The Real Estate Broker's Corner

Much of the trouble in the real estate market today is directly linked to the following question; What are things worth?

The big mortgage lenders usually bundled mortgages as security for bonds. This is how the sold their product and got new money for new loans. These are referred to as CDO's (Collateralized debt obligations) or CBMS  (Commercial Mortgage Backed Securities), or tranches of the same. The underlying collateral was the mortgages, and of course, the collateral for those mortgages was the real estate they were issued for.

Declining home prices caused the "market" to question the value of the collateral. This in turn caused the lenders to be unable to sell the CDO / CMBS, and froze the input of new capital. Today, the thrifts and GSO's are ready to lend money on mortgages, and few other people. As the Fed drops interest rates, people will take a second look at these type of securities, but that is a long way off. We all have to come to grips with the following fact; the circumstances that allowed the housing market to peak will likely never happen again.

Were that the end of the story, the market would correct, there would be some pain, and in 5 years, we might see some light at the end of the tunnel.

But that is not the end of the story.

Imagine for a moment that the mortgage you have has a call option, where the bank can say your home isn't worth as much as we lent you, so give us some more cash, or we foreclose. It doesn't matter if your payment is current, it doesn't matter if your home is or isn't for sale, you have to come up with the dough. Not a lot of folks would want to be in that situation.

But that is exactly the situation that many of the big mortgage companies, (COUNTRYWIDE)  and many hedge funds, and even big banks (CITI) have found themselves in, courtesy of auditors and the FASB (Financial Accounting Standards Board), specifically rule 157, which is how companies determine "Fair Value" of an asset. This rule is the cause of "Mark to Market", and basically says that an asset must be valued at what you can sell it for, not what cash flows it produces.

So if you are Bank Mikey, and have 30 billion dollars of commercial mortgages on your balance sheet, which pay 8% net after delinquency, and there is no one in line to buy the mortgages, well, they just aren't worth 30 Billion. They aren't worth 2 Billion. Because nobody knows what they would sell for, they are essentially worthless, according to the rule.

Bank Mike is OK with that, because Bank Mikey likes getting the 8%, and that is far better than what treasuries yield. But Bank Mikey's creditors, and the Bank Regulators, aren't satisfied. They say that Bank Mikey needs to pony up 20 Billion Dollars to meet balance sheet requirements, all because the 30 billion in mortgages are now worth zero! Bank Mikey can't get 20 Billion. Bank Mikey then goes Bank Rupt. All of Bank Mikey's employees lose jobs, and all of its assets get gobbled up by some other bank.

That is about what happened to Bear Stearns, and it will happen again. As the recent movie title exclaimed, "There will be blood". To be sure, Bear gambled on a ton of the most risky of CDOs, and made a lot of bad loans, and is paying the ultimate price. They are not guiltless. But much of the pain in the housing and financial markets today is because the auditors and accountants cannot figure out how to value mortgage backed securities. Where I went to school (Stonehill College), an asset was valued based on the cash flows it produced. I guess that is out the window.

I need to learn the new math.

Well, Spring is here. The Realtor associations are trying to talk up the market, as they should. The question is on all buyers and sellers minds, is this the bottom?

Well, if I was right more than 50% of the time, I would retire to Vegas, but I'll give this answer. Probably not. And here is why.

The true bottom of the market will be found when we get the inventory down to about 8 months. This is historically the level that is close to Market Equilibrium, the point where supply meets demand. Currently, we are at 9.5 months nationwide, and in Westport, there are 139 single family homes or condos on the market. We have averaged 6 sales a month over the last 90 days, so by my math, we have a twenty month supply. Yikes! I also firmly believe that there is shadow inventory.This is where some folks are waiting to enter the market, waiting for conditions to improve. So every time the market looks like it will make a move, additional inventory comes in, bringing it back down. No one knows how much shadow inventory there is.

What is the cure? The only sure cure would be to let the market correct. Like curing a hangover, you have to sleep it off. It takes time. It also takes the will to allow the market to correct naturally. All of these homeowner bailout plans will just prolong the misery.

This is why it is so important to look at a house as an expense, strictly. Forget resale, forget investment, this is a house your buying. The only question is, are you going to be happy paying $2500 a month for this house for the next 30 years. Will you be comfortable. Do you like living in that space. These are the questions buyers need to answer before making a purchase.

_______________________________________________________________

Many thanks to Lisa for her kind comment on my previous post. I couldn't agree more about the lack of professionalism that some of our fellow real estate licensees display. If you're going to be in this business, be there for your customers. If you can't, then find something else to do. This is not the market for amateurs.  

I came to the office Monday, got a call from a videographer that was waiting me at a listing. It turns out that I had an appointment to film a 2 minute advertising shot, and I hadn't scheduled it on my OUTLOOK.

No problem, I say, I'll be there in a minute. Take the electric razor, brush of my jacket, and go to the property. We shoot the thing with no prep, and the video guy says, "You look fine".

Yesterday, I get the video, and I think there is a great shot that I could get on the funniest home video show! My collar is uneven, my voice sound like a Boston cartoon character, and mysteriously, I look fat!

Then I thought about it, and couple of things came to mind;

    1) I do talk that way, never met an "R" that I liked enough to pronounce,

and

    2) I am a bit overweight, (but the video does ad at least 20 lbs)

Ah well, no TV in my future. You will soon be able to view this great production on our site, the property was 14 Winterberry Lane, and if you can get past laughing at me, you will see a pretty nice property for $589000.

_________________________________________________________________

The market remains challenging, but we are hoping for a great spring. We have opened up with 3 great listings, and have additional properties in the pipeline.  Take a look at the previously mentioned Winterberry Lane, the 10 Watson Way in Little Compton, and the 422 Pine Hill Road in Westport.

    All of these properties are "priced right". 2 years ago, the all would have been on the market for 70-100k more than right now.

________________________________________________________________