Well, the experts are weighing in again. And, once again, they agree: Housing is a lousy investment. And it always will be.

But wait. Just a few years ago, weren’t the experts saying that housing was always a great investment? That house prices would always go up?

Yes, they were.

One thing you can be sure of with respect to market punditry is that experts will extrapolate recent trends into the hereafter. As will most people, actually. That’s why, no matter how many times markets overshoot, people get burned.

With our astronomical cost of rent, buying used instead of new was the only way to go.  I saved a lot of money by going this route, but finding the right car and securing the financing proved to be a massive headache.

Financing
Because I have no established history of credit in the U.S., it was tough to find a lender who would lend to me, let alone give me a decent rate.  TD Bank in the States was no help, even though I have a relationship with TD in Canada; they wanted me to have lived in the country for 2 years.  RBC Centura seemed amenable to giving me a loan, but I needed an RBC account in Canada, which I couldn’t get unless I showed up in person at a Canadian branch.  My everyday bank, Citibank, was unwilling, as was KeyPoint Credit Union, who is affiliated with Google (where I’m working).

As much as I like buying from private sellers (no overhead, so the cars are much cheaper), car dealerships were pretty aggressive when it came to financing — they’re in tough times and a bit desperate for business — but even then, the best rate Sunnyvale Acura could give me for a used car loan was around 10.5%. Not only that, but they restricted the term of the loan to the length of my work visa (3 years).

Toyota of Sunnyvale was actually quite helpful.  The financing agent there offered me 0% for 36 months on a new Prius, or 1.9% over 48 months, all based on my Canadian credit history.  Too bad that a $23,000 Prius would have cost us about $400/month over 48 months, even with 20% down and 1.9% financing.  That was a non-starter for us.

Eventually, Stanford Federal Credit Union came to my rescue.  Like KeyPoint, they are also partnered with Google, but unlike KeyPoint, they have a program to help Googlers who’ve just moved to the States and have no credit history.  With 30% down, I was able to secure a loan for 6.24% — not great, but miles better than 10.5%.

Having a car loan also helps you to build credit fast, which is exciting.  (I find credit-building exciting??  I must be getting old.)

Finding a Car
This was stressful in itself.  When you’re buying a used car, you only have so much selection to choose from.  My shortlist included the Toyota Prius, the Mazda RX-8, and the BMW 3 series… but after scouring Craigslist for weeks of not finding the right car and developing an increasing sense of despair, that list expanded to Honda Accords, 2-door Acura RSXes (completely impractical for a guy with a baby on the way), and even 14-year old Integras, which was what I’d been driving before.

My search was complicated by the fact that I wanted something with manual transmission (what real men drive), but everything out there is automatic.  (I ended up with an auto in the end — guess I’m not a real man.)

My tip is to actually drive the car before you spend a lot of time hounding Craigslist for the particular make and model.  I thought I really wanted an RX-8, but after driving a couple of them, I realized that they were underpowered and too small, despite their technically having four doors.  They are also prone to mechanical problems, which I was willing to overlook as I sifted through the discussions on Internet forums, but suddenly became unacceptable to me as I actually drove one that made Darth Vader breathing sounds from the vents.

Doing Your Due Diligence
First thing to do is to sign up for Autocheck and get the unlimited reports.  (They’re “unlimited” in that you get 50 reports, at which point you have to call and get them to give you another 50. Inconvenient, but technically unlimited, I suppose.)  First thing I did with every car that looked interesting was to do an Autocheck on the VIN to make sure it had a clean record.

The last thing I did once I found the car I wanted was to sign up for Carfax.  Carfax doesn’t have an unlimited option, so doing it last made sense.

It’s probably also a good idea to get a mechanic to inspect the car, but I cheated a bit and just inspected the engine myself.  (This crash course in car inspection helped.)  It was a local car, too, that had spent its entire life being bought from and serviced by a single dealership, despite me being its third owner.  All that, plus a test drive and a good feeling about the seller, was enough for me.

Getting Insurance
From everything I’ve heard and read, Wawanesa is a great insurance company, and their rates are almost half of what most other insurers charge.  They rely on word of mouth instead of spending heavily on advertising.  The downside is that they need a week and a half to process your application — meaning that you can’t use them for your first car purchase.

I ended up calling Esurance, told them their first quote sucked, spoke with a retentions CSR/broker who found me a decent quote from Progressive, and signed up for 6 months.  My next insurance policy will be with Wawanesa, though.

Getting the Deal Done
The seller met me at Stanford Federal Credit Union and the loan officer there did all of the legwork.  No lining up at the DMV, no figuring out what documentation was required or how to fill out DMV forms — easy peasy.  The whole process took about an hour.

I am now the proud owner of a 2006 BMW 325i that’s in pristine condition.  The last owner really took care of this car — it feels just as good as any reconditioned car on a used car lot.

I really miss shifting through gears, though. (Even if my wife certainly won’t.)

So, how can individual investors best-position themselves in the face of this potential upcoming housing bust – aside from not buying Canadian real estate, of course? This is where it gets a little different from the U.S. story.

Since CMHC is directly owned and operated by the Canadian government, there is no opportunity to short-sell CMHC or bet against it in the same way John Paulson profited immensely by betting on the demise of Fannie Mae and Freddie Mac. And since CMHC’s toxic MBSs are guaranteed by Canadian taxpayers and are not on the books of Canadian banks, short-selling the banks or MBS investors is a dead-end as well.

For the typical individual investor, the best opportunities are probably to be found in short-selling Canadian REITs….

Interesting advice.  If I actually had any money to invest, this would be something I’d love to try.

I’m very excited about working at Google, of course, but moving to the USA is not without its headaches. My wife and I are both Canadians (I’ll be working in the States under a TN visa), so most annoying of all is the fact that I have absolutely no credit history in the States — heck, I don’t even have a Social Security Number yet — so getting a mortgage, cell phone, television service, etc. is proving to be a pain.

As far as mortgages go, the plan is to rent for a year while I build up my credit history, then secure a decent mortgage. Hopefully, the timing will work out for us. I’m not as familiar with the U.S. housing market as I am with Canada’s, but I do know that the Bay Area’s real estate values have plummeted off a cliff to the tune of about 30% from the peak — so it’s probably not a bad time to buy. Hopefully, when we’re in a better position to buy in a year’s time, the market conditions will be just as bad (and hence good for us ).

That’s another great thing about moving to the States: had we stayed here, wifely pressure would have forced my hand and we’d have ended up buying an overpriced SFH in Victoria. Obviously now the pressure’s off, and I’m looking forward to being a homeowner in a place where the market conditions are a little better.

Mind you, even after the 30% correction, Bay Area real estate is insanely expensive. But the average salary around here is higher, too, so the high valuations actually make sense, somewhat. Not only that, but the standard mortgage product in the States is the 30-year fixed rate, which takes a load off my mind. Sure, it’s a bit more expensive than the standard Canadian 5-year fixed products, but way, way, way less than a Canadian 30-year fixed rate product (if you can even find a lender who’ll sell you such a beast). I love that I know I’ll be paying $x number of dollars every month for the next 30 years, instead of the uncertainty of rising interest rates after 5 years with a Canadian mortgage.

Thankfully, Google kept a cache of everything, so I was able to rebuild the entire thing, sans comments (all 1 of them).  Gotta love Big Brother!

Globe and Mail: Banks urge Ottawa to tighten mortgage rules

Wall Street Journal: Housing Rebound in Canada Spurs Talk of a New Bubble

Globe and Mail: Ottawa says housing bubble not a concern; no plan to tighten mortgage rules

Globe and Mail: Competition Bureau seeks to smash ‘anti-competitive’ CREA rules on MLS

There is a racial divide in America; just look at what a big deal it was for a black man to be elected president in the first place. At least Chris Matthews doesn’t have his head in the sand about it. Inadvertently or not, he revealed what was going on in his mind, and possibly in the minds of other Americans of his generation, and it was a positive shift in thinking. Let’s not chastise him for it.

Now we need to do the same for Bruce Benham, COO of Re/Max.  Google his name and you won’t find much; but I think he needs to be made infamous for emphatically denying the existence of a bubble at the market’s very peak. So what I propose is this: if you have a website or a blog, make a link with the words “Bruce Benham” that points to the following url:

http://www.realestatevancouver2010.com/market.html#bubblemyth

… and let’s get this onto the first page of Google results whenever someone searches his name.

I have a pretty good idea of what was going through their minds: “If I don’t get in the market now while rates are low, I’ll never get in!” I completely understand because I have those fears myself; what if interest rates go up, and prices don’t come down further? What if the Realtors® are right, and I’m priced out of the market forever??

From a completely rational point of view, though, that likely won’t happen. If rates go up, affordability erodes, meaning consumers can’t buy as much as they used to, which will drive prices down. Most of us as homebuyers (and first-time buyers in particular) already have to leverage ourselves to the hilt if we want to buy a $400,000 property (and if you’re single or your family lives on one income, you’re already priced out). Affordability has already reached its breaking point.

These historically low interest rates that we’re currently seeing is keeping the housing bubble inflated for just a little bit longer — and luring in more first-time buyers in the process. With interest rates having nowhere to go but up, however, I am doubtful that it will end well for my friends. Best case scenario, we will be the generation that spends our entire lives paying off half a million in mortgage debt; worst case scenario, my friends will end up underwater on their mortgages, and won’t be able to afford to keep their homes when they have to renew their fixed rate mortgages 5 years from now at double the interest rate. As I mentioned in my last post, it’s better to borrow $450,000 @ 7% interest rate, as opposed to $600,000 @ today’s 4% interest rates, even though the monthly payments are exactly the same — because you know interest rates have nowhere to go but up from 4%. Better to wait until prices are low and pay a higher rate, than be stuck with a huge mortgage over 25-35 years of fluctuating rates.

Even if I am completely wrong about this and prices don’t fall, but fixed rates creep back up to 6%, I’m not too worried — there are always variable rate mortgages.  As the prime rate goes higher, we should start seeing larger prime-minus rates again. Back in 2005 when prime was 4.25%, I was offered a prime-0.8% mortgage, for a rate of 3.45%. That’s comparable to any 5-year fixed rate that I can get today. (And had I taken that prime-0.8% rate back then, I’d be paying 1.45% on my mortgage right now! Sometimes I wonder if I shouldn’t have just jumped into the condo market back in 2005 instead of sitting on the sidelines Edit: I’ve since found out that the condo I almost purchased in 2005 required remediation.  I probably dodged a bullet on that one.)

A low interest rate environment makes it a dangerous time to buy

A lot of people I talk to seem to have trouble understanding that this low interest rate environment actually makes for a terrible time to buy.  Everyone knows that these low interest rates won’t last forever — but the prevailing sentiment is to lock in before rates go up, which on the surface seems to make sense.  But what these people don’t realize is that, when rates go up, the cost of housing must come down, since we must maintain the same level of affordability.  (I firmly believe that we’ve reached the limits of affordability…. If you still think prices are going up in the near future, because of immigration or higher wages or whatever, I’m all ears, but please back up your assertions with some hard data.)

In other words, if buyers are already stretched to the limit to buy a $600,000 bungalow at today’s historically low interest rates, no one is going to have the means to buy that bungalow for $600,000 when rates go up.  The price of the home has to come down.

Now, would you rather buy a house today for $450,000 at a 7% mortgage rate (pretend for a second that mortgage rates are at 7% today)… or would you rather buy that same house for $600,000 at 4%?  If you picked the former, you win the prize.  It’s much better to owe less at a higher rate; that rate actually has a chance to come down.  On the other hand, if you pay $600,000 today at 4% interest, it’s absolutely certain that rates have nowhere to go but up, so your monthly payments are guaranteed to increase in the future.  25 years is a long time to pay off a loan, and I can guarantee that you won’t be paying a mere 4% on your loan 10, 15, or 20 years from now.

“Even if you lock in a five-year mortgage rate, you have to realize that five years from now, they will be significantly higher….” – CIBC economist Benjamin Tal

Canada’s 5-year terms are effectively teaser rates

25-35 years is a long time to pay off a loan. So why is a 5-year amortization the norm in Canada?  In the U.S., it’s common to lock in to a rate for 30 years, which provides peace of mind — you’ll know what your monthly payments are for the entire term of your loan.

In Canada, the staple mortgage product is the 5-year fixed rate.  And after 5 years, you can be sure that your rate will be significantly higher.  In effect, it’s not much different than an ARM or a teaser rate that got so many Americans in trouble during the U.S. housing collapse.

Loan-to-income ratios are out of whack

At the peak of the U.S. housing bubble, just before it burst, house prices were five times the average American income.  In Canada today, we are at 7.4 times the average income — almost 50% higher.

Debt-to-income ratios are out of whack, too

At the peak of the U.S. housing bubble, the debt-to-income ratio for the average American was 127%. Today, the debt-to-income ratio for the average Canadian is at an astounding 142%.

A housing boom in the midst of a recession

Few stop to think about the absurdity of a housing boom in the middle of a recession.  This has never been the case in recessions past.  For example, in 1989, the market collapsed 28% and didn’t bottom out for five years; it didn’t return to its 1989 peak values for another nine years.

Even bank economists think a bubble is forming

A roundup of bubble comments that the major banks have been making lately.  The prevailing sentiment is that a bubble is forming or has already formed, and come mid-2010 when the Bank of Canada raises rates, we might see the start of a shake-up in the real estate market. Bad news like this is rarely seen in the mainstream media, so when so many noted economists publicly voice this opinion, it’s a good idea to perk up and listen.