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.

As you may have already figured out I don’t exactly adhere to NAR’s, IAR’s, and CAR’s policy of talking up the real estate market in order to drum up business for Realtors. However, as I expand our Web site’s Chicago community housing market profiles I’m not finding a lot of evidence of the end of times - at least not in most of the communities I happen to be analyzing at this time. This is not to say that there aren’t severe problems in some areas of Chicago. It’s just that the more centrally located areas seem to be hanging in there - so far.

First, I should explain that there is a bit of a challenge in summing up the market conditions at the community level. There are no reliable price indices you can look at at this level and I am not a fan of examining median prices because they are so heavily impacted by the mix of homes sold (if lots of expensive homes are sold it raises the median price). You can get a sense of what’s going on by comparing current individual sales to their prior sales but there’s no way to summarize this information. I will say that this anecdotal information seems to support the idea that prices are soft but not plummeting.

Therefore, as a proxy, I rely upon monitoring the trends in housing inventory and the number of days that a home, that is sold, is on the market. The idea is that when these metrics rise it’s an indication of a market in trouble. And I report these statistics for 2-3 bedroom condominiums since condos represent such an important part of the Chicago housing market. I recently updated these real estate statistics for the following Chicago communities:

• Lakeview
• Lincoln Park
• Logan Square
• Near South Side
• West Town

The ongoing list can be found in our Chicago community profiles section. At the time of this post we only cover the above communities but we hope to expand this quickly.

The data shows that the housing market in most of these communities has yet to show signs of stress. The one exception is the Near South Side, which includes the troubled South Loop. Check out the graphs.

Article reprinted with the permission of Thomas Besore.

Please read this post, draw your own preliminary conclusions, and then follow the link to another article on this subject.  I promise you will not be disappointed.  See if your conclusions change after following the link at the end of the post.

There are two essential sets of documents in most real estate transactions.  First, of course, is the written contract itself.  This contract ranks among the most significant legal papers in a person’s life.  Next to a divorce settlement, the real estate contract is probably the most used legal document in most American’s lives.  As a matter of course, we like to recommend that clients retain legal counsel to negotiate sticking points like tax apportionment and also to generally understand the essential terms of the contract.  If the tax apportionment or other aspect of the contract is not right, significant financial damage can result.

The second essential set of documents in a real estate transaction has to do with the loan.  This includes the promissory note itself and the security interest – the mortgage.  Whose job is it to advise the client on the small print in the loan?  Is the real estate agent to handle this?  Most certainly not!  How about the mortgage broker?  Nope.  Not her job either.  The broker simply brings the lender and the client together, outlining the important figures of the loan.   Among the first recommendations of the broker ought to be that the client should retain counsel to help her understand the nature of the loan rights and obligations.

Anybody who tells you that the mortgage broker ought to counsel the client on the loan paperwork needs a lesson in licensing, ethics and the practice of law.  How can a broker, whose compensation depends on the closing of the loan, pretend to counsel the client on that very loan?   Last time I checked, most states laws say you need something called a law license to advise a client of these contractual matters.  Second, every competent attorney knows that you can represent either the lender or the borrower, but never both!  It’s the client’s independent attorney who ought to counsel the client about the small print, the elements of the promissory note and mortgage instrument.  I will argue that it is the failure of borrowers to secure adequate counsel on loans that is largely responsible for the current mortgage crisis gripping our country.

How many lawyers do you know who properly advise their clients on the loan documents?  Isn’t it true that the borrower’s first exposure to the promissory note and the mortgage instrument is during closing?  Aren’t most closings now accomplished by paralegals with the buyer’s attorney showing up at the end just to give the final okay?  When a lawyer charges a fire-sale rate for a real estate “closing”, what level of service are people expecting to occur?  How can we as professionals encourage our clients to engage the necessary experts (and compensate them appropriately) to assist in fully understanding these essential elements of the real estate transaction?  After developing your own conclusions, follow this link to another story on this very issue.  Then return here and leave a comment if you wish!

Here’s that link. I can’t wait to hear from you!

Thomas G. Besore
Attorney at Law
540 N. Lake Shore Drive #315
Chicago, Illinois  60611

(312) 265-6272 Telephone
(312) 276-8558 Facsimile
www.besore.com

Real Estate, Estate Planning and Contractual Matters
Corporate and Individual Representation
Serving Chicago and the Suburbs

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.