Inflation To Fly? Bond Yields Hitting Mortgage Rates

Posted by urbandigs

Thu May 29th, 2008 02:27 PM

A: Real Time Economics had a post yesterday stating a call by JP Morgan economist Michael Feroli that headline CPI will hit 5%. Why is this not startling? Because we only have one more month of statistical wizardry, before the seasonal adjustments are removed from inflation data; finally showing in the data reports what we see everyday! Today, bond yields continue to surge, causing mortgage rates to follow suit. Let's see what a mortgage insider sees right now as a result of all this.

Maybe by talking about it more, will lead to less of a shock when the data comes out? Ehh, who knows. Last week I wrote a piece titled, "Inflation: One More Month of Statistical Wizardry", that focused on an article in The Post quoting a government official responsible for calculating government inflation data:

"We are going to show huge increases," predicted Pat Jackman in a telephone interview with me last week. "If gas prices are stable from May forward, we are going to end up showing roughly a 16.3 percent increase [for the period] between May and December."

But it's downhill from there. "Beginning in June," Jackman said, the seasonal adjustments "will start adding in" inflation, which will be reflected in July's CPI. Why? Because the government changes all of its figures to reflect the seasons. Here's the one thing you need to know about seasonal adjustments: what goes in, must come out.
When I see what the bond market is doing (which by the way is causing some havoc in the mortgage markets with higher rates in the past week or so), I get the same feeling I got a few weeks ago: bond market is pricing in future inflation risks, not growth prospects.

On May 7th, I discussed the steepening yield curve after KC Fed President Thomas Hoenig warned of inflation risks and what this likely signifies for near term:
a) heightened inflation expectations/concerns
b) rates expected to rise in medium term
c) US dollar support
d) economic slowdown/recession expected to be mild
I'd continue to stick with a,b, & c from the above and disagree about the mildness of the economic slowdown. It's hard to imagine higher rates at a time when the economy seems to finally be stabilizing from the potential threat of systemic collapse to the financial system. I mean look at what we are dealing with here: continuing housing recession, tighter credit conditions, surging food & energy prices, negative wealth effect from stock markets and home values, softening jobs market, and on and on. Now we may have to deal with higher rates too?

Take a look at what the 10YR has done over the past 3 months:


In the last few months, the 10-YR yield is up about 79 basis points from 3.31% to what looks to be about 4.104% right now. Thats quite a move considering there was no move by the fed, but then again, it seems like there didn't need to be! In my opinion, the bond market is pricing in a future environment where inflation reports are going to start showing what many have feared, yet expected, for a while now --> a SURGE in headline inflation that will cause the fed to turn hawkish with rates! Starting in July, let's see how it comes out.

For now, us Manhattan real estate junkies can expect lending rates to be surprisingly higher than what it was only a week or two ago! From one of my trusty anonymous mortgage insiders, I get this real-time update to my question:

My Question:
I am hearing rates have surged in past 1-2 weeks with bond market? True? Also, I am hearing about tighter standards for condo financing? Any update?
Anonymous Mortgage Insider's Answer:
"Rates are HORRENDOUS, they have surely sky rocketed in the past 2 weeks. Currently I'm at 6.375%/6.50% on a conforming 30 year fixed. As far as 90% lending on condo's, this is a very touchy subject. I'll explain why.

If it is the 80/10/10, then your info is correct; banks are no longer providing home equities up to 90% due to the destruction of the entire Home Equity line of products. They are by far one of the most riskiest products a bank can offer at this point in time.

However, if you are talking about straight 90% financing (with PMI), then your info is not correct as I know for a fact that I can still do it. HOWEVER, I can only provide it in Manhattan because every other area of NYS is deemed a declining market and we must take 5% off the maximum lending LTV. So essentially 90% minus 5% = Maximum 85% financing outside of Manhattan."
Great stuff from the front lines! Calculated Risk recently discussed a Judge's ruling that a National City 'Stated Income HELOC' that had been foreclosed out, would be discharged; setting up more losses for holders of these distressed loans and/or the securities derived of these products. Clearly this having an effect on the perceived risks of HELOC's in the mortgage markets.

The Million Dollar Mansion Tax Explained

Posted by urbandigs

Thu May 29th, 2008 09:27 AM

A: A simple question yet one that many buyers get confused about, especially when they are looking to buy into a new development, and the purchase price is right around $980,000 or so. Here in Manhattan, the mansion tax is a state tax payable by the buyer for transactions of property priced $1,000,000 or more. For those familiar with NYC real estate, that ain't no mansion, but the tax is certainly real!

Definition of Mansion: a very large, impressive, or stately residence. An abode or dwelling place.

mansion-tax-manhattan-real-estate.jpgAlright, I'll take 'an abode or dwelling place' for $200 Alex! A little history for ya. The mansion tax was instituted by Governor Cuomo in 1989 as a surcharge for the wealthy; back in those days $1M actually bought you a property that could be called something close to a mansion. Talking dollar value, $1,000,000 in 1989 equals about $1,732,443 in purchasing power today, given inflation trends (using this BLS inflation calculator). Today, the mansion tax is an accepted closing cost that buyers' know is coming.

But here is a little something you may not have known about the mansion tax; transfer taxes are considered part of the purchase price!

No other closing costs are considered as part of the purchase price, in regards to determining if the mansion tax is owed. The mansion tax is 1% of the purchase price or 1% of the purchase price + transfer taxes.

As we all know, this little tidbit about the mansion tax only applies for purchases of sponsor units (new development or previously held sponsor unit sales) in which the sell side closing cost of the city transfer tax, is passed down to the buyer at closing.

The Wool Law Group PLLC has a great webpage explaining more details about the New York State Mansion Tax:

* The mansion tax increases a seller's basis for the purpose of calculating capital gains tax. The amount of a seller's gain is reduced not only by capital improvements but by the amount paid in mansion tax. So, like a tax write-off, you can deduct the mansion tax from any capital gain realized upon resale.

* While the law provides that the buyer pays the tax, the parties can contract otherwise. Should the seller agree to pay the tax however, the sales price will not be reduced by the amount of tax paid for the purposes of calculating capital gains tax and real property transfer tax.

* Unless the property is subject to a lien that amounts to $1 million or more, the recipients of real property transferred in the following ways are not subject to the mansion tax: gift, devise, bequest, inheritance or transfer by will. Such transfers are not considered taxable transactions.

* The mansion tax is not applicable to the sale of personal property. If a home's contents is included in the price, the price should be bifurcated into the real property price and the personal property price. It must be noted however, that sales tax is due on the sale of such personal property.

So, can you get out of the mansion tax? Ehh, its not that simple. Falsely recording a sales price so as to avoid the mansion tax equates to tax evasion. Now I am not an accountant or a lawyer, but the phrase 'tax evasion' sounds like something to avoid. With that said, talk to your attorney about purchases that hover right around the $1M mark regarding your options and don't risk punishment by the IRS to save 1% of the purchase price that can be used in your favor to reduce capital gains at resale anyway!

Know your closing costs ahead of time and calculate it into your budget!

Confidence Trumps All

Posted by urbandigs

Wed May 28th, 2008 09:17 AM

A: It's a messed up world we live in today. With oil backing off recent highs and falling $2.50 this morning, I can see it already...'stocks surge as oil prices fall to $125/barrel'; yea, like that will save us. We have seen Moody's admit to a flaw in its ratings' model, which is now being investigated by the SEC because Moody's failed to fix the error once it was detected; you mean some of those CDO's were not AAA, wow what a surprise. It's a world where surging commodity inflation is not seen in the data because of seasonal adjustments; you mean, it is really there? And it's a world where we have seen 260,000 jobs lost in the first 5 months of 2008, yet the unemployment rate ticks down in the last report; you mean, unemployment is worse than the 5% last reported? Through all the statistical wizardry, the seasonal adjustments, the computer model glitches and cover-ups, and insanity in the oil markets one thing has been consistent ---> confidence is down!

By almost every measure I can find, consumer confidence is at 10-30 year lows. As readers of UrbanDigs know by now, I am very big on consumer confidence and buyer confidence when I discuss the local Manhattan real estate market that I do business in; here are just a few reads on the topic.

* Does A Weaker Dollar Accelerate Foreign Demand?
* Buyer Confidence? We Need A Formula!
* Jobs / Confidence / My Thoughts

The bursting of the housing bubble, the credit crisis, and the commodity inflation shock that we all just went through over the past year or so has done significant damage to buyer/consumer confidence. This is something that does not change overnight. One by one I see it in the indexes that track confidence.

The Conference Board Consumer Confidence Index

The Conference Board Consumer Confidence Index, which had declined in April, continued its downward trend in May. tns-confidence.jpgThe Index now stands at 57.2 (1985=100), down from 62.8 in April. The Present Situation Index decreased to 74.4 from 81.9. The Expectations Index declined to 45.7 from 50.0 in April.

The Consumer Confidence Survey is based on a representative sample of 5,000 U.S. households. The monthly survey is conducted for The Conference Board by TNS. TNS is the world's largest custom research company. The cutoff date for May's preliminary results was May 20th.

The Skinny: The Consumer Confidence Index now stands at a 16-year low

Source: TNS The Conference Board

The University of Michigan Consumer Sentiment Survey

A survey of consumer confidence conducted by the University of Michigan. michigan-sentiment.jpgThe Michigan Consumer Sentiment Index (MCSI) uses telephone surveys to gather information on consumer expectations regarding the overall economy.

The preliminary report, which includes about 60% of total survey results, is released around the 10th of each month. A final report for the prior month is released on the first of the month. The index is becoming more and more useful for investors because it gives a snapshot of whether consumers feel like spending money.

The Skinny
: The University of Michigan consumer sentiment index dropped 3.1 points in May, according to preliminary data. The index came in at 59.5, the lowest reading in 28 years, since June 1980.

Source: Bloomberg

Nat'l Association of Realtors: Consumer Confidence Index

OK, so I am including an index from an organization whose past two chief economists (Lehreah & Yun) are widely criticized for spinning datasets and issuing upbeat forecasts that ultimately led to a loss of credibility.

Still, the consumer confidence index that they gather shows a consistent decline as do the above measures of confidence.


The Skinny: The last reading of 62.30 is down 41.39% from 1 year earlier, and is at the lowest level in the past 15 years; since mid 1993.

Source: NAR

Starting to see a trend here? As housing deflation enters its third year, the crunch that resulted is clear both in the pockets of consumers and in the banks that lend to them. Quite simply, the housing ATM is virtually gone as declining equity in a person's home, as a result of past withdrawals and falling value, is yet to fully impact spending. Banks are making it harder and harder to qualify for a loan and to refinance out of trouble; as they deal with their own balance sheet issues.

On a macro note, it was never really about subprime! This was about decades of growth fueled by a platform of credit and debt spending that was kept going by the innovations on wall street. The party just couldn't go on forever. This credit cycle will prove to be one of the most painful in recent history, and will take years to play itself out. As commodity inflation hits food & energy prices at a time when housing deflation hits consumer confidence, the wallets of consumers will be pinched. This is an overall debt problem that was sparked by subprime and spread to auto loans, credit cards, alt-a, prime, option arms, cosi/cofi, and any other types of debt that were securitized by wall street. You can't have decades of credit allowance and debt building unleash itself in a final 5 year frenzy that inflated the housing bubble, unwind in 10 months.

The system is being tested, and is likely to be regulated in the future. The very environment that allowed house prices to rise 100% in 4-5 years, is gone. Back are the days where consumers will be forced to cutback on spending as confidence falls, debt repairment, and saving whenever possible. Thats right, saving! If anything, a decline in consumer confidence will result in a decline of discretionary spending, only after the credit card noose is put on!

That recovery that everyone expects in the 2nd half of 2008 and from the tax rebate checks, in my opinion will be short lived. The surge in sales volume in some local housing markets after purchases basically stalled for months, will be short lived. I have to agree with the great one, Warren Buffet, and say that this recession will be longer and deeper than most think (story). With confidence so low, housing deflation + commodity inflation, and a weak jobs market, I just don't see how housing will see a sustained recovery. With inventory levels at 11.2 months of supply given existing home sales volume, talk of a sustainable recovery is quite silly. This cycle will certainly be one for the history books!

Truancy + Delinquency = Charge Offs

Posted by jeff

Fri May 23rd, 2008 05:08 PM

Apology in advance for the left/right charts displayed in this piece as I try to make my point.

So the Federal Reserve Board stats for bank delinquencies and charge-offs are out, a little early this quarter to beat the holiday rush.....and they ain't pretty. Recall that these numbers cover only federally regulated banks, but it's a big enough and broad enough sample size that it is highly indicative of the state of bank balance sheets overall. Let's start with the source of all the problems, residential real estate loans. Delinquencies hit 3.64%, which rings the bell, it's the highest level in the data, which goes back to Q1 1991 - the last real estate down cycle - exceeding the 3.43% level of Q4 1991. Here is the chart:


Banks have now started to react to the pipeline of souring loans, by charging off the value of more of these loans as outright losses. Charge-offs exploded to .84% of residential loans. This was well above prior spikes of .45% in Q3 2001 and Q4 2003 of .35%. jeff-2.jpgIn the early 1990s real estate down cycle residential loan charge offs appear to have peaked during Q4 1992 at .31% (data only go back to Q1 1991 and could have been higher in the late 80s as several regional residential markets had severe problems from the late 1980s to early 1990s).

Many times delinquent loans are remedied before bank's actually have to charge them off and charge offs are sometimes reversed if the sale of a property produces a value for the bank above what was charged off. This all depends on the "severity" of losses on the underlying real estate. Unfortunately, with charge offs already well ahead of the early 1990s experience, and delinquencies now above the early 1990s level, it can be surmised that charge offs will get worse from here and severity may be.....more severe.... than the last cycle.

As you can see from the chart below, higher mortgage resets, loss of household wealth and the slow economy are now taking a toll on credit card borrowers and lenders.


Credit card delinquencies are getting back up to recessionary levels around 5%. Due to periodic bouts of poor underwriting, this is territory the industry has been in more often than not. Interestingly, according to Seeking Alpha, Capitol One displayed a slide at a recent investor presentation showing that credit card delinquencies rise ahead of unemployment, not vice versa. So the rise we see in credit card delinquencies probably pre-sages further job losses. The question becomes, does this feed into more credit card losses due to the levered state of the consumer?

Credit card charge offs are not worth dedicating a chart to. Suffice it to say that they are near early 1990s levels, as would be expected, but have not spiked as they did just after 9-11 and the bankruptcy reform of late 2005.

Commercial real estate: Now here is where things get interesting. Recall that last quarter there was a clear "break-out" in commercial real estate delinquencies after many years of being under-wraps, post the cataclysmic early 1990s. As expected, we moved further towards 1990s territory this quarter with delinquencies jumping almost a full percentage point, from 2.75% last quarter to 3.72% and reaching a level not seen since Q3 1995, when it was recovering from a peak of 12.75%.


Now those were very different times and I don't expect that we are going anywhere near those numbers, which were caused by a huge supply glut, which just doesn't exist today in most markets and segments. Today's commercial real estate delinquencies seem very likely to get worse, based on the big acceleration we have seen recently, tighter credit markets, and tougher underwriting standards. My guess is that the fact that real estate owners more often have 5 year loans these days than the 10 year loans that used to be more fashionable years ago will mean that many more owners will need to refinance during this down cycle.

jeff-5.jpgAs you can see in the chart to the right, commercial real estate charge offs have begun to follow suit with delinquencies. My guess is that this cycle severity will be less, as despite the fact that many owners of commercial real estate are over-leveraged, the underlying assets supporting loans are in better shape this time around due to less over-building.

Now in the last credit cycle, what really hurt the banks were their commercial real estate losses. This is not the case today, as we can see from these charts. It's the residential losses that are driving the downturn. jeff-7.jpgThe interesting thing is that although residential delinquencies and charge offs are now in record territory, the overall impact on total bank loan delinquencies and charge offs has not driven us anywhere near the levels of the 1990s.

Additionally, the data which goes back further in time than the loan specific data shows; that very high rates of delinquencies and charge offs persisted for much of the late 1980s and early 1990s. The bottom line is that as of today we are just hitting the levels reached in the last recession. There is still room for loan delinquencies and charge offs to move much higher without getting to the levels seen in the early 1990s, when the banking system was literally teetering on insolvency. Additionally, enormous amounts of capital have been raised in the last couple of months to shore up the capital structures of banks (and even more so for brokers and hybrid bank/brokers). We may actually squeak through this without a full fledged banking debacle.

Charts Courtesy of Guild Partners

From the Blogosphere:

Bernanke: Mortgage Delinquencies & Foreclosures Speech

U.S. Credit Card Industry Moving into Uncharted Territory

Banks Continue to Stuff Loan Cushions

Double-Bubble Trouble in Commercial Real Estate

Oooooh Mama! Did Someone Say CHARTS?

Posted by urbandigs

Thu May 22nd, 2008 02:47 PM

A: Sorry guys, but this has been way too long in the making that I have to plug it before all little tests are done and bugs ironed out!


Now go play, chart navigation panel at top for NEW LISTINGS/CONTRACTS SIGNED, PRICE REDUCTIONS, & TOTAL INVENTORY! Remember, we just put this up today so if you find any bugs or problems with the interface or page loading, email me at 'nrosenblatt' + 'halstead' + 'dot com'.


NY City Land: Will High Prices Cure High Prices?

Posted by jeff

Wed May 21st, 2008 09:40 AM

I have been contemplating a piece on NY City land prices for a month or two. A while back I was told about a development site in Long Island City that was going to be sold for under $130 per FAR (buildable square foot) in an area zoned for residential development (residential if permissible is currently still vying with hotel as the highest and best use of land in most of the New York City area, except for the central city, where a combination of retail and office can also make sense). This sale price was a significant downtick from the $140 - $150 per FAR that was typical in Long Island City heretofore, with some sites going for even more. I had also heard of some deals for downtown parcels, attempting to hit new highs failing to close. These were my first whiffs of a land price downturn - of course, developers really in the know, may have seen this happening ahead of me. Give yourself a pat on the back if you did. Since I consider myself a somewhat educated observer, not a super maven, I didn't get really interested in the subject until I saw an article in the Real Deal entitled Dirt Cheapens. The article confirmed my suspicions and quoted several brokers, including John Reinertsen, a senior vice president at CB Richard Ellis, who reportedly said:

there is "probably" a 20 percent reduction in land prices in the boroughs. "But," he said, "It's going on in the negotiations. It's not in the asking price as yet."

However, sources for the article were practically universal in saying that prices were not collapsing, but merely back sliding after spiking up in the last 24 months. Changes in the construction financing environment (banks are willing to lend a lower percentage of project cost) and imminent expiration of the 421a benefits were cited as the chief catalysts for the pullback.

So I was going to write an article talking about how fundamental land prices are to real estate development. How you can try to add value with better design, but you often have to pay an equivalent amount for the best architects and designers. I was going to mention that, while some try to compete on construction costs, inevitably quality, delivery speed or safety are sacrificed, and I was going to note the rash of crane wrecks and other accidents that have broken out recently.

Then I saw a little blurb in Crain's about a recent study by the Federal Reserve Bank of New York on New York metro area land prices, and the chart that accompanied it made the hair on the back of my neck stand up. The short commentary indicated that the authors at the Federal Reserve Bank of New York (FRBNY) had concluded that the meteoric rise in the price of land in the city from 1999 to 2006, was an indicator of the area's economic vitality. O.K., I don't have a Ph.D. in economics, but hey, I get it. Things were good in New York City so land prices rose, a continued rise in land prices would reflect anticipation by investors that times would continue to be good in New York.

But judging from the numbers provided, in the five years ended in 2006 (before a further increase in H1 2007), New York metro area land prices appreciated roughly 409%. To me that implies more than just good times....that's Margaritaville. Just so you can see it visually, below is a graph of the FRBNY data set, with separate lines for the prices of land zoned for residential and land zoned for commercial and industrial use.

nyc-land-prices-nyc-real-estate.jpgPlease note that the data set the FRBNY used includes NY City and Northern New Jersey land transactions of greater than $250,000. However, the subset of numbers for New York City and the boroughs were found not to be statistically significantly different than that of the entire data set in terms of appreciation over the period. As you can see, land zoned for residential has gone parabolic....or at least half of parabolic.

I am also including a chart of the NASDAQ bubble, Las Vegas home price bubble and recent oil price run up from a recent wall Street Journal article on Ben Bernanke's laboratory at Princeton that studies asset bubbles, for comparison.

So is New York City land pricing a bubble that is starting to deflate? Just as a reality test I
looked at oil prices for the last five years. They were roughly $25 a barrel in 2003 and are now roughly $125 per barrel. That's a 400% move. So if oil is a bubble, then New York City land may be a bubble too.

Note that most bubbles are accompanied by a significant pick up in trading volume of the underlying asset. This has been true in the case of oil trading volumes, the FRBNY did not comment on whether this has been true of NY City land, but I suspect it to be so. The issue with both of these assets is "they ain't making any more oil" and "they ain't making any more New York real estate." Bubble%20Graphs.jpgSo maybe these bull markets can keep going longer than Las Vegas homes and the dot com stock market.

Another indication of a separation of land prices from reality was notable in the Fed study. According to the study, the increase in land values generally, and in prices for land zoned for residential use in particular, ran well ahead of the roughly 130% run-up in finished residential property prices in the area over the same period, according to the OFHEO index (this index measures home price appreciation while controlling for the quality of units by using repeat sales data). In the process, the profits for land development were transferred directly to land owners, leaving very little for developers.

Andrew Haughwout, one of the principal authors of the FRBNY study, was kind enough to go through it with me. His comment was "At the time that we assembled the data set, we were still in a market that was in a strong uptrend and the likelihood of it being a bubble had not really jumped out at us. In light of the changing conditions of the market, the possibility of a bubble-induced run-up is one that certainly should be considered".

So what does this mean for New York City real estate? We all know construction permits are way down in the city and that there will be a lull in new supply after the last 421a projects get out of the ground. This lull should cushion prices of finished condos on the downside somewhat. My guess is that land prices will continue to fall to the point where spreads available to be earned by developers widen out and eventually encourage significant new building again. With materials costs remaining firm, costs of money up, available leverage down and sell out prices of finished product being somewhat squishy, the adjustment in land prices could be pretty severe. This will be to the benefit of buyers of new developments, who will end up carrying a less maniacal land cost embedded in their condo prices and have more potential for future upside.

Inflation: One More Month of Statistical Wizadry

Posted by urbandigs

Tue May 20th, 2008 10:07 AM

Again, sorry for light content as we are about to install the programming files/coding for the new charting system and contractor directory today. Please bear with me as my programmers install everything and we iron out any bugs over the nest few days. I will publish a post when everything is working properly.

A: We all know that recent employment and inflation statistics have shown a big disconnect with reality! Employment figures are flawed due to the birth/death adjustment model where the BLS is assuming new company births adds jobs to the economy that otherwise wouldn't be picked up for many months. Inflation data is flawed because of the seasonal adjustments; which explains why the last CPI report stated gas prices as down 2%, when in fact they were up 10%. The markets trade on these adjusted data reports you know; and the markets surged that day because guess what, inflation was not so bad! Was it true, of course not! Do we know why, of course we do. Will the wizadry last, yes! But only for one more month!

It's like listening to the weather man tell you it's sunny outside when your getting drenched with downpours. I don't need the government to tell me inflation is or is not a problem; I can see it with my own eyes. Everything that actually is necessary for me to live (health care, food, energy, rent, electricity, etc..), costs more; and everything that seems unnecessary for me to live (flat screens, apparel, cell phone plans, laptops, memory sticks), costs a bit less. I live in Manhattan, and currently rent, and I will tell you that my rental rate is approximately 40% higher today than average rents were for similar unit's 2-3 years ago.

Well, the party is about to be over for all those who enjoyed the tame inflation numbers disclosed to us so far. How do I know this? Because I am listening to what a top government official, who helps calculate the inflation rate is saying.

According to NY Post article, "July Fireworks: Inflation Rate Will Reflect Gas Costs":

A top government official who helps calculate the nation's inflation rate says gasoline costs in the consumer price index will surge in a couple of months - even if prices at the pump don't.

"We are going to show huge increases," predicted Pat Jackman in a telephone interview with me last week. "If gas prices are stable from May forward, we are going to end up showing roughly a 16.3 percent increase [for the period] between May and December."

Why? Because the government changes all of its figures to reflect the seasons. Here's the one thing you need to know about seasonal adjustments: what goes in, must come out. Jackman said gasoline prices were seasonally adjusted into a figure that looked much better than it actually was because the price of gas climbed even more sharply in percentage terms in April 2006 and April 2007.

So when this year's price was something less than the increases in the two previous Aprils, the computers automatically turned the current year's increase into a more favorable number. Jackman said the adjustments will "mute" gasoline inflation for one more month.

But it's downhill from there. "Beginning in June," Jackman said, the seasonal adjustments "will start adding in" inflation, which will be reflected in July's CPI.
In addition to the end of the fluff in terms of seasonally adjust inflation, will come an end to the boosts in jobs assumed by the birth/death model too! I guess that is why Gold has been getting bid up recently; gold is generally viewed as an inflation hedge and safety net for uncertain times.

I discussed the REAL Jobs report on May 2nd, and showed you the wizadry of the b/d adjustment as told to us by the report itself; here is the fantasy adjustment for construction:


Reality ---> Lost 61,000 Jobs

B/D Fantasy ---> Added 45,000 Jobs

These are seasonally adjusted figures using the birth/death model to assume corporate births and new hirees that otherwise would have been missed. It just paints a very misleading picture, and doesn't tell the story of what is really going on out there. While the credit markets have been easing as a result of unprecedented fed actions, housing is still pressured, jobs market is weak, inflation for the necessities of life are surging. But the biggest problem in regards to inflation, is the expectations!

Inflation expectations are rising and in my opinion, will continue to rise as a result of the following:


I don't care how you cut it, how you count inflation, or what the gov't is telling me. Housing deflation + commodity inflation + no wage inflation will give the perception of a major inflation problem. The pain of food/energy inflation hurts that much more when your wage is falling and your house is worth significantly less than it was a few years ago. It's my opinion. Government reports that contradict reality can only go on for so long; if your outside, its cloudy, and your all wet then guess what ---> ITS RAINING!


These Aren't The Prices You're Looking For (Accrued Interest)

PPI April 2008 = 0.2%, 0.4% Core (The Big Picture)

US Inflation Miracle Continues (The Big Picture)

Introducing the Less Worse Bull Market

Posted by jeff

Fri May 16th, 2008 11:08 AM

"An optimist is the human personification of Spring" - Susan J. Bissonette

With Spring in full bloom in the metro area, and markets finally thawing from the credit crunch, this quotation seems extremely appropriate to welcome in the "It's Getting Less Worse Bull Market".

One week back from knee surgery, I'm still feeling some pain when sitting in front of a keyboard, so pardon me if the statistical back-up is a little lacking in this piece...but here we go. Corporate bond spreads have improved as you can see from the chart below comparing a High Yield ETF and the 10 Year Treasury.


The ABX Subprime Index has also rebounded as can be seen on this chart from

We know that the stock market has been acting much better, to the point that it has become extended - with nearly 77% of stocks above their 50 day moving averages (according to a recent Wall Street Journal article). It seems to be running into some corrective pressure, right where it should, at the declining 200 day moving average. In my piece Where is the Stock Market Headed? 200 Day SMA of February 4, I talked about the importance of this primary trend indicator turning negative, with specific reference to the rally that was under way at that time. I expected a retest of the lows of January at least. Frankly, with all the uncertainty at the time I expected the market to go appreciably lower. We got our "re-test" in March (getting back to the prior lows), and passed a financial market crash test (the Bear Stearns debacle) with flying colors. In the past, I have mentioned Ed Hyman and Nancy Lazar of ISI Group, and it is through Ed and Nancy that most every investor on Wall Street has learned that a wipe out of a major institution takes place at the crescendo of most every major financial crisis from Penn Central to Long-Term Capital, and that the stock market usually does much better once the poster child institution goes tapioca, as it encourages the Fed to bring out the big monetary guns. This has certainly been the case this time around, with the S&P 500 rocketing over 12% off the Bear Stearns low of 1260 to around 1,420 last Thursday. While the 200 day moving average is still negative and should continue to exert some downward pressure on the market, it is starting to flatten and I would not be all that surprised to see the market "break out" above it in the next month or two, signaling for many expectations of a more durable bull market.


So with all these emerging May flowers, one would have thought that the showers would be over with? It's easy to dwell on the continuing massive writeoffs and capital raises we are witnessing, including a small sampling here, here, and here. While the rating agencies' swords of damocles continues to hang over the mortgage insurance companies they continue to be forceful in their protest that with the latest capital infusions they will survive, as triple A rated credits no less.

The magnitude of the funds raised is pretty mind boggling. One wonders why investors are buying this new paper, if they don't expect some kind of rebound, as opposed to just an end to the bloodshed. Maybe playing the trade back to more normalized price to book values even on lower book values is enough for these players, who now see the risk of bankruptcy for financials as being behind them due to the implicit Fed put. My guess is that some players anticipate reversals of the current mark to markets at some point down the road, and see a big rebound in book value for their favorite horses in the race. It's possible, I guess, although for the most part we keep seeing default rates on various debt securities getting worse on not better.

Tom Brown of has done a masterful job explaining why losses on 2006 sub prime loans will be less than expected, check out the pieces here and here. If he is right and his analysis is hard to fault, then the market's perception of the depth of the losses got over-done....basically the norm in these types of crises. Despite this, my guess is that the returns to be garnered on much of the capital raised to offset these losses will be low in general.

Just a brief anecdote illustrating why I believe this. I was speaking to a bank official for a large regional bank about assets the bank might have that are marked for disposition. The bank has experienced significant loan impairments already and has had to raise additional capital. The official noted that they were bringing in a new head of "special assets" to deal with disposing of bad loans and real estate owned (they don't have much real-estate owned today, but he admitted that they certainly would end up owning a lot more in the future). They wanted to put off discussions regarding disposing of non-performing assets until this new gentleman got up to speed, would not be selling any assets at fire sale prices and if they had any assets that were train wrecks they would hold them for their own account until they rebounded. In the intermediate future, they would dispose of some assets at a discount, but would not start the process until the commercial real estate markets had stabilized, which would depend on stabilization of the residential sector, which they were not seeing yet. I certainly sensed no panic on the part of said bank official, and no real urgency to act. Frankly, having been taught that your first sale is usually your best sale, I personally would not be putting my equity capital into the stock of a bank that was not trying to aggressively clean-up its books today - cleaning up responsibly and not in a fire sale, but cleaning up nonetheless. Although our banks have not totally ignored the bad debt issue as the Japanese banks did a decade ago - possibly because to marked to market accounting has not allowed them to - I get the feeling that the fed put and abundance of capital willing to re-liquify these institutions has destined us to a long, slow grinding re-adjustment, rather than a band aid pull-style quick turnaround in lending markets and commercial real estate prices in regions of the country that have over-supply problems.

Meanwhile, the economy overall seems to be holding onto its expansionary ways, if only by a thread. Residential construction hasn't helped the economy in a couple of years and the hurt has likely peaked. Commercial construction will slow but not crash. Domestically, large corporations employ only those deemed critical to be located in the U.S., so the slowdown is unlikely to result in massive U.S. job losses. Overseas markets are slowing with a lag and demand for our now cheap exports may be tempered, but probably not de-railed. The consumer, who constitutes 70% of the economy, is muddling through and reallocating spending to health care and education - the two positive growth sub sectors in the economy which are driving continued services economy expansion. So if a sub prime debacle, recapitalization of the financial system, raging food price inflation and $125 oil can't kill the economy, what will? Without an exogenous 9/11 type event, we may just be hitting bottom in the economy, until a new presidential administration gets the opportunity to make some bad policy choices some time in 2009.

So what does all this mean? In four words, It's getting less worse. While there are still tons of losses to be counted, and probably lots of capital to be raised to cover these losses, future bad news looks like it won't surpass recent bad news. The numbers might conceivably be equal in size, but the capital cushions being put into place and fed backstop facilities make it appear that future holes in the dike will not cause a collapse of the entire system. People are losing their sense of fear and are beginning to take risks again. My feeling is that their returns for this risk will be low, but hey, fed funds are negative on a real basis, so how much of a positive return can one expect to make anyway?

Less worse - that is what the coming bull stock market will be all about. It won't be about growth, which I predict will take several years to recover. But the stock market has done well in other periods of low growth. This time the cloud of incipient inflation and ultimately higher interest rates may restrain equity returns, but the worst could be behind us, which will cause pain to bull fighters and remaining sleeping bears.

Just to really test my hypothesis I checked in with my old buddy Stan Weinstein, technician extraordinaire. Stan has been telling his clients that he is intermediate term tepidly bullish. He thinks the market could exceed the S&P 500 1430 level and Dow Jones 13,135 level resulting in a big short squeeze, soon. Or it could fail to do so and correct for a month or so. Either way he doubts we are going to new lows and sees a selective bull market developing in the second half. Unfortunately, he thinks the coming bull market will grade a B- and we are set for several years of sub par stock market returns.

In the meantime, business around town is slow and getting slower and the mood may continue subdued even as the market breaks above its 200 day moving average. But a better stock market is "less worse" for New York real estate. Take it for what it is, not a huge vote of confidence, just a factor that may start to augur better for the moods of potential buyers as we head into the dog days of summer.

Other Less Worse Thoughts on The Stock Market From The Blogosphere:

A Peak at Pimco's Long View

Merrill To Crank Up Sell Ratings - Major Contrary Indicator

How to Thrive In a Barren Market

Bidding When The Price Is Right

Posted by urbandigs

Thu May 15th, 2008 10:02 AM

A: A great topic of discussion for the times I think. Let's say that you are a serious and qualified buyer, have good product knowledge, and have seen plenty of units in your price point making you a mini-expert on the current state of the market. Let's also assume that you have learned what 'priced right' actually is for your price point, and that gets confirmed after you analyzed building comps for one property in particular. How do you proceed?

The Manhattan real estate market is one of the faster housing markets out there. Demand can pop up at any time, deals can fall through in a heartbeat, bidding wars can erupt if a quality product is under-priced, and buy side attorney's must be very timely in their diligence to get a deal done quickly so the seller broker doesn't use the accepted offer as leverage to other interested buyers.

With all that said, in my humble opinion, a housing market is deemed weak or strong by the level of buy side demand. In a phrase, its 'all about the buyers'! When buy side demand dries up, you will see inventory rise very quickly and all of a sudden getting top dollar is a bit harder to accomplish than in past times with stronger buy side demand. But what happens when the environment is one of cautiousness and a quality product (yes, I view property as a product that will ultimately be resold on the open market) is actually priced correctly? How do you devise a bidding strategy?


Hands down I believe in this. Sure, there will be pockets of luck here and there that will experience the beneficial 'perfect buyer' or 'greater fool theory' that generates a buyer paying a noticeable premium for an overpriced property; but these scenario's are few and far between.

As a seller do you risk it? I wouldn't advise it. Honestly, do you feel that the current market is 10% higher today than it was around this time last year? Some sellers do, I don't. But it has become socially acceptable to price a property in this manner, even when building trades from the past 6 months don't support the price that the seller has in mind. In addition, being pitched by hungry brokers promising the world and an extra $300/sft because they employ the most effective marketing techniques doesn't help. I digress.

The point of today's post comes from my in-field experience that I want to openly discuss with you. Keeping details private for now, how does a broker advise a buyer client when the right property pops up and is priced exactly how it should be priced? In short, it depends on the emotional element of the buyer, how the property meets the needs of the buyer, how the property fits into the financial affordability of the buyer, their willingness to bid in line with what the building trades for, and their acceptance that this product holds the best features for resale out of all the products viewed.

I discussed risk discounting in my quick update yesterday as a phenomenon that I am noticing with some of my buyers. But fact is, when the decision to buy is already made and the product at hand is clearly the best out of the price point in terms of value, location, raw space, light/views, and condition, AND its priced right, it is NOT the time to low-ball and price in downturn risk that has not occurred yet.

First off, you need to know how to determine what priced right is; so ask yourself:

a) Is the product's most attractive features changeable or not? Ideally, you want to put your money into a product that has the most attractive location, natural sunlight, views, and raw space. Everything else can either be changed or should be weighted less in terms of resale value.

b) Is the asking price tacking on the standard listing premium? What I mean is, many sellers typically add 5-10% to the starting asking price of their property over past comparables; giving them wiggle room to come down in negotiations? While it's not 'testing the market', its a typical practice common for Manhattan real estate sales.

c) How does the product compare to current active competition? After viewing 10-15 properties in your price point, you will learn a few things; such as, what 750 sft should look like, what a good view is, what GOOD/EXCELLENT/MINT condition means, and how all these things affect the asking price of the product.

d) Are imperfections priced into the property? All too often I notice buyers who immediately deduct imperfections from a property's asking price immediately, without questioning if the asking price already priced in work needed, or lack of light, or no view.

The final nail in the coffin is analyzing in-building trades in the past 4-6 months. Should you and your buyer broker find that the product in question set the asking price right in-line with past sales, you know it's priced to sell. Pricing in the value for a higher/lower floor unit, renovations, and layout is more of a science. In regards to what value to place per floor, the general rule of thumb is like $7,500 - $10,000 per floor; however, in my opinion this premium should be drastically lower if we are discussing properties whose light/views are relatively unchanged as you go higher up. In other words, the value of a 4th floor unit that does NOT clear the opposing building and the 12th floor unit that does and has unobstructed city views and sunlight could get away with the $10k/per floor premium. However, the difference between a 15th floor unit and a 20th floor unit where light/views are relatively unchanged, should be less.

Here is how I advise my buyer to bid, assuming the decision was made to buy and the decision was made to make this property their first choice.

#1 - Don't mess around with low-balling. It will be counter-productive and will likely result in a 'no-response' from the seller. Instead, bid a bit more aggressively than you might otherwise bid on an overpriced property. The goal is to get a response, get the seller interested and to the negotiating table. You want the seller to take your bid seriously. Using the typical 'bid 10% below ask' is not the way to handle this type of situation and will likely do more harm than good. Sure you can try, but I doubt you will get the desired result.

#2 - Present the bid properly and show you mean business. Very important. Submit the original bid in writing via an offer letter that discloses the buyer's name, job position, salary, liquid assets after closing, attorney information, lender information, and projected closing date. In addition, include a simple financial statement (assets/liabilities/salary/bonus) and a lender pre-approval letter with the original bid. This is business and you are serious. Submitting a verbal bid to the seller broker to 'feel them out' is not the way to go here. Rather, do that when you are trying to low-ball 20% below ask for an overpriced listing, not a listing that is priced to sell.

#3 - Narrow your expectations. Everyone wants a deal and to get a property at the lowest price possible. But when dealing with a property that is priced right, the risk of losing the deal is far greater than for an overpriced listing that is likely to sit for many months on the market. Assuming you know that this is a deal, that its priced right, and that it has the features you know will help at resale, you should also know that the seller is aware of these things too. The seller and seller broker has access to information that you, the buyer, do not. They know the level of interest in the property, if there are multiple second showings, and the level of desperation by the seller. Just because a property is priced right does NOT mean the seller is desperate to sell! Narrow your expectations on the seller's first response, and keep emotion out of the equation here. Deciding NOT to up your bid right below the seller's first response or accepting it outright because you have the need to feel like you won, is the wrong emotion in this situation!

UrbanDigs Says: There are deals to be had out there. Some deals show themselves as products that are priced right, while other's show themselves as a result of overpricing and now playing catch up with price cuts. The important thing to focus on is the quality of the product and the level of interest that you, the buyer, has. If you know you need to buy, and use the tax savings, and you find yourself in the above situation with a product that you know is priced right, be sure to alter your bidding strategy a bit and keep your emotions at bay. If you are a buyer that is in no rush, doesn't have to buy, are stretching to afford the product, clearly this strategy is not for you; in fact, you should re-evaluate the buy vs. rent strategy or your max budget altogether!

Light Week

Posted by urbandigs

Tue May 13th, 2008 10:53 AM

Another light postings week guys. I am very busy with clients right now and finalizing work on charting/contractor directory with programmers for launch. As much as I love blogging, frequency of posts is determined by how much time I have outside of work. Please bear with me until the new tools are launched and my schedule opens up. For what its worth, my business is busy and buyers eager to take advantage of any softness that has resulted from rising inventory and declining confidence from the credit crisis and Bear Stearns headline shock. Uncertainty over the economy, jobs market, wall st, and real estate certainly are keeping buyers cautious and savvy. I am noticing some buyers pricing in potential downturn risk in their bids; sometimes it works, sometimes it doesn't. While seller's for the most part do not seem desperate (pockets of distress can be found, especially in buildings with fierce competition), I think nobody can argue that this wall street bonus season was sluggish compared to years past. In fact, I am finding it busier now, than it was from JAN - APRIL. Best I can tell you right now. I can't speak for other brokers out there, so take it as a simple in the field observation.

By the end of this week, you should have the new charting system up allowing all of us to get a better real-time glimpse into what is going on in Manhattan real estate.

Inventory Update: Why The Jump?

Posted by urbandigs

Thu May 8th, 2008 11:02 AM

A: Because the good folks at are doing their job to solve the problem of transparency for Manhattan real estate! Here is the update.

You may have noticed that inventory for Manhattan jumped today by just under 700 new listings, bringing total active inventory (co-ops, condos, townhouses in Manhattan excluding duplicates, FSBO's and open listings) to about 7,659. The reason for the jump is that Streeteasy has expanded their listings database to include "a bunch of new sources in Manhattan". According to one of the tech guys over at Streeteasy, "...this should be the last big change, at this point we have pretty good coverage".

In a housing market without a standardized MLS system, new sites such as Streeteasy have emerged to solve the lack of transparency that is so troubling for many buyers and sellers. Transparency is a good thing, and knowing that the focus is on quality and accurate coverage makes me very proud to have partnered with such a great startup!

Here is the current inventory trend for Manhattan for the last two weeks:


I have spent the past 3-4 weeks working with developers on the new charting system for you guys, and let me say, it is looking sweeeeeeet! Very soon, the landscape will change and you will have a real-time analytical tool to monitor Manhattan total listings inventory, price reductions, new listings, and contracts signed.

The data will never be perfect without a regulated standardized MLS system, but I am extremely pleased with the accuracy of our efforts thus far. Data may not be 100% real-time, but it is accurate and in-line with respected published quarterly reports by Jonathan Miller.

For all those that can't wait, here is another glimpse into what is to come and one reason why I have been discussing the rising trend of inventory since the low in mid-December:

PREVIEW MANHATTAN TOTAL INVENTORY --> 6 Month Chart w/ % Changes Below


I hope it's worth it guys!!

Yield Curve Steepens / Hoenig Hawkish

Posted by urbandigs

Wed May 7th, 2008 09:18 AM

A: Amazing how things change. Remember late 2006 all the talk about the bond market and the inverted yield curve predicting a coming slowdown in the economy; forcing the fed to eventually cut rates? Well, the fed did so about 10 months later and cut the FFR by 325 basis points to stimulate the economy and credit markets. Now, the yield curve is steepening again and Kansas City Fed President Thomas Hoenig may have something to do with it.

First, some econ 101 about a steepening yield curve:

Steep Yield Curve
: Historically, the 20-year Treasury bond yield has averaged approximately two percentage points above that of three-month Treasury bills. In situations when this gap increases (e.g. 20-year Treasury yield rises relatively higher than the three-month Treasury yield), the economy is expected to improve quickly in the future. This type of curve can be seen at the beginning of an economic expansion (or after the end of a recession). current-yield-curve.jpgHere, economic stagnation will have depressed short-term interest rates; however, rates begin to rise once the demand for capital is re-established by growing economic activity. A steep yield curve is generally a bullish indicator. has a great little Dynamic Yield Curve tool that time lapses the yield curve with the S&P 500 Index since 2000! By hitting animate, the yield curve tool will dynamically change as time goes on, and you can see what equities did as the yield curve flattened, inverted, and steepened! Current yield curve snapshot to the right.

The yield curve is not a perfect indicator, so don't go betting your $$$ on it so fast. I have my doubts about the recession ending so soon and a new economic boom coming; in my opinion, the steepening yield curve is pricing in future inflation concerns and not a new economic boom! I'll go on record for that one, as I am still cautious about the strength of the consumer given a tight credit market, correcting housing market, limited equity for withdrawal (spending) from homes, and irresponsible use of debt/leverage for so many years. In short, I just think the consumer is tapped out and this is not something that turns around so fast; lets not forget that 70% of the US economy is driven by the consumer and the reason why the Bush stimulus package was passed to give Americans more money to spend!

However, as someone who loves to learn and understand 'why' things happen the way they do, it's hard to ignore what is going on in the bond market. It signifies a few things:

a) heightened inflation expectations/concerns
b) rates expected to rise in medium term
c) US dollar support
d) economic slowdown/recession expected to be mild

Whether or not this turns out to be the case is the $64,000 question! Future economic data will certainly drive the yield curve over the next few months; if economic data deteriorates, you will see the yield curve flatten (long end come down more drastically than short end flattening the curve) signaling the fed may need to cut rates a bit further to stimulate the economy. In this case, the US dollar will likely fall further and commodities priced in US dollars will rise further, creating more pipeline inflation pressures.

Hoenig's statement is interesting because it has to do with INFLATION EXPECTATIONS! The psychology of living in a world of rising costs/prices may force businesses and consumers to alter their investment/spending patterns! Businesses will get cautious and look to cut costs to retain profits while consumers will cutback on spending and perhaps even save a bit to afford the higher costs of living.

According to Bloomberg:

The dollar strengthened versus the euro as Hoenig of the Kansas City Fed said in a speech in Denver yesterday that "serious" inflation pressure in the U.S. may compel the central bank to increase interest rates.

"There is a significant risk that higher inflation will become embedded in the economy and require significant monetary policy tightening to reduce it," said Hoenig, who isn't a voting member of the Federal Open Market Committee this year. Consumers are gaining an "inflation psychology to an extent that I have not seen since the 1970s and early 1980s."
The reference to the 1970's and 1980's is when fed chief Volcker had to raise rates to insanely high levels to give the nation the inflation medicine it needed to fight the disease of 'the worst tax of them all'.

Below is a chart that Hoenig refers to in discussing the rise of inflation expectation (Federal Reserve Bank of St. Louis via Calculated Risk)

As I said April 15th, by talking tough on inflation we can remove the speculative currency trade in commodities and ease pipeline inflation pressures without action at this point. Thing is, commodity inflation is similar to fed rate cuts; it takes time to funnel through the system! So, $120 oil today, will have a lagging effect on corporate profits down the road! I can see it already!

2009 Fight of the Year: Inflation vs Economic Recovery

Credit Markets / Level 3 Rising / Fed Widening Collateral

Posted by urbandigs

Tue May 6th, 2008 08:41 AM

A: In the post-Bear Stearns era of a saving grace federal reserve, the risk of a systemic crisis shutting down the financial system was all but removed. So, all those shorts in equities and credit markets had to unwind their bets and buy/bid to cover the very positions that were designed to profit on doomsday; the doomsday that Ben Bernanke will not allow to happen. When I look at the stock market & credit market indexes in the past 5 weeks, I see major short covering rallies and bids. Corporate spreads have narrowed, TED spread has fallen, ABX indices have rebounded, CMBX spreads have narrowed, Investment Grade spreads narrowed, and it seemed as if the credit market distress has eased significantly. Is it truly the end amidst all this new liquidity? If it were, LIBOR would have come in much more, Level 3 assets would be shrinking, capital raising would end, and the fed would not need to continue with TAF's and widening acceptable collateral!

The good news is that there are certainly signs of easing credit market distress as a result of everything the fed has done. The bad news is that we are NOT out of the woods yet, from those I talk to the credit markets still remain quite challenging, and the fed is continuing auctions and widening acceptable collateral to now include credit card receivables and student loan securities. The credit problem is clearly spreading.

If it weren't, Fannie Mae would not have just announced a $2.2Bln loss, cut their dividend, warn of 'severe weakness', and plan to raise an additional $6Bln in new capital by diluting shareholders further! Either you wake up, or you have your head in the sand. While the worst may be behind us, we are by no way, shape, or form in for a new boom!

Let me start with the positives and show you the credit market indices that have eased:

ABX AAA Index - Easing (up) Since mid-March (via Markit)


Corporate Spreads Narrow (Wachovia HY Corporate Bond vs iShares LEH 7-10YR Treasury Bond Fund via Bloomberg)


TED Spread Falling (via Bloomberg)


The 3 charts above show the following signs of easing distress in credit markets since the Bear Stearns bottom:

a) rising ABX AAA Index
b) narrowing corporate bond spreads
c) falling TED spread

What has not participated in easing significantly is the money markets and LIBOR. Banks are still reluctant to lend to one another at normal spreads, signaling the need for capital to remain on the books. In fact, banks need to raise MORE capital as balance sheets continue to update hard to value assets! This is why many brokerages and banks have decided to shift assets into their Level 3 hideout's on their balance sheets.

Look at what Merrill Lynch said this morning, according to CNN Money's "Merrill Lynch Level 3 assets increase through March":

Merrill Lynch & Co. disclosed Tuesday that highest-risk assets on its books rose 69 percent during the quarter ending March 28.

Merrill Lynch had $69.86 billion in so-called "Level 3" assets as of March 28, according to a filing with the Securities and Exchange Commission. Level 3 assets totaled $41.45 billion on Dec. 28. At the lowest end, Level 3 assets are those whose valuation is essentially a best guess by the investor, because there is virtually no active trading market for the product to use as a pricing guide.

Level 3 assets accounted for 15.5 percent of total assets as of March 28 at Merrill Lynch, compared with 9.2 percent as of Dec. 28. Level 3 assets as of March 28 included $9.3 billion of collateralized debt obligations, of which $9 billion were tied to subprime mortgages _ loans given to customers with poor credit history.

Another $20.6 billion of level 3 assets at Merrill Lynch are tied to derivatives of collateralized debt obligations. Within that $20.6 billion, $16.7 billion is related to subprime mortgages. About $18 billion are tied to credit derivatives from corporate and other non-mortgage debt.
Things that make you go hmmmmmmm!

No, things are not rosy just yet. Anyone notice how the fed snuck in another $25Bln in its auction to banks on Friday? And what about the little announcement that the fed will now take on credit card receivables and collateralized auto loans, and student loans! Geez Louise! What in the world is the fed doing here and who is still debating that this is contained to subprime?

According to Daily Reckoning's "US Fed Now Accepts Credit Card Debt as Collateral":
First the Fed increased by US$25 billion the amount of money it will auction to banks (commercial and investment) through its Term Auction Facility (TAF). Here banker people, borrow more. Please.

Second, the Fed expanded the list of collateral it will accept for asset-swapping through its Term Securities Lending (Facility). Remember, that's the one that lets banks and prime brokers swap mortgage-backed securities for Treasury bonds for up to 28-days.

The Fed is now expanding that list of asset-backed securities to include collateralized car loans, credit card receivables, and student loans. It's doing so because the lack of demand for bonds backed by those assets has had a real political impact in an election year. What it really means is that that the Fed has lowered interest rates as far as it can to deal with the bank lending crisis. It still hasn't encouraged banks to loan to each other, or investors to buy bonds backed by various kinds of consumer liabilities.
When will it end? We have a major moral hazard problem brewing here and you can count on one thing: wall street will invent a new product to generate revenue from dodgy debts that utilize the gray areas of future regulation that will be imposed! The reason why? Because they will always get bailed out by our fed!

Must be great to be an American wall street executive!

Inventory Rises Above 7,000; New Charts Coming Soon

Posted by urbandigs

Sat May 3rd, 2008 09:34 AM

A: As most of you probably know by monitoring the powered Manhattan inventory widget on, total inventory in Manhattan seemed to rise above 7,000. The trend is clearly rising, and the reason is clearly sluggish demand. As buyer confidence started to decline late in 2007 as a result of the credit crisis and lagging effect on the equity markets, we started to see a consistent rise in inventory trends. The thing to note is that while this bonus season certainly will go down as a slow one, inventory is by no means at levels that would exemplify fierce seller competition.

First off, here is a preview of the new enhanced charting system that I am custom designing for readers of! The chart below is 1 of 3 charts that will be at your disposal, and compares NEW LISTINGS & CONTRACTS SIGNED data.


The chart you are previewing is about 65% complete. You may notice that the line graph is very choppy/spikey. The reason is because Streeteasy updates their data systems during the wee hours of the morning, when web traffic is lightest. UrbanDigs sends a request to Streeteasy at around 8AM everyday to collect the updated information from the day before. So, there is a 24 hour lag, sometimes a bit longer, between when a listing is first displayed publicly and when it is captured by the Streeteasy systems. In an in-perfect world and a real estate market without a standard MLS listing system, this is the best data at my disposal. So far, it has proven to be fairly accurate.

Moving on, very little updating/editing/adding of new listings is done over the weekends. Since there is a 24 hour lag in data collection, the light data of SAT + SUN is collected by UrbanDigs's widget on SUN + MON! That is why you may notice very low data for contracts signed, price reductions, and new listings on Sunday's and Monday's. This is what is causing the spikes on the above graph. Needless to say, we will probably average the data from the week or come up with a different formula to 'smooth out' the line graph so that you can better interpret the trend without sacrificing data accuracy.

Feel free to offer your suggestion on fixing this in the comment section! The entire purpose of these charts is to get a sense of the general trend! Data will never be perfect or 100% real-time w/out a standardized MLS system, so please understand that these tools are for your general knowledge of trends! In this capacity, it really doesnt matter if a contract signed takes an extra few days to get noticed, or a new listing takes 2 days to get captured; as long as it is captured we can get a more real-time sense of what's going on in Manhattan real estate without waiting for lagging quarterly reports!

Back to the current Manhattan inventory data, it seems to me that listing inventory has:

a) risen about 54% since low in mid-December of 4,600 total listings
b) risen about 10% in the past 4-6 weeks or so; when we were hovering around 6,500 total listings
c) risen about 30% since May 2007; when we were at 5,500 total listings

To me, there is nothing wrong with publicly discussing our housing market; even if that means discussing rising inventory due to slower buy side demand. The trend that I consider worth noting is that at this time last year, we were coming off a very active wall street bonus season where total inventory was DECLINING going into the generally slow summer months. Right now, the trend is clearly RISING inventory coming off a slow wall street bonus season heading into the generally slower summer months.

Here is Jonathan Miller's Manhattan Co-op/Condo Listing Inventory Chart that I am basing these observations on:


NOTE: JM's chart was up until March, 2008. So, I added in green bars to plug in April and today's total inventory number; with this data provided by Streeteasy. It will help you visualize where we are at right now, and the trend.

Click on the chart for the larger version. Note how in the past 6 years, total inventory hit a high just below 8,000 in mid-2006. It seems we are on a path to these levels. Now, when I think back to the summer of 2006, I recall it being slow and hard to get top dollar for my sellers; but in no way were prices falling significantly! It was strange, as traffic was slow and listings took longer to sell (days on market definitely rose during summer of 2006), in the end the price paid was pretty strong and didn't dip as low as one might think given the sluggish activity. The reason I mention this is because it seems we will be close to that inventory high in a few more months, if sales volume continues to be light.

In order for asking prices to show a significant move down (as has occurred in many local markets across the nation), you need to see fierce seller competition at a time when buyer demand is very light. That just has not happened yet. I am still seeing buyer demand here in Manhattan, albeit lighter, and inventory is not at levels where sellers are competing with each other via sharp price cuts to move property. Of course you may find pockets of seller competition in buildings that have 15+ listings for sale (the Trump buildings on Riverside Blvd come to mind), in general the competition has not gotten nasty as of yet.

The new charting system should be ready in a week or so, barring any unforeseen programming issues, and should allow all of us to get a much better glimpse into this very mysterious but fast paced Manhattan housing market! I hope you guys like it!

Analyzing The REAL Jobs Report

Posted by urbandigs

Fri May 2nd, 2008 10:43 AM

A: We got some good news this morning on the jobs report between a less than expected loss of jobs, and a ticking down of the unemployment rate. Stocks are understandably rallying on the lack of a doomsday report. While I enjoy seeing the stock market rise, as it provides a positive wealth effect and helps to support confidence in general for other types of investments (i.e. real estate), I do not enjoy being told something that is a bold mis-representation of the truth. For all those that understand the BLS B/D adjustment model, you will see why this report was paints such a misleading bullish picture. You may wonder why this report seems to contradict reality; it does.

I've discussed this before, and Barry Ritholtz has been one of the biggest voices trying to bring the B/D adjustment crapola to light. Here is the quick definition of the B/D adjustment in the jobless claims report, before I go into today's discussion of fantasy (what we are told) and reality (what is really happening):

B/D Adjustment
- 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.

Here is the B/D adjustment for April's Non-Farm Payroll's report, directly from


I am NOT making this up, this is REALITY and the report published to the public actually calculated in an ADDITION of 267,000 jobs! Are we really to believe that our economy actually added this many jobs? Let's just look at a few sectors and compare the fantasy vs reality!


Reality ---> Lost 61,000 Jobs

B/D Fantasy ---> Added 45,000 Jobs


Reality ---> Added 39,000 Jobs

B/D Fantasy ---> Added 72,000 Jobs


Reality ---> Lost 46,000 Jobs

B/D Fantasy ---> Lost 10,000 Jobs


Reality ---> Added 18,000 Jobs

B/D Fantasy ---> Added 83,000 Jobs

If we only look at these sectors, we will see the following discrepancy between reality and the B/D fantasy adjustments that are added to the report that we see:

REALITY ---> We LOST 50,000 Jobs

Right there, we have a swing of 240,000 jobs that was bullishly embedded into the jobs report; using the seasonally adjusted b/d adjustment! AM I MISSING SOMETHING HERE; If I am please do tell me!

This frustrates the hell out of me, and explains why things seem much worse in the real world when stocks and economic reports show otherwise. For the first 4 months of 2008, and using the fantasized data & b/d adjustment model, we STILL LOST ABOUT 260,000 jobs! In a normal growing economy, we should be adding about 150,000 jobs per month. Yet, with all these jobs lost and the smoke & mirrors used to minimize the REAL PAIN that is going on out there, the unemployment rate ticks down to 5%! The reason: the number of part-time workers who wanted to find full-time work but couldn't, surged to 306,000.

I just don't buy it! BR correctly points out:

• Private payrolls have fallen for five straight months. Weakness in the goods-producing sector is intensifying;

• Employees working part time jobs is +306k this month to 5.2 million. This increase is either because a) Hours have been curtailed; or B)They cannot find full-time employment. Note that if your hours get cut back, you do not show up in the NFP or layoff data.

• As noted earlier, the Birth/Death model was a major distortion. (in several months, we will get the revisions). Lets look at how the B/D has changed from April 2007 (+262) to April 2008 (+267):

+45k construction jobs v 37k April 2007
+8k jobs were added in financial activities versus 1k last April.
+72k in professional/business services versus 48k last April.
+83k in leisure/hospitality (95k last April).

I am certain that some country on some planet in our galaxy is adding more jobs in construction and finance versus one year ago, but it ain't the USA on planet Earth, that's for sure.