"Our" Banks, Warren? No, YOUR Banks

Warren Buffett's Freudian Slip

This land is your land
This land is my(?) land
From California to the New York island
From the red wood forest to the Gulf Stream waters
This land was made for you (and me?).

--Lyrics, "This Land is Your Land"; Woody Guthrie (tweaked by Ross Kaplan)

The first time I read "Pretty Good for Government Work," Warren Buffett's defense of the bank bailouts in The New York Times this week, it all seemed perfectly reasonable and logical: the system truly was on the verge of a melt-down in September, 2008, and doing nothing surely would have brought on -- if not a financial apocalypse -- something very, very nasty.

But re-reading it, I couldn't help coming back to a single, offending word: 'our.'

Here's the context:

Just over two years ago, in September 2008, our country faced an economic meltdown. Fannie Mae and Freddie Mac, the pillars that supported our mortgage system, had been forced into conservatorship. Several of our largest commercial banks were teetering. One of Wall Street’s giant investment banks had gone bankrupt, and the remaining three were poised to follow. A.I.G., the world’s most famous insurer, was at death’s door.

--Warren Buffett, "Pretty Good for Government Work"; The New York Times (11/16/2010)

I suppose if I owned tens of millions of shares in Wells Fargo, Wachovia, and Moody's (the credit rating agency); $10 billion in Goldman Sachs bonds that I very much wanted repaid; billions in credit default swap positions, etc. etc. -- I would start to think of the financial system as "our" financial system, too.

But in reality, it's "their" financial system.

They own it, they derive the lion's share of benefits from it, and they -- quite logically -- defend it.

Bailout Red Herring

The second canard buried in Buffett's apologia is the inference that critics of the bailout advocated doing nothing.

Hardly.

Away from the Op-Ed pages of The Wall Street Journal and The New York Times, there has been a deafening chorus -- nay, consensus -- on what government properly should have done -- in fact, should still do now -- in response to the Wall Street-engineered financial melt-down.

Of course, that's after acknowledging that the very best course of action would have been actually trying to prevent it in the first place (vs. enabling it).

In a mythical letter addressed to "Uncle Sucker," Blogger Barry Ritholtz puts it best:

When the crisis struck, you did not seem to understand the role you should play. Instead of stepping up to halt the financialization, to unwind it, you gave away the shop. You failed to extract concessions from firms on the verge of bankruptcy. Your negotiating skills were embarrassing. In the face of meltdown, you panicked.

You could have undone the decades of radical deregulation at that moment. You could have fired the incompetent management, wiped out the shareholders who invested in insolvent companies, gave the creditors and bond holders a major haircut for their foolish lending. Instead, you rewarded them for their gross incompetence.

The solutions you ran with were ad hoc, poorly thought out, improvised. You crossed legal boundaries, putting the Fed in the position of violating its charter and exceeding its mandates. You created a Moral Hazard, the impact of which may not be felt until decades in the future.

--Barry Ritholtz, "Dear Uncle Sucker . . ."; The Big Picture (11/17/2010)

There are no Pulitzers -- yet -- for blog posts, but if there were, I'd nominate "Dear Uncle Sucker."

Read Buffett's piece, then Ritholtz's in its entirety, and decide for yourself.

P.S.: Dear RE/MAX and Coldwell Banker Burnet: looking for an experienced -- albeit opinionated -- Twin Cities Realtor (and blogger)?

If my boss, Mr. Buffett, reads this, I may be available (Buffett is chairman of Berkshire Hathaway, the ultimate parent company of Edina Realty).

"Must Be One Helluva Place!!"

Rental Double-Takes

I assume that I'm not the only Twin Cities Realtor still adjusting to the addition of rental data on MLS (since Sept. 1).

So, in addition to finding "for sale" properties on searches I've saved for various clients (what Realtors call "hot sheets"), there's now the stray rental included.

If you're skimming quickly (like I am), the tip-off is price: $1,500 or some such, vs. $200,000, $450,000, etc.

So, when I saw $20,000 the other day, I did a double-take: what Twin Cities home rents for $20,000 a month??

Manhattan Prices in Mpls.?

It turns out that it wasn't a rental, it was a home for sale -- and that's the asking price!

Presumably, there's a quick solution to the above, which I've yet to do: tweak all my saved searches to exclude "rentals."

However, with only 300-odd rentals total on MLS, the problem doesn't come up that often. Yet.

P.S.: So what is the most expensive rental on MLS now?

For $9,950 a month, you can rent 1006 Wildhurst Trail in Orono, a 6,400 square foot home in Orono with 5 BR's, 7(!) Baths -- and 140 feet of shoreline on Lake Minnetonka.

Touting a Secondary Area on MLS

Defining "Location"

One of the ways Twin Cities agents search for properties for their clients -- at least until the end of this year -- is by "MLS area."

So, "300" roughly corresponds to Lake of the Isles and Lake Calhoun; "391" to St. Louis Park; "309" to Southwest Minneapolis (Kingfield, Linden Hills, etc.); and "387" to Minnetonka. (Metro-wide, there are about 100 discrete MLS areas.)

One of the ways overly aggressive agents try to get attention for their listings is by "borrowing" the MLS area of an adjoining, more upscale area.

That's definitely a no-no.

Fortunately, however, there's a legitimate way to tout a nearby MLS area: list it as a "secondary area" (MLS has a field expressly for that purpose).

Experienced, local agents will already know which areas abut which -- but it never hurts to underscore it.

Super-sized Tour Today?

As "civilians" (non-Realtors) may or may not know, Tuesdays from 11 a.m. to 1 p.m. is when local Realtors -- at least in the Twin Cities -- go look at all the new listings.

To facilitate that, Brokers print and distribute "tour sheets" with the addresses of the homes on tour, along with short blurbs summarizing the highlights of each property.

With last Tuesday off because of Memorial Day weekend, I was expecting today's tour to be especially big.

But I was still surprised when I got the especially thick print-out, which was more than double the usual length.

The explanation?

Instead of printing out the tour on the usual double-sided paper, my OA ("Office Administrator") used single-sided paper.

4%!!

Realtor Pay-Out's Rise with Inventory

No, mortgage rates didn't hit 4% over the weekend.

Rather, that was the pay-out being offered on not one but two of the homes I showed over the weekend.

In fact, out of 8 homes I showed, fully half offered above the standard 2.7%.

Commission Primer

For those who don't know, "pay-out" refers to the commission offered to the Buyer's Realtor. By contrast, the listing commission is what the agent representing the seller gets.

In both cases, the Realtor further splits their half of the commission with their broker.

In fact, the convention -- at least in the Twin Cities -- is to split the commission 55-45 between the Listing Agent and Buyer's agent.

On a "full service" 6% commission, that works out to 2.7% for the "buy" side.

Fatter Carrots

So offering 4% instead of 2.7% is certainly attention-getting.

Why do that?

Most frequently, it is Sellers whose homes have lots of competition.

If your home is one of dozens that prospective Buyers are considering seeing, offering a fatter carrot to the Buyer's agent is one way to ensure that the Realtor shows your home instead of a competing home.

Does it work?

It can't hurt.

However, a scrupulous Realtor takes care to show the homes that offer the most to their clients -- not the ones they stand to make the most selling.

Just so my clients know that I'm "putting my money where my mouth is," my policy is to always provide them with what's called the MLS "Property/Agent Full" report.

Unlike the more abridged reports, the "Property/Agent Full" version shows everything that the agents see -- including the payout commission being offered to Buyers' Agents.

Unserious Buyers: Top 10 Signs

Clients Who Drive Realtors Crazy

Every Realtor has had them (myself excluded, of course).

Who?

The Buyer who doesn't know what they want . . . and wants you to help them find it.

Here are the top 10 signs that you may have such a Buyer on your hands:

10. They will consider everything -- literally. As in, everything between Wisconsin and South Dakota, between $100k and $3 million.

9. They will consider (practically) nothing: it's got to be a 5 Bedroom Colonial, built between 1935 and 1940, with at least 3 fireplaces, a walkout lower level, and a first-floor office. On a lot that's at least .3 acre. Close in. For under $500k.

8. Per #10, they haven't talked to a lender, and have no idea how much they qualify to borrow.

7. You're their 4th Realtor.

6. You know the other 3 Realtors, and they're all experienced and good.

5. When you show them houses, they focus on the owner's artwork, furniture, or wine collection.

4. They've already been looking for 2 years, and have no discernible timetable.

3. They've already seen more than 40 homes.

2. None of their criteria ever stick: first, they want to see $300k Minnetonka townhomes; then Edina Ramblers between $500k and $600k; then downtown condo's for . . .

1. They say, "we hope we don't drive you crazy."

Yes, that's right: the clients most likely to drive you crazy will actually tell you -- usually, soon after meeting you.

Forewarned is forearmed.

"Not-selling-itis"

Resisting Treatment

Imagine you had a medical condition, and sought advice from an expert.

They told you that, while there was a tiny chance that you could spontaneously recover, in the vast majority of cases the condition was degenerative. Meanwhile, there was a medicine available that was 100% effective, albeit expensive.

Would you take the medicine?

The vast majority of people in this situation probably would -- and sooner rather than later (at least assuming they could afford it*).

"Needles in Haystacks"

Now substitute "home seller" for patient, "Realtor" for expert, and "unrealistic asking price" for "medical condition" . . . and suddenly people's behavior changes.

Instead of responding rationally to overwhelming evidence that their home is overpriced for current market conditions, they opt to wait -- hoping for a stronger market, a needle-in-a-haystack buyer . . . or both.

Unfortunately, like the aforementioned, hypothetical medical condition, time is your enemy when you are trying to sell an overpriced home.

By the time the patient is resigned to taking the medicine, the chance for a "cure" may already have been squandered.

*Of course, just like some patients are willing to take medicine but can't afford it, some home sellers know that their home is overpriced, but can't afford to reduce it -- because they owe more than its fair market value.

Then, they either need to pursue a short sale, whereby the bank(s) reduce the mortgage amount, or, failing that, contemplate defaulting.

Taking a Listing -- Or Not

Knowing When to "Take a Pitch"

[Editor's Note: sorry, couldn't resist the baseball metaphor, after last night's dramatic Twins game!]

Just as homeowners must weigh myriad considerations when deciding which agent to list with, listing agents must weigh a host of factors when deciding whether to take a listing.

Yes, that's right: Realtors turn down listings.

By far, the most common reason is price.

First & Last Realtors

A home that's priced too high is costly, both in time and energy.

It's also a drain on one's wallet: ads, literature, new literature each time the price is cut, endless open houses (or at least requests by the owner).

Although many Sellers are loathe to believe it until they see it with their own two eyes, too-long market time almost always torpedoes their price.

The result is that they invariably get significantly less than what they would have gotten months (or years!) earlier had they priced realistically from the get-go.

P.S.: I've never used it personally -- it strikes me as too cheeky -- but there's a famous Realtor line (at least amongst Realtors) to use on Sellers who don't like the price guidance they're being given: 'If I can't be your first Realtor . . . maybe I can be your last."

Part 2: How Close to the Strike Zone Does it Have to Be?

"It's Not a Comp If . . ."

Misconceptions About "Comp's"

Perhaps no other term in real estate seems so straightforward, yet is so commonly misunderstood, as the term, "comparable sold property ("comp" for short).

As Realtors and appraisers use the term, a comp has a very specific -- and narrow -- definition: namely, a recently sold, similar property that can be used to price the "subject" home (i.e., the one you're trying to sell).

In practice, to be a comp, a property must have sold within the last six months (preferably, three); be physically nearby (in a densely populated city, usually within a mile); and be relatively similar in style, size, and condition.

Take away any of the foregoing attributes . . . and it's not a comp.

So, in that spirit, I offer the following:

"It's not a comp if . . .

--It sold 4 years ago (even if it's your next-door neighbor)

--It's more than twice as big as --or less than half the size of -- your home

--It's in dramatically different condition

--The styles are different (rambler vs. 2-story Colonial vs. suburban split-level vs. Tudor, etc.)

--It's the same size and condition, just sold --- but is across town

--It's a bank-owned foreclosure (at least it's not a comp until there are lots of them nearby).

Realtors, feel free to send this to your clients anonymously (you're welcome!).

Realtor-Friendly Edina

Best (& Worst) Local Cities for Realtors

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

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

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

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

Cities That Twitter

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

Here's my (subjective) list of criteria:

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

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

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

"How to File an Ethics Complaint"

By Popular Demand?

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

Quick Summary: it's easier than you think.

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

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

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

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

New Magazine Idea?

Target Market: Former Realtors

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

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

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

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

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

Realtors & Buyer's Markets

Realtors & Buyer's Markets:
Feeling Sellers' Pain

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

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

So it seems fair to ask:

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

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

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

One. Commissions are based on home prices.

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

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

"Fatigue Factor"

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

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

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

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

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

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

Feeling Sellers' Pain

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

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

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

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

South Minneapolis Foreclosure Sale: 36% over List

Where: 37XX 17th Ave. South, Minneapolis

What: 4 BR/2 BA, 2,386 FSF

When: on market, April 3; closed, May 22; days on market: 2

How much: list price - $88,900; sold price - $121,000

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

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

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

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

Price as a Function of Time

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

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

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

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

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

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

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

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

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

"The House That Soared"

New Home "Home Run?" Not Exactly

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

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

Latest Case-Shiller Numbers

"Are the Case-Shiller Numbers Right?"

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

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

Here's what I emailed Snowbeck:

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

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

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

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

3rd Wave of Defaults

"Safe" Mortgage Pain Spreads to MN

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

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

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

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

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

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

Unfortunately, it already is.

1 in 400 = Smashing Success

Many Agents, Small Market Share

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

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

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

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

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

A monster producer.

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

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

Price Reductions: A Realtor's Take

Cheaper -- Not Necessarily Cheap

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

Not necessarily.

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

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

Looking for Patterns

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

Mainly, how motivated and realistic the Seller is.

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

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

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

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

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