Halloween House (Post-Thanksgiving)

Dramatic . . . or Spooky?

I know what the listing agent was going for here: a dramatic, twilight photo.

I just don't know if that's the effect they achieved.

To me, it's a bit spooky (could that actually be a fire in the living room?? Or maybe it's just the weird color of the sky) . . .

Less Stigma, More Ditched Mortgages?

Social Stigma vs. Financial Self-Interest

Across U.S., Food Stamp Use Soars and Stigma Fades

--Headline, The New York Times (11/28/09)

[A new academic paper] argues that far more of the estimated 15 million American homeowners who are underwater on their mortgages should stiff their lenders and take a hike.

--Kenneth Harney, "The Moral Dimensions of Ditching a Mortgage"; The Washington Post (11/28/09)

During the Vietnam War, civil disobedience consisted of burning your draft card.

In Colonial New England, civil disobedience took the form of throwing highly taxed tea into Boston harbor.

Might civil disobedience, circa 2010, manifest as homeowners ditching their underwater mortgages, even though they still have the means -- at least for now -- to pay them?

Moral "Double Standard"

Called "strategic default," the practice is the subject of a new academic paper by Brent White, a Professor at the University of Arizona Law School. White argues that strategic default is a rational response for millions of beleaguered homeowners:

"Homeowners should be walking away in droves," according to White. "But they aren't. And it's not because the financial costs of foreclosure outweigh the benefits. Most owners are too worried about feelings of shame and embarrassment following a foreclosure, and ignore the powerful financial reasons for going through with it," he said.

--Brent White, "Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis"

According to White, would-be defaulters can organize their financial affairs to minimize the disruptions caused by the inevitable damage to their creditworthiness. That includes making major purchases prior to defaulting.

Aside from the morally repugnant nature of Wall Street executives paying themselves billions barely a year after their recklessness jeopardized the financial system, their behavior risks an even greater harm: it allows millions of Americans to rationalize their own bad behavior.

"The system screwed us," they might logically conclude. "Why shouldn't we screw it?"

"Realtor-Concierge" -- or "Realtor-Slave"?

Can You Say, "No Boundaries?"
How about, "Unprofessional?"

To reduce stress and temper the disappointment of lower sale prices — and also to keep clients from dropping them for another agent partway through a seemingly endless sales process — some brokers are significantly expanding their job descriptions.

Beyond rearranging furniture and decluttering, they take on jobs like plant watering, bed making and floor scrubbing; they check on homes when the owners are out of town; and sometimes even apply a coat of sealer to the driveway or do real estate-related paperwork.

During the two years that their two-bedroom Glen Cove colonial was on the market, Jenna Caggiano and Rich Peck would often return home after yet another real estate open house to find dinner ready. Their brokers — Natalie C. McCray and Eileen B. Heimer of Daniel Gale Sotheby’s International Realty — had cooked it during the event, between visits from potential buyers.

--Marcelle Fischler, "A Little Alfredo With That Listing?"; The New York Times (11/27/09)

Would you expect a lawyer handling an especially drawn-out case for you to start repairing things around your home?

How about your doctor cooking you meals -- elaborate meals, yet -- if your illness lingered?

Apparently, there are some Realtors who think that their job duties include helping clients run their households if the listing doesn't sell.

What exactly are these Realtor-Servants thinking??

"With all the things I have done for them, they stay with me. They will re-sign," said one agent interviewed for the article.

Job Confusion

That would make perfect sense -- if the object were to simply accumulate as many listings as possible, or to re-sign clients in perpetuity.

In fact, the Realtor's job is to sell their client's home (or at least procure an offer).

If a home has been on the market for an extended time, even in a soft market, one (or both) of the following is likely true: 1) the home is mispriced; 2) the home is poorly staged and marketed.

The antidote to #1 is a more realistic price; #2, another Realtor.

Realtor-performed household chores isn't one of the choices.

The Sideways Shot

The photo above is a good example of what I call "the sideways shot."

When done well, the angle shows off the building's size.

When done poorly . . . it leaves you disoriented, with no feel for the building at all.

Minnesota Thanksgiving

Thinking Outside the (Refrigerator) Box

What do you do when your fridge -- and your extra fridge -- are overflowing with Thanksgiving leftovers?

This time of year -- at least in Minnesota -- there's literally an infinite "extra fridge" . . . . outside your door.

Or in our case, inside the garage.

After checking the forecast, and verifying that our garage temp was a just-right 40 degrees -- that's where we put everything.

With seven house guests through the weekend, that should tide us over just fine.

P.S.: Want to guess how Minnesota ice fishermen kill their catch? They toss it outside the ice house to freeze.

Wall Street, Girlfriends & Wives

Did the Girlfriend Already Get Everything??

A judge says that if Denny Hecker can afford a girlfriend, he must pay his estranged wife a nice amount, too.

--"At Issue: 2 Women, Money & Hecker"; Star Tribune (11/26/09)

What a perfect metaphor for our financial mess!

If you haven't been following the story, a Hennepin County judge just ordered Denny Hecker, a Minneapolis auto magnate/wheeler-dealer whose business empire crashed, to give his estranged wife a fraction of the money that he's illicitly been transferring to his girlfriend.

If a bankruptcy judge can force Hecker to support his wife, surely there's a way to make government "do the right thing" with respect to the reeling American middle class.

Unfortunately, there's ample evidence that the "girlfriend" (Wall Street) is still calling the shots.

Two other differences between Denny Hecker and Washington:

One. After Washington has lavished a virtually endless string of trillion dollar "baubles" on Wall Street -- much of it with borrowed money -- it's not entirely clear that there's anything left in the U.S. Treasury.

Two. The money Denny Hecker gave his girlfriend at his wife's expense putatively belongs to him. The money Washington is giving Wall Street comes straight from U.S. taxpayers.

P.S.: the bankruptcy code has something called a "fraudulent conveyance" which allows a judge to reclaim money from girlfriends and give it to wives. Hmm . . . perhaps that has some relevance for Wall Street.

Washington's Financial Savvy vs. Wall St: No Contest

Keith Ellison vs. Lloyd Blankfein

Even if Congress was scrupulously independent of Wall Street -- which is hardly the case -- it would be no match for Wall Street when it came to drafting legislation that made the financial system fairer and more transparent.

The problem is a combination of priorities and expertise.

To take just one example, consider Congressman Keith Ellison, who is now serving his second term representing Minneapolis. (He's better known nationally as the first Muslim member of Congress.)

I don't know Mr. Ellison well, but since he and I were in the same law school class (University of Minnesota, 1990), I think it's fair to say that I know him better than most voters.

Law School Recollections

Almost two decades(!) later, what I remember of Mr. Ellison from law school was his passion for civil rights, and unwavering identification with the underdog. His frequent comments in class almost always spoke to the various ways minorities face discrimination in our society -- undoubtedly still true even today.

Coming from a large family in urban Detroit, he knows those issues not just in a theoretical, academic way -- but personally and intimately.

After law school, Mr. Ellison continued to make social justice the cornerstone of his career, both as a state legislator representing Minneapolis' north side, and as a lawyer in private practice.

In fact, his passion -- and those of his supporters -- was a decided advantage in the big, fragmented field that inevitably materialized to replace Martin Sabo, Minneapolis' long-time Congressman, when Sabo suddenly announced his retirement in Spring, 2006.

Campaign Finance Stumble

Ironically, the one issue that threatened Mr. Ellison's march to the primary -- the only contest that matters in heavily democratic Minneapolis -- was campaign finance.

Specifically, Mr. Ellison's practice of filing tardy, incomplete and/or incorrect finance disclosures.

As I recall, the amounts were trivial: one report showed something like $35,000 of contributions when the correct amount was $40,000 -- or vice versa.

Mr. Ellison made the requisite apologies, promised to do better -- and proceeded to win election to what is universally regarded to be one of the nation's safest House seats.

He was easily re-elected in 2008.

Financial Background: Zip

So what's wrong with this picture?

Getting a $40,000 (or was it $35,000) campaign finance disclosure wrong is not exactly confidence-inspiring when it come to tackling TARP-size numbers, with literally eight(!) more zeroes.

Putting the best possible face on this matter, I think it's fair to say that for Mr. Ellison -- much like Barack Obama -- finance is very far afield from what excites and motivates him politically.

So, to the extent that he has to deal with those issues at all, his instinct is to delegate.

There's nothing wrong, per se, with delegating to people more knowledgeable than yourself; after all, no one can be an expert on everything.

However, what happens when the "experts" you've chosen disagree?

For that matter, how do you know which "experts" to pick?

If Congressman Ellison knew what the future held in store for him 20 years ago, I bet I would have seen more of him in my Antitrust Law, Uniform Commercial Code, and other business law classes way back in law school.

Thanksgiving Special: TV's, Clothes . . . Mortgages

4.75% -- Again

While everyone is eating Turkey and looking for flat panel TV's on sale, interest rates have quietly re-touched their all-time lows: 4.75% (or even lower) for a 30-year, fixed rate mortgage.

That's what supply-and-demand says should happen when soft demand meets ample supply (at least something in the economic realm is functioning normally).

If you missed your chance to re-finance earlier this year . . . take advantage now!

Unlike earlier this year, there's no frenzy, which means a lot less hassle and delay.

P.S.: Of course, the other monetary phenomenon at the moment is bizarrely low short-term rates: effectively 0% for 3-month T-bill's, and less than 1% for 2-year bills.

Black Friday

Ads, Ads, Ads

Got the Star Tribune Sunday -- er, Thursday -- paper on my doorstep this morning.

What's unusual about that?

I don't subscribe. (No, I don't have telepathy -- I read it online, and have for years.)

The size of a (thick) phone book, it was 98% ads.

I gather that there are some sales tomorrow (otherwise known as Black Friday, the day after Thanksgiving).

P.S.: If the newspaper ceased publishing, how would all the retailers get their circulars out??

Latest Case-Shiller Numbers

Chris Snowbeck's Pioneer Press Article

Check out Chris Snowbeck's piece in today's Pioneer Press parsing Case-Shiller's September numbers, "Twin Cities home prices climb 1.8%."

As always, Chris does a nice job teasing out the cross-currents baked into the monthly numbers.

His piece finishes with a discussion of "strategic defaults," including a quote from yours truly.

Thanks, Chris!

Under Water Mortgages & Strategic Defaults

Future Foreclosures?

1 in 4 Borrowers Under Water

--Headline, The Wall Street Journal (11/24/09)

In truth, this isn't just a headline in today's Journal; it's THE headline.

As the accompanying story spells out, even the startling, 1-in-4 statistic understates things: in Nevada, Arizona, and Florida, the corresponding percentages are 65%, 48%, and 45%, respectively.

As I just posted last week ("Watching Strategic Defaults"), the biggest wild card in so-called experts' 2010 housing predictions is what happens when homeowners stop paying their mortgages not because they can't, but because they won't.

This is an unfolding story with huge implications for the entire housing market . .

Holiday Reading List -- Real Estate Version

Reading -- and Skip -- List

Real estate books cover a lot of ground (pun intended).

At one end of the pendulum are the various "how to" books: how to invest, how to fix up properties, how to get into the business and prosper.

At the other end of the pendulum are the more purely recreational and/or aesthetic books that celebrate real estate's potential to thrill and inspire us. You know, "coffee table" books.

No matter where your interests lie, here are a couple ideas likely to appeal to you (or someone you're buying a gift for!).

Recommended:

"A Man in Full" -- Thomas Wolfe. This book is to real estate what "Bonfire of the Vanities" was to Wall Street.

"The Real Estate Game" -- William Poorvu. Best investment book I'm aware of: informed discussion of "cap rates," risk/return, etc. with none of the inane advice found in the various "get rich quick" entries. (The latter collectively conjure up Mark Twain's stock market advice: "making money in stocks is easy. Only buy a stock if it goes up; if it doesn't go up, don't buy it" -- more on this below).

"The Not-So Big House" -- Susan Susanka. A reaction against the "McMansion" movement in 2001, this book is arguably even more relevant today. Susanka has practically turned this into a franchise, ala "The Idiot's Guide to," or the "Rich Dad, Poor Dad" series of books (see below).

Dwell magazine. Who says it has to be a book? Of the multitude of real estate magazines out there, this is consistently one of the most interesting and "fashion-forward."

Skip:

--Anything by Donald Trump. He's a vain idiot, who's burned practically everybody who's lent him money or bought shares in his companies. Or married him: I think it was New York Magazine that wrote that Trump doesn't marry -- he "rents with an option to buy" (apparently, he favors 5 year leases).

--the guy who wrote "Rich Dad, Poor Dad" (nice franchise, dude!). I'm under the impression that very little of it is reality-based, including the mentoring provided by the "rich Dad" who supposedly lived next door.

--anything with the word(s): 'the best'; 'profit'; or "secret" in it.

After browsing maybe a couple dozen of these, here's a fair summary of what they all say:

"Buy an overlooked gem that's priced ridiculously cheap by an unsophisticated, motivated seller who somehow has lots of equity in the property. Get them to finance the purchase. Make a few, cosmetic changes, then sell at a huge mark-up."

Not succinct enough? How about this: "Buy low, sell high."

In truth, there is one useful nugget I got from one of these books (I forgot which one): invest in properties close to where you live. Driving across town to meet a plumber/electrician/handyman is a time-consuming drag.

Your Call:

--"Getting to Yes." Well-known book on negotiation. However, not sure that great negotiating can be taught any more than someone can be taught to throw a 95 mph fastball.

In my experience, negotiating skills are a function of temperament and experience. Lots and lots of experience (I almost think of it like jet pilots logging flying time).

Not in the mood to read?

There's always Monopoly . . .

P.S.: Unlike the various "insider" books on what it's like to be in a various trade or profession -- Scott Turow's "One L," about the first year of law school, comes to mind -- I'm not aware of a consensus pick for would-be Realtors.

Sign of the times: empty lot

Where: 7508 West Lake St. in St. Louis Park

What: .24 acre lot

How much: sold for $75k

When: deal closed just after Labor Day

Who: listing agent - Ross Kaplan; broker - Edina Realty

So what's the big deal about an empty lot in St. Louis Park?

It's not just a lot -- it's a lot I listed and sold for the owner. Almost 3 months ago.

And it IS Minnesota, where the ground is predictably going to freeze sometime soon, closing the window for digging out foundations (and thereby building) until Spring.

No Sign of Life

After a recent trip to Sam's Club, I swung by to see if the Buyer -- who had just gotten married and intended to build a new home -- had broken ground yet (the lot is a couple blocks west).

Nope.

In fact, the only change I noticed was some debris that hadn't been there before.

Following a hunch, I looked up the Buyer's St. Louis Park condo, which had been on the market since July.

Yup, there it was: 'Expired' (as of Oct. 31).

$1 Million Lake of the Isles FSBO

Going it Alone

Where: 16xx 26th St. West, just east of Lake of the Isles in Minneapolis

What: 3 BR/4BA 1921 Colonial with 3,400 FSF

Who: listed by owner

How much: asking price is $1.195M

When: originally listed July, '08 (market time now = 16 months)

It's rare to see upper bracket FSBO's ("For Sale By Owner") -- this one's asking $1.195M -- for a couple reasons.

The biggest one is simply the fact that, as properties become more expensive and (presumably) unique, the "value-added" of good marketing goes up.

Put it this way: which can you say more about, hamburger or filet mignon?

Filet Mignon . . or Hamburger?

At $1 million plus these days, your home had better be filet mignon, not hamburger.

That means great location, great condition, and thoroughly updated. It also means tons of charm and character.

Not only must the home have all those things -- they must all be shown off to maximum effect to prospective Buyers.

In turn, that means professional staging, professional photography, professionally written literature and ad copy, not to mention a generous -- and well-deployed -- ad budget. (Note the frequency of the word, "professional".)

Oh, yeah: and professionally priced -- by a Realtor who knows the comp's, not an appraiser who's never set foot in your zip code (or a homeowner who "knows" that his home is worth more than a neighbor's . . . that sold two years ago).

Time is Money

The other reason owners of million dollar homes tend not to try to sell it themselves is that they're too busy working to pay for them.

Even with jumbo interest rates at 5.75% or lower, the "nut" for a $1 million-plus home -- including property taxes -- can easily exceed $6k-$8k per month. That's on top of the $100k-$200k downpayment you'll need.

Who earns that kind of money now?

Partners at bigger law firms, doctors with lucrative practices, senior business executives, etc. Not exactly the kind of folks likely to spend their weekend holding open houses.

Which might explain why the owner of this house is a FSBO; according to tax records, they purchased the home in 1986 for $204k.

So, it's just possible they're not a high-powered lawyer, doctor, etc.

"Clinton's Folly" . . Seriously!

Playing "Sovereign Monopoly"

One sign that a blog post has "legs" is how many people read it: at the moment, "Clinton's Folly" is getting about a hundred hits an hour, from all over the world (thanks, RealClearMarkets.com!)

Another sign is that the piece proves to be "fertile" when it comes to generating off-shoot ideas.

"Clinton's Folly" does well on that score, too.

While the idea is fanciful, it has more than a little historical precedent: selling -- and buying -- (especially large) tracts of land is one accepted way for indebted nations to settle their accounts with creditor nations.

Here are a couple, other fringe benefits and side angles:

--It removes the possibility of there being a "President Sarah Palin" in 2012 (only U.S. citizens are eligible to run);
--Wall Street can be counted on to throw its support behind the idea (who else did you think was going to handle the underwriting? And wait till you see their fee!!).
--Sometimes nations cede territory without getting paid a dime: even though this country bought large swaths of the Southwest -- including Southern California -- from Spain, which culture (and population) is ascendant more than 150 years later, Hispanic or Anglo? How about in 2050?

On RealClearMarkets.com Today

LA Times, Washington Post, Forbes -- and City Lakes Blog!

RealClearMarkets.com is probably the leading aggregator of business-related commentary in the world.

Its lineup today includes pieces from The Los Angeles Times, The Washington Post, The Times of London, Business Week, Bloomberg, and Forbes.

Oh, yeah: and a post from this blog, "Clinton's Folly," that I ran over the weekend. (Look for it in the "Off the Street" section.)

P.S.: I know when RealClearMarkets.com is running one of my posts because my blog's traffic meter registers a couple dozen hits -- from around the world -- by 6 a.m.

Switching Phones vs. Switching Homes

A Case of, "If it 'Aint Broke? . . .""

Are would-be home Buyers sitting on their hands for the same reason I'm still using my (almost) three-year old Palm Treo?

Granted, I'm not the typical cell phone buyer.

As a Realtor, I want my cell phone to have an infrared sensor so it can double as a "Smart Key" (what Realtors use to get into houses), just like my current phone does.

It also needs to seamlessly "hot synch" with Outlook, so that I can keep track of my appointments and my existing, 1,500 contacts (give or take a couple hundred).

My wife also needs a phone, so suddenly I need to become an expert on all the major carriers' "family plans."

Finally, both my wife and I have corporate discounts through our respective companies.

So, every time I research a plan, the sales rep has to go through an online rigamarole to find out what the applicable discount is, what's covered ("activation charge"), what isn't (hardware), etc.

Phew!!

Paralysis

Having navigated all the foregoing, whenever I'm just on the verge of replacing my Treo -- which still works pretty well, by the way -- there always seems to be "something new," just around the corner: a more generous calling plan; another "latest and greatest" phone about to make its debut; some new "killer app" or software.

In the last month, that would be 'Droid," the would-be "Linux" of the cell phone world (an open, non-proprietary platform pushed by Google and others).

There are probably a couple other considerations as well . . . but you get the idea.

In fact, the software industry long ago discovered the paralysis-inducing effect of promised, new products, and coined the term "vaporware" to describe rumored, new products or upgrades whose sole purpose is to keep would-be competitors' customers on the sidelines.

Mastering Today's Housing Market

Substitute "tax and finance" for "technology," and how much different is all this really than the housing market confronting prospective Buyers today?

For at least two years now, buying a home involves explicitly weighing many (if not all) of the following variables:

--current tax incentives (federal, state, & local);
--possible future tax incentives (federal, state & local);
--risk of home prices falling further;
--risk of home prices increasing out of one's reach (a real consideration for entry-level Buyers);
--one's credit scores and eligibility for a mortgage;
--direction of interest rates;
--the risk that the home one selects won't appraise;
--economic outlook, and in particular, one's job security;
--direction of property taxes (and inheriting an inflated property tax bill for the first year or two).

One more time: phew!!

In my experience, most of my Buyer clients today are much less focused on making a killing than on avoiding getting killed.

If the housing industry really wants to attract more Buyers, reducing the number and complexity of the variables they need to consider would be a good start.

Sacrificing the Body (Politic)??

Lincoln et al on Wall Street

"Often limb must be amputated to save a life; but life is never given to save a limb."

--Abraham Lincoln

In sustaining Wall Street while adulterating everything else about America, are we violating Lincoln's dictum?

What we should be doing now is isolating, minimizing, and ultimately replacing Wall Street and our current, dysfunctional financial system.

In the functioning, non-financial world, that's what happened after the 35W bridge collapsed in Minneapolis three years ago.

Instead, we're seemingly diverting all our (remaining) resources -- and then some! -- to saving our financial "limb."

As if there weren't enough bodies and debris already in the water?!?

Lincoln would have known better.

So would Theodore Roosevelt, FDR, et al.

"'Things' Doesn't Cut It": NY Times

What's Goldman Up to NOW?

“Certainly, our industry is responsible for things. We’re a leader in our industry, and we participated in things that were clearly wrong and we have reasons to regret and apologize for.”

--Lloyd Blankfein, Goldman Sachs chairman and chief executive (Nov. 17, 2009)

It is widely and correctly understood that Wall Street, with Goldman as a leader and with regulators in thrall, helped to inflate and profited from a credit bubble that burst and cost tens of millions of Americans their jobs, incomes, savings and home equity. American taxpayers continue to stand behind the bailouts and other government interventions that have stabilized the financial system, including Goldman, enabling the firm to post blowout profits in 2009 and to set aside $16.7 billion for bonuses so far this year.

--"Goldman's Non- Apology"; The NY Times, house editorial (11/21/09)

The only question I have *right now is this:

If one of the most profitable investment plays at the moment is shorting (betting against) the U.S. dollar -- also known as the carry trade -- and Goldman is now making literally billions per quarter . . . is any of that money coming from shorting the dollar?

Would that really be any different than shorting mortgage-backed securities as it was busy selling trillions of them to investors (as Goldman did)?

It really does seem that what's good for Goldman is bad . . . very bad . . . for the rest of us -- and vice versa.

"Justice Delayed . . ."

Last thought on this for now:

Ohio's Attorney General just filed suit against the credit rating agencies (Standard & Poor's, Moody's, and Fitch) for misrating billions in mortgage-backed securities, costing Ohio retirees hundreds of millions.

The securities blew up starting more than three years ago.

Should it really take government attorneys (federal and state) until, say, 2015, to bring appropriate legal action against Wall Street's key players??

P.S.: Want to guess what Goldman Sachs' defense(s) would be, were it to be proven that it profited, big-time, from shorting the dollar?

Pick one (or more) of the following:

A. That that's perfectly legal to do (completely true).
B. It had a fiduciary duty to its shareholders to maximize profit.
C. Profits from the carry trade made it less dependent on Fed and Treasury guaranties and other support (that it otherwise denies benefiting from).
D. Goldman made much less shorting the dollar than many others.
E. The dollar's weakness isn't due to Goldman and others shorting it (also known as the "it's not my dog" defense).

I'm sure I could double this list if I actually thought hard about it . . .

*It was Wayne Gretsky who said: 'I don't skate to where the puck is . . . I skate to where it's going to be.'

Don't Go By Asking Prices

Sold! (For 1/3 of Tax Assessed Value)

What: 3BR/3BA walkout rambler with almost 2,600 FSF

Where: 2625 Quentin Ave. South, in St. Louis Park's Fern Hill neighborhood

How much: originally listed for $226,800 on Aug. 5.

When: closed Nov. 18 (Thursday); just posted on MLS this morning.

"Exhibit A" under the category, "don't go by asking price" would be this Fern Hill rambler.

Originally listed for $226,800 back in August, this foreclosure had a tax assessed value of $387,500. That consisted of $158,700 for the land, and $228,800 for the building.

The bank-owner took two, 5% price cuts, then finally got a deal in late October.

It closed Thursday.

So . . . . drum roll . . . . what did the Buyer pay?

Try $130,000.

No, that's not a typo.

Why So Low?

The short explanation is "supply and demand."

The longer explanation is that the house is a tear-down, due to the worst mold damage I've personally ever seen (I showed the house multiple times).

So, you toss out the building value, and focus exclusively on the land.

As I've blogged previously about valuing tear-downs, the analysis -- based on back testing dozens of Twin Cities deals the last 6-8 years -- is to determine the top of the block, add 20% for well-done, new construction, then divide by 3.5.

In this case, the corresponding formula is $400k x 120% = $480k; $480k divided by 3.5 = $137k.

Bingo! (Take off a little extra because of tight credit for new construction, and a soft market for more expensive homes.)

P.S.: and yes, you need to know the "comp's" -- which I do -- to know that the top of the block is $400k.

"Clinton's Folly?"

U.S. Garage Sale

Corporations that file for bankruptcy typically have their debt discharged -- zeroing out their shareholders -- and their new equity issued to erstwhile creditors.

What's the equivalent for sovereign nations?

Put it this way: what would Alaska fetch on the open market?

Seward's Folly

When Secretary of State William Seward orchestrated Alaska's purchase from a financially crippled Russia in 1867 -- pundits of the day derided it as "Seward's Folly" -- the price was a measly $7.2 million.

Today, who knows?

One trillion? Five trillion?

We sell it to the Chinese for the upper end of that range, and -- poof! -- we retire what we owe them and even get a little extra to pay down what we owe Japan, South Korea, and the Gulf States.

Sell High, Buy Low

True, Alaska isn't exactly close to China -- I doubt even Sarah Palin can see it from her front yard.

But then, the Falklands Islands weren't exactly near Great Britain. For that matter, neither was India.

And both of those were colonized when "cutting edge technology" consisted of quill pens and carrier pigeons.

Who knows, if we play our cards right, a couple years down the road, maybe we can buy it back cheap -- just like we bought Rockefeller Center back from the Japanese a couple years after they purchased it at the peak.

P.S.: wait till you hear my idea for keeping Social Security solvent (it rhymes with "schmwaii").

Happiest Guy?

November Nirvana

The happiest guy I've seen all day (if not all month?)

That's easy: my mailman.

Just ran into him, on my lunch break.

Short of wearing a swimming suit, he looked like he was on vacation: shorts, headphones, sunglasses, etc. -- plus he was sporting a big, broad grin.

Nice to have an outdoor job on a day like today!

Make that the last month!

"Psst! Mr. Greenspan!"

"Bubble," Defined

For the benefit of Former Federal Reserve Chairman Alan Greenspan, who professed an inability to identify a bubble before it popped, here is the clearest, most concise definition I've seen yet:

Currency is like any financial innovation, an obligation secured by assets. When the obligation is perceived to have increased far beyond the level justifiable by the assets, which in this case make up a country’s economy, a bubble has formed.

--Alice Schroeder, Bloomberg (Oct. 1, 2009)

There Mr. Greenspan, clear enough?

Creating Buyer Urgency ("Threatening the Pooch")

Real vs. Manufactured Urgency

If you don't buy this magazine, we'll shoot this dog.

--National Lampoon cover (1973)

Buyers who feel no sense of urgency don't buy.

But creating that sense of urgency is a tricky thing for would-be home Sellers and their agents.

There's "faux" or manufactured urgency -- and then there's the real thing.

"Faux" Urgency

In the former category, I put the various and sundry deadlines I've been seeing pop up on MLS and in marketing literature lately. Consider these two examples:

Last Chance! This is your last chance before this gorgeous home goes off the market Nov. 14.
--Orono listing

Final Price Reduction!
--Andover listing

In both cases, the problem for the Seller is, what happens after the deadline comes and goes?

Unfortunately, often times today the home goes into foreclosure. While that means the home will be off the market for a period of time (and its condition will deteriorate), it also usually means that the home will be dramatically cheaper in the next 6-8 months.

Result?

Buyers have an incentive not to quickly buy the property -- but to wait.

Even if the only deadline is taking the home off the market during the slow holiday season, Buyers are likely to interpret this as weakness, not strength.

What such Sellers are really saying is, "we haven't been able to sell our home the last [fill in the blank] months, so we're going to give it a rest."

My guess is, many such Sellers, if presented with a real offer in the interim, would reconsider.

And Buyers know that.

Which is the final problem with Seller deadlines, especially if they're self-imposed (vs. set by a third party like a bank): they're not real.

Just like parties in a negotiation are disinclined to believe that any offer or counter is really "final," Buyers are (rightfully) dubious that the Seller can't simply extend or void any deadline if it suits their purposes.

Real Urgency

By contrast, at least in my experience, there's really only one scenario that creates genuine Buyer urgency: when a property is in good condition, attractively priced, and attracting serious interest from multiple parties (lots of first showings, several second showings, etc.).

In such situations, Buyers -- or at least Buyers who know the market -- sense that they have a limited amount of time to make their move before someone else does . . . without the listing agent having to say a thing.

The rest of the time, efforts to "light a fire" under Buyers more often boomerang.

That's because it's transparent that the only party who feels a sense of urgency . . . is the Seller.

All Roads Lead to -- and from -- the U.S. Dollar

U.S. Dollar Down, Everything Else . . Up!

Perplexed by the action in stocks and commodities since last Spring? (I've addressed housing in many, many other posts.)

See the explanation (below), courtesy of David Rosenberg, chief economist and strategist at Toronto-based investment manager Gluskin Sheff.

It's a bit wonky -- note the references to the DXY, VIX, various credit spreads, etc. -- but very worthwhile.

The reader's digest version?

As the dollar declines . . . it's driving up everything else.

The U.S. dollar . . . has become a huge ‘carry trade’ vehicle for all risky assets. Historically, there is no correlation at all between the DXY index (the U.S. dollar index) and the S&P 500. In the past eight months, that correlation is 90%. Ditto for credit spreads — zero correlation from 1995 to 2008, but now it has surged to 90% since April. There was historically a 70% inverse correlation between the U.S. dollar and emerging markets, such as the Brazilian Bovespa, and that correlation has also increased to 90% since the spring. Even the VIX index, which historically has had no better than a 20% correlation with the U.S. dollar, has now sent that correlation surge to 90%. Amazing. The inverse correlations between the U.S. dollar and gold and the U.S. dollar and commodities were always strong, but these too have strengthened and now stand at over 90%.

--David Rosenberg, "Breakfast with Dave" (11/19/09)

I consider my financial vocabulary to be pretty extensive, but I've seen so many references to the DXY the last few weeks that I finally googled it to find out.

It turns out to be a basket of six, non-U.S. currencies that reflects the strength/weakness of the dollar.

If you read the above excerpt, you know which way it's been going.

Rick Sharga, Cont.

Watching "Strategic Defaults"

A couple other points from Rick Sharga's excellent presentation yesterday, including a much-needed "silver lining":

The "X" factor in everyone's foreclosure projections is what happens with "strategic defaults."

Typically, people don't pay their mortgages because they can't. A strategic default is when someone doesn't pay their mortgage because they've decided not to.

Basically, the borrower decides that the "cost" of wrecked credit -- at least for a few years -- is less than the "benefit" of preserving what cash flow they have, and being freed of making payments on a house that will never be worth what they bought it for (if by "buying" you mean putting next-to-nothing down, and making nominal payments for a few years -- the case for millions of "Buyers" at the peak of the housing boom).

The odds of strategic default increase as homes become more deeply "underwater" -- that is, worth less than the mortgage against it.

Nationally, Sharga estimates that more than 20% of all mortgages now meet that description.

A sea change in how otherwise solvent borrowers regard their mortgage obligations would obviously wreak havoc with the experts' current default predictions.

One Solution: Equity Sharing

Precisely because of the risk of strategic defaults, many experts are calling for some sort of "equity-sharing" feature in new mortgages, and in restructuring existing ones (I'm one of them).

For existing, "underwater" mortgages, the bank reduces the mortgage balance in exchange for an ownership stake in the collateral (the home that secures the mortgage). That's pretty much what happens now with creditors and corporations that file for bankruptcy protection.

Prospectively, new mortgages would provide that banks share in both a percentage of the upside and downside in the home's future value. In exchange, borrowers would have to forfeit the "non-recourse" nature of mortgage debt, as it's currently defined.

Oh, yes, the silver lining?

As bad as the foreclosure numbers are nationally, and despite signs of "metastasis" (discussed in my previous post), for now the pain is still geographically concentrated in places like Southern California, Arizona, Las Vegas, and Florida.

Banks & Foreclosures: Rational Actors or . . .

. . . Foot-Dragging Ostriches?

Just a heard a very thorough -- and harrowing -- overview of the foreclosure picture nationally from Rick Sharga, a senior executive at RealtyTrac.

His company compiles one of the most complete databases tracking foreclosures, so he's speaking from authority.

What does he see?

--The housing mess is going to persist longer than is currently projected, because rising unemployment is exacerbating the problems with dubious mortgages -- especially Option-ARM's -- originated when the housing market was flying high.

Think of it as two rivers merging into a mega-river.

So when does he expect to sound the "all-clear," signifying a return to "normal" housing market conditions?

Not before 2012, and perhaps 2013 (no, not a typo).

--Peel back all the confusing statistics, short-term noise, etc. and the current foreclosure numbers are staggering.

According to Sharga, prior to 2009, there's never been a month where the number of foreclosure notices exceeded 300,000. Just so far in 2009, there have already been seven such months.

--Conventional wisdom is that every 6-10 job losses result in one foreclosure. However, because there's typically a 3-6 month lag, there are lots more foreclosures in the "pipeline."

Foreclosure Pain: 4 More Years

More gloomy news:

--Foreclosure pain has metastasized, spreading from places like Southern California, Florida and Arizona to previously unaffected places like Portland, Boise, and the northern Virginia suburbs.

--A combination of logistical delays, federal intervention, and the banks' self-interest are keeping many would-be foreclosures off the market -- for now.

According to Sharga, a bank that forecloses on a home can expect to incur $100 a day managing it, paying the utilities, taxes, etc. That comes to about $36k a year.

Now assume that the bank originally lent the homeowner $600k, and that the home is currently only worth $300k. When the home sells in foreclosure, the bank stands to lose more than 8x its annual carrying charge.

What initially looks like ostrich-like behavior on the banks' part suddenly seem quite rational!

A Financial Gettysburg Address: Redeeming the Crash

"Wall Street Dividend" vs. "Peace Dividend"

[Note to Readers: this post originally appeared two weeks ago. I'm re-running it now because it ran on a weekend, when traffic is light; because Nov. 19 is the actual anniversary date; and because it's the best piece I've written this year, IMHO -- even if The New York Times, Wall Street Journal, etc. declined to run it.]

Tomorrow marks the 146th Anniversary of Lincoln's Gettysburg Address.

What would he say about today's financial melt-down?

My guess is that it would sound something like this:

Three score and sixteen years ago, this country's leaders put in place a series of financial reforms designed to repair the damage from the worst financial collapse the United States has ever known -- and to prevent future such collapses.

They succeeded beyond their wildest dreams.

Due to their efforts, America's capital markets -- and as a result, America -- enjoyed almost 70 years of economic growth unsurpassed in history, benefiting virtually every U.S. citizen, no matter their background or walk of life.

That prosperity is once again threatened -- indeed, has already been severely damaged -- by Wall Street greed and excess.

There is no way to undo the misery already suffered by millions of Americans, who have lost their homes, jobs, and economic security due to Wall Street avarice.

But it is fully within our power to make sure that that sacrifice shall not be in vain.

Let us therefore resolve to redeem this most recent upheaval by rededicating ourselves to the task begun more than three generations ago.

Namely, that we commit to rearranging our economy and financial affairs -- employing all the technological brilliance, resourcefulness, and wisdom that we can summon -- so as to render Wall Street not just tamed but obsolete, never able to wreak such havoc again.

One of the key reasons that the '90's were so prosperous was the so-called "Peace Dividend": the defense savings that Western economies -- and particularly the U.S. -- realized after the Berlin Wall fell and the Soviet Union crumbled, effectively ending the Cold War.

That would pale in comparison to "The Wall Street Dividend."

Great Location, Cheap -- Why?

What's the Catch? (Hint: There's 2)

Where: 31xx East Calhoun Parkway in South Minneapolis

What: 5 BR/4 BA with 4,500 FSF on .29 acre lot

How Much: originally listed for $925k on 9/21; just dropped to $825k yesterday

Who: Broker - Edina Realty; Agent - James Keane

Even in a soft market for upper bracket homes, a 4,500 square foot home, on a .29 acre lot -- overlooking Minneapolis' Lake Calhoun, no less -- stands out.

So what's the catch, besides what some might say is the plain curb appeal?

Looking for Catches

The home doesn't appear to be dated or run-down; in fact, the interior pictures are actually quite flattering.

And no, it's not a foreclosure or short sale.

So what, then?

There is a high-rise tower immediately to the north looming over the home (and no, it's not in the pictures).

Not a huge deal, perhaps, but not exactly an amenity, either,

Catch #2

The other catch -- at least until the taxes catch up to the lower valuation? (Like many expensive Twin Cities homes now, this one is listed for well below the tax assessed value.)

An almost $17,000 annual property tax bill.

In truth, property taxes are a looming issue for many, many other upper bracket homes as well, but particularly in Minneapolis (by way of comparison, you'd expect an $800k Edina home to have a $10,000 property tax bill, give or take).

Biggest U.S. Export? Bubbles

FIFO, LIFO & LILO

"Where is the money [created by the U.S.] going? Where the problem's going to be: Asia. You can see asset prices going up, not only in Korea, in Taiwan, in Singapore and in Hong Kong, going up to levels that are incompatible or inconsistent with the economic fundamentals."

--Donald Tsang, Hong Kong executive; "A Dollar Warning From Asia," The Wall Street Journal (11/17/09)

Cheap U.S. money is stimulating the economy, all right.

It's just that the economies being stimulated the most . . . aren't in the U.S.

Rather, they're in places like China, India, and Brazil.

Like flood waters flowing over already saturated land, a tsunami of U.S. dollars is pouring into those economies because . . . that's where the growth is.

A dropping dollar makes this play even more profitable.

ABC's of the Carry Trade

Through the magic of something called "the carry trade," sophisticated investors can borrow depreciating dollars, make a higher return elsewhere, then essentially re-pay less than what they borrowed (that's what depreciation means).

Say it all at once: 'last one into the carry trade pool is a rotten egg!'

The only problem with that is . . . all the splashing.

The carry trade magnifies the downward pressure on the dollar, creating a vicious, bubble-inflating cycle.

Its balloon-inflating effects are most pronounced on the smaller, developing and emerging economies, where capital inflows can "move the dial" more than they would in a bigger economy.
Just think of it as the sovereign equivalent of the stock market, where "mega caps" like the U.S. and China typically are harder to move up -- or down -- than "small" and "micro-cap countries" like Malaysia or Peru.

Also inflating: many of the old bubbles, including worldwide stocks, gold, and other commodities such as oil and silver.

"FIFO and LIFO"

Who are the losers?

For starters, all the casualties of the old bubbles, including residential (and coming soon) commercial real estate, and before that, high tech stocks.

Next come all the risk-averse savers, whose money market yields and interest on savings have vanished.

Most at risk now?

Anyone who's last into any of the new bubbles.

Call them the Last-in-Last-Out's, or "LILO's" (vs. the more connected and favored FIFO's).

Grandparent and Grandchild Bubbles

A 30 Year Overview of Commercial Real Estate

Did you know that bubbles can have progeny?

That's John Carney's take, in his treatise-length (but extremely worthwhile) post, "How A Government Bailout Created Today's Commercial Real Estate Catastrophe" (Clusterstock; 11/16/2009).

According to Carney, today's commercial real estate bubble is actually a "grandchild" bubble; the "grandparent" was the bubble that resulted from letting commercial banks branch out into commercial real estate loans in the early '80's.

Carney does a remarkable job of presenting three decades of government policy toward banks -- and tracing the consequences of same.

One of his (not so surprising) insights is the extent to which commercial real estate the last three decades has been driven by financing (or the lack thereof) -- vs., say, fundamentals like supply and demand.

One other nugget: the securitization phenomemon that ended up wreaking so much havoc with residential real estate the last few years dates back to government clean-up efforts following the S&L bust in the early '90's.

In essence, securitization acted like a giant sponge, allowing the Resolution Trust Corporation -- the government entity charged with overseeing the S&L cleanup -- to expeditiously sell off thousands of mortgages at a time, in literally millions of tiny slices.

Sound familiar?

Now THAT's Dramatic

Bryn Mawr New Construction

What: 4 BA/4BA new construction with 3,500 FSF.

Where: 20xx Laurel Ave., in Minneapolis' Bryn Mawr neighborhood (just southwest of downtown).

How (much): $739.9k list price

Who: Coldwell Banker Burnet (broker); Steven Gouert (agent)

When: on market 11/16/09

Hard not to notice this dramatic new list -- that's the point!

The asking price -- low $700's -- is a stretch for Bryn Mawr, a great, pocket neighborhood between downtown Minneapolis and Theodore Wirth Park on the city's West side.

Confession: I bought my first house there, in 1987.

Forget about paying what I paid then (don't ask); prevailing prices now range from high $200's for a small, starter home to high $500's, for bigger and/or more updated.

This home is part of a mini-trend of new construction trying to push Bryn Mawr's range to $600k-$800k.

It'll be interesting to watch this one . . .

The Virtue of Proximity

Attending to Listings

There are Realtors who'll take a listing no matter how far afield is.

I'm not one of them.

Like Woody Allen's line about 90% of life just being about showing up, a good chunk of doing a good job as a listing agent (representing Sellers) is simply being attentive.

And it's a lot easier being attentive when your listings are 5 minutes away than 45 (or more).

So, I just spent a few minutes wiping down my one of my For Sale signs after the street sweepers covered it (and the attached "riders") with "leaf debris" this morning.

Glamorous business, huh?

Motivated Sellers . . . & Realtors!

Trolling for Offers

I don't know how motivated Sellers are at the moment, but their Realtors sure seem to be!

I showed perhaps half a dozen condo's within a mile of Lake Calhoun over the weekend, which means that today is "feedback day."

If you didn't know, it's customary for the listing agent, who represents the Seller, to shoot an email form to the Buyer's agent requesting feedback.

The forms vary a bit by broker, but basically, they all inquire about the property's condition (inside and out), staging, the prospective Buyer's opinion as to price, and future interest.

Lukewarm Interest

My client is just starting out, which means that they're learning the market, and not yet ready to buy. On top of that, they didn't love any of the choices.

Which is pretty much what I relayed to the various listing agents via the feedback form.

Notwithstanding that very equivocal feedback, almost every listing agent left me a voicemail indicating that the Seller was motivated, and asking what might get my client to consider making an offer -- any offer -- now.

That doesn't happen in Seller's markets.

I suppose the alternative explanation is that, 10 days ahead of Thanksgiving, the listing agents have a little extra time to follow up.

"Lost in America," Wall Street version: We're the Schmucks

Refunds at the Casino, Courtesy of Taxpayers

In my favorite scene in one of my favorite movies, "Lost in America," a distraught couple makes an impassioned plea to the casino manager to return all the money that the gambling-addict wife has just lost.

The LA-based couple, played by Albert Brooks and Julie Hagerty, had just decided to drop out of the rat race, sell all their belongings, and use the proceeds to travel cross country (in a mobile home, yet).

They make it as far as Las Vegas before Hagerty's' character blows their (sizable) nest egg playing craps.

Broke and desperate, Brooks' character, a marketing guy, has a brainstorm: the casino should give them all their money back as a public relations stunt!

He pitches the casino manager:

What about a billboard with my wife and I on it and we would be smiling and there would be a saying, something like, "These people . . . lost their nest egg at The Desert Inn, but The Desert Inn gave it back." And maybe there could be some kind of a visual with you handing us an egg or something. Now I mean, I'm just formulating this now, as I'm talking, but you can imagine, when it's worked out how effective it could be.

Picture this: maybe, my wife and I will do a television commercial for you and there could be a jingle and it could go: (begins to sing) "The Desert Inn has heart! The Desert Inn has heart! The Desert Inn has heart!" Something like that. See what I mean?

Here's how the casino manager, played by a pitch-perfect Gary Marshall, responds:

I gotta tell you, this is one of the best things I've ever heard. What's the board gonna say again? "Gamblers, come and get your money back." Great. That's great.

He continues:

Let's assume you're serious here. What if this caught on? Could you imagine what would happen? Why, we would have to return everybody's losses. The casino would just crumble. We couldn't pay our bills. You know the casino accounts for a great deal of our profits.

Albert Brooks then tries to explain that the casino wouldn't make everyone whole:

I understand. Of course, you don't pay back everybody's losses. You make a distinct division between the bold, who are out there searching, and all the other schmucks, who come here to see Wayne Newton.

No go (it turns out Gary Marshall's character is a Newton fan).

Here's how things conclude:

Brooks: And just so I understand, we can't get any of our money back, right?

Marshall: Well, not today, no. But if the policy ever changes, we'll write you. (still chuckling as he goes back into his office) That's wonderful. Very good.

If only this scenario had played out in real life.

Imagine, when Henry Paulson had gone to Congress with his request for $700 billion in TARP money, he'd been told: 'good luck to you and stay away from the tables next time.'

Instead, when Wall Street asked government for its money back, it -- us -- gave it to them!

Lost, indeed.

P.S.: guess who the "schmucks" are?

Late Season Landscaping

Not Too Late to Landscape

It's (way) too late in the season to plant anything.

But if you're contemplating a landscaping project (patio, steps, grading, etc.), you've got another month or so before the ground freezes and the window for doing work closes.

Two other benefits to doing the work now (vs. next Spring): landscapers are looking for work; and (therefore) their prices are better.

I know two people doing projects right now, for exactly those reasons.

He's No Ferdinand Pecora: Phil Who?!?

Nine Better Choices to Investigate Wall Street

Do you know who's on the "Financial Crisis Inquiry Commission" ("FCIC"), the 10 member Congressional committee that's now investigating the (ongoing) financial crisis?

Neither do I -- and neither, I submit, do the vast majority of Americans. In fact, I'd be shocked if 5 in 100 knew that the FCIC existed. (If you're a fan of Jay Leno's "Jay Walking" segment, apparently there are plenty of people who don't know who George Washington or Abraham Lincoln are -- let alone Joe Biden or Nancy Pelosi.)

The FCIC, of course, is the heir to the infamous (Ferdinand) Pecora Commission, which laid bare Wall Street abuses leading up to the 1929 stock market crash, and set the stage for overhauling this country's financial regulations.

Regulations such as Glass-Steagall, the Securities Act of 1933, and the Securities Exchange Act of 1934 -- regulations that were highly effective, and worked as intended for almost 70 years (the financial - regulatory equivalent of getting 300,000 miles on your last car).

Deafening Silence

In fact, the FCIC has been meeting since Summer, and is headed by Phil Angelides, the former Treasurer of California (Phil who?!?)

With the exception of Brooksley Born, former CFTC Commissioner (and famous would-be regulator of credit derivatives) . . . I can't name, or even recognize, a single other commissioner.

Which is a double shame, for two reasons: 1) today's financial crash calls for the most serious kind of inquiry, conducted by the wisest, most experienced people available; and 2) we're blessed with many such people, presumably ready, willing, and able to serve -- if only asked.

All-Star Lineup

In that vein, here's a short list of political and business luminaries who should have been chosen for the committee, in addition to Born (I'd then let the panelists choose their own chair).

Paul Volcker. "Tall Paul." Who knew that a public servant overseeing Wall Street could be wise, scrupulously independent, and, well, public-spirited? If there were a financial Mount Rushmore . . he'd be on it.

John Bogle. One-time mutual fund pioneer, now full-time thorn in the industry's side (they deserve it).

Jeremy Grantham. Legendary investor, scathing (and correct) Wall Street critic.

Bernie Madoff. Yeah, he's still going to burn in Hell, but using his knowledge to repair the system he defrauded might buy him a little redemption.

Marcy Kaptur. Ohio Congresswoman (and MIT grad) who had the courage to call out Goldman Sachs. Longest-serving woman in the House of Representatives.

Elizabeth Warren. Harvard Prof. who's in line to head the Consumer Financial Protection Agency -- if it's ever created.

Nell Minow. The conscience of corporate America (not an oxymoron). Longtime shareholder activist (with Bob Monks) at the Lens Fund; co-founder of The Corporate Library. World-class expert on corporate governance, executive compensation.

Simon Johnson. Former chief economist of the International Monetary Fund. Who knew that all his experience helping Third World, "Banana Republics" clean up their finances would prove so relevant to the U.S. today?

Ross Kaplan. As a Minneapolis-based Realtor, has great insight into housing market; plus, brings a "non-Beltway" perspective to the financial mess. Other credentials: former corporate attorney and CPA; Stanford econ degree; widely published and quoted blogger. Founded Bulletin Boardroom, Inc. in 1992 to harness corporate governance to then-emerging technologies.

(Regarding that last choice: hey, it worked for Dick Cheney! If you don't recall, George Bush picked Cheney to vet his VP choices in 2000 -- and Cheney picked himself.)

Just to make clear that the Committee has a broad mandate: make sure that it has sweeping subpoena power, an unrushed timetable -- and no less than than 20% of the budget Ken Starr got.

P.S.: Every good team has a deep bench. Here are some honorable mention picks: Joseph Stiglitz, Floyd Norris, and Thomas L. Friedman.

New Trader Joe's in Minnetonka: Retail Home Run

Just checked out the new Trader Joe's in Minnetonka, located just northwest of 394 and Hopkins Crossroads. The store opened last Fri. (Nov. 6).

Quick first impressions:

1. It's huge. In fact, my cashier said that it's supposed to be the 2nd biggest of 300 Trader Joe's nationally.

2. There's ample parking (makes a big difference if there's not, like at the St. Louis Park location).

3. It's going to be a boon for the surrounding (strip) shopping center and residential neighborhoods.

I've got a client looking in the area now, who perked up when I mentioned that there was now a Trader Joe's in the neighborhood.

Three other clients who have bought homes from me nearby are also thrilled.

Et Tu, FHA?

Hemorrhaging at FHA

FHA runs low on cash, fueling bailout concerns.

--Headline, The Boston Globe (11/13/09)

Here we go again.

First come the rumors of funny accounting and huge, buried losses.

Then come the vehement denials from company executives.

Finally, the truth comes out: the critics are vindicated, the losses are toted up, the discredited executives are booted (or not) . . . and the government provides a multi-billion dollar bailout.

Are we talking about Fannie Mae? Freddie Mac?

Well, yes. But this time, the embattled government agency is FHA.

Background

As you may or may not know, Fannie Mae and Freddie Mac -- the two biggest government-sponsored players in the housing market -- finally hit the (accounting) wall and were taken over by the government more than a year ago.

Both ultimately required tens of billions in government bailout money -- money they denied needing practically up until the end. In fact, they are still in business, still incurring losses, and still in need of more bailout money.

As Fannie Mae and Freddie Mac lending slowed down, much of the slack the last year has been taken up by FHA.

In fact, something like 30% of all mortgages made in the U.S. in the last year were backed by FHA.

Its appeal? Government insurance, plus low, 3.5% down payments.

No Margin for Error

Unfortunately, lending into a declining housing market to Buyers putting down a very slim down payment is a recipe for disaster.

In fact, my first-grader could do the math: 3.5% down, minus the drop in the local housing market (call it 5% to 20%), equals the amount FHA borrowers are underwater.

Throw in millions of recession-induced job losses, and the picture suddenly isn't very pretty.

Even if things aren't quite so dire, after Fannie Mae and Freddie Mac, I doubt that many people are going to give FHA executives the benefit of the doubt.

"Your Money's No Good"

Boycotts, Social Media & Goldman Sachs

If artists doodle, and musicians play little ditties in their head, what do bloggers "noodle around" with in their free time?

At least in my case, provocative phrases with multiple meanings.

Like, "your money's no good."

So far, I'm already up to four, alternative definitions:

One. "I won't accept your money because I hold you in high esteem" (in other words, it's free).

What the bartender says to a longtime friend, star athlete, war hero, etc.

Two. "I won't accept your money because I hold you in low esteem" (in other words, the price is infinite).

What fashionable, upper East Side restaurants now say to Ruth Madoff, or gated communities in LA presumably used to say to OJ Simpson after he was acquitted of murder, but before he was (finally) sent to prison for armed robbery last year.

Three. Your money, specifically, is no good: your credit cards have been revoked, your bank account is overdrawn, etc.

Four. Your money's no good -- and neither is anyone else's -- because the currency has been debased (as they say, this one's "ripped from today's headlines").

Ostracism, 21st Century-Style

Of the four possible meanings, the one I find the most tantalizing is #2.

Combine the latest social networking technology; some old-fashioned notions about boycotts, shunning, and ostracism; and a feckless, co-opted political system -- and suddenly you've got a way to deal with a corporate miscreant like Goldman Sachs.

Namely, society could collectively refuse to do business with Goldman Sachs and its greedy, economy-wrecking executives.

Boycott, the term for such collective action, is usually thought of as a refusal to buy from someone. In fact, the term comes from the local Irish community's refusal to sell to Charles Boycott, after Boycott took the landowners' side in a labor dispute in 1880.

And to think, they had to organize their boycott without the benefit of email, smart phones, instant messaging, or Facebook!

P.S.: One of the funniest stand-up comedy bits I ever heard was (a then unknown) Rob Schneider cataloguing the various usages of the word "Dude."

As in . . . Approval ("Dude!"); Disapproval ("d-u-d-e"); "Is that a stranger in my bedroom closet?": ('d-u-u-u-de??'). And so in that vein (I think Schneider topped out at 12 meanings).

Automated Valuations on Cyberhomes, Zillow, etc.

Wrong Number(s)

Real estate Web sites like Trulia, Zillow, and Cyberhomes now all offer some version of what are called "automated valuations."

That is, they crunch publicly available records and generate an estimated fair market value for millions of homes nationally.

How accurate are they?

Put it this way: if you can find a Seller who'll actually accept what Cyberhomes -- to pick just one example -- says their home is worth . . . pay it!

Case Study

At least, that's my take after checking out 2818 Sunset Boulevard just southwest of Cedar Lake in Minneapolis (pictured above, in its "before" condition).

An extreme fixer-upper when I sold it last Fall for $405k, the new owners have spent the better part of the last year painstakingly restoring and expanding it.

You name it, they did it:

Deluxe, new Kitchen? Check.

Brand new sunken Living Room where the attached garage had been? Check.

All-new windows, mechanical's, updated baths -- not to mention a new, 600 square foot detached garage?

Check, check, check.

So, what does Cyberhomes say the home is worth?

$383k.

What is the home actually worth?

I'd put it at $900k, give or take 5%.

How should I know?

Besides being a professional Realtor who's sold more than a dozen, nearby homes . . . I live two doors away.

P.S.: Cyberhomes' aerial shot of my home still shows the backyard tree we cut down when we moved in . . . 3 1/2 years ago!

Taking -- Or Leaving -- VOW's

VOW's, "Me Media" & the Housing Market

Did you know that there are now real estate Web sites where you can rate homes you've seen, leave comments -- and see what others are saying, too?

So-called Virtual Office Websites ("VOW's") such as ZipRealty.com combine much of the interactivity of social media like Facebook, MySpace, and Twitter with a veritable ocean of housing data available on the local Multiple Listing Service ("MLS"). (My preferred name for social media is "me media").

Just to up the ante, they also promise to rebate 20% of the commission they receive to buyers.

So, is there any "there there?"

I just checked out ZipRealty.com, and was underwhelmed (to say the least).

Results of Test Drive

For starters, you have to register, and accept the standard, "black box" user agreement with tons of microscopic fine print.

It's been 20 minutes since I clicked "yes, I accept," and I've yet to receive any spam or have anyone knock on my door to claim my first-born . . . but I'm not holding my breath.

To test drive the site, I then ran a search on homes for sale in St. Louis Park, and got more than 300 hits.

So far, so good.

However, when I clicked on several individual listings and checked "client ratings," I found . . . nothing.

More accurately, I was presented with a screen that cheerily invited me to "Be the first to write a review."

The categories include "Overall Rating," "Curb Appeal," "Interior Appeal," and "Neighborhood"; reviewers can assign anywhere from one (lowest) to five (highest) "houses," or stars.

The rankings are followed by fields for "Pros," "Cons," and "Review," where users can add their comments.

Waiting for Critical Mass?

Sites such as ZipRealty.com would seem to face two hurdles.

One. "Chicken & Egg" problem.

It's hard to see prospective home Buyers flocking to VOW's before they have any real, user-provided content, yet home Buyers aren't going to input their comments on VOW's until they attract more traffic.

In computer parlance, this is known as a "network effect": the more people use something, the more valuable it becomes -- and the more valuable it becomes, the more people use it. Think, the iPhone and its 100,000 app's, or -- once upon a time -- Microsoft Windows.

Two. Push-back from home Sellers.

As one might imagine, Sellers are not particularly keen to have strangers trash their home in a public forum.

So, brokers such as Edina Realty are incorporating default, "opt-out" language into their listing agreements. Here is the relevant excerpt from Edina's:

I understand that I have the additional option of allowing comments about my property to appear on VOWs, including negative comments, made by persons other than the broker operating the VOW. At this time, however, I decline . . . understanding that I may change these selections at any time.

Personally, it's hard to imagine many home Sellers rejecting this clause and instead "opting in."

Star Trib Print Ads

Less "Bang" for More Money? That'll Work

Selling real estate is all about marketing, and marketing includes advertising.

But there's no law saying where Realtors have to advertise, or how.

Over the last five years or so, the Star Trib's circulation --along with that of all major newspapers -- has dropped dramatically.

Meanwhile, the Strib's rates for its weekend open house directory, which practically require a magnifying glass to read, have gone up (I'd estimate by at least a third).

Hmm, think that that has something to do with newspapers' woes??

In all fairness, the world is inexorably moving online. Squeezing more out of the dwindling number of print advertisers just hastens things . . . .

Bing, 'Bot's & Blog Rankings

Bing vs. Google: No Pay, No Play

It is a bit of an understatement to say that this blog's rank on Technorati, one of the third-party sites that track such things, has bounced around.

In the almost two years that I've been blogging (yeah, it's a verb), Technorati has ranked City Lakes Real Estate Blog somewhere between the high 400's (as in thousand), and and 1.7 million.

Until now.

I checked the other day, and this blog now ranks just over 24,000 worldwide (thanks, regular readers!).

You'd guess that has something to do with my stellar posts (IMHO); as I wrote last month, there are now more than 50(!) posts from this blog that rank (or did) in Google's "top ten" hits, worldwide ("City Lakes Hits").

However, over on Microsoft's search engine, Bing, this blog -- and presumably, many others like it -- don't exist.

What gives?

Bing vs. Google

Bing's rankings are for sale; Google's aren't (or at least, less so).

To take just one example, my post titled "How Big a Premium for Small Lakefront" currently ranks #1 worldwide on Google.

Type in "lakefront premium" on Bing and what do you get?

Literally thousands of (paid-for) hits for lakefront properties for sale. Meanwhile, I stopped searching for City Lakes Real Estate . . . ten screens in (10 posts per).

The blogs touting lakefront properties for sale are both buying key words directly from Bing, and in many cases, using sophisticated software called "bots" to attract the search engines' attention and drive up their placement.

P.S.: the other way I know this blog's rank is climbing is that I'm getting more and more unsolicited email from SEO ("search engine optimization") consultants promising to put me on Google's home page.

Thanks, guys, I'm already on it!

(More) Naked Swimmers

"Botttom's Up" Real Estate Recovery

You don't know who's swimming naked until the tides goes out.
--Warren Buffett

3,500 FSF is the new 5,000 FSF.
--Ross Kaplan

The housing recovery is happening from the bottom up.

As any active Realtor can readily report, the lower the price bracket, the stronger the housing market; the higher, the weaker.

Clearly, that's why Congress is now extending tax incentives to so-called move-up Buyers, rather than just first-time Buyers.

Upper Bracket Woes

So where does that leave owners of upper bracket homes? (In the Twin Cities, three years ago I would have put the threshold for upper bracket homes around $800k; now . . . it's a lot lower.)

In many cases, straining under too-big mortgages on houses that have depreciated in value.

Most at risk are those who bought roughly between 2004-2007, using a lot of leverage; who have jobs or are in businesses most exposed to the recession; and whose other assets, like stocks, are down significantly (although less than last Spring!).

For those folks, the tide is continuing to run out.

That's why I expect the foreclosure pain to continue moving "up market," at least in the short run.

P.S.: one more aggravating factor for would-be sellers of larger, upper bracket homes: Americans' love affair with "big, bigger, biggest" is at least temporarily on hold. I call this phenomenon, "3,500 (square feet) is the new 5,000."

Blog Re-Run's

Note to Regular Readers

I don't do it often, but occasionally I will "jump" an older post to the top of the heap if one of two things has happened:

One. I've tweaked the piece enough since the original post that it's worth re-reading, IMHO (especially if it's a longer post, I'll keep editing, amending, etc. until it feels right); or

Two. The post was lightly read, due to either appearing on a weekend, or quickly being superseded by subsequent posts.

Just think of it as "blog re-runs."

If you've already seen the post and didn't like it the first time . . . feel free to skip!

$6,500 Tax Credit & The Move-Up Market

$6,500 Tax Credit

Move-Up Market

Entry-Level Market


Helping the Move-up Market

The $8,000 tax credit for first-time home Buyers worked so well that the government has extended it to move-up Buyers, too (albeit in slightly less generous form).

Beginning Dec. 1, eligible Buyers who've occupied their existing home for 5 out of the last 8 years qualify for a $6,500 tax credit of their own.

The idea is to leverage strength in the lower rungs of the housing market to help more expensive housing.

If tax incentives actually buoy the move-up market, guess which homes, in which market segment, are likely to be targeted next?

Hint: it takes jumbo mortgages to buy them.

Stock Market Today

Big Rally

Hard to improve on this assessment by Jake Dollarhide, chief executive of Longbow Asset Management:

When you have zero percent inflation, zero percent interest rates, zero percent money markets rates, and when you have metals and gold that have skyrocketed to astronomical levels, stocks look pretty good in comparison."

--The NY Times (11/9/09)

So where does that leave real estate, and specifically, the housing market?

More posts to come . . .

P.S.: Can "Dollarhide" actually be a real name?? (That of a money manager, yet.)

"Daylight Savings" Trick

Let the Sun Shine In

Want to get the most out of Minnesota's sparse winter sunlight?

Take advantage of this week's mild weather . . . and wash your windows.

Especially if your neighbors have been doing lots of (dusty) remodeling over the summer, like ours have been, it's easy to get used to windows that are less than, shall we say, sparkling.

Cleaned-up windows -- especially on a bright day like today -- are like a good jolt of caffeine! (Not to mention cheaper than a sunlamp or FL vacation.)

P.S.: if it seems like the picture above is a commercial for new windows -- it's because it is: I grabbed the photo from Andersen Windows' Web site (I'm guessing the plug makes up for the unauthorized use -- although I was careful to check that it wasn't copyrighted before I uploaded it).

Real Estate Bargain Bin

Minnehaha Falls Deal

Where: 45xx 47th South (just north of Minnehaha Falls in Minneapolis)

How much: list price: $224,800; tax assessed value: $379,500

What: 3 BR/2BA 1948 two-story with 2,150 FSF

Who: listed by Almost Free Realty

When: came on market 10/22/09

No matter how cheap the asking price, it's not necessarily available at that price if it's a short sale.

That's because the bank(s) that hold the mortgage are in the driver's seat: unless they agree to accept less than what they're owed, there's no deal. Then, the home progresses to foreclosure.

Which is in fact what happens something like 75% of the time with short sales.

So, what's eye-catching about the home pictured above is an asking price more than 40% below tax assessed value -- plus the fact that it's not a foreclosure or short sale (loudly trumpeted on MLS).

The Fed & Unintended Consequences

The Fed, Commodity Prices & Economic Recovery

Twelve hundred miles (give or take) from Wall Street, me thinks that a not-so virtuous cycle has emerged regarding the government's various and sundry efforts to nurse the economy back to health.

The dynamic goes something like this:

Step 1: the Federal Reserve and Treasury essentially borrow and/or create money -- at this point, trillions of it -- then direct it where they think it's most needed (not necessarily to me or you . . . but that's another post).

Step 2: the markets ("Mr. Market") take note of all that deficit spending, and drive down the dollar while pushing up commodity prices.

Step 3: elevated commodity prices retard recovery.

To take just one example, at $80 a barrel, oil is likely twice what supply and demand would otherwise dictate at the moment. Meanwhile, "stores of value" like gold -- now around $1,100 an ounce -- drain money that would otherwise fund economic growth.

Step 4: the Federal Reserve and Treasury, noting anemic growth, serve up another helping of stimulus cum deficit spending (see Step 1).

How long can this go on?

As many commentators have now noted, eventually one of two things happen: 1) economic recovery kicks in, and the government can taper its rescue efforts; or 2) the U.S. bumps up against the natural limits of its ability to borrow (not a bright line).

The "canary in the coal mine" for this kind of kind of fiscal/monetary tightrope is Japan, which is a good 15 years ahead of the U.S. on its trajectory of boom, bust, and (non)recovery.

The lesson for policymakers would seem to be, "don't do what Japan has done."