What else is new? The NAR is asking the government for handouts.

As I’ve mentioned before, the last thing we need is for the government to prop up inflated home prices. Nevertheless, the NAR came up with their four point housing stimulus plan a while ago, in an attempt to do just that. Last week they emailed realtors with a Call To Action to get them, and their clients, to email their representatives in Washington in support of the handouts. Chicago Association of Realtors President David Hanna is quoted: “Your action has never been so important, now is the time for you to stand up for your industry and demand the changes we need. Every Realtor must participate in this Call to Action, please contact your representatives and urge your peers and clients to as well.”

Here, in a nutshell, is what they are asking for:

1. Make the $7500 tax credit available to all buyers and eliminate the repayment requirement.
2. Make the 2008 FHA, Fannie Mae and Freddie Mac loan limits permanent.
3. Target more funds to mortgage relief and create a federal mortgage interest buy-down program to make below-market rates available.
4. Permanently bar banks from engaging in real estate brokerage and management.

Here, in a nutshell, are the problems with each of the four points:

1. Why should people who make $200K per year get a tax credit from the government? For that matter, why should anyone? The government should not be subsidizing home purchases. Not to mention that this would cost at least $38B per year.
2. As if Fannie and Freddie weren’t already spread too thin.
3. The very existence of Fannie and Freddie is a buy-down program. They effectively lower mortgage rates. In fact, the entire economic bailout program is helping to lower mortgage rates and low mortgage rates is what got us here to begin with.
4. And this will help the economy how? By keeping real estate commissions high? The NAR is positioning this proposal as necessary to keep the banks focused on fixing all their problems. But come on! Could anything be more blatantly anti-competitive?

It’s stuff like this that gives Realtors a bad name.

Barack Obama’s house at 5046 S. Greenwood in the historic Kenwood district of Chicago can be found on the MLS system. Built in 1910 and sitting on a 70 x 150 foot lot on the west side of the street, this 3 story Georgian home has 14 total rooms, 6 bedrooms, and 5 1/2 baths spread over 6500 square feet and a 4 car garage. Here are a few other key stats on the Obama house:

• Master bedroom is 19 x 14
• His office is 22 x 15
• Kitchen is 20 x 20
• Family room is 38 x 36
• Property taxes appear to be about $22,000 per year best I can tell

I wonder if the size of Barack’s office relative to his bedroom is any indication of his priorities.

I found the following photo of the Obama house on Flickr:

The empty lot on the left of the house is owned by Tony Rezko and has been the subject of much speculation regarding the relationship between Tony and Barack. The two properties were purchased from the same seller and closed on the same day, June 15, 2005. Subsequently, the Obamas purchased a strip of the empty lot from the Rezkos in order to expand their yard.

The Obamas got their home for $1.65 MM compared to a listing price of $1.95 MM. From the public release of the Obama’s tax return for 2007 we know that they deducted $58K of mortgage interest. So I assume they put a fair amount down on the purchase. The CCRD site has no record of this transaction. Perhaps it wasn’t recorded or some legal maneuver was used to avoid the public record. I do know that the transaction was done through a trust to maintain Obama’s privacy. So much for that idea.

I found a very interesting article from someone who lived in the Obama house many years ago. He provides an in depth description of the history of the house and what it looks like on the inside.

The picture above was obviously taken well before Obama won the nomination. The secret service and the Chicago police had not yet taken over the neighborhood. I drove past this area a few weeks ago and noted a couple of interesting things. First, there are signs on 50th St. about a mile away from the intersection with Greenwood requesting all trucks to divert. That seems reasonable except that I didn’t see any capability to enforce that displayed. Once you get to the intersection they have concrete barricades set up on Greenwood to prevent any vehicle from approaching the house and there were numerous Chicago police cars and officers manning the entrances. I didn’t see any donut eating.

If the Obamas decide to sell the place - it’s going to be vacant for the next 4 years - I would be happy to cut them a great deal on the commissions. I suggest that as part of the realtor vetting process the secret service should administer a lie detector test to any prospective realtors.

For those not familiar with Chicago here is a map showing where the house is:

Special Thanks

Special thanks to David Dalka, who runs an Internet Marketing strategy blog, for suggesting this post.

I think Mick Jagger might actually know a bit more about the housing market than our politicians. In case you can’t already see where this is going let me spell it out for you: “You can’t always get what you want but if you try sometimes you just might find you get what you need.” In this case what we need is for the housing market to clear and, unfortunately, that is not consistent with stabilized home prices, which is what everyone wants. And in this highly charged political season politicians want to give people what they want, not what they need. So we hear endless lamentation about how we are not going to solve our economic problems until we stop the decline of home prices and everyone is floating ideas about how to prop up the housing market.

No surprise that the NAR is also getting in on the action with their 4 point plan for government handouts to the real estate industry. More on that another day.

Unfortunately, all this is a bit like trying to build a city below sea level in the path of numerous hurricanes. Wait a second…don’t we do that also? The fact of the matter is that sooner or later nature has to take its course. Home prices have to seek their natural level. They expanded at above-trend rates and now they need to return to the trend line, which is a bit below where they are now. Driving this was an unnatural growth in home ownership levels above the norm of the last 40 years as demonstrated in the chart below from the Federal Reserve Bank of St. Louis.

It should be no surprise that during this period the affordability of homes declined.

Now, as the real estate market attempts to cope with these imbalances, we find buyers and sellers at a stalemate and transaction volume has dried up. Politicians can pull all the rabbits out of the hat that they want: tax credits for homebuyers, Fannie and Freddie support for the mortgage market, government purchases of mortgages, etc… However, they can’t stop the ocean from seeking the lowest level. Nothing will return to normal until prices return to normal. And normal prices will be a good thing. For instance, homes can once again be affordable for people with good paying jobs.

During the last 10 years or so the country made poor financial decisions to put too many people in their own homes and to build bigger homes than people really needed. Instead of investing in our infrastructure we invested in granite countertops and marble showers. So today we find ourselves with vacant homes, collapsing bridges, and roads full of potholes. If the government wants to stimulate our economy they would be better off investing in our infrastructure than in more homes.

Speaking Of Potholes

While perusing David Dalka’s Internet Marketing Blog the other day I noticed several links to sites for reporting potholes and even filing a claim for vehicle damage from potholes. Sounds like a great idea. However, I attempted to file a claim about 6 months ago using the process outlined on one of those sites after my car was nearly swallowed by a giant sinkhole. OK, maybe I’m exaggerating a little bit but I did blow a tire. After dutifully taking my pictures, attaching a receipt, filling out the form, and sending it in I’m still waiting. However, I wouldn’t let that discourage you. Maybe if they get enough forms in the mail they’ll have to do something about it.

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.