“Advising people to sell their homes into a “down” market if they don’t “have” to, is the same as advising people to sell stocks into a “down” market if they don’t have to.
I agree that those who are overleveraged would be wise to get out while they can (IF they can) but the rest of us would be wiser to sit tight and hold, and hold and hold, just the same as you would if you were talking about equities.
Remember, the loss is only a paper one, unless you choose to sell.”
- Dorothy at greaterfool.ca 9 Jan 2012 8:08pm
Dorothy sounds like a stock mutual fund manager, getting paid 1-2% of assets under her command every year, while her customers “sit tight and hold, and hold and hold”. Note that, if this were the case, her customers would have pretty much negative returns over the last 10-12 years to show for it (flat markets, minus Dorothy’s 1-2% per annum, compounded).
Near the bottom of a sell off, when everybody is capitulating, it is smart to hold (or to buy). It is smart to hold whenever it is a time to buy. In fact, we should probably take the ‘hold’ recommendation completely out of investment advice; assets are either a ‘buy’ or they are a ‘sell’.
And, yes, sometimes, towards the very end of a downmarket, it is right to advise people not to sell, at the very moment that they want to sell most.
But, let’s not get confused. That doesn’t mean you never ever want to sell a falling market.
In particular, if you are in even the vague vicinity of a massive, multigenerational speculative mania top, it is wise to sell. Be it near the top, or 10% from it, or 20% from it. Thus, with regard to Vancouver RE (which is such a market) anybody who sold in the last few years will look like a genius in 5-10 years time. And anybody fortunate enough to sell within 10-20% of the top through the descent, the same.
There are no special points for riding a market up, then down (way down, over 5 years or more), then up again. The market doesn’t hand out ‘loyalty’ badges.
- vreaa
The problem is that a lot of people don’t really know whether they “‘have’ to” — there are large numbers of people who don’t seem to mind when HELOC or credit card debt is required to maintain their lifestyle, or when they have no retirement savings other than the equity in their homes.
Never exclusively use comments from an anonymous commenter on a blog of unknown provenance. Platitudes right up there with buying low and selling high.
So in a declining RE market, who is crazy enough to buy? Unlike stocks where you may lose $ in a declining market, with real estate you can lose $$$$ very quickly. We will likely see some very rapid price drops, until temporary plateau points are found.
Hmmm….I’m sure a lot of Nortel, JDSUniphase, Bre-X shareholders would totally recommend her advice and currently loving their market loyalty badge.
Speaking of “having to sell” I am hearing rumors of landlords who a few years ago were financial geniuses leveraging one property to buy the next now being told by the bank to sell their investments. Guess the bank won’t renew the mortgage. The people I am thinking of will very likely not get back what they paid 5 years ago even before realtors fees etc.
I loaned a family member $20K three years ago to help them with a liquidity issue while they were closing on their house. I asked why they didn’t borrow against their Yaletown condo but the response was that they had already borrowed against it for their place at Whistler. they bought the house with a DP from the Whistler equity. The loan was only for 3 months…still haven’t been paid as the bank won’t loan them any more.
They are going to pay me back half next month after going to the load shark (Alpine credits). Scary $hit! I bet my folks they will be back in Yaletown in 5 years with no house or Whistler.
Wow, that’s really shocking! If the banks refuse to renew and they can’t find a new lender, that would just kill the REIN memberes who strives for at least 1 new property a month!
I wonder if all the banks are adopting that new rule of max X number of investment properties total per person, regardless of which banks have the mortgage. I think Scotia is the first one that had that rule?
Wouldn’t surprise me bibc, I have been expecting that recent tightening will been ordained courtesy OFSI. I’m not in the banking industry but that’s my guess. Perhaps others who know more can chime in.
it’s not so much the advice, which at least can be debated. it’s the absurdity of earning a loyalty badge. pls correct me if needed – not much chatter any more about foreign hordes paying cash for $1.5M teardowns lately. seems sentiment has turned decisively on that front. pseudo-value arguments long gone. are we down to the last few oldies? prices aren’t down yet, much. they won’t go down a lot. even if they do, just hold on until they come back. i’ve never heard of a market loyalty badge – is that new or is it a RE thing?
bulls presenting value arguments, trading arguments, etc. – sure, why not? bulls chiding renters over gains left on the table is a sentiment indicator. ironic since one would have to become a renter (or have cut exposure way back) in order to secure those gains. otherwise, the money is still on the casino table. try selling a $1.5M VW teardown this year. i am really curious to discover the fate of all that new VW construction at cost >$2.5M. couple more recent VW data pts i got. a $1.8M teardown project put on hold indefinitely. and another owner holding multiple houses just listed one of them. people in this segment have definitely turned defensive.
Buy and hold. It didn’t work for stocks, but instead of changing the strategy they just changed the asset class.
Please tell me when these doofusses who are part of the real estate anti-meritocracy would ever sell. All the way riding up to an insane bubble peak they are denying the overvaluation and telling people the time to buy is now. Now that we are in, let’s face it, a very bad down market with massive rising inventories … they are already calling the bottom! I am so done with these turkeys. Thank goodness the market is finally putting them out of OUR misery.
They’ll never sell, only trade up. Their property is their bank account/retirement savings plan. If they sold and rented, they might have to live within their means as it would be clear as day if they start spending the capital they pulled out of RE as opposed to the “free money” mentality associated with a HELOC
You know it’s bad news when the most vested interest group out there–mortgage lenders–starts to change its tune on real estate (although their conservative, carefully-crafted warnings don’t go nearly far enough). Note the specific emphasis on the Vancouver market:
http://www.theglobeandmail.com/report-on-business/economy/housing/rbc-bmo-warn-on-housing/article2297346/
Watch for this sort of story to become more common in the media, and with it a change in public sentiment. This change in sentiment, plus the fact that prices are at all-time highs relative to economic fundamentals, households are more indebted than they’ve ever been (more so, even, than the U.S.), and foreign money is drying up, will lead to price declines. Prices declines will beget more prices declines, as greed turns to fear and over-indebted homeowners scramble to liquidate. Advice like “hold on” won’t do much for those with debts to pay and retirements to fund.
I can sell all my stock in the next five minutes. How long to sell a house? Stupid to compare these two types of assets.
The assets can be compared on their earnings merits and risk profiles, including liquidity and diversification risks. Liquidity risk is something not heavily considered in Vancouver from what I see and is IMO a big part of the reason why yields should be higher than they are.
Yeah, my language was sloppy there. Of course you can compare the two types of assets. I just mean it is dangerous to talk about holding real estate in the same way you talk about holding a stock.
There are people in the US who owe more than their house is worth, who are literally “holding” it against their will with no clear way out, because the bank won’t let them sell for less than the mortgage. That doesn’t happen with stocks.
How many hundreds of thousands of dollars does the “market loyalty badge” cost?
@vreaa: “Dorothy sounds like a stock mutual fund manager”
Actually, Dorothy sounds like a homeowner – a responsible homeowner that either owns her home outright or is living well within her means and can afford her home regardless of what happens.
I know many of them myself – they’re the ones that don’t really care what happens to the Vancouver home market week-to-week or month-to-month, and have no need or intention of selling their homes regardless of what happens.
Then Dorothy should be careful blindly meting advice to those who may not share her predicament. She sounds like someone who is arrogant enough to share advice about something that happened to her more out of luck than acumen.
It’s a simple experiment to transpose her statements to California circa 2005 to test how silly her statements are when ubiquitously stated.
Greater Fool and other blogs (including this one) are full of people giving “advice” based on their own singular personal experience extrapolated to the greater market – Dorothy is not new in this regard. Why should she need to be more (or less) careful than any other anon poster in what she says?
“Why should she need to be more (or less) careful than any other anon poster in what she says?”
The commenter doesn’t have to do anything. When this commenter makes a statement like that and is unluckily cited on a bearish-slanting blog, it will get justifiably slammed the same as if Cam Good or Ozzie Jurock were to write an op-ed for the Vancouver Sun.
“bearish-slanting blog”?!
Bearish, yes; Slanting?…. We’re completely unbiased realists!
There is a commenter on here, seems like a nice person, an artist I think. Sold her Gastown apartment in ’02 or ’03 or something. I’ve often wondered what made her sell? What bearish commenter was she listening to at the time?
Or anyone who listened to this very blog in 2008? Selling into the panic only to watch prices continue their inexorable ascent.
I am not wildly bullish by any means, but bears are just as guilty (more so, considering our government has homeowner’s backs) of meting out bad advice.
People need to learn to manage risk and stop trying to predict the future. It’s a mug’s game.
When we have our correction, the media will flock to the bearish commenters and declare them right! Of course, we know better (or should).
Hi, Dorothy here!
Yes, I do own my own home outright, and no it had nothing to do with luck. More to do with years of hard work and sacrifice. I never took out a HELOC and I never ran up a big pile of debt. With the exeception of a car loan and a mortgage I always took the view that if I couldn’t afford to pay cash, then I couldn’t afford to buy it. A novel idea these days I know, but it sure paid off for me. And I believe the same strategy will pay off for many others too if they want to try it.
When I bought my first home I saved a large downpayment, shopped around for a home I could afford (which was less than what the bank would have financed me for), negotiated a good rate on my mortgage, made weekly payments, and always took advantage of my interest free annual prepayment. Consequently I sheared years off my mortgage, and saved thousands of dollars (which I then put into my RRSP).
Dorothy, you are confusing overpaying with leverage. The two are not the same thing.
It IS the same thing Jesse when people use leverage in order to overpay.
Almost everybody buying RE in Vancouver today (or in the last few years) has “used leverage in order to overpay”.
@dorothy. for someone who has made it work the old-fashioned way, you must have some choice thoughts about the casinofication of vanRE.
Hey Blammo- gastown loft 2003 – I’m pretty sure you’re talking about me. The deets: Bought in 1998, sold Dec 2003 for $50k more than purchase, paid off student loans, credit cards, traveled a bit. I sold because I hated the hood and had been renting the place out for a few years simply because I couldn’t afford to sell it and not lose money – when the loft finally appreciated, I was happy to sell. I had pretty good tenants but didn’t want to be a landlord, plus I figured it was only a matter of time until it was wrapped in tarps (which is was in 2009). I thought I might buy something else, in a different area, but felt even then prices were out of whack with fundamentals. A few years later after I married we looked at the market again and found there just wasn’t value in it – that’s when I found VHB & the other bears. I just couldn’t believe that we were the only people in the COV not drinking the RE kool-aid. There was no way we could have known the party would go on as long or get as high as it has and the risk that we saw in 2006 was too much for us. We don’t regret our decision. Sure we didn’t win the RE lottery but we are debt free with a good chunk of savings in the bank today which is a far better position that most of our mortgaged to the teeth friends.
Hi TCGirl. Glad to hear you are doing well. Definitely not a criticism, just an observation. Segueing fundamental analysis with life decisions can be a tricky minx.
“It IS the same thing Jesse when people use leverage in order to overpay.”
My comment is that conflating the investment potential with the financing is incorrect. The first question should be whether the investment produces a decent rate of return. The second question is how to finance the investment. For houses the overwhelming method of financing is through collateralized fixed-term loans (aka mortgage) but those aren’t the only ways and in the long run have little to do with the investment’s earnings potential.
I get that you bought at a reasonable price and didn’t overextend yourself. Congratulations. If others don’t have both conditions there are big risks, albeit much riskier still if they don’t have either.
Nuxfan -> Is there really any Vancouver homeowner who “doesn’t really care what happens to the Vancouver home market” (over whatever timeframe)?
There may be a few… those whose total net worth is so large that the run up in RE prices has been of no consequence to their projected future financial well-being… And, similarly, where a drop in prices of 30 or 50% would have no substantial consequences.
But how many folks do you know like that?
The ‘wealth effect’ is there, concious or unconscious, believe it or not.
Vreaa, This is key. I made the mistake of telling a close friend that I thought values would drop by at least 50%. He bought in 1993, has a good salary, and the house is nearly paid off. I could read the body language – he was crushed – and I realized as I said it that he believed me but didn’t want to. It was clear that a loss of that magnitude would be absolutely devastating. I think there are a lot of people like my friend that, although they might not end up underwater, would definitely be financially flattened by a major correction.
now batting: gravity of realizing ‘money is still on the casino table’
on deck: ’tis but a fleshwound’
“The ‘wealth effect’ is there, concious or unconscious”
I expect most homeowners are affected in one way or another, not always in entirely selfish or obvious ways. Those with adult-age children are probably facing the biggest internal dichotomies.
vreaa…My parents fit that catagory…they bought in 1983…owe 25k on their mortgage…currently assessed at 953k. They wouldn’t sell the place for all the gold in christendom. My father built the house, with help from my sibblings and I as we grew up. They don’t need the money for retirement as they have good pensions(not gov’t, but decent), plus, they have some RRSP’s…
The difference between my folks and their boomer colleauges is that my folks never took out a HELOC…they didn’t spend their paper gains along the way and therefore will not have to worry about paying them back on the way down. My mom’s been telling me that it was a bubble since 95…I think some people are going to be very shocked and dismayed. Only time will tell, eh.
T -> Thanks. Will headline.
@vreaa: I guess the catch here is what the timeframe is. Of course people care at some point, but normally only when they’re ready to sell. If I buy a home, and plan to live in it for 10-15 years, do I really care what the market is doing 2 years after I buy it? Do I really care if there is a crash in the market 3 years after I buy that home that causes house prices to crumble 50%? Not really.
That being said, of course I care at the time I’m ready to sell – the same as I would with any asset that I owned.
The main argument I see on this blog is that people will sell because median housing prices will fall – one will naturally follow the other as we spiral downwards. While this may be true for those that are leveraged over their heads or through circumstance can no longer afford their homes, for those that own their homes outright (such as Dorothy), or who can comfortably afford their homes, this will probably not be the case.
Who has ever met a property owner who doesn’t care if the value of his/her property declines? Certainly not me. But I do know lots of people who would not consider selling their principal residence just because of a drop in property values (largely because property values are generally regionally correlated). Investment properties are a completely different ball game whether they are mortgaged or not. My experience is that most people buy real estate because prices are rising, not because of their earnings. This is why you find very few landlords that have survived more than one price cycle by consistently generating consistent positive returns.
I know lots of owners that are paying off their mortgage, love the fact the house has gone up in value as it is a “security blanket” in case of the unexpected. What happens if the unexpected is a drop in value such that the bank won’t remortgage? What if the unexpected is an interest rate hike makes the mortgage unmanageable?
So yes, I agree that there are a lot of owners that will not sell because of a drop in value but they will sell when affordability pressures force them to. Bottom line is that your 5% down 1.8% variable buyer of a $900k house east of boundary is probably not going to handle a stress test very well, only their lender will handle it as insurance kicks in.
blammo -> “People need to learn to manage risk and stop trying to predict the future. It’s a mug’s game.”
And “managing risk” in the case of a prospective buyer of Vancouver RE would entail….?
Pray tell…
Here are a few of my rules (not necessarily in order):
1. Don’t buy condos (commodities).
2. Don’t over-leverage. 20% minimum dp.
3. No bidding wars.
4. Buy near transit (Skytrain preferably).
5. If you’re cap rate starts shrinking the market is telling you your land is underutilized. Put in a suite.
6. Don’t eat your equity. Once I make an investment I never take my money out except to re-invest. I will only spend ‘their’ money (rent/dividends).
7. Hedge your bets. Personally, if I was on the West Side, I would move East. But I’ve been wrong on that one for a few years.
There are more, but calling tops for 3+ years is not one of them.
blammo -> Thanks for the reply.
Perhaps bears here and there have been ‘calling tops for 3+ years’. Yes, there have been times I have thought the top might have been in, but that isn’t the major call that bears are making. The major call is that we are in a speculative mania, and that at some point it will implode, and then years and years of buyers will end up underwater. So far, I don’t think that major call is wrong… it’s right. The top can’t be timed.
When this is all said and done whether you called a top in 2007, 2008, 2009, 2010, 2011 will make little difference… prices will be far below those levels, buyers in those years will be in dire straits, and bears will still be standing. Ask the guys ridiculed for calling US tops in 2004, 2005, 2006.
Your rules seem sound, but I’d take you to task on one:
“Don’t over-leverage. 20% minimum dp.”
It’s bizarre that, in RE, 5:1 leverage can be seen as prudent.
I’d argue that to have your net-worth leveraged to any degree at all to Vancouver RE at present is completely insane; yet many ‘owners’ hold RE worth 3, 4, 5, 10 times their networth.
(If you feel you could, give us an idea as to what your ‘number’ is… networth to RE_market_value ratio?)
blammo -> “When we have our correction, the media will flock to the bearish commenters and declare them right! Of course, we know better (or should).”
If the “correction” is substantial (30%-60%-off), the bearish commentators will have been right. How should anybody “know better”?
There are many scenarios where a owner will come out ahead or even (I’ve done the math) with a 30% correction. It depends on the vector (over time) as well as interest rates, amort sched, taxes, etc. Not to mention lifestyle.
The only reason that owners have come out ahead up until now in Vancouver has been because of the insane run up in prices. This is a complete historical anomaly. Housing is a bad investment in typical times. And it’s even worse in the years after the kind of run up we’ve seen.
Froogle Scott has intimated that he’ll release a detailed analysis of his ownership costs, that I believe show that the cost of home ownership is easily underestimated.
When you have a hurricane of a mania at your back, it’s easy to make your jogging speed look pretty good.
‘Lifestyle’ should be neither here nor there in the calculations.
“Housing is a bad investment in typical times. And it’s even worse in the years after the kind of run up we’ve seen”.
housing is a bad investment at the best of times. Paying 100s of thousands of $ in mortgage interest is not a decision the pure investor makes. Do something else with you money.
“There are more, but calling tops for 3+ years is not one of them.”
psss, it’s the blogger’s secret. dont tell anyone cuz it’s humiliating.
It’s not ‘humiliating’, it’s a simple fact, and it’s definitely no ‘secret’.
We haven’t been ‘calling tops for 3+ years’, but we freely admit we’ve thought this market was severely overvalued for well over 3 years.
We actually think the speculative mania began in the 2003-2005 region.
It was very definitely fully underway by 2006.
So, what?
This is the kind of thing that bubbles do; they go on and on.
Now what?
Anybody who buys vaguely in the vicinity of the top, without very deep pockets, will be wiped out. The vast majority of bubble participants will end up very financially compromised.
This isn’t over by a long shot.
That’s the issue with bubbles: they look so beautiful and fun in all their fragile shimmering. People ENJOY them, and if they have any concern it is only with the actual POP.
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