Good Reading -- September 2012
Facts and Figures
Yields on U.S. speculative-grade notes have fallen to 6.29 percent, 1 basis point less than a measure of what’s being paid by senior secured loans. (Source: JPMorgan Chase & Co)
The market cap of the financial sector in Australia now exceeds that of the Eurozone. At PPP, GDP in Australia in 2011 was under $1 trillion against nearly $16 trillion in the EU. (Source: BAML; see attached chart)
Reported crimes per capita peaked in America in 1992. Since then, violent crime has fallen 38%. (Source: FBI)
"The Value Investors: Lessons from the World's Top Fund Managers" -- 2012 is turning into the year of the investor profile book. This latest effort is from Ronald Chan, who's previously written about Berkshire Hathaway. Here Chan interviews 12 value investors, including Kahn, Schloss, Eveillard, and several with an international and/or emerging-markets emphasis. This is a fairly elementary book and a very quick read, even more so than its predecessors this year, but it's still worthwhile.
"The Signal and the Noise" -- This book will be released at the end of September, but this interesting excerptabout the failure of most predictions -- and the relative success of meteorologists, something that's near and dear to my heart -- made me pre-order it. The book's website with more about the author is here.
"...one of the arguments that [the book] advances is that we are sometimes too willing to take elegantly written narratives as substitutes for a more uncertain truth. But there is a healthy balance between computer modeling and human judgment in weather forecasting that is lacking in many other disciplines. Usually, we either take the output from poorly designed models too credulously (as in the case of the models that asserted mortgage-backed securities were incredibly safe investments), or we value our own subjective judgment much too highly (as in the case of baseball in the pre-'Moneyball' era.) Weather forecasters, however, have an unusually good sense of the strengths and weaknesses of these approaches."
"The Importance of Expectations" -- An excellent recent essay by Michael Mauboussin. "The key to generating excess returns is the ability to distinguish between price and value—two very distinct concepts...The most basic question you must always answer: what’s priced in?"
"The True Measures of Success" -- More Mauboussin, this time discussing the problem of measuring the wrong metric as a driver of poor business performance. Also look for his new book, which is scheduled to be released in November. A good interview, with some comments on the book, is here.
"A Transactional Genealogy of Scandal: from Michael Milken to Enron to Goldman Sachs" -- This is an interesting new paper about CDOs and financial scandal. A summary from the author's blog: "The paper is about the development of the collateralized debt obligation (CDO) and its incessant connection to financial scandal, from its origins in Michael Milken transactions through Enron (who knew that Chewco was basically a CDO?) and then of course Goldman Sachs' Abacus 2007-AC1 transaction."
A Beginner's Guide to Irrational Behavior -- A free online class by professor and author Dan Ariely. (Thanks to David for finding this.)
Q&A with Wilbur Ross -- This is a great profile of Wilbur Ross, with thoughts on restructuring distressed companies, labor unions, politics, and U.S. economic prospects.
"Why We Die [Interactive]" -- A graphical look at life expectancy and mortality, for all the insurance geeks out there.
Kay Review of UK Equity Markets and Long-Term Decision Making -- Professor (and FT columnist) John Kay recently presented this study describing "the flaws of the UK's financial markets and their relationships with investors and businesses." It's long, and the recommendations may leave you wanting, but this is a worthwhile read.
"Robert Shiller on Behavioral Economics" -- Love him or hate him, this is a good and concise overview of the topic.
"Mendillo Returns to Farms as Harvard Vies for Ivy Rebound" -- A look at recent trends in investing by the big endowments and the focus on "real assets" such as farms and timberland.
"Big Med" -- Another seemingly stretched analogy (here, the Cheesecake Factory and other chain restaurants' lesson for the healthcare industry), this Atul Gawande article is long and starts slow but has a lot of interesting ideas.
"Pallets: The single most important object in the global economy" -- Bear with me...this is actually a really interesting article.
"Shipper Uses Gut in $11 Billion Bet
"House Wars: true tales from the Toronto real estate market" -- Some of the data and anecdotes in this article will blow your mind. There are too many aspects to summarize them all, but I've been looking into the Canadian (and Australian) housing markets for about two years now, and this article captures a lot of the sentiment right now (at least in Toronto).
"Are You Worth More Dead Than Alive?" -- A look at the underworld of life insurance settlements and the actuarial and financial assumptions behind them. (And no, there was not an intentionally morbid theme to this email...)
House Wars: true tales from the Toronto real estate market
The house hunt has become a blood sport involving bully bids, bribery and a willingness to pay $100,000 over asking, without conditions, for the ugliest address on the street
By Denise Balkissoon | Photography by Raina and Wilson
Carlie Brand and Matthew Slutsky were looking at houses again.
It was a sunny April afternoon, the fifth month of their serious search. Brand, a whippet-thin 26-year-old with a mass of curly hair, works in the human resources department of a downtown hospital. Slutsky is 33 and a co-founder of BuzzBuzzHome, a real estate website that catalogues new construction across Canada. They’d been married for a year, were nearly ready to have kids and wanted to move from their condo at Bay and Dundas into a house. They were willing to pay $1 million for a three-bedroom, three-bath turnkey showpiece. Even with that high ceiling, they quickly found themselves without any decent options in their ideal neighbourhood of Seaton Village, and shifted their focus north to Hillcrest.
The couple had already lost three bidding wars and were feeling burnt out. The first bid had been in January, for a house on Olive Avenue—“That house was the love of my life,” Brand said of the semi-detached three-bedroom with original trim and baseboards, for which they tangled with two other buyers before losing by $7,000. They were one of seven bidders on a sprawling but timeworn house on Ellsworth Avenue, in Hillcrest, which they lost by just $1,000. “We had already bid $30,000 over where we thought it should be,” said Slutsky, explaining why they chose not to bid any higher. Right before I met them in April, a house on Arlington Avenue, also in Hillcrest, had gone for $80,000 more than they were willing to pay after another three-way bidding war.
“I’ve given up on a lot of hopes and dreams,” said Brand, as she walked into the first of three houses the couple would tour that day. It was a detached two-bedroom home on leafy Helena Avenue, a two-minute walk from the arty food hub at Wychwood Barns. It was also a dump. Listed at $539,000, the house had been, according to its MLS agent’s write-up, “lovingly maintained by the same owner for 50 years.”
In reality, it had a tiny, crooked galley kitchen, ancient wallpaper and carpet, miniature closets and a musty floral smell. The original claw-foot tub in the tight washroom seemed not like a cool antique, but the site where dozens of now-dead strangers had washed off their grime.
The couple’s agent, Cary Chapnick, was trying hard to keep his clients’ spirits up, and began musing aloud about the possibility of tearing the house down and building a new one. The location was amazing, he pointed out, and the 20-by-140-foot lot sizable and grassy. “You can build something new for about $250 a square foot,” he said. Sure, Brand and Slutsky countered, but a list price of $539,000 in this neighbourhood likely meant a selling price of at least $700,000. Building a new house on top of that would bring them right up to their limit. If they were going to spend that much, they didn’t want to do any work. “I’m not feeling this house, I have no interest,” Brand declared, and so the trio moved on.
Real estate is Slutsky’s livelihood and passion: he has watched the city’s sales figures skyrocket for years. He’s a confident, head-forward bull when it comes to Toronto’s housing market, yet somehow he let his wife talk him into selling their two-bedroom condo before buying a house. Brand had her reasons: she wanted to know just how much money they had to spend, and she didn’t want to get stuck with a condo that wouldn’t sell as a new, bigger mortgage loomed. Slutsky thought this fear was unwarranted, but Brand insisted. They sold last November. When the deal closed 90 days later, they had no choice but to shove most of their possessions into storage lockers and move in with Brand’s parents in Forest Hill. Both say her family is easygoing and generous, but it still wasn’t an ideal situation. “I did not expect to be living with my in-laws,” said Slutsky, with a self-effacing smile. If they didn’t find a place by the end of the summer, the two would re-evaluate their options, perhaps rent for a while.
The second listing on their tour that day was another house on Ellsworth Avenue. It was too small, so Slutsky, Brand and the ever-positive Chapnick went to the last house of the day, on a nearby street. This one was a newly renovated three-bedroom semi, listed at $699,000. It had exposed brick and a fireplace in the living room, a kitchen with an island and lots of storage, and a finished basement with a separate entrance (and, weirdly, two bathrooms). The backyard had a parking garage, a big deck and enough room for a child’s sandbox. Slutsky thought the place might be too small, but Brand was off and running. “I love it,” she said. “Do we need to do an inspection? What’s another $500? Should we bully? $730,000? $740,000?” The two stood on the front porch, judging the view inside and out. It was time to make another offer.
The next week, Slutsky called me, bummed out. He had gone through the house with a home inspector, who advised that the renovation job was sloppy and had been done without permits. The furnace was cheap and improperly vented, and when the inspector touched the fence in the backyard, a board fell out. The house was no good. “We’re really depressed,” Slutsky said. “We’re at our wit’s end with this whole process.” Meanwhile, the house had sold for $737,000, five per cent over asking.
“I’ve got an idea for a new reality show,” a friend of mine recently said on Twitter. “Contestants fight to the death for a detached home with a garden.” To house-hungry Torontonians, that probably doesn’t sound like a joke. Prices have raced upwards for well over a decade, with an all-time sales record of 93,193 set in 2007, when the average home price was $376,236. Even the recession caused by the U.S. mortgage crisis hardly made a blip: in 2008, sales dropped to 74,552 homes, but the average value stayed steady, at $379,347. Since then, dollars and sales have continued to climb. There were 89,347 sales in 2011, and this past June, the average home price was $508,622.
Condo towers keep rising, but people who want an actual house in the city limits have a finite number of options—“They aren’t making more land” is a common refrain. This makes buyers competitive and aggressive, two traits selling agents know how to exploit. When I bought a house two years ago, my mom (who last moved in 1984) suggested I offer $15,000 below the asking price. I laughed. To buy a house in Toronto today you must follow a common schedule: watch for new listings on Thursday, go to the open house that weekend, then get ready to make an offer above the asking price that Monday. Buyers fall in love with a kitchen, or a neighbourhood, or an imagined future life.
Looking for a house is like taking on an all-consuming part-time job. As interest rates dropped over the past few years, the process has grown ever more frenzied. On the evening of the offer, hopeful buyers hunker down in cars as agents scurry to and from the house, wanting to know if their clients can throw just a little bit more on there, a little bit more. So they do. And they do. And they do, again. One disgusted buyer told me she lost a bidding war when another person added a pair of Leafs tickets to their offer. “I am already giving you $700,000,” she said. “I do not have to sweeten the pot.” Buyers use the language of battle: fellow bidders are “the enemy,” to buy a house is “a win.” The person who names the highest number is the victor, and the rest go home to recover, then start again.
Scheduled offer dates, bidding wars and climbing sale prices are a city-wide phenomenon, but there are significant neighbourhood differences. Shabby North York bungalows famously go for a million to builders who plan to put up two new houses on the 40-foot-wide lots. For buyers who want to actually live in the homes they’re bidding on, there are a few trendy neighbourhoods where the wars are dirtiest. As the hip ’hoods of the early 2000s—Riverdale, Little Italy and the Annex—move into the $1 million–plus range, the areas around them have become ruthless battlegrounds. A redone semi in the downtown west end, from Trinity-Bellwoods out to Parkdale, now starts at $800,000. Hordes of young families are trying to get into east end areas like Danforth east of Pape, and south through Leslieville and the Upper Beach, where there are still houses that don’t yet bear post-renovation price tags. Meanwhile, north of Bloor, the St. Clair streetcar right-of-way and Wychwood Barns cachet has helped launch Hillcrest into the bidding war game.
These neighbourhoods share certain characteristics. Decently sized lots and good-to-great schools are a given, but more urban features are important too, like reasonable access to transit and amenities worth hanging around for on weekends. Since the American mortgage crisis of 2008, U.S. researchers have noted that the neighbourhoods bouncing back the quickest aren’t suburban paradises with big lots, but dense urban areas with high “walkability,” the capacity to meet everyday needs by transit, bicycle or foot. A recent New York Times story estimated that every “step up the walkability ladder” added $82 per square foot to the price of a residential home, and mentioned the website Walk Score, which rates this latest real estate must-have.
Walkability matters in the slightly less combative areas, too. Streets off Gerrard Street East, in the heart of Leslieville, earn 77 out of 100: residents can walk to green space, Little India fruit stands and hipster espresso shops, but transit access is poor. On the other side of town, a quick streetcar ride up to the Bloor-Danforth subway is one factor that has made Roncesvalles a million-dollar neighbourhood. Unsurprisingly, it gets a near-perfect walk score.
Convinced that walkable Toronto has more buyers than houses for them to live in, people have become desperate enough to take dangerous risks. Everyone knows that houses are sold as-is, with buyers bending over backward to submit frictionless offers, free of home inspection conditions and with closing dates that suit the seller’s needs. Home inspectors are now most often enlisted by sellers, who then leave a binder out for buyers to flip through. Some buyers pay for a walk-through with the seller’s inspector, or try to nail them down for a quick, free phone chat. The most conscientious buyers jostle to squeeze in a fresh $350 inspection in the hours between the open house and the offer date—Matthew Slutsky and Carlie Brand paid for two inspections and a walk-through on their first three bids, and Brand has a friend who paid for 10 pre-offer inspections before finally buying a place.
When my husband and I were house hunting two years ago, we never saw a single nice place that had been listed on MLS—they all sold before we could make it to a viewing, and instead we were stuck looking at awful, slapdash renovations or depressing, worn-down rooming houses that would require a fortune, and serious imagination, to rebuild. We ended up buying a house that our agent let us see before making it public, something we considered an absolute coup.
A meticulous friend who was searching at the same time made a spreadsheet comparing all the houses he looked at. By the time he bought a place, in his third bidding war, he had logged 75 properties. I can’t imagine buying now, when prices are 20 per cent higher and the desperation 20 times as thick. The entire city is caught up in the action: one buyer who recently went up against 11 other bidders told me about trying to enjoy dinner with her husband in a restaurant while waiting to find out if their offer had been enough. A waiter overheard their conversation and asked if they were bidding on the same nearby house as another couple in the restaurant. They were. “He told me, ‘They just got it,’ ” she recalled. “I wanted to punch him in the face.”
Aimee Cox and her husband, Rob Ershler, both work in insurance. She’s a 37-year-old freckle-faced strawberry blond. He’s 40 and bearded, and was wearing a fedora and a vintage Coca-Cola T-shirt the evening I accompanied them on their house hunt. They’re looking for an upgrade to their townhouse, which is in the Upper Beach. Right now they’ve got three storeys and a rooftop deck, but they’re willing to trade some space for fewer stairs and a patch of grass for their toddler son, Jack, and their dog, a shepherd-Lab mix named Bodhi, to play on. They’d prefer to stay in the same neighbourhood, which they like for its family atmosphere and proximity to the lake.
In April, the couple spent $175 for a home inspector’s walk-through of a house on Malvern Avenue, a sought-after street near the highly reputable Malvern Collegiate Institute. The three-bedroom semi was listed at $579,000, and it seemed perfect. Their plan was to make a bid well above asking in advance of the offer date in the hopes they’d pull the rug out from under other interested buyers and snatch up the home without a bidding war. The bully offer has become more popular with fatigued and fed-up buyers. (A sale within three or four days of a house being listed, especially one for significantly above the asking price, is a sure sign that the seller has accepted a bully.) Agents who make too many such offers get a bad reputation among their colleagues, and some real estate offices insist that if their selling agents receive a bully, they must alert other interested buyers so that they have a chance to place a bid, too.
Christine Cowern, Cox and Ershler’s agent, said she’d help the couple present a bully if they wanted to, even though she knows the process is hell on agents. “I’ve lost a few properties because of bully offers,” she said. “I’ll get a text that there’s a bully offer on a house and they now want offers presented by 6 p.m. tonight. Everyone goes into frantic rush mode, working out financing and the home inspection. Most people can’t act that quickly.” Buyers who bully have usually already lost a bidding war or two. They’ve got their papers in order, and they want a house now.
Ershler and Cox had toured 50 houses since January, and the one on Malvern was the only place they had liked enough to consider going through the drama of a bully offer. But a bully wasn’t in the cards: during the walk-through with an inspector, Ershler discovered “at least 10 things” that needed to be fixed or replaced right away. The repair costs would strain their $700,000 budget.
So here they were, on a Friday in May, squeezing in three viewings before it was time to pick up their son from daycare. “Jack could go to French immersion,” Cox remarked as she popped in and out of homes within walking distance of Adam Beck Junior Public School. One three-bedroom semi was advertised as having both a backyard and a parking spot, leading Cox to exclaim in frustration as she looked out the patio doors—the parking spot was the backyard. To fit in a car, they’d have to eliminate most of the outdoor space. That viewing was over fast. “We’re close to giving up,” Ershler confided as we walked through a highly staged playroom in the next house (the bookshelf held only classics—Richard Scarry, Shel Silverstein, The Little Prince in both English and French). “Christine won’t want to hear that, but we are.”
In this market, buyers resent greedy sellers as much as they do other buyers. In early May, Tovi Heilbronn, the 30-year-old manager of online sales and social networking for the bike shop La Bicicletta, was house hunting. He wanted his own place after three years of living in an Annex rental with four roommates (and their various partners and friends). “I feel like I’m sleeping in a train station,” he said of his apartment, for which he paid $565 a month. Heilbronn wasn’t interested in a condo. He wanted a backyard, and he considered a condo a riskier investment than a house. His original budget was $400,000, which he soon raised to $500,000. First-time buyers have perhaps the hardest go of it right now. The competition is fierce, the houses are either tiny or in rough shape, and every seller is convinced their property is a pot of gold.
The tactic of pricing a house low and expecting a bidding war can fail, too, leaving sellers who under-list their house with offers far lower than they’re willing to accept. Sometimes, the scheme backfires dramatically. Heilbronn was about to make an offer on a house on Delaware Avenue, just west of Ossington, that was listed at $449,000. Then the sellers took the house off the market and relisted it a week later for $730,000. Eventually, the house sold for $601,000.
As with most buyers right now, Heilbronn prepared for the inevitable bidding war by looking at houses priced well below his ceiling. With $500,000 to work with, he went to see a house on Symington Avenue, close to Bloor West and Lansdowne, which was listed at $469,000. It was near the subway and within cycling distance of his job (slim and muscular from road racing, he plans never to own a car). Though it had some knob and tube wiring and needed an immediate paint job, the house was livable, and the neighbourhood is quickly gentrifying. On the evening of the offer date, Heilbronn went in at $479,000, and was asked to bid again. He raised his price to $482,000, but a second bidder won with an offer of $513,000.
A week later, a second Symington house came on the market, a three-bedroom semi listed at $469,900. On the offer night, Heilbronn sat outside the house in the car of his agent, Bonnie Singer—they waited an extra hour while one of the two other bidders made a last-minute walk-through with a contractor. A bidding war ensued, and Heilbronn raised his offer twice, settling at $492,000. Then the selling agent approached the car with good news: “It’s done, it’s yours,” he said, and shook their hands. Heilbronn couldn’t believe his four-month search was over. But the homeowner had other ideas, calling his agent back into the house for, from what Heilbronn could gather, a serious tongue-lashing. The seller had been convinced he’d get $500,000, and $8,000 less didn’t cut it. He was threatening to reject the offer and put the house back on the market.
“I was really, really pissed off. It was 11:30 at night by this point, and suddenly it’s my problem that he feels jilted,” said Heilbronn. “He thinks the market can push his house to $500,000—I am the market. I outbid everyone else.” The listing agent was so rattled by his client that he was shaking and stuttering as he spoke with Heilbronn, trying desperately to save the deal. In the end, the seller agreed to sell his house if Heilbronn extended the closing date by one week. It was an inexplicable request that seemed purely spiteful and required Heilbronn to take the next morning off work to ask his bank to extend his mortgage rate a bit longer. “He wants me to swallow some tough pill,” said Heilbronn, pursing his lips in frustration.
Many of the agents I spoke with blamed the frenzy of bidding wars on sellers—it’s what their clients want, agents say, and their job is to represent their clients. Of course sellers want to make the highest profit possible when off-loading what is likely their largest asset. But clients aren’t the ones putting “SOLD! OVER ASKING!” signs on their front lawns.
I live in Leslieville, and my mailbox overflows with flyers from agents begging to sell my house. I was curious to hear a real estate agent’s sales pitch in these seller-friendly times, and decided to get an appraisal from a local agent whose massive, full-colour flyer featured four nearby houses that sold for higher than the list price. Our semi-private sale had helped my husband, Steve, and I score a very decent price two years ago, and I knew we’d be told that we could make a healthy profit. Even so, it was startling just how confident the agent was that he could stoke a bidding war for our house.
I’ll call the agent Bill, since it’s not fair to single him out—we chose him at random, and I didn’t reveal that I was a journalist working on a real estate story. On a Thursday evening, Bill, Steve and I walked through our house. It’s a modest two-bedroom on the end of a row, but it has red-brick good looks and a very pretty front flower garden, thanks to Steve’s mom. Bill made the right compliments (exposed brick, cathedral ceiling in the bedroom) and the right criticisms (the basement bathroom needs redoing). Then he sat us down at the dining room table and presented a fat book of recent sales and listings in our neighbourhood.
Bill told us he averages eight per cent above asking for each of his listings. “Do you know about that underpricing thing everyone is doing right now?” he asked. He explained that he considers $50,000 a pricing “chunk,” and that he usually prices homes two chunks below what he actually hopes to sell them for. If he wants to sell a house for $600,000, he’ll price it at around $489,000, in order to attract “people who can’t afford your house.” He suggested we list our house four per cent under what we paid for it two years ago, and aim to sell it for a 20 per cent profit. By Steve’s count, Bill said “bidding war” eight times during the 40 minutes he spent with us.
I can’t criticize the man for doing his job. If I were really considering selling my house right now, Bill would be an excellent agent. He obviously knows what he’s doing, and he does it well. He employs professional stagers to bring in better art and furniture than clients actually live with, which he says can net a three per cent price increase. He helps his clients make a windfall on their homes and then pays for them to go out to dinner on the night of their move.
However, there was no way I’d consider his suggestion that we sell before buying in order to take advantage of the hot spring market. I am not interested in living with either of our sets of parents in Scarborough. Bill is a selling agent. He doesn’t work with buyers, which makes it easy to revel in the current seller’s market and disconnect himself from house hunters’ woes. Bill spoke with relish about bidding wars. One house, which sold for $535,000, “wasn’t worth more than $450,000.” Another listing resulted in five bully buyers trying to outsmart each other: on the impromptu offer night, tensions between agents got so high that one buying agent was on the verge of throwing punches and had to be kicked off the porch. Another sent Bill obscene late-night text messages after his client lost. Bill knew that if Steve and I were to sell our house, buying a new one would be a hassle. “You’ll be in a couple of bidding wars,” he assured us. But the junior agents in his office are the ones schlepping buyers around, preparing last-minute bully offers and repeating the cycle over and over. Finding us a new place to live wouldn’t be his problem.
As the buying process drags on, the time commitment and emotional toll start to weigh on people. Since March, Kathy Huynh and Tom Gaschler have been hitting seven or eight open houses every weekend in Bloor West Village, High Park and Roncesvalles. “I drive around and I’m like, ‘I’ve been in that house, and that one, and that one,’ ” said Gaschler. They’ve made one bid, on a property in High Park. The three-bedroom house was listed at $899,000, so the couple made an offer of $940,000. They declined to raise it further, and the house sold for $965,000. “When I lost that house, I felt like I had broken up with someone,” said Huynh.
The couple could increase their budget, if they wanted to. Huynh works in corporate accounting downtown. She is 26 years old, and a blunt fast-talker. Gaschler is 32 and works as a management consultant in Mississauga. In the past few years, both have had a series of raises and promotions. “I could get a higher mortgage, sure,” said Huynh. Every buyer I spoke with was offered a mortgage at least $200,000 higher than the ceiling they had set for themselves. These two consider it foolish to take on excessive debt, but according to the brokerage Realosophy, three out of four home sellers in Bloor West Village are deciding between multiple offers. Somebody is taking mortgage brokers up on their generosity.
If the agent wants to sell your house for $600,000, he’ll price it at $489,000 to attract “people who can’t afford your home”
Probably the most significant driver of the market’s exuberance is the ever-dropping interest rate: five years ago, a friend of mine crowed happily when he locked in at five per cent interest, which everyone agreed was astonishing at the time. Two years ago, he regretted his decision when Steve and I got a rate of 3.59 per cent. We, too, went fixed, because it seemed impossible that it could get any cheaper. And yet it did—this past winter, all of the major banks briefly flirted with 2.99 per cent interest. Huynh and Gaschler were promised a rate of 3.01 per cent if they bought by mid-July. Cheaply borrowed money has helped push the Canadian consumer debt-to-income ratio to 152 per cent, a figure pundits keep comparing to the American debt load before the mortgage meltdown. “It’s an irrational market, and people are maxing out their resources,” said Huynh. “They’re paying the amount they’re willing to spend, not what the house is worth.”
How much a house is worth is a national debate. Finance Minister Jim Flaherty’s droning refrain about the eventual collision of household debt with rising interest rates began to seem a little more real in the late spring, when the Vancouver housing market started to soften. Prices there are still astronomical—in April, the average sale price in Greater Vancouver was $683,000, with the average detached home going for $1,064,800—but they seem to have plateaued. In a few neighbourhoods, prices have actually dropped in the past six months (areas beyond the reach of the SkyTrain with heinous commutes have been hardest hit, lending credence to the walkability theory). In April and again in May, Vancouver recorded the lowest number of monthly sales since 2001.
As the news of Vancouver’s weakening numbers coincided with the traditional flood of spring listings, some Toronto sellers seemed to be re-evaluating their prospects: for a few weeks, an increased number of houses were listed at reasonable prices, and more sellers were accepting offers at any time, not on a specific date. It was a tiny little murmur, though, and hot neighbourhoods remained hot. Buyers still girded themselves for battle, throwing deadly cut-eye at other hapless open-house voyeurs.
The softening out west is not a crisis, yet, except maybe for owners with low down payments and long amortizations, for whom a shift in prices or interest rates could mean more debt than equity. The thing is, there are many such owners: this spring, the Canadian Mortgage and Housing Corporation, which insures buyers who have less than 20 per cent for a down payment, was only $60 billion away from its $600-billion cap. In April, Flaherty passed oversight of the CMHC on to the country’s top financial regulator, the Office of the Superintendent of Financial Institutions. The OFSI could increase the CMHC’s cap, as the federal government has done in the past, but it’s a conservative outfit, and that seems unlikely.
Without CMHC to back them, banks will be less willing to offer wads of money to high-risk borrowers. It’s easy to consider that a good thing, to tell buyers to slow down, save up and wait. But Toronto renters have it almost as hard as buyers, with vacancies at just 1.3 per cent. Competition is heated, and rent on an under-500-square-foot space in one of Queen West’s new condos goes for $1,600. Renters who have been squeezed out of downtown and still pay through the nose often decide they might as well buy. “If I’m going to go through a bidding war, I’m determined to own something at the end,” one first-time buyer said to me. So they scrounge up a five per cent down payment, sign for a 25-year amortization and hope for the best. In May, RBC published a study declaring that owners of detached bungalows in Toronto were spending 53.4 per cent of their income on housing.
Huynh and Gaschler are financially stable and have a generous budget, but they’ve realized it isn’t quite enough. “There just isn’t anything we’re willing to pay for,” Huynh said in mid-June, by which time the couple had toured about 150 homes. They considered bidding on a triplex on Willard Avenue in Bloor West Village, which was listed at $818,000. The location was great, but in the end the idea of converting three worn-down units into a livable home proved too daunting. A beautiful Victorian on Fermanagh Avenue in Roncesvalles was too far from Bloor for Huynh’s commute—it was listed at $900,000 and sold for over $1 million. “We couldn’t have got it anyway,” said Huynh. Gaschler was itching to put their row house up for sale in order to maximize their profits before any softening in the market, and Huynh seemed almost ready to accept renting for a while, or moving in with her parents in Mississauga. “I’d have to figure out the GO trains and how to get rides from the station,” she said. “But really, the prospect isn’t so bad.”
After deciding not to make an offer for the badly renovated house, Matthew Slutsky and Carlie Brand took a break from their hunt for a few days, then resorted to Plan B: the flyer. Before expanding their search from Seaton Village, the couple had printed up a letter to tuck into the mailboxes of the houses they liked the best. “Dear Home Owner,” it read. “Last week my wife and I fell in love with your home….We would like an opportunity to see the inside and discuss the possibility of buying it from you. We are extremely serious….” Slutsky’s web company colleagues made fun of him for the somewhat hokey note—“We are looking for a wonderful home in which to start our new family,” read another line. All the flyer had turned up in Seaton Village were a few lonely senior citizens who called Slutsky for a chat (he spoke to one for half an hour, but declined her invitation for tea). Brand and Slutsky figured the tactic was worth another try, and spent a Saturday afternoon walking along their favourite streets in Hillcrest, delivering 80 flyers.
A few days later, the couple got a call from a man who was fixing up a house on Benson Avenue and planning to sell at the beginning of summer. A neighbour had given him the flyer, and he invited them to come and see the house. “It was perfect,” said Brand. “Three bedrooms, two parking spots. He was still renovating, so we had a chance to comment on style and colour.” The owner said that yes, he’d look at an offer, and so the couple got moving. Part of the seller’s motivation was to complete a private sale, bypassing the four or five per cent commission he’d need to pay real estate agents. This meant face-to-face negotiations and an airtight agreement hashed out between the two sides’ lawyers. Slutsky and Brand made two trips to the seller’s home in Oakville to discuss the purchase, agreeing to a long closing period in exchange for legal assurance that all of the renovations would be finished. In the end, the house was theirs for $860,000, well below their limit.
“It’s one of those great situations where everybody is happy,” said Slutsky. The private sale meant the seller didn’t have to find someone willing to pay $900,000 for his house in order to pocket the same profit. For the couple, it meant a chance to slowly consider exactly how much they wanted the house. It’s a semi, not detached, meaning at least one item had to be permanently struck from their wish list. They also had more time to decide just how much they were willing to pay. “Not having to go through a bidding war was such a win for us,” said Slutsky.
They plan to have two kids in quick succession and expect they’ll stay on Benson for at least five years, at which point they might again start coveting a detached home or a bigger yard. Brand is somewhat nervous that Toronto’s market will soften, but Slutsky is confident that a home as close to parks, amenities and the TTC as theirs will hold its value over the long term.
“Plus, it’s a big enough house that if the market crashed we could stay in it longer, don’t you think?” Slutsky asked his wife. She answered without hesitating: “Absolutely.”
Are You Worth More Dead Than Alive?
By JAMES VLAHOS
‘Do you see lights?” Ruben Robles asked his brother, Mark, in 2007. Bright, star-shaped and white, they flashed before Ruben’s eyes while he was driving, shopping at Costco, feeding the cats. Mark didn’t see anything, so Robles went to a doctor, who thought that the visions might be stress-induced. Robles ran a collection agency in Los Angeles, and the hours were long, the debtors argumentative. Several weeks later, Ruben began suffering seizures. He went to see another doctor, and this one ordered an M.R.I., which revealed a ghostly white orb on his left frontal lobe. The diagnosis was brain cancer. Only 36 years old, Ruben was told that he might not live to see his 38th birthday.
Horrified, Robles says he thought constantly about God. But his crisis was practical as well as existential. Over the next year and a half, surgeons operated on his brain three times, excising as much of the cancer as they safely could. The side effects of the operations left Robles barely able to walk and unable to speak more than a word or two at a time. He shuttered the collection agency. His wife left him, and Robles, needing daily help, squeezed into his mother’s Chihuahua-filled apartment. The medical bills were mounting, and Robles was worried: though he believed God would provide for him in the afterlife, what he desperately needed until then was money.
Ron Escobar, a close friend of Robles’s, went to Carole Fiedler, an insurance expert, for help. Fiedler saw that there was no vacation home or Google stock to unload. But Robles did have a life-insurance policy for half a million dollars. Life insurance is designed to benefit the living, a spouse or heirs, not those who perish. But Fiedler, who owns a firm called Innovative Settlements, knew that a life-insurance policy is an asset that can be resold to a friend or stranger just as a car, boat or house can. In a transaction known as a viatical settlement (for terminally ill patients) or a life settlement (for everyone else), the person selling his insurance gets an immediate cash payment. The buyer, in exchange, is named as the beneficiary and pays the premiums until the insured person dies. Life no longer afforded Robles a traditional way to make money, but to the right investor, Fiedler advised, his imminent death was worth a great deal.
Selling your life and selling a house have more in common than you’d think. The seller puts a listing on the market. Prospective buyers do research and get inspections; there are offers and counteroffers until the seller accepts a bid. The seller doesn’t literally peddle his own life, of course, but his life-insurance policy. The distinction is in many ways moot, however, as the sales value is inextricably linked to a cold-eyed estimation of how much longer the seller has to live. In the case of Robles’s policy, a life-settlement company in Georgia, Habersham Funding, expressed interest. Escobar shipped off six boxes’ worth of Robles’s medical records, thousands of pages in all, to Habersham. The firm, in turn, analyzed the records and also had them scrutinized by an external company specializing in life-expectancy analysis. Fiedler’s recollection is that the reports confirmed the grim prognosis and that Robles had less than two years left to live.
Fiedler, for her part, tried to convince Habersham that Robles was knocking on death’s door. The sooner Robles died, the fewer premiums the buyer would have to pay and the greater the potential value of his policy. “I would never lie, but my job is to make my clients look as bad as possible,” Fiedler says. Habersham opened its bidding at $250,000. “You’ve got to give us more money than that,” Fiedler recalls yelling during a phone negotiation. “This guy is really sick!” The company bumped its offer to $305,000. Fiedler accepted, and the stakes were set. The buyer’s profit would be the $500,000 insurance payout upon Robles’s death minus the $305,000 settlement and whatever the company had paid in premiums. Escobar, meanwhile, was hoping that his friend could beat the grim odds. “I told Ruben, ‘Look, they’re betting that you’re going to die,’ ” Escobar says. “ ‘You’re betting that you’ll live.’ ”
Betting on when somebody will die seems so creepy that it’s hard to believe the practice is legal. Sure, people pay good money to buy life-insurance policies, so perhaps that should confer the right to sell them as well. But the freedoms of ownership are not unlimited, especially when it comes to anything related to life and limb. Possession of and control over what happens to your own body is a fundamental human right. Nonetheless, that hasn’t stopped cultures from banning prostitution, organ sales or for-profit surrogate parenthood. The justification for such infringements upon bodily sovereignty is that people should be protected from financial incentives to harm themselves, and you could argue that a life settlement creates just such an incentive. A potential recipient, for instance, could try to win a larger settlement by offering a guarantee — if I’m not dead in, say, five years, I promise to kill myself so that you can collect the insurance money. That situation is admittedly far-fetched, but history has shown that when there’s a payday offered for someone’s demise, unscrupulous people will step in to hurry death along. In 16th- and 17th-century England, for example, it was legal to take out a life-insurance policy on a complete stranger, and as the historian Sharon Ann Murphy wrote, “these speculative life policies too often resulted in the murder of the insured.”
There are no known cases of murder to collect a life settlement-linked insurance payout. The financial practice originated not as a criminal scheme but as a way to help the terminally ill. In the late 1980s, people infected with AIDS often had little time to live and a great need for money. In response, financial planners established the viatical business. Flyers went up at gay bars and clubs encouraging people to sell their life-insurance policies for quick cash. Some financial planners even trolled hospital wards to find customers.
As the 1990s drew to a close, brokers realized that their thinking had been too limited. “The investors who had started this whole industry realized that the customer doesn’t just have to be someone who is terminally ill with H.I.V.,” says John Kraemer, a life-settlement broker in Southern California. “They could be anyone with an age or other health consideration that shortens life expectancy.”
Rebranded and redefined, the life-settlements business grew swiftly, reaching $12 billion in transactions by 2007. Therecession has since walloped the industry, as have well-publicized cases of fraud, in which unscrupulous brokers persuaded people to take out life-insurance policies expressly for the purpose of reselling them a couple of years later. Only $3.8 billion worth of policies changed hands in 2010, but insiders hope that the business will ultimately surpass its previous high. There are $18 trillion worth of active life-insurance policies in the United States alone, and very few people even know that they can sell their policies. “The public awareness is next to nil,” says Clark Hogan, the managing director of Opulen Capital, a life-settlements brokerage in Southern California. “The industry is in its infancy.”
Advocates of life settlements say that they offer fiscal relief in hard times, especially to seniors whose retirement portfolios have tanked. “We need to be singing at the tops of our voices that selling your life insurance is an option,” says Scott Page, president of the Lifeline Program, a large settlement company. For potential investors, meanwhile, the pitch is that settlements offer a safe harbor. Let the Dow rise, let the Dow fall; a death payout is an uncorrelated asset whose timing bears almost no connection to the mood swings of the market. In addition, both sides participating in settlement transactions are winners: the policy seller is paid upfront, and the buyer is paid even more later. Both parties are playing with house money — that of the insurance company — and the only question is how it will be divvied up.
For all the supposed benefits, settlements still strike many people as creepy. They invert the traditional incentives of life insurance. Insurance companies have always had an interest in you, the policyholder, living as long as possible so that they can collect more premiums. Generally, you also want to live a long time, for obvious reasons. But a settlement means someone hits the jackpot when you die, and the sooner that happens, the more money that person makes.
Clark Hogan represents people who want to sell their life-insurance policies. To find new clients, he cold-calls financial planners, accountants, attorneys and insurance agents. “Hey, good afternoon, Clark Hogan here,” he said one afternoon at the end of last year. “I’m wondering if you’ve ever had a client surrender a life-insurance policy and if you’ve considered a life settlement instead. . . .”
Seller’s agents like Hogan say that while it may seem wrong for strangers to profit from your demise, settlements are a resoundingly pro-consumer innovation. In the casino of life insurance, the game is rigged. The industry’s profit models rely upon the fact that more than two-thirds of customers lapse — stop paying premiums — before dying, thus invalidating their policies before their beneficiaries can collect a cent. People often have good reasons for doing this. A husband outlives his wife, the intended beneficiary. An elderly woman with a dwindling pension decides that she needs money for medical care now more than her heirs will need it later.
Policyholders have only one possible escape route beyond lapsing. If the policy has a redemption provision, the customer can sell it back to the insurance compan