Housing bust moves to the luxury segment

Due largely to the chaos on Wall Street, sales of luxury homes not just in Manhattan but around the country are finally starting to tank after showing some past resiliency. From a Wall Street Journal article:

For months, as housing values were falling for midsize ranch houses in Stockton, Calif., and Las Vegas high-rises, sales of high-end properties in financial centers like London, New York and San Francisco continued to percolate along.

But that was before last week, when turmoil in the credit markets brought down Lehman Brothers Holdings and imperiled thousands of high-paying jobs. While those rare properties priced at $20 million or more are still holding up, there are signs that the crisis is exacerbating a downturn that was already plaguing properties in the $2 million to $10 million range, a market often sought by Wall Street workers...

So far, the strongest part of the high-end market are the few "trophy" properties -- penthouses and other apartments with one-of-a-kind features that rarely come up for sale. "There are always people with money. Somebody's always on the other side of these crises," says David Ogilvy, a broker in Greenwich, Conn., who this year sold a $30 million house -- the second-most-expensive house ever sold in the area...

Just a few weeks ago, San Francisco saw one of its priciest listings ever, a 20,000-square-foot penthouse topping the St. Regis Residences. Encompassing two floors and featuring four terraces as well as a two-story waterfall, the still-unfinished unit has an asking price of $70 million.

So far, places like New York and San Francisco are still faring better than many other areas of the U.S., particularly areas of Southern California and Florida. "I think everyone is taking a hit," says Suzanne Perkins of Sotheby's in Santa Barbara, Calif., where prices have fallen 20% in the last year. "I still have buyers in the $20 million range, but they're looking for deals and they're looking for sellers who will negotiate."

In the run-up to the real-estate boom, brokers sometimes slapped headline-grabbing asking prices on highly desirable homes just to drum up interest and create buzz. Now, many of the tricks brokers are using to sell properties at the high-end are the same ones used with their more modest counterparts. The first and foremost: persuading the seller to list the home at an attractive price...

Amid the financial crisis, agents say many buyers are also more reluctant to buy splashy properties for reasons other than the cost. "I don't think anybody is going to be bidding for at least the next several weeks," says Kirk Henckels of Stribling Private Brokerage. "You'd feel pretty silly walking into a cocktail party today and saying you bought an apartment today."

Columnist Lou Barnes on the proposed fed bailout

So what does the ever-opinionated, pull-no-punches Lou Barnes have to say about the proposed fed bailout to save Wall & Main Street? From his latest column:

Mark this day: the worst of this crisis has passed. However, not yet the halfway point in time: we are thirteen months into this wreck, and you’ll sure as hell feel credit-market distress thirteen months from now. The greatest risk has passed.
Until yesterday the nation labored under the illusion that this crisis was a financial matter -- banks and markets thrashing around, remote from Main Street, something that would either solve itself or be calmed by usual means. In reality, of course, the financial matter was not remote and had been hopelessly lost by August, 2007.
Now this crisis is officially public property, in the political sphere, put there by final disaster on Wednesday, formally acknowledged today by the Fed, the Treasury, the President, both houses of Congress, both parties, and both Presidential candidates...

The authorities, including White House and Congress, have obviously been working on today’s fix for months. Fed examiners have been inside securities firms since June for the first time ever, “lifting the kimono” to discover the Street’s secret losses. Thus we have an initial funding amount; not enough, but most to be recovered one day.
The authorities could not go public with planning until the market damage was so severe that a majority of both parties in Congress was willing to go along. The most difficult part of the journey ahead: helping the American people to understand, and to stay together despite contrary charlatans by the thousand.
Top honor: to Perfesser Bernanke. Quiet, no grandstand, the technician with the life-study knowledge of 1930 and the determination to prevent 1932.
An Honorable Discharge, no medal, to Hank Paulson. You hire an investment banker to look around corners for you. Relentlessly surprised, annoyed at the waste of his valuable time, Hank has only recently discovered that there are corners.
Medal of Honor: Tim Geithner, NY Fed Prez. If we are very, very lucky, this extraordinary man will stay in public service for a while longer.
The Boobs... oh, my. Start with the CEOs and boards of the failed firms. Name them, publicly humiliate them, and then shun them. Forbid them ever again to participate in a public company. That’s authentic “moral hazard.”

If only.

More details on a Fed bailout

The story on the federal bailout of the ailing financial services sector continues to unfold. From a story in the Wall Street Journal:

Treasury Secretary Henry Paulson announced plans Friday to quickly set up a "bold" government program to take over troubled mortgage assets from financial institutions, along with other efforts to step up the purchase of mortgage-backed securities. "The federal government must implement a program to remove these illiquid assets that are weighing down our financial institutions and threatening our economy," Mr. Paulson said in prepared remarks for a press conference. (Read the full remarks)

President George W. Bush warned that a "significant" amount of taxpayer funds will be put at risk with the government's plan to bolster shaky markets, but said intervention is necessary to keep the financial system from grinding to a halt. "This a pivotal moment for America's economy," Mr. Bush said Friday. "In our nation's history, there have been moments that require us to come together across party lines to address major challenges. This is such a moment."...

More immediately, Fannie Mae and Freddie Mac -- which were taken over by the government earlier this month -- will increase their purchases of mortgage-backed debt, he said. To facilitate that effort, Treasury will also expand the MBS purchase program it announced earlier this month.

The details weren't released for a mechanism that would take bad assets off the balance sheets of financial companies, a device that echoes similar moves taken in past financial crises. The size of the entity could reach hundreds of billions of dollars, Mr. Paulson said at a press conference.

Earlier, the Treasury announced a massive program Friday to shore up the nation's money-market mutual-fund sector, responding to concerns that the global financial crisis is starting to affect those historically safe assets. The move is designed to stem an outflow of funds as consumers start to worry about even the safest of investments, a sign of how the crisis is spreading to Main Street. There is $3.4 trillion in money-market funds outstanding.

Under the Treasury's program, the government will insure the holdings of any eligible publicly offered money-market fund. The funds must pay a fee to participate in the program...

Worried that money market mutual funds weren't liquid enough to handle a building wave of redemptions from nervous investors, the Fed said it would use its discount window to lend up to $230 billion to the industry -- via commercial banks -- against illiquid asset backed commercial paper which is widely held by money market funds...

The central bank is taking on a potentially big risk -- if these assets fall in value or default, it is potentially on the hook, because the loans, to be made through its discount window via banks, are non-recourse loans. But officials think the assets are safe and healthy ones, and see the move as a temporary measure to provide liquidity to the market. It took the step under a clause in the Federal Reserve act that allows it to lend to any firm under "unusual and exigent" circumstances.

The Fed took a second step this morning, saying it would buy short-term debt issued by Fannie Mae, Freddie Mac and Federal Home Loan Banks through primary dealers. These instruments are called discount notes, and the Fed said it would buy up to $69 billion worth of these securities to firm up this market. According to Fed staff, agency discount notes amount to about 5% of the assets of the money market mutual fund industry, so the step was another effort to provide liquidity to the market...

The administration had been taking a patchwork approach to the financial crisis, putting out fires as they ignited. The new moves represent an effort to take a more systematic approach, after a spiral of bad debts, credit downgrades and tumbling stocks brought down venerable names from investment bank Lehman Brothers Holdings Inc. to insurance giant American International Group Inc. Banks have grown unwilling to lend to one another, a sign of extreme stress, because financial markets work only when institutions have faith in each other's ability to meet their obligations...

Exactly how such an entity might be structured isn't yet clear. The possible plan isn't expected to mirror the Resolution Trust Corp., which was used from 1989 to 1995 during the savings and loan crisis to hold and sell off the assets of failed banks. Rather, a new entity might purchase assets at a steep discount from solvent financial institutions and eventually sell them back into the market.

The program may look more like the Reconstruction Finance Corporation, a Depression-era relief program formed in 1932 by President Hoover that tried to inject liquidity into the market by giving loans to banks and other businesses.

According to a top congressional aide, the Treasury department wants authority to either control the program or have it be a separate division of the government.