Masters in Business: CEO Jonathan J. Miller (Audio)

the first thing we did was a conference. We were on a panel with the old people, Bob Schiller and Dottie Herman, who I believe was the head of Prudential real Estate at the time, and it was oh seven or oh eight, and you know, she was the only one who was remotely bullish on the panel. It was Miller, Schiller and me, and it was like bear bearer and barrassed. It was was pretty amusing. We've been friendly for for

quite a while. UM. I find him to be really a unique set of insights into what's going on in the real estate market. What his firm does is gathered data from around the country, very often in areas where there are no other form of data collection going on. Specific data far beyond what we see from the National Association of Realtors or what what the commerce department puts out about new houses, and he crunches the numbers and

comes up with some really really interesting perspectives. If you go to a real estate agency somewhere and they give you a tear sheet that shows you lots and lots of information about recent sales and length of time on the market and all that sort of stuff. His firm is the firm that actually collects that data, analyzes it, interprets it, and puts it out. He's got deals with

a number of different companies. Really a fascinating approach to UH, taking data and repurposing it in a way that's useful for consumers. I find him to be very, very insightful about all things real estate. He also has a column now he puts something out once or twice a week on Bloomberg View in addition to what he does for his UH daily blog at Miller Matrix. Just all around

nice guy and tremendously knowledgeable and insightful. The most fascinating thing UH, and I hope this came across in the interview, is he often gets tagged as an expert in divorce settlements and litigation and all sorts of crazy stuff, and he's I am not exaggerating when I say he's pretty much been in every single penthouse in New York City. But he's the go to guy to a praise these fifty and a hundred million dollar properties. Not a lot

of people with a deep expert teasing that. And he could tell stories and actually has, and we touch upon it about some of these apartments that are just un believable, just unbleeping believable. It's it's fascinating. And he tells um all sorts of fascinating tales about where he's been, what he's seen, how stuff gets priced. Is there really a difference between forty five and forty eight million dollars? Turns out an extra bathroom here and a little bigger window

there worth three million dollars. It's really quite interesting. If you are all interested in real estate, and I am, and I assume many of you are, I suspect you'll find this conversation to be engrossing. Without any further ado, my conversation with Jonathan Miller. This is Masters in Business with Barry Ridholts on Bloomberg Radio Today. I'm actually thrilled

to have an old friend in the studio. You may not have heard him directly, but you've probably read a quote of his in the New York Times or anywhere else somebody is talking about real estate. Today, I have Jonathan Miller, founder and CEO of Miller Samuel Welcome to the show. Great to be here. And I have to say, Barry, you have a great voice for radio. I have a face for radio, is what you're trying to say. So for those of you who really don't know who Jonathan is,

he's fairly legendary in the world of real estate. I think that's a fair statement. Right, well, at least in my own mind. You're on legend in his own mind if you're in New York real estate or a few So let me back up and give your CV a little bit. You're so you started out in this industry as a agent and then an appraiser the mid eighties, all right, and and what kind of set you apart? I want to talk about three things so people know who you are. First, you were one of the first

guys in the real estate world. And this sounds insane because you would thought this was going on for decades. Who said, Hey, all these transactions are generating a lot of data. Why don't we take this data and take a closer look at it and see if we can discern any sort of meaning from how long a home is on the market, for what it sells relative to its asking price, etcetera, etcetera, etcetera. No one was really

doing this before you came along, not really. Most of what was being done was marketing brochure not or very complicated in the sense that it was sort of academia and it was hard for the consumer to digest. Uh. As journalists say the trend. Three data points make a trend, and then I like to say, the trend is your friend until it ends right depend at the end. I like that that's even better. So that that's my contribution

to Uh. You know, it's true if it rhymes right right, absolutely so the second so, so, assembling the data was the first thing you did, and then miraculously you were an objective commentator observer. You know, I used to mock relentlessly the National Association of David Lay, the Chief Economists, right, is painful, just just everything out of their mouths were

just horrific marketing spin. Well, you have this dilemma. So in real estate transaction, to have this, you have this if you look at the broad view, you've got it. One end of the spectrum. You've got the real estate community. It's always a good time to buy was literally it was literally an ad they put out in the midst of the housing collapse. It's always a great time to buy or sell a house. What that really means is it's always a great time to generate a commission based transaction.

And ps, my mother was a real estate agent. This was dinner conversation. So I'm not bashing real estate agent as an outsider. This was literally what I grew up with. So when I mock these people, it's from the inside, not the outside, right absolutely. And and then the other

end of the spectrum is the academics. You know, the case Shiller index and and and all the problems of that and what the purpose of it is and uh and we've really position yourself somewhere in the middle, which is essentially in the trenches, providing uh, sort of on the ground observations about the market. And one of the things that I found really fascinating being an appraiser was during the whole big sort of housing boom, run up, credit bubble back, uh starting circus, I started seeing it

in oh three oh four. Uh, no one else was talking about it, and I thought it was really bizarre. It was you were out in left field, and in fact, to emphasize your data slicing skills. So first, the data runs that you put together, Actually it's a feed into Bloomberg. So if you're on a terminal, I don't know what it's called. The Yeah, we have a Manhattan Luxury price index. There's three different meat metrics that are used. We also have a luxury rental price index. And uh, and I've

also seen your specific regional housing data. Yeah, here's NASA County, here's parts of Flower right. We cover eighteen different markets, so we cover we cover a whole bunch of markets in New York City, Metro for markets in South Florida, and then I'm now starting to develop research in Los Angeles. So it's amazing because I'd love to see the San Francisco think that would be Uh. I was approached about that,

but but nothing has come to it yet. But what's amazing about it is the concepts of supply and demand they don't change all that much. I mean the numbers change, how many zeros are After it, I'm amazed what you get in l A for a couple of million dollars versus what you get in New Ye. Right, Well, you always see you always see the celebrity, you know, a

Johnny Depp or whoever. It's like, Oh, they sold their palatial state for three and a half million dollars and I'm thinking, well, that's a large two bedroom in Manhattan. That is not a prestige play. Speaking of which I said, there are three things. The third thing, which is we'll get to You've been in pretty much every penthouse in Manhattan. Is that much of an overstatement? I have one of the most of the greatest experiences seeing these insane penthouses

the design. However, what I don't usually get to see is them in the evening at night. It's always during the day, so I don't get to see them all lights on the city, which is you know, half of the spectacular aspect of review. But we see and you know that in itself is a whole different submarket of the housing market, uh, which is held up really well, which has held up really well because the money is almost an afterthought. It's irrelevant. I'm gonna buy this because

I can, and I don't know. Well, the whole uh, just a digress to the whole phenomenon of this high end aspect is it's a global phenomenon. It's just unique. It's London, it's Hong Kong, it's Shanghai, it's it's to any major city. It's it's booming because there's a boatload of money. We're talking real estate with Jonathan Miller, CEO and founder of Miller Samuel. Let's hold off on discussing the penthouses just for a few seconds. I want to

talk for a moment. I want to pick your brains for a moment about what it is that drives most of real estate. We put together we were talking about this, We're putting together a list, and it was everything from demographics and household formation to interest rate wages. But really all this comes back down to credit, doesn't it. It really doesn't. And that's actually one of the key components. If you look at the bulk of the housing market

right now, it's really defined by access to credit. If you look at you know, I always like to say housing is local and credit is national, and and so literally you know, post Lehman, uh credit crunch. Uh. Every market started behaving the same way. We had things like rents rising because people were tipped back into the rental

market because they couldn't qualify. We also had inventory begin to fall to record lows nearly universally across all housing markets because a homeowner with lower negative equity, which is roughly about all homeowners with a mortgage UH, don't qualify for that next purchase, either a trade up, a ladder, mover, or downsize. So what do they do. They sit and they don't. They don't ender the market organically the way

that normally would bring their house to the market. And then people that don't have a credit condition are saying, well, I'm not I can't find the house I want, so I'm not gonna list my house, and you sort of double down on the problem. And only the only way out of that are is twofold one is housing prices rise, which naturally occurs because not necessarily own demand correct and and and or if strong fundamentals either. It literally is,

if you can strain the supply, prices rise. And that's been my biggest criticism of the pronouncement of the US housing recovery as early as you know two years ago, because the fundamentals in terms, you know, incomes generally stagnant in the US, unemployment even though the numbers on the top level look good, it's still not good. And credit is about is tight, at least for residential mortgage, as it was in the days following Lehman. So so, I never thought in my career that I would be saying

that tight lending conditions are making housing prices rise. But they are, but they really it's it's a combination of tight lending conditions following a boom and bust in real estate, because you end up with a lot of people who don't have any look, under normal circumstances, you're in the house for seven years. Even if you have tight credit conditions,

you should have some equity in the house. But if you bought at the peak before at correction, if you put little or no money down, there is no equity there, and that locks you into that house unless you're just gonna walk away. And if you do that, good luck qualifying for right. And I think that you know, the narrative about housing right now is this idea that you know, is the housing recovery losing steam? You know, are we seeing you know, projections for housing price increases are going

to be less this year than they were last year. Well, last year was based on artificial conditions. I must see two thousand thirteen from the context of the US housing market as as really a an anomaly. In other words, in two thousand ten, eleven twelve, we have this pent up demand the election cycle to build up to the

fiscal cliff. The world apparently didn't end after the fiscal cliff expired, and there was all of a sudden a concern about rising interest rates because the economy was going to get better, and you had all the fence sitters moving out of them out of their tax change as well. And that if the tax change was certainly well on the high end of the market, especially and you had people rush in, and you still have the low inventory issue, prices rise. Now we're you know, we're doing these year

over year comparisons and activity or prices. If they're not above last year, it's somehow a failure or a sign of weakness. When I contend it's the wrong comparison to make, it absolutely is. We're discussing real estate in America with Jonathan Miller. So now let's talk a little bit about the high end. We understand what's constraining everybody's houses. The

normal I don't even know what to call of. The median house is about two D seven thousands, right, it's right exactly somewhere on that and you know, obviously it's really regional. Two seven thousand in the New York metro area doesn't get you a lot. One of the people, am I get to a closet in a hallway that you're going to buy from the co op to combine with your apartment. One of the people in my office

transferred here from Syracuse. They sold a house for a hundred and seven thousand NOWS and I'm like, what is I don't understand. You look at a picture of it. It looks like a regular little you know, a starter house, a ranch. But it would go for three in change here. So when we talk about normal housing, what, what is the story? What should we expect in the near future from this housing market? Has the death of housing been exaggerated? Yes? Absolutely.

I think all it is is a reset from the euphoria that we had last year, which was based on nothing. I like to say it really was based on this horrible skew created by by tight credit that we're already seeing a spread or a widening in general between the high higher end of the market and the balance of the market in the context of the credit conversation we're just having because it's so as you move up in price, there's a higher probability of either more cash paid or

just all cash Outright. You also have the the the preference by foreign or international buyers towards the high end their global investors. Urban markets along the eastern seaboard, on the West coast very similar, Phene, San Francisco, Seattle, Vancouver, Canada, absolutely very similar. And and that's that's a key driver. But other is that we're seeing a disparity between conforming mortgages through the former g s c S versus jumbo

right that that banks like jumbo mortgages. They make money on them, they want to so the business decision, well, slago is what and they like own the jumbo mortgage market right right there, they're they're a huge lion share of the market nationally. But but any lender right now is looking to do jumbo deals because they make a

favorable return on it. And then and and the the the alternative, the the g SC related transactions, which is of the mortgage market is still burdened by in many ways, the credit outlook within that realm is very backward looking. It's looking at the transgressions. The conservative element is from the UH you know, the transgressions that were made several years ago, the Department Justice going after banks for bad

lending practices, all those sorts of things. So it's very backward looking, whereas I think the jumbo finance arena is very much more current looking. Today, we're discussing real estate and housing with Jonathan Miller. Earlier we were talking about the difference regionally. How have these recoveries differed. You know, I know South Florida is different than Arizona, is different than Las Vegas, is different than Southern California, which is

obviously different than On Valley in Northern California. How do these different regions compare and what does that mean for someone, let's say living in New York or Washington, d C. Well, when you look at you look at a lot of the the national housing metrics, and you look at the comparison by city, and you'll see generally what you see

is markets that were hit very hard. Probably the hardest were the markets in the what fd i C calls the Sand States, the Las Vegas of the world, essentially, where there was a tremendous amount of speculation, carpenters and nurses quitting their jobs and becoming real estate speculators, and and so they fell much harder and farther. And you know that what I like, the way I like to describe it is when you go from a dollar to

two dollars, it's a dred percent increase. So the metrics in terms of showing their increase made them look like, Wow, they're really recovering much more quickly than other other markets like New York, for example, that didn't have the speculation that you saw in these markets. So it's really almost in apples and orange comparison. What you're seeing now is

the markets that are seeing rapid rapid price growth. Some of them, like in Las Vegas, the rates are cooling rapidly because they've they've essentially recovered a lot of the almost overcorrection that had occurred in those markets is a lot of low hanging fruit, a lot of low hanging fruit. Whereas markets were the economy is very fundamentally, very strong,

they didn't have a lot of speculation. Uh, you would allude you had talked about it in an earlier segment about you know, someone from upstate New York and how much you got their market, their markets in the country that didn't experience the same boom and bust. So they're not going to rise from the the ashes because it didn't really fall to the ashes. So so I think the rule number one is there is no national housing market, uh, in the in the way that it's presented to us

every month with all the reports. And and and secondly I too, by the way, to be fair to case Shiller, they do release their twenty and forty metro region housing prices and then they jumb them all together. So when you look at the individual index, you could still see and there are a number of people who then take the case Shiller data and slicing dice. In nice Land, you could see. A couple of weeks ago, I ran two

different charts I forgot who I stole them from. One showed the percentage recovery off the lows and how far they still have to go to get to the highs, and they were like Las Vegas was in both they were crazy Wow. We're up off our lows, but we're still But remember the high point that was reached was complete fabrication and consense. It was based on right, it was based on They were building these excerbs in Las Vegas, these big McMansions. That was a two and a half

hour drive from any urban center, any job center. So how are you going to support these homes if it takes you whatever four hours round? Because what was driving the demand was lenders were just looking to lend. That was how they made money. They package up the mortgages and sell them off to the offl of the risk of somebody else. We're not in that world anymore, that's right.

The the shift in credit, and I've written about this over the years, went from the borrower's ability to service the loan to the lenders ability to sell the loan to a securitizer. Once that shifted in the borrower's ability to service, it no longer matter to hey, it was just a matter of time before it collapsed. So so now we talked before briefly about other regions. Texas is an unusual region. I don't think a lot of people realize why Texas avoided the boom and bust. There was

a change in their constitution. I think it was like a century ago where they are not allowed to do cash out. No cash out refinances against their state constitution. So everybody maintaining their falling income, replacing it with helocks and financing their their day to day. Uh. When you run low on money, you just borrow more because how

prices always go up. The other the other quirk in Texas is the idea that the transactions aren't publicly publicly recorded, So so any any studies that are done come out of the realtors, which is really a subset of the public record to begin with, so it's not a full data set. So you could almost argue too that ignorance is bliss, that that the market wasn't fully informed of.

So if I use a Zilo app and show me what's sold nearby in Texas, I'm not going to see the same thing that I see anywhere in ins not necessarily because the information isn't it's a nondisclosure state. So there many non disclosure I don't know offhand. I want to say there's about a dozen. Okay, today I'm speaking with my friend Jonathan Miller of Miller Samuel. He is an expert on real estate appraisal, transactions, home values, etcetera. He has crunches, crunched a lot of data over the

past few decades about what drives housing. And one of the things we really haven't talked about much but I want to discuss is the international component about this. The international buyers coming here to North America buying up real estate, and the booming real estate markets we see in big

cities overseas. So why do we want to start with that, Well, we'll start with the basic driver of it is I'd like to say that global real estate, or specifically luxury real estate, high end real estate in the in in the context of world a worldwide content text is the world's new currency. In other words, you need bitcoin, You just need a really nice apartment for a nice mion

dollar price tag. So what you're seeing is you're seeing across and this has really been a phenomenon that's virtually exploded in the last three to four years, is you have you have a lot of concern UH with wealthy investors in terms of exposure to higher taxation as governments grapple with UH weeken weakening or challenging economic conditions, political

turnout turnover. So you look at Europe for example, uh, tremendous you know pressure, Uh, you know government shortfalls, where do we get the money from, limits on compensation for securities industry, all sorts of things. Uh. And then just on top of that, a higher regulatory overlay for you know,

many of the wealthy that have their own businesses. You start looking around the w world for maybe other places to diversify your your your your net worth, and one of them, it could be pork bellies, but one of them is real estate and and real estate. Ironically, New York is very favorable in the international environment since we're sort of the starting place for a lot of them. What's wrong with the world right now in terms of

credit problems? Um, so cash is king here. Cash is king, and not only that, but it's really I think the terminology here is this global safe haven that what you're looking for is people. I'd like to say that we're building the world's most expensive bank safety deposit boxes where you where you put your valuables in it, like your artwork and whatever else, and then you rarely go back. And there's a lot of that going on here. You've

been in a number of those apartments. Oh absolutely, and and uh, I don't know what mistake I made in my career path, but but I'm not to own one of those at least is that necessarily a mistake. You have a very lovely home in Connecticut, and it's it's certainly not a hundred thousand dollar ranch. It's it's a little bit nicer than that. And so most of us, most of us are not going to be in a

fifty hundred million dollar penthouse. In fact, nine percent of us are not going to be And what you're telling us is even the point of one percent who can be in it, they're not even there. They're not amazing views, aren't they. It really is. And the way you have to look at it. What I find almost humorous about the topic is when you'll see, for example, in London, there have been three transactions over two hundred millions. That's amazing.

In the US, the three highest transactions there was one for millions in the Hampton's, there was another one in Connecticut for a hundred twenty million, and then there was another one in California for around a hundred million. And you throw those all together and it's not even a billion dollars. It doesn't have anything to do with the balance of the market. It is more like a circus side show. It's an anomaly. It has nothing to do.

But but what it what I think the real estate industry sees it as, and you know, perhaps there's some truth to it. It's like, well, if someone's willing to invest ninety million dollars in a condo that they're rarely going to use, that means they're very confident about the New York real estate market and they'll there. You know, it's a good sign for everybody else. Maybe that's true. I can't maybe the million dollars then you don't know what the hell else to do. Well, I think that's

really what it is. And then what you're seeing is you're seeing the other phenomenon you're seeing that's tied into this look of the regions I talked about Europe. You also have China. You have the wealthy Chinese trying to extract their money out. You know, there's a right to versify around the globe. Right Australia is undergoing Chinese investors

right now, Sydney and Vancouver. I've always thought of as life raths for the wealthy Chinese absolutely who are concerned one day they have to hit the eject button and get the hell out of dome. And you have that in uh In South America, the Brazilians have single handedly bailed out the Miami housing market, which was a highly speculative market with ten years of shadow inventory, inventory that was essentially just built and can't be sold, and it's

all been gobbled up. There's really not like a hundred thousand condos. It was a ten year absorption rate. It would take to you know, conservatively to and and it was done in three years. And it was primarily because of Brazilians and Venezuelans. With the wealthy Venezuelans with the regime change, we're looking to get out. And so you see those phenomenons, but they have nothing to do with

any the average American homebuyers. So if someone is looking to pick up a vacation property in Miami, not that I am, but if you were, has that window closed, did you miss the bargain opportunity? Were still seeing a fairly brisk appreciation, right So that I'm sure there's you know, depends every every neighborhood, every market it's a little bit different. What's interesting, and this brings back to the credit discussion.

If you look at Miami, which is a market that I prepare research for, about three quarters of all the distressed condo sales are cash, right, I knew you're going to go that way about that's amazing. Well compare that to what the rest of the country is normally like,

right right, Well, it's about exactly. If you look at the non distress meaning anything that's not a foreclosure or a short sale condo market Miami, the cash buyers in that market account for about there's there's almost no difference there. The variation. It varies every quarter, but the variation is two. It's really not a big difference, which means that it

is a cash market. It remains a cash market. So guess what kind of new development projects are being built in Misery appealing to international high end uh tremendous linkage with New York City. It's about the same time to fly to Miami as it is to take a car to the Hampton's or not quite the same, but that's sort of the three. It's seen as a competing element to it, especially markets like Palm Beach which are almost all New Yorkers, very high and very little foreign whereas

Miami is almost all foreign. So the cash you can see for different reasons, the cash element of real estate really, or the access to credit really defines how markets behave. That's quite fascinating. So we we see foreigners coming to the US and buying real estate, is that what's driving things in London and Sydney and we're else it's exactly the same phenomenon. So you're so in almost every major how urban market in the in the world, you're seeing

record prices. Uh. Incidentally, the high end market in London is about more expensive than the high end market in Manhattan. So we're is it just a matter of not that much more space there were more or I think it's Uh, I think there is less space. I think that's part of it. Also, there's a closer proximity to the Middle East, to Russia, who while they're touted here as big players in the real estate market here because they buy hope, high profile, they're not even the top twenty for tourism.

It's completely overhyped. The foreigners that are very active in the New York market. Uh. And on the East coast tend to be from Europe and and the the Chinese or you know, the Asia in general is probably the fastest growing UH contributors to the market. There was just an article you mentioned Middle Eastern money boosting real estate prices. It was just an article on Bloomberg today that talked about how the Dubai International Airport just passed Heathrow as

the biggest international airport in the world. That that's just unbelievable. Dubai sees more traffic than London and that market is largely driven by speculation. You know that It's it's a not in the context of the flipping, right, it's more of a long term equity play. I think a lot of real estate investment right now or is that speculation? Then if it's it is speculation, but not in terms of I think. I think the way I discerned from

investment versus speculation is the time frame the window. So for example, the time frame in the last housing boom that got us got the real estate market into trouble, the time frame was weeks months quarters. That time frame now is five ten years. It's a much longer window. It's really his investment, isn't it. It is an investment,

and that's really what real estate has always been. We just lost our minds as a as a housing market during the last cycle that that's quite called a systemic breakdown. I'm speaking with Jonathan Miller of Miller Samuel, New York Times, Washington Post, Wall Street Journal. There's a wall of quotes in your office. When I walk in, like I have five things frames I walk in, you have like a whole way with like nine seven was cheaper than artwork,

I guess it is. So we're talking about real estate, and you and I know each other for a long time. There's a couple of things I wanted to share with you that we haven't caught up. So you know, our house has been on the market right for two weeks before we were sold. So someone said to me, wait, you sold your house in two weeks? Really liked seven to ten days. But we had to wait for the contract to come back. So someone said, how did you

price your house? And we had gotten a huge This is like a middle class split level five hundred and change, New Long Island, suburban bedroomtown, had not a big mansion, a beautiful kitchen. I love our granite I actually haven't had an affair with our gran That's that's a whole another story. It is. It is, I just fell in love with this granite and it haunted me for days, and every other piece of granite just didn't do it.

I know that sounds ridiculous. People don't think of me as a person in a kitchen stroking like this is a nice piece of mica. But it's not. My grant is a spectacular It is an So the that's another story I could share the granite. So before I tell you how we sold the house, the granite story was we finally so we we ended up in a house

by accident. It's one of these stories. We had a bye and then we went and sold our house, and then we went back to our by where we had an agreed deal, but we weren't in contract yet and the seller had said to us, we decided we want more, And basically it was like, well, wait, you told us we had to do this really quickly, so we cut our price significant. We cut a price fifty grand. That house also first weekend, and that was in the midst of the frenzy, so it was relatively easy to do. Hey,

if you want to more. That's fine, but then you get full price or you get fast. You don't get both. So if you want, I'll go break this deal and only cut the price twenty five brand and you could wait six months and we could do it at this price. But you don't get both. And what response, Um, well,

we won more. By the way. The side note about that is they had fifty deposit on a house that they're six months in their kind tracked to close, elapsed, and in order to not lose the fifty, they had to come up with another fifty, which is why they were prushing us for the five. We walked away from that. Two years later they got their extra five, but they

lost a hundred to get it. And I remember saying to the agent, look, I know I have a facility of numbers, but you don't need to be a rocket scientist to know that a hundred is a bigger number than twenty five. So that sort of stupidity is life. And here's the thing, And you made the comment, you know, we sold our house in seven to ten days, right.

So what you're seeing now in the market in general, and many housing markets, is when a seller who feels very empowered because there's not a lot of supply out there, so they don't have a lot of competition. The notion that you sell in seven to ten days means too many sellers, that the broker priced it too lower, the seller priced it too low, they gave it away when

the wrong But that is wrong. You're absolutely right, But that is that is a an assumption because it's sold quickly, and I contend in this market, it's either price correctly or it's not in the market. It's incorrectly right, right, It's not a dimmer switch, it's a it's a it's a it's an on off switch. So so here's what I did in order the price of the house. And understand, we found a house that we fell in love with.

And I'll spare the grizzly details, but it's a divorce, and it's a little complex, and it's it's a nicer house on a bigger piece of land in a nicer town, right next to this big preserve. So I'm paying a couple of bucks more for than SEC. But that house was on the market. We haggled over the price. When we finally they priced it too high. It had been on the market for almost I think three hundred days, we're a live one. Oh look, we got someone interested.

It's a contemporary house. You have to either like that or not, so I know it's kind of a little bit of a niche and it's an it's an odd price. It's not one of these big multimillion dollar houses, but it's not a five hundred thousand dollar house. And so it was a weird house. And so our concern was, Hey, we don't want to lose the house. We want to buy, so we're not gonna give our house away, but we're not gonna try and squeeze. Sometimes getting every last penny

is expensive. So here's what I did. I want. I love the Zillo app. We've talked about this. We've both been on our boats in the Long Island Sound using the nearby button on the Zillo app to look at all the prices of the houses that are either for sale or sold that are waterfronts, and it's mind boggling. When I've been, when I've been in the harbor by Port Washington looking at King's Point, these houses are fourteen and sixteen million dollars, like the co ops and condos

that are hundred million. That that's made up. Those are just that's just not real. But eight ten, twelve million dollar house, that's like a real number because there are three four five million dollar houses. So I used that Zillo app and I said, show me every house that's sold in my town with this many beds, three bedrooms, two baths, this this much, you know, and and then I looked at them, and I said, everything that sold

at or above my price point. You know, I was looking for the price where everything was either much bigger, or nicer, or waterfront or some something that made it special, and where that line was. And then I looked at everything that was sold, and it was either not as nice as our house. You know, we stutted the whole house and completely and there's nothing, you know, what has to be replaced. The garage door that was the we ordered one, It never showed up, never paid for it.

That's literally the only thing that we didn't turn over in the past seven years. And so in what you're describing is you're describing the aggregation of real estate information right to the consumer. And and so it's very different. Now, what's interesting when I was talking before about the buyer saying, or rather the sellers saying, oh, I sold it, price

it too low because it's sold too quickly. Uh. What I also have seen through you know, decades of looking at transactions and appraising, is that if you overprice, you'll ultimately end up with selling your home for a lower price than if you had priced it very close to the market. It gets stale. That's a reality of it. And I think a lot of sellers don't get that, and they the agents lose interest. It's just you seeing all what there, there's a nice house, but what's well

think of? Think of you know a lot of people, you know, on one hand where we have all this great transparency, but in the other hand, you're conveying a disconnect with the market. You're saying, uh, I don't know what's going on. This is what I want. So the buyer's thinking, well, this person is going to be really different cult to deal with. They're disconnected. Something wrong with

the house that we don't know about. There's it's just it's all kinds of red flags and that slows down the the market in terms of the interest of your of your home. I see this over and over and over again. It's quite amazing. So so when I looked at the run of Zillo data. I said, when I put my house up for sale, there is not going to be a nicer house at this price point. In fact, everything else plus or minus ten or twenty is not going to be as nice because I'm trying to look

at it as a buyer. Hey, if I'm trying to between choose between this house for and that, I'm gonna go with a nicer house. And I also saw what sold within that price point. I have a feeling that six d is a tough number to get over because if you're conforming mortgage, it's really tough. It's really tough

to to sell something much above that. So could we have listed at six fort nine and and maybe squeezed another maybe, But then we're trying to buy, and that's the whole point of this is we want that house. So you know, when when I started as a trader early in my career, I remember one of the head traders once said to me, I was trying to squeeze

like the last couple of eighths. This is back in the days of fractions out of a trade, and he's like, look, you could get out of this transaction a quarter point lower, just hit the bit and move on. But but but I could squeeze a few more eighths out of this. He goes, Hey, I remember this old guy said to me, Hey, leave a little something for the next guy. And can I tell you something. It's good advice if you're spending all this time and effort in energy to squeeze every

last dime. There are a lot of non monetary fact there's that go into the transaction. How smooth it is, how easy the people were dealing with, it's it's he works at a finance company in New York. He's being transferred from else. They've been so far more or less a pleasure to deal with. And I can't help but wonder, if I'm beating people up for that last ten or twenty thou dollars, how much mental anguish is that going to generate? Right? Because the whole the whole process is

so emotional. Anyway, it's surprisingly emotion it is, no matter what. And then that was one of the problems during the last boom and bus cycle was people are trying to view housing as a you know, a stock or commodity. But but you know what, and that's part of it. But The bigger part is it also has a you know, a use, a usage, that place to live part of what you pay for. And it's an emotional I recall the conversations I had with people. You oh, six oh

seven o eight. I'm sure you went through this way. You're at a barb cure, a cocktail party. That was the only conversation. And neighbors, would you know. Neighbors would say to me, you know, I want to put my house up. And by the way, these numbers are real. That my house that I sold for five and change. People selling for seven eight nine, which never nine, but six seven almost eight. And I remember having a conversation saying, hey, the guy would say to me, the Smiths so their

house for seven fifty. Why can't I get seven fifty. We have a better yard, a better location on the street, a nicer kitchen. Yeah, but the Smiths sold their house two years ago. That was two years. If you have a time machine, I promise you I could get you seven fifty if you don't have. But I'm gonna tell you I know people who still own Yahoo. It traded it almost two right, it's thirty bucks. They can't get to eighty. You can't get seven fifty. You have to

recognize the more. And then I would watch these people put houses up for sale and they were all is six months to a year behind the market. So the market is at six hundred, there at seven hundred, the market drops the fire. They're chasing it, chasing it, but like on a year left we had and never hitting the bid. We had a situation in Manhattan sort of the the tipping point of the market, and we were the Manhattan market was about two years behind the national market.

The national market peaked in the summer of six. Ours was with Lehman in September of eight, and UH prices within the next three to four months fell on average about thirty. So essentially New York was late to the party, but we caught up real quick. And remember most co ops were requiring thirty or the average co op is down so's so what we started to see is we started seeing people start to come out three or four months later to buy, and the broker feedback was, well,

they're all lowballers. They're all offering about thirty below what it was six months ago. And my comment was, if the only people in the market are buying something for thirty only willing to pay less than what it was before. The there that is the new market bid, right. They're

not low bowling, you're high bowling the ass. And it was fascinating because the real estate community in general was more negative than the consumer and and and it took them longer to sort of rebound because they were devastated because the whole principle of property going up forever was shattered essentially. But you know, especially here in New York. So I graduated grad school in eighty nine, and unlike many of my peers who immediately ran out and bought

co ops and condos, the market crashed. First thing New Fed Chack Greenspan did was cut rates, and he had a little boom in real estate in nine and then as rates kind of normalized, if you bought something in eighty nine or ninety in New York City, you did not get back to break even until I want to say nineties six ninety seven, when the dot com boom really started to just started to kick in. And we were just discussing this in the office yesterday. I remember

that was still early in my career. I was on a seal side. I worked in a brokerage farm, and I recall hearing people say repeatedly, Hey, I need to fifty from my account. I need a hundred eighty thousand. I'm trading up, I'm buying a vacation property, I'm buying waterfront. And back in the nineties, two thousand dollars was a huge move. To go from four hundred to six hundred was a big move in real estate. Now it's another bedroom and a little bigger yard. But in the nineties

that was like five houses were really nice houses. Now it's a split level. You know, in a in a development, it's not a right. And what was what the conversation was during the nineties, especially the early nineties, was I know the market stinks, but I want to buy a house. I'm gonna be I lived twenty years and you know we're gonna be here. This is our home, and and so I think that's I think that's always the right approach.

It has to be right for your situation. And I just what I marveled at how we lost our way during this last go round. You know, really you brought you brought in ten million people who previously did not qualify for mortgages. That creates a huge but it was more than clearly more than than just that, right, and so even you know, some people have pointed to as the start of housing becoming unhinged. I look at that as just getting back to where it was eight nine

and a tremendous amount of stock market wealth. It was just diversification. There were people who turned to half a million dollars into five million, or a hundred thousand into a million. The numbers were just stupid. And so in terms of how many zeros are on your IRA, A doesn't affect your lifestyle. But moving to a fill in the blank, bigger, nicer, closer to the water attitude, it's a it's a huge lifestyle change. Also, you're no longer

in the middle class suburb you were. You're now in a whatever, and people love those trade ups, which you know, we started talking about this during the break and I want during the broadcast, and I've written about this, I know if you've written about it. I think all these tales of this is the end of real estate as an American pastime, I think that's nonsense. Wherever I look,

I see people still in love with real estate. So when it so, here's the thing when you what what I find after a change a condition where the markets either going up or going down, pundits, observers, participants in the real estate market, I think linear. In other words, when housing prices are rising, they're gonna rise forever, they're gonna fall forever. When inventory is falling, it's gonna fall forever. And there's kind of there's no web and flow. There's

no it's not it's cyclical. It oscillates, it doesn't project out right, and and so I find that all the time. And then you know, the whole thing in you and I have talked about this, the whole thing about home ownership and how it's declined. Well, it it reached a point uh Fannie May and uh Fannie May stated goal at one point on their website was se home ownership in the US we got to sixty nine and change ridiculous.

It's kind of ridiculous. And we're up from sixty nine was about three to four percent above what the fifty year norm normalized level was. So now we're falling below the you know, we've certainly have been falling from the sixty nine level, and now we're sort of right in the middle of the long term range, and it's continuing to fall. And and the pronouncement is, well, we're going to be a nation of renters. And and it's a

kind of a ridiculous argument. It's as wrong to the downside to the upside correct, and and really what it is is, well, of course, home ownership is falling. Credit is historically the tightest it's been in the modern era. You have a weak economy, you have all these problems. That's why kids are living at home with their parents. It's it's not a lifestyle decision or a change, it's a it's an economic decision because things are still not

that great. And let me tell you, by the time this airs, my or get my house probably closed on my mortgage with Wells Fargo either happened or didn't happen. Um, but I've never experienced anything like the Wells Fargo jumbo investigation. UM. I'm looking to see if I actually got an email from them right now. Uh that it's been pretty pretty astonishing the amount of detail that they've asked. They what did I did I ever ever told you my game show theory about banking with with lending. So think of

it this way. This is This is the this is this is how to explain the irrational behavior that when you interact with a bank to get a mortgage. Look at a bank is playing a game show and let's make a deal. Right So, Door number one is bar from the FED for free, grow other lines of business, rebuild your capital base, all those sorts of things, anything but mortgage lending. Door number two is lend to Joe and Mary holmebuyer for thirty years. Maybe one of them

lose the job. Maybe there's going to be uh decline in their local housing market at some point. So there there's there's risk, more risk associated with it. So they're trying to equalize the risk. This is very simplistic, but try to equalize the risk between the two choices. Now that now Joe and Mary holmebuyer more a third of your mortgage is never going to be the same risk level as as as borrowing from the FED as a lender, right, so,

so they're gonna make them jump through hoops. And I contend it's not triple A. It's really quadruple A. It's irrational. It's irrational lending. And that's the condition. And then you's is that our current conditional condition of quadruple A credit and irrational. We have the cleanest mortgage product being created in the history of mortgages because lenders, essentially, no matter what the the ads say on TV, that's the sales side.

The underwriting side is afraid of its own shadow. And part of that is because of uh, they're you know, we're still under quantitative easing, although that's changing, but that basically still very low. It's a little tight. But also also the economy is not robust. We're not seeing real strong income growth or employment numbers, you know when you really break it down. So they're very conservative, and that conservative is one thing. This is this, I think it's irrational.

I think it's it's beyond it's one step beyond conservative. It's these guys have have examined me so closely. My proctologist is jealous. So they've asked they're looking for reasons not to lend to you. They've asked for three years of personal tax documents. They've asked for three years of business tax documents. They've asked for six months of corporate and personal bank statements. And I'm happy to give them. And every now and then they'll say what's this round

number we see on the fifteenth of each month. Well, it's either drug lords giving me money or paycheck you which would you guess? By the way, you have the corporate account and the personal account, you can match. Oh you lost X here, You've got X there. Do you think maybe that's a coincidence or and some of the stuff it's really you know, it's called fishing. Is essentially they're looking for any reason not to lend to you. To be fair to Wells Fargo, their staff has been phenomenal.

They've given us this checklist and they warned us, hey, listen, by the way, this isn't a multimillion dollar mortgage. This is barely more than the conforming mortgage a little more. And the quite the hoops they've had us jumped through. The one house we looked at that was in danger of collapsing into the you saw, it would have been double the mortgage, and the process was more or less the same. And I'm like, you know, this house is going to tumble into the sea. Rights, it's the risk,

isn't me. It's it's gravity, right, you'reware of it, right, So so so we submitted the last of the paperwork, they start processing it and just before they submitted, they said, we have a question on your credit score. My credit scores okay, it's pretty good. My wife's credit score is phenomenal. And I said, well, what's the issue. You said, I was above this cut off that well, over the past month, your credit score dropped six points or something. Could you

could you explain this thing? And I'm like, I look at this, I'm like, I don't know what be easy? What is this? So they have to translate it into English. And it turns out we hired two new people. We bought two new computers for them, and this was the Apple financing and I and they said, oh, well that affects your credit. I go, look, you guys, see our balance in our checking account. We could have gone out and spent three thousand dollars on two new computers. We

could have done that thirty times over. But instead the account and said, hey, it's better for taxes to lease it then to buy. So we leased it for a hundred and thirty five dollars a month. That's what caused a credit score on the owner of the company. The company lease this. It was like an insane it was an insane. Yeah, but you go from whatever seven and something down seven points that that's a percentage change. That's

the quadruple a standard debt everybody's being held to. And that's the challenge and that's what's defining the housing market right now. That that is. So I'm surprised if that's the case that any houses are getting. So, you know, we're here in Bloomberg. I have a contract I do. I do a column for Bloomberg View. And they said,

you know, list all your sources of income. Well, here's what I get from Speaking Apparent, Here's what I get from our my day job, and here's what I get from Washington Post, and here's what I get from Colombia, and here's what I get from Bloomberg. And they're like, oh, well, is it looks like it's the same amount every month from Bloomberg. Well, yeah, a contract. Can you send us the contract? And I had to ask somebody here, hey, am I allowed to show this too, Like, yeah, I

don't worry about it. But meanwhile, you're asking for a contract, and it's going to be a nineteen year old in Ohio that's viewing the document, right, it's a little more sophisticated than that, but not a whole lot more. And again, to be look, I've been one of the biggest critics of banks since the financial crisis. To be fair to Wells Fargo, they have been really extremely professional, very proactive. They would give us. It started out with this massive list.

I'm holding my arms six ft apart, and each week I would get an update with okay, these three items have been collected. Now we're waiting for these things because to gather all this stuff up to get a p n L statement about two of the companies for the now, the accountants they're not going to do an audit unless we want to pay a boatload of money for it. And it turns out the words review are a term of our art that implies an audit like level of scrutiny.

So Wells Fargo asked for a review of the p and L and the accountants turned around and say, these documents have been submitted in furtherance of federal tax filing. They appear to be in order to us. That's the most the accountants they wouldn't say we reviewed it. They certainly aren't gonna say we ordered it. But apparently submission in order to a furtherance of tax filings was sufficient for well, I think think about that. So you have

that whole interplay between the consumer and the lender. And then you look at the fact that you know, with the upticking mortgage rates over the last year, the rates came back down. They came back down, But we're pretty close to the lows now, aren't we And we're still I think we're half a point up. But in a quarter when we have a really a three seven five for very long, you were there for short, they have a fifteen minutes and then it was back to four.

I mean, that seems to be the floor you don't you're not gonna bring for when you look at that and and U which created a lot of in many ways sort of on one hand, the spike in rates last year created this the surge, the last minute sort of gasp of air of getting people off the fence.

And now it's sort of framing the discussion about housing now, which is it's less than last year, but really it's not really from historical context, it's no different, and the rates are really nominally different, there's really no difference, but a four handle is still in insane But it actually feels tighter or weaker, and and it's all from the

credit orientation that is driving housing. So we really didn't get to what the proper role of government is in this because what some of the arguments that are being made is you have rates at record lows, but we have most of America unable to take advantage and refinance because either they lack the credit history the income history. Amazingly, they're making payments on a house at six percent. Imagine

if they could refi at four that would do the economy? Yeah, that would that would be a huge although you were effectively transferring some income from banks and giving it to everybody, uh, everybody else. But the question is what's the proper role

for government and all this? And if Fannie and Freddie are ultimately on the hook, why not waive some of these requirements and allow refies because if they default at six percent, they're going to default at four percent, and they're less likely to default at four percent, So why not let them do a refi? Right? I think I think the thinking right now, there's there's a lot of uncertainties about the former g scs in terms of what the role is they're going to merge them into one institution.

But Congress doesn't have the will to do that. What was the word you gonna say that the will to do that is that, yeah, exactly. Uh. That And the problem is that it is a one size fits all orientation in government in terms of terms of risk. I think part of it is the austerity concern, or maybe that's window dressing on the problem. And so there there, we're not giving anybody credit to be able to make intelligent decisions. We're really just saying we're not doing this

and let the chips fall where they may. And that's it's a it's a short sighted solution because like you said, there's lots of people with plenty of income. Uh, they might be low on equity and they don't qualify for REFI, and yet there's an existing mortgage at that low equity level. Exactly.

Another component has been uh, and there's been discussion about it, is that the whole concept of principal forgiveness focusing on the the borrowers instead of focusing on the making the bank's hole, focus on main street the economy hall would make the economy hole, and then they're likely make banking hole. But we're sort of stuck in this this box right now, which is you know, Fannie May, Freddie Mack or making a ton of money. It's highly volatile, it's it could

turn on a dime. Uh. We're still dealing with the legacy issues of bad lending practices d o J going after everybody. We have, uh, we have the buy backs being forced on the g S c s. We have Congress saying forced by the g S, forced by the g S. Right. In other words, if you sold a pool of mortgages to Fannie of Freddy and there was some sort of misrepresentation, fraud, whatever, it can be very slight. Really Oh yeah, I mean it's not just because we

know there was a ton of fraud all around. There was there was application fraud, there was underwriting fraud, there was somebody's there was liar loans the whole deal. Because it was just it was just semantics. I've gotten into arguments with some of my conservative buddies about the liar loans, and my argument goes something like this, you're the bank, it's your capital, you're lending it, right, You're the one

who's taking the risk. It's incumbent on you to make sure that the person you're lending it to has an income, has a payment history, has a credit score. When you say don't tell me that, what you're effectively saying is I don't care, so to blame the buyers for you know, look, you we all know the story. Wink wink, nudge nudge. What was going on with mortgage brokers? Here? Leave that blank, I'll fill it in. I mean people signed it and

holding aside the bad behavior of the mortgage folks. If you don't ask for an income history tax file, now, this is the opposite of of the proctology exam I'm going through with Wells Fargo. If you ask for none of that. By the way, we refinance the house we're selling. I don't know. Two years ago it was more than fog a mirror, but not a whole lot more. And the house we had sold before this, I think we refinanced that three times over seven years. I've been in

my house for ten years. I think every year the first couple of years I had it, I think it four times. Yeah, it's and the process was signed here, initials here, checks in the mail. It was insane. So where has it's gone to? One ridiculous extreme. Now we started an opposite extreme. But I hold the banks responsible if you don't ask people what's your income, what's your credit score, what were your tax filings, what's your payment history? How could you complain when they default? You didn't ask

for that information, you didn't verify it. Hey, by the way, wink wink, nudge, nudge, give us a ballpark. Because they could, They could package and sell off the risk to somebody else who was unsuspecting. Although oh no, they knew, but they were more than unsuspecting. They were Look, we're taking this risk and spreading it out. One of my favorite discoveries when I was researching bailout Nation was the warranty keep It was the warranty that that came with these

non bank originated mortgages, primarily out of California. Were with these jobs right? They gave a warranty that said, this mortgage will not this thirty year mortgage, this three and sixty month mortgage will not default for ninety days, and if it does, you could put it back to us. A toaster comes with a longer warranty than that. So how long did it take for the salespeople to figure out Hey, I'm not looking for people who could qualify for a thirty year mortgage. I'm just looking for some

pushchmuck who's going to make the first three payments. And by the way, the first payment is effectively waived. It's covered in closing about the so two payments and I'm out in days. Think of the irony of that though. So during that period you had no credit standards whatsoever, housings housing prices rose rapidly. Fast forward to today, excess credit. The pendulum has overcorrected to the opposite degree. Housing prices are rising and in many markets at a very brisk pace.

Credit is in play in both cases, but for completely different reasons. So somewhere in the middle is the much healthier, slower growth, more reasonable housing market. And that doesn't happen until you get real job growth, real income growth. Not a booming, but but just you know, the whole notion that you actually have to have a job and have a reasonable income to qualify. When that, when those conditions improve, that's how you ease credit. That's how you get housing

to be truly what I call recovered. All we've seen right now I characterized as it's a rebound it's essentially off of a low, but there's dead cat bounce are a little more than that. I think it's a little more than that, because you know, there's so much psychology. I know, I know we have we have two cats. I'm not allowed to say that phrase at home, but but you know there is some psychology to it. People not being afraid to venture into the market and buy.

But the problem is that it's everything is going to happen in slow motion and we want quick, quick results. That's not how the real world operates. Now, you don't get that sort of stuff. So let's solve America's housing, credit and economic problems. All and one fell swoop. So

here's what we're gonna do. So we've noticed that Obama has essentially given up on Congress US, who the day we're recording this, we see in a gallop pole is now down to a seven percent record low since Gallup started asking this question, and I think it was three record low. Not only is it the lowest Congress has ever been, it's the lowest any institution America has ever

ever marked and ament. And so Obama has very interestingly said, I'm going to take a page out of the George Bush playbook and bypass Congress, and there's a lot of stuff I can do through an executive order. And so here's what I want to know. We we know that there's a tremendous amount of economic activity and economic potential locked up in people who are are stuck in their houses.

We also know that ultimately Fannie and Freddie, meaning the taxpayer, is on the hook for those mortgages, whether they a fault at six p or default at a lower rate.

What would happen if the President said to the head of Fannie and Freddy, I want to institute a policy that allows people who are current on their mortgages, so we're not dealing with short sales, we're not dealing with underwater sales, to refinance at their existing mortgage amount or lower, so there's no cash outs at the prevailing interest rate. I know in theory this may reduce the income to Fannie and Freddie, although there will be all these transaction

fees that will help them. What is this a can we can the President order Fannie and Freddie to do that and be what would that do to the to the U S economy and to the U S housing market? Well? Uh, so the caveat that you're not an economist, I probably say I'm a non economist proudly. So the new head of f h f A, the regulatory agency that overseas Fannie and Freddy that was formerly called O H G O and uh, they were asleep at the switch. Worse

than asleep at the switch. They're the ones who gave Fanny and the G S c S permission in late two thousand five. Hey, you're losing market share at Wall Street. You don't have to just do conforming loans. You can do non conforming meanings sub prime and all day. And so two thousand six, Fannie and Freddy go headlong into that just as the market is topic. They might have

been his final spasm. And actually, when they changed their name to f h f A, it literally was the same website, just with different U R L and the logos. Everything was the same. So I never quite understood that. And I sort of feel like the the rejiggering of Fannie and Freddy, if that were ever to happen, is going to be kind of the same thing. It seems like a can of worms. But anyway, I think that I think that you you take away income from Fannie and Freddie to give it to I think it's more.

I think it's more important for the public to be on their feet and spending in a consumer economy than it is about worrying about whether Fannie or or Freddie you're gonna make five million dollars this core. I think that's ultimately that just comes back to the text. It comes back to the taxpayer anyway. So so I think that's important. We do have the head of the f h A. F h f A is much more pro consumer in terms of their outlook and providing some flexibility,

trying to give flexibility to Fannie and Freddie. So I think that's all good. I just I haven't heard any overtures that the Obama administration would even entertain that. Well, I haven't spoken to them yet. But once I planned this idea, well, I I have full confidence that you could sell them on the idea. I don't know if I could sell it, but it's a fascinating concept. I think it's a I think it's probably a good concept because so much of our wealth is tied up uh

people that are stuck. It's tied up in housing, and I think that triggers a lot of other things. The mobility, it triggers its real estate mobility, employment mobility, geographic mobility. That's a key thing. And I'm looking for the downside there. I don't think there really is any downside, especially from the naysayers if it was if you were if you were ignoring principal reduction. Principal reduction is sort of a

hot hotbed of debate. I'm in favor of it. Let we could hold that to put that to the side, and don't even do that. Just the people who are current have employed. You want to REFI to a lower rate and nothing else changes. Even you know, if you have a four thousand dollar Morgans in the house, that's or three fifty, does it matter if the interest rate to to the note holder, if it's six percent or

four percent, it shouldn't make a difference. So that there are people who hold the securitized notes, they have to expect a certain amount of maturation that happens normally. This is gonna be a huge shift. Now in theory, it creates a whole bunch of new paper that Wall Street can then move about and sell to these people. And if you want to hold onto whatever you have, you can hold it. The way this gets called is kind of complicated. Back from the investors that we're expecting a

six return. I'm sorry that you're you're gonna have to get a less of a return like everybody. But you're probably reducing dramatically the default that's right, that's the trade off. You're you're getting a lower default risk because people can afford it, and you're you're helping the overall economy. So I'm looking I've been playing with this idea. I'm looking for a downside to it, and other than the fact

that people hate government intervention. But you know, there's an article in The Times today by Neil Irwin talking about formerly of the Washington Post, talking about the Import Export Bank and how certain people hate it because it's government in bed with big business. And but the reality is that's the nature of industry globally, it has to be. That's what's going Listen, If if the European banks are subsidizing air Bus, how can the US not allow Boeing

to compete on the same planet playing field. And if you don't do that, what ends up happening is they lose the battle right to Airbus because it's subsidized. The ironic thing is the jackasses who were opposed to this are Delta Airlines, because, by the way, worst airline in the planet, run by morons. I can't begin to tell you how much I hate despise that airline, my least favorite airline. Search the blog, search redults dot com for it. You'll see. I don't know, and I don't care to

tell you the truth. But here's the amazing thing. Delta opposes it because they say, oh, you're subsidizing bowing sales to competitive um carriers overseas, and that's not the government's role. Hey, morons, Neil Irwin points out, you guys were rescued in a government bail out, so just sit there and shut the hell up. Or right, it's like, you know, wait, so you got yours and that's the end of it. Nobody

of all the hypocritical things. I don't know if they're more hypocritical than they are a lousy airline, but those are your choices. Most hypocritical company in America, worst airline in America. So that's uh. This message is brought to you by Delta. Fly Delta, and maybe you'll make it there. I just had a couple of really bad experiences with them. Other people disagree with me about Delta, but UM actually rarely fly it, so I don't fly it anymore, and

I'll never forget. I was flying to Atlanta to give a speech. I booked first class and they do what a lot of legacy airlines do, which is when they don't have a full flight, they cancel it and they roll you into the next flight. And I'm like, listen, I gotta be somewhere at six o'clock tonight. I know your your cancelation was nonsense. So they give me. They get, well, we'll get you on this plane, and they go from to A to B which is the middle from from

at back by the bathroom. And I'm like, I'm sorry, I had a first class ticket. Why am I? And the woman says, well, A, you didn't have a first class ticket, you had a six g Y ticket, and B that's the only seat we you know, that's all we have at this time. So I'm like, let me. I just have to stop you there. I don't know what a six G Y is. When I went on to Delta dot com, um, your choice is either first slash business class or Economy and there was like a

six hundred dollar difference in in price. So I don't know how what what six g y is or whatever the code was, but you give me two choices, business or coach. I picked Business. Is there an empty business class seat? I would like to have it? And at that point it's like I had to get down there, so I get on the flight. To add insult to injury, there's an empty seat in business. And then to make matters worse, when I called out to to say, all

I bought this ticket for whatever. I'd like a refund of the difference, they proceeded to explain to me that they couldn't tell the difference in price. Let me stop your second. I work in finance. I could tell you the price of any of ten thousand stocks on any day for the last hundred years, at any second of the day. Your own tickets. You can't tell me what the hell these are outing for. I bought it. You could see the day I bought it. What were you

selling the coach tickets for? It? Just refund me the difference, and I said, you know what, and they refused to do it. They actually sent me a certificate for two fifty dollars, which when I went to use seven months later was expired. So I said, you know, my penalty for this is one day I'm gonna have a radio show, And on that radio show, I'm gonna tell people I

love Virgin American Airlines. Even though the last trip back from San Francisco, the seat didn't work, the juice didn't work, at the power on, the electrical didn't work, the TV didn't work. Still better than Delta and UM anytime if I have to fly Jet Blue, Jet Blue is always fine. I get to sit in the front of Virgin and Jet Blue, it doesn't matter you sit even the even even more spaces like that is the greatest air travel bang for the buck. There is just those extra six

in just by you make all the difference. It really, uh, it really does. So somehow the poor people on a treadmill listening to this, like I thought we were talking about this, red sky will not shut up. So let's bring this back to housing and what this means going forward. Assume the government does nothing. What what is them? Just play out? Yeah, what happens with Fannie and Freddie? What should the role of government be and and what do we do with this, what how does housing manifest itself

over the next couple of years. So I think that housing will follow the path of what the economy does. In other words, I think, I think when we see real improvement in the economy, and what I mean by that is simply more job real job growth, I think that that makes all the difference in the world, and that'll start to melt the problem increases, a little wage increase,

nothing more, you know, huge, just improvement, an uptick. I think, to me, all that matters of the fundamentals that you know, this whole notion, this whole this whole notion of like housing is going to lead us out of this. I feel it's just the opposite. It always has been the opposite. But it's always stated as housing, you know, brings us out.

It's always the the economic sort of interpretation of housing is always how we get out of a you know, a week period, and and I feel it's I don't know how that where that math comes from, but it's always backwards because you actually have to have a job and have you know, income prospects to qualify for a mortgage.

So I feel it all goes hand in hand on the on the more specific government aspect of it is that I don't think Congress has the will or the ability to make a sea change to what is responsible for of the housing of housing mortgages in the country. I think that is just a disaster waiting to happen. Meaning what should they be doing. I think they'll do nothing. I mean as opposed to what would you want them to do? Uh, I think what I'd want them to do.

So so what I've found is is, uh, there has to be more awareness of sort of separation of church and state. In other words, for example, you know the biggest culprits, one of the biggest culprits in this whole last down cycle where the rating agencies right where they are basically joined at the hip with the people that that you know that they were. They were under partners with underwriters, just real state appraisers were joined at the

hip with mortgage brokers. Right, find the right appraiser, make the number, we can do the deal. Right. We have that whole and then we have the revolving door between the regulators and private industry. So there's no real separation. And to me, the only way you reduce that you'll never eliminate it, because human beings are really good at screwing things up. Just everything sort of devolves into chaos

over time. I think you're trying to reduce it. What Dodd Frank does the wrong It sort of takes the wrong approaches. Let's regulate what happened in the past, and that's always true. Isn't every regulation backwards looking? By absolutely? You know, it's amazing how well the formation of the SEC and and glasst Eagle worked from the thirties because it was backwards looking, but it was also when the pace of change was so slow. It was good for

seventy five years. That's whatever you pass, it's got like that's part of my problem with this whole no stion of red revamping Fannie and Freddie. When Fanny worked okay, from the depression up until right up until ten years ago, right, and so you have to look at what changed in O five the middle last decade to make them implode

and then eliminate that. That's the we don't just because you put window you know, new window dressing on an agency that's effectively going to do the same thing doesn't make the problems go away. It's a waste of time. You know, the Fannie and Freddie bashers always conflate two or three issues. One is, Fanny and Freddie was a horrifically corrupt organization who spread a lot of lucre around d C. So they were the biggest supporters of public

relations agencies. Every agency in Washington had a Fannie May account. They they were dominating. They spread them. Anny Franklin Rains was not afraid to spend the cash, and it was funny. It was It was funny that I remember seeing guys like Newt Gingrich not complain about them, and then you find out years later, even though everybody thinks of Fannie and Freddy is a democratic entity, they were spreading the money around on both sides of the aisle, which is

the smart way to do it. One of the good parts about the bail out is that we stopped all that lobbying, at least for Fannie and Freddie. We could have done it for the banks and for Wall Street would be a much healthier country. Nobody thought to say, hey, Goldman in Bank of America shouldn't really be in the corridors of power. As much as Fannie and Freddie were

stopping both, but but hold that aside. Do we need an entity between the buyers and the banks, working either with or with the im premature of government to keep mortgage rates down? We we've seen European don't have this, although they also don't have thirty year fixed mortgages. How is this done around the world? Will make this our last question. How are other mortgages processed, underwritten, regulated elsewhere that might provide an alternative example versus what Fannie and

Freddie does. Well, So what's popular around the world are adjustable rate mortgages. I mean, that's that's not popular that dominates. I think many countries look at US as so it makes homeowners slaves to interest rate fluctuation very much so. And then on top of it, so countries like Spain where you can't walk away from a mortgage ever ever, so you are tied to that and you have to

pay it back. There is no there is no get out of jail free card in in the mortgage world in countries like Spain in the US is in half the US. In the US, it's basically just you know, it's just another process you go through. It's but there are some states that a recourse states, meaning that that it's a debt you can discharge in bankruptcy, but you

can't just walk away. And then there are nonrecourse states where the state the contract says in the event that you failed to pay for the house, the bank gets the house. You're done, which was always thought of as Okay, I'm not making the payments, I lose the house. That was thought of as a kind of fair trade off. Nobody expected a million people to do what it wants, right, an inundation of it, right, Yeah, the states that are dependent on the court systems were the slowest to recover.

Larida had a their own you know, hyper right, which by the way, was supposedly was a debacle, a a gnarly mess of corruption and lack of oversight that and of itself. I'm sure there's a book in that from to sift through it. So so really, the countries that don't have g s c s in the middle, the alternative is fluctuating rates. You know, at rates, it's a

different perspective. You know, I'm, as you said, I'm not an economist, and I and and there's a lot of criticism about the the effort that it takes to to manage a thirty year mortgage, and we shouldn't be doing that, uh and and but it works so well for so long exactly. So my my view of that is, you know, we're we're you know, we're questioning homeownership or questioning uh Fanny May, and we're questioning thirty year fixed. Yet they

worked really well until about ten years ago. So why don't we look at what happened ten years ago and focus on that. So that was sub prime, that was liar loans, that was mass securitization, that was a lack of rating agency accountability. There were a lot of factors caused a functional system to freeze, choke and spit everything out all at once. So then you like, then you think there's a place for the g S c S.

I think there's a place. I don't I. I The way I look at it is funnaments of the economy get back on track. All most of the stuff goes away. It's just a long, gradual process. I fear that by embedding even more layers of Remember, all the regulators were asleep at the switch. Everyone Sheilla Beart maybe one of the few exceptions, and the same with a woman who was the head of the commodities futures trading. She actually was. Yeah, she was soundly ignored by Greens. She was Chastis and

Greens absolutely, So I agree Sheilabert and Uh. I can't recall the woman's name, but I s' that's it. And and they were the ones that sort of the voice of reason. But the balance was they're caught up in it too, and then a lot of it they didn't understand. It, didn't understand you know, the all the the you know, the financial engineering. So I don't think the answer is add more. You made the basket. I don't think I

don't think adding more solves anything. I think it's let's get back to like fixing the economy first, and a lot of this stuff plays out. It's not that we're going in the right direction. It's just a slow motion and slow motion ride. So as the economy goes, so goes real estate. Absolutely, Jonathan, I've had you here for

two hours. Thank you so much for coming in. It's been a pleasure pleasure to you know, you and I talked about this stuff all the time, but it's rare when we actually get to sit down for an uninterrupted meandering conversation about I thought the airline discussion was really important. Though, let me tell you something, it doesn't take much to set me off. I'm I'm getting better, though. I'm I'm

much more present. I read a fascinating study the other day that essentially said the cathartic release of anger does nothing too. Some people say, how you get it out of your system? It turns out they've done studies and people it becomes persistent and higher when you especially when you're driving. UM. So, really, I'm trying to learn how to let these slights go and find a degree of peace. I forgive Delta Airlines for their gross incompetence, and I choose to use my flying you have We know you

have choices in airlines today. Hell yeah, and that's why I could at least get over my cost with with Delta and gratefully fly. They apparently weren't. That's you're listening to Masters in Business with Barry rid Holts on Bloomberg Radio