Sunday, May 30, 2010
Tone down the real estate speeches
In a west Toronto neighbourhood that once had a healthy contingent of blue-collar immigrants, there is a house that the neighbours talk about – not for its beauty, but for its former ugliness and disrepair. Listed for sale about a year ago, the owner told the real estate agent not to bother showing the place to buyers.
It was just a piece of a land, in other words, not far from one of the busiest streets in the city, with a massive renovation liability attached. But it sold – for $522,000. (Postscript: After rebuilding, the new owner put it back on the market this month and got nearly $950,000, attracting a buyer in just four days.) Everyone, or at least everyone who engages in the alternative national pastime of exchanging real estate gossip, has a story like this. Tales of an overheated housing market show why Bank of Canada Governor Mark Carney and Finance Minister Jim Flaherty worry about Canadians taking on too much mortgage debt. Less obviously, they explain why real estate agents are now at war with Ottawa's competition watchdog, are losing the battle of public opinion.
Why is there so much antipathy toward people who sell houses for a living? A 2008 poll by Gallup found 17 per cent of Americans rated the ethics of real estate agents as “high” or “very high” – no higher than lawyers and below bankers, building contractors and yes, journalists. I'd bet it would be higher in Canada, but probably not by much.
Some people say agents' low standing is because the Internet, which has made it easier for people to do their own research when looking for or selling a home, dilutes the broker's value. Others cite the distorted incentives of their commission structure. But I think it's also because most people can do basic math, and they intuitively understand what has happened to the pocketbook of a typical agent.
In 1999, there were 335,000 homes sold in Canada through the traditional real estate system at an average price of almost $160,000, according to the Canadian Real Estate Association.
Last year, the number of homes sold was 465,000, an increase of nearly 40 per cent from a decade earlier. But the bigger growth has been in prices, which doubled in that time. Assuming a commission of 4 per cent, a home seller at the average price is now paying some $13,000 for the privilege of having an agent handling the deal. (Commissions can be higher or lower, of course.) So, the total amount of commissions paid to agents was about $6-billion last year, up from $2.1-billion in 1999 (again, we're estimating using 4 per cent as the rate). That's growth of nearly 11 per cent, compounded annually.
Selling a home did not become harder in many markets; it became simpler. Buyers showed up quickly and tabled offers with fewer conditions. How many people can say that their jobs became easier as their incomes went up?
But there is something awfully dangerous about a market that rises so steadily for so long with so few sustained bumps. The recession-induced housing slump of 2008-09 was too short to have a lasting impact on the Canadian view of real estate; it was only a year before average prices were again breaking records. Now, it's like the correction never happened. Nationally, it has been 15 years since annual home prices took a meaningful hit. Victoria hasn't had a sustained correction in 25 years. In Ottawa, any dips have been so modest that it feels like an unbroken streak of rising prices going back at least three decades.
A funny thing happens to people when an economic or financial trend holds in place for a very long time. They begin to assume that “a long time” equals “forever.” You can see this clearly in the U.S. Its home prices hadn't declined on a national level since the Great Depression, so buyers and rating agencies assumed they could never go down – until they did.
And though the case for a real estate bubble here is not clear cut, one can't help but wonder if Canadians are falling into a similar complacency trap. How do agents play into that? Too often, by fuelling a false sense of urgency.
There are, it must be said, many good agents. But there are many who abuse the power of a hot market, and the biggest problem is the pap they serve up about affordability. A couple with a $100,000 a year in gross income and a healthy down payment can probably qualify for a mortgage on an $800,000 home at current rates. But they probably shouldn't buy it, because when rates go up they'll find their mortgage eating up well over 40 per cent of their earnings.
It isn't complicated to show people the impact of higher rates. (Prospective home buyers who want to do these calculations for themselves can send me an e-mail and I'll send back a handy spreadsheet to use.) But I'll bet it's not an exercise that many agents bother to walk through with their clients. They're too busy preaching the marketing line that you just have to get in on the market while interest rates are super-low.
If more brokers tried harder to protect their customers from getting in too deep, they might lose a few deals. But they would be worth every penny they earn.
Wednesday, May 12, 2010
The Mistakes Smart People Make When Buying a Home – and How to Avoid Them
Mistake 1: Not knowing how much they can afford to pay for a house before they make an offer.
Prevention: Get pre-qualified for a mortgage from a Lender/Bank, so you know in advance exactly how much you can afford.
Mistake 2: Not finding out in advance whom the real estate agent represents.
Prevention: Asking your Realtor. Most people think their agent is working for them. But unless the agent is working as your buyer representative, he/she represents the seller.
Mistake 3: Not realizing that the wrong mortgage can cost thousands of dollars in unnecessary interest and taxes.
Prevention: Consulting with a mortgage specialist before making a final decision on which mortgage to choose.
Mistake 4: Not discovering hidden defects before buying a home.
Prevention: Hiring a professional to conduct a pre-purchase home inspection.
Mistake 5: Not knowing how debt can affect their ability to buy or refinance a home.
Prevention: Do not apply for credit. Ask your mortgage professional in advance
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