Sherry Cooper was reminded of just how devastating the U.S. housing crisis has been for families and the overall economy in that country after speaking recently with a friend who is having trouble selling his house in New Jersey.
Ms. Cooper, the chief economist at Bank of Montreal, is starting to worry about Canada's housing market after refuting the arguments of the extreme bears in the past.
But now Ms. Cooper is looking at the debacle in the United States and the blistering pace of the market here and warning people to tread carefully .
Anybody with friends and relatives south of the border likely knows the pain they are experiencing. I can add a story to the mix: I have a family member who paid about $750,000 for a house in Indiana in the late 1990s. She doesn't think she could get $350,000 for it today.
She also knows that, if she were to list it, her house would be competing with swathes of newer houses built on the surrounding farmland during the boom.
Meanwhile, her husband's job has been re-located about three hours away in Chicago. They're stuck with a house they can't sell without taking a huge loss. How many years will they have to wait for it to recover its value, if it ever does?
The market downturn's impact on the most leveraged buyers has been severe but this tale shows how even two-income families with no mortgage have had their lives altered significantly.
Ms. Cooper notes that real estate prices in the United States have not stabilized even this far into the debacle which was triggered by the financial crisis of 2008. Mortgage delinquency rates peaked at more than five per cent in early 2010 and have only come down less than two percentage points. And still there is an overhang of foreclosed homes yet to arrive on the market.
The news down there just seems to get more grim. Banks have been tackling a backlog of delinquent mortgages that remained in limbo due to foreclosure-abuse claims. As the legal wrangling gets sorted out, the pace of foreclosures has accelerated.
At the same time, about one-quarter of all homeowners with mortgages are underwater – meaning they owe more than their homes are worth.
Ms. Cooper notes that Canada has weathered the storm well so far and Canadians rarely default on their mortgages, but she cautions that an over-heated housing market could cause major problems in the future.
Canadians have never been so indebted and some may land in trouble when rates eventually rise. She recommends locking in a rate on a long-term mortgage.
She also points to potential shocks: Developers could become over-leveraged as condo-building continues apace in Toronto and Vancouver. Delays in construction caused by supply problems, the threat of strikes by city workers or really just about any event out of the blue could cause developers to abandon projects or look around for deep pockets to help with financing. The banks will be reluctant to increase their exposure to the building industry, Ms. Cooper reckons.
She hopes the condo boom gradually slows and that real estate buyers are careful not to load up on too much debt – especially in the frenzied bidding wars in Toronto.
"I'm not forecasting a crash landing but it would be foolish to ignore the lessons learned south of the border," she says.