Lowball Offers in a Bear Market

Housing Bear Market Brings Out
Two Kinds of Low Ball Offers

Although they're invariably upsetting to Sellers who receive them, not all low ball offers should be summarily dismissed. Especially in a housing bear market, there really are two kinds of low ball offers.

The first kind is the stereotypical, "I'd like to steal your home in broad daylight" offer. The amount is insultingly low, there's little or no context or introduction offered by the Buyer's agent, and the financing terms are even weaker than the offer price (if they're even included).

In the case of investment properties, I've even seen offers where key information -- like the property's address -- is wrong, and the entire offer feels sloppy and incomplete. Clearly, such would-be Buyers are throwing, er, spaghetti against a wall and seeing what sticks, i.e., making hasty offers on multiple properties in the hopes of finding a truly desperate Seller.

(Another sign of such a strategy is that the Buyer has only been through the property once. Especially with single-family homes, serious Buyers typically make multiple visits to weigh pro's and con's, study the home's key features, and initiate a dialogue with the listing agent)

"Leaving the Door Ajar"

The other type of low ball offer telegraphs more sincerity and interest -- and therefore needs to be treated more carefully.

While I strongly discourage my Buyer clients from making low ball offers -- as often as not, they backfire -- clearly not everyone feels that way today. Egged on by housing headlines, or thinking they see weakness where a home has languished on the market (note to Sellers: don't let your home languish on the market), some Buyers feel compelled to start out with a very, shall we say, aggressive initial offer.

Once that's been rejected, it's almost as though the Buyer "got it out of their system" and can begin to negotiate seriously.

If the Buyer in fact is serious, they'll typically continue circling the property, making incrementally higher offers.

What happens next depends -- on the home's location, price, and condition; the presence (or not) of other suitors (a direct function of location, price, etc.); on how patient the Seller is; and on the Buyer's psychological investment and interest in the home.

Sometimes the would-be low ball Buyer raises their offer enough to entice the Seller to accept. Sometimes, they don't, and move on. However, a third possibility --and one that seems increasingly common -- is that while the low ball Buyer is dithering, a second, more motivated Buyer appears, steps through the door the first Buyer left ajar . . . and snatches the property.

In fact, I just handled one of these transactions.

Not only is the second Buyer viewed as a White Knight, but often the first Buyer isn't given a chance to match or beat the White Knight's offer ("if they were willing and able to offer more, they shouldn't have wasted my time beating around the bush").

"Get it Back"

Preventing Depression --
Financial & Otherwise

[Editor's Note: Realtors are private citizens and taxpayers, too. You'd have to be living in cave not to be aware of -- and outraged by -- the conduct of Wall Street principals in the ongoing financial mess. The following post is a response to that behavior.]

Dismayed -- infuriated? disgusted? -- by the drumbeat of daily news documenting Wall Street excess, arrogance and entitlement? I am. I feel like the attorney confronting Joseph McCarthy in the famous 1950's hearings: "Have you no sense of decency, sir? At long last, have you left no sense of decency?"

Unfortunately, today the object of that revulsion isn't an individual but seemingly an entire industry, if not a culture.

With all the talk in the air of a 1930's-style financial Depression, there's no mention of another kind of depression: the psychological kind.

According to Psych 101, anger channeled inward becomes depression. Not holding Wall Street accountable for the myriad affronts to basic standards of decency risks a collective emotional Depression. (Interestingly, depression is linked with another mental state: learned helplessness.)

Forget about fear. Today, the biggest threat to our collective, extremely beleaguered "animal spirits" is bottled-up rage.

So here's my prescription: don't get mad, don't get even . . . get it back.

Keep reading:

I think there is an illness called Goldmansachs Head . . . When you have Goldmansachs Head, the party's never over. You take private planes to ask for bailout money, you entertain customers at high-end spas while your writers prep your testimony, you take and give huge bonuses as the company tanks. When you take the kids camping, you bring a private chef. Goldmansachs Head is Bernie Madoff complaining he's feeling cooped up in the penthouse. It is the delusion that the old days continue and the old ways prevail and you, Prince of the Abundance, can just keep rolling along. Here is how you know if someone has GSH: He has everything but a watch. He doesn't know what time it is.

--Peggy Noonan, "Look at the Time"; The Wall Street Journal (1/30/2009)

Let’s insist with all our pent-up anger that those industries that are failing either be allowed to fail or be nationalized, and that their leaders be fired and brought to justice. For, in truth, their behavior has been criminal in its misuse of investor and government funds. The injury they have caused the country cannot be repaired quickly, but they can certainly be made to suffer where it matters most: why not confiscate every dollar they own, and their families own? This money is owed to us not under a Marxist-Leninist belief (although that is looking more appealing everyday) but because they actually, directly stole it.

--Paul Jenkins, "Shameful Bankers: Time for a Revolution"; PJPolitics Blog (1/29/2009)

"If you don’t pay your best people, you will destroy your franchise" and they’ll go elsewhere, [ex-Merrill CEO John Thain] said. Hello? They destroyed the franchise. Let’s call their bluff. Let’s see what a great job market it is for the geniuses of capitalism who lost $15 billion in three months and helped usher in socialism . . . How are these ruthless, careless ghouls who murdered the economy still walking around (not to mention that sociopathic sadist Bernie Madoff?) — and not as perps? Bring on the shackles. Let the show trials begin.

--Maureen Dowd, "Wall Street's Socialist Jet Set"; The New York Times (1/29/09)

Objections

"No legal grounds," you say?

It's been almost twenty years since I practiced corporate law, and yet I can come up with multiple causes of legal action without breaking a sweat (and lawful prosecution is everything -- otherwise, it's just a witch hunt and a mass venting of anger -- no matter how gratifying that they may be!).

For starters:

--Corporate waste (this means squandering assets one is charged to safe keep; I'd call this one a bulls' eye);
--Breach of fiduciary duty;
--Self-dealing (a specific type of breach of fiduciary duty);
--Filing false and misleading financial statements. Shareholders in many cases literally never saw what hit them because the really toxic, leveraged stuff was buried in off-balance sheet entities.
--Attesting to false and misleading financial statements (a separate offense under Sarbanes-Oxley)
--Insider trading. How many senior executives "pulled an Enron?" That is, they privately liquidated their company holdings while reassuring employees and shareholders that the market's fears were overblown. Or out-and-out exhorted them to buy. Let's use our subpoena power (below) to find out.

Undoubtedly, better and fresher legal minds can add considerably to this list.

"The money's already gone," you say?

Imagine telling your credit card company that you won't be mailing in your payment this month, and not to bother coming after you, because "you've already spent the money."

Even at $35,000 a toilet (what ex-Merrill Lynch CEO John Thain spent), you simply can't dissipate hundreds of millions (or billions) that fast. I have a strong suspicion that many of these former (and unbelievably, current) masters of the universe -- stock market reversals notwithstanding -- are far from judgment-proof (legalese for "broke").

Fortunately, our legal system has a variety of tools for recovering money from dry -- and not so dry -- wells. Liens. Garnishment. Security interests. Injunctions on spending. Forfeiture. Asset freezes. Rescinding fraudulent conveyances. Where there's a will, there's a way.

"Public Defenders," or, "Where's Elliot Spitzer
When You Need Him?"

So what can you or I, as private citizens, do to see that anyone who broke laws is prosecuted?

Short answer: we shouldn't have to. Even posing the question is a Red Herring.

As taxpayers, we collectively employ thousands of attorneys at the local, state, and federal levels of government -- and tens of thousands more support staff -- all sworn to enforce existing laws and protect our interests.

That includes 50 state attorneys general; hundreds of U.S. district attorneys; the U.S. Attorney General and Solicitor General, and hundreds more attorneys at the Securities and Exchange Commission.

Fortunately, our "public defenders" have a variety of legal tools at their disposal-- including broad subpoena powers -- to compel testimony and uncover the truth, find and recover ill-gotten assets, etc. Use them.

Yes, our legal system -- wisely -- has safeguards against compelling self-incriminating testimony (it's called the Fifth Amendment). That's why you don't have to submit to a breathalyzer test if you're charged with drunk driving. But if you don't, you automatically forfeit your driver's license and are taken into custody (at least in Minnesota). It's not hard to come up with analogous consequences for financial miscreants.

And yes, holding Wall Street accountable raises complicated, jurisdictional issues, questions of federal preemption, etc. But so what? Attorneys tackle and sort out such issues every day.

On the simplest, most fundamental level, what we have just collectively witnessed -- and continue to witness -- isn't complicated, it's quite simple. Namely, greed run amok.

Naming that behavior and holding the most egregious perpetrators accountable is the first step towards national healing -- financial and otherwise.

Dec. New Home Sales

New-Home Sales Down (Again)

According to the Commerce Department, sales of new, single-family homes decreased by 14.7% in December to a seasonally adjusted annual rate of 331,000.

Frankly, given the economy, accelerating layoffs, etc., it would have newsworthy if new-home sales hadn't dropped hard.

Silver linings? Not if you're a builder, a contractor, or a developer.

However, it's worth noting that 2008 now shapes up as the worst year for new housing since 1982. If 2009-2026 is half as prosperous as 1983-2000 turned out to be, things will be ok (heads up in 2027).

Second, prices stop falling when supply shrinks and demand grows.

Right now, policymakers are focused on goosing demand (lower interest rates, first-time Buyer tax credits, etc.). However, reducing the supply of new homes -- new construction is also down big -- serves to correct the market equally well.

(Not So) Exceptional Properties*

Upper Bracket Woes

Although Edina has been a housing standout in the current downturn, it, too, has pockets of excess inventory, and homes that have suffered serial price cuts -- and still aren't selling.

Just one street in Edina's Country Club section, Sunnyslope, now has six homes on the market, at prices ranging from $729,000 to $5 million. The market time ranges from just over 3 months to almost three years(!) (lots of green lawns in the MLS shots -- never a good sign in the Twin Cities in January).

What's going on?

Sunnyslope Sellers

Unfortunately, not just one thing. The economy, of course. The fact that anyone buying one of these homes likely needs a jumbo loan, which now carries a huge premium to so-called conventional or conforming loans (under $417k). The fact that people with the means to buy upper bracket homes have likely had their assets whacked, and now, their jobs threatened.

Finally, you'd speculate that the "Sunnyslope inventory glut" is emboldening Buyers to make, shall we say, "aggressive" offers that Sellers have been rejecting.

What you can categorically rule out is some sort of long-term decline, or a neighborhood-specific issue: Country Club is -- and is likely to remain -- a premier Twin Cities address.

So what happens next?

You'd guess some combination of more price reductions, Sellers who take their homes off the market, and/or Buyers who raise their offers enough to entice one or more of the Sunnyslope Sellers.

Although Edina so far has been spared the pox of short sales and foreclosures affecting other parts of town, that, too, could change with a deepening recession.

*Edina Realty has a special marketing group for upper bracket home called "Exceptional Properties," which includes two of the six Sunnyslope homes.

Title Insurance Traps

Title Traps Can Bite
Foreclosure Buyers

The potential traps that lurk for Buyers procuring title work, especially for foreclosures, reminds me of a favorite attorney joke (I'm allowed to tell them because I am one, albeit non-practicing).

When a neighbor charges that the attorney's dog bit him, the attorney first denies it. When he's shown photos of the bite and the emergency room bill for the neighbor's stitches, the attorney then argues that the dog attacked in self-defense. When numerous witnesses come forward to testify that the attack was unprovoked, the attorney says . . . it's not his dog.

Similarly, Buyers paying good money for title exam and insurance need to be mindful of numerous pitfalls, especially when foreclosures are involved. Herewith is a partial list:

--Who is the title company working for? If they're hired by the bank that owns and is selling the property -- as some banks require -- their motivation to uncover all potential liens and claims against the property may be compromised.

--What's in the fine print of the owner's title insurance policy? Specifically, what's included -- and more importantly, what's excluded? Many municipalities are now imposing hefty abandoned building fees (Minneapolis' is $6,000). Is the title examiner checking to see if such a fee has been imposed? How recently did they look? Ditto for property taxes, unpaid utility bills, contractor liens, etc.

--Even if the owner's title policy covers a potential claim, it may be subject to a significant deductible. Or, to collect, the owner may have to incur significant legal fees that the title policy won't reimburse.

--Is the company issuing the owner's title policy financially sound? Even an airtight claim is worthless if the company standing behind the policy is bankrupt or otherwise out of business.

When it comes to title work, inattentiveness or unwise penny-pinching can cost Buyers A LOT down the road.

Reviving "Animal Spirits"

Less Trust = Simpler Financial System

"The more complex the transaction, the more trust is needed to sustain the transaction."

--Robert Shiller, "Animal Spirits Depend on Trust"; The Wall Street Journal (1/27/2009)

Robert Shiller, the Yale economist who made his name calling the 2000 Stock Market Bubble, has an excellent piece in Tuesday's Wall Street Journal explaining where the financial system is right now, and exactly how it got there.

In an era when trust has been shattered, securitization and derivatives are out, "plain vanilla" debt and credit -- and a lot less of them -- are in.

Home Buyer Incentives Multiply

"$5,000 here, $10,000 there"

To paraphrase a *famous quote, "$5,000 here, $10,000 there, and pretty soon you're talking about real money."

In this case, the money consists of incentives offered to first-time home Buyers.

New home builders have been offering Buyer incentives for quite some time (upgraded finishes, discounted loans, plasma TVs, etc.). However, now government is joining the party in a serious way.

At the federal level, there is increasing speculation that the $7,500 repayable tax credit now offered Buyers will simply become a straight credit -- no repayment required.

Locally, a number of municipalities are dangling increasingly fat incentives to first-time Buyers to tackle foreclosed and abandoned homes.

The leader so far appears to be Brooklyn Center, offering a $10,000 package to qualifying Buyers.

Do I hear $15,000??

*The original quote was from Senator Everett Dirksen, whose decimal place was actually billions.

Nov. - Dec. Housing Statistics

Foreclosures Explain Latest
Housing Price Drop

The most recent batch of housing statistics -- from S&P/Case-Shiller and NAR -- show that housing prices are continuing to fall nationally. Depending on how you slice and dice the market (sale pairs, top 20 markets vs. all markets, all homes vs. those under $417k, etc.), the year-over-year annual decline ranged from 13% to 18%. Nationally, the cumulative decline from the 2006 peak now is about 25%.

As a boots-on-the-ground realtor, mostly what I'm seeing is that the activity is at the low end of the market, specifically in foreclosures. Locally, lender-mediated transactions (foreclosures and short sales) now account for a staggering 40% of Twin Cities housing transactions.

What market-wide statistics obscure is that there's a disconnect in the pricing of foreclosures, and "traditional" sales.

Depending on the condition, foreclosed properties can sell for discounts of as much as 50%-75% from what they'd fetch in "mint," move-in condition. On top of run-of-the mill neglect and dated features, many foreclosed homes have freeze damage (busted pipes and radiators), no functioning heat, numerous code violations, and a trail of tax and third party liens. It's also the case that they are overwhelmingly concentrated in what were already lower-priced neighborhoods to begin with.

Compounding matters further (if that's possible), most banks won't lend on condemned homes (automatic with no heat). That means that prospective Buyers must hunt for a bank that will, or pay cash. Then, they must figure out how to finance all the aforementioned repairs and updates.

When everything is said and done, the home's purchase price can be little more than a down payment on all the post-closing expenses to come.

How much of a discount would you need to take on such a project??

At this point in the downturn, more and more transactions meeting the foregoing description are being mixed into -- and driving -- the housing statistics regularly being reported by the media.

If you separated the foreclosure sales from the non-foreclosure sales, you'd undoubtedly find that the former dropped much more than 17%, while the latter dropped much less.

P.S.: I discuss the "bifurcated market" phenomenon more fully in two other posts, "Housing's Wal-Mart Effect" and "A Tale of Two Markets."

Ritholtz: 'Affordability Index' is Worthless

Rebutting Ritholtz on "Housing Affordability"

The [Housing Affordability Index] as presently constructed is utterly worthless. It provides little or no insight into how affordable US Housing actually is. Further, what is omitted from the index is especially relevant to the problems occurring in the housing market today. The Index fails to account for -- or even recognize -- any of the out of the ordinary circumstances that are currently bedeviling the Housing market.

--Barry Ritholtz, "NAR Housing Affordability Index is Worthless" (The Big Picture; 8/13/2008)

If you don't read Barry Ritholtz's blog, The Big Picture, you should: his unvarnished take on finance and the economy is consistently superb.

That said, his relentless criticism of Realtors, and, in particular, their trade association, the National Association of Realtors ("NAR"), should be taken with a grain of salt -- just as NAR's pronouncements should be.

First, two stipulations:

One. NAR is a trade organization. Like the Investment Company Institute (stocks) or the National Association of Real Estate Investment Trusts (real estate), it can reliably be counted on to put the best possible face on whatever's happening at the moment. That's what trade associations do.

While I certainly wouldn't decide to buy or sell stocks based on the latest ICI press release, neither would I dismiss everything they say as unadulterated lies and spin. Ditto for NAR and housing.

Two. Most Realtors -- myself included -- don't sell real estate nationally, they sell locally. I focus exclusively on the Twin Cities market. So the HAI chart at the top of this post, and my discussion of HAI statistics generally, pertain primarily to the Twin Cities.

In that vein . . consider NAR's housing affordability index ("HAI").

To come up with a single gauge of relative housing prices, it takes three key variables -- interest rates, median family income, and median housing prices -- and puts them in a blender. The resulting number offers a relative measure of housing's affordability nationally (NAR actually puts out four regional calculations, but it is the national one that receives the most attention).

Back-testing the HAI, you'd expect it to be highest when housing prices were near their low, and lowest when housing prices approached their peak.

Locally, that's exactly what you find. After plateauing in 2003, the Twin Cities HAI deteriorated steadily until the third quarter of 2006. The chart's next installment, showing the change from January, 2008 through January, 2009, will show it skyrocketing (to over 192).

So what are Ritholtz's principal beefs?

One. The HAI remained well north of 100 -- its baseline measure of housing affordability -- throughout the period when the housing bubble was inflating, up to and including the peak (completely true, by the way).

Rebuttal: the HAI should be viewed as a relative measure of affordability.

In the stock market, a Price-Earnings ("P/E") ratio of 8 doesn't necessarily mean that stocks are cheap, just as a PE of 20 doesn't necessarily mean that they're expensive. It's also true that stock values tend to overshoot on both the high and low ends.

Historically, however, lower P/E's correlate with better value, higher with less. Ditto with the HAI and housing.

Two. The NAR methodology doesn't take into account today's much tighter credit conditions, weak economy, and tapped-out consumer.

Rebuttal: Wrong. Those factors are captured by two of the HAI's three inputs -- housing prices and interest rates.

Housing prices clearly are dropping now for all the reasons Ritholtz mentions (fewer Buyers have 20% downpayments, their credit scores are deteriorating, etc.). That feeds directly into the HAI's (shrinking) denominator.

Meanwhile, recessions crimp demand for money, which results in lower interest rates. That, too, is captured by the HAI (its numerator increases). The HAI may be a gross benchmark, but its very consistency means that it can be compared across time intervals.

Three. Regional variations in home prices and income are ignored.

Rebuttal: Wrong. The HAI is computed nationally, but also by region (Northeast, Midwest, South, and West). Even after huge price drops, the HAI in the West is quite low: 108.4. Meanwhile, it's setting records in the Midwest: 186.0 (both numbers as of November, 2008).

For Ritholtz to say that the national HAI ignores regional variations is like saying the Wilshire 5,000 obscures the fact that some market sectors (energy, consumer durables) have outperformed others (tech, small cap stocks). Undeniably true -- and meaningless.

There's no denying that Mr. Ritholtz's skepticism towards NAR is historically warranted. However, trashing a useful tool such as HAI -- without regard to context or application -- is effectively throwing the housing baby out with the bathwater.

What's It Worth?

2445 Portland Ave. So.

Minneapolis

Asking Price: $132,905
Assessed Tax Value: $505,500
Property Taxes (2009): $8,216
Last Sale: $480,000 (3/1/2007)

This 5,200 FSF, Brick Four-plex came (back) on the market late Friday afternoon. A quick look at its selling history indicates that it's been on and off the market, at ever lower prices, since July, 2005.

What it actually sells for is anyone's guess (I haven't been inside). But it's a safe bet that it's worth a fraction of the $505,500 the city says it is. Bet #2: it would sell faster without an $8,216 annual property tax bill attached -- more than the next owner's likely mortgage payments. (You'd further guess that those taxes haven't been paid in quite awhile, leaving a big, fat lien against the property.)

Such out-of-whack tax bills are one of the reasons many foreclosures languish on the market.

Comparing (Bruised) Apples to Oranges

To Help Clear Housing Market,
Peg Tax Value to Last Sale Price

“Believe me, it’s not what it is.”
--New Yorker cartoon

That's what's the woman caught in bed with another man, says to her husband standing in the bedroom doorway.

And that's what government authorities are effectively saying to anyone who buys foreclosed properties at a deep discount. Namely, what you paid isn't fair market value, so therefore it won't serve as the new, tax assessed value used to determine future property taxes.

Bottom line: distressed, beat-up properties currently listed for $50,000 or $100,000 will be taxed as though they are still worth $200,000, $300,000 -- or even more -- regardless of what the Buyer actually pays.

Bruised Apples to Oranges

Certainly, poor condition and tight credit explain why many of these properties are sitting unsold, clogging markets nationally. However, the prospect of being stuck with an annual property tax bill of $6,000 or $8,000 -- compared to principal and interest payments of perhaps $4,000 - $6,000 -- is at least an aggravating factor.

Policymakers nationally increasingly "get" that the key to fixing the sick economy is fixing the housing mess. In turn, the key to helping housing is stemming the wave of new foreclosures --and helping the market absorb existing foreclosures. Short-sighted, reality-suspending tax policies make the latter task more, not less, difficult.

The solution is for the new Congress to pass a law requiring local taxing authorities to use the most recent property sale price as the new, tax-assessed value for every sold property, regardless of legal status (foreclosure, "short sale," etc.)

"Invalid" Sales

Such a policy makes eminent sense, for three reasons:

One. It reflects economic reality.

Foreclosed properties sell at huge discounts from non-foreclosed properties for a good reason (more like 15 or 20). They're typically neglected, uninhabited, hard to inspect (the electricity and water can be shut off), and sold "as is." They also can come with a trail of third-party fees and liens that collectively put a legal cloud on title, and can add significantly to the purchase price.

Who wouldn't expect a significant discount to take on such a challenge?

Two. Comparing the sales price of foreclosed homes to non-foreclosed homes -- as government policy now requires -- is like comparing (very bruised) apples to oranges.

In Minneapolis, foreclosures aren't considered "valid sales" for establishing tax values because they involve "duress." (See, "Sticky Property Taxes"). As a result, tax assessors must look for "traditional" (non-lender mediated) sales to calculate the "real" value of the foreclosed property.

Good luck.

In some markets nationally, 50%-75% of all sales are now lender-mediated. While the overall number is lower in the Twin Cities -- approximately 40% -- it masks a wide variation by neighborhood.

In well-to-do areas such as Edina and Wayzata, the percentage of foreclosures is minuscule -- well under 5%. However, in more "economically challenged" areas, such as Minneapolis' Camden and Phillips' neighborhoods, the percentage of foreclosures now appears to be 80% or higher.

You can't price off of a peer group that doesn't exist.

Three. The government's presumption of "duress" is obsolete.

Traditionally, "fair market value" has been defined as whatever a Buyer and Seller, acting at arm's length and without duress, decide it is. By definition, bank-owned properties are deemed to involve duress.

However, the fallacy is that "duress" and "fair market value" are mutually exclusive.

Foreclosed or not, a property that's been on the market for any length of time and fails to sell is . . . overpriced. The solution is to incrementally reduce the price at regular intervals -- as many times as is necessary -- until it is sufficiently attractive to entice a Buyer (or several -- sometimes deeply discounted properties trigger bidding wars once they truly are attractively priced).

It defies market reality for the government to overrule the foregoing price-setting mechanism and substitute its own, artificial procedure(s).

If government really wants to help the housing market, it should focus on removing obstacles in Buyers' path -- not placing more in their way.

Blog Rankings

I'm Number . . . 756,681??!!

According to Technorati, the Nielsen ratings of the blogosphere, this blog now ranks 756,681 world-wide in popularity.

That's actually a bit better than it sounds: there are millions of blogs out there, and most don't have enough traffic to even warrant a ranking. Technorati alone tracks more than 4.7 million blogs.

Want to see (some of) what ranks ahead of me? Click here to see the Top 100 blogs (Note: you can sort either by "fans" or "authority").

$3,000 ATM Fee?

Cheap Money Elusive for Many

While rates are falling, borrowers face higher costs every step of the way, from rising fees for mortgage insurance to added costs that drive up the mortgage rate. At the same time, lenders have become more cautious about who they will lend to, as more people lose their jobs, watch their incomes decline and fall behind on their bills.

--"Costs and Tighter Rules Thwart Refinancings"; The New York Times (1/24/09)

The big drop in interest rates -- from over 6% to under 5% -- isn't stimulating the housing market as much as hoped because many would-be borrowers and refinancers don't qualify. Depending on the individual housing market, as many as two-thirds of applicants are denied (in the Twin Cities, the number I've heard is 50%).

Many of the remainder still may not get the best, advertised rates, due to something called "risk-based pricing." Just as some people pay 7% on their credit cards and others pay 22%, mortgage rates now vary considerably depending on your risk profile.

To add insult to injury, lenders are now imposing additional fees on weaker credit risks to compensate for their projected higher risk of default. (Such an approach may make sense now, but it smacks of "gotcha" to millions of borrowers who faced no such hurdles when they signed up for their original loans. On the contrary, lenders pitched low initial "teaser" rates, "option-ARM's" and other sugar-coated loan features.)

The net result is a huge winnowing-out factor for those trying to lower their payments and/or switch out of risky mortgages.

Oh, and forget about "cash-out refinancing" -- using your house literally as an ATM. Even if you have enough equity to do it, the cost is likely to be prohibitive: anywhere from $500 to $3,000 to access $100,000 of your equity.

Investment Opportunity!

Wanted: Investor Looking For a Steal

What: Investment Property
How much (asking): $293,000 below current tax assessed value (56% below tax value)
Where: Twin Cities
When: Deadline for offers is 2 p.m. Monday

Who says that there aren't multiple offers any more?

A bank-owned 4-Plex hit the market this morning for a whopping $293,000 below its current tax assessed value. Even in a depressed market, that kind of discount stands out.

The listing agent has already received offers, and has indicated that they'll be reviewed this Monday at 2 p.m. The instructions are "highest and best" -- realtor-code for, this is a game of one-card stud. In other words, you won't get a chance to top any higher offers.

Interested? Call me at 612-710-3282 to set up a showing this weekend.

At least on paper, this is as good a deal as I've seen . . .

Next: How to tell if there really are multiple offers.

"New" vs. "Re-List"

Q: When is a "new list" not new?
A: When it's a re-list

"'Insanity' is doing the same thing over and over again and expecting different results."
--Albert Einstein

January in Minnesota is about snow, subtly lengthening days (finally!), and -- to Realtors -- re-lists. Lots and lots of re-lists, especially this year.

If you're not familiar with the phenomenon, cancelling and re-listing a property is the preferred way for Sellers (and their Realtors) to raise the profile, however briefly, of a home that's been for sale for awhile and starting to get "tired."

Like Craig's List, the Multiple Listing Service ("MLS") database is a dynamic river of new information. The main difference is that the flow is vertical -- specifically, top to bottom -- not horizontal.

The vast majority of prospective Buyers (as well as Realtors) focus on the newest properties to hit the market. If you're seriously shopping for a home, and your criteria are reasonably crystallized, you'll quickly become familiar with all the existing inventory that meets your criteria (or doesn't, as the case may be). So you keep your eyes on what's new to market every day.

For Sellers, the catch is that so much comes on every day that any single listing is quickly buried. After 60-90 days in a market the size of the Twin Cities, it's likely that thousands of listings have come on the market since yours.

So how do you get your home put back on top of the pile? By canceling and re-listing.

Three types of Re-Lists

In truth, there are really three kinds of re-lists.

One. The Serial Re-Lister.

If once is good, several times is better, right? Definitely, positively, not.

Re-listing doesn't really fool anyone, at least not for very long. That's because the MLS has two links, "CDOM" and "History," which show what's really going on. "CDOM" stands for "cumulative days on market," and is exactly that. No matter how many times you cancel and re-list, you can't re-set CDOM (the only way is to take your home off the market and wait one year).

"History" shows, line by line, every change in a home's sales status. The categories include "Active" (same as new); "Pending" (there is a consummated contract, but the deal hasn't closed); "Closed" (equals "sold"); and "Expired."

When an experienced Realtor sees a property history with row after row of status changes, they know that: a) the property was seriously overpriced initially; b) the Seller isn't serious about selling; or c) both a) and b).

Invariably, the answer is (c). When that's the case, the inevitable, final row is usually . . ."Expired."

"Line in the Sand?"

Two. "The Line in the Sand" Re-list.

One of the features of the current, Buyer's market is frustrated, increasingly inflexible Sellers. When their home first doesn't sell, such Sellers may respond by reducing the price in conjunction with making some cosmetic improvements, investing in better staging, etc.

Eventually, however, their willingness (or ability, depending on what they owe) to accept further price reductions evaporates. So, they instruct their realtor to cancel and re-list . . . but at the same price.

This time of year, the MLS database is clogged with homes that either were cancelled around Thanksgiving, and are now being brought back on as new, or, are simply being cancelled and re-listed on consecutive days, with no change in price.

Unfortunately for such Sellers, along with the economy generally, the housing market in most areas has continued to weaken the last few months. So an asking price that was too high in November is even more unrealistic now.

Such a mindset evokes Einstein's definition of insanity: doing the same thing over and over again and expecting different results.

It also recalls an anecdote about Ben & Jerry, of ice cream fame. The two had the same sixth grade Phy Ed teacher, who told the students that if they couldn't do that day's required exercise --running a mile in less than 12 minutes -- they'd have to do it over again until they did.

Ben and Jerry supposedly looked at one another (one can presume neither one would have been mistaken for Carl Lewis), shrugged, and asked the obvious question: 'if we couldn't run a mile in 12 minutes the first time, what makes him think we can do it the second (or third, or fourth)?"

Three. Which leaves the legitimate cancel-and-relist.

Whatever the initial asking price, the re-list price is now at -- or even slightly below -- current market value. Along with the new price, the Realtor freshens the listing's marketing language, and updates any photos that may have become seasonally stale. The owner addresses any cosmetic, easily corrected objections from previous showings.

And perhaps most crucially, the listing agent couples the cancel-relist-price reduction with an aggressive marketing push. That includes networking the price reduction, putting the home back on broker tour (Tuesday's), and holding the house open the next Sunday.

In my experience, such an orchestrated "surge" (oops, bad term) often results in a deal in relatively quick order.

Record "Housing Affordability"

Has Housing Hit Bottom?
Key Metric Says "Maybe"

Falling prices plus low interest rates equals improved housing affordability, right? Maybe. Even if it does, however, Buyers may be too gun-shy at the moment for that to matter.

According to the four local realtor associations, the Twin Cities' Housing Affordability Index ("HAI") is now at 192, the highest number since the statistic was first tracked in 1990.

What that means is the median family income in the Twin Cities is 192% of the income needed to qualify for the median priced home, using a 20% down payment and 30-year fixed mortgage.

By contrast, that number fell to as low as 120% in mid-2006. Not coincidentally, mid-2006 was very close to the peak of the housing bubble.

Watch the Numerator

So is a record-high HAI now signaling that the housing market is close to a bottom?

It depends on the wild card in the equation: Buyers' income.

In a recession, unemployment rises, and wages typically stagnate or fall. I don't compile the HAI statistics, but you'd guess that the income component of the HAI is a lagging number, and is now likely weakening along with the overall housing market.

So some consumer skepticism may be warranted.

Of course, prospective home buyers are not just backward looking, but forward-looking, too.

For now, people who are watching home prices fall and who are worried about losing their jobs clearly are listening to what their gut tells them, not their brain (and certainly not their realtor!).

Edina Realty's '09 Annual Meeting

Surviving the Shakeout

Edina Realty held its annual meeting for its 2,500-plus local Realtors today at St. Paul's Xcel Center.

I couldn't catch all of it -- clients come first -- but what I saw was a combination pep talk, unusually frank discussion of today's brutal market, and an emotional presentation by Bob Peltier, Edina's President and CEO.

Peltier, who along with his brother, Ron, effectively runs the company, suffered a serious stroke last May. He compared his recovery to the challenges facing Realtors today: everything comes harder, takes more effort and persistence, and above all, requires a positive attitude.

The sombre mood was a reflection of today's market. While "Pending" sales are up for the first time since 2004, the increase is largely due to foreclosures: now about 40% of all transactions locally.

As Realtors know only too well, such deals are a tough way to pay the rent: imagine spending several months on an especially thorny deal and walking away with a commission check for, say, $1,500 (before taxes!). You can make that kind of money at McDonald's -- and not have to work nights and weekends for it. You wouldn't even be sacrificing your health insurance. (Realtors pay for their own.)

Clearly, such challenges have taken their toll on Edina's head count, not to mention morale: the company shed 700 realtors, dozens of support staff, and four Twin Cities offices in just the last year.

Notwithstanding these travails, Edina Realty's Minnesota operations still managed to report a profit in 2008. Oh, and no one in management is begging the government for a bailout.

If only the country's banks could say the same . . .

Tighter Credit -- For Realtors, Too

"Put it on my Marketing Account -- Not"

It's not just borrowers getting pinched by tightening lending standards -- Realtors are, too.

For years, Edina Realty and other brokers have basically extended credit to their Realtors through company marketing accounts. Print ads, mailings, Web site and technology fees -- all the day-to-day expenses Realtors typically incur could be charged to their marketing account. As deals closed, the broker would subtract the debit balance in the marketing account from the realtor's commission.

No more.

With deals fewer and far between -- and at lower prices -- brokers are getting stuck with their Realtors' IOU's for longer. And with more Realtors exiting the business, brokers have been increasingly stiffed with large, unpaid balances.

So prospectively, it's increasingly "pay as you go."

Open House Sun. 2-4 p.m.

Linden Hills Charm

Looking for a character-filled home near Lake Calhoun that's perfect for a professional couple or family with small kids? Come by my open house at 3929 Washburn Ave. in South Minneapolis this Sunday (1/25/09) from 2-4 p.m. Highlights include: 4 Bedrooms, 2 Baths and over 2,200 finished square feet; a hillside setting with commanding views; and a private, level backyard. Price: $479,900

"10 . . 9 . . 8 . . 7 . . "

George Bush's Role in
Today's Economic Car Crash

Everyday Americans -- if not historians -- are likely to remember George W. Bush as the President who crashed the family car (the economy).

However, it would be too easy to simply lay it all on #43 and move on (or try to -- right now we're all sort of waiting for Triple A -- Obama and team -- to show up with the tow truck).

If we're honest about it -- and there will never be a better time than Inauguration Day -- we have to allow that there were other, contributing factors. Such as:

--The car Bush got the keys to had major flaws and defects, at least a few of which were non-obvious (at least to people other than Warren Buffett). The role of credit derivatives, the shadow banking system, the (far too) interdependent global banking system and the consequently high risk of financial contagion -- all these phenomena are only now clearly being understood and dealt with.

--The family "car" wasn't in such good repair. In fact, its chassis and fundamental design date back to The Great Depression. As economic systems go, that's the equivalent of a car with 200,000 miles on it. The economy Bush inherited had none of the latest, technologically advanced safety equipment (like air bags, electronic sensors, etc.), and the basic ones it did have -- like brakes -- were old and poorly maintained.

(In fact, there's ample evidence that, in what can only be called an act of economic sabotage, the brakes were intentionally disabled by the very mechanics hired to fix them.)

--The car crashed not just because the driver was inept -- although that's clear -- but because of poor weather and road conditions. Specifically, visibility was poor, the road was slick, and safety features such as guard rails and proper lighting were sorely lacking.

--Unfortunately, we let the insurance premiums partially lapse. The reason people buy insurance is to make them whole in the unlikely event of a catastrophe. We're now in the position of owning a totaled car, without all the money needed to replace it.

What Would Lincoln Do?

So what do we do now?

The first step is to attend to those passengers and innocent bystanders most severely harmed (financially) by the current crack-up. That includes, but is not limited to, people who've lost their homes, their savings, and their jobs. Over time, we must also attend to those who've lost less tangible but no less real things: their faith, their trust, and their hope.

The next step is to make sure that the current driver is the best possible person for the job. On that score, thank God for -- and God bless -- Barack Obama.

Once those two pieces are in place, the last step is to set about re-designing a brand new car.

As Lincoln understood at Gettysburg, the best (and only way) to honor an otherwise unfathomable sacrifice is for the survivors to rededicate themselves to the completion and perfection of the cause at the heart of that sacrifice.

In this case, that means designing a better, market-based, capitalist economy -- one that's fairer, more productive and even more durable than the one FDR bequeathed us (and LBJ and Reagan adjusted).

FDR Redux?

The Financial Crisis So Far

The country -- and world's -- biggest financial crisis since the 1930's has reopened a long dormant debate regarding 1930's economic policy.

Democrats today subscribe to the notion that FDR did too little during The Great Depression, unnecessarily prolonging it. Had he used even more fiscal stimulus (public works, capital spending, etc.), they believe, the economy would have recovered faster.

Republicans today subscribe to the notion that FDR did too much during The Great Depression, unnecessarily prolonging it. According to them, government overreacted to the 1929 Stock Market Crash and subsequent downturn, greatly exacerbating it.

In retrospect, about the only thing that everyone agrees on is that FDR didn't end the Great Depression -- World War II did.

That said, it seems unassailable that FDR was a beloved figure to many, many Americans. If voters thought he was doing a poor job, their actions belie it: they re-elected him a record three times (of course, future generations may wonder how George W. got elected twice!)

Fast forward to today.

Given an incoming Democratic President and continued deterioration in the banking system and broader economy, you'd certainly bet on more intervention -- and more aggressive intervention -- rather than less. As Americans, we can only hope (and pray) that whatever course of action President Obama chooses is effective.

To paraphrase what Santayana (not to mention Nietzsche) would say of our current predicament: those who disagree about history's big lessons . . . get to repeat them.

Jim Cramer's RE Rx

Cramer: 'Home Buyers Need a Bigger Carrot'

In the financial community, Mad Money's Jim Cramer is known for being a showman first, and for prescient market calls a very distant second (his manic, shotgun approach to stock picking seems to be if you throw enough darts, sooner or later a couple are bound to hit the bull's eye).

That said, no one ever called him dumb (he's actually a Harvard Law grad, worked for Goldman Sachs, and is an idea machine). And once you strip out his individual stock picks, his market analyses are often insightful.

So what's his prescription for fixing the housing market?

First, making it the number one economic priority. Here's Cramer's logic:

Everything comes down to housing. The wealth effect, a function of house values and portfolio values, is being gutted by both. You can't fix stocks -- they are reflective of earnings -- but if you stabilized home values, you could get some confidence, particularly given the collapse in oil. Stabilize housing, and you get a positive trend in consumer spending.

--Jim Cramer, "Housing Needs a Tax Credit"

The centerpiece of his proposal is a massive ($25,000) tax credit for home buyers. Cramer also calls for dramatically lowering interest rates, and for a shakeout amongst the national builders.

In fact, all of the foregoing proposals have already been floated in one guise or another (a $7,500 tax credit is already law, though few Buyers seem to have noticed). What's notable about Cramer's approach is the scale and urgency.

In that respect, Cramer joins a growing list of (calmer) pundits, including Thomas Friedman, calling for some variant of "shock therapy" to address the ongoing housing and credit debacle.

As big banks absorb ever-greater mortgage losses, their arguments are gaining traction.

Star Trib Bankruptcy

Lost Ads -- Including Real Estate --
Hasten Local Paper's Demise

The Star Tribune is not the first major city newspaper to file for bankruptcy (last Thursday, 11 p.m.), and it certainly won't be the last. Like the Tribune Company before it, its demise was hastened by, roughly in order of significance: 1) way too much debt, piled on by the most recent buyer; 2) the continuing advertising shift to the Internet; and 3) the recession's effect on advertising generally.

In what rates as a small footnote, the paper's demise was foreshadowed by Edina Realty's decision two years ago to slash its print advertising budget, and instead focus its resources on http://www.edinarealty.com/

At the time, the move was criticized by some as unwise penny-pinching, and as weakening the company's market presence. However, virtually every Twin Cities broker quickly did the same.

Multiply those actions one hundred-fold (or one-thousand), and it's not surprising to see the company -- and the newspaper business generally -- in deep, deep trouble . . .

P.S.: the obvious parallel to the "horseless carriage" is the "newspaper-less," but for some reason the latter term never caught on.

George W. Bush: The L-O-N-G Wait for Redemption

Is Bush's Leadership Like Wagner's Music?

"Wagner's music is better than it sounds."
--Anonymous

Is George W. Bush's Presidency more successful than most Americans (80%) think right now? Will history vindicate Bush, like it did Harry Truman?

I doubt it.

Harry Truman didn't leave office with a PR blitz of interviews arguing that history would redeem his shredded reputation. When you have the courage of your convictions -- and a clue how anxious and angry everyday Americans are right now -- you know when to shut up. If we, contemporary Americans, aren't qualified to judge Bush, why is he spending so much energy trying to persuade us?

Asking people to suspend their (very) critical judgment is more than a bit self-serving, not to mention arrogant and insulting.

Imagine calling the restaurant where you just contracted food poisoning and being told that "it's premature to judge the meal a failure" -- only your great-great grandchildren are qualified to do that.

Sometimes -- no, 99% of the time -- what seems to be a failure, is.

It's certainly possible that history will be kinder to George Bush II than contemporary America. However, it's equally conceivable that history's judgment will be even harsher. Time did nothing to burnish the reputations of Buchanan, Pierce, Fillmore, Harding, Hoover and a host of other Presidential mediocrities. Even luminaries aren't immune from retroactive revisionism: anyone still think Alan Greenspan belongs on an economists' Mount Rushmore?

When Mao Tse Tung was asked, in 1950, what he thought of the French Revolution, he reportedly replied, "it's too soon to tell."

History is not going to wait nearly that long to render its verdict on George W. Bush (no matter how much he hopes otherwise).

2009 "Dear Client" Letter - Part 2

Rational Moves in an Irrational Market

Cont. from Part One:

--Two. If you're a Buyer, take advantage of a soft market to upgrade. That's what stock market investors do during a bear market. Specifically, they buy blue chip stocks that are temporarily "on sale."

Similarly, today's real estate downturn has lowered the entry point for many desirable Twin Cities neighborhoods by $20k, $50k, or more. Dropping home prices, plus cheap mortgages, spells opportunity for millions of younger Buyers. Meanwhile, if you're a move-up Buyer, you're likely to be pleasantly surprised by how much house you can afford, in neighborhoods you wouldn't have dreamed of looking at before.

If you're a Seller, consider taking your lumps. Casting aside all the forecasts -- a good idea, I might add -- no one really knows whether housing prices are headed up, down, or sideways the next 12-18 months.

That depends on interest rates, the national and local economy, unemployment levels, etc. -- complex, inter-related variables that even the pro's get wrong (forget about predicting the future; most economists can't even get the present right: witness the one-year lag diagnosing the current recession).

So if your life circumstances dictate making a move this year, you may just want to . . . move. If you're buying something else, whatever you lose as a Seller may very well come back to you as a Buyer.

In that vein, if you're a prospective downsizer contemplating becoming a renter . . . you may want to consider buying something smaller instead.

Psychologically, it's a lot easier to pull up stakes where you've lived for decades if you're excited about where you're headed. Given today's historically low rates and record-high inventory, the odds of finding a great townhome or condo are a lot better than finding something equivalent in today's increasingly crowded, picked-over rental market.

If you're a longtime homeowner, keep in mind that, while you may be getting less than you might have 2-3 years ago, you're still getting more than you would have 5 years ago -- let alone 20 or 30. Thanks to residential real estate's favorable tax treatment, all of that gain is likely tax-free for most Sellers (no capital gains tax is due on the first $250k of gains for qualifying singles, and $500k for couples).

Three. Read my blog, City Lakes Real Estate (http://www.citylakes.blogspot.com/). Ok, that may not qualify as a "tried-and-true" strategy, but it's still a good one.

Since I started the City Lakes blog more than a year ago, I've posted almost 200 pieces discussing emerging real estate trends, both local and national; market tips for Buyers and Sellers; and how to think about and make sense of broader economic issues.

It's been both gratifying and thrilling to see the City Lakes blog cited by a variety of influential news sources and opinion leaders, both online and off, including The New York Times, RealClearMarkets.com, The Star Tribune, and even Edina Realty senior management (it's spelled K-A-P-L-A-N, guys).

I'm confident that you'll profit from reading my blog. However, just to make sure, if you subscribe by January 31, I'll mail you a $5 Target gift certificate (Dunn Bros., if you prefer). Don't worry, the subscription's free.

While no one knows what the future holds, it's also true that no one needs to simply wait for it, passively. One of my favorite cartoons shows two vultures sitting on a tree limb, with the caption, "To hell with all this waiting -- let's go kill something."

Wishing you good hunting, and a happy, healthy 2009!

Ross

Ferdinand Pecora*

Waiting For Accountability, Closure

"Our current stock market slump and housing bust can seem like natural calamities without identifiable culprits, creating free-floating anger in the land. A public deeply disenchanted with our financial leadership is desperately searching for answers. The new Congress has a chance to lead the nation, step by step, through all the machinations that led to the present debacle and to shape wise legislation to prevent a recurrence."

--Ron Chernow, "Where is our Ferdinand Pecora?"; The New York Times (1/6/2009)

Imagine if a spokesman for the National Transportation Safety Board ("NTSB"), at a press conference today, announced that, effective immediately, it was suspending its investigation into the US Airways crash into the Hudson on Friday.

"We simply can't justify risking our divers' safety in the river's treacherous currents," the NTSB spokeperson said. "What's important at this sensitive juncture is that we focus our energy on moving forward, not looking back, and not waste precious financial resources looking for scapegoats."

The uproar would be instantaneous and deafening.

U.S. air travel is the safest in the world precisely because after each and every mishap, the FAA, NTSB, the airplane manufacturer and all other relevant parties comb the crash site looking for clues, then exhaustively analyze them until they've located the cause(s).

Would anyone seriously argue today that that spirit of objectivity, scientific inquiry, and regard for the public's (financial) safety even remotely describes Washington's stance towards modern-day Wall Street?

There are times when it's appropriate to extend an olive branch to a vanquished foe ("with malice toward none, with charity for all . . "). However, what's needed in the wake of today's ongoing financial calamity isn't magnanimity (or amnesia), but scrutiny and accountability. Without those things there is no closure, and without closure there can be no recovery -- never mind preventing recurrences.

"Charity for all" can wait until Obama's second Inaugural address.

(Another year of George Bush, and "charity for all" might very well be what everyone's in line waiting for.)

*Ferdinand Pecora, who's overdue for a posthumous 15 minutes of fame, was the lawyer who led Congress' investigation into the Stock Market Crash of 1929.

The New Language of Mea Culpa

"Disappointed" Political & Business Leaders

"Vikram Pandit, Citi’s chief executive, calls the latest earnings 'disappointing.'"
--Floyd Norris, "Living Blogging Bank Losses"; The New York Times (1/16/09)

I remember, in another era, when business or political leaders were cornered and had to acknowledge that they screwed up, they'd grudgingly allow that "mistakes were made" (exactly which ones, who committed them and how, were never identified).

For some reason, that vernacular has fallen out of favor and a new one has taken its place: the politics of "disappointment."

Wrong intelligence on Iraq? "Disappointing." Economic crash? "Disappointing." Abu Ghraib, Guantanamo Bay, Katrina and New Orleans, Valerie Plame's outing, SEC non-feasance (Barry Ritholtz's term), trillions in banking bailouts, spiking unemployment -- it's a VERY long list -- all, you guessed it . . "disappointing."

As Wall Street's leaders now divulge the latest round of horrific financial results, gird yourself for lots more use of a certain adjective.

Personally, what I find most disappointing of all is political and business leaders who don't see -- and won't acknowledge -- their own culpability.

2009 "Dear Client" Letter - Part One

Rational Moves in an Irrational Market

Warren Buffett, Chairman of Berkshire Hathaway (the ultimate parent company of Edina Realty), writes a renowned annual shareholders' letter read by tens of thousands. Buffett's letters contain nuggets of wisdom, pithy quotes (his line about credit derivatives being "weapons of mass destruction" was from 2003), and his general take on market conditions.

In my capacity as a Twin Cities realtor, I write an obscure annual letter that I send to a couple hundred people offering . . my general take on market conditions. Here is the most recent edition, headed to clients this weekend:

Dear Client:

Happy 2009!

As the year begins, consider some of the more unusual -- if not unprecedented -- features of today's financial and real estate markets, and the economy in general:

--Zero per cent. As of mid-December, that is the Federal Reserve's target number for short-term interest rates (the one it controls). That's also the interest rate on U.S. T-bill's (actually less than zero, net of fees).

--From $60 a barrel to $150 to $38 to . . .??? After their moon shot during the first half of 2008, commodity prices -- including oil -- suffered a historic collapse the second half of the year. At $1.80 or so per gallon (less at Sam's Club and Costco), gas prices are near their lowest in 5 years, and more than 50% off their $4-plus peak last Summer (seemingly another lifetime ago).

--Falling stocks and housing. Unless you're over 80 years old and started buying stocks when you were a (very small) child, you just experienced your worst-ever year in the stock market: down 40% over all. By comparison, housing turned in a stellar performance: only down 15% nationally, and now 20%-25% off its 2006 peak (again, nationally).

--Not everyone has savings and investments, but fortunately, most people have jobs (almost 93%, to be specific). However, with the economy clearly slowing, many experts predict that the unemployment rate will be significantly higher in 2009.

Comforting, huh?

"Lemonade Recipe" (or, Rational Moves in an Irrational Market)

When things are so uncertain, it's tempting to do . . nothing. In fact, depending on your circumstances, doing nothing may be the smartest move of all (it worked for Seinfeld).

However, even in a sour economy -- perhaps especially in a sour economy -- there are three tried-and-true strategies most people should at least consider. In that vein, here is my 2009 realtor's advice to clients -- past, present, and, hopefully, future -- on how to turn today's, shall we say, challenging environment to your advantage.

--One. Take advantage of cheap money. The flip side of anemic rates on savings are historically low borrowing costs. Long-term mortgage rates have literally collapsed since Thanksgiving, falling from over 6% to 4.75% or even lower. If you plan on staying in your home long-term, you'll easily recoup the expenses associated with re-financing. Even if your time horizon is as short as 5 years, you may still benefit, depending on your current interest rate and mortgage balance.

Talk to a lender to find out. Better yet: talk to two or three (money is fungible), and be sure to ask for the required disclosures: the Truth-in-Lending ("TIL"), and Good Faith Estimate of Settlement Costs. Also ask whether the lender offers a re-lock option: in an environment of volatile (and for now, falling) rates, paying a nominal fee for a "second bite at the interest rate apple" can be a good idea.

Cont: 'Dear Client Letter - Part Two'

A Tale of Two Markets

Read Jim Buchta's Article
in Today's Star Trib

Jim Buchta, the Star Tribune's top real estate reporter, has an excellent article in today's paper surveying the Twin Cities housing market ("Best Sellers: Foreclosures"). And I'm saying that not just because I'm quoted and served as background for the story.

In particular, Buchta does a very nice job conveying that the local market -- like many others nationally -- has essentially cleaved into two. One market consists of lender-mediated properties (foreclosures and short sales) that are selling at dramatic discounts. The other market consists of traditional, owner-occupied homes that are selling for relatively small markdowns -- or even appreciating, in a few cases.

The difference between the two markets is stark: the '08 change in local prices ranges from Mahtomedi's up 11%, to Minneapolis' Camden neighborhood, which experienced a 54% drop.

So what does '09 hold in store? As Buchta notes:

'Tremendous uncertainty still plagues the market. Consumer confidence remains at record lows. Inventory levels hover near record highs despite recent declines in new listings. And rising unemployment hampers predictions for the coming year.'

What does all that add up to?

Here's one prominent local realtor's take (okay, mine): 'I don't think anyone has that kind of foresight. If they did, what would they be doing selling real estate in Minneapolis?" said Ross Kaplan, a sales agent with Edina Realty in south Minneapolis. "I would be dubious about anyone who says they know what's going to happen."

Money's Fungible . . Borrowers Aren't

One Size, er, Rate Doesn't Fit All

One of the more noteworthy features of today's mortgage market, besides greater volatility and generally declining rates, is the wide range in quoted interest rates.

For sterling credit risks -- credit scores in the high seven hundred's or above, plenty of existing home equity (or a fat down payment, if buying new), stable jobs, etc. -- the gates of "(re)financing heaven" are very much open. If that's you, you can walk through and borrow at 30 year rates well below 5%.

However, if you don't meet those criteria -- and anywhere from half to two-thirds of all prospective borrowers/re-financers now don't -- Fuhgettaboutit.

It's also the case that people applying for jumbo loans are being quoted substantially higher rates than for so-called conforming loans (generally, under $417,000), because the latter can still be re-sold on the secondary market, while the former can't.

What that means for consumers is that there isn't one prevailing interest rate anymore -- they're dozens, depending on your profile and borrowing needs.

Amongst other things, that makes using the Internet and shopping for rates a little more daunting now. It also makes good lending relationships more valuable.

That's because, while money may be a commodity ("fungible") . . . prospective borrowers are unique.

Mpls . . . Banking Capital of U.S.?

Name the Country's *Banking Capital

See you how do on this quick financial quiz:

In order of total market cap ("capitalization," or entity value), calculated as of today (1/14/09), rank the following pairs of banks and their headquarters cities:

--Citigroup and JP Morgan (New York City)
--Bank of America and Wachovia (Charlotte)
--Wells Fargo and U.S. Bank (Minneapolis)

Answer: 1) Minneapolis; 2) New York City; 3) Charlotte.

Not convinced? Check out this video, "Minnesota rises as Citi Sleeps," on the (London) Financial Times' web site today.

*Note: although Wells Fargo technically is now based in SF, its predecessor, Norwest, was originally based in Minneapolis and maintains much of its operations and staff here.

Foreclosure Headache #7 (and #9, #17, #22, etc.)

Lack of Standardized Contracts
Creates Foreclosure Can of Worms

From a realtor's perspective, representing a Buyer trying to purchase a foreclosure can present an endless can of worms.

For starters, there's the issue of the house's condition. What is it?

Unlike a typical owner-occupied home, there are no disclosures, and the Buyer usually must agree to purchase "as-is." Since no one's home, literally, anything can -- and does -- go wrong. Because foreclosed homes in Minnesota are frequently winterized, one of the first issues to negotiate is how -- and sometimes even if -- the prospective Buyer can test the plumbing, heating, and other major mechanical systems.

A second hurdle is response time. Unlike a typical deal, where a sale negotiation can be consummated in 24-48 hours, with many banks the equivalent timetable is weeks (I've even heard of months, in a few cases).

However, undoubtedly the biggest headache associated with foreclosures is, shall we say, the "variety" of bank-required contracts (suffice to say, there are as many bank-required legal forms circulating as there are bank-owned properties). That lack of standardization not only creates a great deal of uncertainty, but can be time-consuming, and can present novel traps and pitfalls for Buyers (and their realtors) each transaction.

Not Just "Boilerplate"

One of the biggest advances in residential real estate the last few decades, at least in Minnesota, is the adoption of standardized purchase agreements and addenda. While the 20-odd page, single-spaced contract you signed when you purchased your home last year may have said "Edina Realty," "Coldwell Banker Burnet," or "ReMAX," the underlying document is the same in virtually every deal.

As Martha Stewart might say, "that's a good thing."

Unbeknownst to most consumers (and unfortunately, not a few realtors), the standard real estate contract is a dynamic, constantly evolving document.

In fact, each year, the purchase forms undergo a series of tweaks and adjustments to address new market conditions (like the prevalence of short sales now); conform with any new state or federal law; and to refine earlier language that has proved problematic.

That combination of standardization and constant updating greatly streamlines the deal process, by creating conventions for handling the complications and ambiguities that can be part of any transaction.

To pick just one example, consider the Financing Addendum.

The standard Minnesota form balances the Buyer's need for time to firm up their financing with the Seller's need for certainty. The compromise is to set a specific date by which the Buyer's lender is to provide a "Written Statement" to the Seller indicating that the Buyer has secured their financing.

What happens if the Buyer's lender doesn't do that? The Addendum explicitly addresses what happens to the Buyer's earnest money, the effect on the transaction, each party's relative rights, etc.

Custom Contracts

Now throw all that out and start over with the bank's required forms.

How much time is the Buyer allowed to line up their financing? How are they to communicate lender approval? What happens if they can't get it? Under what circumstances does the Seller get to keep the Buyer's earnest money -- and when do they have to give it back?

As they say, "read the fine print." And if the fine print happens to be ambiguous . . . prepare for some friction and (more) delay, at the very least. (As a general proposition, you can assume that banks are inserting/deleting language to increase their rights and limit their liabilities relative to Buyers.)

Similar issues can arise regarding the Inspection timing and the Buyer's ability to back out; the scope of Seller disclosures (usually, just disclaimers); and responsibility for any third-party claims on the property (delinquent taxes, contractor liens, etc.).

After navigating all these issues, and investing a few months of their time, Buyers (and their realtors) are as likely as not to discover that the Buyer's offer has been knocked out by another, higher one.

For all this aggravation, you'd think realtors would get a bonus, right? No way.

Not only is the typical foreclosure steeply discounted from the average market price (about $180,000 now), but the "payout" (the commission offered to the Buyer's realtor) is heavily discounted, too.