Here Comes The Q1 2010 Report

Posted by urbandigs

Wed Mar 31st, 2010 09:59 AM

A: In the next few days we will get the Manhattan Q1 report, reflecting the marketplace closings from January-March 2010. These closings were likely deals that were signed into contract 2-6 months prior; reflecting market conditions anywhere between October 2009 and January 2010. In order for the closing to be counted in the quarterly report, it must be captured by public record. Generally speaking, the lag for sale to be captured by public record ranges anywhere from a few days to a few weeks. However, there are occasions where it could take months for public record to eventually capture a prior closed sale. As always, use caution NOT to interpret the quarterly report as necessarily reflecting the market conditions at the time of report release.

The interesting thing about this upcoming quarterly report is that it will be compared to the same quarter one year prior which happened to be the report that defined the downturn. Therefore, expect significant year over year changes.

As discussed earlier in the month, "Looking Forward To Manhattan Q1 2010 Report":

"As you take a look at the chart comparing Quarterly Closed Sales Volume for Manhattan Co-ops and Condos, focus on the BLUE BAR that the upcoming report will be compared to and you will notice that it won't take much to easily beat total closings for Q1-2009 - the report that defined the severity of the downturn this market experienced.

I put my estimate for Q1-2010 in there as a shaded bar for easy reference. If the number comes out around the level I expect it to, the headline in mass media could read something like this ---> "MANHATTAN APARTMENT CLOSINGS SURGE 100% FROM PRIOR YEAR"...or such. So just be prepared for that."
*Data Courtesy of

So my expectation is around 2,400 - 2,600 sales for the first quarter of 2010; let's see how close I get.

My new UrbanDigs Analytics systems have become significantly more accurate in the last 3-4 weeks due to the implementation of a Listing Status Flow Algorithm to govern our entire database of real time information direct from the REBNY Broker Sharing Systems. It became necessary to do this to adjust for redundancies and other flaws embedded in the source data for unexplained reasons. In other words, simple 'duplicate' rules could not fully account for the double-counting of the same individual listings. As a result, all datapoints have been downsized and now more accurately reflect the state of the current marketplace. In addition, ACRIS real time feeds now control closing information and BROKER feeds were installed to confirm the status for listings with unexplained alternations of 2 or more status states. Quality of data has been top priority and I believe launch should still be on target for May 1st, 2010.

As of today, I have:

*ACTIVE INVENTORY ---> 7,604 units
*PENDING SALES ---> 2,855 units
*OFF MARKET INVENTORY ---> 8,692 units

The pipeline of sales yet to close remains strong and should carry through to at least Q2 of 2010, perhaps Q3 as well due to the lagging nature of Manhattan sales. In addition, I strongly believe time will ultimately show the progressive improvement in bids from the plunge in sales volume in early 2009 to the sustained rise in volume that started in the 2nd half of 2009.

What I am unsure of is which quarterly report will ultimately show the improvement in price action from the extreme trades at the height of fear in early 2009; but I am fairly confident that going forward from here, the rate of improvement from that extreme depressed point will slow. Keep in mind there were very few trades occurring in early 2009 as bids for property basically disappeared leaving sellers nervous and motivated to hit a low offer if one came in. If anything, the bid/ask spread for Manhattan property narrowed significantly over the course of 2009 and into 2010 from that low point one year earlier.

*UPDATE: I was just made aware a key system refresh was not complete when I quoted the updated numbers yesterday for this post. The flow algo that now governs our systems has been fully implemented as of this morning and I updated the new stats to eliminate the redundancies from broker status inconsistencies. I apologize for the initial confusion. Please consider these updates as BETA until launch.

Rate Watch: Fed MBS Purchase Program Virtually Over

Posted by urbandigs

Thu Mar 25th, 2010 04:51 PM

A: Time to keep our eyes on the Mortgage Markets to see what the initial reactions might be as the Fed marks the end of the The Great Debt Monetization Experiment of 2009/2010. With only $2bln of newly printed electronic dollars left to purchase Agency Backed Mortgage Backed Securities (MBS), next week will be the first time in a long time where the Fed will not be supporting these markets via direct purchases. We should watch the mortgage markets and treasury markets for any re-alignment as we enter a new phase in the Fed's exit strategy.

Via Calculated Risk, "Countdown: Fed MBS Purchase Program only $2 Billion more:

So the program is essentially over. We should be watching to see if 10 Year Treasury yields rise - and if mortgages take "a beating".
Chart below courtesy of Calculated Risk showing us the cumulative weekly totals (in Billions) of the Fed Agency MBS Purchases since January of 2009:


The Quantitative Easing (QE) policy was the most aggressive stage of Fed policy taken on to stem a severe credit crisis and strong deflationary headwinds. When rates are lowered to as low as they can go, this is the next step but is typically only used in extreme situations. Needless to say, what we went through was an extreme situation. In essence, the NY Fed purchases assets directly from Primary Dealers & Money Center Banks via Permanent Open Market Operations (POMO) using funds electronically created out of thin air; also known as 'printing money'.

To see this in black & white simply go to the NY Fed's "FAQs: MBS Purchase Program":
How are purchases under the agency MBS program financed?

Purchases will be financed through the creation of additional bank reserves.
This new money is then deposited into the asset seller's excess reserves, explaining why we have seen such a huge rise in excess reserves held; (View image of Excess Reserves). In addition, the Fed is sterilizing the opportunity cost of using these excess reserves by paying interest for the first time in its history; a little piece of the puzzle put into place in October 2008 - a perfect setup for what was to come; the hoarding of money in excess reserves as the banks attempt to recapitalize. For those interested, read this primer on 'Why Are Banks Holding So Many Excess Reserves'.

The whole process is unprecedented in our history and we will not know the true unintended consequences of such policy actions taken to stem the crisis for years. What goes in will eventually come out and at some point in our future policy will be reversed to drain excess reserves. The fed is now setting up the platform for their exit strategy and conducting tests to see how markets might react in an attempt to minimize shocks to the system. But time is the only true test and next week will be the first glimpse into how the mortgage markets react to the fact that the fed purchases will soon be over. If I was waiting to lock in a rate, I'd probably do so sooner rather than later just in case.

Dollar Rising: So Why Does The Carry Trade Continue?

Posted by urbandigs

Thu Mar 25th, 2010 11:11 AM

A: High yield bond funds continue to be en fuego, as investors rapidly pull cash out of low yielding Money Market funds and search for higher yield. The go to place clearly has been equities and high yield bonds; and any other asset classes that present higher yields. Make no mistake about, this IS the fed's desired environment to help recapitalize the banking system; wall street is simply doing their thing and playing the game to enormous profits. But how could the game continue if the funding currency staged a noticeable rally against other major currencies in the past 3-4 months?

Can we really dollar carry trade our way out of this mess? By looking at the markets over the past 13-18 months you may start to get convinced! What began as a seizing up of secondary mortgage markets and plunging bids for securities tied to mortgages, has ultimately morphed into a historic carry trade driven rise to reflate asset prices. Looking at the $900bln or so decline in Money Market Funds (MMFA Index) over the past year shows you this drastic search for yield (view image).

When you have such a liquidity driven carry trade in play you can't control where the added liquidity ultimately finds a home. That is the essence of what we have seen in all asset classes over the past 12 months. The money has been flowing into any asset class that presents a yield (mainly HY corporate bonds and equities); and its the higher yielding asset classes that saw the most historic rises. But the driving force of this movement of money by mass injections of liquidity/fed guarantees is artificial and unsustainable; yet the effects are immediate and dramatic. This is partially the goal of the fed: to reflate asset prices and recapitalize our banks that still have questionable marks on complicated illiquid and often hidden securities on their balance sheets - some call it extend & pretend.

But the question of control comes to mind and it is no surprise that wall street takes this to an extreme level, trying to cash in as much as possible while the game is on. That is, the game is very profitable and works only until it doesn't anymore. From NY Times "Regulators Tackle ‘Carry Trades’":

But near-zero interest rates in the United States last year saw the dollar become the financing currency for these trades. The big problem with currency carry trades is that they are inherently unstable. Although they can prove lucrative for short-term players able to get in and out of positions quickly, they fly in the face of basic interest rate theory.

The initial buying of the high yielder has the perverse effect of pushing the risky currency higher — giving the impression of a one-way bet and complicating policy for any developing country, as the overvalued exchange rate hammers the country’s export competitiveness. The situation can persist for several months and even years, but the unwind is then all the more sudden and vicious as the leveraged positions all head for the exit at the same time.
chart-dollarindex.gifWhich brings us to the recent rallying US Dollar. By looking at the US Dollar Index chart to the right, you will see that the greenback has actually strengthened noticeably against other major currencies; mainly due to EURO risk aversion with the PIIGS worries casting a cloud over investors. Which begs the question: IF THE FUNDING CURRENCY HAS RISEN SO MUCH IN SUCH A SHORT PERIOD OF TIME, HOW CAN THE ASSET CLASSES BENEFITING FROM A DOLLAR CARRY TRADE MAINTAIN THEIR AGGRESSIVE UPTRENDS?

And herein lies the confusion of many. The thinking goes, if the carry trade is helping the banks to recapitalize and is reflating assets in the meantime for investors to trade on then who the hell cares if another asset bubble is forming somewhere or not? Here is an excerpt from an industry insider regarding this exact topic of conversation:
"The vast majority of HY and equities are in USD anyhow so the FX component is not too relevant. It would really only matter to investors overseas investing here and vice versa.

The carry trade that's on now has nothing to do with the FX carry of old. It's that a US bank can have illiquid assets on it's books at 40 when they are worth 10. They just make $10 a year for 3 or 4 years and write down the investment a little bit more each time around while still able to show a profit. So long as nothing drastic happens eventually they'll have it written down to market. That's why even if you bid 15 for it you can't get them to sell it. Yes the carry trade is on, but if banks can earn their way out then who cares?"

Just keep the game going as long as the fed or the markets don't do anything crazy to disrupt it! And that is a story we all heard before and we all know how the game ultimately ends.

I look for signs of a carry trade unwind daily and to see the funding currency rise makes me wonder if it has started? But with HY and equities marching on, how could this be?

What are your thoughts?

Looking Ahead: More Upside or Downside Risk?

Posted by anamaria

Mon Mar 22nd, 2010 11:39 AM

Both Noah and I have been involved in several conversations about a current market outlook with readers on this site, Streeteasy and amongst ourselves. I therefore thought I would pose the question of: are people seeing more upside or more downside risk in this market? … and for those quant fans among you, how much on either end in terms of percentages?

Arguments for further downside risk:

- The Fed stopping its MBS purchases means rates will spike and prices will have to decrease to maintain current affordability levels.
- The rent / buy equation in NYC is still largely out of whack, even if it has come down from its previously astronomical levels … with rents continuing to fall, it makes no sense to purchase right now.
- The very slow NYC foreclosure process means we are not truly seeing the real distress in the city’s boroughs; Manhattan is not isolated enough to not feel the consequences this distress
- Unemployment is not expected to fall any time soon; its ripple effects will continue to be felt, and then some, as existing owners see no need to move and all potential first-time home buyers purchased during the last 6 months, benefitting from the tax credit.
- Banks can only continue their extend and pretend game for so long before the delinquency backlog catches up with them and us; home prices will then have to be written down to reflect book valuations.
- Nation-wide, housing starts are down; little real recovery can take place without new household creation and this is not on the horizon any time soon.
- The stage is set for a double-dip housing price downturn scenario; the past six months or so was a head-fake before the second phase of this downturn kicks in.

Arguments for upside risk:
- Unemployment is a lagging indicator – the economy always gets well into a recovery when unemployment finally starts dropping (average of about 1 year after the bottom).
- Housing starts are down and excess housing inventory is being absorbed; this is an absolutely necessary step for both housing and the economy to recover.
- Rates will definitely increase and there are plenty of buyers wanting to get in before they reach 7% or 8%. This thinking has already served to decrease inventory and stabilize prices [Each 1% (100 bps) increase roughly equates to a 10% decrease in the price of the home.] Unless you see property prices dropping more than 20%, wouldn't it be worth it to lock in now?
- Manhattan’s rent/buy equation can never be compared to that of the rest of the nation; it’s a unique place that keeps attracting businesses, students and investors, alike. There will always be a premium for living and owning here.
- The weaker dollar is bringing international investors back into the NYC market, the momentum of which is only likely to continue.
- The fact that bonuses were back with a vengeance this year, while not providing a massive cash infusion, has certainly served to boost morale and confidence for sellers and buyers, alike.
- Lastly, the worst is behind us (and, frankly, it was nowhere near as bad as people expected); no longer do we have significant downside potential that would justify material discounts from sellers; we have turned the corner, as evidenced by an uptick in prices and activity at the low-end of the market which will only spread to the higher end.

Given that this market did have an adjustment already, the general consensus that I’m gathering from numerous conversations is that in a worst case scenario, we have another 15% left in terms of decreasing home values, and that’s NOT in the sub-$700k segment. The best-case scenario I hear is a flat to low single digit increases 2010, with low single digit improvements in 2011.

So … what say you, UD readers? First, does this cover both sets of arguments? Second, which side are you leaning towards and how are you quantifying your thinking?

Where are rates going longer term?

Posted by jeff

Sat Mar 20th, 2010 09:07 AM

Since March 2010, Mr. Bernstein has served as Senior Vice President, Research, for AH Lisanti Capital Growth, LLC, a registered investment adviser. This commentary solely represents Mr. Bernstein’s views and opinions as of March 20th, 2010, does not constitute investment advice and does not depict the views of AH Lisanti Capital Growth, LLC.

The great response to Noah's last post...and the fact that I missed out on the excellent discussion that followed, prompted me to write this post. I guess the biggest questions from the discussion thread were, Why is the rebound in New York City real estate sustainable? Why didn't we get down to replacement cost on New York City real estate? Why won't we see much lower prices in a future that promises de-leveraging, slower economic growth and a smaller and less profitable Wall Street?

These questions are difficult enough and I will address them in an upcoming piece. For now please look back at "What's UP with New York City Real Estate" for some tidbits on how New York City is very unlike most other real estate markets. Today I just wanted to throw a graph out there and a couple of thoughts on another question which came up which was; whether to buy real estate when interest rates are low or when rates are high? and the obvious follow-on, where are rates going.

Commercial real estate is very get paid to hold it (unless your a knucklehead and use lots of debt and finance it at rates greater than the cap rate). But in contrast to a treasury bond where you lose value (relative to par) when rates rise, and gain value when rates fall; real estate's income stream is not fixed and often increases in environments where rates are rising (I won't get into real rates vs. nominal rates, which is hugely important but way beyond the scope of a quick post). Commercial real estate values are linked to interest rates, as the multiplier (cap rate) of income is heavily influenced by interest rates, but increased income can partially offset the pressure on values from cap rates demanded by buyers increasing with interest rates.

Residential real estate often acts much more like equities. It is n't valued on it's income generation characteristics (in fact appraisals of residential real estate almost never look at this factor), but rather on the hopes and dreams of future value appreciation (and appraisals are based on comparisons to recent transactions) and thus often in a vacuum versus residential rental rates. This may not be true in certain particular markets like Park City, Utah or Myrtle Beach, South Carolina, where much of the housing stock is rented out for at least part of the year and many unit owners are landlords too. But in New York City, despite its being largely a rental market, there is not as much transmission of information between the individual unit rental and ownership markets. (Of course big players with empty buildings do serious rent-up versus sell-out calculations, but I am talking here about individual apartment owners). Also in many markets like New York City, the rental stock is much different than the real estate available to purchase. It has been noted many times on this site, that the search for a home for a family in New York City often results in the purchase of a co-op rather than a condo and certainly either is preferable to most rental units.

One of our posters noted that perhaps it is better to buy residential real estate when interest rates are high and real estate values are pressured and simply refinance as rates fall. As a general supposition I don't have a big problem with this way of thinking. But the following chart should be self-explanatory with regard to where we are in the long-term interest rate cycle (relevant to those looking to buy an asset with a reasonably long holding period using 15 or 30 year money) and what your intermediate term expectations of rates should be. This is of course barring a permanent deflationary spiral like Japan, which would keep us at zero interest rates until we default on our debt and have hyper-inflation - I think we have avoided that outcome but if I knew that I'd be George Soros. (I know all you Wall Street sharpies, know this chart well, and probably see it in your minds when you close your eyes to go to sleep at night, but this is for the benefit of the rest of the populace).


'Rate of Rebound' From Extreme Starting Point, To Slow

Posted by urbandigs

Mon Mar 15th, 2010 09:31 AM

A: It has been a year since the extreme set in across most asset prices and markets. Sometimes I think we forget just how volatile and how dramatic the markets reaction was to severe credit stresses. It is quite astonishing to see how the mindsets of investors have changed since that time; from complete fear to perceived sustainable reflation. For Manhattan real estate, the next 3 months should start to reflect the rate of rebound from the miserable Q1 2009 data; via the Q1 & Q2 2010 reports. I already discussed the expectation of a very strong y-o-y Q1 report that will be released in a few weeks. When I look back to the confidence levels of market participants exactly one year ago I think about the high level of perceived distress on future expectations, elevated risk premiums due to market uncertainty, and how this affected buyers' offers for Manhattan property. The resulting extreme came on quickly and severely marking a 'starting point' for future stability to eventually build upon. Looking ahead, expect the 'rate of rebound' to slow from this point on as buyers' already priced out the very serious risks that caused the furious adjustment process for Manhattan property. To me, the market continues to trade at an adjusted lower level from peak but at slightly improved levels from the height of distress one year ago.

Asset prices across all classes saw an incredible rise over the course of 2009 as the fed managed to stage a huge 'search for yield/dollar carry trade' for investors. This was especially true for riskier asset prices. The rise was historic only because of the uber distressed levels that we began from. If we look back twelve months ago, even for Manhattan residential property, we must also go back in time & place to a period marked by:

  • immense uncertainty over the banking system and global economy

  • the perception of huge counter-party risks

  • a dysfunctional interbank lending environment

  • tremendous negative wealth effect from plunging asset prices

  • hugely elevated risk premiums as credit markets blew out

  • perceived risk of a systemic collapse of global banking systems & economies

  • Those that understood the nature of the crisis and worked right in the middle of the storm, experienced the most fear. And since the Manhattan residential real estate marketplace centers around a Wall Street that was bleeding half to death, the fear was especially high and dramatic!

    What's my point? Right now we are just over 1 year removed from the height of this fear; and to look back at the changes between the two time periods is quite amazing. The extremes were simply that dramatic and because of that an environment was ripe for a natural market rebound from an extreme starting point! Here is a quick snapshot of some market indexes and credit indicators on March 9th, 2009 and where they closed on Friday:

  • S&P 500 was at 676; Friday it closed @ 1,149

  • DJIA was at 6,547; Friday it closed @ 10,624

  • The VIX was at 49.68; Friday it closed @ 17.58

  • TED Spread was at 96bps, down from 465bps in October, 2008; Friday it was @ 12bps

  • The TED spread, or the difference between the 3-month risk free T-Bill rate and the 3-month LIBOR rate, really captured the extreme nature of the crisis as the measure blew out to over 450 basis points in October 2008 (the VIX blew out to over 80 at this time too); reflecting the markets concerns over interbank credit risk at the time:


    Those moves were not some minor blip in an otherwise general trend. No way. Rather, those moves were signs of the markets' cardiac arrest! The long term average of the TED spread is about 30-50 basis points. Since the credit markets were leading the equity markets for late 2007 and much of 2008, the extreme moves in the TED spread were a signal of the shocks that were to come in both the stock markets and debt markets as we approached March 2009. For Manhattan residential real estate, it was the March stock market lows that really pinpointed the timing of the height of fear for buyers out there submitting bids and sellers hitting them to move property at the time. In other words, there were no strong bids and offers that were submitted "priced in" plenty of future downside risk that had not yet took place.

    Now take a step back. Look at this extreme and imagine what kind of starting point it resulted in for Manhattan real estate when comparing market forces one year later. The progressive improvement in bids for Manhattan property that resulted from the historic rise in all asset classes for much of 2009, began from a highly extreme starting point! That is the key take-away of this discussion. Naturally, the rate of rebound from highly distressed levels will be noticeable and eventually, self-defeating; similar to $150 oil prices causing extreme demand destruction worldwide for the commodity.

    Stocks are a proxy for everything and it should be no surprise that bids for apartments in a market such as Manhattan, improved just like all asset classes improved from that extreme distressed starting point one year ago. For now, its more of a return to normalcy after such extremes of pricing in and pricing out market/credit risk and near term economic uncertainty.

    From my observations over a 12-month period, this market continues to trade at an adjusted lower level from peak in 2007 but at an improved level from early 2009. I expect the next 2-3 quarterly reports to ultimately show this rate of rebound from the extreme starting point; with the largest percentage rebounds in the higher price points for logical reasons. In the meantime, I continue to keep a watchful eye for any signs that the recent market action might soon start to abate. The two biggest macro threats I see on the horizon that can directly affect our real estate markets are:

    1) bond markets reactions to a fed preparing of an exit strategy and the scheduled end to Agency/MBS purchases; i.e. higher lending rates


    2) any disruption to the historic rise in most asset classes (stocks, HY/IG corporate debt, other riskier assets) resulting from the withdrawal of fed guarantees, a stronger dollar and carry trade unwind

    As usual, what is going on today in Manhattan's real estate market does not necessarily have to jive with my longer term macro concerns that we are yet to deal with.

    Signs of Strength: Should Underpin Spring Selling Season

    Posted by jeff

    Sun Mar 14th, 2010 11:13 PM

    Since March 2010, Mr. Bernstein has served as Senior Vice President, Research, for AH Lisanti Capital Growth, LLC, a registered investment adviser. This commentary solely represents Mr. Bernstein’s views and opinions as of March 14th, 2010, does not constitute investment advice and does not depict the views of AH Lisanti Capital Growth, LLC.

    Just a brief post to note the many signs of strength now being exhibited by the economy and mirrored in the stock market. While I had been worried about the stock market and expecting a correction, which we got, I was also worried about the economy's ability to do better than just "Less Worse". While I still see significant overhead supply in the major stock indices moderating further gains, the economy is showing signs of sustainable strength. To wit:

    FDIC figures for early non-performing loans appear to have peaked in Q4.

    Railcar loadings have been running up high single to double digits year-to-year in a variety of categories including steel, automobiles/parts, commodities, and chemicals (away from coal car loadings which have been impacted by high surpluses at utilities related to the slowdown in energy demand and weak cooling demand last summer) for the last several weeks. “Rail traffic trends over the past few months, especially when you take out coal, are consistent with a slowly recovering economy,” said John Gray, AAR senior vice president of policy and economics, in a prepared statement.

    U.S. air traffic has turned the corner, as domestic traffic rose by 1.6 percent, with strongest growth seen by Boston +13%, Baltimore +9.1%, Chicago Midway +15%, Los Angeles +9%, New York LGA +5% and San Francisco +8%, according to the ACI PaxFlash report.

    Freight tonnage is improving. According to Logistics Management:

    "The Cass Information Systems February 2010 Freight Index, which measures the number of shipments and expenditures that are processed through Cass's accounts payable systems, showed that February shipments at .930 was 3.4 percent better than January's .899, but it was down 0.9 percent year-over-year. And February shipment expenditures at 1.569 were 5.6 percent ahead of January's 1.462 and were up 2.7 percent year-over-year. Last week the ATA reported that its advance seasonally-adjusted (SA) For-Hire Truck Tonnage Index was up 3.1 percent in January from December 2009 and was up 5.7 percent compared to January 2009, which the ATA said is its best year-over-year reading since January 2005, as well as its second straight annual increase."

    We are seeing flow through from the better retail sales that have been reported, as manufacturers begin to feel more confident in ordering new equipment. At the least, U.S. companies, which have tightenend their belts, cleaned up their balance sheets and begun to gush free cash flow have the wherewithal to spend some money to catch up on deferred maintenance and revitalize their aging equipment.

    According to a recent article in Transport Topics Online, "truck trailer orders jumped 10% in January from year-ago levels. Yes, the new number is measured against the catastrophic low levels of early 2009. But truck makers at the show had good things to say as well, with one reporting that his company’s heavy-duty truck production was sold out through May and probably soon would be sold out through June. And the May and June sales were for trucks with the new, more expensive 2010 engines."

    Kennametal, the cutting tool manufacturer, whose business is widely seen as a strong indicator of industrial production trends, reported February orders which included the first year-to-year increase in 16 months.

    I do not mean to minimize the real risks I still see in the economy domestically. These include the removal of supports from the housing/mortgage market, and headwinds from continued bank failures and reluctance by banks to lend. Neither do I recommend ignoring the very real threats from macro factors including surging gasoline prices, (which recently broke out technically, and seem to be promising $3.00 + gasoline at the pump again), potential further sovereign debt issues, China stimulus/inflation/bubble concerns. In addition you can add to the list geopolitical risks including, but not limited to, Iraq withdrawal and Iran/Israel nuclear issues which could produce second half fireworks. It's a dangerous world out there, but it has been for a long time. There is no denying, however, that the data flow is to the positive as of late regarding the domestic and world economy. This is why despite the stock market correction earlier this year, the Nasdaq composite and Russel 2000 indices have now broken out to new 52-week highs and are awaiting confirmation of the continued bull trend by the Dow Jones and S&P 500 indices. My expectation is that you will get those confirmations shortly as investors continue to play what looks like a more sustainable economic advance. I still think stock market gains will be limited, but I see a favorable economic backdrop and stock market underpinning spring sales season for New York City residential real estate this year.

    Following The Bids - Mental Math

    Posted by urbandigs

    Mon Mar 8th, 2010 11:32 AM

    A: When I was in elementary school I knew that math was my strongest subject. I recall one teacher that would challenge our class in an exercise she called 'Mental Math', a contest me and a few of my close friends at the time loved and looked forward to. The idea of 'Mental Math' was to shout out a long math problem and see what student can come up with the correct answer the fastest, without writing out the solution on paper. An example would be, 'Okay kids, now tell me the answer to 7 times 6 plus 8 divided by 5 minus 2 times 9 plus 3 divided by 3 plus 9 divided by 2....'. The winner would get one extra credit on the next test; not that it really meant much but to us kids it became more of a contest to be the winner of! I would always be one of the fastest and I loved the next challenge.."17 - is the answer" as I eventually learned to do the calculations in my head on the fly as the numbers came out - always learning to remember where the numbers first came in so I can get the right answer later.

    That fascination with numbers and the rush of the fast paced challenge is what I think attracted me to Equities Momentum trading right out of college. I genuinely loved the rush of trading in and out of positions in a matter of seconds. I started young as my first investment was in SGI, Silicon Graphics to the home gamers, as they made a few of the computer games I always played as a kid. I bought a few hundred shares of SGI at the age of 13 and since then, I was hooked on the markets.

    Now I have a new challenge ---> Manhattan residential real estate. Following where the bids seem to be coming in is a constant challenge, and I love it! If it were easy to follow, I wouldn't be interested in it. I always must admit that the market is bigger than all of us and that what I see out there may not be the actual general trend. The fact that this market is mired in mystery and lacking transparency makes me want to gather more data, parse it, and see what we can come out with! When I tell you real time reports on where I see bids coming in, people yell for REAL CLOSED DATA; and rightfully so. But we all know the lag it takes to close from contract signing.

    Being out there in this real estate marketplace daily eventually gives you a 'feel' as to how strong or weak the market may be at any given time. One example is simply following all the responses of the brokers I talk to everyday and keeping tabs on what the 'individual listings' that my clients become dis-interested in end up doing. Just because a client dismisses a property after a 2nd viewing or a poor response from what is perceived as an offer too low, doesn't mean I stop watching it! I want to know how quickly it goes to contract and ultimately where it sells - so I can gauge how a buyer valued the unique features the property had. Over time, assuming you keep a mental history of what has happened in this market and when, your 'feel' for the market becomes more natural; it takes less effort to focus on multiple variables and understand what it all means.

    Is following the bids an exercise in futility? I don't think so. While I only know where my client's are bidding and how the outcomes are, I still can learn a heck of a lot about the marketplace even if we do not get the apartment. Which is why I can confidently say that today's marketplace is one where bids exist, and sometimes competing with each other. That is much more to say than this marketplace from October 2008 until March of 2009; when bids did NOT exist and sellers had to 'hit a bid' to move property. Today it feels more like buyers are 'paying the offer' or very close to it, to use an old trading term. That is the difference in this same marketplace when comparing two very different time periods: MARCH of 2010 vs MARCH of 2009.

    Here are just a few examples of closed sales where the buyers paid either full ask or more than ask:

    155 W 70
    - 15E sold at Full Ask at 1.699m
    850 Park Ave - 8B sold Over Ask at 4.3m
    10 WEA - 25A sold Over Ask at 1.557m after a price increase in NOV
    333 E 69 - 10CD sold at Full Ask at 3.495m
    210 W 78 - 8A sold for Full Ask at 1.65m
    146 W 57 - 74C, price reduced when it didn't sell in June 09, then sold for Over Original Ask at 3.7m (great example of the progressive improvement in this market over time from early 09 lows)
    15 W 81 - 8G sold for Over Ask at 2.5m
    90 Riverside Drive - 12B sold for Over Ask at 6.125m
    61 Jane Street - 19G sold for Full Ask
    150 WEA - 27M sold at a discounted Full Ask of $1,050,000 and 5% higher than prior sale of $999k in April 2009 (another example of the improvement from early 2009)
    509 Hudson St - #3S sold for Full Ask

    Now you can't cover an entire marketplace with just some examples, I'm aware of this, but these are the things I have been noticing for months now that signal the changes this market experienced over time from exactly one year prior! I mean, what else am I supposed to show if its not actual sales? Even higher end stuff is starting to move again, like the Townhouse over at 178 E 73rd St that sold for $13m after having trouble getting bids in that range for much of 2009 - the contract was signed in late January 2010. A year ago, even 9 months ago, getting an offer of $13m for this proved very difficult.

    There are many more apartments that sold within 5% of the last ask and 10% of the original ask (i.e. 180 E 79th, PHE @ $4.2m or 470 WEA, 14FG @ $2.4m or 1 EEA, 10C @ $3.125m) - a dynamic that depends mostly on how the apartment was originally priced. This is why I say very clearly, 'quality apartments that are priced right are selling fast in today's market'. Not everything is priced right and not all apartments have features that buyers would deem 'quality' worth bidding up for.

    A year ago the bids came in at much lower levels pricing in future downside risk that had not happened yet - fearful or desperate sellers had to 'hit' one of those bids to get a deal done. Take a look at the listing discount of the deals done for 15C at 1165 Park Avenue (20% off Last Ask & 41% off Original Ask) or 9B at 490 WEA (24% off Last Ask & 39% off Original Ask); both contracts that were signed a year ago. Both Listing Discount & Absorption Rates blew out in 2009 reflecting the extreme move this market experienced. I would expect both to come down noticeably based on the data/deals I'm seeing in past few quarters.

    Today offers are not pricing in downside risk anymore and instead, seem to be reflecting emotions of 'missing out on the bottom' or 'losing another quality apartment' more than anything else. For serious buyers faced with frustration over the lack of supply of quality/well priced apartments, a gap up offer all of a sudden becomes something you will strongly consider - feeding the herd-like mentality of this fast paced market. If you are out there everyday, you see this. I simply question how long this will last!

    Then there are those units that didn't close, but I know will close over ask because of information gathered when my clients bid for them: 35 Bethune Street, 205 W 89th Street and 15 W 72nd Street just to name a few. And I'm not including all the broker responses of 'we have multiple offers over ask, doing a best & final soon' to properties I have attempted to setup appointments for in the past months. Follow the bids and keep a mental history of what happened! By doing this you will know not only where this market seems to be trading, but where it recently came from. I consider this to be one of the most important services a broker can offer their client's when devising a buy side strategy and doing a property valuation - where is this market trading right now????

    Do you know?

    VIX Nearing 52-Week Lows

    Posted by urbandigs

    Fri Mar 5th, 2010 04:05 PM

    A: I need to get away from real estate for a moment. Taking a look at the VIX nearing 52-week lows makes me wonder about complacency and how cheap it is right now to buy some volatility? Maybe some puts? Anyway, when the VIX usually gets to this point its a contrarian signal to the markets that complacency might be settling in just a bit too much. The last time the VIX got this low was January 19th, when China's tough talk on curbing bank lending led to a 5-7% adjustment in markets. A hiccup in the grand scheme of things really. But with volatility this low again, I just wonder if a rattle might lie in the near future?

    Here is a quick look at the VIX S&P 500 down 7.37% today.


    The VIX "tracks prices that investors are willing to pay for options on the S&P 500-stock index, often to protect themselves against declines in stocks". As the VIX falls to 52-week lows it is a sign that complacency, or unawareness of dangers still out there, might be settling in. Many traders use the VIX as a contrarian short term signal and buy downside protection while volatility is cheap. It's been pretty spot on so far so lets see what the next week or so brings and if the markets are getting a bit 'ahead of themselves'.

    Measuring UP Square Footage - Is Regulation Needed?

    Posted by urbandigs

    Fri Mar 5th, 2010 08:39 AM

    A: This is a topic I touched on a few times here, and is an old story that gets replayed every 10-12 months or so. Just how 'off' is Manhattan square footage? To be honest, its way off but I think this marketplace has evolved past the point of really caring anymore. Everybody knows that co-op apartment sizes are estimated and I rarely run into a broker anymore that actually quotes some odd total size. They'd be foolish to say something like that given that only condos have the marketable square footage clearly documented in the offering plan filed with the AG's office. Brokers learned, and as a result, so did the consumers that for co-ops the 'how large is this apartment?' question always comes with a roughly estimated number followed by a very clear disclaimer on accuracy! In this day and age, buyer's know they have to take matters into their own hands.

    measure-manhattan-square-foot-nyc.jpgThe Real Deal discusses how the "Inexact science of square footage causing inaccurate appraisals, unhappy buyers":

    "When it comes to square footage in New York City, it's the Wild West," Bill Staniford, the CEO of real estate data Web site PropertyShark. "It's measured in so many different ways."

    And in the current downturn, the difficulty of determining square footage is contributing to a number of other problems, from low appraisals to ruined deals. Staniford, who constantly fields questions from brokers about inaccurate square footage data on file with the city, said using price-per-square-foot as a measure of value is "totally pointless."
    I totally agree and is the main reason why I do NOT use price per square footage as the source for my client's property valuations - rather, I focus on same line comps or at the very worst find a similar bed/bath unit and make a simple size adjustment if the data exists; more on this below.

    The market knows or at least learns very quickly, that marketable square footage is if anything skewed to the upside. Which brings up a very interesting question --> You know those quarterly market reports that we all spend so much time analyzing? How accurate could price per square foot trends really be if the marketed size for 70% of our housing stock is estimated? I guess over the long term one can argue that the trend filters out some of the noise of the inaccurate data.

    Condo's are easy as the marketable square footage is stated in the offering plan; all but eliminating the question of size and making it foolish for the seller or broker to try to artificially inflate! But co-ops? Co-ops take up 70% or so of our housing stock and total size is not listed in the offering plan...and with every co-op sale is a buyer that attempts to value the target property in order to figure out how to bid. Therefore, how do we value or price these things if the listed size is off? Maybe we should start using the # of shares allocated to the unit as a price per share valuation tool? Maybe REBNY needs to implement some regulation on the sell-side that requires every new Co-op listing from a member firm to use an outsourced contracting agency to measure the floorplan/size accurately for marketing purposes?

    The solution MUST encompass most of the market to be worthy - which is why I say that any regulation needs to come on the sell side and not the buy side. I recall being charged about $150 for a professional floorplan to be made by OLR Digital who physically sends someone to the apartment to measure up everything. Is this cost really breaking the bank? What if REBNY required all new listings to be properly measured prior to listing?

    In a commission based industry where the brokers don't earn their cabbage until after the closing, the environment is set up to result in flaws and discrepancies for marketing. Why? Because the broker and the employing brokerage firm doesn't know if they will ever get paid on the sale. That's no excuse, I know. So, maybe REBNY needs to make the employer brokerage firm responsible for professional measurements without penalizing the agent's ad budget? Possible, but not likely in this world.

    My main concerns of this topic are over individual co-op unit valuations and the quality of analytical data for the entire marketplace - if in fact the majority of estimated co-op square footage is artificially inflated. This lowers my confidence level in Price Per Square Foot data trends and calls into question how one may value a target property based on a different apartment line whose total size may have been inflated. Exactly what Bill Steniford talks about in The Real Deal article.

    When I do a property valuation I always look for in-building comps in order of the following priority:

    1) SAME LINE SALE w/ SAME FOOTPRINT - this is the first goal. If my buyer's target property is an 'A' line, then I look for similar 'A' line comparable sales in the same building to do an analysis on. If I find a recent 'A' line to compare to, I just double-check the floorplan to make sure the footprint of the two apartments are identical. This eliminates any flaws in only doing a PPSF breakdown where one of the properties being used may have had its size inflated. I have the same layout, the same line, the sale price and the sale date. Forget the price per square foot method - I'll make my own adjustments for market conditions, renovations, and floor premium or discounts.

    2) SAME ROOMS/BEDS/BATHS - this is the second goal if I can't find a same line to compare the target property to. I always stay in the same building unless the data is non-existent for an analysis. If my client's target property is a 6/2/2.5 (the format of this is generally Rooms/Bedrooms/Bathrooms) apartment, then I look for different lines that may have these exact property features - all in an attempt to compare apples to apples. As you start changing apartment lines, you start changing layouts/views/exposures/natural sunlight/etc..and the valuation becomes slightly compromised and more difficult as the open market value of these types of features in this market are highly subjective on the buy side.

    3) SAME BEDROOMS/BATHS - If I can't find the same r/b/b to compare to, I eliminate the ROOM part of that equation and look for a comparable in the building with similar Bedrooms & Bathrooms. If the size of the both apartments are provided and there is a gap between the two total sizes, I can account for that by taking the sale price per square foot of the SOLD property and multiply that by the gap in size to the TARGET property and add that total to the comparable being analyzed so I have an equal foundation to do an analysis on. Of course the major flaw in this method is whether the SOLD or TARGET property's square footage was artificially inflated. I'll provide an example:

    TARGET PROPERTY --> Apt 14A is a 1,350sft, 5.5/2/2 apt, and is asking $1,595,000
    SOLD PROPERTY (same building) --> Apt 6D was a 1,250sft, 5/2/2 apt, and sold for $1,350,000

    There is a 100sft difference in the two properties, different property line, and an 8 floor difference. If you read my technique for Valuing Manhattan Property you will know that I don't do PPSF valuations and rather I will adjust the two properties to be of the same size if I can't find a similar line to compare to - after this size adjustment, I will do the following adjustments to complete the analysis:

    a) market conditions
    b) light/view/exposures of different lines (floor premium)
    c) renovation differences

    First lets get the SOLD property and the TARGET property of equal sizes by closing the gap using the PPSF of the comparable sale:

    100sft x $1,080 = $108,000

    Since the SOLD property closed for $1,080/sft and the TARGET property is listed as 100sft larger, lets ADD $108,000 to the sale price of 6D and then move on to the other adjustments:

    $1,350,000 + $108,000 = $1,458,000 as a starting point

    The hope is to avoid this 3rd option for a comps analysis and to use a similar line.

    Back to the discussion. The problem is that this is a very solvable problem but I don't think the powers that be have the motivation or the will to put a proper resolution in place that may cost brokerage firms more money to adhere to. It's a man-eat-man world out there and Manhattan buyers learned to fend for themselves. Brokers out there MUST use caution when quoting the total size of co-ops and it might be worth that $150 to simply hire a professional floorplan from OLR to get the exact measurements before the new listing even hits the market.

    Looking Forward To Manhattan Q1 2010 Report

    Posted by urbandigs

    Wed Mar 3rd, 2010 11:16 AM

    A: Lets have some fun here and take some guesses as to what to expect when the Manhattan Q1-2010 report is released in about 4 weeks. One thing is for sure, the SALES aspect of the report will likely show a surge over the prior year; making for some interesting future headlines to come in the mass media. Lets discuss.

    I've discussed the progressive improvement in bids this market experienced since trades in early 2009; and many on this forum took that in the field observation as 'hearsay' without any hard evidence from lagging quarterly reports. That is fine and understandable. While many quarterly reports did catch the slowdown in the pace of decline on a quarterly basis (Corcoran's report also showed a 1% qtr-to-qtr AVG PSFT price increase in deals, although a continued decline in Median prices), it was the Q4 Report that caught an improvement in price action from the prior Q3 report:

    "Overall average and median prices, which include condo and co-op resales and new developments, have continued to decline from a year ago, about 7.8% and 10.0%, respectively. However, since last quarter, price gains were made in overall average and median prices, about 5.5% and 2.0%, respectively."
    I always discussed that we should ignore qtr-to-qtr moves and instead focus on the prior year period to account for seasonality. Since the discussion centered around the extreme fluctuations in the market both on the downside and on the mild stabilization/reflation since then, it is the short term market observations and performance that garnered such a strong response from UD readers. In short, this market overshot to the downside at the height of fear and reflated from the lows as markets in all asset classes surged and priced out systemic collapse.

    It is my belief that the next 1-3 quarterly reports will show this improvement first discussed right here on Timing which report snags it is difficult. As of now, my data shows 1,039 contracts signed in the last 30 Days and the $2M and under market is seeing strong buy side interest. So the market certainly continues to chug along and that will feed the pipeline of closed deals going forward. I have pending sales at 4,532 right now.

    Now, what I think will be interesting is how the media handles the closed SALES component of these quarterly market reports - because the upcoming Q1 report will be rightfully compared to the Q1-2009 numbers. I am on record for estimating approximately 2,400 - 2,600 closed sales for Q1-2010. As you take a look at the chart comparing Quarterly Closed Sales Volume for Manhattan Co-ops and Condos, focus on the BLUE BAR that the upcoming report will be compared to and you will notice that it won't take much to easily beat total closings for Q1-2009 - the report that defined the severity of the downturn this market experienced:


    I put my estimate for Q1-2010 in there as a shaded bar for easy reference. If the number comes out around the level I expect it to, the headline in mass media could read something like this ---> "MANHATTAN APARTMENT CLOSINGS SURGE 100% FROM PRIOR YEAR"...or such. So just be prepared for that.

    As future reports catch up on how this market behaved and improved over the last 6-8 months, the current market at that time of report release may change. So the crazy thing here is that being ahead of the curve with real time reports may present some discrepancies in the future if this market's sales pace and strength prove not sustainable; which I think will be the case.

    The problem is clear: WE NEED REAL TIME DATA so we can see changes as they occur as best as we possibly can. The one problem that I will never be able to solve is the lag from contract signing to closing where the deal price will be kept private until captured by public record. Therefore, the best thing I can do is to provide reports here on where I see deals happening with no hard core evidence to back me up until months later!