Mortgage Rates Report

I know, I know... I'm shooting myself in the foot.  I'll start this essay with the conclusion; if you think prices are going to drop even farther, don't buy a home in San Diego...unless...

Let me explain.  Dean Calbraith wrote an article, in the Union Trib, about mortgage rates' affect on the affordability index in San Diego.  It was the standard industry hype from some local economists and mortgage professionals:

"The day of low interest rates is over," said Dan Seiver, an economist at San Diego State University. "Because of inflation, we'll be having interest-rate rises across the board. But having rising mortgage rates in the current real estate environment is like pouring water on a drowning man."

Eh...maybe, Dan.  You'd be surprised at the resilency of a real estate market to higher rates.  Higher inflation could also lead to higher wages, which throws the affordabilty index out the window.  Purchase prices are permanent while loans are temporary; they can always be refinanced to a lower rate during the next economic cycle.

Oh, yeah.  I almost forgot.  I've been yelling about the affordability index since last Thanksgiving and higher rates since May 2, 2008.  Panic, if you're buying a home in July- lock your rate at application.  Don't fret too much about an economic cycle, though.

Gary London, who heads The London Group Realty Advisors in San Diego, said, "It's inevitable that interest rates will rise, which will only slow what's increasingly becoming a festering situation with real estate."

Many local real estate experts say prices will decline at least through the end of this year and probably through much of 2009. The main reason for that drop is that we're only halfway through the wave of foreclosures emanating from the bursting of the housing bubble.

Maybe, Gary.  If prices plummet more than they have, as you predict, a 4% 30 year fixed rate won't get people off the fence.

Would-be home buyers face a challenge: Do you wait to buy your home until the market hits absolute rock bottom by which time interest rates may be zooming skyward? Or do you buy a home now at interest rates that are relatively cheap, and then watch the selling price of your home erode over the next year or year and a half?

That really is impossible to say.  Timing the bottom is never a good strategy for a long-term investor.  Buying a property you can afford is.  In some areas of San Diego County, prices are at their 2002 levels; a bargain indeed.  In some of the worst affected areas, prices may ALREADY have bottomed as investors step up and buy.

"The rising rates make things a lot more complicated," said T.J. Knowles, a mortgage broker with CalBrokers in Del Mar. "If you wait too long for the price to drop before buying a house while the interest rate is rising, over the long term you could cost yourself a ton of money."

Or not, TJ.    Again, prices are permanent, mortgage loans are temporary.

Call me to run the numbers.  You may very well buy a home for $400,000 today  that drops in price to $368,000, in 2009.  It may also rise to $410,000 at the end of next year.  They key component is your expected hold time.  If it's 7-10 years, you're probably going to make money, regardless of how close you come to the bottom.

Oh, now back to my conclusion:  Don't buy a home today if you think prices are going to continue to drop...unless...

they've dropped as far as they will already.

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Benjamin Bach is Canada's "Wealth Planning Guy" and a Sales Representative with The Wealth Team at Keller Williams Golden Triangle Realty.  His website is http://www.kitchener-waterloo-real-estate-investments.com/.  Benjamin responded to my prediction that the Canadian mortgage and housing markets were ready to crash.  Rather than bury the comment in the old article, I asked him to write it as a guest author.   Here it is:

"Real Estate is all LOCAL"

Parts of Canada's RE market have appreciated at *very quick* rates in the past few years. Certain parts of Alberta have seen huge rises in prices, and I was amongst those that thought the run up in prices was not sustainable.

Other areas have been very flat for the last while. There are cities where a duplex has been $80,000 for the last 10 years, and probably will be for the next 10 as well.

Toronto, the economic centre of the country, continues to sustain prices that, to me, seem high. Condo's for 500K are the same size as what I buy 1hr away for $170K. BUT - ~80,000 people are moving to Toronto a year (that stat was current as of a couple of years ago), and they need to move somewhere. I don't think Toronto's prices will continue to go up as much as they have in recent years, but I don't see them going down. The high end of Toronto's condo market, specifically new non-Name Brand condo's over $1mil (i.e. NOT Ritz, Trump etc), feels a little more inflated by speculation to me.

That brings me to my little gem, Kitchener Waterloo. Our economy continues to grow, unemployment and vacancy (2% !) keep going down, and we have one of the youngest and highest paid workforces in Canada.

The manufacturing sector has been hurt by the currency exchange, but is still profitable. Old plants close down, but Toyota (among others) opens new ones. Old plants - 1 million sq ft last year - get sold or leased, absorbed back into the market.

There are three major post secondary institutions in Kitchener Waterloo, with a medical school almost completed.

We were recently voted the world's most intelligent community

We are the heart of Canada's Hi Tech sector (the Blackberry everyone loves is made in Waterloo, 5 minutes from my office)

We have a very strong FIRE sector.

A VERY diverse economic base.

When I spoke with Benjamin Tal last month, a head Real Estate analyst in Canada, he singled out Kitchener Waterloo as the bright spot for Real Estate investors in Ontario. I agree, and my clients do too - voting with their wallets.

Clients from Toronto, Montreal, Vancouver, Calgary, New York, California and recently even Kuwait are attracted to our low prices and great economy. Condos from 130Ks (they're nice - we own a couple), newer single detahced homes in *nice* areas from the $230,000s - and we're less than 1 hour away from Toronto, and Pearson International Airport.

Just like in the US, there are some areas where, to me, prices feel high. But Canadians as a whole have not embraced the sub prime lending that the US has seen in recent years, and *most* canadians aren't buying huge homes they can't afford, without equity. Clearly, there are always some who do, and independant of the economy, they'll get burned, almost every single time.

Investors in Canada should be looking to areas where they can get a great, reliable, steady return on their investment - Kitchener Waterloo fits the bill in every regard, and you don't need to plunk 35% down like most of us Canucks would have to when buying stateside.

Information is believed to be accurate but is not warranted

Thanks for the contribution, Benjamin!  Your perspective is helpful.

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Yesterday, I wrote about the possibility of a Canadian mortgage crisis akin to the American mortgage crisis.  It would have been less controversial to side with the CBC decision to cancel its renewal of "Hockey Night In Canada" theme song.  To my brothers and sisters in The Great North:  It was a warning, not a criticism.

I'm not alone in my warning.  Here are some articles offering caution:

The Canada Mortgage and Housing Corporation (CMHC) warns of slowed housing starts:

"Strong economic fundamentals such as continuing high employment levels, rising incomes and low mortgage rates will provide a solid foundation for healthy housing markets this year," said Bob Dugan, Chief Economist for CMHC. "Most of the pent-up demand that built up during the 1990s has now been fulfilled and residential construction activity will gradually move in line with Canadian demographic fundamentals. These factors will continue to exert downward pressure on housing starts, which will decline to 199,900 units in 2009."

Michael Shapcott at the Wellesley Institute notes the housing affordability problem in Canada:

The housing affordability gap the difference between actual incomes and the incomes required to afford a private rental unit is growing. And, as the affordability gap grows, renter households have less money to pay for other necessities such as energy, food, medicine, transportation and clothing.

Mark Argentino from the Mississauga Real Estate Blog, reported that the CMHC expects demand for housing to put downward pressure on prices.

Garth Turner documents the decreased housing resale volume and excessive leverage carried by Canadian homeowners on Greater Fool.

HouseHuntVictoria pleads with the CMHC to boost reserves for impending foreclosures:

One fact remains undeniable: never before has the Canadian taxpayer been more exposed to private lending practices than it is today. And as the real estate market winds down and inevitably contracts from its unprecedented expansion, Canadian taxpayers may well end up "insuring" the bad lending practices of banks, private mortgage lenders, the speculative buying activities of would-be real estate investors and the poor insurance decisions of CMHC who agreed to back them.

Does any of this sound like America in 2005?  This is a warning Canadian investors not a prophecy.  If you're heavily invested in Canadian real estate, it may make sense to diversify and take advantage of the currency disparity by investing in an already decreased asset.

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Wachovia Bank CEO, Ken Thompson, played the pass the buck game last week at a shareholders’ meeting.  Rather than admit he got blindsided (like all banks did by the housing decline), he played the typical corporate game; he blamed Golden West, the parent of World Savings.

Morgan Brown thinks World Savings imploded Wachovia’s earnings but I think differently.  I’ve worked with World Savings for 14 years.  I haven’t seen a better underwriting department in my career.  Their common sense approach to evaluating borrowers combined with their conservative valuations allowed for the lowest loan losses in the industry.  World Savings was one of the original innovators in lending with their negative amortization product.

That was before neg-am was cool.  In the early part of this decade, originators abused that product and sold it to borrowers without fully disclosing the risks.  Still, World Savings managed their risk well.

I still recommend negative amortization loans to the suitable client.  They are simply the best financial product available for  responsible borrowers who understand the benefits of arbitrage.  If you’re looking to build up your liquidity, this product is hard to beat.  I know, I know…it’s not “fashionable’ to recommend negative amortization loans now.  It’s almost politically incorrect to say you recommended a negative amortization loan.

Well, I funded two last week.  One to an investment adviser and the other to a real estate broker- I used World Savings Wachovia, also.  Sometimes, you have to adnit that fashionable doesn’t always equal appropriate. Pick a mortgage adviser who isn’t afraid to teach you something about finance and investments (assuming you find one who knows something about it)

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