Month in Review: February 2008
[Previous Months In Review available here: Jan 2008]
[A complete set of 2007 Months In Review available here:
Dec 07, Nov 07, Oct 07, Sep 07, Aug 07, Jul 07, Jun 07, May 07, Apr 07, Mar 07, Feb 07, Jan 07.]
We’re just trying to sell!
During February, the world realized that what we have is not an asset value collapse so much as a combination of repricing risk (widening spreads; the stimulus) and de-levering assets (the painful response):
The shift from homes to money is reflected in my two posts, one on The debtor game, the other on The risk of execution:
While chaos has an infinity of fathers, Mr. Duncan’s slide also picks out a selection of events that might plausibly be said to have triggered each of the major shifts. It’s evident that the capital markets are acting like a skittish observant herd, starting a stampede, then dissipating it, then stampeding again at the sounds of shots.
The thing is, there’s a lot of us, and when we stampede, it raises a cloud of dust
With risk spreads this wide, the music has suddenly stopped, and everybody’s holding large amounts of paper they don’t want, as described in this recent article from The Wall Street Journal:
A new problem is rippling through credit markets: Many of the corporate loans used to finance giant buyouts in the past few years are reeling in secondary market trading, making it virtually impossible for banks to unload other commitments they have made.
The holders of this debt are now facing a risk they never imagined would arise — the risk of execution.
I never thought I’d get into this position!
If in fact the assets are worth much less than we thought, does that mean that those who got paid huge sums for creating the value should give back some of their cash? That’s what I asked in When did I earn it? Part 1: who got paid?, Part 2: who took losses? and Part 3: what’s the fix?:
We just hate that word ‘mistake’, suggesting as it does that other word, ‘culpability,’ and its corollary, ‘litigation.’
At risk of downgrade
We began this essay with Howard Baker’s epistemological question, and converted it into its financial equivalent: what did I earn, and when did I earn it? But when we return to the rating agencies, we revert to Senator Baker’s original form: what did you think, and when did you think it?
A rating agency has a categorical imperative to upgrade or downgrade securities when it has relevant new information. It also has a duty to seek out that information.
“When the facts change, sir, I change my mind; what do you do?”
Losing money isn’t a risk limited solely to capital providers; sponsors too can lose money, even if they are the distinguished chancellor of Texas Tech University, as I chronicled unsympathetically in You don’t expect me to lose money do you? Part 1: what problems?, Part 2: who, me? and Part 3: you want what?:
So far our exploration of Cornerstone Apartments in Haltom City, Texas, has covered rapes, shootings, backed-up sewers, dead rats, no heat over a weekend, enormous water bugs, and an astonishing flyer from the management agent demanding that residents repair defects that are the owner’s responsibility and tacitly threatening them with the loss of their children (since disavowed).
What standard of performance should we expect? Should we make allowances for Mr. Hance’s busy schedule? After all, he is sponsor of fourteen properties and has a full-time job three hundred miles away.
After all, we don’t need to give ‘those people’ anything too comfortable to live in, do we?
“Are there no prisons?” asked Scrooge. “And the Union workhouses? Are they still in operation?”
“Many can’t go there; and many would rather die.”
“If they would rather die,” said Scrooge, “they had better do it, and decrease the surplus population.”
Mr. Hance wishes no such ill upon his tenants:
“I don’t think you could find anyone else who would put that kind of money in a project,” Hance said during a phone interview.
Actually, Mr. Hance, you could find a great many owners who would do that. Some of them are non-profits. An extremely good one has its headquarters in Austin. A national non-profit with a long and successful track record has its Texas office in Fort Worth. Some are large for-profits who value their reputation as high-quality owners and managers. Allow me to call them to your attention.
Rapes, shootings, break-ins, rats, water bugs, leaks. They’re not your problem, Mr. Hance.
You’re only the owner.
`Or would you know,’ pursued the Ghost, `the weight and length of the strong coil you bear yourself? It was full as heavy and as long as this, seven Christmas Eves ago. You have laboured on it, since. It is a ponderous chain!’
Money being lost reveals all kinds of unpleasant truths, such as the symbiois of fraud that sells houses to The homeowner who never was, and raises the specter of neighborhoods regressing, as in The next slum? No such luck, Part 1 and Part 2:
No slumlords, please
Does it undermine Mr. Leinberger’s point too terribly much that we just had a blockbuster hit in I Am Legend, which imagines an entirely depopulated New York City?
I like being able to walk to work
Unfortunately, the next transformation, like the ones before it, will leave some places diminished. About 25 years ago, Escape From New York perfectly captured the zeitgeist of its moment.
Movies about vampiric New Yorkers are so yesterday, dude
Two or three decades from now, the next Kurt Russell may find his breakout role in Escape From the Suburban Fringe.
Unfortunately for Mr. Leinberger’s thesis, Escape from New York is being remade … now.
So much for the New Urbanism
More cheerfully, I examined the impact of housing configuration and tenure on household formation in Love my apartment, love me?
“I know people who figure if they can survive living in a studio or a small one-bedroom in forced closeness, then they know they can stay together,” said Amy Herman, an agent with Halstead Property.
When supply is ample, people have choice; when it is scarce, they have to grab from a limited menu. This is as true in dating as it is in house-hunting. In short, if you can make out there, you can make out anywhere?
And on baby formation in More bedrooms means more babies:
If an economist is a person who is baffled because he cannot explain why people don’t walk up escalators, is then a demographer a person who cannot satisfy himself that more bedrooms mean more babies? As reported in The New York Times:
For the first time in 35 years, America’s total fertility rate — the estimated number of children a woman will have in her lifetime — reached 2.1, the theoretical level required to maintain the country’s population, according to recent data from the National Center for Health Statistics.
Now, why are we making all these babies?
Can I guess?
The most intriguing academic research in February is a work-in-progress by Laura Tach of Harvard, who’s exploring how people’s interpretive frames affect how they perceive revitalizing HOPE VI properties, as I discussed in We see what we expect to see: Part 1, why we want to know, Part 2, what residents see, and Part 3, what it means:
By the time I was done reading her paper, I had become convinced Ms. Tach is right:
The findings presented here suggest that the process of redevelopment can improve neighborhood conditions without necessarily relying on the mechanisms presented in Figure 1 [namely, that higher income residents serve as role models — Ed.].
think this is very big stuff. If it’s correct, it means that:
1. The goal of income mixing is not role models, but simple deconcentration and choice.
2. In mixed-income, the management challenge isn’t the extremely lows, it’s the low-moderate.
3. To draw low-moderate residents into the community, you must go beyond a cheap rent. You have to make them feel part of the social network.
4. Social programs in mixed-income developments need to appeal to the higher-income, and must encourage income mixing.
It turns our mixed-income social upside down.
Maybe we have to rethink our housing models
In the realm of theory, I went to the distant past with World’s first homeownership subsidy, delved into my childhood with Stakeholder incentives: the five Chinese brothers, and made a hundred-year prediction in The century of cities:
Even the very little work I’ve done with SDI so far has shown that their most effective counterparties are neither global entities nor national governments, but municipal governments.
Cities have their own box of policy economic tools. Municipal finance, housing strategy, zoning and local taxation — all are usually within the locality’s control. Cities have to learn their own expertise. They have to become financially and politically autonomous with respect to internal urban policy.
Those of us who work in housing, or urban development, have to help cities succeed even if their larger units of government do not. We may be unable to do anything with the nation of Zimbabwe, but maybe we can do something in Bulawayo.
Harare, Zimbabwe
At least it’s the right place to try.
Finally, as my companies keep looking for new executives, I commented on The talent updraft:
What’s that giant talent-sucking sound?
Phase 4: temptation. Now comes the pitch, in the form of a colleague from the Other Side.
That big deal we were bidding on? The one I told you about? The one that will change the whole neighborhood. We got it.
Wow, congratulations. [Shake of the head.] That’ll really make a difference. What an opportunity!
Actually … we’re so busy over here we really need a capable executive to take charge of it. [Pause to size up the executive.] Would you be interested in working here, as Senior Project Manager?
[Suspiciously] At what salary?
How about 50% more than you’re currently making? — And an incentive bonus, naturally, equal to a percentage of our development fee
[Looking down at his or her drink.] Let me think about it.
And there it is.
The fruit of the tree of the knowledge of good and evil?
Oh, nonsense, what’s corrupting about pots and pots of money, anyway?
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