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Saturday, February 28, 2009

Buffett's Negotiating Secrets

Berkshire '09 Annual Letter -- Part Two

For investors, perhaps the most tantalizing -- and useful -- part of Warren Buffett's 2009 letter to shareholders is a little tidbit that's appended to the end.

Actually, it's a solicitation, addressed to perhaps a few hundred people in the world.

Who? People who run or have large minority stakes in a specific kind of company. One that Buffett might want to buy next.

Specifically, the desired company should have: a market value of $5 billion to $20 billion, ballpark; top-flight management in place; and be able to earn more than $75 million annually pre-tax, through "thick and thicker," as Buffett might put it.

Buffett also stipulates two negotiating prerequisites: 1) the Seller must have a firm selling price -- and be able to deliver it (thus, no consultants or other go-between's; only principals need respond); and 2) there must be no other suitors -- no auctions.

Buffett's Negotiating Secrets

What can Buyers learn from Buffett? Three things:

One. Never negotiate against yourself.

That's what you do when you open negotiations by announcing what you're willing to pay -- as opposed to insisting that the Seller announce its selling price (and indeed, commit to being sold).

Two. Never negotiate against other would-be suitors. That's what an auction is.

Buffett doesn't do auctions because he knows that a skillfully run auction will raise the price (savvy home sellers and their Realtors know that, too!).

One of two things happens in an auction (at least when the prize is gold, not dross).

Either you prevail, in which case you'll likely have overpaid.

Or you lose, in which case, you'll just have helped drive up the price the winning bidder paid.

No thanks.

So why would a choice, up-and-coming company -- and Buffett doesn't covet any other kind -- pass up the opportunity to "play the field?"

Several reasons, actually.

Berkshire Hathaway is like a beneficent -- and distant -- ruler. A very rich and patient ruler, with an unusual commitment to building long-term value and actually investing and creating capital, not sucking it out.

For an ambitious and capable manager, there are worse places to be than part of Berkshire Hathaway's corporate fold.

Oh . . . and negotiations will be simple, quick, and painless (Buffett doesn't do hostile deals). And cheap! (remember, no go-between's). That's actually Lesson #3 -- "keep it simple and friendly" -- for anyone who is counting.

"We can promise complete confidentiality and a very fast answer — customarily within five minutes — as to whether we’re interested," Buffett promises.

I'll bet Buffett gets two corporate takers by this July 1 -- three if the market's down significantly before then (Berkshire's pretty good shelter in a storm).

Warren Buffett's Crystal Ball -- & Rearview Mirror

Memorable Quotes from
Berkshire's '09 Annual Letter

In 75% of [the last 44 years], the S&P stocks recorded a gain. I would guess that a roughly similar percentage of years will be positive in the next 44. But neither Charlie Munger, my partner in running Berkshire, nor I can predict the winning and losing years in advance. (In our usual opinionated view, we don’t think anyone else can either.) We’re certain, for example, that the economy will be in shambles throughout 2009 – and, for that matter, probably well beyond – but that conclusion does not tell us whether the stock market will rise or fall.

--Warren Buffett, 2008 Berkshire Hathaway Annual Report

Substitute "housing market" for "stock market," and you've got a pretty good long-term outlook . . .

If you've never read one of Buffett's letters, I highly recommend it; they're probably the closest thing capitalism has to Mao's "Little Red Book."

At least in my view, here are the most memorable quotes from this year's letter (last year's top line was an instant -- and much quoted -- classic: 'you don't know who's swimming naked until the tide goes out'):

"Putting people into homes, though a desirable goal, shouldn’t be our country’s primary objective. Keeping them in their homes should be the ambition."

"At the moment, it is much better to be a financial cripple with a government guarantee than a Gibraltar without one."

"Beware the investment activity that produces applause; the great moves are usually greeted by yawns."

"When the financial history of this decade is written, it will surely speak of the Internet bubble of the late 1990s and the housing bubble of the early 2000's. But the U.S. Treasury bond bubble of late 2008 may be regarded as almost equally extraordinary."

"Participants [in derivatives contracts] seeking to dodge troubles face the same problem as someone seeking to avoid venereal disease: It’s not just whom you sleep with, but also whom they are sleeping with."

*Through its subsidiary, MidAmerican Energy, Berkshire Hathaway is the ultimate parent company of Edina Realty.

Recession "Name Game"

"The Little Depression"? "The Great Recession"?

Think of [the U.S. economy today] as Alien in reverse: lurking inside a dysfunctional, steroid-stuffed "monster economy" is a healthy, sustainable, and yes, market-driven one struggling to get out -- albeit a smaller, slower-growing, and certainly simpler and more transparent economy.

--"Financial Crash Instructions"; City Lakes Blog (12/12/2008)

Up until the 1940's, World War I wasn't known as "World War I," it was simply "The Great War."

Similarly, we call what happened in the 1930's "The Great Depression" because there's never been a sequel. At least not yet.

The latest batch of economic numbers, for the fourth quarter of 2008, show economic activity falling off the proverbial cliff. Consumption, production, home sales, car sales, retail sales -- you name it -- all showed declines not witnessed since . . . yup . . The Great Depression.

What we're experiencing now may very well qualify as "The Little Depression." Or, as Barron's Alan Abelson proposes, "The Not-So-Great Depression."

If it persists, with economic activity continuing in free fall and unemployment rising well above 10%, it may qualify for another, more ominous name.

Alternative Scenario

Personally, I doubt that that will happen, if for no other reason than life today is so different than the 1930's.

Namely, it's much faster and interconnected, thanks to technology.

Even if the banking system is in worse shape than is now feared -- and the fears are pretty high -- it's hard to imagine modern day Americans raised on PC's, microwaves, ATM's, instant messaging, etc. tolerating that degree of economic dislocation that long.

Policymakers also have Japan's "Lost Decade" (in the '90's, following the Nikkei's crash) to serve as a case study in what not to do.

When a PC crashes, you "re-boot." Yes, you may lose a lot of data, and it's a big headache, but it's not life-altering (usually!).

Similarly, when an over-leveraged, unstable financial system crashes, the solution is to replace it with . . . one's that better-designed (and to minimize the fallout from the crash).

When President Obama says the country will ultimately emerge stronger from this period . . . I think he's absolutely right.

Friday, February 27, 2009

Foreclosure "Wipeout's" Skew Housing Market Stat's

Where: 328 Burntside Drive, Golden Valley
What: 6 BR/5 BA; 4,407 FSF
How much: $369,900
Last sale: $899,000 (3/8/07)
Tax assessed value: $757,700

Just like not all stocks have dropped equally in a market now down more than 50%, not all homes or neighborhoods have suffered equally.

In fact, one of the reasons why the Twin Cities overall is down about 25% from the 2006 peak is that, while many homes have suffered relatively small price declines, others have been near wipe-outs.

Call them the "Citigroup's," "General Motors," and "Fannie Mae's" of the housing market.

The home pictured above, 328 Burntside, is a good example of the latter group.

Sold last for $899,000 in March, 2007, its new asking price of $369,900 reflects an almost 60% drop -- and less than half(!) the current tax assessed value. And that's just the asking price; the ultimate selling price could very well be lower (because I haven't been in, I'm not going to venture a guess).

Typical of the homes that have dropped the most, it's a foreclosure.

Today's Buyer: A Composite

What Do Today's Home Buyers Look Like?

Contrary to popular opinion, home buyers are not an endangered (or extinct) species. Two of my clients just purchased homes, and three more are actively looking.

So what generalizations can you make about them?

They have many (if not all) of the following four attributes:

One. First-time Buyers.

Yes, it's a lot easier to buy if you don't need to sell first.

If you currently own a home and want to buy another, you must either: 1) qualify to own two homes at once, which means an interval of "doubled-up" mortgage payments, utility bills (even if one set is lower because you're not living there), etc.; or 2) make a contingent offer.

That means your offer is contingent on getting a signed Purchase Agreement on your current home, typically within 90 days.

While more Sellers are ok with that in today's market, others want the certainty of a done deal, even if it means accepting a lower price.

Of course, another reason buying is easier for first-timer's is all the incentives being thrown at them.

I'll leave a comprehensive list of programs and incentives for another post, but suffice to say, if you're a first-time buyer and can't find a carrot (or several) for buying right now . . . you're not looking very hard.

Two. Long-term orientation.

I think it's safe to say that the people not buying now are focused on the (downward) direction of home prices.

Which is perfectly understandable.

No one wants to catch a falling knife, and right now the velocity of that knife is record-setting, particularly in places like Las Vegas, Phoenix, and parts of California.

By contrast, many of today's Buyers don't really care what prices will be next year or even three years from now because they're not contemplating selling then.

Rather, they see themselves as locking in their long-term housing costs at today's historically low rates. No matter what housing prices or interest rates do from here, they know that their monthly living costs will be a fixed $1,200, or $2,000 (or whatever).

Three. Financially conservative (or related to someone who is).

It's certainly possible to buy today with as little as 3% or 4% down, particularly for Buyers going through FHA. However, putting more down gives you more options: you can "go conventional" (get a regular bank-issued mortgage); it may qualify you for a lower interest rate (surprise, surprise); and it will help you avoid the various add-on fees becoming popular with lenders.

Also unsurprisingly, Buyers coming in with a heftier downpayment are more popular with Sellers, who don't have to "sweat" the Buyer's financing contingency (the vast majority of Purchase Agreements give the Buyer a prescribed amount of time to secure their mortgage).

When credit was readily flowing, Sellers really didn't care where the Buyer's money was coming from; they knew it would be there at closing. So financially strong Buyers couldn't really get much of a discount.

Today, Sellers can't take anything for granted.

As a result, financially strong Buyers -- making low-risk offers with big downpayments -- can often command a discount from nervous Sellers.

Of course, putting more down means re-paying less.

That same financial conservatism carries over into Buyers' borrowing decisions.

Forget about exotic, adjustable rate loans; they just want plain vanilla, fixed, at the lowest rate they can get.

Four. Custom wants and needs.

I just sold a 4,000 square foot duplex with prehistoric wiring (amongst many other problems) to couple moving to the Twin Cities from Chicago.

Big obstacles, right? Perhaps for many Buyers.

However, one of the clients is a potter who wants to put in a kiln. As a result, they wanted a property where they could install a high-end, 200 amp-plus electric service. Buying a "blank slate" property -- with a discount to match -- suited their needs much better than retrofitting something closer to "move-in ready" condition.

Obviously, not every client needs an in-home kiln (for some odd reason, though, I've now had three clients who have!)

However, plenty of Buyers are looking for homes that they can put their own "stamp" on, whether it means creating a new Kitchen, opening up walls to create a more open floor plan, or simply updating to their taste.

For the first time in a long while, such homes are in plentiful supply, at prices that are likely to prove good, long-term values.

Thursday, February 26, 2009

Clarence's Verdict

"It's a Wonderful (Corporate) Life" . . . Not

Banks have never made money in the history of banking, losing the equivalent of all their past profits periodically.

--Nassim Nicholas Taleb, "How Bank Bonuses Let Us All Down" (2/24/09)

G.M. has become a giant wealth-destruction machine — possibly the biggest in history.

--Thomas Friedman, "Start Up the Risk Takers"; The New York Times (2/21/09)

GM is a 101 year-old company which . . . has accumulated negative retained earnings of $60 billion-and-climbing—meaning that in more than 100 years of operation, the company has not managed to keep a dime’s worth of retained earnings for its shareholders.

--Jeff Matthews, "The Most Irresponsible Thing You'll Read This Weekend" (2/22/09)

In the movie classic, "It's a Wonderful Life," George Bailey's guardian angel, Clarence, shows George all the ways the world would have been poorer had he never existed.

Thriving Bedford Falls is instead tenement-filled Potterville; its citizenry is prostrate and indebted to the town's predatory lender, the Bailey Building and Loan Association; and George's loved ones are either dead, ruined, or miserable.

Clarence's Verdict

Surveying the mounting financial carnage wrought by AIG, GM, Citigroup, Bank of America, Wachovia, Washington Mutual, Bear Stearns, Fannie Mae, Freddie Mac, and a long list of others, what would a financial Clarence say?

That society would have been better off had they never existed.

At least in a strict accounting sense, i.e., accumulated retained earnings, such a conclusion is incontrovertible.

You'd certainly get little argument from their devastated shareholders, nor from taxpayers burdened with their bad bets . . .

P.S.: the usually astute Thomas Friedman isn't even close on which company is "history's biggest wealth destruction machine." That dubious honor goes to . . . AIG.

Wednesday, February 25, 2009

"Pride of Renter-ship"??

Renting vs. Buying: How Interchangeable?

Carla Zeineh, 22, and her husband recently began shopping for a home in Irvine, Calif., and discovered that with a 5% mortgage rate, her monthly payment on a $350,000 two-bedroom home with 20% down could be less than the $1,800 month that they pay in rent on their two-bedroom condo.

Nick Timiraos, "Renters Lose Edge on Homeowners"; The Wall Street Journal (2/25/09)

Besides figuring out how to save the financial system, the other Holy Grail at the moment seems to be calling the bottom in the housing market.

In turn, that has unleashed a search for various "metric's" -- or valuation yardsticks -- that will accurately identify when housing is truly cheap, and therefore likely to stop falling.

So once again the cost of owning vs. renting is back in the limelight -- this time, with commentators noting that the pendulum has swung back towards owning. (In fact, owning has traditionally been more expensive than renting, but in a growing number of markets, the premium is now much smaller.)

It's certainly good news -- to prospective Buyers, if not prospective Sellers -- that housing is more affordable. However, underlying the owning-renting comparison is the flawed assumption that renting is a close, if not perfect substitute, for owning.

In economic-speak, rice and potatoes are close substitutes; apples and oranges are, well . . . apples and oranges.

I'd argue that renting a two bedroom apartment vs. owning a two bedroom home -- the example cited in the Journal article quoted above -- is more like comparing apples and oranges, for two reasons. (Note: for purposes of this post, "condo" means "owned, "apartment" means "rented" -- both are multi-family housing.)

Pride of Renter-ship??

One. Different housing stock.

I work with clients looking for small, single family homes, as well as clients looking for condo's. However, I seldom work with clients looking for both at the same time.

Single family homes have more privacy, no shared walls, and -- if they're located in the Midwest -- a yard and a garage. Because of zoning laws (everywhere except Houston), the single family house is located in a lower density neighborhood surrounded by other single family homes.

By contrast, the condo is likely on a busier street, clustered with other higher-density housing.

Cutting the other way are such factors as convenience and upkeep; condo's offer more of the former, and require less of the latter. It's also true that higher density locations offer better proximity to public transportation, stores, and restaurants.

Two. Different profiles.

Of course, the difference between owning and renting extends to more than just choice of housing stock.

Renters tend to be more short-term oriented, financially less well-established, and, especially today, more risk-averse.

It can also be the case, particularly in the Midwest, that owners -- at least until recently -- enjoy subtly higher social status than renters (they're certainly treated better by the tax code!). Just as it's said that no one ever washed a rental car, few renters invest the kind of TLC in their rental space that owners lavish on their homes.

For all these reasons, the decision to own vs. rent is a more qualitative one that goes beyond simple economics.

Which is not to say that economics are irrelevant.

In my (Realtor's) experience, whether renters decide to become Buyers likely depends much more on their individual economic prospects -- and their expectations of future housing prices -- than housing's cost relative to renting.

Tuesday, February 24, 2009

Stuck Rates

Mortgage Rates: Stuck at 5%

Local lender and blogger Alex Stenback has a nice post from yesterday, "Lower Mortgage Rates Stymied By Supply," that explains what's happening with mortgage rates right now -- and why.

December Case-Shiller Numbers

December S&P/Case-Shiller:
Minneapolis Down 18.5%

The latest S&P/Case Shiller numbers (for December) are out, and to no one's surprise, they're dreadful: all of the nation's 20 largest housing markets show decreases, from the merely bad (Dallas, Denver) to the shocking (Las Vegas, Phoenix).

Minneapolis shows an 18.5% drop from a year earlier.

Before you jump to the conclusion that this is dramatic new evidence of market deterioration, keep in mind two things:

One. Case-Shiller is a month behind other housing statistics. Locally, the Board of Realtors is already reporting January sales activity.

Two. Foreclosures are now dominating sales activity in many markets nationally, including the Twin Cities.

Foreclosure are not exactly known for being in pristine condition, or located in the toniest neighborhoods.

As I've blogged previously (yes, it's turned into a verb, like "Google"), when consumers all switch to buying $1.89 gallons of milk at Wal-Mart from $3.49 gallons at "Deluxe Groceries," it doesn't mean that the price of milk has dropped 46%. Rather, the product mix has changed.

That's equally true in today's housing market.

Short Sale Games

Don't Sell Your House to Your Realtor

Selling your house to your Realtor is a bad idea for about 48 different reasons, beginning and ending with conflict of interest.

That's especially true if the sale is a "short sale" -- that is, the home is worth less than the mortgage against it. In such cases, the bank has to agree to take less than the amount it is owed.

So who's negotiating with the bank(s) on the Seller's behalf, making the case that the home is worth less than the mortgage? The Seller's Realtor, called the listing agent.

When the listing agent is also the Buyer, he suddenly has a big self-interest in how much the bank knocks off the loan -- not to mention what the home subsequently sells for.

While reducing loan balance also benefits the homeowner, who (presumably, but not always) is relieved of repaying the mortgage shortfall, the problem is that these two self-interests -- agent's and home owner's -- can be conflicting.

Guess whose interest can take precedence?

Bad Behavior -- Case Study #1

Here's one scenario that apparently has been popping up:

A Realtor takes a short sale listing where the home has a $100,000 mortgage against it. He persuades the lender(s) to reduce the mortgage to $50,000. The Realtor then enters into a Purchase Agreement with his client, the owner/Seller, for $50,000. Then, the Realtor re-sells the home to a third party for $75,000.

The sale to the third party is accomplished by contractually assigning the Realtor's Purchase Agreement, and is timed to close the same time as the Realtor's purchase. Result: the Realtor pockets an instant $25,000 -- at their client's expense -- most often without the client even knowing.

This game and other shenanigans are discussed in these two videos:

Chris Galler, Chief Operating Officer and Brad Boyd, Esq., Thomsen & Nybeck on Short Sales, Part 1
Chris Galler, Chief Operating Officer and Brad Boyd, Esq., Thomsen & Nybeck on Short Sales, Part 2

Prevention > Cure

To anticipate (at least some of) the inevitable questions (and avoid incredulous email's and angry blog posts):

Yes, a Realtor who did this "broke the rules," and could be pursued by their client, the bank(s), and the Department of Commerce -- or all three! And yes, it's possible that the client could even recover some of their money, and get the Realtor sanctioned if not thrown out of the business.

But you can't count on it.

You can count on spending 6 months to two years of your life pursuing the above cause(s) of action, paying a lot to your attorney, and getting progressively more steamed (and poorer) as the process inevitably drags on. (Remember, I'm a former attorney.)

At the end of the process, the odds are also quite high that you'll be encouraged to accept an insultingly low settlement offer (if you're offered anything at all), and to think of it as a "small cost to pay for getting on with your life" (Yup, that's what they always say.)

My advice?

Just avoid the whole potential mess by not selling to your Realtor.

If they want to buy it, fine, but then get another Realtor to represent you.

There. Simple.

Monday, February 23, 2009

Speaking of '97 . . .

Stocks at 12 Year Lows

4/11/97: S&P 500 = 743
2/23/09: S&P 500 = 743

If somehow you decided in 1997 that stocks were just too expensive and have resolutely remained on the sidelines ever since . . . you now have another buying opportunity (assuming you have the money and the stomach).

After today's 3.4% plunge, stock prices are back to where they were in 1997. Factor in inflation, and they're actually much lower.

I'll stick to housing, thanks very much . . .

Playing Realtor Roulette

Will the 4th Time Be the Charm?

Where: 29xx Quentin, St. Louis Park
What: 4BR/3BA; 3,900 FSF; 1931 two-story home
How much: $264,900
Originally listed: $374,900 (11/2/2007)
Number of Realtors (so far): six
Number of Brokers (so far): four

Scanning today's newly listed -- and re-listed -- homes, I couldn't help but notice 29xx Quentin.

I recalled it being an especially active listing and, sure enough, when I did a little digging, I pulled up a very long listing history. (If this house were a felon, it would have a rap sheet a mile long).

Since coming on the market 16(!) months ago, the owner has dropped the price four times, changed the size of the house once (from 4,505 FSF to 3,902), and switched Realtors four times (they've actually had six Realtors working for them because two of the listings were handled by two-person teams).

Even George Steinbrenner -- famous for hiring and firing managers -- didn't make this many changes this fast.

The Ex-Files

So what's going on?

You don't really know for sure unless you personally know the principals and the home involved -- and I don't.

However, it wouldn't be the first time that the combination of a declining housing market and an unrealistic seller proved combustible.

One pattern I've increasingly seen is that the homeowner insists on an unrealistic price, then finds a Realtor who'll take the listing at that price (one always will). The owner is then positively shocked -- shocked -- when the house fails to sell.

Goodbye, Realtor #1, Hello Realtor #2.

It recalls the Seinfeld episode where Elaine thinks she sees her doctor write that she's "difficult" on her chart, and then tries to get Kramer to track down the chart and delete the note so she won't be ostracized by other doctors.

Real estate's equivalent of a medical chart is the listing archive.

When Realtors see a troubled archival history, they naturally think twice about taking the listing (or should).

Unless they can determine why the listing failed to sell -- and have a plan for correcting it that the Seller will go along with -- the likelihood is that they, too, will be eventually be added to the "ex-files."

P.S.: For Realtors, it's decidedly not better to "have listed and lost then never to have listed at all" (sorry, I couldn't resist)

Next: When to Fire Your Realtor

Sunday, February 22, 2009

Waiting for Cheap Housing . . . Since 1997

Timing the Housing Market

As John Maynard Keynes famously observed, "the market can stay irrational longer than you can stay solvent."

Or, in the case of housing the last decade-plus: 'stay above trend line longer than you can stay in a rental.'

Citing the charts reproduced at right, commentators like Barron's Alan Abelson make the point that, despite housing's 25% fall nationally from the 2006 peak, it's still well above historical trend lines.

The obvious implication is, don't rush (back) into the housing market just yet.

The only problem with that advice is that anyone concerned about historical valuations would have been relegated to the sidelines years ago.

Housing prices as a percentage of rent have been above trend line since at least 1998; as a percentage of median family income, since 2001. Some economists might even argue that the latter ratio has been above the long-term trend line since the late '70's!

That's a long time to stay in your in-laws' basement (or a cramped house you bought before you had kids).

In fact, despite the widespread pain in housing since 2006, anyone who bought in 2000 would still be up 30%. That compares with a 50% drop in equities since then. To paraphrase Churchill's line about democracy, "housing is a terrible investment . . except for all the others."

Housing's Benefits

Of course, anyone who's owned their home for almost a decade would likely have amortized a nice chunk of principal by now, and also have benefited from the tax deductions associated with paying mortgage interest.

Meanwhile, anyone selling with a gain up to $500k ($250k for singles) would have escaped paying capital gains taxes, thanks to housing's favored tax treatment.

But most importantly, anyone who bought a home in 2000 . . . would have enjoyed living in their own home since 2000.

As a Realtor with an economics background, my biggest criticism of the much-cited housing price/rent ratio is the underlying assumption that the rental and purchase markets are, if not interchangeable, at least close substitutes.

That may be true in some markets, but not in the one I work in, the Twin Cities.

In general, rental homes here are located in less desirable neighborhoods, are in worse condition, and have fewer amenities, than homes listed for sale. That's especially true as a soft market swells the number of rentals: "involuntary" landlords who can't attract a buyer -- or can't afford to sell their homes because they're underwater -- frequently lack the time and money to keep up their rental properties.

Unlike, say, Manhattan, in the Midwest owning your own home is as much as lifestyle decision as it is an economic or financial one.

It's one thing to jump into (or out of) stocks based on historical valuations.

Doing that with your family, and disrupting your kids' friendships, schooling, etc. is a sacrifice most people aren't willing to make.

Housing: How Much Further to Fall?

Why People Hate Wall Street --
And Wall Street Analysts, too

When stocks are going up, the airwaves are full of Wall Street analysts and other pundits chock-full of stock picks sure to make you money.

So what can you expect to hear after stocks plummet 50% or more?

All the reasons why stocks "are still historically expensive and have further -- much, much further -- to fall," notwithstanding their sickening plunge to date (call this phenomenon "prediction by extrapolation").

Thanks a lot.

Analysts' housing predictions have been much the same.

To be fair, Barron's Alan Abelson, who cites the charts above, has been bearish on housing all along. In his most recent column, "Double Trouble," Abelson makes the scary point that, despite the housing market's chilling fall to date, it still is well above historical trend lines.

Playing Devil's Advocate

Setting aside the counter-arguments for another post (See, "Waiting for Cheap Housing . . . Since 1997"), what if Abelson's right?

Should every prospective Buyer simply wait it out in a rental, until prices are more appealing? Should every growing family squeezed into a too-small house or apartment make do for another 5,6,7 years -- or longer, according to some bears -- until housing prices return to their long-term trend line?

There are more variations on this theme, but you get the idea.

Unless you: a) believe the prognosticators (always a dubious proposition); and b) are very patient, you're better off making housing decisions based on your current life situation, finances, and job opportunities.

My investing background and Realtor experience tell me that no one -- not Robert Shiller, not Nouriel Roubini, not Warren Buffett -- has a crystal ball accurately telling them what housing prices will be next year -- let alone 5 or 10 years from now.

To quote another investing guru, Peter Lynch, "If you spend 13 minutes per year trying to predict the economy, you have wasted 10 minutes."

Substitute "the housing market" for "the economy," and you'll have it about right . . .

Wall St. Foxes & Chickens

A Short History of Wall Street

Want 70-plus years of Wall Street history in a nutshell?

Here goes:

--The foxes got into the henhouse.
--The government threw them out.
--The foxes got back in.

Now we have two problems: 1) how to make the henhouse secure again; and 2) where to get more chickens.

My suggestion? Tackle the "henhouse security" problem first.

Saturday, February 21, 2009

"57 Channels (And Nothin' On)"??

Three Reasons Why Deals
Are Tougher in a Recession

What amuses me about 99% of the articles written about the housing market -- and there's been an explosion lately -- is that they're not written by active, working Realtors.

Most are simply journalists whose "beat" (area of focus) is the housing market. On a scale of 1-10, their writing skills are a "10." But in terms of first-hand experience, they're . . not very high.

Obviously, brains and good sources can compensate immensely. But you still need to know which sources, and how to filter what they say. And even then, there's still slippage between direct and vicarious experience.

In that vein . . . here's a first-person, Realtor's take on the local housing market right now.

"Low-Low" Offers vs. "Lowball-Low"

Generally speaking, deals are fewer and harder to come by now -- foreclosures being the very big exception -- for three reasons.

One. Buyers and Sellers are starting farther apart.

Between the daily headlines blaring housing's woes, or seeing a neighborhood with one (or two) too many "For Sale" signs, Buyers seem to be overestimating how much leverage they have over Sellers.

As a result, Buyers' initial offers are often -- if not "lowball-low" -- just "low-low."

Needless to say, that doesn't get negotiations off to a rousing start. (Again, foreclosures being a notable exception. Banks don't get p-ssed off. They don't get . . . anything. They just say "no" -- and take their time doing it.)

While both sides may gradually yield ground, the operative word is "gradually" -- and the initial gap can be quite wide. As a consequence, the momentum that's needed to drive a deal through to conclusion is often lacking. (Bonus question: what deals have that quality today? Houses selling in multiple offers -- which is more common than you'd think right now).

Two. Money is tighter.

I've never really worked with clients who are cavalier about money -- people with that attitude tend to be quickly separated from theirs (just like fools). However, in flush economic times, Buyers and Sellers just seem to be more, well, "generous." And flexible.

Now, every dollar counts. Even little issues that are routinely disposed of in easier times can threaten to torpedo deals now.

Three. Inventory can feel surprisingly "thin."

It sounds odd to say in a market with 30,000-plus homes for sale, but I've heard more than one agent working with Buyers now say -- and have experienced it myself -- that it seems like there's a ton of inventory . . . until you have a client actually looking for something.

Then . . it's nowhere to be found (sort of the housing market's equivalent of Bruce Springsteen's song, "57 Channels (And Nothin' On)."

Realtors vs. "Laymen"

No doubt one reason for that is that discretionary Sellers -- people who can afford to wait -- are waiting, until perceived conditions improve (as I've written previously, those perceptions can be very wrong -- See, "Now You See it . . .Now You Don't").

But it's also true that once a home has been on the market for awhile, Buyers tend to look for flaws. (Note to Sellers: the pendulum swings from overlooking flaws to zeroing in on them as a direct function of time on the market.) And market time is appreciably higher in a soft, slow market.

So the same house that everyone would have "oohed and ahhed" over when it first hit the market around Labor Day is chopped liver in late Feb. (and now overpriced, given the drop in the market last Fall).

While Realtors are much less susceptible to this phenomenon than "laymen," they're still human.

Friday, February 20, 2009

YouTube & Real Estate Sales

Star Trib: 'YouTube is Coming Trend'

The most interesting thing to me about the lead story in today's Star Tribune business section, "Increasing Numbers of Metro Realtors Turn to YouTube," wasn't the content, but the byline: the reporter is identified as "a University of Minnesota student reporter on assignment for the Star Tribune."

Hmm . . I wonder if there's any connection between using student reporters and the Star Tribune's bankruptcy filing last month??

It reminds me a little bit of Calvin Griffith, the one-time Minnesota Twins owner, who was famous for his penny-pinching ways. To "leverage" his more expensive, marquee players, Griffith famously relied on Triple A players -- more than a few who appeared to have been prematurely "promoted."

In fact, the student reporter is a good writer, and found some knowledgeable sources for the story.

So is he right about YouTube's growing role in real estate sales?

Virtual Tour vs. Home-made Video

I can't speak for all Realtors, but I don't use video's on YouTube to market my listings -- and have yet to personally encounter one who does.

Instead, I use something called a "virtual tour," which uses streaming video to give prospective Buyers a 360 degree impression of the home for sale. While it lacks the narrative and "personal touch" that's possible with YouTube, it also avoids the vertigo-inducing feeling you can get watching video shot with a shaky, hand-held camera.

Which is exactly the feeling I got watching the video of the Woodbury home that's featured in the article.

Ultimately, the purpose of any online marketing isn't to sell the home -- it's to generate showings, that is, get people in to see it.

What sells homes isn't how appealing they look in online photos or in a YouTube video . . it's how impressive they are once you're inside.

"For Sale, Foreclosed, and Forlorned"

Confused by the Crisis? Watch This

Barry Ritholtz's blog, "The Big Picture," features a video -- "The Crisis of Credit Visualized" -- that provides one of the single best explanations of today's market melt-down/credit crisis I've seen yet. (The video is also available on YouTube in two installments).

It identifies all the players and pieces, puts them in the right order, and gets the interactions right. Superb!

"Small is Beautiful," Cont.

Bucking the Tide: Small Cities
Show Best '08 Appreciation

According to First American CoreLogic Inc., the 11 cities with the highest home price appreciation in 2008 are:

Cedar Rapids, Iowa: 8.83 percent
Binghamton, N.Y.: 7.78 percent
Amsterdam, N.Y.: 7.89 percent
Malone, N.Y.: 7.60 percent
Bay City, Mich.: 6.87 percent
College Station-Bryan: 6.78 percent
Rocky Mount, N.C.: 6.69 percent
Auburn, N.Y.: 6.51 percent
Lebanon, Pa.: 6.41 percent
Elmira, N.Y.: 6.28 percent
Johnstown, Pa.: 6.20 percent

Juxtapose that with a story in today's Wall Street Journal, "The Hamptons Half-Price Sale."

You'd guess that other locales favored by former "Masters of the Universe" -- such as Greenwich, CT and Palm Beach, FL -- aren't faring so well, either.

"Small, Simple, & Local"

New Virtues: Small, Simple, & Local
(or, Bottom's Up)

Just as our political regeneration will happen locally, in counties and states that learn how to control themselves and demonstrate how to govern effectively in a time of limits, so will our economic regeneration. That will begin in someone's garage, somebody's kitchen . . . The comeback will be from the ground up and will start with innovation. No one trusts big anymore. In the future everything will be local. That's where the magic will be . . .

--Peggy Noonan, "Remembering the Dawn of the Age of Abundance"; The Wall Street Journal (2/20/09)

What is the antidote for too-big-to fail? Too complicated to understand? Too remote to be accountable?

Try, small, simple, and local.

Whoever thought that Peggy Noonan, the doyenne of the right, would sound like E.F. Schumacher ("Small is Beautiful")?

If Noonan's correct -- and I think she is -- you'd better like your neighbors and immediate community: you're going to be a lot more involved with (and dependent upon) them.

Thursday, February 19, 2009

Underwater Mortgages: How Much?

Underwater . . vs. Drowned

According to The New York Times, "about $500 billion in mortgage debt is already underwater" ("Bailout Likely to Focus on Most Afflicted Homeowners"). That's realtor-speak for a house being worth less than the mortgage against it.

Unfortunately, based on my calculations, that number appears to be conservative.

Using industry statistics, and a blend of various housing price indices (National Association of Realtors, S&P/Case-Shiller, etc.), I estimate that more than $540 billion in mortgage debt nationally is now underwater. Of course, that number continues to rise as home prices fall.

Here is the math, along with the underlying assumptions (downpayments are presumed to rise steadily from 2006, as lending standards tightened; homes sales include both new and existing):

Home sales (units): 6.5 million
Sale price (ave.): $250,000
Down payment (ave.): 5%
Mortgage (ave): $237,500
2009 market value: $187,500
Amount "underwater" (ave): $50,000
Total -- all homeowners: $324 billion underwater

Home sales (units): 5.7 million
Sale price (ave.): $233,000
Down payment (ave.): 7.5%
Mortgage (ave): $215,525
2009 market value: $187,500
Amount "underwater" (ave): $29,125
Total -- all homeowners: $165 billion underwater

Home sales (units): 4.9 million
Sale price (ave.): $220,000
Down payment (ave.): 10%
Mortgage (ave): $198,00
2009 market value: $187,500
Amount "underwater" (ave): $11,000
Total -- all homeowners: $54 billion underwater

Underwater mortgages - Total: $543 Billion

As the foregoing shows -- and the chart illustrates -- the closer to the 2006 peak one bought, the further underwater they are.

To round out the picture, some further tweaking is necessary.

Specifically, add: 1) the "pre-peak" home buyers in 2004-2005 who still caught some appreciation, but who lost that (and more) in the subsequent decline; and 2) all the homeowners who borrowed against their homes via home equity loans and cash-out refinancings.

The main subtraction would be the three million-plus homeowners who've already lost their homes to foreclosure. According to Moody's, foreclosures could swallow another five million homes the next three years.

If so, that will certainly reduce the number of underwater mortgages -- but only because a corresponding number of homeowners will have drowned.

Taking Trulia for a Spin Hits -- and (Mostly) Misses

Like, promises to arm prospective home buyers with reams of data about homes for sale.

Buyers can search by property type, price, square footage, zip code, etc.; get information about schools and other community info; and even pose questions to the Trulia. com "community" that generate email notices as responses come in.

The site's pro's and con's are discussed in an article in Tuesday's Wall Street Journal, "A Go-To Web Site for Home Buyers: offers an Insider's View of Real Estate."

So does Trulia work as advertised? And make no mistake -- advertising, not great market data or insider real estate scoop -- is what Trulia is selling. Ditto for Zillow ("Zillow for ditto??").

To test it, I ran a search (early Wed. am, 2/18) on zip code 55410 (Southwest Minneapolis) for single family homes between $400,000 to $500,000 to see what would come up.

Not coincidentally, I have a very active listing in that price bracket and area -- a high profile and aggressively marketed listing, I might add. The home is just two blocks south of Minneapolis' Lake Calhoun, and has been generating tons of (non-Trulia) traffic (see, next).

(Still) Not Ready for Prime Time

I originally listed 3929 Washburn Ave. South in early December; my client just reduced the price Monday from $479,900 to $429,900. Here's what I found -- and didn't:

--My search query generated 11 hits on . . . but did not include 3929 Washburn!

--Included on the list: the closest comp ("comparable sold property") for my listing, 4155 Drew Ave. According to Trulia, this home was still for sale for $475,000. In fact, Drew dropped from $475,000 to $450,000 on Oct. 29, went off the market December 8 as a "Pending" sale, and closed January 16.

--The closest (Active) competitor to my listing, 4128 Beard, was identified as "Address Not Disclosed," with an accompanying picture. Curiously, though, clicking on "listing preview" generated a map showing the block where the home is located. Trulia did have the correct price and home stat's.

--Another home, 4404 Abbott for $475,000, is identified as a Coldwell Banker Burnet listing. Which may come as a surprise to the owners -- because it does not appear to be for sale. If it is, it's a non-MLS listed For Sale By Owner, which is quite rare these days.

--Notwithstanding my "single-family" search criterion, one of the eleven hits was a nearby condo.

That's probably a long enough list for most readers (and all the time I have to parse Trulia's "hits").

Conclusion: if you want to really know what's really going on in the market, you'd better talk to someone who's got access to the Multiple Listing Service, and knows the inventory on it.

That would be . . . an experienced, local Realtor (Preferably, me!).

How Big is the Housing Bailout?

Digesting the Housing Bailout

Apparently, no one knows at the moment.

I haven't had time to digest the details of the just-announced housing bailout. But what I find interesting, from briefly scanning news accounts, is the discrepant price tags attached to it: I've seen the total cost pegged at anywhere from $75 billion to more than 10X that.

No doubt, that's partly because no one knows how much government guaranties, matching commitments, etc. are ultimately going to cost.

But I think it's also a case of: 1) initial vagueness in the details (which you'd certainly expect, given the dollars involved); and 2) no one really having had a chance to absorb what details were offered.

More to come . . .

Wednesday, February 18, 2009

Illusory "Bright Lines"

Two Types of Housing Distress

The key to understanding [the administration's housing] plan will be remembering that there are two different groups of homeowners who are at risk of foreclosure. The first group is made up of people who cannot afford their mortgages and have fallen behind on their monthly payments . . . The second group is far larger. It is made up of the more than 10 million households that can afford their monthly payments but whose houses are worth less than what is owed on their mortgages. In real estate parlance, they are underwater.

--David Leonhardt, "Bailout Likely to Focus on Most Afflicted Homeowners"; The New York Times (2/18/09)

Want to know which group of homeowners receives the higher priority in President Obama's housing bailout, due to be announced today in Phoenix? Look at the price tag.

Conventional wisdom seems to be that helping the first, most distressed group will require around $50 billion; the second, closer to $500 billion.

However, if there's one thing that has become apparent the last two years or so, it's that bright lines dividing one group of troubled homeowners from another are illusory.

Illusory "Bright Lines"

Initially, of course, it was thought that the financial fall-out from the housing downturn was limited to so-called "subprime borrowers" -- all the marginal homeowners who put nothing down using toxic loans with low, initial teaser rates.

With housing nationally now down 20%-25% from the 2006 peak, clearly the pain has spread to the entire market.

Now, the focus is all the homeowners who can afford their mortgages, at least for the time being, but economically would seem to have an incentive to default because their homes have lost so much value.

As the Times' Leonhardt points out, it is the behavior of this second group that holds the key to the housing market -- and perhaps the economy. If they honor their mortgages, things get better; if not . .

P.S.: My post, "What's So Bad About Bad Credit?," addresses this subject as well.

"Bank Runs," Circa 2009

No "Run on the Banks?" Define, "Run"

It's true that depositors haven't raced to withdraw their money from the nation's -- indeed, the world's -- largest, so-called "money-center" banks the last 18 months or so (basically, the ones considered "too-big-to-fail"). That's largely a credit, literally, to deposit insurance -- administered in the U.S. by the FDIC.

However, that doesn't mean there hasn't been a run . . . in the world's stock markets, by (and on) their shareholders.

In a devastating post, "Bank Market Caps, Then & Now," financial blog The Big Picture graphically depicts the collapse in value of the world's 18 largest banks since the second quarter of 2007. The list includes not only such storied names as Citigroup and Bank of America, but the "Citigroup's" and "Bank of America's" of the U.K, Germany, France, and Spain -- international entities such as HSBC, Santander, BNP Paribas, and Credit Suisse.

To date, the average drop in value exceeds 80%. And that excludes the fate that befell shareholders at AIG, Fannie Mae, Freddie Mac, Bear Stearns, Lehman Bros., etc., whose drops ranged from 95% to 99%-plus.

All this is against the backdrop of an historic stock market rout, and increasing speculation that the new Obama administration is close to embracing the "Swedish model," or temporary nationalization, to deal with the ongoing financial crisis.

Until now, the U.S. has been focused on preserving some semblance of private ownership through the various, tortured iterations of bank bailouts, debt guaranties, TARP, etc.

Judging by the leading banks' rapidly shriveling market cap's, the equity markets clearly anticipate full-blown nationalization . . . soon.

Tuesday, February 17, 2009

Credit Score Pitfalls

Cash Buyers "Off the (Credit Score) Radar"

I can't say I've run into any as clients, but an article in today's Wall Street Journal makes the counter-intuitive point that simply not using credit -- as opposed to using it irresponsibly -- can lower your credit scores ("Credit Score Pitfalls of the Wealthy").

As the article notes, Fair Isaac, the company that devises the credit-scoring formula (hence the acronym, "FICO scores"), weights not just how responsibly people use credit, but how much credit they have. Basically, the more, the better (an exception: having lots of unexercised lines of credit is a demerit).

So, someone who's quite wealthy but credit-averse -- presumably, they pay cash for everything -- would likely have only a good, not great credit score.

I actually encountered a prospective client years ago who didn't have a credit score. That's not unusual for someone college-age, but this woman was in her late 40's.

It turns out that she had never had a credit card, borrowed to buy anything, or even paid a utility bill. As I quickly learned, she had lived in a rural area with immediate family most of her life, and never made any of the purchases "modern consumers" take for granted!

(And yes, it's tough to get a mortgage without a credit score: I put her in touch with several lenders, who all suggested she get a cheap cell phone or make some other nominal purchase to start the credit score process, then try again in six months. Pretty much, that was the last I heard from her!)

Monday, February 16, 2009

What's Selling: Fern Hill Foreclosure

Where: 2641 Kipling So. (St. Louis Park's Fern Hill Neighborhood)
What: 3 BR/2BA; 1,678 FSF
List Price: $165,000
On Market: 2/4/09
Time to sell: 2 days (*estimated)
Tax assessed value: $392,000

[Reader's note: for related posts, see, "Multiple Offers and $40k Over Asking" and "Fern Hill Flip]

Even in a soft market, a starter home in St. Louis Park's high demand Fern Hill neighborhood still fetches low $200's. (My unscientific definition of a "starter home" is anything with less than 1,000 FSF, and 2 BR/1BA).

And this Kipling home is substantially more house than a starter: in good condition, it could easily be worth high-$200's, if not more. (I think the tax-assessed value is way off here).

While this bank-owned home struck me as rough -- I previewed it for a client who decided to pass -- I'd estimate that a well-spent $20k-$30k would take care of everything. That leaves plenty of upside for anyone paying close to the $165,000 asking price.

In fact, based on the deep discount and fast sale, you'd speculate that there were multiple offers, and that the ultimate Buyer overshot the asking price.

We'll know March 10, when it's scheduled to close.

*According to MLS, this home was actually on the market for 5 days. However, it's a good bet that most of that time the home's status was actually what Realtors call "sold, subject to inspection." By convention, most homes remain "Active" until the Inspection Contingency is removed.

"Bruised" Apples-to-Oranges

Lender-Mediated Sales Swallow the Market

[Note: the following dialogue, between local mortgage broker Alex Stenback and me, encapsulates a much bigger debate going on within real estate right now: how much do foreclosures and short sales "pull down" traditional sales?]

"When “lender mediations” are 60% of the market, it’s getting tougher to say “just ignore that other market” when it mostly IS the market."

--Alex Stenback, "Behind the Mortgage" (2/11/09)

While you could certainly make the case that lender-mediated sales are metastasizing -- even "blue chip" communities like Edina now have some foreclosures -- from my (Realtor's) perspective, it still seems that foreclosures have a pretty definite geographic concentration.

Obviously, once foreclosures surround you on a given block, it's pretty hard to overlook them and instead grab a "traditional" sale miles away as a comp (believe it or not, that what the tax assessors do!). But that's still the exception, not the rule, in most areas of the Twin Cities.

Bottom line: lumping foreclosures together with traditional sales is a "bruised apples to oranges" comparison.

Sunday, February 15, 2009

$8,000 Tax Credit Q & A

Parsing the Home Buyer Tax Credit

Realtors are already fielding questions from clients (see below) about the newly-passed $8,000 tax credit for home buyers.

Details are still sketchy -- the stimulus bill's provisions repeatedly shifted -- but the gist of it appears to be: 1) a scaling tax credit of up to $8,000 (not the $15,000 floated at one point) -- the formula is actually 10% of the home's price, so you max out buying anything over $80,000 (pretty low threshold); 2) a phase-out based on income levels; and 3) no repayment (it's a true credit).

As the details emerge, I think a lot of America is going to discover (remember?) how bad they are at math, and why they hated it in school!

Q: I read a news account saying that the $8,000 tax credit for home buyers is refundable-- does this mean that those paying less than 8K in taxes will be refunded the difference?

A: No. The "refundable" part is that you pay your taxes, then get a refund for whatever part of the $8,000 credit you qualify for. So, if you paid $5k in federal taxes and bought a $100,000 house, you'd qualify for the whole $8,000 -- and therefore get the whole $5k refunded. (You'd actually qualify for 10% x $100k, but it's capped at $8k).

If you pay less in taxes than the credit you qualify for, you leave that money on the table -- you can't get a refund for taxes you never paid. So in the case above, you're "out" $3,000.

Still confused? Just ask your Congressman -- they'll know!

Performing "Listing CPR"

Resuscitating a Cold Listing

Clients may not always appreciate it (or even know), but there's a big difference between what an attentive, skillful Realtor does in the course of marketing a home (a "listing" in Realtor-speak), and what someone less capable or motivated does.

To take just one example, consider what happens when a home fails to sell after an appropriate amount of market exposure (the more expensive the home, the longer the market time you'd realistically expect).

A Realtor doing the minimum will simply let market time mount, and hope a decent offer materializes before the listing expires.

A more engaged realtor will suggest that the client cancel and re-list, to re-attract the market's attention.

"Reintroducing" a Property

By contrast, a Realtor offering the highest level of service will formally "re-introduce" the property to the market.

That means not just going through the motions to cancel and re-list, but also:

--Putting the home back on Broker Tour (Tues.) and doing a Sunday open house.
--Networking the price reduction to other Realtors via email, office meetings, and the Internet.
--"Freshening up" the photos and literature.
--Tweaking the marketing language on MLS.
--Addressing any easily corrected showing objections.
--Revisiting the "comp's" ("comparable sold properties") and recent activity to determine the likely selling price (monitoring the market is really an ongoing task).

Coordinated and done well, all of those things collectively act like a listing "booster shot," and dramatically raise the odds of the home selling.

Of course, one might argue that the very highest level of service would be not having to do any of those things . . . because the home sold quickly in the first place!

However, whether or not that happens is ultimately more in the hands of the homeowner -- and the listing price they choose, the amount of fix-up and staging they do, etc. -- than the Realtor.

Saturday, February 14, 2009

"Cotton Balls, Kleenex's, and Wet/Dry Vac's"

Absorption Rates: Window to R/E Trends

It's easy to get swamped by real estate statistics, which is why a catch-all like the "absorption rate" is so popular.

In one, broad number -- measured in months -- it tells you how long it would take to absorb the current inventory on the market. Four months or less is generally considered a Seller's market; eighth months or more is considered a Buyer's Market.

Depending on how broadly you define the Twin Cities market, the absorption rate peaked at more than 11 months, and has now dropped to around 8 months.

Teresa Boardman, who writes The St. Paul Real Estate Blog, has a nice shorthand for the various types of markets (the imagery is Teresa's, the corresponding market labels are my gloss):

Wet/Dry Vac: Buyer's Market-strong
Paper Towel: Buyer's Market-weak
Kleenex: Balanced
Cotton Balls: Seller's Market-weak
Q-Tips: Seller's Market-strong

Lost in the terrible news lately about the broader economy, and drowned out by foreclosures and (falling) housing prices, is the fact that aborption rates in many markets are now improving.

I'd go even further: within a larger, urban market like the Twin Cities, the absorption rates in more than a few neighborhoods are quite healthy.

Downtown Minneapolis Condo Deal?

Deep Discount

Where: Grant Park Condominiums
What: #2710 (penthouse)
Key Stats: 2,017 sq. ft.; 3BR/3BA
How much: $749,900
Originally Listed: 7/26/2005
Original List Price: $1.195M

Even in a slow market, 3 1/2 years is a long time to wait for a Buyer. And eleven(!) price cuts, totaling almost half a million, is a lot of ground to yield.

What gives?

While I've been in the building, I haven't seen this specific unit, nor have I looked at the "comp's" ("comparable sold properties").

With those caveats, you'd guess the owner is suffering from some combination of a too-high initial asking price (they listed just before the peak in 2006); a weak downtown condo market, with lots of upper bracket competition; and a "B" location on the Southeast corner of downtown (the most expensive condos are concentrated further north, on either side of the Mississippi).

So is the price right now?

Without doing more digging, about all you can confidently say is, "it's getting closer . . ."

Fannie & Freddie "Add-On Fees"

"Airline Pricing" Spreads to Mortgages

Both Fannie Mae and Freddie Mac say they are tacking on extra fees to counter higher risks and losses associated with certain loan products, buyer equity stakes and credit scores . . . However, real estate agents, mortgage bankers and brokers are incensed at the new round of fee increases, calling them counterproductive in an environment in which housing needs help, not new impediments.

--Kenneth Harney, "From Fannie and Freddie, Here Come the Fee Increases"; The Washington Post (2/14/09)

Call it the spread of the "airline industry model." *

They can't figure out how to make money -- in fact, they lose billions every year -- so they have to recoup it any way they can. So they start tacking on fees -- lots and lots of them. For checking extra bags, in-flight food, headphones, fuel surcharges -- you name it. Each year, the list only grows longer -- and more annoying.

Get ready for the post-housing bust Fannie and Freddie pricing model. In addition to paying mortgage interest, borrowers can now expect to pay two different kinds of add-on fees:

One. Premiums, called "delivery fees," for Buyers who can't meet (newly conservative) downpayment thresholds; and

Two. Surcharges for disfavored housing categories (because they're supposedly higher risk). That includes condominiums and owner-occupied duplexes.

Just one more illustration of the old saying about banks "lending you an umbrella when it's sunny and demanding it back when it's raining."

And that's private lenders.

Add government bureaucracy and inefficiency to the equation, and you get the worst of both worlds (JFK famously remarked that Washington "combined the charm of a northern city with the efficiency of a southern one").

*The other parallel with airlines? Custom pricing (no two borrowers pay the same rate) that literally changes minute-by-minute. I attribute this latter phenomenon to modern computing power as much as anything else.

Friday, February 13, 2009

Seed the Bottom of the "Food Chain"

Scorning the Financial Gods --
And Paying the Price

After the tech bubble, the healthy and natural progression dictated we enter recession. Alan Greenspan never allowed us to take that medicine, opting instead to inject the economy full of fiscal and monetary drugs. The resulting imbalances steadily built through the years and arrived at our doorstep with a thud. It’s not wise to mess with Mother Nature. We’re now witnessing the other side of risk gone awry and the cumulative comeuppance of a scorned business cycle.

--Todd Harrison, "The Future of Wall Street"; Minyanville (2/11/09)

If Harrison's take is right -- and I believe it is -- a couple conclusions and observations logically follow:

--Beware of cures that are worse than the disease (anyone else have deja vu right now?). Or, if you want a "folksier", Upper Midwest analogy: don't drive your car into the ditch -- or oncoming traffic! -- just to avoid a deer.

--The stage we're in now could be called "financial de-tox." It's perfectly appropriate -- and maybe even life-saving -- to use "financial methadone" ("hair of the dog," etc.) to help an acutely addicted patient wean themselves from their addiction (I put tax credits for home buyers, stimulus spending, federal aid to states, etc. in that category). Just be clear that that's what you're doing, and that such a strategy is temporary.

--There's something deeply ironic (if not foolhardy) about relying on an institution, The Fed, that helped cause today's financial melt-down to oversee its rescue. Ditto for too-big-to-fail financial institutions, GSE's ("government-sponsored enterprises") such as Fannie Mae and Freddie Mac, etc.

--Instead of breaking with past financial blunders -- and sequestering flawed institutions -- we appear to be doubling (if not quadrupling) down. In that vein, you'd speculate that, once the financial dust settles, there will be calls to strip the Fed of some of the vast new powers it now wields (and to unwind what now very well may be the world's scariest balance sheet -- ever).

"Financial Food Chain"

Life does go on after the meterorite kills off the dinosaurs, the forest fire clears away the old giants, etc.

However, we would do well to *mimic how nature regenerates herself after such cataclysms: not by resurrecting the species at the top of the old, collapsed food chain but by seeding -- literally -- those at the bottom.

The meek may not inherit the earth, but birds and all types of microscopic plants sure seem better adapted to -- indeed, capable of adapting to -- a new and dramatically leaner environment.

*Manufacturers are just now beginning to exploit the secrets of what's called "biomimicry" -- for example, studying how a spider makes silk that is stronger, ounce for ounce, than tensile steel, while using vastly less energy and creating none of the waste or pollution.

Thursday, February 12, 2009

Realogy Bankruptcy Filing Imminent?

Who's Searching for Realogy Info -- and Why?

Judging by all the hits on this blog for anything Realogy-related the last few days, you'd guess that something is up.

For those who don't know, Realogy is the heavily-leveraged parent company of several national real estate companies, including Coldwell Banker Burnet.

In August, I posted an article titled "Coldwell Banker Burnet Troubles." That's the post that has proved especially popular this week (thanks to blog tracking software, it's possible to see where traffic is coming from, and where it's going within the blog).

The $64,000 question is, "who's looking for information about Realogy -- and why?" Unfortunately (fortunately?), that's not something that tracking software can answer (at least not yet).

P.S.: If you didn't know, you should: Google, Double-Click, and countless other companies now have the ability to track Web traffic, mouseclick by mouseclick. That's what drives advertising revenues.

What's Selling: East Edina

Demographics + New Construction + East Edina = Sold!

In a market where new construction is supposedly dead, and high net worth Buyers are thought to be licking their wounds, some developers are still finding strong demand for their product.

Case in point: 5420 Park Place in Edina.

Built "spec" (speculative, as in no upfront buyer) by a local boutique builder, Great Neighborhood Homes, this 4,000 FSF craftsman just sold --before it hit the market. List price: $1.5M.

What did it have going for it?

Multiple, overlapping selling points (see diagram):

--A location in coveted East Edina, on a large lot close to Minnehaha Creek
--New construction with quality finishes, classic design, and minimal maintenance
--A size (4 BR/4BA; 4,000 FSF) and floor plan that appeals to a wide range of Buyers, including families with small children as well as empty nesters interested in a condo alternative.

Build it right, in the right spot . . . and they'll (still) come.

On Today

Nice Company to Be In . . .

Today, features pieces by, among others, Nicholas Kristof, George Will, Nouriel Roubini, Charlie Rose . . . and me! It's the eighth time this blog has appeared on the site's "Off the Street" section in the last four months (not that anyone's counting).

Here's the link:

For a blogger, getting picked up by RealClearMarkets is bit like a book author getting plugged on Oprah: you certainly can't count on it, but it's thrilling if/when it happens. (It's also worth a guaranteed couple hundred "hits" literally from around the world!).

Thanks to the editor, John Tamny, who in addition to his gigs as an economist, investment advisor, and Forbes columnist wades through hundred of posts like mine daily to come up with selections.

Wednesday, February 11, 2009

Taking the Plunge . . Finally

Bear Market Winners: First-Time Buyers
The housing bust is creating a new group of winners: first-time home buyers. People who sat on the sidelines -- often watching wistfully as their friends became homeowners -- are suddenly in a position to grab some great deals.

--Mary Pilon, "For Some, It's Finally Time to Dive Into Housing Market"; The Wall Street Journal (2/11/09)

Check out this survey piece in the Journal profiling recent, first-time home Buyers in Phoenix, Seattle, and Connecticut. According to the article, the various incentives now accumulating for first-time Buyers may help blunt their fears of falling prices.

It's also the case that the housing downturn has created a new *mantra amongst would-be home Buyers.

Just like a rising stock market taught a previous generation of investors to "buy the dips," falling housing prices have persuaded many prospective Buyers that "waiting pays off."

*The best mantra? Don't do what everyone else is doing -- and never do anything reflexively.

Tuesday, February 10, 2009

Hot Property (Really!)

Want a Deal? How about *82% off?

Where: 22xx Vincent Ave. North; Minneapolis
How much: $42,500
Key Stats: 4BR/2BA; 1,363 FSF
Last sale*: $240,000 (6/2006)
Tax assessed value: $165,000

No, it's not in Edina or Wayzata. And, yes, it's a foreclosure, with all the headaches that can be involved (including less than pristine condition).

However, this brick-and-stone rambler is just minutes from downtown Minneapolis, a block off stately Victory Memorial Drive just northeast of Theodore Wirth.

Apparently, the market agrees: another agent who has an offer in told me that he's competing with eight(!) other offers.

Tax Credits vs. Low Rates

The Right Stimulus for Housing

There now seems to be a clear consensus that, to help the economy, government must first do something to help housing. However, there's still no consensus about what.

The two leading strategies are:

One. Using taxpayer money to basically subsidize mortgage rates down to some previously unheard of number, like 4% or even lower.

Two. Using tax incentives to motivate prospective home Buyers. There are various proposals being floated, but the basic idea is to give Buyers up to a $15,000 tax credit.

The debate isn't just over what will stimulate housing the most for the least cost, but which strategy will help housing the most long-term (or perhaps, hurt it least).

In that vein, some critics of the "cheap money" approach are concerned that that will just set up housing for another fall down the road. It's one thing to qualify for a mortgage, they point out, but completely another to be able to afford that mortgage if home prices drop and/or the economy contracts.

Lenders in Florida, Southern California, Las Vegas, Arizona and many other locales can you tell you all about that . . .

Monday, February 9, 2009

Chasing a Falling Market

Seller's Lament: Always One Price Cut (or More) Behind

This chart shows graphically the perils of initially pricing too high, then trying to catch up to a falling market (note: the X-axis is the number of weeks on the market).

In this case, the home (not my listing, thankfully) came on the market last July 10 at $775,000. Here's what happened next:

July 15: price drop #1: $749,900
Sept. 12: price drop #2: $724,900
Oct. 1: price drop #3: $699,000
Oct. 14: price drop #4: $674,900
Oct. 30: price drop #5: $649,900
Feb. 6: price drop #6: $624,000 (not shown)

Clearly, this Seller is trying -- so far futilely -- to catch up to where the market is. I also find it significant that the first price reduction came only five days after hitting the market: such a quick drop often indicates lack of conviction, coupled with unusually harsh early feedback.

By contrast, I don't place that much signficance on the Seller "sticking" at $649,900 from Oct. 30 to Feb. 6: there's no point in "wasting" a price reduction when relatively few Buyers are actively looking.

Hindsight is 20-20, but my advice to homeowners contemplating selling in today's Buyer's market is two-fold: 1) don't overprice; and 2) if you do, bite the bullet and get ahead of the market in one fell swoop, rather than chase it down with incremental drops.

To paraphrase a well-known saying, unrealistic Sellers suffer many price cuts, the valiant only one . . .

Financial Manslaughter -- or Murder?

How Culpable is Wall Street?

"The pressure on financial engineers . . . has been to compete to get new products out the door quickly, with their firms showing little patience for multi-year research and development. It's too bad these new products could not be labeled "beta" . . . to warn that products are not fully tested and still need work."

--Gordon Crovitz, "Time to Reinvent the Web (and Save Wall Street); The Wall Street Journal (2/9/09)

When the dust from the ongoing financial/credit crisis finally settles, the fundamental question society (and likely, judges and juries) must ask is, "did Wall Street commit financial manslaughter? Or is it guilty of something worse, like homicide?"

The difference goes not just to remedies and punishment, but to how we design our future financial system -- the current one's broken -- and prevent recurrences of the current melt-down.

So what's the difference between murder and manslaughter? The perpetrator's intention, and state of mind.

If you're speeding and driving drunk, and inadvertently veer off the road and kill a pedestrian, you're guilty of manslaughter. You may not have intended the result, our legal system says, but the decision(s) you made and your subsequent actions created the risk of harm. As a result, we're going to hold you accountable.

By contrast, murder requires premeditation. The gradations of murder -- first degree, second degree, etc. -- correspond to how cold and calculated (vs. impassioned and spontaneous) the actions were.

What's all this got to do with Wall Street?

Clearly, Wall Street decision makers created a system with enormous risk . . . and it crashed. (I don't buy the line that government is mostly responsible -- when it comes to financial regulation, Wall Street pretty much gets what it wants. Or more accurately: blocks -- or circumvents -- what it doesn't.)

The question is whether all the people at Citigroup, Goldman Sachs, AIG, Countrywide, Lehman Brothers, Fannie Mae, Freddie Mac, etc. who were essentially flooring the accelerator had reason to believe conditions were unsafe (watch for the incriminating e-mail's).

P.S.: backing up over the victim -- paying yourself billions in bonuses while the wreckage is still smoking -- definitely tilts the scales towards premeditation.

Sunday, February 8, 2009

Now You See It . . Now You Don't

Where: 4241 Basswood Rd. (Fern Hill neighborhood in St. Louis Park)
Asking Price: $699,900
Sold Price: $670,000
Tax Value: $731,000
Key Stat's: 3 BR/3BA; 4,300 FSF
Market Time: one day (12/31/2008)

"The reason dolphins have a reputation for saving drowning swimmers is that you never hear from the ones they push out to sea."

There's no question that the housing market is soft in many areas of the Twin Cities.

However, one of the reasons that it appears softer than it really is is that everyone knows about the homes that aren't selling: they've got conspicuous "For Sale" signs in front, attract a steady stream of slow-moving traffic (or not), and almost seem to project a certain forlorn quality as time passes . . . and passes.

By contrast, a home that sells fast barely makes a ripple. The immediate neighbors certainly know about it -- they know about everything -- but anyone just driving past probably doesn't.

"Stealth Sale"

A great example of a home that just came (and went) before the general public knew about it is 4241 Basswood.

The listing agent networked the home via email to other agents, which is how I found out about it. However, the next thing anyone knew, it appeared on MLS "sold."

No "For Sale" sign, no Sunday open, no Broker open (Tuesdays). Boom . . gone. Total market time: one day.

Such "stealth" sales are more common than you might expect, and underscore two things about today's market:

One. Newspaper editors' favorite saying, "if it bleeds, it leads," applies to the housing market, too. Bad news is loud, good news is quiet.

Two. If you are a Buyer and want first crack at a choice property, you'd better have a Realtor.

In my experience, the most desirable homes attract a crowd, in strong and weak markets alike. By the time the general public knows about them . . . it's already too late.

Saturday, February 7, 2009

Westin Galleria's "Edina Effect"

Edina's '08 Price Rise: Less Than Meets the Eye?

Edina was the only community with more than 200 home sales last year that posted an increase in home sale prices. In 2008, the median sale price of Edina homes sold through the Regional Multiple Listing Service was $388,250, up 3 percent from 2007. Throughout the metro area, the median sale price fell 13.3 percent.

--"Edina: Suburban Star"; Star Tribune (1/23/09)

Edina is a wonderful community, full of well-built homes, great neighborhoods, and outstanding schools. Home prices there have doubtless held up better than other parts of the Twin Cities in what is the worst housing bear market in decades.

However, it's stellar 2008 performance is skewed -- upwards -- by the presence of a single, high-end development: the Westin Galleria.

According to the Multiple Listing Service, 26 units in the Westin Galleria sold in 2008 for an average sales price of $1.063 million; the least expensive was $400,000 -- still above the median Edina home's sale price.

Without the Westin's upward pull, it appears that the median Edina sales price last year actually fell about 2%-3%. That's still exceptionally strong -- just not quite as strong as appears at first blush.

Short Sale . . . Long Odds

Short Sale Multiple Choice

My client made an offer November 17 on a South Minneapolis short sale (the lender(s) must agree to accept less than the outstanding mortgage balance). When did he hear back from the listing agent (representing the Seller)?

a. November 29
b. December 3
c. December 21
d. January 23

Answer: none of the above.

Incredibly, my client is now approaching three months without a response to his offer. Buyers who've made offers typically start twisting after 24 hours without hearing back; imagine waiting indefinitely.

What's going on?

According to the listing agent, not all of the lenders have agreed to the short sale (apparently, there are more than a dozen who each have a slice). In addition, so much time has now elapsed that the lender(s) are asking for updated financial information from the owner, documenting his inability to make good on the entire mortgage.

What's next? Two-thirds of the time, short sales don't pan out for precisely these kinds of reasons, and the property proceeds to foreclosure.