Carpet-Cleaning Luck.
CALCULATED RISK'S deeply ironic real estate reporter Jim the Realtor takes his handheld robot to a high-end jungle of foreclosures at Carlsbad in San Diego County. Jim observes "A hotbed of foreclosure activity in Southeast Carlsbad..." The centerpiece of the report is a 3300 square foot new-built house that has now been successfully bought on the courthouse steps sight unseen by a flipper/speculator and then moved at a profit to a buyer. Good for everyone around. I followed the logic of the profiled flipper carefully, a pleasant, superstitious, unseen guy named Adam Rappaport. AR bought the property on the courthouse steps sight unseen in a bidding moment at $591k. The house was new built but never owned by a family; instead it was owned by a speculator/bundler who had many properties and finally let this one go to foreclosure and the bank. AR paid the back taxes, after what sounds like fighting off the county and state ceremonially trying to get the property for back taxes, and then paid $650 for carpet-cleaning. The house is not luxurious, though it is large. Jim the realtor makes much to do about what he calls the river noise of the six lane freeway backing onto the property. He also mentions the power lines and the weather. My memory is that there is nowhere in SoCal that isn't near freeways and powerlines and those rolling desert hills that tend to burn in fire season. Shrug. The summary for Adam Rappaport is that he and his partner got lucky when the tenant moved out easily in the first months, the house was in decent condition, and they found a buyer. Not the $700k plus they asked, bot not the lowball $600k they were offered. Somewhere in between for a gross of about $95k for four months risky of holding the paper. You can hear Rappapaort sign and laugh with the remembered anxiety. Lucky.
Carlsbad Jobs Summit
This may be the way the end-of-the-world of the housing collapse finally ends, with luck and smart, tense bargaining. Jim the Realtor mentions a nearby house at $800k plus, so the new owners have a deal on a block that may be underwater. Lots of short sales ahead in this semi-lux neighborhood. That 15% jobless number likely damaged everything we can see or hear in the video. The national jobless number of 10.2% will be revisited in a week's time, and the Obama administration plans a Jobs Summit to speak to the fears. Those fears look less scary and more complicated when you stare at the overbuilt schemes of SoCal. POTUS and the Obama administration didn't cause this, but their answers so far,willy-nilly TARP, futile stimulus, healthcare novelties, cap and trade delusions, seem out of step with what needs to be done, a profound reordering or real estate prices. Notice that no one talks about sub-prime or Alt-A loans. These are all high-end prime loans, and they are shaky.
Dubai World Fire.
The global question is how does the flipper adventure in San Diego County connect to the sudden news that the Dubai World house of cards has collapsed and that the whole operation, with those silly palm leaf islands, is on the brink of REO? A $65B note floating in promises and half-truths, "a day after the government said it would take charge of restructuring its corporate flagship, Dubai world, and asked creditors to accept delayed payments." In my world, delayed payments sounds a lot like missed and unlikely payments, sometimes called fools or scoundrels running away from the IOUs. In sum, right now the Euro and Asia markets have gone into war dances with risk insurance because of the possibility that the too big to fail white elephant of Dubai World just failed -- the credit default swaps have on Dubai debt have skyrocketed from 318 bps to 570 bps in forty-eight hour. Does this connect to Carlsbad? Yes. That toxic waste keeps circulating; credit is flagrantly, bottomlessly dubious for Dubai. Unknown is how this will affect worldwide credit costs. European banks are said to have $40 billion at risk. The poison sloshes toward our shores, also, and the unanswred detail right now is how much of the Dubai debt is at Citi or Bank of America and so forth? The risk that Rappaport felt in the four months between courthouse and escrow was real. What if Dubai had blown up the day after he bought the REO? Will other flipper deals blow up because of the Dubai World fire panic that just started? I do not have the answers. Neither do California realtors. This does not sound like the beginning of a simple fire:
"The banks with the greatest exposure to Dubai World are Abu Dhabi Commercial Bank and Emirate NBD PJSC, people familiar with the matter said. Executives at the two banks weren't available for comment Thursday. Among the international banks that have large exposure are the U.K.'s Royal Bank of Scotland Group PLC, HSBC Holdings PLC, Barclays PLC, Lloyds Banking Group PLC, Standard Chartered PLC and ING Groep NV of the Netherlands, the person said."
I read comments on Mish's blog that Citi was into this Dubai mess for $1.9 billion. Not confirmed.
And what about Eastern Europe? What about commercial real estate? What about the debts of companies that were purchased by private equity firms in the last decade -- 3000 of them? (Those companies employ 10% of the workforce.)
All of these, I am told, are disasters in the making.
A whole Imelda Marcos closet-full of shoes seem poised to drop.
Flippers are part of the problem, they need to get severely 4th degree burned bad before they give up. 9% sight unseen! very risky indeed.
Funny how European bankers were laughing at us a few months ago...
Why do people go nuts over worthless real estate built on sand? (Dubai, Florida, Nevada, Arizona, California)
Flippers are part of the problem ...
Sapientia - I don't agree. Adam R paid cash. He risked $571K. That's not chicken feed. And there was no public money involved, no one to bail him out. He paid the back taxes. This is all better than having no buyer with the house going to ruin. And the taxes going unpaid.
I bet all the owners nearby are very glad AR then resold the house for more money. It makes their houses worth more.
Flippers makes minor cosmetic changes, new cabinets granite countertops, they add minimal value and reap great rewards, until the bubble bursts. Flippers, stagers, were not selling the intrinsic value of the property, but their decorating skills.
Have you heard the expression "lipstick on a pig?"
Uncle has a small place in West Palm Beach, units have been flipped continuously for 10 years, no improvements, no tenants or occupants. Flippin over and over.
Colleague in Orlando has several houses on his street owned by Brits, taken out with cheap and easy mortgages and rented to tourists. Many flipped over and over.
What’s happening in Dubai exposes the fundamental problems that exist in many (if not all) of the oil-rich Middle Eastern nations. It should also serve as a cautionary tale for the U.S.
Dubai’s vaults are said to be bursting with gold and foreign currency; the UAE sits on a virtual sea of ‘black gold’ – all of it valueless. For decades the country has survived in gaudy opulence off the sweat on the backs of foreigners – mostly people from the Indian communist state of Kerala - who were restricted from integrating with the broader Arab society. UAE citizens themselves do not work. Work is beneath them. They subsist off of oil revenues that the world sends them by the buckets. Whereas the world uses ME oil in the furtherance of work (building/creating…), Dubai simply pays others to do what needs to be done.
These ‘others’, mostly Indians…, send the bulk of their earnings back home where it is used to sustain families in a communist state that cannot provide sufficient work for its own people.
This Dubai snapshot should settle the argument about the definition of ‘wealth’ once and for all. Wealth is not gold, oil or currency. It has little to do with ‘social justice’. Wealth without ‘value’ is nothing. And value can only be derived from human work. Any people who devalue work, or create so many obstacles as to make work impossible; any nation that divert the just rewards of honest work by erratic, self-serving redistributionist policies will end up with nothing.
During WWII, parts of both, Germany and Japan, were physically bombed into oblivion, their populations decimated. Yet, both countries had a work ethic which bombs could not destroy. In relatively few years, both countries were back on their feet. Look at Dresden today; look at Hiroshima!
The desert will reclaim Dubai once the West no longer has need of its oil. America will revert to the wilderness it was before the pilgrims came should it persist in reducing education to mere propaganda (and cult worship); making work unprofitable; punishing exceptional talent or effort outright; creating a sheep-like mentality in a people who would otherwise bust their britches in trying to outdo each other .
Most of the Indian workers in Dubai have been sent home. The communist state of Kerala still does not have jobs for them. They will fan out across the subcontinent to find work – not at Dubai’s generous rates but enough, perhaps to put food on the table back home – and the hollow, reverberating social fallout of fatherless houses will continue.
http://peterkoelliker.blogspot.com/
Did you know that the Saudis want to be subsidized by the UN/rest of the world when they run out of oil? I find that incredible, considering they would still be eating sand...
from Calculated Risk:
http://www.calculatedriskblog.com/2009/11/northern-trust-on-dubai.html
James Pressler at Northern Trust provides an overview of the Dubai situation: Dubai’s Latest Mega-project – A Massive Default? (pdf) A few excerpts:
The complexities of the UAE’s governmental structure make the situation difficult to grasp at first glance, but the problem can be captured by a few basic points. First, Dubai is the second-largest emirate in the UAE next to Abu Dhabi, but Abu Dhabi is also the power of the national government and has been challenged by Dubai’s meteoric rise. Next, the UAE has a sovereign wealth fund estimated at one half-trillion dollars in case of emergency, so money is clearly available at the national level to bail out Dubai if that route is chosen. Lastly, the national government wants to emerge from this situation with international markets assured that a state-run entity has the backing of the government and will be subsequently subject to reform and accountability. Taken together, these points plus an appreciation of the politicial undercurrents suggest a scenario that avoids outright default.
This suggests that Abu Dhabi will bailout Dubai, but that isn't certain:
The first sign of things to come could be as early as the first week in December, when Gulf markets re-open from the Eid al-Adha holiday (Dubai World announcing its debt postponement plans just before Eid celebrations was in all likelihood not a coincidence). This will mark the first chance for officials to state positions and make confidence-building claims, with the further interest of calming international markets. Between that time and the December 14 due date for Dubai World’s next debt payment, we expect to see a concrete plan laid out for bailing out the conglomerate and some pressure taken off the credit markets. However, if no settlement can be reached, it would not surprise us if another major entity started talking about restructuring or a debt freeze before year-end – and not necessarily a company in the UAE.
And from the Financial Times: Abu Dhabi expected to prop up smaller brother
[W]ith Dubai raising the possibility that one of its flagship entities may default, attention is now focusing on just how far Abu Dhabi is willing to go to bail out its smaller brother. Underlying the uncertainty, it is thought that Abu Dhabi officials were caught unaware by Dubai World’s dramatic statement ... Ultimately, though, there is consensus that Abu Dhabi will not see it fail.
excerpted with permission
Should be an interesting couple of weeks.
Sapientia, flippers add value which you cannot see but which is essential to any market... liquidity. Another name for flippers is speculators.
This is directly analagous to the operation of the futures markets. Use corn or wheat as an example. In the grain markets, there are producers (the farmers), consumers (flour makers, cereal makers, etc), and there are the speculators (called non-commercials). Farmers use futures to forward sell their production, effectively guaranteeing a price for their as yet harvested crop. Flour mills and other grain consumers use futures to buy for future delivery, guaranteeing a predictable price for their raw materials for years ahead (a most famous example of this is how Southwest uses futures to hedge their jet fuel costs and thereby gain a competitive advantage). And then there are the speculators who neither produce nor consume but provide the invaluable service of liquidity, by buying or selling when neither producers nor consumers will take on that role.
Real estate flippers perform the same function.
VALUE IS IN THE EYE OF THE BEHOLDER. IT IS ALSO BASED ON PRICE PER SQ FT.
Honest auctions are a very sound way to determine value. It's the market at work. No one forced Adam R to risk his own money to buy this house. No one forced someone else to buy this house from him for more money. This unidentified buyer had many other houses to choose from -- and, yet, chose AR's house.
However, an $8K tax credit for first time buyers is social engineering. If you want to fix the economy w/a tax credit for housing, give it to everyone. Or better yet, let prices fall and buyers/speculators come in when the price is low enough.
I suspect, a bank blessed the above-mentioned purchase by giving a mortgage based on comparables. It is the mortgage process that has failed at Fannie, Freddie, and currently, at FHA
(and, yes, Wall St because of Fannie/Freddie failure) that has caused this housing crisis -- not because of comparables -- but because of reduced standards of lending that is still going on.
It is the government that has learned nothing from the housing crisis. It is the government that is encouraging banks to modify mortgages -- advantaging some, disadvantaging others -- which, ultimately, will cause another wave of mortgage defaults.
It is good-paying, steady jobs that will permit people to pay their mortgages and/or get new mortgages. Adam R has a good-paying job. And, you know what, he created it himself.
A Reuters story about the Dubai debacle contains this paragraph: "The city state's rapid growth revolved around the ruler Sheikh Mohammed bin Rashid al-Maktoum, who outlined his ideas in a book, 'My Vision,' where he suggested other Arab countries could replicate Dubai's success. Now the model -- always controversial among Gulf Arabs since it involved building shining cities in the desert at breakneck speed through the import of foreign residents, finance and labor -- is on the ropes."
The Sheikh's attempt to build cities in a parched wasteland with "foreign residents, finance and labor" sounds an awful lot like what California and the other Sand States tried and failed to do. But only an ill-tempered and deeply unfashionable paleoconservative who views immigration, banks, and free trade with suspicion would be so rude as to point out the similarity.
LOTS OF PEOPLE GO BANKRUPT IN REAL ESTATE. IT'S ALL TIMING & LUCK.
Huntington Hartford (Remember him? He used to have an ugly building on Columbus Circle) lost a ton of A&P money trying to build up Paradise Island. On 9/10/09, Bloomberg.com reported that Tishman Speyer Properties is at risk of defaulting on Stuyvesant Town-Peter Cooper Village because its value has fallen by more than $3.2 billion. General Growth Properties, the second-largest U.S. mall owner, declared bankruptcy last Spring. It was, then, the biggest real estate failure in U.S. history. In 1976, Tishman Realty & Construction defaulted on its construction loan from CitiBank for 1166 Avenue of the Americas. This structure was said to have cost the company more money than had ever been lost before on a single building. Its management decided to liquidate the company.
However real estate, by and large, always bounces back. It's all a question of 'when'? Whether Dubai will bounce back is another story. I remember reading here that one of its main structures had hot and cold running roaches -- instead of water. But I have no doubt that CA, FLA and AZ will bounce back. Nevada I'm not so sure of. After all, it elected Harry Reid.
>But I have no doubt that CA, FLA and AZ will bounce back.
I don't know about the other Sand States, but the future of California looks bleak. The white middle class is fleeing California, having been displaced by low- and no-income Third World immigrants. (I myself just spent a delightful afternoon with a brilliant refugee from Silicon Valley as well as his equally bright and hard-working biochemist wife, both of whom have returned to their Southern roots. Telecommuting makes it possible for them to have have ample time and income for their new baby. Not only do they no longer spend a couple of hours a day sucking in the exhaust fumes from gridlocked cars on California's overcrowded highways, they enjoy a standard of living here far higher than anything they could have aspired to out West, as a quick tour of their recently-acquired farmhouse reveals.)
In particular, as Samuel Huntington and others note, the data show clearly that educational and occupational achievement gaps between white Americans and Hispanic immigrants remain wide, at least through the fourth generation. This new group is proving to be a permanent underclass that will be heavy consumer of of tax dollars, and which seems likely to remain less productive economically than some other ethnic groups.
There is nothing magical about California. Its economy will continue to reflect both the strengths and weaknesses of its inhabitants.
Or to put it another way, I believe that a pre-senility William Buckley once pointed out that if you were to parachute twenty million Swiss into Mexico, you would see great gains there in terms of economic productivity and so on. We will probably never have a practical way to test his contention, but at present our Federal masters are conducting an experiment to determine the converse, with all of us as guinea pigs. The early indications are not good.
>There is nothing magical about California.
THERE USED TO BE A CA TEE SHIRT. THE FRONT SAID: "WELCOME TO CA." THE BACK SAID: "NOW GET THE %#@* OUT."
I happen to think CA is magical. I'm also old enough to remember that respectable publications used to predict that major US cities, including NY, would become all black -- surrounded by white suburbs. Back then, it was called 'white flight'. I don't know if this reversal is now studied in schools -- the way Levittown was studied and also predicted to become a slum -- but I do know that neither event ever happened. I think, in NY, it was simply a case of "too rich to fail" -- too many wealthy people live in NY, and too many young people relocate to NYC from all over, to allow it to go under. Of course, NYC could loose its wealthy citizens if the 'tax the rich' talk turns into ever greater reality. I heard an unbelievable statistic: Somewhere around 43,000 wealthy New Yorkers now pay about 90% of NYC's taxes. If true, or even close to the truth, many wealthy people may decide to leave. But, not yet. I think the wealthy and the middle class and relocating young people probably saved many other cities, as well.
I remember many years ago, when Newt G was in Pelosi's role and he attacked NY for some reason, our senator at the time, Daniel Moynihan, quickly put him in his place. Moynihan explained that NY pays far more per person into the federal budget than Georgia. And Georgia receives far more out of the federal budget, per person, than NY. I also believe, in a similar way, that NYC taxes support almost the entire state of NY. So, I guess what I'm saying, is that maybe it's time for tax reform. And one wealthy person, Steve Forbes, seems to think a flat tax would do it. We, obviously, also need immigration reform. How about starting both in CA? After all, CA is desperate enough, and flexible enough, to try it.
In many ways, CA has always been ahead of the curve -- sorta like the JB Show. If CA goes down, the US is sure to follow. You know why it won't? Because it's magical. It's too beautiful to fail. And because of it's natural beauty, it will keep its share of wealthy and its share of middle class and its share of entrepreneurs who will still want to live there. And they will save it. Nothing altruistic here -- merely self interest.
And what does the tee shirt in the headline have to do with anything? I'm guessing that some wealthy entrepreneur, who's now a pot farmer outside of SF, had something to do with it.
Inventor of the geodesic dome and non-stop monologist Buckminster Fuller held that California was the most quintessentially American part of the USA, being the westernmost of the contiguous states and therefore the final destination of the most restless of our pioneers. The less driven of us put down roots farther east, in places such as Ohio or Nebraska or Alabama. In that sense I suppose that the Golden State is indeed magic, given that it serves as a sort of crystal ball that allows us to peer into America's future. I will confess that I don't much care for what I have glimpsed in its depths--and to judge from how so many Californians are voting with their feet, I am not alone in this.
Your optimism about California is commendable. But remember that at the begining of the Twentieth Century the phrase "rich as an Argentine" was a commonly used expression to denote great wealth, whereas a series of juntas and dictators have left it a saying that today is known mostly to historians. No country is so indispensable and exceptional as to be exempt from history, not even America.
Kenneth - FYI: I put my money where my mouth is. I bought a second home in the Palm Springs area. And I love it. My rationale is that I would rather die of an earthquake in CA than of boredom in Florida. Let's hope my resolve is never put to the test. Yes, golf courses are a major waste of water. But they'd be wasting water whether or not I lived there. And even though I don't play golf, I do like open spaces. Also, I can't help but think that because it's always sunny in the desert, solar panels might be a good source of electricity. I also heard something about that National Parks that might be worth seeing. Right now, I'm trying to figure out what kind of tree to plant. I'm thinking date palm. But I also like olives.
Well, *vaya con Dios*, amigo.
Thank you. Great song by Les Paul and Mary Ford.
Except for the delightful weather and a tradition of IT innovation, jobs can go anywhere. Having a prestigious address off the 101 in Sunnyvale or Cupertino is no longer a requirement.
Hollywood is outsourcing to Vancouver and Toronto, with better union rules and tax incentives.
As I look out my window, I see the two world's largest private trading floors (RBS and UBS) in Connecticut, not NYC or London, or Basel. Tax incentives brought them here. Wall Street is a 10 minute Subway or Ferry Ride to Jersey City, many Wall st back offices are already domiciled there.
Taxes, energy, and Human Capital are all part of the equation a company makes each year.
If you really want the best deals in investment properties, you have to increase your odds by finding more deals. Who is more likely to get a cheap apartment building, an investor that looks through the MLS listings and calls it a day, or the one that uses ten resources?
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