"Quantitative Easing??" Try, "Printing More Idiots"

Is the Fed Repeating
Wall Street's Sins?

Joe Nocera: At a certain point, Wall Street ran out of clients to sell [securitized debt] to. So the only way it could keep the machine going was to buy it themselves.

Jon Stewart: So, they infected themselves. At the end, they themselves became vampires.

[Which suggests] a new theory on the financial crisis: it occurred because of an idiot shortage. If I'm the Fed, I just print more idiots.

--Bethany McLean and Joe Nocera Interview; The Daily Show (11/16/2010)

That's it!

Instead of calling the Fed's current monetary policy something arcane like "quantitative easing," how about calling it "printing more idiots?"

At least, that's how I understand it.

Just like Wall Street ran out of "idiots" to sell securitized debt to, the U.S. Treasury has started to run out of investors to buy (more) U.S. debt.

China already stuffed to the gills with U.S. bonds?

Ditto for Japan, Singapore, South Korea, Saudi Arabia and all our trading partners on the other side of our yawning trade deficit?

No problem -- we'll buy the bills and bonds ourselves!

Two years, five years, ten years . . . you name it.

In fact, we -- the Fed -- will buy so much, we'll actually drive interest rates down.

Which is quite an accomplishment, given that long term interest rates have already collapsed, and short term rates are effectively zero.

Nothing could possibly go wrong with such a scheme . . . . right??

Home Buyers' Mindset

Sales Catalyst: 'Deals Too Good to Pass Up'

Americans are still unsure about the economy, and hesitant to make a large purchase unless they absolutely need to or the deal is too good to pass up.

--Edmunds.com analyst

Today's housing market?

Try, the market for new cars (the giveaway is Edmunds.com, a well-known auto web site).

But, it's a good a summation of the mindset I've encountered hosting several dozen open houses the last few months.

At least after tomorrow, one big variable -- the outcome of the midterm elections -- will be removed.

"The Mulligan Market"

Disregarding Buyers' First Offer

Mulligan (ˈmə-li-gən): a free shot sometimes given a golfer in informal play when the previous shot was poorly played.

So, I think I've got a good name for today's housing market: 'The Mulligan Market.'

That's because so many deals these days start out with the Buyer making an insultingly poor (out-of-bounds?) offer, simply because they believe that: a) housing prices are softer than they really are; and b) every Seller is desperate.

Once Buyers discover otherwise, if they're serious, they typically return to the table with their second, "new-and-improved" offer . . . and negotiations can commence for real.

(The trick for Sellers confronting such Buyers is not to overreact to their first, unrealistic offer.)

"Insider Buying" & the Housing Market

The Housing Market's
Flashing Green "Buy" Signal

In the stock market, open market purchases of company stock by senior management ("insiders") is considered to be bullish.

After all, executives may sell stock for many reasons -- to diversify, to raise money for things like real estate purchases, college tuition, etc.

Presumably, however, there's only one reason insiders buy: they think their company's stock is going to go up.

Is there anything analogous in the housing market?

Housing Market "Insiders"

There is, kind of: Realtors.

Of course, unlike senior executives who now receive much of their compensation in stock, Realtors do not get paid in houses.

However, Realtors are still the closest thing the housing market has to corporate insiders.

After all, they're the ones who are in the trenches every day, representing Buyers and Sellers, noting which way prices are going, prospecting for new listings, potential Buyers, etc.

And presumably, knowing when something's a deal.

Contrarian Indicator

So, is it a "buy" signal when Realtors start buying homes as investments?

On the contrary, such activity is more typically associated with a market top.

That's because to buy, Realtors need not only the requisite incentive, but the wherewithal.

When are Realtors are flushest?

When prices are appreciating strongly and there are lots of transactions.

Conversely, when the housing market is slow, and prices are soft (or declining), Realtors' income collectively takes a big hit.

In a tough housing market, just paying the bills becomes a challenge -- forget about socking away money for retirement (or buying that languishing bungalow at a fire sale price, fixing it up, and flipping it).

Guess which environment we're in now??

P.S.: moderating the foregoing cycles a bit: the number of practicing Realtors.

In boom times, the number expands, meaning the total commission pie is divvied up more ways. Too, more homes sellers are tempted to sell homes without using a realtor (called "For Sale by Owner," or "FSBO").

In lean times, FSBO's disappear and Realtor ranks decline, making it (relatively) easier to eke out a living.

Taking a Cue From the Post Office

Defying the Laws of Supply & Demand

The post office wants to increase the price of a stamp by 2 cents to 46 cents starting in January. The agency has been battered by losses and declining mail volume.

--"Postal Office Seeks 2-Cent Increase in Stamp Prices"; The NY Times (7/6/10)

Let's see . . . the housing industry has also been battered by losses and declining volume.

Maybe home sellers should take a cue from the post office and raise their prices?!?

P.S.: Ditto for Realtors and their commissions, mortgage brokers, builders, remodelers, etc.

Is the Fed Really Done?

Testing "the Bernanke Put"

So, the Federal Reserve’s $1.25 trillion program to buy mortgage-backed securities officially ended yesterday.

Next up: home buyer tax credits, scheduled to expire at the end of the month.

But are the Fed -- and U.S. Treasury -- really done?

In an era of too-big-too-fail, "the Bernanke put" (preceded by "the Greenspan put"), and continued federal stimulus, it certainly seems more like an interlude than the end of an era.

If the housing market reacts badly, it's not to hard imagine further aid efforts materializing (no doubt in different guises).

Real Estate & the Media

Is the Media Right About the 2010 Housing Outlook?

Before tackling how well the media understands the state of the housing market, a threshold question: Does the media's take on the housing market matter?

I think it does, because purchasing a home depends so much on one's expectations about the future.

When people are optimistic, a big ticket decision like buying a home is easier; pessimistic, more difficult.

At the margins, at least, the tenor of the news does influence people's attitudes, expectations, etc.

Which begs the question, how accurate is the media's take on the housing market?

Going to Extremes

It's more anecdotal than scientific, but I think it's correct to say that there's a consensus amongst Realtors -- at least the ones I know -- that the media seldom "gets" the tenor of the housing market exactly right.

A year ago, the media overdid the "doom and gloom."

Today?

If anything, it's overplaying the "recovery" theme.

In the trenches, the housing market still looks shaky, especially in the upper brackets.

To pick just one example locally, there apparently is now a 40 month-plus supply of $1 million dollar homes for sale in Eden Prairie.

Given that 6-8 months of supply is considered balanced . . . that's a lot of inventory.

Escalator Short-Circuit

"Trickle Down" Economics to 'Bubble Up'?

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

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

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

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

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

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

Escalator Short Circuit?

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

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

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

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

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

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

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

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

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

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

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

Jeremy Grantham on Market Timing

"Waiting for the Light"

"Be aware that the market does not turn when it sees light at the end of the tunnel. It turns when all looks black, but just a subtle shade less black than the day before."

--Jeremy Grantham, "Reinvesting When Terrified"; (March 2009 Newsletter)

Grantham, who manages $85 billion and is one of the most astute investors around, was actually talking about stocks, but his advice is equally applicable to the housing market.

In the same piece, he also makes two other indisputable points: 1) you'll never catch the low -- by the time it's clear that that has happened, prices will already be higher; and 2) market commentary will be most negative at the bottom. So if you listen to it, you'll either do the wrong thing, or nothing at all.

Interestingly, he rejects conventional wisdom about how to get (back) into a market that has fallen dramatically and still looks risky: 'Since every action must overcome paralysis, what I recommend is a few large steps, not many small ones.'

Prospective home buyers will definitely relate . . .

Waiting for Cheap Housing . . . Since 1997

Timing the Housing Market

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

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

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

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

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

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

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

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

Housing's Benefits

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

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

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

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

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

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

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

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

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

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

Three Reasons Why Deals
Are Tougher in a Recession

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

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

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

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

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

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

One. Buyers and Sellers are starting farther apart.

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

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

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

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

Two. Money is tighter.

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

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

Three. Inventory can feel surprisingly "thin."

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

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

Realtors vs. "Laymen"

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

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

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

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

Now You See It . . Now You Don't

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

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

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

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

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

"Stealth Sale"

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

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

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

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

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

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

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

Short Sale . . . Long Odds

Short Sale Multiple Choice

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

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

Answer: none of the above.

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

What's going on?

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

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

Big -- and Little -- Ticket Purchases

Recession, Uncertainty Hammer Big-Ticket Purchases

What to know what's selling today? Not big-ticket items.

On a scale of 1-10 (1 is the lowest, 10 is the highest), here is a shorthand -- mine -- for the magnitude of various consumer (and business) purchase decisions. Just like the Richter scale, this scale is logarithmic, kind of (8.0 is a much bigger purchase than 6.0).

Anything ranked over 3.0 has seen a dramatic slowdown; anything over 6.0 has fallen off a cliff.

A. Consumers

Basic Necessities; "Sundries" (toothpaste, gallon of milk, candy bar): 1.0
First-run movie: 1.5
Nice Restaurant: 2.0
Tank of gas: 2.0
Clothes: 2.0 - 3.0
Appliances: 3.0 -4.0
Furniture: 3.0-5.0
Used car: 4.0-6.0
New car : 5.0 - 7.0
House: 10.0

B. Business

Capital equipment (commercial plane, agricultural combine, bulldozer): 10+
Publicly traded company (buyout): 10+++

To my armchair economist's eye, big-ticket purchases have been killed by: 1) economic uncertainty, including job (in)security; 2) financial pressure (and in some cases, hardship), caused by falling housing and stock prices, and rising unemployment; and 3) concern about falling asset prices.

Interestingly, any one of these can chill demand for houses: even people who are relatively flush and feeling confident about the future logically may hesitate to step up and buy if they're convinced housing prices have further to fall. That psychology explains why markets tend to overshoot (a phenomenon also associated with stocks): to coax people out of their defensiveness at market lows, bargains often have to become screaming bargains.

Of course, the companion to wanting to buy is being able to.

Fortunately, the federal government is increasingly focused on steps designed to address that. Those include: a fat tax credit to first-time home Buyers; very cheap mortgage money; and lots of fresh capital ploughed into Fannie Mae and Freddie Mac (which should then "irrigate" the housing market with added liquidity).

Will these steps work? Stay tuned. . .

598,000 Fewer Home Buyers

Latest Unemployment Numbers

According to the Labor Department, the U.S. economy shed 598,000 jobs in December. What does that mean for the housing market? In a nutshell: 598,000 fewer home buyers.

Statistically, you'd guess that a least a couple thousand of those laid off in December were at various stages of buying a home.

That means their Sellers are going to have to deal with busted transactions, and putting their homes back on the market. (As anyone who's applied for a loan knows, continued employment is the major pre-closing lender contingency.)

Has the Internet Peaked?

Old-Fashioned Technology
Makes Real Estate Comeback

"Nobody goes to that restaurant anymore. It's too crowded."
--Yogi Berra

Yogi Berra could easily say the same things about the Internet today, especially with respect to real estate. Consider:

--Online photos are now routinely so overly-flattering, you literally don't recognize the home when you're standing in it.

--Facebook and MySpace are crawling with Realtors, job seekers, and people selling . .. something.

--Sites like Zillow -- never very accurate at pricing homes -- are actually getting worse (their business model isn't to displace Realtors, but to attract eyeballs and advertising dollars).

--Interest rates quoted online are virtually meaningless because they don't take into account the borrowers' unique circumstances. Or, they're loss leaders that 1% of the borrowing public qualifies for (in retail, this is called "bait and switch").

Given all the clutter, distortion, and sheer noise on the Internet today, it seems fair to ask, "Has the Internet's utility peaked?"

For many people, the answer is "yes." That's true even as an estimated 80% percentage of all prospective home Buyers now begin their home search online.

Underwhelming -- and Overwhelming

Unfortunately, once they get there, they're likely to be both underwhelmed -- and overwhelmed.

Overwhelmed by the sheer number of real estate sites and information out there. Underwhelmed by how little of it is actually useful, if not outright misleading.

What's taking the Internet's place? "Low tech," and in some cases, "no tech" (John Naisbitt anticipated this phenomenon years ago with a 1999 book titled, "High Tech, High Touch"):

--Old-fashioned shoe leather and tire-kicking: if you really want to know what a property's like, go look.
--For Realtors marketing a home: personal networking, word-of-mouth, and an especially low tech tool: the phone.
--For prospective Buyers looking for a Realtor: referrals and personal interviews. Plenty of newbie Realtors are great at technology, including Facebook, but don't have a clue about selling real estate (how would they? They've never done it).
--For borrowers looking for a loan: one-on-one contact with a lender.

So is the Internet going away?

Hardly. Once I'm working with a client, the Internet's various productivity tools (email, online forms, government Web sites) greatly expedite communication, work flow, and access to information.

However, purely as a marketing medium, the Internet's value arguably has peaked.

Just like junk mail, the more ubiquitous it becomes, the less it seems to register with people (this blog notwithstanding, of course!).

Lowball Offers in a Bear Market

Housing Bear Market Brings Out
Two Kinds of Low Ball Offers

Although they're invariably upsetting to Sellers who receive them, not all low ball offers should be summarily dismissed. Especially in a housing bear market, there really are two kinds of low ball offers.

The first kind is the stereotypical, "I'd like to steal your home in broad daylight" offer. The amount is insultingly low, there's little or no context or introduction offered by the Buyer's agent, and the financing terms are even weaker than the offer price (if they're even included).

In the case of investment properties, I've even seen offers where key information -- like the property's address -- is wrong, and the entire offer feels sloppy and incomplete. Clearly, such would-be Buyers are throwing, er, spaghetti against a wall and seeing what sticks, i.e., making hasty offers on multiple properties in the hopes of finding a truly desperate Seller.

(Another sign of such a strategy is that the Buyer has only been through the property once. Especially with single-family homes, serious Buyers typically make multiple visits to weigh pro's and con's, study the home's key features, and initiate a dialogue with the listing agent)

"Leaving the Door Ajar"

The other type of low ball offer telegraphs more sincerity and interest -- and therefore needs to be treated more carefully.

While I strongly discourage my Buyer clients from making low ball offers -- as often as not, they backfire -- clearly not everyone feels that way today. Egged on by housing headlines, or thinking they see weakness where a home has languished on the market (note to Sellers: don't let your home languish on the market), some Buyers feel compelled to start out with a very, shall we say, aggressive initial offer.

Once that's been rejected, it's almost as though the Buyer "got it out of their system" and can begin to negotiate seriously.

If the Buyer in fact is serious, they'll typically continue circling the property, making incrementally higher offers.

What happens next depends -- on the home's location, price, and condition; the presence (or not) of other suitors (a direct function of location, price, etc.); on how patient the Seller is; and on the Buyer's psychological investment and interest in the home.

Sometimes the would-be low ball Buyer raises their offer enough to entice the Seller to accept. Sometimes, they don't, and move on. However, a third possibility --and one that seems increasingly common -- is that while the low ball Buyer is dithering, a second, more motivated Buyer appears, steps through the door the first Buyer left ajar . . . and snatches the property.

In fact, I just handled one of these transactions.

Not only is the second Buyer viewed as a White Knight, but often the first Buyer isn't given a chance to match or beat the White Knight's offer ("if they were willing and able to offer more, they shouldn't have wasted my time beating around the bush").

(Not So) Exceptional Properties*

Upper Bracket Woes

Although Edina has been a housing standout in the current downturn, it, too, has pockets of excess inventory, and homes that have suffered serial price cuts -- and still aren't selling.

Just one street in Edina's Country Club section, Sunnyslope, now has six homes on the market, at prices ranging from $729,000 to $5 million. The market time ranges from just over 3 months to almost three years(!) (lots of green lawns in the MLS shots -- never a good sign in the Twin Cities in January).

What's going on?

Sunnyslope Sellers

Unfortunately, not just one thing. The economy, of course. The fact that anyone buying one of these homes likely needs a jumbo loan, which now carries a huge premium to so-called conventional or conforming loans (under $417k). The fact that people with the means to buy upper bracket homes have likely had their assets whacked, and now, their jobs threatened.

Finally, you'd speculate that the "Sunnyslope inventory glut" is emboldening Buyers to make, shall we say, "aggressive" offers that Sellers have been rejecting.

What you can categorically rule out is some sort of long-term decline, or a neighborhood-specific issue: Country Club is -- and is likely to remain -- a premier Twin Cities address.

So what happens next?

You'd guess some combination of more price reductions, Sellers who take their homes off the market, and/or Buyers who raise their offers enough to entice one or more of the Sunnyslope Sellers.

Although Edina so far has been spared the pox of short sales and foreclosures affecting other parts of town, that, too, could change with a deepening recession.

*Edina Realty has a special marketing group for upper bracket home called "Exceptional Properties," which includes two of the six Sunnyslope homes.

Comparing (Bruised) Apples to Oranges

To Help Clear Housing Market,
Peg Tax Value to Last Sale Price

“Believe me, it’s not what it is.”
--New Yorker cartoon

That's what's the woman caught in bed with another man, says to her husband standing in the bedroom doorway.

And that's what government authorities are effectively saying to anyone who buys foreclosed properties at a deep discount. Namely, what you paid isn't fair market value, so therefore it won't serve as the new, tax assessed value used to determine future property taxes.

Bottom line: distressed, beat-up properties currently listed for $50,000 or $100,000 will be taxed as though they are still worth $200,000, $300,000 -- or even more -- regardless of what the Buyer actually pays.

Bruised Apples to Oranges

Certainly, poor condition and tight credit explain why many of these properties are sitting unsold, clogging markets nationally. However, the prospect of being stuck with an annual property tax bill of $6,000 or $8,000 -- compared to principal and interest payments of perhaps $4,000 - $6,000 -- is at least an aggravating factor.

Policymakers nationally increasingly "get" that the key to fixing the sick economy is fixing the housing mess. In turn, the key to helping housing is stemming the wave of new foreclosures --and helping the market absorb existing foreclosures. Short-sighted, reality-suspending tax policies make the latter task more, not less, difficult.

The solution is for the new Congress to pass a law requiring local taxing authorities to use the most recent property sale price as the new, tax-assessed value for every sold property, regardless of legal status (foreclosure, "short sale," etc.)

"Invalid" Sales

Such a policy makes eminent sense, for three reasons:

One. It reflects economic reality.

Foreclosed properties sell at huge discounts from non-foreclosed properties for a good reason (more like 15 or 20). They're typically neglected, uninhabited, hard to inspect (the electricity and water can be shut off), and sold "as is." They also can come with a trail of third-party fees and liens that collectively put a legal cloud on title, and can add significantly to the purchase price.

Who wouldn't expect a significant discount to take on such a challenge?

Two. Comparing the sales price of foreclosed homes to non-foreclosed homes -- as government policy now requires -- is like comparing (very bruised) apples to oranges.

In Minneapolis, foreclosures aren't considered "valid sales" for establishing tax values because they involve "duress." (See, "Sticky Property Taxes"). As a result, tax assessors must look for "traditional" (non-lender mediated) sales to calculate the "real" value of the foreclosed property.

Good luck.

In some markets nationally, 50%-75% of all sales are now lender-mediated. While the overall number is lower in the Twin Cities -- approximately 40% -- it masks a wide variation by neighborhood.

In well-to-do areas such as Edina and Wayzata, the percentage of foreclosures is minuscule -- well under 5%. However, in more "economically challenged" areas, such as Minneapolis' Camden and Phillips' neighborhoods, the percentage of foreclosures now appears to be 80% or higher.

You can't price off of a peer group that doesn't exist.

Three. The government's presumption of "duress" is obsolete.

Traditionally, "fair market value" has been defined as whatever a Buyer and Seller, acting at arm's length and without duress, decide it is. By definition, bank-owned properties are deemed to involve duress.

However, the fallacy is that "duress" and "fair market value" are mutually exclusive.

Foreclosed or not, a property that's been on the market for any length of time and fails to sell is . . . overpriced. The solution is to incrementally reduce the price at regular intervals -- as many times as is necessary -- until it is sufficiently attractive to entice a Buyer (or several -- sometimes deeply discounted properties trigger bidding wars once they truly are attractively priced).

It defies market reality for the government to overrule the foregoing price-setting mechanism and substitute its own, artificial procedure(s).

If government really wants to help the housing market, it should focus on removing obstacles in Buyers' path -- not placing more in their way.

Jim Cramer's RE Rx

Cramer: 'Home Buyers Need a Bigger Carrot'

In the financial community, Mad Money's Jim Cramer is known for being a showman first, and for prescient market calls a very distant second (his manic, shotgun approach to stock picking seems to be if you throw enough darts, sooner or later a couple are bound to hit the bull's eye).

That said, no one ever called him dumb (he's actually a Harvard Law grad, worked for Goldman Sachs, and is an idea machine). And once you strip out his individual stock picks, his market analyses are often insightful.

So what's his prescription for fixing the housing market?

First, making it the number one economic priority. Here's Cramer's logic:

Everything comes down to housing. The wealth effect, a function of house values and portfolio values, is being gutted by both. You can't fix stocks -- they are reflective of earnings -- but if you stabilized home values, you could get some confidence, particularly given the collapse in oil. Stabilize housing, and you get a positive trend in consumer spending.

--Jim Cramer, "Housing Needs a Tax Credit"

The centerpiece of his proposal is a massive ($25,000) tax credit for home buyers. Cramer also calls for dramatically lowering interest rates, and for a shakeout amongst the national builders.

In fact, all of the foregoing proposals have already been floated in one guise or another (a $7,500 tax credit is already law, though few Buyers seem to have noticed). What's notable about Cramer's approach is the scale and urgency.

In that respect, Cramer joins a growing list of (calmer) pundits, including Thomas Friedman, calling for some variant of "shock therapy" to address the ongoing housing and credit debacle.

As big banks absorb ever-greater mortgage losses, their arguments are gaining traction.