Tuesday, August 26, 2008

Renting and Bulls and Bears, Oh My!

Recently I've been thinking. With the move looming overhead, and the closing of a metaphoric chapter of my life upcoming, there is much cause for reflection on these last few years.

One of the things I've been reflective about has been our decision to rent rather than buy. In the "bull" market of E-town a couple of years ago, many of our friends tried to persuade Hubbs and I to purchase a home. The rationale was that we could, prior to a move, build up some equity and make some money before heading to Vancouver. Rather than "waste our money" with renting, we could have applied those monthly payments (along with our savings) towards a mortgage on our own home for a year or two, building sufficient profit on our property to pad our bank accounts for a move.

Of course, this advice was given a year or two ago, when home prices were reaching record-highs in E-town, and the oil industry was booming such that real estate was being snatched up within days (sometimes even hours) of listing, and demand far exceeded supply. People in general were becoming greedy at this seemingly prosperous point in time, borrowing equity from their homes to invest in additional properties, or constantly upgrading their homes and flipping for profit. You might even call these folks "pigs" in their earnest grab for quick and easy profit.

Of course, quite soon into these discussions with friends, I discovered myself to be a bit of a "bear." Whereas they focused on the then-current economic conditions, I chose to look at longer-term forecasts. Even in my ignorance about real estate and economics, I could foresee that the massive hikes in housing prices and economic upturns would be short-lived, and in short order supply would exceed demand again. They thought I was being overly-cautious. They laughed at our decision to rent. As it turns out, I was right.

Had we followed the advice of these well-intentioned others, Hubbs and I would be stuck right now with a property that would no longer be worth as
much as what we would have paid for it when we bought it a mere year or two ago. We would need to eat the difference, and try to sell our home (at a loss) just so that we could move. We would therefore be unable to move when we wanted to, as the relocation would have to be tied to the sale of our home. The market is pretty saturated with listings right now, oil production has slowed to a crawl, and some people we know have been listed since the spring (with continuous drops in pricing) without even any lookers, much less takers.

In hindsight, it paid off for us to be a bear (or maybe a "chicken") and to wait it out these last few years without buying in. In the ebb and flow of economics, certain realities exist. A long term real estate investment will always yield positive returns provided one waits long enough; this is a universal truth. An economy will always swing back and forth between bear and bull; this is also a reality, although the duration of each respective term is relative to other social and economic factors at play in a given area. However, for us and our dream to eventually move to Vancouver, it seemed foolish to jump on the proverbial bandwagon for the relatively short-term, and pour all of our savings into a real estate market that was especially volatile and unpredictable in our area.

So to all those who thought we were being foolish in dumping all our money into rent rather than a mortgage, I guess I can finally say, "I told you so." Because we chose to rent, we are now free to move whenever we want, and our assets are not tied up in a mortgage. We are not facing the stress of having our home be valued at less than what we purchased it for, and we don't have to worry about trying to unload our property before we can go.


Natalie said...

And, if you go soon, it will be a great time to buy in your new town of choice.

Mrs. Loquacious said...

LOL...was that a tongue-in-cheek comment, Natalie? Vancouver's market is a total bear market right now, and the bubble is due to burst in the next few years, bringing it back to realistic pricing. Until then, it is the WORST time to buy. Bloated market, overpriced properties. To put into perspective.. Tony Romo just bought a place (5 bedrooms, 5000 sq. ft.) for $700K in Dallas. In Vancouver, for $700K right now you'd be lucky to get a 2bd townhouse that is larger than 1200 sq. ft. It really is THAT bad.

Oh, I think you can guess said...



Every time we talk about it I need to change my pants!!


Catherine_Jane said...

I'm pretty sure you guys were living together in your rental way before Steve and I decided to invest in our first condo that failed, much less our second one we invested in. Had we the savings to hold onto the first one we put a downpayment on, on top of the one we have now - we'd be up 500 grand. As is stands if we chose to sell this one we have now, we could still get at the minimum 50 thousand more than we paid for it... you might have to be patient but unless you live on 97 st, land values increase over time. My parents bought in Windsor Park for peanuts 12 years ago and now their land is worth a ton. You should go visit my parents once you move. They own their condo two blocks away from where you are moving. They are right next to Cardero's.

Mrs. Loquacious said...

We've been renting for the past 3.5 years, C_J. While I was going to school, there was no way we could afford to own; I wasn't working and Hubbs didn't make quite as much as he makes now. We could only afford to buy as of about 2 years ago, and by then the market was starting to get pretty stupid.

I think that condo values are bloated from what they are actually worth at this point, and judging from the number of listings vs. number sold both here and in Calgary, the market has really slowed down. The first condo you could have bought would have probably made you some money if it had been purchased back then and sold last year, but right now you might be hard-pressed to find buyers for the price you are asking. A lot of folks are having to drop their prices by 10%+ just to get people to come in.

The other problem is that many young couples/families are house-poor, and all of their savings and income are tied up in property that they really couldn't afford to buy 1-2 years ago. To sell now would mean a loss for them, but if interest rates go up, many will not be able to make mortgage payments anymore.

Also, many bought with nearly 0 down on a 35 or 40-year mortgage plan. Not wise. You guys may be an exception and you probably entered into the market with 20% or more as down payments on your home. That also makes a difference.

Then there's the whole deal with "leaky condos" - a problem in Vancouver and presumably in Calgary and Edmonton as well. Newer built structures are not enduring over time, and in a mere couple of years some of them have really shown some major problems that have cost condo owners extra levies and fees upwards of $20K. The horror stories abound, my friend. They really do.

If you guys come up to visit us in Van we'll go see your folks. Otherwise, it would be rather strange for them to have random people ring their doorbell asking to come in for coffee ;)