January 2008 Archives

NYT on Redrin, Trulia and Zillow

John Cook:

The New York Times takes a look at the online real estate category, noting that despite problems in the housing sector startups such as Redfin, Trulia and Zillow.com are still attracting visitors and customers.

No hard revenue figures are provided, so it is a little tough to gauge whether the upstarts will survive if problems persist in the market. But the Times -- drawing comparisons to online travel agencies of the past -- reports that the heavily-funded companies are at least growing.

"In September, we thought it was maybe the beginning of a very long downturn," says Redfin Chief Executive Glenn Kelman -- whose photo appears in the story next to some old company signs. "But for whatever reason, the last few months have been very strong for us."

Meanwhile, Zillow's Spencer Rascoff tells the Times that advertising revenue has more than doubled as it added sales professionals and new advertising products.

A Nielsen Online analyst offers a note of caution with a statistic that advertising on real estate sites actually dropped 31 percent last year. But overall the piece paints a rosy picture of how the real estate startups -- several of which happen to be located in Seattle -- are making headway.

VC funded firms must pay close attention to their cash burn rate, particularly if the loss funding environment tightens.

ARM's Still Useful - in the Right Hands

Carol Lloyd:

In the wake of the subprime mortgage implosion, tales of homeowners going broke when their payments increase have taken on the universality of parables.

At the heart of these stories lurks a seductive villain: the adjustable-rate mortgage. As the prevailing wisdom goes, the loan product lures homeowners into a legal bait and switch - dangling tantalizing teaser rates before their hungry eyes, then revealing an adjustable rate that rears up like a Loch Ness monster from serene waters and devours the homeowner whole.

In this context, it's easy to regard all adjustable-rate mortgages as bad news. But the facts are far more complex.

Sure, many people got adjustable-rate mortgages they didn't understand and ultimately couldn't afford. And now that the 30-year fixed rates have dropped to 5.48 percent, their lowest level in four years, and one-year ARM starter rates are at 4.99 percent, the differential is only about a half a percent. So it's not the most attractive time to shop for an adjustable-rate mortgage.

The Inflation Update

Stephen G. Cecchetti:

Last month I wrote that the inflation numbers were scary. (See the November 2007 update.) Looking at this month's numbers, things look less ominous, but only a little bit. Headline inflation as measured by the all-items Consumer Price Index (CPI) rose 3.4 percent at an annual rate (a.r.) for the month. We now know that prices rose 4.1 percent from the beginning to the end of 2007. As Jim Grant wryly notes in the January 11 edition of his always trenchant and unfailingly humorous biweekly Interest Rate observer, when inflation hit equivalent levels in mid-1971, this provoked a national economic emergency that was met with the imposition of the infamous Nixon wage price controls. I hope that we have learned enough about economic policy not to do that again. But then, politicians will be politicians and this is an election year.

Returning to the subject of my updates, trend inflation measures are slightly lower than last month, but remain high. The traditional core CPI that excludes food and energy rose 2.9 percent (a.r.) in December, well above its average of 2.4 percent for the year. The median CPI computed by the Federal Reserve Bank of Cleveland registered a similarly elevated 3.2 percent (a.r.) reading this month, and is up 2.9 percent since December 2006. Looking at the six-month changes in the median and the 16 percent trimmed mean, my favorite measures of trend, we see that inflation is now pushing 3 percent.

Feeling Misled on Home Price, Buyers Are Suing Their Agent

David Streitfeld:

Marty Ummel feels she paid too much for her house. So do millions of other people who bought at the peak of the housing boom.

What makes Ms. Ummel different is that she is suing her agent, saying it was all his fault.

Ms. Ummel claims that the agent hid the information that similar homes in the neighborhood were selling for less because he feared she would back out and he would lose his $30,000 commission.

Real estate lawyers and brokers say the case, which goes to trial in North County Superior Court on Monday, is likely to be the first of many in which regretful or resentful buyers seek redress from the agents who found them a home and arranged its purchase.

“When your house appreciates $100,000 in the first six months, you’re not quite as concerned that maybe the valuation was $25,000 or $50,000 off,” said Clifford Horner of the law firm Horner & Singer. “But when your house goes down, you ask: ‘Who might have led me astray here?’ ”

Vikas Bajaj:
Everyone wants to know who is to blame for the losses paining Wall Street and homeowners.

The answer, it seems, is someone else.

A wave of lawsuits is beginning to wash over the troubled mortgage market and the rest of the financial world. Homeowners are suing mortgage lenders. Mortgage lenders are suing Wall Street banks. Wall Street banks are suing loan specialists. And investors are suing everyone.

The legal and regulatory wrangles could dwarf the ones that followed the technology stock bust and the Enron and WorldCom debacles. But the size and complexity of the modern mortgage market will make untangling the latest mess even trickier. Some cases stretch across continents. Others are likely to involve state and federal regulators.

“It will be a multiring circus,” said Joseph A. Grundfest, a professor of law and business and co-director of the Rock Center for Corporate Governance at Stanford. “This particular species of litigation will be manifest in many different types of lawsuits in many different jurisdictions.”

Beijing property curbs hit estate agents

Tom Mitchell:

One of China's largest real estate agencies has closed almost half its 1,800 outlets and shed thousands of employees, blaming its woes in part on government measures to curb the sector.

News of the closures and dismissals at Shenzhen-based Chuanghui Real Estate came as China's central bank announced it would raise banks' reserve requirement by 50 basis points.

From January 25, banks will have to keep 15 per cent of their deposits with the central bank, which has been on a tightening campaign as part of efforts to rein in inflation and an overheated property market. Yesterday's move will be the first rise this year but follows 10 increases in 2007.

Lin Fenghui, Chuanghui's chairman, appealed for calm after the closures sparked chaotic scenes at its offices across southern and eastern China. "We have had some cash flow problems," he said in an interview on Chinese website Sohu.com.

In the interview, Mr Lin admittedChuanghui's problems arose in part from him being "over-optimistic about the business" and said that it had expanded too quickly.

Zhang Min, a Chuanghui spokesman, confirmed that the company had closed 800 outlets since November and shed almost two-thirds of its 20,000 agents, with surviving employees paid only on commission. Chuanghui has also closed 150 of its 200 outlets in Shanghai after aggressive local government measures to cool the property market.

Shiller: New York Housing Market to Crash, Too

Henry Blodget:

Yale economist Robert Shiller, who predicted the 2000 stock market crash and the current real estate crash has news for Manhattan: You're not immune. In a lengthy Observer interview, the professor scoffs at the idea that, while the rest of the country implodes, Manhattan real estate will just keep jumping 10% a year. Shiller likens the city to ancient Rome before the fall and says the crash is only a matter of time. Excerpt below:

You’ve been warning of a national real estate collapse since 2005. Do you feel vindicated?

Mr. Shiller: Well, I don’t like to use the word vindicated, but it is unraveling as more or less I expected.

The sub-prime mortgage scandal hasn’t much affected Manhattan. Are we immune?

Firstly, you’re definitely not immune, OK? Manhattan is a unique place, and that does mean that it has different dynamics, but it’s not immune, I can guarantee you that … If it gets too expensive in New York, people will leave it, no matter what—they can’t afford to live there. And so it’s just not true that New York will keep appreciating independently of everywhere else, I just don’t believe it. Elementary economics say people will always substitute away when the price gets too high, and so they’re doing that.

TV-to-Online Ad Shift Coming Soon

Michael Learmont:

We've yet to see evidence that TV viewers are abandoning the tube for the Web. But advertisers are getting ready to do so: Not because they don't like TV, but because strike-weakened ratings mean they need to find other ways to reach their audience. Andrea Kerr Redniss, head of digital buying and planning for Optimedia US, a unit of Publicis Groupe whose clients include T-Mobile and Sanofi Adventis, explains the upcoming shift.

Silicon Alley Insider: We've heard that ad dollars are going to leave TV because of the strike. When will that happen and where will they go?

Redniss: In some cases you are starting to see it now. TV's overall unique audience is down and ratings are down. Many of our clients are looking at the middle of February and knowing they are going to be significantly behind in terms of delivering [ad impressions]. We are looking to make that up in digital. If we can get the impressions on television, we want to stay there, but we are at a point where we are going to have to make some calls, take some dollars back and reallocate them.

Credit Squeeze: The Press Meets the Wrench

Suddent Debt:

The NY Times today has an excellent article that starts: Ben Bernanke, meet Gary Crittenden. While you're easing credit, he is tightening it." In two brief sentences the writer (Floyd Norris) speaks volumes: Gary Crittenden is Citigroup's CFO, who just told analysts the largest bank in the US is reducing consumer lending and raising interest rates. Asked whether credit card lending was an area where Citi might want to “pull back or increase pricing,” he responded, “All of the above.” Mortgage lending is also being cut.

That's what a credit crunch looks like, in the ground: lenders working to repair damaged balance sheets end up throwing monkey wrenches into the Fed's "printing press". And that's also how economies slide to the bottom of a liquidity trap, staring in frustration at a useless ZIRP .

The Dealer Made Me Do It

Steve Finlay:

First off, I’m not excusing auto dealers. Or lenders.

They have a moral and business responsibility to try to stop their customers from doing something stupid, such as buying a vehicle with a sticker price that will stick them with an oppressive debt.

But customers have responsibilities, too. It is their purchase, their money and their car payments. It is up to them, more than anyone else, to know their financial limitations and not cross them.

Yet, so many consumers today buy too much vehicle. Then, when the financial squeeze becomes eye-popping, they look for someone to blame. The dealership and lender make nice targets. Seldom do the debt-ridden blame themselves.

I pondered that while reading a Los Angeles Times article headlined, “New Cars That Are Fully Loaded – With Debt.”

The story tells how some Americans of average means roll over an existing loan on an expensive vehicle in order to get another expensive vehicle. They end up with two loans in one, when they couldn’t afford one.

From the LA Times article:
Americans haven't just been taking out risky mortgages for homes in the last few years; they've also been signing larger automobile loans for significantly longer terms than they used to.

As a result, people are slipping into a perpetual cycle of automobile debt that experts think could lead to a new credit crunch extending from dealerships to driveways and all the way to Wall Street.

How to sell your home fast

Barbara Corcoran:

So, you need to get rid of your house and you need to do it quick. Perhaps you have an adjustable rate loan that is about to skyrocket, or maybe you just got a job in another city. Whatever the reason, don’t panic. This may not seem like the best time to dump your house, but if you follow my advice, it's possible.

Below are the five biggest mistakes struggling homeowners make when selling their home. I’ll also show you some foolproof home-selling tactics that will get you the highest sticker price for your house.

Carolyn Duffy Marsan:

The IT department is dead, and it is a shift to utility computing that will kill this corporate career path. So predicts Nicholas Carr in his new book, The Big Switch: Rewiring the World from Edison to Google.

Carr is best known for a provocative Harvard Business Review article entitled "Does IT Matter?" Published in 2003, the article asserted that IT investments didn't provide companies with strategic advantages because when one company adopted a new technology, its competitors did the same.

The Harvard Business Review article made Carr the sworn enemy of hardware and software vendors including Microsoft, Intel and HP, as well as of CIOs and other IT professionals.

With his new book, Carr is likely to engender even more wrath among CIOs and other IT pros.

"In the long run, the IT department is unlikely to survive, at least not in its familiar form," Carr writes. "It will have little left to do once the bulk of business computing shifts out of private data centers and into the cloud. Business units and even individual employees will be able to control the processing of information directly, without the need for legions of technical people."

Top Internet Themes for 1H'08

Merrill Lynch 180K PDF:

We have identified our six top Internet themes/events for 1H’08 that could create trading opportunities in the group. Intensifying 3rd party seller competition (negative) As the industry giant ($57bn in TTM GMV) eBay’s anticipated listing fee changes could impact the 3rd party market. We think Amazon ($5bn in TTM GMV) might incorporate some of this uncertainty (and consumer uncertainty), into its ’08 outlook, potentially creating a buying opportunity as we expect little actual impact.

Eight business technology trends to watch

James M. Manyika, Roger P. Roberts, and Kara L. Sprague:

Technology alone is rarely the key to unlocking economic value: companies create real wealth when they combine technology with new ways of doing business. Through our work and research, we have identified eight technology-enabled trends that will help shape businesses and the economy in coming years. These trends fall within three broad areas of business activity: managing relationships, managing capital and assets, and leveraging information in new ways.

Managing relationships

1. Distributing cocreation
The Internet and related technologies give companies radical new ways to harvest the talents of innovators working outside corporate boundaries. Today, in the high-technology, consumer product, and automotive sectors, among others, companies routinely involve customers, suppliers, small specialist businesses, and independent contractors in the creation of new products. Outsiders offer insights that help shape product development, but companies typically control the innovation process. Technology now allows companies to delegate substantial control to outsiders—cocreation—in essence by outsourcing innovation to business partners that work together in networks. By distributing innovation through the value chain, companies may reduce their costs and usher new products to market faster by eliminating the bottlenecks that come with total control.

Information goods such as software and editorial content are ripe for this kind of decentralized innovation; the Linux operating system, for example, was developed over the Internet by a network of specialists. But companies can also create physical goods in this way. Loncin, a leading Chinese motorcycle manufacturer, sets broad specifications for products and then lets its suppliers work with one another to design the components, make sure everything fits together, and reduce costs. In the past, Loncin didn’t make extensive use of information technology to manage the supplier community—an approach reflecting business realities in China and in this specific industrial market. But recent advances in open-standards-based computing (for example, computer-aided-design programs that work well with other kinds of software) are making it easier to cocreate physical goods for more complex value chains in competitive markets.

If this approach to innovation becomes broadly accepted, the impact on companies and industries could be substantial. We estimate, for instance, that in the US economy alone roughly 12 percent of all labor activity could be transformed by more distributed and networked forms of innovation—from reducing the amount of legal and administrative activity that intellectual property involves to restructuring or eliminating some traditional R&D work.

Real Estate: The best - and the worst - of 2007


It was a brutal year for housing - but not all markets are ailing.

Renting vs. Owning

Greg Ip:

U.S. house prices “likely would have to fall considerably” to return to a normal relationship with rents, says a study by one former and two current Federal Reserve economists, according to an article in Thursday’s Wall Street Journal.

The study, which doesn’t necessarily reflect the views of Fed policy makers, suggests prices would have to fall 15% over five years, assuming rents rose 4% a year. House prices would have to fall further if the adjustment took place more quickly.

The U.S. study is by Morris Davis, an economist in the department of real estate and urban-land economics at the University of Wisconsin-Madison and until 2006 a staff economist at the Fed; and Andreas Lehnert and Robert F. Martin, staff economists at the Fed. It can be accessed at Mr. Davis’ web site here.

The study converts rents and house prices into a dividend-yield equivalent to make them comparable to stocks and bonds. But as with stocks, the yield can be inverted to generate a price-earnings ratio. At the end of the third quarter of 2007 that ratio stood at 28, or 47% above the 1960-95 average of 19. That ratio would thus have to fall 32% to restore equilibrium. That doesn’t mean house prices have to fall 32%; any combination of declining prices and rising rents that produces a ratio of 19 would do it, much as a combination of falling stock prices and rising profits can correct an overvalued stock market.

Richard Green, professor of real estate, finance and economics at the George Washington University, reviewed the Morris paper on his blog and argues that land-use regulation “is surely more binding now than it was 20 years ago, meaning higher expected long-term growth rates in prices may not be unreasonable.” He also says the quality of homes may have improved in ways not fully captured by the decennial housing census, in particular through increased square footage. “That said, the paper is well worth reading –and should leave us a little more frightened than we were before.”

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