The Father of Waters

While Meade and Lee clashed at Gettysburg, Grant was tightening his noose around Vicksburg, the Mississippi River fortress city.  Confederate General Pemberton and 30,000 rebels had been under siege for months.  To escape Union artillery, residents had moved out of the city and into burrows and caves dug into hillsides.  Visitors said some looked not much different than your living room, except in a big gopher hole.

Situated high above a bend in the Mississippi, and protected by marshes, Vicksburg was the last major Confederate stronghold on the river.  By holding it, and the threat of its huge guns aimed at Union ships, the Confederacy prevented the Union from controlling the river.  New Orleans had been in Union hands since early in the war, and upriver the forts had been subdued by Grant in early 1862.  Just above New Orleans, Port Hudson continued to harass and damage Union gunboats.

But as June ended, Vicksburg's fate looked inevitable.  There was no way to break out, ammunition was low, food was scarce, and Union troops kept moving closer with each passing week.  On July 4, one day after Lee's defeat at Gettysburg, the Vicksburg garrison and city surrendered to Grant.  A fine Independence Day gift to President Lincoln.

Five days later, hearing that Vicksburg had surrendered, Port Hudson's commander Gen. Gardner surrendered too.  From this date to the end of the war, the Union controlled the Mississippi for its entire course.  The Confederacy was split, isolating Texas, Arkansas and Louisiana from the other 8 rebel states. 

Lincoln's announcement of Union success was characteristically biblical in tone: "The father of waters once again flows unvexed to the sea."  (compare that eloquence to our politico crowd of today)
Grant would next move northeast to help the Union recover from the terrible loss at Chickamauga, and lead a Union victory at Chattanooga in the fall.  As 1863 ended, the war in the west was over, and Lincoln could concentrate his efforts on destroying the Army of Northern Virginia and Robert E. Lee.

Real Estate Recovery

For the first time since the real estate collapse, we have seen several indicators move up at the same time.  The most persuasive generally are the new building permits and the Case/Shiller index showing 19 of 20 markets moving up.  Mr. Shiller, who famously warned of a real estate bubble in 2004, was interviewed yesterday about his views on the index results.  He was notably cautious and said if the numbers continue to move up like this he will be optimistic.

We should respect his views and the authority with which he wields it (I know it's hard for you Harvard men and women to defer to an Eli from New Haven).  We have many indices to consult on home values, including FHFA tracking of 379 real estate markets.  In our business, we don't have the luxury of relying on national or regional trends.  We're focused on local influences, and fortunately there are tools to help there. 

Other factors constrain us - or at least add complexity.  For example, Millenials (those born after 1982) prefer renting.  The rental market, even for single family homes, is hot with prices rising and supply short in most places.  We have to factor rental market influences both as a preferred lifestyle alternative, and on how they affect home sales.  Some have told me they wish appraisers had paid more attention to the rental v. home price gap in markets like Miami prior to 2008, and that we should take a lesson from that experience. 

We also have to keep in mind that millions of foreclosures, delayed due to several influences, are once again entering the pipeline.  Since about a third of these are suburban homes, be on the lookout for activity and concentrations in markets your clients move people into and out of.  There is good data on this activity from several government websites, and from RealtyTrac.

All in all, despite the fits and starts of past predictions that recovery was underway, my view is that we are in a slow climb nearly everywhere.  Except for local influences that might bring a market down (a plant closing, base closing, storm impact), we should see continuing modest improvement.  As I wrote in early 2009, the Fed will continue to keep rates low and mortgage rates will be at or near historic lows for a long time to come. 

I'd like to hear your views.

REO Rental Initiative Update

Now that the Federal Reserve has given a go-ahead to the REO to Rental initiative, investors and lenders may proceed with more confidence.  FHFA, Fannie and Freddie's regulator, has responded to questions about the program and the first pilot of 2500 properties in several states.  They have named 3 main goals of the program: 

- Gauge investor appetite for bunches of homes
- Will the initiative persuade investors and service providers to improve market conditions for real estate
- Can the model be replicated and become a "standard" program for REO sales

What does this have to do with relocation?  Not sure, but bulk sales of properties have to influence local markets, and valuations must account for them.  National and regional statistics on home values have to take into account these sales.  And, these homes may be an attractive alternative to a relocating family that needs space and is stuck with an underwater departure home.

Younger folks are renting anyway in bigger numbers - rising rents and higher occupancy practically everywhere.  Keep an eye on the FHFA program and make adjustments as needed.  You may find the markets used for the 2500 home pilot at fhfa.gov.

Homes for Rent from your friendly Fannie Mae

As many of you know, Fannie Mae and Freddie Mac have embarked on a national initiative to turn the foreclosed homes and condos they own into rental properties.  The idea is to attract investors to purchase or merely rehab the homes and offer them for rent in this robust rental market.  The two entities own about 240,000 homes!

The RFI issued in September generated 4,000 responses, and FHFA (Fannie and Freddie regulator) recently announced a pilot program.  The investor will purchase homes, rehab them and offer them as rentals in certain locales.  If the pilot is successful, most observers predict the program will be rolled out across the nation.  The Federal Reserve just last week chimed in and blessed the idea as acceptable management of REOs (bank-owned homes).

Since rental occupancy is high and rents are increasing, the entry of the Fan and Fred homes should help the supply/demand situation.  A rehabbed, rented home is a better influence on a neighborhood or local market than an empty, perhaps boarded-up home.  The taxpayer investment in Fan and Fred ($150 billion) may perhaps realize a payoff (of sorts) if the intiative works - especially since younger folks seem more inclined to rent, less interested in buying.  And, if home value appreciation continues to be slow, at least cash flow from a tenant creates value for the investor, for Fan & Fred and, presumably, for lenders who take a similar approach with their own REO homes.

There are about 600,000 such homes on lenders' balance sheets, and another 700,000 currently in foreclosure.  We're not out of the woods yet, but maybe this effort will ease some of the gravity weighing on the housing market.

Chancellorsville

Now that the slaves were considered free in all of the Confederate states, the war for many became a crusade.  Any slave who escaped to the Union lines was declared a free person; often they immediately volunteered to fight for the Union.  However it took a while before blacks would wear the Union uniform.  The film Glory depicts the brief history of the 54th Massachusetts regiment, the first all black unit in the Union.

Lincoln once again changed commanders after Ambrose Burnside disappointed his superiors.  Fighting Joe Hooker, an aggressive corps commander at Antietam, was promoted to command the Army of the Potomac.  His orders were to destroy Lee's Army of Northern Virginia, and was given vast resources to complete his task. He devised a very sound plan to trap and destroy Lee. 

He moved the army into Virginia and crossed the Rappahannock River in April with a force fully 30,000 men larger than Lee's army.  In early May he began execution of his plan to flank Lee near Chancellorsville and destroy the Confederate force once and for all.  But Lee, taking great risks, divided his smaller army not once, but twice and outmaneuvered, surprised Hooker's flanking force.  Lee's army, led by the audacious, pious General Stonewall Jackson, drove the Union force back in disarray.  Hooker was stunned when a shell slammed into a porch he was standing on and took him out of the battle.  But he was completely unnerved by that time and later apologized to Lincoln for his failure.

Chancellorsville is considered Lee's masterpiece.  His tactical brilliance and exceptional use of resources are still studied at military academies today.  Prussian observers were so impressed with Lee's management of the army that they incorporated much of what they learned in their 1870-1 victory over France.  Lee's stunning success further added to his gathering legend, and added to Union morale problems. 

But Lee suffered one loss that would have profound impact throughout the rest of the war.  On the evening of the second day of the battle, Stonewall Jackson was shot by friendly fire as he inspected the lines.  He died a few days later, and his last words were reported as "let us cross over the river, and rest under the shade of the trees."

Nevertheless, Lee decided the time was right to invade the North again. He prepared to strike north and west of Washington toward the important railhead of Harrisburg PA.  The stage was set for Gettysburg, the greatest battle ever fought on the North American continent.

Some Good News

The recent report by the NAHB and First American shows that 29 metro areas have been added to the list of improving real estate markets.  The list now totals 98 that have shown appreciable improvement in the past 6 months.  The index is based on local employment and housing price, housing growth trends. 

Among the new additions are Miami, Tampa, Boston, Detroit, Omaha, Salt Lake City and Kansas City.  Many mid-sized cities such as Syracuse NY and Youngstown OH have also joined the list for the first time. 

A few markets dropped off the list, once more demonstrating that this recovery is likely to be uneven.  San Jose, DC, New Orleans and Jackson MS were in retreat, at least for the moment.  In the case of DC, the change is likely due mostly to the unusually robust market over the past year that may not be sustainable for at least a time. 

Let me know if you want to learn how to access and use this information.

Housing Recovery Comments

There is a lot of discussion about reducing principal balances on underwater mortgages.  The head of the FHFA recently estimated that even a small reduction on Fan and Fred loans could cast $100 Billion, which would have to be funded by taxpayers.  That is not a very palatable option when over $150 billion has already been sunk into Fan & Fred.

Bailouts of homeowners (e.g, reducing their principal balance)  are unpopular for other reasons. First, one third of Americans rent. Why should they help bailout homeowners that are underwater? Second, 30+% of homeowners don't have a mortgage. Why should they help bailout  heavily indebted homeowners, when many over-extended unwisely? Third, The overwhleming majority (probably 85%) of homeowners with a mortgage are current in payments. Why should they help bailout other homeowners?

There would have to be a load of political air cover for these sorts of actions.  Opposition to homeowner bailouts was, after all, one of the early motivating forces in the Tea Party movement, along with TARP.  And, we already have a huge deficit and debt to manage: adding to it is problematic even in a non-election year.

Maybe people should look at their houses as homes, not assets, and just stay put until we settle into normalcy. 

Emancipation

After Antietam, Lincoln proceeded with his plan to proclaim the Emancipation of three million slaves.  It was a bold act that some of his closest advisers, and members of his cabinet, opposed.  But he was determined to proceed and knew that his act would change the nature of the war.  Instead of a war to preserve the Union, the war would now be seen as a crusade to end the national disgrace of slavery.

Of course, the end of slavery had only practical effect where Union forces were in control, and this was not the case in most of the 750,000 square mile Confederacy.  The plantation economy was already severely strained with cotton markets cut off by military blockade.  And, the loss of slave labor would change the economics of cotton, rice and tobacco production.

But, there was still a war to win, and Lincoln was determined to press aggressively to destroy Robert E. Lee's Army of Northern Virginia.  Lincoln sacked McClellan after Antietam when the general refused to follow up on his repulse of Lee's invasion.  Ambrose Burnside (he of the grandiose sideburns) replaced McClellan and in December marched south to the environs of Fredericksburg VA, on the Rappahannok River only 60 miles from the Confederate capitol at Richmond.

Lee was entrenched across the river in a nearly unassailable position.  (It seemed at times that Union commanders forgot that Lee was a superb military engineer).  Burnside hurled his army of 100,000 against Lee and was thrown back with heavy losses.  The Army of the Potomac fell back, having been routed by the rebels, and retreated toward Washington. 

Many thought this terrible defeat would cancel out the effect of Antietam and cause Lincoln to reconsider his decision.  But on January 1, 1863 Lincoln signed and issued the Proclamation.  It immediately freed 50,000 slaves and would apply as Union armies advanced.  It did not make slavery illegal - that would be left to the passage of the 13th Amendment to the Constitution in 1865.

Longer shadows

Freddie and Fannie just announced payment relief for unemployed borrowers.  It appears these folks can have an up to 12 month moratorium on payments.  The effect for the real estate market is to make the already persistent inventory shadow even longer.

Recent data on home values is mixed as usual.  Only local data is worth taking into account in business decisions - the national numbers are just guesses, and the market will be troubled in most places for years.  So plan accordingly.  Don't react to these frequent spots of good news in a national context. 

Rental prices are increasing as the young folks who used to buy in the 25-35 years are renting, and commercial construction of rental units is improving.

Altos, FHFA, Case/Shiller, AVMs, are still good sources for local trends but treat each home as a risk management assignment and enlist the real estate pros with realistic outlooks and demonstrable success valuing and selling home in our long winter of discontent.

When a complex assignment comes in, tag-team the deal; put your best people on it.  These times are not for those short on experience or for the faint of heart.