There is a massive arb opportunity out there in playing off La Jolla, CA, and Sioux City, IA, real estate prices. If you just buy real estate in Sioux City, and sell it in La Jolla, you could ... now wait, that won't work. Hang on, I'll figure out the trade mechanics.

In the interim, from a new Coldwell Banker release:

Although both are waterfront cities, something besides the salt water separates La Jolla, Calif. on the Pacific Ocean from Sioux City, Iowa on the Missouri River – a $1.7 million dollar difference in the cost of homes studied in the 2008 Coldwell Banker® Home Price Comparison Index (HPCI). In an annual comparison of similar homes in 315 U.S. markets, La Jolla topped the chart as the most expensive real estate market in the nation with a $1,841,667 average home price. Sixteen hundred miles away in America’s heartland sits Sioux City, the most affordable real estate market in America, where a similar home would cost $133,459.

Some more tidbits from the new Coldwell Banker release:

• Dubai is the most expensive market studied outside of North America, where an HPCI subject home averages $2.45 million U.S. dollars, 33 percent higher than La Jolla.
• Quito, Ecuador, ($96,000) is the most affordable foreign market included in the survey. Nine markets altogether average less than $200,000 including Guayaquil and Samborondo, Ecuador.
• Vancouver, British Columbia, tops the Canadian list, with comparable four-bedroom homes averaging $1,257,000 U.S. dollars. The most affordable studied market in Canada is Charlottetown, Prince Edward Island ($157,000). The price difference between Vancouver and Charlottetown is a stunning $1,100,000.

Okay, now there's a better arb trade: Quito to Dubai. If nothing else, it's a great Scrabble set. Runner up: Charlottetown to Vancouver.

Bill Gross's Pimco may not have just delivered the best one-day gain ever on a trade, but his $1.7-billion gain on Monday was arguably among the best from a risk-return standpoint. He locked himself into the agency mortgage bond market -- more than 60% of his fund was in mortgages by May of this year -- so he was hugely levered to a Fannie/Freddie bailout.

He, of course, didn't leave that to chance, agitating at every opportunity he could for a "new balance sheet -- i.e., taxpayers via Treasury -- to support Fannie and Freddie. That culminated in his primal scream last Thursday, and the bailout on Sunday.

Nicely done, Bill. More here.

Bleak piece in today's Sun wherein the writer found two people in U.K. named "Freddie Mac" and "Fannie Mae". Black comedy ensues:

FREDDIE Mackie — known as Freddie Mac — lives with his wife Carol in a two-bed terraced house in Glasgow.

Amazingly, he is a mortgage broker. And he has had to take on a second job as a debt adviser to survive.

Instead of 40 hours a week, he now works 60 to try to maintain his £25,000 a year pay.

Dad-of-one Freddie, 56, left, said: “It is ridiculous. You work twice as hard just to stand still. There was no way I could afford to have my normal quality of life if I didn’t take another job.”

RETIRED teacher Fannie MAY is trying to beat the crunch by going back to work as a rock singer.

Fannie, 53, of Cambridge, quit school earlier this year to record an album after cutbacks saw her do more work for no pay rise.

The widowed mum of one has a £400,000 mortgage and is worried house price falls could leave her in negative equity.

She also invested in property but is now selling her five flats.

She said: “I hoped the flats would give me a healthy pension but it’s an uncertain future.”

You break it, you bought it. That's the Pottery Barn rule, at least as channeled by ex-Secretary of State Colin Powell. Apparently Peter Orzag at the Congressional Budget Office lives by an accounting variant of the same thing:

Given the steps announced by the Treasury Department and the Federal Housing Finance Agency on September 7, it is CBO’s view that the operations of Fannie Mae and Freddie Mac should be directly incorporated into the federal budget. The GSEs’ revenue would be treated as federal revenue and their expenditures as federal outlays, with appropriate adjustments for the manner in which credit transactions (like a mortgage guarantee) are reflected in the federal budget.

While rational, that can't be what Treasury was hoping for here.

[via CBO]

My friend Nouriel Roubini (and some others) were on Charlie Rose last night talking Fannie/Freddie. Worth watching.

Hard not to think the unthinkable in the wake of recent events. Specifically, what is the likelihood of the U.S. defaulting on its debt? Admittedly, it would never be because of this one episode -- it would be that, plus multiple financial seismic shocks. But all of these are more likely than they were before. Default, while still wildly unlikely, is more plausible than it was a day/week/year/decade ago.

One answer (based on illiquid data):

The price of credit default swaps on five-year US government debt rose to a record 17.5 basis points in early trading, according to CMA Datavision. This means that it now costs $17,500 a year to buy insurance on $10m of US government debt.

Although the market for such insurance is relatively illiquid, the price suggests the market believes the US government is more likely to default on its obligations than some other industrialised countries. “The USA is now ‘riskier’ than Norway, Germany, Netherlands, Sweden, Finland, Austria, France, Denmark, Quebec and Japan,” said Tim Backshall, chief strategist at Credit Derivatives Research.

[via FT]