In the words of C-3PO in Return of the Jedi, "Here we go again."
As I woke on Tuesday morning to type this, the financial headlines have changed little in the past few days. "Volatility rules in global markets," the Globe and Mail said. "Market rout deepens global crisis," according to the National Post.
Canada seems better positioned than almost every country out there to cope with this financial meltdown and the second recession almost sure to follow. For most Canadians, if they keep their job, as most will, the impacts will be minimal. Many will see their retirement savings take a beating, but they will have time for those savings to recuperate.
For others, the impact will be much more deeply felt.
I have close friends who lost their business because lenders in 2008 suddenly tightened up credit, and they couldn't buy inventory for the crucial Christmas season. They struggled mightily, and in the three years since, have paid back huge amounts of debt as a result, finally getting into the light at the end of the tunnel in the past few weeks.
We personally took a very, very large hit. I was offered my current job in late August 2008. At the time, oil was around $120 a barrel. The economy was absolutely booming. There were only four, highly over-priced houses on the Estevan market in our range. We bought the cheapest. The sellers would not accept the standard condition of waiting until your house sells before the deal closes - it was cash on the barrelhead, take it or leave it. In later discussions with our Estevan neighbours, who had been in their houses for several years, I have determined we paid substantially more than nearly all of them, but got one of the most modest houses on the block. Our Estevan house had doubled in price in just a few years.
Our house in North Battleford was a nice house, in the best neighbourhood. More importantly, in the summer of 2007, the next door neighbour sold the identical house, right across the fence, for what I felt was a princely sum. Our house wasn't as updated as that one, but not far off. However, we had not been expecting to move at that time, so there were a number of little things, like appliance replacement and fence repair that needed to be done before we could list the house. Essentially, we needed to be out of the house before it would be ready, and that would not happen until Oct. 31. We would support two mortgages over that time.
In the mean time, the big investment banks all got into serious trouble in September, just a couple of weeks after we signed up for the second mortgage - the one that not only paid for the new house, but also paid off all our existing debt reducing us to just one payment a month.
By the time the house listed in November 2008, the world was falling into the depths of a recession, one many called the worst since the Dirty Thirties. Several people looked at the North Battleford house, but no offers. Not even a nibble. Weekly calls to the realtor were depressing to say the least.
We didn't get an offer until April 2009, nearly six months after we listed, and eight months after the initial purchase. Eight months with two mortgages, something my father-in-law desperately warned us not to take on. By this time, the price of oil was down to the $38/barrel range. Talking to the Estevan realtor, our new house had lost $50,000 in value by that date.
We only got one offer, and it was $40,000 below our initial list price (which was reduced several times.) There was no negotiation on price. We jumped at it, despite being $60,000 less than what the neighbours had sold their nearly identical house for 18 months prior. Between the inflated price of the new home, the loss in value of the old home, and the cost of sustaining two mortgages, I reckon we were out over $100,000.
Some people told me, "Oh, you don't see that until you sell your house." To that, I say bovine feces. We see it every day, in the much higher mortgage payment due to the lower equity we took with us, and the higher price we paid. Our mortgage, which had been down to 14 years, got pushed to 30 years. We were making payments that were at least half principle by that point. Now, a year's payments barely scratched the surface of the principle.
Over time, the value of the Estevan house has recuperated, and likely healthily exceeded the price we paid. But we will not capitalize on that any time soon, because we couldn't afford to move if we wanted to. And we would still have to buy another, even more expensive, home.
There is a very real cost to the tomfoolery in the markets. We will be paying that cost for an additional 16 years. Don't let it happen to you.
Brian Zinchuk is editor of Pipeline News. He can be reached at [email protected].
