All Posts from Walker
Santa Fe’s Camino Del Monte Sol Historic District
Santa Fe probably has more designated historic districts per unit of population than any other city in the country. It does not, however, have more designated historic districts per unit of history! This thanks to the fact that the European era of Santa Fe’s history extends back past 1600 and even arguably to 1540 or so, when Francisco Coronado first passed through the area on his one and only expedition.
I recently stumbled upon the fact that one area, which I have long thought of as the coolest in town, is known as the Camino Del Monte Sol historic district. It’s so named because the street (or footpath, as it once was) takes one in the direction of Sun Mountain, or Monte Sol. Indeed, if you walk south from Canyon Road on Camino Del Monte Sol, Sun Mountain is the first thing you see. It was quite literally the road to Monte Sol.
The Firewood yard on Camino Del Monte Sol, just off of Canyon Road
Before there were any artists in Santa Fe, before any galleries, before tourism, before Americans, what we now know as the eastside was farmland occupied by the first Spanish settlers; it was traversed by acequias, many of which still function. The lot lines of those old Spanish farms from the 16th, 17th, 18th, and 19th centuries are what give the Eastside its interesting structure. Land was divided (generally) so that farmers had equal claim to both high and low areas, so one uphill landowner couldn’t deprive downhill neighbors of water. Many of those farms (the cornfields were called milpas) survived into the 20th century, and the dwellings of some of those early Spanish families survived. Thanks to foresight on the part of the city, a portion were preserved due to the 1988 designation of the area as a historic district.
From 1984’s “Camino Del Monte Sol Architectural Historic Survey,” which successfully argued for the later creation of a nationally designated historic preservation district.
Long after the Pueblo Revolt in 1680, long after the Spanish colonial period gave way to Mexico’s more open attitude toward Americans in 1825 or so, long after New Mexico became a territory in 1850, artists from the east coast began to float into New Mexico in pursuit of its dreamy light and a culture that was vastly different from any in the United States, typified by scenes similar to the below.
Boys riding uphill from town, ~ 1920
Camino Del Monte Sol was one of the areas those artists settled. Will Schuster, responsible for so much of today’s culture in Santa Fe (via Zozobra; google it) was among them. As you walk south from Canyon Road, Shuster’s house will be one of the first you see on the right.
Will Shuster’s house on Camino Del Mote Sol
As more and more of the artists who became known as “The Santa Fe Colony” converged upon Monte Sol, they left their imprint via many of the decorated doorways, adapted from the pueblo style, which famously line the road and give it its character.
588 Camino Del Monte Sol
Indeed, they made Canyon Road what it later became. I haven’t learned enough to write in a valuable way about the history, but I am genuinely thankful for the effort that resulted in the 1988 designation and led the area to be so beautifully preserved. If you have not yet strolled up the street from Canyon Road, know that it’s worth doing, and it’ll likely fire your curiosity for what happened here.
580 Camino Del Monte Sol
Mid-spring on Camino Del Monte Sol
Just outside Santa Kilim, on Acequia Madre
The Coming Requirement for a Written Agreement between Buyers and Their Brokers
[Editor’s note: this story has been updated. For the latest developments on the topic, read my November 15, 2024 story here.]
Keeping The Intent in Mind
Whenever I’m speaking with anyone about the change coming in residential real estate, I start at the same place: understanding the intent of the settlements is key. Broadly speaking, the aim is to bring greater transparency and clarity to transactions. That’s a good thing.
Some of these changes, though, will seem strange and unfamiliar to buyers, who will be required to adopt new practices in their searches. One of those is that after the changes take effect nationally on August 17, homebuyers must sign a written agreement with a broker.
This is new. But the motive, again, is to encourage transparency.
The Buyer-Broker Agreement Comes to The Party
In many states, signing a written buyer/broker agreement has been a requirement for years. But New Mexico has not been one of those states. Their use here has been limited. What’s their purpose?
These agreements typically accomplish a few things: 1) they identify the parties who are working together 2) they specify a term during which they propose to do so 3) they specify whether the agreement is exclusive (with that broker only) or non-exclusive (a buyer may work with multiple brokers). In certain states, where brokers more frequently act in an agency capacity, these agreements 4) specify agency or a lesser form of representation known in New Mexico as transaction brokerage. Given how complex real estate transactions can be, it’s a prudent thing to have the terms of a relationship in writing.
Right? Absolutely.
What’s Different?
One thing that’s different is that as of a certain date, having a signed buyer-broker agreement will be required before a single property is shown. That’s right! In the past, one could sign one at the outset, after a week or two, before an offer’s submitted, or never. Now it has to happen at the outset. This question is somewhat in flux but as of right now, that’s the state of things.
The agreements themselves are not that big of a deal. Again, they identify who’s working together, for how long they plan to do so, whether the arrangement is exclusive, and (often) whether agency will be in force. Not huge.
Acceleration of Certain Buyer Conversations and Decisions
But some of the conversations and decisions about the house-hunting process will be accelerated. For some, having to decide about working with a particular broker will arrive uncomfortably early. Why, you might ask, would the National Association of Realtors (NAR) submit to a provision that seems to make the process more cumbersome? Answer: these agreements are one of the mechanisms through which more transparency and flexibility is introduced into transactions. How? Via the mandate that sellers have choice as to whether to offer compensation to buyer’s brokers. That is the crux of the matter. And there will now be a number of scenarios under which a buyer’s broker can be compensated, not just one.
A Page from The New Mexico Association of Realtors’ Buyer-Broker Agreement
One positive effect is that it will become more important for buyers to have a broker (me!) who’s done his or her homework, who knows the contours of the new landscape as well as the old, who welcomes competition, and who can negotiate the coming terrain. My advice is to embrace the (seeming) greater complexity; good things will inevitably come as the system evolves and buyers and sellers will be much better informed from the outset.
To read more, see the National Association of Realtors’ “Written Buyer Agreements 101,” available here.
A Day at My Listing in O’Keeffe Country on Abiquiu Lake
I half-promised I wouldn’t write about listings, but I’m going to make an exception here. The natural beauty of the area around Abiquiu Lake (an hour north of Santa Fe) and Ghost Ranch, where Georgia O’Keeffe lived and painted, is spectacular. This striking 14.5-acre lot on the lake is a wonderful site for a retreat from city crowds. Visit the O’Keeffe Museum if you are here in Santa Fe, and if you want to rest your head just down the road from where she painted, you know where to find me. $495.
“Walking rain” as the natives used to call it
Driving into the neighborhood under the Pedernal, subject of so many of O’Keeffe’s paintings
It’s no small butte!
Nearing the development (more accurately, the lack thereof) on Abiquiu Lake
One of at least two potential building sites on the property
View of Abiquiu lake from the land’s shoreline
Near the shared boat ramp of the Mesas de La Joya development
Below, the painted shoreline
Video: What to Know about Interest Rates, The Bond Markets, and The Mortgage Markets
Because Rescue Means Rescue: Adventures with My Almost-Wild and Always Opinionated Maremmano-Abrusezze Best Friend, Allie
“He’s weird about that dog.” So goes the under-the-breath muttering I occasionally hear.
Several years ago, I found myself in my hometown of Houston after a long absence. Maisy, my yellow lab, my running buddy, my snowshoe buddy, and my Santa Fe ski buddy, had stayed in New Mexico in the wake of my divorce. It was the best thing to do for Maisy, but heartbreaking for me.
I was dogless for the first time since 1998. And it felt weird.
So I started volunteering to walk the dogs at Special Pals, a well-respected shelter in Houston. One day, as I pretended to do office work there, I noticed a giant, white, fluffy, gorgeous thing strolling casually and slowly around the office, saying hello to everyone who cared to chat. She was clearly a very special dog, evidenced in part by the fact that no one else had been allowed to just hang in the office while the other dogs were being put through their paces.
Alaska, it turned out, was her name.
This is Allie on the way home from the shelter. Fresh air is good.
Her head shape reminded me of my old yellow lab, Maggie, so I was immediately drawn to her. Soon I found myself talking with Valerie, then the Special Pals kennel manager, about her. “She’s a Maremma Sheepdog” Valerie said. I’d never heard of the breed. As it turned out, few people in the U.S. have.
The Maremmano Abruzesse is the ancestor breed of the Great Pyrenees and has existed almost entirely unchanged since Roman times. They’re unrecognized (thank God) by the AKC, which has allowed the few of them who are in America to avoid being interbred with golden retrievers, pugs, or Afgan hounds – all the terrible stuff that happens when a breed gets really popular. As livestock guardian dogs, Maremmas are extremely intelligent, independent, somewhat aloof, and as I was to learn, absolutely opposed to being indoors, at all times. So Allie sleeps outside, even when it’s in the single digits. I literally have to drag her in.
And there is the especially endearing quality of Maremmas, which is hard to impart to anyone who has not experienced one, that they just do not give a damn what you think.
So as I talked to Valerie about her history, it became clear that Alaska needed a person who could understand and handle her. She’d been in and out of Special Pals for a year and a half with her littermate, JJ. She and JJ escaped their owner’s house repeatedly, wandered around, and over months, wound up in the hands of the good people at Special Pals over and over again.
One of the employees there mentioned that they often put Alaska in one of the outdoor huts, which kinda resemble human shelters, with pitched roofs and windows about five feet off the ground. “She even gets out of there” he said, pointing to the window. There was also the story about a trial adoption gone wrong, when an unsuspecting would-be adopter had left her closed up for a while and paid for it with the sacrifice of a few thousand dollars’ worth of Venetian blinds. The tales of Alaska’s destructiveness were many, but that’s not what I listened to.
Allie and her brother JJ, the first day they landed at Special Pals
I listened to the voice that said “If anyone can help this dog, you can.” So Alaska came home for a test drive, and I eventually abbreviated her name to Allie. I remember googling the breed, coming upon a webpage of “The Maremma Sheepdog Club of America” and reading “Maremmas are not recommended as pets.”
I say all the time that owning Allie is like owning four regular dogs, so there is a great deal of truth in the above caveat. But I knew that enough mind- and heart-melding with a dog can overcome almost anything.
I was immediately apparent that if I were to keep Allie, I’d have to radically alter my lifestyle. No more weekend trips to Austin. No walking out the door at 7:30 am and returning at 6:00. Indeed, pretty much everything would be turned upside down, and there were times when I thought “How am I going to do this?”
Gradually, I did indeed change my entire lifestyle in order to be able to keep Allie and give her a good life. I didn’t have 200 acres of pasture, like Maremmas require. I didn’t have a flock of sheep, like they need. I certainly didn’t have penguins for her to protect from foxes (if you haven’t seen the movie Oddball, it’s a good way to get to know the breed). All the things Maremmas normally have and the environment they need to thrive was lacking. Literally all of it.
I could offer none of the things they need to thrive, except perhaps one thing. I got it. I understood. I figured that might do it.
Maremmas are a wild breed. They’re working dogs. They’re bred to do a job. And since Allie is effectively an unemployed security guard, I compensate for all the things I can’t do by doing every single little thing I can do. When my co-workers look at me like “Why the hell does he take that dog everywhere?” and people don’t seem to understand why she goes with Heather and me to dinner (outdoors) when it’s 35 degrees and cloudy, or when I say to someone “I can’t do that because I don’t have anything to do with Allie,” I really don’t care.
The rewards of being a best friend to a dog like Allie are endless. Everywhere she goes, life is a spectacle. People just look at her and smile. As I drive around town, people mel into “awwwww” expressions when they see her giant head and neck sticking out of my car. As I walk about the plaza at lunch every day, we’re approached by (no exaggeration here) at least ten different groups of people who want to pet and admire her. Being with Allie is a circus.
Despite her intelligence and independence, she and I are absolutely joined at the hip (so to speak) and I know she’d be lost without me. I’ve seen the look in her face when I disappear behind some Chamisas on a walk. I made a promise to her (and to myself) that her life would be a lot better with me than it would otherwise have been. After six years, I think we’ve nailed it. It has been extremely difficult at times and a ridiculous amount of trouble, and I dare say most people wouldn’t have stuck with her. But it has been an amazing experience.
Because rescue, dammit, means rescue.
Walker’s Eight Irreverent Tips for Santa Fe Home Sellers
Unless you live in a yurt, you’re going want to be in the driver’s seat when selling your place in Santa Fe, at least within a certain price range. While the market has reached a more traditional balance between buyers and sellers after the recent changes, there are some things you can do to make sure you actually get to drive the car. Read on.
Ditch The Flowery Language & Stick to The Facts
Flowery language full of superlatives and 42 adjectives per line won’t sell your home. The facts will. When a realtor is considering showing your home to a potential client, the only thing they look at is the skeletal stuff. They want facts. Buyers do too. The only problem is the flowery language has somehow become an entrenched tradition. Don’t let your home be marketed via nonsensical prose that paints it like a 90,000-square-foot chateau built by the Duc de Burgundy’s first son. And make sure the facts are properly represented in your listing.
Hit The Market with a Bang
Marketing plays a pivotal role. And the best marketing strategy may be something close to my “everything, all the time” approach. Make sure photos are ready; make sure brochures are ready; have your broker send out e-mails to other brokers. Hold open houses: not once or twice, but as much as possible. If the marketing plan doesn’t reassure you from the outset, it may not be sufficiently strong. Spending loads of money isn’t a requirement, but expending energy and effort is. If it doesn’t feel like you hit the market with a bang, don’t panic. But make sure you do so in the ensuing weeks.
Think about Skipping the Staging
Most buyers can quite easily look past the furniture that you’re self-conscious about, your shortage of attractive hand towels in the kitchen, and the fact that your mid-century modern furniture was only modern in 1874. But don’t get me wrong; staging can place your home in the most attractive light for showings and there are many circumstances when it helps. My point is that there are many other things that can eclipse it in importance (appropriate pricing, for example!) and it’s important to attend to those.
Be Honest, Always
It is vital to be straightforward, clear, direct, and fully honest at all stages of the contracting process, whether you’re a buyer or a seller. For example, disclosing (potentially) adverse material facts about a property is a fraught process. Given how convoluted the regulation surrounding this issue is in New Mexico, it’s vital that your disclosures be defensible. If a second-floor bathroom leaked four years ago and your homeowner’s insurance paid for repairs, you must disclose. It’s also important that your honesty is apparent to the counterparties in the transaction. This removes risk from the process and can smooth things greatly.
Do The Work
This is the most important thing, and it’s something some sellers don’t want to hear. Be willing to put in the work. It isn’t just hard work for the realtor; it can be hard work for the owner. Don’t expect it to be otherwise. If you need to do a little landscaping to improve curb appeal, consider it. If you must clean the house constantly for showings, do it. If you need to leave for four hours to accommodate open houses, try to do it. It often takes work.
Try To Get a Backup Offer
In New Mexico, sellers have relatively fewer rights during the contractual process, and buyers have many more. Certain provisions in New Mexico purchase agreements provide exit chutes for buyers that carry few repercussions for them. If, for example, when your home is inspected, NM buyers can raise any number of objections based upon the report (within reason) and if the seller does not agree to cure all of them, the buyer has a right to terminate and have earnest money refunded. A contract may have one or more contingencies attached (the sale of another home or obtainment of a mortgage) which may cause the deal to terminate with little consequence to the buyer. Make sure your broker is willing to do the leg work to attempt to get a backup offer, so that should the primary-position buyer exercise his or her rights, you’re protected. Many times, backup offers (depending upon the motivation level of the buyer) are stronger than the first contract, and this can work in your favor. It takes a lot of work to get a solid backup offer, but it’s a worthwhile tactic.
Read Your Dang Documents
The home purchase agreement in New Mexico, without any addenda or amendments, now runs 20+ pages. But almost every page of that contract will contain provisions or language that are vital for sellers to fully understand. If the thought of reading a real-estate form puts you to sleep, that’s good. You’re normal. Have your realtor explain exactly what the provisions mean so that you know where your rights lie. The language is not that impenetrable and the more fully it’s understood, the lower the odds of a surprise.
Everything’s Negotiable, Except When It’s Not. Be Reasonable
In theory, almost everything regarding a New Mexico real estate transaction is negotiable. In practice, certain traditions (which can vary from county to county) mean that some things can be firmer than you’d like. In Santa Fe County, it’s customary and typical that the parties split title company closing fee, the seller pays the cost of the new owner’s title insurance policy, each party pays his or her recording fees, and the seller pays the cost of a survey (if needed). Your closing costs will generally run about 7.50-7.75% of the purchase price.
There are hundreds of points of negotiation in a sale; the one thing a broker can’t control is how responsible a negotiator your counterparty is. Sometimes it’s best to choose your battles wisely, to ensure that a successful transaction actually takes place.
Why The Inverted Yield Curve Is Good News for Santa Fe Homeowners
I make a regular habit, since I’m detached from the bond markets now, of looking at the (admittedly simple) Bloomberg table below. It’s accessed via the “markets” tab on the home page, and shows closing yields of U.S. Treasury bills, notes, and bonds with maturities from three months to 30 years. Lately, it’s reflected how inverted the yield curve is, which is when short rates are higher than long rates. (The Financial Times, incidentally, published a wonderful, educational primer on the yield curve here.)
When I contemplate the current inversion and the probabilities associated with it, it gives me a pretty strong sense of what’s likely to happen in the mortgage markets and what’s likely to happen with Santa Fe home prices over the next few years.
But not for the reasons you might think.
A 116-Basis-Point Inversion Is Nuts
With the Fed Funds target rate set at 5.25% to 5.50% (this is the rate banks charge one another for overnight loans) and the 10-year Treasury having closed on March 12 at 4.17%, it’s becoming apparent that the prospects for mortgage rates drifting significantly lower are dim, whether the Fed lowers the target rate or not.
With the Fed funds effective rate (a weighted average of real-world Fed funds trades) at 5.33% on March 12 and the 10-year yield at 4.17%, the 10-year is a jaw-dropping 116 basis points below the overnight rate. And fixed-rate mortgages are priced off of the 10-year yield.
Closing Yields as of March 12, 2024
Inversion Happens Only About 10% of The Time
The yield curve is, over time and on average, rarely inverted. The rule of thumb my fixed income portfolio manager friends use is that over a 50-year period, one might see the curve inverted perhaps 10% of the time. It’s comparatively rare. Borrowing for longer periods is normally more expensive than borrowing for shorter periods because there’s less risk in lending your money out for a shorter time. Bond geeks call higher rates of long-term borrowing the “term premium.”
So if the curve is flat or normal 90% of the time and the 10-year yield is now at 4.34%, what happens when the curve normalizes? If you concluded something to the effect of “nowhere to go but up,” you may be pretty close to the truth.
What about Potential Fed Funds Cuts?
Let’s return to short-term rates for a moment. Recently, most economists had predicted that the Fed would cut overnight rates in the March 20 meeting, or barring that, certainly by the July 31 meeting. But in the face of a screaming economy with full employment and almost all other indicators showing things at full tilt, the Fed has very little incentive to ease. So the forecasts on the timing of the first cut have been pushed back again and again, now from the March to the July meeting.
Even if we do assume a Fed cut as early as March 20, what does that mean for mortgage rates?
Very likely, almost nothing.
Fed rate cut odds as predicted by the Chicago Merc
What Will The Return of A Normal Curve Mean?
If the yield curve reverts to what it has done 90% of the time (a flat or normal shape), we might be looking at a 10-year yield of 5.00% or so, and with the 10-year at 5.00%, mortgage rates would be around 8.00%. Moves higher than 5.00% in the would push mortgage rates above 8.00%.
Many of the most respected minds in finance believe that 10-year yields will remain high not just over the next year or two but high over the next decade. So even if the Fed cuts by a full percent and the curve normalizes, mortgage rates may stay at current levels or climb higher.
Yes, even with Fed funds a full 100 basis points lower than they are now, mortgage rates would more likely be higher than lower, because it’s unlikely that the curve remains inverted. It’s simply much more common, by a factor of about 10, for the curve to be flat or sloping upward. In terms of probability, it’d be a simple reversion to the mean. To be clear, we are only discussing probabilities here. Just because a certain pattern (the curve only being inverted 10% of the time) has taken place in the past, does not mean it will necessarily do so in the same manner in the future. But in finance, these things tend to be a decent guidepost.
But Higher Rates Are Good for Santa Fe Home Values
Higher rates, as I wrote here, are keeping those with cheaper mortgages in their homes, restricting existing-home supply. In Santa Fe, the $400,000 to $1,200,000 range is very tight. The longer rates are high, the longer supply will remain tight. We have such steady demand here from Colorado, Texas, Arizona, and California that demand has continued to edge out supply, quite reliably.
New-Home Construction in Santa Fe Won’t Fill The Gap
In some locales, new-home construction can move in to fill the gap. This tends to be where new home construction is freer and subject to fewer municipal regulations and environmental restrictions. In Santa Fe, building is not like it is in Houston (thankfully). Santa Feans are averse to sprawl, building permits are hard to come by, and in general, new-home building remains tepid. Prices, therefore, are likely to keep up their steady climb.
If you own a home in steady-demand Santa Fe, this is all very good news. The capital appreciation you may expect over the next several years will net a healthy return on funds — especially if they’re borrowed. Painful as the entry may be, compelling investment potential remains.
Seven Strategies for Santa Fe Buyers in a Market of Scarcity
The past few years have been a bit unkind to buyers in certain ways; the market has contracted and slowed (in Santa Fe) but despite this, supply is scarce, and prices have continued to climb. If you find yourself in the market here, there are definite steps you can take to make it easier on yourself by the time you write a contract.
Offer Cash If You Can Do It
I’m embarrassed to have written something so elementary, but it may merit some explanation. Offers in which the buyer has to submit a financing contingency are inherently weaker for a couple of reasons: 1) Unless a buyer has actually gone through the loan application itself and has been offered a loan on the property, the buyer comes to the table with loan pre-approval, which is really only bank speak for “We kinda like the idea of lending you money.” But pre-approvals are never a guarantee of an offer of a loan. And sellers know this. Moreover, in part because of the great financial crisis and some of the reforms that were enacted afterward, loan offers take much longer now than they did before 2010. Some sellers may need to close quickly, and waiting on loan approval can preclude that. Many buyers come to the table armed with cash to make sure that their offer is the one that’s accepted.
Be Prepared to Show Proof of Funds
A strong offer is a cash offer, yes. But you gotta prove it. For me, it’s not enough to receive a letter from a family-owned CPA firm in New Braunfels stating, “My client has sufficient funds to make a purchase of up to a million.” I want to see numbers. I want to see a statement. This is important if you’re going to submit a cash offer and expect it to be seen as a strong offer.
Eliminate Home-Sale Contingencies
Smart sellers aren’t fans of contingencies. If you need to sell your current home to obtain the proceeds to fund an offer, your seller will be interested in how your contingency is structured. With your offer submission, try to ensure that your home is marketable and indeed has already been placed on the market. Some of my sellers recently received an offer from a buyer from out of state who had a financing contingency and a home-sale contingency, and the home had not yet been placed on the market. An offer like that, with two contingencies, can indicate to the sellers that the buyer is not serious. Indeed, it was not a serious offer and though I was obligated to present it to my clients, I recommended that they not counter. If you must have a home-sale contingency, make sure you have a plan for getting your home on the market, make sure it’s priced reasonably, and make sure your agent’s marketing of your home is effective.
Be Prepared to Act Quickly
In Santa Fe, homes that are in good condition and marketable will receive offers. Often times, those offers will come within hours or a day of their having been listed. Enter with a bang. You may not want to be the first to make an offer, but you do want to be the strongest. So be prepared with the above and conduct your due diligence on the home ahead of time. Stay a while at the first showing. Ask hard questions. Put your best foot forward from the outset. In short, don’t forget that real estate markets are still competitive and that you too must be competitive.
Be Flexible on Earnest Money
Customary earnest money percentages vary by market. A homeowner in Houston’s West University neighborhood might expect a 2% earnest money deposit or even 3%, but in Santa Fe’s Eldorado, 1% might be customary. Or vice versa. If your seller is asking you for a larger earnest money deposit to show good faith, make sure you are comfortable with the request and be flexible if you can. In the end, this may aid negotiations because more is at stake.
Be Nice. And Make Sure Your Agent Is Too.
Sadly, this is probably the least understood advantage you can bring to the table. Sellers respond to agents and buyers who are congenial, personable, kind, and easy to work with. You can negotiate with an iron fist but do it behind a velvet glove. If you’re not super capable in that department, choose an agent who is. It sounds trite to give people advice to smile and make conversation, but it is a critical element of the negotiation and contracting process. Forging relationships, especially between strangers who have not done business with one another, is critical.
Be Rational About Inspection Results
Many deals fall apart because buyers and sellers can become inflexible and rigid at the point at which inspection results are returned. It’s important to keep a level head and remember what you may be asking a seller to do so that compromise remains an option and you can reach the closing table. A 101-year-old home in New Mexico is going to have some quirks! Keep your requests in perspective, be reasonable, be prepared to defend what you’re asking for, and remember that compromise may save you more money than an overly stout demand.
Musings on Business Integrity and Walker’s Enhanced Three-Strike Rule
I didn’t really realize it, but I’ve wanted to write on this topic for a long time.
I think “business integrity,” or rather the lack of it, has a great deal of conceptual overlap with public corruption. At least there are similar ways to parse the topic. Transparency International publishes a study on levels of public corruption globally, using various indices. It’s interesting reading, not least because the position of the United States lies well down the list of countries with the lowest levels of corruption. Darker red countries in the graphic below are “highly corrupt” while those in yellow are seen as “very clean.” The U.S., somewhat surprisingly, is not at all among the cleanest.
Similarly, from industry to industry, there is tremendous dispersion in the degree of esteem in which each is held by the public. Gallup surveys Americans continually on the topic, asking them to state whether they view a given sector positively, somewhat positively, neutrally, somewhat negatively, or negatively. It’s interesting to see how quickly industries can fall from favor. Those with the greatest increase in positive perception are shown at the top of the image below.
And then there are those sectors, below, whose esteem is taking a hit. Among them, real estate, which lost four percentage points in the most recent polling. Only 30% of respondents, as of September 13, 2023, viewed real estate favorably.
Most of this decline, I imagine, resulted from the publicity surrounding the recent lawsuits against the National Association of Realtors and certain real estate brokerage firms, about which I will write later. Nevertheless, no one in this industry would be pleased with the perceptions the ranking reveals.
But the ranking isn’t my point.
History and Regulatory Structures Drive Perceptions of Integrity
Many of you know I worked in the investment management industry for quite a long time, for more than 25 years, beginning in 1994.
Thanks to the catastrophic market crash of 1929, which sent the nation spiraling into an economic depression from which it didn’t fully recover until 1942, the federal government began to intervene in securities markets, beginning with the establishment of the Securities Exchange Commission in 1934 and culminating (the initial round of regulation, at least) with the Investment Advisors Act of 1940.
If you’ve worked in the field, you know the extent to which the SEC and FINRA (the Financial Industry Regulatory Authority) scrutinize every person and every tiny event that takes place, down to the manner in which things are phrased in correspondence. As a onetime writer for such investment managers, I was all too familiar with the danger of crafting language that might be construed as promissory (“We believe this investment strategy will yield attractive results over the next five years”) versus sterile and neutral language (“We believe this strategy may hold promise of attractive returns, though of course, no approach is guaranteed.”)
Tight, Effective Federal Regulation Yields Results
The result?
Extremely high levels of regulation at the federal level have paid dividends in stabilizing the industry and bolstering the esteem in which it is held. In my entire career in securities trading, sales, and investment management (going back to 1994) not once did I observe a person behaving unethically in a capacity pertaining to the business itself.
Not one time. Over 25+ years.
In fact, the most egregious thing I remember is an instance during the time I was a broker trainee in 1995 in Houston, and one of my fellow trainees cold-called potential customers and in a rather affected manner, pretending that he knew them. Of course, it was sleazy. We ruthlessly mocked him for it. If you’re still around and reading this, Tom, so sorry!
In my work at American General in Houston (a trading position), at AIM Management in Houston (an institutional marketing role), at Thornburg Investment Management in Santa Fe (a marketing role), at USAA in San Antonio (a product management role), not one time did I observe anyone behave unethically in the slightest way regarding their fiduciary obligation to the public or to other institutions. Not one time.
Who knows? Maybe I was in the wrong meetings!
Real Estate’s State-Level Regulation is Inherently Looser
Since the turn of the (nineteenth) century, there has been no similar national-level scandal or economic calamity which had real estate as its cause and genesis. The federal government has therefore been content to allow the regulation of the real estate industry to remain in the purview of the states. It is, in my view, somewhat under-regulated, while the investment management business is arguably over-regulated, but that, again, is not the point.
Because state regulatory frameworks are most often looser in their effect, it is incumbent upon the individual to effectively reconnoiter situations with sparse regulatory guidance.
Recommendation: Walker’s Enhanced Three-Strikes Rule
One must be attentive to what I call, rather tongue in cheek, “offers of information.”
One might witness a person behave in a way that isn’t nice or kind. File it away. One might witness something similar in a different situation, and it becomes a second data point. And then perhaps a few weeks later a third instance emerges. At that point, in my view, one has enough data to form an impression and to draw a conclusion. In highly regulated fields, this perception often doesn’t matter in the least, because one knows with absolute certainty that that person is going to abide by the rules because if he doesn’t, he’ll lose his job, face penalties, or much worse. But in an environment primarily regulated at the state and not at the federal level, participants can’t always rely on explicit and detailed regulatory frameworks to assure the ethical behavior of a counterparty or an agent in a transaction.
And where there is more opportunity for a broader variety of behavior, a broader variety of behavior will occur.
I recently had had the displeasure of observing a few instances of behavior during a transaction, which were most certainly what I’d scale as unethical — but only for subjective, human reasons. No state regulation was breached, no guideline encroached upon. Indeed the nearest regulation lies approximately 602 miles away from the topic then at hand. But it was fundamentally dishonest behavior and was sufficient to flip the “avoid” sign into the up position.
Be Attentive to Patterns and Intent
It’s one thing to be extremely annoying (as I am 100% of the time) to office staff; it is another thing entirely to give someone the opportunity to say to a peer, “Wow that was not cool” and worse, to have that judgment seconded by someone else who has dealt with the same person. The enhanced three-strikes rule gives you enough latitude to allow an initial perception to be confirmed, and then reconfirmed. And once one reaches a conclusion, the action chosen is yours. Using the rule gives you a reliable framework within which to feel your way through situations that may be uncomfortable a bit too fluid.
It is therefore important to be hyper-attuned to the signals you receive, whether it’s a person being rude to another in a conversation, a remark that raises an eyebrow, or something that’s demonstrably unethical. Without a federal regulatory authority policing everyone and every minute action, it’s wise to enter into a potential transaction with the proper navigational gear.
[Editor’s note: As a reader observes in the comments, brand reputation and integrity play a role in self-governance, and the currency of Sotheby’s carries an obligation to maintain that extremely high level of brand integrity, so this is a factor too.]
2023 Year in Review: Santa Fe Real Estate Sales Volumes
When I look at real estate sales volumes in Santa Fe for the last 10 or 12 years, the first thing that comes to mind is that the Fed has done a pretty damn good job slowing things down. And this is meant only partially tongue in cheek.
If we’re looking at all types of sales (single-family homes, condos, raw land, etc.), 2023’s total number of transactions settled at 3,149, versus 4,766 in 2021, the peak year, when rates were still ultra low.
When people as me “How is the market?” I often respond by saying, one way or another, “smaller.” Normally that gets a somewhat perplexed look. Then I explain by saying that the market is about 65% the size it was at the 2021 peak. To be precise, volumes (again, the number of transactions, not the dollar volume) for 2023 were 66.1% of the 2021 peak.
The fact that the Fed has managed to slow things this dramatically without, so far, causing some form of distortion to enter the markets is a good thing, and fundamentally, the Santa Fe markets are, ironically, quite healthy.
Looking at residential sales only, the numbers look similar, with 2023’s volume of 2,496 transactions versus 2021’s 3,769 showing a similar drop of 66.2%. As importantly as the magnitude of the drop the Fed managed to engineer is how long it’s been since sales volumes in Santa Fe have been at these levels: roughly speaking, sales volumes are at the same levels they were 10 years ago, in the 2014/2015 time frame.
In the chart below, 2023 is to the left and 2006 to the right.
Much as many of us who have experience in the investment management business like to malign Jerome Powell (mostly for his pretty terrible communication skills), the Fed’s having been able to orchestrate a slowdown of this magnitude without breaking things is pretty remarkable.
Land sales may prove to be somewhat exempt from this pattern, because bare lot sales have begun to climb due to the demand for new homes having climbed to fill the supply gap of existing homes, which, as everyone now knows, is severely constrained by homeowners with cheap mortgages wanting to stay put so they can hang on to their cheap mortgages. In my view, this supply constraint is not likely to change materially unless mortgage rates drop to the 5.00% to 5.50% range, which I don’t see as likely. Subject to constraints within Santa Fe regarding new-home construction, lot sales volumes will likely continue to climb, bucking the overall trend.
Many pundits (Nobel Prize winner Paul Krugman among them) have pronounced the inflation fight over (and in substance, it is) but with the U.S. economy still screaming along as it has been, short-term rate cuts of any significance (more than 75 basis points or so) seem not to be in the cards, and mortgage rates will likely remain in their recent trading range.
The constraint in supply, of course, is driving the steady price increases we’ve seen in Santa Fe, perhaps a topic for another post. Seeing price increases while volume has been cut by 35% is indeed anomalous. But as long as a vast pool of cheap mortgages exists for homeowners to sit on, price increases will continue. Overall, the Santa Fe market is smaller but quite healthy. When we burn through the pool of cheap mortgages and unlock significant supply, things will get very interesting.
What Does A Dozen Years in Santa Fe Teach You about People?
“I need a really good marketing person who can do everything,” the woman who’d later be my boss told me from Santa Fe, back in 2002.
“Will you settle for 80% of everything?” I asked.
Before I knew it, I was up in Santa Fe from Houston, staying at the Eldorado hotel, breathing the clean, dry, fresh New Mexico air.
My dad gets the credit, because it was through him that I came to know this place. Dad was what we now call an ‘investment advisor’ but back then we were known simply as ‘brokers.’ He was extremely competent in the fixed income markets and knew what he was doing. In 1986, if you wanted to put together a municipal bond portfolio, you pretty much had to do it yourself. But one day these two guys from New Mexico (one or both of whom are likely reading this) stopped by the Rauscher Pierce office in downtown Houston with an alternative: an all municipal bond portfolio within a mutual fund wrapper. It was a big deal. Dad started doing business with them, and was soon one of their best customers. When Thornburg Investment Management later invited dad up to their Santa Fe headquarters to kick the tires, I got to go.
Yours truly, my sister, and my dad, downtown Santa Fe, 1991
My Santa Fe Love Affair Started around 1990
So began my love affair with Santa Fe. At the Thornburg due-diligence conferences, we got to take diversionary jaunts like rafting the Rio Grande, skiing in Taos, and visiting the foundry in Tesuque. It was great fun. I was hooked on the company and on the place. My sister and I accompanied dad on one of the trips; the photo above was taken roughly in 1991 (she was doing a triathlon near Cochiti Lake, if memory serves).
Anyway, when the chance came to take that marketing job, I snapped it up.
12 Years in Santa Fe in Two Parts
All told, I’ve lived in Santa Fe about 12 years. From the day I first strolled around the plaza, it felt like home. I settled northwest of town in a new development called Aldea, having bought the third house there. It was “just us and the ravens,” I used to say. That’s about all the company I had there, aside from the occasional coyote trotting over the patio to catch a rabbit.
I fell in love with all the typical Santa Fe things: skiing, snowshoeing, hikes in the Alpine country, trail running, cycling, the town itself. There’s something mystical, even spiritual, about the place. When I had to leave town for Texas not too long afterward to help take care of a family member, I was heartbroken. My eyes welled with tears as I drove south toward I-25. Leaving was hard. So was being away.
Snowshoeing with Maisy on Aspen Vista trail in 2017
While back in Texas I had time to think about what made Santa Fe feel like it did. It was a mix of the Alpine environment, the beauty of the high desert, being able to roll out of bed and go skiing, the many amazing restaurants. All this made it special, right? I now know that’s not a full answer.
My Colorado Mountain-Town Exile Was Instructive
After time away from the mountains, they drew me back, this time to Boulder, Colorado. I lived there as long as I could take it. The popular perception of Boulder from flatlanders is “Oh man, that place is gorgeous! What a paradise!” Fair enough. Well, I remember thinking beforehand “It’s not as diverse as Santa Fe but I can probably take it; it won’t be that big of a deal.”
Well, it’s a big deal.
Lest you think this a woke post about diversity, it isn’t. But Boulder’s lack of it tripped the thought process that led me to a deeper understanding of Santa Fe. I remember driving around, searching (in vain it would later turn out) for the heart the place. Never found it. Looked a long time! It gradually dawned on me that Boulder’s lack of diversity contributed to an unappealing cultural shallowness. People seemed so dead-set on preserving a mountain-town fitness-Mecca paradise that they lost the paradise altogether, and, in fact, were pretty mean and rude to each other. “Call a place paradise, kiss it goodbye,” goes the Eagles’ lyric. Santa Fe’s approach is different, I knew. But how? Plenty of other places in the U.S. offer broad diversity and are vibrant cultural crossroads all their own: New Orleans, Houston, Charleston, Los Angeles, Austin, Tuscon.
The Root of Santa Fe’s Spirit? Its History
What makes Santa Fe so special, I realized, is its people, and more particularly, the respect they have for the history of their interactions over hundreds of years. The Spanish were here starting in 1540 or so, and together with natives, they had the place to themselves for about 300 years. Americans have only been here for about the last 200.
Fiesta parade on the plaza with the Plaza Cafe sign in view, circa 1930
American Latecomers, 1822
The Spanish, wisely, kept the Americans out. But after gaining its independence from Spain in 1821, Mexico welcomed trade and the Santa Fe trail opened. Interest in the territory was acute, and this began a long period of discovery. Fortunately, New Mexico wasn’t overrun from the east. Many deep Spanish traditions survived, including a unique dialect of Spanish that’s spoken only in northern New Mexico and a form of Catholicism practiced only here. The more I learn about the history of the place, the more I feel like a latecomer, an interloper, like I haven’t earned the right to be here. And it’s that vague sense that this place really belongs to someone else who was here long before you were, that generates this deep respect for other people, cultures, and land in New Mexico. In Boulder, they are bitterly protective of their vision of Utopia. In Santa Fe, we are fiercely protective of each other because we recognize that we need each other to keep this place what it is.
Just One of Our Traditions: Christmas in Santa Fe
Among the many Spanish Catholic customs is one that makes Christmas in Santa Fe a mystically beautiful thing. There’s a community procession after sunset, on Christmas eve; it happens all over northern New Mexico and in Santa Fe the gathering is on Canyon Road. “The Canyon road Thing,” as we call it, is a joyful, warm community event, where locals walk up and down the hill with Luminarias (small bonfires) lit in the road for light and heat. Farolitos, a sort of old-fashioned Spanish sidewalk light, line the sidewalks and tops of adobe buildings all over town. New Mexico Magazine has a fun article on this here.
Farolitos lining the Canyon Road sidewalk
Santa Fe Teaches You What’s Possible
What’s really special about Christmas in Santa Fe is not these trappings of it but how we interact, in a genuine and respectful way. Here, if you see someone that doesn’t look like you, you walk toward them to talk and show gratitude for them, not away from them. I’m glad I get to help other people contemplate living in this place. It’s taught me that if history, the land, and cultures permit it, people do develop a sort of enlightened view of one another, that it is possible and that it does happen. But Santa Fe is not for everyone. You have to want to be a part of this place and to contribute to it with your heart, not just your pocketbook. Those who genuinely want to do so can be part of something exceptional.
Snow and farolitos on the steps to a Canyon Road gallery
That’s just bull. Actually bison
Santa Feans gathering around a luminaria on Canyon Road
A gallery on Canyon Road
A magnificent bronze horsehead cast at the onetime bronze foundry in Tesuque
The Canyon Road scene on Christmas Eve
Events of 15 Years Ago Are Behind Today’s Housing Shortage
The single most important factor driving the housing markets nationally is something that began in 2008: the great financial crisis. But not for the reasons you might think.
The GFC, as investment management types call it, was a credit-driven event, not a rate-driven event as we have now. The big banks (such as Wells Fargo) and the non-bank lenders such as Countrywide (may it rest in peace) first eased and then ignored their own underwriting standards, making “no doc” or “low doc” loans (mortgages that required no or little documentation of a borrower’s credit worthiness). Not super smart. And such offenders were many.
When the cookie inevitably crumbled, credit dried up, institutions wobbled, many failed. Bad real estate loans ate through the economy, culminating in the failure of Bear Stearns, Lehman Brothers, Countrywide, and others who had direct and indirect mortgage exposure. Had the U.S. Treasury and the Federal Reserve not intervened, the great financial crisis would indisputably have turned into the second great depression.
Unfortunately, it’s the Fed’s reaction to the GFC that we’re still grappling with, and it’s is the biggest factor in the housing shortage nationwide and in Santa Fe. It may be a challenge to work out of.
A Bit of Monetary Policy History
Let’s backtrack to September 11, 2001. After that ‘exogenous’ shock to the economy, the Fed used mostly conventional measures to try to re-stimulate demand. It lowered the Fed funds target rate to near zero and though it undertook a few other measures that were novel at the time, the Fed stuck to its knitting and mostly just waited it out. The shock proved temporary, and though a brief recession followed, the central bank began to raise overnight rates again in 2004 (the chart below shows that rate from 2001 to 2023). All well and good. A conventional policy response.
Not so in the events that followed the GFC.
During and after the crisis, then Fed chair Ben Bernanke undertook the usual responses of dropping the Fed funds and the discount rates, but it was clear that those measures alone would be ineffective in the face of full-on economic collapse. One of the extraordinary policy responses later adopted is what’s now driving the shortage in housing nationwide. Yep. From all the way back in 2008.
You may (if you were paying attention) have heard of “quantitative easing” or “QE” many times over the past 15 years. Its effects linger. Those of us who were in the investment management business between 2008 and 2020 knew that eventually, the QE piper would have to be paid.
Now the piper’s taking his due. Below I explain how.
Quantitative Easing’s Long-Term, Unintended Effect
On the short end of the yield curve, the Fed traditionally controls rates not by fiat (merely pronouncing what they think the Fed funds target rate should be) but by market action or “open-market operations.” The Fed enters the market and buys enough overnight paper to drive rates down or sells enough to drive rates up. This, the short end of the market, is the Fed’s bailiwick. It’s one it stayed in until it a few more tricks were called for in 2008.
The threat to the economy during the GFC was so great that Treasury and the Fed (acting together, thankfully) realized that cutting short rates wasn’t going to do a thing for an economy on the brink of collapse. Rates needed to be cut across the board: for two-year, five-year, 10-year, and 30-year paper. The emergency called for so many extraordinary measures that dropping rates to these artificial lows was just one of hundreds of policy measures enacted by a very capable team of Bernanke as Fed chair, Hank Paulson at Treasury, and Tim Geithner at the New York Fed. I show below just one page from the New York Fed’s “Financial Turmoil Timeline” covering three months starting in September. See the November 25 entry. It was nuts.
Among many other things, the Fed in November 2008 began a program of buying huge quantities of longer-dated bonds (first mortgage-backed securities, or MBS) in the open market, driving rates to extreme lows and flooding banks with massive quantities of cash, preventing further failures. But the Fed didn’t stop with MBS. Eventually, they would move on to plain ol’ corporate bonds, treasuries (of course), municipal bonds, and virtually everything inbetween. If a promissory note existed, the Fed bought it.
The “buyer of last resort” saved the day, thankfully, helping prevent wholesale economic failure. This was one of the most effective measures.
Addiction is a Terrible Thing
There was just one problem. This QE stuff was something of a drug. As we in the business knew, the economy no longer needed QE by about 2013, when the Fed should arguably have terminated the various QE programs. But the Fed was chicken.
The Fed feared that the economy wasn’t strong enough to handle rising rates, so it kept vacuuming up everything in the long end of the market, year after year after year after year, to the consternation of bond managers and investors, who were sick of 0.50% yields. Homebuyers reaped the “rewards” of QE with mortgages in the 3% range and lower. So began a long, long, bull market in housing, driven not by market fundamentals but by artificially low mortgage rates, rates that were 200 to 600 basis points lower than they would have been if naturally set.
Then Fed “tapering” became the buzzword in the investment management business as it timidly and gingerly began cutting back on the buying. By 2019 or so, the cutbacks had begun in earnest but rates were still too low, still “fake” low and still not at levels the market would otherwise set. What had been a free market at the long end of the curve was now a market dominated, manipulated, and controlled by the Fed behemoth. It was not healthy.
It had an effect that’s proving difficult to manage years later.
By 2019, much of the U.S. population had moved into new and different housing, financed by mortgages at low rates. Then, the other shoe dropped. What happened? The pandemic. That accelerated mobility.
When again threated by events that might devastate the economy, the Fed hit the bottle again, this time with a vengeance. Not only was the easing program on the long end of the curve expanded, it was undertaken with such force that long rates came close to 0% (in some countries they went negative as global central banks copied the Fed’s moves). Thirty-year mortgages hit levels as low as 2.30%. On and on it went, as homeowner after homeowner borrowed for three decades at below 3.00%.
The chart below shows the 10-year U.S. Treasury yield during that time frame. It’s not hard to detect the beginning of the deliberate downward push by the Fed in 2008. What’s important to note is that these levels (from 2008 to 2022 or so) are abnormally low by any historical measure. So the 4.25% to 5.00% trading range that we have seen lately is reflective of fair value and more in line with what the market typically sets. Absent a return to quantitative easing (the bond purchase programs described above), reversion to those levels simply will not happen, and it’d have unwanted economic effects anyway.
Back to our story. Soon 80% of the outstanding mortgage stock in the country was below 4.00%, as I wrote about here. Someone with a 2.35% mortgage, no matter what the cause impelling them to move, does NOT want to move into a new loan at 7.10%. The effect of homeowners staying put because of low interest costs became known as the mortgage-rate lock-in effect, and it’ll persist until those loans are paid down and that mortgage stock works through the system.
Though it might have been good news for those who bought at low rates and for those who refinanced during the 2008 to 2022 period, the artificially low rates have been, in some fundamental respects, not so great for the housing markets. The extent to which it’s now limiting supply is extreme. It does have an effect in keeping prices stable. That’s good. But inadequate supply is inadequate supply, and residential real estate markets will suffer from this for the foreseeable future.
This will have two effects aside from stable prices: new home construction will rise (it already has; see the November market update on Santa Fe) to fill the supply gap, especially in those areas of the country where building is not regulated heavily (my hometown of Houston, for example). The overall size of the residential market will also continue to contract as sales volumes decline. In Santa Fe, residential market volumes are at roughly 65% of their 2020/2021 peaks. The market is plain-old smaller. That’s not necessarily an evil after the frothiness of 2020 and 2021.
It’s important to keep in mind that these effects (rising prices in a declining market, rising new home construction, and contracting sales volumes) are the product not so much of higher rates, but of the artificially low rates that persisted for over a decade.
Homebuyers will adapt to higher rates eventually, and the mortgage-rate lock-in effects may taper off. On the other hand, they may not. Nobody knows.
So, the next time you’re tempted to blame high rates for a market that’s slowing down, don’t. What you’re seeing are free-market rates, not rates manipulated by a central bank through brute strength. A return to those low rates would likely have negative consequences, and this time, the Fed seems to know it and is staying out if the liquor cabinet. Now that free-market forces have returned to the long end of the curve, housing markets may adapt in a healthy, non-distorted way over time.
And that’s a good thing, though we will have to contend with limited supply in the interim.
For grins, check out the New York Fed’s full Timeline of Policy Responses to the Global Financial Crisis. It’s kinda terrifying.