Just dropped a kid off at NYU--and thought about the real estate.

So we just had the first one leave the nest for Greenwich Village (second one leaves in two weeks for Evanston). Two real estate thoughts hit me:

(1) NYU dorms are the bargain of the century. They are very nice (four young women share two bedrooms, a living room and a kitchenette) and have views that would command double the price per square foot in the standard, un-rent-stabilized NYC housing market. The hallway gives a great view up Lexington Avenue (you can see the Chrysler Building) and over the Williamsberg Bridge.

(2) People need to get over considering price-to-household-income as the key fundamental. Density in lower Manhattan is so much greater than nearly anywhere else in the country, it will of course be the case that the relative price of housing to anything else--including wages--will be higher there than elsewhere.

Getting a California Mortgage in 2008

My wife and I close on a house here today. It is our fourth house--we bought two in Madison, and one in Washington, and then one here in LA.

The first three houses were a piece of cake to buy; this one was a lot harder. In the process of doing it, I think I spoke with half a dozen lenders, including CNB, the bank that is funding the mortgage. The experience included:

(1) a broker who tried to get my business by trashing his competitors

(2) a broker who dangled an impossibly low interest rate loan from a lender whose balance sheet is in such bad condition, it is likely not able to make loans anymore

(3) a bank that told me that investors are not much interested in California

(4) lenders are reluctant to count any income beyond salary income for underwriting purposes.

The last point is almost certainly true, as rates on California mortgages seem to be about 50 bp higher than in other parts of the country.

In the end, CNB was quite professional, but I have to say that the level of scrutiny--particularly with respect to the appraisal--was mich higher than I had ever experienced before. Perhaps in general this is a good thing. But if conditions remain this way, potential homebuyers are going to have to understand the need to keep excellent documentation about their income (keep those W-2s!) and buyers and sellers are going to need to understand that transactions will take longer than it did a couple of years ago. And to get the housing market unstuck, lenders are going to have to think about how to underwrite self-employed people, rather than just rejecting them.

The Mystery of Airlines

Other than Southwest (which hedged its fuel costs), they are all losing money. Yet every flight I take is packed. The obvious solution is for them to raise prices, except that they fear losing market share--in a market that loses money. Perhaps there is some sort of Nash game that explains this behavior...

Alan Greenspan has an Idea

In an interview in today's Wall Street Journal:

He also offers a novel suggestion to bolster the housing market: Increase the number of potential home buyers by admitting more skilled immigrants.

I have actually wondering whether enforcement of immigration laws within the last year has worsened the housing situation in Arizona, Nevada, and the California Inland Empire. While overbuilding, undisciplined lending, and speculation are all at fault for the mess we are in, I can't help but wonder if lower levels of immigration in the Southwest haven't matter as well.

Neither McCain nor Obama seems particularly interested in keeping immigrants out of the country, so it will be interesting to see what happens to housing absorption in 2009.

How much should gas prices be capitalized into SUV values?

Let us say that the baseline car gets 20 mpg, and an SUV gets 13 mpg (this is for in-town driving). If the average person drives 15,000 miles per year, this means the SUV driver uses about 400 gallons per year more than the baseline car. Let us suppose the equilibrium price was determined when gas was $2 per gallon.

Now that gas is $4 per gallon, the SUV driver is paying $800 per year more relative to the baseline car than expected. Suppose the real discount rate for a car is .05, and that cars depreciate on a straight-line basis over 10 years. This means that SUV values should fall by $800/.15 or about $5300. Seems to work....

Just thinking out loud

Wells Fargo has a market cap of about $100 billion; Freddie Mac's is under $4 billion.
Wells Fargo has been well managed for years; Freddie, not so much.
Wells Fargo has long had a higher standalone credit rating than Freddie.

Might it make sense to allow a GSE to become a subsidiary of a bank? As I said, just thinking out loud...

In LA

I suppose it is time to resume blogging...

Bldgblog on my new town

I like his take:

I got back from Los Angeles last night and my head is still spinning. I'd move there again in a heartbeat.
There are three great cities in the United States: there's Los Angeles, Chicago, and New York – in that order.
I love Boston; I even love Denver; I like Miami; I think Washington DC is habitable; but Los Angeles is Los Angeles. You can't compare it to Paris, or to London, or to Rome, or to Shanghai. You can interestingly contrast it to those cities, sure, and Los Angeles even comes out lacking; but Los Angeles is still Los Angeles.

[Image: L.A., as photographed by Marshall Astor].

No matter what you do in L.A., your behavior is appropriate for the city. Los Angeles has no assumed correct mode of use. You can have fake breasts and drive a Ford Mustang – or you can grow a beard, weigh 300 pounds, and read Christian science fiction novels. Either way, you're fine: that's just how it works. You can watch Cops all day or you can be a porn star or you can be a Caltech physicist. You can listen to Carcass – or you can listen to Pat Robertson. Or both.
That's how we dooz it.

L.A. is the apocalypse: it's you and a bunch of parking lots. No one's going to save you; no one's looking out for you. It's the only city I know where that's the explicit premise of living there – that's the deal you make when you move to L.A.
The city, ironically, is emotionally authentic.
It says: no one loves you; you're the least important person in the room; get over it. What matters is what you do there.

I agree with his assessment about the three great American cities--San Francisco and Boston are wonderful, but then so is Madison. None of them are as consequential as the big three. I think he gets Washington right--it is perfectly pleasant, and has become far more international in the years I have been coming and going to and from it, but I have never been able to fall in love with it, as I have Madison--and Chicago, New York and Los Angeles (and Rome and Tokyo and Hong Kong and Mumbai, but that is for another time).

In any case, Randy Newman's song is not ironic, and neither am I--I love LA, and am looking forward to many happy years there.

Wow

I wake up this morning to read:

In an interview, Freddie Mac’s former chief risk officer, David A. Andrukonis, recalled telling Mr. Syron in mid-2004 that the company was buying bad loans that “would likely pose an enormous financial and reputational risk to the company and the country.”

I left Freddie at the beginning of 2004. At that time, I believed that it excelled at mortgage underwriting--it had very serious people who constructed careful, sophisticated models of default prediction.

Dave A. was among the most highly respected people in the company. Apparently, things changed after I left.

I hope this is a quiet week

I move to California on Thursday. My guess is that I will not be posting again until after I get out there.