Chasing bad products with bad policy

It is not all quiet on the western front this morning. The subprime mess has become so overwhelming that even a Republican president in the US is speaking out about "helping the people." Of course, ol' Georgie does it under the guise of "mortgage insurance" and "tax-cuts" but make no mistake about it, GW is bailing out big businesses and investors that made bad decisions by giving money to people who had no business owning homes that they couldn't afford.

But Georgie isn't alone. When Greenspan left the Fed, you'd think that the policies he'd implemented would have been scrutinized prior to their continued use. Apparently Bernanke isn't so much an analyst, more like he's a puppet on a Greenspan string with his statements this morning:

The adjustable-rate subprime mortgages originated in late 2005 and in 2006 have performed the worst, in part because of slippage in underwriting standards, reflected for example in high loan-to-value ratios and incomplete documentation. With many of these borrowers facing their first interest rate resets in coming quarters, and with softness in house prices expected to continue to impede refinancing, delinquencies among this class of mortgages are likely to rise further...

Although this episode appears to have been triggered largely by heightened concerns about subprime mortgages, global financial losses have far exceeded even the most pessimistic projections of credit losses on those loans.

It is not the responsibility of the Federal Reserve--nor would it be appropriate--to protect lenders and investors from the consequences of their financial decisions.

The incoming data indicate that the economy continued to expand at a moderate pace into the summer, despite the sharp correction in the housing sector. However, in light of recent financial developments, economic data bearing on past months or quarters may be less useful than usual for our forecasts of economic activity and inflation.

On the other hand, the increased liquidity of home equity may lead consumer spending to respond more than in past years to changes in the values of their homes; some evidence does suggest that the correlation of consumption and house prices is higher in countries, like the United States, that have more sophisticated mortgage markets (Calza, Monacelli, and Stracca, 2007). Whether the development of home equity loans and easier mortgage refinancing has increased the magnitude of the real estate wealth effect--and if so, by how much--is a much-debated question that I will leave to another occasion.

So let's sum up these comments in plain language: ARM's are bad products, predatory even; pessimism in the global markets have led to greater than expected financial losses; the Fed should not bail out the bad product pushers and ignorant investors who bought products they didn't understand; despite housing sector crash, economic growth (and inflation) continue to rise; and surprise, surprise, when people have easy access to low-interest credit (HELOCs) they buy stuff they can't afford--and when that easy access disappears, they look for ways to not pay for what they bought.

Here's where Georgie steps in and turns the homeowner into the "victim."

Bush will direct Treasury Secretary Henry Paulson and Housing Secretary Alphonso Jackson to work on an initiative to help troubled mortgage holders get services and products they need to keep them from defaulting on their loans.

Bush also planned to:

- Urge Congress to pass Federal Housing Administration overhaul legislation that would give the FHA more flexibility in assisting mortgage holders with subprime mortgages.

- Pledge to work with Congress to reform the tax code to help troubled borrowers rework their loans.

- Call for rigorously enforcing predatory lending laws and strengthening lending practices.

On behalf of all sane, educated and aware investors out there, I'd just like to say thanks to Georgie and Benny for working so diligently to inspire confidence in our economic systems. I know, I know, we are different up here in The Best Place to Live on Earth TM.

This just in: apparently sane, educated and aware investors are a minority in the marketplace as markets react favorably to Georgie and Benny's "there, there, everything is going to be OK" speeches. How does dumping money into a sinking ship plug the leak?

Has it started?

Over the last week or so listings in our segment of the market have been going through a bit of a change. I'm not sure if the total listings in SFHs with suites have gone up (I haven't counted sales yet), but I do know that there have been multiple, substantial price changes downward. I also have noticed that quality has gone up. I don't know if this is the work of flippers, but it appears in photos at least, that the places listed in our price range (max $425K) look better kept than they did four months ago.

Another piece of anecdotal evidence: where we used to see places come onto the market at $419K or $424,900, we're now seeing $399K and $405K. Could it be that the tides have turned for agents? Are the RE professionals recommending lower starting prices for quicker sales? I'm guessing so. That small difference isn't much, either to us, or to a Realtor's commission. The quicker they sell a place, the sooner they get paid. After a couple of years of hectic sales, I'm sure the gang used to quick selling are just itching to get that turnover going again.

We've had to literally put the phone down twice this week as a preventative measure against getting sucked into looking and potentially buying something. We've been doing math like crazy lately, but every time we do, we make sure we do the math when that price has come down by $40K not twenty--that's only a 10% drop. Hopefully in the next few months we'll be doing the math on places that have dropped 15%.

Tuesday News Hunt

Just some highlights from a RE/money market-filled news day:

Foodflation rears its ugly head again.

While the BoC says that despite all the visible warning signs, inflation is, in fact, under control (yah right) and therefore likely won't be raising rates again in September.

Scotia Bank sees massive profit and claims little exposure to speculative ABCP markets.

Meanwhile RBC states ABCP risks tally to $1.1B; but remember that's barely 3% of annual operating profit.

CHIP finally has some legal competition in the "we'll steal your hard earned home right out from underneath you seniors' unsuspecting eyes" market.

South of the border, new home sales beat expectations, but sales of existing homes drag prices down 3.6%.

Closer to home, BC tops in RE prices, but income gains, not so much, despite record unemployment. BC's average income = $39,500 annually. Income growth gains are LOWEST IN ALL CANADIAN PROVINCES.

This is eerily similar to a certain name we all know and love, non?

"Ingenious" would-be landlords "bend" rules of the RTA to take advantage of uneducated, unsophisticated, first-time renters in a tight market: who would of thunk it?

Over to you...

Student Hunt in Victoria

Now before you drivers get too excited, we're not inventing a new game involving fast moving cars and a certain circular shaped traffic route with plenty of zebra-striped "target rich environments" on campus. Rather we're simply pointing out that students too are feeling the house hunting blues.

Maybe we'll start seeing ads on Craigslist like this:

FOR RENT: first time landlords, previously university students themselves, seek four international, female, quiet, studious, master's students to share one room with outhouse in back forty of scenic, serene, private, quiet, inner-city, farm-like, family home off West Saanich. Just 20 kilometres from campus, this unique opportunity provides all the benefits of close proximity to campus, yet 2 one-hour bus rides to school each day each way, will make you feel like you did when you spent the summer hopping trains all day while backpacking through Europe. No phone, no cable, no internet, no pets, no parties, no running water, no heat, no electricity included (or available). $2500 per month. ACT QUICKLY, this unit never lasts long. 420 Friendly.

Quick thoughts on Penticton

Ms. HHV and I are up in Penticton this weekend to cheer on some compadre's competing in Ironman Canada today, and so I can sign up for next year... the swim start truly is the most amazing spectacle in sport. Almost 3000 racers left the beach together for what will be a 17 hour race for a few of them.

To say this town is booming is a considerable understatement. Condos going up everywhere. Beautiful place. Must be the Olympic factor. Or maybe it's the spillover from the real retirement capital of Canada 45 minutes up the 97?

Open thread for your comments, links etc... next post likely from Vancouver on Tuesday.

Do Something

Dear Victoria City Councilors:

As concerned residents of Victoria, who currently rent and watch the local real estate market closely, we write to implore you to consider further action on the affordable housing crisis. It is admirable that the city recognizes that coop housing collectives and non-profits working at eliminating homelessness do necessary work; however, these targeted efforts do little to nothing in the way of impacting real rents that hard working individuals and families pay.

My previous employer is facing a critical labour shortage. Its employees need only have a high school education. That employer offers above average wages and benefits too. But the lack of affordable rental housing is driving its employees, both new and old, out of the city. You see, it's not just Victoria that has extremely low unemployment. It's a Canada wide phenomena that is causing young people to examine the cost of living in Victoria and look at opportunities in cities with more affordable housing stock.

A developer has approached you with a proposal to build 39-units of rental stock for a guaranteed 10-year period of 10% below average rents. If you use today's current rental rates as per BC Statistics, the developer is promising 2-bedroom units at approximately $750.00 per month. For a young family earning roughly $50,000 per year, that rent would require roughly 20% of their gross monthly income. That kind of rent to income ratio would enable disciplined individuals and families to save a considerable down payment in order to own a similar sized home of their own in the future. Who knows, maybe they will see the benefit of ownership and even work to own the unit that they rent from the developer?

We know that Council is divided on this issue: some of you believe that adherence at all costs to the official community plan is paramount. But we think that Helen Hughes has a much more realistic outlook: "We have to think of the larger good in addition to the needs of the close proximity," Victoria councillor Helen Hughes said. "If we turn this down, we are saying to anyone else, 'Don't bother, because we don't care to look at this.' ... This could kick-start others to think this way."

Ms. Hughes is right. And she is in direct opposition to at least three of you--Mayor Alan Low, Coun. Pam Madoff and Coun. Geoff Young--who believe that building apartments equates to "destabilizing neighbourhoods." Mr. Young went so far as to even comment that "other developers will stampede to the city looking for similar concessions 'if we send a message that blockbusting is OK and we are prepared to throw community plans in the dumpster.'"

Mr. Young, we here at HouseHuntVictoria hope you are correct. While you see the development of similar rental housing on similar (to these proposed) terms as bad for your community plan, we see them as sustainable. We believe the average Victorian will agree as well. But we won't receive confirmation of that until you allow a public hearing, which it seems naysayers on Council are wanting to prevent from happening. Thankfully, naysayers are in the minority.

We encourage Council to consider other similar plans, in other locations like Fairfield, Fernwood, and Sears. If the real estate market has changed enough to have developers considering rental stock as a suitable alternative to the pump and dump process of condominium development the city should embrace and encourage sustainable, affordable growth for the people who want to live, work, pay taxes and raise families here. It is time for this city to send a message to its citizens, and people considering becoming citizens, that it wants to provide opportunities for sustainability and not just cater to wealthy Baby Boom-generation types seeking waterfront properties and luxury condominiums and the developers who cater to them.

To the immediate neighbours of proposed rental developments: we don't believe that rental housing equates to issues that can't be fixed. If you are concerned about traffic, work to address the reliance on cars made necessary by inadequate public transit and bike lanes in your neighbourhood. If you are concerned about crime, work to address the inadequate policing that the City of Victoria provides. If you are concerned about density, get over it. Density is a reality when people move into town. Your property's market value is directly related to the amount of people who want to live in Victoria, if you want to see your bubble-value remain long term, then you should work to encourage sustainable growth, otherwise businesses will suffer, young working people will leave and Boomers will move to where they truly can have it all.

Respectfully,

HouseHuntVictoria and Ms. HHV

Maybe this time it really is different?

I have to admit that four straight days of TSX increases has got me in a bit of an ignorant stupor. Beginning last Friday, when the US Fed dropped its short term interest rate by 5o points (0.5%), the markets have undergone a bit of stabilizing and a subsequent rally that has the TSX recovering 50% of its recent drop.

A recent Decima poll produced some rather unexpected (on my part) results:

The Canadian Press-Decima survey found that 55 per cent of respondents didn't think the market troubles herald a recession, compared with 22 per cent who were pessimistic. It also found that 66 per cent of respondents reported being unaffected by the financial tumult.

Another four per cent said they'd lost a lot of money, 17 per cent reported losing some money, and five per cent said they'd made money.

Almost half of the people surveyed said they felt the worst was over and the market will rise again soon, while 28 per cent said markets will continue to fall in the next few months.

I don't wish financial hardship on anyone. I think that savvy investors, both RE and equities, can avoid losing money in most market cycles by paying attention, getting good advice, and trusting their instincts. That said, from watching the markets with more care and attention, mostly due to this blog, for the past 8 months I'm surprised that more people aren't concerned about both over-inflated markets.

I consider myself fairly risk friendly. I like to play poker and I don't mind losing. I've found that by learning and paying better attention, I lose far less often. I have a similar outlook on the equities market: I'll take a chance with a percentage of my portfolio, rarely exceeding 20% speculation. The rest of my investments I consider value. That means I look for good deals. My favourite ratio is price to sales. I like to think that for every dollar of my own, I should get at least a dollar of the consumer's.

During recessions the pickings are slim for this philosophy, mostly because the peeps aren't a buying. During periods of high inflation (like now, and yes I know that's unsupported) the pickings are also slim because stock prices are hyper-inflated. Long story short, I have some cash in my trading account that I can't find a suitable place to park. Usually in transitional markets the choices are plentiful. I don't believe that this market is in a transitional phase. And I do believe that is a direct result of Central Banks' irresponsible actions over the past few weeks... even years.

Take this headline for example: Central banks are stealing from the average citizen.

What happens when fiscal irresponsibility gets rewarded with bailouts? You get more fiscal irresponsibility.

But as our credit bubble undergoes an ugly unwinding, it's dawning on folks that central banks lie at the epicentre of the problem.

Andy Xie (Financial Times) writes: "The global credit bubble is bursting. This bubble is primarily leverage financing for owning risky assets. The people who were responsible for what happened played with other people's money, marketed arcane financial products with false promises of fat profits, but stuffed their own pockets with big bonuses. Neither these masters of the universe nor their greedy but naive investors deserve to be bailed out. They deserve what is coming to them.

"The central banks should focus on price stability, not financial market stability, and should provide liquidity only to contain the multiplier effect of the bubble bursting on the economy. Nor should central banks stimulate to avoid recession at any cost. Business cycles are not bad. Excesses must be followed with cleansing...

"Markets have been taking more risk than they should because they believe that central banks will come to their aid during times of crisis, like now. The penchant of Alan Greenspan, former U.S. Federal Reserve chairman, to flood the market with liquidity during financial instability is the genesis of this 'central bank put.' As long as this expectation remains, financial bubbles will occur again and again. Now is the time to act. Let the crooks go bankrupt. Central banks should bury the Greenspan 'put' for good."

Now to paraphrase Mr. Wheaton (sorry couldn't resist one last poke): one person's opinion does not an expert analysis make. So I'll give you this one too, also from the same article:

U.S. Comptroller General David Walker was quoted Tuesday (also in the Financial Times), as follows: "Drawing parallels with the end of the Roman empire, Mr. Walker warned there were 'striking similarities' between America's current situation and the factors that brought down Rome, including 'declining moral values and political civility at home, an overconfident and overextended military in foreign lands, and fiscal irresponsibility by the central government.'"

I'm not suggesting that the doomsday scenario is imminent, but is it not telling of a considerable problem when federal financial leaders split on economic policy so diversely? What is it going to take for the markets to start paying attention? Given how interconnected the RE and stock markets have become since the dawn of the ABCP debt-funded retirement mutual fund mess, something drastic needs to take place in the stock market for the drastic correction I'm looking for in the local real estate market.