Real Estate Investment in the USA: A Brief History

Real estate investment in the United States has a rich and fascinating history that reflects the growth, development, and economic evolution of the nation. From the early settlements of the 17th century to the modern era, real estate investment has played a crucial role in shaping the American economy. This article delves into the key milestones, trends, and transformative events that have defined the history of real estate investment in the USA.

1. Early Settlement and Land Acquisition: The history of real estate investment in the USA can be traced back to the early days of European settlement. The acquisition of land was central to the growth of colonies, and it spurred the development of land speculation. Large land grants were given to individuals and companies, creating opportunities for investment and speculation, particularly in the 18th and 19th centuries.

2. Westward Expansion and Homesteading: The 19th century witnessed a significant period of westward expansion, with the government encouraging settlers to claim and develop land. The Homestead Act of 1862 granted free land to those willing to improve it, attracting millions of individuals to invest in real estate across the expanding territories. This period marked a pivotal moment in real estate investment, as it facilitated the growth of agricultural and mining industries.

3. Urbanization and Industrialization: The late 19th and early 20th centuries saw a rapid urbanization and industrialization boom, leading to increased demand for commercial and residential properties. Major cities like New York, Chicago, and San Francisco experienced unprecedented growth, with real estate investors capitalizing on the rising urban population and expanding industries. Skyscrapers, apartment buildings, and industrial complexes became symbols of progress and investment opportunities.

4. The Great Depression and Subsequent Reforms: The Great Depression of the 1930s had a profound impact on the real estate market. Foreclosures and bankruptcies were widespread, causing a collapse in property values. In response, the government implemented various measures to stabilize the housing market, including the creation of the Federal Housing Administration (FHA) and the introduction of mortgage insurance programs. These reforms laid the foundation for the post-World War II housing boom.

5. Post-WWII Housing Boom and Suburbanization: The post-World War II era witnessed a surge in real estate investment as returning veterans sought housing and the Baby Boom generation came of age. The GI Bill provided financial assistance for home purchases, leading to a significant increase in homeownership rates. The development of suburban communities, with their promise of a "white picket fence" lifestyle, became a lucrative investment opportunity.

6. Real Estate Investment Trusts (REITs) and Financial Innovations: In the 1960s, Real Estate Investment Trusts (REITs) emerged as a vehicle for individuals to invest in real estate on a larger scale. REITs allowed investors to pool their resources and invest in diversified real estate portfolios. Additionally, financial innovations such as mortgage-backed securities and collateralized debt obligations transformed the real estate investment landscape, enabling investors to trade real estate assets more easily.

7. Boom and Bust Cycles: The USA experienced several boom and bust cycles in the real estate market. The 1980s saw a real estate bubble driven by excessive lending and speculation, followed by a market crash and a wave of foreclosures. A similar scenario occurred in the mid-2000s with the subprime mortgage crisis, leading to the Great Recession. These events highlighted the risks inherent in real estate investment and the need for prudent financial practices.

The history of real estate investment in the USA showcases the dynamic nature of the industry and its profound impact on the nation's economy. From the early days of land acquisition to the rise of urbanization, the post-war housing boom, and financial innovations, real estate investment has been an integral part of American economic growth. Understanding this history provides valuable insights for present-day investors navigating the ever-changing landscape of the real estate market.

What are the most lucrative countries to invest in real estate?

 

The most lucrative countries for real estate investment can vary depending on various factors, including economic conditions, market trends, political stability, and legal frameworks. However, here are some countries that have historically been considered attractive destinations for real estate investment:

1. United States: The United States has a large and diverse real estate market, offering opportunities in residential, commercial, and industrial properties. Major cities like New York, Los Angeles, and San Francisco have long been popular investment destinations due to their robust economies and high demand for real estate.

2. United Kingdom: The UK, particularly London, has been a prominent real estate investment hub. The city's international appeal, strong rental market, and long-term capital appreciation potential have made it an attractive choice for investors. Other cities like Manchester and Birmingham have also been gaining popularity.

3. Germany: Germany is known for its stable economy and reliable legal system, making it an appealing country for real estate investment. Cities such as Berlin, Frankfurt, and Munich offer a combination of high rental demand, strong economic growth, and relatively affordable property prices compared to other European markets.

4. Australia: Australia has experienced a long period of economic growth, and cities like Sydney, Melbourne, and Brisbane have seen substantial increases in property values. The country's strong rental market, high demand from international buyers, and a well-regulated market make it an appealing investment destination.

5. United Arab Emirates: The UAE, particularly Dubai and Abu Dhabi, has emerged as a thriving real estate market with a global appeal. The rapid urbanization, ambitious development projects, and tax-friendly environment have attracted investors from around the world.

6. Singapore: Singapore is known for its strong economy, political stability, and efficient business environment. The city-state's real estate market offers opportunities in residential, commercial, and industrial sectors, with a focus on luxury properties and high-end developments.

It's important to note that real estate markets can be subject to fluctuations and regional variations. Conducting thorough market research, understanding local regulations, and seeking professional advice are essential before making any investment decisions in a foreign country.

American Vs Canadian Home Sale Prices

American Vs Canadian Home Sale Prices - 2000 to 2011

American Vs Canadian Home Sale Prices - 1999 to 2013.

American Vs Canadian Home Sale Prices - 1970 to 2010.

American banks pushing home equity loans to seniors

Bankers are becoming eager to bump up sluggish revenue growth and are therefore once more returning to a business model that lost much of its appeal during the 2007 - 2009 financial crisis: home equity loans.

If you don't what that is, basically it is a reverse mortgage wherein you bargain the value of your home (which has already been fully paid for) and reverse refinance it so you gain money back from the value of your home - essentially selling the bank part of your house, so that when you later sell it (or you die and it gets sold) then the bank collects on the debt after you die.

Thus if you are watching TV, an American channel, you will likely start noticing these ads for reverse mortgages / home equity loans.

The problem during the 2007-2009 subprime lending crisis was that home prices dropped so rapidly that banks were losing money on the value of the homes they had bought into.

New home equity loans reached a record of $430 billion in 2006. Banks made record profits during that time period on home equity lending as home prices soared, but many property owners treated their property value as a personal ATM and spent the money on luxuries they didn't need. As the housing market turned sour, 30% of home equity in the country was destroyed - and with that the banking industry lost billions.

During 2010 and 2011 the banks began offering home equity loans again, but they weren't really pushing them because the market was considered to be too soft and there wasn't enough profit to be made at the time.

But starting in 2012 the USA has recovered from the financial crisis completely and American consumers are now receiving pitches in their mail boxes, email, and brochures in bank branches. Bankers admit the competition is increasing rapidly and they are all trying to capture customers with more flexible terms and lock them into reverse mortgages.

This spells more profits for banks in the long run - so long as home prices in the USA remain stable.

Which, judging by the median new home prices, is happening.

As the USA economic pictures continues to brighten the banks are relaxing their standards for who they are willing to loan money to - and home equity loans to seniors who already have their homes fully paid for is considered a pretty safe bet that can only be affected if the value of someone's home drops.

It isn't just homes being offered reverse mortgages either. Businesses are being offered the same deal for their commercial real estate - pushing the idea that if you own the land, why not cash in on its value NOW instead of later?

According to the U.S. Office of the Comptroller of the Currency survey of 86 of the largest banks in the USA as well as federal savings associations (the survey was conducted between Jan 1st 2012 and ended on June 30th, 2013) it showed a dramatic increase during that 18 month time period of home equity loans. The survey represented 87% of total loans in the system, with 11 categories of commercial lending addressed and 7 categories of retail products, including conventional and high loan-to-value (LTV) home equity products.

Which means banks are again increasing their appetite for risk, which means they are also easing their standards on credit cards, asset-based lending, and more.

High LTV home equity loans saw the most tightening of standards during the 2007 to 2011 period. In 2012, standards were eased at 17% of financial institutions. Many banks however tightened their standards, but are now pushing home equity lending because they are trying to cash in on those people who fit the standards - and thus still make some good money off those people.

Banks say they are being more cautious about home equity loans and are ensuring customers can afford the loan, but they are also covering their assets to make sure they make money off these people.

The push to increase revenue comes as banks are facing increasing pressure from investors to grow revenue, which has declined along with the mortgage refinance business. When mortgage rates spiked in 2013, demand for mortgage refinance loans dried up, and this cost the big banks millions in potential income.

Today banks are pushing the idea that they don't want to lend to people who just have equity - they also want the person to have a strong credit score above 700, and a sufficient income / stockpile of cash to fulfill their new standards.

Finding a good real estate agent

Whether you plan to sell your current home or buy a new home, you need to find a real estate agent you can depend on. Sometimes it is difficult to know where to begin looking, especially if you don't have a good and solid referral from a friend or family member.

Doing the research yourself can be time-consuming, difficult and frustrating since you won't always be able to find all the necessary information to give you a full picture of prospective agents to help you figure out who might best serve your needs. When it comes to finding the ideal realtor for you, Agent Harvest has tools and resources to make quick work of finding a real estate agent who will quickly and efficiently help you buy a new home or sell your current home.

This online referral firm specializes in finding top-rated real estate agents, leasing agents and giving you a general idea of all the things you should know about buying and selling a home. Even if you have experience with either, if you haven't been in the market either way for a while, you probably imagine things have changed. Enlisting the help of a qualified and professional agent with a high referral from a reputed agency will ease your mind since your agent will do all the leg work and heavy lifting in the purchase or sale of your home.

Looking for an agent through this performance-based referral service makes your search simpler and more clear cut since real estate agents have to meet Agent Harvest's high standards in the industry. Each agent must have a proven record of success, a detailed and intimate knowledge of your real estate market area, expertise in marketing and pricing homes appropriately and excellent communication skills. It is critical that your real estate agent returns your phone calls or emails in a timely manner, and you should know their statistics on issue this before making any other arrangements. Real estate agents will be working full-time on your behalf, following leads and generating interest in your property, so they should be committed to your success.

The referral agency will look for the top 10 rated real estate agents in your area from which you can choose. Otherwise, the agent must rank nationally or regionally or have received certification or an award of excellence to make the list of qualified real estate agents.

Canadian Mortgages Vs US Mortgages

The Canadian mortgage market has been sitting on the edge of a precipice ever since the American market burst in 2007. Six years later skeptics and pundits alike are still trying to predict when the housing market and the corresponding mortgage market will burst in Canada.

6 years later in 2013 the proverbial dam still hasn't burst.

If you want to buy a home in Canada you should first arrange financing and think in terms of whether you can actually afford this mortgage - or whether it is better to wait until real estate prices come down in 2015-2016 - when the dam is expected to finally burst.

According to CIBC economist, Benjamin Tal, there are many rational reasons why the Canadian mortgage market continues to sit on the edge of a precipice - and is firmly entrenched there, waiting for the eventual avalanche.
 

Tal admits that all is not well with Canadian housing. It is floundering and there is a lot of doubts and lack of confidence in the market, and yet Canadians keep buying homes and condos anyway because people need a place to live and they're tired of waiting for the market to collapse. Patience is a virtue, but everyone has their limits for how long they will wait.

 

"Any comparison to the American market of 2006 reflects deep misunderstanding of the credit landscapes of the pre-crash environment in the U.S. and today’s Canadian market.”says Benjamin Tal.
In a nutshell the Canadian and USA mortgage markets differ in the following ways:

The U.S. mortgage interest tax deduction - This American tax benefit played only a limited role in stoking the U.S. housing bubble. The absence of this rule in Canada means that Canadians can't claim mortgage interest on their income taxes, and thus they have to be more prudent and careful about whether to buy a house and get a mortgage.

Lender recourse - Canada’s recourse system (which keeps people on the hook after foreclosure) does “not provide a full shield from a substantial fall in prices,” says Tal. In the USA, only 12 states have no-recourse law. According to some sources the probability of mortgage default is actually up to 20% higher in non-recourse states - meaning Americans in the USA were more likely to default on their mortgages - which meant the banks would take bigger losses.

When you default on a loan (any kind of loan) in Canada, lenders send the hunting dogs after you in the form of really annoying phone calls from collection agencies and letters from lawyers - but if you don't have any money or assets or a job, they really can't do anything to you. And worse comes to worse, you declare bankruptcy and have bad credit for 7 years.

Canada’s low arrears rate - Canada’s minuscule default rate is pretty stellar and is slightly less than half that of the American average default rate (pre-2006). However we should note that Canada's other debts (credit cards, student loans, lines of credit) have skyrocketed since 2008, suggesting that many Canadians are paying off debtors by borrowing money from other sources - and eventually that money has to be paid back.

In contrast in the USA: “In a short eighteen-month period in 2007-08, the serious mortgage arrears rate in the US surged by more than 300%," says Tal.

So Canada hasn't reached that point yet. But we could if Canadians continue to pile on consumer debts with credit cards/etc.

The American arrears spike was also largely caused by legal underwriting that was either near-criminal or even outright criminal on the part of the banks giving out mortgages. 

Rate Sensitivity - Canadian mortgages are more vulnerable to interest rate hikes than the average American because our terms are far shorter (5 years versus 15-30 years).

Less subprime - The American crash and "Great Recession" was largely the result of subprime mortgages and risky floating rates. Canada still has subprime mortgages but they are comparatively rare because Canadian banks are more cautious about who they give mortgages to.

However this doesn't completely protect Canada. Foreign investment in Canadian real estate has created a bubble in major cities, and if something ever happens to hurt the bubble then those markets will collapse in a flash. If a collapse happens in Canada it won't be subprime mortgages, it will be foreign investors pulling out all at once which will sink the ship.

Negative Equity - One-third of American mortgages in 2005-2006 were already in negative equity. Over 50% of the mortgages had less than 5% equity, thus “making [Americans] highly exposed to even a modest decline in prices,” says Tal.

In Canada however only 15-20% of new mortgages have less than 15% equity. Plus negative equity is virtually non-existent in Canada, and out of fear such mortgages were phased out pretty quickly by Canadian banks.

No teasers - Millions of Americans got teaser mortgages with rates that reset a few hundred basis points after 2 or 3 years. So they would start a mortgage thinking they got a deal and could afford it, but when the rates reset they were screwed and couldn't afford the home they had purchased - and were locked into it so they had no choice but to default. Over $2,000,000,000,000 dollars worth of mortgages were reset in 2006-2007 alone.

Canadian banks don’t give teaser rates. Borrowers must prove they can afford the normal higher rates in advance.

Tighter housing supply - New Canadian housing starts have exceeded household formation by only 10% in the past decade. That means that Canadians have a comparatively small number of available homes whereas the USA was building new homes like crazy, building so many that it was outpacing demand. The USA was outpacing demand by 80% right before the crash.

Note: In Toronto and Vancouver the new condo market is outpacing demand by approx. 40%, and those condos will be finished being built by 2014-2015, which means Toronto's condo market should implode by that time.

Debt-to-income Ratio - The debt to income ratio doesn't really matter as long as the economy in Canada stays stable. Yes, Canada's debt to income ratio is really bad and is growing worse... but as long as the economy and employment rate stays the same Canadians should be okay.

Better credit - Canadian credit scores have improved since 2008. In contrast during the four years heading into America's Great Recession, the ratio of “risky” borrowers rose by 10+ percentage points and comprised 22% of the market. Many Americans simply had really bad credit, largely due to a floundering economy during the Bush era.

Yes, Canada hasn't been touched yet. But if we keep piling on household debt and spending beyond our means the collapse will come eventually.

What the heck is a FHA loan and why are Americans defaulting on them?

As a Canadian I have to stand in ABSOLUTE AWE of the American mortgage system.

There are a "ridiculous" number of mortgage options out there. There are many options here in Canada too, but its much more regulated by the Canadian government to prevent booms and busts of the housing industry.

In the USA however it seems to me like its a bit of 'Wild West Free-for-All'. Mortgage lenders are like hired guns, bankers and thieves all at once. They're offering many different options and they're all looking to make a fast buck, often by targeting a percentage of people which are higher risk but can be charged higher interest rates.

In recent year the American mortgage market appears to finally be stabilizing, but just so long as you ignore loans backed by the Federal Housing Administration. FHA loans are federally insured loans which, you guessed it, are covered by Washington in the event of foreclosure or serious delinquency.

While other mortgage loans are either bank held loans by financial institutions or insured by Fannie Mae/Freddie Mac, the FHA loans are operated separately and have very different rules governing who can get a FHA loan.

Lets start with some numbers:

Bank held mortgage delinquency is down 39% in the last year (from the 1st quarter of 2011 to the 1st quarter of 2012).

Fannie Mae and Freddie Mac delinquency is also down 14.7%.

Sounds great, right? Wait til you see the FHA numbers: 26.6% MORE delinquencies.

Furthermore FHA loans are growing in popularity. The reason is because they are much easier to get. All you need is apply for a loan of "less than $729,750" and qualify to have a debt-to-income ratio below 43%*. There are a couple other minor things you have to jump through hoops for, but otherwise its one of the easiest mortgage loans to qualify for in the USA even if you have had past debt problems.

* Actual number varies.

In one way FHA-insured loans are a good thing. They are keeping the American housing market stable for the moment by allowing people to buy or refinance their homes with less fuss.

But on the other hand FHA-insured loans are increasingly falling into foreclosure or serious delinquency, moving in the opposite direction of loans guaranteed by Fannie Mae and Freddie Mac or those held by banks, which are all showing signs of improvement.

The scary bit is that American taxpayers could ultimately be on the hook for FHA's growing number of troubled mortgages. The agency's finances are already on shaky ground, and additional losses from loans going sour could prompt the need for a federal bailout.

"We can't escape this one," said Joseph Gyourko, a real estate professor at the University of Pennsylvania's Wharton School. "This is an arm of the U.S. government." If a large enough share of the government-guaranteed loans, are delinquent for 90 days or more then we will see a jump in foreclosures which could prompt a federal bailout.

Note: The FHA itself doesn't provide the money for loans. It just insures them in the event that people fall into delinquency. Its a bit like having a co-signer on your mortgage. If you stop paying your mortgage, the co-signer is the one who ends up paying for it and eventually the home is foreclosed if the homeowners don't catch up on their payments.

Part of this problem isn't just the people applying for the mortgages. Its a few unscrupulous companies which are selling FHA-insured loans and are taking advantage of the less strict rules for approving mortgages.

Which begs the question, will be having another real estate bust in America in a few years from now when and if the FHA-insured loans cause a federal bailout? Or will such a bailout just be a band-aid measure which keeps everything afloat?

As to why Americans are defaulting more often on FHA loans my guess is its because they were given to people who probably weren't ready to be purchasing a house.

How is it possible that Miami condos are cheaper than Toronto's?

Seriously.

How is it possible that Miami condos are cheaper than Toronto's?

When browsing condo websites (a hobby of mine) its always fun to check out what is available. Some of the condos in Miami are dirt cheap compared to the prices in Toronto.

The median sales price of a condo in Miami is $160,000 (stats from Trulia.com).

That is pretty dirt cheap if you know anything about the ridiculous prices in Toronto which have been inflated by foreign investors.

The average sales price of a new condo in Toronto was $432,256 in June 2012. Existing condo sales averaged $364,597 in June 2012. So... basically you could buy 2 condos in Miami for the cost of 1 in Toronto and still have money left over.

But it is also fun to explore the websites that specialize in LUXURY condos. eg. Condo Sunny Isles is a good example.

Now with respect to luxury condos the prices can be pretty ridiculous. Think between $500,000 and $40 million. Yes, that is correct, $40 million for a luxury condo in Miami. For that kind of prices you have to imagine a place that comes with its own private indoor pool, tennis courts, etc...

The example I am looking at is:

100 S POINTE DR PH-2
Miami Beach, FL 33139
$39,000,000
6 BEDS, 8 BATHS
10 PARKING
11,031 square feet + 6,31 in extra lot size (parking, etc).

The place apparently comes fully furnished, marble floors, private pool on the balcony, access to the condo's various facilities (tennis courts, etc, but they're not private)...

But the funny thing is I don't think its worth "$39 million". For that kind of money a person could buy 13 smaller condos worth $3 million each, basically the whole floor of a condo building... but why would ANYONE need that many extra beds and kitchens?

Or alternatively you could buy 13 different condos in 13 different cities (Paris, London, New York, Tokyo, etc) and rent out half of the condos and then move from one condo to the next every 2 months. Just because you can. Sheer silliness.

I think you would have to REALLY love marble floors to want to spend that much extra on a single property, because lets be honest, its all the marble that has made that property so dang expensive.

And its completely unnecessary. I can see spending extra on a house that has beautiful ivy on the exterior of the building, but spending a obscene amount extra just so every room can have marble floors? Pfff!

I can only just imagine the kind of ridiculously rich person who would buy such a place. Probably the kind of person who bilked the American government out of millions during the bank bailouts and then got an annual bonus in the 10s of millions.

Detroit bankrupt, houses and condos are supercheap

Once the backbone of American manufacturing, the city of Detroit is poised this Friday to commit financial seppuku (Japanese ritual suicide).

And it is really a damned if they do and damned if they don't situation.

You see Detroit needs $80 million in emergency funding just to keep the city running and in April Detroit Mayor Dave Bing handed financial control of the city over to the state of Michigan (which ironically owes Detroit $220 million, but is also suffering financially).

It seems like an extreme measure for Detroit Mayor Dave Bing who just weeks ago shocked America by announcing plans to save Detroit money by cutting off all street lighting to large swaths of the city. (And watch the crime rate go even higher.)

This is after all, Detroit, America's first "Ghost City". It was once America's 19th largest city, but since 2007 its population has shrunk to 713,777 (according to Google). Truth be told Detroit was dwindling in size since the 1960s.

Detroit has been on life support since April, when the mayor and city council approved an agreement that handed over control of Detroit’s finances to the state of Michigan. But that apparently wasn't legal says Detroit's city lawyer, Krystal Crittendon, who was never consulted on the deal. Since then she has filed a lawsuit arguing the agreement was illegal because it contravenes the city’s charter, which states the city cannot enter into agreements with parties that owe it money. Since the state of Michigan owes Detroit about $220 million, then the agreement has to be struck down. A ruling is expected tomorrow (Wednesday the 13th).

Meanwhile the state of Michigan says it is going to cut off crucial funding to Detroit starting this Friday. Funding that governs everything from street lights to garbage collection. The city will basically be cut off completely.

And frankly who will want to live in a city that doesn't even have garbage collection or street lights?

Right now the bulk of the jobs in Detroit are the result of teachers and city services. The Detroit public school system is the city’s largest employer, with more than 13,000 jobs. #2 is the city of Detroit staff with 12,400. #3 is the Detroit Medical Center with 10,500 staff.

Manufacturing in Detroit is down to two thirds of what it was in 2006. 271,600 jobs in 2006 to just 187,800 jobs in 2010. Probably less than 170,000 by mid 2012.

In 2011 unemployment in Detroit was 20.2% (compared to 8.9% in the USA) and suicide, abortion and crime rates are all up due to extreme poverty.

City libraries have been closed, the quality of education has slumped because teachers are leaving for sunnier pastures and the spike in crime is filling the city jails and creating a huge backlog. The city can barely afford to pay for defense attorneys.

However... on the plus side land is super cheap.

You can buy a 750 square foot condo for $10,000.

Or a 3-bedroom 1500 square foot condo for $19,000.

Or how about a 6 bedroom + 3 bathroom, 3,600 square foot HOUSE for... $16,000. A mere $4.44 per square foot.

And this is just one Detroit real estate website I consulted (trulia.com), but you can certainly find other cheap listings on various Detroit real estate websites.

Including prices as low as $1 because the previous owner didn't pay the back taxes and the property has been seized by the state. All you have to do is pay the back taxes and its yours.

However if Detroit really does cut "the gravy train" (as Toronto Mayor Rob Ford likes to call essential services) then we can expect property prices in Detroit to collapse even further. In which case a wait and see approach is best, since you could in theory snap up a lot more for your dollar if you wait a bit longer. (But why would you want to live in such a horrible city???)

Frankly if you're in the market to buy cheap property why not buy it somewhere NICE?

For example you can buy a 2 bedroom condo in Hawaii for $25,000. However the current renters are unwilling to leave so you will need to find a way to kick them out if you want to live there. Still if you manage to do so its in HAWAII! The place is a paradise and a no brainer in comparison to Detroit where you can get mugged going to the bathroom.

Canada's housing starts indicate an ever expanding bubble

Back to the news... If you are looking for MY QUEST FOR A CONDO, click here.

Canada's housing starts have almost doubled since the start of 2009. In the last 3 years Canada's housing starts have gone from approx. 130,000 in January 2009 to almost 250,000 by April 2012.

HOWEVER AT THE SAME TIME Canada's household debts has skyrocketed from $1.3 trillion (it was $600 billion in January 2000) to $1.61 trillion in only 3 years. So either way you look at it ($300 billion in 3 years or $1.01 trillion in 12 years) we've really been piling on the household debt in the form of mortgages, credit cards, lines of credit...

NOTE: $300 billion is enough to buy 600,000 houses for the average price of $500,000. I would hazard a guess that Canada's housing bubble is being fueled by too much credit and household debt.

Bank of Canada governor Mark Carney says he regards Canada's household debt — which currently is at a near-record 151 per cent of disposable income —as the No. 1 domestic risk to the Canadian economy. Individual household debt was $39,597 in 2009, but has risen to approx. $48,735 by April 2012.

Remember that is an average debt per household. It may not seem like a lot, but when you consider the demographics of WHO is in debt you start to realize its a lot more than $48,000.

The following is from Statistics Canada:

32% of working Canadians are not saving anything (for retirement or anything else because they have too many debts to worry about right now).

For people making less than $35,000 a year, 49% surveyed reported that their debt levels rose in the last three years. 42% for people $35,000 to $75,000 a year. 38% for people making over $75,000.

So evidently its effecting lower income people more, but when you consider middle income and upper income people are also packing on the debts (and when you consider its middle and upper income people who buy houses and condos) it becomes self-evident that if a housing market collapse happens it will be the middle class people who have a huge mortgage they cannot afford which will end up losing their shirts.

Driving the housing starts is all the pressure on condos currently happening in Toronto and Vancouver, where the condo markets are so red hot you'd have to be a complete fool to be purchasing during a bubble. (Because when the bubble pops you won't be able to refinance...)

In theory Canadian banks should be more cautious about whom they give mortgages to, but the problem is that the banks don't insure their own mortgages. The CMHC (Canada Mortgage and Housing Corporation) insures them. Its basically the equivalent of Fannie Mae and Freddie Mac in the USA.

NOTE: When the US housing market collapsed in 2007-08 it ended up costing American taxpayers $700 billion in bank bailouts and hundreds of billions of dollars more in economic stimulus from the resulting economic fallout. Due to the CMHC's policies the same thing will likely happen here in Canada between now and 2015.

I say 2015 because that is when the condo market in Toronto and Vancouver will likely implode due to the sheer number of condos currently being built which will become available by 2015, despite the fact that people aren't buying that many condos... See my older article Toronto condo market might burst for complete details.

Toronto currently has 199,000 condo units, but another 27,504 are under construction right now and will be finished by 2015. That will boost supply by roughly 14%. The problem is that there is not enough demand for people to buy 27,500 extra condos in the next years. Prices will have to take a huge hit (by maybe 10 to 12% over the short term), but over the long term it will kickstart a collapse of housing prices in Toronto.

A lot of it is fueled by overseas investors who purchase the condo using a Canadian mortgage (via a Canadian bank, insured by the CMHC) and then flipping it for a profit when the property is built. However if they start taking losses all the investors will pull out of Canada in a hurry and the prices won't just fall, they will PLUMMET.

So yeah, doom and gloom.

But there is a sunny side of this for people like me who wants to get a condo (see My Quest for a Condo). It means that when people are desperate to sell they might be willing to trade...

NOTE: Household debt is leveling off, slowing to 4% annual accumulation in 2012 from a high of 10% in 2011. Why? Many Canadians have reached their credit limits and can't get more credit. The danger however is that this means many people might cut back on spending, which will hurt consumer confidence levels, cause more companies to go bankrupt, layoffs, economic downturn... and possibly a housing market collapse ahead of schedule.

I am still betting it will happen by 2015 to coincide with the condo market overflow of supply, but if it happens sooner than I expect then I won't be complaining. It will just make it easier to buy (or trade) for a condo when the prices drop to half.

Who is to blame for Canada's housing bubble?

Its so easy to point fingers.

Banks. The government. Local politicians / mayors. The real estate industry. The housing industry. Greedy sellers.

Canada’s housing market has been relatively stable for over a decade, with the notable exception of Toronto and Vancouver which are the country’s hottest real estate markets. As Canada’s largest city Torono's home prices have risen 10.5% over the past year alone. The condo industry in Toronto is so hot that there is now three times as many cranes dotting Toronto’s skyline as there are in New York City.

Many real estate analysts are becoming increasingly worried that Toronto, Vancouver and Calgary are in an American-style housing bubble which could lead to an implosion of prices and a recession.

The analysts are not alone. Bank of Canada Governor Mark Carney is sounding the alarm over the growing level of household debt, while maintaining the overnight lending interest rate at a near-record low level of 1%. Mark Carney's hands are a bit tied in this matter. He can't raise interest rates without risking being the needle which bursts the bubble.

What is bizarre is the economy in Toronto and Vancouver are both stagnant and yet the prices are rising unusually fast. In contrast cities like Edmonton and Saskatoon where the economy is booming but home prices are stable.

Some people argue that the Canada Mortgage and Housing Corporation’s (CMHC) policies are to blame because they encourage overseas investment in Canadian real estate. They claim that investors from overseas have corrupted the system and is creating an artificial and potentially dangerous real estate bubble that will ultimately lead to a recession in Canada.

There is of course a quick and easy solution to this. Ban overseas investors from buying homes and condos in Canada.

The CMHC controls the majority of Canada's mortgage insurance and securitization markets and guarantees all (100%) of the principle balances and interest rates on insured residential mortgages.

The problem is that the Bank of Canada has such low interest rates that in combination foreign investment and low interest rates in causing the bubble to grow at an exponential rate. Investors are particularly attracted to Toronto and Vancouver's markets because of the recent history of rising housing prices.

Another problem is Canada's artificially low interest rates have been kept low for since 2008.

The longer interest rates remain low and investors keep flooding the real estate bubble the worst it will be when the bubble bursts and a market correction takes place.

Trying to prevent a correction however might make foreign investors skittish and cause them to withdraw from the Canadian real estate market in a hurry. Thus a preventive measure could even kickstart the market correction.

Foreign investors are not wholly responsible for creating Canada's housing bubble. Investors are sheep. They go where they see a financial opportunity with little risk.

Foreign investment is normally a good thing. It creates jobs and adds to the local economy. More condos and homes being built means more money for developers and construction works. More rental properties become available. The problem however is that investors have a tendency to flood markets. The home prices and rental prices go up, people get into household debts they cannot afford due to outrageous mortgages... and when the fit hits the shan everyone with a mortgage loses their shirts.

While its true that in Canada we crave foreign investment, that is only true so long as the investors stay the course and don't all back out at the same time. We need to avoid an artificially inflated housing market that will bring the whole economy crumbling down when the bubble bursts (see the USA, circa 2007-09).

So who does the bulk of the blame lay with then? The answer is the blame can be placed squarely on government policy.

By guaranteeing 100% of CMHC-insured mortgages and 90% of privately insured loans, the government removes the risk from banks and investors, making it much easier to get loans whether you are a foreigner or a Canadian. A foreigner with a good credit rating can invest in Canadian real estate, borrow money from the Canadian government to invest in our own housing market... and if anything goes wrong they're not Canadian and don't have to face any financial responsibility here. If everything goes smoothly for the duration they eventually withdraw their money (with a decent profit) and put it to use elsewhere.

Having such weak policies and lending standards is Canada's Achilles heel.

A report from the Reason Foundation in the USA found that government guarantees always underprice risk, drive mortgage investment into unsafe markets and inflate housing prices by distorting the allocation of capital. Governments simply cannot price risk accurately while banks and private lenders have every incentive to price risk appropriately because its their money on the line. If the government loses money its the taxpayer that ends up with burdened and governments are far too willing to take unnecessary risks when there is no incentive to insure success.

If we were to try to prevent an American-style housing bubble bursting we should not have the Canadian government guaranteeing mortgages. Let the banking industry put the money up themselves and take on the risk.

After all why should taxpayers be asked to take on the risks of bankers and foreign investors? If people want to invest in Canada, fine, but they should do so without using government money as collateral.

The USA is already starting down that path. People looking to get a home purchase loan are now looking at companies which guarantee their own mortgages. ie. Mortgage Solutions of Colorado and similar companies are reducing (or removing entirely) their dependence on government guarantees.

Part of it may be because companies have realized that the American government isn't going to guarantee mortgages willy-nilly any more. Another part of it is Americans have become much more scared of mortgage contracts signed during a bubble and they think it is less risky to deal with a company which has its own money and isn't borrowing against itself to prop up its business.

Sadly I don't think Canada will learn from the USA's mistakes. We are just going to repeat the problem.

American real estate websites are interesting

For fun I sometimes look at real estate websites in the USA. I especially like real estate websites from Hawaii, just because its exotic.

Lets take midsouthhomebuyers.com for example, a website which specializes in Memphis real estate investing which basically means they take your money and invest it in rental properties, rent the property out and then you receive a portion of the rent.

Its an interesting concept... but what is more interesting is the question of how much these properties are actually worth. Remember that Memphis was hard hit during the US recession of 2007-2009.

From 2006 to early 2009 the median prices of homes in Memphis dropped from $105,000 and dropped down below $75,000. Right now the median price is hovering around $85,000.

Compared to prices here in Toronto, real estate in Memphis is dirt cheap.

Now I admit that is not as cheap as some other locations (ie. Detroit), but it is still a bargain.

What midsouthhomebuyers.com does therefore is hunt around for bargains, then flip them as rental properties and eventually (when the real estate market has recovered) sell it for a profit.

Lets say you buy a property for $100,000 and rent it out for $1,000 per month. 2 years later, depending on the demand, you might be able to sell the same property for $110,000... and better yet you've pocketed $24,000 (minus property taxes, income taxes, maintenance costs and lawyer fees) from the rent.

If you look at the ROI (Return on Investment) for many of the properties on midsouthhomebuyers.com it varies between 32% and 48%. It really makes you realize that renters in the USA are getting bushwhacked by high prices and that investors are cleaning up and laughing all the way to the bank.

I do think you could do this yourself, assuming you had enough spare cash. My uncle David and an investment partner did this years ago back during the 1970s and 1980s. They bought several properties near Niagara Falls, waited for them to shoot up in value and then sold them all. Then (for fun) the two of them had the bank give all the money to them in cash, bought some champagne and rolled around in the cash. My uncle even has photos of the event of him and his buddy rolling around drunk in all the cash.

So you can make a lot of money investing in real estate. You can go through a company or broker that specializes in it or you can do it by yourself or with an investment partner.

And in places like the USA where the economy collapsed a few years ago its easier to find deals where if you invest wisely (and spread the money over multiple properties, thus alleviating the risk) you can make a bundle.

During the height of the recession in Detroit there was properties being sold for $1. Just one dollar. They had been seized by the federal government for failure to pay back taxes. If a person wanted to buy those properties they could fish around, check which properties could be snapped up for $1 and whatever the back taxes were and they could get a chunk of land which 10 years from now might be worth $50,000 to $100,000 or more when the economy has recovered and Detroit becomes a desirable place to live in again. Too late now. All the really nice properties have been snapped up.

Cities like Memphis in comparison are less risky. The economy there is better. The prices are higher and the ROI is less, but at least there is comparatively little risk.

Food for thought.

Real estate schools in the USA

Real estate schools is an interesting phenomenon. I wonder who first invented them???

There is even Graduate / Masters level programs in real estate. eg. Master of Science in Real Estate or Master of Real Estate Development.

According to my research the first universities to introduce real estate programs were MIT and Harvard in 1983. Columbia University (1985), Texas A&M University (1985) and University of Southern California (1986) soon offered similar programs in real estate studies. Today there is literally dozens of places in the USA offering educational programs in real estate. I count a total of 40 universities in the USA with some kind of real estate masters program.

Overseas they are no so common. More often they are in the UK (15 universities), Germany (7 universities), France (5), Italy (5), Australia (4), and a few others in Europe and Asia.

As far as I can tell there is NO masters level programs in Canada for real estate studies. (This might be a good thing.)

There is also hundreds of places offering certificate programs.

Key Realty School Logo

So what are these real estate schools actually preaching?

Before selling real estate for a living, you need to know about a few different tactics that can help you make those big sales. As an agent, you are only going to be paid on commission, so getting the sales is incredibly important to the success of your new career. KeyRealtySchool.com is the premier Nevada real estate school, and you can learn many things that will help shape your future if you attend classes.

Staging the House Helps Tremendously

You can often sell a home very quickly if you stage it, rather than leaving it empty. Do not put too many things in the building. You still need it to be a blank slate so that potential buyers can imagine what it would be like if they lived there. However, having it be entirely empty often makes the rooms look small since people have a hard time understanding the space without couches or tables filling it. Their minds will make the rooms look smaller than they really are, and putting in a few items gives them the correct scale.

Always Be on Time

Few things can prevent a sale like showing up late or forgetting that you are showing the house at all. If the buyer has to call you and ask where you are, he or she will come to the table with a negative opinion of the house before setting foot inside of it. You need to be on time or early so that they are feeling positive. 

Now I presume there is more to it than that. After all, they're selling a certificate in this program, right? So there must be a lot more things they are trying to teach you about the process of selling homes. There should be some gritty legal explanations, some MBA stuff about good business practices, some sales/advertising/marketing advice. Probably some other things I am not thinking of.

In theory a savvy person who goes through such a program could make a lot of money selling homes - especially if they are a people person who is charismatic. Unfortunately I have a hunch they don't teach people how to be charismatic.

Business savvy and charisma, the two things a real estate agent needs more.

Cheap Deals in the USA... caution is key.

There are a lot of cheap real estate deals in the USA right now, thanks to the real estate market there collapsing back in 2008. Even now the United States economy continues to struggle and housing prices have yet to recover.

Thus you could get a small 9-acre farm with a 3 bedroom, Florida home for $360,000 USD... prime real estate, yet cheap by Canadian standards.

Or you could buy your dream home in Arizona for $276,000 USD... about 60% below the home’s peak value of $650,000 in 2007.

But these cheap / prime real estate deals don't come without a healthy dose of caution, so here's some advice I found for people looking to buy real estate in the USA.

1. A “site-built” house, i.e. no mobiles, modulars or prefabs, which are harder to insure and resell.

2. Look for places with plenty of space. You will appreciate this later.

3. No renovations necessary and sufficient space for everyone.

4. Look for places with easy access to local amenities and attractions, especially if you're just visiting there in the winter. ie. state forest trails.

5. Offer a price of $300,000 maximum. Anything over that and they're still dreaming of 2007 prices.

6. Make your offer conditional on insurance, an increasing problem in some states with so many major insurers no longer writing new policies. If you’re a Canadian snowbird the insurer may insist on a security system.

7. If you offer on a short sale, foreclosed or auction property, make it clear you want proof that the offer has been presented.

8. Don’t buy thinking you’re going to make a killing; buy because you love it and plan to use it for years.

9. Don’t assume the property tax on the listing sheet is what you will pay. There are a number of state exemptions for permanent residents and U.S. citizens.

10. Look at hundreds of homes online using the local multiple listing service, and then pick dozens of open houses in all price brackets to get a feel for the local market.

11. Eliminated from your list homes that were more than 10 years old so you don’t spend precious vacation time doing renovations.

12. Remember to count your blessings you live in Canada where we have a stable economy.

$144,456 for a 4 bedroom executive home in Windsor

CANADA - Home prices in Canada can be incredibly different depending on where you go...

The price of an average four-bedroom, two-bathroom home in Vancouver is $1.5 million.

In Windsor the average for a four-bedroom, two-bathroom home is $144,456 currently.

It doesn't take a team of top notch Toronto accountants to tell you that is a huge price gap!

And worse, the price is dropping!

Last September I wrote a similar article to this one (see $68,007 for a four bedroom house?) which was talking about Detroit and other cheap/expensive places to live. At the time the average price in Windsor was $158,242.

So its dropped $14,000 in 10 months.

The issue is that Windsor has been hit hard by the recession in the USA. Bad if you are looking for a job, good if you are looking for a cheap place to retire to.

Vancouver meanwhile is the 3rd most expensive place in North America to buy a four-bedroom home, behind only California’s Newport Beach at $2.5 million and Pacific Palisades at $1.6 million.

And Vancouver is getting worse. In 2010 Vancouver saw an astounding 25.7% increase in home appreciation prices, according to figures released this Wednesday by the Canadian Real Estate Association.

Some economists are saying Vancouver's housing market is in an unsustainable price bubble.

“Quite simply, no other city in the country is seeing anything remotely close to what’s unfolding in Vancouver,” said Bank of Montreal deputy chief economist Doug Porter.

Back in Windsor however... Major unemployment from the crash in the auto industry, Windsor is now trying to promote itself as a retirement community.

“There is a huge difference when you look across North America to see what your money can buy for the same kind of property,” says Jim Gillespie, CEO of New Jersey based Coldwell Banker. “In this case it would make sense to sell that home in Vancouver if you’re thinking of retiring in Windsor.”

Heck, you could sell your "executive home" in Vancouver and buy a freaking dream estate in Windsor. That is how low the prices are!

For fun I decided to check a Windsor real estate website (windsorrealestate.com) and the most expensive home is Windsor is the following:

$2,295,000
Bedrooms : 7 Full Baths : 10 Half Baths : 2

The description for the home is:

"THIS IS YOUR DREAM HOME COME TRUE. A MAGNIFICENT HOME W/ATTENTION TO DETAIL LIKE NO OTHER & SITUATED ON YOUR OWN PARK-LIKE MANICURED GROUNDS IN PRESTIGIOUS SOUTHLAWN GARDENS. YOUR FAMILY HAS ALL THE AMENITIES & PRIVACY INCLUDING 7 BDRMS, 10 BATHS, FINEST MATERIALS, INDIVIDUAL ENSUITES, POOL & HOT TUB, MAIN FLR OWNERS SUITE THAT WILL SAVE YOU, FANTASTIC LAYOUT & QUALITY THAT WILL IMPRESS. OLD WORLD CHARM ABOUNDS. EVERY DOOR TO EVERY ROOM WILL UNFOLD TO SOMETHING THAT YOU WILL LOVE. COMPLETE DETAILS AVAILABLE. 3400 OUELLETTE YOUR DREAM HOME COME TRUE."

And that is the most expensive home in Windsor, according to that website. Probably even has multiple sunrooms, a tennis court, a pool (it says pool in the description and I presume its a nice one) and other cool stuff. With 7 bedrooms you could rent out 6 of them to well-to-do playboys and make yourself a nice bachelor pad. Maybe even start a reality tv show...

In contrast I also checked the same website to see what the cheapest home is...

$34,900
Bedrooms : 2 Full Baths : 1 Half Baths : 0

Honestly, you could probably offer them a flat $30,000 and they would take it.

Overall Canadian housing prices are going up, mostly due to our stable economy and constant influx of well educated immigrants who want to buy homes in Brampton, Richmond Hill, Oakville, etc.

Canadian existing home sales were up by 2.7% in May from year ago levels according to CREA. Average prices were also up by 8.6% to $376,817.

An average executive four bedroom home in Toronto is only $378,913, making it cheaper to buy a home in Toronto than in Guelph, Burlington, Ottawa or even Wasaga Beach.

A four bedroom home in Leaside (swanky Toronto neighbourhood) would cost $1.12 million and in Moore Park it would cost $1.7 million.

So lets say you were reasonably well paid, ie. you worked as IT staff for local companies in Toronto. Chances are likely you could afford a home in central Toronto.

I guess the point I am trying to make with this article is that if you're willing to live anywhere in Canada, you really have your choices when it comes to price.

Take Ottawa for example, which is pretty average as far as prices go. You could find a pretty decent home there. I found one for $168,000 via ottawaliving.ca. A two bedroom, 2 bath home with a balcony. Looks like it might need some of its windows repaired so I could probably contact an Ottawa windows company to fix it for me. But whatever. Any cheap place is probably going to need some fixing.

But once you have it, and poof its paid for, you don't have to worry about rent any more. You pay off the mortgage, raise some kids, eventually retire and presumably by the time you have retired the housing prices have skyrocketed. Or you live there until the day you die, content in the knowledge that its YOUR HOME.

And really money is worthless if you don't have a home.

$68,007 for a four bedroom house?

$68,007 USD for a large four bedroom house... there's only one problem: Its in Detroit, the cheapest place in the USA to buy a home.

Looking to get more bang for your buck? Imagine living in a city where the local economy has collapsed and housing prices have dropped so much its ridiculous.

In Windsor, also hit hard by the economy, you can get a huge four-bedroom, two-bathroom home for an average of $158,242 according to a report by Coldwell Banker Canada. Its the cheapest place in Canada to buy a home.

What you don't want to do is buy a home in Vancouver... where a four bedroom home costs an average of $1,324,000. (Vancouver is definitely in a real estate bubble.)

In Kelowna B.C. a four-bedroom home costs an average of $916,697.

In Fort McMurray, Alta. a four bedroom home costs $593,390.

In the GTA a four-bedroom home costs an average of $495,398. (The GTA includes Toronto, East York, Scarborough, Etobicoke and North York.)

Toronto costs less because it has more alternatives like condos, lofts and townhomes.

Relocation for work isn’t the biggest factor in most people’s decision to move however. A study by TD Canada Trust released Wednesday says retirement (30%) is the number one choice for people to sell their home and move.

Other reasons include market conditions (16%) investment opportunities (16%) and children moving out (15%).

Meanwhile Newport Beach, California, is the most expensive place to buy a four bedroom home in North America: $1,826,348 USD.

Globally, Shanghai is most expensive at $1,494,072 USD and Dubai is 2nd at $1,413,750 USD.