Manhattan Trends Report Since November 2007

A: I only started to collect data from Streeteasy.com in late 2007, and that is when I launched my data widget and chart system. I wish I could have sealed a data partnership earlier but what can you do. Anyway, people have been asking me for data going back as far as I have it and I only had time to make the following two charts for you guys. Below are the trends for total active inventory in Manhattan & the 30-day moving average trend for contracts signed activity in Manhattan. Its always nice to know where you came from when discussing the Manhattan residential real estate marketplace. Since so many tend to cherry pick data and choose the best time range to support an argument, here is the real stuff that I had collected for just under two years now. When UrbanDigs 2.0 launches you will have many more tools available to analyze what is actually happening in our marketplace in real time. The goal will always be to keep you ahead of the curve.

Here is total active Manhattan inventory trends since NOV 2007:

As you can see from the above chart, inventory started its upward trend in early 2008 as the warning signs of the credit crisis started to flash. If you check out what happened in mid-September, there was a sharp upward move in total active inventory after Lehman collapsed and AIG had to be rescued. That was when this marketplace froze up and buyers disappeared. As I said many times here on this site, its all about the buyers! Don't let anyone fool you that the weak dollar, or foreigners, or that this is an island and supply will be limited are the main forces at work. Sure they play a role but in the end it is all about buyer confidence in the asset class, affordability, and the availability of credit to finance transactions. Should one of these dynamics dislocate we will see an adjustment in our marketplace, regardless of how weak the dollar is or how deep the foreign interest is for our inventory! We learned this lesson big time in Q4 2008 and Q1 2009.

Moving on, below is the Manhattan contracts signed trend since NOV 2007; with a 30-day moving average added to show you the general trend and smooth out the spikiness that comes with data that is influenced by little to no activity during weekends:

The 30-day moving average (black line trend) is what you want to focus on in the above chart. The moves are quite telling! If you compare the trendline to the above inventory chart, things start to make some sense. You can see how real time analytics can be an extremely useful tool for any buyer or seller in this fast paced marketplace.

You can see the sales volume fall significantly from early 2008 to the post-Lehman period between September 2008 and the fear months of February/March of 2009. In hindsight, that period of fear and very low volume was shown to be a great contrarian buying opportunity with desperate sellers hitting low ball bids to move property; now don't you think that real-time information is valuable for anyone aggressively seeking to buy at that time? Translating these charts and real time trends into buying & selling strategies is the future focus of this website.

Following the frozen period that defined the first wave down in prices, the 30-day moving average shifted from 10 or so on the left y-axis to about 35-40 or so by the end of June & July. This represented the surge in contracts signed activity that started around May and lasted for a good 3-4 months.

Since then we have slowed a bit as seasonality kicked in. Activity still seems higher than normal for this time of year but down from the levels in May & June. The chart shows that clearly. The recent surge in action will ultimately be reported in the lagging quarterly reports leading me to write about the coming qtr-to-qtr improvements. While y-o-y prices will still be pressured for a few more quarters (Q2 2010 report will have a very favorable prior year to be compared to as Q2 2009 basically defined the downturn) its the qtr-to-qtr rise in activity that will likely be the focus of the reports. In a commission based industry sales volume is the name of the game.

You want to be ahead of the curve, you keep it here!

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Total CMBS Delinquencies Up 4% in August

A: The story continues and commercial losses are one of the five or so concerns associated with another possible future wave to the banking system. The other concerns are prime mbs, jumbo, private equity financed LBOs, helocs, and credit cards. We can go further and discuss the re-default rate on loan modifications and the wave of recasts (not resets) set to hit the alt-a/option arm universe. The one good thing is that banks have raised a ton of money and the fed continues to rig the environment for bank recapitalization in an attempt to earn their way to a healthier balance sheet. Marks on whole loan books that do not have to be marked to market and a future FASB change regarding off-balance sheet assets may weigh on banks balance sheets for years. Everyone knows bids for legacy whole loans are no where near the carried marks. I still think the banks have some cushion looking ahead, but whether the market decides to peak further out and price in possible future concerns is a whole different story. This is why you must keep an eye on credit for another disruption similar to 2007. Should troubled banks run into liquidity or operational issues, any cushion built up could be very short lived and the dramatic improvement in credit could change on a dime.

Via Housingwire.com, "Trepp Says CMBS Turns 4% Delinquent in August":

Overall delinquencies on commercial mortgage-backed securities (CMBS) surpassed 4% by the end of August, as multifamily and lodging — or hotel — sectors remain weak.

The percentage of commercial loans 30 or more days delinquent rose 32bps to 4.03% at the end of August, according to Trepp’s September CMBS performance report.

The commercial mortgage market is seeing delinquencies climb even on a loan-level basis. A handful of names continues to make waves in the space as delinquencies rise or the threat of delinquency nears.

Trepp noted Lembi, Babcock & Brown, Bethany and Trilogy Apts all contributed to higher multifamily delinquencies. If the Stuy Town loan becomes delinquent, the multifamily rate could approach 10%.

Here is the breakdown of the report:

Multi-Family Delinquencies up to 6.8%,
Lodging Loan Delinquencies up to 6.15%
Retail Delinquencies up to 4.21%
Office Loan Delinquencies up to 2.27%
Industrial Loan Delinquencies up to 2.89%

Its funny how the markets work. At some times they ignore data like rising delinquencies and deeper delinquencies into higher quality debt classes. Then at other times, like today, news like this serves as a reminder against complacency and how quickly things may change.

Structurally we still have problems to deal with - it's not as if the consumer is strong and jobs are being created. Stimulus will only last for so long and that is not without its unintended consequences later on; I guess we will deal with that later. You may find a few quarters of stimulus induced growth and less worse trends in housing and autos, but at the end of the day the destruction in wealth in the stock market + housing market + credit markets + shadow banking system will have longer lasting effects. Solving a debt problem with bailouts and more debt is not without its consequences. And we are yet to see the endgame of this story.

Less bearish is the best I can be right now, as I don't see another Lehman happening. Doesn't mean a shock can't occur here or overseas; just that I think we experienced the hardest of the shocks already. Once we are cleansed of the above noted concerns and the defaults seem to be approaching their peak, losses are written down, marks are where they should be, debts restructured and re-organize business models to this new world, we can talk about longer term sustainable growth that sees job creation, and not job destruction. The deleveraging process may last for years folks, so just be prepared for unexpected waves every now & then (read Rolfe Winkler's piece on America's Japanese Banks discussing what the loans may be really worth).

In the end, banks need financially sound consumers & businesses to lend to! For now, lets not keep our heads in the sand like many did in late 2007 and early 2008!

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Is Ginnie Mae & FHA Following the Fannie/Freddie Path?

A: Nearly 1 out of every 4 mortgages issued is now being insured by the Federal Housing Administration. With low down payment requirements of 3.5% of the purchase price, some 80% of FHA mortgages went to first time buyers. FHA insures the loan and then Ginnie Mae packages them up and sells them. Does something seem a bit non kosher to you about this? Haven't we been down this road before? So Fannie & Freddie subsidized housing for decades and end up being nationalized by the government. Now FHA steps up and picks up the slack to keep the mortgage markets going and easy money available. With low down payment requirements and higher loan limits to $729,750, the FHA has grown its business from 3% in 2006 to over 23% today. The insanity continues and time will tell if the FHA is following the same path as Fannie & Freddie.

From USA Today, "FHA on track for busiest year as it backs 23% of mortgages":

Almost a year after the federal government launched its rescue of the housing market, nearly one in four new mortgages is insured by the Federal Housing Administration. From Oct. 1 through mid-August, applications for FHA single-family-home mortgages were up 50%, to 2.52 million, from the same period a year earlier. Approvals for purchases, refinancings and reverse mortgages rose 70% to 1.67 million.

FHA loans also have become more popular because of the demise of many subprime lenders, which sometimes allowed buyers to purchase a property with nothing down and no documentation of income.

But as FHA insures more loans, it is also assuming more risk. Foreclosures on homes with FHA mortgages rose to 1.76% in June from 1.6% a year ago, and the default rate — for mortgages 90 days or more delinquent — was 6.88%, up from 5.57%.

"I'm very concerned about risk," says FHA Commissioner David Stevens, who adds that risk is mitigated in part because applicants today are more solid than those in recent years. FHA also has tightened lending standards, requiring a 10% down payment for those with credit scores below 500.

Did I read that last part right? For those with a credit score UNDER 500, they decide to tighten lending standards from 3.5% down to 10% down? Are you kidding me? What credit scale from hell are these guys using?

According to Bankrate.com, "By Freddie Mac standards, a score below 620 indicates 'high risk' with an unacceptable credit reputation that could make traditional financing difficult to obtain." If a score below 620 is considered a high risk to Freddie Mac, how in the world is the FHA even giving loans out to those with credit scores under 500? Have we already forgot the severity of the credit crisis that we just went through or are we so desperate to keep the mortgage market and housing market from being disrupted that we are willing to continue gov't subsidized programs that continue to insure very risk loans? I guess I don't get it. In my opinion, every homeowner should have 20% to put down on a home with liquid assets leftover and verified by the lender. Salary should conform to strict standards maxing out around 33% debt/income ratio; ideally closer to 28% or under. If you don't qualify to these guidelines, then you can't obtain a loan and buy a home that you likely could not afford in the first place.

Putting only 3.5% down on a home purchase greatly reduces the borrowers interest in what usually is the biggest investment of their lives. Should the price fall or the borrower run into tough times, the fact that they only have minimal exposure to the property may facilitate a default or encourage the owner to walk away. Requiring 20% down for the purchase in my opinion makes the buyer think twice about the home they intend to purchase, BEFORE THEY PURCHASE IT, and adds some rationale to the decision. Now they have their own money at risk and are less likely to take on a speculative investment or buy a house that they cannot afford. With the banks money, who cares right?

FHA is not the only one as Ginnie Mae has been growing even faster! According to WSJ.com, "The Next Fannie Mae":

Only last week, Ginnie announced that it issued a monthly record of $43 billion in mortgage-backed securities in June. Ginnie Mae President Joseph Murin sounded almost giddy as he cheered this “phenomenal growth.”

Ginnie’s mission is to bundle, guarantee and then sell mortgages insured by the Federal Housing Administration, which is Uncle Sam’s home mortgage shop.

Herein lies the problem. The FHA’s standard insurance program today is notoriously lax. It backs low downpayment loans, to buyers who often have below-average to poor credit ratings, and with almost no oversight to protect against fraud. Sound familiar? This is called subprime lending—the same financial roulette that busted Fannie, Freddie and large mortgage houses like Countrywide Financial.

Is anyone on Capitol Hill or the White House paying attention? Evidently not, because on both sides of Pennsylvania Avenue policy makers are busy giving the FHA even more business while easing its already loosy-goosy underwriting standards.

Then there is the booming refinancing program that Congress has approved to move into the FHA hundreds of thousands of borrowers who can’t pay their mortgage, including many with subprime and other exotic loans. In some cases, these owners are so overdue in their payments, and housing prices have fallen so dramatically, that the borrowers have a negative 25% equity in the home and they are still eligible for an FHA refi. We also know from other government and private loan modification programs that a borrower who has defaulted on the mortgage once is at very high risk (25%-50%) of defaulting again.

With private subprime lenders out of business, the FHA and Ginnie Mae are picking up the slack and very few are talking about it. Ginnie Mae's exposure is expected to top $1Trillion by the end of this year, more than double the portfolio in 2007. The FHA now insures $560Bln or so in mortgages, more than quadruple the portfolio in 2006. The madness never ends and I doubt we have the political will to stop the insanity!

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So, Is This The Time Gold Breaks Out?

A: You know my feelings on gold here and how if there will be another bubble in our future, precious metals is the asset class at the top of my list for going parabolic. There are different theories on the gold trade from inflation/dollar hedge, to safe haven play in times of uncertainty, to a coming default at the Comex. I'm of the camp that likes gold because of the insane amounts of fiat money printing that is going on as a coordinated effort to stave off the same deflationary forces. Add in that the fed's balance sheet was likely compromised big time by all the credit facilities put in place to avoid a systemic financial event. Gold tried and failed to break out three times now leaving many gold bugs pulling out their hair in frustration. So is this it?

There is one noticeable difference that comes to mind about this time around compared to past times when gold approached $1,000 --> the need to delever and level of fear. The first time gold approached $1,000 was around February of 2008 when Bear Stearns was about to be rescued by the fed and JP Morgan for $2/share. The 2nd time was in early 2009 as the stock market approached its lows in a fierce selloff ridden with margin calls, fear, wider credit, and redemption requests. Both of these times saw the need to delever big time and raise cash, perhaps limiting the potential breakout of gold. In other words, those that needed to raise cash took advantage of the one asset class that was performing at the time of stress; and that was gold.

But this time around equities are in the midst of a 50% surge, fear is non-existent, credit dramatically improved, corporate bond spreads much narrower, and tons of money was made on the reflation trade momentum - not really an environment conducive for fear based forced selling. Look at the chart to the right and notice where 3MTH LIBOR was the last two times gold approached the $1,000 mark:

February 2008 --> 3MTH LIBOR at 3.111%
February 2009 --> 3MTH LIBOR at 1.184%
TODAY --> 3MTH LIBOR at 0.34%

Clearly fear is not contributing to gold's rise right now. I think a large amount of deleveraging was already done in past episodes of fear and we may not see the forced selling to raise cash this time around as gold approaches that $1,000 mark - in short, the need to delever may not constrain gold from popping this time around. I deep down believe that one of these days gold is going to go ballistic and kill the shorts and surprise many. Whether that move is to 1,200 or 1,500 I don't know and when it happens I dont know, but it will be impossible to time and trading dynamics will kick in giving it that extra uumph to reach levels once thought impossible - similar to the move in oil from $100 to $145 in mid 2008 over a very short period of time that was mostly speculative momentum.

In my "How IN is Gold, huh?" piece back in February:

THE CORE OF THE GOLD TRADE LIES IN THE DEBASEMENT OF ALL FIAT CURRENCIES TO COUNTERACT THE GREATEST WAVE OF CREDIT DEFLATION SEEN SINCE THE GREAT DEPRESSION

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.

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.

Well, the fed will likely end up monetizing close to $300bln in treasuries and up to $1.25Trln in agency debt. That's a lot of dinero! Those buying gold on hyperinflation worries are simply hitching a ride as inflation concerns are way way out and I doubt the market is being influenced by that. Its hard to argue that inflation is pushing gold up now as we see credit contract, stocks trading at a 35% discount from peak levels and housing prices trading at even deeper discounts - those dollars that are losing value against other major currencies can still buy you way more house and way more stocks than only 2-3 years ago. So that argument doesn't jive with me. Gold is rising for other reasons and if the fed's balance sheet starts to come into question or people realize just how much money was printed to offset the destruction of wealth in the shadow banking system, you may see a jump to gold as an anti-fiat currency trade. Gold is finite and to many considered an alternative form of money that cannot be printed.

What To Watch For: Gold to rise even as the dollar rises. This disconnect occurred early 2009 as the US dollar index approached its most recent high of 89 right as gold approached 1,000 for the 2nd time. Gold is usually a dollar inverse trade so keep an eye out for another disconnect there.

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FHA Moving To Center Stage

A: "With private subprime lenders out of business, the FHA and Ginnie Mae are picking up the slack and very few are talking about it". Well, now they are talking about it. With gold nearing a thousand and Gartman on CNBC this morning discussing something lurking out there, maybe we have another problem with the FHA or Ginnie Mae to deal with.

Via WSJ, "Loan Losses Spark Concern Over FHA":

The Federal Housing Administration, hit by increasing mortgage-related losses, is in danger of seeing its reserves fall below the level demanded by Congress, according to government officials, in a development that could raise concerns about whether the agency needs a taxpayer bailout.

Some 7.8% of FHA loans at the end of the second quarter were 90 days late or more, or in foreclosure, according to the Mortgage Bankers Association, a figure roughly equal to the national average for all loans. That is up from 5.4% a year ago. If its reserves fall short, the agency is obliged to notify Congress, which could spark a commotion over the extent to which the government is funding losses in the housing market.

A senior official at HUD, which oversees the FHA, said there is "no risk" that the FHA would require money from Congress if the ratio falls below 2%.

Phew, well that's comforting, 'no risk' that FHA will need money - mark that down in your little notepad of famous quotes to join Countrywide, Fannie Mae, Freddie Mac, Washington Mutual, Bear Stearns, and Lehman.

Via CalculatedRisk, "FHA: The Next Bailout?":

"The FHA's aggressive lending programs have continued throughout the housing downturn, causing its market share of the mortgage industry to grow from 2% in 2005 to 23% today. ... The FHA insurance fund, however, is likely running dry. ...

While almost all of the experts believe that Congress would support the FHA if necessary (it's currently self-funded), we wonder if FHA officials will be under pressure to continue tightening their lending policies, which currently allow 96.5% mortgages to people with 600 FICO scores. ... Claims against the insurance fund have climbed, with roughly 7% of all FHA-insured loans now delinquent."

And from Rolfe over at Reuters:

The required reserve level is a paltry 2%. Readers may recall that was the capital level Fannie and Freddie were operating with just before they were taken into conservatorship. The ratio last year was around 3%, down from 6.4% in 2007.

No doubt the reserve ratio has fallen substantially since last year. The revised figure won’t be made available until FHA’s fiscal year ends Sept. 30th. FHA’s exploding volumes are just another indicator of the substantial government support propping up house prices.

With all that volume, one would hope FHA had a robust risk management apparatus. Nope. Over $600 billion of loans backed by the end of this year, but no chief risk officer….

A canary in the coal mine was the raid on Taylor Bean & Whitaker, a multi-billion dollar lender that had seen its FHA lending business expand very quickly over the past year. But TBW’s underwriting was terrible so FHA suspended them from issuing guaranteed loans. By the end, TBW’s business had grown to $100m-$150m worth of loans per day. The suspension put TBW out of business overnight.

You can always count on Rolfe to dig up some nice details. Why does the FHA have no chief risk officer? Is this really true?

People like to ignore stuff like this and choose to accept that the problem will resolve itself with time. What readers of this site should be concerned with, is that all you need is a perceived problem with the FHA and Ginnie Mae that could very well undo the dramatic improvement in credit that was engineered by our fed. Whether the problem ultimately leads to an event becomes secondary as the perception of confidence is all that matters to start the ball rolling - from then on it can easily gain steam and become another toned down version of a crisis of confidence. If that happens credit will widen and that could affect the financing operations of any levered business; especially one tied to insuring huge amounts of loans. Is the rise in gold tied to something lurking out there? Who knows, too conspiracy theory for me and if credit did start to act hairy we would see it. For now lets just focus on asking the right questions and always keeping an eye on credit for any notable widening.

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Prime Deliquencies Accelerating: A $4.5Trln Market

A: The delinquency problem has been spreading to higher quality debt classes for some time now. It is not new but seems to be something lingering out of mind right now. Since prime loans make up '80% of US bank exposure to mortgages + credit card loans', its something worth keeping our eyes on. According to the latest T2 Partners report the total size of the prime market is about $4.5Trln. As the lower end of the national housing market starts to stabilize and even improve from uber distressed levels, its the higher end market that is yet to see the same level of re-entry activity. This is probably a force that will last for a while as move-up buyers are not part of any near term housing recovery.

First the news via WSJ, "Troubles For 'Prime' Borrowers Intensify":

Rising delinquencies on prime mortgages helped drive the total mortgage-delinquency rate to a record 9.24% in the second quarter, according to the Mortgage Bankers Association. The data reflect loans at least one payment past-due.

Such delinquencies on mortgages made to prime customers rose 5.8% in the second quarter, compared with a rise of 1.8% among subprime customers. Still, the delinquency rate for prime loans was 6.4%, far below the 25.4% rate for subprime loans, according to the Washington-based trade group.

Take a look at this chart presented in the latest T2 Partners report in July, showing us the size of the prime mortgage market:

I believe that total includes all whole loan originations + all refinancing activity for prime borrowers. The scary thought lies in the appreciation levels that some of these higher end properties saw during the boom. How much of that was cashed out when MEW was the hot thing to do? Now that the high end home is worth significantly less, the debts still remain. In a rising unemployment environment, its only a matter of time for prime borrowers to start running into debt service problems. And we are seeing that now.

Its the lower end to mid end of the national housing market that is seeing the most activity and the most stabilization. The pace of destruction in home prices for these segments were not sustainable and a natural market rebound can be expected as investors and first time buyers take advantage of attractive prices and government tax credits. But the higher end is still adjusting. This is due to a combination of lack of credit availability in the high end market + tighter lending standards for higher end property + misaligned price/rent affordability ratios for higher end + a shrinking buyer pool that can qualify and close for a higher end property.

One major element that is missing from the higher end market nationally are the move-across and move-up buyers! No longer are people taking profits from their mid sized homes to put that towards a higher end move-up purchase and financed by an easy credit system.

Calculated Risk has covered this absence of move-up buyers in detail as 70% of total sales in Q2 were first time buyers taking advantage of gov't tax credits and investors (click for larger image):

"According to the Campbell survey over 70% of sales in Q2 were to first-time buyers and investors.

Although we don't have historical data for distressed properties - or buyer types - this does suggest a market that is far from normal with few move-across or move-up buyers. "

Lots of things to put together to get a clear bigger picture view of what is happening out there. Prime is part of Wave 2 concerns discussed here. The banks raised a ton of money and still have a steep yield curve to benefit them with higher earnings potential to help build a nice cushion for absorption of future loan losses. The question is when does the second wave of pressures start to be a real burden on the balance sheets of our bigger financial institutions. Since stock market indexes are what most people use to gauge the health of our economy, I think we still have some improving data from fiscal/monetary stimulus and inventory restocking to get through before we see equities adjust to these fundamental issues that don't seem to go away.

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Jets Mangold & Rhodes Tweeet About 'Big' News

A: Could Brandon Marshal be on the way? Please, lord, almighty. Enjoy Labor Day all!

Please excuse the one day break from the economy and Manhattan real estate to enjoy the days leading up to this years NFL season kickoff. Ahhhhhhhh, feeling kinda Sunday!

Brandon Marshall is a force. Get him and worry about taming him later on. Besides, the very presence of a stud WR like Marshall on your team affects the opposing teams game plan and opens up the run game big time. With a solid o-line and explosive RB Washington around to spell the under-rated Thomas Jones, the AFC leading rusher last year, getting Marshal has very positive consequences for this team. Finally, I see a value in Twitter.

KERRY RHODES 16 HOURS AGO: jet fans expect a big announcement coming soon lol!

NICK MANGOLD 15 HOURS AGO: @kerryrhodes what's our big news that I apparently don't know about?

NICK MANGOLD 15 HOURS AGO: @kerryrhodes your killing me and your loyal followers. Shoot me a text so I can know too!

NICK MANGOLD 10 HOURS AGO: I must tell you all ignorance is bliss. Now I have to keep a secret that I'd love to share but I need to investigate futher. Good things tho

The teasing ends with this Kerry Rhodes tweet:

GET HIM! And that is not because he is on my fantasy team. I swear.

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Watch For a Seasonal Uptick in Inventory

A: With a delayed seasonality effect hitting our marketplace due to the recent wave down in prices, we need to keep our eyes on all the listings that were removed from our marketplace over the past two months. Over the past 8 weeks, some 2,321 listings (coops + condos in Manhattan) were taken off the market for various reasons. This does not include listings sold or entering contract. These are listings whose internal status updates were changed by the listing agent from ACTIVE to either POTM (permanently off the market) or TOTM (temporarily off the market). To put that number into perspective, over the same 8-week period we saw 1,624 new listings hit the market and 1,819 listings signed into contract. The net result is a total active inventory reduction of about 2,500 listings. This information is based on one of the internal broker sharing systems and not part of the widget displayed on UrbanDigs.

This is as real time as I can give it to you guys right now until my new system is up and running.

I would argue that our normally active months of JAN-MAY or so was delayed due to the more powerful market forces that were in place during the first half of that period in 2009. Instead of seeing a very busy January-February-March, we saw a frozen start to 2009 as the ripple effect from Lehman's failure made its way through to our local real estate marketplace. As a result, the 4-5 months that usually define our seasonally active marketplace was pushed back; starting in late April instead.

What you guys need to know is that the dramatic reduction in total active inventory is happening for 3 main reasons:

a) more listings being removed from the marketplace (seasonality)
b) fewer new listings hitting the marketplace (seasonality)
c) surge in contracts signed (combination of delayed seasonality and first wave down)

Here are the real time numbers corresponding to each letter above:

a) In the last 8 weeks 2,321 listings were removed from this marketplace
b) In the last 8 weeks 1,624 NEW listings were brought into this marketplace
c) In the last 8 weeks 1,819 listings were signed into CONTRACT, thereby being removed from active inventory from this marketplace

I don't have more data on these trends to chart it out because the system I use to check these trends is very limited and not designed for analytical purposes. But I can tell you that the 4-week trend for each of the 3 metrics discussed is DOWN significantly from the prior 4 weeks! This tells me a number of things that most people watching our marketplace obsessively don't get to see:

LISTINGS REMOVED trend is falling (down 27% compared to prior 4 week period) ---> this is one of a few seasonality effects. As we get passed Labor Day and the upcoming Jewish holidays, expect a significant amount of listings to come back onto the market and fewer listings to be removed. As I mentioned above, we saw 2,321 listings temporarily or permanently removed from our marketplace over the past 8 weeks. Many sellers decide to take advantage of the generally slower summer months to take their listings off the market in an attempt to 'freshen them up' for a new try. Sometimes the seller switches brokers after taking 1-2 months off. The point is that we are getting to the time of year where fewer listings are removed from our marketplace and more new listings tend to come on. New listings usually see a noticeable rise as we get closer to the upcoming bonus season.

NEW LISTINGS trend is falling (also down 27% compared to prior 4 week period) ---> another seasonality effect. During the month of August, fewer new listings hit our marketplace. This usually changes after Labor Day and I expect history to repeat itself this time around. Over the next 4-6 weeks I would expect to see a rise in active inventory that represents not only brand new listings, but, older listings that were removed for temporary reasons.

CONTRACTS SIGNED trend is falling (down 23% compared to prior 4 week period) ---> looking at the real time inventory charts here on UrbanDigs may have led you to believe that contract signing activity has surged again on a month to month basis. Not so. In fact, over the last 4 weeks our market saw 789 listings go into contract compared to 1,030 in the prior 4 week period. This is quite telling. What I can tell you is that the trend for contracts signed has been falling for about 2-3 months now; telling me that the peak activity was during the months of May, June & July following the first wave down in prices. The UD real time charts on these metrics have been especially useful for this down cycle so far.

All in all, this market is still actively trading at the lower end of the discount range from peak based on price point - and the market still seems to be more active than usual for this time of year. The surge in activity was a function of lower prices and higher confidence in the asset class. The slight rebound in prices was a function of removing Armageddon and Fear trades from the table that saw our market naturally overshoot to the downside in February & March. I expect this market to muddle around this new comfort zone for a while. However, I expect the upcoming Q3 report to show relative improvement from the prior quarter in terms of contracts signed & number of properties sold that will likely lead to a media headline frenzy that the 'bottom is in' and 'rebound underway'. I expect Q3 sales to come in around the 2,000 - 2,250 level or so. I will be more interested in the year-over-year trends to see where this market is in the grand scheme of things and where we came from.

Expect continued pricing pressure in the upcoming reports for another quarter or two as lagging sales get flushed through the system and compared to year earlier levels.

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Fed Beige Book: New York

A: Here is the latest info from the Fed Beige Book for Second District - New York.

Via Fed Beige Book September 9, 2009:

Commercial real estate markets in the District were steady to somewhat softer since the last report. Manhattan's office vacancy rate rose moderately in July and August, while asking rents continued to decline--rents on Class A properties are down roughly 20 percent from a year earlier, and that does not include increased concessions by landlords. Elsewhere in the District, however, office markets have generally been stable: vacancy rates rose modestly in Long Island, northern New Jersey and metropolitan Syracuse but edged down in Westchester and Fairfield Counties and in the Rochester area; vacancy rates held steady in the Albany and Buffalo areas. Asking rents on Class A properties are down modestly over the past year across most of the District. Industrial markets have been mixed but mostly steady.

The housing market has shown scattered signs of a pickup in parts of the District, though conditions have continued to weaken in New York City. A New Jersey contact notes signs of a mild pickup at the lower end of the resale market--helped by the homebuyer tax credit--but maintains that sales and starts of new homes remain flat at low levels. Prices are said to have firmed slightly in New Jersey's resale market, though they remain substantially lower than a year ago. Similarly, Realtors across New York State report that prices rose in July but are running well below comparable 2008 levels.

In contrast, New York City's multi-family market has continued to weaken. Manhattan co-op and condo prices have reportedly continued to fall in the current quarter. However, transactions activity, which had been exceptionally sluggish in the second quarter, has reportedly picked up in the current quarter, except at the high end of the market, where activity has evidently been constrained by tight credit. Prices of newly-constructed condominiums, which are mostly at the high end of the market, have been discounted steeply, reflecting a large inventory. The apartment rental market has also continued to deteriorate, especially at the high end: overall, asking rents are reported to be down 6 to 10 percent from a year earlier in August; moreover, landlords are typically waiving commissions and offering concessions, such as 1-2 months free rent.

We will likely find that prices are slightly rising and now stabilizing on a quarter to quarter trend yet still falling on a year over year basis. This is due to the last quarterly report catching the February and March fear trades closing. The freeze up started in mid-September, then overshot to downside in February & March, and since priced out Armageddon and started to stabilize at current levels down from peak. The end result looked something like this:

The simplest way to look at what has happened in this marketplace is to understand that we had a wave down in prices that started around September 2008, lagging national markets - this wave produced a frozen market for about 6-7 months followed by a surge in contract signing activity as prices reached comfort zone levels. There is generally a 2-3 month time lag between contract signing and closing; obviously more with pre-construction deals. As a result, reports up to Q4 2008 do not reflect the wave down in prices. It really started with the Q12009 report which showed closings and activity from JAN-MARCH of 2009, the fear factor months.

Therefore, it is safe to say that pricing pressures on a y-o-y basis will be pressured up until Q12010 or so, when the comparison will finally catch up to the prior year report that captured the wave down. However, we will see improvements on a quarterly basis for contract signed activity and total sales volume when the Q3 report is released in October. The media and brokerage community will likely use that rolling improvement as proof the market has bottomed and in recovery. Until fundamentals start to improve, I have to remain cautious and be in the camp that sees price actions muddling at current comfort zone levels until outside forces clarify a new path.

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Madoff's Penthouse: What Will It Fetch?

A: Lets have some fun here. Madoff's PH unit at 133 E 64th street, a 7-room duplex with a wraparound terrace and quality views is going to be hitting the market in a week or so with Sotheby's agents Serena Boardman & Anne Corey. Personally, I was rooting for my good friend who is also at Sotheby's, Paul Anand. So, what SHOULD it trade for and what WILL it trade for? Two different things so lets hear your thoughts.

Hat tip Curbed.com.

My gut is telling me that the price point this property fits into is roughly trading down about 27-32% or so from peak trades about 2 years ago. This segment of the market was trading down closer to 35% and even saw some distress sales trading closer to down 40% from peak, back in February & March.

I like to do a property valuation based on three main variables: market conditions, property condition, and light/view premium (read my 'valuating Manhattan real estate' piece for more on this topic). Clearly this one will be a bit trickier to pinpoint where it might trade.

Here are the details I have for 133 East 64th Street:

Ownership Type: Co-op
Building Type: Mid-Rise
Service: Full-Time Doorman
# Floors: 12
# Units: 23
Age: Prewar, Built 1927 and Converted 1946
Financing Allowed: 50%

I can't find details on his unit other than that its a seven room PH duplex. We need to know the approximate size, or amount of shares held if possible, # bedrooms and # baths. I assume the property condition will be very good. The key will be valuing the wraparound terrace. How big is the terrace? How is it furnished? Exposures/Sunlight/Views? Layout? It all will play a role.

Past 3 sales in building I have details for include:

3A; 11room/4bed/4bath, 3,800 sft - Sold for $5,730,000 on 10/26/2005
5A; unit info n/a - Sold for $5,000,000 on 05/31/2005
6A; 12room/5bed/4bath, sft n/a - Sold for $5,882,353 on 08/26/2004

The stigma of buying Madoff's home will be the most interesting dynamic in this transaction. Personally, I think its all about exposure when it comes to real estate. Maximum exposure equals maximum profit potential and this one will get massive press. All you need is two willing and able buyers to step up to the plate and when you see the amount of money that was made in the debt/equity markets in the past 7 months, I bet there are a few more multi-millionaire hedgie's out there that would love to brag about owning Madoff's pad! It is a co-op but I wonder what level of pressure is put on them when evaluating the prospective buyer.

I doubt the stigma of it being Madoff's home hurts the value that much in today's market. I think the amount of press it gets will negate any negativity associated with buying the ponzi master's digs.

So, where does it trade? Where is the market for this type of product now? In my view, 9-10 mil is starting pretty high! When I look for some active competition out there I only see:

188 East 76th Street PH with terrace asking $7,850,000 - on market for 12 weeks

My guess is they are setting the price with this 9-room PH duplex listing in mind.

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Deflation Will Partially Negate Extreme Inflationary Policies

A: One can easily describe the environment today as one of extreme inflationary policies to combat deflationary forces and mass deleveraging from years of excess. That is how I like to look at it in terms of inflation or deflation. It gets more confusing when you start debating how one defines inflation. Some simply view inflation as a weakening of the relative currency. It is all relative right? If the US dollar is to get destroyed, it must do so against other stronger currencies. So really it is a question of which currency is the weakest at any given point in time. In other words, we can have extreme inflationary policies yet see a strengthening dollar relative to weaker major currencies. If anything, let us at least admit that a definition of inflation needs to take into account a few other dynamics. And in doing so, you will realize the bigger picture phenomenon at play right now...that deflation will partially negate extreme inflationary policies that are in place to support asset prices, a banking sector recapitalization, a smooth deleveraging process and economic stability that hopefully leads to a recovery.

Or you can say it this way --> extreme inflationary policies are in place to negate a deflationary spiral. I guess it boils down to how you define inflation. I tend to side with Mish that inflation is a expansion of the money supply and credit where credit is marked to market. While the money supply has surged as the fed responds to deflationary forces, the destruction of wealth in the shadow banking system is approaching $1.7 trillion or so. As a result, banks are contracting lending to consumers as credit quality deteriorates amidst a rising unemployment environment.

Take a look at the latest fed report on consumer credit and you will notice that there was a month to month decline of $21.5Bln (the largest monthly drop on record), and a fall of about $70Bln over the past year - non-revolving debt contracted at a 11.7% annual pace:

This trend is likely powered by a combination of consumers paying down debt balances and banks seeing rising charge-offs. Credit contraction of this magnitude is certainly not inflationary in a fiat universe with a fractional reserve banking system designed to have a money multiplier effect. Back to Mish:

"In a fiat world which we are clearly in, not much happens unless credit is extended or money somehow makes its way into the economy. Realistically "debt deflation" is about all one is ever going to see in a fiat regime. The reality is "Debt Deflation = Deflation" in a fiat regime. Indeed it is the destruction of debt that matters most.

Those who stick to a monetary definition of inflation pointing at M3, MZM, base money supply, or even Money AMS, are selecting a definition that makes absolutely no practical sense."

If it were not for deflationary forces and an extreme destruction in credit wealth, the US dollar would be much much weaker today - given that the extreme dollar negative inflationary policies were still put into place! Think about that for a moment. Deflation is playing a role in negating extreme inflationary policies and will continue to do so for probably a few more years. It's as if there is a currency battle going on between deflationary forces that should strengthen the dollar and extreme inflationary policies that aim to debase the dollar.

Now, lets get creative here. What if inflationary policies end up having some unintended deflationary side effects - the effect of higher rates, higher taxes, and higher commodity inflation come to mind and their combined effect on both consumers and corporations. I think that is part of endgame and will be the new reality once we get through this mess.

I really think that any inflation we see first will be of the 'crunching' variety right as unemployment reaches its peak across this country. That is, I think inflation will first show up in the form of higher energy prices, higher food prices, higher health care costs, higher rates, higher taxes, higher commodity prices, etc..the stuff that we need to live on day to day. Those expecting wages to rise and housing to surge as a side effect of inflation will likely be disappointed due to the credit shock we have been through and the residual damage that was done to the banks balance sheets, the securitization model, the consumer balance sheet, elimination of exotic loan products, tighter lending standards and the speculative/move-up/move-across home buyer.

It gets confusing when you start talking about how inflation will support housing prices, especially those hyperinflationists that see housing price levels surging to peak levels as a result of the weakening dollar. I disagree with this 'inflation induced home price surge' for a number of reasons but I do not discount the possibility that we will see natural rebounds off the trough from the hardest hit markets! After fierce destruction, one would expect a bit of a rebound as past housing reports including high amounts of distressed sales are ultimately compared to.

Housing is tied to the availability and cost of credit in addition to fundamentals like a strong labor market, rising wages, and simple supply/demand imbalances. Add in a host of other dynamics like securitization of loans, easy appraisals, exotic loans allowing affordability to surge, no underwriting standards, govt subsidized lending rates, first time buyer tax credits, housing programs and a speculative bubble component and you have the makings of an asset class that is festered with outside interference. Its not just about the house being priced in US dollars. Rather it is a amalgam of forces that can affect which direction housing prices drift. Sure the dollar may weaken, but in no way will the engine that powered housing growth over the past decade work like it did as we approached the peak in credit.

Therefore saying a weaker dollar IS inflation and in times of inflation housing SHOULD rise because the asset is priced in dollars, will have some flaws to it because the recipe for housing success has greatly changed in today's world.

With deflation the US dollar should swell. This is what happened during the course of 2008 which since has been negated some by inflationary policies and a rush out of dollars to higher yielding asset classes; doesn't mean we have an inflation problem now though. The net move in the US dollar was muted because of deflationary forces and the rise that our currency saw when the crisis reached its zenith.

Already we are hearing talk of possible exit strategies by our fed to limit any whiplash inflation resulting from the extreme policies put into place to stem this crisis. The most recent is the potential for tighter capital requirements for our banks - Greenspan on Bloomberg:

Former Federal Reserve Chairman Alan Greenspan said banks should be forced to hold more capital on their balance sheets, reinforcing a weekend push by finance chiefs from the Group of 20 nations.

I listed this as #4 in exit strategies to expect in 2010 & 2011, as the fed reins in emergency lending facilities. The process of writing off bad loans/securities and debt-restructuring will continue until consumers and businesses can sustainably maintain debt service payments. When the debts are written down to where they should be, we can start to discuss future sustainable credit growth. Until this process plays out the fed is likely to maintain stimulative inflationary policies. In the end, banks need sound consumers & businesses to lend to and that is the deflationary process that is ongoing today.

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Madoff Apartment to Start at $9.9M

A: Crazy overpriced if you ask me. I hear the 7-room PH duplex is about 2800-2900sft although I believe it will be marketed at 3,000 interior sft + a 1,000sft wraparound terrace. Assuming its marketed at 3,000 total interior sft (you do not include exterior sft as marketable livable space), that means they are asking a lofty $3,300/sft. With apt 8A on the market for over 3 months now, an 11-room apartment in the same building asking $7.6M, I say Good luck! Serena Boardman is a monster producer at Sothebys so at least they picked a star to market this thing.

Via NY Post "Bernie's Pad Up For $9.9M":

Sotheby's Realty put the eye-popping price tag -- more than $2 million higher than expected -- on the 133 E. 64th St. duplex.

Asked by US marshals to appraise the property, other brokers thought it was worth about $7.5 million.

"There's not a chance they'll get anything close to that," said a rival broker. "It's tainted by who he is, and it's just not that great. It's a Lexington Avenue co-op."

I agree. My bet is the apartment sells for between $6M - $6.5M or so. In the meantime, it will help 8A sell faster.

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Corus Bank Shut Down - $16 Trillion in Govt/Fed Programs

A: One of the remaining biggies was just shut down. Check in with Bill over at Calculated Risk as he covers all these bank failures individually, along with commentary. Bill is wicked smaaat!

From the FDIC, "MB Financial Bank, National Association, Chicago, Illinois, Assumes All of the Deposits of Corus Bank, National Association, Chicago, Illinois":

Corus Bank, National Association, Chicago, Illinois, was closed today by the Office of the Comptroller of the Currency, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. To protect the depositors, the FDIC entered into a purchase and assumption agreement with MB Financial Bank, National Association, Chicago, Illinois, to assume all of the deposits of Corus Bank, N.A.

As of June 30, 2009, Corus Bank had total assets of $7 billion and total deposits of approximately $7 billion. MB Financial Bank will pay the FDIC a premium of 0.2 percent to assume all of the deposits of Corus Bank. In addition to assuming all of the deposits of the failed bank, MB Financial Bank agreed to purchase approximately $3 billion of the assets, comprised mainly of cash and marketable securities. The FDIC will retain the remaining assets for later disposition. The FDIC plans to sell substantially all of the remaining assets of Corus Bank in the next 30 days in a private placement transaction.

The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $1.7 billion. MB Financial Bank's acquisition of all the deposits was the "least costly" resolution for the FDIC's DIF compared to alternatives.

Seems like minimal damage to the DIF fund. One concern floating around while stocks ride the rally wave further is how will the street react if/when the FDIC needs a new round of funding? Watch out for reactions if the FDIC needs to tap into more credit with the US Treasury. I think there is under $30bln left in the reserves and as Rolfe at Reuters points out:

"The issue is the liquidity of their assets. A huge chunk of their balance sheet is made up of assets received from failed banks. REO, toxic loans, etc. That’s not cash they can use to finance bank seizures and sales. If they run out of cash, they may have to borrow from Tim Geithner."

Lets be real here. The credit markets and equity markets are reacting 'strong like bull' to any news that is even remotely negative. Its all about momentum and trading off the dramatic improvement in credit given the $16 Trillion and 30 credit facilities and programs put into place by our Government, the FDIC, and the Federal Reserve - of which just over $3 Trillion has been used so far.

No way they use it all and a wind down of programs is expected sometime in 2010; but you can see the bazooka brought out to fight this episode of debt destruction. The question that matters most is when perception changes and confidence changes ever so slightly - and what changes it. One sign will be a reversal in credit markets and if/when equities selloff on positive news that we know is coming.

Via Tom Joyce's latest presentation from Deutsche Bank Securities - "One Year After the Shocks of September 2008: Over $16 Trillion in U.S. Government Programs" - View Larger Image

Yes, unprecedented actions were taken to save our banking system and yes it is having an effect on our dollar, credit & equity markets. I'll try to get more info from that report up here next week.

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Five Manhattan Properties Up For Auction Sept 15th

A: Looks like there are 24 more residential properties up for bidding over the next 3-4 weeks too. Something to keep an eye on. BidOnTheCity.com is handling the auctions.

This site and service is getting more and more press and making more and more waves as an alternative to the traditional brokerage model. Some of these properties are listed with brokers in addition to the auction, but not all of them. For example, 212 E 48th - 2B doesn't seem to be listed with any brokerage firm and is slated for auction in three days. With a starting bid of $399,000, reserve in place, I wonder how this will affect the two other 'B' line properties currently on the marketplace: 7B asking $575K and 5B asking $559K.

Here are the five properties set to be auctioned off on September 15th via BidOnTheCity.com:

Happy Bidding!

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Five Buyer Tips & Tricks

A: Too busy over here to write something new so I just wanted to plug five old discussions here that may be of interest to buyers out there in Manhattan; especially first time buyers.

Dealing With a Bully Seller

Room Count: A Shady Science

The Seller's First Response: The Probe Bid

Timing The Market: The Wait & See

Bidding Strategy 101: Reverse Psychology

Will put up some sell side tips later today.

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The Picture of Recasts - Neg Am Speeding Up Recasts

A: The deleveraging process on the consumer and business side will continue. One pressure on the consumer side that should be of concern is the coming recast schedule for all those with Option ARMs. Those using negative amortizing payment schedules will see a recasting of their loan to the new higher principal amount, causing a 'payment shock' that was building up for years - the easier payment schedule was the clear choice for many with mortgages that were barely affordable to begin with. The rate reset schedule doesn't bother me so much given the dramatic improvement in LIBOR and other credit indexes that the reset is tied to. But now it seems the recasts schedule is approaching faster due to the rate at which borrowers are reaching their balance cap.

The new T2 Presentation out, some 155 pages of doomy charts and graphs, showing us a glimpse of the Option ARM recast schedule (sorry, the file is too large to upload here and I'm looking for a outside link).

First, let's revisit what this recast vs reset thing means:

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

LOAN RECAST - 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

That last part is what is important to note here! One of the two ways a loan will recast to the new higher principal amount is if the balance cap is reached. Generally speaking, the balance cap is set to 110% - 125% of the original principal balance.

According to the latest T2 report, "Option ARMs are Recasting Much Faster Than Expected Due to Negative Amortization":

Nobody is denying that the worst is likely behind us in terms of price destruction in many hard hit residential markets - a combination of government subsidies on the mortgage side, first time buyer tax credits, monetary stimulus, and a natural deceleration of unsustainable fierce price declines. The less-worse reality will be with us for a while given unprecedented measures taken by the Fed, the FDIC, and the government. But what we need to keep our eyes on are variables like this that contribute to the prolonging of the deleveraging process. The recast wave was thought to be a few years out but with more borrowers utilizing the negative amortizing payment option to keep costs as low as possible, the recast is hitting earlier than expected. This is one of many reasons why the side effects of this housing/credit crisis will feel like it never goes away.

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Where is NYC Losing Jobs?

A: The Crains New York job-loss meter is now at 73,181 since the peak in August 2008 and last updated September 14th, 2009. The last NYC Comptroller Comments report had 2009 & 2010 estimated NYC job losses at 110K & 87K respectively. The job loss forecast by the Mayor is significantly higher at 172K and 129K respectively for 2009-2010. Anyway you cut it, its clear that NYC continues to be in a rising unemployment environment however my hope is that this fed engineered reflation environment helps to constrain future planned job cuts. If anything, maybe we can escape this severe crisis by seeing less jobs lost than originally announced by major firms. Time will tell if there are major consequences to these extreme policy actions. So where are jobs being cut the most?

First, here is the job-loss estimates state in "The Comptroller's Comments on the Adopted Budget for Fiscal Year 2010 and the Financial Plan for FYs 2010-2013" report issued two months ago:

The Crain's Job-Loss Meter sits at 73,181 and is calculated as follows:

CrainsNewYork.com's Job-Loss Meter has been updated to show the number of jobs lost in New York City since the peak of August 2008. Our base figure draws on Eastern Consolidated's seasonally adjusted analysis of New York Department of Labor monthly statistics.

We also update regularly to include layoffs in the city that have been announced to the Department of Labor to satisfy the Workers Adjustment and Retraining Notification Act. According to WARN, all private employers who have 50 or more employees must file notice with the state at least 90 days before they intend to lay off 25 or more employees.

So, outside the financial sector where is NYC losing its jobs? Here are the Top 10...

1. MTA NYC Transit - 1,194
2. Caritas Healthcare (Mary Immaculate Hospital) - 1,045
3. MACY's - 1,012
4. Amalgamated Life - 466
5. American Transit - 400
6. Milford Plaza - 354
7. Cipriani Fifth Avenue / Rainbow Room - 261
8. Transit Facility Management Corp. - 248
9. Thacher Proffitt & Wood LLP - 243
10. Finley Fine Jewelry - 226

In the financial sector, I see an additional 4,937 jobs lost reported in this survey since peak employment hit in AUG of 2008. I know in June of last year there was an estimate of 22,000 jobs lost on wall street here in NYC, via Crains:

In the past year, 22,000 New Yorkers who work on Wall Street have lost their jobs, according to a Crain’s estimate. The city's Independent Budget Office forecasts that 33,300 Wall Street jobs—17% of the city's best-paid workforce—will disappear by next year.

Announced cutbacks at securities firms: total worldwide followed by estimated number in New York City:

CITIGROUP 15,900; 3,000
BEAR STEARNS 9,200; 7,000
UBS 7,000; 1,000
LEHMAN BROTHERS 6,400; 2,000
MERRILL LYNCH 5,200; 2,000
MORGAN STANLEY 4,400; 2,000
J.P. MORGAN CHASE 4,100; 1,500
BANK OF AMERICA 3,700; 1,000
GOLDMAN SACHS 1,500; 500
WACHOVIA 1,400; 1,000
CREDIT SUISSE 1,300; 750
DEUTSCHE BANK 500; 250

I am hoping it is not that high and I don't have an exact number on it today. Does anybody else know of an outside source for where wall street job losses are today? With a fed reflation strategy in full force and a dramatic improvement in credit, hopefully the dire expectations for total job losses made last year will prove to be too pessimistic. What would be interesting to know is whether or not securities firms adjusted their planned layoffs from previous announcements!

As good as the equity market is performing and the things that is telling us about the near term, mainstreet will continue to FEEL pressured as consumers continue to save and repair balance sheets. Let us not forget that the foundation of many balance sheets was in real estate and homeowners did take a 20-30% haircut, depending on price point, on their largest held asset that was likely further hurt by equity taken out during the credit boom. Lower asset prices + higher principal owed can be a crimp on any lifestyle that one got used to in the old days.

Stocks are a proxy for everything and right now credit has improved dramatically; something you can't deny. What I mean is, even CMBS AAAs, series 1, can't rally much more because the bids are close to par right now - around 93/94. Series 5 CMBS AAAs are around the low 80s. CMBS AAs are tougher to call but they are not a whole lot of the notional outstanding. AAAs are about 80% of the notional outstanding or so and tell you the clearest bigger picture of the perceived health of commercial real estate.

In short, worries about commercial real estate being the next shoe to drop is just not hitting the bids on derived AAA securities. Instead, bids for CMBS AAA have rallied dramatically along with the improvement in credit as a result of extreme fed policies and liquidity measures. If there is a problem ahead of us, we will see it here first and right now it just ain't there! I'll do a separate piece on this later.

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Jamie Dimon @ JP Morgan Cyclicals Conference

I was fortunate enough to attend Jamie Dimon's lunch presentation at the J.P. Morgan cyclicals conference yesterday. I think it's worth re-capping here. I read Dimon's letter to shareholders in the J.P. Morgan annual report a few months back and was amazed by how well Dimon explained the financial crisis in plain English that even non-Wall Streeters could understand. You can find it here. I have always believed that the true measure of intelligence is the ability to explain complex concepts in simple terms. So I had great expectations of Dimon's lunch presentation at the conference and I wasn't disappointed. I will try to re-cap what I heard for you. My apologies to you and to Jamie if I miss anything or mischaracterize anything that was said.

Dimon began by taking the audience back in time to the Bear Stearns bankruptcy, when he got a phone call at a Greek restaurant asking if he could lend Bear Stearns $30 billion. He proceeded to walk through the incredible happening of the next nine months culminating with the Fannie/Freddie implosions, Wamu, Wachovia, Lehman, AIG et al. He noted that while he raised his hand to tell the powers that be that his bank did not need TARP, several other institutions said they would take the money before the Feds even finished making their offer. He averred that he agreed with the strategy of making all of the 19 large institutions take the TARP money, so as to avoid the risk of the strong refusing it because they didn't need it and the weak refusing it for fear of causing runs on their banks. Was TARP the perfect plan? No! But in hindsight it seems to have worked. Dimon averred that he didn't like how the Feds bailed out the auto companies by giving the unions 50% of the the business, but he told his bond guys he believed that it was fair that as secured creditors, his guys received just 30 cents on the dollar of debt, because in a liquidation they would have received even less. Not perfect, but the point was for the government to do something, not nothing.

Dimon asked the audience, which included a large number of management teams from cyclical companies that were presenting at the conference (many of these companies were large and small conglomerates serving many diverse end markets): Is your business stabilized or getting better? Many hands went up. Then he asked how many people's business is getting worse? One hand went up. Then he asked: What stock are you? Eliciting a well deserved roar of laughter. Not only is the guy straight as an arrow in telling it like he sees it....he's got a sense of humor too.

Dimon then discussed the kind of freeze he believed took place as a result of the markets going tilt last year. He asked, How many people moved money from riskier to lower risk assets in response to the crisis? Many hands went up. Dimon said that some $1 trillion of corporate assets were believed to have been moved into low risk, short maturity paper and was poised to move out on the risk curve. I don't believe he offered a quantification of the amount of consumer money that had done the same. He discussed the consumer pullback and some research by J.P. Morgan economists suggesting that if the current decline in consumer consumption was sustained, the consumer balance sheet would be de-levered back to 2003 levels within three years. Dimon's opinion was that this would not happen, as he expected consumer spending to pick up and de-levering to take place over a longer period of time.

On the subject of bank losses Dimon was less sanguine, saying. "Expect several bank failures each week," the reason for this being that local and regional banks are much more levered to commercial real estate. Dimon asserted that the commercial real estate shoe had already dropped and that the recognition of the consequences was merely a matter of accounting treatment. That said, he did not believe that these bank failures posed a systemic threat to the system. He noted that the 19 largest banks hold 50% of all loans. All 19 are now sound due to TARP, stress tests and required capital raises. He averred that these banks also had a margin of safety from their "well capitalized" status even if un-employment exceeds the "worst case" 10% level. Additionally, these banks have other levers to pull in terms of cost cutting and efficiency, as well as the ability to earn significant sums in short-order in the current environment.

In terms of the progress of the economy and capital markets, Dimon pointed out that the capital markets continue to open wider and wider, accommodating increasing lower rated credits' capital raising needs. He stated that stimulus money was only just beginning to flow and that the near-term economic outlook was increasingly positive. At this point Dimon threw the floor open to questions. His answers were concise and well reasoned, and addressed questions as diverse as what should bank regulations/capital requirements look like going forward? (Capital requirements will be higher) Should there be a "Too big to fail" policy? (No, it would invcentivize everyone to consolidate into giant banks status), Can J.P. Morgan make a 15% ROE in the future? (They can and are already at 10-12%).

Dimon opined on the status of the dollar by saying that China held only 65% of its assets in U.S. currency and could easily diversify by buying either yen or euros; he wasn't sure that either of those was a great alternative. He also said that if they did divest dollars in a big way, the yuan would appreciate significantly, killing their economy. I asked perhaps the most debated question of the current time: Are you more worried about inflation or deflation?

Dimon, in my opinion, showed his intelligence by saying, for planning purposes we look at those issues and I am equally concerned about both. It is possible that we could fail to get the economy going fast enough to become self reinforcing (I am paraphrasing here) and could have a double dip. At the same time there will come a time when the Fed has to remove the huge amounts of liquidity they have pumped into the market.

Bravo Jamie! I should mention that throughout, Dimon maintained a very composed and respectful demeanor even when he joked about writing a $25 billion (I think that's the number) TARP repayment check at a New York City J.P. Morgan branch while sending a note to Geithner reminding him that while the Fed had lent J.P. Morgan $25 billion, J.P. Morgan was still holding loans to Uncle Sam of $200 billion. He used some colorful language now and again to underscore a point and prove that not only is he one of us, but he's a real New Yorker.

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Seller Pricing Strategies Should Ignore Stock Rally

A: The less-worse bull market continues and we still have inventory restocking and uber stimulus in the pipeline that will contribute to much better economic data as time goes on. Stocks are in the process of pricing this in and gold is surging which is generating a reflation trade mentality out there. This does trickle down to our markets here in Manhattan in the form of higher buy side confidence and lower sell side motivation for those without a financial pressure to raise $$$ - both psychological. Media headlines are even starting to reflect the impact on sell side pricing strategies. But if I can offer a voice of reason to sellers it would be to ignore the stock market rally and continue to price your apartment closer to the most recent sales and where your price point is trading down from peak levels. The stock market can change on a dime at any time and many buyers continue to question the foundation, or sustainability, of this rally. It takes two to tango and just because you feel your property deserves to price-in future appreciation that hasn't happened yet doesn't mean the buyers will dance with you!

Bids for Manhattan residential property have improved and activity levels are promising for this time of year. It is what it is. However, I still find that buyers are bidding with the caution that the world has changed substantially since the peak. As a result, serious sellers always should be realistic on where the bids are right now.

The media campaign is beginning and we should worry about sellers adjusting their strategy too aggressively. Wait until they get a whiff of the upcoming Q3 report showing the vast improvement in sales activity from the 2nd quarter.

Here are two headlines already:

Time to raise residential prices? Depends on whom you ask

Expected price cuts not coming

Any struggling seller should ask themselves if you would pay near peak or above peak prices for a Manhattan property today? If you answer is 'yes', then I would question your bias as a homeowner who happens to be selling. The market does what the market wants and nothing I say here will change that. The best I try to do is report on it in real time. It seems bids are coming in at better levels than six or seven months ago when fear was high, but not anywhere near peak levels - especially for 1M and above. Therefore, expectations that a future bid will come in at a premium representing future profit potential on a so-called reflation trade should be tamed.

If you must sell, never price a property with the assumption that a perfect buyer with tons of money and no care in the world will happen to come along. Doing so will do more harm than good and may even scare realistic buyers away that otherwise might have been willing to view your apartment and bid. Do not underestimate how many buyers out there simply do not request a viewing because they feel the seller needs to get more in line with the realities of today's market OR refuses to put a bid in for fear of insulting a seller. I tell you from experience that many buyers think this way and will simply pass on your property until pricing is more in line with the market they obsess about daily. Im even willing to bet that the buyer pool out there that is interested in your property probably knows today's market better than you! After all, they are looking at all your competition.

If you have been on the market for the past 3-4 months and had more than 35-40 buyers through your property with no acceptable bid, question your pricing strategy! Simple. Done. If you don't have to sell, fine. The marketplace at all times contains subsets of sellers that either have no financial pressure or reason to sell or is simply choosing to test the market to see if they can get their price - a price closer to peak levels or if anything, minimizing the haircut when buyer confidence seems to be on the rise.

Fact is, this market has been considerably active since May and the upcoming Q3 report will show this on a quarterly trend basis. Given the dramatic improvement in credit and economic data, stocks are surging and this may lead some sellers to think the market will rise up to their expected level - so why not price high or consider increasing your price. Dangerous if you ask me. In this day and age every buyer can see the full listing history of your property even if you decide to remove it from the market and bring it back on later at a higher price. Emotions lead sellers to do these types of things and right now the markets are fueling this 'reflation' sense. This doesn't mean buyers will start chasing property and bidding near peak levels though. If I see that happening I will tell you about it her but I got to tell ya, I don't see that happening.

In my humble opinion, bids from buyers are coming in at the lower end of the range down from peak - not much more. I'll provide a hypothetical example to explain. Lets take a typical F/S Drmn Classic 6 in UES or UWS and see the range where bids came in when fear was high and where they seem to be coming in today:

HIGH FEAR (Feb-March 2009) ---> bids came in down 25-30% from peak levels pricing in fear/uncertainty
TODAY (July-present) ---> bids coming in down 20-25% from peak levels pricing out fear/uncertainty with reflation mentality

That is the best I can describe the difference in market conditions from high fear in March to the one I see out there today - varied on price point of course with higher end still struggling way more than lower price points. The difference is notable as we seem to be trading at the lower end of the range down from peak today, instead of at the higher end of the range down from peak 7 months ago. Bids improved just like it did for equities following an overshoot to the downside.

Now, do we expect this to continue and bids to improve further from here? Maybe, but I'm just not seeing it out there right now as buyers are also questioning the sustainability of this equity rally and noting the continuing fundamental concerns. If I sense a change beyond this trust me I'll tell you. For now, considering the depth of the shock we went through I am still amazed at how quickly this marketplace changed from Armageddon to Reflation. I can't deny it and it is what makes this market such a great place to build a real estate business in.

My advice to sellers is to take advantage of the strategy of realistic pricing and the benefits of high traffic that come with it. In the end the market will dictate the value of your home, not the brokers. Price right, get the traffic in, create a sense of urgency and get buyers to bid it out.

Do some of your own research on where this market seems to be right now and see how that compares with what brokers are telling you on sales pitches - knowing full well the brokers are competing for your listing! Look at the most direct competition that actually went into contract in the last month or two and see how their pricing strategy differs from your ideas. Look at the direct competition that did not sell and is still on market for a 3-4 months and see how they went wrong? Try to find what that gap is. Analyze most recent sales and if you see a deal that was signed into contract in Feb or March, which closed 3 months later, you probably can assume a slightly better bid today. But be realistic. Don't price high or near 2007 levels just because stocks are surging as that will only help to sell the competition that is priced right. Use the active market to your benefit. If you do decide to price high and test the market, prepare yourself for minimal activity and strongly consider all bids that may come in at realistic levels yet down considerably from your ask.

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Madoffs Montauk Pad Sells For Above List Price

A: The Hegner's are happy with this one! The property at 216 Old Montauk Highway was asking $8.75M and sold for all cash reportedly over the asking price.

I still think the UES PH is overpriced but clearly the insane exposure and millions made in this equity/credit rally is expanding the pool of buyers able to bid cash for this property. I can't help but have a side to me that thinks some rich banker/hedgie will want the Madoff property as some sort of trophy of the biggest ponzi scam ever to hit wall street. The mass exposure is certainly negating any negative stigma of the ponzi master's digs! Not sure how the list price in Hamptons was compared to the market out there, but it seems these sales will be outliers considering the unique circumstances around the properties and less to do with general market conditions and fundamentals.

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Friday Noteworthy Links

A: Out all day on appointments! Enjoy some interesting reading and feel free to suggest other links you found worthwhile in comment section!

Ending the off-balance sheet charade (Rolfe Winkler)

But another reason banks like off-balance sheet structures is that it enables them to manufacture profits. Coming up to the end of a quarter, if a company is a bit short of its earnings target, it can package some assets together into a security and “sell” them to an off-balance sheet entity.

The entity is conjured out of thin air with a small equity investment by the company itself. The entity “buys” the securitized assets at a nice markup, enabling the company to book a profit on the sale. Is it really a sale if the company still owns the risk? Of course not. If I sell an asset to you, a share of stock for instance, then I transfer all the rights of ownership. Any gains or losses in the stock are yours alone.

With many off-balance sheet entities, however, companies aren’t really transferring risk to anyone else. They’re just pretending to do so in order to lever up and recognize a gain. It’s the acknowledgment of risks that is most important. Pushing assets off balance sheet — into the “shadow banking system” — put them beyond the reach of regulators, whose job it is to make sure banks have enough capital to absorb losses.

Barclays risky assets move a little too cozy (Reuters)

Barclays has come up with an interesting way to solve an optical problem. Concerned that the bank’s shareholders are nervous about possible future writedowns of wobbly assets with a value of $12.3 billion, it has sold them to its own employees.

The deal does not remove the assets from Barclays’ balance sheet. What it does is allow the bank to pull them out of its mark-to-market book, where their carrying value is contingent upon the financial health of some monolines with whom Barclays has taken out credit insurance.

VIEWPOINT: The Wrong Way to Think About the Fate of the GSEs (Housingwire.com)

As it stands now, the Fed is scheduled to halt its support of pass-through markets just as the GSEs are scheduled to begin reducing the portfolios in 2010 (10% a year until they reach combined $250 billion, estimated to occur around 2020 as required by Housing and Economic Recovery Act of 2008).

Nothing I’ve read yet – in the financial media or in sell side research – considers the relationship between these two impending events or questions the impact the two will have together on the remaining sponsors of the MBS markets

Trepp Sees CMBS Spreads Narrow on New Tax Rules (Housingwire.com)

Commercial mortgage-backed securities (CMBS) spreads are tightening this week, indicating greater demand of CMBS bonds. Spreads are the difference in yield between a bond and its benchmark (here the swap rate). New rules issued Wednesday by the International Revenue Service (IRS) and US Treasury Department permit in certain cases the modification of commercial mortgages within real estate mortgage investment conduits (REMICs) without tax penalty.

“In the past, such discussions had the potential to trigger tax events,” Trepp said in commentary Thursday. “The market, sensing this ruling might stem the rising tide of delinquent loans, bid the market up.”

Is the Rally Ending, or Does it Have More to Go? (Ritholtz vs Mish via The Big Picture)

Here are 5 most reasons why I think we can have more upside, plus a look at some grim economic reality.

1) Individual investors remain under-invested (See Liquidity/Sentiment Review).

2) Market Breadth and momentum are each positive (i.e., supportive of further upside);

3) Sentiment has not (yet) reached extreme levels; bear secular rally

4) The broader investment community believes — incorrectly in my opinion — that a recovery is upon us, profits are getting better.

5) History shows that secular bear markets have deep selloffs and huge rallies; this current rally still has room to run based upon a composite of prior cycles (See Four Stages of Secular Bear Markets).

WaPo: FHA Cash Reserves Will Drop Below Requirement (Washington Post via Calculated Risk)

The Federal Housing Administration has been hit so hard by the mortgage crisis that for the first time, the agency's cash reserves will drop below the minimum level set by Congress, FHA officials said. "It's very serious," FHA Commissioner David H. Stevens said in an interview. "There's nothing more serious that we're addressing right now, outside the housing crisis in general, than this issue."

The new audit shows that even without any new measures, the reserves will rebound to the required level within two or three years largely as the result of the recovery in the housing market, Stevens said.

I discussed FHA & Ginnie Mae earlier this month as following in the footsteps of Frannie...they clearly have been picking up the slack along with $866Bln in fed purchases of MBS since the start of QE policy. Its all good though right, nothing to see here, lets just inflate those asset prices up any way we can! Punch anyone?

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Back by Mid-Week

sorry guys, crazy busy...will get back to posting by tomorrow or Thursday.

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Looking At Todays Manhattan Marketplace

A: I always enjoy reading my friend and fellow colleague Doug Heddings stuff over at TrueGotham.com, especially when its strictly about what he sees in the marketplace at any given time. His latest discussion delves into the realistic pricing adjustment that he says sellers have made either in listing price or in negotiated price for a deal. This varies depending on price point and right now the lower end (studios, 1BRs), especially under 1M, is very active. This is mostly a function of lower prices, higher buy side confidence and more liquidity in the mortgage markets. I see similar things that Doug reports on out there, but I also see a good amount of listings that are still ridiculously overpriced with no relation to past comparable sales. What buyers need to understand is that there will always be a subset of sellers that will test the market and have no financial or time pressure to sell. After all, its not your apartment to sell.

Doug discusses his feelings that "Sellers More Realistic Than Buyers in Today's Manhattan Real Estate Market":

Before you get all crazy on me, here me out. I'm not AT ALL suggesting that it is a seller's market...because it's not. That said, it also is NOT the buyer's market that many believe it to be.

Anecdotal evidence is showing that aggressively well priced properties are receiving multiple bids which may indicate that we are nearing the "bottom." Most sellers and their agents have already adjusted asking prices to reflect recent depreciation. Of course some are still delusional but it seems to me that asking prices are down almost the same 10-40% from peak levels. Buyers bidding another 20% below these already adjusted prices are experiencing overwhelming frustration at the inability to negotiate with sellers.

So despite the fact that we have witnessed one of the most rapid price declines in housing market history, buyers must take into consideration that many sellers have finally accepted this fact and adjusted prices accordingly.

I largely agree with this. Just yesterday Christine Toes writes to me..."I'm seeing bidding wars left and right in the under 600K range."

I have certainly seen this market as quite active for about 4-5 months now. The market will always do what it wants to regardless of what you, me, or any one individual thinks or says. The fact is this market is reacting with the same reflation trade mentality that is encompassing the credit markets and the equity markets. It seems assets across the board have got a bid under them - even in the CMBS world where AAA Series 1 bids are in the low-mid 90s where it doesn't seem it could rally much further. Any talk about commercial real estate being the next shoe to drop certainly is not being reflected in dropped bids for commercial mortgage backed securities. Back to the market.

Looking at today's Manhattan marketplace it seems to be a classic case of a natural market rebound after an overshoot to the downside. In a few months you will have the analytics to see this in the data as it happens - so stay tuned as Im working hard on this now for you guys!

What buyers need to know is where this market seems to be trading right now. That is why Doug says, "It has never been more important than it is today to analyze an apartment's price and how it compares to peak pricing levels as well as recent sales and contract signings.". Well, where are contracts being signed? Where are the bids coming in? This is what brokers need to educate their clients on and in my opinion is where the true meat of the buy side consulting kicks in. If you are going to spend hundreds of thousands or millions of dollars on a property, its kind of important to have a credible guide advising you where this market seems to be trading today. Otherwise you will be navigating a very fast moving marketplace blind and bidding at a level conducive to 'getting a deal done'. If I had a dollar for every time I was told by a listing broker that the 'bid must come in near ask' with no comparables to support that price leve, I would be a rich man.

It seems to me that each price point is now trading at the lower end of the % discount from peak range noted here in earlier posts. So it would look something like this:

HIGH END ($5M+) - down aprox 28% - 38% from peak
HIGH/MIDDLE ($2M - $5M) - down aprox 23% - 28% from peak
MID END ($1M - $2M) - down aprox 18% to 23% from peak
LOWER END (Under $1M) - down aprox 15% - 20% from peak
*NOTE: approximations of where price points seem to be trading must always take into account any one unit's unique identifying features (light, view, raw space, renovations, layout, outdoor space, monthly expenses, bldg amenities, etc.)

If I were a serious buyer today, this is the range I would use to figure out where any one product likely will trade in the marketplace today. Fine tuning the analysis based on the unique features of a property then comes into play. If you compare this to my previous estimates on where price points seem to be getting bids, you will notice that it has been updated closer to the lower end of the range down from peak. The biggest fear I have now is that sellers will get too optimistic and refuse to move property where bids seem to be coming in - that leads to a buyer-seller disconnect and much lower volumes. For now that doesn't seem to be happening as serious sellers acknowledge where the market is today.

You just can't deny that buyers are out there and bids are coming in around the levels I described above. If you are a seller and you got a bid higher than the range I suggested, I say great for you and strongly advise you to take advantage of the confidence boost that comes with a surging equity market and recovery headlines. Always know that confidence can turn on a dime and be shattered at any time due to some unforeseen event or trend reversal. Nobody can predict the timing so we are left to analyze where we are today, where we came from, and where we might be going. I'll leave the future up to you guys and stick to monitoring whats happening out there now. If bids change further, Ill report on it here.

The biggest mistake a seller can make right now is to price their property way ahead of where this market is right now, simply on the belief that the perfect buyer will come in and include a premium in their bid for anticipated future profit potential. I still see many listings out there today that are pricing this way. That strategy is counter productive. Only you and your broker know how traffic has been and where bids are coming in - and this is not a perfect science and I am only one agent out of more than 8,000 doing business in the NYC area. Ask yourself, is the pricing right or are the bids right? If you think your priced right and we are telling you this market is quite active, then why haven't you sold?

The best description I can give regarding my buyer clients mentality right now is that they are more than willing to pay market value for property, but not at all willing to chase for fear of being priced out forever or be swayed into pricing in a future profit potential that has not occurred yet. This leaves sellers and their brokers to figure out where market value is for the property. Price right - get the traffic in - create a sense of urgency - and hopefully get multiple strong bids.

Buyer's seem to be well aware that bids have improved over the course of the last six to seven months, and to get a property today they need to come in around those improved levels. Similar to what Doug said, I find that buyers bidding as if fear of future downside risk should be baked into the purchase price are getting disappointed in the response.

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Come Out Come Out Wherever You Are

Sorry to have been so unproductive lately. I have been taking care of some personal business that will hopefully be settled soon and I will be able to get back to a more normal writing schedule. Just a few observations today.....with unfortunately not much statistical back-up to refer to.

Jim Grant of Grant's Interest Rate Observer wrote an essay in the Weekend Journal last weekend that I found noteworthy precisely because, as the author put it, he is "Not famously a glass half-full kind of fellow." He was being kind. Grant is usually downright downbeat, as well he should be, being a seer of all things related to interest rates and therefore by definition an armchair dismal scientist (economist). Grant's essay can be boiled down to its subtitle "The deeper the slump, the zippier the recovery." The bottom line being that throughout American history, not only have we experienced more profound downturns than the one we have just been through, but even following policy errors the economy has bounced back. In fact it has bounced back more strongly, the sharper the downturn. The exception being the Great Depression, when several policy mistakes were made accompanied by the "dust bowl" climate aberration, when the economy was very significantly leveraged to agriculture.

I'm a contrarian, but the problem with being a contrarian is that you have to identify what the consensus thinks or is doing in order to do the opposite. In this case I do believe that Grant has a non-consensus opinion, although looking at the stock market one might think that everyone believes him and is betting stocks to beat the band in their effort to sing from the same hymnal.

I was recently privileged to hear stock market strategist Jason Trennert of Strategas Research Partners speak at the C.L. King "Best Ideas" conference in New York City. Trennert noted in his talk entitled "Bullish Till the Bill Comes Due" that both anecdotal and statistical evidence from folks suggests that John Q. Public has been a buyer of bonds and foreign equities, not the U.S. stock market, and his hedge fund clients have in no way embraced this rally with passion. Trennert also noted that the average rally during the Japanese lost decade was 61% (7 different bear-killing episodes). He also recounted how the mid-Depression rally from 1933 to 1937 was a 372% gusher. In keeping with Grant's piece Trennert also noted that despite an unimpressive contraction in real GDP of 2.2% in the latest recession (several recessions in the last 100 years exceeded 3% on the downside), government stimulus, both fiscal and monetary, totalling 29.9% of GDP is off the charts vs. even the monster 8.3% spent from 1929 to 1933. All of this argues for more upside to both the economy and the current bull market.

Unfortunately, my buddy Stan Weinstein reports that mutual fund managers are reported to have spent down much of their cash chasing the recent rally. That datapoint, however, is practically the only one is his monthly "Weight of the Evidence" indicators that is flashing even a yellow light. Away from mutual fund cash, technically the market is signalling all systems go and Stan advises that pullbacks will be controlled and met with buying by those who are still looking for opportunities to get in.

I personally am wary that the market has gone from trading 20% below its 200-day moving average to 20% above it, i.e., the easy money has been made, folks - take a victory lap if you were buying when everyone else was panicking. Yet I am still tantalized by the prospect that the bear case, which everyone can now quote chapter and verse, could be wrong.

Let's review:

The consumer is 70% of the economy.

The consumer's greatest asset is their home and home prices have nowhere to go but down.

High unemployment has everyone scared to death and those who can spend are loath to, while the overlevered majority is having to kick up their savings rate and cannot spend.

Due to structural issues with the economy....the U.S. no longer produces anything anyone wants.....employment will be very slow to come back.

The bull case is a painstakingly slow recovery if the residential and commercial real estate debacles don't yet drag us back into a deflationary spiral. Our economy is doomed and our dollar is worthless so buy gold.

If the economy somehow gets up any head of steam it will be due to over-stimulation which will cause mega inflation, so buy gold.

I learned long ago on Wall Street that whenever the crowd can easly articulate the bull case for a stock, the stock had probably had its run. Likewise, whenever everybody was wise to the short story on a stock, it was probably near its bottom. For this reason I constantly question the accepted facts. So I was delighted to read Business Week's recent analysis "Reconsidering Consumers' Impact on the U.S. Economy." In the articles the author showed the GDP accounts where the 70% of GDP comes from. Here is the breakdown:

The articles points out that each one of the categories above includes very significant items that are not paid for directly by consumers, are partially paid for by the government or employers, or are simply econometric creations like "non-farm owners' equivalent rent." Their estimate of direct consumer spending as a percentage of the economy is 40%. Recently I read some additional work, which I can't put my hands on this minute, implying that....as with most data....the over-levered consumer balance sheet is not, as the averages would have you believe, incredibly pervasive, but rather more a product of a minority who are deathly over-levered and a majority who are in much better shape. I will revisit some of the other assumptions in the consensus view of the economy in upcoming pieces as well as my personal conspiracy theory that some of the driving technologies that will help turn around the U.S. economy longer-term are actually being kept quiet and for good reason (no I have not gone totally batty). I'm not telling anyone to run out and buy stocks on margin, nor am I pretending that this economy and the American nation doesn't have a long row to hoe. But get out from under your desks folks.....enough already. There is a decent chance that we have seen the worst part of this recession, both stocks and businesses may be able to succeed and flourish in the environment of the next decade, and it's time to start thinking more about how to make that happen. And by the way, if you're about to have a baby, have survived this long in your job and have 20% to put down on a property, it's okay to start trauling for some values in the New York City real estate market. Just don't expect to get rich on New York real estate any time soon.

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Why Is The Board Taking So Long?

A: Its been a while since I discussed a topic like this. Seems more old school urbandigs from 2006 or so. But as an active member of the Manhattan real estate blogosphere, naturally I find myself on the streeteasy forums in between work projects. So when I see an in-contract buyer seeking advice regarding why a board is taking so long to review a purchase application, I relate. I relate too well. Make no mistake about it, the co-op board purchase application process is a tedious and emotional headache. This is one aspect of the Manhattan transaction process that I would love to see enhanced. I understand the right to properly review a prospective resident, but lets at least respect the other side of the transaction in the meantime! In the end, the board has the right to review, request more information, deliberate, and reject. Just do it within the allotted time that is documented on the package itself - usually within 30 days of receipt of the package - and when possible, earlier.

From Streeteasy's Forum: Board Approval or Rejection

Prospective Buyer:

I am in contract for coop apartment . After every thing is complete from my side I am waiting 6 weeks to hear back from the board. Is this to long ?
Not sure what to do...

Co-op Vice President response:

At best, it takes three full business days from the time you submit your application until board members actually get it in their hands. Generally, I open these packages the very day I receive them. I give the other board members two full business days before emailing about when/where we should discuss this applicant.

If we're less than two weeks away from our monthly board meeting, that's when we'll discuss the application. Otherwise, it's very difficult to coordinate the schedules of seven busy professionals. Sometimes we'll get lucky and be able to have a majority meet informally later that same week. More often than not, however, it's at least another two weeks before we meet in person to discuss your application.

That's providing, of course, your application is complete, and we have no questions. Again, more often than not, the application is poorly-assembled, the numbers don't add up, and we have to go through the channels for clarification: our managing agent, to the broker, back to you. Or the questions might not get back to you -- we may be busy calling your references. Or your employer. Or your bank. Sometimes it takes days or even weeks (especially during summer vacation season) for these people to get back to us.

Trust me, no news is good news. These things take time.

Right there, is exactly how I see it too. Thats the reality. I go out of my way to get a good package together and there are always delays, more information requested, delays in getting credit reports run, red tape in getting the package processed by management prior to be sent out to the board, misplacement of documents, checks forgotten to be handed in, etc..

If you are a buyer seriously looking at co-ops to purchase, know in advance that a board package process lies ahead of you. More often than not, the board will be nitpicky and look into everything to make sure information lines up and you meet their guidelines for purchase.

When you submit a bid, it should be in writing and should present yourself in the best light possible. I always advise my clients to make transparent the following information (offer letter + REBNY financial statement) when submitting a written bid:

a) employment situation
b) total combined salary that can be backed up by employment letters / tax returns / pay stubs
c) total liquid assets that can be backed up by hard copy financial statements
d) timeline to close
e) attorney information
f) lender information and mortgage information

Some buyers like to maintain their privacy and not disclose any of this information. Well if that is how you feel about it, maybe a co-op is not right for you because the board package process will certainly request documents to support all of the above mentioned items.

Common mistakes I find buyers often make are:

a) confusing liquid assets and retirement assets
b) overstating liquid & illiquid assets
c) understating existing debts
d) overstating salary and then not being able to back it up with tax returns or employment letter
e) overstating bonus and then not being able to get documentation to support

This becomes a nightmare for the agents involved when a buyer discloses incorrect information with a written bid and then can't back it up later on. At this point the contract is signed, the pre-qualification was done, and everybody expects a smooth transaction. I mean, what are we as brokers supposed to do - ask the buyer for tax returns and bank statements when they submit a bid? That won't happen and a standard REBNY financial statement signed by the buyer is the most common practice. We just assume the information provided is accurate.

Its always very obtrusive when a broker asks you about your financial situation, especially if they just met you. But the reason is they have been down this road before, been burned before, and now are trying to pre-qualify you so as not to waste their time or a listing brokers time if the co-op happens to be on the stricter side. Its a part of this business in this market where 70% of the housing stock is co-op.

Generally speaking co-ops look for 1-2 years of liquid assets AFTER closing and a salary that can support a debt/income ratio of below 25% taking into account all carrying charges of the property and minimum payments on existing debts. This is the least strict of the guidelines and only gets stricter from here. It usually takes 2-5 weeks to get a package completed after contract signing with the loan commitment taking the longest to finish it off. Then you send to management for processing where that can take a few weeks. Once processed, the board receives the package and can take another few weeks. It seems the buyer above included mgmt processing time in the 6-week wait period. Maybe mgmt took 3 weeks and the board only had it for 3 weeks. Add in seasonality and that delay can get worse. The board can either call for a meeting upon receipt of the package OR have the buyer wait for the regularly scheduled meeting whenever that may be. For long delays, the buyer should be very mindful of the expiration date on the loan commitment letter and raise concern with the contact at the management office should you be approaching 14 days to expiry.

My opinion is that the board should be respectful of the existing shareholder that likely wants a timely review of their transaction - this then becomes respectful to the prospective purchaser and agents/attorneys/lenders involved in the deal. But that is not always the case and the fact is the board can take their time (usually up to 30 days of receipt of the package) and either deliberate or request more information before making their final decision. All you can do is provide the best package, the best deal price for the shareholders/future loans/future refinancings with everything requested and then pray to the co-op gods that an approval will be granted. If a rejection is passed down no reason has to be provided - a power the co-ops enjoy greatly. Ultimately, the above buyer got turned down. Unfortunately I know the feeling and just had my 2nd board turndown in as many months - trust me, its emotionally draining!

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Will the Elephants Dance?

So the stock market has been correcting for a couple of days, and with earnings season around the corner it feels like we could be in for more of a pullback than we have seen so far in this rocket ship rally out of the basement since March. In many cases the rubber will have to meet the road in-terms of investors getting a bit of a sense of recovery as opposed to just the "less worse" news flow of recent months.

Last week we got some disappointing news on home sales and durable goods orders. Gold, which had been holding well above $1,000 an ounce, wilted back below the four figure mark, despite the weak dollar - chart here(View image). Oil which has paced this rally (in fact it bottomed out in late 2008 before the stock market) appears to have begun potentially topping out a couple of months ago - chart here (View image). Meanwhile the stock market appears to have reached a critical short-term junction, as best illustrated by the market leading NASDAQ Composite Index. You can see where I have marked up the chart here (View image).

The NASDAQ has had a great high octane rebound from the lows of last Spring (which has featured only one real pullback thus far) and it appears to be stalling out just below a key resistance level (a level where stocks traded sideways for some time and presumably many buyers during that period were stranded with losses) established when all hell broke loose in October of last year. The fact that "the NAZ" has been able to overcome the downtrend line from the markets' peak, I view as a long-term positive suggesting that the upcoming potential market softness will only be a pull back in this cyclical bull. The Dow, on the other hand, has not overcome its long-term downtrend line yet and is running into headwinds at a minor resistance level where stocks paused after their initial post-Lehman downward cascade, as opposed to at the major resistance around 11,000 - chart here (View image).

So you say "Ok Jeff, lots of squiggly lines you are trying to interpret here, but what does this all mean to me?" Let's break it down. Oil is a great barometer of world growth, it is also a commodity with a cost of production, beneath which producers won't produce (eventually deflation cures itself, because producers either stop producing voluntarily or go bust and have to stop). Oil stopped sinking when investors realized that the global economy wasn't going to zero and anticipated that OPEC would cut back on production. The commodity immediately made a bee-line for the marginal cost of production (cost for the least efficient producer to make a profit) though to be $60 - $70 a barrel. At this point demand really has to come back to give oil much more headroom, or OPEC would have to tighten even more (why would they when they are making good money at these levels and the world seems to be able to pay these prices). Gold has been in a five year basing pattern associated with the tug of war between inflationary trends (which were clear in 2006 and 2007) and the deflationary forces that were brewing below the surface and of course boiled over in the last year. The break above $1,000 coupled with the breakdown of the dollar appears to have signaled the market's belief that the U.S. will inflate it's way out of the debt crisis and that our creditors will indeed supply the fuel for us to do just that. I expect a brief re-think of this scenario in reaction to evidence of the still hurricane-like strength of the deflationary forces as we pass through the recent eye of calm. Reminders like the recent results of the shared national credit review and hometown examples of moguls laid low like Kent Swig will way on the market's complacency. In my opinion the NASDAQ has led the stock market higher due to the recognition that technology companies have better exposure to emerging markets than the average U.S. equity, as well as stronger prospects for growth, due to the "tech super-ball effect" wherein lower prices drive technology penetration (note that the hottest new market for PCs is rural China)

Meanwhile, the Dow Jones has shown some interesting divergences, with stocks like Target having made huge runs, while Wal Mart (View image) lags behind. Exxon(View image) and GE (which actually finally "broke" out a couple of weeks ago{View image}) have struggled while Goldman has run into overhead supply not far from its all time highs. However, this rally has been so pervasive that even the laggards stocks are technically positioned for a big move up. My guess is that after some corrective activity we will see the market resume it's upward trajectory, but at a more moderate pace. This because I expect the government to continue to do everything it can possibly do to keep the recovery on track, while avoiding sure deal killers like a big tax increase, major protectionism, etc. My guess is that the next phase of this bull market will be lead by the formerly lagging mega cap stocks, particularly those with a defensive tilt. So in fact we should eventually see these elephants dance....if not something is probably going wrong. Big hat tip to technician Carter Worth of Oppenheimer who alerted me to the interesting divergences among large cap stocks in contrast with the overall bullish blush of stocks but in light of the markets need to take a rest.

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Get Ready! Here It Comes...

A: Its starting early and I suspect it will only get louder as we get to week end. With Manhattan's Q3 Residential Real Estate report slated to come out in a few days, expect a surge in activity to be reported. Quarterly reports are a peak into the rear view mirror for the past few months; so lets do a little backward looking. As usual, due to the lagging nature of these reports headlines may mis-represent what seems to be going on out there now. If you want to see whats in front of you, don't look in the rear view mirror.

Expect both contracts signed activity and actual sales to surge on a quarter-to-quarter basis. The preferred analysis will be y-o-y and that will probably show a level sales comparison with lower prices from the year ago quarter.

In Q3 2008 we had 2,654 sales. Its quite possible that we get close to that level in this upcoming report (closed sales) and actually beat next quarters level of around 2,300 when Q4 is ultimately reported. After all, many contracts were signed over the past 3-5 months and now we are just waiting for them to close; a 2-3 month process. In terms of sales volume, the quarters that defined the downturn for the Manhattan residential market were Q4-2008 through Q2-2009 - so we got some favorable comparable reports in our future for y-o-y analysis. Take a look...

*data courtesy of MillerSamuel.com

The one area we won't see improvements is in price levels. The NY Times discusses in "At Long Last, a Leveling Out? ":

A review of closing data shows that median and average prices on co-ops and condos have continued to drift lower in the third quarter. Sales volume has picked up from the moribund levels earlier in the year, but remains about 29 percent below the levels of a year ago.

Because of the long lag time between contract signings and closings in New York, many brokers are hoping to see stepped-up activity reported in the fourth quarter, normally a sluggish period. They are also looking forward to a surge in sales based on a forecast of significant bonuses, at least among the Wall Street firms that survived the downturn.

I guess we can hope for a surge in sales on headline news too. So, the headlines will likely remain focused on the sales volume rebound as proof this market has not only bottomed, but is now recovering. Buy now or be priced out forever right? Umm, no.

Its true that you can't deny the pricing out of fear this market experienced via the improvement in bids for Manhattan property. But to cherry pick price action and ignore the entire correction by looking at the improvement in bids recently is to miss out on the adjustment this market has made. Stabilization is quite different than a new sustainable rise in prices built on improving fundamentals. What we had is a stabilization of prices after an enormous shock that saw bids for Manhattan property adjust to a new, lower level. It took a few bumps to find that new, lower level, but then again that is usually how markets work. This is where we are now and this is where I think we will stay for a while.

The Q3 report will probably show this muddling around of prices on a quarter to quarter basis. No market was immune from the deflationary forces of the greatest round of debt deflation since the 30s. Anyone expecting a prediction from me going forward, I'm sorry to disappoint. The correction I was expecting happened, and other than muddling around for a while I don't see any big moves in either direction until some outside force acts upon us. This could be a number of things:

a) another shock to the credit markets - so far, the exact opposite has happened and credit has improved significantly
b) a sharp rise in rates - who knows how mortgage markets may react to the winding down of fed quantitative easing policies, continued supply of treasury auctions or perceived inflationary pressures in the years to come
c) another fierce equity selloff - tied to 'a' above, who knows when stocks will decide to fall given all known information being fully priced in - right now the path of least resistance is clearly up.

In the meantime, individual distress will be where the best values are and I'm sure consumer deleveraging will continue for years as homeowners in trouble will do everything they can before being forced to sell their primary residence. The banking system continues its recapitalization with plenty of outside help and bad debts need to ultimately be written down. At the same time consumers are repairing their own balance sheets via higher savings, less spending, and paying down of excess debts. When we reach the end of this cycle we can start to talk about sustainable credit expansion without emergency fed facilities for an economy that sees job creation and consumers with rising credit quality - that is when loans will start to accelerate and the money multiplier effect kick in again. For now, the patient is still receiving a steady IV drip to nurse itself back to health.

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