I think I spoke too soon when I extolled the wisdom of the American people last week. Despite having improved upon the Paulson plan they shot it down yesterday. They called and wrote to their congressmen to express their outrage and their congressmen, afraid they would have to get real jobs after the November elections, voted against the plan.

The stock market reacted quickly - to the tune of wiping out $1.2 trillion of wealth in one day. As some commentators have noted this is more than the amount of money being considered for the bailout.

What I find frustrating in all this is the lack of understanding about this bailout package. For instance, people talk as though $700B is the cost of the plan. But it’s not. It’s just the amount of money being put at risk. The cost will be the amount of money lost between what the government pays for the assets and what they can ultimately sell them for. By many accounts the cost will be negative - i.e. the government will actually make money on the deal.

The other bizzare attitude is summed up in the following photo, taken from an article on the Time Magazine site:

As if bailing out a bank is not bailing out the people?

Frederic Mishkin, a former Federal Reserve Board Governor (I took a money markets class from him in business school) had a great story to tell on one of the Sunday talk shows this last weekend.  His grandfather owned a store when the stock market crashed in 1929. His grandfather delighted in the fact that those wall street guys got what they deserved. One year later his grandfather was out of business.

I never thought I would find myself saying this but I actually think that Americans and congress have just demonstrated their intelligence in their reaction to the proposed $700 billion mortgage bailout plan. Maybe it’s just another example of “The Wisdom of Crowds” - the fact that a group of people can arrive at better decisions than a simple average of individual decisions - but I’m impressed with the results of a process that I usually despise. Not that I agree with everything that is being layered onto the plan, but for the most part I think it will actually end up being a better plan after all the obvious posturing is finished.

For starters, like most people, I am outraged that the government has to step in and clean up a mess in the private sector. I love the fact that Lehman died an unnatural death and would love to see even more of the culprits bite the dust. However, I believe Paulson and Bernanke when they tell us that without some intervention we will experience a catastrophe of biblical proportions:

Real wrath of God type stuff.
Fire and brimstone coming down from the skies! Rivers and seas boiling!
Forty years of darkness! Earthquakes, volcanoes…
The dead rising from the grave!
Human sacrifice, dogs and cats living together… mass hysteria!

But do we give them a blank check? Well, the American people and congress have spoken and the answer is No! Here are some of the modifications being sought:

Execute this program on the installment plan, with additional draw downs needing approval. I like this idea, but maybe for different reasons than intended.  No one can know what the real need is but if they give Treasury $700 B then $700 B will be spent. One of my concerns is that the government isn’t merely trying to avoid a depression but they are also trying to avoid a recession. But a recession might actually be healthy for the economy in the long run. So if they have to go back for approval periodically that could discourage them from going overboard.

Take equity stakes in the companies being helped. Seems like a good idea to me. Look at Warren Buffet. He just negotiated a sweet deal with Goldman because he’s the  800 pound gorrilla. Well the US government is the 2000 pound gorilla and should be able to get an even sweeter deal. Besides, this bailout needs to be painful for those who screwed up.

Cap executive compensation within rescued companies. Now normally I would abhor the government influencing executive compensation, regardless of how outrageous it is. But this time it’s different. These companies are taking government money so it can’t be siphoned off into executives’ pockets. Besides, under my pain theory these CEOs need to suffer from their mistakes. There will probably even be a side benefit to a compensation cap. It will prevent CEOs from taking advantage of the taxpayer dollars if they don’t really need the help.

And I’m not the least bit worried about there being a talent shortage because I think these executive types are over-rated anyway. There are a lot of smart people out there waiting in the wings to jump in and take over for $400,000 per year. I don’t subscribe to the view that you have to have a celebrity CEO. In fact, I suspect that the celebrity types are not as smart as the underpaid quiet types. They got us into this mess.

Provide oversight. I have no idea how this would work but in principle it sounds like a good idea.

Helping distressed homeowners. This is the one that concerns me the most. As if this proposal doesn’t already help homeowners by propping up home prices? I’m OK with modifying the bankruptcy laws slightly but what more do they want?

Aside from this last add-on, by and large, the political process seems to be working. The key question that is still up in the air is how to set the purchase price for these assets. That issue alone could make or break this deal for the American taxpayer.

Last week I attended a real estate agent training class. These are almost always a disappointment and this one was no exception. It’s no wonder that there are so many poor agents out there. The only reason I attend these is to stay in touch with what the traditional approach to real estate is.

In this class the subject of homes that don’t sell came up. The instructor’s handouts listed only 3 reasons a home might not sell:

1. Lack of marketing
2. Price is too high
3. Terms are too restrictive

However, based upon the instructor’s class discussions you would think that price was the only reason on the list since everything always came down to price. He spent no time talking about items 1 or 3. When explaining why we needed to provide ongoing feedback to sellers he said “so you can have the pricing discussion with them.” And he encouraged us to feed lots of data to sellers so that we could get them to lower the price.  And he told us how to have the pricing discussion with sellers.

Granted, pricing is a big issue. There are many homes on the market that are over-priced and 9 times out of 10 that’s the reason a home won’t sell. In theory, pricing should solve any problem. However, if an agent isn’t doing their job then replace the agent. Or if something needs to be fixed (I guess that would include an agent that’s not doing their job) then fix the problem.

The problem is that many Realtors tend to accept problems as givens when in reality they’re not always. For example, suppose the next door neighbor is raising chinchillas in their back yard. Well…you can report them to the city. Or if the front porch is falling down you probably should get that fixed since it’s going to create one heck of a first impression.

As long as the expected benefit from the improvement is going to exceed the cost you might as well deal with it. And you should deal with it before any buyers notice it. A good Realtor should be on the lookout for problems that are almost certainly going to come up upon further examination by a buyer.

People who are aware of the considerable lobbying machine operated by Realtors get pretty hot under the collar about it. I don’t blame them. I’ve always seen this as an obviously self serving activity and the description of these organization’s purpose is pretty scary to consumers.

• Protects your income and maintains your commissions.
• Educates and elects policy-makers who support REALTOR issues.
• The candidates we support make decisions that affect REALTORS’ ability to assist clients in buying and selling property.
• RPAC ensures that we have strong and informed candidates who support our issues.

Of course, that’s what all lobbying efforts are so why should this one be any different? Which is why I’m not in favor of lobbying in general. But I guess it’s a fact of life with our political system.

I bring up the Realtor lobbying machine because I recently got the invoice for my 2009 dues for the three levels of Realtor associations: national, Illinois, and Chicago. (I have no idea why we need three levels of this stuff. I think it’s part of the bloated bureaucracy of this industry.) Just to give you an idea of what it costs to be a Realtor, those 3 total $520 - and that’s before MLS fees. But added on to the bottom of the invoice are”voluntary” charges for RPAC (REALTORS® Political Action Committee) and CARPAC (Chicago Association of REALTORS® Political Action Committee), which total an additional $75. In going through the online payment process it’s actually kind of tricky to remove these charges. However, if all of the 17,000 Realtors in Chicago (At least that’s how many there were at the end of 2007. Maybe a lot of these folks have left the business since the gravy train is gone.) were to pay this money that would amount to $1.2 MM for just Chicago. Of course, I’m sure that many Realtors, like me, chose not to pay this money. (I don’t think I’ve ever supported a PAC.) However, RPAC’s goal for the year is to raise a total of $10 MM.

As a side note, RPAC claims to be the largest bipartisan PAC in the world. In the 2006 elections they spent $12 MM supporting various candidates sympathetic to Realtors’ causes. You can check the following link to see exactly what else these Realtor PACs do.

Surprisingly, it’s actually not such a bad list after all. Sure, it has it’s share of anti-competitive initiatives, such as keeping banks out of the real estate business. However, overall, it’s dominated by activities in support of homeowners and landlords. Perhaps one of the most important pro-homeowner activities CARPAC engaged in during the last year isn’t even listed. That would be their opposition to the city of Chicago’s increase in the transfer tax. It’s not listed because CAR chose to highlight their accomplishments and this is a battle they lost. Nevertheless, I think they deserve an A for effort against what I think is a really bad idea.

If you like the list, I’m sure they would take your money - even if you’re not a Realtor.

…Happy Days Are Here Again.

Well, that might be a bit of an overstatement but not by much. In reaction to the Fannie and Freddie takeovers bank stocks were up today and so were homebuilders. In fact, Toll Brothers (luxury homebuilder) was up 9.4%, reaching its highest level in more than a year. The reason for all the optimism is that some folks are predicting that mortgage rates will drop by a full percentage point in the next week or so as the governement’s actions reduce the risk of funding mortgages. So this would appear to be good news for the housing market.

Could this be the bottom of the housing market? Not so fast!

The fundamental problem is that all this appears to be the very visible hand of the government interfering with the markets and artificially supporting housing prices. It might work for a while but in the end houses must be priced in accordance with fundamental values. And if prices are being propped up for now then it just means that the day of reckoning has been postponed. Either they will ultimately come down or they will stop moving up until fundamental value catches up with prices.