A Good-Bye To 'Tanta', of Calculated Risk

Posted by urbandigs

Sun Nov 30th, 2008 10:52 PM

A: Very sad news tonight. Tanta, co-blogger with Bill over at Calculated Risk, passed away early this morning after battling ovarian cancer for the past 3 years. Tanta has proven to be an amazing resource during a time of crisis in this country, and was a voice of both reason and sanity in an insane world. She did her best to talk about the problems with our financial system, how we are 'all subprime now', and in depth discussions of the mortgage industry where she worked for over 20 years. She will be greatly missed.

The news, "Sad News: Tanta Passes Away":

My dear friend and co-blogger Doris “Tanta” Dungey passed away early this morning. I would like to express my deepest condolences to her family and friends.

Tanta worked as a mortgage banker for 20 years, and we started chatting in early 2005 about the housing bubble and the changes in lending practices. In 2006, Tanta was diagnosed with late stage cancer, and she took an extended medical leave while undergoing treatment. At that time I approached her about writing for this blog, and she declined for a simple reason – her prognosis was grim and she didn’t expect to live very long. To her surprise, after aggressive treatment, her health started to improve and she accepted my invitation. When she chose an email address, it reflected her surprise: tanta_vive ... Tanta Lives!

Tanta liked to ferret out the details. She was inquisitive and had a passion for getting the story right. Sometimes she wouldn’t post for a few days, not because she wasn’t feeling well, but because she was reading through volumes of court rulings, or industry data, to get the facts correct. She respected her readers, and people noticed.
The blogging world benefited greatly from Tanta's presence and I learned a wealth of information from her writings. On a personal note, its been about 17 months since I lost my father to lung cancer, and until you see the illness up close and personal, you realize that you probably have been taking life for granted. I do not wish it on my worst enemy and if there is anything I want to get through in this piece devoted to both my father and Tanta, it is to enjoy your life, be good to your family and your friends and others, don't take anything for granted, and know that good health is a blessing that should not be overlooked.

Tanta, you will be dearly missed. My condolences and prayers to Tanta's family, and dearest friends. We lost one of the 'good guys'.

Bernanke's Printing: Take II

Posted by urbandigs

Fri Nov 28th, 2008 04:11 PM

A: By the way, I hope everyone enjoyed their Thanksgiving holiday and took some time out to offer prayer for the families of those killed & injured in the Mumbai terrorist attacks. Its times like these that we realize how precious life is, and what we should really be thankful for. I just want to follow up last weeks post on "Is Helicopter Ben 'Printing Money' or Not?", with the exact same chart of the St. Louis Fed's Adjusted Monetary Base. Its quite amazing to see this chart fly on a weekly basis. Only last week the y-o-y percentage change in the adjusted monetary base was about 33%. Well, upon last recheck the same metric surged to about 78%! Start the presses!!!

As the fed flushes money into the system via the front door, the question is how much is being destroyed through the back door? Is this pure expansion of the money supply (printing) or is it an illusion?

First, here is the chart of the % Change y-o-y of the St. Louis Fed Adjusted Monetary Base, this time the data only goes back to 1984, but still allows you to see the expansion:


Now, we must keep in mind the level of destruction in the shadow banking system as hundreds of billions of dollars worth of write-downs took place so far since the credit crisis began. The fed has been taking on risky assets as collateral for short term repos and for other credit lending facilities, trying to re-liquefy the credit markets. But banks seem to be still unwilling to lend like mad. Can you blame them?

The purpose of this is to understand that as the fed tries to pour water on a forest fire, there will eventually be a price to pay for this medicine! There are no free lunches and it seems to me at least that the fed is printing like crazy in an attempt to stop a deflationary spiral of asset prices. What will endgame bring? When I talk about endgame, I mean the final chapters of this story AFTER the economy is past the worst of the credit crisis, the rising unemployment, the GDP contractions, the manufacturing contractions, etc.. What will the price be that we have to pay in exchange for all this fiscal & monetary stimulus? If its inflation, where will it show up? Its just hard to see inflation re-emerge in housing prices as the credit markets will not revert back to the free-flowing days of 2002-2006! With regulation coming, securitization gone for now, and plenty of damage done, investor appetite for risky mortgage backed securities is likely never to reach the peak seen during the housing boom. And without this system of credit in place, I just don't see a new housing boom.

For now, its a race to debase and the fed's desire is for a weaker dollar; their fight is against deflation and the dollar swelling that comes with debt-deflation.

So, while deflation is king now and asset prices adjust, the question is will endgame bring inflation and if so, in what form? Housing? Stocks? Commodities? Precious Metals? Of these choices, I would have to say precious metals. I just don't see the new-age heavily regulated credit engine and the banks that lend off it, supporting another housing bubble anytime soon. Besides, after this housing deflation cycle, the asset won't be as 'sexy' as it was once perceived and in fact, a house will be viewed as an investment to save up for and live in; rather than a speculative asset that could be flipped for 50% profit in two years!

Try & Buy - Fad or Trend?

Posted by jeff

Wed Nov 26th, 2008 10:03 AM

Desperate times sometimes require creative measures. A Reuters article on rent to own programs being offered by the homebuilder Toll Brothers recently caught my eye. It mentioned that Toll was offering the program at the Northside Piers development in Brooklyn.

Just by way of history, sales began at Toll's Northside Piers in Williamsburgh in early 2007, and by March of 2008 70% of the 180 apartments had been sold in the first 29-story glass tower. It appears that as of today, only 14 units in One Northside Piers remain unsold, per the development's web site.

According to the New York Times, in the first go round Toll reportedly had to cut prices on some larger apartments and others with limited views. They altered their plans on phase II to include more studios and one-bedrooms, which appeared to be in greater demand than two and three bedroom units. According to Street Easy,59 sales have been recorded at the development to date at an average price of $734,000 and around $920 per square foot. Another 26 units are in contract. According to Street Easy's data on the units in contract, the two bedrooms sold for an average $945,379 and $833.75 per square foot with units averaging 1,134 square feet. The one bedrooms sold for an average $666,133 and an average $713 per square foot, with units averaging 934 square feet. Please note that the square footages here may include outdoor space, I don't know how Street Easy collects its data.

So I called David Van Spreckleson, Toll's VP for the New York area to ask about the rent to own program. He avered that 10 units out of 70 remaining units in the project were being offered in a pilot program. "We wanted to see how people on the fence about buying or about moving to Williamsburgh would react to it." He also offered that 2 of the units had already been rented and the tenants were both very happy, sounding like someone expecting a couple of sales to result. As far as the workings of the program, it's pretty simple, before renting the prospective tenant must first pre-qualify as a buyer with Toll's mortgage company. The typical compexion of a loan would be your classic 20% down, but Van Spreckleson said Toll could be flexible depending on the buyers qualifications.

If the renter agrees to purchase their unit within the first 6 Mos. as tenants, their entire rent will be credited towards the purchase price. Thereafter, the amount credited towards purchase will tail off month by month. The renter's original qualification with the mortgage company will endure, unless they are laid off or have some other change of life and the renter is also free to shop for the best mortgage they can find elsewhere. The program is not being run out of the Northpoint Piers sales office but rather out of an Elliman storefront office on Bedford Ave. According to Street Easy, Lior Barak and Christine Blackburn are the agents there. Interestingly, Street Easy shows 11 units for rent at Northside Piers that appear to be in the program.

I have not heard of any other try and buy programs around town, but let us know if you have. I expect there will be more, just as we have seen a resurgence of the old "layaway" programs now being seen at retail. It's a sign of the times. I couldn't discern any obvious gotchas in the Toll Bros. program from the brief description I got, but if you do look at a rent to own program with any new project make sure to read the fine print.

NY Mag: Can This Market Be Saved

Posted by urbandigs

Tue Nov 25th, 2008 09:21 AM

A: Got some press yesterday in the NY Mag piece, "Can This Market Be Saved". It was a round table discussion on the state of Manhattan real estate, that actually lasted about 2 hours over at NY Mag's office. The article gets most of the stuff we talked about, but couldn't include everything. The main point I want to get out to readers was my opinion that we are in the 2nd or 3rd inning of a slowdown here, that the macro economic fundamentals are deteriorating here as job losses will rise, and that the market is highly illiquid right now which marks the initial knee jerk snap-down phase from peak levels! In an illiquid market, we see who is swimming naked and that is the phase we are in now. Sellers should fight denial, fight the urge to anchor to peak prices, and fight the trick of listing with a broker that promises the highest price to get you to sign that dotted line! If there is ever a time for ahead-of-the-curve consulting, now is it! Don't be shocked to see where some deals are happening at when the data filters through into the reports in the 1Q/2Q of 2009 or so.

Read the FULL ARTICLE here:



Bringing in a Buyer Broker After Viewing a Property?

Posted by urbandigs

Tue Nov 25th, 2008 08:49 AM

I'm getting busy right before Thanksgiving with buyer clients looking to pickup a deal that was trading near peak levels only 6-8 months ago. With time scarce, I just wanted to re-publish this post from April, 9th, 2008. I get approached by many buyers these days seeking services, and usually they have already seen a property or worked with a broker that they no longer want to work with; for whatever reason. Just so you know your rights, here goes. Just understand that if you have submitted a bid with a seller broker, and then try to bring in a buyer broker, it can get a bit hairy.

A: I won't go into details of my latest experience, but lets discuss a very common ethics situation that seems to pop up way too many times in the world of New York City real estate: can a buyer bring on buy-side representation AFTER they met with the seller agent? For all REBNY member firms and the exclusive listings they are marketing, the answer is 100% YES! However, the situation usually doesn't evolve as smoothly as one would think given REBNY's rules of conduct; leaving the buyer wondering if it's even worth it. Lets discuss.

ethics.jpgYou know, I must apologize on behalf of my industry to any buyer that has been put through a difficult and awkward situation because an agent at a REBNY firm won't allow you or makes it very difficult for you to change brokers and bring in buy-side representation! With that said, let me clearly point out what the REBNY rule of conduct is for member firms and their agents:


In the event that a customer has already visited the property the exclusive agent should advise a scheduling cooperating co-broker of that fact. This resolution is not intended to encourage buyers/tenants to willfully abandon one agent for another. Co-brokers must not attempt to persuade a customer to revisit a property with them rather than with the original showing exclusive agent or showing co-broker; a reshow with a different agent should only take place under circumstances in which a buyer/tenant has reason to feel abandoned or inadequately represented by the original showing agent.

In the event that this situation does arise, the second co-broker should obtain a letter from the buyer/tenant indicating that the buyer/tenant has viewed the property with one broker but wishes to return with (name of new broker). This letter should be directed by the second co-broker to the exclusive agent and the exclusive agent's manager. The exclusive agent, as the fiduciary of the seller/landlord, should do nothing to discourage or create awkwardness for the buyer/tenant.

There it is, in black & white, and couldn't be clearer!

The seller broker is probably going to do anything to convince you, the buyer, that you do not need buy side representation. It's true! Technically, you can buy a property without the use of a buyer broker. However, most buyers (especially first time buyers new to the buying & valuation process) seek buy side representation to get a trusted third party opinion of the property at hand, to get a unbiased property valuation given comps & current market conditions, and to have an agent working FOR THEM to advise on bidding strategy & negotiating leading up to accepting an offer. In addition, a buyer broker will guide you through the buying process up until closing.

In a perfect world, this situation would be accepted by all seller brokers as simply 'something that happens and is perfectly allowed' in the field. But in reality, seller brokers don't like the idea of having met the prospective buyer first and just handing them off to another broker who will come in and take half their commission away. Its understandable, humans work to make money, and in the Manhattan real estate world, vested interest often conflicts with ethical behavior.

For many first time buyers, buy side consulting is a service that is warranted. For others, it is sometimes deemed not necessary. Either event is fine by me, but what is NOT FINE is when a buyer requests buy side representation, and the seller broker makes it difficult or downright refuses to allow that to happen because they risk losing the full commission to a co-broker that would otherwise split the deal with them. That is where you see the seller broker's true intentions and I don't know who would want to work with a broker whose intentions are self-vested.

For any buyer that finds themself in this situation, you can ask your new broker to fill out the following
, you sign it, and then have your new broker fax it back to the seller broker. At that point, there is nothing the REBNY member agent can do to prevent you and your new broker from seeing the property and submitting a bid, just like you would if the new broker was there since the beginning!

ETHICS! It should be a good thing!

Douglas Heddings of TrueGotham.com has his Dirty Real Estate Tricks section especially for the purpose of discussing on an open forum the shady behavior of some agents that give rise to the overall negative reputation of brokers in general.

Citi Rescue Close

Posted by urbandigs

Sun Nov 23rd, 2008 07:59 PM

A: Don't want to talk too much about this because I laid out my thoughts on Friday in the "Citi's Death Bed" piece. As I said then, the most likely options were an AIG type rescue, a capital injection from TARP directly into Citibank, or the purchase of distressed assets by TARP from Citi's books. It appears a combination of the last two concepts will be the path taken, in a 'good bank / bad bank' type of rescue structure. We should hear an official announcement soon on what is quickly becoming, "just another bailout Sunday".

The news from Charlie Gasparino over at CNBC.com:

The U.S. government and Citigroup are working feverishly to hammer out a rescue plan for the beleaguered bank. The exact nature of plan remains unclear, but the government is leaning towards some sort of cash infusion into Citigroup. The plan will probably be a multi-layered one, which means the government could backstop losses on Citigroup's troubled assets as well. In exchange, Citi may issue preferred stock to the government.

While the Fed could buy more than $100 billion or more in the bad assets if the plan goes through, that doesn't mean it will pay Citi $100 billion, depending on the final valuation of those assets. According to people with knowledge of the discussions, the plan for Citi resembles the original TARP proposal, in which the government would buy bad assets for financial firms at some price higher than what's being offered in the market.
Citi is so large, and interconnected with the global financial system, it cannot be allowed to fail. However, stockholders should understand that they are the lowest class on the todem pole, and that the share price and their dividend are at high risk should any substantial rescue take place. Time will tell and who knows which way this could go in such a crazy market.

One thing is for sure if any deal is reached:

a) management changes should be announced immediately
b) elimination of the dividend

With the stock price trading under $4, time has run out and something had to be done. Investors had enough, pushed Pandit into a corner, and called the hand. Now its time to see what the government does to keep Citi alive, and how Citi may look after a deal is reached.

Is Helicopter Ben 'Printing Money' or Not?

Posted by urbandigs

Sun Nov 23rd, 2008 11:16 AM

A: We got a great thread going on over at Streeteasy, discussing the gold trade and whether or not the fed is really printing money or not. It's always nice to have a constructive conversation on these types of topics, without going on tangents. I'm no expert on monetary policy theory but the subject does fascinate me from a trading/investment standpoint. In some crazy way, I feel the deeper my understanding of the dynamics at play here, the better the chance I can position myself and my portfolio to take advantage of the situation I helplessly find myself in. So, is the fed 'printing money' out of thin air? Is hyperinflation the end result? Will fed actions stop the deflationary spiral? Great questions, but for now lets start with the effects on the monetary base and see if the fed is 'printing' or not.

Michael Shedlock over at Global Economic Trend Analysis, has proven to be spot on from before this crisis even started in 2007; the site is a daily must read. I want to go back to a discussion Mish had in SEPT 2007 titled, "Is the U.S. printing money like mad?":

Curve Watchers Anonymous (a group that normally focuses on the yield curve) is asking a different question today: "Is the U.S. printing money like mad?"

That's a good question so let's take a look. For purposes of this discussion we choose to define "printing money" as an expansion of monetary base money.
When most think of 'printing money', they think of helicopter Ben dropping freshly created dollar bills from the air into the economy. Well, its not that simple. When I think of printing money, I think of the actions the fed can do to inject money into the system; these include:

1) Buy Treasuries/Securities via Open Market Transactions / Repos - buying Treasuries from primary dealers, thereby exchanging 'dollars' for treasuries and injecting 'new money' into the system. With all the new lending facilities, the fed has been taking on much riskier securities as collateral in exchange for short term loans. If you look at the fed's ever growing balance sheet (now up to $2Trln), you will see that the amount of treasuries held has gone down, while the amount of riskier securities help shot up.

2) Lowering Reserve Requirements - (similar to #1) in this case, lowering reserves allows more money to flow into the economy; The fed buying securities makes the reserves go up, and thus is called a quantitative ease as the banks supply of reserves rises. Reserves are either in bank vaults or on deposit at the federal reserve

3) Lowering Fed Funds Target Rate / Discount Window Rate - cheaper money usually means more is taken out, borrowed and put into the economy. With credit deflation however, the lowering of these overnight borrowing rates have NOT translated into more loans, given the state of the banks balance sheets and the seizing up of the secondary mortgage markets where MBS were previously traded. The credit freeze resulted in banks hesitant to lend to each other or to riskier borrowers as peak credit is upon us

Back to the discussion. As the fed pursues these measures, where would it show up in the data that reflects the 'printing' effect on the money supply? Mish argues that it will show up in the St. Louis Fed Adjusted Monetary Base, which can be compared to the current CPI data to see if the fed is printing money. I am not about to argue with Mish, because I will lose, and lose bad! Back to Mish's 2007 discussion on the topic, after doing this analysis (Adjusted Monetary Base compared to CPI), allowed him to come to the conclusion that, "...Heck, the U.S. is actually printing well below the CPI". So, at the time, the answer was NO, the fed was not printing like mad!

Which brings us to today, some 14 months later. Lets redo the analysis. Here are two charts, the first is the St. Louis Fed Adjusted Monetary Base dating back to 1970:


Now, lets take a look at the % Change Y-o-Y of the St. Louis Fed Adjusted Monetary Base dating back to 1970:


Quite telling isn't is! Look at the spike in the adjusted monetary base resulting from the 18 fed credit facilities, 525 basis points of easing, and expansion of the fed's balance sheet as they dealt with this current credit crisis!

Y-o-Y Monetary Base expansion went from just above 0% to about 33% in 2008! With current CPI -1% in October, and the fed expansion of the monetary base by 33% year over year, not only is the fed printing, it seems they are printing like crazy! Quite a different environment from when Mish addressed the topic late 2007.

Now, again, I am no expert here but I dig learning and I try to absorb as much as possible when I educate myself on topics like this. But its not that cut & dry. Things like:

a) are fed actions sterilized
b) is the fed monetizing the debt

etc., are things that I don't fully understand that may play a role here in determining the full effect of the spikes shown in the above charts. That's why I blog with a comments section and encourage readers to chime in with their thoughts! In my opinion, the fed IS printing its way out of a deflationary spiral with hopes to inflate us out of this mess. The end result may be inflation without assets seeing the normal strength as they would have in inflationary periods (due to regulation, extinct securitization model, credit deflation, 10:1 leverage down from 30:1 leverage, and asset deflation's effects on investor psychology); but that is years away and the fed knows how to handle that (as painful as the medicine may be at the time). Time will tell, for now, the printing, the lending facilities, and the bailout chapters to this story are not finished. Yet the effects are already evident in the adjusted monetary base!


Citi's Death Bed - CDS Protection Surges

Posted by urbandigs

Sat Nov 22nd, 2008 09:03 AM

A: For all those out there trying to find the bottom in Citigroup shares, simply because its Citigroup, and Citigroup will always be Citigroup, there was an important lesson to be learned. It was NOT the short sellers that drove the stock to a trading low of $3.05, it was not the media, and it was not the lack of stimulus from the fed and treasury. It was the combination of too many businesses, a highly toxic balance on/off balance sheet, a severe credit credit crisis, deflation, deteriorating fundamentals, and a Dick Fuld like stance by Vikram Pandit to play tough and refuse to make any deal for the desirable Citi businesses to raise capital when they could have. Confidence has been lost in Citi's management, ability to raise capital, and future business prospects; and with the stock trading down 20% even as the market rallies 6.5%, this should tell you something!

Citi's balance sheet is a complete mess and their off-balance sheet contains over a trillion dollars of illiquid toxic assets. Citi was highly leveraged and a big player in the high risk/high reward game of mortgage backed securities that collapsed beneath them. They were stuck holding the biggest bag when the music stopped.

Now that the stock is trading under $4/share, a crisis of confidence begins and options available to management die out quickly. This is the exact same sequence of events that ultimately led to Lehman's failure, with one big exception. Citi can and will NOT be allowed to fail! A failure of Citi would unleash a credit event of gargantuan proportions onto the financial system, causing a disruption in global markets unlike anything we have seen thus far. A run on banks would occur, and put simply, the government won't let it happen.

Take a look at Citi's CDS (credit default swap) trades as of the past few days, courtesy of CMAVision.com:


Amazing. In April, I got into a argument with a commenter blasting my piece on Citi's leveraged loan asset sale, where I stated:

"...my interpretation of the Citigroup plans is much different; they had NO CHOICE, must raise capital, and what they sold off is only 25% of their total leveraged loan portfolio which has nothing to do with toxic mortgage backed securities still held on their books! When a bank or brokerage has to sell stock (whether it be common shares or preferred; hey WaMu how r u!), that is a BAD sign and a clear sign that the firm is in need of cash and fast!

This deal involved leverages loan assets, which was sold to private equity firms using, drum roll please, you guessed it....leverage! Citigroup, come on down, you are the next contestant on THE PRICE IS RIGHT! But in no way, shape, or form does this save Citigroup and in my humble opinion is a signal of the necessary capital raising efforts that will happen over the next few quarters; one could actually argue that the leveraged loan assets were the ONLY troubled assets Citi could find buyers for! Expect plenty more rounds of asset sales and fund raising efforts before the credit storm dies out; and at some point investors will realize that this is dragging along way longer than they expected."
A commenter replied:
"Noah Rossenblatt, Your right you don't know anything about legeraged loans and the like.
Citi which may have had what you continue to call call toxic paper, do not understand CITI took a write down, a write down in excess of what was necessary. By taking the loss at year end 2007, They now have a loss reserve on their books of $24 billion. It now looks like they will only use 10% of the loss reserve so they will be in a position to write up $22 of profit down the road. In the meanwhile they get a check from the US treasury for the taxes paid for the last 5 years about 15 billion which they can use as cost free capital. Citi also has the support of the FEDERAL Reserve Bank behind them. Since the Fed announcement on March 17 Citi stock is up 40% and your friend is correct. Become more knowledgeable before shooting your mouth off with such grandiose bravado, might save you from idiot status. Ass"
Ahh, I love some people who cling to hope and choose to be an eternal optimist rather than put the pieces of the puzzle together and admit that there is a problem not only with the balance sheet, but with the near term environment that is deteriorating ahead of them. Citi was trading at $23.50/share on the date of that discussion. 'Write-Ups' HA! You have got to be kidding me. Go back to that post and read the responses I made to this commenter, for an idea on how ridiculous that argument was 7 months ago. Citi stock is at $3.80 today, down some 84%. Sure, there will be a time for write-ups, but that is years away.

The options, as I see it, for Citi include:

1) a government rescue similar to AIG
2) nationalization - I view this as unlikely because it would become a credit event leading to major counterparty payouts and disruptions in the financial markets, not what we need right now
3) another round of injections from the TARP, directly into Citigroup
4) using TARP to buy distressed assets from Citi's balance sheets
5) sale of parts or whole company
6) capital raising by share dilution - virtually impossible with the stock under$4/share. This is why GE raised capital when its stock was at $21 to Buffett, they did it when it was still viable to do so
7) capital raising from private markets - unlikely, who is willing to put good money on top of bad at this point without government assurances

I think #1, #3, or #4 are the most likely options as the government can't let Citi fail. Andrew Ross Sorkin had a great piece in the NYTimes yesterday, "Shares Falling, Citigroup Talks to Government":
With the sharp stock-market decline for Citigroup rapidly becoming a full-blown crisis of confidence, the company’s executives on Friday entered into talks with federal officials about how to stabilize the struggling financial giant.Other options discussed included a public endorsement from the government or a new financial lifeline, people involved in the talks said.But after a year of gaping losses and an accelerating decline in share price, Citigroup, which has $2 trillion in assets and operations in scores of countries, is running out of time, analysts said.

But with Citigroup’s troubles opening a new chapter in the long-running financial crisis, government officials said that the Treasury Department was considering whether to ask for the second half of the $700 billion rescue fund approved by Congress in September.
Just so you can understand, Citi already received $25Bln from the first round of TARP injections. As of the close of trading yesterday, the market cap of the entire company was $20.54Bln. Talk about things that make you go hmmmmm. The problem with Citi is the balance sheet, and the assets both on & off; at a time when investment banking is all but extinct, the wall street business model dead, severe credit crisis, credit/housing deflation, severe deterioration in macro fundamentals, and leverage being taken down to 10/12:1 from 30/40:1. We know that Paulson decided against using TARP funds for buying distressed MBS, so the question is, what will Citi do with these toxic assets, who will buy them, who will take on the challenge, the debts, the toxicity?

I'm afraid that the government is the only lender with such capacity to do so. Time will tell. With gold surging $70 in the past few days, and Citi stock floundering, I get that feeling something eery is coming for this financial conglomerate.

FSBO Friday

Posted by urbandigs

Fri Nov 21st, 2008 01:46 PM

A: Just want to thank the 5 FSBO's that responded to my call for their feedback on an an alternative business model for NYC real estate. I appreciate your time. Only two wanted to take advantage of the free plug, so here goes. Please help pass the word on these two properties if you or someone you know are looking for something at this price point around the location. Enjoy your weekend all!

702 Ocean Parkway; Apt 4B


Asking Price: $449,000
Maintenance: $330/Mth
RE Taxes: $18/Mth; 15 YR Tax Abatement
Size: Aprx 1036 SFT
# Beds: 2
# Baths: 2
PPSF: $$433/per sft
Marketed By: Click To Email Owner

251 Pacific Street, Brooklyn 11201

**OPEN HOUSE: SUNDAY NOV 23rd 1:00-4:00PM**

Asking Price: $305,000
Maint/RE Taxes: $514.80
TD: 40%
Size: N/A
# Beds: JR1
# Baths: 1
Marketed By: Click To Email Owner

Corporate Credit Distress - The Next Wave Is Here

Posted by urbandigs

Thu Nov 20th, 2008 10:39 PM

A: As Paul Krugman says, "...Don't Panic About The Stock Market...Panic about the credit markets instead. Interest rate on 3-month Treasuries at 0.02%; interest rate on high-yield (junk) bonds over 20%." I'll leave it there. Other credit indicators, such as LIBOR, came in after co-ordinated fed rate cuts, the 1.3Trln CP facility, and the $290Bln of TARP bank injections. The one thing that got worse was corporate debt spreads! Wayyyyy worse!

Krugman is spot on. When 3-Mth treasuries are 0.02%, and high yield junk bonds are 20%, something is very very wrong. Take a look at the widening spreads between the Wachovia High Yield Corporate Bond Index vs. iShares Lehman 7-10 YR Treasury Bond Fund for a clue on the distress in the corporate bond market:


Stocks are the lowest of the todem pole in the investor classes. When you buy shares in a company's stock, you are the last to get fed when the food is close to running out! If corporate debt is this distressed, we should know why stocks are behaving the way they are. Fitch recently downgraded $300 Bln worth of U.S corporate bonds in Q3, and more is likely on the way as $500Bln more worth of debt matures in 2009. Ugly. Think of refinancing rates as this debt is rolled over. Debt tied to shopping malls, office buildings, and other forms of commercial property was especially hard hit, and rightfully so. This IS the next wave of the credit crisis!

Adjustment Phase Will Reveal Skinny Dippers

Posted by urbandigs

Thu Nov 20th, 2008 10:36 AM

A: As the first stage of the adjustment is underway in Manhattan, we get our first glimpse of who was swimming naked. Lets face it, Manhattan is not rampant with speculative flippers or shady subprime borrowers, but that doesn't mean distressed sellers won't rise to the surface here. With the market highly illiquid right now as buyers back off, sellers that were overexposed, over-leveraged, lost their job, bought on the currency trade with expectations to flip at a profit, or just scared about the future, aggressive price reductions are the only way to move property. As I said before, I think the level that deals are happening at right now puts the market down about 15%-18% from peak levels. Illiquidity being the main reason. Hindsight will probably show the peak being contracts signed in early-mid 2007; with delayed new dev closings skewing the actual peak.

skinny-dipping.jpgThose who signed contracts for new development as the market was near its peak, had to sit tight and wait to close on their property before putting it back on for resale; if that was the plan originally or if the plan changed during the 'waiting period'. With the credit crisis beginning in mid 2007, some 'in contract' buyers were helpless to do anything about their pre-crisis purchase other than to make the tough decision to walk away and surrender their 10% deposit.

I think we will see the sharpest adjustment from peak levels in these forced resales of very expensive new developments first. It's early in the process, as most will choose to wait for things to improve before forcibly selling their property in a tough market.

Just the dynamics surrounding the transaction process for a new development, make it the most exposed to the downturn when buyers simply disappear. Why? Because not only were these products very expensive, with closing costs some 1.5% above a resale condo's closing costs, but the contracts were signed well in advance of the closing as the buyer waited for the building to be completed. This means signing the dotted line for a product before the credit crisis began, waiting to close as the market deteriorated, and pushing back the ultimate resale until AFTER the Manhattan housing market turned illiquid. In addition, foreigners buying on the currency trade with the intention of renting out or flipping for a profit, tended to buy new developments that were marketed directly to them. Second homes and investment properties are usually the first large assets to go on sale when financial distress hits home.

For this discussion, lets take a look at Ariel West, a luxury new development in the Upper West Side that started closings in late 2007, to see what I mean.

Take a look at what appears to be the first resale at Ariel West, Apt. 7-C:

ORIGINALLY CLOSED ---> January 10th, 2008 for $1,558,000
ASKING PRICE TODAY ---> November 16th, 2008 asking $1,450,000

First let me be clear that this is NOT occuring en mass yet in Manhattan, and in fact this is only one of a few new dev resales that I am finding with an asking price below the closing price. Clearly the property is at least trying to be marketed aggressively, ahead of the curve to get a deal done. This apartment probably went into contract in early 2007, before the crisis began and reflects a price near peak levels just under $1,200 per square foot. If the seller didn't have to sell, they probably wouldn't. But as is the case even in the Manhattan market, there are always a number of sellers that must move their property.

This property is currently being listed at a 7% discount from the closing price. But where will it sell for? Its a problem of lack of bids that describes this marketplace right now. There is a big difference between what a property is asking and what it ultimately sells for, especially in a illiquid market like today. In addition, add in that the original buyer probably paid about $85,000 in buy side closing costs, and will have to pay about $100,000 in sell side closing costs (assuming 6% commission and a full ask deal), and you are looking at a minimum loss of approximately $300,000 or so on this transaction from beginning to end.

The adjustment has begun and I have a feeling we will be seeing noticeably more new development resales come to the market. Not all will aggressively cut their asking prices, as most buyers-turned-sellers will try to test the market and recover some transaction expenses in the deal. It is only when desperation hits and the property MUST be sold fast, that the aggressive reductions begin. Seller psychology is a strong force and things like denial & price anchoring tend to take over their minds at first. Nobody wants to hear that the market has weakened or worse, that the market has become illiquid. Nobody wants to hear that they may have to take a loss on the property. Nobody wants to hear at what price will result in a quick sale. My mother sold her house on LI after 11 months at a 25% discount to where the house was selling for in late 2005. It took here 7 months to realize the reality of the situation, at which point, it became a process of finding out where 'true value' actually was. In declining markets, this process is painful, emotional, and feels like it will never end.

The market does what the market wants and nothing I say here will change that. I just tell it like I see it, regardless of how that may affect my own personal business. Right now, we are in the process of finding out what the market feels is a proper valuation for an apartment in a market with clear near term challenges. And nothing I say here will change this or enhance this process. In other words, me writing this article is not the reason any apartment is not selling for a higher price!

My advice to sellers:

a) fight denial and recognize that the market has changed; this is the first step
b) do NOT anchor to peak prices; this will be counter-productive
c) do NOT believe any broker that promises you an extraordinary price because they are the best and they know how to market a property the 'right way' to get 10% more profit than other brokers. In the end, buyers dictate the value of your property and it is only worth what someone is willing to pay, NOT what a broker working on commission trying to get that exclusive listing agreement signed says its worth
d) price ahead of the curve; rather than test the market and play catch up via reductions as inventory rises and the local economy deteriorates further
e) only YOU know how quickly you must sell, so do yourself a favor and anticipate a longer time on market if you start at a higher price. The last thing you want is to put yourself in a position where the property must be sold within 1-2 weeks, because you tested the market first and wasted valuable time that you could not afford

If you have to sell, you have to sell. Period. Hopefully you have enough equity in the property so as to cushion the blow to your originally expectations on what your place is worth. Every seller, including me when I sold my place, thinks their place is worth top dollar because of the renovation work you did and because of the memories experience in your home. Buyer's do not care about your memories, they rarely love every single renovation you did and often have plans to change the place to their own taste, and are very savvy about what is going on right now in the world. The greater fool theory should not be counted on to save you and procure a deal above peak levels. Its a slowdown, it has to happen, and there is nothing wrong with discussing it openly. Adapt accordingly and don't fall for any dirty tricks.

Legalize Pot To Fund The Rescues? Pam Says So!

Posted by urbandigs

Wed Nov 19th, 2008 05:30 PM

A: I am a fan of Pamela Anderson. She makes the best amateur movies. And she has the best ideas! To help fund the rescue of Corporate America, lets legalize marijuana and use the tax proceeds towards mortgage backed securities for a few seeds on the dollar! Then we can really say the banks executives made the money go 'Up In Smoke'!! Go PAM!

pamela-anderson-legalize.jpgVia PamelaChannel.com:

"I think we should Legalize Marijuana, tax and monitor -farm Hemp etc-this would make our borders less corrupt and then I think eventually this will be more secure option and save children in the long run – we should be able to farm Hemp in America- it’s just silly— it would create jobs- and be good for environment."
Okay, so Pam didn't explicitly say to use the taxes on legalized reefer to fund these bailouts, but is the idea so far fetched?

Go smoke a jiffy and think about it! After today, a little humor doesn't hurt!

Citi Under $7/Share

Posted by urbandigs

Wed Nov 19th, 2008 03:12 PM

A: These are truly crazy times when Citigroup shares trade below $7/share. You mean, having more than 1 trillion in off-balance sheet toxic assets means something? Citi's market cap is now under $40Bln..Hewlett Packard's market cap is now more than 2X that of Citi's!


The gov't simply will not allow Citigroup to fail, but even knowing this it is amazing to see the stock price so distressed. Its not surprising, its just amazing. I mean what would happen if Citi failed? Could we even imagine the effects on the financial system around the globe? The confidence shock? As it looks right now, the stock is headed quickly towards zippo! Is it possible?

Citi already announced major job cuts, and other organizational changes, but clearly the toxic balance sheet + news that the TARP will not be buying distressed mortgage backed securities + no market for these securities + very difficult credit environment + inability to dilute shareholders with stock at $7 + dead investment banking model = bad news for the lowest of the todem pole investors; the shareholders!!

Should the gov't allow GM/F/Chrysler to fail, what will the ramifications be on the issuers of credit default swaps that pay out with such a credit event?

Realogy Now on Endangered List

Posted by urbandigs

Wed Nov 19th, 2008 09:15 AM

A: Realogy was taken private by Apollo Management in a $6.6Bln LBO, from NRT last year. Talk about ill timing. Realogy owns prized real estate brokerage brands Century 21, Coldwell Banker & Corcoran. This will be one of the side effects of the credit crisis / severe economic slowdown on both the country and our local Manhattan real estate marketplace. As sales volume falls, and stays low for the foreseeable future as the 'real' effect of the crisis starts to hit home in Manhattan via job losses, budget deficits, and bankrupt retail stores, expect the commission based real estate model to contribute to a significant portion of agents 'dying out'.

180px-Dilophosaurus.jpgAccording to Crain's "Seven area firms make endangered list":

"The most vulnerable, according to S&P, include Realogy, the Parsippany, N.J.-based owner of such brands as Century 21 and Corcoran Group. The firm, which was taken private last year by Apollo Management in an $8.8 billion leveraged-buyout, has struggled mightily amid the housing crisis. Last week, the firm warned that it’s at risk of violating the terms of its bank loans and is trying to swap $1.1 billion of bonds for new debt at a discount.

A default does not necessarily mean the end of a company. Traditionally, many companies in default have been able to negotiate new debt terms with their creditors. But with so many defaults looming, experts warn that fewer companies will be able to restructure their debt. As a result more of troubled firms could wind up in bankruptcy court and being liquidated."
Bloomberg chimes in:
Parsippany, New Jersey-based Realogy, purchased for $6.6 billion in April 2007, is trying to reduce debt by almost $600 million. Standard & Poor's slashed Realogy's corporate credit rating to CC from CCC last week. A CC rating means a company is "highly vulnerable" to missing a payment.
Realogy's bonds are tumbling, as the company reported about $200Mil in losses over the past 3 quarters. The company is now trying to exchange around $1.1Bln in existing bonds at a discount for new notes, to stave off a potential default. If they are not successful, they could be in violation of the loan's covenants under the senior secured credit facility.

I discussed the LBO Buyout Boom as a Reason To Worry way back in June of 2007, as cov-lite (great for borrower, bad/riskier for the lender) deals were being done as LBO deals started to dry up after an unsustainable buyout boom:
"My Point - Forward thinking. I am by no means an expert of leveraged buyouts, credit risk, derivative products, cdo/abx markets, etc.. However, it doesn't take an expert to see how the industry adapts to continue to be able to lend to support such massive buyouts in the private equity sector. I'll repeat this again --> Right now you are seeing an environment that is a result of years of ultra cheap money and tons of liquidity. What is yet to be seen is the effect of globally rising interest rates to levels we see today; that will take 1-2 years. For the near future, I don't think the end result will be that bad, in fact I think the environment will remain bullish for some time. However, red flags are waving for the years to come when we will be able to look back at how many of these massive buyouts were successful, and how many caused major problems to banks and other lenders"
The brokerage model in Manhattan is mostly commission based, with agents earning their $$$ at the closing of a deal. When that check is given to the agent, it is made out to the employing brokerage firm; i.e. Halstead, or Corcoran, or Elliman. The employing brokerage firm then takes their portion (usually between 50%-70% based on production), and then cuts the agent the remainder about a week later. A real but dirty way to look at this model from the employing brokerage standpoint is that you have 'X' number of rats running around the city, bringing cheese (the deal) back to the home base! Yes, that means I called myself a rat! I told you it was a dirty way of looking at it!

The analogy is accurate though. The more agents you have running around bringing cheese back to the home base, the more potential profits the firm can make. A firm with 1,000 agents will likely earn more than a firm with 200 agents; some firms base their model on quality, and not quantity and that is what I found from the private firm of Halstead, whose sister company is BrownHarrisStevens. Ideally, you try to hire the most 'connected', 'educated', and 'networked' agents possible that can generate deals quickly and continuously; but of course this does not always happen in a low barrier to entry business.

In a market with declining sales volume and prices, this model becomes VERY pressured. I expect the # of agents who work solely on commission as their full time job to shrink drastically over the next few years. The strong will survive, the weak will die out and look for new jobs. It's an inevitable side effect to a market experiencing less total sales volume and declining prices. Which begs the question, will a new model emerge? I brainstorm this potential daily.

Bank Loan Stats: The Good, The Bad & ........

Posted by jeff

Tue Nov 18th, 2008 04:42 PM

The Federal Reserve's survey of loan quality for U.S. commercial banks is in. Bottom line, it's still all about residential housing delinquencies and charge-offs, which remain ugly and are killing the banks. Surprisingly to some, credit card delinquencies and losses are holding up reasonably well, and while we continue to see some erosion in the commercial real estate market, it is not yet the debacle some have been expecting. Overall, the pain has not ratcheted up to quite the early 1990s level....a time those of us who can remember try not to. So let's dive into the data, but first just a reminder about why we consider these somewhat lagging data (all the banks who give this data to the feds have already reported it publicly when they reported earnings) to be of particular importance in this credit crunch. Remember that these days banks can lend money in two ways: first, they can make old-fashioned loans, which they hold on their books. Some of these go delinquent and if the borrower does not cure their delinquency they eventually default and the loan is charged off. Secondly, they can make loans, bundle them together and sell them off to investors. If they keep any part of the CMBS security they have manufactured for themselves it is held as a marketable security. In some cases they got stuck holding CMBSs they assembled and were about to sell into the market, when the credit crunch hit. In other cases, they bought CMBS securities from other banks to hold as investments. Generally, in these cases the bank is forced to mark the securities to market whenever a trade is reported, the way they would any other stock or bond. If the security trades and a new price is established in the market, the bank's position must be marked to that value. In the case of whole loans held to maturity, the bank does not take a write-down until the borrower goes into delinquency (even then, banks have flexibility with regard to how they value the loan). Even when a loan is charged off as permanently impaired, the bank may still eventually reverse the charge off, if, when it sells the underlying property collateralizing the loan, it gets back all of the money owed to it. Believe it or not this does sometimes happen. In the 1990s, many loans that were charged off eventually brought in greater proceeds when the property was sold and the charge offs were reversed.

One of the biggest debates in this credit debacle has been whether the hellacious markdowns being experienced in the CMBS market accurately reflect the future actual losses that will be realized on the underlying loans and real estate. This is still an open question as the markdowns continue to get worse. By looking at the whole loan books of banks, we can get some insight into just how many borrowers are actually going delinquent on loans of various types. So here we go.


First some good news. As you can see from the chart above, although credit card delinquencies are rising somewhat, and have reached prior recessionary levels, they are by no means skyrocketing. The latest click came in at 4.9% of credit card receivables outstanding. In Q3 of 2001, during the last recession, this figure hit 5.1%, while the high water mark in the recorded data was 5.41% reached in Q3 of 1991. So while you may be reading about American Express and Capital One taking TARP funds, it's not because the consumer is all of a sudden defaulting on their credit cards left and right. The credit card companies saw the economic problems coming 12 months ago like everyone else and they started to reduce borrowers' credit lines, boost interest rates and penalties, etc. They essentially sent the message out that they did not want people running up debt, which they might later have trouble paying off. Since credit card debt is a short-term smaller liability, if you start managing things a year ahead of a recession, you can actually batten down the hatches pretty well. While there is no doubt things will get worse here, it looks to be reasonably well contained and "normal for a recession" so far.

Where American Express has a problem is that it was not a bank and it funded new receivables by selling off existing credit card receivables to investors in the ABS (asset backed securities) market, which has completely seized up. So American Express is buying a bank and taking some TARP funds. Capitol One, in comparison, bought a couple of banks in the last couple of years (the old North Fork in NYC for one) and they are taking TARP funds just to give themselves even more liquidity and flexibility. Frankly, with everyone becoming a bank these days, the fight for deposits used to fund these other businesses is going to get nasty and raise people's costs of funds.


I am pleasantly surprised by the commercial real estate data. Commercial real estate loan delinquencies rose 49 basis points to 4.52%, nothing to cheer about to be sure, but while it's still reasonably ugly, it is not going ballistic at the rate it was two quarters ago. Between Q4 2007 and Q1 2008, delinquencies vaulted 97 basis points. However, delinquencies are back to levels not seen since late 1994. I still believe there are some big shoes to drop here. Right now, however, it's hard to see commercial delinquencies getting to 10 percent plus of commercial real estate loans in this cycle, as they did in the early 90s.


BUTT UGLY! those are the only words I can use (in public) strong enough to describe the chart of residential loan delinquencies above. Residential delinquencies hit 3.64% of all residential loans in Q1 2008, and that was the highest figure for as far as the data go back - Q1 1991. Now remember, these are the residential loans that banks chose to keep on their own, books as opposed to selling into the secondary market. Now for those pups out there who don't remember the last real estate cycle, it included a rolling residential recession that struck Texas, Oklahoma and Colorado after the late 70s/early 80s oil boom went bust. It then went on to strike southern California, in part due to defense industry consolidations, and eventually it hit New England and the Silicon Valley area, following the mid to late 80s tech venture bust. So the high levels of delinquencies experienced in the early 90s were actually sustained throughout much of the late 80s and into the early 90s. However, the firestorm that has raged across the country looks to be of a whole different proportion. Residential delinquencies jumped 47 basis points from 3.64% to 4.11% between Q1 2008 and Q2 2008. In Q3 they leapt another 100 basis points to 5.11% - stratospheric vs. the prior highs. Let's hope the feds figure out some kind of plan here and start working it....cause as Tuco says: "There are two kinds of people in the world, my friend. Those who have a rope around their neck and those who have the job of cutting."

Now I don't have the figures on what percentage of bank loans are residential, versus commercial loans, but my wager is that the former is significantly larger than the latter. I will be investigating this further but if any of you brilliant and good looking Urban Digs readers does know the answer, please save me some work and leave us a comment. In any event, the commercial loan losses that did in the banking system last time around will not likely be matched this cycle. But we have busted out to new highs on residential delinquencies and we are accelerating, it could be just as bad. We can get a little insight from the total delinquencies data, below.


Even with the soaring residential loan losses, the total loan delinquencies as a percentage of all loans has not come anywhere near the levels of the early 1990s. In Q3 2008, total loan delinquencies stood at 3.64% of all loans, up 49 basis points and an acceleration from the 26 basis point rise in Q2. We are at the highest level since Q3 1993, but well below the peak value of 6.33% of all loans seen in Q1 1991, when the banks truly were all busted.


Interestingly, the charge-off data is available all the way back to 1985. Despite the much higher percentage of delinquent loans seen in the early 90s, charge-off levels are already back to the 1.4% plus range seen back then. I suspect that it may be because banks are being more pro-active about charging off bad loans this time around, but I can only speculate. A big question will be what the ultimate recoveries will look like in commercial real estate. I will wager they will be much better. With regard to residential recoveries......well, that could be a problem.

Manhattan FSBO Survey

Posted by urbandigs

Tue Nov 18th, 2008 10:30 AM

A: Some questions for all the Manhattan FSBO's out there. The only agenda here is to get insight into the marketing services you would like to see offered to you that is fair and beneficial both to you and the firm providing the services. No comments will be publicly displayed for this. Instead please email me (email address below) and I will incentivize participants with a plug for their property on this blog via a post on Friday. Thanks!!

fsbo-nyc-real-estate-apartments.jpgFor Sale By Owners, there is no agenda to procure an agreement to list your property for sale. This is simply a survey to see what services might be of assistance to selling your property, for an idea way way down the road.

If you are selling on your own, I have a few questions for you. Please email me at nrosenblatt + 'at sign' + halstead.com for a few minutes of your time. Thanks in advance!!

For all FSBO's that reach out to me to participate in the survey, I will include a listing description of your property for sale, a picture of your choice, and advertise any OH you may have on Friday, and leave the post up at the top of UrbanDigs.com for the entire weekend. UrbanDigs.com receives around 4,500 unique visitors on weekdays, and around 2,800-3,000 unique visitors on weekends. Please pass the word if you know someone trying to sell on their own that may not know of this blog. THANKS!!

Lets Discuss 'Priced In' From A Traders Perspective

Posted by urbandigs

Tue Nov 18th, 2008 09:46 AM

A: Forget Manhattan real estate for a moment. Lets talk about the equity markets and I want to talk about some of the 'feelings' I'm getting and anyone out there into this stuff can tell me what you're feeling. In February, I did a different type of post ("Sometimes We Get Lost In The Dark") with the same idea to describe the 'feelings' I had in my gut, the Dow was 12,381 at the time and the S&P's at 1,353; ahhh the good old days. Since that post, the Dow is down 33% and the S&P's are down 37%; so have equities re-adjusted enough?

Unfortunately, probably not but the pricing in process is in full force and is likely much closer to the end than the beginning. A glimmer of hope I guess, but I fully expect the markets to make new lows; especially if GM/F are allowed to fail and another credit event / confidence shock occurs. I do believe these guys should go into bankruptcy protection and re-structure to do the things necessary to solve the problems that led to their demise; but will gov't allow this near term disruption that brings with it so many more job losses? The whole thing is a mess and recall what I stated in the "Sometimes We Get Lost In The Dark" piece nine months ago:

No matter what you hear about this current situation, we can't argue that we are in a period of de-leveraging. Risk is being repriced and the credit markets are in shut-down mode as the industry around it attempts to corrects itself. Games that worked before, do not work now. And since housing is illiquid and nobody knows how Americans will be impacted by any economic slowdown, which few deny is here, it is impossible to predict the short term bottom for prices.

We don't know what other obstruction may pop up. We don't know the level of certainty or uncertainty that this information will bring with it. So we look to the stars for some sense of direction. The stock market is the stars, and is the tool that most use to figure out where they are when confused, or lost. But in this unchartered world where we don't know what lies ahead, this widely used, widely publicized vehicle is not a very good navigator for one real reason. Stocks trade on information available and investor sentiment for the near term, lets say the next six months. If the world around us slows and earnings come down, then the entire valuation model of equities (p/e) will have to re-adjust to the weaker times that we know are about to come.
Okay. That was my gut around nine months ago. I call the stock market the stars because that is the investment mechanism with the most reach around the country that generates positive & negative wealth effects; most have some exposure to the stock market as opposed to say buying corporate debt. Now when I look to the stars (equity markets), I see a different constellation. A smaller one. A less distinct one. Its hard to make it out, but its there with some imagination. Uncertainty reigns supreme and stocks are pricing in the challenges ahead with the information at hand.

In terms of how this affects us, confidence will remain low as long as stocks remain low and jobs are being shed! These two forces...

a) one's portfolio; which likely took a huge hit as equity markets plunged
b) one's primary source of income; which is likely significantly more uncertain today than 12 months ago.

...are vital to the confidence of any one individual. They say its a recession when your friend loses their job, and a depression when you lose your job. The psychology is accurate. Fact is, stocks will price in the worst possible outcomes well before the officially declared unemployment rate hits its peak and GDP rebounds and stays in growth mode. So for sake of this discussion, lets look at what the stock market has done and the phenomenon of 'priced in'.

First lets clear up what the stock market is. The stock market is a discounting mechanism that is not rational and attempts to value the security price of a corporation's health & future prospects with the information at hand at that time. Which brings us to the trading term 'priced in'.

'Priced In': simply refers to the point at which a stock's price has reached a level which takes into account the positive or negative information at hand and the uncertainty or certainty that may ahead. The more uncertainty there is, the longer the pricing in process lasts; and vice versa. The stock market is not perfect, and the stock market is often wrong as it was in late 2007 in pricing in the severity of this credit crisis and I expected an adjustment. Now, you can define 'priced in' a variety of different ways, the end point is all the same. A good example of 'priced in' would be when a company announces horrible news, yet the beaten down stock rises after the news is released. The flaw remains with the fact that the stock market is an irrational discounting mechanism that is imperfect in its calculations.

Todays example: HEWLETT PACKARD - Like most stocks, HPQ was sold off in the past 3 months as uncertainty and negative news gripped the markets. Stocks priced in this uncertainty and lower profit potential as the slowdown spreads globally. Margin calls and forced selling enhanced this process making it very painful for everyday investors. HPQ's stock fell from 49 to just under 30, as traders priced in the potential hit to this tech powerhouse. This morning, HPQ delivered solid earnings and provided guidance into 2009's expected EPS that came in above analysts dampened expectations. The result is HPQ's stock price is trading up about 12% as traders remove the previously priced in uncertainty, and now attempt to price in the clarity provided by the corporate guidance. Now, will it hold at these levels?

So, have stocks 'priced in' the current wealth of negative news and uncertainties? Probably not, but we are well on our way in the process. The adjustment hurt alot of people, hedge funds, and asset managers. At some point soon we are likely to see a bear market rally, or Elliot wave countertrend rally, or whatever other technical term you want to call it. The end result will be the same; negative news will come out and stocks will rise leaving few wondering why. That's the irrationality of the markets and the phenomenon of 'priced in'. As smart as some people are, this irrationality and mysterious point at which traders think the stock is 'priced in' makes even great trades go wrong at times.

We are reaching the latter stages of government and fed intervention and soon we will be at a point where no more can be done; leaving the stock market to handle negative news on their own. Pity the stock market. Its been about 15 months since the fed started slashing rates, and it takes about 8-12 months for each cut to funnel its way through the economic system. So, for the next 8+ months or so, the system will start to see the benefits of rate cuts occurring up to the very last one in mid-October bringing the FFR to 1%. But this won't stop the deflationary forces from doing their damage and bringing deteriorating economic data for the most of 2009; this is what I believe is not 'priced in' yet. Time will tell.

Translating this to Manhattan real estate, you need to look at the buy side paralysis that came once the stock market sold off big time in October! Why? The credit crisis was in full effect for 12 months already, and the damage was mostly done. What took so long for buyers to realize this? The answer lies in the stock market, the so-called stars! Although the macro economic data was quickly deteriorating, and deflation taking hold, most buyers didnt feel hurt because their portfolio's only declined say 10% or 15%. But once the plunge began, and stocks fell closer to 40%, that is when it really hit home, headlines took the front pages, and buyers took a big step back! The end is near many thought.

Amazing, but not surprising. If stocks have a bear market rally up 15% or 20% from these levels, I guarantee you some buyers here in Manhattan will feel more comfortable with pulling the trigger; leaving out right or wrong, that is just the way it is. If you plan to buy, and you have the means to buy, and you feel wealthier because stocks just rallied, you may feel more confident in bidding. Transaction volume is not going to zero, but it is going to be well below what we got used to over the past 3-4 years as the after-effects of this slowdown hits home here in Manhattan. Adjust accordingly and know that many are continuing to look to the stars to time their re-entry into the real estate market! When they feel better, and stocks rebound, confidence will rise and a decision might be made. While my thought is that this is the wrong way to view a Manhattan real estate purchase, this is how many make decisions. Since stocks are irrational and often wrong, they should not be viewed as the indicator to guide you on a real estate investment! But for most, they do.

Renovation Projects: Pros and Cons

Posted by Toes

Mon Nov 17th, 2008 11:41 AM

Hi! Christine Toes posting... I enjoyed reading Noah's renovation post last week and wanted to add some personal perspective. I have been through renovations for an alcove studio co-op on the UES, a three story townhouse investment property in Brooklyn, and am in the middle of a partial renovation of a one bedroom co-op in the W Village.

Co-ops require the use of licensed and insured workers. I needed to get the townhouse up and running so I could get renters into it asap. So I used a contractor for all three jobs, none of my own elbow grease.

So here are some numbers for you. My E. 63rd St apt was a learning experience for me, so not my best investment but I was still happy with it:

440 sq ft alcove studio. Paid $310K in July 2006. Needed new kitchen, new bath, closets, floors, painting. Total cost of labor and materials including marble bath w/ Kohler fixtures + granite/stainless kitchen was $30K. Think "GE" quality appliances (or something even less expensive) for an alcove studio. Anything too high end and you will not recoup your costs! Having at least one "brand name" to catch people's eye in a property description never hurts, but don't even think of putting a SubZero refrigerator in a studio or one bedroom co-op apartment in a 1960s building.

Time it took for board approval and the renovations to be completed: 12 weeks (mortgage + maintenance was approx $2,200/month, so figure $6,600 spent for carrying costs). My contractor was terrible, which cost me at least a month of time.

You may have to pay "double rent". I have the luxury of having a father in a rent stabilized 2 bed in Stuy Town, so I spent 3 months in a twin sized bed in the apt I grew up in. My dad is a saint and let me stay there rent-free (my dad rocks!). Luckily I didn't have much furniture, so I spent $75/month on storage.

The apt was in a landlease building and the land rent was going to be renegotiated in 2009. It was looking like the maintenance was going to go up a lot, plus I learned a huge lesson with the move - the Upper East Side, while lovely, is not for me. So in June 2008 I decided to get out, thinking I might move to my house in Bed Stuy for a while if one of my tenants moved out. I sold the apt for $400K two years after buying it. So here's the math:

$30K renovations
$6,600 carrying costs while apt was under reno
$225 storage
$3,700 closing costs + attorneys fees (co-op closing costs are much lower than condo closing costs)

$24,000 brokers fees (I made about $9K of this back but lets say for demo purposes that I didn't)
$1,500 attorney fee (actually he discounted it to $500 b/c I have used him so many times & now that we have done this a few times, he doesn't have to do any hand-holding. Usually you are going to pay at least $1,500 for an attorney for a studio, so let's use that number)
~$19,300 NYC and NY State transfer taxes (1.425% of sale price) and other closing costs

Total expenditures = ~$85K

At the time of the sale, the mortgage was approx $235K since I had paid down some of the principle over the two years. So I netted ~$17K (plus the $9K back b/c I am a broker, but again, I'm not counting that here), which may not seem all that exciting at first glance. But I also received tax benefits for the mortgage interest (about 85% of the monthly mortgage payments for the first few years of the mortgage) and 45% of the maintenance payments. Those tax deductions were over $16K in two years. So I consider my "profit" to be more like $33,000.

One last point to consider (although I am not using this in my calculations anywhere) is that I also looked at subletting out the apartment and had an offer of $2,400 a month to sublet it, so my monthly costs to own were actually less than what I would have paid renting the same apartment after the renovations.

Figuring out the opportunity costs of the up-front $62,000 down payment + the up-front ~$40,000 renos, carrying costs and purchase costs depends on the rate of return you think you would have been getting. Let's say I would have made $11K on my $102K in 2 years (some people have sadly lost 30% of their stock portfolios in the last 6 weeks, so I'm estimating a conservative investment vehicle).

So say my true profit for buying and fixing up an apartment and living there for two years instead of having the $ sit in the bank for two years and renting instead was $22,000. With total expenditures of $85,000 and opportunity costs, I "made" a 25% ROI in two years.

As a real estate agent, this was an invaluable learning experience for me & I actually found it fun. My favorite part of the experience was getting to renovate something to my own taste. I was so happy to come home to my "own" apartment! But I was also careful to keep the resale in mind and do something that other people would like without going too high end. It is a huge annoyance to walk into a "renovated" apartment and hate the renovations. You have to be careful not to add too many "bells and whistles" or to go too crazy with gold fixtures, pink marble, etc. Look at new condos and condo conversions, aim for finishes that are timeless (but potentially not as high end, especially for smaller spaces), and at least most buyers wont think they need to rip everything out and start over!

Toes says
: If you love the "bones," don't be afraid to take on a renovation project if the numbers make sense to you. Plan to live there for two years to avoid gains taxes. Keep an eye on whether a building has a high "flip tax."

Toes says
: Manhattan is not a great place to try to buy and flip something, especially when buy side demand is softening. The entry and exit costs eat too much into profit margins. In addition, c nstruction and moving costs here are relatively expensive.

The Devil's Bargain 2.0

Posted by jeff

Sat Nov 15th, 2008 03:31 PM

Devil%27s%20Fiddle.jpgI have pointed out several times in the past that the US credit crisis was actually a world credit crisis and that at least some of the emerging market economic miracle, commodity bubble and private equity-real estate boom was a mirage fueled by an excess of money and mis-allocation of capital. In my view, the latest leg down in the economy and markets is in part a recognition of this issue and its impact on corporate profits. As I read up on the latest developments around the globe and started to delve a little more deeply into the havoc being played by the receding tide of optimism and easy money, it struck me that all of the self delusion about the new world order was actually a Faustian bargain between East and West. It allowed eastern economies to climb out of the 3rd world on the back of western consumers and infrastructure building, and allowed western consumers to continue to sustain unrealistic wage levels and living standards from Wall Street to Detroit to Stuttgart. It also resulted in the concentration of wealth among titans of industry and finance worldwide in a way not seen since before World War I. I believe that this bargain will actually stay in place to a great extent, but it will be altered in fundamental ways that are very difficult to predict at this time. It would seem to me though, from the numbers I will share with you below, that it is the West that should be engaging in infrastructure building, while the east should provide the tax cuts ands other stimuli to consumption. Clues regarding whether world leaders begin to get this should start to be forthcoming soon. So let's take a little tour of the goings on around the planet and the various imbalances to be addressed.


Plump with oil profits, Russia's oil profits reserve fund, which was held aside for a rainy day, reached $130 billion as of November, according to an article by the Associated Press, which also noted:
"State-owned VEB bank, which is acting as the government's lender of aid packages to other Russian companies and banks, said Wednesday it has received requests for $75 billion as companies try to refinance their foreign debt." In order to try and stabilize the Ruble, the Russian government has already plowed through $112 billion in currency reserves (leaving the total at $485 billion) and is now trying to help cushion the currency by cranking up interest rates......they raised their key rate a full point to 12%. This should do wonders for domestic economic growth at a time when, according to the CIA FactBook, "Despite Russia's recent success, serious problems persist. Oil, natural gas, metals, and timber account for more than 80% of exports and 30% of government revenues, leaving the country vulnerable to swings in world commodity prices. Russia's manufacturing base is dilapidated and must be replaced or modernized if the country is to achieve broad-based economic growth." A few other facts jumped out at me. Gross fixed investment was an estimated 21% of GDP in 2007 and has been growing 10% per annum, meanwhile 15.8% of the population lives below the poverty line. While GDP per capita has risen to $14,800 (near the $15,000 mark that conotes "first world" status), the formerly communist country has already seen consumption by the top decile of income earners rise to 30.4% of total consumption, while the bottom decile consumes just 1.9%. Russia is a resources-dependent, top-heavy empire on course for a major re-balancing. Meanwhile, their oil reserves are on an inexorable decline. The stock market, which had a value of over $1.3 Trillion in 2006, has lost $1 trillion (with a "T") of value since Dmitry Medvedev (whose name appropriately derives from the Russian word for "Bear") took office last May. Fortunately for the U.S., Russian bankers are said to be wary of lending, even to Russia's degraded military industrial complex, which is threatening plans the country had for upgrading its defense programs and exporting more weapon systems. According to an article in the Moscow Times, Yevgeny Primakov, head of the Russian chamber, said private banks "ceased to be solely commercial" when they accepted state money. "We need to demand that they do what the government and the society require -- demand is the word," he said. Primakov, who led Russia's government as it emerged from its previous financial crisis 10 years ago, said a "state dictatorship" was required to ensure that tens of billions of dollars flowed through banks to their intended recipients in industry. Even a bear doesn't change its stripes. Primakov also railed against businessmen who were profiting from relationships with corrupt officials, stating "No one should get rich in a crisis. Some things that might have been forgivable in another situation cannot be overlooked now," The coming reform could be complex, shall we say?


Just days after announcing a $586 billion stimulus program (only a small dent in their foreign currency reserves of $1.5 trillion), Premier Wen Jiabao of China pronounced the effect of the world financial crisis "worse than expected." I wonder what he will do when he discovers it's "Really really bad!" After a couple decades of holding China's currency down in order to boost exports, while financing feckless American consumers' purchases of doo dads and other melamine enhanced and lead-painted brick-a-brack, China is finally going to try to stimulate domestic consumption. However, press reports suggest that in particular they are going to recycle a bunch of their U.S. dollars in order to build a bunch of stuff (domestic investment is already a titanic 43 percent of GDP). In the past, such infrastructure projects have often been associated with "image" projects and have included duplicating existing infrastructure, according to a recent article in the China Daily. This may be good for the industrially heavy Chinese economy, which constitutes 48.6% of GDP. In contrast, 40.1% of GDP comes from services, and 11.3% from agriculture. A little wrinkle here, though: 43% of the jobs are in agriculture, 32% in services and only 25% in industry. Maybe they should focus on improving their farm productivity? About 20% of the population lives below the poverty line and per capita GDP is $5,400 per annum. Amazingly, China is even more top heavy than Russia and the United States in terms of consumption, with the top decile of wage earners doing 35% of the consumption and the bottom decile 1.6%.

Imbalances in the economy are now turning into "low level unrest," as exemplified by the recent taxi strikes, according to the Economist. Other examples of workers demanding fairer treatment can be seen here.

Interestingly, unrest in China that resulted in a disturbance in industrial production would actually be a significant negative for US and European companies. According to an article on the Washington Post.com, "a large share of both European and American corporate profit growth in the last decade has stemmed directly from their ability to assemble goods at low cost in China and sell them for a markup in the developed world. Most exports from China are actually produced by European and other foreign companies, not by domestic Chinese companies. "Made in China" does not necessarily mean "Made by China." In fact, from a share of 2 percent in 1985, aggregate exports of foreign-owned subsidiaries accounted for nearly 60 percent of China's total exports in 2006. While Chinese manufacturers generally subsist on razor thin margins, Western companies are often able to sell consumer goods in Europe and the US for significantly higher profit margins, with the Western consumer eating the difference."

Still, at 37.5% of GDP in 2007, China's addiction to exports should not be under appreciated. Just after announcing the domestic stimulus plan, the State Council announced a plan to increase tax rebates on 3,770 export items, or 27.9 percent of all products shipped by China, according to the AFP news service. The pain that is being felt in China is already substantial, with reports of millions of migrant worker jobs being lost as plants fold left and right. The story of Tao Shoulong who ran China's biggest textile dye business, burned his company's financial books, sold his gold memberships and disposed of his Mercedes and ran away leaving corporate debt of $200 million is one of the more stark illustrations of how quickly businesses run on razor thin margins and over-leveraged can collapse.


In a letter to his conglomerates' CEOs, the Chairman of Tata group recently warned that a downturn in business lasting at least a year was in the offing and that capital expenditure projects and acquisitions needed to be put on hold, while operational expenses need to be severely curtailed. He expressed concerns about the ability of the country's many smaller enterprises to access funds to run their businesses. Meanwhile, the top 40 richest Indian's have reportedly experienced a 60% mark to market on their net worths. Don't feel too badly for them, as they still have $139 billion to play with, while 25% of the population lives below the poverty line. In contrast to China, India is a services-driven economy (however, the services are also exports, in that in many cases they are sold to foreign corporations). Services constitute 52.8% of GDP and provide 28% of the jobs (as of 2003; likely higher today). In contrast, Industry is 29.4% of the economy and just 12% of jobs. Like China, India has a significant population of indigent farmers. According to the CIA Fact Book, the agriculture business constitutes just 17.8% of GDP, but 60% of all jobs. Powered by its services business and exports of its industrial companies that have also benefited from infrastructure growth, India has built up $275 billion of foreign currency reserves vs. its $149.2 billion external debt. Domestic gross fixed Investment in structures is a large 33.9% of GDP. Cutbacks at the IT outsourcing firms that have catalyzed growth away from the investment in internal infrastructure appear to be in the offing, according to a Financial Times article entitled "India Inc must cut cost to survive economic crisis".

Linda Yeuh, an economist at Oxford, had this to say in a BBC article about emerging economies' potential to spend some of their foreign currency reserves by helping western countries through the financial crisis, if only in the name of self interest.

"By recapitalising the West, China and other emerging economies can preserve their export markets by helping the world's richest economies weather the storm and prevent a drawn out recession, or even depression. Belt tightening by western consumers is still necessary and will happen but a long period of austerity can be avoided. China, and emerging economies, contributed to this crisis and are suffering the consequences as their financial markets and export sectors decline. They can also help resolve it."

I believe that one way or another China, Russia and India will spend a large portion of their currency reserves trying to keep their economies going and/or bailing out the West. This is because the dangerous imbalances in these countries are not going away anytime soon. If they hope to help themselves, they will be forced to continue to subsidize western governments and consumers, while they work to bring their economies forward on a sustainable basis.

Just a few stats on our own country for comparison.


Agriculture: 1.2% of GDP and 0.6% of jobs; Industry: 20% of GDP and 22% of jobs; Services: 79% of GDP and 77% of jobs. Per capita GDP: $46,000. Population below the poverty line: 12%. Gross fixed investment: 15.5% of GDP. Public debt 60.8% of GDP. The current account balance was a negative $731.2 billion in 2007. Lowest decile of income earners represent 2% of consumption, with the highest at 30%. Oil consumption: 20.8 million barrels per day, production 7.46 million barrels per day.

While many speculate that China's stimulus package will crowd out it's purchases of US debt, I tend to agree with economist Brad Setser, who follows central banks at the Council of Foreign Relations and wrote in his blog, "China's fiscal stimulus will offset a fall in domestic investment more than it reduces China's purchases of U.S. debt, Chinese banks that previously were lending to China's property developers will be lending to China's government instead. And the rise in the U.S. fiscal deficit will offset a fall in borrowing by American households and firms. As a result it won't need to be financed as heavily by the rest of the world."

Let's hope everyone involved recognizes reality. The image above was taken from Despair, Inc. I know some of my meager purchases this holiday season will definitely be coming from their catalog of excellent posters and other products including the poster that says "It's always darkest before it goes pitch black" and coffee mug that says HOPE - may not be warranted at this time.

From the Blogosphere:

Russian stocks shed over $1 trillion in crisis

Economic crisis could push China reform

Crisis won't end in a hurry says Ratan Tata

Factories shut China workers are suffering

India's multi-pronged anti-crisis strategy

India moving towards recession

U.S. lacks resolve to recover through public works

Manhattan Inventory Passes 9,000

Posted by urbandigs

Fri Nov 14th, 2008 10:08 AM

A: Woke up to a bunch of emails this morning from readers that the Streeteasy powered real-time widget tool just passed the 9,000 mark for Manhattan inventory. So what does this mean? Rather than look at that, lets look at what this tells us. As sales volume slows and inventory rises, it represents a shift in psychology amongst both buyers & sellers. The Manhattan real estate marketplace right now is noticeably more illiquid today than normal for this time of year. Sure, the seasonal component at play in our market historically has slower volume for OCT-DEC and active volume for JAN-APRIL, but today the market is more illiquid than normal. Then again, these are anything but normal times.

Here is the 6-MONTH chart of inventory trends for Manhattan:


The key to look at is the 3-MTH trend which is UP about 29%! To be fair, lets check in on Jonathan Miller's charts on listing inventory for Manhattan co-op/condo since 2002 for the seasonal change of inventory during the months AUG-SEPT-OCT to see how strong this seasonal dynamic is.

NOTE: Streeteasy powers the UrbanDigs real-time widget tool. I know that Streeteasy gets their data through a combination of direct data feeds and website crawls. I'm not sure the source for Jonathan Miller's data but you need to know that these are two different data sources and as such are showing two different levels of inventory! Since there is no standardized MLS system for Manhattan, I prefer to look at the trends in general rather than the number itself when analyzing this data.

MillerSamuel Chart Source


So, going back the past 6 years (which is all the data I had access to for this), this past inventory surge for the months AUG-OCT was only topped by the inventory change in 2002 for the same time period. Which brings us to how is today different than the environment in 2002. In 2002, there was a psychological affect from the terrorist attack on 9/11 and a negative wealth effect from a sharp decline in equities from earlier in the year. Manhattan real estate experience a quick adjustment in prices after 9/11, and many sellers decided to sell for reasons associated with that horrible event. It took about a year or so for prices to recover to pre-9/11 levels, but the psychological impact lasted a bit longer. In addition, credit was just about to start its parabolic rise and the fed cut rates aggressively to under 2% from 6% to combat the dot com crash and after effects of 9/11. Lending standards were about to go out the window, speculators were about to enter the housing market, exotic loans were about to hit the marketplace, and securitization of loans were about to go parabolic leading to the credit bubble that allowed the housing boom to occur. Jobs market would be very strong and stocks would recover and hit record highs, as wall street marveled at their brilliance and benefited from huge bonuses. Manhattan prices were about to start their wild ride.

Fast forward to today and we have a host of different fundamentals affecting our economy:

a) securitization model is all but extinct
b) parabolic credit boom went bust; credit deflation
c) mortgage rates have NOT come down with fed rate cuts
d) housing bubble bust
e) Manhattan prices run up about 100% in 5-6 years
f) lending standards tightened significantly
g) exotic loan products eliminated
h) wall street investment banking gone
i) wall street bonuses coming down fast/hard for forseeable future
j) job losses

We simply can not compare today with 2002. We are in a new world now, unchartered waters if you will, and right now we are trying to figure out how get the credit markets back to normal and re-capitalize our banking system to restore confidence. The after effects of this credit crisis are still yet to reveal its full force.

Since the Manhattan real estate market started its decline, I am less bearish than I was 12 months ago when we were still at peak levels. Arguably, I think we are down about 15-18% right now. The problem is the illiquidity of today's market and the price level that deals are happening at, if a property must be moved. This is the stage where we find out who is overexposed, who is forced to sell, and who is swimming naked. I would expect this stage of the slowdown to last a few more quarters as the next wave of job losses unfortunately hits home for many in Manhattan. By this time next year we will have a better idea of how sharp the initial adjustment actually was.

30YR Bond Auction Goes Badly

Posted by urbandigs

Thu Nov 13th, 2008 06:23 PM

A: As I said many times here, the fed can NOT control the long end of the curve! We have massive treasury issuance upcoming to fund our debt interest obligations, government functions, and rescue plans! Today's auction of $10Bln in 30-YR Treasury bonds did not go well as investors demanded a higher yield for the longer term product; perhaps something we should get used to!

I discussed my thoughts on how this New Age Slowdown Could Pop Treasury Bubble, and the problems I see at the long end of the curve:

"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. 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."
Bloomberg reports, "U.S. Treasuries Fall After Investors Shun 30-Year Bond Auction":
The bonds drew a yield about 9 basis points above the level in pre-auction trading. At 4.31 percent, it was still the lowest since regular sales of the security began in 1977. Investors have been favoring shorter-term debt, which serves as a haven in times of turmoil and a bet the Federal Reserve will lower interest rates. "The 30-year is not a central bank product, and there's no real interest from pension funds" at a yield below 4.5 percent, said Andrew Brenner, co-head of structured products in New York at MF Global Ltd., the world's largest broker of exchange-traded futures and options contracts. "There's just no interest in it."
No interest is right, not at these current yields at least! John Jansen over at Across The Curve delves in on how this auction cost the taxpayers an additional $175,000,000:
The Treasury auctioned $10 billion Long Bonds and the result was a genuine debacle for the taxpayers. A tail is the number of basis points from where the issue was trading in the market moments prior to the auction to the level at which it actually cleared. The auction average was about 10 basis points cheaper than market levels.That is mucho dinero. One basis point on a Long Bond equals 5 ½ /32s. The nuns taught me quite well in grammar school and that means that 10 basis points equal 55/32s. Because I do not wish to work to hard I am going to proclaim the result 56/32s which is 1 ¾ points and an easier number to work with it. That means that for every million bonds auctioned the Treasury paid an extra $17,500.

Ten billion bonds is ten thousand million which when multiplied by $17,500 means the result cost the taxpayers $175,000,000.
Now I am no bond expert, but then again I don't have to be. There are fundamental reasons why the long end may experience rising yields in the years to come and they include:

a) a 27 year secular bull market
b) massive upcoming issuance (supply) to fund the rescue of our financial system
c) markets questioning credit worthiness of US resulting from this crisis and actions taken; rising CDS premium on 10YR treasuries as an example
d) effect of US slowdown on China and other exporting countries that hold massive amounts of our treasuries and have been funding our debts
e) flood of interest into treasuries over the past year as a safe haven driving yields to ultra low levels; when market turns, reversal could be dramatic
f) introduction of Ultra-Short Treasury ETFs; hmmmmmm....

Add to the list a lack of interest at the long end at current yields! Most of the issuance upcoming is likely going to be in the short end, and probably the 2-YR. But this auction today really gives us a clue of what some of us have been discussing for months now.


SEPT 25th - Recapitalize & Steepen; Markets Paralyzed

AUG 4th - Peak Credit & What That May Mean

Paulson's TARP Pulls An Audible

Posted by urbandigs

Wed Nov 12th, 2008 06:22 PM

A: To be honest with you, I like this call. I know that it adds uncertainty, and that is the last thing that the market needs right now, but the fact that Paulson changed the play because the original plan was thought to be less effective, is progress! Good decisions can't be rushed! $350Bln of the TARP was already used to inject capital into the banks and another portion of funds may be put to work in the auto sector. That leaves only $300Bln or so left to buy distressed securities. What the heck is that going to accomplish? Citigroup alone has about $1.18Trln of off-balance sheet holdings, just to put the numbers into perspective! If anything, expect the TARP funds to be used for more bank injections so that the capital raising required is not done on desperate terms from the private sector or through further share dilution. This does NOT mean that is not in the cards for later on though!

Originally, the TARP was going to be used to buy distressed mortgage backed securities from the balance sheets of banks. Non-agency MBS bounced a bit on news of the rescue plan, making some of us wonder what the point is going to be using TARP funds to pay marks much higher than market value! I mean, if you found out $500Bln+ is about to be poured into this market, it should artificially prop up the market from previous lows! Now that the plan has changed, the ABX's are selling of again and making fresh, new lows. This comes as other credit indicators have come in significantly since the launch of the Fed's CP facility and the TARP rescue plan. Here is a chart of the ABX-HE-AAA via Markit.com:


Bloomberg reports in the story, "Mortgage Bonds Fall to New Lows as Paulson Scraps U.S. Buying":

Residential and commercial-mortgage backed bonds tumbled after Treasury Secretary Henry Paulson said the government no longer plans to buy devalued mortgage assets, credit-default swap indexes suggest.

All 24 of the ABX indexes tied to subprime mortgage bonds fell to new lows, according to Markit Group Ltd. The second half of the program will be used to help relieve consumer credit, not buy mortgages and related bonds, Paulson said today in a speech. Treasury and Federal Reserve officials are exploring a new "facility" aimed at bolstering the market for securities backed by assets other than mortgages, he said.
So, the 2nd half of the funds is going to ease the stress in the consumer credit area. As I long told you, this is NOT just a subprime problem. The debt problems we face cover all quality classes and include subprime, alt-a, prime, credit cards, auto loans, student loans, lbo loans, cov-lite loans, HELOCs, option-arms, well you get the point.

I think it is almost a given that a 2nd TARP-like stimulus program will be announced. I mean, what is going to happen to the toxic stuff on the balance sheets if there is no RTC-like vehicle to buy the distressed junk? We know $320Bln+ of alt-a MBS are on review possibly to be downgraded!

Or is Paulson's play a bluff? Doubtful. If the gov't were to buy distressed securities, a few things come to mind, which kind of cancel each other out:

1) the taxpayers will want attractive marks so as to increase the potential for profit, and decrease the risk of losses
2) to succeed and recapitalize, marks must not be too low as to destroy the banks anyway
3) its best if the market doesn't know how much distressed MBS may be purchased and when the buy will occur, so that valuations reflect the actual market for these securities without any expectations of a BIG BUY ORDER coming in, canceling out #1

Maybe Paulson did this to take out the premium for MBS priced in because of the TARP funds about to come in. Maybe the job proved too difficult to pull off. Maybe the remaining funds were deemed insignificant to have any effect. Who knows. One thing is for sure, anyone that is not respecting this credit crisis and the deflationary environment that resulted from it, will be hit the head by a 2x4 in the near future!

Paulson's move today tells me that actual decisions are being made to adapt to the situation as it evolves! That's a good thing and a sign of leadership even if adds to near term uncertainty. Don't mis-interpret this to mean all is well now, its not, and I think a 2nd TARP-like program is coming.

We are entering the dark stages of this process where corporate warnings (INTEL After the bell, Best Buy this morning) come in fast, and macro economic data deteriorates noticeably. Stocks react making the pain hit home for average investors as they avoid checking their portfolio's for fear of being scared at the exact losses taken so far.

My "Sometimes We Get Lost In The Dark" piece back in February stated:
The stock market is the stars, and is the tool that most use to figure out where they are when confused, or lost. But in this unchartered world where we don't know what lies ahead, this widely used, widely publicized vehicle is not a very good navigator for one real reason. Stocks trade on information available and investor sentiment for the near term, lets say the next six months. If the world around us slows and earnings come down, then the entire valuation model of equities (p/e) will have to re-adjust to the weaker times that we know are about to come. Here is a great recent example:

APPLE (NASDAQ: aapl), was trading at a higher price/earnings ratio only 4 weeks ago when shares were hovering near $160 a share and off its high of $200; lets say 31 although I don't have the exact #. Then something happened. On JAN 23rd, the earnings forecast disappointed. The stock fell 11% as investors re-adjusted the share price to be more in line with the lowered earnings forecast. As with most earnings disappointments, the adjusting stock slowly slipped over the following few weeks to a current trading price of $118.

This very dynamic, is why stocks CAN'T be used as an accurate gauge to our current situation.
In short, the 'E' in P/E is coming down fast as this slowdown proves to be deeper and longer than most thought. That means stocks get re-valued downwards to reflect the new, weaker outlook! Expect more corporate warnings to come and stocks to continue to add to the negative wealth effect that feeds this loop.

Oh, almost forgot. Former Goldman Sachs Chairman John Whitehead thinks (via CalcRisk):
"I think it would be worse than the depression," Whitehead said. "We're talking about reducing the credit of the United States of America, which is the backbone of the economic system. ... I see nothing but large increases in the deficit, all of which are serving to decrease the credit standing of America. ... I just want to get people thinking about this, and to realize this is a road to disaster. I've always been a positive person and optimistic, but I don't see a solution here."

"Before I go to sleep at night, I wonder if tomorrow is the day Moody's and S&P will announce a downgrade of U.S. government bonds," he said. "Eventually U.S. government bonds would no longer be the triple-A credit that they've always been."
Sweet Dreams.

Halstead TV: Behind The Numbers

Posted by urbandigs

Tue Nov 11th, 2008 05:29 PM

A: This is my company's new Market Report narrated by Halstead Chief Economist Greg Heym. Greg is very real, very in tune with the current situation, spoke to agents about a year ago about the challenges we face, and tells it like it is. Very refreshing I must say. Anyway, just wanted to pass this along, as I know they are working on enhancing this quarterly video report as we enter 2009. Enjoy.

Behind The Numbers - 3rd Quarter 2008

Few tidbits:

  • Average Price 1.47 Million; Up 12% from Q3 2007

  • Just Under 3,200 closings in Q3; Down 14% from Q3 2007

  • New Dev Accounted for 1/3 Total Q3 Sales & 70% of all Condo's Sold in Q3

  • On Average, New Dev Contracts Were Signed in DEC 2007, closing in Q3

  • NYC Employment Up 31,000 from AUG 2007, Despite Loss of 11,000 Securities Jobs

  • NYC Unemployment Under 6%

  • While Greg discussed the raw data, it is important to understand that we are at now now. Greg mentioned the challenges NYC faces, and acknowledges the credit crisis that began just over a year ago. Its true that 'so far the data remains positive', but that is to be expected from lagging data. My own opinions on where we are now and likely trends looking ahead include:

  • Average price data will start to reflect weakness, and accelerate as we go through the next 3-4 quarters. This is all lagging data as reports catch up to real time contracts being signed, and new dev closings are slowly replaced by resales. Right now, we are in the process of finding out who is distressed and over-leveraged. This is when deals sometimes happen at surprising levels, based on the sellers level of desperation.

  • Unemployment is going to rise in Manhattan and I would guess that job losses in our financial industry near 75,000-100,000 by this time next year; especially as mergers close. So this data will be lagging as well. Its very sad, and nobody wants it, but lets keep it real here.

  • Sales volume will remain low compared to peak levels from year ago, and media headlines will likely further depress buy side confidence for a few quarters as the initial shock of the adjustment results in patience by buyers. The negative wealth effect will contribute to low ball bids as buyers price in downturn risk, leaving the seller with a decision to make. Unless a property is aggressively priced, sellers lost a bunch of negotiating power in the past 8 weeks.

  • We are probably down about 15%-18% from peak levels right now, and sellers are finding it hard to get that strong, serious bid in. Those that must sell quickly have to resort to aggressive price cuts and strong consideration of low ball bids received. It looks like 22% of all listings experienced a price cut in the past month, assuming 1,916 price cuts for 8,683 properties available for sale in the past 30 days.

  • There is nothing wrong with openly discussing what is going on in our market! Manhattan historically lags in recessions and leads in recoveries. Arguably, the national housing slowdown is in its 3rd year now and we are probably 8-12 months into our downturn with the severe knee-jerk adjustment lower occurring mostly in the past 8 weeks. Why? Buyers simply backed off. Local real estate is all about the buyers and Manhattan is no different. If a deal needs to get done, the seller has few options and time against them. Now is not the time for sellers to be anchored to peak prices!

    This might surprise many, but I am a bit less bearish than I was 12 months ago when we were near peak levels and apartment sales were yet to catch up to deteriorating macro fundamentals. I know the worst is still to come for Manhattan, and I am still bearish, but when an illiquid housing market rolls over the initial adjustment is fast. Today, a noticeable adjustment has occurred and the pendulum has clearly swung in favor of buyers.

    But who is buying? This is why I am still bearish. Consider me less bearish than I was 12 months ago, now that the downturn begun and prices are starting to correct; but still bearish for the next 3-4 quarters as job losses mount, distress rises, and negative wealth effect hits home. If it were a baseball game, I would say we are in the 2nd or 3rd inning; better than the pregame warmups right! The good news, we have to go through this. The bad news, we have to go through this. There is nothing I can do to stop it, so lets adapt to the changing world and act accordingly.

    Deflation Buyer Strategy: Buy To Renovate

    Posted by urbandigs

    Mon Nov 10th, 2008 11:11 AM

    A: Its been a while since I spoke out loud about a buy side tip I will be giving to my clients these days. I apologize as I focused content on the credit crisis and deteriorating macro fundamentals. As the world around me changes rapidly, I adapt to it and consult my clients accordingly. For most of my buyers, that means exercising patience and using the forces to our favor. It also means utilizing the changing world around us to target a buy side strategy that you may not have had before. Lets discuss.

    manhattan-apartment-renovate.jpgIn real estate markets where buyer confidence is declining, job insecurity rising, and loans are harder and more expensive to get, what type of product do you think will be very hard sells? In my opinion, the hardest sells these days are properties that:

    a) are cookie cutter with no distinct characteristics
    b) lack natural sunlight
    c) lack a view
    d) in need of a total renovation
    e) undesirable location

    ...and a combination thereof. Lets focus on (d) in need of a total renovation!

    In boom times, I would say that for every $1 you put into renovating, you could probably get back $1.25-$1.50 depending on the deal you got for the work and the quality of construction that was done. In boom times the perfect buyer would willingly pay up for a XXX mint renovated apartment that is just what they wanted, except without the headaches associated with a total renovation project.

    Today, as buyers low ball and price in downturn risk, renovations will not pay off as well as it did in the boom times and unrenovated properties will be even harder to sell. This is especially true for properties that lack light, views and a desirable location. So, lets use the time/cost of renovating a property to our benefit and price in accordingly on top of the discount that should be received due to general market conditions.

    Now lets move on to material and labor costs! From 2006 to mid-2008, commodity prices surged pretty much across the board making material costs more expensive for the end user. In addition, the demand for good contractors rose as home prices quickly appreciated and stocks rallied, allowing a positive wealth effect to take hold. Fast forward to today!

    The commodity bubble popped, stocks plummeted 40% from peak levels, Manhattan housing started its downturn, job security has become a very real concern, and the negative wealth effect has slowed excessive spending while credit deflation helped to put renovation projects on hold. The world has changed drastically! So how do I take advantage if I was in the market to buy an apartment at more attractive prices than just 12 months ago?

    One strategy would be to target an apartment that is selling at a discount not only because of the distressed macro economic environment and decline of buyer confidence, but also because it is in need of a TOTAL RENOVATION!
    Which leaves us to finding the desired property that is also in your price point, and willingness of the buyer to take on a complete renovation product. I think this strategy will be a recipe for success in the end for anyone buying for all the right reasons.

    Get the discount on the property that will come anyway, and get a renovation for a total price that is likely noticeably less expensive than only 12 months ago. In the end, you bought a cheaper house, did a cheaper renovation, and end up with 'more product for the buck' that was designed exactly to your needs! Not a bad scenario for the serious buyers out there!

    China Stimulates, $34Bln Alt-A Securities Downgraded

    Posted by urbandigs

    Mon Nov 10th, 2008 09:30 AM

    A: With China stimulating their economy and the globe right now, we have to wonder if this is more economic Cialis? What happens after the 36 hours are up? This is $586Bln less that is available to buy up our treasuries as we issue massive supply to fund our own rescue. As I said before, this is not a subprime problem. Subprime seems small when compared to the number of near prime (alt-a) and prime mortgage backed securities held on the books of the financials. You see, as the rating agencies downgrade these securities, the firms that hold them are forced to raise more capital to meet requirements resulting from the downgrade OR sell them off completely because they can only hold 'AAA' rated securities. In this environment, that can be very difficult and result in forced selling of assets to raise the needed cash internally. Last Thursday, S&P downgraded some $34.1Bln of ALT-A Residential Mortgage Back Securities and warned in mid October that it may cut ratings on as much as $351Bln of Alt-A securities; which leaves about $300Bln left to go.

    Via Housingwire.com:

    Standard & Poor’s Ratings Services said late Wednesday that it had cut its ratings on 1,078 classes from 86 U.S. RMBS Alt-A deals issued in 2006 and 2007 — the latest blow to investors in an already battered mortgage market, and evidence that the nation’s mortgage crisis is moving up the proverbial value chain. In aggregate, the classes with lowered ratings had an original par amount of approximately $34.1 billion, which has been paid down to approximately $28 billion, S&P said.

    The cuts should hardly be a surprise — S&P had warned in mid-October that it may cut ratings on as much as $351.7 billion of Alt-A securities.

    S&P’s analysts said that as of the Sept. 2008 distribution period, severely delinquent loans for affected transactions average a little over 13 percent of current pool balances — an increase of almost 30 percent in just one quarter. For anyone familiar with Alt-A deals, those should be stunning numbers, worth repeating: more than 13 percent of remaining loans are 90+ delinquent, in foreclosure, or held in REO. This number is so damaging, in particular, because Alt-A transactions were comparatively thin on credit enhancement relative to their subprime counterparts: a weighted average FICO of 700+ had a way of convincing everyone these deals would perform.
    Anyone thinking that the worst is behind us for the financials needs to understand the scope of the problems here and why the government & fed are intervening on such grand levels. This is some serious stuff.

    What do these downgrades mean? Bloomberg states it best:
    Securities downgrades may boost the capital needs of holders such as banks and insurers, and force some investors to sell debt. Rating companies have been stepping up downgrades on mortgage bonds backed by loans other than subprime or second mortgages amid tumbling home prices and soaring late payments.
    The prime,alt-a jumbo story is still being written. We were sold the TARP program as one that will buy up distressed assets and recapitalize the banking system so lending can resume. Well so far AIG is eating up twice as much funds as originally thought needed, and $250Bln of the $700Bln was used to inject capital into the banks directly. Which leaves only about $350-$450Bln left for distressed asset purchases; not nearly enough. Fannie Mae just announced $29Bln in losses this quarter & AIG announced $24.5Bln in losses.

    Mort Zuckerman, CEO of Boston Properties, on a Bloomberg interview, (video link in Related Video on right side of page & well worth the 10 minutes) tells us the harsh reality:
    "...The financial crisis is going to feed into the real economy resulting in an adverse feedback loop, back into the financial economy. This is the biggest wipe-out of financial wealth in our history, and nobody knows what the effects of it will be.

    The only accomplishment that we (TARP) have had so far is that its prevented some major financial institution from falling into a trap door and disappearing in 72 hours; by the way, that is not an insignificant achievement because if that happened it would crash the whole level of confidence in the financial world. It was ridiculous to have presented that (TARP) as something that would increase lending on the part of banks, WHY? Because #1 the borrowers credit has not improved in all of this, and there is no point in the banks to have make a whole series of additional bad loans and re-create this mess...

    Unfortunately, they sold it (TARP) to the American public on the grounds that the money would be used for lending. Every bank I know is reducing their lending book! The financials own book, their own portfolio of loans are in much worse shape than they have us understand. Nobody knows how bad this is. Nobody knows how bad the loans are that the banks already have on their books. They are low interest rate loans, they cant get out of them, and they have to protect their own basic financial situation, and I understand that. Its just that the Treasury & the Administration for political reasons sold this (TARP) on untrue grounds."
    There is a ton of truth to those statements and the entire video is worth watching! Which begs the question, is $700Bln going to be enough? IMHO, no way! As global economies stimulate to help their own people, where does this leave us? We are going to spend $700Bln to save the financial system and not create any more jobs, or repair our aging infrastructure. Which makes me believe that we have a few more stimulus packages in the works for 2009! At some point, this becomes real money.

    NY Times: "A Downturn Begins"

    Posted by urbandigs

    Sat Nov 8th, 2008 09:30 AM

    A: Mother Media is starting to publish the headlines that readers of UrbanDigs knew well in advance! Honestly, this report to me is a bit early as mixed results show the downturn in some areas, but not all. I am still on record for the nasty price reports to come out in 1Q of 2009 or so, released in early April 2009, showing price declines across the board. If I had to estimate where we are right now, I think we had the quick adjustment of 12%-18% from peak levels already, with pockets of distress doing deals at lower levels or wherever a serious bid that can get financing comes in at. Even though this report is earlier than I predicted, the effects will not be.

    manhattan-price-changes.jpgThe NY Times front page of the real estate section states, "A Downturn Begins":

    Median prices in Harlem and East Harlem were down nearly 20 percent, to $440,000 at the end of this year’s third quarter, from $549,000 at the same time last year, according to data from Miller Samuel Inc., a real estate appraisal and consulting firm.

    Similarly, condominiums in Midtown East and Turtle Bay dropped 18.6 percent, to $1.197 million from $1.47 million; and condos in Midtown West and Hell’s Kitchen dropped 8 percent, to $1.01 million from $1.099 million.
    It wasn't all bad, as some neighborhoods including the UES, UWS, & FiDi showed price increases; but don't get too excited folks because that is the lagging data talking where plenty of new developments are still being closed. We are at now now and I will tell you that the price that deals are happening at in ALL neighborhoods in Manhattan are down right now from peak levels!

    You read this blog, you are ahead of the curve. As I said to you guys in July's "Preparing For Price Reports w/out New Devs" piece:
    "...Price data is lagging and misleading, and just as it mislead on the upside and brought unwarranted happiness to many homeowners out there, it will also bring unwarranted depression and media headlines! Be prepared, be ahead of the curve, and understand that when it happens it will probably cause interpretations to be exaggerated as a market that just eroded!"
    So here is the report, and people probably think the market just fell in the past month or so. Not so, this has been happening for 8-12 months at least already as buyer confidence started to decline with the beginning of the credit crisis. I went into more detail in July, some 4 months ago, in the "Low Ball Bids & Cold Feet" piece:
    "If you come here mostly for the front line, real time conditions here in Manhattan, I would have to describe the buyer confidence level as one of low ball bidding and cold feet. Eventually, this will cause a media problem for us; because what went into the price data to skew it upwards, will eventually come out and skew it downwards. As the upside data came out, it painted a misleading upside picture. When the downside data ultimately comes out, it will be equally misleading as a market that just fell off a cliff."
    For any broker that is just now realizing that this market has some upcoming problems and that prices are only now starting to turn, you are ridiculously behind the curve! Denial is a powerful force and it's understandable that brokers do not want to hear any negative news, data, trends, or near term predictions for fear it may bring down their business. Brokers get paid on commission and have a vested interest in you buying or selling. As such, trust, honesty, and unbiased consulting from the client's point of view must be earned. Falling for broker babble in times like these is what the greater fool theory is all about.

    Lets be real here. The market is adjusting to an unsustainable appreciation in housing prices resulting from:

    a) boom on wall street; jobs and equity markets providing positive paper wealth effect
    b) parabolic credit boom
    c) easy money & exotic loans
    d) cheap money & artificially low rates
    e) strong local economy
    f) weaker dollar brought in outside investors
    g) tight supply
    h) 70% co-op housing stock limiting speculators
    i) new dev building boom promising that the sky is the limit with potential profit
    j) higher quality of life, cleaner city
    k) trend to live closer to where you work

    etc..With the exception of 'h', 'j' and maybe even 'k' still, all of these fundamentals have reverse course with great speed and depth. Housing & credit deflation has murdered wall street and we are in the early phases of the job loss cycle in the financial sector that will ultimately lead to slower consumption, conservative behaviors that will exacerbate the problems to retail as time goes on. The job losses that start on wall street will eventually lead to the restaurants, real estate sector, gov't jobs, retail jobs, and on and on. As with most cycles, the process feeds on itself.

    Manhattan is not immune, and we are in the first phase of the downturn right now where the initial jerk downwards from the peak reveals itself. As time goes on we will see who must sell and who overexposed themselves. That is when things get hairy. My concern is that the media will enhance the decline of buyer confidence to the downside, just as it enhanced confidence on the upside during the boom.

    Most brokers would have you believe that there is 'sideline money' waiting for a 5-10% drop to swoop in. This can NOT be further from the truth! Humans generally react with a herd like mentality and when the reports start to come out that a housing market downturn begins, buyers usually back off for fear of catching a falling knife. If you believe brokers, a report like this will bring in droves of buyers seeking a bargain. If you believe what I am saying, reports like this will result in further declines of buyer confidence, weaker bids placed, and the backing away of buyers who weren't sure if now is the right time to jump in. As I said in December 2007, "Who Wants A Depreciating Asset?".

    The good news, if any, is that this has to happen when you take into account the national housing downturn, severe credit deflation, elimination of wall street, and the negative wealth effect and jobs effect that comes with it. Real estate is illiquid so it takes time for things I say here to come out in public reports. You can't day trade real estate. As real estate prices correct, the process of finding value begins and the sooner it starts the sooner we can cleanse the market. The bad news is, we are likely early in the cycle and yet to see the full effects of job losses, negative wealth effect, budget issues, and how quality of life is affected. My biggest fear, as I publicly stated in the Gotham Gazette interview is:
    "My biggest fear is seeing a change in crime, cleanliness, drugs, homelessness, etc. to this great city. Everything that Rudy Giuliani did to clean this city up, I fear may be undone by this Wall Street centered crisis. The worst-case scenario for Manhattan is if crime increases and quality of life deteriorates as the local economy and individuals hurt from this deep slowdown. If the perception of Manhattan as a "great place to live" is psychologically altered, that combined with the negative macroeconomic forces can put downward pressure on real estate values for many years to come"

    Coming Soon! The Zombie Condos That Ate New York

    Posted by jeff

    Thu Nov 6th, 2008 09:39 AM

    As those who read my piece "Running Off The Cliff" know, the changes made to the 421a tax abatement program resulted in a perverse rush by developers to begin construction on new condo projects in New York City in the face of a declining Wall Street economy. It's an amazing testament to the distortion of behavior that subsidy programs can have. The chart from that piece was so striking I am reprinting it here (but slightly gussied up).


    Note that building permits for single family homes and 2-4 family homes peaked in 2006, lagging the US overall - as New York typically does - but falling off precipitously and quite rationally since. However, as a result of so many developers trying to "get into the ground" to secure their 421a tax abatements, the number of permits for buildings with more than 6 units continued to rise in 2008 (with YTD numbers through August actually ahead of full year 2007 numbers), despite market signals that it probably wasn't a great time to reach for new heights in condo building. I thank Christine for her recent piece "New Dev Buyers: "What Are You Going to Give Me?" about condo developers finally getting down and dirty with deals. As I mentioned in my prior piece, in order to retain their tax-advantaged status, these buildings must be built without "undue delay" and I noted that city planning specified that "We would deem completion within 36 months from commencement as a guideline for construction being completed without undue delay."


    So despite the struggles of projects in later phases of development, we can expect delivery of several thousand condo units starting around December of next year - 18 months would be a typical construction period for a project that's not too elaborate - with deliveries being completed before June 2011. Of course, developers will be out marketing these projects well before they are completed, causing further competition for those units in buildings now being completed that continue to linger on the market.

    Now, perhaps, the unkindest cut for developers has come. According to a recent Real Deal article,
    lenders are becoming wary of making mortgage loans to those buying condominiums in buildings where fewer than 51% of the units have already been sold.

    "There are certain buildings that some lenders just won't lend to, period," said Allan Trub, a senior vice president at GuardHill Financial. "There are a lot of buildings with very low presale numbers, far below the numbers that lenders typically require. It's become much more challenging to get them approved."

    These lenders aren't dumb, they do not want to lend money on an asset that is potentially going to face not only severe competition from competing properties, but potentially competition from duplicate units in the same building. The marks to market could come fast and furious. Additionally, buyers of units in condominium projects that fail face significant problems - the likes of which have not been seen since the early 90s.


    Craig Delsack, a Manhattan-based real estate lawyer, spoke with me about some of the issues. He opined that in a tough market "the sponsor may do bulk sales of units to another entity. That entity will be on the hook for common charges for that block of units. If they then have trouble selling the units common charges could go unpaid". He noted that "the condo association could foreclose on the units which are not paying common charges, but it's a drawn out and expensive process and could lead to assessments on current owners to cover the common charges and legal expenses." For a lender to owners in a busted condo building this can be a risk in and of itself. Some buyers may be so upset with conditions that they walk away from their units and loans. Another alternative is for the condo sponsor to rent out unsold units. This can result in the building having a very different demographic than some buyers may have expected and, let's face it, renters don't care as much about the upkeep of a building as owners. Accordingly, Delsack suggests, "banks are going to look at units owned and occupied by owners, not investors or even foreigners who use the unit as a pied a` terre, before they commit to lending to buyers in new developments. One way to avoid these issues is not to buy a condo in a new development."

    There will likely be bargains aplenty for those inclined to take the plunge in a new condo development, particularly if you have the wherewithal to pay cash. Being the buyer who puts the development over the 50% mark may warrant an even greater discount. But be careful out there, there is no doubt we will see some busted deals, where sponsors go bankrupt and common charges go unpaid as a result of the current climate. Here come the Zombie Condos....don't get eaten alive!

    Wall Street Bonus Redux

    Posted by urbandigs

    Thu Nov 6th, 2008 06:55 AM

    A: As I said in January, "Bonuses: It's 2009 That Will Hurt More". What I should have said is, "Bonuses: It's 2009 That Will Hurt More Unless Taxpayer Money is Used To Recapitalize Firms, Then It May Not Get So Bad". I guess I need to work on my prognostication skills. The very idea that taxpayer money is being used to save the financial sector from systemic collapse, and yet dividends continue to be paid out and bonuses will not be cut as much as if this money weren't injected, is unnerving to say the least. I'm a wall streeter, always have been and probably always will be, but my life on wall street is as an independent equities trader. I do not work for any firm and therefore I do not receive any bonus. Expect 2009-2011 bonuses to be bad, but perhaps not as bad as expected now that Uncle Sam came to help. I'm sure the public outrage will be strong on this one.

    The money quote from Bloomberg's, "Wall Street's Top Executives Face 70% Bonus Cuts, Study Says":

    For workers whose compensation isn't disclosed, Johnson estimates that investment bankers and employees in the fixed- income departments will have bonuses reduced between 35 percent and 45 percent this year. People who work in prime brokerage departments will have their year-end awards cut by 15 percent to 20 percent, the report estimates.

    "However, thanks in part to the financial bailouts and mergers we've seen recently, the decline in incentive payments won't be as drastic as first thought," Johnson said in the report.
    I'm on record for estimating that bonuses in 2009 will be down approximately 40%-50% from the 33.2Bln doled out last year! The question should be, in what form will bonuses be structured and to whom will bonuses go to! One thing is for sure, as consolidation in the industry closes, the worst of the job cuts will be announced.

    Here is a chart from the Bloomberg piece on which business areas will see what bonus reductions:


    Wall Street bonuses are paid out based on generated revenue. Which begs the question, how many generated revenue in 2008? All I know is, this year has been mired in writedown after writedown, loss after loss, so bad that the government had to step in with bailouts, forced marriages, and taxpayer rescue plans. What happened to accountability? I understand the need to retain talent, and in doing so, handing out bonuses to those that did make money or bring too much to the table for the firm to lose. But across the board? I think this is a bit misleading, I think many more jobs are going to be cut on wall street, and I think bonuses for the average employee will be down more than people think. Retention of talent and acquisition of talent will be where most of the bonuses are paid, in my humble opinion.

    Regardless, the insanity is over and it ain't coming back for a looooong time. Wall street is forever changed, the securitization model is all but extinct for now with non-prime MBS issuance at ZERO for Q3, investment banking is all but dead, the last two investment banks are now commercial bank holding companies regulated by the fed (Goldman, Morgan), balance sheets are still impaired, leverage is still being taken down, and heavy regulation is upcoming. We are at now now. The fallout from this will be felt in 2009 & 2010 here in Manhattan, when reality sets in for many used to extravagant salaries to pay for their extravagant lifestyles. This is what leads to over-leveraging in your personal life, spending beyond your means, thinking the party will last forever, and finding yourself swimming naked and forced to sell assets to 'right the ship'. I think the worst of this real world deleveraging in Manhattan is ahead of us, not behind us.

    New Dev Buyers: "What Are You Going to Give Me?"

    Posted by Toes

    Wed Nov 5th, 2008 08:09 AM

    On Saturday I visited a loft conversion building in Williamsburg, which opened at the worst possible time for a new development: three weeks ago right in the middle of the stock market selloff. My buyer wants something with character, so the all-glass ground-up somewhat generic condos (like Northside Piers) are not for him. A converted factory is just what the doctor ordered. But what's the incentive to buy more than a year out in a new development anymore? Back in the day, as long as you "got in early," you were guaranteed to make money before the building closed. Those days are long gone.

    When speaking with my buyer, I said "if you really like the building, we could put in an offer with a contingency that somehow protects you against prices going down by the time the building closed. It's a long shot, but it never hurts to ask!" Figuring that anything goes in this market, I called the sales office. The developer will consider putting a clause into the contract saying that if prices in the building go down, you can renegotiate the price of a unit to the average price of comparable apartments in the building! Wow! It would be interesting to see exactly how that is spelled out in the contract, but I was impressed because I haven't heard of anyone else offering that.

    I think the idea of protecting new development buyers from potential declining prices is going to have to be the "wave of the future" for new developments that are six months or more out. Buyers will be more confident locking in potential upside while eliminating or at least reducing downward risk. Having developers throw in closing costs, storage units, cabanas, or parking spaces is nice, but most buyers (mine, anyway) are concerned more with overpaying for an apartment than getting a 10 by 10 foot storage unit.

    Unless developers can make buyers feel that they are getting an amazing deal or are protected from declining prices, their development will be dead in the water.

    So where are some of the "other" deals?

    Belltel Lofts' sponsor will pay 50% of closing costs. The building is for immediate occupancy. They are also offering 4% broker's commissions (something we can sometimes use for negotiating "wiggle room").

    905 West End Avenue is offering up to 90% financing for seven years through the sponsor at a 4.875% fixed rate for a limited time. This is pretty huge - getting 90% financing is like finding a needle in a haystack these days.

    Isis Condo was offering $50,000 towards closing expenses for all buyers through mid-October (I wouldn't be surprised if they have extended this deal).

    Jade Living is offering discounted furnishings from BoConcepts. Basically they are offering furniture and a professional decorator for 75% off. Buyers can work with a designer to furnish their apartment and pay $6,250, (25% of the $25K value) for the furniture that they choose. Jade is also offering a 5 year tax refund/credit. Buyers can either take the money off of the purchase price or get a check back at the closing. They only have a few units left, though, starting at approx $1.4M, so they're offering these incentives to finish out the building.

    300 east 64th Street is only requiring $10K down on the contract deposit, the rest you can come up with at the closing, which will be sometime around Spring of 2009. It would appear to me that they are running the risk of people backing out of their deals if prices in the building go down. It's not that hard to walk away from your deposit if it's $10K! (But I haven't seen the fine print.)

    Court Street Lofts is offering a few "buyers incentives," either 2% cash back at the closing, 2 years of paid common charges, or a half point rate buy down through Wells Fargo. (If you are being quoted a 6.5% rate, they will buy it down to 6%).

    Besides these publicized "deals" a lot of negotiating is going down at new developments these days. Ask for the moon and the stars and you might just get it! It will take time for the reports to 'catch up' to where deals are being done at today, so be sure to look beyond pricing reports when playing this market.

    Get Out & Vote / Gold Advice Anyone?

    Posted by urbandigs

    Tue Nov 4th, 2008 01:26 PM

    A: Lines were crazy long this am, so I will try in an hour or so to go back and vote. Hopefully everyone is finding time to make it to vote today as well! In meantime, I want to ask readers for some help. I am in no way a gold bug, I'm not obsessed with it, and I don't revolve my life around it! But I do have a collector mentality (baseball cards / garbage pail kids / memorabilia have always interested me), and I do like gold on deleveraging dips considering the printing that is going on globally to combat this severe crisis. So, I did something nutty and bought my first piece of physical gold last week. Here is my experience, which I have little of, and hopefully someone out there can teach me more.

    First off, I went to a few coin shops to check out buying American Eagle gold coins. I could not find any! From what I was told, these circulated gold coins are in huge demand and orders take time for delivery. When I went to FH Coin on Lexington Ave, I was told, "If I had any Eagles in, the line would be out the door within 24 hours to buy them...I expect an order to come in about 3 weeks from now". Of course this could have been BS! He did have Canadian Maple Leaf 1/oz gold coins that I could have bought for $815/each, some $65 over spot at the time. I didn't buy any.

    GoldBarHundredGram.gifHonestly, I just wanted to mess around with like $2,500 and buy either Eagles or a gold bar. The more I researched the more I found out that the commissions to buy coins are much higher than the commissions to buy bars. So, I went downtown to a gold bullion dealer on Broad Street, named Manfra, Tordella & Brooks, Inc.. I didn't know anything about these guys except from what I see on the internet, but they were listed with the Better Business Bureau with no complaints filed and a satisfactory BBB rating, so I guess that's something.

    As I walked into the lobby entrance, I had to take an elevator down to the basement; shady! But I guess it has to be downstairs where products are safely held in vaults. When I exited the elevator, there was a glass encased window between me and the bullion desk; kind of like at a a bank! Discussions of 1000/oz orders could be heard in the background making my intentions feel minuscule! Oh well, I'm just nibbling here as I am holding a bunch of gold etf's, physical is a whole new world to me! I figure if I can buy 2-3K worth each year and put it away, it can be a nice way to preserve some wealth if things get hairy. Of course if it does get hairy, I got way worse problems to worry about! I digress.

    As I asked a million questions, the guy behind the desk started to give up and didn't have time to talk. Spot gold was at $744/oz, and he had only 2 gold bars left at the site. Both were 100g bars or 3.2125 ounces of 999.9% pure gold. The manufacturer was PAMP in Switzerland.

    He would ONLY SELL ME ONE at the current spot price, and told me that if I wanted to buy more I would have to wire money into an account with them, lock in the spot price when I wanted to place the order, and wait 2-4 weeks for physical delivery. Ummmm, yea, not too enticing as I have no desire to buy lots of physical gold here.

    I did buy the 100g PAMP Swiss Bar for $2,425, in cash as that was the only way they would do it, which came out to about $754 an ounce or about $10 over spot at the time of the deal. The rush I used to get as a kid when going to baseball card shows and buying a boxed set or a big name rookie card, returned! It lasted about 3 minutes. Since I already decided to buy something, I thought it was a way better a deal than paying more commission for Canadian Maple Leaf coins.

    I don't know much about buying physical gold other than that there is not much of it around these days for us to buy at retailers, and that commissions are added and spreads wide between bid/ask. One thing I did make sure of is that the dealer would buy back the gold from me; which is a policy of this 57 year old dealer. The gold I bought is very similar to the picture above, its in my desk at home, with its assayer certificate (that I was told means nothing), and is kind of cool to look at!

    I feel like a kid again. Anyway, just wanted to share my little gold buying experience with you and hopefully I don't come out as a super crackhead for doing so. If gold were to selloff more, I would get more interested in buying some more physical bars where commissions over spot are minimal; and just sock away. Of course, this is money I deem as unneeded and I would never put more than 5% or 7% of my total worth into physical gold.

    Would love to hear from anyone out there who collects gold, about their experiences, what they learned, if I was ripped off at the time of the deal, where they do their deals, opinions on physical gold, etc..This is not meant as a prediction piece for gold! It is just to educate myself from readers who may have more experience in this sort of thing.

    Thanks for any feedback.

    Tapped Dry? CC Balances Soar $32Bln in 10 Weeks

    Posted by urbandigs

    Mon Nov 3rd, 2008 02:43 PM

    A: You know how I discussed the 'completely tapped out consumer' on this site earlier in the year? Well, did you also know that in the past 10 weeks, outstanding credit card balances soared $7.1Bln in the week ending October 15th, representing a +1.9% single-week rate of expansion ... or ... nearly ONE-HUNDRED PERCENT annualized (+98.4%)? That's how you know consumers are tapped dry, resorting to their credit cards to help pay for their living expenses! You know it wasn't going to discretionary items! Worst of all, the fed just reported that both credit card limits & demand are contracting fast; not the best combination!

    The federal reserve estimates that this country has an outstanding unpaid balance totaling approximately $850,000,000,000 in credit card loans. We are very rapidly approaching a trillion! The subprime market was about a trillion or so wasn't it?

    What's most disturbing is the pace at which credit card balances soared in the past 4 weeks, just as the fierce stock market selloff got going. Here are the details via Clusterstock.com:

  • Credit Card Loans, 10 months Sep-07-thru-Jul-08 ... UP $29.1 billion

  • Credit Card Loans, 10 weeks Aug-08-thru-Oct-08 ... UP $32.3 billion

  • "In other words, Commercial Bank 'exposure' via the total amount of Credit Card 'loans' outstanding has risen MORE in the last ten WEEKS, than it did in the previous ten MONTHS COMBINED !!!
    Telling isn't it. One thing is for sure, most Americans can no longer count on their homes for mortgage equity withdrawal! You want to know how dead the non-prime mortgage backed securities industry is right now, check this out!

    "Non-Prime MBS Issuance Hits Record Low in Third Quarter of 2008: Zero" (via Infectious Greed)
    There was no issuance of subprime, Alt A or “other” non-prime mortgage backed securities in the third quarter of 2008, the first blank quarter since the creation of the non-prime MBS market, according to the Inside Mortgage Finance MBS Database.
    Back to credit lines for a moment, the fed just released data stating (via Bloomberg):

  • 95 percent of U.S. banks raised the costs on credit lines to large firms, and "nearly all banks" increased the spread on borrowing rates over the cost of funds on loans to large and mid-sized firms versus July

  • Nearly 60 percent of respondents indicated that they had tightened lending standards on credit card loans, while nearly 65 percent of respondents indicated that they had tightened lending standards on other consumer loans

  • About 85 percent of domestic banks tightened lending standards on commercial and industrial loans to large and mid- size firms, the highest since the survey began in its current format in 1991

    The lone bright spot:

  • About 70 percent of U.S. banks indicated they tightened standards on prime mortgage loans, down from 75 percent in the previous survey in July

  • The debt party is over. Hopefully you have managed your debt wisely, and lived within in your means. There was a time I did not, and I paid for it. Luckily, it was a learning experience. You wouldn't think it was that easy to save a few hundred bucks a month from sacrificed luxuries, and put it towards your credit card debt. It is. Start by paying off the lowest balance first, get it to zero, and than work on the bigger ones. If possible, try to rollover super high rate balances to a new card that is offering a 12-month 0% balance transfer incentive. That will help a bit too. Outside of this, it's up to readers to provide more CC debt paying tips!

    Blogs Cover Possibility of Higher Rates

    Posted by urbandigs

    Sun Nov 2nd, 2008 09:20 AM

    A: Readers of UD know by now my thoughts on the long end of the treasury curve; my expectations for a multi-year rise of longer term yields. In the past few days, some very prominent bloggers have been discussing this 'endgame' side effect in detail. Since this in my view will likely be the 5th or 6th chapter of the general slowdown (that is, rising borrowing costs), it is very important to both discuss and prepare for.

    DISCLOSURE: I own shares of Ultra-Short Treasury ETF's (TBT, PST) as a medium to longer term hold. Nothing discussed here is investment advice. As always, talk to your financial planner before making any speculative equity investments and understand the risks involved and your tolerance for losses.

    Lets get right to it. First, I have argued that the 25+ year secular bull market in Treasuries may be nearing an end, topped out with a massive supply of treasury issuance upcoming to fund the rescues and bailouts stemming from the credit crisis. For a visual, take a look at what 10-YR Treasury Yields have done since 1981, with a peak yield of 15.84%:

    *NOTE: As bond prices rise, yields fall and vice versa. Therefore, when looking at this 27 year chart dating back to 1981, the downward move in yields brought with it a rise in the price of the bond; a secular bull market in treasuries.

    We are at now now. Calculated risk discusses how the US slowdown may affect demand for Chinese exports. China holds a large amount of US treasuries, in essence, funding our debt. If our friendly funders, for whatever reason, decide not to be friendly anymore a situation may arise where purchases of our treasuries slow, stop, or worst of all, reverse and holdings are sold. CR discusses the possible impact of Contracting Manufacturing in China:

    vicious.jpgAs China tries to stimulate their economy, this could have an adverse impact on U.S. interest rates. Let me explain ...There is a strong correlation between increases in mortgage debt and increases in the trade deficit. GDP in the U.S. is now contracting, and imports are falling and the trade deficit is shrinking. And as foreign CB invest less in dollar denominated assets (and also try to stimulate their domestic economies) this could lead to higher interest rates for intermediate and long term U.S. assets. As I noted in 2005, the result could be a vicious cycle with higher intermediate and long term rates further depressing the U.S. housing market and consumption.
    The premise is simple. China is eager to fund our debt, buy our treasuries, and continue exporting their goods to us as long as our economy is thriving. As our housing market busted, our mortgage equity withdrawal faded and our consumption slowed, we import less from China and others. This lowers the trade deficit but more importantly, also lowers the attraction of our treasuries by these outside monsters. Less foreign investment in our treasuries at a time when supply is about to go through the roof, could lead to the end of artificially low yields, especially at the longer end of the curve where the fed has little influence. CR shows a visual of this vicious cycle above.

    The second blogger discussing this 'endgame' is Paul Amery of PrudentBear.com in his piece "The Credit Crisis Endgame" published Friday:
    It looks increasingly likely that the endgame in the credit crisis will be a bloody standoff between investors and governments. Their battlefield will be the market for government bonds, where countries all around the world finance their deficits.

    On the surface nothing remarkable is happening – the 30 year US Treasury bond yield recently hit an all-time low of 3.88%, as investors sought a safe haven during equity market turbulence. Yet while nominal bond yields have declined, the credit risk component of US Treasuries has been on an increasing trend since last year. According to data provided by CMA DataVision, the credit specialists, the 10-year credit default swap spread – a form of insurance contract against issuer default – has risen steadily - from 1.6 basis points (0.016%) in July 2007, to 16 basis points in March 2008, to 30 basis points in September, to over 40 basis points on October 27 – see the chart below for the spread history so far this year. In other words the cost of insuring against a US government default has risen by 25 times in little over a year. Similar trends have been evident in the UK and German government bond markets.

    In both the US and UK, budget deficits are poised to explode, for a number of reasons. The recession is hitting tax revenues, while government entitlement programmes should soar in cost. Then there is the steadily increasing bill for the wars being fought in Iraq and Afghanistan. But the really big impact is coming from the rescue packages being thrown at the financial sector. Signs of strain in the US Treasury market are already there, despite the current low yields. Recent auctions have shown poor bid-to-cover ratios, and long tails (the difference between the average accepted yield, and highest yield), both signs of shallow demand. Delivery failures in the secondary market have also hit record levels, a sign of poor liquidity. Market observers should keep a close eye on the progress of future auctions, particularly as the issuance schedule picks up.
    While a default by our government is highly unlikely and would be the equivalent of Financial Armageddon, we do not need it to happen to see higher yields in treasuries. All that needs to occur is a loss of confidence by the markets of the US's ability to rollover and repay these debts at attractive levels. Remember, the yield that is paid at the long end is driven by the market players, NOT central banks! So, this yield is exposed to market forces and the yield tied to longer term treasuries is what the market is willing to buy them for. If demand slows, the yield will have to rise to make it more attractive!

    I'm a contrarian investor, and I like to sell near tops and buy near bottoms. Right now, the treasury market seems to have some forces against it that could lead to higher rates for all of us. Forces include:

    a) a 27 year secular bull market
    b) massive upcoming issuance (supply) to fund the rescue of our financial system
    c) markets questioning credit worthiness of US resulting from this crisis and actions taken; rising CDS premium on 10YR treasuries as an example
    d) effect of US slowdown on China and other exporting countries that hold massive amounts of our treasuries and have been funding our debts
    e) flood of interest into treasuries over the past year as a safe haven driving yields to ultra low levels; when market turns, reversal could be dramatic
    f) introduction of Ultra-Short Treasury ETFs; hmmmmmm....

    Feel free to offer further market forces I may have missed, or chime in on your thoughts about this very important topic. Always look ahead, invest wisely by knowing when to sell and when to nibble, and prepare yourself for multiple scenarios that may lie in front of us!