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Sunday, May 31, 2009

Weighing the Risk of Inflation

Rebutting Paul Krugman on Inflation

If you don't know whether to worry more about inflation or deflation -- economists seem to be evenly split at the moment -- a good technique is to parse the arguments being made by the two camps.

Here is the case made by Paul Krugman, a leading proponent of the "worry more about deflation" school ("The Big Inflation Scare"). As you'll see from my rebuttals (in parentheses), I don't find him persuasive.

PK: At the moment, all the leading price indices show that inflation is quite modest. If anything, the direction of prices is deflationary (especially home prices).

Rebuttal: Three days before Katrina hit, the weather in New Orleans was sunny. Simply extrapolating from current conditions doesn't constitute rigorous forecasting.

PK: Historically, very few countries have purposely used inflation to pay off a runaway national debt. For example, France after WWI. On the other side of the ledger, countries such as Japan, Canada, and Belgium have serviced national debts that, relative to the size of their economies, were even bigger than the U.S. debt is soon projected to be.

Rebuttal: Canada? Belgium? How does the experience of these countries -- literally a fraction of the size of the U.S. -- portend anything for the U.S? Even Japan's experience is a dubious precedent for the U.S.: it is a nation of savers, and traditionally has run huge trade surpluses. The U.S. is by far the world's biggest economy, and now has the dubious distinction of being the biggest debtor nation -- by far -- in history.

PK: At the moment, all the money stuffed into banks to repair holes in their balance sheets is just sitting there, rather than funding new loans. So, at least at the moment, the Fed's decision to "monetize" the banks' bad debts isn't inflationary.

Rebuttal: So what? A warehouse full of dynamite isn't safe just because there aren't any matches around at the moment.

Echoes of LTCM

Ultimately, what I find most unsettling about the arguments advanced by Krugman et al is their assumption that, simply because something is historically rare, therefore, it's unlikely.

That sounds a lot like the thinking baked into the models used at Long-Term Capital (Mis)Management ("LTCM"), the Nobel laureate-advised investment fund that famously blew itself up in 1998 -- and threatened to take the U.S. financial system with it.

Or, much more closer to home (pun intended), the arguments economists made to justify perpetually rising housing prices, or at least a long-term plateau.

As recently as 2006, they argued -- correctly -- that U.S. housing prices had never fallen in aggregate on an annual basis since The Depression.

So much for that one . . .

Saturday, May 30, 2009

Price as a Function of Time

"For Sale" Homes, Wine, & First-Run Movies

Some things become richer and more valuable with time. Fine wine. Love. Collectibles like antique cars or rare paintings.

A home for sale isn't one of those things.

Rather, a home on the market is like a newly released movie.

The most fanfare accompanies the "premiere," when the stars, director, and other VIP's gather at an invitation-only event. For a home, the equivalent event is the Broker open -- or Tuesday tour -- when Realtors check out the new inventory.

Next comes the first few weeks on the market, when the most motivated fans pay top dollar to see the movie at first-run theatres. For a home, the first few weeks on the market are also typically the period when it commands the highest price.

Eventually, the first wave of demand is exhausted, and the movie is released on DVD, where it reaches a second, less price-sensitive audience. Ditto for homes after 40-60 days on the market, when the first price reduction is in order (if not before).

Finally, movies show up on TV, where the general public can watch it for "free" (networks make money on the ads).

Thankfully, for-sale homes never reach that stage. However, after six months or so of market time, their initial asking price is usually just a dream . .

Friday, May 29, 2009

"The House That Soared"

New Home "Home Run?" Not Exactly

You know you're a Realtor when you notice a headline, like this one in today's New York Times -- 'The House That Soared' -- and immediately think to yourself: 'What developer is making a killing in such a tough market for new homes? What was their secret? Where's the house?'

Alas, the article isn't discussing the housing market at all; it's about Pixar's new movie, "Up," about a house that literally is carried off into the clouds by balloons.

Effect(s) of Rate Jump

Didn't Lock? Wait, and Hope for the Best

Nice piece exploring the potential fallout from this week's dramatic spike in mortgage rates (Potential Consequences of 5.5% Mortgage Rates).

Although I think it's premature to entertain all the negative consequences -- after all, it's possible that rates may drop as quickly as they popped -- the post does a nice job of explaining how the mortgage market works.

In particular, if you didn't already know, lots of folks with pending re-fi(nance) and mortgage applications opt to "float" (vs. lock) their rates. So, when rates jump dramatically, these same applicants face either sharply higher borrowing costs, or, in many cases, no longer qualify for their loans. Neither is good news for the housing market, or broader economy.

On the other hand, anything that boosts anemic interest rates arguably helps millions of savers currently earning next to nothing on their liquid cash.

So what do you do if you're one of the people with a mortgage application pending, or who's contemplating refinancing?

Two thoughts: 1) the move in rates has been so huge, you'd naturally expect at least some retracement (in the stock market, it's common for a big move to be followed by a partial reversal); and 2) if your lender offers a "re-lock" option at a reasonable cost . . . get it.

Especially when rates are so volatile, getting a "second bite at the apple" is a good idea.

P.S.: the "why" of the mortgage rate spike is at least as significant as the "what." At the moment, there appear to be two, competing narratives: one camp holds that higher rates are a sign of a strengthening economy; the other, that massive federal borrowing is causing the bond market to demand higher returns. In fact, they're probably both true . . .

Thursday, May 28, 2009

Homes as Investments

WSJ: 'Homes are Poor Long-Term Investments'

Today's Wall Street Journal is running the latest in what has become a perennial real estate subject: how do homes fare as investments? ("Is Your Home a Good Investment?").

Its (non-groundbreaking) conclusion: long-term, homes barely beat inflation.

In fact, depending on your starting point, statistics indicate that annual home appreciation nationally averages just 4%-5%.

Of course, that assumes you paid cash for your home. Factor in leverage, which is what putting down 10% and borrowing 90% is, and those returns go up dramatically.

Such articles also typically omit:

--the tax savings associated with deducting mortgage interest;
--if you're an investor, the benefit of depreciation and other deductible expenses;
--if you're not an investor, what economists call "imputed rent" -- the benefit homeowners get from, well, living in their homes ("except for that, Mrs. Lincoln, how was the play . . . ?").
--the tax-free status of long-term capital gains when it comes time to sell (up to $500k for couples, $250k for individuals)
--the fact that renting and owning are not perfect substitutes: at least in the Midwest, renters simply don't have the same breadth or quality of housing choices that owners do (to pick just one example, I'm aware of very few homes for rent in Edina's tony Country Club neighborhood).

Of course, given what's happened to stocks -- the last year, the last 10 years, etc. -- homes' investment returns recalls Churchill's line about democracy: 'the worst form of government . . . except for all the others.'

Wednesday, May 27, 2009

Escalator Short-Circuit

"Trickle Down" Economics to 'Bubble Up'?

Soft drink aficionado's may recall "Bubble Up" as a long-ago rival to 7-Up.

It may also be the best label for today's, post-crash, post-Trickle Down economy.

Notwithstanding the latest, dire Case-Shiller statistics, Realtors in many cities nationally are reporting more and more instances of multiple offers for deeply discounted, bank-owned foreclosures.

The phenomenon is the logical result of several, reinforcing developments: record low interest rates; a passel of incentives aimed at new home buyers, ranging from the federal government's $8,000 tax credit to local programs that in some cases are even more generous; and dirt-cheap housing prices that compare favorably with the rental market, even after factoring in the fix-up costs associated with many foreclosures.

Which begs the $64,000 question: will emerging strength in the bottom rungs of the market "bubble up" to the middle and higher rungs of the housing market -- and indeed, the overall economy?

The short answer: possibly, but not directly, and not in the way(s) you'd necessarily expect.

Escalator Short Circuit?

If the housing market is an escalator, anything that strengthens the lower rungs theoretically benefits the higher rungs, too.

That's so because entry-level Buyers allow "move-up" Buyers to, well, move up. In turn, owners of middle-bracket homes who can suddenly sell their homes can graduate to Buyers of upper bracket housing (assuming their jobs and credit scores hold up in the Recession -- see below).

Unfortunately, today the linkages between the various parts of the housing market are attenuated, for three reasons.

One. By definition, banks, not individuals, own the foreclosed homes being snapped up. As a result, when a deal closes, the Seller doesn't automatically become a Buyer for another home. Rather, the bank-owner simply credits "cash" on its books and debits "REO" (real-estate owned).

Assuming that the home is sold below the banks' carrying cost for the home -- a safe assumption -- the difference is booked as a loss. And a loss diminishes the bank's capital, and with it, presumably, its ability (and appetite) to lend.

Two. Financing costs for upper bracket homes are still abnormally high. In a market where "conforming" loans (under $417k) can be had for under 5%, jumbo loans still cost around 6.5%. The difference on a million dollar home: an extra $10,000 a year.

Three. A 20% down payment on that $1M home -- preferred by lenders, and the threshold for avoiding mortgage insurance -- is a cool $200,000. Assuming that that money was in stocks, it's likely to have shrunk to something like $150k today, even after the recent stock market rally.

In a tighter credit environment, closing that gap with a bigger mortgage may not be feasible.

None of the foregoing is to say that strong activity in the foreclosure market isn't beneficial. It's just that the benefits are indirect, and not necessarily immediate.

Specifically, shrinking the supply of foreclosures on the market removes a major depressant on home prices; outlays for home repairs, contractor labor, etc. increase economic activity and improve the housing stock; and creating a new class of homeowners with hard-earned "sweat equity" bodes well for future "move-up" housing demand (today's sweat equity is tomorrow's down payment).

Now if there was only a name for this new economic era that didn't have the word "bubble" in it . . .

Big Jump in Rates Today!

Credit Market Indigestion?

Big jump in rates today: from 4.75% to well over 5%. That may not seem like much, but in the mortgage market, that's like a 250 point drop in the stock market.

The explanation? Apparently, a not-so-successful U.S. Treasury auction, which mortgage rates key off of.

Maybe borrowing a couple extra trillion is starting to create indigestion???

Sold . . in 7 days!

Where: 2600 Inglewood, in St. Louis Park's Fern Hill neighborhood
What: 3 BR/2BA Georgian Colonial with just under 2,000 FSF
How Much (Asking Price): $374,900
When: May, '09
Who: Ross Kaplan, listing agent

Case-Shiller may show that the Twin Cities dropped 6.1% in March, but that didn't stop this handsome Colonial from selling quickly (technically, it's "Pending" or under contract; the actual closing date, which is when title transfers, is still a month away).

In the real estate equivalent of "build it and they will come," if you prep well, price it right, stage carefully, and market aggressively . . . it will still sell.

Pioneer Press article

Local Reaction to Case-Shiller Numbers

Apparently, Case-Shiller's March statistics showing a 6% drop in Twin Cities house prices provoked a range of reaction, including some questioning its accuracy.

Chris Snowbeck's piece in the St. Paul Pioneer Press today, "Home Prices Dive -- With an Asterisk," does a nice job cataloguing the responses (including a quote from yours truly). According to Snowbeck, "reaction to the Case-Shiller numbers ranged from skepticism to indifference."

My take definitely places me on the "indifferent" end of that scale, for the reasons I mentioned on this blog yesterday . . .

Tuesday, May 26, 2009

Latest Case-Shiller Numbers

"Are the Case-Shiller Numbers Right?"

Chris Snowbeck at the St. Paul Pioneer Press is soliciting local Realtor and lender feedback to the latest Case-Shiller housing statistics. The (absymal) March numbers showed a record one-month fall of 6% in the Twin Cities.

Snowbeck's question to the "experts" (myself included): 'are the Case-Shiller numbers accurate?'

Here's what I emailed Snowbeck:

My main reaction is that a market-wide statistic simply isn't that useful, no matter how accurate it is. The Twin Cities housing market, to me, is at least 90 discrete sub markets; even Minneapolis has thirty-plus separate neighborhoods (and 11 separate areas for MLS purposes).

I don't doubt that the neighborhoods where foreclosures are running rampant -- Jordan and Folwell in Camden; Phillips; parts of Powderhorn -- are down much more than 6% in March. However, near Linden Hills, parts of Seward, and near Cedar Lake are doing fine.

The 6% is a blended number, that masks huge variances . . .

Watch for Snowbeck's article tomorrow(?) . . .

Multiple Offers

Is it REALLY in Multiples? How to Tell

With multiple offers making a comeback -- especially bank foreclosures that are "priced to sell" (and then some) -- it once again bears asking: 'how do you know if the property you're interested in is really in multiple offers?'

Herewith are the four ways to tell.

One. When it comes to multiple offers, it's not "location, location, location" -- it's "context, context, context."

The only way Realtors -- or appraisers, for that matter -- have to determine value is by looking at similar, recent sales. Called "comp's" ("comparable sold properties"), they typically are the 3 most recently closed sales of similar properties.

So if you're contemplating buying a 1928 Tudor (3 BR's/2BA; 2,100 FSF) in Minneapolis' Longfellow neighborhood that's asking $249.9k, and the last three sales have been $270k, $300k, and $304k . . . it's certainly plausible.

To know for sure, though, you'd have to have some firsthand knowledge of the other Tudor's.

Did they have the same FSF, bedrooms, baths, etc?

Were they updated?

What were the floor plans?

Were the mechanical's, roof, appliances, etc. all new -- or a mess?

Once you're armed with that information, the likely selling range for any given home usually becomes apparent.

Two. Usually, but not always, multiple offers materialize early in a listing.

For the same reason you don't see too many $100 bills lying around, you don't see too many $125k homes linger on the market at $85k -- even in a Buyer's market with lots of inventory and tighter credit.

So if the home in question has been on the market 3 days, and the listing agent says that there are multiple offers . . . you'd certainly find that a lot more credible than if the corresponding market time was 203 days.

The one exception to that is a home that has suffered serial price reductions over a very protracted listing period, to the point where it is now arguably undervalued (again, based on the comp's).

It's not unheard of for multiple buyers to simultaneously reach that conclusion, and enter into a mini-bidding war causing a "bounce" in the home's selling price.

Three. Who's the agent?

If it's a reputable agent, and they say that there are multiple offers . . . there are. Period. End of story.

Depending on my Seller's schedule and wishes, I'll frequently tell prospective Bidders in a multiple offer situation that "all offers will be presented at my office at 2 p.m. Thursday." If they want to know if there are other bidders or not, all they have to do is show up at my office.

Even when the offers are not presented in person, listing agents lie about multiple offers at their peril.

While listing agents typically cannot divulge anything about competing offers, simply how they field questions can be instructive. When there is another offer, the rebuff's tend to be quick and straightforward; when it's a bluff, there's more hesitation and fumbling.

Too, good listing agents know that Buyer's agents will know the comp's. If the home in question is tens of thousands more than the comp's, it's simply not credible that there would be multiple offers. An agent who says otherwise has no credibility -- on this deal, or future ones.

Four. Wait.

Even if there are multiple offers, it doesn't necessarily mean that any of them are strong offers.

And it's certainly possible that an agent marketing a unique, hard-to-price home might succumb to temptation, and (convincingly) fabricate the existence of another offer.

So how can you know for sure?

If you wait a week and the home is "Pending," they were telling the truth.

If they were lying, you'll know because the listing agent will call your agent to see if you're "still interested," and dangle a big price concession.

Monday, May 25, 2009

The Hippo in the Coal Mine

California's Financial Mess

You have to wonder if California’s political paralysis foreshadows the future of the nation as a whole.

--Paul Krugman, "State of Paralysis"; The New York Times (5/25/09)

Just in case you've been enjoying a blissfully off-line Memorial Day weekend, the big story percolating on the leading op-ed pages and blogs at the moment is California's financial predicament. As in, it's out of money. Very soon.

Apparently, its three options are: 1) federal bailout; 2) bankruptcy; or 3) a dramatic cut in services coupled with tax increases. Or all three.

As Krugman notes, if it's true that, as California goes, so goes the country . . . we're in trouble.

Unfortunately, while there is only one Freddie Mac and Fannie Mae, and a handful of too-big-to-fail banks, auto makers, and insurers -- there are 49 other states, hundreds of big cities, thousands of counties, etc.

Bad Precedent

There really is no philosophical reason to extend aid to California and not to Colorado, or New Mexico, or . . . you get the idea.

So, what inexorably bubbles back up to the top of the agenda: the need for structural reform.

As cited in this blog and many others, the good news is, there's surprising consensus about the appropriate package of economic and political prescriptions (address the phenomenon of "regulatory capture," wield the nation's foreclosure laws as they were intended, open up the nation's sclerotic, two-party political system, etc.).

The bad news is, it's far from clear that doing any of the above -- on any realistic kind of timetable -- is politically viable.

Krugman again: "What’s really alarming about California, however, is the political system’s inability to rise to the occasion."

Is California "us??"

3rd Wave of Defaults

"Safe" Mortgage Pain Spreads to MN

In the latest phase of the nation’s real estate disaster, the locus of trouble has shifted from subprime loans — those extended to home buyers with troubled credit — to the far more numerous prime loans issued to those with decent financial histories . . . Economists refer to the current surge of foreclosures as the third wave, distinct from the initial spike when speculators gave up property because of plunging real estate prices, and the secondary shock, when borrowers’ introductory interest rates expired and were reset higher.

Peter S. Goodman and Jack Healy, "Job Losses Push Safer Mortgages to Foreclosure"; The New York Times (5/25/09)

What's eye-catching about today's NYT story isn't the phenomenon of foreclosures spreading to formerly solid borrowers now falling behind due to job losses; in the worst recession in decades, such "metastasis" is hardly a surprise.

Rather, it's the local angle: the two families profiled, both deep in the hole on their mortgages, are right here in Minnesota (one is in Woodbury, the other is in Babbit, up north).

According to the nonprofit Minnesota Home Ownership Center, three of every five Minnesota borrowers seeking foreclosure counseling now have a prime loan.

So much for "it can't happen here."

Unfortunately, it already is.

Sunday, May 24, 2009

Like (vs. Love) at First Sight

Real Estate 'Lightning'

Does love at first sight happen in real estate? Absolutely.

However, I'd say it occurs less than 10% of the time. When it does, though, you know it: like lightning striking, the Buyer -- or Buyers, if it's a couple -- immediately have a changed look in their eyes and, in fact, their entire demeanor shifts.

In a word, everything about them telegraphs "Ye-s-s-s!!"

It might just be my imagination, but I swear you can feel the crackle of electricity in the air.

Most of the time, however, I'd characterize Buyers' initial reaction to the home they end up buying as "strong like."

From "Like" to . . Anxiety

When they first see the home, it just seems to feel right. Then, when they see it again, the feeling grows.

The home may not have everything they want, but one of two things inevitably happens: the Buyers either decide it's not that important, or, they busily get to work figuring out how to add what they want, or, change things to their taste.

(This is yet another uncanny instance where there are strong parallels between homes and relationships: how many times have you heard a single guy (or woman) tick off all the attributes they're looking for in their ideal mate? Then, when the right person shows up, "the list" somehow seems to get discarded.)

As a Buyer's agent, I can always tell when my clients are progressing to making an offer, because another emotion kicks in: anxiety.

As in, "how long do we have before somebody buys it first?"

Saturday, May 23, 2009

Required Reading

"Who's Who" Discussion of Financial Crisis

Best read of the weekend: a roundtable called "The Crisis and How to Deal With It."

Participants are a "who's who" of finance and public policy: Bill Bradley, Niall Ferguson, Paul Krugman, Nouriel Roubini, and George Soros.

Warning: their (quite sober) analyses are not for the easily spooked or faint of heart. Here's an excerpt from Nouriel Roubini:

There are only a few ways of resolving a [huge national] debt problem: either you default on it as countries like Argentina did; you use the inflation tax to wipe out the real value of the debt; or you have to raise taxes and cut government spending.

As depressing as the mess, its causes, and likely solutions are . . it's encouraging that someone out there has got a handle on what to do about it.

Now, if only they were in charge . .

Friday, May 22, 2009

Every Seller's Worst Nightmare

"Left at the Altar"

It's every Seller's worst nightmare: you're hours away from getting the last set of signatures that will make it a "done deal," when the Buyer informs you that they're backing out.

Why? Because they found something that they like better.

Does it happen?

Sure, but much less often than you'd expect, for three reasons:

One. By the time Buyers have gotten deep into negotiation on a Purchase Agreement, it's likely that they're already emotionally "invested" in your home.

In fact, it's a pretty safe bet that they'll have already seen your home several times, memorized the listing information, and carefully researched the neighborhood, local schools, etc.

In the course of doing all those things, the prospective Buyer's attachment to the home usually intensifies. Just as it can be said that you "bid on something you want," it's also true that you "want what you bid on."

In fact, many times I have to caution Buyers I work with not to start "mentally redecorating" or otherwise psychologically move into a home that's for sale until they actually have a signed Purchase Agreement.

Second. Buyers today have already done their homework.

With the exception of foreclosure sales, it seems that the average Buyer today spends more time studying the market, learning prices, and touring homes than a few years ago.

If you know what's out there, and are clear about what you're looking for . . . you're more likely to make a deliberate (vs. impetuous) purchase decision -- and less likely to have second thoughts later.

Will more homes continue to come on the market? Of course.

However, if you've really done your homework, the odds of a new listing offering more house, for less money, are quite low. In the rare event that that happens, multiple offers invariably eliminate any discount.

Three. Once "seasoned" Buyers find something they like and commit to it . . it's natural to stop looking.

In that way, homes are a lot like relationships.

Once you find the home you really love . . . all the rest seem to fade into the woodwork.

Even if the relevant emotion is only "strong like" (vs. love), prospective Buyers will mentally begin the process of customizing and updating their prospective new home to their taste, solidifying their attachment. (see, Reason #1).

As I like to tell prospective Buyers, if you'll only settle for a home that's a "10," the odds are pretty steep. However, if you're willing to consider something that's a "7" or "8" that over time you can make a "10," suddenly, there are a lot more choices.

Now if only one's romantic partner was amenable to such retrofitting.

Thursday, May 21, 2009

Hurricane Metaphor

Breached Levee's & Underwater Mortgages

If the housing bust and resulting recession are the equivalent of an economic hurricane (albeit a man-made one), what were the levees designed to hold back the flood waters?

Certainly, the major ones were:

--the role played -- or not played -- by the credit rating agencies, which blatantly mis-rated trillions in securitized mortgages as "Triple-A" that in fact were junk.

--the Glass-Steagall Act, passed by Congress in the Depression to separate investment and commercial banks, and repealed --at the behest of Wall Street - in 1999.

--SEC rules limiting investing bank leverage that were relaxed (gutted?) in 2003.

--the (erroneous) assumption that there was no "national housing market," just dozens of "local" ones (the diversity was thought to protect against a simultaneous downturn).

--the belief that the Federal Reserve possessed the tools and discipline to keep monetary policy on an even keel, or, in the event that an asset bubble formed and then popped, it would know how to clean up any resulting mess (Alan Greenspan's mantra).

--the belief, widely held by lenders, that borrowers with high credit scores -- and not much else -- would never default.

Clearly, all these "levees" and more were breached.

As is also the case with hurricanes, it's the low-lying areas that get inundated first. In the housing market, that would be homes purchased by marginal buyers, using dubious loans, with nothing down.

No wonder a mortgage that's worth more than the underlying home is said to be "under water."

Uncertainty Principle: 'Not Knowing' Takes Toll

What is making people miserable? No one knows. I don’t mean that no one knows the answer to this question. I mean that the answer to this question is that no one knows — and not knowing is making us sick.

--Daniel Gilbert, "What You Don't Know Makes You Nervous"; The NY Times (5/21/09)

Gilbert, a Harvard Psych Professor, offers some interesting observations about why uncertainty is so hard on people -- often times, worse than bad news itself.

Gilbert explains why:

Why would we prefer to know the worst than to suspect it? Because when we get bad news we weep for a while, and then get busy making the best of it. We change our behavior, we change our attitudes. We raise our consciousness and lower our standards. We find our bootstraps and tug. But we can’t come to terms with circumstances whose terms we don’t yet know. An uncertain future leaves us stranded in an unhappy present with nothing to do but wait.

Interesting read . .

Wednesday, May 20, 2009

1 in 400 = Smashing Success

Many Agents, Small Market Share

What do you call a Presidential candidate who loses four out of every ten votes?

A landslide winner (indeed, even garnering 56%-57% of the vote is considered a victory of historic proportions).

What do you call a major league hitter who hits into outs two out of every three at-bats?

A batting champion (indeed, not only would a batting average of .333 top the league most years, over a career it would likely qualify one for the Hall of Fame).

So what do you call a Realtor who closes one out of every four hundred Twin Cities real estate transactions?

A monster producer.

Real estate sales is the ultimate fragmented market, at least at the agent level (at the broker level, Edina Realty and Coldwell Banker Burnet combined control just under half the Twin Cities market).

Closing 100 deals a year, which represents roughly .25% of the Twin Cities annual sales, would certainly qualify a Realtor as a "mega-agent."

"They're B-a-a-a-c-k . . ."

Return of the Sub-Prime Lenders

One of the surprises -- at least to me -- wading through all the foreclosures in Minneapolis neighborhoods like Phillips, Camden, and Powderhorn Park is the identity of the banks who now have title (i.e., they're the owners).

It's a veritable "who's who" of the most aggressive -- and least ethical -- subprime lenders: entities like Countrywide, Indymac, Washington Mutual, etc.

At least to my knowledge, none of these lenders had a major presence in the Twin Cities at the peak of the market. Of course, today they're folded into other banks that bought them at fire sale prices after they collapsed or outright failed.

So what gives?

The explanation has to do with how the mortgage market works.

Borrowers can either apply for a mortgage directly from a lender, or, go through a broker who does the shopping for them in exchange for a commission.

Guess which lenders dangled the fattest commissions in front of Twin Cities brokers (and presumably, mortgage brokers nationally) when the market was frothiest??

Unfortunately, as far as the subprime lenders are concerned, it's not so much that "they're b-a-a-a-c-k," as, "they never really went away."

Tuesday, May 19, 2009

Picked-over Inventory?

Wanted: 'Something Not on the Market'

One of the puzzles of a supposed Buyer's market, with 27,000-plus single family homes for sale area-wide, is having serious Buyers who can't find what they're looking for (see my earlier post, "Buyer's Market Conundrum").

Which is why you increasingly hear Realtors who are networking for their clients say, "I'm looking for something not already on the market."

What they're really saying is: 1) my clients have already seen everything currently for sale that meets their criteria; and 2) they don't like it.

How is that possible?

If you're looking for a specific kind of home in a specific location, suddenly, 27,000 homes collapses to perhaps 10-15. Assuming that one-third of these are overpriced, and another one-third have updating and/or floor plan issues (which ultimately amounts to being overpriced), the number of suitable homes dwindles to a handful.

Of the remaining, "legitimate" contenders, you'd further expect several to sell quickly, because they are relatively scarce. (In fact, many would-be Buyers can tell you that that's happening.)

Voila! Your clients have already "seen everything that's for sale."

Monday, May 18, 2009

A Study in Two Relief Efforts

35W Bridge vs. Wall St. Collapse:
A Study in 2 Relief(?) Efforts

This August, the Twin Cities will observe the second anniversary of the 35W Bridge collapse. Summer, '09 will also mark (approximately) the second anniversary of Wall Street's housing-triggered melt-down.

So how have the two relief efforts been conducted? What are the results to date? Herewith is a comparison:

Immediate Aftermath

35W Bridge: Authorities immediately erect roadblocks and barricades, and route traffic away from the disaster area. Victims are evacuated to area hospitals for emergency treatment.

Wall Street: Authorities hurriedly direct hundreds of billions of taxpayers' money to the epicenter of the disaster: a handful of heavily-leveraged, "too-big-to-fail" banks and financial institutions whose political clout effectively let them write their own rules.

Meanwhile, the disaster's principal victims -- the 3 million people (and counting) who have lost their homes to foreclosure -- are essentially ignored. So are the disaster's secondary victims: tens of millions of savers whose returns are decimated by near-zero interest rates designed to support the afflicted financial giants.

Runners-up candidates: investors with money in the stock market, especially retirees; the newly unemployed; and taxpayers -- likely several generations of them -- saddled with the clean-up bill, and the monster inflation it risks.


35W Bridge: A federal-state blue ribbon commission, headed by the National Transportation Safety Board ("NTSB"), immediately opens an investigation into the cause(s) of the bridge collapse. Within three months, a consensus emerges that a combination of original design flaws, poor maintenance, and excess weight on the bridge at the time of collapse were to blame.

Wall Street: No formal investigation to date.


35W Bridge: Within six days of the collapse, Congress earmarks emergency funds to build a replacement bridge. Rescue crews continue combing the debris for victims for three weeks, then demolition crews move in to clear the site.

Meanwhile, authorities solicit bids from contractors seeking to build the replacement bridge. A winning bid is selected within six weeks; "fast-track" construction begins a month later. Authorities establish a multi-million dollar fund to aid victims and survivors, and affected businesses.

Wall Street: When the initial bailout funds prove inadequate, the Federal Reserve and U.S. Treasury orchestrate repeat bailouts -- and commit a multiple of the original funds -- to the same beleaguered financial institutions.

A single entity, AIG, receives three infusions (so far) of taxpayer funds totaling $200 billion. Citigroup, Goldman Sachs, Fannie Mae, Freddie Mac, Bank of America, Merrill Lynch and numerous others receive multiple bailouts, federal guaranties, etc. totaling tens of billions apiece.

An unknown percentage of these funds go toward paying management "bonuses" at the aforementioned companies. For that matter, none of the recipient companies provide -- or are required to provide -- a detailed public accounting of how they've used bailout funds.


35W Bridge: The 35W replacement bridge is completed -- under budget and ahead of schedule -- in September, '08, barely 13 months after the original bridge collapse. At 189 feet across, the new bridge is two-thirds wider, and carries two more lanes of traffic, than the original bridge. Total direct cost: approximately $250 million. Total indirect cost to the Twin Cities' economy resulting from the bridge collapse: approximately $150 million.

Wall Street: None yet -- the crisis is ongoing. Here’s where things stand currently:

Notwithstanding federal aid now totaling in the trillions, several of the nation's biggest financial institutions are feared to be "zombie's": in business, but technically insolvent and unable to originate new loans.

The U.S. economy enters its 16th month of recession -- the longest since WWII. Unemployment approaches 9%. Home mortgage delinquencies and defaults continue to set records, and stress spreads to commercial real estate loans, consumer installment debt, etc.

Total indirect cost (so far) of the Wall Street collapse to the U.S. and world economy: tens(?) of trillions.

All of which prompts the rather obvious thought: if you want to end the financial crisis . . . put the people who fixed the 35W bridge in charge. Really.

Instead of letting Wall Street fix Wall Street -- which in practice feels a lot like letting Wall Street [your verb here] the rest of the country, it's high time for the rest of the country to "fix" Wall Street.

Certainly, it's qualified.

Downtown Mpls. Retail Bust

Recession Casualty . . . or Something Else?

I made the rare foray into downtown Minneapolis for some retail shopping the other day, and what I found reminded me of an old skit from The Chris Rock Show.

An African-American man is shown trying, unsuccessfully, to hail a cab. Naked. As each cab passes him by, he grows increasingly angry and indignant, railing that the cab drivers are blatant racists, that an African-American "can't get a break," etc. (yeah, you have to be an African-American comedian to safely traffic in this kind of humor -- and this is one of Rock's more politically correct skits).

Back to downtown Minneapolis.

I would be shocked if retail sales haven't cratered. I don't think I saw 20 shoppers in the 30 minutes or so I was walking around.

However, as tempting as it would be to blame the recession, there's a much more obvious explanation: road construction and parking.

Virtually every downtown street within a 6 block radius of the IDS (the epicenter of downtown) is torn up and restricted to one, v-e-r-y s-l-o-w-l-y moving lane of traffic. Parking was nowhere to be found, and when I finally did find a spot, the meter informed me that an hour would require 16 quarters (or something like that).

I don't think I carried around that much change when I used to use laundromats.

Somewhere in between waiting for interminable traffic lights to change and looking for a merchant who could make some change, it occurred to me that shopping in the 'burbs was a whole lot more convenient.

Which is where I headed.

Sunday, May 17, 2009

Price Reductions: A Realtor's Take

Cheaper -- Not Necessarily Cheap

In a recession, everyone's looking for a sale. So it stands to reason that a home that has just had a big mark-down is a deal, right?

Not necessarily.

Simply knowing that a home that used to be "X" is now $10,000 less -- or $50,000 -- really tells you nothing, for the obvious reason that the original asking price may have been inflated. All you can confidently say is that the price is now "better" (in fact, the preferred Realtor term for a price cut is "price improvement").

In my experience, some of the homes touting the biggest price drops are precisely the ones that were most overpriced initially.

Looking for Patterns

So what does a price cut -- or series of them -- tell you?

Mainly, how motivated and realistic the Seller is.

A home that has been on MLS at the same price for 60 days-plus is almost certainly too high (the exception being an upper bracket home, which has a longer expected market time).

At that point, most serious Sellers will entertain anywhere from a 3% - 5% price cut.

If their home doesn't sell in the next 60 days, they'll take another price. Wash, rinse, repeat until sold.

So when you see a home sitting at 187 days with no price reduction, you know something's up.

Similarly, when you see a home that took a price cut at 60 days, and another at 120 days, and it's now at 179 days . . . you'd guess that an attentive Buyer is going to factor a third price cut into any offer they make.

Saturday, May 16, 2009

Easy Money No More

Crash Victim: The Mortgage "Honor System"

I thought I knew a lot about go-go mortgages. I had already written several articles about the explosive growth of liar’s loans, no-money-down loans, interest-only loans and other even more exotic mortgages. I had interviewed people with very modest incomes who had taken out big loans. Yet for all that, I was stunned at how much money people were willing to throw at me.

--Edmund L. Andrews, "My Personal Credit Crisis"; The New York Times (5/14/09)

When Times financial reporter Andrews says personal, he means personal: the details are things you wouldn't even expect close friend to divulge.

Leaving aside the stress, aggravation, etc. that has engulfed Andrews and his family, he reports a phenomenon I saw and heard about in spades a couple years ago -- namely, anyone with high credit scores could borrow virtually as much as they wanted.

Which is why I routinely counseled my clients to distinguish between how much mortgage they could qualify for, and how much they felt comfortable borrowing.

Today, of course, that advice is no longer necessary: banks once again are telling customers how much they can borrow, instead of vice versa.

Friday, May 15, 2009

"Highest & Best," Explained

Multiple Offer "Rules of Engagement":
Highest (Offer) & Best (Terms)

Careful readers of MLS listings these days will notice more references to the phrase "highest and best" -- as in "highest and best offers due by noon, Tuesday."

What exactly is the listing agent talking about? Two things.

First, multiple offers have been received for the property in question (duh!).

Yes, these are increasingly common at the lower end of the market, particularly with bank-owned foreclosures priced, shall we say, "conservatively."

Once it's apparent that there are going to be numerous offers, a standard tack is to inform both prospective Buyers who've already submitted offers, as well as those who are on the verge of doing so. A deadline 24 or 48 hours away is announced, and everyone gets a chance to (re)bid.

Two. "Highest and Best" also means, "one round, with no chance to raise."

I've had more than one client, who, upon learning that their offer in a "multiples" situation fell short, insist on submitting a higher offer.

Unh-unh -- that's not how "highest and best" works (assuming, of course, the Seller is playing by the rules).

In fact, that's the whole logic behind "highest and best."

Instead of going multiple rounds with multiple Buyers, the Seller is basically saying, "cut to the chase and get to your highest offer -- with the best terms (contingencies, closing date, etc.) -- now."

Buyers in this situation not only have to decide what the property is worth to them -- they also have to guess what it's worth to the competition!

Wednesday, May 13, 2009

William Seidman

Needed: A New Generation of Bill Seidman's

While watching the financial news out of the corner of my eye at lunch, I noticed the name "William Seidman" flash across the screen.

For those who don't recall, Seidman was the crusty, very independent, and scrupulously honest chairman of the FDIC when it dealt -- successfully -- with the S&L mess 20 years ago. (Amazingly, Seidman had no ties to Goldman Sachs, as far as I know.)

My immediate reaction was relief: Seidman is exactly the kind of public servant this country used to be able to call upon to navigate financial messes.

I figured, Obama was appointing him to play an advisory role of some kind. Sure, that makes great sense.

The next thought was, Seidman must be pretty old by now (Hell, he seemed old 20 years ago when he was the FDIC chair.)

In fact, Seidman was 88 years old. Sadly, the news is that he passed away after a brief illness.

Tuesday, May 12, 2009

$425,000 vs. $424,975

Pricing Psychology & the "Too-Precise" Price

Quick, which home is priced more carefully: the one that's $425,000, or the competitor down the street that's $424,975?

You'd certainly guess the latter . . . and you'd be wrong.

It's simply not possible to price real estate with the exactitude of a pound of hamburger, or a tank of gas; even when the "comp's" (comparable sold properties) are what I like to call exceptionally "tight" (vs. loose), the allowed range is still 2% - 3%, give or take.

Going back to the hypothetical $425k property discussed above, that's translates into a swing of $10k - $15k. Where in that range the ultimate selling price falls depends on a host of situation-specific factors: the Buyer's subjective attachment to the home; how well the home is staged and marketed; the Seller's patience (or lack thereof); micro-trends affecting nearby supply and demand, etc.

So why use an artificially precise number instead of a round number?

Two reasons: 1) it stands out; and 2) it suggests greater precision, which may make Buyers believe the price is more accurate -- and firmer.

My take?

Experienced Realtors see the "too-precise price" for what it is -- a gimmick -- and tend to avoid it (thankfully, I've yet to see the $424,974.23 home!).

P.S.: as I've also previously blogged, sales gimmicks are like cockroaches: you seldom see just one.

Monday, May 11, 2009

"They're Just Not That Into . . . Your Home"

"The No Feedback" Feedback

Unbeknownst to many prospective Buyers, their agents receive emailed "feedback forms" immediately after showing a property.

The templates vary, but the general format is to ask for comments regarding the home's interior condition, exterior condition, curb appeal, staging, and price. Ratings can be either numeric (1-10), or qualitative ("good," "fair," "poor," etc.)

Unfortunately, if you've just showed clients eight or ten homes, your recollection of each one may be foggy, at best. And yet, thanks to computerization, the feedback forms keep filling up your mailbox, until you oblige and fill in . . . something.

So, you get a lot of variations of what I just got back from an agent yesterday:

Interior condition: 'good'
Exterior condition: 'good'
Curb appeal: 'good'
Price: 'good'
Any further interest? 'No'


Even when a prospective Buyer is cool to a home, the reason(s) can be (genuinely) vague. In the real estate equivalent of the famous "Sex and the City" line: sometimes "they're just not that into . . . your home."

As I like to tell clients, the only feedback I'm really interested in is a full-price offer from a well-qualified Buyer. Even better: two such offers.

In the meantime, if I really want an agent's feedback from a showing -- if I know they know the neighborhood -- I'll call them.

P.S.: if the feedback is a surprise to your Realtor . . . they're not a very good Realtor! The one major exception to that is the projected selling price of a highly unusual or unique home.

Saturday, May 9, 2009

The Age of Scuffs, Dents & Bruises

The "No Name (Yet) Recession"

As previously alluded to ("Recession Name Game"), the current economic mess has yet to be definitively named.

In fact, pundits can't even agree on whether what we're experiencing is a Crash, a Recession, or a Depression. (First get the nouns right, then the adjectives will fall into place.)

So, while it violates the implicit requirement that the winning sobriquet includes a mandatory reference to finance, economics, or the stock market, here's my nomination: 'The Age of Scuffs, Dents & Bruises.'

In the housing market, it's not just the foreclosed homes that look used and abused: more owner-occupant homes seem tired, and in a little worse shape, than they did just 18 months ago.

Scrimping on needed repairs and updates may be a "penny wise, pound foolish" strategy, but Sellers who are financially squeezed are cutting expenses where they can.

On the roads, it's not just that the cars are visibly older (at least for the auto industry, a annual sales drop of 40% is an unqualified Depression). It's that the cars themselves seem to have more scuffs and dings than usual.

A year ago, you might not have thought twice about taking care of that nicked bumper likely to be under your $1,000 deductible. Today . . . it's not so urgent.

Finally, more people (at least than usual) seem to be suffering from a mild state of disrepair -- psychologically, if not physically,

My wife, a physical therapist, reports that more of her older patients, on fixed incomes, are spreading out their treatments, or simply cancelling. Why? The $25 (or $75) co-pay suddenly is a financial burden. Even the cost of transportation and parking to get to and from the appointment is now a major consideration.

Certainly, the increasing cost of health care is a bigger concern, for more people, in an age when a good job is a prerequisite for affordable health insurance . . . and good jobs are not exactly in abundant supply.

Which leads to my runner-up name for today's era: 'The Co-Pay Age.'

Grantham's Latest

Grantham Sounds the All-Clear (Sort of)

Bubbles in global profit margins, risk premiums, and U.S. and U.K. housing prices . . . have thoroughly burst and are in their overcorrection phase with the single exception of U.K. house prices, which I’m confident will do their duty.

--Jeremy Grantham, "The Last Hurrah and Seven Lean Years"; Q1 '09 Letter

Maybe it's just because I agree with him, but money manager Jeremy Grantham continues to provide one of the most comprehensive, astute takes on the current investing landscape. His first quarter newsletter is no exception.

As the paragraph cited above indicates, Grantham believes that the bubble in U.S. housing prices has fully burst, and that prices have now overcorrected. Of course, that judgment is at odds with consensus economic forecasts, which call for continued declines.

P.S.: If you're looking for a term sure to gain added currency, it's "the financial-industrial complex" (go ahead and Google it and see what comes up). I had no idea when I used it in a post this Thursday that Grantham had already beat me to it.

Friday, May 8, 2009

Home Showcase: 2600 Inglewood (Fern Hill)

[As they say on TV after a long interruption: 'now, back to our regularly scheduled [real estate] programming . . .']

You're Invited!

Where: 2600 Inglewood Ave. South (St. Louis Park's Fern Hill neighborhood)
What: All-brick Georgian Colonial with 3 BR/2A, gorgeous hardwood floors (newly refinished), and just under 2,000 FSF How much: $374,900
When: first open house this Sunday (5/10) from 2-4 p.m.
Who: listed by yours truly

What the exterior photo above won't tell you is the wonderful location: just two blocks from Minneapolis' Cedar Lake, and less than 10 minutes to downtown (less to Uptown).

Click here for the full MLS listing info:

Bank "Stress Test" Results

The "Muddle-Through Strategy"

What we’re really seeing here is a decision on the part of President Obama and his officials to muddle through the financial crisis, hoping that the banks can earn their way back to health . . . maybe we can let the economy fix the banks instead of the other way around.

--Paul Krugman, "Stressing the Positive"; The New York Times (5/8/09)

No, there's been no official pronouncement, but as Krugman details, the administration has clearly adopted what pundits are calling "the muddle-through strategy."

A similar approach worked in the early '90's, after U.S. banks suffered from the collapse of commercial real estate.

Will it this time?

Again, Krugman cuts to the quick.

Whether or not you benefit from Washington's solicitous approach to the big banks "depends on who you are: a banker, or someone trying to make a living in another profession."

Thursday, May 7, 2009

"The Scorpion and the Tortoise" defense

Posner: 'Blame Regulators (& Economists)'

Let's place the blame where it belongs. Not on the bankers, who are not responsible for assuring economic stability, but on the government officials who had that responsibility and failed to discharge it. They failed even to develop contingency plans to deal with what everyone knew could happen in a context of escalating housing prices (it had happened in Japan in the late 1980s and the 1990s). Lacking such plans, the government responded to the crisis with spasmodic improvisations, amplifying uncertainty and mistrust and thus retarding recovery.

--Richard A. Posner, "Capitalism in Crisis"; The Wall Street Journal (5/7/09)

The Wall Street Journal is providing an ongoing platform to Judge Richard Posner, the latest installment of which appears on today's Op-Ed page.

(Sidebar: just like celebrities hit the talk shows to promote their new movies, leading commentators have a way of showing up on Op-Ed pages just as their latest book debuts.)

Posner's thesis: 'you can't blame capitalists for doing what is in capitalists' DNA to do.'

Call it "The Scorpion and the Tortoise" defense.

Notwithstanding the scorpion's promise to the tortoise not to sting it mid-way across the stream, causing them both to drown . . . that's exactly what the scorpion does. Its retort: 'I had no choice. It was in my nature.'

All of which cries out for a two-word rebuttal: 'regulatory capture.'

Here's Wikipedia's definition:

Regulatory capture: a term used to refer to situations in which a government regulatory agency created to act in the public interest instead acts in favor of the commercial or special interests that dominate in the industry or sector it is charged with regulating.

All the people -- including Posner -- now calling for tighter regulation of finance are conveniently overlooking one little question: who dismantled all the protections and safeguards enacted after the last systemic crisis, eighty years ago?

Beware the "Financial - Industrial Complex??"

Ironically, Posner, an esteemed law professor and jurist who should know better, makes the classic legal mistake of confusing de jure and de facto causes of what he calls the "Depression of 2008."

(De jure refers to what is technically correct, in a narrow, legal sense; de facto is what's actually true.)

So, the de jure causes of today's mess would be such actions as repealing Glass-Steagall; allowing a handful of investment banks to lever up 40:1; deflecting calls to regulate exotic credit instruments ("collateralized debt obligations?"); failing to act as the credit rating agencies gradually lost their independence -- and credibility, literally; and engaging in overly accommodating monetary policy (again, accommodating whom?).

The de facto cause would be an implicit belief that what's good for Wall Street is good for Washington -- and vice versa.

Assuming there's any difference.

No less than President Eisenhower, leaving office, famously warned of the threat posed by "the military-industrial complex."

He'd likely offer an updated version were he to survey today's business and political environment . . .

Wednesday, May 6, 2009

What Offers Did the Banks See?

More B.S. ("Bait & Switch")
from the Foreclosure Banks

The water cooler is long gone, but that doesn't mean Realtors don't engage in "water cooler talk."

One of the hottest topics at the moment is foreclosures.

Here's how it appears to the (above) average Realtor -- OK, me -- who's had some passing involvement representing would-be Buyers in foreclosure deals this Spring, and has compared notes with a number of colleagues:

--A handful of Twin Cities Realtors appear to have "cornered the market" as listing agents, simultaneously representing anywhere from dozens to hundreds (no typo) of foreclosed homes.

--A small but growing number of foreclosed homes appear to be intentionally priced dramatically below market.

There's nothing wrong with pricing conservatively -- I routinely warn my Selling clients of the risks associated with doing the opposite.

However, there's pricing at or slightly below market, to create a sense of Buyer urgency and elicit more than one offer -- and then there's pricing 30% - 50% below market.

The result, as you might expect, is a feeding frenzy: I've now seen -- and participated in -- several deals where there were more than 15 offers on a single home.

More B.S. ("Bait and Switch") from the Banks

That's not savvy marketing; that's financial bait and switch. It's also a violation of Realtor ethics, and likely, state law. (Note: technically, a listing on MLS is not what attorneys call an "offer to sell." Rather, it's a solicitation of an offer.)

Some more details:

--The sales process accompanying many multiple offers is not exactly a model of clarity, punctuality, or fairness (or so it would seem to someone who's handled more than 100 deals).

To put a finer point on it: often times, the whole process smells.

The listing agent is uncommunicative about the status of the property, any required municipal inspections, or the timetable for responding to offers.

The deadline for submitting offers is either unclear, or not enforced.

The prospective Buyer must get pre-approved by the bank selling the foreclosure, even if they have their own financing (from a more reputable lender) lined up.

Even after the bank has accepted an offer, the listing agent's front desk is often unaware(?), and confirming new showing requests. ("Hmm . . . if we leave the door ajar, maybe an even better offer will materialize.")

Nothing is more annoying to a busy Realtor -- or their client -- than wasting your time on a property that you subsequently find out was already sold when you showed it (MLS rules strictly prohibit this, by the way).

Conflicts of Interest

Of course, the biggest issue of all regarding the conduct of foreclosures in multiple offers is, who won (and why)?

Surprise, surprise, in many situations the winning bidder is represented by . . . . wait for it . . . the agent representing the bank!

This is called dual agency, and is fraught with conflicts of interest. Perhaps that's why 42 states -- but inexplicably, not Minnesota -- prohibit it.

Even when the winning bidder is represented by another agent, it's hardly evident how -- or why -- that bid won.

I've represented one client now who, in the span of three weeks, has lost out on three multiple offers, each time bidding anywhere from 10% to 30% over asking price, within 48 hours of the property hitting the market. Other Realtors tell me they've participated -- and lost -- on even more multiple offer deals.

Is this just sour grapes, or, is something else going on?

"I'm Never Going to Tell. Hang me"

It's certainly possible that the bank chose the highest and best offer, after carefully weighing the various offers' financing, closing dates, and other key terms.

However, given all the murkiness surrounding these deals, you certainly wonder.

The biggest question on the lips of the Realtors representing all the runners-up -- many who also offered well over asking price: exactly what offers did the bank actually see?

The potential for mischief -- or worse -- in foreclosure deals reminds me of a favorite joke:

A posse hunting a bank robber finally apprehends the suspect. However, he doesn't speak English, so the head of the posse has to find an interpreter. Through the interpreter, he tells the robber, "if you don't tell us where you hid the money, we're going to hang you."

The interpreter relays the warning to the robber, who blurts out (in Spanish): 'I hid it under a big oak tree a mile west of town.' The interpreter pauses a moment, then tells the posse leader (in English): 'he says, 'I'm never going to tell, hang me.''

Tuesday, May 5, 2009

Wall Street, Lions and Zebras

I do not think [financiers] can be blamed for [the financial melt-down] any more than one can blame a lion for eating a zebra. Capitalism is Darwinian.

--Judge Richard Posner, "A Failure of Capitalism: The Crisis of '08 and the Descent into Depression"

Personally, I think Posner lets Wall Street off the hook a little too easily.

I don't have a problem with lions eating zebras, either. But that's not exactly what happened.

Rather, one specific pride of lions deposed the game warden, installed one of their own in his stead, then decided to cull all the rival lions and get the other animals to herd the zebras into holding pens.

What a surprise, then, when the supply of zebras gets inexplicably low, and the entire food chain is distorted and disrupted . . .

Distressed Markets Show Improvement

What Goes Down . . . Must Come Up?

When buying is cheaper than renting, markets begin to turn. At the current rate of sales, there is less than three months of inventory in the Sacramento market. In normal times, that would indicate a seller’s market. Except these are not normal times. The unemployment rate in the county is 11.3 percent, the highest in decades. That will prompt more foreclosures all by itself. Furthermore, banks have lifted various processing moratoriums that lowered foreclosures last fall.

--David Streitfeld, "Where Home Prices Crashed Early, Signs of a Rebound"; The New York Times (5/5/09)

Nice piece in the NYT encapsulating the competing trends roiling the housing market nationally.

On the one hand, housing prices -- especially foreclosures -- are tantalizingly cheap.

On the other hand, the severe recession is hamstringing people's purchasing power, and ability to qualify for mortgages.

No surprise, then, that cash purchases and various types of alternative financing (contracts for deed, Seller-provided second mortgages) are on the upswing.

Monday, May 4, 2009

Motivated Buyers

Return of the Motivated . . . Buyer??

For as long as anyone can remember, all anyone's talked about in the housing market are motivated Sellers.

As in, desperate for a deal, because their house has sat on the market for eon's and they're running out of time to make a move. Or, if they don't sell, they'll lose the house to the bank (assuming, of course, they have any equity left in it -- or ever did).

Now, I'm starting to hear and see isolated instances of Buyers feeling pressure to buy (imagine that!).

It's certainly not the case in every Twin Cities neighborhood, or at every price point, but the number of motivated Buyers seems to be creeping up.

Here are a couple of the reasons:

--First-time Buyers want to close before the end of the year to take advantage of the $8,000 tax credit.

--Buyers know that, while there are a growing number of programs to assist eligible (mostly first-time or lower-income Buyers), many of the programs have limited funding that is quickly exhausted.

--Buyers who've been looking for bargain-basement foreclosures and have lost bidding wars (yes, they're popping up again) are nervous that the next wave of foreclosed homes won't be as attractive -- or attractively priced -- as the last wave. Or, there won't be another wave.

--Buyers looking for what everyone wants -- homes in a good location, that are nicely updated, have a sensible floor plan, etc. -- are disappointed by how limited their choices seem to be in certain, higher demand areas of the Twin Cities. Instead of waiting for an even better price, they're increasingly nervous that they're going to be outmaneuvered by another Buyer willing to pay close(er) to asking price.

What all of these situations have in common is the fear of loss.

When Buyer psychology tips from fear of buying too soon, to fear of missing out . . . the market's definitely firming up.

Turning 50!

Big Milestone Ahead

Now that I'm on the verge of turning 50 (undisclosed date later this year), I find myself following the same health advice that I give to clients who own older homes (and which I followed when I owned one): wait till three things break, then fix them all at the same time.

Realtor Compliments

Realtor "Atta-Boy": 'Nice Listing!'

A new listing has a surprising number of parallels with the opening of a Broadway play.

There's the opening night anticipation.

There are the hopes (and fears) about whether the audience (prospective Buyers) will like it.

And there can be a sense of dread about what the toughest critics will have to say.

In real estate, the toughest critics are invariably . . fellow Realtors.

One of the best -- and earliest -- signs that a new listing is going to meet with a strong reception is when other Realtors weigh in with a "nice listing," "Congratulations," or the equivalent.

What they're really saying: the home is attractively priced, well-staged and presented, and -- perhaps most importantly -- likely to sell quickly.

P.S.: notwithstanding the foregoing, I like to tell clients that the only feedback I'm really interested in . . . is a full price offer from a well-qualified Buyer. Even better: two such offers!

Saturday, May 2, 2009

Realtor Ball & (Key)Chain

If you've been around a Realtor lately, you may notice that they're "clanking" more than usual.

Thanks(??) to a recent security upgrade, all Realtors must now carry around a small plastic fob that generates random codes. To access the MLS ("Multiple Listing Service") database, Realtors must enter the random code in addition to their User ID and Password.

Practically, the best way to have the fob accessible is to add it to your key chain (news flash: many Realtors' key chains already resemble mini-boat anchors, at least by weight).

So, whenever you log on to MLS now, your key chain must be handy.

Thanks, MLS.

Sellers Offer Goodies in lieu of Price Cuts

A Price Cut By Any Other Name

When is a home price cut not a price cut?

When it's billed as "Seller financing" (or other creative Buyer inducements).

In a soft rental market, landlords will do practically anything to entice prospective renters without actually lowering their nominal rental rates.

By far the most popular gambit is free rent (typically, one or even two months). Next most popular are "freebies": free plasma TV, free tickets to Hawaii, etc.

Similarly, home owners who are loathe to take (more) price reductions are starting to offer other Buyer incentives.

Anecdotally, I'm seeing more instances of Sellers who are trying to move upper-bracket homes dangle attractive financing terms: second mortgages on attractive terms; contracts for deed (essentially, a Seller-provided mortgage, but one where title doesn't transfer until the last payment is made); etc.

Which makes sense: one of the big impediments to selling an expensive home today is the premium attached to jumbo loans.

I've yet to see the "Buy this house, get the [collector sports car in the garage free] pitch," but it may very well be coming . . .

Friday, May 1, 2009

Hot Listing . . or Hot Potato?

Be Careful What You Wish For -- RE Version

I got a courtesy call from an acquaintance the other week to let me know that they were "going to go with another Realtor" (yes, it happens -- even to me!).

I knew the owner was contemplating selling, but didn't know when, and also knew that one of their neighbors and close friends was a Realtor.

So it wasn't exactly a shock.

And believe it or not, I do appreciate such calls, because: 1) you like to know where you stand; and 2) it gives me a heads up on an upcoming property that one of my Buyers may be interested in.

Whatever disappointment I was harboring quickly turned to relief when I saw the home's listing price today.

In a word, "Yoww!"

The price is easily 25% over market, and going toe-to-toe with at least 3 other, similar properties literally priced $100k-$200k lower.

The homeowner's chances of selling for anything close to their asking price, in this lifetime: zero. At least IMHO, as they say ("in my humble opinion").

In the meantime, you can speculate that a couple things will happen.

The owner will get increasingly annoyed that "nothing's happening," and suspect that the Realtor "isn't doing enough" (on this second score, they may even be right -- see below).

The Realtor will get increasingly annoyed with the Seller, whose inflated expectations defy all manner of negative feedback.

The Realtor's time and marketing dollars -- assuming they intend to commit any -- will be wasted, because the property is unsaleable.

And the home's time on the market will steadily mount, making prospective Buyers even more critical -- and aggressive on their offer price (assuming they offer).

As Realtors like to say, "if I can't be your first Realtor . . . maybe I can be your last."

"Rehab Glass" Half Empty

In Buyer's Market, Rehab Discount Widens

Less than three years ago, the discount on a solid-but-dated home was quite small -- maybe 10%.

Today, at least anecdotally, it seems to me that the corresponding discount has widened considerably, to perhaps double that. (Note: at any given time, there are two kinds of Buyers for rehab properties: owner-occupants, and resellers -- "flip" refers to something illegal).

What explains the change?

Reasons #1, #2, and #3 all have to do with the economy: it stinks. Unemployment is up, confidence is down, and the supply of homes needing rehab is much greater. Meanwhile, mortgages may be cheap, but they're only available to borrowers with strong credit.

Related to all the foregoing is a palpable change in psychology.

When the market's going up, contemplating a rehab is exciting. It's easy to see potential everywhere you look -- and imagine the pay-off waiting for you when it comes time to sell.

In a soft market, however, prospective Buyers focus more on risk.

Will the market drop before I'm ready to sell? Is my budget and timetable for doing the work realistic? What if subsequent Buyers don't like the finished product?

And certainly this question: will I have an even better opportunity if I wait?

Needless to say, such psychology puts a damper on Buyers' enthusiasm -- and consequently, what they're willing to pay for homes needing substantial updating.

Of course, the flip side is this: precisely because of the foregoing mindset . . . there's a lot less competition for the multiple opportunities out there now.