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Tuesday, June 30, 2009

IPO's, REO's & Market Manipulation

Bank Foreclosure Sales Recall '90's IPO's

We've seen this movie before.

Specifically, many of the practices embraced today by banks selling foreclosures, or Real Estate Owned ("REO"), echo tactics used by Wall Street more than a decade ago to sell "hot" tech IPO's ("initial public offerings").

Consider these 3 parallels:

One. Artificially low prices.

At the height of the tech boom, it wasn't uncommon to see IPO's priced at $15 or $20 a share skyrocket to $100 or more the first day of trading.

Similarly, I can point to dozens of foreclosure sales in the Twin Cities this Spring that have attracted at least 10-15 offers, and sold for huge premiums over the artificially low list price.

In each case, the effect is to whet "investor's" appetite -- also known as "pump demand" -- for the next offering. Pretty soon, you have a full-blown feeding frenzy on your hands -- at least in the short run.

Two. Favored insiders.

In a practice called "spinning," Wall Street firms doled out cheap shares to favored customers -- existing and prospective -- who could quickly sell to dumb outsiders -- the public -- clamoring to get in on the "boom."

With foreclosure sales, the favored customers are the Buyers represented by the listing agents -- who also represent the banks!

Tech IPO's -- The Sequel?

Imagine you're conducting an auction with multiple bidders. If Buyers #1, #2, or #3 -- all of whom have their own agent -- submit the winning bid, you split the commission.

However, if Buyer #4, who happens to be your client, submits the highest offer, you get all of the commission.

As listing agent, you see all the other offers.

Now, guess how often Buyer #4 prevails?

Interestingly, such "dual agencies" are enough of a red flag that I've now seen an off-shoot practice: the listing agent steers Buyers to a supposedly independent agent in return for an undisclosed kickback.

Three. Legions of Losers.

We all know how the late '90's IPO boom turned out: eventually, the IPO market got sated, tech share prices collapsed, and the ensuing bloodbath brought down the rest of the stock market (and economy) with it.

We all know what that ushered in: free money, courtesy of the Fed, to revive a prostrate economy (be careful what you wish for!).

Do we really want to see what happens when the foreclosure feeding frenzy subsides, and the "winners" of all these bidding wars wake up with hangovers? What then: REO's -- the Sequel?? Pump-and-Dump . . and Dump again?

Even if foreclosure Buyers didn't overpay, it hardly excuses all the market manipulation on display, and what should instead be a focus on "discovering" -- honestly -- market-clearing prices for a huge class of assets.

If government is serious about (re-)regulating financial markets, a good place to start is policing how banks sell their REO's.

Spec Builders Play it Safe(r)

More Singles & Doubles, Fewer Home Runs

Baseball batters facing a strong pitcher and defense adjust by hitting for singles and doubles rather than home runs.

Similarly, in a tough economy, more builders and contractors appear to be adjusting by hitting economic "singles" and "doubles" rather than home runs.

So, instead of paying $400k-$600k for a lot (or tear-down), than putting up a $1.5M-$2M home, I'm seeing more instances of $80k-$140k lots being turned into $250k-$350k new homes.

Or, the same contractors are paying the bills by doing $100k-$250k major remodels.

No, the margins aren't as good, but it keeps crews busy (and intact). It also takes a lot less time to sell a $300k new home in a tough economy than a $2M home.

The Twin Cities neighborhoods that appear to be benefiting most from this "downshifting" trend have three things in common: 1) good location; 2) older, often under-sized housing stock; and 3) relatively modest prices

Where's that?

Neighborhoods such as Minneapolis' Longfellow and Seward neighborhoods, St. Louis Park's Birchwood neighborhood, and parts of Golden Valley and Hopkins.

Monday, June 29, 2009

Housing Market Psychology

"Can't Sell" vs. "Won't Sell"

Much attention has been paid to all the homeowners who want to sell now but literally can't afford to, because they owe more on their mortgage than their home is worth (in Realtor's parlance, they're "underwater").

Unless they can get the bank(s) to reduce their principal or simply default, they would need to write a check at closing for thousands or even tens of thousands of dollars.

However, anecdotally, I'm seeing more instances where Sellers are declining to sell for psychological rather than purely economic reasons.

Specifically, they're not willing to sell until they can break even (because they still have equity in their home, they would still receive money at closing rather than have to pay it).

Latent Supply

This isn't surprising to behavioral psychologists, who've long noted that loss aversion is a more powerful incentive than scoring gains.

However, Sellers' "need" to break even suggests that there is at least some latent supply that improving conditions will unlock.

That, in turn, will act to keep the recovery subdued.

Of course, there is also "latent demand" waiting for signs that housing prices have finally stabilized.

At least in the short run, the direction of housing prices may depend on which of these two groups -- "latent buyers" or "latent sellers" -- is larger.

Urban Planning - Edina Style

Keeping Country Club . . . Country Club

My law-practicing days (in the early '90's) are fading fast, but I do recall a basic principle about constitutional (vs. unconstitutional) zoning restrictions: general rules with a strong public policy component work, overly specific ones don't.

So, cities that don't want Wal-Mart's can't simply pass an ordinance saying, "no Wal-Mart's." Rather, they have to pass an ordinance prohibiting "retail buildings bigger than 200,000 square feet within city limits."

What makes me think of this is various local cities' efforts to control tear-down's, and specficially, McMansion's.

The city's goal may very well be to ban tacky, lot-devouring McMansion's. However, for legal reasons, the city's tack has to be more general.

Like, "no tear-downs of historically significant, pre-1944 residential structures in the Country Club neighborhood" (my paraphrase).

That's how Edina does it, anyways.

Is it effective?

Take a drive through Country Club, and you'll have your answer.

Sunday, June 28, 2009

Michael Jackson Tribute

Street Tribute to Pop King

I don't know what's on car stereos around Lake Calhoun or Lake Harriet this weekend, but in New York, it's Michael Jackson.

From swanky Fifth Avenue (across from where Jackie Kennedy lived), to ethnic, blue collar Queens, all I've heard is vintage Michael Jackson songs ("Beat it," "Thriller," etc.)

Of course, given that it's New York, the music was blaring way too loud . .

Skyscraper Jungle

"Sliver Buildings" Take Their Place in NY Skyline

[Note to Readers: still in New York City; this is another "dispatch" in between kid-centric activities]

If you like skyscrapers, there's no better place -- at least in North America -- than New York City. All the buildings in downtown Minneapolis would barely fill up Rockefeller Center, which itself is perhaps 5% of Manhattan's commercial office space.

Since living here in the late 90's, though, there's a new "species" in the skyscraper jungle: 'the bamboo shoot.'

Also known as "sliver buildings," these are incredibly tall, incredibly narrow buildings: imagine a 60 story-plus building on the footprint of a two-story colonial house. Literally.

Ten years ago, I noted perhaps a half-dozen of these strange species; today, Manhattan easily has dozens.

Why the proliferation?

My guess is a combination of ever-more limited land, plus advancing technology.

P.S.: As a former resident of one, I have some advice to would-be tenants: check how many elevators the building has -- and if they work!

Saturday, June 27, 2009

Goldman Sachs, Culprit

Regulatory Capture -- Exhibit A

Goldman Sachs made out on the housing bubble twice: it f---ed the investors who bought their horsesh-t CDO's by betting against its own crappy products, then it turned around and f---ed the taxpayer by making him pay off those same bets.

--Matt Taibbi, "The Great American Bubble Machine"; Rolling Stone (July 9-23, 2009)

Too subtle for you? Try this one, from Taibbi's blog:

Imagine a meat company that bred ten billion rats, fattened them on trash and sewage, ground their bodies into chuck, and then sold it all as grade-A ground beef to McDonald’s and Burger King, right under the noses of the USDA. [Securitized subprime mortgages] are exactly the same thing, only with debt instead of food. We’re eating it, they’re counting the money.

Looking for a culprit for today's financial mess? (plus today's oil price roller coaster, plus the '90's Internet stock bubble, plus AIG's black hole for taxpayer dollars -- plus a lot more).

Taibbi makes a damning -- and compelling -- case that Wall Street's fingerprints -- and specifically, Goldman Sachs' --are everywhere.

The piece reads like the stuff of conspiracy novels, which even Taibbi acknowledges at the end.

However, much of what he alleges -- the players, their business practices, the regulations they lobbied for (and thwarted), who profited -- is a matter of public record.

The more I see and read, the more I'm convinced that slow, creeping regulatory capture is the meta-problem at the root of all our other financial problems. Taibbi's piece is Exhibit A.

Read it, and decide for yourself.

Friday, June 26, 2009

S.C. Gov. Mark Sanford

"Hiking on the Appalachian Trail"

How long do you think it takes before "I'm hiking on the Appalachian Trail" becomes -- at least in certain circles -- a catch-all alibi?

As in, "I'm hiking on the Appalachian Trail."

Not, "I'm not drinking with buddies and watching football."

P.S.: might have to adapt it for Minnesota. Maybe, "I'm canoeing in The Boundary Waters"??

Closing Time

"Avoid Fridays"

Don't fill up your gas tank just before Memorial Day weekend.

Don't move at the end of the month.

And, if you can avoid it, don't close on a Friday.


The title companies are swamped then, especially this time of year. Edina Title, which is representative, is literally seven times busier on Fridays than the next busiest day.

Admittedly, it's not that big a deal.

The odds of a mistake are still less than 5%, and if there is one, it will be caught and fixed (at least, Edina Title will). However, you may find yourself delayed significantly by closings earlier in the day. Or at the least, dealing with a closer who's under more time pressure than usual.

So, pick another day, as long as it's not Monday: that's when the overflow from Friday gets dealt with.

P.S.: One more: don't book your airlines tix on a weekend. The airlines know that that's when people buy the most tickets -- and make sure their fares are highest then (true).

Thursday, June 25, 2009

NY Dispatches, Cont.

Life in the (Really) Big City

It could just be that it takes me a day or so to adjust to "life in the (really) big city," but from previous trips, I've come to expect a "New York moment" shortly after arriving (half a day, max).

Last time, it was paying for a Wall Street Journal ($1.50) with a $20, and getting $3.50 back. When I said I had just given him a $20, the vendor insisted I'd given him a $5, whereupon I pointed to the $20 on top of the register ("who are you going to believe, me or your own lying eyes??").

According to my (native NY)in-laws, the mistake was mine: whenever you pay for a small item with a large(r) bill in NY, you announce, loudly, "I'm-giving-you-a-$20," precisely to avoid this type of "misunderstanding."

Nevertheless, I keep having "misunderstandings."

Last night, I bought two packs of fig bars (a mainstay at the corner groceries here, and a staple of my diet when I lived here in the late '90's). Cost: $2.50.

This morning, I grabbed two more packs and handed the cashier $2.50.


Cashier: it's $3
Me: They were just $2.50
Cashier: The price went up.
Me: Since last night??

If I were wearing plaid shorts and a camera, I'd understand. But I wasn't.

I walked a block and paid $2.50.

Housing, Leverage & the Recession

Combustible Mix

The severity of this economic downturn is rooted in the household leverage crisis, which in turn is closely related to the housing market. If the housing market continues to deteriorate, then further de-leveraging of the household sector will likely keep a lid on any rebound in consumption. In other words, the future of consumptionand house prices are closely linked.

--"Housing Bubble Fueled Consumer Spending"; The Wall Street Journal (6/25/09)

Quick summary of a nice piece in today's WSJ:

--If you borrow a lot against an asset that then falls in value . . . you're in trouble.
--If lots of people do that . . . the economy's in trouble.

Read the piece, though; the authors’ methodology is quite clever (and their logic is compelling).

Super! . . . Again

"Drum Roll Please . . . ."

No, there's no Oscars or Emmies for Realtors. The closest there is (so far) is the Mpls-St. Paul Magazine's annual "Super Realtors" list.

So it's nice to be selected again. Realtors just got notified by letter; the list is published in the fall, and is supposed to identify the top 3% or so of Twin Cities Realtors.

I've written previously about the list ("Many Are Text-Messaged, Few Are Chosen"), so won't repeat myself here.

The only thing that I can add, one year later, is that repeat selections are not influenced by whether or not you pay Mpls - St. Paul Magazine to "leverage" the award (by buying an expanded profile in the print magazine, licensing the award logo's, etc.).

Either that, or they're not keeping very good track, because I didn't pony up . . .

Dispatches from NY

Barry Ritholtz Talk

I'm in NY the next few days, mainly to serve as a chaperone to a few kids (at least they're my own!).

However, I did manage to break away to hear Barry Ritholtz, of The Big Picture blog (see, my Blog Roll) at a midtown Barnes & Noble. Or, more accurately, see him sign his new book, Bailout Nation -- family responsibilities came first, and I got there at the tail end.

I still caught one good tidbit, though.

Ritholtz speculates that the reason why JP Morgan Chase has held up so much better than Citigroup is that its CEO, Jamie Dimon, was the one-time heir apparent at Citigroup, before being passed over.

Privy to all the excessive risk-taking at Citigroup, Dimon made sure that JP Morgan Chase steered clear (relatively speaking).

P.S.: Showing up late meant I didn't get to engage Ritholtz on a topic nearer and dearer to my heart: why he heaps so much scorn on Realtors (to be fair, his shots at NAR, the National Association of Realtors, are all too often on the mark -- unfortunately).

Wednesday, June 24, 2009

Summer Reading List

Recommendations: Stiglitz, Lewis, Grantham

All right, so no one's ever curled up with Joseph Stiglitz's latest 10,000 word economic tome on a Summer beach blanket. And Floyd Norris' missives don't have quite the same tension and suspense of a thriller by Tom Clancy or John Grisham.

However, if you can handle some summer-time intellectual stimulation -- indeed, suffer withdrawal if you're deprived of it -- you could do worse than googling the following writers:

Michael Lewis, Matt Taibbi: the youngest and most irreverent (or, in Taibbi's case, out-and-out raunchiest) of today's top drawer business writers. Lewis' Liar's Poker, about his brief tenure at Salomon Brothers in the '80's, remains one of the best "inside Wall Street" books ever written.

Warren Buffett: Buffett is how Mark Twain would sound if he understood the stock market. Interestingly, Buffett's actually a much better and pithier writer than practically all the people who write about him. So, better to go directly to the source (try any of his annual Berkshire Hathaway shareholders' letters).

Jeremy Grantham, Joseph Stiglitz, Simon Johnson: weighty, but worth it. Check out Stiglitz's recent piece in Vanity Fair, "Wall Street's Toxic Message," exploring the likely shockwaves from today's financial crisis.

Floyd Norris: the Harry Truman of the financial journalists: decent, full of common sense and (occasionally) righteous indignation.

Tom Friedman: business and economics is not his main thing these days -- politics, specifically, Mideast politics, is. However, when he does write about finance, he's invariably superb.

Who's missing on this list?


Several make honorary mention, including: Peggy Noonan (The Wall Street Journal), Caroline Baum (Bloomberg); and Margaret Carlson (The Washington Post). However, at least in my subjective opinion, none consistently crack the top ranks.

Why is that?

Maybe for the same reason women are underrepresented in the ranks of Fortune 1,000 CEO's, hedge fund managers, and senior economists.

Which would be the subject of an entirely different post . . (I hear Larry Summers has some ideas on that -- or used to, until it cost him the Presidency of Harvard University).

Tuesday, June 23, 2009

Lying Realtors

Reason Not to Lie #37

Lying is hard, telling the truth is easy. By definition, every good Realtor juggles: multiple clients, dozens of showings, lots of parallel deals at varying stages. It's hard enough keeping all the details straight and presenting them coherently to your client(s); not tripping yourself up in a web of lies would seem to increase the "difficulty factor" exponentially.

--Ross Kaplan, "Freakonomics Rebuttal"; City Lakes Real Estate blog (3/23/08)

Faithful readers of this blog might be surprised to hear me say that, as far as I can tell, Realtors seldom lie -- and good Realtors never do.

There are multiple, reinforcing reasons for that: it's unethical, it's bad business, it's hard to do (see above), it's easily found out, etc., etc.

On that last score -- it's easily found out -- I heard a good anecdote recently about a Realtor who felt the need to "embellish" the turnout at a Tuesday broker open. If you didn't know, at least in the Twin Cities, the custom is for Realtors to tour the new inventory each Tuesday from 11 a.m. to 1 p.m.

Instead of simply reporting to his clients that, for whatever reason, the turnout was poor, the Realtor "borrowed" a slug of colleagues' business cards to leave out on the client's dining room table.

What happened next?

The client wanted to hear the broker open feedback directly from "the horses' mouths," and decided to call the agents directly.

When not one of them turned out to have actually attended the broker open . . . the client did what any client would -- and should -- do: fired the Realtor.

Bold Mortgage Prediction!

Mortgage Prediction: More Red Tape

Clients know that I demur when asked where I think interest rates are headed.

If Ben Bernanke, Chairman of the Federal Reserve, doesn't know with a high degree of confidence -- what chance does anyone else have?

That said, here's one major development that's easy to predict: there will be more red tape.

That's so because government, by default, is going to be more and more involved in the lending process.

In fact, it's likely to be the loan originator, the underwriter, the appraiser, the insurer, the servicer, and the securitizer (did I forget anything?).

Since the full nationalization of Fannie Mae and Freddie Mac almost a year ago, it's already playing many -- if not all -- of those roles.

If the old focus was making money (through any and all means), the new focus is not losing it.

That mindset -- plus government "process" -- is not likely to breed expediency or economy.

"Housing Market for Dummies"

Upper Bracket Squeezed by Jumbo Bottleneck

Mortgage Update: Jumbos Remain Elusive

At a time when some mortgage products are showing signs of life, jumbo mortgages are hard to get and expensive, making it difficult for many would-be move-up buyers to take action.

--Minneapolis Association of Realtors (6/22/09)

Want a quick, simple handle on today's housing market?

Take $417,000, the limit for conforming loans (vs. jumbo loans); then divide by 80% (that builds in a 20% mortgage, which is the typical threshold for avoiding mortgage insurance).

The result: low $500's.

Below that threshold -- especially well below, where first-time buyer incentives dominate -- the Twin Cities housing market is doing OK.

Above, well, things aren't so great.

Monday, June 22, 2009

Goldman Sachs' 9-Plus Lives

Hen House Preservation Principles

"Goldman to make record bonus payout."
--headline, (6/21/09)

Principle #1: When presented with overwhelming evidence that the foxes have taken over the hen house . . . stop adding chickens!

Principle #2: It's not hard to figure out -- at least in the short run -- which foxes stole the most chickens: look for the ones with the bulging bellies (see, headline).

At the height of the financial crisis last fall, Goldman Sachs "shapeshifted," in record time, from a Wall Street investment bank to a bank holding company. As an investment bank, Goldman Sachs wasn't eligible for direct aid from the Federal Reserve; as a bank holding company, it was.

Such aid was promptly forthcoming -- by the tens of billions. Exactly how much of a lifeline that aid constituted isn't known (and may never be). However, it never hurts to have another $10 (or $30) billion of capital and federal guaranties backstopping you in the midst of the worst financial melt-down since The Great Depression (one that you helped precipitate).

Now, of course, the financial markets (if not the broader economy) appear to be recovering, and Goldman Sachs has decided that the pay restrictions that came with the federal aid are unduly onerous.

Voila! The government gets its money back.

Want to bet what the company's next move is? (assuming, of course, that the financial markets remain benign):

Take itself private, so it doesn't have to publicly disclose its pay practices anymore.

[Not sure how much any of that had to do with real estate -- but it sure felt good!]

3 Weeks ahead of Strib

You Read it Here First!

Nice to be first with some good, cutting-edge housing market insights -- plus some extra analysis and context.

Compare what ran in the Strib yesterday, with my May 27 post:

The banks are selling, but banks aren't buying . . . the result: a one dimensional housing market dominated by first-time Buyers.

--"In Real Estate Fire Sale, Sellers Can Get Burned"; Star Trib (6/21/09)

Now, here's my crack at explaining the same phenomenon, back in May:

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

--"Escalator Short-Circuit"; City Lakes Blog (5/27/09)

Real Estate & Technology

"The More Things Change . . ."

Taken to their logical conclusion, innovations like Twitter are inevitably leading us, I suppose, to some sort of real-time, Borg-like mind meld (my apologies to Star Trek fans).

And certainly, advancing technology is affecting how real estate is bought and sold (more posts on that in the works).

However, I think it's fair to say that a good percentage of the advances relate to the speed and reach of people's communication.

So, Susan Boyle is a nobody yesterday, and famous today (and back to a nobody tomorrow?). Or, the street riots in Tehran are on display worldwide, notwithstanding the regime's efforts to suppress eyewitness accounts.

In the meantime, real estate itself is surprisingly technology-resistant.

At the end of the (24-7) day, it's still about bricks-and-mortar, or land, or some combination thereof. That's so even if the "bricks-and-mortar" are now high-tech composites, and the central nervous systems of buildings -- homes included -- are increasingly sophisticated.

"The more things change . . ."

I find that both a bit of a relief, and reassuring.

It reminds me of an experience I had in law school, when I argued a real estate case in moot court (simulated courtroom practice for novice attorneys, in front of a panel of attorney-judges).

Although I did well, advancing three rounds, I remember being thrown by one of the judge's questions.

In particular, he wanted to know why I couldn't "cite any legal authority more recent than 1892" to support one of my arguments.

A bit flustered, I said that, actually, that still appeared to be the governing precedent.

Afterwards, the judge came up to me, and told me I should have "stuck to my guns" when he had pressed me.

"A century-old case is recent when it comes to real estate law," he pointed out (correctly).

Foreclosure "Bait & Switch"

One-Item "Bait & Switch"

Bait and switch (noun): 1 : a sales tactic in which a customer is attracted by the advertisement of a low-priced item but is then encouraged to buy a higher-priced one.

--Webster's dictionary

Can "bait and switch" ever involve just one item?

I'd argue that it can.

Normally, of course, there's the low-priced "bait." When that's unavailable -- and it's always unavailable -- the customer is presented with the much more expensive "substitute."

With many foreclosures lately, it certainly would appear that the "bait" instead consists of the artificially low list price dangled in front of the public.

The "switch"?

The real -- and dramatically higher --price.

How much higher?

That all depends: on how many bids come in; how motivated -- and flush -- the bidders are; and on how many rounds of manipulative bid-raising they'll tolerate before they storm off.

If you want to auction off the property, fine, but then do it in public, and don't call for "highest and best" offers.

Bank Shareholders Cum Taxpayers

So what's so bad about all this? Two things.

One. Listing a $100k home for $50k (or $25k) is deceptive advertising. (See, "Sold Price: Almost 5x Over Ask").

We don't let automakers, pharmaceuticals, or cigarette makers (er, scratch that one) engage in such practices -- and we shouldn't let banks selling foreclosures do it, either.

Two. The banks own the foreclosures, but who owns the banks?

If it's a busted, toxic lender like Washington Mutual, Countrywide, or IndyMac, the answer is: us. That's because the government brokered their sale -- or what was left of their carcasses -- to mega-banks kept alive by taxpayer bailouts. Of course, that was after the FDIC -- taxpayers again -- made depositors whole.

Bank shareholders cum taxpayers have an interest in seeing that foreclosures are expeditiously sold off in a manner that is fair, transparent, and serves to maximize each home's selling price.

Instead, in many cases the process appears to be opaque, rigged, and designed to repel any Buyer unwilling to play the required games.

Saturday, June 20, 2009

Sold Price: Almost 5X(!) Over Ask

List Price: $17,900; Sold Price: $85,100

Sure, it was a mess. But this beat-up, bank-owned home was in a prime location -- just a couple blocks from the Mississippi, in Minneapolis' Longfellow neighborhood (the land alone had a tax assessed value of $44k).

So it wasn't surprising to see this home sell quickly.

However, even by the standards of recent South Minneapolis "foreclosure feeding frenzies," the selling price -- almost five times the asking price -- was still a shocker.

Want to guess how many offers came in on it?

Bonus (non-rhetorical) question: who was the seller?

Answer: Washington Mutual, one of the biggest peddlers of toxic loans before it blew up and was seized by the FDIC last September (what was left of its carcass was bought by JP Morgan Chase).

P.S.: in what is close to a record for turnaround time, the Buyer did a gut rehab and just re-listed the home for $239.9k.

Next Post
: Foreclosure Bait and Switch

Friday, June 19, 2009

City Lakes Blog Milestones

500-Plus Posts? Phew!!

After almost 500 posts spanning a year and a half, the City Lakes Real Estate blog is approaching several key milestones --and logged several, notable distinctions:

Number of discrete visitors: 10,000
Number of page views: 20,000
Number of countries represented by blog visitors: 37
Posts run in 9 (RealClearMarkets is the leading aggregator of U.S. --and world -- business and economics opinion pieces. Samples: "The Bob Newhart Economy"; "Is it Too Late to Bail Out Enron?")
Mentions in Star Tribune, St. Paul Pioneer Press: 7
Blog posts ranked in Google "top ten" worldwide: 6 (discussing these subjects: Realogy and bankruptcy; Realtor letters to clients; multiple offers; Edina's Westin Galleria; the critique of Realtors in the book, Freakonomics; and Case-Shiller's housing statistics for Minneapolis). A seventh, "Real Estate and Inflation," is in the top 20 (and moving up with a bullet!).
New York Times corrections attributed to: 1
Technorati blog rank (out of 20 million-plus worldwide): 634,232

Thanks for visiting!

Realtor-Friendly Edina

Best (& Worst) Local Cities for Realtors

Just like people, some cities have their act together, some don't.

Ranking very high in the former category: the city of Edina.

Admittedly, it's not the most important thing for Realtors (or their clients), but it does come up.

Examples include: getting information about zoning and building permits; compliance with any applicable truth-in-sale of housing ordinances; and navigating city rules regarding things like set-backs and remodeling.

Cities That Twitter

So, from a Realtor's perspective, what separates a well-run city from one less so?

Here's my (subjective) list of criteria:

--Well-designed and current Web site
--No maddening "phone trees" or voice mails that never get returned
--Being routed, quickly, to an actual human being who has jurisdiction over the issue/question you're dealing with, who's authoritative and knowledgeable.

On all these counts, Edina scores superbly (I won't name a city that doesn't score so well, but it rhymes with "Schminneapolis").

P.S.: to my knowledge, the City of Edina is the only local municipality that now twitters!

New York Times' "Great Homes and Destinations"

"What You Get For . . . [A Whole Lot Less]"

If you want a window on the national housing market the last 3 years or so, all you have to do is look at The New York Times' weekly real estate feature, "Great Homes and Destinations."

The feature's signature headline, "What You Get For . . . " is followed by a price; next comes profiles of three homes nationally selling for that price, complete with flattering interior and exterior shots.

Since the market peak in 2006, the "showcase" price has come down dramatically: the Houston home pictured above is currently on the market for $399,000(!). Likewise, the amount of house that the "price of the week" can buy has gone up dramatically.

Even allowing that Houston housing prices are famously modest (true), this house is loaded: four BR's up, hardwood floors, high-end finishes, pool, landscaping, etc.

Hard to imagine what $1M would buy in Houston today!

Thursday, June 18, 2009

Amateur Photography

"It's a Plane, it's a Bird, it's . . it's . ."

OK, so it's not quite as embarrassing as emerging from the restroom with a piece of toilet paper stuck to your shoe and not knowing it.

However, here's betting that that bright light in the top middle of the window (pictured above) isn't an extremely bright (and low-hanging) streetlight, or some other UFO.

Give up?

It's the flash from the Realtor's (or Realtor's assistant's) camera. (No, it's not my listing -- and to be fair, it's not exactly a $1M property.)

How do I know for sure?

Several other photos have the same "street light" effect, in the same location.

Fixing Wall Street (and other things)

Blueprint for Fixing a Broken System

If something exists, it must be possible.
--Amy Lovins

After decades of ineffective band-aid's, senior government officials finally "bit the bullet" and commited to a long-term fix.

First, they came up with a design that would meet 21st-century needs. Then they raised enough capital to overhaul the old, antiquated system, and implement the new one. Finally, acting on the public's behalf, key politicians stood up to special interests who didn't want to see the status quo changed.

Sounds like a blueprint for fixing Wall Street and the financial system, right?

Actually, it describes the $300 million, 35W/Hwy 62 Crosstown Project in South Minneapolis, currently in-progress and due to be completed by the end of next year. (If infrastructure's your thing -- and even if it's not -- it's hard not to be impressed by the project's sheer scale and rapid progress.)

The "officials" in question were Minnesota state and local lawmakers. Before the project could begin, dozens of private homeowners had to be bought out and relocated.

Maybe somebody on Wall Street -- or in Washington -- should take note . . .

Wheels of Justice

Fraud Catches Up to Ex-CEO

Judge orders Scrushy to pay $2.8B to shareholders

--Headline, The Associated Press (6/18/09)

An Alabama state judge just ordered Richard Scrushy, former CEO of HealthSouth, to pay shareholders billions in connection with fraud committed at the rehabilitation chain between 1996 - 2002.

Scrushy's chutzpah extended to the courtroom: during one of his (many) previous trials, it was discovered that Scrushy had made large contributions to several jurors' Birmingham churches.

If the same legal timetable applies to Wall Street misconduct at the heart of today's economic mess, you can expect to start seeing convictions and financial penalties meted out . . . around 2015.

Wednesday, June 17, 2009


"Making Bankers Mad"

The Obama plan is little more than an attempt to stick some new regulatory fingers into a very leaky financial dam rather than rebuild the dam itself . . . Firms will have to put up a little more capital, and deal with a little more oversight, but once the financial crisis is over, it will, in all likelihood, be back to business as usual.

--Joe Nocera, "Only a Hint of Roosevelt in Financial Overhaul"; The New York Times (6/17/09)

"Back to business as usual" is not a ringing endorsement, if you believe, as I do, that today's economic crisis actually has some culprits (besides Bernie Madoff). So, it's disappointing to see the early reviews on Obama's proposed financial reforms come in "thumbs down."

Nocera saved the best line(s) of his piece for last:

If Mr. Obama hopes to create a regulatory environment that stands for another six decades, he is going to have to do what Roosevelt did once upon a time. He is going to have to make some bankers mad.

For now, it's everyone else who's mad -- or should be.

"Such a Deal"

Is it REALLY "Below Market Value?"

As many Sellers already know, it's a tough market out there, especially in the higher brackets.

So, to let prospective Buyers know that their home is a deal, more Sellers (or their agents) are peppering their marketing with phrases like, "asking price less than market value."

Is it?

"That's Easy For You to Say"

Without doing the "comp's" (comparable sold properties) or knowing the neighborhood, it can be hard to tell. And if it's a property that you love and want to buy, you may not to wait around to find out.

However, if a home really is under market value -- and it's not north of, say $600k -- it'll sell, quickly. Even in today's Buyer's market.

If it lingers for weeks (or months, or longer) . . . by definition, it's not "less than market value."

P.S: And no, asking less than tax value doesn't automatically make a home "below market value" these days. Depending on the part of town, I'd estimate that perhaps 50% of the homes currently listed for sale are under tax assessed value.

P.P.S.: one of my favorite New Yorker cartoons shows a father and son standing in front of a storefront covered with signs screaming "Must Liquidate," Going out of Business!!,""90% Off!," etc.

The caption: 'some day, son, this will all be yours."

Taking Financial Inventory

Questions, Questions

Will the U.S. economy start to recover before the cost of intensive care bankrupts it?

(No, the economy isn't running "normally" yet, not with 0% interest rates -- to the banks, not consumers; continued government bailouts; and burgeoning transfer payments for things like unemployment insurance.)

Can the U.S. afford the ICU bill it's rung up to date?

And, how did the "patient" get sick -- was it poison, some organic disease, or just a case of really bad flu?

No answers . . . but at least there's a consensus about what the (very big) questions are.

Tuesday, June 16, 2009

"How to File an Ethics Complaint"

By Popular Demand?

The first item in today's online newsletter from the Minnesota Association of Realtors is a YouTube video titled, "Filing an Ethics Complaint."

Quick Summary: it's easier than you think.

Two educated guesses: 1) there are a lot of seething Realtors (and non-Realtors) out there at the moment; 2) the vast majority are upset by how foreclosure sales are being handled (search "foreclosure" on this blog and you'll get an earful).

My take? An ounce of prevention is a lot smarter and more efficient than exacting a pound of flesh.

If you're not sure a foreclosure is for you . . it isn't.

If it makes you feel better, the feeding frenzies attending many of these properties lately is frequently reducing, if not eliminating, any market discount.

"Non-Traditional" vs. "Regular" Sales

"We Have Some With Ham, Too"

One of my favorite Mad Magazine cartoons shows a food stand advertising every kind of burger known to man: 'Buffalo burgers,' 'Chicken burgers,' Turkey burgers,' 'Veggie burgers,' and on and on.

The caption: 'we have some with ham, too, but we don't know what to call them.'

In that vein, the real estate industry is struggling to come up with a name for plain, old, non-lender-mediated sales.

As you may or may not know, "lender-mediated sales" -- namely, foreclosures and short sales -- have devoured the market in many locales the last six months or so.

For now, the preferred label for everything else: 'traditional sales.'

What were the runners-up?

"Regular" sales? "Normal" sales?

P.S.: my clients (and neighbors) know that I have a penchant for quoting Mad Magazine. In fact, another cartoon was the inspiration for my license plate.

It shows an overbearing, 50-ish guy with too much chest hair and bling (not me, I promise) trying to entice women back to his yacht with the cheesy pickup line, "I named it after you."

Sure enough, the last frame cuts away to a yacht with the license plate, "After You."

My car's license plate reads, "MY RLTR" -- as in, "there goes . . . my Realtor."

Monday, June 15, 2009

Home Focus: 110 Kentucky No. (Lion's Park in Golden Valley)

"No Surface Left Untouched"

Where: Lion's Park neighborhood in Golden Valley (west of 100, between 394 and 55)
What: almost 2,500 totally remodeled square feet, 3 Bedrooms, 3 all new baths; great floor plan and flow
When: Broker open -- 11 a.m. to 1 p.m. (6/16); public open -- this Sun., 2 p.m. - 4 p.m. (6/21). Days on market: 3
How much: $439.9k
Who: listing agent - Ross Kaplan (desk: 612-925-7701)

This updated, Golden Valley two-story is perfect for the family looking for Hopkins schools, in a terrific suburban setting, or, for professionals who want to be close to the city, but need a little more elbow room (the lot is .29 acre, with a deck, fenced backyard, and old-growth trees).

Please feel free to stop by either tomorrow or Sunday!

Organic Gardening Tip

Weeding Secret

This may very well be the first, last, and only gardening tip on this blog -- my thing is more the business end of real estate, with the occasional economics riff. However, this one's too good to not pass along (or, it may just be that I'm a gardening idiot and have never heard of it).

I'm trying to get rid of some weeds popping up through the flagstone in our patio, and wanted something that would be effective, but not so toxic that it would pose a threat to our little kids (and new puppy).

I was literally trying to choose amongst half a dozen or so similar-looking products, when a Home Depot floor rep asked if I needed help. Her suggestion: pour hot water on the weeds!

P.S.: I'm sure this post will provoke some skepticism -- not about the advice, but the fact that a Home Depot floor rep asked if I needed help (true) . . .

High-Tech Servants' Entrance

High-End Trend?

Wouldn't it be nice to be able to let the furnace contractor in* without waiting for them to show up during their seemingly days-long "window"? Or, once they got there, if they could proceed directly to the utility room, without traipsing through your front hall (and past your messy Kitchen)?

The (very high-end) new home just being finished at the south end of Minneapolis' Lake Calhoun has that one solved: the utilities room has its own contractors' entrance. That's where the mechanicals, plus the "central nervous system" that runs this high-tech home, are located.

Like to see it (or partake of the view)?

You'd better know the owners (or perhaps, be a big sponsor of the major league sports team they own): the home isn't on the market.

*The rest of us will just have to rely on lockboxes, drop cloths, etc.

Saturday, June 13, 2009

"Teaming Up"

Realtor "Teams" Suffer High Divorce Rate

To the public, it sure must seem like there are a lot of Realtor "teams" out there: 'the Nelson team'; "the Anderson-Jones team," etc. Substitute "group" for "team," and you'd describe even more Realtor pairings.

But are such combinations really that popular? And do they last?

I'm not aware of any empirical studies, but from what I've observed first-hand, I'd estimate that fewer than 5% of practicing Realtors formally partner with another Realtor (include married couples, and maybe the number is 10%). And the life expectancy of a typical "team" is probably less than five years.

High Divorce Rate

Why is that?

In seven-plus years in the business, I've never partnered with anyone, so I have to speculate.

My guess is that "too many cooks spoil the soup."

If the client is a couple, a residential deal already involves 3 parties (the two principals, plus the Realtor). And that's just one side. Add in a "Co-Realtor" (or two -- if the other side also is a "team"), and communication can rapidly become unwieldy.

That isn't to say Realtors don't make use of Assistants. Many do. And many more rely on informal, quid pro quo arrangements with colleagues to, say, back them up when they're on vacation.

However, in every deal, one agent needs to be primary (my opinion), and "teaming up" interferes with that.

Friday, June 12, 2009

Cisco for General Motors

Economic Watersheds & Financial Footprints

If you follow the Dow Jones Average, you know that General Motors was recently dropped for Cisco Systems (and Citigroup for Travelers).

Locally, there is an echo of this "changing of the guard": the old Ford Motor dealership in St. Louis Park, near 36th St. and Highway 100, is out, and a new LA Fitness is on the way in (hard bodies for car bodies??).

Leaving aside what happened to Detroit and why, there is an obvious economic difference between a manufacturer like Ford, and a service business like a health club.

Think of it this way: each car sale creates demand for car parts, steel manufacturing, repair services, auto insurance, banking and finance, etc. Economists call this a multiplier effect.

By comparison, what you might call the "financial footprint" of a health club is much smaller.

On the plus side, at least it can't be outsourced . . .

Warren Buffett, Revisited

Swimsuits and Tides

Today's recession-slash-financial crisis may not have a name yet, but it clearly has a signature parable: Warren Buffett's now-infamous observation that "you don't know who's swimming naked until the tide goes out."

If you're looking for a bookend, it would be Buffet's equally famous pronouncement that credit derivatives are "financial weapons of mass destruction." [Full disclosure: Buffett is Chairman of Berkshire Hathaway, which is the corporate "great-grandparent" of Edina Realty.]

Well, the tide's definitely gone out . . . and by now, we (pretty much) know who's been swimming naked.

In light of these events, you'd think that policymakers' focus would be to round up some swimsuits. Instead, my read is that they've been trying to get the tide to come back in.*

The former task is limited in scope, has a finite cost, and is actually achievable.

The latter?

We're in the process of finding out . . .

*I suggest a corollary to "a high tide raises all ships": 'first, they have to be floating.'

New Magazine Idea?

Target Market: Former Realtors

If you're over 30 years old, and are a fan of Reese's peanut butter cups, you may be remember their classic ad campaign from the '70's and '80's.

The ads showed two people, one eating peanut butter and one eating chocolate, colliding. One person would say, "you got peanut butter in my chocolate," to which the other would reply, "you got chocolate in my peanut butter." Each person would then experience an epiphany: the two went great together!

What made me think of this was a purely serendipitous overlaying of two magazines in my (too messy) home office: Experience magazine, which my wife reads, and Realtor magazine, which I read. Realtor magazine overlaid the "perience" in Experience, creating the combination "Ex[Realtor]." Hmm . . . "Ex-Realtor??"

No, I'm not leaving the real estate business. But I know lots of Realtors who are -- and have. Nationally, the number no doubt is in the hundreds of thousands (at the peak, there were almost 1.3 million Realtors).

Free business opportunity for anyone who's looking . . .(maybe an ex-Realtor??).

New Consumer "Payment Hierarchy"

Credit Card Bills Trump Mortgage Payments

I attended a private dinner this week where the featured speaker, a senior executive at FICO, offered a wide range of comments. Since the talk was off-the-record, I won't mention the individual's name, but the insights were fascinating.

In a nutshell, FICO is observing a sea change in how consumers prioritize their debts.

Twenty years ago, here's how it looked:

1. Mortgage
2. Car payment
3. Utilities
4. Credit Cards

Today, that hierarchy has literally been turned upside down:

1. Credit Cards
2. Car payment
3. Utilities
4. Mortgage

To say the least, this change has huge implications for housing, and the economy generally.

Two conclusions seem inescapable:

--The risk of continued mortgage defaults is quite high, especially in locations where homeowners are deeply underwater (i.e., their home is worth less than their mortgage). According to the executive, the % of underwater mortgages nationally is now 40%(!).

--The U.S. consumer is tapped out, and especially vulnerable to anything that makes installment debt (credit cards) less available and/or more expensive. Which is pretty much what's happening now.

When you're living off your credit cards, it's safe to say that any financial "cushion" you once had is already gone.

The executive was optimistic that the Federal Reserve was on top of things, and reacting appropriately to the economic crisis; less so that Congress would surmount politics, and spend and tax appropriately.

Silver Linings (Kind of)

Silver linings? The executive cited three (kind of):

--Per above, solving today's economic challenges isn't a question of knowing what to do -- there's actually a surprising consensus amongst policymakers about what's needed (I've noted this on previous posts). Rather, it's having the political resolve to do it (the ball's in Congress' court, not the Federal Reserve's).

--While the ranks of consumers with low FICO scores is swelling, so is the number of people with high FICO scores. The executive called this phenomenon a "flattening out of the bell curve"; the explanation is that many consumers are spending more conservatively, paring their debt, etc. as a result of the financial crisis.

--Everyone's mailbox is a lot emptier these days without all the junk mail, credit card solicitations (have you noticed?).

P.S.: It's too off-color for this blog, but Tom Wolfe has a hilarious, updated version of the "first base, second base" vernacular that every high school boy knows. FYI, "first base" is still kissing -- everything else is different. You'll have to read his novel, "I am Charlotte Simmons" to find out the rest.

Thursday, June 11, 2009

Cautionary Inspection Story

Foreclosure Minefield #37

At a lunchtime training class today, the presenter -- a very seasoned appraiser -- relayed a story I'd never heard before in connection with foreclosures (and I've now heard -- and seen -- plenty).

When the appraiser arrived at the house, the water was turned off -- a common occurrence with foreclosures in Minnesota. So, the appraiser turned it on (a big no-no, for liability reasons), and proceeded to open a few faucets. So far, so good: no leaks.

End of story, right? Hardly.

After closing, the Buyer turned on the water again and immediately discovered water everywhere, coming from literally dozens of leaks.

The explanation?

A home's plumbing system has to be at full pressure to be fully tested -- a process that can take hours, depending on the size of the home. Simply running water through the system, briefly, won't necessarily reveal leaky pipes . . .

Wednesday, June 10, 2009

North Minneapolis Duplex for $18,900

Where: 26xx Colfax Ave. North, in Minneapolis' Camden neighborhood
When: originally on market March, '08; canceled and re-listed -- with a BIG price drop -- today
What: 2,000 sq. ft . duplex (each unit 2 BR/1 BA)
How (much): $18,900; tax assessed value ('09): $178,800
Who: listed with RE/MAX Results

Can you afford a monthly payment of $113?

That's what the mortgage on this duplex would come to. Split it with a renter, and your monthly payments (at least for principal and interest) would be less than your cell phone bill.

Before you start writing an offer, though, keep in mind a couple things: condition is virtually guaranteed to be a mess; the neighborhood is rough, and pocked with foreclosures; and the current tax bill ($3,200) -- established when times were better -- is locked in until 2011.

FICO's Decline (& Fall?)

Credit Rating Agencies, Writ Small

As a long-time lender, I would always trade off fico for equity.

--email from Angelo Mozilo, Countrywide CEO (now charged with civil fraud), to a lieutenant

What exactly is Mozilo talking about?

Sub-prime lenders' growing concerns, circa 2006, that the size of a borrower's down payment was a much better predictor of their loan quality than their credit score as calculated by the Fair Isaac Corp. (now called "FICO").

As the housing boom wore on, such scores came to loom increasingly large in mortgage origination decisions -- much like the Triple-A ratings parceled out by Standard & Poor's and Moody's effectively became the "Good Housekeeping Seal of Approval" for trillions in mortgage-backed securities.

Unfortunately, the calculations made by both FICO and the credit rating agencies rested on the same, fatally flawed -- and for a time, very lucrative -- assumption: namely, just because something had never defaulted in mass numbers, it never would.


With respect to mortgage-backed securities, the prevailing mindset was that the risk of default to investors, always historically negligible, could be reduced even further by segregating the highest risk securities into discrete groupings or "tranches."

In FICO's case, the decision-making was at the level of the individual mortgagor (or borrower).

The fatal assumption? That consumers who had never defaulted on their debts, never would.

As now seems obvious, there's a big difference between paying your utility bills on time and owing, say, a couple grand on a few credit cards, and owing several hundred thousand (and perhaps much, much more) on a mortgage. On a house that's worth less than you owe. That you've got no equity in (and indeed, never did). When you've maybe lost your job, or are afraid you might. You get the idea . . .

Not surprisingly, the foregoing proved to be an especially combustible mix.

Lenders: 'Show me the money' (downpayment)

So now what?

At least at the moment, everyone's "back to basics":

--Only lend against good collateral, conservatively valued;
--Require borrowers to have some "skin in the game" (a sizable down payment);
--Carefully vet the borrowers' income and assets.

As Mozilo and other long-time bankers know -- and always knew, deep down -- it is those principles that are the foundation for high-quality mortgages -- not a third party's flawed, seal of approval such as FICO scores.

Mozilo's been called lots of things, but "dummy" isn't one of them (unless you count leaving behind incriminating emails).

Tuesday, June 9, 2009

A Tale of Two Professions

Are Realtors Underpaid??

Consider the following parallels between these two groups of professionals:

--Both groups include highly skilled, highly trained individuals;

--Both are known to tackle cases with long odds and a high risk of failure;

--Notwithstanding the aforementioned risks, both get paid only if their client gets paid. If their client walks away empty-handed . . . so do they.

--Both can toil for months -- if not years -- on behalf of their clients, investing hundreds of hours of their time, and incurring thousands in out-of-pocket expenses, before they see a dime of compensation.

So who are these two groups?

Plaintiff's attorneys bringing class action suits -- and Realtors! (specifically, listing agents representing Sellers).

Unlike the former, whose contingency fees typically range from 25% to 33%, full-service Realtors typically charge a 6% - 7% commission. Which they proceed to split four ways (with their broker, the Selling agent (representing the Buyer), and the Selling agent's broker).

Realtors . . . one of the great bargains left!

Home Showcase: 53XX Xerxes Ave. South (Minneapolis)

Where: Minneapolis' Fulton neighborhood in SW Minneapolis (one block north of the Minnehaha Creek)
What: 2 BR/1 BA; 1,080 FSF. Year built: 1924
When: on market yesterday (June 8)
How much: $124,900
Who: listed with Coldwell Banker Burnet

It's never a good sign for prospective Buyers when you arrive at a showing to find several parties milling around in front, waiting for their Realtors, to tour a just-listed home (conversely, it's always a very good sign for the listing agent).

And that was in addition to the two groups already looking around inside.

Yet that's exactly the scene I encountered this morning when I showed up to screen the home pictured above for a client.

So what's all the commotion about?

While the home is anything but sexy -- 2 BR, 1 Bath, extremely dated -- the price more than makes up for it. In fact, at $124,900, it's easily $50,000 less than similar, nearby homes (and $114k under the assessed tax value!), even without a garage.

How much do you want to bet that that gap closes -- or disappears completely -- once the inevitable multiple offer feeding frenzy takes hold?

Banks Still Calling the Shots

Worst-Kept Secret: Foreclosure Banks
Flaunting MN Disclosure Laws

A problem has arisen in Minnesota regarding lenders who have acquired property through foreclosure and then listed those properties for sale to Minnesota consumers. The problem is that lenders are refusing to comply with Minnesota disclosure laws.

--Donald D. Smith and Brad J. Boyd, "Seller Disclosure Obligations Under Minnesota Law for REO Properties"

The above paragraph, from a memo drafted by the legal counsel to the MN Association of Realtors, is hardly news to anyone representing would-be Buyers trying to buy foreclosures lately (or to readers of this blog).

However, what's interesting is the Board of Realtors' response, undoubtedly borne of futility: instead of getting the appropriate legal authorities (MN Attorney General? U.S. Attorney General? Hennepin County Attorney? The Congress?) to get the banks to stop defying the law, it is shifting responsibility back to the Realtors.

Namely, it advises Realtors, when working with banks that refuse to comply with MN disclosure laws, to obtain from the bank the "legal support for that position." (Good luck with that one!)

Assuming, quite safely, that no "legal support" is forthcoming, then what?

Smith and Boyd again:

Without such evidence, supported by accurate and substantiated legal authority, Realtors in the state of Minnesota are being encouraged to avoid unwarranted personal legal liability and risk to themselves and their brokerage, by resigning from any and all listings with sellers who refuse to comply with these legal obligations.

That's right: put the burden on Realtors to ostracize law-breaking banks.

After everything that's happened to housing (not to mention the broader economy) the last couple years, is it really possible that banks are still running the show?? (and yes, that's rhetorical)

Monday, June 8, 2009

Hamptons for $375k!

How the Upper .25% Live

I quickly browse a lot of real estate-related material, but when I came across "Hamptons" and "$375,000" in the same sentence, I slowed down.

If you don't know, the Hamptons in Long Island is (summer) home to Wall Street's -- and Manhattan's -- rich and famous, and home prices there routinely trip eight figures (as in $10M-plus). Or did.

Which was the import of the article ("The Hamptons Stress Test" - Vanity Fair). Not so surprisingly, Wall Street's crash has hit Long Island real estate; as a result, prices (and deals) have plummeted.

Still, "Hamptons" and "$375,000" simply don't go together.

The catch?

That's not a sale price. It's a rental price. For one month.

To be fair, the property (pictured at top) fronts the ocean, and the month in question is August.

Real Estate "Story Time"

Buyer's Market "Stories"

At the market peak around 2006, the real estate "stories" were all told by Sellers: what they had just sold for, and how much it exceeded their (dramatically lower) cost.

So, in a historic Buyer's market, it stands to reason that the stories are now being told by Buyers -- presumably, about the killings they're now making.

In that vein, I recently heard about a Buyer who, in a single deal, had just scooped up 20 North Minneapolis properties for $200k in cash.

Yes, that comes to $10,000 apiece. And yes, there are documented sales recently at that price, in that neighborhood.

So, in theory, it's plausible.

Creative License?

However, before you feel like you missed out, consider a couple things:

--Homes that sell for $10,000 are, by definition, not habitable. Making them habitable can cost many multiples of the purchase price.

--The holding costs associated with buying dilapidated properties are considerable. To pick just one example, the city of Minneapolis now assesses a $6,000 abandoned building fee annually. Many of these homes come with a long trail of unpaid liens, fees, fines, etc. that may -- or may not -- be picked up at closing, leaving the Buyer on the hook.

--Who exactly is going to rent -- or buy -- the rehabbed homes? At the moment, there is no sign that foreclosures are abating, at least in many Twin Cities neighborhoods.

Are there opportunities in foreclosures?


But just like Hollywood, the real estate stories that the public hears have often been edited and/or embellished to spice things up.

P.S.: often, it's the stories you don't hear that are the most interesting. In that vein, there's a saying that the reason dolphins have a reputation for saving drowning swimmers . . . is that you don't hear from all the ones they push out to sea.

Countrywide's Angelo Mozilo

Personal Fortune, Economic Disaster

I don't follow pro sports very closely these days, but growing up, I remember a statistic in basketball and hockey called the "plus/minus ratio."

The goal was to filter out individual statistics like goals scored or baskets made, and instead, focus on each player's net contribution to their team.

The result was something called the player's "plus/minus" ratio.

To calculate it, you added the total points scored by the player's team while he or she was on the ice (or court), then subtracted the total points scored by the opposing team.

So, a player who didn't score much, but was great on defense, would have a deceptively high plus/minus ratio.

So would a consummate team player, who unselfishly aided his or her teammates' point-scoring.

Net Minus

What makes me think of this is Angelo Mozilo, former CEO of subprime lender Countrywide, who now stands accused of (civil) fraud.

Leaving aside the particulars of the subprime business, what's clear is that Mozilo's total compensation over the last decade or so was several hundred million dollars.

Compare that to the carnage caused by the the toxic loans his company made: hundreds of thousands -- if not millions -- of foreclosures. Conservatively, say the number is 500,000.

Assuming each foreclosure costs $50,000, Mozilo's conduct arguably could be said to have cost the economy $25 billion. And that's before taking into account the human suffering, dislocation, etc. caused by all those foreclosures.

That makes Mozilo's "plus/minus" ratio a rather lopsided negative $24.5 billion. Not quite up there with Bernie Madoff (minus $50 billion), or the senior management of AIG, Merrill Lynch, or Goldman Sachs -- but a pretty staggering sum, nonetheless.

Compare that to the contributions made by a teacher, a fireman, or a talented doctor, whose pay may be nominal, but whose efforts add real wealth to the economy, and society generally.

Unlike the Angelo Mozilo's of the world, they would all score very high on the social "plus/minus" scale.

Not to mention the "financial" Hippocratic oath: 'first, do no harm.'

Sunday, June 7, 2009

Verbal abracadabra

Quick: Synonym for "Other-than-Temporary?"

Want to get rid of something? Change -- or obscure -- its name.

So, it's no longer swine flu, it's an acronym.

In finance, all the toxic loans still on too-big-to-fail bank balance sheets are not "toxic loans" -- suddenly, they're "legacy assets."

And how are those to be valued?

According to FASB, by applying new, so-called "other-than-temporary impairment" (OTTI) rules.

English actually has a word for "other-than-temporary": it's called 'permanent.'

Housing Bears Shift Arguments

Key Factors Now: Job Losses, Historical Precedent

When it comes to predicting housing prices, I'm officially agnostic: in the short run, I have no idea what they're going to do (and neither does anyone else).

In the long run, I'm on record forecasting that they'll be higher: historically, at least, that's been a very safe bet (sort of the housing equivalent of JP Morgan's prediction about the stock market: 'it will fluctuate').

However, now that housing prices nationally have dropped about 30% from the peak, housing bears have been deprived of perhaps their biggest "gun": the argument that housing prices are still above historical trendline -- sometimes way above.

In fact, depending on the city, housing prices have reverted to levels prevailing in 2003, 2000 -- or even earlier (take a look at Detroit or Cleveland).

So, what arguments do housing bears cite now when they predict future housing market deterioration? Two things:

1) Recession-driven job losses; and 2) historical precedent suggesting that housing markets rebound slowly -- typically, much more slowly than the stock market, for example.

The first argument seems fair; the second, more in the spirit of "prediction by extrapolation."

After all, very few prognosticators called the current market accurately by looking in the rear-view mirror.

Housing Headline du jour

"Home Prices May Fall Further"
--generic headline discussing the housing market

Whenever I see a "non-headline" headline like this, it reminds me of a colleague's comment about an ad for income property a few years ago. Along with the property's asking price, key stat's, etc. was this language: 'rents could be higher.'

To which my colleague riffed, without missing a beat: ' . . . and they could be lower, too."

So, yeah, home price may fall -- or, they may rise!

Sort of sums up the options.

P.S.: in the same vein, years ago National Lampoon ran a spoof of USA Today, which raised (lowered?) banal headlines to an art form. Example: 'Puppies . . Dogs of the Future?"

Renting vs. Owning

Renting vs. Owning: Not-So-Perfect Substitutes

Every article I've seen in the last few years trying to divine the direction of housing prices inevitably compares renting to owning.

The underlying assumption: when the cost of home ownership is more expensive relative to renting, housing is (still) too expensive. By contrast, when owning a home is cheaper or even the same cost, housing is fairly valued -- or even cheap.

But is the assumption that people readily switch between owning and renting, depending on market conditions, really valid?

Robert Shiller, Yale prof (and the "Shiller" in S&P/Case-Shiller), claims that the answer is "no":

In fact, most decisions to exit the market in favor of renting are not market-timing moves. Instead, they reflect the growing pressures of economic necessity. This mayinvolve foreclosure or just difficulty paying bills, or gradual changes in opinion about how to live in an economic downturn.

--Robert Shiller, "Why Home Prices May Keep Falling"; The New York Times (6/6/09)

Unlike, say, jumping out of a frothy stock market, becoming a renter takes time, and involves major lifestyle changes. Shiller again:

Among couples sharing a house, for example, any decision to sell and switch to a rental requires the assent of both partners. Even growing children, who may resent being shifted to another school district and placed in a rental apartment, are likely to have some veto power.

While Shiller's observations appear to rest on common sense, not empirical data, they intuitively seem right.

It's also the case, as I've noted many times previously on this blog, that renters and owners face very different housing choices, especially in the Midwest.

While there are certainly plenty of homes for rent in the Twin Cities today, my impression is that relatively few of them are located in the kind of stable, high-demand neighborhoods with good schools that most families seek out.

Friday, June 5, 2009

Realtors & Buyer's Markets

Realtors & Buyer's Markets:
Feeling Sellers' Pain

It was the best of times, it was the worst of times.
--Charles Dickens

In a Buyer's market, Sellers' pain is Buyers' gain. And the vast majority of Buyers today are represented by Realtors, too (acting as a Buyer's Representative).

So it seems fair to ask:

Why isn't a Buyer's market, with dropping prices and lots of inventory (at least in most parts of the Twin Cities), as good for Buyer's agents as it is bad for listing agents (representing Sellers)? (Of course, most agents typically play both roles.)

The short answer is, for some Realtors, it is. Especially for agents representing lots of first-time Buyers, this is a once-in-a-lifetime market. However, for many experienced agents, this a trying market (to say the least).

Here are three obvious (and perhaps not-so-obvious) explanations:

One. Commissions are based on home prices.

To dispense with the obvious, Realtors' income, at least collectively, is a direct function of home prices. When the average Twin Cities home sale (vs. home -- BIG difference) falls from $220k in 2006 to $165k today -- a drop of 25% -- Realtors' income falls 25%, too.

Of course, Buyer's markets are also frequently characterized by a drop in sales volume -- especially in the early stages (look at Manhattan now). That delivers a second blow to Realtors' incomes.

"Fatigue Factor"

Two. Balky Buyers. I'd characterize the mood of my recent buying clients as "cautious" or even "anxious" rather than "celebratory." They are naturally pleased -- if not delighted -- by how much house they can buy now.

However, they're equally nervous about home prices falling further. Depending on their job security, they're also worried about the recession hurting (or eliminating) their income.

As a result, Buyers today seem to be viewing more homes, and taking longer to make purchase decisions, than when the market favored Sellers. The net result -- at least for their agents, if not for them: an increased "fatigue factor."

Three. Realtors tend to identify with Sellers more than Buyers, because of how the business works (and used to).

Until perhaps 20 years ago, Buyer's agents didn't even exist: if you sold residential real estate, your client was always the Seller, even if the agent worked with and otherwise assisted the Buyer.

Even today, when Buyer's agents are rapidly reaching parity with Seller's agents, it is the Seller who pays both agents' commission (who split again with their respective brokers). So, there's what could be called a "vestigial" identification with Sellers.

Feeling Sellers' Pain

Too, as Realtors gain experience, their client mix often shifts from mostly Buyers to mostly Sellers ("agents who list, last").

That's so because Sellers tend to favor established Realtors. After all, who would you trust to sell your $300k (or $1.3M) home: someone who's done it three other times, or someone who's been selling homes for 10 years?

Given that real estate is a famously transient business -- four out of five Realtors are out within five years -- over time, the nucleus of the Realtor ranks becomes dominated by experienced Realtors whose clientele is weighted towards Sellers.

When they hurt, their Realtors feel their pain . . .

Thursday, June 4, 2009

Edina on Sale

Not So Recession-Proof, After All

No, it's still not cheap by Twin Cities-wide standards, but asking prices for Edina homes have come down dramatically in the last 2-3 years: from $350 to even $400 per finished square foot ("FSF") in mid-2006, to around $200 per square foot today.

Translated into bricks-and-mortar choices, that means that $600k -- the average list price of the 250 homes now for sale in East Edina -- gets you a home with about 2,500 FSF.

In West Edina, where the homes are bigger and prices per square foot are a tick lower, the "average" home now lists for $700k and sports almost 3,600 FSF (that's typically 4 or even 5(!) Bedrooms).

And those are the asking prices -- Buyers may very well be able to negotiate lower prices (see below).

Lag in Prices

Two other interesting features of Edina prices.

One. Compared to asking prices, actual "sold" prices are 10% lower. That suggests that Edina sellers may still be unrealistic.

Two. While Edina prices initially held up well, as the housing downturn and recession have ground on, they've been increasingly impacted.

That echoes what has happened with consumer "luxury brands" like Tiffany, Coach, etc.

Eighteen months ago, they were all thought to be "recession-resistant," if not recession-proof; today, it's clear that they're not.

(Thanks to John Smaby, manager of Edina's 50th & France office, for the foregoing statistics.)

Recession Casualty: Pretense

Starbucks vs. Burger Jones

One restaurant doesn't exactly make a trend, but the new burger joint new Lake Calhoun -- aptly named "Burger Jones" -- appears to be embracing an anti-Starbucks marketing strategy.

So, forget Starbucks' "Tall," "Venti," and "Grande" for "Small," "Medium," and "Large" (or, is it the other way around?).

If you order a burger at Burger Jones -- and that's pretty much what people do -- the choices aren't "rare," "medium," and "well-done," or gradations thereof.

The choices are: "some pink" and "no pink."

(Another) Foreclosure Feeding Frenzy

Home Focus: 38xx Harriet Ave. (South Mpls.)

What: 2 BR/2 BA; 1,364 FSF in South Minneapolis' Kingfield neighborhood
When: On market 4/17/09; closed: late May
List Price: $75,000
Sold Price: $91,000
% Over List: 21%

This home sold for $91,000 -- a mere 21% over asking price. I was told that there were at least 8 offers on this home within 2 days.

Lots more of these deals are in the pipeline, because they came on the market earlier this Spring, and are just closing now.

Based on what I saw, I wouldn't be surprised to see at least a few bank-owned foreclosures that fetched 50% over asking price (imagine telling your client what the asking price is, then telling them what they likely have to bid to actually have a chance of getting the property).

I'm also hearing that Seller bad behavior is -- surprise, surprise -- begetting Buyer bad behavior: namely, the best way of winning one of these "real estate lotteries" is to buy lots of "tickets" (submit offers on multiple properties simultaneously).

As a consequence, the fall-through rate on these deals apparently is astronomical.

Wednesday, June 3, 2009

Taking Away the U.S.'s Punch Bowl

In Jeopardy: U.S.' "Punch Bowl" Privileges

The job of the Fed is to take away the punchbowl just as the party gets going.

--former Federal Reserve Chairman William McChesney Martin

What if the Fed won't take the punch bowl away? Or can't? Indeed, what if official U.S. policy is to keep replenishing the punch bowl way past the point that all the guests -- not to mention the host -- are inebriated?

What happens then feels a lot of like what's happening now:

--Key U.S. trading partners become increasingly reluctant to accept U.S. dollars for their exports;
--Key U.S. creditors, such as China, Japan, and Germany, telegraph that their willingness to keep buying -- indeed, holding-- U.S. debt is finite;
--As a result of both of the foregoing, the dollar weakens and the cost of servicing the U.S. debt rises; which in turn . . .
--Accelerates a concerted, multi-lateral push to replace the dollar as the world's de facto reserve currency with a basket of world currencies.

It's as though, after more than a half century of relative calm, the world financial system is waking up to the realization that the status quo has a major loophole: it rests on the discipline of U.S. monetary authorities to parcel out credit judiciously.

Like any privilege, if it's misused, it can be revoked.

By whom, and how, is what's now on the table.

China, cont.

"Geithner Says China Has Faith in U.S."
--headline, The New York Times (6/3/09)

[Editor's Note: Sorry, I'm on a China kick -- just one more in that vein. And yes, it does bear on real estate. In fact, whether China keeps buying U.S. debt -- and therefore whether mortgage rates stay low -- is probably the single biggest variable affecting U.S. housing prices right now.]

Just two thoughts on the above headline:

One. Wouldn't it be more reassuring if it read, "China says China Has Faith in U.S."??

Two. Actions speak louder than words.

Some of the most flattering things you'll ever hear about a publicly-traded company are analysts and major stockholders praising it as they seek cover to dump their shares (or recommend same). Or buy credit derivatives that appreciate as company shares tank, which is effectively the same thing.

You'd think that the Securities and Exchange Commission ("SEC) would police that (and a lot of other things), but there's plenty of evidence that they don't.

"Over a Barrel"

So here's what you're left with: don't listen to what Chinese leaders say, watch what they do.

Of late, they've been pushing to have their own currency, the renminbi, included in a basket of world currencies to serve as a meta "reserve currency." That's significant because it would supplant the U.S. dollar as the de facto world reserve currency.

Why does that matter?

A key difference between, say, Albania, and the U.S., is that the latter's debts are denominated in its own currency. If the U.S. debt becomes unmanageably large -- one of the big concerns at the moment -- it always has the option of printing more money. For now, at least.

One last quote regarding China, which already owns a trillion-plus in U.S. debt: 'if you owe your bank $1,000, they've got you over a barrel; if you owe them a couple trillion, you've got them over a barrel.'

Unfortunately, there's a crucial difference between dumping what you already have -- and buying more.

Tuesday, June 2, 2009

China's Purchasing Power

"Chinese Company Said to Be Buyer of Hummer"
--headline, The New York Times (6/2/09)

The bad news is, China's appetite for ever-more trillions of U.S. debt may be waning.

The (mostly) good news?

China's appetite for U.S. assets may just be kicking off . .

Mpls Advantage Program -- Update

"Going, Going . . . Gone"

According to my office's in-house mortgage lender -- Steve Mohabir of Edina Mortgage -- the cupboard is almost bare at Minneapolis' loan program for first-time Buyers, called Minneapolis Advantage.

Specifically, only 4 loans are left out of 100 originally made available.

According to Mohabir, other municipal loan programs around the Twin Cities are facing similar issues. The result is, the burden is on borrowers not just to track currently available programs, but to monitor how well-funded they are.

"April Showers, May Flowers"

Appraisal Issues Back on the Front-Burner

As the saying goes, "April showers bring May flowers."

In the real estate market this Spring, the equivalent is, "April multiple offers bring . . . May appraisal issues" (OK, so it doesn't have the same ring to it).

One of the consequences of a home selling in multiple offers is that the winning bidder may easily drive the ultimate price well past what's supported by the comp's ("comparable sold properties"). That's especially the case in neighborhoods where all the recent sales are foreclosures being dumped by their bank-owners.

What happens if the house doesn't appraise? There are generally 5 possibilities:

One. The Buyer puts up more money.

Two. The Seller reduces their price.

Three. Some combination of #1 and #2.

Four. Neither #1 nor #2, in which case the Buyer's financing fails, and the deal derails.

Five. Buyer or Seller challenge the appraisal and/or the individual appraiser (and try to get another one).

Until recently, option #2 was a fairly common outcome.

Now, depending on how much equity the Seller has -- or doesn't -- that option can be off the table.

Monday, June 1, 2009

South Minneapolis Foreclosure Sale: 36% over List

Where: 37XX 17th Ave. South, Minneapolis
What: 4 BR/2 BA, 2,386 FSF
When: on market, April 3; closed, May 22; days on market: 2
How much: list price - $88,900; sold price - $121,000

Want an example of a too-cheap foreclosure setting off a feeding frenzy?

This spacious 1 1/2 story (much bigger than it looks) in south Minneapolis attracted more than 10 offers -- my client's was one of them -- and ultimately sold for $32,100, or 36%, over the asking price.

While these numbers are eye-popping, they are by no means unusual these days: I've personally seen at least two dozen of these real estate lotteries just in the last two months.

They create a handful of winners, plus a whole lot of losers: all the runners-up Buyers and agents who wasted their time in a process that looks and feels manipulative; the banks, who may or may not be selling their foreclosed homes at market prices; and the people who own the banks that own the foreclosures: the taxpayers.

Freakonomics (Re)Revisited

"How is the Klu Klux Klan
Like a Group of Real Estate Agents?"

[Note: this post is a follow-up to to two, earlier posts discussing the best-selling 2005 book, Freakonomics: "Do Realtors Really Add Value," and "What Do Realtors Really Get Paid For?"]

You'd guess that any book with a chapter by that title -- as Freakonomics, Chapter 2 has -- would not exactly be a fan of Realtors.

And you'd be right.

The two authors of Freakonomics, economists Steven Levitt and Stephen Dubner, waste no time trashing Realtors as self-interested weasels who prey on vulnerable clients (it doesn't help that they each appear to have been victims at one time or another).

But are their criticisms fair?

To pick just one example, Levitt and Dubner make much of the fact that listing agents (who represent Sellers) only make a few more pennies in commission for every extra dollar their client's home fetches. Therefore, according to the authors, Realtors will invariably sell out their client's interests and push for quick sales, at less than top dollar.

Their evidence? Some thin, not-so-current data that purports to show that Realtors take slightly longer to sell their own homes than homes they're hired to sell.

Rebutting Levitt and Dubner's argument are these three facts:

One. Good Realtors typically engage colleagues to sell their own homes. Not only isn't it professional to sell your own home (it's too personal, emotional, etc.), it's also risky: if you make a mistake or get sued, you're likely not covered by insurance (the liability policies at brokers like Edina Realty specifically exclude Realtors who are acting as their own agent).

Two. There is an inverse relationship between time on the market and selling price. Translation: homes that sell quickly get top dollar, while homes that languish get discounted -- sometimes A LOT.

Is it possible for an unethical Realtor to convince an ignorant Seller to list for too little?

Unfortunately, I can't say that I've never seen that happen.

However, when it does, the market invariably steps in, and drives up the price (the one conspicuous exception to this is when the listing agent also represents the Buyer -- a practice sometimes called "single-agent" dual agency. It's banned in 43 states, and it's time Minnesota did, too).

Three. A Realtor who puts their self-interest ahead of their client's isn't just a lousy Realtor. They're violating their fiduciary duty to their client.

That's at the core of the relationship between a Realtor, whose job -- acting as an "agent" -- is to serve and advance the best interests of their client, legally known as the "principal."

Too lawyerly?

Try this: 'Good Realtors know not to scr-w their clients.'

For one thing, such clients tend not to refer business to you. For another, they tend to get mad and do things like fire or sue you.