“If I had bought when I was 20, I would likely be mortgage free right now. In 10 years, I’ll likely be glad I bought in 2011, as opposed to waiting an additional 5 years.”

“The sooner you buy, the sooner you’ll be mortgage free, and then the sooner you can retire/diversify your time with minimal monthly fixed costs. If I had bought when I was 20, I would likely be mortgage free right now. In 10 years, I’ll likely be glad I bought when I did (last year [2011]), as opposed to waiting an additional 5 years.”
- gobigorgohome at RETalks 27 Nov 2012 12:54pm

Appropriate handle.
Timing can be a bitchallenging.*

People who bought near the top in 1981-1982 waited 25 years (yes, twenty-five, not a typo) to break-even in real dollar terms.
- vreaa

[* see what he did there? if only you were all as polite. -ed.]

33 responses to ““If I had bought when I was 20, I would likely be mortgage free right now. In 10 years, I’ll likely be glad I bought in 2011, as opposed to waiting an additional 5 years.”

  1. I’m curious what VREEA thinks…

    Since prices are down in Vancouver this year, I presume that the bubble has already “popped”. VREEA and others think there will be a real estate crash… my question: if there were going to be a crash, shouldn’t the rate of price decrease be quicker? Aren’t we approaching a year past the peak price and the proverbial bursting of the bubble?

    It could hardly be called a “crash” if it takes 7 years to reach the nadir – that would be more akin to a deflating bubble (something some people have said is impossible).

    I suppose we will know more in another year, but isn’t it possible that we will see a controlled descent to the bottoming of real estate in Vancouver?

    • dude, what i saw was more like a silent implosion … perhaps because of how msm covered the story(s) – most unpopular … very little change in the headline price metrics but huge changes behavior … serious-serious puckerage … this continued for quite a while … then after you gave up following the story out of boredom, come back and notice transaction prices are a lot lower … and nobody talked about it at all – most impolite … live mortgage-free or die – pfffft! … http://tinyurl.com/bw8onn4

    • I think 7 years to the trough sounds about right. Prices are sticky on the way down.
      I’d call it a bubble popping if it takes that long but goes 65% off, like in many places in the States. That’s still a big whack down per year, near symmetrical to the rate it inflated, and those folks in the trough who are underwater have lost a hell of a lot. Plus, this could have a shoulder – a bear trap late 2013/2014? – depending on a lot of factors.

    • It took the US housing bubble two years befor it stated tumbling. I heard it started declining in 2005.

    • During the descent, I think there will be a period (a year or two in length perhaps) of faster rate price drops after a critical sentiment level is reached… when people realize that the drops are going to be substantial. That hasn’t happened yet.. in fact, we’re actually still in the latter stages of the topping process… it’s still ‘choppy’, some areas still showing resilience. After everything is clearly heading down, there will come a point when this trajectory becomes ‘common knowledge’… at that point I’d expect us to see faster drops.

      Later, I’d expect a temporary bounce around the 2008-2009 price low points.

      As for time-frame in ‘crash’ definition, I really don’t think that’s too important. If we lose 50% real price over 2 years or 5 years, it’s still a crash. Obviously the former would be more dramatic, but very similar when one looks back in years hence. I don’t expect a bottom within 2 years.. that wouldn’t be enough time to truly flush out all the speculative sentiment.
      The ultimate real trough may come in later than 5 years.

      For prospective buyers, timing the bottom precisely isn’t necessary.
      One simply has to wait for a time when there is arguably decent value in the market; when rental yields make sense is likely the best indicator.

    • if there were going to be a crash, shouldn’t the rate of price decrease be quicker?

      I’ll extend VREAA’s comments with my own from ‘common knowledge’: at this stage sellers start making excessive price changes to find a bidder waiting at the bottom. When lenders begin to see values reduced below assessment or at values that would make their securities harder to maintain (overcollateralization), or cause losses from asset depreciation on their books — they get nervous, and refrain from lending, causing even less sales or liquidity for sellers.

      It eventually becomes a negative feedback loop that drives the market down faster and faster. When it happens can’t be predicted, but when it starts, down she goes.

    • Robert that is an excellent question. I’ll leave you with some things to ponder.

      1. Say prices perform a “controlled descent” — I’m assuming current price changes are “controlled” at -4% YOY — for 4 years. How many households are likely to be in a negative equity situation?

      2. At -4% YOY for a prolonged period what do you think will happen to earnings of Realtors and mortgage brokers over that time?

      3. How likely are builders to start new projects if prices are dropping at -4% YOY?

      I don’t know the exact answer to these, but controlling a descent from current levels involves increasing stresses as prices drop, and involves controlling sales and inventory to servo price changes to an acceptable band. I think that means adjusting availability of credit if price drops become too severe. I’m not optimistic this is practicable.

    • Reinhart and Rogoff, in “this time is different” report (page 226) that after a banking crisis house prices deflate for an average of 5 to 6 years … the average price decline has been 36 percent in real terms … the data was current to 2007/2008, so once they factor in the ongoing crises the averages may change.

  2. Nothing is impossible, but is there any historical precedent for a bubble (from any asset class) deflating slowly?

  3. I’d wager that this buyer will, in 10 years, think he made the right decision as long as he’s still in that home and making the payments, no matter what happens in between. Few enough people can do a reasonable buy/rent comparison when they’re renting. NOBODY does it after buying. Even if this guy’s house is down $10,000 in nominal dollars ten years on, and he could have bought it for 50% off somewhere in between, he’ll say “it only cost me an extra thousand a year over renting, and it was worth it” and he’ll believe it, too, unless you beat him over the head with a rolled up spreadsheet.

    Cognitive dissonance — it’s what keeps us all from spending our lives moping around thinking about past bad decisions.

  4. Long time lurker. First time poster. I’m a home owner and one that puts a large premium on the ownership premium. Anyways, i came across this tool from the ny times that helps you find whether renting or buying is better. You can include all types of expenses. I guess in the early years of buying, owning home is more expensive, but to be honest, the premium was not that much and I attribute that to being able to paint the colours I want, make the renos I want, etc.

    I know this forum is really rent biased. But the premium me and my wife pay is what it would cost us to go on a 1 week cruise. So at the end of the day, we make a trade-off. Everyday, we wake up in a place we love and call our own, vs. someone else in our position may choose to go on a vacation, but have a “less” personalized home.

    At the end of the day, it’s all really personal preference. I like your blog to see the different side of the equation. Though I feel some “renters” here are a bit dillusional, because at the end of the day, it’s all based on timing. And that is something most of us cannot predict,

    http://www.nytimes.com/interactive/business/buy-rent-calculator.html

    • You state that home ownership carries a premium. However, that tool demonstrates the opposite. It shows that over the long term, home owners come out ahead financially. But if renting is more expensive long term, then renters are paying the premium! So which is it? Is there an ownership premium, or a rental premium?

      You’ve already admitted that ownership carries a significant premium. On that we both agree. And I’m sure you’d agree that it is therefore extremely important for a home buyer/owner to accurately assess the cost of this premium. Hopefully then, you’d also agree that using an Internet calculator that ignores things like maintenance, insurance and strata fees, in order to make said premium look like a discount is not the best way to accomplish this.

  5. Wow, what a simplistic logic. The biggest mortgage we ever had was $292,000, which was 50% of the value of our home. We sold in 2010 and paid off the mortgage and rented. I can’t imagine getting a $300,000 or $500,000 mortgage and actually believing it will be paid off in even 25 years. Perhaps I’m just old school, or perhaps I just have 25 years of house buying experience. Our first mortgage in 1986 was at 12%. And then for the next 25 years we refinanced for anywhere from 4.25% in 2008 to 7 to 10% during the late 90′s and into early 2000′s. I think people will believe whatever they want to believe when they want something bad enough. It’s sad. But I guess experience is the best teacher. It would be really interesting to see what gobigorgohome thinks in 10 years when their mortgage is still really big and hanging around their neck like an anvil.

    • pricedoutfornow

      Exactly…how is he going to feel when he opens that assessment notice every year and notices that the house is assessed at $400k and the mortgage balance is around $600k (if he’s lucky). Ouch. I do believe this is going to happen, in fact, it’s already happened to people I know who live in BC but outside the lower mainland. They are stuck. We don’t have to look far outside the lower mainland’s boundaries to see such sad cases (coming soon to a municipality near you).

  6. What have I told you about going to Realestatetalks?

  7. critically relevant – sasquatch may claim wilderness property rights, use droppings as claim markers … land is running out
    ‘BIGFOOT’ DNA SEQUENCED IN UPCOMING GENETICS STUDY … Government at all levels must recognize them as an indigenous people and immediately protect their human and Constitutional rights against those who would see in their physical and cultural differences a ‘license’ to hunt, trap, or kill them.” … http://tinyurl.com/bm3n63p

    • Having sampled a plethora of discarded Kokanee cans collected in the Anarchist Protected Area and subsequently forwarding the swabs to my good friends at the Welcome Trust Sanger Institute to perform the tricky work (PCR), RJ… I had independently arrived at much the same conclusion… and, not being restricted to mitochrondial material, my samples yielded a complete sequence.

      Unfortunately, the Institute’s experiencing a spot O’bother these days of the BrainDrain variety… So, naturally, someone absconded with the samples/genome…

      I’ll just have to distribute more Kokanee lures this winter and check back in the spring, I suppose.

  8. Just to reiterate, I asked the question because I don’t know what the future will hold, just as no one else here does either. I seem to remember that the “groupthink” here seemed to be that a rapid and deep crash is inevitable.

    I found some info on average annual prices for Toronto real estate. There was a severe bubble from 1985 to 1989, during which the price rose from 109k to 274k. Then the decline, which seems fairly steady to me: 1990-1996: 255k, 234k, 215k, 206k, 208k, 203k, 198k. After 1996, another boom started that has yet to definitely come to an end.

    http://www.torontorealestateboard.com/market_news/market_watch/historic_stats/pdf/TREB_historic_statistics.pdf

    Granted that Van RE bubble is probably more extreme, but the Toronto bubble was over a 2.5x gain over a 4-year period, followed by about 27% decline over 7 years. I realize that interest rates were a lot higher in the 1980s and 1990s than they currently are and that makes the situations different. Nevertheless, it does seem that a “controlled-descent” post-bubble is possible under some circumstances.

    Of course these are nominal prices and do not account for inflation. Which leads to the question: when you call for a 50% decrease in the price of RE, is that nominal or inflation-adjusted? If the later, one must be aware that there are many methodologies for calculating inflation.

    We know the reasons why Van RE is likely to crash, but perhaps there are reasons why the fall in prices might be cushioned. It would be worthwhile to discuss these as well.

  9. I think a soft landing in RE prices in Vancouver is wishful thinking. A pull back in easy credit is a given and a long term ongoing risk. It’s not going to get easier to buy RE now, it’s going to get harder. In other words, the easy credit party is now going into reverse at the same time income increases and spending is stagnant. It doesn’t mean there will be a crash and burn scenario, but it also doesn’t mean a slow, easy market correction. I don’t think crash and burn OR soft landing is going to happen. I think what happened in the late 80′s and early 90′s is going to repeat itself, where prices decline for three or four years in a row by a substantial amount each year, with an overall price correction of 25% to 40%. In other words, it’s going to hurt, a lot, but over a 3-4 year period.

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