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Canadian Housing Bubble and how to short it

Posted on May 30, 2010

canadian housing bubbleRecently I went to a PHP programming conference in Chicago, Illinois and was able to sit next to a Canadian businessman on our flight home. We discussed many things and some how we ended up on the U.S housing bubble.

“How much have homes appreciated in value where you live?” I asked.

“Well, I sold a home in early 2000 for about $180k” he started. “Now that same home, with maybe $300k worth of upgrades would go for $700k-$800k”

Uh oh, I thought strike one

I proceeded to tell him about Bend and how at our height, the median was around $400k.

“What is it now?” he asked.

“Well, I think last month the median was around $180k”

The businessman sat there, mouth agape, stunned.

“Glad that isn’t happening up north, I’d be in trouble.  I think homes in Canada are going to just level off in large YoY appreciataion because they were so cheap before”

strike two I thought.

“Well why couldn’t it happen with Canada also?” I asked directly.

He looked at me, and with conviction, said “Well, Canada is different…” and proceeded to tell me how.

Strike three I thought this thing is toast

And then today I read this article from mish

Imagine, 68% of your disposable income being spent on housing costs with the remaining disposable income likely being spent on their favorite Top Ramen and KD dinners. This is insane as well as unsustainable. It’s funny that many Canadians seems to think that the 49th parallel has magically created immunity from a housing bust that in their minds is exclusive to the United States. I can’t tell you how many times friends and acquaintances say that Canada’s banks are sound and there was no sub-prime lending and it just can’t happen here. I’m quick to remind them that the loss of one income from a two income family will in essence convert a low credit risk to a poor credit risk akin to that of a sub-prime borrower real fast. Now, multiply this my hundreds of thousands if not millions of borrows and we too have a major problem in Canada no different from that of the US. Wishful thinking really. The proof’s in the pudding and this puddings going to bring a dose of reality to those that are living in fantasy land, way beyond their means and who apparently have missed the global financial crisis that’s been gaining traction and intensity since August 2007.

We’re not only “Hosers” in Canada but we’re royally Hosed as well!!

Robert Clegg, JD, LL.M
Ombudsman, University of Calgary
Calgary, Alberta

Now if only I could figure out how to short the housing mess that we all know is coming to Canada, I’d be insanely rich.


Choose your own financial adventure

I posted a hypothetical question over on the Bend Economy Bulletin Board. It was the direct result of a conversation with a buddy. I am always of the opinion that the more voices I listen to, the better my decision will be. And would encourage anyone who is interested in their financial future to think about using the forum to ask questions. Plus, there are several smart people who frequent it, so that helps.

Keep in mind, no one is saying you have to actually use the advice. So ask yourself “what can it hurt?”


How to calculate the true cost of Real Estate

I have several articles that you probably should read concerning real estate, here and here.

Now for a long while (over 6 years) I have been bearish on RE. For those who may not understand the term bearish, it pretty much means that I think that purchasing a property has NOT been a good move. But things are changing.

Take these homes for example.

Some things I know after researching the homes using DIAL and the CLERKS records are.

  • They are both short sales
  • They are right next to each other
  • They were built for $106k in 1996.
  • Annual tax is around $2k

Now how can we distinguish if this is a good deal? Well lets lay some ground work.

I currently rent a crappier home than either of these for $775 a month. So if my net monthly cost is less than $775 a month, this tells me that I should consider “buying” a home. So I go to and open up their mortgage calculator.

The homes are asking $89k, and I would put down roughly $20k in cash. Making the loan amount $69k. And with a 15 year fixed and good credit, you should be able to pull close to 4.5% on the interest. You can see that the monthly payment is then $527.85. This may lead you to think “Jared, you would be saving $250 dollars a month, what is stopping you?” and that is a reasonable question.

If you look up the properties in DIAL, you will see that the annual taxes due on the homes is roughly $2k. Dividing that by 12 gives you your monthly tax rate at $166 a month.

$527.85 + $166 = $693.85

Monthly Mortgage Payment + Monthly Tax Rate = $693.85

Which doesn’t look quite as attractive, but is still interesting. Finally you should calculate maintenance costs. Which most people say the bare minimum is 1% of the purchase price. Realistically, I think we probably should go with 2-3% of the purchase price for these older homes, but for the sake of this post, we will just use 1%. 1% of $89k is…$890 which we will divide by 12 to get our monthly maintenance cost. $74.16.

$527.85 + $166 + $71.16 = 765.01

Monthly Mortgage Payment + Monthly Tax Rate + Monthly Maintenance Cost = $765.01

Yes, this looks really attractive, but I also want to add the transaction cost (The amount you pay in fees to the RE agent, Mortgage broker). I will have to guess a little bit here, if a real estate agent can shed some light I would appreciate it. So lets say that the total fees paid, is roughly 7% of the purchase price.

$89k x .07 = $6230

Now divide $6230 by how many months you will have the mortgage loan for. In our case, it is 180 months.

$6230 / 180 months = $34.61

Keep in mind that if you roll any of the fees into the loan, then you will pay interest on them.

$527.85 + $166 + $71.16 + $34.61 = $799.62

Monthly Mortgage Payment + Monthly Tax Rate + Monthly Maintenance Cost + Monthly Transaction Cost = $799.62

This is the basic math I use to figure out if I really am getting a deal or not. The interesting thing here, is that an investor could potentially buy this place. I mean they could maybe rent it for $850. So they would make ($577.85 x 12) $6934.12 annually on a $89k purchase. Roughly 7% +/-. Not a terrible investment using this math.

I did call about these homes, supposedly they have several offers. Thing is, with over 400 Notice of Defaults in January, we all know that there is plenty of inventory. Meaning that there is absolutely no freakin rush to “buy” a home.

Anyway, just some thoughts for people to consider before they purchase and please comment if I missed something.

Top 5 Bend blog predictions for 2010

Posted on January 1, 2010

Everywhere you turn this time of year, you have people making predictions. They are all interesting, but after reading them I have to laugh. One could no sooner hit a mosquito with a bb-gun then predict anything accurately (And in these economic times no less). So it becomes a pathetic guessing game. And with that, here are my simple guesses for 2010. And I am picking on the locals, who I hope realize that all this snark is a compliment.

best minimum wage job a middle aged guy ever had
This year, our much beloved Duncan McGeary will take a vacation from both Blogging and Work (OMG!?! I know right!). Oddly enough reports start coming in from FoxNews CNN MSNBC reliable news sources that Hell has frozen over. Upon hearing this, Linda and Dunc decide to go take their icy holiday in Hell for a quote “Righteous ice fishing trip dude!” as well as visiting the historic set of  “Bill and Ted’s Bogus Journey”. While there, the happy couple will also learn that the best selling board game in Hell is “The Settlers of Satan” (Say-tawn), where alas, Satan always wins. Never the less, good times had by all!

Jake Ortman will sit down at his desk, boot up his computer, open his favorite web browser, and stumble across a cold and deadly truth. There is no longer any Time to kill. So successful were his “Time Killing” posts, that Time suffered a fatal blow in 2009.  For what should have been several weeks (were Time to still be alive) Jake will find himself in a near anemic stupor. But finally,  Jake will set into motion a new diabolical plan. Being both a Blogger and a fan of  phonetics, he will start off on a horrific killing spree with his series of “Thyme Killing” posts targeting both the spice and the Japanese band.  (Mwhahahahaha!)

Seeing the failings of the Democrats to do anything worthwhile in two years and having a gift for sensing weakness, BendBubble2′s Paul-Doh shuts down his blog and announces that he is running for Jesus. “I think this is the right time for it.” Paul says when asked about his reasoning “The Dems have been pathetic and Jesus is a deity and political position that I was born for. The prophetic nature of my blog, along with my strategic use of the ‘F’ word, will easily help the transition from blogger savant to savior of souls“. Sadly the campaign poster of an Anglo-Saxon Paul-Doh, with creamy skin, blue eyes, flowing brown hair, and clothed in a blue and white robe while holding two swim-suit clad women under each arm, does nothing to garner support. (Pundits will eventually argue that it actually weakened his message)

Jon Abernathy surprisingly rues the day “The Brew Site” was able to supply him with an all-you-can-drink alcoholic beverage buffet. In a drunken haze some time during June and while trying to sober up, he will access his HackBend blog over an unencrypted wireless network at one of the many coffee shops around Bend. The packet containing his username and password will be garnished by a 15 year old taking a break from an eighteen hour WoW marathon. The teen will then proceed to hack “HackBend” leaving the message “You’ve been h@x0r’d!!! All your base are belong to us!on the index page of HackBend’s site. Oh the irony!

My Back Pages
After seeing Avatar in 3D, Jesse Felder makes a bullish move and goes long on Pandora. “I believe that the unobtanium stock pile that exists beneath the surface of Pandora is where the market is headed” Jesse will state on record. He will then go on to research the world of Pandora, even going as far as calling James Cameron to ask for insider tips on when “The Company” will IPO and release their market shattering quarterly. James’ people will eventually leave a brief voicemail message that states “Dude, we realize that the movie contains ground breaking CGI and sweet 3D cinematography leading to the very edge of realism, but thats all it was, a movie.”

Congrats to everyone who made it in the Top 5 this year, and a happy holidays to all!


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