Problems With Case/Shiller Index For Us

Posted by urbandigs

Wed Aug 29th, 2007 01:01 PM

A: You may have read in the past few days that the Case/Shiller Housing Index for the NYC Metro area experienced a decline of 3.4% year-over-year. I know what your saying, "But Noah, you keep saying that Manhattan inventory declined and I don't see where prices are declining?". Well your right! Manhattan inventory DID decline 32% since June of 2006 and I have NOT seen any significant correction in prices since the frenzy months of early 2007! So what gives? It's the index people! I'll explain why it just can't be used for Manhattan buyers or sellers as an accurate gauge to our real time market values.


First, the news. According to CNN Money article titled, "Home Prices: No Relief on Horizon" yesterday:

On Tuesday, Standard and Poor's said its nationwide S&P/Case-Shiller Home Price Index fell 3.2 percent in the second quarter, compared with a year ago. For the three months ended June 30, prices dropped 0.9 percent from the first quarter.

Major housing markets showed worse declines. The Case-Shiller index covering 20 top metro areas for the month of June fell 3.5 percent, and the 10-city index dropped 4.1 percent year-over-year.
To understand WHY I think the NYC Metro Index should not be seriously considered as accurate for Manhattan, we must look at what areas make up the index in the methodology paper of the index itself. For the NYC Metro Area, counties included are:
Fairfield CT, New Haven CT, Bergen NJ, Essex NJ, Hudson NJ, Hunterdon NJ, Mercer NJ, Middlesex NJ, Monmouth NJ, Morris NJ, Ocean NJ, Passaic NJ, Somerset NJ, Sussex NJ, Union NJ, Warren NJ, Bronx NY, Dutchess NY, Kings NY, Nassau NY, New York NY, Orange NY, Putnam NY, Queens NY, Richmond NY, Rockland NY, Suffolk NY, Westchester NY, Pike PA
Would you consider these counties a good representation for co-op, condo, and condop prices here in Manhattan? I certainly wouldn't.

That's not to say I don't believe in the goal of this index or to diss Professor Shiller's ultimate goal, which is in the realm of creating a housing exchange and adding transparency to home prices in major cities. That's all great stuff, but I just don't think we can follow it too closely! So for me, this index is un-usable and I think is more for those buyers and sellers in the suburb counties of the metro areas; I also think it affects buyer psychology and confidence.

However, curiosity kills. So lets see what the NYC Metro Index has done over a few different time periods.

SINCE JAN 2006 - NYC Metro Home Price Index


SINCE JAN 2002 - NYC Metro Home Price Index


SINCE JAN 1997 - NYC Metro Home Price Index


Allllllrighty then!

Spotting A Bottom In Local Housing

Posted by urbandigs

Wed Aug 29th, 2007 10:02 AM

A: Lets take a step back and talk a bit about how one would go about spotting a local housing bottom, as tough a job as you can strive for! First off, its important to note that picking a bottom in housing is extremely local given the variety of factors that are involved in housing fundamentals. However, we can strive to get close to a bottom by analyzing a few local factors + general economic conditions; inventory, affordability (jobs & rates), economic growth prospects, and buyer confidence. In my humble opinion, these are the fundamentals to watch out for. The hard part is combining this analysis and monitoring with your own unique situation to see if buying now or waiting to find a bottom is the better choice.


To pick a bottom you must be forward thinking! You can't wait until the data shows that the bottom was reached and we are already 6 months into the turnaround because by then you missed it and everyone on the sidelines plus speculators will be racing to buy in; unless of course you are more conservative whose investment strategy is geared towards transparency and comfort of buying when the housing environment is rosier. But this discussion is about spotting a bottom, or at lest trying to get as close as possible to finding one before it happens. Here is what I would look for on the fundamentals; you make your own opinions.

Inventory Increases Slowing

With the existing home sales report yesterday we learned that the # of months of inventory on the market right now across the nation hit a 16 YR high! As we are today, there is a 9.6 months batch of inventory waiting to be sold. That means, at the current sales pace and given the current # of units available for sale, it would take 9.6 months to clear out the entire batch! That of course assumes no additional units come to market and sales pace remains constant; an impossible scenario!

In addition, this data metric is not just about the total # of units available. It is also about the sales pace. The reason we reached a 16YR high is because a combination of rising inventory and slowing sales volume. Think about it. If sales volume would have increased instead of slowing, the # of months inventory on the market would not have been as high! Ah, I see the light!

So, there are two very important factors to keep an eye on as prices across the nation continue to fall PLUS one very important dynamic that comes with cheaper homes for sale!

Factors: Watch out for inventory trends! What we need to see to form a bottom in housing is a slowing down in pace of the rising # of units hitting the overall marketplace! When you start to see inventory trends even out and even drop, we might be close to bottoming out.

Dynamic: As prices fall it is prudent to predict that sales volume will increase! And as I just explained, as sales volume increases the # of months of unsold inventory by law will begin to drop! As this inventory metric drops and the # of months of unsold inventory begins to reverse course, you will start to see headlines discussing a bottom and more confidence in housing's future prospects for appreciation.


THE LOCAL FUNDAMENTAL! In terms of housing, there are two important elements to affordability; jobs/salary + lending rates. We can keep this discussion short & sweet as long as we remember that jobs & salaries are a local phenomenon (look at Seattle, Atlanta & Dallas whose housing markets are still very strong due to local job growth); rates are more uniformed but vary with personal situations. Don't take my word for it. Check out the Case/Shiller Home Price Index Charts (via for Seattle, Atlanta & Dallas since they started keeping track and you will notice that the trend STILL is upward with the last update in the 2nd quarter of 2007:


When a local job market is strong, housing will be more affordable than when the jobs market is weakening. This is one aspect to affordability.

The other is lending rates. Lets put aside for a second the fact that alot of people made poor investment decisions and are now suffering for their mistakes; I'm talking about buying a house you cant afford in an environment where lenders would accommodate with loan products that were ticking time bombs.

That is the past, it happened already and steps are in place to prevent it from happening further. Right now, there is talk of the side effects of the credit squeeze effecting the jobs markets and therefore salaries. So let's see how that aspect of affordability is hit. In terms of where lending rates are, we already know that a disconnect has occurred in the lending rate world as risk was priced into the secondary mortgage markets. As bond yields fell with a flight to quality, interest rates rose because there was more risk associated with mortgage lending. In normal times, lending rates would have fell with bond yields; but we are not in normal times.

What do we need to see to spot a bottom? Two things, falling interest rates and a sustainable healthy job environment. These are the areas of most uncertainty! If jobs are lost and salaries with it, how will the buyer pool be effected? If rates continue to rise because risk is still being priced in, how will prices be effected? Here is what to look out for:

Factors: Healthy future local job growth prospects & falling interest rates. Buyers MUST be able to afford a home if there is to be a bottom and ultimate reversal in housing price appreciation! I just don't see how there can be a turnaround if a recession hits OR if interest rates continue to move higher as a result of deteriorating credit markets.

Economic Growth Prospects

In a phrase, we need economic growth prospects to include CERTAINTY, LIQUIDITY, LESS RISK, & GLOBALIZATION. Things we got used to in the past few years that helped fuel the stock market rally, and recently lost due to the current uncertainty surrounding the credit squeeze; except for globalization, however risks remain to global growth as a result of this situation.

We went from high liquidity and low volatility to low liquidity and high volatility virtually overnight! The tradable markets are in shock right now and are still trying to re-price risk and uncertainty to the still unfolding story of the credit markets & secondary mortgage markets. We just don't know who holds what garbage and how deep the hole is. We need this to pass through the system and the losers to be shaken out before any certainty will come back!

With uncertainty comes possible economic slowing and should a recession hit here at home, I don't see how that environment would help in any housing recovery. However, it may help us to spot the bottom as any economic slowdown (which will be accompanied by the Fed lowering fed funds rate and ultimately interest rates to the consumer) should be the next leg down in the national housing market. And buying in towards the back end of a recession BEFORE the eventual recovery may prove very profitable in the long run. Here is what to look for:

Factors: Spillover to US economic growth prospects from the current credit/liquidity squeeze. Expect stocks to price in these risks in ahead of time via a selloff and price in the recovery ahead of time with a turnaround as uncertainty dissolves. We are looking for signs of stabilization and confidence should a slowdown hit the US pushing housing more out of favor with buyers.

In addition, monitor effects on global economies (watch oil prices for an indication on global demand) as that could hit us at home if a slowdown oversees occurs, as well as the pricing of risk. You can monitor the pricing of risk by watching credit spreads. If risk is a concern, credit spreads will widen.

Buyer Confidence

Can someone please explain to me why there is no buyer confidence index for the housing market? One can easily argue that what bulls the housing markets up or down, when all else is normal, are the buyers! When buyer demand and confidence is high, inventory gets eaten up fairly quickly unbalancing the supply fundamental. On the flip side, when buyer demand and confidence is low, inventory quickly builds up putting sellers and pricing in a very bad situation; especially for those that MUST sell.

I have preached this before. Waaaay back on January 18th, 2006, I wrote a post titled, "Buyer Confidence? We Need A Formula!"; one of my favorite posts to this day because there is no such index! In that post I stated:

The national economy and the stock markets have the Consumer Confidence # as one indicator of the current strength/weakness in the overall economy. What current or leading indicators does the real estate industry have; let alone the NYC real estate market? Sales of existing homes? Filed Mortgage Applications? This is a very fast paced city and to keep ahead we must wisely analyze the data for hints of the near future. We need more.

We need a Buyer Confidence index, for housing only, that will help us gauge the strength or weakness of what really makes our real estate market move; the buyers!
Although none exists, and I'm currently trying to change that to add transparency for the consumers, YOU GUYS, we have to rely on our own observations. Look out for:

Buyer Confidence - Buyers get more confident when the economy is strong, jobs market is tight, salary's are high, uncertainty is at a minimum, inventory offers choices, prices are affordable, and wealth effect is in place! In essence, buyer confidence is the ultimate effect of most of the fundamentals I discussed above when they positively relate to the buyer! I know, sounds like a lot to ask for. But it's important, especially OUTSIDE MANHATTAN!

UrbanDigs Says - These are my opinions for those who want a general understanding of what makes for a prime opportunity to buy close to a bottom. In the real world, it's not as cut and dry. Opportunities will pop up even if all these fundamentals don't line up. In addition, trying to time the housing market is EXTREMELY DIFFICULT and should not skew or alter your decision to buy if that decision is a clear one. Understanding your own situation, personally and financially, and combining that with your investment strategy is the way to go when deciding the timing of your purchase. This discussion is for those with very short term investment goals and strategies who are eager to learn under what circumstances the near term housing prospects (remember real estate is LOCAL) may reverse course in favor of appreciation for the years to come.

Existing Home Sales Slow, Supply Rises

Posted by urbandigs

Mon Aug 27th, 2007 01:26 PM

A: Lets go national on the more important existing home sales data that was released today. In short, sales pace of existing homes slowed to the slowest level in 5 years while inventories rose to a 16 year high. More of the same for the national housing market outside Manhattan.

From Yahoo Finance -

Sales of existing homes dropped for a fifth straight month in July, falling to the slowest pace in nearly five years, while home prices fell for a record 12th consecutive month.

The median price of a home sold last month slid to $230,200, down by 0.6 percent from the median price a year ago. It marked the 12th consecutive month that home prices have declined, a record stretch.

The inventory of unsold homes rose by 5.1 percent at the end of July to a record of 4.59 million units.
According to CNN Money -
Homeowners trying to sell last month faced the biggest glut of homes on the market in about 16 years, as declining sales and growing problems in the mortgage market helped push home prices down for the 12th straight month.

Not only did sales slip but the number of homes for sale jumped 5.1 percent, the group said, meaning there is now a 9.6-month supply of homes for sale, up from 9.1-months in the June reading. It was the biggest supply of homes by that measure since October 1991.
Calculated Risk, as always, has great commentary on the housing front and is a must read for any investor seeking to find in depth analysis on housing data and mortgage related news as it breaks.

Here is a great chart from CR showing you the comparisons of inventory (via # months of supply on market) from 2007 so far with the same months of the previous 3 years. I cut off the chart after July because that data for 2007 is not released yet and it wouldn't fit in this site. If you want the full chart, simply click on the table:


You should be able to visualize the inventory problem currently going on outside our little world here in New York City! Nationally, buyers are beginning to see some great opportunities popping up as inventory trends greatly favor buyers and sellers are forced to lower prices aggressively to move property; an ideal situation for any savvy contrarian buyer with a longer term strategy for their investment!

Remember, for those investors seeking to find the bottom you will NOT know when the bottom reveals itself until AFTER it's already too late! Hindsight is always 20/20 and if I was a buyer outside Manhattan in a local market flooded with inventory, desperate sellers, buyer control, and dropping prices my eyes would be lighting up for longer term investment opportunities!

As for Manhattan, well, our inventory has declined 32% since last July! Obviously we are at the other side of the equation!

Does Investor Psychology Matter?

Posted by urbandigs

Mon Aug 27th, 2007 10:48 AM

A: I had to remove the Saturday Humor videos because it was eating too much bandwidth; just to explain why its not up anymore. Today I would like to discuss the change in psychology that I am noticing due to the 5-6 weeks worth of headlines around the current credit/liquidity squeeze. Does investor psychology even matter? In my opinion, BIG TIME! Whats your opinion?


Here are some of the headlines that buyers and sellers of Manhattan Real Estate have been reading recently; no wonder they are so confused:

Drop Forseen in Median Price of U.S. Homes (NY Times)

Cracks May Appear In Manhattan Apartment Market (Reuters)

The Subprime Crisis: Will It Affect Borrowers (NY Times)

The Manhattan Real Estate Slump That Wasn't (NY Times)

Why The Blowup May Get Worse (Barrons)

Sweet. Great stuff. Thank god for that positive NY Times article that explained WHY NYC real estate differs from most other local markets. But even with that article, buyers and sellers have been inundated with headlines in local papers and online media regarding the re-pricing of risk that has been taking place and still taking place right now.

I have mentioned in a few past articles that what I see right now is a psychology shift in both buyers and sellers of Manhattan real estate. What does this mean and is it important? It means:

Buyers - Are beginning to realize HOW the re-pricing of risk will affect them! Buyers are realizing at a lag that lending rates are rising to price in the increased risk with mortgage loans and how that hits their wallets. Buyers are also realizing that prices have not come down and because of that they are a bit MORE WARY of future price appreciation given macro economic red flags that are waving. Combine these changes in thinking and what you get is a MORE CAUTIOUS BUYER more willing to sit on the sidelines than to jump in and bid close to ask.

Sellers - Sellers are reading these headlines and analyzing traffic to their property and it is exponentially raising concern that the two are connected. Before this credit mess hit, if it took 3 months to sell, fine, that's about long it usually takes especially if they priced high to test the market. Now, if the property has been on the market for 2+ months without a bid, its because of the credit mess and that buyers are not chasing! This change in psychology is making sellers a bit MORE EAGER to unload their property in the very near future. However, I am yet to see ANY panic selling or aggressive price cuts across the board. This change in psychology is yet to have a fundamental effect on pricing or inventory trends. If it did, you will see prices come down and inventory rise; not so yet. But you may see some responses to lower offers that you otherwise may have not seen 6 months ago!

The NY Times had a great article recently titled, "A Psychology Lesson From The Markets", where I read this statement -

Rising prices encourage investors to expect more price increases, and their optimism feeds back into even more increases, again and again in a vicious circle. As the boom continues, there is less fear of borrowing heavily, or of lending heavily. In this situation, lower lending standards seem perfectly appropriate -- and even a fair way to permit everyone to prosper.

Many people feel that they have discovered their true inner genius as investors and have relished the new self-expression and excitement. Investors across the world have been thinking that they are winners -- not recognizing that much of their success is only a result of a boom. Declines in asset prices endanger this very self-esteem.

That is why it is so hard to turn around investor attitudes once a downward psychology sets in. The Fed and other central banks do not have lithium or Prozac in their bag of remedies, and so cannot control it.
Before you go and diss this article, you should know that it was written by Robert Shiller, professor of economics and finance at Yale and co-founder and chief economist of MacroMarkets LLC. Oh, and he also was the co-creator of the Case-Shiller Home Pricing Index which allows investors to trade options contracts on 10 metro markets on the CME.

UrbanDigs Says - Investor psycholgy is worth following and is one of the MAIN factors that I consciously monitor when I am out with buyers and sellers. It is a leading indicator of sorts, in my opinion, from the best source possible as to what may come down the road; the buyers & sellers themselves. However, investor psychology is usually a lagging result from macro changes; so how can it be a leading indicator of whats to come (which is my opinion of investor psycholgy)? Think of it this way and it should help explain why I think so:


Now this is NOT a prediction, nor is it an observation on what is going on. It is simply an explanation WHY I think investor psychology is worth noting and how it could be a leading indicator. I'm sure many will argue and thats fine. But this is how I think. The question is how YOU think? The Manhattan story is still unwritten and right now fundamentals are in tact. Let's see if this change in investor psychology that I am noticing has any ripple effect or passes us by.

"I" is for Inventory: NYC Still Very Tight

Posted by urbandigs

Thu Aug 23rd, 2007 10:07 AM

A: Readers often confuse statements that I make on this blog and interpret something I say as a prediction of future price appreciation. Not so. I rarely delve into that area as its way too hard to predict what short or medium term price appreciation will be in any given neighborhood of Manhattan. What I do strive for is to report to you what I see in this fast changing marketplace so that you can get a front row seat to any changes before mass media reports on them. I'll also provide my opinions and tips so that you see my opinions on handling the changing marketplace in the best way possible. When I state that 'because Manhattan is 75% co-op, we are somewhat protected from the subprime mess' it does NOT mean I am predicting an overly optimistic picture for future price appreciation. It means that this market is driven by unique fundamentals that if understood, will explain why we have not seen a correction thus far. Which brings me to today's post on inventory.

Inventory in the New York City real estate market is still very tight. My clients, who range in price point from low $300's (yes I still work with all buyers) to low $2M's, are still having trouble finding products that meet their living needs. Its not to say that there is absolutely nothing, it's just that options are very limited and what is available usually has more than one item that discourages them from bidding.

These clients are not picky either. They know that compromise is inevitable and that they will have to buy a property that has at least 'something' to it that they dont like. The key is, what that 'something' is. It's my job to make sure that the 'something' is NOT a permanent feature that will eventually limit resale profit potential. These 'somethings' include location, light, views, or raw space. This is where the problem is. Finding a property priced right in the perfect location, with good natural sunlight, at least decent views, and enough raw space to meet the buyers' needs. That is where inventory is limited.

Which brings me to today's market report. While the macro economic environment is still very uncertain, it is less uncertain than it was just a few weeks ago. Today, we know that:

a) The Fed is ready to step in when needed; although if stocks continue to rally on the assumption of a rate cut, that rate cut will never happen

b) The banking system seems to be reacting favorably to fed liquidity injections and cut in discount window

c) Major banks, like Bank of America taking a $2B stake in Countrywide Financial, are ready and willing to jump into buying opportunities for struggling smaller lenders

...this is helping to restore investor confidence and therefore stock prices. What is beneath the surface AND the ultimate economic side effects of this credit squeeze are still yet to be known. So we are not out of the woods yet. So what does this mean to NYC real estate that we know is so directly tied to wall street and wall street related jobs and bonuses?

It means that as long as NO MAJOR STOCK SELLOFF OR ECONOMIC RECESSION OCCURS, our marketplace fundamentals will NOT be so quick to change. Manhattan market fundamentals in place right now include:

* Tight Inventory - opposite of what is going on in most other local suburban markets
* Strong Jobs - jobs are still plentiful. There is only talk of job losses as a result of an economic slowdown from this credit squeeze; it did not happen yet.
* High Salaries - NY'ers are still making plenty of $$$. Again, there is only talk of a restriction in salaries as a result of any future recession.
* Bonuses - Umm, we are still only 800 points from record highs on the DOW. Who knows where we will end the year but if things pass over better than most expect and stock markets hold up, bonuses will not get hit as much as everyone expects. There goes that doomsday scenario.
* Weak Dollar - foreign buyers still see value in NYC real estate based on currency trends
* Lifestyle - urban lifestyle is still in demand as trend to live closer to workplace grows stronger
* Rental Rates Soaring - any change in this trend will be lagging from economic slowdowns. Soaring rents make buying more attractive options for those that can afford it, and as I mentioned above there are still plenty of buyers out there.

I see this recent headline from the NY Times story on Sunday that states "...Since June 2006, the national inventory of houses has increased by 12%, but Manhattan's apartment inventory has decreased by 32%":


The Manhattan Real Estate Slump That Wasn't (NY Times) -

Even the condo glut that so many real estate executives feared has turned out instead to be a boon of sorts. "If we didn’t have new development coming on at the pace we did, we'd have a chronic shortage across all sectors, and we’d see 20 percent price growth," said Mr. Miller, the appraiser.

To the extent Manhattan's housing market is threatened by a weak national economy and by declining bonuses, said Mr. Miller of Miller Samuel, "then the fact that we have a lower level of supply coming on would help keep the market from correcting."
Tell me where I am wrong here right now? I discussed the potential threats to jobs, salaries, and bonuses as the red flags are being waved; but doomsday hasn't hit yet. So far the fed has handled this credit squeeze admirably and Bernanke's actions seem to be working. That's not to say it wont get worse, because it may, but it hasn't changed any of the fundamentals yet; at least I am not seeing any changes.

UrbanDigs Says - As long as inventory remains tight, I just don't see how prices can come down as aggressively as some people think. That is not to say I expect 10% appreciation per year for the next two years! I don't. Rather, I see a sideways market for the near term. Corrections are perfectly normal for longer term sustainable growth, I've said this a number of times, so for now its important to continue to monitor the macro economic environment to see how that ultimately effects jobs, salaries, bonuses, affordability, rental rates, and ultimately inventory here at home!

Living In A Tougher Lending World

Posted by urbandigs

Wed Aug 22nd, 2007 09:30 AM

A: I think back to November 2001 when I first bought real estate here in Manhattan. For the most part, the memory is still there although being almost 6 years ago. I was a NASDAQ Equities trader with Tradescape (at the time I was trading for over 3 years) and recently went through 2 very dramatic events; the dot com crash and 9/11. Trading was not only volatile but it was physically and emotionally draining at that time. As a contrarian investor seeking to buy my first piece of NYC real estate, I was disappointed that I couldn't get what I wanted for the price I was able to afford. I started following NYC real estate aggressively in 1999 when I started making money. With 9/11, the NYC real estate market had a brief but sudden correction; nobody wanted to hold on to properties and all of a sudden deals were to be found. My eyes lit up and I signed a contract in November 2001 and closed on the property on April, 5 2002; some 5 months later. Why so long? Because I had such a tough time getting my loan! The past has finally caught up with us!


I recall the seller being super pissed. I recall my attorney doing everything he can to buy me more time to secure the loan. I recall weeks and weeks of phone calls with my lender demanding more documents to back up my income. This is February & March of 2002. This is before lending standards starting loosening up so drastically which helped power the recent national housing boom. This was the time when the 30 YR fixed rate fell to 6.875%, and continued to fall for years after; I ultimately refinanced in 2005. This was the time I thought I would lose the deal of a lifetime.

I purchased a 1,093 sft JR4 condo at 245 East 93rd street for $500,000; Denice Rich of Corcoran was the selling broker. Actually, the sellers were asking $479,000 for the property because they wanted the place sold in '2 weeks time'; a bidding war erupted in the first 3 days after 40+ people packed the Sunday open house. An aggressive strategy that was common for that time period in New York City as residents had the fresh scare of terrorism in their minds and buildings were still being evacuated at least once every week or two for safety precautions; sellers wanted out! A crazy time to be buying to say the least but a good time for any contrarian investor who sees the longer term reward potential that comes with buying an asset that is down & out with mainstream investors.

But I almost lost the deal. I had trouble getting the damn loan commitment because...

1. I was a self-employed Equities Trader working AFTER the market crashed
2. I had declining income reported in 2001 compared with 2000
3. I had to come up with the last 3 years Tax Returns
4. I had to take a higher interest rate that I originally had a problem with
5. I had to provide bank statements & pay checks for last 3 months
6. I had to get a expected income verification letter for 2002 from my CPA saying my income would rise from 2001's.

It was hell. The whole process totally drained me. As if trading in a post stock market crash environment wasn't enough I had to deal with angry sellers, relentless sellers' attorney's, a tough lender, a hard trading market, and the questioning that comes with buying after the worst terrorist act in recorded US history. But the deal was too good to pass up on and I was determined to put up with the headache of getting that loan commitment so I can proceed to closing. I did and I finally closed on the property in early April, 2002.

The only reason it took so long was because I had to prove to my lender that I actually earned what I said I earned and that I could actually afford this property going forward. And for those that say, 'why didn't you call a different lender', I did! No one else would talk to a self-employed equities trader after the markets got hit so hard! Oh, one lender offered to work with me at a rate of 8.75% for a 30YR fixed; I didn't bend that far!

My Point: We are returning to a lending environment more like this! We are in the very early stages of tighter lending and underwriting standards after we got so used to no standards at all for the past 3-4 years! Looking forward, buyers will have to prove their earnings and employment. As Michael McGivney, a Wells Fargo Private Banker, said back on Aug. 10th:

Last week, a client getting approved for an interest only product, like a 5 year ARM, on a $500,000 loan qualified on the payment of $2604 at a rate of 6.25%.

Today, that same client, to qualify for the same loan, will need to have enough income to qualify for the "fully indexed, fully amortized" payment. That means they MUST qualify at a rate of 11.25%, fully amortized. That means a payment of $4863!!!!!! That's nearly DOUBLE the payment. That means they must have nearly DOUBLE THE INCOME!!!
And they will need to have the documents to prove that income before the loan gets committed to! Adjust accordingly and be prepared! This credit squeeze is only 5-6 weeks old in the tradable markets minds; although many have been waiting for this to happen for years.

It's going to take more than a few months to adjust to such a different world after years of loose lending standards. For any seller thinking about accepting a deal from a buyer whose income is derived 100% via self-employment, be sure that they can back that up with documents so you have no issues with the deal closing!

For more in depth talk on this topic, read my post last week titled, "Adjust Your Risk Tolerance For Loans".

Markets Forcing The Fed Into Rate Cut?

Posted by urbandigs

Tue Aug 21st, 2007 10:14 AM

A: I have to stick to more heavily weighting macro discussions on urbandigs while so many changes are taking place. Its just very important to explain to you why things happen. Right now, the short term US Treasury markets are rallying bringing yields WAY WAY down! Normally, the spread between the 3 Month T-Bill and the fed funds rate is about 50 - 75 basis points (0.50% - 0.75% spread in yields). We know that the fed funds rate stands at 5.25% right now, but 3-Month T-Bill is now yielding below 3%, over 200 basis points spread! This is the markets way of forcing the feds hand into a rate cut, and it may just work!

First off, there is much debate about whether this is the markets way of forcing the feds hand, a repricing of assets to quality and out of anything associated with risk OR the markets overshooting as they normally do which will ultimately correct itself. In either of these cases, its worth discussing.

Check out what the 3-Month T-Bill yield has done over the past 4 weeks; just an amazing rally in bond price and subsequent steep selloff in yield (a drop of over 240 basis points or 2.4%!). I circled the yield change from last month to yesterday for ease of interpretation.


This discussion focuses on the 3-Month T-Bill, whose yield movement over the past 30 days I just circled above, and the spread that this short term yield now has when compared to the fed funds target rate of 5.25%; I discussed credit spreads widening about two weeks ago. Historically, the spread between these two instruments are about 50-75 basis points OR 0.50%-0.75%. However, in the past 30 days due to the repricing of risk, the spread between these two has gapped to about 240 basis points. Reasons why could include:

1. T-Bill Markets Are trying To Force The Fed To Cut Rates To Normalize The Spread
2. Short Term Treasury Yields Are Experiencing A Flight To Quality As ALL Risk Is Avoided
3. Short Term Treasury Yields Are Pricing In Severe Deterioration In Economic Conditions
4. Short Term Treasury Markets Are Overshooting & Will Correct As Risk Repricing Continues

Yesterday alone, the 3-Month T-Bill experienced the steepest decline in yield since the crash of 1987; the T-Bill yield was down by a full percentage point before recovering!


MoneyAndMarkets has a great peice on what is going on in the short term T-Bill markets yesterday:

Some of the world's largest and most "professional" investors, so cozy in their complacency just days ago, are dumping short-term loans (commercial paper) like hot potatoes, especially those backed by mortgages.

* The 1-month T-bill rate has plunged from 4.52% last Tuesday to as low as 1.25% today. That's not a typo! It was actually down by more than THREE full percentage points in just four trading days!

* Today alone, the 3-month T-bill rate was down by over one full percentage point before recovering a bit.

* The all-critical spread, or difference, between the 1-month T- bill and 30-day commercial paper rates is now as much as THREE times bigger than it was just a few days ago - another confirmation of panic in these markets.
They list 5 reasons why this is happening and what this could mean to you:

First - even investors in the shortest-term debt market are shunning any kind of loans with risk attached to them. They don't want sub-prime paper. They don't even want prime paper. They just want ultimate safety - short-term Treasury bills backed by the full faith and credit of the U.S. government.

Second - if you've got a chunk of your nest egg in one of our favorite short-term Treasury-only money funds, good. It means you already own what nearly everyone else now wants.

But if your fund has an average maturity of just a few days, don't be surprised if your yields start dropping sharply very soon.

Third - don't be surprised if the panic in the U.S. money markets soon becomes a panic in the U.S. stock market. Heck, if investors think normally-safe commercial paper is so risky, why should they believe stocks are any less risky?

Fourth - with the yield on U.S. Treasuries plunging, watch out for another, even more severe plunge in the U.S. dollar, especially against the Japanese yen.

Fifth - brace yourself for more. Today's panic in the money markets is just a sampling of what's possible in the days ahead.

Personally, I think the markets will successfully get what they want: A FED MOVE! I expect a fed rate cut in September UNLESS tradable markets show a bounce and close near 13,400 or so by the next meeting. However, I dont expect that. I expect uncertainty to continue and volatility to be high as markets re-price risk. I think there are many hedge funds, lenders, and banks still yet to come out with their holdings. The fed may have to move sooner rather than later and an intra-meeting rate cut is certainly possible. It's going to be a wild few months!

** 3-Month T-Bill Yield Sees largest Drop Since 1987 Crash Amid Flight To Safety

Mortgage Report: August 20th - 24th

Posted by steve

Mon Aug 20th, 2007 01:03 PM

The Federal Reserve moved in last Friday to calm the financial markets and cut the discount rate by 50 basis points to 5.75%. This is the rate at which the Fed lens money directly to commercial banks, credit unions, and large savings and loans institutions. The Fed's move to cut the discount rate has no impact on mortgage rates or consumer rates like home equities.

As the press continues to sensationalize the mortgage meltdown nationwide, we need to
remember that our NY Metro Marketplace is in much better shape than most of the rest of
the country. Yes there are clearly many changes being made by banks on a daily basis and
more banks will fold - and some types of loans are harder to get today than they were even
just a week ago - but the mortgage market is not broken - it is correcting and we cannot lose
sight of the many lenders, especially our portfolio lenders, that continue to offer COMPETITIVE
rates and mortgages to all sectors of the marketplace.

You CAN still get a No-Income Verification loan
You CAN still borrow 90% on a mortgage – in fact there are still lenders allowing 100%
You CAN get a fixed rate at 6.75% with 0 points up to $1 million
Banks ARE still lending on super jumbo loans – no loan size too large
You CAN still get a home equity loan
You CAN still get financing for an investment property

Yes, the playing field has changed and many of the banks that we have done business with
over the years are going through a period of correction and they will be back but, in the meantime, we have a large number of portfolio lenders that are ready to lend money and they have not increased their rates. We are simply going back to doing business the old fashioned way – and this is a good thing for the future of the Real Estate Market.


How Many ARM's Set To Reset in 2008...?

Posted by urbandigs

Sat Aug 18th, 2007 10:04 AM

A: You wonder quietly to yourself? Thanks to the we have an idea of what's to come in the ARM reset category of the housing equation for the next 3 years.


In 2007 (from July 1 - December), there are just over $200B worth of home mortgages that are expected to reset into higher interest rates; that is, adjustable rate mortgages or ARM's. Of that $200B, abut $150B was subprime loans, $30B or so of Alt-A (in between subprime and prime, or near prime loans) loans, and about $30B of loans backed by Fannie Mae or Freddie Mac.

So, whats expected for the next year? Let me break it down for you in comparative purposes to 2007; or just look at the chart.


Subprime - Aprox. $260B of loans set to reset into higher rates

Alt-A - Apox. $30B of loans set to reset into higher rates

Prime - Aprox $15B of loans set to reset into higher rates

Fannie/Freddie Backed - Aprox $50B of loans set to reset into higher rates


Luckily, according to this study by Deutsch Bank Securities, the dollar amount of home loans expected to reset into higher interest rates for 2009 & 2010 drop significantly. It's 2008 that we have to worry about and how that may or may not further change the lending environment and ultimately housing.

Since banks and lenders have smartened up in the past 6-10 months or so with tighter lending and underwriting standards, less of these adjustable rate loan products were being committed to which explains the drop off expected in 2009 and 2010. Most adjustable rate mortgages are for three or five years; so we are really talking about those who purchase homes between 2004-2006 that we still have to worry about.

There should be some great buying opportunities in the coming year or two as the smoke clears from the mistakes made that led us into this credit/liquidity squeeze. Contrarian investors unite, especially outside Manhattan. As with every recovery, you won't know we are in one until it already happened!

How Mortgage Backed Securities Work

Posted by urbandigs

Fri Aug 17th, 2007 11:37 AM

A: Getting way too many emails and questions from clients asking me to explain why we are having these liquidity problems. In a nutshell, the secondary mortgage markets are not functioning properly; there is no liquidity and a lack of buyers for mortgage backed securities. Here is a quick 4-step guide that hopefully will break it down for you.

The problem we are currently seeing is in the secondary mortgage markets, which was created in the first place to provide more liquidity in the mortgage markets and allow banks and lenders to provide more financing and more loan options to YOU, the consumer. Now that liquidity has completely dried up in these secondary markets, banks and lenders are left holding assets that are virtually worthless and that no one wants to buy. We still don't know WHO HOLDS WHAT or what the market value of these holdings are! This is what we are working through right now.

Let me try to explain by first defining for you what the secondary mortgage markets are.

Secondary Mortgage Markets - The secondary mortgage market allows banks to sell mortgages, giving them new funds to offer more mortgages to new borrowers. If banks had to keep these mortgages the full 15 or 30 years, they would soon use up all their funds, and potential homebuyers would have a more difficult time to find mortgage lenders. Many of the mortgages on the secondary market are bought by Fannie Mae. Other are packaged into mortgage-backed securities, and sold to investors.

Lets talk about that last part, where mortgages are packaged up into mortgage backed securities and then resold to investors. That is where we got into trouble and is what led to a re-pricing of risk on the street!

STEP 1 - A pool of mortgages are owned by a bank or lender. They are grouped into categories by credit risk including subprime, alt-a (between subprime and prime), and prime.

STEP 2 - The pool of mortgages are packaged into a mortgage backed security.

STEP 3 - The mortgage backed security is then sliced and diced into different classes with varying maturities (called tranches). Each tranche offers varying degrees of risk to the investor. The first loan to default will be placed into the Junk tranche while the strongest loans receive the highest credit rating of 'AAA' and are placed at the top of the tranche division. As with any asset associated with risk, the highest risk tranche receives the highest rate of return or yield while the lowest risk (AAA rated) will receive the lowest yield.

STEP 4 - The tranches are then resold to investors who are willing to take on the varying degrees of risk and maturities.

*refer to the following chart for a visual of the above defined steps


There are many fees embedded in this process for the lender, brokerage, hedge fund or investor that I did not go into. This is not an in depth analysis of how MBS work but the easiest way for me to explain the basics of how mortgages are packaged into mortgage backed securities, sliced and diced up, and then resold to investors. It's interesting because if you take a pool of subprime mortgages and go through this process, in the end you can come out with AAA rated paper. Turning subprime into AAA; hmm, I wonder why we are in trouble.

Right now, holders of these securities are having trouble finding investors to buy them as the secondary mortgage markets basically freezed up. There is no liquidity. As a result, those that hold these assets and who took out financing to do so, may have margin calls due that force them to liquidate assets at market value which is not desired. The market value of these assets fell substantially as subprime loans started to default leading us to where we are today.

Time To Talk Global / Consumer / Jobs

Posted by urbandigs

Fri Aug 17th, 2007 10:45 AM

A: Lets start looking ahead and be forward thinking since I strongly believe Manhattan real estate is directly tied to wall street. If wall street has a rough few years, we will lose some fundamental umph that has helped sustain housing prices while the rest of the country is in the middle of major correction. I'm being asked what to look for as red flags. In my opinion, it's time to focus on oil prices as a sign of global growth, jobs, and the consumer. In addition, today's fed statement in essence is a change in bias towards concerns of future economic growth.


Energy prices have stayed at high levels (high 60's - mid 70's) for some time now amid strong global growth, supply/demand imbalances, recent hurricane concerns, and geopolitical tensions. While the trickle down effect has been modest and the only real pain felt by consumers is higher gas/heating costs, it could have been much worse. We could have felt more significant inflationary pressures as a result of higher energy and commodity prices, but it seems we haven't. Inflation here at home as been moderating and it seems now the fed has changed their bias towards future economic growth concerns with the accompanying statement of today's discount window rate cut.

Here is what the fed said today that is in essence an intra-meeting change in bias:

Financial market conditions have deteriorated, and tighter credit conditions and increased uncertainty have the potential to restrain economic growth going forward. In these circumstances, although recent data suggest that the economy has continued to expand at a moderate pace, the Federal Open Market Committee judges that the downside risks to growth have increased appreciably. The Committee is monitoring the situation and is prepared to act as needed to mitigate the adverse effects on the economy arising from the disruptions in financial markets.
Now, you've heard the word 'globalization' a lot in the past few years and the strong global economies have been a key fundamental driver to US equity markets. What should happen if global growth slows? If the US sneezes, will the world economies catch a cold?

Keep an eye on oil prices as a global indicator towards slowing worldwide growth! Should oil prices correct and remain at those correction levels in the near future, chances are this liquidity/credit squeeze is starting to effect global growth and that could hurt US equities and corporate profits that have a big presence globally. Here is a chart to show you the recent drop to around $71/barrel:



Given the current credit mess, stock market correction, and today's fed statement disclosing an admitted concern of future economic growth here in the US, how will companies prepare for possible rough times ahead? Economists are putting the risks of a recession at 50/50 right now. Should that occur, expect corporations to announce job cuts and expect the unemployment rate to rise, at a lag.

Something to keep an eye on. Here in Manhattan, if jobs are at risk, so is the health of the prospective buyer pool.


The US economy is 70% reliant on US consumer spending. We are still waiting to see a trickle down effect of the slowing housing market on US spending. As the values of one's home falls, the ability to withdraw equity shrinks and that removes potential spending habits.

In addition, we are still trying to figure out how deep this credit issue goes and how the consumer is ultimately affected by it. Should consumer spending start to slow, that certainly will have an affect on the US economy and therefore stock prices.

But Noah, if the fed cuts the fed funds rate that will bring lower rates to the consumer? Yes, but at a lag. And lets not forget that if the fed starts cutting the fed funds rate (which remained at 5.25% and was not the rate cut today) it is because they are starting to see a sluggish US economy and will cut growth forecasts. The US economy is like a huge ship with one propeller. Once it starts going a certain direction, it takes time to turn it around. A few fed cuts will mean that there are serious risks to the US economy and that the fed is starting to use the strongest ammunition at their disposal to prevent the economy from entering a deep recession. Sound good to you?

Read my previous post titled, "Why Lower Rates May Not Be Good", where I stated:
There is a false perception out there that if the fed starts to cut interest rates that housing will be set up for another boom. I strongly disagree with this train of thought...

If the fed cuts interest rates one or two times towards the end of the year, which is by no means a certainty, it is because they are starting to see signs that the economy is weakening and want to add some stimulation to prevent a recession.

So lets break that down. If the economy is starting to weaken, than stock prices will reflect that early on with a selloff. Since the stock market is a leading indicator of the economy, it will be the first to show signs that trouble might be ahead. Assuming this happens, paper profits and consumer portfolio values will restrict making people feel less confident and less wealthy. As this occurs, there will start to be talk of a fed rate cut as Ben Bernanke and company attempt to put a floor on how bad things might get.
For the past 12-18 months I have publicly stated that the two biggest threats I see to housing are:

1. Tighter Lending Standards
2. Job Losses

Now that #1 has already occurred and you all are seeing the effects of the credit squeeze and tighter lending standards, I need to update this moving forward. The two biggest threats I now see to housing are:

1. Global Growth Slowdown Amid Credit/Liquidity Crisis
2. Job Losses

Job losses are the side effect of a slowing economy. Stock prices will price in a US economic slowdown or global slowdown first, and job losses will occur as a result.

THIS HAS NOT HAPPENED YET. Right now the equity markets are re-pricing risk and pricing in the effects of a low liquidity / higher risk world. Volatility comes with this re-pricing.

Keep an eye on oil prices, consumer spending, and jobs. Oil will be the signal of global growth trends, consumer spending will be a signal that credit/housing woes are hitting wallets, and weak jobs data will be the final nail in the coffin as corporations restructure and cut costs.

This post is a forward looking discussion based on what I see right now. Things change and savvy investors adapt. If you don't, you'll be eaten. And nobody wants to be eaten!

Did you unwind some of your positions at the open of today's trading? The markets already gave up 2/3 of their gains since the open!

Bernanke Cuts Discount Window

Posted by urbandigs

Fri Aug 17th, 2007 08:52 AM

A: The Federal reserve cut the discount window rate, the rate that banks can borrow at, by 50 basis points in an effort to normalize liquidity concerns amid growing downside risk to the US economy. This is an amazing move by the fed WITHOUT cutting the fed funds target rate which continues to stand at 5.25%. Bernanke is quickly gaining an enormous amount of credibility by the timing of his actions in dealing with this credit mess, and not cutting the target rate to maintain longer term policy goals. Amazing job Mr. Bernanke! First the liquidity injections and now the cur in the discount window rate. Lets discuss.


Obviously, and I agree completely, cutting the target fed funds rate is an emergency option for the fed. Instead, the fed cuts the discount window today and offers a so called 'time-out' for markets. Let me first define the discount window and the fed funds target rate so you know the difference and exactly what Ben Bernanke did today.

Discount Window Rate - Discount window represents an instrument of monetary policy (usually used by central bank) that allows eligible institutions to borrow money, usually on a short-term basis, to meet temporary shortages of liquidity caused by internal or external disruptions. The interest rate charged on such loans by central bank is called discount rate, and constitutes important factor in the control of money supply -- which is a significant tool of monetary policy. When a bank in the United States is in need of money, it can turn to the Federal Reserve for a loan, the interest that the Fed charges the bank is called the discount rate.

Fed Funds Target Rate - The federal funds rate is the interest rate at which private depository institutions lend balances (federal funds) at the Federal Reserve to other depository institutions overnight.

According to Yahoo Finance:

The Federal Reserve, declaring that increased economic uncertainty poses risks for U.S. business growth, announced Friday that it has approved a half-percentage point cut in its discount rate on loans to banks.

The action was the most dramatic effort yet by the central bank to restore calm to global financial markets which have been roiled in the past week by a widening credit crisis.

The decision means that the discount rate, the interest rate that the Fed charges to make direct loans to banks will be lowered to 5.75 percent, down from 6.25 percent.

The Fed did not change its target for the more important federal funds rate, which has remained at 5.25 percent for more than a year.
With this 50 basis point cut in the discount window, it is STILL 50 basis points ABOVE the fed funds target rate of 5.25%. Bernanke took another alternative move to cutting the target fed funds rate, which is the rate at which banks lend to each other overnight. As wikipedia puts it:
Another way banks can borrow funds to keep up their required reserves is by getting a loan from the Federal Reserve itself at the discount rate. These loans are very short term and rare, as they are subject to audit by the Fed and the discount rate is usually higher than the federal funds rate.
If anything it was the right rate to cut! It leaves the option for Bernanke to cut the fed funds target rate should things get real hairy down the road!

What does this move do?

1. It Adds Credibility - tells the markets that Bernanke & Co. are on top of the liquidity crisis in the banking system and willing to provide the liquidity needed to normalize the markets.

2. Provides Lift To Equities - stock futures first down big, reverse course and surge. Gives a great opportunity for those long equities to unwind some positions and puts shorts in a very bad situation of having to cover, further bullying the stock market.

3. Adds Liquidity To Banking System - alternative move gives more liquidity to the banking system and allows banks to borrow money on a short term basis, to meet temporary shortages of liquidity

4. Yield Curve Steepens - Banks like a steep yield curve so they can profit more. Todays fed move is steepening the yield curve, a good thing for banks

5. Brings Arbitrage Players Back - which helps the markets become more efficient. How long it lasts is another question.

It's important to note that this is NOT A PERMANENT FIX! This is going to have a temporary effect and in my opinion, gives investors a chance to unwind positions and banks a chance to fix their books a bit. It does not solve our credit problems longer term! I'll have to do follow up reports on this once the market opens and I need a chance to unload some long positions I have been building up over the past 4-5 days as the market sold off.

Foreclosure Guy Offers Investment Advice

Posted by urbandigs

Thu Aug 16th, 2007 01:29 PM

A: Guess what email I just got! An invitation to connect via LinkedIn from Casey Serin, the guy! Are you kidding me. Obviously a bulk email he is sending out and hilarious if you ask me. The balls on this guy! I dont even want to link out to his site, but I had to as he shut the site down because 'it became a media circus'; I wonder why! This is the guy that admitted to mortgage fraud, made awful financial decisions, couldn't handle the mess he created for himself, went against advice he received, and then started blogging about his problems in the hopes of raising money or exposure or whatever his agenda was. This is a guy who doesn't learn from his mistakes, has no qualms about frauding banks, and is getting exactly what is due to him.

Here is copy of actual email I just got:


I would like to add you to my professional network. (Doing a bulk add.)

We've talked before or you're in my address book or mailing list. You may have seen

my old blog

I'm now doing investment and marketing consulting. Lets stay in touch for any opportunities.

Let me know if I can help you find something (projects, assets or financing) or you have something to sell/offer. I have made some great contacts in the past year and have access to projects / funding from small to big. See my profile for more info.

- Casey

YEA RIGHT CASEY! Your just the guy I want to do investment and marketing consulting for me! Absolutely amazing! Count this post as the 'ARE YOU F'ING KIDDING ME POST OF 2007'!

Adjust Your Risk Tolerance For Loans

Posted by urbandigs

Thu Aug 16th, 2007 09:37 AM

A: Pre-approvals mean sh*t! Thats right, I said it, and it had to be said! I've been advising clients on both the buy and sell side of this for about 2 years now as the typical offer when submitted includes an offer letter, financial statement, and pre-approval from a lender. In this new world of high cost risk, limited loan options, drying up of liquidity in RMBS markets, liquidation of assets to cash, and tighter underwriting / lending standards it is absolutely crucial that the dealmakers focus on the loan aspect of the transaction and making sure that will go through!


This post is for BUYERS & SELLERS of Manhattan real estate, or any market really, as you adjust to changing market conditions due to macro economic events unfolding; specifically in the credit markets as liquidity dries up.

I've posted before on what you need to do to submit an offer for a property here in NYC, which basically includes:

1. Offer Letter - Includes your initial offer, your job position and company, length at job, total salary, liquid assets leftover AFTER closing, attorney info, expected closing date, and lender info.

2. Financial Statement - Includes a snapshot of your financial situation such as total assets (liquid and not liquid), total debts (include min payments if high), total salary and bonus.

3. Loan Pre-Approval - 1-page document from lender with building address shown and loan amount minus down payment. Don't worry if loan amount you are pre-approved for is higher than what you plan to bid, it is for strengthening your offer ONLY and NOT to give away your negotiating hand.

In today's world of high cost risk, limited loan options, tighter underwriting standards and uncertainty, it is critical that both buyers and sellers do their homework BEFORE submtting and accepting a bid. The last thing you want is to do a deal with an unknown lender that can't come through with a loan commitment days before your expected closing. This should now be viewed as a real possibility for any buyer with:

  • weak credit

  • self-employed / limited docs available to define income or paid taxes

  • use of an out of state, unknown lender because a lower rate is quoted

  • As Tanta of Calculated Risk timely states the quote of the day yesterday from Washing Post article:
    "What I'm telling people is that they should not shop around for the lowest rate necessarily," Binstock said. "Go with the lender who you think is going to be there in the end."
    Thats SOLID advice!

    UrbanDigs Says - BUYERS ---> For the best rates, stick to dealing directly with a bank rather than a broker or middleman that makes a commission on the deal. Also, go with a bank that has a large presence and is absolutely based in Manhattan. I'm thinking of the Wells Fargo's, Chase's, Citibank's, etc. that do business here.

    UPDATE: 12:28PM - Manhattan Mortgage Company is also worth a phone call as I am hearing that rates are as competitive as direct lenders and they are a big presence here in Manhattan. If anything, call a few for comparative purposes and let me know if this has changed in past few days, but I dont think it has!

    SELLERS ---> Its not all about what price you get, it's also about buyer quality and ability to get a loan commitment so the deal gets done! Now is NOT the time to mess around with iffy, subprime borrowers that are self employed and wrote off 60% of their stated income in their past 2 years tax returns! Give more weight to buyers that have solid jobs, have solid income, minimal debts, and are able to produce any and all required doc's to a lender as the underwriting process starts AFTER the contract is signed and appraisal is ordered!

    A pre-approval does NOT mean a loan commitment!! That is your new mantra!

    Thornburg Mortgage President on CNBC

    Posted by urbandigs

    Tue Aug 14th, 2007 05:16 PM


    A: Breaking News: Thornburg Mortgage (TMA), a jumbo mortgage lender, President makes a live appearance on CNBC after stock plunges 46%. What a brave thing to do and props to this CEO for stepping up, marking their holdings to market (which I said is crucial to get through this credit mess) value, taking the loss, and restructuring their company for future shareholder value. Here are some points that the CEO is making as I listen:

    Thornburg Mortgage President Larry Goldstone makes the following points on live conference call:


    * No Chapter 11 Plans - Wont Solve Problems. Will Make Problems Worse

    * 80% of Rumors are NOT TRUE

    * Able to reach 80% of obligations

    * Financing in Jumbo Mortgage Space is very difficult thing to do

    * Massive Credit Mortgage Crisis - Hundreds if not more lenders not funding loans.

    * Severe Credit Crisis Going on

    * Lenders Making It Very Difficult to Rollover Financing. Value of Assets declining precipitously in recent weeks. Liquidating assets in recent weeks

    * Asset Backed Securities Markets for non govt mortgages not functioning properly

    * Mortgage backed securities markets not functioning properly

    * We can sell everything right now, and still have $14.28/share left

    * Been selling mortgage securities, liquidity does exist, but not a palatable thing to be doing

    * Currently marking to market right now

    * Market having a hard time differentiating between high quality assets and low quality assets

    * Taking steps to put ourselves in position whereby we can comfortably fund our day to day positions

    Recall my post back on August 6th titled, "Should The Fed Step In And Save The Credit Markets", where I clearly stated my opinion on the best way to minimize the pain of the current credit crisis:


    Uncertainty, Risk, Liquidation --> Strong $

    Posted by urbandigs

    Tue Aug 14th, 2007 03:24 PM

    A: Lets change it up a bit and look at what has happened in the currency market in the past week or so, that I feel is worth discussing. This is a world of uncertainty. Uncertainty in the credit markets, uncertainty in the banking industry, uncertainty in the ultimate economic impact, and uncertainty in global growth effects. Usually, in times of uncertainty a safe haven play would be to buy Gold in addition to US Treasuries. While there has been a flight to quality into US Treasuries that is evident by a rise in bond prices and a drop in yields, there has NOT been a rush into buying Gold? Why, you ask? Because this is a liquidity squeeze and that means positions of all kind are being liquidated to what is ultimately king. And right now, CASH IS KING! Let's analyze.

    Liquidation - In finance, liquidation is also sometimes used as convenient shorthand for converting an asset to cash.

    Uncertainty - The lack of certainty, A state of having limited knowledge where it is impossible to exactly describe existing state or future outcome, more than one possible outcome.

    Risk - Risk is a concept that denotes a potential negative impact to an asset or some characteristic of value that may arise from some present process or future event. In everyday usage, "risk" is often used synonymously with the probability of a known loss.

    Given these times of uncertainty, we are seeing a liquidation of assets to cash to either unwind a long position that is on the wrong side of a trade to reduce exposure to risk OR to convert an asset to cash to pay off a debt, margin call, or other. In past times of uncertainty, we would see a flight to quality in the bond market (bond prices rise as stock prices fall) and a rising interest in safe plays such as Gold. But this time around, Gold is not seeing an uptick. Perhaps waiting for fed cuts?

    Here is the drop in Bond yields as a flight to quality takes place and investors seek the safety of US Treasuries. As bond prices rise, the yields fall as is evident by this 30-day chart of the 10YR which saw a drop of 30 basis points (0.30%) in yields:


    Now, lets take a look at the chart of Gold prices in the past 30 days when these credit concerns finally reached the surface. No real surge? Keep your eyes on it though.


    Notice how the price of Gold in the past 3 weeks is relatively flat! No sharp movements at all. In fact, one can argue that there is an unwinding of positions across the asset classes in response to the current liquidity crisis. Lets be open-minded here, hedge funds, pension funds, major banks, etc. do hold positions in commodities like Gold and in times of extreme stress where cash is needed fast, they may be forced to liquidate positions that otherwise would be held! What other asset holdings will have to be liquidated if times get real hairy?

    Now lets take a look at what the US Dollar Index has done in the past 5 trading days:


    Quite impressive considering the threats of the credit crunch on the US economy? But why is this happening? I'm hearing differing angles from traders which include:

    1. Funds are liquidating ALL asset classes
    2. Yen Carry Trade liquidation
    3. Pressure on Euro due to credit fears hitting their housing market. US Housing already deep into correction and expected to recover sooner than any European housing downturn due to credit crisis.
    4. Shorting of Euro
    5. Cash is KING and rush to load up on US greenback

    Whatever the reason is, there is obviously some buying going on in our currency as evidence by the chart. Is this the start of a comeback for the US greenback? Probably not, but who the hell knows. What I do know is that the US dollar has been hit for so long and is near record lows against the Euro that its hard to argue against a contrarian play in the US dollar. To see how bad the US dollar has been hit, lets chart out the US Dollar vs. Euro over the past 5 years:


    Ouch. Just an ugly chart for us Americans holding US dollars. Just think, out of all that money you made in either the housing market or the stock market, most of the gains got wiped out due to inflation and the falling value of the US dollar. Yay America! Go us!

    There is a reason why foreigners are buying NYC real estate and its mainly because they are taking advantage of currency trends! Here is an example over a 5YR period to give you an idea of how much more house a buyer with Euro's could buy here in Manhattan real estate simply due to the falling value of the US dollar and the relational rising value in the Euro.


    1 Euro = $0.97 US Dollars

    500,000 Euros BUYS $485,000 worth of US Housing


    1 Euro = $1.37 US Dollars

    500,000 Euros BUYS $685,000 worth of US Housing

    Today, based on currency trends alone a 500,000 Euro buyer can now buy $200,000 MORE HOUSE in New York City than they could 5 years ago! If I went back a few more years it would have been even more as when the Euro was introduced in 1999, it fell to a low and was once trading $0.82 or so on the US dollar. Amazing stuff.

    Keep an eye on how the credit crunch effects the Eurozone economies because if it does hit hard over there you will see a selloff in the Euro as a result; clearly a bet that some hedge funds are now taking with the Euro near an all time high against the greenback. You know the old saying BUY LOW & SELL HIGH, well lets see how that plays out in the currency world.

    If the US Dollar does mount a comeback and the Euro buys significantly less US Dollars down the road than it does today, it may remove a key fundamental driver to the Manhattan real estate marketplace as foreigners see less attractiveness in buying US assets based on currency trends.'s New Dev Directory

    Posted by urbandigs

    Mon Aug 13th, 2007 03:19 PM

    A: I don't plug companies that often here on because I think it lowers the quality of the ultimate goal of this site. But when a great product comes out, I have a tendency to want to help spread the word. If you are looking for updates on new developments, or an easy way to find one, don't miss's New Development Directory.

    The directory is broken down by section of Manhattan (downtown, midtown, UWS, UES, etc.) and provides you with the neighborhoods in each section as well as a quick glance of the number of new developments listed in each neighborhood.

    Simply click on the neighborhood and all the new developments in that area are clearly listed and sortable. A great resource for any prospective buyer seeking a brand new product in a brand new building ripe with luxurious amenities! They also list coming soon, price movers, latest discussions, and new dev pricing data based on property size and general location. Very informative! Thanks Streeteasy guys!! Happy browsing!


    A Marketplace With Vultures

    Posted by urbandigs

    Mon Aug 13th, 2007 09:29 AM

    A: New York City real estate is a completely different animal than most other markets across the country. One thing I think many economists and experts would agree on, is that real estate IS a local phenomenon governed by the fundamentals of supply/demand and macro conditions affecting the specified area. Given the steep housing correction going on across the country, and the lack thereof here in Manhattan, one thing is for sure: there are plenty of vultures flying around waiting for either a correction or for a desperate seller to produce a deal here at home.


    I am a man that likes to analyze data. I like to quantify an investment before I make it. I like to break things down so that I can understand something that on the surface seems confusing. So when I see a housing market that has bucked the national trend and remained so strong in the face of such macro uncertainty, I want to understand why. In addition, when I hear so often from my buyer clients, "I'm waiting for a downturn to jump in", I want to know how many others there are out there who are thinking/planning the same way?

    Fundamentals I see that are crucial in maintaining the NYC housing market RIGHT NOW include:

    1. Very Tight Inventory
    2. Strong Jobs
    3. High Salary's & Bonuses
    4. Weak Dollar Increasing Foreign Buyer Demand
    5. Rental Vacancy Rates Below 1%
    6. Skyrocketing Rental Rates
    7. Trend To Live Closer To Where You Work
    8. Urban Lifestyle Demand Very High

    Now this does not discount the current credit crunch and liquidity crisis now going on, nor does it take into account any ramifications of how these concerns may ultimately play out here at home or globally. It is what I think is currently powering our Manhattan marketplace.

    When I look at these fundamentals, I wonder which ones would change should the current credit mess ultimately result in a major stock market correction, a US economic recession, or global recession. Should any of these macro events happen, I think the following fundamentals that are helping to power the NYC real estate market will be most directly effected:

    1. Very Tight Inventory --> more sellers and weaker buyer demand reverse inventory trends?
    2. Strong Jobs --> jobs market goes into recession shrinks buyer demand?
    3. High Salary's & Bonuses --> recession causes pay cuts and cutback of bonuses restricting afordability and buyer demand?
    4. Skyrocketing Rental Rates --> similar scenario to 2000-2001 after dot com bust that saw correction in rental rates?

    One thing I can tell you is that there are many buyers that have been priced out of buying in the Manhattan marketplace for the past few years, as well as those that have been eagerly waiting for a housing correction to hit NYC to jump in. Forget foreign demand due to the weak dollar as I don't see that trend changing anytime soon or the number of new workers or relocations that help maintain the demand side of NYC's housing equation. In short, there are plenty of vultures flying around waiting for Manhattan real estate prices to dip.

    I just don't think many other markets can make that claim. Frustration on the buy side is all too common here in Manhattan as I see it everyday. Buyers that are earning great incomes and who have saved up hundreds or thousands of dollars that just can't seem to quantify paying $1M for a 850 sft 1BR condo in a doorman building. But if that price drops to $800K, well than they would become much more interested. Now that is an extreme example of a 20% decline in housing prices; but the point remains the same:

    This is not broker babble, and it is NOT any attempt by me to try to expand my business or convince any buyer clients of mine that I know read this site to pull the trigger on a deal.

    This is how I truly feel. If you read this site, you should know that I am not a car salesman and do my best to report to you what I see going on in this fast changing housing marketplace. There is a reason Manhattan real estate LAGS in corrections and LEADS in recoveries. The fundamentals that are so in-balanced in local markets such as Miami, Phoenix, or Ft. Lauderdale are completely the opposite here in New York City.

    In terms of the credit mess and the end result of subprime borrowers defaulting on their homes, we just don't have those issues in Manhattan. First of all, anyone that has trouble affording a property here in Manhattan, obviously is going to lean towards buying a co-op because of all property types, a co-op offers the most bang for the buck. Second, there is no way that a co-op board will approve a weak home purchaser. On the contrary, most co-op boards have stringent financial guidelines that must be met and backed up in order for the deal to go through. This discipline in home ownership in a way provides a hedge against the loose lending standards that many banks got used to in the past few years. It protected out marketplace. And lets not forget that Manhattan is comprised of about 75% co-ops; not the most speculator friendly marketplace! What we do have is the side effects of the subprime debacle leading to less loan products, more stringent underwriting, and higher rates.

    UrbanDigs Says - The biggest threats I now see to Manhattan housing include a major stock market correction that can effect jobs, salaries, and bonuses as well as a recession in the jobs market in general. A lesser but more probable threat is the end result of the credit crunch that brings less options and higher rates to the prospective home buyer affecting their affordability. If all this happens and Manhattan prices do correct, mark my words, at some point the vultures will come in and scoop up the deals especially if rental rates are lagging in their lateral correction.

    If you want to discuss longer term threats to our housing marketplace, I think you need to look for changes in the other fundamentals now in place; such as the trend in living closer to where you work, the demand for urban lifestyle, and a reversal in the weak US dollar that removes the attractiveness of foreign investment. A long term bear market in US equities and the US economy are also threats for a longer term correction. Question is, what do you think will actually happen? Me, I'm not a doomsday kind of guy. If Manhattan corrects, I will be one of the vultures eager to jump in!

    2007 Predictions Revisted / Told Ya So

    Posted by urbandigs

    Sat Aug 11th, 2007 10:52 AM

    A: For readers of, the current situation we are in right now is NO SUPRISE! Knowledge IS Power and I hope that you have learned a thing or two about investing in Manhattan real estate and the macro economic fundamentals that DRIVE both the economy and the housing market. There is a reason to learn about this stuff so that you can become a savvier investor and at the very worst, understand WHY we are in the situation we are in right now and what trickle down effect that may or may not have on our local real estate marketplace. Lets revisit what I predicted back on January 2nd, 2007, as well as look back to some of the posts I wrote many months ago warning of the coming credit crunch that is now headline news. Told Ya So!

    2007 Predictions Link From January 2, 2007


    MY 2007 HOUSING PREDICTION --> I expect a slight increase in activity in the months of JAN - MARCH which is proven mid year by lagging housing data reports on deals during this timeframe. Remember that housing data is lagging. I wouldn't be surprised if housing shows some price gains during these months as well as an uptick in sales volume.

    During the course of the summer I worry that economic jobs data might come in lower than expected, putting some pressure on housing as this industry still searches for a bottom. Activity will again slow during the summer months and desperate sellers will once again have to negotiate more than expected to move a property. Overall, by the end of 2007, I expect NYC housing to experience a decline of about 3-5% or so as fundamentals continue to correct for longer term sustainable growth. If the first few months prove to show gains of 1-2% in prices, then the summer months and remaining months of 2007 will show a wipe-out of these gains plus a few more percentage points.

    Should economic data come in weaker than expected in jobs and wages, I would expect housing to suffer for a bit longer than expected with sharper movements.

    Keep close eyes on lenders during this time to see if banks tighten the noose of easy credit! Should this occur, as a result of a slowing economy (job losses and downward wage pressure), housing could be in for a bigger slump than previously expected and might last for a few years longer until an outside force (such as monetary policy) stimulates buyer demand again.

    All in all, I expect a slightly down year for NYC housing prices with activity staying stable as lower prices and deals attract more buyers. Put simply, the fundamental of 'negotiability' as experienced in buyers' markets, will show itself in data during the course of 2007. You can't have a market where there is widespread negotiating and still show solid gains in pricing at the same time! That would be a paradox.

    WHAT REALLY HAPPENED --> Manhattan housing was VERY strong from the months of JAN - APRIL or so and experienced many bidding wars, shortage of inventory, and solid price appreciation given such a short time frame. The wall street months came through. The solid transaction volume left us with no inventory as we head into the summer months and right now we are still struggling to get supply where it needs to be to meet demand. Overall, I would say NYC prices are up 3-5% for the year or so and are currently holding onto gains given the tightness in inventory.

    I am starting to see a bit of a psychological effect in buyers/sellers given all the headlines around the current credit mess. How this plays out is still yet to be seen

    The credit crunch is here and that is extending the housing correction across the nation and limiting the options available to prospective buyers with less than stellar credit.

    MY 2007 STOCK MARKET / ECONOMY PREDICTION --> The US economy will prove its resilience once again as corporate profits continue to be strong, but NOT as strong as previously predicted by the equity markets. I expect wages and jobs to come under a bit of pressure; especially in housing related industry's where job losses will skew the overall national jobs numbers downward. Wages will stabilize but for the most part remain strong as 2007 proves to be another good year for stocks; just not as good as 2006. I would think 8-10% gains in major indexes for the full year as long as nothing crazy happens with energy prices or unexpected unnatural disasters. The end of the year might prove worst for the US economy as housing related consumer spending cutbacks may prove real.

    WHAT REALLY HAPPENED --> Stocks surged from January to mid July as the Dow went from 12,500 in January to a high of 14,000 in mid July. Quite a move. Since, credit concerns and a drying up of liquidity installed enough fear and uncertainty in the markets to correct about 4-5% from record highs, leaving us right now at 13,270 on the Dow. The DOW is up about 6.5% or so in 2007.

    Jobs data has been strong with an unemployment rate of 4.6%, but are showing some signs of slowing. Lets see if my end of 2007 prediction of slowing jobs comes true. Average hourly earnings have remained strong so far this year.

    My wild cards of Housing & Energy are still in play for effecting the US economy and stock prices as we end the year out.

    MY 2007 FED / INTEREST RATE PREDICTION --> I'm going to play it conservatively and say that at the end of 2007 the fed funds futures will be either the same or at 5%; down 1/4 point from where we are today. I'm going to bet that inflation pressures continue to ease with the correction of energy prices allowing the fed to focus on economic expansion issues that may arise. If jobs and wages show weaker than expected numbers, partly as a result of weaker housing, than the fed might ease a bit to psychologically stimulate the economy. But this can very quickly change if inflation data comes in higher than expected.

    WHAT REALLY HAPPENED --> Fed stood still and left the target fed funds rate at 5.25%. A cut of 1/4 point has not happened yet but is very possible given the recent turmoil in the credit markets. Inflation here at home has been moderating, although global growth and still high commodity prices make the future threat of inflation trickling very real. The fed publicly has stated that inflation is still their primary concern, removing chances of an aggressive rate easing campaign.

    The latest fed meeting left no change in rates as expected, but included a statement that they are monitoring the credit markets for signs of distress. The fed recently pumped $62B into the credit markets, following the action of many global feds doing the same thing, to help ease liquidity issues as an alternative move to cutting the fed funds rate.

    Not bad so far! My oil prediction is off for now as I predicted oil prices to tumble to around $50/barrel by years end. Certainly a possibility if you start to see these credit concerns infect the global economy causing a slowdown in emerging markets and Europe/Asia. If global economies slow, oil demand will certainly be a leading indicator of it!

    Told Ya So - The current credit crunch is not news. It is the end result of what happens from years of ultra cheap money and excess transforming one asset bubble into another (stocks ---> housing). As rates rise and borrowers stretch to purchase homes with exotic loan products and no resistance from lenders in giving them the loan products, the credit crunch scenario becomes more likely. Here are my previous posts and an excerpt from each regarding this scenario before it happened.

    January 18th, 2006 --> Regulations on Lending? You Bet Ya! - If regulation is enacted on the lending industry I think the biggest side effect will be less options for potential homebuyers. While this is a good thing in protecting uneducated buyers, it will be 1 of many ingredients that will prolong a slowdown in the housing market.

    As rates are much higher now than they were a few years ago, I would expect homeowners who took out 3YR ARM's to face tough times when the locked in rate expires. Combine that with a cooling housing market and a dynamic shift of control from sellers to buyers, and desperation might cause the homeowner to sell at a loss.

    December 28th, 2006 --> Housing Data In: Not Too Shabby...But! - Things to look out for in 2007 that will cause the housing market to retreat:

    1. Weaker Economic Data Showing Weakness in Jobs & Wages

    2. Lenders Tightening Loan Restrictions & Ease of Borrowing Ending Years of Credit Giveaways

    These are the two biggest threats to housing's future and will occur if the bond market is right in predicting a recession in late 2007 or 2008. But for now, the stock market is getting the headlines as equities bet on a soft landing!

    January 30th, 2007 --> Credit Crunch? Tighter Loan Standards? - Resetting into higher interest rate loans could create a credit crunch down the road that could extend the leg of the housing correction; especially for much of the country outside of New York City.

    March 9th, 2007 ---> Developing Story: No Loans For You - Fact is, outside of NYC the housing market is fairly weak and loans are getting harder and harder to lock in. Its only the beginning and what happens next is still unwritten.

    It's the domino effect that is going on right now and its only a matter of time until this starts to affect prime lenders as well.

    Right now we are neck deep in an environment where tighter lending standards are being put in place for subprime borrowers. It is only a matter of time until prime lenders follow suit; especially if the fed gets involved and puts regulations in place to protect the consumer. This 'credit crunch' will restrict purchasing power and limit the buyer pool's size and stretchability when it comes to how much they can afford!

    March 16th, 2007 --> Views/Truths About Subprime & Economy - I feel that what we are seeing in the sub-prime world is just the tip of the iceberg and that this disease has already spread to some prime lenders but is yet to show its surface marks. The real issue is any change in lending standards that comes as a result of this problem! If regulations are put in place to protect the consumer and the industry itself, than that means a credit crunch as tighter lending standards will restrict purchasing power and help sustain the housing downturn. That is my worry.

    I've been talking for a long time that those who used risky mortgages to rationalize a purchase price above their means will meet with major problems in the years to come. And I expect 2007-2009 to bring these weak players out. How the industry adapts is what I am not sure of yet.

    Insider Mortgage: Underwriting Standards

    Posted by urbandigs

    Fri Aug 10th, 2007 11:22 AM

    A: An update from Michael McGivney, a sales manager and private mortgage banker at Wells Fargo, on yesterdays internal news release to employees about the change in underwriting standards being put into effect.

    Excerpt from actual email distributed by Michael McGivney relaying the internal changes to real estate brokers looking to get an update on how to proceed with prospective buyers:

    As you are aware, there is an abundance of news in the financial industry of mortgages and the mortgage industry in deep trouble. We at Wells Fargo have felt minimal, compared to many companies in the industry, effects from the increasing difficulties in the credit markets.

    HOWEVER, things are changing rapidly industry wide. Rates have been on the rise and underwriting requirements, the rules that govern whether someone gets a loan or not, are changing. Most impacted by these changes are the restrictions being placed on the wholesale channels through which MORTGAGE BROKERS place their loans. Many banks are totally withdrawing from lending to clients through these channels, others are making it very, very difficult for brokers to get loans for their clients through this channel. Wells Fargo, as it hit the news a week ago, raised their rates to brokers by a FULL 1%!!!! MY rates however remain as competitive as ever. It is now obvious, the BEST way to get a client a loan is to go directly to the bank.

    As for underwriting restrictions, they are becoming more stringent. However, Wells Fargo will never renege on a commitment once it's issued. Our closing GUARANTEE, yes guarantee, remains in place.

    An example of increasing restrictions on approving loans is as follows:

    Last week, a client getting approved for an interest only product, like a 5 year ARM, on a $500,000 loan qualified on the payment of $2604 at a rate of 6.25%.

    Today, that same client, to qualify for the same loan, will need to have enough income to qualify for the "fully indexed, fully amortized" payment. That means they MUST qualify at a rate of 11.25%, fully amortized. That means a payment of $4863!!!!!! That's nearly DOUBLE the payment. That means they must have nearly DOUBLE THE INCOME!!!

    Trump: "Make A Deal With Your Lender"

    Posted by urbandigs

    Fri Aug 10th, 2007 10:54 AM

    ***BREAKING ALERT*** - US Fed Adds Liquidity Again For 2nd Day To Help Ease Liquidity Problems. More to come soon.

    A: Anybody else hearing this in their office right now? The Donald is on CNBC right now in a live interview pleading with Bernike (thats how he pronounces it) to lower interest rates RIGHT NOW or else people will lose their homes. He admits that Manhattan real estate is still red hot, and that the best thing for people in trouble to do is to call their lender and make a deal. He has a point, only one agreeable point though in my mind.


    Trump Says:

    If your having trouble with your loan, DONT LEAVE, FIGHT LIKE HELL, call your lender and negotiate with them and you very well might get a better deal than you originally had. Lenders do NOT want to take your home and hold it for 5 years!

    I agree with The Donald that every troubled homeowner should absolutely call their lender, explain their situation, and work with them in any way possible to re-negotiate either the rate or the payment schedule to avoid foreclosure. The banks do not want to take your home away as that costs money and given the current housing market across the nation, they know it will be hard to sell in a timely manner.

    I also agree with The Donald that Manhattan is holding up very strong with tight inventory, still plenty of buyers (although I'm seeing a psychological effect sinking in right now given the headlines in the media), foreign buyers/demand, and super low rental vacancy rates. Manhattanites need a home and rental rates have skyrocketed making buying more attarctive; except there is very little product out there!

    However, I disagree that the fed should jump in right now and cut rates aggressively! Provide liquidity like other banks are doing, but don't cut rates! If they do act aggressively and cut a whole point, as Donald suggests, that will really SCARE the markets! Ultra loose monetary policy led us into this mess, not at least let the markets correct themselves; we are 700 points or so from record highs for gods sake! What happened to us all!!

    Global Feds, Libor Rate, Fear Continues

    Posted by urbandigs

    Fri Aug 10th, 2007 09:00 AM

    A: More global banks are flooding financial systems around the world with liquidity to help ease the drying up of the secondary mortgage and credit markets. Both Japanese & Australian central banks are the latest to step in and add liquidity to credit markets. Meanwhile, the ECB stepped up again and pumped another 61B Euros into their systems. More fed action equals more FEAR on wall street as traders assume the worst. The US Fed was expected to announce soon more liquidity to be added to our financial systems. On a side note, all those with adjustable rate mortgages should note the rise in the LIBOR rate, which is what those ARM's adjust to after the initial lock in rate expires. The LIBOR rates have been rising adding some more pain to those with resetting ARM's.

    First, the news.

    Major Central Banks Take Action... (Forbes) -

    In moves that deepened the well of negative sentiment that impacted European markets in early trade, the Bank of Japan pumped 1 Trillion Yen into the local money markets Friday as overnight rates shot up amid fears of shrinking liquidity.

    'We offered one trillion yen ... as we judged it would be better to offer (ample) funds,' a spokesman for the central bank said.

    The sum compares with the 400 billion yen the bank injected Thursday and is the highest amount since it offered one trillion yen on June 29.

    In Australia, the Reserve Bank injected more than twice the average daily amount of funds into the banking system.

    The central bank's market data showed it injected 4.95 billion Australian dollars into the system Friday, well above the daily average for the year-to-date of around 1.86 billion dollars.
    I would expect the US Federal Reserve to announce today a further move to add liquidity to our credit markets; which is an alternate move to pump liquidity into our financial systems without cutting the fed funds rate.

    Its important to know that this credit crunch is NOT an interest rate issue, rather it is a liquidity issue in the credit markets and specifically the secondary mortgage markets where banks, lenders, and hedge funds are having major problems unloading securities that have lost tremendous value. A lot of these investments, especially in the hedge funds world, were made via a marked to model approach using specialized software algorithms that analyzed past trends and markets and makes probability predictions that are later invested on. Right now, hedge funds and other major brokerages are finding that this marked to model approach did NOT take into account the current credit/liquidity crisis and are now realizing that the securities marked to market are worth much much less. This is why many banks, lenders, brokerages, and hedge funds are trying NOT to mark their holdings to market value and book the losses. They are trying to ride out the wave.

    Moving on. Lets define the LIBOR rate so I can explain whats happening here.

    LIBOR Rate - LIBOR stands for London Interbank Offered Rate. It's the rate of interest at which banks offer to lend money to one another in the wholesale money markets in London. It is a standard financial index used in US capital markets and can be found in the Wall Street Journal. In general, its changes have been smaller than changes in the prime rate. It's an index that is used to set the cost of various variable-rate loans, including credit cards and adjustable-rate mortgages.

    Recently, this LIBOR rate has been moving higher; a bad sign for all those with adjustable rate mortgages that are resetting to current LIBOR rates. If you are a resetting ARM holder, you may see your monthly payments jump even higher.

    According to Bloomberg's article, "Overnight Dollar Libor Gains to Highest Since 2001" -
    The London interbank offered rate climbed to 5.96 percent from 5.86 percent yesterday, when it gained more than half a percentage point, the most in at least six years.

    Three-month dollar Libor rose to 5.58 percent from 5.5 percent, the BBA said. The three-month euro interbank offered rate rose to 4.45 percent today from 4.41 percent yesterday.
    I am having trouble finding up to date charts for this Libor rate so for now, you will have to trust me and the Bloomberg article that this rate has risen signficantly over the past week or so. I'll try to find a chart to add to this post now.

    UrbanDigs Says - More central banks acting means more perceived problems on wall street adding to the fear that is currently out there. The stock markets hate uncertainty and every time a fed adds liquidity, a bank goes under, a hedge fund announces a liquidation, or a brokerage shuts down a fund it ADDS to the uncertainty of the current credit crunch and how deep the whole thing goes. This is what we are in now. Other than to expect extreme volatility, I don't have much to say as I continue to analyze this situation and report back to you. I remain a strong believer that all news should come out as soon as possible, which would add to the pain, so that we can get through this mess via transparency and global feds can do what they need to assess and plan a strategy to aid the credit crunch. As long as corporations, hedge funds, lenders, and big banks continue to hide these problems and try to ride out the wave, we are going to see very volatile markets and doom & gloom headlines in all media.

    New & Notable: Still Need More Inventory

    Posted by urbandigs

    Thu Aug 9th, 2007 11:05 AM

    A: New York City real estate still needs more inventory to meet demand. While I am still assessing whether the current credit concerns are infecting us here (nothing yet other than some psychological concern), the more important trends to watch are inventory and price points. Both are very healthy and with rental vacancy rates at 0.81% last month and no signs of any significant slowdown in buyer demand, we need more product to come to market if any price relief is to come to fruition. For now, here are some new and notable listings I am seeing.

    136 Waverly Place; Apt: 4C


    First Came on Market: 8/06/2007
    Asking Price: $995,000
    Maintenance: $909 (nice and low at just over $1/sft)
    Size: 900 SFT
    PPSF: $1,105
    Marketed By: Jennifer Roberts of Bellmarc Realty

    175 West 13th Street; Apt: 12H


    First Came on Market: 8/08/2007
    Asking Price: $425,000
    Maintenance: $701
    Size: N/A
    PPSF: N/A
    Marketed By: Gene Staquet of Corcoran

    And finally, the listing that anyone can afford...drumroll please.......Just under 10,000 SFT of space to do whatever you want. Attention rich people with play money!

    As per the website, in addition to residence use..."Permitted uses also include community facility and not-for-profit organizations"

    147 West 15th Street; Apt: MAIS


    First Came on Market: 2/06/2007 - Back On Market --> 8/08/2007
    Asking Price: $5,500,000
    Maintenance: $4,858 (Just Above $0.50/sft!!!)
    Size: 9,550 SFT --> attn: visionaries with lots of money
    PPSF: $578
    Marketed By: Anita Grossberg & Team of Corcoran

    **As always with these New & Notables, I will NEVER accompany you to these listings or represent you to bid on any of these properties. Please contact the exclusive broker if you are interested in viewing or bidding on any of the listings noted above.

    US & Global Feds Inject Liquidity

    Posted by urbandigs

    Thu Aug 9th, 2007 09:03 AM


    A: US Federal Reserve to add $12B into the financial systems to help ease the problems with credit concerns; specifically with the ultra dry liquidity in the mortgage backed securities markets. In Europe, the ECB agreed to inject 95B Euros (roughly $129B in US Dollars) to help add liquidity into their financial system. Obviously Europe is taking a much more aggressive stance than our fed is. The fact that both fed's are acting on the same day is quite interesting and concerning at the same time. As I wrote on Monday in my post "Should Fed Step In To Save Credit Markets", I clearly noted the side effects of fed action in spooking the tradable markets. Its happening this morning.

    The news:

    ECB Adds EUR94.841 Billion in One-Day Quick Tender At 4% ( -

    The ECB said earlier Thursday that the liquidity providing fine-tuning operation aimed to assure orderly conditions in the euro money market. It also said it intended to allot 100% of the bids it receives. The ECB received EUR94.841 billion in bids from 49 bidders.
    Fed/ECB Respond To Credit Crunch ( -
    Two days after taking a tougher-than-expected stance on monetary policy, the Federal Reserve injected $12 billion of reserves into the banking system. Meanwhile, the European Central Bank - which has been in an overt tightening mode for several months - has allocated nearly 95 billion euros, or about $130 billion, at a fixed-rate of 4% in a "fine tuning operation" aimed to assure orderly condition in the euro money markets.

    The central banks' actions come as a the investment unit of BNP Paribas, France's largest bank, temporarily suspended three of its funds due to a lack of liquidity in the market. In addition, Dutch investment bank NIBC Holding said it lost at least 137 million euros on subprime investments
    On Monday I stated:
    If the fed comes out and cuts interest rates to help the current credit problems, it will come off the wrong way and will be interpreted as an acknowledgment by our monetary policy makers that there are major issues that are seriously bothering them right now.
    I was referring to a rate cut in the above statement and NOT an injection of cash into the credit markets; which is what happened this morning. At Tuesday's meeting, they didn't cut rates, nor did they fully remove their tightening bias as they maintained inflation as their #1 concern. However they did add some language regarding an eye on the credit markets. Today, with the fed acting to add liquidity to the financial system, it has completely SPOOKED THE TRADING MARKETS as it adds to uncertainty of these credit concerns.

    While it is a good thing to have the fed step in there is a temporary price to pay and an unavoidable side effect of stock market carnage that comes with it. To take a step forward, we have to take three steps back. Expect stocks to get clobbered at the open of today's trading; I'm focusing on if there will be a bounce showing resiliency later in the day.

    July Rental Statistics For Manhattan

    Posted by urbandigs

    Tue Aug 7th, 2007 05:51 PM

    A: Fresh off the presses for you guys! Here are Citi-Habitats monthly statistics of rental trends in New York City. Tough market still for renters as vacancy rates are still below 1%, and came in overall at 0.81%. Chelsea leads the rental market with the least available rental inventory while Battery Park / Financial District leads the rental market with the highest vacancy rate. As you will see, rental prices for studio's and 1-BR's rose 2% and 1% respectively, with no change for 2-BR's and a slight decline of 1% for the higher end 3BR rentals.

    With rents rising for studios and one bedrooms, and vacancy rates still very low, prospective purchasers are finding limited choices in rental world keeping them more interested in buying. The rent vs buy decision is a tough one and should be made based on your own specific situation; combining personal and financial circumstances. Either you need to save your way to home ownership in New York City or you have too short a timeline to own making you choose renting instead of buying. I'll get into this discussion later this week.

    Here are vacancy rates broken down by neighborhood:


    Here are July's rental stats:


    Playing NYC Housing With Credit Fears

    Posted by urbandigs

    Tue Aug 7th, 2007 10:20 AM

    A: First off, everybody needs to relax, take a step back, and re-analyze their own personal situation. Take a deep breath. The world is not coming to an end. The era of ultra liquidity is coming to an end. The era of stupid loans being made to buyers who never should be buying is coming to an end. The era of no doc loans, 100% financing, stated income, etc. is coming to an end. But Manhattan housing will always have value. While our marketplace is not immune to a recession, time and again NYC has proven to lag in housing downturns and lead in recoveries. Which brings us to to YOU!


    Whether or not you should be buying or selling in the current New York City real estate marketplace is a decision tailored to your own unique situation. You should not make rash decisions about an article you read in the paper. You should not sell your home because Bear Stearn's announced that two hedge funds went under. You should sell your home if you find yourself in financial disarray due to a job loss and dwindling savings account. In short, take a step back, look at your own situation and then make an educated decision GIVEN the current environment we are in. Here are some tips starting with our current environment.

    The New World - This is a changing lending environment where job security, salary, and credit actually mean something! The days of no doc, stated income, 100% financing are over! Lucky for us that really doesn't apply for us in Manhattan. Lets not forget that Manhattan is 75% co-op (down from 80% or so given all new construction) which requires a strict set of financial guidelines for prospective purchasers.

    However, just how exposed our buyer pool is to wall street and interest rate increases is still yet to be seen. It's something to keep an eye on. For now, the credit crunch is hurting suburban markets and highly speculative urban markets (like Miami or Phoenix) way more than it is hurting us. In New York, there is just no shortage of qualified buyers who are fully capable of getting a loan! You can't even attempt to buy something here if you were hoping for no down payment and stated income loan. Forget about it. We never had those types of buyers here, nor did we have the level of speculative investing that other markets had. On the contrary, the current Manhattan real estate marketplace could be described as having limited inventory, plenty of willing and able buyers, high salaries, very limited rental alternatives, high and rising rental rates, and foreign buyers taking advantage of currency trends. Certainly a market that I would feel safer investing in and working in compared to many other local US markets when looking at the fundamentals driving it.

    For Prospective But Nervous Buyers - Re-analyze your situation! Plain and simple. Stop trying to time the market or get caught up in all the headlines in the media. The media is enough to drive a man insane, especially if that man doesn't understand the current environment we are in and reads a doomsday article. Instead, focus on the four items that I talk about often here on

    1. Job Security - Do you have a job? The word for today is Job! J - O - B! Before even thinking about buying a new apartment, you should be sure you are happy and comfortable with your current job and that there is very limited chance that you will get fired or relocated in the very near future! Job security should be viewed as a blanket of comfort.

    1. Salary - Assuming you answered 'Yes' to #1, what is your gross salary? Is it high enough to provide you with a debt to income ratio of 30% or under? To do this, add up all your current monthly minimum payments (or debt payments you are required to pay) and add in what your total monthly costs of living would be with your new purchase. Take that # and divide it by your monthly gross take home pay. What do you get? Here is an example:

    Minimum Debt Payments
    (Car, Credit Cards, Student Loans) = $750/Month
    Mortgage Payment (including interest before tax benefits) = $1,800/Month
    Maintenance Costs = $600/Month
    Real Estate Taxes = $400/Month

    Buyer Joe Shmo Earns $120,000/Year (including bonus) OR $10,000/Month Gross

    To get the debt/income ratio divide $3,550/$10,000.

    3,550 / 10,000 = 0.355

    Joe Shmo has a debt/income ratio of 36%. Joe Shmo could be OK buying a condo but should make sure the bank will lend given his higher than hoped for monthly expenses. Some banks like to see a debt/income ratio under 28% and most co-ops like to see a debt/income ratio closer to 25%. In the real world, Joe Shmo could pull this off, especially if he does not live a luxurious lifestyle and is a bigger saver than spender! Joe Shmo could easily put more money down to lower his debt/income ratio to closer to 28% if he has the liquid assets. Lets get to that now.

    3. Liquid Assets - You need to have some savings before you buy a new property. It costs money to buy or sell a home, so you need to take into account how much down payment plus closing costs will come out to. AFTER these closing costs, you should have liquid assets leftover to show the board, or if its a condo, for your own emergency funds.

    For co-ops, a general rule of thumb is to have at least 1 years worth of maintenance plus mortgage in liquid assets after closing. Stricter co-ops can as for 2 years worth of assets.

    For condos, its more up to the buyer's comfort level but 6 months of maintenance plus mortgage in liquid assets should be viewed as a minimum after closing. You would rather be closer to 1 years worth of assets, but if your salary is high, you could pull it off with less!

    4. Timeline To Own - Very important. You should have a timeline to own of at least 4 years! Preferably 5 if possible! That way, you have enough ownership time to take advantage of tax benefits via deductions of interest and taxes, paying down equity and building wealth, and appreciation of the asset. If your timeline to own is 2 years or less, don't even consider buying. The transaction costs alone will make the investment hard to profit from. If its in the middle at 3 years, you have a decision to make; if renting out afterwards is an option then lean towards buying, if not then don't.

    For Prospective But Nervous Sellers - Don't make rash decisions based on articles! This one is easy. Only sell right now while credit concerns is headline news if you are in:

    1. Financially Disarray - If you lost a job, took a huge pay cut, or are using savings to cover living expenses than I would stop messing around and liquidate your biggest asset; i.e. sell your house! If you can't afford to live in your home then chances are you will be forced to sell at a later time, and that is a position that no seller should be in if they want to get top dollar at resale. Having a time pressure to sell forces you to aggressively lower the price of the property to move it quicker! Instead, sell now when inventory is so tight and buyers are still plentiful to avoid what could be a bad situation to sell in at a later time.

    2. You Know 100% You Will Sell In Near Future - If you are completely certain you will be selling your property within the next year, and have options at your disposal to move in elsewhere or be relocated, then consider selling now. No one knows how these credit issues will ultimately play out and if you will be forced to sell in say 6 months but have a time pressure to close the deal by, then I would rather you sell now when you are not in any rush!

    See the consistency here? I want you to avoid being a seller in a distressed situation and would rather you choose to sell sooner rather than later if you are in financial trouble or know for a fact you will have to sell in the very near future!

    Wells Fargo Rate Jumps To 8% Overnight?

    Posted by urbandigs

    Mon Aug 6th, 2007 01:14 PM

    A: Not news, as this was announced late last week and is a result of the re-pricing of risk I discussed previously. On Friday, Wells Fargo announced that the rate for jumbo fixed rate loans will jump from 6.78% to 8% overnight due to the increased risk in the credit markets and specifically loans made to residential home buyers. While their website still shows lower rates for Jumbo loans, I'm sure that 8% quote is for those that are at the bottom of the credit quality food chain. In essence, this is Wells Fargo's way of tightening lending standards and controlling their exposure to mortgage risk without outright shutting down the loan products altogether. Whether or not other major lenders will follow suit remains to be seen.

    Lets jump right to the news. Wells Fargo Raises Rates: Are Homeowners Out In The Cold:

    "They're pulling themselves out of the market to regroup," is what one of my mortgage broker buddies told me on the phone this morning when I asked how in the heck Wells Fargo could raise rates on a 30-year jumbo fixed rate mortgage from 6 7/8% to 8% overnight. A jumbo is anything over $417,000, and given today's home prices, that's going to hit an awful lot of borrowers.

    Then he tells me he got an email this morning from Vertice, which is part of Wachovia, saying:

    Based on current market conditions, investor appetite and liquidity for Alt-A features, including higher LTV/CLTV products and reduced documentation types, have all but disappeared. In response, Vertice is announcing the temporary suspension of a number of programs effective immediately.

    This means they're pretty much not doing Alt-A loans anymore (these are the loans somewhere between prime and subprime--the "low-doc" or "no-doc" loans with no income verification). There's just no liquidity for Alt-A. The CDO's are not being packaged and sold anymore because there's no market for them, so forget it.
    Lets run down what some of the banks and lenders are saying:

    IndyMac Bancorp (IMB) - CEO Michael Perry states that the market for mortgage backed securities is "very panicked".

    Countrywide Financial (CFC) - Nation's largest home lender states they are seeing a spread from subprime defaults into alt-a and prime borrowers. Also states they have plenty of funds to weather the storm.

    National City Corp. (NCC) - Said yesterday that it is suspending originations of stated-income loans, which don't require the borrower to verify income

    Wachovia (WB) - Said it had stopped making Alt-A loans through brokers, joining a trend among big lenders to rely less on outsiders to arrange mortgages

    Wells Fargo (WFC) - Raises rates on jumbo loans. Tells brokers this week that it was making "day-to-day" decisions on the pricing and availability of Alt-A loans amid reduced investor demand.

    Accredited Home Lenders Holdings (LEND) - Stock dives after auditors said its "financial and operational viability" is uncertain if a pending merger isn't completed

    American Home Mortgage (AHM) - Stopped making loans earlier this week, said late yesterday it would cease most operations, slashing its work force to about 750 from more than 7,000

    Novastar Financial (NFI) - Will temporarily suspend funding for wholesale loans that have not been locked in. Suspension will last until Aug 7th when a re-evaluation will take place.

    MGIC Investment (MTG) - Says $515M partnership stake in C-Bass, may be worthless. C-Bass hires Blackstone Group to advise and help raise cash to "help solve the liquidity challenge it currently faces."

    Sound contained to you? I didn't even include the big bond players that are no longer buying these repackaged MBS. This is a perfect example of the widening of credit spreads that is happening at a very fast pace as the correlation between treasury yields and lending rates widen.

    As long as the credit crunch continues to play out and more lenders publicly announce how deep their troubles really are, I would expect more of the same in the lending industry in the near term. Here is a chart of Jumbo Rates as published on Wells Fargo site right now:


    Unfortunately I couldn't get any inside information to you as my favorite Wells Fargo contact Michael McGivney is in quarantine and not allowed to comment on the fast changing environment that surrounds their institution. I don't blame them for advising their lenders to keep quiet until credit concerns die down a bit. However, he did say that his rates are approximately 0.125% lower than what is quoted on the above chart, and that obviously depends on credit risk, risk adjusters, loan amount, relationship with wells fargo, and the other normal items that effect the ultimate rate you will be quoted.

    Prospective home buyers are not only facing less options as tighter lending standards limit the number of loan products at their disposal and the conditions get stricter for qualifying for these loans, but now they need to deal with a jump in rates as well as risks rise.

    Just so all of you are clear on one very simple and fundamental issue regarding credit: AS RISK RISES SO DOES THE RATE ASSOCIATED WITH THAT LOAN. IN OTHER WORDS, LITTLE RISK OFFERS LOW RATES & HIGH RISK DEMANDS HIGHER RATES

    All of the lenders, brokerages, homebuilders and other industries directly exposed to the re-pricing of risk will continue to face pressure until the markets fully correct themselves and that will only happen when companies come clean, write down the losses, and remove the uncertainty.

    I worry that this rational behavior might be difficult to gather, as companies try to ride out the bad times and do everything possible to avoid financial distress and investor/shareholder losses.

    Should Fed Step In To Save Credit Markets?

    Posted by urbandigs

    Mon Aug 6th, 2007 09:19 AM

    A: There is talk on the street about whether or not Bernanke & Company at the fed should jump in and become the savior, or ‘lender of last resort’ to help the credit markets in their time of turmoil. Barry Ritholtz recently criticized Jim Cramer on his blog, The Big Picture, for practically begging the fed to step up and cut the fed funds rate! In my opinion, this would be a drastic mistake and I am not betting on any rate cut by our fed at this time; agreeing with Barry's ultimate conclusion that its not the fed's job to bail out speculators and 'guarantee a one way market', as he says. The fed meets on Tuesday and I'm betting on no change, with hopefully an adjustment in the issued statement removing the 'tightening bias' phrase so that a neutral bias is put in place for future meetings/actions; slow and steady.

    First Off - Check out the Jim Cramer Madness on CNBC late last week. The blowup happens halfway through the video:

    The fed’s job is not to bail out bad bets. It is the markets job to correct itself and the environment we are in right now, the re-pricing of risk is the markets way of fixing the current credit mess. These funds that are in trouble made tons of loot during the past years with their high risk high reward bets. Sometimes it doesn't work out. You can't just expect the fed to come to the rescue every time this happens. One could easily argue that one of the reasons we are in this mess in the first place is because Alan Greenspan cut rates so drastically from June 2000 to October 2002 (from 6.5% all the way to 1%), pumping the system with liquidity to stimulate the economy after the dot com bust and 9/11. The result was excess liquidity which led to a housing boom, that of course was unsustainable. This time around, let the markets adjust and hopefully get help from our corporate leaders! A 5.25% fed funds rate is not restrictive given the global boom and worldwide inflation concerns that are still in place.


    During Friday’s 2PM Bear Stearn’s conference call to investors, the CFO of the company described the current credit environment as the “…worst in 22 years”! While this may be true, the problems are not big enough to warrant any fed action in monetary policy at this time!

    Let the markets re-price risk on their own and let the companies who made bad bets take their losses and write-offs! This is extremely important if we are to get though this mysterious crisis! I’ll repeat:

    Transparency in the corporate world is crucial to the timely recovery of the current credit crisis! Bear Stearns seems to be on this path with publicly acknowledging 3 funds failures, declaring bankruptcy protection for these funds, and announcing executive changes as I posted yesterday when the Co-President resigned.

    By coming out in this manner and letting the current value of their holdings to actually trade and liquidate would allow the financial markets to weed out the bad bets made and the losses to be written off. While it will be painful for the companies and their investors to do this, it will be better for the overall credit mess and it will allow the markets to function more effectively in re-pricing the risk so that we can move past the mysterious problems that we now face. It’s the uncertainty right now that is killing equities.

    If the fed comes out and cuts interest rates to help the current credit problems, it will come off the wrong way and will be interpreted as an acknowledgment by our monetary policy makers that there are major issues that are seriously bothering them right now. While stocks will likely rally due to the surprise of action, in the longer term it will spook investors and not have the desired liquidity effect of the fed coming to the rescue. Lets not forget, a rate cut now is only good for psychological reasons and will not 'kick-in' until 8-12 months down the road. Lets see things get way worse before any fed action is put into place so that a more planned and systematic course of action could be put into effect.

    Instead of cutting rates at Tuesday's meeting, in my opinion the fed should:

    1. Remove the tightening bias in the statement. Excessive growth should no longer be a concern and inflation, while still a global threat, seems to be moderating here in the US.

    2. Take a balanced stance between growth & inflation. Perhaps mention that credit concerns are being monitored.

    The fed meets Tuesday and I’m betting on NO CHANGE in rates with hopefully an updated statement as I noted right above.

    Bear Stearns Co-President Resigns

    Posted by urbandigs

    Sun Aug 5th, 2007 07:17 PM

    A: Now, urbandigs isn't a news site. Its a site to discuss current events so that future decisions on the investment in Manhattan real estate could be a bit more profitable. But with so much uncertainty, and a few posts I'm about to publish, I feel a need to pass this on. Bear Stearns Co-President and Co-COO resigns today amid the bankruptcy of two large hedge funds that invested in mortgage backed securities.


    Bear Stearns Co-President, Co-COO Quits

    Bear Stearns Cos. said Sunday that co-President and co-Chief Operating Officer Warren Spector has resigned following the meltdown of two hedge funds that invested in risky mortgage-backed securities.

    "In light of the recent events concerning (Bear Stearns Asset Management's) High Grade and Enhanced Leverage funds, we have determined to make changes in our leadership structure," Chairman and Chief Executive James Cayne said.

    The funds filed for bankruptcy protection Tuesday, two weeks after the company told investors that one with assets of about $638 million was essentially worthless, and another worth about $925 million before taking on losses in March had lost more than 90 percent of its value.
    Don't forget that Bear Stearns CFO recently described the current credit markets as "...the worst I've seen in 22 years!".

    I'm not sure how the street will take this. On one hand, I'm on the train of thought that every lender needs to come clean, book bad bets to market value, write off losses, and announce restructuring (I'll go into this more in tomorrow's post that I delayed publishing to follow up on research). On the other hand, the markets are selling off on any news and this news could produce another selloff with the uncertainty around a high end change at Bear. Lets see.

    One things for sure, the credit markets are in turmoil and buyers should expect higher rates as more and more bad news leading to future uncertainty comes out; more risk means a higher premium to take it on!

    This type of news is significant because if the stock markets continue to selloff due to continued uncertainty (I'm not sure what the tradable markets will do this week), then the New York City real estate market gets one step closer to a correction in our marketplace. Lets be open minded here and at least discuss intelligently what is really going on in the world!

    Its A Risky New World: Credit Spreads

    Posted by urbandigs

    Sat Aug 4th, 2007 11:38 AM

    A: Back to blogging in a very different world. While the news that has come out in the past few weeks at Bear Sterns, American Home Mortgage, Countrywide Financial, etc. is by no means a surprise, they have been the most direct contributors to the current instability in the mortgage markets leading to a re-pricing of risk in the corporate and residential debt markets. As a result of this uncertainty, stock prices have corrected from record highs, especially the financials and homebuilder stocks, and there has been a flight to quality into the bond markets driving down yields as investors seek the safety of treasury returns. However, you may have noticed that lending rates have not dropped that much considering the 10YR yield fell by over 50 basis points in the past 4-5 weeks. The reason why lies in RISK!

    Lets get right into this mess! For the past few years I have been explaining the relationship between stock markets and bond prices/yields, inflation, fed moves, currency trends and global growth and how they all relate to the Manhattan real estate marketplace and your investment! I try my best to simplify these macro issues so that you can understand what is going on in the world and why rates go up or down leaving you with either a lower or higher monthly payment on mortgages, credit cards, and other forms of debt. But now, the world is really changing and rather than stick to the old model, we MUST adapt quickly with the markets to understand where we are RIGHT NOW in the hopes of best understanding how any changes might relate to our investment decisions.

    In the Old World (2002-2006) - Money was very inexpensive to borrow, especially in the beginning of this range. After Sept. 11th and the dot com stock market crash, the fed did everything possible to pump liquidity into the financial systems via cutting the fed funds rate all the way down to 1%. The effect took a year or so to kick in with stock prices bottoming out in 2003 (in hindsight), and lending rates fell to ultra low historical levels providing homeowners with amazingly low rate offers for home purchases. This pumped up affordability and led to a housing boom involving real buyers, developers, and speculators. Lenders of all types jumped on the bandwagon and offered very creative loan products to prospective buyers as home prices boomed and buyers found asking prices out of their budgets. The exotic loans made the home payments more affordable, albeit for a little while. The fed started raising rates at very small increments (mainly at 0.25% clips, or 25 basis points) all the way up to today’s level of 5.25%. The effect of this rate tightening took some time to kick in again, leading to the new world of higher rates and more expensive debt.

    In the New World (mid 2006 - Present) - Subprime woes, bad loans, resetting ARM’s, rising rates, falling home prices, rising defaults, tighter lending standards all started to come to a head. Higher rates started to wake up homeowners to the new reality that monthly payments are significantly higher than they first thought; especially for those with resetting short term ARM products and interest only loan products. Defaults started to rise. The lenders found themselves in a bit of trouble as the repackaging and reselling of mortgage backed securities became more and more difficult as risk started to rise in the mortgage markets. In lay terms, with defaults rising and home prices falling, fewer and fewer investors wanted to buy these mortgage backed securities. Those funds that had to sell were forced to liquidate their holdings at levels far below what they thought they were worth; Bear Stearns funds are a great example of this. Other funds and lenders tried to ride out the wave until they had margin calls due and couldn’t pay up; American Home Mortgage is a great example of this. All in all, there is a re-pricing of risk going on in the tradable markets right now and risk is getting very expensive driving up rates for risky debt. As a result of this, those holding mortgage backed securities and CDO’s are having trouble finding buyers and are forced to liquidate at big time losses. Liquidity is drying up and that is bad for everyone. This is the world we live in. This is the beginning of a credit crunch. Every company with exposure to this is feeling pain.

    Credit spreads are widening as a result of all this. In other words, the difference between corporate bond yields and US government treasury yields are increasing as the risk associated with corporate paper rises! Relating this to the mortgage markets, while short and medium term US gov't treasury yields are falling fast due to a flight to quality as stock prices fall, the rates on mortgage products are NOT falling at the same pace! This is because mortgage debt is now MORE RISKY than treasury bond notes and therefore demands a HIGHER RISK PREMIUM to gather investorsl i.e. higher yields. This is causing the spread between the two to widen.

    Confused? I'll put a pure definition of credit spreads up here to hopefully clear things up.

    Credit Spreads - In finance, a credit spread, or net credit spread, is the difference in yield between different securities due to different credit quality. The difference between the yield on a corporate bond and a government bond is called the credit spread. As such, the credit spread reflects the extra compensation investors receive for bearing credit risk (these last 2 sentences & hypothetical chart example below via


    I have said for a long time that the 10YR bond is our most reliable short term indicator as to where lending rates are headed in the very near term. Due to the current credit crunch and re-pricing of risk, this NO LONGER APPLIES as a reliable indicator!

    Due to the re-pricing of risk, mortgage rates are NOT falling as much as one would think with such a dive in 10YR bond yields over the past 4-5 weeks. As more and more lenders go under and less options become available to homeowners and perspective buyers (stated income loans are starting to go away now), rates are going to be in a generally upwards trend (Wells Fargo recently announced that 30YR rates for jumbo loans are going to be around 8% - I'll write on this topic shortly)! In short, the risk is too high to allow mortgage rates to fall in conjunction with falling bond yields; again, causing the widening of credit spreads.

    Starting to get it? If I were a soon to be homeowner, I would keep my eyes glued to what is going on in the credit markets. Its hard to miss! Just watch CNBC for 15-20 minutes at any given time and you should catch at least one economic discussion on the topic. For those interested in more in depth conversations on the topic, tune in to Kudlow & Company on CNBC from 5-6PM daily and I guarantee you will start to learn more about what is going on in regards to the re-pricing of risk currently underway.

    It’s a changing world. Either you realize it and adapt with it, or you lose; plain and simple. I believe bond yields will continue to be pressured as long as this credit mess is around with more and more lenders and home builders getting into trouble in the near future. Every time a major lender goes under, tighter lending standards get more real, risk gets more attention, and home loans should demand higher rates and stricter underwriting requirements.

    In the end, its healthy for all markets that this is a known problem and that its OUT for the markets to adjust to. It would have been worse if there were cover ups on this delaying the inevitable to a later time; this is yet to be seen. Instead, lets get it all out now or in the very near future and let the tradable markets do what they have to do to absorb the problems so that a longer term sustainable growth pace can reveal itself. In the meantime, we are still trying to find out how deep this rabbit hole is!

    Lets See Why This May Ultimately Hit Manhattanites - Stock/Job losses are the most direct threats to the continued sustainability of the New York City real estate marketplace. If stocks flounder, it could start a chain reaction of events that includes job losses, contraction in bonuses, lower salaries, weaker buyer demand, and forced resales of already purchased properties that were bought by unsuspecting high earners hurt by job loss or salary/bonus cutback. It could also put some fear into non wall street homeowners who will choose to sell and pocket profits made over the past years. The current inventory tightness could reverse as a result providing more competition amongst sellers during a time with weaker buyer demand and higher interest rates on loans. All of this has not yet occurred and is only a potential outcome should stock losses really hit the market. I will not comment on the likelihood of this happening due to the uncertainty in the credit markets and what may be done about it.

    Inman, Bloggers & Flight Delays

    Posted by urbandigs

    Sat Aug 4th, 2007 11:13 AM

    A: Well, it was a blast spending time with great people helping to shape the real estate industry across the country. I was honored to speak in front of over a thousand people at the Inman Real Estate conference with such great bloggers including Kevin Boer, Jonathan Miller, Ardell Dellaloggia, and Theresa Boardman, Jim Cronin, Dan Green, Mary McKnight, Brian Brady, and Charles Turner. All these guys are providing a great service to their readers by discussing real time tips from street level so that everyone can learn a little bit more about real estate, mortgages, appraisals, and starting a new real estate blog to take your career up a notch or two. I also spent time with Joe & Rudy of Sellsius, Drew Meyers of Zillow Blog, Lockhart Steele of, Pat Kitano of Transparent RE, Jim Duncan of Real Central VA, Phil & Christian of, Kris Berg of San Diego Real Estate Blog, Todd Carpenter of Lenderama, Joel Burlesom of Future of Real Estate Marketing & New Inman Partner, and Im sure a few more Im forgetting (sorry!).

    What sucked was the flight back to New York which was delayed 2 hours leaving San Francisco, then delayed 2 hours in the air as we were rerouted to Virginia awaiting air traffic control to organize the backlog of flights landing in JFK, then running out of fuel and landing in Atlantic City, and finally being grounded in Atlantic City for another two hours waiting for thunderstorms to clear out of New York. Fun! All in all, what was supposed to be a 8:30 arrival time turned into a 3:30AM arrival time in JFK.

    The silver lining was that I realized I was trapped on the same flight as superstar appraiser Jonathan Miller and got the great opportunity to talk to him about the current credit mess, thoughts moving forward, how companies can help solve the problems, fed talk, real estate talk, and tools both of us are working on to make real estate analysis more transparent. Jonathan truly is a stand up and down to earth guy and I'm just happy to have got to known him a bit better. Fact is, he doesn't have to blog on his incredibly informative site Matrix, but he does out of the passion for writing and bringing readers inside tips and thoughts on his industry and the real estate market in general. Very admirable in my opinion for a guy that has a wealth of information to share and is a consistent source of information in the most respected media outlets.

    Moving on, I'm about to start publishing what I think are incredibly informative posts about the macro economics of what is going on right now. I hope you understand the short term disconnect in writings about the NYC real estate market as I attempt to cover the issues we currently face in the credit markets and how that effects us.

    Back on SAT - Blogs/Chat Back Monday

    Posted by urbandigs

    Thu Aug 2nd, 2007 09:52 PM

    Its been amazing the past few days here at the real estate conference in San Fran. Lots of great talent here and great speakers showing off future tech, directions of industry changing companies, and top bloggers.

    Ill be back Friday evening and will return to posting and live chat on Monday. Thanks for bearing with the light postings this week!!