A: On Monday I posted one of my more emotional posts in a long time titled, "To Mr. Bernanke: BE STRONG", with the clear message to NOT CUT RATES and to BRING ON THE RECESSION! With stocks near record highs, oil just off record highs, commodities surging, and the dollar at record lows, aggressive fed rate cuts is the last thing we need! The problem lies in housing and the credit markets. Housing woes were brought on by ultra stimulative fed policy and ultra cheap money, while credit woes were brought on by bad bets / loans by lenders and the securitization of these loans into mortgage backed securities that went sour as the secondary mortgage markets seized up. Fed rate cuts is not the answer; a recession is the better option to flush out the bad bets, let housing work itself out without encouraging more bad bets by cheaper money, and let everyone learn their lessons so we can move on.
Yesterday, the WSJ Blog Real Time Economics had a post discussing, "Recession the Best Way To Deflate The Housing Bubble", deriving the idea from the American Enterprise Institute's John Makin. I think its spot on and is exactly what I talked about on Tuesday:
The American Enterprise Institute’s John H. Makin says that a recession "is the most desirable outcome" for deflating the U.S. housing bubble. "Avoiding it would involve so much government intervention and so much reinflation by the Fed that risk-taking would be encouraged even further, resulting in an even larger bubble and a larger subsequent recession..."SPOT ON Mr. Makin! Spot on!
"I am suggesting here that the cost of avoiding recession after the biggest housing bubble in American history has burst is too high. It will involve rewards to those who took excessive risks that will only result in more underpricing of risk in the future, and therefore larger bubbles and, ultimately, a more unstable economy that underperforms expectations…"
"At the end of the day, the problem facing the U.S. economy - a collapse of a housing bubble with attendant damage to overall growth - is acute but not chronic. The way to avoid a recession - having the Fed print money and push house prices back up - is not a viable option. "
In my post on Tuesday I displayed my version of agreement with John Makin, and asked why we fear recessions so much. I got a bit emotional calling on Big Ben Bernanke to reach deep within himself, find his cahones, stand up to wall street, and take no action at all later today! Cut the discount window if you want to pump more liquidity into the system, but leave the fed funds rate alone.
WHY ARE WE SO SCARED OF A RECESSION! What has become of us! Why must we bail out those that made the bad bets? As I said on Tuesday:
We have become a society that fears recessions rather than understand them for what they are; healthy and normal disruptions in economic growth necessary to ensure longer term sustainable growth. We need to shake out the bad bets and weak players, let the markets fix themselves, and move on with the lesson learned.The problems out there lie in:
a) credit markets
b) housing markets
c) threat to consumer spending
d) threat to economic growth
...all of which may combine to put us into a recession. Possible a harsh one. So what! We'll get through it. What we need is to be more forward thinking and consider just for a moment the problems that may arise if the fed continues this easing policy! Oil at $120/barrel? The US dollar continuing to fall? Re-inflation of asset classes? Failure to let the housing bubble correct itself by easing policy? Moral hazard issues of future risk taking? Volatile growth? Uncontrollable Inflation?
A recession will:
a) penalize those with bad asset holdings by not injecting more umph into our economic systems
b) allow housing PRICES to fall to correct inventories rather than RATES to fall to stimulate buyers
c) weed out the weak players who made problematic / risky bets
d) help to moderate commodities and energy prices without re-inflating them by easing policy
e) help prevent future buildup of pipeline inflation that easing policy creates
Recessions are normal disruptions in economic growth, necessary to penalize those that made problematic risky bets, to flush them out of the system so that we can continue on a path of longer term sustainable economic growth with the lessons learned! That is what the definition of a recession should be! There is nothing wrong with it, yet this new fed is hell bent on avoiding a recession at all costs; even if those costs put us in a worse situation down the road. There needs to be a stand, and tomorrow Ben Bernanke & Co. will have a choice.
Will they take the red pill and cut rates aggressively so that we don't enter a recession at the expense of bailing out those in need, the weakening US dollar, and a future buildup of inflation pressure?
Or, will they take the blue pill and stand strong, leave rates alone, announce that they are ready to act if things get real hairy, and support our currency and help prevent the buildup of future inflation pressure?
The choice is yours Ben. NO CUT!
A: Pirates? Um, what year is it?
CNN: Crew Storms Bridge to Wrestle Control of Pirated Ship
A crew battled pirates in a deadly fight Tuesday to regain control of a North Korean cargo ship off Somalia, the U.S. Navy said. The Navy is still chasing a second ship held by pirates in the area.What does this have to do with Manhattan real estate you ask? Nothing. I just can't believe I read a story about pirates taking over a ship. A little reminder that old habits die hard and some side news before we delve into fed talk tomorrow!
When the fight aboard the Dai Hong Dan was over, two pirates were dead and five others were captured, the Navy said, citing initial reports from the crew. Three seriously injured crew members were transferred to the destroyer USS James E. Williams, according to the Navy.
Pirates had seized the ship's bridge while the crew was holed up in engineering and steering compartments, the Navy said.
A: Mr. Chartman himself, Jonathan Miller is back with some great stuff as he publishes is quarterly report for Douglas Elliman. Here is the link for all of this quarter's charts; 13 of them in total! In short, the data shows you how powerful blogging can be for those that read daily! As many of you know, I do my best to provide real-time reporting to you guys from street level of Manhattan real estate. I HATE lagging data, no offense Jonathan, I love yours as its by far the best and most credible data mining we have! But, I just wish we had more real time tools to analyze what is going on in the NYC real estate marketplace as it happens, rather than after. Lets start digging.
First off, recall my previous posts on the decline in buyer confidence that I reported on starting in early August, some 10 weeks ago as I first noticed signs that sales volume will probably start to slow a bit:
AUG 9th ---> "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. "
AUG 27th ---> "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.
...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."
SEPT 24th ---> "However, I have a hunch that July-September sales volume will come in a bit lower than expectations (which will be proven by data released in December or so) resulting in a bottoming out of these declines in inventory. This hasn't happened yet, its just a hunch. I think the headlines of the credit squeeze, along with higher rates and tighter loan standards has had a psychological effect on the buyer pool by pouring some caution into the minds of would be buyers. In addition, I think many buyers are just flat out frustrated by what they can get for their budgets and are choosing to hang tight a bit longer.
Too early to tell, but come early 2008, I would expect these inventory trends to reverse course a bit and start to either bottom out or rise again for the upcoming 2008 wall street bonus season."
OCT 2nd ---> "This report confirms my inventory reports (Sept 24th, Sept 11th, Aug 23rd, Aug 9th) but its the sales volume that I question in the upcoming quarterly report for the months of August, September, & October. My gut is telling me that sales volume will slow resulting in a slight build of inventory for these months!"
On to the charts!
Conclusions: There is a clear tick up in listing inventory as a result of the clearer tick down in sales volume from the month of August to September! This is consistent with the tick down in buyer confidence that I have been reporting on since early August. The theory goes:
BUYER CONFIDENCE TICKS DOWN DUE TO CREDIT CRUNCH ---> BUYERS ARE MORE CAUTIOUS ---> SELLERS PRICING REMAINS HIGH AS INVENTORY IS TIGHT ---> LESS BUYERS JUMP IN ---> SALES VOLUME TICKS DOWN ---> INVENTORY TICKS UP
What started the whole trend is what I have been cautiously reporting here on Urbandigs.com; the change in buyer confidence (real-time reporting is what its all about)! It's all about the buyers! Now, this report is still overall bullish and by no means are the reversals in inventory & sales volume significant enough or long enough to establish a meaningful trend. It simply points out that confidence can change markets and makes it even more important for us to monitor these stats moving towards the wall street bonus season. Will it continue? Will it turn back around? We need more data before making any iron clad statements regarding a change in the fundamentals of Manhattan real estate.
A: The fed meets and decides the next move in the fed funds target rate on Wednesday. We also get plenty of economic data this week, which I'm sure the fed will get early access to before making their final decision on rates! The biggest reports will be GDP on Wednesday, ISM Manufacturing Index on Thursday, and the Employment Situation report on Friday. With the fed funds target rate at 4.75%, I wonder, is that really restrictive to economic growth? While the US dollar tanks, oil surges to $93/barrel, stocks just off record highs, and other commodities trek higher, it's hard to imagine that Big Ben will be aggressive with rates on Wednesday. But we all know he will because thats what the market wants! I say, be strong Ben! Show us you own a set of cahones, support our dollars, tell the markets you are not their bitch, and surprise us with your inner strength!!
Free market capitalism, HA! What a joke! It's clear that Ben Bernanke and the fed is a printing press for the tradable markets and will do everything in their power to keep the game going a bit longer and help bail out all those that made bad bets. Only it won't come out like that. It will come out as if the fed is acting to, "...forestall adverse effects to the US economy", or some similar jargon. Meanwhile, expect your dollars to be worth less soon.
With that said, there are problems here. The problems are a direct result of bad bets and bad loans that never should be made in the first place. So, to fix the problem the fed is pumping liquidity into the financial system, at the expense of our US dollars' value and future inflation in the pipeline. Companies are trying to team up and get this super conduit called MLEC up and running so that those holding bad assets can get bailed out and don't have to be forced to sell at distressed levels. Gone are the days where bad bets are penalized by the tradable markets, because if they were it would cause financial distress to our economic system that maintains afloat from interventions from government and private institutions. That is why free market capitalism is NOT AT WORK HERE!
If it was, the markets would have to work themselves out and stocks of banks, lenders, and others who hold these assets would have corrected significantly more; and that is obviously not happening. We have become a society that fears recessions rather than understand them for what they are; healthy and normal disruptions in economic growth necessary to ensure longer term sustainable growth. We need to shake out the bad bets and weak players, let the markets fix themselves, and move on with the lesson learned.
The US economy is slowing and jobs growth is decelerating, no doubt about it, but what happens if the US dollar continues this freefall? What happens to our immediate future if oil prices jump to $120/barrel; which will occur if the fed maintains an easing policy? Won't that hurt us even more down the road? Do we really need to keep cutting rates BEFORE the economic data clearly shows that they are needed at this stage of the game? Is 4.75% fed funds rate really that restrictive?
I think Ben Bernanke needs to stand tall, tell wall street he is NOT THEIR BITCH, and NOT CUT TARGET RATE AT ALL! Instead, I think they should leave the door open for more cuts if need be, and they should cut the discount window so that it comes down to where the fed funds target rate is now at 4.75%! If they do cut, at most cut rates 1/4 point and be clear in their message that future rate cuts are not a certainty!Right now, banks are announcing major losses in write downs and wall street is treating those acknowledgments fairly positively. I mean, UBS comes out today, warns of losses that will extend to future quarters filling the air with uncertainty, and the stock is down all but 0.71%! Are you kidding me! The reason why the free markets are not working properly right now is because they are waiting to know how many shots of heroin their pimp is going to give them!
Here are facts:
- Stocks are 1.5% or so from Record Highs
- Oil is at Record Highs
- Problems lie in credit markets; cutting rates will NOT cure this problem
- Rate cuts will help cushion any slowdown that may come down the road
I would LOVE to see the fed do NO CHANGE with rates on Wednesday, but I doubt that will happen. The credit markets are still in distress, there are more losses yet to be reported, we still do no know who holds what, and if the fed does nothing the markets will selloff and correct. Awww, cry me a river. I wonder if Big Ben can handle a little selloff on wall street?
Am I alone here in this way of thinking? The fed funds futures are actually starting to predict a slight chance of ZERO CUT at the meeting. Bill Pimco says we need a fed funds rate of 3.75%; might as well burn our dollars for heat! Here are some other thoughts around the blogoshpere:
Fed Calls: Quarter-Point Consensus (Real Time Economics - WSJ Blog)
Wall St Wants 50, Fed May Give Zip For Now (Bloomberg)
No Free Lunch: Ongoing Ramifications of an Easy Fed (The Big Picture)
The Fed's Dilemma (Econoday - Simply Economics)
Fed Meeting Wednesday Keeps Pressure on US $ (FXView)
Countdown to the Fed (Think BIG: Bespoke Investment Group)
A: It's been a while since I discussed a new tip for sellers, so when I noticed this one I thought it would be perfect for those about to put their property on the market! Assuming you are using a broker and understand that maximum exposure means maximum profit potential, it's a good idea to ask your broker to market your property to the brokerage community one week before the first showing! That way, if your apartment is priced right, you will generate plenty of interest for the first showing and create a sense of urgency for prospective buyers.
A few things have to be assumed for this concept to work properly, so lets get into these first:
1. Listing With A Broker - If you go it alone then your main medium of advertising is online and in print. Its hard to apply this strategy if you are not getting full distribution to the Manhattan brokerage community. Check out my posts on FSBO Tips & FSBO Checklist if you decide to go it alone!
2. Full Distribution to Manhattan Brokerages w/out Delay - Some brokerage firms have policies in place that delay the distribution of the new listing to other brokers for a couple of days. If the brokerage firm you are listing with does this, you will have to add a couple of days to the time line so that ALL brokers know of the property a week in advance before any showings.
3. Property is Priced Right - Yea I know, your home is worth more than everyone else's. Its a common tale and I don't buy it unless your property has something to offer above and beyond its competition; outdoor space, amazing views, unique style, etc..To maximize interest by keeping the property restricted for 7 days, it also must be priced right. If you decide to test the market and overprice, don't expect a crowd on the first day of showings which obviously will generate no sense of urgency; which is the ultimate goal here. Check out my post on Priced Right Apartment Sells in First Month to see why I think pricing is so important!
Assuming your property meets these 3 criteria, here is what you do:
ASK YOUR BROKER TO LIST THE PROPERTY FOR SALE TO THE ENTIRE MANHATTAN BROKERAGE COMMUNITY 1 WEEK BEFORE THE FIRST SHOWING OR OPEN HOUSEThe goal here is generate interest and give time to all brokers who have buyer clients to find the listing. Clearly stating, "FIRST SHOWING NEXT SUNDAY's OPEN HOUSE" in the listing description or similar will do the job! There is no doubt that the majority of deals in Manhattan real estate are co-broke's where both buyer and seller are represented by a broker. So, you must take advantage of this aspect of your target buyer pool and reach out to the brokerage community as much as possible.
UrbanDigs Says: It's a little thing and something most brokers don't do, but when applied correctly this could be a very powerful way to start off the marketing of a new listing! If its an open house that is the first showing, just the fact that so many buyers will show up with brokers and on their own should create a psychological sense of urgency and might get the seller a few bids for fear of losing the apartment! In addition, the thinking that goes on in the buyer's heads are that this property must be a great value if so many people are coming in to view it. Both situations are favorable for the seller. Hopefully its enough to get you a serious bid. The only downside to this is if the seller gets caught up in the action and decides to get greedy in response to bids that might come so early! As I mention in my post, "Don't Mess Up In Here", most of your action will happen in the first 3-4 weeks so be sure not to dismiss an early offer just because it came early! In the end a quick sale is generally what most sellers want!
Originally Published March 15th, 2007
A: Hat tip to CR, for bringing this up on his blog. This joint economic committee's report and recommendations from Senator Schumer and Rep. Carolyn Maloney is a very interesting read to say the least. Put your helmet on.
JEC: The Subprime Lending Crisis
1) Aprox. $71 Billion in housing wealth will be directly destroyed through the process of foreclosures
2) More than $32 Billion in housing wealth will be indirectly destroyed by the spillover effect of foreclosures, which reduce the value of neighboring properties
3) States and local governments will lose more than $917 Million in property tax revenue as a result of the destruction of housing wealth caused by subprime foreclosures
4) We estimate there will be approximately 1.3 million foreclosures and a loss of housing wealth of more than $103 billion through the end of 2009 (assuming estimated 18% foreclosure rate)
*click to enlarge
But most troubling in my mind is the trend of mortgage originations towards subprime. Take a look at this statistical analysis showing the percentage of subprime originations and the percentage of these subprime originations that were securitized from 2001 until 2006. It's clear we are in the heart of the mess right now, with more carnage to come.
MORTGAGE ORIGINATION STATISTICS
Print out the report and read it on your commute if you can. Its an eye opener.
A: Sorry for the lack of content, this new site upgrade is so damn tedious. Anyway, lets take a look at what is going on with new home sales and the distressed ABX markets. The new home sales report was slated as good news by the media, but when you break it down, it really wasn't! Meanwhile, the ABX Indices are continuing their fall as the demand for credit protection picks up; those are bets that profit as the ABX markets fall. Its a sign that investor sentiment is negative and anticipating future defaults and foreclosures down the road.
First, the new home sales report (via Forbes.com) -
New home sales unexpectedly rose 4.8 pct in September to a 770,000 unit annual rate, the Commerce Department reported today, rebounding from an 11-year low in August.Ehh, numbahs! Spin em every way you can. This report is not very accurate and gets revised often. I wouldn't be surprised if next month's report revises these numbers down. Making bets on this report is a fools paradise.
Analysts were expecting a 775,000 unit rate, which would have been a decline from the originally reported August 795,000 unit rate. However, downward revisions cut August sales by 60,000 to a 735,000 unit rate, the lowest since 720,000 in Oct 1996. The revisions also reduced the July and June sales rates by a total of 107,000.
September sales were off 23.3 pct from the same month in 2006. September inventories of unsold homes fell to 8.3 months' supply after the upwardly revised 9.0 months in August.
Barry Ritholtz has it right in his post, "No, New Home Sales Did NOT Rise" -
First, we see the headline number. This month, September 2007 sales of new one-family houses were up 4.8%, at annual rate of 770,000 (SA).Confused? Look at the chart I posted above via CR. Calculated Risk shows you the chart of New Home Sales and installs grey recession bars going back the past 35 years. It should visually show you that this report in no way is worth cheering about!
Second, we look at the year-over-year data, which in this case was 23.3% below the September 2006 estimate of 1,004,000.
Third, we look at margin of error. The monthly gain of 4.8% was within the "estimated average relative standard errors" of ±10.3%. This means the data point was not statistically significant.
Based on this data, we know for sure that year-over-year sales decreased; What we can tell about month to month sales is that they may -- or may not have -- increased (we just don't know).
Lastly, we need to consider Cancellations. The Census Bureau does not make adjustments to the new home sales figures to account for cancellations of sales contracts. As we have seen, the Cancellation rates of Home Builders have been huge:
Firm . . . Cancellation rate for Quarter
Centex (CTX) 35%
MDC Holdings (MDC) 57%
KB Homes (KBH), 50%
Lennar Homes (LEN) 32%
D.R. Horton (DHI) 48%
Beazer Homes (BZH) 68%
As for the ABX markets, well, the stabilization I talked about three days ago didn't last! As you can see on the chart to the left, the 'AA' rated market continued the selloff after a brief rest. It's a sign that investors are betting on much more carnage in the mortgage markets in the near future. Expect defaults and foreclosure data to continue to rise and distress in the secondary mortgage markets to continue! Holders of residential mortgage backed securities do not have a favorable market to selloff assets to; as noted by Merrill Lynch's $8.4B write down that was recently announced; yes that is a "B" for Billion! They told the street to expect half that in losses related to subprime mortgage, structured bonds, and bad loans in the 3rd quarter. Do you really think this is the end of it and that Merrill is the only one holding bad assets on their books?
The problem here is one of uncertainty! As I said a number of times, there are two main issues:
a) we do NOT know who holds what assets on their books
b) we do NOT know what the value of these assets are on the open markets
...because there is NO market, as evidence by the selloff in the ABX indices! If your wondering why this is important, you need to understand why the secondary mortgage markets are here in the first place. The secondary mortgage markets are where existing mortgages and mortgage backed securities are traded! It allows the originators of mortgages to selloff holdings, so they can free up capital for more loans. Well, these markets are in turmoil! That is why I continue to report on them. As long as the distress continues, we should expect more bad news from brokerages, lenders, banks, and any other institution holding these assets on their books. The problem will continue to be the unfavorable valuations for those that must sell at these distressed levels, and the lack of transparency for investors and the street as to who holds what on their books. The story is not finished.
A: Quick checkup into creditville; a new town that is not such a great place to call home. The ABX Indexes seemed to have stabilized a bit after plunging since Oct. 11th; not such a great sign after the steep selloff as some sort of a rebound would have been nice to see. Meanwhile, the mortgage insurance companies continue their slide as PMI, MTG, & RDN plunge over 30% in the past 5 days. I'm still waiting for a clear indication of stability or a rebound in these two markets to quell fears that round two of the credit squeeze is near.
A quick description of the mortgage insurers I noted above.
PMI Group (NYSE: PMI; down 7.15% right now) - The PMI Group, Inc., through its subsidiaries, provides credit enhancement products that promote homeownership. It operates in four segments: U.S. Mortgage Insurance Operations, International Operations, Financial Guaranty, and Other. The U.S. Mortgage Insurance Operations segment provides residential mortgage insurance and structured finance products to mortgage lenders, savings institutions, commercial banks, capital market participants, and investors in the United States. The Financial Guaranty segment provides financial guaranty insurance for public finance and structured finance obligations; and offers credit enhancement solutions that enable municipal and asset-backed issuers to facilitate access to capital markets. It provides direct insurance to issuers and lenders, and reinsurance to financial guarantors.
MGIC Investment Corp. (NYSE: MTG; down 6.72% right now) - MGIC Investment Corporation, through its subsidiary, provides private mortgage insurance to the home mortgage lending industry in the United States. The private mortgage insurance covers residential first mortgage loans and expands home ownership opportunities by enabling people to purchase homes. The private mortgage includes primary and pool mortgage insurances. Its primary insurance provides mortgage default protection on individual loans and covers unpaid loan principal, delinquent interest, and various expenses associated with the default and subsequent foreclosure, and generally apply to owner occupied, first mortgage loans on one-to-four family homes, including condominiums.
Radian Group (NYSE: RDN; bucking trend after plunging and up 0.36% right now) - Radian Group, Inc., through its subsidiaries and affiliates, operates as a credit enhancement company that provides credit protection products and financial services to mortgage lenders and other financial institutions. The Financial Guaranty Insurance segment insures and reinsures credit-based risks. The Financial Services segment specializes in credit-sensitive, residential mortgage assets and residential mortgage-backed securities, as well as in credit card and bankruptcy-plan consumer assets. The company's customers include mortgage originators, such as mortgage bankers, mortgage brokers, commercial banks, and savings institutions; and financial institutions.
I normally don't like to talk about stocks here on UrbanDigs.com, but when it involves the mortgage insurance companies and is in regards to a 30% plunge in the sector during a 5 day trading period, I feel it's worthwhile to discuss. Obviously, investors are pulling bids fast in anticipation that major losses are mounting in the secondary mortgage markets and the holders of assets that use these companies for credit protection!
As for the ABX Indexes, well the plunge seemed to find a bottom yesterday and I'm now focusing on whether it will hold, rebound, or start a new leg down! The chart on the right shows you the current stabilization after yesterday's trading. In no way is this soothing news after the severity of the selloff last week, but hopefully its a sign of a rebound. In my opinion, this is why the equities markets sold off towards the end of last week. For those interested in what the ABX Index is, here is a quick breakdown:
ABX = Asset Backed Index
HE = Home Equity
AA = Credit Rating
07-2 = Issuance for 2nd half 2007
PS: I'm in the last lap of developing UrbanDigs.com PHASE II - del boca vista! I have been spending a lot of my time on this new site and apologize for the lack of content regarding the current state of the Manhattan marketplace. Once I get the new site launched, and bugs fixed, I'll go back to mixing up content again! Hang in there guys! I expect launch to be within 2 weeks.
A: I want to re-publish this post from January 8th, 2007 after going through this experience again with one of my buyer clients. It's important to know that even when you get a verbally accepted offer, the deal is not done! Lets revisit how it works here in Manhattan so you are prepared for the process before you submit your bid. So, you've gained product knowledge by viewing more than 15 properties over the past 2 months or so, and got to the point where you know what 750 square feet should look like and whether or not a property is a good deal or not within a few minutes of entering. You did your pricing analysis with your broker, got past solds, analyzed current actives, valued in light & views & renovations & monthly expenses, and presented a bid. After a few back and forth sessions with the seller's broker, your offer was accepted! Congratulations, but don't get excited yet!
Before you submit a bid you should already have:
1. Pre-Approval Letter For Loan - you should have called at least 3 brokers, with one of them being a direct lender to get a competitive rate quote on all the loan products you are considering. Also make sure you get a rundown of closing costs and terms of the loan so that you don't have to pay any points or penalty's if you pay off or refinance your loan early.
Quick Tip: If you are pressured by time to close within 10 weeks or so of contract signing, especially if you are buying a co-op and have to go through board approval, be sure to ask the lender if they can expedite the appraisal, the appraisal's processing, & GET YOU A LOAN COMMITMENT LETTER + AZTEC RECOGNITION FORMS WITHIN 4-5 WEEKS OF CONTRACT SIGNING! These docs take the most time to get and are usually the last forms received to complete a board package, so be on top of this early on.
2. Real Estate Attorney - your attorney will be priced between $1500 - $2000 or so and will review the offering plan, contract of sale, 2 years of building financials, and board minutes. THIS IS THE MOST IMPORTANT ASPECT OF THE BUYING PROCESS BEFORE YOU SIGN A CONTACT! This is the time where you find out if the building you are thinking of buying into is financially healthy, is planning any assessments/major improvements, is operating at a gain/loss, has a healthy reserve fund, etc..Do not rush this process and be sure to ask your attorney if they notice any red flags about the diligence they did on the building!
3. Financial Snapshot - you should have a financial statement that clearly shows your assets, liabilities, and salary information for the seller to review. Presenting yourself in a clear light puts you in a good negotiating position right off the bat! Strong buyers that present little or no risk to the deal going through should gain a bit more control during negotiations; especially for a co-op that has strict financial guidelines limiting the buyer pool the property could be marketed to! Don't be upset if your representative buyer broker wants to pre-qualify you before viewing apartments or asks for this information before submitting a bid on your behalf. It's completely normal and to your advantage to provide transparency to the seller so that your bid is reviewed seriously!
So the time has come, the bid was submitted and your offer was accepted. The accepted offer that you have right now is non-binding and remains that way until you have a fully executed contract. That means the property is probably being marketed even while your attorney is reviewing the terms of the deal and building; anything can happen during this part of the transaction process! The timeline of this process will look something like this:
ACCEPTED OFFER ---> ATTORNEY REVIEWS CONTRACT OF SALE, 2 YEARS BUILDING FINANCIALS, OFFERING PLAN & BOARD MINUTES ---> BUYER SIGNS CONTRACT FIRST & SENDS IN 10% DEPOSIT ---> SELLER COUNTERSIGNS CONRACT ---> FULLY EXECUTED CONTRACT OF SALE IS REACHED AND BOARD PACKAGE + APPRAISAL CAN NOW BEGIN
Congratulations, the deal is now done and probably contingent upon receiving financing (if it isn't than that means you signed a contract without the financing contingency; read more here) and board approval! The buyer broker (or seller broker if there is none) will get to work on the board package at this time and your lender will get to work on ordering an appraisal of the property so that the loan commitment letter can be processed. Again, read my above tip if you are under any time pressure as getting these loan docs can sometimes slow things down and delay the closing.
UrbanDigs Says: Just because you have an accepted offer does not mean you have a done deal yet. The seller broker knows this and will KEEP the listing ACTIVE and continue to market the property until a contract is signed. Some things that could kill a deal before a contract is signed is inaccurate data presented by the seller broker that is disproved by the offering plan, building financials or contract of sale, a very low reserve fund in the building, or the building operating at a loss. If the seller broker advertised the property at 650 square feet and is later found to be 575 square feet, a re-negotiation of price might take place before the buyer signs the contract; so it really doesnt pay to lie about size (see my post, "Marketing Square Footage: Be Careful Not To Lie", as issues can come up at contract signing or the appraiser will appraise at a lower price when he comes to measure/evaluate causing a potential issue with lending). The two main things that can kill the deal after the contract is signed is failure to receive financing or a board rejection. Hopefully the seller broker was able to pre-qualify the buyer for both of these situations before even submitting the bid to their client for review! Good luck and remember to leave your emotions contained until that contract is fully executed!!
A: Last Tuesday, I started discussing how something was brewing underneath the surface of creditville which led me to state that, "...the street is yet to adapt fully to a world of credit restrictions...". On Thursday, I came right out and said, "Just a lot going on under the surface here folks that could lead to another round of credit woes when it reaches the top..." and "...I do know that the core of the credit markets are undergoing serious distress right now and it's got to trigger some type of adjustment in equity markets in the near future". On Friday the stock markets got killed! Let me explain to you why I had this bad feeling, so you can see that there are clear indications that round two of the credit crunch is near; ABX plunge, Mortgage Insurers Selloff, Foreclosure Index Trend ticks up.
ABX Indexes Plunge - Investors Shun Subprime Mortgage Markets
ABX Index Explained - The ABX Index is a series of credit-default swaps based on 20 bonds that consist of subprime mortgages. ABX contracts are commonly used by investors to speculate on or to hedge against the risk that the underling mortgage securities are not repaid as expected. The ABX swaps offer protection if the securities are not repaid as expected, in return for regular insurance-like premiums. A decline in the ABX Index signifies investor sentiment that subprime mortgage holders will suffer increased financial losses from those investments.
This index is in total FREEFALL; look at the chart on the right showing you the steep selloff in the past week or so! It all started around Oct. 11th, the same time that the mortgage insurance stocks (I'll get to this in a moment) started their freefall as well! Coincidence? No way! It is a clear sign that something is brewing in the credit world as investors remove bids for anything associated with subprime investments. In my opinion, the overall stock market reacted at a delay to this brewing uncertain situation.
CNBC's David Faber even started to acknowledge the plunge in the ABX markets mid-day Friday as the markets were in the process of a steep selloff. A bit too late if you ask me, as this situation could have been discussed earlier in the week, to raise concerns that a credit storm may be brewing again!
Mortgage Insurance Companies in Freefall
Holy Batman! Are you guys paying attention to what is going on with the mortgage insurance stocks; ABK, MBI, GNW, PMI, MTG, & RDN over the past week in conjunction with the selloff in the ABX Indexes? This sector is down betwen 10% - 45% in the past 5 trading days! This is important because these are the companies that are generally very highly leveraged, and may have trouble paying out claims for customers with heavy losses in the residential mortgage backed securities markets; the same market that I showed above as collapsing.
Mortgage Insurers Explained - Mortgage lenders and other institutions that buy & sell residential mortgage backed securities (RMBS) and other collateralized debt obligations (CDO's) need to have some kind of insurance in case their bets go against them. We are talking big money here and there has to be some kind of hedge for the holders of these risky assets. There needs to be credit protection. There needs to be management of credit risk. The mortgage insurers provide a financial guaranty that insures lenders against loss in the event a borrower defaults on a mortgage. If the borrower defaults and the lender takes title to the property, the mortgage insurer (MTG, for example) reduces or eliminates the loss to the lender. In effect, the mortgage insurer shares the risk of lending the money to the borrower.
OK, so now you understand the role of the mortgage insurer for the lender or holder of subprime derivative products. Here is what happened to this sector in the past week; note the right side axis that shows the percentage loss for the week ranging from -10% to -45%!
Foreclosure Index Trend Ticks Up
CoreLogic's Foreclosure Index Trend has also ticked up in the 3rd quarter of 2007.
The CMRM forecasts the relative risk of residential mortgage loan delinquencies due to fraud propensity and collateral risk, house price dynamics, and the health of the local market economy. An elevated Core Mortgage Risk Index signals the increased potential for financially disruptive and costly economic consequences for consumers, their local community, and mortgage financiers.
Beginning to get the picture? I started to notice the unraveling of the ABX markets on Monday, about 4 days after the fall began, and the collapse of the mortgage insurers on Wednesday. That led me to write about my 'paranoia' as I stated on Thursday. Now, I don't know how all this will end, but I do know that investors are pulling bids fast from the ABX markets and the mortgage insurance companies. These are NOT normal moves people and it's clear something is going on! Expect another round of uncertainty and media reports on the credit crunch, and the secondary mortgage markets to seize up again leaving no place for holders of these distressed assets to sell positions; which leads me to be very concerned about those entities that are forced to sell to meet debt requirements! I would also expect to hear more bad news from brokerages, hedge funds, banks, and other entities with uncertain exposure to these markets.
For consumers, this probably means that lending rates will tick higher again (or not fall as much as expected with bond yields or future fed rate cuts), lenders will demand higher quality borrowers, underwriting standards will continue to tighten, and fewer loan options will be at your disposal! These are all unavoidable side effects of a credit squeeze, and I'm trying my best to convey to you the warning signs that I am noticing in the tradable markets which may be a clue to the next credit storm.
Next week will be a very interesting week to say the least. Watch out for how the above noted markets follow through on last week's selloff, and whether or not we see some stablization or rebound.
A: I hope I don't need to explain why the words from a company like Caterpillar (NYSE: CAT) may be important from a trickle down confidence perspective to the housing markets! Lets get right to what they said.
* "MANY US INDUSTRIES ALREADY IN RECESSION"
* "US ECONOMIC REBOUND GONE"
* "THE NORTH AMERICAN ECONOMY WILL GROW WELL BELOW POTENTIAL"
* "WEAK ECONOMY WILL ENCOURAGE THE FED TO REDUCE INTEREST RATES FURTHER"
Oh happy day. Included in the report though were comments on the very strong global economy. The thing to note here is that this report goes hand in hand with confidence in the homebuilding sector. While CAT has many businesses, its the demand for heavy equipment that is considered a barometer of sorts for US economic conditions/confidence. We know from the housing reports on Wednesday that builder confidence is at the lowest level in more than 12 years. So, this report is not shocking. But for forward thinkers, CAT is one company whose statements are worth noting for any sign of improvement in heavy equipment demand that may signal renewed confidence in the future of the US economy.
A: Stocks are just off record highs, fed funds target rate is at non-restrictive 4.75%, the US dollar is at record lows and sinking further, oil is bubbling at record highs, inflation is a long term threat, and commodities are at very high levels; hardly an environment that needs rate cuts. But this credit situation is much worse than many people think and I think the fed is cutting rates now so that when they 'kick in' in the future it will be just when we need them to! It's a very confusing time right now, leaving me to focus on the biggest threat to everything: the credit markets.
The fed has two decision meetings left for this year; Oct. 31st & Dec. 11th. As much as I don't want it to happen given inflation concerns down the road, it looks like the fed will cut rates again by 1/4 point at the end of this month.
The earnings for major banks have come out in the past few weeks and they have been nothing short of disgusting!
* Wachovia (WB) - Wachovia Corp. before Friday's opening bell said its third-quarter earnings fell 10% from a year earlier as the bank booked a $1.3 billion write-down as a result of disruption in fixed-income markets.
* Bank of America (BAC) - Nose-diving profits at the company's global corporate and investment-banking group were behind the earnings miss. Profits at the unit fell 93.0%, to $100 million, from $1.43 billion a year ago.
* Citigroup (C) - Citigroup, the global banking giant, said today that third-quarter profit dropped 57 percent after it faced heavy blows to its fixed-income and consumer businesses. "There really is a lot of deterioration happening in mortgages right now," Gary L. Crittenden, Citigroup's chief financial officer, told investors and analysts on a conference call today.
* Washington Mutual (WM) - Washington Mutual Inc. shares fell nearly 8 percent Thursday, a day after reporting fallout from the housing slump drove its third-quarter profit down 72 percent. Chief Executive Kerry Killinger said "increasingly difficult market conditions" are hamstringing the banking industry.
Just to name a few of the big boys. We heard about insolvency cases at Rhinebridge CP and fire sales of assets to meet debt payment deadlines at Tango Finance, Ltd.. But the most compelling case that problems are getting real serious again in the credit markets, comes from the plunge in the ABX Indexes over the past few weeks. Folks, if you want to get an idea of investor sentiment in the subprime mortgage backed securities world, you look at the ABX Indexes! As I have discussed since Tuesday, things are getting very scary! The chart below shows you the selloff in the ABX Index for 'AA' paper. Look at that selloff since October 11th (I inserted red 'y' and 'x' axis so that you can see the low we hit when the credit mess first hit, the recovery, and the recent selloff taking us below the low point hit back in early August)! We are now lower than the bottom hit when the credit crunch first came to the surface back in early August; you know, when the Dow went from 14,100 to about a trading day low of 12,455 or so in a 2 1/2 week period + started the changes for everyone seeking a loan!
The Wall Street Journal Blog, Real-Time Economics, had a post yesterday citing a quote from a hedge fund manager who said:
...Somebody told me this morning, ‘It is starting to feel like early August, and not just because of the weather"...This hedgie insider is referring to the dysfunction going on at the core of the credit markets; the secondary mortgage markets! The ABX Index is real evidence of this distress! On Tuesday, I thought I wrote a great post titled, "Will The Real Hangover Please Stand Up", but it didn't get the reader participation I was hoping for. In that post I stated:
It was clear that equities were drunk on rate cuts, as I posted last week, and I think the street is yet to adapt fully to a world of credit restrictions, solvency issues, global inflation and higher rates. The first credit blip was an 'awakening' of sorts, and for those that think it's completely over, well, stop hitting the snooze button! Is the latest collapse another indication of distress in the credit markets? I've mentioned before that the credit mess is NOT OVER! We are yet to see the full dragging effects of the credit turmoil in corporate earnings and the side effect to investors and the consumer.The DOW is now down 290 points or so from when I wrote that and it's because something is brewing in the very confusing, mis-understood, world of credit! I think another round of woes is very near and it looks like the fed will have to act to limit the ultimate drag on the US economy down the road.
Expect another preventative fed rate cut to help 'forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and to promote moderate growth over time.'; as the fed stated with their last easing!
A: Call me paranoid, but something is going on at the core of the credit mess here. The newest SIV casualties who can't repay their bondholders debts are Rhinebridge Commercial Paper PLC & Tango Finance Ltd.. Why is this important? Its a signal that things are NOT ok in credit land. As you all found out in early August what this means for the consumer in terms of tighter standards, fewer loan options, mandatory doc checks and higher rates, it IS IMPORTANT! It seems we are now in the beginning phase of what may eventually be called the insolvency era. But hey, whats a few billion amongst friends?
The news from Bloomberg:
Rhinebridge Plc, the IKB Deutsche Industriebank AG structured investment vehicle that has lost about half its value, is unlikely to repay all its debt.If Fitch had a "AAA" rating on 83% of this outfit's assets, what does that say for the well-being of all the assets out there that are NOT of the highest credit rating? Truly amazing.
Rhinebridge suffered a "mandatory acceleration event" after IKB's asset management arm determined the SIV may be unable to pay back debt coming due, the Dublin-based fund said in a Regulatory News Service release. Rhinebridge had $1.2 billion in commercial paper outstanding as of Oct. 5, according to Fitch Ratings. As of late August, 79 percent of Rhinebridge's holdings were in the U.S. and 80 percent in mortgage-backed bonds, Fitch Ratings estimated in an Aug. 22 report. Eighty-three percent of the assets had the highest-possible AAA rating, Fitch said.
From the Wall Street Journal:
Thursday, two European funds which as of this summer had about $16 billion in assets were in the process of selling off some of those assets or on the verge of doing so, people familiar with the situation said. Tango Finance Ltd., one of the world's largest SIVs, has been selling assets, said a spokesman for Dutch bank Rabobank, which runs the SIV. It had $14 billion in assets as of July.On a side note, the ABX Indexes are absolutely plunging; and continued the fall again today! Something is cooking as appetite for risk is once again in the process of being repriced. There is just no interest in bonds backed by mortgage securities. Assuming there are more troubled outfits out there, what happens when these guys are forced to mark their holdings to market in a very troubled environment with no bids? As a commenter of CR states:
Tango was set up in 2002 by Rabobank, with the help of Citigroup. The SIV had senior debt totalling $14 billion as of July 13, according to a September Citigroup research report. Based on that report, Tango is the eighth-largest SIV globally.
Tango is repaying debt using so-called repo financing, in which securities are used as collateral for loans, and selling assets, a spokesman for Rabobank said Thursday.
"Over recent months, the SIV sector has been under considerable pressure as liquidity has dried up" in the asset-backed commercial paper market, said the spokesman Jan-Willem ter Avest in an email.
In other words, the market thinks this tranche is toast, it has for months, the argument now is how long until it defaults. Current prices suggest about 14 more months. Is it significant these are trading lower. OF course. But bear in mind current levels suggest the market thinks the BBB-, BBB and A tranches are gone; it is only arguing about the time of death.So when will the time of death be? I have no clue but I do know that the core of the credit markets are undergoing serious distress right now and it's got to trigger some type of adjustment in equity markets in the near future.
If there are any readers of this site involved at structured credit desks, hedge funds, or any other type of trading that is related to this topic, PLEASE COMMENT ON WHAT YOU ARE SEEING?
A: Just a lot going on under the surface here folks that could lead to another round of credit woes when it reaches the top; that is mass media and consumers. Let me just get right into the three reasons why the credit squeeze is not over: ABX markets plunging, Bank of America's Earnings Miss, & Cheyne Finance's PLC insolvency issue.
In a sign that investor sentiment is plunging for mortgage backed securities, the ABX markets are getting whacked again. Take a look at the two charts over on the right here. The TOP chart shows what is going on with "AA" while the bottom chart shows the "BBB" markets. Notice the steep selloff in the past week! For "AA", we are now at the same level we were when this credit squeeze first hit the surface back in early August!
We virtually erased the rebound entirely showing an utter lack of confidence in the secondary mortgage markets. Recall that these ABX indexes are a series of credit-default swaps based on 20 bonds that consist of subprime mortgages. Some show what is going on in higher quality bonds ("AA" or "AAA" rated) while others show what is going on in riskier markets ("BBB" rated). In this case, forget the rating's as its clear the same sickness has infected most of the ABX markets. When you see a steep selloff like this, it's an indication of a decline in sentiment in the mortgage backed securities (mbs) markets. It's entirely possible that this leads to another round of seizing up of the secondary mortgage markets. The link works like this:
INVESTOR SENTIMENT FOR MORTGAGE BACKED SECURITIES (MBS) FALLS ---> ABX INDEXES PLUNGE ---> SECONDARY MARKETS CANT FIND BIDS ---> HOLDERS OF MBS ASSETS CAN'T SELL ---> CAPITAL GETS TIED UP AS LENDERS CAN'T SELL MBS ON SECONDARY MARKETS FOR DESIRABLE PRICE ---> LENDERS HAVE LESS CAPITAL TO LEND OUT ---> TIGHTER LENDING STANDARDS ---> HIGHER RATES AS RISK RE-ENTERS THE MARKET
Again, this happened in late July right before the first credit wave hit which resulted in all the headlines, stock selloff, uncertainty of who holds what assets, and ultimately much tighter lending standards and a pop in lending rates as risk was repriced. Well, its happening again! All you have to do is look at the demand, or lack thereof in this case, for mortgage backed securities.
In a sign that the worst is obviously not over for the major banks, Bank of America (BAC - stock down 3.5%) reported earnings that missed consensus estimates by some $0.26!
From Yahoo Finance:
Bank of America Corp., the nation's second-largest bank, said Thursday its profit fell 32 percent in the third quarter as trading losses and write-downs on a wide variety of loans offset solid revenue growth in most businesses. Earnings from its global corporate and investment bank fell by $1.33 billion, or 93%, as a result of the disruption in the financial markets during the quarter.The structured credit markets, fixed income markets, and secondary mortgage markets (anything to do with credit basically) remains dysfunctional! My concern was how widespread the problem is and whether it will carry over into future earnings of company's exposes. I just don't see how it won't. Expect more bad news from banks, lenders, hedge funds, and brokerages with exposure to the credit markets.
"While the significant dislocations in the capital markets have hurt most participants, we are still very disappointed in our third-quarter performance," Chairman and Chief Executive Kenneth D. Lewis said in a statement.
n the bank's largest consumer unit, which includes America's biggest credit-card business and bank-branch network, net income dropped 16 percent to $2.45 billion.
Thanks to Calculated Risk, who is always on top of this stuff, we get a glimpse of the first insolvency case. According to CR (via Bloomberg's article "Cheyne Finance SIV Won't Pay Debt as it Falls Due"):
Cheyne Finance Plc, the structured investment vehicle managed by hedge fund Cheyne Capital Management Ltd., will stop paying its debts, a receiver from Deloitte & Touche LLP said. Cheyne issued $8 billion of short-term debt to buy securities linked to home loans, according Moody's Investors Service.SIV's are Structured Investment Vehicles.
The receivers declared an "insolvency event," Deloitte said. That means the SIV is unable to pay its debts when they are due, according to its prospectus.
SIVs, with $320 billion of assets, invest in securities from mortgage-backed debt to bank bonds. They finance their investments by selling commercial paper, debt that comes due in 270 days or less, and medium term notes, which mature in nine months or longer.Only two days ago did I write my most recent post about lagging concerns I have; credit restrictions, solvency issues, global inflation, and higher rates. But that wasn't when I started talking about it.
Investors in the past three months have avoided asset-backed commercial paper on concern that delinquency rates on home loans to people with bad credit will continue to rise and hurt the value of mortgage bonds held by SIVs.
SEPT 10th, 2007 ---> The two biggest threats to housing I now see are:
1. Global Growth Slowdown Amid Credit/Liquidity Crisis
2. Insolvency Crisis - Inability to pay back debts; assets no longer exceed liabilities
SEPT 13th, 2007 ---> Lets be frank, America does have a debt problem and both mortgage debt and credit debt has been getting more costly to the holder of late! That means more money out of the pocket of the consumer that could be going towards spending, that is now going towards living.
If there just isn't enough money to pay this off, well then, the debtor becomes insolvent! An insolvency crisis has been brewing for some time and now that risk is causing the rates on loans and other debts to cost more, I worry that the game may end in a rough way down the road. What happens when these debts can't be paid off? What happens when the corporation can't raise enough money to pay its creditors? What happens when assets no longer exceed liabilities
SEPT 16th, 2007 ---> Well the news out of American Home Mortgage on Friday could be signs of the beginning of that insolvency (assets no longer exceed liabilities; inability to pay debts) as a very real concern and that there are a number of classes that could be effected including the consumer, corporations, hedge funds, and any other highly leveraged entity.
This credit story is NOT OVER! We are also yet to see any actual evidence in US economic data that the credit squeeze is hitting the wallets of consumers. I think it's a matter of time. I only hope that the mature and proven resilient US economy will be able to absorb this shakeout like a mild case of fleas!
A: Brutal housing data just got released but I would go as far as say that it should be a sign of brighter times ahead. Builder confidence is at the lowest level in more than 12 years as housing permits slumped 7% to an annual rate of 1.23M units. In order to REVERSE the incredible buildup of inventories across the nation, we need builder confidence and permits to FALL so that less product gets built down the road! While the report is not rosy, its a necessary step to fix the problem. These reports all but guarantee bad reports to come in the near future, setting up what could be a good buying opportunity for longer term investors shopping in distressed markets. Contrarians unite!
**NOTE: When I write posts like this one, tapping into my past experiences (1998-2004) as an equities/options trader, be careful NOT to interpret the discussion as an endorsement of an individual stock or sector. I will NEVER recommend buying or selling individual stocks or sectors on this site! That is up to YOU and your financial advisers. This is not a forum that I will discuss my specific long or short holdings in; although I may blip about getting out of a general position. On UrbanDigs.com, I will only discuss how watching a specific equity sector may be a forward indication of renewed confidence in the industry.
According to CNN Money:
Builders continued to slam the brakes on new homes in September, as the government's latest reading on the battered market out Wednesday showed housing starts and permits were weaker than expected at levels not seen for more than a decade. The pace of housing starts plunged 10 percent to an annual pace of 1.19 million from a 1.33 million rate in August. That was the weakest level in just over 14 years. Economists surveyed by Briefing.com had forecast that starts would fall to an a rate of 1.29 million.I wrote a post a while ago discussing whether the homebuilders are in the process of bottoming out as they sector rebounded nicely from lows; "Are Homebuilders Pricing In A Bottom?". One thing to keep in mind from a stock viewpoint as an indication of future health in the industry, is that these home builders will price in a bottom IN ADVANCE! In other words, without the use of hindsight, if the bottom turns out to be late 2008 for the housing market, then the homebuilders will most likely bottom out around APRIL/MAY of 2008 in anticipation of the near term expected recovery. In the post I stated:
Housing permits, which are seen as a sign of builders' confidence in the market, slumped 7 percent to an annual rate of 1.23 million from 1.32 million in August. It was the lowest level of permits in more than 12 years. Economists had looked for permits to slow to a 1.3 million pace.
Keep in mind that these stocks will price in a rebound 4-6 months in advance of it actually coming; with institutions opening new positions, a bullish longer term analyst call, a ton of short interest, and vulture/contrarian investors getting started.And Citi investment analyst Stephen Kim states:
However, it bears repeating that the home-building stocks have an established history of rallying well before industry fears have finished transitioning into fact.Right now, the news is bad, real bad. The next few reports are likely to be real bad as well. No one is arguing that . But this process sets up an emotional element where the bad news is 'so baked in' and estimates go so low, that future reports could come in ahead of expectations and surprise the street. While that is still some time away, it's getting closer. When I see builder confidence at decade lows, and plans to build new product get cut back significantly, I think that a slowing down in the pace of inventory build is near! Reread that last sentence if it seems confusing.
A: For readers of urbandigs, you know my cravings for macro economics and my interest of understanding how markets relate to each other for future forecasting / investing. It was clear that equities were drunk on rate cuts, as I posted last week, and I think the street is yet to adapt fully to a world of credit restrictions, solvency issues, global inflation and higher rates. The first credit blip was an 'awakening' of sorts, and for those that think it's completely over, well, stop hitting the snooze button!
First, I want to briefly talk about what is going on in the ABX markets, AGAIN! Perhaps this is one of a few reasons why stocks are retreating from record highs. Thanks to Calculated Risk, we can see that the credit markets are again having difficulties finding any bids! Look at the charts on the right, provided in the post, "ABX Indices: Look Out Below". These markets collapsed in February, when the Yen/Carry trade issue popped up, and then again in July, right before the credit crunch awakening hit. Is the latest collapse another indication of distress in the credit markets? I've mentioned before that the credit mess is NOT OVER! We are yet to see the full dragging effects of the credit turmoil in corporate earnings and the side effect to investors and the consumer. This is why the fed aggressively cut the funds rate by 1/2 point, as a lagging action for the future hit! You remember my initial reaction when they took this action, where I stated:
With such a move, I question how bad this credit mess really is on effecting the US economy and continuing the housing downturn!Is the recent selloff in ABX markets a sign that foreclosures and defaults are a problem again? Are we going to get another round of credit worries? After all the write-downs by corporations, will we find out that MORE is yet to come as earnings are hit in future quarters? These are the questions that come to my mind when I see what is going on in the credit markets! But don't take my word for it.
Housing Derivatives Blog has a great explanation of the ABX markets:
The ABX Index is a series of credit-default swaps based on 20 bonds that consist of subprime mortgages. A decline in the ABX Index signifies investor sentiment that subprime mortgage holders will suffer increased financial losses from those investments. Likewise, an increase in the ABX Index signifies investor sentiment looking for subprime mortgage holdings to perform better as investments. This week, all of the BBB- tranches settled on lifetime lows. Three of the four BBB tranches settled on life-of-contract lows.Conclusions? Something is going on under the surface that is yet to hit! With stocks just off record highs, and the inflation pipeline bursting at the seams, what is the fed to do about it? First off, know that the action taken by the fed on Sept. 18th was preventative and has not yet funneled through the economic system. It was an insurance policy taken out by the federal reserve board of governors in case the fallout from the credit squeeze is worse than expected! They don't know how bad it will be yet! But we do know what is limiting their actions: future inflation and price stability!
That is what makes this situation so unique. Oil is trading at record highs, near $88/barrel, on geo-political tensions and supply concerns. Out of that, I would say add in about $10-15/barrel of speculative bets on momentum. Nevertheless, it's a concern at these levels for future inflation and slower growth. In my post, "Hot Numbers & The Misleading Core", I discussed how the headline PPI # came in high, but when you strip out food & energy, came in moderate. Well, we are YET to see the full effect of higher food & energy prices on US economic data! Hard to argue that inflation will moderate in the years to come. The US economy is a mature and resilient monster, and as such, may not suffer as hard as some faster growers internationally; but the story is yet to be finished and we must focus on the last few chapters very carefully to see how that effects monetary policy, the US economy, jobs, and the credit markets. My opinion? I think we are headed for an era of tougher credit, solvency issues, higher rates, and global inflation. How the US economy handles this compared to global economies is what I have no clue on. To put it another way, if the party ends at 2AM, I think it is about midnight right now and I just don't know how bad or how long the hangover will last.
Here are some words from Ben Bernanke from the NY Economic Club:
* "It remains too early to assess the extent to which household and business spending will be affected by the weakness in housing and the tightening in credit conditions...Conditions in financial markets have shown some improvement since the worst of the storm in mid-August, but a full recovery of market functioning is likely to take time and we may well see some setbacks"
* "The further contraction in housing is likely to be a significant drag on growth in the current quarter and through early next year."
* "the FOMC was prepared to reverse the policy easing if inflation pressures proved somewhat stronger than expected."
I expect monetary policy easing to reverse by early-mid 2008, as inflation data finally shows the effects of higher energy, higher commodities prices, higher food prices, and side effects of global inflation hitting home: read Barry Ritholtz's "Exporting Inflation from China" post and Time.com's article "China's next Big Export: Inflation" for a more detailed analysis on this topic.
A: Haven't touched this topic in a while and was asked to put a new post up on some price cuts. Meanwhile, I'm working on making a new portal for you here so you can monitor trends in price cuts over time, a dataset that may be interesting to follow in order to get a better handle on the CURRENT state of our New York City real estate marketplace. For now, here are some notable price reductions from today; I see 28 total price reductions from yesterday (10/15/2007) to 9:30AM today .
515 E 89th
PRICE: $429,000 (reduced $21,000 on 10/15/2007)
SIZE: Alc Studio - size not listed
ON MARKET SINCE: 9/21/2007
51 Saint Marks Place - Apt 11
PRICE: $719,000 (reduced $30,000 on 10/15/2007)
SIZE: 825 sft
ON MARKET SINCE: 8/09/2007
125 Central Park North - 7B
PRICE: $1,199,000 (reduced $96,000 on 10/15/2007)
ON MARKET SINCE: 10/03/2007
817 West End Ave
PRICE: $1,999,990 (price reduced $300,000 on 10/15/2007)
SIZE: 2,179 sft
ON MARKET SINCE: 8/17/2007
105 West 13th Street - 16B
PRICE: $398,000 (price reduction $17,000 on 10/15/2007)
SIZE: 480 sft
ON MARKET SINCE: 2/04/2007
I'll leave it up to you to decide if the current price is now worthwhile and more in-line with current demand and market valuations! As always, I will never work with buyers seeking to view these properties. If you are interested in seeing anything listed above, please contact the seller broker directly for an appointment.
Noah's recent posts on the Jumbo mortgage crunch, new condo closings and new trend to conservative appraisals (yes the Hating has begun) inspired me to write about an up and coming NYC market that is both near and dear to my heart, but also could be both problematic for developers and an opportunity for long-term investors in the near-term.
That market is Long Island City (LIC). Interestingly, my friend Mike Stoler, who is widely recognized as one of the most informed investors on the Manhattan market has recently written favorably (in a long-term sense) on the area in his New York Sun Column of October 4th, and he will be hosting a panel of mega LIC developers on his Stoler Report TV show on October 23rd. I mention this because I think with the primer below and Mike's article and panel potential homebuyers should become very well informed on this emerging NYC market. I have no doubt it will be a winning market from a quality of life and investment standpoint over ten years. But let me be clear here, a large surge of new product - 15,000 new residential and rental units by my count - coming on the market in the next few years in an emerging neighborhood that lacks critical mass and retail infrastructure means I see deals on new construction ahead. Note this mention of sponsor incentives in LIC in the Wall Street Journal recently. Couple this with my opinion that NYC will suffer a mild real estate price downturn, focused on condos and the boroughs and I think a potential homebuyer, buying for utilization ahead of investment may get a good deal on both in LIC in the next 18 months. Okay sorry for the preface, now everything you might want to know on LIC and gulp.... more (sorry for the length).
P.S.1, the world renowned showcase for cutting-edge contemporary artists, was founded in an abandoned school building in Long Island City in 1971. This was the beginning of the cultural re-emergence of Long Island City.
After going dark in the 1920s, the lights were turned back on at the old Astoria Film Studios in Long Island City in 1976, stoking the potential for the industrial neighborhood as a base for film and television production. Within 6 years, Silvercup Studios, Eaves & Brooks Costume Company, Bond Film Storage Service, Variety Scenis Studios and Film Treat International had relocated to Long Island City.
In 1984, Citibank acquired a 2-acre, 82,000 sq ft trapezoidal shaped site in LIC for an estimated $3.5MM ($42.68 per sq ft). This was reportedly 75% cheaper than land in Manhattan at the time. In February 1989, Citibank built the 48-story 1.4MM square foot One Court Square building. Citibank did not intend to take the entire building for occupancy, but was unable to attract other tenants.
In 2000, Michael Bailkin and Paul Travis of the Arete Group tried to buy two larger sites, including a large city-owned garage, at the junction of Queens Plaza and Jackson Avenue. they also bought air rights to part of Sunnyside Yards. These moves prompted the Department of City Planning to devise the Queens Plaza Special District (approved in 2001), which featured incentive bonuses and urban design guidelines that called for broad setbacks, new parks, and ground-floor retail shops to enliven the street. The lots Arete sought have since been sold to Tishman Speyer and were upzoned to Floor Area Ratio (FAR) 12, signaling a dense future for LIC.
In May 2001, MetLife announced that it entered into a lease with Brause Realty for the former Brewster building at 27-01 Bridge Plaza North. The city reportedly provided MetLife with 426MM in real estate tax abatements and other incentives for the move. Two years later, Brause finished an adjacent 12-story, 282,000 sq ft building which was connected to 1 MetLife Plaza. The location of the MetLife Plaza - proximate to a Twin Donut where Rikers Island inmates were released after serving their time - made this a poor choice for an early corporate relocation to LIC. MetLife has since moved its people back to Manhattan - the only real setback in the progress LIC has made in recent years.
In July 2001, the New York City Council approved the re-zoning of 37 blocks along Jackson Ave. The re-zoning was designed to facilitate commercial development and allow new residential projects. It was hoped that this re-zoning sould spur reinvestment and redevelopment, taking advantage of the neighborhood's proximity to Manhattan, outstanding mass transit and potential for significant development.
Th population of LIC is set to explode and demographics are about to change radically. Only 25,595 people lived in LIC as the the 2000 Census. The median household income level was $28,872 or only 68% of the U.S. average, with 27% below the poverty line. There will be more than 15,000 rental and condominium units entering the market over the next four year's according to Guild Partners' project database. Applying the 2000 average of 2.56 people per household to these units implies population growth of 38,400 people or a 150% increase over the next six years or so. The economic backdrop will be inexorably altered as well, considering that the median home value was $187,200 in 2000, while the vast majority of new units being added are selling for $500,000 and up. Commerce in LIC will also be impacted by the growth in commercial activity, as 7MM square feet of commercial space is set to enter the market over the next five years. Significant new office developments that are contemplated or in progress include Citicorp Square II, Silvercup Studios West, Queens Port and Gotham Center.
Planned improvements to street appearance and traffic flows will remake the streetscapes of LIC, particularly its downtown. Jackson Avenue is envisioned as the business district's main boulevard linking Queens Plaza with Court Square. It will also be revitalized with new planted medians, punlic art, pedestrian furniture, street lighting and improvement f nearby open spaces. Renovations to Queens Plaza are to be completed by 2009, with construction expected to start in 2007.
The post-war residential story of LIC is now being written in bold face. Bars and dining are on the upswing including Water Taxi Beach, Waterfront Crabhouse, Smokey's Bar & Grill, Riverview Restaurant/Lounge, Tournesol Bistro, P.J. Leahy's, Cafe Henri, Manetta's Restaurant, Manducatis, Tuk Tuk, Dorian Cafe, Brazil Coffee House, The Creek and the Cave, Dominie's Hoek, Meridian cafe, Lounge 47, LIC Bar, Brooks 1890 Restaurant, La Vuelta and Jackson Ave Steakhouse.
New additions to LIC retail scene include: Briggs & Costa, chish carries an array of imported furniture, household goods, candles, textiles, lighting and art. Several new businesses on Vernon Boulevard include a State Farm insurance office, photo studio/gallery and Blend - a new Latin Fusion restaurant.
Chocolate Factory Theatre
Socrates Sculpture Park
5 Pointz Gallery
Thalia Spanish Theatre
Fisher Landau Center for Art
The Sculpture Center
Several parks offer recreation opportunities in the area including the East Coast Esplanade, Hunters Point Community Park, Queens Bridge Park and Rainy Park. The recently approved waterfront development plan will expand Gantry Plaza State Park into a 1.5 mile esplanade punctuated by relaxation and recreation options. The views of Manhattan from Gantry Park - just one stop from Grand central on the #7 train - are nothing short of spectacular and worth a trip in and of themselves.
Condos and rentals in my favorite corner of LIC, Hunters Point, at The Gantry, City Lights, RiverEast (Rockrose) and 5 SL (Toll Bros.) have been absorbed well to date. In fact 5 SL by Toll Bros. increased prices at least 6 times during pre-sales and has busted through the $1,000 per square foot price point on some units (closing in on Manhattan prices).Still, I think the big backlog of units coming to market will make for some deals to be had. Also note, that sell out for properties nearer to the gritty Queens Plaza area have been slower than in the Hunters Point area and there have been some grumbles on blogs about quality of construction and service levels for otherwise highly publicized developments like the Arris Lofts.
LIC Rising Update - New Site, Many Drawings (Curbed)
LIC Finally Reaches Critical Mass (NY Sun)
$1,000 Per SFT in the LIC (Curbed)
Condo Market Still Hot - In LIC At Least (A Fine Blog)
Bubblemania Returns To LIC (Curbed)
LICBDC Map of LIC Developments (OuterB)
Changing Tides in LIC (Greater New York)
Some New Orleans Flavor Comes to LIC (Long Island City Blog)
The Long & Short of LIC (New Media Newsroom 2007 A)
Image Source: Photo (c) John Roleke; About.com
A: Hot economic data folks. The headline PPI came in high at 1.1%, while excluding food and energy in the so-called core PPI came in at 0.1%. Retail sales were strong. The question in my mind is how much weight should be given to the CORE #'s overall as the fed targets inflation; Barry Ritholtz's take on the misleading core is well known. Fact is, the US economy is a mature, resilient economy and as such I think the day of the CORE # has passed. Inflation is OUT there and the fed's model of focusing only on the core needs to be updated so we don't get hit by the 'cruelest tax of all'. Lets discuss.
First the data. According to Yahoo Finance:
Retail sales posted a stronger-than-expected gain in September as a big jump in auto sales helped offset weak demand for clothing. The Commerce Department reported Friday that retail sales increased 0.6 percent September, compared to August. That was double the gain that economists had been expecting and was also in contrast to reports Thursday of sluggish demand from the nation's leading retail chains.The street interprets the retail sales strength as evidence the slowing housing market is not yet hitting the wallets of consumers. They interpret the headline PPI data as evidence that inflation in the pipeline should be a concern. That is what I want to focus on.
In other news, the Labor Department reported that wholesale prices jumped by 1.1 percent in September, pushed higher by gains in food and energy costs. Excluding those volatile categories, wholesale prices were up by a moderate 0.1 percent.
I was listening to Rick Santelli this morning and he made a statement that I thought was dead on regarding the Core data that the fed seems to love so much. Let me first explain how this works.
Headline # ---> shows the total data for the specific report type
Core # ---> excludes food & energy because these items are thought to be volatile #'s (sudden & sharp movements) that skew the headline # and don't give an accurate look into how the overall economy is doing on the specific report type
*the fed has been known to follow the core dataset more heavily for policy actions
The argument is WHY THE HELL SHOULD WE REMOVE THE FOOD & ENERGY ELEMENT OF THESE DATASETS? You eat right? You use energy to heat your homes & fill up your gas tank right? They are a part of everyday living right? So, why exclude them when monitoring if inflation is in-line or out of control? Here is what some of the fed governors say about this (via Real Time Economics: WSJ Blog):
Cleveland Fed President Sandra Pianalto ---> "The reality of rising oil and commodity prices is evident, and my Federal Reserve colleagues and I have been clear that we believe the impact of these influences will dissipate over time. But until our beliefs are validated by the data, there is a risk that the public’s trust could erode and inflation expectations could move higher."
Dallas Fed President Richard Fisher ---> "Both food and energy have had a steep upward tilt for the last three years in a row. Under those circumstances, I’m personally reluctant to put complete faith in the core measures because they may be removing more signal than noise."
Berkeley Professor Brad DeLong says:
If the rise in inflation is thought to be (a) transitory and thus (b) self-limiting, the Fed would prefer to let sleeping dogs lie rather than hit the economy on the head with a brick.Back to real world Rick Santelli: this morning Rick made a statement to the effect that the Core # is a somewhat old school methodology for a time where a spike in energy and food prices was sudden and temporary. Are higher food & energy prices transitory (not lasting) and self-limiting (limiting its own growth by its actions) as Prof. DeLong says? On the contrary, I would argue that food & energy prices have been high for years now and is part of the new world that we live in as globalization plays a key role and the US economy matures. So shouldn't we put less weight on the core # and NOT exclude these elements that seem NOT to be just a temporary spike?
However, when increases in inflation are confined to (i) energy and (ii) food prices, odds are that the increase is transitory and will be self-limiting. Hence the concept of "core inflation." If the Federal Reserve concludes that the current rise in inflation is transitory and self-limiting, it can point to the core inflation number as a principled excuse for not hitting the economy on the head with a brick.
Look at what is going on in the mind of Axel Weber, a governing council member of the European Central Bank (via Bloomberg):
European Central Bank governing council member Axel Weber yesterday said policy makers might need to increase borrowing costs to keep inflation under control.Wow! A central bank member that actually stands by the stated mandate of the governing body! It's clear that Ben Bernanke & our Fed has chosen economic stability / growth over price stability and inflation; as evidence by the aggressive 1/2 point rate cut at the expense of future inflation in the pipeline and a very weak US dollar.
"If risks to price stability are threatening to materialize, monetary policy can't lose sight of its primary mandate -- even if that means no longer supporting the robust economy or becoming restrictive," Weber, who also heads Germany's Bundesbank, said in the text of a speech in Munich. There may be an "additional need" to raise interest rates, given the "expected acceleration in euro-region inflation over the coming months."
Ive said it before; read my post "Moderating Inflation? I Don't Think So" where I discuss this in more detail. I think the days of ultra cheap money and deflation are over. I think we are headed for a longer term period of higher rates and inflation as the global boom continues.
A: OK, after a long talk with a trusted and very successful colleague of mine who is at a different brokerage firm, he told me of what happened to his deal 3 weeks ago that fell apart. Its an example of in what form the credit squeeze effects us here in Manhattan. To say its an isolated incident and that this situation hasn't happened anywhere else or won't happen anymore, is naive. The key to this story is: THE APPRAISAL DIDN'T COME IN!
One of my stated effects of the credit squeeze has been tighter lender and underwriting standards! If you break that down to its core, then you can include the role of the appraiser in the underwriting process as most lenders utilize a third party appraiser for an unbiased report on the property's market value.
As the secondary mortgage markets continue to not function normally, lenders will keep standards tight and try to make the higher quality loans to their books. The days of no money down, aggressive loans for very weak credit, and aggressive appraisals to meet the # are over! Either you realize that or continue to live in fantasyland; which I hear its very nice.
Here is the TRUE, REAL LIFE example of what happened as I relay the events of the story (the colleague, bldg, and firm obviously will remain anonymous):
I HAD A DONE DEAL. OFFER ACCEPTED, CONTRACT SIGNED, DEPOSIT IN ESCROW, AND BOARD PACKAGE HANDED IN TO THE MANAGEMENT OFFICE. THE BUYER WAS QUALIFIED, AND WAS PUTTING 10% DOWN. THEY WERE PRE-APPROVED FOR A LOAN. THE PROPERTY'S SALE PRICE WAS $565,000, ABOUT $40,000 HIGHER THAN THE LAST LINE COMP FROM 12 MONTHS AGO. THE PROPERTY WAS IN MINT CONDITION AND TOTALLY RENOVATED, BUT ON A LOWER FLOOR WHEN COMPARED TO THE LAST COMP. THE SELLER HAD THE PROPERTY APPRAISED FOR A HELOC 14 MONTHS AGO WHICH CAME IN AT $515,000 W/OUT THE RENOVATIONS. THE BUYER'S LENDER APPRAISER CAME IN AT $505,000, SOME $60,000 BELOW THE PURCHASE PRICE, EVEN AFTER THE RENOVATIONS. THE APPRAISER OBVIOUSLY HAD PRESSURE TO BE CONSERVATIVE AND AS A RESULT THE LENDER WOULDN'T COMMIT TO THE LOAN. THE BUYER GOT SCARED AWAY, GOT HIS DEPOSIT BACK, AND THE DEAL WAS DEAD! I HAVE NEVER SEEN AN APPRAISAL COME IN SO FAR BELOW AN AGREED UPON PRICE.What happened here is a real life example of the tightening of underwriting standards and the change of environment in the appraisal world! Gone are the days of appraisers whimsically 'making the #' so the deal would go through!
This is part of the new world we live in. While it's good for the long run and for the lending industry, its an unavoidable side effect from the drunken party of low rates and lax standards that we had for the past 4-5 years! It's also what led me to write that forward looking post about "New Dev Closings: A Potential Problem" the other day, where I stated:
"WHAT ABOUT ALL THE BUYERS THAT SIGNED CONTRACTS ON EXPENSIVE NEW DEVELOPMENT PROPERTIES BEFORE THIS MESS HIT, AND WILL NOW CLOSE THEIR DEAL IN A LENDING ENVIRONMENT THAT IS TIGHTER & MORE EXPENSIVE?"That doesn't mean the market is going to sh*t and about to experience a 30% decline! That also doesn't mean I'm predicting the market. It means I'm trying to explain to you, like I always do, what is changing in the macro economy, why it's changing, and how it will wind up effecting you and I in this crazy market we call Manhattan real estate! What other brokers, besides Doug Heddings of True Gotham who wrote about his credit crunch casualty, will talk publicly in an unbiased manner about this stuff!
The credit squeeze will reveal itself in a number of ways including:
a) appraisals being much more important & conservative; gone are the days of aggressive appraisals to make the #
b) higher rates reducing affordability as risk is re-priced for mortgages
c) tighter lending / underwriting standards requiring higher credit scores, doc's to back up assets, and employment checks
This is the real world. It has changed. Either you are educated about it or you aren't.
SELLERS & SELLING BROKERS - This market is slower than most would like to admit. Yes, inventory is tight and stocks are at record highs, but buyer confidence has declined a bit and there is some caution in the mindset of the buyer pool. Sellers MUST adapt to this and price properly if they truly need to sell; if there is one constant it's that properties are never worth what an owner thinks its worth! There are two gods that you must appease to get a deal done: the BOARD GODS & the LENDING GODS! Right now, the lending gods are stubborn so think about the ramifications of pricing high and getting lucky enough to procure a buyer willing to pay that price; as chances are the appraisal may not come in causing the deal to go sour unless the buyer picks up the difference!
A: Hey Ben, LETS DO ANOTHER SHOT! Ben Bernanke LOVES Patron Silver. Did you guys know that? You should, because he passed out about a million shots of it to investors when he cut interest rates by 50 basis points a few weeks ago. Now, the stock market is drunk on rate cuts; how bad will the hangover be? I've said it before and I'll say it again, don't expect this to be the start of an aggressive easing cycle! In fact, I would say we have at most one more 1/4 point rate cut in the works with a very good chance that there are no more rate cuts by years end; as the markets are telling the fed to take it easy.
Lets break down the fed minutes released yesterday which served up more tequila shots for the market. By the way, Brian is drunk!
READ FOMC SEPT 18th MIMUTES
* ...the staff marked down the fourth-quarter forecast, reflecting a judgment that the recent financial turbulence would impose restraint on economic activity in coming months, particularly in the housing sector.
* The staff also trimmed its forecast of real GDP growth in 2008 and anticipated a modest increase in unemployment.
* Moreover, lower housing wealth, slower gains in employment and income, and reduced confidence seemed likely to restrain consumer spending in 2008.
* With credit markets expected to largely recover over coming quarters, growth of real GDP was projected to firm in 2009 to a pace a bit above the rate of growth of its potential.
* Headline PCE inflation, which was boosted by sizable increases in energy and food prices earlier in the year, was expected to slow in 2008 and 2009.
* The disruptions to the market for nonconforming mortgages were likely to reduce further the demand for housing, and recent financial developments could well lead to a more general tightening of credit availability.
* Tighter credit conditions were likely to weigh particularly on residential investment and to a lesser extent on other components of aggregate demand in coming quarters.
* Furthermore, recent financial developments had the potential to deepen further and prolong the downturn in the housing market, as subprime mortgages remained essentially unavailable, little activity was evident in the markets for other nonprime mortgages, and prime jumbo mortgage borrowers faced higher rates and tighter lending standards. Moreover, conditions in the jumbo mortgage market were expected to improve gradually over time.
* Although employment probably was not as weak as the most recent monthly data had suggested, trend growth in jobs had fallen off even prior to the recent financial market strains, and participants judged that some further slowing of employment growth was likely.
It's clear that even the fed IS CONFUSED ABOUT WHAT IS GOING ON; I bolded the uncertain remarks above! They really are dependent on future data and don't know the ultimate hit the credit disruptions will have on the US economy! That's what I get from reading these minutes. They acted aggressively in the face of uncertainty in the credit markets to prevent any sudden negative effects to US economic growth. But now that they did that, and markets seem to have stabilized, I don't see how they can act again given that they really are not sure what may be coming in the near term! Recall what I stated when the fed did act back on Sept. 18th in my post, "Fed Acts! Cuts By 1/2 Point!":
The accompanying statement mentions the "return of inflation concerns" and it appears that this VERY AGGRESSIVE MOVE IS A TWO AND THROUGH MOVE! The markets love this with a huge stock rally but how they feel about it when things settle down and they realize that future cuts seem unlikely is yet to be seen!I think the TWO & THROUGH feeling will prove to be very close to right. I hope they don't cut at all at their next meeting, but given their expectations of downside risk with this credit mess and continued weakening employment, they may do one more 1/4 point ease. The bond markets are starting to flatten out as they no longer are looking for aggressive rate cuts. One thing is for sure, this is NOT a long term easing cycle!
My longer term feeling (2+ years) is that we are in a new world of riskier credit, tighter standards, global inflation and higher rates to come! That does NOT mean the economy is tanking and we will experience a 2000 style of selloff. On the contrary, the US economy is a mature and resilient economy and as such should be able to absorb shocks more easily; although growth will be more modest as well. That is why you are seeing a decelaration in jobs growth. Regarding our weakening US dollars, I think the dollar has a better chance of rebounding in the face of fewer rate cuts & global fed easing's and slowdowns! For example, with the Euro at record highs, economists and politicians are now concerned that their currency will impede future growth; so you may see some action to bring their Euro valuations down in the future which will be bullish for the US dollar!
A: I want to discuss something that has NOT happened, is not even in the very near term horizon, but very well may impact the Manhattan marketplace at some point in 2008; buyers with expected new development closings amidst the new credit world. How may it impact our marketplace that has held up solidly in the face of a nationwide housing slump.
Why does this matter? Well...
The secondary mortgage markets (where rmbs, cdo's, cmo's are traded) exist to provide a market for lenders, banks, or specialized firms to sell existing holdings in order to free up capital for new loans. That secondary market is still seized up, although I'm hearing not as bad as it was a few months ago. Nevertheless, if investors are still not willing to buy these securities due to the changing risk associated with it, the lending world will continue to experience a drying up of liquidity resulting in tighter standards, fewer loan options, fewer lenders in general, and less $$$ to provide to the consumer via a home loan!We still don't know how this will play out and I'll show you how I can tell these markets are still not functioning properly. First, look at this incomplete list of new developments that are awaiting their CofO so that they can start closing the deals:
NEW DEVS / CONVERSIONS COMING OCCUPANCY'S: 75 Wall St, Ariel East, Ariel West, 205 W 76th, Chelsea Stratus, 157 Hudson St, 215 W 88th, 517 W 46th, The Link, The Element, The Platinum, Sky House, 166 Perry, 200 West End Avenue, The Ansonia, Avonova, 10 West End Ave, 520 W 19th, 447 W 18th, 246 W 17th, 39 E 29th St, 459 W 18th, 225 E 74th St, The Lucida, The Brompton, 265 W 122nd, Chatham 44, The Laurel, The Stanhope, 300 E 79th St, 212 E 47th, 170 East End Ave, 1200 Fifth Ave, The Rushmore, The Avery, Linden78, 100 11th Avenue, SoHo Mews, Artisan Lofts, 45 John St, Tribeca Summit, 330 E 57th, 240 PAS, 225 E 34th, Gramercy Starck, 55 Wall St, 5 East 44th St, Park Avenue Place, Thorndale, Hit Factory, Cocoa Exchange, Kalahari Condo, Miraval Condo, 650 Sixth Avenue, The Clement Clarke, William Beaver House, BE@William, 80 John St, 106 W 116th St, and on and on...
*ran out of time. I couldn't check on every one of these and this isn't nearly close to the full list!
I don't need to explain why Manhattan real estate has held up (just read this, or this, or this), but I do like to discuss dynamics that may come into play down the road! Why? It's just more fun to me than to read a lagging quarterly report about what happened 3 months ago, thats why!
Since the credit squeeze made it to the surface (for the media that is) in mid July, there have been a number of adverse side effects as the investment world changed it's appetite for risk:
...just to name a few. The psychological effect however is still lingering as in my mind I cannot understand how 4 years of ultra low rates and lax lending standards can be self-corrected in 3 months time; but hey, thats just me. That bolded items I listed above are what scares me.
What no one wants to discuss is:
WHAT ABOUT ALL THE BUYERS THAT SIGNED CONTRACTS ON EXPENSIVE NEW DEVELOPMENT PROPERTIES BEFORE THIS MESS HIT, AND WILL NOW CLOSE THEIR DEAL IN A LENDING ENVIRONMENT THAT IS TIGHTER & MORE EXPENSIVE?Will this become a problem? I don't know, but it's something I'm watching very carefully; are you?
You can tell that the mortgage markets are still not functioning by the continued widening of spreads; in this case between Jumbo & Conforming loan rates. Thanks to Calculated Risk, I can see the disconnect in Jumbo Loan Rates (which is what a majority of new dev purchases will require to close) in relationship to the Conforming Loan Rates; notice the widening spread when the credit mess hit showing dysfunction in the market!
Whenever you see the spread disconnect this much from the norm, it is a sign of distress in that particular marketplace! We saw the same thing with yield premiums in the asset back commercial paper market as well when that seized up; I wrote about that back in my posts "Its a Risky New World: Credit Spreads" & "Markets Forcing The Fed Into Rate Cut":
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 investors; i.e. higher yields. This is causing the spread between the two to widen.I know what you are saying, "stocks are at records, the fed is cutting rates, everything is wonderful and will always be wonderful, ahhhhhhh"...well, sure if you live in fantasyland. But we are not messing around on this site. We need to be critical of what is really going on in the world to understand WHY things happen that effect our local housing markets! Look at what Fannie Mae said about the continued distress in the Jumbo credit markets (via Weekly Commentary):
"... lenders reported a lack of investor demand for high credit quality jumbo mortgages and other mortgages not eligible for agency purchase. This dislocation pushed the cost of prime jumbo financing significantly higher relative to rates on conforming loans.Hmm, lets be creative here for a second. What happens to all those new development buyers that are currently in contract, waiting for building completion to close, if the jumbo credit markets continue to be in distress and there is a much different lending world than when the original contract was signed?
In mid-August this spread spiked to above 90 basis points after fluctuating between 15 and 25 basis points for the prior year-and-a-half (about equal to its historic spread). This spread has moderated somewhat over the past couple of weeks, however, and fell below 80 basis points in late September, suggesting some modest improvement in the market conditions for prime loans with balances above the conforming loan limit. Even so, the spread remains historically wide -- suggesting that the prime jumbo market remains in distress."
What if the buyer doesn't have the doc's to get the commitment, if lending/underwriting standards have tightened so much in the past 3-6 months? What if the buyer gets a much higher interest rate than was originally anticipated? What if the bonus doesn't come in as expected? What if they lose their job? What if the property becomes unaffordable? What if the appraisal doesn't come in and you signed a contract without the financing contingency?
While these are valid questions, they are also on the doomsday side and must be looked at with an open mind; after all, if it wasn't for new dev units we would have an extreme shortage of supply! This is a very wealthy city, with great salary's / bonuses and plenty of qualified demand. But with some 17,000 - 20,000+ units set to close in the next 1-2 years or so, questions should be raised given the change in the macro environment and re-pricing of risk in the mortgage markets!
Strange how this topic has not been raised in the major media? Too negative maybe?
A: Lovin it! Inman News last week named their list of 25 of the most influential bloggers and I'm very honored to have made the list! Inman has a great real estate conference called Connect that is held twice a year in San Francisco and New York City. I will be speaking at this year's conference with Barry Ritholtz, of the Big Picture, Professor Nouriel Roubin, of RGE Monitor, and hopefully one or two more highly influential economists and bloggers. I can't tell you how ecstatic I am for this panel that I am proud to say helped co-ordinate! The Connect NYC conference will be held JAN 9 - 11th, 2008 at Marriot Marquis at Times Square. You can register here early!
First, the honor of being named in the Top 25 Most Influential Real Estate Bloggers:
BROKER & AGENT BLOGS
Teresa Boardman - ST PAUL REAL ESTATE BLOG
Ardell Della Loggia - SEARCHING SEATTLE BLOG
Marlow Harris - 360 DIGEST
Doug Heddings - TRUE GOTHAM
Noah Rosenblatt - URBANDIGS
And some of the other notables that I have met in the past and who do great work with their blogs!
Dustin Luther - RAIN CITY GUIDE
Greg Swann - BLOODHOUND BLOG
Todd Carpenter - LENDERAMA
CR & Tanta - CALCULATED RISK
Jonathan Miller - MATRIX
Kevin Boer - 3OCEANS REAL ESTATE
Joel Burlesom - FUTURE OF REAL ESTATE MARKETING
Pat Kitano - TRANSPARENT REAL ESTATE
Jim Cronin - REAL ESTATE TOMATO
Joe Ballgame & Rudy Love - SELLSIUS
Jonathan Butler - BROWNSTONER
Adam Koval - SOCKETSITE
David Gibbons - ZILLOW BLOG
Glen Kelman - REDFIN
Peter Coy - BUSINESSWEEK BLOG
Pat Killelea - REALTY PARSER
Keith - HOUSING PANIC
John Cook - VENTURE BLOG
Second, I am honored to have worked with the man, Brad Inman & Michelle over at Inman News, for the past few months trying to add a great element to the Real Estate Connect conferences. I thought, wouldn't it be great to bring some of the best minds together to try and get a debate going covering the macro economic topics that are powering the national real estate marketplace; both bull vs bear sides! I'm glad to say that it looks like we have Barry Ritholtz of The Big Picture & Professor Nouriel Roubini + yours truly on the panel so far! It should be both a very educating and entertaining hour with this talent on the stage!
Hope you guys can make it to Real Estate Connect NYC in early January!
A: Every macro and financial site/blog out there is reporting on todays jobs report and what it tells us about our economy, future fed moves, a soft landing, etc.. While the stock market rallies a bit on what appears to be a solid report with upward revisions, when you break it down it really is further proof that the US economy is a mature one with decelerating job growth! I just don't see this report being as strong as the headline seems. The emotional element is at play here (with a collective sigh of relief from traders that economy is not tanking), and I think this makes the next jobs report even more important for just how aggressive the fed will get with policy. For the upcoming meeting, I think there is a 50/50 chance of either a 1/4 point rate cut or NO CUT AT ALL; time/incoming data will tell whats after that.
Lets just see what I am talking about when I say the US economy is mature and as a result just can't grow as fast as some Int'l economies. Here is a chart showing the deceleration in jobs creation since January of 2006 (via Econoday):
NOTE: During the mature phase of an economic expansion, monthly payrolls gains of 150,000 or so are considered relatively healthy. In the early stages of recovery though, gains are expected to surpass 250,000 per month.
It's pretty clear that jobs growth is decelerating, but if that line chart is not enough, here is a breakdown of AVERAGE MONTHLY NON-FARM JOBS GROWTH FOR THE PAST FEW YEARS (via bls.gov statistics):
2004 = 172,000 jobs per month created
2005 = 212,000 jobs per month created
2006 = 189,000 jobs per month created
*2007 = 122,000 jobs per month created
*includes monthly jobs data up to September
So, its very clear that jobs growth is a concern and the questions that I have are:
a) do these jobs reports include the full effect of the recent credit squeeze
b) how long will this deceleration in jobs growth last for
c) will further revisions cloud recent months data
d) will big corporate write downs / job cuts last only 1 quarter OR spread to later quarters
e) soft landing instead of a recession
While the headline of today's jobs data sounds good, it really isn't! When you break it down like this, it's easy to make a case that the fed has good reason to cut the feds funds rate again at their next meeting, leaving future cuts after that up in the air. The bond market clearly sees today's jobs report as more bullish than expected and something that will limit the # of rate cuts that were expected; this interpretation is clear with bond yields rising as a result of fewer anticipated rate cuts. The US dollar is also seeing a bit of strength with this jobs report; as fed cuts rates, the dollar weakens as investments in other asset classes, like stocks, become more attractive.
Lets see what the blogoshpere thinks about this report and the changing macro environment:
Barry Ritholtz (The Big Picture)
The most interesting news in the report was the Average Hourly Earnings -- they rose 0.4% (0.1% more than expected) -- and were up a substantial 4.1% y/o/y. This may improve the outlook for consumer spending, but also reduces Fed Cut possibilities.Bill ??? (Calculated Risk)
The US Dollar is rallying on the news, implying the odds of another Fed Cut are lowering. Rate cut odds for a 25 bps cut at the October meeting have fallen to 52% (from 72% as of yesterday). The odds of a total of 50 bps by yr end is down to 16%, from 40% yesterday.
Overall this is a stronger than expected report. Even the projected downward revision (that will be included in the January report) is smaller than expected.Jordan Kahn (In The Money)
This type of job growth is still below trend for a growing economy, but it is much better than the bears had feared, and not indicative of an economy on the brink of recession.
The bond market agrees, and yields on the 10-year are up this morning to 4.61%. But this is still below the fed funds rate of 4.75%.
A: I just want to give a plug to my friend and fellow broker Douglas Heddings who runs TrueGotham.com, another real estate blog who talks about the state of the market, dirty agent tricks, buyer tips, etc.. He has been working on a new reporting product that mixes his knowledge of the NYC real estate market, current problems/issues, and experts to provide their opinions on the topic at hand. TrueGotham TV launched today and I just wanted to bring it to your attention! Good luck Doug!
I spent alot of time playing around with the idea of investigative reporting myself until I realized how time consuming and hard work it is to produce a high quality video! Recall my reporting on The Cielo Condo & Buying With In-Building Competition. So, when I see what Doug is doing here I totally respect and appreciate the time it takes to make something like this so that buyers and sellers can get more information!
MYSTERY BEHIND TOTAL SQUARE FEET MEASUREMENTS
A: Lets mesh some group stock performances with recent housing data and environment to see what may prove to be a good time to start buying distressed properties in the hardest hit but fundamentally solid local markets!
Look at the stock performance of the homebuilders in the past week; which had 15-25% gains in the sector! A great bounce that is squeezing the shorts now. Keep in mind that these stocks will price in a rebound 4-6 months in advance of it actually coming; with institutions opening new positions, a bullish longer term analyst call, a ton of short interest, and vulture/contrarian investors getting started. Is this renewed confidence or another dead cat bounce? If it is renewed confidence in the homebuilders, I wonder if the time is ripe to start nibbing at fire sale deal's of existing/new homes in markets that have been killed in the past 2 years! You can never pick the bottom, but you want to buy on the way down when news is real bad and you can still negotiate the price down more. When inventory trends do reverse course, and confidence regains, it will be too late to have that control over the seller. Just a thought!
Remember my two previous posts (Realizing When To Re-Enter The Market & Spotting A Bottom In Local Housing) on spotting a housing bottom; since we won't know where a bottom is until its already happened! Lets revisit the main points:
Inventory Increases Slowing - Look to buy when inventory levels have topped out, reversed course, and are into a correction to more normal levels.
Affordability - Local economy needs to be sound with tight jobs market. If you can't get a job in that town/city, then your not alone and afordability of homes will be pressured.
Buyer/Investor Confidence - Look to buy when buyer confidence shows signs of bottoming and bad news gets absorbed easily. This may be a sign that the road in the future will be brighter, or not as bad, as originally expected!
Interest Rate Policy - Look to buy when the fed nears the end of a rate easing campaign and interest rates are nearing their bottom. What if this easing cycle will be over right after it began? If fed starts raising rates, its because economy is strong and inflation is renewed concern!
Time on Market - Look to buy when time on market tops out, starts to reverse course and head back to the norm.
Well, we are seeing renewed confidence / interest in the homebuiders after another awful report came out, but brighter times may be in sight. Plus there is huge short covering pressure adding to upside and a bullish call by Citi Investment analyst Stephen Kim stated (via Marketwatch.com):
"The woes in the U.S. housing sector have been extensively documented, and we do not pretend that any near-term relief in industry fundamentals is in sight," Kim added. "However, it bears repeating that the home-building stocks have an established history of rallying well before industry fears have finished transitioning into fact."Thoughts running through my head are:
a) how many more limited-time fire sale's will there be from builders to help reduce inventory?
b) how will bulk REO's (real estate offerings - I'll post on this in a few days) help reduce existing foreclosure inventory? Thats a hot market I hear right now!
c) will contrarian investors interpret a bounce in homebuilder index as a catalyst to start buying existing deals for longer term investments
d) if fed ENDS rate cuts or raises rates, then US economy is handling nationwide housing slump well
e) will secondary mortgage markets repair themselves, leading to looser, but still tight lending standards
A: You can't have them both! Interesting topic to touch on as we head closer to Friday's all-important jobs report! That report will be a leading indicator for the fed funds futures market to re-price expectations of future moves by the fed! While the stock market rally of the past few weeks has been based on one part by more expected rate cuts, what is it that the markets really want? Do we want stronger data showing a resilient US economy holding on and not as bad as first thought OR do we want weak data that will give the fed more leeway to cut rates in the future? With stocks already pricing in a few more rate cuts, should that data come in stronger than expected we may get a selloff as equities take back future rate cuts!
It's strange to have an environment where weaker economic data will be viewed as a buying opportunity in advance of future fed rate cuts! But then again, there is nothing normal about how stocks move. There is an emotional element at play here, with bad news being absorbed quite well and expectations for an accommodating fed. To understand what I mean, look at how the markets reacted to the news on Citigroup, Netbank, and UBS in the past week:
CITIGROUP ---> Admits a $5.9B loss and write-down due to subprime related mortgage market investments gone bad; stock gained 2% on news
UBS ---> Admits a $3.4B hit to earnings; stock gained 3.2% on news
From USA Today:
Two of the world's biggest banks, Citigroup (C) and UBS (UBS), announced multibillion-dollar third-quarter write-offs Monday. But instead of dampening spirits, the red ink stoked enthusiasm among investors who appear to believe that the meltdown in the subprime mortgage market is over.
The stock of Citigroup, which announced a $5.9 billion write-down, closed at $47.72, up more than 2%. The stock of Zurich-based UBS, which announced a $3.4 billion hit to earnings, gained 3.2% for the day.
NETBANK ---> Internet banker files for bankruptcy as regulators take over accounts. The bank's failure this year was the result of margin compression from an inverted yield curve, fewer mortgage originations, and demands to repurchase delinquent loans, according to a bankruptcy court filing.
Lets go back. When this credit squeeze first hit the media and became a big headline risk to stocks, I wrote a post titled "Should The Fed Step In & Save The Credit Markets?", and dug deep to my past experience trading and following the markets to state very clearly:
LET THE COMPANIES WHO MADE BAD BETS STEP UP TO THE PLATE, PUBLICIZE THEIR LOSSES, TAKE BOOK VALUE & LIQUIDATE BAD HOLDINGS IN ORDER TO WRITE OFF THE LOSSES! ANNOUNCE A RE-STRUCTURING EFFORT AND PUBLICIZE EXACTLY WHAT IS BEING DONE TO FIX THE PROBLEM & BRIEF INVESTORS ON THE FUTURE DIRECTION OF THE COMPANYThis is why the banking and brokerage sectors have cheered the coming out of awful earnings news from Citigroup & UBS. Stock markets obviously feel this credit mess is contained and that the fed is there to help if things get bad. But what if that help is short-lived or limited due to a US economy that is not as weak as expected? It's a great question that will be answered on Friday with the jobs report: STRONG JOBS and there goes the expectations for aggressive rate cuts; WEAK JOBS and that should solidify at least another 1-2 rate cuts by years end. You know my thoughts with longer term inflation out there and the currency, stock, and commodities markets virtually telling the fed to take it easy with more cuts!
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.
What would you rather have? STRONG ECONOMY or MORE RATE CUTS?
AVONOVA, a pre-war condo conversion on the corner of Broadway & 81st, recently opened its doors for a broker's open house tour. Here are the details...
219 W. 81st St
Built in 1911
12 stories, 117 apartments
Dec 2007 / Jan 2008 closings
Some rent stabilized / rent controlled tenants remain, so only 40 apts are being released at this time. Market rate tenants are being offered the option to buy, so as leases come up, more apartments may become available.
Owner Storage & Bike Storage
The usual Pre-War details (9.5 - 10 foot ceilings, crown mouldings, hardwood floors)
Washer/dryer in all units
Window a/c units
1 bedrooms (544 - 849 sq ft) - $735,000 to $1,165,000
6J is $755K for 544 sq ft. CCs are $364; RE Taxes $177 (Total is $542, less than $1/sq ft)
2 bedrooms (1,006 - 1,518) - $1,465,000 - $2,045,000
8D (2 bed, 2 bath) is $1.98M for 1,494 sq ft. CCs are $956 and RETs $465 (Total is $1,422)
3 bedrooms (1,763 - 2,117) - $2,175,000 - $2,995,000
6K (3 bed, 2 bath) is $2.975M for 1,763 sq ft. CCs are $1,388. RETs $676.41 (Total $2,064)
AVONOVA's apts have windows in almost every room (including the baths) and the windows are larger than in many other pre-war buildings. I was not the only agent to comment that the master baths have "too much going on" from a design standpoint. There must be 5 different types/textures/colors of tile, marble, and mosaic glass work, which for me was just too much for the eye.
Toes Says: Please take note that some bathrooms do not include a shower door or shower rod. It is left up to the buyer to install what they prefer.
I heard mixed reports from different sales agents at the building as to whether the developer is going to redo the hallway floors. The current hallway flooring looks like a pre-war rental building's floors, not floors for a luxury condo.
Keep an eye on how much of this building is going to be owner-occupied. With so many rent stabilized/controlled tenants, if there isn't a high enough owner-occupancy rate, it is likely that in the current credit environment some lenders may not finance in this building.
My favorite quote from the marketing brochure, "The kitchens in AVONOVA present owners with a quandry: to cook in them or to gaze at them." BARF! Yes, the kitchens are great (definitely plenty of cabinet space although some of the cabinets are not very deep & will quickly become "junk drawers"), but I highly doubt anyone is going to sit around gazing at them.
Overall, the brand new luxury condo feel had started to wear me down a bit, so AVONOVA was kind of refreshing. After you've seen 20 new developments, most of the buildings that are being built from the ground up feel like a big, stale box. So many buildings have 200+ apartments that have exactly the same cookie-cutter layouts & finishes. The kitchens and baths are exactly the same size in the studios as in the one bedrooms and sometimes as in the two bedrooms (cheaper for the developer to have to order the same size appliances and cabinetry). And many new buildings feel like large, impersonal hotels. So there is something charming and comforting about a pre-war building with new finishes.
A few months ago, I had a $1M+ UWS (70s - low 80s) one bedroom buyer who wanted a pre-war building but he didn't have the reserves to qualify for a co-op. Since co-ops make up almost all of the pre-war inventory on the UWS, there were only 3 pre-war condos on the market at the time in his price range! With so few pre-war condos available on the Upper West Side, AVONOVA should do well.
Looking forward to hearing your comments!
A: Cmon now, you can't expect me to let such a solid report on Manhattan real estate come and go without a little attention here! As far as I can see, the year-over-year reports from the likes of Elliman, Corcoran, Halstead, & Brown Harris Stevens are solid! My concern is the lagging nature of these reports in the media and that the true state of the Manhattan real estate market has undergone a psychological shift which is NOT reflected in any of these numbers. Consider me cautiously optimistic as I await the next report that will better show how our housing marketplace handled the recent credit squeeze!
With that said, lets review this bullish report on Manhattan real estate that in my opinion is a direct result of the extremely tight inventory over the past 3 months!
According to CNN Money:
Prudential Douglas Elliman reported that inventory in Manhattan fell 31.7 percent to 5,204 units in the third-quarter from a year-ago total of 7,623 units, while units stayed on the market for 123 days, faster than the 150 days seen in the same period last year.So what do we have here, lets do some text based math:
The broker reported that the number of sales increased 65.6 percent this quarter to 3,499 units as compared to the 2,113 units sold a year ago. In similar quarterly reports from Brown Harris Stevens, Halstead Property and the Corcoran Group, all three brokers also reported shrinking inventory.
SHRINKING INVENTORY + SHRINKING TIME ON MARKET + RISING # OF SALES = SOLID BUYER CONFIDENCEI discussed in a past post that buyer confidence / inventory is ruling Manhattan prices right now and the threats to changing this trend in the future! I stated:
It all comes down to the buyers when evaluating the strength of a local real estate marketplace. Are there buyers out there? Do they have choices or not? Do they have buying power? Do they have confidence in the local housing market? Are they motivated to buy? These are extremely valuable questions that I wish I had real data on, but I don't; so I'm left to speculate. The answers to these questions in large part will determine the effect on local inventory and pricing. And that is where you can stop and analyze a local market for its strength or weakness. When buyer demand is strong, choices are limited, buying power is prevalent, confidence is high, and motivation is rising then I'm willing to bet that inventory in that local marketplace is very tight.This report confirms my inventory reports (Sept 24th, Sept 11th, Aug 23rd, Aug 9th) but its the sales volume that I question in the upcoming quarterly report for the months of August, September, & October. My gut is telling me that sales volume will slow resulting in a slight build of inventory for these months!
This hasn't happened yet and we will not know until reports come out in the media in December/January! My feeling is that buyer psychology / confidence has negatively shifted a bit with the headlines from the credit mess, tighter lending standards and rising loan rates ultimately resulting in some hesitation from those buyers that either:
a) weren't sure whether to rent or buy
b) are heavily reliant on bonuses as significant portion of annual salary
c) first time buyers
d) employed in financial sector; especially hedge funds, derivatives, structured credit, debt / fixed income positions
What I don't know is the percentage of the entire buyer pool that fits into these categories. Let's see how it plays out in a few more months especially after the fed's action to increase liquidity / confidence sparked a new stock rally, and I'll revisit this post for a follow up. If Manhattan proves to emerge from these past 3 months with continued shrinking inventory, continued rising sales volume, and falling time on market then there will be little argument against the near-to-medium term strength of this housing market!
A: Barry Ritholtz often argues about the flaws in the datasets that the fed uses to monitor inflation. These statistics, issued by the BLS/BEA/COMMERCE DEPT, has shown inflation as moderating here at home which allowed the fed to act aggressively in preventing the US economy from falling into a recession with their 1/2 point rate cut a few weeks ago. But I and many others out there have argued for some time that inflation IS out there, there is now a buildup of inflation in the pipeline, and to ignore food/energy in the so called CORE datasets is to turn your head away from reality! You want to see inflation? Look at what Dean Foods CEO said today about the current environment to get an idea about what it really is like out there!
First, why do I talk about this if this is a Manhattan real estate site? Here's why:
INFLATION RISKS ---> COMPANIES RAISE PRICES OF GOODS AS COSTS RISE ---> COST OF LIVING INCREASES ---> SPENDING POWER DIMINISHES ---> FED MUST RAISE RATES TO COMBAT INFLATION ---> AS RATES RISE, THE COST OF DEBT RISES ---> BOND YIELDS RISE TO REFLECT THIS MACRO ADJUSTMENT ---> LENDING RATES & CREDIT RATES RISE ---> AFFORDABILITY GOES DOWN
If you don't understand the macro effects of a high inflationary environment, then you probably will have a hard time connecting the dots to how it can ultimately trickle down to investment classes like stocks or housing. It's all connected.
THE FED WAS ABLE TO CUT RATES TO 'FORESTALL ADVERSE ECONOMIC EFFECTS' BECAUSE:
a) inflation data showed moderation (while some argue about the makeup of these models)
b) jobs data showed weakness indicating an adverse effect on US economy
c) housing woes continued to pose threat to overall economy
But I ask? HAS INFLATION REALLY MODERATED? Look at energy costs, look at overall housing prices in the past 5-6 years, look at food prices, look at health care costs, look at commodity prices showing whats in the pipeline! To say inflation is NOT a problem is utterly ridiculous! It's this train of thought that leads me to believe the fed is VERY CLOSE to being done with rate cuts, and that we are in a longer term trend of rising rates. I mean, since when is a fed funds target rate of 4.75% restrictive to economic growth?
Here is real world evidence of inflation via the CEO of Dean Foods:
"The third quarter has been particularly challenging as dairy commodity costs have risen sharply, hitting all time highs," said Chairman and CEO Gregg Engles. "This is by far the most difficult operating environment in the history of the company, reinforcing the importance of the long-term strategic initiatives we have underway."Now I understand this is one company and that we can't predict something as dynamic as 'inflation trends' from any one CEO. But this is just another example of how government statistics don't reflect what is going on in the real world. The fed loves to watch the CORE PCE as a measure of inflation, which measures prices paid by individuals for goods other than food and energy; here is that chart going back to the late 1980's:
The company, which makes products such as Silk soy milk and International Delight coffee creamer, said that increasing commodity costs have materially reduced profits. They also have hurt sales as customers react to higher prices
Recall the inflation problem of the late 1980's, as indicated by Core PCE # above 4, and how the fed raised the fed funds rate (the same one they just cut to 4.75% two weeks ago) to just below 10% to combat runaway inflation. While I am not predicting such an extreme, I do think inflation in the pipeline is a problem. Its not on the surface yet and the fed is clearly taking a 'wait and see' attitude about this problem. If the problem doesn't go away, rates will HAVE to go up.
Is inflation out there? Do you think your cost of living has increased in the past 5 years OR no? Here are some others take on this incredibly confusing situation.
There's No Inflation: If You Ignore The Facts - (Newsweek via The Big Picture Link) -
Imagine that a cardiologist told you that aside from the irregular heartbeat, the stratospheric cholesterol count and a little blockage in your aorta, your core heart functions are just fine. That's precisely what the government's cardiologist - Ben Bernanke, chairman of the Federal Reserve - has just done. The central bank is supposed to make sure the economy grows fast enough to create jobs and make everybody richer, but not so fast that it produces inflation, which makes everybody poorer.Speechless on Core CPI - (The Big Picture) -
Catch that bit about "core inflation"? That's Fedspeak for: inflation is under control, unless you look at the costs of things that are going up.
I wonder what people will be saying when the September CPI comes out. It will be substantially higher due to soaring energy and food prices this month. Oh, wait, that's not in the core. (Nevermind). Gee, I wonder why the Fed prefers Core PCE as an inflation measure -- instead of what is occurring in the real world?Picking an Inflation Measure and Sticking With It - (Portfolio.com) -
The Fed has said, quite consistently, that the measure of inflation it cares about most is core inflation, as measured in nominal dollars, ex food and energy. You can argue with that decision, but once they've made that decision, I'm not a fan of suddenly deciding when food and energy prices rise that, oh deary me, they do matter for monetary-policy purposes after all.CPI's Lie on Household Inflation Doesn't Wash - (Bloomberg) -
The U.S. consumer price index continues to be a testament to the art of economic spin. Since wages, Social Security cost-of-living increases and some agency budgets are tied to it, the government has a vested interest in keeping it as low as possible.The Llama of Lame - (Long or Short Capital) -
Yet your real cost of living -- what you keep after taxes, medical bills, college expenses and other household costs -- is probably much higher than the 2 percent annual rate the government reported in July, showing a slight decline.
First of all, as far as I can tell food and energy are the only two items you should NEVER exclude from an inflation index. Tell your wife and kids they can have everything in the consumer basket except food and energy and you will quickly see that they are actually the two MOST important and indispensable factors in the CPI.Interesting food for thought from those that are on this side of the argument. I hope I'm wrong. One last thing, there is an argument that housing is deflating and is another example of how there are no inflation problems out there. There is one major item that is being left out of this affordability equation: RISING RATES! Housing has underwent an unsustainable rise in pricing over the past 5-6 years; over the past 3 years, rates have been rising offsetting any recent decrease in prices (prices go down, but cost of loan goes up). As home prices across the nation correct towards the norm, any affordability gained has been wiped out by a combination of rising rates and side effects of the recent re-pricing of risk / dysfunction in the secondary mortgage markets!
This will come back to bite you but not nearly as much as it bites us. The cheaper the dollar gets the more expensive all our imports get, inflation will rise faster than you can statistically manipulate it and when that happens expected inflation goes through the roof (which as you yourself have pointed out many times is by far the most serious threat to economic existence). Then the only way out will be interest rate increases as swift and severe as all the cuts have been.
I wouldn't consider the housing correction as deflationary because the cost of living has not declined in lock step with pricing. Where I do see deflation is in consumer electronics, apparel and autos; hardly anything that I would consider as essential to daily living!
Just an update for you guys. I usually spend 3-4 hours a day researching / writing for UrbanDigs.com and then the rest of the day with my clients. But for past few months, I've been working diligently to bring you guys a better site with more functionality and tools for analyzing the Manhattan real estate market. The site is about 65% ready and I am spending my time with my designers/programmers daily to get it ready for launch. The rest of the day I must spend with clients and on showings. Please expect light postings for the next few weeks until the new site launches!
Hopefully in the end you guys will appreciate it!
211 Madison Ave
Morgan Court has been around since 1985. The developer, Perlbinder Realty Corporation, sold 19 of the apartments when the building first opened and kept the remaining units as high end rentals – until now. Perlbinder is gut-renovating their holdings in the building and selling them.
40 units are for sale for IMMEDIATE closings
Floors 3 – 14 are one bedrooms. Each apartment is a half-floor.
Floors 15+ are duplex 2 bed, 2.5 baths
For the next five condos that sell, the developer will pay the city and state transfer taxes (approximately 1.8% of the sales price of the apartment)
Buyers can choose from two different finishes & the developer will build out closets to buyers’ specifications if they purchase soon
Feature washer/dryers, garbage disposals, and wine coolers
Even the one bedroom baths have double sinks
Include all the usual high end appliances: Bosch, Sub Zero, Viking, Kohler
Most with balconies or terraces
Garden with reflecting pool
Full time doorman, concierge
Building staff brings your mail to your door
They also accompany food delivery guys to your apt to avoid those annoying menus under your door
5BT is 1,095 sq ft for $1,648,500 with common charges of $1,269.02 and real estate taxes of $861.71
12AT is 1142 sq ft for $1,695,000 with CCs of $1,380.35 and RE Taxes of $973.58
2 Bed, 2.5 Duplexes
14AT is 2321 sq ft for $3,195,000 with CCs of $2,805.31 and RE Taxes of $2,001.36
18AT is 2321 sq ft for $3,395,000 with CCs of $2,805.31 and RE Taxes of $2,223.63
The common charges and real estate taxes for the building are high considering there aren't that many amenities. "Good" common charges are around $1/sq ft. Morgan Court’s are $1.21/sq ft, not including the real estate taxes. The common charges for an apt on the 14th floor are the same as the CCs for the same apt on the 26th floor, which is odd. Generally, co-op and condo apartments on higher floors or with better light/views have higher common charges than the same apartment on a lower floor.
The duplex apartments have spiral staircases, which many buyers dislike, however the spiral staircases in these units are very wide, making them much easier to navigate.