I We have no money to invest right now, with a new house and baby on the way. But I’m still following a few select companies, watching for good value in the market, and following financial market news.
Barron’s on the weekend had an article titled “The No-Money-Down Disaster” about the housing bubble in the USA. Inventories of unsold houses are rising, new home starts are falling, personal debt levels are skyrocketing, and mortgage defaults are increasing. Those are all big, scary things.
However, the following stats sort of blew my mind:
- 32.6% of new US mortgages and home equity loans in 2005 were interest only, up from 0.6% in 2000.
- 43% of first-time home buyers in 2005 put no money down.
- 15.2% of 2005 buyers owe at least 10% more than their home is worth.
- 10% of all home owners with mortgages have no equity in their homes
- $2.7 trillion dollars in loans will adjust to higher rates in 2006 and 2007
You owe more than your home is worth if your home goes down in value from your purchase price. It happened here in Canada in the 80’s when interest rates were in double digits, as housing prices went down because mortgage payments became too expensive as mortgages were renewed at the much higher interest rates. But prices are going down for a different reason in the US. These interest-only mortgage products have made it too easy for people to buy homes.
We have been luckier in Canada, as our banks haven’t been as “creative” with mortgage products, and there hasn’t been the same property frenzy as there has been in the USA over the past 5 years. But look at Calgary today and tell me a correction isn’t somewhere in their future?
I could rant for days about this, but everyone’s eyes are probably glossing over already. Suffice to say that I’m watching for opportunities to personally profit should the housing bubble burst …
Kris - I am also watching and actually taking a financial planning course to back me up.
Victoria’s housing prices rose 26% between the end of 2004 and the end of 2005. What a gongshow it is out there…your money doesn’t buy much, but the inventory has started to rise and, if it actually is a “bubble”…I’m fairly certain it’s about to burst.
BC is awesome. It’s not half-a-million-for-a-condo awesome.
Gary - I enjoyed your financial dribble Dan. Keep the good stuff coming. Here’s an anecdote on the housing bust. An accountant in Detroit bought a house a couple of years ago paying interest only for a couple of years. Right about now, it resets to paying off principal and so her payments rise about 60% or so ( i can’t remember the exact number). If she tried to reset the mortgage she would have to pay exhorborant fees. So she can’t afford to pay that (she claims that the details of the mortgage weren’t clear) and now wants to sell the place. However, no one bit on her original asking price of $470,000 and now she’s reduced it to $270,000 and still no buyers! The US is in for a hurtin’, my friends. But please tell me how you would plan to profit from the impending US housing bust? I’m not quite sure I have a strategy for that other than buying a house in the US.
I was just in Calgary. My brother was telling me about the craziness there. They bought a house just over a year ago and the value has gone up 60% since they bought. The bad part is they do not have grass yet. Contractors are a little busy at the moment.
mark - those stats are hilarious in a “terribly alarming and sad” sort-of-way. It’s amazing that so many people could be so… irresponsible.
I too am interested in hearing how Dan plans on profiting from these (un)fortunate circumstances.
Jen - Coming from a home owner in Calgary that could go on an 8 hour rant about the ridiculous-ness of this city and its inflated prices – I will spare you but if any of you have inside information or a slight indication on the bursting of the C-Bubble, please let a girl know. My greatest fear of ’06 is to be grouped into the above mentioned statistics (the Canadian version of course).
The funny part of this is that the only way you can make any money off your real-estate “investment” is to sell while the prices are hot and get the heck out of this town. Everything else is increasing at the same rate and therefore completely unaffordable. Unless I plan on living in my 800 sq. ft. of space until I’m 85, then as a single (unmarried) person I have no hope in hell in ever affording anything remotely close to a single family home in this town. Or anything larger than a shoe-box for that matter.
Now if only salaries could increase at the same rate as housing prices then we wouldn’t necessarily have a problem.
dan - I think it’s funny that the google ads for this entry are refinance offers – perpetuating the problem 🙂
dan - How to profit? Let’s think … ideas in bold.
– People will be losing their homes because they can’t afford payments on a mortgage renewed at higher interest rates.
– Some of these people will find smaller, cheaper homes to buy. Some will be forced back into the rental market.
– Rental vacancy rates should fall, so residential property management companies should be more profitable, as their overhead is absorbed by more tenants. These are often structured as income trusts, so pay out that excess profit in monthly dividends. Saweet.
– Losing their house has scared these people into spending less $. Discount retailers should see further sales growth.
– Losing their house has made people realize they’re living on the edge. Companies that help you out of bankruptcy or restructure your finances should do well. In fact, maybe we should start one?!?
Those are just a few of the paths … any others?
dan - August market commentary from Eric Sprott of http://www.sprott.com, who manages some of our better performing mutual funds:
requiem for a housing bubble
Gary - Sprott is certainly more bearish than most, but his track record is really good. I wish he had some recommendations on investments during the crash. He’s obviously bearish on US stocks.
Of your ideas Dan, I like the residential REIT’s best. Rents will go up and vacancy rates will go down. I don’t like discount retailers because their margins are so low and I think even their revenue will suffer. As far as financial restructuring companies, I just can’t invest in a market that I dispise. These are the same companies that get people in this trouble in the first place.