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There’s always something to howl about.

Author: Sean Purcell (page 8 of 11)

Real Estate Renaissance Man

October 16, 2008

And That’s Why Commission is Better

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Real Estate Renaissance Man

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There are a great many rewards to being a commission-based, self-employed entrepreneur.  Freedom has to be number one.  Even in the limited form it takes within our system of centralized decision making, pointless licensing laws and oppressive, regressive taxation, there is still freedom.  Another, decidedly less esoteric benefit, is the inherent unlimited income opportunity.  To what degree we utilize that opportunity is entirely up to us.  I mention this in light of all the discussion lately about Socialist policies and redistribution of wealth.  It seems an opportune time to point out how the system self-corrects when left to itself (albeit painfully at times).

It wasn’t more than a year, year and a half ago that social engineers were up in arms over the outrageous pay CEO’s received.  They would graph the income of the president of a large company as a factor of the average employee’s income within the same company.  “This is wrong!” they would yell.  “A moral outrage” they would opine on the talking head shows.  “Another example of the evil capitalist system rewarding the rich at the expense of the poor.”  We all heard it and quite frankly, I had a hard time myself not gagging over some of the pay structures I saw.  I would be the first to stand up and agree that paying a CEO tens (never mind hundreds) of millions of dollars is nearly impossible to justify from an economic standpoint.  But the difference in argument should be painfully obvious.  The enraged egalitarians may have disagreed with the economic soundness of executive level pay but they decried the morality of it.  Few things as scary as a large crowd informing me what morality is.

Those angry groups of ivory tower thinkers and blue collar unifiers do not believe the system corrects.  They believe the best option is their option and invariably it involves income redistribution.  Pointing to graphs relating a CEO’s pay to that of an average employee on the assembly line is meaningless.  Their is no logical nor economic reasoning to justify some type of mathematical relationship.  The issue, of course, is whether a company Read more

October 14, 2008

Why the Bailouts Don’t Work and Why Wall Street Loves Them

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Real Estate Renaissance Man

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The stock market came back with a vengeance yesterday.  On Friday’s episode of BloodhoundBlog Radio we noted that the market was vastly oversold from a fundamental perspective and suggested a rebound after the weekend.  This was prescient enough that the Mortgage Cicerone made note of it, which is high regard indeed.  So why am I not celebrating?  Because yesterday’s reaction was as irrational as the sell-off.  One thousand points?!  Sure the correction was in there, but so was the exuberance of a seemingly ceaseless font of federal gifts.  The markets like the latest ideas out of Washington and why shouldn’t they?  Wall Street has done a good job creating an aura of representation – most people now believe that was is good for Wall Street is good for America.  How else do you explain the frantic efforts our fearless leaders make each time the market drops?  The rally cry lately seems to be: “If we make the Dow go up, we must be on to something.”  This is nothing new.  For years now the markets have taken a preeminent position in economics beyond their reach or relevance.  One need look no further than earnings reports.  You might report record earnings for your company, yet your stock is pummeled because the reported earnings did not equal what the market had already priced in to the stock.  “You didn’t do as well as we thought you would do based on our self-serving judgment of what is best for you.” (Which is shareholder profits, of course.)

If you believe what you hear from the talking heads (and by virtue of the fact you are reading BHB, I doubt you do) the source problem for the economy is the toxic mortgage derivatives and their tentacle like reach.  Everyone bought these things, even when they didn’t know they were buying them.  Now (as the story goes) our problem is this: no one knows what this stuff is worth.  Everyone is marking down their portfolios, no one wants to risk lending money and the initial bailout (bailout 1.0) didn’t phase anyone; all because we don’t know the real Read more

October 13, 2008

You Don’t Always Get What You Want, But If You Try Sometime, You Might Find, You Get What You Need

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Real Estate Renaissance Man

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If you are a mortgage holder who is either struggling with crushing payments, bitter for having overpaid for your home during the bubble, or who has extravagantly refinanced when prices were rising, the government’s landmark $700 billion bailout package has an important message for you: stop making your mortgage payments.

So says Peter Schiff, president of Euro Pacific Captital and author of “The Little Book of Bull Moves in Bear Markets” in his op/ed piece entitled, Just Stop Paying Your Mortgage.  You may or may not read it with tongue in cheek, but read it you should.

When a financial institution holds a mortgage, homeowners must live with the fear of foreclosure. Private institutions only have obligations to shareholders. In the case of a defaulting borrower, they will look to recover as much of their principal as possible. If foreclosure is their best option, they will take it in a heartbeat.

The government has no such obligations. Its only goal is to keep voters happy. After supposedly bailing out the fat cats on Wall Street, no politician wants to be accused of evicting struggling families. Once you understand this, all of your anxiety should melt away.

The law of unintended consequences is never so manifest, or insidious, as when politicians correct the free market with legislation.  (Except, perhaps, when they do so because they are …from the government and … here to help.)

October 13, 2008

The Glass IS Half Full

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Real Estate Renaissance Man

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The “new, post-bail-out era of real estate” is how Cheryl Johnson describes things going forward amidst the “collapsing global financial markets” in Back At The Ranch. In a comment to Friday’s edition of the Bloodhound Blog Radio Mortgage program Brian Brady and I co-host, the optimistic view I have for real estate practitioners was gently questioned.  I believe the exact quote was “I thought you were starting to sound like NAR spokesmen”… a particularly disheartening comparison on a number of levels.  The truth of the matter is this: I believe we are entering one of the greatest real estate opportunities in years – maybe decades.

The idea is two-fold:

  • Consumer credit has collapsed and will not be coming back any time soon.  That means store credit, car loans, credit cards, home equity and so on have stopped flowing.  The bailout package did not make a dent in this secondary level of credit.  Financial institutions (those that are left) are hoarding cash; when they finally do trust enough to poke their heads out, consumer credit will not top their list of “things to finance.”
  • Real estate mortgages have gone vanilla.  Similar to Henry Ford‘s sentiment when he said: Any customer can have a car painted any color that he wants… so long as it is black.  We have Fannies, Freddies, FHAs and VAs – you can have any mortgage you like… so long as it is a conforming government loan.  BUT, these vanilla loans are being served with gusto.  Money for these loans is flowing though the pipeline and the valves are wide open.

So, what does this mean?  It means the government wants to see real estate serve a function it has come to perform so well: propping up a sagging economy.  The government is pumping money down this pipeline and will continue to do so.  Combine that with the lack of consumer debt and you only have one place where people can spend: real estate.  The demand created by cheap money and even cheaper homes is causing volume to increase in many of the hardest hit areas.  According to the NAR (I know, I know), Read more

October 6, 2008

And Now, No Reason to Root At All

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Real Estate Renaissance Man

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Last week, while watching the House contort itself in a self-serving round of navel-gazing over the bailout package, I pondered two connotations of their disconnect with the populace.  Taken together they are a question really, that looks at the motivation behind politicians’ decisions; the metaphysical understanding of a Representative if you will.  This question in particular asks why our elected officials vote for legislation they know their constituents are against.  At the time, many of our representatives had chosen not to support the bailout package; not because they were against it – quite the contrary, they wanted to vote for it – no, their problem was their constituents didn’t want it and the election was to close for a nice spin cycle.  So I wondered if they ignored the people who elected them because:

  • …constituents are too stupid to understand

or

  • …constituents are not the ones who pay their bills

Over the weekend I am sad to report the answer became clear.  The majority of America (at least the majority of America who contact their representatives) were against the bailout the first time around.  I had hoped it was due to the fact that middle America was smarter than the politicians and pundits surmised.  But then Wall Street had its little temper tantrum and middle America couldn’t wait for the bailout package to pass.  They told their representatives so with an onslaught of voice mails, emails and snail mails.

Walls Street’s melt down affected every-one’s retirement funds and investment funds and saving funds… if they elected to sell them that day.  Otherwise it made not a wit of difference to the average person on the street who does not expect to need those funds for years yet.  But people panicked anyway.

I learned from this episode a lesson most politicians must learn early in their career.  I learned that middle America did not read up on or have at least a passing understanding of what the bailout meant, nor did they look into and try to understand how Wall Street’s shoe stomping episode actually affected them.  Instead, middle America did what they always do: they Read more

September 30, 2008

A Quick Primer on Liberal & Conservative Economic Theory

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Real Estate Renaissance Man

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We may or may not be in favor of the bailout.  We may or may not fully understand what the bailout will or won’t do.  We may or may not be any smarter than the politicians who (in my humble opinion) don’t have a clue what the bailout will or will not do.  But I am guessing we can all recognize good ideas from bad ideas.  It’s easy: the former stimulates business and the latter stifles it.

Case in point (you can read the full story here):

Congressional leaders scrambled Tuesday to come up with changes to help them sell the failed $700 billion financial bailout to rank-and-file members. One idea gathering support: raise the federal deposit insurance limit to reassure nervous savers and help small businesses…

Republican House aides said the FDIC proposal might attract some conservatives who want to help small business owners and avert runs on banks by customers fearful of losing their savings…

Another possible change to the bill would modify “mark to market” accounting rules. Such rules require banks and other financial institutions to adjust the value of their assets to reflect current market prices, even if they plan to hold the assets for years…

Some House Republicans say current rules forced banks to report huge paper losses on mortgage-backed securities, which might have been avoided…

Liberal Democrats who opposed the bill are suggesting other changes. Their ideas include extending unemployment insurance and banning some forms of “short selling,” in which investors bet that a stock’s value will drop…

The conservatives want to

  • Raise the insured limit on bank deposits.  Of dubious actual benefit in my opinion – but tough times call for paper mache measures.
  • Change the mark-to-market rules.  The mark-to-market rules are onerous to investment companies and do not reflect asset values accurately.  This should have been enacted long ago.  Using the bond concept of yield to average life would make more sense.

The liberals, on the other hand, want to

  • Extend unemployement insurance.  What? To stimulate the economy you want to increase the weight of one of its anchors?  I know this is Read more
September 30, 2008

No One to Root For…

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Real Estate Renaissance Man

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I wrote yesterday that we were Front Seat to History, but main stream press continues to miss it and I fear I was a little too cavalier in my writing.  The real story here is not the initial failure of the bailout, but the in-your-face blatancy of our politicians.  There is no longer even the veil of accountability or representation.  I know this is a political philosophy question regarding representative government, but there has always been at least lip service paid to the idea of politicians keeping their finger on the pulse of their constituents.  Senator McCain said “Americans are frightened…” and the Democratic leadership is returning to the bargaining table in hopes of enticing more politicians from both sides of the aisle to vote against the wishes of the very people who voted them into office.  Today we had President Bush demand “Congress must act.”  In most scenarios, if  the White House disagrees with congress, the President takes it to the people and admonishes all of us to call, write or email our representatives and let them know how we feel.  But in this case there is no call to action.  Why is that?  Obviously the majority of America does not agree with the bailout as it is presently understood, but there is more to it.  Congress and our executive leaders are all of one mind: get this done despite what middle America thinks.  This has two connotations:

  • Don’t bother representing your constituents – they are too stupid to understand.
  • Don’t bother representing your constituents – they are not the ones who pay your bills.

Either way I want to SCREAM OUT to everyone watching this.  I want to say: Pay Attention!  It is rare that an event of this magnitude happens close enough to an election that we witness the true motivation of those who run for office.  If you feel a disconnect with your elected officials… is it any wonder?

September 29, 2008

Wachovia Fails… Did You Notice?

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Real Estate Renaissance Man

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Lost in the tsunami of bail-out failure, Wachovia gave up the ghost.  Wachovia now joins Countrywide and WaMu as the big three option arm originators now become three of the biggest financial failures of all time.  If this looks familiar to any posts you may have read here at BHB, including those on The Mortgage Dance and Wachovia Completes the Gang of Three, consider it pure coincidence.

Does it sound like I am gloating a little over the downfall?  I am.  Option arms were the tool and bribery was the modus operandi.  Loan originators fed their greed while homeowners lied to get homes they could not afford and Wall Street leveraged the whole thing to apocalyptic proportions.

I wonder if there is enough blame to go around.

September 29, 2008

Front Seat to History

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Real Estate Renaissance Man

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Whether or not you approved of the bailout, you have to count yourself lucky to be witnessing an historic event.  Take a good, hard look at what is unfolding before us.  One elected official after another said they could not vote for this legislation because their constituents back home were not in favor of it and would vote them out of office.  As a matter of fact, this was part of an openly discussed game plan yesterday before the vote:

Both parties were also scouring the political map to identify lawmakers who face little or no opposition for re-election in November, knowing they would be more willing to vote yes. New York Times News Service

Think about that again.   They wanted to vote for it, but the people they represented were overwhelmingly against it and would have thrown them out for approving the bill.  How often does anything of REAL importance happen this close to an election?  This is so close to election time that the legislators are accountable for their votes.  Imagine that!  And they are scared.  They can not do their politics as usual because they don’t have time so spin it.  This is a magical time to witness: politicians acting out of accountability rather than self-interest.  Were that it was always true…

September 26, 2008

Some Details on the WaMu Buyout

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Real Estate Renaissance Man

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In a comment to an earlier post I was sent the link to JP Morgan Chase’s Investor Presentation regarding their purchase of WaMu.  This was courtesy of Bob Wilson, whom readers may know for his many thoughtful comments here on BHB.  I highly recommend reading it by clicking here, but in the mean time – some of the highlights:

  • They are taking over the deposits and leaving the liabilities.  This helps the FDIC out tremendously but I can’t help thinking of the great line from The Godfather: “Leave the gun, take the cannoli.”
  • They plan to exit all non-bank originated retail lending.  Say good-bye to most of WaMu’s products.
  • They are most excited by WaMu’s large presence in California.  According to their projections CA sees the most population growth, followed by Texas and then Florida.  This is great news for these hard-hit areas.  Arizona sees about half the growth rate and the northeast and rust belt continue their problems with fundamentals.  (I believe we are looking at a very stratified housing market for some time to come.  There has never been a national housing market and such a concept is becoming harder to even say with a straight face.)
  • JP Morgan Chase paints a pretty rosy picture of potential earnings.  They look at their credit card and investment sales in-branch and overlay that onto all the WaMu branches.  But I don’t see the same types of customers at WaMu as I do at Chase and I have a hard time believing Chase will get the same level of commercial banking profits from them.
  • Expected cost of this acquisition is $1.5 billion now and another $.5 billion over the next couple of years.
  • They will keep WaMu’s low risk, profitable lending programs in the multi-family niche which should be welcomed by investors who are currently getting shut out of the market by underwriting constrictions.
  • Finally, they project current-pricing-to-trough depreciations for CA, FL and the US as a whole.  The numbers are interesting, but what’s more interesting are the headings.  They project losses based on three scenarios: Current Estimates, Deeper Recession and Severe Recession.  Apparently the analysts feel we are Read more
September 26, 2008

The Mortgage Dance Continues

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Real Estate Renaissance Man

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I posted the following back in July and with WaMu going down it seems like a good time to bring it back to the top.  If there is any confusion as to who is going down and why, make a point of clicking the link on the “accounting debacle”.  It goes to a post from August of last year and will explain a lot about what is really happening and why.

And the beat goes on…  but sometimes it helps to have that little bouncing ball show us exactly what lyric we are singing this week.  All together now:

Today the Fed suprised no one by opening the discount window to ailing siblings: Fannie Mae and Freddie Mac.  Together they hold more than half of all mortgages in the US and the guarantee that they would not fail has been implied for some time.  The Fed also intimated there would be no other bail outs in the foreseeable future.  Who is walking the thin line?  WaMu, Wachovia, Downey, Indy Mac (oops, they were written out of the chorus last week).  Now it looks as if the Fed has reworked a few more lines and their song to the Wall Street firms goes a little something like this: if you can not fix your problem with the ability to borrow at 2.25%, your problem is not fixable.

This does not bode well for our short list.  Downey is more of a regional and will likely go down under its own weight of Losses and Lawsuits (the real ”L” words).  Previous posts right here on BHB have fixed WaMu as the consensus “next big one” to fall.  Wachovia, in my opinion, is more of a question mark.  Straight-laced, tea-loving bank goes to a frat party where “everyone who is anyone” is drinking and the peer pressure just becomes too much.  This is a hangover for which they are ill prepared.

What does this mean for real estate and the mortgages that drive its cycles?  Here’s one thought: if you are a specialist in homes that do not play the Fannie/Freddie tune, you may Read more

September 23, 2008

Federal Bailouts, World Crisis… What About Little Ol’ Me?

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Real Estate Renaissance Man

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Lots of talking heads.  Lots of outrage.  Even a little fear.  Keeping up with economic developments lately is taxing and I mean taxing in its most negative “IRS and April 15th” connotation.  Last night Brian Brady and I were interviewing Matt Padilla for Bloodhound Radio.  It was a great discussion and got me to thinking about what is (or rather should be) important.  I mean, the whole thing can be overwhelming: how did we get here, who’s to blame, what are the macro ramifications of this massive federal bail-out… makes one feel small and even a little lonely in the midst of this big economic world gone ’round the bend.

So I stopped on the way home for a big shot of wheat grass (substitute whatever manly libation you prefer here), calmed down and eventually found myself a little less interested in what it all means and a little more interested in what it all means to the real estate agent on the street.  In other words: What is the next step?

Last week I suggested that Wall Street’s Meltdown may actually help the housing industry.  Consumer debt will dry up in the credit crunch and this bail-out will not have much impact in that arena.  The financial industry is going to come out limping and take some time to lick its wounds.  Consumer debt has always been a risk and will end up on the back burner for a while, but the need for profits is always there; where will it come from?  Where is the supply of money going to be greatest?  Thanks to Uncle Sam it is going to be mortgage money that flows freely.  But flowing freely is not the same as distributed evenly and this is where the real potential lies for homeowners as well as real estate agents.

By the end of the year conforming loan limits are going to drop.  Here in San Diego they should end up around $625,000.  Under that limit there is going to be a large supply of federally backed (and encouraged) cheap money.  Over that limit, however, it is going to be Read more

September 19, 2008

Alex, I’ll Take “Terrifying” for $1000

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Real Estate Renaissance Man

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Even with all the financial failure that surrounds us, I still find myself loathe to accept any type of government intervention.  We throw around comments like “too big to fail” but rarely examine the end game.  Greg Swann recently reposted a very intelligent treatise on something he likes to call Rotarian Socialism and how each “fix” only begets a greater problem down the road.  As a matter of fact, Mr. Swann and I share a healthy fear of government and the implied force of violence that backstops all regulations and laws.

Earlier this week I followed a story out of Spokane, WA.  It centers around a Mr. Kevin Coe, convicted rapist and suspected serial rapist.  For the relevant details and background on this story click here.  Mr. Coe, however, is not the scary part of this story:

Coe has completed his sentence of 25 years in prison, but he is not getting out of jail yet.  Starting tomorrow, Coe faces a civil trial as the state tries to keep him locked up indefinitely as a violent sexual predator.

“We think he’s mentally ill and dangerous,” said Todd Bowers of the state Attorney General’s Office.

In 1990, Washington became the first state to create a program to keep behind bars people determined to be at risk of committing more sex crimes even after they have completed their sentences. A special facility near Tacoma holds about 300 of them, including Coe, whose sentence was completed in 2006.

A person is convicted of a crime and sentenced.  He never allocutes; he maintains his innocence throughout (despite the government’s repeated attempts at blackmail offered in the form of early parole) and he serves his FULL TERM.  At which time the government continues to keep him locked up; found guilty by a jury of legislators, of having the potential to commit another crime.

The state reserves the power to take away your property, your liberty and your very life.  They enforce this power at the tip of a gun.  All laws, all regulations (and, apparently now, all judgment on potential) is maintained by the government, ultimately, on penalty of death.  The abrogation Read more

September 19, 2008

How Wall Street’s Meltdown Helps Main Street’s Housing

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Real Estate Renaissance Man

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Just for fun, let’s imagine a possible silver lining to the complete melt down on Wall Street.  In this scenario, the next big shoe to drop will be access to consumer debt.  No one is going to extend car loans, credit card debt, retail debt and so on.  But this may not be all bad for our industry.

Imagine John & Mary Homeowner talking about their day.  John says gas prices are up and his long commute is killing them.  They need to buy a different car.  “But no one is lending money for new cars,” Mary replies.  John decides that if he can not have a better ride, he will have a better destination.  “Let’s add on a nice deck for me to enjoy after my long commute.”  Mary smiles pleasantly and reminds John that no one will extend an equity line for home improvement.  Exasperated, John suggests they just buy a jacuzzi and settle for some easy relaxation.  But Mary points out that no store is offering credit, so large purchases are largely impossible.

What do you suppose John and Mary do?  What about next Sunday, out for a drive, when they see a nicer home, closer to work, with more square footage – and they realize they can own it for the same payments they are making now.  What happens when the only money available is purchase money? Thanks to Fannie & Freddie (and FHA, VA) home loans will be plentiful while every other kind of debt will disappear for a while.

Supply and demand… the meltdown might be just what we needed.

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