Is Goldman Sachs Over-Paid for Doing “God’s Work?”

I guess I haven’t reached that point in my life yet when I’m so jaded (or is it cynical) that nothing will surprise me.  I say this after reading an interesting little article in the London TimesOnline.  They had the chance to interview Lloyd Blankfein, the Chairman and CEO of Goldman Sachs.  It seems he’s convinced – or at least he’s convinced he can convince us – that Goldman serves “a social purpose.”  As a matter of fact, Mr. Blankfein is so enamored with the self-importance of Goldman that he proudly proclaims he’s “Doing God’s Work.” Wow…

Just to refresh our memory:

• Goldman received $10 Billion in Tarp Money
• Goldman received $12.9 Billion of government money through AIG
• Goldman received $20.9 Billion in FDIC debt guarantees
• Goldman, restructured as a “bank holding company” borrows at the Fed Window (at basically no cost)

Oh, and one more thing: Goldman will be paying $21.9 Billion in bonuses for 2009.  I don’t begrudge them bonuses, after all: they’ve had a helluva year.  Although some of that might be due to their oligarchical position within the federal government.  It would be nice – every once in a while – if Goldman would send a little thank you nod our way; maybe a quick wave or even a wink.  I guess I’m saying that when you’re screwing me this bad, a little dinner wouldn’t hurt.

John Lennon stirred up quite a spot of bother when he said: “We’re more popular than Jesus now.”  Have to admit though, that seems like such a trifle compared to the CEO of Goldman Sachs.  I mean, who cares if you’re more popular than Jesus?  Mr. Blankfein is angling to BE Jesus.

Filed under: POLITICAL & ECONOMIC FOLLY , Goldman Sachs, Wall Street

And Now, No Reason to Root At All

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 swam over to the shallow end of the pool, dipped their face in the water for a second or two and then asked someone else what to think and how much to panic. The bailout package passed.  The market is down 500 points.  Happy Monday everyone.  There must be a lot of head scratching going on now.

By the way: Why do our elected officials vote what they think is best despite what their constituents may think or tell them?  Because we are simply too stupid to understand.

(This post was first published here.)

Filed under: LENDERS, POLITICAL & ECONOMIC FOLLY, REALTORS , bailout, government, Wall Street

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

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 a ghost town in a dust bowl surrounded by desert.  Over $1 million and it opens up a bit because you are generally talking about buyers with large sums of cash.  But between $625,000 and $1 million the ability to finance a purchase is going to tighten up and so too must demand.  As you may recall from Econ 101, when demand drops so does pricing.  On the other hand, back below the magic limit, the supply of money will create demand and here’s the really interesting part: that demand will bump up against a supply limit.  The supply of homes within that range is finite and the demand for homes below $625,000 will remain targeted; it is artificially capped.  What happens when increasing demand (due to cheap money) meets a finite supply?  Appreciation.

We can expect to see demand driven appreciation knockdown the oversupply of inventory in many parts of the nation over the next year (maybe two).  This will drive home prices up to, but not over, the conforming limit.  At the same time it will depreciate homes that are over the limit, possibly even push some below the magic line.  What does this mean to the agent on the street:

• If you are an agent working with move-up buyers within the temporary loan limits – but over the upcoming conforming limit – their window of opportunity is slamming shut.  Get them off the fence quickly and stop taking on new clients in that price range.
• Buyers below the new conforming range will see upward demand on appreciation in direct correlation to their distance from the conforming limit.  In other words, the closer in value your purchase is to the loan limit, the less appreciation you will see.
• Sellers below the conforming range will see greater demand and more price appreciation in direct correlation to their distance from the conforming limit as well.  In other words, the supply near the conforming limit will grow and appreciation slow (or stop) while the supply at the lower ends will decrease and appreciation grow.  If you already have a listing near the conforming limit, time is not your friend.
• As an agent, your marketing should be divided: for listings, your area of focus is the lower end homes where demand is going to increase and market time decrease.  For buyers, you can expect the best deals to be nearer the conforming limit where supply will grow and pricing will stagnate.

For the next couple of years you can envision real estate as a great freeway with virtually no tolls and cheap gas.  But the speed limit is absolutely enforced.  Cars starting out will see rapid acceleration, but as you near the speed limit there will be congestion and a corresponding drop in enjoyment.  Eventually the speed limit will be relaxed; in the mean time… enjoy the ride.

(This post was first published here.)

Filed under: BUYERS, INVESTORS, LENDERS, POLITICAL & ECONOMIC FOLLY, REALTORS, SELLERS , bailout, REALTORS, Wall Street

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

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.

(This post was first published here.)

Filed under: BUYERS, INVESTORS, LENDERS, POLITICAL & ECONOMIC FOLLY, REALTORS, SELLERS , bailout, Real Estate Future, REALTORS, Wall Street

Countrywide, Wall Street and Animal House

There is a great scene toward the end of the movie Animal House.  The Deltas have decided to wreak havoc on the Faber College Homecoming parade.  The grandstand has been destroyed, floats are running amok, people are fleeing for their very lives and there is chaos in the streets.  One of the ROTC members who has been charged with maintaining public safety (played, I believe, by Kevin Bacon in his on-screen debut) stands still amidst the whirlwind of activity that envelops him and screams at the top of his lungs: “Remain Calm!  All is Well!!”  The absolute lunacy of his reality is made hilarious by his sheer conviction.  I am amazed every time I see it.  I feel that way lately as I watch Wall Street react to Countrywide, almost imperceptibly screaming “Remain Calm! All is Well!!”

I was more than a little confused by Wall Street’s reaction to Countrywide’s pronouncements last October regarding a profitable 4th quarter.  I wrote about it then and I guess I am writing again with a childish “told you so.”  Countrywide is underestimating their financial obligations in my humble opinion and it seems rather obvious to even the casual observer.  But as I have pointed out, main stream media is missing the real problem as well.  In a world of doom and gloom I am loathe to admit it, but these players are not doom and gloomy enough.  That is all well and good because their misjudgments serve them and it is easy for us to follow the ball when we follow the money.  More difficult to follow, however, is Wall Street’s desire to play along.

Today Countrywide announced that they were in fact unprofitable in the fourth quarter (which must have come as a bit of a shock to those that bid their stock up last quarter) .  This was in direct contradiction to their public estimates.  It now seems even more reasonable to conclude that Countrywide’s set asides are woefully inadequate, yet their stock today was… up.  “Remain Calm!  All is Well!!”

Filed under: LENDERS, POLITICAL & ECONOMIC FOLLY , Countrywide, Wall Street