How Big is the U.S. Debt?

U.S.’s 65 trillion in debt is bigger than globe’s entire GDP of 60 trillion

(Most scary numbers explained in simple terms)..

(US Dollar cannot survive in its current form), some massive restructuring has to happen..

5 Factors That Might Burst The Housing Bubble

Canadian real estate market is on fire. Record numbers of sold homes, record prices, bidding wars… All this is happening while we are coming out of the worst recession in 90 years, & Canadians are still losing their jobs. Here are 5 factors that might burst the housing bubble:

1) DEMAND COULD WEAKEN

One reason that the housing market is booming right now in Canada is because we are caught in a mini “demand bubble”. This demand is coming from A) the lack of sales last winter where buyers put off the buying decision during the financial crisis and B) buyers looking to buy before rates increase. All the home owners that didn’t buy from Sept ‘08 to March ‘09 are competing with the buyers who want to take advantage of the low mortgage rates. This means that the demand could weaken in the coming months because everyone has already bought!

2) MORTGAGE RATES WILL INCREASE

It’s impossible to know how quickly rates will increase, however, simple math dictates that when mortgage rates go up, homes become more expensive. This will create weakness in home sales and it might drive down prices. The mortgage rate over the last 20 years has averaged around 8%, and for the past 5 years, most Canadians have been obtaining mortgages at 4-6%. If buyers are getting caught up in a bidding war and overpaying for a home that they can barely afford, at 4% interest, then they might have difficulty paying a 7-8% mortgage when rates increase.

3) NO MORE ROOM TO MOVE

In the past, whenever there was weakness in the housing market, the Canadian Government loosened the mortgage restrictions in order to stimulate the housing market. The government extended the amortization, reduced the amount of the minimum down payment, and increased the RRSP amount that can be used by 1st time buyers. There is now no more room to move (assuming that we won’t go back to allowing $0 down and 40 year amortization which was allowed in 2008). More than 50% of all mortgages in Canada this year were amortized longer than the standard 25 years. This means there is very little that the government can do to simulate the housing market if sales weaken. If the housing bubble bursts, and housing prices crash, then that means we are on our own.

4) UNEMPLOYMENT RATE

When people lose their jobs, it becomes hard to pay their mortgage. Some people might take out a line of credit to help them until they find their next job, but others will need to sell their home. A poor job market will create more supply and, at the same time, it will create less demand because fewer jobs means that less people can buy.

5) HOME PRICES DECREASE

If higher mortgage rates, higher unemployment rate, and a weaker demand make housing prices start to decrease, then watch out. Decreasing home prices are a very slippery slope. Deflation has been identified as the pro-longer of the great depression. When the price of a product is decreasing, and consumers know that they can buy the product in a few months at a cheaper price, then they will wait to buy. This “waiting” is poison for any industry. The more consumers wait to purchase, the faster prices fall. The more prices fall, the longer consumers wait. It’s a vicious spiral! We saw a brief glimpse of this from Oct 08 to April 09 as Toronto home prices started to crash when no one was buying.

No one can predict if the bubble will burst. It might not even burst. Perhaps homes in Canada were already priced low (compared to New York, Hong Kong, Dublin), perhaps the economy will continue to improve, interest rates will remain low, and salaries will increase. Regardless of what happens, it makes good personal financial sense to examine multiple “what if” scenarios before you pay $50,000 over asking with 5% down and 35 year mortgage at 4%.