A Tale Of Several Cities

Since the Meredith Whitney interview on 60 Minutes aired a little more than a week ago (see 60 Minutes Looks At "Day Of Reckoning" For Our Insolvent States) I have been paying closer attention to the plight of city, county and state governments whose resources are stretched to the breaking point.

I have had no trouble finding daily pieces about the travails of many US municipalities and states. Here's just a scatter shot of stories from around the nation which have run in just the past few days:

Vallejo, CA

http://www.commondreams.org/headline/2010/12/20-6

Every Vallejo man, woman, child & baby would have to fork over $1,500 each . . . just to cover the unfunded pension obligations at this moment. So the city declared bankruptcy in 2008.

Vallejo, a former US navy town near San Francisco, is still trying to emerge from the Chapter Nine bankruptcy protection it entered in 2008.

The city, now a symbol of distressed local finances, is still negotiating with the unions, which refused to accept a salary cut plan two years ago. Paul Dyson, an analyst with the Standard & Poor's credit agency, said Vallejo, which is mostly a dormitory town for Oakland or San Francisco employees, did not have enough local industry to sustain its finances and property tax - a major source of local income - plunged with the collapse of the real estate market. The S&P credit-rating agency has a C rating on the town - the lowest level.

With a population of about 120,000, Vallejo has $195m (£125m) of unfunded pension obligations and has to present a bankruptcy-exit plan to a Sacramento court by 18 January. Since 1937, 619 local US government bodies, mostly small utilities or districts, have filed for bankruptcy, Bloomberg News recently reported. US cities tend to default more than European municipalities as they usually rely on bonds issued to investors, which enter into a default if the creditor misses payments. European towns, by contrast, traditionally depend on bank loans and government bailouts.

San Francisco, CA

http://www.nytimes.com/2010/12/17/us/17bcbenefits.html?hp

Talk about kicking the can further down the road: Retirement healthcare needs of $4.4 BILLION and San Francisco has only put aside $9.7 Million, meaning, SF needs to find another $4.391 BILLION to set aside.

After months of delays, the San Francisco controller’s office announced Thursday that it expected the city to pay $4.4 billion to provide municipal retirees and their dependents with lifetime health benefits.

The city has set aside $9.7 million to cover the costs.

The estimate of San Francisco’s unmet health care liability has been closely watched by ratings agencies, labor unions and other groups concerned about the city’s long-term finances. Moody’s Investors Service downgraded San Francisco’s debt rating in November, citing the enormous retiree health-care obligations, among other factors.

The city has set aside $9.7 million to cover the costs.

The estimate of San Francisco’s unmet health care liability has been closely watched by ratings agencies, labor unions and other groups concerned about the city’s long-term finances. Moody’s Investors Service downgraded San Francisco’s debt rating in November, citing the enormous retiree health-care obligations, among other factors.

To put the $4.4 billion liability in perspective, San Francisco has borrowed $2.6 billion through general obligation bonds in its entire history.

Indiana

http://www.courier-journal.com/article/20101227/NEWS02/312270043/-1/rss

Indiana seeks to pass a new state law allowing the State of Indiana to take over insolvent municipalities and then cut their budget, renegotiate labor contracts, and approve or veto contracts, expenses, loans and hiring.

A plan backed by Gov. Mitch Daniels would allow local governments in Indiana to ask for a state takeover and declare bankruptcy if necessary. Daniels says he hopes there won't be many local governments that seek bankruptcy, but says the state needs to have the law clarified and on standby in case it happens.

Republican state Sen. Ed Charbonneau of Valparaiso is sponsoring a bill to outline the procedure. His bill would allow a local government in financial trouble to ask the Indiana Distressed Unit Appeals Board to appoint an “emergency manager” to run the government.

The emergency manager would have the power to cut the budget, renegotiate labor contracts, and approve or veto contracts, expenses, loans and hiring.

The bill states that if the emergency manager can't turn around the local government's finances, the unit would be allowed to seek federal bankruptcy protection.

The State Board of Accounts in recent audits has questioned the abilities of the city governments in Gary and Lake Station to “continue as a going concern” because of continued high city spending despite significantly reduced city revenues because of statewide property tax caps.

Hamtramck,MI

http://www.nytimes.com/2010/12/28/us/28city.html?hp

Another old working class town, near death, begs the State of Michigan to allow it to declare bankruptcy.

HAMTRAMCK, Mich. — Leaders of this city met for more than seven hours on a Saturday not long ago, searching for something to cut from a budget that has already been cut, over and over.

This time they slashed money for boarding up abandoned houses — aside from circumstances like vagrants or obvious rats, said William J. Cooper, the city manager. They shrank money for trimming trees and cutting grass on hundreds of lots that have been left to the city. And Mr. Cooper is hoping that predictions of a ferocious snow season prove false; once state road money runs out, the city has set nothing aside to plow streets.

“We can make it until March 1 — maybe,” Mr. Cooper said of Hamtramck’s ability to pay its bills. Beyond that? The political leaders of this old working-class city almost surrounded by Detroit are pleading with the state to let them declare bankruptcy, a desperate move the state is not even willing to admit as an option under the current circumstances.

“The state is concerned that if they say yes to one, if that door is opened, they’ll have 30 more cities right behind us,” Mr. Cooper said, as flurries fell outside his City Hall window. “But anything else is just a stop gap. We’re going to continue to pursue bankruptcy until the door is shut, locked, barricaded, bolted.” (Note: Rock added the emphasis in this paragraph with Italics and Bold.)

Houston, TX

http://online.wsj.com/article/SB10001424052748703548604576038080723678202.html?mod=WSJ_hp_mostpop_read

Houston is so strapped that it is attempting to hit up non-profits to help cover city infrastructure and services . . .

The issue is on display in Houston, where some flood-prone roads are in such disrepair that signs warn drivers, "Turn around, don't drown."

Houston's taxpayers in November narrowly voted to adopt a "drainage fee" to raise at least $125 million a year toward the cost of improving roads and storm-water systems. The city will charge fees to property owners, and it won't grant exceptions to churches, schools and charities.

The city has been tightening its budget. "We're cutting up the city's credit cards," says Mayor Annise Parker. "Everyone who contributes to drainage issues has to share in the cost of correcting those issues."

A number of groups—including schools, businesses, churches and senior citizens—are demanding exemptions. "We'll defeat this," says David Welch, of the Houston Area Pastor's Council, who plans to lobby state legislators in January. "This is really a tax. It is the first time that churches would not be exempt from property taxes," he says. Some opponents have filed suit claiming the ballot wording was misleading.

At a group called the National Council of Nonprofits, Tim Delaney, chief executive, says, "Governments are taking their public burdens and putting them on the backs of nonprofits, at a time when the demand for our services is skyrocketing."

These are just a few stories in the past few days which paint a very bleak picture of what James Kunstler would call "The Long Emergency" during Peak Oil times.

To neglect what is and what you do not want to see is Denial.

Denial was high during the run up to the Dot Com Crash, the Housing Crash and the Credit Bubble Crash.

Today, the stock markets have been on a tremendous bull run built on noticeably low volume. In a time of unaccountable and un-regulated derivatives trading (much of the newer bets funded by cheap money given to the Too Big To Fail boys)much of what is happening in the US stock markets is simply "churn" trades between HFT Bots from different firms, with their algorithmic programmers trying to outwit each other with daily tweaks to their programs, programs which are now, I fear, suckering in the last of the "sheeple" who follow investing newsletters and services built on the premise that Wall Street is not a casino, but Capitalism at its altruistic best.

I have a very bad feeling that in the next 18 months, as more governments big and small in the USA ask for bankruptcy protection, more pensioners and soon to be pensioners will wake up and realize they no longer have a pension. The effect on Baby Boomers realizing they have been wiped out by false promises by corrupt politicians will create an anger and panic which will spill over to the markets as Boomers head for the exits with what remaining capital they might have left in their paltry "retirement savings".

Lastly, let's look at one more frightening and sobering statistical read just published by MyBudget360. The title alone sends chills down any middle class taxpayer's spine. You will want to read the whole post and look over all the graphs and charts under the title "Retirement account fantasy and middle class erosion – 1 out of 3 Americans has zero dollars in a retirement account. From 1950 to 1989 top 1 percent earned roughly 7 to 8 percent of nationwide income. Today it is inching closer to 20 percent resembling pre-Great Depression levels"

The Games Realtors Play With "Original Price" and DOM (Days On Market)

Hello Friends,

Today we are going to look at what I believe is an honest mistake made by a Real Estate company which obviously hasn't kept close tabs on one of its entries to my favorite MLS in the Florida Keys. This Real Estate company in question simply keeps tabs on properties for sale down in the Keys and adds very good slideshows and a decent, quick-searchable data base set up by price, different Florida Keys, different types of homes (condos, duplexes, etc.) and so on. As this Real Estate company does officially represent the sellers of but just a few of the properties on this searchable MLS, my guess is they sell "shoppers" on using them to mediate a sale.

This particular MLS is the one with photos of most every home and business listed and can be found at www.keywestmls.com.

This particular MLS, sponsored and edited by Key West's Seaport Real Estate, is the most popular MLS which my Key West friends use. Other MLS searchable databases put together by other Real Estate company go nowhere near the lengths which Seaport provides information.

Most especially welcome on this great website is the tab for "Just Reduced" homes which, like it's title, shows all homes and their new reduced "listing" prices over the past 7 days. (And please, please, please . . . if you are new to looking for a Key West home . . . notice nowhere on the website of www.keywestmls.com is there a tab for "Just Increased" home prices. That should tell any novice that prices are still cratering in the Keys.)

Nevertheless, Seaport Realty's webmaster makes a mistake once in a while and leaves up two MLS numbered entries for the same home. Today, I discovered one I want to share. And please keep in mind this is not to condemn Seaport Realtors for their mistake, but it is to applaud the fact that their mistake is another in a long line of proof which I have supplied over the years that Realtors are trying everything to put lipstick on the Housing Crash Pig.

Onward.

In many a past blog post I have told you why I recommend you keep your own Excel spreadsheet on falling home prices if you are seriously considering buying in the Keys within the next 6 months. Among my reasons, I told you how Realtors play this game of ripping homes off a market after an "original" price had multiple price drops and then coming back on the market a few days or weeks later with a new MLS number and new "original" price.

The reason for doing this is obvious:

1) The new "original" price is a much lower price than the old "original" price and subsequent price drops. Hence, with a newer starting price, one cannot fathom the "panic" in the seller's position, giving a potential buyer less leverage in making a deal.

2) When a new "original" price is listed, it also means the DOM (Days On Market) start afresh. Meaning a listing with only 7 days on market and an "original" price looks more enticing to sellers than one which has been on the market for 300 days and has had 5 price reductions would look to buyers. Sellers and Realtors want to "keep up appearances". Buyers are looking for desperation from sellers, i.e., deals.

3) And when a new, lower "orginal" price is lowered or reduced to a new listing price, should that price sell, the Real Estate cartel will trumpet it was only 20% off the original price and prices are firming, when in reality, the "Just Sold" price could be as much as 50-70% off the first "orginal" price. All of the above might sound confusing to a new reader, so let me show how one house in Cudjoe Key has been marketed, accidentally, with two MLS numbers - one of which shows the real drop in value on the property.

Let's start with the more benign listing, the one with the least amount of depreciation in pricing.

Here's the mansion in question:

MLS#:	550147
Original Price:	$3,795,000
Listing Price:	$3,100,000
Address:	23069 Redfish Lane
City:	Cudjoe Key
Subdivision:	Cudjoe Acres
Mile Marker:	23
Prop Type:	Single Family
Waterfront:	Yes
Days on Market:	276
Bedrooms:	5
Bathrooms:	5.5
Interior Sq Ft.	4,430
Price Per Sq. Ft.	$699.77
Lot Sq. Ft.	0
Year Built:	2007
Taxes:	$25,000.00
Tax Year:	2008
Exemptions:	Homestead

Here's the description of the property by the Realtor:

Private Gated Keys Estate With Open Water Views. Chestnut & Marble Floors, Gourmet Kitchen, Elevator, Private Boat Basin, Ramp & 2 Lifts. Lounge By By Your Pool Or Beach. 5 Bds/ 5.1 Baths + A Library & Loft. Main House Features 3bd/3.5 Baths & Thguest House Offers 2 Bd/2 Ba. True Paradise Living To The Most Discriminating Buyer Who Wants Everything...With A Sense Of Being Away From It All.

Notice the following three data points above: Original price, Listing price and DOM (Days On Market)
1. Original Price: $3,795,000
2. Listing Price: $3,100,000
3. Days On Market: 276
(By the way, to see the 9 slide photo shoot of this listing click here)

Now as I never kept track of Florida Keys mansions by entering their info on a spreadsheet, it is very possible this mansion had more than one "Reduction In Price" in the past 276 days.

Regardless, let's pretend for a moment that some well heeled buyer simply comes along today, plops down the new listing price of $3,100,000.

Well, the way the Good Deeds in the Sunday paper would report this sale is "100% of asking price". And, invariably, some of the Realtors in our town would crow that this 100% bid on the listing price is "proof that the Real Estate market is bottoming in the Keys."

In reality, the sale at $3,100,000 would represent a drop of 18-19% from the owner's "Original Price" some 276 days ago at $3,795,000. But the Good Deeds in the Sunday Key West Citizen long ago quit showing both "Original Price" and "Listing Price". So, buyers looking at the Good Deeds now are thinking, "Prices don't seem to be falling as much. That's good."


Time For Another Strong Dose Of Reality In Keys Real Estate

But what if the mansion discussed above had been on the market for a longer period of time at a much higher price? Don't you think a savvy buyer would like to know this information so he/she could drive a better bargain with maybe a panicked seller?

Well, in a case of laxity (that's my guess), the keywestmls.com webmaster did not notice the same mansion appears twice, with a different front photo shot, and a different MLS number on their www.keywestmls.com website.

Here's the first entry for the same mansion we are looking at above with new cover photo. (Also if you want to see the original 19 photo slide show, click here) :

MLS#:	107685
Original Price:	$4,499,000
Listing Price:	$3,100,000
Address:	23069 Redfish Ln
City:	Cudjoe Key
Subdivision:	Cudjoe Ocean Shores Sec 2,2b,3
Mile Marker:	23
Prop Type:	Single Family
Waterfront:	Yes
Days on Market:	813
Bedrooms:	5
Bathrooms:	5.5
Interior Sq Ft.	4,443
Price Per Sq. Ft.	$697.73
Lot Sq. Ft.	32,242
Year Built:
Taxes:	$20,589.00
Tax Year:	2009

Notice the following:

This earlier listing of the exact same property with different MLS number has been on the market for 813 days! That means this mansion has been on the market since early 2008 and is really in its third year of being marketed.

Secondly, notice the "Original Price" of $4,499,000! That is $704,000 more than what the newest listing (MLS #550147 with 276 Days On The Market) is showing as an "Original Price" of $3,795,000.

Same property, two different MLS numbers showing, two different DOMs showing, and two different, very different "Original Prices" showing. (Meaning the webmaster's slip is showing how Realtors really play the game to "juice" Potemkin pricing which many times is a facade for what has really gone on behind the scenes.)

If some rich buyer comes to the Keys today, without thinking about hurricanes and oil spills, rising sea levels, a county government in deficit, declining county services, bad schools, etc., and pays $3,100,000 (the new listing price), said buyer would actually be getting 31-32% discount from the real "Original Price". Not only is that the real discount so far, but, the Key West Citizen would be showing the sale as 100% of the Listing Price in the Sunday paper's Good Deeds. (It should be noticed that "Good Deeds" are sponsored by some Title Company here in the Keys, and it is they who obviously decided to discontinue showing "Original Price" of homes sold.)

These are the games going on all the time with the MLS as played by Realtors. They put homes on the MLS. They rip them off. They assign new MLS numbers and put properties which have been for sale for years back on the market after a few days breather to hide market inefficiencies and buyers who were in denial for a loooooong time and who are now determined to get out of their money holes.

This is why serious buyers must pay attention and do their own diligence: Realtors are not going to give you the whole story and you will not have the macro-Economic wide angle view you need to know whether you are getting a deal, whether Real Estate is really bottoming (don't worry, buyers, it is not) and whether you should rush in now to get a "deal" compared to 2006 prices (don't, rates have only one way to go . . . higher . . . and as rates go higher, even fewer people will afford "more" home meaning home prices will have to drop even further).

That said, anyone buying a home in the Florida Keys or Florida before the BP Oil Deluge is finally stopped is not paying attention to the current Double Dip Recession which may turn into a Depression forcing even more pressure downward on Keys home pricing.

Stay aware of Macro-Economic trends. Stay aware of local trends. And whatever you do, don't listen to the FIRE Economy cheerleaders who are telling you "There's never been a better time to buy a home!" They've been saying this for the last ten years. Keep in mind these are the vested interests who do not have your best interests at heart.

As always,

Caveat emptor!


Rock Trueblood