Excess Reserves Go Berserk As Lending Flatlines

It's not too often that you see a chart that looks like this. So when Noah found it he sent me an e-mail asking for a plausible explanation as to what is going on with excess bank reserves.

The guy I talked to at the St. Louis Fed on Friday couldn't explain much about excess reserves and why they might be so elevated, except to say that the Board of Governors collected these data, not the St. Louis Fed, and that it was reserves held on deposit with the bank. So I had to go to a different source for more insight.

According to Wikipedia, excess reserves are bank reserves in excess of the minimum reserve requirements set by a central bank. These reserves held on deposit were generally considered uneconomical as they earn no interest. For this reason, the Wiki contributor avers, banks minimize their excess reserve amounts by putting them to more productive use, usually by making overnight loans on the fed funds market to other banks who may be short their reserve requirements, on that particular evening. A good, succinct definition, but unsatisfying with regard to the current situation. So I dove into a little history.

Recall that back in May of 2008 the Fed asked Congress to allow them to pay interest on bank reserves (Noah discussed this in October, "Serenity Now...Thoughts out Loud" with the unintended side effect of hoarding cash in reserves rather then lend to deteriorating consumer). Permission for this had actually been given back in 2006, with a target date for implementation of 2011. The theory was that it would allow the Fed to better control the fed funds rate set by the Fed, but traded by the market. In times when banks had excess reserves and wanted to put them to work, they might actually be tempted to lend them out at less than the going fed funds rate. In fact, back in 2007 when the financial crisis was just getting started there were a couple of episodes where fed funds rates plunged to zero on a few trades when volumes were low.

According to a Wall Street Journal Online article in May of 2008 regarding the new reserve interest paying policy:

"In addition, the Fed could theoretically combat the credit crunch by buying securities or extending loans without limit without causing the Federal-Funds rate to fall to zero, something that could fuel inflation or distort markets."

So now that we have a picture of how banks deal with excess reserves in normal times, and a clue as to why the Fed wanted to be able to pay interest on bank reserves in normal times, let's focus on what is going on now in Abby Normal times, as Igor would say.

The Fed began paying interest on excess reserve balances on October 9, 2008 after the passage of the Emergency Economic Stabilization Act. Initially, the rate paid on excess balances had been set at fed funds minus 75 basis points, but that was quickly changed to fed funds less 35 basis points, starting October 23. The Fed judged that the narrower spread would "help foster trading in the funds market at rates closer to the target rate." Just to clarify here, the Fed wants to be able to control fed funds rates better, so it is paying a return on any excess reserves a bank happens to have, so that banks won't lend out their excess capital in the fed funds market at less than the stated fed funds rate.

Here is an explanation for the Fed's policy of paying interest on excess reserves in its own words. According to the Federal Reserve Bank of New York:

Without authority to pay interest on reserves, from time to time the Desk has been unable to prevent the federal funds rate from falling to very low levels. With the payment of interest on excess balances, market participants will have little incentive for arranging federal funds transactions at rates below the rate paid on excess. By helping set a floor on market rates in this way, payment of interest on excess balances will enhance the Desk’s ability to keep the federal funds rate around the target for the federal funds rate. Recently the Desk has encountered difficulty achieving the operating target for the federal funds rate set by the FOMC, because the expansion of the Federal Reserve’s various liquidity facilities has caused a large increase in excess balances. The expansion of excess reserves in turn has placed extraordinary downward pressure on the overnight federal funds rate. Paying interest on excess reserves will better enable the Desk to achieve the target for the federal funds rate, even if further use of Federal Reserve liquidity facilities, such as the recently announced increases in the amounts being offered through the Term Auction Facility, results in higher levels of excess balances.

Full Stop: Please Understand What This Means! If banks can't find any use for their capital i.e., lending it out to borrowers at rates well above fed funds, they could previously have kept this money on deposit at the Fed as excess reserves, and earned nothing for their trouble, or they could have lent the money out to other banks overnight in the Fed Funds market. Recall that a few months ago banks were afraid to lend to each other overnight, because they were terrified that the counter-party bank could go tapioca at a moments' notice. However, as the Fed has virtually guaranteed to rescue any large bank, it seems that a different problem has developed: keeping Fed Funds rates from going through the floor because banks don't really want to lend out any of their capital to real economy borrowers and are willing to settle for puny overnight rates paid by other banks. Additionally, as implied by the New York Fed's explanation concerning further use of Federal Reserve liquidity facilities, as the Fed keeps pumping up banks' capital bases by allowing them to swap bad paper as collateral for borrowing of safe treasury securities this problem is potentially exacerbated.

Now let's step back for a minute and think about what the Fed really hopes to achieve here. Some would argue that banks have more losses to recognize over the next couple of years than their entire capital bases (including all the preferred and common equity they have issued so far). The Fed has been allowing the banks to temporarily offload their bad paper onto its books in order to keep from having markdowns take their capital bases below the levels set by the OCC, Treasury etc. The way losses are normally absorbed is for them to be netted against bank earnings over time. There are three ways that losses will likely be recognized:

1) Presumably some of the bad paper the Fed is renting right now will go back on bank balance sheets as their earnings recover and there are enough profits for these losses to be netted against.

2) Some of the bad paper will actually be purchased outright by the Fed (taxpayers), removed from the banking system altogether and will be written off by the government.

3) Some of the bad paper that is STILL on bank balance sheets will be netted against new TARP funds that were taken in by the banks (essentially through preferred equity offerings to Uncle Sam) and the TARP funds taken in will melt away.

Just to be fair, the ultimate losses on the paper may be much lower with a government-managed process of this sort, than if all the banks went bust and vulture investors bought the paper at cents on the dollar in liquidations.

So how can the Fed help banks earn enough to offset all their losses and digest them without their capital bases ever falling so much that the regulators have to call them insolvent and close them? (So far the regulators have been afraid to even allow failures of big banks so they just arrange shotgun marriages before the bad news gets out).

1) The Fed allows the banks to borrow from the discount window at near-zero rates (ZIRP) and lend to the very best of borrowers for a spread above treasuries

2) The banks can just lend money back to Uncle Sam by buying treasuries.

3) If they don't like either of these options they can let their now-excessive un-lent capital sit as excess reserves at the Fed and get paid interest on them.

This is the reason for the mountain of excess reserves in the chart above. This chart also means that the fed is "pushing on a string" all the stimulus of TARP, Liquidity Facilities and ZIRP are just pumping up excess bank reserves right now, the funds are NOT getting into the market and therefore NOT having their intended multiplier effect (high velocity money).

Among the alternatives, only the spreads from lending to real borrowers are attractive to banks today due to the headlong rush by financial players into treasuries, but banks are still afraid to lend to all but the very best borrowers (and many of the lesser quality potential borrowers don't want to borrow), hence the explosion of excess reserves on bank balance sheets despite all the efforts to resucitate lending. Some would assume that this mountain of reserves will get put to work in the credit markets at some point and cause economic activity to go wild. My guess is that these excess reserves will be melted away as banks absorb losses on delinquent loans and as marked down securities see their income streams actually collapse.

Eventually, bank balance sheets will be cleaned up, the economic outlook will brighten and banks will start making well underwritten loans to worthwhile borrowers who are ready to invest in reasonable risk/reward opportunities. By that time some of the charged off real estate still on bank balance sheets may be found to have greater value than banks expected, but all of these would appear to be a long way down the tracks. At least that's my interpretation. In my view, any effort to force banks to lend out these reserves before the clean-up (recognition of losses) is finished will just cause more uneconomic loans to be made and ultimately prolong the pain. Banks are in intensive care and the excess reserve build we are seeing is like a measure of all the medicine being pumped in to save their lives. They are not ready to get up off the bed and run around the room yet. But we will keep watching this chart as a decline in excess reserves will probably signal that losses are being charged off as needed and eventually will signal that money is being lent out.

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Rates: Down!!

Guys,

Quick update from the mortgage market:

CONFORMING RATES ARE DOWN!

Here is where I'm at right now:

30 Year: 4.875% @ 0 Points.
15 Year: 4.500% @ 0 Points.

The New York Fed started buying a lot of MBS yesterday and as a result the FNM coupons are trading very well as of this morning. Noah discussed the Fed's plan on quantitative easing about a week ago in the piece titled, "Fed to begin Quantitative Easing in January".

If you have a mortgage professional that you work with, I truly suggest you call them and discuss your mortgage scenario - it might make sense to refi. As I have said many times, rates go up much faster than they come down and I believe it is a great time to take advantage of the opportunity.

Getting approved is really the obstacle we need to get out of the way at this point in time.

Best of luck!

-MM.

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Manhattan Inventory Stagnates - For Now

A: With Q4 in the books, we are getting the first glimpses of what happened to our marketplace in the period after the fall of Lehman and the gov't rescue of AIG. However, use caution when reading into these reports because they are lagging in nature & are still a bit skewed from new dev closings whose contracts were signed up to 18 months ago. I have reported on the illiquid nature of this market since mid November, as buyers seemed to disappear and sellers had to 'hit the bid' to get deals into contract. When bids disappear, we see who is swimming naked and nobody likes a slow market. But we deal with what the market offers, and right now it is a waiting game to discover the price that some of these deals occurred at. Since quarterly reports are the most widely used barometer of the health of this market, and are lagging in nature, we must wait until Q1 of 2009's report to come out to see where deals were done at for the past few months.

In the meantime, Manhattan inventory seems to be stagnate. Generally speaking, some sellers take their listing off the market in late NOV and DEC for the holiday season/new years, to 'freshen up' the property for re-listing. I think it is safe to say the decline in total inventory for the past month or so is a result of this, and NOT a result of increasing sales volume for this time of year.

Looking at the UrbanDigs Real-Time Manhattan Inventory Chart (this real-time tool was launched to try to add some transparency to our local housing market with the hopes of gaining more information on trends as they change), we can see the runup of inventory since August, and the latest retrenchment as we neared the holiday season.

I find the % change tool at the bottom of the charts very useful. As you can see, inventory is:

DOWN 3.39% over the past 1 Month

UP 9.91% over the past 3 Months

UP 19.68% over the past 6 Months

Quite telling. Real time data will compliment what I see out in the field and what I hear from clients I am in touch with. It will allow me to continue reporting to you guys on what is really going on out there, without bias, and with data to back me up. Granted, the data is not perfect and the guys at Streeteasy are doing all they can to make the data as accurate as possible, it's still very useful for trends.

Checking in on the accuracy of the data, I see the UrbanDigs Widget says we have inventory right now of 8,925 for Manhattan; this excludes listings with no address, duplicates, and is only for the island of Manhattan. Checking in on Miller Samuel's Co-op/Condo Listing Inventory charts, it seems we are very close! As you can see, at end of December, it appears total inventory was a touch over 9,000! A great sign and a vote of confidence to the Streeteasy tech team in charge of data mining & cleaning.

Back to the market, not much new to report. As reports come out showing price declines and sales volume declines, you will start to hear brokers talk about bottoms and recoveries! Ask yourself if they ever discussed this downturn to begin with! With unemployment in the city expected to rise in 2009 & 2010, as the wall street crisis spreads from layoffs in the financial sector to the real economy, it is quite silly to start discussing bottoms or recoveries right now. The boom that led us to peak arguably lasted about 8-14 years (seeing prices rise a wide and staggering range of about 100% - 500% for some units, depending on how far back you go and other variables attributed to the product), and right now I think we are about 7-12 months into the slowdown. Are we to believe that a boom of this caliber and duration, will lead to a downturn that only lasts a few quarters when facing a crisis of such high magnitude? Especially when this city revolves around wall street!

When I look at Continental Towers, a full service condo at 301 E 79th, I can see what a unit did in the mid 1990's compared to what it recently sold for (based on internal system data), and the results may surprise you:

16B SALE HISTORY

1994 - $240,000
2000 - $575,000
2008 - $1,100,000

17G SALE HISTORY

2002 - $391,000
2008 - $765,000

Want another condo? No problem, lets stay in the UES and check in at The Gotham, a full service condo at 170 E 87th Street:

W 12A SALE HISTORY

1995 - $630,000
2008 - $2,325,000

E 15D SALE HISTORY

1995 - $297,000
2008 - $1,070,000

How about The St. Tropez condo on 340 E 64th:

22B SALE HISTORY

2000 - $925,000
2008 - $2,090,000

12J SALE HISTORY

2003 - $860,000
2008 - $1,830,000

We can do this all over the place, but the point is that the boom that allowed prices to inflate the way it did relied on a number of factors that happened to converge at the same time, ESPECIALLY FROM 2002 - 2007:

a) ultra low interest rates in response to dot com crash
b) unwillingness to put money to work in stocks after dot com crash
c) deregulation in banking system allowing very loose lending standards
d) host of exotic loan products to allow the borrower to reach above affordability to purchase as much house as possible
e) securitization model allowing loans to be packaged, rated, sliced/diced, and resold to investors - leading to a quantity over quality management style that generated high revenues
f) combination of brokers/appraisers/lenders working to sustain higher and higher prices and to make the # work so the deal occurs
g) inflow of foreign demand from a weakening dollar helping to soak up pricey new development units specifically targeted to them; keeping inventory tight, buyers excited, and bidding wars everywhere
h) strong wall street bonuses
i) strong equity gains from 2003 - mid 2007

etc..This is now over and people need to realize the structure that was in place for the past 6 years, which helped to fuel the housing boom, is gone and not coming back anytime soon. In August of 2007 I explained this risky NEW WORLD. So, to expect a 'V' recovery or call for a bottom in housing with no quantifiable data or logic to say where demand will come from to sustain higher prices, is silly.

Quarterly reports are lagging and only count units that close, meaning the data for the next 1-2 years is likely to be sobering. As the tide goes out, we see who was overexposed, overleveraged, and needs to sell to raise cash because they can no longer satisfy their debt service. As long as unemployment rises, negative wealth effect is in place, lending is very tight, consumers get frugal, and confidence is declining, bids will come in at a snails pace compared to the past few years that we got used to. When the market stays illiquid, sales volume will reflect that and inventory tends to rise. Those with a time pressure to sell have to compete with each other to offer the best deal, and price discovery ultimately occurs. Finding a 'greater fool' to pay peak prices will get harder and harder as buyers read media headlines, hear about job losses from friends and family, and and see their net worth shrink from equity losses. Once we see where some deals are happening, it sets the new benchmark for the real-time market and bids are usually placed around that and the confidence/desire in the individual asset in question.

Appraisers already started placing a negative time value on appraisals, and one appraiser I recently talked to, it is the first time in 15 years their firm has done this for Manhattan. Time is what we need to get through this cycle. Until then, lets KEEP IT REAL!

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Shock & Awe! - NOI Gets Bombed

Noah and I have been talking ad nauseam about the imminent threats to the New York City land market, commercial real estate market and ultimately the residential real estate market as a result of the tentacles of the credit debacle going back quite a stretch. We opined over and over that job losses on Wall Street were on the way, the commercial market was going to get smacked despite being a "demand driven market" and that the residential market would go the same way. We have even gone so far as to assert that the near-sacrosanct multi-family rental market will get hurt due to over-use of leverage and, believe it or not, rent declines.

Unfortunately we were right and the world of "...New York is the capital of the universe, we never got overbuilt, they ain't making any more land on the island..." is now colliding with REALITY!

It's lights out. The shock came with the demise of Lehman Brothers and the subsequent stock market crash. But you are about to see the Awe. Or, as Brando says in Apocalypse Now, "The Horror....The Horror".

Just thumb through the latest issue of The Real Deal and you will see that most of the sales professionals in the real estate market have finally started to get real about their expectations. There is still a glass-half-full-mentality and downplaying of the bad news, but sprinkled in with the positive sound bites are some honest comments about the outlook. The denial is over. Here are a few select quotes on topics ranging from the outlook for the real estate brokerage business, to condo development, hotels, office and the retail markets:

"I bet we'll see fewer brokers in the business by the end of 2009."

"Just as in earlier down cycles when transactions dropped significantly, Darwin will probably apply to the field of brokerage. Shrinkage in the order of 30 to 40 percent would not be surprising, and would be consistent with the cycle of the early '90s. In the past five years, there has been an influx of inexperienced brokers."

"I have seen prices drop up to this point anywhere from 10 percent on the low end through 15 percent and up to 20 or 22 percent at the high end. And I think there is probably a little more to go."

"I recently drove by projects that were going up in East Bushwick and noticed that construction had stopped on a number of them. It can't get much worse than that. Those properties that are in fringe neighborhoods are not going to do as well."

"If a developer is smart, he will do everything in his power to get it sold or rented or a combination of both."

"After [the holidays], there may be a bloodbath with retailers both large and small leaving spaces, consolidating or renegotiating their leases."

"Investors in large properties with high vacancies, because there are very few deals being done in the $100 to $500 million dollar range and absolutely no prospect of refinancing for the next 24 months. Office buildings will be hit hardest, followed by new hotel or condo construction, which we see disappearing except in extraordinary circumstances."

"We currently are forecasting a year-end 2009 overall Manhattan vacancy rate between 13 and 15 percent. Honestly, I feel that the higher figure is more likely given recent data regarding layoffs and the general weakness not only locally, but globally. [That means] there will be no expanded demand from any industry."

"Business travel, we know, has fallen off sharply, especially to expensive markets such as New York. Domestic tourism is dropping as well due to layoffs and the overall nervousness of the economy. And finally, foreign travelers to New York are not as plentiful as the dollar strengthens. Hotels should have a difficult time unless they begin a significant reversal to the steep run-ups to room rates that we have seen over the past few years."

"Most, if not all, of the money that goes into the real estate sector will be in the form of the buyer looking to buy distressed properties."

"Buyers are looking for, in some cases, 30 to 40 percent off of what the price would have been a year ago for an apartment," he said. "They want real estate to mirror the loss in the Dow."

Check this latest commentary by the top building broker in New York City in terms of volume - pay attention to the facts not the spin. If this is what the folks who are habitually positive are saying....guys like Noah and I - who have been warning for almost 18 months about the dangerous imbalances in world economies, markets and the New York City real estate market - can now go a step further and say the debacle we feared is now in progress.

BEWARE OF DECELERATION TRAUMA!

This week's Crain's New York Business features an article Stress and the city, subtitled "New York is gripped by fear. Are we headed back to the bad old days of the 1970s." Now I am by no means suggesting that we are heading back to the those days, but these fears are based on the realty of unemployment, declining business profits, declining real estate profits, declining tax revenue, declining services and a declining quality of life quality. We called the peak in NYC quality of life several months ago in a piece entitled Is The Bloom(berg) Off The Big Apple so for Urban Digs readers this not a new concept.

In my opinion the next 3 -5 months is going to see a huge step down in prices across the board in New York City real estate both commercial and residential to reflect the coming declines in personal income and Net Operating Income from owning real estate. Don't let anyone tell you otherwise. As a result of declining operating performance of real estate properties, the weak (over-levered) hands are going to either fold on there own or be forced to fold. A significant part of my business is financing commercial real estate and I can tell you that there is very little financing available and what is available is aimed at loaning to own or de-levering over-levered but high quality properties (if you have need for bridge or mezzanine financing or partner equity aimed at de-levering a property or getting to income stabilization we can help). Financing for construction is all but un-available and financing for acquiring properties is only available at very low leverage levels, largely for ultra-safe multi-family property and essentially only to those who don't need it. With a decline in the profitability of operating real estate just unfolding, few want to speculate on how bad it will get so providing debt will only be done with a large margin of safety in debt coverage (particularly in the case of the remaining portfolio lenders) and/or collateral value (particularly in the case of hard money lenders). Purchasers of equity in properties can't get much leverage to do it even if they wanted to and are demanding big discounts to provide their own margin of safety. Anyone doing a "market rate" transaction, just hasn't gotten the memo yet.

We are about to see the same series of events we have seen in other markets around the country that led the way down on the residential side. First comes delinquency, then foreclosure, then the bank gets in trouble and finally when the bankers are fired, new bankers come in and punt the properties. Transactions are driven by "foreclosure buyers" and if you are not a distressed seller, you are just out of luck. We are going to see this process unfold in New York City in a compressed time frame. You see in Florida and Nevada the delinquencies were happening before the actual economy turned down and joblessness started to soar. Banks had not marked to market away as much of their capital bases and world markets had not crashed, so when investors went to the banks looking to buy shaky loans at a discount the banks resisted. In New York City, only the small local portfolio lenders will be able to hold on to REO (real estate owned) and hope to parse it out over time. I am already hearing that one of NYC's premier local portfolio lenders is liquidating their bad construction loans.

RESISTANCE IS FUTILE

CMBS financed properties and large bank-held properties will be being puked widely by the second half of this year. The credit rating agency Fitch has identified 1,100 fixed-rate CMBS loans that need to refinance on or before June 30, 2009. They will likely be transferred to special servicing where the holders will be able to extend maturities, while praying for a miracle - and that's the bull case. Most of these loans were performing well and could have been refinanced in earlier times: however, with the credit crunch and economic downturn, no one wants to touch this stuff. The point being that even reasonable assets and deals will have trouble being refinanced; forget anything with issues (and issues will be widespread). When you talk about New York City and you look at vacancy rates soaring for office space and retail, hotel guest counts plunging and partially sold condos that have to go rental you are talking about major pressures on Net Operating Income of the properties and not just cap rate expansion (where investors are simply demanding higher returns on their money for existing cash flows because money has gotten more expensive). Now investors are going to demand higher returns on their money while factoring in declining cash flows and property prices. This is what causes the big markdown in prices in a market. It's a familiar cycle in the stock market. In a bull market, price earnings ratios sometimes compress due to fears of a slowdown or higher interest rates, and you get corrections. In a bear market, P/Es get compressed and the E (earnings) get slaughtered, thats why stocks get bombed out. We are about to see real bear market action in real estate. As a market that is discontinuous and doesn't trade daily or smoothly, you should understand that when Wiley Coyote realizes he has run off the cliff, the first step down is a doozy.

The stealth transmission mechanisms will turn higher vacancies into lower rents and lower transaction volumes into lower prices for residential units despite people's difficulty imagining how everything works in reverse after such a long bull market in real estate. When people lose their jobs some have to move in with other family members, they don't just become renters or move downscale....demand is destroyed.

Grab a bunker and some tinted glasses Manhattan project style!

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Where Some Deals Are Being Done

(Posted by Toes)

I am eating some of the words from my post entitled "The Sky Is Not Falling" last year; yea yea I know the timing was way off! I'll leave the macro to Noah & Jeff, but continue to try to pass on to you what I am seeing out there in the field so you have as much real-time information as possible.

Maybe the sky isn't falling, but the weather sure isn't pretty & the near term forecast isn't so fabulous either. Yesterday's market reports analyzed in the NY Times barely scratch the surface of where sales are actually being done. Because it takes two to three months to close on an apartment in New York City (perhaps more given the difficult lending environment), the numbers for Oct-Dec 2008 may not show up until 2Q 2009 reports.

I feel very lucky that I have had a few listings go into contract in the past few months because it has been a very challenging market to navigate. Sellers and buyers have been so far apart (Noah's post on "The Buyer - Seller Disconnect" was both timely and accurate), it takes hours of educating and negotiating to bring people together. So here is some anecdotal information about what I have experienced happening in the market since October.

A one bed condo that probably would have easily sold for $900K earlier this year is closing for 12% less (went into contract in Nov)

A one bed co-op with comps near $585K is in contract for about 15% below the comps (went into contract in Dec)

A studio with comps at $475K received two offers at $425K, over 10% below what it probably would have sold for in 2007

A two bedroom co-op that appraised for $1.1M in August will go into contract at around 18% below that amount

Although these were all priced around where the comps sold, deals are being done 10%-18% below recent comps. Take it for what it is worth, and what I am seeing out there in the market right now.

The studio and one bedroom market is where most of the deals seem to be happening. Larger apartments are not faring as well; clearly a result of the dismantling of wall street, high paying jobs, need for cash, and the difficulty in financing larger deals. Since smaller units are selling and fewer new developments are closing, the median and average prices in NYC are going to correct as the next few quarterly reports come out.

We seem to be back to around 2006 prices. For my buyers, I am looking at the building's sales from 2006 and making offers in that price point, or looking at recent sales and taking 10% off of the price, if not more, depending on how much competition there is for that type of product.

Unfortunately most sellers haven't come to the realization that prices are down more than 10%. They can keep riding the market down, or they can do some soul searching, realize that they probably (hopefully) made their money, swallow their pride, and take the offer. I know how hard it must be, but if you have to sell your apartment in the next six months, that's what you have to do.

Toes says: If an apartment is being marketed everywhere possible, the most serious buyers will come in the first three weeks on the market. If you don't get an offer after 30 days on the market or if 30 buyers come through the door, the apartment is not priced appropriately for the current market conditions. Time seems to be a seller's enemy right now as the market is trending down and appraisers started to do negative time adjustments on their appraisals.

Toes says: 3% price drops are ineffective in this market. A 5% to 10% price reduction is needed to get buyers' attention.

Toes says: Buyers: put in a few offers, be patient, and look for sellers who really need to sell. Don't forget that if interest rates go from 5% to 6%, but prices come down 10%, your monthly payments are exactly the same. It's impossible to try to time the bottom of the market, so try to combine finding an apartment that you love, taking advantage of low interest rates, and getting a great deal. The key is buying an apartment that makes you happy, that you can afford, and where you can see yourself living for at least the next 5 years.

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Pick Your Poison: Fair Market Value, Orderly Liquidation Value or Forced Liquidation Value

I'm a certified machinery & equipment appraiser (CMEA), one of my lesser-known talents. In machinery and equipment appraisal there is a concept called market exposure; my business partner who is a trained commercial real estate appraiser reminds me that the same concept also applies to real estate appraisal. Market exposure, loosely speaking, is the amount of time a property, company or piece of equipment would be expected to be on the market in order to produce a full price sale. A "full price sale" is generally defined as Fair Market Value (FMV). An appraiser has several ways of estimating Fair Market Value. In residential real estate they generally stick to the Sale Comparison Approach, or comps, for short. A sale of property with a normal period of market exposure should produce a price near appraised "Fair Market Value" based on comps. Just set aside for the moment that in a significantly declining market comps get stale quickly (as Noah has written about, appraisers have a strategy for addressing this called time value adjustment). When an entire company or a piece of machinery and equipment has to be sold more quickly than through "normal market exposure", an appraiser will look at two other potential values: Orderly Liquidation Value (OLV) or Forced Liquidation Value (FLV). These would be the values expected to be produced if the company or machinery and equipment had to be disposed of much more quickly, say, over 90 days in the case of OLV, or at auction (essentially immediate liquidation) in the case of FLV. These market exposure situations generally result because of a need to repay debts.

So what does this have to do with New York City real estate? As I said earlier, in the case of a Fair Market Value sale, value is generally expected to be 100 cents on the dollar vs. comps (in the case of real estate it would be time-adjusted comps). In the case of orderly liquidations of machinery and equipment, the rule of thumb is that the assets generally bring about 50 cents on the dollar of OLV vs. FMV. Forced Liquidation is assumed to result in recovery of about 25 cents on the dollar of Fair Market Value. I know from my Wall Street days that the orderly liquidation of a company is usually thought to bring 50 - 70% of book value, depending on how much of that value are things like receivables that can be sold at small haircuts and how much is land or machinery and equipment that must be liquidated at bigger discounts.

Real estate appraisal only has one definition for "distressed"-type sales.

According to the Dictionary of Real Estate Appraisal 4th Edition "Liquidation Value" is:

The most probable price that a specified interest in real property is likely to bring
under all of the following conditions:
1. Consummation of a sale will occur within a severely limited future marketing period
specified by the client.
2. The actual market conditions currently prevailing are those to which the appraised
property interest is subject.
3. The buyer is acting prudently and knowledgeably.
4. The seller is under extreme compulsion to sell.
5. The buyer is typically motivated.
6. The buyer is acting in what he or she considers his or her best interest.
7. A limited marketing effort and time will be allowed for the completion of a sale.
8. Payment will be made in cash in U.S. dollars or in terms of financial arrangements
comparable thereto.
9. The price represents the normal consideration for the property sold, unaffected by
special or creative financing or sales concessions granted by anyone associated with the
sale.

From what I understand, there is no rule of thumb for the markdown required to move property with less than "normal" market exposure, but I am already seeing busted condo developments where investors are valuing the property at the 50 cents on the dollar OLV level. They get there not by valuing them as condos, but by falling back on the value of the units as rental apartments, because no one even wants to think about having to sell new condos in this environment.

We have not yet seen Forced Liquidation Value type blowout sales and maybe we won't in commercial real estate. But I would not be surprised to see some OLV type residential real estate sales as we are seeing in commercial. For those who have been asserting that NYC residential real estate values could fall 50%...there is actually a pretty decent theoretical basis for their argument (although my official prediction is 40%), since we are all coming to understand that weak-handed sellers and vulture buyers set pricing in markets where normal buyers fear to tread. Orderly Liquidation Value is the watchword for now. I would be curious to know what Forced Liquidation Values look like vs. peak prices in places like Florida and Nevada where they actually are having auctions; 75% off seems too steep a hit even for these horrendous markets.

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NYC Job Loss Estimates Rise To 243,000 Through 2010

A: As I discussed in my 2009 predictions piece, '2009 will be a dark year for the city's economy'. Based on the latest report issued by the NYC Independent Budget Office, the city faces job losses of approximately 243,000 through 2010, and now faces 'swelling budget gaps'. The job loss revisions are 40% higher than previously estimated only a few months ago, and put it higher than the 222,000 jobs the city lost in the last recession. As I said a few times already, any broker, brokerage executive, or chief economist at a major brokerage firm that starts talking about bottoms or recoveries at this point in time, has little to no fundamental data to back up their argument other than that prices have started to fall.

According to NYC Independent Budget Office report:

"After several years of amassing large budget surpluses, New York City now faces swelling budget gaps as a long and deep recession erodes jobs and tax revenues. IBO projects that the city will lose 243,000 jobs from the peak during the first quarter of 2008 and tax revenues will fall by $2.8 billion in fiscal year 2009 to $34.7 billion and then decline by $380 million more in 2010.

Recognizing that the city will not be generating large surpluses to cover the shortfall between recurring revenues and expenses, the Bloomberg Administration and the City Council have ended the property tax rate cut six months ahead of schedule, taken steps to generate additional revenues, and cut spending. Despite these efforts, the city faces daunting budget gaps beginning in 2010—the upcoming fiscal year.

Based on IBO’s estimates of revenue and expenses under the November 2008 financial plan, adjusted for the tax measures adopted last month, we project that the budget gap for fiscal year 2010 has grown to $4.3 billion (10.4 percent of city-funded revenues). With little recovery of the local economy anticipated before the end of calendar 2010, we expect the fiscal year 2011 gap to reach nearly $7.0 billion (15.9 percent of city-funded revenues)."

The city lagged into this housing slowdown cycle (that saw the nationwide housing slowdown start around early 2006), and in my opinion is now experiencing the adjustment phase at a much faster rate than I originally expected. Unfortunately, jobs are a major driver of housing affordability and the overall health of buy side demand for any local marketplace. Given that the worst is ahead of us in terms of job losses, it is quite silly to start talking about a bottoming and outright ridiculous to start talk about a near term recovery simply because prices started to fall and there are 'sideline buyers' waiting to swoop in. If the argument does come up, ask what fundamentals are in place right now to support a rapid pickup in demand and affordability based on today's asking prices. I'd love to know. There will be time to discuss a recovery, but for now I just don't see any fundamental reasons to start.

Forecasts for our local economy continue to be revised downward, and unfortunately the worst is ahead of us, not behind us in terms of job losses. Talk about federal aid is sure to pop up soon. We are yet to see any drastic effects of changes in quality of life due to massive service cuts from budget issues, but clearly there will be some in the years to come. It takes time for the perception of quality of life in a given area to change, and I just hope the current powers that be can minimize damage to the quality of life that we got used to here in Manhattan. My greatest fear is damage to the perception of Manhattan as a 'great place to live and raise a family', but again, something like this takes time to both occur and diagnose.

What is interesting to me is the total revenues collected from mortgage recording taxes (MRT) and real property transfer taxes ((RPTT) compared to 2007's record collections year:

2007 --> $3.3 Billion and having grown 24.6% annually since 2001
2008 --> $2.6 Billion; down 21%
2009 (estimated) --> $1.6 Billion; or estimated to slide down 51% or so from peak levels in 2007

Budget gaps are projected to be $4.3Bln in FY2010, $6.9Bln in FY2011, and $7Bln in FY2012; so clearly there are no predictions for a local economic recovery anytime soon:

For now, we are dealing with the initial stages of the down cycle where bids seem to just disappear and the initial snapdown from peak levels occurs. This is the fiercest phase of the cycle and price discovery will occur over the next 2-4 months on where deals took place during the 4th quarter of 2008. What will the new benchmark be?

For what its worth, I am seeing an uptick in demand on the buy side for the past week or so but it is way too early to tell if it will hold or follow through via confidence in bidding levels. Some brokers I am talking to are also reporting a pickup recently. I generally don't feel comfortable devoting a piece to topics like this until I see the pickup sustain itself for a minimum of 2-3 weeks; so lets just take this as a grain of salt. It is very likely that bids will still come in 15-20% below peak levels and price in near term 'downturn risk' that is perceived to be ahead of us. Time will tell.

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Manhattan Absorption Rate = 12 Months**

A: Wanted to pass on some information from Vanderbilt Appraisers, courtesy of Michael Vargas, who is Co-Founder/Principal of the firm and performed more than 15,000 appraisal assignments. Now, keep in mind that Absorption rate is basically the amount of time a local market would take to clear out all the inventory, given current sales pace. The higher the rate, the more of a buyer's market it is because of rising inventory and slowing sales volume. Now, I put a '**' asterisk in the title for a reason; mainly because Manhattan has no MLS and there are different systems showing different data. First, read Mr. Vargas's update below, and then I will chime in with some two cents at the end, and do my own math with OLR/Streeteasy data to see how it compares.

From appraiser Michael Vargas:

A great way to determine trends in a particular real estate market is to analyze inventory and determine absorption rates. In appraisal methodology, the real estate market can only be defined as one of the following: Appreciating, Stable, or Declining. How does an appraiser determine when a real estate market most favors the seller (Appreciating prices); the buyer (Declining prices); or, is neutral (Stable prices)? The answer often lays in market absorption rates.

In order to account for seasonality (or extraordinary interruptions such as collapse of Wall Street!) our methodology employs the following:

Total # Currently Active / Avg # of CLOSED Sales Per Month for Past 6 Months

**The graphs above are figures compiled for the period of closings from 7/1/2008 – 12/31/2008

~~~Generally speaking, real estate markets are at equilibrium when the absorption rates are at 6 months

~~~For Manhattan Coops ALL market price segments (except for $300-500,000 market) are over 6 Month Supply and the Average Rate is: 11.6 months

~~~For Manhattan Condos the Average Rate is: 9.7 months (please note: the price segments under $1.5mil are indicating absorption figures of 5-6 months but these figures are in actuality much higher due to significant “shadow” inventory in the lower tier price segments.)

~~~For Upper East Side Coops ALL market price segment are over 6 Month Supply and the Average Rate is: 12.69 months

~~~For Upper East Side Condos ALL market price segment are over 6 Month Supply and the Average Rate is: 12.04 months

~~~The Absorption Stats indicate that the market is decidedly in favor of the buyer or a “Declining Market” scenario

~~~For the purposes of bank loans, once a market is identified by the bank and/or appraiser as “declining”, there is a 5% cut in loan-to-value ratios. For example, if you have a buyer qualified for a 20% down purchase transaction, there will be a counter offer by the bank prior to closing reducing the loan to 75%. Thus, your buyer requires an additional 5% down payment as long as the market is identified as declining.

~~~This is the first TRUE buyers market in Manhattan since 1993. The period from 1988-1993 was the last prolonged buyers market. Although there were brief periods of interruption, appraisers have indicated the Manhattan market as either stable or appreciating for 15 years in a row!!

~~~Inventory at the worst point of the last buyers market (1988-1993) was measured at 4 years!! as opposed to the current 12 month supply of housing.

~~~The Declining Market scenario is not a crisis of Supply (i.e. Manhattan is not overbuilt with too many units and no market demand for those units). Rather, the negative development is largely on the Demand side. The rate of closings fell in most price segments 40-50% due to the extraordinarily negative events in financial markets in Sept/Oct. The market will move toward equilibrium when demand is restored. Even a restoration of 25% of lost demand will go a long way towards realizing equilibrium again.

** Noah Again:

Great stuff, thanks Michael!

For sake of this discussion, I will be using OLR's data. OLR is one of 4 data companies that Manhattan brokerages use to connect to the internal sharing system. Since Manhattan has no MLS, this is one of four systems that currently is in place for the brokerage community to share listings.

Now, here is the thing. Michael uses a different system for his data, I believe RealPlus, which is one of the other 3 internal sharing systems for Manhattan brokerages. And he confirmed that the CLOSED data was for the entire month of December, 12/1/2008 - 12/31/2008; 31 days.

As of today, OLR states the following data from 12/16/2008 to 1/13/2009, 29 days:

PROPERTIES SOLD - 392
TOTAL # OF UNITS - 9,708

To get the absorption rate we divide the total # of active units in Manhattan by the total number of properties sold for this range which gives us:

9,708 / 392 = 24.7 Months
*OLR data uses less days and the past 4 weeks, not month by month

Clearly, there is a big difference between what this math comes out to compared to Michael's data. But I don't know much about OLR's data other than what is presented to me in their market pulse report when I log on.

Michael's figures for 12/1/2008 - 12/31/2008 were:

PROPERTIES SOLD - 688
TOTAL # OF UNITS - 8,500

Giving us an absorption rate of about 12%.

If I use Michael's DECEMBER SOLD properties # and the UD total inventory # at the end of DECEMBER, I get:

8,900 / 688 = 13 Months

I'm leaning towards using Michael's data where the number of properties sold for the entire month of December was used for the analysis. That gives us about 12-13 Months Absorption Rate for Manhattan. Either way, volume is way down the past month or so leaving us to wonder whether this anomaly remains just that, an anomaly, or if this is how the Manhattan slowdown will look like in its initial phases.

I will leave you with one last piece of data from Michael, regarding the number of properties sold in the month of DECEMBER for 2007 compared to 2008:

12/1/2007 - 12/31/2007 - 1,127 Properties Closed
12/1/2008 - 12/31/2008 - 688 Properties Closed

This tells us that closed deals are down about 39% year over year. It also shows the illiquid nature of the market from 2-4 months prior, since in Manhattan there is a time lag between when a property goes into contract and when a property closes.

UPDATE @ 10:31AM - Sorry forgot to point this out. Take a closer look at the absorption rate tables above the chart. You will notice the steady rise as you go to the next price point. Now this steady rise is likely normal in good times, but in today's market, the gap is widening and the biggest rises in rates are occurring in the higher end. Perfectly logical considering the nature of this economic slowdown.

Under $1MIL, both co-ops & condos, the average absorption rate based on the above table chart is 5.8 Months. It is safe to say, that the fastest and most fierce adjustments are occurring in the high end right now.

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Fed's Kohn: 2nd Round TARP to be Injected into Banks

A: It appears more & more likely that the 2nd tranche of TARP funds will be used similar to that of the 1rst round; injected directly into the banks. This raises the possibility of a TARP II or RTC like vehicle to be created to transfer toxic assets directly off the banks balance sheets to the government. I'm not defending more government rescues here, just looking at the scope of the problem, the trend of deteriorating economic conditions, and what the government already proved they will do to prevent systemic collapse. I wonder if/when in 2009 we find out officially that $700,000,000,000.00 wasn't enough to solve the problems we face.

Via CNN Money's article , "Fed's Kohn: Banks will get more TARP money":

Federal Reserve Governor Donald Kohn is set to tell Congress Tuesday afternoon that the lion's share of the remaining $350 billion from the government's controversial financial rescue plan will once again go towards propping up the nation's banks.

"I would expect the bulk of the remaining...funding to be devoted to strengthening financial institutions," Kohn said, according to a copy of his prepared remarks, which were released Tuesday morning.

The TARP was originally packaged and sold to Congress as a necessary, emergency rescue plan, that would directly buy troubled assets off the balance sheets of distressed banks. Instead, Paulson called an audible, and used the funds to inject capital directly into the banks to shore up capital ratios as more writedowns were forcing the banks to raise more capital. You remember those write-downs don't you?

The first batch of funds lasted about three months. Now they need the second batch. It seems likely that a portion of the 2nd $350Bln will be set aside for smaller banks, other sectors, foreclosure prevention, loan modifications, and who knows what else. But the biggest banks will likely get another communal injection of the same amount at the same time; just like last time. This way no one bank is exposed as more or less distressed than another. No way another $350Bln is enough to keep the banks fully recapitalized if the economy continues to worsen, more loans stop performing, and the distress spreads to higher quality debt classes. Lets not forget we have about $300Bln of ALT-A residential mortgage backed securities (RMBS) still on review for downgrades at S&P. What about Prime? What about HELOC's? What about Credit Cards? What about Auto Loans? What about CMBS? And on and on the debt pyramid goes.

I think the general strategy with these banks right now is to prevent systemic collapse by keeping the banks capitalized as the toxic balance sheet unwind continues. Clearly, the bulk of TARP round 1 was used to recapitalize and it appears TARP round 2 will be used in the same manner. Which leaves us with ridding the balance sheets of the remaining toxic assets that are causing the most problems. I see no reason why government will stop now, given the scope of the problem.

I recall this market exposure chart by T2 Parners, LLC floating around the blogosphere a month or so ago:

Here is the Full 116-page report from T2 Partners found online and issued December 18th, 2008.

Now, if this is close to being accurate and defaults are rising and spreading to higher quality debt classes, how long do you think another $350Bln distributed to hundreds of banks will last? If anyone has an updated chart on the market size of the above debt classes, please post in comments below.

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EuroDollar Futures Selling Off

A: Taking a step back from Manhattan real estate for a moment, I want to point something out. Since yesterday, Eurodollar futures have sold off noticeably. I want to explain why I think this will be significant IF the sell-off continues! Right now its too early and more of an eye-opener waiting to see if it continues.

In general, I have noticed a disconnect lately between credit indicators and equity indexes. Since early/mid 2007, credit indicators have been a very accurate LEADING INDICATOR of where equity prices were heading over the short term. In other words, credit markets were driving stock movements; first credit markets would deteriorate, and soon after stocks would have a new wave down as discussed in "Stocks Lagging Credit Markets" discussion.

But recently, credit indicators have come in (a good sign) as TED spread is down below 1, corporate bond spreads came in, LIBOR has come in, commercial paper market was improving, yet stocks did not rally as much as one would expect for these types of improvements.

Now, Eurodollar futures are selling off since yesterday. Look at the very recent drop, where I enhanced the section from the past 5 days or so:

*To get chart on Bloomberg Terminal type in 'EDH9' + COMMODITY + GO

This is important in the context with which it is occurring. First, let me get a textbook definition of Eurodollar futures:

A Eurodollar future is a future on a three-month Eurodollar deposit of one million US dollars.

CME Eurodollar futures prices are determined by the market’s forecast for the delivery date of the 3-month USD LIBOR interest rate. The futures prices are derived by subtracting that implied annualized interest rate from 100.00. For instance, an anticipated annualized interest rate of 5.00 percent will translate to a futures price of 95.00. On the expiry day of a contract, the contract is valued using the current fixing of 3-month LIBOR.

Eurodollar contracts are extremely popular due to their ability to accurately hedge LIBOR swaps and other market instruments such as mortgage market debt. The correlation with mortgage market debt is extremely high, higher than the CBOTs Treasury Futures contracts.

As Eurodollar futures fall, yields rise which means we likely will see the 3-MTH LIBOR rate rise too. When we see an equity selloff, usually we would expect rates to fall, to compensate for the expected slowdown ahead. But the fed has no more room to cut rates!! With Eurodollar futures selling off noticeably yesterday, and other credit indicators having less of an effect on equity movements lately, I wonder if things might be changing a bit in terms of WHAT FORCE moves the stars (equity prices). Lets never forget that the stock markets are probably the most widely used gauge as to the health of the economy.

Some thoughts:

1) If rates are at ZERO and stocks sell-off but eurodollar futures see another sharp sell-off at the same time, how much is 'credit risk' really deteriorating? How high may borrowing costs rise just as a new round of fear takes over equity markets?

2) Will this lead to a new round of forced selling to raise cash to compensate for coming rise of borrowing costs?

3) Does the 'credit risk' include worry over the US government's ability to repay its debts? I do NOT think the US gov't will default, BUT, that does not change the fact that market players won't QUESTION the US gov't's ability to repay its debts. That is why we have CDS trades on treasuries. Last time I checked, CDS on 10-YR US TREASURY was at a record of about 68 Bps. Anyone got the last quote?

So, will we see a surge in the 'other' credit indicators in the near future? TED? LIBOR? Will Eurodollar futures become the 'GO TO' indicator for the next couple of months? Time will tell, but my eyes are shifting to whether this may be signaling a new wave of fear based trading. If it does, it gets moved up my list of things to keep my eyes on.

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Submerging Markets - Catching Down to the US

Let's take some time out from lamenting the dour economic news at home, the sense of betrayal we all feel by the collective gods of Wall Street, captains of industry and frauds of our country (Madoff, this means you), and take some solace in the fact that we're not the only ones who %&*(#@!^'d up royally.

As I have opined before, unsustainable growth breeds fraud and poor underwriting. I have also written before about the many bubbles that formed around the world as a result of the globalization of capital flows and low interest rate environment that prevailed in many large industrialized nations following the
dot-com crash. In some ways, we are very fortunate that the US was not the only place where a bubble formed. As a result of worldwide deflationary forces, the US dollar and our Treasury securities are being seen as a safe haven by investors worldwide. You can read some of the elements involved in the US becoming the Donald Trump (circa 1990) of the world - we owe so much money other countries can't afford to let us go under - in my prior piece, Devil's Bargain 2.0. The following are some lowlights of economic news around the globe:

Why Spain's Economic Crisis is More Than a Housing Slump - this article discusses the economic downturn that has hit Spain and how the country's rigid union wage policies will make the downturn even more difficult. It also underscores the deflationary pressure caused by collapsing land values as seen in Japan for the last 20 years.

Ireland, in contrast to Spain, is seen as a model of de-regulatory, business-friendly policies. The country embraced foreign investment, chopped import duties, rewired its telecommunications network and invested heavily in education over the last 20+ years. But the good times rocked on a little too hard and long. This recent New York Times article chronicles the troubles of the country's leading real estate mogul.

Another form of capitalism was incubated in Russia - Gangster Capitalism - and despite the cosmetic reforms implemented by the Emperor of Gangster Capitalism himself, Vlad (the impaler) Putin, Russia still seems to be the Wild West of the world. The recent natural gas crisis involving Europe and the Ukraine is just the latest example. This recent article from German Magazine Der Spiegel walks through how the Russian oligarchs lost 180 billion euros in the economic crisis through frivolous behavior and excessive use of leverage. REAGAN FIXED THESE GUYS BUT GOOD; WE BROUGHT THEM CAPITALISM AND DIDN"T GIVE THEM THE INSTRUCTION MANUAL.....HELL, WE SEEM TO HAVE MISPLACED IT OURSELVES.

Fraud goes where the money is, and India certainly has been a nation that was making lots of money in recent years, leveraging off the Y2K software conversion business a highly educated, English-speaking population and relatively low wage rates. The Satyam scandal may be the only malfeasance that took place in India....NOT!, but even if it is, I guarantee you there was a ton of bad risk underwriting involved in the soaring property and stock markets.

Seeking Alpha, a web site targeted at the hedge fund set, gets a decent amount of thoughtful commentary, analysis and research by people with real expertise in various markets 9I say that because I'm a contributor). I love to read everything written on China by Michael Pettis, a professor at Peking University's Guanghua School of Management and ex Wall Street trader. He wrote a piece recently about how the economic implosions worldwide are now catching up with the great producing nations of the world....who in many cases don't have the government debts or consumer debts that the great consuming nations do. His contention is that the surge in unemployment could be even sharper in these nations and could lead to protectionist or economic expansionist policies that could cause a global trade war.

Even Japan, which took very little part in the world's bubbles this time around is taking a significant hit due to its status as one of the great exporters and premier manufacturers of high- quality goods. This recent Bloomberg article highlights that Japanese machine orders fell by a record amount in November.

Stresses on foreign economies are being expressed by increasing prices for debt default protection in the credit default swap market, as noted in this Bloomberg article. The pressure on European economies, particularly those that enjoyed high growth rates previously, like Ireland and Spain, is expected to put downward pressure on the euro for some time to come.

Obviously, as much as it may make us feel better to know we are not alone, the downside of this global economic slowdown is that there is precious little place to hide from an investment standpoint, and few catalysts for future growth. The system needs to be cleansed on a global basis and this will take a long time. More immediately, my guess is that we will see foreign nations catch down and through the US in terms of negative economic developments, starting with banking issues. Away from the European banks and UK banks, there was not much exposure to collateralized debt around the world and the mark-to-market losses had a much less severe impact on these nations' banks. However, we are now in the real economic downturn phase of this crisis where income declines and debt repayment capacity falls. Add to this a rapid decline in consumption of commodities and finished goods, and real economic pain is spread across consuming and producing nations alike. The true delinquency phase, where the market's opinion of defaults as expressed in debt security prices and spreads, is played out in the reality of borrowers failing to pay back debts, is now under way. The bad news on the economy has already been somewhat reflected in U.S. banking system losses due to the prevalence of securitized debt (although actual losses are soon to wreak a second round of havoc here). This is not true of the banks of less developed nations which will soon take huge hits from the real downturns now hitting their economies and the inability of debtors to continue to support their debts. Beware of falling BRICs!

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BAC/MER Gets Life Support / $100Bln Writedown?

A: And the tentacles of the credit beast attack again! If you missed the chart I posted a few days ago, take another look at the estimated market size of the different classes of derivatives held on the books of the financials ranging from subprime to CMBS to Alt-A to Prime to Autos to HELOCs to Leveraged Loans to Agency MBS to Commercial & Industrial to CDOs to HY Corporate Bonds; well you get the idea! It was meant to be an eye opener as to the scope of the problem we face here in our banking system.

So, now BAC gets $138,000,000,000.00 from the US Gov't in what amounts to $118Bln in toxic asset guarantees (including Residential / Commercial / Credit Default Swaps assets), and $20Bln in direct capital injections via the purchase of preferred shares with an 8% dividend. Think about this for a moment. Steve Liesman on CNBC moments ago explained it perfectly:

Consider if MER was a standalone company right now, this would be the equivalent of BAC saying that we are WRITING DOWN OUR ASSETS BY $100BLN & WE ARE GETTING CAPITAL OF $20BLN! This would be an extraordinary move on the part of MER all by itself and raises all types of questions. Ken Lewis was saying that we didn't mis-value the assets, rather, the assets deteriorated further in the 4th quarter.

Simply fascinating. If you did go back and look at the table chart from a few days ago, you start to get the picture of WHY these writedowns/guarantees or whatever you want to call it, continue to occur and at such alarming levels! The scope of the problem IS that big!

So, lets tackle another question that Jeff & I have been discussing, the accumulation of excess reserves. Here is the latest chart showing Excess Reserves at Depository Institutions via the St. Louis Fed:

Americans/Politicians/Economists and others are doing their ranting - LEND LEND LEND!!! Why should they? Seriously now. Considering that bank capital ratios are so messed up, toxic assets remain on & hidden off the balance sheets, consumer credit quality is deteriorating, consumption is slowing, savings rate is rising, businesses can't sell out inventories, and the economy in general is undergoing one of the most severe downturn's since TGD. Does this sound like a solid environment to be lending in? This is an environment where performing assets become toxic, and at a fast rate! Let's not forget what got us into this mess into the first place!

This is a solvency problem with our banking system and until the balance sheets are cleansed, get used to this type of news. Jeff wrote an excellent piece two weeks ago, explaining that excess reserves are rising dramatically because:

"...Among the alternatives, only the spreads from lending to real borrowers are attractive to banks today due to the headlong rush by financial players into treasuries, but banks are still afraid to lend to all but the very best borrowers (and many of the lesser quality potential borrowers don't want to borrow), hence the explosion of excess reserves on bank balance sheets despite all the efforts to resucitate lending. Some would assume that this mountain of reserves will get put to work in the credit markets at some point and cause economic activity to go wild. My guess is that these excess reserves will be melted away as banks absorb losses on delinquent loans and as marked down securities see their income streams actually collapse. "

I'll leave this piece with a few rants from two of my favorite bloggers:

MISH's "Bank of America Threatens Fed, Demands More Cash From Taxpayers" -

A shotgun wedding at a purposely ridiculous price with an agreement from the Fed to pick up the pieces later if necessary sounds just like what the doctor ordered. Of course it could be pure incompetence by Lewis, or a pure gamble by Lewis that the Fed (taxpayers) would pick up the pieces if it all came crashing down.

Congress, the Fed, and the Treasury are proposing that insolvent and overburdened taxpayers should bailout insolvent banks. The idea of course cannot possibly work, but the bureaucrats would rather believe in the Keynesian Free Lunch theory, than common sense. Let me simplify matters a bit with this statement. "Bank of America is Insolvent".

BR's "The $45 Billion Dollar Club" -

The United States of Wall Street just added another major holding to its portfolio of financial garbage: Bank of America.

Like Citi, BA has now received more MORE IN BAILOUT MONEY than its actually worth. (BAC = $53B; C = $21B) How this can ever be a profitable investment, as some mathematically challenged Congress-critters have suggested, is all but impossible to imagine. Blaming “previously undisclosed losses from its Merrill Lynch,” B of A threatened to kill their purchase of Mother Merrill. Treasury made an emergency capital injection of $20 billion, on top of the $15B and $10B already received by BA and MER respectively. The taxpayers will also backstop $118 billion of assets, setting up what is likely to be a jumbo money losing trade.

What should have happened in both instances was an orderly liquidation, selling off the pieces to competent managers who understand risk, and can manage smaller portions of the firm. Instead, the same idiots who helped destroy all of companies involved are still running the show.

Like Citi, the B of A monies are a terrible deal for the taxpayer — not a lot of bang for the buck, and leaving the same people who created the mess in charge.

Interesting times indeed. As I finish this piece, BAC stock is trading DOWN $0.25! I guess wall street realized buying stock in a very sickly patient that just received a new IV, may not be the best investment.

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'Aggregator Bank' Talk begins

A: Here we go! Im off to upstate NY for MLK weekend, so I hope everyone has a enjoyable and safe 3-day weekend!

I have discussed that an RTC-like vehicle is very likely since we got wind that TARP was being used to recapitalize banks, and not to buy distressed assets. The toxicity is way too deep for 700Bln to cover. Hard to imagine isn't it?

Bloomberg reports, "Paulson, Bair Raise ‘Aggregator Bank’ to Remove Toxic Assets":

The heads of the U.S. Treasury and Federal Deposit Insurance Corp. gave further momentum to the idea of a new government-backed bank to remove toxic assets from lenders’ balance sheets.

Today’s remarks come days before President-elect Barack Obama takes office, and signal a readiness among regulators to undertake what’s likely to be the most radical effort yet to unfreeze lending. Fed Chairman Ben S. Bernanke earlier this week urged a “comprehensive plan” to address illiquid assets, floating the idea of a “bad bank.”

An RTC like vehicle was one of my 2009 predictions under 'THE FED' category:

I really wonder whether a very big bank will have to be nationalized or not; Citigroup being the biggest question mark. For 2009, here is what I expect:

1) Second round of TARP will be used like the first, most going to inject capital directly into the major banks. The remainder, say $75Bln-$100Bln, may be saved to help other sectors, smaller banks, big developers, autos, homebuilders, and whoever else they decide to be worthy of taxpayer rescue.

2) Obama's fiscal stimulus will be near $1Trln, and will focus on jobs, infrastructure, homeowner relief, foreclosure relief, some pork, and who else knows what sector they feel like including. As with most gov't packages, we must question how efficiently funds are applied, used, and when the goals of the program are actually achieved. Will it take 6 months, 12, 18? In the meantime, how deep does the recession get?

3) TARP II or RTC like program to directly take on distressed assets from the big banks? As the first $700Bln goes to recapitalize, and the next phase has the fed focused on getting the system interested in taking on riskier assets by driving up treasuries, the final phase may be to rid the balance sheets of the spreading toxic assets. Lets be real, as the problem spreads to alt-a, prime, helocs, credit cards, auto loans, lbos, option arms, etc.., more and more assets are becoming toxic as deflation continues. The final phase may be to just transfer these toxic assets from the banks to an RTC like vehicle. I'm not for gov't intervention, just telling you what I think is possible. Maybe this program is another $700Bln, who knows.

I just dont see any other way. The strategy of RECAPITALIZE ---> SETTING SYSTEM UP TO TAKE ON RISKIER ASSETS ---> RID BALANCE SHEET OF TOXIC ASSETS, seems to be the most logical considering the situation. I am not in favor of this solution, this mess, more government interventions, more rescues, etc.., just talking out loud on what I think will happen. Without something like this, we will have multiple quarters ahead of us with more writedowns and more assets becoming toxic as the economic slowdown accelerates. Maybe that is what we need? I give up at this point even thinking about at what point the balance sheets will be cleansed of all the excess that was taken on.

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Manhattan Inventory Reflects Season

A: Generally speaking, the end of the calendar year for Manhattan real estate is slow. Between thanksgiving holiday, christmas/hanukah/kwanza/festivus, new years and whatever other holiday you may observe, the months of November & December usually see some stale listings removed in an effort to 'freshen up' for what normally is a more active bonus season in the months of JAN - APRIL. This year is certainly going to be unique because the wall street bonus season that usually takes place now, clearly won't. After all, we need wall street to exist if there is to be a bonus season devoted to it. Almost three weeks into the new year, it's pretty clear that inventory has come back on the market in anticipation of any type of pickup in demand.

Here is a 3-MONTH Manhattan Total Active Inventory chart showing you the dropoff in inventory during the month of December, and the sharp uptick of inventory over the past few weeks:

As a trader after a 3-day holiday weekend, its very hard for me to discuss real estate trends when BAC is trading at $5.92, C is trading $3.08, WFC is trading at $15.83, and JPM trading at $20.30. All I can say is wow!

For this morning's doom & gloom, look no further than Professor Nouriel Roubini's prediction that the entire US banking system is insolvent, via Bloomberg:

U.S. financial losses from the credit crisis may reach $3.6 trillion, suggesting the banking system is "effectively insolvent," said New York University Professor Nouriel Roubini, who predicted last year’s economic crisis.

"I’ve found that credit losses could peak at a level of $3.6 trillion for U.S. institutions, half of them by banks and broker dealers," Roubini said at a conference in Dubai today. "If that’s true, it means the U.S. banking system is effectively insolvent because it starts with a capital of $1.4 trillion. This is a systemic banking crisis."

Hard to discuss a bottom or recovery for Manhattan residential real estate when the banks that provide the loans are struggling for survival!

Expect more of the same in terms of general trends for our local housing market; slower than normal sales volume, and steadily rising inventory levels. I think we are somewhere in between the ANXIETY & FEAR stage right now for Manhattan real estate, which means we are likely seeing the evolution of the DENIAL stage in full force. As some sellers 'hit the bid' out of fear, other sellers are reaching their breaking point where the powerful force of DENIAL is overcome, and asking price reduced to a level once thought highly unlikely. When the bids disappear, we see who is swimming naked.

Unfortunately, based on the psychology of asset cycles, this means we still have the following stages left to experience:

DESPERATION

PANIC

CAPITULATION

DESPONDENCY

DEPRESSION

Savvy contrarian investors usually get rich by putting money to work somewhere in between the DESPONDENCY - DEPRESSION stage of the cycle. As for fierce seller competition, that usually kicks in around the DESPERATION - PANIC stages; anyone trying to sell a home in Miami/Phoenix/Los Angeles the past year or so knows about this stage! This is when sellers compete with each other to lower their asking price to a level that will re-stimulate demand, pitting seller against seller. I recall the process of selling my mothers house in East Northport, LI last year, an 11-month process from initial listing to contract signed. After every price cut, we found the competition reducing their price even more within a week OR a few new listings hitting the market at better prices. So, we had to reduce again and the cycle feeds on itself.

Whether this occurs in Manhattan will depend on HOW LONG THIS MARKET REMAINS ILLIQUID! One thing is for sure, Manhattan may be different, but it is in no way immune to macro forces! Any broker ranting, "buy now or be priced out forever" OR, "Manhattan has sideline buyers that will put a floor on prices", OR, "Manhattan never goes down", has been proven very wrong. This is a market, just like any other, that is comprised of buyers and sellers. So when the buyers disappear, the sellers must adjust the asking price of the asset.

If a seller has to sell, lowering your price is the best option; switching brokerage firms or choosing to list with a broker who specializes in your building is not the answer. Blame will be placed on the broker, but it should not be for marketing efforts! In my opinion, if a property doesn't sell it is NOT because of a marketing problem, it is a MARKET problem. If there is blame to be laid, it should be on the pricing strategy suggested that either puts a seller ahead of the curve, or behind it; now is not the time to list your property with the broker that promises the highest price and suggest a peak level starting price.

So, this broker-blogger will be keeping his eyes on sales volume to gauge how long this market remains illiquid. Its all about the buyers after all and your property is only worth what someone is both willing & able to pay for it at any given time!

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Financial Black Hole: Close To Nationalization?

A: Ok, things are getting a bit serious now that RBS seems to be a test subject for nationalization. The government already stepped up and rescued Bank of America & Citigroup recently. Yet the shares are trading as if both companies will be nationalized, go the way of the GSEs, and see equity shareholders wiped out. I just get the feeling that something big will happen in the next month or two. I don't know if the system is prepared? I'm sure that this is a major aspect of talks right now. We saw the nuclear weapon test with the failure of Lehman, and learned that letting BAC or C go that same route simply can't happen. When we saw Fannie/Freddie get nationalized, it seemed to go more orderly than I original thought. I wonder if a similar path will be taken again.

Look at this image showing the bottom half of my trading screen; it shows you the bid/asks of JPM - BAC - C as of 2:30PM:

Focus more on BAC & C! It's fairly clear there is absolutely NO CONFIDENCE in the common equity of these two ginormous institutions. It's not that these firms are expected to fail, but rather, that the common shareholders are likely not going to survive what lies ahead. With these big boys' stock price trading at such distressed levels, there are few to no options available should a cash crunch come in the near future. The government will have to step up again, which they could do using 2nd half of TARP, or something more drastic will occur. RTC?

I think we are reaching the point where something more drastic is likely to occur. Like the GSEs, I think we are very close to the point of no return, the black hole, where a decision needs to be made and what better way to do it then in the first few weeks of a new administration ---> clean the slate!

If they are going to do it, JUST DO IT ALREADY, and might as well do it to both BAC & C at the same time! Heck, I wouldn't be surprised if Wells & JPMorgan won't be down this road in another 3-4 months - do them too! It has been a busy path that has decimated investment banking and wall street as we used to now it. I can hear the cries of 'privatize the profits, socialize the losses' already, and they are growing louder! Free market capitalism? I think not.

A nationalization would trigger a credit event, and that means all those pesky holders of credit default protection would have to be paid out. Chances are, this has been discussed prior to any announcement and the process could be more orderly than some doomsayers think. This is the tangled web of finance that we have woven; the interconnectedness of the global banking system. This also is what played a large role in taking down AIG, a big issuer of CDS protection on the wrong side of some very big trades. Who issued protection against a credit event for BAC and Citigroup, and on the hook should either one go under government control? Who knows, as this market trades OTC and is largely unregulated. DTCC has a page showing you gross notional, net notional, and contracts on CDS for the Top 1000 entities.

Can the system absorb a chain reaction of events from such a large credit event? This is what the top dogs fear and probably are discussing. It started when the party just went on and on and on, then the music stopped, many were left without a chair, and there was nothing that could be done for those left holding highly toxic balance sheets when bids for structured credit assets disappeared and the housing/credit boom went bust. Picture a black hole with its fierce event horizon (the point of no return). I feel like Citigroup and Bank of America common shares are caught in the gravitational tidal forces sucking it closer to the point of no return.

If it happens, the common shares will be wiped out and prob open at like $0.50/share. But the credit event that is triggered and the domino effect of that is the situation to watch! Orderly Liquidation or Fear Based Selloff? I think the biggest test is very near and I wonder if the world has been preparing to handle such a storybook ending to this banking saga?

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Data Widget / Slow Blogging

A: Hey guys, sorry for the slow blogging lately as I got a bit busy with some new listings coming in and buyer clients. Also, the UrbanDigs Real Time Manhattan Data Widget should be fixed by tonight, and updated by tomorrow morning. Sorry for the inconvenience on that front.

Also, you will notice in about a week or so, that my own personal exclusive listings will be featured in the 300 x 150 ad spot right ABOVE the data widget on all UrbanDigs web pages. This space will ONLY be for my seller clients; and not a pay-for-spot ad service for other properties.

I was hesitant to put my listings on this blog for years, because I felt that it might negatively impact the essence of this site - that is why the only ads I have are that one spot (Floorworks NY has taken this spot for the past 10 months or so and is the ONLY flooring company that I recommend to clients) and Google ads whose revenue goes to site maintenance and data tools. Lucky for me, I am more of a buy side broker so I really didn't have many sales listings anyway. But times are a changing and I am getting plenty of calls from frustrated sellers that feel they need more of a macro-level consulting strategy to stay ahead and move property in this illiquid market. I also got way too many requests from sellers asking for a spot on UrbanDigs.com, and I feel the time is right to enable that feature in a non-obtrusive capacity.

It will not make the site appear any busier than the current layout, and it certainly won't lower the quality of content published on UrbanDigs.com. The goal will always remain the same, to provide forward looking commentary on the state of the macro economy and how that may ultimately affect Manhattan real estate! I try to tell it like it is, always have and I always will! Transparency is good and I am actively working to provide an even greater product for buyers/sellers of Manhattan real estate. 2009 should be exciting!!

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"The Times They Are A-Changin"....

A: With most slowdowns, come opportunity! I don't see this Manhattan slowdown as any different in terms of change. The MLS free, teflon sales market in Manhattan is starting to crack. And as the cracks grow to larger gaps, there will be new innovation & services popping up trying to find a better way to grab market share. I think there are about 8,500 - 9,000 real estate agents working in Manhattan, and I would not be surprised to see that number shrink by 40% by the end of 2010. As there is less business to go around for all, brokerages and brokers alike are scrambling to find the 'right ingredients', the right business model so to speak, to keep them at the leading edges of a changing landscape. And in the end, it will be the consumers of this great island that benefit most. The times, they are a-changin - and after 3+ years of blogging, I hope to be right in the middle of it!

Here some of the headlines hitting the presses after only 4-5 months of illiquidity:

Homestead NY Leaves Home -- For Good (The Real Deal)

Citi-Habitats Shuts FiDi / 57th Street Branches (The Real Deal)

More Trouble For Realogy... (WAV Group Newsletter)

Ilan Bracha Starts Blogging! (BrachaBlog)

Tom Demsker, former Elliman broker, Starts FSBO MLS (NY Post.com)

NY Times Ad Revenue Down 21.2% (MoneyNews.com)

Elliman Recruiting Agents For New Rentals Office (The Real Deal)

Brooklyn Properties Closes One of Four Offices (The Real Deal)

Core's Shaun Usher Creates 'Contracts Data' Reports (The Real Deal)

Shhh! Silent Offer Event For UWS Classic 7 - Don't Tell Anyone!! (Warburg Realty)

...just to name some of the doings & happenings in this exciting, or sometimes dull, marketplace we all work in! From talks with colleagues across different firms, I can tell you that brokerages are adapting to the slowdown in the following ways: cutting ad budgets, shutting offices, canceling Christmas parties, eliminating food deliveries for sales meetings, restricting uses of ad budgets, tightening split levels, etc..

One thing I can say, is even though Manhattan real estate may be slow, I still find it exciting because of the opportunities that lie ahead. This was one of the major reasons I started blogging in the first place.

This industry will change. A large percentage of brokers will either switch to part time, virtual agents or simply choose to take on a career change. Right now there is still plenty of hope that Manhattan real estate will bottom or even recover by the 2nd or 3rd quarter of 2009. Talk like this is silly with no evidence to support it, and usually comes from a source that never saw the slowdown coming in the first place. There will be a time to talk about recovery, but for now, let's keep it real.

As the business that is Manhattan real estate slows, the players that defined the industry will find it hardest to change course. For example, I would be very surprised to see a Corcoran or Elliman introduce a new type of brokerage model! Rather, that type of change will come from somewhere else. But where? Perhaps a disgruntled yet successful broker with a mission to change the world? Perhaps a broker-blogger? Perhaps a new startup? Perhaps a forum/site that managed to grab the attention of buyers - the gold mine of any slowdown? Time will tell.

The inefficiencies and shady behaviors that hovered over the traditional real estate broker and the model of their employing brokerage firm, will be the top focal points of those that attempt to innovate. This broker-blogger thinks the future is a bright one in terms of the transaction process and transparency for both buyers and sellers. Since I plan to be a part of this, I can't go into too many details on how I see the landscape changing, but I can say this:

1) Manhattan Will Have A Public MLS - the internet has grown to the point where maintaining a marketplace with only an internal MLS system, is almost impossible. Streeteasy.com, REBNY's Residential NYC, and OLR Public are the three venues working to bring a public MLS system to Manhattan. It basically is there now.

2) Brokerage Model Innovation - whether it is new FSBO listing service, a new Rutenberg syle of brokerage service, or Flat Fee consulting service, one thing is for sure: the traditional brokerage model seems threatened to me. Not to say that it is dying out completely, just that the future for traditional brokerage services does not seem nearly as bright as it did only a few years ago. As the market slowdown progresses and new innovations appear, the consumers will have more options at their disposal. The question really is, which model will be the winner? In the traditional world, only the most established agents will survive - albeit at a slower pace than in previous years; the rest will work part time or leave.

I have my thoughts on a new sell side model, but it is not quite ready. When the time is right, and model is tweaked to solve a few issues that I see, I'll take a shot! For now, the idea remains in development.

3) Transparency IS Coming - for the longest time, Manhattan real estate was clouded in mystery because of the utter lack of information available to the public. Not so anymore. Brokers can no longer pick & choose what supportive comps to present to a buyer before bidding, because that buyer can simply get an account at Streeteasy and see all the past years comps for themselves. This wasn't possible a few years ago. Now you can see full listing histories, all price increases/decreases, whether a seller switched firms and how pricing changed, etc..

You can also get real time charts right here on UrbanDigs to analyze the trends AS THEY OCCUR in our marketplace! Previously, we were limited to lagging quarterly reports released by the brokerage firms. I expect more in terms of this type of transparency to come in the future.

---

There was and still is a very low barrier to entry in the real estate industry. It takes a heartbeat to get your salesperson license, and the traditional brokerage model is to get as many producing agents as possible running around the city, working on commission only, bringing deals back to the home nest where the revenue is split based on production levels. So for an agent, finding a home is not a problem. But with sales volume down big time, deals will be much harder to come by and the established agents will have a huge advantage over newcomers.

In the web world, I think we will see at least 2-4 new ideas come out for sell side services, except their success will depend on a number of variables including:

a) level of innovation - is it just another site to list a property on OR a truly unique new business model offering services not seen before? How is the service being offered different from traditional models? Does the consumer really benefit?

b) stickiness of site - does this new entity have the reach that say a NYTimes.com or Streeteasy.com has? If the new entity is targeted to sellers, do they have the buy side reach to compete with the established big online players? Or, is it a model launched as quickly as possible, to be the first new one, depending upon press/advertising to get the name out? Building a large and sustainable target base audience takes time and is earned by the quality of content being offered. This gives sites like SE, PropertyShark & NYTimes Online a big advantage over newbies in terms of traffic. Efforts to gain market share in the reverse order (launch now w/ no footprint, and worry about getting traffic later), will have bumps along the road and depend on the uniqueness of the model offered.

c) credibility / trust - real estate is still a service oriented business where trust, loyalty, honesty, and ethics should play a key role; in addition to quality of services offered. This is one reason why I discussed 'stickiness' of site above - credibility is vital. The brokerage industry does not have the best reputation and I think any new service should focus on branding & credibility to build a new idea around. Its not a surprise that the new site nobrokersplease.com is building a sell-side consulting business around the embedded hatred for the brokerage industry.

..to name a few.

On the buy side, I see flat fee consulting as one of the more lucrative areas of future innovation. But it will be difficult to for any broker to just flip sides and offer pay-per-consulting services without an established virtual presence. Where will customers come from? How will this consulting be setup? What will the fees be now that the buyer gets outside, unbiased consulting while submitting the bid directly with the seller broker? What type of analytics will be available? How far does the consulting go? Hmmm, the options are endless and exciting.

These are unprecedented times, and no longer is this a market that brokers can 'fool' or 'trick' buyers into bidding wars or full ask offers; if anything we all learned that following what is happening around us really does matter! Its that simple. You can tell buyers to bid close to ask, but they likely won't listen or they will demand actual evidence to support such a bid. In short, what worked from 2004-2008 will not work in 2009 and on. Either you insult the intelligence of your client and lose their business, or you tell it like it is and hope that a seller is realistic in terms of pricing & motivation to move the property and a buyer is realistic in terms of how much downturn risk to price into the bid. Without the combination of the two, there will continue to be a disconnect between buyers & sellers and sales volume will remain pressured.

As the disconnect continues, innovation will arise to formulate a new business model to 'make a buck or two' in this new, slower world. There may even be some great new ideas that don't catch on because the timing is not right for the consumers to use the new service in mass. Buyers & sellers often scream about the inefficiencies of this real estate industry, but they must also know that unless they decide to actually use a new service that is introduced to better the consumer, the chances of survival are low. Which is why the next year or two should be very interesting. The times, they certainly will be changin!

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WEEKEND PRESS: Front Page NY Times Real Estate

A: Got some great press and with great company in this weekend's edition of Sunday NY Times Real Estate section. The article seems to focus on how the downturn is affecting the bloggers, either by job layoffs, traffic decreases, lack of content, or lower ad revenue. Lets discuss, and also take a look at how this site's traffic has fared over the course of this crisis. In short, traffic has been rising consistently as the severity of this credit crisis was revealed.

From NY Times, "And The Blog Goes On":

For readers, it was fun to pillory the design flaws of new offerings and to read about how one broker had trashed another in an overheard conversation in an elevator.

But with the recession in full swing and the housing market waning, what will these blogs write about now? It’s not entertaining to skewer a market where property values are falling and scores of people are losing their homes to foreclosure. Nevertheless, the blogs’ founders worry about declines in page views and advertising, and like the owners of other forms of media, they are trying to find strategies to deal with the recession.

Yes, it is true that there is no entertainment value in writing about a pressured sales market, where those that MUST sell are having a very hard time moving their property. But, readers of this blog were warned well in advance as the focus of this site has been to dissect the macro economic trends as they turned from bad-to-worse, way back in mid 2007, before the problem evolved into a full fledged credit crisis. In July 2007 I wrote, "MuBiS, Credit Fears, & Housing Woes" and I said:

In my opinion, Inventory, Wall Street & Jobs are the most direct fundamentals to the sustained growth of the Manhattan real estate marketplace in this past housing boom! Right now, this is what is supporting us and at the same time these fundamentals are the biggest threats to keep your eyes on! Should wall street flounder, resulting in a loss of jobs and high end salaries then it is very possible that more and more inventory will hit the marketplace at the same time that buyer demand loses a big umph.

A few weeks later I wrote, "Its A Risky New World: Credit Spreads":

It’s a changing world. Either you realize it and adapt with it, or you lose; plain and simple.

Those discussions, written over 17 months ago, started a shift of content here on UrbanDigs.com from writings focused on Manhattan real estate TO writings focused on the severity of the credit crisis, our banking system, and the overall economy. At the time, I started getting emails from people asking me to write more about Manhattan real estate and to stop talking so much about the macro economy. Hopefully now they realize why I didn't do that.

Today, we find our local marketplace neck deep in the slowdown that has wreaked so much havoc on the nations housing markets, banks, individuals, equity prices, etc..Turns out we are not immune as so many brokers have promised we would be. It also turns out that people out there are in fact interested in learning WHY this slowdown is as severe and unique as it is, compared to previous recessions. That is why traffic on this site has steadily increased since 2005, seeing monthly page views hit just shy of 600,000 and monthly # of visits hit over 105,000 last month alone; according to urbandigs.com server awstats! Here are some graphs showing you traffic growth over the past 3 years:

I have plenty to write about now that the eternal optimists and the most upbeat economists have realized this credit crisis is as bad as originally feared. I also will continue to write about the state of the Manhattan real estate market as we deal with this crisis, in real time as I see trends play out.

Jeff & I will continue to analyze, break down, and discuss the changing trends of the macro economy, the credit crisis, and ultimately endgame (some thoughts on the latter stages of debt-deflation), and how this all may affect our local housing markets! Let's keep it real and discuss openly the problems we are facing without bias, spin, and other types of misleading emotional bullshit. It is what it is, and either you adapt and survive, or you hope & get hit on the head with a 2 x 4. Heck, even Larry Kudlow has ceased being an eternal optimist lately!

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The 'Disconnect' Continues - It's All Relative

A: For what it is worth, I am hearing talk of some activity on the buy side from colleagues, but in my opinion I think it is all relative. The 4th quarter of 2008 saw Manhattan sales volume fall noticeably while most agents I spoke to discussed a 'complete halt' of business beyond what is considered normal for the end of a calendar year. Fewer calls, fewer appointments, fewer bids to submit, far greater low-ball bids to submit, fewer contracts signed, and overall just less action for almost everybody in this business. So I can pass on that market update here to you guys with a degree of confidence. Now, I'm hearing some talk of an uptick in demand (buy side calls, open house traffic, and overall general interest) and I too started to see some action again. However, there is a big BUT here! Its all relative! Getting a few more calls after experiencing nothing, may seem like a pickup in activity but for this time of year it is still nothing to get excited about! Considering the activity that is normal for this time of year, so far, most of the action I see is on the sell side. And for me, that is quite telling.

About 8 weeks I wrote about the "Buyer-Seller Disconnect" in the Manhattan real estate market that defined the illiquid nature at the time:

So, why is the market illiquid? Two main reasons:

a) sellers are anchored to peak pricing; yet to realize the significant decline in buyer confidence OR that their property is likely worth 15-20% below peak levels

b) buyer confidence has not only declined, but has been shattered; as prices fall and fundamentals deteriorate, more buyers have rushed to the sidelines rather than jump into the market to take advantage of deals. The sideline money theory (the argument, mostly by brokers, that there will be a floor on prices because buyers will flock to pick up deals from the sidelines on even the most minuscule of price adjustments) was proven wrong once again

This is the reason why even with the market down 18-20% or so from peak levels, as I believe deals are happening at now, the market is still illiquid!

We already discussed why we can't look to lagging quarterly pricing reports as a real time or even forward looking metric of this once fast moving market - if we did, deals would be happening at or near peak levels and clearly this is not the case. In this life after wall street, if you want a real time gauge as to what is happening in Manhattan residential sales, look no further than sales volume, price reductions and total active inventory trends. I can say with clarity that sales volume is down, price reductions are up and total inventory has steadily increased since mid 2008.

The pickup in activity that brokers are discussing is relative! It comes after a period of time when business came quite close to an all-stop! That is not to say that deals are not being done, they were, but at levels significantly lower than previous years volume. Want to see what I mean? Take a look at Miller-Samuels data on "Manhattan Co-op/Condo Listing Discount vs Days on Market":

Listing discount in 4Q of 2007 was just under 3%, while in 4Q of 2008 it spiked to over 7%! It's also clear that DAYS ON MARKET ticked up to the highest level since the 1Q 1997 - about 160 days, when the chart begins! A reflection of the bids disappearing and the reaction on the marketplace when buyer's seem to just go away!

The mechanics of a downturn generally start with sellers in denial about the true worth of their asset, just as the buyer pool dries up and the tide goes out. This market is no different. Sellers seem to be getting a bit more in tune with where asking prices need to be to stimulate traffic but that doesn't mean a seller will procure a willing & able buyer immediately. It does prove that pricing is the most important means of getting people in, and that the problem we face is a market based one - not a marketing based one!

I can tell you that for this time of year, right now 2009 is starting out to be slower than 2006, 2007, or 2008 in terms of motivation on the buy side! That is what I mean by all relative when discussing the continuing disconnect I see out there. Sure, action has picked up compared to a brutally slow 4th quarter of 2008, but then again, getting just a few calls and a few appointments would mean activity is picking up compared to the last 3 months. So what the heck does it mean to say activity has picked up if we are comparing it to a period of time that saw hardly any action at all? That's my point.

For this time of year, I was hoping for more motivation from my buyers - but knew that the herd like mentality of patience/caution when the market rolls over is a powerful one. I would say that 15% of my total buyer clients are aggressively looking right now, a far cry from previous 'bonus season' levels where the majority of my buyer clients were actively looking. Most of the action I have seen lately has been on the sell side, which is quite telling in my opinion for a broker who focuses more on the buy side and publishes a blog that discusses the negative forces at play in the real world.

As the process plays out I will report what I see. In the meantime, I want to see sales volume rise & more contracts signed before getting excited about any pickup in demand. The market remains illiquid and sellers must acknowledge where they are on the curve if they truly wish to sell.

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More Bank Hoarding as Velocity of Money Slows

A: Watching these St. Louis Fed charts come out is like seeing the scope of this credit crisis right in front of you. Its nutz! On one hand, we can see just how much the banks are keeping on hand as excess reserves (bank reserves in excess of the reserve requirement) that are not being lent out, while on the other we see the M1 multiplier plunge below 1.0! The M1 Multiplier # is officially defined as the ratio between M1 and the adjusted monetary base. But more importantly, the multiplier tells us just how fast the money is moving through the economic system! To see it plunge the way it is, tells me that money is not changing hands as much as it was, is not being multiplied as it was designed to do under a fractional reserve banking system where only 10% is required to held in reserve, and is a sign that credit is contracting! Relating this to a high end housing market like Manhattan, this is not an ingredient for calling any type of bottom.

From RGE Monitor:

Milton Friedman, who also advocated narrow banking, blamed the Depression on the Fed’s failure to offset the M1 money multiplier’s collapse. In the past year the M1 multiplier has contracted by over 40 percent, forcing the Fed to double base money. If the multiplier shoots back up, we could see the money supply and prices explode.

Use caution when interpreting that last sentence! Sure, we can see the money supply and prices explode, and that is one reason why I owned gold since the beginning of this crisis, but unless we see wage inflation, positive wealth effect, a strong jobs market, a fixed credit system, and confidence in housing as an asset class of choice again, chances are likely that any price explosion in the near future will be limited to commodities and precious metals; NOT housing.

Lets take a look at the M1 Multiplier's plunge below zero, via the St. Louis Fed data:

Quite a chart, huh? Now I know what you are saying, what the heck does a chart like this have to do with Manhattan real estate? Well, directly, it has nothing to do with Manhattan real estate; but indirectly and in my opinion, it is a sign of the deflationary pressures that we are currently facing. Fourteen months ago you might have asked what the heck the ABX Index plunge had to do with Manhattan real estate; well, now you know the effect that subprime had on our banking system and overall debt markets. It had EVERYTHING to do with our market, albeit at a lag.

Back to the topic. Banks are hoarding cash in excess reserves because their balance sheets are a mess, their toxic assets are marked at levels way above previous price discovery, they will be forced to raise more capital in an environment where issuing common stock is not an option, the economy is neck deep in the deepest recession in decades, and credit quality of borrowers is deteriorating. Want to see it? Here you go, via the St. Louis Fed data:

For a more detailed discussion of excess reserves, read Jeff's piece, "Excess Reserves Go Berserk As Lending Flatlines".

In a fractional reserve banking system, a system that Mish all too often blames as a key role in the current debt-deflation mess, money is multiplied each and every time it is borrowed and then deposited again! It's quite amazing to learn about the physics of our monetary system.

For example, did you know that if ALL DEBTS WERE REPAID, THERE WOULD BE ZERO MONEY LEFT IN THE WORLD? If you pay down your full debt, and pay down your full principal, you are taking money OUT of the system; which only new loans can replace. An extraordinary thought to grasp, and I too am having trouble grasping this concept. This is why we MUST let the system DEFAULT on their debts, via a comment string at Seeking Alpha that seems to hit the nail on the head:

The trouble with our system, which is used everywhere in the world today, is that there is no external source of non-debt money that can be left circulating in the economy when debts are being rapidly paid down. Rapid debt paydown is rapid circulating money supply contraction, as borrowers take money out of the economy to repay principal, which destroys that money. Only new loans can put that money back into the system.

Bank loan defaults help, because the person who defaults has already paid the loan money to someone else to buy a house or a vacation, and the person who 'earned' the money from the defaulting borrower does not have to pay the money back. This leaves 'owned' money in the system, but at the price of bankruptcies and destroyed creditworthiness.

The Mandrake Mechanism is the method of which the fed creates money out of nothing, to convert debt into money.

It's just that simple. First, the Fed takes all the government bonds which the public does not buy and writes a check to Congress in exchange for them. (It acquires other debt obligations as well, but government bonds comprise most of its inventory.) There is no money to back up this check. These fiat dollars are created on the spot for that purpose. By calling those bonds "reserves," the Fed then uses them as the base for creating nine (9) additional dollars for every dollar created for the bonds themselves. The money created for the bonds is spent by the government, whereas the money created on top of those bonds is the source of all the bank loans made to the nation's businesses and individuals. The result of this process is the same as creating money on a printing press, but the illusion is based on an accounting trick rather than a printing trick.

Craziness. To simplify this point, let me ask you a quick question:

Q: IF YOU ARE GRANTED A LOAN OF $10,000 TO BUY A USED CAR, AND YOU PAY THIS MONEY TO AN INDIVIDUAL WHO THEN DEPOSITS THE MONEY IN THEIR BANK, AND THE SYSTEM REPEATS TO ITS THEORETICAL MAX, HOW MUCH MONEY IS CREATED FROM THE ORIGINAL LOAN OF $10,000?

A: $100,000 of new money can be created (10,000/10% reserve requirement)

This is the way our fractional reserve system is designed, to expand the money supply by re-lending out deposits above the reserve requirement. A pyramid built on debt. But in this case, the pyramid seems to be inverted and the system is now collapsing on itself. Between trillions of destroyed shadow banking system wealth, nationalizations, write-downs after write-downs, credit contraction, asset selloffs, auction failures, ponzi schemes, CDS blowouts, fed facilities, rescue packages, slowing velocity of money, hoarding of reserves, etc., call it a Kondratieff Winter!

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Let's Not Face It - The Banks are Bankrupt

I have previously mentioned the likelihood that the U.S. banking system's total capital will be burned through as the mountain of bad debt is recognized and written off. Last night I heard Nouriel Roubini tell Bloomberg News that he estimated that the $1.8 trillion in losses during this financial crisis means that the largest U.S. banks are effectively bankrupt. I have been trolling around for some data on total bank capital in the U.S. (without resorting to adding up the tangible equity of a bunch of banks one at a time.....business is a little slow, but it's not that slow). I recently found some data on the Federal Reserve web site aggregating the assets and liabilities of all commercial banks in the U.S. Now this means we are missing S&Ls/thrifts and credit unions from the calculation, but let's face it - these organizations are numerous but in aggregate don't add up to a pile of beans, versus the big money center banks and super regionals captured here. As of January 14, 2009, the total assets of the large banks totalled $12.3 trillion. On the other side of the ledger, the total liabilities - including to a great degree deposits of $7.3 trillion (I have seen this data point before) , but also borrowings from other banks - totalled $11.2 trillion. The "residual" as the Fed calls it, would ordinarily be called shareholders' equity (the actual money the bank owns supporting all the loans it has made and all the deposits and loans it owes) came to a grand total of $1.1 trillion. The $12.3 trillion in total assets equates to 11.2x the "residual." Commentators like to talk about the higher leverage ratios that the investment banks were carrying going into the crisis to illustrate how quickly capital can be burned through due to leverage. As Nobel prize-winning economist Joseph Stiglitz of Columbia University recently wrote in an editorial for CNN:

"At 'just' 25:1 leverage, a 4 percent fall in the price of assets wipes out a bank's net worth -- and we have seen far more precipitous falls in asset prices. Putting another $20 billion in a bank with $2 trillion of assets will be wiped out with just a 1 percent fall in asset prices."

As you can tell that the 11:1 ratio I refer to above is still pretty awfulI. I do not know if these numbers include the accounting gimmickry of goodwill or whether the "residual" is hard tangible equity, but it dosn't really matter, because the losses in this credit crisis are widely believed to exceed $1 trillion. It doesn't take a rocket scientist to figure out that these large banks will see 50% to 150% of their capital wiped out over the course of the crisis if the estimates are correct. Since the estimates seem to keep rising, I would wager it's more likely that the losses will be even greater and, oh, by the way, I am sure the banks' assets and liabilities don't include off-balance sheet vehicles and credit derivatives positions which, in many cases, tilt the balance further towards the liability side and carry the risk of significant losses.

I would go as far as to say that the Federal Reserve data suggest that Nouriel Roubini is actually on pretty safe ground in saying that the biggest banks in the country are effectively bankrupt. I am actually willing to take that a step further....and I am not breaking new ground here.....the FDIC, which is insuring all these deposits, would be effectively bankrupt if they ever had to deal with the insolvency of these large banks. Way back in August, the Wall Street Journal discussed the FDIC's funding shortfall. You can read about it in this Reuters article.

Now for the latest twist. Even those conservative Savings & Loans and Thrifts...yes they learned a thing or two from the ass whoopin they took in the 1980s...have something to fear. The Federal Home Loan Banking System, which was created in the Great Depression (1932 to be exact) to help promote home lending, acts as a mini Federal Reserve to the thrifts of the world. It has equity which is contributed by the banks, each of which owns a significant amount of its regional Federal Home Loan Bank's (FHLB) stock, which it can lever up significantly through Federal Reserve borrowing and it then lends those funds to the banks in its region to lend out to their customers. You can read about it in this Bloomberg article entitled FHLBs May Fall Below Capital Minimums, Moody's Says.

The FHLB of Atlanta reported a loss for the fourth quarter, which has finally stirred concern about these highly levered quasi-government institutions.

So the banks are bankrupt and by association so is the FDIC; throw in the FHLB system for good measure. What's to be done? I'll tell you what. I'll make a deal with all of you. I will pretend that my bank still has all my money and can pay me back, and that if there is a problem, the FDIC will backstop the bank, as long as you promise to do the same. If we all do this for the next few years, the government can print enough money, while paying interest on the excess reserves the banks are not lending, to paper over the losses that need to be recognized. We will raise the money to pay for this from foreigners....and our own citizens.....who will buy U.S. bonds at super low rates to safeguard their savings (as the rate of those savings necessarily increase). We will all collectively pretend that the huge number of new dollars are still worth the same amount, because hey, who wants to own the peso when drug traffikers run the whole country, or the ruble, for that matter, when arms traffikers run that whole country. Sound like a plan? Great!

From the Blogosphere:

Jim Rogers Calls Most Big U.S. Banks Bankrupt

Why Bank's Still teeter After $232 Billion in Aid

FDIC to Go Bankrupt by 2009

The Next Bank Bailout - federal Home Loan Banks Positioned to Need Taxpayer Help

Naked Emporer image pen and ink on paper to illustrate Jean Roberton Hans Andersen’s Fairy Tales (1961). Borrowed from Cambridge Book & Print gallery.

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Bonus Bummer

A: Some of the headlines of the bonus activity on wall street. Now, there is a growing rage regarding wall streeters receiving any bonus at all, given that their employing firms would likely have gone bankrupt if it weren't for taxpayer rescues and aggressive fed policy; and honestly, who can blame them. It doesn't look good! But I think most of the bonuses are going to top performing PMs and retentions to maintain talent. Basically wall street was completely dismantled, and investment banking is nothing like what it was during the boom years. This is not coming back anytime soon. For a housing market inflated from the uber-high paying jobs and bonuses on wall street, I would expect a significant correction in the high end for our local marketplace when all is set and done, now that the wall street world has changed.

UBS Slashes Its Bonus Pool for 2008 by More Than 80%

UBS AG, the European bank with the highest losses from the credit crisis, cut its bonus pool for 2008 by more than 80 percent. Variable compensation for the bank’s employees excluding brokers in the U.S. is being reduced, Andreas Kern, a spokesman for Zurich-based UBS, said in an interview today. The pool will be less than 2 billion Swiss francs ($1.75 billion), based on the 9.5 billion francs UBS has said previously it paid out for 2007.

UBS reduced bonuses after it was forced to accept a $59.2 billion government aid package in October, mirroring the U.S.’s capital injections for the biggest American banks. Now that governments have a stake in the industry, employees will be paid less and firms will have to prove they are rewarding talent based on performance...

Wall Street Bonuses Plummeted 44 Percent During 2008

Cash bonuses paid to New York City employees of Wall Street firms declined 44 percent last year amid record losses in the securities industry, state Comptroller Thomas DiNapoli reported today.

Financial firms disbursed $18.4 billion compared with $32.9 billion in 2007, DiNapoli’s office calculated, basing its estimate mainly on personal income-tax collections. While the decline represents the most ever in total dollars, the bonus pool remained the sixth-largest ever, the comptroller said in a yearly report.

BofA Bonus Deferral Anger

Bank of America is planning to defer bonus payments to some investment banking staff this year – a move certain to inflame tensions between its employees and officials of newly acquired Merrill Lynch, executives familiar with the matter say.

With that probe under way, BofA was expected to tell staff at its capital markets and investment banking units on Thursday that it would be deferring payment of 2008 bonuses of $50,000 or more, according to executives familiar with the decision. BofA employees, who normally receive their 2008 bonuses in February, will be paid the first third of that sum in February 2010, with the remaining thirds paid in 2011 and then 2012, the executives said.

BofA insiders said the deferrals would be a particular problem for executives who had constructed a lifestyle around the near-certainty they would receive a bonus each February.

That BoA announcements is especially stunning. The thing is, the average base salary is about $150,000 - $250,000 or so, with bonuses making up the majority of the expected earnings for wall street employees. As most humans do, the lifestyle that an individual takes on usually follows the expected total income to be taken home. I wonder how many wall streeters either bought property or got used to a lifestyle that is suitable for incomes in the 350,000+ range? Now what happens when the money doesn't come in? How much was already consumed? How much was lost in their portfolio as equities plunged leaving less available to cushion any blow from job loss or loss of compensation? How much was expected to come in to be able to afford that $3M pad? Was a down payment placed on a high end new development with the expectation of a huge bonus coming in?

These are the things that happen when the tide goes out! The high end in Manhattan is especially vulnerable right now as the core of this crisis is on wall street and the high salaries and bonuses that employees got used to. While the 44% decline in bonus payments may not sound like armageddon to some, its pretty bad! What is to be expected in 2009? 2010? And what about all those employees that are not getting a bonus because they lost their job?

Problems arise when individuals are over-levered, over-exposed, over-consumed, and can no longer meet debt requirements to maintain the lifestyle that they took on. If they happen to own a high end property, with much of their wealth left there, guess what asset will be the first to go to make ends meet again? I'm sure many still have a good amount of equity left in these properties if they bought a while ago, but what kind of bids will they receive with the market so illiquid? I would think that owners of these homes still consider most of that equity to be there, until time comes to sell and they realize that bids are coming in so much lower; wiping out a good portion of that equity instantly.

I mean, are there masses of people buying $4-5M+ properties right now? I think the high end will see the most severe and surprising correction of the entire Manhattan housing stock as this adjustment plays on. For example, you may see a peak $7M property trade at $4M because the seller was forced to hit the bid and move the property; perhaps erasing 4-5 years of gains instantly. But I don't think we are at the point where a $1M property will trade at the same 43% discount. Also, be sure not to mis-interpret this statement to mean that all high end properties are selling at steep discounts right now! There needs to be the right setup for this to occur and that involves the high end property owner facing some type of distress and being forced to liquidate their asset or face default; and that means taking whatever bid is willing & able to close. When time pressure hits a seller, crazy things can happen.

Just last month, Doug Heddings of TrueGotham reports:

I have signed contracts on 4 properties over the last 3 weeks. Asking price last year of almost $5M ($1M overpriced and should have sold last year for $3.7M) selling to my buyers for under $2.5M.

So, its starting to happen already. According to Streeteasy's 4Q Market Report, the luxury market (defined by the top 10% of Manhattan condo/coop sales) saw sales volume for condos down 26% and co-ops down 32%! Was the 4th quarter a Lehman-induced anomaly or a glimpse of the new world here for Manhattan real estate? I have a feeling price discovery for high end sellers who were forced to 'hit-the-bid' over the next few quarters will be surprising to say the least.

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Price Discovery Phase 1 Begins

A: I started discussing the change in buy side psychology in late 2007, the low ball bids & cold feet in mid 2008, and the illiquid nature of the market in late 2008. Notice a trend there? It's all about the buyers, and it always will be. If you want to keep it real and stay ahead of the curve, then stay tuned with UrbanDigs as this adjustment plays out. It turns out what is happening in the economy truly does matter, making consulting for buyers/sellers that much more critical in times like these. For now, we are about to get the first wave of closings from the very illiquid market in the 4Q of 2008, following the failure of Lehman and rescue of AIG. As we get price discovery, it will confirm the real time reports written about here, and will set a new benchmark for comps analysis and bids received.

Here we go. Hard to ignore when you see a 16% decline for the exact same unit sold and resold within 16 months of each other, case in point 201 East 80th, APT 11D:

Please recall my 2009 Prediction for Manhattan housing:

For a real time guess on where we are right now, I put the deals being done right now down around 15%-25% from peak levels (peak being deals signed into contract in early/mid 2007).

With that said, everything has a price and this adjustment is all about price discovery. We are in that illiquid part of the process where price discovery ultimately surprises us, yet only the guys that transact and appraise the property know where the deal was done; UNTIL IT CLOSES. After the closing takes place, the world discovers the price and issues in the next level of price discovery that will set the new benchmark for comps and pricing analysis. The downturn is defined.

Sure enough, this is one pure example because it is the exact same unit; thereby removing the variables that differentiate one property from another whether it be a different line, a different view, a different renovation, etc.. With the same unit selling at a 16% discount, you can't argue the change in the marketplace.

There will be plenty more of these same unit deals selling for between 15%-25% less as time goes on, but most of the comparisons defining this downturn will be of different units in the same building. I don't have time to go researching for how many others there are out there like this, so I'll leave it for you guys to post in the comment section.

It's clear that the buyer bought this place right around peak levels, likely signing the contract around May 2007, and its even clearer what the new buyer perceived as the proper value when signing their contract in November of 2008. This seller seemed to hit the bid, which was 16% below what they paid for it. Calculating in buy & sell side closings costs and it appears to be about a $350,000 hit or so. I wonder what would have happened if this seller priced more aggressively when the listing was back up for sale in DEC 2007, instead of pricing $250,000 above the original level only 4 months after the deal closed. That was not the case, and five aggressive price cuts had to occur before a buyer was procured; a classic example of chasing a moving target.

I see that inventory took a big spike up in the past week or so, as we approach the 10,000 level. While we may be seeing traffic and getting calls, I wonder how many deals are really being done right now during what normally is an active season. In my opinion, there is still a disconnect between bids received and the seller's expectation on what the property should trade for. The next month or two will reveal similar deals that took place when the market froze up in the 4th quarter of 2008; setting up the new benchmark to compare future bids to against current active inventory. Truly interesting times.

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