Soapbox Entering Matrix From The Housing Helix

April 13, 2009 | 11:59 pm | Milestones |

Wooden_Box

It’s not reasonable for one person (me) to maintain 3 blogs and have a life, let alone 2 blogs and have a life or really a family of 6 (excluding the cats), 2 companies, a blog, 2 web sites and a podcast, so with the addition of my new podcast/blog The Housing Helix, I have decided to freeze my other appraisal blog Soapbox and provide appraisal content here on Matrix in addition to all the stuff you are used to seeing. Gasp.

If you are an appraiser, and only care about appraiser stuff, there will be plenty going forward if you bookmark this link.

As we say on Matrix and became apparent on my Soapbox endeavor: Everything that has a beginning, must have an end.”

Let the fun begin (again).

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The Black Swan and Really, Really Dumb Smart People

March 31, 2009 | 12:22 am | | Milestones |

Sorry but I am in Manhattan Market Overview high gear prep mode – the report will be published later this week – so I am pretty lame on the content side for Matrix at the moment.

One of my semi-regular podcast downloads is Russ Robert’s EconTalk. This week he interviews Nassim Taleb , the author of Fooled by Randomness and the Black Swan of a few years ago. I own the latter, but I think the former is over my head. I’ve never heard him speak before. I have now listened to this podcast 3 times already and thoroughly enjoyed it. Also make sure you read the slew of comments posted to their site.

Nassim Taleb talks about the financial crisis, how we misunderstand rare events, the fragility of the banking system, the moral hazard of government bailouts, the unprecedented nature of really, really bad events, the contribution of human psychology to misinterpreting probability and the dangers of hubris. The conversation closes with a discussion of religion and probability.

On one hand I am very leery of people who suggest they have all the answers to a problem but not the solutions – Nouriel Roubini is another example – but Taleb’s arguments are compelling. After all, I think we all want to understand how so many smart people could be so utterly stupid for so long. If it wasn’t mortgages as a vehicle, it would have been something else.

I loved the ten year flood example given in the notes of the interview:

A ten year flood has a higher probability than a 100 year flood, but the 100 year flood will be massively more consequential. You care about the probability times the size of the impact, the expectation of these events. Small-probability events can have in some domains, fat-tailed domains, a big impact and we don’t know how to estimate them.

Here’s the compensation scenario and moral hazard – notes from the interview:

Were heads of Bear Stearns and Lehman Brothers not aware of how much they were gambling or did they not care how much they were gambling? Combination. Three things: 1. fooling themselves, psychological dimension. 2. Had an interest in building huge risks and tail because if you blow up every 10 years, you will make 9 bonuses and the 10th year someone will pay the cost, not you. Vicious: taxpayers are paying retrospectively for the bonuses of the first 9 years. Banks are insolvent, have lost more than their capital base, but managers have kept their bonuses. Some of them have been wiped out because they went a little further than normal blow-up cycle. What about the ones who didn’t do it? Lower returns year after year; now should be doing extremely well, but now unable to buy up some of the firms that have made the mistakes because the government is propping them up.

Aside: Speaking of dumb, how about the new space station named “Colbert” and video. To see the vote page and the number one suggested name – go here.


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Catch-22: Fannie Mae, AMCs and a $39 suit

March 22, 2009 | 12:00 am | Milestones |

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[In The Media] Theory Of Negative Milestones Means A New Beginning

November 9, 2008 | 8:30 pm | | Milestones |

I have long believed in what I call the “theory of negative milestones.” There are seminal events that mark new periods of real estate activity. (both map mashups courtesy of NYT)

This weekend’s New York Times real estate cover story was based on my firm’s ongoing research of the Manhattan housing market. The content in the article was thoroughly fleshed out by my friend Noah over at Urban Digs so I won’t elaborate.

In 2008, the influence of the credit crunch has been characterized by various levels of impact on segments and a lower level of activity. Everyone who lives in Manhattan can feel it, especially those in the real estate brokerage business. The events of the past two months have marked a new milestone with the bailout of Frannie, the $700B stimulus package, collapse of Lehman, the purchase of Merrill, the reclassification of Morgan and Goldman to commercial bank status, aggressive actions including cutting rates by the Fed, a culmination of 22 months of campaigning, a new party taking over the executive branch and gaining power in Congress. In other words, change.

The promise or anticipation of change makes people in real estate pause and reflect.

Still, there is real estate activity, albeit at a slower pace. Informed buyers are signing contracts. Many participants are optimistic about the new direction promised by the new administration, and in the short term, that may cause a slight bump up in activity. However, the credit crunch continues to overshadow housing markets in the US.

Stabilize credit, then and only then, can the housing improve.

Speaking of wolves at the door…


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[Choking] No Questions Allowed, Ramming 700 Billion Answers Down Our Throats

September 23, 2008 | 12:51 am | | Milestones |

I don’t know if have much fight left in me. I am now reading the novel Choke (same author as Fight Club, an all-time favorite), the transition to this book seems appropriate at the moment.

We are spinning around in circles wolfing down the information we are fed and I think we are slowly, painfully moving in a more productive direction. But it is going to cost us dearly, talk a while and we don’t really understand how to fix it or prevent it from happening again.

It’s not enough for Wall Street to be reinvented. Of the 5 big investment banks, Bear and Lehman are now gone, Merrill was bought by BofA and Morgan and Goldman decided it was better to be a commercial bank.

Still no answers yet.

And old habits die hard – commercial banks don’t want assets valued at market value just yet because it might hurt their books before the bailout.

The SEC has been MIA and Paulson and Bernanke are moving in on their turf.

Members of the economic far left and far right don’t like the $700B bailout without answers either:

From the left

“This administration is asking for a $700 billion blank check to be put in the hands of Henry Paulson, a guy who totally missed this, and has been wrong about almost everything,” said Dean Baker, co-director of the liberal Center for Economic and Policy Research in Washington. “It’s almost amazing they can do this with a straight face. There is clearly skepticism and anger at the idea that we’d give this money to these guys, no questions asked.”

From the right

“This is scare tactics to try to do something that’s in the private but not the public interest,” said Allan Meltzer, a former economic adviser to President Reagan, and an expert on monetary policy at the Carnegie Mellon Tepper School of Business. “It’s terrible.”

Perhaps, the dialog for a solution can finally begin. The Brookings Institute released a brief: A Brief Guide To Fixing Finance

It’s all pretty basic but lays it out cleanly.

  • Policy makers need to set priorities – the problem is too vast to fix at once.
  • Know What Went Wrong Before Beginning to Fix Anything
  • Act In Our Own Interest, While Consulting with Other Countries
  • Principles To Guide More Permanent Reforms

They recommend these reforms should be:

  • First, financial instruments and institutions should be more transparent.
  • Second, financial institutions should be less leveraged and more liquid.
  • Third, financial institutions should be supervised more effectively, with greater regard for systemic risks.

Is gagging better than choking?


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[Moral Hazard] No Atheists In Foxholes, No Ideologues In Financial Crises

September 22, 2008 | 12:01 am | | Milestones |

A lot has been made of the lack of moral hazard on Wall Street, festering into the current crises.

Michael Lewis, author of a number of great books, including Liars Poker comments in his recent column titled: Bright Side of a Total Financial Market Collapse:

No sooner did Greenspan shuffle off the stage and sell his memoir than the financial system he helped shape fell apart.

He’s left not only a mess but a void. No matter how well- educated we become in our financial affairs, we still need public officials to look up to, unthinkingly.

Slate’s new The Big Money is an excellent resource for financial news commentary. Martha White’s article: What Is a Moral Hazard? The economic reasoning behind bailout or no bailout is a good read.

While bailout seems to be the financial term du jour, right behind it is the more ambiguous “moral hazard.” Treasury Secretary Henry Paulson cited moral hazard as the reason not to swoop in to save Lehman Bros. and Merrill Lynch. Puzzling to many, though, was that while moral hazard was discussed in conjunction with the rescues of Bear Stearns, AIG, Fannie Mae, and Freddie Mac, it wasn’t a deal breaker in any of those cases.

…moral hazard is the idea that insurance in any form makes people riskier.

When I was 15 years old back in the Bicentennial summer of 1976, I rode my bicycle 4,400 miles zig zagging across the US with a group formerly called Bikecentennial. Of 4,000 people who participated, 3 people actually died riding that summer, and within our own group of a dozen riders, those who did wear helmets experienced wrecks and those who didn’t wear helmets (like me), were fine.

I often wondered if wearing a helmet made the riders more prone to take risks. I don’t think so – they represented a cross section of temperaments in our group. In fact, I bought a helmet when I got home and have worn one ever since – and no wrecks.

Perhaps it is more as an argument of convenience. Throw it in if it helps make the case?

The absence of moral hazard of the current situation was created by the GSE structure to begin with. Investors assumed the US would bail out ‘Mac & ‘Mae if they ever ran into trouble because they were “government sponsored”. I can only imagine what would happen to the financial system if the former GSEs were allowed to fail. “Faith and credit of the US” would have meant nothing forever, or at least as long as the current Yankee Stadium is old.

And the system seems to be unraveling quickly judging by more actions this weekend.

Paulson and Bernanke have been making moves faster than Congress or the President can seemingly comprehend. Expect Congress to start fighting the changes once they get it.

There are no atheists in foxholes and no ideologues in financial crises,” Mr. Bernanke told colleagues last week, according to one meeting participant.

A bit unnerving but the Bush administration has been disconnected from the crisis until a few days ago, when it began to back Paulson’s actions. In fact, that was a requirement of Hank’s acceptance of the position to begin with, unlike his predecessors in the current administration.

And the candidates, until a few weeks ago, didn’t discuss the issue directly – and still don’t seem to get and at the very least, didn’t see it coming. Paulson and Bernanke need to move fast.

The lesson learned from this bailout of epic (trillions) proportions, was best said by Floyd Norris in his Reckless? You’re in Luck

If an activity is important enough to justify a government nationalization to prevent a default, it is important enough to be regulated. The regulators need to know what risks are being taken, and by which institutions, in time to act before a crisis develops.

Had the government bothered to do that in years past, it might not have faced the decisions it faced this week. First, it let one big firm go down, and then it became scared enough to nationalize another one to keep it afloat.

Now, showing no sign of embarrassment over how badly they failed before, the current crop of regulators seem to be unified in their determination not to let the markets force them to make a similar choice on some other big financial institution.

It’s not about more regulations, its about regulations that deal with today’s markets.

Paulson and Bernanke will have to wrestle with these issues later, right now, they are suggesting we all wear a helmet.


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[Crackin’ The Crystal Ball] Short Selling Real Estate

September 18, 2008 | 11:00 pm | Milestones |

About a week after 9/11/01, seven years ago to this very day in fact, I remember a real estate broker telling reporters that the market had fallen 30% over the prior week and was expected to fall much further. I got calls from several reporters to confirm or to provide empirical evidence to support or disprove the claim.

Falling 30%?

I basically said:

How can someone describe a market as “falling” only days after a significant event occurs when there is no activity to base such a conclusion? What is the basis? A client conversation concerning one deal?

When someone loudly calls a market (up or down) based on anecdotes rather than evidence, it’s irresponsible. Everyone is entitled to their opinion, but it should not be presented as fact.

At that moment back in 2001, who would have anticipated one of the biggest housing booms in US history (and we are painfully unwinding from that expansion right now) was soon to follow?

Fast forward 7 years.

A high end Manhattan broker did the same thing today. Without empirical evidence (no data), who can state the market is instantly down 25% a few days after the Lehman bankruptcy?

Was this pronouncement based on a handful of conversations with past clients? A gut feeling after years of experience?

Quick, call the SEC!

I suspect this was simply extracurricular media commentary by the individual because the brokerage firm is one of the big three in New York and has a great reputation.

Don’t get me wrong, I like Brian Ross’ work and ABC, but he falls short with headline…”Top Broker: NYC Real Estate Already In Steep Decline” …is considered “investigative journalism“? It’s more like entertainment journalism, no?

Better yet…

Good grief.


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[Credit Cross Section] Peeling Back The Bark On The Financial Crisis

September 16, 2008 | 10:10 pm | | Milestones |

Yesterday was sort of a media frenzy day for me, with calls all day about with the news of Lehman, AIG and Merrill – primarily, what was the linkage to New York City real estate, as well as the US?

Today I got a call from the New York Times asking me to share what I was thinking when I first heard the news about Lehman. It’s quick, I promise. Three others were interviewed from different walks of life in separate clips. Kinda neat.

It ended up on the front of the business section (middle column, center) tonight under the header “Shockwave” and then will permanently sit on the same page as the Patrick McGeehan article City and State Brace for Greater Demands on Diminishing Resources page going forward.

I don’t look forward to Fridays anymore. The weekends are exhausting. Mondays are as bad. Wait. That leaves Tuesdays, Wednesdays and Thursdays to relax. Ok, make that Tuesdays and Thursdays since tomorrow is going to be all about AIG and the Fed.

Listen the to the NY Times Business page audio clip.


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Growth By Mortgage = Death By Mortgage: Was It Worth It?

September 14, 2008 | 9:28 pm | | Milestones |

Well another Friday came and went and more weekend meltdowns were on the agenda. This time it was Lehman Brothers, the second big investment bank to experience trouble. I have friends at Lehman and they have been scared to lose their jobs for months, and yet they had nothing to do with mortgages. I know a couple with a large exposure in Lehman stock and have been paralyzed to take action to move out of the position for the past year. The time came and went, unfortunately. No bailout this time.

During the mortgage hay days, Lehman did a lot of new development deals. They occasionally brought us in for a “reality” consult after reviewing appraisals already done for new deals. We weren’t asked to do any project appraisals, only “reality check” on the price point and local absorption. I suspect they were “arbitraging” the relationship between reality and what needed to be done to make the deal. Smart people too.

When you think about the scope of the mortgage problem that continues to unfold, its pretty scary and likely has quite a way to go. It says a lot about how ridiculous the talk of “bottoms” and “temporary” conditions really are. I mean, the idea that housing is going to be fine in less than a year is completely insane given the damage that remains to be discovered.

I tried to think of the big players in the mortgage market of the past five years:

Countrywide: bought at a discount by BofA (for their technology/servicing)
WaMu: Under legal pressure, removed CEO, stock price fell to the floor, rumors of buyout
Bear Stearns: Big subprime player. Gone for nearly nothing by JPMorgan Chase
Lehman Brothers: Big mortgage player. Lots of development financing. Nearly gone
Merrill Lynch: Just bought by BofA
Barclay’s: Took their licks in write downs and were too undercapitalized to take over Lehman.
Fannie, Freddie: The housing bill placed nearly all it’s faith in Frannie and now the former CEO’s are eligible for $24M in parachutes. A potential for $200B in losses.

Up until now, the billions in mortgage losses were just numbers to me. But now, the numbers are more in context because they have brought down some of the biggest, most profitable financial firms out there.

All because of idiotic lending practices.

Old school leadership at these entities were no match for fast changing mortgage products without meaningful regulatory oversight.

Well, of course it wasn’t worth it.


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A Busy Week For Senators, Lawyers, Brokers And Ex-Fund Managers

June 20, 2008 | 12:12 am | | Milestones |

My kid’s last day of school was yesterday so I’m fighting the urge to take the summer off. Ok, it’s not possible, but I can dream.


It’s been a week to remember.

Fast and easy credit that was relatively unchecked by regulators provided the perfect environment for fraud, the creation of instant wealth and/or newly found leverage to those who were willing to use it or accept it.

We seem to be entering the fourth phase of the credit crunch (not marriage). Discover, Fret, Propose, Charge, Reconsider, Solve

This week’s persistence award goes to a woman who, for 6 months, tried to get someone at WaMu to talk to them about their mortgage (hat tip to Holden Lewis/Mortgage Matters). Can someone please explain to me how WaMu’s CEO has been able to hold onto his job?

Here’s Politco’s list of mortgages held by US Senators.

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Akron Is Just Like Iceland, Only With More Rock

April 22, 2008 | 12:05 am | | Milestones |

Every so often a city or location jumps out at me as getting a lot of coverage in the news. Sort of the Six Degrees of Kevin Bacon versus Credit Meets The Housing Market.

I was reading the review of the new blues rock album by one of my favorite bands The Black Keys. They are based in Akron and apparently love it there, despite its deep economic problems including unemployment and foreclosures. Home to Goodyear, Akron has fallen behind other metro areas (incidentally, Rubber Factory is TBK’s best work IMHO).

The following day I read the New York Times article Don’t Hate Me Because I’m Solvent which chronicled an Akron couple who own:

an exquisitely renovated 1913 Tudor house, with six fireplaces, a solarium and a billiards room, which is well within their means, in part because they paid $65,000 (12 years ago).

They have no mortgage and more importantly, the husband is a part time rock musician.

He is 44, the son of an engineer, married for 19 years, and a lifelong resident of Akron. He may also be the only person in the known universe who has both written for “Beavis and Butt-Head” and names “It’s A Wonderful Life” as his favorite movie. Mr. Giffels identifies with the film’s hero, George Bailey.

And what does this have to do with Iceland?

Insofar as Americans think about Iceland at all, it’s as a land whose remoteness belies a vibrant cultural scene featuring hipster titans, like Björk and Sigur Rós, and exceptional social conditions—it’s the top-rated country in the U.N.’s most recent human-development index. But in the financial world Iceland is now a hot topic of discussion for a different reason: many people suggest that it could become the “first national casualty” of the ongoing credit crunch.

Besides the musician reference, Iceland has represented the bright end of the economic spectrum, the opposite of Akron, whose economic problems were in play well before the recent housing boom not unlike it’s rustbelt neighbors, whom the boom largely passed by.

Now analysts are wondering whether the new Nordic Tiger will end up, instead, as “the Bear Stearns of the North Atlantic.”

Although Iceland’s banks avoided subprime mortgages, most of the capital it raised came from foreign investors. With the credit markets drying up, many investors are unwilling to invest in Iceland and the crunch has begun.

Iceland has been swamped by that tsunami because it trusted in the availability of global credit in time for that credit to evaporate. And the fact that Iceland has been so dependent on foreign investors makes those investors even more skittish about investing there: in markets, weakness often begets weakness.

In other words, the global credit crisis is not just about subprime lending. It is about the lack of availability of credit for investment (in Iceland) and an increase in foreclosures (in Akron).

No matter how loud the music was played in either place, everyone’s ears are still ringing.


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[Wall Street] Dominoes To Go

March 24, 2008 | 12:42 am | | Milestones |

Source: Slate

Click here for full sized graphic.

Supposedly, JPMorgan in Negotiations to Raise Bear Stearns Bid

Good grief, I don’t mean to come across as so gloomy. I don’t even know how to play dominoes.


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