Boycott Citigroup . . .
Pay Higher Taxes?
How do ordinary citizens disgusted by serial government bailouts of Wall Street register their displeasure?
Assume that you are not prepared to join the ranks of the posse comitatus, and mail in your 1040 next April with just an expletive scrawled in crayon at the top, no payment enclosed.
Further assume that you do not have the ear of anyone in a position of authority, either on Wall Street or in Washington, and therefore are powerless to stop extremely good money -- trillions of money -- from being thrown after merely very good money.
Finally, assume that you have neither the inclination nor the aptitude (let alone the time!) to become a latter-day Howard Jarvis (of Proposition 11 fame in 1970's California); a Frank Capra-style Mr. Smith, bent on cleaning up a corrupt system; or even a Howard Beale ("Network"), decrying its ills.
What's left?
The one course of action remaining to the "little guy" would seem to be to vote with your consumerist feet. In other words: commit acts of financial civil disobedience.
Financial Civil Disobedience
Purely hypothetically, say the object of your displeasure is Citigroup. (Unfortunately, AIG has fewer retail lines of business.)
You could cut up your Citigroup credit card and replace it with one issued by another bank; withdraw your (diminishing) savings from Citigroup branches and open up an account across the street; and vow not to apply for a mortgage from Citigroup (not that you'd get one, anyways).
After all, it's supposedly a free country, and a free marketplace. What better way to punish an especially irresponsible financial scofflaw than to pull all of your business, modest as it may be?
Unfortunately, there are at least three problems with such an approach.
One. It might boomerang.
Imagine that such financial civil disobedience actually caught on, and Citigroup's business began to suffer as a result (the term's relative).
Citigroup would lose even more money, bringing it close to collapse (again). To prevent that, the government might very well feel compelled to inject yet more of your money into Citigroup to save it.
Perversely, the greater the public's resolve to kill Citigroup . . . the more expensive the government rescue.
"To Tell The Truth" -- Banking Version
Two. No good alternatives.
What if the bank across the street is just as bad? That is, what if every bank did what Citigroup did, and is now getting federal bailout money?
Imagine for a moment that you run a bank, and all your competitors who screwed up are getting cheap -- or free -- no-strings-attached, government money. Wouldn't you grab some, too, even if your bank was run conservatively (and profitably)?
Given that you compete with the "bailee-banks" for loans, deposits, etc., your competitive position would suffer if you didn't.
Now imagine that the government purposely obscured the distinction between "bad banks" and "good banks," by forcing the latter to accept bailout money. (Unfortunately, you don't need to imagine this -- it just happened.)
The result would be a surreal game of "To Tell the Truth," in which millions of ordinary consumers-cum contestants have to figure out which banks are genuinely virtuous, and which are impostors.
Three. Financial temptation/co-option, or, "cutting off your nose to spite your face."
The reason that Fannie Mae and Freddie Mac, so-called government sponsored entities ("GSE"s), had such spectacular access to cheap money was that its lenders believed -- correctly, it turned out -- that the federal government guaranteed their loans.
Now, the government is not only guaranteeing a big chunk of Citigroup's debt -- it's a shareholder! To protect its investment (and Citigroup's market share), the government logically should now make sure that Citigroup's rates on everything from mortgages to car loans are competitive. Perhaps too competitive.
Calling Howard Jarvis
If 30 year mortgages are available from Citigroup for 5%, and Hometown Bank for 5 1/2%, which are you going to choose? Ditto for CD's yielding 4% vs. only 3% at the competition. H-e-l-l-o . . . Citigroup!
These conundrums (and more) are exactly why government shouldn't decide which financial institutions should live and which should die, and why doing so leads to absurd and potentially disastrous outcomes.
In a market economy, the marketplace -- and the millions of consumers who comprise it -- make those decisions.
Sadly, the expression, "you can run, but you can't hide" now describes the futility of trying to shield your wallet -- and your descendants' -- from a federal government bent on ever-more expensive and wrongheaded bailouts.
Sunday, November 30, 2008
Wednesday, November 26, 2008
14 Offers!
Fern Hill Foreclosure Goes Fast
Yes, the home was priced $200k below tax value. And, yes, it was located in a strong neighborhood (Fern Hill) near Cedar Lake, and sat on a one-third acre lot. Still, it was a bank-owned foreclosure with zero curb appeal and more than a little rough around the edges, being sold "as is, where is" (as they say) -- no contingent offers entertained.
Don't believe me about the curb appeal? Take a look for yourself:
http://matrix.northstarmls.com/de.asp?ID=5511934353
So what happened after 4221 Cedar hit the market late last Friday?
It touched off a mini-feeding frenzy, attracting a total of 14(!) offers. The deadline for submitting something was yesterday noon, so presumably the bank has either accepted an offer by now, or is working with a handful of finalists.
What happens now? Thirteen would-be buyers go back to the drawing board, looking for the next opportunity. When they find it, you'd guess that they bid a little -- if not a lot -- more aggressively.
It may not make headlines, but such is the stuff of market bottoms . . .
Upcoming: Are there really multiple offers? How to tell.
Yes, the home was priced $200k below tax value. And, yes, it was located in a strong neighborhood (Fern Hill) near Cedar Lake, and sat on a one-third acre lot. Still, it was a bank-owned foreclosure with zero curb appeal and more than a little rough around the edges, being sold "as is, where is" (as they say) -- no contingent offers entertained.
Don't believe me about the curb appeal? Take a look for yourself:
http://matrix.northstarmls.com/de.asp?ID=5511934353
So what happened after 4221 Cedar hit the market late last Friday?
It touched off a mini-feeding frenzy, attracting a total of 14(!) offers. The deadline for submitting something was yesterday noon, so presumably the bank has either accepted an offer by now, or is working with a handful of finalists.
What happens now? Thirteen would-be buyers go back to the drawing board, looking for the next opportunity. When they find it, you'd guess that they bid a little -- if not a lot -- more aggressively.
It may not make headlines, but such is the stuff of market bottoms . . .
Upcoming: Are there really multiple offers? How to tell.
Mortgage Rate Rally Continues
Turning a Corner??
Mortgage rates barreled lower a second straight day today, dropping from 5 5/8% to 5 3/8% for thirty year loans.
That brings the two-day drop to almost a full point, roughly equivalent to a 1,000 point rally in the Dow Jones average -- which, not coincidentally, is what the stock market gained the last few days.
While it's true that lower rates don't help homeowners with negative equity or wrecked credit, they're a boon for millions of other Americans.
Consider who benefits:
--Virtually overnight, prospective home buyers have 10% more purchasing power.
--Home sellers suddenly have a bigger pool of buyers who can afford their home.
--Existing homeowners with mortgages above 6% can refinance, using the savings to buy other things. In turn, strengthened consumer demand helps bolster an economy in recession.
--Banks and loan officers have a wave of new business to accommodate (I'd much rather see banks make money the usual way -- making loans -- than need bailout money from taxpayers).
Thanksgiving, indeed.
Mortgage rates barreled lower a second straight day today, dropping from 5 5/8% to 5 3/8% for thirty year loans.
That brings the two-day drop to almost a full point, roughly equivalent to a 1,000 point rally in the Dow Jones average -- which, not coincidentally, is what the stock market gained the last few days.
While it's true that lower rates don't help homeowners with negative equity or wrecked credit, they're a boon for millions of other Americans.
Consider who benefits:
--Virtually overnight, prospective home buyers have 10% more purchasing power.
--Home sellers suddenly have a bigger pool of buyers who can afford their home.
--Existing homeowners with mortgages above 6% can refinance, using the savings to buy other things. In turn, strengthened consumer demand helps bolster an economy in recession.
--Banks and loan officers have a wave of new business to accommodate (I'd much rather see banks make money the usual way -- making loans -- than need bailout money from taxpayers).
Thanksgiving, indeed.
Mentioned in NY Times
Check Out Floyd Norris' Blog
in The New York Times!
In a column today titled, "Accelerating Falls," Floyd Norris, The New York Times business columnist, made a rare mistake in his analysis of the latest S&P/Case-Shiller housing numbers.
Specifically, he reported that, according to Case-Shiller, the Minneapolis market peaked in 2003. I emailed him to tell him that the actual peak here was much later, and questioned whether the market peaks for other cities were wrong, too.
He revisited his data, caught the mistake, and posted a correction very graciously acknowledging me and this blog.
Here's the link:
http://norris.blogs.nytimes.com/2008/11/25/accelerating-falls/
The gist of his post, which like everything Mr. Norris writes is excellent, is that prices in most markets nationally have rolled back to where they were several years ago.
in The New York Times!
In a column today titled, "Accelerating Falls," Floyd Norris, The New York Times business columnist, made a rare mistake in his analysis of the latest S&P/Case-Shiller housing numbers.
Specifically, he reported that, according to Case-Shiller, the Minneapolis market peaked in 2003. I emailed him to tell him that the actual peak here was much later, and questioned whether the market peaks for other cities were wrong, too.
He revisited his data, caught the mistake, and posted a correction very graciously acknowledging me and this blog.
Here's the link:
http://norris.blogs.nytimes.com/2008/11/25/accelerating-falls/
The gist of his post, which like everything Mr. Norris writes is excellent, is that prices in most markets nationally have rolled back to where they were several years ago.
Tuesday, November 25, 2008
Big Mortgage Market Rally
Big Drop in Mortgage Rates
I don't know what button the Fed or Treasury pushed today -- I've been mercifully out of the news loop* all day, doing what realtors do -- but clearly something happened to drive mortgage rates dramatically lower.
Rates fell from around 6% yesterday to 5 5/8% at the end of today. That may seem like a trivial drop, but it's the mortgage market equivalent of a 500 point gain in the Dow Jones.
Given all the complicated proposals to aid the housing market, what's been overlooked is that the single biggest -- and simplest -- way to spur demand for housing is to make it cheaper.
In turn, there are really only two ways to do that: 1) Sellers drop their prices; or 2) financing becomes cheaper (the vast majority of residential housing is purchased with borrowed money). There is actually a third way -- consumers make more money -- but that's off the table during a recession.
After all the cash pumped into banks this Fall, it's about time for a little of it to actually reach the housing market in the form of lower rates.
*Here's the missing link explaining the rate drop:
"The mortgage markets were electrified by the Fed’s announcement that it would swoop in and buy up to $600 billion in debt tied to mortgages guaranteed by Fannie Mae and Freddie Mac. Interest rates on 30-year fixed-rate mortgages fell almost a full percentage point, to 5.5 percent, from 6.3 percent." -- The New York Times (11/26/08).
I don't know what button the Fed or Treasury pushed today -- I've been mercifully out of the news loop* all day, doing what realtors do -- but clearly something happened to drive mortgage rates dramatically lower.
Rates fell from around 6% yesterday to 5 5/8% at the end of today. That may seem like a trivial drop, but it's the mortgage market equivalent of a 500 point gain in the Dow Jones.
Given all the complicated proposals to aid the housing market, what's been overlooked is that the single biggest -- and simplest -- way to spur demand for housing is to make it cheaper.
In turn, there are really only two ways to do that: 1) Sellers drop their prices; or 2) financing becomes cheaper (the vast majority of residential housing is purchased with borrowed money). There is actually a third way -- consumers make more money -- but that's off the table during a recession.
After all the cash pumped into banks this Fall, it's about time for a little of it to actually reach the housing market in the form of lower rates.
*Here's the missing link explaining the rate drop:
"The mortgage markets were electrified by the Fed’s announcement that it would swoop in and buy up to $600 billion in debt tied to mortgages guaranteed by Fannie Mae and Freddie Mac. Interest rates on 30-year fixed-rate mortgages fell almost a full percentage point, to 5.5 percent, from 6.3 percent." -- The New York Times (11/26/08).
Banking Bailout Trivia Quiz
Name that Bank Executive!
You helped lead one of the country's biggest banks for a decade, during which time you collected hundreds of millions in compensation. Now that bank needs an open-ended cash infusion from U.S. taxpayers to stem the bleeding. First installment: $300 billion, with more (perhaps much more) to come.
What do you do for an encore?
a. Renounce your worldly possessions and head to the slums of Calcutta to minister to the poor.
b. Hit the golf course!
c. Head to prison
d. Forfeit your fortune to U.S. taxpayers, as a down payment on what they're putting up to bail out your bank.
e. Join the new administration as a senior advisor.
Answer: (e)
Bonus round questions: 1) name the official; 2) name the bank.
You helped lead one of the country's biggest banks for a decade, during which time you collected hundreds of millions in compensation. Now that bank needs an open-ended cash infusion from U.S. taxpayers to stem the bleeding. First installment: $300 billion, with more (perhaps much more) to come.
What do you do for an encore?
a. Renounce your worldly possessions and head to the slums of Calcutta to minister to the poor.
b. Hit the golf course!
c. Head to prison
d. Forfeit your fortune to U.S. taxpayers, as a down payment on what they're putting up to bail out your bank.
e. Join the new administration as a senior advisor.
Answer: (e)
Bonus round questions: 1) name the official; 2) name the bank.
Sunday, November 23, 2008
Leaf-raking Slackers
Hubcaps for Plates & Banjo-picking Albinos
I always thought that the worst that could happen to you if you didn't rake your leaves is that your neighbors would glare at you, and you might get some sort of citation. Clearly, I lacked imagination.
According to Garrison Keillor, worse -- much worse -- potentially lies in store:
So, according, to Keillor, how does one find salvation, if it isn't already too late? Snow-shoveling.
I always thought that the worst that could happen to you if you didn't rake your leaves is that your neighbors would glare at you, and you might get some sort of citation. Clearly, I lacked imagination.
According to Garrison Keillor, worse -- much worse -- potentially lies in store:
"Those unraked leaves of slackers will freeze and form a hard crust and kill the grass. In the Spring, they'll seed and lay sod but grass will never grow there again, due to powerful toxins created by unraked leaves, and as a result those homes will lose half their value and the nonrakers will go bankrupt . . . Those families will be forced to migrate south and pick cotton and live in shotgun shacks and eat biscuits and gravy with hubcaps for plates and be tormented by red-eyed evangelists and banjo-picking albinos and clouds of horseflies and cottonmouth snakes slithering into the bedroom at right."
--Star Tribune (11/23/08)
So, according, to Keillor, how does one find salvation, if it isn't already too late? Snow-shoveling.
Stuck (Broken?) Elevator
Case of the Missing Equity . . times Millions?
As a realtor, I think of housing as an escalator that roughly corresponds to people's life stages.
In your 20's, you buy a condo or starter home. When (and if) you get married, you and your partner buy a small family home. When (and if) you have more money and start having kids, you move up to a bigger home.
A couple decades later, after the kids have moved out and you're an empty-nester, it's time for less space, often a town home or condo.
Finally, when health issues predominate in later life, assisted living may be appropriate.
What's that got to do with today's housing market?
In many markets, the housing escalator is stuck -- or broken. Just as global economies and equity markets are now interconnected, a malfunction in one part of the escalator has consequences for all the other parts.
Broken Escalator
Until now, by far the most attention has been focused on the escalator's beginning rungs. That's where first-time Buyers with marginal credit made their first step onto the housing escalator -- and promptly got thrown off, or stuck.
The reasons and fallout have dominated the news for well over a year now: aggressive, "gotcha" loans to people with marginal credit; loose lending standards; overheated housing markets that are now plagued with an overhang of both existing inventory and new housing.
However, much less remarked is what's happening at the escalator's more advanced rungs. In particular, many elderly home owners are also suffering fallout from a broken escalator.
The New York Times just ran an excellent story exploring this phenomenon titled, "In Housing Slump, Elderly Forgo Assisted Living" (11/21/08):
http://www.nytimes.com/2008/11/22/us/22home.html?_r=1&hp
As a realtor, I just witnessed something similar in the course of selling a Minnetonka town home.
The town home was a perfect downsizing choice for someone who no longer needed a big, single family home -- exactly my client's circumstances when she and her husband purchased it 20 years earlier. Now, as a widow approaching 80, it was time for the next "rung" on the elevator: a condo in a new, full service building with nice amenities, true one-level living (vs. stairs), and less living space.
The Case of the Missing Equity
As a listing agent, I tailored my marketing to prospective downsizers, and had no trouble generating traffic at my numerous open houses. Although I heard the occasional negative feedback, by far the most reaction was a wistful, "this is exactly what I'm looking for. I just wish I could afford it."
Given that most of these people had been homeowners for decades, and the townhome's relatively modest price, my reaction was a dumbfounded, "hunh??" Weren't their homes long paid off?
The surprising, all-too-frequent answer was, "no." Many, many of "The Greatest Generation" had taken equity out of their homes, to the point where their ability to finance even a less expensive property was jeopardized. Even if they hadn't taken equity out, they were concerned about what their homes would fetch in a soft (and deteriorating) market.
(Just as an aside, if the home equity had gone towards expensive toys and consumption, I didn't see it: most of the 60-something's coming through my open houses were conservatively dressed, driving older model cars, etc.).
My client's town home finally did sell, but the market time was relatively long, and the price, although consistent with the new market reality, disappointing. As I told my client, it's one thing to wonder if you sold too low when it sells in a week. However, after 8 months on the market, 7 Sunday open houses, 3 broker opens, print ads, volleys of mailings to the neighborhood, and more than 50(!) showings . . . you don't have to worry about that.
Multiply my client's experience by a couple million and you have today's real estate market.
As a realtor, I think of housing as an escalator that roughly corresponds to people's life stages.
In your 20's, you buy a condo or starter home. When (and if) you get married, you and your partner buy a small family home. When (and if) you have more money and start having kids, you move up to a bigger home.
A couple decades later, after the kids have moved out and you're an empty-nester, it's time for less space, often a town home or condo.
Finally, when health issues predominate in later life, assisted living may be appropriate.
What's that got to do with today's housing market?
In many markets, the housing escalator is stuck -- or broken. Just as global economies and equity markets are now interconnected, a malfunction in one part of the escalator has consequences for all the other parts.
Broken Escalator
Until now, by far the most attention has been focused on the escalator's beginning rungs. That's where first-time Buyers with marginal credit made their first step onto the housing escalator -- and promptly got thrown off, or stuck.
The reasons and fallout have dominated the news for well over a year now: aggressive, "gotcha" loans to people with marginal credit; loose lending standards; overheated housing markets that are now plagued with an overhang of both existing inventory and new housing.
However, much less remarked is what's happening at the escalator's more advanced rungs. In particular, many elderly home owners are also suffering fallout from a broken escalator.
The New York Times just ran an excellent story exploring this phenomenon titled, "In Housing Slump, Elderly Forgo Assisted Living" (11/21/08):
http://www.nytimes.com/2008/11/22/us/22home.html?_r=1&hp
As a realtor, I just witnessed something similar in the course of selling a Minnetonka town home.
The town home was a perfect downsizing choice for someone who no longer needed a big, single family home -- exactly my client's circumstances when she and her husband purchased it 20 years earlier. Now, as a widow approaching 80, it was time for the next "rung" on the elevator: a condo in a new, full service building with nice amenities, true one-level living (vs. stairs), and less living space.
The Case of the Missing Equity
As a listing agent, I tailored my marketing to prospective downsizers, and had no trouble generating traffic at my numerous open houses. Although I heard the occasional negative feedback, by far the most reaction was a wistful, "this is exactly what I'm looking for. I just wish I could afford it."
Given that most of these people had been homeowners for decades, and the townhome's relatively modest price, my reaction was a dumbfounded, "hunh??" Weren't their homes long paid off?
The surprising, all-too-frequent answer was, "no." Many, many of "The Greatest Generation" had taken equity out of their homes, to the point where their ability to finance even a less expensive property was jeopardized. Even if they hadn't taken equity out, they were concerned about what their homes would fetch in a soft (and deteriorating) market.
(Just as an aside, if the home equity had gone towards expensive toys and consumption, I didn't see it: most of the 60-something's coming through my open houses were conservatively dressed, driving older model cars, etc.).
My client's town home finally did sell, but the market time was relatively long, and the price, although consistent with the new market reality, disappointing. As I told my client, it's one thing to wonder if you sold too low when it sells in a week. However, after 8 months on the market, 7 Sunday open houses, 3 broker opens, print ads, volleys of mailings to the neighborhood, and more than 50(!) showings . . . you don't have to worry about that.
Multiply my client's experience by a couple million and you have today's real estate market.
Saturday, November 22, 2008
Linden Hills Preview
Star Trib Features New Listing
Looking for a great home in the middle of high-demand Linden Hills? Check out today's Star Trib real estate section:
http://www.startribune.com/homes/sell/34819879.html?elr=KArksLckDiUvckDiUiD3aPc:_Yyc:aULPQL7PQLanchO7DiU
The home that goes with the dramatic Living Room is 3929 Washburn Ave. South, just two blocks south of Lake Calhoun; it has 4 BR's, 2 Baths and over 2,200 FSF. List price will be $479,900.
Look for it on the market right after Thanksgiving!
Looking for a great home in the middle of high-demand Linden Hills? Check out today's Star Trib real estate section:
http://www.startribune.com/homes/sell/34819879.html?elr=KArksLckDiUvckDiUiD3aPc:_Yyc:aULPQL7PQLanchO7DiU
The home that goes with the dramatic Living Room is 3929 Washburn Ave. South, just two blocks south of Lake Calhoun; it has 4 BR's, 2 Baths and over 2,200 FSF. List price will be $479,900.
Look for it on the market right after Thanksgiving!
Friday, November 21, 2008
Watch the Denominator
"Context, Context, Context"
I've got numerous clients, savvy investors all, who are beginning to nibble on distressed properties, including multi-family units like condo's. For those so-inclined, the new mantra is "context, context, context."
That plays out two ways.
First, multi-family units typically bear a pro rata share of their building or complex's common area charges. To take just one example, I just sold a Minnetonka townhome in a 22 unit complex that had a $300 monthly association fee.
What if suddenly one-third of those units went into foreclosure? (They didn't, and won't -- the complex is extremely well-run, is in a great location, has low turnover, etc.)
The complex would still have the same expenses, but they would be divided across a smaller base. At the very least, the foreclosure units would likely fall behind on their share of the townhouse association's dues, crimping its ability to perform things like standard maintenance, snow removal and lawn care, etc. Such is the stuff of vicious (as opposed to virtuous) cycles.
The other consideration when scouting an investment is to know what's around you. One foreclosure on a block -- or in a building -- likely isn't fatal. But a couple can signify a very dangerous trend, and more than a couple probably isn't worth the risk, especially when there are so many other choices.
Fortunately, a good realtor, using the tools provided by MLS, can advise clients accordingly. In my case, being a CPA/attorney is a good start when it comes to assessing the financial strength of any given building or development (though I'm careful to advise clients who get that far to consult someone who's licensed and has practiced within the last decade!).
I've got numerous clients, savvy investors all, who are beginning to nibble on distressed properties, including multi-family units like condo's. For those so-inclined, the new mantra is "context, context, context."
That plays out two ways.
First, multi-family units typically bear a pro rata share of their building or complex's common area charges. To take just one example, I just sold a Minnetonka townhome in a 22 unit complex that had a $300 monthly association fee.
What if suddenly one-third of those units went into foreclosure? (They didn't, and won't -- the complex is extremely well-run, is in a great location, has low turnover, etc.)
The complex would still have the same expenses, but they would be divided across a smaller base. At the very least, the foreclosure units would likely fall behind on their share of the townhouse association's dues, crimping its ability to perform things like standard maintenance, snow removal and lawn care, etc. Such is the stuff of vicious (as opposed to virtuous) cycles.
The other consideration when scouting an investment is to know what's around you. One foreclosure on a block -- or in a building -- likely isn't fatal. But a couple can signify a very dangerous trend, and more than a couple probably isn't worth the risk, especially when there are so many other choices.
Fortunately, a good realtor, using the tools provided by MLS, can advise clients accordingly. In my case, being a CPA/attorney is a good start when it comes to assessing the financial strength of any given building or development (though I'm careful to advise clients who get that far to consult someone who's licensed and has practiced within the last decade!).
Stuck Rates
High Mortgage Rates Defy Drops Elsewhere
T-bill's are yielding zero, the Fed Funds overnight rate is 1%, the 10 year bond is at 3% . . . and mortgage rates are still at 6%? What gives?
Traditionally, 30 year mortgages are 160 basis points above the 10 year bond. If that relationship held now, mortgages would be at 4.6%. Think 4.6% mortgages would stimulate home sales? You 'betcha.
Unfortunately, like so many facets of today's dysfunctional credit and equity markets, traditional relationships no longer apply, and gravity has been suspended, at least temporarily.
T-bill's are yielding zero, the Fed Funds overnight rate is 1%, the 10 year bond is at 3% . . . and mortgage rates are still at 6%? What gives?
Traditionally, 30 year mortgages are 160 basis points above the 10 year bond. If that relationship held now, mortgages would be at 4.6%. Think 4.6% mortgages would stimulate home sales? You 'betcha.
Unfortunately, like so many facets of today's dysfunctional credit and equity markets, traditional relationships no longer apply, and gravity has been suspended, at least temporarily.
Thursday, November 20, 2008
How about ExxonMobil instead??
Portfolio of Dogs
"I wouldn't want to belong to any club that would have me as a member."
--Woody Allen
That's how I feel about the U.S. government buying, ostensibly on my behalf, an equity slice (or several) in household names like Fannie Mae, Freddie Mac, AIG, Wells Fargo, Bank of America, Citigroup, and countless others.
Just me talking out loud, but if my tax dollars now give me a .0000000000000000001% stake in a portfolio of American corporations, why do they all have to be dogs? Why can't they be profit-gushers like ExxonMobil or Chevron Texaco? Or at least Wal-Mart, Johnson & Johnson, Microsoft or any of dozens of other venerable companies that are still making a profit and have positive net worth?
When it comes to the first group of companies, U.S. taxpayers would appear to be not so much "stakeholders" as "bag-holders" (as in, "left, holding").
"I wouldn't want to belong to any club that would have me as a member."
--Woody Allen
That's how I feel about the U.S. government buying, ostensibly on my behalf, an equity slice (or several) in household names like Fannie Mae, Freddie Mac, AIG, Wells Fargo, Bank of America, Citigroup, and countless others.
Just me talking out loud, but if my tax dollars now give me a .0000000000000000001% stake in a portfolio of American corporations, why do they all have to be dogs? Why can't they be profit-gushers like ExxonMobil or Chevron Texaco? Or at least Wal-Mart, Johnson & Johnson, Microsoft or any of dozens of other venerable companies that are still making a profit and have positive net worth?
When it comes to the first group of companies, U.S. taxpayers would appear to be not so much "stakeholders" as "bag-holders" (as in, "left, holding").
On or Off?
Taking it Off the Market: Pro's and Con's
Perhaps the number one question realtors field from Sellers this time of year is, "should I take my home off the market for the holidays?" (Question number two? "Should I wait until after the holidays -- or even Spring -- to put my home on the market?").
Assuming that you don't know whether the market is going to be weaker or stronger in six months -- if you do, I'd like to talk to you ASAP! -- the analysis goes something like this.
Leave it On
The best three arguments for keeping your home on the market are as follows.
One. Buyer quality over quantity. The only way to get an offer is to get showings. To get showings . . your home needs to be on the market. Put another way: while it may be true that a relatively small percentage of homes on the market sell during the holidays, 100% of homes not on the market will fail to sell. Or if you prefer, "if your parents don't have children, you won't either."
According to conventional wisdom, there may be fewer Buyers looking during the holidays, but the ones who are, are more motivated. The motivation can be a job relocation, an imminent new family member, an expiring lease, etc. Regardless, if someone is taking time away from family and friends to look at your home, in a "weather-challenged" time of year, they're probably serious.
Two. Less Competition. The second reason to stay on the market is supply-related. I like to tell clients that the Spring market kicks off when Target switches from selling gloves to selling swimsuits -- usually, around mid-Feb. Plenty of Sellers plan to relax over the holidays, then immediately afterwards start whipping their house into shape so they're ready by mid-Feb. I'm working with several of them now.
If you don't want to compete with that looming new supply . . . sell before it hits the market.
Three. Holiday cheer: the best staging!
Even though it can be dark and cold, some homes truly look their best during the holidays. Holiday lights and decorations, cooking for company, etc. can all combine to fill your home with the emotional qualities that Buyers find especially inviting. Buyers want to buy homes that they fall in love with, and all the trappings associated with the holidays can make that easier.
Take it Off
The three-part case for taking your home off the market is as follows:
One. It's inconvenient and intrusive. The same entertaining that can make a home especially appealing over the holidays can make it an inconvenient time to clear out for a showing.
Ditto for trying to keep your home pristine on the off chance that a prospective Buyer may want to see it.
Two. Leverage. Trying to sell something when few people are buying can look desperate. And Buyers tend not to make especially strong offers to Sellers who look desperate.
Three. It's demoralizing. If the odds are against you . . take a break! Without a big "For Sale" sign in your front lawn, it needn't be the first topic of conversation at all those holiday gatherings you'll be busy hosting. Too, demoralized Sellers tend to have "demoralized" homes: dark, a bit unkempt (vs. kempt), and generally not fresh and welcoming.
Personal Circumstances
Ultimately, the decision about whether to take a property off the market or leave it on is house-specific and Seller-specific.
If you are being transferred out-of-state Jan. 1, you probably leave your home on.
On the other hand, if you've had all of three showings since Labor Day, my advice would be to temporarily take your home off the market (thankfully, none of my sellers are in this predicament!).
Use the holidays to make some cost-effective improvements, then bring it back on closer to Feb., at a more attractive price -- ideally, coupled with a big marketing push.
Perhaps the number one question realtors field from Sellers this time of year is, "should I take my home off the market for the holidays?" (Question number two? "Should I wait until after the holidays -- or even Spring -- to put my home on the market?").
Assuming that you don't know whether the market is going to be weaker or stronger in six months -- if you do, I'd like to talk to you ASAP! -- the analysis goes something like this.
Leave it On
The best three arguments for keeping your home on the market are as follows.
One. Buyer quality over quantity. The only way to get an offer is to get showings. To get showings . . your home needs to be on the market. Put another way: while it may be true that a relatively small percentage of homes on the market sell during the holidays, 100% of homes not on the market will fail to sell. Or if you prefer, "if your parents don't have children, you won't either."
According to conventional wisdom, there may be fewer Buyers looking during the holidays, but the ones who are, are more motivated. The motivation can be a job relocation, an imminent new family member, an expiring lease, etc. Regardless, if someone is taking time away from family and friends to look at your home, in a "weather-challenged" time of year, they're probably serious.
Two. Less Competition. The second reason to stay on the market is supply-related. I like to tell clients that the Spring market kicks off when Target switches from selling gloves to selling swimsuits -- usually, around mid-Feb. Plenty of Sellers plan to relax over the holidays, then immediately afterwards start whipping their house into shape so they're ready by mid-Feb. I'm working with several of them now.
If you don't want to compete with that looming new supply . . . sell before it hits the market.
Three. Holiday cheer: the best staging!
Even though it can be dark and cold, some homes truly look their best during the holidays. Holiday lights and decorations, cooking for company, etc. can all combine to fill your home with the emotional qualities that Buyers find especially inviting. Buyers want to buy homes that they fall in love with, and all the trappings associated with the holidays can make that easier.
Take it Off
The three-part case for taking your home off the market is as follows:
One. It's inconvenient and intrusive. The same entertaining that can make a home especially appealing over the holidays can make it an inconvenient time to clear out for a showing.
Ditto for trying to keep your home pristine on the off chance that a prospective Buyer may want to see it.
Two. Leverage. Trying to sell something when few people are buying can look desperate. And Buyers tend not to make especially strong offers to Sellers who look desperate.
Three. It's demoralizing. If the odds are against you . . take a break! Without a big "For Sale" sign in your front lawn, it needn't be the first topic of conversation at all those holiday gatherings you'll be busy hosting. Too, demoralized Sellers tend to have "demoralized" homes: dark, a bit unkempt (vs. kempt), and generally not fresh and welcoming.
Personal Circumstances
Ultimately, the decision about whether to take a property off the market or leave it on is house-specific and Seller-specific.
If you are being transferred out-of-state Jan. 1, you probably leave your home on.
On the other hand, if you've had all of three showings since Labor Day, my advice would be to temporarily take your home off the market (thankfully, none of my sellers are in this predicament!).
Use the holidays to make some cost-effective improvements, then bring it back on closer to Feb., at a more attractive price -- ideally, coupled with a big marketing push.
Tuesday, November 18, 2008
Foreclosure Bottlenecks
Unclogging the Foreclosure Market
. . . on the Cheap
Want to fix the economy? First you have to address its Achilles' Heel, the weak national housing market. In turn, that means addressing housing's Achilles' Heel, the burgeoning number of foreclosures.
Instead of throwing tens of billions at former investment banks, Washington would do well to enlist -- for a fraction of the cost -- an entity that's much better situated to directly help the housing market. That's because it conveniently already has thousands of local housing experts strategically located in dozens of the hardest-hit U.S. markets.
Who's that? The National Association of Realtors, and, at least at the moment, its distinctly underemployed one-million plus members.
View from the Trenches
It's no secret among realtors working with "lender-mediated properties" (foreclosures and short sales) that bank response times are terrible. Weeks can go by without hearing anything, by which time any serious Buyer has likely lost patience and moved on.
No wonder so many distressed properties are languishing on the market.
However, clearly another aggravating factor in the dysfunctional, molasses-like foreclosure market is the overloaded listing agents representing such properties -- and the cut-rate commissions the banks are offering them (hmm . . . maybe there's a connection??).
It's not unusual today to find one realtor representing dozens of foreclosed properties. Indeed, a few minutes searching on MLS popped up at least four Twin Cities agents whose current listing inventory approaches or exceeds 100 foreclosed properties.
To put that in perspective, the average realtor closes anywhere from 8-12 "transaction sides" a year. Assuming those are evenly split between sales (representing Buyers) and listings (representing Sellers), that translates into 4 to 6 listings annually. Factoring in average market time, you'd guesstimate that at any given time, the average realtor has 1-3 active listings.
Nobody Home . . in Every Sense
So what happens when a realtor has ten -- or one hundred -- times that number of active listings? Not surprisingly . . very little.
Calls and emails from Buyer's agents get returned slowly, if at all. There's little or no information available about the home, either online or in the home -- never mind fancy color photos or any other marketing materials. You can also forget about Seller disclosures, municipal inspections, or any of the myriad other "trappings" of a listing not in foreclosure.
Even such basics as a functioning lockbox on the front door, to permit access, aren't a given (any idea how much 100 decent lockboxes cost??).
Such are the hallmarks of a low fee, high volume business -- which is exactly what brokering foreclosure sales is.
Real Estate "Combat Pay"
Instead of around 3% per listing, it's typical for foreclosure agents to get paid half of that, if not just a flat fee. Factor in the asking price of many foreclosures -- often under $100k -- and the listing agent's take may come to as little as $500 per house after subtracting their expenses and the listing broker's cut. That's not much for the real estate equivalent of combat pay.
Industry-wide, realtors are suffering from a triple whammy of shrinking volume, dropping prices, and shrinking margins. Bottom line: realtor commissions have dropped from almost $100 billion in 2005 to about half that this year.
That $50 billion pie is split amongst 1.2 million realtors. To put that in perspective, the top 25 hedge-fund managers earned $16 billion in 2007. The top-ranked manager, John Paulson, personally made $3.7 billion. How? . . . . drum roll, please . . . by essentially shorting the housing market.
Cheap Solution(s)
The foregoing suggests that, instead of throwing mega-billions at Wall Street, policy makers who want to stabilize housing could get a lot more bang for their buck doing something about the anemic commissions associated with foreclosures.
For a measly $5 billion -- half of what Goldman Sachs just got, or what AIG is getting weekly -- Washington could dangle a $5k carrot in front of every realtor selling a property in foreclosure. In turn, that money would ensure that realtors selling foreclosures can do their jobs properly. In other words, serve as liaisons to the bank-owners; attract and convert surprisingly strong Buyer interest in foreclosures into offers and closed deals; and otherwise make sure that someone competent is "minding the store" (the banks themselves clearly aren't).
Meanwhile, local governments could also help clear the foreclosure market by not heaping fees on foreclosed homes to recoup their increased expenses.
It's one thing to hike fees 10% or 20% -- but double or triple smacks of opportunism (and frankly, idiocy, given the consequences -- the fees usually become a lien against the property, which has the same effect as a tax. Aren't we trying to stimulate sales right now??).
Finally, the banks themselves may want to reconsider the wisdom of paying realtors as little as possible to urgently attend to what should be their highest priority. Perhaps a certain large new, taxpayer-supported shareholder can help in that regard.
Oh . . and banks with lots of foreclosures on their books may also want to re-think whether a local realtor who's currently sitting on 156 unsold properties (no, that's not a typo) should really be hired to list number 157.
. . . on the Cheap
Want to fix the economy? First you have to address its Achilles' Heel, the weak national housing market. In turn, that means addressing housing's Achilles' Heel, the burgeoning number of foreclosures.
Instead of throwing tens of billions at former investment banks, Washington would do well to enlist -- for a fraction of the cost -- an entity that's much better situated to directly help the housing market. That's because it conveniently already has thousands of local housing experts strategically located in dozens of the hardest-hit U.S. markets.
Who's that? The National Association of Realtors, and, at least at the moment, its distinctly underemployed one-million plus members.
View from the Trenches
It's no secret among realtors working with "lender-mediated properties" (foreclosures and short sales) that bank response times are terrible. Weeks can go by without hearing anything, by which time any serious Buyer has likely lost patience and moved on.
No wonder so many distressed properties are languishing on the market.
However, clearly another aggravating factor in the dysfunctional, molasses-like foreclosure market is the overloaded listing agents representing such properties -- and the cut-rate commissions the banks are offering them (hmm . . . maybe there's a connection??).
It's not unusual today to find one realtor representing dozens of foreclosed properties. Indeed, a few minutes searching on MLS popped up at least four Twin Cities agents whose current listing inventory approaches or exceeds 100 foreclosed properties.
To put that in perspective, the average realtor closes anywhere from 8-12 "transaction sides" a year. Assuming those are evenly split between sales (representing Buyers) and listings (representing Sellers), that translates into 4 to 6 listings annually. Factoring in average market time, you'd guesstimate that at any given time, the average realtor has 1-3 active listings.
Nobody Home . . in Every Sense
So what happens when a realtor has ten -- or one hundred -- times that number of active listings? Not surprisingly . . very little.
Calls and emails from Buyer's agents get returned slowly, if at all. There's little or no information available about the home, either online or in the home -- never mind fancy color photos or any other marketing materials. You can also forget about Seller disclosures, municipal inspections, or any of the myriad other "trappings" of a listing not in foreclosure.
Even such basics as a functioning lockbox on the front door, to permit access, aren't a given (any idea how much 100 decent lockboxes cost??).
Such are the hallmarks of a low fee, high volume business -- which is exactly what brokering foreclosure sales is.
Real Estate "Combat Pay"
Instead of around 3% per listing, it's typical for foreclosure agents to get paid half of that, if not just a flat fee. Factor in the asking price of many foreclosures -- often under $100k -- and the listing agent's take may come to as little as $500 per house after subtracting their expenses and the listing broker's cut. That's not much for the real estate equivalent of combat pay.
Industry-wide, realtors are suffering from a triple whammy of shrinking volume, dropping prices, and shrinking margins. Bottom line: realtor commissions have dropped from almost $100 billion in 2005 to about half that this year.
That $50 billion pie is split amongst 1.2 million realtors. To put that in perspective, the top 25 hedge-fund managers earned $16 billion in 2007. The top-ranked manager, John Paulson, personally made $3.7 billion. How? . . . . drum roll, please . . . by essentially shorting the housing market.
Cheap Solution(s)
The foregoing suggests that, instead of throwing mega-billions at Wall Street, policy makers who want to stabilize housing could get a lot more bang for their buck doing something about the anemic commissions associated with foreclosures.
For a measly $5 billion -- half of what Goldman Sachs just got, or what AIG is getting weekly -- Washington could dangle a $5k carrot in front of every realtor selling a property in foreclosure. In turn, that money would ensure that realtors selling foreclosures can do their jobs properly. In other words, serve as liaisons to the bank-owners; attract and convert surprisingly strong Buyer interest in foreclosures into offers and closed deals; and otherwise make sure that someone competent is "minding the store" (the banks themselves clearly aren't).
Meanwhile, local governments could also help clear the foreclosure market by not heaping fees on foreclosed homes to recoup their increased expenses.
It's one thing to hike fees 10% or 20% -- but double or triple smacks of opportunism (and frankly, idiocy, given the consequences -- the fees usually become a lien against the property, which has the same effect as a tax. Aren't we trying to stimulate sales right now??).
Finally, the banks themselves may want to reconsider the wisdom of paying realtors as little as possible to urgently attend to what should be their highest priority. Perhaps a certain large new, taxpayer-supported shareholder can help in that regard.
Oh . . and banks with lots of foreclosures on their books may also want to re-think whether a local realtor who's currently sitting on 156 unsold properties (no, that's not a typo) should really be hired to list number 157.
Saturday, November 15, 2008
Burning Down the House*
Saving Detroit -- Or Not
"Even when people set their own houses on fire, we still dial 9-1-1, hoping to save lives, salvage what we can and protect the rest of the neighborhood."
--Bob Herbert, "'Drop Dead' is Not an Option" (The New York Times; 11/15/08)
Great analogy, but Herbert doesn't push it nearly far enough in making his case for why Washington should come to Detroit's rescue.
When an arsonist torches their own house, do we really write them a check -- or give them a loan -- for 50X its market value? General Motors' market value today is less than $2 billion; the amount being bandied about as part of any rescue effort, including sums already disbursed, is around $100 billion.
If the house in question was structurally unsound -- and in fact, condemned -- would you still risk men and materiel to extinguish the blaze?
Even if the house was once grand, and may still have good "bones," do you really ignore all the smoke and water damage, and try to re-build, regardless? What if the owner, to save money, had skimped on things like maintenance and insurance -- or quit paying the premiums altogether? And the surrounding block is full of other, nicer homes that are also for sale?
Oh . . . and once the fire is put out, what does society do with serial arsonists??
*Actually, there's an even better analogy than arson to explain how the house caught fire: the owner was carelessly making "meth" in the basement -- and had bribed the police to look the other way!
Financially, geopolitically, environmentally, and yes, morally, gas-guzzling SUV's like the Hummer were the automotive equivalent of "meth." Congress steered clear because of Detroit's lobbying clout.
"Even when people set their own houses on fire, we still dial 9-1-1, hoping to save lives, salvage what we can and protect the rest of the neighborhood."
--Bob Herbert, "'Drop Dead' is Not an Option" (The New York Times; 11/15/08)
Great analogy, but Herbert doesn't push it nearly far enough in making his case for why Washington should come to Detroit's rescue.
When an arsonist torches their own house, do we really write them a check -- or give them a loan -- for 50X its market value? General Motors' market value today is less than $2 billion; the amount being bandied about as part of any rescue effort, including sums already disbursed, is around $100 billion.
If the house in question was structurally unsound -- and in fact, condemned -- would you still risk men and materiel to extinguish the blaze?
Even if the house was once grand, and may still have good "bones," do you really ignore all the smoke and water damage, and try to re-build, regardless? What if the owner, to save money, had skimped on things like maintenance and insurance -- or quit paying the premiums altogether? And the surrounding block is full of other, nicer homes that are also for sale?
Oh . . . and once the fire is put out, what does society do with serial arsonists??
*Actually, there's an even better analogy than arson to explain how the house caught fire: the owner was carelessly making "meth" in the basement -- and had bribed the police to look the other way!
Financially, geopolitically, environmentally, and yes, morally, gas-guzzling SUV's like the Hummer were the automotive equivalent of "meth." Congress steered clear because of Detroit's lobbying clout.
Friday, November 14, 2008
The Real Housing Lender of Last Resort
The Real Lender of Last Resort --
And Why It's Due for a Comeback
Traditionally, the Federal Reserve holds the title of *"lender of last resort." However, that's only true if you are a troubled corporation with a $100 billion-plus balance sheet.
If you are Joe or Jane Home Buyer, the real lender of last resort is . . . your home seller.
Back to the Future?
Few people remember, but when long-term interest rates topped 14% in the early '80's, Seller financing became quite popular. Instead of getting a bank mortgage pegged to nosebleed levels, Buyers got mortgages at more affordable rates from their Sellers.
Done well, everyone came out ahead.
Buyers got their dream home at a "below-market" interest rate that they could actually afford. They also saved thousands in lender fees -- origination, underwriting, application, processing, etc.
Meanwhile, Sellers also did well. They got a decent price for their home, a reasonable investment return on their money, and a ticket out of a house that might otherwise have languished in a slow market.
Ironically, the reason why Seller financing may be due for a comeback now is abysmally low interest rates.
0% T-bill's
Equity-rich home sellers today (yes, there are still plenty -- see below) have never faced more nerve-racking choices about where to put their proceeds.
Want super-safe? The U.S. government will let you park your short-term money in T-bill's if you pay it for the privilege (until the financial crisis abates, rates are effectively 0%).
Too low? There's the commercial paper market, but then you have worry about whose balance sheet is going to blow up next. That's an even bigger concern for corporate bonds with longer maturities.
Want to juice those returns a little bit? There's always auction-rate securities (oops! That market collapsed after leaving thousands of investors trapped for almost a year).
Worried about the federal government taking on trillions in bad debt? You'd guess that commodities like oil and wheat, and currency hedges like gold, would be stellar performers -- and would have lost from 20% to 50% of your money the last six months.
So how about the stock market? Yes, how about the stock market!
After seeing 30% of their money vaporize just since Summer -- and the remainder gyrate wildly on a daily if not hourly basis -- investors are understandably gun-shy about entrusting what's left of their nest eggs to Wall Street.
Prerequisite: Equity
In such a dismal investing environment, the best credit risk might very well be . . . that nice, young couple with two sweet kids who want to buy your home.
Thanks to technology, Sellers can easily access Buyers' credit scores -- and practically anything else they care to know about them.
Buyers can arrange their own appraisal, which, along with realtors' comparative market analysis ("CMA"), serves to establish fair market value.
One-stop shopping real estate brokers and title companies will be more than happy to assist with the promissory note, mortgage, warranty deed transfer, etc. Who knows, with the advent of peer-to-peer lending (think of it as "eBay for loans"), it may even be possible to securitize, er, package, the resulting loans to investors in exchange for cash to Sellers, discounted to present value.
Which just leaves one, key ingredient: equity. For Seller financing to work, Sellers must own most or all of their home.
Guess what? Plenty do. Lost in today's headlines about record foreclosures, short sales, subprime lending, etc. is the fact that one-third of all homeowners own their homes free and clear.
While the Federal Reserve and Treasury try to sort things out, such Sellers -- and their Buyers -- may very well decide to take matters into their own hands.
Next: the opposite of redlining? Greenlining!
*For those keeping score, the federal government has also assumed, to date, the mantle of "insurer of last resort," "commercial paper buyer of last resort," "auto lender of last resort," "credit card issuer of last resort" . . .
And Why It's Due for a Comeback
Traditionally, the Federal Reserve holds the title of *"lender of last resort." However, that's only true if you are a troubled corporation with a $100 billion-plus balance sheet.
If you are Joe or Jane Home Buyer, the real lender of last resort is . . . your home seller.
Back to the Future?
Few people remember, but when long-term interest rates topped 14% in the early '80's, Seller financing became quite popular. Instead of getting a bank mortgage pegged to nosebleed levels, Buyers got mortgages at more affordable rates from their Sellers.
Done well, everyone came out ahead.
Buyers got their dream home at a "below-market" interest rate that they could actually afford. They also saved thousands in lender fees -- origination, underwriting, application, processing, etc.
Meanwhile, Sellers also did well. They got a decent price for their home, a reasonable investment return on their money, and a ticket out of a house that might otherwise have languished in a slow market.
Ironically, the reason why Seller financing may be due for a comeback now is abysmally low interest rates.
0% T-bill's
Equity-rich home sellers today (yes, there are still plenty -- see below) have never faced more nerve-racking choices about where to put their proceeds.
Want super-safe? The U.S. government will let you park your short-term money in T-bill's if you pay it for the privilege (until the financial crisis abates, rates are effectively 0%).
Too low? There's the commercial paper market, but then you have worry about whose balance sheet is going to blow up next. That's an even bigger concern for corporate bonds with longer maturities.
Want to juice those returns a little bit? There's always auction-rate securities (oops! That market collapsed after leaving thousands of investors trapped for almost a year).
Worried about the federal government taking on trillions in bad debt? You'd guess that commodities like oil and wheat, and currency hedges like gold, would be stellar performers -- and would have lost from 20% to 50% of your money the last six months.
So how about the stock market? Yes, how about the stock market!
After seeing 30% of their money vaporize just since Summer -- and the remainder gyrate wildly on a daily if not hourly basis -- investors are understandably gun-shy about entrusting what's left of their nest eggs to Wall Street.
Prerequisite: Equity
In such a dismal investing environment, the best credit risk might very well be . . . that nice, young couple with two sweet kids who want to buy your home.
Thanks to technology, Sellers can easily access Buyers' credit scores -- and practically anything else they care to know about them.
Buyers can arrange their own appraisal, which, along with realtors' comparative market analysis ("CMA"), serves to establish fair market value.
One-stop shopping real estate brokers and title companies will be more than happy to assist with the promissory note, mortgage, warranty deed transfer, etc. Who knows, with the advent of peer-to-peer lending (think of it as "eBay for loans"), it may even be possible to securitize, er, package, the resulting loans to investors in exchange for cash to Sellers, discounted to present value.
Which just leaves one, key ingredient: equity. For Seller financing to work, Sellers must own most or all of their home.
Guess what? Plenty do. Lost in today's headlines about record foreclosures, short sales, subprime lending, etc. is the fact that one-third of all homeowners own their homes free and clear.
While the Federal Reserve and Treasury try to sort things out, such Sellers -- and their Buyers -- may very well decide to take matters into their own hands.
Next: the opposite of redlining? Greenlining!
*For those keeping score, the federal government has also assumed, to date, the mantle of "insurer of last resort," "commercial paper buyer of last resort," "auto lender of last resort," "credit card issuer of last resort" . . .
Thursday, November 13, 2008
Realtor Lobbying Clout . . Not
Realtor Lobbying Clout Overrated
Housing may enjoy its share of tax breaks, incentives, etc., but that's likely in spite of -- not because of -- realtors' lobbying clout.
Locally, the deadline for paying annual dues to the board of realtors is Dec. 1. As part of their dues collection campaign, the board implores its members to voluntarily contribute to its lobbying efforts. What percentage actually do? About 5%.
As an Edina Realty office manager pointed out, the million-odd realtors nationally are all independent contractors. We already pay for our own insurance, health care, business equipment, continuing education, etc. -- and are not inclined to pay for "discretionary" items like lobbying.
By contrast, the banking or oil industries, to pick just two examples, are dominated by a handful of goliaths who wield much more power over their employees.
They don't ask their employees to support their political agendas, they tell them. Senior management also has much more authority to spend corporate resources on their company's behalf.
Housing may enjoy its share of tax breaks, incentives, etc., but that's likely in spite of -- not because of -- realtors' lobbying clout.
Locally, the deadline for paying annual dues to the board of realtors is Dec. 1. As part of their dues collection campaign, the board implores its members to voluntarily contribute to its lobbying efforts. What percentage actually do? About 5%.
As an Edina Realty office manager pointed out, the million-odd realtors nationally are all independent contractors. We already pay for our own insurance, health care, business equipment, continuing education, etc. -- and are not inclined to pay for "discretionary" items like lobbying.
By contrast, the banking or oil industries, to pick just two examples, are dominated by a handful of goliaths who wield much more power over their employees.
They don't ask their employees to support their political agendas, they tell them. Senior management also has much more authority to spend corporate resources on their company's behalf.
Re-Naming TARP
Successors to "T.A.R.P.":
"B.A.R.F" and "H.U.R.L."
Given the evolving nature of the Troubled Assets Relief Program ("TARP"), and the *Federal Reserve's penchant for appending the term "facility" to all its financial rescue efforts, it may be timely to give TARP a more accurate -- and descriptive -- name.
My suggestion: Bank Assets Relief Facility, or "B.A.R.F."
In truth, given the capital black hole that AIG has become, an even more urgent priority is to stem the bleeding amongst all the companies that insured credit default swaps, collateralized debt obligations, etc.
Such a federal effort could descriptively be called "Help Underwriters Reduce Liabilities," or H.U.R.L.
*Technically, B.A.R.F -- er, TARP -- is being administered under the auspices of the Treasury.
"B.A.R.F" and "H.U.R.L."
Given the evolving nature of the Troubled Assets Relief Program ("TARP"), and the *Federal Reserve's penchant for appending the term "facility" to all its financial rescue efforts, it may be timely to give TARP a more accurate -- and descriptive -- name.
My suggestion: Bank Assets Relief Facility, or "B.A.R.F."
In truth, given the capital black hole that AIG has become, an even more urgent priority is to stem the bleeding amongst all the companies that insured credit default swaps, collateralized debt obligations, etc.
Such a federal effort could descriptively be called "Help Underwriters Reduce Liabilities," or H.U.R.L.
*Technically, B.A.R.F -- er, TARP -- is being administered under the auspices of the Treasury.
The Bird in the Hand Society
"In the long run we're all . . . broke?" *
Until recently, the standard for futility was the Cal Tech football team ("we may be small, but we're slow").
Now, however, it's many long-term stock investors. Really long-term.
Pick an investment, and, if you're brave, glimpse at how far prices have been rolled back. The NASDAQ? 2002. General Electric? 1998. Intel? 1996. The Nikkei? 1982. General Motors? 1948.
Don't even ask about Fannie Mae, Freddie Mac, Bear Stearns, Lehman Bros., etc.
Even worse, the drop in nominal prices comes before taking account of inflation, and taxes due on capital gains (should there be any). Plus all the volatility investors in these companies endured along the way (toward what end?).
Sleeping -- and Eating -- Poorly**
To take just one, (all too) personal example, the Intel shares I bought in 1995 for $9 per share have appreciated a lousy 25%(!) during the entirety of my 13 year holding period -- a span that includes the vaunted tech stock boom.
Unfortunately, just to have the same purchasing power in today's dollars, Intel's stock would have to be well over $13. So what happens if I sell now? Thanks to "low" (but non-indexed) capital gains taxes, my phantom $3 gain shrinks even more.
Talk about adding insult to injury.
Certainly, anyone who buys an individual stock and later complains that it went down in price is . . . a complainer. But when millions of conservative, buy-and-hold investors deploy their savings across broadly diversified asset groups, only to find that they are worse off long term -- maybe much worse off -- something bigger is at stake.
One Bird -- or Less -- in the Bush?
What that is, ultimately, is a breach in the social contract -- or at least the investor's version of it.
At its heart, that contract is captured by the maxim, "a bird in the hand equals two in the bush."
If instead there's only one bird waiting for you -- or something less than one bird -- what's the point? And if there's no point, why bother to save instead of consume now?
The implications of such a shift in behavior are profound, and likely to have three main consequences.
"Venture Capitalist of Last Resort?"
One. Emphasis on current consumption. Rational investors who conclude that time erodes rather than multiplies their capital are likely to ask for their money back -- and not make any more available.
What will they do with their suddenly expendable nest eggs? Spend them!
If you're going to be broke long-term, anyways, you might as well spend the present living it up! Eat out. Travel. Buy new furniture. Upgrade your wardrobe. In truth, "a bird in the bush" mentality means that you go out and buy whatever you want, now, while you can still afford it. (Heads up, luxury goods short-sellers.)
Two. Even more dependence on government. If you thought Americans saved too little before, just wait until a widespread "spend it now" mentality takes hold. While it may be "good" for the economy temporarily (in a very dark sort of way), the consumption "pop" is one-time only. Once your nest egg is gone, you need the government to take care of you. Good thing it's so flush.
Three. Reduced capital for investment. With companies and consumers alike lining up for government alms, who's left to see to capital formation? Job creation? Innovation?
In addition to "lender of last resort," "insurer of last resort," "commercial paper buyer of last resort," etc., might as well add "investor of last resort," "entrepreneur of last resort, " and "venture capitalist of last resort."
*It was John Maynard Keynes who famously said that "in the long run, we're all dead."
**Investors have traditionally been told that they must choose between "living well" (tolerating more risk) and "sleeping well" (opting for security and lower returns).
Until recently, the standard for futility was the Cal Tech football team ("we may be small, but we're slow").
Now, however, it's many long-term stock investors. Really long-term.
Pick an investment, and, if you're brave, glimpse at how far prices have been rolled back. The NASDAQ? 2002. General Electric? 1998. Intel? 1996. The Nikkei? 1982. General Motors? 1948.
Don't even ask about Fannie Mae, Freddie Mac, Bear Stearns, Lehman Bros., etc.
Even worse, the drop in nominal prices comes before taking account of inflation, and taxes due on capital gains (should there be any). Plus all the volatility investors in these companies endured along the way (toward what end?).
Sleeping -- and Eating -- Poorly**
To take just one, (all too) personal example, the Intel shares I bought in 1995 for $9 per share have appreciated a lousy 25%(!) during the entirety of my 13 year holding period -- a span that includes the vaunted tech stock boom.
Unfortunately, just to have the same purchasing power in today's dollars, Intel's stock would have to be well over $13. So what happens if I sell now? Thanks to "low" (but non-indexed) capital gains taxes, my phantom $3 gain shrinks even more.
Talk about adding insult to injury.
Certainly, anyone who buys an individual stock and later complains that it went down in price is . . . a complainer. But when millions of conservative, buy-and-hold investors deploy their savings across broadly diversified asset groups, only to find that they are worse off long term -- maybe much worse off -- something bigger is at stake.
One Bird -- or Less -- in the Bush?
What that is, ultimately, is a breach in the social contract -- or at least the investor's version of it.
At its heart, that contract is captured by the maxim, "a bird in the hand equals two in the bush."
If instead there's only one bird waiting for you -- or something less than one bird -- what's the point? And if there's no point, why bother to save instead of consume now?
The implications of such a shift in behavior are profound, and likely to have three main consequences.
"Venture Capitalist of Last Resort?"
One. Emphasis on current consumption. Rational investors who conclude that time erodes rather than multiplies their capital are likely to ask for their money back -- and not make any more available.
What will they do with their suddenly expendable nest eggs? Spend them!
If you're going to be broke long-term, anyways, you might as well spend the present living it up! Eat out. Travel. Buy new furniture. Upgrade your wardrobe. In truth, "a bird in the bush" mentality means that you go out and buy whatever you want, now, while you can still afford it. (Heads up, luxury goods short-sellers.)
Two. Even more dependence on government. If you thought Americans saved too little before, just wait until a widespread "spend it now" mentality takes hold. While it may be "good" for the economy temporarily (in a very dark sort of way), the consumption "pop" is one-time only. Once your nest egg is gone, you need the government to take care of you. Good thing it's so flush.
Three. Reduced capital for investment. With companies and consumers alike lining up for government alms, who's left to see to capital formation? Job creation? Innovation?
In addition to "lender of last resort," "insurer of last resort," "commercial paper buyer of last resort," etc., might as well add "investor of last resort," "entrepreneur of last resort, " and "venture capitalist of last resort."
*It was John Maynard Keynes who famously said that "in the long run, we're all dead."
**Investors have traditionally been told that they must choose between "living well" (tolerating more risk) and "sleeping well" (opting for security and lower returns).
Strib Piece on Foreclosures
Strib's Buchta Dissects Foreclosures
The Star Tribune's Jim Buchta has a nice piece in Wednesday's paper titled "Foreclosures Not Dwindling" (Star Tribune; 11/12/08).
Interestingly, the same piece online today is titled, "Bits of Good News Surface for Twin Cities Housing Market."
http://www.startribune.com/homes/34308234.html?elr=KArksUUUU
Buchta notes many of the points I made in my Oct. 30 post, "A Tale of Two Suburbs," and goes on to collect perspectives from a cross-section of local realtors, lenders, and appraisers (including yours truly). It's a thoughtful, well-researched article worth checking out . . .
The Star Tribune's Jim Buchta has a nice piece in Wednesday's paper titled "Foreclosures Not Dwindling" (Star Tribune; 11/12/08).
Interestingly, the same piece online today is titled, "Bits of Good News Surface for Twin Cities Housing Market."
http://www.startribune.com/homes/34308234.html?elr=KArksUUUU
Buchta notes many of the points I made in my Oct. 30 post, "A Tale of Two Suburbs," and goes on to collect perspectives from a cross-section of local realtors, lenders, and appraisers (including yours truly). It's a thoughtful, well-researched article worth checking out . . .
Only One Bird in the Bush?
Only One Bird in the Bush -- or None?
Floyd Norris notes in his blog today that Intel shares are now back to where they were twelve years ago ("Approaching New Lows"; The New York Times, 11/13/08). Tell me about it.
Here's what I posted on his blog in response:
Intel shares I purchased in the mid-90’s are now up a cumulative 25%(!) over my 13 year-plus holding period — a stretch that includes the vaunted tech stock boom. Even that overstates my “gain”: according to the Bureau of Labor Statistics, the $9 per share I paid would have to be over $13 now just to have the same purchasing power.
Of course, if I sold now, I’d have to pay capital gains tax on my completely phantom “gain.”
If instead of two birds in the bush, investors can now expect only one — or less than one — where is the incentive to save? Invest?
A whole generation of (non)investors is being taught to ask for their bird in the hand, now, thanks very much.
P.S.: Good thing I'm a student of portfolio theory and thought to diversify my holdings by also buying a mutual fund tied to the Nikkei! (Japan's counterpart to the S&P 500).
Floyd Norris notes in his blog today that Intel shares are now back to where they were twelve years ago ("Approaching New Lows"; The New York Times, 11/13/08). Tell me about it.
Here's what I posted on his blog in response:
Intel shares I purchased in the mid-90’s are now up a cumulative 25%(!) over my 13 year-plus holding period — a stretch that includes the vaunted tech stock boom. Even that overstates my “gain”: according to the Bureau of Labor Statistics, the $9 per share I paid would have to be over $13 now just to have the same purchasing power.
Of course, if I sold now, I’d have to pay capital gains tax on my completely phantom “gain.”
If instead of two birds in the bush, investors can now expect only one — or less than one — where is the incentive to save? Invest?
A whole generation of (non)investors is being taught to ask for their bird in the hand, now, thanks very much.
P.S.: Good thing I'm a student of portfolio theory and thought to diversify my holdings by also buying a mutual fund tied to the Nikkei! (Japan's counterpart to the S&P 500).
Tuesday, November 11, 2008
Financial "Reptiles" vs. "Mammals"
Financial "Reptiles" vs. "Mammals"
(Guess which Goldman Sachs is)
American Express' hastily approved move to turn itself into a bank holding company, like Goldman Sachs and Morgan Stanley before it, appears to be about two things: 1) positioning itself for federal largesse, current and prospective; and 2) insulating itself from the vicissitudes of the short-term credit markets for its ongoing capital needs.
In the latter respect, American Express illustrates the difference between financial "mammals" and "reptiles."
In this case, oddly enough, the "mammals" are the heretofore plodding (depository) banks, while the "reptiles" are (or were) the high-powered (and higher-leveraged) investment banks. (Sort of vindicates the critics of Bear Stearns, Goldman Sachs, et al who reveled in pointing out all their cold-blooded, reptilian qualities).
Reptiles take their cue from their environment -- specifically, the sun. When it's warm, they're warm; when it's cold, they're cold.
By contrast, mammals are much more autonomous. Their thermostats are internal and self-regulating, maintaining a constant body temperature.
As long as the environment is hospitable -- the proverbial sun is shining -- reptiles do fine. But should there be a sudden shock, their ability to quickly adapt is limited. Sound familiar?
What's happened in the credit markets this past year is the financial equivalent of the asteroid that killed off the dinosaurs. Virtually overnight, the credit markets froze, and all the economic entities whose financing relied on it . . perished: Fannie Mae, Freddie Mac, Bear Stearns, Lehman Bros, AIG, etc.
By contrast, banks rely on customers' deposits for their ongoing capital needs. Insured by the government, such deposits represent a vastly more stable source of funds.
Unfortunately for the erstwhile dinosaurs, changing into a mammal isn't simply a matter of legal semantics. Like tigers, dinosaurs can't simply change their stripes.
(Guess which Goldman Sachs is)
American Express' hastily approved move to turn itself into a bank holding company, like Goldman Sachs and Morgan Stanley before it, appears to be about two things: 1) positioning itself for federal largesse, current and prospective; and 2) insulating itself from the vicissitudes of the short-term credit markets for its ongoing capital needs.
In the latter respect, American Express illustrates the difference between financial "mammals" and "reptiles."
In this case, oddly enough, the "mammals" are the heretofore plodding (depository) banks, while the "reptiles" are (or were) the high-powered (and higher-leveraged) investment banks. (Sort of vindicates the critics of Bear Stearns, Goldman Sachs, et al who reveled in pointing out all their cold-blooded, reptilian qualities).
Reptiles take their cue from their environment -- specifically, the sun. When it's warm, they're warm; when it's cold, they're cold.
By contrast, mammals are much more autonomous. Their thermostats are internal and self-regulating, maintaining a constant body temperature.
As long as the environment is hospitable -- the proverbial sun is shining -- reptiles do fine. But should there be a sudden shock, their ability to quickly adapt is limited. Sound familiar?
What's happened in the credit markets this past year is the financial equivalent of the asteroid that killed off the dinosaurs. Virtually overnight, the credit markets froze, and all the economic entities whose financing relied on it . . perished: Fannie Mae, Freddie Mac, Bear Stearns, Lehman Bros, AIG, etc.
By contrast, banks rely on customers' deposits for their ongoing capital needs. Insured by the government, such deposits represent a vastly more stable source of funds.
Unfortunately for the erstwhile dinosaurs, changing into a mammal isn't simply a matter of legal semantics. Like tigers, dinosaurs can't simply change their stripes.
Sunday, November 9, 2008
"Realtor Capital" vs. "Political Capital"
Realtors, like Politicians,
Also Have "Capital"
When an elected official is said to have a lot of political capital, what do they mean? That they have a big store of accumulated authority and goodwill to advance their legislative agenda, whatever it is.
Similarly, realtors also have capital. The difference is that their "agenda" is to sell real estate.
What increases "political capital"? Winning an election by a wide margin (Obama), exercising authority wisely and responsibly, making good decisions.
What decreases it? Presiding over an economy that appears to be in the ditch, or making decisions that make the country's problems worse (Bush).
"Realtor capital" is ultimately about credibility, too.
In their capacity as listing agents (representing Sellers), realtors are the "public face" of the properties they represent. Their job* is to entice prospective Buyers by pointing out the home's strengths, whatever they are (location, curb appeal, aesthetics, value, updates, mechanicals, etc.).
When a realtor says to their colleagues and the public, "my new listing is a great house at a great price, and it's going to go fast" -- and it does -- their "realtor capital" shoots up.
When they say the same thing, and the listing sits on the market for months and months, suffering one price cut after another, their "realtor capital" shrinks.
*As I've written previously, a good realtor's marketing function once a home is actually for sale is just a piece of what they do. Arguably, even more important is the behind-the-scenes role they play getting a property ready for market, overseeing staging, repairs, cost-effective improvements, municipal inspection requirements, etc.
Also Have "Capital"
When an elected official is said to have a lot of political capital, what do they mean? That they have a big store of accumulated authority and goodwill to advance their legislative agenda, whatever it is.
Similarly, realtors also have capital. The difference is that their "agenda" is to sell real estate.
What increases "political capital"? Winning an election by a wide margin (Obama), exercising authority wisely and responsibly, making good decisions.
What decreases it? Presiding over an economy that appears to be in the ditch, or making decisions that make the country's problems worse (Bush).
"Realtor capital" is ultimately about credibility, too.
In their capacity as listing agents (representing Sellers), realtors are the "public face" of the properties they represent. Their job* is to entice prospective Buyers by pointing out the home's strengths, whatever they are (location, curb appeal, aesthetics, value, updates, mechanicals, etc.).
When a realtor says to their colleagues and the public, "my new listing is a great house at a great price, and it's going to go fast" -- and it does -- their "realtor capital" shoots up.
When they say the same thing, and the listing sits on the market for months and months, suffering one price cut after another, their "realtor capital" shrinks.
*As I've written previously, a good realtor's marketing function once a home is actually for sale is just a piece of what they do. Arguably, even more important is the behind-the-scenes role they play getting a property ready for market, overseeing staging, repairs, cost-effective improvements, municipal inspection requirements, etc.
Saturday, November 8, 2008
Mobile Homes & Stradivarius Violins
Stricter Underwriting Standards:
Dotting “i’s” -- lots and lots of “i’s”
Until recently, once the appraisal was completed and the amount supported the purchase price, it was very unusual to hear more from the underwriter. But that’s clearly changed.
One of the biggest consequences of spiking mortgage defaults is tighter lending and underwriting standards. For home buyers, lenders, and realtors, that manifests as greatly increased scrutiny, and more “i’s” to dot and “t’s” to cross – lots more.
Mobile Homes with Stradivarius Violins
Until recently, once a home had satisfactorily appraised, the loan was typically as good as done. Now, however, it’s not unusual for multiple layers of lender review, accompanied by requests for yet more information. Or, for lenders to insist on adherence to what seem like silly rules.
To pick just one example, the lender on one recent deal required the Buyer and Seller to delete a section addressing the sale of personal property.
The concern, which can be legitimate, is that a big chunk of the value that’s securing the loan actually resides in the personal property exchanging hands, not in the home itself.
If you were borrowing $200k to buy a $50k mobile home that just happened to include a $150k Stradivarius violin, the lender clearly would have grounds for concern. That’s because if you stopped making payments on the mobile home, the value of the mobile home at foreclosure –- presumably something much less than $50k -- wouldn't be nearly enough to make the bank whole. Meanwhile, you and the Stradivarius would likely be long gone.
But that was hardly the case with my client. The purchase price of their home was over $500k -– and the value of the furniture in question was about $250 dollars. Maybe.
Oh, well.
After years in eclipse, the Golden Rule is seemingly being re-asserted . . . with a vengeance.
Dotting “i’s” -- lots and lots of “i’s”
Until recently, once the appraisal was completed and the amount supported the purchase price, it was very unusual to hear more from the underwriter. But that’s clearly changed.
One of the biggest consequences of spiking mortgage defaults is tighter lending and underwriting standards. For home buyers, lenders, and realtors, that manifests as greatly increased scrutiny, and more “i’s” to dot and “t’s” to cross – lots more.
Mobile Homes with Stradivarius Violins
Until recently, once a home had satisfactorily appraised, the loan was typically as good as done. Now, however, it’s not unusual for multiple layers of lender review, accompanied by requests for yet more information. Or, for lenders to insist on adherence to what seem like silly rules.
To pick just one example, the lender on one recent deal required the Buyer and Seller to delete a section addressing the sale of personal property.
The concern, which can be legitimate, is that a big chunk of the value that’s securing the loan actually resides in the personal property exchanging hands, not in the home itself.
If you were borrowing $200k to buy a $50k mobile home that just happened to include a $150k Stradivarius violin, the lender clearly would have grounds for concern. That’s because if you stopped making payments on the mobile home, the value of the mobile home at foreclosure –- presumably something much less than $50k -- wouldn't be nearly enough to make the bank whole. Meanwhile, you and the Stradivarius would likely be long gone.
But that was hardly the case with my client. The purchase price of their home was over $500k -– and the value of the furniture in question was about $250 dollars. Maybe.
Oh, well.
After years in eclipse, the Golden Rule is seemingly being re-asserted . . . with a vengeance.
Friday, November 7, 2008
Defusing the Option-ARM Time Bomb
Next: Defusing the Option-ARM Time Bomb
As if enough shoes hadn't already fallen on the beleaguered national housing market, there is still one, very big one left: the option-ARM bomb, er, shoe.
To recap, first came the now-infamous, sub-prime "Liar Loans": low or no-doc loans to borrowers with poor credit, putting nothing down, to buy homes in overheated housing markets. Such loans were characterized by low teaser rates and payments that quickly re-set much higher, typically within 2-3 years.
Sure enough, 2-3 years past the housing market's 2005 peak, the double whammy of negative equity and zooming payments sunk many of the sub-prime borrowers.
Now come the option-ARM borrowers -- apparently, legions of them.
The specialty of banks like Washington Mutual and Wachovia, these loans are literally financial time bombs: instead of amortizing principal, or even just paying interest, option-ARM borrowers can "opt" to make payments so low that they don't even cover the interest due.
What happens to the shortfall? It's added to the principal, a phenomenon innocuously known as "negative amortization." Lenders I've spoken with put the amount of outstanding option-ARM loans at about the same size as sub-prime loans, around $1.5 trillion.
Wanted: 'Financial MacGyver's'
So why haven't we heard more about them?
Three reasons.
One, it's hard to be heard in a Category 5 financial hurricane.
Two, they're heavily concentrated geographically. In markets like Florida, Southern California, and Las Vegas, they accounted for a significant percentage of all loans originated at the peak. In more staid markets like the Twin Cities (my focus), reputable lenders wouldn't touch them -- and now don't have exposure to them.
Third, and perhaps most significantly, the option ARM's have long fuses: five years, to be exact.
Yes, that's right: at the height of the housing market in 2004-2006, aggressive lenders, in their infinite wisdom, gave their shakiest borrowers five years to start making real payments (and you thought the local furniture store's "no interest till 2009" pitch was generous!).
That makes fallout from the biggest wave of option ARM's due to hit in 2010-2011.
Two Ways to Disarm
So what do you do now? There are really only two options, er, choices.
One. Re-float the housing market. Higher prices mean more homeowner equity. More homeowner equity means more wherewithal to refinance, and less incentive to default.
Unfortunately, to truly disarm the option-ARM bomb, housing prices would not only have to revisit the 2005 peak, they would have to substantially exceed it. That's because all those option-ARM borrowers now owe a lot more than they originally borrowed (thank you, negative amortization).
The odds of housing prices suddenly going up 50% or more in today's environment are about the same as NASDAQ hitting 6,000.
Two. Make sure the banks have lots and lots of capital.
Clearly, that appears to be the approach embraced by the Fed, the Treasury, and the banks themselves.
How else do you explain the otherwise anomalous behavior of a bank like Wells Fargo, Wachovia's purchaser, saying it's well-capitalized on Monday, "accepting" $25 billion in federal money on Tuesday, and selling $11 billion in stock on Wednesday?
Sure it's well-capitalized. Just like Fannie Mae, Freddie Mac, Bear Stearns, Lehman Bros, AIG . . .
As if enough shoes hadn't already fallen on the beleaguered national housing market, there is still one, very big one left: the option-ARM bomb, er, shoe.
To recap, first came the now-infamous, sub-prime "Liar Loans": low or no-doc loans to borrowers with poor credit, putting nothing down, to buy homes in overheated housing markets. Such loans were characterized by low teaser rates and payments that quickly re-set much higher, typically within 2-3 years.
Sure enough, 2-3 years past the housing market's 2005 peak, the double whammy of negative equity and zooming payments sunk many of the sub-prime borrowers.
Now come the option-ARM borrowers -- apparently, legions of them.
The specialty of banks like Washington Mutual and Wachovia, these loans are literally financial time bombs: instead of amortizing principal, or even just paying interest, option-ARM borrowers can "opt" to make payments so low that they don't even cover the interest due.
What happens to the shortfall? It's added to the principal, a phenomenon innocuously known as "negative amortization." Lenders I've spoken with put the amount of outstanding option-ARM loans at about the same size as sub-prime loans, around $1.5 trillion.
Wanted: 'Financial MacGyver's'
So why haven't we heard more about them?
Three reasons.
One, it's hard to be heard in a Category 5 financial hurricane.
Two, they're heavily concentrated geographically. In markets like Florida, Southern California, and Las Vegas, they accounted for a significant percentage of all loans originated at the peak. In more staid markets like the Twin Cities (my focus), reputable lenders wouldn't touch them -- and now don't have exposure to them.
Third, and perhaps most significantly, the option ARM's have long fuses: five years, to be exact.
Yes, that's right: at the height of the housing market in 2004-2006, aggressive lenders, in their infinite wisdom, gave their shakiest borrowers five years to start making real payments (and you thought the local furniture store's "no interest till 2009" pitch was generous!).
That makes fallout from the biggest wave of option ARM's due to hit in 2010-2011.
Two Ways to Disarm
So what do you do now? There are really only two options, er, choices.
One. Re-float the housing market. Higher prices mean more homeowner equity. More homeowner equity means more wherewithal to refinance, and less incentive to default.
Unfortunately, to truly disarm the option-ARM bomb, housing prices would not only have to revisit the 2005 peak, they would have to substantially exceed it. That's because all those option-ARM borrowers now owe a lot more than they originally borrowed (thank you, negative amortization).
The odds of housing prices suddenly going up 50% or more in today's environment are about the same as NASDAQ hitting 6,000.
Two. Make sure the banks have lots and lots of capital.
Clearly, that appears to be the approach embraced by the Fed, the Treasury, and the banks themselves.
How else do you explain the otherwise anomalous behavior of a bank like Wells Fargo, Wachovia's purchaser, saying it's well-capitalized on Monday, "accepting" $25 billion in federal money on Tuesday, and selling $11 billion in stock on Wednesday?
Sure it's well-capitalized. Just like Fannie Mae, Freddie Mac, Bear Stearns, Lehman Bros, AIG . . .
Wednesday, November 5, 2008
"Housing Micro-Markets"
New Technology Lets Realtors
Hone in on "Micro Markets"
Investors are fond of saying "it's not a stock market, it's a market of stocks." By the same token, I think of the housing market not in terms of overly broad, market-wide statistics -- which can mask a great deal of variation between neighborhoods -- but as an aggregation of dozens of micro markets.
Thanks to advances in the Multiple Listing Service ("MLS") mapping features, realtors can now capture what's happening in each of these "micro markets" with startling accuracy and precision.
Just to pick one example (there are dozens), the neighborhoods just west and south of Cedar Lake in Minneapolis have really had some nice appreciation the last five years. The lots are big, location is great, and there are a lot of well-built '50's ramblers that, because they need a lot of updating, are relatively cheap.
So demand has been pretty strong (it's also the market I live in and have done a lot of deals). Once you get within a block or so of Cedar Lake, the land alone can be worth high six figures.
On MLS, the aforementioned Cedar Lake area straddles Minneapolis and St. Louis Park, and areas 300 and 391. Searching only by city or MLS area or gives you a very different -- and overbroad -- market picture.
Using the MLS mapping tool, I can basically draw an L-shaped map hugging Cedar Lake and generate my own, custom (and much truer) market statistics. These include average selling price per square foot, average days on the market, price trends, inventory trends, etc.
Armed with these numbers, I can leave the headlines behind, and tell clients what's really going on in the corner of the market that matters to them most.
Hone in on "Micro Markets"
Investors are fond of saying "it's not a stock market, it's a market of stocks." By the same token, I think of the housing market not in terms of overly broad, market-wide statistics -- which can mask a great deal of variation between neighborhoods -- but as an aggregation of dozens of micro markets.
Thanks to advances in the Multiple Listing Service ("MLS") mapping features, realtors can now capture what's happening in each of these "micro markets" with startling accuracy and precision.
Just to pick one example (there are dozens), the neighborhoods just west and south of Cedar Lake in Minneapolis have really had some nice appreciation the last five years. The lots are big, location is great, and there are a lot of well-built '50's ramblers that, because they need a lot of updating, are relatively cheap.
So demand has been pretty strong (it's also the market I live in and have done a lot of deals). Once you get within a block or so of Cedar Lake, the land alone can be worth high six figures.
On MLS, the aforementioned Cedar Lake area straddles Minneapolis and St. Louis Park, and areas 300 and 391. Searching only by city or MLS area or gives you a very different -- and overbroad -- market picture.
Using the MLS mapping tool, I can basically draw an L-shaped map hugging Cedar Lake and generate my own, custom (and much truer) market statistics. These include average selling price per square foot, average days on the market, price trends, inventory trends, etc.
Armed with these numbers, I can leave the headlines behind, and tell clients what's really going on in the corner of the market that matters to them most.
'Underwater' vs. Foreclosure
"'Underwater' Need Not Mean Foreclosure"
That's the title of a nice article in today's Wall Street Journal. The article's author makes the point -- which I have observed -- that most people who owe more than their home is worth keep making payments, regardless.
Assuming they can.
According to the article, the two biggest factors causing people to mail their lender the keys (so-called "jingle mail") are financial wherewithal, and the expectation that their home price will eventually recover. Of course, homeowners who default know -- or should -- that their credit will be wrecked for years to come.
Future Expectations Key
So what does the foregoing tell you about likely foreclosure rates this cycle?
That the key is whether "underwater" homeowners view their situation as temporary or permanent.
By that reasoning, areas of the country with rosy long-term outlooks, like San Diego, Boston, and Denver, will likely experience relatively fewer foreclosures. Declining, economically depressed cities like Detroit will have it rougher (what's new??)
That's the title of a nice article in today's Wall Street Journal. The article's author makes the point -- which I have observed -- that most people who owe more than their home is worth keep making payments, regardless.
Assuming they can.
According to the article, the two biggest factors causing people to mail their lender the keys (so-called "jingle mail") are financial wherewithal, and the expectation that their home price will eventually recover. Of course, homeowners who default know -- or should -- that their credit will be wrecked for years to come.
Future Expectations Key
So what does the foregoing tell you about likely foreclosure rates this cycle?
That the key is whether "underwater" homeowners view their situation as temporary or permanent.
By that reasoning, areas of the country with rosy long-term outlooks, like San Diego, Boston, and Denver, will likely experience relatively fewer foreclosures. Declining, economically depressed cities like Detroit will have it rougher (what's new??)
Tuesday, November 4, 2008
Economic Stimulus -- Local Version
New Coen Brothers Movie
Shooting in St. Louis Park
I have no idea if the new Coen brothers movie -- about their upbringing in St. Louis Park, circa 1965 -- is going to be a money maker or not. But the movie shoot is clearly injecting hundreds of thousands into the local economy.
The location, at Highway 7 and Ottawa Blvd. in St. Louis Park, looks like a makeshift city, albeit an especially well-lit one (banks of lights, hydraulic lifts, and what appears to be sound equipment are everywhere). Trailers and trucks extend a couple blocks along the highway frontage road.
Word is that the former cantor at my synagogue plays the same role in the movie. Hundreds of "extra's" are just regular local's who showed up at a casting call, including a good friend, who had to be outfitted with a period-appropriate suit and tie . . for a tiny, non-speaking part in a bar mitzvah scene! (If they'd picked me, they could have saved the wardrobe expense.)
If this is a low-budget, "indie" film, I'd like to see the real (reel?) deal!
Shooting in St. Louis Park
I have no idea if the new Coen brothers movie -- about their upbringing in St. Louis Park, circa 1965 -- is going to be a money maker or not. But the movie shoot is clearly injecting hundreds of thousands into the local economy.
The location, at Highway 7 and Ottawa Blvd. in St. Louis Park, looks like a makeshift city, albeit an especially well-lit one (banks of lights, hydraulic lifts, and what appears to be sound equipment are everywhere). Trailers and trucks extend a couple blocks along the highway frontage road.
Word is that the former cantor at my synagogue plays the same role in the movie. Hundreds of "extra's" are just regular local's who showed up at a casting call, including a good friend, who had to be outfitted with a period-appropriate suit and tie . . for a tiny, non-speaking part in a bar mitzvah scene! (If they'd picked me, they could have saved the wardrobe expense.)
If this is a low-budget, "indie" film, I'd like to see the real (reel?) deal!
Monday, November 3, 2008
Open House Misconceptions
Open House Motives Vary by Realtor
Unless you live next door to a realtor, or have bought or sold recently, the most common way to run into a realtor is probably at a Sunday open house.
Popular as they are, open houses are frequently misunderstood by the public. In particular, there seem to be four misconceptions:
Misconception #1. The purpose of the open house is to sell the home.
That can certainly happen, but statistically, it's not very likely. Conventional wisdom is that less than 5% of all homes are sold as a direct result of a Sunday open house.
So what's the real purpose?
In my case, it's to get good feedback (see, Misconception #3).
However, for the majority of realtors hosting them, it's to prospect for new clients. Their goal is to connect with people coming through who are just starting their home search, and aren't yet represented (anyone coming through who does have an agent is expressly off-limits).
Misconception #2. The realtor hosting the open house is the agent getting paid to sell it (the listing agent).
Usually not. Rather, the hosting agent is typically a "newbie" standing in for the listing agent. Even if someone decides to buy the house as a result of seeing it on Sunday, the hosting agent only gets paid if the would-be Buyer doesn't have an agent yet.
In my experience, casual lookers don't buy, and serious Buyers already have agents.
That's not to say casual lookers don't eventually buy. When they do, they often use an agent they first met at a Sunday open house.
Misconception #3. Experienced agents never hold open houses.
Not true. I personally make a point of hosting the first 2-3 open houses for every home I list. My goal isn't to prospect for future business, it's to get the best possible market feedback.
Just as what someone says can be less important than how they say it, watching someone's reaction to a home can be much more instructive than simply asking them what they thought of it afterwards.
Where prospective Buyers linger, how much time they spend in the home, their "body English" after they're done -- all speak volumes about their interest level.
As listing agent, such non-verbal cues help tell me if the home is appropriately priced, and if not, why. I can then make intelligent suggestions to my client about any needed mid-course corrections.
Misconception #4. Neighbors aren't welcome.
I love neighbors! Who's more credible talking about how great the neighborhood is: a realtor trying to sell you the house, or, someone who lives next door? I've hosted plenty of open houses where the neighbors who came through actually did more selling than I did! (I shut up).
Nobody is more motivated to recruit the home's next owner. Neighbors help get the word out, leveraging my marketing budget. And perhaps most importantly, neighbors help fill up the open house, giving it that elusive buzz and energy.
Neighbors certainly know who they are, but the prospective Buyers in their midst often don't!
Unless you live next door to a realtor, or have bought or sold recently, the most common way to run into a realtor is probably at a Sunday open house.
Popular as they are, open houses are frequently misunderstood by the public. In particular, there seem to be four misconceptions:
Misconception #1. The purpose of the open house is to sell the home.
That can certainly happen, but statistically, it's not very likely. Conventional wisdom is that less than 5% of all homes are sold as a direct result of a Sunday open house.
So what's the real purpose?
In my case, it's to get good feedback (see, Misconception #3).
However, for the majority of realtors hosting them, it's to prospect for new clients. Their goal is to connect with people coming through who are just starting their home search, and aren't yet represented (anyone coming through who does have an agent is expressly off-limits).
Misconception #2. The realtor hosting the open house is the agent getting paid to sell it (the listing agent).
Usually not. Rather, the hosting agent is typically a "newbie" standing in for the listing agent. Even if someone decides to buy the house as a result of seeing it on Sunday, the hosting agent only gets paid if the would-be Buyer doesn't have an agent yet.
In my experience, casual lookers don't buy, and serious Buyers already have agents.
That's not to say casual lookers don't eventually buy. When they do, they often use an agent they first met at a Sunday open house.
Misconception #3. Experienced agents never hold open houses.
Not true. I personally make a point of hosting the first 2-3 open houses for every home I list. My goal isn't to prospect for future business, it's to get the best possible market feedback.
Just as what someone says can be less important than how they say it, watching someone's reaction to a home can be much more instructive than simply asking them what they thought of it afterwards.
Where prospective Buyers linger, how much time they spend in the home, their "body English" after they're done -- all speak volumes about their interest level.
As listing agent, such non-verbal cues help tell me if the home is appropriately priced, and if not, why. I can then make intelligent suggestions to my client about any needed mid-course corrections.
Misconception #4. Neighbors aren't welcome.
I love neighbors! Who's more credible talking about how great the neighborhood is: a realtor trying to sell you the house, or, someone who lives next door? I've hosted plenty of open houses where the neighbors who came through actually did more selling than I did! (I shut up).
Nobody is more motivated to recruit the home's next owner. Neighbors help get the word out, leveraging my marketing budget. And perhaps most importantly, neighbors help fill up the open house, giving it that elusive buzz and energy.
Neighbors certainly know who they are, but the prospective Buyers in their midst often don't!
Sunday, November 2, 2008
Is that house REALLY for sale?
"Top Ten" Signs
Just because a house has a "For Sale" sign in front doesn't mean it's really for sale. In fact, a large percentage effectively aren't.
Unbeknownst to the general public, on average more than one-third of all listings simply expire, unsold, after the listing contract ends. That number is undoubtedly higher in the current Buyer's market.
It reminds me of an article about dating that compared a single man ready to settle down to a cab looking for a fare (just to avoid chauvinism charges, I'm sure that the same is true of single women).
According to the article, when a single man is finally ready to commit, an "available" light gets switched on. If the light's off . . don't bother.
Or consider Berger's blunt assessment to Miranda, Carrie's pal, in "Sex in the City": 'he's just not that into you.'
When it comes to being serious about selling . . . homeowners either are or they aren't.
Serious About Selling
Fortunately, it's not that hard to tell the difference.
In that spirit, here are the "top ten" signs that the homeowner's "light" is really on:
10. The home is attractively priced relative to its comp's ("comparable sold properties").
9. The home is available to be shown on reasonably short notice (vs. "it's not convenient now," "try again next week," etc.)
8. The home is empty when you get there (no roaming animals, sleeping tenants, etc.)
7. There's minimal deferred maintenance (preferably, none).
6. The home's price is reduced incrementally as market time mounts (the opposite -- a homeowner asking the same price after ten months on the market -- is almost certainly not serious about selling).
5. The home is being marketed by a reputable, full-service realtor (indicative of homeowner commitment -- both financial and emotional).
4. The home shows well, i.e., it's well-staged, clean, well-lit, in good repair, warm, and welcoming (vs. winterized, unheated, and dark). See #5.
3. The listing agent has put together flattering literature, photos, and a coherent marketing campaign (see #5). Corollary: behind every unmotivated agent is an unmotivated Seller.
2. The owner has provided clear and complete Seller disclosures, and satisfied any point-of-sale inspection requirements in their municipality.
1. The MLS listing doesn't include the terms "motivated seller," "priced to sell," "hurry, don't miss out," "make an offer," etc.
At any given time, such hyperbole can be found in hundreds of MLS listings. It's attention-grabbing only until you see that the home has been on the market since . . . 1985.
The New Yorker captured the essence of this approach in a cartoon showing a father and son standing in front of a clothing store. The store's picture window is plastered with signs screaming "90% Off!," "Must Liquidate!," "Going Out of Business," etc., etc.
The caption: 'some day, son, this will all be yours.'
Just because a house has a "For Sale" sign in front doesn't mean it's really for sale. In fact, a large percentage effectively aren't.
Unbeknownst to the general public, on average more than one-third of all listings simply expire, unsold, after the listing contract ends. That number is undoubtedly higher in the current Buyer's market.
It reminds me of an article about dating that compared a single man ready to settle down to a cab looking for a fare (just to avoid chauvinism charges, I'm sure that the same is true of single women).
According to the article, when a single man is finally ready to commit, an "available" light gets switched on. If the light's off . . don't bother.
Or consider Berger's blunt assessment to Miranda, Carrie's pal, in "Sex in the City": 'he's just not that into you.'
When it comes to being serious about selling . . . homeowners either are or they aren't.
Serious About Selling
Fortunately, it's not that hard to tell the difference.
In that spirit, here are the "top ten" signs that the homeowner's "light" is really on:
10. The home is attractively priced relative to its comp's ("comparable sold properties").
9. The home is available to be shown on reasonably short notice (vs. "it's not convenient now," "try again next week," etc.)
8. The home is empty when you get there (no roaming animals, sleeping tenants, etc.)
7. There's minimal deferred maintenance (preferably, none).
6. The home's price is reduced incrementally as market time mounts (the opposite -- a homeowner asking the same price after ten months on the market -- is almost certainly not serious about selling).
5. The home is being marketed by a reputable, full-service realtor (indicative of homeowner commitment -- both financial and emotional).
4. The home shows well, i.e., it's well-staged, clean, well-lit, in good repair, warm, and welcoming (vs. winterized, unheated, and dark). See #5.
3. The listing agent has put together flattering literature, photos, and a coherent marketing campaign (see #5). Corollary: behind every unmotivated agent is an unmotivated Seller.
2. The owner has provided clear and complete Seller disclosures, and satisfied any point-of-sale inspection requirements in their municipality.
1. The MLS listing doesn't include the terms "motivated seller," "priced to sell," "hurry, don't miss out," "make an offer," etc.
At any given time, such hyperbole can be found in hundreds of MLS listings. It's attention-grabbing only until you see that the home has been on the market since . . . 1985.
The New Yorker captured the essence of this approach in a cartoon showing a father and son standing in front of a clothing store. The store's picture window is plastered with signs screaming "90% Off!," "Must Liquidate!," "Going Out of Business," etc., etc.
The caption: 'some day, son, this will all be yours.'
Saturday, November 1, 2008
"The Bob Newhart Economy"
Six Years of Economic Growth:
Just a Dream?
Until someone comes up with a better name for The Financial Melt-Down of 2008 (how about, "The Financial Melt-Down of 2008"?), I have my own suggestion: "The Bob Newhart Economy."
Just like the sitcom's famous last episode revealed, much of what happened in the U.S. economy since 2002 is starting to appear like a collective dream.
Consider where we were then, compared with where we are now (or appear to be headed quickly):
U.S. home prices then (national ave.): $150k
U.S. home prices now (national ave.): $150k
Gas prices then: $2 a gallon
Gas prices now: $2 a gallon
S&P 500 then: 1,000
S&P 500 now: 1,000
Biggest economic bogey then: deflation
Biggest economic bogey now: deflation
If all we really did was end up where we started (but for ballooning U.S. and individual debt), why is everyone so manifestly worse for wear?
Maybe because it really is true that, "it's not the destination that matters, it's the path."
Just a Dream?
Until someone comes up with a better name for The Financial Melt-Down of 2008 (how about, "The Financial Melt-Down of 2008"?), I have my own suggestion: "The Bob Newhart Economy."
Just like the sitcom's famous last episode revealed, much of what happened in the U.S. economy since 2002 is starting to appear like a collective dream.
Consider where we were then, compared with where we are now (or appear to be headed quickly):
U.S. home prices then (national ave.): $150k
U.S. home prices now (national ave.): $150k
Gas prices then: $2 a gallon
Gas prices now: $2 a gallon
S&P 500 then: 1,000
S&P 500 now: 1,000
Biggest economic bogey then: deflation
Biggest economic bogey now: deflation
If all we really did was end up where we started (but for ballooning U.S. and individual debt), why is everyone so manifestly worse for wear?
Maybe because it really is true that, "it's not the destination that matters, it's the path."
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