Jeff Mayers: Hi everybody; welcome to the Madison Club, and welcome to the October luncheon, which is a cooperative venture of WisBusiness.com, Madison Magazine and the Madison Club. And maybe they can turn down the elevator music? [laughter] I will be singing later on in the lounge, but... [laughter]. OK, we'll be doing karaoke later, OK? So everybody get ready for that.

Anyway, just while lunch is being served, I wanted to tell you about two upcoming events for wisPolitics. WisPolitics.com also does its luncheons here, and I'm usually the host, because I run WisBusiness.com and WisPolitics.com. But on Thursday October 16th we have Democratic pollster Paul Mazlen in. He's a national pollster who happens to do his business out of Madison. He'll be here to tell us the lay of the land from the Democratic point of view.

Then on October 23rd, a week later, we'll have Congressman Paul Ryan, he's Republican who is an architect of the 700 billion dollar... either it's a financial rescue bill or a Wall Street bail-out bill, depending upon your point of view; and so he'll be here to tell us what happened there, and what that might portend for the elections. So now I'm going to turn over to Neil Heinen, from WISC TV.

Neil Heinen: And Madison Magazine. Thank you, Jeff. And I want to start just by welcoming you all. I don't know which one of us will break the news to Buer [sp 01:35], but he's no longer the biggest draw. I think he can handle that, but I'll break it to him gently. This is a terrific turnout, and I thank you all for coming; and I think it probably speaks to the subject matter and the quality of our speaker. I do want to start however by thanking and welcoming and introducing you to our sponsor for this series of business lunches, Lee Hecht Harrison.

Lee Hecht Harrison is a global provider of services, customized and fully integrated human capital solutions, and they provide career transition, leadership consulting, and workforce solution services to businesses. 240 offices around the world, and Dave Gromacki [sp 02:25] and his team are here, and I'm very appreciative that they have decided to sponsor these business lunches. They've been in the area for about four years now, and I certainly feel like I know them. But that still is somewhat new, certainly compared to our guest and his company. So we welcome them.

Earlier this year, Stark Realtors celebrated their 100th anniversary here in Madison. We are very fortunate to have three generations of Starks here at the lunch today: Phil and Chris, and of course Dave Stark. The company started in 1908, and among other things, it has always been an integral player in civic life in this community, in addition to being a stalwart of the business community. It has been very gracious and generous over the years; the whole company has, in terms of supporting civic endeavors in Madison.

Dave Stark is president of the company, and we're really fortunate to have him as our guest speaker here today. So, as always, we will give opportunities to you to ask questions. Jeff and I will fire away to begin with, but as we get started, Dave, you and I have talked over the last several months quite a bit about a difference in perception, a difference in opinion about the effect of the credit crisis, of the sub-prime situation; that maybe perception has not been reality, necessarily, in this market, having to do with real estate. So I would like you to kind of start there, give us your current assessment of the market and where we are.

Dave Stark: OK. Can everybody hear me? OK, good. Thank you. First of all, I would be remiss if I didn't thank all of you for coming to hear this. I guess I tend to agree with Neil, that whether it's the quality of the speaker or not, I don't know, but certainly the timeliness of the topic, I think, has a lot to do with why folks have shown up. If anything has been top of mind with people in the last few months or years, it has been real estate; and of course, now with the credit markets and what not, it's a big deal. And I also appreciate you introducing both dad and my son Chris, and I should also introduce my stepson Nathan, that's for him, who's there. But that's all right.

And also, you said this is a record crowd; one of the ways you do that is to seed the crowd with lots of folks, there's a lot of Stark Realtors people here, why don't you raise your hands? See them all there? You can see, that's good. So, take them out, and it'll be back to normal. [laughter] But that's OK. I do appreciate everybody coming to hear this today. As to the state of the market, I guess I would like to say a couple of things, just to kind of get us started, and then we'll kind of go from there.

First of all, one of the catch lines that I've used for many years when people say: "How is the market?" Because everybody asks me that whenever they see me; and the first thing I would say is: "Well, you know, it's not as bad as everybody thinks it is, but it's not as good as it should be." And I think that really sums up where we are and continue to be today.

The events of the last few weeks, I think, have brought renewed attention to this, but they illustrate one of my primary points about the real estate market that I've felt really from the beginning. In fact, if you've read my newsletter over the last couple of years, you've probably heard me say this a couple of times. And that is that at root - and this is my belief, but I think it's playing out this way - this is not really a real estate crisis per se. I don't think this has been driven by real estate.

And I think that's the way it has often been positioned in the media is that this is a real estate problem, and all this is being brought about by a meltdown in the real estate markets. Rather, what I would suggest is that the real problem has always been a credit problem. That this problem began in the credit markets, it spread to the real estate market through various mechanisms that we could talk about in more detail if you would like to, but suffice it to say that a lot of liquidity, and a lot of financial innovation, and some really sloppy underwriting around the country led to some difficulties in housing that are now rebounding back through the whole economy and back up into the credit system. But at root, this is a credit problem, not a housing problem.

And it may sound like a distinction without a difference, but to me it's an important distinction. And the reason it's important, is because what drives a lot of people in their real estate decisions today is this fear that housing is somehow a damaged asset. That there's a problem with housing, that it's risky to own, that you can't own it, that it's a bad thing. And my feeling has been, certainly here in Madison, Wisconsin and elsewhere, and I can prove this a hundred times over if you want to really get into it, is that here in Madison, Wisconsin and Dade County, housing values have been very stable, in fact, they continue to rise ever so slowly, except for maybe in the last three to six months. But pretty much dead flat going all the way through this whole episode, our prices have been very flat. We have not seen a decrease in our housing prices, and yet that is the fundamental mindset that a lot of people have.

And to my mind, if I had to choose between owning real estate and mortgage securities, which is what really caused it all, I'd take the real estate in a heartbeat, particularly if I were living here in Dade County. But that is not always the perception that people have. So for me, it's important for people to realize that real estate as an asset to own is still just fine.

The other thing that I think, and Neil and I have talked about this, and I think this is that important stakes and people have to bear in mind, is that real estate markets are by their very nature local. And yet much of the discussion about this whole situation over the last few years has been about housing on a national level. I said this at another forum a few months ago, and after that they reprinted the head in the newspapers, I'll say it again here for you to see it. It makes about as much sense talking about a national real estate market as it does talking about a national weather forecast. You know, the fact that it's 25 degrees in Anchorage and 70 in Miami, doesn't mean it's 55 degrees in the country. It's meaningless.

What it means, it's sort of like having one foot in boiling water and another foot in ice water and saying that I am balanced and comfortable. It just doesn't work that way. Real estate buyers are inherently local. As you look at the price indices that have described what has been going on with real estate over the last few years, what you will see is that there are vast differences. The real problems are concentrated in a relatively few areas, none of them here.

In fact, you hear there are four states where most of these problems are concentrated -- California, Florida, Nevada, Arizona. If you took those four states out of the Union, and sent them off into the ocean for a while, our housing situation would pretty well correct itself immediately just by definition. So, to spend time fretting about housing as an asset is really, really tough. Yet that is the mindset that buyers have. So that causes problems for us.

Certainly it has affected us and I don't want to pretend that it hasn't. On average, so far this year, sales are down in Dade County, about 22% to 23% through September. September isn't quite that yet but I think that is a pretty good guess. September is going to be a little bit better. In September we are going to be off, I'm going to guess right now about between 15% and 20%, may be closer to 15%, which is an improvement. But we are off for sure. The volume of sales and the amount of inventory that we have is still higher than we would like. New construction has been very much impacted. So there are effects. But the root of this starts in the credit market. I think this is people's natural perception. I could probably go on and talk for the rest of the half hour but you probably want to ask some questions. So I will try and narrow it down to what you want to focus on.

Neil: So Stark has been around for a century. Is there a period of time that you can compare this to, maybe add some context to people here?

Jeff: Sure. Yeah. In fact, the one that everybody compares it to right now is the 1980, '81, '82 period, which I also had the pleasure of selling through. In fact I'm having my 30th anniversary, not my 100th. It feels like it. But I am only at my 30th anniversary right now. I started in 1978. I had a great year in 1979. You might remember that in 1980 interest rates went up over 13% for the first time. There were usury laws back then that limited it at 12%. So basically for a little while there, no money was available because it was all available at usurious interest rates. The usury laws were taken away. That just caused interest rates to go up to 16%, 17% 18% for 30 year rates. We were selling almost everything on land contract.

The sense of the housing market back then was that it was a much, much more difficult change. The difference was that when you're dealing with 17% or 18% interest rates, you know what the problem is. Back then if you wanted to go and buy a house and you were not a current customer of the bank or if the underlying mortgage was not at the bank you were trying to buy it from, there was no credit available. They simply said, "We will not lend to you." Credit was not available at all. Only to certain repeat customers and that sort of thing and that was at very, very high rates.

We did a lot of work on land contract. It took a lot of really creative financing. I actually had one of my agents just the other day come to me and say, "I just did my first land contract." I thought, "Holy smokes. Here we go." What is different about this than that is that we remain in a period of historically -- well let's just say long-term it's a very low interest rate environment. If I have been surprised by anything in this whole debacle, back in 2006 when things started to happen and all the alarms were ringing, "Housing is going to crash. Housing is going to crash. Housing is going to crash." I kept thinking this is a tempest in a teapot and this is going to blow over because we still have 5%, 6%, 6% interest rates. It is nothing like 16%, 17% interest rates. If we had that we would have problems.

This is the first time I have ever seen the housing market turn sluggish in the face of historically low interest rates. I have never seen it happen before, which is what leads me to think that buyer psychology and fear can play a big part of this. But the only other thing to which I can really compare it would be that period. That was much more difficult than this. In fact if you go back and look at statistics from what I understand the unemployment rates were much, much higher than they are today. The changes in the stock market back then were much, much bigger than they are today. The pressure on banks was much, much greater than it is today. So we forget quickly that there was a lot of information that came out of that period that served us well. But that would be the closest.

Neil: So I guess we ask if the current stock crisis in the world financial markets, the $700 billion bailout is designed to calm that, although that would not be working today with the Dow Jones dropping below 10, 000. But what will a $700 billion bailout do for us here in Madison?

Jeff: Well, that's a great question. Of course nobody really knows. There are probably people in the audience that might know more about the details of what is going on in the banking world than I do. I have a working man's sense of it. So I'll do what I can with it. If anybody else wants to correct me or add to what I want to say, I would be happy to hear it.

Fundamentally, what this had all been about, and I mentioned this in my opening, was very, very sloppy lending practices on a widespread scale, particularly concentrated in a few markets in the four states that I mentioned. That caused housing prices to run up at a very high pace. There was a lot of talk about speculative bubbles and housing and so forth. That was really true only in a handful of markets around the country. But they were big markets and there was a lot of activity and a lot of mortgage money poured into those areas. There was a very high level of speculative buying, by the way, and house prices got unhinged from the underlying costs to actually create the housing. There was story after story after story that people would buy a house, flip it two or three times at profits of up to $100, 000 every time they flipped it before someone would actually live in it and own it. That never happened here in Madison. But it was happening there.

The underwriting that was going into the loans that were creating that situation was nonexistent. In a lot of cases, it was utterly nonexistent. How it got to that, I think people are still scratching their heads as to how common sense was thrown out the window on such a widespread scale. But it was. And we could get into whether or not the government was pushing Fannie and Freddie to do too much low income lending. We could get into whether it was greed and innovation on Wall Street. We could get into all those things. But the bottom line is that I think the really key thing is that underwriting began to become so loose based on the assumption that housing prices would always rise that caution went out the window.

Well, once housing prices stopped rising and in fact started to fall, speculators flew out of the market. Demand tumbled in those markets where this had been going on. It left the mortgage securities that were created in those markets in real, real trouble. There are now, estimates are upward of $1 trillion of these mortgage securities sitting in banks and investment banks and all kinds of funds all over the place. They are very opaque, which is to say that it is very difficult to figure out with these securities who is really on the hook, who the decision-makers are, who profits or does not profit depending on whether there is a default or not. It is very, very complex. I don't pretend to know everything about it. I just know they just threw the dice so many times that it is very difficult to decipher.

What that led to was a complete breakdown in confidence in the credit markets because what was happening was that banks had to write the value of these securities down very quickly under current accounting rules, another thing that is being looked at. As they wrote those values down, basically the market value, which under this circumstance was zero, banks' capital positions were being compromised. As bank's capital positions were being compromised, they had to raise capital. They were being liquidated. People were starting to get nervous. There were runs on the banks that were starting to occur. Banks were stopping lending to each other as they have to during normal overnight operations.

So all these things were happening causing what they are now describing as a seizing up in the credit market that is grounded in the fact that nobody knows how to value this roughly $1 trillion of mortgage assets that were stupidly made but made nonetheless. Now somebody has to figure out what to do with it and how to pay for it. So windingly now I come to the question, "What should the $700 billion bailout do?" What the $700 billion bailout is designed to do is basically take the stinking meat out of the refrigerator. That is basically what they are trying to do so it doesn't stink up everything else. They are trying to get it so that everything, I think the thought is that if you get it out, quarantine it, and put it away where it can just get out of the way, on the government's books and wait for the mortgage market to return that confidence will return and that the credit markets will start to function again. That is the theory.

When they announced the bailout, my first reaction was finally because my feeling, as I was watching this, was that until we can start to value and create a market for these mortgage securities, this problem was not going to be solved. What the government's action was designed to do was create a market. By creating a market, it creates the opportunity for these things to be valued. Once they can be valued, they can be bought and sold. We can figure out what everybody has and we can start to move on. So this starts to create that market.

In that sense, it is a good thing. If it gets the credit crisis out of the headlines it is good for us. Now you mentioned the stock market is down again today. That's true. Obviously the financial markets are still very leery about what this all is going to mean. The credit markets have yet to just burst open and start moving again. It's going to take some time for it to value these securities, to figure out how they are going to be bought and who's going to pay for it, all these questions that remain. So we are not out of the woods. But one would hope that if this is successful, and the credit markets start to function normally again that we can settle down, stop worrying about it, and get the fear out of it.

If I can just say one other thing -- the State Journal published a really interesting piece on Sunday -- you probably saw it -- about who caused this mess. I actually brought it with me and I wanted to refer to it. But there were three different editorial opinions about what was causing all this. The one that really struck me was the theory I will just summarize here, that fear is really driving all this. It drove it on the upside. I think he is right. The author's point was that four to one or 75% of people tend to be more motivated by fear. 25% were more motivated by greed or by trying to gain. So there may have been some greed in the early going.

But once the mania started, it was really more fear of being left behind. So it got going and going and going and going and going. Everything got run up. When the party ended, now fear is driving everybody to the sidelines. There is no confidence and nothing but fear in the credit markets right now. Something needs to be done to remove that fear. When we remove that fear I think we are going to move forward. I am comforted by the fact that interest rates have remained very stable. They still have not moved into a spiral. So that is a positive and will hopefully stay that way.

Neil: I need to ask you to predict a little bit, if you can, how quickly this might happen. Here is why. As a member of the media, everything you said about the cause and about what people are thinking right now I think is accurate. But the news is bad. We are seeing instability in European markets that if nothing else is going to just reinforce this notion of virus psychology and fear.

Jeff: If I get this one right, you can put me in the Hall of Fame. [laughter] Because I don't think anybody really knows the answer to this one. I would hope, and this is based on nothing more than just a gut feel, in fact I'll even preamble it this way -- I really thought back in 2006 when this all started, this was going to blow over in six months. People were saying, "Oh gosh." There were those who were saying, "This is a bigger problem than you think and this is going to really affect the system." They were right. Those of us that were looking at it were wrong. I rationalized that by saying rates were low and I had never seen [inaudible 21:40] when rates were low. So I had a good reason for predicting as I did. But, it still came out the way it did.

So with that preamble that I was wrong the last time, to me there are positive signs. For what? You might all recall about a year ago when Countrywide blew up. Do you all remember the big Countrywide fiasco? It was one of the sub-prime credit crises. It really got people's attention and started to become a big deal. We saw our activity on a seasonally adjusted basis fall by about 20% to 25%. It has stayed there ever since. This happened a year ago.

In September we are going to be off by not that much when it comes right down to it, compared to a year ago, which tells me that we have stayed pretty much there. We are not falling further, at least not that we can tell. If that is true, and in fact this is just speaking for our Company, I don't know what other companies have experienced, but offer activity in our Company was up about 20% in September, over the previous September. Now that says a lot about how bad last September was and I'm not suggesting that we will go back up to normal levels. But there was an increase.

If we continue to see small increases in October and November that would tell me that consumers are continuing to buy through this fear in housing. If that happens and if we can see inventories come down just a little bit, I think you might see the whole housing situation stabilize. On the national picture, it depends partly on how quickly they can get the plan implemented, how quickly they can get somebody to get that sold and whether or not it has the intended effect of actually unfreezing the credit market.

One thing the Fed and the Treasury have proven they are very interested in doing is having a fire hose of liquidity going into the credit markets right now. They're blowing money into the credit markets like there's no tomorrow. They do not want to see this contract and go away. So I think they are going to do whatever they have to do. I think there is a better than even chance that by next spring we will see a noticeable up-tick in the housing market. I really do. I don't think you're going to see a lot of movement over the next three to six months because these tend to be the slower months anyway seasonally. So the idea that the market is going to blow open between Thanksgiving and Christmas I just don't see. But we might see a noticeable increase after the first of the year. If we don't, then my guess is we will see a Company very similar to what it was this year.

On the credit front nationally, there are a lot of really smart people trying to figure that one out. I am hopeful that within a few months this news ebbs away and we can start to get back to normal. If we are still seeing the credit markets really locked up a couple of months from now, this could drag on a while. Just how long I don't know. We will just have to deal with that when it comes.

Neil: I just want to throw in a couple of different components here and then ask for your perspective again on the local market. In the last couple of months I have met with representatives from both Habitat for Humanity and Operation Fresh Start. Both of them say they have got housing. They say people are not taking advantage of opportunities to get into housing. The Mayor has started talking about inclusionary zoning again and some components of that. The conversation around workforce housing continues on a regional economic issue. As you look at the broadest possible view of it, what does '09 look like?

Jeff: Well, first of all, inventories overall -- and this is when you get into Habitat and some of those folks -- remain higher than we would like. As things stand right now, by the latest statistics, we have about 5231 residential single-family and condo housing units on the market in Dade County as of the end of August. That may be down just a little smidge by the end of September. That divided up, about 3000 of it is in single-family and about 2100 of it is in condos.

Interestingly, and I think a lot of people don't realize this, let's just take single-family as a starter, 26% of that inventory is under $200, 000 in Dade County. Another 36% or 37% of it is under $300, 000. So, over half of the inventory in Dade County is under $300, 000. That's single family. In condos, 59% of the inventory in condominiums is under $200, 000. Another 22%, so almost 82% of the inventory in condominiums is under $300, 000 in Dade County. A lot of people assume that all we're doing is building big houses. They see the condo towers and they go, "Oh my god. Who is buying these big expensive condos, who's buying them?" In terms of condos over 700, 000 right now, there are only 34 on the market--that's it, 34--whereas there are 1, 264 under 200, 000.

So there are opportunities out there for housing. And here's another stat that will probably surprise people. The rule of thumb is that if there are six months of inventory in a market, that's considered a balanced market. Right now, for single-family homes under $200, 000--single family, under $200, 000--you take the pace of sells for the last six months, there are 5.99--exactly six on the button--months of inventory under 200, 000 in the marketplace. You take the last 12 months base of sales, which gets you in the slower two quarters--the first and fourth quarter--it rises to about seven, seven-and-a-half months of inventory. Nonetheless, that's not so over-inventoried as you might think.

Where it gets slow and sluggish is when you get up to the upper price ranges. Over 700, 000, it's only 6% of the market, in terms of number of listings. But there are somewhere between 20 and 23 months of inventory, based on the current base of sales. So a lot of the sluggishness is in those upper price ranges, but the bulk of the inventory is in the lower price ranges. In terms of availability in housing, in terms of the housing mix, we're in very, very good shape, here.

Our inventories, I think, overall, need to fall about another 10-20%, let's say 20%, and we'll be right where we want to be, in terms of having a normal market. The 2000, 2001, 2002, 3, 4, 5-period felt good. But when you get down to the '03 and the '04, we were running with probably two or three months of inventory in a lot of price ranges. That creates the over-bidding and the sense of a housing shortage that leads a market to get unhealthy on the outside. We're not that far from being healthy and balanced. We're just a little bit off. There's lots for people to pick from.

The biggest issue we have is the fear that somehow people are going to buy-- I think the folks here from the Stark Company will confirm this, they hear this every day--"I want to buy, but I want to wait until it hits the bottom." [laughter] Well, this is the bottom. We've been bouncing along the bottom for the last couple of years. If you wait much longer, it's going to go up. How do you know it's going to go up? Well, the prices are rising. [cough] Don't wait until it's too late. They're releasing money on the table. Buy it now, that's the smart thing to do. But the pure mentality won't let people do it. But the inventory's there and the market is really not as far from balanced as you might think.

Niel: What do you tell people when they come to you--and everyone's got a situation, right--but what do you tell people when they're stuck in a bad mortgage or they want to sell, but boy, this looks like a terrible time to sell. What do you tell people?

Jeff: Those things always come down to cases. One thing about real estate, it is not a commodity. I think that's one of the reasons that people tend to misperceive what's going on with real estate prices in the marketplace. They assume that markets should clear on a daily or monthly basis like stock markets do; they don't. It's a capital good and in an orderly sale and orderly market, it takes time.

People accept that fact, but that means that people tend to not--people don't want to see to see their housing values fall. Psychologically, people do not want to see their housing values fall. As we can see when housing values do fall and they fall quickly, it's bad. So you don't want to see the housing values fall and there are a lot of good reasons why over time, they tend not to. We can get into that if you want.

When you find somebody who has the, first of all is the belief system that this is a bad time to sell, the first thing we want to know is why you want to sell. What is your deep motivation? Why is this important to you? If you really don't need to sell that badly and you really need to get top dollar--or maybe, perhaps, even unrealistic, maybe you never really had a top dollar. Because there's a lot of that in the marketplace, too, as I think my folks are going to attest. People get an idea that their house is worth X and it never was. It will be someday, but isn't now. Somebody said, "The buyer for your house at that price may just be being born right now." [laughter] You get that sort of thing.

But nonetheless, there is a price in which it will sell, but if that's not the price that meets your needs and you don't really need to sell, then don't. There's really no reason to. You're gumming up the market, if you do; you're part of the statistics that make it slow. On the other hand, if you really do need to sell, if you really do, then you have to be realistic about what's going on in the market.

Plus, you have to deal with the marketplace as you find it. That means that you have to be very clear, first of all, on what's your timeframes are, how quickly you want to sell. You have to look at what you're competing with. That just, on the macro market, you have to look at it in your price range, in the neighborhood that you are and houses that are like yours. What we tell our people is to take a look at what's the absorption rate in your marketplace? What are the inventories in your marketplace? What are the prices that people have been selling for comparable houses and what are the prices that they have not been selling? What are the prices of the competition you have right now and where and why do you need to be, based the absorption rates that we have for this particular market, to get you where you want to go in the timeframe you want to get there? That's the conversation you need to have and you need to fairly realistic about it.

Then, of course, you run into--I think this is implicit in your question--what do you do if you're over-mortgaged, you can't get the equity out that you wanted? I'll just talk about foreclosures and short sales here briefly. Foreclosures, well they're up in our market. I'm really not driving what's going on in this market. We have not seen a substantial increase in our foreclosures. In fact, our foreclosure rate's so low here that even if it doubles, it's still low. I mean, it just isn't enough to really create a big impact on the market.

What we are seeing more of are short sales. Short sales are functioning not so much of the declining house values as they are of over-mortgaging, either upon purchase or through second mortgages, is where we're seeing a lot of it. The typical scenario, you buy the house for $200, 000 in 2000. Then in 2005, when things were really rocking and rolling, you say, "Boy, I think I can get 300, 000 for it. I'm going to pull a $100, 000 out and buy new furniture and put on a deck." So they do that and back then you could get an appraisal for just about anything you wanted, frankly, unfortunately. And someone said, "What do you need?" "Yeah, it looks close." "We'll do it." You lend them $300, 000. Now, we've got to sale. They come to us and, well, 280 is more like it and we're 20 short. That's what we're seeing--fair amount and others--still making $80, 000 on the house. But in their mind, they're losing money because they over-mortgaged it through a second mortgage or some other scenario.

So we do run into some of that and those are tough situations. Because, again, depending on your motivation, why do you need to sell, the timeframe you need to sell in? Sometimes there's not a lot you can do. But the market is the market and the buyer's not stupid. We hear this all the time, where people come in and say, "Well, let's just try it at this price." [laughter]

Well, you can try it all you want. About four or five years ago, that probably worked. Because four or five years ago, prices were rising at 5, 6, 7% a year. I think we topped out at about 8% on '03 and '04-- not nearly what people thought it was--probably our highest increase of price, seven or 8% in the year. But nonetheless, if you tried for another 10, then you could probably get it because inventories were short. Now we have the opposite situation and buyers got lots to pick from and they're going to pick the best value for the price range they can afford with the amenities they want. They're just going to do that. That's how a buyer looks at it and you can't get around it.

Neil: I've been saying, "This is a great time to be a first time buyer in the market, if you can get the loan. "OK, let's open it up to questions out there from all of you. Don't ask about your particular house and... [laughter]

Jeff: I always get that, "I'm a house owner and I can't get it sold. It's listed with a good company." [laughter]

Neil: Can you shout real loud?

Woman 1: Yeah. What effect is the presidential election, being so close to all of this going on right now, how is that going to impact what we're experiencing?

Jeff: Well, it doesn't help.

Neil: Let's repeat the question.

Jeff: I'm sorry. The question was, "How does the presidential election going on in the middle of all of this, impact us?" My thought is that it doesn't help, because I heard somebody say over here... Everybody wants to make the call that the sky is falling. After eight years of George Bush, it can't possibly be any worse. So, whether a Republican or a Democrat, I would make it better because it's terrible now and I'm the answer to your prayers. When there's all this negativity that's out there, on top of the financial negativity, it does not create a positive environment where people feel good about things.

In fact, well that was really, had more to do with just the financial stuff. But there is evidence and there's been some surveying of colonel, buyers and sellers, that have been saying, "Yeah, I am going to stay on the sidelines because this all makes me very nervous and I want to wait until it all comes out." So I don't think it helps. And of course most of what they have to say about it is not helpful. It is all crisis and horrible and "We have got to get the bad guys and the bad guys are not me, it is somebody else." I think it creates a tremendous sense of uncertainty and frustration amongst home buyers and that does not help.

So I think getting the election over with will be a good thing. It is probably a good thing it is happening in the fall when the market tends not to be seasonally as active. If we get all of this off the decks before January first I will be real happy.

Neil: Other questions for Dave? Yeah Glenn?

Glenn: How do you see credit availability mortgage money right now in light of this crisis?

Jeff: Credit is far more available than people have been led to believe. My biggest reservation in even going more strongly on that is that the current three to four weeks have changed that landscape. But up until the last three to four weeks, credit availability was never an issue in this market. Where it was an issue was again with the lower qualified, sub-prime type buyer where a lot of these difficulties with these crummy securities came to be. Those buyers have a tougher time now.

We have not been an FHA market really for the last 10 or 15 years. FHA is now a big thing. You can get FHA loans now with three or four percent down. They have a little more inspection and a different kind of underwriting. You have to pay FHA premiums. There are conventional loans available with lower down payments, but you are going to pay private mortgage insurance now.

You are going to be underwritten; put to standard underwriting standards again, unlike a few years ago when whatever you needed you could probably get. So it will be tougher for certain buyers on the margin. But if you are a buyer with a decent credit score, a good standard credit score...I see a number of lenders in the room that can correct me if I am wrong. But if you are a buyer with a good credit score, it is not a problem.

We are seeing that appraisers are getting much pickier. We have had a couple of deals that have been hung up over disputes of the amount of the appraisal. And I understand that. One of the things that caused this was loose appraising. Pendulums tend to swing the other way and now we have had a handful of incidents where the appraisal came in very low. We had one just recently where the appraiser declared the market that we were trying to operate in as a declining market. It was not a local lender and it was not a local appraiser who was doing the work. It was a wheel loan, so there were issues there. We put the counts together and we got the declining market to be reversed. So you have more hurdles to get over but it can be done.

Credit availability is not the problem, notwithstanding the function of the credit markets at all, which I guess we will have to see if the bailout happens. It could become a problem, but up until now that has not been an issue. There was a question up here.

Man 3: My question had to do with credit availability, especially as it relates to the secondary markets. You may not be the right person to ask, but I have been hearing about these credit default swaps. You haven't really mentioned that and it sounds as though it was in essence some sort of insurance against defaults in the secondary market, but yet that insurance was not really in place. That sounds like a huge problem there.

Neil: I think it is a huge problem. I will give you my layman's understanding of it. If there is anybody in the room that knows more about this than I do you can correct me or add onto me. Basically, as I understand it, you are correct. It was understood I think by the people making these mortgages that there was a little more risk than normal. So in their ever expanding desire to try to get creative in dealing with that risk, they basically sold little insurance policies called credit default swaps to try to hedge against the possibility that these things might go bad.

When they sold those, they might assume...I have seen models that say a three percent loss or a four percent loss. Well they are looking at, right now, some of these portfolios are looking at a 100% loss. Certainly there could be 20 or 30% loss far more than what was insured against for the economic assumptions. I think the reason AIG was bailed out, my very layman's understanding of it, is that they had become a player in this credit default swap game, and as they saw the insurance contracts they had enforced, that people were looking at the liquidity call that was going to make on them if they had to make good on all of these. It was causing real problems, and that was why they did it. From what I understand, there are trillions of dollars of these things enforced. I think it was Warren Buffet who called them financial weapons of mass destruction is how he described these things.

So it is not a pretty picture; some of the stuff that went on. And I think again, what the Federal Reserve and the Treasury are thinking in trying to pull these assets out is to kind of try to just take all that off the table to remove the risk of that happening. One of the other interesting things I didn't mention about the bailout plan, and this has not been widely reported, is that the thinking, and we will see if it works, but if they can buy these at the right price, and that is going to be one of the big issues-buying these at the right price. But assuming that they buy them at something approaching market value and hold them for six months, a year, two years, at some point a lot of money is going to be made, because the fact of the matter is, even though these are being market valued at zero right now-the mortgage securities, or close to it...I think Merrill Lynch just sold a bunch of them at 22 cents on the dollar if I am not mistaken. That was one of the first sales and that was very, very low. So that is a huge write off. But the fact of the matter is that 80 to 90% of the loans that were made during this period are still performing just fine. So the economic cash flows, if you were going to bail these out on a discounted economic cash flows basis, the actual value should be far higher. The problem is that the uncertainty is just causing people to want to stay away from them totally. So it is creating greater risk.

I have seen some suggest that the Treasury could make billions if not trillions of dollars on this deal over time if they hold them and resell them into the market. Now whether that will happen or not, I don't know. But somebody is going to make money on these eventually, and someone is going to lose money on them eventually. Right now I think a lot of the fighting is over who is going to take the loss. Is it going to be the default swap people? Is it going to be the people that made them? Is it going to be people that are holding them? Is it going to be the Treasury? Who is it going to be? Nobody wants to take it, so everybody is sitting on their cash just waiting to see what is going to happen. It is that sitting on that cash that is causing everything to happen. But yeah, the default swaps were an ill advised way to try to deal with it to hedge that risk, and it clearly didn't work and it made the system worse.

Jeff: Jim.

Jim: Hey Dave, let me just...Thanks Dale. Are you seeing any difference in closing rates or deal making based on the lenders? I talked to a client in Silicon Valley last week and they said that if the buyer doesn't come with a DFA [sp 43:11] or Wells-Fargo mortgage it is not happening.

Neil: I don't know that we have seen that so much. Have you guys seen any of that coming out? No, I don't think that we have seen that locally here. If you go back three or four years at the height of this whole thing, there were some Internet lenders and some mortgage brokers that were operating in the marketplace that were very difficult to deal with. I know that most of my folks here could attest than when a buyer would sometimes come to us with a letter of approval from a certain lender, it was like "Oh boy. Here we go." We would have to try to work through it. A lot of times there were fees and difficulties at the closing payable and we were delayed and what not. So that was a problem. Those folks have been wiped off the landscape very quickly.

So we are just not seeing that anymore. Most people are dealing now with fairly reputable and good lenders. See, the other thing you have to remember is that this market is not like the markets were in California where the big problems are existing. There they have huge collateral issues; huge collateral issues. The collateral issues there are real. In fact, if you will indulge me for a minute, one of my pet peeves is the way housing prices are often...I did some research on this this morning, so I want to tell you about it so I can make good on the research that I did. [laughter]

Home prices- if you will just let me kind of veer into this for a minute. There is a lot of talk about home prices. About every month the Case-Schiller index gets published, and what we hear is home prices are down 20% in the housing market. I just heard this story this morning. This is a beauty; this will set the stage. I was talking with one of my managers. They were dealing with...I don't know the exact numbers. Let's just say it was a $220, 000 house and the buyer insists on coming in $50, 000 low. The reason they are coming in $50, 000 low...Well first of all, they went out and got a Zestimate on Zillo. [laughter] ...which is always not helpful. Those are just very broad brushed guesstimates usually based on assessments. But they also came armed with the Case-Schiller index saying "Case-Schiller index's prices are down 20%, so we are going to buy low and that is what we are going to do."

The Case-Schiller index, which is by far the most widely used index, quotes 20 market indexes; 20. Here are the markets. I am going to read them for you right here: Boston, Chicago, Las Vegas, Denver, Los Angeles, Miami, New York, San Diego, San Francisco, Washington D.C., Atlanta, Charlotte, Cleveland, Dallas, Detroit, Minneapolis, Phoenix, Portland, Seattle, and Tampa. Of those 20, seven of them are in the four states that we just talked about; California, Nevada, Arizona, and Florida. The index that I like to use is one that is published by the office of Federal Housing Enterprise Oversight. It is called OFHEO. They oversee Fannie and Freddie; did a great job there. [laughter] But they do also publish what I think is the most reliable housing index in the country.

The reason it is reliable is because they actually take repeat sales. What they do is when a house sells, the go back and look at the last time that same house sold, they look at how much that actual house appreciated, and they put that into their numbers. They cover 292 markets in the country, not just 20. The include Madison Wisconsin. The OFHEO index for Madison Wisconsin...Let me see if I can find it here. I have got it here somewhere. Oh, here it is right on top. We ranked 118th in the country. Over the last year our prices have risen 1.15%. Now that includes the first small drop of one half of one percent over the most...And this is through the second quarter. The third quarter won't be available probably until November. It comes out quarterly. They cover all conforming loans that are done by Fannie and Freddie. So in our market, it probably covers 70 to 80% of the sales, at least. So it is a very stable accurate index.

Of those 20 markets that I just told you about...Let me see if I can get this right here. I have gotten it written down here somewhere. Oh yeah. It is right here. This is good. Nine of the 20 are in the bottom 20% of the OFHEO rankings. 11 of the 20 are in the bottom 30% of the OFHEO rankings. 17 of the 20, almost all of them, are in the bottom 50% of the rankings. The only one that is in the top 10 is Charlotte, which ranks seventh. Then you go to Dallas, which ranks 84th, and the next one is Denver at 143rd out of 292. Then we go Atlanta, Portland, Chicago; New York is 192, Cleveland- 193. All the rest are ranked in the bottom. Boston-211, Minneapolis-222, San Francisco-236, Washington D.C.-250, Miami-254, Detroit-255. This is out of 292. All the way down to Tampa, and at the end, Las Vegas is 278th on the list. So that is hugely overweighed on volatility on the downside.

Now OFEAO does pick up on the down stuff. For example, Merca [sp 48:26], California is the worst market in the country from a price perspective. In the second quarter their prices there fell 15.9% in one quarter; 15.9%. And over the one year at the end of the second quarter they fell 34.5% in one 12 month period. So OFHEO picks this stuff up. They have got it all here, but that is all Case Schiller picks up. So when you keep basing your prices on 20%, 20%, 20%, it is irrelevant to us. Our prices have not fallen at all.

They have been very, very stable. If there is any price weakness in our market, it is probably at the upper end where we have got a year and a half or two years of inventory. There, I think you have to do what you have to do, depending on what you may have had to do a couple of years ago. But if you own your home for five or 10 years you are going to make plenty of money on it. Again, you may not make as much as your fantasy world thought you would, but you are certainly not going to come out behind. It is going to be very stable. If you buy today and you hold it for three to five years or longer, which is the way you should do it with residential real estate; you should not be buying it and flipping it; that is not the way it works; never has and never should. You are going to be fine. You are going to be fine.

But in this climate, people really misunderstand it. People just have to realize that real estate markets are not national. Yet much of the news that we get is very skewed toward the negative. It is frustrating.

Jeff: We have got about five minutes left Dave. That last comment put me in mind of something that I wanted to ask you, and I wanted to take the opportunity to do it before we are done because I think it is connected to a lot of what you have been talking about, and that is your family's approach, your company's approach to involvement in this community. I want you to just describe that commitment for us.

Neil: Thank you. I appreciate you bringing that up. This is something for us that really goes back. This is pretty deep. I never knew my grandfather. From everything I have ever heard he was a really great man. And in fact, what I have been told about him is if he were alive today, he would certainly be one of the city fathers that would have a lot to do with getting the Frank Lloyd Wright Convention Center off the ground. That would have been involved in making all the things that make Madison great happen. He was just that kind of a guy. That was passed on to my Dad. I don't know where he is sitting in here. Oh there he is. He is hiding over there in the corner. Sorry. [laughter] He is all embarrassed now.

When we were growing up I heard from him a thousand times that giving is a habit. People that don't do it are just not in the habit and they don't understand what they are leaving on the table.

It is our own believe as a company, we talk about this quite a bit in fact, that commitment to community is important. And that really all wealth, if you will, is created by giving more than you expect to get back. That is how wealth is created everywhere for everybody. And it doesn't just mean philanthropically of course. It means that giving more value than you receive in payment for anything you do, you always want to be receiving more value than you receive in payment. But it means also that there are times when you have to go a little bit above and beyond.

When you are here for 100 years, you feel dug in; you feel like you are a part of it, and I think that is always something that has been important to us. It is something that we talk about a lot. I can't tell you how proud I am of the people who I work with, many of whom are in this room. If I could have picked a year not to have our 100th anniversary, this would have been the year. [laughter] It was not ideal by any stretch of the imagination. But it was what it was. We said "What can we do to make this memorable?" When we hit on the idea of "You know we don't have to go and throw a big party for ourselves because that is just a big waste of money anyway and everybody will forget it. Let's give back. Let's do something. Let's put out some service projects."

So every office got together and decided what was important to them. We probably had 20 different events that happened over the period of a year in various communities. Then we wrapped it all up with a golf outing where we raised $10, 000 at one golf outing alone and gave it back to the community. The mayor was nice enough to show up and get the check. [laughter] I mean that sincerely. I wasn't meaning it that way. [laughter] It was great.

The energy and the commitment of these folks for showing up and the way they came together around that, and how good they felt about what they were doing for the community was very heart warming for me. I could not be more proud. So yeah, it is something that is important to us and I appreciate you asking about it.

Dave: Thank you. Anything you want to add?

Jeff: OK. So WisBusiness.com and Madison Magazine. Next lunch is November third; Monday, November third, the day before the election. We are thinking we will have an influential UW representative; very possibly the new chancellor Biddy Martin [sp53:45]. But, WisBusiness.com and MadisonMagazine.com will have plenty of advance information on who that guest will be. And Dave and Sharon, thank you both very much for sponsoring this lunch today. And we thank you for coming and will see you next month.