Enough Commission Incentives - Just Drop Prices!

Posted by Toes

Mon Jun 30th, 2008 10:01 AM

(Toes here! I've been really busy lately, my apologies for the length of time it has been since I last posted!)

Lately, I feel like developers and owners are trying to bribe me at every turn. Particularly since Bear Stearns went under, my email inbox is flooded with commission incentives:

"2 months broker's fees and one month's free rent at Dwell by Starck!"
"6% broker commissions at Atelier!"

Rental Market

The NY Times called it - this summer's rental market is soft. Management companies are offering tons of incentives like one or two month's free rent and "OPs" ("Owner Pays" broker's fees). Usually there are a few OPs in places like the Financial District, Midtown West around 10th Ave, Harlem, and Roosevelt Island. This year, there are OPs all over Manhattan. 89 Murray in Tribeca is paying one month free rent and one month OP and giving a $200 Amex gift card to the broker at the lease signing. BLDG, one of the largest landlords in NYC, offered OPs this summer for the first time I can remember. And not in undesireable locations - in buildings on the Upper East Side & Upper West Side, in Midtown East & Midtown West, and even in the Village! OPs in the Village?! Woah.

I realize that it makes owner's rent rolls look better to keep rents high and just pay the broker's fee to get a tenant into the apartment. But it would be far more effective if landlords did not try to raise rents 10%-15% this year. The last two years saw huge rent increases & I think that renters are just saying "enough!" Renters aren't upgrading to a better apartment. They're sitting tight because they would have to make a huge jump in price to get something better than where they are now. People are watching their wallets. Maybe they are worried about layoffs, next year's bonuses or high oil/gas prices. Maybe they're entering a holding pattern because it is a Presidential election year. Whatever the reason, owners should keep rents the same as they were last year if they want 100% occupancy in their buildings. Maybe a 5% increase. Maybe.

Sales Market

New developments typically pay between 2.5% and 3% commissions upon closing of the apartment. Sometimes they pay 4% commissions. Recently, developers are offering to pay commissions in advance and 4%, 5% and 6% commission emails are popping up in my email twice daily. Here are some examples:

1. "4.5% commission for the first apt sold at 45 John; 5.5% commission for the 2nd apt sold in the building"
2. "6% broker commissions at Atelier!"
3. "Earn Green When Your Clients Buy Green! 1% upon contract signing; 3% commission upon closing at Visionaire (total 4% commission)"
4. "Earn a $10,000 AMEX Gift Card plus 3% Commission at 34 Leonard"
5. "4.5% Commission at m127!"
6. "4% Commission and Chance to Win Dinner at Ago in The Greenwich Hotel" (Riverhouse Condo)
7. "1% at signing and 3% at closing at 166 Perry St"

What I find interesting is that when the Manhattan market started slowing down a few months ago, I was inundated with emails for broker's previews, cocktail parties, champagne open house tours and luncheons. The developers realized that they might need us so they went for our stomachs :) ! Now that things have gone a bit further downhill, they seem to be throwing money at us.

What I would love to see instead is... Price reductions! Or at least closing cost incentives; pass savings on to the buyer! Most real estate agents who love their jobs want to pair their customer with the best apartment at the best price. Offering commission incentives does nothing for me. I will offer to lose the extra commission to try to get my customer a better price on the apartment every time. But I wont bring a customer to a building where prices are completely out of their budget.

If a building's inventory is completely over my customer's budget, it wont appear in the search I created for them in my database. Rather than making me call every new development to figure out if they are paying the closing costs, extra commissions, giving out AmEx cards, etc, it would make my life much easier if developers would just bring the prices down.

I realize that dropping prices causes the need for the developer to file extra paperwork with the Attorney General's office. I am sure that filing a price amendment with a downward trajectory is depressing for a developer and investors. I suspect that other buyers who may have purchased at a higher price will be annoyed. When the building closes & the sales become public record, those buyers will know that you sold the apartment upstairs from them for $2.15M instead of $2.3M anyway.

Which leads me to my next point: negotiability. Prices in many new developments (and rental buildings) have finally become NEGOTIABLE! It's amazing! Last year, I'd bring a buyer to a new development and we were lucky if we got $10K off the price of a $1M apartment. Or we were lucky if the developer split the transfer taxes with the buyer. This year, developers are negotiating more on pricing and closing costs.

Toes says: Developers and owners of rental buildings: Incentives are just not as effective as making prices more realistic for the current market conditions.

Toes says
: Don't be afraid to make a low offer. Definitely ask for the developer to pay the transfer taxes. However, if a building is selling well, don't be surprised if they won't take your offer, either.

Toes says: If you see an apartment that you love, be it a new development or a resale - make an offer! You never know where someone is in their selling cycle - you may bring them to that 50% point where they can declare their offering plan effective. They may only have a few units left in the building. Maybe their goal is to sell those units quickly so they can stop paying their sales team and stop spending marketing dollars. It never hurts to try. For a rental, don't expect to get an apt listed for $3000 for $2500, but $2800 is not inconceivable.

Toes says
: If it is unique or in a fabulous location, it is still selling/renting. Cookie cutter apartments that are not very well priced or that need renovations are more likely to sit on the market right now.

Explaining The CRUNCH In Mortgage Land

Posted by urbandigs

Sun Jun 29th, 2008 09:35 AM

A: Yves Smith's blog Naked Capitalism points me to a great chart on Econbrowser showing the dramatic retrenchment of securitizing mortgage loans. This death of securitized mortgages, as Yves calls it, explains why our housing market is in the shape it's in and one reason why banks balance sheets continue to be crunched! Lets delve into this topic for a moment to understand how the system used to work, and what is happening now.

First off, let us not forget my piece on January 2nd, where I explained this very topic in detail. In the discussion, "Bonuses: It's 2009 That Will Hurt More", I stated:

The derivatives trade of securitizing loans and selling them off in pieces on the secondary mortgage markets generated billions in revenue for these banks & brokerages. Now that the housing bubble popped nationally, risk has been re-priced, secondary mortgage markets are not functioning properly, liquidity dried up for mortgage backed securities, and the announcement of billions in losses and potential insolvencies, THE GAME IS OVER! How will these banks and brokerages generate the kind of revenue that they got used to generating the past few years?
I can't get clearer than that statement, as it reminded me of decimalization ruining volatility/spreads when I was day trading NASDAQ equities! Of course, this statement was used in the context for discussing why the 2009 wall street bonus season will be the troubled one, and not the upcoming 2008 wall street bonus season that every agent was looking forward to at the time (put yourself back in time 6 months when the post was written).

Fast forward to today, and Econbrower's Peter Hooper provides this very compelling chart showing you the current extinction of securitizing mortgage loans:


This is one crazy and extremely important dataset! What does this all mean and what caused it? Well that is a very long discussion for another day. What you need to know is that this securitization model is what allowed the housing boom to occur in the first place; and now its dead. It was a volume & fee based securitization model where quality was replaced by quantity in order to generate as much revenue as possible, and now we are paying the price! In went a little something like this:


See "How Mortgage Back Securities Work" for a visual and more details on this money making process. Of course this is the short short version, but you should get the idea of how the securitization model and a normal functioning secondary mortgage market allowed banks to offload loans on their balance sheets, make money in the process, and free up capital to lend all over again. This cycle is now broken because:

a) housing bubble burst, making home loans a risky asset
b) demand for mortgage assets dropped sharply, resulting in an illiquid secondary mortgage market
c) securitization model dies, banks/IB's can no longer off load mortgage assets without incurring a huge loss (resulting in write downs of these assets as price discovery for trades brings down the value of everything still held on the books)

...resulting in a capital CRUNCH! This is credit deflation resulting from housing deflation, destroying the balance sheets of the very banks that lend to consumers to purchase a new home. The end result for consumers is:

a) elimination of risky loan products
b) much tighter underwriting standards to be approved for financing
c) higher lending rates; disconnect from bond market as risk is re-priced into loans
d) higher reliance on debt-to-service ratio
e) higher correlation between credit score and lending rate
f) lower loan-to-value ratio; no more 100% down!

Now think, in this new crunchier environment, how is housing supposed to get the spark it needs to bottom and recover? This is what is happening and will continue to happen as long as housing prices are pressured to the downside and wall street restructures their balance sheets. Unfortunately, even as housing stabilizes and prices start to rebound, regulation resulting from the fed's unprecedented liquidity actions will put a bit of a stranglehold on this securitization model in the future to prevent another credit crisis from repeating. In short, wall street will NOT be the same for a while...as I said 6 months ago, THIS GAME IS OVER!

Office Market Rolling Over - Why It Matters

Posted by jeff

Fri Jun 27th, 2008 04:05 PM

If you are considering investing in Manhattan residential real estate, the state of the Manhattan office market matters to you. "Of course" you reply, "the city's economy and economic outlook are a factor that I consider relevant to my decision, but, hey, the state of the office market in Manhattan could be impacted by so many things, why would this one metric be of interest to me?"

I'll argue here that the Manhattan office market is and has been for several years, purely a demand-driven market, supply just isn't a big factor. Further, I will aver that as a result of the tight supply situation, which, under normal circumstances looked likely to persist for at least a couple more years, few employers in New York want to risk running out of space and/or having to find new space at substantially higher rents. For these reasons it is particularly notable that the commercial market in New York is softening fast. It argues that space reductions are being made despite the fact that space might be quite tight in the next upturn, indicating that those cutting back expect their employment levels in Manhattan to remain lower for several years to come. Of course they could be wrong, as they have been in several other downturns, but this time, as Noah has predicted here previously, the whole model for banks and investment banks looks to be changing to one that will limit the size of these institutions for a long time to come, and they constitute a very large percentage of both the office market and employment in the city.

So let's take a look at the numbahs. According to Scott Latham, Executive Vice President of Cushman & Wakefield, as quoted earlier this year on The Stoler Report, during the 1960s, 1970s and 1980s builders delivered an average of 56.5 million square feet of new commercial office space per decade, plus or minus. In the 1990s and 2000s 15.5 million feet of new space was delivered while 25 million feet of commercial space was converted to other uses. The city has been experiencing demand growth of about 3.5 million square feet per year typically.

The Manhattan office market constitutes an estimated 350 million square feet of space. So the typical annual addition of space recently has been 1% of the total. As you can tell, it would take several years of space additions with no increase in demand to cause vacancy rates to move up 3 percentage points. Another way to look at it is that as the economy recovered from 9/11, between 2004 to 2006 vacancy rates fell from 10.9% to 5% and 30 million square feet of space was absorbed. Voila! demand-driven market. (Although 14.5MM square feet came out of the market as a result of the World Trade Center attack, the market demanded another 16.5 million feet of space, or another 4.7 year's worth of typical supply growth.)

Regarding the current market fundamentals, office leasing fell 9.3% year to year in square feet terms in H2 2007. By May of this year, the Manhattan Class A Office vacancy rate was 6.9%, according to Colliers ABR information reported in The Real Deal, up from 6.4% in April, 5.3% in January and less than 5% in 2007. The last two quarters (Q407 and Q108) reportedly saw negative absorption of 2 million square feet after several years of net absorption. In the last two years rent growth was 20% per year, although this slowed significantly in the second half of 2007. During the first half of 2008 rents have reportedly continued to rise by 1 – 1.5% per month.

While on the surface the numbers appear to only suggest a deceleration, according to a recent Crain's Article ,"Manhattan's once red-hot commercial real estate market is developing a chill. Vacancy rates are edging higher. The pace of new lease signings is flagging, and the volume of sublease space hitting the market is soaring. More important, for the first time in six years, effective rents have begun to fall."

The key word here is effective rents. Effective rents factor in the tenant improvement funds and other concessions and giveaways that landlords throw in to get tenants to sign new leases. Effective rent declines are usually a leading indicator of actual rent declines.

Another factor that portends outright rent declines is sub-lease space available. Sub-lease space represents a liability that a tenant is carrying for space they can no longer fill. Such tenants are usually more concerned with getting the liability off their books....getting the space filled with bodies, than maximizing the rent they receive. The availability of cheap sub-lease space puts significant pressure on prices generally. According to the Crain's article, "In the last five months, 5.3 million square feet of sublease space has landed on the market, a jump of 51%. That space now accounts for 19% of the 27.5 million square feet available for rent. Experts say that when sublease space reaches 35% to 40% of the total, it begins to pull all prices down." It is natural to think that with Wall Street layoffs continuing to mount, this activity is bound to increase significantly in the near term and get into the danger zone.

According to a recent Reuters article, Marc Holliday, CEO of Manhattan office-focused REIT SL Green, said that "he expects effective rents -- rents paid after factoring in free months of rent and other incentives -- to fall between 10 and 15% from their highs reached last year, as sublease space from financial firms hits the market. But the sublease space and the lower rents probably won't appear for another 12 to 18 months as financial firms figure out what they want to do and put plans in place to do it." My guess is that things unfold a little faster than that.

When looking at how layoffs could impact vacancies, the number people usually throw around is 250 square feet per person. If an additional 40,000 layoffs are in the cards over the next year (less than half of what the NY City Comptroller estimates as many job losses may not be office jobs), this would equate to 7.5 million square feet of office space to come on the market, or about 3.5 percentage points of vacancy. Since about 33% of the city's office space is leased by financial firms, it could be fairly easy for empty space to pile up, even without the contribution of many more layoffs by the very biggest firms.

From the Blogosphere

Sources: Job Loss Not a Harbinger of Vacancy

Firms Shed Space, Vacancies Jump

Credit/Bank Woes Tank Equities

Posted by urbandigs

Thu Jun 26th, 2008 06:07 PM

A: The credit tsunami is starting to really hit stocks as deflation of credit shows how it could affect corporate profits in the near future. Looking at the credit market indicators, it appears that we are entering fearful territory again; new lows in ABX's, rising TED spread (hat tip CR), widening of corporate spreads, rising 1-Wk LIBOR, and broken technicals on stock indexes. We just can not discount the possibility of another crisis of confidence bringing down a big bank or brokerage house in this environment. With balance sheets in disarray and capital raising and deleveraging a must, when you get this mix of ingredients, capitulation or an event becomes likely.

The Volatility Index (VIX) is only around 24, but the trader in me is starting to feel that pit in your stomach; just hit me today. Back in the day, this 'feeling' got your eyes wide open, expecting either an event, a big bounce, or a capitulation (fierce selloff) to get out the weak hands and flush the system. So, I'm certainly keeping tabs on the market and I'm sure big media will jump on board too with headlines like "....STOCKS DIVE! OIL HITS NEW RECORD...", spreading the word to masses.

Here are the deteriorating signs in the credit markets, telling us that once again banks are likely to get very stubborn with their lending and nervous about their struggling holdings of assets that trade in out of favor illiquid marketplaces:

a) Markit's ABX-HE-AAA reaches new lows (indicating eroding sentiment for residential mortgage back securities as defaults expected to rise; discussed 9 days ago)
b) TED Spread rises to 1 (difference between 3-Mth T-Bill and 3-Mth LIBOR; normal around 0.5, the higher it goes the higher the perception of credit risk. As US treasury's are considered risk free, and 3-Mth LIBOR starts to rise, the gap between the rising rate and the stable/falling one grows indicating increasing credit risk being priced into lending rates. Risk of default rises as TED spread rises)
c) 1-Wk LIBOR perks up; (rate that banks willing to lend at with each other is rising again)
d) Corporate Spreads widening again; pictured below (Markit CDX.NA.HY widening)
e) VIX rising
f) Fed's latest auction got oversubscribed



: Simply add "IEF:US" symbol to this chart to see widening spread.

Bond yields came down with stocks and the 10-YR gave back about 23 basis points in the past two weeks; so we will likely see a bit of relief in the mortgage markets UNLESS this IS another wave of the credit crisis and a re-pricing of risk is built back into lending rates for residential mortgages; if that should happen, the gap between conforming and jumbo will rise again and we won't see as direct a relationship between lending rates and the falling 10-YR yields, as we have over the past few months. Certainly crazy times.

Fed Holds Rates Steady: Language Changes

Posted by urbandigs

Wed Jun 25th, 2008 02:14 PM

A: No change to fed funds rate. However, a change in the statement is a shift from the downside risk to growth TO the upside risk of inflation. This will be a data dependent fed, with rates on hold for now! The 'Tough Guy Act' is on!

One dissenting vote from Richard Fisher who wanted to hike by 1/4 point at this meeting. Upside risk to inflation is the key tough guy element of the statement!

Personally, I think the fed is in transition mode as it PREPARES US FOR RATE HIKE's down the road. No doubt about it. It's just about when they start the campaign, and that will come the moment economic data shows a bit more signs of stability; probably in the labor market! As long as unemployment is rising, the rate hike campaign will be on hold. A big wild card is inflation expectations that is clearly rising.

While the credit crisis is not over, we do have 325 basis points of easing, fiscal stimulus and fed targeted liquidity injections to fully kick in in our future! So, don't be shocked with more bad news but know that measures taken are lagging in nature and the time when it will start funneling through the economic system is in sight.

Remember when the fed cut rates and used the 'to forestall adverse economic effects' phrase? Well, we all know economic data is weak and likely to weaken, but how will past moves put a floor to how bad it would have got? Think along those lines.

Manhattan Housing: Mid Year Review

Posted by urbandigs

Wed Jun 25th, 2008 11:33 AM

A: Why not, recall my 2008 predictions made Dec. 27, 2007! In a nutshell, right now I see new listings coming to market slowing down a bit, which is completely normal for summertime in Manhattan and after such a significant rise of inventory levels since mid-December 2007. Let us not forget that inventory levels are about 45% higher right now, than they were 7 months ago. As I said a few weeks ago, I would expect the next few months to see stagnating inventory levels as both sales and new listings coming to market remain at lower levels. For buyers, you will not see the amount of options that you saw during the past 4-5 months when inventory surged. For sellers, pricing correctly is everything.

Today's market is a very difficult one to discuss for me because I am extremely busy. So, while my little world is active, how is the market in general doing? From talks with colleagues, it is soft. Overpriced properties are lingering, price reductions are common, and buyers are much savvier than they are being given credit for by sellers. If you think you can fool a buyer into paying a 10% premium over 2007 comp's, think again! You'll only be doing your listing a disservice, and chances are it will remain on the market with little to no traffic until seller denial is overcome by reality. Seller denial is a very powerful thing.

Barry Ritholtz's review (a great read) of the 5 Stages of Grief comes to mind here, as the softness hits Manhattan real estate. The 5 stages and an example of how the Manhattan seller likely is thinking goes something like this:

1. Denial - My home is worth way more than others'. Its MY home. I can easily get 10-15% appreciation for my family's memories experienced here and hard work on renovations over 2007 comparable sales.
2. Anger - Why isn't this idiot real estate broker doing their job! I mean, 20 people come in and no bids. WTF! Stupid broker, what good are they anyway with their 6% commissions. If they don't get my price, I'm switching my listing to another firm.
3. Bargaining - You can tell that low ball bidder I have no response. If they come higher, I will respond. Not before. Earn your money. Did you tell them how wonderful my home is? What? They aren't budging? Ok, lets lower the price a bit then before accepting such a low offer.
4. Depression - What do we need to do to get this property to sell? More price reductions? But you originally said the place will sell for my price! Were you lying to me just to get this listing (hint hint)? Let me think it over at the bar tonight with my friend Jack Daniels. He always has the answers.
5. Acceptance - Lower the price to where the market is right now and let's sell this apartment. I'm willing to go down to X to move this property. Just get me a bid, any bid, and I'll consider it!

Now, it isn't this cut & dry but you get the picture. Psychology plays a big role in real estate transactions, and in the end, the seller must realize the type of market that it is right now (preferably educated by their broker to stay ahead of the curve, rather than playing catch up) before exiting the denial stage. Brokers MUST educate their sellers about the effect of declining confidence/tighter lending standards on buyers' willingness to throw money at real estate. I recall a recent office meeting where 60 or so agents attended and a question regarding the 'mindset of sellers' was asked...the office in unison responded, "denial".

As for my opinion on where we are in the cycle, probably between Anger & Bargaining. I think denial still exists out there in listings that tack on a 20% appreciation in their asking price from 2007 comps, but for most part serious sellers have realized that they need to price correctly to sell or reduce their price to re-attract buyers. Given that demand is still out there, I'm not sure we will reach the depression/acceptance phase unless job losses really accelerate and our local economy notably slows. We know what's happening on wall street, the question is how deep will it ultimately affect us? I stated in January how 2009's bonus season will reflect the credit crisis we are going through.

I can generalize this update to you folks, but there will always be that prime property with fascinating views, insane renovations, or the perfect location that finds the perfect target buyer willing to pay top dollar. That's what makes Manhattan such a different marketplace than say Miami or Phoenix. But the volume of these types of premiums being paid is slowing and our market has a history of lagging in slowdowns and leading in recovery.

In late 2007 (here, here, and here), I declared that..."2008 is going to be the year that Manhattan real estate inventory reverses course". I stand by this today, although I expect us to linger around this level for a while now that a big runup already occurred.

As for prices, if you are the type of person that listens to lagging quarterly reports for a clue on how the market is doing today, there is little hope getting through to you what is really happening on the streets of Manhattan real estate. The combination of high end condo conversions (15 CPW & The Plaza) and lagging new development closings will continue to skew price data to the upside; read my piece "Why Manhattan Price DATA Will Stay Strong in 2008" for an in depth discussion on this dynamic. However, if you are someone who prefers real time data on what is happening, then look to sales volume, price reductions and inventory levels to see what we are seeing on the streets. In the past few weeks, the weekly average for both inventory and new listings retraced; with new listings dropping more significantly than contracts signed:


Hey, I use what I have at my disposal to make Manhattan real estate a bit more transparent in the hopes of finding out what the heck is going on out there! In the above weekly average chart, you can see that the drop in new listings in the past week or two has been more dramatic than the drop in contracts signed. Normal for this time of year. Now, is this data perfect, No! But it's what we have to work with and we put a lot of time into making this analytical tool as accurate as possible.

I expect a slow summer. Perhaps this is the time for buyers to get a bit of a better deal as sellers are pushed to the brink with light traffic and lower demand for private showings; raising their desperation level. But this comes at the expense of less options for buyers. By no means is there a glut of inventory in this marketplace, leading me to watch the current uptrend for the next move. Nothing goes in a straight line! I'll keep you posted here on UrbanDigs.

Fed's "Tough Guy" Act & Lending Rates

Posted by urbandigs

Mon Jun 23rd, 2008 08:26 AM

A: Well, it's officially summer but there is nothing hot about the markets these days. The second half recovery that economists and analysts have been predicting, certainly seems a distant memory at this point. What I see, is what so many of us have been talking about since this credit crisis began, except now its finally here. I mean, the bond insurers' saga took weeks of front lines in January, and now its actually here inflicting it's pain. The credit crunch has way more respect, now that it is causing collateral damage and dragging stocks down with it. Hmmm, to think, who would have thought that a blow to the credit engine (a.k.a. the US growth driver) would cause such worries? I mean, so what if people's houses are worth 10-20% less. And if their portfolio's are worth 15% less. And if their debt is quickly rising and costing more to maintain. And if they can no longer use their home as a nearby ATM. And if their job is at risk. The fed can always inflate us out of this mess right? Well, yea, but first we will need to deal with the 'tough guy' act and for us Manhattan real estate junkies that means discussing how lending rates may behave.

I have said before how the I believed the 2nd half recovery, if any, will be short-lived, and how I just don't see the fed starting a rate hiking campaign as soon as others (and the bond market) predict. Rate cuts and hikes are hardest to predict at the very beginning & end of the cycle; as a trader, you got used to being addicted to fed moves and their effect on markets. Rarely will the fed just throw out a cut on its own, unless it is nervously required; such as after some sort of event occurring. With housing still pressured, a weak jobs market, a broken wall street revenue model, a struggling credit market, an upcoming election, uncertain tax policy, and teetering growth, the fight against inflation will have to wait a bit more. Which brings us to the upcoming 'tough guy' act the fed will pull off in order to smoothly transition investor psychology for the coming rate hike campaign.

The fed will smooth us into a rate hiking campaign by talking before acting (in essence, doing a stealth ease by letting the markets act first), because trust me, when rates start to rise it will probably be a continuous and prolonged campaign. To fight the collapsing credit markets, housing markets, and potential effects on the US economy, the fed cut rates 7 times from Sept to April. Included in these 7 rate eases, were a few event cuts (75bps twice) to fight off the SocGen debacle and the failure of Bear Stearns as an independent company. It was serious action for a serious situation; well, not the SocGen cut as that in hindsight was simply to calm the equity markets as Int'l markets cliff dived first.

Thinking back to the Greenspan era, easy Al took us down to 1% on the funds rate in his efforts to combat the dot com collapse and short recession of 2001. He kept rates all the way down at 1% for a year; giving rise to the argument that Greenspan allowed too much lagging monetary policy, or umph, to seap into the economic system fueling the housing/credit bubble. The resulting rate hike campaign to cool things down was slow & methodical. All in all, we had 17 one quarter point rate hikes between June 2005 and June 2006; finally pausing at 5.25%. Graph below (via St. Louis Fed page):


Rate hikes are most effective in slowing down an economy that is overheating with growth, where capacity limits are reached and input prices are inflationary (wages, rents, supplies, etc.). But right now, we do not have rising wages or rents. What we have is runaway commodity inflation that is kicking us while we are on the ground struggling to get up!

Economic growth is not the cause if this inflation; at least not here in the US! Rather, we are experiencing commodity inflation as housing/credit deflates. The fed won't hike right now because the next rate hike campaign will likely be another long and calculated one. I wouldn't be surprised if the first rate hike will be 1/2 point. After that, the majority of rate hikes will likely be 1/4 point moves; a bunch of them. The problem this time around is we have no housing market boom, job growth or easy money (credit) system to go along with the real reason the fed is raising interest rates; to cool inflation! At least not at this point.

Instead of hiking, the fed will put on their tough guy act and talk about how inflation is becoming the bigger threat. It's already happening, and the markets are listening. We in essence had a stealth ease when Ben talked about the rising threat of inflation; treasury yields rose, credit got more expensive, and the effect on corporate profits was clear. Citigroup CFO, Mr. Crittendon, announced recently that "...credit costs are rising, provisions for bad consumer loans are rising, and more write-downs on subprime assets are likely". The effect on lending rates was even more clear, as rates jumped noticeably over the past 3-4 weeks; my post on May 29th discussed Bond Yields Hitting Mortgage Rates, leading me to say:

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.
So this is what we will have to deal with for the next few months; a battle between rhetoric and the effect on the bond markets.

How tough will the fed get before pulling the trigger? It all depends on how smooth a transition they manage to pull off before pelting us with rate hikes! For now, I think we will have some rate relief as the bond market realizes the fed won't raise rates until more economic/election uncertainties erode away. But that relief is likely to be short-lived as surging headline inflation data (the seasonal component will be removed starting in July), re-invigorates the bond market's perception of the rate hikes that will ultimately come. The first round of the tough guy act is in the books, and we have seen the effect on lending rates in the past few weeks. Expect continued volatility for mortgage rates for the next few months, with the risk clearly to the upside.


Waiting for "The Hating" - Asset Cycle Revisited

Posted by jeff

Fri Jun 20th, 2008 01:16 PM

Back in September of last year I wrote a piece called the Psychology of Asset Cycles. In it I tried to lay a roadmap for the housing bust, as well as a guide to the progression of various asset bubbles and the psychology of greed and fear they inevitably produce. I think it's time we revisit the key elements of these cycles and try to identify where we are on the continuum of Euphoria and Depression.

I am a believer that there are several important cycles taking place in the world today. There's an agriculture cycle, a commodity cycle and an oil cycle. There is also an emerging markets development cycle. Fear and greed are reflected in how all these trends proceed and are eventually self limiting (they eventually burn themselves out). But in this piece I want to focus on the residential housing cycle, not the stock market, not the economy, not the credit cycle and not the commercial real estate cycle. The reason I think it's key to home in on the residential housing cycle...pun intended....is that it's the key driver of the other four right now and although they all impact each other with important consequences, I think the root cause is important to stay focused on.


So where are we on the continuum? In my prior piece I gave some milestones seen in other cycles that I think are really important to reflect on. On the way up the cycle there is, The Lift-Off Phase, Leveraging Up & Relaxing Standards, Fraudsters Pile On/Big Business Plays Along. These were all elements of the recent residential housing cycle, starting with many years of moribund growth in the 1990s and a lift off phase after the tech bubble burst. They correspond well with the Optimism, Excitement, Thrill and Euphoria emotional aspects of an up-cycle.

"The Fed Raises Rates" phase is what starts the decline in the cycle. It is the beginning of the Anxiety, Denial and Fear emotional states of the down cycle. These parts of the cycle are typically when Skinny Dippers Get Caught- skinny dippers being those market participants that got caught up in the excitement, thrill and euphoria and threw caution to the wind or significantly ignored the risks of their business practices. The latest cycle was like a swim meet at a nudist colony; the list of companies that got caught with their pants down is too long to go into but Rating Agencies, Bond Insurers, Mortgage REITs, Mortgage Brokers, Mortgage Insurance Companies, Banks, Investment Banks and Hedge Funds were all part of the rogues gallery.....and man were they ugly in the buff.

The next phase is an interesting one I call No One Gets Out Alive. It usually takes place during the Desperation, Panic and Capitulation aspects of the cycle, because the market has become such a mess that people are prematurely groping around for a bottom. This is the part where even experts in the asset class get burned because the asset class has grown to have so much gravity in financial markets that they get sucked in. It may be that an investor group resisted investing in the area all through the upturn, only to plunge in at the very top, or that they come in after the peak and try to catch a falling knife, getting impaled in the process. Examples this time around are Carl Icahn's investment in WCI Communities, sovereign investment funds' investments in big banks.....they didn't realize that they were not investing in the "credit cycle" - they were investing in the US residential real estate cycle. The huge gravity of this asset class has trumped all. Lehman Bros., most recently, thought they were hedging their risk in the markets and still got side swiped primarily by $2.4 billion of "adjustments" in residential mortgages.

These phases often overlap. The No One Wants To Get Caught Holding phase has been one of the most important phases of this cycle. Banks and brokers have lost faith in each other's balance sheets, because they all know there are many "old maid" cards in circulation and no one wants to get stuck with them. It goes without saying that big pension funds, mutual funds and other market players are equally disinclined to trade with these organizations. The Bear Stearns debacle was perhaps the best example of this kind of behavior.

Eventually we come to the latter parts of the down cycle which include the inevitable Closing The Barn Door. This part of the phase is usally concurrent with the emotional response of Capitulation. Essentially, the cops come and people start to have to admit to what happened, there are consequences and anyone holding on to last hopes of things going back to the way they once were are finally disabused of these notions. Those who may have been trying to ride out the storm are removed from command and the capitulation phase can really begin. I would argue that events like the firing of Ken Thompson, the CEO of Wachovia, is one of the markers of this phase. Here is a guy who bought what was once a great company (Golden West) at precisely the wrong time in the cycle, while also allowing his bank to get very aggressively into risky construction lending. He hoped to ride out the storm, but instead a new team will likely come in and throw in the towel on bad investments. This is also the time in the cycle when politicians finally realize what has happened, determine that it should never be allowed to happen again....and the political machinery finally grinds through enough rotations for the government to do something colossally stupid to prevent a recurrence. The new regulation or legislation usually has the unintended consequence of making the asset downturn even worse. Now we have not really seen this phase play out in full yet. We got some whiffs of it earlier this year, which I chronicled in my piece "Regulator Revenge: There's a New Sheriff in Town", but we are starting to see this phase begin in earnest. An additional feature of this part of the cycle is that some heads must be taken. Some of the players involved in the excesses of the up cycle get publicly punished. I would aver that the arrests of the Bear Stearns hedge fund managers Ralph Cioffi and Matthew Tannin last Thursday were a clear marker that this phase of the cycle is now in full swing. Before it's all over their names and others will enter the lexicon like Bernie Ebbers and Ken Lay did post the tech stock bubble. Not unexpectedly, this comes at the same time that Senate is getting serious about considering some housing legislation. Regarding this legislation, the Office of Management and Budget warns "The federal government must not prolong necessary corrections in the housing market, bail out lenders or subsidize irresponsible borrowing and lending at the expense of hard-working people who have played by the rules,." CLASSIC! Meanwhile, the power struggles have begun regarding which regulatory bodies will grow and which will languish as a result of the re-regulation of the financial markets. The re-regulation will have huge impacts due to the size of the markets that need to be brought to heel. According to a recent Marketwatch.com article, "The shadow banking system grew rapidly during the past decade, accumulating more than $10 trillion in assets by early 2007. That made it roughly the same size as the traditional banking system, according to the Federal Reserve."

It is no coincidence that residential home prices are now plunging in some of the most overbuilt areas - even while less over-built areas seem to be stabilizing. The capitulation phase in residential real estate has begun. Paul Kasriel writes in an article on the Market Oracle web site "According to Federal Reserve flow-of-funds data, homeowners' equity dropped by $399 billion quarter-to-quarter in Q1:2008 and $880 billion year-over-year - both record absolute declines. The chart below of the Case Shiller composite through May 2008 is one of a textbook barf out (pardon the color).


The final phase of an asset cycle is the one I call "The Hating." On our chart it corresponds to Despondency and Depression. You know this phase has arrived when people don't even want to talk about the asset anymore. The bears cling to the notion that the asset will go into an even more cataclysmic downturn (usually driven by the capitulation itself and the inevitable regulatory/legislative screw ups), the Bulls get tired of fishing for a bottom and things just start to get quiet. I can't see bus tours of foreclosed neighborhoods figuring strongly into "The Hating" phase. So I am currently watching the capitulation phase for signs of boredom.

After the bubble phase it doesn't always take a long time in the depression hope phase for the asset to start acting "normally" again, but I mean long-term normal. With 11 months of single family home inventory on the market, it may take a while for stabilization to follow capitulation. It may take decades before a bubble phase develops again.

Fed's Latest Auction Gets Over Subscribed

Posted by urbandigs

Tue Jun 17th, 2008 10:46 AM

A: I'm very busy, so lets just do a quick check on credit markets and the Fed's latest $75Bln auction to banks. Recall, that in easing credit conditions these auctions will receive bids BELOW the limit amount; in this case $75Bln is the total amount being auctioned by the fed. When we had an auction receive only $35Bln or $40BBln in bids, the market would interpret that as the credit markets easing and a sign that the banks did not need the capital being offered to them during the credit crisis. However, this latest auction was oversubscribed with a total of $89Bln worth of bids coming in for an auction totaling $75Bln; a clear sign that the credit crisis continues behind the scenes.

From CNN Money's, "Fed Auctions $75Bln To Banks":

In the latest auction, commercial banks paid an interest rate of 2.360% for the short-term loans. There were 76 bidders for the slice of $75 billion in 28-day loans. The Fed received bids for $89.38 billion worth of the loans. The auction was conducted on Monday with the results released on Tuesday.
With commodity inflation surging, the fed has relied more on these short term facilities to ease the credit crunch over cutting the fed funds rate further; which would fuel further run ups in commodities and pressure the dollar to the downside. We are about to enter a period where headline inflation is likely to surge; as the seasonal adjustment element of inflation reporting is taken out.

Checking into the ABX indexes, I see a significant decline over the past few weeks signaling investors' fear of rising defaults resulting in the potential of more writedowns for securities of these loans. Here is MARKIT's AAA ABX Index, showing us below the level hit in early March before Bear Stearns failed:


By now, I think most have awaken to the reality that this credit crisis is not just a random and short-lived event. The problem we are about to face is one that the blogosphere has been discussing in depth for many months; inflation at a time when economic weakness remains. What is a fed to do? If the data on inflation really gets hot, at the same time that unemployment is rising and growth weak, it doesn't even matter what the fed does because the bond market will likely price future moves in on its own. That in and of itself will cause some pain without the fed even hiking rates; and to an extent this has happened over the past 3-4 weeks.

Anyone who checked mortgage rates recently knows what I am talking about. Anyway, corporate spreads still seem to be OK and LIBOR is not showing any serious signs of distress, so for me, its more of the same in terms of the credit markets; housing/debt continues to be pressured as defaults and foreclosures are rising and spreading to higher quality debt classes. HELOC's are a growing problem. This credit storm is clearly coming in waves and while the worst may be behind us, we are not out of the woods yet!

As for the fed, I think the bond market is getting a bit ahead of itself in pricing in rate hikes. I do not think it will come as fast as some think, as long as economic data continues to be weak. However, the medium term forecast for fed funds rate (especially after the election) is definitely biased towards the upside. In short, we will have to deal with the pain of rate hikes to combat the coming inflation problem.

NY Rental Property As Good As T-Bills?

Posted by jeff

Mon Jun 16th, 2008 09:38 AM

Way back last summer my friend Mike Stoler wrote an article in his column in the New York Sun about how some investors were viewing the New York residential rental market. The piece was entitled Investors Compare Manhattan Buildings With T-Bills. Being a skeptic like me, I was certain at the time....as I am today, that Mike raised an eyebrow when Israeli real estate mogul Ofer Yardeni said "We truly believe that owning apartment buildings in Manhattan is as secure as owning treasuries with upside in value creation." Now Yardeni is as smart as they come. He buys under-managed buildings that are of high quality and in desirable locations, and his fund doesn't employ high degrees of leverage. He has been an avowed bull and buyer through this downturn and I am sure he will make out fine. It's just that comparison he made..."as good as T-Bills"...it's the kind of thing people say at market tops. Maybe it was that Yardeni realized that the full faith and credit of Uncle Sam wasn't going to be quite as highly valued in the future or that T-Bills were going to become a loser of an investment. Today they offer negative real (adjusted for inflation) returns. But all kidding aside, many of the investors in Manhattan and New York City rental buildings are neither as smart as Yardeni nor as conservative in how they finance deals, and a confluence of events are making life tougher for leveraged rental landlords around the city who have any of the 1.2 million rent controlled or rent stabilized apartments in their buildings. Rent regulated buildings have been a magnet for investors the last couple of years; you see clever real estate investors in New York realized a long-time ago that the market is distorted by the lack of buildable airspace and the existence of rent control regulations. With regard to the latter, they figured out that there was embedded value in all rent controlled buildings that was not expressed in the current net operating income generation of the buildings. Over time, attrition combined with several aspects of rent control regulation would allow rents on rent controlled or stabilized units to rise from synthetically depressed levels to market levels. Owners of rent regulated buildings were in a position to capture this upside, with very little risk due to the high occupancy of New York residential buildings. You see, as one would suspect, the holders of rent controlled or rent stabilized apartments try to hang on to them as long as possible and not get thrown out for missed rent payments or any other reason. So in a rent controlled/stabilized apartment, you essentially have a tenant base that tries very hard not to get thrown out for non-payment, coupled with very high occupancy, but natural attrition (death and major life changes) that would translate to a certain number of people leaving every year and certain regulatory thresholds that de-regulate your apartment base over time. It's all good.

The only problem is that these types of investments include a perverse incentive to try to expedite this natural attrition rate, thereby raising your return on investment, This incentive is heightened if the landlord pays a high price for the properties purchased and uses lots of leverage. I'm not saying any tenants have been pre-maturely sent to the next life by avaricious landlords trying to get them out, but landlords have incentives to make current tenants of rent controlled or stabilized units less than comfortable, shall we say, thus pulling forward their move out dates. Of course, these perverse incentives, coupled with avarice and leverage seem to have resulted in some anti-tenant behaviors, which one would of course expect. To wit, complaints against landlords accusing harassment of tenants rose almost 31% in 2008, according to a quote in the Daily News by by Leslie Torres the State Deputy Commissioner of Rent Administration.

A backlash has been brewing as a result of these trends.

The New York Times pointed out in an early May article that "Private investment firms have been amassing what seem like unusual stakes in New York real estate: they have bought hundreds of apartment buildings with thousands of rent regulated units across the city that produce decidedly meager returns. As regulatory filings and promotional materials show, the companies expect to generate higher returns quickly by increasing rents after existing tenants vacate their units. Their success depends upon far higher vacancy rates than are typical in rent-regulated apartments in New York."

The Village Voice did an article in late May titled "Wall Street Takes Dead Aim at Affordable Housing in New York City" To paraphrase the article, "Some 30,000 rent-regulated apartments are lost yearly due to rising rents. Now, Wall Street investors have devised a strategy poised to take an even bigger bite. Under this approach, private investment firms, backed by large banks, purchase buildings in working-class neighborhoods and then aggressively challenge the identity of as many tenants as possible. The apparent aim here is to replace as many people as possible with higher-paying residents, while taking advantage of the lax enforcement of rental-housing laws. So far, it appears to be working. The Association for Neighborhood and Housing Development reports that the turnover in many buildings purchased by these private-equity firms has been as high as 25%. We are not talking about small time players here - see the New York Times article on Tishman Speyer Properties' record breaking $5.4 billion purchase of Stuyvesant Town and Peter Cooper Village and the heavy handed tenant treatment supposedly being meted out.

A recent article in Crain's New York highlights several pro-tenant bills that are being considered by the New York State Assembly Housing Committee as a result.

Bill A.74I6A seeks to repeal the vacancy decontrol aspects of rent control, whereby, once an apartment rent exceeds $2,000 per month, the unit becomes deregulated once the tenant vacates. Bill A.10055A would reinstate prior restrictions regarding changes to preferential rents. Perhaps most onerous of these bills for those looking to step up rent regulated rents to free market levels is Bill A10647, which would increase the threshold rent level at which apartments would become free market, upon being vacated by a tenant, from $2,000 to $2,700 per month. It would also raise the annual income that would disqualify a renter from eligibility to occupy a rent regulated apartment to $240,000 per year for two consecutive years, versus the prior $175,000. The new levels would also be indexed to inflation.

Finally, Bill A.799 would significantly impact smaller rent regulated buildings' conversion to free market status. This bill would limit the ability of landlords to take more than one unit of a building for personal use. It would also bar the landlord from taking such a unit from a tenant who has been in residence for twenty or more years. For those who want to understand more about these bills and read the justifications for them cited by lawmakers, click here and enter the bill number.

The proposed rent increases for this year for rent regulated apartments, as promulgated by the New York City Rent Guidelines Board, look to be on the higher side of recent history, as well they should. The final of three rent control guideline board meetings will take place on June 16, with the vote to be held June 19. This chart from the NY Post shows, what the rent increases have been over the last several years and the proposed rent increases for 1 and 2-year leases to be renewed between October 2008 and September 2009.


With oil hitting new highs daily and natural gas going along for the ride, you can imagine that landlord fuel costs are rising quickly. Imagine for a moment that you bought a building on a highly levered basis, projected increased rents through high rent regulated tenant turnover and moderate expense increases....I promise you many building buyers did. The combo of soaring fuel costs, a crackdown on tenant harassment and tighter bank lending could put a serious squeeze on some building owners in the years to come.

So, you say, what does this have to do with me, the residential real estate buyer? To which I am forced to reply: not all that much. If you are currently a renter of a rent regulated apartment, don't be surprised if you get bullied by your current landlord as a result of their quest for turnover. Additionally, don't be surprised if your landlord ends up in financial trouble and your building eventually changes hands as a result of some investors quest for free market rents being foiled by new regulations. If you have a great rent controlled apartment, hold onto it like it's your long-lost twin, it really is better than T-Bills, despite your rent probably getting jacked up a little this coming year. Additionally, the quality of life issue comes into play, unhappy residents, being harassed by landlords or buildings being foreclosed on by banks because owners can't refi their loans, just aren't good trends for New York City. I know that's not all that much, but for readers who are interested in the New York commercial real estate environment and news on how investment opportunities are changing, I hope this piece was educational.

From the Blogosphere:

Tenants say investment firm is harassing to cash in

Without Major Action Housing Crunch Will Only Get Worse

The Fight For 47 east 3rd Street

Rent Stabilization - part of this neighborhood

Some Slack?

Talking Out Loud

Posted by urbandigs

Fri Jun 13th, 2008 08:46 AM

You know, I want to switch it up a bit and just talk out loud for a discussion today; I'm warning you its a bit longer than normal so have your cup of coffee handy. These are some crazy times, I must say. While the Manhattan real estate market softens, and yes it has softened as buyer confidence declined, lending standards tightened, rates ticked up, and inventory jumped, my business is quite strong; the last two weeks felt like wall street bonus season for me. I have this blog to thank for that I guess and that means I have all of you to thank. But just because I'm busy, doesn't make the entire market a frenzy, as we saw from The Real Deal's survey of brokers last week! What is really going on out there?

Almost every broker I speak to is experiencing softness in some way, shape or form compared to this time last year. That in and of itself should not be a surprise to anyone reading this, but when it comes to my feelings about it, here goes.

First off, inventory surged since DEC 2007 about 40% or so until about 3 weeks ago. So what happened? Did listings just stop coming onto the market OR did sales volume begin to tick up? In my humble opinion, a bit of both. Nothing goes in a straight line forever, and that includes inventory trends. We just jumped 40%, thats 40%! Of course a pause, or even a retracement isn't out of the question here or healthy. But I think there's a bit more to it. The seriousness of a seller is starting to show right now!

If you have to sell, it will show. Other than that, listings have tamed down a bit heading into the hot summer slow months, and perhaps those sellers that tried to test the market during this past sluggish wall street bonus season are giving up and removing their listing from the open market. One thing is for certain, this summer will be slow all around. Sellers will find it slow because of the seasonal component, and buyers will find it slow because options aren't growing! Get used to it. Expect inventory to waddle around 7,500 and then tick up a bit as we get closer to the end of the year. I also expect sales volume to be on the lower end, proven at a lag of course.

In regards to the stock markets, well we just had a 900 point selloff in the past 3-4 weeks. That's quite a shock to even novice investors and a noteworthy negative wealth effect for those that count on their portfolios to decide their max budgets in real estate purchases. But where do we go from here? Honestly, I'm confused right now; which is why I covered about 75% of my short positions and mostly in cash right now. I do know that inflation is about to rear its nasty head starting in July as the seasonal adjustment trick is no more. And evidence of this is being shown in the bond markets as yields rise, pricing in a rate hike campaign by the fed. The question isn't one of IF, but WHEN. Personally, I feel like the economic weakness is just about to really show (as we see the damage from the credit hurricane), so I don't see the fed hiking rates so quickly. Which is good and bad. While lending rates might have relief days ahead, for a short while, it is at the expense of a very weak economy (after the rebate stimulus effects pass that is).

Do not discount the negative effect that higher yields are causing right now. Lending rates are surging, banks profits are being crunched, and money in general costs more to borrow. As to commodity inflation, we are yet to experience the side effects of $135/barrel oil, trust me! That will come in future inflation datasets for sure, and our fed will shift bias real fast! When a fed hikes rates because they are forced to with rising inflation pressure as opposed to overheating growth, that's a problem. Why? Because it will hamper the recovery that didn't happen yet!

When I see reports that mortgage equity withdrawal (MEW) is down 60% from Q1 2007, courtesy of Calculated Risk, I see the credit machine for growth broken. When I see a shake-up in Lehman, only weeks after the CFO assured us all is well, I see a crisis in confidence. When I see lending standards tightened across the board, after 4 years of easing standards, I worry about future growth potential and availability of credit for investments. Did I mention MEW (chart below from Calculated Risk)? MEW is that little thing homeowners do to pull out money from their homes equity and spend it; so yes, down 60% year-over-year is noteworthy.


This is a significant amount of money that is simply gone, and not available for use either now or the near term. What's the lag time? As a CR commenter asks:

Bob_In_MA: And the lag time for MEW/spending is probably 2-3 months, right CR?

CR: Bob_in_MA, maybe even a little longer. MEW appears to be spent over several quarters. But this will be a drag on consumption this year. It's hard to distinguish the MEW drag from the rest of the economic slowdown, but I think the effect is real - if not perfectly measurable.
There are a lot of reasons to be negative, and for this trader, to be short stocks. But one thing is very sure, I am feeling a lot less negative now than I did 8-10 months ago! We are now going through the mess that I stated 10 months ago we needed to go through to get past the mistakes we made. Its part of the process. Its healthy and it hurts, and its going to hurt more before it gets better and there is nothing that any of us can do about it.


Buyers: Expect the recent inventory surge to flatten out. If you don't like what you see now in your price point, you will have to wait for price reductions to reveal a deal. I don't expect inventory to surge for the next few months, and rather, I expect a slight correction in the upward trend until later in the year. Options will not grow as fast as it did in the first 6 months of 2008, and rates will be pressured to the upside; especially when inflation data really comes out and the fed has to talk tough on inflation.

Sellers: Wake up to reality and price right to sell and get traffic in. Either you re-price to this new market or you risk being behind the curve and playing catch up with a stale listing that was overpriced to begin with. If you are overpriced, both traffic and bids will be low. True colors will get you action, and that means pricing power will determine your fate. Expecting a 15% appreciation from 2007 comps is a fantasy; but if you happen to get it, TAKE IT and don't think twice.


Volatility. Up 900, down 900, up 900, down 900. Thats the game. At any point the event risk is to the downside, not upside. We can not have a sustainable bull market rally until financials recover and that is a multiple quarters out at least. Sure, they may be oversold bounces, but in the end the wall street revenue model is broken. With money costing more to borrow and credit being crunched, downside risk is still slightly favored; although that is way more positive than I was only 7-8 months ago. Lets not forget, if corporate profits fall, then equities will have to be re-priced to this new and more sluggish environment. Are your stocks both prepared and priced for this threat?


Pressure to upside as I discussed 2 weeks ago in my piece, "Inflation To Fly? Bond Yields Hitting Mortgage Rates". Bond markets are pricing in inflation pressures right now in yields, and starting next month the seasonal aberration is removed and we will see the effects of soaring commodity prices in the inflation data. Expect this to continue and certainly expect the next big campaign by the fed to be one on the hiking side. Its a question of when it starts. The medicine that saved our financial system and helped to 'forestall economic weakness', has side effects, and those side effects are just beginning. Inflation, at the same time of stabilization for the economy, will be the rock and the hard place that the fed finds itself in between. The fed very well could be forced into raising rates if commodities don't correct and that could set up a dog fight for 2009: ECONOMIC RECOVERY vs INFLATION BATTLE! I still view deflation as a problem near term.

Continued nervousness in the mortgage markets and banks facing quarters of balance sheet repairs and capital raising from write-downs, a future environment of rising rates will likely see a correlational rise in lending rates; from the continued re-pricing of risk that comes from an out of favor secondary mortgage marketplace. Huh? Let me rephrase:
If housing is still out of favor that means securitized loans as an asset will also seem out of favor and more risky. If the secondary mortgage market is still weak, risk will be priced into mortgages, and that means continued higher rates as we see now. If fed funds rates jumps from 2% to 4% and bond markets follow, we could see lending rates jump with it from 6.5% to say, 8%, if risk is still being re-priced at that time!
There is plenty of uncertainty in our future and if anything, I feel that upside could come just as easily as downside (stocks are irrational and damage is somewhat priced in right now as lagging effects of monetary/fiscal stimulus is ahead of us); a new & positive feeling that I recently favored more to the downside from AUG 2007 - APRIL 2008 (I think my past posts here on urbandigs can show that sentiment). So, that's my ray of hope. Hey, I need at least one!

Is The Bloom(berg) Off The Big Apple?

Posted by jeff

Wed Jun 11th, 2008 09:30 AM

It's been a great run. Anyone who lives, works or plays in Manhattan or the boroughs knows what a fantastic improvement has taken place since Rudy Giuliani first got tough on quality of life issues. New York City and Manhattan are cleaner, crime is down, and many neighborhoods that were down and out are bustling with commerce, entertainment and new residents. But like all cycles, this one has gotten a bit long in the tooth. The cost of living in Manhattan has gone through the roof, mere mortals are being priced out of the market and affordable housing has been taken off the market at a rapid pace in the last number of years. We are even seeing the real estate foreclosure debacle impact the boroughs.

Let's look at some numbers:

The Observer served up these figures in an April article on "Where Manhattanites Move When They Want to Stay in New York." (FYI, the punch line was: The Bronx...from 2001 to 2006 over 23,380 Manhattanites moved there).

From 2005 to 2006 10,000 Manhattanites moved to the outer boroughs.

The average Manhattan apartment price hit nearly $1 million in 2005, $1.25 million in 2006 and by the last quarter of 2007 it was $1.4 million (the latest data according to Prudential Douglas Elliman).

The City is losing 30,000 rent-regulated apartments per year and 28,000 similar unregulated units, according to the Gotham Gazette article As City grows, Affordable Housing Shrinks.

The number of foreclosures in the five boroughs increased 51.4% from q4 2007, to 918, according to PropertyShark.com.

Manhattan's population of children under 5 years old jumped 29.4 percent from 2000 through 2006, according to the US Census Bureau. This compares with 6.6% growth for the city overall.

We have recounted several impending quality of life and economic issues on Urban Digs before,
in "School Crowding A Concern!" and "The Ax Man Cometh: Can the Tax Man Be Far Behind?".

The school crowding problem was discussed again in a recent New York Times article, "New York's Coveted Public Schools Face Pupil Jam," which pointed out issues downtown, on the upper west side, as well as in Brooklyn, the Bronx and Long Island City. The surge in families staying in the city is also impacting recreation opportunities, as pointed out in a Crain's New York article in April, "Ballfields become new community rallying point," which quotes a little league board member saying "The fields are absolutely filled to capacity."

The financial industry layoff issues continue to mount. The recent Lehman losses and dilutive capital raise could obviously foreshadow, more head count reductions there as well as at other firms who may have more losses coming. One friend of mine at a big bank believes there are new losses from CDOs that need papering over. Another friend who is a partner in a small securities firm confided that they had their first ever layoffs. The firm has been around since at least the late 1980s and just cut 25% of their staff, due to the lack of investment banking business.

Noah has noted the rise in the cost of a slice of pizza in New York as a lighthearted reminder of the increased cost of living resulting from recent inflationary pressures. But more serious signs of financial stress on New York consumers are now in evidence. According to a recent Crain's New York article entitled "More Can't Pay Utilities Bills," "Con Ed alone says that more than 187,700 customers were in arrears last month, a 9% rise from a year earlier."

So while New York City retail rents are reportedly surging, according to this New York Observer article, which cites a recent REBNY report, Urban Digs readers are reporting seeing lots of empty storefronts around town in more residential neighborhoods(see "Manhattan Downshift, Yes or No?....Let us Know").

Foreign demand for apartments, shopping, entertainment and meals has certainly been bolstering the city's economy thus far in the downturn, while the quality of life for New Yorkers from rich to poor shows signs of fraying. The overheated environment of recent years is now taking its toll, with the crane wrecks of late being a clear manifestation of the intersection of fevered growth, cost increases and a slowing economy. If New York becomes an unfriendly place for New Yorkers, unfriendly New Yorkers may make it an unfriendly place for our foreign guests (that makes sense, I think).

So with undeniable signs that the city has challenges, what we really need is a solid leader, a guy who can do what's necessary to address the city's problems, a guy who doesn't have to answer to special interest groups, a guy who can make hard decisions and keep the city government moving forwards....OOPs - We already have Mike Bloomberg and perhaps the biggest risk to New York City over the next couple of years is the loss of leadership like Mr. Bloomberg's.

At least there is some hope here, according to the New York Times, Mayor Mike is considering trying to overturn the city's term limitation statute so that he can run for Mayor again in 2009. Alternatively, he may seek the Governor's chair in 2010.

Contractor Directory on UrbanDigs.com

Posted by urbandigs

Mon Jun 9th, 2008 10:19 AM

A: Okay, one more tool for you guys. UrbanDigs is proud to have partnered up with Cityhammer.com, NY's #1 Remodeling Directory, in a content sharing tool for this blog. You can now browse this Contractor Directory right here on UrbanDigs.com, and find contractors based on the category of work needed and see how they are rated. Please give us a few days to iron out any bugs, especially with links out to the ratings/review for each contractor. Enjoy!

As usual, please use the tabs above the most recent post to view MANHATTAN INVENTORY CHARTS, TALK REAL ESTATE, and the new CONTRACTOR DIRECTORY.


Was Friday A Capitulation?

Posted by urbandigs

Sun Jun 8th, 2008 01:24 PM

A: In my opinion, no. This is the trader in me talking here. I do keep an active trading account open, and if you want some disclosure, I have been trading the ultra short ETF's (SKF, SRS, EEV, FXP, SDS, DXD, DUG, etc..) since Sept-Oct (1, 2, 3, 4 discussions on this) of last year; when the credit markets really started to deteriorate before the equity markets followed. Friday's selloff was a 2x4 hitting equity investors in the face, waking them up to reality (so to speak) that macro forces don't go away so easily! But I did not get the sense of fear that would characterize a capitulation day. While it certainly felt painful to many, give us a day where the equity markets hit an intraday low of down 5-6%, and then we could talk about a flush-out of the system. For me, Friday's selloff was a stepping stone of fear.

Take a look at the VIX (which is an index of short term volatility and widely used as a measure of investors' fear level - the higher the VIX, the higher the fear; for traders, you sell your long positions when fear is low, and buy into new long positions when fear is very high after the selloff), and you will notice that it jumped 26% on Friday's selloff:


In the past 6 months, the VIX hit this level on the upside 5 times (shown on the above chart), excluding Friday's move. When I look back at the week FOLLOWING the vix reaching the current level, the S&P:

#1 (DEC 11th - 18th) - 1,477 to 1,445 or DOWN 2%
#2 (JAN 4th - 11th) - 1,411 to 1,401 or DOWN 0.7% (with a 5.1% drop 3 weeks following)
#3 (JAN 16th - 23rd) - 1,373 to 1,338 or DOWN 2.5% (S&P surged 25 pts on the last day)
#4 (FEB 28th - MAR 6th) - 1,367 to 1,304 or DOWN 4.6% (hitting 1,273 4 days later)
#5 (APR 14th - 21st) - 1,328 to 1,388 or UP 4.5% (only time in the past 6 months that S&P rose the week following a rise in VIX to the level reached on Friday)
#6 (JUN 6th - 13th) - ??????????

I only went back 6 months for this out of my own curiousity and because I wanted to see the reaction in the equity markets to the VIX in this current credit crisis cycle. Interesting nonetheless.

This tells me that investors' fear level jumped Friday, but it's not the capitulation that may mark a tradable bottom (like the intraday low hit in January when SocGen news broke, or the closing low in early March before the BSC news hit). Both those events had several days leading up to the low hit. Friday's selloff seemed more to me like a stepping stone in fear, waking us up to the multiple whammies of a credit crisis, housing recession, oil surge, weak jobs report, and weakening economy. It was like someone said, "...ummm, what the hell just happened", instead of saying, "....holy s#@t....the market's are getting destroyed!!".

As stupid as this sounds to non-traders, we must have the destruction in order to ultimately get through this in terms of pricing risk into equities. Since the stock market as a discount mechanism is the preferred gauge of the economy for so many people, and a measure of paper worth for so many people, this topic is important to discuss. For those interested in how I treat days like this, I sell out of some of my ultra short positions, limiting my short exposure and taking some profits yet still holding 40-50% of the original total position. Since August, I have been focusing my trading strategies on timing the short plays; getting long (which means short) on the rallies, and lightening up (which means exiting the shorts) on the selloffs; I don't always hit the tops & bottoms, but for me, I fine tuned my strategy after years of trading and following the equity markets. I am not long any positions and usually hold any one trade for 1-2 months, from opening the position to closing it; a far cry from the minute-to-minute trader I used to be from 1998-2004 with Tradescape (now Lightspeed Trading, LLC)

With the VIX surging on Friday and the perfect storm of macro forces at play, we are at a new step of fear. As the VIX climbs, the destruction day gets closer. Even if an event can be avoided, an escalation of fear could cause a crisis of confidence that in and of itself causes the event leading to the capitulation. That's how this cycle usually works. Expect volatility to be high as long as the VIX is above 23-24, and be especially cautious if it rises above 30.

Manhattan Broker's Dealing w/ A Softer Market

Posted by urbandigs

Fri Jun 6th, 2008 05:17 PM

A: It's official, Manhattan real estate has changed. Well, official in the sense that brokers realize they actually can discuss it openly without fear they will lose direct business that is! A shock? Not if you are reading UrbanDigs.com, where the decline in buyer confidence since late 2007 (AUG & SEPT & OCT) has been discussed in depth! Keep it here if you want to stay ahead of the curve!

According to The Real Deal, here are a bunch of broker's observances of how the credit crisis hit buyer confidence here in Manhattan:

Eddie Shapiro, president and CEO, Nest Seekers

The credit crunch seems to be over. Yes, we will still continue to experience side effects, but at least we don't have to hear about it every single day.

Jessica Armstead, vice president, the Corcoran Group

It is more important than ever to be pre-approved before venturing out into the Manhattan real estate market. Lending criteria has changed.

Antonio del Rosario, managing director and executive vice president, Barak Realty

June will be tough for sellers of studios and one-bedrooms because of the surge of inventory we are experiencing.

Deanna Kory
, senior vice president, the Deanna Kory Team, the Corcoran Group

Overpricing is the kiss of death in this market.

Kathleen Brimlow
, director of planning and development, Manhattan Apartments

I believe we will see fewer transactions in June and July.

Yuval Greenblatt
, executive vice president, Prudential Douglas Elliman

Activity seems to suggest there are plenty of buyers. However, more seem unrealistic and looking for discount opportunities that do not exist.

Melissa Leifer, senior agent, Best Apartments

The rents are going up, less is available, and the quality of the available apartments isn't as high.

Gloria Sokolin
, senior vice president, Fox Residential Group

Would-be buyers are putting off buying, so they are renting instead.

Darren Sukenik, executive vice president of luxury sales, Prudential Douglas Elliman

Banks aren't lending to able buyers. The pendulum has swung so far that that in and of itself is hurting the market.

Joanne Wong, senior sales associate, City Connections Realty

I don't think it's realistic for buyers to think they can wait for prices to resemble what one would find in other boroughs.

Gil Neary, managing partner, DG Neary Realty

Low owner-occupancy buildings and buyers who cannot go full doc[umentation] are hitting a bumpy road with lenders.

Jim Mazzeo, president, Weichert Realtors, Mazzeo Agency

The apartments are taking longer to sell and require more showings.

Heather Bise, associate broker, DJK Residential

Prices are still inflated, and we are seeing many buyers holding out for lower prices.
Who do I agree with? Anthony del Rosario, Deanna Kory, Kathleen Brimlow, Yuval Greenblatt, Darren Sukenik, Gil Neary, Jim Mazzeo, & Heather Bise.

I disagree with Eddie Shapiro's statement about the credit crisis being over. Far from it, as the bond insurers got downgraded yesterday insuring (no pun intended) another round or two of massive write downs for the financial sector. Plus, defaults and foreclosures are rising and what was once subprime, is clearly proving to be a problem in higher quality debt classes. This credit crisis is not over, and there will be talk of it for a while longer. In addition, lending rates are still behaving independent of the bond market, indicating a continuing re-pricing of risk and capital crunch in the mortgage markets.

I disagree with Melissa Leifer about rents, although I am not actively in rentals anymore and am basing my disagreement with the fact that as macro deteriorates, so will affordability in general. Rental prices have been VERY strong over the past 2-3 years, and are up about 30-40% or so. A softening in this market as job losses mount seems more likely for near-medium term.

For Jessica Armstead's statement regarding being pre-approved, she certainly is correct except buyers' should know that pre-approval's amount to basically nothing these days! What matters is securing a loan commitment and that part of the deal doesn't come until AFTER you get a signed contract of sale. So, take it a step further and request a pre-commitment whenever possible and discuss the terms of the commitment beforehand to ensure that your loan will be secure! Credit quality, loan-to-value ratio, and debt service ratio are the terms buyer's need to get familiar with right now!

Still, great stuff by The Real Deal in getting quotes from across the industry! As always, the crew over here at UrbanDigs will do our best to give you 'ahead of the curve' opinions on the state of the macro economy, so that you don't have to play catch up! Right now, the credit crisis, the oil crisis, inflation, and the weakening economy rules the day.

Oil Hits Record At $139.12/Barrel

Posted by urbandigs

Fri Jun 6th, 2008 04:21 PM

A: Remember that Naked Gun scene where Leslie Nielson says, "...Alright, Move On, Nothing To See Here, Please Disperse! Nothing To See Here...!". Does anyone else get this feeling? HOLY S%#T!! But don't worry, inflation is expected to moderate as the economy slows, so please, move on, there is nothing to see here!



Jobs, Downgrades, Foreclosures Oh My...

Posted by urbandigs

Fri Jun 6th, 2008 11:48 AM

A: Umm, who was it that keeps saying this stuff doesn't matter; the fed will bail us all out, don't fight the fed! Yea, right! In yesterday's bizarro trading day, S&P cut the ratings' of bond insurers MBIA & Ambac and Fitch downgraded MGIC Investment and PMI ratings, and stocks ignored it and flew on stronger than expected retail sales data. It's amazing how bond insurer downgrades went from and 'end of the world' play, to a huge rally play over the course of 5 months! Perhaps this was all part of the grand plan, to postpone the effects of downgrades to a later time when markets could more easily absorb the impact? Just do not discount the after-effects these downgrades will result in for the banks and brokerages with assets insured by these guys! In short, expect the write-downs to keep coming.

Lets discuss one by one.

JOBS: Unemployment Rate Jumps to 5.5%; NFP -49,000

A shock to markets, yes, a shock to those following macro trends, no! That's all I really have to say about that, Bubba. The labor market is very weak, and the unemployment rate never should have ticked down to 5% last month anyway (read, "Analyzing The REAL Jobs Report")! Nevertheless, the 0.5% jump will cause a headline shock to markets and the media will be all over this with recession articles this weekend!

The talk with this report is that perhaps the adjustment due to the surge in 'youngens' entering the work force. As we talk often about understating data, perhaps this report is overstating the unemployment rate? The fed recently updated its guidance for 2008 unemployment to be 5.6%; so the fact that we could be at 5.5% right now, makes the feds expectation seem very conservative!

Barry Ritholtz does his usual jobs reporting (chart via BLS):



According to CNN's, "Homes In Foreclosure Tops 1 Million":

More than one million homes are now in foreclosure, the highest rate ever recorded, according to a trade group which warned Thursday that number will continue to climb.

The Mortgage Bankers Association's first quarter report showed that a record 2.5% of all loans being serviced by its members are now in foreclosure, which works out to about 1.1 million homes. That's up from the 2% of loans, or about 938,000 homes, that were in foreclosure at the end of 2007.

The report also showed that 448,000 homes, or about 1% of loans being serviced, began the foreclosure process during the first quarter. That's up from about 382,000 homes, or 0.83%, that entered foreclosure in the last three months of 2007.
This too really isn't that surprising as we all know that housing across the nation is struggling. What it tells me is that we are past the expectation of this grim reality, and entering the period where we will have to deal with it! It means a lot of bank owned homes will be sold at big discounts, which will ultimately have an effect on the homes nearby and on psychology of buyer interest in general. The result will likely be a continued period of negative pricing data on the Case/Shiller index. As I said before, talk of a housing bottom and a sustainable recovery is quite silly at this point.

BOND INSURERS: Downgrade Assures More Write-Downs To Come

Ahh, the bond insurers; the topic of so many posts from November - February.

In simple terms, lets explain why the threat of downgrades for the bond insurers were newsworthy. The problems of the credit crisis were initially caused by the bursting of the housing bubble (lets forget what led to this bubble for now). Housing is a highly leveraged asset, and wall street innovated products that could generate tons of revenue securitizing loans for home purchases, allowing the banks who make the loans to offload the asset and write more loans. The volume and fee based innovation encouraged reckless lending, as the option for securitizing the loan into a mortgage bond and reselling it on the secondary mortgage market existed. Well, that all came to an end real fast. These products were insured to protect against default; hence the industry of the bond insurers! If the bond insurers get downgraded, the products they insure get downgraded too! So, not only do Ambac & MBIA lose the ability to write new muni business, it will cause a new round of write-downs for the corporations that bought their insurance policies of the riskier bond products held on their balance sheets; a secondary effect on the whole financial services sector.

Back on February 26th, the AAA ratings of Ambac & MBIA were maintained, and I wrote:
"Getting ratings affirmations for both these guys does two very important things: adds clarity/confidence to tradabale markets + saves a round of write-downs for financials that would have come if the downgrades hit. I caution you to interpret this as a solve all fix, as it is very possible we will revisit bond insurance ratings issues if credit markets and housing markets continue to be pressured causing more defaults; especially to higher quality debt classes."

So it goes like this:


Thats the simple explanation; of course its way more complicated than this. So what can we expect for further write-downs on a sector battered by hundreds of billions in write-downs already and multiple rounds of capital raising and shareholder dilution? Yves Smith over at Naked Capitalism has a discussion today:
"I received a note today putting exposure within the banks at $600 billion. Barclay’s is estimating losses of $143 billion on a markdown - I think Moody’s has to follow suit for it to kick in at that level - UBS puts it at $203 billion, and Oppenheimer says Citi, Merrill, and UBS will write down somewhere between $40 and 70 billion among the three of them - a wide spread, I agree."
Reality is starting to hit. Is your head in the sand?

Permits & Construction Costs

Posted by jeff

Thu Jun 5th, 2008 12:24 PM

The response to Noah's piece, The Manhattan Inventory Argument, suggests that folks might like to see some data on Manhattan housing permits (these are planned construction projects; not every one gets built) along with the construction cost data that is included. First, a couple of points: the data below is for New York County which is constituted by Manhattan and I believe a tiny slice of the Bronx (Guru help on this?) and the data I present below only include buildings for five or more families. The buildings could be apartments or condos; the government does not split it out by end-use. I would note that in recent years, the cost of land and construction, made financing the construction of apartment buildings prohibitive, although building apartments is a better alternative in terms of after-tax returns to builders. The apartments built were generally on land people acquired cheaply years before, or for projects where lots of developer equity was available. In recent years, most developers wanted to use as much leverage as possible and get paid back as quickly as possible so they could pay back their construction loan. With stricter lending rules, apartment projects are becoming a bigger piece of the pie these days. Okay, so here is the data on building permits starting in 1990.


You can see the impact of the credit crunch in the early 1990s - it's too bad no data from the late 80s are available to get a sense for how much construction dropped off. You can see the impact of the 2000 to 2003 economic slowdown as well and the big leg up in the 2005 to 2007 time frame. In contrast you can see the H1 2008 fall off versus H1 2007 below. Year-to-date permits indicate 2,037 units to be built, down 59.7% from 5,055 over the January to April period last year.


The 1990 and 1991 construction cost data have got to be an error in the government statistics. But as you can see, there has been a steady rise in construction costs per residential building unit. I am not sure that these numbers are super meaningful as the mix of buildings with large numbers of units versus buildings with small numbers of units will impact this figure a lot, which is why the annual percentage changes are very volatile. So the median annual change of construction cost per unit (starting in 1993 so as to factor out the weird 1990 and 1991 data) at 15% is probably more meaningful than the 47% average. Interestingly, the construction cost per unit rose 15% in 2007 - about the median amount.


Data: U.S. Census Bureau
Charts Courtesy of Guild Partners

The Manhattan Inventory Argument

Posted by urbandigs

Wed Jun 4th, 2008 01:05 PM

A: So whats the deal? I know Manhattan is an island, that the 421a abatement is being phased out, and I have argued for years here on this blog about the many differences between NYC real estate and other local markets, but can inventory rise significantly? I mean, is it possible? I have had many discussions with people who say "no, it can't". How strong is this "tight inventory" argument anyway and how may factors change? Here are my thoughts.

I was on a showing with a buyer the other day, and as I normally do after seeing the property, we went to the roof to check out the building's communal deck. This was a 30 story building in Gramercy. As my client observed the usefulness of the roof deck, I was looking at the Manhattan view and thinking quietly to myself...Damn! There are a ton of building's with a ton of units!

I started to wonder about the 'tight inventory' argument that you hear so often for Manhattan real estate. I even discussed 'tight inventory', which was and to an extent still is true by the way, here on this site many times. Sure, inventory is rising and we can deduce why by looking at the credit crisis and weaker macro forces, but how far could it really go?

So I turned to appraisal extraordinare Jonathan Miller for his best guess on how many residential apartment units there are here in Manhattan. His guesstimate, and it is just a guess so feel free to comment if you have a source for total residential units in Manhattan, is about 300,000 total units; that is all co-ops + condos. Remember, condops are co-ops with condo rules/bylaws.

inventory-manhattan-real-estate-rise.jpgPeeking at UrbanDigs Charts, I see total active inventory for Manhattan at about 7,763 right now. This would mean that only 2.5% of the total apartments in Manhattan are currently listed for re-sale (pie chart on right; assuming 300K total residential units + 850K total rental units; feel free to direct me to source that could confirm these #s)! Hardly a market that has a glut of inventory! While it is all relative (since inventory is up about 40% during a normally active wall street bonus season), think about what could happen with inventory! Miller explains to me:

We typically see an average of 3% to 7% of a building's units turnover in the course of a year (sales) so that seems reasonable that about 2.5% of the housing stock is listed for sale. Inventory levels are currently below 2006 levels but if sales continue to remain at lower levels, the potential for an increase above 2006 levels is very possible.
Often I get asked by readers at what level would fierce seller competition kick in, forcing asking prices to come down in order to move property. I think I said somewhere between 8,500 and 9,000 or so; keep in mind this was when total inventory was about 6,250 or so. Boy, I need to revise that big time!

Fierce seller competition occurs in local markets where buyers simply go on strike and are no where to be found. This is hardly what I am seeing right now in Manhattan. While buyers here may be cautious, we still have a healthy mix of buyers that most other local markets cannot claim. But, that doesn't mean this can't change! Confidence can change very quickly and almost every broker I know now understands how relative confidence is to sales volume! Most brokers are behind the curve because they focus on selling the product at hand and their own personal real estate business; nothing wrong with this is there? But there is a lack of brokers out there who are ahead of the curve and advise their clients to observe the changing environment in order to achieve their goal; rather than be behind the curve and play catch up. Applying this phenomenon, Manhattan is a marketplace where brokers frequently overstate a property's worth on the open market in order to secure a signed listing agreement; after all, sellers rather hear that their apartment is worth more than worth less (see TrueGotham's piece on "Grossly Overpriced Property...The Kiss of Death")! In my opinion, overpriced properties are going to contribute to a sustained rise of inventory throughout 2008; especially resellers of recently closed new development units.

Today, the 'inventory is tight' argument holds less water than it did in the past few years for one very big change ---> decline in macro conditions that led to a decline in buyer confidence. Inventory is rising because sales volume is just not keeping pace with new listing inventory as buyers have become more cautious. While I would not say that inventory is overflowing, it seems to have the potential to do so if conditions worsen.

Assuming the 300,000 total residential units in Manhattan is somewhat accurate, then current inventory is at 2.5% of the total pie. With a building boom bringing many units to market as new developments are completed and units are closed, I would expect this number to rise a bit, and total inventory to rise with it! I stated many times that I expect 2008 to be the year Manhattan inventory reverses course; and so far it is. But to say that fierce seller competition is here and sellers are fighting with each other to lower their prices, is far from true. Yes, you are seeing pockets of distress and some in building competition, but it is not generalized for all of Manhattan.

Inventory will have to soar to well above 10,000 units at the very least, for us to see some level of fierce seller competition. As I looked out from that roof deck at all the buildings in Manhattan, I tell you, it certainly is possible. Did it happen yet? NO! Will the new 421A rule + credit crisis eventually slow development (recent story in The Observer about permits rising in 2008 as last chance to take advantage of 421a exemption; via Curbed)? YES! Will that make Manhattan inventory tight no matter what? NO! There are enough total units out there that should an economic slowdown deepen and persist, inventory could rise significantly.

Time will tell. For now, let's at least know what it is we are dealing with.

Confidence In Credit? It's A Fragile Thing!

Posted by urbandigs

Tue Jun 3rd, 2008 11:09 AM

A: Most of the indicators on the credit markets have eased nicely since the chaos hit it's peak in mid-March, and the fed saved the financial system. But things are starting to seem a bit murky again in creditville; a not so nice place to call home. While things like the TED spread seem fine, the AAA ABX index is once again falling and when I look at the stock prices of investment bank Lehman Brothers and bank Washington Mutual, I wonder if another disaster is setting up? One thing I do know, is that if we do have another shock to the system, expect confidence in the credit markets to once again be rattled!

Take a look at what the ABX AAA Index has done over the past few weeks (via Markit):


Notice the deterioration in the past two weeks, quickly approaching the lows hit in mid-March when fear level from the credit crisis hit it's peak. The vix hit 32 during that time. Currently, the volatility index is around 19.50, up from a low of around 16.30 a few weeks ago, but still well below the fear level peak when Bear Stearns decided to hibernate forever.

Not all of the credit indicators are deteriorating though. Credit spreads seem ok for the most part, TED spread is below 1, and LIBOR seemed to come in a bit when compared to the fed funds rate of 2% (although it has come to light that banks have been misstating LIBOR rates for fear that it will show distress for those banks quoting higher rates). Yet all these indicators can change very quickly should another shock to the system occur; and when I look at where LEH, WM, and C are trading right now, it seems traders are pricing in some uncertainty for these guys.


In short:

LEHMAN BROTHERS (NYSE:LEH) - down 28% in 1 Month
CITIGROUP (NYSE: C) - down 18% in 1 Month
WASHINGTON MUTUAL (NYSE: WM) - down 26% in 1 Month

Imagine what would happen should Washington Mutual come out and say they are insolvent? Or, if Citigroup announces it must cut their dividend and write down another couple of billion? Or if Lehman comes out and says everything is fine, they dont need any capital, but they will dilute shareholders anyway and raise another $4 Billion? Oh wait, that just happened!

According to Clusterstock.com's article, "Lehman's Laughable Damage Control; Don't Need To Raise Capital, Just Might Want To":

Lehman Brothers (LEH) was hammered yesterday on fears that the company will have to sell more equity in another emergency capital raise. The WSJ put the amount at a highly dilutive $4 billion of common equity on an $18 billion market cap--this after the firm has raised $6 billion in the past two months.

In typical fashion, however, Lehman comes out fighting, saying in a statement (per CNBC) that it doesn't need to raise the money that it is only considering raising it because it might want to.

Please. Companies don't dilute shareholders by 20%+ when their stocks are already down more than 60% from their peaks unless they absolutely have to.
Why would a company dilute shareholders if they didn't need to? The answer: because they have to! I don't need to explain to this audience the critical nature of confidence, and how a crisis of confidence can destroy a firm. It seems Lehman is trying to retain confidence, and as the article states, "...understanding that preventing a run on the bank is all about perception."

The point of this post is to explain that with the stock prices of LEH, C, & WM down at these levels, confidence is a very fragile thing right now. Sentiment, especially in the credit markets can change very quickly and do some damage. While the credit markets seem to be in a much better state than it was in mid March, there are still concerns! The last thing we need is an insolvent Lehman or a bankrupt Washington Mutual. Something like that will shatter confidence and erase all the progress that the credit markets made since the fed saved the financial system!

2nd Ave Subway Business Fundraiser Thursday

Posted by urbandigs

Mon Jun 2nd, 2008 12:44 PM

A: As discussed 18 months ago here, the 2nd avenue subway construction brings with it both positives and negatives. The clear negative is the disruption in foot traffic to businesses right on the front lines of construction work. As a 10-yr upper east sider, you get to know the business owners of your favorite restaurants, and DELIZIA on 92nd & 2nd is up there on my Pizza & Italian list. Check out this flyer I got when we ordered delivery last night!

Back in November 2006, I posted this update on the 2nd avenue subway project:

What To Expect During Build: Streets to be completely demolished during the boring process and tunnel build. Local businesses on 2nd Avenue will have a rough time and will most likely go out of business temporarily with some type of city support program kicking into effect. A few years of loud noises, construction barriers, air pollution, and big time machines.
Then I get this with my order:

Please try to support the businesses that are hurting because of construction barriers, work, noise, and dust between 90th & 94th Streets on 2nd avenue! Blondie's is a great sports bar right in the middle of the action and is holding a fundraiser this Thursday June 5th from 6:00 - 8:00PM.

Inventory Flatlining...But Should We Celebrate?

Posted by urbandigs

Mon Jun 2nd, 2008 10:57 AM

A: You know, I get into a lot of conversations with investors who ask me how the Manhattan market is doing, expecting a change every week or so. Manhattan real estate is certainly a fast paced market, but it is still housing, and housing is an illiquid asset! Therefore, the market fundamentals will not change on a dime like say a stock would should a company issue a profit warning and change the entire dynamic on the equity's valuation. Market psychology CAN change on a dime though! So, when I take a look at the new chart system here on UrbanDigs.com, I notice a clear flattening of the inventory trend after a 47% rise since mid December. So what does this all mean?

First off, for anyone new to this blog, let me warn you that content is based on what the writer's (Jeff, Christine, and yours truly) are thinking about on that particular day. For me, its usually something macro, so don't expect a 'on the front lines' report everyday!

Second, the navigation tab for this blog's tools is right above the most recent post! Here is a visual showing you where you can go to TALK REAL ESTATE and observe CHARTS. Soon you will have a contractor directory as well. This is where all new tools will be added to the blog in the future.


Moving on. Here is a 3-Month chart showing you the result of sluggish demand during the normally active wall street bonus season. Notice how inventory rose during the months of FEB-APRIL, and seemed to flat line after a 47% rise since early December just above 7,500 total listings:


Here are the noteworthy percentage changes over the near term for Manhattan inventory:

1-MONTH --> Up 11.1%
3-MONTH --> Up 35.2%
6-MONTH --> Up 47%

The pace of change has certainly stalled. Last year, inventory went from about 6,100 in JAN to about 5,100 in JUNE, reflecting the strong sales volume. In 2006, the reverse occurred and the market was similar to what we saw over the past 5 months. In 2006, inventory went from about 6,200 in JAN to about 7,600 in JUNE. We seemed to have reached the same level this year, as we did in 2006 at the same time. However, this year, we started JAN at a total inventory level of 5,300 or so; some 900 listings fewer than two years prior showing the more aggressive rise of inventory this time around.

But, lets talk more about what is going on now. The height of the credit crisis, in terms of fear, occurred during the months of Jan, Feb, and March; with the failure of Bear Stearns in March capping the rise in fear. The headline shock of these turbulent months definitely played a role in declining confidence for buyers here in Manhattan. I think this is clear in the inventory trends for these months; resulting from sluggish demand. But the rate of acceleration has all but stopped right around this level of 7,700 total active listings or so. A good sign? Sure! However, we must take into account where we came from and what time of year it was!

Inventory started to rise from a low around 4,600 listings or so, and the surge came at a time when Manhattan sales volume is supposed to be very strong! The effect of confidence at work. Anyone who believes that it is NOT all about the buyers, should rethink how strong a decline confidence is as a force in a local housing market. Heading into the generally slower summer months, we must wonder if sales volume will pick up causing a retrenchment in total supply or if this is just a layover until the next round of rising inventory. The jury is still out on this and cause for a celebration should probably be put on hold. I mean, inventory rose about 3,100 listings in the past 6 months; so how could a 4-week stall be viewed as such a positive? That's like being happy when you buy a stock at $100, and it falls to $60 and stops! Well, you need that stock to come way back up! It's all relative. Show me a decline to about 6,000 listings or so, and I'll start to get excited that buyer confidence is rising!

Fewer Wall Street Job Cuts?

Posted by jeff

Mon Jun 2nd, 2008 09:32 AM

It took 10 minutes last week to undo 85 years of Wall Street history. The Bear is dead! Long live the bull? Shareholders approved the sale of Bear Stearns to JP Morgan Chase at a slightly higher price than the original fire sale contemplated, but still 94% off the 52-week high for the stock. A stunning punctuation mark to the end of the credit crisis....for now.

According to an article in the New York Times last week, New York City Comptroller William C. Thompson Jr., said New York City will lose 85,000 jobs next year, and about a quarter of these will come from Wall Street. Reuters quoted a number of 15,000 to 25,000 from the report that was issued by the Comptroller's office. According to the Comptroller's report, this compares to 40,200 jobs during the 2000 to 2003 downturn. Now this differs considerably from the figures I cited in my piece The Ax Man Cometh, Can the Tax Man Be Far Behind?. In it I wrote: the "Securities Industry and Financial Markets Association showed 39,800 Wall Street jobs lost in 2001, and this number climbed to 90,000 in the next two years." The difference may be made up partially by Wall Street jobs lost outside Manhattan.

According to the Reuters article, "the latest job-loss estimates were milder than several others. For example, Wall Street could shed one in five jobs if this cycle in an industry known for its volatility mirrors previous ones, according to a state labor department analyst. That works out to 36,000 of lay-offs. Similarly, the city's Independent Budget Office, predicted 33,300 job cuts."

Crain's reported yesterday that 22,000 jobs had been lost on Wall Street in the last year and that the outlook was for far more. the article quoted Jonathan Jones, president of Manhattan's Jones Search Group as saying, "I'm afraid we're not even halfway through the wave of layoffs"

The bottom line is that like so many numbers people throw around these days, the quality of these numbers and projections stinks. The Reuters article goes on to say "Though banks and brokerages employ less than 10 percent of the city's workforce, they earn more than 30 percent of all wages and salaries, he said. And each Wall Streeter helps create 1.5 jobs in other sectors, from restaurants to shops." In my prior piece on Wall Street job losses I wrote that "According to the New York Post: "Economists at the city's Independent Budget Office have calculated that for every job lost in the securities industry, there are eventually another four to five jobs lost across the city economy." The conservative Manhattan Institute Empire Center for New York State Policy released a study back in October in its Fiscal Watch publication, which predicted a less draconian loss of two non-securities jobs for each lost Wall Street paycheck."

More junk statistics! For my part, the only thing I read into the latest projections is that the "It's less worse mentality" is alive and well for now. It is apparent that the current spin is that things are not as bad as "everyone" expected. Well, how could they be? "everyone" was expecting the end of the world about 2 months ago.

Both the Mayor's office and the Comptroller's office agree that there will be job losses in the city in 2009. I'd put my money on that - for the very little it's worth. Wall Street traders focus on second derivatives....is the current trend accelerating or de-celerating. If you are a trend follower this keeps you safe, because if something is accelerating to the upside, it usually dosn't just fall immediately without decelerating first. Financial stress seems to have stopped accelerating and for now the buzz will continue to be that things are "better than expected."

With the engines of commercial real estate finance, leveraged buyouts, IPOs, M&A, and fixed income structured products stalled, I don't see Wall Street in need of adding jobs any time soon and the prospect of a slow bleed out of more personnel remains very real. The question becomes, what will be the new "new thing" that creates traction on Wall Street and the economy as a whole? Without some outside spark the economy seems vulnerable to a double dip should conditions like inflationary commodities markets persist. Remember those words "double dip" - they'll be throwing them around after "less worse" gets stale.

From the Blogosphere:

NYC Independent Budget Office - Analysis of the Mayor's Budget 2009

Renters' Market - Landlords Ready To Offer Up Deals (Due To Financial Sector Slowdown)

Barton Biggs is Bullish