Quote of the Day
"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"
*courtesy WSJ.com
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.
Comments (12)
I agree with this, for the past 2 years if you were in the real estate industry you could feel the weakness, and see all the loans that people were being given for no reason. So when you see all that happening its only a matter of time before that has to flush through the entire economy, and this past 3 weeks that has been the case.
Posted by Michael Oliver | October 11, 2008 2:21 PM
Hey Michael...yep, its been quite a wake up call for those thinking stocks were already pricing in the distress. Clearly they were mistaken.
Take care
Posted by Noah | October 11, 2008 5:29 PM
How is this different to you than NYC RE brokers telling you that Manhattan is different and that while all markets in the Universe go up and down, the NYC market is the only one where special circumstances make it go only up or sideways?
Posted by Anonymous | October 11, 2008 6:26 PM
how is what different? The Manhattan re market right now and its near term prospects? Or something else? Whats the question?
Posted by Noah | October 11, 2008 10:00 PM
How is the Manhattan RE market in general different from any other speculative market? Every market (stocks, bonds,commodities, art, oceanic shipping rates) goes up and down. US RE market goes up and down. Yet most brokers in NYC continually tell you that supply/demand conditions make the Manhattan RE exempt from the dynamic that affects all other markets.
You say that as the mortgage mess has played itself out, the MSM and Financial media has brought out a string of bottom callers and eternal optimists telling us that the problems are contained.
Now, as unprecedented turmoil is hitting the economic base of the city, especially its wealthier members (not only through layoffs, but wealth effect) we hear a slew of NYC RE experts telling us that Manhattan RE market is its own world and prices will stay flat or maybe decline 10%.
Any similarities strike you between the two cases?
Posted by Anonymous | October 12, 2008 1:23 AM
Anon-
NYC RE "experts" and the bottom callers/perma bulls in the MSM have quite a bit in common: a profit motive to mislead the hapless and uninformed into continuing the game (in the form of making transactions they or their corporate owners make comissions/fees off of).
The problem is most RE "experts" don't have any experience with a downward market.
We know Manhattan RE goes down- I've seen data sets that suggest the median purchase in Manhattan in 1988 had to wait til 1997 to break even. Throw in inflation, and the picture is even uglier.
Posted by drtomaso | October 12, 2008 4:27 AM
To Noah's credit, he has always been honest about the inevitable downturn in Manhattan real estate. I agree with the above postings that argue for a substantial decline in Manhattan real estate prices. All fundamentals have turned dramatically bearish and they will remain so for several years. pricing may well drop 40%, or more, from peak to trough. This process will take years.
Posted by nh23 | October 12, 2008 8:27 AM
anon - because they have a vested interest in painting a rosy picture. Brokers work for commission, brokerages get as many rats(brokers) in their house to go out and bring cheese back to the home base where they get 35-50% splits.
Its in the industry's vested interest to paint a rosy picture to keep sales volume as high as possible, to bring in as many deals as possible.
Its no different from many other SALES industries that are commission related.
Posted by Noah | October 12, 2008 8:30 AM
PS: when I say 'rats' I dont mean to refer to brokers individually as rats. Simply meant the business model of hiring as many brokers as possible to get the cheese and bring it back to the house.
MH23 - thanks! Thats why I started this blog to begin with, to discuss these things in a public diary so people can easily go back and see my thoughts as these events unfolded
Posted by Noah | October 12, 2008 9:10 AM
Noah, a question for you - and if there is no data to answer my question, I'd love it if you could take a stab and guess. For a random $2mm apt purchased in NYC between 2002-2007, what would you guess was the average down payment? I'm curious as to how long it would take such an apt owner to get underwater in a RE downturn.
Posted by Anonymous | October 12, 2008 11:00 AM
anon, for condos as late as last July-ish 10% down with a 10% heloc (for those closing at the time) was still available for that sort of market (I know because I was still looking). I don't know what the percentage of condo sales were (I think about 45%, but I may be wrong) and about 30% of those were foreigners. But remember, many of the foreigners were spending A LOT of money, not 2M and below.
Burn, Plaza, Burn.
Some people must be in pain. Look at the inventory, no one in their right mind would sell now unless they felt the need to.
Posted by brenda | October 12, 2008 3:26 PM
old trader maxim - sell when you can, not when you have to...
Posted by Anonymous | October 12, 2008 7:42 PM