Bob Truman posted a good guest post on his blog.  It is a month old but I think still has some great info. Be sure to read his comments as well for further insight.

Also read the next post as it gives the other side from Garth Turner. Remember always read the comments that is where the good information to support the ongoing conversation is.

Once again Garth has attacked an innocent person who has come to ask him a reasonable question.  Check out the post here

In this comment “Third, what the hell is wrong with having no property, no debt, and $800,000 in cash?” he once again is discouraging people from buying a home, yet he has bought I think four homes in the recent past?

Anyway, how about this as an alternative strategy?

Buy the home for $900,00 and put $400,000 down. There are two ways to analyze this.

1) Value of buying this home today versus a year ago

I’m assuming this home is down 15% versus one year ago. (If people know the real data on this please comment and I will fix.)

2009 Price = $900,000                                     2008 Price = $1,035,000               -15%

2009 Mortgage rate (5 year fixed) = 4.39%   2008 Mortgage Rate = 5.65%        -29%

2009 Down Payment = 44% or $400,000  2008 Down Payment = 44% or $460,000   -15%

Amortization 25 Years in both cases

2009 Mortgage Payment = $2,736.87             2008 Mortgage Payment = $3,560.12     -30%

Mortgage balance at end of term:

2009 case = $438,178.33                                   2008 case = $513,966.53         -17%

she will be ahead by $513,966.53 – $438, 178.33 = $75,787.50 then she would have been by buying a year ago. There is the $50,000 she was lamenting about losing by selling too early and then some.

2) Velocity of Money Strategy

With the balance she has remaining ($400,000) after her down payment she could invest in Garth’s bank preferred shares option at 7% annual rate of return.

At the end of five years her investment account will have: $564,239.50 for a profit of $164,239.50.  After tax at say 35% she has $105,113 to protect her net worth against any drops in her home value.

This is where the opinions will run wild, here is mine:

If Garth and his army of doomsayers are correct and over the next five years her real estate will drop in value, then the first 19% drop is protected by her gains in her investment account $105,113 and the equity she has built up by her principal reduction 0f approx. $62,000. ($105,113 + $62,000)/$900,000

I for one believe that over the course of five years she will see a moderate increase or at worst flat.  Why?  Housing has always grown with incomes (except when they temporarily overshoot income, causing the market corrections that we have seen).  Incomes in BC, in my opinion, will likely rise moderately as the west coast is set up well in the recovery therefore her home value net should rise moderately in my OPINION.

Therefore if at worst her property increase is flat her net worth will have risen by the equity she built (principal repayment on her loan of approx. $62,000 and her investment account balance of $105,113 = $167,113).

Compare this to Garth Turner’s advice.

Rent and invest her money.

Investment ($800,000 at 7% annual rate of return) = $1,128,479.01.  Profit = $328,479.01 after tax (35%) = $213,511.36

Lost rent money= This is tough as I don’t know what her rent is right now?  What is reasonable in Vancouver to compare living in her $900,000 home?  I don’t know let’s say this one.

Therefore her rent at $3,600 per month X 60 = $43,200 GONE.

Therefore her net worth with Garth’s advice = $213,511.36 – $43,200 = $170,311.36

Conclusion:

There is a million ways to likely analyze this but you may say

“Yes, but garth’s advice has less risk against the catastrophic drop in property values we believe will happen”

I can’t combat this one, we will have to agree to disagree on this point.  Keep in mind I never put in ANY property appreciation over the next five years in my example, what if we see a moderate increase of 2% per year? There would be an additional $94,000 added to her net worth.

My final point is that Garth Turner ALWAYS discounts the intangible value of living in your own home, even though he is in his own home.

In my OPINION MOST rental homes are not located in the best areas, and are often not the best kept homes.  Those that are, typically cost MORE per month in rent then what you could pay in a mortgage payment for a comparable home in the area because they can get a premuium rent for obvious reasons.

So why not encourage people to live in their own nice comfortable home in a good area for a committed period of at least five years or more (property flippers deserve the pain they get when caught in a correction, because they take risk and can profit in a boom) as long as they think it through:

1) don’t get caught up in the hype of competitive offers and overpay

2) work with a mortgage professional who will design a personalized mortgage strategy to protect you and that will complement your overall financial wellness.

….Taking a deep breath and ready for the Garth followers…sigh

I have been reading Garth Turners blog for quite some time and today I actually got a brief glimpse at what it is like to monitor comments from rude, ignorant, people who largely are so far in the extreme of their ideas they are not prepared to listen to others views.  Garth, seriously dude, hats off.

Anyway although I may not agree with many of Garth Turners views, or his motives, which I am actually not sure what they are beyond selling books, I try to keep my rebuttals respectful, so here we go again.

The most recurring cheap shot was that I was lieing when I discussed the base of our Inflation Hedge Mortgage Strategy which is to protect people from future payment shock of certain higher interest rates in the future.

In the video here are the

ASSUMPTIONS:

Purchase Price: $450,000

Down payment: $45,000 (10%)

Mortgage Insurance: $8,100 (2%)

Amortization: 25 Years

Term: Five Years

Starting Interest Rate Today: 4.39%

Here are the FACTS:

Mortgage Payment Today = $2,261.20

Balance at the end of the term = $362,885.07

THEREFORE to calculate the payments at the END of five years you would take the NEW balance of $362,885.07 and do a new schedule based on 20 years remaining.

New payment at the start of YEAR 6 = $3,366.26

Difference in payments between the Year 6 payment and the year one payment (payment shock) = $920.89

By the way if the client takes our Inflation Hedge Mortgage Strategy they would owe $288,892.47 after five years and have ZERO payment shock. That is a saving of $73,992.60 over five years.

Please Note: This is corrected math from what was presented in the video. I said in the video that it was approximately $600 and that was incorrect.

Our philosophy is to ensure that people who are going to buy a home do it responsibly and understand all the financial repercussions they are facing.  We design a mortgage strategy that will fit into their overall financial wellness, particularly ensuring that they can truly afford the house they are contemplating and to protect them against inflation, which will lead to higher interest rates in the future and the dreaded payment shock. Garth Turner’s job is to tell people not to buy homes, my job is to ensure those that are going to, do it carefully and with a well thought out plan.

This morning I had my first Live broadcast for the Mortgage and Real Estate Show for my good friends at Royal Lepage Foothills Real Estate here in Calgary.

Today’s topics include a discussion around all this negative talk on the blogosphere, particularly led by the likes of Garth Turner about an impending housing shock, when people buying homes today have to renew their mortgages in five years time, you will be shocked at the results.

As well we have a discussion about the effect the recovery will have on Calgary Real Estate and the Calgary mortgage market.

This morning on Global News they were reporting that the Calgary Real Estate market was strengthening.  Of course we are thankful of this reporting, BUT once again they interpret the data incorrectly which results in the story being slightly skewed and unfortunately misleading to the public.

Let me explain.  The reporter, Cara Fullerton, correctly mentioned that the real estate market in Calgary has picked up and mentioned that the reason’s are because of lower mortgage rates, and because of lower house prices.  Both of these are true and accurate as to explain our recent success in the Calgary Real estate market.

But hold the phone, just when I though we would get through a media story that is reported properly she goes on to show the year over year price differences (prices were shown as 8.7% lower today then they were in May of 2008) and makes the correlation that prices are falling right now, which is not true.  In fact in May prices rose as they did in April.

As well mortgage rates are not falling, they are in fact rising.

This is misleading.  People buying in Calgary right now need to decide if they should contionue to wait?  Mortgage rates AND house prices are on the rise despite what the media tells you.

Recently a reader of my blog asked me to comment further on the relationship between interest rates and inflation, and the performance of the market.

With respect to the first part on how interest rates and inflation are related you need to understand that there are economic laws at play with these two itmes.  Inflation ALWAYS affects both short term AND long term interest rates in two very different ways.

With respect to long term rates, you need to remember what drives long term rates,  that is long term bonds.  Therefore one needs to know that as inflation rises bond yields ALWAYS go up.  When bond yields go up (as they have been steadily for the past 6 weeks) then fixed rates ALWAYS go up. As for how that affects the stock market, TRADITIONALLY as bond yields rise people flee the stock market which then does bring the stock market down in lockstep as bonds rise.  Couple this with the expectation that there will be periodic profit taking from the stock market as there has been recently and you can wit certainty predict that the stock market will continue to be volatile for 12-18 months as we navigate inflation rising.

With respect to short term rates remember that variable rates are priced off short term t-bills or Bankers Acceptance rates.  Those rates are determined solely by the central banks overnight rate.  TRADITIONALLY, the central banks ONLY weapon against inflation is to raise the overnight rate.  As this happens of course then variable rates go up.

What does all this mean with respect to the real estate market then?

Well, first we would all do well to understand and accept that the ONLY reason we have seen a quicker recovery to the real estate market is SOLELY based on the fact that both long and short term interest rates are at significantly historical lows.  That means readers would say “based on what Greg said above if inflation rises (which EVERYONE expects that it will) then interest rates will rise respectively, which will cool the recent rebound in real estate.”

The answer to this is “not necessarily”.  Let me explain in point form below:

1) Short term rates may not go up as fast as inflation this time around

There are two reasons for this, number one is that the Bank of Canada has repeatedly said recently that they are not going to touch the overnight rate until June of 2010.  However they have also been adding the caveat recently that they may change this stance if inflation surges out of control.  My guess is that they will let inflation get slightly ahead of their comfort zone, and then attack it, which means we will get a the rest of this year and maybe Q1 of 2010 at these unbelievably low variable rates.

The second reason is that as the banks cost of funds continue to drop and they start reducing the risk premium they have been attaching to their loan pricing they will drop their premiums over prime to gain more market share.  This has already been happening as a few months ago the best deal you could get was Prime +.80% and today you can get Prime +.40% or lower. Look for this premium to be dropped all together in the coming months, and likely we will be back into Prime Minus within a year or so.

2) Interest rates are sooo low now

What I mean here is that even if interest rates were to rise by 1 to 1.5% in the coming year we would STILL be below “normal” historically.  Therefore how much would this cool the real estate market?

3) Never bet against momentum

As interest rates start their slow climb back to normal levels many people will panic and get into the market to buy “before rates go higher”  this momentum will gain steam as it goes.  We will likely continue to see a strong real estate market with strong demand as rates rise.  Of course as rates rise above say the 5% level again then affordability becomes an issue. If strong demand causes a bigger then expected rise in average price, coupled with a decline in affordability then remember what we learned in the last crash as soon as average home prices start to overshoot our growth in family income then you can absolutely predict with certainty a real estate correction.  This time we will be ready.

With Oil rising quietly lately and the fact that it will likely be over a $100 or close to it by years end and the fact that the US money multiplier will rise (more of the billions they printed to get out of the banking crisis enter the market) you can count on inflation.  But don’t count on that shutting down the real estate market in the short run.  It will be a few years before we will see a cooling or an outright correction. Tread carefully.

As a final note, PLEASE anyone taking a new mortgage today, or any of my colleagues selling mortgages today, make sure you can afford the house you are contemplating if interest rates were in the 5 to 5.5% range.  better yet, set your payments today as if the rate WAS 5.5%.  Why?  because when you renew five years from now, count on the fact that it will be that or maybe higher, and that you will likely have moderate equity gain in that time period and you will not be able to count on a refinance to bail you out.

Let’s not repeat our past mistakes, gluttony is a cardinal sin remember.

As we are in the heat of the market and many people are starting to welcome the balanced market we have it is a good time to review how to choose a Realtor.

Let me start off with the number one mistake in choosing a Realtor.  Simply based solely on them being a friend or family member.  It is important you let your friend or family member know that you will be interviewing other Realtors.  if for no other reason but to make your friend or family member have to be on their game to prove they are worthy to sell your home.  This is business not personal, do it right.  On that note what should you be doing?

1) Interview more then one Realtor

This is often a big mistake people make.  it is valuable to hear a couple different viewpoints on the pricing of your home, the strategy proposed for marketing, and the track record of the candidates.  Remember also that if you are going to be working closely together for a few weeks or longer it is important that you also like the person you will be dealing with.  If they turn you off in the first meeting what do you think it will be like after three weeks of continuous contact and meetings?

2) Write out your questions in advance

Do some research, remember this is an interview.  The internet is full of informative sites that can be used to gather some questions that you should ask your candidates.  It also allows you to reflect on their answers later during the deliberation phase to see who you will choose.

3) Innovative, and Fresh Marketing strategies

Make sure you go with the Realtor who has a broad, but most important a unique and innovative marketing strategy.  If the strategy is holding open houses and advertising in the local real estate print media, then consider whether this is enough in today’s internet world.

Today’s marketing strategy must have a solid internet and/or social media component as this is the way buyers today are shopping for homes.  A staggering over 80% of buyers today shop on-line for their real estate.  Look for the realtor who comes up with more strategies to get your home in front of as many eyeballs as possible.  If you would like a good example of Realtors who are embracing the internet world go to www.foothillsrealestate.ca .

4) Price Strategy

This is a big one.  Make sure you ask lots of questions on how they came up with the proposed price for your home. Try not to get in the way here.  many homeowners have an inflated view of the value of their home and weak Realtors will just agree with your over-priced value in order to get the listing, and then just beat you down over the coming weeks to get your price where it should have been. It will sell weeks later then it could have if you priced it right in the first place.  If a Realtor does not respectfully disagree or challenge you on your inflated price then you need to ask yourself if this is the right one for you.  Remember if you have chosen your candidates properly you are dealing with someone who has sold many homes in your area and knows more about the price then you do who have sold no other homes in the area. Trust the experts.

I spoke in my last post that fixed rate spreads were shrinking due to continued increases in bond yields.  We predicted many months ago that if/when spreads started to contract banks would hold off increasing their fixed rates and that has proven to be an accurate prediction.

Now what about variable rates.  Given the time of the market and that this is traditionally the busiest time of year banks are very hesitant these days to be uncompetitive for any period for risk of losing market share.  That explains in part why we have seen variable rate premiums fall from prime + .80% that we saw a month ago to Prime +.40% that can be found today.

The other explanation has to to do with banks cost of funds.  Short term money costs have dropped significantly.  watch the TED Spread that has more or less returned to normal, in addition many of the large lenders have significant deposit bases of cheap money as people continue to reach for safety of their cash in bank accounts or money-market instruments.

Unless we get an unforeseen market disruption I think variable rate premiums will continue to slide.  We are not that far off of “Prime” loans.  As for “Prime Minus” loans the jury is still out.  If the real estate market continues to stabilize, arrears rates stabilize, and the banks continue to get short term money cheaply, you may see these mortgages return.