Housing, the most manipulated market in the world

Here is an executive summary of what happened to the U.S. economy:

1. Cause of Great Recession:  Collapse of Banks
2. Cause of Bank Collapse:  Collapse of Housing Bubble
3. Cause of Housing Bubble:  Massive Socialist Government Manipulation

Socialist Manipulation

Free-market capitalism is a myth, as shown by housing, which is the most manipulated market in the world.

One can argue that the US housing bubble started with the government's socialist policy of enabling every American to realize the American dream of home ownership.  According to this article:

"For nearly a century it has been the policy of the U.S. government to increase American homeownership.  Its efforts include (but aren't limited to) bouts of easy money from the Fed, the mortgage-interest deduction, the exclusion of capital gains on primary residence sales, direct and indirect subsidies from the Department of Housing and Urban Development, and artificial liquidity pumped into the mortgage market via government sponsored entities Fannie and Freddie."

Many policies and programs were put in place to manipulate the market, such as the 1977 Community Reinvestment Act, which required banks to extend loans to high-risk, low-income borrowers.  These borrowers bought homes that they couldn't afford and therefore they eventually defaulted.

The manipulation of the housing market has not only created bubbles, but it has also created huge injustices.

The US government stole billions or trillions from non-homeowners, children (read "stealing from children") and taxpayers to fuel a housing bubble through vehicles such as:

• Fannie Mae and Freddie Mac purchased and guaranteed $5 trillion of mortgages (half of all U.S. mortgages) which transferred the risk from banks to them (source).  Even the riskiest mortgages were guaranteed.  Consequently, the bailout for Fanne and Freddie were the most expensive (source), so much so, that the bailouts of Citigroup and Bank of America look like chump change.
• $3.9 billion in CDBG grants to help homeowners in poor neighborhoods.
• Treasury Department bought shares of Fannie and Freddie's stock to support stock price levels and allow the two to continue to raise capital on the private market (in order for them to buy and guarantee more mortgages).
• Low interest rates fuel demand for housing.  Fed kept interest rates so low that they had negative real interest rates in 2002-2005 (source) and again in 2008-present.
• Fed bought $1.25 trillion of mortgage backed securities, to enable more lending to home-buyers and to keep mortgage rates low (source).
• mortgage interest is tax deductible
• $10 billion for Cash for Caulkers (source), compared to $3 billion for Cash for Clunkers (source).
• $75 billion Making Home Affordable program, “a.k.a. mortgage bailout” according to this article .
• Federal Housing Administration (FHA) guarantees $300 billion in new loans to keep 400,000 homeowners out of foreclosure (source).
• $15 billion in tax breaks (article).
• FHA’s Refi program for underwater borrowers (aka the FHA Short Refi Program)
• HAMP (Home Affordable Modification Program)

According to this video, the government raised red flags in April 2001 stating that the size of mortgage giants, Fanne Mae and Freddie Mac, is "a potential problem" because trouble in either one of them could "cause strong repercussions in financial markets".  In 2003, the government's warning of Fannie Mae and Freddie Mac (government sponsored enterprises) was upgraded to a systemic risk that could spread beyond the housing sector.  In 2005, Alan Greenspan stated:

"...Enabling these institutions to increase in size - and they will once the crisis in their judgment passes - we are placing the total financial system of the future at a substantial risk."

Despite this, socialist politicians, such as Barney Frank, wanted Fannie and Freddie to do more to put low-income people into homes.  According to the above video, in 2005, Senator Charles Schumer stated:

"...I think Fannie and Freddie over the years have done a incredibly good job and are an intrinsic part of making America the best-housed people in the world...if you look over the last 20 or whatever years, they've done a very, very good job."

In 2006, John McCain stated:

"For years I have been concerned about the regulatory structure that governs Fanne Mae and Freddie Mac...and the sheer magnitude of these companies and the role they play in the housing market...the GSE's need to be reformed without delay."

Our housing bubbles are created by huge socialist policies.  Socialist policies have been tried by dozens and dozens of countries around the world.  Without fail, they have always brought prosperity to a pocket of the population in the short run.  Without fail, they have always made the country poorer in the long run.  This record is unbroken in earth’s history.

Politicians, such as Senator Chris Dodd in September 2008, bragged about the government's [false] achievement.  Starting at 3 minutes and 25 seconds into the video on the left, Dodd stated:

"...a great source of wealth creation in this country has been home ownership... Fannie and Freddie…created so much wealth for so many Americans…"

After the bubble collapsed, the fake wealth disappeared and the country became poorer.

Socialists are well-meaning, good-hearted people, but uneducated in economics and myopic.  Essentially, they don’t know how to grow a country’s wealth.  Capitalists appear cold-hearted, however, free market capitalism has been the only system in recorded history, other than killing and stealing, able to generate long term sustainable wealth.

Suggested viewings of Milton Friedman:
http://www.youtube.com/watch?v=RWsx1X8PV_A
http://www.youtube.com/watch?v=DvNzi7tmkx0&NR=1

Suggested reading:
Socialism vs Capitalism


Canada's Housing Manipulation and Bubble

Canada has a very similar socialist policy with a similar number of money stealing programs to fuel house prices:

• Home Renovation Tax Credit
• First-Time Home Buyers' Tax Credit
• GST/HST new housing rebate
• Home Buyers' Plan
• Provincial credits and grants
• CMHC insures mortgages to transfer risk from the banks
• Self-Directed RRSP mortgages
• Capital Gains exemption

To be fair, the government should provide this kind of support to every other industry.  Why just housing and the people that benefit from housing such as construction companies and real estate agents?  Why not provide this support to renters, furnitures, computers, books, phones, clothing, shoes, food, massages, web developers, programmers, janitors, maids, restaurants, etc., etc., etc.?  Are citizens in those industries relegated to second-class?  Why do they have less rights and privileges?  Housing is so manipulated, that it is akin to "central planning" of the economy by Russia and China during their communist years.  As we know from their experience, central planning drove their countries into poverty.

As in the US, money is stolen from non-homeowners and children (read "stealing from children") to fuel Canada's housing bubble.

So, if you sell your over-priced house, you are capitalizing on the stolen money.  If you are a baby-boomer looking to downsize, and if you sell your house to a young couple, then you will be exploiting them to fund your retirement, in addition to the billions that you are stealing from children.

Canada's Sub-Prime Mortgages

TD Bank told me that for a couple of years, Canadian banks were giving out zero-down, 40 year mortgages to people who were one paycheque away from insolvency.  These were Canada’s version of subprime mortgages.  These seemed like a conundrum on the surface.  Canadian banks are very conservative and risk-averse.  Why would they give out so much money to such risky borrowers?  I asked TD this question.  TD explained that they were not taking any risk.  Canadians are, through CMHC, which is owned by the government.  CMHC insures these risky mortgages.  If the borrower defaults, taxpayers would be on the hook.  The banks do not take the risk, but get the reward.  CMHC is Canada’s version of Fannie Mae and Freddie Mac.  MacLean’s magazine now says the same thing in their article called "The CMHC: Canada's mortgage monster".

According to MacLean's magazine:

"The CMHC is a driving force in the housing market.  But critics warn its policies could fuel a U.S.-style meltdown."

As the US has shown, housing can be as volatile as stocks.  Why don’t taxpayers insure the banks to lend me money to buy stocks?

Canada is now more socialistic than China.  The government needs to try a little free-market capitalism for a change.  (Read more on Socialism versus Capitalism)  If governments didn't insure any home-buyers, then we can let the free market decide on how much risk they should take.  As this article concurs, I can assure you that the banks would never have given out zero down, 40 year mortgages if they took all the risk.  Isn't this how it works on car loans?  Isn't this how it should work?  Should taxpayers insure car loans, business loans, and every other type of loan?  Why should taxpayers be forced by the government via CMHC to insure mortgages, especially risky mortgages?

Political Motivation

Let’s say you’re a politician. You know that:

• You’ll get re-elected if you:
  • grow the economy, or
  • make your voters feel wealthier

• Economy will grow and your voters will feel wealthier, if you:
  • boost housing sales and prices

• Housing sales and prices will go up if more people buy houses
• More people, even if they can’t afford it, will buy houses if they can borrow and leverage more
• People can borrow and leverage more if you:
  • reduce down payment
  • extend amortization
  • reduce interest rate
  • enable banks to lend to risky borrowers

• Banks will lend more, if you remove their risk
• CMHC can remove the risk from the banks
• As long as you get re-elected, that’s all that matters. This built up of un-sustainable debt and fake wealth is the next politician’s problem.

What would you do?

Is this why down payment requirements went from 25 to 20 to 15 to 10 to 5 to 0 percent?  Is this why amortization went from 25 to 30 to 35 to 40 years?  Is this why a Canadian politician justified GM’s bailout by saying he wanted to support home prices?

Financial Motivation

Most politicians are likely homeowners and not renters.  Therefore, if they can continually increase home prices, they stand to benefit.

In China, government officials are making lots of money through grafts by helping the developers.  According to this article, one of the largest real estate developers in China stated:

"Corruption is everywhere...No wonder public opinion of anyone who has money equals corruption." 

"We are the number-one hated people in China."

"For the country, I think it's very dangerous." 

"the real estate bubble is disserving the nation…" 

"I happen to know that they don't need it so much. But it still doesn't stop me from producing so long as they are queuing up outside and want the product." 

"there is no apparent need for more buildings"

According to this article about China:

"Corruption is particularly rife in the real estate market.  Officials and developers often obtain choice pieces of property at bargain prices"

This corruption is not limited to China.

This Canadian CBC show called Condo Crunch (you might have to be patient as the video is slow to load) explains how condo buyers are taken advantage of and how the developers have the "ear of the parliamentarians":

(23:10 into the video) Lawyer:  "If you go into a new car showroom and order a specific car with four-wheel drive, power steering, air conditioning, and a whole list of extras, and they deliver you something that has very little resemblance,...the automobile associations, the consumers, the ministers of parliament across the country and in Ottawa, would be up in arms.  You can't do this.  When you buy a car, that's what you're entitled to get…" 

CBC:  "So, why is it okay with the condo…?" 

Lawyer:  "Because the builders are not subject to the same regulations as the car industry" 

CBC:  "Why not?" 

Lawyer:  "…[long pause]…you want this on tape right?" 

CBC:  "Yeah" 

Lawyer:  "Why not?  Because the builders have a lot of sway and the consumers don't.  And the consumers do not have the ear of the parliamentarians who make these laws." 

[scene break] 

CBC:  "We want to talk to the Ontario government about why condo buyers aren't better protected, but like the developer who sold us our condo, they don't want to touch this one either."

Why do "the builders have a lot of sway" with the politicians?

Marc Muzzo, Rudolph Bratty and Alfredo DeGasperis are real estate developers and former owners of Canada Homes and Greenpark.  They are also amongst the richest Canadians (source).  In the 1980's, the Globe and Mail implicated them for bribing city officials by giving a house to an official for three quarters or half price and dropping off baskets of cash in front of officials' homes.  Numerous city councillors were implicated.  The mayor of one of the suburban cities (Vaughan, Markham or Richmond Hill) received a house at a significant discount.  In return, the developers got their land re-zoned ahead of everybody else.  Other land owners were very angry.  One of the mayors had to step down.

According to this article:

"...Muzzo testified that paying bribes was standard practice..."

In the 1980's, Torontonians were up in arms and protesting against the development of their water front.  They argued that it should be park land and the water front should accessible to the public.  Nevertheless, tall condos went up.  Is it possible that the developers gave condo units to the politicians at significant discounts?

According to this article, an Ontario mayor involved her city in a $14.4 million land deal with her son, a real estate developer:

"people "fortunate enough to enjoy friendships" with the mayor have reaped benefits from those ties" 

"If the deal had gone through...[mayor's son] might have made more money than he otherwise would in a lifetime"

Is it possible that developers and the CREA lobbied, befriended, wined and dined or gave incentives to:

• CMHC executives to insure more and more risky mortgages?
• politicians to relax the mortgages rules from 25 years amortization to 30 to 35 to 40, and down payment from 25% to 20% to 15% to 10% to 5% to 0%?

Knowing that the relaxation of mortgage rules will fuel housing, did these CMHC executives and Canadian politicians stock up on investment properties before changing the rules?  U.S. Congressmen do insider trading before passing laws (source).  Why wouldn't Canadian politicians?

In the Liberal Sponsorship scandal, suppliers provided condos, furnished with prostitutes, to politicians and took politician wives on shopping trips.  (Read more)  Could the CREA or real estate developers be doing similar things?

CMHC has nine directors on its board.  Seven directors make or made their livelihood from real estate.  Even if they are no longer employed with real estate related companies, is it possible that they own more real estate than the average Canadian and therefore would benefit from ever increasing prices?  These directors are:

• Dino Chiesa, Chairman:
  "Principal, Chiesa Group commercial property investors...previously served as ViceChair of the Board of Trustees of the Canadian Apartment Properties Real Estate Investment Trust"
• Karen Kinsley, CEO:
  "Prior to joining CMHC, Ms. Kinsley was Vice-President and Treasurer with two real estate development companies...received the Award of Excellence in 2004 from the Canadian Home Builders’ Association in recognition of service to Canada’s home building industry.  In 2006, she was inducted into the Canadian Mortgage Hall of Fame by the Canadian Association of Accredited Mortgage Professionals in recognition of her service to the Canadian mortgage industry."
• Brian Johnston:
  "Johnston is the President of Monarch Corporation, one of Canada’s oldest and largest real estate companies. In addition...Johnston is an active member within the home-building industry.  He...is a Past President of the Ontario Home Builders’ Association."
• André G. Plourde:
  "Plourde has been President of Montreal Real Estate Group Inc. since 2001, an important commercial real estate brokerage firm in Montreal."
• Sophie Joncas:
  "...experience in the public and private sectors, including construction and real estate firms..."
• Michael Gendron:
  "...Gendron is Chief Financial Officer and part owner of Mancap Ventures Inc., a privately owned venture capital company with majority equity interest in a number of homebuilding and support companies..."
• Rennie Pieterman:
  "...served eight years on the Board of Directors of the London Home Builders’ Association, including as President in 2003.  She has been a member of the Association’s Renovators’ Council since 1994."

Which of the following would the CMHC directors personally benefit from and be more interested in?:

• perpetually raising home prices, or
• lowering prices for first-time buyers

Would they care about making homes affordable for young or future Canadians?

Effect of Manipulation

Due to the massive manipulation, it fuelled house prices, which fuelled the housing bubble.  One of the effects of a bubble is that the rising prices fuel two emotions:

• Greed  (Speculators jump on the bandwagon in hopes of making money.)
• Fear  (First time home-buyers panic as they rush to jump on, for fear of never being able to jump on later.)

Americans' household debt to income ratio peaked at approx. 124% in 2007, coinciding with the peak of their housing bubble and fake economy.  After the bubble burst, they have deleveraged down to approximately 105%.

Canadians' household debt to income ratio continued soaring to 150% in February 2011 (according to CBC), coinciding with Canada's housing bubble and fake economy.

Homes in Florida now cost $30 to $100 per square foot.

Homes in Canada now cost $200 to $700 per square foot.

In the 1970's, blue-collar, first-time home-buyers were able to come up with 25% down payment and afford a mortgage with 25 year amortization.  Now, with prices so high, white-collar, first-time home-buyers can only come up with 5% down payment and can only afford a mortgage with 35 year amortization.

What happens to the CMHC if the Canadian housing bubble bursts?  Like Fannie Mae and Freddie Mac, it will lose billions and this loss will be passed to taxpayers.

Now that housing is a bubble, is that good for everybody?  It is for homeowners, but what about non-homeowners and first-time buyers?  The younger generation, first-time buyers will have a lower standard of living because they will spend far more to get the same housing as somebody who bought before the bubble.

What about subsidized, affordable housing?  Now that house prices are so much higher, do taxpayers have to subsidize more affordable housing?

This is like taking one step forward and two steps back.

Read the following for explanation of how the housing bubble will make some people rich and some people poor:

Bubbles - Extreme Maker and Breaker of Wealth 

Real Estate - Ponzi Scheme?

Read the following for explanation of how housing bubbles have ruined countries and screwed the younger generation and made them much poorer.

Housing:  After the Bubble Bursts

Watch this video on CMHC's manipulation.