Blessed by the Potato

From MSN, discussing Douglas Adams, favourite quotes, and the Meaning Of Liff:

Potato: “SHOEBURYNESS (abs.n.) The vague uncomfortable feeling you get when sitting on a seat which is still warm from somebody else’s bottom”

J: “But what if you like that feeling?”

Potato: “Then you are a very strange person indeed.”

J: “Not that I do… I figure it’s usually that warm because someone let one rip before they moved.”

Potato: “I don’t think flatulence has any real effect on seat warmth.”

Holy crap, they’re actually halting sales of basically all their top models.

I’ve been trying to follow along with the Toyota accelerator pedal issue especially since I’m planning on getting a Prius soon, but I haven’t seen much solid information so far. Some cars have accelerated out of control, with one case leading to the death of four people. The stuck accelerator was blamed on human error or improper floormats which could hold the pedal down (which is basically a roundabout way of saying a combination of a pedal that’s too close to the floor, and… driver error). It was assumed that people were too panicked or didn’t have the driving skills to use their toe to pry the pedal back up when this happened… until it was a cop that was killed in a runaway Lexus. However, unless I missed a critical report along the way, they still haven’t found a mechanical or computer problem to explain the runaway behaviour, or why the braking system didn’t overpower the engine to stop the car anyway.

Out of the millions of cars Toyota has on the road, this has only happened to a few dozen — and even then, they can’t seem to agree on whether or not the problem affects the Prius (which is not under this latest stop-sale order).

Here’s the FAQ from Toyota on the latest recall.

So for me, I wonder if this might be an opportunity to get a Prius cheaper than if I waited a little longer. I’m reasonably certain that this is the last winter I’ll keep my Accord for, though it has been quite well-behaved for the last two months, even in the cold. However, it would be a bit of a shock to our finances to get a car immediately after moving, and a good couple of months before we had otherwise planned to. I’m not sure the extra ~$100-200 off would be worth it. What do you think? Will this lead to a big fire sale at Toyota? Will dealerships be deserted in the next few weeks as Toyota becomes a pariah? Or the opposite: will the Prius go out of stock as it becomes the only mid-size car Toyota is still selling?

I’m not too concerned about the accelerator issues: if it does turn out to affect the Prius, the odds seem to be in my favour, and Toyota will probably fix it not too far down the road in a recall.

Larry McDonald is giving people a sneak peek at Professor Milevsky’s upcoming book. One neat concept is the idea of a “holistic porfolio” — that you decide on your investments not just based on your risk tolerance and time horizon, but also on your human capital and career. I think I’ll add it to my summer reading list (as soon as I find my summer reading list in the move) as it sounds like a neat idea that I could get behind. Jonathan Chevreaux mentioned a similar concept in Findependence Day. So, as he says, if you’re an investment banker, maybe you should have a portfolio that is largely bonds, since your human capital is very stock-like: your job security and salary are probably closely linked with the equities market. Vice-versa, teachers are very bond-like with a stable job that is not sensitive to economic conditions, and a healthy pension to boot. So what money they invest should be largely in equities.

So, what about homeowners? On the one hand, a mortgage is like being short bonds – a negative bond, since you’re borrowing money rather than lending it. To compensate for that, Prof. Milevsky suggests homeowners should own bonds (and avoid REITs to prevent over-exposing themselves to real estate). Buying a house may also be like buying stocks because of the long-run returns, and sensitivity to economic conditions.

However, I questioned that, since I don’t think a person could expect positive after-tax returns in bonds when borrowing with a mortgage (maybe in corporates, but not by much) — you’d probably be better off paying down the mortgage. It’s important to be diversified, but does it make sense to do so without an expected return? Also, while the mortgage may be like a negative bond, to me the house itself is bond-like since it’s interest-rate sensitive and a slow, steady grower. Obviously there I’m disagreeing about houses being stock-like, and I might have to wait for the book for the full explanation of why I might be wrong. Though real estate may be best considered as its own asset class and perhaps we shouldn’t try to shoe-horn it into the bond-like/stock-like paradigm.

It promises to be an interesting discussion, so please feel free to jump over to the Canadian Business Online blog and join in with your thoughts!

We are fairly well-read people (in the sense that we read a lot, not that we’ve read all the classics), and own a buttload of books. I keep trying to rename our dining room “the library” since it’s basically wallpapered in bookshelves, but the name hasn’t stuck yet. Now as we find it’s time to move, we’re faced with the task of moving these hundreds and hundreds of heavy, heavy books.

We just don’t wanna.

After all, a lot of them we’re never going to read again, or loan out to friends to read, so why hold on to them? In just a brief round of going through the bookshelves, we found 5 boxes worth of books to pull out and discard without the slightest regret (i.e.: books we had zero emotional connection to and would have no desire to read again). The question became: what to do with them? We figured that they had to be worth something, and kept planning to haul them down to the used bookstore to see what we could get. Even if it was just a dime a book, that’d make the trip down worthwhile since we had so many.

Unfortunately, our time has been quite tight lately, especially during business hours, so we just haven’t gotten around to doing it. Now we’ve got just a few days left before the big move, and the damned books are still sitting there in their boxes, and we don’t want to move them! So, abandoning our plan to recoup some of the costs of these tomes, we started looking for convenience. Just any way to get rid of them that would be a step above the recycling pile. Much to our surprise, the London Public Library makes book donations very hassle-free: we called in and set up an appointment for a fellow to come to our house and pick the books up.

And of course, we love the library now: we can read all the books we want without having to pay for — or store them!

There is a great deal of systematic risk associated with allowing people to buy homes with 0 or 5% down. It’s a part of the system that I really think needs to be changed, and that I hope does get changed soon if our government ever gets back to work (especially with the deficit, I hope they’re refunding their salaries for all this time off!).

The risk comes from a number of fronts. One is that it allows young, stupid people to buy homes. People who don’t have a track record of sticking to a budget, or of weathering a bad year, or even of being able to save very much at all are allowed to take on massive amounts of debt, which is in a way kind of crazy. Especially since the ability to buy with a small downpayment means that it often ends up that the downpayment is all the homebuyers have at first: no emergency fund in case something unexpected happens, and no equity in their home to borrow against. They start off stretched to the limits. Multiply it out across all the young recent homebuyers in our population, and a slight recession (where they are caught with their shorts down and need to sell due to job loss) can turn into a massive housing bust. I have to admit that I was actually surprised that the emergency interest rates were able to overcome this last year — I had given the Canadian housing market up for dead when it ground to a halt in the fall of ’08.

Add it all up: people with no proven history of being able to stick to a budget for a long period of time, no home equity to speak of, and no safety net, and it may not surprise you to hear that having no equity in your home is almost as strong a predictor of defaulting on your mortgage as having poor credit. Now, that’s for the post-crash US market, so it’s having no equity to begin with and then being upside-down that I’m talking about, but with only 5% and closing costs of ~10%, even a flat market can leave you upside-down if you’re forced to sell. Of course, “layered” risk factors are exponentially more risky: someone with poor credit (i.e.: someone who has been late or defaulted on a payment in the past) but managed to save up a 20% down payment and has it invested in the house has let’s say a ~1% chance to default in a bad housing market, and someone with good credit but no equity has a ~0.8% chance of defaulting, but someone with poor credit and no downpayment is way more likely to default, at say ~7%. This is where a lot of the attention goes in the discussions of the shoddy US lending practices and how Canada is “different”… but we’re writing a tonne more low-downpayment mortgages (though to people with decent credit), which is really only a difference of degrees vs subprime in terms of risks to the system. It’s not throwing gas on the fire in terms of adding accelerants, but it still burns.

And speaking of acting as an accelerant, have you ever heard someone complain in the last few years that “the market goes up faster than we can save!”? And what happens when someone complains that the housing market is going up faster than they can save? They stop saving and dive in with whatever they’ve got, even if they have to borrow the downpayment from mom and dad. It’s how speculative bubbles are made: prices start to rise, and people, being afraid they won’t be able to buy higher, buy in a panic. Which drives prices higher… When you have to have skin in the game, it can slow things down. If you have to save up 20%, it can mean that no matter how fast the market goes up, you still have to keep saving. You can’t bring demand forward from younger and younger people afraid of being priced out but who don’t have savings yet. And if you do get priced out then that helps act as a natural brake, because the demand is both removed when prices over-shoot (and people trying to save harder may spend less and put a damper on the local economy which may also help slow the market), and because it limits speculative frenzy. You don’t see a whole lot of people running down to pick up a half dozen condos on the first day of pre-sales when they have to put down 20%.

Of course, the most bizzarre proof that I have that low down-payment mortgages are dangerous is the existence of the CMHC itself. Banks are not allowed by law to hold a mortgage with less than 20% down — if they could, they might write many such mortgages. But doing so would put our whole banking system at risk if there’s a housing crash because there’s a good chance that even with a minor housing crash, with many homes having several years of mortgage payments under them, that the banks could not expect to recover more than 80% of the home’s original value. And banks failing due to aggressive mortgage writing could bring down commercial lending, and lead to panic and runs for deposits, and all the doomsday scenario stuff that we just went through in the US. So our banks aren’t allowed to hold those sorts of mortgages without insurance.

However, in a strange twist, a low-downpayment mortgage insured by CMHC is less risky to the bank than a conventional mortgage would be, since CMHC doesn’t just cover the difference between the actual downpayment and the insurance-free 20%, but rather the whole cost of the mortgage. The risky mortgage is basically off the bank’s balance sheet and put into a CMHC mortgage-backed security. Ah, yes, “securitization”. You’ve heard that word in the news a lot: a way of taking the risk away from the people making the decisions about writing a mortgage. Yes, that risk factor is alive and well up here in Canada, despite the recent lessons from the south.