Bank Foreclosure Sales Recall '90's IPO's
We've seen this movie before.
Specifically, many of the practices embraced today by banks selling foreclosures, or Real Estate Owned ("REO"), echo tactics used by Wall Street more than a decade ago to sell "hot" tech IPO's ("initial public offerings").
Consider these 3 parallels:
One. Artificially low prices.
At the height of the tech boom, it wasn't uncommon to see IPO's priced at $15 or $20 a share skyrocket to $100 or more the first day of trading.
Similarly, I can point to dozens of foreclosure sales in the Twin Cities this Spring that have attracted at least 10-15 offers, and sold for huge premiums over the artificially low list price.
In each case, the effect is to whet "investor's" appetite -- also known as "pump demand" -- for the next offering. Pretty soon, you have a full-blown feeding frenzy on your hands -- at least in the short run.
Two. Favored insiders.
In a practice called "spinning," Wall Street firms doled out cheap shares to favored customers -- existing and prospective -- who could quickly sell to dumb outsiders -- the public -- clamoring to get in on the "boom."
With foreclosure sales, the favored customers are the Buyers represented by the listing agents -- who also represent the banks!
Tech IPO's -- The Sequel?
Imagine you're conducting an auction with multiple bidders. If Buyers #1, #2, or #3 -- all of whom have their own agent -- submit the winning bid, you split the commission.
However, if Buyer #4, who happens to be your client, submits the highest offer, you get all of the commission.
As listing agent, you see all the other offers.
Now, guess how often Buyer #4 prevails?
Interestingly, such "dual agencies" are enough of a red flag that I've now seen an off-shoot practice: the listing agent steers Buyers to a supposedly independent agent in return for an undisclosed kickback.
Three. Legions of Losers.
We all know how the late '90's IPO boom turned out: eventually, the IPO market got sated, tech share prices collapsed, and the ensuing bloodbath brought down the rest of the stock market (and economy) with it.
We all know what that ushered in: free money, courtesy of the Fed, to revive a prostrate economy (be careful what you wish for!).
Do we really want to see what happens when the foreclosure feeding frenzy subsides, and the "winners" of all these bidding wars wake up with hangovers? What then: REO's -- the Sequel?? Pump-and-Dump . . and Dump again?
Even if foreclosure Buyers didn't overpay, it hardly excuses all the market manipulation on display, and what should instead be a focus on "discovering" -- honestly -- market-clearing prices for a huge class of assets.
If government is serious about (re-)regulating financial markets, a good place to start is policing how banks sell their REO's.
Tuesday, June 30, 2009
Spec Builders Play it Safe(r)
More Singles & Doubles, Fewer Home Runs
Baseball batters facing a strong pitcher and defense adjust by hitting for singles and doubles rather than home runs.
Similarly, in a tough economy, more builders and contractors appear to be adjusting by hitting economic "singles" and "doubles" rather than home runs.
So, instead of paying $400k-$600k for a lot (or tear-down), than putting up a $1.5M-$2M home, I'm seeing more instances of $80k-$140k lots being turned into $250k-$350k new homes.
Or, the same contractors are paying the bills by doing $100k-$250k major remodels.
No, the margins aren't as good, but it keeps crews busy (and intact). It also takes a lot less time to sell a $300k new home in a tough economy than a $2M home.
The Twin Cities neighborhoods that appear to be benefiting most from this "downshifting" trend have three things in common: 1) good location; 2) older, often under-sized housing stock; and 3) relatively modest prices
Where's that?
Neighborhoods such as Minneapolis' Longfellow and Seward neighborhoods, St. Louis Park's Birchwood neighborhood, and parts of Golden Valley and Hopkins.
Baseball batters facing a strong pitcher and defense adjust by hitting for singles and doubles rather than home runs.
Similarly, in a tough economy, more builders and contractors appear to be adjusting by hitting economic "singles" and "doubles" rather than home runs.
So, instead of paying $400k-$600k for a lot (or tear-down), than putting up a $1.5M-$2M home, I'm seeing more instances of $80k-$140k lots being turned into $250k-$350k new homes.
Or, the same contractors are paying the bills by doing $100k-$250k major remodels.
No, the margins aren't as good, but it keeps crews busy (and intact). It also takes a lot less time to sell a $300k new home in a tough economy than a $2M home.
The Twin Cities neighborhoods that appear to be benefiting most from this "downshifting" trend have three things in common: 1) good location; 2) older, often under-sized housing stock; and 3) relatively modest prices
Where's that?
Neighborhoods such as Minneapolis' Longfellow and Seward neighborhoods, St. Louis Park's Birchwood neighborhood, and parts of Golden Valley and Hopkins.
Monday, June 29, 2009
Housing Market Psychology
"Can't Sell" vs. "Won't Sell"
Much attention has been paid to all the homeowners who want to sell now but literally can't afford to, because they owe more on their mortgage than their home is worth (in Realtor's parlance, they're "underwater").
Unless they can get the bank(s) to reduce their principal or simply default, they would need to write a check at closing for thousands or even tens of thousands of dollars.
However, anecdotally, I'm seeing more instances where Sellers are declining to sell for psychological rather than purely economic reasons.
Specifically, they're not willing to sell until they can break even (because they still have equity in their home, they would still receive money at closing rather than have to pay it).
Latent Supply
This isn't surprising to behavioral psychologists, who've long noted that loss aversion is a more powerful incentive than scoring gains.
However, Sellers' "need" to break even suggests that there is at least some latent supply that improving conditions will unlock.
That, in turn, will act to keep the recovery subdued.
Of course, there is also "latent demand" waiting for signs that housing prices have finally stabilized.
At least in the short run, the direction of housing prices may depend on which of these two groups -- "latent buyers" or "latent sellers" -- is larger.
Much attention has been paid to all the homeowners who want to sell now but literally can't afford to, because they owe more on their mortgage than their home is worth (in Realtor's parlance, they're "underwater").
Unless they can get the bank(s) to reduce their principal or simply default, they would need to write a check at closing for thousands or even tens of thousands of dollars.
However, anecdotally, I'm seeing more instances where Sellers are declining to sell for psychological rather than purely economic reasons.
Specifically, they're not willing to sell until they can break even (because they still have equity in their home, they would still receive money at closing rather than have to pay it).
Latent Supply
This isn't surprising to behavioral psychologists, who've long noted that loss aversion is a more powerful incentive than scoring gains.
However, Sellers' "need" to break even suggests that there is at least some latent supply that improving conditions will unlock.
That, in turn, will act to keep the recovery subdued.
Of course, there is also "latent demand" waiting for signs that housing prices have finally stabilized.
At least in the short run, the direction of housing prices may depend on which of these two groups -- "latent buyers" or "latent sellers" -- is larger.
Urban Planning - Edina Style
Keeping Country Club . . . Country Club
My law-practicing days (in the early '90's) are fading fast, but I do recall a basic principle about constitutional (vs. unconstitutional) zoning restrictions: general rules with a strong public policy component work, overly specific ones don't.
So, cities that don't want Wal-Mart's can't simply pass an ordinance saying, "no Wal-Mart's." Rather, they have to pass an ordinance prohibiting "retail buildings bigger than 200,000 square feet within city limits."
What makes me think of this is various local cities' efforts to control tear-down's, and specficially, McMansion's.
The city's goal may very well be to ban tacky, lot-devouring McMansion's. However, for legal reasons, the city's tack has to be more general.
Like, "no tear-downs of historically significant, pre-1944 residential structures in the Country Club neighborhood" (my paraphrase).
That's how Edina does it, anyways.
Is it effective?
Take a drive through Country Club, and you'll have your answer.
My law-practicing days (in the early '90's) are fading fast, but I do recall a basic principle about constitutional (vs. unconstitutional) zoning restrictions: general rules with a strong public policy component work, overly specific ones don't.
So, cities that don't want Wal-Mart's can't simply pass an ordinance saying, "no Wal-Mart's." Rather, they have to pass an ordinance prohibiting "retail buildings bigger than 200,000 square feet within city limits."
What makes me think of this is various local cities' efforts to control tear-down's, and specficially, McMansion's.
The city's goal may very well be to ban tacky, lot-devouring McMansion's. However, for legal reasons, the city's tack has to be more general.
Like, "no tear-downs of historically significant, pre-1944 residential structures in the Country Club neighborhood" (my paraphrase).
That's how Edina does it, anyways.
Is it effective?
Take a drive through Country Club, and you'll have your answer.
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