These PE Firms Are About To Get Crushed By Their Subprime Auto Bets

In the aftermath of the "great recession," private equity firms placed massive bets on subprime auto finance companies with the typical "thesis" going something like this: "well, people have to get to work don"t they?"...genius, if we understand it correctly.

Of course, the "thesis" seemed to be confirmed when auto securitizations performed relatively well throughout the financial crisis, amid a sea of mortgage bonds getting wiped out, and private equity titans were off to the races with wall street titans from Perella Weinberg to Blackstone and KKR scooping stakes in small niche lenders.

Unfortunately, as Bloomberg points out today, the $3 billion bet on subprime auto lenders hasn"t played out precisely to plan as the "well, people have to get to work" thesis has proved to be somewhat less than full proof.

A Perella Weinberg Partners fund has been sitting on an IPO of Flagship Credit Acceptance for two years as bad loan write-offs push it into the red. Blackstone Group LP has struggled to make Exeter Finance profitable, despite sinking almost a half-billion dollars into the lender since 2011 and shaking up the C-suite multiple times. And Wall Street bankers in private say others would love to cash out too, but there’s currently no market for such exits.

 

Since the turn of the decade, buyout firms, hedge funds and other private investors have staked at least $3 billion on non-bank auto lenders, according to Colonnade. Among PE firms, everyone from Blackstone and KKR & Co. to Lee Equity Partners, Altamont Capital and CIVC Partners waded in.

 

Many targeted smaller finance companies that often catered to the least creditworthy borrowers with nowhere else to turn. Overall, subprime car loans -- those extended to people with credit scores of 620 or lower -- have increased 72 percent since 2011. Last year, about 20 percent of all new car loans went to subprime borrowers.

 

“The PE guys sailed into this thing with stars in their eyes. Some of the businesses have done fine and some haven’t,” said Chris Gillock, managing director at Colonnade Advisors, a boutique investment bank. But right now, “it’s about as out-of-favor a sector as I can think of.”

Of course, the turnaround strategy was "simple." Given that subrpime auto collateral held up well during the great recession, private equity investors figured they were sitting on rock solid collateral that would holdup under even the most egregious loosening of underwriting standards.  Therefore, given that there was "no downside", lenders wholeheartedly embraced deteriorating underwriting standards, like stretching out terms so borrowers could "afford" cars they couldn"t really afford, as a way to grow their loans books. 

Alas, it didn"t work out as planned as subprime delinquencies are suddenly soaring and used car prices are tanking...making profits somewhat elusive.

Take Exeter. The company, which is licensed in all 50 states and works with roughly 10,000 dealerships, hasn’t been profitable since 2011, when Blackstone took a majority stake, an S&P Global Ratings report in September showed. That’s after the PE firm invested $472 million to help Exeter expand and cycled through three CEOs at the lender.

 

On a pretax basis, Exeter turned a profit in 2016 and 2017, according to Matthew Anderson, a spokesman at Blackstone. He added the New York-based firm hasn’t tried to sell the lender.

 

Blackstone may look to unload Exeter later next year, said a person familiar with the matter, who asked not to be identified because it’s private.

 

Bad loans remain an issue. This year, a rash of delinquencies in two bonds stuffed with loans that Exeter made in 2015 caused the securities to dip into their extra collateral to keep investors whole.

 

Another example is Flagship, which Perella Weinberg bought in 2010. (Innovatus Capital Partners, which manages the lender on behalf of Perella Weinberg, was formed by former Perella Weinberg managers last year after they split from the firm.)

As it turns out, the "well, people have to get to work" thesis only works to the extent that auto manufacturers maintain some level of discipline and refrain from exploiting their captive finance companies to flood the market with new supply...a move which will eventually lead to crashing used car prices and massive subprime securitization losses.

Unfortunately, as we pointed out last month, a review of the latest Fed data on auto loans underwritten by "Banks and Credit Unions" compared to those loans provided by "Auto Finance" companies prove that the nightmare scenario is playing out for subprime lenders...

First, taking a look at auto loans provided by traditional banks and credit unions, one can see some marginal deterioration in subprime auto loans.  That said, the deterioration is certainly nothing substantial with 90-day delinquencies pretty much in line with 2004/2005 levels and no where near the rates experienced in 2008/2009.

 

 

But, a drastically different picture emerges when looking at just the auto loans originated by America"s auto finance captives.  To our great "shock", auto OEMs in the U.S. seem to have been much more "flexible" on underwriting standards over the past couple of years resulting in delinquency rates that nearly rival those last experienced at the height of the great recession.

 

Of course, we"re sure that GM Financial and Ford Motor Credit just got unlucky with their deteriorating credit portfolios...certainly they would never knowingly attempt to game their own short-term financial success by putting millions of Americans into cars they can"t possibly afford, right?

This Michigan Bank Just Brought Back The Zero-Down Mortgage; They"ll Even Cover Your Closing Costs

A small savings bank in Michigan, Flagstar Bank, has come up with a genius, innovative new mortgage product that they believe is going to be great for their investors and low-income housing buyers: the "zero-down mortgage."  What"s better, Flagstar is even offering to pay the closing costs of their low-income future mortgage debtors.  Here"s more from HousingWire:

Under the program, Flagstar will gift the required 3% down payment to the borrower, plus up to $3,500 to be used for closing costs.

 

According to the bank, there is no obligation for borrowers who qualify to repay the down payment gift.

 

The program is available to only certain low- to moderate-income borrowers and borrowers in low- to moderate-income areas throughout Michigan.

 

Borrowers would not have to repay the down payment or closing costs. But a 1099 form to report the income would be issued to the Internal Revenue Service by the bank. So the gifts could be taxable, depending on the borrower’s financial picture.

 

Flagstar said borrowers who might qualify for its new program typically would have an annual income in the range of $35,000 to $62,000. The sales price of the home -- which must be in qualifying areas -- would tend to be in the range of $80,000 to $175,000.

Think it"s too good to be true?  Lakeshia Wiley of Detroit"s west side begs to differ...she recently went through Flagstar to purchase her new home and only had to come up with $350 of her own money.  Per the Detroit Free Press:

Lakeshia Wiley, 35, said she wouldn"t have been able to buy her first home without the Fifth Third Down Payment Assistance program and two other grants, including one from Southwest Solutions.

 

The brick home, built in 1951, is on Detroit"s west side, needed very little work and was priced at $50,000.

 

"I"m very excited every time I think about it. It"s beautiful. I love it," Wiley said.

 

Wiley never expected to be able to buy a home, though, because she has had a hard time saving for a down payment.

 

"I didn"t think I"d be able to do it," said the single mother who has two sons, ages 17 and 10, and a daughter, age 6. She works at a Detroit pharmacy.

 

Thanks to the down payment assistance and the grants, Wiley was able to buy her home in April. She had to bring less than $350 to the table at closing.

The Flagstar program is available in 18 counties in Michigan, and could be used for certain homes in Detroit and Flint, along with other cities.

Of course, we would highly encourage Flagstar to take a look back into ancient history for case studies on what happened the last time banks started peddling "innovative" mortgage products.  Here"s a summary of the Lehman Brothers case study:

Ironically, South Park also did some fascinating research on the topic:

Hedge Fund Homebuyers In The Hamptons Already Have A Plan To Game Trump"s Mortgage Cap

One of the key changes in the House GOP tax bill was to implement a cap on home interest deductions to the first $500,000 worth of mortgage debt and eliminate  interest deductions from second homes.  Of course, given active opposition from some very powerful realtor and homebuilder lobbying groups, it"s unclear whether the changes will find their way into the final tax bill.  But, at least according to Bloomberg, New York"s "millionaire, billionaire, private jet owning" hedge fund managers aren"t waiting around to find out and are already taking steps to game any potential tax changes.

Out in the Hamptons, Wall Street’s favored beach resort on Long Island, brokers and buyers already have a workaround for a tax-plan provision under consideration in Congress that would take away the mortgage-interest deduction for second homes.

 

A client of Brown Harris Stevens broker Jessica von Hagn who works at a hedge fund decided to turn the vacation home he’s buying into an investment property by setting up a limited liability company. That will allow him to deduct the interest and earn rental income at the height of the season from the modern home on Bridgehampton’s Lumber Lane, with four bedrooms, three baths and a swimming pool on an acre of land.

 

For the buyer: problem solved. For the Hamptons market: more high-end vacation properties getting listed as rentals, more competition and, most likely, falling rents.

 

“If you aren’t able to take advantage of the mortgage deduction for your second home, you’ll see more people putting their homes on the market and the inventory will grow,” von Hagn said. “There’s only a certain number of renters every season and we just keep adding more and more inventory.”

 

Whatever happens with the tax plan, the Bridgehampton buyer isn’t worried. He’s paying more than $2 million for his 3,400-square-foot vacation home, and though he’ll end up spending less time there than he had originally hoped, he figures the rent he’ll earn will more than cover his property taxes and help pay the mortgage.

Of course, it"s not just the Hamptons that would be impacted by the GOP tax bill as brokers in second-home markets across the U.S., from Cape Cod in Massachusetts to Lake Tahoe, California, are bracing for a hit.

A House version of the tax plan, passed by the Ways and Means Committee on Thursday, cuts the mortgage-interest deduction on second homes, and on home-equity loans, which buyers sometimes take out on their primary residence to pay for a vacation property. The Senate’s plan, details of which were released late Thursday, also does away with the home-equity deduction, but preserves the break for second-home mortgages.

That said, realtors, like Tim Bailey in Cape Cod, will undoubtedly call on his powerful lobbying groups to preserve his livelihood which "relies on selling second homes."

Even before any change is passed by Congress, the possibility that the second-home mortgage deduction will be gone is already changing the calculus for some buyers, said Timothy Bailey, a broker with John C. Ricotta & Associates Inc. in the affluent Cape Cod town of Chatham.

 

Bailey said an agent told him that one of her deals, for a $1.5 million vacation property, fell apart over the tax plan.

 

“My whole living relies on selling second homes,” Bailey said. “Because it’s a discretionary purchase, if they lose that deduction, it might be more attractive to rent.”

Of course, as we pointed out recently, this is just more unwelcome news for realtors in a market where buyers favoring lower-priced homes, you know those shacks costing less than $2 million, continued to rise in the third quarter, according to the latest Douglas Elliman Real-Estate Report. This left the high end of the market in a double-bind as supplies of new homes hit the market while sales tapered off...

Purchasers agreed to pay more than the asking price in 10 percent of deals for properties under $3.3 million -- this quarter’s definition of “non-luxury” homes, making up the bottom 90 percent of the market, according to a report Thursday by appraiser Miller Samuel Inc. and brokerage Douglas Elliman Real Estate. It was the biggest share of transactions with bidding wars since the firms began tracking the data in the second quarter of 2016.

 

In their zeal for lower-end deals, buyers snapped up condos as well. Those units -- with a median sale price of $567,500 -- were available for just 97 days on average before going under contract, the fastest clip in six years of record-keeping. On the high-end, buyers showed less interest in acquiring luxury homes than sellers did in listing them. Inventory in that top 10 percent of the market jumped 22 percent, the biggest pile-up in two years.

 

“The market is looking towards those smaller, more manageable homes,” said Carl Benincasa, a regional vice president at Douglas Elliman who oversees sales in the Hamptons. “That’s certainly been a trend we’ve been observing.”

Meanwhile, the real question, at this point, is will this extreme show to aggression towards America"s billionaire class be allowed to stand by the Senate?  What say you?

The Republican Tax Plan Will Crush These Housing Markets

For the past few weeks, Chuck Schumer and Nancy Pelosi have screamed to anyone who would listen that the GOP tax plan is nothing more than a tax break for millionaires and an attack on middle class working families.  But, as the Wall Street Journal points out this morning, America"s millionaire, billionaire, private jet owners living in expensive urban areas are set to lose "bigly" if Trump"s $500,000 cap on the mortgage interest deduction survives.

But in the priciest markets, concentrated in some of the nation’s largest coastal cities, the impact could be significant. In the San Jose, Calif., metropolitan area, 75% of new mortgage loans thus far in 2017 were for more than $500,000, according to an analysis by CoreLogic Inc., a housing data provider. The median home price there is more than $1 million, and even small starter homes can climb well above the proposed cap.

 

In the San Francisco metro area, 60% of new loans were for more than $500,000, while in Los Angeles and San Diego, the figures were 44% and 37%, respectively.

 

The impact wouldn’t be limited to California. In Honolulu, 48% of loans were greater than $500,000, while the figures for the New York area and Seattle were 22% and 25%, respectively.

 

An analysis by ATTOM Data Solutions yielded similar results. In the Washington, D.C., area, 35% of purchase and refinance loans in 2017 thus far were for more than $500,000. In Hawaii, 15% of loans fell into that category, while in California 12% did.

In addition to capping the mortgage interest deduction, the current GOP bill also limits the amount of property taxes that households can deduct to $10,000 annually.

Not surprisingly, the assault on McMansions has angered the realtor lobby which we"re certain will fight tooth and nail to preserve the status quo.

Jeff Barnett, a California realtor and vice chairman of the National Association of Realtors’ large-firm real-estate services committee, said his area will be hit “very, very hard” if the tax bill passes. Even if corporate tax cuts help boost the economy, he doesn’t think that will be enough to compensate.

 

“You’ve taken away so many incentives for housing, they can’t spend” the money from any extra economic growth, he said.

Of course, as we pointed out earlier this week (see: Trump Is About To Crush Home Prices In Counties That Voted For Hillary: Here"s Why), Clinton won the vote in the top 45 counties in the country with the highest median home prices which has resulted in rampant speculation that the mortgage cap is nothing more than a clever punishment levied on Democratic voters.

As Dennis Lee calculated, "assuming that all of these homeowners are taxed at a marginal rate of 39.6%, we find that the increase in tax burden during the first 12 months of homeownership driven solely by the mortgage interest and property tax deduction caps varies from $0 for the county with the 20th highest median home price (San Miguel County, Colorado) to approximately $7,200 for the highest-priced county (San Francisco County, California)." Barclays" conclusion: these counties - all of which are largely pro-Clinton - would need a 0-11% decline in their median home prices to keep the after-tax monthly mortgage and property tax payments the same for would-be buyers.

Of course, only time will tell whether the swamp (a.k.a. "The National Association of Realtors" in this case) will allow this particular component of the GOP tax bill to survive...

Foreclosed $51 Million "Billionaire"s Row" Penthouse Sells At A 30% Discount

Kola Aluko’s posh penthouse apartment in One57, one of Manhattan’s most expensive luxury towers, has finally sold after months of delays in what New York realtors agree is the most expensive residential foreclosure in city history.

The sale price - a paltry $36 million - suggests that the stress seen in the ultra-high-end real estate market in New York City has only worsened as buyers brace for a glut of new luxury buildings coming online in the coming years.

The buyer of unit 97, one of five bidders aside from the bank, wouldn’t answer questions, and his name wasn’t immediately available. Aluko purchased the building through shell companies. Recently, his assets have been seized by authorities in several countries as he’s wanted for bribing officials to receive lucrative contracts with his country’s state-owned oil company, Bloomberg reported.

Aluko bought the 6,240-square-foot (580-square-meter) residence in December 2014 for $50.9 million, according to New York City records. The sale yielded a compound annual return of about minus 11%.

And in September 2015, he took out an unusually large mortgage with an unusually short term: one year. The $35.3 million mortgage was obtained from Luxembourg-based lender Banque Havilland SA. The full payment of the loan was due one year later, according to court documents filed in connection with the foreclosure. The borrower failed to repay, and now Banque Havilland has forced a sale to recoup its funds.

“It’s probably the most-expensive foreclosure we’ve ever seen in luxury development,” said Donna Olshan, president of high-end Manhattan brokerage Olshan Realty Inc. “I don’t know of a foreclosure that’s larger than that."

WSJ reported in August that luxury condos in Billionaires’ Row have faced steep discounts as building owners have struggled to find buyers.

An analysis of condominium records shows the average discount on nine contracts signed at the Baccarat in 2016 was 22% below the peak asking prices of 2014, when the market was red hot. These include the sprawling 7,300-square-foot penthouse plus terrace that sold in June 2016 for $42.6 million, soon after the asking price was from $60 million to $54 million. Overall that amounted to a 29% price reduction.

One57 went on the market in 2011, and as of August there were still five units for sale. As we’ve previously reported, foreclosure proceedings were started in January. An auction scheduled for July was delayed after a creditor claimed Aluko owed it about $83 million for gasoline and jet fuel.
 

World"s Longest Bull Market (55 Years) In Australian House Prices Is Over, According To UBS

This morning, CoreLogic released its monthly report on Australian house prices – the world’s longest running bull market. Finally, measures to tighten credit standards and dissuade overseas buyers (especially Chinese in Sydney and Melbourne) are beginning to bite and price rises ground to a halt last month. From the report...

Since moving through a peak rate of growth in November 2016, capital gains across Australia’s housing market have been losing momentum, with national dwelling values unchanged over the month of October. For October, conditions were flat across both the combined capital cities and the combined regional areas of Australia, however over the past twelve months growth in the capital cities (+7.0%) has outperformed the regional areas (+4.9%).

 

CoreLogic head of research Tim Lawless said, “The slowdown in the pace of capital gains can be attributed primarily to tighter credit policies which have fundamentally changed the landscape for borrowers.” 

 

“Lenders have tightened their servicing tests and reduced their appetite for riskier loans, including those on higher loan to valuation ratios or higher loan to income multiples.  Additionally, interest only borrowers and investors are facing premiums on their mortgage rates which are likely to act as a disincentive, especially for investors who are generally facing low rental yields on investment properties. 

 

“In fact, the peak rate of growth in dwelling values lines up closely with the peak growth rate for investment lending in late 2016.   We saw the housing market respond in a similar fashion through 2015, and the first half of 2016 as investors faced tighter credit conditions following the announcement from APRA that lenders couldn’t surpass a 10% speed limit on investment lending.”

The top line in CoreLogic’s summary table below shows that Sydney prices seem to be leading national prices lower.

Following the release of the data, Bloomberg reports that UBS is calling an end to the boom in Australian housing...

The housing boom that has seen Australian home prices more than double since the turn of the century is “officially over,” after data showed prices now flatlining, UBS Group AG said.

 

National house prices were unchanged in October from September, while annual growth has slowed to 7 percent from more than 10 percent as recently as July, CoreLogic data released Wednesday showed. “There is now a persistent and sharp slowdown unfolding,” UBS economists led by George Tharenou said in a report.

 

“This suggests a tightening of financial conditions is unfolding, which we expect to weigh on consumption growth via a fading household-wealth effect.”

 

An end to Australia’s property boom will be welcome news for first-time buyers, who have struggled to break into the market after surging prices propelled Sydney past London and New York to be the second-most expensive housing market. Less impressed may be property investors, already squeezed by regulatory lending curbs that drove up mortgage rates.

 

The cooling housing market may encourage the Reserve Bank to keep interest rates at a record low. A rate hike would be undesirable as it would put further downward pressure on dwelling prices, said Diana Mousina, senior economist at AMP Capital Investors.

The regulatory crackdown on the insanely loose practice of lending on high loan to valuation ratios is well overdue. This was permitting speculators to use unrealized gains on one property as a down payment on another property, then another property as prices roses, and so on. See our post from last month “Australia Mortgage Market Is Now A $1.7 Trillion ‘House Of Cards.’”

As we noted at the times, over a decade ago, the U.S. residential housing market was revealed to be perhaps the biggest ponzi scheme ever created as easy financing enabled people to buy/build countless investment properties, that they were in no way adequately capitalized to own, with no money down all based on the premise that the house could be "flipped" before the first mortgage payment even came due.  It was a classic ponzi that worked great for a while but inevitably turned south when home prices suddenly soured and their was no cash equity backing the trillions of dollars in outstanding mortgage debt. But, if a new report from LF Economics is even directionally accurate, then the bubble currently percolating in Australia could take the residential housing ponzi game to a whole new level courtesy of a "creative" little product called "cross-collateralized residential mortgages."

The Australian mortgage market has “ballooned” due to banks issuing new loans against unrealised capital gains of existing investment properties, creating a $1.7 trillion “house of cards”, a new report warns.

 

The report, “The Big Rort”, by LF Economics founder Lindsay David, argues Australian banks’ use of “combined loan to value ratio” — less common in other countries — makes it easy for investors to accumulate “multiple properties in a relatively short period of time despite high house prices relative to income”.

 

“The use of unrealised capital gain (equity) of one property to secure financing to purchase another property in Australia is extreme,” the report says.

 

“This approach allows lenders to report the cross-collateral security of one property which is then used as collateral against the total loan size to purchase another property. This approach substitutes as a cash deposit.

 

“This has exacerbated risks in the housing market as little to no cash deposits are used.”

Yes, you read that correctly...Australian housing speculators can literally use unrealized gains in investment properties as a "cash substitute" for down payments on other investment properties.  Of course, we"re not experts at "the mathematics," but if you constantly take every dollar worth of equity you accrue and pledge it as collateral toward a new purchase then doesn"t that mean the entire system is built on debt and no actual equity at all?

Earlier this month, the Bank for International Settlements (BIS) released a new working paper,  “Interest rates and house prices in the United States and around the world”.

This identified Australia’s 55-year housing bull market – 50 years from 1961-2010 then 2013-2017 without a downswing in between – as the longest in world. The US housing bull market from 1992-2006 was a mere 15 years. This was the BIS methodology.

Another way to appreciate the persistence of house prices is to contrast the length of their upswings and downswings. We define an upswing (downswing) as a period of house price increases (decreases) sustained in an individual country for three years or more. Based on this definition, periods of upswing accounted for nearly 80% of the advanced economy sample. The up swings lasted on average 13 years; with the longest one, in Australia, still continuing after half a century.

Here are the results in tabular form – Australia is third from bottom...

Since 2000, the BIS found that Australia has seen the second largest increase in real house prices, only exceeded by New Zealand – where the new government has just banned foreign buyers from the market.

 

Our gut feeling is that today’s data signals the beginning of a “Minsky Moment” for the Australian housing market.

How Many Hours Americans Need To Work To Pay Their Mortgage

When it comes to the cost of living in cities, a general rule of thumb is that housing prices are much higher in the country’s economic and population hubs, especially in the cities along the coasts.

As Visual Capitalist"s Jeff Desjardins notes, particularly in recent years, prices have been pushed sky-high in places like New York City or San Francisco through a combination of limited supply of new homes, increasing demand, shifting demographics, and government regulations.

PUTTING IT INTO PERSPECTIVE

Today’s visualization from HowMuch.net applies a common denominator to compare 97 of the biggest cities in the United States. Using a measure of median household income against the average mortgage payment in each city, we get a gauge of how many hours must be worked each month just to pay down the house.

The visualization uses data from the U.S. Census for household income and Zillow for median home listing price, while calculating mortgage payments based on a standard 30-year term.

Courtesy of: Visual Capitalist

THE RESULTS

Using the above method to compare the amount of hours it takes to pay down a monthly mortgage, we see some interesting contrasts in the country.

Here are the five most expensive cities in the United States for housing:

With about 170 hours in a normal work month, the average people in these cities are spending 50% or more of their income just to pay down their mortgages. It’s worst in New York City and Los Angeles, where at least 65% of income is going towards housing.

These cities stand in stark contrast to the five cheapest cities based on hours of work needed:

In a city like Memphis, TN it takes only 18.4 hours of work a month to pay down the average mortgage. That’s equal to only about 10% of monthly household income.

COASTAL DISPARITY

Interestingly, even though coastal hubs have high prices relative to the cities in the middle of the country, they differ quite widely against each other. This discrepancy does not necessarily show in terms of ranking, but more in terms of the actual hours of work needed.

Washington, D.C., for example, requires less than half the hours of work to pay down a mortgage than Los Angeles or New York City. Meanwhile, a popular west coast hub like Seattle only needs 72.8 hours in comparison to New York’s 113.5 hours.

Vulture Investors Swarm To Houston As Flooded Homes Sell For 40 Cents On The Dollar

      "The time to buy is when after there"s blood water in the streets."

As 1,000"s of families along the Texas shoreline continue to struggle with putting their lives back together following the apocalyptic landfall of Hurricane Harvey roughly 6 weeks ago, vulture investors are increasingly swooping in to exploit their misery with offers to buy flooded homes for cents on the dollar.  As Bloomberg points out this morning, one such investor is Bryan Schild who has sourced capital from local "hard-money lenders" to scoop up 30 flooded homes for as little as 40 cents on the dollar.

Bryan Schild drives through the byways of Houston looking for what could be the investment opportunity of a lifetime: homes selling for as little as 40¢ on the dollar. “We Pay Cash For Flooded Homes $$$$$$$$ Don’t fix it, sell it. Quick close,” read the signs piled in the back seat of his Ford pickup.

Schild stops by a ranch-style house where 74-year-old Paul Matlock lives with his wife, disabled from multiple sclerosis. Matlock is desperate to leave and is considering Schild’s offer of $120,000—half the home’s value three weeks earlier. A half-dozen other investors have made offers, one as low as $55,000. “The whole thing makes me feel like there’s a bunch of vultures sitting on my back fence,” Matlock says. “They’re waiting for the dead body to fall over.”

It’s axiomatic on Wall Street that the time to buy is when fear overtakes greed—when blood (or, in this case, water) is in the streets. Now some are eyeing the billions of dollars in hurricane-ravaged property in Texas and Florida and deciding it may be the time to take out their checkbooks. Investors such as Schild figure they can buy low, either fix up and flip the houses or rent them out for several years, and unload them later, doubling their money or more.

And if exploiting the elderly isn"t enough to make you a little queasy, how about taking advantage of a disabled Army vet who has been forced to live out of a hotel room and eat two meals a day just to save a little cash after he lost his home to Hurricane Harvey...

One of Schild’s prospects is Joseph Hernandez, a disabled U.S. Army veteran married to a housekeeper. The couple are living in a hotel and saving money by eating only two meals a day. Schild has made them a painful offer. If they walk away from their two-bedroom house, worth $127,000 before Hurricane Harvey, Schild will pick up the mortgage payments, paying nothing else. Although he says he sympathizes with the Hernandezes’ plight, he thinks the offer is fair because he figures the home is now worth less than its $65,000 mortgage.

Hernandez is in a bind. He didn’t buy flood insurance because his house wasn’t in a high-risk area. He can’t afford to rebuild, and he’s been told he’s eligible for only $23,000 in federal assistance. If he turns over the deed, he’s looking at losing the entire $60,000 in equity he had before the flood. “It’s blurry, what’s coming,” he says. “We’ll probably have to sell to an investor, and that’s not good. We were forced out.”

Hernandez isn’t ready to take Schild’s deal. But Matlock, who rescued his disabled wife from chest-high water, is tempted by the investor’s $120,000 offer. Their home, now stripped to the beams, has flooded twice in two years. Schild says Matlock should be able to recover much of his loss on the house’s value through federal flood insurance. (In past storms, homeowners have complained the program lowballed them.) Before he leaves, he asks Matlock to spread the word. “Anybody looking to sell, tell them to call me,” he says. “I’ll give them a bid.”

But, it"s not just small-time, local investors looking to earn big profits from the misery of displaced Texans.  Nope, wall street investors, led by Bain Capital, are also getting involved.

The cycle begins with small-time investors such as Schild, who’s bought more than 30 waterlogged houses for an average $175,000 apiece. Then Wall Street swoops in. Gary Beasley, former chief executive officer of Waypoint Homes, also sees an opportunity. He’s pitching private equity firms and pension funds on the potential profit in buying flooded homes, repairing them, and renting them back to homeowners.

Bain Capital LP and billionaire Marc Benioff, co-founder of Salesforce.com Inc., are backing Beasley’s two-year-old company, Roofstock Inc. It runs a website where investors can buy and sell single-family rental properties. Beasley thinks owner-occupants may be interested in selling there, too, and that flooded neighborhoods are the Next Big Thing. “It’s much like the housing crisis, when the institutional guys came in to buy homes nobody wanted,” he says. Like other investors, Beasley and Schild view themselves as helping homeowners to move on and Houston to rebuild.

Of course, as Andrea Heuson, a finance professor at the University of Miami, points out, most of the people selling aren"t doing so because of a lack of financial sophistication that impairs their ability to comprehend the fact that they"re getting shafted but rather just a complete lack of alternatives.

Others take a less rosy view. “What worries me is people making pretty dramatic decisions without the education to figure out what the alternatives are and without looking at the situation rationally,” says Andrea Heuson, a finance professor at the University of Miami who specializes in mortgages. Some of those considering Beasley’s strategy don’t want to be named for fear of looking like catastrophe profiteers, Beasley says.

Many homeowners would be forgiven for panicking. During hurricanes Harvey and Irma, wind and water damaged almost 1.8 million homes, causing uninsured flood losses of as much as $57 billion, according to CoreLogic Inc., a real estate data firm. Homeowners without federal flood insurance are most likely to be desperate. Those with policies don’t yet know how much they’ll get for their losses, which is key to deciding whether it makes sense to sell.

On the upside, these displaced families will be able to buy their homes back from Bain at double in the price in 5 years or so...

The Global Housing Bubble Is Biggest In These Cities

Two years ago, when UBS looked at the world"s most expensive housing markets, it found that London and Hong Kong were the only two areas exposed to bubble risk.

What a difference just a couple of years makes, because in the latest report by UBS wealth Management, which compiles the bank"s Global Real Estate Bubble Index, it found that eight of the world"s largest cities are now subject to a massive speculative housing bubble.  And while perpetually low mortgage rates are clearly to blame for the rapid ascent of home prices, Chinese money laundering operations clearly seem to also be playing a role as their favorite markets of Vancouver, Toronto and Sydney all made this year"s list.

Bubble risk seems greatest in Toronto, where it has increased significantly in the last year. Stockholm, Munich, Vancouver, Sydney, London and Hong Kong all remain in risk territory, with Amsterdam joining this group after being overvalued last year. Valuations are stretched in Paris, San Francisco, Los Angeles, Zurich, Frankfurt, Tokyo and Geneva as well. In contrast, property markets in Boston, Singapore, New York and Milan seem fairly valued, while Chicago remains undervalued, just as it was last year.

Price bubbles are a regularly recurring phenomenon in property markets. The term “bubble” refers to a substantial and sustained mispricing of an asset, the existence of which cannot be proved unless it bursts. But recurring patterns of property market excesses are observable in the historical data. Typical signs include a decoupling of prices from local incomes and rents, and distortions of the real economy, such as excessive lending and construction activity. The UBS Global Real Estate Bubble Index gauges the risk of a property bubble on the basis of such patterns.

As UBS points out, artificially low interest rates in Europe, for example, have kept mortgage payments below their 10-year average despite real prices surging 30% since 2007. 

Falling mortgage rates over the last decade have made buying a home vastly more attractive, which increased average willingness to pay for home ownership. In European cities, for example, the annual usage costs for apartments (mortgage interest payments and amortization) are still below their 10-year average, despite real prices escalating 30% since 2007. In Canada and Australia, too, a large part of the negative impact of higher purchase prices on affordability was cushioned by low mortgage rates.

The intuition is that the national and global growth of high-wealth households creates continued excess demand for the best locations. So, as long as supply cannot increase rapidly, prices in the so-called “Superstar cities” are supposed to decouple from rents, incomes and the respective countrywide price level. The superstar narrative has received additional impetus in the last couple of years from a surge in international demand, especially from China, which has crowded out local buyers. An average price growth of almost 20% in the last three years has confirmed the expectations of even the most optimistic investors.

Of course, at some point even artificially low interest rates can"t offset 10%-20% annual real home price increases, which imply a doubling of prices every 4-7 years.  

Annual price-increase rates of 10% correspond to a doubling of house prices every seven years, which is not sustainable. Nevertheless, the fear of missing out on further appreciation predominates among home buyers. After all, the price increases appear rational, for three reasons.

First, financing conditions in many cities are now more attractive than ever before. Second, the global increase in wealthy households seemingly creates constant demand for the most attractive residential areas. Third, building activity cannot keep pace with this demand.

Expectations tend to be prone to exaggerations in boom phases. The optimistic projections of the trends outlined above create ever-greater price fantasies. However, should sentiment change or interest rates increase, a correction is practically inevitable. In the past, rising interest rates almost always triggered a crash in housing markets. In addition, the dependence of prices on international flows of capital represents an incalculable risk. Plus, once demand fell, even the low growth in supply would no longer provide an anchor.

Meanwhile, the U.S. has managed to avoid UBS"s bubble territory, and a repeat of the 2007 housing crisis, for now...even though markets like San Francisco and Los Angeles look set to give it another try...

The Real Estate Market, Explained In One Graph

The U.S. housing market has now surpassed its pre-recession peak by 4.3%. This is great news for the economy, although there’s still an ongoing debate about the possibility of another housing crash.

Whatever you believe about real estate, there’s no doubt that prices depend on where you live. HowMuch.net created a new visualization to demonstrate what this looks like...

According to Zillow,  the median price for a house is $200,400, up 7.4% over last year.

So, naturally, how big of a house can you afford with a mortgage of $200,400? Our visualization answers this question on a sliding color-coded scale. We broke each state into a grid with 25 boxes, representing 2,500 square feet—that’s a large home with at least 3 bedrooms and 3 bathrooms. Green boxes indicate affordability and orange and red boxes mean it’s expensive. We then graphed how much house you can purchase with exactly $200,400.

The results highlight the enormous differences between housing values in the U.S. It is all about location, location, location.

In the Hoosier State, your $200k mortgage can purchase 2,330-sq. ft., but in Washington D.C. only 497 sq. ft. That’s the difference between a large home and a cramped studio apartment.

The fact that Washington D.C. boasts the most expensive housing market in the coutry should come as no surprise to observers of the economy in the aftermath of the recession. While real estate market crashed in other metro areas, it kept rising in Washington D.C. The nation’s capital has actually started to come back down to Earth, but the area is still an outlier. If you can get a high-paying job in the government, chances are that you’ll need to find a roommate to make ends meet.

Except for Ohio, rural states without large cities dominate the list of affordability. The five most affordable states to purchase a home for a mortgage of $200,400:

1. Indiana - 2,330 sq. ft.

2. Arkansas - 2,227 sq. ft.

3. Mississippi  - 2,277 sq. ft.

4. West Virginia - 2,252 sq. ft.

5. Ohio - 2,252 sq. ft. 

The five most unaffordable states highlight pockets of high economic growth in the U.S. (like Colorado) or a restriction in housing availability (like Hawaii, which is in the middle of the Pacific Ocean!).

1. Washington D.C. - 403 sq. ft.

2. Hawaii - 418 sq. ft.

3. California - 713 sq. ft.

4. Massachusetts - 887 sq. ft.

5. Colorado - 982 sq. ft.

Think about the inequality here: The fourth most unaffordable state in the country (Massachusetts) is still more than twice as affordable as Washington D.C. and Hawaii.

Whether you are buying a home or just renting, chances are you know that the price you pay can vary from neighborhood to neighborhood. If you ever think you are paying too much, just know that someone else in Washington D.C. is paying a heck of lot more for a smaller home.

Data: Table 1.1 

Australia Mortgage Market Is Now A $1.7 Trillion "House Of Cards"

Over a decade ago, the U.S. residential housing market was revealed to be perhaps the biggest ponzi scheme ever created as easy financing enabled people to buy/build countless investment properties, that they were in no way adequately capitalized to own, with no money down all based on the premise that the house could be "flipped" before the first mortgage payment even came due.  It was a classic ponzi that worked great for a while but inevitably turned south when home prices suddenly soured and their was no cash equity backing the trillions of dollars in outstanding mortgage debt.

But, if a new report from LF Economics is even directionally accurate, then the bubble currently percolating in Australia could take the residential housing ponzi game to a whole new level courtesy of a "creative" little product called "cross-collateralized residential mortgages."

The Australian mortgage market has “ballooned” due to banks issuing new loans against unrealised capital gains of existing investment properties, creating a $1.7 trillion “house of cards”, a new report warns.

The report, “The Big Rort”, by LF Economics founder Lindsay David, argues Australian banks’ use of “combined loan to value ratio” — less common in other countries — makes it easy for investors to accumulate “multiple properties in a relatively short period of time despite high house prices relative to income”.

“The use of unrealised capital gain (equity) of one property to secure financing to purchase another property in Australia is extreme,” the report says.

“This approach allows lenders to report the cross-collateral security of one property which is then used as collateral against the total loan size to purchase another property. This approach substitutes as a cash deposit.

“This has exacerbated risks in the housing market as little to no cash deposits are used.”

Yes, you read that correctly...Australian housing speculators can literally use unrealized gains in investment properties as a "cash substitute" for down payments on other investment properties.  Of course, we"re not experts at "the mathematics," but if you constantly take every dollar worth of equity you accrue and pledge it as collateral toward a new purchase then doesn"t that mean the entire system is built on debt and no actual equity at all?

As LF Economics points out, just like the American mortgage bubble, the current ponzi scheme in Australia is also completely dependent on constantly rising prices.

The report describes the system as a “classic mortgage Ponzi finance model”, with newly purchased properties often generating net rental income losses, adversely impacting upon cash flows.

“Profitability is therefore predicated upon ever-rising housing prices,” the report says. “When house prices have fallen in a local market, many borrowers were unable to service the principal on their mortgages when the interest only period expires or are unable to roll over the interest-only period.”

And, just like the American bubble, much of the madness is being funded by unsuspecting foreign investors.

LF Economics argues that while international money markets have until now provided “remarkably affordable funding” enabling Australian banks to issue “large and risky loans”, there is a growing risk the wholesale lending community will walk away from the Australian banking system.

“[Many] international wholesale lenders ... may find out the hard way that they have invested into nothing more than a $1.7 trillion ‘piss in a fancy bottle scam’,” the report says.

Meanwhile, there is no shortage of "success stories" from people who make next to no money doing their "day jobs" but have been able to acquire dozens of investment properties with nothing but debt.

Last month, a young Sydney couple revealed how they had racked up $1.2 million in debt on a portfolio of five properties in just two years.

Roy Palleson and Rowena Ebona, appearing on the ABC’s Four Corners, said they had no concerns about their debt — nearly 10 times their combined income of $135,000 — and were hoping to expand their portfolio to 20 investment properties “initially”.

Prominent Sydney property investor Nathan Birch, who accumulated more than 200 properties worth an estimated $55 million by channelling the equity from capital gains into deposits for new purchases, earlier this year announced he was selling off some of his portfolio.

Mr Birch blamed the move on tougher loan serviceability restrictions by the banks. “Anytime you withdraw equity, you need to show income to service that new loan,” he said. “Sadly, the banks don’t value rental income as highly as they once did.”

Eddie Dilleen, a young investor with 10 properties worth about $2 million, last month said he was not fazed by tightening lending environment or talks of a housing bubble.

Mr Dilleen said the majority of his portfolio was positively geared, largely because he avoided borrowing against existing properties, instead saving up for each new deposit by working several jobs.

Conclusion: "Short everything that guy has touched."

NYC Commercial Real Estate Sales Plunge Over 50% As Owners Lever Up In The Absence Of Buyers

So what do you do when the bubbly market for your exorbitantly priced New York City commercial real estate collapses by over 50% in two years?  Well, you lever up, of course. 

As Bloomberg notes this morning, the "smart money" at U.S. banking institutions are tripping over themselves to throw money at commercial real estate projects all while "dumb money" buyers have completely dried up.

A growing chasm between what buyers are willing to pay and what sellers think their properties are worth has put the brakes on deals. In New York City, the largest U.S. market for offices, apartments and other commercial buildings, transactions in the first half of the year tumbled about 50 percent from the same period in 2016, to $15.4 billion, the slowest start since 2012, according to research firm Real Capital Analytics Inc.

At the same time, the market for debt on commercial properties is booming. Investors of all stripes -- from banks and insurance companies to hedge funds and private equity firms -- are plowing into real estate loans as an alternative to lower-yielding bonds. That’s giving building owners another option to cash in if their plans to sell don’t work out.

“Sellers have a number in mind, and the market is not there right now,” said Aaron Appel, a managing director at brokerage Jones Lang LaSalle Inc. who arranges commercial real estate debt. “Owners are pulling out capital” by refinancing loans instead of finding buyers, he said.

But don"t concern yourself with talk of bubbles because Scott Rechler of RXR would like for you to rest assured that the lack of buyers is not at all concerning...they"ve just "hit the pause button" while they wander out in search of the ever elusive "price discovery."  

At 237 Park Ave., Walton Street Capital hired a broker in March to sell its stake in the midtown Manhattan tower, acquired in a partnership with RXR Realty for $810 million in 2013. After several months of marketing, the Chicago-based firm opted instead for $850 million in loans that value the 21-story building at more than $1.3 billion, according to financing documents. The owners kept about $23.4 million.

“The basic trend is you have a really strong debt market and a sales market that has hit the pause button while it seeks to find price discovery,” said Scott Rechler, chief executive officer of RXR.

The debt market has become so appealing that landlords are looking at mortgage options while simultaneously putting out feelers for buyers, said Rechler, whose company owns $15 billion of real estate throughout New York, New Jersey and Connecticut. That’s a departure for Manhattan’s property owners, who in prior years would pursue one track at a time, he said.

Of course, this isn"t just a NYC phenomenon as sales of office towers, apartment buildings, hotels and shopping centers across the U.S. have been plunging since reaching $262 billion nationally in 2015, just behind the record $311 billion of real estate that changed hands in 2007, according to Real Capital. Property investors are on the sidelines amid concern that rising interest rates will hurt values that have jumped as much as 85 percent in big cities like New York, compounded by overbuilding and a pullback of the foreign capital that helped power the recent property boom.

The tough sales market has put some property owners in a bind -- most notably Kushner Cos., which has struggled to find partners for 666 Fifth Ave., the Midtown tower it bought for a record price in 2007. The mortgage on the building will need to be refinanced in 18 months.

Thankfully, at least someone interviewed by Bloomberg seemed to be grounded in reality with Jeff Nicholson of CreditFi saying that it just might be a "red flag" that buyers have completely abandoned the commercial real estate market at the same time that owners are massively levering up to take cash out of projects.

Some lenders view seeking a loan to take money off the table as a red flag, according to Jeff Nicholson, a senior analyst at CrediFi, a firm that collects and analyzes data on real estate loans. It may signal the borrower is less committed to the project, and makes it easier to walk away from the mortgage if something goes wrong, he said.

But, it"s probably nothing...

Housing Bubble 2.0: Home Equity Loans Soar To Highest Level Since 2008

It seems as though the practice of using one"s home as a personal ATM machine is making a "yuge" comeback of late thanks, at least in part, to the same aggressive lending terms and attractive teaser rates that nearly sank the world economy just under a decade ago.  According the Wall Street Journal and Equifax, home equity originations soared to $46 billion in 2Q 2017, the highest level since the market collapsed in 2008.

“If customers feel like their home values are stable or increasing, and if they feel like their job prospects are good—that they will have the ability to pay back a loan they take—then they will start to take out more home-equity lines,” said Mike Kinane, head of U.S. consumer-lending products at TD Bank. “That is what we are starting to see.”

Home-equity line originations rose 8% to nearly $46 billion in the second quarter, their highest level since 2008, according to credit-reporting firm Equifax . Borrowing via cash-out mortgage refinances hit $15 billion, up 6% from a year earlier, according to recent data from Freddie Mac.

The main engine driving demand: rising home prices. The median sale price of an existing home rose to $263,800 in June, the highest on record, up 40% from $187,900 at the start of 2014, according to the National Association of Realtors.

But, don"t worry because the banks and loan officers re-inflating the housing bubble are here to assure you that it"s all different this time around...

Banks insist the increased borrowing doesn’t herald a return to housing-bubble days when consumers came to view their homes as cash registers. Banks say they are being more cautious in how they make such loans and some add they are encouraging borrowers to tackle renovations or consolidate debt—uses that are considered investments rather than luxuries.

“We continue to watch what’s going on and the way it’s being done, but it’s much different from before the crisis,” said Tom Wind, head of U.S. Bancorp ’s home-mortgage division. Mr. Wind added that the bank expects this type of borrowing to keep rebounding because the equity in people’s homes is “meaningful and people want things like renovations.”

...because home prices appreciating at over 5x inflation is just "normal."

But perhaps the best example of why "this time is different" is illustrated by the case study of Marc Yu of Atlanta who took out a home equity loan on his family"s home just so he could afford the down payment on an "investment property".  See, completely different this time.

Marc Yu took out a home-equity line to buy an investment property, a house he now rents out at a profit. He has thought about paying off the line early, but instead decided to keep it open as long as interest rates stay relatively low.

“I wanted to use the equity” in the first house, rather than “it just sitting there,” said Mr. Yu, who works in digital forensics in the Atlanta area.

Seems like we"ve seen this movie before...

BOE Warns Popular 35-Year Mortgages Shackle Consumers With "Lifetime Of Debt"

Consumers in the UK have been on a credit binge since the Bank of England cut its benchmark interest rate to an all-time low as investors braced for the widely anticipated economic shock of Brexit – a shock that, unsurprisingly, has yet to arrive, despite warnings from the academic establishment that a "leave" vote would trigger an imminent economic catastrophe. And now, with total credit growth rising at 10% a year, the BOE is warning that the increase in unsecured lending is becoming increasingly unsustainable.

While the central bank is less concerned with mortgage debt than credit-card debt and other types of consumer credit, some at the bank are beginning to worry that the growing demand for long-term mortgages will shackle borrowers with a lifetime of debt, according to the Telegraph.

“British families are signing up for a lifetime of debt with almost one in seven borrowers now taking out mortgages of 35 years or more, official figures show.

Rapid house price growth has ­encouraged borrowers to sign longer mortgage deals as a way of reducing monthly payments and easing affordability pressures.

Bank of England data shows 15.75pc of all new mortgages taken out in the first quarter of 2017 were for terms of 35 years or more. While this is slightly down from the record high of 16.36pc at the end of 2016, it has climbed from just 2.7pc when records began in 2005.”

The steady rise has triggered alarm bells at the BOE, prompting regulators to warn that the trend risks storing up “problem[s] for the future” if lenders ignore the growing share of households prepared to borrow into retirement. Indeed, bank figures show one in five mortgages today are between 30 and 35 years, up from below 8% in 2005, as the traditional 25-year mortgage becomes less popular.

There’s also the unaffordability question. That borrowers are opting for longer mortgage terms means they’re finding rent and mortgages are growing increasingly unaffordable, a worrying sign as credit expands.

David Hollingworth, a director at mortgage broker London & Country, said the trend showed that an increasing share of borrowers were “struggling with affordability pressures, and deciding that lengthening the term will offer leeway” as house price growth continues to outpace pay rises.

Sam Woods, the chief executive of the Prudential Regulation Authority, has said policymakers are watching developments closely.

“If lenders become too narrowly preoccupied with the profile of the loan in the first five years” and not look at the entire profile of the loan when assessing affordability “this could store up a problem for the future,” he said in a speech.

While interest rates are expected to stay low, the pound’s 15% drop against the dollar since the last year is driving up the price of consumer goods, adding to the pressure on borrowers. Prices of consumer staples are growing at an annualized rate of 3%, far more than interest rates on savings accounts.

 

5 Ways to Keep a Tax Farm (Citizens) Producing

Via The Daily Bell

The government depends on the citizens to produce, to create value from which the ruling classes can leech. They need to keep us working and spending in ways that they prescribe in order to insert themselves into transactions which would otherwise have nothing to do with them. Here are five ways that they keep the tax farm going.

1. Credit Cards and Debt

Credit cards, student loan debt, home loans, and car loans all represent an obligation to work full time. Once you have been saddled with debt, you cannot make the choice to take time off to pursue a business endeavor you are passionate about. You are on the hampster wheel.

The more debt you have, the more you have to earn, and the more taxes you will pay on those earnings. The less freedom you have to be productive in an alternative way.

The housing bubble was no accident; the government doesn’t care if you can afford it, they want you to “own” a home–or rather own a mortgage.

Of course, debt has it’s place, for instance taking on a home loan in order to have lower monthly payments than rent, and put that money into an asset.

But the problem comes when people take on an expensive home loan because they currently have a great job, ignoring the possibility that the job may not always be there. There are people who take out loans for a car–a clever trick GM started back in the day–in order to keep up with their neighbors or squeeze some momentary satisfaction out of the purchase.

And of course, credit cards give us a dangerous “solution” to depression: shop therapy! Just like a drug, it can give a momentary high, replaced by an anxious desperation when the bill comes. And all the while you are paying sales tax on almost every purchase.

That is why we must avoid debt at all costs. Spend within your means. Delay gratification by saving before purchasing rather than paying interest after a purchase. And really consider whether a purchase is going to make your life easier, or make you happier, or if you are using it like a drug for a momentary high.

When it comes to college debt, the thing to do is spread awareness of alternatives to college if you think someone you know may be making a big mistake.

JP has the answers:

2. Full-Time Corporate Employment

Corporate employment is a cycle in itself; it keeps you going for the next raise, for the next promotion, and for all the benefits. Corporations are a creation of government, and would otherwise not exist in their current structure.

Health insurance through work was once an extra incentive to make a job attractive; now it is necessary to avoid a government fine. Better work more than 29 hours to make sure your employer has to cover it!

And when you are self-employed, the government punishes you by making you pay twice the Social Security contribution, since technically you employ yourself.

A corporate job alone is not always a bad thing, it works for some people. But there are plenty of people who push themselves into a job which cannot allow them to reach their full potential. People get a job in order to pay off student loan debt, or in order to get a nice car or to spend more on clothes, alcohol, and novelties.

The government likes this because the entire tax extraction process is designed around this system. Even bonus pay is taxed at a higher rate, like lottery winnings.

But there is a way to use a corporate job as an out. If you can manage to get a nice paying job, not rack up debt or long term obligations, and save, then you have the freedom to turn that saved capital into freedom.

This doesn’t work if you save up just to travel or buy a house on the beach to pursue the #SurfLife. It works if your capital is used to create value.

Here’s an example from my own life. My sister worked a corporate job in Massachusetts and took out a home loan to buy an undervalued house. By improving the property, selling it, and moving to an area with a much lower cost of land, she was able to buy a nice chunk of property without needing a loan.

That piece of property is now being used as a mini-farm with various avenues for making money. She is now her own boss and can pursue more personally fulfilling ways of earning a living, which does not always involve fiat currency.

3. Regulations and Laws

Okay, so let’s say you have managed to avoid debt, and have saved up enough from your corporate employment to start your own enterprise. The government creates barriers to competing against their corporate lovers.

I’ll continue with the example of my sister’s mini-farm. An easy way to start earning money would have been to sell the delicious hard cider she and her husband were already producing as a hobby. But the law said that they could not produce it on their own property, they could not distribute it without paying about $10,000 for entry into the market, and a host of other tight regulations.

Okay, they also wanted to run a hot dog cart. They already owned the cart from toying with the idea in Massachusetts. Well, you can’t do a cart, come to find out. In that area, all food trucks must be enclosed. They already had a cart, they did not have a food truck.

They are powering through and creating a great business based around the farm, but her husband had to continue to work instead of being able to immediately pursue the business dreams.

There are a million other examples of government throwing roadblocks in the way of unique self-employment or starting a small business.

Let me know in the comments if you have run into these issues in your own business endeavors.

4. A Fiat Currency

Here is an easy way to extract money from the population: continue to print money. The Fed says openly they aim for an inflation rate of 2%. What does that really mean? It means they aim to steal 2% of the value from all cash and saved dollars every year.

The Fed prints the money, and therefore it is they who gets to spend the value they rob from our savings. It is just another back door tax, a harvest, to reap the products of our labor.

On the flip side inflation is a little gift to those citizens who are behaving properly, according to the government, and taking on debt. They get to pay back their debt in inflated dollars.

But the best part for the government is they don’t have to deal with any resistance to raising tax rates. Most people don’t even understand what inflation is, they simply think stuff just gets a little more expensive each year.

Having a currency with no true value means whoever controls it has the ultimate power.

The old standby strategy to mitigate inflation is to hold reserves in tangible assets such as silver or land.

But cryptocurrencies are another promising innovation. They aren’t where they need to be yet, but there is reason to be hopeful for their development in divorcing us from the Federal Reserve system.

You’ll want to subscribe (and get our free metals report) to hear more about the difference between investment, speculation, and currency when it comes to crypto-coins–our discussion on the topic is about to heat up.

5. Advertising to Promote Consumerism

Just like GM encouraged car owners early on to trade in their vehicle each year for the newest model, citizens are now conditioned to trade in their expensive iPhone for the newest model.

TV programming has long highlighted the lifestyle of the rich and famous, encouraging ridiculous spending on wedding dresses and birthday parties, and glorifying rich spoiled brats.

This article does a nice job summing up the disease of consumerism:

Under our current working conditions, people are forced to build a life in the evenings and their days-off. We find ourselves more inclined to spend heavily on entertainment and conveniences because we rarely have any free time. When we do have time to ourselves, it’s usually fleeting, and we eventually find ourselves neglecting those activities which are free—walking, exercising, reading, meditating, sports, hobbies, etc.—because they take too much time.

While having extra money comes at the sacrifice of personal time for some, for others they not only are robbed of their personal freedom, but they struggle to make ends meet on top of it. The “perfect” consumer works full-time, earns a fair amount of money, indulges during their free time, and somehow just makes it by each month. However, even those who don’t earn fair wages sometimes find themselves wasting small increments of money on unnecessary items for the wrong reasons—a cup of Starbucks here, a McDonald’s cheeseburger there, and those really cool fuzzy dice hanging from the rear-view of your 1993 Honda Civic.

Any way you look at it, we have become an unhappy, mindless, over-worked society. We buy silly items for a few moments of happiness before getting bored and moving on. We feel a need to keep up with fads, or to fulfill our childhood vision of what adulthood would be like. We hide our insecurities, avoid issues, and replace psychological needs with material items. By keeping society’s free time scarce, people will pay more for convenience, gratification, and any other relief they can buy.

But at the end of the day, the choice is still our own. With a little mental toughness, we can train ourselves to psychologically exit the system, which is the first step to bringing it down.

Canadians Brace For A "Perfect Storm" Brewing In Housing Market

We"ve spent a fair amount of time discussing Canada"s housing market over the past several months as Chinese money laundering operations have sprouted up bubbles all over the place.  Here"s a modest sampling of our recent work:

But, as the Globe and Mail notes today, there could very well be a "perfect storm" brewing in several Canadian housing markets as the result of extreme pricing bubbles, over-indebted consumers, a major tightening of mortgage rules and the prospect of rising rates.

On the regulatory front, Canada"s Office of the Superintendent of Financial Institutions (OSFI), is considering new rules that would require lenders to effectively "stress-test" borrowers to confirm they would be in compliance with credit metrics even if rates were to rise 200 bps.  From a practical standpoint, such a move would immediately remove roughly 20% of the average Canadian"s home buying power.

Canada’s banking regulator (OSFI) is proposing that anyone who gets a mortgage at a bank or bank-funded lender prove they can afford a rate that is at least 200-basis-points higher than their actual rate.

A similar debt-ratio “stress test” is already in place for folks getting a default insured mortgage, as well as most variable-rate and short-term borrowers.

If OSFI’s change goes through as planned, otherwise credit-worthy borrowers would qualify for roughly 18 per cent less mortgage, other things equal. This one change would have more of an impact to mortgage shoppers than any Bank of Canada rate hike in history.

Of course, with mortgage rates at multi-decade lows, they likely only have one direction to go.  Moreover, as rates rise, it will only serve to amplify the impacts of the proposed OSFI regulations noted above.

If you believe the Bank of Canada’s hints and bond market probabilities, there’s a real chance we’ll see higher floating rates as soon as next week’s rate meeting, or at its meeting in September. (Albeit, Thursday’s OSFI news could limit the BoC’s rate hike plans.)

As for fixed mortgage rates, they’ve already shot up on the back of a 50-basis-point surge in bond yields since June 6. RBC, Canada’s de facto leader in setting mortgage rates, hiked most of its advertised fixed rates by 20 basis points on Thursday morning. Most other lenders have done the same and it may be only the first of multiple moves.

All of which leads the Globe & Mail to ask "what should Canadian consumers do now?" 

Well, luckily for our northern neighbors, we would point out that the U.S. had a similar housing bubble issue a few years back...here"s a hint on what you should do next...