Market Report: Transition To A Buyers Market

A: Its already starting to happen folks! Its May 1st and already I am noticing the beginning signs of a slowdown in Open House activity! After being on record since January 10th for stating that market activity has begun to surge, I am now going to go on record for stating that market activity is beginning to wane at public open houses. What we are seeing now is the transition in the Manhattan real estate marketplace from the sellers market of January - April to what will eventually be a buyers market as we get closer to the months of July & August. Sellers, its time to pass the torch back on to the buyers!

Brokers, Buyers, & Sellers - After reading this post I would love to hear your comments on what I am seeing as this is really only the 2nd week I have noticed things starting to slow a bit! Are you noticing the same thing?

Its important to note that media outlets differ from blogs because they usually lag in their reports to the readers after waiting for the event to happen and data reports to show a trend or surprising number. In the blog world such as UrbanDigs, I'm doing my best to tell you what I see right now!

And what I see right now is slowing open house activity! I went to three open houses this past Sunday and the most traffic out of any of them had only 2 other people there at the same time we were. The others we were the only ones there for the 10 minutes or so we stayed. Compare that to what I said back on January 10th:

After spending a few of the past 3 Sunday's with her going to Open Houses, I can tell you firsthand that most of them had very good traffic; by that I mean at least 4-5 different buyers were there at the same time we were. And that was ONLY 15 minutes or so of a 2 hour open house!

I've also had talks with a few other agents holding OH's and they report to me a noticeable, 3x or so, pickup in activity and this is across a range of price points across the city! This is the kind of reporting that you can take advantage of if your in the hunt to buy in the very near future! I'm not making this stuff up. If I had to estimate, I would say my own business has picked up about 4-fold in the past 3 weeks alone; most of it in the past 7-10 days!

As for my own business, I am noticing continued activity from brokers via appointments scheduled during the week. Most of my deals are co-broke and I usually rely on the Manhattan brokerage community heavlily to bring to the table the most qualified and highest bidder for my sales clients. Once this starts to slow I know I am in the dog days of summer.

My last open house was two Sunday's ago and we actually had a decent showing with about 12 people stopping by; not uncommon for the first open house of a new listing. I'm certainly curious to see how my first open house for my other new listing goes this coming Sunday; I'll report on that one next week although first open houses are not the best gauge to notice any new trends.

If I were to visually design for you how the NYC real estate market is seasonal, it would look something like this, for months JAN - SEPT. I left out OCT-DEC because those months seem to me to be very erratic; sometimes hot and sometimes cold. The months of JAN - SEPT have market characteristics to them that are easy to notice and eventually take advantage of:

To prove this, recall Jonathan Miller's chart breaking down the AVG Price Per Square Foot per quarter by clicking here. I wrote about his findings in my post titled, "Data Shows NYC Real Estate is Seasonal", and stated:

I talk often how buyer demand in the months of JAN - MARCH are normally much more active than any other 3-month consecutive range of the remaining calendar year. The months of MARCH - MAY are transition months where activity from buyer demand tends to move from very active --> to active --> to good ---> to slow. Once we get into the months of JUN - AUG, the market is typically significantly slower with only a few serious buyers coming to open houses and much fewer appointments during the week!

UrbanDigs Says: During the month of May I expect brokers to start noticing a gradual slowdown in total buyer activity; mainly buyers working on their own. If brokers were getting between 20-30 buyers at an open house during the months of JAN - APRIL, I would think that number will shrink down closer to 10-15 towards the end of this month; a noticeable 50% reduction in traffic. As we head into the months of July & August, expect that traffic to shrink closer to 7-10 people per open house with the overpriced listings getting more like 5 people to show up! For all you sellers out there who are under a time pressure to sell, I discussed your 5-week warning last week with thoughts of what to do based on your strategy!

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The 1-2 Punch: When A Deal Falls Through

A: Very interesting topic for a post that comes straight from the field. You have a new product on the market, priced right, that procures an accepted offer near ask within the first week. The deal eventually falls through. Then, a new bidder comes in with a strong bid, but not as strong as the first, and gets very little response. The 1-2 punch for the seller takes control right out of the 2nd bidder's hands leaving a situation to deal with. What to do?

Its hard enough being a buyer of Manhattan real estate these days without having to deal with lack of negotiability because of a previous deal falling through. How is a broker to advise their client?

On the one hand, the seller must be ready to go after experiencing a deal slip away. But on the other hand, being that the first offer was slightly under asking it makes any future offers that may be lower but still strong, seem not worthwhile! The seller broker is clearly doing their job and bringing in offers left and right for their client, but in the end they need to generate a fully executed contract of sale to get credit and move forward to closing.

When a deal falls through, the psych of the seller changes a bit. First off, they get a taste of what their property might sell for. Second, they get more confident and patient when it comes to future bids. Third, they keep the ball in their court and play hardball especially if the two bids come in within the first 4 weeks of the listing. All of this doesn't bode well for the buyer in terms of control during the negotiating process. Not such a bad thing if the property is priced right to begin with.

So, how does a buyer broker advise their client in this situation. Certainly you can advise them to go just under ask and get the deal done on the premise that bids are coming in quickly on the property in question which obviously means the product is getting traffic and is priced properly. Or, you can play hardball back and stick with the lower bid in and see how time changes the mind of the seller.

The only way to be sure is to put the seller into a situation where they might lose the 2nd deal! Question is, does the 2nd bidder want to risk losing the property? So, here is what I would advise my clients to do based on the economic and emotional status of the buyer:

Buyer Loves Property & Can Afford It - A property is worth what a buyer is willing to pay for it. If the deal is only $10,000 away or so and it is economically feasible for the buyer to pay that amount, go for it! Obviously the property is priced properly which is why the buyer loves it (assuming they did their homework and has product knowledge) and multiple bidders have made a play for it. So whats the problem. Taking into account past comps and current products in the price point, if the deal is within striking distance I would say to my client to up their bid and end the ping pong game now before a third bidder comes in and they lose the property they love.

If it does get you an accepted offer, don't waste time! Tell your real estate attorney to do their diligence promptly so that you can sign the contract and send it over to the seller attorney with your 10% deposit. A deal is never done until the seller countersigns the contract and the seller broker is wise to fully market the property until this happens. As you can see, deals do fall apart and the fact that the property was almost lost creates a sense of urgency to other interested buyers.

Buyer Likes Property & Will Have To Stretch To Buy It - Here is where I don't like my clients going. Its never a good idea to stretch far above your intended budget to get a property you love! That is allowing emotion to take over the investment decision.

If the buyer (2nd bidder in this case as first bidder deal fell through) already put in their MAX amount they can afford and anything over this amount leads to a sacrifice in quality of life, then your decision is clear! KEEP THE BID IN & PUT A DEADLINE ON IT!

In the end we must not forget what buying a home is all about beyond the investment value. When making the decision to buy, you need to:

A: Love the home
B: Can afford the home; job is stable & salary is high enough
C: Look to stay for at least 3-4 years
D: Know product knowledge and how to bid properly

Most sellers want to sell their home and those that price their homes high and dont get any bids for months, tend to react more aggressively when one finally comes in. However, on the flip side, those sellers that price right and get multiple bidders in a relatively short time period tend to get more stubborn. As a buyer you need to decide which strategy you want to take once that first deal falls through because chances are the seller will not be that accommodating!

Do the right thing. Sleep on it, take into account how much you love the property and the happiness it will bring to your lifestyle without sacrificing quality of life financially, and make your decision with a clear mind!

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How Brokers Sell Their Own Apartments

I bought my Village studio with help from my grandfather in 2003. After living there for 2.5 years, I've been subletting it out for 1.5 years and making positive cash flow. I would have kept it forever but the building only allows subletting for 2 years out of every 5 years in one year lease periods. When it was time to sell, I didn't want to annoy my tenant with constant showings. She was planning to move out May 1, so I put my apartment on the market April 1 with the plan to sell it quickly so that it wouldn't sit vacant for too long. Here is some insight on how a broker sells her own home. I hope you find it helpful!

1. Looked at comps in my building. The last studio in my line went for $365K, but it was a sponsor unit and didn't require board approval, which commands a higher price. Still, the market is a little hotter now than it was in the winter, and I'm on a higher floor, so I determined that my apartment was worth $369K. The highest price ever received for a studio in my building is $380K. That apartment was completely gut renovated with a new wall mounted plasma TV and surround sound and it had a much nicer view than my own, so I knew I wasn't getting $380K.

2. Price the apartment $10K lower than it is worth, $359K, to get lots of people in the door, multiple offers, and a price above the asking price. TIP: If you want to sell your apartment quickly, price it 2 - 3% below market value and you will generate so much interest that you end up getting what you wanted in less time, or you will get more than you were hoping for. Every time an owner has allowed me to price an apartment below the market price, this has happened. When New Yorkers see that a dozen other people are interested in an apartment, they get competitive and they want the apartment more. Once someone has offered $359K for an apartment, it isn't much of a stretch for them to offer a few thousand dollars more to out bid someone else. If you have a 30 year fixed mortgage, it is only $30 a month to finance an extra $10K.

3. I believe in "the system." A property gets the most exposure when it is on the market at a 6% commission. Even though I'm a broker and I could try to market my apartment without my company in order to "save" money, I know that the way to get top price for a property is to use a brokerage firm. 85% of apartment sales are co-brokered deals, not broker direct to buyer or owner direct to buyer. To bring in the most *qualified* buyers in the shortest period of time, I fill out an exclusive agreement with my company, Citi Habitats. It is worth paying the extra money - you get what you pay for.

4. Luckily, my tenant attends Parsons School of Design and the apartment looks better than when I lived there. The paint colors and furniture are fantastic and appeal perfectly to someone looking for a Village studio. No need to paint or stage the apartment, SWEET! (If the apartment needed a coat of paint, or if her furniture was horrible, I would have waited for her to move out and then I would have staged the apartment in order to get top dollar).

5. Line up cleaning service, virtual tour and professional photos (which my company pays for when we have an exclusive listing) for the week before the apartment will go on the market. That way the listing is perfect when it hits the market - great description, quality photos, and a virtual tour. Allows me time to prepare a postcard mailing to the building announcing the listing (Citi Habitats also pays for this).

6. Call the mangement company to confirm the building open house policy. Building doesn't allow them. Damn. It is so much harder to sell an apartment when you have to show by appointment. I can only show 8 people an apartment in 15 minute intervals on a Sunday between 12 and 2pm by appointment, whereas I always get 20 - 35 people at my first open house for a new listing. Some people only search open houses, or they sit down with the NY Times in the morning and circle all of the open houses. Apartments not having an open house can easily be forgotten, simply because of the inconvenience of having to make an appointment when a buyer can just drop in to 10 other apartments. Confirmed the maintenance, assessments, sublet policy, financials, planned capital improvements, etc, with the managing agent.

7. Spent two hours making sure every detail about the apartment and building were accurate in our database, which we share with our sister company, Corcoran. Wrote and re-wrote the description for the apartment so it would be perfect the first time. Otherwise, we have to change it in the database and show sheets and send a separate email to our sales department to get it fixed on our website. Better to get it right the first time.

8. Got the photos within three days of the shoot, upload them to the website, database, and postcard mailing and send them to our marketing department so they can create show sheets. It takes them a few days to prepare the sheets and I want to have them for the first showing.

9. Contact my mortgage guy to do a handout with different mortgage rates and what the monthly payments would be at various rates before and after tax deductions. It helps buyers to see in print exactly what they are going to be paying.

10. Sign the exclusive agreement and send it to our sales department to put it into the database on a Monday. It takes about 48 hours for the listing to make it through the various database feeds and show up in the databases used by all 200+ member firms of the Real Estate Board of New York. By putting it in on Monday, everyone should see the listing on Wednesday, giving them plenty of time to work me into their Sunday schedules.

11. Sent out postcard mailing.

12. Drafted the NY Times ad (Citi Habitats pays for a NY Times ad every weekend). Deadline is Tuesday for the next Sunday paper.

13. Decide to run a potentially controversial "open house by appointment only." Make it VERY clear in our database and on our website that all showings are by appointment. Give a list of everyone who has an appointment to my doorman as proof that I am showing by appointment and not through a true "open house" in case someone balks.

14. Advertise the apartment on Craigslist to get some direct buyers. Especially with studio sales, buyers don't always have a broker yet. The target market for a studio in a building that doesn't allow pieds-a-terre is a 22 - 27 year-old first-time buyer. This generation uses Craigslist for everything. Additionally, our website ads feed into the NY Times on-line version on Thursdays, so to reach out to buyers early, Craigslist is a good place to start.

15. Before posting the ad, I draft an email explaining the financial qualifications buyers needed in order to purchase in the building. My building requires 25% down, doesn't allow students or pieds a terre, and isn't kind to freelancers or others who don't have a steady, fixed income. They also require 2 years of mortgage and maintenance payments in reserve after the down payment. I determine that my buyer must have at least $145K in the bank and must make over $105K. This is a ton of money! There are a LOT of unqualified buyers on Craigslist, so an email spelling out the financial requirements eliminates my wasting my time showing the apartment to unqualified buyers. Despite my disclaimer email, there is a ton of interest in the apartment, and I quickly line up 6 appointments for Weds night and 6 for Thursday night in 15 minute intervals. I make sure to casually mention which appointments are already taken so buyers know how desirable the apartment is. About 50% of the total inquiries that I receive realize that they aren't financially qualified for the apartment after they receive my email. Such is the nature of Craigslist buyers.

16. I advertise my apartment in my e-newsletter, which goes to over 2,300 friends, former co-workers, clients, and other agents. Basically, everyone who has emailed me since I started in this business goes in my e-mail list. They can remove themselves by the simple click of a button so I don't feel guilty for spamming.

17. Brokers and buyers start calling and emailing, so I know the apartment has officially hit the market. So exciting! I schedule 10 appointments for Sunday between 12 - 2pm. I receive an very unhappy call from the management company regarding the "open house," even though it clearly states that ALL viewings are by appointment only. I take down my "open house by appointment" ad, and try not to sweat it too much because all of the appointments are already full. I am still annoyed because it is very clear that this isn't a "free for all" open house. I have a list of everyone coming, what time they are coming, and I am escorting them to and from the lobby, so there is no security concern of people wandering the building unaccompanied. Either someone on my board is so bored that they scour the NY Times weekly to catch brokers having open houses in our building, or the other real estate agent who lives in my building tattled on me. The managing agent chuckles when I mention said broker's name, essentially confirming that she was the narc. I decide she is just bitter and must have nothing better to do so I go back to what I love most and do best... Selling and marketing apartments!

18. On the second Sunday, there is so much demand to see the apartment that I can't fit everyone in. I have a brief panic attack when I envision someone on the board seeing 5-10 people in the lobby backed up waiting for their appointments, but my problem solving skills kick in. I enlist two agents from my office so we can double up showings between 12 and 2pm. If they see people in 5-10 minute increments, I can get in at least 16 people.

19. Showings are a tremendous success and offers are coming in. I schedule "best and final" offers. In 10 days on the market I have 4 offers at or above the asking price. Two offers are from buyers who aren't really qualified, one who doesn't have a social security number and one who the board might consider a pied a terre. I choose the most qualified buyer. His broker was also smart enough to offer an odd numbered price, beating out the other offer by $1,200. Three hours later, I have already accepted the offer and sent out the deal sheet to the other broker when another offer comes in that is even higher than the "highest and best." I struggle with what to do, but I can't help but consider this other offer - the broker swears she didn't realize the offers were due by noon, she thought it was just sometime that day. I go back to the original buyer and ask them if they will match the new offer. They do! YAY!

The contracts are signed in under a week and the board package is being assembled as we speak. The buyer has better than a 25% debt to income ratio and has more than 2 years of mortgage and maintenance payments in reserve. He just started his job in September, so I ask the buyer's broker to let the buyer know that he may have to put maintenance in escrow since the building can be tough on new hires.

Toes says... Pricing is KEY, but planning and strategy is also very, very important. All your ducks should be in a row before formally putting an apartment on the market. The way you time your marketing pieces and advertising is critical to a successful first week on the market. The serious buyers all come in the first two or three weeks on the market, so you want to sell the apartment in less than 30 days or buyers will wonder what is wrong with it and why it has been on the market for so long. An apartment should come onto the market with a bang, not a whimper!

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Economy Still Strong / Yields Rise

A: A bit of a macro economic update for you here. The US economy, while showing signs of a slowdown in consumer spending, for the most part is still strong! The service sector expanded at a faster than expected pace in April which represents the 49th consecutive month of expansion in the non-manufacturing industries. At the same time, US business productivity also grew at a faster than expected pace and jobless claims came in lower than expected. All signs that the US economy continues to chug along. The only dataset of concern is the consumer and whether the sluggish spending report continues.

Lets get right to the economic reports.

ISM Service Sector Growth Exceeds Forecast -

The U.S. service sector expanded at a faster rate in April after hitting a four-year low in March, a trade group said Thursday, with concerns about energy costs persisting.

The index was above Wall Street's expectation of 54, according to Briefing.com, and April represents the 49th consecutive month of growth in the non-manufacturing industries.

Indeed, a wide range of commodities increased in price, including airfare, aluminum, diesel fuel, gasoline, and hotel costs, the report said. The prices paid index, a potential inflation indicator, increased in April to 63.5, up from March's 63.3. The index jumped almost ten points in March.

Productivity Jumps in First Quarter -

U.S. business productivity grew a greater-than-expected 1.7 percent in the first three months of 2007, but labor costs rose far less than forecast, a Labor Department report showed Thursday. Analysts expected business productivity, a measure of how much any given worker can produce in an hour, to rise 1 percent in the first quarter.

Federal Reserve officials have been concerned slowing productivity could push up wage inflation amid tight labor markets. But they also have said the slowdown in productivity is likely to be temporary rather than a sign that U.S. workers have lost their competitive edge.

Jobless Claims Post Surprise Drop -

The number of U.S. workers filing new claims for jobless benefits fell unexpectedly by 21,000 to the lowest level of claims since January, a Labor Department report showed on Thursday.

Analysts polled by Reuters were expecting a 4,000 rise in claims from the previously reported level of 321,000 in the week ending April 21.

In short, the economy seems strong which is not surprising given the stock market hitting new record highs with corporate profits coming in at or above wall street estimates!

Forget a rate cut in the near future as there is no way the fed will ease with the US economy producing these types of numbers and stocks at record highs. The fed eases in the face of an economic slowdown and the only sign of slowing right now is from the consumer in spending. The last report on consumer spending showed that growth in spending was the slowest in 6 months; most likely a result from higher gas prices and the national housing slump. Whether or not that becomes a trend affecting the overall economy is still yet to be seen.

What you need to know is that lending rates will stay where they are or likely trickle a tad higher
with the latest signs of strength in the US economy. The 10YR yield already popped a bit to 4.68% and as you know, lending rates tend to follow the yield on the 10YR for those interested in the short term movements of mortgage rates.

Those planning on lower rates in the near future because of a fed ease might have to hold out a bit longer, unless future economic data reverses course and shows a sharp turnaround towards slowing growth on multiple levels. This has not happened yet. While inflation is moderating, it is still a threat to future growth and that puts the fed on hold for now until more trends can be seen.

Some fundamentals that are keeping the US economy and corporate profits at these levels include:

Liquidity - tons of it

Weak Dollar - pumps up profits oversees

Foreign Investment - strong

Management - since dot com collapse, corporate management has excelled from past errors

Low Interest Rates - still allow for profitable leveraging

WILD CARD - Jobs! While the labor market is still strong I still wonder if it will be sustained throughout the year. As long as the jobs market is strong, the economy should keep chugging along. I worry that a slowdown in the jobs market might be the third leg in the housing slump heading into 2008.

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Fed To Hold Hearing on Lending

A: Here it is! Thanks to Calculated Risk for showing me the way to this one. I've been saying for the longest time that the two biggest threats to housing were tighter lending standards and regulation and weaker jobs. While the subprime mess led to in-house adjustments in lending standards, now it seems the fed is about to chime in!

According to MarketWatch.com -

the Federal Reserve will hold a public hearing June 14 to consider adopting new rules to combat abusive lending, especially in the subprime market, the Fed announced Thursday. "The goal is to find ways to promote sustainable homeownership through responsible lending, informed consumer choice, and effective guidance and regulation," said Fed Gov. Randall S. Kroszner in a statement. The Fed said the hearing would "focus on how it might use its rulemaking authority to address concerns about abusive lending practices in the home mortgage market." The Fed has authority to issue regulations that cover all lenders, not just banks.

According to the Fed's Press Release -

The Board held four hearings in the summer of 2006 under HOEPA. Those hearings addressed three topics: (1) predatory lending and the impact of the existing HOEPA rules, and state and local anti-predatory lending laws on the subprime market; (2) nontraditional mortgage products such as interest-only mortgage loans and payment option adjustable rate mortgages, and reverse mortgages; (3) and, how consumers select lenders and mortgage products in the subprime mortgage market.

Based on testimony and public comment from the 2006 hearings, and in response to increased subprime mortgage foreclosures, the Board plans to hold a fifth hearing that will focus on how it might use its rulemaking authority to address concerns about abusive lending practices in the home mortgage market.

As I said before, if the fed puts regulations on the lending industry to protect the consumer from abusive lending tactics, the following will occur:

1. Weak Credit Buyers Will Lose Loan Options That Otherwise Would Make A Home Purchase Affordable - such as a I/O 3YR ARM for someone with no credit history

2. Purchasing Power Will Be Restricted With Less Loan Options

3. Home Affordability Will Be Tested Before Loan Commitment Issued

4. Buyer Pool Will Restrict As Purchasing Power Restricts

So that we are clear...

Fed regulation on lending standards is meant to protect the consumer from abusive tactics that otherwise would provide a buyer with a loan who should have never got one in the first place! If regulation is placed on the lending industry to protect the consumer, less options will be available to the purchaser and more stringent guidelines will have to be met to underwrite the loan. Put this all together and that means a restriction of purchasing power and the number of buyers that could ultimately afford the home.

Here are a few of my past articles on the topic:

Regulations on Lending? You Bet Ya! (Jan. 18th, 2006)

Credit Crunch: Tighter Loan Standards? (Jan. 30th, 2007)

Lenders Starting To Tighten..! (Feb. 13th, 2007)

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How To Handle A Bidding War

A: I got an email from a FSBO (for sale by owner) the other day asking me for advice on how to handle a multiple bid situation. She knows about bidding wars and priced her property low enough to produce one, but she didn't know the best way to handle a bidding war. Very understandable given this seller is on her own and without a broker to advise her on how to proceed. Here you go.

First off, you must know how to interpret when a bidding war exists (especially if you are selling a co-op with board requirements)! It is NOT as simple as getting 2 verbal offers. A bidding war should arise when you receive COMPLETE BIDS IN WRITING (see Brady's post titled, "The Art of the Offer: How To Submit A Bid" for details on how to submit a complete bid) that are:

Within the ACCEPTABLE PRICE RANGE / TIMING FOR CLOSE of the seller AND Financially Qualified to buy and pass the board

Assuming that two or more bids are received that meet the above mentioned criteria, you could create a bidding war situation. It is very important to note that the intended seller strategy of a bidding war is to encourage a sense of urgency via potential property loss and NOT to install fear into the prospective buyers. I can't begin to tell you how important this is. By installing fear into the bidders rather than encouragement to participate in the bidding war, chances are you will 'scare away' and lose one of the bidders messing up the entire goal of the war.

The ultimate goal of the bidding war is to procure the highest & best bid that generates a signed contract for the seller! Let me repeat that so as to keep the ultimate goal very clear!

The ultimate goal of the bidding war is to procure the highest & best bid that generates a signed contract for the seller!

If you get a great bid because of a bidding war that fails to produce a signed contract, than you got nothing out of the deal and are back to square one with only 1 bidder who may feel questionable about why the first deal fell through. So, here is your step by step guide as to how to handle this situation that is in the best interests of the seller and the prospective buyers that are participating in the bidding war.

Step 1: Confirm A Bidding War Could Exist - Did you receive multiple bids in the acceptable range of the seller that are financially qualified to purchase the apartment and pass any board requirements? If a bidder fails to meet one of these criteria than you don't really have a bidding war situation since one of the bidders is meaningless.

Also, make sure both bidders don't have any restrictions on the time line to close the deal that may conflict with the seller's time line for closing.

Step 2: Announce the Bidding Procedure & Deadline - Announce to ALL parties the bidding procedure plus deadline for submitting their final bids. It may look something like this:

"Due to the high level of interest the seller has decided to give all interested parties the opportunity to present them with their "Highest and Best" offer by 11 AM Friday May 11th. The seller will accept the winning bid by 12 noon Friday and the contract of sale will be delivered to the buyer's attorney shortly thereafter."

You will also want to include the items expected with any bid in writing. You could say something like:

"All offers must include the following information.

1) Offered price with financial analysis. Please specify if it's contingent upon financing or not and how much. Pre-approval letter should be provided from Manhattan based lender.
2) Proposed closing date.
3) The buyer's full names, address and social security numbers.
4) The buyer's attorney details. (Name, address, phone and email)"

Step 3: Announce Expectations For Winning Bid - Announce to ALL parties before hand what the expectations are for the winning bidder. The reason you do this is to ensure all bidders that the winner will be given X amount of time to have their attorney complete diligence and generate a signed contract. It could look something like this:

"The winning bid will have until 12 noon May 18th to deliver a signed contract with 10% down payment to the sellers attorney. If the sellers attorney is not in receipt of the contract by set time the seller will move forward with the back up offer immediately."

Lets not forget the meaning of 'BEST & FINAL' and that a deadline was presented to the bidders. You must honor this deadline and give the winning bidder a chance to generate a signed contract. Should the winning bidder NOT produce a signed contract by the previously disclosed timeline, the seller can move on to the other offer. In the real world deals fall through and buyers get cold feet. There is nothing you can do about this other than be prepared to move on to the next qualified bidder.

Step 4: Announce Any Unit/Bldg Info - Now is NOT the time for surprises! Be sure to announce any assessments, delayed/expedited closing dates, inclusions, or any other matters of fact that will ultimately come out when the winning bidder's attorney does diligence.

Step 5: Announce Complete Marketing Until Signed Contract - Announce to all parties that the property will continue to be shown and marketed until a signed contract of sale is provided to the seller's attorney with 10% deposit! This does not mean you will go behind your word of giving the winning bidder a chance to produce a signed contract! It just means that the apartment will be considered ACTIVE & ON THE MARKET until a fully executed contract of sale is reached.

The rest is up to you!

UrbanDigs Says - Bidding wars are a very desirable situation for a serious seller. However, you can mess one up if you don't know what you are doing! By being too demanding and fearsome in your demeanor you may scare away potential bidders. By being too lax, you may open yourself up for a confusing and troubling situation should one party fail to act accordingly. You must find the middle ground to encourage participation by the prospective buyers and at the same time lay down the rules that are in the sellers best interest and fair to the bidders. In the end, if you stick to this method you should do just fine!

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Skinny Dipping Anyone?

A: I would like to introduce a guest writer to UrbanDigs.com. His name is Jeff Bernstein is a partner at Guild Partners; a residential investment and development company. I met Jeff the other day and we had some great conversations about what is happening in the macro world today and how we can best take advantage of them with our investments; which is the ultimate goal of this blog with a focus on Manhattan residential real estate investment. So, here is Jeff's first post discussing the rapid growth experienced oversees in China, and whether another financial crisis such as the Asian financial crisis that occurred back in mid 1997-1998 will happen again. A topic worth reviewing.

East Asian Financial Crisis -

The East Asian Financial Crisis was a period of economic unrest that started in July 1997 in Thailand and South Korea with the financial collapse of Kia, and affected currencies, stock markets, and other asset prices in several Asian countries, many considered Four Asian Tigers.

When two ex-Wall Street stock jockeys sit down for a cocktail the conversation inevitably turns to.......China? Well the conversation inevitably turns to investments fads and bubbles that are or may be brewing. By these earmarks China probably ranks as a subject worth discussion. While the economic juggernaut that is mainland China is not new news, recent efforts to slow the pace of growth in China has spurred new speculation about how and when this colossus of an investment trend will end and more importantly, will it end badly? The jury is out on these questions and I will argue that it may be out for some time to come. I'll also argue that it will end badly, no ifs ands or buts. Unfortunately, China has become such a big factor in the world economy that trouble there will reverberate worldwide as it did briefly when the Chinese stock market plunged 8% in one day in February of this year.

Just to re-cap some very well known history. Mainland China's growth has been on a tear driven by industrialization in its coastal regions. This has drawn literally billions of people from the rural hinterlands to the cities seeking their fortunes. Recent commentary also suggests that they are now fleeing under-investment in the countryside particularly as far as social services go. But just to hit a few data highlights - in addition to some "up and to the right" charts shown below:

China Current Account Surplus

Direct Foreign Investment in China

China has been growing its GDP at over 8% per year for 20 years. According to Jim Jubak, of Jubak's Journal "China's government wanted to slow the economy's growth a bit from the 10.7% rate turned in for 2006. A rate near 8% would be ideal, Beijing's planners said at the beginning of 2007, because that is high enough to generate the jobs the country needs to stay even with its population growth and low enough to keep the economy from further overheating. Instead, what they got was 11.1% growth in the first quarter, the National Bureau of Statistics announced April 19. And now the Chinese Academy of Social Sciences is predicting 10.9% growth for all of 2007."

This GDP result for 2007 is actually expected to exceed the forecast on the chart above as growth has seemed to re-accelerate. As a result of the many years of growth, China's current account surplus (roughly how much they sell overseas vs. how much they buy) has exploded as has its foreign currency reserves. Not only has China become "rich", but almost everyone wants to invest there - as show by the Foreign Direct Investment chart. Although I couldn't find a good chart of fixed investment (manufacturing plants and other big stuff being built), suffice it to say that Chinese are equally bullish on their own prospects as foreigners and are "building big stuff" to beat the band. Fixed investment has been growing at rates over 15% per year for years and grew 25% in the first quarter of 2007.

So it's all good, right? Well, not exactly. Each country has its own potential to grow driven by a multitude of factors, which are hard to calculate and estimate. They are basically unknowable with any precision. If a country grows "above its potential" something eventually has to give, usually in the form of higher prices or "inflation" or other imbalances including social problems and pollution. However, if a lot of the investment in stuff is not investment personal consumption (things people buy and consume or put on a shelf), but rather investment in productive equipment (manufacturing plants) like in China, inflation can stay low as the productive equipment churns out tons of new goods, keeping a lid on pricing.

Although inflation in China appears to be under control, the government still seems to be concerned. This may be out of real worry or possibly to assuage foreign governments and investors who believe that growth above potential is dangerous. Regardless of the motivation, China has been raising interest rates ever so slightly and tightening its bank reserve requirements. The half-hearted interest rate increases and refusal to let the currency appreciate much, beg the question of whether the government really wants a slowdown. But most recently the deposit-reserve ratio was boosted by the biggest amount in years, 50 basis points, to 10.5%. Many argue that even this will be of minimal impact as most banks reserves are already well above the 10.5% level.

For now, China's economy looks like a runaway train. Some, including The Economist magazine have pointed out in the past that poor measurement of economic statistics make the fixed investment boom in China look bigger than it really is etc, etc. But one thing that's clear as day to a couple of guys sitting on a barstool is...Nothing grows to the sky and when something appears to be half way there, start to worry, the downsides of unfettered growth, be it at an individual company or a country are usually ugly as the warts that were previously hidden by the growth dynamic come to the surface. As Warren Buffet has been said to have commented "when the tide goes out you find out who is skinny dipping".

Interestingly, over the years when foreign economies have become especially strong companies and individuals in those countries have tended to go on "trophy hunting" expeditions, buying famous brands, companies and real estate in far away lands. These trophy hunting expeditions have often marked the top in their economies and stock markets. Recall when Japanese investors bought Rockefeller Center and Pebble Beach, just before their economy tanked. I recently heard a big New York Real Estate investor talk about the continued potential appreciation in the unique New York market and the huge impetus it would be for prices if the Chinese ever decided to invest 1/10 of a percent of their foreign currency surplus in New York real estate. Be careful what you wish for.

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New Listings Week of 5/1 - 5/8 = 282

A: New Listings inventory for the first week of May totaled 282, a slight rise from the last report I did on the subject. Not too many good deals out there but here are some notable new listings that may be worth a visit if they fit into your criteria and price point.

Neighborhoods included: Carnegie Hill, Central Park South, Chelsea, Clinton, E. Village, Fin District, Flatiron District, Gramercy, G Village, Little Italy/Chinatown, LES, Midtown, Murray Hill, SoHo, Sutton Area, Tribeca, UES, UWS, W. Village

61 West 62nd Street; Apt: 5F

First Came on Market: 5/02/2007
Asking Price: $650,000
maintenance: $1,448 (high, keeps price lower)
Size: 750 SFT
PPSF: $867
Marketed By: Jessica Cohen & Robin Greenbaum of Douglas Elliman

340 East 74th Street; Apt 4C

First Came on Market: 5/07/2007
Asking Price: $1,200,000
maintenance: $1,469 (low monthly's for size)
Size: 1,250 SFT
PPSF: $960
Marketed By: Stacy Froelich of Corcoran

158 Chambers St; 5th Fl PH - Walkup w/ 700 Sft Roofdeck * Roof Rights

First Came on Market: 5/08/2007
Asking Price: $1,485,000
maintenance: $2,050 (not bad for size + roof deck and rights)
Size: Aprox 1,700 + 700 SFT Roofdeck
PPSF: Aprox $874
Marketed By: James Attard of Tabak of Tribeca

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The Legacy: On Market For $8M+

A: The new development called The Legacy over at 157 East 84th street had its offering plan approved and now has 3 units on the market for the low low price of $8,000,000+! Actaully, I have to admit that these full floor units look sick and being that there are only 3 of them on the market I'm sure someone with the luxury of tons of $$$ will be interested in taking a serious look! Here are the details.

About The Legacy - Core's the Legacy at 157 East 84th Street is a seven-story, seven-unit conversion of a former garage. "It cost us over $1 million just to create the façade," said Josh Guberman, Core's president. Residences at the Costas Kondylis- designed condo will include two duplex townhouses, three floor-through units and two duplex penthouses. The units range in size from 3,300 to 5,500 square feet and all come with terrace space.

The Legacy will boast a 24-hour doorman, a landscaped rooftop garden and a host of high-end finishes and features, said Gurberman, including "computer brains" that control each unit's audio-visual components.

Here are a few pictures of one unit:

Here are apartment listing details:

APT - 2nd Floor

First Came on Market: 5/07/2007
Asking Price: $8,299,500
maintenance: $4,576
RE Taxes: $3,931
Size: 5,175 SFT
PPSF: $1,604
Marketed By: Loy Carlos & Carrie Chang of Corcoran

APT - 3rd Floor

First Came on Market: 5/08/2007
Asking Price: $8,399,500
maintenance: $4,702
RE Taxes: $4,039
Size: 5,175 SFT
PPSF: $1,604
Marketed By: Loy Carlos & Carrie Chang of Corcoran

APT - 4th Floor

First Came on Market: 5/07/2007
Asking Price: $8,499,500
maintenance: $4,825
RE Taxes: $4,145
Size: 5,175 SFT
PPSF: $1,604
Marketed By: Loy Carlos & Carrie Chang of Corcoran

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Congress Debates Lending Reform

A: Nothing new here, just passing on the latest. As you know, the Fed is holding a hearing on May 14th to discuss placing standards on the lending industry to prevent abusive lending tactics. This is in addition to that meeting.

According to Yahoo Finance -

Congress is looking at potential reforms to risky home lending practices, but a Tuesday hearing at a House subcommittee suggested many lawmakers are still sorting out the complex workings of the mortgage market -- and some are unsure whether reforms will necessary in the short term. "There is a very complicated web of contributors to this issue that makes it very difficult and unwieldy to unwind," said Rep. Melvin Watt, D-N.C...

Watt and other committee members said Congress needs to be careful about unintended consequences of potential reforms.

"It's kind of like the Pillsbury dough boy," Watt said. "If you push in one place, it juts out someplace somewhere else."

Rep. Carolyn Maloney, D-N.Y., the subcommittee's chairwoman, did not say whether legislation is needed, but suggested that it could be necessary.

"This committee is by no means waiting for the private sector to do what it thinks is right to solve this rapidly growing crisis," she said.

My last post discussed how the fed is meeting next week to discuss this very same issue to protect the consumer. Problem is, as Congressman Watt said, if you push in one place, it just comes out somewhere else. In this case, if they enact lending reform, fewer buyers will be able to afford a home and that could be disastrous to the national housing slump already searching for a bottom.

Market forces are working right now as companies are self-correcting a major part of the problem in the face of the hole they dug for themselves. The question that remains is whether or not the federal government feels the need to step in and regulate. Time will tell but speculative investors and homeowners looking to sell soon are certainly hoping for NO REGULATION! In their eyes, we need as many options available for potential home buyers so that affordability stays high enough to pay asking prices!

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Sellsius Launches Classified Site

A: My friends Rudy & Joe over at Sellsius launched a new real estate classified site a few weeks ago and I just wanted to help them in spreading the word! These guys are all about people and providing a service to help the consumer. Here are the details.

SELLSIUS REAL ESTATE

About - Sellsius is an all-inclusive real estate classified site----sales, rentals, res, commercial, biz for sale, getaways + classified ads for real estate products and services & job and wanted ads + directories of professionals. We are more than a place to list property---we list professionals too.

Search Capabilities - Search functions include:

Niche Search (penthouses, studios, timeshares, etc)

Exact match (find a duplex penthouse fixer upper with a southern exposure---no fuzzy search results---will become more valuable as data is added)

Open House search

Professional Directories search

User-Generated Content - Members are free to add tips and articels (comment permitted). In this way other pros or agents who dont have blogs can get the google juice benefit by adding content on sellsius. Links from the tips & articles go to member. We are big on this aspect too.

Wanted to wish you guys the very best with your new venture!!

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Serious Buyers Get Ready: Summer Control

A: This is a post for all you serious buyers out there that know for a fact you will be buying a Manhattan apartment in the next 4 months or so. Get ready! As we head into the summer months, you should be able to determine those that really need to sell. Here is what to look for.

Now that the frenzy months of JAN - APRIL are over and things seem to be cooling a bit, those buyers that are not just browsing for fun or looking to learn product knowledge for a purchase sometime in 2008, should wake up and get to work!

But what happens if you finally found your desired property but there have been NO price cuts in the past 3+ months on the market? Well, chances are this seller has no pressure to move the property and is waiting for their price. In the real world, their is little you can do other than to test it out by submitting a bid that you are comfortable with. Have your buyer broker educate you on what the building is trading at and place a bid based on these comps with an explanation why so that the seller sees it; explain that anything over your price is out of whack with building past solds and might result in a failure of the property to appraise by a lender. Then hope for some type of reasonable response.

However, if you do find a property that has had multiple price cuts in the past month OR one really big price cut recently, you might have a ripe situation for getting a great deal. Unfortunately in real estate, one man's misfortune is another man's reward!

In addition to the buyer broker you may be using, you should be searching sites like Streeteasy.com & PropertyShark.com to learn product knowledge and educate yourself on past solds in the building and neighborhood you might be looking into.

The goal should be to find a seller who MUST sell and decided to overprice their property and test the market heading into the summer months. These sellers will be pushed against a wall come July & August, after months on the market and a stale listing, leaving them only with a price reduction strategy to re-stimulate interest. Questions that remain are whether or not you can find these property's and if they meet your desired criteria for your new home.

Finding a distressed seller will be much easier with the help of a buyer broker. The system should be:

BOTH OF YOU SEARCH FOR PROPERTIES & THEN WHEN ONE IS OF INTEREST HAVE YOUR BUYER BROKER SEND YOU THE LISTING HISTORY & BUILDING COMPS

What you are looking for is multiple price cuts in a short period of time OR one really big price cut in the past week or so. Once you see 2+ price reductions in a 4 week period, you know the seller is either getting nervous and needs to sell soon OR was ridiculously overpriced to begin with and is choosing the small but more frequent price cut strategy to stimulate interest (not a good strategy heading into the summer!). When you see one real big price cut in the past week or two, you get that same feeling. Here are some examples.

251 West 19th - Price Cut $650,000 Yesterday!

First Came on Market: 3/02/2007
Original Asking Price: $3,400,000
Asking Price Reduced From: $2,750,000 on May 9th, 2007
maintenance: $785
RE Taxes: $990
Size: 1,822 SFT
PPSF: $1,153
Marketed By: Elaine Claymen & Daniel Ruiz of BrownHarrisStevens

430 West 34th - Price Cut $80,000 2 Days Ago!

First Came on Market: 1/19/2007
Original Asking Price: $875,000
Asking Price Reduced From: $875,000 on May 8th, 2007
maintenance: $1,560
Size: 1,200 SFT
PPSF: $662
Marketed By: Michael Johnson & Tami Solomon of Corcoran

UrbanDigs Says - You really need to be educated and willing to risk losing the deal during negotiations to get a very attractive price on a property (when your low bid is countered to but not accepted, you might have to back off for a day or two to see if the seller comes back to you to get a deal done). First off, you need to find an apartment where the seller is still willing to come lower on price. Second, you need to know how to negotiate. Third, you need to be able to get the deal done quickly before more buyers realize the value being offered. Losing a deal because you are not ready is a horrible feeling.

As you head into summertime, be sure to have your attorney already picked out, your lender fine tuned down to the 2 most competitive offers, and your eyes open. Working WITH your broker instead of against them will only help you in getting the best deal possible. With my clients, it is not uncommon for them to spot a deal before I do and send it over to me for review. I will then send them the info they need on the building and last sales so that together we can valuate the property properly and devise a bidding strategy when necessary. Are you doing the same with your broker?

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Inflation Moderating Yet Bond Yields Up?

A: What gives? In a perfect world, the inflation data that came out this morning via a mild PPI # told the street that the fed would have an easier time cutting interest rates since inflation seems to be moderating? Right? Not exactly. If this were true, the yields on most bonds would be falling to anticipate future lower interest rates. But that is NOT what is happening? So what is really going on?

The pipeline is what is going on! While the PPI report came in ahead of expectations in terms of inflation worries, its what is yet to come that is still worrisome; there are still signs of trouble in regards to inflation and a few moderate reports does not a trend make. Let the street applaud the temporary relief in inflation with higher stock prices, but I'm not convinced yet and neither should those expecting lending rates to dip on this news!

According to CNN Money:

The Producer Price Index, which measures the price of goods at the wholesale level, rose 0.7 percent last month, down from a 1.0 percent gain in March, the Labor Department reported. Economists surveyed by Briefing.com had forecast a 0.6 percent rise.

But the more closely watched core PPI, which strips out volatile food and energy prices, showed no rise after also coming in unchanged in March. Economists had forecast a 0.2 percent increase.

The report showed that energy prices jumped 3.4 percent in the month, while food prices rose 0.4 percent. Both were down from the increases posted in both February and March.

The overall PPI is now up 3.4 percent over the last 12 months, while the core PPI is up only 1.6 percent over the same period. The Federal Reserve is generally believed to want to see core inflation readings in the range of a 1 to 2 percent increase on an annual basis.

But here is the real good part...

Mark Vitner, a senior economist with Wachovia, said the PPI report has some readings that justify the Fed's concern. The overall and core PPI is for finished goods such as bread but prices for crude goods such as wheat and intermediate goods like flour are also measured. Prices for intermediate goods jumped 0.9 percent, while prices for crude goods excluding food and energy climbed 0.4 percent, pointing to inflation pressures in the pipeline.

"The Fed is not going to say 'We have to cut rates because consumer spending was weak in April,'" Vitner said. "They're right that inflation is still higher than they'd like. The best way the Fed can keep higher energy prices from spilling over is to hold the line on rate cuts."

Fact is, we are far from easy street in terms of inflation and as long as this is the case, you MUST NOT count on easing interest rates in your investment decision making. Keep in mind that inflation pressures have been dogging around for almost 2 years now, so don't think for a second that a couple of moderate reports such as this last one is going to solve everything!

While short term bond yields dipped on this latest inflation news, the 2YR / 3YR / 5YR / 10YR / 30YR all rose a bit signaling that the bond market is not buying into an easing inflationary world. If it was, all yields will be falling as expectations that the fed can lower rates take hold. You see, the main reason why the fed CAN'T lower rates right now is because of inflation. High energy prices, high food prices, high commodity prices are all contributing to this dynamic. As long as these fundamentals stay at these levels, all the fed can do is HOPE that an economic slowdown resulting from these higher costs in itself eases inflationary pressures. If it works out this way, you will see energy, food prices, and commodity prices all fall. This has not yet happened.

Stocks still seem to be the market of choice for investments although short term CD's and even some online savings accounts are offering no risk 5% returns. With a continuing weak US dollar, the fed is stuck with leaving rates unchanged. The only thing that will change this is if the housing market gets so bad that consumers stop spending and the economy completely derails; which will force the fed to cut rates to settle things down. If this should happen, I don't see how stock prices will hold onto their recent gains given all the uncertainty that is to come with this scenario playing out.

Time will tell. For now, you need to know that inflation STILL EXISTS and the fed will keep rates unchanged. Don't bet on lower rates yet to bail out out housing market. Perhaps towards years end.

Expect lending rates to see-saw around current levels heading into Tuesday's CPI report, which will tell us more detailed information on the inflation front. Looking back, I cannot recall a more confusing time in terms of future monetary policy direction than what we are in right now. I have been following this stuff obsessively since 1992 or so and right now we seem to be in a war between those that think the US economy is in the midst of a serious slowdown mostly from housing woes, and those that think the US economy is still strong but inflation is hiding and waiting to attack. Where interest rates go depend on how the ivy leaguers at the fed interpret the data, so that is our best chance of making the right bets and investments in the near term. Don't fight the fed.

Keep in mind one very important factor, that monetary action lags by a good 12 months or so! We are still waiting for the FULL EFFECTS of monetary action to funnel through the economic system. In my opinion, the fed is waiting to see the full effects of what they have done so far. In the coming months either the US economy will slow enough to ease inflation OR it won't. It will be the answer to this question that I think will dictate the next move. The jury is still out on whether Bernanke & Co. are true inflation hawks, and the next 3-5 months should reveal the hand they have been playing since pausing with their 2+ year interest rate hike campaign. You would be wise to keep tabs on this!

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Market Report: Active Transition

A: With many of you out on Mother's Day enjoying the great weather, I was still in town working with some buyer clients and holding an open house for my sellers. As much as I would like to take these holidays off, it tends to be a great time to take advantage of marketing a property when most inventory takes a week off of advertising. Those that do show up at open houses also tend to be more serious buyers, helping my chances of procuring a bid for my clients. What I saw yesterday is a still active transition month!

I browsed 3 open houses, mostly in the Murray Hill area, with some buyer clients of mine and noticed that all of them had pretty active attendance while we were there. Not only that, but the open house for my exclusive at 205 E 78th had about 13 people show up. Not bad for Mother's Day holiday!

While I still believe we are in the midst of a transition from a seller's market to more of a buyers market, right now I would have to say we are still closer to a housing market that favors sellers. If I were to visualize on a scale where I think we are right now, it would look something like this:

A few months ago that 'notch' would have been 3-4 ticks to the right as we were in frenzy months with more buyer demand, bidding wars, and very little inventory. Right now the market seems to be fairly similar to that with the only difference being a minor slowdown in buyer demand. I am still seeing tight inventory and even a few bidding wars.

I can tell you one bidding war situation that happened at 325 E 79th, a classic 6 in the UES, where a good friend of mine went $100,000 over ask and still didnt get it at the best and final deadline of 12 NOON on Saturday. While I am upset that my friend didn't get the property they went for, I am relieved that they didn't end up paying such a premium (over $1085/sft for a unrenovated low floor unit) in a building whose last few sales were about $775/sft (for higher floor 2BR units that were smaller than this one).

Recall my post I wrote on "how to handle a bidding war" and if you are a buyer keep in mind one very important thing:

BIDDING WARS ARE A SELLERS BEST FRIEND. IN SUCH A SITUATION, YOU ARE IN ESSENCE BIDDING BLIND AGAINST YOURSELF AS THERE IS NO WAY OF KNOWING WHAT YOUR COMPETITION IS BIDDING. IN GENERAL, IT IS VERY HARD TO BUY FOR VALUE IN A BIDDING WAR SITUATION THAT IS SO FAR ABOVE PAST BUILDING SALES. USE DISCIPLINE AND KEEP EMOTION OUT OF YOUR ULTIMATE BIDDING PRICE IN THESE TYPES OF SITUATIONS.

UrbanDigs Says: It's encouraging to see the Manhattan real estate market as strong as it is. While there has definitely been a slight slowdown since earlier in the year, for the most part the market is still healthy as inventory remains tight and prices remain high. I would expect inventory to remain tight in the coming months and buyer demand to slow more, especially as we hit late July and August. This is when a seller's true colors should reveal itself in either price reductions or more negotiability during the bidding process!

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Inflation & Condo Conversions: Good Combo

A: An interesting topic as there is a new trend nationwide that could eventually help drive DOWN inflation, and specifically the CPI #! The trend of existing unsold condos converting to rentals nationwide is helping to add to the supply of rentals on the market (mostly outside Manhattan), which is expected to help ease inflationary pressures in the CPI number. The reason, is that apartment rental costs are a key component to the CPI # and as rental costs fall so does the inflationary pressure on the overall number. Today's CPI # came in at expectations as the very important Core CPI yr-over-yr dropped to 2.3%; a sign that the fed's hold policy is working and inflationary pressures seem to be moderating.

First, lets pass on to you what today's very important economic data told us and then Ill discuss in more detail how condo conversions will help ease inflation down the road.

According to CNN Money:

Prices rose a bit less than forecast in April, according to the government's key inflation report Tuesday, but a closely watched reading showed a pick-up in prices outside of food and energy.

The Consumer Price Index showed prices at the retail level rose 0.4 percent in the month, compared with the 0.5 percent rise in March. Economists surveyed by Briefing.com had forecast a 0.6 percent increase in the CPI.

The more closely watched core CPI, which strips out the volatile prices of food and energy, rose 0.2 percent, after edging up only 0.1 percent in March. The reading was in line with economists' forecasts.

Contributing to the tame CPI number were falling prices for airline tickets, clothing/apparel and tobacco products.

According to Yahoo Finance:

Through the first four months of this year, consumer inflation is rising at an annual rate of 4.8 percent, almost double the 2.5 percent increase for all of 2006. The acceleration has occurred in large part because of higher costs for food and energy.

However, excluding energy and food, core inflation is up at an annual rate of just 2.2 percent through April, an improvement from the 2.6 percent rise in core prices for all of 2006.

That improvement is certain to be welcomed at the Federal Reserve, where policymakers are hoping that their campaign to restrain inflationary pressures is beginning to show results.

Expect stocks to remain strong as long as the Fed has less reason to hike interest rates. Moving forward, there is another trend that I think will help ease consumer price inflation; CONDO CONVERSIONS TO RENTALS!

It's very important to note that this trend is mostly true for markets outside of Manhattan real estate, where inventory is not so much of a problem and therefore won't be included in this theory.

To understand this theory we must first understand what makes up the Consumer Price Index (CPI) and why it is such a closely watched dataset by the Fed for inflation monitoring.

According to Wikipedia:

SOURCES OF CPI DATA

Prices for the goods and services used to calculate the CPI are collected in 87 urban areas throughout the country and from approximately 23,000 retail and service establishments. Data on rents are collected from about 50,000 landlords and tenants.

So, rental prices are considered a good portion of the CPI data used to monitor inflation. This is important because with nationwide housing inventory at very high levels contributing to the weak housing market outside of New York City, there is a growing trend of converting condo inventory into rentals to:

a) avoid taking a loss on the property via selling
b) help ease overall inventory
c) take advantage of high rental prices

As this trend continues, I would expect rental inventory to grow as we head into the end of 2007 and into 2008 causing the supply/demand imbalance to shift in favor of renters, finally! Again this is mostly true for outside of Manhattan. In Manhattan, there are a lot of new development units set to come to market but thus far there are no major inventory issues to speak of. As long as this doesn't change, the # of unsold new condos that convert to rentals should stay at normal levels.

As rental inventory increases across the rest of the nation prices should ease, helping to further moderate the CPI data that eventually comes out! The chain of events that ends with moderating inflation is already underway. We already have high inventory of unsold condos with reports like...

Housing is Going to Get Worse (Miami Herald, FL)

Making It Appealing (Myrtle Beach, SC)

Downtown Condo Sales Down 46% in First Quarter (Crain's Chicago Business, IL)

Washington, DC: Big Condo Supply Brings Prices Down (USA Today)

Time will tell but the conversion of unsold condos to rentals seems inevitable and should help ease inflation down the road, reverse the trend of rising rental costs, and contribute to easing the high levels of unsold inventory. Something to keep an eye on especially for those looking to time their re-entry into a correcting housing market for most of the nation outside of Manhattan. Fundamentally speaking, all of this should be on your radar so that you can learn the after effects of the biggest bull run in housing recent history ever produced.

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U.S. Home Prices Fall For 3rd Straight Qtr

A: Nothing new here and the trend continues. Outside of Manhattan, housing stinks. According to the NAR, the latest data reveals that the median price of a home in the US fell 1.8% to $212,300. It was the third consecutive quarter of decline. Here in Manhattan, the lag is yet to hit.

According to CNN Money:

The home price report revealed a broad but shallow pattern with prices declining over every region but by no more than 2.8 percent, which occurred in the Midwest.

The first-quarter drop follows an overall 2.7 percent slump in the fourth quarter of 2006, which was the biggest year-over-year drop on record.

NAR President Pat V. Combs said in a statement that the flattening in home prices is encouraging.

"It appears the worst of the price correction is behind us," she said. "More stable home prices and declining mortgage interest rates are increasing buying power, which should encourage potential buyers who've been on the sidelines."

Don't be fooled by the NAR's always optimistic view and the legacy left behind when David Lereah stepped down. Outside of Manhattan, home prices are in the midst of a correction and no one knows what might be the surprise that reveals itself and results in either a turnaround or a downright crash.

Fundamentally, there is no end in sight and with housing being such an illiquid investment, the market as a whole will take time to turn the corner. Keep an eye on jobs, consumer spending and interest rates to see how both the economy and the housing market will hold up in the near term.

As far as Manhattan is concerned, the lag is yet to hit. Historically speaking, after Memorial Day the buyer activity tends to die down significantly. I'll report as I see it to see if this summer is any different.

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What's UP with Manhattan Real Estate?

Or a better question is……Why is New York Residential Real Estate up? We were recently trying to raise some money for some other developers doing a real estate project in a very desirable southern community that isn’t well known to Yankee financiers. A real estate investment banker we spoke with said “Yeah yeah everybody who needs to raise money has some great project in a real estate market that is still going strong, but you look in the newspapers and residential real estate all over the country sucks”. As a generalization, I guess he’s right. The question becomes for the markets that are still doing well – the Wall Street Journal recently pointed to Portland OR, Seattle WA, Boise ID, Raleigh and Charlotte NC, and Austin TX., is What’s driving it and will it last? At least, Can you feel comfortable as a buyer that you are not making a terrible timing error in these remaining strong markets?

For Yankees you don’t have to look any further than the Big Apple to find a residential real estate market that is still strong. According to the Real Estate Board of New York (REBNY) – in its just launched quarterly report of citywide residential real estate conditions sales price rose significantly for New York City Apartments in Q1 2007. Average prices rose 23% to $745,000 during the quarter. The median price – a statistical figure which tries to identify the middle of a range without undue influence of $20MM apartments or those sold for $1 – was up 20% to $450,000. By the way, when a mean price is way above the median, sales of super high price apartments are dragging the average price up from what the “middle of the pack” price really is. The average sales price per square foot rose 14% to $733. Condominium prices per square foot were even more robust, up 19% to $791. REBNY has included a bunch of other data on the boroughs, one-to-three family homes, coop sales etc. I’ll cut to the chase…they are all good, with Manhattan condos being the best.

Explanations? Press articles talk about New Yorkers not being spooked by the sub prime lending market debacle Yada Yada Yada. Irrelevant. Markets are made up of buyers and sellers. On Wall Street on a good day in the market some would slyly opine it was because there were “More buyers than sellers”. But that’s completely wrong. There are always an equal number of buyers and sellers. The question is who wants it more or who is potentially a buyer and potentially a seller. What decides these factors is PRICE. The rest of the country had a great run up in prices, but lots of supply was brought on, satisfying many potential buyers. As real estate got less and less affordable due to increased interest rates and higher prices, bidding wars stopped as people didn’t want the properties as badly. Then potential buyers dropped off altogether at certain price levels. In Manhattan this hasn’t happened yet despite the soaring prices. Why? The market has trouble delivering large amounts of new supply, due to lack of available land, zoning regulations, availability of construction, labor/material costs (which makes new building hard to justify without ever higher prices) and recently tighter construction loan lending standards. As one developer I know likes to say “They ain’t makin any more of Manhattan”. In fact, according to one NYC real estate appraisal firm total housing units in Manhattan only grew 1.6% from 2002 to 2005, while total owner occupied housing grew 3.5%. New York is a unique market in other ways. Interestingly, 67% of New York housing stock is rental property, double the level of the country overall. Free market rentals (non-rent controlled or stabilized), which truly respond to supply and demand constituted only 33.3% of the rental market according to the 2005 New York Housing Vacancy Survey. So the relationship between renting and buying in Manhattan is also a bit dysfunctional. Lastly, for a number of years Manhattan has existed in a “state of housing emergency” with a vacancy rate below 5%.

Bottom line is Manhattan is a place like no other. It has been perpetually in a tight housing situation. With Wall Street profits continuing to be strong and very active mergers and acquisitions and commercial real estate markets driving the legal and banking businesses, New York City employment continues strong. The strength, albeit more moderate, in the boroughs is a reflection of the tight Manhattan market for rentals and sales. In contrast, it’s not that surprising that the Tri State Area suburbs, where supply is more plentiful, are in the same residential real estate rut the rest of the country is in. That rut will only get worse if employment slackens, which looks like the only thing that will throw Manhattan off its current upward trajectory.

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Jobs Market Strong! Rates Heading Higher

A: Wow, this certainly was a surprising jobs report! Jobless Claims fell to the lowest level in 4 months, surprising wall street analysts. The yield on the 10YR surged to 4.74% from 4.7% on this report which will certainly have an effect on lending rates in the near term. Expect mortgage rates to trickle higher as longs as the US economy remains strong.

According to Yahoo Finance:

Newly laid off workers filing applications for unemployment benefits fell last week for a fifth consecutive time, pushing jobless claims to the lowest level in four months.

The unexpected drop caught analysts by surprise. They have been expecting claims to begin rising as a result of the economic slowdown triggered by a steep slump in the housing industry.

While businesses so far have resisted laying off workers, many economists still believe the unemployment rate will start rising in coming months, climbing to perhaps as high as 5 percent by the end of the year.

The biggest increase in layoffs appears to be in the auto sector as layoffs in the construction industry lags what most economists were expecting at this time of the year. In simple words, the steep slump in the nation wide housing market has not yet resulted in the number of layoffs economists would expect. Time will tell if this ever happens, but I think it will towards the end of 2007 bringing the jobless claims data higher.

So what do we have here?

Corporate Profits at record highs. The US Dollar near record lows vs. other currencies. A US GDP # that was the lowest in four years. Unemployment rate near a 6 year low. Stocks at record highs. Housing nation wide in a deep slump. Here are some charts:

UNEMPLOYMENT RATE

US DOLLAR WEAKNESS VS. EURO (5 Year)

So, does anyone have any idea what the heck is going on? I certainly don't. I knew inflation was a concern and continues to be a concern which made me believe rates need to go higher; and according to todays bond market reaction, they will. This latest jobs number will certainly help to keep rates steady. There was even a discussion over at The Big Picture recently about how the government measures of inflation are UNDER-REPORTING inflation over the past 8 years. Here is what Barry Ritholtz discussed:

In his post titled, "Want To Measure Actual Inflation: See The Core/Headline CPI Spread":

Whenever I hear the phrase "excluding volatile food and energy" I just laugh. Can a pricing group be considered volatile if it merely goes up each month in an orderly fashion -- for years a