Housing

A Tale of Two TIME Magazine Covers

September 7, 2010

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Back in June 2005, TIME magazine put what in hindsight turned out to be a massive housing bubble on its cover, cleverly calling it “Home $weet Home”. Inside, the main story titled America’s House Party raved about how disk jockeys, hair dressers and Taco Bell cashiers were making fortunes flipping houses:

You shouldn’t get the impression that you can make six figures in real estate by snapping your fingers. Just ask Max Kaiser. It once took him a whole hour. The South Florida real estate investor bought a Miami-area two-bedroom luxury condo–which had not yet been built–for $425,000 last year. After signing the purchase papers, Kaiser, 32, heard that a couple outside the developer’s office was interested in the same apartment. So he sold it to them on the spot for $525,000. “I heard it’s now going for $570,000, but what can you do?” he says. Don’t cry for Kaiser. Four years ago, he was an accountant, stultified by his job. Now he’s pricing Porsche Carreras.

At that time, I wondered if the cover story portends a real estate downturn. It turned out that in a mere weeks, the housing market started to slow down, setting off a chain reaction of economic events that brought the financial world so close to Armageddon.

TIME Magazine cover stories on housing
How TIMEs have changed! Now, with US National home prices back at the level they were in the Fall of 2003, the magazine is at it again putting the housing market on the cover (thanks to Thicken My Wallet for alerting us to the story), only this TIME the caption reads “Rethinking Homeownership: Why owning a home may no longer make economic sense”. This may or may not be the absolute best time to buy a home in the US but we can say with some confidence that it is less risky buying a home after prices have dropped sharply than it would have back in 2005 after years of strong home price increases. Did TIME once again nail the precise moment in which the market turns? We’ll know in 2015.

Competition Bureau versus CREA, Round 2

March 23, 2010

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The Canadian Real Estate Association (CREA) tried its best to beat back the charge by the Competition Bureau that CREA’s rules that limit the choice of consumers as “anti-competitive”. The Association voted to change the rules requiring agents to represent sellers for the entire duration the property is listed on the Multiple Listing Service (MLS). CREA says the change will address the Competition Bureau’s concerns and provide consumers with the choice of listing a home on the MLS for a flat-fee and handling the rest of the home selling process on her own.

While that sounds like the Competition Bureau has prevailed in its attempt to inject competition, CREA’s proposal is reported to include an escape clause that would allow local real estate boards to enforce their own set of rules. The Competition Bureau lost no time in firing back that the amendments do not go far enough:

“There is nothing in these proposals that we haven’t seen before and they do not solve the problem,” said Melanie Aitken, Commissioner of Competition, “They are a step in the wrong direction. These amendments amount to a blank cheque allowing CREA and its members to create rules that could have even greater anti-competitive consequences.”

The Competition Bureau will now take its case to the Competition Tribunal but CREA can be expected to put up a good fight. It will be a fascinating battle to watch but you do get the feeling that CREA is fighting a losing battle. It is naive to expect that the real estate market will remain immune from the competitive forces that have brought in discount pricing in so many other industries.

New Mortgage Rules and Rental Properties

February 17, 2010

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Attention Ottawa-area readers: CBC Ottawa is looking to talk to a regular investor between the ages of 25 and 50, who actively keeps an eye on the stock market and may have lost money during the economic downturn and are changing their investment strategy. If you are interested please contact Sannah Choi at 613-288-6471. You can also reach Sannah via e-mail at Sannah-(dot)-Choi-(at)-cbc-(dot)-ca.

You would have heard by now that the Federal Government has announced three changes to the rules governing government-backed mortgages (current rules in brackets):

  1. All borrowers must meet the debt service ratios for a five-year fixed rate mortgage even if they opt for a mortgage with a lower interest rate and shorter term. (Borrowers must satisfy the debt service ratios with the interest rate on a three-year fixed even if they opt for a variable-rate mortgage).
  2. Mortgage refinancing will be limited to 90 percent of the value of the property. (Refinancings are limited to 95 percent of the value of the property).
  3. Small rental properties of 1 to 4 units will require a minimum down payment of 20 percent. (Rental properties require a down payment of just 5 percent).

The first tweak appears to be a marginal change because the differential between a 3-year rate (that is currently used to determine debt service ratios) and a 5-year fixed-rate mortgage is only about 0.5%.

The second and third tweak are likely to have a significant impact on investors in rental properties. Many investors purchased their first rental property by taking equity out of their primary residence. With ever-increasing home prices, they would then proceed to take equity out of their first rental property and purchase their next property. Rinse and repeat and pretty soon you can own a string of properties supported by massive amounts of leverage. It would be interesting to see if prices for rental properties decrease (and rental yields increase) in the wake of new mortgage rules.

You can also check out Canadian Mortgage Trends’ take on the subject here.