A: Enjoy. Be safe. Drink well. And party on, Wayne! Oh, one more thing, if you happen to stumble upon a shady, white, hairy pimp with bling, that's me! Although, it turned out more like a Howard Stern wannabe disco outfit. Whatever. I look ridiculous and that's all that counts! MurphGuide.com has a good list of venues hosting parties tonight throughout New York City.
A: If you were at the Yale Club panel two weeks ago, you saw me repeat a few times that..."the Hamptons is done, just wait 6-12 months and compare prices". OK, so maybe I used trader jargon to describe the situation, but people should know by now that I will not say something as strong as this, without confirming it first! Today, the news is out and this high risk/high reward market seems to be rolling over.
According to Bloomberg, "Hamptons Home Prices Plunge as Wall Street Upheaval Cools Sales":
Home prices in the Hamptons, the summer resort of Wall Street bankers and Hollywood celebrities, plunged a record 19 percent in the third quarter from a year earlier as stocks tumbled and the financial industry shed jobs.Imagine if you heard that Manhattan fell 19% from year ago levels just to put this price movement into perspective. In my opinion, Manhattan is down about 8-10% from peak levels and the price that deals are being done at right now may be a bit lower; depending on quality of product. Of course, it will take a few quarters for what I say to you here today to be reflected in lagging price data.
The median price for a home on the eastern tip of New York's Long Island fell to $830,000 from $1.03 million, the biggest drop in at least five years, according to a report today by New York based appraiser Miller Samuel Inc. and broker Prudential Douglas Elliman Real Estate.
The number of home sales fell 29 percent to 257 during the quarter from 361 a year earlier, and the inventory of properties on the market rose to 1,561 from 1,422, Miller said.
It's all about the buyers! When buyers disappear, we find out who needs to sell and at what price! The first wave down from the peak can be fierce depending upon the size of the bubble and the market. For the Hamptons, a summer retreat and second home market directly exposed to this wall street crisis, was overly exposed to a combination of absentee buyers & sell side margin calls and forced liquidations. So this market was very risky and prone to more severe price movements once the roll over began. As prices flew higher, the inevitable 'reversion back to the mean' was sure to begin on a high note.
In terms of Manhattan residential real estate, you can't really compare it to the Hamptons on various levels. However, you can get an idea of what the wall street crisis is capable of for a market exposed to the loss of these buyers and distress of these homeowners. Our market will not fall this fast, but pressure surely is on the downside right now. I am still not sure which year over year price report will reflect the contraction from peak levels, probably Q4 2008 (released in JAN 2009) or 1Q 2009 (released in APRIL 2009). It's the Hamptons headline shock and the news articles to come that may further depress buy side confidence, adding speed to the cycle. As I said many times since late 2007:
1) Expect 2008 to be the year inventory rises
2) Expect 2009 to be the year that shows the lagging price decreases
It's no surprise that buyers are waiting. It's also no surprise that sellers are more eager to adjust their asking price lower and entertain a lower bid. In fact, sellers don't even expect full ask anymore, they know that bids will come in below their asking, unless the property is severely under-priced which I am not seeing yet. The tides certainly have changed.
A: Fed cut 50 basis points yesterday and until the last five minutes of trading, the markets enjoyed it. Why not right? Now, I have been in the camp of rate cuts for about 4 months now, once the commodity bubble started to roll over showing the true strength of deflationary forces. Deflationary forces also sparked a dollar rally, bringing a reversal to long-held carry trades and 'short dollar/long euro/pound' trades. But does the fed really want a stronger dollar? In my opinion, NO WAY! It's nice to have some national pride and desire a stronger dollar, but if the dollar continues on its fierce upward trajectory, it will do more harm than good and hurt large multinational corporations who depend on currency trends to boost the revenue effect of foreign business, IBM is a great example. Ben's trying to inflate us out of this deflationary spiral, and a weaker dollar at this stage is probably desired.
In regards to the moves the dollar has made, think of it as a wrestling match and lets call it DEFLATIONARY FORCES vs FED & TREASURY TAG TEAM.
Deflation is causing the dollar to rise, but Ben & Hank want to inflate and that means debasing the dollar; after all if they wanted a strong dollar they wouldn't be cutting rates so aggressively now would they? Any strong dollar talk from this fed or treasury, in my opinion is BS! If dollar strength continues at this rate, more harm will be done and its clear the fed will do everything to inflate, and that means trying to debase the dollar or at least stop its sharp upward movements.
Deflation is the worst outcome, unfortunately its already here. The fed will take a little bit of inflation later, if it means getting us out of this deflationary spiral in the near future. While housing and credit contract, are prices everywhere going down though? Econbrowser debates whether general deflation is here:
"In a general deflation, the purchasing power of a dollar bill goes higher and higher, and as Greg notes, this can produce big economic problems, as it did for the U.S. in the 1930s or Japan in the 1990s. But it is absolutely a problem that the Federal Reserve can fix. If you increase the quantity of dollar bills fast enough, you're sure to create inflation, not deflation. And the Federal Reserve has unlimited power to increase the quantity of dollar bills."That is what they are doing. If you don't believe this, just look at all the facilities the fed has taken on, trying to liquidate the market, and how much money was poured into bailing out those institutions deemed too big & too interconnected to fail. The fed's balance sheet doubled from a year ago, according to this Forbes story:
According to the Fed's H.4.1 releases, as of Thursday, Oct. 23, the Fed's assets totaled $1,804,208,000, roughly double its total of $919,235 a year earlier. Bank reserve balances during the same period rose from $294,225,000 to $301,270,000, an increase of only 2.4%. Thus the monetary impact of Fed activities over the year has been substantially less than implied by the doubling of its assets.Corrected, as in, weaning the banking system off all these lending facilities. Yes, that is in our future, the only question is when. Below is the latest figures for the Fed's expanded balance sheet as of Oct. 23rd, via federalreserve.gov:
One could easily argue that the Fed overdid its sterilization for most of the period, which made monetary policy too tight. As for the recent period, the extremely high growth is probably appropriate, and not inflationary, while credit markets remain frozen and velocity continues to fall. It is something that will have to be corrected as we return to normal in credit markets, or accelerating inflation will become a serious concern.
For now, all attempts are on inflating to kill the deflationary monster. From Bloomberg:
Federal Reserve Chairman Ben S. Bernanke signaled he's ready to cut interest rates to the lowest level on record should the central bank's actions fail to stem the deepening economic slump.Will they be successful? Will the dollar stop rallying with the fierce moves it has in the past few months? Will the fed stop deflation, and contain the inflationary side effects down the road? For me, this type of success is impossible. I'm not making predictions, I'm just saying that a weaker dollar is a side effect of inflation, and it's inflation the fed is trying to accomplish here.
Bernanke is drawing on an academic career studying the failed efforts to prevent the Great Depression, and yesterday's shift indicates he's prepared to revisit his 2003 commitment as a governor to lower rates to zero percent if necessary. Should lending fail to revive by December, the central bank will probably cut by another half point, said former Fed Governor Lyle Gramley.
In real estate parlance highest and best use is code for the most profitable, legal and feasible way of utilizing land. For the last couple of years the highest and best use of land in most of Manhattan and even parts of Brooklyn and Long Island City has been hotels. This has literally been the driver of the land value bubble in many locations. Long time readers of Urban Digs will be familiar with the New York City hotel market and the unusual relationship between it and the high-end condo market from my prior piece The Marriage of Lodging & Living in NYC In the article, I took you through a stroll down memory lane, back to the early 2000s when the condo market was so hot and new product was so scarce that a passel of hotel owners decided to take their properties condo, including the Mayflower, the Essex House, 995 Fifth Avenue and of course The Plaza.
Ironically, just as these properties left the market, the moribund lodging market in New York City, which had seen demand squashed by 9-11, came roaring back to life on the back of the weak dollar (and perversely the World Trade Center site becoming a huge tourist attraction). As a result, hotel occupancies went ballistic followed by room rates that became all but unaffordable unless you were lousy with Euros, Pounds, Won, Dinars or other exotic currencies.
With hotel values following on the heels of the vastly improving fundamentals, developers moved quickly to accommodate demand for new hotels. In fact, as of today, there is a backlog of projects that will reportedly add 20 percent to the current room base of 77,000. The only problem is that by rushing out to buy sites for hotels, developers were jamming up prices of land in an already over-heated New York City land market. I commented on the land price bubble in a piece earlier this year entitled NY City Land: Will High prices Cure High Prices?
In my original piece on the lodging and residential market cross pollinization in New York City, I stated that: "The increased cost of land, construction and service worker wages needed to supply the luxury digs and over the top amenities in 5 Star Hotels is requiring the sale of condos to subsidize development. So despite the hot lodging market in the US, (its sizzling in New York) developers need to get some cash out up-front by selling condos. In fact Lodging Econometrics is cited in the article as estimating that 95% of luxury resorts in the U.S. are being built as part of bigger overall projects, vs.10% in the 90s, and essentially functioning as amenities." So as you can surmise the seeds of destruction for hotel developers who were late to the party were already being planted. The cost of development sites were already so high that getting a decent IRR required not only building a hotel and getting great occupancy and room rates, but also monetizing something up front by selling off the top couple of floors as super amenitized condos or selling time shares.....if you could find enough dumb foreigners to buy them (no insult intended to our foreign friends in general, but if you bought one of these....).
One important thing to mention about hotels, hotels by nature should be the highest and best use of land in almost any market that allows them, where lodging demand is high and supply is low - better than office buildings, better than retail, better even than condo (in some cases). Why is hotel the highest and best use of land bar none? It's a risk reward trade-off. Yes folks, listen carefully here because the concepts of risk and reward are coming back into favor. You will be tested on these concepts later....repeatedly.
In real estate lawyer-speak a hotel room is a daily or short-term leased fee. It is leased to the customer daily or for some other short-period of time and that's the entire obligation. Office buildings, retail malls and apartment buildings are leased fee estates for years. Both landlord and tenant have security from the relationship. The former from knowing that the tenant will be there for a set period paying a known periodic rent and the latter from knowing they have a place to live or conduct business at a known cost for the same period. The hotel owner, in contrast, literally has no idea who is going to be renting from him a week from now (or not much of an idea as reservations can be cancelled) and what rents he can expect. By nature a hotel is a much riskier asset - it has much higher volatility of returns - and therefore it must carry a higher return on investment to attract capital.....at least, if the capital is not being deployed by a bunch of dumb-asses (fill in name of your favorite investment bank, REIT, private equity firm here).
NEWSFLASH according to my sources hotel bookings after the holiday season in New York are looking dismal. Rates are reportedly going to be down big time. Anyone surprised? If you are, you have not been reading the New York Times, Crain's or Urban Digs for the last few months where reports about cracks in the foreign visitation boom and New York City lodging market have been percolating. The latest surge in the buck ain't helpin. One minor consolation is that the credit crunch will stop some of the ridiculous backlog of planned hotel rooms from being built. But in my humble (but loudmouthed) opinion, it won't keep rates from getting ruined as demand slows and new supply comes on.
So here's the poetry of the universe in action again. The most volatile real estate asset class was actually the driver of the last surge in the bubble of New York City Land prices charted below. Data is from the New York Fed. Recall that when the boys downtown put these numbers out they opined that the lovely trend was your friend and portended positive future developments for our great city.....oops!
P.S. This morning I got an e-mail regarding a failed condo project in midtown, where only 50% of the units had been sold out. The developer is looking to sell the project. They gave back the condo buyers' deposits so they could reposition the property as a high-end boutique hotel. Good luck with that!
A: If any broker uses the 'foreign buy side demand' argument to get you to bid more aggressively, you need to get away from that broker immediately! Now is not the time for behind-the-curve consulting for real estate investments! The reality is that confidence trumps the currency trade, always has and always will! With that said, there were plenty of deals involving foreign buyers over the past few years, especially into new developments at top dollar and delayed closing dates. At the time of contract signing, foreigners had a few things going for them: a weakening dollar allowing more house to be bought for their local dollars, a strong local economy, a strong Manhattan real estate market, and strong gains in hometown equity markets resulting in a positive wealth effect. In today's environment, they lost them all!
Readers of UD knew my feelings about foreign buyers and delayed new development closings for over a year now. Here they are if you missed them or are new to this blog:
NOV 16th, 2007 - Does A Weaker Dollar Accelerate Foreign Demand?:
There is no anecdotal evidence to support a re-acceleration in foreign demand; its mostly theory and we are left to ask the brokers what they are currently seeing for a clearer picture. In my opinion, confidence trumps the weakening dollar in the mindset of foreigners. As the US dollar weakened further in the past 3-4 months, so did the macro environment! Here is what has changed:OCT 9th, 2007 - New Dev Closings: A Potential Problem?:
Credit Crunch - Bear Stearns starts it in early August
Eurozone Housing Market has been slumping*
Major write-downs in brokerages, banks, & lenders; Northern Rock is Europe's version of Countrywide Financial
Investor Confidence has clearly dipped a bit going into an uncertain bonus season
To say all of this had NO IMPACT on foreign demand / confidence for Manhattan real estate is crazy. To say that foreign demand for Manhattan real estate has accelerated because each Euro now buys $0.05 more US dollars, is crazy! As the US dollar falls against the Euro, it is more THEORY than REALITY that demand will accelerate when so much surrounding the macro environment has changed towards the negative! In short, there is no evidence that for every penny the US dollar loses against the Euro, 'X' number of additional buyers will pour into our marketplace.
What no one wants to discuss is:Today, Michael Stoler writes in The Real Deal's article, "Foreign Apartment Buyers Grow Scarce":
WHAT ABOUT ALL THE BUYERS THAT SIGNED CONTRACTS ON EXPENSIVE NEW DEVELOPMENT PROPERTIES BEFORE THIS MESS HIT, AND WILL NOW CLOSE THEIR DEAL IN A LENDING ENVIRONMENT THAT IS TIGHTER & MORE EXPENSIVE?
What happens to all those new development buyers that are currently in contract, waiting for building completion to close, if the jumbo credit markets continue to be in distress and there is a much different lending world than when the original contract was signed? What if the buyer doesn't have the doc's to get the commitment, if lending/underwriting standards have tightened so much in the past 3-6 months? What if the buyer gets a much higher interest rate than was originally anticipated? What if the bonus doesn't come in as expected? What if they lose their job? What if the property becomes unaffordable? What if the appraisal doesn't come in and you signed a contract without the financing contingency?
"At my class today at the NYU Real Estate Institute, a number of prominent real estate lenders on a panel stated that they feel that many of the sales of the condominium units in these two developments as well as other planned condominium developments will fall out of contract by foreign buyers. It is much less expensive to lose 10 to 20 percent on a contract than to purchase a condominium which may have lost significant value during the economic downturn.Yes. This site will always attempt to be a forward looking forum. It does nobody any good to try to look ahead by glancing into the rear view mirror! Lucky for Manhattan, I never bought into the currency trade and I never bought into the size of the buyer pool that is comprised of foreign buyers/investors. Unlucky for Manhattan, is that there was a rise in sales to foreigners here, not just as mush as you were told by brokers. This means that many foreigners who bought on speculation, excess leverage, or for a second home, may have to liquidate the asset to meet financial obligations. In times of stress, a second home is usually the first large asset to go! I've stated my stance on the over exaggerated foreign buyer theory last year! It still applies. After all, if this city's residential sales were bullied more heavily by foreign buyers, we would be in a much bigger mess with many more distressed sales than we have right now! Time will tell who was swimming naked.
Sales of apartments by foreign investors are down by at least 50 percent year to date. Industry leaders say that a number of foreigners that bought downtown are being forced to sell residences as a result of the world financial crisis. During the past three years, Irish investors represented one of the largest groups who purchased Manhattan residential condominiums. The weakness of the euro to the dollar, coupled with the major loss in value in the Irish stock market, may have serious effects on the purchases of residential condominiums in New York City."
There's really no other word that I can use to describe last week's rates.Give me about a minute to back track and give you an idea of the volatility in rate, in the mortgage markets.
I'll start with the rate from Monday of last week and work my way up.
All rates are based on a 30 Yr Conforming Mortgage at par, with a 60 day lock.
I will update via comments if we have any rate adjustments today.
Rate at open: 6.75%Tuesday:
Rate Adjustment: 6.625%
Rate Adjustment: 6.50%
Rate at open: 6.25%Wednesday:
Rate at open: 6.125%
Rate at open: 6.125%
Rate Adjustment: 6.25%
Rate at open: 6.25%
Rate Adjustment: 6.375%
Rate Adjustment: 6.625%
Rate at open: 6.625%
Rate Adjustment: 6.75%
Rate at open: 6.875%
As you can see, it is an extremely volatile environment; Rates can sometimes change 4 times a day! If you are working with a loan officer or broker, I would make sure you get confirmation of the lock as soon as you tell them to lock you in.
Other than that it has been pretty quiet here. Business is very slow and I am trying to make it through this.
God it seems like I am saying this almost every week now...
A: I want to take another few steps back today (after last weeks Debt Deflation Theory discussion) and think about the future in terms of this slowdown, the causes, the effects, the stimulus, and where it may lead us to; I can't go into every detail so lets keep it basic for now. I discussed my views on the new wall street a few days ago and Mortgageman discussed his views on the new mortgage markets yesterday. Nobody denies the credit monster anymore and most learned to respect this beast with many tentacles. It would be wise to view this slowdown on its own, in stages, and shy away from comparing it to past recessionary periods. If we view the crisis in stages, where did it start, where are we now, what actions were taken, unintended consequences, and what lies ahead? Lets be constructive and talk this out. What is the end game? For fun, here are my thoughts.
STAGE 1 (In Progress) - Housing & Credit Deflation: first the national housing bubble popped, followed by the bust of the credit bubble. The parabolic bubble in the credit markets helped to fuel the national housing bubble, MEW, over-spending, over-investment, and way too much use of debt. When the house of cards fell for housing, the credit markets peak followed. The two were intertwined and the two are now deflating.
STAGE 2 (In Progress) - The Credit Crisis: includes seizing up of secondary mortgage markets, absence of buyers for structured debt assets, price discovery via deleveraging/unwinding of toxic assets to raise cash, writedowns, capital raising, industry self correcting by tightening lending standards / higher rates / extinction of risky loan products, banks' balance sheet repair & shareholder dilution, spreading to other areas of debt markets, spreading from subprime to higher quality debt classes, auction rate securities, corporate bond market, MBS & CMBS assets became toxic, student loans, auto loans, etc..
STAGE 3 (In Progress) - Application of Stimulus: rate cuts, fed lending facilities, fiscal stimulus via tax rebate checks, bailouts, rescues, forced marriages, capital injections and TARP programs, issuance of treasuries for funds, global co-ordinated efforts
STAGE 4 (In Progress) - Loss of Confidence: consumer confidence, business confidence, investor confidence as corporations issue paper at very high rates, confidence in currencies, confidence in stimulus efforts and side effects of,
STAGE 5 (In Progress) - Equity Collapse: the broadest gauge as to the health of the overall economy and most widely held, liquid asset class collapses. Stock markets at home and around the world plunge 35-50%+ for fears of a deep and long recession. With uncertainty for corporate profits and growth prospects, comes selling. This results in a mass acknowledgment of the problem as losses hit home for many unsuspecting people when they look at their portfolio statements. Confidence falls further as a negative wealth effect kicks in.
STAGE 6 (In Progress) - Redemptions / Margin Calls / Unwinding of Longer-Term Trades: exacerbates the selling pressure causing a vicious cycle. Hedge funds have to meet redemption requests and margin calls, investors have to meet margin calls, investors can't take it anymore and throw in towel, and longer term unwinding of carry trades and other trades that 'worked' feeds the selling pressure. Volatility surges and trader emotion rises.
STAGE 7 (Early In Process) - Economic Data: This is where we start to see confidence reports really dive, GDP really contract, Unemployment really rise, manufacturing contract, etc..Time goes slow and it feels like these lagging reports don't ever get better.
STAGE 8 (Early In Process) - Mainstreet Blues / Saving / Capacity Reductions / Budget Crises: the real pain of job losses, and the slowdown hit the people. Time slows down and it feels longer than it is. However, this time it is likely to be longer than past recessions. Saving increases, and spending decreases. This makes the economic data noted above continue for longer than expected. The cycle feeds on itself for an economy that is driven 70% by the consumer. Capacity is reduced to adjust to the slowing demand. With the slowdown comes less revenue for cities and states. Traffic volume is down a record 5.6% in August as consumers cut out unnecessary spending/driving; driving costs money. The Terminator already called for a special session as California's budget shortfall surpasses $3Bln. It would be narrow sighted to think they are the only one in trouble.
STAGE 9 (Yet To Come, End Game) - Regulation: since taxpayer funds are being used for rescues/bailouts, the credit system will be rebuilt and regulated so that this never happens again. Stocks that used to trade on high expectations for growth, will realize that the new world won't allow growth to go parabolic because the credit system will not be the same. Transparency will be demanded, and leverage will be greatly reduced. The new world will be a lot less sexy than when credit was on its way to its peak.
STAGE 10 (Yet To Come, End Game) - Treasury Market?: massive treasury issuance to fund bailouts, nearing the end of rate cut cycle which is yet to come (I'll bet on 75-100 more bps of easing), stabilizing economic data which is far off, unwinding or slowing of treasury purchases by foreigners, rolling over of treasuries, selling of widely owned treasuries for this slowdown, and most of the damage done to equities already may all contribute to the selling of treasuries. The treasury market is arguably at the tail end of a 27 year secular bull market. What will treasury buyers demand in yields 12-24 months from now? Will treasuries still be in huge demand, as they are today, right in the center of the crisis? The end game may bring with it the end to the secular bull market in treasuries and higher yields; especially in the longer end of the curve! How will lenders and businesses adapt to higher borrowing costs should this occur and drag credit rates with it?
STAGE 11 (Yet To Come, End Game) - Inflation?: in 18-24 months or more, what will the side-effect of fiscal/monetary stimulus be? Right now, deflation is the word of the day and has been for about 8-10 months now here on urbandigs.com. With the commodity bubble bursting and a global slowdown, inflation expectations should fall drastically. But times may change by this time next year or 2010. Do we expect 5 years of deflation, or 2-3? 10? Are we headed towards a Japan style decade? What lies right after the deflationary spiral? It's silly to talk about inflation now, yes, but it is not silly to talk about it the endgame of fiscal & monetary policy that is being thrown at the wildfire. Ben has proven to us that he will try to inflate us out of this mess, viewing the threat of ultimate inflation as the better case against a prolonged deflationary spiral that we are in now.
UrbanDigs Says: These are simply my thoughts, nothing more! I like to view this experience in stages, and learn from it. I think we are in Stage 6 right now. I think what lies right in front of us is very poor economic data for remainder of 2008 and well into 2009. On Wed, the fed comes out with their decision on rates and statement. On Thursday comes Q3 GDP Advance numbers. Yes, the fed will have this data before it is released and yes the data may affect their decision tomorrow. I would not be surprised to see a much worse than expected GDP number on Thursday. Who knows, just my two cents. With shipping rates cliff diving, commodities tumbling, and industrial metals plunging, clearly the world is contracting FAST! This is not a slow evolving cycle. The sh*t is hitting the fan very quickly! So, we should expect some sharp downward numbers in our future; especially for Q4 that we are in right now. If the credit markets ground to a halt in September, and stayed that way for 6+ weeks so far, how do you expect the period right after this to be?
I'll try to do a similar piece on stages of the Manhattan real estate cycle, but need to research older cycles first.
A: Sorry for the late post, had some work to take care of today. Lets continue to keep it real. Lets continue to keep our heads out of the sand and acknowledge the times we face. There is still buying going on out there and I continue to get buy side requests, but clearly, things have slowed from what will eventually be looked back on as record levels of sales activity. Why are things slowing? Why is sales volume down? Look no further than the BUYERS! Buyers make or break the market when it comes to Manhattan residential real estate sales, and the sooner you realize that it is "buyer confidence that trumps all", the sooner you can get an idea of where this market may be headed. CNBC's Charlie Gasparino gives us the latest figures on the looming budget crisis and job losses to date.
First, the expected loss of tax revenue. NYS Comptroller DiNapoli is forecasting a loss of tax revenue by an estimated $3.5 Bln by March 2010, "due to a lack of wall street bonuses", as Gasparino puts it. With wall street revenues way down, and losses being booked, this is not shocking. This $3.5Bln will come out of the budget by 2010 and does not include the likely loss of revenue from individuals, smaller businesses and retailers. Expect property/capital gains/income taxes to rise, etc., in the near future to help make up for the tax revenue shortfalls that await us.
Second, job losses in the financial services industry hit 111,000 so far year to date, according to Challenger, Grey & Christmas. In the article, it was stated:
The fallout from this year's global credit crisis has claimed jobs on all corners of Wall Street, from hedge fund managers to floor traders and beyond. More than 110,000 have lost their jobs so far this year, and some industry experts forecast it could come close to 200,000 before the year is over.That job loss number I believe is for ALL jobs falling under the umbrella of the financial services industry, with probably half the amount coming from New York City firms. As Gasparino reports this (click here for video), the key element to understand is that "wall street is consolidating and a change in the business model". As consolidation occurs and mergers close, jobs are lost as costs are brought under control. With a changed business model brings the loss of structured credit and other positions related to the securitization process of different types of debt. This sector got hit very heard.
"Wall Street the way we know it is frankly gone," said Dr. Michael Williams, dean of the graduate school of business at Touro College in New York. "This was inevitable because there's just not enough money out there to support the huge staffs these banks and investment banks had before."
The next 3-4 quarters are going to bring with it more and more job losses as the dust storm settles and we get our first glimpse of what the new wall street looks like and how heavy the regulation is going to be. This is an ongoing process and it will get worse before it gets any better.
My apologies for the lack of posts everyone, it’s been a little hectic here.
I wanted to change things up this week and instead of giving you a usual "Mortgage Market Update", I sort of copied Noah's last post and modified to my end of the business. After all, the post was very insightful and all of you gave excellent opinions and your points of view.
So, what do YOU think will happen with mortgages once strict regulation is in full effect?
Here is my $.02:
1) Underwriting Guidelines: A complete revamp of the entire credit policy. In a nutshell, a complete revisit to all guidelines to make sure something like what we are experiencing present day NEVER happens again due to mortgages. That said, Stated Income & Asset mortgages will only be offered once there is investor confidence in mortgage backed securities that consist of this feature. To get this, borrowers will most likely have to present a minimum 740/760 credit score as well as a nearly perfect financial scenario. I also think that the default back to Full Doc will be very high... Basically any questionable item to the profile of the loan will make it revert in to a full documentation file.
2) Declining Market Strategy: Hopefully with fair and correct lending practices in effect, as well as a solid secondary market, home prices begin to adjust for the better, banks and the GSE’s take away the declining market policy which adds premiums to rate, lowers the allowable percentage to finance, and is virtually wiping out the private mortgage insurance market.
3) Subordinate Financing: I expect this to make a huge comeback. The days of 80/10/10 financing via HELOC's or HELOAN's are long gone. However now that the government wants to buy up these products, I think banks will start to issue them again but this time under much tighter underwriting standards. These products are very profitable on the secondary market; I don't see why banks won't lend them out again.
Conforming: Will have a closer relationship with the 10yr Treasury note due to the increased liquidity and will hopefully come down to levels of 175bps over the 10 Year.
Jumbo: Spreads will hopefully ease due to the availability of cash on the respective bank's balance sheet, as well as a healthier secondary market. I expect rates on 5/1 ARM to be around 5.75%
Risk Based Premiums: Gone or reduced.
5) Sub-prime & ALT-A: I am afraid to even mention these two, but I have to be realistic... I don't think we will see these anymore. I don't know if that’s bad or good… My take? FHA or the Federal Hosing Administration will be in place of these mortgages. After all, this is America.... The land of opportunity... I think the government wants to keep it that way and instead of selling the loans on the secondary market to private investors, it will buy and securitize them all by itself.
Now the 5 items above are basically assumptions. They are based on the assumption that banks will take the money FROM the government and lend it TO the consumer. Something that one bank, internally, has intended not to do.
Now let’s be honest here, I think a lot of us here expected many financial institutions to hoard the cash they receive from the Hank & Neel. So I don't particularly see this as a huge surprise, but I do think it goes against the whole principal of this "bailout" and deserves some regulation of its own...
What's your take?
A: I would love some reader participation here, and some opinions on what the new wall street or the new credit world, whatever you want to call it, may look like after regulation? Speak up all, especially if you work on wall street. How is the industry changing before our very eyes?
I'll get the ball rolling:
1) LEVERAGE - the use of leverage for risky investments will fall from 30:1 & 40:1 to 10:1 or so as the last two investment banks, Morgan Stanly & Goldman Sachs, changed to bank holding companies regulated by the fed. With leverage drawn down to such a level, returns on investment/equity and speculative trading are both going to return to more normal levels which means less profit potential for executives, employees, clients and shareholders.
2) STRUCTURED CREDIT JOBS/TRADING - for the most part, gone. With the extinction of the securitization model (that is bundle --> securitize --> slice/dice --> sell), comes the extinction of many jobs tied to this model. The use of credit derivatives went parabolic sending us into a credit boom never seen before. The desire for high yielding structured investment products will never be the same, at least for a long while. These include CDOs, CLOs, and other tranched credit products.
3) WALL STREET BONUSES - greatly diminished from peak levels of 2006. For the trading year of 2006 (given Jan-March 2007), wall street gave out $33,900,000,000 worth of bonuses. For the trading year of 2007 (given Jan-March 2008), wall street gave out $33,200,000,000 worth of bonuses. I expect this number to be closer to $16-$18Bln given out in 2009, for the trading year of 2008. Even that number is astonishing considering that wall street was mired in heavy losses, shareholder destruction, bankruptcy, and forced marriages. A 'retention of talent' event may also influence this years bonus season as wall street consolidated.
4) CREDIT DEFAULT SWAPS - these financial weapons of mass destruction will be regulated in some, way, shape or form. What arguably brought down AIG, Bear Stearns, and who knows what role they played in Lehman, Fannie Mae, Freddie Mac, and WaMu, will be moved to an exchange where they could "employ daily mark to market pricings that liquidates positions of traders who can't pay their margins" (via Bloomberg). NakedCapitalism reports that key members of the CME don't want CDS trades on their exchange.
5) ASSET MANAGEMENT - one side effect of less leverage, a hurt reputation, loss of confidence and declining markets, is a likely hit to asset management deposits and fees. With heavy regulation upcoming that will affect banks and hedge funds, I would expect the asset management sector to see it's share of shrinkage as well, but it may be shallow & temporary. THIS IS THE ONE AREA THAT I COULD BE WRONG & COULD GROW IN THE LONGER TERM! Perhaps wall street will use asset management, private equity funds and hedge funds to bypass upcoming regulation, and find loopholes in an effort to find any way to increase profit potential. I would love feedback on this sector of the financial industry please, looking ahead of course!
One thing is for sure, wall street is forever changed! The question is, how will this wall street city with its wall street tax revenues and its wall street homeowners adjust in the years to come? Thoughts?
A: Yale economist, and skull & bones member, Professor Irving Fisher is known for a lot of economic principles such as the Fisher Equation, the Price Index, the Phillips Curve, the Money Illusion, and the Debt-Deflation theory which I want to discuss today. For a bio on Professor Irving Fisher, click here. Although he did warn of the 'permanently high plateau' of stock prices only a few days before the great crash of 1929, he believed a recovery was just around the corned and as such, managed to lose most of his personal wealth and his reputation in the multi-year selloff during the great depression. Following the destruction, Fisher analyzed the Great Depression and came up with his debt-deflation theory. Try to take your time reading the below highlighted points, and then take a step back at the environment we are in today and decide for yourself if the theory holds water in todays complex intertwined system of finance.
The entire theory is provided in the link below. What you need to know is that this theory was formulated after an analysis of the Great Depression, and refers to the 'perfect storm' of events that must combine at the right time to have caused such an event. The entire paper is a worthwhile read. As in the paper, I will refer to certain points by the number they are referred to in the paper, so you can easily find them on the link below.
Professor Irving Fisher's Debt-Deflation Theory
19. I venture the opinion, subject to correction on submission of future evidence, that, in the great booms and depressions, each of the above named factors (over-production, under-consumption, over-capacity, price-dislocation, maladjustment between agricultural and industrial prices, over-confidence, over-investment, over-saving, over-spending, discrepancy between saving & investment) has played a subordinated role as compared with two dominant factors, namely over-indebtedness to start with and deflation following soon after; also that where any of the other factors do become conspicuous, they are often merely effects or symptoms of these two. In short, the big bad actors are debt disturbances and price level disturbances.
While quite ready to change my opinion, I have, at present, a strong conviction that these two economic maladies, the detb disease and the price-level disease (or dollar disease), are, in the great booms and depressions, more important causes than all others put together.
20. Some of the other and usually minor factors often derive some importance when combined with one or both of the two dominant factors.
Thus over-investment and over-speculation are often important; but they would have far less serious results were they not conducted with borrowed money. That is, over-indebtedness may lend importance to over-investment or to over-speculation.
The same is true as to over-confidence. I fancy that over-confidence seldom does any great harm except when, as, and if, it beguiles its victims into debt.
21. Disturbances in these two factors -- debt and the purchasing power of the monetary unit -- will set up serious disturbances in all, or nearly all, other economic variables.
22. No exhaustive list can be given of the secondary variables affected by the two primary ones, debt and deflation; but they include especially seven, making in all at least nine variables, as follows: debts, circulating media, their velocity of circulation, price levels, net worths, profits, trade, business confidence, interest rates.
24. Assuming, accordingly, that at some point of time, a state of over-indebtedness exists, this will tend to lead to liquidation, through the alarm either of debtors or creditors or both. Then we may deduce the following chain of consequences in nine links:
1) Debt liquidation leads to distress selling and to...
2) Contraction of deposit currency, as bank loans are paid off, and to a slowing down of velocity of circulation. This contraction of deposits and of their velocity, precipated by distress selling, causes...
3) A fall in the level of prices, in other words, a swelling of the dollar. Assuming, as above stated, that this fall of prices is not interfered with by reflation or otherwise, there must be...
4) A still greater fall in the net worths of business, precipitating bankruptcies, and...
5) A like fall in profits, which in a 'capitalistic', that is, a private-profit society, leads to concerns which are running at a loss to make...
6) A reduction in output, in trade and in employment of labor. These losses, bankruptcies, and unemployment, lead to...
7) Pessimism and loss of confidence, which in turn lead to...
8) Hoarding and slowing down still more the velocity of circulation.
The above eight changes cause (9) Complicated disturbances in the rates of interest, in particular, a fall in the nominal, or money, rates and a rise in the real, or commodity, rates of interest.
Evidently debt and deflation go far toward explaining a great mass of phenomena in a very simple logical way.
27. In actual chronology, the order of the nine events is somewhat different from the above 'logical' order, and there are reactions and repeated effects. The following table of our nine factors, occurring and recurring (together with distress selling), gives a fairly typical, though still in adequate, picture of the cross-currents of a depression in the approximate order in which is is believed they usually occur:
31. The two diseases act and react on each other. Pathologists are now discovering that a pair of diseases are sometimes worse than either or than the mere sum of both, so to speak. Just as a bad cold leads to pneumonia, so over-indebtedness leads to deflation.
32. And, vice versa, deflation caused by the debt reacts on the debt. Each dollar of debt still unpaid becomes a bigger dollar, and if the over-indebtedness with which we started was great enough, the liquidation of debts cannot keep up with the fall of prices which it causes. In that case, the liquidation defeats itself. While it diminishes the number of dollars owed, it may not do so as fast as it increases the value of each dollar owed. Then, the very efforts of individuals to lessen their burden of debts increases it, because of the mass effect of the stampede to liquidate in swelling each dollar owed. The more the debtors pay, the more they owe.
Noah here. So lets see, first off over-indebtedness and purchasing power of the monetary unit lead to deflation. We certainly had that over the 7-8 years or so as the dollar crashed against other major currencies and credit went parabolic with debt levels rising enormously. This lead to an imbalance of the 9 variables listed above, especially debt liquidations forcing a seizing up of the very marketplace where structured debt products traded. That led to a reduced velocity of circulation, or less lending. Which led to more debt liquidation. Which led to a fall in security prices, and then commodity prices. All at the same time, the dollar has strengthened, which is in-line with this debt-deflation theory!
Clearly, right now, we are in forced liquidation mode, commodities have collapsed, and the dollar has surged which would put us around Level V or VI of the above noted chain of events or consequences of debt-deflation. Keep in mind this paper was written some 70 years ago, yet fits fairly well with our complex system of finance in place today!
As you can see, I dig learning! Thoughts?
A: Oh boy. Wall street will soon be officially declared 'DEAD'!
According to Bloomberg, "House's Frank Calls for 'Moratorium' on Wall Street Bonuses":
House Financial Services Committee Chairman Barney Frank said there should be a freeze on Wall Street bonuses until companies find a way to keep the year-end payouts from encouraging excessive risk-taking.As a trader, this is a very sad time for me. Granted I never worked with an actual job on wall street, and therefore never got paid any bonus, to see it destroy itself and the nation hurts. Now wall street isn't the only one to blame, but they were in an integral component of the system that allowed credit to go parabolic. To be fair, we must also blame deregulation, ultra low interest rates, way too easy money, fraudulent lending tactics, loose lending standards taking advantage of a fee based securitization credit model (the bundle, slice & dice, and sell model), exotic loan products, flawed rating models, use of complex derivatives to disperse risk and recycle funds, rampant speculation on an illiquid asset class, poor/greedy decisions by buyers to take on too much house, extinction of MEW, use of MEW on consumption, unregulated CDS markets, fractional reserve banking, shady accounting rules, govt subsidized housing plans, use of FNM/FRE to keep rates low as long as possible, and the 'everybody should be able to own a home' concept.
"There should be a moratorium on bonuses," Frank, a Massachusetts Democrat, told reporters yesterday in Washington. "They have a negative incentive effect because they are the ones that say if you take a risk and it pays off you get a big bonus," and if it causes losses "you don't lose anything."
The halt on bonus payments should last "until they can get a better structure without that perverse incentive," he added.
As I said January 2nd in my forward looking piece "Bonuses: It's 2009 That Will Hurt More":
"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 expect 2009 bonuses to be down 40%-50% minimum. I expect bonuses thereafter (assuming the moratorium has an expiration) to be the exception, not the rule. The game will never be the same.
A: A quick check here as there are good & bad signs since the peak of fear indicators a few weeks ago. As LIBOR & TED spreads ease, the corporate bond market seems to be getting way worse. Mish was all over this two days ago. I discuss corporate bond spreads to treasuries here every now & then, last being back in February, as another indication of stress in the debt markets. The wider the spread, the larger the distress. Well, spreads have widened big time blowing way past the levels we reached when Bear Stearns had to be rescued.
First, lets start with the good news, LIBOR is down noticeably from peak levels of last week. The following indicators are showing signs of easing (courtesy of Across The Curve):
Second, the TED spread is down. In short, the TED spread is the difference between 3-Month LIBOR and 3-Month Treasury Bills. The TED Spread is now below 3, after hitting peak levels of about 4.7 in the last two weeks. As LIBOR surged (indicating a lack of trust and unwillingness of banks to lend to each other), and short term Treasuries fell (indicating a flight to safety), the TED spread jumped. When Bear Stearns collapsed, the TED spread hit 2. We are still high, as normal is well under 1, yet going the right direction. Here is the TED Spread:
But what is not easing, and in fact is getting worse, are corporate bonds. David Merkel over at The Aleph Blog points out:
Pepsico issued $3.3 billion of corporate debt yesterday. For a company with recession-proof products and a Aa2/A+/AA- balance sheet, for them to pay 4%+ over Treasuries is astounding. Liquidity? What liquidity? If financing needs are outside the A-1/P-1/F1 CP box, there is no help. Not that there should be help, but the corporate bond market is a truer indicator of our stress than the money markets, which still aren’t in great shape.You can't get more real world than this. If you want me to put this into pictures for you, here you go. Take a look at the Wachovia High Yield Corporate Bond Index vs. iShares Lehman 7-10 YR Treasury Bond Fund; notice the widening spread:
What David said above about Pepsico, is shown in the chart above. We are truly in unprecedented territory. The fed is pouring buckets of water over the wildfire trying to put out flames in one place, only to see more flames erupt elsewhere. The latest is the $540Bln dollar facility to ease stress in the money markets. Anyone keeping track of these trillions of dollars being poured into the wildfire? All I know is, it doesn't feel like its working!!
The French government is investing $14 billion into its six biggest banks. The Netherlands is throwing a lifeline to ING to the tune of a cool $13.4 billion. South Korea, with memories of the 1997 Asian contagion still ingrained, announced a $130 billion plan to backstop its financial system and currency (the won has been pummeled in recent months and got smoked last week).
So is this all our fault? Did Lehman, Bear, Fan, Fred and AIG cause this entire mess? Or was it Joe the Plumber buying a McMansion with a sub prime loan instead of being content with a trailer and a six pack? Did all that hot hedge fund money enable the manufacture of "made to trade" debt securities instead of durable debt products such that poor un-sophisticated banks and insurance companies around the world just got caught up in it unknowingly? None of the above! We all know that the blame lays firmly at the feet of the most powerful man in the world.....George Bush.
Yes, it must have been his deregulating, profligate, war-fighting ways that caused the entire world to collide with the reality of bad debts. Sorry, but it's just too easy to blame your favorite disputant (or decider as the case may be) for the world's woes.
NEWS FLASH! The world financial crisis has been caused by greed, profligacy and an over-use of debt worldwide. If you have been reading Urban Digs lo these many months, you know that we have been talking about bubbles worldwide and critical imbalances that were being mirthfully ignored by those involved. The Chinese pretended that their economic miracle was being created by their own ingenuity and productivity (some of which was true) and not to a significant degree by their suppressed currency value. The U.S. pretended that the world funded our deficits because of our financial and political stability, not to mention good looks. We ignored the fact that our creditors had inexorably tied their own growth to our addiction to the consumption of goods and energy, an addiction which they merely needed to enable by lending us more money. Europe pretended that socialism worked great and that depending on exports to China could make up for their aging static workforces and lack of domestic vitality. India pretended that services outsourcing could carry the day when what they really needed was a national help desk to assist business people navigate the most bizantine regulatory system on earth. Russia and the Mideast imagined they had something going for them besides oil, which required miles and miles of new skyscrapers to be built as well as the odd indoor ski mountain. They also believed that those with the political connections to succeed in oil and real estate should make as much money as those good-for-nothing hedge fund managers in New York. Note that per Forbes, Moscow now has the world's largest number of billionaires. Everyone pretended that you were nobody if you didn't own a place in New York City, in addition to one in Paris, London or Moscow.
Alas the lie is being given to all of these misplaced beliefs. We in the United States are somewhat fortunate to have realized the mess we were in a little earlier, but it's an integrated world and stock market debacles from Shanghai to Mexico were telegraphing that the U.S. was not alone in the deleveraging cycle. In the final analysis we might even prove better off than others if we fully embrace the necessary mea culpas. This graph from the IMF shows that at the very least, we are only in the middle of the pack with regard to our housing price debacle.
Not only that, but as much as people are trying not to notice, three years into the housing bust, the huge decline in home prices in the most overbuilt markets in the U.S. is actually starting to result in increased turnover, portending an eventual bottom. The other countries on this list mostly entered the housing bust this year. I would wager that things will get worse for them before they get better. If statistics are ever supplied, they may eventually show that the Chinese housing downturn was right up there with many of the leading losers. Many of these countries also had commercial real estate bubbles which will prove much more damaging to bank capital ratios than the residential housing bubbles. These unwinds are just starting.
So, countries around the world are going to increase their government debt significantly by cranking up the printing presses. Just a few quick facts here: the U.S. actually ranked number 27 in debt to GDP ratio among all nations for 2007, with some pretty big dogs ahead of us on the debtors list, including Japan #2, Italy #7, Belgium #12, Norway #17, Canada #22, France #23 and Germany #25 (according to the CIA World Fact Book). Now our private debt means that as consumers we will be re-trenching for a long while, but this hurts many countries as much as it hurts us. Additionally, countries like the UK, which is much lower down the list of public debt, have even greater issues with private debt than the U.S. does.
With most of the largest nations on the planet set to crank up spending/money printing to keep the money supply from going to zero, what predictions can be made regarding inflation? It is a very complex picture. If inflation is a purely monetary phenomenon then you would think we are in for a generational increase; however, currency values are a relative business, if everyone is printing money, who does the de-valuation hurt? If we have severe malinvestment to digest, do we face any imminent shortages of labor or materials? If inflation is a labor and/or commodity shortage-driven phenomenon we probably have less to worry about.
Postscript: I hope readers appreciate the tongue-in-cheek aspects of this piece for what they are. I think i managed to poke fun at nearly everyone involved. The point is that this crisis is a worldwide affair, driven by a worldwide credit and investment boom. There's no single villian, and the faster everyone admits to their part in this credit crisis, the faster the recovery will happen. Same as it ever was.
Or it could just be the evil ugly Americans.
From the Blogosphere:
US "Tapeworm" Economics Causes World Financial Crisis
Sell America to Pay off its Debts
World's Greatest Ponzi Scheme
Crisis Sparked By World's Rich
U.S. Financial Crisis: Why China Has Much to Fear
A: Lets change things up a bit and see how the commodity bust may affect maintenance costs in the months to come. In addition, given the evolution, or de-evolution I should say, of wall street firms and their hefty revenues, one way the city will be forced to makeup for tax revenues collected will likely be in property taxes. It's already expected that the 7% Bloomberg Property Tax cut will be scrapped.
Monthly Maintenance Costs
If we look at a building as a private company, which co-ops technically are, a building's maintenance charges cover all the expenses to operate the business. With that said, every business (any one individual building) is managed differently and as such the ultimate maintenance charges you end up paying are a result of these variables:
a) financial health of the building / size of reserve
b) need for capital improvements on the building
c) amenities offered by the building that add to the overall expenses for residents
d) savviness of the board who controls building funds and makes decisions using building funds / wasteful spending
e) mortgage held by the building
f) salaries paid to porters, resident manager, anyone assisting in the overall upkeep of the building
g) revenue generating usefulness of the building (i.e. storage revenue, streetfront revenue, rooftop revenue from wireless carriers, etc..)
i) raw costs to operate the building (energy, water/sewer, electrical, etc.)
...these are the basics, there are more as indicated by the building financials that are reviewed before any purchase. As in the business world, some companies are better managed than others.
From 2003-2008, most residents noticed annual 'energy assessments' contributing to rising monthly maintenance costs. This was the lagging result of rising oil prices, as the global boom occurred. In short, the price of crude rose from $22/barrel in 2002 to a record high of $145/barrel only a few months ago. Today, the price of crude is off by about 50% in three months time (chart on the right shows you the fall in the past 3 months & today's last quote)! Yes folks, that is a dramatic correction measured by any investment standards. Here is the selloff in oil as the commodity bubble collapsed on itself:
The End Result: falling oil & natural gas prices for buildings
The Wild Cards: whether or not your building locked in a longer term delivery contract at or near peak oil prices over the summer
Assuming your building decided not to lock in your oil delivery at a higher price, you should see a nice dropoff in energy costs in the months to come; the real question is how long $70/oil will last and which way it's going to go next. For now, consider it a tax break for buildings whose finances/costs have been properly managed.
Not as rosy a picture. The Bloomberg 7% property tax cut has been in effect for a year, and as of early 2008 there was hope that the cut would continue in effect for a second year. In May, to the delight of property owners, Bloomberg declared the tax cut in effect for a 2nd year. But the party only lasted a month.
In a mid June article via Reuters, "New York property tax cut may be history: Bloomberg":
A 7.0 percent property tax cut was enacted last year, and Bloomberg in May extended it another year, but it might now have to be reversed.There is no choice here. With the extinction of wall street, and the billions in generated revenues that came from investment banking and a securitization based credit model, the city is facing a looming budget crisis.
"We may very well have to put it back for this year. Or we can balance next year's budget but it would be so onerous," he said on a local radio show, explaining that he wished to avoid cutting programs.
Just as I pay estimated quarterly taxes, if I know my salary will be higher than last years reported income, so did wall street. Well, last quarter the estimated taxes paid by wall street firms in New York was down a staggering 96% from previous years levels. Simply astonishing.
For the 2009-2010 fiscal year, Governor Paterson recently called an emergency session in response to the state's current budget deficit, seeking $2,000,000,000 in budget cuts (via Newsday.com):
"We're more than in a recession, we are in a very serious economic crisis," he said.'Rattling at the core' is right. Our wall street is now small street. It's a new world, and just like the credit markets had to adjust to a world without a housing/lending/structured finance boom, we will have to adjust to a world without these cash cows. The need is for business acumen to address the business problems of the very big corporation that we call home; New York City.
The governor said immediate "drastic action" will be needed for making the cuts for the 2009-10 fiscal year, which begins in April. Paterson said he would not address the shortfalls by raising taxes. But given the grim projected forecast, he added that nothing would be taken off the table beyond the 2009-10 budget.
"Our fiscal condition continues to deteriorate," even after about $1.8 billion in cuts this summer, Paterson said. "Our financial service industries are rattling at the core."
Expect property tax hikes (estimated between $308-$358 for co-op and condo owners; would be received by residents in the form of quarterly bills that would start to be sent out in DEC of this year), starting with the elimination of the 7% property tax for a 2nd year, to be the easiest attainable source for funds to help makeup for shortfalls in the years to come (in addition to event tax hikes, parking ticket hikes, DOB violation hikes, and other little areas like these). After the revenue earning hikes, spending and service cuts will be decided upon to make up for the rest. Hopefully it doesn't spread to personal/business income & state taxes, but nothing is out of the question these days. The state & city budget challenge is likely to be a mult-year one as we transition to the new world without peak credit and wall street casinos.
A: Are we all just pawns in a bigger chess game? I'm not one to buy into conspiracies, but this read is just too crazy, given what we know of today's credit/financial crisis and how it has evolved from dynamics/products such as counterparty risk, credit default swaps, complex derivatives - mortgage backed securities, corporate bonds, treasury/commodity holdings, insider trading, friendly bailouts, deregulation, etc.. The read is simply too juicy and intriguing not to share with you guys. I repeat, I'm not one to buy into conspiracy theories, including this one, but this is just too eery to completely dismiss considering what has happened to date in the financial system.
I found this read here, but I think its part of an upcoming October report due out this weekend from Robb Kirby's website, Kirby Analytics Newsletter. Not sure. I highlighted some interesting sentences. My head is spinning and I, Noah, can not verify all the claims made in the piece. Print, Have a Drink, Don't Shoot Yourself & Enjoy (note: "CDSwap" = Credit Default Swap)!
THE MONSTER, ITS BROKER & HARLOT
JPMorgan will require fresh asset meat every several weeks in order to survive, but the process will result in a sequence of severely damaging CDSwap fires. Perversely, the FDIC is their investment banker agent. Two mergers of questionable nature highlight the altered role of the Federal Deposit Insurance Corp (FDIC), which no longer protects bank depositors or their investors, but rather serves JPMorgan Chase. When Bank of America merged with Merrill Lynch, a trend started, one that exposed private stock brokerage accounts. Officially they can be legally borrowed across subsidiary lines. The FDIC averted a failure of Merrill Lynch without the credit default implications.
The other event was more blatant, as the FDIC steered Washington Mutual out of bankruptcy failure and into the JPMorgan slaughterhouse. Inside its chambers, JPM gobbled up the WaMu deposits and benefited from ratio improvements. Senior bond holders were crushed, fully denied due process from bankruptcy. The FDIC has become an ugly investment banker lookalike, serving JPM and not the US public. The FDIC owns a pitifully small $45 billion in funds available for bank bailouts, at June count. When the dust clears a year or more from now, many multiples more will be necessary for many bank failures.
The path of JPMorgan growth into a FRANKENSTEIN took radical changes in course after both the failures of Lehman Brothers and recognition that Fannie Mae & Fannie Mae had to be taken over by the USGovt. To halt the run on their bonds, the USGovt acquired the entire F&F Cesspool. The impact hit the Credit Default Swap market immediately. AIG had been weakened one week earlier from the technical default of Fannie & Freddie, which resulted in broad CDSwap payout's. Ripple effects from the Lehman Brothers failure that followed were deep and broad throughout the system, killing AIG. The Wall Street central harlot (Goldman Sachs) advised the USGovt to assume full control and risk of AIG, as GSachs avoided $20 billion in sudden losses in the nick of time, a pure coincidence!
The entire episode with Wells Fargo bidding for Wachovia, in competition from Citigroup, is steeped in comedy with vampire stars. The grapevine in Washington and Wall Street passes word that the Citigroup versus Wachovia wrestling match was actually a sponsored backdoor bailout attempt to save Citigroup, not just Wachovia. Again, the FDIC was the matchmaker. My term has been ‘Dead Marrying the Dead' which still holds true, since Citigroup has been dead for one year. Under the original Citigroup proposal, the FDIC had arranged for guarantees of $42 billion for Wachovia debt by the US Fed. The new Wells Fargo deal enabled the US taxpayers to get off the hook. The reversal by the FDIC to serve the public has caused gigantic Wall Street problems, as Citigroup now finds itself in a position more perilous than anyone believed. This battle has flip-flopped once, and might again. Citigroup would probably have died if not for the USGovt purchase of bank stocks.
THE TEETH OF THE MONSTER REVEALED
JPMorgan is a monster predator at work, hidden from view. After the Fannie Mae experience, covering their giant raft of CDSwap contracts, making huge payout's, JPMorgan was close to a bankruptcy. They needed to feed off another bank, to consume private deposits and thus shore up the balance sheet. Lehman Brothers was let go to fail, but its failure would surely trigger a gigantic wave of credit market fires. The Lehman CDSwap resolution has cost roughly $300 billion, paying 91 cents per dollar of coverage on their failed bonds. The Wall Street Powers permitted Lehman to fail, so as to prevent a JPMorgan failure, thus risking that the fires caused could be contained in CDSwap fallout. The irony is that JPMorgan undoubtedly suffered considerably from that fire in fallout. Now JPMorgan might need another Wall Street failure, for to consume another block of assets, but with yet another ensuing CDSwap fire. JPMorgan is a monster predator at work, soon hungry again. It might be eyeing Morgan Stanley. We might discover a failure in an unexpected place, like a big insurance firm, whose sector condition is not well advertised.
With each big bank failure, whether a commercial bank or investment bank, heavy damage is done to the system. The CDSwap destruction is mostly hidden, with large pillars burned out. We the people hear of the destruction only if and when a major bank fails as a result. No death, no news, however but with potentially significant hidden structural damage. As financial firms pay out vast sums on CDSwaps as in the Lehman case, and the Fannie Mae case, and the Freddie Mac case, the system bleeds capital. Lending suffers. The sequence corresponds to a powerful vicious cycle. JPMorgan will need more deaths to survive, but each death causes more deadly CDSwap fires. JPMorgan is a monster predator at work, which leaves fires on pathways where it last stepped. The best analogy is that CDSwap contract payout's from bond failures are like mini-Hiroshima events that might lead to a bigger such event. Ironically, to save JPM the financial system must destroy the shadow banking system centered in New York City, since Wall Street firms, plus Bank of America are at its center. The system lacks disclosure and transparency, just like Wall Street likes it.
Permit the pathogenesis to proceed further, and the majority of Western bank system must be burned in order to leave JPMorgan as prominent survivor to rule over a scorched empire. This process is a sick consolidation. The bank conglomerate is a major crime syndicate colossus, and center of the drug traffic money laundering, coordinated by security agencies, fully condoned by the US Federal Reserve itself. The AIG story is nowhere complete, the latest being their expensive parties. AIG has caused major complications, another monster that will resurface periodically at feeding time. Personally, my wish is to see the RICO law brought forward, at least to deposit the monster in a cage. In done my way, not a single additional US Congressional bill would be approved and granted for a bailout or rescue without rapid investigation, prosecution, turn to state's evidence, asset seizure, restitution, and imprisonment for dozens of Wall Street executives, starting with Hank Paulson.
STOCK MANIPULATION WITH DEEP MOTIVE
Few analysts, pundits, or anchors are aware of the mammoth conflict of interest involved with the USTreasury Bond sales required to pay for all the bailouts. JPMorgan, with the essential aid of Goldman Sachs, plot to bring down the DJIA index and the S&P500 index whenever the USTreasury conducts auctions or needs Congressional passage of key bailout bills. They have sold $194 billion of Cash Mgmt Bills (CMB) in the last two weeks, today $70B, tomorrow another $60B. The big stock declines seen recently work to the BENEFIT of the USTreasury and US Fed. as agent for auctions. TBill yields are down near zero, in case you have not noticed, with principal prices corresponding almost as high as the bond permits. The USGovt is conducting auctions for TBills at top dollar prices, when its credit rating should be caving in radically upon downgrades. These USTreasurys are destined to enter default at a later date, where the loss to foreign investors will be maximized. Most of the US public has savings dominated by stocks, with little in bonds. So the US public is being fleeced, coming and going, since even money markets contain toxic mortgage bonds. Look for the stock market decline to come to a surprising end when the USGovt has completed the majority of their planned emergency supply sales via auction.
The Wall Street tactics have recently turned more vicious and devious, actually creating volatility, producing fear for political purpose. They accuse hedge funds of driving up the crude oil price, rendering great harm to the US Economy and US citizens. So they urged unsuccessfully the Securities & Exchange Commission to force hedge funds to reveal their speculative positions. The Wall Street thieves and conmen wish to learn details on hedge fund positions so as to target them illicitly. In a queer twist, JPMorgan has benefited from an interesting double kill. They exploit hedge funds, wreck them, then encourage them into the fold at JPM in brokerage accounts, where their private accounts are rendered vulnerable under the new US Fed. rules. JPMorgan is a monster predator at work, which is permitted to manipulate markets and clients with total impunity.
There is one more detail. Lest one forget, Goldman Sachs was exempt from the short rule restriction placed on a few hundred financial stocks traded. The reason had something to do with market stability and integrity assurance! Goldman Sachs clearly profited from the ups & down in the Dow and S&P500, lifting stocks after Congressional agreements, pulling them down before those agreements. JPMorgan and Goldman Sachs profit handsomely when the USGovt Plunge Protection Team pushes the stock indexes up with their usual methods. Of course JPM and GSachs are the managers of the PPT efforts. YES, IT IS TIME TO PUKE NOW!!!
HIDDEN US GOVT COUP BY WALL STREET
The US Congress has been subverted by intimidation and ignorance, maybe bribery. Regulators and law enforcement bodies are mere accomplices. The entire US banking system has undergone an unprecedented grand nationalize initiative, including the financial system, when considering the mortgage and insurance giants. The total bailouts are huge when put into perspective. This is a hidden coup, complete with deep fraud, corruption, and ruin for both prosecutors and whistle blowers. The US Dollar is caught in the middle of a black hole scrambled with fraud. Paulson is the new Chancellor of US Inc, Bernanke the new Currency Lithography Manager, and Sheila Bair the Investment Banker (a la Goldman Suchs). Paulson assumes all powers over the financial state from the president, via the banking industry control.
The government bailout redemption of $trillion past fraud closes the loop. Bernanke manages all efforts to use printed money for the purpose of buying worthless counterfeited and fraud-laced bonds, buying commercial bonds and posted collateral among businesses, as well as making printed paper products available to foreign central banks in relief of past fraud. Bair will act as the director of slaughterhouse traffic for JPMorgan, which needs a steady supply of bank deposits to offset their destroyed balance sheet from continued credit derivative implosion, thereby betraying the chartered FDIC pledge to protect bank depositors and senior bank bond holders through liquidation procedures, with full recognition of expedience. Hail to the king, long live the king! The US public seems so dumbstruck that it cannot demand even full disclosure of the process, let alone private offshore bank accounts for the new leaders of the successful coup.
The coup formalizes a climax to a Ponzi Scheme. A pyramid scheme is a non-sustainable business model that involves the exchange of money primarily for enrolling other people into the scheme, without any product or service bearing true value delivered. With the ongoing steadfast support offered by Alan Greenspan, they were able to maintain an incredible Ponzi scheme. They sold financial toxic waste products in the form of Mortgage Backed Securities (MBS), Collateralized Debt Obligations (CDO), Structured Investment Vehicles (SIV), Unidentified Financial Objects (UFO), and Credit Default Swaps (CDS). My favorite remains the UFOs. The corruption of politicians in Congress enabled the process, with relaxed guidance by the Financial Accounting Standards Board (FASB). The two key ingredients for the Ponzi Scheme are a mythological ideology and a high priest to endorse the game from a credible pulpit. Alan Greenspan claimed legitimacy of the US banking system, blessed credit growth and fractional bank practices as beneficial, and praised risk pricing systems using credit derivatives as sophisticated. The high priest used to be Greenspan, but now a tag team has replaced him. Hank Paulson is the spearhead for the great coup of the US financial system. Usage of short restrictions rules has been key to both instilling instability at necessary times, and raiding hedge funds. US Fed. Chairman Bernanke swaps USTBonds for any piece of bonded garbage known to mankind. Mammoth placements of leveraged trades by Wall Street firms make for some of the most grotesque insider trading in US history.
DECEIT & INTIMIDATION
The lies, deceit, backroom pressure, and fleecing of the American public is deep. Take the Emergency Economic Stability Act. Most of the initial $250 billion outlay was not devoted to American bankers, but rather to foreign bankers, primarily in Europe and England, and to purchase preferred US bank stocks. The US public was not told about this redirection, which constitutes misallocation, misappropriation, and fraud. Tremendous backroom pressure was exerted at every step. The underlying assets involved in swaps do not even have to be US-based mortgage bonds. The formerly submitted Paulson Manifesto was revived in a power grab, complete with considerable infighting and squabbles, since Morgan Stanley was given favor. The usage of funds to buy investment stakes in the giant US banks is yet another direct Fascist Business Model tactic, assisting banks close to the power center, yet reeking with corruption. The sickening irony is that they have no more money to disseminate and distribute. They cannot reveal their lies until they formally request more Congressional funds. Much discussion has come that the USGovt should adopt the Swedish model in the resolution of the current crisis. Not in a New York minute!! That would require heavy stock and bond losses, and more transparency of scum. Interestingly, the market discounts words as worthless, while bailout actions fail to produce even a positive reaction for a full day, until Monday last week when the Dow Jones Industrial index rose over 900 points. That was clearly Wall Street engineering a profitable short cover rally. Check S&P futures positions beforehand, if you can. The credibility of the US Fed. is close to being destroyed. On October 15, the same Dow Jones index fell over 700 points, almost 8%. Even the global rate cut was rejected by stock markets, a major insult.
Intimidation of the US Congress has been huge and powerful, similar to when the Patriot Act was passed in 2002. The Congress was actually threatened by martial law in the cities of the United States if the big bailout package was not passed two weeks ago! This was not reported on CNN or CNBC, but C-Span did cover it. The mobilization of the US Army for civilian control is well known in the past couple weeks. See the Third Brigade back from combat duty in Iraq. This account came from Rep Brad Sherman of California. To achieve supposed financial stability, the nation succumbed to totalitarianism by Wall Street thieves, conmen, fraud kings, and criminals. Instead, the bailout only covered up $trillion fraud. My position has been very stable and consistent, that such tactics are typical characteristics of the Fascist Business Model. The state merges with the large corporations, who proceed to terrorize the citizenry after unspeakable protected corruption and theft. To object is to be labeled unpatriotic!
TOP DOWN SOLUTION FAVORS THE ELITE
The top-down approach used to date aids the wealthy bankers, while the homeowners are denied aid. That aid is promised but rarely arrives. The fundamental problem here is that billion$ are devoted to shore up insolvent banks, to redeem their worthless (or nearly worthless) bonds, and to give a giant pass to the executives. Trust has eroded throughout the system. Banks distrust each other's collateral. The result is that eventually the US Economy will enter not a recession, not a depression, but a DISINTEGRATION PHASE. Despite Bernanke's studious efforts, borrowing from revisionist history, his liquidity is nothing more than bailouts at the top for the perpetrators of the housing bubble and mortgage debacle. The bank system benefits little inside the US walls of finance. A bottom-up approach might have had a chance to succeed, but a top-down approach is a sham. To expect a top-down solution that actually relieves the housing inventory logjam is insane. That is like feeding a teenager with meals placed inside the human rectum, expecting nutrients to find their way to the rest of the body! The credit mechanisms do not travel upward within the pyramid, but rather in the downward direction, starting with a borrower, a good collateralized risk, and an underwritten loan, when plenty of lending capital is available. The US public has bought this stupid ‘Trickle Down' philosophy for years, learning nothing. The US Economy is on the verge of collapsing. Short-term credit is being denied at key supplier intermediary steps, soon to result in recognized disintegration.
The primary practical objective of this corrupt trio (JPM, GSax, FDIC) is to avoid Credit Default Swap fires, which would bring an end to their reign of terror. This US Economic failure is in progress and is unstoppable. The 1930 Depression resulted after monumental credit abuse from the bottom up, as hundreds of thousands of people leveraged investments 10:1 with stocks primarily. The 2000 Depression will come after monumental credit abuse from the top down, as hundreds of big financial firms leveraged investments by 7:1 and 20:1 with bonds primarily. The most absurd of all is the CDO-squared, leveraging upon leverage. Total seizures have crippled the banking system. Short-term credit has largely vanished, as letters of credit are routinely not honoured at ports in the United States. The panic will continue, especially when supplies dry up.
GOLD & SILVER AWAIT THEIR EXALTED STATUS
We are witnessing the disintegration cited in my recent forecasts. It is a systemic failure, marred by lost confidence and trust in the entire financial system. Expect foreigners soon to pull the rug from under the American syndicates in control. Several key meetings have already concluded, totally unreported in the US press, which occurred in Berlin Germany. Consider it the Anti-G7 Meeting. Implications are profound, and involved the Shanghai Coop Org tangentially, since its member nations possess so much new commodity supply. Consider it the Anti-NATO group. An important and powerful alternative financial system is soon to spring into action, including high-level bilateral barter. Those who expect the current US Regime to continue their financial terror are in for a big surprise.
Expect defaults in the COMEX with gold & silver, whose prices for paper vastly diverge from physical, to the anger of foreigners watching. They hold massive precious metals assets. Disparities now contribute to powerful forces, sure to break the current system. Grand systemic changes come. THE RESULT WILL BE A BREATH-TAKING DISCONTINUITY EVENT.
Ironically, the more inner anguish felt on the falling gold & silver prices, the closer we are to a new financial framework, with the US Dollar relegated to a Third World role. A REPLACEMENT GLOBAL RESERVE CURRENCY HAS ALREADY BEEN DECIDED UPON. Its launch awaits the proper moment. The Americans are last to know, as usual. The US leaders are under the illusion of being in control!
Thankfully, housing starts fell 6.3% nationally in September to a seasonally adjusted rate of 817,000 units, according to the Commerce Department. This was the lowest national rate since January 1991, according to CBS Marketwatch. They were also revised down for July and August. No surprises here, quite rational in fact. The market is reacting to the horrible housing oversupply and moribund demand conditions by decreasing supply. Let's hope it goes to zero; in fact, if they could turn the minions of idle bulldozers to knocking down some of the vacant and half-built surplus housing, it would probably do us all a favor, and hell... it would be fun to watch on YouTube. Building permits, which are considered to be less volatile than housing starts, reportedly fell 8.2% to 786,000, a 27-year low, also very rational. So one might ask what is happening closer to home in our beloved Gotham City. The chart below of housing permits for Manhattan, Queens, Brooklyn and the Bronx, is quite eye catching (September numbers aren't out yet).
New York City real estate aficionados will easily identify the absurd spike in building permits back in June as a result of the re-vamping of the 421a tax abatement program. For those novices out there, see Noah's prior pieces on this program here and here. The bottom line is that the city made the 421a program, which was originally meant to incentivize the building of affordable housing, harder to get, while restricting the locations it was available in to much less popular neighborhoods and lowering the overall subsidy. For those of us who don't believe in government subsidies (although we all have learned that regulation is another story), it is not surprising that contrary to its initial intent, this program ended up "incentivizing" builders to build luxury condos in prime locations.
The removal of the subsidy for many prime areas around the city was a very strong impetus for developers holding land to "get in the ground" and get grandfathered for the subsidy. In fact, in the 421a FAQs bulletin on the HPD web site it states that "Any project that commences construction prior to December 28, 2007 or July 1, 2008, respectively, will not be subject to these new provisions and will still be eligible to receive 421-a tax benefits pursuant to the prior law. Any project that commences construction after the relevant date will be subject to the new provisions." Later it reads "Construction must commence on or before the effective date of the specific provision. It will be considered the later date of a building or alteration permit and the installation of a metal or concrete load bearing structure, footing or caisson." As to when the construction must be completed, the regulations say "without undue delay" and "We would deem completion within 36 months from commencement as a guideline for construction being completed without undue delay."
So there you have it, not only do the permits have to be filed, but actual construction has to take place this decade in order to qualify for the tax abatement. Heavy incentive for a land owner to build a building and oh, by the way, developers don't usually build buildings until they have a construction loan or at least a bridge to construction loan in place. Even financial institutions are likely committed to delivering the 16,774 units of new housing product indicated by the permits taken in June.
As many of you understand, land is the underpinning of all real estate value, being the key piece of equity onto which leverage is applied. Land values, particularly in a buoyant market, begin to reflect the future profit potential of full utilization of airspace at its "highest and best use." In fact, near the end of a real estate cycle many times the "developer's profit" is largely eaten up by the high cost of the land. Meaning that if you build the full airspace available at its highest and best use and sell it out, after paying for design costs, construction costs, marketing etc., there may be very little profit left above the initial cost of the land - although this only becomes obvious in retrospect. In an efficient market environment this would be a gaiting factor on land prices. Once developers began to foresee that the sell out values they could get from building were declining or even just flattening, they would refuse to buy increasingly high priced land that became available. In fact, well before all hell broke loose in the financial markets, land prices in some areas of New York City were starting to slip back from their bubble-like run-up.
Sorry for digressing, but as you also know the real estate development market isn't truly efficient and is as subject to emotion as any other. However, it does still have a discounting mechanism. In the case of New York City new housing permits, developers were further blinded to the realities of what is likely to unfold, due to their desire to capture the 421a benefit. In fact, they had to try and capture the 421a benefit because to some extent it was already factored into the price of the land when they acquired it. Read that again, because this is how markets work: they anticipate future benefits and detriments and build them into prices (though sometimes better than at other times).
As Mike Stoler noted at the Yale Club gathering, we will be at peak supply of housing inventory in New York City in no time due to all the construction activity. Now you know why developers are still running off the cliff. Even when the banks eventually take over these projects, they will likely make sure that construction is finished without undue delay to preserve the value of the 421a tax abatements, even if the building is eventually going to go rental. Today the 421a legislation does have some exemptions to the completion without undue delay clause. "Such factors may include fires or other casualties that cause damage to completed construction work or severe, prolonged, and unavoidable labor stoppages or industry-wide material shortage." Maybe they could add industry-wide insanity to the list.
A: You know, I'm starting to realize that this crisis will have multiple stages; the credit crisis stage, the financial distress/recapitalization stage, the equity correction stage, the weak macro economic data stage, the main street stage, and the city/state budget stage...But I must say, after 15 months or so since the credit crisis began, I am getting more and more bullish. That doesn't mean stocks will fly, although I am long at these levels and out of my short positions, but it may mean we have seen the worst of the credit distress.
Few things to note:
OCT 27th - The fed's commercial paper facility will begin. I am hearing very positive things about this facility and I have gone long stocks due to the combination of a nasty adjustment and the actions that are upcoming to ease the credit distress. I want to be long heading into the launch of this facility.
EARLY NOV - The TARP program will begin buying toxic mortgage backed securities. Now, $250Bln of this $700Bln plan has been injected directly into the banking sector. Some $125Bln was allocated to the 9 largest firms, and the rest likely injected into the regionals/smaller banks. With the TARP program about to begin, this injection of capital likely removes the element of an immediate capital raising that would come about from the first marking down of assets as the treasury begins their reverse auctions for toxic paper; and price discovery results! Look at it as a 1-2 punch. First inject the capital, then clean up the balance sheets. It seems there was little choice from the major banks to take this injection, thus removing the element of volunteering for injections that may have uncovered perceived weakness at specific firms.
In the past few weeks, we have seen the following credit indicators show extreme distress:
a) TED spread
c) Commercial Paper spreads
d) Corporate Bond Spreads
Now, I'm hearing from my contacts that spreads are "SCREAMING IN"; we'll see tomorrow by how much. I think we have experienced the worst of this distress, and the upcoming facilities by the fed and treasury likely will mark that the worst is behind us. For some time, the credit markets have been leading the equity markets; so if we do see substantial easing in the credit markets, we could see a relief rally in stocks.
However, we are not out of the woods and credit indicators are still at elevated levels. I just think we saw the worst already, unless an unforseen event arises. I still see problems with:
a) CDS - credit default swap industry & counterparty risks; which is about to be regulated and placed on an exchange
b) Fed's Balance Sheet - quality of collateral being put up by financials? Unsecured loans? Reining in all the facilities that were put in place to combat this severe credit crisis?
c) Rising unemployment
d) Weakening GDP
e) City/State budget crisis upcoming
f) Prolonged consumer led recession
g) Heavy regulation upcoming in financial system / credit system
h) Upcoming tax liabilities as a result of massive treasury issuance
i) Rolling over of treasuries as they mature may yield higher rates; long end of curve seeking significantly higher rates in years to come making borrowing more expensive
So, I still have concerns. But I think they will soon shift from the credit crisis, to the financial rebuilding, on to the pressure in stock market as economic data is very weak, on to main street, and then on to city/state budget issues. The chain reaction of events that started with the bursting of the housing & credit bubble are yet to show their ultimate effects, and time will expose who overleveraged themselves and are forced to sell assets at prices lower than they hoped.
For now, I am significantly more bullish than I was only 6 months ago, when I knew the worst of the credit crisis was ahead of us and that stocks have not yet priced in the severity of the situation we face. Today, I think we are much closer to the end of the credit stage of the crisis (those that went to the Yale Club heard my comments on Wed regarding my thoughts that we are nearing the end of the 'worst' part of the credit crisis & the fed's upcoming CP facility towards the end of the discussion - anyone have audio of this?). I see Barry Ritholtz feels the same way:
"For most of the past 2 years, I have invariably been the most bearish guy in the room. This has been true whether I was at a meeting or conference, on TV, in print, or simply out having dinner. The lone exception were anytime Nouriel Roubini was also present. Then I would be the 2nd most bearish person in the room.The future holds the next few phases of this deep and prolonged recession, and it will hurt. For now, lets get the credit system fixed, confidence restored, trust, and lending going again without sacrificing quality/standards or being forced to lend. But this has to happen if better times lay ahead. Lets hope that the next administration puts in place the right combination of execution of facilities, policies & regulation, so as to cushion the blow to the average Joe without placing too much debt burden on us all. Or is it too late for that?
Lately, I am the most bullish guy in the room -- and I have to tell you, that is just plum weird to me."
If Mish had his way, we will eliminate:
1) The Fed
2) Fractional Reserve Lending
3) Micromanaging Interest Rates
What do you think?
If you were unable to attend the real estate panel at the Yale Club last night, you missed out on some great news and views. But have no fear, while Christine & Noah were working (Christine doing the introductions and setting up and overseeing the whole gathering through the auspices of the University of Virginia Club, and Noah playing panel bad boy) I was scribbling away in the audience trying to capture as many of the juicy tidbits for you as possible.
First off, all of us at Urban Digs would like to thank Melissa Cohn (MC) Founder and President of Manhattan Mortgage Company, the number one mortgage brokerage in the country (if I got that statistic right) and Jonathan Miller (JM), President and CEO of the well known appraisal firm Miller Samuel, for serving on the panel with Noah (NR). We also want to thank one of the deans of New York City Real Estate, Michael Stoler (MS), Senior Principal at Apollo Real Estate Advisors and host of the Stoler Report television show for playing host and trying to maintain some semblance of decorum despite Noah's efforts to cause a rumble.
Secondly, I'm not the fastest writer in the world so I can't claim 100% accuracy and what follows are my interpretations of what I heard, actual quotes are marked. I know I definitely missed some points here and there, but I think I have captured most of the informational content. If anyone was there and wants to add their comments, or correct/embellish my re-telling please feel free.
Here is a list of the data points and comments that caught my attention and that I was able to get down on paper....I couldn't get the questions, but the answers are what mattered, so here they are:
MC - June, July, August mortgage apps were in line year-to-year. In October mortgage apps fell about 15% year-to-year. Last 4 weeks we have seen a lower pace of sales, but not seeing price declines. "People willing to pay the price are the people buying the properties".
NR - Sellers are anchoring to peak 2007 types of prices of $1,400 per square foot. They have not yet faced the reality that to move their properties they will have to compete with other listings and offer buyers a margin of safety. I think forces are conspiring for a significant break in prices, it hasn't happened yet, but buyers are going to be in charge soon.
JM - "Properties that are selling are selling in a reasonable amount of time because they are priced correctly." Because of the reporting lag sellers in New York City are usually three quarters behind the market in terms of their price expectations. Inventory is now greater than last year, but lower than 2 years ago.
MS - With all the cranes operating around town now we will be at peak inventory levels soon.
MC - Foreign purchases of NYC properties are down 50% year-to-date. A number of foreigners bought downtown and now need to sell as a result of the world financial crisis. Banks are pulling back from lending to foreigners. There used to be ten that were active, that number is down to four.
JM - A third of buyers in new developments were foreigners, which is double the historical numbers, but new developments are only 20% of sales in the city so the overall impact of foreign buyers has been greatly exaggerated.
MS - Several new buildings were sold 100% to Irish investors through syndicated deals. One building at 23rd St and 3rd Ave ended up being sold by the developer as a college dorm (for NYU?), after the Irish investors who were supposed to take the units pulled out. The building was made for foreign investors, with units that were more like hotels rooms.
MC - People buying today need a place to live or a place to go and that's why they are buying. There will always be people who have some kind of change in their life and need new shelter. Market volumes won't go to zero.
NR - The Hamptons are going down! (repeatedly)
JM - Coops and condos have been about 50/50 in terms of volumes. Coops didn't have speculation. In Q3, there was a 7.9 months inventory absorption rate in New York City, vs. 60 months in Miami and 40 months in the Washington D.C. condo market. There is still a surprising drive to purchase property, but the amounts people are qualified for is way lower than it was.
MC - Jumbo mortgages start at $417,000 and will go up to $625,000 by year-end. With the average apartment costing $2 million in New York, it's a jumbo market and you are losing a whole segment of first time home buyers who just don't have 20% to put down.
JM - Funny thing, banks all of a sudden have questions about appraisals now.
MC - Banks are still relying on closed comps, we have not seen low appraisals yet (where appraisals reflect lower market prices and impact what sellers can realistically list their apartments for).
JM - Tomorrow I am putting out the latest statistics on Brooklyn. (He gave some numbers, but we won't break that news here on Urban Digs). Nothing much has changed from last quarter, but in East New York where there was sub prime credit being used and speculation, prices are down significantly. In contrast to "brownstone Brooklyn" in the northwest has held up much better.
MC - Underwriting standards are now limiting total debt payments to 38 - 40% of monthly gross income and requiring 20% down. Post closing reserves of 3 - 36 months of debt service are required. A credit score of a minimum of 720, up from 660. If your credit score is lower, you may still get a loan, but your rate will be higher. There are no interest only loans available if you have a lower credit score. Probably one of the biggest changes is that there are no case-by-case exceptions made anymore. "New York City is a city of exceptions". Many people work for themselves or are business owners, etc.
NR - "Buyers want to get downturn risks priced into their purchase." Most of my buyers have moved to the sidelines and are waiting for those discounted prices. I am advising them to do so. I would expect the Upper East Side and Upper West side to hold their values the best. I think areas where there has been lots of new supply added like Downtown, Midtown West and the West Village will get hurt more than other areas.
MC - Families want to be in those neighborhoods. Thank god for all the private schools on the Upper East and Upper West sides.
JM - I am not yet seeing a big difference in price changes among Manhattan markets, based on contracts being signed now.
MC - 30 years fixed rate mortgages are 6 7/8 - 7 1/4% vs. 6% pre crunch. Every 1/2% increase cuts buying power by 10%. Things have gotten worse since the bailout was announced, rates have gone up not down.
NR - A lot of investors are seriously looking at curve steepening trades. As a result of all these bailouts, the government is going to be printing, printing printing. With massive treasury issuance upcoming to fund these rescue packages/bailouts, debasing the currency, we could be setting ourselves up where long-term rates are eventually going to go up substantially. The fed can control the short end, but not the long end. Should the credit quality of the USA come into question, should the foreign funders become unfriendly or sell their holdings, the long end will see rising rates and that will affect borrowing costs for everyone. This could be the 5th or 6th chapter of the housing slowdown in the years to come.
MS - 5-15% of all buyers are walking away from contracts on new developments.
JM - I don't see a significant improvement in the market until 2012.
MC - It will take more than a year until there is positive movement in the credit market.
NR - I see a 2 - 4 year downturn in the New York City market. Did I mention that the Hamptons are going down! Manhattan is still considered a 'sexy' investment, as opposed to other markets that are completely hated and filled with fierce sell side competition. We are not there yet here, although the ingredients for the recipe are setting up. The correction is likely to be an 'L' shaped adjustment.
MS - In many cases developers are going to be the ones who break on price. In many cases its no longer in their hands. The banks are now in charge. The projects are costing more than they were supposed to and are selling out more slowly and the banks are starting to call the shots. The big European banks were a significant factor in financing and they are in trouble and are no longer lending for development in New York.
JM - We are not yet seeing any trend to seller financing.
JM - There are serious city financing problems due to the shortfalls from real estate transfer taxes and the city will likely raise property taxes to cover it.
JM - I have not seen appreciable softening in the luxury market. I consider the luxury market to be the top 10% in price or $2.8 million and above. I am more worried about the bottom end of the top 10% bracket or the $3 - $8 million market. This was the everyday Wall Streeter market and is the area that many developers targeted. I am less concerned about the market for apartments worth north of $8MM.
NR - One silver lining from the busting of the commodity bubble (signaling the slowdown in global economies) is fast falling energy prices. While maintenance costs are highly correlated to the management of any one individual building, if the building was well managed and finances in order, you might get some relief in maintenance as energy prices continue to fall. Property taxes are another story. With the city facing serious budget issues now that wall street is done, I would expect property taxes to rise to make up for the shortfall. Collected revenues from wall street were down a staggering 96% last quarter, and this story is not going to change; in fact, the city might owe some refunds to financial firms.
MS - As far as the commercial real estate market goes, commercial office rents are falling and commercial office building prices are down 15 - 25%. Land prices are down 20 - 40% from the bubble like $400 per FAR level.
All I can say is WOW.
Not only is every hard working American suffering from all the woes on Wall Street, but I am finally starting to feel the pain of people from overseas as well...
I received a frantic call from my cousin in Moscow this morning. Here is the latest scoop: A major bank in Russia has temporarily ceased all withdrawal requests. Not only that, but media all over Europe is blaming the U.S. for all of this. Now whether or not this is right or wrong of them is up for debate, all I know is that it would be absolutely horrifying if this happend here. I mean we saw a sample of this scare with the IndyMac seizure back in July but at least we have the "security" of the FDIC. A lot of countries, like Russia, do not have anything like that. But I digress.
Here is the latest from the mortgage markets: It's a little scary!
While the LIBOR slid 9bps to 4.55%, and the credit markets should as a result show some easing, mortgage rates are extremely high and the 10 yr treasury note jumped 35bps from last week.
Amid the uncertainty in the capital markets as well as investor fear and truly unbelievable volatility, here is what I am quoting as of today:
I am hoping that with the combination of a cash infusion into the secondary markets, as well as a decreasing LIBOR that the spreads on most jumbo and non-portfolio mortgages will contract and mortgage rates will head in the right direction.
1) Conforming 30 Year Fixed: 7.125% @ 0 points (one point increase from last week)
2) Jumbo 5/1 ARM: 8.25% @ 0 points (seven eighths increase from last week)
Mortgage business is scarce right now as banks do not want to lend out money from their balance sheets. Combined with high interest rates, it's not a great time to be in the mortgage world right now.
Thankfully I am armed with a dedicated client base, a good loan pipeline, and have wiped away all of my revolving debt last year. It just makes me sick to my stomach when I think about people who have kids, a mortgage, and are used to a certain lifestyle that they simply cannot afford to uphold any longer.
It truly is terrifying.
A: State of the Manhattan Real Estate market panel discussion tonight! Please register via the link below for the discussion I will be participating in at the Yale Club on October 15th. I hope to see many of you there. Tickets I believe are $20 for non members, $5 extra at the door; with none going to the panelists unfortunately! I GOT THINGS TO TALK ABOUT!!!
WHEN: October 15th @ 7PM
WHERE: Yale Club at 50 Vanderbilt Avenue
MICHAEL STOLER - Senior principal at Apollo Real Estate Advisors, Publisher of Stoler Report
NOAH ROSENBLATT - Publisher of UrbanDigs.com, VP Halstead Property LLC
JONATHAN MILLER - CEO of Miller Samuel, Publisher of Matrix Blog
MELISSA COHN - President of Manhattan Mortgage Company
The discussion will be real-time, hopefully heated, and probably about 45 min to 1 hour; from 7PM to 8PM. After that there will be a 30 minute or so Q & A for the panelists. Once that is done I will be heading to....
BAR AND BOOKS @ 73rd & Lexington Ave for some GOOD SCOTCH after the panel to meet anyone that wants to meet me and discuss this crazy world we are in right now! I should be there around 9PM, give or take 15 minutes!
It would be so nice if something would make sense for a change - Alice
Poetry of the investing universe- that's what I call the phenomenon whereby universally held beliefs fall apart after a trend based on those beliefs has played out. A prime example of this was the sudden discovery, after the dot com bubble burst, that Internet traffic wasn't actually doubling every month and that much of the new traffic being generated was in part a result of all the new sites being started by venture capital fueled companies. Also in this vein: the oft-cited
Harvard Joint Center for Housing Studies (possibly named for what they smoke while they make this stuff up) figures on household formation, which underpinned so many dreams of avarice driving the U.S. residential housing bubble. Don't worry though, the Harvard folks were still bullish when they put out their last report, though they did seem to admit that the bubble itself might have had something to do with the numbers: "After averaging 1.15 million per year in 1995–2000, household growth notched up to 1.37 million annually in 2000–2006. While some of this increase may be due to the unusually favorable homebuying
conditions in the first half of the decade, much of it was expected as the echo boomers began to form independent households and immigration continued to climb." Unfortunately for the Cambridge cogitators, not only have the unusually favorable homebuying conditions evaporated, but the immigration trend also fueling the boom has become an outmigration trend.
A recent Wall Street Journal article chronicling this trend read, "After years of growth, illegal immigration to the U.S. from Mexico and Central America has slowed sharply. At the same time, say demographers and immigrant advocates, more Latin American immigrants like Mr. Carrillo are apparently returning home." Further The Journal opined "It is difficult to track short-term changes in the population of the estimated 12 million immigrants who are in the U.S. illegally. But a new study by the Pew Hispanic Center, an independent think tank in Washington, D.C., estimates that annual undocumented arrivals from Mexico are down about 25% this year from 2005, to about 350,000. Undocumented arrivals from Central America have been halved since then, to about 120,000, according to the study." Of course the poetry of this situation was that the big attraction to foreign nationals coming to the U.S. in prior years was....drum roll please....well paying jobs in the U.S. housing construction industry.
Which brings us to the latest poetical situation, this one in our own Big Apple. An article in this week's Crain's New York entitled "Tourism Well Running Dry" avers that the strong visitation trends that have favored the New York City economy are about to run into a buzzsaw of domestic belt tightening, a stronger U.S. currency and weakening foreign economies. Meanwhile NYC & Company, the city agency tasked with counting visitors to Gotham, says that visitation is on track for 47.7 million tourist visits this year up 3.4% from 2007. Further, it quotes an official saying that a slowdown is not inevitable and averse currency trends don't matter because "the strength of the product is so amazing." In contrast, Carlson Wagonlit Travel (a very large travel agency) reports a 12% drop in domestic and international business travel to the city through August. The chart below shows the visitation figures for the last 10 years.
You can see the significant growth since the post 9-11-01 trough, starting in 2003. What may be less visible is the very significant contribution of the foreign visitation componet to the growth in the last 4 years, during the worldwide oil, commodity, and property boom. In fact, of the 6 million increase in visits to New York between 2004 and 2007, 2.6 million, or 42.6% was accounted for by the increase of foreign tourism, which constituted a seemingly less weighty 19% of all visits in 2007. In other words, if foreign tourism reverts to a pre-global boom level, it's likely to have an outsized effect on overall visitation to New York, despite its smallish overall percentage. I wouldn't be surprised if foreign tourism, coupled with the global boom were not the major catalysts for demand for New York City real estate by foreigners, both residential and commercial. After all, where's an international real estate mogul to take his wife shopping, while he does business anyway (or vice versa)? Plus we all know it was simply impossible to get a decent hotel room - before they started putting up a hotel every five minutes - so why not own a place. Of course the other great attraction to New York City real estate is it always goes up.....oooh.
A: What took so long? Did they forget that commercial real estate was under severe pressure just like residential real estate was 16 months ago? Did they not know that the commercial sector was at high risk? Did they forget that Manhattan is a wall street city facing a wall street crisis? What happened?
I heard of a report from a Goldman Sachs analyst stating that commercial real estate prices need to fall 19%; but can't find the article online to use as a source. I'm looking for the article and will hopefully add shortly. The news is hitting REIT's hard, even when the markets were up this morning before the selloff.
Here is the 1-DAY charts for REIT's holding office space in Manhattan; Vornado Realty Trust (NYSE: VNO), SL Green (NYSE: SLG), and Boston Properties (NYSE: BXP):
*Courtesy of Yahoo Finance
The day is wild, with a 650 point range thus far, but these moves are worth noting. Similar to how I reported on the interconnected bond insurers stocks getting whacked way back in October of 2007's discussion "Credit Crunch: Part II":
"Holy Batman! Are you guys paying attention to what is going on with the mortgage insurance stocks; ABK, MBI, GNW, PMI, MTG, & RDN over the past week in conjunction with the selloff in the ABX Indexes? This sector is down betwen 10% - 45% in the past 5 trading days! This is important because these are the companies that are generally very highly leveraged, and may have trouble paying out claims for customers with heavy losses in the residential mortgage backed securities markets; the same market that I showed above as collapsing."Boy did these guys take over the headlines about three months later!
It would be narrow sighted to predict that Manhattan commercial real estate gets through this deflationary cycle unscathed. It is hitting everywhere, and our market tends to lag recessions and lead in recoveries. Considering that this is a wall street city facing a wall street crisis, we have some adjustments ahead of us.
Anyone in the commercial sector care to speak out on what you are seeing out there? I had a conversation with a commercial real estate agent about 4 months ago who told me that deals were all but dead. I can't imagine this market improving since then, considering the paralysis in the credit markets and gov't takeover/demise/buyout of AIG, LEHMAN, MERRILL since then. We don't need Einstein to help us solve this formula; expect office vacancy rates to rise and rents to fall as the crisis hits home.
A: No, I don't think this will be another Great Depression, with bread lines and 25% unemployment. But I also think that the term recession, as we know it, is too optimistic given the current environment. With peak credit past us, deflation upon us, perhaps this will be a 'new age' style of depression that isn't as dire as it was in the 30s, yet more economically painful than anything we have seen in decades. The shock alone of shifting from a wall street innovated credit system to a heavily regulated 'old world' banking system will be long, boring, and non-sexy. It will mark the end of an era where its back to basics as Americans start saving and cut down on excessive consumption, credit is vastly different from how we remember it, and housing is once again viewed as a 'place to live' and not a casino/atm. But the hidden danger lies in the after-effects of funding these rescue/bailout packages ---> with massive treasury issuance may come the inevitable popping of the treasury bubble, emphasis on the long end of the curve. Lets connect the dots.
First, lets take a look at how GDP changed from 1929-1933, in the beginning of the depression:
Courtesy of USStuckonStupid.com
Second, lets take a look at what unemployment did during this same period:
Courtesy of USStuckonStupid.com
So, GDP went from +3% or so all the way down to -13% or so during the first few years of The Great Depression. Unemployment went from about 3.5% to about 25% during this same period which clearly marked the worst times.
Fast forward to today and we currently have a 6.1% unemployment rate and a 2Q GDP of 2.8%. Do I see us nearing depression levels on these datasets? No! But, given the extraordinary set of macro forces at play right now around the globe and the furious actions taken by governments to catch up and slow this deflationary spiral, I don't think many have awaken to how bad the economic data is about to get; given the period of paralysis in the credit markets. By this time next year, many of us will be asking ourselves, "...man, when will this end!".
I have one force against me; tweaked BLS economic modeling compared to the 1930s whose design alone will make the data less painful. Even with this tinkering, I think the likelihood of 10% unemployment and far negative GDP numbers than what are currently expected, is rising fast. How will markets react?
Two differences between The Great Depression and today are:
a) the actions of the fed/treasury that led to the Great Depression and were taken in response to the event, as opposed to the global actions (fed/govt's) taken over the past 12 months
b) the use of credit/debt to get us out of the Great Depression, as opposed to the use of credit/debt for sustained excessive growth to get us into our current mess
As I noted in my Peak Credit discussion:
"The use of debt in the 1930s was a direct response to the Great Depression! We used debt to get us out of the depression. Recently, we used debt for an entirely different reason: TO SUSTAIN ECONOMIC GROWTH! My two questions are, who are we going to borrow from this time to get out of this mess + how are we going to service our current levels of debt?"The upcoming massive treasury issuance to fund these rescue & recapitalization plans could mark the bubbly top to an arguable 20 year secular bull treasury market!
Very few are really discussing this! I'm always worried when there is massive supply coming to market and to boot, this is becoming a favorite trade of a few high profile investors.
Julian Robertson, featured here on this CNBC video states:
"My favorite trade right now, is something I did not even know about 15 months ago, is the Curve Steepener, and that in effect is a derivative that pays the movements in the difference between the 2 year interest rate, on government bonds, and the 10 year and 30 year. My thought is that the Federal Reserve will continue to be very accomodative, and they can help the 2 year rates a great deal, but they have no control over the 10 year and 30 year rates, and I think gradually people will shy away from those particular type of investments, particularly as the dollar continues to weaken, and so I think the curve steepener is the best hedge against inflation, and I think we are going to have some inflation..."Jim Rodgers recently discussed his interest in shorting the long end of the curve on CNBC, but I can't find the video to get the exact quote (help from anyone finding this?)
I've discussed this treasury trade idea a few times here on UrbanDigs (here & here), and I don't think many people connect the dots and realize how this may ultimately affect the housing market's wished recovery. If the long end of the curve does pop, and treasury yields spike down the road, think about how that will affect borrowing costs for businesses and lending rates for homebuyers/consumers. This may be a side effect of the massive medicine we took to combat this new age slowdown, is a multi-year train of thought and yes, it is worth discussing on a real estate blog. It could be the 5th or 6th chapter of the nationwide housing slowdown as affordability restricts with higher borrowing costs. Time will tell.
I have been quiet for a couple of weeks. During this Rosh Hashana/Yom Kippur period when Jews typically ask their family, friends neighbors and maker for forgiveness, I have been asking the financial gods to forgive me for my Spring 2007 article Black Monday 20 Years Later wherein I wrote:
Recently, several significant issues have been percolating beneath the surface of a buoyant stock market. Despite an otherwise sanguine investment outlook, I can’t help but continue to see parallels to the market environment of 1987: a buyout boom fueling stocks that are running up in the face of slowing profit growth, a weak dollar, bond yields backing up on inflation fears and even insider trading scandals.
Well, we got a bear market and then a crash on top of it...I'll admit I was a year early on the crash part and was only pointing out the possibility of one, not calling for one. I never even considered that if it happened it would be this bad.
I was also asking the market gods to forgive Noah and I for professing the following impolitic and profane ideas over the last many months including that:
1) The economic model of Wall Street would change for a long time and firms would be smaller and less profitable.
2) Job losses on Wall Street would be severe.
3) We were as good as in a recession as of December 2007.
4) Commodity prices were a bubble that would pop.
5) The US was not the only country swimming naked...not by a long stretch. In fact, it was a nudie Olympics, with bubbles in the UK, Ireland, Spain, Eastern Europe, India, China, Dubai, etc, etc.
6) States and municipalities, including the Big Apple would come under severe financial duress.
7) The CDO market was a disaster waiting to happen....I don't think we ever got around to calling hedge funds a bubble, although we did refer to private equity deals under that rubric.
8) The commercial real estate market would be shown to have had its share of nude free stylists.
9) The New York City land market was a bubble, and as the underpinning of real estate values in NYC, a negative harbinger for all real estate values in Gotham.
10) The stock market would get hit. I for one was too early in trying to think about what a bottom in the stock market would look like....but that's our job now, thinking about a bottom -one that is properly covered in the correct swim wear.
11) New York City residential real estate prices are headed for a fall, with the worst declines to be felt in the boroughs and Harlem.
So, since Urban Digs, with the help of many good blogs and information sources, warned you about this list of risks, which have now been pretty much accepted by the world, the question becomes, what other surprises are still ahead? Thankfully, I am not sure there are that many negative surprises left (let's all hope not). Here are a couple of surprising pieces of data I have run across in the last couple of weeks, which may explain some of what is going on in the world right now and may have portents for the future.
October 21 is reportedly settlement day for Lehman Brothers default swaps, apparently the markets were worried sick last week about the potential for implosions tied to what was thought to be many billions of dollars of notional exposure. It seems that theDepository Trust Company believes that investors may be overly concerned about the size of the CDS market, its relationship to sub prime debt and the total size of Lehman CDS exposure outstanding. The settlement of the oustanding Lehman CDS contracts, which amount to a less than cataclysmic $6 billion, may be something of a positive to credit markets.
Baltic Dry Freight rates have been tumbling for the last couple of months, which many have taken as a sign that world economies are plunging into recession. Of course collapsing commodity prices have also fueled this anxiety.
Interestingly, as much as the commodity bubble drove prices way ahead of fundamentals and was brought back to earth by the credit collapse, it also seems the credit crunch is impacting Baltic freight rates. According to an article in Seeking Alpha, shippers in Asia are finding it hard to get financing to pay for the shipment of goods. So don't be surprised to see some shortages develop due to the credit crunch. No, this is not a result of overboard money supply expansion or a robust rebound in world economies, it's due to the credit system being jammed up.
According to a tiny squib of an article in Business Week (my favorite kind, because the only really important news is usually in articles too small for anyone to bother with), the ratio of home price to household income in Beijing has hit an all time high of 28.8x, while the World Bank considers five times to be a healty norm. Many other things besides poisoned milk are amiss in the "Middle Kingdom" from what I have been reading lately, including imploding commercial property marts and under-capitalized small manufacturers, who are racking up bad debts. These debts are held by the massive shadow banking system, which stepped in to finance the boom, when officials started tightening credit at legitimate lenders. Chinese miracle?....we may need to re-think that.
Lastly, the Financial Accounting Standards Board (FASB) had a board meeting last week and discussed the highly topical subject of "Determining the Fair Value of a Financial Asset in a Market That is Not Active". It looks like the green eye shade set will be releasing an update to their standards that should give institutions a little more flexibility in making certain illiquid assets on their balance sheets look a little more..... green. I am personally very much looking forward to the Q3 data on bank credit quality from the Federal Reserve to see how non-mark-to-market loan defaults are tracking.
"This is worse than a divorce. I've lost half my net worth, and I still have a wife."
- says one shell-shocked trader via NY Post's "Chaos Caps Dow Nightmare Week"
That quote says it all as the Dow experiences its worst week ever in its 112 year history of trading. Readers of some macro economic blogs (Calculated Risk, NakedCapitalism, The Big Picture, Roubini's Blog, Mish's Global Economic Analysis, UrbanDigs, etc..) can't say they weren't warned as mainstream media and business networks filled the past 6-12 months of air time with bottom callers, eternal optimists, and those seeking the 'light' at the end of the tunnel and choosing to deny the severity of deflationary forces facing the global economies.
Back in December of 2007, Jeff wrote a very timely piece titled "Making Money out of Thin Air" ending with this bold statement disagreeing with the maestro, Alan Greenspan, regarding rising inflation:
"Independent Strategy noticed that asset prices and financial sector balance sheets were growing at multiples of GDP in recent years while measurable money supply wasn't. This set them on their objective to identify the missing money. Well, that extra un-measured money supply is shrinking and it will have an impact on the other parts of the equation: asset prices, GDPs and financial sector balance sheets generally. So there you have it. This conclusion puts me at odds with the "Great Maestro" Greenspan, who is worried about inflation....if your a monetarist, money supply is contracting and the Fed needs to address it, it follows that inflation will be coming down with just about everything else."Well said Jeff given at the time (Dec 2007) commodity prices were rising very quickly prompting generally accepted calls to battle inflation; which was simply wrong. Go read the entire article and put yourself back in time & place about 10 months ago.
A: Almost all other markets outside NYC are experiencing fierce seller competition where battles take place to be the most aggressively priced property on the open market. The result is asking prices some 20%-30% below peak levels. Yet in Manhattan, this is not the case. This leaves buyers wondering why the Manhattan real estate market is not filled with more fear, considering the events we are facing. It also leaves sellers in a state of 'wishful thinking' and 'hope' as their competition is priced at or near peak levels. This combination is likely to lead to the adjustment phase. Updated at 11:48AM
I can't stress enough the role that hope/anchoring & confidence play in a housing market in times like these. Anchoring affects the sell side while confidence affects the buy side. The combination of these two mental forces lead to real changes. When I say anchoring, I mean the psychology of sellers to anchor themselves to a fixed point (in this case a price, perhaps from a previous higher sale), even though that point has no more relevance in today's marketplace.
Case in point, while this time of year generally sees an uptick in inventory on the open market, the past 6 weeks has seen a dramatic 18% increase of inventory; from a level of 6,950 around in late August to a level of 8,200 or so today (chart below; click for all real-time charts here):
Given the state of the credit markets, the negative wealth effect from equity correction, an upcoming weak bonus season, high paying wall street job insecurity, and a decline in buy side confidence, this noticeable surge in inventory stands out from past seasonal upticks.
Buyers are wondering why asking prices have not softened to levels noticeably lower than peak levels? To answer this you need to go into the mind of the 'boss' in charge of setting the asking price; and that means the seller! Contrary to what many may think, most sellers set their initial asking price based on hope. They hope to get a certain price, and if they do not try then they lose any chance of getting that price! At least that is what goes through their heads. That, and the notion that their home is worth more than comparables because of the lasting memories and good times they experienced there!
One final dynamic that affects sell side psychology comes from interviewing multiple brokers that may possibly represent them to market the property. It is a well known internal fact that a successful sales pitch comes from executing a few things perfectly:
a) Look - a seller broker must appear to be successful. Dress professional. Act professional. And at all times, give the impression that you are busy, closing deals, and active in the marketplace.
b) Marketing Strategy - a seller broker must explain strategy that will be implemented to give the listing maximum exposure. After all, if a seller is going to agree to a 6% commission at closing, they should expect plenty of marketing from the seller broker and their employing brokerage firm
c) Presentation - the seller broker must PRESENT themselves and their sales pitch in confidence. A seller broker that is not confident, at a loss for words, takes time to answer a question, or simply doesn't know how present themself has little chance of getting that exclusive
d) Pricing - the key! The seller broker must NOT scare away the potential seller client with a sales price that they feel is too low, although that may be in line with current market valuations! This is so important and is the key element that dupes so many sellers into choosing their ultimate representation. Sellers will hear things like, "...your property is gorgeous and should not get less than X using my services" or "your property is easily worth X and I'm the guy that will get it for you" when in reality X is known to be significantly ABOVE current market valuations. Sellers want the highest price, and experienced brokers know the key to their hearts; quote a high price, get the listing, and work on price reductions after the first month! Many are fooled without realizing that other brokers are attempting to keep them 'ahead of the curve' by pricing correctly.
I can't tell you how many sales pitches I lost because I quoted a price that was realistic yet lower than competing quotes, and ended up seeing the property on the market with another broker at a price some 15-20% higher than my quote. It doesn't sell at that price, but the winning broker executed the sales pitch properly and the fish bit!
Understanding this, explains a lot about current property pricing. I have colleagues everywhere acknowledging that their listing is overpriced and in need of a reduction. Buyers who are perplexed that asking prices should be lower, need to realize that the price deals are occurring at is what counts; not asking prices. As long as sellers cling to hope and are not scared into pricing aggressively from the outset to move the property in a timely manner, inventory will rise and the setup for fierce sell side competition occurs.
Bidding in a market that the buyer thinks should be fearful is as simple as executing The Probe Bid correctly to gauge the sellers first response:
Assuming the seller is not testing the market and is really looking to sell, it will be the FIRST RESPONSE to your initial bid that will give you the best look at the poker hand the seller is holding.In this market, I stress patience with the bidding process to maximize negotiating success. This is more of an art than a science, and is all about execution and presentation.
First of all, in today's market the quality of the buyer is absolutely crucial when it comes to negotiating. With the mortgage markets distressed and the seller aware of this, it is vital for the buyer's broker to present the bid properly and in the best light. Giving assurance that the deal will close, financing secured and that a board will approve, means a heck of a lot more today than it did only 6 months ago.
Second, don't be in any rush to respond once the initial bid is submitted and a response returned.
Third, execute the 'back out' at the right time and for the appropriate period of time. You will only know if NO really means NO when the seller is faced with losing the deal.
Finally, understand what the property was valued at near peak levels and what downturn risk should be priced in. I am finding that most buyers expect a 7-10% downturn risk (as explained previously in my July post "Low Ball Bids & Cold Feet") as a premium in their bids:
"At the right price, buyers are there. At the wrong price, buyers are pricing in potential downturn risk via low ball bids. The true motivation of the seller comes out at this time."This is sacrificed under certain situations including if the buyer finds the perfect property that has unique hard to find features.
The Manhattan housing market is not yet experiencing fierce sell side competition or a complete absence of buyers. How this changes as time goes on is on my radar. Until then, it is up to the buyer to be prudent if they know they are buying, but at the same time realistic in that finding the perfect property that also is distressed and willing to accept 20% below peak levels is going to be very difficult right now.
The turning point could be a few things but the dynamic remains the same; a complete absence of buyers that results in sellers being forced to dramatically lower their price to stimulate a sale. The spark that could lead to some form of this lies in Manhattan pricing reports. When it is showed that a decline has occurred across the board, buyers (even those that are on the sidelines waiting for a 5-10% decline) are likely to back off in a herd like fashion out of fear for catching a falling knife. Time will tell.
A: I want to discuss the uptick rule, being that the ban on short selling expires today. I don't listen to Fast Money as much anymore, but I just happened to have it on last night and overheard a discussion on re-instating the uptick rule as the ban on short selling expires. Assuming the ban does expire as planned, I agree with this 100% and actually argued on this side of the debate many months ago with a wall street insider who happens to be a compliance attorney working on short sale ban implementation! Now, my general feeling on short selling is that I think it has a place in the free markets, so it should be restored. Then again, I'm a trader deep down inside. Let me explain this uptick rule for those that don't know what it is and more importantly, how trading firms used to get around it.
First, a quick stock trading 101: Stocks are traded on exchanges. There are bids and there are offers; just like in any trade. The inside market for a stock consists of two prices; the highest bid & the lowest offer! . The difference between the highest bid and the lowest offer that make up this inside market is known as the spread. The image below shows you the highlighted inside market (highest bid & lowest offer) of the stock JPM with both an uptick and a downtick (refer back to this image as you read on):
There are two ways to sell short:
1) hit the bid and sell short (not taking advantage of the spread)
2) place an offer and have a third party execute the sell trade (buy from you taking advantage of the spread)
Now, to understand how the uptick rule worked you first need to grasp one very simple concept regarding how the inside market changes as stocks trade.
To sum up the basics, an uptick occurs as the stock is on its way UP (with price rising); as evidence by a new high bid coming into the inside market. A downtick occurs as bids leave and the stock is on its way down (with price falling). Now lets get on with the official definition of the uptick rule, that on its own, probably would be confusing for someone who doesn't trade or familiar with the rule.
UPTICK RULE - A rule established by the SEC that requires that every short sale transaction be entered at a price that is higher than the price of the previous trade. This rule was introduced in the Securities Exchange Act of 1934 as Rule 10a-1. The uptick rule prevents short sellers from adding to the downward momentum when the price of an asset is already experiencing sharp declines.
I bolded that last part because that really is the reason for the uptick rule. That is, to prevent massive selling pressure from being applied as a stock is falling which would increase the downward momentum of the move. You see, if a stock is falling, there will be no chance to short it because the stock will experience mostly downticks as bids are either removed or hit by the selling trader (look at the left trading box of JPM which has a downtick).
Without this rule in place, you could just sell all you wanted as the stock fell, putting more force onto the down move. With the rule there, the downrun has probably ended and the stock will see new high bids come in (allowing me to short again as the downtick changes to an uptick) making the short trade less likely to be immediately profitable.
When I was trading with stocks in fractions, the uptick rule was in place. But traders got around it using something called bullets. In those days, bullets had to be setup for any one individual stock that you wanted to trade. To set it up, you had a 2nd account where you bought X shares of the stock, with X being the ultimate number of shares you could short on the stock with a downtick. Then, you buy puts on the stock. I forget the formula used but the idea was that the put option contract always offset the losses or gains in the stock that was held long in the 2nd account; making the trade net out to zero or very close to it.
Once this was setup, bam, you could short on a downtick the number of shares that you bought in that 2nd account, because technically you were selling shares of a position that you were long in; when in reality you were day trading it short and bypassing the uptick rule. Another less complicated way was for the trader to do two simultaneous trades; first you place a small high bid order creating an uptick and then you quickly hit the bid underneath you to take the short position. This required very fast hands.
I'm not sure if bullets exist anymore or if they caught on to it, and for the record, I never used them because I only focused on trading long positions. But it proves that if they re-institute the uptick rule, wall street will likely find a way around it! So they better be on top of it. And there you have it, the uptick rule explained for those that didn't quite understand the official definition.
A: Insanity Later? Boy oh boy oh boy. Folks, we have reached the panic stage of this massive credit deflation cycle. Back in February I devoted an entire discussion noting that stocks are lagging the credit markets, and still, there are people out there that are only now waking up to this reality and wondering why their portfolios are getting whacked. When it comes to stocks, you got to be IN IT to WIN IT. With risk comes reward, so NEVER forget the risk part of the equation! I'm reading headlines like, "Retirement Accounts Lose $2 Trillion", and "Stocks Battered Again", making the fear grow amongst the masses. This is a time for transparency, for trust, and for confidence, and right now there isn't much of any. Until this changes, the story continues.
Stocks are lagging the credit markets, and have been for the past 14 months! The stock market is a discounting mechanism which lead many to believe it is a forward looking indicator! The flaw is that the stock market is both not rational and not always right. Certainty and Confidence are the bloodstream! Since the stock markets have such a far reaching and psychological effect, the cycle feeds on itself. Right now, credit deflation and the acceptance of peak credit is hitting consumers, small and medium sized businesses, most sectors of the debt markets, global markets, commodity markets, and stocks are adjusting at a lag! As the adjustment occurs, people get more and more aware of what has going on around them.
I noticed something today. My office was ripe with circles of agents talking about how bad this stock market is. We are passed denial and maybe entering the anger phase. People are pissed. You know when this is all over, we'll have our dose of lawsuits and criminal charges leading to jail sentences. Then comes the regulation so that this NEVER happens again! Oh, and the fact that we will have to deal with the after-effects of massive treasury issuance to fund all these rescue tactics/deals.
Here is an interesting thought. The fed is pulling out every facility and maneuver they can think of to target their shot at a specific sector, and yet, stocks continue their freefall. It's because stocks lag the credit markets and know that a broken credit market means a prolonged/deeper slowdown for the economy!
The two most important fed moves this week were:
a) fed to pay interest on bank reserves - The fed giving money to guys for the reserves sets up an interest stream flowing the other way...back to the banks from the fed...making the banks net borrowing cost over a period of time lower.
This has the effect of lowering fed funds effective rate for the banks without encouraging them to provide cheap money - thus avoiding the knock on effect in the economy. An unforeseen consequence of this is that you encourage banks to hold excess reserves and therefore reduce the incentive to lend...making the credit supply situation worse.
b) injection into the commercial paper market - setting up a separate entity (SPV - special purpose vehicle) to buy three month unsecured and asset backed commercial paper directly from issuers. The hope is to free up lending to the small, medium and large businesses that rely on loans to operate; that means paying their employees and their suppliers/advertisers/logistics, etc..! The chain is long!
Now, the commercial paper news had an immediate impact on short term T-bill yields as it seemed there was less interest here; a good sign as the targeted action worked a but! A deeper look doesn't paint as bright a picture, as Across The Curve discusses little buying in the corporate bond market:
"The corporate bond market is mired in a melancholy malaise. Sentiment is glum and no amount of good news can shift sentiment. The Federal Reserve announcement this morning of the CP rescue package should have sparked some buying. One veteran corporate bond salesman noted that he saw not even a nibble."But stocks still sold off. Lets face reality. Credit markets are STILL dysfunctional as evidence by distressed LIBOR, CDS, TED spreads levels. There is no trust amongst banks, no certainty, and very little transparency. The suspension of mark-to-market accounting rules will only prolong restoration of these three key market elements.
It's as if the credit markets are in the process of a transformation to something else. The old credit market is gone, and a new one is coming. For now, we have to live in a world of financial fear and risk aversion. The ultimate impact this standstill has on economic data down the road is yet to be seen; but we don't need Einstein to solve this equation. Weak GDP readings and rising unemployment is in the cards.
We're in a recession that cannot be compared to others because the combination of forces we face today are truly unprecedented for our time (credit bubble bust, MEW bubble bust, tons of debt, securitization model extinct, dead secondary mortgage market, insolvent banks, no more investment banking, staggering debt-to-GDP levels, commodity bubble bust, housing bubble bust, strapped consumer, stock market bust, and on and on). So act accordingly and look for signs of transparency, trust, and confidence to return to the credit markets, because only then, will stocks be close to a bottom. Until then, purge on!
I thought today started off bad when the subways decided not to run out of Brooklyn anymore, thus making my respective commute 2 1/2 hours long.
Alas, I was wrong.
I walk into the office and the Dow is down below 10k, Russia's market fell 16% and trading was suspended, Oil is close to $90, and the treasury yields are plummeting. After pinching myself twice, to see if maybe this was all a bad dream, I decided to check what the hell is going on with the mortgage markets.
Here is what I see as of 11:50AM:
1) Conforming rates are down only an eighth from last week to 6.125% on 30 Year Fixed mortgages, 5.875% on 15 Year Fixed. Just goes to show you that the treasuries are not as closely related to mortgage rates any longer.
2) Jumbo products are down a half point! As of right now a Jumbo 5/1 ARM yields about 7.375%. Whew! Heading in the right direction!
3) Rumors that Fannie Mae / Freddie Mac are lowering their risk based premiums. Definitely need confirmation of this, but perhaps the GSE's will lower the cost of conforming mortgages a bit mostly due to the ridiculously high premiums charged for the past 4 months.
That is it for now. I am almost confident that I will see at least two rate adjustments today from our pricing desk and am anxious to see what will happen once the first $250 billion is injected into the credit markets.
Hope you have a great Monday!
A: Tally up the debts! Lets just all pray that the committee appointed to buy these toxic securities, is prudent in the price willing to pay for them. Although that goes against the overall goal, to try and recapitalize the banks & spark private sector interest back to the secondary mortgage markets. The heroin was administered, the high lasted a few days leading up to the peak, and now it appears the hangover is beginning early as the markets realize this just didn't do much to solve the fundamental problems; hopefully the credit markets react favorably from this approval, or else it wasn't worth it!
As I said Wednesday, ..."Clearly, traders are betting on a positive outcome which begs the question, if it does pass, will it be another buy the rumor sell the news situation?".
Yes it will! I guess this is better than stocks being down 900 if the plan didn't pass, but then again, now we have massive treasury issuance upcoming to fund this concept and a good amount of pork to go with it! Instead of $700Bln, the add-ons to convince some to vote yes for the plan is likely to add another few billion to the tab. What a world we live in.
Let us pray that the foreign institutions that buy up our debt via treasuries, have no plans on selling those assets to support their own people as the global slowdown continues to evolve.
A: Sales down, inventory up, and prices UP slightly to an average of $1.5 Million. Why is this no shock to me or UrbanDigs readers? Because if you read this site you have known since April exactly WHY Manhattan real estate prices will remain strong for much of 2008! Lets recap and discuss again.
First the news. According to NY Times, "Concern for 2009 as Manhattan Real Estate Market Slows":
Even though the national housing market is suffering and jobs on Wall Street are being lost every day, Manhattan real estate prices are higher now than they were a year ago. The average price of a Manhattan apartment rose slightly to $1.5 million in the third quarter of this year compared with the same period last year, propelled largely by a few purchases at the high end of the market, according to reports released yesterday by four large real estate brokerages.Thats the jist of the Q3 report. It is not news because I have been discussing since late 2007 how buyer confidence has been declining, and how sales volume has been slow since early 2008.
And data tracked by the brokerages indicates that the market has slowed: there are fewer sales than in the last five years, there are more apartments for sale now than in the past eight years, and more sales contracts are being canceled. Even the pace of growth for luxury apartments, long the strongest segment of the Manhattan market, has slowed.
I started talking about Mortgage Unbacked Secuirities, Credit Woes and severe national housing woes in July of 2007, some 14 months ago! You want to be ahead of the curve, keep it here!
Back to the topic at hand. In April, I explained to readers WHY Manhattan real estate prices will remain strong for most of 2008, even as I stated on a daily basis how severe this credit crisis is and that we are no where near the end of the problems. I titled the post appropriately, "Why Manhattan Price DATA Will Stay Strong in 2008":
The reason is in the new development closing dynamic and the fantasy of perceived timing; deals signed 10 months ago that close two weeks ago are considered recent and reflective of current market conditions.That was 6 months ago! So put yourself back and then look at today's Manhattan pricing reports; and you should understand why prices are holding strong. That whole piece is a worthy read.
If a contract was signed in 2007 for a new development that closes 12 months later in 2008, the price data reported will reflect the market conditions for when the original contract was signed! However, human nature will perceive the future report as current and in line with the market at the time of the reports publish date! PRICING DATA THAT IS YET TO COME WILL REFLECT PRICES PAID FOR NEW DEV CONDO'S MANY MONTHS EARLIER!
For a better indication of the CURRENT health of the Manhattan real estate market, look at different metrics such as sales volume and inventory trends! It's clear that sales volume is down and inventory is up. You can track this data in real time via UrbanDigs Charts with data provided by Streeteasy.
I am on record for stating that the first significant price declines are likely to emerge in the reports for the 4th quarter, which will be released in January of 2009. The 4th quarter of 2007 showed a tremendous increase in the average price of a Manhattan apartment and a 17% increase in prices, due to closings of high end new developments; specifically 15 CPW and The Plaza. Without these upwardly skewing closings, the 4Q of 2008 will likely show year over year declines, as the anomaly is removed. As I said in the market report back in July, "Low Ball Bids & Cold Feet", what goes in will eventually come out! The worry is how the mass media will handle the price declines and the effect on buyer confidence. Unfortunately, when mass media starts writing articles titled, "Manhattan just fell off a cliff, down 10% Y-o-Y", buyers tend to back away for fear of catching a falling knife. Let's see how things play out.
A: Here we go. In the past 5 trading days, including the huge 777 point drop on Monday and bounce back yesterday, the BIG 3 banks (C, JPM, & BAC) stocks are up 20%, 18%, and 12% respectively. Hmmm, do you think the markets are pricing in a positive outcome for tonight's amended plan vote? I think so!
Putting right & wrong aside for a moment, I just don't see how the past day and a half of private meetings amongst Senators (especially those that are not adamantly against this plan) and add-ons to the plan will result in another failed vote. If it does fail, watch out below. However, it looks like traders are already banking on this amended bank recapitalization plan passing the test tonight. Check out the action on the stock prices of Citigroup, JP Morgan & Bank of America over the past five trading days; these big banks stand to benefit significantly if this plan goes through as they will be able to pass-on their toxic assets to the treasury at likely rewarding marks:
These are fairly big moves considering the S&P 500 is down 2.5% and the DOW is down 0.8% over this same 5 day trading period. Clearly, traders are betting on a positive outcome which begs the question, if it does pass, will it be another buy the rumor sell the news situation? And secondly, it puts the most pressure on the House vote on Friday! All I now is, our macro economic problems from this credit crisis and the paralysis over the past few weeks is just getting started; regardless of the passage of this plan. Expect weak GDP numbers, rising unemployment, and poor ISM manufacturing numbers that seem to already be here.
By the way, anyone notice how the National debt has just exceeded $10 TRILLION? I'm not a smart man, but with all the spending we will do to rescue our banks, Fannie/Freddie, AIG, Bear Stearns, etc.., won't this go higher over the coming years? Umm, what is the interest alone on debt of this magnitude?
Ehh, I'm sure we will be fine. After all, if mark to market accounting rules are set to be suspended, as it will if this plan is passed, we could just put these debts into purgatory and act like they don't even exist! Cant we?
Don’t worry, the credit rating of the City of New York has not fallen to one rung above junk. Hopefully Bloomy III can save the city from such an ignominious plight. No, I’m writing about another triple B¬ Bank Branch Blight. According to a recent Real Deal article, if Chase lives up to it’s stated consolidation plans regarding the recent Washington Mutual (Wamu) purchase, 40 branches in New York City could be closed by the end of 2010.
Of course residents of the city, and those who work here, have known for a few years that the city was becoming over-banked. It started with the deposit-grabbing moves of North Fork and Commerce Bank early in the decade. Commerce in particular pioneered a brand of banking that saw the branch as a retail outlet and crown jewel of a bank (former Chairman Vernon Hill had owned fast food franchises and knew the value of letting customers “have it their way”). The genius of this model was that people were so sick of the bad service at their traditional banks, that when Commerce opened up their seven-day-a-week gleaming new branches with efficient service personnel, people threw money at them and required very little interest on their deposits in return. These very low-cost funds could be re-deployed into government bonds with a decent return earned and very little risk taken. No wonder everyone wants to be a bank now.
Competitors like Wamu, who needed to feed their mortgage machines followed and they liked the low cost deposits too. Capital One the credit card company figured out deposit gathering was a good low cost source of funds for its credit card lending and snapped up North Fork. The sleepy older banks like Chase who were losing share reacted by building some new branches themselves.
I decided to take a look at the new retail footprints of the combined Chamu (Chase/Washington Mutual) and Citi-Overya (Citi/Wachovia), just in Manhattan south of 125th street. I chose this area because I’m lazy and arguably the bank density in this area is the greatest in the city, due to the very high population and business density. The top Google map is the new Chamu network and the lower Google map is the new Citi-Overya network. As one can readily tell, these institutions have branch redundancies as well as people redundancies.
By my reckoning (using the bank branch locators for each institution), Chase has 31 branches in Manhattan south of 125th street, while Wamu has 39, for a total of 70. Of the 39 Wamu branches, only 16 are located further than 5 blocks away from an existing Chase branch. There are 11 Wamu branches that are within 2 blocks of an existing Chase branch. So I would definitely concur with the Real Deal folks that the Chamu network is likely to close many branches in Manhattan.
The combined Citi-Overya network contains 54 branches. Wachovia brings an additional 22 to Citi’s existing network of 32 branches. Of the 22 additional branches, only 7 are more than 5 blocks away from an existing Citi branch, and 8 are within two blocks of an existing Citi location.
Those commercial real estate people in the know will tell you that banks were considered to be chumps when it came to leasing space for new branches. Although they tied up fantastic street corner locations for their branches, by and large they paid 15 to 25% more to rent space than other retailers. So on top of all those empty storefronts that are likely to result from the consolidation starting to sweep banking, there is likely to be severe downward pressure on store-level retail rents as these premium properties come back into inventory and only get removed at much lower lease rates if at all.
A new bank run by ex-North Fork and Signature execs called Heritage Bank has just taken office space in the city, according to Crain’s. If not, there’s always Goldman Sachs and Morgan Stanley.