Shadow Banking System: Death From Nowhere

Posted by jeff

Sat Feb 28th, 2009 03:18 PM


Who knows what evil lurks in the hearts of men......The Shadow knows....HEHEHEHE

Credit is likely to be tight for several years and it probably doesn’t even matter. That’s a bold statement to be sure. But let’s explore the reasons behind the declining lending capacity in the U.S. market and consider the fall-out – as unpleasant as this may be,it’s probably a good planning exercise for us all.

A recent Wall Street Journal blog post entitled “Bankers to Congress: We are Lending, We Swear!” discusses the fact that banks really are lending at a pretty satisfactory level considering the economic circumstances. The blog quotes some lending figures that I have updated/modified. According to the FDIC, total loans & leases oustanding for all FDIC-insured banks was $7.875 billion for the fourth quarter of 2008, compared with $7.906 billion at the end of the fourth quarter of 2007. Indeed, as the article states, this does seem to validate Ken Lewis’ admonition to Congress “Make no mistake: We are still lending.”

The piece also quotes economic researcher James Bianco as saying, “Every other time we’ve been 12 months into a recession and this goes back to the early 1970s, we’ve had negative growth in loans, but now we’ve got barely positive.”

That does not mean that underwriting has not tightened up signficantly and that the amount of leverage people are able to use – as expressed by loan-to-value ratios (LTV), loan-to-cost ratios (LTC) or debt service coverage ratios, has not fallen. I can tell you from my own personal experience that they definitely have in commercial real estate (including the return of personal guarantees being the rule rather than the exception), and the move has been dramatic at the margin, because some lenders were giving credit for pro forma income levels (and property values based on these) previously and they are now looking strictly at current run rate results. Additionally, appraisals of collateral now include negative time adjustments, because comparative transaction values from several months ago are not indicative of the new lower values being "discovered" as the economy slows.

The real issue for the lending market now and for the indefinite future is the disappearance of the “shadow” banking system. Now the shadow banking system means different things to different people. Many people consider the $43 trillion of credit default swaps (at year-end 2007) according to the Bank for International Settlements) or total derivatives of $500 trillion as part of this market. This is partly because securitized loan portfolios were often hedged in the interest rate derivatives and credit default swap markets and synthetic securitization exposure created through side bet vehicles called ABS CDOs. Further, many securitized loans were held in levered bank sponsored SIVs, (which ultimately have gone back on bank balance sheets or could) creating a nasty cocktail of leverage and counter-party risk. While I recognize that if the credit default swaps and derivatives markets went tapioca all at once we would all be living in caves (the reason why AIG will have an unlimited credit line with Uncle Sam), I don't consider these markets to be central to future credit availability because this activity didn’t really fund any loans directly, although it allowed the lending market to grow significantly, in an unregulated fashion and pumped up the money supply without central bankers really knowing it. What I am referring to as the shadow banking system is just the securitization market broadly, not to diminish the grave importance of this smaller market.

One of the greatest drains on lending capacity in the economy to date has been the virtual shutdown of the securitization market. According to the American Securitization Forum's Winter/Spring 2009 issue, "U.S. financial institutions securitized just under half the credit they originated between 2005 and 2007." According to the Wall Street Journal blog article, Dealogic reports that asset-backed security issuance has declined 90% year to year to $2.6 billion from $32.1 billion.

Securitization began because of the need for additional debt capacity in the economy beyond traditional bank loans when banks' capacity to lend was impacted by the 1980s/1990s S&L crisis. It allowed for discrete credits, be they auto loans, commercial real estate loans, college loans or small business loans to be packaged together with other loans of like kind, thus diversifying borrower risk to buyers of these securities. By slicing the packages of securities into first loss, or higher loan-to-value pieces and pricing these tranches differently, securitizations also tailored risk and reward to different investor objectives. Adding an insurance wrapper to these securities was believed to further reduce risk. Trading of securitized products and the ability to hedge them and make levered bets on them through the use of CDSs (the bigger "shadow" system) transformed corners of this market into trading markets as opposed to long-term ownership and investment markets. Hedge funds became the audience of choice for new debt issues of this type. As a result of all the factors mentioned above, pricing (the risk premium over treasuries required by investors) of securitized loans narrowed significantly, versus the pricing for an individual loan that would have been made by a bank (I wish I had empirical data to back this up, but suffice it to say that few banks still make auto loans, credit card loans etc. and hold them on their books as price competition from the securitization markets squeezed them out).

The production pipeline of securitization led to a moral hazard. The underwriting function was seperated further from the origination function and the ultimate ownership of the risk. (I know a lot of this is review for our many savvy readers, but bear with me). Underwriting standards, which normally move in cycles due to competition, simply disintegrated in the most recent up cycle.

The sub-prime implosion and subsequent chain reaction margin call impacting the securitization insurers, CDS dealers, and originators initially shocked the securitization market and drained liquidity from it. The subsequent severe economic downturn laid naked the poor underwriting that took place and excessive use of leverage across several sectors.

Having lost faith in the quality of securitized product and being made acutely aware of the hazards of the securitized debt manufacturing process, investors are highly unlikely to return to buying new issues from this market quickly. The new $200 billion Term Asset-Backed Securities Loan Facility (TALF) may facilitate liquidity for banks and financial services firms in the securitization business and it may even help forestall a refinancing crisis of certain maturing securitized products, but in my opinion that is the best that can be expected. You see, even if the securitization market became liquid again tomorrow, the risk premiums on these securities would trend much closer to the pricing of the underlying loans of these types than they did in the past. This is because the benefits of diversification and insurance wrappers have been shown to be smaller than previously believed and the fundamental underwriting issues are now well known.

Don't expect traditional banks to be able to rush in and fill the voids either. In many cases banks no longer participate in the markets where securitization became dominant. In segments like auto loans, they simply left the business and much of their underwriting and local customer expertise was dissipated over the years. In some cases, like commercial real estate, banks still made loans despite heavy competition from securitization (CMBS), but they were conservative and became cherry pickers only competing where price was not the determining factor.

When you look at the 400 basis point plus spreads that portfolio lenders to the real estate market are now demanding from borrowers.... and getting, it becomes apparent that even a new revamped, regulated and re-populated securitization market, will be charging much higher risk premia for its product. This, while banks will continue to tighten up underwriting considering the runaway losses they are experiencing, which I highlighted in my piece Bad Loans: Going to Extremes. In fact, as shown above, banks have not yet begun to really cut back on lending. I believe that is still ahead of us (but that's the subject of another piece). According to the American Securitization Forum, "banks may fail to meet approximately $2 trillion of demand for credit origination globally over the next three years in the absence of well-functioning securitization markets."

Mort Zuckerman, Chairman of the Board of Boston Properties, Editor in Chief of U.S. News & World Report and, until recently when he got caught holding Madoff funds, considered no dummy, views the outlook for the shadow banking market this way: Business Week

"This shadow banking system of money-market funds, investment funds, private equity funds and hedge funds that has been largely unregulated - that is no longer going to be possible."
Now he was referring to the uber uber shadow banking system including all non-bank regulated financial players, but his point is well taken. Fraud, mis-representation, over-the-top risk taking and out and out thievery have ruined the party for everyone and resulted in the obliteration of trust in the origination market and much of the buying community (funds etc.) for securitized product.

The securitization egg cannot be unscrambled! Hedge funds were a significant source of liquidity in this market, as were SIVs and other off-balance sheet vehicles. Crippled investment banks were the aggregators of product which was sourced by brokers nationwide and underwritten by small outsourcing firms. These firms are all in various states of implosion and now they will begin to bear the costs of finally being regulated. In fact, the busted securitization system is choking on its own feedback loop. According to Richard Watson, managing director of the European Securitization Forum, "banks that used to buy triple-A MBS tranches at 50 basis points (bp) over LIBOR can't or won't buy them today at a spread of 200 bp or wider, even though the annualized rate of return would be 25% based on a capital requirement of 8% against the position. We need to recapitalize the banks to get carry investors back into securitizations that provide cash to the real economy."

Hold onto your hat though, because here's a real shocker. I am not even sure any of this matters. My partner continues to rib me that no one has ever seen me and Paul Krugman in the same room together, but along with lots of things I don't agree with, he recently gave us all a simple, yet wise, reminder when he wrote "Everyone talks about the problem of the banks, which are indeed in even worse shape than the rest of the system. But the banks aren't the only players with too much debt and too few assets; the same description applies to the private sector as a whole."

Savings%20Rate.jpg As you all know, and this graph hauntingly illustrates, the savings rate in the United States has collapsed and dis-saving is likely to pick up in the near term due to lower compensation and increased unemployment. It is, of course, not a surprise, then, that people are not in the mood to borrow or consume. The trend towards thrift that I pointed to a few months ago in my piece Trading Down: It's Cool to be Frugal is likely to accelerate as Americans work double time to increase their savings rate.

I know there is not a huge amount of new news in this piece, but it was meant to persuade rather than inform. By stringing together information we have all been hearing in a coherent fashion (hopefully), I wanted to lead you to a conclusion.

When a market or industry cycle ends, "Everything Works in Reverse." We are in a credit cycle and we have most definitely shifted out of neutral and into reverse.

A year ago, my firm Guild Partners, made the rounds to commercial real estate clients and prospects with a presentation on the coming de-leveraging cycle. I sincerely hope it helped a few folks to be better prepared for the environment that has ensued. I am currently updating the presentation to take into account all that has happened in since. If you or anyone you know would like to hear our new presentation please feel free to contact us. I am more confident than ever that we are in a de-levering cycle that for a host of reasons will run its course despite whatever small measures can be mustered by our government to ease it. Those who are prepared for it will survive and maybe even profit.

FDIC Q4 2008 Headlines

Posted by jeff

Fri Feb 27th, 2009 07:21 AM

Break%20the%20Bank.jpgThe FDIC's quarterly banking profile is out for Q4 2008. Here are some headlines with my comments:

Industry Posts $26.2B Loss. That's maybe $262 billion of lending power up in smoke.

Industry Posts First Loss Since 1990. The prior loss came after charge-offs had peaked in 1989.

Quarterly Net Charge-Off Rate Matches Previous High- The annualized quarterly net charge-off rate was reportedly 1.91%, equaling the high water mark reached in 1989. The year-over-year increase in quarterly net charge-offs was led by real estate construction and development loans at $6.1 billion as I had posited in my piece Bad Loans: Going to Extremes These loans are going bad really fast because so many were either for residential homes or condominiums or for new retail centers located near new residential areas. The severity is also very high (amount that is charged-off versus original loan amount) because depreciation of these assets has been so severe.

Provisions for Loan Losses are More Than Double the Year-Earlier Total. and despite this high level of provisioning....

Reserve Coverage Ratio Slips to 16-Year Low - This is indicates much more reserving activity is needed, especially with the accelerating delinquencies being observed. The charging-off of these reserves against loan losses is how a large part of the pile of excess bank reserves being held at the Fed are going to get used up. I discussed this in Excess Reserves Go Berserk as Lending Flatlines.

A couple of additional comments:

1) A lot of the losses to date have been concentrated in the very biggest banks, where big trading losses were registered. With the significant acceleration in loan delinquencies now being seen, smaller institutions, which up until this point have remained unscathed, are going to begin to be hit and their lending power will likely shrink significantly.

2) We have just started to see the fallout from the commercial real estate and business downturns. According to this FDIC report, there were $1.1 trillion of commercial real estate loans outstanding at the end of Q4 2008. Commercial and industrial (C&I) loans, which can be secured by commercial real estate, plant & equipment, receivables or other business assets was another $1.5 trillion. This compares with 1-4 family residential mortgages which totaled $2 trillion and home equity lines, constituting another $667 million, where loan delinquencies have been concentrated to date. So the commercial and industrial problems we face have the potential to rival those from residential lending, although the relatively more mild over-supply issues should mitigate the losses here somewhat.

Bring on the Auction Hammer

Posted by urbandigs

Thu Feb 26th, 2009 01:59 PM

A: The NY Times discusses a batch of new development units that are going to be auctioned off in April. The meat of the article suggests that bidding will start some 40% - 45% below peak asking prices in the 1Q of 2008. I think its fair to say that PEAK in Manhattan was contracts signed anytime between 1Q of 2007 and 3Q of 2007, closing thereafter. I used contracts signed as an indication of where peak was, even though the transaction didn't close for months or in some cases, years later. The reason is that psychology started to shift around 4Q of 2007, as the credit crisis evolved from early 2007 statements by HSBC and the failure of two Bear Stearns hedge funds in mid 2007. From bidding wars, weak dollars & foreign demand to new development auctions, Manhattan has come a long way in a very short period of time! I discussed the potential problems of 'New Dev Closings', way back in October, 2007, and here we are today.

From the NY Times, "And Do I Hear $2 Million? No? $1 Million? Sold!":

Real estate auctions, rarely used in New York, have the potential to both move property and indicate to reluctant buyers what the true market prices are. Given the current sales drought, even a handful of auctions could reset prices for new condominiums citywide, said Jonathan J. Miller, the president of Miller Samuel, a Manhattan research and appraisal company. He said he expects the auctioned properties to sell for 40 to 45 percent below the asking prices of the first quarter of 2008, when the market peaked.

Accelerated Marketing Partners, a real estate marketing firm, is discussing auctions that will start as early as April on five mid-range to high-end projects in desirable neighborhoods of Manhattan and Brooklyn. “We’re in a deflationary, devaluating market in which no one knows the value of anything anymore,” said Jon Gollinger, the co-founder and chief executive of the firm, based in Boston.

In the auctions run by Accelerated, only a portion of a building’s unsold units are sold in one swoop, to avoid depressing values more than necessary. The remainder are marketed the traditional way, at the new, lower auction prices.

“The general impression I get is that this period of denial — the market-will-get-better mentality — is coming to a close,” said Mr. Miller, the appraiser, who will likely be working with Accelerated to determine the market value of units put up for auction.
Some great statements in this piece that accurately describe the deflationary forces and the effect it has on buy side psychology as this cycle plays out.

  • "Deflationary, devaluating market" - Yes. No matter what way you slice it, asset prices are coming down as the core engine that drove prices higher (ez credit, healthy securitization market/model, highly leveraged bank balance sheets, cheap money, positive wealth effect, high paying jobs / bonuses, etc.), is drastically changed. Some people still don't 'get it'. You really can't help these people, and they will continue to believe what they want to believe. If you believe the banks are solvent and well capitalized, well, then you probably also believed the chairman of Bear Stearns comments two business days before his firm was forced into a fed sponsored rescue with JP Morgan.

    The deflationary process is exactly that, a process. It will continue. The household side has not fully deleveraged, and the hit to the local economy is in its early stages. You may have started to notice a helluva lot more empty retail spaces available in Manhattan; so either you view this as a great time to start a new business or you view it as a symptom of a severe economic slowdown.

  • "The general impression I get is that this period of denial — the market-will-get-better mentality — is coming to a close," - Yes. It is. Denial marks the early phase of the asset cycle where the seller of the asset is anchored to peak pricing. Afterall, it is their home, and their home cant decline in value! This is enhanced when multiple brokers fight for the listing, and promise to deliver a peak level transaction because of their amazing marketing services that allows their sellers to bypass the deterioration in buy side confidence.

    guiness.jpgThe denial phase is still in play, but not nearly at levels it was 4-6 months ago. Sellers are starting to get it, but not en masse. We declined very sharply, in a short period of time, and we seem to hit a comfort zone; for now. I advise all sellers to get their property sold by May! Once we hit the slow days of summer again, traffic will be significantly lighter than it is now and reducing your asking price to re-stimulate demand will be your best option to get bids. Even still, you don't want to be forced to hit a bid when the market is very slow and illiquid, like it was in the 4th quarter!

  • "The remainder are marketed the traditional way, at the new, lower auction prices" - Hallelujah! So you are saying, the developer will auction off the first batch to see where the market values the properties and then price the remaining units at or near that level of price discovery?

    BRILLIANT! Just like those Guinness commercial guys! The market will determine the value of these products, NOT the broker or the sales office! Re-pricing your inventory to where the market values them, is the first step out of denial and on the road to moving inventory! Sure, it won't be pretty, but nobody said deleveraging and deflation was the American way.

    The new level of price discovery will set the benchmark for future valuations placed by buyers. Yes, I recall reading that somewhere on UrbanDigs by that Noah guy! Until then, there will be deals done at every price, and the process will play out in stages - not in one full swoop.

  • Bad Loans - Going to Extremes

    Posted by jeff

    Tue Feb 24th, 2009 08:22 PM

    "Darling I don't know why I go to extremes
    Too high or too low, there ain't no in-betweens
    " Billy Joel 1990

    Yes folks, we are back to early 1990s levels on bank loan delinquencies and charge-offs. This according to the latest Federal Reserve Board data just out. I'll be referring to a bunch of charts in this piece, but I am going to make most of them pop-ups, because large charts eat up so much space. For illustrative purposes I am featuring the chart below of delinquencies as a percentage of all loans.


    As you can see, with latest surge of delinquent loans from 3.67% of all loans in Q3 2008 to 4.84% of all loans in Q4, delinquencies are now firmly back in late 1980s S&L crisis territory. Surprised? At this point neither am I. But remember when people were saying that mark to market was grossly distorting what eventual losses would be like, etc. Recall that these delinquencies are not market trading related; these are loans where the borrower has gone delinquent and is no longer making payments to the bank. This is a true indication of the trend of loans going sour and it's ugly - real banking crisis ugly. All loan charges also surged in the quarter, rising 55 basis points from Q3 2008 to 2.01%. As you can see (View image), charge-offs have moved up even more rapidly than they did in the early 1990s, at higher rates of delinquency. This signals that banks are actually being more aggressive in reducing the values at which they are carrying these loans and hopefully portends a greater velocity of dealing with these problem assets than in the prior crisis.

    The difference between the banking crisis of the early 90s and this one is that commercial real estate delinquencies were much worse and really drove the banking crisis. Don't get me wrong, the residential downturn was bad and killed a bunch of S&Ls, but it happened on a rolling basis, moving from geography to geography over a period of several years. Once the system was weakened in this way, the recession of 1990 sparked a collapse of commercial real estate, which is what really put the large banks and insurance companies on their backs. As you can see from the following graph, residential loan delinquencies are literally off the charts (View image). After surging 100 basis points from Q2 2008 to Q3 2008, residential delinquencies tacked on an additional 181 basis points in Q4 2008. This is a runaway freight train and if it isn't stopped, I really fear for the consequences. Residential charge-offs are just absurd, but at least banks are writing these loans off and presumably liquidating them with abandon (View image).

    I don't like to be wrong, but I freely admit when I am. When I first started monitoring these data over a year ago, I couldn't imagine the commercial real estate market getting anywhere near as bad as it was in the early 1990s, because we didn't have the tax-driven over-building that took place in the late 80s. I was wrong. As I work with building owners and developers who are trying to de-lever their portfolios and I see the intimate details of how aggressively commercial real estate was financed and underwritten, I understand why we are experiencing such a painful commercial real estate downturn. I also have a theory about why we are seeing a surge in commercial real estate charge-offs (View image) to early 1990s levels, despite a slower trajectory of delinquencies.

    I believe that the initial commercial loan charge-offs are largely tied to new construction projects, particularly residential condominium projects and land loans (I know, tell me something I don't already know Jeff). As I noted in my piece Zombie Condos II - Day of the Charge-Off, when condo construction loans go bad, the severity of the losses can be incredible. So as we begin to see interest reserves on construction loans from the tail end of the bubble roll-off and these loans roll from delinquency to default, we will see a surge in charge-offs. The surge may start to dissipate in the next 6 months. At that point new delinquencies will more likely be from loans on "stabilized" investment properties, where owners paid too much for the property, experienced increased vacancies (particularly in retail, office and industrial) and don't have deep enough pockets to make their loan payments. While values for these loans will be haircut when they are charged off, my guess is the process will be much less severe depending on the market....malls in suburbs full of empty foreclosed homes could still experience pretty ugly writedowns, for example. This is in no way meant to minimize the trend in delinquencies, which is pretty ugly. Commercial real estate delinquencies surged 91 basis points to 5.42%, nearly doubling their rate of ascent from Q2 to Q3, but they are still well below the 10-12% levels seen at the peak of the early 1990s cycle.

    Noah and I both get accused of painting dark pictures on Urban Digs for some really weird reasons, like we are talking down the markets so we can profit by it - I wish I had about $100 million to spend buying buildings in NYC over the next 18 months - but unfortunately, I haven't raised it....yet....donors are welcome.... see me after class. Contrary to the doomsayer characterization, I have been an unabashed optimist regarding credit card losses this cycle because of all the warning that card companies had about a coming economic contraction. They saw the residential real estate market topping out in 2005/2006 and consequently tightened up their lending practices. For this reason, I expected the credit card companies to experience less horrific losses this cycle than many have been expecting. I have noted in the past that I also believed that the dysfunction of the securitization market was a much bigger problem for the credit card companies than credit losses. From the data we are seeing now, I have to admit that credit card delinquencies are about as bad as they have ever been (View image), I would note, however, that the credit card business was a much more conservative one in 1990 than it is today. On a relative basis I think these guys are actually hanging in there okay. The charge-off data only go back to 1995. As of today, we have not breached the prior highs seen post 9/11 (View image).

    In summary, residential delinquencies are driving the banking system into the grave and we saw an acceleration of this problem in Q4. I prefer to look at non-seasonally adjusted data, and perhaps, there was some acceleration in charge-offs to "clean up" the books, but there is no putting a positive spin on this; it's an unmitigated disaster. Commercial losses are surging, but are still nowhere near the early 90s levels. However, I expect the next 6-9 months to bring the maximum pain levels here, and the severity of losses will be ugly. This may moderate some by year-end. Lastly, I'm not crying for the credit card companies; they are doing relatively okay and continue to agressively pull back on lending, (check this article on American Express customer buyouts,) which will reduce their ultimate losses.

    Bonuses vs. Prices: Correlation or Causation

    Posted by jeff

    Tue Feb 24th, 2009 03:51 PM


    This graph of Wall Street Bonuses vs. Manhattan Apartment Prices was done by Matthew Kelley, a bank stock analyst at Sterne Agee, which is a brokerage firm that has a strong focus on analyzing banks and financial services firms as well as a couple of other industry groups. The data on bonuses comes from the New York Comptroller's office and Manhattan apartment price data comes from Miller Samuel. I wish I had thought of doing this analysis myself. The chart is a beaut. Matt lags the Wall Street bonus data by a year to reflect when the funds actually get paid out. The implications here are both intuitive and a bit scary, which taken together likely describes the nature of this high end recession. Here is another previous discussion on why 2009 bonuses will hurt more.

    Thanks Matt!

    Praying For Stella

    Posted by urbandigs

    Tue Feb 24th, 2009 08:48 AM

    I got some very bad news yesterday on my 10 year old chocolate lab, Stella. After being up the entire night before with her, thinking her stomach was upset or something, I realized that she was bleeding from the back of her mouth and rushed her to the AMC.

    An hour later, the doctor hit me with what they think it is: a mass in her entire right jaw.

    Today Stella goes for a cat scan and a biopsy to see exactly how big it is and what type of cancer it might be. I am holding out hope that it could possibly be something else. I guess we can use a few more prayers for her today.

    If anyone has been through jaw cancer before with their dog, I would really appreciate that you reach out to me so I can ask you a few questions. Either way we are planning to visit Dr. Post at the Veterinary Oncology & Hematology Center in Norwalk, CT for a 2nd opinion before doing anything. We hear great things about him, but would love any more feedback if anyone reading this has personally used him before. As always, I appreciate any help from you guys and in my own messed up way, find this therapeutic to share with my readers. Somehow your wonderful comments seem to pick me up. So, thanks to all that left them in yesterday's comment thread.


    Manhattan's Correction Now Front Page Media

    Posted by urbandigs

    Mon Feb 23rd, 2009 09:54 AM

    A: Just like they did to support and enhance the upside, with articles focused on the weak dollar, a surge in foreign investment, tight supply, and bidding wars, the media is now putting the Manhattan adjustment on its front page. The latest is Barron's Cover, 'Manhattan On Sale', covering the high end recession discussed right here on UrbanDigs almost a year ago.

    barrons.jpgDon't say I didn't warn you about the coming impact of the media! The media plays a role both in booming markets and in busting ones. The only problem is that when a market rolls over, the uneducated start blaming the media for causing the downturn!

    In booming markets, the media enhances the validity of the up move and argues why it will last for much longer; fooling many into buying at or near the peak. In falling markets, the media enhances the deterioration and tends to depress buy side confidence; causing what sellers/brokers claim to be an adverse feedback loop. Any broker that argues the downturn is the result of negative media, simply doesn't understand the macro forces at work here. Besides, if media enhances the boom side of the asset cycle, of course it should be expected to affect the bust side as well! And it does.

    I tried to warn my readers about this in my 'Preparing For Price Reports w/out New Devs' piece way back in July, 2008:

    Price data is lagging and misleading, and just as it mislead on the upside and brought unwarranted happiness to many homeowners out there, it will also bring unwarranted depression and media headlines!
    According to Barron's Cover Story titled, "Manhattan On Sale":
    First came Miami, Las Vegas and Phoenix. Now Manhattan's high-end housing market is cratering. With Wall Street firms stepping up layoffs, and money for big-ticket mortgages drying up quickly, prices for new york apartments and townhouses of $5 million or more have been falling and may well drop by another 30% before finally bottoming out. That could help turn the Big Apple into the ugliest housing market in America., a Website that pulls together listings and insights from a variety of brokers and buyers, now shows 795 New York apartments offered for $5 million or more, up from 518 a year ago.

    Realty brokers, the industry's natural cheerleaders, are now unabashedly glum about the high-end market. "The $5 million-and-above market is inventory-rich and buyer-poor," says Dolly Lenz, a broker to the stars and vice chairman at Prudential Douglas Elliman.

    One of the thorniest issues for the New York market is mortgage availability. Though high-end buyers historically have paid mostly or entirely in cash, more now need to borrow -- just when large mortgages have all but vanished.
    I would have been more impressed with Dolly Lenz if she was on record for predicting this downturn a year ago. But I guess that is not good business for one of the best producers, in a sales based industry. And here is stupid me, spilling my guts on UrbanDigs trying to tell it like it is! I digress.

    I'm sure we will hear calls for bottoms & recoveries from all the top brokers and firm executives, who never saw this downturn coming to begin with; or at least, who publicly wouldn't acknowledge it to begin with. This industry is a changing, you can count on that. Today we get news that BrownHarrisStevens is acquiring Edward Lee Cave boutique realty, via The NY Times:
    "I would assume that almost every firm has a negative cash flow," said Hall F. Willkie, the president of Brown Harris Stevens. While the number of closings filed each week is still plummeting, he said that the pace of new deal making had picked up a bit in January and February.

    For consumers, this changing landscape could create some nervousness, but the best brokers, those with the strongest deal-making skills and deepest knowledge of the market, will no doubt continue to thrive and offer useful advice throughout the downturn.
    That's quite a statement from Mr. Willkie, president of BrownHarrisStevens. I tend to agree that most brick & mortar based realty firms are being squeezed, from the drop of sales volume and prices that started with the collapse of Lehman Brothers last September. And I would also agree that the most established and seasoned agents will gobble up what's left of sales volume amongst themselves, making it especially hard on new agents that are yet to learn the ropes of this industry and build a solid referral base.

    Expect more innovation as time goes on, more transparency, virtual realty firms, new models, new buy side / sell side services, etc.. as this market continues its adjustment. It is virtually impossible to get away with broker spin and dirty real estate sales tricks to convince buyers to pay peak prices; without making the broker look like an idiot. Those with the deepest connections, networks, referral base, consulting expertise, sales savvy, and vision will succeed. The rest of the brokers will have to adjust to a new, slower world where more work is needed to make less money. Nobody likes slow markets, especially in a commission based sales industry like this one; but the future can be exciting if you envision it that way!

    Citi ATM Fees Can Buy You 1.6 Common Shares

    Posted by urbandigs

    Fri Feb 20th, 2009 02:09 PM

    A: Hat Tip to Johnny for pointing out. Quite a statistic huh? With Citibank charging $3 for ATM fees at their E 86th / Lexington branch, I could have purchase 1.6 shares of the glamorous Citigroup common stock instead - although I think the end result would be the same. Quite telling isn't it. Citigroup common stock is trading as if the company will be nationalized, and is basically a call option right now. At $1.90/share, the fee they charged me to take my money out of their amazing, technically superior ATM machine, could have been spent purchasing 1.6 shares of the common stock!


    Just do it already! The market knows it already. Do it while its almost fully priced in, lets open up limit down on Monday, take the global selloff medicine, get it past us, and move on! Don't do it half-way! Destroy the common and preferred, and give a haircut to bondholders. Get rid of management, selloff/writedown bad assets, restructure, and lets move on! Hurt those who took risks on their investments.

    Barry Ritholtz has a LIST showing those in favor of nationalization.

    The problem is I'm not sure you can just do one, without dragging down the remaining 3 big boys (Bank of America, Wells, and JP Morgan). So, what makes this so complicated is what do they do with all four and the consequences of a credit event on CDS counterparties exposed to those holding insurance on these guys. How will market react? Will it destroy the system or be a Black Monday that we can recover from? Will it cause runs on other banks?

    I feel like we are all waiting for this to just happen already!

    How IN is Gold, huh?

    Posted by urbandigs

    Thu Feb 19th, 2009 10:15 AM

    A: You gotta love it. Gold is clearly outperforming all other asset classes at a time when deflation is becoming a household name. It seems to be the only trade that doesn't have that 'big worry' or liability attached to it. The only other asset class I can think of that is even close is US Treasuries, and even that trade has its valid bear arguments. The only word on the street that I am hearing to bring down the gold trade, is that it's getting 'crowded'; a trading term based on too many players holding/buying the asset raising the concern that a 'rush for the exits' sell order may be looming. My deep down opinion is that gold is performing how it should, at a time when general confidence in fiat currency is declining. In my humble opinion, the gold trade is not a hyper-inflation trade right now, but more of a lack of faith in paper money/fiat currency trade that ultimately could test its inflation adjusted high. Those in it now for the inflation hedge, are along for the ride as the world united battles deflationary forces. Lets discuss.

    For those new to UrbanDigs, this may sound like I'm only now jumping on the gold bandwagon. So, before you read this please consider that I have publicly stated how 'I am very bullish on gold' in my 2008 predictions written DEC 2007, 'loved gold' in my JAN 2008 discussion on fed policy/ratings downgrades, and that I expected 'precious metals to outperform' in my 2009 predictions written DEC 2008. This streeteasy discussion forum has some tasty arguments supporting the gold trade as well.

    Right now, this is a global debasement of fiat currency trade, way more than it is an inflation trade; as gold is being viewed as money without the debasement of government interference. Below is a chart of the nominal and inflation adjusted (in SEPT 2007 dollars) price of gold since 1913; courtesy of


    For the next few years while global fiat currencies are systematically debased, via central bank printing to counteract local slowdowns, the future whiplash-inflation trade (maybe 2012-2013) will be slowly building as the Kondratieff Winter plays out. It seems logical that the gold trade is a multi-year trade; if it doesn't get parabolic too early.


    That's how I think. That's how sick I am. Somebody heeeeeelp meeee!

    Look at how gold has performed in other currencies, if you question this statement. One big fear I have right now, which happens to fit as a texas hedge with my gold trade, is a sharp selloff in some bond market, in some country, somewhere, at some point down the road. Its a very possible event that could spark a global equity selloff that ultimately earns a color to depict the day it happens on! This is part of the gold trade.

    Our fed, and I'm sure ultimately other central banks, have a period of quantitative easing ahead of them - pure money printing. They are purchasing agency debt now right, $115Bln so far, and may have to fill the void and buy longer term treasuries down the road, should our friendly foreign funders decide to lay low, and focus on their own slowdowns for while.

    Ray Dalio, chief investment officer of Bridgewater Associates, discussed this in a recent Barron's interview that is a very worthwhile read:

    "The Federal Reserve is going to have to print money. The deficits will be greater than the savings. So you will see the Federal Reserve buy long-term Treasury bonds, as it did in the Great Depression. We are in a position where that will eventually create a problem for currencies and drive assets to gold.

    You print a lot of money, and then you have currency devaluation. The currency devaluation happens before bonds fall. Not much in the way of inflation is produced, because what you are doing actually is negating deflation. So the first wave of currency devaluation will be very much like England in 1992, with its currency re-alignment, or the United States during the Great Depression, when they printed money and devalued the dollar a lot."
    I've discussed the process in which the fed 'prints money' by purchasing assets from primary dealers in exchange for electronic credits - virtual money printing. If your into this stuff, you also may want to read about the Mandrake Mechanism, our fractional reserve banking system, and how our money is multiplied.

    Keep your eyes on foreign purchases of US Treasury bonds, as well as purchases internally by the fed. If outside demand wanes, for whatever reason, the fed will be forced to pick up the slack and that is very dollar negative. As Mr. Dalio states so clearly, it will 'drive assets to gold'.

    There is no quick solution to the process of debt deflation. It has to just play out. Bad debts need to default and be written down. Leverage needs to come in. Business models tied directly to the old system of credit, need to be completely restructured. Bad models must die out and declare bankruptcy. Consumers need to delever and repair their balance sheets by increased saving and lowering debt load. This has to happen. Purge the excess. And when its done, most of us will be dizzy and wobbly from the multi-year pounding given to us the right corner, and still reigning champion of the world,...De - "Upper Cut" - Flation.................!

    You Worry About ARM Resets, I'm Worried About Recasts!

    Posted by urbandigs

    Tue Feb 17th, 2009 09:33 AM

    A: For a while now, most of the credit indicators that traders like myself use to determine the level of stress in the lending world, have come in. A good sign. But you must understand that these indicators came in because of the ginormous policy actions taken by our Fed and our Treasury. If you take a step back you will know that strong economies don't need this level of interference to prevent a systemic financial collapse. Yet I continue to hear words of hope from attorney's (you know who you are), agents, and anyone else I run into that the government is solving all of our problems and the world in the near future will be filled with candy canes and roses. Keep dreaming. While LIBOR and other indexes that are tied to Option ARM resets have come down greatly, its NOT the reset I worry about; its the RECAST! Let me explain for those who think every Option ARM is about to reset lower and help borrowers meet debt requirements.

    First, let me define the difference between these two real life forces for anyone with an Option, Pick-A-Pay, NegAm ARM loan product:

    LOAN RESET - when the RATE on your loan adjusts from an initial teaser level

    - when your loan is re-calculated with the new principal amount, to fully amortize within the previously agreed upon term; a.k.a, re-amortization of outstanding principal at the fully indexed rate. When the loan is recast, the payment required to fully amortize the loan over the remaining term becomes the new minimum payment, and the payment cap no longer applies.

    It's the NEW PRINCIPAL AMOUNT that is the worry here, because of all the borrowers out there choosing the negative amortizing monthly payment option that causes the original loan amount to rise over time! There are two main reasons why your Adjustable Rate Mortgage will re-cast:

    1) the loan reaches it's balance cap
    2) the first scheduled re-cast date, usually 5 years from origination

    This makes me especially worried about Wells Fargo, who acquired World Savings Bank (aprox $122Bln of option adjustable mortgages) - which was acquired by Wachovia in 2006; both with huge holdings of Option Arm, Pick-A-Pay, and other NegAm loans on their books. Now Wells has it all.

    Rolfe Winkler, who publishes, chimes in:

    When recast happens, the interest rates may or may not be more favorable but all of a sudden you're forced to make a FULLY amortizing payment on a loan balance that's 15-25% larger than the one you started with!

    90% of Option ARM borrowers make the minimum payment, which doesn't even cover interest. Regardless of where interest rates are, the recast to a fully amortizing payment will be much higher than the minimum payment the borrower has been making.

    Payment shock = instantaneous toxicity. Can't refi because loan balance is higher than when you started and the home price is WAY below what you originally paid. These things default like none other.
    Rolfe isn't the only one talking about this. The late, great Tanta of Calculated Risk discussed the recast problem in depth a number of times, in her attempt to educate readers of the dangers lurking in our future. Here is one of Tanta's discussions from AUG, 2008:
    As far as I'm concerned, a large part of the confusion here is that our friends in the media are not very careful about using the terms "reset" and "recast" consistently, like us UberNerds do. "Reset" refers to a rate change. "Recast" refers to a payment change.

    On a normal fully-amortizing ARM, the interest rate resets on what is called the "Change Date" (five years out for a 5/1 ARM, three years out for a 3/27 ARM, each year thereafter for the 5/1 and every six months thereafter for the 3/27, etc.). The payment recasts exactly one month after the rate resets. Mortgage interest is paid in arrears, so first you reset the rate, then the following month you recast the payment. "Recast" is really just a shorter word for "re-amortize": you take the new interest rate, the current balance, and the remaining term of the loan, and recalculate a new payment that will fully amortize the loan over the remaining term.

    By and large, the biggest danger for Option ARMs and IO ARMs is the recast date, not the first or subsequent rate reset dates.
    So, how many loans are set to recast? Look at this Barclay's report displayed in the WSJ last year to see the wave about to hit, right as the banks lie wounded on the ground:


    Think of all the borrowers, with Option Arms/NegAm/Cosi/Cofi/Pick-A-Pay loans, that chose to pay the bare minimum monthly payment in order to buy the house that otherwise they couldn't afford, and saw their original principal rise over time; and now the recast is near! You worry about the loan resets, I'm worried about the loan recasts!

    Zombie Condos Part II - Day of The Charge-Off

    Posted by jeff

    Mon Feb 16th, 2009 11:55 AM

    Zombies.jpgSo what's going to happen to all those partially built buildings around the city and the boroughs? I am afraid the prognosis is not good unless the developer has deep pockets....and who has deep pockets these days? Even those who do are up to their pockets in alligators right now. But let's go through an example of what happens to a real estate project when it fails to achieve its original highest and best use.....I'm warning those of you with weak stomachs that it ain't pretty.

    But first, an explanation of highest and best use. Highest and best use is an appraisal concept, but it's a really good way to think about how land is utilized. Simply stated, the highest and best use of a piece of land is its maximally productive (most profitable), legally allowable, physically possible and financially feasible use. So, for example I may have a piece of ocean-front property and I may want to build a casino on it, but if it isn't zoned commercial, isn't in a place where gambling is legal and the flood and wind insurance is ridiculously expensive, I'm probably not going to be able to make much money trying to do it and therefore probably won't be able to, period.

    In general, certain locations will best support certain kinds of development depending on zoning, traffic, supply/demand etc. In the last number of years the highest and best use of land in New York City in areas zoned for residential development (and even in some that aren't) was condominium development. Residential real estate prices were high and rising, supply was reasonably tight, financing was available on good terms and condominiums can be sold out quickly, allowing the sponsor to pay off their debt and extract their profit quickly. At the tail end of the real estate boom, when condo prices started to stall and financing condominium projects got hard to justify, hotel development became the highest and best use in many areas (even those zoned for residential) because the hotel market was very tight. The near 90% occupancy (which is about as good as it gets because they have to change the sheets some time) and high and rising room rates, appeared to support new supply additions. Hotel development should naturally have a high return because unlike office or retail properties which may be rented for five or ten years with rents indexed to inflation, hotels have very volatile/unpredictable cash flows. They are an overnight leased fee business, so you never really know what your cash flow will be tomorrow (yes, reservation systems give you some visibility, but you get my point) and you have to really manage them; they are probably the most management intensive real estate asset, followed by multi-family.

    Now, land sellers are not stupid. They know that their land is going to be bought by a developer building condos who thinks he's gonna sell out at $1,400 a square foot, or a hotel builder who is going to get $600 per key for his hotel in an acquisition; and they price their "PRIME HOTEL DEVELOPMENT SITE" accordingly. This is where the trouble starts. Developers, whose job is to develop stuff, buy this premium priced land, which already has a bunch of the developers' profit baked into the price because to develop stuff you need land. They then race to get the building built while the market is still good. That's unless they are the deep pocketed/experienced guys who buy up cheap land in a downturn, or when a neighborhood is bad, and sit on it until they can see that in two or three years when they finish building the market will be primed to take up the space. Read here about how even these very experienced, professional and deep pocketed types are being vexed by the current environment.

    Okay, now you get the picture of the challenges that developers face, but usually can surmount when prices are going up, up, up. Now I will share with you an example of what happens when things go wrong going into a downturn. Names and other details have been changed to protect the subject.

    I recently came across a project in an emerging market of New York City, where the developer built a very nice condominium building and ran out of construction funds when he was about 85% done. He had some delays and construction problems, resulting in cost overruns, and the bank refused to give him any more money. He had already used some mezzanine financing and could not access any more debt. NYC%20Land%20Price.jpgNow this guy, unlike so many of the New York City developers who were buying land in the last couple of years, paid only a couple million bucks for his land 15 years ago and could have sold it for $10 - 12 million 2 years ago, but decided to develop it. Note for those who have not seen my previous comments about the New York City land bubble, here is a chart of data from the New York Fed, from about 9 months ago. The chart doesn't look like this anymore...LOL.

    Unfortunately, he chose to build, and he actually had pretty good luck in pre-selling the units. He was able to pre-sell maybe 55% of the units for $900 per square foot (reasonable for the fictitious neighborhood), implying a value for the project of about $60 million. His construction loan was $25 million and he had $2 million of mezzanine debt. He needed an additional $6 million to finish the project. There is a school of thought that would say, despite all the financing challenges in the market and the decline in the value of these units since pre-sale, if you really put your back into it, you could blow these condos out in the next 6 mos. for $650 per square foot on average, leaving a project value of $46 million and a profit even after the additional construction cost of maybe $10 to $13 million.

    The 'take in a partner - finish the building - and blow out the condos' option doesn't actually exist in this environment. No investor wants to take that kind of risk, regardless of how much of the $13 million profit you offer them. Here's where it gets ugly.

    When a bank used to underwrite a condo deal, they wanted to know what it would be worth if they ended up owning it (they have revived this practice in the last 12 months, but they aren't really financing anything anyway). To be conservative they would value the building based on its use as a rental property, which the bank would own and rent out, until it got its money back, just in case the sale of condos was somehow precluded. If you read some of the recent press out their about Zombie condos, you will see that many have been going rental. So that is how this fictionalized property is currently being viewed by potential investors.

    Valuing the property as a rental, where the initial investment is recouped through years of rental income (which is very tax efficient, but slow) produces a current value of approximately $27 - $28 million. You see multi-family rental is not the highest and best use of a building of this type, even in today's environment where condo prices are down 15% plus. Even if it were, it's a way less valuable use than condos were a couple of years ago when the construction financing was put in place.

    As a result, we have to take the $28 million rental value, back out the $25 million construction loan, $2 million mezzanine debt plus the additional $6 million the bank would have to spend to finish the building and oops, this thing has negative value. In truth, the developer's equity is totally wiped out, the mezzanine debt position is worthless and the bank will likely take a loss even if they finish it themselves and keep it for five years. Since the bank isn't in the business of throwing good money after bad and managing multi-family buildings, they will probably look to sell the loan for a haircut. An investor looks at this and says, well the building is worth $27 - $28 million, but I need to spend $6 million to finish it and then I will have the carrying costs of marketing it and getting it rented up and maybe some interest cost, plus I want a good return. So, I'm only willing to buy this thing for .......drum roll please! Maybe $17 million. That's right, the project, which originally was selling out at an implied value of $60 million, will be sold for $17 million, with the bank taking an $8 million hit.

    Now take a look out your window at all those half built condos and hotels....OOOH that's gonna leave a mark. Understand as well that before the actual charge-off of the bad loan and sale to an investor at a price where something can be done with the site, the bank will have to foreclose on the borrower, who may try to declare bankruptcy to forestall the process/allow for some kind of debt restructuring, all of which can take a year or more. You can read about how messy these battles can get here. The one positive fallout is that land prices are going to continue to be crushed, which will eventually help make new development sensible again.....eventually.

    From The Blogosphere:

    Bank Insolvencies Tips & Tricks: Don't Feed The Zombies!

    Half-built Sites Cast Shadow Over NY Economy

    What's With All These New Hotels?

    Hilton's Huge NYC Hotel Sale

    Quinn:Unsold Condos Would Make Great Middle-Class Housing

    In Distress They Invest

    Streeteasy New Listing Grab Lag = 36 Hours

    Posted by urbandigs

    Sat Feb 14th, 2009 12:37 PM

    A: Not bad at all! has proven to be a very useful resource on a mission, and is quickly solving the 'no mls' problem that Manhattan seems to face. I entered this new listing into the system late afternoon on Wednesday. It was active on after about 36 hours. The REBNY rule is that you must share the new listing with the brokerage community within the first 24 hours - so the fact that SE gets it only 12 hours later is comforting; a system working as it should. This kind of performance tends to increase my confidence in the UrbanDigs Charts system, which is powered by the data aggregator.

    Here is the REBNY passage regarding co-brokered sharing of new listings:

    More particularly, within 24 hours after execution of the exclusive listing agreement, the Exclusive Agent must make such offer of co-brokerage to all Residential Members who have expressed, in writing, an interest in receipt of such offers. Information regarding the Exclusive Listing (the “Listing Information”) must be sent out via the REBNY Listing Service (“RLS”) simultaneously with any public dissemination of the listing information. If the Listing Information is not disseminated to the public, the Listing Information will be sent out via RLS within 24 hours of obtaining the signed Exclusive Listing. These obligations are mandatory unless the Owner has specified in writing that an offer of co-brokerage is not to be initiated with respect to the Exclusive Listing.
    Ahh, that last line. Quick lesson for you brokers, if you want to hold back a new listing for whatever reason, get it in writing on the listing agreement!

    Lets do some Old School blogging! Check out the interview I had with Michael Smith, CEO of way back in February, 2006:
    First and foremost, Mr. Smith made his position clear:

    "We entered this market knowing there would be competition, and we are executing on a clear strategy that will lead to a service that is very different than what we see in the market today. We care about the buyers of New York City real estate who use this site and we are here to stay."
    The guy was on a mission, and executed. And as the landscape changes, Streeteasy will be one of the guys leading the way.

    Quality of content or in this case, data, is the most important thing to perfect. Anyone with experience structuring database tables and perfecting rules via custom designed algorithms, knows that when you are dealing with multiple sources of data, gathering the data, cleaning the data and fine tuning the front end usability is a never ending project. Add in that the data is only as good as the agent that enters the information, and you instantly lose a ton of control over quality of content. Different formats, inconsistent updates, hundreds of sources to combine; its not easy. You see, when you compete with the NY Times, which had the NYC residential ad model secured due to the eyeballs online and in print, you have to solve a transparency & social networking problem that the competition was lacking. Streeteasy did this, and there is not much the NY Times can do about it right now.

    To think that you may need to spend years cleaning the data and fine tuning the data gathering methods, to get the system 'right', is a scary proposition for the 'make money now' minded institutions. And who can blame them. But that kind of environment allows for innovation and change, and what better an environment to introduce change than in a distressed one. Enter, working to fine tune and perfect a quality system knowing in advance that it is an ongoing job.

    The future will be an exciting one in regards to transparency and analytics for Manhattan real estate. I hope to compliment Streeteasy going forward, and make doing business in this great city more efficient and transparent for the consumers - and at the same time maintain the 'keeping it real' commentary/discussions that is so hard to come by in a commission driven industry that rewards volume.

    LeFrak: "If You're Highly Leveraged, See Ya!"

    Posted by urbandigs

    Thu Feb 12th, 2009 11:05 AM

    A: Great segment on CNBC this morning with Richard LeFrak, President of The LeFrak Organization. The whole interview is worth the 9 minutes, where he starts out discussing our local real estate marketplace and who really drives the market ('the buyers!'), and gets into the trouble in the credit markets and the process of deleveraging that is occurring now. If I can sum it up in one phrase, here it is: "we are in the process of returning to a new, less sexy NORMAL!"

    I love how Mr. LeFrak went into the how the savings rate was rising for the first time in decades. This is exactly what I took a few precious minutes of Inman Conference Panel time to talk about on January 7th:

    "Also, what nobody is really talking about is the savings rate. For the first time in 20+ years, the savings rate is spiking. This is very interesting. We went from a negative savings rate a year ago, to about 3% right now. People are getting very frugal. Consumers are buckling down, everybody is buckling down, they see friends losing their jobs, they see their net worth & homes go down, their portfolio go down and they are starting to save. Now think about the adverse feedback loop that a higher savings rate has on corporate America. If people aren't spending for products, what is going to power corporate profits or power corporate stock performances?"
    Seeing the savings rate rise is like watching our culture start the shift from 'buy now, worry later' and EZ-money, to 'pay down debt' and 'hunker down'. Everything contracts, everything delevers (Jeff's piece on "De-Leveraging Will Be Televised" is a must read), everything slows down, and we are heading to a new normal! That new normal is going to be more boring & less sexy as consumers/corporations/private investors/banks absorb the shock and pain of the deflationary process. This is a healthy adjustment to purge the excesses taken in the old system. When we get through it, we will be in a better position to build the platform for longer term sustainable growth; although at a slower pace as well!

    Click on the video below to watch:


    Some points that Mr. LeFrak makes on Manhattan real estate:

  • Prices have come down, transactions have slowed, the time its taking to sell apartments is longer, and reality will come in. The ASK will come down.

  • The BUYER sets the price BUT the SELLER writes the check and the SELLER is really the one in the end that sets the price. **

  • Big increase in office vacancies because the financial service industry was the engine that was driving this bus, and it will take a while to adjust

  • We're adjusting, rents are down, and that's the reality of it, and if you are highly leveraged, SEE YA!

  • Not that much supply coming on the market

  • Halfway through the commercial adjustment

  • ** I think Mr. LeFrak misspoke on this statement. I think he meant to say the SELLER sets the price BUT the BUYER writes the check and in the end it is the BUYER that sets the price! Now ultimately, the seller chooses whether or not to accept a bid or not, but in the end, the property is worth only what a buyer is willing to pay for it at any given time.

    EXAMPLE: Seller sets asking price at $1M, bids come in at $875K. Seller accepts. The seller set the original asking price at $1M, the buyer bid what they feel its worth at $875,000, seller accepted that bid and the buyer writes a check for the transaction.

    In a side note, CB Richard Ellis just reported net income down 94.7% and decided not to issue a 2009 profit forecast. It seems LeFrak is spot on in regards to the commercial sector.

    Manhattan Inventory Crosses 10,000

    Posted by urbandigs

    Thu Feb 12th, 2009 07:32 AM

    A: Ding Ding Ding....And here we are! I remember when I first got the widget up here on UrbanDigs in an attempt to make this residential marketplace more transparent, and total inventory was around 5,500 or so. All it took was the dismantling of wall street, the worst credit crisis since the depression, ZIRP fed policy, a $700Bln bank rescue plan, the failure of Lehman/AIG, the nationalization of the GSEs, life support for Citibank/Bank of America, shotgun marriages for Countrywide/Merrill/Bear Stearn/Wachovia/WaMu, two fiscal stimulus packages totaling over $1Trln, a 76% drop in the price of oil, 40% plunge in equities, and well that's about it! We are at now now, and while anecdotal reports suggest a counter-trend surge in activity, it is yet to show up in the trends.


    Don't you just love that widget! Thanks to the crew over at for powering the data for the widget and working with me to apply some rules to fine tune the raw data for a more accurate picture of what Manhattan real estate is doing real-time!

    A quick guide to the data, and how the widget works:

  • data is updated daily every morning AFTER streeteasy performs their wee hour web crawls and updates their systems

  • in the widget, the NEW LISTINGS / PRICE CUTS / CONTRACTS SIGNED #s that show up in the 7DAY/30DAY brackets are cumulative totals

  • for the charts, the NEW LISTINGS / PRICE CUTS / CONTRACTS SIGNED are shown as a weekly average (this will be updated to a 4-week moving average soon to smooth out the trendlines) - the reason for this lies in the minimal activity over the weekends that cause a spikey chart when plotting daily updates

  • in the widget, the TOTAL INVENTORY # is logged daily after the streeteasy system performs their updates, and is averaged for the 7DAY/30DAY #s

  • data is ONLY for the island of Manhattan, excludes listings without an address, excludes duplicates that may arise from brokerage switches, and includes all co-ops, condos, & townhouses

  • As a broker/blogger, I strive to provide the most real time reports for you guys and at the same time mix in my thoughts/experience following changing macro trends to put the pieces of the puzzle together, AS I SEE IT! Since about the fall of 2007, that picture has been quite negative, as readers of this blog know. Anyone can look in the rear view mirror and re-iterate what has just happened, but to put the pieces together and use some vision/logic to assume what may happen in the near term is a bit more difficult. I do the best I can and this blog is simply a window into my thoughts on the markets and Manhattan real estate; so interpret at your own risk.

    The only real time report I can add for what I see in Manhattan is that there IS an uptick in activity, I am submitting bids for my buyers, and I am getting new listings to market. I tend to shy away from reports on foot traffic and buyer calls because that doesn't really mean anything. What is meaningful is whether or not deals are happening, contracts are being signed, where those contracts are being signed, and are those deals closing! Thats the important stuff. Everything outside of this is anecdotal and a surge in open house traffic doesn't mean the market just got infused with thousands of willing & able buyers ready to pull the trigger on a moments notice!

    I want to see the DATA! For now, we simply hit a comfort zone where buyers are comfortable placing bids for products some 15-25% below peak prices. So, where was peak? I put peak at deals signed in early - Fall of 2007, and closed 2-3 months later or so. But if you find a comparable unit that closed in the summer of 2008 (meaning the contract was signed a few months earlier), it's a good bet that bids will be coming in around 20% below that level; properties with unique sell side features that are not in the high end should be cushioned a bit. This really is a high end recession here as the core of the problems we face are on wall street; and between the destruction of net worth, hit on stock options held, negative wealth effect on overall portfolios, loss of high paying jobs, loss / reduction of bonuses, tightness in mortgage markets, etc., it's the high end that is adjusting the quickest.

    I just did an audiocast for The Real Deal, that pretty much sums up my feelings on where we are right now in the Manhattan real estate cycle, here are some tidbits from that interview:

    a) we are in the initial snapdown from peak, after the market rolled over and bids disappear. Since Lehman failed, the market became very illiquid. Deals are probably being done about 15-25% from peak right now. Certainly the inventory and contracts signed trends doesn't show this yet.

    b) I don't see mass strength anywhere, but I do see an uptick in activity and I am hearing colleagues discussing an uptick as well. Call it a counter-trend surge in activity, embedded in a bigger longer term correction.

    c) nothing goes in a straight line forever, there are deals at every price on the way up to peak and on the way down to the ultimate bottom. Right now is a far cry from the illiquid 4th quarter, which was totally dead.

    d) I am not a fan of the stimulus package. They are not letting the market work naturally, and for defaults to happen, and for companies to fail and consumers to puke up debt. They need to let the market do what it needs to do to cleanse the system - purge the bad debt. Government is not an efficient use of money, it will not equate into job creation right away, and they keep pouring more money into the banks without letting price discovery occur and hits to be taken. If they have to issue bonds to fund these bailouts/stimulus, what happens when our friendly funders aren't friendly anymore? We can see rates surge and that can come right when Manhattan is in the middle of the correction.

    e) High end is getting hurt a lot faster than the studios/1BRs. I don't like to talk about bottoms or recoveries yet when fundamentals are still so negative.

    f) I'm seeing an uptick, like everyone else, but I am not seeing deals signed everywhere. I am submitting bids, and I am seeing a lot of action on the sell side which is quite telling for me. There is still a bit of a disconnect between what sellers think their place is worth and what a buyer deems it's value on the open market.

    The entire audiocast is about 9 minutes. Enjoy!

    The Death of NYC Multi-Family Rent Regulation Arb?

    Posted by jeff

    Tue Feb 10th, 2009 01:29 PM

    rent.jpgIf you pay attention to the commercial real estate market in New York City, there is no doubt you have seen the recent articles on Larry Gluck's Riverton Houses apartment building investment. The Real Deal recently reported that the property will be foreclosed on February 20th. Even if you never heard of Gluck's Stellar Management, you would most certainly have heard of a little firm by the name of Tishman Speyer and would probably be aware of their investment in Stuyvesant Town and Peter Cooper Village, which is now also on death watch. If you have not heard of the Stuy Town deal you are missing out on a little piece of history, as in my opinion, this one will go down with AOL/Time Warner in the annals of top marking value destroying transactions. But don't feel bad for either the Glucks or Tishmans, they have deep enough pockets to absorb the hits.....or save these deals if they really wanted to. Neither put up very much equity in the deals, relying on the largesse of truly stupid banks/CMBS buyers and not very swift partners to allow them to capture big potential upsides with little risk. In the case of Riverton and several other large deals of similar ilk by large institutional sponsors like Praedium and Apollo (now Area) Real Estate Partners, the sponsors were able to refinance their original purchases and take out their original purchase prices and a huge profit when initiating their current financing. The valuations the banks were willing to place on these properties and the assumptions of future rent growth implicit in these valuations were nothing short of stunning. Oh if only it were just the sharpies who took out these highly levered loans with visions of institutional slum lordship fattening their golden calves. Alas, visions of grandeur actually swept across the entire New York City rent-regulated multi-family market.

    I chronicled this veritable tulip mania in prior pieces entitled "NY City Rental Property as Good as T-Bills?" and "NY City Rental Property - As Good As T-Bills - NOT!" In it I explained how the rent de-regulation arbitrage game was played, saying

    Rent regulated buildings have been a magnet for investors the last couple of years; you see clever real estate investors in New York realized a long-time ago that the market is distorted by the lack of buildable airspace and the existence of rent control regulations. With regard to the latter, they figured out that there was embedded value in all rent controlled buildings that was not expressed in the current net operating income generation of the buildings. Over time, attrition combined with several aspects of rent control regulation would allow rents on rent controlled or stabilized units to rise from synthetically depressed levels to market levels. Owners of rent regulated buildings were in a position to capture this upside, with very little risk due to the high occupancy of New York residential buildings. You see, as one would suspect, the holders of rent controlled or rent stabilized apartments try to hang on to them as long as possible and not get thrown out for missed rent payments or any other reason. So in a rent controlled/stabilized apartment, you essentially have a tenant base that tries very hard not to get thrown out for non-payment, coupled with very high occupancy, but natural attrition (death and major life changes) that would translate to a certain number of people leaving every year and certain regulatory thresholds that de-regulate your apartment base over time. It's all good.

    The only problem is that these types of investments include a perverse incentive to try to expedite this natural attrition rate, thereby raising your return on investment, This incentive is heightened if the landlord pays a high price for the properties purchased and uses lots of leverage. I'm not saying any tenants have been prematurely sent to the next life by avaricious landlords trying to get them out, but landlords have incentives to make current tenants of rent- controlled or stabilized units less than comfortable, shall we say, thus pulling forward their move out dates.

    I cited an emerging backlash against rent regulation arbitrage players as posing a risk to this business model. A model which, by my reckoning, was the motivation for the purchase of roughly 1,500 apartment buildings in the Bronx, Brooklyn, Queens and Manhattan between 2003 and 2008 (not including those sold in large building packages or those worth less than $5 million). In my follow up piece I reviewed the egregious prices that investors were paying to play the de-regulation arb game and the stupidly leveraged basis on which they were doing it. I also mentioned that this was across the spectrum of larger and smaller players and buildings. I don't think I warned explicitly about the coming refi crunch that is going to strike as the popular 5 year balloon loans used to finance these deals start having to be rolled over....right about now. So you can put me on the record now - a refinancing debacle is coming. You see the players wanted to get in, turn over tenants, rehab units and jack up rents quickly, then in 3 or 4 years when their prepayment penalties were rolling off, refi the properties and taken a slug of cash out for their troubles. The only problem is they paid too much, levered too much and now the projected growth in net operating incomes they expected aren't coming to fruition due to higher energy costs, difficulty turning over tenants and pressure on rents when they do go free market. Yeah, energy costs will get a bit better when passed through next year - but notice how everyone is trying to convert to tenant paid electricity

    If all of the above was not enough now comes the coup de grace. The passel of legislation that was bouncing around the halls of the state capital in Albany have now emerged from the assembly as a coherent package. Now thus far the media have only focused on a couple of the bills in this package, one that doubles the income level required for a tenant to be thrown out of a rent controlled apartment and a limit on rent increases to a maximum of 10% from 20% when an apartment turns over. In truth however, the package looks as if it is aimed at closing every regulatory device provided by the Giuliani administration to allow rent de-control. You can see the press release put out by the assembly here and it has links to all the related bills. The bills would cut the amount of a rent increase catch up when a tenant vacates an apartment to 10% from 20%. They would also increase the ceiling level rents have to get through by way of Rent Guideline Board sanctioned increases (or other methods) from $2,000 to $2,700 before an apartment can make the jump to market rates. Additionally, rent hikes would be limited to one per year, through any means. The bills would also freeze rents on buildings "bought out" of the Mitchell-Lama subsidy program and elongate the period over which landlords can charge back the cost of apartment upgrades through rent hikes. They would also raise the threshold for tenant incomes to $240,000 per year, before forcing the surrender of a rent-regulated apartment. In the most amazing bill, the city would also be able to claw back into the rent regulation system any apartment that was ever used under the Section 8 federal housing subsidy system (going back to 1974). Lastly and rightfully so, one bill would increase the fines that can be levied for tenant harrasment, since the fines have not changed in 10 years.

    In short, it's the full monty. The death of the rent deregulation game. Don't pass go, don't collect $200, go straight to your bank and drop off the keys, cause the gold in them thar hills has turned to coal. Now I am not feeling sorry for the knuckleheads who egregiously over-paid for NYC multi-family assets, or their dim-witted financiers. Neither am I a fan of rent regulation and the twisted incentives it creates. A debacle was already fait accompli in my book due to over payment and abuse of leverage. But I do want to point out that in my opinion, this legislation, if it makes it through the State Senate is potentially the road back to "The Bronx is Burning." While we probably don't agree on everything I do agree with Joseph Strasburg, President of the Rent Stabilization Association, a powerful landlord group, who was quoted in a recent New York Observer article saying. “You have total chaos in this city when you have large complexes being foreclosed on.” Considering that of all New York City residential units 52% are rent-regulated apartments (per the Housing and Vacancy Study of 2005), this would be bad news for all residents of New York City as the impact on the quality of life would be horrific.

    If this stuff is really interesting to you drop by Guild Partners' web site and send us a request for a copy of our 50-page report on the New York City Multi-Family market. It goes through the different strategies investors have used to transform rent-regulated apartments to free market rents and its chock full data on the excessive prices paid and tenuous financing structures used to acquire these properties, as well as supply and demand stats for the New York City multi-family market.

    Elliman OR Ebay? That is the question...

    Posted by urbandigs

    Tue Feb 10th, 2009 07:20 AM

    A: And things get weirder and weirder! If your looking for an East Village converted two bedroom, you can either call the broker at Elliman or place your bid on ebay! The choice is yours and I wonder what the reserve is? From silent sales & rental auctions to no reserve ebay auctions, I thought I have seen it all. But if there is one thing I know about Manhattan, it's that this city is never short of surprises!

    MINIMUM BID OF $350,000 HERE ON EBAY....


    OR, ASKING $425,000 AT ELLIMAN...


    Only two days left for the auction and already there is a nice round bid; hmmm, I wonder if the seller placed that first bid just to get some action going.

    But WAIT!! There's more.

    Check out 438 W 49th street on EBAY HERE and on ELLIMAN HERE! This time the ebay starting bid is $40,000 lower than the brokerage webad.

    Any takers on whether or not we see these listings in contract by this time next week? Might as well have fun with this. I can see the brain stormers pondering away the new Manhattan auction real estate brokerage site already. We can call it,!

    Is the Bond Market Cooked, as Endgame Starts Early?

    Posted by urbandigs

    Sun Feb 8th, 2009 10:09 AM

    A: Hmm, tough call but I honestly don't think so - especially when the fed can talk up purchases of treasuries and change investor sentiment on a dime. This doesn't change my longer term thoughts on the bond market though. Remember that nothing goes in a straight line, but if a market is about to roll over (like oil, dot com tech stocks, etc..) you will see bids disappear real fast as the initial plunge is always both surprising & shocking. Longer time readers of this site caught my multiple mentions of endgame, and the likely reversal of the secular bond market rally that has lasted about 27 years. While consumers, corporate exec's, and traders cry for bailouts so that their stocks would rise faster, few out there talk about the unintended consequences of the path our decision markers are putting us on. The latest comes from the stimulus package's 'Buy American' talk and new Treasury Secretary Tim Geithner's 'fightin' words against China!

    With the treasury about to embark on a major fund raising campaign via bond sales to help pay for all this stimulus, I'm not sure now is the time to:

    1) have the latest stimulus package include a 'Buy American' order
    2) have our new Treasury Secretary / President pick a fight with China, claiming manipulation of currency

    ...whether or not these are the things that both should happen and have been happening, is another issue. Bonds already had a big rally, and now it seems to be reversing:


    You don't start a fight or place protectionist trade barriers with the people who have been funding our debt for so long, hold tons of treasuries, and who we hope to continue funding our debt moving forward! Is this just me here? Are they trying to pop the treasury bubble and send rates skyrocketing? Do they not understand the unintended consequence of these actions? Somebody help me, please!

    Now, to understand the worry here you need to understand the situation we are in. Since the beginning of this debt-deflation adjustment, money has come out of stocks & commodities and went into treasuries as a safe haven play.

    Today, we are about to pass an enormous $827,000,000,000.00 stimulus package to deal with this severe recession, we hope to raise these funds by selling bonds! The bond market capped off a 27 year secular bull rally with an amazing bubble like run to close out 2008. As stocks plunged and fear rose in the 4th quarter, more money poured into treasuries sending rates uber low and bond prices surging. But what if this money starts to pour OUT of treasuries, right before the massive supply to fund the stimulus package is about to hit the market? What if our friendly funders, become not so friendly anymore and do the unthinkable to deal with their own crisis - what if they sell their treasuries? What if the bond market rolls over?

    I may not be right all the time, but at least I'm asking the right questions! Now, I don't think this is going to happen just yet and I think the latest bond selloff will ease a bit; but in this market, you just never know what could happen!

    If the bond market does roll over, we will see a mad rush for the exits as everyone that is long treasuries with the expectation of holding the asset for a trade, sells out. This will send yields surging. And if yields surge, the cost of money will surge. Think about how any future recovery may be affected if the bond market rolls over, and borrowing costs skyrocket!

    The WSJ Marketbeat blog is calling it 'The Geithner Bond Selloff':

    “He came right out and said Obama believes China is manipulating their currency,” says Maryann Hurley, bond market strategist at D.A. Davidson, who notes that China’s economy is slowing as well. “It’s very easy to pick another country to be your whipping boy. In an era where we’re looking at deficits as far as the eye can see all we don’t need is somebody starting to dump our debt.”

    China is the largest foreign holder of U.S. Treasury securities, although data for November (the most recent available) showed that the country reduced its long-term holdings, though short-term holdings rose
    I also discussed this in Stage 10 of my piece, 'Stages of the Slowdown / End Game?", back in October:
    STAGE 10 (Yet To Come, End Game) - Treasury Market?: massive treasury issuance to fund bailouts, nearing the end of rate cut cycle which is yet to come (I'll bet on 75-100 more bps of easing), stabilizing economic data which is far off, unwinding or slowing of treasury purchases by foreigners, rolling over of treasuries, selling of widely owned treasuries for this slowdown, and most of the damage done to equities already may all contribute to the selling of treasuries. The treasury market is arguably at the tail end of a 20 year secular bull market. What will treasury buyers demand in yields 12-24 months from now? Will treasuries still be in huge demand, as they are today, right in the center of the crisis? The end game may bring with it the end to the secular bull market in treasuries and higher yields; especially in the longer end of the curve! How will lenders and businesses adapt to higher borrowing costs should this occur and drag credit rates with it?
    You hear talk of how fed policy and trade policy can turn a severe recession like this one, into a depression. And at the heart of a statement like that, lies the unintended consequences of policy taken in times of distress. This post helps explain just HOW and WHY it could happen. Its the $25 TRILLION of US bond market debt, as estimated by Wikipedia in 2006, that could drive the next phase of this slowdown! It takes about $1.2 Trillion alone to fund our deficits, and that is sure to rise more and assumes things don't deteriorate further! At some point we are talking about real money here.

    Let me guess in advance, they will ultimately blame any bond market selloff on the short sellers! I can see it already.

    NYC Apartment Boom: Bedroom Surprises

    Posted by jeff

    Fri Feb 6th, 2009 10:55 AM

    After touching off quite a lively debate with my last piece on the NYC housing bubble, I wanted to do a follow up piece that answered some questions and explored the issue of appreciation based on number of bedrooms. I also wanted to go as far back in time as the data permitted and look at price appreciation versus inflation to get a feel for how much "excess" return was generated in the New York City market as the result of animal spirits above and beyond inflation.

    I like to be transparent about my methods to highlight the limitations of my primitive analyses, so let's go through the drill again. I used data from Miller Samuel on the Upper East Side market that extends back to 1989. I used the Upper East Side market because it has not been a transitional neighborhood and should not reflect appreciation based on greatly improved quality of life as some emerging neighborhoods in New York may. Note also that, as in my last piece, I interpolated the data for 2005 in the graph below because Miller Samuel didn't have the data (although I understand Jonathan Miller does have a note from Epstein's mom to explain why he didn't show up to work that year).

    Purists will be relieved to know that I calculated compound annual growth rates for this study (CAGRs), and separated them out into 3 time categories; 1989 - 2007 (full period), 1989 - 1999 (stagnate market) & 1999 - 2007 (robust market).

    You may be surprised to know that during the period 1989 to 2007, 1 bedroom apartments appreciated more rapidly than either 2 bedroom or 3 bedroom units:

    CAGR of UES Median Price Gains Coops/Condos 1989 - 2007

    1BRs - 6.7% per year

    2BRs - 6.2% per year

    3BRs - 6% per year

    The same did not hold true, however, in the rather moribund 1989 to 1999 period:

    CAGR of UES Median Price Gains Coops/Condos 1989 - 1999

    1BRs - 2.2% per year

    2BRs - 2.8% per year

    3BRs - 3.1% per year

    In contrast, during the robust 1999 to 2007 period:

    CAGR of UES Median Price Gains Coops/Condos 1999 - 2007

    1BRs - 12.7% per year

    2BRs - 10.6% per year

    3BRs - 9.6% per year

    I was surprised by these data and wondered if it was peculiar to the Upper East Side, so I did the same analysis on the Upper West Side data from Miller Samuel.

    CAGR of UWS Median Price Gains Coops/Condos 1989 - 1999

    1BRs - 3.2% per year

    2BRs - 6% per year

    3BRs - 4.8% per year

    Interestingly, prices for 2BRs led the way during this time period. For the more bullish years of 1999 to 2007, however, 1 bedrooms played a little bit of catch-up:

    CAGR of UWS Median Price Gains Coops/Condos 1999 - 2007

    1BRs - 12.3% per year

    2BRs - 8.9% per year

    3BRs - 14% per year

    Furthermore, on the Upper West Side as one might have expected, the increasing population of families pushed up the median price of more scarce 3 bedrooms by 14% per year. This drove 3 bedrooms to the leading position over the full 19 year stretch, with an appreciation of 8.8% per year, versus 7.3% for 2 bedroom units and 7.2% for 1 bedroom units on a compound annual basis; more in line with what you would expect for larger apartments that are in less supply.

    The chart below shows the Upper East Side apartment figures graphed against owner equivalent rents. As in my earlier piece, I just took the 1989 price of a 2 bedroom as my base and inflated by the annual rate of growth of owner equivalent rents for the New York area from the Bureau of Labor Statistics. Some folks complained that I only looked at data back 10 years to the beginning of the boom in my last piece, albeit without intent to deceive (potentially making the bubble look worse). So here you have a "full cycle" picture, which I think is very telling. After underperforming inflation for the 1989 to 1999 period, the market raced ahead of it for a number of years and got far above the trend line in the last couple of years. We can see that this may be part of a normal "full cycle." It doesn't detract from the idea that a regression to below the mean may be quite painful, however.


    Noah and I recently discovered this jiffy display tool for Urban Digs which I will utilize to let you look right at the raw data on the various apartment sizes for the Upper East Side, here (View image) and for the Upper West Side, here (View image). Additionally, you can pop up the chart above and see it more clearly if you click here (View image).

    I also want to note that in comments on my last piece someone accused me of over-dramatizing the run-up in prices by presenting average annual growth numbers (in addition to total appreciation figures). They then presented their calculations of the compound annual growth rates for the various neighborhoods in the study. The numbers looked too low to me, but I didn't get a chance to calculate them until I sat down to write this piece (and I really felt my point was valid regardless of the start point or growth rate calculation method). But we at Urban Digs are always open to dissenting views and constructive criticism. So let me give you the correct compound annual growth numbers here.

    From 1998 to 2007, the compound annual appreciation of 1 bedroom condo and coop median prices for the following neighborhoods discussed in my last piece were:


    Greenwich Village - 12.4% per year

    Upper East Side - 13.4% per year

    Upper West Side - 13% per year

    Clinton - 15.4% per year

    Harlem - 23.1% per year

    Washington Heights - 31.9% per year

    Is your head spinning yet?

    Sign of the Times: Rental Silent Auction?

    Posted by urbandigs

    Fri Feb 6th, 2009 10:16 AM

    A: Interesting to see this e-blast in my inbox this morning. Check out this NO FEE 1,800 sft 3BR/3BTH rental with an asking price of $8,990/month conducting a silent auction with bids starting at $4,900! I guess its a good way to create a buzz!

    Check out below:


    Listing can be found here, you guys are on your own! Truly interesting times.

    Deals At Every Price / Inventory Close To 10,000

    Posted by urbandigs

    Thu Feb 5th, 2009 11:58 AM

    A: A quick check on some real time data for Manhattan real estate. Doug over at TrueGotham reports on an active start to 2009, and there is talk from colleagues about an uptick in traffic as well. Given that this market arguably drained 15%-25% off the peak level following a very dull 4th quarter, this is to be expected! What people that actively monitor Manhattan real estate trends need to understand is that deals happen at every price, both on the upside and on the downside! As word spreads that deals are happening at levels closer to 2005 pricing, buyers seem more comfortable bidding. Time will tell whether this pickup is simply a counter-trend activity surge, embedded in a longer term correction. For now, as prices reach a certain level, there will be renewed signs of interest; and this market is seeing that right now.

    Take a look at what total inventory over the past 3 months has done, and notice the large uptick in January:


    Now, in my humble opinion, there IS a pickup in action right now that is not reflected in the above chart, and that is a function of a few dynamics:

    1) some sellers are 'hitting the bid', and just want OUT
    2) sellers are getting more realistic, and lowering prices to where it needs to be to get a noticeable increase in foot traffic and bids received
    3) this market is arguably down about 20%-25% in the past 4-6 months! It is now the active season, of course there will be a pickup in action reported by agents / attorneys
    4) some buyers are comfortable bidding and signing a deal at a 25% discount to peak sales - not everybody tries to time the exact bottom of the market and sales volume never falls to zero!
    5) pickup in activity immediately follows a completely dull 4th quarter with drastically less deals occurring

    Look, on the way up and on the way down there ARE buyers! Right now, prices are on the way down and guess what, there ARE BUYERS! On the way up when the market fundamentals are strong and on the way down when market fundamentals weaken, deals were happening. Period! Its when the market gets illiquid, that a new trend will likely emerge until we hit the next 'comfort zone'. For now, it seems we hit the first comfort zone as buyers start to perceive 'a deal' wherel transactions seem to be reportedly occurring at.

    This story of a pickup in activity is ruminating through the brokerage community, in buy side calls coming in, in foot traffic at OH's / showing requests, and in bids received. Most deals seem to be occurring at the comfort zone level of 15%-25% below peak; but time will reveal price discovery as contracts signed today close in 2-3 months. The correction so far was fast, furious, and to many, shocking. Not for us here at UrbanDigs! I continue to expect macro forces to drive this marketplace going forward, as buyers set the tone at what price any property is worth bidding for!

    S&P Lowers Hammer on Thousands of Toxic Securities

    Posted by urbandigs

    Wed Feb 4th, 2009 12:41 PM

    A: It was November that I last discussed the downgrades of supposedly 'AAA' sugar pies to 'CCC' rated junk. We all know the banks are holding these assets as AAA on their books, waiting for the downgrades to come, and in the meantime assigning flawed model valuations to the securities that can't find buyers on the secondary market. Well that's not entirely true, there are some buyers out there but the sellers are not interested in unloading at the bids being offered because of the massive hit the deal would have to their books, and the rest of the toxic junk held. In meantime, institutions wait patiently for the next move from the government to see if a bad bank will really take off; ultimately allowing a place to warehouse all these junk securities that are crippling our banking system.

    daemon_hammer.jpgFrom's, "S&P Slashes Thousands of RMBS Ratings":

    On Monday, Standard & Poor’s Ratings Services lowered the boom — again — on thousands of Alt-A and subprime RMBS, moving them all to a ‘D’ rating, as well as cutting hundreds of formerly AAA-rated securities multiple notches from their previous perch atop the ratings heap. The agency also began cutting ratings on prime deals, as well.

    The rating agency said it had lowered its ratings to ‘D’ on 1,078 classes of mortgage pass-through certificates from 650 U.S. Alt-A RMBS transactions from various issuers, while also placing 2,111 ratings from 143 of the affected transactions on CreditWatch with negative implications. Approximately 81.82 percent of the ratings on the 1,078 defaulted classes were lowered from the ‘CCC’ or ‘CC’ rating categories, and approximately 98.98 percent of the ratings were lowered from a speculative-grade rating, S&P said in a statement.

    Despite all of the cuts to securities that were already considered speculative grade, it’s perhaps more telling that S&P also took the hatchet to AAA-rated classes — an example of a few Wells Fargo deals involving 32 classes is here, but there are others. These downgrades weren’t to a ‘D’ level, of course, but a fall from the AAA perch is likely to be comparatively far more painful for an investor. And for those really, really geeked out by this sort of stuff: some of the 2007 deals being downgraded here now have cumulative loss projections exceeding 20 percent. For the ENTIRE issue. That’s nearly unheard of outside of the subprime space.

    The bottom line here is this: for all of the pain felt in this area already, plenty of banks large and small are still generally carrying securities on their books at a level justifiable against current ratings levels, which is partly why trades in this space have been frozen. Buyers know the securities aren’t worth the AAA rating they’ve got, and frankly so too do any would-be sellers, but nobody can sell a security still at AAA at C-level prices and then justify the hit that so doing would have on the rest of their books.

    There is a reason there is so much discussion — heated discussion — around a bad bank right now. Financial institutions are quite aware these downgrades are coming in waves, and are trying to figure out how to get out from underneath the second wave of soon-to-be bad debt as fast as they possibly can.
    Ahhhh, what a wonderful world. I love how these firms honestly think that by hiding untradable securities off their balance sheets, it makes the problem go away. They can't all honestly believe this? Ehh, it's all temporary anyway, because in the end, it will all come out. It's looking more and more likely that an RTC-like vehicle will be set up to warehouse all these troubled assets. Problems will arise, what price will be paid, will taxpayers get screwd, how will it affect assets still held, how long until performing non-toxic assets start underperforming now that Alt-A & Prime are shitting the bed?

    What we know is that they won't let the banks fail. And for some reason, they seem to be wary of a full fledged nationalization of the most troubled of institutions, which also happens to be one of the biggest names in the banking system --> Citibank!

    This balance sheet problem will take time to iron out, and in the meantime, the problem continues to spread to higher quality debt classes, as proof from today's S&P announcement. I guess we know part of the reason why banks are hoarding cash in excess reserves that get paid interest! As Jeff stated in that great discussion:
    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.
    BINGO! In addition, according to the fed's loan officer survey, bank lending is contracting, HELOC underwriting criteria is tightening, and demand in general for prime loans is waning as criteria there gets tightened as well; all this with government actions to bring down interest rates to spur lending! Oh what a tangled web we weave! When will they understand that when credit quality is deteriorating, home values falling, unemployment rising, consumer spending falling, and a severe economic slowdown that crunches individual balance sheets, lending SHOULD decline! Upgrades: What Would You Like?

    Posted by urbandigs

    Wed Feb 4th, 2009 10:30 AM

    A: Reader participation day! I'm about to put some $$$ into the site again to help make it more interactive for reader use, and to enhance the chart system so you guys get as much information as possible to identify trends with. But more importantly, I want to hear from you guys. How am I doing and what would you like to see to make this site better? Below are some of the ideas I am shooting for.

    In no particular order:

    1) TIME RANGE ON CHARTS - I have chart data going back to NOV 2007, but right now charts only have 3 time range options, with the max going back 6 months. I would like to enable the range options to include 1YR + MAX choices

    2) TWEAK MOVING AVERAGE - The data for New Listings / Price Cuts / Contracts Signed is vulnerable to weekends that see very little if any updates, making the charts very spikey and hard to read. I had a weekly average rule placed on these but I dont think its enough. I think I will place a 4-WEEK MOVING AVERAGE on these charts? Thoughts? The goal is to smooth out data so that we can better interpret trends

    3) LAST 5 COMMENTS - I feel the site needs to be more interactive. Say a discussion from two months ago, gets active again. Nobody on the main page will know. I think I should add a rectangle section to the right side of urbandigs showcasing the last 5 active comments with links out to the discussions that got them? Thoughts?

    4) ADD DATES TO TALK REAL ESTATE FORUM - The talk forum is not performing great but I think it is because it is not properly advertised on the main page and because there are no dates. I think dates should be added to get a sense of when the comment was made, and perhaps similar to above, add a rectangle showcasing the last five talk threads that are active with links to them on right side of urbandigs? Thoughts?

    5) TIMELINE SHOWING PREDICTIONS - Jeff thought it would be interesting if we did a timeline of our predictions, more for entertainment and to see how we did, by creating a visual of where we came from, where we think we are now, that could be updated as time goes on. This likely is more time consuming and costly, and Im not sure its worth it right now, but figured to ask you guys?

    6) 10% / 15% / 20% BELOW ASK SECTION - For sellers to plug their own listings if they can prove that their asking price is BELOW a previous and recent comp! I will check and confirm, and if it complies, I will add to the section. I figure to reward sellers who accept this market for what it is, and make a place for readers to go to see what properties are priced to move given the market trends and the real time reports of down 15-25% that I discuss often here? Thoughts?

    7) ANYTHING ELSE..........?????????

    Thanks all!

    Just How Big Was The NYC Housing Bubble?

    Posted by jeff

    Tue Feb 3rd, 2009 03:31 PM

    If you disagree that there was a bubble in New York City residential real estate, even this article is unlikely to convince you, so you may as well click along on your merry way. But if you're in the mode of accepting reality, you may be curious to get an idea of "Just How Big was The Big Apple Bubble?" in residential real estate. A buddy of mine recently shared with me that one of his mentors used to say that residential home prices should track inflation over the long-term and that when it ran above for some period of time, it would eventually revert to the mean and in the process of so doing, prices would likely deflate to below the trend line for some period of time. I have used similar comparisons to look at past bubbles in many other asset classes, so of course this argument seemed reasonable to me. With this in mind I figured I would share some data with you on the subject of New York City's residential housing bubble


    The chart above (View image) utilizes data from Miller Samuel, that you can get right of their web site. Thank you Jonathan Miller for the use of your data and for your ongoing work on behalf of transparency in NYC real estate data. Jonathan is a friend of Urban Digs, but our nefarious use of his data in no way means that he agrees with us or in any way supports or condones our sometimes questionable methods and conclusions.

    I took data from Miller Samuel on the median sales prices of one bedroom condos and co-ops in three neighborhoods that I view as having been stable over the last decade, Greenwich Village, the Upper East Side and the Upper West Side. By focusing on "stable" neighborhoods, I hoped to distill the impact of interest rates, lending standards and overall exuberance on real estate prices while excluding the salutary effects of a transformative change in a neighborhood quality of life. By using a one bedroom apartment as the benchmark I hoped to exclude any impact of lesser availability of any particular apartment sizes that may have unduly impacted prices over the last decade. I also utilized median sales price to try and minimize the impact of very high-priced apartments dragging the average up, something that Urban Digs readers know has skewed New York City average pricing significantly higher in the last 18 months. Please note that in the cases of the Upper East Side and the Upper West Side, the 2005 figures were missing, so the data points on the graphs for those years were interpolated by yours truly using a proprietary algorithm I developed myself (I averaged the 2004 and 2006 figures). I then provided an inflation reference line for comparison. I did this by averaging the median prices of a Greenwich Village coop/condo, Upper East Side coop/condo and UpperWest Side coop/condo, that average price being $231,392 in 1998. I then inflated this base number by the New York City area CPI component called owners equivalent rent of primary residence (data from the BLS can be found here). I could have used a lot of different inflation indicators, and many provided by the government are considered to be low. I thought it would be most informative to look at inflation in terms of the rent escalation you would have seen in the New York market during the period. The problem with this statistic is however, that geographically it covers more than just New York City proper, so again it may be a little low.

    The data crunching produced some worthwhile data points:


    Greenwich Village - 185.2% gain, or 18.5% per year

    Upper East Side - 209.5% gain, or 21% per year

    Upper West Side - 200.5% gain, or 20% per year

    One thing for sure is that New York City residential real estate beat the pants off the stock market and most hedge fund managers over the last 10 years! In comparison, the median price of my average stable market condo/coop would have increased 41.6% in value from 1998 through 2007, if it had appreciated at the rate of growth of owner equivalent rent.

    As you can see from the graph, real estate values ran up well ahead of the increase in owner equivalent rent and to come down just in line with my admittedly contrived inflation measure, will cause severe pain....I don't think quoting specific numbers is really even relevant. If we have to go below the inflation trend line for some time to get healthy.....let's not even go there.

    With an eye towards helping people think about what areas might or might not have as much distance for prices to fall, I thought it would also be of interest to look at some transformational neighborhoods. I used the same methodology as before and chose neighborhoods I consider to be "emerging" where Miller Samuel had ten years of data (View image).



    Washington Heights - 1110.5% gain, or 111.1% per year

    Harlem - 550% gain, or 55% per year

    Midtown West / Clinton - 263.8% gain, or 26.4% per year

    Regardless of which of these markets you focus on, it is striking how much of a boost an improving neighborhood can give an area above and beyond other market factors. Interestingly, I also looked at a prior hot neighborhood Tribeca/Soho, which had a huge run in the late 1980s to late 90s in terms of quality of life and redevelopment. Over the 1998 to 2007 period Tribeca/Soho was a relative laggard appreciating just 149.2% or 14.9% per year according to the Miller Samuel data.

    What does this mean for the future of "emerging" neighborhoods? It is hard to say. I am on record saying that recently heavily developed areas like Harlem, Long Island City and Williamsburgh will get hit hard as prices reset to drive absorption of all the new supply. In emerging neighborhoods with less of a surplus of new supply, I would still expect volatility on the downside to correspond with the volatility on the upside and therefore a deeper decline than in stable neighborhoods, but it may not be quite as bad as in over-built areas.

    Inman Bull vs Bear Video

    Posted by urbandigs

    Tue Feb 3rd, 2009 11:26 AM

    A: You need a membership to view the Inman Conference video, but in case you don't, here is a transcript of what I said at the JAN 7th conference, that was more of a national / macro economic discussion on the housing problems facing this country. I'll try to write down here as much as I can so you get the gist of what I was saying, but unfortunately I don't have time to do this for all the speakers on the panel.


    On National Housing / Overall Health Banking System

    14:30: NOAH ROSENBLATT - "On the macro side, I think we still have structural problems, and I have been thinking about this before the conference, I don't think we should even discuss a recovery at this point, instead we should discuss a stabilization, because there is not going to be a 'V' shaped recovery.

    People are really expecting us to just stop the freefall, reverse, and rise again. We are going to have a muddled 'L', and Prof. Shiller discussed the chart of Japan urban land prices in the 90s and that is what it will likely be similar to because of the structural problems we face.

    The banks, I hate to say this, but there was a reason $700bln was devoted to the banks. Whether the TARP funds are being used the way it was originally sold to the American public is a different story. Paulson called an audible, there was something he didn't like, and he decided to use the funds in a different way, fine, you should change when you see something change. But you have $350Bln there that will be used to inject into the banking system, with the biggest banks probably getting half of that, and the reason is that you still have a lot of these securitized assets on the balance sheets of these banks, and that whole unwind that Barry was just talking about, is NOT just subprime, its alt-a, prime, jumbo, leveraged loans, commercial, HELOCs, credit cards, auto loans, student loans, it can go on and on; and it will take years for this to unwind and until this happens and time is the only cure for that, we are not going to have a system of credit that is going to power what we saw in the last five years.

    Until then, its a matter of correcting the inventory problem by natural market forces, and unfortunately what I see is rising unemployment and the price to house income ratio that we were just talking about, was 5 standard deviations above normal, actually has come down and is about 60% corrected, and is still correcting, we still have to correct. Basically what I am saying is that housing is still unaffordable. If unemployment is going to rise, how can that possibly help the housing situation en mass.

    Also, what nobody is really talking about is the savings rate. For the first time in 20+ years, the savings rate is spiking. This is very interesting. We went from a negative savings rate a year ago, to about 3% right now. People are getting very frugal. Consumers are buckling down, everybody is buckling down, they see friends losing their jobs, they see their net worth & homes go down, their portfolio go down and they are starting to save. Now think about the adverse feedback loop that a higher savings rate has on corporate America. If people aren't spending for products, what is going to power corporate profits or power corporate stock performances?

    Ben is trying to inflate, inflate, inflate, and is printing money and not all of it is reaching the ground/main street, because you have a huge destruction of wealth in the shadow banking system. And the more money Ben creates, he is trying to make up for the gap of all the hundreds of billions of dollars that disintegrated as these derivatives lost value, so its an adverse feedback loop and its going to play out over years, not quarters. Time is our ally here.

    I'm less bearish today because the process is happening, as a year and half ago I was way more more bearish than I am today. And as time goes on, I will probably become even less bearish.

    : Well, your in real estate, so how do you manage your business if you believe the way you do?

    : You are going to see a lot of real estate agents die out, and take time to die out as they go into another business and you will see the more established agents take up more market share over time. Nobody likes bear markets, nobody likes dull markets, and we all want volume to come back. My sales volume may be down, but you have to tell people what is really going on, and hopefully earn their business. I learned early on that in a service industry, honesty & integrity builds good business and ultimately takes you further.

    On Gov't Meddling w/ Rates

    28:06: NOAH ROSENBLATT - One problem with bringing rates down, is first of all, if you can't afford to buy something with a 5.5% interest rate, I'm not so sure you should be buying with a 4.875% interest rate. We are getting awfully close to that boundary that started this mess to begin with. Maybe they will be affordable for 6 months or a year, but ultimately they could get stretched and default.

    #2, there is a price to pay for government meddling to get rates down. They are conducting Quantitative Easing now, and buying up agency debt and perhaps treasury, and that is ultimately inflationary. Now, I don't think you will see inflation end up in higher real estate prices, but I do think you will see inflation come in the form of commodities, precious metals, food, health care, and these aspects of the economy and that could put another crunch on consumers and businesses.

    BRAD INMAN - Where will we be in a year from now?

    NOAH ROSENBLATT - You will see unemployment close to 9% by the end of the year, and you will start to see the pace of national housing metric declines slow.

    Developers (Finally) Reducing Prices, Not Just Negotiating Them

    Posted by Toes

    Mon Feb 2nd, 2009 01:17 PM

    (Christine Toes posting here)

    In November of 2007 I posted about developers starting to offer incentives for buyers to purchase in their buildings. In June 2008 I wrote that it was time for developers & landlords to stop throwing the kitchen sink at buyers and to just reduce the prices already. Seven months of concessions later, I am finally seeing developers not just NEGOTIATE on prices, but actually REDUCE their prices.

    One example of a building that significantly reduced their prices is Maison East, which is trying to sell out their last few units. Prices were reduced in mid December.

    Apt 3A sold for $800K. After starting at an asking price of $850K, 6A sold for $805K in August of 2008. The developer is now offering Apt 4A for $695K.

    In another example, 24A sold for $995K in 12/07 and 25A was reduced to $895K a few days ago.

    Even better, developers are catering to buyers and even trying to make them happy! I remember going to new developments with buyers in 2005-2006 and basically, you paid the asking price for the apartment (maybe 1%-2% less on anything under $1M) as well as the transfer taxes (maybe the developer would split them with you if you were buying a line in the building that wasn't selling that well). One of my customers even got screwed out of a shower door. Times have changed!

    I recently had customers sign contracts in a new development on the Upper East Side. It was the most refreshing experience! My customers paid $40K less for their apartment than their downstairs neighbor paid, they didn't pay any transfer taxes or the developer's attorneys fees, and they got a storage unit for half price. The developer agreed to build out a home office for them and build in shelving in a hallway. In the past, you would be laughed at if you wanted any customization done in a one bedroom apartment. Maybe if you bought and combined two apartments they'd hook you up a little bit, but not in a one bedroom.

    My second new development deal this month (I thank my lucky stars every night that sales are actually happening) is in a small walk up condo in Brooklyn, where the developer had dropped the price on the last few units units by about 10% at the start of the new year. I don't want to jinx the deal until contracts are executed and her downstairs neighbor would cry if he/she knew what my customer is paying. So lets just say that she isn't paying the asking price or transfer taxes. This apt was already hands down the best deal for her under $350K budget in Williamsburg. (Finding a condo under $350K is still like finding a needle in a haystack). My customer is also getting a "seller's concession" to help cover her closing costs. We did try to get the developer to provide the washer/dryer (right now there is just a w/d hook-up), and to install a toilet paper holder, towel bar, and new vanity in the bath, but no luck. There are only 10 units in the building and seven are already sold, so I "get" that the developer doesn't want to bother with minutea. It was worth a try, though!

    One other new development in Brooklyn that we had looked into had dropped prices on some units from $499K to $399K.

    Toes says: Everything you read on UrbanDigs about prices being down 10% and deals actually being done 5-10% below that is true - at least that is what I am seeing in my own business. Most of the buyers right now are entry level buyers (under $1M), so apts in higher price points are seeing more significant price cuts in some cases.

    Toes says: Don't be afraid to ask for the moon, you just might get it!