Nantucket's two worlds

Last year, after reading a story about the depressed vacation home market in Nantucket, I considered bidding on a mega-property up for absolute auction — no minimum bid. Little did I know that the Colgan family in New Jersey would also respond as I did too the New York Times piece. The tale of their purchase of a distressed property is a telling anecdote for Nantucket real estate, which I write about more deeply in a lead story for Fortune.com today and in a brief item last week for Barron’s.

Everyone likes to write about the hot properties. And my stories touch on some trophy properties — like the recent contract for the estate of ex-Goldman Sachs honcho Jon Winkelried. (The property was reportedly signed for close to $29 million, an island record.) But the Fortune.com feature focuses on the year-round residents, who are still picking up the pieces from Wall Street real estate’s binge in the first part of the decade.

The family consortium I assembled to bid on the Second Glance never even got to first base last year; the auctioneer convinced us that the bargains I envisioned were illusory. And in the case of that one property, she was right. It went for more than $5 million. (You can read those stories here and here). But the Colgans were much shrewder and dogged bargain hunters than we were. To think, we could have been neighbors.

This item on the backstory to Nantucket home sales wouldn’t be complete without a shout out to former T/S contributor Paul Smalera, now a senior editor at Fortune.com. He was a pleasure to work with.

Here’s the story of two worlds  on Nantucket — Wall Street, where fortunes are turning around fast, and everyone else.

FORTUNE — In the past decade, Nantucket Island has served as a barometer for the fortunes of Wall Street. The glass cracked after years of unsustainable pressures. But almost by magic, the barometer is rising once more even as something new and unexpected has come to the summer paradise: foreclosures, short sales, failed auctions, and a skinnier municipal budget. And while financiers can cut and run, it’s the locals who are being hardest hit.

“It’s two different markets,” says Brian Sullivan, a broker for Maury People Sothebys. There’s Wall Street, and everyone else. You can see that on Yahoo’s;s real estate listing for distressed properties on Nantucket: nearly two-thirds are listed for under $1 million, the price sector dominated by the island’s 12,000 year-round residents. But the banks have basically turned their backs on small borrowers, so anyone who does want to buy will have a hard time getting a loan. “They want to lend to people borrowing $1.5 million and up,” says Sullivan.

via Millionaire foreclosures on Nantucket – Jul. 19, 2010.

Splash! Safe landing for the economy, but too much was lost

Sullenberger pulled off the ultimate soft landing

As 2009 comes to a close I had this funny thought: Pain and suffering are market neutral. The market goes up, the market goes down and the pain and suffering continue.

I think of this as I stare down the data of 2009: The “V-shaped” recovery is here (see graphics below) — at least for now — and the stock market is up 20%, surging 60% from the March lows. The investment banks that nearly brought down the global economy are racking up both record profits and record bonus pools.

With so much good news, why are so many so glum?

Oh, we’re not glum the way we were in November 2008 or even last March. The nation feels glum the way a lost child feels knocking around the house, unclear which way to go or what to do. Or glum, the way one feels after a death. Change is in the air, and it doesn’t feel the least bit comfortable. In theory, The Great Recession should usher in The Great Recovery. Instead, 2010 looks, at best, like The Great Blah.The wind in our collective sail has faltered because in retrospect the bailouts have shattered our notion of fairness. And this is a country that accepts differences in wealth — so long as things feel fair. You work hard and are smart and lucky? Congrats on your millions, even your billions.

The bailouts have smashed our sense of ourselves as a nation in charge. The vision was an illusion lead by Alan Greenspan and a host of enablers; Bill Clinton, Robert Rubin, Phil Gramm, Barney Frank and all the other lawmakers and economists who thought they could engineer society (100% home ownership!) and the economy (low rates forever; no failures) without any negative consequences. Greenspan and his denizens appeared to have believed that they were Captain Chesley Sullenberger at the helm of an Airbus A320, capable of a soft landing no matter where. But what the ideologues in Washington and New York failed to realize is that even a soft landing is far from painless. Sullenberger saved the passengers but the aircraft was lost; now the bureaucrats saved the aircraft but crippled the passengers.

We look back, and still wonder: How could it have happened — not just the greatest bubble in economic history but the response? And the survivors! Key players who were responsible for many of the threads leading to the great market crack-up are flourishing. You won’t find them on the unemployment line. White House economic advisor Larry Summers, Treasury Secretary Tim Geithner, OCC chief John Dugan (recently profiled in an amazing piece in The Nation), Congressman Barney Frank, and NY attorney general Andrew Cuomo (former HUD give-’em-all-loans secretary). You have to wonder how the geniuses behind the Fannie Mae and Freddie Mac implosion performed so scandalously while one private firm (Enterprise Community Investment) devoted to low-income housing has fared so brilliantly, even during the darkest day of the economic breakdown.

And then there were the bailouts, an astonishingly slap-dash, even naive affair by Wall Street standards that left taxpayers with just the bill and not much more. We saved GM while castigating the world for contributing to climate warming. How about putting all those billions into building public transportation? Why subsidize something that symbolizes our dependence on oil? No vision whatsoever.

What is left behind is gnawing resentment between the haves and have-nots. And a series of tiresome articles about bonuses and benefits — a distraction in what some have tallied to be a $17 trillion bailout. Isn’t the whole point of capitalism that people can get rich? Isn’t that supposed to be an incentive? I don’t care if the bankers make more money than Midas himself. This is America. Anyone can do anything. A poor kid can become a billionaire — but his investors get rich with him. A man raised by his grandmother can become President, and we are all the richer.

But it’s New Year’s eve, so I’ll hit the pause button on this rant to consider the  V-shaped recovery, which everyone had been longing for. In this economic scenario, the economy comes roaring back from its lows. In an L-shaped recovery, which everyone feared, we just hobble along the bottom. In 2010, I expect the V-shape could continue, but we, as a nation, will feel like we are in an L-shaped scenario because the recovery will help relatively few people and because of the state of our national debt.

So here’s a roundup of a few data points that support the V-shaped recovery outlook:

First, the “activity index” from the Chicago Fed:

You see the “V” shape on the far right in the graphic? Business fell off a cliff and while still not in an expansionary mode is clawing it’s way back to Square One. In fact, according to the Chicago Federal explainer, this graph shows a classic pattern of recovery after a recession.

Next, existing home sales (via Calculated Risk):

The extension of the first-time buyer tax credit has given an extra boost to November home sales, but the ‘V’-shape is unavoidably visible.

Next, the Philadelphia Fed’s Coincident indicator (again, via Calculated Risk):

A majority of states show increasing activity for the first time since the Great Recession began.

Here’s the coup de grace, gross domestic product, a measure of how we’re doing coast-to-coast — even including California!

You can see the V-shape emerging.

And just for those of you who would like to see an upside down V that signals good things — the declining number of jobless claims:

via Calculated Risk

This brings me back to the start of my post: pain and suffering are market neutral. This, of course, has always been true. It just feels so much more poignant now. What strikes me as particularly humorous this go-round is that in the ’00s, hedge fund managers sold “market neutral” strategies as a sure-fire method to avoid losing money in down or up markets. AIG Financial Products was so hedged that its fearless leader promised winnings no matter what. (Estimated minimum loss to taxpayers: $30 billion — remember the biggest bailout until 2008 cost taxpayers $1 billion with the demise of Continental Illinois in 1984.) The emails in the recent Washington Post story on the demise of AIG are amazing to read. One trader, puzzled by the implosion, complains that he isn’t getting his allotted high-fives.) Market neutral was one of the biggest flops on Wall Street, along with credit default swaps and securitized mortgages, and the triple-A seal of approval from the credit rating agencies.

And now as we look into 2010, investors ask whether the market rally is a true harbinger of The Great Recovery. Who better to ask than the famous hedge fund manager of the month? According to the Wall Street Journal, David Tepper foresaw it all — the “V” in recovery and the brightness of our future. This fearless manager had the backbone to invest in America, the tree that grows no matter what. David Tepper, hedge fund manager and brilliant strategist stood tall and bet that we wouldn’t lapse into a recession, as a result, raking in a cool $7 billion profit for his Appaloosa Fund.

But is that really what Tepper’s trading bets signal? A real belief in the hardiness of our oil-dependent, smoke-belching, Zombie-lovin’ economy? Or maybe he was just placing a bet on the spinelessness of the feds and their willingness to print and print and print more dinares for supplicant financial Amazons. I’ll grant Tepper has the cajones to follow his instincts. He’s one hell of a trader. But his instincts didn’t exactly point to a noble vision of American know-how leading to great economic success. No, his vision wouldn’t result in a wild rendition of “Ode to Joy.”  In his own words, Tepper says he was betting that the feds wouldn’t let the banks go under:

On Feb. 10 of this year, Mr. Tepper read that the Treasury Department was introducing the so-called Financial Stability Plan. It included a commitment by the government to inject capital into banks by buying their preferred stock, or shares that carry less chance of reward but also less risk than common stock.

At the time, investors worried that the government ultimately would have to nationalize big banks. U.S. officials said they had no intention of such a move, which could wipe out common shareholders, but investors were dubious.

The news from the Treasury Department struck Mr. Tepper as proof that the government would stand behind the banks. He directed his traders to begin buying bank stock and debt.

For the past decade, the feds have basically pursued a policy that enabled moral hazard. Why would Tepper believe that anything different would happen this time round?

So even as 2009 was shaping up to cap the worst decade for stock investors in nearly 200 years, Tepper’s Appaloosa Management is up 120%, after fees. On Twitter the traders soundly chastised all the lumpen-proletariat who missed out on one of the greatest market rallies. One commented that they held on to their bearish views “the way toddlers clutch  blanky.”

But one trader said to me that playing the rally doesn’t signal a long-term bullish Indeed, the Treasury curve, typically interpreted as the Grand Seer of the macroeconomy is sending mixed signals. The difference in yield between the two-year and 10-year note has now widened to 2.81 percentage points. The last time the yield curve looked this steep was 1992 or 2003, according to the Journal. And what do you know — that was just when we were emerging from recessions. It could be yet another harbinger of recovery. But this time round some are wondering whether the yield curve is signaling something else. It may be a measure of how much investors fear the mounting costs of the bailouts and the ambitious Obama agenda. This year alone, Treasury issued a record $2.1 trillion in new debt. The yield curve may be saying: Next year, the Fed won’t be buying debt to help repair the economy; it may actually be selling securities, depressing bond prices and raising interest rates. Yikes.

At the moment, our leaders are relying on a sea of liquidity, which is not unreasonable so long as it flows to where it’s truly needed; so long as it doesn’t offend our sense of fairness.  At the moment, bank lending is abysmal and non-financial companies are sitting on a hoard of cash. With some luck and skill, we can hand back the economy to entrepreneurs who create something more than financial instruments. That is where the future lies.

I wish you all a prosperous and healthy 2010.

You can't blame Goldman for this: FHA mess

Seems like our government agencies have never met a home loan they don’t like. Fannie. Freddie. And now here’s a graphic that captures the abysmal state of lending at the Federal Housing Administration. Blogger Tim Iacono notes that FHA lending “went from about 2 percent of all loan originations a couple years ago to a whopping 25 percent this year. Obviously, they’re going for quantity, not quality.”

via The Mess that Greenspan Made; graphic from T2 PartnersLLC

EZ-pass bailout for housing agency

Automatic overdraft protection for the FHA

The Federal Housing Administration is burning through its cash reserves like mad — no surprise given the collapse of the housing market. But it won’t have to face Congress to beg for more dough like most corporations.  It can just keep writing checks, courtesy of the US taxpayer, and keep on going. According to the borrow-and-go story in today’s Washington Post, the agency keeps excess reserves in an account at the Treasury:

The government is legally required to ensure that the balance in the FHA’s emergency reserve fund does not drop below 2 percent of outstanding FHA loans. Over the past five years, starting during the years of the housing boom and continuing into the bust, FHA’s reserves have tumbled and are now below that threshold, according to the agency.

Under a 1990 law, the FHA turns over to Treasury each year whatever excess money the agency expects to have left over after it pays losses on insured mortgages from what is known as the financing fund. The excess money is credited to the FHA’s emergency reserve fund. In those years when the FHA underestimates its needs, it automatically gets an infusion from Treasury to make up the difference.

via FHA’s reserve fund hits 7-year low – washingtonpost.com.

Commercial real estate showing signs of life?

Non-distressed properties may have found a bottom in 3Q 2009

For the past months, everyone has been warning about the impending implosion of commercial real estate — the next un-natural disaster waiting to wreak mayhem on the banking system. So it was quite a surprise when M.I.T. released a commercial real estate index showing a 4.4% rise in prices in the third quarter, the first uptick in more than a year. Further, transactions surged 12%, a first in two years. (Click on chart, above, for a closer look at the numbers.)

Naturally, inquiring minds went: Huh?

Professor David Geltner, director of research at MIT/CRE, explains that the transaction-based index may well be signalling a bottom in prices for properties that were never truly distressed in the first place. Distressed properties, alas, remain distressed:

“Our latest results relate interestingly to recent results posted by another commercial property price index whose methodology was developed at the MIT/CRE: the Moody’s/REAL Commercial Property Price Index – or CPPI – produced by Moody’s Investors Service,” Geltner noted. “Analysis of that index shows that healthy properties, those that are not in distress, have only dropped in price about 33 percent from the mid-2007 peak, a similar drop to the supply-side index we’ve recorded here representing property owners’ willingness to trade, while distressed properties in the CPPI have fallen 56 percent. The types of properties and owners tracked by the TBI would generally be less subject to distress than those tracked by the CPPI,” Geltner noted.

In any event, for disaster lovers, the non-distressed picture isn’t lovely to behold. Prices are now down a mere 36.5% from their 2007 peak versus 39% in the second quarter. Institutional investors aren’t exactly engaging in bidding wars.

And what does this mean for the residential as well as commercial outlook? Calculated Risk explains:

Typically prices fall much faster for commercial real estate than for residential real estate (prices for residential RE tend to be sticky and decline for several years, however CRE owners have far less emotional attachment to their properties).

It is very possible that CRE prices are near the bottom for non-distressed properties. It depends on if buyers are adequately discounting future increases in the vacancy rate and lower rents. It is a different story for distressed properties.