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Flipping Dubai World

By John Batchelor on November 28, 2009 at 1:30 PM in Current Affairs

Tune in to my radio show Sunday night when Larry Johnson will call in, for the experts’ panel, from Egypt. My syndicated shows run Saturday and Sunday on many stations and via iTunes.

Carpet-Cleaning Luck.  

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CALCULATED RISK’S deeply ironic real estate reporter Jim the Realtor takes his handheld robot to a high-end jungle of foreclosures at Carlsbad in San Diego County.

Jim observes “A hotbed of foreclosure activity in Southeast Carlsbad…”  The centerpiece of the report is a 3300 square foot new-built house that has now been successfully bought on the courthouse steps sight unseen by a flipper/speculator and then moved at a profit to a buyer.   Good for everyone around.

I followed the logic of the profiled flipper carefully, a pleasant, superstitious, unseen guy named Adam Rappaport.  AR bought the property on the courthouse steps sight unseen in a bidding moment at $591k.  The house was new built but never owned by a family; instead it was owned by a speculator/bundler who had many properties and finally let this one go to foreclosure and the bank.  AR paid the back taxes, after what sounds like fighting off the county and state ceremonially trying to get the property for back taxes, and then paid $650 for carpet-cleaning.  The house is not luxurious, though it is large.  Jim the realtor makes much to do about what he calls the river noise of the six lane freeway backing onto the property.  He also mentions the power lines and the weather.  My memory is that there is nowhere in SoCal that isn’t near freeways and powerlines and those rolling desert hills that tend to burn in fire season.  Shrug.

The summary for Adam Rappaport is that he and his partner got lucky when the tenant moved out easily in the first months, the house was in decent condition, and they found a buyer.  Not the $700k plus they asked, bot not the lowball $600k they were offered.  Somewhere in between for a gross of about $95k for four months risky of holding the paper.  You can hear Rappapaort sign and laugh with the remembered anxiety.  Lucky.  

Carlsbad Jobs Summit

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This may be the way the end-of-the-world of the housing collapse finally ends, with luck and smart, tense bargaining.

Jim the Realtor mentions a nearby house at $800k plus, so the new owners have a deal on a block that may be underwater.  Lots of short sales ahead in this semi-lux neighborhood.  That 15% jobless number likely damaged everything we can see or hear in the video.  The national jobless number of 10.2% will be revisited in a week’s time, and the Obama administration plans a Jobs Summit to speak to the fears.  Those fears look less scary and more complicated when you stare at the overbuilt schemes of SoCal.

POTUS and the Obama administration didn’t cause this, but their answers so far, willy-nilly TARP, futile stimulus, healthcare novelties, cap and trade delusions, seem out of step with what needs to be done, a profound reordering or real estate prices.  Notice that no one talks about sub-prime or Alt-A loans.  These are all high-end prime loans, and they are shaky.

Dubai World Fire.

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The global question is how does the flipper adventure in San Diego County connect to the sudden news that the Dubai World house of cards has collapsed and that the whole operation, with those silly palm leaf islands, is on the brink of REO?  A $65B note floating in promises and half-truths, “a day after the government said it would take charge of restructuring its corporate flagship, Dubai world, and asked creditors to accept delayed payments.”

In my world, delayed payments sounds a lot like missed and unlikely payments, sometimes called fools or scoundrels running away from the IOUs.  In sum, right now the Euro and Asia markets have gone into war dances with risk insurance because of the possibility that the too big to fail white elephant of Dubai World just failed — the credit default swaps have on Dubai debt have skyrocketed from 318 bps to 570 bps in forty-eight hour.  Does this connect to Carlsbad?  Yes.  That toxic waste keeps circulating; credit is flagrantly, bottomlessly dubious for Dubai.  

Unknown is how this will affect worldwide credit costs.  European banks are said to have $40 billion at risk.  The poison sloshes toward our shores, also, and the unanswred detail right now is how much of the Dubai debt is at Citi or Bank of America and so forth?  

The risk that Rappaport felt in the four months between courthouse and escrow was real.  What if Dubai had blown up the day after he bought the REO?   Will other flipper deals blow up because of the Dubai World fire panic that just started?  I do not have the answers. Neither do California realtors.   This does not sound like the beginning of a simple fire:  


“The banks with the greatest exposure to Dubai World are Abu Dhabi Commercial Bank and Emirate NBD PJSC, people familiar with the matter said. Executives at the two banks weren’t available for comment Thursday. 

Among the international banks that have large exposure are the U.K.’s Royal Bank of Scotland Group PLC, HSBC Holdings PLC, Barclays PLC, Lloyds Banking Group PLC, Standard Chartered PLC and ING Groep NV of the Netherlands, the person said.”