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 just...wow...unbelievable.

Why Real Estate in BC, and Therefore Canada, is Fucked

I decided to read a few articles from my past post on magazine articles today. I cam upon "The End", by Michael Lewis in Portfolio magazine. This is a great article. I have read many articles on the financial collapse in the last few years. None of them have made any sense to me. This is a great article because it explains that things collapsed because none of this stuff made any sense to anybody. Which somehow makes me feel better.

Think about it. Think about past articles. Well, the market collapsed because banks repackaged sub-prime loans as AAA rated bonds and re-sold them, then, when the real estate market collapsed, they were worth nothing. That is as far as they would take it. Nobody would ever try to explain why that happened, how it happened or what it actually meant. Now I know it's because there is no answer to that question. There's no logical answer for why it happened. But nobody ever just came right out and said that.

So, on to why Canada is, as I said above, fucked. Page 3 or the article, maybe one third of the way down...

There’s a simple measure of sanity in housing prices: the ratio of median home price to income. Historically, it runs around 3 to 1; by late 2004, it had risen nationally to 4 to 1. “All these people were saying it was nearly as high in some other countries,” Zelman says. “But the problem wasn’t just that it was 4 to 1. In Los Angeles, it was 10 to 1, and in Miami, 8.5 to 1.

So, let's analyze where we're at. Start pulling data from places. Here, here, here.

Let's start with the City of Vancouver proper. Average January 2010 real estate price, $638,000. This includes, condos, townhouses, everything. Median family income (I would guess that the average would actually be substantially lower than that, as when you analyze other median/averages, the top end salaries pull the averages up), $80,127.

That's a ratio of 7.975. Worse, I don't think they are considering people owning shitty little condos when they consider a ratio of 3 to 1 as being healthy.

So, now, I hear you. Vancouver is crazy. The rest of British Columbia/Canada will be fine.

Average real estate price, British Columbia, $492,000. Median British Columbia household income, $65,780. Ratio, 7.479. It's hardly better. An entire province running ratios referred to as crazy for a swanky American major Metropolitan area. It's crazy.

Now, if you still aren't convinced, I referenced this page up above, but here it is again. Apologies if they've updated the data by the time you read this, but you can trust me that I'm telling the truth. Anyhow, look at the chart right at the top page. This is based on a 25% down payment and a 25 year mortgage, purchasing in what I must assume is Metro Vancouver based on the prices given.

2 story detached - Average Price $716,000 - Income to carry mortgage, $141, 600
Detached bungalow - Average Price $635,800 - Income to carry mortgage, $126,000
Townhouse - Average Price $476,300 - Income to carry mortgage, $94,500
Condo - Average Price $362,700 - Income to carry mortgage, $72,400

So, this is saying that if the average family manages to scrape together a down payment of $90,675, they'll have enough income to buy the average condominium or perhaps get in to the bottom of the townhouse market. Then, if they decide that they don't want it anymore, they'll be able to put the $1,154 they could get in the open market for rental income towards their $1,800 in monthly expenses (mortgage and property taxes) and make out like bandits!

This is crazy. This makes no sense. Even using these extremely generous mortgage guidelines there are not enough people to keep this going. There's too big of a spread in the statistics.

For days when you are bored at work.

I have seen links like this before, but this seems to be a pretty good one. Straight from boingboing, the "Best Magazine Articles Ever".

Lot's of David Foster Wallace, including the cruise article I talked about a week or so back and one about string theory that I'm certain Evan will get excited about (sorry...it's actually about tennis). I also just read the Federer article, which is just about the most thorough description of a sport I've ever read.

I attempted to read one the Tom Wolfe article about Nascar a year or so back, but Tom Wolfe can be really annoying sometimes and I couldn't get more than a few paragraphs in. Even the title of the article is annoying.

And I read this Errol Morris article about stupid people not knowing that they are wrong a month or two back. I think I posted it on my other blog (god, that sounds terrible). Part 2 is is about hysteria and mental disease. Part 3 is about Woodrow Wilson's anosognosia and its consequences. Part 4 is more of the same and Part 5 tries to bring it all back together.

Other than that, I have a lot of reading to do.

Just like Gary Mason but not a completely unintelligible full of shit asshole.

There was a boingboing link to one of David Mitchell's Guardian articles today and I enjoyed it so much that I went back and read a few of them. A memorable line from each...

The boingboing link in question about the burqua ban..."As long as people aren't wearing crotchless jeans outside primary schools or delly boppers with attached sarklers on pertrol station forecourts, we've all got a right to wear exactly what the hell we like and I can barely believe that we're having this debate."

This one about Rupert Murdoch, blogging, media and all sorts of other things. I don't have a moneyshot for this one.

I'm not actually sure what his point is here...but I'm sold by anything with a line like "In the middle ages, having a candle, a bowl of gruel and a roof migh have felt like party night."

It's all pretty great stuff.

A rock critic that you want to read

So this guy, Robert Christgau, is apparently calling it quits after a long career of music writing. I started flipping through the pages on his janky looking site, and he's kind of amazing. In the sense that he's an amazing writer, first of all, but he's also mostly right most of the time. You should check out his piece on "avant-punk." He basically defines all the bands that led up to punk happening in the late 70s. The list is pretty standard now: Velvets, Iggy, MC5, Modern Lovers, etc. But the thing is, he wrote that piece in 1977. So here's a guy who saw through punk's so-called reinvention of rock when it was happening. That's points. Big points.

Anyway. You guys have any rock critics you think are worth following?

Books are sometimes hard

I have several books that I've tried reading over the last few years but just can't make it over the beginning hump. Gravity's Rainbow is the worst one for me. I've started that thing at least two or three times but I can't make it past the first quarter. I've also started David Foster Wallace's Infinite Jest and just been unable to push on through. I will try both of these again, but when this happens, I feel sad and dumb.

I enjoy reading but I'm seldom looking for (or seeing) a deeper meaning or theme. I like a good story and these books make me feel like I'm not smart enough to get it.

So I've been reading a fair amount of Chuck Klosterman lately. Eating the Dinosaur is remarkably current and I very much enjoyed it. Sex, Drugs and Coco Puffs didn't quite do it for me. None of the topics were very near to me so it didn't resonate. I'm on to IV and it's really quite fabulous.

One essay/article/piece has been especially captivating for me over the last few days. He writes about his experience on a Styx/REO Speedwagon/Journey themed cruise. It reminds me of an article I read a few years ago about a similar Barenaked Ladies themed cruise. It got me wondering...

Twenty years from now, which current bands are going to be playing at suburban casinos and hosting themed cruises? Is my future self going to be interested in something like that? What band would force me to take part in something like this? What's the next frontier for washed up musicians?

Anyhow, in Klosterman's essay he references a David Foster Wallace essay about a week-long cruise. I just finished reading it. It's so oddly descriptive. It's an amazing(ly long) read. It also makes me imagine David Foster Wallace on a cruise, holed up in his room, standing in strange places observing everybody, just being an all-around pale skinned weirdo. I think that if one had encountered him in real life he would have come across as a person too strange to befriend. Like the weird guy in your high school that didn't talk to anybody, wore lots of black and spent most of his time writing in his notebook (actually, I was pretty good friends with a guy like this. He didn't wear black though). It's a shame, really.