October 2007 Archives

October 1, 2007

New Development (Sort of): Morgan Court

Posted by Christine Toes on October 1, 2007 at 8.39 AM

Morgan Court
211 Madison Ave
www.morgancourtcondo.com

History
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.

The Building
32 stories
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

Incentives
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

The Apartments
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

Amenities
Garden with reflecting pool
Full time doorman, concierge
Live-in super
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

Pricing
One Bedrooms
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

Assessment:
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.

October 2, 2007

Working on UrbanDigs Phase 2

Posted by Noah Rosenblatt on October 2, 2007 at 9.25 AM

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!

Moderating Inflation? I Don't Think So...

Posted by Noah Rosenblatt on October 2, 2007 at 10.52 AM

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."

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

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:

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.

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.

Speechless on Core CPI - (The Big Picture) -

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.

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.

The Llama of Lame - (Long or Short Capital) -

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.

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.

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!

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!

Weeeee - Manhattan Doing Fine, But....

Posted by Noah Rosenblatt on October 2, 2007 at 12.53 PM

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.

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.

So what do we have here, lets do some text based math:

SHRINKING INVENTORY + SHRINKING TIME ON MARKET + RISING # OF SALES = SOLID BUYER CONFIDENCE

I 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!

October 3, 2007

AVONOVA: Pre-War Condo Conversion

Posted by Christine Toes on October 3, 2007 at 10.59 AM

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...

Building
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.

Amenities
Doorman
Fitness Center
Resident's Lounge
Playroom
Courtyard
Roof Terrace
Owner Storage & Bike Storage

Apartments
The usual Pre-War details (9.5 - 10 foot ceilings, crown mouldings, hardwood floors)
Viking appliances
Washer/dryer in all units
Window a/c units

Pricing
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)

Broker Feedback
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!

Wish List: More Rate Cuts OR Strong Data?

Posted by Noah Rosenblatt on October 3, 2007 at 11.31 AM

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 COMPANY

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.

This 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!

What would you rather have? STRONG ECONOMY or MORE RATE CUTS?

Are Homebuilders Pricing in a Bottom?

Posted by Noah Rosenblatt on October 3, 2007 at 1.33 PM

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

October 4, 2007

TrueGotham TV

Posted by Noah Rosenblatt on October 4, 2007 at 10.17 AM

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

True Gotham TV Episode One - New-York, NY 10021 - Video

October 5, 2007

Jobs Report / Fed Thoughts

Posted by Noah Rosenblatt on October 5, 2007 at 11.09 AM

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.

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.

Bill ??? (Calculated Risk)

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%.

October 9, 2007

Inman News Names UrbanDigs...

Posted by Noah Rosenblatt on October 9, 2007 at 9.39 AM

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!

New Dev Closings: A Potential Problem?

Posted by Noah Rosenblatt on October 9, 2007 at 12.57 PM

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:

the secondary mortgage markets siezed up; hence the tightening of lending standards, fewer loan options, bankrupt lenders, and rising loan rates

asset backed commercial paper market dried up, although there have been signs of life of late

equities markets experienced a short term blip; and a great recovery response thanks to the fed

fed did its job to inject liquidity to help normalize the credit markets; the fed moved aggressively with monetary policy to prevent future economic shock at the expense of inflation in the pipeline

jumbo mortgage rates disconnected from other loan products

...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.

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."

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?

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?

October 10, 2007

Drunk on Fed Rate Cuts

Posted by Noah Rosenblatt on October 10, 2007 at 12.12 PM

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

Interesting points:

* ...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!

October 11, 2007

How Credit Squeeze Reveals Itself

Posted by Noah Rosenblatt on October 11, 2007 at 9.41 AM

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!

October 12, 2007

Hot Numbers & The Misleading Core

Posted by Noah Rosenblatt on October 12, 2007 at 10.08 AM

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.

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.

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.

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.

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.

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?

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.

"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."

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.

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.

October 14, 2007

Spotlight LIC: Risk w/ Plenty of Reward

Posted by Jeff Bernstein on October 14, 2007 at 11.04 AM

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).

The Rejuvenation of Long Island City: 30 Years in the Making

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.

The Dynamic Long Island City Market

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.

LIC Attractions & Improvements Continue

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.

Residential, Recreation, Retail

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.

Recreation:

P.S. 1
Chocolate Factory Theatre
Bernard Gallery
Socrates Sculpture Park
5 Pointz Gallery
Silvercup Studios
Thalia Spanish Theatre
Fisher Landau Center for Art
The Sculpture Center
Noguchi Museum

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.

Related Bloggings:

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

October 15, 2007

Notable Price Reductions

Posted by Noah Rosenblatt on October 15, 2007 at 9.55 AM

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)
SIZE:1,177 sft
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.

October 16, 2007

Will The Real Hangover Stand Up?

Posted by Noah Rosenblatt on October 16, 2007 at 12.19 PM

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.