Thanks to Phil for sending in this question:
“I am sure that I am not the only one out there, who bought my house at the May 2007 ‘peak’. I am not a property investor, just a home owner. I am familiar with what house prices have done since then, but the question I really have is this: What does it mean to me? I am a working professional, and I can predict that sometime in the next 3-8 years I may be required to move with my job. What should my home ownership strategy be for the short/long term? What sorts of concerns should I have about my investment? Could you please point me in the right direction?"
First of all, you are defnitely not the only one out there, LOTS of us bought at or near the peak – at that time not only were prices peaking but so were the number of sales. In other words, way more people bought at the peak than before or after it simply because there were so many sales. So you are not alone. Secondly, that’s an excellent question! Here are our suggestions.
Short term
1. Keep your propety well maintained. In other words…take care of it! Replace the shingles when they are supposed to be replaced, if you have 20-year-carpet that’s been down for 20 years…replace it! Everything in your home has a lifespan, don’t try and will something to live past it! When it does come time to move on, selling your home can sometimes be a game of inches. Buyers can tell when a home has been well cared for. Keep in mind – many people replace all these things right before they go to sell, which means they don’t get to enjoy any of the benefits of a new hot water tank, or high efficiency furnace….you might as well get some enjoyment out of your maintenance investments.
2. Plan any upgrades wisely. If you’re on a budget plan to do the upgrades that will give you the biggest bang for your buck. Painting is pretty much the best return on investment you can get (partly because it’s so inexpensive) as long as you do it right… painting mint green and bubble gum pink may have worked in the 80′s but do it today and you’ve thrown away your money! Kitchens and bathrooms are where buyers place the most value on a home, so don’t hesitate to upgrade them, but again, you have to do it right. I’ve seen many homes that have been customized so specifically to the current owner, the upgrades have no value to anyone else. If you’re uncertain about your upgrades – contact a professional. Our clients know they are encouraged to contact us for advice on renovating their homes anytime.
3. Don’t focus on the day to day stats and value. They’ll drive you crazy. It’s time in not timing that will make the difference, it’s time in. Averages can also be very misleading, and things will go up and down on the short term. Your home is not a short term investment.
4. Make sure you have the right mortgage. Interest rates are great now. That can keep your payments lower and give you an advantage when rates rise. A well thought out mortgage can make a huge difference in your lifestyle if you have the right one with the right terms. You can always contact a mortgage broker for advice…it won’t cost you anything!
Long term
None of that will matter as the market will swing the other way again… following the above rules will help you on the long term as well – it’s always better to have your home in above average condition than below average.
Great post Sara/Sheldon!
The only thing I’d add is try to put extra money down on your existing mortgage. This is especially crucial for people who signed up for longer amortizations. If your in a 30,35 or 40 year amortization and you bought at/near the peak you can at least minimize your interest cost by paying off your existing home sooner. So cut the daily coffee; divert the proceeds of your new raise to the mortgage; or put that “found” money from your long lost dead Aunt toward the mortgage and maybe a dinner out for you and the wife.
You may think it’s funny but the little values add up. When your dealing with longer amortizations and exponential interest you’ll pay the purchase price of your home to the bank AND the original capital lent. If you don’t believe please see the link below…
http://www.amortization.com/40_year_mortgage_interest_saving_tip.htm
Bascally, for a $311,000 mortgage (Average CDN Price July 2007) @ 5.85% for 40 years you’ll pay $488,000 in interest PLUS the $311,000. I’ve not confirmed the math but the web is littered with these examples.
Great post Sara/Sheldon!
The only thing I’d add is try to put extra money down on your existing mortgage. This is especially crucial for people who signed up for longer amortizations. If your in a 30,35 or 40 year amortization and you bought at/near the peak you can at least minimize your interest cost by paying off your existing home sooner. So cut the daily coffee; divert the proceeds of your new raise to the mortgage; or put that “found” money from your long lost dead Aunt toward the mortgage and maybe a dinner out for you and the wife.
You may think it’s funny but the little values add up. When your dealing with longer amortizations and exponential interest you’ll pay the purchase price of your home to the bank AND the original capital lent. If you don’t believe please see the link below…
http://www.amortization.com/40_year_mortgage_interest_saving_tip.htm
Bascally, for a $311,000 mortgage (Average CDN Price July 2007) @ 5.85% for 40 years you’ll pay $488,000 in interest PLUS the $311,000. I’ve not confirmed the math but the web is littered with these examples.
O said:
“Bascally, for a $311,000 mortgage (Average CDN Price July 2007) @ 5.85% for 40 years you’ll pay $488,000 in interest PLUS the $311,000. I’ve not confirmed the math but the web is littered with these examples.”
I think you just accelerated that sinking feeling some of these people have.
Unfortunately there are some who bought at this time that where just looking at the monthly payment and not the total cost of ownership over the period of the mortgage.
Your point on the TOC for a house over a 40 year mortgage is one that many people need to take into account before suggesting the 35-40 year mortgage periods, or even accepting a mortgage like this; its absolutely rediculous to pay that amount in just interest, but people do it just due to focusing on the monthly/bi-weekly payment instead of the big picture.
Overall however, I don’t think people who bought over this time period should be overly worried. Eventually they will recoup what they have currently lost in equity, and ultimately will come out on top, but that is like Sara stated, over time. If you went into that purchase knowing you could afford it, then you have nothing to worry about, and its just a waiting game now, focus on something else other then housing for the next few year, get a good hobby. For someone who purchased during this time as an investment property for a quick flip, and are barely able to make it now as its a complete loss, well, better fiscal planning in the future with investments, lesson learned.
Thanks Saab.
I wasn’t trying to make these people feel any worse than they already do. But, unfortunately, this is the reality of what’s at least happened in the SFD market in Edmonton. Chalk it up to the need for better financial literacy; really understanding the true cost of what your getting yourself into; or getting caught in the “if I don’t buy now we’ll never afford a place”.
People need to take responsibility for their own financial health and wealth picture. Don’t outsource this to a banker or a mortgage broker. Please realize these people don’t care about your financial health and well being. They earn a return on selling you the use of their money. And like every other salesmen they typically are incented and rewarded on the same. They give you enough debt capacity to take you to the maximum debt-service possible. And that is not a “low stress” financial situation.
The financial reality for people who either bought at/near the peak is that your in a paper loss situation on an asset that you don’t technically own (because the bank does). For people with long-term horizion’s Ii.e. people who bought a housing for housing sake) I suspect the market will see levels like this again. Whether that is in 3 or 10 years who knows? But I agree with Sheldon/Sara that they shouldn’t concentrate on the short-term stats and movements because if your horizon is 5 years, why care about the monthly movements. If you bought a house to live in and raise a family and hold for long term horizon than I’m sure the price will regain in the long term.
If, however, your one of these people who have leverage every equity dollar you have into the Alberta real estate market, I hope your cash flow analysis is really strong. Because the same banker that put you into all those mortgages will be more than willing to exercise their call option on them if you stop paying them for 90 days.
For people who rolled in and bought investment properties
Please omit that last sentence.
Also, Saab, completely agree with your post! Love the “get a hobby” recommendation and your “better planning next time” note for highly leveraged flippers or investors with multiple properties. I personally don’t have much sympathy for the later group if they lose money.
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“The idea of your house being a theoretical bank in which you deposit your money and extract it to finance your retirement is absurd. But that doesn’t stop it from happening. At its very essence, the value of any investment is equal to the cash that can be extracted out of the instrument in the future. Aside from embarking on a leveraged rental strategy, what cash can be extracted from residential real estate?”
http://www.dailyreckoning.com/rpt/Credit-Bubbles.html
“Over the course of the past 5-10 years, however, the financial system has evolved to the point where bankers have more incentive to sell the right to collect your future monthly payments into a secondary market. This secondary market is created by large Wall Street firms who make commissions and fees in a fashion similar to that of the stock market. Therefore, the local banker has been transformed into an agent of institutional and individual investors looking to invest in an income-producing security that pays a yield greater than Treasury bonds.
How have the priorities and incentives of your local banker evolved? Think volume, not thoroughness of credit profiling.”
http://www.whiskeyandgunpowder.com/Archives/2006/20060503.html
“note that the term ‘boom’ is actually a negative term, or should be. during the boom, which is itself a result of lax monetary policy, capital is malinvested and the economy’s production structure damaged/distorted. the bust is the economy’s attempt at RECTIFYING the mistakes of the boom by liquidating malinvested capital and redirecting those resources to their optimal use (usually, that entails the realization that assumptions about future demand were simply wrong, as they are based on the illusion created by the credit expansion).”
http://www.whiskeyandgunpowder.com/Archives/2006/20060619.html
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“Risk is something an investor needs to develop a healthy respect for. Ignoring it will not make it go away or act as a shield from its consequences.
If you do not factor risk into the price of your investments then the market, like a very blunt instrument, will eventually do it for you by taking your investment down to a price that most certainly factors it in.
The recent drop in value of real estate, stocks, mortgages and asset-backed corporate paper, to name just a few, shouldn’t come as a surprise. This price reduction is reflecting reality coming back into the markets. Investments that were priced as having little risk are now being repriced to levels that reflect their true ratio of risk to reward. This is not dangerous; it is healthy.”
http://www.edmontonsun.com/Business/News/2008/02/10/4838364-sun.html
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At Truman’s site you can see that the prices increased again…for emdonton
I think that the reduced price per sft tells the correct picture…any commnets
Just checked the site and yeah the average price of SFD for the first 1/2 of Feb is up $9,000 on 278 sales. This is not a “price increase again”. At mid-month this is the only price increase since May 2007. (As observed on the same site.) But, of note is that “Sale Price / Square Foot” (i.e. SP/SF) has still fallen again. From $273 to $269. Thus I’d read that $9,000 increase as being the result of a larger property sold mix than during the month of January. Maybe large acerages; larger homes; who knows.
Thanks for sharing this interesting tips. It’s really important to go to the right mortgage who knows the right investment for you.