A: Yea, 125 basis points of fed rate cuts also helps but in my view its the roller coaster rumors surrounding the bond insurers that are moving markets. Yesterday, S & P downgraded Fitch and rumors swirled that Ambac and/or MBIA may be next! Today, MBIA had a call and re-assured investors that they have sufficient capital to maintain their 'AAA' credit rating ---> markets quickly rallied as this news spread. While psychology & investor confidence experience their violent ups & downs, front lines still remain shaky. So what happens when you can't pay your debts? You cede control of your holdings to the real owner; the lender. That's exactly what Macklowe just did.
The feds super aggressive fed rate cuts have a two pronged effect:
a) initial jolt of confidence for tradable markets
b) an 8-12 month job, stimulate the economy, encourage investments/risk
It has rained stimulus over the past 2 weeks. In another week or so, the initial jolt of confidence (which seemed to last only an hour yesterday) of the rate cut will wear out. Then we have to wait another 8-12 months to see the actual effect of the 50 basis point ease. In a few more months, we'll probably start to see the effects of the first rate cuts of this latest easing campaign.
But in my opinion, its the fate of the bond insurers that are sparking these rallies and selloffs. Talk about volatility, how important is it that the biggest insurers maintain their 'AAA' ratings! The markets, especially the financials, think its very important. I see one of two things occuring in the next two weeks:
1) some sort of bailout plan announced on a company by company basis in some way, shape or form by either gov't or private sector
2) ratings downgrades
Its a race. Which will win out first? After today's MBIA call, the markets and financials are betting on choice # 1!
According to this Forbes article: "On the call, MBIA Chief Financial Officer C. Edward Chaplin said that rumors that company is nearing insolvency "are without merit." He also said the company has enough cash on its balance sheet to cover its needs for two years. He said insurance company dividends and a credit facility combined offer another four years of coverage."OK, I hear you. I also heard Countrywide tell me two months ago that they would be profitable this quarter, they weren't! Instead, they posted a $420+ million loss! But, the MBIA CFO says so! What about Ambac? Radian? PMI? MGIC?
Meanwhile, in the real world but not really news, Macklowe can't pay his debts. This story popped up a while ago and the world knew there were potential problems. So, he'll pass over his $7 Bil worth of office properties to the lender.
Calculated Risk is on the wsj.com story:
Troubled New York real estate titan Harry Macklowe has reached a tentative agreement with his lender to turn over effective control of seven Manhattan office buildings he triumphantly acquired less than a year ago for $7.2 billion. Mr. Macklowe borrowed $5.8 billion from Deutsche Bank to acquire the buildings in a highly leveraged transaction during the height of the real estate frenzy early last year. The debt is scheduled to come due on Feb. 9.While not necessarily walking away, it is a sign of the times. Remaining solvent (able to pay off your debts) is a question mark for 2008 outside of Manhattan's little shell. How will this impact the CMBS markets that we discuss here often?
According to FT.com's article "Macklowe’s potential to default could weigh on CMBS deal":
Developer Harry Macklowe’s financial woes could negatively impact COMM 2007-FL14, a USD 2.5bn commercial real estate deal, a buyside source and a source familiar with the transaction told Debtwire. If Macklowe fails to pay, the loan will go to the special servicer who would declare a default and start the loss mitigation process. It is unlikely, however, that the default would lead to an actual foreclosure, because Macklowe’s properties “are so sought after,” the source familiar with the transaction said.Ahh Manhattan real estate's primo location saves this situation! A nice sign in an otherwise cautious story.
PS: I'm very busy! Doug Heddings is dead on that its active out there. I still see some drop in confidence, but there seems to be plenty of buyers out there looking at our tight inventory. Herd like mentality tends to make those without any pressure a bit more interested if the property meets their needs and is priced right! More listings are coming on as expected, so lets see how sales volume does and whether sellers are willing to price right and sell fast OR price higher but negotiate to get a deal done with a serious buyer.
PHOTO: nypost.com "FLIP FLOPPED: Macklowe Seeks $1B Infusion"
Back in September I did a piece called The Psychology of Asset Cycles where I tried to lay out a roadmap for the unwinding of asset bubbles and the various phenomena that are commonly seen along the way, which might serve as a guide for what was to come. I talked about the outsized leverage employed in a bubble - oftentimes not widely known or understood until after the fact - as well as the high incidence of fraud in bubble assets, etc. We have been seeing all of this play out in the residential real estate market. The deflating of the bubble has been following the script very closely. That's why I want to revisit a concept I call Closing the Barn Door. In my piece I wrote...
The last phase of the saga is the closing of the barn door. This happens of course when the horse is in the next county and wreaking havoc there. The great legislators of our country wake up to the fact that an asset bubble caused misbehavior intentional and unintentional and they create laws to protect the populous from this ever happening again.......... Importantly, these laws make the pain in the asset worse and really put the nail in the coffin. Whereas before you could borrow to your heart's content to leverage an asset, the new rules significantly impede the ability to do this, making the asset less profitable to play in, so more people sell it. The related professions that were supposed to have some watchdog function in the industry that failed, like bond rating agencies and real estate appraisers get, tarred as criminals.
Before we go any further let me state for the record: I don't have anything against bankers, investment bankers, appraisers, mortgage brokers, sub prime borrowers or lenders, regulators, rating agencies, bond insurers, et al. Did some of these guys do nefarious things? Undoubtedly! Are they all evil? No. It's the bubble people. Greed makes people do crazy, illegal, unethical, immoral and flat out stupid things. It's human nature. People who crossed the line into illegal territory will be punished. I view the rest as victims of human nature....same as it ever was.....same as it ever was. The mistakes that will be maid by overzealous lawmakers and regulators are part of the same cycle...so don't hate these guys either.
Let's check out the beginning phases of the Barn Door Closing now underway - and remember the key here is that the closing of the barn door makes the bear market in the asset even worse than it has to be. As you will notice, the allegations, accusations, finger pointing and "regulating" are starting to take place up and down the supply chain of residential housing.
First off, have no worries because the FBI is now on the case. The G-men have reportedly launched a probe of the sub prime crisis with 14 criminal investigations launched. Really makes you want to be in the mortgage business, right? No wonder as Noah noted this morning, mortgage rates are going up while the Fed slashes Fed fund rates.
An appraisal fraud conference was held in St. Petersburg, Florida. Joni Herndon, the incoming Chairwoman of the Florida Real Estate Appraisal board, was interviewed there. She had some harsh things to say about her own peers. "In most cases, you can't have mortgage fraud without an appraiser. A fraudster is not going to pay cash for a home. They have to get a lender, who hires an appraiser to inflate the value. The appraiser is key to mortgage fraud. She also commented about the increased level of complaints by the public about her colleagues. "In 2000, we had 220 complaints. For the 2006-2007 fiscal year, it was up to 681. At our last meeting, we revoked eight licenses. We're also getting five times as many voluntary surrenders of license". Real punishments are being meted out for illegal behavior. One Arlington, Texas appraiser was sentenced to 5 years in prison.
Now some appraisers are striking back at the system that put them under intense pressure to play ball. WaMu is being sued by an appraiser who claims she was blacklisted for giving a housing market forecast that was too downbeat. She has company: a 2006 national survey of appraisers reportedly found 75% said they got stiffed on fees or didn't get future business if they refused to inflate home values.
Further, up the line from the home valuation process there is an arcane business conducted by mortgage loan due diligence firms. These companies will scrutinize a certain percentage of the loans that are being submitted by a Wall Street firm into a pool of mortgage backed bonds set for securitization. Apparently, some of these firms warned their Wall Street clients that a decent percentage of the bonds going into securitization pools did not conform to their clients' own quality standards, but they were overridden and these mortgages were allowed to get to market as part of MBSs. Attorney General Andrew Cuomo has reportedly entered a "cooperation agreement" with at least one firm, Clayton Holdings to help him understand how the whole process worked with their various Wall Street clients.....nice of them, eh? Considering that according to the Wall Street Journal New York State Attorney general Andrew Cuomo is said to be poised to use the Martin Act of 1921, which allows securitites fraud suits to be brought, without the persecutor proving intent to defraud, who wouldn't cooperate?
The credit rating agencies, were one group I foresaw coming under scrutiny back in September. Frankly, I think the U.S. government has been going easy on them so far because they are worried about what will happen to markets if their credibility is totally shredded or if they start to really over-react to the political pressure on them. The EU has been less shy about voicing their dissatisfaction: According to the Financial Times
Credit rating agencies were warned last night by European leaders to address conflicts of interest and provide better information to the markets or face new regulation at a "credit crunch" summit in London.
Note that the rating agencies aren't taking this laying down. They are pointing fingers toward the Wall Street firm's and their outsourced due diligence purveyors. According to Tom Brown's excellent BankStocks.com blog, while relaxing in the luxury of the Davos World Economic Forum and Ski A Go Go, the CEO of Moody's opined that. " The key assumptions failed in part because the information policy, completeness and veracity feeding the work agencies were doing was deteriorating."
While we are on the subject of the veracity of data being impugned, we might as well bring your attention to hedge fund manager Bill Ackman's recent letter to the New York insurance regulators regarding MBIA and Ambac's disclosure of the details of their bond guarantee business. Bottom line is according to his letter Ackman is short these stocks. He has had some very sharp, hard working analysts put together a massive model that says these guys are gonna lose a bunch of money and in my opinion is putting indirect pressure on Moody's, Fitch, et al to downgrade them, which will make their situation worse, while pressuring regulators not to bail them out, by making them look like they don't deserve a bailout or that one will be fruitless. These guys are smart, that's why they get paid the big bucks. Apparently, this ploy is working as a downgrade of a smaller bond insurer has just occurred.
Now these are just the initial signs of fear and loathing descending on this residential real estate mess. Not much in the way of new laws have been passed yet (correct me if I'm wrong as there may have been something pushed through on mortgage brokerage professional standards). But don't doubt it for a minute: new laws are coming and they won't make it easier to buy a home, get a mortgage or trade in securities linked to mortgages. They will raise the cost of home ownership and make it less profitable to be a lender. Already the regulatory climate that will cause this is heating up. Tom Brown has another article on his blog about the new chief national bank examiner just promoted at the Office of the Comptroller of the Currency. Bottom line is according to Tom, the guy has a reputation stretching back to the early 1990s real estate debacle as a very tough cookie with regard to bad loans. Others are already calling for overpaid bankers to "pay the price" for their mismanagement.
If my cycle road map is right. The final phase I call "The Hating" is still coming. It happens around the time the bad guys are getting sentenced, and new laws are passed to make sure a bubble like this can never happen again (or at least for 20 years until people figure out how to get around the new regulations). We will know this phase has arrived when bus loads of "bargain hunters" are no longer seen making the rounds of ghost town condo developments looking to make a killing in residential real estate. In the mean time my prediction is there is more pain to come in this asset class.
A: I think reality is setting in that there is a reason the fed is acting so aggressively; risks to the economy. The drug injections Ben handed out today obviously wasn't his best stuff and the addicts on wall street feel shafted. In the meantime, reality wakes us up. Fitch cut the rating on FGIC, the 4th largest bond insurer and S & P lowered, or may lower ratings on up to a half a trillion, thats trillion with a 'T', of subprime mortgage securities and CDO's.
It brings me no pleasure to say that reality beat out a drug induced fantasy today on wall street. The fed used more of its precious ammo and cut both the FFR & Discount window by 50 bps, yet markets sold off by the end of the day due to the realization that there are valid reasons why the fed is acting so aggressively. Meanwhile, expect commodities to rise and inflation pressures to rise in the years to come as the fed clearly is pulling out everything in its arsenal to combat the problems bubbling under the surface. Sooner or later, a billion dollar write down starts to mean something.
Since the rate cut is not news anymore, lets get to what spooked the markets. According to Bloomberg (via Calculated Risk):
Standard & Poor's said it cut or may reduce ratings of $534 billion of subprime-mortgage securities and collateralized debt obligations as default rates rise.Then came Charlie Gasparino and his gut instinct of bond insurer downgrades coming as early as today; recall posts on UrbanDigs here & here and here about this possibility and likely effects. Then it happened. According to Bloomberg (again, via Calculated Risk):
The downgrades may extend losses at the world's banks to more than $265 billion, S&P said.
Financial Guaranty Insurance Co., the world's fourth-largest bond insurer, lost its AAA credit rating at Fitch Ratings after missing a deadline to raise capital.As bond insurer's get downgraded, further write-downs in the financial sector becomes a reality. Again, we just don't know who holds what, whats insured, for how much, will the claims be paid, and on and on. Its all interconnected and being fueled by a slumping housing market, rising defaults, and a dysfunctional secondary mortgage market where these securities trade.
Financial Guaranty, a unit of New York-based FGIC Corp., was cut two levels to AA, New York-based Fitch said today in a statement. The company had been AAA since at least 1991. Moody's Investors Service and Standard & Poor's are also reevaluating their ratings.
The loss of the AAA stamp jeopardizes ratings on bonds Financial Guaranty insured and limits the company's ability to generate new business. FGIC, along with MBIA Inc. and Ambac Financial Group Inc., are paying a price for expanding beyond their traditional business of backing municipal bonds to guaranteeing debt linked to riskier subprime mortgages and home- equity loans, as well as collateralized debt obligations.
What does this all mean? A few things come to my mind:
a) The fed is on our side. While we have pain to go through until the ship is righted, when the clouds clear there will be another fed assisted economic boom. The question is when. This will certainly help, but I'm afraid it will take some time.
b) I love gold.
c) The fire is fueled by deflation in housing prices across the country. As home values fall, so does equity withdrawal strapping the homeowner. Those holding homes whose loan balance now exceeds the value of the asset, are considering walking away from their homes. Those who cant afford to pay their mortgages, simply aren't. Its becoming socially acceptable to go into foreclosure these days as that may be the best financial option for the struggling homeowner. And guess who lent out the money, bundled it into a security, and sold off the bond to investors who are now holding the toxic waste?
d) As defaults rise, holders of the securities derived from these debts lose. Hence the billions of losses you are hearing about. So far, we've seen the lowest quality homeowners get hit; naturally. Risks to other debt classes?
e) Leverage. The unsustainable housing boom built from lax lending standards, rising home prices, speculative investing, and low low rates was leveraged up the wazoo! That makes the problem that much more complex and is clear by the struggling financials and those who bought up the risk globally. We will have to fix the financials before we can get through the downturn. Its clear the fed knows this and is taking aggressive action! It will help, but it will take time.
f) Over-estimating Losses? A very valid hope! It is entirely possible that if all this stimulus helps to stabilize housing as time goes on, that losses are overestimate. Way too early to tell now, but certainly a valid hope that I am clinging to and watching out for. I am NOT in this camp right now.
We will get through this. But we are talking about a housing/debt fueled problem, so it will take time. Housing is an illiquid asset, as opposed to stocks, and take time to sell on the open market. With inventory outside Manhattan a concern, it will take time to work through this process. All eyes should be on housing data for signs of:
1) decreasing iventory
2) rising sales volume
3) decreasing absorption rates
...for any clue as to when the clouds may clear.
A: We got some mixed data today via a stronger than expected jobs report and a weaker than expected GDP report. What does it all mean? Besides a slowing economy, who the hell knows as both these reports are likely to get revised later on anyway. How does it affect the fed? Who the hell knows what helicopter Ben & Co. will do later today. All I know is, it's going to be a wild ride for a while.
I should clear up one major thing for readers here. The worries that I have and which I publicly discuss, are fueled by a national housing slump and the resulting fall in securities that come from it. Thats it. Should housing stabilize across the nation, inventories start to fall, sales volume pickup, and defaults/delinquencies go lower you will see alot of the problems we currently face go away. It's perfectly clear that the fed, the gov't and the private sector is doing everything they can to inject liquidity, aggressively ease monetary policy, push an economic stimulus plan and bail out the troubled institutions so that credit markets can operate normally again. Outside of housing, financial turmoil, and dysfunctional credit markets, the US & Global economies are fairly strong.
What remains to be seen is HOW housing, financial turmoil, and dysfunctional credit markets ultimately hit both our economy and economies abroad. Hence, the proactive stimulus. America's well known debt problem finally faces the fire and what we are dealing with here is a fuel (housing slump) that was leveraged up the wazoo! How will other debt classes be hit in the future and will the stimulus be enough to save us?
On to the economic data. Checking in on the jobs report, we got some positive news although future revisions can always occur later on. According to Marketwatch.com:
Employment in the U.S. private sector grew by 130,000 jobs in January, according to the ADP employment report released Wednesday. Adding in some 25,000 government jobs typically added but not covered by the ADP report, it suggests non-farm payrolls grew by about 155,000 in January. This is much faster than the 70,000 economists expected before the report.The more important measure of how our economy grew in the 4th quarter, the GPD (advance) number came in well below expectations. According to Bloomberg:
The U.S. economy weakened more than forecast in the fourth quarter as housing sank deeper into recession and consumer spending cooled.The GDP number clearly was the more important number to the markets today. Now, the fed makes its decision on rates at 2:15, and I got to say there are wide thoughts on what may be done!
Economic growth slowed to an annual rate of 0.6 percent in October through December, half the rate forecast, following a 4.9 percent pace the previous three months, the Commerce Department said today in Washington. Residential construction dropped by the most in 26 years.
Housing slumped as subprime lending collapsed and financial markets seized up, putting the six-year expansion at risk. The economy was forecast to expand at a 1.2 percent pace, according to the median estimate of 77 economists surveyed by Bloomberg News.
CUT 1/2 ---> Economy needs the insurance and aggressive ease to ensure that we do not fall into recession.
CUT 1/4 ---> Fed just cut 75 bps last Tuesday in an emergence rate cut that appeared as a panic move as global markets plunged. Turns out, the selloff was blamed on a rogue trader at SocGen. Yea right! No way he pulled this off by himself under the radar of top level exec's, but hey, its an easy way to move blame from bad bets to fraudulent trader.
NO CUT ---> Fed trying to regain control over the tradable markets. Site commodity inflation risks. Inflation gauge in GDP report showed a huge increase in core inflation from 2% to 2.7% in 4th quarter. Hmm, you mean today's world is more expensive than 5 years ago? I didn't notice! Ehh, lets just inflate our way out of this mess anyway.
I hate to say it, but given the weak GDP and fear that the markets will plunge on no cut, I think the fed will make a move today. I'm just not sure if it will be 1/4 or a 1/2. Your thoughts? I'm going with 1/4. Stocks will likely selloff with anything but 50 bps.
I still think we need to let a recession fix the problems we are in, let the private sector consolidate the financials and clean out the books, let the credit markets fix themselves, and let housing prices fall enough so that affordability kicks in bringing real buyers to the marketplace to bring brighter times ahead without inflation problems! My worst fear is that the fed over stimulates, re-inflates assets, the problems eventually turn out to be not as bad as feared, and then they will have to take back the rate cuts down the road to curb runaway inflation.
I may not always be fully informed, but at least I'm asking the right questions. That's the message I take from two articles that recently came out on the expected path of commercial real estate in the U.S., which opened my eyes a little further on the subject.
According to a recent Bloomberg article:
Federal Reserve Chairman Ben S. Bernanke is proving powerless to prevent a deteriorating commercial real estate market. While the yield on 10-year Treasury notes fell 1.43 percentage points in the past three months to the lowest since 2003 following four interest rate cuts, the cost of borrowing for apartment buildings, offices, retail properties and hotels climbed as much as 1.25 percentage points.
As can be seen from the chart on the right, the spread (or premium in yield) investors are demanding from 'AAA' Commercial Mortgage Backed Securities has risen significantly (higher costs to borrow to buy these assets; uptrend is negative in this case). We knew spreads had widened, forcing banks to write down the values of some of these CMBSs, but what really worries me is that the widening has continued even as the fed has slashed rates. Fed cuts rates and borrowing cost goes up, not the math we want to see. Calculated Risk is always reporting on the front lines of these metrics, and is a daily read for anyone interested in this type of analysis.
Since cap rates (mutiples of net operating income) at which properties trade are directly correlated with borrowing rates (increased interest cost = increased cap rate) and increased cap rates equate to lower prices versus net operating income, assuming net operating incomes from commercial properties just stay flat, prices will fall. So even in a market with great dynamics like Manhattan, if borrowing costs rise, net operating incomes need to rise just to keep cap rates stable and keep prices from falling. Again, this equation isn't new news, but you really want to see borrowing costs stop rising.
Now there are bankers who don't use the CMBS market. They are called portfolio or balance sheet lenders, and they keep the loans they make on their books. In recent years they were squeezed out of the lending game by Wall Street's appetite for both product and risk (see chart on right). In fact according to Scott Tross, a mortgage specialist and partner at Herrick, Feinstein LLP, who was quoted in the Bloomberg article regarding commercial real estate loans:
"Lending standards became more lax because people knew they wouldn't be keeping the loans on their books".If these more judicious portfolio lenders step in to a fundamentally strong market like New York City, can they keep borrowing costs from rising? Not likely, they don't generally take the risk of lending the huge sums required to buy just one large building in New York City (although some of the insurance companies and pension funds may), and since they have to live with these loans for years, they charge premium rates if they can get them and require much tighter terms than CMBS intermediaries. (Nevertheless, I will be meeting with some of these folks to get their take on the environment and I will be reporting back anything germain that I learn.) Moreover, for the reason outlined below, I'm not holding my breath that lower fed funds rates or the re-emergence of portfolio lenders will stop borrowing costs from rising and save the commercial real estate market....and I'm less sure that tight supply conditions will.
This brings me to yesterday's article by Herb Greenberg at CBS Marketwatch - Why office real estate is headed lower. In the article Greenberg opines that commercial real estate prices aren't just going to correct, they are going a lot lower.
The proof can be found in the shares of real-estate investment trusts, which have a remarkable track record when it comes to predicting what will happen to the prices of commercial real estate. Six month's after REITs start trading at premiums or discounts to their net assets or underlying values, commercial real estate typically turns in robust or dismal returns over the subsequent 12 months.
Greenberg goes on to talk about Manhattan's own SL Green (whose management I quoted prominently here last week) as a poster child for this indicator. SL Green is reportedly trading at a 23% discount to its net asset value, despite being called one of the best office REITs and being focused almost exclusively on the strong New York City market. The stock is saying current NAV is over stated and is predicting lower operating incomes from the firm's office buildings.
Gulp! I was unaware of the historical accuracy of this indicator, let's hope it's wrong this time!
P.S. This is not a negative commentary on SLG stock, which is already pricing in an NYC downturn, and technically looks like it may have hit a bottom and is way oversold. It's simply a discussion on the topic at hand.
"ECONOMIC CIALIS: What I call the economic stimulus plan because it will last 36 hours, and then it will wear off"
- Dan Fitzpatrick, contributor TheStreet.com & RealMoney.com; Founder StockMarketMentor.com
Ehh, I got a kick out of it!
A: Funny, doesn't it just seem like 2008, the year of the ARM reset, the year that started with a 10% correction in equity markets hasn't heard much about rising defaults from homeowners recently? It seems like it just went away and global stock selloffs & bond insurer bailout plans took center stage! Are we out of the woods? Unfortunately no. As I've said over and over on this site and what has got some to think I am a doom & gloom blogger, I call it realism, this is NOT a subprime problem; its a complete mortgage/debt problem! Here is the latest from FirstFed.
Via Calculated Risk (source HousingWire.com):
Delinquencies and non-accruals - non-accruals refer to severe delinquencies 90+ days in arrears or in foreclosure - have been skyrocketing at FirstFed. The bank reported that single-family non-accruals jumped to $179.7 million in Q4, up a stunning 116 percent from the third quarter alone. Delinquencies less than 90 days among single family loans rose to $236.7 million by the end of Q4 - that’s 231 percent over the $71.5 million recorded just one quarter earlier.But FirstFed is based in California, this doesn't affect Manhattan, right Noah? Right, but it does reflect the severity of the housing slump outside Manhattan, and that affects the securities derived from home loans outside subprime! We must be aware that subprime was not the only loan type to be securitized that got the word itself listed as "2007 Word of The Year". We also have option ARM's (link shows you all posts where I mentioned option ARM's), heloc's, cosi, cofi, neg amortizing loans, credit cards, auto loans, commercial real estate loans, etc..When those defaults rise, the secondary markets where the securities are traded seizes up just like it did with subprime, and the losses of the toxic waste held on the books of banks/brokerages pile up! Facts people. Reality. If you don't like, this site is not for you. It is this indirect impact that could ultimately hit home, as if this contagion spreads to other debt classes it will result in more write downs, a prolonged economic slowdown & job losses, falling stock prices, and a tighter lending environment. That is where it could hit us.
During the fourth quarter of 2007, just over 1,800 borrowers, with loan balances of approximately $830 million, reached their maximum level of negative amortization and had a resulting increase in their required payment. The bank said that it estimated that another 2,400 loans totaling approximately $1.1 billion could hit their maximum allowable negative amortization during 2008.
(To make it clear: that’s $1.9 billion in forced resets against just $128.1 million currently reserved for loan losses.)
Just because we don't contribute, doesn't make us immune to a fall in buyer confidence; and that's the key to a health housing market! Inventory is a very close second. Here is some more news from around the net regarding this issue.
According to Bloomberg:
"There's going to be more issues with regard to writedowns," said Peter Sorrentino, who helps oversee $12 billion as senior portfolio manager at Huntington Asset Management in Cincinnati. "We've got more classes of debt securities that are going to become questionable as this consumer malaise drags on for a while."According to Daily Reckoning:
AMBAC, MBIA and a few other bond insurers have guaranteed some US$2 trillion in assets. We are not suggesting that all those assets would suddenly be in jeopardy. But the truth is, off in the distance, well behind the front lines, there is another wave of dodgy U.S. mortgage products massing. These option-ARMs are threatening billions more in losses for the banks that made the loans and the investors that bought them. They made their first tentative attack yesterday.Just keep an eye on default levels for option ARM's, cosi/cofi, HELOC's, credit cards, auto loans, etc.. in the first half of 2008! I'm hoping that things stabilize, I really do, but the trend out there and the state of the national housing market as a whole is not on our side. So, this must be on our radar when discussing how long this credit crisis may last.
"The no-worries lending that inflated the housing bubble is resulting in a flood of soured option-ARM loans, adjustable-rate mortgages that allow borrowers to pay so little every month that their loan balances rise rather than fall, sometimes sharply," reports Scott Reckard in the L.A. Times. The trouble here is that this genre of bad loans came into existence in 2006 and 2007, at the peak of housing bubble.
Last in, first to default, you might say. "Numbers from industry trackers suggest that these borrowers, most of whom boast respectable and often top-tier credit scores and appear to have substantial incomes and home equity, are starting to create a second tide of defaults for lenders swamped by the meltdown in subprime loans made to people with bad credit or overstretched finances."
A: It's always nice to take a step back every once in a while and try to see the bigger picture of what has happened in the past, and where we are right now. In my mind, when I do this I see so much stimulus injected into US economy and institutions and we aren't even in a recession yet, at least not in the minds of the organization that will ultimately declare it; the NBER. On a positive note, with the latest stimulus package there will be a temporary rise in the Jumbo loan limit for homebuyers; a positive incentive for those who both intend to purchase and can afford to purchase a home, especially here in Manhattan where majority of loans are Jumbos.
Lets just list what stimulus we have seen since late 2007:
a) 175 basis points of cuts to fed funds rate; 1.75%
b) Cash injections into Merrill & Citigroup
c) Buyout of Countrywide Financial; whose stock price today is trading below the buyout price
d) Mortgage Rate Freeze Plan
e) Talks of Bond Insurer Bailout Plan; $15 Billion to cover Hundreds of Billions in potential losses, think of the failed Super SIV rescue plan that also boosted banks when announced
f) In Europe, bond bailout of Northern Rock by gov't to incentivize private takeover
g) Economic Stimulus Plan For Housing; make mortgages easier to get & cheaper
h) Economic Stimulus Plan For Biz; tax breaks
i) Economic Stimulus Plan For Tax Payers; checks to 117 million Americans
I'm sure I am missing a bunch of other cash injections to individual banks/brokerages, but am I missing any other major stimulus thus far? I think I got most of it. Now, again, there is still a debate about whether we are in a recession or not right now as chances are we won't find out until later on anyway. But forget that for a moment. Look at that list above! Are we really to believe that the economy is in fine shape with all this stimulus going on? How could we simply ignore the reasons for all this stimulus in the first place!
It's encouraging to see things happening, but will it all work? Will it stop defaults from rising? Will it cause more bubbles? Will it encourage a moral hazard and future reckless behavior? Will it stop housing from falling? Will it fix the credit markets? Will it fix the toxic waste holdings held on the books of financials? Will it really save the bond insurers? Will it stimulate consumer spending and consumption? Will it bail out those who made awful decisions? So many questions. So little answers!
With all this stimulus, it's not surprising that equity markets are bouncing here; but what I'm interested in is will this fix the problems we face without causing any future bubbles/inflation problems? Is this delaying the inevitable washout? All open for discussion as I wont give any predictions with so much uncertainty out there.
On a side note, the jumbo loan limit was raised from $417,00 to $625,000 until December 31st! I think this is overall a good thing for us here in Manhattan but it does come with some question marks. Here are my thoughts:
POSITIVES: cheaper mortgages & cheaper fees for those serious buyers who have every intention of buying a new home. May increase purchase price budgets a bit with savings from taking on non-jumbo loan; hopefully with caution by the buyer not to exceed affordability. Our co-op filled market may prevent reckless buyers who decide to purchase based on this incentive alone but cant really afford it.
NEGATIVES: incentivizing homebuying by cheaper loans, how is this any different than what got us into this mess to begin with (think I/O, ARM's,)? What happens if someone who is on the cusp of affording to buy, gets convinced to purchase due to this temporary offer? Will this setup future problems of distressed sellers should we indeed enter a recession? Will it really bring MORE buyers into our marketplace OR convince prospective buyers to increase their budgets dramatically thus rendering the investment unaffordable?
Overall, I would have think this is a positive for our marketplace. Since most people put max 20% down, and most condo buyers like to put only 10% down, we are looking at a target group of sub $785,000 or so for co-op, and $695,000 or so for condos.
It will help those that have every intention of buying to 'pull the trigger'; hopefully without upping their budget too much! That's the only downfall I can see; over leveraging via a higher loan amount due to the 1% savings of taking the non jumbo loan.
ADD-ON @ 11:02 EDT: Wall Street Journal (via Calc Risk):
The package agreed upon by Congress would temporarily allow Fannie and Freddie to buy or guarantee mortgages as high as $729,750 in cities with high housing prices, according to House Speaker Nancy Pelosi. House Republican Leader John Boehner put the ceiling at $625,000, according to a news release.
The higher allowance would expire Dec. 31, though it would be permanent for loans guaranteed by the Federal Housing Administration, the New Deal-era agency that typically helps low- and middle-income home buyers qualify for low-interest mortgages.
In my recent piece "How Bad is The Bad Debt Situation" I looked at some data on banks' delinquent loans and charge-offs, from a historical perspective. There are a lot of concerns swirling regarding credit card debt, auto loans and commercial real estate loans. My conclusion was that residential loan delinquencies were quickly mounting to historically high levels, and charge-offs were already there, but that there was a lot of room for other bad debt to rise without reaching levels of the early 1990s credit crunch. Today I want to focus on commercial real estate loans for a couple of reasons.
First, several rather spectacular large commercial market blow-ups have grabbed the spotlight in recent weeks and soured sentiment on the commercial real estate market. A major Australian mall developer Centro, which has made large acquisitions in the U.S., has been unable to refinance $3.4 billion in short-term debt. Bruce Eichner a Las Vegas casino developer defaulted on a $750 million loan from Deutsche Bank due to refinacing problems, and New York's own Harry Macklowe faces a February deadline to refinance $7 billion of debt for several commercial property acquisitions for which he reportedly put up just $50 million in equity. In the U.K. individual investors are desperately redeeming shares of that nation's version of REITs, causing turmoil in the market.
Second, thus far this earnings reporting season several U.S. banks have reported rising commercial real estate losses. Third, commercial real estate is a major New York City industry (according to the NYS Bureau of Labor Statistics there are 200,000 plus jobs in real estate rental and leasing and construction) and a major tax generator. According to an article on the slowing New York City commercial real estate market from the New York Observer, the city's Independent Budget Office saw combined revenue from tax and property transfer taxes jump 255% between 2000 and 2005. According to a recent New York Times article, "George Sweeting, deputy director of the city’s Independent Budget Office, said the slowing real estate market would cost the city about $100 million in revenue."
Lastly, Wall Street firms like Merrill Lynch have significant exposure here and potential risk going forward. "In fact, bond rater Moody's Investor Service cited Merrill's $18B of commercial mortgage exposure as one reason it is maintaining its negative outlook on the Wall Street titan's creditworthiness even though Merrill has raised billions in fresh capital. Big additional losses could hit not just Merrill but also Citi, which has $20B in commercial real estate loans on its books and J.P. Morgan Chase, which has $16 billion in commercial mortgage-backed securities," according to a recent Crain's article.
So let's take a closer look at the losses being reported by banks and at the outlook for commercial real estate, particularly in NYC. The losses on the commercial real estate side are both charge-offs of whole loans and writedowns of CMBS (Commercial Mortgage Backed Securities). As I noted in my prior piece, there is a major distinction between losses from whole loans held by a bank that go bad, and write-downs of securities collateralized by loans, which are marked-to-market. The marking-to-market simply means the value of a tradeable security declined (or the value of an illiquid security is thought to have declined in line with the values of comparable securities that trade more frequently). There is no actual loss here until the security is sold at a loss or the underlying loans default, lowering the return on, and of, capital. Now there was a false assumption running around Wall Street in the fall that the eventual losses on many of the sub-prime related securities would not actually total up to the write-downs of market value being taken by the banks. Then the second round of writedowns came....essentially demonstrating that the banks thought their first haircut of securities values was actually too conservative and/or that even more securities were facing loss issues. No one knows what the ultimate losses will be and if some of the writedowns will be reversed. In the case of CMBS, we are in the first round of securities value reductions, where the banks are largely just owning up to the fact that spreads between treasuries and the CMBS securities have widened, which is a polite way of saying the value of CMBS's have declined, not necessarily because their interest and principal paying abilities have declined yet, but because investors are fearful of this and are dumping them. In some cases the banks hold offsetting credit default swaps, which have risen in value and protected them against net market losses.
As I perused conference call presentation materials and transcripts on banks and financial services firms that recently reported earnings I had a couple of key takeaways. The CMBS losses were not specified by market area or property type and seemed to be largely driven by pure mark-to-market. The whole loan losses and provisions were almost universally said to be residential housing related, whether it be single family or multi-family planned unit developments, real losses are still focused in the residential sector. Some regional banks, like Huntington Banchshares, which has exposure to the upper Midwest, characterized business conditions as depression-like in some markets (not really new news for Michigan), but I didn't see anyone talking about office occupancy declines, industrial facility closures etc.
As far as New York City goes, SL Green, a REIT that is a large owner of New York City office space, had several interesting things to say on its conference call. First, the firm reminded listeners that "since June 2007,we have been sounding cautionary signals on our earnings calls regarding what we believe would be a gradual slowing in the leasing market as a result of the anticipated pullback and space requirements from the financial services sector." However, while the slowdown in demand from financial firms has indeed come to pass, growth from other areas has made up for it so far. The company also said that it has not yet seen the offers of concessions by landlords that usually pre-sages rent declines appearing yet. In contrasting the firm's outlook versus the last recession, the management made some very good points including that "At each point in time today versus January '02, we were approximately nine months into an economic downturn that eventually became a full fledged recession. However, you should note the following. First we are starting off in a much better position now than in 01' and 02'. We have a 6% total vacancy rate versus 9% then in midtwon and downtown." Additionally the management noted, that "the component of total availability represented by sublet space is almost negligible. In each case, it is only about 1% of the total vacancy, approximately a little over 1% is sublet space and for downtown it's actually 0.9% of the 7%." It is worth noting that traditionally sublet space is more likely to be blown out by a tenant who doesn't need it at much lower rates. The final statistic of note with regard to New York office space was the firm's view that "New construction is much more scarce than it was back in '01,'02, '03 when there was about 10 million square feet of space delivered to the market. Today it is only 6.5 million square feet slated for completion in 08' and 09'."
At this point in time the commercial real estate market is being impacted by the credit squeeze and crisis of confidence moreso than by declining rents or fundamentals suggesting a significant fall in rents. No doubt the slowing economy will have a significant impact going forward, which is why Fitch Ratings recently said it expected delinquencies on commercial mortgage backed securities to triple this year - note that this would put defaults closer to the average annual level of 79 basis points. However, there are three cardinal sins in real estate: over-paying (which the market has already opined on through the CMBS market), over-leveraging (which is apparent from the short-term debt roll-over issues for guys like Harry Macklowe, and over-building. It seems like the last sin may have been the only one not commited in the commercial real estate space, particularly in New York City and it may be a saving grace. According to their recent 2008 Real Estate Capital Markets Industry Outlook: Top Ten Issues Deloitte L.L.P. believes that the lack of over-building nationwide suggests a slowdown, not a crash in the commercial market. Another recent survey report by the Urban Land Institute and PricewaterhouseCoopers notes "Respondents believe the correction in the commercial market will not be as severe as in the residential real estate market. Commercial real estate supply and demand is relatively strong, development is in check and the fundamentals are still healthy, according to respondents". The report also ranks New York as "the hottest commercial real estate market in the country".
Let's hope the fed's rate cuts firm up confidence in the financial system so that we survive long enough to see if economic weakness causes as much pain in commercial real estate as the headlines would currently have us believe.
Negative Commercial Real Estate Commentary From the Blogosphere
Wall Street's Next Crisis
The Worst Lies Ahead for Wall Street
U.K. Real Estate Losses May Be Biggest in 25 Years
A: So, we went from the very front lines of the credit crisis and breaking down the negative announcements, to stock shock around the globe. Whats next? The hard data! We must be prepared for how this cycle will likely play out. Now that stocks adjusted, with the help of a very aggressive 3/4 point inter-meeting rate cut by the fed, the economic reports (jobs, gdp, inflation measures) are going to be coming out and the news is widely expected to be sobering! Stocks are now pricing this in and adjusting to slower growth. Question is, will it actually come via weak data releases?
So we had a fierce market adjustment and it got a lot of people's attention! How does this compare to past market crashes? Barry Ritholtz over at The Big Picture shows us:
Stocks are one thing, real economic data is another. Lets stay ahead of the curve and look out to the economic reports that will be released soon. Here is a schedule of the more important market moving releases that are coming:
TODAY ---> Existing Home Sales
JAN 28th ---> New Home Sales
FEB 7th ---> Pending Home Sales
TODAY ---> Initial Jobless Claims
JAN 29th ---> Durable Goods Orders
JAN 30th ---> GDP (advance)**
JAN 30th ---> FOMC Statement
JAN 31st ---> Personal Income & Outlays
FEB 1st ---> Employment Situation
FEB 1st ---> ISM Mfg Index
Now seriously, do you think these reports are going to far exceed expectations? Chances are, unemployment is going to rise, jobless claims will start to rise (may be lagging closer to mid 2008), gdp will fall, and homes data will either stay bad or get a bit worse. Anything better than that will be viewed ultra positively! So, there is a lot coming that we will need to digest and trust me on this one, if these reports do come in on the disappointing side, the chatter in the media will change from whether we will go into a recession to how severe will the recession be!
Its clear that our fed is favoring growth over inflation right now to deal with this crisis and its also clear that we have more rate cuts coming! Totally different situation over at the ECB in Europe whose primary reason for existence is to guard against inflation; rate cuts won't come over there until growth is clearly slowing or things get real hairy.
While we undergo stock shock right now, prepare for the data reports and how the street interprets them. In addition, watch out for the proverbial 'other shoe to drop' in the credit markets that may result in all banks/brokerages writing down way more losses than expected; i.e. more bond insurer downgrades, disruptions in CRE secondary markets, rising defaults in other areas of debt markets (alt-a, prime, credit cards, auto loans, helocs, etc..). That will certainly cause a second shock wave through equity markets, especially if we see problems arise in global economies/markets.
Luckily for us, yesterday's rally was most likely a result of a rumor that the NY State Insurance Association is in talks with major banks to help bailout the bond insurers; a rescue plan of up to $15 Billion. I just don't see how that will have any effect given the hundreds of billions of dollars worth of CDO's/CMO's, etc held and insured on the books of these financials.
A: Say it ain't so! Given the listing history & price per square foot for this two bedroom duplex + setback terrace in Lion's Head Condo in Chelsea, I would hardly say it's a pre-foreclosure deal as some think of when they hear those words. A sign of things to come? In my opinion, probably not! While I'm sure we will have our share of distressed sellers and foreign resales to deal with in the future, I just don't see the level of foreclosures outside of Manhattan hitting our marketplace. All this can change if the economy rapidly deteriorates of course, but that is yet to be seen. For now, inventory trends while rising are still fairly tight giving even distressed sellers a good market to list in. It's when you have fierce seller competition via surging inventory that foreclosure sales provide the fire sale discount that we come to expect with such a situation.
Since this listing is fairly old, I have no idea if it has been marketed as a foreclosure sale for a while now, or if that was a recent addition to the web description. Anyone know?
121 West 19th Street; Apt. PH-E
First Came on Market: 1/19/2007
Original Asking Price: $3,950,000
Asking NOW: $3,700,000
RE Taxes: $727
Interior Size: 2,071 sft
Exterior: Setback Terrace
PPSF: $1,786/sft not including Private Roofdeck
Marketed By: Super Broker Elaine Clayman of BrownHarrisStevens
Now, PH-F in this same building currently has a contract signed and that property was asking $4,250,000 and was 2,365 total square feet (4BR/3.5BTH). At that asking price, the price per square foot was $1,797 and since both had terraces, we can see that the unit above is asking slightly under this very recent deal. One major difference though is that with PH-F in contract, you had the possibility to increase the private outdoor space by 1,000 sft; prob through a purchase of buildable rights from the board/bldg. What we don't know is what the contract price was on this unit!
Nevertheless, interesting to see the words "Foreclosure" in any Manhattan high end listing! Note that buyer pays the 6% fee at the bottom.
A: UrbanDigs Charts, powered by Streeteasy, are still in BETA testing and will be for another few months. Still, the TOTAL ACTIVE inventory category is interesting to keep tabs on since early November. The data includes listings of co-ops, condos, and townhouses for the entire island of Manhattan where the full address is included in the listings and duplicates removed. This way, none of the open listings (W 70s, LUX New Dev, UES 1BR, etc..) spam is included in the data collection!
NOTE: Way too early to put any significance into this and hard to analyze without a longer time range in the charting system. I'll upgrade functionality of charting system once we are out of BETA testing in another 3 months or so! The goal will be to have a more real time gauge of what is going on in Manhattan real estate, so we don't have to wait for lagging quarterly reports! Use at your own risk right now.
Here is the chart showing you the generally upwards trend that total active listings inventory in Manhattan has done since the start of 2008:
Now, we had about 6,000 total active listings in DEC of 2006 and about 4,800 total active listings exactly one year later showing a decline of about 20% in our inventory. Over the past 4 weeks or so as we entered the wall street bonus season, it appears that listings rose about 8-10% or so; again, this is 4 weeks of data and not enough to warrant any conclusions from.
The purpose of this is to simply report on the rise, to state that it is completely normal for inventory to rise at this time of year, and that it will probably continue to rise as more listings come to market. The key factor in my mind to watch out for is sales volume as an indication of buyer confidence given the current macro environment and stock market selloff as a result. Should buyer confidence continue to fall, expect sales volume to be light and inventory & time on market to rise a bit; especially for those properties that are testing the market and pricing significantly above last years comparable sales! All worth watching!!
For those of you actively looking to buy a property, what are you seeing?
I recently had the pleasure of touring Brooklyn with a broker friend of mine (name withheld to protect the innocent) and I was pleasantly surprised. On the basis of some of the numbers, which I will get to in a minute, I have been a little worried about Brooklyn, which I previously lumped into the "emerging markets" of New York City. Contributing to this worry was some commentary I had heard at a conference where Joshua Muss of Muss Development spoke. The Muss family are long-time major developers in Brooklyn (as well as Queens) and frankly at the conference a few months ago Joshua was prescient in his bearishness on the economy, Wall Street situation and (potentially) Brooklyn real estate. His take was simple: it's been 20 years since we've had a major real estate downcycle and we're gonna get one. He believed that land prices had appreciated beyond levels where developers could turn a profit on new construction and that with all the building Brooklyn has seen in the last few years and the somewhat fevered pace of the last 18 months, it would suffer too. But as I implied at the beginning of this piece, I'm a little more positive on Brooklyn than a couple of the other "emerging markets" around NYC following my recent tour. So let's look at some data and then I'll give my two cents on the takeaways from my tour with a knowledgeable commercial and residential broker. I took the data on condo plan filings with the NY Attorney General's office below from a Real Deal published in late November. The data is a little stale as it only goes through October 15, 2007, but let's face it, with the credit crunch in full swing, I doubt a huge amount of new filings hit in November and December. (I have a Freedom of Info Act request in for the latest data...stay tuned).
The chart above shows that the big ramp in condo development in NYC in the last couple of years had an abrupt slowdown in 2007. Part of it may have been uncertainty about 421A, but at the same time, lots of guys were trying to get out of the ground ASAP in case the program was axed in June of 2007, instead of 2008. Most likely the credit crunch stopped things cold starting in the summer. However, since it usually takes at least 18 months to deliver a ground up development, there is still a rather large pipeline of projects that have not come to market. The pipeline number in the chart is my creation....it's just 2006 + 2007 condo plan filings, as the large bulk of these should be delivered to market....if they got funded.....in 2008. (There are lots of potential problems with this number, I know, but it's all we have.)
As you can see from the chart, Queens has seen the least slowdown in condo plan filings, while the spigot looks to have been just about cut off in the Bronx. Also note that both Manhattan and Brooklyn have way bigger pipelines. Every one of these boroughs on its own constitutes one of the larger cities in the country, if not the world, and we all know that the supply side in Manhattan has been tight for years, driving people to the boroughs - see my piece What's Up with Manhattan Real Estate for some background here. So the pipeline in and of itself doesn't really worry me that much and the fact that new additions to the pipeline are decelerating significantly is a big positive a year or so out.
What worries me more are some of the neighborhood numbers. For instance, in Brooklyn, Williamsburgh has the biggest pipeline of units at 2,493, followed by East Williamsburgh at 1,136 and Fort Greene at 1,060. That's a lot of product in a pretty condensed area, and it constitutes 30% of the total Brooklyn pipeline.
In Manhattan, the top 3 neighborhoods in terms of supply pipeline are Lower Manhattan with 3,361 units, the Upper West Side with 2,982 and Harlem with 2,851, constituting a large 46.5% of the total Manhattan pipeline. Now the new unit applications for the Upper West Side and Downtown slowed significantly in 2007, down 62% and 81%, respectively. But Harlem has only slowed 11% and the pipeline there constitutes 14.4% of Manhattan's total.
Queens may have the most dramatic neighborhood inflation. Of the total Queen's pipeline of 6,730 units, 1,007 units, or 27.4% of the pipeline, is from one neighborhood, Long Island City. I have written positively here about both Harlem and Long Island City as emerging neighborhoods that deserve home buyers' attention. However, I have also cautioned that these "emerging markets" will get hit hardest in a downturn.....but will offer some of the best opportunities for future gains when they do.
Back to Brooklyn. So my broker buddy takes me on a grand tour of Brooklyn - for which I sincerely thank him for his time and urban combat driving skills. We visited many of the key neighborhoods and looked at a bunch of his listings around the borough. On the way he points out several new condo developments where "they ain't movin". His biggest complaint, though, is that sellers, just don't get it. In particular, he does pro formas on commercial sites that would be condo conversions or development sites and finds that the numbers just don't work for potential developer buyers. You can't overpay for land/FAR (buildable area) and make a return, particularly when costs are spiraling higher and sell out prices for finished condos are flat or .....DOWN. He is turning away listings where customers just aren't realistic about selling prices, because the listings are just not worth the time and marketing dollars. For the market, this is actually future good news, land pricing will come down eventually and in the mean time the pipeline of new condos will dry up. Until land/FAR prices re-normalize, developers won't be getting a lot of new product started. It wasn't for nothing that Joshua Muss was harping on over-valued land pricing when I heard him speak. My friend says that on the residential side many of his potential buyers seem to have stepped to the sideline but business is seasonally slow anyway - he's hoping that come Spring they will come back in and potentially be met by more realistic sellers.
Among the other takeaways from my tour were that emerging markets of Bushwick and Bed-Stuy were still too early (rough and tumble) and would likely fall out of favor with the market downturn. But overall Brooklyn really isn't emerging - it's here and now. Perhaps most importantly, in Williamsburg and Fort Greene, despite the numbers above, I didn't feel overwhelmed by the cranes per square foot. The state bird of South Florida, just didn't seem overtly prevalent. In contrast, Long Island City and Harlem seem to have construction going on everywhere you look. All this is totally subjective and one not very well informed man's opinion (when it comes to Brooklyn in particular), but when all was said and done, I came away less bearish on Brooklyn than I expected. It's not that I don't expect a price correction, I do, particularly for land prices, I just think Harlem and LIC are more likely to see some condo fire sales.
A: The ivy leaguers at the fed just don't understand the tradable markets! In response to a global selloff, and a sharp down futures day for our markets, the fed decided to open their arsenal and cut the fed funds rate by 75 basis points. As of right now, some 25 minutes after the cut, there is NO improvement in the futures. The fed just wasted their ammo in this clear panic move.
According to Yahoo Finance:
The Fed decision was taken during an emergency telephone conference with Fed officials on Monday night. Those discussions occurred after global financial markets had plunged Monday as investors grew more concerned about the possibility that the United States, the world's largest economy, could be headed into a recession.I discussed capitulation late November, as that is a trading term given to a market that is facing fear, panic, emotional selling all at the same time. Anyone not familiar with this term should now know what it means after we had a day to digest the coming carnage. Back in November, I said we need a DOW day -450, and NAZ -80 or so. Looks like we will get this and more today.
In a brief statement, the Fed said it had decided to cut the federal funds rate "in view of a weakening of the economic outlook and increasing downside risks to growth."
The central bank said that the strains in short-term funding markets have eased a bit, but "broader financial market conditions have continued to deteriorate and credit has tightened further for some businesses and households. Moreover, incoming information indicates a deepening of the housing contraction as well as some softening in labor markets."
Here is the problem! WE NEED CAPITULATION! WE NEED TO GET DESTROYED! We need to flush out the system and get this stock market adjusted to the new world and to this young bear market. Let the adjustment happen! The fed made their move before the markets opened and now it had ZERO effect on futures after an initial jolt.
Instead, the fed should have let the markets open, let the carnage take place and then pull out the rate cut mid day! It still would have happened on the same day! You see, this rate cut was meant as a two pronged attack:
1) inject some confidence to the markets
2) to add stimulus to a weakening economy and to cushion the blow further from any future downturn as financial conditions globally deteriorate
They totally blew #1! The second reason takes 8-12 months to have any effect as fed rate cuts take time to funnel through the economic system. If they simply waited until mid day after the capitulation happened on its own, it would have had more of an effect. But, they just dont understand the psychology of the tradable markets.
This cut could easily be interpreted as a panic move and is a clear sign that we are in some serious distress! Expect more rate cuts in the future and pray that they have an effect to lower the severity of the expected recession to come. I'll continue to discuss the macro problems we are facing that is causing all this pain on urbandigs, in the hopes that we can understand why we are in this mess and how things may play out down the road.
A: Well, the credit crisis that wreaked havoc on our financial system, is sending International stock markets plunging! Fears that the US is already in a recession, expectations of corporate defaults, continuing credit crisis, continuing housing slump, and toxic waste on the books of financials is trumping everything right now; nothing else matters. If our stock markets were open today, it appears that the DOW would open -350 or so and the NAZ would open -65 or so. After a 15% selloff over the past 4 weeks, that is more painful than it appears! Get ready for capitulation, hopefully, and for fear to start fueling these down days ahead; we need this to happen so we can price it in and get through it later on. Its going to be a wild ride!
According to Bloomberg:
Stocks plunged in Germany, Hong Kong, India and Brazil, and U.S. index futures dropped on mounting speculation that the global economy is slowing and company defaults will rise. Hong Kong's Hang Seng Index had its biggest drop in six years after BNP Paribas said Bank of China Ltd. may write down overseas securities by $4.8 billion because of losses from U.S. subprime mortgages.But Noah, corporate earnings are still good, its a global economy, the weak dollar bulks profits, and I own stocks; this can't happen!!! Well, you need to wake up! The credit crisis is powered by a complete debt problem, not just subprime, and that was powered by a slumping housing market following years of reckless lending practices, speculative activity, and easy monetary policy. Consumers are now tapped out and mired in debt, home equity is contracting, defaults/deliniquencies are rising, financials' books are in complete turmoil and still hold plenty of toxic holdings, and it's starting to spread internationally. It really doesn't matter what corporate earnings were, it only matters what they will be in the future! As the slowdown hits, so will spending and corporate profits will slide; that means the all important value indicator of PE ratio (price/earnings ratio) will rise making the stock price seem too expensive! Hence the ongoing correction.
"It's the worst I've ever seen," said Johan Stein, who helps manage the equivalent of about $14 billion at Nordea Asset Management in Stockholm. "The financial system is in terrible shape, and no one knows where this will end."
This environment is so complex and the credit crisis has so many tentacles that it really is impossible to gauge how bad it will ultimately be or what the next big catalyst will be. One thing is for sure, there is so much uncertainty right now that this ride will not only be wild, but will be painful too as we don't see what hits us until after it happens! At some point, there will be some great entry points for both stocks and housing, its a question of when that is the tough part!
Lets go back 6 long months ago to my July, 2007 article "MuBIS, Credit Fears, & Housing Woes" -
There is a flight to quality going on right now into bonds sending bond prices higher and yields lower out of fear for growing problems in the RMBS (residential mortgage backed securities) markets, credit markets, and housing industry. Is it warranted? Sure. However, as time goes on it seems the problems get more and more real and that is what is causing uncertainty to take over. And the tradable stock markets HATE uncertainty causing a flight to quality in the bond markets.Well, its 6 months later and...
So far it has not happened and even a few down days on wall street is not a trend make as we are only off record highs of the Dow by a few hundred points. However, where we will be in 6 months is another question. If you see stocks get killed, chances are that will start a chain reaction of events that would directly impact our housing market that has been so strong in the face of multiple adversities happening outside our city!
a) DOW dropped from 13,473 to 12,100 on Friday and looks to open MUCH lower tomorrow
b) Countrywide avoids bankruptcy by being bought out by BAC; deal in question?
c) Financials Killed; billions and billions in losses and more to come as bank's books are still holding tons of toxic asset backed securities that can't be sold off in current environment
d) Subprime sparks fire; Whats next? HELOC's, Option ARMS, Alt-A, Prime, Credit Cards, Auto Loans, Corporate Defaults, etc...
e) US infects Global Equity markets; Int'l markets plunging
Four and a half months ago I put my latest update on the two biggest threats I see to housing; I have not changed that since:
1. Global Growth Slowdown Amid Credit/Liquidity Crisis
2. Insolvency Crisis - Inability to pay back debts; assets no longer exceed liabilities
My biggest fear now is that a slowdown is here in the US economy and even worse, it will SPREAD TO GLOBAL ECONOMIES! Globalalization has been such a major factor in the growth of US corporate profits and ultimately stocks for the past few years. If we remove that equation, we will be entering a period of stock market corrections, more layoffs, negative wealth effect, change in consumer psychology, and big cutbacks in bonuses and salaries. This has NOT happened yet!Fast forward to right now. Facts people. This is reality. It appears we are headed for a -3% opening tomorrow and the more our stock indices fall, the more it starts to hit home as the media amplifies the problems in the minds of consumers. The chain reaction ending with consumer confidence begins. Everything is intertwined and all this so far has been due to a little thing we call subprime! What if it goes deeper than that?
A: Such an important topic to discuss and one that we talked about months ago. Proof the credit crisis has tentacles, ratings agency Moody's threatened to downgrade the credit rating of Ambac, a bond insurer. Stretching this news out, Merrill plans to write off $2.6 Billion of default protection from Ambac & others, because that very protection of the toxic CDO's held, are now worthless. This is one of the events we discussed months ago that posed a possibility of haunting us as the credit cycle continues to play out.
First the news. According to Yahoo Finance article "Moody's Sinks Bond Insurance Stocks":
Bond insurance stocks plunged Thursday after a ratings company said Ambac Financial Group Inc.'s plan to raise cash may not be enough to save its crucial credit rating. Moody's Investors Service said Wednesday night it is considering cutting Ambac's "AAA" financial-strength rating, which would squelch the insurer's prospects for winning new business.Bloomberg has the release on Merrill's write down of $2.6B as they realize the protection they thought they had for their toxic securities is worthless:
"A rating agency downgrade would be the death knell for Ambac," Friedman Billings Ramsey analyst Steve Stelmach wrote in a client note. "Merely the threat of a downgrade complicates the company's capital-raising plans even further."
Ambac and MBIA are under pressure to prove their capital cushions are sufficient to cover claims.
Merrill Lynch & Co., the biggest underwriter of collateralized debt obligations, said it will write off $2.6 billion in default protection from bond insurers including ACA Capital Holdings Inc. because it's worthless. Merrill Lynch's writedowns demonstrate how a downgrade of bond insurer credit ratings can spread throughout financial markets. Losing the AAA stamp would cripple the bond insurers and throw doubt on the ratings of $2.4 trillion of securities.Back in late October, the bond insurers started getting whacked, raising this concern. Then in November, I discussed it in more detail when ACA Capital's stock was halted for news pending.
The bond insurers guaranteed almost $100 billion of CDOs backed by subprime-mortgage securities as of June 30, according to an Aug. 2 report by Fitch Ratings. Most of those guarantees are in the form of derivative contracts. Unlike insurance, those contracts are required to be valued at market rates.
First Bond Insurer Close To Insolvent
If ACA loses its credit rating, they will most likely become insolvent. This is big news folks, because there are many other bond insurers (PMI, ABK, MTG, RDN, to name a few) in deep trouble and if these insurers go, then the ratings agencies will get serious heat, and those trying to receive claims will be left with nothing to get; and we know there are tons of brokerages, banks, and other institutions holding billions of dollars of untradable assets whose losses are yet to be revealed. This will have a crippling effect, the severity of which is the only unknown. You will also start to see heat on the ratings' agencies: MOODY's & FITCH. As the heat is put on, more companies will be put on negative watch and future downgrades of credit ratings are all but guaranteed.Well, the heat was put on and the downgrades are likely to come. The impact of bond insurers going under is massive and will be another shock to the financial system. The reaction will be felt:
a) further writedowns at brokerages/banks of protection they thought they had on toxic securities
b) muni bond meltdown
Jeff discussed the potential impact on the muni bond market as a tentacle to the credit beast on November 19th:
Municipal Money Market Funds. Friday's Wall Street Journal discussed problems with bond insurers and the impact on municipal bonds as well. Municipalities and public institutions like hospitals use bonds to finance themselves and over the years, even those with lower credit ratings have been able to access capital markets easily by using bond insurers to help them attain investment grade status. These same bond insurers also insured CDOs and sub prime CMBSes and as a result of the sub-prime credit debacle stocks of the insurers like Ambac have gotten creamed this year. People are worried about how much of a hit they will take on the insurance they have written. As a result, municipal bonds backed by these same insurers are getting roughed up, raising the cost of new bond issuance by municipalities. You see this credit crunch keeps branching out and side swiping otherwise innocent bystanders.Conclusion: Someone has to save these bond insurers! Their corporate bonds are trading like junk predicting major trouble, and Merrill already decided to write off their insurance protection as a loss. It will get much uglier if more bond insurers go under, so the thing to look out for now is how they may be saved.
A: Take it for whats it worth, as things are starting to pickup a bit. Nothing to go crazy about and perfectly normal for wall street bonus season. While caution is still there and it remains to be seen how sales volume will do for the next few months, it certainly is nice to see any signs of a pickup. I usually wait 7 days or so to see if it holds, and it certainly has. Many colleagues also reporting same pickup in calls/open house traffic/showing requests for their listings. For me, I am working with mostly buyers until my new listing gets up and they have started to get very active.
Still early but I figured you may want to know this. Certainly don't look at this as a reason to go way over ask in a bidding war; continue to stick to what works for you and what you can afford.
I'm also about to start some website work and relaunch the live chat tool, and my buyer and seller services pages. I'll go back to holding live chats from 10AM - 11AM in the morning for you guys, or so, but if I'm not online its because I'm either super busy or out on appointments.
I was considering adding some new content for you guys too. Would you have any interest in me integrating:
a) neighborhood guides & info; school info, restaurants, nearby shops, etc..
b) contracting directory + reviews; breaking down all sorts of avail contractors in the boroughs and reviews of contractors
c) subway directions tool
d) other tool...?
Feel free to email me at nrosenblatt + "at sign" + halstead + "dot com" your thoughts or post a comment below on what you would like to see here on urbandigs.com. I am currently orking on real time data tools and other analytical tools for buyers/sellers. I expect a product to be ready near Fall of 2008.
Please note that this is me, Christine Toes, writing this post, and not Noah:)
I am representing a seller in a building with a difficult managing agent or a difficult co-op board (it is hard to say which & it could be a combination of the two. Perhaps they aren't being difficult, it might be that they just don't care?). The buyer was approved by the board to purchase the apartment on Thursday, December 20th. Normally, we'd schedule a closing date and be done in about two weeks, perhaps a little bit more due to the holiday season. So we should have closed before January 4th.
The co-ops proprietary lease expires in about 30 years, and her lender (Wells Fargo) will not give her a 30 year loan until the Managing Agent (MA) sends them a letter saying that the board intends to renew the proprietary lease. It is my understanding that every lender is going to require that a co-op's proprietary lease be valid for more than 30 years or they are not going to issue a 30 year mortgage. So this isn't a problem with Wells, it is something any lender would require.
Of course the board is going to renew the proprietary lease! This should be a routine procedure. But the MA says we must wait for the next board meeting in order to address this issue, citing that she doesn't have the authority to write the letter.
Originally the meeting was supposed to be the first week in January, so we figured this issue would just set us back 2 weeks. Then the board cancelled their January meeting and decided to wait until February 6th to meet!
Despite repeated calls to the Managing Agent by the seller, and both the buyer's and seller's attorneys the M.A. says her hands are tied and we have to sit tight until February. The seller also called his neighbor who is on the building's Board of Directors, but hasn't received a response. Meanwhile, the seller is paying for a vacant apartment and the buyer's mortgage rate lock has probably expired. Luckily for her rates have probably gone down since she locked in a rate, but she may face penalties or incur additional fees for extending her rate. And she'd obviously like to move into her apartment!
I am tempted to write a letter to the entire building letting them know what is going on. I don't know if the Board of Directors (except the seller's neighbor) is even aware that this is happening. And I suspect shareholders in the building would not be happy to learn that the MA / Board are unnecessarily holding up a sale for SIX WEEKS!
My seller's attorney (who has done thousands of co-op transactions in Manhattan) tells me that this is preposterous and that he has never seen it happen before.
1. If you are on your building's Board of Directors, find out when your proprietary lease expires and make sure that the Board votes to renew it when it gets down to 30 years prior to its expiration.
2. If you are on your building's Board of Directors, give your Managing Agent a directive to contact you if a problem is holding up a sale in the building.
3. If you are selling your property, talk to your managing agent and ensure that the proprietary lease is not expiring close to 30 years from when you anticipate a closing.
A: Taking a focus on the markets now because its important to discuss whats happening here. Citigroup sucked the markets. Investors realize that write-downs will not be done this quarter, and that a fed rate cut probably won't come until the next meeting. Seems like we are close, but I don't get that sense of panic that is so necessary to ultimately form a bottom.
I did think the fed would pull the trigger and cut inter-meeting by now, not that I want that given the commodity inflation problem, but I thought the markets would squeeze one out of Bernanke by now after that awful jobs report 2 weeks ago.
I spoke about capitulation in November:
The credit crunch is stealing all headlines today, and you know it will spur major media during the week to write fairly negative articles that will reach millions of investors across the country. I feel that a capitulation day for the stock market is nearing;Turns out the Countrywide call wasn't too far off as Mozilo had no choice but to be bought out by BofA! If they hadn't, they probably would have been forced to declare bankruptcy.
Anyway, I think all we need is one piece of really bad news to start a panic selling day, like a Countrywide Financial filing for Bankruptcy protection as credit downgrades limits availability to raise cash; or something like that. Give us a DOW day of -450 and a NASDAQ -80 or so, and I think it will be enough to qualify.
Right now the DOW is down 2% and NASDAQ down 2.5%. I said in November to give us a DOW day of -450 and a NASDAQ day of -80 or so and that would probably qualify. Not quite there yet but volume and volatility is quite high! Citigroup dropped the ball as they didn't give investors the 'full plate' of bad news! That means this will drag on for another few quarters and prolong the uncertainty. Even given inflation concerns, I just don't see how the fed won't act aggressively at the next meeting. I would expect 50 bsp cut in both fed funds rate & discount window. If we don't get that, the market will likely selloff.
Also, if this stock selloff continues, a negative wealth effect is bound to set into consumers' minds as the media always amplifies the falling value of many people's portfolios. A painful process, but we need the panic selling to work itself through for stocks to form a bottom.
A: Who the hell cares about the price of GOLD on a real estate site? Well, sometimes if we take a step back, we can get a clearer picture of what is going on. As more financial firms release updates regarding the mess on their books, and stocks seem to be pricing in a recession, gold is soaring! But not to inflation adjusted highs! You see, gold is typically a safe haven investment that gets plenty of attention when economic times become uncertain. So, to be backwards analyzing, one cold interpret the rise in gold to a deteriorating and uncertain economy, which then could explain why wall street is struggling right now. Add in comparisons to the mid/late 70's stagflation and gold surging, and it paints a disturbing similarity to today's environment.
According to Zeal Gold Investing 101:
The primary reason to own physical gold is to protect a core portion of your portfolio from all kinds of nonlinear contingencies.Now, Im not telling you to dump everything in your portfolio and load up on Gold stocks or ETF's. The point of today's post is to explain to you that rising gold is on some level the street telling us that they are uncomfortable with the economic environment, expects further rate cuts that will weaken the US dollar, and are seeking a safe haven investment for possible turbulent times. Gold could also rally in major bull markets, but to see what it is doing right now compared to stocks, its clear that we are not in a major bull market. So lets exclude that reasoning altogether. So when did gold last rally huge; IN THE MID 70s WHEN STAGFLATION WAS THE KEY WORD & THE US WAS IN THE WORST ECONOMIC DOWNTURN SINCE THE GREAT DEPRESSION! See this historical chart below showing you the rise of gold in this era of uncertainty and economic distress:
We humans generally become complacent as investors and assume that tomorrow will be just like today. History has proven that linear assumptions are one of the most dangerous and lethal errors that investors can make. Even in fairly normal life we are all aware of local nonlinearities including hurricanes, tornadoes, and earthquakes. Financial nonlinearities also abound, such as the implosion of the great NASDAQ bubble in early 2000. Gold is the perfect investment to protect a foundational portion of your portfolio from an inherently unpredictable future.
Owning physical gold in your own possession is like having fire insurance on your house. Gold protects against all kinds of nonlinearities, from the insidious to the geopolitical to the bizarre. Gold protects against insidious nonlinearities like the gradual erosion of paper currency values through inflation. Untold financial havoc has occurred in history because people made foolish linear assumptions that the value of paper currency is sustainable.
According to an old US News & World Report article, being sure to put yourself back into time & place when it was written in August 2006:
Ben Bernanke may be facing a nasty relic of the disco era. It's called stagflation. The U.S. economy seems to be experiencing a bout of stagflation. It's a rare, worst-of-both-worlds situation where economic growth and employment stagnate yet inflation rises. In 1974, for instance, the U.S. economy shrunk 0.5 percent and unemployment rose to 7.2 percent, even though prices skyrocketed 11 percent. Oil shocks, loose Federal Reserve monetary policy, and out-of-control government spending have all been blamed for the stagflation. The economic mess culminated in America's worst economic downturn since the Great Depression.The uncertainty today continues to lie in the credit markets, the financial institutions, and the housing sector. As housing falls, financials lose billions in their toxic asset backed securities on their books, which cripples balance sheets and starts a chain reaction on wall street. You are seeing it right now. As I noted previously here on UrbanDigs.com, we are yet to see significant defaults of alt-a, prime, option arms, credit cards, auto loans, etc.. although we are getting the warning signs! Believe it or not, even those loans/debts were securitized on wall street and what we saw with subprime could very well spread to other areas of debt as well. Thats the uncertainty! Thats why we need a recession to fix these problems; I just don't see any other way.
If the fed acts aggressively by cutting rates, it will re-inflate the asset bubble, not allow the system to correct itself on its own, and will result in runaway inflation as gold will likely rise to $1,500 and oil to $125+. It will also hurt the US dollar as the world's currency. Remember, foreign governments own tons of US debt in the forms of treasuries; if the fed eases aggressively those foreigners may unwind those treasuries leaving us to pay off our deficit at much higher rates!
Right now I am seeing asset deflation (housing prices falling) and commodity inflation (food, energy, gold rising). Not a good scenario any way you slice it and one that puts our fed in a very tough spot! Although its a far line, if you connect the dots it is worthwhile to keep an eye on gold for any clues about how uncertain wall street is. As we all know, wall street sentiment and the positive or negative wealth effect that results, is a strong force to be reckoned with here in Manhattan real estate! Hence, its worth a discussion!
Much has been written lately about what the Fed does or might have done to assist banks. And some of this is misinformation. So to clarify, the Fed has two key objectives - (1) maintain monetary policy and (2) ensure the safety and soundness of banks.
And they do this in a way that's trying to be pro-active rather than re-active. So if the Fed takes an action that may have investors scratching their heads, Fed policymakers were probably thinking long-term impact on the economy as a whole (not just investors or homeowners - sorry!).
Noah & Co. have discussed the first point more at length on this site, so I'll focus on the second point - safety and soundness of banks.
A bank's charter (akin to a license) can be with a particular state or national. This is important because the Fed doesn't regulate all banks. It regulates state chartered holding companies and state-chartered banks that are members of the Federal Reserve System.
The Office of the Comptroller of the Currency (OCC), part of the US Dept of Treasury, regulates all nationally-chartered banks. The Office of Thrift Supervision (OTS) regulates all banks chartered as 'thrifts', and each state's banking department regulates the banks in its respective state.
Ok, got that?
Confusing as it might sounds, all regulations are the same, and each regulatory body uses the same criteria when evaluating banks. The regulators also work with each other to evaluate the same institution that might have >1 regulator (for example, Citigroup, a financial services holding company, is regulated by the Fed, but its main bank, Citibank, is nationally chartered and therefore regulated by the OCC).
Still with me?
Regulators audit banks about every year, sometimes more, evaluating them mainly for capital adequacy, liquidity, earnings, asset quality, management and risk management. In addition, banks are required to report key data to the regulators on a quarterly basis.
So what else do regulators do?
In this regard there seems to be even MORE confusion. As Noah mentioned in his post last week, Marketwatch's Herb Greenberg is guessing (perhaps facetiously) that the Fed was somehow behind the recent announcement for BofA to purchase Countrywide, and that the government would provide a guarantee to BofA against any loan losses as a result.
First of all, when a bank announces a merger deal, it is always subject to regulatory approval. BofA isn't even regulated by the Fed. The closest the Fed might have come to getting involved would have been to consult with both Bof A and CFC while they were negotiating the deal to find out if there would be any regulatory hurdles that might hamper the deal. Also, regulators appreciate knowing of any upcoming mergers that would have an impact on the markets.
Secondly, it would take an act of Congress or Executive Order by the President in order for the government to guarantee BofA against any losses incurred as a result of its purchase of Countrywide. The Fed certainly wouldn't do this, nor should it. It would be akin to a government bailout of CFC.
BofA wouldn't agree to the acquisition if the bank didn't think it could absorb CFC's losses and get some benefit. It's the market working itself out without any government influence - and that's a good thing.
A: Like I said numerous times, this is NOT A SUBPRIME PROBLEM. This is an overall mortgage + debt problem that extends to alt-a, prime, heloc's, option arm's, cosi/cofi loans, negative amortizing loans, credit cards, auto loans, etc.. Whether you like it or not is an entirely different story. This cycle must play out and that means more pain before we get better. Think of it as a very sick patient that must go through numerous surgeries and rehab before they can get back to normal. Well, we are about to get our 3rd of X number of surgeries and we haven't started rehab yet!
When I wrote the Reset Storm post, I tried to explain that we are about enter a painful period where affordability becomes more of a problem as mortgages reset higher, which will further pressure housing, which in turn will further pressure wall street and the securitization of all types of debts:
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. 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. This is an outright affordability problem both for homeowners & prospective buyers alike; a rare combination. 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.So far, we only saw the credit crunch sparked by subprime. Now we are starting to hear from credit card companies. As for the Countrywide buyout, I think Herb Greenberg is dead on by stating the fed was behind the deal. If Countrywide had to declare banktrupcy, which they most likely would have been forced to do, it would have been a huge shock to both the tradable markets and consumer confidence. The fed knows this and to think of this deal happening a few years ago, brings regulatory anti-trust questions that likely would have blocked the deal. Not so in today's environment. Lets get to the headlines.
AMEX + CAPITAL ONE TO MISS EARNINGS ON CARD LOSSES
American Express Co (NYSE:AXP) and Capital One Financial Corp (NYSE:COF), the largest independent U.S. credit card companies, projected profits below analyst forecasts on Thursday, citing mounting consumer loan losses as the U.S. economy slows.MERRILL LYNCH REPORTEDLY FACING MASSIVE WRITE-DOWN
The forecasts show how the housing slump, tighter credit, high oil prices and rising unemployment have made it harder for many consumers to pay their bills. This has caused credit problems to widen beyond mortgages and affect other forms of debt, including credit cards and auto loans.
The nation's largest brokerage firm, Merrill Lynch & Co., is expected to report losses of $15 billion stemming from soured mortgage investments, according to a published report Friday.BANK OF AMERICA TO BUY COUNTRYWIDE FINANCIAL FOR $4 BILLION
The New York Times, citing people who have been briefed on the broker's plans, said the losses would come in nearly double its original estimate, prompting the firm to raise additional capital from outside investors. The losses are expected to be disclosed when the brokerage reports earnings next week, those people said. Merrill is likely to write down the value of its CDO and subprime mortgage-backed security exposures by $10 billion next week, Bernstein Research estimated. Such hits have increased concern that banks and brokerage firms may not be capitalized well enough and sent many companies in search of fresh cash.
Bank of America Corp. said Friday it's purchasing Countrywide Financial Corp. for $4 billion, effectively doubling down on a previous investment in the troubled firm and catapulting the buyer into the top spot among mortgage lenders and loan servicers in the U.S.The fact that Countrywide is selling out at these levels indicates serious distress; and BAC already has a vested interest of $2B at $18/share! Herb Greenberg reported yesterday that the Fed was behind the Bank of America / Countrywide deal as bankruptcy rumors started swirling for the troubled lender. Could you imagine the shock to the tradable markets and to consumer confidence that would have occurred if Countrywide declared bankruptcy? They are the nations largest retail lender! According to Greenberg's Marketblog:
The stock-swap deal will put an end to the independence of the troubled California lender headed by Angelo Mozilo, and represents an increase from the Charlotte, N.C., bank's August investment of about $2 billion.
We’ll know it soon enough, but with the leak that Bank of America is near acquiring Countrywide, several things would appear apparent (at least while we’re playing the guessing game):This writer agrees that the fed may have been behind this as that would have been news that would have rocked the markets; the last thing we need after an 11% correction!
1. The Fed is behind the deal.
2. The Fed is behind the deal because the rumors yesterday of a near bankruptcy were probably true.
3. As part of the deal, the government likely agrees to guarantee BofA against Countrywide-related losses.
4. Lost in the in the noise yesterday was that Moody’s downgraded the ratings on 30 (count ‘em — THIRTY!) tranches of Countrywide’s mortgage debt by more than a few notches. They did something similar before American Home Mortgage filed for bankruptcy.
5. Investors bid the stock higher assuming a premium when it’s likely that BofA still needs to fully assess the value of the assets before the deal’s full value will be known.
6. Big question, of course, is what Countrywide investors will get.
7. Rule of thumb with bankruptcies: Stocks often double on their way to zero.
8. BofA gets a free bank and a put to the government.
Paul Krugman, the Princeton Economist and NY Times Columnist, recently wrote a piece called "After the Money's Gone" that I think is spot on and, echoes themes I have been talking about regarding the sub-prime debt crisis. So I'm going to steal his analogy from the piece. He writes about a hypothetical single bank, which is rumored to have made a big bad loan and could go under. All the depositors line up to get their funds. Thankfully, the Federal Reserve steps in, allows the bank (which has not really made a bad loan) to borrow as much as needed to forestall the short-term "liquidity crisis" and the bank is saved. Which begs the question, What happens when the bank did make the bad loan? The answer is, it depends if it eats up enough of the bank's capital to make the bank insolvent or unable to pay back all depositors even after getting back all the remaining value of its loans. In practice the Feds would put strict controls on a bank headed in this direction, well in advance of a full out implosion.
Right now banks are loath to lend to other banks, because they don't know how many bad loans the other guy (bank) has made. What they do know is that everyone has made some. So this brings us to the question: How bad is the bad debt situation really? While it truly appears to be the "not knowing" that is impacting inter-bank lending today, let's hope that knowing won't make it even worse. As you will see below, the Blogosphere is filled with articles on the proliferating bad debt problem and yesterday both Capital One and American Express released negative information about mounting credit card and home equity loan losses. It also appears that people who can no longer tap their homes for quick cash are turning to their credit cards, with credit card debt spiking 11.3% percent in the November, according to Federal Reserve numbers released recently (a similar phenomenon happened leading into the 2001 recession). While revolving credit tends to be about 36 to 37% of total consumer debt this has been ticking up as access to home equity has fallen.
So let's define some terms and then crack open the history books. First, let's briefly discuss the process by which banks deal with their inevitable bad loans (they make some in both good times and bad; it's part of the business). The first thing that happens is that a loan becomes "delinquent." According to the Federal Reserve Board of San Francisco, "delinquent loans and leases are those past due thirty days or more and still accruing interest as well as those in nonaccrual status." This is for purposes of the historical data they keep, which we will be examining to get a feel for how bad the bad debt issue really is. After 90 days or more the loan becomes non-performing and when a bank has concluded that it will not be able to collect on a non-performing loan, it "charges it off," this write-off of the value of the loan is subsequently revised down to reflect whatever value the bank is able to get in a recovery - sale of the underlying property in foreclosure. This is why historically, after a major recession, charge-offs can go negative as some of the charged off value is actually re-captured. The Federal Reserve Bank of San Francisco defines charge-offs as "the value of loans removed from the books and charged against loss reserves, measured net of recoveries as a percentage of average loans and annualized."
So where are we historically with regard to bank loan delinquencies and charge offs? Please note that the following do not include the massive "write-offs" by big banks that you have seen publicized in the newspapers recently, as the data available is only through Q3 2007 and these write-offs are a different animal than "bad loans." What the banks have "written down" are the carrying values of sub-prime and other mortgage-backed securities. These are not loans, but rather securities backed by the payments from loans. As securities I believe that they are not actually carried on bank's books in the loan category (someone who has expertise here correct me if I'm wrong) and won't show up in the data we will be discussing.
Presumably, banks only chose to keep the very best loans, in geographic markets they know well, on their books. I make this presumption because in recent years banks could have easily sold off all but their very best loans to the "secondary market" and gotten the liability off their books, while collecting riskless fees. It is therefore likely that the data of more recent vintages somewhat understates the severity of the bad debt problem, as we are looking at problems with the very best loans. O.K. so here goes.
Delinquent residential bank loans peaked in Q3 1991 at 3.36% of total bank loans, and they have been under 3% since Q4 1992. Note that they only started collecting data in Q1 1991 - when a crisis was already in full swing - typical! At Q3 2007 delinquent residential loans were at 2.74% of all loans, higher than at any time since late 1993. Charge-offs of residential loans peaked in Q4 1992 at 0.27% of loans. Note that charge-offs peaked well after delinquencies (Q3 1991) and of course are much lower, as much of the value of a delinquent loan can usually be re-couped in a work out deal with the borrower or a foreclosure and sale of the underlying property. Interestingly, as of Q3 2007, charge-offs of residential loans were only a hair's breadth lower than the peak of the early 1990s crisis at 0.25% This argues that either despite a lower number of delinquencies, the ability to salvage value on a delinquent loan is much lower today than in the early 1990s, or something else is going on. Frankly I have only one speculation on what it could be, which I will share with anyone who cares....but if you are a bank examiner and have some insight please enlighten us.
Commercial Real Estate Loans
Commercial real estate delinquencies peaked at a ridiculous 12.07% of all loans in Q1 1991 (the first period for which data are available). Obviously, this was where the real problem was back in the old days, when a perverse tax incentive structure and bank corruption drove massive over-building of commercial real estate. In Q3 2007 commercial delinquencies were 1.94% of all loans, up from historic lows of 1.02% in Q1 2006, and above recessionary levels of Q3 and Q4 2001. But they were nowhere near the absurd levels of the early 1990s and the high levels that persisted through 1998. Commercial charge-offs peaked in Q3 1992 at 2.54%. The Q3 07 level of .10% is well off the 0.03% recent low set in Q4 of 2005, but still below the recession-driven peak level of 0.17% in Q4 2001.
Credit card delinquency rates peaked at 5.45% in Q2 1991. They actually hit the 5% level again in Q3 2001 driven by the dot com/September 11 recession. Credit card delinquencies were 4.29% in Q3 2007, up significantly from the trough of 3.54% in Q4 2005, but still below the higher "normal" levels seen in the late 90s. Interestingly, credit card charge-offs' historic peak was 7.67% in Q1 2002. This was driven by the recession and likely by the much larger sub prime credit card market that existed versus the early 90s, coupled with a greater societal acceptance of bankruptcy as an option for expunging debt. As of Q3 2007, credit card charge-offs were 4.00%, well off the 2.98% low of Q1 2006, but still well within the recent historically "normal" range.
All Bank Loans
Delinquencies for all bank loans peaked at 6.15% of total loans in Q2 1991; the interim high of 2.75% in the dot com/September 11 recession wasn't even close. Delinquencies have risen from the 1.51% trough of Q1 and Q2 2006 to 2.12% at Q3 2007, but they are still in very good shape historically at this point.
So the very good news is that as in Krugman's example, so far the banks don't have a big enough bad loan problem to be insolvent and the current issue really looks like its the liquidity crisis and bank's willingness to lend, rather than their ability to lend. I will be watching these delinquency and charge off numbers closely, and I am very confident the street will as well, to see if the slowing economy puts significant upward pressure on these numbers and hence banks' ability to lend. The Q4 numbers should be out around March 1.
Please note that the data referred to above is for all US Commercial banks and does not include non-federally chartered S&Ls, credit unions etc.
Various Bad Debt Issues From The Blogosphere
Defaults on Insured Mortgages Hit Record
New Wave of Defaults in the Offing for 2008
Defaults Moving beyond Sub-Prime
Defaults To Rise As Economy Slows
Amount of Unpaid Credit Card Bills is Rising
Shares Battered By Possible Student-Loan Defaults
A: Very interesting and a phenomenon that you will not hear about from brokers, on any listings site, or any news/media site. I am telling you that in the past 5-7 days the number of email blasts from the Manhattan brokerage community I am receiving has surged! I used to get about 4-5 a day and that to me was normal. However, over the past 5-7 days I have been receiving over 30+ email blasts a day from brokers trying to pro-actively market their sales/rental listings. While inventory is still very tight, and down about 15% since this time last year, its clear that sales activity is not; forcing brokers to reach out to each other to 'bring the listing details' to the community instead of waiting for the action to come to them.
E-blasts have been a special little trick that I used for my clients for years, and I spoke about them a few times here as tips for brokers and FSBO's. But fact is, its email spam on a mass level done by the firms that offer the brokerage community back end tools for searching, updating, and adding new sales listings to market. With the extensive database of broker emails, its a great little business to offer customized e-blasts to brokers as a proactive marketing tool. But it's getting to be real annoying and that will force many brokers to request removal from the database list and/or just deleting all the e-blasts altogether without looking at them.
Now, the fact that the number of e-blasts I received has surged suggests to me that the bonus season is starting out a bit slow, which is both fine and not unexpected. As I mentioned previously, I believe bonuses to be handed out this year (with 2009 the bonus season to worry about) but was more concerned with how they will be spent as confidence has dropped for the overall economy. Recall my 2008 predictions posted about two weeks ago:
"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."Because I love my readers and I believe in reporting on what is going on 'right now', I will share with you an image of what my inbox looks like without even having to remove any private emails because I got e-blasted so many times. Notice in the image below that there are 13 such emails from brokers across Manhattan since 4:11PM on Thursday. I am writing this post at 5:45PM Thursday so what you are looking at is 13 e-blasts in the past hour and a half only, I deleted about 20 already from earlier Thursday!
Interesting to say the least. While I do not think this is something that totally sums up the Manhattan housing marketplace, I do think it is indicative of the current environment that brokers are facing in trying to move properties for their sellers!
The bonus season usually lasts from January to about April or so, but the real action usually occurs in the beginning of February to about the end of March. Those eight weeks have been nutz for the past 3-4 years, with packed open houses and bidding wars. With inventory so tight and expected to build, at least by me, lets see how things pan out this year!
A: Link on Inman News courtesy of the very great Wellcomemat video service!
The panel went over its time limit but it was worth it! Once we got into the discussion, I thought the topics discussed were right on. Enjoy!
I must apologize. As I switched over to Halstead, not only did I have to get all set up with the new firm but I had update everything here on urbandigs.com too. I completely forgot to switch the target email for the CONTACT US FORM! So, if you have been trying to contact us for the past 3 weeks or so, it got sent over to my old email address and I never got the message!
Please re-send any and all requests made in the past 3 weeks or so here. I'll do my best to get back to you in a timely manner. Again, I apologize for the inconvenience.
A: In case you guys couldn't make the conference, InmanNews has you covered with these excerpts from the bull vs bear debate yesterday.
NOAH ROSENBLATT --->
"There are a lot of tentacles in this credit crisis," and the fallout has the potential to reach pension plans and other financial sectors, said Noah Rosenblatt, founder of the UrbanDigs.com blog and a real estate agent for Halstead.
"We know we had a debt problem. Stupid things were going on. Wall Street took advantage of it like they always do. It's a demon and we're paying the price for it. It's going to make the housing recession worse," Rosenblatt said.
But a recession also presents an opportunity, he said, and a chance to correct a market that had moved so fast for so long. It definitely is going to take time, he said, as the prolonged period of lax lending standards will not be mended in the short term.
"This is a necessary but good thing for us to go through. We should go through this and accept it. This has to happen," he said. "We need this downturn."
BARRY RITHOLTZ --->
The five stages of grief, which you might learn about in a college psychology class, are very telling about the discussions over the slumping housing market, said Barry Ritholtz, chief market strategist of Ritholtz Research and CEO and director of equity research for Fusion IQ.
The first stage, he said, is denial. At first, when the housing market began to slow, some analysts and experts said it would be short lived.
At the next stage, there was an admission that there was a housing problem but a denial that it was impacting the overall economy.
That digressed to talk of the housing market downturn's slight impact on the economy that was relatively contained, followed by claims that there were impacts to the economy but they were already accounted for in stock prices, Ritholtz said.
The next stages of grief, he said, are depression and acceptance. The National Association of Realtors trade group shares some blame for releasing "sunny forecasts," he said, that he believes did not accurately reflect the spiraling market.
Wall Street's system for packaging and selling mortgage risk as securities is in need of an overhaul, as "nobody really knows how to value them," he said, and it will be a "painful process" when Wall Street fully recognizes and purges the problems.
PROFESSOR NOURIEL ROUBINI --->
Nouriel Roubini, professor of economics at New York University's Stern School of Business, is calling it the worst housing recession since the days of the Great Depression. Roubini said he believes that a U.S. economic recession began in late 2007 and "is going to be much more severe" than economic recessions earlier this decade and in the early 1990s, with credit problems spreading across the financial system and impacting all forms of home loans, commercial real estate loans and even auto loans, among other forms of financing.
"What we're worried about today is a systemic financial crisis. This is a severe, massive problem. It's going to take years to adjust," said Roubini. Home prices have already fallen 15 percent to 20 percent in some areas from their peaks during the latest housing boom, with housing starts tumbling 40 percent and sales sliding about 50 percent, he said.
If prices fall 30 percent from the peak, that would represent about $6 trillion in lost value and millions of homeowners with negative equity, he said.
DOTTIE HERMAN --->
Dottie Herman, president and CEO for Manhattan-based brokerage company Prudential Douglas Elliman, said that mortgage interest rates were at about 19 percent when she entered the real estate business, though properties were still bought and sold even during those times.
"Do I think we're going to go through some painful times? Yes." The credit crisis is a problem that will touch everyone -- and it is not just isolated to the real estate market, she said.
The housing downturn may serve to make housing more affordable for buyers who are in the market, and has provided an ample selection of properties on the market. There are lessons in the downturn, Herman said, about loose lending practices and consumer education about home loans. Consumers are ultimately "responsible for what they're purchasing," she said, and "some people gamble."
I felt like it was a great panel, humorous with timely comic relief to counter the negative tone of topics covered, that accurately broke down why we are in this mess and how the cycle will likely play out.
Before I start, know that is me, Christine Toes that is writing this, not Noah!
I recently encountered a situation where a buyer whom I thought was qualified, my sales manager thought was qualified, and the seller thought was qualified was turned down by a co-op board.
A board turn down is frustrating for everyone involved. Buyers may have already given notice to their landlord that they are moving & may suddenly find themselves scrambling to find another apartment. Sellers may have moved out in anticipation of the sale and now have their apartment sitting vacant. Mortgage and maintenance payments may be flying out of the seller's pockets while they start the lengthy co-op process (a three month minimum "to do" unless the buyer pays all cash) over again. The brokers who negotiated the deal and put together the lengthy co-op board package start all over again. The mortgage brokers/bankers get nothing, the attorneys get only a portion of their fee. Basically everyone loses.
With this particular board rejection, there were a few issues at hand:
1. A New Management Company: The building had recently hired a new management company & they were unable to give insight about what this particular board was looking for as far as financial requirements. My buyer had the qualifications co-op boards generally look for: 20% down, 2 years of mortgage + maintenance payments in reserve in liquid assets, a 25% debt to income ratio (although a large part of her income was bonus, which I will get to in a minute), and a 770 credit score. Often, we can feel out the managing agent for what the board has/has not approved in the past, but since this was the first board package this M.A. had submitted to this board, the M.A. didn't know what to expect. We were going in blind, which is a real estate agent's nightmare.
2. My Buyer Was In Finance / Nervous About Future Bonuses: Although my buyer was at one of the very few companies not hit by the credit crisis, I think the board may have been nervous about bonuses. I suspect that they were probably harder on my buyer because of what is happening on Wall Street now. Even though my buyer was in a "Future Leaders" program at the company, perhaps they also feared the projected layoffs. In short, if it had been last year, my buyer might have soared through with flying colors.
3. Sale Prices Too Low: After the board turn-down, I brought a new buyer for the apartment. This time, the managing agent was willing to run the new buyer's profile by the board (this rarely happens). The response we received regarding the new buyer was that the "board liked the new buyer's financial profile better than the previous buyer's profile...And they liked the sale price better as well."
Then it dawned on me.
The first transaction happened when I brought the buyer for an apt that was For Sale By Owner. Since the owner was selling it, the apt was really not getting the exposure it would have gotten on the open market. My buyer and I knew we were getting a great price on the apartment.
After the co-op board turned my customer down, luckily for me, the seller still really liked me and she gave me the exclusive on the property. Within a week of the apt being officially on the market, I sold the apartment for over $35K more than what the first deal was for in a bidding war. (Even after adding in the additional commission she ended up paying me, the seller made $20K more using a broker).
I don't want to give exact numbers, but basically it was a difference in the sale price of about 770K and 810K. Although I never really thought about it before, I think there is another issue to consider when looking at why co-ops turn buyers down: the board wasn't happy with the sale price. Particularly in a smaller building, every sale counts because every sale is going to be scrutinized as a comparable when current owners sell their apartments in the future. Makes you wonder.
1. Steer buyers with low income and high bonuses towards condos whenever possible even if you (and they!) think it is crystal clear that they can afford the apartment. You never know when a co-op board is just not going to be comfortable with people who make so much of their income in bonus.
2. If you are getting a fabulous price on an apartment, don't rule out the possibility that the board might turn down the buyer, not because they aren't qualified to buy the apartment, but because they are afraid that a sale at a low price will hurt future sale prices in their building.
3. Never rule out the possibility that just because a buyer of a certain financial profile passed a board last year, that a similar buyer might not pass this year because of what is going on in the economy and/or news media.
4. The strict financial requirements of co-op buildings in Manhattan have helped keep NYC's housing market healthy and prices stable despite the loose lending standards of the past few years. We are certainly being saved from the high foreclosure rate affecting other cities. However, in some cases, I think boards have become too strict. I highly recommend that if you have an opportunity, get on your co-op board so that you can make sure your building is not keeping perfectly qualified buyers out. When you go to sell, you'll be very happy that your board doesn't have a reputation for being the most difficult board in the neighborhood!
Links: Co-op Board Ratings via WallFly.com!
The Attorney General speaks out on problems with co-op boards
A: Well, if you didn't believe in the credit crisis or the macro environment, you surely do now! Stocks are now in full blown correction mode after falling some 11% over the past 4-5 weeks as the reality of the housing slump, credit crisis w/ all its tentacles, bank/brokerages mbs write-downs, ratings' farce, etc.. all come to a head. I have discussed the situation in depth with the hopes of explaining to you what is going on, but now we have to face the music. And the music is going to be as ugly as Elaine's dance moves.
A week ago I wrote a piece how bonuses will be more affected in 2009 due to the game being over for how many banks/brokerages have generated billions in revenue over the past few years; "Bonuses: It's 2009 That Will Hurt More":
Bonuses are generally calculated using generated revenue, not income, which leads us to what happened in 2007! For the first half of 2007, revenues generated by the investment banks, brokerages, trading desks, and banks were very high! My point, bonuses will be granted this year; its 2009 that we will have to worry about!Today, there is an article out on CNN Money discussing this exact topic, "Investors Brace For Bad Bank Earnings":
The derivatives trade of securitizing loans and selling them off in pieces on the secondary mortgage markets generated billions in revenue for these banks & brokerages. Now that the housing bubble popped nationally, risk has been re-priced, secondary mortgage markets are not functioning properly, liquidity dried up for mortgage backed securities, and the announcement of billions in losses and potential insolvencies, THE GAME IS OVER! How will these banks and brokerages generate the kind of revenue that they got used to generating the past few years?
Sometimes when it rains, it pours on Wall Street. And next week, forecasters are calling for a flood. Beginning next Monday, Wall Street will most likely find itself drowning in a torrent of dreary earnings news from some of the nation's biggest banks, marking yet another grim milestone for the troubled financial sector.Now, from trading equities for over 10 years I have learned that news is interpreted differently based on the current environment in the overall market. What I mean is, bad news will be interpreted differently if the DOW is at 13,800 right off record highs, than it will if the DOW is at 12,600 following a 11% correction. Obviously, we are in the latter environment so it's very possible the street reacts favorably to the bad news; but that remains to be seen as we don't know how bad it will be and one thing investors hate is uncertainty and quarter after quarter of more write-downs!
"It's not going to be a pretty sight," said Frank Barkocy, director of research at the investment advisory firm Mendon Capital Advisors in New York, which owns shares of a number of large banks including Bank of America and Washington Mutual. The worst news is expected from Citigroup and Merrill.
In the coming weeks, the financial sector will be releasing earnings reports and write-down updates. We will start to see how bad it really is out there. For those hoping for a new bull market, all I can say is that is virtually impossible if the financials do not participate!
A: Inman Real Estate Connect conference is back in New York City starting tomorrow. The event takes place January 9th-11th at Marriott Marquis in Times Square. I will be on a BULL vs BEAR economics panel with some of the great scholars/minds out there. I hope you can register and make it to the conference and this panel.
Here is the info.
Wednesday, January 9, 3:30 p.m. – 4:15 p.m.
The Housing Debate: Bull vs. Bear
Where is the housing market headed? More doom? Stability? Or modest recovery? Join this lively debate between housing bulls and bears who present differing views of housing's future.
Sponsored by: NY Times Real Estate
Moderator: Andrew Ross Sorkin, Assistant Editor, Business & Finance, Chief Mergers and Acquisitions Reporter, The New York Times
Dottie Herman, President & CEO, Prudential Douglas Elliman
Barry Ritholtz, Chief Market Strategist, Ritholtz Research & CEO; Director of Equity Research, Fusion IQ
Noah Rosenblatt, Founder & Publisher of UrbanDigs.com / Vice President, Halstead Property
Professor Nouriel Roubini, Co-Founder & Chairman of RGE Monitor; Professor of Economics, New York University’s Stern School of Business
It should be a very entertaining and educating discussion at a time when things are starting to get VERY interesting to say the least! I hope it gets a bit heated at times. Hope to see you all there and don't forget to register below in advance if you plan to stop by!
Also, Doug Heddings of TrueGotham will be there speaking on a panel titled, "Beyond The Written Word: Video Blogging & Podcasting".
A: Not really, but in this case I think I can relate two things this homebuilder's CEO talks about to the Manhattan real estate marketplace moving forward. In addition, it lines up with what I have been discussing for so long on this site as what I consider to be forward looking indicators that may ultimately affect our marketplace.
Thanks to Calculated Risk, KB Home CEO sums up his views on the housing market and the trouble he is seeing for his business:
"Several factors weighed on the entire housing industry this year, including a persistent oversupply of new and resale homes available for sale, increased foreclosure activity, heightened competition for home sales, reduced home affordability, turmoil in the mortgage and credit markets, and decreased consumer confidence in purchasing homes."So, relating this to Manhattan real estate I see a few points worth discussing: AFFORDABILITY + CONSUMER CONFIDENCE.
With Manhattan being so different than most markets, and that being proven by our strong marketplace, we can immediately dismiss OVERSUPPLY, FORECLOSURE ACTIVITY, HEIGTENED COMPETITION FOR SALES (at least for now), & TURMOIL IN MORTGAGE / CREDIT MARKETS. We do not have an oversupply problem. The fact that we are 65-70% co-op takes out foreclosure activity as a major concern. With such tight inventory, sellers do not face any serious competition with other sellers resulting in battling price reductions. Finally, in this market I think mortgages are available and that buyers are qualified to obtain loan commitments. So, I do not think these fundamentals are hurting us in any significant way.
However, looking ahead, I am concerned about affordability and buyer confidence. Some people dismiss these fundamentals, but not me. I think these two phenomenons are the most important items to watch in the Manhattan real estate marketplace, for any signs of a slowdown. And I discussed both in depth for months. Affordability is linked to jobs and we are about to head into a period where layoffs in the financial sector are coming. I hope I do not need to explain Manhattan's link to wall street and the financial sector here. Buyer confidence is linked to sales volume; as a drop in confidence will result in one of two things for a prospective buyer ---> cutback in budget for the property purchase OR a putting off of the purchase altogether. Either one will affect sales volume and put some pressure on prices. The lagging result is a build of inventory as days on market lengthens. The lagging result of that is heightened competition amongst sellers; something that does not affect us right now.
I'll continue to report on our jobs market and on buyer confidence to see if these indicators change the fundamentals of our marketplace.
A: When unemployment rises 3 ticks unexpectedly, and surprises economists, traders, and analysts, you must expect recession talk to get more serious. And it has. While bloggers like myself, Barry Ritholtz of The Big Picture, Bill over at Calculated Risk, Naked Capitalism, Professor Nouriel Roubini & Accrued Interest have been working hard to break down the credit crisis and how it may affect the overall economy, it wasn't until last Friday's awful jobs report that some of the big names spoke out. In my opinion, the blogs noted above are the creme-de-la-creme of macro economic analysis in the blogosphere and should be daily reads for anyone interested in understanding what is going on underneath the surface.
Barry Ritholtz has a great post today titled, "Merrill: Recession is already here" where he delves into a chart comparing the unemployment rate (year/year difference) and past recessions:
The caption is: WHENEVER THE UNEMPLOYMENT RATE GOES UP 0.5PPTS OR MORE FROM ITS TROUGH, THE ECONOMY HAS TRANSITIONED INTO AN OFFICIAL RECESSION 100% OF THE TIME (the chart shows you this with the gray bars indicating a recession & it's length)
But Merrill Lynch analyst David Rosenberg isn't the only big name talking recession. Martin Feldstein, the father of the Bush Tax Cuts and famed Harvard economist, has spoken out as well. According to Feldstein (via CNN Money):
Martin Feldstein, the Harvard economist credited with being one of the fathers of the Bush administration tax cuts, says the U.S. economy is now likely to slip into a recession, and that avoiding one will take a new round of tax cuts and interest rate cuts from the Federal Reserve.We must understand something. A recession is not the end of the world! We have had 4-5 years of lax lending, no underwriting standards, financial innovations that have generated billions, risk dispersement, global growth, a housing boom, and a credit bubble. Did we really think this would all last forever? The problems we face right now are so complex, that a recession is not only likely, but is probably the only real cure to what ails us! It is necessary to weed out the bad bets, clean up financial balance sheets, deflate the asset bubble, tighten up lending standards, and bring normalcy to a world that was irrational for the past 4-5 years!
But he said he now believes a recession is likely, as he pointed to both a report from the Institute of Supply Management showing manufacturing activity in decline for the first time in almost a year, and Friday's December jobs report that showed a jump in the unemployment rate to a two-year high.
In October I wrote a piece titled, "To Mr. Bernanke: BE STRONG" where I stated:
"We have become a society that fears recessions rather than understand them for what they are; healthy and normal disruptions in economic growth necessary to ensure longer term sustainable growth. We need to shake out the bad bets and weak players, let the markets fix themselves, and move on with the lesson learned.The following day I commented and praised American Enterprise Institute's John Makin for stating:
The US economy is slowing and jobs growth is decelerating, no doubt about it, but what happens if the US dollar continues this freefall? What happens to our immediate future if oil prices jump to $120/barrel; which will occur if the fed maintains an easing policy? Won't that hurt us even more down the road? Do we really need to keep cutting rates BEFORE the economic data clearly shows that they are needed at this stage of the game? Is 4.75% fed funds rate really that restrictive?"
John H. Makin says that a recession "is the most desirable outcome" for deflating the U.S. housing bubble. "Avoiding it would involve so much government intervention and so much reinflation by the Fed that risk-taking would be encouraged even further, resulting in an even larger bubble and a larger subsequent recession..."He's right! Right now, equities have corrected about 10% over the past 4-5 weeks as an economic slowdown gets priced into stocks. The same uncertainty has helped to fuel GOLD prices higher (see chart on the right), a clear sign investors are seeking a safe haven from a possible recession. The bond market is also predicting a slowdown that will force the fed to lower rates and stimulate our economy. The pieces of the puzzle are connecting, and the picture is starting to emerge: uncertainty! How long may the recession last? Are we already in a recession and just don't know it yet? How severe will it be? These are the unknowns. But what I do know is that this recession is an unfortunate but necessary side effect if we are to get through this housing & credit problem! Do not fear a recession. Acknowledge what is going on and understand it for what it could do to help us proceed on a brighter path in the years to come.
With that said, savvy investors know that opportunities always present themselves in times of distress, and this writer will certainly be keeping his eyes open for my next big investment.
One more reason why fixing the mortgage mess is so complex has to do with an accounting rule that, ironically, was enhanced after the Enron scandal. Unless the SEC and the Financial Accounting Standards Board (FASB) give their blessings to a changing interpretation of this rule, plans like Paulson’s that require mortgage servicing companies (servicers) to assist borrowers may result in a credit crunch. Alternatively the changes may further shake investor confidence in the mortgage backed securities market.
As Noah mentioned some time ago (How Mortgaged Backed Securities Work), banks package loans into mortgaged backed securities and sell them off their balance sheets as a way to reduce the capital they must hold aside as required by regulators. FAS140 is the accounting rule that allows this sale to be recognized for financial reasons.
So how would this affect homeowners?
It could dry up the mortgage market in these 2 ways:
(1) Shaking investor confidence: Any change to the servicer’s role may compromise its fiduciary responsibilities to investors. Servicers may assist borrowers in default with special payment programs – but not borrowers AT RISK OF DEFAULT, those supported by the Paulson plan. The result is a breach of contract between investors and the trust and lawsuits to follow. Investor confidence would be undermined and liquidity in the mortgage market would dry up.
(2) Weakening a bank’s financial health: Because the change to the servicer’s role may compromise the loan’s status as a “true sale”, banks would then have to bring these loans back onto their balance sheets. The result would require banks to raise more capital and, if the loans were in default, write them off at a loss. HSBC and Rabobank have recently faced this, with an increase of $45 billion and $7.6 billion respectively. A worse case scenario: banks may hold off on making more loans, thereby generating a credit crunch.
This was not the intention of FAS140. The idea behind further defining a “true sale” was to prevent the mysterious transactions that got Enron into trouble. That said, requests to expand the “true sale” definition under FAS140 was proposed by trade groups and endorsed by others including Secretary Paulson and Congress. The SEC and the FASB must accept these changes – so far they have acknowledged but have not officially sanctioned the idea.
My view is that the SEC and FASB, understanding the gravity of the situation, will ratify the idea, assisting banks and ultimately homeowners.
The downside is that the action will further affect investor confidence because it would - like the Paulson plan - further change the rules of the game regarding fiduciary duties for investors of mortgage backed securities. This sets a precedent that can have major consequences for our capital markets. This may, however, be a short-lived reaction and the lesser of the two evils (save homes & banks vs. some investors? Hmm….). Something policymakers have to consider. Stay tuned.
SOURCE: Saving Banks: How The Mortgage Bailout Strains Accounting (CFO.com)
In case anyone missed this as I did: The New York Times reported last week that New York Water Taxi has suspended service on its East River routes. According to the firm's web site, these stops include Hunters Point, Queens, Williamsburg and Dumbo with East 34th Street and Wall Street being destinations. The web site says that service will return in the Spring. According to the article:
"To lure water taxis, the developer agreed to make monthly payments to subsidize the service for the residents, said Tom Fox, president of New York Water Taxi. Only about 60 residents regularly ride the boats, even with the subsidy, their tickets do not cover the rising fuel costs and other expenses., Mr. Fox said. We've been losing money for too long now, Mr. Fox said, adding that his fuel costs had risen by $1 a gallon or about 30%, since last winter".
This dosn't necessarily sound to me like a situation that will be rectified by the spring. In fact, Mr. Fox had more dire pronouncements to make in The Brooklyn Paper, when complaining about the lack of promised ferry subsidies by the city.
"We've been led to believe that the city is ready, willing and able to assist us, but we're still waiting for them to decide what role they want to play in supporting waterborne transportation. We can't go it alone anymore, We've been shouldering it ourselves for a long time and the weight has become more than we can bear".
If the service doesn't return, I would consider it to be a significant negative, particularly for Hunters Point, which I am more familiar with. There are many new developments coming on line in the area and ferry service seemed to be a very attractive amenity, despite very easy subway access on the 7 train at Vernon/Jackson Avenues. The firm's Water Taxi Beach outdoor bar and beach was a real attraction for Hunters Point and a reason for people to come over from Manhattan for a visit. It really gave the sense that something new and special was happening on the Queen's waterfront. Let us hope that it and the ferry service will return come spring time.
A: An appropriate title for what I would like to discuss today. Who the hell cares what happened during the bonus season in 2007? Who cares what happened during the summertime. That's over now, and to grasp what may be ahead of us we must analyze current buyer confidence and try to understand why that may go up or down; which brings us to the bigger picture, the macro economy. Last week's bullish real estate report on Manhattan was a lagging report. Which is fine, but be careful not to believe anyone's future predictions if they are based solely on this report! That would be like trying to look ahead by glancing into your rear-view mirror!
For the record, I started discussing a dip in buyer confidence back in August, about 3 weeks after Bear Stearns kicked off the now infamous mortgage problems & credit concerns:
AUG 9th --->
"New York City real estate still needs more inventory to meet demand. While I am still assessing whether the current credit concerns are infecting us here (nothing yet other than some psychological concern), the more important trends to watch are inventory and price points. "AUG 27th --->
"Today I would like to discuss the change in psychology that I am noticing due to the 5-6 weeks worth of headlines around the current credit/liquidity squeeze.I was very clear in stating that accompanying this dip in buyer confidence was a continued tight level of supply in the Manhattan real estate marketplace. I spent part of September discussing the very tight inventory, and the significance that it will play in holding prices steady for the time being:
...Combine these changes in thinking and what you get is a MORE CAUTIOUS BUYER more willing to sit on the sidelines than to jump in and bid close to ask."
SEPT 21st --->
"Out of all the variables out there to analyze a local housing market, look no further than the buyer characteristics of that marketplace to get a solid sense of what inventory trends probably are. The two are most likely related! Right now in Manhattan, inventory has declined 32% in the past 12 months and is only showing some signs of increasing in the past few months; but nothing concrete enough to make any trends yet. The reason very well be because of the healthy buyer pool that caused this restriction of inventory in the first place!SEPT 24th --->
Moving on, as long as inventory remains tight in Manhattan prices will be sustained! Which brings us to what may affect this trend..."
"Inventory in Manhattan is very tight, and as a result, prices are holding and buyers scramble to find a product that meets their needs. I think the headlines of the credit squeeze, along with higher rates and tighter loan standards has had a psychological effect on the buyer pool by pouring some caution into the minds of would be buyers."Now, action that occurred during July, August, & September will be reported in the 4th quarter that covers closings (amongst other data) for the months of Oct-Nov-Dec, lagging but right now the best source of information we have to analyze the New York City housing market. Which brings us the bullish report that Elliman released last week. I thank Doug Heddings for breaking it down and pointing out a few very important items:
4th QUARTER 2006 ---> 4th QUARTER 2007 (via TrueGotham's breakdown)
Great stuff, but as Doug points out, highly skewed due to the 90+ ultra luxury units that sold at The Plaza & 15 Central Park West.
What do we know? We know the bonus season (JAN-MAY) of 2007 was very active. We know that foreigners signed many a contracts, especially in new developments in the first half of 2007 due to currency trends. We also know that inventory got taken down sharply as a result, leaving us with very little supply for the remainder of 2007. After all, did you know that we had a total of 6,236 units available for sale in December 2006, and only about 5,000 units or so available for sale exactly one year later! Thats a decline of about 21% or so if I'm not mistaken.
So what has happened now that this world (credit crisis, recession fears, rising unemployment, declining manufacturing, tighter lending standards, rising jumbo rates, massive uncertainty on wall street, declining stock prices, declining confidence, etc) is very different than it was this time last year? Let's take a look at what Manhattan real estate did from the 3rd quarter to the 4th quarter (that is, once the scarier world described above began), and be very cognizant of the fact that this market is seasonal and generally slows down as we near Nov-Dec:
3rd QUARTER --> 4th QUARTER (via TrueGotham's breakdown)
Hmm, a result of the seasonal slowdown or the credit crunch; or perhaps a bit of both? It's clear much of the bullish data occurred in the first half of 2007. We can see that Manhattan real estate slipped in terms of sales price, days on market, sales volume, and listing discount during the final 3 months of 2007. Even as inventory continued to shrink by 1.4% (probably the result of sellers taking listings off the market before Thanksgiving), days-on-market rose as it took longer to sell a property.
UrbanDigs Says: Recall the title of the post right now and the forward looking nature of this site. What makes this time around different is that as the seasonal element will shift from generally 'very slow' to generally 'very active' (end of year slowdown ---> bonus season pickup), the macro environment continued to deteriorate; evident by rising unemployment, rising uncertainty, falling stock prices & future financial sector layoffs that are widely expected to come. All of this a result of the credit crisis and meltdown of subprime mortgage markets.
You can't look ahead by glancing into your rear-view mirror! What happened, happened, and is over and done with. We must look at where we are now, both economically & on the streets of NYC real estate, for any indication of where our market may be heading! And right now I am concerned about the economy, job losses, and recession possibility/severity, that may contribute to a further dip in buyer confidence. The situation must be respected and watched very closely. Even in this circumstance, inventory must reverse course, and build substantially BEFORE we see any significant pressure on prices.
A while ago, I wrote about the 2 family townhouse I bought in Bedford-Stuyvesant, Brooklyn; after searching & searching. Although I wasn't sure whether I was going to move there or not, after contemplating my commute & the fact that I don't need the space right now, I decided to stay in the city in my alcove studio.
I had a contractor renovate my kitchen and bath in my current co-op, so I thought that since I had been through a renovation before, I sort of knew what I was doing...Not so much!
So what have I learned about renovating a three-story, two-family townhouse so far?
1. I Firmly Believe That You Get What You Pay For: I interviewed three contractors and only one gave me a detailed, professional estimate. It also happened to be the contractor who my neighbor in Bed Stuy (who is also a real estate agent) highly recommended. Generally, we ("we" being "real estate agents") are told not to recommend contractors because no one loves their contractor and it will come back to bite us in the arse ("Oh, my broker recommended him and he was TERRIBLE"). However, I am willing to go out on a limb here because my contractor, Mike Zych of Mike Zych Construction, was fabulous. He finished on time, and he would have been on budget had I not decided mid-project that I wanted to do a few extra things in the house. Although the other two contractors came in slightly lower than Mike, there is nothing like having a very detailed estimate so there is no confusion about exactly what you are getting for your money. I am sure that if I had gone with the lower estimates, that the costs would have ballooned to more than what I paid for Mike's team to do the work. And despite the hundred annoying questions I probably asked him, he and his assistant, Renata, kept me sane during the process.
2. Ikea Cabinets Actually Look Nice: Considering I knew that for part of the time I would own the house, either all or part of it would be occupied by renters, I didn't want to spend a mint on cabinets. I was pleasantly surprised that the Ikea cabinets look great. How long they will last is another story. I'll get back to you in a few years. Bottom line: About $3K for two Ikea kitchens. Here is the kitchen BEFORE & AFTER:
Oh, and I took out the dropped ceiling to make it loftier and more open. Here is the BEFORE & AFTER, look at the glass at the top of the door to see the end result:
3. Countertops Take Forever: If you are a renovation rookie like me, you bring in a floorplan and sit down with the guy at Home Depot. He draws a sketch of your kitchen & you pick out what countertops you want. You think you're done? Hardly. It turned out that the smaller of the two kitchens didn't have enough counterspace to even justify its own order. So I had to order the same countertops for both kitchens (which thankfully looks ok). All of the cabinets AND appliances need to already be installed before the countertop people can go to measure the kitchen and make sure the floorplan you gave them was correct, and they need to make sure they cut the countertop to fit the sink and faucets correctly. THEN, they order the damn things, which takes another 10 days. Then they have to come install the countertops. God forbid you also get the 4 inch backsplash (a good idea so water or anything tenants might spill doesn't drip down behind the cabinets & start rotting stuff) and then they have to come back AGAIN to install that. Toes' Tip: Get those cabinets & appliances in early so you can get started on the lengthy countertop process. It takes WEEKS. Bottom Line: Silestone will survive virtually any tenant but you will pay out the wazoo for it. Budget $3K for two kitchens.
4. The Small Things Add Up!: When estimating the costs of doing a renovation, don't forget the small stuff you are going to have to purchase. Like doorknobs. And light fixtures. And did you know that almost no one makes a 24 inch over the range microwave, and the only one out there is like $350 bucks!? I must admit that I didn't realize how much these things would add to my bottom line. I priced out the countertops, cabinets, and appliances before beginning this process, but not the smaller items.
Doorknobs: My dad poked fun at me for ordering $60 doorknobs since there are renters in the house. Yes, he is right - maybe I shouldn't have spent the money. But crystal/glass doorknobs keep with the period of the house (it was built in 1899) & they look beautiful. Unfortunately, they are also expensive. But I didn't want to buy $20 doorknobs only to turn around in 3 years when I want to move in and then spend another $60 on doorknobs. I'm pretty sure doorknobs last a long time. I searched about 7 websites for the cheapest crystal knobs out there. After they were installed (and look fabulous), my mom told me a story about people who stole the doorknobs out of her friend's house because they were being evicted and they were mad that they had to move. THANKS, MOM! Luckily, I know some of my tenants personally & I have a great renter's insurance policy, so I think I will be ok. If not, lesson learned! Bottom line: in a 3 story house, I had 22 doors. That's $1,320 for doorknobs.
Light fixtures: I wanted to keep with the style of the house & there are gorgeous ceiling medallions throughout the house. Since I plan to move in at some point, I wanted to spend the money on a few nice light fixtures in the highly visible areas and try to buy less expensive ones for the hallways and rooms where the fixtures wouldn't be as noticeable. Despite my strategy, nice light fixtures are about $120 each. There are 20 lights in the house! I spent about $120 on 6 of the fixtures, $80 on 6 of them, and $30 - $50 on each of the rest. That's $1,600 on light fixtures. Ouch.
5. Most Dryers Do Not Run On 110: After I purchased the washer/dryer for the basement, my contractor's electrician informed me that the dryer I bought only runs on 220. When I called PC Richards & Home Depot to discuss dryers that run on 110 (it actually doesn't say on their websites, even in the detailed information about each dryer), I found out that there are few 110 dryers available and they are not very effective. Basically, you can dry, like 2 pairs of jeans at the same time. This is the only thing I was a bit perturbed with my contractor about. It would have been nice to get a head's up about this. The issue hasn't been resolved yet. Evidently it can be a nuisance to deal with Con Edison to have them run 220 into the house (even though the electric in my house was upgraded during the renovation). So I may need to return the electric dryer and order a gas dryer, in which case my contractor will need to vent the dryer to the outside. Either way, I forsee this costing me more money, which is annoying. But considering that this was a big renovation job (2 gutted kitchens, a gutted bath, two walls/doors being moved, new windows, new electric, 2 upgraded baths, dropped ceilings being removed, etc.etc), I think it was a pretty minor mishap.
After my tenants get all settled in & I see what the heat and hot water really cost, I will give an update on how my investment is turning out!
A: I have been bombarded recently with comments that I am a doom & gloom blogger, always talking negatively about the economy & housing, even when a very bullish Manhattan real estate report was published by the top firms (which I'll get into later today). After 2+ years blogging, I really hope most of my readers know me better than that! I am not a doomsday thinker, investor, or blogger. I am a realist; what you see is what you get. I try to tell you what I am thinking about on any particular day, and do my best to relate it and connect the dots to New York City housing. There is a lack of transparency in this industry and I'm trying to fix that with this site; so that you guys have a reputable source for front line information. With all that said, if sentiment is negative and red flags are waving, I will discuss it here without bias. Today's jobs report was so weak that we must now respect recession arguments and expect the fed to act a bit more aggressively at a time when the US dollar is so weak, oil prices are so high, and pipeline inflation remains a concern.
Lets get right into the news with a chart on the right showing you the Non-Farm Payrolls & percentage changes monthly/yearly (via The Big Picture). According to CNN Money, "Jobs Weak, Unemployment Soars":
There was a net gain of 18,000 jobs, according to the Labor Department report, down from the revised 115,000 gain reported in November. Economists surveyed by Briefing.com had forecast a gain of 70,000 jobs.While this report may be revised higher later on, it was still a very bleak economic report. The unemployment rate surged 0.3% from 4.7% to 5%, a big surprise to many economists and analysts, but not to Barry Ritholtz:
The unemployment rate rose to 5 percent, the highest reading since November 2005, from a 4.7 percent reading in November. Economists had forecast the unemployment rate would rise but only to 4.8 percent.
Unemployment rate rose to 5.0%, the highest in 26 months. As we have noted repeatedly in past months, to keep up with population growth requires ~150k new jobs to be created each month. Given the number of months we have seen below that level, an uptick in unemployment was inevitable.I'm not sure how the bulls will find any significant positive spins on this jobs report outside of wage growth.
This should not be a shock for UrbanDigs readers as Jeff & I (Jeff's recent post is below) have been discussing the coming wave of layoffs and job loss concerns for many months. As recently as Wednesday I stated:
"Not only will 2008 prove a very difficult year for these guys (financials) to generate revenue anywhere near years before the credit crisis hit, but we are about to head into a period of layoffs as efforts to cut costs and restructure the company is a must to restore investor confidence and bully the stock price.I understand why people consider me doom & gloom as it is no fun talking about a coming recession, potential job losses, stock losses, negative buyer sentiment, and pressure on Manhattan real estate; especially for a homeowner! But this is real people! Would you rather be advised by a broker who has no clue what is going on around them, or by someone that can keep you ahead of the curve?
In my opinion, its next year's bonus season that will prove to be much less than expected as generated revenue is way down in this post-credit crunch world. Add in the fact that job losses are inevitable, and you start to think reality rather than fantasy."
Now, while this jobs report is only one report and we must be careful not to dig too deeply into it, word on the street is that a wave of job cuts are coming at firms like Merrill Lynch, Citigroup, Morgan Stanley, etc.. in the coming weeks and months. Expect headlines on this topic.
Again, forget the past, this site is forward thinking as that is all that matters right now; either you adapt or you get slaughtered. The chain reaction that job losses and weak employment data will bring for Manhattan real estate starts at the psychological level. It will work like this for the majority:
JOB CUTS / WEAK JOBS DATA ---> UNCERTAINTY / CONCERN OVER JOB SECURITY ---> CONSERVATIVE MINDSET SETS IN ---> RISK APPETITE RESTRICTS ---> FEWER BUYERS JUMP IN ---> AMOUNT TO BE SPENT GETS CUT BACK ---> DEMAND WANES ---> SALES SLOW / INVENTORY BUILDS ---> PRESSURED HOMEOWNERS ADD TO INVENTORY
I didn't even talk about what it will do to those who lost their jobs and may have to sell their property. Its the same story that has hit so many local markets outside Manhattan already, that are not exposed to the same fundamentals (tight inventory, healthy buyer demand, foreign $$'s, trend to live closer to work, low rental vacancy rate / high rental prices, etc..) that help to drive our marketplace. But even our strong fundamentals are cyclical and NOT immune to a slowdown should a recession hit, and the biggest consumer concern with a recession is job losses, job security, affordability, risk management, and negative wealth effect with stock losses for the buyer. All these items will affect buyer psychology / confidence and that sentiment will spread with a herd-like mentality. Nobody likes a recession, not even Manhattan real estate. Which is why I pay attention to macro events so closely. Right now, my main concern is the psychological hit that will come with recession worries / job losses during a generally very active bonus season here in Manhattan real estate.
But for those that say I'm never positive, here you go. Two positives I can see from this report, wage growth & eventual fed action. Expect the fed to seriously consider a more aggressive 1/2 point rate cut for their next move. While we have pain to go through first, there WILL be brighter times in the years ahead as all this fed stimulus will eventually 'kick in' at a time when we are nearing the end of the worst housing recession since the Depression & the worst credit crunch since the Savings & Loan crisis. When will the opportunity present itself?
I like to follow "smart money" a legacy of my first job working for a firm that researched only companies where "smart investors" had taken large stakes. I recently read an interview in Time Magazine and a synopsis of a speech by Sam Zell at the Executives Club of Chicago. The the famous "grave dancer" vulture real estate investor has time and again bought assets (real estate and many others) when most investors were too petrified. Note his recent acquisition of Tribune Inc. - when most think the newspaper business is dead. He has also been prescient in selling before the last call was sounded at asset parties. Zell will go down in history (in my opinion) for hanging his Equity Office Properties Trust on Blackstone Group and others they re-sold many of the assets to (like Harry Macklowe), just before the real estate cycle ended. I think if I were Zell, I'd be licking my lips right now thinking about the bargains I would be picking up if all hell broke loose....his favorite environment, I would guess. But not Mr. Zell, he denied that his sale of Equity Office Properties was a "top marking event" and sounded an optimistic tone about the real estate business referring to the lack of supply and virtual standstill on new construction....at least as it concerns his Equity Residential Properties Trust (NYSE/EQR).
According to a recent article in the Tribune - which he now owns:
"The new year could bring a new reality for landlords and investors, said Carroll of Cohen Financial. The downtown Chicago leasing market faces 6 million square feet of new offices in development that will start coming online in 2009."But hey, Why talk down your own positions and why bring attention to the fact that you blew out at the top in a bidding war?....you might want to do the same thing again in the future. So while I am a big fan of Sam Zell, I watch what he does more than what he says, publicly. This is because it's easier to understand when assets look priced for perfection than it is to predict the economy....which is why Warren Buffett and Sam Zell don't trade macro bets; they invest in assets they understand well, buy them cheap and sell them dear. It just so happens that this oftentimes correlates well with economic turning points (although many times it doesn't). Zell's bull case for the economy avoiding recession and his apartment owning EQR weathering the storm was largely predicated on the economy sustaining something like full employment. According to the article, "He expressed confidence that as long as the unemloyment rate stays below 5.5%, it was very very unlikely that the subprime contagion would spread". This was based on the idea that fortunately the sub prime mess hit when the economy was strong, not weak. Let's hope the asset implosion doesn't wag the dog.
In a December 3rd speech, Fed Governor Janet Yellen made central reference to unemployment but in my opinion likely understated the risk to the labor market of caution by employers: "To sum up the story on the outlook for real GDP growth, my own view is that, under appropriate monetary policy, the economy is still likely to achieve a relatively smooth adjustment path, with real GDP growth gradually returning to its roughly 2½ percent trend over the next year or so, and the unemployment rate rising only very gradually to just above its 4¾ percent sustainable level. However, for the next few quarters, there are signs that growth may come in somewhat lower than I had previously thought likely. For example, some of the risks that I worried about in my earlier forecast have materialized—the turmoil in financial markets has not subsided as much as I had hoped, and some data on personal consumption have come in weaker than expected. I continue to see the growth risks as skewed to the downside in part because increased perceptions of downside economic risk may induce greater caution by lenders, households, and firms."
So it should be of no surprise to you that all eyes are riveted on Friday's Labor Department Non Farm Payroll Report. Bank lending has been temporarily curtailed by asset losses, the Fed is doing its best to keep a liquidity crisis at bay....and many feel that if we can just get through this extreme indigestion period all will be well again. It comes down to confidence: will employers start to cut back in anticipation of tougher times or will they wait to see how things play out. The early look - an independent survey by payroll processor ADP, which came out this morning - isn't so great. "Private Sector companies in the U.S. added 40,000 jobs in December, according to the ADP employment report released Thursday. It's the weakest growth since 27,000 jobs were added in August." Additionally, exports don't seem to be bailing us out as "Factory employment has fallen for 18 straight months." As Urban Digs has noted, financial service layoffs are still coming, but these firms reportedly reduced employment by 5,000 last month, "The third decline in the past five months."
The other advanced data, Initial Jobless Claims released this morning, read a little better. First time jobless claims fell 21,000, breaking a recent string of increases, but continuing claims kept on rising, hitting the highest level since November 19, 2005.
Hang on till Friday.
Recently, one of my customers had $15,000 stolen from her checking account. The incident happened about three weeks after her board package had been submitted to a co-op board. The thief allegedly called Citibank with sensitive personal information such as her bank account numbers, social security number, date of birth and address. The scam artist changed some of my customer's account information and was somehow able to walk into two branches in Westchester, two times each, and withdraw $15,000 in cash. She also opened a credit card with a $750 limit and charged it to the max. I am sure the impersonator's photo has been captured on a security camera somewhere and she will hopefully be caught.
It is certainly possible that this incident had nothing to do with my customer's co-op package. Maybe she left her wallet somewhere. Perhaps someone at her office picked up some of the information she was faxing to me or to her mortgage lender out of the fax machine. But it does seem to be a bit too coincidental. I was happy to report that I had already shredded all of her personal information as I do with all board packages. Out of the dozens of co-op transactions I have done, none of my other customers have had this happen to them.
A special fraud unit of the NYPD is investigating the situation & hopefully the impersonator will be caught. My customer has had her money returned to her, but this incident has taken a considerable amount of her time. She also has to worry about who has her personal information and when her identity might be stolen again.
I think this type of incident is fairly rare and there is no reason to be paranoid when submitting a board package. But it never hurts to be extra cautious!
It is important for buyers of co-ops to know who sees their personal information:
1. Their real estate agent and any assistants who help them compile board packages.
2. Their real estate agent's sales manager who gives the package a once-over.
3. The seller's real estate agent and their sales manager then reviews the package.
4. Some companies have a mail room that types and makes copies of board packages for them.
5. The buyer's mortgage lender.
6. The managing agent of the co-op board.
7. A messenger service if the board package is delivered via messenger.
8. The co-op board's screening committee, usually 3 - 6 people.
Unfortunately, I think that some co-op boards are not really educated on what to do with board packages once they are done with them. One board member admitted that she has a pile of them sitting in her apartment because she doesn't really know what to do with them. Many board members probably don't have shredders in their apartments. I wonder how many board packages just end up in the garbage?
After this incident, I realized that further steps are needed in addition to my just shredding my customer's information. We unfortunately can't just trust/assume that the brokers, messengers, board members, etc., will exercise the same care with others' personal information as they would with their own information.
So here are some actions you and your real estate agent can take in order to protect your personal information:
1. Black out with permanent marker all but the last four digits of bank account numbers on the *copies* of the board package. The original copy that goes to the managing agent does need to include complete bank account numbers.
2. Black out all but the last four digits of the social security numbers on all copies of the board package. The only place a SSN is really needed is on the credit report form that the managing agent uses to run the buyer's credit.
3. I've now decided to include a self-addressed envelope in each board package with a letter. The letter says something to the effect of:
Dear Members of the Board:
In order to protect my customer's sensitive personal information, I would be so appreciative if you would be so kind as to return his/her board package to me for shredding. I have included a self-addressed envelope and please send me your name and mailing address and I will gladly reimburse you for postage. Thank you so much for your consideration.
Even if board members don't return the package to me, I hope that the letter in itself will remind them of the importance of protecting prospective buyers' personal information. Thus far, I have submitted two packages this way. I hope both Boards respond favorably. Both managing agents have promised to try to help me to make sure my customer's information is protected.
I recently joined the Membership Committee of the Real Estate Board of New York City (REBNY). I hope to discuss with them the possibility of coming up with Standard Operating Procedures (SOPs) for brokers, managing agents, and co-op boards for protecting our customer's sensitive information. I am sure this issue is already on their radar, but it never hurts to have another person speak up!
A: This is Manhattan real estate, and this is wall street bonus season. When it comes to wall street bonuses, we must understand one thing: REVENUE vs INCOME. Bonuses are generally calculated using generated revenue, not income, which leads us to what happened in 2007! For the first half of 2007, revenues generated by the investment banks, brokerages, trading desks, and banks were very high! Then came the meltdown in mid July starting with the ABX indices signaling distress in the credit markets. Within a few weeks Bear Stearns started the credit crunch wave by announcing the failure of 2 funds. That is when the credit & secondary mortgage markets changed drastically. My point, bonuses will be granted this year; its 2009 that we will have to worry about!
When I first starting trading equities professionally in 1998, stocks were listed on exchanges in fractions. What I mean is, the level 2 trading quotes that the trading software accessed showed bids and asks in fractions. For example, when EBAY was trading around $100 a share, the bid would be say 99 3/4 and the ask would be something like 100 1/8. The spread between the bid/ask was 3/8's (often spreads got as low as 1/6 or teenies as we used to call them). This spread, wider as a result of the equity trading in fractions, opened up the opportunity to trade and exploit the spread. It also made stock movements much more volatile, and as a trader, volatility is a very close friend!
Then came decimalization around 2002 I believe, can't remember. Stocks no longer traded in fractions, and instead started trading in dollars & cents. So, that same EBAY trade that I described above would now have a bid / ask more similar to say 99.98 x 99.99, giving us a penny spread. With spreads so tight, stocks just didn't move the way they used to; and a crash from the dot com bubble didnt help either. The game was over in my mind!
Back to the discussion so I can relate the analogy. The derivatives trade of securitizing loans and selling them off in pieces on the secondary mortgage markets generated billions in revenue for these banks & brokerages. Now that the housing bubble popped nationally, risk has been re-priced, secondary mortgage markets are not functioning properly, liquidity dried up for mortgage backed securities, and the announcement of billions in losses and potential insolvencies, THE GAME IS OVER! How will these banks and brokerages generate the kind of revenue that they got used to generating the past few years?
Now, 2007 still saw at least 4-6 months of great revenue before the sh*t hit the fan and the game ended. The game is not coming back for a long time folks. So, looking ahead to 2008, we must wonder about the hit to generated revenue that these guys are going to take. And with a hit to revenue for a full 12 months, comes a hit to bonuses; 2007 was only 6 months of trouble, 2008 will be 12 months.
Which brings us to maintaining talent. As Goldman Sachs prepares to take over the world after being on the short side of the mortgage backed securities trade, competing brokerages and investment banks will be forced to pay out bonuses this year to keep their talent in house or risk losing them to the sharks!
From an anonymous insider I keep in touch with:
Looks like the real bonus cutting will be next year since banking revenues were so high in the first part of 2007 and the bonuses are calculated off revenue - not income. "Ultra-Luxury" retailers are still reporting good numbers for Christmas even though the same people who are doing the spending are saying they expect bonuses next year to be down significantly.Which brings us to the conclusion. Not only will 2008 prove a very difficult year for these guys to generate revenue anywhere near years before the credit crisis hit, but we are about to head into a period of layoffs as efforts to cut costs and restructure the company is a must to restore investor confidence and bully the stock price.
Some of the banks started paying a bigger percentage of revenues as bonuses to try and keep up with Goldman - in the past they were paying 40-50% but it's up 10-20% in some cases. That can't last for long. Investors must be furious. They will have to cut headcount to get that "% of revenue" number back down.
In my opinion, its next year's bonus season that will prove to be much less than expected as generated revenue is way down in this post-credit crunch world. Add in the fact that job losses are inevitable, and you start to think reality rather than fantasy. I'll leave it up to you to relate this scenario to wall street, the economy & New York City housing.
I welcome any comments regarding this topic, especially from those working at trading desks, investment banks, & brokerages!