Thursday, November 25, 2010

The strategy


An almost-30 with fifty thousand in the orange guy’s shorts and a GF “with a ticking clock.” “She grew up in one house and that’s what she wants now,” he said, “and babies.” He puts on a brave face.

A father of three, 55, with a company, “in the yellow zone thanks to this economy.” Two hundred left on a four hundred house, $85,000 in a GIC, no pension, nice suit. Have you told your wife yet, I ask, if she knows you’re going to run out?

A retiring 60ish civil servant with a pension of thirty thousand and less than $8,000 in liquid assets. Two kids, 22 and 26, back home after losing their jobs. Paid-for house, but he’s convinced he can’t pay the electric bill.

Rural boomers with an acreage near town they always planned on as their retirement strategy. So they worked hard to pay it off, and neglected investing. Now the farm’s in an environmental protection zone, and illiquid. “These days,” she says, “I don’t sleep anymore.”

Just four I spent time with over the last few days. Looked into their troubled eyes. They asked me for advice and I gave it. Asked for help, but there was little. Stories like these underscore two realities of our time. A majority of people – despite the veneer of middle classness, and the nice car which just pulled up beside you – are disasters in the making. Second, real estate’s as much a destroyer of financial security as it is a builder of it.

It wasn’t supposed to be this way, as you know. If you got married, had kids, bought a house and threw at it what was left after everyday living, you’d be fine. Pension, maybe. Lots of equity, for sure. Inflation, wage gains, a swelling economy and constantly rising asset values would paper over neglect, ignorance or foot-dragging. It was a formula that worked just fine for about half a century. Until two years ago.

So this week, the Koreans started a pissing contest. Could soon be a war. Ireland crapped out, with Portugal and Spain now on bond vigilantes’ hit list. The US real estate market took another bullet, as new home sales dropped and the shadow inventory of resales – foreclosed homes not yet for sale – ballooned to over 2.1 million. This could keep American staggering for three more years. President Palin?

Ontario announced it’s spending $90 billion on a power plan which will double electricity bills. Ottawa revealed a big jump in inflation, of which the HST figures prominently. F told MPs there is no housing bubble, while he prepares an austerity budget for the new year.

In short, there’s instability, global debt excess, country risk and rising prices – at the same time governments figure they have no choice but to turn off the spending taps. This means hundreds of thousands of laid-off civil servants in Britain. Higher retirement ages in France and elsewhere. Budget massacre in the PIGS. A Tea Party austerity binge in the USA, and belt-tightening here.

In this world now unfolding, prices will keep rising while asset values fall. So you’ll pay more for power, food, insurance and taxes, while your house loses value and your wages flatline. If you happen to be like any of the people I’ve tried to help this week, and lived your life as your parents wanted you to, well, you’re pretty much toast. As I keep telling anyone who will listen, having the bulk of your net worth in one piece of property over the next few years will be like betting your future on Butterbutt in the fifth. Not diversifying into multiple asset classes, or thinking a baby needs a 2,500-square-foot, is an equal gamble.

Some people come to this sorry blog because they’re anxiously awaiting a 50% plunge in housing values so they can buy one. Others come to argue a housing collapse is impossible and sustained demand (as we see now) will propel it higher, emasculating mortgage debt. Neither group gets it.

It’s not that housing won’t correct. It will. But Vancouver won’t become Phoenix or Toronto turn into Toledo. By the same token, without a burst of economic growth, more jobs and higher salaries, no boom’s possible. Instead, it’s the dangerous, muddling middle that we have to understand.

Modest, but sustained, price declines. Economic torpor. Unemployed, boomers especially, who never work again. Young homeowners under water, until their kids move out. No bang. Many whimpers.

Some people have no time to recover. Millions do.

You?