Preservation, Restoration, and Rehabilitation

Iconic photo of the Singleton House by Julius Shulman

Few would question that architect Richard Neutra was one of the preeminent modernist masters of our time. Some of his most famous works – the Lovell House, the Strathmore Apartments, the Kaufmann Desert House – are considered museum-quality treasures to this day. He had the unique distinction of being featured on the cover of Time Magazine in 1949 – before some of his best works were even on the drawing board. So does that mean his houses should be faithfully restored and impeccably maintained in their original state, frozen in time as the master created them? Or are they homes for the living that need to evolve and adapt to ever-changing lifestyles and to remain viably marketable? (Especially when the alternative is, too often, the wrecking-ball.)

No house has energized this debate more then Neutra’s magnificent Singleton House in the Bel Air neighborhood of Los Angeles. Built in 1959 for the wealthy industrialist Henry Singleton (Teledyne Corp.), and purchased in 2004 by the hair-care tycoon Vidal Sassoon for a reported $6 million, the house was extensively renovated and reconfigured by his wife Ronnie for an attempted “flip” project during the height of the real estate boom. The results, unveiled when the house hit the market in 2008 for an eye-popping $24.5 million, were nothing less than controversial. The milder reviews called the renovation “an act of architectural vandalism” and “hostile to Neutra’s entire vision”.

I’ve toured the house and it remains jaw-droppingly stunning. But is it still a Neutra? What Ronnie did would have been considered brilliant in any other house. She essentially flipped the floorplan around. A small kitchen facing the driveway was moved across the hall to the south side of the house and opened-up to take in the commanding views of the pool and sun-filled vista beyond. This is, after all, where we now spend most of our time with family and friends. (In 1959 the kitchen was strictly the domain of servants.) A row of small bedrooms that turned their backs on the pool and view were moved to where the kitchen used to be on the dark side of the house. A small master bedroom tucked off the living room was converted to additional entertaining space with a built-in bar. And a new wing housing a state-of-the-art master suite with spa-style bathrooms and a screening room was added along the far end of the pool. Ronnie did her best to respect the spirit of Neutra by retaining or replicating the many built-ins throughout the house and matching the original materials in the new bathrooms, down to the 50 year-old fixtures still available at Sears.While still retaining the look and feel of Neutra’s original, there is no doubt the house makes better use of the siting and is far more livable than its predecessor. But the question remains – is it still a Neutra? How would the master himself feel about it? How it will stand the test of time is yet to be determined. After two years on the market, it remains unsold despite a price reduction of over $5 million. And the debate rages on.

Shakers and the Birth of Modernism. (Really?)

Really. “Form follows function” and “less is more” are phrases commonly associated with the modernist movement of the Bauhaus. But did you know where the German Bauhaus of the 1920s got their inspiration? From the eighteenth-century American Shakers and their famous Shaker furniture.

The Shakers and their famous Shaker chairs and Shaker chests also directly inspired the Danish Modern movement known for its simplicity, purity of form, and grace.

Who are the Shakers? Of the hundreds of early experiments in communal living in colonial America, the Shakers were the most successful and enduring. The Shakers started in England as a dissident Protestant sect known as “Shaking Quakers” for the wild form of dancing they practiced during intense prayer sessions. Under persecution from the English, eight of the faithful fled to America in 1774 led by Mother Ann Lee.

Mother Ann Lee 1736-1784

Lee and her band of merry followers settled in New England but quickly spread, establishing Shaker communities from Maine to Florida and as far west as Ohio and Indiana. Surprisingly, Shakers are celibate, so they can only perpetuate and thrive by recruiting new adult members and by taking in orphans, a practice that was eventually made illegal in the 1960s. Children were not raised as Quakers but were allowed to choose when they turned 21. Those who chose to leave were first given money, tools, and a trade. That trade was usually furniture making.

“Hands to work, hearts to God” was Ann Lee’s motto. And when those hands weren’t working the fields, they were busy building houses and the furniture with which to furnish them.  Mother Lee established a strict set of maxims including “simplicity is the embodiment of purity and unity”, “beauty rests in utility”, “that is best which works best” and, most famously, “God is in the details.” (150 years later, Mies van der Rohe paid homage to Lee, with a wry spin, when he coined the phrase “The Devil is in the details.”)

The Shakers strove to create an environment that was clean, orderly and free of distraction so they could worship with pure hearts and minds. This meant a blanket rejection of materialism, vanity, and decoration for decoration’s sake. This is reflected in their furniture, notable for its lack of adornment.

An 1840 Shaker table from Enfield.

Shaker style furniture was also seen as innately American in its rejection of anything European or British, and demand among non-Shaker colonists was strong in the aftermath of the Revolutionary War. The Shakers began selling their furniture to the public in 1789 and continued to do so until 1947. Most Shaker style furniture made today is mass produced by mainstream furniture makers. New pieces by the rare remaining Shaker artisan sell for many thousands of dollars.

This Shaker chair from 1840 is priced at $6,500 from John Keith Russel Antiques.

Popularity of Shaker style furniture surged again after the Civil War as a rebuke to the over-adornment of the Victorian age with its excessive ornamentation and gingerbread. The Shakers introduced a catalogue in 1870, which they distributed nationally, that offered chairs, tables and other pieces in a variety of sizes.

Shakers are often mistakenly thought to be luddites, like the Amish, but nothing could be further from the truth. The Shakers have always embraced technology and welcomed any innovation that saved time, which they believed belongs to God. Their inventions numbered in the hundreds, many of which we still take for granted today including the flat broom (replacing bundled sticks), the circular saw, the common clothes pin and the rotary oven. They were the first to sell packaged seeds, the first to popularize photography, the first adopters of electricity and automobiles. They even invented the automatic washing machine with powered agitators which they exhibited at the 1876 World Exhibition in Philadelphia. They became wealthy selling their washing machines to hotels all over the world.

It was at that World Exhibition that the Shakers saw Thonet’s remarkable bentwood furniture from Vienna and quickly adopted the technique, integrating it into their furniture designs and famous Shaker boxes.

So the next time you see a Shaker chair, think of Thomas Merton, the Trappist monk and scholor who said “The peculiar grace of a Shaker chair is due to the fact that it was built by someone capable of believing that an angel might come down and sit on it.”

The Election’s Over – So What’s Next for Real Estate?

fortune-tellerNovember 11 2008  JetSetRnv8r has donned his turban and dusted-off his cyrstal ball for a look-see into the future. He knows exactly what’s going to happen and when, but he’s only going to share a little bit at a time to avoid causing a stampede.

As Vice President-elect Joe Biden famously said in one of the debates, “the past is prologue” so let’s take a look back at recent history to put the future into perspective.

Remember 2006? The country was bracing for mid-term elections. The House and Senate had both been under Republican control for twelve years. With an increasingly unpopular Republican president in the oval office, all eyes were on the elections to see if Democrats would make a come-back. There was a lot of anxiety through the summer and fall as these elections were seen as an important indicator to the future direction of the country, the economy, and the conduct of the war.

We didn’t know it then, but in retrospect 2006 was also the start of the leveling-off of the real estate bubble. House prices were reaching a plateau and sales activity was waning. JetSetRnv8r had a newly-completed house on the market. The house had garnered a lot of attention having been widely published, featured on HGTV and on a high-profile design tour. Now that it was on the market, it attracted lots of lookers, including its fair share of coveted celebrity shoppers, but there were no offers as we crossed the dreaded 60-day threshold.

Then came Election Day. Democrats swept both the House and the Senate achieving a clear majority. By 10:00AM the next morning, JetSetRnv8r had three offers on his house. By the end of the week, the house went out in trampoline-bounce3multiples at over asking price to a high-profile television and film star. JetSetRnv8r was not alone. The real estate market throughout Los Angeles experienced a very noticable election bounce that restored the market and pumped a little air back into the slowly deflating bubble, at least for a little while.

The lesson here is that elections do matter. Politics has a powerful effect on consumer confidence, and that directly affects every business including real estate.

So now that we’ve gotten through the most highly anticipated election in American history and elected a wildly popular new President who is expected to take the country in a radically (and welcomed) new direction, will we see an election bounce in the real estate market again? As of this writing, it’s been exactly one week since the election and it’s too soon to tell for sure. But anecdotal evidence collected by JetSetRnv8r among his circle of real estate agent contacts is that there has definitely been a surge in activity.

200187506-001Every realtor surveyed this weekend reported an increased number of calls on long-moribund listings and a frenzy of showing appointments. Attendance at this past Sunday’s open houses was definitely up, at least at those throughout the Hollywood Hills and Beverly Hills visited by JetSetRnv8r. For many months, JetSetRnv8r had been the only person on sign-in sheets and greeted by lonely, over-eager agents who jump up from their quiet reading on the couch. This past Sunday, sign-in sheets were overflowing and houses were comfortably full with the vibe of happy cocktail parties.

Pending Home SalesAs of this writing, JetSetRnv8r knows of no significant offers on long-time listings, but the post-election showings are definitely under way. Thirty to forty days from now will be the time to check the MLS for sales over the previous 30 days – the typical escrow period. Then JetSetRnv8r will reveal a little more of his prediction for the real estate recovery.

If you’re a real estate agent, let us know what you’re experiencing.

Read JetSetRnv8r’s posts on real estate sales trends in Beverly Hills here, the impact of the Wall Street bail-out here, how the real estate market brought down the entire economy here and here, and how to profit in a down market here.

Welcome to a New Era

obama

November 5 2008   The 21st century may be getting off to a late start, but thank goodness it’s finally here!

Happy Halloween 2008

How Did the Falling Real Estate Market Lead to a Global Economic Crisis?

October 27 2008   Real estate has always been cyclical and we’ve been in what looked like a routine down cycle since mid-2006. Real estate has also been the engine of the greater economy with new homeowners buying appliances, furniture, building materials and more – boosting production and creating jobs. So it’s never been surprising when a slow real estate market slows everything down. But how in the world did this real estate bust ever bring down the biggest Wall Street firms and lead to the global economic disaster we’re in today? And why hasn’t this ever happened before? And what are all these new terms we’re hearing like “sub-prime mortgages”, “mortgage-backed securities” and “credit default swaps”? It can all seem mind-boggling, but it’s really quite simple.

In the good ol’ days, your local bank gave you a mortgage for your home and you paid that very same bank back over the next 30-odd years. You may have done all your banking with this particular bank and you and your wife may have even played bridge or tennis with your banker and his wife. Beaver and Opie lived down the street, Donna Reed greeted you at the door in a crisp shirtdress and pearls, Hazel cooked and cleaned while doling-out sassy back-talk, and Father always Knew Best.

For better or worse, those days are long gone. The Republican revolution of the 1980s led by Ronald Reagan followed by Newt Gingrich’s “Contract With America” ushered in a new wave of “small government” and pro-business thinking in Washington. Deregulation became the magic elixir and Wall Street embraced the mantra of “greed is good”. One of the things this new deregulation did was allow banks to sell their mortgages to larger banks, who in turn packaged them together and sold portfolios of these mortgages to investors in financial instruments called “mortgage backed securities”. Some of these portfolios were made up of better quality mortgages, and some of lower quality mortgages and they were rated according to risk. This new packaging of bad loans with good loans made it easier for banks to issue riskier loans to less qualified consumers – and with more people flooding into the housing market, house prices shot up like a rocket. Throughout the 1990s, people who had previously been shut out of the American Dream of home ownership were now welcomed with open arms. Those who wondered how they would ever make the payments when their adjustable rate mortgages actually adjusted were reassured that rising home values would enable them to refinance before their payments increased. Why, they could even take money out of a refi and still lower their payments! Houses became giant ATMs – never mind you were simply giving up equity. There were actually financial experts advising people to never pay off a mortgage – that that was “old-fashioned”, “unsophisticated” thinking!

Before I go any further, let’s take a step back further in time – back to the turn of the last century. The “gilded age” of the 1890s was a decade of rising affluence as cities and municipalities grew rapidly to absorb the mushrooming population of immigrants from the previous 20 years, many of whom were now beginning to prosper. As the industrial revolution took hold, a new wave of manufacturing and service industries grew, and so did the stock market. Investing in stocks became available to the working classes for the first time and with the increase in investors, new investment vehicles sprouted like weeds in a garden. One of these popular new investments was side bets made on the performance of a stock. Without actually buying a stock, you could place a bet that that stock would go up or down. These side bets became known as “derivatives” and they were bought, sold and traded in betting parlors all over the city called “bucket shops”. Since these bucket shops fell outside the scope of federal regulators, nobody was checking to see if the so-called “banks” selling these derivatives had the cash reserves needed to pay off these bets. As the stock market reached a fever pitch in 1907, these derivatives added to the hysteria that led to panic resulting in a stock market crash. So in 1908, this kind of gambling on stocks was made illegal and the bucket shops disappeared. During the depression, even tighter regulation was established by the Securities Exchange Act of 1934.

Now fast-forward to the year 2000. Bill Clinton is a lame-duck President with a Republican-dominated congress. Deregulation is still the mantra and Clinton, a centrist Democrat eager to co-opt the Republican agenda whenever he could, along with his Chairman of the Federal Reserve, Alan Greenspan, enthusiastically signed into law the Commodities Futures Modernization Act of 2000. This not only overturned the 1908 law, but most significantly it removed the trading of derivatives around these new mortgage-backed securities from Federal oversight. Savvy investors could bet that some of these mortgage backed securities would fail as homeowners defaulted on their mortgages. These bets, called “credit default swaps”, were invented by JPMorgan in 1994 as a sort of insurance against outstanding corporate loans and to free-up cash to offset the huge cash reserves they were required to keep against those loans. Hedge fund managers trading them had become the new Masters of the Universe. Now credit default swaps could be traded against mortgage backed securities with no federal oversight – meaning no requirement to keep cash reserves to pay them off, unlike credit default swaps against corporate loans and other investments. Real estate was the new lawless wild west town. This further stimulated a market for ever more risky mortgages, throwing more gasoline on the bonfire. By 2006, the housing bubble began to plateau as prices simply became unsustainable. Homeowners who were counting on refinancing before their mortgages became unaffordable suddenly found themselves “upside-down” (owing more on their house than it was worth). Foreclosures started to mount, swelling to a tidal wave that crashed on the beach in September 2008, wiping out everything in its path, including the giant Wall Street firms who had taken to mortgage-backed securities like a junkie on smack. Without the cash reserves they would have been required to hold had they not been deregulated, they were wiped out.

The problem, as Alan Greenspan now points out, is that he and the others in charge had too much faith in the executives running the banking industry. They believed bankers would be responsible to their shareholders and self-regulate. Instead, these executives paid little attention to the details and took delight in paying themselves enormous bonuses – often in excess of $100 million. Now that a conservative Republican, pro-business/small government administration has (ironically) federalized the banking system, we, the taxpayers, will all be paying for that party for decades to come. Will the bailout work? It’s too soon to tell, but the fact that it’s being administered by the very same Wall Street executives who created the mess doesn’t give JetSetRnv8r much faith. 

Update:  Days after writing this post, it was revealed that the first thing the Wall Street firms did with their federal bail-out money was set aside billions of dollars for executive bonuses. Surprised?

Vintage Furniture – Real or Fake? Mies van der Rohe’s Barcelona Chair

My “Real or Fake” series on vintage furniture is, by far, the most popular draw to the JetSetRnv8r site. I’ve received lots of emails asking about other pieces, but none more than Ludwig Mies van der Rohe’s iconic Barcelona Chair, also known as the MR90 so here it is.

 

Like the other pieces in my series so far, Corbusier’s LC chair, Eames’ Lounge 670 and Ottoman 671 and Noguchi’s coffee table, the Barcelona Chair is one of the most popularly knocked-off pieces of mid-century modern furniture. It’s familiar to everyone because there’s a version of it in nearly every furniture store in the world.

 

As with many modernist pieces, its simplicity makes it easy to duplicate. Many copies are of exceptionally high quality – some would argue even better than the real thing. This is a case where you can get a good quality knock-off at substantial savings, but, as always, if you’re buying for investment value, only the real thing will do.

 

The Barcelona chair was designed in collaboration between Ludwig Mies van der Rohe and his partner and companion Lilly Reich in 1929 for the German Pavilion at the Barcelona International Exhibition. Two of these chairs and two matching ottomans were the only pieces of furniture in the pavilion. The chairs were created as thrones for the visiting King and Queen of Spain, and the ottomans were for their attendants.

The originals in the Barcelona Pavilion

The originals in the Barcelona Pavilion

King Tut's folding throne

King Tut's folding throne

Egyptian folding stool

Egyptian folding stool

The design was influenced by ancient designs for folding campaign chairs used by early Egyptians, Greeks and Romans – the similarity is apparent in museum pieces.  But its simplicity and grace, the “serenity of line” (as the MoMA website so eloquently describes it) made it an instant symbol of the fledgling modernist movement and it became an immediate sensation.  A swooping steel frame with two leather cushions suspended by leather straps – it sounds so simple, but as Mies was famous for saying for saying, “the Devil is in the details”.  (He also coined the phrase “less is more”.)

Soon after the closing of the pavilion, the chair went into production at the Bamberg Metal workshop in Berlin. Although the modernist ethos was to build furniture cheaply for the masses, the Barcelona chair was extremely difficult to manufacture and was fabulously expensive from the start. The earliest versions were made from welding low-grade steel plates in a flat finish – not chromed as they are today – upholstered in white kid leather. Thonet took over production in 1932 until 1948 when Hans Knoll’s wife, designer Florence Knoll, purchased the licensing rights to most of Mies’ furniture and Knoll began manufacturing the chair, which they still do to this day. The chair was such a big seller that Knoll created a whole line of Barcelona furniture inspired by the chairs including Barcelona stools, the Barcelona Daybed, Barcelona Benches, Barcelona sofas, Barcelona coffee table and the Barcelona side table. Many of these pieces are mistakenly attributed to Mies by people who should know better (hear that, DWR catalogue?) but he did not design them.

Barcelona Daybed by Knoll, not Mies

Barcelona Daybed by Knoll, not Mies

 

The sofa's not even by Knoll

The sofa's not even by Knoll

Although stainless steel had been around since the turn of the century, it did not come into popular use until the 1950s when Mies redesigned the chair to be made from this superior material. Today, the chair is available in a choice of two finishes – chrome plated and polished stainless steel. The two are nearly undistinguishable to the untrained eye, but if you saw them side-by-side, the polished version has a more “liquid” finish. And there is a significant difference in cost – Knoll charges $4,083 for the chrome plated model and a staggering $6,235 for the polished stainless. The matching ottomans are an additional $1,930 and $3,608, respectively.

So the next time you see a stately pair of Barcelona chairs and ottomans in a sleek modernist home, you can appreciate the fact you’re looking at nearly $20,000.

Unless, that is, you’re being deceived by clever fakes. The chair is easy to copy and passable versions are available for as little as $329 online, or $635 including an ottoman. Good quality reproductions can be had for $800 and up. The real deal is made in the U.S.A. but fakes come from Italy, Brazil, China, India, Korea, Vietnam, Russia and Romania. You’ll often see them called “Pavilion Chairs” to avoid trademark infringement.

 

Knoll modified Mies’ design fairly significantly making today’s chairs very different from the original thrones. Since Knoll took over production, they are generously proportioned and nearly square at 30” high x 30” deep x 29.5” wide with a seat height of 17”. They feature supple leather cushions that subtly follow the curves of the frame and are held in place underneath by matching leather straps. There are no visible welds or seams and the finish is flawless. Once you’ve studied one, the fakes will be easier to spot.

A cheap fake

A cheap fake

The first give-away is the proportions. Many cheaper fakes are visibly smaller or appear to stand taller than they are wide – Knoll’s version appears wider than tall. The cushions are often straight and stiff. The leather cheap and shiny. Whereas the Knoll version is upholstered with twenty individual panels, cut and hand-welted and tufted with matching buttons, cheaper copies are simply one piece and pleated. Knoll ottomans stand slightly taller than the edge of the chair seat – many copies have a lower (and more comfortable) ottoman.

Knoll logo in the leg

Knoll logo in the leg

 

So if you’re buying vintage, how do you know if you’re getting the real thing? First look for the Knoll Studio logo and Mies’ signature stamped onto the frame. Without that, it’s a fake. If it has the stamp but you think it may be counterfeit, double-check the dimensions of the chair. Then look at the quality of the leather and make sure it’s not a single pleated piece. Check the quality of the leather straps – if they’re vinyl or nylon, walk away.

Welting detail

Welting detail

 

Matching leather straps

Matching leather straps

As for prices, this is a case where you can save significantly right now by buying vintage over new. Due to the downturn in the economy, recent auction results have been dire for sellers – you can pick up a pair of excellent vintage chairs in polished stainless steel – some even with the distinguished provenance of being from the Seagram’s Building in New York – for less than $5,000 per pair – with ottomans! Two pairs offered at the October 7, 2008 Wright auction in Chicago estimated at $5-7,000 per pair went unsold. Two pairs at the October 25-26 Rago Arts auction are estimated at $3-5,000 per pair. (UPDATE: The Rago auction sold two chairs in polished steel and black leather for $3,250 for the pair – essentially a third of the price of new.  And two chairs with one ottoman in white leather and polished steel got $6,000 for the entire set.  A nice discount off the $16,078 list price from Knoll.)
Lot 167 from the 10/25/08 Sollo Rago modern auction. Estimated at $3-5,000. Sold for $6,000.

Lot 167 from the 10/25/08 Sollo Rago modern auction. Estimated at $3-5,000. Sold for $6,000.

But if you insist on buying new, buy from an authorized Knoll dealer or reseller like Design Within Reach. If it hurts to write that check, you can comfort yourself with the knowledge that Knoll pays a royalty on each chair to the Museum of Modern Art who now owns the design rights. They should throw in a free museum membership for life with each chair.

How to Buy Foreclosed Properties

Up till now, I’ve been a flipper of high-end properties.  That may change given the upheavals in our economy and it’s possible I may move into the foreclosure market.  These properties are also called “bank owned property” or “REO” for “real estate owned”.  You’ve probably been hearing a lot about “short sales” too, but that’s something different and I’ll get into that in a separate posting.

In the interest of full disclosure, I have not yet bought a foreclosed property but it’s not for lack of trying.  I’ve been shut out of six offers in recent months because I didn’t know the nuances of the game.  Here’s what I’ve since learned:

 

Banks are dispassionate

When buying from an owner, there is lots of emotion that guides the strategy of the offer and the subsequent negotiations.  When buying from a bank, the property is just a number on a very long list and the bank has no emotional ties to the house whatsoever.  Your offer is reviewed by a bank employee who is following strict policies and procedures.  Your offer either falls within their acceptable parameters and the deal kicks into gear, or it doesn’t and your offer is ignored.  There’s no negotiation so any efforts to try to outsmart the bank are wasted.

 

Understand how the price was determined

Banks are overwhelmed with properties and it’s getting worse by the day.  They do not have the wherewithal to inspect each property or the money to spend $400 or more for a proper appraisal on each and every one.  Instead, they often outsource to a real estate broker for what’s called a “BPO” – a Broker’s Pricing Opinion.  This broker may or may not visit the property – they may establish the price merely by doing some quick desk research and going by gut feel.  (As a former appraiser, I can tell you they also called me for an opinion.)  Since the property is one in a very large portfolio, nobody cares enough to re-think or second-guess the BPO.  I know from having worked with real estate agents and brokers, they will do everything they can to prop up the prices so they will generally come in high – higher than a certified appraiser would.  Even though the banks know this, they’d still rather start on the high side than leave money on the table, so the high estimate is accepted.

 

Know when the price starts to move downward

I made a lowball offer on a foreclosed house while it was within 30 days on market and my offer was ignored.  About 90 days later, it sold for much less than my offer.  What happened?  I was aggressive too soon.  When a foreclosed house is first listed, the bank will be the least flexible on the price.  Once the listing hits 30 to 60 days on market, the bank may start accepting offers that are within 10-15% of the asking price.  At 90 days, they may lower the price and accept offers within a wider margin.  So pay attention to how many days the house has been listed by watching the “Days On Market” or “DOM” on the MLS listing.  And be sure to check the listing price daily – if it drops, it’s time to make your move.

 

Know your market to spot the bargains

Frequent readers of JetSetRnv8r know that my Golden Rule is to buy where you know – know the prices, know the buyers, know the trends, etc.  If you’re an expert on the area, you’ll know if the price on a new listing is high, reasonable or low.  In their rush to get the house listed, the bank may have accepted a BPO which is too low and that should set-off alarm bells in your head.

 

If at first you don’t succeed, try, try again

If the bank doesn’t respond to your first offer within a week at most, don’t wait, they are not going to respond.  Like I said earlier, they do not negotiate so no response is a clear “no thanks”.  Raise your offer a few points and repeat every four to five days until you have a deal.

 

Look for more postings to follow as I wade deeper into the foreclosure pool.  And I invite my readers to contribute their experiences in this burgeoning new market.

 
 

 

Who’s to Blame for the Mortgage Meltdown? You? Me? Or “Them”?

October 15 2008   With the capital markets frozen and the world economy in crisis, everyone is looking for someone to blame.  The airwaves are full of politicians and pundits lashing out at this party or that party.  The Obama-Biden team blames runaway de-regulation dating back to the Reagan administration.  John McCain blames the rampant “greed and corruption on Wall Street” while his running mate likes to wave her school-marm finger at the “predatory lenders”.  Some conservative talk radio hosts blame consumers for not taking “personal responsibility” while more liberal commentators lay the blame squarely at the Bush administration.

 

We’re all swayed by our own reality and frame of reference.  But I can tell you one thing, I’ve worked inside the system and I could see things unraveling years ago.  The system is broken and has been rotting from the inside-out for many years.

 

When I got into real estate investing full time, the first thing I did was get my appraiser’s license as I felt that was the best way to learn the fundamentals of the industry.  I freelanced for two appraisal companies (more on the life of an appraiser in a separate posting) and had a handful of my own clients who were mortgage brokers.  Banks worked only with the most senior, experienced appraisers who might sub-contract the work to less-experienced appraisers such as myself.  But mortgage brokers preyed on new appraisers who they knew were the most desperate for the work and would do whatever it takes to deliver the desired outcome.  Banks paid their appraisers within days – mortgage brokers paid whenever they felt like it, if at all.  And if pressed for payment, they’d drop you for another new appraiser.

 

I can attest first-hand that appraisers have been under tremendous pressure to “hit the number” – that is, bring the appraisal in at the value needed by all parties – sellers, buyers, agents, mortgage brokers and bankers – for the deal to go through. 

 

What does this mean?  OK, think back to the go-go years of 2003, 2004, 2005.  Values are rising up to 20% per year.  An aggressive seller prices his house high.  An eager buyer, convinced by his agent and financial advisors that values are rising fast, agrees to the price – or offers an even higher price to best any competitive bids – and applies for a mortgage.  Both the buyer’s and seller’s real estate agents as well as the mortgage broker and bank all have an incentive for that price to be as high as possible as everyone along the chain is earning a commission on that sale price.  The mortgage broker – or the bank – hires the appraiser and seeks the one who they know will turn the appraisal around the fastest (2-3 days) with the fewest problems. 

 

The appraisal must be based on “comps” – or the actual sales of comparable homes in the neighborhood during the past few months.  Not listings, not pending sales, not sales that fell out of escrow but actual closed sales.  There are tight guidelines for what kinds of sales are appropriate comps – they must be in the immediate neighborhood – across a busy road or higher up a hill should not be used as neighborhoods can change within a block or two.  Houses larger or smaller by a factor of 20% should not be used.  Houses of similar condition are sought – if the “subject property” (the house being appraised) is a fixer or newly renovated, than the comps should also be fixers or recently renovated.  Amenities such as room counts, bathroom counts, fireplaces, pools, views and number of garage spaces are all considered.  The appraiser finds anywhere from eight, nine, ten or more potential comps and narrows the choice down to three to five for the appraisal report.  Adjustments are made to each comp – adding or deducting value to account for differences from the subject property.  It is three parts science and one part art and requires sound judgment, in-depth knowledge of the area and experience.  The appraiser has the most at stake here as any mistakes or the slightest appearance of fraud can lead to loss of work or worse – lawsuits or loss of their license.

 

Aggressive seller’s agents often meet the appraiser with stacks of “comps” they’ve pulled.  They do this under the guise of being helpful but their real motive is to try to ensure that the appraiser uses the best comps – the highest sales – for their reports.  These comps, however, are rarely useful and the appraiser is discouraged from accepting them.  They pull from better neighborhoods or larger homes in better condition.  Since refusing them will raise red-flags with the agent, the savvy appraiser accepts them with a smile then throws them away.

 

During the recent real estate boom, mortgage brokers (like my clients) would call and say “I need this house to come in at $X”.  Right off the bat, this is a violation of the ethics rules as they are not supposed to pressure the appraiser or influence the outcome.  It wasn’t unusual for the mortgage broker to call two or three appraisers and ask each one for a verbal confirmation on that phone call that they could “hit it” before they’d be hired – also a violation.  If the appraiser couldn’t meet that number, this could kill the sale which would incur the wrath of all parties so that appraisal would be thrown away and a new appraiser hired until they got the results they wanted.  When this happened, everyone accused the appraiser of incompetence and that appraiser would not only not get paid for his work (anywhere from $350 to $1,200) but would be black-balled from any future work from all parties involved in that deal.  It only took one or two such instances to kill a career.  Appraisers who cooperated were highly sought-after and got lots of work from strong referrals throughout the industry.

 

Appraisers did not stand idly by.  They were screaming bloody murder at anyone who would listen – banks, industry organizations, even the press.

 

So who’s to blame for the current crisis?  I blame the legislators who created a system that motivated and rewarded inflated values if not outright fraud.  The consumer is the hapless victim and is the last person who should be blamed.  The consumer was just following the advice of experts they relied on and the government who encouraged them through tax incentives and a steady drumbeat of homeownership as “The American Dream”.

 

Auction Results Suffer in a Tough Economy

CHICAGO, October 7, 2008.  Like the orchestra playing on the deck as the Titanic made its final descent, Wright Auctions of Chicago gamely held their Modern Design auction of mid to late twentieth century furnishings and art in the midst of the global economic tsunami that’s engulfing us all.  (Dow down 500 that day!)  With even the rich feeling the pain of evaporating investments, some diehard collectors practiced retail therapy by opening their thinning wallets to pry loose their last few dollars.  (Brother, can you spare an Eames LCW chair?)

After a quick analysis of the 417 lots by such stalwarts as Charles and Ray Eames, George Nelson, Isamu Noguchi, Norman Cherner, Florence Knoll, George Nakashima, Edward Wormley, Hans Wegner, Milo Baughman, Jean Prouve and others, here’s how the results broke down:

    117 lots sold within their projected ranges (28%)

    157 lots did not meet their reserve (37%)

    49 lots sold below their ranges (12%)

    94 lots sold above their projected ranges (23%)

Of the 157 lots that did not sell, many were assorted tables and chairs by George Nelson, George Nakashima, Vladimir Kagan, Hugh Newell Jacobsen, Florence Knoll, Finn Juhl, Gio Ponti and, surprisingly, various pairs of Mies van der Rohe’s Barcelona chairs reasonably priced between $5,000 and $7,000.

A Swan Chair by Arne Jacobsen estimated between $4,000 and $6,000 sold for a conservative $4,800 – considerably less than prices as high as $7,200 I’ve seen in recent years.

Of the 94 that sold above their projected ranges, there were a few notable pieces that hit it way out of the ballpark:

A chair by Charles Eames and Eero Saarinen for the MoMA Organic Design Competition which was expected to get between $15,000 and $20,000 sold for a whopping $50,400.

 

 

An Eames DAR shell chair on an “”Eiffel” base that was expected to get between $500 and $700 got a remarkable $5,400.

 

 

A pair of Eames DKR wire chairs with “bikini” slip covers that were projected to get $500 to $700 roped-in $3,000.

 

 

An Arredoluce 3-arm floor lamp in all-white that was estimated at $5-7,000 got $15,600 (while a nearly identical Arredoluce lamp with blue, red and yellow shades got a mere $8,400.)

 

An Eames ETR “surfboard” coffee table that was projected to get $3-5,000 sold for $24,000!  Kowabunga, dude!

 

 

And the surprise of the evening was a 1937 bakelite radio by Isamu Noguchi for Zenith that was expected to get $3-5,000 and instead sold for an eye-popping $22,800!  (And it doesn’t even play FM!  What’s that about?!?)

 

Readers of my posts on the Eames Lounge 670 and Ottoman 671 will be interested to know that a vintage rosewood model by Herman Miller sold for $3,120 – within its projected range of $3,000-$4,000 but way below its historic high of $7,000.  And an early Noguchi coffee table in ebony with a rare green-glass top was a bargain at $1,920, a bit shy of it’s projected range of $2,000-$3,000 and far less than the $6,600 the same table got at the same auction last year – perhaps a sign of the times.

So how does this compare to years past?  There are too many variables to make a definitive apples-to-apples comparison but Wright’s October 2007 Modern auction raked in $3.9 million (an average of $7,876 per lot) to this year’s $2.1 million ($5,155 per lot) – a stunning 45% drop.  And whereas 37% of the lots sold for above the projected range in 2007, only 23% did so in 2008.  Unsold lots increased from 21% to 37%.

Of special note, Barcelona chairs that sold above estimates for $7,200 a pair in 2007 had no takers at all in 2008 despite a minimum reserve of only $5,000.  An Edward Wormley 6329 sofa that sold for three times its estimate for $14,400 in 2007 got only $4,800 in 2008.  And a Comprehensive Storage System by George Nelson that sold for a whopping $36,750 in 2007 (estimated at $5-7,000) got a mere $8,400 in 2008.  Ouch!  On the other hand, anything Eames such as assorted DCW, LCW and RAR chairs all increased in value by up to 450% from last year’s prices.

A logical conclusion one could draw from these results is that with so many of the lots by Charles and Ray Eames selling for far above estimates this year and for far higher prices than a year ago, anything by Eames has been a stellar investment for those lucky sellers.  Nakashima, Nelson and Kagan collectors?  Not so much.  But times change and tastes shift so better luck next time.  To see the entire results for yourself, visit the Wright20 site here.

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