There was a little party at our place a while ago. Every time we have a party we get asked at least a few times “when are you going to buy a house?” I never really have a solid answer. There are just so many reasons. From now on my answer will just be “when we have a good reason to.”
One of our friends who seems especially interested on knowing when we will buy a house, just bought a house in Calgary with her boyfriend. We surprised that they bought a house together before they were married (or even engaged) but to each his own. I was told by mutual friends that their reasons for buying a house were 1) because they were tired of and/or hated paying rent (but they were dying to pay interest?) and 2) they bought it as an investment (the other past investment they have made is in a pyramid scheme). Wow, solid reasons there. They just bought the house 3 months ago, emailed everyone about it, and the subject line on the email was “House Owners!!!!” Reason 3): desire to be “home owners.” So they bought it 3 months ago and she was pleased to tell us about how they bought it right before the market “really took off” and that the house had already gone up by $35,000. I just kept my mouth shut, not bothering to mention that the market has been gang-busters for the past several years and the fact that it has gone up in value means nothing unless you realize that value. Not only that but it means absolutely nothing unless you take your gains in real estate and invest it somewhere else, downsize to a smaller place, sell it and rent somewhere, move to a different city, etc… because presumably if your house went up by $35,000 so did all the other houses like yours.
Buying a house under their circumstances as an investment is about the stupidest thing you can do. Think about it, they were paying rent in a 1 or 2 bedroom apartment and are now mortgaging a 3 bedroom, 2 bathroom house with a 2-car garage near the end of what could be described by some (by some I mean many) as a real estate bubble. How much more money are they paying in interest right now compared to how much they paid before in rent? Well I can tell you for a fact that their house was in the $300k range. I have no idea how much of that they mortgaged but their monthly expense could be at least $2000 and their former rental was probably ~$1000. If you do a long-term analysis (I just did a quick one on a spreadsheet) they could do just fine and be no worse off than renting and stashing the extra in the stock market. But could they do just the same at the same risk? Things could turn out very badly too…
This is a blog focused entirely on the real estate bubble as it unfolds in Calgary called the Calgarian Contrarian. He wrote an article at the end of May called “Huge Price Increases and Market Psychology.” He mentions the Calgary Real Estate Board’s website that lists current inventory (see “active listings”) and that
. . . if you want an excellent predictor of timing, continue to follow the inventory situation. . . Right now we are just below 2000 active listings, which is extremely low by historical standards. If you see that number start to climb back to “normal” levels of between 5000-6000 you can expect prices to slow down or even begin to drop slightly. As the number goes much above that level, you should see prices begin to decline. That is the pattern we have seen in many US cities. Once a bubble market exhausts itself, there is a rapid climb in inventory levels, followed by prices beginning to decline.
Interesting. The inventory has climbed to 3,600 since his May article. He has a chart of historical inventories in Calgary here. Something is definitely out of whack there and will undoubtedly swing back the other way.