Housing Rally Continues

Posted by jeff

Tue Dec 29th, 2009 05:18 PM

The Case-Schiller index of home prices was released today....I'm sure many have seen it. The bottom line is that the upward trajectory in home prices across the nation continues although it appears to have slowed in October. Home prices which have increased for five months in a row, were up 0.4% month-to-month and the year-to-year decline moderated to 7.3% from 9.4% for the month of September. According to figures posted on Seeking Alpha by Research Recap, prices across the 20 city composite have now fallen from the peak in the second quarter of 2006 through the trough in April 2009, by 32.6% and from the peak to today by a slightly moderated 29.0%.

So what is going on closer to home here in the New York City Area? According to S&P, keeper of the Case-Schiller Indices, the New York MSA composite (which includes parts of New Jersey, Westchester, Rockland and Putnam Counties-see top graphic), saw home prices unchanged month-to-month from September to October, after a 0.1% decline from August to September. On a year-to-year basis prices were down 7.7%, better than the 9% year-to-year decline registered in September.

So what's the outlook for the Metro area? I was sifting through some e-mails today and came across a piece by Deutsche Bank's securitization research group from December 17. They report on everything from credit card debt to CMBS and seem to do some very good deep dives on the underlying credits. It's no surprise then that they have a healthy interest in the mortgage market and have done some fairly extensive modeling on the residential housing markets of the country's key cities. Their conclusion is that during this rolling real estate downturn (it started in late 2005 for markets like Las Vegas) markets have tended to revisit prior levels of "maximum affordability". On that basis they believe that the New York/New Jersey MSA has the worst outlook of the 100 MSAs they follow, with a projected 29% decline in home prices projected still to come to reach maximum historic affordability levels. This would bring home prices from a current 7x median incomes down to the historically most affordable level of 4x reached in 1998. If the New York/New Jersey area resists the tendency of other markets to touch maximum affordability levels on the way down, but instead merely corrects to the average affordability levels of 1980 to 1999; home prices would decline another 8% on average. My current opinion is that the former is more likely than the latter, as the aberrant Wall Street performance of 2009, is replaced by several years of much more sedate profit potential, which will unfortunately cause a slow grinding down of Wall Street incomes, employment and real estate values for the Tri State area. But hey, our area is much less over-built than many markets across the U.S., the economy seems to be turning around, and 2010 is a new year, so maybe the New York/New Jersey MSA just sees a bit more correction before bottoming.

Have a and Profitable Happy New Year!

Noah's 2010 Predictions

Posted by urbandigs

Sun Dec 27th, 2009 02:42 PM

A: Lets keep it going. You can view my 2009 predictions, 2008 predictions, and 2007 predictions by clicking on the appropriate links. By no means should these predictions be taken in an advisory capacity; rather, they are my gut feelings on a few main topics based on information I have on hand at the time of the writings. I urge you to put yourself back into 'time & place' when the predictions were written. Since hindsight is 20/20, often I find many to believe the past was easily predictable once the set of events took place. This is the nature of human psychology. The clearest example I can find is the severity of the credit crisis if you put yourself back into late 2007 and early 2008 - today, almost everybody says 'oh yea, I saw that coming, it was easy to see' - but in reality back in those days the exact opposite was the case as the most bearish predictions on the severity of the credit crisis was met with much opposition and many bullish arguments against what eventually took place. In the end, its easy to look back and say something was easy to see. This is why I prefer to look ahead and talk about what didn't happen yet. I like to say, you can't see what's in front of you by glancing in the rear view mirror.

National Housing
- The bulk of the adjustment is behind us. Many hard hit markets are seeing inventory levels fall as sales volume accelerates with what I dubbed The 4 Forces: more affordable prices, record low lending rates, extension/expansion of gov't homeowner tax credits, continued foreclosure pressure.

In general, existing home inventory is down about 12% or so from peak levels in mid-'08 and months of supply plummeted to about seven months; down from over eleven months in early 2008. The reason: artificial sales surge from government incentives and fed meddling with interest rates. This trend is not sustainable but the effects so far cannot be overlooked and have made for a weak foundation to support a bottom in housing argument.

I do not see the 4 forces acting together at the same for long, in fact one of the forces already is disappearing --> lending rates already risen to over 5% as of this writing from recent record lows.

Looking ahead, deals are still there to be made although buy vs rent enthusiasts will still have to anticipate further pressure on rents as unemployment finds its ultimate peak in the next year or so. Further pressure on rents may suggest still more pressure on house prices; especially in markets not as hard hit as Miami, Phoenix, and Los Angeles.

Shadow inventory continues to be a concern that will last for another year or two. I define shadow inventory for national housing as including Bulk REOs, pipeline foreclosures, and unlisted new development units.

The wearing off of government incentives and fed MBS purchases should both contribute to a decline in demand as we get into 2010; especially the 2nd half. Therefore, while the bottom may prove to be in during the course of 2009 in hard hit markets, its hard to argue for a 'V' recovery in prices. Rather, I would suggest a retest and muddling of the bottom range already hit in many markets as future buyers digest the removal of forces that contributed to a surge in sales volume during much of 2009. Sacrificing low rates and government incentives for a slightly lower price might be the buyer story as we get to this time next year!

All I know is, higher rates + higher taxes + removal of gov't incentives will be the three main pressures for buyers as they measure affordability in asking prices across national housing markets.

Manhattan Residential Markets - I cannot deny the resiliency of this marketplace when faced with severe adversity. But, I also cannot deny that the forces described above will have an effect on our market too at some point in 2010. We are where we are right now and both buyers and sellers should be happy? Sellers should be happy because fear trades only lasted a few months and the reflation process started and lasted longer than many expected. Buyers should be happy because deals could still be had when compared to peak levels and Armageddon was taken off the table. While buyers in hindsight might be kicking themselves for not pulling the trigger in early 2009, when it comes down to crunch time, few buyers have the nerve to follow through with a big purchase when so much uncertainty clouds the market.

Manhattan real estate took a hit in all price points, with the high end more affected due to the nature of this crisis. So where do we go from here?

Honestly, I think the solid sales volume pace maintains itself for at least another 3-5 months as we head into 2010. Where we get into trouble is when seller optimism starts to really outpace the improvement in buy side confidence; aka, the bids! Will sellers get too greedy? Well if traffic levels improve from where we left off before the holidays, I fear they may. But for the most part, good products that are priced right are trading and exceptional products in prime locations are seeing surprising bids due to a lack of quality inventory in higher price points. In short, higher end buyers are frustrated with the lack of realistic sellers trying to sell high quality products. This has caused a buildup of buyers that need homes in the $2-3M and above marketplace. I would not be surprised to see some 'best & finals' and quality products sell quickly as we get into the active season.

All the good products traded already or are pending closing. So get ready for a few bullish year-over-year reports as the reflation months from the Feb/March lows get caught over the next few quarters! The data I have shows fairly clearly that pent up demand from the freeze up period made their moves, and inventory adjusted downward with this surge in volume. As a result, active inventory is down about 29.6% in 6 months and the pace of listings being removed from the market declined - telling me sellers are generally happier with how the market is behaving. Therefore:

I see a good chance of a setup for an increase in demand for a lack of quality priced products for the first few months of 2009. My eyes will be on the shadow inventory and the number of new listings + listings coming back on market to see if that balances out the equation. While my belief is that wall street bonuses will be of the less cash and more deferred stock variety, I still think we have a period ahead where buyers will experience an increase in competition towards a supply that is limited in properly priced quality products.
I do not expect another fierce, fast move down in our markets like we saw after the failure of Lehman in late 2008. Rather, we could see a gradual slowdown of sales volume as we head into the 2nd half of 2010 as higher rates and higher taxes start to take a toll on how buyers value listings in the open market. Higher taxes are already having an effect, although a muted one as the reflation trade continues. When both rates and taxes reach a level worth media attention, we likely will already be in sustained downtrend of sales volume until prices adjust a bit to re-spark demand. Time will tell and this blog will be all over the data in real time to find exactly what is going on as it happens in 2010 and beyond!

The Fed - Two words: exit strategy! How will the fed manage to please the markets, maintain stimulus, yet slowly close the liquidity spigots that have been pouring for so long now. Main questions I recently addressed and continue to have are:

1) When will the fed stop buying MBS and agency debt/securities putting pressure on lending rates?

2) When will the fed raise the Fed Funds Rate from the zero interest rate policy we have now?

3) When will the fed do something to control excess reserves from flooding the economy via aggressive bank lending? What will they do?

4) When will all the liquidity facilities be closed?

Since we lack political will and the fed loves to give the markets what they want, I'm sure the party will last for much of 2010; as the hard decisions are left for others to make later on.

In the meantime, a dangerous US dollar carry trade will grow and investors will flock for anything with a yield. Pimco had a great read for his December Investment Outlook on Pimco.com earlier this month:
My how things have changed! With the global financial system apparently stabilized, returns “on” your money are back in vogue, and conservative investors who perhaps appropriately donned a Will Rogers mask nary a fortmonth ago are suddenly waking up to the opportunity cost of 0% cash versus appreciated assets at renewed double-digit annual rates. That 0% yield is not a joke. Almost all money market accounts – totaling over $4 trillion dollars, shown in Chart 1 – yield close to nothing, so close to nothing that I mistakenly did a double take when reviewing my monthly portfolio statement. “Yield on cash,” read the buried line on page 15 of the report, “.01%.”

Recently, approximately $20 billion a week has been exiting those payless, seemingly godless funds in search of a higher-yielding Nirvana. Moving out on the risk asset spectrum has worked wonders since March of this year, but it comes with the risk of principal loss – failing to receive the return of your money. When viewed from 30,000 feet, there is even a systemic risk that new asset bubbles are in the formative stages – perhaps because of the .01%. Gold at $1,130 an ounce, global equity markets up 60-70% from their 2009 lows, a cascading dollar now 15% lower against a basket of global currencies just 12 months ago, oil at 80 bucks, mortgage rates at 4% thanks to a $1 trillion dollar credit card from the Fed; the list goes on. The legitimate question of the day is, “Is a 0% funds rate creating the next financial bubble, and if so, will the Fed and other central banks raise rates proactively – even in the face of double-digit unemployment?”
Read the whole PIMCO article. I talked about this here on UrbanDigs back in mid November's "A Search For Yield", when I took a look at the plunge in Money Market Mutual Fund Assets of about $500bln - money that is looking for yield!

You may not be worried about it, but I am. I refuse to deny the possibility of unintended consequences of all the fed/treasury guarantees, zirp, liquidity facilities, and the massive debt monetization experiment. At some point something's gotta give as wall street only cares about maximizing profits from the gravy train ride while it lasts. How will the fed squeak their way out of this one! Everybody loves a party until the hangover hits and you get the spins.

My three biggest fears for 2010 may be: surprising sovereign defaults + failed bond auctions somewhere + the unintended consequence of a massive dollar carry trade unwind that comes with withdrawal of stimulus. Time will tell.

Stock Markets - As long as credit continues to be on fire from the actions of the fed, treasury, and government, stocks will continue to be a proxy for everything! This is a concept you must understand.

Right now, credit continues to be en fuego! And why shouldn't it be? Everything is guaranteed and everything the markets want, they get! Watch the dollar! If the devaluation of the dollar continues, which is what the fed and other CBs probably want right now, stocks will continue to rise as the currency depreciates. But if the carry trade unwind occurs, watch out.

By the way, did you notice the quiet move the US Treasury made to prop up the GSEs a few days ago - in essence, "removing the caps that limited the amount of available capital to the companies to $200 billion each". Holy moly folks! When will it end? Unlimited access to bailout funds through 2012 was "necessary for preserving the continued strength and stability of the mortgage market," the Treasury said. While people spent their holidays with their family, this headline likely will go mostly unnoticed - strategic timing or something else?

Again, why shouldn't stocks continue to rise? The reflation efforts continue with no regard for unintended consequences of future tough decisions. As long as this continues, stocks globally will see a path of least resistance to the upside. Like inertia affecting an object moving in space, this will continue until acted upon by some outside force! So, what will the force be? Who knows. China collapse? Sovereign defaults - recall the Dubai default that the markets shook off like a flea? Failed bond market auctions? A huge dollar rally and carry trade unwind? Take your pick. I gave up many months ago fighting what the powers that be are doing to prop up all assets and rescue the banking system, the economy and the housing markets.

While stocks look toppy to me and the contrarian trader in me is dying to put a ton of shorts on, I simply can't. I cant go against the massive printing of money. All this stimulus will have an effect. Its the end game I worry about.

For the sake of predictions, put me down for another 6-8% rally before something gives somewhere that changes the world as we known it for the past 6-8 months. I'll still keep my eyes on credit.

Jobs - The problem with the unemployment rate that the mass media uses to judge how good or bad the labor market is that it doesn't tell the whole story of what is really going on. If it did, you would notice a few unnerving things:

1) U6, a broader measure of unemployment, is around 17.2% - seeing a distressing surge in the gap between U3 & U6 to about 7 percentage points (norm is around 3-4 percentage points)
2) The massive growth of PART-TIME workers for economic reasons
3) The average Workweek is declining
4) The Participation Rate (Not in the Labor Force rose drastically to over 81 million) has declined significantly - meaning the labor pool is decreasing which gives a false signal that more people found work due to simple arithmetic

So, what will happen when businesses get more confident? Well first, they will probably increase the work week of full time workers. Next, they probably will re-hire those full time workers that were demoted to part-time workers - I guess tied to the prior statement. And finally, they will hire new workers - which is what we are looking for!

Therefore, I must question the strength of the foundation of any recovery built mostly on stimulus and reflation policies that will eventually wear off and reverse course. While we may get some distortions in the U3 unemployment rate until it finds its ultimate peak, the story out there in the real world is quite different than what many interpret it as from the headlines. The jobs market continues to be pressured and while the worst of the deterioration seems behind us, I just do not see a massive driver of new job growth outside of government & stimulus spending for another year or two.

The whole birth/death bullshit is another story worth noting as the BLS decided to go crazy with this phantom model during the entire course of this very severe recession.

Inflation - I will stick to my guns from the past few years that the first signs of any inflation that we see will come in the form of higher rates, higher taxes, higher health care costs, higher food costs, higher energy costs, higher raw commodity costs, etc.. All the stuff that squeezes consumers wallets and shrinks businesses profit margins.

I do not see wage inflation or much in the way of asset inflation the way most of us think about it. What I mean is, usually people buy housing as a hedge against inflation. Well, this is flawed if you consider where we just came from and where we are now. Noting the housing and credit boom and then bust, if rates and taxes rise yet wages do not how the heck can house prices see a sustained increase as a hedge against inflation? That is my argument. I'm sure you have yours.

I continue to see deflation as the current enemy our fed/govt is fighting as the economy deals with the aftereffects of a major contraction in credit and a severe bout of debt deflation. People like to forget where we came from and focus on the up move from the bottom to support an argument. For example, a $500K condo trades up to $1M at the peak of the market, and then craters to $400K at the bottom - then, it bounces back to $500K and people argue about the asset inflation from the $400K move to the $500K level. An amazingly narrow minded and flawed way of looking at things; rather you need to look at the big picture. Inflation? Not a concern right now as the fed desperately tries to recapitalize the banking system from the effects of deflation and inflate our way out of this mess. Yes, stocks are a proxy for this reflation environment right now but 'out of control' inflation is no where in sight.

What concerns me is how the fed will prevent the banks from aggressively lending the $1.1trln in excess reserves that is currently being hoarded by the banks, from entering the system. That is the root of the hyperinflationists argument; i.e. massive money printing to combat this severe destruction of wealth in the shadow banking system. If we absorbed $2trln of losses in the shadow banking system, then the fed has printed around $1.75trln so far - but that money is not being lent out or multiplied by our fractional reserve system. Instead, credit is contracting and consumers and businesses are not borrowing as they restructure, file for bankruptcy, write down losses, reorganize, and start over with much less leverage available to them. How is this inflationary?

- I'm not always right, I am no messiah, and I never ever claim to be! UrbanDigs.com, since the very beginning, has been a way for me to 'speak out' on how I feel about the macro economy and the Manhattan residential real estate marketplace. I tell it how I see it, and nothing more. My true background is with a momentum style of equity trading as I was a NASDAQ equities trader with Tradescape from 1998-2004 and have been following the markets since 1990. I learned a lot along the way and I feel I have a much deeper understanding now, than I did 10 years ago when I started trading professionally, but that does NOT mean you should make any investment decisions based on what I say here! Talk to your financial adviser for that. As for buying or selling real estate here in Manhattan, no one can time the market perfectly and you should always take into account your unique financial situation and needs. So, if you are thinking of buying now, consider your job security, liquid assets, salary, timeline to own, and whether you can afford a product that meets your needs rather than day trade housing and waiting for the perfect entry point! Real estate investment decisions are very personal and everyone's situation is unique. With that said, I welcome any comments regarding what I said above!!

Happy Holidays

Posted by urbandigs

Fri Dec 25th, 2009 01:14 PM

I couldn't help but share this - I promise you a very enjoyable minute and a half of your time! The face he makes before he scratches the itch on his nose gets me every time. Happy Holidays all!!

Source: uke3453's youtube version of 'I'm Yours'


Q3 FDIC Stats - Messy but Improving

Posted by jeff

Wed Dec 23rd, 2009 11:41 AM


The FDIC's quarterly compendium of statistics for Q3 (ended September 30) 2009 is out. Overall the numbers are messy but improving. Here are some highlights and lowlights with my comments:

FDIC insured institutions earned $2.8B vs. a loss of $4.3B in Q2 and an $879 million profit in Q3 2008.

Improvements in securities markets/changes in accounting rules (technically, declines in realized losses on securities), increases in non-interest income (fees) and very large spreads (net Interest income/margins) drove the better results. The first factor is ephemeral, the second unsustainable and the third will likely be the one most relevant to the health of banks and the economy going forward.

Only 43% of all institutions reported higher quarterly earnings versus the prior year. Fully 26.5% of all FDIC insured banks were unprofitable in Q3 09.

Many banks experienced deterioration in their loan portfolios that overwhelmed the positive forces cited above.

Net interest margins (the spread banks are garnering between their own borrowing costs and what they are being paid to lend money out) hit a high not seen since Q3 2005.

The Federal Reserve has been able to engineer an environment where banks borrow dollars from them for nothing, hold those dollars in interest paying reserve accounts at the Fed and lend out funds they don't need to the U.S. government by buying Treasuries or mortgage backed securities. These markets are being supported by Fed buying and now explicit government guarantees. The yield curve continues to steepen (spread between long and short rates widen) as bond holders grow increasingly anxious that economic growth and deficit spending will cause inflation. (Inflation would eat up bond holders returns and hence buyers are demanding higher long-term interest rates). The bottom line is that banks are re-liquified to the point that they appear to be able to afford to take the losses on their debt. This liquidation of bank debt, on the one hand, will take place while on the other hand the federal debt grows. The federal debt is in part being monetized (Fed printing money to buy the debt and support prices) and inflation expectations are being pushed up. WE ARE INFLATING OUR WAY OUT OF THE BAD DEBT PROBLEM BY MAKING MONEY OUT OF THIN AIR THROUGH THE MECHANISM OF SYNTHETICALLY PROPPED UP BANK SPREADS.

Loan loss provisions appeared to peak this quarter, declining 7.1% from Q2 2009 to $62.5B, marking the fourth consecutive quarter above $60B. Despite registering the smallest year-to-year increase in provisions in 2 years, almost 2/3 of institutions increased their loss provisions year-to-year.

Because a well run bank, should be increasing provisions at a faster rate than loan delinquencies are piling up (in order not to fall behind), the potential peak in provisioning activity does not necessarily signal the peaking of delinquencies.

Loan Losses as measured by charge-offs (final tally of the loss from a loan that has gone bad, once it is disposed of by sale, foreclosure, etc.) increased for the 11th consecutive quarter to $50.8B, up 80.5% year-to-year. Charge-offs as a percentage of all loans hit 2.71%, a record since measurements began in 1984.

The biggest increase in charge-offs came from C&I (commercial and industrial loans) which were the last to start going bad (C&I Starts to Unravel), reflecting the downturn in the economy more so than purely shoddy lending practices. Overall the record in charge-offs implies that this credit crisis is worse than the early 1990s experience.

Loan loss reserves grew at the smallest rate in eight quarters but the ratio of reserves to noncurrent loans declining for a 14th consecutive quarter from 63.6% to 60.1%.

While loan reserve growth moderation appears to be signaling that banks believe that they may have reserved enough for the bad debt they see coming, the numbers so far do not bear this out, as reflected by the continuing decline in the ratio of reserves to noncurrent loans.
Banks continue to display a rather cavalier and deceptive attitude towards the bad-debt situation....the earnings improvement on display in these figures, would have been significantly lower had banks reserved enough of their profits to boost their ratio of reserves to noncurrent loans. This is a tack that would seem prudent given the continued growth in noncurrent loan balances.

Noncurrent (90 days past due) loans continued to rise, increasing by 10.5% year-to-year to $366.6B, or 4.94% of all loans. This is also a record. the rate of growth in non-current loans slowed for the second consecutive quarter, and was the slowest in four quarters.

This is the most important figure in this data as far as I am concerned. We are still plumbing the depths of the bad debt. It appears that with the recent slowdown in debt going delinquent and a recovering economy, that we could be nearing the peak of the bad debt problem. Although, there is still much uncertainty with regard to further residential mortgage deterioration and commercial real estate loss recognition.

Overall, I think it would be difficult to argue against the supposition that the banking system continues to be in terrible shape. There are glimmers of light in the darkness of the debt abyss, however. The chief factor that have contributed to the stabilization of the banking system and snap back in financial markets is the massive spread widening engineered by the Fed, and the consequent improvement in net margin driven earnings power of banks. This has tempted investors to bid bank shares up and allowed for a momentous amount of capital raising, yet still the banks are not rich and would appear in even worse shape were it not for accounting shenanigans including reporting as profits dollars that should be being shunted into reserves for bad loans.

I hope this crystallizes for Urban Digs readers why many aver that the Fed will remain on hold for a while yet (they need to keep bank funding costs down and preserve the wide spread) and why I still have worries about "repurfusion injury". That is possible unforseen issues resulting from the massive spread widening campaign (be it inflation, asset bubbles or more bad lending e.g. the FHA) and negative consequences that may be catalyzed by an economy that actually starts to accelerate. Case in point is the situation with C&I loans. Commercial and industrial companies, if well run, produce more cash flow during the onset of an economic slowdown than during an expansion. During slowdowns, these firms run down inventories and collect receivables from business booked previously thereby wringing cash out of their working capital accounts. FDIC%20lending%20fq309.jpg At some point however if business doesn't rebound cash flow will stagnate at a low level, potentially resulting in an inability to support debt that was sustainable before the downturn and even for a while during the deceleration phase. When demand does return those businesses that can still support their current debt loads often need more money to start to grow their inventories and support receivables growth from their customers. This is often when the businesses are choked by a lack of financing availability. Here is the chart of bank lending included in the FDIC report. As you can see, lending continues to decline, with C&I loans being hard hit. Is it any wonder that the President is cajoling lenders with regard to lending to small businesses. If you are a banker, still sitting on piles of bad debt, making huge spreads while taking no risk lending to the government, why would you want to make loans to commercial and industrial companies, which while high yielding are among the most risky loans you can make? In a strong enough non-inflationary rebound spreads flatten and banks eventually begin to move out on the risk curve (while the risk of making loans to business actually comes down due to the more durable nature of the expansion).

Any way you slice it the banking system is slowly coming out of it's coma. There will be unforseen complications from this near-death experience, which may not currently be factored into buoyant financial markets (which is why I am cautious on stocks right now). Thankfully, we do not all live and die by the stock market and any correction should not be nearly as bad as the prior crash, as long as taxation and spending policies are reasonably supportive of the expansion and sustainable.....a tough balance to be sure but one I wouldn't bet against right now. The slowly improving environment should be supportive of real estate overall. New York City's dependence on Wall Street makes it a special case. I would not worry about the market here running away to the upside while the best of the market and financing activity snap backs may be behind us for now.

Quick Pre-Holiday Market Check

Posted by urbandigs

Tue Dec 22nd, 2009 11:28 AM

A: I wanted to wish everyone a very Happy Holidays and a safe and enjoyable upcoming New Years! Its been another great year for UrbanDigs and 2010 looks to be even more exciting. I can't wait to share with you guys what I spent so much time working on and years trying to secure the right data source to build the tools I think this market so desperately needs! For now, here is a quick check into the pre-holiday real estate market.

The market is still more active than normal for this time of year. What amazes me is the traffic levels and demand that seems to be out there for higher price points. I simply cannot deny it and will continue to try to keep it real; whether it be bearish or bullish for the very short term. In the end, pricing correctly is the most important thing a seller can do right now to take advantage of a healthy buyer pool in a much stabilized marketplace. If anything, I am finding a lack of properly priced quality products in the marketplace today.

Since following the market on a short term basis is so in demand, I have to describe things in relative terms. What I mean is, bids seem to be coming in about 5-10% higher than they did 8-9 months ago, but still 15-25% lower than peak levels - depending on price point. The improvement in bids was documented here many months ago, has sustained itself up to todays marketplace, and is a result of a reflation mentality from the fed's liquidity facilities, guarantees, and zero interest rate policy. Credit is much improved and on fire lately, as the search for yield continues! Stocks are a proxy for everything as bids improved in asset classes across the board.

You know my thoughts on that gravy train ride - at some point it will end and a carry trade unwind will occur. When? Who knows? How fierce? Who knows? Just keep your eyes on it.

As for our market, I can see a few general trends:

1) Listings Removed - I see about 2,146 listings taken off the market in the past 30 days or so. The majority of which were removed in the past 3 weeks as we entered December. This is a seasonal pattern and follows a trend where fewer sellers were removing listings from the marketplace likely as a result of the improvement in bids. I have listings lingering off market at around 11,283 or so - the new site will offer a breakdown of this metric so we can try to pinpoint the shadow inventory trends that encompasses existing inventory removed and not just new development units that are yet to hit the marketplace.

2) Contracts Signed - Healthy. I have 1,089 contracts signed in the past 30 days or so; very solid given this time of year. Contracts signed surged from 550/mth in February & March to about 1,100-1,200/mth in June-August or so as pent up demand from the freeze up period swamped in with lower prices - as discussed in mid-July.

Now, there are a few listings where the broker keeps adjusting the status from CONTRACT SIGNED to PERM OFF MARKET back to CONTRACT SIGNED back to PERM OFF MARKET, etc., over and over and over again. So, we are in the process of accounting for these types of errors in the backend so that trends and data we release to you is as accurate and bug free as possible. Trust me, it's a very tedious process that has taken us many months to get to where we are at now. I'm about 95% confident right now in the data we have and should be closer to 97-98% confident in another few weeks before launch. We will explain everything once we launch so you know up front how we count each datapoint and what flaws might exist due to source data problems.

3) Active Inventory - We have active inventory at 7,787 units as of right now. This represents a 10.2% decline in the past 3 months and a 25.8% decline in the past 6 months.

4) Pending Sales - We have pending sales data at about 4,938 units. These are listings in contract that are awaiting closing. Relatively speaking, pending sales went from 7,500 units or so in early-mid 2008 (a function of the post-peak market), to about 3,250 units in early 2009 (a function of the freeze-up period and buyer-seller disconnect after Lehman), to about 4,938 today. We have flatlined around this level for the past 4-5 months. This means pent up demand surge came and went after the adjustment and the market has stabilized to more normal levels the past few months. Although I would add that the market to me still seems a bit stronger than usual for this time of year, since after Labor Day.

All in all, I would expect minimal activity for the next 2-3 weeks for holidays. The market tends to pick up in mid-January and listings start to come back on around the end of January and into February for the active season. The data will show it, so we will track it!

Happy Holidays all!!

Happy Holidays!

Posted by jeff

Fri Dec 18th, 2009 09:43 AM

My wife and I are getting set to sit down and watch our favorite holiday movie, Holiday Inn. With snow on the ground and more expected later in the week, my guess is that many people's thoughts are turning away from worldly matters to family and the joys of the holiday season. So before I forget and everyone goes on vacation, I wanted to thank you all for reading and interacting with us this year as well as wish each one of our Urban Digs readers a happy holiday season. As the Counting Crows said "A long December and there's reason to believe maybe this year will be better than the last."

I don't know if anyone else has been hearing the "Redefine Christmas" communiques being played on the radio recently. If you haven't, the general message is this; during this time of economic difficulty why not consider making a charitable donation in the name of a friend or family member this year in lieu of giving a material gift that may soon be forgotten or thrown away? Seems like an excellent idea to me and it got me thinking that maybe some of our readers still had not completed all their holiday shopping.

I am on the board of a New York City-based charity called the Nordoff-Robbins Music Therapy Foundation, which supports the operations of the Nordoff-Robbins Center for Music Therapy at NYU. Like many other charities the center is struggling with lower levels of charitable giving being experienced across the country this year. So please excuse my forwardness, but if any Urban Digs readers are grappling with the age old question "What do I get for the person who has everything, or doesn't seem to really want anything in particular?" Please consider making a donation to the Nordoff- Robbins Foundation. The center provides unique improvisational music therapy for people of all ages including children with communications and/or emotional issues. Improvisational music tailored for individuals does its particular magic in helping bring otherwise isolated children into a world of interaction. I think you will find this video compelling and heart warming.

So if you are thinking about making a donation in someone's name as a gift this year, please consider the Nordoff-Robbins Music Therapy Foundation. Our organization is very lean and the vast majority of contributions go directly to providing services to individuals in need. No donation is too small. Contact Ruth Davis at (401) 497 - 6684. Checks can be made payable to Nordoff-Robbins Music Therapy Foundation. C/O Nordoff Robbins Center for Music Therapy, 82 Washington Square East, 4th Floor, New York, N.Y. 10003. Donations are tax deductible. Your recipient will receive a thank you note from the foundation commemorating your gift (no amounts will be mentioned).

Have a very Merry Christmas and a Happy New Year!

The Bernstein Family


Q & A with Bob Knakal

Posted by urbandigs

Thu Dec 17th, 2009 10:30 AM

A: I had the pleasure of meeting Mr. Bob Knakal a few weeks ago for an after-work chat to discuss everything markets. It was time very well spent. Mr. Knakal is chairman and founding partner of Massey Knakal Realty Services and publisher of the relatively new StreetWise blog where he discusses thoughts on the macro economy & New York City Investment Markets. I find his content to be unbiased, real time, educational and easy to read. I asked him to delve into some questions that UrbanDigs readers might be interested in, and he quickly agreed. Enjoy!

massey-knakal-manhattan-nyc-real-estatejpg.jpgQuestion: Where are we in this residential & commercial cycle? What inning might we be in?

Answer: I believe the residential market is further along in the cycle than the commercial market. While it is difficult to predict precisely where the residential market is, I believe that we could be close to approaching a bottom. The tremendous and unprecedented government intervention that we have witnessed has artificially propped up the market in a number of ways. Therefore, I don’t believe that we are presently at a natural bottom and there may be a slight double dip. The first time home buyers credit, artificially low interest rates and the fact that the government (between Fannie Mae, Freddie Mac and FHA) guarantees 92% of all home loans in the country. This is an unsustainable level of support. That being said, I believe that the residential market is somewhere in the 7th or 8th inning and that we could see an upswing in the market sometime in 2010.

With respect to the commercial market, we have seen the volume of sales start to increase from its low point, however, value continues to slide. This slide is based upon the fact that unemployment is continuing to rise and we must always remain cognizant of the fact that there is nothing that more profoundly affects the fundamentals of real estate than employment. As most economists expect unemployment to peak in the first half of 2010, it is very likely that at that peak we will see the weakest status of our fundamentals and, therefore, a low point in value. After hitting this low point, we expect value will bounce along that bottom for an extended period of time until a determination is made as to whether all of the capital on the sidelines will rush into prop the market up or the deleveraging process will be so debilitating that it will keep value at it’s low point.

Question: What are the biggest 3 bearish risks to Manhattan real estate going forward?

Answer: The first bearish risk for the marketplace has to be taxes. We have seen, recently, a substantial increase in real estate tax rates which are further compounded by increasing property assessments. This is a trend that we don’t expect to see reversed any time soon as the city deals with its fiscal problems. We expect increased taxes, not only on the real estate front but, with respect to state and local income taxes and other taxes and fees. These are a significant downside risk to the marketplace.

The second risk is based upon the extraordinarily liberal, if not militant, positions on regulation and oversight of our markets by the New York City Council and our elected officials on Albany. Some of the positions they have taken recently are extremely harmful to the marketplace from a number of perspectives. The pending changes to the residential rent regulation system will, if passed by the Senate, cut jobs and reduce tax collections. Fortunately, the commercial rent control bill seems to be on the back burner for the time being although that would have also cut a significant number of jobs and reduce tax collections.

Particularly distressing is the position that the City Council took relative to Related’s Knightsbridge Armory development in the Bronx. There position was one of not only telling developers what they could build and how they can build it, but, they attempted to place restrictions on the tenants in the property requiring the tenants to pay its employees wages in excess of the minimum wage. This would knock out many of the national big box retailers who would be natural prospects for a development of this nature. This proposal, and its restrictions, makes absolutely no sense for the city nor to Related and the transaction is now stalled leaving a dilapidated eyesore in the middle of the Bronx. This property has been abandoned for over 10 years and will remain so indefinitely. Rather than having economic development, job creation and increased tax collections we are left with stagnation. We have witnessed a project that would have created 1200 construction jobs and 1100 permanent retail jobs go down the drain due to irresponsible policy. The result is that today there are no jobs and no wages being paid at that site.

The third downside risk to the marketplace is that our infrastructure continues to age. Stimulative dollars could be spent upgrading the various infrastructure systems of the city. Particularly if, as the Bloomberg PlanNYC projects, one million additional residents move to the city over the next 20 years, our infrastructure systems need to keep up with the demand that will be created.

Question: What are the biggest 3 bullish factors for Manhattan real estate going forward?

Answer: Perhaps the most pronounced bullish factor is the fact that we went into this down cycle with far less speculative construction than we did going into the recession of the early 90’s. Supply of available property is very low and the amount of new construction is not nearly what it would need to be to meet the demand that is projected for the future. This dynamic alone could lead to an extremely sharp spike in value when the market is in full and tangible recovery mode.

Secondly, New York City seems to be maintaining its domestic and global standing as the financial capital of the world. During this global economic recession, we have seen significant problems emerge in London and Paris and we have seen emerging markets like Dubai show their vulnerabilities. The fact that New York is still the number one destination for investment capital from around the globe is extremely positive and will serve the city well.

The third thing to keep in mind, which is a more long-term benefit for our marketplace, is that the city is literally running out of developable land. There are very few large land parcels that even exist, let alone available to be developed. At some point, particularly in Manhattan, we will see a dynamic similar to what Tokyo has experienced where values will spike considerably simply based on the fact that supply constraint will be very palpable.

Question: Do you see a second wave to this credit crisis, ultimately affecting Wall Street and our markets, or did the fed save the day?

Answer: Well, I believe the Fed’s policies stopped us from entering a catastrophic period that we all feared. If you recall, one year ago, everyone was running around putting money into different banks and were trying to figure out which banks would be solvent and which ones wouldn’t be. There were some major banks that failed and it was really unclear as to whether the system could recover. Policies that were implemented brought us off of the edge of the cliff but we still have a significant way to go before we can have a tangible recovery. Unprecedented government intervention has created a scenario where banks do not have to face the losses that are, so clearly, embedded in their balance sheets. The changes to mark-to-market accounting rules, the fact that bank regulators have been allowing banks to keep loans on their books at par even thought the collateral may be worth half of that, and the modifications to the REMIC guidelines have created an environment in which balance sheet losses can simply be ignored. It is very clear that we have to go through a massive deleveraging process to create stability in our marketplace and until that occurs there is still some downside risk embedded in our marketplace.

Question: Do you see continued concessions by landlords and owners to fill vacancies or have we seen the peak of the deals already being offered?

Answer: We have seen periods of significant concessions on behalf of both residential owners and commercial owners. In the residential sector, we have seen owners offering one or two months of free rent as well as owners paying brokers one month rent as commissions as well. We have seen effective rents down 20-25% causing significant downward pressure on values. In the commercial sector, we have seen inflated free rent periods and work letters for tenants bringing office rents down anywhere from 30-40% depending on the report that you read. I don’t believe we will see concessions grow and, as history tells us, we will see these concessions start to dissipate before we see increases in rent levels.

Question: When do you envision higher interest rates being a significant drag on housing investment in Manhattan? With rates close to all time lows today, is this even a risk worth discussing now?

Answer: Higher interest rates are absolutely a risk but not necessarily in the short-term. All signals coming from the Fed are that they are going to keep interest rates near zero for the foreseeable future. If there was any inkling that rates might be raised, the financial problems in Dubai have cast a spotlight on credit problems that may exist both worldwide and at home. There are other countries that have significant debt problems, such as Greece, where credit ratings of sovereign states are in question. We believe that we will see inflation based upon the massive increases that we have seen in the money supply and that, with this inflation, the Fed will have no choice but to tighten monetary policy. As they tighten, they will increase the Federal funds rate which will put pressure on the spreads that the banking industry is currently enjoying. The Fed’s monetary policy has allowed for a recapitalization of the banking industry and banks have become comfortable with their massive spreads. So the question is: When the Fed starts to tighten monetary policy, how much of that rate increase will the banks absorb, in the form of compressed spreads, before they start to pass increases along to the consumer in form of higher mortgage rates. Most of the bankers I have spoken to have indicated that they would absorb 50-75 basis points of increase but, above that, would start to pass along the increased rates to the consumer. As interest rates increase, it places downward pressure on value.

Question: Please discuss your thoughts on the recent tax hike of 10.3% for NYC co-op and condo owners and the affect it might have on affordability for future sales?

Answer: I am generally opposed to tax increases and believe that the government should exhibit more restraint on the spending side of the equation. However, given that condos, and most particularly coops, are typically taxed at a much lower taxes per square foot than other building classes (due to the low target assessments), increasing tax rates on that type of property is serving to equalize the tax burden and is probably an appropriate move for the city.

Question: Is inflation a threat in your mind, and if so, is real estate a good hedge?

Answer: Inflation is definitely a threat. As I mentioned above, the increase in the money supply over the past nine months has doubled the country’s money supply and the increase is larger than the aggregate increase over the prior 50 years. This has to lead to above-trend inflation and hard assets are the best hedge against inflation. Commercial real estate is a great hard asset. The only caveat is that you would want to buy it before the inflation kicks in and lock in the low interest rates associated with the pre-inflationary period. Owners who lock in fixed-rate debt at today’s rates for the long-term will enjoy significant benefits of owning commercial real estate. Commercial properties are also a better hedge against inflation than residential properties as it is possible to pass along the increase in operating costs to commercial tenants.

A big THANK YOU to Mr. Knakal for taking the time to answer these questions for our readers!! Great stuff!

Fed Update: "Low Funds Rate For Extended Period"

Posted by urbandigs

Wed Dec 16th, 2009 02:59 PM

A: Quick check into the fed meeting and statement today.

As expected the Fed left rates unchanged and continues a zero interest rate policy. Actually rates are not zero, but rather hovering between 0.11% - 0.13% or so. Close enough right.

Here is the full Fed Statement.

In my opinion there are a few main things going on here that people should be aware of - Ill point out in bold and then include the fed wording in quotes:

A) Gradual Wind-down of Emergency Liquidity Programs - My thoughts on exit strategy were discussed here back in August. "First they will slowly remove emergency credit facilities", was my starting point.

In the fed's words:

"In light of ongoing improvements in the functioning of financial markets, the Committee and the Board of Governors anticipate that most of the Federal Reserve’s special liquidity facilities will expire on February 1, 2010, consistent with the Federal Reserve’s announcement of June 25, 2009. These facilities include the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, the Commercial Paper Funding Facility, the Primary Dealer Credit Facility, and the Term Securities Lending Facility. The Federal Reserve will also be working with its central bank counterparties to close its temporary liquidity swap arrangements by February 1. The Federal Reserve expects that amounts provided under the Term Auction Facility will continue to be scaled back in early 2010. The anticipated expiration dates for the Term Asset-Backed Securities Loan Facility remain set at June 30, 2010, for loans backed by new-issue commercial mortgage-backed securities and March 31, 2010, for loans backed by all other types of collateral."

The liquidity spigots that have been wide open and caused a huge carry trade in search for yield, will slowly be turned off.

B) Engineered Bank Recapitalization Environment Will Continue - Make no mistake about it, the fed has successfully engineered an environment suitable for the banks to recapitalize themselves. We can debate the merits of their policy choices in another discussion. The point was to recapitalize the banks, period - and we are in the process of doing this.

Yes unemployment is high and rising, yes we faced a severe recession, but the real damage was done to the banking system and that is where the fed is trying to target their fixes. Without healthy banks even when the economy and unemployment start to recover, lending will be subdued at best. Many think lending will be subdued anyway as accounting rule changes and off balance sheet rule changes will drag the writedown process out for years; i.e. zombie banks. I probably put myself in that camp. We still do not know how far off the marks are for CMBS, Whole Loans, P/E lbo's, etc.., or where these mis-marked assets may be hiding off balance sheet.

Everything and anything was done to help the banks. Now the street is riding the dollar carry gravy train looking for yield!

C) Lending Rates Are Super Low Because The Fed Wants Them That Way - Duh, right? Lending rates are likely 50-75bps lower than they probably would be due to a massive debt monetization experiment in which the fed is buying agency debt and agency mortgage backed securities. The total purchases are set to reach around $1.425 trillion! Umm, I don't even know what that is anymore. Given that close to $2 trillion in losses in the shadow banking system and who knows how many future anticipated losses are sitting on the books of the financials now that every rule was changed to benefit banks, the number is not as inflationary as some may think. In short, the money printing is not entering the economy!

Rather, the banks continue to hoard just under $1.1 Trillion in Excess Reserves as seen in the chart below
(via the St. Louis fed).


Why would they do this? Two main reasons that I see:

1) Banks should not and are not lending to consumers and businesses that are experiencing declining credit quality in a rising unemployment environment where everyone seems to be spending less, and...

2) Money is being hoarded to help absorb future loan losses that were not taken and rebuild capital ratios

If you see other reasons why the banks are hoarding, please speak up! These are the main reasons I think banks are not increasing lending, and rightfully so. Its the one thing banks got right in this whole mess.

So, rates are low because the fed wants them that way. In the fed's own words:
"To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve is in the process of purchasing $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt."
Which leaves us at what moves the fed may have next as they formulate an exit strategy. In my opinion, its the same as I thought back in August:

1. First they will slowly remove emergency credit facilities - that is clear
2. Second, they will be forced to raise rates - timing is iffy, and markets may force their hand
3. Third, they can sell securities to primary dealers via POMO at the NY Fed, thereby draining liquidity from excess reserves - likely way out there, maybe 2011-2012.
4. And finally, as a final and more aggressive measure, we could see capital or reserve requirements tightened on banks to hold back aggressive lending that may cause inflationary pressures and money velocity to surge. - at some point, yes.

These are my thoughts on the fed, what the fed is doing, the environment they are engineering, and what likely steps they have ahead of them over the next 2-4 years. Since they don't want to rattle markets or do anything counterproductive to their bank recap goals, these steps will likely be implemented slowly and in stages.

Is Manhattan Getting 'Cranky'?

Posted by urbandigs

Tue Dec 15th, 2009 10:17 AM

Quick Note: With the holidays, my clients and working more than part time on the new site I won't have much time to write here for the next 3-4 weeks. I'll do my best to keep posts shorter and to the point though so at least I can try to keep you updated on what I am seeing in the Manhattan market real time.

A: Interesting discussion on Streeteasy.com a few days ago, discussing whether or not sellers are cranky? Given the time of year and what we just went through, I figured it might make for a good discussion here. Are sellers cranky? Are buyers cranky? Is it the media's fault? Lets discuss.

cranky.jpgManhattan real estate is always a topic of interest. I find that even if you are a buyer or seller that is not interesting in transacting in the very near future, you still have a desire to follow the market and read the real estate sections of the NY Times or other to 'stay in the loop'.

While I am just one man in a very big market, I'll try to give some thoughts on WHY both buyers and sellers may be cranky:


Buyers may be cranky because of these two main reasons:

1) Declining Inventory - My new backend systems have active inventory around 7,810 or so right now. We spent many months tweaking and spot checking our new data feed and fixing many bugs that were affecting the real time status of each listing. We have over 180K records and over 13M status updates going back 6 years, so you can imagine the job we had to ensure that accuracy and quality of the data was very high.

Looking at where we came from, I see this active inventory down 25.7% over the past six months alone. The reason was a combination of listings removed from the marketplace and the strong pace of contracts being signed. In short, the market was active for properties that were priced right OR where the seller was reasonable in terms of hitting a market rate bid submitted.

When buyers have trouble finding adequate options in their price point that meet their needs, they tend to get frustrated.

2) Improvement in Bids - The recent lows from the adjustment we had occurred during the months of February, March & April of 2009. Those were the so-called fear trades I discussed here often. Since then, the market has gradually and sustainably priced OUT fear and bids improved just like they did across all asset classes. This is known as a reflation trade and I can't deny it. Since the adjustment I was looking for in late 2007 and early 2008 took place, I became significantly less bearish on Manhattan property prices.

Buyers are frustrated because the fear trades only occurred over the course of a few months and that bids improved so quickly and continued to do so right up to today's' market. Every buyer wants a deal and every buyer has a hard time buying into the fact that they have to raise their bid to get a deal done. While trades are still occurring noticeably below peak levels in 2007, bids have noticeably improved in all price points.


1) Sell-side Optimism Outpacing Improvement in Bids - This is a psychological force that I discussed around August - which was about 3-4 weeks after I first started to see out in the field here. It takes two to tango, so if sell side optimism outpaces the improvement in bids submitted by buyers we will see another period of slower sales - and we all hate that! Well maybe not the buyers but then again if sellers do not see bids in their 'perceived acceptable range', they are likely to remove the listing from the market and try again at a later time. By the way, my new data shows a huge surge in listings removed from the market in September of 2008 - now why would that be????

Sellers may be cranky because they are seeing healthy traffic levels, tons of private showing requests, receiving multiple bids on their property but not near levels they feel is appropriate given the reflation that has occurred in other asset classes. Reports from brokers, media, and seeing most of their competition enter into contract likely re-inforces this optimism that the perfect buyer with the strong bid is just around the corner. That optimism may cloud the sellers thinking from working with a perfectly good buyer who submits a solid market rate bid that may be just a few percentage points off from being accepted. Sellers should know that it is all about pricing right OR being reasonable when a market rate bid is sent in.

2) Media Effect / Uptrend in Contracts Signed - Between reading reports here on strong activity the past 6-7 months, seeing streeteasy listings go to contract, and reading the NY Times articles stating that "Bidding Wars Resume", why wouldn't sellers expect to get much more for their property?

You can't deny the affect this all has on the average seller - you know, the seller that really is not pressured by financial turmoil or forced to sell real fast for personal reasons. Going into the mind of the seller, if you were affected by this media effect and the traffic is there but the bids aren't, you may tend to get cranky!

My $0.02: Everyone should just calm down. Sellers should be happy that this market has proven to be as resilient as it has when faced with a crisis as severe and wall street centered as we just had. Buyers, while in hindsight probably wished they bought at the height of fear, usually do not want to bid when things are outright scary out there! Hindsight is 20/20 and right now I see a market that stabilized quite well considering the nature of this crisis. If I was a buyer, I would feel safer and more secure buying in a market that saw a healthy adjustment in prices but is not imminently facing Armageddon.

Sales volume has been unseasonably strong and has been solid for about 7-8 months now. Its normal for listings to be removed from the market and for new listings to not come to market this time of year! The last few weeks in December usually is slow and boring, so why get cranky? I would expect more listings to come back on starting in mid January in anticipation of more buyers getting serious about pulling the trigger in the first 4-5 months of the year. Until then, crank down!

New Yorkers...and the Rest of "The Rich Financiers" Under Attack

Posted by jeff

Thu Dec 10th, 2009 10:33 AM


"I didn't set out to save Wall Street. I set out to save Main Street. But to save Main Street, I had to save Wall Street." - Ben Bernanke

The quote above from the Fed Chairman was his attempt to explain why the U.S. taxpayer has contributed heavily to an increasingly unpopular bailout of Wall Street - a situation where talk of big winnings in the markets this year and huge bonuses only further inflames the populace.

In a Wall Street Journal article this morning by David Wessel entitled "The Public's New Fear of Finance," he refers to Bernanke's quote and opines that "Many Americans see simpler logic: Wall Street got bailed out, and Main Street didn't. They are looking for someone to blame. The truth is that the list of checks on the financial system that failed is long; it is hard to identify any one that worked. But the public wants a culprit, and they have found a couple of candidates. One is big finance itself."

Later in the article Wessel quotes Paul Volker, probably the most respected central bank chief the U.S. has ever had (sorry Greenie, you've fallen a few notches, despite the teary eyed "I never imagined this could happen" mea culpa) in a speech to a Wall Street Journal sponsored Future of Finance conference. Volcker derided bankers that "You have not come anywhere close to responding with necessary vigor to the crisis we have had."

Flip a few more pages through the Journal and you will see that there is no reason for Volcker to worry about bankers' failure to act; politicians and regulators are about to act for them. Today's Journal contains articles about a 50% tax on financial industry bonuses being propsed by the U.K. government, while the U.S. pay czar is extending his $500,000 salary cap from top execs at bailed-out firms to employees a level or two lower. The editorial section of the Journal discusses a newly proposed 35% tax on "carried interests" also known as performance fees, the vig that helps hedgies get rich if they make money for clients. Apparently someone from Goldman Sachs heard Volcker. Just moments ago I saw a headline that Goldman's management committee will receive no cash bonuses this year.

None of this should be surprising. In fact, the only thing surprising to me is that the backlash hasn't come sooner through regulation, rather than taxation (Regulator Revenge: There's a New Sheriff in Town). My guess is it's because things looked so dire just six months ago, that Bernanke's stance voiced above seemed very rational. Let's face it, the government is pursuing the non-intuitive strategy of encouraging banks and government entities to make what are in many cases risky loans, even when the full reckoning for the bad loans already made pre-crisis is still years off. But there is a difference between saving Wall Street to save the economy and encouraging a"Trading Mentality." This is why taxes on financial transactions are becoming a favored potential revenue generator to fill holes in government budgets worldwide.

This article is in no way trying to comment on the ethics, morality or even macroeconomic impacts of punishing Wall Street for the financial crisis....I'll leave those debates up to readers. My key takeaway is, the backlash that I envisioned a very long time ago against the financial industry is just starting...likely because the economy and markets are seen as healthy enough to endure the fallout. I don't think this backlash is going to be good for the economy of New York City and New York City real estate values (particularly at the high end). So while I encouraged people to get out from under their beds and look around a few months ago. I reiterate my view that now is not the time to buy New York City real estate as an investment asset. Weigh the utility value of a move heavily in your calculus.

The future's so bright ... don't break out the shades just yet

Posted by anamaria

Sun Dec 6th, 2009 03:12 PM

Apparently, the NYC economy is better off than many would have otherwise expected. A new IBO (Independent Budget Office) report provides a few juicy tidbits:

  • 2009 profits are expected to be $59bn for 2009, versus the record $42.6bn in losses for 2008 and $11.3bn losses in 2007 (not too shabby a turnaround)

  • Higher expected tax revenues of $35.5bn ($650m more than last year) based on Wall Street Profits, in the form of personal income tax collections from high bonuses ...clearly they're expecting a high cash component of given bonuses (Noah's post on the bonus discussion)

  • Fewer than expected job losses of 157,200 versus the predicted 254,500

  • A resumption of peak employment levels by Q1 of 2013 (after bottoming out in Q3 of 2010)
  • We thought this might be some good fodder for a rich conversation. Whenever we have a "to buy or not to buy" conversation, we often speak of price levels, their comparisons to rents, supply v demand, etc. Every now and then, the discussion veers towards the marco picture: purchasing an asset in NYC as it relates to the future health of the city and its fiscal discipline.

    Looking at demographic trends in the city, we know that:
    - Since 2000, NY has experienced the greatest national migration loss of 1.5million people; this has been offset by a large influx of foreigners which has lead to a mild overall population increase
    - 85% of the above loss has come from the NYC region, while 70% has been from the city, itself
    - The annual peak was at 250,000 people in 2005 and the low was 126,000 last year (reflecting a national mobility decrease)
    - Interestingly, the income of households moving out of the state was 13% greater than those coming into the state

    So ... what say you, UD readers? What's your outlook for the NYC economy and how do you weigh all of these factors in terms of landing on a macro-economic perspective on the health of the Big Apple?

    Reperfusion Injury: The Economic Thaw

    Posted by jeff

    Wed Dec 2nd, 2009 05:23 PM

    Reperfusion Injury - Damage to tissue caused when blood supply returns to the tissue after a period of ischemia.

    Above is the definition of reperfusion injury from Wikipedia. Yes you are reading Urban Digs, and no I have not completely lost my mind....although I did recently herniate a disc in my back. Lately, I have been pondering reperfusion injury as it relates to the economy (maybe it's the pain pills). What damage is being caused by the rapid re-introduction of economic oxygen into the system?

    A year ago, the global capitalist populace was collectively hiding under their beds, occasionally poking their heads out to watch another scary story on T.V. about economic Armageddon. What few realized was that this behavior resulted in a cessation of economic activity roughly equivalent to throwing gasoline on a fire. The bear market already in effect was finally punctuated by an all-out panic. In response to the conflagration of world markets, central banks brought out the BIG monetary and fiscal hoses to quell the blaze.

    Fast forward to today and the massive streams of stimulus have rapidly re-floated market boats. My feeling is that the neck snapping rebound in both financial and economic markets has caused some underlying damage that may by felt in the next 12 to 18 months (or sooner in the case of my own cervical spine, which is obviously a finely tuned market barometer).

    So what are the likely symptoms of economic reperfusion injury?

    1) Hallucinations/Frothing at the Mouth - Several markets have levitated on highly questionable supply/demand fundamentals (ex speculation)....I can name a handful off the top of my head: natural gas, aluminum, the baltic freight index. That's not to say that fundamentals have not turned the corner for these products and services; however all of the above have an excess of current supply versus both current and historic demand and fairly positive supply outlooks for the next few years. The fluff in prices is in my book the mark of speculation and indicates increased market risk from easy money. (Isn't this what put us in the soup in the first place?) Check these charts of aluminum inventories and prices: inventories are near bubble highs and prices, which leapt off the lows like a scalded cat, are breaking out again to the upside. I understand why it's happening....it just doesn't make economic sense.



    2) The bends (micro bubbles) - Outside of financial markets asset bubbles are being re-flated, as evidenced by big rebounds even in assets with little or no income potential, like gold and art and the outright calling of bubble activity even in the best growth areas of the world. Goldman Sachs reportedly just raised its Gold price forecast from $960 to $1,350 for 2010....I'm trying to recall how their $200 oil call worked out.

    3) Deceleration trauma - The magnitude of last year's market/economic drop and the incredible G-Force of the recent pop represent risks in and of themselves. Of course, this is a unique market/economic time period for any of us not active in the markets in the 1970s, or not veterans of Japan's lost decade. For traders it probably offers great opportunities. However, for business planning it's a nightmare. Just as folks get comfortable enough with their survival to loosen the reins on cost containment, there is as likely as not to be a micro bubble bursting or hallucinatory supply/demand pseudo equilibrium being jolted out of alignment. Just one example of the perils of business planning in this environment is the air freight market. Just six months ago that market was swimming in over-capacity and supply chains were being contracted to reduce excess inventory; the need for high speed delivery was nil. In reaction to economic realities, passenger airlines, which carry a great deal of the overall air freight in their bellies, were grounded. This large reduction in capacity in the market, coupled with retailers' overly pessimistic ordering patterns for the Christmas season, has resulted in a late mad dash to bring popular goods to store shelves and a spike in air charter activity and rates. Does anyone want to bet their business that these higher rates will last, with tons of capacity on the sidelines that can come back to market?

    Questions about how sustainable global growth is, tight lending markets and economic/market volatility are a bad mixture for business confidence and a robust recovery. Add "Reperfusion Injury" to your worry list. This is not to say the economic patient won't survive, but my bet is we will still be in the recovery room for some time to come, with bouts of both fever and chills....we have seen some of the fever already.....might be time to make sure you have a blanket handy.

    Some Thoughts on Housing - The 4 Forces

    Posted by urbandigs

    Tue Dec 1st, 2009 11:56 AM

    A: Its been a while since I took a step back and did a general thought piece on one market in general. So, I would like to discuss thoughts on some of the hard hit housing markets out there and how the temporary confluence of 4 forces may provide a good entry point for those ready, willing & able buyers that are still waiting to pull the trigger.

    This is not a Manhattan micro piece.

    homebuyer-tax-credit.jpgWhile every market is local and experienced their own degree of severity against the deflationary forces out in the world since 2006, we can try to take a step back and look at housing in a more general sense given the unique nature of the current environment. Some things that pop into my head include:

    1. Unsustainable plunge in pricing - where are we today compared to where we came from; nothing goes in a straight line
    2. Artificially Low Lending Rates - ZIRP + fed buying of residential mortgage backed securities and agency debt
    3. Government Tax Credits for Buyers - no explanation needed here
    4. Government Credits for Developers - see above
    5. Fed Engineered Bank Recapitalization Environment - leading to a reflation mentality and a extremely positive carry trade with the dollar as the funding currency for money to chase yield
    6. Unemployment Still Rising Yet Likely Near Its Ultimate Peak - a bold statement yes, but not a crazy one

    Every single one of what I see as positive driving factors of housing markets across the country is a temporary one. The main negative is the continuing deterioration in labor markets and the number of unemployed out there. But with hard hit markets trading down some 40-50%+ from peak levels, I think we can argue that a good portion of this cycle has been priced into those markets. The main government programs that allowed for the temporary homebuyer and developer tax credits are i) Worker, Homeownership, and Business Assistance Act of 2009, ii) American Recovery and Reinvestment Act of 2009, and iii) 2008 American Housing Rescue and Foreclosure Prevention Act.

    The only element I would even remotely consider as "a rock building a foundation" for future sustainable housing activity is #1 - an unsustainable plunge in pricing. That was the healthiest thing that happened and the major reason why buyers are stepping in to purchase homes. Kind of like a reset button on a EA Sports Madden game. Umm, prices went too high, game over, lets start again! Now policy is in place to stop prices from falling, stabilize housing, motivate lending, and keep rates as low as possible to keep the party going for new purchases and debt refinancings.

    With that said, I consider now to be one of the better times to buy real estate in many hard and moderately hit markets. Why you ask, given the weak foundation that seems to be supporting current markets? Because of what I will call the 4 main forces and how all four are working together at the same time right now:


    1) Homes can be bought for much more affordable prices with some markets trading down 38-50%+; Las Vegas -55%, Phoenix -52%, Miami -46%, San Diego -38%, etc..
    2) Lending rates right now are at all time record lows; 30YR rates averaged 4.78% last week
    3) The government just extended & expanded the homebuyer tax credit
    4) Supply is still high when counting the shadow/foreclsoure inventory that is still lurking; options and control are there for buyers

    It is the temporary CONFLUENCE OF THESE 4 FORCES that combine to make for a very nice opportunity should the buyer be able to afford it and is buying for the right reasons. Its still a buyers market out there and there are still real fundamental pressures that sellers have to deal with to move property. The trader in me looks at this as buying on a downtick with free gifts at the same time.

    Its really the first time in about 3 years that I have felt this way about hard hit markets across the country; and its a strange feeling because I am against so much of what is making this temporary environment exist in the first place. Speculative investors will always be out there looking for action and some will always be caught naked when the tide eventually does go out - its the nature of markets and the players that play them. The successful speculative players understand risk management and the importance of discipline applied to their investment philosophies.

    I may not agree with government tax credits and stimulus for everything and anything. I may not agree with the fed's tampering with rates to maintain the recap environment. But that doesn't matter because what the heck can I possibly do about that? All I know is that these four forces will not all be working together at the same time forever as we are yet to see what the future world without the govt/fed steroids will look like.

    This doesn't mean prices are on a one way trip back to new highs. Far from it. Rather, try to think about it in terms of what happens when....

    a) there is no more government tax credit for buyers? How far and for how long will sales volume dry up now that we pulled forward demand to take advantage of the govt offer?

    b) our fed removes liquidity and eventually talks about potentially draining excess reserves from depository institutions to make sure lending does not get out of control with the crisis behind us? what happens to lending rates?

    c) when most of the shadow foreclosure supply has been eaten up? That pressure still exists and will continue to exist for many months ahead but at some point, and largely due to the stimulus efforts, the pipeline of foreclosures will start to head down.

    d) will 'a' & 'c' cancel each other out????

    Sure this is talking years out but that is what this piece is all about. You may decide to wait another year focusing on price action alone, and prices do in fact turn out to trade a bit lower, but now your lending rate is much higher (maybe 5 7/8s instead of 4 7/8s) or the tax credit expired or your options are narrower without severe foreclosure pipeline pressure working in your favor. Of course if you are an all cash buyer and rates do ultimately rise, you could be in a better position down the road to grab a property when rising borrowing costs is affecting affordability. But lets be real here; most people buying a home look to secure some portion of financing to do so.

    I'm in that very odd position of not agreeing with policies taken to stem this crisis yet cognizant of the fact that the confluence of these 4 forces makes for a very interesting opportunity in hard hit markets; of which there are many across this country! Get the low price or the foreclosure price --> get the record low rate --> get the many options available to find the right home --> and get the homebuyer tax credit.

    Always make sure you know your job security and your local market very well before making any decision; and always know what you can and cannot afford! If we do have a double dip and a payback period of consequences, you need to be prepared with a safety net - no safety net, don't buy yet!

    Double Double Toil and Trouble: Conjuring Up Spells to Get to the Closing Table

    Posted by anamaria

    Tue Dec 1st, 2009 09:55 AM

    We all know that the HVCC (Home Valuation Code of Conduct) has changed how appraisers are engaged, leading to the hiring of professionals who are not as familiar with the Manhattan market. More often than not, this change has resulted in lowered (you might say bewitched) appraisal values, for the most part, putting both buyer and seller in an interesting predicament.

    We've come across several such situations where sellers believe that the buyers must come up in price, and that they have no choice in the matter as if entranced. This is simply not true, especially not when 98% of loans extended are mortgage-contigent. We are living in different times, my friends.

    So what are the choices that both parties have if the appraised value comes in below the contract signed price?


    1. Come up in price by that difference between the appraised and contract numbers, that is, if you want the property badly enough or if there are other bidders breathing down your neck
    2. Pay for PMI to lower the 20% downpayment threshold, resulting in a one-time lump sum payment and higher monthly premiums. Here, try to negotiate with the seller for a concession towards that lump sum.
    3. Renegotiate the contract price to the appraised value
    4. Walk away altogether by getting a declination letter from your bank. This document basically states that the bank is not willing to extend you financing based on the previously-agreed-upon price and loan to value, making the contract null and void.


    1. You can reduce the price of your property to the appraised value; this is where you need to manage your expectations throughout the process. Just because you have a contract signed close to ask, doesn't mean it will close for that much.
    2. Reimburse the PMI lump sum via a concession at closing ... at least you're meeting the buyer part-way.
    3. Let the buyer go, and cast a spell for an all cash buyer to come your way before the next full moon. Be very careful here; unless you happen to be in the lucky position where you have other buyers who have not yet left the table despite the contract being signed, you would be starting the process all over again. Though all-cash buyers do exist, you would need some pretty strong bat whiskers and mummified toenails to create that magic upon request.

    As always, we'd love to hear from you on both sides of the transaction. What have you seen and, perhaps more importantly, which choice would you make?