2nd Ave Subway Wreaks Havoc To Retailers

Posted by urbandigs

Mon Dec 31st, 2007 11:00 AM

A: Thanks to Curbed.com for pointing this article out. The 2nd avenue subway project is underway and causing pain for retail shops in the East 90's where construction workers are busy re-aligning electrical and plumbing systems so that the tunnel boring machine can be installed to build the subway tunnel. I discussed this scenario way back in late 2006 before the subway project begun.

second-ave-subway-hurts-nyc-business.jpgIn my post in November, 2006 titled : "2nd Ave Subway Work Set To Start":

What To Expect During Build: Streets to be completely demolished during the boring process and tunnel build. Local businesses on 2nd Avenue will have a rough time and will most likely go out of business temporarily with some type of city support program kicking into effect. A few years of loud noises, construction barriers, air pollution, and big time machines.
While it may seem so obvious, I got so many emails from readers after I posted this article stating stuff like "what the hell do I know about how it will affect business", and "wouldn't this bring more action to business because the area will get more attractive with the subway coming in", etc..Not sure why people got so upset, but they did.

According to NY Post (via Curbed.com):
Shop owners on Second Avenue between 91st and 96th streets complain that their sidewalk space has been more than cut in half by guardrails and concrete barricades that are keeping customers away. "It cut down my traffic tremendously," said Marcelo Ronchini, who owns Nina's Pizzeria on Second Avenue between 91st and 92nd streets. "I've lost 20 percent of my revenue."

John Ng, manager of Hokkaido restaurant, at the corner of East 94th Street, said, "Business has dropped at least $20,000 a month. We're trying to wait it out. What can we do?" And Vicky Schreier, owner of Rainbow Ace Hardware at 94th Street, said that her business, too, was down and she wanted the city, along with the MTA, to come up with ideas to help the shops.

"There is a significant drop in business," Schreier said. "We understand it's good for New York, the good of people, but it's not good for us."
Look, I view things very differently than alot of people out there, and I have no qualms telling it like it is even if that means I lose a deal here or there. I feel there is a lack of honesty in this business and buyers/sellers too often have to deal with broker babble and lies in an effort to convince them to either buy or sell immediately! Hence, the purpose of this site!

The 2nd avenue subway is a great long term project for this neighborhood and the entire east side of manhattan! Trust me, it is sorely needed to ease subway congestion and meet the needs of population growth that is expected. However, there is going to be growing pains with this massive infrastructure project and homeowners, business owners, and sellers will have their headaches to deal with. Here is what to expect:

Business Owners - As I stated over a year ago, businesses right in the heart of construction will be hurt. Traffic will be down, sales will be down, while costs will remain the same. Simple math. Hopefully there will be some aid to these struggling businesses so that they can make it through the 1-2 years of construction work that is expected in their immediate area. Once the tunnel boring machine is installed, sidewalks should be rebuilt and construction efforts will be much less obtrusive; but that is some time away!

Homeowners - A few years of obtrusive construction equipment, noise, dust, and limited sidewalk space and temporary walking routes. Yes, it gets very annoying after a while!

Sellers - Not a good time to be selling a property on a low floor with direct exposures to the 2nd avenue work going on. These sellers should expect to see un-interested buyers as a result of all this, and will most likely have to offer a discount to the prospective buyer who will have to deal with this nuisance for another few years. If you don't have to sell, try not to until the bulk of the work is completed. Other then that, not much I can tell you. Certainly, it is expected that savvy buyers may see these products as potential values if a seller must move the property quickly. Therefore, bids are likely to come in fairly low. If you are trying to sell one of these types of apartments right now and do get a strong bid, take it and run! Now is not the time to be greedy, and waiting to get that extra $10,000 could prove to be a mistake.

The Reset Storm - An Affordability Problem

Posted by urbandigs

Mon Dec 31st, 2007 09:53 AM

A: While most are aware of the coming adjustable rate mortgage resets in 2008, I feel like the anticipated severity of the problem is being under-estimated. After all, a couple of hundred dollars a month extra may not be a big deal for you, but for many others it's enough to make living at that home unaffordable. At a time when new home sales are at a 12 year low, inventories and months supply at highs, we are about to enter a period of time when many struggling homeowners will be hit with payment shock. I want to share with you the copy of an 'ARM Reset Reminder Letter' that one such homeowner received; in essence warning the lendee of the coming payment increase.

This is going to happen to many people in 2008! This letter is from a small lender in Texas, while the homeowner is in New York. For privacy purposes, the letter was cropped to only show the message body, and all names/numbers were blacked out. I personally know the person who sent me this so I assure you it is real.


You should note that this homeowner's payment will rise $550, or about 12.5% of the total payment, and will continue to adjust further every 6 months for the life of the loan. The letter also had a clear statement advising the customer to call them to discuss the financial situation & options in more depth, if there will be problems meeting this debt obligation. Every struggling homeowner who either already hit their reset or received a similar warning letter should call their lender and be proactive about working out a deal!

arm-resets-option-hybrid-interest-only-arms.jpgFrom a macro perspective, this is not good. Thats a significant jump in monthly payments! And as you can see by the chart on the right (courtesy of Calculated Risk), 2008-2010 will bring a wave of resets for those that took out teaser/adjustable loan products. Forget the homeowners who already can't meet their debt obligations, it may be time to worry about those who feel they are OK now, but won't be in another 8-12 months! That payment increase will add up very quickly for those not paying attention to their mortgage situation, and I worry that a very bad financial situation will sneak up out of no where at a time when housing is already so down & out. This is an outright affordability problem both for homeowners & prospective buyers alike; a rare combination.

As far as Bush's rate freeze plan, recall that it doesn't apply to ALL struggling homeowners about to be hit with higher resets. And you recall my many rants about how this is NOT just a subprime problem (read "Not A Subprime Problem; Loan-To-Value Ratios"), but an overall mortgage/debt problem with many tentacles yet to reveal itself (option arms, hybrid arms, heloc's, credit cards, auto loans, etc.).

According to the Wall Street Journal's article "Option ARM's: Next Weakling":

The Bush administration is pushing its plan to help subprime borrowers whose loans are due to reset to higher interest rates next year. But left out of the mix are hundreds of thousands of borrowers with good credit who could face sharp increases in their payments.

These homeowners could be the next wave of trouble for the mortgage industry. They took out what are known as option adjustable-rate mortgages, or option ARMs, which give borrowers a choice about how much to pay back each month. If they choose to make only the minimum payment on a regular basis, their loan balance can actually rise.

In a report issued last week, Merrill Lynch economists called option ARMs "ticking time bombs" that will start "ticking louder next year." Merrill estimates that losses on option ARMs could total $100 billion, on top of an estimated $400 billion in losses on subprime and other mortgages.
We are headed right into this storm, whether you like it or not. While the second half of 2007 saw many banks/brokerages/lenders/insurers visit the confessional and announce write-downs, 2008 will most likely see the consumers visiting the confessional as they no longer can meet their debt obligations and become delinquent. It has come time to move beyond fear & expectations, and into reality as what we were all scared of, finally arrives.

UrbanDigs Says: Nothing I can do about wall street. Those holding bad assets will get slaughtered and either go bankrupt or be bought out. But I do care about the consumer who may be able to help themselves. Do yourself a favor and get re-acquainted with the terms of your loan if its any type of adjustable rate or negative amortizing product (interest-only arm, option arm, hybrid arm, cosi loan, cofi, loan, etc). Reach out to your lender if you foresee any problems meeting your housing payments after a reset. The last thing you want is to become a distressed seller when you least expect it, at a time that is very difficult for sellers in many local markets. I expect both housing & wall street to go through the worst of this storm in 2008, so if we can absorb the shock a bit by being more educated about the root cause of the problem, we should!

Bank of America Lays-off Soups & Soaps

Posted by urbandigs

Fri Dec 28th, 2007 03:49 PM

A: This is just great if it turns out to be true! Charlie Gasparino is reporting, from an inside source at Bank of America, that the company is eliminating the lowest cost items for the everyday workers. What did the CEO get paid this year? I have a hard time believing this is true at all because of how crazy it is, and considering the amount of money this bank spends on branding; but if it is, it will be a nightmare for the company's reputation. I mean this is just ridiculous.

The news seemed to be an image snapped by a Bank of America employee and secretly sent to Charlie Gasparino.


Since the image is blurry, I'll write down what the alleged Bank of America notice says:


  • Soups

  • Crackers

  • Flavored Teas

  • Sugar-Free Hot Chocolate

  • Hand Soap

  • Gasparino even contacted BAC a few times to shoot down this rumor which they denied any response; leading to the story coming on the air.

    UrbanDigs Says: Think twice before shaking the hand of any Bank of America employee and ask for plain tea if your thirsty.

    Real Estate Data & Charts

    Posted by urbandigs

    Fri Dec 28th, 2007 02:02 PM

    You may have noticed a large drop in the # of total active listings in the Manhattan housing data tool & charts today. The reason is because one of the listing providers to Streeteasy.com (who powers the data), adjusted and enhanced their website to more accurately reflect current active listings. Needless to say it contained a good amount of out of date listings that were removed. This is why data and charts are in BETA testing for another 4-5 months or so. Streeteasy is working very hard on data accuracy and timeliness on their end, but at times is at the mercy of the brokerage firm's site; meaning the data they get is only as accurate as the agent at the brokerage who updates the listing. Working with each firm on accuracy, quality control and data feeds is tedious.

    I can tell you from starting The HotSpot Haven, way back in 2002, that cleaning data and getting a collection system that works (I have over 100,000 hotspots from over 250 providers) with so many different types of sites and data sources is not only very difficult, but very timely. It's an ongoing process and I for one appreciate what Streeteasy is trying to do for a market without an MLS system. For the data they provide for UrbanDigs, they will let me know when the platform is enhanced enough to take charts out of BETA. In the meantime, you will see discrepancies like today in reported data. In the longer run, you will have a more accurate tool for monitoring trends. Please be patient.

    New Home Sales: Downward Revisions

    Posted by urbandigs

    Fri Dec 28th, 2007 10:57 AM

    A: While not a dataset that affects Manhattan, New Home Sales were released this morning and the data wasn't pretty. Sales of new homes plunged to their lowest level in 12 years, and were weaker than already beaten down expectations. As a result, inventories of unsold homes in markets already struggling rose even further. As a leading indicator, this pretty much locks in that housing data will continue to be very gloomy for the next few months.

    According to CNN Money:

    New home sales tumbled 9 percent in November to a seasonally adjusted annual rate of 647,000, according to a Census Bureau report Friday. That was the worst showing since April 1995, when the pace of sales was 621,000, and is much worse than the 715,000 sales pace forecast by economists surveyed by Briefing.com.

    The sales pace is down more than a third from year-ago levels. Furthermore, the decline is widespread nationwide, ranging from a 28 percent drop in the Northeast to a 38 percent plunge in the Midwest. And the glut of new homes on the market rose to a 9.3-month supply, as the number of completed homes for sale reached a record 193,000 at the end of the reporting period. Builders now typically have to wait 6.2 months to sell a completed home, the longest wait since July 1993.
    Thanks to Calculated Risk, we can see a visual of the carnage going on in the new home sales sector that has caused so much pain for the homebuilders, whose debt ratings were recently downgraded by Moodys (debt of Lennar & Centex downgraded to junk status in October):


    Downward revisions to new home sales were also made to August, September & October! I wonder what the NAR has to say about this report after they estimated 4th Quarter New Single Family Home sales to be 718,000 (some 71,000 sales too optimistic or 10% off); I'm betting its a positive spin. For new home inventories, we now have a supply of 9.3 months worth of homes given the current sales pace & inventory levels.

    CR expects this report to be further revised downward in the months to come as, "...This is another VERY weak report for New Home sales. All revisions continue to be down. This is the fourth report after the start of the credit turmoil, and, as expected, the sales numbers are very poor."

    8 Predictions for 08'

    Posted by jeff

    Fri Dec 28th, 2007 08:16 AM

    Yes, it's that time of year again. The famous quantum physicist and 1922 nobel prize winner Niels Bohr once said in true Yogi-esque fashion: "Prediction is very difficult, especially about the future." But, what the heck? Here goes my outlook for 2008.

    #1 The U.S. will enter a recession - We may already be in it. Okay, nothing original here, plenty of other people are saying the same thing, but I will go on record as being in this camp.

    #2 The dollar will remain weak, but will start to stabilize - This will be driven by weakening foreign economies. Foreign economies that, ex-China have already begun to slow their recent rate increasing campaigns will start cutting rates due to broadening global economic weakness sometime in 2008. The big driver of short-term currency movements tends to be interest rate and economic growth rate differentials. As the market starts to anticipate that these will begin to harmonize, it will make holding dollar assets more attractive...not that the world has really been shunning them. Additonally, if it continues, all the bargain hunting by sovereign funds in U.S. assets will put a floor under the value of the dollar as these investors convert their dinars, Euros, drahkmas etc. into dollars to buy our companies and real estate.

    #3 Strong Manufacturing/Exports - The last recession was a dot-com driven corporate recession. Manufacturing%2520employment.gifCorporations were so worried about investing in software, the internet, telecom pipes and fancy Aerron chairs (to keep employees from jumping to dot-coms), that bloated capital spending was later decimated by the downturn. In fact, a 2004 Congressional Budget Office report on exports (chart below), noted that the cap ex slowdown was one of the reasons for losses of manufacturing employment shown in the following chart on the right.

    The other reasons, of course, were high benefit and wage costs in the U.S., as well as many frictional costs like restrictions on pollution, worker safety, child labor, etc. Exports.jpgDue to the fact that many emerging economies ignore these issues, manufacturing has been in a downtrend for years. However, many of these countries also preserved lower wages and costs by keeping their currencies unnaturally low, even as they industrialized rapidly, by not allowing their currencies to float freely and rise with their relatively higher economic growth, inflation and interest rates. In the recent upturn they took more share than they should have, and the normal rebound in exports failed to materialize as you can see in the chart to the left.

    The coming recession will be an asset-driven affair, which will hurt the consumer who owns the asset, and financial companies that take ownership in the asset through their debt positions. It may side swipe corporate spending, just as the dot com debacle side-swiped the consumer. However, business capital expenditures in the U.S. and, more importantly abroad, are not ground zero of the recession this time. For this reason, as well as the weaker dollar, I believe that exports will be a relatively better performer than other parts of the economy and that manufacturers in the U.S. will benefit. So here are some relevant and interesting factoids.

    Top 5 States by Exports (2006 Exports and Major Export Products)

    North Carolina $211.2 Billion (Tobacco, Cigarettes, Aircraft Parts, Blood Components)
    Texas $150.9 Billion (Oil, Semiconductors, Drilling Equipment, Aircraft Components)
    California $127.7 Billion (Semis/ Semi Equipment, Aircraft Parts, Data Storage, Almonds)
    New York $57.4 Billion (Diamonds, paintings, jewelry, aircraft parts, gold)
    Washington $53 Billion (Aircraft, Aircraft Parts, Soybeans, Corn, Refined Oil products)

    As you will notice, aircraft and aircraft parts are a significant factor for each of these large exporting states. Fortunately, the last few years has seen an explosion in orders for new aircraft from newly rich and oil rich emerging markets and even some fleet maintenance orders by recovering U.S. carriers. These backlogs will be delivered over several years and will drive continued strength even with some inevitable cancellations. Note that New York's exports tend more towards luxury items - much of the demand for these are also emerging market driven today and may stay strong, but have no backlogs, so I see risk here. It's fairly self evident, but I don't think a lift in New York exports can come close to cushioning the blow of a shrinking Wall Street economy.

    5 Fastest Growing Exporters ($ of exports and 2006 y-y growth + biggest exports)

    Delaware $3.9 Billion, grew 54% (Pharma, Refined Oils, Auto Parts)
    Washington See above - exports grew 40% in 2006
    Nevada $5.4 Billion, grew 40% (Gold, Casino Gaming Machines, Copper, Semis)
    Alabama $13.9 Billion, grew 29% (Auto Parts, Coal, Polycarbonates, Optics, Cotton)
    Kansas $8.7 Billion, grew 28% (Aircraft, Cattle, Auto Parts)

    You will notice commodity exposure in the list of fastest growing exporting states, including coal, copper, cotton, cattle, gold, refined oils and soybeans.

    #4 Commodity & Agricultural Prices Slow But Stay Firm - I believe that as long as the Chinese economy hangs in there, oil prices will stay firm and Russia, along with India and South America, will keep the commodity boom alive. Although I wouldn't be surprised to see a jaw-dropping correction in commodity prices in the first half as markets adjust to the recession outlook. I think as these countries pile in to buy on weakness you will get a neck snapping rebound. My pick of favorite states to benefit from the continued agricultural and commodity up cycle and export boom are below.

    JB Picks

    Montana $887 Million, grew 25% (Machine Parts, Copper, Silicon, Industrial Gases)
    Louisiana $23.5 Billion, grew 22% (Corn, Soybeans, Refined Oils, Wheat)
    Nebraska $3.6 Billion (Soybeans, Harvesters, Cattle Skins, Corn)
    Idaho $3.7 Billion, grew 14% (Semis, fertilizers, chemicals, lead ore, potatoes)
    Iowa $8.4 Billion grew 15% (Tractors, Corn, Swine, Soybeans, Aluminum)

    Note that these states didn't have any major real estate boom conditions. Affordability will likely correct with the entire country, but they won't have the caustic over-supply of the coastal states and Nevada/Arizona. Why is this important?

    #5 State Fiscal Crunches - Okay. This isn't really a prediction, it's already fate accompli. As you can see from the chart below, the real estate debacle is crimping state revenue during a period when spending was ratcheting up with the ebullient economic conditions. In fact, state spending grew 9.3% in 2007, but is now projected to grow only 4.7% in 2008. My real prediction is it will have to go negative in 2009. Already, New York, Arizona, California, Florida, Georgia, Kentucky, Indiana, Michigan, Maine, Maryland, Massachusetts, Nevada, Rhode Island, South Carolina, Virginia and Washington are talking about lower revenues, budget cuts or all out crises. Now here is the real problem: state spending is $1.8 trillion annually and reportedly about 13% of the economy and state spending is going from a big booster of growth to potentially contracting. In my opinion, New York City is apt to have budget issues caused by the combined effect of a weak real estate market and weak Wall Street.


    #6 Foreign Visitation Will Continue To Flourish. - New York has been a huge beneficiary of the 27.3% growth in foreign visitation since the rebound from 9/11/01. The weaker dollar has continued to boost foreign visitation to the city and the state. In 2006, foreign visitation grew 6.7% to 7.3 million, according to NYC Visit. This is why hotel rates are sky high and 30,000 new hotel rooms are planned to be built in New York City in the next 3 years. According to U.S. Department of Commerce data, New York ranks as the #1 port of entry for foreign visitors to the U.S., at 2.7 million through September 2007. Newark, New Jersey has moved up from port of entry number seven to number four in September. I don't think the 1.1 million visitors who arrived in Newark through September were headed to the Joisy shore. So I add the 6.4% of foreign visitors that came into Newark to the 15.4% for New York and the Big Apple's share of foreign visitation jumps to 21.8%. Travel & tourism now accounts for 26% of all U.S. services "exports" and 7% of all U.S. goods and services exports.

    #7 Availability of Business Loans Will Be Strong - This is the only area that has not gotten too out of control, away from the LBO guys. With interest rates coming down and banks being encouraged to lend, there will be money for good business ideas, particularly tied to exports, commodities, the farm belt and energy, if my other predictions are on the mark.

    Finally, Bonus prediction #8 - If you keep reading Urban Digs you will have whiter looking teeth, fresher breath and be a hit at parties in 2008.

    Have a Happy and Safe New Year! From the Blogosphere & Internet:

    Aircraft Backlogs

    State Fiscal Issues

    Real Estate Downturn & State Budgets

    More State Budget Issues

    Gutierrez Applauds Record Summer For International Visitation & Spending

    Noah's 2008 Predictions

    Posted by urbandigs

    Thu Dec 27th, 2007 10:57 AM

    A: All for the sake of discussing, so why not! My 2007 predictions hit about 50-50, so lets see if I can do a bit better this time around. Just a disclaimer, this is by no means investment advice and is simply for the sake of discussion and your comments. I'll try to break it down by category and this time I won't include the wild card as I know some readers thought that was me bailing myself out. DISCLOSURE --> I bought my condo in Nov, 2001 and sold in July 2006. I rent now. I am also waiting to buy back into Manhattan real estate with a product that can meet my needs for a longer term timeline to own; so either my salary needs to rise or prices need to fall. Unless things fall into place, I refuse to buy a place I cannot afford.

    2008-predictions.jpgNATIONAL HOUSING - More ugliness as affordability on the buy side is still a problem. Mortgage resets will continue to make struggling homeowners payments even more unaffordable. I do not think the gov't sponsored rate freeze plan will be as effective as some think. Inventory will continue to be a drag on national housing and buyer demand will continue to be pressured. Prices will continue to drop in most of the struggling markets like Miami, Las Vegas, & Phoenix with some markets seeing 10-15% drops. I am fairly negative on national housing for 2008, however, if I were in the market for the longer term I would start to get VERY interested in bidding for distressed properties that have realized a 20-30% correction in price since 2006. All in all, I think its going to get uglier before it gets better and I expect foreclosures & delinquencies to rise in 2008 causing more pain for wall street financials. I also expect commercial to follow residential and get hit in 2008.

    Towards the end of 2008 I expect the rate of declines for major datasets to slow, showing a glimmer of hope for 2009.

    MANHATTAN HOUSING - I expect a slower than normal wall street bonus season in the months of JAN - APRIL, in terms of buyer demand. As for bonuses, yes I think they will be given out (with some departments seeing drastic cuts in bonuses) but its HOW THEY ARE SPENT that I'm a bit concerned about. I expect inventory to build as we near summertime, as a result of a slower than normal bonus season, and wall street to deteriorate as we get more clues about whether we are in a recession or not. As wall street falls, so will confidence and demand on the buy side for Manhattan real estate products. At the same time, we will see more types of sellers contribute to inventory builds toward the end of 2008; speculators, foreign buyers flipping, second home's selling, and struggling buyers who bought a bit more than they can chew or whose job security has changed to the negative. I expect job losses to grow during the first two quarters of the year as a result of the credit crisis and hit to the financial sector, leading to what I described above.

    I'm also a bit concerned about appraisals coming in for contracts signed on new developments BEFORE the credit crunch hit. If sales do start to slip, how will banks lend on a product that sold for $1,400+ a square foot a year earlier? This worry is also tied to the state of the credit markets; should we see improvement this concern will ease.

    While we won't see a crash by any means, I think sellers will find that its a bit harder than they thought to move their property above last years comparable sales. As always, data proving or disproving this will not come until mid year at the very least due to its lagging nature.

    THE FED - I expect more rate cuts. The credit crisis is still evolving and I expect more write downs for more banks, lenders, insurers, state pensions, etc..We are yet to see the full effects of this situation or how widespread it will be. It could easily infect global economies and start a slowdown everywhere. As a result, I expect our fed to reduce the fed funds rate by at least another 50-75 basis points in the first half of 2008 to counter any lagging effects to the US economy. I also expect targeted measures to be taken by our fed by pumping more liquidity into the financial system to help restore investor confidence and stabilize the non-functioning secondary markets. How low the fed will take the FFR depends on incoming inflation data that could be pesky due to high energy and commodity prices; which is amplified by fed easing making the situation that much more difficult.

    STOCK MARKETS - One of my better calls from last years predictions. I expect a very volatile 2008 making this a tough call. All in all, I'm negative on stocks due to the credit crisis and unknown effect it will have on the US economy. We still don't know who holds what, the value of these securities, and how bad the total write downs will be. We also don't know how bad this mortgage/debt problem goes and how the consumer will handle it.

    I expect a flat to down year for wall street when all is said and done. To put percentages on it, by DEC of 2008 I expect to see stock markets to range between -5% - +2% or so. I'm aware of all the sovereign wealth funds, fed easing, weak dollar, and global influence on corporations, but I just can't ignore the after effects of this credit storm on the US consumer. With confidence down, mortgage equity withdrawal way down, a deteriorating housing market, rising debts, and negative savings rate, I think the US consumer is tapped out. Ultimately this will come out.

    I am very bullish on agriculture, global/domestic infrastructure plays, gold, oil, miners, and large cap tech with global exposures. I am still negative on retail, airlines, financials, insurers, homebuilders, food chains, and anything exposed to housing, mortgages, or consumer debt.

    JOBS - Ugly. I think 2008 will show the effects of the credit crisis with major job losses across the financial sector; except for Goldman of course. I also expect a recession to show its ugly face at some point during the year, if we are not in one right now. As the recession reveals itself, corporations will get defensive and cut jobs; with the financial sector being the hardest hit. Since the Manhattan real estate market is so closely tied to wall street, if this occurs we should expect to see a change in confidence, sales volume, and inventory. If it doesn't and we get through this with no recession and limited job losses, then the US economy is way more resilient than I give it credit for.

    I think this downturn is necessary to get past this credit crisis, weed out the bad bets, clean out corporate balance sheets, allow for integration of regulation and gov't sponsored reforms, and clear the clouds for a brighter future.

    INFLATION - Since I expect the fed to cut rates further, I expect energy & commodity prices to stay at high levels. The one factor that can counter this is a global slowdown. In that case, global central banks will lower their rates and perhaps provide a bottom for the US dollar. Although many argue about the accuracy of US data reports on inflation, specifically the headline vs the core argument, I expect the past year's higher energy & food prices to continue to trickle into inflation reports. This is what will prevent the fed from acting more aggressively with rate cuts. Deep down inside I believe we are in for a few years of inflation problems, although this may occur while the US & global economies slow; stagflation. All I can say is, its a much more expensive world today than it was 5 years ago.

    DISCLAIMER - I'm not always right! And my true experience is with equity trading and the behavior of stock movements. I learned a lot along the way and I feel I have a much deeper understanding now, than I did 5 years ago, but that does NOT mean you should make any investment decisions based on what I say here! Talk to your financial adviser for that. As for buying or selling real estate here in Manhattan, no one can time the market perfectly and longer term investments usually prove to be great decisions. So, if you are thinking of buying now, consider your job security, liquid assets, salary, timeline to own, and whether you can afford a product that meets your needs rather than day trade housing and waiting for the perfect entry point! Real estate investment decisions are very personal and everyone's situation is unique. With that said, I welcome any comments regarding what I said above!!

    80/20 Rule Expanded: Co-ops Should Thank Bush

    Posted by urbandigs

    Wed Dec 26th, 2007 03:28 PM

    A: Did you know that the recent Mortgage Forgiveness Debt Relief Act of 2007, recently signed into law on December 20th by President Bush, contained an amendment that should make co-op owners rejoice! The 80/20 rule now includes more options for co-ops to qualify and receive market rate commercial rents that otherwise wouldn't have been realized due to tax laws.

    80-20-rule-coops-manhattan-real-estate.jpg80/20 Rule - A federal tax rule that requires residential co-ops to get at least 80 percent of their gross income from their tenant-shareholders and no more than 20 percent from other sources like commercial rents.

    According to a release by attorney Aaron Shmulewitz of Belkin, Burden, Wenig, & Goldman, LLP:

    On December 20, 2007 President Bush signed into law the Mortgage Forgiveness Debt Relief Act of 2007. The law contained an amendment to §216 of the Internal Revenue Code (the “Code”) that is of immense importance to many co-ops.

    In order for a co-op to qualify as a "housing cooperative" (and, thus, enable its shareholders to enjoy the same tax benefits available to home owners (i.e., the $250,000 per person exemption on the gain on sale of a residence, as well as the tax deductibility of interest paid on the shareholder’s apartment loan, interest paid on the co-op’s underlying mortgage, and real estate taxes paid by the co-op), a co-op must satisfy various requirements stated in Code §216.

    The most difficult requirement to satisfy has usually been that at least 80% of the co-o’s income for the year must come from its shareholders, and no more than 20% could come from non-shareholder sources. As a result, co-ops whose buildings contained large stores or other commercial spaces were often forced to keep the rent payable by such commercial tenants artificially below-market, or keep the maintenance payable by the co-op’s shareholders artificially high, or impose assessments on the shareholders, so as to preserve the 80/20 income ratio. Some co-ops resorted to even more complicated efforts.

    However, the new law radically changes that by adopting two additional alternatives that would also satisfy the “80/20” requirement. Now, a co-op can also qualify if, for the tax year in question:

    (i) at least 80% of the total square footage of the co-op’s property is used or available for use by shareholders for residential or residentially-ancillary purposes, or

    (ii) at least 90% of the co-op’s expenses are for the acquisition, construction, management, maintenance or care of the co-op’s property for the benefit of its shareholders.

    The change became effective immediately, and will benefit co-ops whose tax years end on and after December 31, 2007.
    This new law expands the ability of the corporation to qualify and charge market-rate rents for commercial tenants that otherwise would not have been allowed by tax law. As a result, co-ops that can now qualify should be able to realize significantly more revenue from commercial tenants assuming the raised rents are agreed. Interesting little find here!!

    Who Wants A Depreciating Asset?

    Posted by urbandigs

    Wed Dec 26th, 2007 10:11 AM

    A: The topic of this post really does go against mainstream media, bullish brokers, and naive buyers who are always late to the party. Putting fundamentals aside for a moment and taking a peak at what our future may bring, you can't help but notice the warning signs to the broader economy. And to be blunt, I don't care how strong the currency trade is here for our market, if the US were to go into a recession (whether it be soft or outright nasty) the real estate market in Manhattan will quickly change! The Case-Shiller Index released this morning showed a broad based decline across all metro areas measured. While not shocking, we must note that as the housing market continues to decline, wall street and the securities derived from loans on these homes will cause more problems and we will move one notch closer to a recession. As far as investing is concerned, nobody wants to own a depreciating asset!

    Where to begin, how about the media! I was late in reading this NY Times article titled, "New York Condos Lure Deal-Seeking Europeans" but was immediately fed up when I got to this statement added in by the author:

    "While natives remain wary about real estate and worry about bonuses and the economic climate, foreign tourists are keeping brokers busy with their eagerness to buy up Manhattan apartments, which many see as investments."
    So, are we basically saying that foreigners don't know sh*t, are completely clueless when it comes to our slowing housing market, and are blind to the economic warning signs that are expected to hit not only in the US, but abroad as well? Is this what we are pinning our hopes on; the foreign investor? Read "Does A Weaker Dollar Accelerate Foreign Demand", for my take and other top brokers' take on foreigners in our marketplace.

    What happens if the dollar rebounds? Are brokers and journalists going to switch their argument from "well, Manhattan is supported by a weak dollar and foreign demand" to "well, a strong US dollar is a sign of a strong US economy and with that comes strength in real estate"? Put me down for this quickchange in broker babble to occur at some point in the future. All BS'ing aside, I like to discuss investment strategies, real data, real macro trends, and how that all may affect asset classes. And I'll tell you one thing, NO ONE WANTS TO OWN A DEPRECIATING ASSET!!

    On to the data. According to the Case-Shiller Home Price Index released this morning:

  • the 10-City composite posts a record low in its annual growth rate

  • 11 of the 20 Metro areas did the same

  • every Metro market went DOWN in both October & September

  • 11 of the 20 Metro areas tracked, plus the two composite indexes, recorded their single largest monthly decline on record in October

  • For a visual on this, please see the chart:


    Housing downturn cycles tend to take a while to play out. First comes the drop in buyer demand, which leads to low sales volume and inventory building, which leads to weak data reports magnified by mainstream media, which encourages more drops in buyer demand, which causes prices to fall, which hits the investors holding securitized mortgage bonds, which infects the financial sector, which leads to higher lending rates, fewer loan options & tougher underwriting rules limiting who can even get a loan, which restricts buyer pool further, and on and on and on! Those in-the-know of macro trends tend to get cautious ahead of the curve, never timing it perfectly, but also not exposed to the pain & loss that hits home for many naive buyers and blind speculators who think the game will go on forever; (hmmm, go back to the above mention of the NY Times article and foreigners buying now even while "natives remain wary about real estate and worry about bonuses and the economic climate").

    While the Case-Shiller Index is rear-view mirror and doesn't apply to the Manhattan real estate marketplace (read my post here why), it still is a dataset relied upon by the financial markets to monitor the national housing market. While not a leading indicator, it does paint a grim picture on housing and if the national market continues to tumble in 2008, then the pain will extend to wall street, the credit markets, and the financial sector and put us that much closer to a recession. No one wants a depreciating asset; not a homeowner, not the banks, not the investors holding mortgage backed securities, not the fed, and certainly not a prospective buyer about to put their money to work. This last part is not as cut and dry though as everyone needs a place to call home.

    If a recession were to hit the US economy, than stocks will price that in ahead of time and continue to drop until the cloudy picture clears up. Corporations will get defensive and cut jobs, pay, and spending. The combination of a negative wealth effect and lack of security for one's job will certainly have an impact on buyer sentiment here in Manhattan. Sales volume will quickly slow, inventory will quickly build, and sellers will be faced with something that they had the luxury of not dealing with even as the national housing market crumbled; fierce seller competition. When speculators, foreign buyers, and distressed sellers join the normal every day sellers that just needs to unload a home at the same time, you will know the lagging slowdown finally hit Manhattan. We are a market so closely tied to wall street, and almost everyone on wall street knows there is danger in the air. Recessions do occur, downturns do occur, and housing is a market just like every other; it can go up & it can go down. Manhattan is no different; it is just much better positioned & protected. Think of Manhattan as the General Electric of the housing market, and to keep up with the analogy, I would call markets like Miami, Phoenix, & Las Vegas the ETOYS of housing.

    China Update - A Prayer for The People's Republic

    Posted by jeff

    Wed Dec 26th, 2007 09:38 AM

    A couple of items have caught my eye in recent weeks regarding China. While we shoppers are gorging ourselves on Chinese goodies this holiday season, I thought it appropriate to do an update to my original piece, "Skinny Dipping Anyone ", on the raging growth machine that is the People's Republic.

    According to the Chinese Central Bank's research bureau, economic growth in China is forecast to slow slightly in 2008 to 10.9%. This after closing out 2007 at an 11% clip vs. 10.7% in 2006 and at the highest rate since 1995. Let's face it the place is 'en fuego'. Importantly, inflation will be up 4.5% in 2007, and hit a decade high monthly rate of 6.9% in November, more than double the central bank's target rate and the highest since 1996.China%20Rates%20%26%20Reserve.jpg

    As you can see from the charts above China's central bank is using a couple of its policy levers to try to slow the economy down and has been doing so for well over a year. Interestingly, their latest policy move was to raise the lending rate by 18 basis points to 7.47%, while raising 1 year deposit rates by 27 basis points to 4.14% - shorter term 6 mos. and 3 mos. deposit rates were raised even more. (Please note that our Fed only controls fed funds and discount rates, not the rates bank pay depositors or at which they make loans to borrowers. The Chinese authorities have much greater control - but as you will see even the central banks with the broadest powers really have only very blunt instruments to work with in tuning economies.) The Chinese are pushing up lending rates less than deposit rates and it is speculated that this is because the authorities want to make deposit rates more attractive so people don't move money into the raging stock market as quickly as they have been. Of course the mainland China stock market is up something like 86% this year (see chart below) so I don't know how tempting 4.14% really is in comparison. On the flip side, the government is believed to feel that capital is so available in this booming market from both overseas investors and the stock market that targeting lending rates won't do bubkis to slow growth, so they are hiking reserve requirements as a way of rationing bank lending - you can see this in the right-hand chart above. How reserve rates help central banks control money supply growth is explained in my recent piece Making Money Out of Thin Air.Shanghai%20Composite.jpg

    Now bullish stock markets are not usually accompanied by the kinds of "tight" monetary policies now officially being pursued since the December 8th Chinese Central Economic Work Conference. Surging food prices and wages have persuaded government officials that despite the risk of popping a stock market bubble, they must curb money supply and investment to keep inflation from getting embedded in the economy, all the while increasing government spending to boost consumption and ensure a soft landing. YIKES! that's one tall order. Every time we have an interest rate increase cycle in the U.S., something goes pop....even when there is a soft landing. If it's the Chinese stock market that does so in this case it could get a bit ugly.

    For many years China's state owned enterprises SOEs were closely watched for signs of China's success in transitioning to a market economy. Many of these businesses were, highly subsidized, barely profitable and often-times corrupt. After the Asian contagion threw a scare into the Chinese, the government worked hard to reform these businesses and allow the bad ones to die or be merged out of existence, while bolstering the strong. People don't pay as much attention to them these days as their numbers have dwindled to 150 recently from 196 in 2002. However, 2007 was reportedly a good year for them with profits up 30% to 1 Trillion yuan (roughly $136 Billion yankee dollars). But their are a couple of wrinkles, 9 internationally known leading companies like China Mobile, China National Petroleum and China Boasteel generated 70% of these profits. Additionally 31.2% of profit growth came from "non-regular revenue"...that's code for stock market investments. These are the same shenanigans that busted the US in the 1920s and Japan in the 1980s.

    Speaking of Japan in the 1980s. It was the Japanese who swooped in and bought Rockefeller Center just as the commercial real estate downturn in the U.S. was getting underway in 1989. Interestingly, while they were too early in their call on U.S. real estate, the deal was more of a marking of the top in their home market and economy than in ours. Let us pray for the People's Republic that China's deals to buy stakes in Blackstone Group at the peak of the recent buyout mania and Morgan Stanley (as a contrarian play) last week aren't similar markers. With China expected to be one of the only growth locomotives in a world economy where Europe and Japan are slowing and the U.S. could have a recession......we need these guys to stay healthy. So stuff those stockings a little higher this year, say a prayer for the People's Republic and Have a Merry Christmas and Happy & Profitable New Year.

    While my piece is meant to make you aware of the possibility of trouble in China, I write it somewhat tongue in cheek as I don't see a high probability of a major downturn there before the Olympic Games.

    Bearish Sentiment on China In the Blogosphere:

    China Fears Devastation to Exports

    The Coming China Crash

    We Interrupt This Blog To Announce the End of the World - Maybe

    Happy Holidays!!!

    Posted by urbandigs

    Fri Dec 21st, 2007 10:36 AM

    happy-holidays-urbandigs.jpgI just wanted to take a moment to wish everybody a very Happy Holidays! Please be safe, be courteous to others, try not to stress out too much with last minute shopping, and enjoy yourselves and your time off!!

    I think I speak for all of us here at UrbanDigs when I say this: ITS BEEN A WONDERFUL YEAR FOR THIS SITE AND ITS ALL BECAUSE OF THE READERS! LETS MAKE IT EVEN BETTER IN 2008!!

    You have my word that I will continue to put my all into this site, tell it like it is, and enhance the site so that you have a bit more transparency for your Manhattan real estate investments. In case you don't know who writes for this site, here is an updated breakdown:

    - Me, UrbanDigs. I'll continue to write based on my experiences from trading on wall street and understanding of macro economics. Most of the content will be focused on the macro issues we are currently facing that may ultimately affect the broader economy, lending, and housing. I'll also get back to reporting on the state of the Manhattan real estate market now that the site has been upgraded and my move to Halstead is complete. I consider this site my baby, and as such, a living thing. I will continue to care for it so that you guys have an open forum and a useful resource for staying 'in touch' with the most important issues as they unfold.

    CHRISTINE TOES - Toes. Christine will continue to write for this site and will discuss what she sees on the front lines of NYC real estate. Topics will be directly from personal experiences and include new developments, buyer tips, seller tips, state of the market, and predictions. Christine has proven to be brutally honest, a great characteristic of content on this site in an industry known for sales talk. Her posts are always real time and invaluable insight into what is going on in Manhattan housing right now.

    JEFF BERNSTEIN - The developer. Jeff works with a development company in LIC and works as a research analyst for future projects. His mindset is mostly macro and his investment thoughts are dead on. He has proven to discuss topics in a timely manner before mainstream media picks up on them, and in my opinion translates what he learns in his little world wonderfully to this site. I look forward to Jeff's posts as an insider in the development world for insight into changes that are taking place that we would not otherwise hear about.

    - New Gal. Beth was a long time reader of UrbanDigs and contacted me a number of times before we discussed her writing for the site. Her experience as a bank analyst with the Fed and how regulatory actions affect businesses and markets is perfect as an additional contributor for UrbanDigs. Beth will discuss what is going on inside Congress, the Fed, and future regulations as they occur and how that may affect the housing market, homeowners, and investors. A great angle and invaluable addition!

    I hope you guys can see the direction I am trying to take this site! For 2008, I plan on getting charts out of BETA testing, expanding charting options of data collected for trend analysis, adding the live chat again, adding more writers that fit the mold of this site, and keeping the content high quality so that you will want to come back daily to read what is on all of our minds for any given day! In the end, it's all about providing what you guys want! So, never hesitate to email me at nrosenblatt@halstead.com with any suggestions to further enhance UrbanDigs!

    Aiding Subprime Borrowers: Congress vs. the Fed

    Posted by marathongal

    Fri Dec 21st, 2007 08:45 AM

    In addition to lending a hand to lower income borrowers (see my previous post), the recent bills passed by the House & Senate also propose greater regulation of mortgage lending practices. This is partially a reaction to the Fed's lack of oversight of oversight in this area during the run-up of the housing bubble under Greenspan. And it brings into question who regulates mortgage lenders that fall outside of the US banking system.

    The legislation proposes the following:
    • Require lenders to have a fiduciary responsibility to their customers
    • Require that originators ensure that borrowers have the ability to repay their loans and
    • Ensure that refinancing would have a ‘net tangible benefit’ to the borrower.

    The purpose is to discourage predatory lending practices. Requiring lenders to have better documentation on customers - such as proof of income, is a good thing and shows that proper due diligence has been done.

    As for ensuring a borrower’s "net tangible benefit", the law would have to be VERY clear on how it defines this term. How would a lender ensure this? Would the FHA provide some guidance?

    In my experience with regulation, laws with good intentions can backfire in the worse way. Unless the practice of evidencing “net tangible benefit” is clearly accepted within the scope and intent of the law, it will pave the way for litigators to sue mortgage lenders out of business.

    As a result, the law as it is proposed can discourage lenders from taking risks, thereby holding back on providing loans, which can reduce homeownership. I doubt that is what Congress intended.

    Enter the Fed

    The Fed has been criticized for being asleep at the wheel during the housing bubble run-up. According to yesterday's Wall St. Journal, efforts to have the Fed oversee mortgage lenders by non-banking companies were opposed by Greenspan: "Fed's New Rules On Mortgages Draw Hostility":

    Alan Greenspan, then Fed chairman, opposed the move, Mr. Gramlich said. Mr. Greenspan has confirmed his opposition. More recently, Mr. Greenspan told National Public Radio there was little the Fed could have done short of a sudden increase in interest rates that would have popped the housing bubble and also "broken the back of the economy."
    The Fed’s primary oversight responsibility extends to financial services holding companies and banks that are members of the Federal Reserve system.

    The Fed’s new plan, unveiled this week, seeks to accomplish the same goals but by taking a different approach:

    • Cover prime and subprime borrowers
    • Require lenders to assess subprime borrower’s ability to repay loans from sources other than rising home values
    • Clamp down on payments to mortgage brokers that can encourage them to earn profits on loans at the expense of customers
    o Bar lenders from making high cost loans that rely on unverified income or assets
    o Ban lenders from paying mortgage brokers bonuses beyond what consumers have agreed in advance the brokers would receive.
    • Require lenders to establish escrow accounts to ensure that subprime borrowers pay insurance and property taxes, a common practice for prime loans.

    subprime-loans-shrinking.jpgBoth Congress and the Fed want to show they can ensure against anothe subprime meltdown. IMHO the Fed’s approach is more sensible. It has a team of examiners and expertise in bank policy and risk management to provide effective oversight. The issue is that the Fed is showing up late to the game as the plan would address lending practices going forward but won't do much to address those who are already at risk of default. The market is already working itself out in this regard, as mortgage lenders have already tightened up their lending standards and total subprime loan originations have dropped significantly. To the right is a chart showing you the projected drop of subprime loan originations in 2007 to about $200 Billion, far lower than the nearly $600 Billion in subprime loans issued over the past two years.

    Hopefully either Congress' or the Fed's plan help prevent another mess in the future. This being a hot issue during an election year, however, anything can happen. Stay tuned.

    Not A Subprime Problem; Loan-To-Value Ratio

    Posted by urbandigs

    Thu Dec 20th, 2007 10:55 AM

    A: What happens when prime starts to behave like subprime? The mess we are in is being blamed mostly on 'subprime' and the securitization of these lower quality loans that have gone from bad to worse lately. However, it's important to note that this is a complete mortgage/debt problem, not just subprime, and that there is a much wider pool of mortgages out there consisting of near prime (alt-a) and prime loans that are seeing rising delinquencies as well. If subprime defaults ultimately led to a collapse of the securities derived from these bad loans, what happens if this same infection hits near prime & prime bonds as well! Well, the rating agencies and analysts are starting to warn about this possibility. This is not just a subprime problem!

    subprime-prime-alt-a-ltv-ratio.jpgOut of anyone, I would say Bill & Tanta over at Calculated Risk has been the most vocal blogger out there arguing this point! Just check here, or here, or here, or here, ahh you get the point.

    Today, S & P cut it's ratings on $7 Billion worth of Alt-A Mortgage Bonds, the higher quality version of those subprime mortgage backed securities that have led us into so much pain. According to Bloomberg:

    Standard & Poor's reduced its ratings on about $7 billion of Alt-A mortgage securities, citing a sustained surge in delinquencies during the past five months on loans considered a step above subprime.The lowered bonds represent about 1 percent of the $694 billion of securities backed by Alt-A mortgages created in 2005 and 2006, the largest ratings company said today in a statement. Countrywide Financial Corp., Bear Stearns Cos., and Lehman Brothers Holdings Inc. issued the most debt downgraded, S&P said.

    "These actions reflect a persistent rise in the level of delinquencies among the Alt-A mortgage loans supporting these transactions," along with S&P's expectations for further home price declines, the New York-based unit of McGraw-Hill Cos. said. Prime 'jumbo' mortgages from recent years packaged into securities also have rising delinquencies that may create losses among some bonds with investment-grade ratings, according to reports yesterday by New York-based securities analysts at Credit Suisse Group and UBS AG. UBS called increases in late payments on adjustable-rate mortgages, or ARMs, from this year 'alarming.'
    This is a complete mortgage & debt problem that is spreading from subprime into alt-a, prime, hybrid option ARM's, cosi & cofi loans, neg amortizing loans, HELOC's, credit card debts, auto loans, etc..

    Subprime was simply the spark that lit the fire and is getting most of the attention in the mass media. To think that defaults will not spread to higher quality borrowers is wishful thinking. And to think that the mortgage bonds derived from these higher quality loans will not be affected, is wishful thinking. As home prices fall, the all important Loan-To-Value ratio (or so called LTV) rises. And as the LTV ratio rises, the credit quality of the derived security on this loan falls. Let me explain with a hypothetical borrower and a house whose price has fallen over the past year.

    1 YEAR AGO

    HOME VALUE ---> $500,000
    LOAN ---> $400,000
    LOAN-TO-VALUE ---> 80%

    SAME HOME TODAY - Nothing Changes Except Home Price

    HOME VALUE ---> $425,000
    LOAN ---> $400,000
    LOAN-TO-VALUE ---> 94%

    Notice how the LTV ratio for this homeowner jumped up to 94% now that the value of the home has gone down! In many local markets outside Manhattan, this is a grim reality. Now, as the LTV ratio rises, the derived security from this loan's credit quality falls; it's a higher risk. In other words, the prime loan starts to behave like a subprime one!

    You can imagine what happens when the value of the home falls below the loan amount, leading to a LTV ratio of over 100%! Not a good situation for the homeowner or the investor/holder of the mortgage backed security. Should this borrower default, it's losses all around. So what we are seeing here is a deterioration of LTV's as home prices fall, which could lead to credit downgrades; a vicious cycle.

    Think about how many Alt-A loans out there, whose underlying collateral (the house) is falling in value, are at risk for credit quality downgrades! Recently CIBC has said that loan-to-value ratios are a better measure of risk than FICO scores. According to Marketwatch.com's article, "Forget FICO":
    "The modern foundation of the lending market is about to be uprooted as FICO scores, the long trusted gauge for lenders in determining risk and price, will prove virtually meaningless in this credit cycle," wrote analyst Meredith Whitney in a research note.

    "Today, as a higher percentage of people own homes and many of them have taken on 'too much house' or high LTV [loan-to-value] loans, things are different," Whitney said Wednesday.
    She added that many individuals previously considered 'prime' customers who took on loans with LTV ratios of 80% and higher are performing closer to subprime loans.

    "For those lenders overly weighted to FICO scores in underwriting, we expect the rudest awakening," Whitney wrote.
    I bolded the very important sentence in this excerpt: "...many individuals previously considered 'prime' customers who took on loans with LTV ratios of 80% and higher are performing closer to subprime loans."

    Get it? Citigroup has the highest exposure to mortgages held with high LTV ratios and many analysts expect a further $4 Billion - $6 Billion hit in 2008 due to losses on these loans. When prime becomes subprime, no one wins! This is not a subprime problem, but we all may become suprime at some point during this credit cycle.

    Congress Acts to Assist Low Income Homeowners

    Posted by marathongal

    Wed Dec 19th, 2007 12:19 PM

    Allow me to introduce myself as a new contributor to UrbanDigs.com. I've always enjoyed following politics, whether good or bad. After a stint as a bank analyst with the Fed I've been following how regulatory actions affect business and markets. For this site I'll be focusing on how government policy affects the housing market and welcome your comments. So on to my first post below.

    - Beth

    The White House’s ‘rate freeze’ plan proposed by Hank Paulson isn’t the only program coming out of Washington to address the subprime mess.

    On Friday the US Senate overwhelmingly passed a bill that will enable the Federal government to assist at least 200,000 subprime borrowers facing foreclosure. According to CNN Money:

    Christopher Dodd (D - Conn.), the sponsor of the Senate bill, which passed last week, hopes to make low-cost, fixed-rate mortgages available to more homebuyers and to homeowners seeking to refinance out of expensive adjustable rate mortgages (ARMs).

    "This measure can shield homeowners from harm by helping families find safe, fair and affordable mortgages," said Dodd in a statement. It can help provide credit, both for new homeowners and those seeking a way out of abusive loans in which they are currently trapped."

    FHA mortgages are consumer friendly loans made by private banks that are insured by the government. That makes them especially attractive to lenders because the government guarantee enables the lenders to easily sell off the loans.
    The bill will allow homeowners to obtain mortgages requiring low down payments and low rates with the assistance of the Federal Housing Authority (FHA), part of the U.S. Department of Housing and Urban Development.

    Lower income homeowners could have turned to the FHA in the first place, but the agency’s criteria couldn’t compete with subprime lenders for lower income applicants, most of whom earn around $55,000 per year.

    The Senate bill would lower the down payment requirement from 3% to 1.5% and increase the amount of mortgages the FHA may insure from $130,000 to $417,000. The House of Representatives passed a similar bill in September, which allows for higher loan limits and more flexible repayment terms. The House bill would also establish a new trust fund that would require contributions from the FHA.

    The FHA’s insurance program is intended to offer an easy option for homeowners who qualify for Paulson’s mortgage “subprime rate freeze” plan to refinance. It could also extend to those homeowners who may not qualify for the Paulson plan; as Noah wrote about on December 6th. The plan uses no public funds, instead covering its costs by charging a fee to home buyers.

    Either bill sounds like a win for homeowners who can benefit from extra help. Once the House and Senate versions are reconciled the President is expected to sign the resulting bill into law.

    US Foreclosures Up 68% From Year Ago

    Posted by urbandigs

    Wed Dec 19th, 2007 11:18 AM

    A: Ehh, nothing unexpected here. However, we did see a 10% decline in foreclosure filings from last month; a trend I don't think will continue! With 2008 expecting a record number of mortgages to reset to higher interest rates, it's likely the foreclosure problem is still evolving rather than nearing an end.

    If there is one point I would like to get across here, it's that this will be a slow and painful process that we will have to go through; to weed out the bad bets, let the system fix itself, so that we can return to a more healthy environment of longer term sustainable growth. I'm sure there will be plenty of silver linings and hopeful data reports during this process, but overall, expect the foreclosure/defaults trend to get worse before it gets better.

    According to Bloomberg:

    U.S. home foreclosures rose 68 percent in November from a year earlier as adjustable-rate mortgages left subprime borrowers unable to meet higher payments, according to data compiled by RealtyTrac Inc.

    There were 201,950 foreclosure filings in November, including default notices, auction letters and bank repossessions, down 10 percent from October's total, RealtyTrac reported today. California, Florida and Ohio had the most filings and Nevada had the highest foreclosure rate.

    Interest rates increased on more than $87 billion of subprime mortgages in the third quarter, and another $84 billion will reset in the fourth quarter, according to New York-based analysts for Credit Suisse Group. Foreclosures may surge next year as payments rise on about 1 million home loans, Rick Sharga, executive vice president for marketing at RealtyTrac, said in an interview.
    This is an affordability problem for many homeowners. With rates rising, bills piling up, re-financing options restricted, and falling home values, its just a matter of time for those struggling to meet debt payments to be forced into foreclosure. Gloomy, but reality.

    People normally do whatever they can to avoid foreclosure: start using credit cards for payments they can't make now, file chapter 13 bankruptcy protection to stop foreclosure action, borrow from friends, cut down on spending, etc.. Unfortunately for those that bought a house they couldn't afford and rationalized that purchase by taking out an aggressive loan product, its a ticking time bomb that will ultimately go off. This story is still being written and who knows what the next chapter will bring as we are yet to see the future effect on wall street innovations.

    Making Money Out of Thin Air

    Posted by jeff

    Wed Dec 19th, 2007 09:34 AM

    DollarSigns.jpgEvery once in a while you read an article that makes you say "aha!" The information imparted satisfies a gnawing question lurking deep in your mind that you couldn't even put words to. I felt just that way after reading The Global Money Machine, an Op Ed piece in Friday's Wall Street Journal by David Roche, President of Independent Strategy, a London-based investment consultancy. Now I have the question and the answer.

    The question is....Why do I have this feeling that the US sub prime debacle is just part of a larger breakdown of underwriting standards that goes farther than most in the mainstream media have really given voice to, and won't the sudden tightening of lending standards, driven by the sub prime mess initially, have a significant negative impact to the economy beyond just low income borrowers and speculators in residential real estate?

    The answer is yes, there will be wide ranging ramifications of this "increase in risk premiums", as there always is. The unwinding of what some people have called the debt bubble (which I think is overly sensational, but not so far off the mark as to be ignored) will have a wide reaching impact globally and it's not just because of tighter underwriting standards. The squeeze is coming from a significant shrinkage in money available to lend, well beyond the traditional bank lending downturns that have historically taken place. This is because of the partial unwinding of a new source of financing that has taken control of the money supply out of the hands of banks and government central banks. I want to use this piece to elaborate on the Op Ed piece, and its implications and why I think its so important to the outlook for the markets and ultimately New York City real estate.

    Back in the early 1980s, when inflation was the driving force in financial markets, Wall Street economists used to follow the "money supply", as many "monetarists" believed that inflation was strictly a monetary phenomenon - a result of central banks making credit too easily available. At that time even the Fed paid a lot of attention to money supply and at times even targeted its policies to manage the supply of money. For a variety of reasons, which Fed governors discussed in later years, traditional measures of money supply M1, M2 and M3 seemed to become less accurate. Check this link for a great primer on money. The reason the M's became less accurate was financial innovations that allowed the creation of money that couldn't be captured in even the widest basket called M3.

    I am getting to a point here. One of the ways that money is created is by the leverage of lending. Central banks make money available to banks. Banks can borrow from the central bank and lend the money out, but they must keep a "reserve" level of funds (equity or capital) in case any of their depositors want their money back on a given day. Old bank collapses happened when all depositors wanted their money the same day...a so called "run on the bank" - I digress. As long as the bank kept its reserve levels high enough it could lend as much as it wanted....but these reserve requirements ultimately limited the amount by which the bank could multiply the money created by the central bank. The central bank had several ways of controlling money supply. They could change the rates they lent at, which made it more or less profitable for banks to borrow from the central bank and lend (thus multiplying money); they could change reserve requirements (the amount the banks could multiply the money by) or they could tighten bank inspection standards and pressure banks to lend only to the best borrowers, thereby rationing money based on credit worthiness. This last method was also called "moral suasion" or "jawboning", where the fed effectively just tells banks to lend more or less - but this only works to a point - which we will talk about later.

    David Roche points out that Wall Street's financial innovation circumvented the reserve requirement system temporarily. This allowed money supply worldwide to grow faster than central banks could measure. A recent Barron's article called Wall Street "a place where people who shouldn't lend are introduced to people who shouldn't borrow"...HA. I love it, but it's exactly true. By allowing banks to "securitize" debt and sell it off of their balance sheets, reserve requirements were effectively circumvented as new lenders beyond the Fed's ken were introduced into the system. (There was another fancy way of keeping loans from impacting reserve requirements called synthetic securitization, where banks eliminated credit risk through default swaps and interest rate risk through interest-rate swaps). Banks could multiply money as many times as they wanted as long as they could find new sources of capital. New lenders who traditionally lent by buying bonds, not by making bank loans, became sources of such funds. These included money market funds, bond funds, insurance companies and hedge funds, foreign sovereign funds etc. The latest innovations like SIVs and CDOs allowed the bank loan products to be packaged into bond-like pieces that accommodated the investment restrictions on these varied lender types. Now many of these funds have their own ability to leverage...or in my parlance....multiply money. These funding sources are not new - though some have grown exponentially in recent years like hedge funds and sovereign funds - and their ability to leverage and lend was expanded significantly by packaging innovations.

    Money%20creation.jpgPUNCH LINE - We are now going back to basics. The game is temporarily over. Because of the failure of some of these packaging techniques to deliver the risk levels expected and because of the lack of transparency about who owns what paper and how toxic it is. Transparency was much better when banks owned all the debt and bank regulators had the last word on lending standards. Think of it as many small banks going under. These new lenders are all pulling back from lending and likely won't ever be able to come back with the leverage levels or appetites they once had. All those dollars that were created out of thin air and central bank control are going away. Now central banks can lend to banks and keep them lending to each other, they can lower the cost of money and boost bank profits, but they can't (and shouldn't) force banks to lend or lower their lending standards using moral suasion alone. Additionally, the real banks are having to take assets back on their balance sheets and write them down to market value, which is shrinking their capital bases significantly. In order to meet reserve requirements they must pull back on lending volumes. Perhaps most importantly, the central banks can't bring back the non-bank lenders with their added multiplier effects. As a result central banks are trying....in new creative ways.... to offset the destruction of money that is taking place...but they can't un-pop the bubble. This chart shows what the fed has been doing with the printing presses.

    Independent Strategy noticed that asset prices and financial sector balance sheets were growing at multiples of GDP in recent years while measurable money supply wasn't. This set them on their objective to identify the missing money. Well, that extra un-measured money supply is shrinking and it will have an impact on the other parts of the equation: asset prices, GDPs and financial sector balance sheets generally. So there you have it. This conclusion puts me at odds with the "Great Maestro" Greenspan, who is worried about inflation....if your a monetarist, money supply is contracting and the Fed needs to address it, it follows that inflation will be coming down with just about everything else.

    From the Blogosphere

    Bernanke Goes to Statue of Liberty Play - Bank System Scores

    The Collapse of the Modern Day banking System

    Monetary Policy Using the Asset Side of the Fed's Balance Sheet

    Five Things You Need To Know About Stagflation

    No Way Back - the Horrible US Economic Morass

    Manhattan Inventory Declining?

    Posted by urbandigs

    Tue Dec 18th, 2007 10:23 AM

    A: Well, I'll feel much better talking about this in another 4-6 months when we have a nice baseline of data collected from the Streeteasy tool. But hey, that's way too far out and I hate waiting (like Enigo Montoya who couldn't wait for the man in black to climb the cliffs of insanity!). Anyway, the chart shows a fairly noticeable decline in total active inventory for the island of Manhattan so why not discuss this a bit.

    manhattan-real-estate-inventory-trends.jpgBefore sellers get all giddy that inventory is down 5-7% or so in the past three weeks, please know that these systems are in BETA, we are constantly tweaking collection methods and fixing bugs to ensure better accuracy, and that we only collected about 2 1/2 months of data so far! Also, its DECEMBER!

    The seasonal aspect of Manhattan real estate kicks in during the tail end of November and most of December as those sellers who do not have to sell REMOVE THEIR LISTING from the open market to freshen it up for a normally more active selling season in the first few months of the year. I think this is the biggest reason for the decline in total active inventory from about 5,300 total units to about 4,950 units or so it is showing now. The market is generally slow in the month of December and most sellers try to enjoy the holiday and their shopping rather than dealing with prospective buyers & brokers. So, we must take this well known trend in mind!

    With that said, I expect inventory to rise as we get closer to February & March; right in the middle of the bonus season. Sellers normally re-list their properties, and new sellers usually try to time their marketing with the bonus season to take advantage of the activity so lets see what happens this time around with the data tools & charts clearly displayed!

    Any active buyers out there care to back up the decline in inventory OR question it? Would love to know what you guys see.

    ECB Takes Action, Injects Massive Liquidity

    Posted by urbandigs

    Tue Dec 18th, 2007 09:51 AM

    A: This credit crisis is just as much a liquidity crunch as it is a credit one. To break such a complex environment down to its core, there just isn't the liquidity in the secondary mortgage markets as their used to be; and that means trouble for those holding big time mortgage backed securities assets in their bag. While the problem stemmed from the spike in defaults of subprime borrowers leading to lack of interest for the securities backed by lower quality mortgages, one solution may lie in providing sufficient liquidity to corporations that need to raise capital but can't by selling their assets into a healthy marketplace; because the marketplace isn't functioning properly. In comes the European Central Bank with solid action.

    I think this is fairly big news on the credit front given the deal that is being offered (low rate) and the time that it is being offered for (two weeks). Lets get right into it.

    According to Bloomberg:

    Money market rates tumbled after the European Central Bank injected an unprecedented $500 billion into the banking system as part of a global effort to ease gridlock in the credit market.

    The amount banks charge each other for two-week loans in euros dropped a record 50 basis points to 4.45 percent, the European Banking Federation said today. The rate had soared 83 basis points in the past two weeks as banks hoarded cash in anticipation of a squeeze on credit through the year-end. The ECB loaned a record 348.6 billion euros ($501.5 billion) for two weeks at 4.21 percent today, almost 170 billion euros more than it estimated was needed. Bids were received from 390 banks, ranging from 4 percent to 4.45 percent.
    I bolded what I thought were some of the more important points. In my view, one of the clear signs of distress in the credit markets lies in the LIBOR rate, which is the rate at which banks participating in the London money market offer each other for short term deposits. The action by the ECB brought relief to rising LIBOR rates.

    According to Financial Times (via Calculated Risk):
    "This is basically Father Christmas to those who have access," said Erik Nielsen, economist at Goldman Sachs. "They are bailing out people who have not really adjusted their balance sheets to the new reality."

    But Julian Callow, economist at Barclays Capital in London, said the funds injected today would later be "mopped up" by the ECB, which was "simply doing their job at being lender of last resort".
    Last week I discussed this in my post, "Fed Action Coming; LIBOR Targeted?" where I stated:
    "It seems a co-ordinated effort with International central bankers is underway to help the credit markets and specifically the LIBOR rates which have drifted to a 85 basis point spread from fed funds rate. That widening spread is a clear signal of distress in the credit markets showing that banks are risk averse in their lending habits.

    Getting LIBOR back in line, within 10-12 basis points of fed funds rate historically, should be a top priority to soothing the pain in the credit markets and ultimately for consumers."
    I also put a chart up showing you the widening spread between the Fed Funds Rate & the LIBOR rate since August 1st, about the time when this credit crunch hit mainstream media.

    So, if I were a central banker and knew that rate cuts in a pipeline inflation world may not be the best thing, why not try some reverse thinking. We know LIBOR is disconnecting from fed funds rate because of distress in the credit markets. We also know that tons of adjustable rate loans (ARM's) are tied to this LIBOR rate. So, we know we need to get LIBOR back in line. Hmmm, how do we do this when banks themselves set this rate and its clear there is anxiety about lending right now? Perhaps we should provide MASSIVE AMOUNTS OF LIQUIDITY to the banks in need who can't raise enough capital because of the distressed state of the secondary markets where billions worth of mortgage backed securities holdings are traded! That way, banks can tap into this liquidity to raise capital from us, rather than from a fire sale of distressed assets! That should help the liquidity problem & confidence at the same time!

    That is exactly what is happening and as a result, LIBOR and other money market rates have been heading lower!

    According to Forbes:
    Interbank lending rates in the euro zone fell today in the wake of a liquidity injection by the European Central Bank.

    The three-month euro London Interbank Offered Rate (Libor) fell almost 10 basis points, the largest drop in six years, to 4.85 pct from 4.95 pct yesterday.
    This action has been a TARGETED ACT towards the credit markets and getting LIBOR back in line to a more normal spread with the fed funds rate.

    You can look at it like I just described OR you can break it down further and see some acts of desperation. You can also look at it as "geez, look how many banks tapped into this cash injection; that can't be good!". Time will tell whether this action eases the crisis we are in, but all in all, I think its a very solid move by the European Central Bank. Now, will it be enough, will banks get too used to this act of kindness and not bother to clean up their books, or will it prove to be too little too late?

    Moving To Halstead

    Posted by urbandigs

    Mon Dec 17th, 2007 10:27 AM

    A: Just a heads up to readers that I will be switching brokerages and moving to Halstead. This will not change anything on the site.

    halstead.jpgWhile I finish up the paperwork for the switch, I wanted to let you guys in on the move. It was something I was planning on for a little while now, but wanted to wait until UrbanDigs.com went through its full site upgrade, integration of Streeteasy data, charts, real estate chat section, etc.. Now that the site is getting to where I would like it to be, I have more time to focus on my real estate business again. I certainly feel like I have become a bit out of the loop of what is going on in the streets of Manhattan real estate over the past few months. I blame that on site upgrade, vacation time, and holidays. Now, I'm getting ready for 2008!

    Since I focus on sales, Halstead is a very good fit for me. They have a wonderful brand, a great vision, a focus on quality over quantity, a solid base of highly successful agents whom I've met over the years, and a great 'sales' reputation. They are the sister company of BrownHarrisStevens, which I consider one of the best of breed brokerages in Manhattan high end real estate. I am extremely excited about the move as I focus on building my sales business moving forward, learning about new development marketing / condo conversions, and servicing of higher end transactions. My philosophy for servicing buyers & sellers will not change, other than to incorporate new learning experiences into what I already have learned.

    For Buyers: I focus more on buy-side consulting, rather than finding listings. In my mind, the internet has become transparent enough where the prospective buyer can easily search what is available on the open market in Manhattan real estate. However, knowing how a product's pricing compares to its group, whether the product has features that will retain/rise in value with the market, analyzing past/active comparables, devising a bidding strategy, negotiating, and guiding the buyer through the transaction process is where I like to focus my efforts.

    For Sellers
    : Marketing, Marketing, Marketing! In my mind, the best service a selling broker can do is to pro-actively market a property above & beyond the tools provided by the employing brokerage; to reach as wide an audience as possible. In addition, prepping the property for sale by taking advantage of some low cost renovation options can go a long way in getting top dollar on the open market. Going out of your way to accommodate every showing request, being educated on the product/building/neighborhood/ and market itself, and negotiating the highest & best price for the seller is where efforts should be placed. Knowing how to handle all types of personalities doesn't hurt either as I believe there is a lot of psychology involved in this aspect of the game.

    The only thing that changes is that I feel I will be with a highly regarded brand with exceptional marketing tools for sellers. For buyers, its all about the agent's knowledge & strategy than it is about the employing brokerage! So, I feel this is a great move for me all around!

    The move also means starting fresh with a new webpage, no listings right now, changing email, and a new internal brokerage system and culture. I will use the remaining weeks of the year to get set up so that in January I can be back in full force. Once I get back, I will start reporting on what I see in the Manhattan real estate market again on a more frequent basis. As you now know, if I'm not on the streets, I don't like to comment on the market; and will report on macro instead! So I look forward to getting back to the game and my old schedule.

    Housing Forecasts For 2008

    Posted by urbandigs

    Fri Dec 14th, 2007 02:57 PM

    A: Calculated Risk updates us on what some of the experts and organizations think about 2008's existing home sales volume. Surprisingly, the NAR is most bullish.


    NAR, Dec 2007

    Existing-home sales are likely to total 5.67 million this year, the fifth highest on record, rising to 5.70 million in 2008, in contrast with 6.48 million in 2006.
    From AP:
    Patrick Newport, an economist at Global Insight, forecasts that home sales will drop from 5.66 million this year to 4.7 million in 2008
    Goldman Sachs:
    Back in August, Goldman Sachs forecast existing home sales would fall to 4.9 million in 2008. However, since then, Goldman has becoming even more bearish on housing.
    Thanks to Bill over at Calculated Risk for always being on top of this!

    Pipeline Inflation: Here Already?

    Posted by urbandigs

    Fri Dec 14th, 2007 12:06 PM

    A: When the fed announced its actions on Tuesday, some were wondering why the previous bias towards focusing on growth suddenly seemed to disappear. In its place, was more wording about inflation. I've discussed pipeline inflation plenty here on urbandigs.com over the course of the year, and it's clear that with today's economic data it will begin to take headlines once again. Think to yourself sarcastically, ..."you mean, record high energy prices, higher commodity prices, and higher food prices are inflationary?". Yes, they are.

    Forget the whole argument about headline vs core for a moment (read my recent post, "Fake OR Real Inflation?", back in mid November - Search Results for ALL "inflation" articles), today's CPI data came in hotter than expected all around. According to Yahoo Finance:

    The Labor Department said the consumer price index rose 0.8 percent in November amid a spike in gasoline prices. The 0.8 percent increase in consumer prices topped the 0.6 percent rise economists had been expecting. The report also showed core inflation, which excludes often-volatile food and energy prices, rose 0.3 percent, the biggest increase in 10 months. The report also found large increases in the cost of clothing, airline tickets and prescription drugs.

    The report raises questions about the Fed's plans for priming the economy.
    This is important because it will change the roadmap of policy actions by our fed. It will also bring treasury yields up & strengthen the US dollar; all part of the system correcting itself and certain markets reverting back to the mean (treasury's & currency's). cpi-inflation-bernanke-federal-reserve.jpgIf the fed either doesn't ease as much or is forced to consider rate hikes sooner rather than later, it will strengthen US dollars. Think of how many traders are short US dollars and will ultimately need to cover those positions!

    Barry Ritholtz over at The Big Picture provides this chart on the year-over-year changes of the CPI Headline & Core #'s showing the sharp uptick since July:
    The 0.8% gain was the largest since Hurricane Katrina's boosted CPI in September 2005. That was obviously a weather induced number, and you need to go all the back to January 1990 to find a comparable CPI price increase. And the so-called Core? 0.3% gain was the most since June 2001.

    So, what do these inflation figures really mean?

    Well, you can forget about a half point cut anytime soon -- at least until the Fed has gone from nervous to scared $#@tless. That's how you know they are in full blown panic mode.

    Pipeline inflation (as I like to call it), the buildup of inflation from the past 6-12 months that is yet to trickle down into higher prices for consumers and be reflected in economic reports, is very real. While we may see short term rate easing as the fed tries to stave off any slowdown from the credit crunch, we are probably in for a medium-longer term period of rate hikes. It's just that this credit crisis needs to show signs of normalization, and the housing market needs to stabilize before the fed can risk raising rates; so we have some time and maybe even another rate cut or two in the near term as recession fears remain.

    As for lending rates, I would expect them to tick higher on this report. However, you must keep in mind that these days there is less and less relation of fed action and bond yields on lending rates. The reason is the credit crunch, the risk that comes with mortgage lending, and the risk aversion of the banks to this type of lending. Add that all together and you get:

    a) higher cost of debt
    b) tighter underwriting
    c) fewer loan options

    ...so yes, the credit crunch is related to real estate on a macro level. The time it takes to hit local markets will lag. My thoughts on our fed? I think they will still act in the near term (lower rates) as the credit crunch lingers, but that longer term we will see the lagging effects of global inflation leading to a more sustained campaign of rate hikes in the years to come.


    Inflation in the Euro Zone Climbs (AP)
    Inflation in the 13 nations that use the euro surged to 3.1 percent in November versus a year earlier, its highest level in more than six years, the European Union's statistics agency Eurostat said Friday. It is now well over a guideline of just under 2 percent that the European Central Bank looks to when it decides whether to raise interest rates to boost borrowing costs.

    But the ECB is now under pressure to keep rates on hold to encourage reluctant banks to keep lending out money to each other in the wake of a credit crisis where they are worried about taking on extra debt.
    Inflation: Hot & Getting Hotter (BusinessWeek)
    A larger than expected pop in the November consumer price index may temper the Fed's willingness to loosen policy any further. As if the Federal Reserve didn't have enough headaches these days, inflation appears to be on the march after a long period of relative quiet. Case in point: The release of the U.S. consumer price index for November on Dec. 14. The headline CPI surged 0.8% on the month, while the core rate, which excludes food and fuel, rose 0.3%. Markets expected tamer rates of 0.6% and 0.2%, respectively, according to S&P MarketScope.

    Everything Works in Reverse - Asset Cycle II

    Posted by jeff

    Thu Dec 13th, 2007 11:16 AM

    It can be very hard for investors to adjust their psychology to new market conditions - I have the scars on my back to prove it. For one thing markets tend to go up over the long-term. If you are a true investor and have a holding period of 10 years or more -Warren Buffet has been quoted as saying his favorite holding period is "forever"- over any ten year period the worst that usually happens to you is you get bored. Obviously if you are not properly diversified, if you buy the most speculative areas...when they are hot, trade in and out, or use leverage, a lot worse can happen.

    100_year_dow_bull_bear_periods.jpgLooking at these longer-term charts, I am sure you can see how in the long periods of appreciation in different asset classes you can get pretty "long-term" optimistic. In fact since businesses can't trade the markets and have to gear themselves to their long-term competitive positions, they almost have to adopt the "long-term bullish" mentality. Of course this is where the seeds of down cycles are planted. Imagine that you were a large mortgage lending entity...say Freddie Mac....and you were losing share to many alternative sources of financing. Meanwhile real estate prices were marching inexorably higher and competitors were figuring this appreciation trend into their calculus for loan to value ratio requirements. It is likely that you would respond, even just to maintain market share. In fact according to the CFO this is exactly what happened "The underwriting standards declined," said Anthony Piszel, chief financial officer of Freddie Mac. "That was across the board." This according to a Floyd Norris article in the Times Herald Tribune, he writes "A kinder way to look at it is that competition forced the company to lower its standards. Either way, Freddie this week released data showing how its standards eroded. None of the loans on its books from 2003 or earlier call for payments of interest only. Almost a quarter of the loans it bought this year had that characteristic."

    Home%20prices.jpgSo these days Freddie is no longer buying the NINA (no income no asset) loans they were before the credit crunch - and they are raising capital to butress their balance sheet. So what's my point? In order to adjust to the transition from bull to bear market you have start thinking in reverse....once you start doing it, its actually pretty easy. Just think about all the things that people did and realize they will do the opposite when the market turns down. Think about all the positive data and how it underpinned the decisions of appraisiers, lenders, rating agencies, buyers and sellers and realize the bad data will have the opposite impact.

    This month's Real Deal has a cover article on "The Commercial Slowdown - How Deep Will the Dip Be" in New York City. Interestingly, it parallels the Freddie Mac example. According to Adrian Zuckerman, the head of the real estate practice for Epstein Becker and Green P.C. and head of the firm's Real Estate Steering Committee. "Lending standards over the past few years were speculation-based, not performance-based". Now although the headlines are coming out now, I have been hearing for at least 6 months about how difficult it was to be a commercial real estate investor/developer and acquiring property in NYC - "Going long the market". But folks were doing it anyway...why? They are in the business of buying and developing real estate and prices usually go up. Zuckerman comments further in the article "There's still a relatively strong leasing market in New York, but if the leasing market drops , or even remains stable, the projected rents won't be there - estimated performance projections won't be met". The article goes on to talk about an increasing number of commercial buildings that are in technical default....they have not stopped paying their mortgages, but they don't have the required interest coverage ratios and other measures of financial health that banks insist they maintain. We have many projects particularly in the boroughs that are coming out of the ground to beat the 421A expiration and I have heard about several deals that are already having financing issues. The current stalemate of buyers and sellers may be broken, when banks join the ranks of sellers. This is a particular risk in the boroughs.

    Things working in reverse...thats why they say you can't un-pop a bubble. Pervasive declines in underwriting standards...we are now finding out that they were not just in loans to individuals for residential real estate, they were in loans to developers and commercial real estate buyers to. It is the natural cycle of things - like in the bible 7 fat years...

    Manhattan Real Estate Update

    Posted by urbandigs

    Wed Dec 12th, 2007 11:24 AM

    A: I have to admit that I have been spending more time on urbandigs than on the streets of Manhattan real estate the past month or two, especially after that vacation in Jamaica. But, that doesn't prevent me from seeing how quiet the market is. There is just no real urge to jump in from buyers that I am sensing. But I am hesitant to report on it here because I am not out there as much lately. So, lets check in with what Doug Heddings over at TrueGotham is seeing as he is definitely more in touch with 'right now' than I am.

    manhattan-real-estate-update-quiet.jpgAccording to TrueGotham's "How's The Manhattan Real Estate Market?" article:

    It's SUPER quiet right now! Buyers and sellers alike are indeed digging in their heels. Having said that, I'm seeing more motivated sellers on the market right now than those who "test" the market to see if they can get their price (inflated usually). The best article that I have read lately that most accurately portrays the current market is Between Buyers and Sellers, a Stalemate written by Christine Haughney for The New York Times (and I'm not just saying that because I was quoted in the piece).

    " Manhattan is apparently full of sellers who think foreign buyers, or bankers who might still get big bonuses, are ready to pay full price for their apartments. These sellers do have recent history on their side. For the first three quarters of this year, Manhattan apartments over all continued to sell at record prices.

    Now, brokers say, they see a stalemate developing between buyers and sellers in Manhattan, especially for apartments in the $1 million to $5 million range. Sales in this range made up more than half of the total dollar volume in the market in the third quarter of this year, according to data tracked by Radar Logic.

    Brokers say it is the buyers in this sector of the market who are now growing concerned about the impact of the weak national housing market and the effect that Wall Street losses might have on Manhattan apartment prices. So they’re lowering their bidding or stopping their searches altogether until they have more confidence in the market. "
    I'll be getting much more active with buyer clients come January and will start reporting more of what I am seeing on the front lines a few weeks after. Keep in mind that these reports are highly individual! Those brokers who put 10 hours a day into their business with buyers probably will report seeing a very healthy and active market. While those that deal mostly with sellers, will report its a bit on the quieter side. For me, I like to focus more on buyer psychology & confidence as a leading indicator of what may be ahead of us; and that is something I openly discuss with my buyer clients.

    Fed Action Coming; LIBOR Targeted?

    Posted by urbandigs

    Wed Dec 12th, 2007 09:36 AM

    A: Breaking news to be released soon. As I said yesterday, I admire the move the fed did yesterday to regain control over the tradable markets' expectations, and to setup a situation that will allow for more surprising action with the saved ammunition. It seems a co-ordinated effort with International central bankers is underway to help the credit markets and specifically the LIBOR rates which have drifted to a 85 basis point spread from fed funds rate. That widening spread is a clear signal of distress in the credit markets showing that banks are risk averse in their lending habits. By now, most know the importance of the LIBOR rate (which has surged in the past 4 weeks while the credit situation deteriorated) as that is the rate many adjustable mortgages reset to. Getting LIBOR back in line, within 10-12 basis points of fed funds rate historically, should be a top priority to soothing the pain in the credit markets and ultimately for consumers.


    Yesterday, in my post I stated:

    In my opinion, this move was the fed's way of regaining control over the tradable markets by not delivering what was hoped for, while at the same time taking some action. I admire this move because it removes a level of expectation from the markets and could set up a surprise move down the road; when it may be needed more.
    Today, the tradable markets are waking up to this concept and the breaking news soon to be released confirms it. As for LIBOR, here is what the credit sensitive rate has done in the past few weeks compared to the fed funds rate:


    Notice how 3-Month LIBOR remained above 5% while the fed funds rate was cut down to 4.25%! The spread between the two right now is about 86 basis points! Historically and in normal credit conditions, this spread is about 10-12 basis points. It rises when credit markets are in turmoil and banks become risk averse in their lending. It's a clear sign that a credit crunch is underway; but you don't need me to tell you that.

    I think the fed is working on a solution to target LIBOR and sooth the credit distress that is evident by rising LIBOR rates. Keep an eye on this as news unfolds!

    : Credit Crisis Hits Libor Rate

    Fed Cuts Funds Rate + Window By 1/4 Point

    Posted by urbandigs

    Tue Dec 11th, 2007 03:01 PM

    A: Before everyone out there bashes Big Ben for not acting aggressive enough, lets take a step back at what the fed probably accomplished here; given the disappointment in action & in the issued statement. In my opinion, this move was the fed's way of regaining control over the tradable markets by not delivering what was hoped for, while at the same time taking some action. This makes it more likely that the ultimate recovery will be pushed back. I admire this move because it removes a level of expectation from the markets and could set up a surprise move down the road; when it may be needed more.

    According to Yahoo Finance:

    The Federal Reserve cut a key interest rate by one-quarter of a percentage point Tuesday, trying to keep the country out of recession.

    The reduction in the federal funds rate to 4.25 percent marked the third rate cut in the past three months. Fed officials signaled that further cuts were possible if a severe downturn in housing and a crisis in mortgage lending get worse.
    And here too:
    Investors had been expecting policymakers would cut rates for a third straight time, though there was debate over the size of the cut. Most economists had been expecting a quarter-point cut in the benchmark federal funds rate to 4.25 percent -- but some investors were hoping for a half-point cut in the Fed's last meeting this year, and their disappointment took the market lower.

    The Fed as expected also cut the discount rate. The Fed cut the rate it charges to lend directly to banks by a quarter-point to 4.75 percent. Fed officials signaled that further cuts are possible if a severe downturn in housing and a crisis in mortgage lending worsen. Investors had sent stocks higher in recent weeks as they grew more confident in the Fed's openness to loosening its policy again.
    The fed did NOTHING today that they could later be blamed on! They cut rates. They just didn't cut them as aggressively as the street hoped, and some economists had hoped. Cry me a river. I can sense a Cramer outburst coming.

    The fed acknowledged the worsening housing & credit crisis. They acknowledged inflation risks. They acknowledged the weak dollar. And they disregarded the street's hope. They also told the street that they won't always give them what they want and at the same time, saved some precious ammunition for later on should it be needed to jolt the markets with an injection of confidence if things get real hairy.

    This move may help HELOC rates a bit but prob won't bring lending rates any lower, since that market is more tied to credit quality & risk appetite these days.

    It was a boring, disappointing, solid move. It was like an NFL team drafting a top rated left tackle with the 2nd pick in the NFL draft, to shore up their O-line for the running game and quarterback protection. Sure its not as exciting as drafting a star Quarterback or Running Back, but it will prove worthy later on. Sorry, its the best analogy I can think of given its playoff time in fantasy football.

    What do you guys think of this move? I say the markets have more reason for rallies down the road with more rate cut ammunition at the fed's disposal.

    Today's Credit Crunch

    Posted by urbandigs

    Mon Dec 10th, 2007 04:34 PM

    A: It still amazes me how hopes over rate cuts can cloud investors bets' and make them ignore news. Consider this just a brief overview of what news came out today pertaining to the ongoing credit crunch. I'll leave it up to you to decide whether its getting better or worse.

    First: UBS To Take Further $10 Billion Write-down

    Swiss banking giant UBS (NYSE: UBS) warned that it will write down the value of its subprime mortgage holdings by a further $10 billion, leading to a loss in the fourth quarter and potentially wiping out all its profits for the year. It also detailed an $11.5 billion capital injection from Singapore and the Middle East. In a bid to soothe the bad news, the bank also announced plans for a capital injection of 13 billion Swiss francs ($11.5 billion) from the government of Singapore and an unnamed investor in the Middle East. The plans would give Singapore a roughly 9% stake, making it the Swiss group's biggest shareholder.

    "Conditions in the U.S. mortgage and housing markets have continued to deteriorate, and we have updated our loss assumptions to the levels implied by the current distressed market for mortgage securities," said CEO Marcel Rohner in a statement. "In the last several months, continued speculation about the ultimate value of our subprime holdings -- which remains unknowable -- has been distracting," Rohner added. "In our judgment these write-downs will create maximum clarity on this issue and will have the effect of substantially eliminating speculation."

    With the latest announcements, UBS has recorded $13.7 billion in write-downs, more than any European bank.

    mc6758bp.jpgSecond: Bank of America Closing Money-Losing Fund
    (NYSE: BAC) According to The Wall Street Journal, the fund was worth $40 billion several months ago but has dropped to roughly $12 billion. The fund, a short-term investment pool for investors willing to put in at least $25 million, was closed after several clients took out their money.

    The fund was a so-called "enhanced cash fund," essentially a version of a money-market fund that puts its money in riskier investments. The Journal said a rapid decline in the price of the fund's mortgage-backed securities led to clients taking out their money.

    Third: Washington Mutual Cuts Dividend, Slashes Jobs, Sets Capital Infusion
    Washington Mutual (NYSE: WM) , the U.S. savings and loan slammed by slumping mortgage markets, on Monday said it would slash its dividend, cut more than 3,000 jobs and announced a $2.5 billion capital infusion.

    The Seattle-based bank also said it expects to report a net loss in the fourth quarter after recording non-cash write-downs.
    Ahhh, sounds like all is fine & dandy in creditville! Looking good Big Ben! Feeling Good Mr. Paulson!!!

    Converting MORE Rentals to Condos in FiDi!

    Posted by Toes

    Mon Dec 10th, 2007 03:54 PM

    I just saw this article in the NY Sun about Rockrose converting their 400+ rentals at 99 John street to condos.

    I don't quite understand what they are thinking. There are SO MANY new developments and condo conversions in the Financial District right now! Off of the top of my head, they are still actively selling units at William Beaver House, 88 Greenwich, 90 William, 75 Wall, District, 159 John, the South Star, 20 Pine, the Setai, 25 Broad... There are 800 rental units on John Street ALONE being converted to condos!

    Although the Financial District was a darling of mine for a while, I am going to have to cry "glut, glut, glut" after this latest announcement. I'd love to have a chance to pick the brain of whomever ran the numbers to make that decision...

    NAR: Lifts 2008 Housing Outlook; "...local markets seeing increases"

    Posted by urbandigs

    Mon Dec 10th, 2007 10:58 AM

    A: When will they learn? The NAR, a trade group for real estate agents, said today that the clobbered housing market is on the verge of stabilizing and inched up its outlook for 2007 & 2008 home sales. Um, isn't 2007 pretty much over?

    Before I get into what Lawrence Yun said, NAR chief economist, lets check in on the NAR's track record for the past 9 months or so.

    The NAR has unsuccessfully predicted housing trends for 70% of 2007! For the past 9 months, count 'em NINE MONTHS, the NAR had to downwardly revise their housing predictions; which were unsurprisingly too bullish. This is the same trade group that was once headed by David Lereah, you remember, the poster boy for 'everything is OK' as the national housing market went into free fall. In Mr. Lereah's own words, "It's a great time to BUY & it's a great time to SELL"! That one was the best. Hmmm, a great time to buy and a great time to sell is what the head of a real estate agent trade group is telling us! Talk about losing credibility as head of a group of people that earn their salaries on transaction commissions.

    BubbleMeter's History of Calling out David Lereah

    inventory-months-supply-homes.jpgEven Jonathan Miller of MATRIX gets into the NAR groove: NAR's Temporary Housing View

    Not a month goes by that Larry doesn’t say housing is getting better and that mortgage problems are temporary:

    "Lawrence Yun, NAR chief economist, expected the sluggish performance. "As noted last month, temporary mortgage problems were peaking back in August when many of the sales closed in October were being negotiated. We continue to see the biggest impact in high-cost markets that rely on jumbo loans," he said. “Mortgage availability has improved as evidenced by much lower mortgage interest rates and a sharp jump in FHA endorsements for home purchases."

    I was wondering what mortgage data Larry is referring to? I don’t believe its part of his research but is a primary basis of rationalization for glowing market conditions, despite the fact that inventory tracked by NAR is at its highest level since 1985 and has continued to rise despite temporary mortgage problems.

    I yearn for the day when NAR finds that perfect moment and decides to inform the public and the consumer what is happening in the housing market, rather than assume we are illiterate. I know many, many brokerage firms and agents that agree with this. PR driven quotes like this don’t move markets so what is there to be afraid of?
    It's just so sad, it really is. JM is dead on and I just don't get why the NAR is so afraid to be unbiased and acknowledge what is really going on in the world of real estate. This is one very big reason why real estate agents have a bad reputation!

    Anyway, here is what the NAR stated today according to Yahoo Finance:
    The revised monthly forecast from the National Association of Realtors, which followed nine straight months of downward revisions, calls for U.S. existing home sales to fall 12.5 percent this year to 5.67 million -- the lowest level since 2002. Last month, the association predicted 5.66 million existing homes would be sold this year. The Realtors' group also forecast sales will rise slightly in 2008 to 5.7 million, up from last month's prediction of 5.69 million.

    Numerous other economists, however, are far less optimistic than the trade group. They predict weak sales and falling prices through next year and beyond and emphasize that those problems could worsen if the economy sinks into a recession.
    Let us not forget the real data showing delinquencies rising at a faster rate, inventory of unsold homes at record levels, a mortgage market that is in distress, tighter lending standards, and fewer loan options.

    Fed Time Again: 25 or 50 Bsp?

    Posted by urbandigs

    Mon Dec 10th, 2007 10:17 AM

    A: It's the day before the next decision on fed funds rates. Everyone gather round and huddle up. What should be done?

    Arguments For 1/4 Point Rate Cut: The more likely option. Since Fed vice chairman Donald Kohn spoke a few weeks ago, the equity markets have translated his words (backed by a Bernanke speech the next day) into a rate cut induced party burning the shorts and resulting in a nice recovery after a very dangerous selloff. Now that wall street has undoubtedly 'priced in' a 1/4 point rate cut, the question is will there be any surprises?

    The argument for a 1/4 point rate cut remains the same. The downside risks to the economy are clear, even though at this point in time the economic data continues to show some strength and moderating inflation; giving the fed some room to cut. Flawed or not, this is the data the fed looks at. The credit markets are still in distress, the housing market is getting worse at a faster pace, the future with ARM resets is cloudy at best (even with this gov't sponsored private sector rate freeze plan), and even Stevie Wonder can see the red flags waving that could hurt the consumer and the US economy in the months to come.

    As a result, the fed will cut at least by 1/4 point to forestall the adverse effects to the economy. With pipeline inflation still a concern and the US dollar still very weak against other major currencies, the argument for a 1/4 point rate cut gets stronger. Plus, by cutting only by 1/4 point, the fed can save some ammunition for later use should things get real hairy in 2008; something that can prove to be vital to help restore some confidence without over-stimulating the economy or presenting a moral hazard for all those that made bad bets again.

    Arguments For 1/2 Point Rate Cut: The main arguments for a 50 basis point rate cut is a combination of the fed being behind the curve already, the street already pricing in 1/4 point cut, and that the macro data shows a seriously slumping housing sector that will inevitably bleed into consumer spending. We know that there is a lack of liquidity in the secondary mortgage markets, but fed rate cuts do little to reverse that. We know that the credit markets are in distress, but that has to be worked out on corporate balance sheets (hey there, UBS with another $10 Billion in write downs; how are you doing?) first before normalizing.

    And we also know that the housing market will get worse before it gets better and the side effects of that on the consumer, in my opinion, is the biggest argument for the fed to be aggressive and cut rates by 50 basis points.

    For now, lets enjoy the free round of tequila shots that the fed has provided us via speeches by its members, as it almost makes it look like things are getting better. Beware not to confuse rate cut induced rallies for confidence & certainty returning to the marketplace. While subprime has taken all the headline blame for what is going on right now, let us NOT forget that there are plenty more loans out there that are waiting to go bad: option arms, hybrid I/O loans, cosi & cofi loans, alt-a (already starting), second mortgages, HELOC's, credit cards, and prime loans (already starting).

    THIS IS NOT A SUBPRIME PROBLEM! This is a complete mortgage/lending mess that has yet to fully reveal itself and explains WHY the fed is taking aggressive proactive measures to soften the blow expected to come.

    MY BET

    65% ---> 1/4 point rate cut fed funds, 1/4 point rate cut discount window
    30% ---> 1/2 point rate cut fed funds, 1/2 point rate cut discount window
    5% ---> some combination of above
    0% ---> NO CUT; that would be a shock

    Toes' Predictions for 2008

    Posted by Toes

    Fri Dec 7th, 2007 09:47 AM

    My buyers have been asking me where I think the real estate market is heading. Please keep in mind when reading this post that 90% of my buyers are first time buyers and are purchasing in the $300K - $2M range. Most of them have been sitting on the fence for the past 2 - 3 months waiting for the predicted impending doom & hoping that prices would come down. The NY Times front page article this weekend titled, "Stalemate," was pretty accurate. However, when an apt comes onto the market even $5K-$10K below market value, buyers pounce on it, it goes into a bidding war, and it is gone in 2 open houses at above the asking price. I've seen it happen on several occasions in the last three weeks.

    2008-real-estate-predictions.jpgSince Thanksgiving, I have seen a significant increase in what I perceive as the level of seriousness of the buyers that I am currently working with. I think they have realized:

    1. Manhattan is probably not on the brink of a 15% drop in sales prices.
    2. The wintertime is frequently slow and can be a good time for "deals." Sellers who want to get out by the end of the year finally dropped their prices right around Thanksgiving.
    3. Anything terribly overpriced has come back down to some semblence of reality.
    4. My buyers know that they are at least not buying at the absolute "top of the market."
    5. First time buyers just want to get into the market somewhere. "Time in the market is more important than timing the market."
    6. I suspect they are also getting sick of looking by now, since they have seen 30 properties in the last 2 - 3 months. Basically they have seen everything on the market in their price range and are comfortable picking their favorite property or jumping on something they like when it first comes onto the market. You can only spend so many Sundays at open houses before you fall in love with something.
    7. They are looking for somewhere to spend the next 3-5 years, so they aren't as concerned with what "might" happen in the next 1-2 years.
    8. They have been renting for 2-3 years in their current apartment and are tired of renting & ready for a change.
    9. They want to get in somewhere so when they get married, etc., they can trade up to something larger because they have been building equity instead of spending money on rent.
    10. Their income is finally getting to a high enough level where they could use the tax deductions.
    11. Sellers are finally waiving the mortgage contingency.

    So what are my predictions for 2008? Unfortunately I do not have a crystal ball. However, I think that the entry level market ($300K - $1M) is going to be fairly level from January 2008 to January 2009. Why do I think this? There are always people in NYC looking for their first home, pied a terre, or small investment. Studio sales remain strong and developers aren't building enough of them. Permits for new condo developments are down 50% so the predicted "condo glut" is just not going to happen for the smaller units (studios, one bedrooms) although the larger units will take longer to move. (Side note: I do think there are a lot of new developments / condo conversions in far west Chelsea and also now in the Financial District, and I don't see how all of it is going to be absorbed. But other areas in Manhattan below 96th street seem to have more of an inventory shortage than a surplus). A million people are expected to move here by 2025.

    So my thoughts are: The sky is not falling. Noah is going to disagree with me here, but as someone out on the streets:

    1. There are a good number of buyers at all of the open houses I have attended in the past 2 weekends.
    2. One of my listings just had a bidding war and sold over the asking price in just a few days on the market.
    3. I do a lot of work in the Village/SoHo, the UES and the UWS and prices have come down just enough to make buyers feel comfortable taking the plunge.

    Looking forward to hearing everyone's comments:) Noah, if I am wrong, I owe you dinner!

    MBA: Rate of Deterioration Increases

    Posted by urbandigs

    Thu Dec 6th, 2007 10:41 AM

    A: In mathematics, a derivative is the rate of change of a quantity. A derivative is an instantaneous rate of change: it is calculated at a specific instant rather than as an average over time. In the real world of analyzing foreclosures and delinquencies, the second derivative will tell us whether the rate of change is increasing or decreasing. As confirmed by the Bankers Group, the rate of deterioration of foreclosures & defaults is increasing! What does this mean? Things are getting worse, faster!

    MBA: Delinquencies Increase in Latest MBA National Delinquency Survey


    Prime Loans ---> Increased 15 basis points (0.15%) from 2.58% to 2.73%
    Subprime Loans ---> Increased 105 basis points (1.05%) from 13.77% to 14.82%
    FHA Loans ---> Increased 43 basis points (0.43%) from 12.15% to 12.58%
    VA Loans ---> Decreased 34 basis points (0.34%) from 6.49% to 6.15%

    Facts people, if you don't like it than I am very sorry. I try to be unbiased here and as many of you know I have no qualms about telling it how it is, even if the news is not good. And yes, I derive 75% of my annual income from real estate transaction commissions in an industry where sales skills is the name of the game. Obviously, I'm not a good salesman so I will never be a mega-performer in this game; something I have no problems with.

    Back to the news. According to Bloomberg's article, "U.S. Mortgage Foreclosures, Delinquencies at Record, MBA Says":

    The number of Americans who fell behind on their mortgage payments rose to a 20-year high in the third quarter as borrowers were unable to refinance or sell their homes. The share of all home loans with payments more than 30 days late, including prime and fixed-rate loans, rose to a seasonally adjusted 5.59 percent, the highest since 1986, the Mortgage Bankers Association said in a report today. New foreclosures hit an all-time high for a second consecutive quarter.

    "These are the first numbers we've seen that combine the meltdown of the credit markets with the drop in home prices," said Jay Brinkmann, vice president of research and economics for the Washington-based bankers trade group. In the quarter, 3.12 percent of prime borrowers made their mortgage payments at least 30 days late, up from 2.73 percent in the second quarter, the report said. The subprime share of late payments rose to 16.31 percent from 14.82 percent.
    The Bloomberg article didn't touch on the actual RATE of increase I was looking to point out here. The CNN Money article, "Record Rate of New Foreclosures" does:
    The rate of home owners going into foreclosure hit a record high in the third quarter, while those late with their payments were at the highest level since 1986 - the latest signs of the meltdown in the mortgage and real estate markets shaking the U.S. economy. Mortgage delinquencies and foreclosures became a serious problem during the quarter, as investor demand dried up for securities backed by mortgages, particularly subprime loans made to borrowers without top credit scores.

    That meltdown in the mortgage market made many major lenders pull back from making subprime mortgage loans, which in turn helped send home sales, prices and new construction sharply lower, raising the risk of a recession.
    The troubling item of this report is that the rate of delinquency is rising & that it is starting to infect alt-a and prime loans. Overall, most loan categories experienced rising rates of defaults. All part of the downturn cycle. Expect news to get worse before it gets better.

    Mortgage Bailout Plan / Subprime Rate Freeze

    Posted by urbandigs

    Thu Dec 6th, 2007 09:30 AM

    A: Back to work. What do you do when free markets take advantage of ultra cheap money and a booming housing market? You have gov't step in of course to clean up the mess! However, I caution anyone from interpreting this Bush sponsored subprime rate freeze as anything more than political window dressing. While the full plan has yet to be unveiled, major parts of the plan were and from what I can tell, this is nothing more than putting 2 or 3 band-aids onto a gunshot wound. I'll explain why.

    subprime-rate-freeze-bailout.jpgFirst off, this subprime rate freeze plan does NOT affect all subprime borrowers about to be dealt with higher resetting mortgage payments. That is the most important thing you need to know. It is not a fix-it-all plan and it will not stop foreclosures and defaults from rising in 2008! Sure, it may help a little, but the most I get out of this is a stab at restoring confidence into the credit markets that the gov't will be there to help if things get hairy.

    What's unusual here is the grand scheme of things is the proactive measures that both our gov't and the federal reserve have been taking lately! Is anyone else noticing this or viewing the situation in this light? I mean, if it wasn't for rate cut hopes via a fed governor speech or a Super SIV bailout plan that will ultimately be half as big as once thought, or now gov't intervention to freeze some subprime mortgage rates, where would be right now? There is an awful lot of action being put in place beforehand to soften the hit that is obviously expected to come later on. I digress.

    Back to the mortgage bailout plan. Here is who the plan will work for:

    a) ONLY loans made at the start of 2005 through July 30th, 2007
    b) ONLY loans that will reset to higher rate between Jan 1st, 2008 through July 31, 2010
    c) ONLY owner occupied borrowers (primary residence borrowers)
    d) ONLY those borrowers who CAN afford 'teaser' payments & CAN'T afford resetting payments
    e) ONLY those borrowers who CAN PROVE they cannot afford resetting payments
    f) ONLY those borrowers who are making payments ON-TIME

    So, completely eliminate speculative borrowers who used these teaser mortgage products to keep costs ultra low while they flipped their properties! Also eliminate any borrower who...

    1) already had their teaser rate reset to a higher rate
    2) already are missing payments
    3) was savvy enough to avoid a teaser mortgage product but now pays a higher 30YR fixed rate

    Obviously, those in dire need are not going to qualify for this plan! You must also understand what most subprime borrowers deal with. Since they are subprime, or poor credit borrowers, even their teaser rate is much higher than a 30YR fixed rate that most of us take for granted. Most subprime mortgages start at teaser rates of between 7% - 9%, only to re-adjust to about 9% - 11% or so after the teaser period is over. This is the price you pay for having poor credit and buying a home during a real estate boom where lenders didn't care whether you could actually afford the house or not!

    The fault lies partly to the borrower & the lender. As painful as it is for anyone to lose a home, fact is way too many people bought a house they couldn't afford in an attempt to ride the real estate boom bandwagon. They were just poor investment decisions that went through because the lenders allowed them too. In the eyes of the lender, it was more about getting the deal done, collecting their fees, and packaging the loan up into a mortgage backed security that could be resold to some other investor to deal with! Well, the game is over and now we are paying the price with an illiquid secondary mortgage market where no investor is putting a desirable price on these mortgage backed securities.

    I wonder how the ABS (asset backed securities) investors are handling all of this now that they will take a costly hit here as they will not get their higher resetting rates for some holdings; which is the whole point of dealing with these types of borrowers in the first place, to get that higher rate. I'm sure you'll hear more on this side effect as the full plan is unveiled.

    This subprime rate freeze plan will not fix the problems we face in the housing downturn cycle or the crisis to the credit markets & secondary mortgage markets that happened as a result. It may install some confidence for a while though and it may help some struggling borrowers, but it won't nearly be enough!

    Data Dump

    Posted by jeff

    Tue Dec 4th, 2007 05:55 PM

    In the interest of keeping folks up on some of the data Noah has focused on the last number of weeks - and correctly so - I am giving Urban Digs readers a little real time data dump. There's no way I can duplicate Noah's graphics arts mastery so I'm not going to try. This dump will mostly be sans charts.

    LIBOR to Treasury Spreads - This is the difference between yields on "riskless" short-term U.S. Treasuries vs. the short-term rates banks lend to each other at...and which they price various loans off of. These spreads continue to rocket higher as banks are scared to lend to each other and charging each other ever higher interest rates. Thi is because they can't assess each other's risk with regard to holdings of toxic sub prime paper. At the same time they are buying up "riskless" U.S. Treasuries as a safe haven as are all the other market players. This is driving a continued widening of spreads. As the old saying goes, "if you don't need to borrow money (or you can print your own) it's easy to get a loan".

    More Blow-Ups - A short-term fund run by the State of Florida as a place for various Florida municipalities to park their cash and earn slightly better than money market fund rates has experienced a flight of capital by city governments that invested in it due to fears about its holdings of SIVs. Montana and Connecticut reportedly have similar problems with state funds and speculation is there are others yet to step forward.

    More Poorly Thought Out Intervention - First there was the SIV masterfund plan, which was to bring together large banks to buy SIV overnight paper and keep these vehicles alive and off bank balance sheets. These SIV funds run by banks made the oldest mistake in the banking book, borrowing short and lending long or failing to "match maturities". So the government was going to get these same banks together to try to put together a fund to help these vehicles hobble through the crisis in overnight funding because longer-term the paper that the SIVs hold is supposedly not really that bad off. Tell me another! HSBC nixed this idea and went ahead and owned up to being responsible for its SIVs and took a big write down. I have not been hearing any new positive developments about the super SIV plan since.

    ARM Freeze - So now we have a new novel government idea, freeze the interest rates on sub prime ARMs. Andy Laperriere who works the Washington beat for Fast Eddie Hyman (the famous Morgan Grenfell economist of the 1980s) at ISI Group wrote a great Op Ed piece in the Wall Street Journal Tuesday on why this idea is preposterous in terms of implementation and morally hazardous to the point of being laughable. He also points out that most sub prime paper has been going tapioca before the first interest rate increase....these people never had the money to pay back these loans, reset or not. My twist is this. Even after having done some work on the Myrtle Beach vacation home market, which I learned has historically been driven by speculators, I was still shocked to find out that "half the subprime loans made in 2006 were for homes that are not the owner's primary residence" what's worse these speculators had way higher median incomes than the local Myrtle Beach folk. You want to freeze interest rates for these knuckleheads..... please!....NEXT!

    ABX Index - This index of sub prime paper caught a brief short-covering rally on the news of the potential freeze on interest rate resets. It was the biggest one day up move the index has ever had....that's what happens in bear market rallies, they are short, sharp and designed to punish bears that are feasting too aggressively on a sell-off. But the ABX started to give back today.ABX%20triple%20B%20-.jpg

    We are not out of the woods and this asset meltdown is following my asset cycle script pretty closely. Later in the week I will have some juicy tidbits from NYC developers....who are starting to get downright negative.

    From The Internet & Blogosphere

    All Major Central Bank's Should Cut Rates Now

    Losses Stack Up

    Defining Delinquency Down

    NYC Housing - A Brief Update

    Posted by jeff

    Mon Dec 3rd, 2007 08:24 AM

    NEWYORKSKYLINE.jpgI am sure very few of the NY real estate cognoscenti out there missed the Wall Street Journal Online's "They'll Take Manhattan -- For Less" article on Friday. For those who did, the article quotes the Corcoran Group real estate brokerage firm saying that inventory in the NYC market is rising and that prices are flattening. It cites third quarter data from Radar Logic, Noah's friend Jonathan Miller's firm indicating that the median Manhattan apartment price fell 3.4% quarter-to-quarter in Q3, but was still up 2.3% year-over-year. Sales volume reportedly declined 11.2% compared with the prior quarter, but was still up year-over-year. Properties were lingering on the market for 123 days, up from 94 days during the 2005 boom period. If you have been reading Urban Digs, this is probably not a surprise. Christine Toes broke the story of proliferating developer incentives - a leading indicator - here a few weeks back, which is also highlighted in the Wall Street Journal Online article. Of course you have heard Noah and me ramble on about the strong and insidious macro headwinds that are proliferating and seem destined to at least dent, if not break, the unstoppable NYC housing boom. So what about activity thus far in Q4? Now that Urban Digs has real time data to look at, I thought I would bring it to everyone's attention......in hopes of keeping some content flowing while Noah is getting some R&R in Jamaica. The data have been available here for a few weeks due to Noah's recent re-design of the site and collaboration with Street Easy, who has cleaned up the data to Noah's exacting standards (once a trader, always a trader). We will eventually have a regular piece highlighting the data as the set gets longer and we learn a little more by tracking it over time relative to other indicators. Understand, this is only a couple of weeks worth of data. This piece is not intended to be an indication of how we will utilize or feature this data in the future, just a reminder that it's already here on the site for your use.Listings%20-signings%2012-3.jpg
    As is evident from the graph, there was a spike up in activity in late November, but we have seen a steady decline since. My guess is that people wanted to get their apartments listed and or get contracts signed before the holidays and we are now in hibernation mode through the holidays....it will be much more interesting to see how the market starts coming back after the New Year's holiday. By then we will have a data series that actually could reflect a trend. As you can see from the second chart however, it would be hard to characterize Manhattan apartment inventory as busting out.

    The price cuts, notable in our final chart, coincide pretty well with the increase in both listings and closings...again I would speculate it was due to attempts to move apartments before the holidays...and it looks like it worked.