Real Estate




Grasshoppers, Ants, Politicians and Central Bankers

(This is my reflection on the Greek tragedy that is unfolding before us.)

30 years – that is the most common term for a mortgage.  30 years –  that is an approximation of the most productive years of an average human.  30s – that is about the age to start the activity known as household formation.

Housing, transportation and food, those are the three essential elements of life.  Of the three, housing is the highest expense for most households in the US.  However, once paid for, housing can maintain its utility value for a long time, unlike food that has be replenished and paid for every day anew.  Once the house is paid for, all kinds of good things happen.  If one manages the mid 30 years of one’s life wisely, then one can enjoy one’s golden years.


KrekelMierImage credit: McKenna


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Signs of the Times

Recently, Mortgage News Daily reported on the current status of home equity in this article: 15% of Low End Homes Remain Under Water.

Summarizing, 8 years after the bursting of the sub-prime bubble, 30% of mortgaged homes still have less than 20% equity and 10% have negative equity. This is not home-ownership. These people are just mortgage slaves in worse condition than if they were just renting.


From Housing Wire : “Housing advocates: REO-to-rental boom is bad for California renters, buyers”. That was the short version. Housing Wire also included the long version. This survey is the shot across the bow. Wall Street may celebrate rent increases as a form of housing recovery, but renters may not share these sentiments. I wonder how many renters appreciate being told it is “cheaper to buy” when they are struggling to come up with first and last months’ rent, plus a deposit.



Image via


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No Mortgage Burning Parties Anymore

Much attention has been paid to mounting student loans and their potential impact on young graduates looking for their first homes.  What about seniors though, the 10,000 baby boomers reaching the age of 65 every day?

A long long time ago, in the era of our grandparents, there was once an event called the mortgage burning party, usually around the time of retirement.  I have not been to one of these parties in a very long time.


Mortgage-Burning-PartyOnce upon a time there was a tradition …

Photo via pinterest


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The Interest Rate Guessing Game

Seldom does a day go by without some guru offering his or her prediction on when the Fed is going to raise rates.  They all come with scholarly theories supporting their prediction.  It sounds like a fun game.  I want to play, but I’m not sure what the object of the game is.




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From 4% to 5%

If the 30 year mortgage rate increases by just a quarter percent to 4.25%, monthly payment increases by 3%, which may only have a minor impact on the market. Half a percent to 4.5% would increase payments by 6.13% and that may start pushing marginally qualified borrowers into the “application denied” pool. With a 1% increase, from 4% to 5%, the monthly payment goes up by 12.44%. Needless to say, in order to qualify household income would have to increase proportionally. That should put a real damper on purchases, especially at the entry level.


30 year fixed rate, log scaleThe 30 year fixed mortgage rate average, 1979 – 2015, log scale, via Saint Louis Federal Reserve Research – click to enlarge.


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Throwing Caution to the Wind

We have discussed the dangerous housing and consumer credit bubble in Canada in these pages on several previous occasions in some detail (see “Carney’s Legacy” and “A Tale of Two Bubbles” as examples). Since we first wrote about Canadian real estate, the bubble has continued to grow with nary a pause. Why are we calling it a bubble? The gap between incomes and house prices is widening ever more, and has been far above what is considered normal for several years already.

This decline in affordability is the result of monetary pumping and ultra-low administered interest rates imposed by Canada’s central bank. Moreover, the boom is subsidized by a giant state-owned mortgage insurer, an institution that has the potential to severely impair the government’s finances once the bubble bursts.


van-twilightVancouver skyline at night – no doubt a nice place, but a bit pricey.

Photo credit: Mohsen Kamalzadeh,


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Nothing Against the Old

We would like to preface today’s Diary with a clarification: We don’t have anything against old people. We don’t have anything against high GDP growth rates either. But the two don’t go together.

Some of this opinion comes from looking in the mirror: New products? New technology? New businesses? The older we get the less interest we have. When we learn a “new” song on the guitar, for example, it is likely to be one written half a century ago.

When we sit down to watch a movie, we’re as likely to pick out something from Leslie Nielsen’s Naked Gun series as a new Hollywood release. There are different stages in life… with different interests. One dear reader explains it:


In India there is a concept of Vrana ashram. In it, a person’s life is divided in four parts. From birth until 25, it is Brahmacharya – a person should gain knowledge by reading scriptures. From 25 to 50, it is Grihastha ashram – to live married life. From 50 to 75, it Vanaprastha – away from society in the forest seeking god. From 75 to 100, it is Sannays – complete renouncing of the world.”


We guess we are in the Vanaprastha stage. Maybe that’s what we’re really doing out on this remote ranch high in the Argentine Andes: seeking god.


Saiva_Swami_Sangam_2011Vanaprastha activities in the temple.

Photo credit: Kauai’s Hindu Monastery

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Thank God It’s the “Lucky Country”, and Good Thing it’s not a Bubble …

We have previously written about the many extant housing bubbles in the world, which are a result of the incessant monetary pumping by central banks (see: “A Tale of Two Bubbles” for details). Recently Australia’s big banks published a study in which they strenuously deny that one of the biggest housing bubbles the world has ever seen is actually a bubble. This is no surprise, because when – not if – this bubble implodes, Australia’s financial system will be in major trouble and the “big four” Australian banks are going to have a front-row seat. As “The Australian” reports, the “banks are dispelling housing bubble fears”. Not surprisingly, their arguments sound eerily similar to those of the NRA in the US shortly before the demise of the significantly less enormous US housing bubble.


“Amid fears that record low rates are laying the ground for problems, the Australian Bankers’ Association will today release a ­report arguing there is “insufficient evidence” of a speculative bubble, adding that the banks have not added to the price surge by relaxing lending standards.

After assessing the past 25 years, the paper, “Key truths on housing in Australia”, finds that the biggest driver of prices is mortgage rates falling below 5 per cent, and plays down the impact of foreign buyers. It also backs a Reserve Bank study this week that shows the highest debt loads are held by wealthy, less risky borrowers.

But the ABA does concede that houses are expensive relative to rents and “current rates of return may be economically viable only if expectations of further price gains are fulfilled”.

Also, prices have become more expensive relative to purchasing capacity and buyers should view “with a critical eye” claims that the structural housing shortage is massively driving the market. The major banks have repeatedly dismissed a bubble in their most lucrative asset class, and the ABA says it is important to “get the facts on the table” and not just focus on the recent bull market, particularly in Sydney.

“House prices in Australia are currently in a period of strong growth. (But) there is insufficient evidence to conclude that house prices are unsustainably overvalued or that Australia is currently experiencing a speculative ‘bubble’,” the report says.


Since the market stirred to life in mid-2012, Sydney is up 35 per cent — far outpacing the 23 per cent increase in the patchy broader market, including capital cities like Perth that have begun going backwards, according to CoreLogic RP Data.”



sidney shack
Anecdotal proof that there is “insufficient evidence of a bubble” in Australia’s housing market: this shack on Edith Street in Sidney sold for $980,000 in May of 2014. The cottage has been uninhabited for 20 years. The walls that have not disintegrated are covered in graffiti and the house is littered with rubbish. The backyard features the remnants of an outdoor toilet, with rubbish strewn about amid patches of weed, which are the only vegetation. Size of the property: 278 sqm. (~2,992 sqft.)

Photo credit: Attila Szivasi


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There is good news.  Part 3 is the last of the “Real Estate is Doomed” series … and it is short.

“In substance foreclosure (ISF)” is a technical FASB accounting term.  I first learned about this term during the S&L era in pertinence to income property loans.  Once upon a time, S&Ls were holding thousands of loans that were still current, but operating with negative cash flow.  As an example, if an apartment building is collecting $1 million in gross rent, has $300,000 in expenses and a debt service of $800,000, the loan is technically an “in substance foreclosure” (ISF).  The theory being that even if the loan is current, the borrower will run out of funds sooner or later unless his cash flow condition recovers.




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The End Result of Decades of Fiat Money

We have recently come across a few house price charts – the Economist has a handy tool that allows one to compare global house prices and a few related indicators, like price/rental yield and price/income. Based on house price indexes alone, the cheapest real estate is currently available in Japan (where prices have been declining since 1989 in spite of the fact that they are not making any new land there – imagine that!), while the by far biggest real estate bubble appears to be underway in South Africa.


Two large bubbles on black background

Photo credit: Getty Images


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Mortgages Are Cheap, Cheap, Cheap, but …

On the left hand side of the chart below, mortgage rates peaked at 18.28%. By comparison, today’s rate is hovering at less than 4%, a whopping 4.5 times off the peak.  More importantly, there was no time in history when a mortgage loan was cheaper than today.  As we now know, it was all the Fed’s doing.  Mathematically, unless they figure out a way to go negative, they are done.  Can the real estate market flourish when 35 years of continuous stimulation is removed?


reid2Image via


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Too Much Debt

The Chair and the Vice Chair of the Fed both spoke last week.  Janet Yellen testified in front of the House and Senate with this speech.  Stanley Fischer’s speech was delivered here.  They were basically the same speech, Yellen’s just had more fluff for the politically motivated audience.

The message was negative for housing.  Allow me to elaborate.



Image via


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