Understanding Housing Collapse

[Chris L]

Let me try this another way.

The dealer isn't the cause of drug abuse. Drug abuse is created by the end user. No one shoved mortgages up anyone's you know what.

I would go one step further by saying that US RE was crashing before the drug was taken away.

The drug dealer took the drugs away when it was obvious the addict wouldn't be able to repay the dealer. Something similar will happen in Canada and whatever precipitates it will be (wrongfully) called it's cause. However the real cause is human emotion.

It's a confusion of cause and effect.

Watch for a change in buyer sentiment to precipitate a drop in Canadian RE. It's already starting to happen. You can see it in the comments section of the globe and mail. Two years ago, the comments were all pro RE. Completely backwards from right now. Now people even hate RE agents of all people...you know, another crack dealer. Pretty soon it will be greedy banks. These are all illusions. The cause is in the mirror.

[kcowan]

Let's look to Vancouver. What's causing it to decline right now? All of the rest of Canada seems to continue booming, and yet Vancouver is declining. Why? Buyer sentiment is changing...and yet credit still flows freely. Canadian RE has been doomed ever since it decoupled from fundamentals like a solid economy and rising incomes.

Vancouver demand by Chinese investors has dried up. It was the quick path to immigration but no longer. Locals have not got the message yet but they will.

[Chris L]

Vancouver demand by Chinese investors has dried up. It was the quick path to immigration but no longer. Locals have not got the message yet but they will.

HAM [hot asian money] was slight of hand invented by real estate agents. It represented an extremely minor subset of buyers, but it worked to fan the flames and drive prices up even higher. If you do enough research, you'll find that the helicopter rides hired out to these Chinese "buyers" were actually local real estate agents posing.

I didn't mention in the other posts that Canadian attitudes about real estate are quite resilient and we'll weather the storm more than in the US. Meaning, even if our equity drops significantly, if we can, we'll hold on for the ride and resist selling.

Therefore, while houses will change hand at lower valuations, it will happen only at the fringe to people who have to move, or can not make other sacrifices to keep their home. I do however think that this margin is quite significant and larger than ever before. It's also probably going to take a decade to unravel. The downsizing boomers will come in later on to add even more downward pressure on prices as they come to realize that home ownership isn't for the elderly. A house will once again become nothing more than a home (as it was when boomers first bought). We'll repeat the cycle when the average person has forgotten the lesson learned.

[Rusty O'Toole]

"Let me try this another way.

The dealer isn't the cause of drug abuse. Drug abuse is created by the end user. No one shoved mortgages up anyone's you know what."

But they did shove mortgages up anyone's you know what. Dozens of fly by night mortgage companies used the cleverest advertising and promotion tricks they could find, to entice people into signing up for mortgages. The loan officers for these companies were induced to maximize fees and profits using every trick they could find. People with good credit were signed up for sub prime mortgages because the fees and interest rates were higher. Borrowers were induced to lie on their applications. If they wouldn't lie, the company would fill out the forms and lie for them. Lenders pushed loans they knew the borrower could never pay off. They even offered what they called NINJA loans (no income, no job, no assets) and what they frankly called "liar's loans".

The end they had in view was to maximize their profits by sucking in the public on bad loans. They didn't care what happened to the loans or the borrower. They cared only for their own fees.

These fly by night mortgage lenders quickly flipped the loans to one of the big banks like Goldman Sachs for a profit. The big banks then bundled or packaged the loans together and used them as collateral to borrow from other banks, pension funds, hedge funds etc. by selling mortgage backed bonds. They knew perfectly well the mortgages were bogus. All they wanted was to palm them off on a sucker before they blew up. It is a documented fact that while one department was selling these to investors, another department was buying credit default swaps on them, confident that they would soon blow up. There are emails in which these bank employees referred to the investment they were selling as "vomit" and "dog crap".

The rating agencies got in on the action too. They would rate practically anything investment grade if it was packaged right and you paid the right fee.

The whole thing was a scam from top to bottom. If there were no innocent parties, the poor suckers at the bottom who only wanted a decent house to live in, were the least sophisticated and the least to blame. They only did what they were supposed to do, what they have been told to do all their lives, take part in the American Dream and listen to the financial advice of the big banks.

Eventually the whole scam exploded as all the world knows. Then the big banks got a bailout from the government and whole mess got shoved onto the taxpayers. Since then the suckers have lost their homes, their savings, their jobs, their freedom and possibly their minds.

The big banksters continue to collect their multi million dollar bonuses.

[Rusty O'Toole]

I also disagree with the thesis that drug abuse problems are created by the end user. All the evidence I have seen is that drug use is not a very big problem until someone dumps large amounts of a drug on the market. The drugs create the demand, not the other way around. This has happened several times in the last 75 years in the US. In every case the CIA was behind the sudden influx of drugs. It was part of their program to raise money to fight Communism by supporting the rebels in whatever country they were interested in, and the rebels' finances were always based on drugs.

If you don't like the CIA theory, go look up the Opium Wars in China in the 1840s. England wanted to sell large quantities of Indian opium in China to redress their balance of trade on Chinese tea, and to pay the tax deficits of the Indian government. The Chinese government was opposed to turning their people into drug addicts. The English won, and opium became a terrible problem in China.

This is history, and completely verifiable. It may not be the history you learned in school, or see on TV, but it is true nevertheless.

To go on with the story, China did not succeed in stamping out the opium trade until the Communist takeover in the late 40s. The ragtag and bobtail of Chiang Kai Shek's army ended up in the mountains of Vietnam, Laos and Cambodia. When the CIA went looking for rebels to fight against Communist North Vietnam, that is where they found them. Air America was set up to support them and one of its biggest jobs was exporting opium. A lot of American soldiers in Vietnam took drugs and a lot of drugs were sold into the US and around the world. This is why there was so much heroin in the US in the fifties and sixties.

There is nothing very secret about this, not now. It was very hush hush at the time but these things have a way of coming out, after they no longer matter and it is too late to do anything about them.

You could also look up the role of the CIA in flooding Los Angeles with crack and cocaine in the eighties, in support of the Sandanistas. Or the way Bill Clinton protected the flood of drugs coming through Mena Arkansas when he was governor. It's all documented now, now that it no longer matters.

[sags]

I could understand a person staying in their undervalue home, if it was the perfect home for them, had great scenery or whatever turned their crank..............but people were paying $800,000 to 1 million or more for crack shacks.

Spending the rest of their life in a dump wasn't the plan.

They thought they were going to unload it to a greater fool for a tidy profit.

It doesn't look like that is going to happen now.........at least in Vancouver where prices have fallen and listings are the highest they have been in 10 years.

[Rusty O'Toole]

Vancouver and Toronto are weird but they are not Canada. Take a map of Canada and color Vancouver and Toronto in red. You will have 2 tiny dots on a large map. The rest of the country is a very different market, in fact it is many different markets.

I bought houses in small town Ontario in the last year or 2, for $85,000 to $175,000 that would have cost half a million, a million or more in Vancouver or Toronto. I don't understand those markets and wouldn't touch them. I'll stick to the other 99.999% of the country.

[kcowan]

The thing about the collapse, is that is dependent on attitudes. It has nothing to do with logic. And if housing collapse in Toronto, it is game over. That does not matter to savvy investors outside the GTA, but it is the way Canada goes.

[Berubeland]

Has anyone considered the fact that part of the reason there was this loosey goosey credit situation in the USA is because everyone, mortgage brokers, bankers, real
estate agents were also drinking the Kool Aid?

Lets take for example the ramification of foreclosure in a rising market...nothing even a year later, there's equity in the house. So why would any of these people care if there is a foreclosure in a year or two, they will be able to get all/most of their money back without a problem. There was a complete lack of understanding about the risks of widespread foreclosure.

In a falling market, it's an entirely different story. My theory is that most people including the ones in the mortgage industry and banking thought everything would be just fine. Also individually they thought they were only approving one or two bad ones and thinking it didn't matter simply because no one foresaw how the entire market would unravel. Can you predict which raindrop is the one that overcomes the accretion point?

Our housing market is like bone dry tinder just waiting for a spark to ignite it. The actual spark doesn't matter.

[uptoolate]

I enjoyed reading the thread. I didn't see it mentioned (though it may have been) but the book 'The Big Short' by Michael Lewis was a great review of how mortgage debt that was essentially junk status was packaged and then sold and resold as solid investment grade derivatives. The details will never be entirely known by the public of course but the book and others like it give a taste of how the average Joe was taken for a ride. At the end of the day, I think Jack Nicholson said it best, "You can't handle the truth." We'll never know for sure and I'm sure many of the experts still don't know how it got away from them - and of course it's not that important to them as almost all of them got away with it! Ca-ching! (and that isn't the sound of cell doors closing!)