Kajal and Vishal Dharod paid $559,000 in 2006 for a new four-bedroom house built in Rancho Cucamonga, California. Today, it’s worth about $360,000. “We don’t know how we can come back from a loss like that,” said Kajal Dharod, 29, a first-time homeowner with a $4,200-a-month mortgage. “Buying the house was a mistake.”

Those few words are from a Bloomberg wire story which moved Tuesday. I post them here as a reminder that smart, middle-class people in the most developed country in the First World, who follow all the rules and pay their bills with dollars earned from full-time careers can be destroyed by real estate. We should never forget that lesson.

When a house stops being a place to live and becomes an investment commodity, the market’s living on borrowed time. That would be now.

How else would you describe a scene in which people buy inflated assets with 95% or 100% leverage? Where sellers wring every last dollar out through an orchestrated auction-like process? Where flipping houses is so common many people never get their basement boxes unpacked? Where the inexperienced are led to slaughter by the greedy? Where the ‘winner’ of a bidding war can ever only win by finding a greater fool to sell to?

The housing market’s sure looking like the worst of the penny stock business. The way people talk about their homes, you’d think the conversation was about Nortel shares in the fall of 1999. In fact, Canadians today convinced housing prices will trend higher forever sound exactly like Americans three years ago. Like the young couple in the story above, so many of us have rolled the dice, thrown everything we have against a piece of real estate, and then hope for the best.

Some plan.

And now to Vancouver, and another 29-year-old:

Garth: I’ve been following your blog since I met you at a session in Vancouver a number of months ago (maybe even a year ago?) at the advice of a family friend of mine.  I’m recently married in Vancouver, income around $85k and wife is looking for work, 29 years old with about $55k in RRSPs ($25k in a money market fund ready to use as a first time homebuyer), $25k in stock, and $65k in cash.  No debt, paid for car, and renting for approximately $1200/month with the intent to buy as soon as fundamentals make sense.

Given the volatility in the markets today, where’s a good place for a young guy like me to make a good return over the LONG TERM?  Does it make sense for me to continue to load up on cash and hope like hell that some normalcy returns to the real estate market, or should I look at investing in some of the other avenues you’ve recommended (bank preferred stock, oil, etc) and hope that the market for them is strong when I need to cash them out to move into real estate?  All of my friends have purchased in the past 5 years, many at 5/35, and while I’m happy to rent for as long as necessary (maybe look at a bigger place?) it would be nice to put some of the cash to use.  I just feel like I’m spinning my wheels saving every month when the market goes up more than I can save.

I’ve been able to keep the new wife satisfied with a honeymoon in Asia, new furniture, and the ability to stay at home while she looks for work.  Once she finds something though I know her nesting instinct will kick in…

Tick tock tick tock… Canucks Fan

OK, puck boy, so you have $145,000 in liquid assets, of which $125,000 is earning diddly. Fix that. You live in a city where the average single-family home is selling for $732,000 and the average piece of junk is $535,000.

If your friends have purchased homes with 5/35 deals, unless they come from millionaire families, odds are they’ve bought condos for $400,000 just like the apartment you rent for $1,200. That would mean downs of $20,000 and monthlies (at 3%) of $1,500 plus strata fees, plus a debt of $380,000. If they renew their loans in three or five years at just 6% (and it will be higher, trust me), the monthly charge will be $2,200, plus fees – and they will owe the same amount. If mortgages return to the 8% average of the last twenty years, payments rise to $2,700 – and yet the debt level does not drop, thanks to the 35-year amortization.

So here’s the thing, Canuck Lover. If they make mortgage payments for a few years and pay nothing off, how is that mortgage different from your rent? Other than the fact you have the same and pay less for it? Or that you’re free, I mean? And they have $380,000 in debt? Which might destroy them if condo prices fall by 10%? Which is about certain once the Olympic stuff is over and Van property taxes go up? And the HST comes in? And all the rich Asians stay in Asia where the action is? I mean, what’s the difference?

Oh yeah. You still have $145,000. No debt. New wife.

I don’t know how you take the suffering.