Thursday, October 25, 2007

Nucking Futs

A word of wisdom "Never hold your farts in. They travel up your spine and into your brain . . . that's where the worst ideas come from." I am sure that is where this idea came from. Just when you think things couldn't get any nuttier, CMHC has gone to the dogs. Yes that is right, our national taxpayer funded subsidy to the banking and mortgage business is doing stuff that is . . . well . . . Nucking Futs.

Latest in their 'brilliant' financial innovations is a splendid no-down-payment-required 'investor' mortgage insurance so that lenders need not worry and extend credit in even the craziest of situations. CMHC gets a gigantic cut of the purchase price at 7.25% to shield them from the risk of default by the borrower.

Why would a borrower ever default you ask? After all our real estate market is bullet proof and prices only go up and we are hosting a two week long sporting event in a couple years and rich celebrities and asians and drug dealers will buy all the property in the province in a couple years with their endless wealth. Why not borrow all the money you can get your little speculative, gambling hands on and bet the (taxpayer funded) farm on some shoebox condos made by drug smoking, ill-qualified construction workers and marketed by a delusional multi-millionaire with a marketing budget so big it dwarfs the construction costs?

That's it . . . I give up . . . I am going to nominate the CMHC economics department, Bob Rennie and Cameron Muir for the Nobel Peace Prize in Economics for rigging an industry that is immune to rational thought and behaviour and is immune to the vagaries of the business cycle.

Hat tip to freako and CMHC for inciting this rant.

43 comments:

HADENOUGH said...

This is a train wreck waiting to happen.

DaMann said...

The is borderline criminal. When it all goes to hell in a hand basket CMHC will be bailed out by us the tax payer, the banks will still get their cash, and the specuvestors that got in and then out in time will have made a fortune. The idiots that buy it all up now who get caught with their pants down will be whining to the Gov. for a bail out.

What I can't fathom is that it has all unfolded in the US yet these Einstein's at CMHC can't even see that as a good sign of "what not to do"

Moronic on a monumental scale. Are these idiots not wacthing the Alberta RE situation?!?!

HADENOUGH said...

I am sure the RE agents and developers are now rubbing their hands with a big smile.

They are most certainly doing this to try and keep the ball rolling.

Duran said...

It boggles the mind to see this new NO MONEY DOWN! "investors" mortgage option announced at the same time the mess is unravelling down south.

Your postings are getting more and more enjoyable everyday Mohican. Keep it up...

jesse said...

7.25%? So the lender pays that? It's crazy but heck there's such a thing as alien abduction insurance. If somebody wants to pay it, why not, as long as the rate covers the risk?

VAB said...

The buyer pays the 7.5%, but not up front, like everything else, it's available on credit. So, if the buyers bail after a year the taxpayer will be left holding the bag with no offset.

And, no, it's not futs at all from the point of view of developers, agents and banks. It's like a direct transfer payment from us to them.

What it is is corrupt. There is no other word for it.

mohican said...

This product is corrupt. Think about it from the purchaser's point of view. 7.25% of the purchase price goes to CMHC. Another 5%+ goes to the real estate agent and untold sums go to the bank in the form of interest payments every month at a rate of 6%+ per year. So in the first year of your purchase you need to pay upwards of 20% of the purchase price to industry insiders in pure profit. Outrageous and disgusting.

jesse said...

"So in the first year of your purchase you need to pay upwards of 20% of the purchase price to industry insiders in pure profit. Outrageous and disgusting."

Then don't pay it. Sounds like a credit card!

What is more egregious is that CMHC will sit by as salesmen sell these things to desperate or ignorant people. I wonder if THAT'S in CMHC's mandate. Usury doesn't contribute anything useful to society.

Paul said...

LOL! great post.

This truly is insane. WTF is wrong with CMHC not to mention any "investor" thats willing to cough up 7% extra.

Deliverator said...

http://tinyurl.com/2sl3jx

Buyers line up for a home in athletes' village

"Condo fever has hit the Olympic athletes village near False Creek, with prospective buyers already lining up for sales that don't start until Thursday afternoon.

The athletes village becomes a market-priced housing project - Millennium Water - after the 2010 Games. ..."

I thought the line-up stupidity ended with the W...

Given the fact that things like this are still happening, it seems there is a while yet to go before the inevitable.

freako said...

Just a little OT. As I have suggested, the problems related to jumbo loans HAMMERED the U.S. medians as a result of the sales mix returning to normal.

This should not be a surprise to anybody but the NAR and the fools who listen to them (apples to apples, not much changed).

However, I am now 99% certain that we have the most expensive RE in North America as measured by medians. Read this:

In the Bay Area, sales of existing, stand-alone homes plunged 45.6 percent between September 2006 and September 2007, while the median sales price slid 5 percent to $702,240. September’s median was a whopping 17.7 percent below May’s peak of $853,910.

That is below $700K in Canadian dollars. I don't know exactly what the GV SFH median is, but I bet a pretty penny that we are higher than that. Thus it is very likely that we are #1. Considering our incomes, that is truly nucking futs.

freako said...

The buyer pays the 7.5%, but not up front, like everything else, it's available on credit.

As I posted earlier, that would be like a fronting people lottery tickets. You will only get paid if they win. What is the point of that?

Clarke said...

"And, no, it's not futs at all from the point of view of developers, agents and banks. It's like a direct transfer payment from us to them."

I think that pretty much sums it up. As taxpayers underwrite the CMHC, it is pretty much risk free....

freako said...

Oh, and on the topic of U.S. medians, the NAR releases Q3 numbers in mid Novembers, so about three weeks. It always gets prime MSM coverage. For the Q2, chief economist Yun played up the fact that a majority of metro markets were up YOY, and hinted that the market is turning. The problems were that:

1. Even though a majority of metro areas were positive, overall the aggregate median actually declined.
2. YOY misses the recent trend, which was down.
3. The median overstated due to the change in the sales mix.

Based on September data, the q3 median will be down down down. Let's see how Yun spins that one. At the very least he should go back and apologize for earlier spin. But of course he won't.

Alpha_Bear said...

Freako,

The latest NAR figures for sales of existing homes include monthly average and median sales prices, and they are not "seasonally adjusted". (This is an Excel file)

It should be easy to calculate the quarterly numbers, except the sales numbers of new homes (from the Census Bureau release) are only estimates, and are routinely "corrected" downward a month or two later.

Another reason for inaccurate sales numbers is the huge percentage of cancellations. Some homebuilders in the US are reporting as many as 68% of sales cancelled.

freako said...

Thanks for the link Alpha.

1. What the heck are seasonally adjusted prices? Never heard of such a thing. Sales, yes, but prices?

2. Those are aggregate numbers for the main regions. The quarterly report has it broken down by metro area, and will really hit home. The local press will run with the local numbers (if they haven't already).

Alpha_Bear said...

Re: Seasonally adjusted prices

My bad (confusing) grammar, the product of a public school education, intellectual sloth, and having to type in a small comment box.

Thinking about it, I wonder if perhaps the NAR might consider implementing "seasonally adjusted prices" on an annualised basis, to provide yet another layer of misinformation, as sales and prices race to the bottom?

freako said...

My bad (confusing) grammar, the product of a public school education, intellectual sloth, and having to type in a small comment box.

No, the NAR had it in capital letters right on the spreadsheet, you were just the messenger.

I have no clue why they would include such a caption. I don't think they do either.

bearette said...

Amen, brother Mohican. Testify!

Damir said...

Whoa - you can't compare medians from the "Bay Area" to Vancouver just like that. For starters, the Bay Area has 4x the people and covers nearly 8x the land area.

Metro Vancouver to (only) Santa Clara County would be a much more reasonable comparison. Or even to Marin + SF proper + San Mateo. I'd be curious to see such numbers, if they're broken down to that granularity.

Damir said...

Ok, the numbers for SF proper as of September '07 are..

SFH: $885k median, $1.1M average
Condo/TH/etc: $785k median, $816k average

Vancouver-proper + NV + WV would be a reasonable comparison, I think. The SFH numbers are probably pretty close, but they probably have us whooped on condo prices.

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BC Buds said...

I have been a long time bear on the Vancouver real estate market but with this latest product from CMHC and the obsession with real estate in Vancouver I think there might be potential to make some money over the next year even with some crazy fees built in. I'm not saying it makes sense just that there's an opportunity. Thoughts?

Ulsterman said...

bc buds, i was thinking the same thing. I've been reading this board for a couple of years and been the looney bear telling people that "it can't go on forever" blah blah. Meanwhile my audience just keeps getting richer. Of course i've since stopped mentioning real estate prices with colleagues and friend because it's too embarrassing.

With the CMHC changes i wonder if it may be possible to join the crazy gravy train for 12-18 months and make a quick profit?

I watched those people waiting outside Millennium Waters and i can just imagine a bunch of them flipping their assignments in 12 months for a 10-20% profit. On a 500k condo that's quite a few months of take home pay for me.

Just a few thoughts cos this market is making me feel really bummed!

Patiently Waiting said...

bc buds and ulsterman,

You know the theory about how when bears give up and start buying, the top is in?

Seriously, just think about all the new condo inventory that will be added in the next few months and how credit is tightening. You don't want to be one of those sucker bears that proves the above theory.

Ulsterman, your audience is probably just getting richer on paper gains. If they are smart, they haven't borrowed on the soon-to-disappear equity.

patriotz said...

Well the last metro in the US to turn, Seattle, is now falling and Alberta is falling too - Edmonton looks like it could be called a crash.

I think the jig is just about up for Festung Vancouver. It's just not that special to withstand a global downturn like this for much longer. Really the only think special about it is its ability to maintain absurd RE prices in the absence of locally generated wealth. Sort of like Bend, Oregon by the sea.

You might see a turn on Vancouver Island and/or the Okanagan (Alberta money a factor in both) first. If you do, I think the end will come very soon.

freako said...

Metro Vancouver to (only) Santa Clara County would be a much more reasonable comparison. Or even to Marin + SF proper + San Mateo. I'd be curious to see such numbers, if they're broken down to that granularity.

NAR breaks it into:

1. SF/Oakland/Freemont
2. San Jose/Santa Clara/Sunnyville

Yeah, if we start tinkering with the granularity things change, but we gotta draw the line somewhere.

I should mentioned that nothing else is even close. We are miles ahead of the rest of the top 10 most expensive U.S. metros, such as San Diego. We are literally triple Portland and Phoenix.

freako said...

As for making some money riding out the last part of this bubble, Newton comes to mind.

Who knows you might be able to make a few bucks, but keep in mind transactions cost, negative cash flow and beware how fast the market can become illiquid.

jesse said...

"I think there might be potential to make some money over the next year even with some crazy fees built in."

Sure, go for it. Going through the math, you don't need much of an appreciation to come out ahead.

If you do decide to take the chance and the market starts to drop, please don't trail the market down. Discount and sell your place fast to cut your losses, because it's a long way down from here.

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freako said...

Discount and sell your place fast to cut your losses, because it's a long way down from here.

Again beware the illiquidity. It will take a few months to determine that the market may be turning. A few more to be more certain. The doors literally close. There are really only two outcomes, both bad:

1. Prices hold up well, but sales plummet.

2. Prices plummet, but sales hold up well.

History suggests the former. It is deceptive, because for all practical purposes they are the same. The former only exists because sellers are stubborn, and very few will be able to fetch the "going prices". As Jesse suggests, a sharp discount may get you to the front of the line, but in some of the U.S. meltdown areas, even double digit discounts (compared to other asking prices) don't attract buyers. Only reserveless auctions are guaranteed to move properties, and now we are looking at 20% plus "discounts".

The original data thief said...

Only reserveless auctions are guaranteed to move properties, and now we are looking at 20% plus "discounts".
And sometimes even deeper discounts

At one recent auction, McCabe said, investors walked away with three-bedroom condos for $300,000 that originally sold for $550,000 to $675,000

HADENOUGH said...

You might see a turn on Vancouver Island and/or the Okanagan (Alberta money a factor in both) first. If you do, I think the end will come very soon.

I have a private client listing service for all over Victoria and Bear Mountin, Elk Lake - all over the place.

I can tell you anything over $800,000 is not selling. We are sitting at 200 days for many. If anything does sell there is a discount of about $100,000. Over a million just won't move.

There are discounts on really nice beautifully renovated homes. It was not like this 1 year ago.

van-realestate-crash said...

I don’t think they are nucking futs.

I think they are greedy, and irresponsible.

The remuneration for the top brass is based on the size of the portfolio, and with hundreds of thousands of dollars to be made in bonuses, the more victims they can bring into the Ponzi scheme the better for them.

CHMC is betting that there will be plenty of cheap,world wide money sources for Canadian Banks to lend out to people who can't use a calculator.

Many of the foreign investors scorched by the American sub prime lenders will come to play at our slightly less corrupted casino.

It’s other people’s money, and it is risk free to CMHC management.

When this unwinds,the worst that can happen is they get a couple of million dollar severance packages, and then they will move on to mess up some TSX listed company.

Not nucking futs at all, just greed, with little regard for other people’s money.

jesse said...

"The remuneration for the top brass is based on the size of the portfolio"

This is partly true. Bonuses are based upon today's profits and tomorrow's expected profits. The latter is typically measured by increasing market share. In a rising market you take whatever you can, knowing at worst you will recover the principal thanks to subsequent capital appreciation.

Guess what happens when capital appreciation stops.

Pondering said...

In response to hadenough. I was over looking at some of the places over 800k in Victoria. We are talking hideously low quality flips (One had simply nailed new planks on top of the rotten existing deck), houses with unfinished basements and low quality finishings. Even the house the family got murdered in is counting a 6' high basement as 1/3 of the square footage of the house. There is a reason they aren't moving. No value. Especially given Victoria has even less of the excuses of Vancouver, no olympics, no immigration and almost no industry beyond of the government.

Sam said...

hey wait a minute there - Victoria has Butchart Gardens! Wouldn't you pay 3/4 million to live somewhat near them?

P.S. I live here (Metchosin), so I'm allowed to make fun of it. Creepily, we were just in Seattle for the weekend and when we mentioned where we were visiting from, Butchart gardens was what everybody mentioned. I don't know if they were just trying to be nice though.

jc said...

On the topic of making a quick buck against an obvious trend... given the US RE market seems to be trainwrecking as we speak, is anyone considering shorting the US RE market?

HADENOUGH said...

Pondering,

You got that straight. I looked at one house 1.2 million and it had rat shit in the basement. The few (and very few) houses that have sold in the $700,000 and $800,000 price range were actually very nice. Most of them are bulls**t. I can't believe that people could actually live in them in the state many of them are in.

Then again building is so freaking expensive now that most people cannot afford renovations. This is not a high income city. Funny though, the incomes here are higher than in Vancouver.

Pondering said...

The thing about Victoria is that the incomes are squished into the middle. The average or median might be higher due to the fact that the lowest paying government jobs still pay well but conversely there are not very many at the high end who could actually afford a million dollar house.

freako said...

is anyone considering shorting the US RE market?


What is there to short? The builder and lender stocks have already imploded.

Duran said...

"What is there to short? The builder and lender stocks have already imploded."

Take a look at SRS, an ETF that shorts the US Dow Jones Real Estate Index with double exposure. A rollercoaster ride with all the interest rate cuts and the preceding speculation.

I agree with Freako, a lot of the blows have already been dealt to that sector. From here on out, it's unpredicatble.

WoodenHorse said...

Further to what duran has said, SKF does the same for US financials as SRS does for commerical REITs.

And I disagree with the fact that they've already imploded....I think there lots of room to fall.

However, I wouldn't buy either until you know what the fed's decision is tomorrow (note: I have both SKF and SRS....and I will have an early day tomorrow)