Wednesday, August 18, 2010

Not just Real Estate is Fucked...

Oh boy. This is heavy. I was re-exploring my reading list that I posted a week or so back. I stumbled upon this article by Matt Taibi that furthers what I was talking about with respect to real estate prices last week. It actually digs a little bit deeper than the Michael Lewis article I was talking about before. I was just going to add an update to my other posting, but it feels like it deserves it's own moment in the sun.

The Matt Taibi article puts some meat on the bones of where mortgage backed securities were created, how they were allowed and where they came from. It paints a shocking picture of the investment landscape and basically makes me fear for my financial life. Just read it. It's shocking, shocking stuff.

Two things really come to mind from this article. Number one, I feel stronger about my opinion on real estate. What has kept me out of the Vancouver market over the years is the irrationality of it all. I haven't bought because it hasn't made sense. Every time I compare the numbers of renting to the numbers of buying, I get a bit freaked out and lose my nerve. I've even made it to the point where I've put offers on places. At that point, the bidding war that has commenced has scared me off. Deep inside me, I'm not willing to throw money at something just so that it can be mine.

Up until 2008, the Canadian market closely followed the American market. We went up as they went up. We dipped when the American economy fell apart. And then...things got weird. All of a sudden, you could buy a mansion in the states for no money at all, and Canadian real estate was rebounding. The reason for this was:

1) Canadian banks were more solid than American banks due to stronger regulation.

2) We didn't have sub-prime mortgages and therefore our housing market was on solider ground.

Now, after reading this article, I have a better understanding of it all. I finally can understand where the frenzy came from, how things became so inflated and why it all collapsed. I heard it all before, but it didn't really make sense.

But Canadian real estate didn't rise in a vacuum. Our prices rose as American prices rose as the rest of the world rose. Without that American bubble, we would not be anywhere close to where we are today. We had a direct benefit due to American house prices rising in a ridiculous fashion. We just didn't have the secondary crazy mortgage speculation directly fueling our fire. We had crazy mortgage speculation in the US fueling crazy real estate appreciation in the US fueling crazy real estate appreciation in Canada.

But it all really comes down to people buying houses that they can't afford, borrowing tremendous sums against the rising value of that home, banking on that value always rising.

How are we any different? We have all of this, the only difference is that our sub-prime mortgages are backed by a government agency, CMHC. The only difference is that when our house prices dipped, our entire economy did not imploded because we hadn't made the same gambles selling of this horrible mortgage debt and because it was the government backing the loans. So we recovered. But all the underlying symptoms are there. We still have a drastically over-inflated real estate market being bought up by people that can't really afford these homes, with incredibly long mortgages at ridiculously low interest rates with almost no money down, ratcheting up their lines of credit and credit card interest to pay for all the new crap that they need and to cover off the fact that they can't actually afford to be doing what they are doing.

I don't think this is sustainable.

Now, the other thing that this article brings to mind, number two if you will, is that it's scary that an article like this gets no coverage and no response. Now, I am taking a leap of faith in believing everything that this article says. But it seems to me that it's incredibly well researched and draws from facts of the past. That's what makes it believable.

Now, if one magazine and one author can put together a case like this, what exactly is the government up to? What are larger "news" organizations doing? It's just all so incredibly scary I don't know what to think. Why isn't anybody doing anything about it?

And the final point about cap-and-trade. Sweet jesus. I've long thought cap-and-trade is the stupidest idea ever. The shear amount of money that would need to be spent and government intervention required just to figure out the baseline for each company would be staggering. I don't even know how they would figure it out. How do you account for every delivery truck and every smokestack across and entire continent? You just can't. It would be much simpler to tax the fuels and chemicals that create the problem in the first place. Much, much simpler. I could never figure out why anybody would push for cap-and-trade. I never considered this side of things. And for the first time in my life, I'm questioning the motivations of people pushing for something that I firmly believe in.

What a crazy, exciting, interesting, depressing article.

Update - August 19th. I just finished reading this. It's more of a scientific analysis of exactly what I just wrote about. It's


  1. There's this old, but good, argument that today's form of social control is credit. In the sense that a hundred years ago, social control came in the form of factory discipline, the establishment of the work day and work week, and the growth of "leisure industries" of all kinds. When those factories were shuttered, the new way to keep people out of trouble, keep them working, and keep them circulating money was to extend them more credit, and make them work it off, possibly for life, which was never possible before quite recently. And that credit was, as we've seen, leveraged and speculated as if it were real money. But at the root of the thing is a whole class of people who are basically sharecroppers.

    It's fucked up when it feels like the best way out is the Fight Club solution: bomb the bank servers, reset everything.

  2. But that would just reward stupidity, Evan.

    The solution is actually to live within your means and not buy anything that you can't truly afford.

    I know, I know. Student loans. But that's more an argument for placing greater importance on cheap and easy education vs. an argument against debt.

    There's just a lot of really stupid people out there. There's a lot of dead air to fill with stories. There's a lot of people out there telling other people what to do without knowing what they are talking about.

    It all really comes down to "you don't need that much shit and it doesn't really matter."


    This is the first mention of "bubble" I've read in a mainstream publication. Even though it's in quotation marks. As in "listen to this crazy idiot talking."

    But how is real estate going to drop in the 6 major markets and stay strong in the rest of Canada? Not possible.

    And the only way for prices to remain stagnant for the next 5-10 years is if everything remains constant for the next 5-10 years. Interest rates. Job growth numbers. Etc.

  4. And here we go...Globe and Mail as well.

    Does anybody else feel that it's criminal to talk non-stop about how great real estate is and then 3 months later be talking about a bubble?