Tale of Two Parent Companies
[Note: see, "Realogy Bankruptcy Filing Imminent?" (2/12/09) for an update to this post]
One of the most popular quotes making the rounds these days is Warren Buffett's observation about risk: "You don't know who's swimming naked until the tide goes out."
Latest addition to the list of naked swmmers? Realogy, Coldwell Banker Burnet's parent company (and Edina Realty's biggest rival in the Twin Cities market; Buffett is chairman and CEO of Berkshire Hathaway, Edina Realty's corporate parent).
According to the new Barron's (Sept. 1, 2008), one of the most troubled private equity deals in the last few years is Apollo's late 2006 purchase of Realogy for $7 billion ("Look out Below! More disasters could hit debt-laden companies owned by private equity shops Apollo, Blackstone, & KKR").
The Barron's article notes that Realogy's bonds are trading for 50 cents on the dollar. For those who don't know finance, that qualifies as somewhere between intensive care and life support.
By contrast, Berkshire Hathaway, Edina Realty's parent company (via MidAmerican Energy), is flush with cash and in acquisition mode. In just the last six months, Berkshire financed Mars' acquisition of Wrigley, launched a new municipal bond insurance company, and expanded its transportation sector investments. Oh, yes, and it's stock price is holding up well at $117,000 a share.
So how will the prospect of Realogy going bankrupt affect Coldwell Banker Burnet? To tweak that old line about chicken soup,"can't help, might hurt."
Saturday, August 30, 2008
Thursday, August 28, 2008
"Tear-down Index" Up
Tear-down Activity Belies Recession Signals
Yes, the Case-Schiller real estate index just showed a record drop, and yes, consumer sentiment as reported by national gauges remains low. And investors don't need to be told that the stock market remains highly volatile, and down sharply so far for 2008.
However, under the category "all real estate is local," tear-down activity near the City Lakes appears to be at a record high.
I'm personally aware of at least six projects at various stages of completion within one mile of Cedar Lake in Minneapolis. I'd estimate that the market value of the homes under construction ranges from $1.5M to more than $4M (check out the spectacular home going up on the west side of Lake of the Isles!).
Counting major rehabs -- defined as more than $250k -- swells the number of in-progress projects to about a dozen in the same area.
Aren't we supposed to be in a kind-of-recession?
It is a bit perplexing. The bullish explanation is that people may be pessimistic short-term, but are optimistic long-term. If you are building a $3M home near Cedar Lake for yourself (vs. "spec," or resale), you undoubtedly are thinking long-term.
The other possibility is that at least some of this activity is defensive: when markets are volatile, people want their money close to home -- literally. You can't live in your stock portfolio, and, given the U.S. budget deficit, higher taxes on everything from capital gains to earned income may be in the offing. However, mortgage interest for most people is subsidized by the government (via itemized tax deductions).
There may also be a "buy low, sell high" phenomenon at work, at least with respect to contractors. With new construction off sharply and the overall economy slow, now is a great time to interview and hire people in the building trades (electricians, carpenters, etc.).
Yes, the Case-Schiller real estate index just showed a record drop, and yes, consumer sentiment as reported by national gauges remains low. And investors don't need to be told that the stock market remains highly volatile, and down sharply so far for 2008.
However, under the category "all real estate is local," tear-down activity near the City Lakes appears to be at a record high.
I'm personally aware of at least six projects at various stages of completion within one mile of Cedar Lake in Minneapolis. I'd estimate that the market value of the homes under construction ranges from $1.5M to more than $4M (check out the spectacular home going up on the west side of Lake of the Isles!).
Counting major rehabs -- defined as more than $250k -- swells the number of in-progress projects to about a dozen in the same area.
Aren't we supposed to be in a kind-of-recession?
It is a bit perplexing. The bullish explanation is that people may be pessimistic short-term, but are optimistic long-term. If you are building a $3M home near Cedar Lake for yourself (vs. "spec," or resale), you undoubtedly are thinking long-term.
The other possibility is that at least some of this activity is defensive: when markets are volatile, people want their money close to home -- literally. You can't live in your stock portfolio, and, given the U.S. budget deficit, higher taxes on everything from capital gains to earned income may be in the offing. However, mortgage interest for most people is subsidized by the government (via itemized tax deductions).
There may also be a "buy low, sell high" phenomenon at work, at least with respect to contractors. With new construction off sharply and the overall economy slow, now is a great time to interview and hire people in the building trades (electricians, carpenters, etc.).
Wednesday, August 27, 2008
National Energy Crisis? Not So Fast . .
Twin Cities Well-Positioned
to Harness Wind Power
"Wind advocates say that just two of the windiest states, North Dakota and South Dakota, could in principle generate half the nation's electricity from turbines. But the way the national grid is configured, half the country would have to move to the Dakotas in order to use the power."
--"Wind Energy Bumps Into Power Grid's Limits" (The New York Times; 8/26/08)
It certainly makes sense that it might cost tens of billions to build power lines from the Dakotas to population centers on either coast.
However, last time I checked, the state that shared the longest border with North and South Dakota was . . . Minnesota. Granted, the Twin Cities is located on the opposite side of the state, but we're still talking hundreds of miles, not thousands.
Through the early nineteenth century, cities formed near cheap transportation -- think natural harbors (New York, San Francisco, Seattle) and rivers (St. Louis, Minneapolis, New Orleans), etc. Fifty years ago, cities sprang up -- and grew fastest -- where the human intellectual capital was greatest (think, Silicon Valley and Boston). Now, what may very well separate urban winners and losers is . . . access to cheap energy.
On that score, the Twin Cities would seem to be looking (surprisingly) good, cold climate notwithstanding.
to Harness Wind Power
"Wind advocates say that just two of the windiest states, North Dakota and South Dakota, could in principle generate half the nation's electricity from turbines. But the way the national grid is configured, half the country would have to move to the Dakotas in order to use the power."
--"Wind Energy Bumps Into Power Grid's Limits" (The New York Times; 8/26/08)
It certainly makes sense that it might cost tens of billions to build power lines from the Dakotas to population centers on either coast.
However, last time I checked, the state that shared the longest border with North and South Dakota was . . . Minnesota. Granted, the Twin Cities is located on the opposite side of the state, but we're still talking hundreds of miles, not thousands.
Through the early nineteenth century, cities formed near cheap transportation -- think natural harbors (New York, San Francisco, Seattle) and rivers (St. Louis, Minneapolis, New Orleans), etc. Fifty years ago, cities sprang up -- and grew fastest -- where the human intellectual capital was greatest (think, Silicon Valley and Boston). Now, what may very well separate urban winners and losers is . . . access to cheap energy.
On that score, the Twin Cities would seem to be looking (surprisingly) good, cold climate notwithstanding.
Monday, August 25, 2008
Contrarian Indicator
The Big (and Little) Picture
The most bullish housing signal I've seen lately is all the attention paid to Nouriel Roubini (The NY Times, The Wall St. Journal, etc.). Roubini, an economics professor at NYU and "perma-bear" known for his dour forecasts, is rapidly emerging as the guru of this cycle (like Abby Joseph Cohen was to the '90's Bull Market, Henry Blodgett was to Internet stocks, etc.).
Nobody paid attention to him a year ago; now, everyone is. Not quite as good as Newsweek putting the bear market on its cover, but a good sign, nonetheless. (As every good contrarian knows, when everyone holds the same opinion . . it's usually wrong.)
When I work with Buyers and Sellers, "macro stuff" is really just background noise: ultimately, the focus narrows from the direction of interest rates, broad market trends, etc., to at most a handful of homes. Specifically, Sellers what to know the comp's for their home and how it stacks up against them; prospective Buyers want help whittling a list of finalists down to "the one."
That said, I think the key to the broader economy is housing, and the key to housing is the fate of Fannie Mae and Freddie Mac.
I'm going to venture a little way out on a strong limb, and make two predictions: 1) the template for any fix is going to be modeled after the Resolution Trust Corp. (the entity charged with cleaning up after the S&L mess almost 20 years ago), just with more zeroes added; and 2) the clean-up task is going to fall squarely in the lap of the new administration.
The most bullish housing signal I've seen lately is all the attention paid to Nouriel Roubini (The NY Times, The Wall St. Journal, etc.). Roubini, an economics professor at NYU and "perma-bear" known for his dour forecasts, is rapidly emerging as the guru of this cycle (like Abby Joseph Cohen was to the '90's Bull Market, Henry Blodgett was to Internet stocks, etc.).
Nobody paid attention to him a year ago; now, everyone is. Not quite as good as Newsweek putting the bear market on its cover, but a good sign, nonetheless. (As every good contrarian knows, when everyone holds the same opinion . . it's usually wrong.)
When I work with Buyers and Sellers, "macro stuff" is really just background noise: ultimately, the focus narrows from the direction of interest rates, broad market trends, etc., to at most a handful of homes. Specifically, Sellers what to know the comp's for their home and how it stacks up against them; prospective Buyers want help whittling a list of finalists down to "the one."
That said, I think the key to the broader economy is housing, and the key to housing is the fate of Fannie Mae and Freddie Mac.
I'm going to venture a little way out on a strong limb, and make two predictions: 1) the template for any fix is going to be modeled after the Resolution Trust Corp. (the entity charged with cleaning up after the S&L mess almost 20 years ago), just with more zeroes added; and 2) the clean-up task is going to fall squarely in the lap of the new administration.
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