overstated. People don’t seem to appreciate both how much freedom you do have as a tenant and how little most people actually renovate. Heck, for the first three years after I moved out I had white, barren walls because I didn’t dare paint or put any holes in them. But you can paint however you want, the only stipulation in your lease agreement is usually that you have to paint back to white (or whatever it was) when you leave. Hell, look at my bedroom: the last tenant painted bugs on the walls for her daughter! (they were awesome, so we chose to keep them, which also let us take over the place a week earlier since they didn’t need to repaint, which made moving much easier) Likewise, you can put holes in the walls to hang pictures or install shelves, but you can’t get too ridiculous (I don’t have a legal definition on “ridiculous” though). Moreover, nearly anything is negotiable with your landlord: want a new fridge or stove? Heck, want a natural gas fireplace in the living room? If you’re going to stay there a while and were willing to pay for it anyway, why not discuss it with the landlord? Now of course it’s harder to bring yourself to spring for a full kitchen remodel, or to convince the landlord to bang out a wall to open things up, but those sorts of renovations are much rarer than people seem to feel they might be when they need to have that control — and vice-versa, people looking at condos will find they have much less control over radical renovations than they might think. Sure, at some point in your life you’ll probably want your dream home kitted out just the way you want, but you don’t necessarily need to get into that with the first place you move into after your parents’ basement.

Rant #2: the Silly Real Estate Agents rant. It should be said that there are a number of real estate agents that just need to be taken out behind the shed and put down. It’s a field with very little repeat business, low barriers to entry, oh, and it’s commission-based. So there’s a lot of incentive for agents to be greasy sharks, and to be constitutionally unable to see past their own efforts to rationalize that now is always the best time to buy. They pass off their failures to properly price the market as victories, but the thing that really cheeses my nachos is that they charge tens of thousands of dollars for their services, the most important of which is access to their exclusive listing system, and they can’t even take a minute to proof-read, or spend the $5 to have a high-school student do it for them. That’s leaving alone the issue of not taking advantage of the ability to post pictures to MLS.

Of course, not all agents are all bad, but they can have a silly side. One has a blog that I just found and read a few posts on. He’s a decent writer, and for the most part has his head on his shoulders, but still says a few silly things about property values. In one post he talks about the difficulties of assuming a tenant can pose to selling a property. The points he makes are valid, but he ignores the elephant in the room: that the condo in question is flaberghastingly over-valued (and what rosy realtor(TM) glasses he must be wearing to call it “a very attractive price”). While it can be a pain to deal with a tenant if you just want to just live somewhere, having one who wants to stay can make the life of someone looking for an investment property much easier. In this case a potential investor can’t fool themselves about what market rent might be, it’s right there in the listing that this unit screams overpriced. The asking price of $575k is 230X the monthly rent of $2.5k. At a generous 5% interest rate/opportunity cost on the purchase, the cash flow is already down to about $100/mo, easily coming to a loss with just the condo fee, let alone maintenance or vacancy allowances. Yet just two weeks later this guy talks about a four-plex being overvalued and having poor cap-rates, and at the current rents it is rough, at 270 times rent — but if he’s right and the rent could be $1600/mo for each of the four units, then it’s just 203X, a better buy than the very attractively priced condo he talked about two weeks previously! (and it could be better yet since they added a 5th unit to the basement!) One more example with a price-to-rent of 260X, yet the conclusion is “I’m shocked that this house is available at a ‘paltry’ $1,299,000. But I’m not so shocked that nobody is banging down the door to rent it for $5,000 a month…” Yet again he doesn’t see the buy vs rent logic: if the interest cost alone is closing in on $5000 per month, why wouldn’t someone who wants to live there consider renting it at that price? The only reason I can think of is conspicuous consumption/pride — people don’t rent million-dollar mansions.

There are other factors to consider, of course, not the least of which being the cracked foundation mentioned. But one distinction is that one was a luxury condo, and the other was just a regular brick four-plex. For some reason condos make people in this city stupid. You’d be hardpressed to convince a group of homeowners to band together to pay monthly for services they didn’t really need, like having a surly security guard patrol the neighbourhood at night. But, call him a concierge and have him nap behind a desk and you’ll get condo owners springing for it in their monthly condo fees every time.

To give credit where credit is due, I think anyone thinking of buying a pre-construction condo (if any still exist, as many pre-construction projects have been cancelled) should read his post on why that ship has sailed.

Rant #3: A Conversation With My Dad: In the mid-80’s, my dad left a small job at a major accounting firm to start his own company. His financial consulting business covered a lot of bases, but developed a focus on assisting clients through bankruptcy (or skating around it). In the late 80’s and early 90’s this part of his business took off, and one thing he had to do a lot of was evaluate and dispose of properties. I knew he had been all over Ontario and parts of Alberta looking at houses and to a lesser extent, office buildings, helping to arrange for hundreds to be sold, but I was just a kid at the time and there wasn’t really much call to talk about it since. With the downturn in real estate coming though, it’s looking like old times to him, with the first sign being the freeze in sales, especially at the higher end (and around their house there are dozens of listings that are now closing in on over a year for sale; others that spent months on the markets and were delisted, but still don’t have drapes in the windows).

We took a walk around the neighbourhood one day with the dog pointing out houses for sale, and ones that obviously weren’t lived in. The beginnings of the end could be seen in some, for example one house a builder obviously ran out of money and has been sitting with the inside unfinished. For sale, as-is 1.2M, or 1.46M if finished, and over a year on the market (in another realtor blooper, the picture with the for-sale sign and snow on the ground has a date of February 2008).

Oh, that listing I linked to above with the spelling errors? It’s actually been relisted with a new price and a new host of spelling mistakes (and oops, he also forgot to take the old listing down). $600k to $520k, a 13% decrease. Still more than I’d pay for that house, but getting there. An improvement over the 2% drop for the other pair of houses that have have been sitting for over a year just down the street from that one, and it might actually move.

Back in the very beginning of the 90’s he was faced with a client’s home to dispose of. It was in a small town north of Toronto, and there were a dozen nearly-identical houses all sitting for about the same price — their 1988 price. And some of them had been on the market for over two years without entertaining an offer. But since the last completed sale in that small, illiquid market might have been in 1988, that was the only set of comparables the agents had to work from. It was clear at that point that the only way to get things to move was to “lead the market lower”. So they put the house up at 15% less than all the other homes were at, and they got a buyer. That got the whole market for that town moving again — generally lower and lower each sale until it bottomed out, but at least people who needed to sell could.

This time around it is a bit different. Things are still fairly seized up, and sellers are hoping that the nice weather of spring will make it all better and they can get what their house is “worth”, but the buyers aren’t buying. Someone will probably start leading the market lower before the volume picks up again, but the low interest rates are confounding that, making things appear affordable because the monthly payments are lower.*

We also had a long, painful discussion about what to do about the family cottage in northern Ontario. Last October the stock market was crashing, and it was looking like we would have to sell the cottage; Wayfare and I were up there on our honeymoon, and we very nearly had to hang the for sale shingle on our way out. When things stabilized (however temporarily) and my dad’s heart stopped racing, we were thrilled that, while things were not as good as they were last year, they were not so dire that we would be forced to give up things like the cottage just to keep my parents in retirement. However, over the winter we had some really nasty weather, with snow squalls pretty much every week. My parents didn’t make it up there even once a month, and with my dad’s poor health it’s not like they snowmobile or go boating anymore anyway.

So the issue went from having to sell the cottage to one of maybe we should. On the one hand the cottage costs a fair bit every month to keep up, money that’s just wasted if my parents are only going up once or twice a month now (they used to spend more time at the cottage than in the city, when they did snowmobile and swim and paint the deck or cut down a tree just for the sheer hell of it). They could spend a few months in South Carolina every winter just on the money saved in property tax and energy, let alone the opportunity cost of the equity in it. While they used to sometimes go up just for a few hours and drive back the same night, the cost of gas is not negligible anymore, and not getting cheaper. Plus as painful as it would be to sell now, as frozen as the market is, it’s not likely going to get better in my estimation. We could be the ones to lead the market in that area down, since it’s still frozen for now, and get a decent price (even if it is ~20% less than what we could have got last year). I figure if they’re not enjoying it like they used to, my parents might as well sell it. Being down in London I only make it up there once a year, and my brother only goes a few times a year himself, despite still living in Toronto. However, the other issue is the long-term destiny of the cottage. Despite the expenses, might it be worthwhile to hold onto through the next few years of limited use so it’s still in the family when us kids have the opportunity to go more, when my sister and I finish school and move back to the city?

* – I drafted this in London before leaving for my dentist appointment, but after arriving in Toronto I see that the market, bewilderingly, isn’t completely frozen. There are a half dozen “sold” signs up, and the place across the street from Wayfare’s parents, that had been up for so long the paint on the for sale sign was fading also finally sold (though we have no idea how much any of the properties sold for). Of course, in some cases I have to wonder if the agents weren’t just putting sold stickers up on houses that were merely delisted: one had Re/Max (I think) sign up for 6 months that now has “sold” plastered on it, and right beside it a new for sale sign from another brokerage has cropped up. Either someone is taking this house-flipping thing a little too seriously, or the representation changed after no action was had and a misleading sold sticker was put up (I kind of doubt CREA regulates the use of sold stickers). While I’m a big believer in the rent-vs-buy calculation and price-to-rent ratios for determining when things are overheated, which to me points to at least a 25% downturn needed in Toronto, perhaps 10-15% is all we’re going to get if that’s all the price reduction it took to get these properties moving again… I still feel it’s probably a “bear market rally” driven by low interest rates, nearly meaningless tax credits, and buyers that couldn’t out-wait the sellers… but I’m not as sure of it any more.