Earlier this year, there was a football game between the Kansas City Chiefs and the Philadelphia Eagles.
I think you might heard of it?
It was called the “SuperBowl” or something like that.
Apparently, and I just learned this, there are people who will wager or “bet” money on the outcome of the game, or on a multitude of possible outcomes during the game.
I decided to become one of these individuals, so I bet $1,000 on the Philadelphia Eagles to win with a nice gentleman who runs a company called “Bet 365.”
The Philadelphia Eagles did not win, however, and that made me upset.
You see, I had merely assumed that I would win, and once I had lost, I regretted making the bet.
You see, after the game was played, I realized that I should have bet on the Kansas City Chiefs instead.
But the craziest thing happened: Bet365 didn’t want to give me my money back! Imagine that?
So I decided to take this to the media and I went to the Toronto Star to complain.
Alright, this didn’t happen.
Not only because I am vehemently against gambling, and I blame our federal government for ruining televised sports and making me not want to allow my children to watch with me for fear of being inundated with celebrities glorifying throwing their money away (except for all you ‘sharps’ who are always winning, right?), but also because this story is for illustrative purposes.
I know what gambling is, in all its forms.
Some people, it seems, do not.
When we hear “gambling,” we usually picture people standing at a roulette wheel in a casino, putting quarters into a slot machine, or filling out a betting slip at the horse track.
But what is gambling?
Here are a few definitions:
“Play games of chance for money”
“Take risky action in the hopes of a desired result”
“The practice or activity of betting”
“The practice of risking money or other stakes in a game of chance”
I think you get the picture.
Is investing in the stock market considered “gambling?”
There are a lot of financial advisors about to hate on me right now, but could we apply the definition of “gambling” to buying stock?
I suppose it depends on who you’re asking.
What would Mark Hanna say?
“Number one rule of Wall Street. Nobody – and I don’t care if you’re Warren Buffet or if you’re Jimmy Buffet – nobody knows if a stock is going to go up, down, sideways or in fucking circles. Least of all, stock brokers.”
Mark Hanna is a fictional character from “Wolf Of Wall Street,” played by Matthew McConaughey in what is one of my favourite movie characters of all time.
But to some, investing in the stock market is gambling.
To others, it’s a well-thought-out, researched, directed, strategic deployment of capital.
Either way, if you win, you get to keep your money. If you lose, you can’t get it back.
So let’s agree that there’s a gambling element to investing. And I mean investing in anything, whether it’s the stock market, real estate, gold coins, or a Banksy drawing.
Does anybody recognize this man?
That’s Cory Youmans from Dallas, Texas.
Last year, he was in the right place at the right time and caught “lightning in a bottle.”
Actually, he caught New York Yankees’ star, Aaron Judge’s 62nd homerun in the bleachers at the Texas Rangers’ stadium.
Even before the homerun was hit, the media, fans, and onlookers alike were discussing how much the ball would be worth once it was hit. Seats for the left-field bleachers were trading at astronomical prices as it was more than likely that the right-handed hitting Judge would hit his 62nd homerun to left field.
I mean, that’s gambling, right?
Paying more money for left-field seats than you would for infield seats because you have a higher percentage chance of catching a baseball that could be worth millions of dollars. Right?
Everybody knew that the ball would be worth a fortune, and as a result, the stadium security anticipated a potential mob of whoever caught it.
Here’s Mr. Youmans with a police officer who helped him “escape” with the ball:
Mr. Youmans became an overnight celebrity.
There were videos on social media of him walking with security and people asking him how much he wanted for the baseball.
In 1998, Mark McGwire broke Roger Maris’ homerun record, and at an auction in January of 1999, his 70th homerun ball sold for $3,005,000.
But Mark McGwire took steroids and many people think that his homerun record is tainted.
On the other hand, Aaron Judge is “clean.” He’s also a Yankee. He’s also a Yankee breaking the “legitimate” record of 61 homeruns set by Roger Maris, also a Yankee.
Early estimates had a “guarantee” of $2,000,000 for the baseball.
Here’s a Tweet from noted sports journalist, Darren Rovell:
But others began to suggest that Mr. Youmans could sell the ball for more than the Mark McGwire ball sold for.
In fact, this was confirmed in multiple articles:
Youmans confirmed he declined a $3 million offer and chose to auction the ball “after weeks of a lot of deep conversations” with his wife, sports reporter Bri Amaranthus, and his attorney.
The reasoning, of course wasn’t money in the end.
It was, apparently, fairness.
“It seems fair in the sense it gives anyone that is interested and has the means the opportunity to own it,” Youmans explained about the life-altering decision. Dave Baron, Youmans’ lawyer, said the auction house thinks the baseball could sell for “significantly higher” than $3 million “based on New York, the New York fan base and how crazy it could get at an auction.”
If you know anything about the sports memorabilia business, or if you’ve watched “King Of Collectibles: The Goldin Touch” on Netflix, you know that auction houses will often give guarantees or advances on memorabilia that is special.
Despite being guaranteed $2,000,000 by Memory Lane, Mr. Youmans ended up going the straight auction route with Goldin Auctions.
Leading up to the auction, Mr. Youmans’ lawyer suggested on multiple occasions that the ball could sell for more than $3,000,000. That quote above shows that he even said “significantly higher.”
What’s significant? $3,500,000?
Could we be talking about $4,000,000?
Does anybody know what this ball sold for in the end?
Have a look.
A paltry $1,250,000.
That cost the buyer $1,500,000 with the 20% buyer’s premium.
So let me ask you again: please define “gambling.”
Did Mr. Youmans gamble?
Damn right, he did!
He turned down $3,000,000, allegedly, and ended up with less than half of that.
Sidenote: it’s worth reading about Mr. Youmans who is a cancer survivor and has absolutely no regrets about his actions in selling the baseball, and who is very open about the entire experience.
So now we’re at the point where many of you are thinking, “Okay, David, where is all this going?”
It’s time, I agree.
As much as I want to talk about sports memorabilia, this is a real estate blog, after all.
If you had to define the word “variable,” what would you say?
As an adjective: “able to be changed or adapted.”
As a noun: “an element, feature, or factor that is liable to vary or change.”
Okay, so let’s agree that when just as when it comes to defining “gambling,” we use the word “chance” or “risk,” we can also assume any definition of “variable” will use the word “change.”
Now, let me ask a question that I’ve been holding back for quite a while, but one that I simply can’t avoid asking any longer?
How come so many people are caught off guard by variable-rate mortgages?
It’s a serious question.
Even though, in theory, nobody is really “caught off guard,” but rather you’d like to think they’re just disappointed, I think that if we’re all being very honest, we know that many people have absolutely no idea what the difference between a variable-rate mortgage and a fixed-rate mortgage is, or at least they know, but they don’t know the consequences.
Is anybody else picturing Homer Simpson?
“That damn record company. The first nine were only a penny. Then they jacked up the price!”
Starting last year, we saw a lot of articles in the mainstream media about “what’s going to happen when rates go up.” We read that a lot of people won’t be able to afford their increased mortgage payments, and we were told that there could be a massive sell-off.
Those of us that knew how variable rate mortgages worked were acutely aware of that, yes, when rates increased, so too would the monthly payments of many Canadians.
It goes without saying that some home-owners would end up with payments they could no longer afford, and it goes without saying that this would be a newsworthy story.
But an individual story? I mean, one of those “tales from the trenches” stories with woe-is-me home-owner?
I sympathize with anybody experiencing financial stress, let alone financial peril. But I don’t understand this article that appeared in the Toronto Star a couple of weeks ago:
“Barrie Area Woman Watches Mortgage Payments Go From $2,850 To $6,200, Forced To Sell”
The Toronto Star
August 3rd, 2023
It’s all over the place.
It talks about the woman who is being “forced” to sell her home, but it also talks about the COVID-19 pandemic (even though she bought after the pandemic), then delves off into food banks, and ends with talk about shoplifting.
There’s a lot happening here, and although I would be called an asshole by much of society for doing anything but siding with and defending the home-owner here, I think that much of the story is missing.
The headline tells the story, right?
A home-owner took a variable rate mortgage less than two years ago and started out paying $2,850 per month and is now paying $6,200.
But the theme of the story doesn’t make any sense.
The very first words of the article are: “The Bank of Canada recently hiked its overnight lending rate to five percent.”
That’s very, very indicative of where this article is going.
While the article isn’t blaming the Bank of Canada for this poor woman’s plight, the article sure doesn’t blame her for the variable-rate gamble either.
“To have to leave the home that we spent so much blood, sweat, and tears into building — everything was custom-built for our family here — and to now give that up, it definitely feels hard. But now, looking at rentals, we’re looking at rentals for $4,000 a month.”
It’s sad, no doubt.
But what’s this about “custom-built?”
They spent money on “custom-built” features, finishes, and furnishings?
Hmmm. Maybe the money spent on those items could have represented a “rainy day fund” for if and when interest rates increased and mortgage payments increased along with them?
“It’s not like we’re struggling for work or anything. We make good money. We have good jobs, but it’s just, we want to be able to live our lives and not be putting every dollar toward a mortgage.”
But what does “live your lives” mean?
Nice trips? Consumer goods? Custom-built features, finishes, and furnishings throughout the house?
And here’s the rub: when this woman accepted a variable-rate mortgage that resulted in payments of $2,850 per month, she could have likely accepted a fixed-rate mortgage that might have resulted in payments of $3,100, or something similar.
I would also add that the math doesn’t add up here.
I ran multiple scenarios and nothing about this added up.
Using a very basic example, we can see why.
Let’s say that a person paid $929,000 for a house with 20% down, and took a 2.29% rate with 30-year amortization.
That would result in a monthly payment of $2,851.92, or essentially the $2,850/month from the article, which is certainly rounded.
To get from $2,850/month to $6,200 per month would mean that a corresponding rate would have to reach approximately 9.6%, which rates have not. Not even close.
Something in this story doesn’t add up.
Trust me. I ran the numbers multiple times and with multiple scenarios.
There’s absolutely, positively, no way this story is accurate if we are to assume that it’s simply a case of a variable rate increasing.
It’s almost certain that there’s a home equity line of credit, second mortgage, or private loan in play here.
This article stinks.
The author goes from reporting on the increased monthly payments of variable rate mortgages to interviewing the executive director of the Barrie Food Bank!
From the article:
“A hike in interest rates for those with variable mortgages or loans will push more people to use our services.”
Now we’re linking variable rate mortgages to food bank usage? What’s next: increasing variable rate mortgages to an increase in shoplifting?
Oh, wait. We can read more about that if we simply get to the end of the article where things really go off the rails…
Do you know what I would love to see?
More articles about what mortgages are. More articles about the features of mortgages, types, styles, risks, and rewards.
I would love to see more of a focus on the variable element of the variable rate mortgage and an explanation of the pros and cons therein.
For example, perhaps an explanation of how a borrower could “take a gamble” on a variable-rate mortgage and “win” in the long run if rates stay low, but also how a borrower could “lose” if his or her “risk” didn’t pay off.
Because that’s what this is, right?
That’s what the decision to take a variable-rate or fixed-rate is?
An educated guess. A projection. A well-thought-out investment.
But there’s risk involved, just as there is for anybody who places a bet, whether that bet is on “Kansas City versus Philadelphia,” or whether that bet is on “put options on Tesla versus call options on Tesla,” or whether that bet is on “variable-rates versus fixed-rates.”
It’s a risk.
It’s a bet.
It’s a gamble.
It’s a damn variable.
That article by the Toronto Star is a puff-piece. It’s got a name, a face, and the “art” to go with it, notably, the home-owner standing out front of her dream home that she’s being “forced” to sell.
But it doesn’t help do anything except sell papers, get clicks, and rile people up.
It’s not the Bank of Canada’s fault.
It’s society’s fault for not making financial literacy a cornerstone of education.
And if we’re going to be fair, it’s the “fault” of those who made the decision, or bet, on the mortgage market. Whether that’s the home-owners, the mortgage broker, their financial advisor, or the fortune-teller at the mall down the street…