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U.S. Housing bust

The U.S. Housing market in many cities across the United States has blown into an overinflated bubble, and we’ve recently seen indications that the bubble has in fact burst. According to RealtyTrac Inc., foreclosures in the U.S. have risen 62% in April compared with last year. The states that topped the list in foreclosures were Nevada, Colorado, Connecticut, California and Ohio. Some are blaming the brokers for issuing high-risk loans without doing the proper background checks simply so that they would get their commission and profit from the boom (See Toronto Star Article).

A lot of prospective home owners in Canada are questioning whether they should buy now; many are worried that the same crash that happened in the US will happen here. I’m very confident that this will not happen here; signs indicate that the housing market in Toronto is cooling. But the cooling simply means the values of homes will increase at a slower pace than the last few years. The value of Toronto property is still significantly lower than other large cities in North America and around the world. Vancouver’s median house resale value is significantly higher than Toronto by almost $200,000. I find the banks in Canada are less inclined to give out mortgages to risky customers. In the U.S., it’s much easier to get a mortgage when in fact you are incapable of paying it back. I read a New York Times article today about a lady whom in my opinion made a very poor choice of purchasing a $515,000 home when her annual salary is a mere $40,000. She apparently was expecting her parents to live in the basement and help with the $3,699 monthly mortgage. Am I supposed to feel sorry for this lady?

This summer I’m taking an economics course for school. The economics textbook describes business cycles as alternating rises and declines in the level of economic activity, sometime over several years. The 4 phases it describes are: Peak, Recession, Trough and Expansion. Before the dot com bubble burst in 2000, people were blindly investing their money into startup companies with the expectation of high returns. The same thing has happened with the US housing market. People were blindly purchasing houses without ever planning on living in them. They planned to flip them as soon as they were built at an obviously higher price than they purchased it for. But when everybody is doing the same thing, there is nobody left to actually buy the houses after they were built. The investments were being made faster than the demand could keep up. Now it has crashed in several cities and investors are trying to get their down payments back. I’ve read about many people who have forfeited their down payment because if they keep the house they will end up losing more than their down payment. The other day I read about a man who had walked away from a $350,000 down payment on a 1.1 million dollar condo in Miami simply to cut his losses.

Here is a neat article entitled “International Housing Affordability Survey: 2007” that rates the most unaffordable cities in Australia, Canada, Ireland, New Zealand, United Kingdom and the United States. They take the median house resale price and divide it by the median income to determine how affordable the city is. The general rule of thumb when acquiring a mortgage is that a property isn’t affordable if it’s more than 3 times your gross salary. The city that topped the list is Los Angeles-Orange County, where the average home value is 11.4 times the average salary. San Diego is a close second at a multiplier of 10.5. Vancouver rolls in at number 13 with a Median multiplier of 7.7. Interestingly enough, some of the cities on that list are also in the list of cities whose bubble has burst.

I keep asking myself if the Vancouver real estate bubble will burst, but having visited Vancouver recently, I don’t believe this will happen. I think it will cool down like Toronto; it might possibly become even more stagnate than Toronto, but I don’t think it will burst. I honestly think people are buying properties in Vancouver because it’s a beautiful city to live in and they are actually living in their houses rather than flipping them. Vancouver property value was significantly driven up from foreign investment; mostly Asian investors. There still seems to be a lot of demand to live in Vancouver, so I think it will survive this little ‘hump’.

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