Housing market: Another man's pain

Bad news in the U.S. housing market might be good for Canadian investors.

Everybody wants to time the market and get the best deal, no matter what they’re buying. But the financial markets seem to have already rebounded from the global credit crunch spurred by the meltdown in sub-prime mortgages in the United States. That doesn’t mean, though, that the bad news is over for anyone in the U.S. housing market. Roughly US$700 billion of painful sub-prime mortgages will be reset at higher rates before the end of 2008, forcing thousands to default on their payments.

Indeed, the pace of foreclosures is picking up steam, and fast — nearly 250,000 of them in August, up 36% from July and a whopping 115% over the previous year. The highest rates are in former hot spots such as Florida, Nevada and California. In San Diego, there were some 6,000 bank-owned properties and another 12,500 in default at the end of September.

And there’s more pain to come, even if the U.S. Federal Reserve keeps lowering interest rates. “It’s just the tip of the iceberg right now as far as the potential foreclosures and market adjustments, unless the government steps in and comes up with a solution,” says Don R. Campbell, president of the Real Estate Investment Network, a Calgary-based organization that offers market analysis and workshops for its 2,200 members. “A half-point drop is not going to make that much of a difference when people’s payments are going up $300, $400, $500 a month when they do the resets.”

Canadian real estate investors and homeowners shouldn’t panic. For one thing, Canadian banking laws force all loans worth more than 80% of a property’s value to be insured. And even though lenders have dropped their lending criteria and upped broker commissions, the number of sub-prime mortgages is far below that of the U.S. In mid-2007, 21% of all mortgages down south were sub-prime, compared with only 5% in Canada (all of which are insured).

The U.S. collapse could also mean an upcoming opportunity to invest in a market that has generally been too rich for many people’s tastes. “For Canadians, with our dollar at par, it’s a great opportunity to start looking in the States for that one property that we want as our winter property, but that’s it,” cautions Campbell. “I wouldn’t be investing in that market until the big wash goes through and cleans it all up.”

Others are more bullish, pointing out that it’s unlikely the sub-prime meltdown will drag U.S. consumer spending down with it. Personal savings rates have not increased, indicating Americans are spending as much as ever, and those losing their houses will still have to live somewhere, increasing the need for rental properties. Also, keep in mind this is the fourth time in the past 20 years that the U.S. Federal Reserve has been forced to inject liquidity, and none has pushed the country into recession.

One place to find a few investing cherries is foreclosures. “Start preparing now — depending on the area, there is going to be a buying opportunity in 90 days up to a year and a half,” says Bill Nazur, a California-based mortgage broker and co-author of Finding Foreclosures: An Insider’s Guide to Cashing in on This Hidden Market. Finding foreclosures is pretty simple, says Nazur. Look for the “real estate owned” or REO tab on American banking sites, or get a weekly list sent to you by the state’s escrow or attorney departments. “They [properties] are coming on at such a rate right now that the ones coming on now aren’t the values,” says Nazur. “The bank, while they have a motivation to move these [properties], they’re more concerned with the ones that they’ve had three months or longer. That’s where I look.” You can also use a subscription service such as RealtyTrac, but stay away from auctions, where your emotion may overtake common sense, and avoid buying-as-a-lease options, as the contracts are generally worded such that the buyer doesn’t actually gain ownership.

One thing is for sure: Canadians will start seeing more U.S.-based seminars on getting rich quick in real estate, because most Americans are trying to cover up their risk appetites. Or, to borrow one of Campbell’s favourite Warren Buffett quotes: “It’s only when the tide goes out do you learn who’s been swimming naked.”