Nelson Rises But Grand Ave. On Hold…

June 3rd, 2008

As we began preparing in earnest for trial, the blog suffered from neglect.  However, now that our trial has been continued from July 9, 2008 to January 12, 2009 (over our objections), I have a little more time to breathe …and blog.

 Some new developments:

–Nelson Rising was appointed CEO of Maguire Properties.  Mr. Rising, who started with Maguire Thomas and was instrumental in building the US Bank building, has come full circle by returning.  Of course, in between he has accomplished some pretty amazing things:  CEO of Catellus Properties, owner of Union Station and developer of numerous projects throughout the state, member of the Federal Reserve Board of San Francisco, Chairman of the Grand Ave. Project.

–The Downtown News did a profile on Dr. Lee of Jamison Properties/Jamison Services.  This Korean doctor has built an empire of office properties throughout the City, including Century Blvd., Korea Town and downtown.

–Speaking of the Grand Ave. Project, it has been pushed off until at least 2009…but Park Fifth received its final City of L.A. approval.  We do not recommend holding your breath in anticipation of completion (or even groundbreaking).

Economic Forecast: Using Numbers, Averages and Common Sense

May 1st, 2008

If there was one important thing I learned in economics, it’s that everything comes in cycles.  It should have been no surprise to anyone that home prices were going to run out of rocket fuel, but even after 2 similar booms during the 70’s and 80’s, people still cry out and say “How could this happen?!?!” 

I may be a man who’s only one year out of college, but I knew that the housing bubble was going to burst way before it happened.  How did I know?  Because the numbers made no sense!

Before I get into the housing market bubble, let me explain how I come to my conclusions.  I come to my conclusions by trying to find any irregularities that deviate from what the averages should be.  Not that technical right? 

Now that I explained my KISS method (Keeping It Simple, Stupid), please take your time to look at the graph below:

 Shiller Graph

Now I have to say that I myself didn’t gather the data or do the data to make this graph, but none of the numbers here come as a surprise to me.  In history, I learned that between WWI to WWII, people struggled to make ends meet, US economy had a booming economy after the war only to stall during the 70’s, and the U.S. experienced periods of strong growth in the 80’s and 90’s.  See the correlation?  Back to my main point, the housing bubble.

If you take a look at the two peaks during the 70’s and 80’s, it’s obvious that these pulses were abnormal.  Now take a look at the huge stalagmite at the end of the graph.  Common sense would tell you that  something was wrong.  Unfortunately sense wasn’t that all common because numerous people kept buying houses at overinflated prices.

As a result, we are in a situation where fiscally irresponsible people are stuck with mortgages for overvalued houses .  Now while I do feel sympathy for those victims, I strongly opose any multibillion-dollar government bailout.  The main reason is because people the fiscally responsible should be rewarded for being sensible.

There are a lot of people who bought at the wrong time, but there are also many other people who didn’t buy at the right time.  If the government were to involved in helping these victims, they would only hurt the conomy more.  Take a look at the graph someone else did below:

 Projected value in home prices

 I’ll admit that this graph depicts an optimisitic timeline and drop in house prices, but I agree with the graph’s point that everything will eventually drop back to reasonable levels (and maybe even below) if you let it take its natural course.  If the government makes a minimal effort to save the “victimized” homeowners, houses prices should drop to reasonable levels. The government should reward the sensible and responsible by minimizing any effort to help homeowners. 

Maguire: Trying to Go Private

May 1st, 2008

Robert Maguire introduced a take-over plan for his eponymous real estate company, Maguire Properties.  Under the plan, the Company would divest itself of its assets located outside of Orange County and distribute $18.18 a share to shareholders.  Maguire would then make a cash tender offer of $2.82 a share for 75% of the company, giving shareholders a “stub interest” in Maguire Properties, according to Tuesday’s Wall Street Journal.  This deal values the company at $21 a share, compared to the market price of $17.07.

According to RTT News, the Special Committee of independent directors on the board has stated that the ‘expression of interest’ is not up for consideration “due to substantial contingencies and questions regarding the prospect of Robert Maguire’s plan.”  However, the company will work with Mr. Maguire on a more acceptable proposal.

RTT News describes the transaction as follows:

 The Los Angeles, California-based company said that the special committee of independent directors of its board received from Robert Maguire an expression of interest in pursuing a plan that involves multiple transactions. These include the disposition by Maguire of substantially all of its non-Orange County assets in several separate but inter-conditional transactions with different parties, a special cash distribution to the company’s shareholders principally funded from the net proceeds of such dispositions, and a cash tender offer by Robert Maguire for about 75% of the company at a price presented as giving effect to the asset dispositions and special distribution. The plan also involves the retention by Maguire shareholders of a “stub interest” in Maguire.

The Company had taken itself off of the market last month after no buyers emerged.

$2,145 for a two-bedroom apartment in Downtown L.A.

April 14th, 2008

Or $2.13 per square foot on average for downtown rent.  Some new projects, such as Canvas L.A. and Hikari, surpass $3.00 per square foot.  “Average rents in and around Downtown, among the highest in L.A. County, spiked dramatically — more than 10% — in 2006-2007,” according to the Downtown News.

Occupancy dropped from 98% to 96% over the last three years, but some attribute it to the glut of supply rather than an “exodus of renters”, as the Downtown News puts it. 

With its location only about three feet from the 110 Freeway, another amenity of Canvas L.A. is that you can drive directly into your living room from the 110 Freeway (or, more accurately, it looks as if a drunk driver who inadvertently crosses over the double yellow line on the side of the freeway may end up in your bed at night).

The Downtown News report (link here) cites the newest Casden Forecast, which examines rent in Los Angeles.  What was recently the hottest market around is now slowing down with more supply coming on-line, more condo projects turning into rentals and the “shadow market” of condos being rented out.

New projects opening or soon to open include Canvas L.A. (204 units), Artisan on Second (118 units), Belmont Station Apartments (275 units), Bixel Court on Fifth Street (80 units), a 151 unit high-rise at 717 Olympic Blvd., Union Lofts (92 units), two Spring Street projects by Barry Shy (440 units), and TenTen Wilshire (227 units).  Last year 1,253 units were completed in and around downtown (beaten only by Hollywood for number of new units).  In 2008 the number is expected to be 1,843 new units.

One difference we note:  It is not unusual to see people walking their dogs in downtown now.

Non-Bailouts and Moral Hazard: The Decline of Accountability

April 11th, 2008

Wall Street Journal

“Consequences not suffered from bad decisions lead to lessons not learned, which leads to bigger failings down the road,” says Ethan Penner, former CEO of Nomura Capital in a well-written editorial in today’s Wall Street Journal.

“And so we have the insidious modern trend to shirk responsibility and blame others for our missteps.  This trend, this ‘victim mentality,’ is a path toward personal disaster.”

Mr. Penner discusses the ‘non bail-out’ of Bear Stearns by the Fed.  He also notes that “in a bear market–with losses looming for investors, homeowners, financial services executives, homebuilders and the average stretched consumer–the hue and cry for the government to save everyone is reaching a fevered pitch.  Even avowed capitalists who enjoyed the benefits of bull markets are now advocating government intervention.”

Add to this the pressures of a disputed democratic primary where the candidates are daily trying to step to the left of their opponent and you end up with:  demands to halt or delay foreclosures, demands that mortgage lenders reduce the principal loan amounts for houses that are ‘underwater’ (worth less than the mortgage), and significantly increasing conforming loan limits.

Of course, Mr. Penner notes that during the run-up in house prices, “no one was calling up his congressman to complain that home values were appreciating too quickly.”  Homeowners moved up to bigger houses with smaller, or no, downpayments based on loan applications based on ’stated income’ (from the latin, “liar loans”).  Many buyers had no skin in the game.  Those that did “drained that appreciation regularly through refinancings to pay for vacations, new cars and other pleasantries, all of which created the prosperity for whcih politicians were pleased to take credit.”

 shiller-graphjpeg.gif

Which is to say that we all loved the reward we reaped from our risk, but now clamor for government protection when that reward turned to downside.  “The lesson we all must take away now is that leverage is not a one-way path to wealth with no risk of loss.”

“The unstated premise [behind this clamor for government protection] is that, with better government oversight, we would not be suffering today’s bear market and financial chaos.”

Mr. Penner ends by concluding that “[h]omeowners must learn that there are risks to using a home as an ATM.  Investors who borrowed to flip condos must learn the downside of such risk.  ….  And, much as it is impolitic to say, people who took money from lenders and signed without considering how they’d repay those loans must also be held accountable.”  “It is each and every citizen’s job to manage our own affairs, make our own decisions, bear the fruits or painful consequences and learn our lessons.”

“The free market is the essence of our society’s strength and is rooted in the Lincolnian precepts of accountability and responsibility.  When decisions are made and actions taken (or not taken), there are consequences.  These consequences are models for us to learn from and serve to stimulate social growth and advancement.”

Bravo to Mr. Penner for saying what no politician will.  I would add that the same politicans who are pushing for government intervention to stop foreclosures and allowing prices to fall are the same politicians who decry the lack of ‘affordable housing.’  We must allow the market to correct by allowing prices to decline.  In the end this will make houses more affordable.  [See my article in the California Real Estate Journal entitled “Is Affordable Housing The Right Thing To Do?”]  Unfortunately both sides of the aisle (and, also in today’s Wall Street Journal, even the last hold-out, John McCain) are giving into the populist rhetoric of the campaign season.  It is also ironic that, on one hand, it is acceptable for home prices to shoot through the roof but we must have goverment intervention to stop gas prices from doing the same.  There is now a push for gas prices to be capped or reduced (”windfall profits”) while we must have government intervention to stop home prices from going down.

Link to the Wall Street Journal Article.