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Friday, April 30, 2010

Rays of Hope on Wall Street: Goldman Sachs Criminal Charges?

"Better Late Than Never" Dept.

No, I'm not wishing that the stock market goes down.

But at least it's going down today for a "good" reason: it's being pulled down by a sharp drop in the price of Goldman Sachs stock, which may now be charged criminally (it is already the subject of civil fraud charges).

While the criminal charges are long overdue, they are certainly welcome -- what's that line about "justice delayed is justice denied?"

Also heartening:

--Judging by the abrupt price drop today, nobody got tipped off early.

Unfortunately, it's now common practice to witness seemingly inexplicable moves in stocks ahead of significant news. So, maybe some honesty and propriety really is creeping back into the market.

--A drop in Goldman Sachs' stock -- everything else being equal -- means that the company has less money to spend on politicians, lobbyists, and defense lawyers.

Not to mention hiring (warping) the nation's supposed "best and brightest," who have responded to the siren call of Wall Street riches in record numbers the last, oh, 30 years.

To paraphrase Martha Stewart, "that's a VERY good thing."

A Rose By Any Other Name??

Real Estate Names With -- and Without -- Cachet

Where would you rather pop for a $2 million home: a town named "Seabreeze" -- or one named "Lump?"

Or ponder this one:

Which list of city names, "A" or "B," is more suggestive of affluence and status?

List A: Sag Harbor; Huntington Beach; Boca Raton

List B: Sack; Pile; Mound

A Boy Named "Sue"

OK, so I'm exaggerating (a little).

But if you're a non-Minnesotan reading this blog, "Mound" happens to be a real Twin Cities suburb.

One that happens to have miles of shoreline on the west side of the Twin Cities' biggest and swankiest lake, Lake Minnetonka, and is home to dozens of upper bracket (as well as more modest) homes.

So here's a marketing freebie for the next Mound City Council meeting: how about "Tonka Shores?"

P.S.: my native New Yorker wife reminds me that not everyone's association with "Mound" is negative; hers is with "Mounds" candy bars.

FRIDAY(!) Open House


Tax Credit Countdown

When
: 4-6 p.m. today
Where: 4121 W. 28th St (28th & Inglewood Ave. So.), in St. Louis Park's Fern Hill neighborhood
What
: 4 Bedrooms (all up), 3 Bath 1937 Colonial with 3,000 square feet
How much: $549,900
Who: listed by Ross Kaplan, Edina Realty City Lakes

Will there be a burst of last minute home purchases ahead of today's tax credit expiration?

We'll find out.

Just to give procrastinators one last opportunity, I'll be at my listing at 4121 W. 28th St. (28th & Inglewood) in St. Louis Park's Fern Hill neighborhood from 4 - 6 p.m. today.

Highlights -- besides the value, location, and curb appeal -- include a beautiful, wood-paneled Family Room; four Bedrooms up; formal Living and Dining Rooms; and a ton of charm and character throughout.

Oh, yes: and an attached, 3-car garage with tons of extra storage space, plus a Gazebo in back.

P.S.: For more on whether today's deadline is a big deal or not, see "It's a mad dash for home tax credits," in today's Pioneer Press. Reporter Chris Snowbeck surveys several local agents -- including yours truly -- about whether the tax credits are going to expire with a bang or a whimper.

Thursday, April 29, 2010

Housing Market "Beached Whales"

What's Wrong With This Picture?

You don't know who's swimming naked until the tide runs out.

--Warren Buffett

So, what's wrong with this Minnetonka home (pictured above)?

That is, besides that fact that the front (and most important) photo on MLS looks like the home is stuck in a winter time warp, and it's now almost May.

Actually, nothing.

I just showed the home, and it's very impressive.

Great floor plan; open, spacious Kitchen; great owner's suite (and three more bedrooms up).

So what is it, then?

The rest of the block.

Whereas this home, built in 2006, is selling for $649.9k, all the other homes on the block are easily 50 years older, less than half the size, and worth hundreds of thousands less.

As the locals say, "uff da!"

Housing Market Time Machine

What happened?

This home -- and hundreds of other homes like it in the Twin Cities -- was built in 2006 at the height of the market.

At the time, homes were appreciating 15% annually, and the sky was a(n almost) cloudless blue.

Developers were getting ever-more aggressive putting up "spec" homes, venturing from "sure bet" neighborhoods to ones (like this one) where prevailing home prices were dramatically lower and nothing had turned over yet.

Their thinking, no doubt, was that the whole block was a candidate for redevelopment, and that their smart, new home would soon be surrounded by other, similar homes.

But then all of a sudden . . . the tide went out.

For now, this is the only new home on the block.

From the street, it's hard to escape the image of a beached whale, now stranded a long way from the receding ocean.

Hole in My Resume

Vacancy on Minneapolis Zoning Board of Adjustment

As resumes go, mine's on the long side:

Realtor. Former corporate attorney. Former CPA. Entrepreneur. Writer/blogger. Investor. Political candidate. Law school and economics background.

You get the idea.

But it turns out there's a hole in my resume -- at least at far as the Minneapolis Zoning Board of Adjustment ("ZBOA") is concerned.

When I applied for the current vacancy, the panel doing the interviewing told me that the ideal candidate is . . . an architect (the ZBOA already has a Realtor, and they want more balance).

The panel hasn't made a formal recommendation yet -- but I'm not holding my breath . . .

P.S.: the ZBOA's main function is to review requests for variances from Minneapolis homeowners, developers, etc. As such, it provides a great window into what's happening in various Minneapolis neighborhoods -- and a chance to influence same.

No More "No Name" Neighborhoods


Neighborhood Name as "Brand"

Once upon a time, people lived in St. Paul, or Minneapolis, or St. Louis Park.

Now, they live in Fern Hill, Birchwood, or Sorenson (all neighborhoods in St. Louis Park).

Overall, as Martha Stewart would say, "that's a good thing."

Especially if the neighborhood name isn't just marketing, but reflects an active neighborhood association, and a growing sense of neighborhood identity.

As a Realtor, I can attest that Buyers value -- and pay up -- for those things.

Just look at prices in Linden Hills!

Wednesday, April 28, 2010

Pearlstein: 'Profitable Goldman Better for Taxpayers'

Post's Pearlstein Gets It Very Wrong

Much of [yesterday's Senate] hearing focused on how Goldman went from having billions of dollars of exposure to the subprime mortgage market in the first half of 2006 to posting big profits from the implosion in that same market by the second half of 2007.

The more benign way to look at this dramatic rebound is that it speaks to Goldman's knack for anticipating the market and its willingness to break from the Wall Street herd. Many of us may be jealous of Goldman's success or suspicious of exactly how it came, but surely we are all better off than if Goldman had remained long on mortgages, tumbled into insolvency and required a big taxpayer bailout.

--Steven Pearlstein, "Two planets collide for three hearings on Goldman"; The Washington Post(4/28/2010)

Of all the myths and misconceptions about Goldman Sachs' role in today's financial crisis, the one perpetuated (above) by the normally astute Mr. Pearlstein is the most infuriating and pernicious.

That's because society is patently NOT better off because Goldman Sachs profited from the housing bust.

By figuring out how to make money off of "shit" -- Goldman Sachs' word for their mortgage-backed securities, not mine -- Goldman stoked demand for . . . . more shit.

That assured that even more oceans of capital would flood into the housing market, driving prices even higher -- and making any crash harder.

Ironically, the higher the housing market went, the more potential to "short," or bet against it, which sucked in even more capital.

Doomsday machine, indeed.

Instead of viewing Goldman's obscene profits as averting another taxpayer bailout, as Pearlstein does, they need to be viewed in the larger context of causing trillions of dollars of (additional) carnage in the housing market and broader economy.

And Pearlstein is dead wrong that Goldman didn't get bailed out.

What else do you call pumping $185 billion(!) into AIG; allowing Goldman Sachs to become a bank holding company virtually overnight and borrow for free from The Fed; beggaring savers with zero percent interest rates to resuscitate the banks; using The Fed's balance sheet as a dumping ground for Goldman (and other banks') toxic assets.

And on and on . . . .

"Shitty" doesn't begin to describe it.

Tuesday, April 27, 2010

Twin Cities Housing Market: Quirks & Curiousities

The More, The Merrier?

One of the weird things about the local housing market at the moment is that small, entry-level homes are hard to find -- and (therefore) seem to be fetching a healthy premium.

Meanwhile, north of seven figures, there seem to be TONS of choices, many steeply discounted.

That disconnect suggests a solution (I'm kidding, but not completely):

Groups of first-time Buyers should combine to buy large, upper bracket homes -- and share them!

Not only will the co-owners enjoy more space per person that way, they'll also enjoy the quality of an upper bracket home; live in a (very) nice neighborhood; and possibly even get to enjoy (part of) an especially nice, oversized lot.

Not sure about the parking, though . . .

The "Driver Ed" Response to the Financial Crisis

Geithner: 'Increase Financial Literacy'

I wish it were from The Onion, but unfortunately, it's not:

While Americans from Wall Street to Main Street focus on much-needed financial reforms that will set and enforce clear rules across the financial marketplace, we also need to recognize that most Americans don't have the knowledge and skills they need to make the right financial decisions for themselves and their families.

--"Using Education to Cope With a Complex Economy"; The Huffington Post (4/27/10)

Imagine just witnessing -- OK, living through -- the biggest (financial) freeway crack-up in almost 80 years.

The proximate causes (in order)?

No speed limits; defective cars; and no highway patrol (although if they're no speed limits, exactly what are they enforcing?).

The solution(s) to the foregoing would obviously be: going 55 mph (vs. 200 mph-plus); well-designed cars; and cops.

So, is that what Timothy Geithner (Treasury Secretary), Arne Duncan (Education Secretary), and Valerie Jarrett (Senior Obama Advisor) -- co-authors of the piece quoted above -- are calling for?

Not exactly.

They think the solution is for average Americans to become more financially literate.

In other words, prevent another financial crash by focusing on . . . better driver ed.

"Down & Out" vs. "Up-and-Coming"

Northeast Minneapolis' 13th Ave.

What's the difference between a neighborhood that's down-and-out vs. up-and-coming?

Or, in the case of a Northeast Minneapolis neighborhood long anchored by the Modern Cafe, the difference between warm and hot?

One or two new restaurants, a popular new bar -- and a profile in The New York Times' Sunday travel section (see, "A Minneapolis Stretch Reborn").

FYI, the two new restaurants are Anchor Fish & Chips, and Northeast Social.

Federal Reserve & Low Mortgage Rates

No Change in Mortgage Rates (Yet)

I have just received the following telegram from my generous daddy. It says, 'Dear Jack: Don't buy a single vote more than necessary. I'll be damned if I'm going to pay for a landslide.

--John F. Kennedy

Almost a month after The Federal Reserve completed its massive, $1.2 trillion purchase of mortgage securities, 30-year mortgage rates are about 5%.

What were they prior to March 31?

About 5%.

Which begs the question: did The Fed really need to spend all that money?

Broker Open "Buzz" or . ..

Who's That Woman on the Cell Phone in Front of the Broker Open?

I noticed the woman on the cell phone in front of the broker open as I was looking for a parking space.

Hmm, I thought -- must be a hot new listing if the agent is on the phone to a client even before she can get back to her office (if you ever see three agents on their cell phones in front of a broker open, the house is probably going to sell, quickly, in multiple offers).

Why outside?

It's probably obvious, but it's not such a great idea to be overheard telling your client, "Cancel your appointments this afternoon! You've got to see this place -- it's a steal!"

Unfortunately for the owner in this case, that's not what was going on.

The person on the cell phone was a loan officer who was co-hosting the broker open, and couldn't get good cell phone reception inside.

Spend it Now -- Or Spend it Later*

Prepping For Sale

You can pay me now, or pay me later.

--Oil filter commercial, circa 1970's

One of the more difficult conversations listing agents can have with their Sellers concerns spending (some) money to prep their home for sale.

That's an especially sensitive topic if some (or all) of the homeowner's motivation for selling is financial.

The good news is, a lot of the necessary prep is free.

So, things like de-cluttering and cleaning are simply a matter of finding the time.

As burdensome as emptying an attic full of decades of memento's is, the stark reality is that what's at issue is ultimately just timing: the stuff is going to have to be donated/thrown after the Purchase Agreement is signed -- so do it beforehand, and get more money for the house!

Out-of-Pocket Expenses

Of course, not everything on the prep list can be done for free or at a steep discount (unless the homeowner is an expert painter, landscaper, or in the carpet business).

A good Realtor will suggest cost-effective repairs and improvements, knowing that $1 spent by the owner can easily return $3 or $4 AND help the home sell faster.

Ultimately, like the car owner deciding whether to buy a good oil filter or a cheap one, the decision isn't whether to spend the money.

Rather, it's whether to spend the money before the home hits the market -- or a couple months later, after it's been sitting with little or no Buyer interest, and the owner is facing both a price reduction AND cosmetic updates.

Trust me, it's a much better investment beforehand.

*Corollary: you can de-clutter your house now, and sell for more. Or, wait until it sells, then have to empty out your home in order to move.

Monday, April 26, 2010

Buy By Friday?

Tax Credit Count-Down

As anyone actively looking for a home is no doubt acutely aware, the deadline for qualifying for various Buyer tax credits is this Friday (Buyers actually have another two months, until June 30, to close).

So, is it time to pull the trigger?

If you've already got something in your sights (sorry, can't seem to drop the gun/ammo/bullet metaphor), by all means, go for it.

However, as your price range goes north of $300k or so (and your income trips $100k), the odds of qualifying for the credit -- or having it be material to the price of the home -- go down considerably.

So no, I wouldn't make a rash decision just to lock in the tax credit.

"Ready! Fire! Aim!"

Biting the Bullet BEFORE Listing

It's certainly possible to put a home on the market -- like the one I showed clients this weekend -- with a roof that's clearly past its useful life.

But I wouldn't recommend it.

There are two reasons why:

One. The cost of the new roof is guaranteed to come straight off the selling price.

In fact, the eventual Buyers will likely tack another 20% - 40% onto the replacement cost, just as insurance for any surprises, and to compensate for the hassle of dealing with it.

Two. Of course, that presumes prospective Buyers will be able to see past the defective roof.

Many Buyers -- mine included -- subscribe to the "there's never just one cockroach" theory of home repair.

If the homeowner let their roof go, what other deferred maintenance lays in store for the next owner?

Rather than wait around to find out, many prospective Buyers -- including mine last weekend -- just move on to the next home . . .

Sunday, April 25, 2010

"Out of Bounds" Showing Directions

Showing Directions as
Marketing Strategy

One of the most famous lines in sales is "always be closing" ("ABC").

Less well-known -- but equally important -- is "always be marketing."

I was reminded of that yesterday when I was showing homes to Buyers yesterday in the West suburbs.

"Out of Bounds" Showing Directions

Prior to meeting clients to tour "For Sale" homes, Realtors will typically print a map with all the homes they'll be visiting.

However, once the Realtor gets close to a particular home, it's common to consult the MLS listing info and follow the listing agent's directions.

Which I did.

About halfway through my (especially scenic) drive through Cedar Pass -- a newer, upper bracket neighborhood in Minnetonka -- I realized what the listing agent was up to.

On the west side of the "For Sale" home -- the more convenient and closer approach -- is a neighborhood of older, more modest homes.

On the east side is Cedar Pass.

Best foot forward
, indeed.

P.S.: And no, I don't think such a tactic is out-of-bounds (pun intended); it's actually very good marketing!

Goldman Sachs: 'Let's Be Aggressive Distributing Things'

"Distribute?!?" How About, "Palm Off?"

Dis-tri-bute: 1 : to divide among several or many : apportion
2 a : to spread out so as to cover something: scatter; b : to give out or deliver especially to members of a group.

--Merriam-Webster dictionary

According to The New York Times, as early as 2006, "company email messages show Goldman executives discussing ways to get rid of the firm’s positive mortgage positions by selling them to clients. In one message, Goldman’s chief financial officer, Mr. Viniar, wrote, 'Let’s be aggressive distributing things.'”

No, Goldman Sachs' definition of "distribute" isn't the dictionary version, or the meaning you and I associate with the term.

Rather, as used by company executives, it means "palm off on unsuspecting customers."

Saturday, April 24, 2010

"Rehab Novices"

Why Such a Big Discount For
Big Homes Needing Updating?

Want a novel -- but not at all far-fetched -- (additional) explanation for why so many nicer, bigger homes are facing significant discounts in today's market, especially ones that need significant updating?

Keep reading.

Far and away, there are three big reasons why such homes -- let's just say 4 or 5 Bedrooms, 3-4 Baths, with 3,500 to 4,500 finished square feet, in a nice part of town -- are proving tougher to sell. (Note: the price tag for such a home could be anywhere from $600k-$800k (or more) locally, depending on the particulars).

One. The economy. A rough economy shrinks the number of people who can swing a $5,000 monthly mortgage payment, $10k or so in annual property taxes, and the upkeep on a bigger home.
Oh, and since Buyers of such homes typically need a jumbo mortgage, they'll need to put down $50k or $100k instead of a fraction of that amount needed to buy a home under $500k.

Two. Demographics.

The Baby Boom generation now retiring/downsizing is being followed by a smaller generation with fewer, smaller families.

Ergo, demand is less than supply.

Three. Remodeling costs. You can finance a home purchase with a still-cheap 5%-plus mortgage.

Remodeling costs are typically straight out-of-pocket (remember that little Recession we were just in?).

Rehab Novices

That's probably all the explanation needed to explain why bigger, dated homes are taking longer to sell.

But I think there's actually a fourth reason that goes with the other three.

Namely, the resulting "market compression" makes rehab/updating projects especially daunting for the people who would naturally undertake them.

Here's the logic:

Because of the peculiarities of today's market, it's not unusual to see a completely updated, mint condition home with around 2,500 square feet fetch $500k or more, depending on where it's located.

Meanwhile, some 4,000 square foot-plus homes can be had -- especially if they need significant updating -- for $600k to $700k.

What happens when someone who's outgrown their (otherwise perfect) 2,500 square foot home looks at a 4,500 square foot home that needs "everything?"

It looks overwhelming.

That's especially the case if the biggest remodeling project they've tackled previously is a new bathroom.

Ironically, this "feedback loop" results in bigger homes sitting on the market, which results in discounting, which makes them affordable (at least on paper) to more Buyers moving up from smaller homes . . . who find a big project daunting.

No, I can't prove the foregoing -- but my gut (and my Buyer clients) tells me there's something to it . . .

Jeremy Grantham, Animal Spirits, and "Bubble Business"

"Don't Just Stand There -- Buy Something!"

Some people wait for a new episode of a favorite TV series (Seinfeld, The Sopranos).

Others for a new album from a favorite artist.

I look forward to Jeremy Grantham's latest quarterly newsletter. Seriously.

The man's honest, brilliantly insightful -- and a great writer, to boot:
Greenspan was lucky enough to inherit Volcker’s good work, and that gave him a base from which he could launch or blow a huge equity bubble; he also had the advantage that the country’s balance sheet was in excellent shape. Even Bernanke inherited a reasonably solid position from which to fund a second bailout. But a third time? It is hard to work out where the resources would come from to resuscitate the economy if a real shock were to be delivered by another collapse of a major asset class.

--Jeremy Grantham, "Playing With Fire"; GMO Q1 2010 Newsletter

Subscribing to the notion that the "bigger the bubble, the more damaging the bust," what is Grantham's antidote?

"We had better hope that something lucky turns up to break the speculative spirit."

Friday, April 23, 2010

Short Sale Bank: 'No Games'

"It'll Go Fine -- Really"

Short sales deservedly have a reputation for being aggravating time sinks for home Buyers (and their Realtors!).

Even when they work out -- which is less than one-third of the time -- the Buyer can easily wait months for the bank(s) holding the mortgage(s) to agree to take a haircut on what they're owed, clearing the path for a deal. (If they don't -- the usual outcome -- the property progresses to foreclosure.)

In the meantime, many banks continue to collect offers, which they're allowed to do because they haven't finally signed off on anything (the typical short sale purchase agreement contains one or more contingencies, which serve as "outs" should the bank receive a better offer).

The foregoing means that short sale Buyers need to have A LOT of patience, and accept that they can either be "bumped" or have to increase their offer at any time if they really want to buy the property in question.

"Masochism Quotient"

With all that as prelude, I saw the following in the "Agent Remarks" field on a short sale that hit the market yesterday:

Subject to bank approval. Seller will sign only one P.A. & submit to bank all other offers will be back up. Process started with bank. Agent experienced in Short Sales.

Translation: assuming all of the foregoing is true (see, "Experienced Short Sale Agent"), the odds of a deal in this case are a little higher, and the "masochism quotient" for would-be Buyers will be a little less . . . .

Thursday, April 22, 2010

Michael Lewis Deconstructs Goldman Sachs

SEC vs. Goldman Sachs

Confused about why the SEC sued Goldman Sachs for fraud, and what it means?

Here's about as succinct a summary as I've seen, from the inimitable Michael Lewis:

Just as there was a time when people could smoke on airplanes, or drive drunk without guilt, there was a time when a Wall Street bond trader could work with a short seller to create a bond to fail, trick and bribe the ratings companies into blessing the bond, then sell the bond to a slow-witted German without having to worry if anyone would ever know, or care, what he’d just done.

That just changed.

--Michael Lewis, "Bond Market Will Never Be the Same After Goldman"; Bloomberg (4/22/10)

Brilliant -- and exactly right!

The Beauty of an Ugly House

Making Sure That "Ugly is Only Skin Deep"

No matter the price bracket -- OK, maybe not at $5 million-plus locally -- virtually every home represents a list of trade-off's for prospective Buyers.

Better location, smaller size. More square feet, worse condition. Great condition, not as good location.

And so on.

So, of the various attributes on most Buyer's lists, which is one of the best to be flexible on?

My personal candidate is curb appeal.

Buyer Trade-off's

Home Buyers naturally flock to homes that have curb appeal -- and tend to avoid ones that don't.

The resulting discount spells opportunity for Buyers who otherwise couldn't afford a particular neighborhood, or are willing to trade curb appeal for, say, extensive updates.

The only trick is just to make sure that, to paraphrase that famous line, "ugly is only skin deep."

U.S. Presidents & NFL Football Players

Obama: More Like Kevin Garnett -- or Kwame Brown (Kwame who??)

Even after all the interviews, debates, and due diligence, the choice is ultimately still a crap shoot, taking years before it's apparent whether the choice is a Hall of Famer or a bust.

The NFL draft?

Try, picking U.S. presidents.

Just as in pro sports, sometimes consensus first picks turn out to be busts -- and sometimes lowly ranked players (or walk-on's!) end up being Hall of Famer's.

At least in my view, here are the four categories that (most) U.S. Presidents fall into:

1. Consensus 1st Pick: 'What You See is What You Get'

George Washington, Dwight D. Eisenhower: both highly regarded national leaders who literally were drafted to serve as President. Their successful Presidencies were characterized by the same leadership skills, judgment, etc. they exhibited prior to their election.

2. 1st Round Busts: U.S. Grant, Warren G. Harding.

Both men were central casting's idea of what a U.S. President should look like -- and disappointments (or worse) in office.

Call them the "Ryan Leaf's" of presidential politics (Leaf was chosen second by the San Diego Chargers in 1998, right after Peyton Manning -- and never heard from again).

3. Late Round (or undrafted) Hall of Famer: Abraham Lincoln, Harry Truman.

Lincoln had achieved some measure of fame debating Stephen Douglas, but was largely unknown nationally prior to his election. He emerged in 1860 only because the leading Republican contenders (William Seward, Salmon Chase) deadlocked.

"Plain-speaking" Harry Truman emerged from FDR's shadow to become a near-great (and favorite underdog) President.

4. Late Round (or undrafted) Bust: Jimmy Carter. Obscure former Georgia Governor with a squeaky clean image that was especially appealing after Nixonian sleaze.

Great ex-President, mediocre President.

So where does that leave Barack Obama and George W. Bush?

Obama is like the high school phenom so talented that they skipped college and went directly to the pro's -- as the very first pick, no less.

Time will tell whether he turns out be another Kevin Garnett or LeBron James -- or Kwame Brown (Kwame who?).

George W. Bush, meanwhile, is like the walk-on who got installed as starting NFL quarterback not because of a stellar college career -- but because he was the owner's son.

Who Do You Call First?

Done Deal! Then What?

It's 9 p.m., and you've just agreed to terms with the Seller you've been negotiating with to buy their home.

You initialled the last change on the Counter Offer form, and faxed it to your Realtor.

Who do you call/tell first?

A. Your parents, to tell them the good news!
B. Your best friend, to let them know you're moving.
C. Your kids, to let them know.
D. Your home inspector.

Answer: D

That's especially the case in late April, probably the most active time of the year for purchasing a home even without the tax credit expiring in 8 days.

The home inspectors I work with most frequently are working 12-plus hours a day now, seven days a week, and returning my phone calls at 8 p.m. (or later).

With that in mind, it might be a good idea to: a) lengthen the time allowed for an inspection in the Inspection Contingency; and b) consider using an inspection company that has multiple inspectors on its staff.

P.S.: And yes, I've told clients to call home inspectors (or leave a message) at 9:30 p.m.

Wednesday, April 21, 2010

The Bullish Scenario for Housing

Sell (Stocks) High, Buy (Housing) Low . . . Again?

Stock market investors who'd gotten in at much lower levels and were worried that a correction was overdue decided to take profits.

The sector they turned to?

The housing market, where wary Buyers burned by the last downturn were still keeping their distance -- or clamoring to get out at the bottom.

The foregoing pretty much describes what savvy investors were doing . . . in the late '90's.

Back then, of course, the Nasdaq was well on its way to its 5,000-plus moonshot, and stocks like Pets.com were fetching -- temporarily -- billions despite having no sales or earnings.

And the real estate downturn that was still fresh in people's minds?

The early '90's bear market, which was especially severe in places like Manhattan and Southern California.

Then and Now

Fast forward to today.

After rallying some 75% now from the lows set in March, 2009, here's what Gluskin Sheff analyst David Rosenberg says about stocks today:

The April data was just updated and showed the inflation-adjusted normalized P/E, premised on "bird-in-the-hand" (as opposed to consensus earnings forecasts, which is historically more than 20% higher than we get actually get — one reason why Wall Street banks are dubbed "the sell side") 10-year trailing profits, expanded to over 22x from 21x in March.This is not nosebleed territory, but it is expensive; the historical average is 16.4x. So, this implies that the market is currently 34.7% overvalued benchmarked against the historical norm. It would be nice to say that a higher-than-normal P/E is justified by low inflation and low interest rates. But frankly, real bond yields are not that far from their long-run averages; however, equity valuation is, and something is going to give at some point.

--David Rosenberg, Gluskin Sheff (4/21/2010)

Translation for non-economists: 'stocks ain't cheap anymore.'

As Yogi Berra would say, is it "deja vu all over again?"

The Buy-Versus-Rent Question

Calculating the "Rent Ratio"

Sometimes, the decision whether to buy a home or not seems to require an economics Ph.d.

Are interest rates headed higher? How strong is the economy? Are home prices now recovering, or will there be a "double-dip?"

It's enough to make your head spin -- or hurt.

If the foregoing (unanswerable, by the way) questions seem too daunting, try this one instead:

Can I rent a nicer place for less money than it costs to buy?

In many cities, including Minneapolis, the answer is now "no."

Check out this NYT piece, "In Sour Home Market, Buying Often Now Beats Renting," for the particulars.

Warning: you'll need to divide by 20 to calculate the local "rent ratio" -- the best yardstick for gauging whether buying is a better deal than renting.

If you need help filling in the numerator and denominator . . . . call me! (612-925-7701)

Tuesday, April 20, 2010

Commit Fraud, Get Free Money

Borrow at 0%, Lend at 3%, Make Billions

Is it customary, when someone is charged with fraud and awaiting trial, to leave them in possession of the victim's credit cards, and, indeed, to continue to allow them to spend and gamble the victim's money?

In the corporate arena, apparently the answer is "yes."

U.S. vs. Goldman Sachs

While the putative victims in the SEC's fraud case against Goldman Sachs are two institutional investors, the real victims are the millions of Americans who've lost their homes and jobs due to Wall Street's role in causing The Great Recession.

Yet Goldman Sachs, by virtue of its status as a "bank holding company," continues to have direct access to the Federal Reserve's discount window, where the cost of money is . . . . nothing (not coincidentally, what millions of thrifty Americans are currently earning on their hard-earned savings).

Goldman Sachs and other too big to fail banks can then take that free money and turn around and lend it back to the government -- taxpayers -- for a risk-free 3% (more if you add leverage).

How much of Goldman Sachs' just announced $3.5 billion quarterly profit was made in such a fashion?

How about, just for the sake of decorum, suspending Goldman Sachs' access to free Fed money, until it's cleared of the charges pending against it?

Baby Boomers & Reverse Mortgages

Next Big Thing:
Reverse Mortgages

Take 80 million Baby Boomers fast closing in on retirement age, many of whom (still) have lots accumulated equity in their now too-big homes, and what do you get?

A vast potential market for something called a reverse mortgage.

Like its name suggests, in a reverse mortgage, the lender pays the borrower, instead of the other way around (it can either be a lump sum, or periodic payments).

The benefit to the borrower?

They get to tap their home equity without making payments -- and without qualifying for a new, conventionally amortizing loan (which could be difficult, given the now-retired borrower's lower income).

In fact, there are no income tests for reverse mortgages; to qualify, the borrow only has to: 1) be at least 62 years old; and 2) have sufficient equity in their home, as determined by an appraisal.

Reverse Mortgage Logistics

How big a reverse mortgage one qualifies for is then a(n actuarially determined) function of age: the younger you are, the less you can borrow.

Why no screening for pre-existing conditions, or other health issues that might affect the borrower's longevity?

Because someone in poor health is actually a better risk for the lender. If they die the day after taking out a reverse mortgage, the lender pockets the borrower's residual equity.

Conversely, it's the 62 year-old who's fit as a fiddle and lives to be 100 that causes lender losses (because the unpaid principal and interest keep accruing).

Fortunately for the reverse mortgagors, it's impossible to owe more than their home is worth (a condition called being "underwater").

For the 3% of (long-lived) borrowers where that would otherwise happen, insurance kicks in to cover the shortfall.

Downtown Minneapolis Parking -- Or Lack Thereof

8th Time is the Charm?

No, downtown Minneapolis doesn't literally have "Keep Out" signs posted on its perimeter.

But it might as well have.

I just returned from a (thankfully rare) appointment downtown, and spent double the time it took me to get downtown, about 10 minutes, looking for parking once I got there.

Thanks to ongoing road construction, a good chunk of the street level parking meters are out of commission. Even when they're available, you'd better have a pocket full of correct change: a quarter only buys 12 minutes (or is it 8?).

Meanwhile, it took me 7 parking ramps before I finally found one that wasn't full.

Eighth Time is the Charm?

So, given all those full ramps, isn't this just a Yogi Berra-esque case of "nobody goes there anymore, it's too crowded?"

Actually, no.

Judging by the signs in front of all those full ramps, the majority of cars parked there are monthly contract parkers -- that is, people who work downtown.

But the clincher was the sparsity of retail stores -- and the lack of customers in them.

By my unscientific count, the number of retail stores in downtown Minneapolis is down 30% from 5 years ago, and the number of customers in what's left is down . . . . more.

Post-March 31 Mortgage Rates Flat

The Dog That Didn't Bark?

So, the Federal Reserve finished its massive, $1.25 trillion purchase of mortgage securities almost three weeks ago.

Have mortgage rates spiked upwards since then?

Nope, they're basically unchanged.

What could that mean?

Other investors -- supplying fresh capital -- have taken their place (the "supply explanation"); a weak economy is keeping demand for mortgages -- and therefore rates -- low (the "demand explanation"); and/or the Fed's exit was so loudly pre-announced that the bond market already anticipated it ("other").

As they say, "buy the rumor, sell the news."

Any other "Other" plausible explanations, anyone?

Monday, April 19, 2010

"This Time is Different" & Financial Predictions

Cloudy Crystal Ball

To get some historical perspective on today's financial crisis -- and possibly divine some hint of where things go from here -- I've been skimming "This Time is Different: 8 Centuries of Financial Folly."

The co-authors, Kenneth Rogoff and Carmen Reinhart, are highly pedigreed economics professors; almost half of their exhaustively researched, 500 page book is devoted to various appendices, charts, and tables.

So what do other countries' experiences with financial crises, going back centuries, suggest for the U.S. now?

According to Rogoff and Reinhart, "the recent U.S. financial crisis . . . will remain in the hands of the fates as of this writing, and probably for some time beyond." (p. 217)

Translation?

"Hell if we know."

At least they're honest
(more than can be said of Jim Cramer and half the yahoo's on CNBC).

Benjamin Franklin, Strategic Default, and Economic Recovery

Strategic Defaults Driving Retail Sales?

A penny saved is a penny earned.

--Benjamin Franklin, circa 1780

A penny defaulted on is a penny earned.

--Benjamin Franklin, 2010??

No, I have no way of knowing whether a modern-day Benjamin Franklin would have uttered the second quote. In fact, he didn't even say the first one (that hasn't stopped him getting credit for it, though!).

But the sentiment is well-placed.

More and more economists now see a connection between rising strategic defaults -- the term for owners who walk away from their underwater homes to preserve their cash flow -- and recovering retail sales.

That link helps explain a conundrum -- namely, why are retail sales improving when hiring is anemic and unemployment is still high?

Strategic Default Economics

The (partial) answer appears to be that people who've ditched their expensive mortgages have more disposable income to spend at Target, Bed Bath & Beyond, restaurants, etc.

Sometimes, A LOT more.

So, somebody who bought a home at the peak in Las Vegas (or Southern Florida, or Phoenix) for, say, $600k and has seen prices subsequently drop 40% could easily rent for $2,500 a month, instead of paying their $4,500 monthly mortgage. And live in just as nice a place.

Voila!
An extra $2,000 in monthly disposable income.

Multiply that phenomenon by a couple hundred thousand people, and suddenly it's no surprise to see retail sales pick up.

Here's what David Rosenberg, former chief economist at Merrill Lynch and now playing the same role at Canadian firm Gluskin Sheff, says in today's edition of his daily market analysis ("Breakfast with Dave"):

Speaking of the U.S. housing market, we are convinced that strategic defaults by various homeowners, along with double-digit growth in tax refunds, have spurred the jump in retail sales (Easter timing helped too) of late. The economy is growing, the bulls are in a great mood, apparently we are into a new phase of job creation, and yet somehow 320,000 mortgage loans that were current when 2010 began were at least 60 days past due in March. Interesting.

--David Rosenberg, "Breakfast with Dave" (4/19/2010)

Of course, more borrower defaults ultimately means more foreclosures, which translates into more housing market supply -- and more bank write-off's.

But thanks to the Federal Reserve's policy of zero percent interest rates, banks are now booking huge profits to help offset their mortgage and housing-related losses ("Citigroup Posts $4.4 Billion Profit" -- WSJ).

They also continue to benefit from the government's unofficial policy of "too big to fail," with the implicit promise of future bailouts, if and when needed.

It all sort of recalls the chorus from a classic rock 'n roll song:

Take a load off Annie, take a load for free;
Take a load off Annie, And (and) (and) you put the load right on me

--The Band; lyrics, "The Weight"

The (financial) weight, indeed.

SNL on Goldman Sachs

Betting On Its Own Lawsuit??

Best line (to date) about the SEC's fraud case against Goldman Sachs is this nugget from "The Weekend Update" segment on Saturday Night Live:

Goldman Sachs was accused Friday by the Securities and Exchange Commission of fraudulently selling mortgage-backed securities to its customers. If convicted, the firm stands to make $10 billion.

Can The Onion top that?

Sunday, April 18, 2010

Sold! . . . Not Sold! . . . Sold! . .


Back on the Market Twice (in 10 days);
Third Time's the Charm?

The image I have in my head for this St. Louis Park foreclosure is a traffic light, alternately blinking green, then red, then green, etc.

That's because in less than 2 weeks on the market, it's already gone "Pending" twice, and each time has quickly come back on the market.

What's going on?

Be Careful What You Bid For

Given the price, $89.9k, location (just Southeast of 394 and 100), and the fact that it's a foreclosure, you'd certainly speculate that an overeager Buyer won a (presumed) bidding war, then either couldn't perform financially, or, re-did their math after carefully going through the home -- I did last week, and it's a total mess -- and reconsidered.

After all, foreclosure Buyers have been known to bid first, and do their homework second -- if and when they actually get the property.

It's also the case that sometimes condition is irrelevant, because the home is a tear-down. However, given the limited upside on the immediate block, I don't see that happening here.

Yet another possibility is that the bank dropped some bomb on the Buyer in the custom contracts it routinely substitutes for the standard Minnesota forms everyone else uses.

Possible, but less likely given that banks typically sell "As is," and provide no disclosure whatsoever.

So which of the above is it?

To paraphrase that old commercial for a hair color product ("only your hairdresser knows for sure"), in this case, only the listing agent knows for sure.

Dramatic Price Cut! Open Today


Deceptive Curb Appeal

Where: 1340 Fairlawn Way in Golden Valley's South Tyrol Hills
What: 4 BR/3BA '50's split level with almost 3,600 FSF; rock-solid, nicely updated!
Who: listed (and hosted) by . . . yours truly
When: 12:30 p.m to 2:30 p.m. this Sunday (4/18)
How much: list price -- $411,500 (just reduced from $434,900)

This is a lot of house, in a great neighborhood. And for anyone stuck in the maw of the Crosstown Project's daily gridlock -- a blissfully short commute to downtown Minneapolis (about 7 minutes, tops).

I hate to use the term, "not a drive by," but . . . it isn't. (Realtors use the term when the curb appeal doesn't do the interior justice.)

In particular, the almost-600 square foot Great Room (pictured above) features a Fireplace with granite surround, skylights, and a vaulted ceiling.

Hope to see you!

Saturday, April 17, 2010

"What the Hell!" Showings

The (Mythical?) Serendipitous Buyer

There are Realtors who don't believe in putting "For Sale" signs in front yards because they think that the would-be Buyers such signs attract invariably . . . aren't Buyers at all.

Serious buyers, their thinking goes, proactively look online for homes that meet their criteria -- usually in concert with their agent.

While I don't happen to agree, there is something to that.

First, a definition: a "serendipitous Buyer" is a Buyer who isn't necessarily looking for a home in a particular neighborhood -- or may not even be looking for a home at all. But then they literally happen upon the perfect home, fall in love . . . and decide to buy it, then and there!

Or at least, that's how the story goes.

Such occurrences may not be as rare as Loch Ness monster sightings -- but I don't think they're exactly common, either.

Buyer "Due Diligence"

In my experience, serious Buyers are more methodical.

Specifically:

They've been vetted by a lender, and know what their budget is.

They've gotten a couple Realtor referrals, done some interviewing, and signed a "Rep Agreement" with one.

They've been studying the market for awhile, and know what's available.

By contrast, the kind of Buyer whose interest is piqued by a "For Sale" sign probably has skipped one (or more) of the foregoing steps.

Ditto for the Buyer who is working with an agent, but requests a "short notice" showing (usually defined as giving less than one hour notice to the owner -- often, a lot less).

My guess is that 80%-plus of the time, what's behind such a request is "serendipity" (they just drove by) and/or curiosity, not serious interest.

Iceland's (Volcanic) Ashes

Iceland's Last Wishes

For connoisseurs of dark humor, there's a beauty on Twitter that apparently has gone "viral":
Iceland's last wish: to have its ashes scattered all over Europe" -- market analyst

For those who don't recall, Iceland's (ongoing) banking crisis makes the one in the U.S. look like a summer squall.

Friday, April 16, 2010

Edina's Country Club for $200/sq. ft.

Discounting for an Achilles Heel

Normally, homes in Edina's tony Country Club neighborhood fetch anywhere from $300 - $400-plus per square feet.

The home pictured above, located at 49xx Sunnyside, is selling for $200 a square foot (divide the $850k asking price by 4,233 square feet).

What gives?

It's located just east of Highway 100, and has a highway sound barrier wall running the length of the (back of the) lot.

Enticing Discount

While that's certainly a drawback, the 40% discount also represents an opportunity for the right Buyer (I was just in the home, and the freeway actually isn't much of a factor).

The fact is, every home is a trade-off between multiple, competing factors: price, location, size, condition, and floor plan.

Someone who wants a bigger home in Country Club -- on a cul-de-sac yet! -- but doesn't have $1.5M just might find it intriguing.

Amy Deckas and MaryBeth Goulett of Edina Realty have the listing.

Whose Laws? The Political (vs. Business) Case for Ending TBTF

The Too-Big-To-Fail Debate

Advocates for cutting so-called "too big to fail" financial institutions down to (less threatening) size -- I'm one of them -- have rightly focused on the systemic risk such entities pose; the unfair, distorting effects on competition such a policy causes, due to the implicit federal guaranties backing TBTF companies (which drives down their borrowing costs); and the monopoly profits TBTF companies enjoy simply as a result of having survived when their smaller ("not-TBTF") competitors have all perished.

But there's an even more compelling reason to break up TBTF entities.

Namely, entities like Goldman Sachs wield far too much political power, which they've clearly used to game the system. (From Wall Street's perspective, showering money on politicians is no doubt just an especially shrewd form of "reinvesting profits.")

"Thumb -- and elbow, and thigh, and . . -- on the Scale"

Perhaps the most insidious aspect of the financial debacle the last two-plus years is to read about some especially egregious Wall Street conduct -- is it still possible to be shocked anymore? -- then to hear the perpetrators claim that "no laws were broken."

As a former corporate lawyer, I take strong issue with that: even given the watered-down (or non-existent) rules governing Wall Street, I can still toss out -- practically in my sleep -- multiple grounds for suing various investment banks.

Like breach of fiduciary duty; conflict of interest; self-dealing; fraudulent and/or misleading disclosure; gross negligence . . . . and ???

Still, my best guess is that the legion of clients screwed by Goldman Sachs and its ilk aren't suing -- yet -- not because of some decision on the legal merits, but: a) because they're broke; and b) Goldman Sachs very much isn't.

Litigation is a financial marathon, and there are plenty of plaintiffs who've walked away empty-handed and financially drained, years later, not because their arguments lacked merit, but because the defendants had more staying power (can you say, "Exxon Valdez?").

Who Made the Rules?

That said, there's no denying that Wall Street got the financial rules that it wanted the last 20-plus years.

A partial list would include:

--Repeal of Glass-Steagall, allowing commercial and investment banks to combine.

--Lax accounting rules for banks, allowing them to substitute "mark to make-believe" for "mark to market."

--Amazingly, no regulation --still -- of credit derivatives -- the instruments at the heart of the AIG debacle (and dubbed "financial weapons of mass destruction" years ago by Warren Buffett).

--Wall Street-engineered exemptions on leverage, allowing Lehman Bros., Bear Stearns etc. to borrow as much as $40 for every $1 of their own money.

So, the next time you hear someone on Wall Street defend their latest skulduggery by saying "no laws were broken," stop to ask, "who made the laws??"

Deep Discount in South Tyrol Hills


50% Off Original Ask

There may be another home in the Twin Cities that's been on the market longer, or has been discounted more from its original asking price than this one.

But if so, I'm not aware of it.

Originally listed at $1.395M in September, 2007 (yes, that's 32 months ago!), this postcard-pretty 1937 home -- located in Golden Valley's South Tyrol Hills neighborhood -- is now asking $699.5k.

Now that's patience (or stubbornness).

So, is it finally a bargain?

Who wants to know??

Wednesday, April 14, 2010

How's THAT for Seller Candor?

"And the Mechanical's are Ancient, Too!"

I just tripped across this in the Agent Remarks field of a St. Louis Park duplex that's currently on the market:

Sale Subject to Bank Approval of Short Sale. Cash Low and is fully rented on Long-term leases. Owner could occupy though with proper notice. Huge 4 car garage (each unit has private 2 car garage). Great condition, new roof, Great location.

I could be wrong, but I've got a hunch that "Cash Low" was supposed to be "Cash Flow."

That can't be helping the market time (250 days and counting).

Sen. Ted Kaufman: 'Break 'em Up!'

An Independent Voice on Financial Reform
(Hmm, I wonder why . . .?)

Senator Ted Kaufman, Joe Biden's replacement in the Senate, has rapidly emerged as perhaps the leading Congressional advocate for real financial reform (Chris Dodd's version doesn't come close).

Not a few people have noted that Kaufman's path to the Senate -- he was appointed -- insulated him from the soul-rotting temptations of Wall Street campaign cash.

Here's Kaufman's latest:

Letting giant institutions fall into bankruptcy is not the answer to "too big to fail." When Treasury Secretary Hank Paulson decided to let Lehman Brothers fail, the credit markets immediately froze and the worldwide financial system was on the brink of collapse. If we do nothing about these megabanks and wait for another crisis, future presidents—whether Republican or Democrat—will face the same choices as President Bush: whether to let spiraling, interconnected TBTF institutions, like AIG, Citigroup and others, collapse in a contagion, sending the economy into a depression, or step in ahead of bankruptcy and save them with taxpayer money.

The answer instead is to break up these megabanks. As even Alan Greenspan has realized about our current predicament: "If they're too big to fail, they're too big."

--Letter to Editor, The Wall Street Journal (4/14/2010)

And the arguments against this are??

Extreme Makeover - Fern Hill Edition

Worst-to-First on Huntington

You're not likely to recognize the home pictured above -- 2820 Huntington Ave. South, in St. Louis Park's Fern Hill neighborhood.

And no, it's got nothing to do with the snow being gone.

Rather, it's because there are multiple dumpsters in front, and the place is swarming with contractors.

Extreme Makeover

What's going on?

The new owner, apparently a spec builder/remodeler, is doing a major addition upstairs (finishing the expansion, and bumping it out towards the back of the yard), as well as totally renovating the first floor and widening the garage from one car to two.

When the work is complete, the home is likely to be put back on the market somewhere around $800k, probably sometime in late Summer.

That's more than double what the buyer paid for it, $390k, and still leaves a nice profit even after subtracting what is sure to be $250k or more in labor, material, and financing costs.

Makeover Economics

Extreme makeover candidates share many of the same attributes as tear-downs, about which I've blogged numerous times previously ("Tear-Down Economics," "Contender . . . or Pretender?" "Attributes of Tear-Down Neighborhoods").

Namely, they have the potential to go from "worst to first" in a neighborhood where the ceiling on homes is much higher than the asking price. (I've also referred to this phenomenon as "playing tear-down leapfrog").

In this case, Huntington has a huge, 2,000 square foot foundation; sits on an almost quarter-acre lot; and is on a block where the top end is high six figures.

Check, check, and check.

The Contractor's Kids Always Go Barefoot??

Factor #2: Lots of In-Process Projects

The original version of the above quote, of course, is "the cobbler's kids always go barefoot."

The idea is that they're so busy attending to their client's needs that they neglect their own -- or their kids.'

But I've also observed that a lot of the contractors I know live in homes that are, shall we say, less than showcases.

A part of that is that they always seem to have a couple projects in progress, making things look especially disheveled.

But I think another piece of that is that, when you can fix it yourself -- schedule allowing -- what I'll call "deferred maintenance" isn't so scary.

For run-of-the-mill homeowners (like me!), I don't recommend it.

Tuesday, April 13, 2010

5th Place Medal

"Mom, Dad, I Won the . . . Copper(?) Medal!!"

My 7 year-old son proudly told me he "won fifth place" at his swim meet over the weekend (and showed me the ribbon to go with).

I got the general report --but not the particulars -- after my Sunday open houses.

So, how many competitors were there?

Five.

Monday, April 12, 2010

The 91% Solution

The Quick & Simple Way to Fix Wall Street

[Editor's Note: in a post last week, "Financier, Heal Thyself? Don't Count On It," I promised a part 2. This is it. Heads up: if you read this blog purely for real estate content, or want a post with a little levity -- skip this one.]

Want to test your knowledge of political Americana?

Answer this puzzler:

Which U.S. Presidential candidate endorsed a 91% marginal tax rate on income?

A. George McGovern
B. Dennis Kucinich
C. FDR
D. Dwight Eisenhower

Answer: D.

In fact, the question is a bit of a curve ball: Eisenhower never campaigned on a platform of 91% marginal tax rates -- he didn't have to. That's because Eisenhower inherited a 91% marginal rate from the Truman administration -- and saw fit to leave it there during his eight years in office.

Dwight D. Eisenhower: West Point graduate. Supreme Allied Commander in World War II. President of Columbia University. Two-term Republican(!) U.S. President . . . wealth-redistributing, Commie radical!

Beaver Cleaver

If you don't remember the '50's -- and you won't unless you're at least 60 years old -- it wasn't exactly a Communist love-fest.

On the contrary, that era notably witnessed the Cold War, "duck-and-cover," and Joe McCarthy and his anti-Communist witch hunts ("are you now, or have you ever been . . .?").

Some other tidbits of '50's culture: Beaver Cleaver, "Father Knows Best," Bob Hope, Doris Day, and drive-in movies. (And to be sure, "colored-only" drinking fountains, restrooms, etc. in the South.)

Still, not exactly Haight-Ashbury in the '60's.

And yet.

And yet society and its lawmakers saw fit to levy a 91% marginal rate on annual income over $400,000 (equivalent to about $3 million today).

What were they thinking?!?

Values, Then & Now

A couple things, perhaps.

--That the country's social fabric was more important than the (very) well-being of its richest .05%.

--That the pursuit of ungodly sums of money was unhealthy -- even corrosive -- to one's self, and one's larger community.

--That the ability to make such ungodly sums of money was itself due to a peculiar historical confluence of built-up legal and political institutions; heretofore unimaginable gains in technology and productivity; and the sacrifices of many, many preceding generations.

Isaac Newton said that "if I have seen further, it's because I have stood on the shoulders of giants."

Today's CEO's are pygmies who think they are giants -- and that modern economic life began with them (obviously not true, but if we're not careful, it certainly may end with them).

It's hard to tell which trait best defines today's CEO's: hubris -- or greed.

Financial Reform, Circa 2010

Which brings us back to financial reform.

First, three stipulations:

One. The current financial system is so enormous and complicated, and has so many moving parts and interconnections, that few people understand half of it. Unfortunately, almost none of those people are elected officials in Washington.

Two. Even if FDR and his brain trust somehow sprang back to life with a divinely inspired blueprint for reform, they would be thwarted by today's political system. Too partisan, too balky, too corrupt.

Three. More limited, strategic reforms have either been ineffective -- or backfired spectacularly.

Case in point: legislation passed by Congress in 1993 to limit executive compensation -- considered excessive back then, even though it was a fraction of today's levels.

Barred from deducting executive salaries greater than $1 million, publicly traded corporations simply switched to awarding stock options and bonuses to CEO's.

More accurately, CEO's -- via their handpicked boards of directors -- started paying themselves in stock options and bonuses.

The 91% Solution, or, "I Like Ike"

Add the foregoing "stipulations" together and what do you get?

A broken, dysfunctional financial system that cannot be fixed.

Or can it?

To paraphrase Albert Einstein, the problem of Wall Street cannot be solved at the same level of thinking with which it was created.

So, go up a level.

What is Wall Street ultimately about, at least today?

Not service to one's fellow man ("God's work" -- the real kind); one's country (the definition of patriotism); or even just providing and efficiently allocating capital to the rest of the economy (Wall Street's putative purpose and raison d'être).

It's all about making money.

Obscene, unprecedented tidal waves of money.

To pick just one example, last year -- not a banner year for most, to put it mildly -- the top 25 hedge fund managers averaged $1 billion in compensation. That they paid 15% income tax on.

$30 Million a Year

Such a financial bonanza also suggests the solution: go back to Eisenhower-era marginal tax rates.

Hell, bump them up 10-fold, just to account for today's more expensive luxuries and toys (tycoons really couldn’t buy Lear Jets in 1955).

So, the John Paulson's and Lloyd Blankfein's of the world can make up to $30 million annually before coughing up the lion's share of it to Uncle Sam. Thirty million a year -- still not too shabby.

Such a remedy has the virtue of being simple, efficient, and laser-focused on the underlying problem plaguing today's financial system.

Oncologists now understand that the best way to kill an advanced or otherwise inoperable tumor (because of its proximity to vital organs) is to cut off its blood supply.

Raising marginal tax rates to 91% will have the same effect on the metastasizing cancer that modern-day Wall Street has become.

The OTHER Reason Sellers Love Multiple Offers

Inspection Contingency Leverage

The main reason home Sellers love multiple offers is because it bumps their price -- if not over asking, then usually pretty close.

But there's a secondary reason Sellers love multiple offers: it can result in the Buyer pulling their punches during the Inspection phase of the deal.

Inspection Issues

Once the Buyer and Seller have agreed to terms, the next step typically is for the Buyer to inspect the home.

The standard for any Seller concessions is actually pretty clear-cut: usually, it's limited to a material item (depends on the deal, but typically at least a couple hundred dollars) that couldn't have been discovered beforehand.

So, a forced air furnace with a cracked heat exchanger (or what looks like one) is in bounds; the dated Kitchen isn't.

Looking Over Their Shoulder

Not all inspection issues are black-and-white, however, and how aggressively a particular Buyer pushes -- and how accommodating the Seller is likely to be -- can often turn on who has more leverage.

A Seller with a back-up offer (or several) in hand . . . has more leverage than their Buyer.

Unless.

It's not unheard of for some Buyers in multiple offer situations to make a preemptively high winning bid -- then try to use the Inspection negotiation to recoup at least some of it.

"Sticky" Property Insurance Rates

Home Prices Down, Insurance Premiums Up??

Property taxes aren't the only expense pegged to real estate values that should be dropping in sympathy -- so should insurance rates.

In fact, given a nationwide average drop in home prices of 25%-plus from the peak, you'd expect a similar drop in home insurance premiums.

Instead, speaking for a population of one (me), my insurer bumped my rate by almost one-third this year (or is trying to), and has almost doubled my rates in the last five years.

What could account for that?

The only claim we've submitted -- along with most of the Twin Cities -- was for roof damage in a horrific storm two Springs ago.

Have all underwriters raised their premiums a similar amount?

I'm about to find out . . .

Sunday, April 11, 2010

Client Kudos on Angie's List

"Ross was Great to Work With"

One of the nicest things that can happen to a Realtor is a client who thinks you're the best.

What's even better?

An appreciative client who tells the world!

Here's what Emily, who relocated from Chicago to Minneapolis, wrote about me on Angie's List:
Ross did a great job communicating with us, even though we weren't in town. Emails, scanned documents, phone calls, etc. And every trip that we made to Minneapolis, he made time for us without any trouble.

The house we bought was a foreclosure, and with all the difficulties of this, Ross stepped up and made it all go off without a hitch. We've recommended Ross to anyone who's looking for a Realtor without hesitation. We had an amazing experience and couldn't have been happier. We've kept in touch with him and he's come by to see all the work we did on our house. Don't hesitate to get in touch with Ross if you're looking to buy or sell!

Hard to top that!

Thanks, Emily and Ian -- you were both great to work with, too!

Biggest Sunday of the Year? Today!

Open Houses Galore

Clients often ask if a particular Sunday is a good time to hold an open.

I don't forecast home prices or interest rates, but I'm going to go on record with this prediction: today, April 11, will be the busiest day of the year for open houses (the "retail" kind; broker opens -- the "wholesale" version -- are held each Tuesday).

I can think of at least five reasons for that:

One
. Last weekend, Easter, was an off-day. Today will benefit from pent-up demand.

Two
. The tax credit for Buyers expires April 30.

Three
. Realtors like to hold opens on days when they know there will be lots of other opens; that way, they can piggyback on all the other marketing out there (see Edina Realty's ad at upper right).

Four
. At least in Minnesota, the Spring market doesn't start in Spring, it starts in February, right after the Super Bowl. So, we're now well past the mid-point.

"Crunch Time"

Buyers of family homes in particular like to make their purchases by Memorial Day, so they have time to close by mid-Summer and be unpacked and in place for the school year.

Sellers of family homes know that, too, which is why now is crunch time for doing a deal.

Five
. Nice weather!

Personally, I'll be doing an open house double-header.

Please stop by my open at 4121 W. 28th St. (28h and Inglewood) in St. Louis Park's Fern Hill neighborhood from 12:30-2:30 p.m.
Or, come by my open at 1340 Fairlawn Way in Golden Valley from 3-4:30 p.m.

Saturday, April 10, 2010

"There Goes the Neighborhood?!?"

Substitute Your Own Caption (Here)

That's my caption for the photo at left (sorry, I've been reading too many New Yorker cartoons).

The house in the photo -- being relocated from Crystal to North Minneapolis, next door to clients of mine -- was the subject of another post Thursday ("Now, THAT'S a Roadblock!").

Substitute your own caption here.

The "Non-Conforming" Catch-All

Missing by a Little -- Or a Lot?

What does a "non-conforming bedroom" look like?

When it comes to real estate listings, it could mean a lot of things.

At one extreme, a Realtor might list a bedroom as "non-conforming" because the egress window is smaller than allowed by code, or there's no closet.

At the other extreme, there is no egress window; you have to be a (short) child to stand up straight without hitting your head; there's no closet; the room is smaller than 8o square feet; and the walls, ceiling, and the floors are unfinished.

Oh, and there's no heat.

Call it "hitting the trifecta (plus)" of non-conforming.

Most Common: Too Short

In practice, "non-conforming" is perhaps most commonly associated with height issues.

So, the 1 1/2 story home has a finished Owner's Suite on the upper level, but the overhead averages less than 7.'

Or, the nicely finished lower level (basement) is just a tad low.

"Will it 'Fly'?" Test

Ultimately, whether to bill something as "non-conforming" or just omit it altogether (the more conservative approach) is a judgment call.

To paraphrase a popular line, "if, but for a technicality, it walks like conforming space, and quacks like conforming space, and looks like conforming space" -- it's reasonable to tout it to prospective Buyers, with the caveat that it's "non-conforming."

On the other hand, if prospective Buyers' collective reaction is likely to be "you've got to be kidding!" -- forget it.

Thursday, April 8, 2010

Financier, Heal Thyself? Don't Count on It

Cutting Wall Street's Gordian Knot

Call me a skeptic when it comes to financial reform.

If health care consumed a solid year of legislative maneuvering, how much time will it take to carefully consider the various and sundry proposals to rein in Wall Street, which is infinitely more complicated?

Which is kind of the point, actually.

Wall Street and modern-day finance are so mind-numbingly complex that you need to enlist Wall Street-types to oversee it.

So, that's how you get former Goldman Sachs and other financial executives in dozens of senior government positions, influencing -- and setting -- U.S. policy towards the financial industry.

Wall Street is also so complicated that you need Wall Street's expertise to help reform it.

Which is, as they say, "the rub."

Giving Wall Street insiders a seat at the financial reform table -- as it clearly now has -- virtually assures that any legislation that emerges from Congress will: a) be weak; and b) contain sufficient ambiguities and loopholes that it will effectively be "business as usual."

After the biggest financial crash since The Great Depression.

That result simply isn't acceptable.

My proposal?

Part 2: The 90% Solution

What Are Mortgage Rates? Get Your Calculator

Blend of Two Variables

Answering the question, "what are prevailing mortgage rates?" seems simple enough.

After all, the answer should be "5%," "5.25%," or something similar, depending on one's credit scores, and the mortgage product in question (fixed, 5 yr ARM, 10 yr. ARM, etc.).

In practice, it's a little more difficult, because rates are really a function of two variables: the quoted mortgage rate, and the lender's origination fee (also called "points" -- essentially, their commission).

So, whereas a week ago rates may been quoted at 5.25% and .75% points, this week they might be 5.375% and 1% origination.

To make an apples-to-apples comparison, you need to get out a spreadsheet and tweak the mortgage rate by the imputed rate of return on the lender fee (or at least, I think that's what the MBA-types would say).

B.Y.O.H. ("Bring Your Own . . . House!")

"Now THAT'S a Roadblock!"

Clients of mine posted this picture on Facebook this morning.

Apparently, they have a new neighbor: a new (old) house, moved by truck from another location -- complete but for the foundation. It was deposited in the middle of the street, around 1 a.m. last night.

As another acquaintance posted, "Now that's a roadblock!"