Don't Be Tempted By U.S. Fire Sale
Canadians have a piggy bank with a lot of money in it, making the fire sale going on in the United States housing market a great temptation.
It seems like a once in a lifetime opportunity. Interest rates are low, the loonie is above par versus the greenback and the average price of a Canadian home has more than doubled over the past 15 years while U.S. prices have dropped by as much as 50% in some markets.
Last year, the average price of a home sold in Canada in 2010 was $339,030. Back in 1995, it was just $150,720.
Price appreciation has led to major increases in equity in Canadian homes, says the Canadian Association of Accredited Mortgage Professionals.
CAAMP says based on October 2010 numbers, there was $820-billion of debt on $2.9-trillion of residential property — that’s an impressive 72.8% of equity in our homes. Using the 2010 average home price, that’s about $246,000 of equity.
Some of that money is going to buy U.S. property.
The Washington D.C.-based National Association of Realtors says Canadians are the number one foreign buyer of U.S. real estate. Canadians were responsible for 23% of all purchases by foreigners in the U.S. last year. No other country’s consumers were even close.
“The primary reason is the buying power,” says Walter Molony senior public affairs specialist with the group. “We’ve had three years of price declines followed by a flat year last year, combined with the buying power of the Canadian dollar. Plus, there is the proximity. It’s a close destination for snowbirds.”
Vince Gaetano, a principal broker at Monster Mortgage, says he’s had a dozen clients in the last year take equity of out their home to buy an American property. “What they are doing is refinancing their existing home to access capital. They buy their U.S. home with cash. The majority try to avoid any mortgages down there,” says Mr. Gaetano, referring to the difficulty of securing financing.
The cash goes a long way. Let’s say you were to refinance that average home with $246,000 in equity. You’re probably going to keep your equity at 20% because once you fall below that level you have to start paying mortgage default insurance. But even at 20% equity, and once you consider your original debt, the average Canadian homeowner could withdraw about $180,000 from their home for an investment.
You’re not going to get a lot of questions from your bank, as long as you have a job and good credit. You might get asked by your bank what it’s for and you can just say investment purposes and the conversation is over and the cash is yours.
Mike Belmont, president of Minto Communities in Florida which is associated with the well known Canadian entity, says his company has been doing its fair share of marketing back home.
“Around Thanksgiving we sent about 30,000 letters to existing Minto homeowners in Canada about a campaign called Own The Warmth,” said Mr. Belmont. “The price for new homes in Florida is really affordable. It’s really a great bargain.”
Can you buy anything for $180,000? You bet. For $178,900 the company’s Sun City Center development in the Tampa/Sarasota area has a brand new 1,544 square foot home with two bedrooms and two baths and a two-car garage. For that price, you’d be lucky to just get the garage in Vancouver.
It may sound like a dream come true, getting a U.S. property, but it could become your worst nightmare, says Philip McKernan, author of South of 49 and Fire Sale: How To Buy U.S. Foreclosures.
“The equity release is a scary prospect,” says the Irish-born Mr. McKernan, who now lives in Vancouver but witnessed a similar phenomenon in his homeland. “They called it the Celtic tiger. People released vast amount of equity from their home, including myself. I believed I had an ATM in the back of my house.”
He leverage the equity in a home on the west coast of Ireland to buy two properties in Finland and the next thing he knew the value of his principal residence had shrunk dramatically and his overseas properties were just holding their own.
“My purchases were driven by greed and ego,” says Mr. McKernan, adding it’s the same for many Canadians this time. “Prices came off [in Ireland] and we were left with a piece of real estate that had negative equity and we had to keep paying it off.”
He’s not against investing in the U.S. but a vacation property you are going to visit a couple of times of year and try to rent out the rest of the time is going to give you negative cash flow. He’d rather see people do some research and buy a $50,000 property in Michigan that generates $600 of rent a month.
“If you are sitting around a dinner party in Toronto, you don’t want to talk about your three-bedroom house in a dodgy area that has positive cash flow. You want to talk about the golf course and the lakes. It’s not sexy but they are choosing sexy over security,” says the author.
Certified financial planer Kurt Rosentreter, of Manulife Securities Inc., says supposedly “cheap” U.S. real estate isn’t reason enough to buy. It makes more sense if you are buying something for personal reasons that you’ll want to use for your retirement.
“It probably won’t economically be a wise thing to do,” he says, pointing to the carrying costs associated with property until you retire. “I don’t plan to buy in the U.S.”
Me neither. If you really want access to the U.S. housing market, you could purchase something like the S&P Homebuilders Index, which contains a basket of American home companies whose fortunes will rise and fall with the housing market.
Better yet, you could just keep the equity in your Canadian home and save your cash for a U.S. vacation.