i'm not the only one...

I could not resist, and took drachen's suggestion for the pic'. The original was intentionally boring, but maybe just a bit too much so.



I read a couple of things worth reading over at Garth Turner's blog, which I have redacted below. (some of the commentary is good too - if you can get past the masturbation)

Whatever one might think of Turner the politician, he does know a fair bit about finances.

In any case, don’t let the media fool you. Stock market stories are not about stocks. They’re about the economy. Markets, you see, are harbingers. People who trade on them spend a lot of time betting heavily on what comes next. Right now, they’re worried.

The world economy, dragged down by the States, is slowing. America has never been so in debt, or so long at war, or with such a weak currency. And on a day when realtors in Canada were trumpeting the greatest sales volume ever for residential homes...far too many buyers here could be in as much trouble as a couple of million of Americans who losing their houses. We...categorize the subprime mess as giving loans to people who did not deserve them. But...we are busy selling $400,000 homes to young couples with between 1.5%... and 5% down, and with 40-year mortgages that turn a $300,000 debt into one of $884,000 at current rates.

This is unwise. It’s gambling. Canadian banks have been handing out mortgage loans like candy... offering a zero-down option, asking them to come in with enough money only for closing costs.

No wonder Bay Street’s worried. Nobody in the world of financial securities would extend 98.5% leverage, and yet we are soothing your homebuyers into precisely that. Should the US slowdown affect our economy, which it will, buying an expensive house with no money might not look like such a great idea.

This was worth quoting too;

Like the North Star, we are a bright light for others to follow. Canada has emerged as a shining example in an economic universe of rapid change and uncertainty. We are leading the way with our tax cuts, our debt reduction and our focused and responsible spending. Our fundamentals are strong and we are well positioned to weather any sudden economic storms.
- Jim Flaherty, budget speech, October 30, 2007

“There’s reason for continuing concern about the weakening in the U.S. economy. The subprime reality … continues,” he said. “It’s broader and deeper than originally predicted and it’s reason for caution as we look forward.”
- Jim Flaherty, interviewed in National Post, January 2, 2008

In the sixty-odd days between those two comments, what happened?

The "experts don't know WTF is going on. You and I know better than the Federal Finance Minister. That's what freaks me out...

the bubble book

I bring you some levity in this time of alarm bells ringing from the south. Maybe I am just hearing spooky, dis-embodied voices in my head, but I don't think so.

Back to the levity - li'l solipsist has a book for the bath called Bubble Book, and I was inspired to take a little artistic licence with it. I re-wrote parts of it, and of course, had fun with Photoshop. Enjoy.


Young James has noticed that there are several housing bubbles outside. He begins to worry. Young James has bought beyond his means, and is beginning to understand.

Little Lucy snickers as she realizes that Young James has not noticed her Rennie The Raptor poster. Well, duh! she says.


Learnin' Lenny is doing his sums. He differentiates between mortgage payments and rent payments while Young James the Reformed explains the idea of compound interest. "Much better to earn interest than pay it" he admonishes. Learnin' Lennie wonders if Young James the Reformed has heard of market cycles. He also realizes that his $1000 bills stuffed into a soup can up on the shelf are earning no interest.


Young James the Reformed invites Scared Silly Sally out for a walk while he posts his mortgage payments. She is very worried about being priced out. Young James the Reformed begins to hatch a scheme in which he sells his place to Scared Silly Sally for "2008 prices". Scared Silly Sally has never heard of compound interest, but she thinks that maybe she is not priced out forever - what with the new zero-down, 50 year amortized mortgages (I'll be paid off by the time I'm 60, she ponders excitedly).

Stay tuned for the next exciting instalment - It's Just Bubbles Down the Drain.

before the drop

The above picture is illustrative of much right now. Markets and economies soaring so headily for the last 6 years or so are paused in a Wile E. Coyote moment, and about to feel the effects of gravity. Everything is going around in circles, and there is not much that interests me enough to write about (in regards to real estate in Vancouver). It's all been said 10,000 times.

Greenspan keeps dropping bombs on his book tour - saying today that UK RE is overvalued.

Tomorrow the US Fed is expected to cut rates between 25-50 bp's, and those expectations seem to be having more of a subduing effect on the markets than a boosting effect. CAN $ is up even more.

Northern Rock in the UK saw a bank run that pulled some 2 Billion Pounds Sterling out in the last couple of days.

Meanwhile, in Canada, the 40 year mortgage trap is set, and ready to snap closed.

Look out below.

fly like a loon

How about that dollar? It has taken wing. It is up about a half-cent today (93.17 cents US) on hints from the BoC that it will be raising the rate to keep inflation in check. We keep hitting new 30 year highs. The last time our dollar was this high, Talking Heads had just released their first album, and Stevie Wonder was "it" (I wonder how many that are buying condo's have heard of either). We were also moving into recession.

I think that the timing is pretty safe - the economy is over-heating, house prices are, um, nuts, lumber is already in the toilet, and other economies are slowing down - which will mean less demand for commodities in general. Oil fell 2.8% today as well. It has to happen sooner or later.

The Canadian dollar is at a 15 year high against the Yen, a 6 month high against the euro and is showing strength against the most traded currencies. The big banks raised mortgage rates 0.3% today as well.

What does it mean? I think that we will see housing inventory surge, sales slow markedly, increasing unemployment, less commodity sales, less tourism, and hopefully - a return to some semblance of sanity.

This excerpt from Bloomberg

Canada's Dollar Reaches 30-Year High on Hint of Rate Increase

By Kim-Mai Cutler and Haris Anwar

May 29 (Bloomberg) -- The Canadian dollar rose to a 30-year high after the central bank said it may raise borrowing costs to restrain inflation. Short-term government bond yields surged.

The Bank of Canada suggested it may raise overnight rates in the ``near term'' to curtail inflation, though it held the benchmark lending rate at 4.25 percent for an eighth meeting. It last raised borrowing costs 0.25 percentage point in May 2006. Benchmark two-year bond yields climbed the most in almost 23 months to 4.58 percent, the highest since March 2002.

``This is more hawkish than what the market was expecting,'' said Marc Levesque, chief North American strategist at TD Securities in Toronto. ``The Bank of Canada is squarely telling the market that it's going to hike and the Canadian dollar has clearly gotten a kick off the back of that.''

The central bank, departing from earlier statements describing inflation risks as balanced, said there is an ``increased risk'' that inflation will persist above the 2 percent target. The statement added that ``some increase in the target for the overnight rate may be required in the near term to bring inflation back to the target.''

Ten of 15 economists surveyed today by Bloomberg predict the central bank will raise rates at its next meeting, July 10. Last week, two of 19 forecast such an increase. (Gee, psychology can turn pretty fast...)

mortgage defaults

bcbuds sent me this link (thanks buds).

New Data Show That Nontraditional Loans Are BeginningTo Haunt Borrowers With Midlevel Credit; Prime Still Fine

The mortgage market has been roiled by a sharp increase in bad loans made to borrowers with weak credit. Now there are signs that the pain is spreading upward.

Borrowers who take out Alt-A mortgages are considered less risky than subprime borrowers because of their higher credit scores. But as the housing market cooled and loan volume declined, some lenders lowered their standards for Alt-As. Now a rising number of borrowers who took out these loans are running into trouble.

We will be hearing the same here soon enough, me thinks.

The company cut back on riskier loans and began relying more on analytical tools to verify a borrower's income and creditworthiness.

What a great idea. Let's use some analysis and verification.

As in the subprime sector, the riskiest loans are those made to home buyers who put little, if any, money down and don't document their income or assets.

CMHC thinks it's a great idea to back 0% down loans - with our tax dollars. Will heads roll when it goes sideways? Scameron jumped ship. Did he see his head rolling?

The mortgage industry is battling a rash of cases in which borrowers, loan officers and appraisers collude in providing false information to induce lenders to advance more money than homes are worth.

That sounds very similar to what has been going on here. I think that the term was "liar loans".

I think we are heading for a real mess - and fast. Your thoughts?

calculations

So I was goofing around with this Mortgage Qualifier Calculator at the Glob of Mucous, and found some interesting realities. I took screen shots of different scenarios to demonstrate just what can be afforded.

The first shot reveals that a couple, both earning the average wage in the GVRD*, could afford to buy a house (or apt., condo, etc., but you would have to add in condo fees) worth $316,507 - with the respectable sum of $50K for a down payment, and a 25 year amortization. This is without GST (applicable to a new, or renovated property). The monthly P&I payment would be $1,660.17. That is close to 30% more than I pay for rent on a SFH with a view. Nothing is calculated for repairs, etc.

click for larger view

With 0% down, you can buy $263,906 worth of dwelling.

click for larger view

OK, so let us say that that couple will buy a new construction (add in GST, but not condo fees), still zero down, but going for a 35 year amortization. They could buy a bit more - $288,272.

click for larger view

All these calculations are at a 5.5% mortgage rate, which is what ought not to be too hard to get for a 5 year loan, for most people. Rates will go up sooner or later, so re-financing could have you looking at 7%, or more. And, is there anything worth buying in the GVRD for those prices?

I did a quick MLS search in that price range for Van. East, and came up with 95 condo properties. The cheapest was $1,000 more than the lowest number above. Interestingly, a lot of the places for sale boasted that they had never been lived in.

The same price range search in Van. West turned up 80 properties. freako - is this your price compression revealing itself?

The long and short of it is that there are 175 condos, or apartments, for sale in Vancouver proper that could be afforded by a couple making the average wage*. There must be more than 175 couples looking for a condo in this fair city. Do you hear the din of bidding wars?

Almost needless to say, there are 0 houses for sale in this town, in that price range. Something's gotta give.

What is wild to me is that the reported earnings only rose $156 per annum when comparing 1993 to 2002. In 1994 the average wage was more than $4,000 more. I don't do graphs, but maybe one of you who does could chart the average wage with the average house prices. VHB may have already done so, so look there (my quick search did not find it).

Disclaimer - Information is made available to you as a self-help tool for your independent use and are not intended to provide investment advice. I can not and do not guarantee it's applicability or accuracy in regards to your individual circumstances. All examples are hypothetical and are for illustrative purposes. I encourage you to seek personalized advice from qualified professionals regarding all personal finance issues. Go ask yer Momma.

*This number was found here. Source: Canada Revenue Agency
Prepared by : BC Stats, July 2006

mortgage poverty

pablo picasso - poor people on the shore (1903)

I came across a poll (results below) on my ISP's home page yesterday that asked about the amount to which people are mortgaged, and I was a bit surprised at the low levels reported. It is definitely a questionable result, as it is possible to vote as many times as you want, so things could be dramatically skewed. Further, there is no regional break-down, and the sample size was not reported. Interesting none-the-less though.

The poll disappeared today, but it is to note that they had a poll about the dispute between Rosie O'Donnell and Donald Trump (I haven't a clue about that) that lasted for five or six days. Weird priorities...

the poll

The hot housing market in Western Canada, in particular, has forced many to take on large mortgages. How big is your mortgage?

9% More than $300,000
13% More than $200,000
24% More than $100,000
31% Less than $100,000
15% I rent
5% I live for free with family

Is this believable?

Addendum -

Mohican has a good post on "liar mortgages", or "stated income" approved mortgages. When I was pre-approved (by a bank and a broker) I needed to supply my notice of assessment from Rev. Can. The bank offered me way more mortgage than I would ever even think of taking, and the broker was more stringent (or stingy?).

I do know someone who forged a T4 slip to get their first mortgage. He went on to foreclosure and divorce.