Month in Review: February 2007
[Previous Months-in-Review available here: Jan 07; Dec 06, Nov 06, Oct 06]
During February, the fervid pursuit of fair maiden Equity Office reaches feverous pitch, with both Blackstone and Vornado vying to present their credentials to best advantage:
Don’t look at him, look at me.
First we had Vornado raising its bid, Barbarians: selling the sale?, then Blackstone first saying No (Blackstone is standing pat) and then, perhaps after reading AHI! J, realizing the value of an in-between move: the zwischenzug, which coupled with Equity’s in-between move, won the day:
In my uninvited opinion, Blackstone should do something, even as little as upping its bid by $0.50 per share [Easy for you to give away $175 million of someone else’s money! — Ed.], so as to demonstrate that its ardor matches Vornado’s. That may seem silly —- money talks louder than everything else combined — but nevertheless, a gesture might tip the scales.
Blackstone on one side, Vornado on the other
With the courtship over, it was time to review the whole symphony, in four-part harmony: Barbarians, the aftermath: Part 1, the overture, Part 2, the melody, Part 3, the crescendo and Part 4, the coda,
Though not mentioned up until now, there was another financial party with interests to be satisfied: holders of Equity Office’s bonds.
We’re not satisfied about the bonds
As detailed in another article from the Journal’s thorough and insightful subscriber-only coverage:
The deal came with significant gamesmanship between existing bondholders and the company.
On Dec. 26, before Vornado appeared on the scene, EOP and Blackstone announced plans to buy back all of EOP’s $8.4 billion in bonds as part of the Blackstone buyout.
Just as lenders are jokingly described as people who will sell you umbrellas only if it isn’t raining, they have a similarly through-the-looking-glass orientation toward repayment — when you want to repay them, they don’t want you to do so. Specifically, borrowers want to repay when interest rates have fallen, and when that happens debt that carries an above-market interest rate can sell for a premium. Here, Blackstone probably had a more straightforward but equally compelling set of reasons: it wanted clear title so that it could put its own new first mortgage financing, or sell assets, without the complications of lenders’ liens.
The offer covered short-term bonds due within the next 10 years and longer-term bonds due as late as 2031. But debt investors rallied against it, rejecting the terms as too little for the long-term bondholders.
“How dare you try to pay me back?”
which contained the AHI punch line:
New landlords raise rents faster. Right or wrong, they step on the gas pedal.
Higher rents … and step on it!
As I noted earlier in this extensive post, even though offices are thought safer than apartments, apartment leases are easier to raise (yearly) and an apartment building (unlike an office) never goes fully vacant. Further, increasingly we see cities as adult residential playgrounds, with conversions of retail, commercial, and office space into apartments and condos for multi-housing families and others. Hence:
Where Equity Office has gone, can Equity Residential (or AIMCO) be that far behind?
Apartments next?
February also saw the DVD release of Building on Faith, a documentary on affordable housing, featuring myself in both the main text and more extensively in Part 2, the bonus (technical) material:
We delve into the affordability dynamics of the cost-value gap,
Smith: Affordable housing does not exist in economic nature. It comes into being only as a result of conscious political choice and wise government policy and program development.
and the need for external social-capital funding:
Smith: If you look at the price of housing, the price of housing consists essentially of three things. Number one, the cost of operations: utilities, maintenance and stuff. Number two, the cost of construction. And number three, the price of land. Land, used to grow human beings as opposed to crops, doesn’t have any intrinsic value. The value of land is the residue of what people can afford to pay for housing minus those two previous costs. And so what happens, and this is the first thing that governments have to understand, is that in any urban or urbanizing environment the price of land rises to precisely the point where it supports market housing. Which means it leaves behind the creation of affordable housing.
Must be an expert, he’s wearing a tie
Sheila Crowley, National Low Income Housing Coalition: There’s no place in the country, not a single place in the whole country, where if you’re a fulltime minimum wage worker, that you can afford the rent on a one bedroom rental unit.
Smith: And so you can choose the two-hour commute or the single room occupancy apartment, or the under-maintained, deteriorating shell. None of those are societally acceptable in a large inter-dependent urbanizing environment. And therefore, if you don’t like that outcome, you have to change the economics.
I also contrasted the depressing gap between airy promises and the hard reality of being a landlord by reviewing the story of the nation’s longest-running exercise in tenant managed housing, Bromley-Heath, in A too friendly landlord? Part 1, the property, Part 2, the management, and Part 3, the stalemate, concluding with:
When a property is severely troubled, there are three logical possibilities:
1. Management good, property bad.
2. Management bad, property good.
3. Management bad, property bad.
The truth lies under one of the three
Ms. Mildred Hailey [de facto Chair-for-life of the Tenant Management Council] and the TMC vociferously if vaguely claim they are in the right:
In an earlier interview with the Herald, Hailey said the report was “full of lies” and that the TMC prefers to help families, not evict them.
Who are you helping, Ms. Hailey, and who are you harming? Those whom you allow to stay, or those who are victimized by the problem families?
“We love this community. We have worked hard for 40 years to make it the community that it is,” Hailey said.
Today Bromley-Heath is a failed community; it is failing most of its residents.
“We have families with problems, not problem families. We are about rehabilitating those families, not eviction.”
Ms. Hailey, the TMC is failing the families who are not problems. It is time for you, and the TMC, to go.
Such misanthropic conclusions lent a strong note of skepticism to my review of French presidential candidate Segolene Royal’s housing menu: France: promise them anything:
Elsewhere I’ve posted at length about France’s dreadful riots, their connection to the deplorable slums-inside conditions in French public housing (see in particular French urban policy: fixing jobs and houses, and Fixing French housing policy: tear down the high-rises) and the so-far-meaningless promises offered by the incumbents (see France: riots, jobs, and housing and French urban policy: watch the feet, not the hands) and the fears I have for France.
Fight against expensive housing, housing security for life.
But the key element in the high cost of living is the cost of housing: there is total agreement on the seriousness of the situation. There is not enough housing, and it is too expensive. The Solidarity and Urban Renewal law must be better enforced.
A form of inclusionary zoning, the SRU imposes on towns with less than 20% public housing to take steps to provide more. (
[…]
The program is massive — and it’s just one of 100 points, at least 75 of which also involve spending more public money, directly or indirectly, on
As Keynes said, more or less, “in the long run, we are all broke.”
The more ‘dignified’ old-school restaurants used to provide two menus, one with dishes and prices, the other just the delicacies.
It was known as the ladies’ menu.
Let’s hope Ms. Royal has been reading not just the dishes but also the prices.
“Make mine a Royale with cheese.”
Just as affordable housing is intimately connected to income subsidy (or one of the other four kinds of money), market housing is directly linked to credit. When we move down the income pyramid toward the less financeable, we enter the realm of the credit conundrum:
Risk premiums are thus a kind of unwitting insurance pool, where the good pay for the bad.
As a borrower, I don’t like being lumped into a risky class of ‘those people’; I want to be lumped in with the good customers.
Do I look like a bad credit risk, you young twerp?
In credit decisions, as in politics, appearance is reality. Who you look like determines what you pay. And those who most need help grabbing hold of the ownership ladder’s first rung? They seek to light themselves above the unfinanceable … and hence, they are charged the highest risk premium.
You look like a dog, I charge you a bigger premium
There is the credit conundrum.
The Credit Conundrum
As lenders move down the income pyramid, their natural credit scoring makes it ever harder to go lower, when as a policy matter, we would like them to .
I read from time to time that this is a market failure. It’s no such thing. The market is doing what the market must, and should, do — it is pricing risk as efficiently as possible given the information available.
Capitalist nature abhors a product or service vacuum:
Not that kind of vacuum!
so that those who cannot tap the normal mortgage or financing markets are often routed to those less friendly, less desirable, and less affordable, reaching eventually the noxious profession of Payday lending: Part 1, doing well … and its impact, Part 2, … by doing good?. One step up is subprime lending, whose troubles I briefly described in All that jitters does not fold:
In an efficient capital market, originators like subprime lenders then sell their paper, often via securitization. Without delving too deeply into the details [Have patience, dear readers: Sherlock Holmes will discourse on securitization in a future post. — Ed.], in a securitization the originator keeps the junior piece and thus takes the first loss, whereas the investors take the senior piece. So ordinarily the investors would be safe, unless their junior holder/ originator suddenly found itself in financial trouble.
Did someone say, “financial trouble?”
New Century is one of the nation’s biggest specialists in “subprime” mortgage loans, or home loans for borrowers with weak credit histories. The company blamed its woes on “the increasing industry trend of early-payment defaults,” those that occur within the first few months after a loan is made.
When faced with an unpleasantness, resort to euphemism, for it clouds the ugly reality so nicely.
I expect to have quite a bit more to say about subprime loans in future posts.
On the lighter side, I commented on those zany legislators in Geographical bachelors:
My face is my character
All hijinks aside, the post had a real point:
Physical separation thus creates specialized housing demand by its fracturing of multi-housing families.
Communities of men working on a task have existed since the pharaohs built the workers’ city outside the
In such cities, a man seeking earned income cares only about maximizing his work activity (and sending his wages home), so he (it is almost invariably men who relocate to the city) is largely indifferent to his physical surroundings (a phenomenon known to wives around the globe as Selective Blindness):
What housework?
From the barracks, to the dormitory, to the work house, throughout the centuries employers have created single-sex housing, usually for men, working men. Surrounding several of
Apartheid hostels on the hills outside
Even today, mention of ‘hostels’ brings a shudder to many South Africans. Whether in
In a reference context, I applauded the Center for Housing Policy’s recent primer on tools used to Increase workforce housing availability, and ended the month with a two-parter, featuring that still-unhappy city and further impractical efforts to save it, in The Battle of New New Orleans: Part 1, the battle:
On this blog I’ve chronicled the insurance challenges, the mold risk, the flood-plain issues, the willingness to rebuild houses that the next hurricane will simply level again. […] Even with a motivated and generous home builder and lender giving its all, the new homes come slowly. Meanwhile, where are the people? Who is coming, who is staying, who is leaving?
Who’s coming, who’s going?