A: Ok guys, thanks to your feedback we realized the problem with IE6. It should display correctly now. If it doesn't, or you see other html errors that cause the site to not function properly, never hesitate to email me so I can fix!! On that note, I'm off to doobyville!
I'll be on vacation in Jamaica starting tomorrow until next Thursday. I told Jeff & Christine they can go ahead and publish any posts they like while I'm away, but still you should expect content to be very light while I'm away.
Of course, no dooby's for me though other than the Dooby Brothers. Aire Mon!!
ADD-ON: If possible, please upgrade to latest version of Internet Explorer (IE Version 7) if you do NOT see the sidebar to the right! I'll try to make fix on my end too, but that may take a few days.
Sorry guys, tech problems here. Do you guys SEE THE SIDEBAR to the right? There should be an entire column there showing, in order of top to bottom:
a) NYC Stats - Streeteasy.com widget
b) Some Display Ads - Manhattan Mini Storage, Graubard & Nihamin RE Attorney, Morgan Court Condo
c) Sponsored Links, Categories, Archives, Recommended Links, etc
DO YOU SEE IT? Please comment if you do not. Should Look like Below:
QUICK SOLUTION: Either your browser (IE, Firefox, etc) needs to be upgraded, or the coding on this site is not compatible with your browser, and needs to be updated. Either way, if you tell me what browser you are using if you do NOT see it, that will allow me to fix the problem much faster!! Thanks for help.
A New York Magazine article recently highlighted the issue of surging enrollment in the best rated public schools in New York City and the potential problems this could create. It seems that luxury condo developers are attracted to areas with the best public schools, which they hope will entice buyers. This seems pretty intuitive, as does the result that surging vertical construction in these nabes is now resulting in a big rise in munchkin population and demand for seats in schools. The suspicion is that government authorities who have approved all this new development, may not have fully accounted for this surge in demand in their plans for new school capacity.....was someone cutting math class? The article cites several top rated schools that are reportedly busting at the seams and asserts that DOE has plans to build 105 schools and expand others (in addition to a recently funded five year plan to reduce class sizes) . However, it also quotes a non-profit activist group which claims that the 63,000 new seats planned are too little by half. Now before we go blaming the current New York City administration, it is apparent from the reading I have done that the City's school system has been chronically under-facilitized for over a decade. Also let me remind you that many of the new condo developments are being built "as of right", meaning that the areas they are in are zoned for this kind of density and they have not had to get any special permission to build, aside from having plans approved. I doubt whether the guys who approve the building plans talk to the Department of Education to warn them about new kiddies likely to move into a neighborhood. However, there have been several zoning changes around town, whose review process should have anticipated these issues and certainly any zoning variances granted could and would force developers to build schools or pay impact fees to help offset the needs for expanded education. In the meanwhile, the City is threatening to close many existing schools that are receiving failing grades for quality; my guess is that these are in less affluent neighborhoods.
Lest anyone think that the imbalances developing between have and have not neighborhoods and schools doesn't matter to the real estate market in NYC, a recent Wall Street Journal Op Ed piece comments on the importance of married people with children to urban growth. The article opines that the focus by cities on attracting YUSPIEs (Young Urban Single Professionals) has been misplaced. It claims that the strongest job growth has occurred in areas that attract yound educated families. This information may or may not be correct; however, it is hard to argue the correlation (which does not equate to causality) of real estate values increasing in the last few years and the boom in families living in NYC. According to the New York Times, since 2000, the number of children under age 5 living in Manhattan has balooned by 32%. Much of this growth was reportedly driven by non-hispanic whites whose median income was $284,208 in 2005. Over the same period the median home value for all owner-occupied housing has risen 86% from $423,000 to $787,000 since 2000, according to the U.S. Census Bureau.
I don't need to point out the danger that if job growth, development and housing prices were to decline in Manhattan, the City's coffers might not be as full and the ability to invest in the new classroom seats necessary might become an issue. Thankfully, the City's demographers do not see the young urban family growth trend continuing. According to a December 13, 2006 press release regarding City demographers population projections through 2030, "The school-age population, which numbered 1.40 million in 2000, is projected to increase to 1.43 million in 2005. This population is then projected to decline, reaching a low of 1.36 million in 2020. These declines are the result of recent declines in childbirth rates, net migration losses, and the smaller cohorts of women of childbearing age." Now these are city-wide projections, not Manhattan projections, and as we have all learned before, the averages don't tell the whole story. My suspicion is that neighborhood by neighborhood there may be some problems if poorer neighborhoods have fewer children to educate going forward and richer neighborhoods have more.
From the Internet & Blogosphere
Wall Street Journal Op-Ed Piece & Comments from AtDetroit.Net
The End of White Flight?
Questions Rising Concerning Spending of Funds by the Mayor and the New York City Schools
Who Got the Raw Deal in Gotham
A: Federal Reserve Vice Chairman Donald Kohn is speaking today, meaning we should listen to this veteran of the federal reserve system. Here are some of the things Mr. Kohn said this morning, which is moving markets higher on word the fed will act at their next meeting! At a time when the fed seems more confused than ever, these statements seem pretty dead on.
Here are excerpts of what Fed Vice Chairman Kohn said:
Finally, an acknowledgment about the quickly deteriorating credit markets and the wider spreads and higher rates that are resulting from the repricing of risk. Now you know why I talk about LIBOR spreads & other macro news here on a Manhattan real estate website. While it may not directly affect our marketplace, the trickle down will. Keep in mind that the current problems we are now facing in the credit markets originally stemmed from subprime defaults that occurred across the country (not in Manhattan), and ultimately hit the security derivatives on wall street which then seized up the secondary mortgage markets causing such havoc in the credit markets. Its all connected and the end result is tighter lending standards, higher rates, & uncertainty.
Fed VC Kohn made it clear that the credit crunch will result in higher borrowing costs for consumers & businesses (I just wrote about this), that further tightening in credit is probable, that LIBOR spreads are a clear sign of the distress in credit markets, and that the credit crunch may cause restraint on the flow of credit. In short, the credit cycle is only in the beginning phase.
A: Just out. Wells Fargo is the latest financial institution to announce more write downs and future actions related to the credit crisis. Whats very interesting here is that the company intends to liquidate their riskiest assets, even as the market for these products is in distress. That to me is a clear admittance of lack of faith in the housing / mortgage markets for the near to medium term.
According to CNN Money:
Wells Fargo will take a $1.4 billion provision in the fourth quarter for loan losses, the bank said Tuesday. The portfolio represents about 3 percent of Wells Fargo's loan balance, and the bank said the debt poses the biggest risk to its balance sheet.Wells Fargo stock (WFC: NYSE) is down just under 4% in after hours trading. Again, what is intriguing here is the intentions to liquidate ALL of their riskiest mortgages onto a secondary market that is still seized up. The company's eagerness to sell their holdings at such distressed levels is either a very smart move, or a very desperate one. Let's see how the market reacts to the continuing write downs tomorrow after a nice rebound rally today.
In a filing with the Securities and Exchange Commission, the San Francisco-based bank said it will create an $11.9 billion portfolio of the company's riskiest mortgages, which it plans to liquidate. The portfolio consists of three types of home-equity loans, or additional money lent to homeowners who already have mortgages.
A: Interesting story developing here. As I discussed yesterday, Senator Schumer publicly announced his intentions to request a investigation into Countrywide's use of $51 Billion from the Federal Home Loan Bank system. Today, Professor Nouriel Roubini writes a hard core article about what Countrywide did and calls it "...a massive stealth public bailout that has put at severe risk taxpayers' money" while increasing the likelihood that Countrywide is "...likely insolvent rather than illiquid". I have a feeling there is more to this story that will make it to the public ears soon!
According to Professor Nouriel Roubini's post, "The Steal Public Bailout of Reckless 'Countrywide': Privatizing Profits & Socializing Losses":
The letter by Senator Schumer questioning the $51.1 billion that Countrywide borrowed from the Federal Home Loan Bank system (specifically the Federal Home Loan Bank of Atlanta) has finally revealed the little dirty secret - that was known only to a few insiders and was noticed on this blog a month ago - that Countrywide, the largest US mortgage lender, has received a massive stealth public bailout that has put at severe risk taxpayers' money. Here is Countrywide - the premier poster child financial institution of the reckless and predatory lending practices of the last few years - getting in severe financial trouble because of its rotten lending practice in subprime, near-prime and prime mortgages - and whose CEO Mozilo is under SEC investigation for potentially illegal activities - now receiving a massive $51.1 billion of public bailout money with little official supervision of such lending.A must read! Roubini discusses that the right thing to do would have been to take over the bank and put it formally under public control; like what happened with Northern Rock, the Countrywide Financial of the UK and who's had their own problems recently.
As the Schumer letter correctly points out the collateral against this $51 billion loan is mostly toxic waste subprime garbage whose market value is now much lower than the face value of such mortgages; so $51 billion dollar of taxpayers’ money has been put at risk with garbage as collateral for it.
Instead, "...the US Treasury, the FHFB, the Fed and the banking regulators have been tacit and/or explicit accomplices of the stealth public bailout of most egregious example of reckless and predatory lending, the core institution at the center of a subprime and mortgage disaster that is now taking the entire US economy into a recession."
Personally, I'm a paranoid guy when it comes to deals and actions going on behind the scenes with some of these major troubled institutions. All we need is a Countrywide Financial to become insolvent and file for bankruptcy to spark a major selloff on wall street ultimately hurting everybody! Efforts are most likely underway, in hush hush mode, to avoid or delay major problems to major institutions that will serious disrupt the tradable markets, confidence, and the US economy.
From the blogosphere:
Countrywide's FHLB Bailout (Portfolio.com)
Countrywide Waves Off Call For Probe (TheStreet.com)
Countrywide: No Blow From Freddie Loss (CNN Money)
A: I want to touch on this topic as I have been asked recently why mortgage rates are not falling as much as 10YR Bond yields have? In the past there was a much closer relationship between 10YR bond yields and lending rates, but something changed. Risk joined the party. As a result, investors deemed mortgage related security products much riskier than in the past and would only be interested if the yield that came with this riskier bet was increased. For main street, any debt that is related to the current fear of delinquency & default risk, comes with a higher borrowing cost. In this new world where risk has been re-priced, that is the key term here, bond yields are no longer a reliable indicator to the future direction of lending rates. Instead, lending rates will be more closely tied to the evolving credit crunch and will act more on credit history than ever before!
Lets see what I mean. The simplest way to get statistical evidence of what I just said, we must look at how 10YR bond yields & NY 30 YR Jumbo mortgage rates have performed over the past month or so! Lets no forget that things have changed significantly over the past 30 days as the credit crunch worsened, stocks sold off, bond yields plunged, and yet lending rates went higher. Here are my sources:
BANKRATE.COM: showing the trend of NY 30YR Fixed Jumbo mortgage rates; 1 month
MARKETWATCH.COM: showing the trend of 10YR Treasury Yield; 1 month
I merged the two line charts onto one graph that shows:
a) the downward trend of 10YR bond yields
b) the upward trend of 30 YR Fixed Jumbo rates
I don't know how much more clear this point can get! During times of credit distress, your credit rating will be more important than ever in deciding how low of a rate you can get on a loan as lenders try to clean up their books, tighten lending & underwriting standards, and assign a higher rate to riskier borrowers!
My friend and fellow blogger Dan Green will support this theory now, but argued with me a number of times in the past before the credit crunch invaded; where I often showed you charts relating the 10YR bond yields to mortgage rates.
Dan discussed recently, "Where Mortgage Rates Come From", and stated:
Mortgage rates are "made" from the price of mortgage bonds using a mathematical bond formula. This is fact. And by exclusion, this also means that mortgage rates do not come from the price of the 10-year treasury note.So, at least there is one agreeable point here: 10 YR TREASURY YIELDS ARE NO LONGER RELATED TO LENDING RATES; ESPECIALLY JUMBO RATES! At least Dan provides an actual answer to where rates are linked to, the fixed rate mortgage backed securities (via The Mortgage Market Guide). Does your loan officer have this tool for real-time reporting? I'd certainly be surprised if they did.
So, let's hammer the point home. As of 2:00 P.M. ET yesterday (Nov. 20th), the U.S. treasury market was rallying. The bond market looked good from 30,000 feet. A check into the mortgage bond market, though, showed that mortgage prices were getting killed, off 25 basis points.
This is about the same time that my inbox starting dinging with new mortgage rate sheets reflecting higher rates from our nation's lenders. I wasn't surprised by the reprice for the worse because I had been watching the market slowly slip away on my MBS ticker all day. I had ample time to contact a few clients and get them locked in at lower rates before the reprice.
A: Forgive me for wanting to go back to Oct. 16th - Oct. 18th for a moment. In addition, most ABX Indices stay at lows as the 'AAA' index reverses course and heads down again to new lows. In short, a decline in the ABX indices signifies investor sentiment that subprime mortgage holders will suffer increased financial losses from those investments. Its a new world, follow what has been dead on people!
Flashback 6 weeks ago:
October 16th: Will The Real Hangover Please Stand Up
...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!October 18th: Proof The Credit Squeeze is NOT Over
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!
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. 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 timeOctober 18th; later that day: Another Day, More Insolvent SIV's
Call me paranoid, but something is going on at the core of the credit mess here. 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. 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. But hey, whats a few billion amongst friends?Here is a chart of the DOW stock average since October 16th and the observations noted above:
DOW JONES IS DOWN 1,145 POINTS (just under 10%) since my comments 5 weeks ago of: "Call me paranoid, but something is going on at the core of the credit mess here. 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."
Lets stick with what works. Here is a chart of the ABX 'AAA" index. Notice where I circled the uptick that occurred last week; I discussed that here two weeks ago with the hopes that maybe some bids were coming in. But that didnt last and you can clearly see the selloff to new lows that took place. This is further evidence that it is not just a subprime problem anymore, and the future probably holds bad news for alt-a (near prime) and prime delinquencies & defaults. Should this occur and the ABX be right again, we will have a further seizing up of the secondary mortgage markets as investors back away from buying repackaged securities of higher quality loans. Needless to say, this is a very big deal and could make the tens of billions in write downs thus far look minuscule.
In meantime, enjoy these short covering & glimmer of hopes rallies but know that the credit crunch is in full swing, nothing can stop it (not even fed rate cuts), and the best thing we can hope for is full disclosure of holdings so we can fully understand what the problem is and solutions can be formulated. This is as much a liquidity crunch as it is a credit crunch at this time. I'll continue to report on the ABX Indices as the financials have been following moves in these markets for the past 3-4 months.
THE ABX INDEX - At a time when almost nothing about subprime securities seems certain, the ABX index is a key point of reference for investors navigating the world of risky mortgage debt.
The ABX, launched in January 2007, serves as a benchmark of the market for securities backed by home loans issued to borrowers with weak credit. The ABX tracks the performance of a basket of credit default swaps based on U.S. subprime home loans. Credit default swaps, which are like insurance contracts, allow buyers and sellers to trade risk. A decline in the ABX suggests that the securities have become more risky and that investors have lost confidence in them.
WHAT TO WATCH - The part of the ABX linked to the riskiest subprime bonds has fallen about 67 percent since the mortgage wipeout began in the summer. Now subprime fears are spreading to segments of the market once considered ultra-safe.
For example, AAA-rated mortgage-backed debt has tumbled on the ABX in the last month, reflecting concerns that even those bond holders higher up in the capital structure - those who get paid first - may also suffer losses.
Citigroup CEO Gary Crittenden referred to the decline in the AAA index when the financial services giant announced on Nov. 5 it would write down as much as $11 billion in the fourth quarter. "Now the best way to kind of get an outside perspective on this is to look at the ABX indices, which have dropped dramatically since the end of September," Crittenden said.
A: Sorry guys, but the talk real estate discussion forum is being inundated with spam. Please give my programmer some time to install measures to return the forum to an anti-spam environment. In meantime, I apologize for inconvenience.
A: The credit crunch is stealing all headlines today, and you know it will spur major media during the week to write fairly negative articles that will reach millions of investors across the country. I feel that a capitulation day for the stock market is nearing; just a gut feeling after trading for so long.
Capitulation - In the stock market, capitulation is associated with "giving up" any previous gains in stock price as investors sell equities in an effort to get out of the market and into less risky investments. True capitulation involves extremely high volume and sharp declines. It usually is indicated by panic selling.
Great stuff for guys like me that try to profit from the volatility of these types of trading days. Anyway, I think all we need is one piece of really bad news to start a panic selling day, like a Countrywide Financial filing for Bankruptcy protection as credit downgrades limits availability to raise cash; or something like that. Give us a DOW day of -450 and a NASDAQ -80 or so, and I think it will be enough to qualify.
As the stock market reacts to the uncertainties brought on by the evolving credit crunch, a flight to safety is bringing the yield on the 10YR Bond down to levels not seen since 2004! This is a sign of rising uncertainty and the markets way of trying to tell the fed that action is needed! I think they may get some action by years end, as I discussed in a past post about my expectations for a surprise rate cut; especially in discount window.
Check out what 10YR Bond yields have done over the past 4 weeks, and keep in mind today's drop down to a yield of 3.847% is not reflected (down about 60 basis points in past 3 weeks or so):
Rising Uncertainty ---> Stocks Selloff ---> Bond Prices Rise & Yields Fall ---> Investors Flee To Quality
Just think what your money could become getting 3.85% for 10 years!! Great world we live in.
Meanwhile, Senator Schumer sent a letter to regulators today urging them to examine (via WSJ.com)...
"potential risks posed by a sharp increase in lending by the Federal Home Loan Bank of Atlanta to Countrywide Financial Corp., the nation's biggest mortgage lender. In a letter sent today to Ronald Rosenfeld, chairman of the Federal Housing Finance Board, which regulates the 12 regional home loan banks, Sen. Schumer said: "I am concerned that the loans being pledged by Countrywide to secure these advances (borrowings) may pose a risk to the safety and soundness of the FHLB system as a whole." He called for a review of the Atlanta bank's policies for evaluating collateral and of the loans pledged by Countrywide to secure its advances."
What is the bond market trying to tell us?
Is Countrywide Financial screwd?
A: I cant recall the last time all breaking news and recent headlines were all on the same topic: the credit crisis. Let me just briefly go over the latest news.
1. HSBC Bails Out Two Troubled Funds
HSBC Holdings PLC, Europe's largest bank, said Monday it will bail out two troubled funds it manages by transferring about $45 billion of their assets onto its balance sheet. The funds are "structured investment vehicles" or bank-sponsored businesses that sell short-term debt but have been operated off the bank's balance sheet.As Calculated Risk states: "This is a poke in the eye to the SIV Superfund and will put pressure on Citi and others to make similar moves."
The moves are another symptom of a global credit crisis which has forced up the cost of short-term lending.
2. Citigroup Examing Ways To Cut Costs; Layoffs Likely
Citigroup Inc., bracing for big credit-related losses in the fourth quarter, is looking to lower costs -- which could mean another round of job cuts at the nation's largest bank. In the third quarter, Citi's subprime mortgages and its exposure to financial instruments tied to those mortgages led to a loss of about $6.5 billion.According to TheStreet.com: "CNBC, citing people with knowledge of the matter, reported Monday morning that the bank could cut as many as 45,000 jobs, but hadn't yet set a firm number."
"We are engaged in a planning process in anticipation of our new CEO, and our business heads are planning ways in which we can be more efficient and cost-effective to position our businesses in line with economic realities," said Citi spokeswoman Shannon Bell.
3. E-Trade Woes Continue
Shares of E-Trade Financial Corp. fell Monday after news that prospective buyers of the online brokerage are debating the value of its deteriorating mortgage portfolio. The Wall Street Journal reported over the weekend that TD Ameritrade Holding Corp. and Charles Schwab Corp. are worrying that some parts of E-Trade's business have not been marked down enough to reflect current troubles in the subprime mortgage market. E-Trade's mortgage portfolio was valued at $29.3 billion on Sept. 30, and the company owns $12.4 billion in mortgage-backed securities. But the company has posted $197 million in pretax write-downs for its securities portfolio and is holding aside $237.8 million in loan-loss provisions.4. Virgin Group Takes Lead in Bid for Norther Rock (UK Lender)
Northern Rock PLC will hold accelerated takeover discussions with a consortium led by Virgin Group, the battered mortgage lender said Monday. Northern Rock, which relied on short-term borrowing, ran into trouble in September when the subprime lending crisis in the United States made banks wary of extending credit. The Bank of England stepped in as a lender of last resort and triggered a run on Northern Rock deposits, and a collapse of its share price.Expect to see more consolidation in the financial sector as troubed banks and lenders resort to 'takeover talks' in order to survive!
A: As Eurobanks fear the credit crisis, LIBOR rates (rates that Euro banks offer each other overnight), continue to rise. In short, when you see these overnight lending rates RISE at a time when the fed is cutting rates and bond yields are falling fast, it is a clear sign of distress in the credit markets. You can choose to wake up and acknowledge this so you can adapt, or you can look away. While I understand that discussing LIBOR will not tell you whether that apartment in Murray Hill is a good buy or not, it is important to understanding what a credit crisis is and how this will effect all asset classes. That in itself is far more important for any investment in my mind.
Lets take a big picture viewpoint for a moment. What is going on? Well, we are probably in the 3rd or 4th inning of a vicious credit crisis that is now making headlines and affecting investor confidence as consumers 'wake up' to this new world. Its not just here in the US, as the credit bug is spreading into Europe also. So with all this happening, and those in the know that read this blog will probably agree with this, it's safe to say that we probably have a few more rate cuts ahead of us as the fed uses its only weapon to help slow the total effect this credit crisis will have on the US economy; inflation will be second priority after growth.
With that said, lets look at this very interesting chart that I found on Global-View.com. Before you get un-interested because it looks like a complex chart, it isn't! Just bear with me for a second so I can explain it. The chart shows the current three month libor rate (blue-dotted line), the current Fed funds target (red-dotted line) and where the futures markets are currently trading three month rates for the specified periods in the future. The chart also includes comparisons of where these futures rates were trading most recently, a week ago and four weeks ago. The chart provides a view on where the markets feel U.S. interest rates are headed. There are 2 main points I want you to take from this chart.
The Big Picture: Take a look at the trend of the lines on this chart looking into the future! Those are market expectations as to where US interest rates are likely headed going as far out as 1 year from now. It's clear the market expects a troubling 2008 and a fed that will be forced to cut rates as they attempt to sooth the economic pain. However, in this world of re-priced risk, lower fed funds rate DOES NOT mean lower lending rates; at least the relationship is not as direct anymore! Expect lending rates to remain at higher levels as mortgage risk gets more out of favor.
LIBOR vs FED FUNDS RATE: I extended the MONTH AGO maroon colored line across the chart so we can use that to see where 3-MONTH LIBOR rates & FED FUNDS rates have gone over the past 30 days! I added arrows on this MONTH AGO line to show you that while fed funds rates have gone lower (with our fed cutting rates a total of 75 basis points (3/4 pt), LIBOR rates have actually gone up!
THIS IS A SIGNAL OF DISTRESS IN THE CREDIT MARKETS AS BANKS RAISE THE COSTS OF BORROWING TO EACH OTHER ON THE OVERNIGHT RATE!
This is also the rate that many adjustable rate mortgages and credit card rates adjust to! Some adjust to the 1-MTH LIBOR rate while others adjust to 1-YR LIBOR rate. Why do I discuss this? Just look at the web definition of LIBOR rate as stated by Bankrate.com:
It's an index that is used to set the cost of various variable-rate loans. Lenders use such an index, which varies, to adjust interest rates as economic conditions change. They then add a certain number of percentage points called a margin, which doesn't vary, to the index to establish the interest rate you must pay. When this index goes up, interest rates on any loans tied to it also go up. Although it is increasingly used for consumer loans, it has traditionally been a reference figure for corporate financial transactions.With record ARM's set to adjust over the next 6-12 months, you should start to see why this is important. Lets hit some fresh news to back up what I discussed here, and you can see why I think these fundamentals are causing a change in confidence amongst foreign investors for Manhattan real estate, even as the US dollar continues its fall against the Euro.
Euro LIBOR Rates Up Again, Reflect Tensions... (Reuters UK)
London interbank offered rates for two-month euro deposits rose to new six and a half-year highs on Monday and three-month euro rates rose for the ninth straight session on persistent concerns over banks' year-end funding. The shrinkage in the asset backed commercial paper market is forcing banks to turn to Libor based funding, while supply of period funding is lower as banks hoard cash as a contingency against credit-related losses.UK 3-MTH Overnight Libor Rises Again... (Forbes)
The cost of borrowing between banks in the UK rose again on a three-month basis as concerns increased over funding in the financial sector ahead of the New Year period. The London Interbank Offered Rate (LIBOR) rose to 6.53 pct from 6.52 pct yesterday for the three-month contract. This is still the highest rate since Sept 19.LIBOR Soars As Credit Crunch Returns (Telegraph)
The credit crunch is returning in a virulent form to money markets, experts warned, after City banks raised their wholesale lending rates to the highest level in two months. Morgan Stanley said that the recent jump in the benchmark London Interbank Offered Rate, which yesterday rose to just under 6.45pc, was not merely a seasonal blip but a major warning sign of pain ahead. It came amid further jitters in the banking sector, where many smaller, more indebted banks are struggling to find lenders to keep them afloat. Libor rates, which indicate how willing banks are to lend to each other, have risen sharply during the past week, after spending almost two months close to the 6.3pc level - a worrying sign since it was Libor's increase in August that signalled the initial impact of the credit crunch.
Wanted to wish everyone a very Happy Thanksgiving! Enjoy your company, get there safely, eat & drink well, watch football, and for god sake, don't forget the TUMS!
Back on Monday!
A: That is the word for today! J-O-B! In true fashion of this site, I want to shift to the next topic that I think will become a major focal point as economists and analysts figure out if we actually are in a recession. We must be prepared for secondary actions that corporate America will take as it realizes the credit crunch is not going away; as my fellow contributor Jeff just said, "this credit mess has more angles than a Tiger Woods birdy putt". How will jobs be affected in upcoming reports? I also want to talk about the importance of confidence and some of my own thoughts on the Manhattan real estate market.
You watch the fed start to focus on jobs now to see how aggressive the rate cuts need to be! Trust me, they are on 24-HR jobs watch for any sign that the credit crunch is directly hurting the US economic workforce. I hate to say it, but I think more rate cuts are in the cards before a new wave of rate hikes kick in further down the road. The reason is jobs losses and a slowdown in job creation, which will come out over the next 2-4 months; lagging effects of the credit crunch.
What does this mean for us, and specifically, for Manhattan real estate investors. Well, if jobs growth becomes a problem, it will be clear the US economy is nearing, or possibly already in, a recession. With every rate cut, comes stated concern by our fed about growth. Recessions aren't good for anyone. Bear markets aren't good for anyone. The fed will be forced to cut interest rates at a time when pipeline inflation is a very real threat; i.e. higher gold & oil prices & agriculture prices. If we do enter a recession, the stock market will be the first to price it into equity prices; this may be happening right now.
As stocks fall, people feel less wealthy. On paper, their 401K's and stock portfolio's normally take hits, unless they are otherwise hedged with short positions or bond investments; however, most are not as many people enjoy being long stocks and overweight these positions that gain in up markets. Why? It's more fun to be positive and long stocks than to be gloomy and short them! Moving on.
As people feel less wealthy, they cut back spending and start to wonder about their job security as job losses grow. They become conservative. They stop buying second homes. They unload any asset exposed to depreciation that is not a primary residence; since everyone needs a place to sleep in they only sell their primary if times get real tough. Investment properties become the first to go when someone gets into 'tough times'. Psychology changes! As all of the above occurs, confidence dips. And in my opinion, its ALL ABOUT CONFIDENCE if you want to stay ahead of the curve, rather than behind it!
That is why I go on record to question the re-acceleration of foreign demand as the US dollar weakens to record lows against other major currencies. Why? Because there is a credit crunch going on that is infecting equity markets and losing a lot of money for financial institutions, bond insurers, home builders, lenders, and consumers that invested in them! To say this has no effect on foreign confidence in our housing market is ridiculous! So, I focus on that as a leading indicator on future sales volumes, which is so critical to maintaining inventory levels. I also wonder about the percentage of foreign buyers that are in contract right now, who will flip when they close?
The chain goes something like this:
CONFIDENCE DIPS --> INVESTMENTS ARE CUT BACK --> SPENDING IS CUT BACK --> REAL ESTATE SALES VOLUME SLOWS ---> INVENTORY BUILDS AS A RESULT ---> FUNDAMENTALS SHIFT AS SUPPLY RISES & DEMAND DROPS ---> ASKING PRICES DROP / BECOME MORE NEGOTIABLE ---> DISTRESSED SELLERS GET CAUGHT ---> VULTURE INVESTORS NIBBLE AT FIRE SALES
This has already occurred in housing markets outside Manhattan! We have been spared thus far, but I think that will change in 2008. While I am short term bearish on Manhattan housing, I am longer term bullish. It is the corrections in the Manhattan housing market where I look to buy in; as I did after 9/11 when I bought my first condo (a 1,093 sft JR w/ 660 sft terrace for $500,000 in the UES). I sold that very same condo last year for $935,000. Now I'm renting waiting for the buy decision to line up properly.
What am I waiting for?
a) fundamentals to shift a bit towards buyers so I can negotiate
b) inventory to rise so I have more options and sellers have to compete a bit against each other
c) my salary to warrant buying; so I need to make more money or prices/rates need to drop
d) timeline to own to be 5+ years; so I need to be able afford a 2BR that I can grow into
e) job security; transparency in incoming salary and that business will stay that way
f) enough liquid assets to do deal comfortably
g) to a lesser extent, the credit crunch to be closer to an end
Now, I have most of the above already, but not all. So, I'll be patient and continue to monitor the changing situation so that I'm on top of a deal if one presents itself.
Manhattan real estate has a history of lagging in recessions and leading in recoveries. Just because we've held on so far, doesn't mean we are immune to any slowdown. I certainly think one is coming. But the difference is, I think a slowdown is completely healthy for longer term sustainable growth! If Manhattan gets a bit out of favor, I'll get interested. Don't day trade Manhattan real estate! Don't analyze every asking price because real estate investing is very personal and depends on your own unique situations! Instead, put your efforts into managing your own finances and investment decisions so that you avoid stupid mistakes, like buying a $750,000 condo with the hopes of selling for a profit next year.
A: ACA Capital Holdings stock is halted for news pending but it's not going to be good and is going to show why I discuss these topics regarding credit so often here. It is further proof that the credit crunch cycle is expanding bringing stocks and investor confidence down with it. Expect news to get worse before it gets better.
About ACA Capital Holdings (I bolded the parts that should be familiar to you by now) - ACA Capital Holdings, Inc., a holding company, provides financial guaranty insurance products to participants in the global credit derivative, structured finance capital, and municipal finance capital markets. It also provides asset management services to specific segments of the structured finance capital markets. The company selects, structures, and sells credit protection principally on highly rated liabilities of structured financings, including layers of risk of single tranche transactions and fully distributed CDOs, MBS and ABS transactions. It also provides financial guaranty insurance focusing on underserved segments of the public finance market and specific credits.
I talked (click on links for my previous posts) about the bond insurers before here on UrbanDigs, and I discussed the problem with the ratings agencies, how future downgrades will cripple some of these companies ability to raise cash, and how insolvency is a very likely final result.
If ACA loses its credit rating, they will most likely become insolvent. This is big news folks, because there are many other bond insurers (PMI, ABK, MTG, RDN, to name a few) in deep trouble and if these insurers go, then the ratings agencies will get serious heat, and those trying to receive claims will be left with nothing to get; and we know there are tons of brokerages, banks, and other institutions holding billions of dollars of untradable assets whose losses are yet to be revealed. This will have a crippling effect, the severity of which is the only unknown.
You will also start to see heat on the ratings' agencies: MOODY's & FITCH. As the heat is put on, more companies will be put on negative watch and future downgrades of credit ratings are all but guaranteed. Its all part of the vicious credit cycle that will prolong the slumping stock market, lead to higher borrowing costs, contribute to a negative wealth effect, force the fed to cut rates at the expense of future pipeline inflation, and a dip in consumer confidence that may affect any asset class expected to depreciate.
A few general things I want to disclose that keep popping around my head:
A: After previewing comments this morning to publish or junk away, I came across Rick's statement on my, "An Accepted Offer Does Not A Deal Make", post. Rick is dealing with a bully seller who accepted his offer but is refusing to fork over the offering plan and building financials for his attorney to review. As we all know, a buyer's real estate attorney does their diligence before advising you to sign a contract of sale. So, what to do? Fight back!
Hi -- have you ever seen a situation where the seller withholds the condo docs, thus making it difficult -- if not impossible -- for the buyer to sign a contract? That's what I'm facing right now and don't know what recourse I have.My Answer:
I have actually. Unfortunately, it probably means the seller accepted a lower than expected bid and is taking their time to get these docs to your attorney for review, in the hopes of getting a higher offer. Maybe they have a very interested buyer who is keeping them on the ropes.The problem here is one of helplessness. In the world of Manhattan real estate, the timeline for submitting a bid and getting a fully executed contract of sale is as follows:
SUBMIT A BID / NEGOTIATE ---> OFFER ACCEPTED ---> BUYER ATTORNEY DOES DILIGENCE ---> BUYER SIGNS CONTRACT FIRST / 10% DEPOSIT SENT ---> SELLER FULLY EXECUTES CONTRACT OF SALE
The problem is that nothing is binding until the seller countersigns the contract of sale making the deal fully executed. The only other issues that can likely affect the deal at this point are a board turndown or failure to get a loan committment; see my post titled, "No Finance Contingency Explained" for more info on this common practice in housing markets favoring sellers.
So, when you are at the stage of OFFER ACCEPTED the next move is for the your attorney to review the offering plan + 2 YRS building financials + board minutes + contract of sale. You should NEVER sign a contract of sale before your attorney does the diligence and OK's you to proceed with the transaction. But what if the seller delays getting these doc's to your attorney? Why would they do that? A few things come to mind.
WHY A SELLER WOULD DELAY GETTING DOCS TO BUYER ATTORNEY
In the real world it seems logical that a seller would delay getting a signed contract for one reason: they really aren't pressured to move quickly on the deal at the accepted purchase price. Other reasons could be:
These are some reasons that I can think of off the top of my head that would result in a seller delaying getting the doc's to the buyer attorney for review. Most of them are price/time sensitive.
So what can you do about it? Not much actually since you are helpless at this stage and can't proceed with the deal until your attorney reviews the building you are about to buy into.
UrbanDigs Says: The ONLY thing that you can do with a bully seller is to play hardball right back. Fight strength with strength. See how badly this deal actually means to them by PLACING A DEADLINE onto the seller to get the building/apt documents to your attorney. If its been more than 5 business days since an offer has been accepted and still no docs have been received by your attorney from the seller, put a deadline of 3 MORE BUSINESS DAYS onto the seller or else you will WITHDRAW YOUR OFFER! That is really the only thing you can do. If the seller doesn't want to move forward with you at the accepted purchase price, then why waste your time waiting for documents that might never come. Lay down the law and put the ball into the seller's court as clearly as possible. To me, a deadline is the most efficient way to achieve this or at the very least, find out what the deal really is sooner rather than later.
Originally Published February 6th, 2007
A: I'm happy to announce that UrbanDigs CHARTS are now live! We have partnered with Streeteasy.com to bring to you daily snapshots of what is happening in the Manhattan real estate marketplace. The data is real time and updated daily. The widget on the top right of the page will show you a snapshot of TODAY, 7-DAY and eventually 30-DAY's worth of data for four key metrics that I thought was most important: NEW LISTINGS, PRICE REDUCTIONS, CONTRACTS SIGNED, & TOTAL ACTIVE INVENTORY. The charting system is based on this data.
To access charts, simply click the CHART INVENTORY TRENDS tab at the top of the main content section. That tab section will from now on be your control panel; as I continue to brainstorm what other tools/data may be added in the future. You can also access the TALK REAL ESTATE section from there.
Now, it is very important you understand that as of now we only have recorded data since November 5th, so 14 days. As time goes on, charts will get more useful. For now, feel free to check back daily to see what's going on but DO NOT analyze the charts too deeply as we need at least 6 months of data collected before any trends can be seen. We need a base collection of data first, and that takes time.
Here is how charts will appear, as for the first chart I had NEW LISTINGS & CONTRACTS SIGNED combined together so we can see:
a) what new listings came on to the market
b) what listings are now off the market
...from Manhattan real estate total inventory. Now, TOTAL ACTIVE INVENTORY is not calculated by the difference of these two metrics, as it's a bit more complicated than that (think about listings that are taken off market, or placed back on without ever going to contract)
The two other charts will show you TOTAL INVENTORY & TOTAL PRICE REDUCTIONS. Again, please be patient and wait until we have at least 6 months of data to get any significance from these charts.
As for retrieving the data, Streeteasy.com's systems update every 24 hours (over the wee hours of the morning), and we pull information AFTER this update has been completed. So, data is static with an update every morning basically reflecting what changes/new listings/contracts signed/ etc. that occurred the day before. It is important to note that:
a) Streeteasy often adds new firms who meet their listing standards that can lead to spikes in NEW LISTINGS data every so often
b) Streeteasy is at the mercy of the listing agent updating a property that has a CONTRACT SIGNED. So, its very possible this data is a bit lagging. The data is only as good as the agent that publishes it.
c) Streeteasy does the best job they possibly can, with the resources available to them to get the most accurate picture of what is going on with NYC real estate.
d) Streeteasy data is comprised of exclusive listings with an exact address in Manhattan (open listings and listings without an exact address have been removed for these tools). No representation is made as to the accuracy of this data.
e) Data includes the entire island of Manhattan.
f) Data includes Condo, Co-op, & Townhouse listings ONLY.
Trust me. They are putting forth a great effort in a city that does NOT have any public MLS system and whose data is only as accurate as the agent that publishes/updates it.
With that said, this data and charting system can no way be absolutely perfect. Thats almost impossible. However, after enough time (about 8-12 months) we should establish enough of a baseline so that basic trends can be able to be interpreted, and that is the entire point of these tools!
Transparency is GOOD! I hope you guys enjoy!!!
On Friday morning the Wall Street Journal pointed out that more money market funds are being hit by the sub-prime credit debacle and talked about troubles in municipal bond land - lets explore how the tentacles of the credit beast have ensnared both these areas. Now this story involves a little bit of esoterica so lets define some terms.
CDO = a collateralized debt obligation and it is an amalgam of low credit debt securities which when packaged together are supposed to have lower risk, these securities may have an insurance wrapper or guarantee from a bond insurance company backing them.
SIV = a structured investment vehicle. It essentially owns longer-term higher yielding paper that it funds with short-term lower yielding borrowings. It is technically a "spread arbitrage vehicle". What investors have recently learned is that banks set these funds up....and they didn't have to account for them as obligations on their balance sheets. They sold shares in the SIVs to investors (mostly hedge funds) and earned fees for managing them. Some of these funds held sub-prime related securities like CDOs and have had trouble borrowing short-term funds to support their holdings due to the credit crunch.
Bond Insurer = A bond insurer is an insurance company that sells a policy to a bond issuer or a company that creates bond-based products. The policy insures that if the bond or bond product has an unanticipated credit hit, the investor (owners) of the product will be protected to some extent. The policy is a cost to the issuer of the product or bond - but is basically passed along in some way to the buyer. It is a way for bond issuers to gain access to the investment grade market or for bond product producers to aggregate together lower quality credits and make a higher credit quality product. Rating agencies often get involved in requiring an issuer to get insurance if they hope to achieve a certain credit rating for the product.
Money Market Fund = an ultra short-term bond fund. The portfolio of bonds turns over and is re-invested in new short term bonds within 30 days or so. Due to the short-term securities these funds hold, they tend to have very little interest rate or credit risk and tend to have yields that hew closely to short-term government bond returns, though a little bit higher because they don't hold risk free assets (hitherto known as US Treasuries). As a result of their low credit and interest rate risk and the fact that they pay out all their interest gains these funds tend not too trade very far away from a $1 unit value. These funds are therefore used by investors (like myself) to keep liquid assets in, above and beyond their FDIC insured bank accounts. For this reason the $1 value has been seen by investors and fund management companies as sacrosanct.
In past times of credit market crisis, fund companies have actually intervened to defend the $1 valuation level of a share of these funds and not allow them to "break the buck". Well its that time again. According to Business Week Online there have been 30 incidents this year in which fund management companies have intervened to prevent a fund from "breaking the buck". The reason these funds are having trouble, for the most part is not because they held subprime securities, but because they held short-term funding paper issued by SIVs which themselves held sub-prime paper and CDOs.
According to today's Wall Street Journal the fund companies involved in protecting their $1 unit value recently include such household names as Bank of America's Columbia Management Group, First American Funds, Credit Suisse Asset Management, Wachovia's Evergreen Investments, SEI Investments, SunTrust Bank and U.S. Bancorp's FAF Advisors.
Now according to Business Week there has only ever been one money market fund that "went bust" and investors got back 96 cents on each dollar. So nobody panic. However, it is concerning that funds regular folks depend on as essentially riskless are having some problems - it makes you wonder just how tangled a web has been weaved here. So lets tackle just one more curve ball.
Municipal Money Market Funds. Friday's Wall Street Journal discussed problems with bond insurers and the impact on municipal bonds as well. Municipalities and public institutions like hospitals use bonds to finance themselves and over the years, even those with lower credit ratings have been able to access capital markets easily by using bond insurers to help them attain investment grade status. These same bond insurers also insured CDOs and sub prime CMBSes and as a result of the sub-prime credit debacle stocks of the insurers like Ambac have gotten creamed this year. People are worried about how much of a hit they will take on the insurance they have written. As a result, municipal bonds backed by these same insurers are getting roughed up, raising the cost of new bond issuance by municipalities. You see this credit crunch keeps branching out and side swiping otherwise innocent bystanders. Thus far the wounds have not been particularly bad, but it has created an environment of risk aversion, which makes sense, but also raises the cost of doing business for most participants in the economy.
The chart below shows the divergent performance between bonds in general and municipal bonds in recent weeks as the street started to worry about municipal bond insurers ability to pay out claims. Specifically, the chart shows the Lehman Muni Bond Index vs. Lehman Aggregate Bond Index (notice the widening of the spread since mid October!):
What This Chart Means: It means tighter money for a less than investment grade municipality (state & local govt's, hospitals, infrastructure, bridges, tunnels, services, roads)! Municipal bond prices (presumably those with "credit enhancement" or bond insurance backing their ratings) are under pressure due to worries about the insurers' ability to pay out claims. This concern raises the cost of borrowing for these lower rated borrowers, and is just another example of the market spread between high credit worth borrowers and others rising. Note that this comes when the tax base of many municipalities is being hurt by lower numbers of real estate transactions - which the market may also be factoring in.
I got the bright idea this summer of not keeping all my cash reserves in bank accounts when an unknown amount of sub prime damage was about to come crashing down on money center banks. I was also worried about moving all the funds to a money market fund which could have some issues with the sub-prime mess. So thinking I was a savvy - though obviously overly paranoid - guy. I moved a bunch of money into a Municipal Money Market Fund. This is a fund that owns short-term municipal securities and acts just like a money market fund, but it also has the advantage of being federal and state tax free. This morning I'm wondering what, if any, exposure I have to the credit mess with my Muni Money Market Fund. Don't call to ask me any questions on this article..... I'm on hold with Fidelity. But seriously, I'm not really too worried, but there is a point here. This credit mess has more angles than a Tiger Woods birdy putt. Its very hard to know what and how big the fall-out will be and whether the wide disbursement of risk made possible by so many new financial products, derivatives and investment funds is a great thing or means that an eventual all out credit crisis (which happens every so often like it or not) will be even worse when it does come.
Oh what a tangled web we weave!
P.S. For any one who does own muni bond funds, I stumbled across another issue that could become a concern....bad luck sure clusters - check this Supreme Court Case on State Tax Powers out.
From the Blogosphere:
Money-Market Funds: A Safety Check (BusinessWeek)
Will Your Money Market Fund "Break the Buck" (Washington Post)
Money Market Funds at Risk? (CNBC)
How-to-tell-whether-to-move-out-of-your-money-market-fund (Blogging Stocks)
Municipal Bond Insurers: More Dangerous than you realize (Accrued Interest)
Good Summary of How the Bond Insurance Business Works (Common Sense Forecaster)
A: A great discussion and purely my opinion on this topic. As the US dollar continues to fall against other major currencies, people mis-interpret the trend to mean that X number of additional buyers are pouring into Manhattan real estate! In my opinion this is an incorrect assumption! It is not that cut and dry and to dismiss macro economic events, confidence, and near term expectations as part of this currency trade equation is a mistake. There is no anecdotal evidence to support a re-acceleration in foreign demand; its mostly theory and we are left to ask the brokers what they are currently seeing for a clearer picture. In my opinion, confidence trumps the weakening dollar in the mindset of foreigners.
There is no real evidence of a re-acceleration of foreign buyers RIGHT NOW, as the US dollar falls further against international currencies. Forget what happened already and the foreigners that already put their money to work because of currency trends; that is old news. In order to dig deep into this topic, we need to figure out what is happening right now, as the dollar continues to weaken at the same time that a credit crunch is going on. I wonder:
a) does the credit crunch and uncertainty that comes with it affect the mindsets of foreign buyers even as the currency trade for Manhattan real estate gets more attractive?
b) is there a re-acceleration of foreign demand in terms of NEW MONEY coming in right now, as we enter an uncertain wall street bonus season?
UrbanDigs Says - NONE of my buyers are foreign investors! I get a constant stream of buyers asking me to work with them and I can only recall 2-3 requests in the past year or so of foreigners inquiring to use my services. I'm not even seeing any foreign demand for my sales listings. If I had to put an estimate on it, I would say 10-15% of the entire Manhattan buyer pool is comprised of foreign demand. I think new foreign money is being somewhat affected by the credit crunch as caution negates and acceleration that may have taken place with a further weakening dollar in an environment without credit issues. However, foreigners still have a currency trade here and can get significantly more bang for their Euro, Pound, Kroner, Bhat, whatever, right now. Additionally, I think foreign demand is more focused on the higher end product.
Many foreigners already made their purchases here in Manhattan as the weak US dollar is not a new story! Every media outlet, blog on NYC / Manhattan real estate, and TV segments on the topic have been discussing the weak US dollar as one piece of the puzzle in keeping the market here so strong, even as the nationwide housing market floundered. We should be grateful that we had this element on our side, helping to push inventory levels lower as nationwide inventories soared! So, what has really changed?
As the US dollar weakened further in the past 3-4 months, so did the macro environment! Here is what has changed:
*According to Forbes article, "Credit Crunch Hits UK House Market":
The impact of the global crunch is being felt by the British housing market. House prices in the country have fallen at their fastest rate in nearly two and a half years, according to data from the Royal Institute of Chartered Surveyors released Tuesday. "Interest rate rises, the recent credit crunch and subsequent tightening of lending conditions have all had an impact upon demand," said the institute on Tuesday.To say all of this had NO IMPACT on foreign demand / confidence for Manhattan real estate is crazy. To say that foreign demand for Manhattan real estate has accelerated because each Euro now buys $0.05 more US dollars, is crazy! As the US dollar falls against the Euro, it is more THEORY than REALITY that demand will accelerate when so much surrounding the macro environment has changed towards the negative! In short, there is no evidence that for every penny the US dollar loses against the Euro, 'X' number of additional buyers will pour into our marketplace.
It added that a shortage of housing supply could help support house prices. "The housing market is seeing the awaited slowdown that many had been expecting, with modest falls reported across most U.K. regions," said RICS spokesman Ian Perry.
I'm not saying there is not an attractive trade here. There is, and there has been for some time. Thanks to foreign demand, many of our new development inventory has gone into contract, in addition to many existing resales; especially the higher end. The element of foreign demand has helped keep Manhattan inventory at such tight levels, which in turn helped keep our marketplace shielded from the nationwide housing slump. But there are other elements at play here helping to support our market:
a) tight inventory**
b) rising rental prices**
c) trend towards living closer to where you work
d) strong economy / strong jobs**
e) years of very strong bonuses**
Notice the asterisks? I put those next to the elements that can easily be effected by the current macro environment; which is why I discuss macro on this site! Do you really think foreigners don't know this? They do, and they have been exposed to the same headline shock that we have been exposed to, resulting in a dip of confidence. That dip in confidence can very easily turn an investor cautious, and in my opinion that is more powerful a force than the currency gains the Euro has enjoyed over US dollars since the credit crunch hit the media back in early August.
Am I alone in this way of thinking? I asked a few brokers their opinion on the topic, some agreed, some didn't:
Douglas Heddings of TrueGotham.com:
This is hard data from my current transactions...the one condo that I have in contract is being purchased by an investor from Spain for his daughter. The other condo I have has been viewed by several foreign buyers with none making offers. The rest of my properties are co-ops so they don't appeal to most foreigners. Yesterday I received a call from another investor from London who is coming into town to purchase a "positive cash flow" investment property for $1.5M to $2.5M (good luck with that right!). Having said all of this, I just don't see the masses of foreign investors pouring into the Manhattan market like I've been reading in the press. One thing that I would add is that the information that I'm getting from new development projects that I visit is that as many as 20-30% of the projects are being purchased by foreigners either as pied a terres or investment properties. Who knows how accurate that info is if you know what I mean?
Peter Comitini of Comitini.com at Corcoran:
I haven't been working with many foreign buyers personally which is not unusual for me. But most agents in my office can cite a recent deal that involved overseas money. On the listing side, of 10 offers I've received on an $8.5M exclusive for sale, 8 have been from overseas buyers. These buyers have tended to be in very strong cash positions as well. I think that this is typical of investment caliber properties right now in the $3M to $10M range. I also think that the foreign investment market is more about smaller buildings than condos, as there is more opportunity to bring value to the real estate by design or repositioning. Condos rarely have positive rental cash flow on NYC investment purchases. On an international scale NYC is still well-priced compared to cities like London or Hong Kong. Anecdotally, the market for pied-a-terres is quite strong and I think foreign money is driving a portion of the luxury new development condo market at the high end.Louise Phillips Forbes of Halstead:
I think one must be cautious in drawing too many inferences from the world of Wall Street investing to real estate. A tiny fraction of the NYC residential business is a pure investment play. Finally, I just wouldn't get too spooked about the Wall Street executive who's bonus is off 15% over consecutive record years. He still makes a very healthy bonus. People buy real estate because they need it as much as because it's an amazing investment.
All I can say since November 1st of 2007 I have received signed contracts and/or sent contracts out to seven New York residents who are making an ordinary life change and buying another home in comparison to the 13 foreign nationals that in three weeks have stepped up to the plate to buy in my conversions or other real property. In their minds they are buying a piece of the rock at a huge discount!!!!
Jacky Teplitzky of Douglas Elliman:
I do see a pick up in demand now from foreign buyers. During the crisis of the credit crunch the foreigners were calling me to find out how this situation was affecting the New York market and I kept saying that it was not affecting the market. They were a bit nervous as they are not that familiar with our specific market and they hear the news from overseas and think of the US as one market. Now that the storm has passed they see that I was right and feel more comfortable. I just finished a 3 day intensive work with a foreign buyer and we could not find the right property because of lack of inventory so that proved my point of a stable market here in the big apple.
A: A breath of fresh air! Hot off the presses as Federal Reserve Governor Randall Kroszner is in New York this morning discussing the state of the current economy, threats, inflation, and monetary policy. While I said in a post back on Nov 5th, that I thought we would get a surprise rate cut before year end, dedicated readers of this site know that is not what I wanted.
According to Bloomberg.com:
Federal Reserve Governor Randall Kroszner said economic indicators in the coming months will reflect a "rough patch" though that wouldn't be enough to warrant additional interest-rate cuts.Fed Governor Kroszner is a voting member of the FOMC in setting monetary policy, and serves as the fed board's liaison on bank regulation.
"The current stance of monetary policy should help the economy get through the rough patch during the next year, with growth then likely to return to its longer run sustainable rate," Kroszner said in a speech in New York. Data consistent with such growth "would not, by themselves, suggest to me that the current stance of monetary policy is inappropriate."
The comments represent the most explicit message from a Fed policy maker since the Oct. 31 rate cut that officials are reluctant to lower borrowing costs further. "The downside risks to economic growth now appear to be roughly balanced by the upside risks to inflation," Kroszner said, echoing the Federal Open Market Committee's Oct. 31 statement. "I would add that the limited data and information received since the October FOMC meeting have not changed my thinking in this regard."
ADD ON @ 9:57 EDT --> You know, this very well could be the fed desperately trying to regain control over the markets! Fed funds futures were pricing in 117% chance of a rate cut at the next fed meeting. That means they are expecting 100% chance of a 1/4 (25 basis points) ease + 17% chance of another 1/4 point ease after that. Its clear that the fed wants to eliminate the markets expectations of future moves that pin the fed into a corner come decision day; as if they don't deliver it will be a shock to the tradable markets.
A: Folks, keep an eye on LIBOR rates again as they are marching higher with the deadline of FASB 157 today. Although many brokerages and banks already adopted the new accounting change, the very fact that far more assets will be classified as Level 3, or hard-to-value given iliquid nature of the markets they trade in, is raising expectations of more devaluations and write downs to come. In addition, expect a whole new round of risk re-pricing in 2008 as ARM resets kick in causing havoc to many homeowners who already are struggling to pay monthly housing costs.
According to Bloomberg's article, "Overnight Dollar LIBOR Soars on Writedown Concerns":
The cost of borrowing dollars overnight rose by the most since September on concern investment banks will disclose more writedowns on securities tied to U.S. subprime mortgages. The London interbank offered rate, the amount banks charge each other for dollar loans, increased 19 basis points to 4.96 percent, its fourth straight day of gains, the British Bankers' Association said today. The three-month dollar rate rose 3 basis points to 4.91 percent.On to accounting of hard to value assets, Professor Nouriel Roubini has a new discussion on FASB 157:
"Everyone is very nervous about the possibility of further losses, and the market remains very fragile," said Nathalie Fillet, senior interest-rate strategist at BNP Paribas SA in London. "There are a lot rumors that banks are continuing to have problems accessing financing, and that is driving up borrowing costs."
While FASB decided yesterday to to pospone the implementation of some parts of FASB 157, only non-financial assets (business combinations, etc.) have been excluded from this implementation; thus financial assets including asset backed securities and other illiquid financial assets will now have to be valued - whenever possible - using market prices or proxies of them rather than using voodoo-finance models and credit ratings (or better misratings) that don't make sense.Happy day Nouriel is very hard to argue. While I respect his views and expertise, I think the only flaw to his logic is what actions will be taken to help ease the pain of the carnage that may come.
So far banks and other financial institutions have recognized losses only in the $40-50 range. But market estimates by myself and other analysts (RBS, DB) suggest that total losses for investors from subprime and other mortgages (and their related securitized assets) could be in the $300 billion to $500 billion range. While many of these losses will be borne by banks and investment banks many will be borne by other financial institutions (hedge funds, insurance companies, asset managers, both in the US and abroad). Losses will be even larger once we including the looming disaster in commercial real estate (expected losses of $100 billion), credit cards, auto loans and other consumer credit (securitized or not).
I'll be on a BULL vs BEAR panel at the Inman Real Estate Connect Conference in NYC in January with Professor Roubini & Barry Ritholtz; register here if you want to get in as I hope this becomes a Kudlow style heated debate!
Moving on. As I discussed previously, 2008 is going to be a very tough year for the housing market, write downs, and wall street. With so many ARM resets expected to higher rates, its only logical to expect defaults & foreclosures to rise; which is what got us into this credit crunch to begin with. The ABX indices certainly are pricing this in as investors bet on more carnage in the mortgage markets (buy credit protection), which leads to more seizing up of the secondary mortgage markets, which leads to no place to sell distressed mortgage backed securities, which leads to continued distressed pricing for Level 3 assets that no longer can use in-house model valuations. Get all that?
According to Seeking Alpha article, "Financial Sector Trap: the Worst is Far From Over":
Finally, has everyone just forgotten the billions worth of ARMs that are scheduled to reset over the coming months? The problem with the ARM situation is that rate cuts won’t help nor will refinancing, because in many cases the ARMs teaser rate payment is about as much as the borrower can afford. Once the teaser rate period is over the borrower has a loan they can’t afford even if they refinance to an uber-prime fixed rate mortgage, and rate cuts won’t prevent the loan from resetting to a rate that’s higher than the teaser rate. Over the next 2-4 months there is going to be a spike in ARM resets, followed by an accompanying spike in foreclosures 3-6 months later.Here is a chart courtesy of SeekingAplha.com showing you the coming ARM resets on a month to month schedule.
The ABX Indices, while bouncing now for a 2nd straight day, have been pricing in this expected mess for some time, and we are about to hit the eye of the storm. Expect a volatile 2008 in terms of defaults, foreclosures, and many complaints about what can be done to help homeowners ease the pain of the coming payment resets!
A: Which do you think we have? It is very hard to argue that the reason we have a headline data report and a core data report is to eliminate the volatility that food & energy prices have on the results. With wild swings, comes inconsistent data that is hard to draw conclusions from. In addition, as food & energy prices RISE, they are considered to be TRANSITORY (temporary) & SELF LIMITING (inhibiting it's own growth). But what happens when food & energy prices go only up? There is no temporary and there is no self-limiting! Should we still strip out these inflation items as the fed sets policy?
Its the great debate. Is their inflation or not? I have asked so many people about this and every single one of the answers was..."YES, we have inflation!" After all, have you noticed food prices, housing costs, gas prices rising or falling in the past 3-4 years?
FANTASY - Core economic datasets have shown inflation pressures to be moderating. These reports exclude food & energy prices because of their volatile up and down trading nature. The fed is thought to favor these core reports in their inflation targeting.
REALITY - Headline inflation has not been moderating and is the same report as the core plus the effect of food & energy prices. If you look at the chart below (courtesy of The Big Picture where Barry Ritholtz discusses here, here, and here his feelings on the topic), you will see the actual relationship between the core rate of CPI inflation and the headline rate of CPI inflation (the rise shows the widening spread between the two measures as headline inflation shows reality and core inflation excludes food & energy)
FANTASY - House prices across the nation have fallen, so affordability has risen significantly and monthly living payments have been declining!
REALITY - Well what about the rise in borrowing costs since the peak of the nation wide housing market back in late 2005 or so. What about the re-pricing of risk that has occurred in the mortgage markets and the subsequent rise in lending rates, especially for not perfect credit borrowers? What about the rise in heating and maintenance costs? Don't these increases in costs counter any reduction in monthly payments from a lower loan amount? To the right I have a chart (via bankrate.com) showing the rise in 30YR Jumbo Mortgage Rates Nationally since early 2005 (notice the rise in borrowing costs since mid 2005, as national housing slump began - rates are even higher today for lower credit borrowers due to credit crunch)
This argument is important because monetary policy is going to be set based on the presence or absence of inflation! I live in the real world. I pay my bills. I buy food and pay my own health care costs. I also pay rent. It is without a doubt a more expensive place to live my daily life in.
However, I can buy any of the following today for LESS MONEY: flat screen tv's, cars, ipods, compact discs, clothes from Gap, a dvd, a vhs (if you can find one). So I said "Hey Lama, HEY, how about something, you know, for the effort", and all of a sudden I have total consciousness coming to me on my death bed.....which is nice. I digress.
Is inflation a rise in living costs and goods needed to live OR a rise in wage inflation OR a monetary phenomenon OR a result of the weak dollar? Do we have fake or real inflation? Put me down for real & stop focusing on the CORE!
A: The blogosphere is putting aside current events and market reports to do our side job, busting petty open house thieves! Doug Heddings of TrueGotham.com got these pictures of two woman after they were caught stealing at one of his open houses. The agent running the open house confronted them, got them all nervous that they dropped items stolen from previous open house visits, and called 911 as they ran out. The lady felons are now roaming somewhere! We need your help to identify them and turn them in!
Pics right off the presses of the thieves as they did their getaway.
If you know these naughty girls, please do email me or Doug Heddings.
Noah's piece yesterday titled, "Credit / Downgrades / Commercial" talks about the shutdown of the commercial CMBS market and predictions of a decline in commercial real estate prices. Up until now the commercial construction market has been very strong and commercial construction has done much to pick up slack from the implosion in residential construction.
According to an August 13th Wall Street Journal article commercial construction was growing at a 17% year-to-year rate over the summer and was cushioning the effects of the residential construction slump. However, the tightening of credit seems like it could very well throw cold water on this trend.
According to Bloomberg.com :
U.S. commercial real estate prices may fall as much as 15 percent over the next year in the broadest decline since the 2001 recession as rising borrowing costs force property owners to accept less or postpone sales.And Calculated Risk discussed yesterday how Countrywide's Commercial real estate loan pipeline is down significantly; check out this chart:
The chart says it all. I have been attending a weekly real estate seminar in Manhattan for the last few weeks with my partner. Many of the city's biggest and best developers come to speak on various sub-markets around town and segments from retail to multi-family rentals. For the first few weeks the panels started out very ebullient. Each developer in turn waxed poetic about the subject of the day be it prospects for downtown or Coney Island developments, or $2,000 per square foot CondoTel prices, "Main Street" retail rents of $350 per square foot or $100++ per square foot office rents. Somewhere towards the end of the talk, the very talented moderator would finally ask the tough questions about financing, end buyer/user demand for product, absorption rates etc. My partner would comment to me that the panel would visibly slump when the discussion reached these topics and the ebullience would immediately cease. Still people spoke of potential eventual downturns, etc.
Last week the discussion, which was about one of the boroughs, started similarly but quickly got to the tough questions. This time a prominent New York City developer (names withheld to protect the innocent) launched into a monologue about New York's real estate cycles and how long it has been since a downturn. This gray beard averred that cycles had not been revoked and that we were heading into a downturn. He added that this particular borough had way too much new condo supply coming on and was headed for trouble.
Fast forward to this week. The tough questions came right away. One portfolio lender....a banker who makes loans that his bank will hold until maturity.....meaning that unlike Wall Street who packages loans and sells them off....this guy has to eat what he kills. His bank has to live with the loans they make until they are paid back. He also opined that they have gotten much more active as other sources of funds have all but dried up and they are getting rational terms that they were not able to get in prior years in many segments of the market. This had caused them to pull back significantly from New York City lending in recent years. Additionally, he came straight out and said he expected a recession and falling rents in New York City and was underwriting with this in mind. The moderator then ticked off a list of expected additional Wall Street layoffs to be announced soon. The rest of the panel pretty much all capitulated right away and said layoffs were indeed coming, would impact the city's economy negatively and they were worried about the slowdown. It was like a group confessional. To a man/woman they believed that although not many commercial properties had traded recently, cap rates (Net Operating Income/Property Price) had already increased as much as 50 basis points equating to a 10 - 15% correction in price. With costs continuing to increase, this could certainly curtail the booming pace of new commercial construction. A cooling of the commercial construction markets now, while occupancy rates are still very high for apartments, retail and commercial properties in New York could mean a pause that refreshes rather than a big digger, especially if the nation as a whole undergoes only a modest slowdown.
A: It's a new site, with new functionality and tools, so I just want to point out to all that the comment system is now automatic! No more moderating before publishing. But I have found 7 comments in the JUNK folder because the commenter forgot to add the security word before posting their comment.
Consider this just a friendly reminder moving forward! If you write a comment and DO NOT see it published after you RELOAD THE PAGE, then chances are you forgot the security code or typed it incorrectly. I get like 600+ spam comments daily and don't have time to go through it for mis-junked comments. Here is what the security system looks like:
A: A noticeable uptick in the ABX 'AAA' index yesterday, although lower rated indices held at their lows. Also, it seems the financial stocks are starting to react favorably to negative news (HSBC, BAC, & BSC), a good sign. This doesn't mean the total write-downs are over or that the credit crunch is over! It simply means confidence is trickling back into the sector, and that's worth noting. All that is needed to destroy that is another negative surprise or a new phase of the credit crunch cycle unveiling itself.
First, the ABX 'AAA" move yesterday. While its not anything to cause major celebration, it is a good sign to see some bids coming in. You can see on the chart to the right that there was a nice little rebound after the steep selloff over the past week or so. After hearing news of Blackstone & Oaktree rallying up funds to start nibbling on distressed assets, I've been watching the ABX indices for any bids to come. Hopefully we will see a more pronounced rebound in all of these indices which will signal renewed confidence in the distressed secondary mortgage markets.
OakTree Capital Raises $10Bln For Fire Sales (via Reuters)
Investment firm Oaktree Capital Management L.P. is armed with over $10 billion to pick up assets during fire sales as the credit crisis continues to roil financial markets, said chairman Howard Marks on Tuesday. "An enormous part of what lies ahead depends on confidence ... I think it unwise to take actions today on the assumption the worst is over." With three to five years of aggressive investing behind us, it's unrealistic to expect the last four months to have unwound all of that, he said.On a side note, here is the credit news out since yesterday:
This year Oaktree has raised two funds that could invest in leveraged buyout debt that has been marked down because of the credit crisis. One is Oaktree's $3.5 billion Opportunities Fund VII which is expected to pick up a chunk of LBO debt and the other the $4 billion Oaktree Loan Fund which is primarily for the purpose of buying bridge loans related to LBOs.
...yet the market shrugged off the negative credit news and focused on the near term future and what Bear Stearns said about the worst being over. Personally, I don't buy it and I worry there will be a new phase of the credit cycle to reveal itself as ratings downgrades continue. But, the market has its own way of interpreting things, and I'm not going to argue a positive reaction. Its a sign of confidence trickling in a bit as these write downs are now embedded in the mindset of investors. I question how many more it will take to change that sentiment? For now, just expect more write downs and losses to be reported, and more ratings downgrades from Fitch & Moodys.
As Howard Marks of Oaktree Capital said, "With three to five years of aggressive investing behind us, it's unrealistic to expect the last four months to have unwound all of that!"
A: Lets enjoy what looks like will be a nice Walmart induced bounce today, even as credit concerns continue under the surface. Yesterday, Fitch downgraded some $37 Billion worth of structured finance CDO's, Blackstone President warns of a mortgage black hole, and a spillover into the bonds backed by US commercial mortgages which shrank some 84% in the past 8 months. On to the discussion.
Just the facts people as we try to assess the continuing damage bubbling under the surface before it reaches the good people of creditville; a not so nice place to live. A few things are worthy of discussion on a day that will seem like a nice relief rally from the credit selloff.
FITCH DOWNGRADES $37.2 Bln WORTH OF CDO's
As the rating agencies scramble to fix the mistakes they made by dropping the ball on what used to be 'AAA' rated securities, more downgrades were announced.
According to Forbes:
Derivative Fitch said it has downgraded 37.2 bln usd of structured finance collateralized debt obligations (SF CDOs) across 84 tranches.Nothing new here folks. In my post about "Ratings Farce Hurts credit Markets" I discussed how:
Ratings on 66 US cash and hybrid SF CDOs remain on negative watch pending resolution on or before Nov 21, 2007. It said the actions are based on the continued credit deterioration of the underlying collateral, as well as changes to the default forecasting assumptions.
What once was thought to be AAA rated securities, actually are NOT! As rating agencies adjust their criteria for rating these assets, and downgrade the ratings, the investment opportunities shrinks as many hedge funds and other institutions have restrictions on purchases of junk rated holdings.Quite simply, its much harder to RAISE CAPITAL if your assets are getting downgraded to JUNK status; which is currently happening.
CREDIT MARKET SPILLS OVER TO COMMERCIAL MORTGAGES
Ugh. It was logical to think it's just a matter of time until the credit problems start to infect the securitization of commerical mortgages. Well, that time has come.
According to FT.com's article "Hysterical US Bond Investors Threaten Commercial Property":
Global credit turmoil has spilled over into the market for bonds backed by US commercial mortgages, threatening to push down property prices and scuttle deals.What I worry about in this commercial sector, is that many banks have loosened their terms in order to get more business in the past 12 months or so. The story mentioned this too.
Issuance of US commercial-mortgage-backed securities fell to $6.3bn in October, down 84 per cent from a record $38.5bn in March, according to Commercial Mortgage Alert, a trade publication. The decline in CMBS issuance is crucial because such securities have provided an estimated 40 to 60 per cent of financing for new commercial property purchases in recent years.
Moody's index of commercial real estate prices is expected to show that prices flattened or fell in September, after rising nearly 14 per cent in the 12 months to August. RBS Greenwich Capital predicts that US commercial property prices will fall 10-15 per cent next year. Market turbulence is also raising the cost of commercial mortgage borrowing.
In the past six to 12 months, banks have scrambled to attract borrowers by agreeing to looser terms - making loans that exceed the value of properties and accepting more interest-only repayments. Loans rose to 118 per cent of the value of commercial properties in the last quarter, Moody's says.Ramifications of those looser terms is my main fear in this sector.
BLACKSTONE PRESIDENT WARNS OF MORTGAGE BLACK HOLE
Ok, so their CEO got questioned on his exit strategy and the stock has floundered since going public. But the Blackstone Group still has some very smart people, and when the President publicly states something like this, it's worth listening to.
According to FT.com:
The US mortgage crisis is "deeper" and "scarier" than anyone expected, Tony James, president of Blackstone, said on Monday. Mr James, also Blackstone’s chief operating officer, said that deal flow was rebounding but the market for private equity buy-outs would be constrained by the reluctance of big banks to lend during the mortgage crisis.Scary, but perhaps a silver lining? That note referencing the fact that subprime mortgage prices (the bonds) are reaching a point of 'real value' could hint that the Blackstone Group is beginning to nibble on some distressed assets? The one big thing I'm waiting for is liquidity to come back into the secondary mortgage markets to signal that value is being picked on by longer term investors. So far, it hasn't happened but this is an interesting thing to hear.
"The mortgage black hole is, I think, worse than anyone saw. Deeper, darker, scarier. [The banks] are now looking at new reserves and my sense . . . is they don’t have a clear picture of how this will play out and confidence is low."
However, he said that subprime mortgage prices were reaching a point where they offered "real value". Blackstone is more interested in buying mortgages themselves than home lenders, he said.
Also, we need to keep an eye on any forced liquidation of assets that may need to occur in the near future due to ratings changes, unwinding of Yen carry trade, or credit market deterioration. Keep an eye on commodity prices for any signal of major liquidations to meet debt requirements.
The property appraisal business has been coming under the spotlight lately. I expect the lights to get a lot hotter. This has implications for the real estate market overall, NYC in particular and it has implications for how you the buyer may want to approach your real estate transaction.
First a few disclaimers. I am not an appraiser (so all of you who are please cut me some slack on the particulars). Second I have nothing against appraisers, in fact I think they are among the most highly trained professionals in the art of valuing real estate. Thirdly, my apologies for being late on this story. In my piece on asset cycles a couple of months back I did mention that appraisers and bond rating agencies were apt to come in for some severe criticism during this real estate down cycle. But honestly, I should have written about this subject earlier in keeping with Noah's practice of being ahead of the crowd in spotting trends that will be important to you the real estate buyer and investor. That said here goes.
The cover of last Thursday's Wall Street Journal read "Probe Widens on Inflated Home Appraisals"; online version has free preview only.
The bottom line is that N.Y. State Attorney General Andrew Cuomo wants Fannie Mae and Freddie Mac to look into how well they helped protect mortgage investors from losses due to faulty appraisals on loans that should not have been made. This follows on the heels of The Governator of California signing a law in October trying to prevent lenders from pressuring appraisers into making the numbers work on deals. The issue of mortgage fraud - and faulty appraisals being behind 80% of these scams - was raised as far back as early 2005 in the articles below. Now remember fraud follows assets that are in bull markets because as Willie Sutton said "That's where the money is". It's not a characteristic of all the professionals who work as stock or rating agency analysts or appraisers to commit fraud, but these people's opinions are very important to how money is raised and invested and there is great potential for them to abuse their positions or aide and abet others who do.
Certain loans secured by real property fall under the purview of the Federal Institutions Reform, Recovery and Enforcement Act of 1989 (FIREA) and require a written appraisal of the value of the real property asset. Read the law here.
As can be noted from the name of the law this is one of those great pieces of after the fact legislation written in the wake of the last real estate debacle - the S&L crisis. As in all bear markets bad underwriting (assessment of risk) was at fault and FIRREA tried to address this after it was too late.
So Jeff? Why do I care?
1) Expect more properties not to appraise at levels buyers and sellers hoped for - As I opined in my asset cycles piece:
Virtuous cycles where real estate or other asset prices rise for several years tend to condition the professional evaluators like stock analysts to bias their assumptions and adjustments up. On the other side when the asset cycles turn vicious assumptions and adjustments start to be biased down.Often times the government moves this process along by beating up on the evaluators. For example, after a decade long bull market, stock analysts had buy ratings on everything in sight, some ended up being quasi investment bankers. Their positive ratings helped companies' stocks rise helping them pay themselves and raise money. When the boom ended regulators asked why no one had sell recommendations on stocks that appeared to a reasonable person to be overvalued. Wall Street complied and in the teeth of the bear market with stocks getting cheaper daily, analysts came out with tons of sell recommendations. In fact research departments, though they hadn't been given a quota by the SEC, voluntarily decided it was only reasonable to have 20 or 30% of their recommendations be sells. This is a good article on the conflicts of interest in stock ratings and one on the new rules the SEC adopted soon after to prevent future problems.
My prediction is now that the heat is being placed on appraisers they to will adopt some kind of unspoken quota system on how many properties "don't hit the number". This will just put more pressure on the downward move in home prices. According to Jim Gannon of Guild Partners (a trained appraiser):
"Some lenders may appreciate this trend and hide behind more conservative appraisals when telling good customers they can't make a loan that they would rather avoid extending anyway."2) In New York City two of the three appraisal methodologies are typically not used for valuing coops and condos. Coops are leased fee, not fee simple interests. You own shares in a corporation and a right to use an apartment, you don't own the asset, therefore replacement cost can't be used to value these assets. Condos are fee simple interests (you actually own the apartment), but you don't own the building and replacing a single condo is un-realistic. (Note that in the suburbs replacement cost is looked at for home valuations which may put a floor on appraisals if sky rocketing building costs offset the inevitable decline in land values). Secondly, you can't sub-let coops easily, therefore you can't equate them to rentals and value them on an "if rented" income capitalization basis. In general, although Manhattan is dominated by rentals and you should do your own rent vs. buy analysis, appraisers don't try to look at what the cash flows on a condo would be if it were sub let and equate that with value of the condo. So in general appraisers have to rely on one valuation technique, which is comparable sales. With comparable sales prices likely to start to soften, it will be harder to get an appraiser to sign off on your paying up for an apartment. It may even be hard to get them to sign off on a purchase in line with comps from a few months ago if prices have been generally falling.
3) If your dream apartment doesn't appraise don't panic ...RENEGOTIATE. It ain't gonna appraise for anyone else who is trying to buy it. So if the seller wants to sell, its a perfect reason for you to get them to knock down the price.
I love happy endings!
Just a few more details for you macro mavens.
The tools of real estate appraisal. There are three accepted methods to valuing a piece of real estate of any kind - below are some vast simplifications of what they are and why they are very subjective.
1) The income or yield capitalization method - What are the potential cash flows the property can produce and what are they worth in today's dollars. This includes the cash generated by the sale of the property five or ten years out. These future values must be quantified and brought back to today based on a discount rate for the cash flows and a reversion rate for the future sale price. What discount and reversion rates to use are a subjective judgement by the appraiser and the only way to actually get an idea of what rates are being used in the market are by surveys or using historical transaction data (which tends to be a bit stale). FYI nothing says that investors will still apply these same rates to a property in the future...or even next week.
2) The replacement cost method - If you had to build this home or building today, what would it cost, then add on the value of the land (which can be determined from comparable land sales, which can be somewhat stale depending on the market) and subtract any depreciation due to the age of the building being valued versus a new one. For this analysis the appraiser needs to have a good sense of what current construction costs are for different types of buildings, despite the rapid rates of increase and swings in commodity prices in recent years.
3) Comparable sales method - What are comparable properties selling for in the market today, adjusted for any differences in location, size, utility (does it have a pool etc.) and ownership structure (condo vs. coop etc.) and when the sale took place. In a rising market appraisers adjust upward the value of comps that were sold a while ago to account for market appreciation. In a falling market they will have to adjust them down This is often a very good indicator of the current market value of a property, particularly for real estate that trades a lot (its harder to use for valuing things like golf courses that have a serious land value but don't turn over that much). Comp information for residential real estate is reasonably available, and tends to be fresh in large markets, but must be adjusted as no group of four or five properties are that alike.
In many cases more than one technique can and should be used for the appraisal process and an average or median of the values is used to determine a value judgment. Sometimes its weighted towards one or other method, which looks like it should be more accurate in particular case. This along with all assumptions and adjustments mentioned above is where the art of appraisal comes in. Just like valuing a stock, its not a science. There is no absolute correct answer. Only future trading will tell you how far off an appraisal was from the eventual sale value of a property as an appraisal values a property only on a particular date, because market conditions are ever changing.
Billions of dollars of consumer wealth and borrowing power - on paper at least- depend on appraisals. As appraisers start to get less sanguine about valuing properties, there will be less wealth in the nation....how much less is an open question. Due to the additional appraisal methods available to evaluate commercial real estate the impact of changing sentiment among appraisers may be less of an issue.
Other related posts from the blogosphere:
Fannie & Freddie Get Appraised (Matrix)
Appraisers: Pushers & Pressures (Matrix)
What's Wrong with Approved Appraiser Lists (Calculated Risk)
Price is NOT Right: Appraisals Sink Home Sales (Boston Herald)
A: Last minute notice that I will be a guest contributor on Fox Business tomorrow at 7AM's 'Money For Breakfast' segment on FOX Business Channel. Try to catch it if you can!
Among the topics that will be discussed:
Of course, it's out of my hands what actually gets discussed on air.
A: As you guys probably noticed by the type of content I have been publishing the past 6-12 months, the new urbandigs will be a blog dedicated to "MACRO ECONOMIC DISCUSSIONS & INVESTMENT STRATEGIES FOR MANHATTAN REAL ESTATE". The goal will always be to maintain an open discussion forum to analyze and talk about what macro events are occurring that may have a delayed impact on Manhattan real estate. I will post articles based on my thoughts for the day, that are fresh and pertinent to the near term economy and our local Manhattan real estate marketplace. If you are new, its probably best for you to search the archives for past discussions on tips for buyers & sellers. For regulars, I hope you find use from the new tools and consider participating as much as possible on comment threads and the new discussion forum. Here's a breakdown of features the new urbandigs will offer. Enjoy and as always, THANKS for reading!!
1. REAL-TIME MANHATTAN HOUSING DATA - Finally! I am very excited to have partnered with the great people at Streeteasy.com to bring real time data for us to easily track. The main tool will allow you to track TODAY's, 7-DAY, & 30-DAY raw snapshots of activity in the Manhattan real estate market. All data is provided by Streeteasy.com for this snapshot and is the data used for the charting system I'll get to in a moment.
How It Works: Streeteasy's systems update once a day, in the early hours. Once we grab the daily update, the raw data won't change again until the following morning. I worked with the streeteasy team to fine tune data collection and provide:
a) only listings for the island of Manhattan
b) only co-ops, condos, and townhomes
c) excluding any listing without exact address
d) only exclusive listings
e) duplicates removed
You may notice the 30-DAY isn't there yet! Thats because the finished product with all rules in place to clean data used for these stats, is only 3 weeks old or so. Once 30-DAYS of data is received, the # will display on the widget. We will continue efforts to fine tune and enhance these tools as we go. We have reached a point where I'm confident enough to get it live, but consider it in BETA for an additional 6 months or so.
2. DISCUSSION FORUM - This has been the most requested new feature. From now on, if you have a question, problem, thought, service needed, opinions wanted, advice needed, whatever, just post a new discussion in the TALK REAL ESTATE tab above. It is dynamic, so there is no moderating for new discussions and I decided not to install a 'create account' requirement. The discussion forum is open to all at any time.
I plugged in a batch of categories that I thought covered most areas related to real estate, but if I left something out you can always email me the suggestion and I'll add it. I only ask that you keep it clean as I will have to remove any discussion that may pose as a liability for me.
To start a new discussion, simply click on the appropriate link, type in your name or screen name, select a category, type your main question in the subject line, and then the actual question in the comment box. The Category, Subject line, & # Comments will be displayed on the main discussion forum. The system will place the 'last replied to' discussion at the very top.
3. CHART MANHATTAN INVENTORY TRENDS - My favorite new feature is taking a bit longer than thought to build. We will launch the charting system by next Monday, November 18th. Please check back here soon.
When the charting software is activated, it will only display data recorded when we finished the charting database, which is at 12 days right now or so. Needless to say, consider the future charting section to be in BETA for the next 3-5 months as we fine tune the visual features and collect enough data to start discussing trend changes.
4. AUTOMATED COMMENT PUBLISHING - Write a comment, type in the security work, publish, and reload page. Bam, your comment is up. Sorry it took so long! Hopefully this will entice more to participate and share their thoughts on comment threads!!
5. BOOKMARKING - Feel free to add any article you want to share publicly to any or all of the following bookmarking / social media sites. Account may be required.
6. CREATIVE ADS - It's been just over 2 years and I've said no to all advertising requests thus far, with exception of Google text ads that pay for my health insurance. Thanks Google, but inflation is a bitch! I hope you don't mind, but I installed a simple ad system that has 3 spots under the real time housing data widget at the top right. I tried to make it as unobtrusive as possible, so that it doesn't distract form the content and tools this site strives to offer. There will be no flash or pop ups allows; only still creative ads and slow animated gif's. If you are an advertiser, you can learn more.
A: Another day, another bite from the credit monster. Lets keep the credit discussions going as this is by far the most important macro economic news going on right now, with $95 oil a close second, and the free falling US dollar an even closer third. Here are todays credit crunch headlines as well as the latest 'level 3 assets' disclosures as filed to the Securities & Exchange Commission.
First, lets size up what we know (which is already outdated) as disclosed in filings to the SEC for level 3 assets exposure by major banks and brokerages; again, this is important because these numbers will likely have to be revised higher once the new accounting change takes place on Nov. 15th.
Source: FACTBOX: Sizing Up Banks' Hard To Value Assets (Reuters)
MORGAN STANLEY (NYSE: MS) -----> $88.21B as of August 31st
GOLDMAN SACHS (NYSE: GS) ------> $72.05B as of August
LEHMAN BROTHERS (NYSE: LEH) ---> $34.68B as of August 31st
BEAR STEARNS (NYSE: BSC) --------> $20.25B as of August 31st
CITIGROUP (NYSE: C) --------------> $134.84B as of September 30th
MERRILL LYNCH (NYSE: MER) ------> $15.39B as of September 28th
BANK OF AMERICA (NYSE: BAC) ----> $21.64B as of June 30th
TOTAL = $387.06 Billion of Level 3 Assets Known So Far
Now, the $250 Billion dollar question is how will these numbers be revised in future filings after the accounting change takes place on November 15th? Note that these are not losses, they are the total assets deemed by the company to fit into the category of un-tradable assets because not enough liquidity exists in the marketplace to get a true price value on the securities; so instead of marking them to market they are marking the asset values to models. In other words, the firms use these in-house valuation models to put a price tag on what these assets might be worth if they could be traded. Needless to say, you can see the problem with certainty here and why future write downs and losses are likely as the secondary mortgage markets continue to be seized up!
Today's credit crunch headlines:
Wachovia Sets $1.1B in OCT Losses (AP)
Wachovia Corp. said Friday the value of collateralized debt obligations in its portfolio fell about $1.1 billion in October, making it the latest financial institution to warn of sharp losses last month in the credit markets. The company also said it plans to boost its allowance for loan losses in the fourth quarter due to expected credit deterioration in the housing market in certain regions. The provision is pegged at $500 million to $600 million in excess of charge-offs in the quarter.Barclays Denies Speculation About Write-Downs (Bloomberg)
Barclays Plc, Britain's third-biggest bank, denied speculation that it will announce a substantial writedown in the value of its assets after its stock fell as much as 9.1 percent.HSBC Exits Mortgage Securities (NY Times)
"There is absolutely no substance in these rumors," spokesman Alistair Smith said. He also denied speculation that Chief Executive Officer John Varley may step down.
HSBC Holdings, the British bank, said it had stopped sales and trading of mortgage-backed securities in the United States after the collapse of the subprime market forced it to close two lending units.On The Subprime Endangered List (BusinessWeek)
The bank will keep its asset-backed business both globally and in the United States, Mr. Goad said, including securities backed by non-United States mortgages.
Which CEO will be catching subprime heat next now that Citigroup's Chuck Prince is out? It will likely come down to whose losses are biggest. Bear Stearns' James E. Cayne may be the most vulnerable CEO.Those last two sentences are why I included this in today's discussion! Especially the very last sentence: "That, in turn, could make it harder and costlier for Bear to borrow the money it needs to run its day-to-day operations." Keep in mind that as this credit crunch evolves to future phases, ratings downgrades become more and more likely and that in itself can cause more problems. The vicious credit cycle feeds on itself.
Bear's biggest problem may be its so-called Level 3 assets. That risky group includes all securities that require a lot of guesswork to value - such as mortgage-related debt and assorted corporate loans. Those hard-to-trade assets are susceptible to markdowns - and Bear has $20 billion worth. Bear has offered little hint about the type of Level 3 assets it holds, but analysts think the bulk are mortgage-related. In its recent conference call, Bear said it had $2.4 billion in subprime exposure.
For a company of Bear's size - its market value is roughly $15 billion, vs. $165 billion for Citi and $45 billion for Merrill - a $3 billion-plus hit would be disastrous. It would be nearly triple the $1.1 billion in net income Bear generated in the first nine months of the year. And it would likely tarnish its credit rating, signaling to lenders that the firm has a thinner cushion against potential losses. That, in turn, could make it harder and costlier for Bear to borrow the money it needs to run its day-to-day operations.
A. I've been waiting and watching the higher rated ABX index for sharp movements, and it finally came yesterday. The 'AAA" ABX index absolutely plunged yesterday falling from 80.17 to 71.88, a plunge of over 10%! To put that into perspective, it would be like the DOW falling 1,340 points in one day; if that happened do you think people would notice? The blogosphere has been successful in analyzing and interpreting the ABX indices for some time now, so it's no surprise that I need to bring this up after yesterday's move. As the contagion hits higher rated paper and investors desperately try to buy credit protection for these holdings, is it only a matter of time for alt-a and prime mortgage backed securities to get their day at the confessional? Needless to say, alt-a & prime make up a significant larger portion of total loans outstanding than subprime.
First, lets look at the chart courtesy of Markit:
Wow. Quite a move. In fact, all of the ABX Indices got whacked again yesterday. The only difference today is that it now means something to people who normally would never monitor trends of these indices. It's just a clear sign that deeper problems still exist in creditville.
For those that are a bit more educated regarding these trades, or are employed in or around this industry, here is how the ABX trade works (courtesy of anonymous source right in the middle of this derivative trading action at a hedge fund). WARNING - This is not easy to understand and I don't fully get it, so don't ask:
Here is how an ABX trade works:Don't say I didn't warn you in advance how the ABX trade works! Here are my concerns:
I want to buy protection on 100mm. The ABX coupon is 70 bps and the price is 95. I pay (1 - 0.95) * 100 mm = USD 5mm upfront. Every month (different compounding on ABX) I pay 70bps/12 * 100 mm = $58,000
1% of the pool defaults and I get paid USD 1mm. Going forward I pay the 70 bps on 99mm. In fixed income when 'spreads widen' then 'bonds gets cheaper' because you are discounting future cashflows at a higher rate.
When ABX spreads widen the bond price drops and I can close out the trade at say 85 by selling protection. I will receive (1 - 0.85) * 99mm = $15mm making a P&L of about 10 million, minus whatever coupons I paid plus whatever default payments I received.
You should recognize that this discounting of future cash flows assumes you know WHEN these cash flows will take place --> duration is critical.
Over the life of the trade the price will drift to 100. Imagine it with one day left - how much upfront would you pay for 1 day of protection ? = none.
Prepayments reduce the notional but don't trigger protection payments which is why you need to get the duration right initially. Quoting in bond points removes the need to agree on a duration - it's implied in the price. If we agree on a price we're done - you could have gotten to that price with different spread and duration assumptions than me.
KEY POINTS - there is a lot more to pricing an asset backed instrument than meets the eye - interest rates, mechanics, prepays, defaults, timing, carry all have to factor in and there is no simple answer. You need to put it all into some sort of model and your intuition is often wrong. There is a lot more to it than "I think there will be more defaults so spreads should go wider". Remember that when yields or spreads go up you are discounting future cash flow at a higher interest rate so the present value of a future dollar is less and the present value of the sum of these cash flows is less so the price is lower. This is the inverse relationship between bond prices and interest rates.
1. The FASB 157 accounting change will adjust how Level 3 assets are classified and how they get disclosed to investors. This is a major problem. What used to be able to be classified as tier 2, may now need to be adjusted to tier 3. Needless to say, banks & brokerages used this gray area to underestimate the exposure of assets considered under level 3 accounting disclosures.
2. The problem is no longer contained to subprime. The plunge in AAA ABX is consistent with what my sources were telling me for past 10 days or so. Investors are buying credit protection for alt a and prime mbs holdings. You can imagine the worry if its no longer just a subprime illness. Of course there were problems making AAA paper from subprime junk, but what if this spreads to higher quality paper before its securitized?
3. Ratings downgrades will have a two pronged effect. First, it will restrict who can buy the distressed assets as many pensions accounts and even hedge funds have restrictions on junk purchases. Second, level 3 accounting adjustments due to downgrades of holdings to markets that are untradable?
A: More of the same today as GM's insurance segment and other businesses led to an astounding $39B loss. I really hope with this new accounting changing for Level 3 Assets coming Nov. 15th, we are not entering the next version of Enron, Worldcom, & Tyco type surprises. Here are some headlines validating the continuing credit crunch, the falling dollar, and $100 oil. The story is still being written.My thoughts at the end.
WaMu: Expected "Soft Landing" Becomes "Severe Downturn" (Reuters via Calculated Risk)
"The soft landing we were anticipating quickly transitioned to a severe downturn," Chief Executive Kerry Killinger said in a presentation to investors in New York. "This process is painful."Stocks Pull Back As Dollar Tumbles (Yahoo Finance)
Stocks fell sharply and bonds jumped Wednesday after the dollar sank further amid speculation that China will seek to diversify some of its foreign currency stockpiles beyond the greenback. The 13-nation euro hit a fresh record against the dollar -- rising to $1.4729 -- before falling back. The dollar fell not only against the euro but in Asia following a report that a senior Chinese political figure said China should diversify its $1.43-trillion foreign exchange reserves into the euro and other strong currencies.
GM Reports $39Billion Loss on Deferred Tax Charge (Bloomberg)
General Motors Corp., the world's largest automaker, reported a record $39 billion quarterly loss after three money-losing years forced the company to write down the value of future tax benefits.Bottomless Banking (Forbes)
The Detroit-based automaker signaled that it won't generate enough earnings to use the benefits, citing defaults on subprime mortgage loans at GMAC LLC and "more challenging" auto-market conditions in the U.S. and Germany.
As Citigroup faces another massive quarterly write-down of credit derivative assets, questions remain about other banks' exposures, and when the crisis goes from a trading book issue into an industrywide credit quality problem. Morgan Stanley may be on the hook for another $6 billion in write-downs for collateralized debt obligations and other mortgage exposure, according to Fox-Pitt Kelton analyst David Trone. And rumors continue to circulate about Goldman Sachs, which so far is the least scathed of all the Wall Street firms.Within Fed: Resistance To More Rate Cuts (NY Times)
Traders are intensely focused on level 3 reported by the banks, because new accounting rules changing the way assets are valued kick in later this month and could fuel a new wave of write-downs. To hear executives from the banks talk in recent weeks, Wall Street is going through another one of those unprecedented moments where the models that perform so well in good times prove utterly useless when things go haywire.
In an unusually blunt interview, the president of the Federal Reserve Bank of Philadelphia said he already expected growth to slow to an annual pace of 1.5 percent or less. But he said he would not support another rate cut unless the slowdown appeared to be even sharper than that.Crude Oil = $98; Gold = $845 (The Big Picture)
Mr. Plosser suggested that he disagreed with the Fed's decision to lower the benchmark federal funds rate last week, its second rate cut in two months. "I happen to think this decision was a close call," he said.
The Fed recklessly abandons their price stability mandate, and this is what it has wrought: Dollar at record lows, oil and gold near all time highs.Wow, just a lot of crazy things going on right now. I think the biggest concern right now should be the magnitude of write-downs as the truth makes its way to the surface AFTER the accounting rule change takes place on Nov. 15th! I discussed Level 3 Assets on Saturday and told you to expect chatter about this in the media as we near the deadline.
It is the first rule of economics, yet so many idiots pundits cannot seem to to remember it: THERE IS NO FREE LUNCH.
In physics, the corollary is that "every action has an equal and opposite reaction." Why this is too complex for their little frontal lobes is beyond me. It is simple. It is basic. It is easily understood by even supply siders.
Think about all of the brainiacs who have been begging for rate cuts -- and from historically moderate rates -- over the past 2 years. Be sure to thank them for the reckless disregard for your wallet.
What we need to look out for now, is what round 3 of the credit crunch may be caused by. I think it will be lowered valuations for Level 3 Assets. On November 15th, a new accounting rule will require the disclosure of these assets whose market valuations were assigned by in-house models, as the market where they trade in are illiquid and in distress.Even Rick Santelli, talking from the bond pits in Chicago, mentioned how the blogosphere was ripe with talk about the upcoming FASB 157 accounting change! He's right, and its the unknown that worries me. How many more surprises are out there and how many quarters of earnings will be adjusted as the truth comes out? All of a sudden the P/E's of companies that appeared so attractive from a valuation standpoint, will rise significantly as earnings disappear!
It's the balance sheets that will define round 3 of the credit crunch as the value of level 3 assets gets disclosed to investors. Hard to imagine how the assigned valuations of these un-tradable assets rise; instead, expect to see significant write-downs and more distress as we work through this process.
The ABX indices have correctly predicted the carnage in the mortgage markets starting back on October 11th; I first talked about it on Oct. 16th. R-E-S-P-E-C-T the ABX! Investors are STILL pulling bids and its clear the demand for credit protection is high as the ongoing credit crisis threatens holdings that cannot be sold on the secondary mortgage markets. Expect:
a) lending capital to be used for highest quality borrowers
b) lending rates to continue to be disconnected from falling bond yields and fed funds rates
c) risk to continue to be re-priced for residential mortgage backed securities
d) lower quality borrowers to find higher rates
e) very tight lending & underwriting standards
f) secondary mortgage markets to be seized up restricting available capital for loans
...to continue until this situation clears up! I really wish all the news would just come out so we can get through this quicker, but that won't happen. I think the idea of a recession w/out future easing in fed funds rates is the sleeper call to get through this conglomerate of problems. A recession helping to ease the credit problems / weed out bad bets, national housing inventory problem, higher oil prices, higher commodity prices, weakening dollar, avoid bail out / moral hazard, pipeline inflation is becoming clearer each day.
We need to clean the slate as stagflation becomes a very real possibility; recall my post back on April 19th:
What you need to know is that right now we very well could be heading into a period of stagflation; that is high inflation and slowing economic growth via rising unemployment or a recession. The problem with this scenario is that if the fed tries to control one problem they can make the other problem much worse!
A: Would love some reader participation here, especially if you are in financial industry and need to post comment anonymously. Most of my contacts I have surveyed STILL expect to get paid their full bonuses come early 2008; in fact 90% of the friends / clients / colleagues I talked to about this said they expect a satisfying bonus season. But I wonder if it will turn out this way. Manhattan real estate is seasonal and it's normally the JAN-APRIL bonus season that turns out to be the most active time of year for sales volume, inventory declines, and bidding wars. What will happen this year given the carnage in the financial sector?
This is going to be the first big test for Manhattan real estate. I'm somewhat relieved to hear the positive words from those I keep in touch with about these topics, but I have to wonder whether these people are a good representation of the whole industry? I'm not so sure; given the generally positive nature of the self. It's very hard for me to imagine a bonus season where everyone gets their expected bonus. The write-downs in the brokerage and banking world have been in the tens of billions so far, and with some 8 weeks or so left in the year, and the Nov. 15th accounting change, it's all but guaranteed that more write-downs of losses will come. It's still too early too tell how the bonus season will be, with such uncertainty in this sector.
With Bill Gross of Pimco declaring this credit crisis as a "$1 Trillion Problem", and predicting "$250 billion of subprime and Alt-A mortgage loans to default and those defaults will fall to the balance sheets of investment stalwarts such as Merrill Lynch and Citigroup", it's hard to ignore the side effects to bonus pool. That would mean we have some $200+ Billion of losses yet to be reported.
My sentiment for a great bonus season has certainly declined in the past 3-4 weeks. No question about it. When I was interviewed for the OpenHouseNY segment, back in mid September, we didn't know how bad the credit crunch was getting. Needless to say, the credit environment has deteriorated significantly in the 5-7 weeks after that taping. I'd be a fool to stick to what I said in the past when the environment has changed so drastically.
As I reported a few times over the past 3 months or so, buyer confidence has dipped and sales volume seemed to have slowed. This combination helped to build inventory slightly from the month of August to September, as noted by Jonathan Miller's reporting. While the changes are small and not enough to base any trends on, they are worth noting given the change in buyer confidence.
I expect bonuses to come in, but not as widespread (in total bonuses handed out) and not as high (in size of bonus) as some may expect with stocks just off record highs. The financial sector has felt a lot of pain, and management knows the level of toxic waste still on their books. I would go far as to say that 2009's bonus season looks to be the real problem, not this years, as we still have some time to get the full depth of losses off the books.
For Manhattan inventory trends, this bonus season will be especially important! We must monitor the sales pace during these normally frenzy months to see if the deals come through as expected, or not. If they don't, and volume is light, we will have much more inventory heading into next summer than we did in previous years.
FINANCIAL SECTOR WORKERS ---> What is your feeling about your upcoming bonus?
A: Some good stuff out there in the blogosphere that I would like to share with readers.
Quitest October in a Decade (truegotham.com)
That said, if the October and first week of November activity are any indication of what's on the horizon for the New York City real estate market, that correction may indeed be just around the corner. I'm not prophesying by any stretch here as that always gets me into trouble but this has been the quietest October I have seen in the past 10 years.Citigroup: $134.8 Billion in 'Level 3' Assets (Marketwatch.com via calculated risk)
Citigroup Inc. ... said its so-called level 3 assets as of Sept. 30 were $134.84 billion. Level 3 assets are holdings that are so illiquid, or trade so infrequently, that they have no reliable price, so their valuations are based on management's best guess.Lara Meyer: I'd Be a Dove on This Fed (realtimeeconomics.com)
But Mr. Meyer, now a Fed watcher at his old firm, Macroeconomic Advisers, feels like a soft-money inflationist next to the current crew running the central bank.Credit & Financial Bloodbath Will Continue (Prof. Nouriel Roubin's Blog)
The Fed, he says, left last week's meeting, at which it cut rates by a quarter point, "with even more resolve" not to cut rates again. "The markets may have pushed the FOMC into a cut in October, but we think the message is: 'Push us once, you win. Push us twice, you pay!' This is one of the most hawkish Committees that I can recall … Put it this way: I would be the dove on this committee today, and I don't usually do even a good imitation of a dove."
The amount of losses that financial institutions have already recognized - $20 billion - is just the very tip of the iceberg of much larger losses that will end up in the hundreds of billions of dollars. But calling this crisis a sub-prime meltdown is ludicrous as by now the contagion has seriously spread to near prime and prime mortgages. And it is spreading to subprime and near prime credit cards and auto loans where deliquencies are rising and will sharply rise further in the year ahead.Fitch May Downgrade Bond Insurers After New Test (bloomberg.com)
Valuation of illiquid assets is a most complex issue; but starting with the November 15th adoption of FASB 157 the leeway that financial institutions have used so far for creative accounting will be much more limited. Valuation of illiquid assets is a most technical issue. But new regulations will limit the ability of financial institutions to put "illiquid" asset in "level 3" securities, i.e. securities where the lack of market prices allows them to use dubious "valuation models" and "unobservable inputs" to value such assets.
Fitch Ratings may lower the AAA credit ratings on one or more bond insurers after a new review of the companies' capital takes into account downgrades of collateralized debt obligations that they guarantee.
Fitch said it will spend the next six weeks reviewing the capital of insurers including MBIA Inc., Ambac Financial Group Inc., CIFG Guaranty and Financial Guaranty Insurance Co. to ensure they have enough capital to warrant an AAA rating. Any guarantor that fails the new test may be downgraded within a month unless the company is able to raise more capital, New York- based Fitch said today in a statement.
Fitch said it decided to review the bond insurers after "broader and deeper' downgrades of "CDOs, which package debt such as subprime mortgage securities and loans.
The bond insurance industry has guaranteed more than $1 trillion of bonds issued by U.S. cities and states as well as bonds backed by mortgages, credit cards and other assets, and the guarantee allows borrowers to use the insurers' AAA rating.
A: I'm going with my gut on this one. I think the credit crunch has matured to the point where we could see Ben Bernanke & Co., surprise with an inter-meeting cut. I know, I know, this goes against everything I said only a week ago when I didn't want the fed to cut. Fact is, I don't! We have enough problems with pipeline inflation, weak dollar, and rising commodity and energy prices. But there is a big difference between what I want, and what will happen. I think the credit crunch is getting so bad, that it wouldn't shock me to see the fed use the element of surprise before years end to try and restore some confidence via a stimulative inter-meeting rate cut.
The problem is the rate cut will not be a cure, it will only dampen the effect that the credit crunch has on the overall economy in the months to come.
Here are my concerns:
a) Nov. 15th accounting change; level 3 assets set stage for more widespread write downs
b) Citigroup & Merrill announce pain & management shakeup
c) Mortgage insurers whacked; should insurance availability for CDO's & CMO's shrink or outright disappear, or claims can't get paid out, we'll have major problems for those holding these bad assets
d) Ratings agency downgrades will lead to more credit pain
e) Nationwide housing slump continues; foreclosures & delinquencies rise predicted by ABX Indices
Again, I think the best way to get out of this mess is for our economy to go through a nasty recession that penalizes those that made these bets, without aggressive easing by our fed that may cause a moral hazard, weaken our dollar further, and buildup pipeline inflation. The recession itself will flush out the problems, clean off the balance sheets, and help ease inflation pressures. But, I doubt the fed will stand idle and let this scenario play out like that. They will most likely take action and cut rates to limit the severity of any recession, at the expense of:
a) bail outs; creating a moral hazard
b) weakening our US dollars further
c) rising energy prices
d) rising commodity prices
e) pipeline inflation
A: I want to discuss what will soon be in the media alot, as round 2 of the credit crunch already is underway! First off, I don't care what CEO's get fired or how many rate cuts printing press Ben Bernanke does, the credit crisis problems lie so deep that these actions will not cure the disease; it will only provide some temporary relief as the problem phases itself out. What we need to look out for now, is what round 3 of the credit crunch may be caused by. I think it will be lowered valuations for Level 3 Assets. On November 15th, a new accounting rule will require the disclosure of these assets whose market valuations were assigned by in-house models, as the market where they trade in are illiquid and in distress.
LEVEL 3 ASSETS (via Marketwatch.com) - Level 3 assets are those that trade so infrequently that there is virtually no reliable market price for them, and valuations for these assets are based on management assumptions.
Problems people! I've discussed many times in the past few months how the markets for these CDO's, CMO's, and other mortgage backed securities have seized up. There are just no bids and no volume, making no market!
Now, what we do know is that brokerages, banks, hedge funds, and other institutions are holding very complicated assets whose actual value has virtually vanished. The key word here is actual, or real market value. But these level 3 assets are NOT being marketed to the real market! They are being held, hidden on the books of major corporations and institutions, as management places their best-guess valuations that are almost always grossly overvalued!
Round 3 of the credit crunch will be the 'coming out' of sorts of the adjusted valuations of these level 3 assets leading to the uncovering of major losses to the most exposed corporations and institutions. I think this process will take months to play out and we are heading right into the heart of storm as November 15th approaches.
RULE SFAS157 (via PrudentBear.com):
From November 15, we will have a new tool for figuring out how much toxic waste is in investment banks' balance sheets. The new US accounting rule SFAS157 requires banks to divide their tradable assets into three "levels" according to how easy it is to get a market price for them. Level 1 assets have quoted prices in active markets. At the other extreme Level 3 assets have only unobservable inputs to measure value and are thus valued by reference to the banks' own models.To get an idea of the potential size of this problem, here is what I was able to find that is somewhat fresh news.
GOLDMAN SACHS - said Wednesday (OCT 10th) the size of its level 3 assets at the end of third quarter increased to $72.05 billion from $54 billion at the end of the second quarter.
In terms of percentage, the New York-based investment bank's third-quarter level 3 assets amounted to 7% of the total assets, compared with about 6% at the end of the second quarter.
Figures that have been disclosed show Lehman with $22 billion in Level 3 assets, 100% of capital, Bear Stearns with $20 billion, 155% of capital, and J P Morgan Chase with about $60 billion, 50% of capital. However those figures are almost certainly low; the border between Level 2 and Level 3 is a fuzzy one and it is unquestionably in the interest of banks to classify as many of their assets as possible as Level 2, where analysts won't worry about them, rather than Level 3, where analyst concern is likely.So far, subprime mortgages and the derivative products associated with them has caused round 1 and round 2 of the credit crunch. We saw what effect it has on the markets when Merill, Wells Fargo, Citigroup, Bear Sterns, Bank of America, and Washington Mutual write down losses far exceeding original estimations. But there are far more assets out there whose valuations have been guessed at and will soon be classified under the level 3 category. As the PrudentBear.com article points out, these include:
a) Alt-A & Prime Mortgage Backed Securities - As home prices fall, debt-to-equity ratios rise. As ratios pass 100% of original loan-to-value, the mortgage becomes "uncovered", and the securities related to them become unmarketable level 3 classified assets whose value gets assigned by management
b) Securitized Credit Card Obligations - $915B credit card debt outstanding
c) Leveraged Buyout Bridge Loans
d) Asset Backed Commercial Paper - Slowing market from $1.2Trillion to $900Billion in past 3 months
e) Credit Default Swaps - Hello ABX Indices; we discussed the plunge here
f) Complex Derivative Contracts - Interest Rate & Currency swaps
According to The Business:
It's the level 3 assets that must concern investors more than ever as they are marked to in-house models. Those models are more art than science and are subject to the banks' judgment.It's the balance sheets that will define round 3 of the credit crunch as the value of level 3 assets gets disclosed to investors. Hard to imagine how the assigned valuations of these un-tradable assets rise; instead, expect to see significant write-downs and more distress as we work through this process.
Much of the attention of such Level 3 assets has been focussed on mortgage-related assets. But they also include complex derivative contracts, credit card receivables, loans linked to leveraged buyout loans and asset backed commercial paper. From Nov. 15, the Level 3 disclosures will be accompanied by details of the basis on which they are classified.
I can feel the new development slowdown - can you feel it? I know Elliman superstar Doug Heddings feels it as he recently reported on "Broker Incentives" two days ago on his blog TrueGotham.com:
I couldn't resist blogging about something I just heard. Avonova, one of the latest condo conversions on the Upper West Side located at 81st and Broadway is launching a new program offering broker and buyer incentives for upcoming sales. Buyers will receive a $10,000 gift certificate towards the purchase of California Closets and their agents will receive a full 4% commission and an additional $2500 American Express gift card at closing. The reason I share is that incentives are rarely seen in a hot market where demand outweighs supply. Perhaps this is a sign that the Fall market isn't providing the demand that sellers and developers had hoped for.My new development buyers are just not in the game right now. They're looking, but no one is buying anything. They're worried about their jobs and their bonuses. They're concerned about a recession. They anticipate a market downturn in the first quarter of 2008.
Unfortunately, I don't have a crystal ball and I don't know how long it will last. All I can tell my buyers is that if they buy now there are some good deals and incentives out there. Thanksgiving to New Years is generally a dead time for sales and is probably a big reason why developers want to stimulate sales before year end. Since we aren't expecting record bonuses this year, sales are probably going to be fairly weak until people at least find out what their bonus is going to be and whether they still have a job.
My low end buyers are buying, but they are resale buyers since new development basically starts at $900K. The $1M+ new development buyer seems to have gone into hibernation. The buyers I have over $1M right now are looking for "value". They want the worst house on the best block or a great price per sq ft.. As long as they are getting a "good deal", they are buying - but right now, that means they are buying resales.
Developers must be feeling the slowdown because I can hear a hint of desperation in the voices of their salespeople. Salespersons at new developments and conversions are quietly dropping hints that the developer "might" negotiate the transfer taxes or throw in a storage unit. They are encouraging customers to "make an offer", whereas a few months ago, they would flat out tell you there was no negotiating on prices. This is definitely a new tune from the spring when the same sales agents practically laughed me out of the room when I asked if the developer would pay part of the closing costs or was offering concessions of any kind.
And although I'm not seeing prices come down yet, the developers must be feeling a crunch. They are doing everything they can to move apartments without reduce prices. In the past month, I have been invited to more catered broker's open house tours and cocktail parties at new developments than I can possibly schedule into my blackberry. Suddenly vacations, AmEx gift cards, and offers of higher commissions are coming out of the woodwork! My prediction is that there are more incentives come over the next few months.
So who's offering?
The Chatham at 464 W 44th street is offering the following incentives to brokers:
A $15K AmEx giftcard to the broker that sells PHC, a 2bed 2bath, 1576sf, E and W exposure for $2.5M.
A $5K AmEx giftcard to the broker that sells PHA, a 1bed 1.5bath, 828sf apt for $1.25M
(Toll Brothers frequently pays 2% commission but most new developments pay 3%. Some developers, such as Related, usually pay 4% commission, but in general, 3% is the norm to the broker bringing the buyer).
45 Park Avenue is offering 5% commission to brokers to help them sell the last 10% of their units
Avonova is offering a $10K California Closets gift certificate for buyers and their e-flyer says to "ask about additional broker incentives." They are also offering 4% commission.
SohoMews is offering to pay 50% of the commission to the buyer's broker at the contract signing instead of at the closing.
865 UN Plaza - Developer paying closing costs (this isn't new, they have offered this since they opened)
517 W 46th - Paying transfer taxes & attorney's fees
75 Wall - Offering 18 month rate lock
Twenty9th - Developer offering long term rate locks and rate buy-downs
The Clement Clark is offering to pay the developer's transfer taxes, which will save you 1.8% of the sales price in closing costs.
Morgan Court was offering to pay the buyer's transfer taxes for the next 5 apartments that sell.
Loft 14 - paying transfer taxes (1.8% of sale price)
Here are some other events appearing in my inbox. Brokers are fairly easily bribed into attending new development events when free food and an open bar are involved.
** You're Invited to a SOUTH STAR Event at the Hotel Gansevoort - Wednesday, November 7 **
** Your Invited to Mohawk Atelier for a Preview of our Astonishing Penthouse - Thursday, November 1 from 5-7:30pm **
I will keep you posted periodically with where the incentives are! You never know where the next "great deal" will appear! :)
A: I want to quickly discuss one more aspect of why the carnage in the CDO markets and other structured credit markets are getting killed. It lies in the rating agencies! What once was thought to be AAA rated securities, actually are NOT! As rating agencies adjust their criteria for rating these assets, and downgrade the ratings, the investment opportunities shrinks as many hedge funds and other institutions have restrictions on purchases of junk rated holdings. Let me explain.
A very big portion of the problem lies in the ratings of these CDO's, CMO's. Although many were and still are rated AA and AAA, they really are more like junk! We just don't know and neither do the investment banks that hold the assets!
The rating agencies are in the process of fixing their mistake; by adjusting their ratings criteria. Moodys already cut the ratings of about $35B worth of CDO's, but they are in the process of reviewing a hell of a lot more of these instruments. Once they get downgraded to basically junk status, investments in them become restricted by hedge funds and the like! That exponentially will hurt this problem of illiquidity as there already is no market for valuing these instruments. So how do you mark these assets to market value if there is no market? You can't? You have to try to value them and that is what is being adjusted by many of these large banks as the original valuations are way off!
According to Bloomberg:
Moody's Investors Service cut the ratings of collateralized debt obligations tied to $33 billion of subprime mortgage securities it downgraded this month, a decision that may force owners to mark down the value of their holdings.This is another reason why the ABX indices are plunging as the insiders buy credit protection and bet that more carnage is coming in foreclosure world. I hope this helps those desperately trying to understand what is going on in this very complicated, and un-transparent world! Expect many more ratings downgrades to come as the review process continues! Also expect the pool of buyers for these distressed assets to shrink as the rating downgrades limits investments in these instruments as they don't pass what is 'allowable' by funds previously looking to buy them at cheap prices!
Securities with ratings as high as AAA from at least 45 CDOs were either cut or put on review for a downgrade, according to individual statements distributed today by the New York-based ratings company.
"They're going down now and they're likely to go down further in the future," said Dan Ivascyn, a managing director at Pacific Investment Management Co. in Newport Beach, California, manager of the world's largest bond fund. "This is just one step in aligning ratings with where the market is trading bonds."
Almost 480 tranches of CDOs had been downgraded, according to an Oct. 5 report by Morgan Stanley structured credit analysts. That included 69 AAA securities and 106 with AA ratings.
A: Drug dealer Ben Bernanke & co. delivered a 1/4 pt rate cut to the addicted markets and all but declared, "NO MORE DRUGS FOR YOU"; let the hangover begin! Future actions are now entirely data dependent as the fed views current policy as balanced between inflation risks in the pipeline and slowing economic growth. The knee jerk rally on wall street was not surprisingly short-lived, especially as the deeper problems of credit woes began to resurface! This credit crunch is not over, and the news about foreclosures rising and expected delinquencies going into 2008 is not news at all if your on top of macro economy and reading your stuff!
First, I want to say one thing about the fed. The action taken yesterday is a preventative insurance policy for the economic weakness expected as the spillover of a nationwide housing slump and credit crunch hits the consumer in 2008! As I said in my post in mid August regarding 2008 ARM resets:
"It's 2008 that we have to worry about and how that may or may not further change the lending environment and ultimately housing."Expect things to get worse before it gets better and the environment to be ripe pickings for contrarian investors whose eyes light up when an asset class gets to be really 'down & out'. I expect 2008 to be the year for these opportunities, possibly continuing into early 2009.
As far as the credit woes coming back to haunt the markets, it shouldn't be surprising to any readers of this site that foreclosures spiked higher & ARM rates rose! After all, the plunge in the ABX indices and the freefall in the mortgage insurers have been predicting this for weeks now. According to CNN Money:
Foreclosure filings climbed during the third quarter of 2007 with no relief in sight, according to a report released Thursday. The report by RealtyTrac, an online marketer of foreclosure properties, showed the number of filings rose 30 percent from the previous quarter and nearly doubled from a year earlier. More than 635,000 foreclosure filings were reported nationwide - one for every 196 households. The filings include everything from default notices to auction sale notices to actual bank repossessions.On to those that hold these dysfunctional loans turned into mortgage backed securities. There are billions and billions of dollars in bad assets held by banks, brokerages and lenders whose market value is virtually impossible to figure out. Even the holders of these notes don't know what they are worth. All we know is that the markets to buy these assets are in distress and selling at such unfavorable levels is extremely undesirable. So, you write down the losses without physically selling the assets; and this is what is happening. The problem with this is it doesn't cure the disease! Here is an idea of what we found out in the past week alone:
"August and September were the two highest monthly foreclosure filing totals we've seen since we began issuing our report in January 2005," said Saccacio.
Citibank (NYSE: C) - It took more than $3 billion in writedowns in the third quarter on its exposure to leveraged loan commitments, subprime mortgages and fixed-income trading. Citi's total credit costs jumped by $3 billion, as the bank recognized $780 million in credit losses and took a net charge of $2.24 billion to increase loan-loss reserves.
"For Citi to re-establish an average tangible capital ratio of over 4.25%, Citi will need to raise over $30 billion of equity," she writes. "To do that Citi could cut its dividend, raise capital, sell assets, or a combination thereof. ... We believe such a catalyst will pressure the stock."
Merrill Lynch (NYSE: MER) - What is the balance sheet of Merrill Lynch really worth? Wednesday, Merrill reported third quarter earnings that contained $7.9 billion of losses on collateralized debt obligations (CDOs), which are complex debt securities, and junk mortgages. What shocked the market was that only three weeks ago Merrill estimated losses of $4.5 billion on these sorts of assets. One cause was that Merrill gave the job of valuing these securities to a group of people who turned out to have a much more conservative view on these assets' true worth.
Credit Suisse (NYSE: CS) - Credit Suisse reported a 31% drop in third-quarter net profit Thursday after the credit market crisis wiped around 2.2 billion francs ($1.9 billion) off the value of its mortgage book and leveraged loan commitments.
We knew there was trouble in creditville and expectations of increasing foreclosures and delinquencies by monitoring what is going on in the ABX indices. I started reporting on this weeks ago, with posts and my statements below. While you read those over, glance at how the ABX 'AA' market is continuing to plunge, indicating investor expectations of more carnage to come before this credit mess can be declared over. Notice where the two red lines intersect indicating the point where the index blew past the low level reached when the credit crunch first hit us in August!
OCT 16th ---> "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!"
OCT 18th ---> "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. In a sign that investor sentiment is plunging for mortgage backed securities, the ABX markets are getting whacked again. It's entirely possible that this leads to another round of seizing up of the secondary mortgage markets."
OCT 20th ---> "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."
So, whats going on here? Other than uncertainty regarding the depth of the credit squeeze, I'm not sure! It's clear the fed is trying their best to eliminate the delusion from the tradable markets that their policy actions are taken to meet their demands. In other words, they don't want to be wall street's bitch anymore. But its also clear that the side effects of a nationwide housing slump are yet to hit full force. As for the credit squeeze, expect the secondary mortgage markets to continue to be in distress and for lending rates to behave independently of fed action and 10YR bond yields; as yield premiums rise for higher perceived mortgage risk. As long as there is no normal functioning market to unwind bad asset holdings, lenders will be very cautious to whom they hand out their capital via loans to and will demand high premiums for riskier borrowers, or not loan to these borrowers at all. They need to clean up their books and the end result of that is tighter lending / underwriting standards for new loans.