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My professional qualifications to discuss this topic are zilch. This is based entirely on anecdotal observations of recently having to buy a house in a reasonably hot market (Twin Cities) and still trying to sell a house in slow market (rural Manitoba). But I've found the contrast between Canada and the U.S. to be remarkable.

In Canada, CHMC (an arms-length federal corporation) provides mortgage insurance for non-traditional mortgages, but most people pony up 20% down to avoid paying mortgage insurance (you can tap your RRSP—an IRA/401(k) equivalent—without penalty if you're a first time homebuyer). Banks and credit unions sell mortgages, and while they repackage some of them as mortgage-backed securities for the bond market or mortgage-based mutual funds, they also hold an awful lot of first residential mortgages on their balance sheets (ca. 30-40% of their capital structure, substantially more for Credit Unions). Mortgage interest is not tax-deductible, although interest on loans made for investment purposed is deductible. Banks typically do not issue mortgages for longer than 7 years (even if the amortization period is 25 years), and right now you can get 350 bp for going with a 1 year convertible floating-rate loan (4.25%) as opposed to a 7 year fixed loan (7.75%). There are no financing or discount points at time of sale, and closing costs on a C$200 k house were about C$2,000 (ca. US$1,250), exclusive of pre-paid property taxes.

Contrast this with Amerika, where 10% down and PMI seems to be standard. Thirty-year fixed rates are typical, and even though I didn't want a 30-year mortgage (I'll be 72!), there was no real incentive to go with a floating rate (only 200 bp reduction for 1-yr floating versus 30-yr fixed!). Even a 15-year amortization only carved off 50 bp. So I got a 30-year loan for 6 1/8% that'll cost me about 4% on an after-tax basis. I pay my brokerage 6.5% U.S. and 7.5% Cdn for margin money right now, so I'll happily take that rate for 30 years, thank you very much. But why in the devil is the U.S. government subsidizing my debt burden for purchasing a home?

As soon as I got off the phone committing to a particular mortgage broker, before I even signed papers, her organization had already hedged their interest rate exposure. By the time we closed 3 weeks later, the yet-to-be issued mortgage had already been sold, twice! Wells Fargo owns it for now. And the number of parasites collecting frictional charges meant that closing costs were about 2.4% of purchase price, as opposed to half that in Canada. Title Insurance? What a total scam. I signed 2 documents to buy our house in Canada. I'm sure I signed 30 last week.

And what effects do easy money and frictional costs have on housing prices? That's hard to judge, and this part is very anecdotal, but I know from looking at dozens of houses that we got a relatively good deal in Minnesota. Our new house is about an equivalent distance from Mpls/St. Paul as I now am from Winnipeg, but we had to pay about twice as much for less house on a lot less property with higher maintenance costs.

I'm obviously venting, but I'm also interested in knowing if and how I can hedge a major purchase like this. Do you just say forget about it, you needed a house and you bought one? At a 4% after-tax cost of capital, it probably won't look so bad in another decade. Or do you take 30% of the value of your house and go short a correlated asset? I would have happily gone short Freddie, Fannie, or Sallie 2 months ago, but after $10-20 drops I'm not so eager (not that they aren't all still a long way above 0 if and when the 40:1 or 25:1 leverage turns on them) .

Todd
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