America (and Canada) is addicted to credit

[Thomas Beyer]

The Dow dropped almost 40% from its peak. Japanese stock index dropped around 10%, including the world`s largest and best car manufacturer, Toyota. Iceland got bailed out by Russia. UK and Germany pumped in billions to help troubled banks. A coordinated rate cut of 1/2 % was announced on October 8, 2008. It may help to stabilize the market .. and may bring more buyers into real estate and stock investing .. or it may also prolong the wild overspending of many Canadians and Americans.

We used to earn money first, then spend it. Now we spend it first, then earn it maybe .. and pay back at higher interest rates !

We want it now: designer purses, designer jeans, a new car when 22 years old with no job, a new flat screen TV, .. now .. now .. now ..

America is not only addicted to oil, but especially to credit. So a rate cut will delay the necessary but bitter tasting cure: spend less, save more, cut expenses, move to smaller homes (or less homes ), cut up all but one credit card.

So if you think we are not going into a depression, just a prolonged and deep recession, and thus, will have paying tenants for life, then this rate cut is good news: you will pay less on your mortgage.

If you think that a drop of the Dow of only 40% from its peak is insufficient, and more companies, banks and countries or counties or states like indebted California need to fail first, then maybe this rate cut is the wrong medicine.

It depends what you believe.

The economy, real estate, money, debt, interest rates, loans .. this is all man made ... so man can surely fix it .. (unlike global warming I shall add which is not man made)

Expect money to tighten, to become less available and thus real estate to retract to lower and more sustainable values that make more sense ..

We landlords will surely benefit from all this .. or so we smugly think .. more renters, more demand, lower vacancies, higher rents, thus higher asset values .. even if stocks like Boardwalk, Northern Property REIT, Mainstreet, RioCan got hammered just the same ..

The market is highly irrational right now ... so how do you argue with an irrational patient ? You give him medicine and wait ...

I hope and pray that my many tenants will not loose their jobs so they can continue paying rents !

What do you think will happen next ?

 

[TommyK]

I am watching Oprah now! She`s talking about how to "save money" on our daily consumptions.

ie: saving energy, smart grocery shopping... darn, this is a life-long journey!

I guess one pro-active way is to educate your tenants about "savings"? From energy saving tips to simple money management. If the tenants (and even ourselves) can hang in tight through this bumpy economy, I believe a better time has yet to come in the west coast!

 

[bigbabba]

I agree with you Thomas, it`s hard to say what`s going to happen..as I have been watching this unfold now for over a year. Economist have been flip floping weekly so I take what they say with a grain of salt inclusing Ben Tal, end of June Tal was predicting a 5% increase in Canadian real estate and a month later he was saying a 20% drop in some areas

.

My personal opinion is that RE prices will drop to sustainable levels..hard to say what that is at this point. Some say 10% drop some say 40%..who really knows. But this is a bubble made by man for sure and man will have to fix it, some people will get hurt while the fix is going on and some will prosper. Alot of people have lost alot of money in the market and if you are young enough to recover then you are ok but if you are close to retirement and have an aggresive portfolio (not sure why you would have that) then you will pay for it. That is my 2 rupees

 

[Nir]

The main reasons no one knows how the situation will affect Canadian rental business is that no one knows the extent of the recession/depression.

Therefore, no one knows for example whether:

1. It will be severe to the extent that less people can get a mortgage and buy a house and therefore more people will rent ---> lower vacancy rates (Yeah!).

OR:

2. It will be so severe that people will either move back home, stay longer at their parents` place , live with other tenants (more people per unit) or unfortunately become homeless ----> all contribute to higher vacancy rates. (Ouch!)

In other words, an economic decline can either increase or decrease vacancy rates depending on different factors. It is clear there is a lot of change, unfortunately no one can tell us what the bottom line effect on our business will be. such lack of information that we do not even know if it will have a positive or a negative effect and of course for how long.

At least we are realistic

Regards,
Neil

 

[Jack]

QUOTE We want it now: designer purses, designer jeans, a new car when 22 years old with no job, a new flat screen TV, .. now .. now .. now ..
Absolutely, 100% correct.

I had a buddy of mine that I was renting out my basement to, well below market price for a separate-entranced full suite in an inner-city location. Figured I was doing him a favor, he had got into some fairly high (yet not unmanageable with a plan) personal LOC debt, he essentially had no assets, and he`d now have about a 33% drop in rent relative to what he was used to. He said that he wanted to focus on "paying off his debt", and I figured I`d be the white knight that`d give him the platform to do so.

A couple months later, he`s driving a 2007 SUV that the dealership financed. This costs him over $500 per month. So, instead of servicing his debt, he`s paying $500/mo. + on a depreciating asset that costs him money every time he ignites the engine. Also, of course, he had to have the windows tinted, have a navigation system put in, have satellite radio put in, etc.

All the while, he`s showing me these new cell phones that he`s buying basically every month. The guy has about 5 cell phones all less than a year old sitting and collecting dust in his basement. Alas, I`m sure he looked real cool when he was holding each to his ear...

...oh, and I shouldn`t forget to mention the 53" plasma that he decided to buy (and pay for in a year) and mount downstairs. How can a person ever get by without one of those?

After all this, he decides that he`s going to get a second job to help "pay down his debt". Um, dude? Remember how I cut your rent by 1/3? And now you`re in a worse position?!?

Fine example of someone who still has a lot to learn. He`s now working two jobs and has made zero progress from a year ago. Actually, he might even be in worse shape as he`s committed himself to so many multi-year cash outflow agreements (car, tv, etc.).

 

[wealthyboomer]

QUOTE (Jack @ Oct 9 2008, 06:28 AM)
Absolutely, 100% correct.



I had a buddy of mine that I was renting out my basement to, well below market price for a separate-entranced full suite in an inner-city location. Figured I was doing him a favor, he had got into some fairly high (yet not unmanageable with a plan) personal LOC debt, he essentially had no assets, and he'd now have about a 33% drop in rent relative to what he was used to. He said that he wanted to focus on "paying off his debt", and I figured I'd be the white knight that'd give him the platform to do so.

A couple months later, he's driving a 2007 SUV that the dealership financed. This costs him over $500 per month. So, instead of servicing his debt, he's paying $500/mo. + on a depreciating asset that costs him money every time he ignites the engine. Also, of course, he had to have the windows tinted, have a navigation system put in, have satellite radio put in, etc.



All the while, he's showing me these new cell phones that he's buying basically every month. The guy has about 5 cell phones all less than a year old sitting and collecting dust in his basement. Alas, I'm sure he looked real cool when he was holding each to his ear...

...oh, and I shouldn't forget to mention the 53" plasma that he decided to buy (and pay for in a year) and mount downstairs. How can a person ever get by without one of those?

After all this, he decides that he's going to get a second job to help "pay down his debt". Um, dude? Remember how I cut your rent by 1/3? And now you're in a worse position?!?



Fine example of someone who still has a lot to learn. He's now working two jobs and has made zero progress from a year ago. Actually, he might even be in worse shape as he's committed himself to so many multi-year cash outflow agreements (car, tv, etc.).


Cool! You're subsidizing someone else's lifestyle!

Time for that RENT-INCREASE!

I don't call those type of people 'friends'.

 

[DragonflyProperties]

Report on Business - DEBT: All borrowed out

The global credit crunch has arrived on Main Street USA

Hi all,

An article from the September 27th, 2008 edition of the Globe and Mail (Report on Business). Excerpts:

The fabled American consumer, driver of two-thirds of U.S. economic activity and de facto engine of the world`s economy, is vanishing from the aisles of the nation`s stores. Already reeling from the implosion of the country`s housing market and the jobs shed by the slowing economy, the voracious U.S. consumer is now being choked by evaporating credit. The meltdown on Wall Street, which also has its roots in the housing debacle, is creating a lending lockdown between banks that is now turning off the spigot of cash to businesses and consumers.

Businesses are struggling to get credit, with short-term markets seized up as interest rates soars and lenders hoard cash.

Consumers are feeling the pinch as lenders tighten credit card limits and home equity lines of credit, and toughen mortgages and student loan requirements.

Even if the cash were available, it`s not clear consumers are in the mood to spend. Once so hungry to borrow and spend, an ever-more fearful consumer now looks poised to retreat further from the malls and bars, pinching pennies. The growth in credit has slowed substantially, with car and home loans already all but stagnant, and is teetering at the edge of a decline, which would be a first since 1992.

"There`s no doubt the consumer has downshifted, and part of the reason is they`re borrowing at a slower rate - but make no mistake, they`re still borrowing," said James Paulsen, chief investment strategist at Wells Capital Management.

The credit crisis has created a greater change, one sharply away from the free and flagrant-spending days of recent years. "That one is attitudinal," Mr. Paulsen said of the change. "Among consumers. Among lenders. Among everyone. It`s a cultural thing that will take, at a minimum, a couple years to rebuild - if not longer."

The apparently waning appetite of American consumers is among the greatest risks facing the U.S. economy - with major potential reverberations in Canada and around the world. With so many exports going south, from auto parts to oil to lumber for houses, a U.S. recession means hard times if not worse for Canada.

Cash register-shy consumers could undermine the massive $700-billion (U.S.) bailout that is being negotiated in the nation`s capital to quarantine bad bank debt and prod banks back into the lending business.

The government bailout is all about rebuilding shattered confidence, to slowly soak up the disastrous lending decisions of this decade that have unfolded in spectacular ways and are on the verge of ramming the world`s most powerful economy in to the ground. It`s about believing the money can keep moving.

A lot of that shopping was financed by credit.

Since the late 1990s, the personal savings rate in the U.S. has plunged to almost zero from 3 per cent of income, according to figures from the Federal Reserve and research by Innovest Strategic Value Advisors Inc. Meanwhile, the amount of disposable income going to service credit card, mortgage and other debt has risen steadily. Real wages haven`t risen much, but credit card debt is up 80 per cent.

With banks pulling back on lending, credit is quickly becoming less available to consumers.

Loans for cars and home equity borrowing are freezing up faster. These so-called non-revolving loans grew only at a 0.5-per-cent rate in July compared with steady growth of around 5 per cent as recently as the spring.

Every kind of credit is getting crunched. The Student Loan Network, a U.S. information service, said more than 30 lenders have cut off loans to students since mid-2007 and added that it is "virtually impossible" to get a student loan without a co-signer.

While lenders are tightening up, money previously lent is not getting paid back. Foreclosures are escalating and, on Thursday, Discover Financial Services, the No. 4 credit card company, said its loan-loss provision surged 80 per cent in the quarter ended Aug. 31.

Signs of the squeeze on consumers are littered across the landscape. Measures such as the Consumer Comfort Index are near a record low, suggesting Americans are uncharacteristically depressed about their economic prospects.

The vise gripping the consumer is being tightened by an array of economic problems. The number of Americans filing for initial unemployment claims is at a seven-year high. Expensive gasoline keeps gobbling up available dollars and has reduced demand for the fuel every week since the spring. Gas sales are down 8 per cent from a year ago.

Housing, the root of the contagion, remains moribund. Sales of existing homes, reported this week, are still flatlining. New homes sales continue to plummet, falling 11.5 per cent in August - to the slowest rate since the hard recession of the early 1990s.

And mortgage rates are still going up.

The jump in mortgage rates this week is another tangible sign of tighter credit, said David Rosenberg, economist at Merrill Lynch. "As a result, we expect little rebound in home sales activity. We continue to believe that the bottom in housing is still at least a year away."

"We`ve been living on credit for so long, the government and the people, it`s insane," she said.

And Mr. Glick, who has closely followed the amazing implosion of Wall Street this month, has little faith the situation will turn around any time soon.

"I don`t think we`ve seen the real depth of how far this`ll go," said Mr. Glick, in a ball cap, sweater and blue jeans, dismissing the rescue plan. "You have to be a real fool to believe that. This isn`t going to be solved by Congress approving $700-billion."

style="font-size:12pt;line-height:100%">http://www.theglobeandmail.com/servlet/story/LAC.20080927.RCOVER27/TPStory/?query=david+ebner

Keith

 

[DragonflyProperties]

Report on Business - Solvency Street, a penny at a time

Subprime mortgages are just a manifestation of the bigger problem ...

And another ...

An article from the September 27th, 2008 edition of the Globe and Mail (Report on Business). Excerpts:

If you want a sense of the pain that still lies ahead, look closer at the details. Look at who`s not part of the rescue: the Federal Deposit Insurance Corp., the agency that guarantees Americans` chequing and saving accounts.

Well, baby, it`s pouring outside now. And the tale of FDIC seems like a perfect illustration of what has made the U.S. economy so sick. Subprime mortgages are just a manifestation of the bigger problem: The people don`t save, the government doesn`t save and even the parts of it that exist to set aside money for the bad times, don`t save enough.

All of that will have to change, and that`s a big reason to believe this downturn will be not only sharp, but prolonged.

The return of the saver will mean the U.S. can fund more of its investment needs on its own, and will be less reliant on the kindness of foreign lenders. "In the long term, the U.S. economy will be better off if everybody saves more," Mr. Gault says. "It won`t be an easy adjustment." Nope: The road back to solvency is paved with less personal consumption, possibly higher taxes and, for many Americans, a lower standard of living.

Thrift may be a virtue. But no one said it`s a painless one.

http://www.theglobeandmail.com/servlet/story/LAC.20080927.RDECLOET27/TPStory/?query=Derek+decloet



Keith

 

[UTCVenturesLtd]

QUOTE (Jack @ Oct 9 2008, 07:28 AM)
Absolutely, 100% correct.



I had a buddy of mine that I was renting out my basement to, well below market price for a separate-entranced full suite in an inner-city location. Figured I was doing him a favor, he had got into some fairly high (yet not unmanageable with a plan) personal LOC debt, he essentially had no assets, and he'd now have about a 33% drop in rent relative to what he was used to. He said that he wanted to focus on "paying off his debt", and I figured I'd be the white knight that'd give him the platform to do so.

A couple months later, he's driving a 2007 SUV that the dealership financed. This costs him over $500 per month. So, instead of servicing his debt, he's paying $500/mo. + on a depreciating asset that costs him money every time he ignites the engine. Also, of course, he had to have the windows tinted, have a navigation system put in, have satellite radio put in, etc.



All the while, he's showing me these new cell phones that he's buying basically every month. The guy has about 5 cell phones all less than a year old sitting and collecting dust in his basement. Alas, I'm sure he looked real cool when he was holding each to his ear...

...oh, and I shouldn't forget to mention the 53" plasma that he decided to buy (and pay for in a year) and mount downstairs. How can a person ever get by without one of those?

After all this, he decides that he's going to get a second job to help "pay down his debt". Um, dude? Remember how I cut your rent by 1/3? And now you're in a worse position?!?



Fine example of someone who still has a lot to learn. He's now working two jobs and has made zero progress from a year ago. Actually, he might even be in worse shape as he's committed himself to so many multi-year cash outflow agreements (car, tv, etc.).






I would like to find a place to rent in Calgary for a 1/3 off! I sold off my Calgary house last June and bought 3 properties. One in Sask, one in Blairmore and the other, a duplex that needed work located about an hr south of the city. Idea is to rent one suite from my company as we renovate it, then rent it out, move into the front suite and renovate it and move onto another project as we wait for prices to drop further in Calgary to repurchase. Problem is with winter coming, my wife is terrified of the hwy drive plus her work has taken off needing her there and the 3hr commute a day for her is too much added to sometimes a 12hr day! We had a tried to be house sitters to a snowbird but the folks who had been searching for house sitters decided to just shut it down while they were away on business long term. There are more vacancies out there, but the rent prices have not dropped as yet.



My renovator had a similar problem tenant and being "nice" to try and help usually doesn't work. His tenants recieved a temporarily greatly reduced rent deal while they were in dire straights and then when their incomes went up, they moved out on him instead of staying and paying the going rate.



Credit problem? What credit problem? I still get many offers in the mail to borrow money. I recieved a letter from Canada Trust saying that they added revolving credit to my cheq acct where i had put the balance of the sale money from the sale of my house! Funny that they are willing to loan money to people who don't need it. People starting businesses have lots of trouble obtaining financing and when the business is going great, the banks are there to loan you what you want although you don't need them anymore! Ironic!



It all boils down to living within your means. Borrow for things that appreciate and pay cash for the rest!

 

[Thomas Beyer]

QUOTE (UTCVenturesLtd @ Oct 11 2008, 01:06 AM) It all boils down to living within your means. Borrow for things that appreciate and pay cash for the rest!
well said !!