Alt-A Checkup: Is Near Prime Next?

A: I do not want to ruin the early party that seems to be going on at wall street after UBS announced a staggering $19Bln write-down & Deutsch Bank announced $4Bln in write-downs; stocks seem to be betting that the end may be near!! However, I want to point you in the direction of a daily must read blog, Mish's Global Economic Trend Analysis, for today's discussion. Many of us do not have bloomberg terminals or access to front line information that many traders and investment banks have. But Mish shares with us the progression of deterioration in Washington Mutual's Alt-A books. This is consistent with discussions on UrbanDigs and elsewhere regarding the spread of problems to higher quality debt classes. This is not just a subprime problem.

As stocks figure out whether bad news is already priced in, my eyes are still on the credit markets and the spreading of delinquencies to other debt classes. Mish's blog gets down & dirty on WaMu's Alt-A mortgage pool and shows us what has been happening in the past 90 days; the trend is it's getting worse! In this credit world of no transparency, this is the first time I have seen a blogger go into this kind of detail of a bank's mortgage pool.

According to Mish's article, "WaMu Alt-A Pool Deteriorates Further":

I have been tracking a particular WaMu Alt-A mortgage pool for a couple of months. The pool is known as WMALT 2007-0C1.

January Pool Stats

* 19.3% 60 day delinquent or worse
* 13.15% Foreclosure
* 1.83% REO

February Pool Stats

* 22.69% 60 day delinquent or worse
* 11.62% Foreclosure
* 3.56% REO

March Pool Stats

* 25.3% 60 day delinquent or worse
* 13.35% Foreclosure
* 4.44% REO

Note the above progression. This cesspool from May of 2007, was 92.6% originally rated AAA, even though loans had full doc only 11% of the time. In less than one year, the pool was 25.3% 60-day delinquent or worse. Of that 25.3%, 13.35% is in foreclosure and 4.44% is bank owned real estate.

Obviously the stat that pops out to me is the rise in '60 Day Delinquency Rate or Worse' from January to March. This is real people. Mish then goes on to discuss how Moody's downgraded the ratings of 279 tranches of 27 Alt-A transactions issued by Lehman Brothers; with an additional 97 tranches placed on negative watch (story).

I am not looking at the stock market as a sign of the health of the credit markets or delinquency trends and whether the problem is spreading; this is a very volatile market and you will see big swings both up & down. I just question how strong this rally could really be when we see info like this, and headlines like the following:

Deutsche Bank to Write Down Record 2.5 Billion Euros (Bloomberg)

Deutsche Bank AG, Germany's biggest bank, will write down 2.5 billion euros ($3.9 billion) of loans and asset-backed securities and said markets are deteriorating.

"Conditions have become significantly more challenging during the last few weeks," Deutsche Bank said today in a statement.

Leveraged Loans Fall by Record as Bank Losses Deepen (Bloomberg)

Prices for high-yield, high-risk loans in Europe dropped by a record in the first quarter, causing bigger losses for banks and hedge funds. Investors have abandoned the market for leveraged loans on concern corporate defaults will rise because of higher borrowing costs triggered by the U.S. subprime mortgage crisis. Banks in Europe are holding 58 billion euros of loans they planned to sell, according to Standard & Poor's.

"What's largely driven the deterioration is forced selling by hedge funds and market-value funds," said Paul Watters, head of loan and recovery ratings at S&P in London. "Some banks are doing what they are required to do by marking their portfolios to indicated secondary market levels. For now, those are largely unrealized losses."

Banks Face Biggest Crisis in 30 Years, Report Says (Bloomberg)

Credit market turmoil poses the most severe crisis for banks in 30 years, surpassing Black Monday in 1987, the Asia currency crisis and the burst of the dot-com bubble, Morgan Stanley and Oliver Wyman said in a joint report.

Revenue from investment banking may drop 20 percent in 2008 before a further $75 billion in markdowns, analysts led by Huw van Steenis said in a note to clients today. "The industry is facing the most severe investment banking crisis in 30 years," the analysts wrote in the report. "Global securities markets are in the midst of profound cyclical and structural change."

What are we really celebrating here? $23Bln in write downs and Lehman selling $3Bln in preferred stock when the CEO states there is no liquidity problem? Cmon now, is anyone else tired of this? Lets at least keep a straight head about what is still going on out there.

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Why Manhattan Price DATA Will Stay Strong in 2008

A: The power of the data! Now that Bloomberg came out with a 'Manhattan Slowdown' article that rippled across the blogosphere, I want to explain to you why I would NOT expect future data reports to show a slowdown in prices! The reason is in the new development closing dynamic and the fantasy of perceived timing; deals signed 10 months ago that close two weeks ago are considered recent and reflective of current market conditions. If you want to monitor the health of the current NYC real estate marketplace, stick to watching sales volume and inventory trends as a reflection on buyer confidence.

NOTE: I wrote this two days ago after I read the Bloomberg piece, not after today's Q1 report; so I referenced the older Bloomberg article to make my point.

If a contract was signed in 2007 for a new development that closes 12 months later in 2008, the price data reported will reflect the market conditions for when the original contract was signed! However, human nature will perceive the future report as current and in line with the market at the time of the reports publish date! No this is not an episode of LOST with Desmond jumping back and forth through time! Its a simple acknowledgment that: PRICING DATA THAT IS YET TO COME WILL REFLECT PRICES PAID FOR NEW DEV CONDO'S MANY MONTHS EARLIER!

Because of this dynamic and the fact that Manhattan has plenty of new construction deals waiting to close at high prices per square foot, if we are to grasp the health of the CURRENT market we should look at inventory and sales volume trends! Otherwise we will likely be confused by stale misleading data.

Let me show you an example of what I mean. Did you notice that the Bloomberg article published Monday showed the following trends:

a) Year-over-Year Sales Volume SLOWED 6.4%
b) Inventory ROSE 15% Since Start of Year

...leading us to believe that the market was softening, sales volume slowing, and inventory rising. Yet, the article later stated...

c) Property Prices ROSE 14% to Median $850,000
d) Condo & Co-op Prices ROSE Throughout Year, UP 6.4% in Q4 from year earlier

...leading us to believe that prices are in the process of rising!

So what gives? How could prices rise as sales volume slows and inventory rises? The reason is because the prices component is NOT registered until after the deal closes; some 1-3 months generally from contract signing! For new development deals, a contract can be signed over a year in advance of the closing. Which leads me to tell everyone that 2008 will see the closings of thousands of new development units that were signed into contract in 2007!

QUESTION: How will the prices paid, especially the price per square foot paid, ultimately affect future quarterly price reports for Manhattan?

ANSWER: Positively! As new dev deals close, it will help to offset any weakness that may be occurring in the current existing resale marketplace causing a misleading and mysterious report that probably will not be in line with the sales volume & inventory trends at the time!

So, given the method of collecting closed sale prices, I would expect future Manhattan price data to remain strong as inventory & sales data (especially contracts signed data) more accurately represents the current marketplace at any given time!

Lets face it, sales of 15 CPW & The Plaza skewed last quarters pricing report and gave a very bullish yet misleading picture of our marketplace. According to Bloomberg's article, "Manhattan Home Prices Rise on Sales at Plaza Hotel":

Manhattan apartment prices rose 6.4 percent in the fourth quarter, boosted by sales at two new luxury developments, the Plaza Hotel and 15 Central Park West.

"A lot of the gain has to do with the unique circumstances of these two major buildings closing about the same time," said Gregory Heym, chief economist for Terra Holdings LLC, the closely held company that owns New York brokers Brown Harris Stevens and Halstead Property. "The high-end properties really pushed up the average price."

Apartments at the Plaza Hotel and 15 Central Park West, which accounted for 7 percent of total condo sales in the quarter, sold for an average $6.95 million, Heym said. The median price of a Manhattan apartment, including condominiums and co-ops, was $850,000, compared with $799,000 in the same period in 2006, according to Radar Logic Inc., a New York real estate data firm.

Now we have hundreds of new developments that will be closing deals in 2008, that will do a similar thing!

Jonathan Miller, of Miller Samuel & Matrix blog, chimes in on this topic:

"The record prices we saw in the current quarter don't reflect the "on the ground" activity of the market this quarter due to the high number of closing within new developments that actually went to contract last year. There was an unusual weighting of high end properties that skewed the mix of sales this quarter. The barometer of the market for 2008 will be largely measured on 3 factors: number of sales, listing inventory and days on market. Sales activity leads price direction."

Today's NY Times story, touches on this exact phenomenon after reporting on Manhattan real estate's Q1 report:

Sales in the first quarter were strong in part because nearly a third of the apartments that closed were for condos that buyers signed contracts for at least a year ago, according to data tracked by Brown Harris Stevens and Halstead.

So, when a broker or a friend says to you, "yea but look, Manhattan prices are up 15% since last year..." you can brush that off as just babble! We are at now now! If you want to know what is going on now, stick with sales volume and inventory trends!

PS: Now you know why I am trying to track contracts signed & new listings! Lets try to stay ahead of the curve so that we can expect the unexpected!!

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Real(i)ty Check: Brooklyn Revisited

With the flowers starting to bloom and the song birds all atwitter I decided to get a few brokers on the line for an update on the kickoff of spring selling season in Brooklyn. I was a little surprised by how much activity there seemed to be, but I got a strong sense that price concessions are helping rev up demand.

Joan Goldberg, of Brown Harris Stevens, has been a brownstone owner for over 20 years, she sells real estate in Brooklyn Heights, Dumbo and Fort Greene as well as other areas of the borough. She called me from Arizona saying:

The season has started off busy. I'm on a mini vacation break and I still can't get off the phone. A lot of buyers are out in the market and they seem serious. The stock market acting better recently may be a factor. People who are looking for houses are not as affected as the low end. One bedroom buyers are much more careful. I'm not big in condo sales. I have not seen any noticeable impact from tighter financing, but some one bedroom buyers are asking to put down less money, but can't do that in a co-op. My guess is they may have been condo buyers moving over. I don't see any lessening of interest in any particular neighborhood, things are busy in all my markets.

I spoke with Jerry Minsky, a 23-year veteran broker in downtown Brooklyn and the surrounding areas. Minsky works as an SVP for Corcoran, but considers himself a one-man sales machine, as well he should. According to Corcoran's web site he is consistently a member of their Multi-Million-Dollar Club for outstanding sales volume. Here is what Minsky had to say about the downtown Brooklyn market:

The market is at a slow point the likes of which I have not seen since I was a buyer back in the early 80s. I have had 2 sales this week, but prior to that I hadn't had 2 sales since August. We just sold a two bedroom unit on Pacific Street in Boerum Hill, a restored townhouse condo conversion. My associate converted a renter to a buyer for this 1,100 square foot $982,000 unit. It was on the market for one week. I was shocked. A week ago Friday, a Bear Stearns employee signed a contract for $625,000 for a Bedford Stuyvesant brownstone. It took me 90 days to sell this property where it used to take me 30. I call it like I see it and I think we are at the beginning of the end of the down market. I saw it early back in August, where things just felt wrong in my gut. Now right or wrong I will go on the record saying I think the worst is behind us. It's not all rosy mind you, but things should start to get better. Real buyers out there should not sit on the sidelines for too much longer.

With regard to downtown Brooklyn and environs specifically Minsky noted: "Brooklyn is on the map and will come back very strong once the fundamentals of the economy really really stabilize." As for other secondary New York City markets he says "Up and coming markets always come back more slowly."

Over in Williamsburgh, Frank Castoria of the eponymous real estate firm, who has had a presence in his market for 30 years, says:

The market is somewhat overbuilt right now. Everything will eventually sell, but with the economy slowing down, I see the next 2 years somewhat of a correction or slowdown. Prices have come down 10 - 15% on townhouses and condos more like 20%.

My buddy and fellow Union College alum Jeff Winter, co-owner of Coldwell Banker Innovation Real Estate in Park Slope, concurred with aspects of both Minsky and Castoria's observations on their markets.

The condo market is overbuilt and the poorly constructed stuff will sit as sponsor unit rentals until the market recovers and they put them up for sale again. But business overall appears to be picking up. The weather is better and people are coming out to look. Everybody needs a place to live! I had three offers on the same property fall through right after the Bear Stearns meltdown. But people are back making offers on things if they are priced correctly. I have a $1.2 million offer out on a $1.5 million property and the seller is considering it. The good thing with sellers is I don't have to beat the information into them now, they realize that the market has changed. I am doing more due diligence on buyers than I ever have, I need to know if they can close. The problem on the residential side is you never had issues with financing, you could always get a second mortgage or something. Now with the credit crunch it has reduced the funnel of buyers down from a flood to a trickle. So today it's about real buyers and real sellers.

Winter, who has a strong presence in the commercial market in his area as well, offered that:

"On the commercial side I have a mixed use building on Prospect Park, which the seller priced at 15.5x rent roll, but he's seriously considering an all cash offer at about 13x. I have had to put some developers doing rehab projects in touch with hard money lenders. They had their fingers in too many pies and are now looking to cross collateralize the properties they have equity in to borrow money and support project debt payments."

I talked to JJ Katz of Heights Properties, who has been in Brooklyn real estate for 11 years, seven of those in Crown Heights. This market is more affordable for young people than Park Slope or Prospect Heights and the credit crunch seems to be weighing on this market a bit more. Spring has apparently not really started in Crown Heights, but that may be in part due to the reluctance of the Hassidic community to entertain sellers or get very involved in shopping for a home before completing the traditional spring cleaning of their homes ahead of the Passover holiday. According to JJ:

We are feeling the mortgage crisis, banks are a lot more difficult. This is for qualified people, putting down real money, decent credit and reasonable income and the banks are checking every little thing.

During our phone call JJ had to drop off because of a last minute glitch with a financing commitment. Then he called me back. "There were six things the bank said they needed when they made the commitment. All of a sudden they need other things. One little thing was missing on the application and it wasn't even relevant." As for the state of the market, JJ remarked:

A lot of properties are on the market as a lot of people are believing that the market is going to drop even more. As far as buyers, no one wants to be the last guy to pay a high price. In the past you never saw more than 3 houses for sale in the Hassidic neighborhood,now there are many and they are sitting for four months, five months.

As far as the condominium market goes JJ opined that:

In the past two years there was a boom in condo development. Six to eight months ago I sold a piece of land to some developers. The buyers sat for a while, but are now building to get the foundation in the ground before the sunset on 421A. They're hoping that in two years when they are done building things will be better. A lot of condos are sitting empty as prices have fallen below the levels developers were looking for. Three development projects have turned into rentals, and one development of 33 units at the corner of Lefferts Ave and New York Ave is in pre-foreclosure.

So there you have it. Despite financing conditions being sub-optimal, spring has sprung in Brooklyn and buyers are out looking. Properly prices product - generally reduced from recent highs - are moving. The low-end buyer who may be less financially well endowed is suffering the brunt of the credit crunch, along with some developers who were late to the party and penciled in unrealistic sell out numbers. Makes sense, no?

Photo by Ruby Washington - New York Times

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Is B/D Adjustment the BLS's 'mark-to-model'?

A: Today's jobs report was downright ugly but not unexpected. This all but assures that June 26th's Q1 GPD advance number will be negative and show continued economic contraction; any final Q1 # below 0.6% would mark the recession as starting in Dec 2007. But it's Mish's blog post today that delves into the jobs report that really made me think. How accurate is the data that is being provided to us?

Lets start here. The BLS B/D Model page states:

* There is an unavoidable lag between an establishment opening for business and its appearing on the sample frame and being available for sampling. Because new firm births generate a portion of employment growth each month, non-sampling methods must be used to estimate this growth.

Which brings me to this quote from Mish:

"Virtually no one can possibly believe this data. The data is so bad, I doubt those at the BLS even believe it. But that is what their model says so that is what they report. Just as there is mark to model in the investment world, there is mark to model in the BLS world."

What he is talking about is what Barry Ritholtz has been stating for years; the Birth/Death Adjustment (B/D) suggest that construction added 28,000 jobs, leisure & hospitality added 44,000 jobs, and the total B/D adjustment was 142,000 net new jobs created in March. Are you kidding me? Now, remember this is a MODEL that assumes these jobs were created, and then adds it into the report that we see! Hence, the reference by Mish that the BLS is 'marking to model', rather than 'marking to market' to use a term that we all now can relate to!

The meat of the jobs report is this (bolded items are jobs LOST, unbolded are jobs ADDED):

* 51,000 construction jobs were lost
* 48,000 manufacturing jobs were lost
* 12,000 retail trade jobs were lost
* 35,000 professional services jobs were lost
* 18,000 government jobs were added

This would explain why on main street the pain seems a lot worse than the historically low unemployment data shows. So, what is a more realistic gauge of the unemployment rate? Where are we if it is not 5.1% or so?

Mish goes on to declare:

"If you start counting all the people that want a job but gave up, all the people with part-time jobs that want a full-time job, etc., you get a closer picture of what the unemployment rate is. The official government number is 5.1% but Table A-12 suggests it is closer to 9.1%. I believe that is on the low side.

Regardless, the trend in unemployment is now clear, it is rising sharply. Expect to see 6% this year. This report was a disaster."

Barry Ritholtz provides a chart on The Big Picture (courtesy of Econoday) showing us the NonFarm Payroll's Monthly & Yearly Change:

Look at the trend, and the fact that we are looking back in these reports. It is clear that we are slowing, that we are most likely in a recession right now, that GDP in Q1 will show further contraction confirming this, and that unemployment is deteriorating at a faster pace. The next few months will likely show a continued rise in unemployment and jobless claims, as the damage from the credit storm reveals itself. The question that is being wondered right now is, how severe will the slowdown be! Obviously, stocks are betting that we are closer to the end and rallying on the notion that we are about to enter the exiting phase of the recession!

In a healthy economy, the US adds about 150,000 jobs per month. So far for the first three months of 2008, we have lost a total of 232,000 jobs! That is why SF Fed President Janet Yellen declared that the US economy has 'all but stalled and could contract' in the first half of 2008 (story via Reuters):

"It appears that growth in consumption and business investment spending has slowed markedly after years of robust performance, and, as a result, the economy has all but stalled and could contract over the first half of the year."

Expect more weak economic data ultimately showing this recession's birthday for a few more quarters, as reports pick up on credit crunch's damage. Question is, how bad and for how long!

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Derivatives Tail Wagging The Financial Market Dog

A: I'm going to keep this post a simple link out + few excerpts to what I considered to be an amazing read. ContraryInvestor.com discusses market observations and explains, with tough clarity (read it twice if you have to), why the equity markets are being driven by the derivatives unwinding and will continue to be during the prolonged cycle of deleveraging. This is not a post regarding the state of Manhattan real estate. This is a link-out for anyone trying to understand the credit markets, those who understand credit default swaps, structured credit traders, hedge fund traders, equity traders trying to understand the seemingly irrational behavior of recent stock movements, and anyone who is attempting to understand the derivatives effect on markets. A great read.

ContraryInvestor.com: WAGGING THE DOG

Few excerpts:

"...the evolutionary character of the credit markets is THE issue to focus upon, an issue that is clearly driving both broader financial market and real economic outcomes of the moment. It's our belief that a credit cycle of really generational proportion has now given way under its own weight to an elongated process of systemic deleveraging. A process that has really just begun."

"What occurred in the week after the Bear Stearns debacle was simply the dream levered hedge portfolio (long gold, log oil, long commodities, short financials, short brokers, short discretionary stocks, short the GSE's and housing related stocks) of the last six plus months being turned completely on its head. And what it clearly suggests as one potentially very meaningful driver of performance during that week was levered speculating community leverage unwinding. A leverage unwind that is not finished. As we're sure you already know, if indeed you were a levered fund either choosing or being forced to unwind a portfolio perhaps due to the heavily increased margin/collateral capital calls from the prime broker community in the wake of Bear's sudden submergence, the influence of collective levered portfolio unwinding (raising liquidity) might have looked exactly as is detailed in the table above. To delever you would have sold what you were long and bought what you were short. So although the CNBC fan club may indeed have tried to celebrate the big bear market bottom for the financial markets, what we may have indeed experienced is simply more significant major macro credit cycle reconciliation - levered investment position unwinding (the hedge and levered speculating community)."

"Alright, fine, so how does the credit default swap market relate to equity market sector volatility of the moment? It is absolutely clear that the "acquisition" of Bear avoided triggering Bear Stearns related credit default swaps and swaps against CDO, SIV, etc. positions they may have held (assuming a potential Bear BK would have forced a mark to market event), which would indeed have happened had Bear formally entered bankruptcy and their bonds/debt became potentially very meaningfully impaired. There is simply no question whatsoever in our minds that this was the key reason a theoretical acquisition of Bear HAD to happen. Remember the details. JPM took out Bear for a couple of hundred million at the headline $2 per share initial offer level, but concurrently announced it was going to need to charge off about $6 billion as a result of the so-called acquisition. Even at the ultimate $10 level (which is basically shut up money offered to help prevent litigation, which might also have led to asset price discovery) JPM was "telling" us Bear was worth far less than zero by the charge-off number alone. Of course the truth simply had to be that if Bear had filed bankruptcy and the credit default swaps written against their bonds/debt/asset positions had been triggered, the credit default swap liabilities in the market would have been well north of a $6 billion hit to whomever had written those Bear specific CDS contracts. Well north. And that simply could not have been allowed to happen."

"Now put yourself in the position of a meaningfully levered hedge fund who had purchased CDS contracts against Bear credit vehicles. You had levered up against what was continually becoming very profitable CDS positions or credits as Bear was heading nose first into the tarmac. Who knows, you might have even increased the position prior to the weekend based on info your fellow good buddy hedgies were feeding you about Bear's imminent demise. When those long CDS contracts against Bear credits/positions went to zero virtually the Monday after the JPM acquisition announcement, all you were left with was massively deflated CDS asset values relative to the prior Friday and still in place leverage. So what do you do when you get up in the morning on Monday after the Bear acquisition announcement (assuming you slept Sunday night, that is)? You start delevering (see chart above for asset price performance 1 week after Bear Stearns/JPM deal announced). You start unwinding in place inflation themed trade positions to raise liquidity. You sell what assets you can (gold, oil, commod's, etc.) and get less short those sectors you have heavily shorted (financials, brokers, consumer, etc.) to raise liquidity and decrease total leverage against a now immediately diminished asset base."

Read the whole article here if the above excerpts are your cup of tea in the ongoing quest for understanding what may be going on in this very complex credit market cycle.

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Renovating To Rent: Keep Costs Low

A: For any business decision its easy to understand that to make the most money you need to spend the least amount of money (keep expenses low) while bringing in the most amount of money (keep revenue high) as possible. Amazing how smart I am right? But when it comes to Manhattan real estate and renting out your apartment for the most money, keeping costs low becomes ultra important. And that means spending the LEAST amount of money possible to get your apartment into renting shape that will bring in the most revenue possible. Here's a guide.

Its a good time for landlords in NYC. We are getting close to the most popular move in date in Manhattan, September 1st, and rental vacancy is under 1% (**this post was originally published in August 2007). Demand is high as the rental pool increased with so many potential buyers priced out of the real estate market either because of rising rates, too little options to choose from, or prices just too high. Add it all up and there are plenty of people looking to rent in New York City.

But with management company's owning most of the rental inventory leaving your competition with fully renovated new units to rent out at top dollar, what is an independent investor to do to maximize rental revenue without spending tons of cash fully renovating their sublet friendly property? In a nutshell; floors, appliances, paint job, cleaning.

Unless your place is an ultimate dump, chances are you can salvage your property and ask similar rental premiums that most managed buildings do without having to fully renovate the apartment. Lets break it down by order of priority.

1. Refinish Your Floors - Floors are usually the first thing buyers or renters notice when they enter a property. I can't tell you the difference in 'aura' that a newly refinished floor provides to a buyer/renter as opposed to a lifeless stale floor that drains life from the apartment. The cost of refinishing a floor is so low that doing this renovation makes alot of sense.

For approximately $2.25/sft (more if your floor is damaged or tiles missing) you can have your old lifeless floor sanded, stained, and poly'd as long as there is enough width on the existing floor to withstand the sanding phase. Most floors have about 2-3 refinishing lives in them.

I like to use Marc at Floor Works New York as I have worked with him a number of times and so far every one was overly satisfied with the quality of work. The last time I used them was for an exclusive sales client that listened to my advice when I consulted on what to do to prep the property for sales marketing. Here is the Before & After shots so you can see the difference. In the end, we got a bidding war in 2 weeks and a contract signed a week later.

This apartment, 314 W 56th Street - Unit 1A, was 550 sft and cost aprox $1,000 to fully refinish the hardwood floors.

2. New Appliances - If you ever gone through a full kitchen renovation, you know all too well that it is not cheap, it is not quick, and rather, it is a big headache! Assuming your cabinetry and counter tops are in at least OK shape (no granite counters needed), you will be amazed at how much better your kitchen will look if you simply replace ALL the appliances. Go with stainless steel as long as it fits into the look and feel of your kitchen. They look better and won't show wear and tear as much as white appliances.

Buying new appliances is not as expensive as one would think. The going rate for Frigidaire stainless steel appliances are as follows:

Frigidaire Top Freezer Refrigerator - Aprox $949

Frigidaire Stainless Steel Gas Range - Aprox $900

Frigidaire 24" Granite Grey Interior Dishwasher - Aprox $549

Frigidaire 1.5 Cu. Ft Over Range Microwave Oven - Aprox - $369

So, all in all if you were to stick to the same company and try to get some sort of deal (which you probably can) you are looking at approximately $2,800 to replace ALL your appliances with brand new stainless steel ones. Compare that to the cost of fully renovating the kitchen (say $25,000 + 2-3 months of work) and you see why its a great low cost option for landlords looking to make their property more rentable on the open market.

3. Painting - A fresh coat of paint (white or other neutral color) is a must for any landlord prepping their property for rental market. Not only do custom dark colors make any apartment feel a bit smaller, but it may not be the taste of the potential renter that comes to view the apartment. Since you can't assume that renters have the capacity to visualize the place in their own custom colors, stick to plain white for marketing purposes. Plus the new paint smell gives renters the impression that the apartment has been worked on and is being renewed for the new occupant!

Hard to estimate the cost of painting but for my current 900 sft 1BR apartment I paid $600 to one of the porters to paint it with my customized colors and it came out great. A small price to pay for any landlord seeking to make their place into a blank slate for marketing purposes!

4, Cleaning - For heavens sake, please make sure your property is CLEAN before you bring any potential renters in. Especially the windows, kitchen and bathrooms! Hire a referred cleaning company (I am still looking for a good company to use and refer) to deep clean the property before any showings take place. Hopefully the property is empty so you don't have to worry about constantly cleaning up.

Overall, it should only cost $100-$300 or so depending upon the size of your property for deep cleaning. If you have the floors refinished than make sure you tell the cleaning company NOT to touch the floors! They might do more harm than good. Ideally, you want to refinish the floors first and then deep clean last!

For under $5,000 you can really turn your apartment into great renting shape that should be able to get you more money at the end of the day! Keep in mind that most management companies do renovate a unit before they re-rent it out so any potential renters that do come to see your place will compare it to fully renovated units they have already seen. The goal to you is to make yours at least comparable while keeping costs as low as possible!

Originally Published August, 2007

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NAR Releases Pending Home Sales & Adds Spin

A: What else is new right! Anyway, lets take a look at this leading indicator in the pending home sales and see how activity is doing across the country as prices fall. As usual, the NAR puts their positive spin on the number as Lawrence Yun now expects a strong final quarter of 2008; 'The slip in pending home sales implies we're not out of the woods yet, though an era of successive deep sales declines appears to be over,' Yun said. Ahh, very comforting Mr. Yun!

February Pending Home Sales (via Bloomberg)

* Down 1.9% from January
* Down 21.4% from year ago

According to Bloomberg:

The number of Americans signing contracts to buy previously owned homes declined more than forecast in February, indicating the U.S. real-estate recession will extend into a third year.

The National Association of Realtors' index of signed purchase agreements decreased 1.9 percent to 84.6, the lowest reading since records began in 2001, the group said today.

Economists had forecast the index would fall 1 percent from an unchanged reading previously reported for January, according to the median of 29 estimates in a Bloomberg News survey. The pending figures are considered a leading indicator of resales because they track contract signings.

Not much surprise here. Lets do some word math: DECLINING CONFIDENCE + SLOWING ECONOMY + JOB INSECURITY + TIGHTER LENDING STANDARDS + RISING RATES = SLOWING SALES VOLUME

More on what Lawrence Yun said via FXStreet.com:

NAR's chief economist, Lawrence Yun, said existing home sales could start to show a sustained increase within a few months. "We're looking for essentially stable sales in the near term, before higher mortgage loan limits translate into more sales in high-cost markets," Yun said. "The wider access to affordable credit should increase sales activity notably this summer as pent-up demand begins to be met."

OK, first of all the higher loan limits only help out a subset of buyers and the GSE's are charging a 2 pt fee for access to this expanded product whose rates are high to begin with! A 2 pt fee on a loan is 2% of the loan amount; so on a loan of $600,000, you must cough up $12,000! Second, the mortgage markets are contracting and still in distress; I'll go into this in a moment. Fewer lenders are offering fewer loan products and requiring tighter standards before committing to the loan. To state that 'wider access to affordable credit should increase sales activity' is very misleading and in my opinion, just wrong altogether.

We are correcting and the process continues. The recession is most likely in its very early stages and to suggest that the recovery will come in the very near future is highly unlikely. The credit cycle is still unwinding and the sector is still re-structuring to the new world of capital preservation and deleveraging. An example of this would be Washington Mutual's exit from the wholesale mortgage business as part of the terms of the deal of their $7 billion capital raising effort.

As the lending industry corrects itself after the credit crisis disease spread so rapidly, we are starting to see fewer lenders, tighter underwriting standards, and rising rates; especially in jumbo market. This is hardly a dynamic that will assist in promoting sales activity as we go through the recession. According to Bloomberg's article, "Citigroup, Wells Fargo May Loan Less After Downgrades":

Bank holding companies including Citigroup Inc., Bank of America Corp. and Wells Fargo & Co. have the thinnest safety cushion against losses in seven years.

The margin may erode further in coming weeks. Credit ratings on $704 billion of bonds have been cut this year following the collapse of the U.S. housing market. Sheila Bair, chairman of the Federal Deposit Insurance Corp., said last week that the downgrades may compromise bank capital ratios enough that some of the largest institutions will no longer be considered well capitalized.

The biggest danger to the economy is that to preserve their ratios, banks will cut off the flow of credit, causing a decline in loans to companies and consumers.

Let's at least understand the environment we are in and ask the right questions when it comes to forecasting a recovery. It amazes me that all those that kept saying the US will skirt a recession and now admit that a recession is highly likely, are already discussing the recovery! So, those in denial went from DENIAL ---> ACKNOWLEDGMENT ---> FORECASTING THE RECOVERY virtually overnight! Must be a nice frame of mind to have!

Lets get through the recession first before we can seriously discuss the recovery in housing! We are about to enter a world that is very unknown to all of us; so lets not make any predictions based on recent history where access to credit and easy money was no problem!

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Raised Limit Conforming Loan Explained

A: A great topic that is often misunderstood! With the new jumbo loan limit being raised from $417,000 to $729,750, expanding what counts as conforming and therefore a lower rate, cheers are being hollered that this will save the markets, yay! Not so fast. Now that the plan has recently took effect, some buyers who fit into the subset of this plan and can take advantage of the conforming raised loan limit, are finding that the rate is higher than normal conforming loans? What gives? The answer lies in a little 2 point fee that the GSE's are charging for this raised limit product and is being priced into the rate; therefore making the raised jumbo loan limit having a raised rate as well!

From one of my anonymous mortgage insiders that I know, trust, and works as a loan officer at a major bank:

Rates for the new limits vary depending on product. In this example, I will use a 30 Year Jumbo Mortgage vs. a 30 Year Raised Limit-Conforming Mortgage, in Manhattan with a loan amount of $700,000 - on a Purchase transaction.

30 Year Raised Limit - Conforming: 6.875% @ 0 points
30 Year Jumbo: 7.375% @ 0 points

Keep in mind that, under the new limits, CO-OP's are not allowed any financing; They have to be financed under traditional loan limits. For example, on a co-op purchase with a $417,000 loan amount, a conforming mortgage currently yields a rate of 5.875% @ 0 points.

The fee for doing a loan under the new limits is 2 points, but that fee gets built into the pricing of the rate.

No matter what the loan limits or products are, strict underwriting is a standard in the current mortgage environment. There is very little margin for error, and overall banks are taking a very conservative approach when it comes to lending money.

**Also please note that the rates quoted above are as of today, Tuesday April 8th, 2008, and are subject to change.

The key phrase is: The fee for doing a loan under the new limits is 2 points, but that fee gets built into the pricing of the rate. Take a look at the conforming rate of 5.875% compared to the raised conforming loan rate of 6.875%! In this case, for a loan of $700,000 and zero up front points, the two point fee translates to a 1% HIGHER RATE!

The new raised limit rate is better than the jumbo rate, but still misleading given the announcement of the stimulus plan back in January. This explains why the rate is higher for any buyer who tried to take advantage of the jumbo limit being raised! There is no such thing as a free lunch! Two points is in essence 2% of your loan amount that will be built into the interest rate (not sure of exactly how) over the course of the loan.

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Inside The Citigroup Leveraged Loan Asset Sale

A: A quick check up into creditville, a not so nice place to call home. I got an email from a UrbanDigs reader telling me about the Citigroup asset sale plans and saying that this is a sign of the bottom. He went on to say, if Citigroup unloads their bad assets, it will free up cash and lending environment will improve. I guess in theory this sounds logical, but my interpretation of the Citigroup plans is much different; they had NO CHOICE, must raise capital, and what they sold off is only 25% of their total leveraged loan portfolio which has nothing to do with toxic mortgage backed securities still held on their books!

When a bank or brokerage has to sell stock (whether it be common shares or preferred; hey WaMu how r u!), that is a BAD sign and a clear sign that the firm is in need of cash and fast! Sure, the bulls can spin anything to be a positive, and the knee jerk reaction will be a positive one since the alternative outcome is bankruptcy or forced sales of assets at very low prices (remember BofA's cash injection to CountryWide when shares were at $18, and rallied to $23 on the news?), but ultimately it will prove to be a sign that the firm is in trouble! Which is why they need the cash to begin with.

We are entering a period of time where fund-raising will be necessary on a grand scale. Get used to it. Last Friday it was Washington Mutual, today it is Citigroup. Lets understand what Citi really did.

Citigroup is selling off about $12 billion in leverage loan assets to a group of private equity firms. Now these assets are only 25% of one sector of assets that is hurting Citigroup; Citi's leverage loan portfolio has about $43 billion worth of assets. Leveraged loans are the asset class that Citigroup has as part of its stake in the LEVERAGED BUYOUTS business! This is not mortgage backed assets! Which brings me to the point that was raised many many times before. This is NOT a subprime problem! I wrote about cov-lite leveraged buyout deals being a future concern way way back in June of 2007, in my post titled, "Buyout Boom Brings Reason To Worry", as I started to focus content on the credit crisis:

My Point - Forward thinking. I am by no means an expert of leveraged buyouts, credit risk, derivative products, cdo/abx markets, etc.. However, it doesn't take an expert to see how the industry adapts to continue to be able to lend to support such massive buyouts in the private equity sector. I'll repeat this again --> Right now you are seeing an environment that is a result of years of ultra cheap money and tons of liquidity. What is yet to be seen is the effect of globally rising interest rates to levels we see today; that will take 1-2 years. For the near future, I don't think the end result will be that bad, in fact I think the environment will remain bullish for some time. However, red flags are waving for the years to come when we will be able to look back at how many of these massive buyouts were successful, and how many caused major problems to banks and other lenders.

Well, Citigroup is selling off 1/4 of their leverage loan portfolio at a discount of 90 cents on the dollar. But the amazing thing is that they are giving a loan on this sale! Isn't that incredible! Citigroup is actually getting only a portion of the $12 billion in assets in cash, and is providing a loan for the rest of the sale to the group of private equity firms! This removes potential write-downs for 1/4th of their total leveraged loan asset holdings. It does not prevent write-downs on other debt holdings. According to Bloomberg:

A sale to the private equity firms would shield the bank from further declines in the value of the debt, said the person, who wouldn't be identified because negotiations are private. The loans are part of the $43 billion in financing that Citigroup agreed to provide for leveraged buyouts last year before credit markets froze and saddled the New York-based company with hard- to-sell assets.

"As a Citigroup investor you won't have to worry about more mark-to-market writedowns on these loans," said William B. Smith, senior portfolio manager at New York-based Smith Asset Management Inc., which oversees about $80 million, including about 66,000 Citigroup shares.

Now if we take a step back and look at this credit crisis and the problem of toxic waste on the books of banks and brokerages, this sale proves that the problem has spread to other debt classes; something I have discussed ad nausem on this site. The real problem areas continue to be subprime, alt-a, HELOC's, credit cards, COSI, COFI, option ARM's, commercial, and auto loans. This deal involved leverages loan assets, which was sold to private equity firms using, drum roll please, you guessed it....leverage! Citigroup, come on down, you are the next contestant on THE PRICE IS RIGHT!

Ah what a world we live in. If this is a sign of anything positive, it would have to be that there are buyers out there taking on some forms of troubled debt; that helps. But in no way, shape, or form does this save Citigroup and in my humble opinion is a signal of the necessary capital raising efforts that will happen over the next few quarters; one could actually argue that the leveraged loan assets were the ONLY troubled assets Citi could find buyers for! Expect plenty more rounds of asset sales and fund raising efforts before the credit storm dies out; and at some point investors will realize that this is dragging along way longer than they expected.

Oh by the way, Citigroup is expected to write-down another $17 billion when they announce first quarter earnings (story via FinancialWeek). Yep, the end is clearly so close! We haven't even starting discussing the $40+ trillion worth of credit default swaps that are out there; which Warren Buffet described as Financial Industry's weapons of mass destruction!

NYSE: C current trading UP 1.1%, or $0.24

ADD ON @ 1:25PM: Mish's Blog references Minyanville's Mr. Practical's response (no source that I can find) to this mis-understood Citi $12 asset sale:

As investors bid up the Citigroup (C) stock price early on the news that the bank sold $12 billion of bad loans at not too much of a discount, perhaps they should look closer at the deal.

In order to get that price, C had to agree to indemnify the buyers of the first 20% of losses.

Citi obviously did the deal at this artificial price so that it would not have to mark down too significantly the rest of its portfolio. Not to let facts get in the way, but the price it sold the loans at, if you include the indemnification, is very poor. Risk is high and growing.

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Inventory Check: More of the Same, High End Price Cuts

A: The reason why I don't post content everyday about Manhattan real estate, is quite simply because there is not much change from my last update on the market! You can't day trade Manhattan real estate, and its not the type of marketplace that will be very strong one day and very weak the next! So, I can't possibly talk about the state of the market everyday and provide new insight with each passing day. With that said, I see much of the same. Buyer's are a bit nervous, seller's seem to be getting a bit nervous too since the Bear Stearns headline shock, sales volume is light and inventory seems to be rising & holding. There are deals to be found, and priced right properties are getting traffic and bids!

Before I continue, let me repeat as I always do, that Manhattan real estate is a market and just like any other market out there, it is not immune to market forces. The difference with Manhattan that makes it much stronger than other local housing markets, is that it lags in recession's and leads out of recoveries. Arguably, we are seeing some signs of a slowdown about 2 1/2 years into the national housing recession. The best reasons for this tend to be:

a) much higher quality/volume of buy side demand
b) healthy mix of buy side demand; Int'l demand on currency trade
c) tight inventory; good products are hard to find
d) minimal exposure to speculators
e) minimal exposure to subprime / weak buyers
f) mostly co-op inventory that blankets against weak buyers
g) trend to live closer to work

etc. etc.. Much of the same that I have always mentioned. BUT, even these market characteristics are not strong enough to make Manhattan immune to a slowdown. The current environment is rooted on wall street and investment banks, so it would be foolish to deny how macro might ultimately affect us. Corrections in our real estate market do occur, are healthy disruptions of growth, and always prove to be temporary that ultimately pave the way for longer term sustainable growth! In short, nothing goes up forever or in a straight line and Manhattan real estate is no different!

So, no one should get all defensive and crazy when one mentions an utter peep that perhaps the Manhattan market is slowing! As I try my best to be unbiased and provide front line info on what I see in the marketplace (tell you like it is without sugarcoating), I'm sure people will see me as the enemy because god forbid you mention a slowdown in Manhattan. What I am saying here should not be a shock to any reader, as I've been discussing it for months.

What I see right now is:

1) continued depression of buyer confidence - its not that every buyer stopped looking, not the case, but there has been an effect in general on buyer confidence. Buyers are a bit nervous, lending rates are higher for them, underwriting standards are a lot tougher on them, they see the headlines, they see their equity portfolio's and if they are employed in the financial sector, they are concerned about job security. This explains the first phase of the correction cycle, where buyer confidence slows down sales volume. This is what we saw for the first quarter of what normally is a very active bonus season.

2) rising inventory - this is the result of #1. Buyer confidence declines, sales volume slows, and inventory builds. Simple math. In the past four months, inventory is up about 40%, from a total of 4,600 listings in Manhattan, to a total today of about 6,500. The second derivative, or rate of change, seems to have slowed in past weeks as the majority of the rise occurred from January to mid end of February. Since then, we have trickled higher to where we are now. My prediction is that inventory will pick up steam as we enter the summer months, when more layoffs are announced and executed, when the recession becomes official leading to more media driven headline shock, and more sellers seek to list properties for sale.

Right now, at 6,500 listings, inventory is still tight and by no means is there a glut. However, most sellers are now behind the curve, especially those sellers that priced way too high because their special broker promised that they are the best and can get that price, and find themselves chasing the current reality of the marketplace. For Manhattan to have a glut of inventory, I would expect total listings would need to be at or above the highest point in the past 5 years or so, and that would mean higher than 7,750 listings or so that we hit in mid 2006. In my opinion, we would need more than 8,250 listings or so before you see a noticeable level of fierce seller competition to move property. To get to this level, a combination of an absence of buyers + increase in sellers must occur; so if we ever reach that level the state of the market would have swung favorably to buyers.

3) high end struggling - it seems to me, although I only have one $3M+ buyer at the moment, that the $3M-$5M marketplace is starting to slow noticeably. Inventory is building and price reductions are significant. When a property at this level gets reduced, it is in the 'hundreds of thousands' increments. Unfortunately, asking prices mean very little to me as what a seller is asking can be significantly higher than the actual market value of the property at any given time. A home is only worth what someone is willing to pay for it.

4) lower end still active - still plenty of buyers in the studio, one bedroom, and lower end two bedroom market place. Its silly to call a $1.3M buyer a lower end buyer, but for sake of this discussion, I'll group them together. Most of my buyers fit into the $650K - $2M range, so that is the market that I see most frequently. Inventory for two bedrooms seems to be rising more quickly than inventory for good studios. One bedrooms for some reason I just can't figure out how the pace of inventory is doing; maybe rising slightly.

All in all, its much of the same! My buyers are quite aware of the current situation and are using my services to find the best deal in their price point and negotiate accordingly. The buy vs. rent decision is clear, and timing the market by renting for a year and buying next year is not a viable option for the majority of them. Having a long term focus is a must (4-5+ years), and understanding what you can afford is critical in such a tight lending market. So, for anyone looking to time the market, understand that most rental leases are for 1 year terms locking you out of buying for a good 8-10 months or so, unless you don't mind carrying two payments for a while! A fine strategy if you are nervous, unsure about your job security, or just don't have enough funds yet to make the purchase.

What I see is based on my business and listings I find; its a big market out there so I usually talk to at least 5-7 other top producing colleagues I know to see if their business activity is similar to mine. For most part it is.

What do you see?

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Freelance Programmer?

Can anybody recommend a qualified and reasonable freelance web developer that is familiar with front end design for charts? Back end is already built and installed. Please email me at "nrosenblatt + 'at' + halstead.com" if you do!

Thanks!!

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China Update - Olympian Challenges

Misery loves company. So with GE's surprise earnings miss and guide down on its growth rate for 2008 hammering the stock market on Friday, it's only appropriate to spotlight some economic misery that is starting to impact 1.3 billion other souls; namely, the beginning of the slowdown in China. (Recall that back in October GE's Jeffrey Immelt had told the Financial Times that strength in China and India would insulate GE from any US dowturn). Now, I know China is still supposed to see strong economic growth this year. Its economy is estimated to grow 9.4% in 2008 vs. 11.4% in 2007, according to The World Bank - down from their 9.6% estimate last month and 10.9% being talked about a few months ago. Economic growth can be like heroin, though, you keep needing more and more and it gets pretty ugly when you get less. Due to imbalances in the Chinese economy, the country has grown to rely on high rates of growth.

Why does China need this super fast economic growth? While the country has made huge progress from the 1970s, when they had 250 million people living in extreme poverty, they still have 29 million or so who are barely subsisting. Additionally, the Chinese had a baby boom in the early 1960s and an echo boom in the early 1980s, creating demand for 25 million jobs or so a year, while the economy is only creating about 10 million per year. The situation is summed up well in this quote from the Tehran Times (no that wasn't a typo):

China is facing a very severe unemployment problem, says Labour Minister Tian Chengping. He said 20 million new workers entered the labour market each year, chasing only 12 million jobs.

While I have sympathy for the Tibetan people, who have been in conflict with their Chinese occupiers for many years, the latest strife seems to be equally motivated by relative economic inequity between the Tibetans and the more recently arrived native Chinese Han, who have moved into the area due to the new rail links from the east and seem to be prospering more than the locals.

This overview of the situation from the UK's Guardian:

In the past two decades, new railways have economically integrated China's remote provinces of Qinghai and Xinjiang, making them available for large-scale resettlement by the surplus population.

Similar strife is erupting between the native Chinese Han and the Turkic Muslim Uighur (Wee-gur) in Xinjiang. Is it just chance that these issues are coming to the fore as China's economy downshifts? Certainly, increased public attention to China being generated by the Olympics and the torch procession are a catalyst for visible protests, but so too have the Olympics been a major catalyst to economic growth in China these last couple of years. Don't be surprised that a little post partum economic depression is arriving early.

According to the Associated Press, Chinese President Hu Jintao made these comments to Australian Prime Minister Kevin Rudd recently at an economic forum in Hainan:

Our conflict with the Dalai clique is not an ethnic problem, not a religious problem, nor a human rights problem," the official Xinhua News Agency quoted Hu as saying, referring to supporters of Tibet's exiled Buddhist leader, the Dalai Lama, whom Beijing blames for fomenting the unrest. "It is a problem either to safeguard national unification or to split the motherland.

The commentary belies a full understanding of the economic forces at work here.

Stock markets are the crucible wherein all economic, social and political inputs are synthesized, and the implications of the recent Chinese stock market performance are not encouraging. The Shanghai Index has already suffered a bear market decline of about 34% this year, and the outlook is overshadowed by a massive supply of shares still looking to come to market. According to Forbes, the Chinese stock market has a massive share overhang problem:

Currently, about 74.4% of the Chinese domestic A-share market, worth 24.6 trillion yuan ($3.5 trillion), is restricted from trading. These shares, mostly held by different government bodies, will be progressively released over the next five years. According to the timetable set by China's State-Owned Assets Supervision and Administration Commission, 1.6 trillion yuan ($225 billion) worth of shares could be sold in 2008. Including the unsold A-shares carried forward from 2007, Morgan Stanley predicted the total disposable overhang this year would add up to 2.7 trillion yuan ($380 billion), accounting for 32% of the market free float.

Besides the shares being successively unlocked by different government units, institutional investors that have participated in China's new listings in the past few years are also poised to dispose of their shares. Morgan Stanley said there were $64.5 billion worth of new shares floated in 2007, and 30.4% of those shares are locked up as IPO investments subscribed by institutions for as much as three years. Those shares will be flooding the market from 2009 onwards.

But it's not just the overabundance of shares looking to come to market weighing on the Chinese stock market, according to The Wall Street Journal:

The National Bureau of Statistics' survey of large industrial companies showed their profit growth slowing to 16.5% in the first two months of 2008 from 43.8% for the same period a year earlier. Dragging down the figures were industries hit by rising energy costs they were unable to recoup -- chemical fiber makers, electric utilities and oil refiners. Mining companies, by contrast, showed enormous gains. Stuck in the middle are ordinary manufacturers, where growth is continuing but at a somewhat slower pace.

The article quotes Citigroup as forecasting that growth in earnings per share for the all the Chinese companies they cover will be cut in half to 25% from 50%. Still healthy growth, but be mindful of the deceleration trauma. When a company grows 50% in a year it covers up a lot of warts - many caused by the unsustainable growth rate - and when the slowdown comes the warts break out with a vengeance.

China's inflation issues are one of those warts, and the government now appears to be pursuing a strategy of a stronger currency coupled with the increasing interest rate regime that has been in place for some time, to try to bring inflation under control. These policies are starting to have visible impacts, as reported in this piece on the blog of the Socialist Party Australia.org

The renminbi’s accelerating rise against the US currency - by 4.1% in the last quarter alone - has led to some of the features of a recession in southern China’s export powerhouse, the Pearl River Delta (PRD), a region that accounts for one-eighth of China’s GDP. Based on some estimates, 1,000 shoe factories have closed down in this region in the last year, most of them moving to cheaper, less regulated inland provinces, or to Vietnam and other lower-wage economies. The local government in Dongguan, an industrial city in the PRD, recently announced a new fund to help foreign companies there upgrade technologically, to shift out of labour-intensive lines such as footwear and textiles, which have faced the brunt of the renminbi’s rise.

When the tide goes out you find out who is swimming naked. The tide in China has been rising for years. The ethnic strife that has lately come to a head in China may be the latest sign that the surf is no longer up. My bet is a lot of skinny dippers are about to be exposed - and it ain't gonna be pretty.

From The Internet & Blogosphere

Maybe Monks Hold the Clue to Future of the U.S. Dollar - really worth reading

China: Save the Stock Market Investor!

China's Economy The Sound of Bubbles Bursting - also really worth reading

Chinese Inflation: It's Money Not Pork

China Currency Stronger Than 7 to the US Dollar

Picture from the Deccan Herald

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The Seller's First Response: Probe Bid

A: After almost four years in real estate sales now, I have gone through my fair share of both buy & sell side negotiations. One thing that seems consistent with almost ALL the deals I do, is that the seller's first response to your initial bid is a reliable indicator as to where you might have to go to get a deal done! Lets discuss the seller's first response to your initial probe bid and whether this information gathering strategy may be right for you. Originally Posted February, 26, 2007

Its the most challenging part of my buy-side consulting for clients since I attempt to get the lowest price possible for my buyer, I have to hope the seller agrees to that price range. In the end, buyer clients must understand that it is not my decision whether or not the seller will respond to our low-ball bidding strategy. And it's not my decision how low the seller is willing to go to do a deal with you! If there is one thing I learned after 3 1/2 years it is this:

Every seller is unique and under a personal set of circumstances when selling their home. Just because a building's 1BR's are trading for $900/sft, doesn't mean the seller of the property you are interested in will sell it around that price point! If there is no time pressure to sell or the seller is just testing the market, then bidding $1,000/sft for the property still may not get the desired result.

In fact, a complimentary side effect of this principle is that assuming the seller is really looking to sell their property than there is a price range already pre-determined as to what the seller would like to move the property for. The question that remains is how big is this 'acceptable range' and how quickly the seller wants to move the property; the faster the need to sell the lower the price is likely to be.

Which brings me to this conclusion:

Assuming the seller is not testing the market and is really looking to sell, it will be the FIRST RESPONSE to your initial bid that will give you the best look at the poker hand the seller is holding

I use a poker analogy because of the incredible strategy and observational skill needed to play a good hold em' tourney from beginning to end. A similar scenario could be argued for housing negotiations.

Probe Bet: A bet made primarily to gain information by gauging opponents' reactions, especially a small bet made in pot-limit or no-limit games.

In poker, I like to send out what are called 'probe bets' every once in a while to see if I can gather ANY information at all from my opponents as to the strength of their hand. Even if I am holding a weak hand and planning a bluff strategy, a probe bet can be very useful in either winning the hand right there or saving me from an eventual big loss.

In real estate, the initial bid could be considered a 'probe bid' to see where the seller stands as far as their need to sell. If you get a very quick and aggressive response, well then you know you have a seller who is looking to sell quickly and is taking your bid seriously; giving you a tactical advantage. If you get only a slight response two days after your initial bid, then you know the seller is looking for a certain price range and may not be as motivated to sell right now for a lower than expected price. If you get no response, then you know the seller is under no time pressure at all and is likely to be testing the market; or your bid was simply too far below the seller's intended 'acceptable range'.

In all situations, it was the first response to the initial bid that set the groundwork for what is to come next. Sometimes your strategy will fail, and you have to be prepared for that; especially if you are using a low-ball bidding strategy. Other times you will get a very desirable response and your only decision left is how to play the rest of the ping-pong game.

It's impossible to set up one formula or theory that applies to all situations, so I leave it up to you and your buyer broker to discover for yourself. However, if you have read all the way down to here and still don't get what I'm saying, maybe this chart can help you visualize the importance of the seller's first response.

APT X IS ASKING $500,000 (say $850/sft) AND IS PRICED RIGHT

Situation 1 - Low Ball: Your initial bid of $425,000 gets no response. Obviously the seller knows the property is priced right and has a tight range of 'acceptable price' that is needed to make a deal happen. In this case I would advise my buyer client that a bid of at least $475,000 or so is needed to get the property. Since the apartment is priced right from the get go, the seller is not interested in buyers who are playing bidding games or not-motivated to proceed to the next step.

Situation 2 - Fair Bid: Your initial bid of $450,000 (10% below ask) gets a response of $485,000. Again, the property is priced right and the seller is telling you that there isn't much more room for negotiations! While your bid of $450,000 is a bit low for a properly priced apartment, the seller acknowledges and respects your bid by providing you with a response. The response of $485,000 tells me that you will need to come up more than the seller will likely come down to get a deal done. I would probably advise my client to bid $470,000 next and expect a response of mid-way from the seller.

Situation 3 - Aggressive Bid: Your initial bid of $475,000 gets a response of $487,500 from the seller; halfway. While you may feel like you didn't leave yourself much room for negotiating and getting the lowest price possible, you did tell the seller that you are a serious buyer and that you understand the property was priced properly from the start. At this point you have 2 choices. Either you stand firm and tell the seller that your initial bid is your most aggressive bid that you are comfortable making with the hopes of them accepting it OR you move to $480,000 to get the deal done. I don't see how a seller who responds to your initial bid of $475,000 with a counter of $487,500 will say NO to your $480,000 2nd bid.

BIDDING UNDER ASK FOR NEW DEVELOPMENTS

A tough feat to accomplish, but not impossible. Most developers will not budge in their set asking prices for units, leaving the buyer with a decision to make. Either the buyer sucks it up and pays full ask + sponsor closing costs OR you try to negotiate an incentive on the passed down closing fees that the sponsor asks all buyers to pay.

This is not meant to discourage you from trying to bid below what a developer is asking for a particular property, only to tell you that in many situations you will not get the desired result. You are at a disadvantage in the sense that transparency comes in only one form; what is being told to you. The information regarding percentage sold, remaining units, future price amendments, previously negotiated deals, traffic activity of sales office, desperation of the developer, etc.. are all pieces of information that either you do not have or must trust what is told to you by sales representatives. This leaves you bidding blind, trying to get the best deal possible. I find that there is a better chance offering full ask, and working on an incentive with closing costs the better strategy. Of course, this assumes the price is OK with the buyer's comfort zone!

Like all negotiating situations, the only way you will know for sure if NO to your lower bid really means 'NO', is by backing out of the deal and leaving the seller with a few days of 'thinking about losing the deal' to see if they won't come back to you! You must be willing to play hard-ball and risk losing the deal as well, if you want to give your low bid any chance of succeeding after a 'NO' response was already given back to you. Hopefully the seller will cave first.

UrbanDigs Says: Use your initial bid as a probe bid to see what the seller's reaction will be. Many times you will be able to get a lot of good information from a solid probe bid that will give you an idea of where you might have to go to get a deal done. In the end, every deal ends up at one price that is suitable for both the buyer and seller. So the question is, are you comfortable with where the seller is looking to move the property at. Since it is no one's decision but the seller's to ultimately make that decision to move at a requested price, the buyer must do all they can to find out the range where that requested price falls into!

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Light Posting Week

Sorry guys, but postings will be light for a week or two. I'm in the process of trying to fix & enhance the charting system and train a new buy/sell side consulting team for my business. The new buy side consulting page will be activated in coming weeks or so once the team is ready. Any free time that I do have is going towards servicing buyer & seller clients in the field. I'll try to post updates when I can, but chances are it will be light until I'm done with these two projects.

In meantime, here are daily reads for all you macro/nyc real estate junkies:

Mish

Big Picture

Calculated Risk

True Gotham

Curbed

Accrued Interest

Naked Capitalism

Inman News

Interfluidity

Matrix

WSJ Real Time Economics

Streeteasy Discussions

The Real Deal

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Wait...So Your Saying Rate Cuts Fuel Inflation?

A: As Bernanke & Company did what they had to do to save wall street and 'forestall future adverse effects to the economy', you are seeing the side-effects of this type of policy. Our fed has clearly moved from a dual mandate of price stability (inflation) & economic growth, to one solely of economic growth! Now, I'm reading headlines like 'Food Shortage Rises With Prices' and 'Food Prices Rising Fastest in 17 Years'. Now that the fed used up much of its arsenal, I'm wondering when the time will come that they will have to combat inflation by hiking rates; and whether we will be out of this housing/credit mess by that time?

Can you imagine rates rising when housing is still pressured and loans are still hard to secure? There is no such thing as a free lunch and right now, the fed has poured a rainstorm of stimulus onto wall street in the hopes of easing the credit crisis (seizing up of credit markets resulting in the inability to offload assets on the secondary mortgage markets) that resulted from natural market forces related to the housing/debt correction. We are no longer a society that allows a market to go down, for fear of the consequences. Instead of taking our medicine now, we have to deal with the side effect of commodity inflation as housing continues to deflate. Will we need to take the medicine later anyway? The fed's actions, while understandable given the depth of the problems we face, may still not be enough and I am concerned that inflation will runaway from us; what am I saying, it already has!

According to Bloomberg:

Treasuries fell as a government report showed wholesale prices rose at almost double the pace forecast, while New York manufacturing unexpectedly grew, fanning concern that inflation will accelerate.

The producer price report is "a wake-up call that's there is still inflation pressure," said T.J. Marta, a fixed-income strategist in New York at RBC Capital Markets. "It's definitely bearish for bonds." Prices paid to U.S. producers increased 1.1 percent in March from 0.3 percent the previous month, the government said. The median forecast in a Bloomberg survey was for an increase of 0.6 percent.

Every time the fed cuts rates to cure one ailment, they make another scratch somewhere else. With each cut, the US dollar gets weaker and commodities priced in dollars rise. The speculative trade riding the currency wave isn't helping much either; leaving the fed hoping that a slowdown will be the driving force to bring down commodity prices. I've said this so many damn times on this site: commodity inflation + housing deflation is NOT A GOOD MIX! Pipeline inflation is bubbling and we can expect future inflation data to be very troubling indeed.

The fix? Here's a thought: ANYTHING THAT WILL SUPPORT THE US DOLLAR! We MUST remove the speculative currency trade that has driven commodity prices higher; arguably there could be $30/barrel in speculative trade in oil as an example. Even if this means the fed changes verbiage to put their bias into the fight against inflation, then so be it! That would be interpreted by traders that future rate cuts are in serious doubt, the US dollar will be supported, and it would remove a good portion of the speculative trade in most commodities. It doesn't fix the supply problem that has resulted from fast growing economies like China & India, but it will help by removing the bets made simply on the premise of a weakening US dollar.

Barry Ritholtz, the ever present force arguing against the use of CORE datasets (for the simple reason that food & energy price rises have NOT been self defeating and have NOT been temporary in the past 4 years), provides this chart of March PPI; with the red dotted line showing the fed's target level:

If we let inflation runaway much further, because of the continued bias on growth and the current crisis, we will enter a period of rate hikes in the medium term future to combat the side effects that resulted from the management of this crisis. Think about how that will impact consumer debt payments, the bond market and lending rates and how healthy the credit markets may or may not be at that time! Inflation is a silent killer and as the saying says, 'is the cruelest tax of them all'!

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The Importance of Views

A: I want to re-iterate just how important views are when trying to get top dollar at resale. In my opinion, its #1 and ahead of location as the permanent feature worth going for when you look to buy; with the focus being on finding motivated sellers with a view apartment who doesn't have time to 'test the market' with a steep premium! Whenever I have a buy side deal that involves a property with spectacular views, I always am concerned that another bidder will come out of nowhere before we get a fully executed contract. I worry about this, because it has happened to me before.

The four permanent features that all buyers should focus on putting their money towards when deciding which product of the group to bid on continue to be:

a) views
b) location
c) natural sunlight
d) raw space

...as these property features generally do not change! The only item that can be changed is natural sunlight and views if you happen to buy a property with a view of a lot that may ultimately be developed; and therefore eliminating or altering your view and natural sunlight. Other than that one risk, your pretty safe. These are the features I focus on when I do consulting for my buyer clients.

But one feature stands above the rest in this fast changing marketplace: VIEWS, especially really good ones! I'm talking central park or river views here, as there is a larger concentration of properties that offer open city views. Having that park or river view really does put your property above the rest in terms of luxury and should allow you to price the apartment a bit higher than the group. The fact that it isn't easy to find these properties tells you something!

Now, this doesn't mean that views should demand $300/sft more than comparable listings in the building on a different line without views, it shouldn't. It does mean that a premium will be paid for the views and that marketing efforts should allow the selling broker to procure a much bigger and more serious audience; which in and of itself is something for getting more money in the end.

Your focus should be on finding these types of view properties that seem to be priced 'in-line' with other comparable line apartments in the building that do not have views! If you do find one, its a sign that the seller is probably ready to go, and advised the broker to skip the premium that is normally associated with view apartments because they want a quicker timeline to sell.

For example, lets say that the building has two main exposures:

Exposure A ---> gets park views
Exposure B ---> gets interior building / courtyard views

Now, lets say that there are similar property types (say a 1BR unit w/ same floorplan) on both sides of the building! One has Exposure A and the other has Exposure B. Now lets assume that these comparable, yet opposing units are around the same floor in height, thereby eliminating any significant premium for being on a higher floor. Pricing should be as follows:

1BR w/ Exposure A (park views) ---> aprox $900,000
1BR w/ Exposure B (interior views) ---> aprox $825,000

These numbers are for argument only to prove the point that the 1BR unit with park views should demand a premium over the similar 1BR with interior views. Your focus should be to find a property type that enjoys park views, but whose asking price is more 'in line' with the last comparable sale that did NOT have the luxury of that gorgeous view! Not an easy task, but a sign that the seller is motivated!

With that said, here are some apartments that I think exemplify what I mean by view apartments; yet don't necessarily mean they are priced to move! Having open city views are nice, but should be given a less favorable premium due to the higher concentration of apartments that enjoy this type of view. Add in more premium for river and park view properties! It's up to you to determine exactly how much premium is deserved.

635 West 42nd Street

PRICE: $1,850,000
SIZE: 1,017 sft
DAYS ON MARKET: 62 Days

45 East 89th Street

PRICE: $1,995,000
SIZE: N/A - 2BR/2BTH unit
DAYS ON MARKET: 7 Days

80 Central Park West

PRICE: $1,445,000
SIZE: 900 sft
DAYS ON MARKET: 13 Days

As always, if you want to see one of the above noted apartments, please contact the listing broker directly. Before bidding on any apartment, you should have your buyer broker do an analysis of where the building trades so that you can assign the proper premium to the property with views, in line with the most recent market values.

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Charts Fixed

Sorry for the bug with the CHARTS page, as data was seized up from the credit markets for the past 8 days. Anyone that says the credit crisis is not spreading, here is proof. We should be able to recover the past 8 days of data that was missed; but that will take another day or two. A big thanks to Streeteasy's tech team for the help!

COMING SOON:

a) contractor directory for New York Area
b) complete upgrade of charting functionality as testing ends

Both should be active in 3 weeks, hopefully sooner. Stay tuned and hope you guys all like the new resources! This site's goal will always be to discuss macro economic conditions and investment strategies for Manhattan real estate; and to help make NYC real estate more transparent!

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Credit Woes in Europe? BoE Gets 3X Demand For Auction

A: I don't want to rain on yesterday's equity parade, but I want to point out something. Have you noticed over here that when the fed holds one of their auctions, say for $50 Bln, and the demand comes in lighter than expected only requesting $30 Bln, the analysts and economists go out of their way to point out that this is a POSITIVE sign that distress in the credit markets may be easing; as there is less of a need for borrowing from the fed. Well, look at what is going on in Europe; the exact opposite! Keep an eye out if housing and credit woes may be moving across the Atlantic! What would happen to the foreign demand argument for Manhattan real estate; how may this ultimately affect foreigners who already purchased units? Lets discuss starting with the macro signs.

Credit markets are still not fully healed over here, as the fed and their emergency team of surgeons, successfully stitched up the Bear Stearns artery that tore 4 weeks ago. There is still a little blood leaking out, evidenced by LIBOR rising (in part due to the oversubscribed BoE auction that I will go into) in the past week and TED spreads widening as well. The continuing disconnect of equities to credit markets (read my "Stocks Lagging Credit Markets" piece) was covered today on the Wall Street Journal:

Stock and credit markets are once again singing from a different hymnal. One closely watched measure of credit-risk worries, the gap between three-month Treasury bill rates and the three-month London interbank offered rate -- the "TED spread" -- widened Wednesday to about 1.6 percentage points, the highest since late March. Before the credit crunch, the spread was about 0.35 percentage point.

The TED spread is a measure of the difference between buying a relatively safe government bond and making a riskier loan to a bank. This spread widens when lenders want to avoid risk.

Always look ahead of the curve; short term money is still very tight! But what concerns me a bit more is what happened when the Bank of England had an auction that yielded bids from financial institutions totaling 3X the amount being offered! Thats exactly the opposite scenario from the light auction we saw & cheered over a few weeks ago as a very positive sign! So, the laws of some form physics would say that the BoE auction is a very negative sign; as the need for fund raising surges in Europe!

According to Bloomberg's article, "BOE Received Most Bids in Three Months at Auction":

The Bank of England said financial institutions bid for 50 billion pounds ($99 billion) in its weekly auction, the most in three months, as a worsening shortage of credit increased the need for central bank funds.

Financial institutions are struggling to raise money and refusing to pass on the Bank of England's interest rate cuts to consumers. The cash shortage has already ended the U.K.'s decade-long housing boom and threatens to push the economy into a recession.

You know, the foreign demand argument has been a favorite for most brokers in the past few years, as the US dollar continued to plunge in value. I never denied the existence of foreign demand in Manhattan on the currency trade, I just didn't buy into the depth of the phenomenon that some brokers tout. I mean, is there any real means to quantify what percentage of our buy side demand are foreigners anyway? No! Which led me to write, "Does A Weaker Dollar Accelerate Foreign Demand?", five months ago:

"As the US dollar continues to fall against other major currencies, people mis-interpret the trend to mean that X number of additional buyers are pouring into Manhattan real estate! In my opinion this is an incorrect assumption! It is not that cut and dry and to dismiss macro economic events, confidence, and near term expectations as part of this currency trade equation is a mistake. There is no anecdotal evidence to support a re-acceleration in foreign demand; its mostly theory and we are left to ask the brokers what they are currently seeing for a clearer picture. In my opinion, confidence trumps the weakening dollar in the mindset of foreigners."

My Point: If the Manhattan real estate marketplace used the foreign demand argument for years (me included), as a reason why our market is so strong, then at least we must be open to the possibility that this source of buyers may be contracting. If this is not a possibility in a brokers mind, well, then I guess that's why there is the old 'having your head in the sand' saying. I would expect foreign new dev sales, with many closing during the course of 2008, to contribute in some way, shape or form to our rising inventory trend. This is part of the natural cycle, and there should be nothing wrong about discussing it openly. Time will tell, and I could be dead wrong.

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Bond Market Starting To Price in End To Rate Cuts?

A: Something that Rick Santelli over at the CME has been pointing out for days now on CNBC, is fairly significant. The bond market, and specifically the 2-YR Treasury yield, has been pricing in LESS ACTION from our fed lately which may signal we are nearing the end with rate cuts. With commodity prices surging and oil over $116/barrel plus good earnings news rallying the street, the street is awakening to the possibility that the fed's mindset will begin to shift from growth to inflation. If the fed gets more hawkish, which would encompass a range between only cutting by 1/4 point to a change in the statement to no cut at all in the next meeting, we would see a surge in the dollar and a likely drop in commodities priced in dollars. The question really should be, when will we see a rate hike?

Take a look at the 2-YR treasury yield over the past month (chart on right), up almost 70 basis points. In fact, yields are up across the board for treasuries, as the stock market rallied over 4% this week. The most dramatic action in the bond market was in the short end; 3mth, 6mth, 2yr & 3yr yields causing the so called 'flattening' of the yield curve. Now, while the curve isn't flat, it is flattening! This gives investors more incentive to cash out of longer term treasuries, and put that money to work elsewhere (stocks?). It also could be a sign that expectations are rising for less action from our fed, probably resulting from pipeline inflation pressures. Here is the general definition of a flat yield curve for all those that don't know.

Flat Yield Curve: When short- and long-term bonds are offering equivalent yields, there is usually little benefit in holding the longer-term instruments - that is, the investor does not gain any excess compensation for the risks associated with holding longer-term securities. For example, a flat yield curve on U.S. Treasury would be one in which the yield on a two-year bond is 5% and the yield on a 30-year bond is 5.1%.

Give Rick Santelli credit for calling this one earlier in the week, and telling viewers to watch out for the rising 2YR treasury yield; as when it got close to the rate of the fed funds rate of 2.25%, you will start to see confidence return to equities. Now its becoming a top story on business channels.

Whether this rise is a result of the re-adjusting LIBOR rate or from better than expected earnings which is rallying the stock markets, I don't know. But the 2YR is almost above the fed funds rate of 2.25%, and that means traders are betting on a more hawkish fed down the road. That is the angle I want to focus on here. I spoke often (here, here, and here, 4th comment) that when the fed sees less of a risk to economic growth, whether it be from all the stimulus thus far or that the economy is holding on better than expected, that they will 'take back' rate cuts rather quickly to combat inflation. Well, the bond market is starting to bet this way too. Since fed policy works at a lag, they may want to see how efforts so far fully affect markets and the economy.

If I were to look into the future, some questions that come to my mind if the bond market is right are:

Will the fed be forced to hike rates if lagging economic data is bad?

Will the fed cut less than expected OR not cut at all OR combination of rate cut but change in verbiage regarding future more hawkish policy?

What happens if housing/credit markets are not fully healed when the fed is forced to combat inflation by hiking rates?

How will equities react?

Something to keep an eye on! If the bond market is right on this, then we could be heading into a rate hiking campaign sooner than we originally thought! We may be risk adverse to keeping fed funds rate too accommodative for too long; especially after seeing the lessons learned from the Greenspan sponsored 1% fed funds rate for so long; that many now blame for causing the housing bubble. The fear is in the way the fed ultimately handles inflation pressures, given the housing/credit crisis; in other words, what if they tighten too soon hurting the eventual recovery!

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Economic Calendar May Reveal Recession's Birth

A: On April 30th, we get the Q1 Advance GDP data. The NBER generally defines a recession as two consecutive quarters of declining GDP; although there are many arguments how a recession should be defined. Many believe that Q1 GDP will be the final nail in the coffin to define when the recession officially started. If you recall, Q4 GDP came in at 0.6%, down sharply from a 4.9% growth reading registered in the previous quarter. We need to see how this is revised down the road, and whether the NBER declares a recession starting in late 2007, or early-to-mid 2008. It's very hard to imagine us avoiding one.

Due to the almost 10 month old credit crisis so far, a recession almost feels expected at this point. It shouldn't scare anyone and is a healthy process to ensure longer term sustainable economic growth; it cleanses the system! So, when next week comes around and we get the first glimpse at how the Q1 GDP number is, it really is a matter of how slow we were in the months of JAN - MARCH. Consensus calls for a range between 0.4% - 0.7%; with the key number being 0.6% from the previous quarter. In my opinion, we can easily go to 0% growth, and possibly a bit negative for Q1 GDP. Chart on the right courtesy of The Big Picture (via Econoday)

Now, if the number comes in below Q4's 0.6%, the media will start the recession story and headlines will be everywhere. Depending on how low the number is, I wouldn't expect it to cause that much of a headline shock for buyers in general because we have been thrown into a credit fire storm for months and came out a bit tougher because of it; I mean we lived to see a Bear get shot & killed. Call it the teflon effect if you will. It doesn't mean that consumers will go nuts spending again or that buyers will start bidding over ask for Manhattan real estate; it simply means that the psychological effect likely will be muted and not one of surprise & shock!

In a recession, corporations cut costs in any way possible to adapt to the slowing economy. With brokerages & banks at the epicenter of the storm, we know that job losses will mount over the coming quarters; we are at about 35,000 right now and that is expected to rise to about 100,000 by this time next year. So, for the next two quarters we should see pressure on GDP as the result of the credit hurricane and the lack of available credit/higher costs for consumers and small businesses. After that, you will start to see the effects of Fed policy and the $168 billion stimulus package that sends out checks to tax payers in June. Clearly, the gov't passed this stimulus package to, drum roll please, you guessed it...STIMULATE the economy! The hope is that Americans take their free money and go shopping for goods and services! Not me though, that money will wisely go towards paying off my highest costing credit card's! I apologize for not playing the game that I am supposed to play to stimulate the American economy; but to me, we are not out of the woods yet so stimulus money = debt paying money!!

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Credit Easing or Credit Short Covering?

A: Sorry for the lack of content lately as I have been very busy with buyer/seller clients in the field, and working on the new charting system for you guys! Since Manhattan real estate does not change day to day, I want to discuss something that I have talked about with those I know on the front lines of the credit markets earlier this week. Reality is, that when the credit storm really got rolling many hedge firms and brokerages became risk averse and hedged their long positions by going short on the credit markets; a logical move. While it was a profitable trade for months, when the fed bailed out Bear Stearns they basically removed the systemic crisis that these trades were meant to profit from. Upon this realization, there has been a major short squeeze in the credit markets to cover some of these hedges, causing bids to come in on what otherwise were illiquid markets. What we hear as signs of easing in the credit markets via bids coming in, may simply be short covering! Add on to that the usual speculative in-the-know crowd riding the wave and we may have some false signs of hope.

The motivation to write about this came when I read Yves post on Naked Capitalism this morning, that included an excerpt from Doug Noland's article in the Asia Times, who hits it perfectly:

"When the Fed and Washington radically altered the rules of US finance last month, they placed in jeopardy huge positions that had been put in place to hedge against and profit from systemic crisis. With the end of stage one arises a major short squeeze in the credit, equities, and derivatives markets. And when it comes to contemplating the scope and ramifications of today’s hedging activities, we’re clearly in uncharted waters. It is not beyond reason that a disorderly unwind of bearish credit market positions could incite a mini bout of liquidity, speculation, and credit excess that exacerbates global monetary instability while setting the backdrop for stage two of the crisis."

Lets go back to basics. What got us in this mess in the first place was irresponsible lending + buying that led to the busting of the housing bubble. That resulted in the seizing up of the secondary mortgage markets which led to distress in other credit markets. What started as subprime, quickly spread to auction rate securities, alt-a, student loans, etc..It is still spreading and losses and write-downs continue to mount. Through funky accounting and creative fed swap programs, much of the garbage is either being hidden or transferred from balance sheets to the fed.

Here are some of the recent headlines in creditville, where fund raising (as I discussed April 9th) is the name of the game!

RBS To Sell $24 Billion in Shares To Shore Up Capital

Citigroup Sells $6 Billion in Preferred Shares

National City Follows Wachovia, WaMu in Rush For Cash

Why raise cash? Because loan loss reserves are dwindling and regulators require at least a 7.5% reserve in Tier 1 Capital! As Mish accurately points out in regards to Citigroup's Tier 1:

Citigroup raised capital in December and January by selling stakes to investment funds controlled by foreign governments including Abu Dhabi, Korea and Kuwait. The infusion helped boost Citigroup's Tier 1 ratio to 8.8 percent by Jan. 22 from 7.1 percent at the end of the year. Citigroup's so-called Tier 1 capital ratio -- a measure of its ability to withstand loan losses -- fell to 7.7 percent at the end of March, the New York-based bank said yesterday. Citigroup says it needs a 7.5 percent ratio to provide a margin of safety and preserve its credit ratings.

Mish's Comment: 8.8% is now 7.7% and shrinking. Citigroup will soon need to sell more assets or cut its dividend or both. I predict both.

Mish was right and the very next day Citigroup announced a $6Bln preferred share sale! Look at it this way, why borrow cash if you don't need it? If you need the money, then you MUST raise cash, and right now there is massive capital raising going on reflecting the weak state of balance sheets; if it were any other way they wouldn't need to dilute by issuing more shares!

Housing is still correcting, the consumer is tapped out, credit is being withdrawn as evidence by the pulling of lines of credit (HELOC's), homeowner equity is declining and unable to be accessed as an ATM anymore, credit costs have risen, and we are likely in a recession that will cause job losses. Since 70% of the US economy is driven by the consumer, its hard to discount all these macro stresses that the consumer must deal with. If the recession hits, how in the world will there be enough buyers to take down housing inventory?

So, it is just illogical and wrong to accurately predict how or when this credit crisis will end at this point in time. You can't have decades of debt building and very poor lending standards leading to the sharpest 5-6 year rise in housing prices nationwide unwind in a 8-month period of time! It will take time to heal these wounds, and right now I strongly believe in what Doug Nolan is saying and have discussed this exact scenario with friends that I consider to be very smart on the front lines of the credit markets. If the credit markets were fully healed, LIBOR wouldn't be so much higher than our fed funds rate! Time will tell.

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Timing The Market: The Wait & See

A: Real estate is a personal decision. Timing the market is a fairyland. In a perfect world, one could buy Manhattan real estate at the bottom, sell at the top, rent for a few years, and upgrade after the market corrected a bit and some deals popped up. Now wake up! Timing the market is impossible to do, so don't even try it. It will make an already complex investment decision even more complex; yes, I view your house as an investment that you live in, and that should be a part of your portfolio. If you don't like the investment, rent. If you prefer to own, build wealth, and take advantage of tax benefits, then buy. But don't try to perfectly time it as that will cloud the overall decision. Instead, focus on what works for you and finding the best product in the price point that is out there and getting it for the best price possible! Originally Published January 28th, 2008.

This is for those that are looking for a new home to use as their primary residence. While I discuss what interests me here on UrbanDigs, including what is going on outside our walls, I don't want that to cloud your investment decision. Just because I made it my point to focus on the credit crisis since last July, and hopefully now you understand why, doesn't mean I expect Manhattan housing to crash 50%, I DON'T! Lord knows there are enough people out there that are making this assumption for me.

Deciding whether to pull the trigger should be a clear decision. A decision that is made after assessing four very important personal criteria:

a) Liquid Assets After Closing Costs
b) Salary / Debt-to-Income Ratio
c) Job Security
d) Timeline To Hold/Own

Assuming you made the decision to seriously consider buying, you must now figure out if you can afford it with your total salary, if you have enough liquid assets leftover after the transaction, if your job is secure, and if you intend to own/hold the asset for at least 4 years. Let me just briefly go into each one:

Liquid Assets After Closing Costs: Do you know what the buy side closing costs are going to be? Many brokers don't discuss this with their clients until they get very close to bidding, and for some buyers that # comes as a shock. So, better off knowing before hand how much OUT OF POCKET you will be to actually buy the condo or co-op. A rough estimate is about 4.25% of purchase price for a Condo, 5.75% of purchase price for a new-dev Condo (assuming pass down of sponsor costs), and about 1.75% of purchase price for a Co-op. This does not include points and is dependent on how much you are putting down as well so use as a very general guide.

Now, the down payment. After you add up the down payment + estimated closing costs, how much money do you have leftover in your liquid accounts; 401K/Retirement accounts not included. You can convert some retirement money into liquid money, but there likely will be a penalty for doing so.

QUICK TIP FOR USING ROTH IRA FUNDS PENALTY FREE: For those with a ROTH IRA account over 5 years old & plan to purchase their first home, you may use up to $10,000 penalty free for the down payment. Click the link for more details on qualifying for this distribution incentive.

Generally, you want at least 8-12 months of MORTGAGE + MAINT/TAXES leftover in liquid assets to buy a condo, and probably more to pass a co-op board. You can do it with less liquid for a condo, say 6 months total payments in liquid, but you really do want to leave yourself some security just in case when the deal is done.

Salary / Debt-To-Income Ratio: Now, take your total expected monthly payments and add in any minimum debt payments you currently have. Divide this total monthly expense by the total gross income you are bringing in each month (I usually add in bonus if its set in your employment contract, but acceptance of this trend is likely to change).

Here is a hypothetical to give you an idea:

TOTAL MONTHLY PAYMENTS ---> $4,000
TOTAL MIN DEBT PAYMENTS ---> $650
TOTAL GROSS INCOME ---------> $15,000
=================================

$4,650 / $15,000 ---> 0.31 or 31%

This person's debt/income ratio is 31%. Generally, you want to keep your debt/income ratio UNDER 28%! Anything over that may become a problem either for the lending gods or the board gods! If you do go over 28%, you may be able to still do the deal if you can offset this with bulky liquid assets leftover after closing. But, anything over 33% is probably going to be a problem for any co-op board. Condo's of course are less stringent leaving the buyer to gauge their own comfort level as opposed to the board's/lender's comfort level!

Job Security: Please make sure your comfortable with your job; both in keeping it and staying in this location. One of the biggest destroyers of wealth, besides divorce, is being forced to sell your largest asset because of job loss or relocation! If you have to sell quickly, you will have to be flexible on pricing!

Make sure your job is secure before making such a big investment decision!

Timeline To Hold/Own: General rule of thumb is 5 years. Its a good rule, although I can live with one less. If you are going to hold the property for at least 4 years, and you meet all the above criteria AND YOU WANT TO BUY AND OWN YOUR OWN HOME, then you have very compelling reasons to pull the trigger!

Since buying & selling real estate incurs transaction costs, you want to have time on your side to both build wealth and take advantage of tax benefits! Ideally, you want to be able to sell the asset when YOU choose to, not when you have to. A longer timeline to own gives you the freedom to pick & choose your exit points.

The wait & see attitude generally comes from those concerned about the economy, asset deflation, buying more then they can afford, or just putting most of their eggs into one asset class. For these people, buying may not be the best decision if it will result in large amounts of stress and a negative effect on the quality of your living standards. The last thing you want is to argue about the new apartment you bought that caused you to not enjoy life as much as you did before. If you don't qualify for the above 4 criteria to buy, then you shouldn't be buying in the first place! If you think you'll need a bigger place in 1-2 years and can't afford that larger property now, then you shouldn't be buying!

Happiness is still more important than money, so be sure you can find a place that not only you can afford, but one that makes you happy and hopefully is scalable so that you can grow into it should your family grow in the future!

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Yields Rising: Fed Expectations Changing

A: Follow up, from my post last week on Fed nearing the end of rate cut cycle. It's one crazy world we live in, and the coming months and quarters will certainly be very interesting indeed when looking at how the Fed handles runaway commodity pipeline inflation threats at the same time they navigate through the credit crisis. I told you guys last November that mortgage rates were "...no longer tied to bond yields" as the markets re-priced risk and the bond market started to price in a slowdown and bring down yields; which didn't bring down mortgage rates! But now, the bond market seems to be pricing in a near term end to fed rate cuts! My question is, if lending rates rose while the fed eased because of the re-pricing of risk in the mortgage markets, what happens when bond yields rise on expectations of a more hawkish fed?

According to Bloomberg:

Yields on Treasury two-year notes rose to the highest level relative to the Federal Reserve's target rate in almost two years as traders pare expectations for additional reductions in borrowing costs by the central bank.

"Stocks are down, and no one wants to buy the front end if the Fed is done," said Ian Lyngen, an interest-rate strategist in Greenwich, Connecticut, at RBS Greenwich Capital, one of the 20 primary government security dealers required to bid at Treasury auctions. "The market is clearly thinking more about a 2 percent fed funds than a 1 percent fed funds rate", said Jason Brady, a managing director in Santa Fe, New Mexico, at Thornburg Investment Management, which oversees $4 billion in fixed-income.

Traders see an 18 percent chance the Fed will keep its overnight rate unchanged on April 30, up from no chance a week ago, futures on the Chicago Board of Trade show.

This is a very important dynamic to watch for in the coming quarters: will the fed shift their focus from growth to inflation? We know that fed policy is lagging and takes time to work through the economic system; so, we have 300 basis points of cuts yet to fully show their effects! The fed clearly is noticing the stimulatory effects of these cuts on commodity prices and its debasing effects on the US dollar; it may be time for a change!

Because of the credit crisis, fed rate cuts did NOT have any effect on jumbo mortgage rates over the past 7-8 months or so. The chart on the right, courtesy of bankrate.com, shows the relationship between Fed Funds Rate (red) vs 30YR Jumbo Mortgages (blue) & 30YR FHA Mortgages (green) over the past year. Notice the separation between the jumbo rates in blue and the conforming rates in green since the start of the credit crisis: this shows you the re-pricing of risk in the mortgage markets for non-GSE backed loans and the rise in jumbo rates even as the fed eased.

Right now, the fed is nearing the end of their rate cuts but jumbo rates are still high! The point of acknowledging this is the very fact that the bond market is now pricing in a 'nearing of an end' to rate cuts due to commodity inflation pressures, bringing yields higher!

KEEP AN EYE ON HOW HIGHER BOND YIELDS MAY AFFECT LENDING RATES IN THE NEAR TERM!

I'm thinking they will. What if 10YR yields rise from 3.8% to 5% in 6-8 months time? In the world of 'repricing of risk', it was possible for bond yields & fed funds rate to come down WITHOUT lending rates following; it was because of the dysfunctional secondary mortgage markets at the time and the higher risk associated with larger non-guaranteed loans. But, if bond yields & fed funds rates start to rise in response to a more hawkish fed, it will be highly unlikely that lending rates will not follow suit higher as well!

Hence, the importance of discussing this. We never got the drop in lending rates after all the fed's actions, but will likely see the rise when rate cuts are taken back!

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A Different Recession?

On the Jewish holiday of Passover one of the highlights of the seder meal is when the youngest child capable of doing so asks the four questions. The first question has become world famous (at least in New York...and probably Miami.) Why is this night different from all other nights? And so it only seems appropriate this week to ask a similar question about the economy, with the general consensus having become that the U.S. has tipped into recession. Why may this recession different from all other recessions?

The current downturn was not sparked in the usual way that economists have thought about business cycles since World War II. The standard model, if there is one, is that the economy gets up a good head of steam, causing inflation pressures to build, and causing hoarding of some goods, over-production of others and over-investment in production equipment. The assembled excess inventories become fuel for the downturn, once a slowdown hits. The slowdown is usually catalyzed by the fed raising interest rates and thereby crimping growth at the margin. It may also be accompanied by a negative wealth effect of a declining stock market, also catalyzed by higher rates. As businesses start to realize that they have too much inventory, they cut investment and production, which hits both jobs and wages and we start the vicious downward cycle of a recession. This continues until inventories are cleaned up and incipient inflation pressures have abated. By then easier credit conditions begin to start an expansion again. Okay, so much for the perfect world. Of course recessions never happen exactly this way as there are always more secular business and social as well as political factors at play as well. It is still instructive to think about the current economy from the perspective of this model. Let's take a look at inventories.

As you can see from the table above, which comes courtesy of the U.S. Census Bureau, the ratio of inventories to sales in the economy was creeping up from late 1999 to late 2000 and by mid-2001 it peaked. There was a strong downturn in this ratio in both 2002 and 2003 as businesses cut back on inventories even faster than they saw their sales decline. Note that the inventory to sales ratio continued to fall until late 2005. Part of this is due to a very strong secular trend toward better management of inventory. Technology employed in the late 1990s really allowed this so called "collapsing of the supply chain" to where the Wal Mart's and Target's of the world have become so efficient that they rarely have inventory pile up on their shelves and even their suppliers are able to run very lean. Also note, that while the stock market was declining by the second half of 2000, signaling the upcoming recession, inventory to sales was still climbing. In fact the official beginning of the recession did not arrive until March 2001, according to a chronology of the recession from the U.S. Office of Management and Budget. It was only after 9/11 that the inventory disgorgement really hit. So unlike, the economic model mentioned above, in the 2001 cycle inventory cutting and slowing production didn't kick off the downturn. Importantly, there was never any real build in the inventory to sales ratio in the current economic cycle. There was a bounce off the bottom in late 2006, but that quickly was brought back down. It has since crept up a little in 2008, as inventory grew .9% and .6% in January and February, sequentially, while sales grew 1.3% from December 2007 to January 2008, but fell 1.1% in February. So basically, like the last recession, this one was not started by an inventory cycle. Importantly, and in contrast to the last recession it seems very unlikely that this recession will be pushed along to any great degree by a future inventory disgorgement cycle.

In the last economic cycle, capital investment did appear to peak right at the economic peak in 2000. What is fascinating is that information technology spending, which one would have expected to plunge, merely slowed. However, the prior rise in capital expenditures was more than 100% accounted for by high tech spending. Cap ex for all other industries had already been declining significantly, way before the economy peaked. So it looks like the slowdown in high tech capital investment was one of the triggers of the recession last cycle....no duh. But it took a while for this decline to result in job losses, as is evident from the chart below. Note that overall employment did not begin to fall until the economy was already "in recession".

The contrasting pictures of employment across sectors after the last economic peak are also informative.

Despite the Wall Street job losses associated with the last recession, overall financial employment (including banks, leasing companies, money managers, mortgage brokerage, insurance), didn't even flinch in the downturn and powered ahead through to the recovery. Little did we know that the emerging housing bubble significantly supported financial employment. In contrast, manufacturing employment was in a downturn going into the recession and never had an up tick. Business services and trade, transportation and utilities areas saw job trends closely track the overall economy as did jobs overall.

Perhaps most telling of the employment data I looked at with regard to the current downturn was construction employment. It peaked in the last economic cycle, about when employment overall did. Interestingly, despite a supportive residential real estate market, construction employment didn't really take off until 2004, at which point it really flew. It is instructive to note that construction employment peaked last summer and started to roll over with the financial markets. Just like capital spending did in the last cycle.

So let's review. Inventory liquidation was a lagging factor in the last downturn, and may not be a factor at all in the current recession. Employment declines overall lagged the peak of the stock market last time and didn't get going until the actual recession started. Employment in most sectors turned up co-incident with the stock market recovery of early 2003.

Ground zero for "over-activity" in the last economic cycle was capital expenditures. It peaked as the stock market peaked. This time ground zero for "over-activity" was in construction. Construction employment peaked with the financial markets and is now headed down.

With these observations in place, I will make a couple of guesses about what the future might be. I think construction activity and employment will get worse as commercial real estate activity cools in addition to residential. Interestingly, employment in the financial sector has been in a secular uptrend in this country and the 2000 recession did not even touch employment growth in the financial arena. I believe that that is due to the longer-wavelength credit cycle, which drives financial employment(see my piece The De-leveraging Cycle Will be Televised). With the fed still easing, in financial institutions may hang in there for a little while. However, as the debt cycle turns down, I expect this sector to be a source of job losses for several years to come. The good news is that manufacturing employment is about 70% bigger than financial services employment (according to the data I looked at), so although wages are probably lower, there should be some cushion to the overall economy here. In the last cycle, construction growth replaced tech investment growth as an economic driver....just when everyone thought all new jobs would be outsourced to India or China. This time the deleveraging cycle seems likely to be a drag on employment in the financial and construction areas for some time to come. Manufacturing, agricultural and energy related work, seem likely to be a cushion, but what will the big motor of an employment recovery be? That's still an open question. From the looks of it, we may wander in the desert for some time before we are led into the promise land of growth again - be sure to bring some Matzoh along for the trip!

Employment Charts Courtesy of the US Bureau of Labor Statistics and Guild Partners

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Pizza Inflation Drives Brokers Crazy

A: Lets change it up a bit. When I'm out all day with clients, and very little time in between appointments, pizza is the way to go! Which is why I get reminded of food inflation daily, and don't need the gov't to tell me that its under control because the core datasets are not showing anything yet. Passing my favorite UES pizza joint (Patsy's on 118th & 1st still is my all time favorite), Anna Maria's on 83rd & 1st, shows me how they are passing on rising flour costs to customers! $2.75 a slice, talk about dough!

The price you pay for living in Manhattan! What's a slice going for around you guys?

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LOST: Time Loop Theory

It's my birthday tomorrow and so today is a day off! I kind of wanted to talk about something totally unrelated to the economy and Manhattan real estate for once, but still provoke some thinking. So, I wanted to talk about this LOST theory that someone told me about.

WARNING: This theory is just some guy's, (Jason Hunter) opinion on what is going on in the show LOST. For me, this is it. While I don't think it spoils anything, some people may want to continue watching the show with as little info as possible, so they can figure it out on their own. So, if you are one of these people, you may not want to read this.

Below is a visual courtesy of TimeLoopTheory.com, here are the links if you want to understand this theory. It's pretty damn cool.

THE TIMELINE (READ THIS FIRST)
Q & A
REBUTTALS
SUPPORTING EVIDENCE

That's it, that's the end of the story. Anyone know a physicist to elaborate on this theory, and where the holes are?

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Renovating In A Cooling Market

Very busy right now with clients & the new urbandigs charting system. Postings will be light for next week or so, when enhanced chart system will be launched. Please bear with me! For now, here is a quick renovations tip for a seller looking to spice up their property for resale, in a tough marketplace; dollars & sense!

A: If you bought a wreck for a discounted price or just found an apartment in good, but not great condition, then you'll probably want to renovate. But what if you are looking to flip the property or sell it within the next 2 years or so? What renovations are worth it and what aren't in a cooling housing market? Let's try to answer this common problem! Originally Published July 31st, 2006

Past history tells us that money spent on kitchens, bathrooms, and floors get you the most money back at resale! But thats in a booming housing market, not a cooling one. To find out what renovations pay off in a slowing market, lets try to go into the minds of a buyer who is dealing with less affordability due to higher lending costs (like today), and may have some uncertainty about the market in general. In short, the buyer is very cautious how they spend their money!

Bobby Buyer makes $150K a year, has $150K in cash in banks, and wants to buy a $500K condo with 10% down. OK. Right off the bat he will need about $70K to close on the deal ($50K for down payment + $20K or so for closing costs). That leaves him with about $80K AFTER closing to do what he wants with the property. Chances are he is NOT finding a fully renovated condo for this price so lets assume the apartment needs work! Should he:

A: Renovate the kitchen
B: Renovate the bathroom
C: Renovate the floors
D: Renovate ALL OF THE ABOVE

Tough question. Now lets assume that Bobby Buyer intends to sell the apartment in 2 years, once he satisfies the tax code for primary resident tax exemption of up to $250K. Lets be conservative and assume the Manhattan real estate market will stay flat to down over the next 1-2 years, what renovations would make sense to you?

Here are my thoughts, one by one.

A. Renovate the kitchen - DEFINITELY NOT! It will cost about $20-$25K (min for gut renovation on most kitchens - add 10-15K easily for high end renovation on kitchen) or more to redo your entire kitchen, plus 1-2 months of contracting work that you have to deal with. In addition, kitchens are a very personal room that most buyers like to fit into their own taste. If your renovations conflict with the potential buyers taste, you may NOT get any premium when you go to resell.

Now, given current market conditions and our quick prediction on what the market might be like in 2 years, how are we to expect top dollar for this type of renovation where we cant guarantee the buyer will even like it? We can't! Pass on this given the situation at hand as to me it looks like a high risk (due to high cost), low reward (premium not guaranteed) scenario.

B: Renovate the bathroom - POSSIBLY! You can get away with cosmetic work to the bathroom for relatively cheap. Options include re-glazing the tub, re-tiling the floor, a new medicine cabinet, and a paint job. You don't have to spend $10K on a bathroom if you don't want to and being stingy on this work might make for a good investment at resale. Buyers HATE disgusting bathrooms and showing a nicely refinished bathroom could mean the difference between a bid of $425K and $440K. Dollars & Sense; if you can spend $5K and make a bathroom much nicer than it is now, then DO IT!

C: Renovate the floors - DEFINITELY! I'm huge on hardwood floor resurfacing because of the risk/reward ratio that this renovation offers. I know, you hear risk/reward and you think of gambling or stock trading. Well, thats how I view things. If you can spend $1000-$1250, or $2-$2.50 a square foot for a 500 sft surface area of hardwood flooring (whose apt size probably totals 650 sft), and get a newly finished floor that just shines back at you, THEN DO IT! Trust me, it is night and day for such a little amount of money. When you go to resell, buyers will have a great first impression when they open the door to a bright floor that shines in their face! A good first impression for the buyer is critical when selling a home and equates to a higher bid at resale.

D: Renovate ALL OF THE ABOVE - NO! If it was up to me, I would spend $6,000-$7,000 total on refinishing the floors and re-doing the bathroom as much as possible with the remaining funds. Adding in the kitchen renovation will boost your expenses to almost $30,000 and force you to get $585K or so at resale to break even (taking into account seller fees). It just doesn't add up.

The SKINNY:

IN A SLOWING HOUSING MARKET YOU WANT TO DO THE LOW RISK HIGH REWARD RENOVATIONS THAT COULD PAYOFF AT RESALE. THESE INCLUDE FLOORS & BATHROOMS, NOT KITCHENS!

Of course, its entirely up to you and the money you want to spend on your new home. To each his own. Just before shelling out $20-$25K on renovations, ask yourself if you will want to sell in under 2 years. If you do, I strongly suggest cutting this expense down to $7K or under and that to me means floors and bathrooms! After all, spending more money than you want to will only worsen your financial situation and might force you to sell down the road sooner than you would otherwise want to. Not a good recipe should the housing market remain slow and you need to find a buyer fast!

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Fed Set To Reveal Poker Hand; LIBOR vs FFR

A: With the fed meeting this week and announcing their next move on Wednesday, plus the first glimpse of Q1 GDP, it seems the fed is set to reveal their hand and let us know if rate cuts are in fact ending soon! The current consensus on the street from people I talk to tends to be a 'one & done' move, with a change in the issued statement. With 3-Mth LIBOR still 65+ basis points above the fed funds rate, we are left to wonder whether the credit crisis is over or just in a the so called 'eye' of the storm.

Lets start with the fed. We will get a glimpse of Q1 advance GDP on Wednesday, before the fed announces their decision; so clearly that information is playing into the next fed move. However, with oil trading at $120/barrel, and other commodity prices surging to the 'weak-dollar' policy we have seen in the past, consensus is for a change in bias! I doubt the fed will disrupt market expectations, so instead of looking at their action (I'm expecting a 1/4 point cut, along with the street's expectation) focus on the issued statement for changes to the following passages from the previous statement:

a) 'inflation has been elevated and some indicators of inflation expectations have risen'
b) 'outlook for economy activity has weakened further'
c) 'financial markets remain under considerable stress'

Personally, I expect an increase focus on inflation and a decrease focus on 'considerable stress' in the financial markets; thinking this way since April 18th when 2YR treasury yields were about to go above the fed funds rate:

"Take a look at the 2-YR treasury yield over the past month (chart on right), up almost 70 basis points. In fact, yields are up across the board for treasuries, as the stock market rallied over 4% this week. The most dramatic action in the bond market was in the short end; 3mth, 6mth, 2yr & 3yr yields causing the so called 'flattening' of the yield curve. This gives investors more incentive to cash out of longer term treasuries, and put that money to work elsewhere (stocks?). It also could be a sign that expectations are rising for less action from our fed, probably resulting from pipeline inflation pressures."

It's highly possible the markets rally on a positive fed statement in the sense that considerable stress is no longer seen! Time will tell. Certainly, there are signs of easing in a few sectors of the credit markets. Specifically:

1) spreads in CDX indices have narrowed
2) spreads in CMBX (commercial re mbs) have narrowed
3) investment grade corporate debt spreads narrowed

What isn't improving is:

1) money market rates
2) LIBOR rates
3) ABX indices

These are just a few sectors that I follow and discuss with friends I know on front lines. There are many other areas that I am not as real-time updated on. Lets focus on LIBOR for a moment. LIBOR, the London Interbank Offered Rate, is the most active interest rate market in the world. It is determined by rates that banks participating in the London money market offer each other for short-term deposits. LIBOR is used in determining the price of many other financial derivatives, including interest rate futures, swaps and Eurodollars. So, it's a worthy indicator of stress amongst the banks; are they aggressive or reluctant to lend to each other?

One way we can determine this is by comparing the LIBOR rate to the fed funds rate, and looking at the spread between the two rates. In normal markets, 3-MTH LIBOR is within about 15 basis points, or 0.15%, of the fed funds rate, which currently stands at 2.25% going into Wednesday's meeting! Below is a chart (courtesy of Financials.com) showing you the spread between 3-MTH LIBOR and FFR for the past 30 days; notice the widening of the spread in mid-April!

This is the simplest way to show you, what I like to look at for a glimpse into bank's willingness to lend to each other. Now, there could be a number of reasons for this abnormal spread of about 65 basis points:

1) credit worries remain
2) banks are capital constrained as they correct balance sheets
3) recent concerns about LIBOR reporting
4) expectations of rising fed funds rate in near term

I'm sure there are more. But fact is, this wide spread tells you that banks are still reluctant to lend to each other! It's a signal of continuing distress. Which leaves us wondering, who is right? Is LIBOR lagging and behind the curve in its behavior to narrow closer to the fed funds rate OR is LIBOR leading and telling us that more stress is yet to come in the credit markets?

One thing is for sure, and that is by end of day Wednesday we will know a lot more information regarding our economy, the potential recession's beginning, and what the fed is likely to do with rates over the next few months!

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Contract Re-Assignments: A Sign of the Times?

A: For all you guys that want front line reporting. I just went through my first contract re-assignment closing for a buyer client of mine; so basically, a buyer goes into contract for a property but for whatever reason CAN NOT close on the deal. Likely culprit is inability to get financing. Instead of going through the headache of litigation over the down payment and who can claim it, the original buyer attempts to assign the contract to a new buyer. The positives for the new buyer include getting a deal that was in a previous pricing amendment or a unit that was in a sold out line. The negative is that the terms of the deal with the sponsor are non-negotiable and will be the same as the original deal; but that doesn't mean you can't work something out with the assigner on incentives for taking on the transaction!

Lets go back 5 1/2 months when I published a post titled, "New Dev Closings: A Potential Problem?", where I stated in an unbiased discussion:

"I want to discuss something that has NOT happened, is not even in the very near term horizon, but very well may impact the Manhattan marketplace at some point in 2008; buyers with expected new development closings amidst the new credit world.

What happens to all those new development buyers that are currently in contract, waiting for building completion to close, if the jumbo credit markets continue to be in distress and there is a much different lending world than when the original contract was signed?

What if the buyer doesn't have the doc's to get the commitment, if lending/underwriting standards have tightened so much in the past 3-6 months? What if the buyer gets a much higher interest rate than was originally anticipated? What if the bonus doesn't come in as expected? What if they lose their job? What if the property becomes unaffordable?"

The post back in October is a great example of me discussing my true feelings on what could be on the horizon, that was not a trend yet, but due to the macro fundamentals that were building at the time seemed a likely result for our marketplace. Its all about being one step AHEAD OF THE CURVE!

Anyway, back to the assignment. What I discussed back in October is now reality; albeit a rare one at this point in time. There are actually a few other assignment requests in the same building that we just completed our deal for a few days ago. This was confirmed by the attorney who has done a number of deals in this building, and by this different ad in craigslist that I found this morning (all details, building, etc. were not included for privacy):

In an environment of tighter underwriting standards & credit quality based lending rates, contract assignments become a very real option for those that can't secure financing due to the credit crunch. I would expect this trend to continue, especially for those financially borderline buyers & speculative investors who signed new development contracts of sale BEFORE the credit crisis began in July 2007. Quite simply, it was a different world back then.

Now this is very important, I do NOT view this as anything that will take down our market; and is likely to be more of a rising 'pockets of distress' trend since contract assignments occur in strong markets too. It is just another sign of the times and tells you that the world we live in today is quite different than the world that existed during the boom times. For my client, they got to purchase a desired unit that was part of a sold-out line as of many months ago in a nearly sold out desirable building; plus a minor incentive by the original buyer to take on the assignment.

Anyone else hearing about contract re-assignments in their neighborhood/building? I would be interested to see how widespread this trend is at this point in time.

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Manhattan Downshift, Yes or No?.......Let us Know

So someone has finally come out and said it. Business in New York City has slowed down. According to an article in this week's Crain's, Is there a cheaper bottle?, "across the city restaurants and hotels are noticing a significant falloff in what is traditionally a major cash cow: corporate parties and banquets."

Maybe three months ago my partner tells me, "when I take the subway home at night after working late, there's nobody on it, people aren't going out like they used to". He stops me on the street in front of Grand Central as we are walking to lunch last month and says "I used to work around the corner from here, and you could barely get down the block this time of day, there were so many people on the street....take a look around". "You're right," I say, "it's dead" (relatively). I launch into a story (something I'm infamous for...and although they are usually way too long, they often have a point): "So a buddy of mine calls me from San Francisco just after the tech bubble collapsed and tells me, I just drove back from seeing a company in the (Silicon) Valley and there was no traffic in either direction...business is dead." At the time I laughed and said "that dosn't mean anything"......but it sure did.

A couple of weeks ago I hear through the grapevine that a well-trafficked New York eatery, known for its power lunches, that happens to have a diverse clientele representing New York's major industries - Wall Street, media, real estate and supporting professional services like law and accounting - had seen a sharp slowdown in traffic. I stopped by and inquired...So how's business? The answer..."Don't tell anyone else, but it's slow." I contemplated this admission, which only made sense, and thought about trying to gather information for an Urban Digs piece. But let's face it, who would go on the record saying business was rolling over.....unless it was already so bad that everyone knew....sort of like asking brokers about a real estate slowdown or the President about a recession. I shouldn't have let it stop me....mea culpa. But I had trouble finding much corroborating evidence in the media. There was the hotel manager for an unnamed four star brand quoted by the blog HoweStreet.com saying ""business is down across all of our hotels in Manhattan. When the finance industry isn't doing so well, we aren't doing so well either." There was a quote by a manager at Delmonico's "You definitely see a little decline probably in the lunch crowds because I think the companies have cut down on their expenses." Offsetting the slowdown is the obvious surge of tourist money making its way into the coffers of New York businesses.

It's pretty clear, however, that corporations are cutting back on parties and banquets and trying to rein in hotel expenses, and this is impacting lodging and restaurants in the Big Apple. The Financial Times notes that Duetsche bank execs are being told to wash up at the airport frequent flyer lounge after an all-night flight instead of getting a hotel room to use to clean up before a morning meeting.

At the lower end of the economic spectrum, the strains of the slower economy are already being seen. The New York Daily News notes today that people in New York City receiving money from Uncle Sam's stimulus package expect to use it to pay existing bills.

I suspect that even the wealthy, sophisticated and good looking Urban Digs readership....LOL.... may be going out less, springing on fashion items and accessories less and maybe even driving your car/SUV less or generally keeping a lid on expenses. You may also be noticing that there are fewer people frequenting your local watering holes and eateries......although they can't be saving that much grabbing a slice of pizza instead. Anyway, we want to know. Tell us if you perceive that business in New York has slowed, whether it's your business, business at establishments you frequent or just how much money you are spending or plan to spend. Inquiring minds want to know!

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Fed Cuts 1/4; Growth Risks Remain

I did NOT read the statement yet, and simply heard the statement read on CNBC...my gut reaction, this is a much LESS hawkish statement than I thought would come out. Still a comment about risk to economic growth and to inflation, but certainly nothing that SHIFTS the focus from growth to inflation. Thats my gut reaction. More to come later. It seems a pause is in the works for a while now!

ADD-ON @ 2:33PM - After reading the statement here, I find this statement to be WAY LESS HAWKISH than I originally thought it would be. I see the following statements that are associated with growth concerns:

*Recent information indicates that economic activity remains weak.
*Household and business spending has been subdued and labor markets have softened further.

..and the clearest statement:

*Financial markets remain under considerable stress, and tight credit conditions and the deepening housing contraction are likely to weigh on economic growth over the next few quarters.

The 'downside risks' phrase was left out. Take it for what its worth, but this statement coming along with the rate cut, makes me think they will pause, with the full intention of ACTING if economic data continues to come in weak. I think many expected a strong stance in the wording against inflation. The fed still expects the slowing economy to help moderate inflation, so they aren't budging yet in taking the offensive against rising commodity prices and pipeline inflation threats. I think:

a) future rate CUTS are still a very real possibility
b) the fed will be data dependent again on the economic data side
c) the fed just doesn't know if the worst has come in yet, but also knows its way too early to abandon the focus on growth concerns

The street got what they were looking for, I just think is a lot less hawkish than some markets were pricing in. I wouldn't expect that strong dollar induced selloff in commodities just yet!

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