Juggling Dynamite

One of the currently underappreciated costs of the AI bubble is all of the resources and attention it is sucking away from other critical activities and investments.

Gary Marcus, founder at Geometric Intelligence, joins BNN Bloomberg to discuss concerns around the AI bubble. Here is a direct video link.

Craig Fuller, FreightWaves founder and CEO, joins ‘The Exchange’ to discuss the looming freight recession, why sectors relying on freight have been weaker and much more. Here is a direct video link.

Located on the Gulf coast of Florida, Cape Coral has long been a haven for retirees, speculators and boom-bust real estate cycles. 

In the 2002 to 2006 property boom, debt-flush buyers pushed median home prices in the greater Lee County up by 280% in just 4 years.

Naturally, this made the area a leading foreclosure center when the bubble burst in 2007. As borrowers defaulted and banks slowly seized homes, Cape Coral led the country with a median price decline of 62% from $252,000 in January 2007 to $95,000 by 2009.

Then, as central banks flooded the financial system with debt-backed liquidity, prices bounced from 2011 to 2017. In January 2018, the average sale price in Cape Coral had returned to $210,000—a double in 8 years—but was still 16% below the cycle top 12 years earlier.

The US National Case-Shiller 20-City Composite Home Price Index peaked in April 2006, then fell 34% to March 2012. 

Heavily concentrated in real estate and property services, the Cape Coral area also saw some of the highest job losses during the bust, with unemployment quintupling from 2.5% in April 2006 to 12.5% by 2010. 

By early 2018, commentators and local politicians were celebrating that Cape Coral’s unemployment rate had finally returned to 3.6%, approaching the cycle low reached in 2006, and I was documenting all of this in real time.

By 2018, the median sale price in Cape Coral was $209,900 (still 17% below the January 2007 cycle peak). Then, the COVID pandemic hit in February 2020, and fiscal and monetary ‘stimulants’ gushed. The US 30-year fixed mortgage rate tumbled 35% (from 4.54% in 2018 to 2.96% in 2021) and Cape Coral home prices doubled to $419,000 by April 2022 (Redfin).

Next, bubble-stoking policies were normalized (again), mortgage rates recovered to more than 6%, and surprise, surprise,  The Worst Housing Market in America Is Now Florida’s Cape Coral (encore):

Today, “For Sale” signs line every other block. Open houses are deserted for hours. Foreclosures are ticking up. Home builders are listing half-built shells at discounts as they abandon projects to cut losses. Locals say the lack of traffic has led to an increase in vehicles speeding through empty residential streets.

“Cape Coral is the worst housing market in America right now,” said José Echevarria, a Realtor. “I don’t think we’re at the bottom yet.”

Home prices for Cape Coral-Fort Myers have tumbled 11% in the two years through May, the most of any major metro area, according to an analysis for The Wall Street Journal by the listing site Homes.com.

Many other areas in Canada and America are now following a similar pattern of mean reversion; generally, markets that rose the most above long-term norms have the furthest to fall.  The same goes for other asset markets, such as equities, credit, crypto, and commodities.

It doesn’t take a genius to see the devastation caused by asset bubbles and debt-fueled gambling. They are promoted as progress during the inflationary phase, but they end up costing us a fortune. Can we learn to stop this madness? Or are the masses doomed to repeat financial suicide generation after generation?

According to Statistics Canada’s 2024 population estimates, there are roughly 9.3 million Baby Boomers in Canada (born 1946-1964), now aged 61 to 79, and comprising 23% of the population. The final 25% of the group (2.2–2.4 million, born 1961-1964) will be turning 65 over the next three years (2026-2029).

Similar ratios apply in America, where the latest U.S. Census Bureau counted 71 million Baby Boomers, and the last quarter of them (15–17 million, born 1961–1964) will turn 65 from 2026 to 2029.

In other words, by 2030, the entire Boomer cohort will be over age 65.

Recent studies (from BMO, RBC, and Angus Reid) report that roughly half of unretired Canadian homeowners plan to sell their primary residence (fully or partially) to fund their retirement — significantly higher than the 36–40% reported a decade ago.

A similar Re/Max poll conducted last year found that one-third of Canadians are relying on their home as their only financial plan for retirement.

Reliance is highest among the youngest boomers (turning 65 over the next three years) and Gen X (about 8 million Canadians born 1965–1980, turning 65 from 2030-2045), who often have high home equity but inadequate registered or workplace savings.

These trends are related. Because home prices inflated much faster than incomes over the past 15 years, Canadians have borrowed more and saved less for retirement and other needs. In the process, home equity has become the dominant household asset, and it comes with high property taxes, maintenance, and utilities.

The need to reduce overhead and increase capital encourages the masses to see housing wealth as retirement savings, even though it’s illiquid until sold.

AI astutely summarizes the implications of these dynamics as follows:

• Concentration risk: Many Canadians are effectively “all-in” on one asset class (residential real estate), leaving their retirement income dependent on future housing market conditions.
• Timing risk: If selling coincides with a soft market (e.g., during rate-cut recessions or demographic downsizing waves), expected proceeds may disappoint.
• Policy implications: As the population ages, more simultaneous home sales could increase housing supply and weigh on prices in certain regions (e.g., Ontario, BC).
• Advisory takeaway: For portfolio managers, it’s crucial to help clients model realistic after-tax, after-transaction net proceeds and consider diversification well before they need to sell.

If you’re counting on the equity in your home to finance your retirement, then you’re vulnerable to declining property values. At the same time, non-housing retirement savings are also exposed to a dangerously inflated financial market bubble.

Simultaneous bubbles are a brutal landscape, especially for those in or within a decade of retirement; see, While we fret over a stock bubble, the one in housing has already burst:

Perhaps the stock market is in a bubble that will end badly. Meanwhile, many Canadians are enduring a correction that is already taking a toll on their financial health.

Home prices in Canada have been grinding lower for 3½ years and counting. And still, the long-awaited rebound has yet to materialize.

…From January, 2005, up to the housing market’s peak, the average home price more than tripled in Canada, topping out at about $820,000.

One side effect of a two-decade property boom is that it increasingly put Canadians’ homes front and centre of their finances.

Even after the correction, real estate accounts for more than 40 per cent of total household assets, according to Statistics Canada data. (It peaked at 46 per cent, see chart below).

Even though Canadians have record high levels of stock-market exposure, equities make up just 26 per cent of the average Canadian’s total assets.

Clearly, Canadians’ financial well-being is much more dependent on the housing market than the stock market.

This is especially true of lower and middle-income Canadians, since stock ownership is heavily skewed to wealthier brackets.

Understanding where we are is critical in planning for where we hope to be. Resisting groupthink and proactively managing risk are highly recommended.