A: Fresh from the Greenpearl conference, I wanted to give a plug to my good friend Phil Thomas Di Giulio who was co-founder of both Wellcomemat.com and recent startup Pegshot.com. Phil started the two companies with his partner, Christian Sterner. Phil is da man!
Phil convinced me to do a very brief sneak peak at UrbanDigs 2.0 while at the conference as a test try of his new Pegshot.com mobile upload service. It was super cool!
Sneak Peak at UrbanDigs 2.0
I'm sorry it cant be more at the moment, and yes, its hard to see much in the brief video but trust me these final stages are taking 80% of my time right now. I pretty much stopped everything and am not taking any new clients so that I can get this very challenging and tedious project finished. I hope its worth the wait!
A: Ryan Slack, CEO of Greenpearl Events , founding CEO of PropertyShark.com, and one of Crain's 40 Under 40 of New York Rising Stars in 2007, put together this packed conference and has a great list of speakers covering a wide array of expertise the next two days. If anything, the brokers in this industry should have a great interest in attending this conference. I will be speaking at Thursday morning's panel titled, 'Master Bloggers and Microbloggers' from 8:40am-930am and hope to see some of you there.
I got lucky and will be speaking with some wonderful friends and new colleagues that I am very eager to meet with:
Master Bloggers and Microbloggers
Steve Goldschmidt, Senior Vice President, Warburg Realty
Jonathan Miller, President & CEO, Miller Samuel; and Publisher, Matrix and Housing Helix
Paul Zweben, Residential Broker, Prudential Douglas Elliman
Teri Karush Rogers, Co-Founder & Editorial Director, BrickUnderground.com
You can Register Here.
I will be at the conference tomorrow around 1pm attending other panels if anybody feels like meeting up and chatting.
Hope to see you there!!
Time for a controversial question from The Apple, Peeled … which came first, the shady broker or the shady client? We have all heard of the horror stories of ill-intentioned brokers using bait-and-switch tactics, not showing up for appointments or lying about features or conditions altogether … so many, in fact, that many have attained the status of urban legends. You will find such stories sprinkled throughout the net, shared across dinner tables in bite-size, juicy morsels and relied upon over drinks for award-winning story telling throughout the city (and the country, really). Such stories generate enough emotion to power a small car, it seems.
Less prominent are those tales of clients doing the same on their end.
For some reason, we’ve heard too many of such occurrences recently to keep them all to ourselves. Although they exist on the sales side of the equation, as well, to be sure, they truly flourish in rental land, where the transaction cycle is shorter and more ripe for their full glory. Here is a sampling (names are fictional to protect the innocent and not-so-innocent):
TALE #1: Molly’s mom desperately calls Broker A to beg for help in finding her daughter an apartment this weekend, asking Broker A to please adjust her calendar to accommodate these dire needs as she has nowhere else to turn. Broker A’s heartstrings are pulled, and she spends a good half-day begging other brokers for last minute appointments. Right before leaving the office, Broker A overhears Broker B in the same office letting his assistant know that Molly’s application on her apartment had been approved. It so happens that Molly had been working with Broker B for 3 months now and had already placed an application on an apartment. When confronted on the phone by Broker A, Molly replies “… silence … I’m canceling my appointment” and hangs up.
TALE #2: Ted tells his Broker that he wants to see as many apartments as possible over the next two days because he needs to make a decision ASAP. Ted conveys that he is committed to working with the broker and appears very serious. The broker spends about 5 hours researching and setting over 16 appointments for the said properties, clearing out her calendar to do so. When she sends Ted the itinerary the night before, he notifies her that he’s seen most of the apartments on the list either by himself or with other brokers, and to only show him two of the 16 apartments the first day and one the second day. The Broker goes on to cancel 13 appointments and re-arrange the remaining ones. At 11am, at the first apartment, 10 minutes pass, 20 minutes pass with no sign of life and direct transfer to voicemail, and Ted ends up being a no-show altogether leaving 2 brokers (Ted’s and the owner’s) high and dry.
TALE #3: Jack and Jill finally found their perfect apartment with their Broker. They tell him that they definitely want it, ask for it to no longer be shown and want to move forward ASAP. On New Year’s Eve, around 4pm, they beg for the fifth and final show of the said apartment at which point they hand over certified checks for the non-refundable deposit. The Broker accommodates the request just prior to the evening’s festivities, in full party attire, trekking it to the Upper West Side to ensure that the couple has the apartment. Two days later, after several futile attempts to get in touch with Jack and Jill by the Broker, the couple threatens a lawsuit to get their deposit back via email as they’ve changed their minds. To top it off, they ask high-powered friends to call different people they know throughout the brokerage firm to threaten the same, all the while never picking up the phone.
Tenants aren’t the only ones getting burned out there. Brokers are mistreated all the time … it comes with the territory but can leave a real mark on many. After enough of these instances, after enough times of going above and beyond for sincere-sounding tenants, they toughen up. After enough instances of tenants renting apartments behind their backs that in no way met the criteria they described of their ideal home, they start hedging their bets and showing different kinds of apartments anyway (leading many tenants to respond with “this is NOT what I said I wanted! didn’t you listen to me?” After enough tenants going directly to a building to bypass the broker altogether (with the leasing office calling the agent telling him/her so), they stop providing actual addresses. They refuse second or third showings without the completed application upfront, or pressure tenants to sign the lease / provide the deposit the very same day of the apartment visit. They realize that every minute or every hour they spend on long conversations or on long, draw-out appointments may amount to absolutely nothing and, well, they get jaded. (To those who believe this post is too one-sided, you may wish to read the one on the shady broker practices on Craigslist.)
Noah further points out:
"This applies to sales as well. All too often the story is only how shady brokers are, because lets face it, people want choices and the option to pick and dump whomever they want as they see fit irregardless of the quality of service provided - the broker becomes a great scapegoat for any buyer that is too emotional or too confused about the buying process. As a broker, you learn to fine tune your instincts to maximize buyer loyalty and minimize the occasions where a buyer will use you and then dump you - something that takes years to do and unfortunately, many bad experiences need to occur for the agent to see the signs of these types of buyers. Over time, the agent learns when a buyer is playing you or wasting your time and tends to focus on the clients that both respect their time and the service that they bring to the table. Trust me, not every buyer does."
The moral of the story is that, if you’d like to be treated professionally and with respect (which you should expect for sure), karma would suggest you do the same in return. Be honest, respect others’ time, and stick with one person. Not only will your experience be infinitely more enjoyable and productive, but you can prevent the birth of a shady broker in the process, benefitting generations of renters and buyers to come.
A: It's time to put the statement 'Bidding Wars' to rest. It's just way too misleading and infers that there was a broad change in price action across the market. When readers see MSM articles titled, "Bidding wars now run-of-the-mill", they mis-interpret that title to mean brokers are yelling how prices are at peak levels again and you better buy now before you miss it. In reality, that interpretation is far off. What you need to know is, that at all times in the market there are 'multiple offer situations' happening. Its highly individual and linked to the motivation and pricing strategy of any one seller. In the end, if you price low enough you will get multiple offers; does that mean the market has shifted? Of course not. Its only on certain occasions that the market sees a shift in inventory, sales pace, and buy side psychology all at once that its worth discussing as a possible changing state of the market. I believe we recently came out of one of those occasions.
Many people wonder why any buyer would even participate in a multiple offer situation. Its easy for sideline buyers and renters to wonder this because they don't know what the individual situations surrounding multiple bidders may be. I often find that my motivated clients with a time pressure to close on a property, only need to lose one sought after property to a higher offer to trigger an attitude change on how the next strategy might be implemented.
In The Real Deal's recent article, "Bidding wars now run-of-the-mill", I noticed this very interesting comment by a reader:
"The only way buyers learn from a bidding war is when they lose the apartment, that way they don't hesitate the next time."There is a lot of truth to that statement. I have seen buyers swear they will never get involved in a situation where multiple offers were submitted and a best & final situation declared, only to change their mind completely once they lose a property or two of serious interest.
That kind of buyer originally thinks:
a) I will control the negotiation
b) The place is worth ONLY what I am willing to pay, nothing more
c) I will wait for the seller to lower the price and/or get more motivated to deal with me
d) Why hasn't this already sold? Where are the bids? There aren't, therefore I am right and the seller is wrong on what their place is worth.
...only to see the property of interest go to contract leaving them wondering who could have stepped up and what price they paid? If the situation was a multiple offer one and the buyer took it easy, its when they lose the deal and see that CONTRACT SIGNED update on the website that they start to believe maybe, just maybe, there are other ready and willing buyers out there bidding on Manhattan property.
Either way, to experience these situations as a serious and motivated buyer is to change something inside the mindset of that buyer. The end result is a buyer that is much more likely to get more aggressive the next time they find a property of interest, after learning of the failure to secure the deal by prior strategies.
Now take a step back and look at the market as a whole. As I said above, "Its only on certain occasions that the market sees a shift in inventory, sales pace, and buy side psychology all at once that its worth discussing as a changing state of the market." One of those times in my opinion was this past January and February. Looking back, I saw the confluence of...
a) a sharp decline in Active inventory trends as a result of the sustained strong sales pace starting from mid 2009, plus...
b) a sustained uptick in sales pace, plus...
c) months of sales seeing the most desirable and properly priced properties go to contract and close, plus...
d) progressive improvement in buy side confidence leading to even the most skeptical buyers seeing targeted properties go to contract...
January and February saw buyers scrambling to bid for whatever new and desirable property hit the market; and that was remotely close to being priced properly. As a result, multiple offers were being submitted on a much wider pool of properties at the same time - reported to you in late February. Brokers picked up on this change. My clients experienced at least six of these lost deals over those two months before securing their deals for a new property just listed on the market.
The data that shows this best is the sharp decline in both Listing Discount and Days on Market trends from Q4-2009 to Q1-2010; courtesy of Miller Samuel - View larger image:
History usually shows that these types of mini-euphorias, which I described as starting from an adjusted lower level from peak, don't last long. And I believe this to be true as of now. While the market continues to seem strong to me, its a bit "less frenzy-ish" than it was in February & March. Likely the result of rising inventory and a slight turn around in demand as many buyers already pulled the trigger and now await closing.
The Skinny: Followers of Manhattan real estate constantly ask for state of the market reports and naturally, the journalists out there go to the brokers for answers. I'd like to believe the brokers being interviewed are accurately reporting on what they are seeing; but of course can only trust myself and the colleagues I have learned to trust over the years as to what's going on out there. So when I see comments like, 'Broker's lies to make you jump in! Listen to them and you're dead!', and 'Brokers are liars!', I see how a simple article can be mis-interpreted.
The marketplace saw a confluence of forces that led to a hectic first few months of 2010; forces which took many months to embed into the mindsets of the buyer pool in this market. There are reasons why buyers get aggressive towards property newly listed or submit a 'gap up' offer when there are other known bids in. And it probably has something to do with what that buyer just went through for another property. This occurs at some level at all times in a healthy marketplace, but on occasion it affects the broader market across price points at the same time. I believe we just came out of one of those occasions.
A: I must admit it is a bit strange when the apartment you used to own hits the auction block. Its the same apartment I blogged about right here on UrbanDigs way back in JAN 2006 when I turned my JR4 into a 2BR for marketing purposes when I decided to sell. Now the unit is active on Bid on the City with a starting bid of $799,000. Weird.
When I owned that apartment the only major thing I did to it was renovate the terrace. I added lattice wood all around for privacy, installed planters with ivy to grow into the lattice, a cast aluminum table with umbrella that seated 6 comfortably, a BBQ, a hammock, landscape chips (not an easy job when you do it yourself), a shed, and plants everywhere. I can't tell you how soothing it used to be to come home after a long day of work, open my terrace door, play with the dogs for a while and then take the hose and water the plants and terrace tiles. Its just something that most apartments in Manhattan can't offer.
I have no idea what that terrace looks like today but the space was awesome! The embedded picture shows you what it looked like after I finished it back in late 2002 or so.
I easily spent 11 out of 12 months a year out on that terrace, eating breakfast in the sun, drinking cocktails and wine on the nights and weekends, and lying in the hammock on the hot summer days. I especially loved playing with the dogs who loved it when it snowed. A terrace apartment like that doesn't come around too often and for those who admire outdoor space, I would certainly check the place out.
I know the new owner gut renovated the kitchen, likely a $35,000-$40,000 job. Not sure what else was done. I sold the place for $935,000, all cash, back in early 2006 and closed in July 2006. And that was after turning down a $950,000 offer a few months prior - yes, I got greedy in the first few weeks of showing and thought I could get more (I detailed this story into a discussion on The First Few Weeks for sellers). The offering plan states 1,069sft and the terrace is about 650sft or so. Total monthlies today look to be about $1,683/mth, about a $320 per month more than when I sold it in 2006.
My feelings about seeing my old place on an auction site like BOTC are mixed. On one hand I think I made a great sale; although a year or so before the peak. On the other hand I feel like that apartment should never be auctioned off. And yet I feel like all I really want is someone who really appreciates outdoor space to step up and buy this place and enjoy it for what unique feature it offers -- the terrace. That apartment is all about the terrace, always was and always will be. I'd be lying if I told you I am not insanely curious to see how that auction goes, because if there ever was a unit that should do well in an auction type setting, it is this one.
I was hesitant to write this piece at first, but now I feel like maybe there is someone out there that is perfect for this apartment who may not know that the auction takes place on April 27th; ironically one day after my birthday. I do feel like perhaps it was meant for me to step up and buy back the apartment that brought so much happiness and entertainment for me and my family. But unfortunately circumstances change and that apartment could not fit the needs we have for the years to come. So hear I am wishing the auction good luck!
A: Ahhhhhh Jon Stewart, never disappoints. Ehh, I need some afternoon humor as this data work is driving me crazy. The project is in the final stages of development after a major structural upgrade with source data, but unfortunately we will not be able to get this up by May 1st. I'm hoping the delay will only be a week or two. Hang in there and please know that content will be light until this mission is accomplished!
So, can someone explain what these guys did to cause the SEC to take such drastic action against the firm that does 'gods work'?
Explanation #1: "Lets treat GS as if it were an antique car dealer, an exotic car dealer..."
Explanation #2: "If Im buying a meal from you, I want to know that the meal is actually nourishing for me when I give you money that you are not selling me a poison meal betting that I am going to die.."
Explanation #3: "Its sorta like the Mets playing the Yankees, but the manager of the Mets gets to pick the Yankee lineup.."
Explanation #4: "When you buy a used car you want to buy one that is certified right? So you buy the car and it breaks, they shouldn't have certified it as being certified, because it wasn't...my used car analogy, do you think this explains to folks what was going on here?"
A: The fraud charge news today is really not a surprise. What is surprising is whom it came out against and from what I am reading, the blatant nature of it. In a nutshell, Goldman is charged with misrepresenting to clients who picked the quality of the 'stuff' that was bundled into a CDO called Abacus 2007-AC1. This is the kind of news that can change things quickly. Lets see if the cockroach theory goes into effect here now that the King Goldman cockroach is already out and about.
I explained in layman terms how Mortgage Backed Securities work (MBS), the stuff the fed ended up buying with $1.25Trln of printed money, back in August of 2007. The charges against GS today have to do with Collateralized Debt Obligations, a.k.a. CDOs. The CDO was a compilation of the bottom tranches (BBB rated levels of the tower) of other subprime mortgage backed securities, put together to make a new tower of structured debt. This new tower of BBB junk was then sliced and diced further so that the top levels got AAA ratings - therefore gaming the ratings agencies to place a AAA stamp built entirely from BBB crap. Now the BBB crap can be sold to institutional investors. And there is your profit system.
Synthetic CDOs got there cash flow by selling credit default swaps against other CDOs, sending the insurance premiums to the investors. The buyers of the CDS's that made up the synthetic CDOs were basically shorting the subprime mortgage market. This is where the issues come into play.
In this case against GS, it is believed that Goldman created these synthetic CDOs and used Paulson & Co. to hand pick the 'stuff' that went into the security: likely the CDS on the worst CDOs out there. Then Paulson bet against the thing and profited handsomely. That is when you see this in the SEC's Fraud Filing today:
"GS&Co marketing materials for ABACUS 2007-AC1 – including the term sheet, flip book and offering memorandum for the CDO – all represented that the reference portfolio of RMBS underlying the CDO was selected by ACA Management LLC (“ACA”), a third-party with experience analyzing credit risk in RMBS.Paulson asked for it, and Goldman set the deal up for a $15,000,000 fee from Paulson; so the SEC says. Since Paulson bought the CDS on the lowest levels of the CDO, the investors loss of $1,000,000,000 became his gain. One of the internal emails the SEC caught stated this: “One thing that we need to make sure ACA understands is that we want their name on this transaction. This is a transaction for which they are acting as portfolio selection agent, this will be important that we can use ACA’s branding to help distribute the bonds.”
Undisclosed in the marketing materials and unbeknownst to investors, a large hedge fund, Paulson & Co. Inc. (“Paulson”), with economic interests directly adverse to investors in the ABACUS 2007-AC1 CDO, played a significant role in the portfolio selection process. After participating in the selection of the reference portfolio, Paulson effectively shorted the RMBS portfolio it helped select by entering into credit default swaps (“CDS”) with GS&Co to buy protection on specific layers of the ABACUS 2007-AC1 capital structure.
Given its financial short interest, Paulson had an economic incentive to choose RMBS that it expected to experience credit events in the near future. GS&Co did not disclose Paulson’s adverse economic interests or its role in the portfolio selection process in the term sheet, flip book, offering memorandum or other marketing materials provided to investors."
Shady? Clearly. Clear? Not so much. And so went the engine of subprime mortgage backed securties and its derivative offspring, the CDO. Americans who should never had bought a home in the first place, became ground zero for the entire scheme. And now, the chickens are coming home to roost for the gamers. Expect more charges in the months to come as the inner workings of the core of The Great Recession come to light.
A: From our dear all knowing Fed; the same fed that said subprime mortgage risk was contained in early 2007. You know my thoughts on our local market; and I work here!
From The Fed's Beige Book (Second District - New York District):
Manhattan's housing market remains sluggish, though there are signs of stabilization, especially in the rental market. Co-op and condo sales transactions were reported to have doubled in the first quarter from the depressed levels of a year earlier but were still down modestly from the 4th quarter of 2009. Prices were also down modestly for the quarter and continued to run roughly 20 percent below a year earlier, with milder declines on studio and 1-bedroom apartments but steeper price drops on larger units. Manhattan's apartment rental market showed further signs of stabilizing in March: rents edged up and were down just 1½ percent from a year earlier, though vacancy rates rose modestly.What are the buyers or other brokers out there seeing?
A: Okay so my headline could be a bit better. The reason I have fewer real time reports from the field is that most of my clients that intended to purchase a new home, already have. I have nine deals done in the last two quarters, five of which sold and four of which are still pending. Currently I have two active negotiations ongoing with a third on its way. But my schedule is no where near as hectic as it was for the first three months of 2010. That means, I am not out there viewing property and submitting offers as actively as I was for the past 6-8 months or so - as many of my clients are aggressively looking for months before ultimately signing a contract for their new home. However, I thought it would be interesting to see how the dollar's rise might affect a foreigner who might be looking to buy in our market over the past few months. The findings may intrigue you.
Lets go back in time exactly 5 months: HOW HAS CURRENCY TRENDS AFFECTED PURCHASING POWER FOR BUYERS IN EUROZONE AND IN THE UK?
First Step: Put the currency moves into perspective! To do this, all you need is to show how much less house the Euro/Pound can now buy over here compared to only five months ago by doing some reverse math. How many US dollars could 1 Euro buy today compared to only five months ago? Here is a chart showing the decline in the Euro/Pound against our almighty US dollars (I cant believe I said almighty).
November 13th, 2009 - 1 EURO buys $1.4892 US dollars
April 13th, 2010 - 1 EURO buys $1.3571 US dollars (updated 10:15am)
Next Step: Take an example and convert the currency! Here is how the math works out for a buyer with say E1,000,000 (Euros) to convert to US dollars and buy real estate in Manhattan.
November 13th, 2009 (5 months ago) - E1,000,000 BUYS $1,489,200 worth of US real estate
April 13th, 2010 (today) - E1,000,000 BUYS $1,357,100 worth of US real estate
Based on currency trends over the past five months, look at how much less house an investor with Euros can buy right now of US assets - including Manhattan real estate! In this case, the foreign investor can buy $132,100 LESS HOUSE! All this because of the rising value of the US dollar! If it were British pounds and the same time period, the 1M pound investor would see a $124,000 reduction in purchasing power. All on currency trends alone.
Now, most will ask why I stopped short at five months? Did I cherry pick that time period? Why not go further back? Fine. If you want to go back two years ago, the EURO was at $1.5954 against the US Dollar and to compare to today would mean a 1M Euro-investor would lose more like $230,000 of purchasing power compared to where the dollar is today. A one year trend would show a slight increase in purchasing power to today's rates.
I stopped at five months because that is where the most recent dollar rally started and the move was noticeable and sustainable thus far. In other words, a trend could be in place and we should keep our eyes on if it continues. We are at now now and buyer psychology tends to absorb market forces over the very near term, say for the past few months both behind and what may lie ahead of us - markets are future discounting mechanisms and investors love to place bets on recent information and trends. Certainly buyer psychology is nothing like it was if we go further back in time, say 12 months or 18 months ago. Those fear days are looong gone. So here we are today, in the midst of a 4 1/2 month rally in the US dollar, and wondering how foreigners might be viewing our markets?
My opinion has to be that investors savvy enough to put money to work in foreign real estate markets certainly should have a pulse on currency trends; stronger dollar = less purchasing power of foreign investors. My next opinion would be that foreigners that already bought Manhattan property on currency trends alone, would be more willing to sell the investment now that the asset has risen in the local currency. If the current trend continues, both these opinions may start to mean something.
Brokers have a tendency to spin everything positive explaining how its always a good time to buy - typical of any commission based industry. Which is why I was stupefied by this MSNBC article in late March, "Foreign buyers return to Big Apple real estate: Dollar’s rally prompting some to jump in before property gets too pricey":
The dollar's recent rally, rather than putting off foreign buyers, is encouraging them to jump into the market before it rallies further and drives up prices, insiders say.Ummm, ok. So I guess the spin goes something like this:
"People are thinking it might run away from them because there are these predictions the dollar will even go further," said Richard Martin, specialist at DE Capital Mortgage. "We are talking a lot about foreign borrowers lately."
Manhattan property prices rally as US Dollar weakens and entices foreign demand
Manhattan property prices rally as US Dollar strengthens and foreigners fear runaway prices
Foreigners flock to US dollar based assets before its too late: Manhattan property benefits
Anyone else confused by this? Now Im not saying foreigners are fleeing our markets; that is to mis-interpret this discussion. The reality is the reflation trade mentality and boost in confidence as all asset classes benefit from a fed engineered carry trade environment, is in play both for local buyers and foreign buyers. Tons of money was made in the last 12 months and will be put to work in our market. What I'm saying is that the purchasing power of foreign dollars has declined noticeably in the last 4-5 months: and its worth a discussion!
A: If it is, that means an extended period of rising rates for borrowers. I can't help but get that long term 10YR US Treasury chart that Jeff wrote about in late March out of my head. The secular bull market for US treasuries is close to the 30 year mark now and the run was nothing short of spectacular; marked by the culmination of fear in late 2008 sending 10-yr yields plunging down close to 2%! It was the two month period from November and into December of 2008 that saw truly mind boggling moves in the ten year - reflecting the extreme environment at the time. Its timely to discuss this again because about 16 months later, 10-yr yields are now at the same levels they were before that volatile period. Which brings us to whether the secular bull market for US Treasuries is over, issuing in a new stage of end game?
Is the long gold / short treasuries texas hedge the trade of choice right now? With gold showing great strength even as the dollar rises against other major currencies, it should be crystal clear that the precious metal's demand is less of a US dollar hedge thing and more of a hedge against global fiat currencies thing. The comment thread in the last gold discussion over a year ago (I try to limit these discussions to once/twice a year) brought out lots of emotions and arguments supporting the rise of gold as an inflation-dollar destruction hedge only relationship. I tried to explain my view in the simplest terms:
"The gold rise is NOT a US dollar hedge here. Gold is finite, and paper is unlimited. In a world of printing presses, they cant print more gold. Worldwide Govt's/CB's are facing the same severe deflationary winter; and reacting in same way. Runaway Inflation is a dream ways off. Can gold rise at the same time your dollars gain purchasing power? Yes."Even Soros recently announced a 152% increase in gold holdings as he anticipates the UK to further devalue their currency. It seems to me a rise in yields will likely be accompanied by the surge in gold that many of the gold bugs out there have been waiting for; and at some point it may even get silly/parabolic.
The recent strength in gold prices makes me worry about whether the rise in yields has entered its beginning phase? If so, its something that borrowers will have to adapt to for many years to come. The NY Times discusses: "Consumers in U.S. Face the End of an Era of Cheap Credit":
Even as prospects for the American economy brighten, consumers are about to face a new financial burden: a sustained period of rising interest rates. The shift is sure to come as a shock to consumers whose spending habits were shaped by a historic 30-year decline in the cost of borrowing.Clearly the bond king thinks an adjustment is under way for treasury bonds and that the era of cheap money will certainly over; by looking at his portfolio he is putting his clients money where his mouth is. But are we prepared for this? In my opinion, no way! Especially the younger generations that turned into first time borrowers in the past 4-5 years and only know a world of ultra-cheap money. Geez, it was only 8 years ago when I took out my first loan at an interest rate of 7 1/8% and thinking 'I did great on my rate'! My how times changed.
“Americans have assumed the roller coaster goes one way,” said Bill Gross, whose investment firm, Pimco, has taken part in a broad sell-off of government debt, which has pushed up interest rates. “It’s been a great thrill as rates descended, but now we face an extended climb.” Nine months ago, United States government debt accounted for half of the assets in Mr. Gross’s flagship fund, Pimco Total Return. That has shrunk to 30 percent now — the lowest ever in the fund’s 23-year history.
My questions on these topics right now are:
How long can the fed constrain borrowing costs and when will market forces at the longer end of the curve start to behave independent of fed policy?
Is now the time to buy treasuries, in anticipation of a reversal in asset prices after the historic rise?
How will the world perceive $1,500 gold if the precious metal starts to go parabolic? Will we mis-interpret the signal as a hyperinflation threat sending bond yields surging?
If we have an adjustment in treasury yields, will it be fast & furious to the new level or slow & methodical as the fed would like?
The fed ended their US treasury borrowing program at $300bln, surprising the markets when it was announced? Was this intentional and do they see a need in the future to use these final QE bullets to support treasury prices if a selloff does occur?
How will buyers in the fastest and greatest real estate markets in the country react if borrowing costs do adjust higher? At what level will it start to mean something? 5.5%? 6%? 6.5%?
Will Howard Lutnick be proven right on his call of a constraining of treasury yields in 2011 or 2012 as the second wave of the credit crisis hits home - sending yields lower and killing the short treasury bets?
DISCLOSURE - I only have 2 longer dated gold calls right now. I sold my GLD position and shorter term call options about 5 months ago with the hope of buying back in at lower levels. That did not happen and I never got back in. With gold rising as the dollar rises, its just another sign of strength for the precious metal. Watch for a breakout over 1,220/oz or so.
A: I say 'touch' because at this point, that is all it really is. After a 70%+ rise in equities, having a down day in today's world seems to be as much of a surprise as if the Fed would hike rates intrameeting; which we know ain't happening anytime soon! Is it me, or does it seem like markets just go up everyday? Ah, the environment where complacency sets in. Today the markets are getting a whiff of renewed Sovereign concerns over Greece. Portugal and Spain are not far behind. While it means nothing yet and with high yield still 'en fuego', it's something to watch as a potential threat to the broader market recovery. If there is one thing I learned as a trader, it is that you never know when markets will all of a sudden deem a piece of news as a 'trigger' for a new market selloff. This is what makes timing the markets so difficult as the markets can stay irrational way longer than any one investor can stay solvent!
Taking a break from Manhattan real estate today. Here is a chart showing you a 1-YR chart on 5YR Sovereign CDS spreads for Greece, Portugal and Spain - the P, G, & S in the so called PIIGS concerns (chart courtesy of my old trading buddy Anthony over at Momentum Trading Partners):
As worries rise over the ability to repay government debt, the cost of insuring those bonds rises with it - this is measured by the widening spread of Credit Default Swaps. The chart above shows you the markets worries. The spread widens as the annual amount it costs the buyer to protect against default of the insured contract rises. The spread is expressed as a percentage of the notional amount.
From FT Blog:
"Greece’s CDS spreads spiraled upwards today, providing a reminder that the sovereign’s problems are far from solved. The country’s spreads rose to 400bp, 50bp wider than Thursday’s close and the first time it has reached this key level since Feb 24. The widening appears to have been sparked by concern about bond issuance and the rate that Greece can borrow from the EU. In what appears to be yet another example of the disunity within the EU, Germany is in conflict with its fellow members over the interest rate that will be charged to Greece if it taps the emergency loan package agreed last month. According to reports, Germany is opposed to Greece being lent money at the same rate Portugal and Ireland fund, believing that Greece’s fiscal position merits a higher rate."I repeat, we had our brush with these issues and so far they have amounted to nothing more than a case of fleas that the market ultimately brushed off. But given where we came from and how hot the high yield market has been lately, its only a matter of time until what we consider to be the same old news, is reacted to quite differently by the markets. Since most people follow the stock markets as a general indicator of economic health, rarely do they focus on the markets that may lead equities one direction or another. In late 2007, it was the ABX and Corporate Debt markets that flashed the big time warning signs, and stocks cratered after.
When a trade has been working so well for so long built upon Fed guarantees and liquidity, I always look to see what may trigger the party's end. As a HF buddy of mine likes to say, 'it works until it doesn't anymore'.
A: I've often been told that when I complete my vision for this site and the end product is launched, that brokers will hate me! That brokers will find a way to discredit me, find a way to ruin the brand of 'UrbanDigs' that was built from years of commentary on the markets, and find a way to run this site to the ground. As I get closer to releasing the product that took so long to put together and build, do I really have an uphill battle against me? Is a revolt soon to be at hand?
Sometimes I just don't get it. Why are brokers so against the release of information? Is the foundation of this industry really built upon obscurity? Will the release and publishing of accurate data really affect the way business is done here?
I know I am not alone in this fight for Transparency; Michael Smith, CEO of Streeteasy.com is one of the bigger believers in it and his efforts are now well known. It took me 3 years of efforts to get a direct connection to the Rolex broker sharing system and a specific user agreement on what we are allowed to publish and redistribute - something we will adhere strictly to when we launch. Of the firms that said no to me were OLR and PropertyShark; by the way propertyshark was just bought out at least telling me that the demand for information is reaching investors. Streeteasy listened to my pitch and I spilled my guts on what I wanted to build, but in the end an expanded partnership was just not meant to be. We continue to be on very good terms and I hope it stays that way.
I remember the battles that Streeteasy said they were fighting as brokers attempted to prevent their listings from being scraped and published. That is until the brokers realized that the target consumer was using Streeteasy to find their agent's exclusive listings and sending over tons of traffic; and traffic means more potential clients and deals. So, what started out as a fight against this information turned into an embracement of this engine of consumers.
Are brokers and brokerage firm executives so narrow minded to think that innovation and transparency will kill their business models? Or the commission structure of this industry? Or both?
Everywhere I look I see more innovative business models are entering this marketplace and looking ahead nothing is going to be able to stop this progress:
Clearly innovation is happening! So are we to believe that brokers are really afraid of transparency? The days of hiding listing histories and selecting only the comparable sales that support an argument for a higher offer are done! Over! Bye bye! Never to come back again. The consumer has too many resources at their disposal to find the truth, and it will get more and more difficult to 'pull a fast one' on the masses as time goes on.
If the fight against transparency is to protect a higher commission standard in the industry, I think that is a losing battle too. In the end, innovations tends to make markets more efficient and I see no reason why this market would be any different. Although discount models have tried and failed to infiltrate this market (Foxtons comes to mind), I doubt the innovations will stop there. More ideas will eventually come through and one will ultimately hit. Who knows what that model is and who knows when it hits the market, but I am yet to see a really intriguing model designed for sellers to make the marketing process more efficient and cost effective when compared to the full service brokerage model currently in place. Up until now, most of the innovation has been launched with the buyer and broker in mind.
In my view, its the consumer that drives the success or failure of the innovation. Its up to you guys! Plain and simple. You can have the best idea in the world, but if nobody uses it, what good is it in a market as fast paced as Manhattan real estate? Streeteasy happened to do it right and with the consumer user experience in mind; the users came first, the brokers followed. More will come.
Any brokers fighting transparency are fighting innovation and progress; and to me that is a losing battle. Why fight it? I mean, is providing real time data, improved data I should say that more accurately reflects what is really going on out there, a clear & present danger to individual broker business models? In my opinion, no way! In fact, I think it will help the broker service their client. Individual brokers run their own business and craft their own model; they are as successful as their model and networking/referral reach permits and usually is measured based on the quality of service provided to their clients. Higher quality of service, more repeat/referral business. There is a usually a close attachment between the relationship of any one buyer/seller and any one broker and the human element will always serve a purpose.
I really wonder if what some people tell me will prove true after I release this new platform. Will bad press start to come along to discredit my efforts? Will brokers start a legal battle to prevent the publication of the data I will present? Will firms do something more rash, like remove their listings from a private sharing system to boycott the progress of transparency in this market? To this I say, NOT IF THE CONSUMER DECIDES TO USE IT!!
Embrace innovation and accept that the old model is dying. If the world is changing, either you adapt or you slowly die out. I bet it will be the agents that are losing business to more cutting edge & successful brokers out there that will use 'transparency' as the cause. I can't tell you how many times I heard brokers say, 'ugh, this streeteasy is killing my business, why does a buyer need me'. To that I respond, oh really, is streeteasy really to blame or is it yourself? Buyers and sellers will always desire service, and innovation will make it easier for them to get. But nothing can replace good old fashioned advice from an active broker that is on top of their game, on top of this market, and has a good pulse on current conditions to which they can properly advise a buyer or seller.
A: As you browse all the Big Brokerage reports you will see that there is a story to tell about what this market experienced. Although the brokerage reports have variations in how they report on the first quarter of 2010, there are similarities that I would like to point out. The bigger picture on recent market activity is clear in my mind and confirms what has been discussed on UrbanDigs for the past few months.
As discussed earlier in the month, I estimated 2,400 - 2,600 sales for the first quarter of 2010 reflecting the sustained rise in sales activity since early 2009. According to Bloomberg's, "Manhattan Apartment Sales Jump, Buyers Seek Bargains":
The number of sales soared to 2,384 from 1,195 a year earlier, New York appraiser Miller Samuel Inc. and broker Prudential Douglas Elliman Real Estate said today.So readers should have been prepared for the headline of surging sales in Manhattan that is reflective of the past 2-5 months of market activity!
To make things easier for you guys, I made the following table that clearly shows the quarter-to-quarter and the year-over-year movement in Market Wide Average/Median Sales Prices from the Big 3 firms and Streeteasy.com:
Hopefully this confirms for you why I described the relative quarter to quarter improvements in past months; as I saw the bids improve. Brokers with experience and a stable business in the field everyday can easily see the uptick in sales from the depressed levels of 2009. What was more difficult to get a sense of was what everyone wants to know about: PRICE ACTION! What is going on with prices!
That to me is the ongoing challenge. I should reiterate that lagging quarterly reports that show price action really capture a deal that was signed into contract some 2-6 months earlier! To me, the best snapshot of where bids are and where this market is trading today is at the moment the contract is signed - so it will always be a challenge to close this gap before the report captures the sale and analyzes the market as a whole. For a good discussion on understanding this lag and how the quarterly reports work, please read "Understanding The Lag w/ Quarterly Reports".
By sifting through all the Big Brokerages' quarterly reports, I am seeing a clear trend that:
Therefore, as I said in previous discussions, "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". I think I am now getting more confident that the extremes of price action this market saw were spread out due to the natural lag and ultimately reflected across Q2 & Q3 reports of 2009.
Therefore, I would expect one of the next two quarterly reports to show the y-o-y progressive improvement in price action this market has seen since early 2009; again, captured and reported to you guys at a big time lag. These reports will be released July 2nd + October 2nd respectively; and I look forward to confirmation of the real time reports I have been discussing here for the past 4-5 months as I saw the changes occur.
Moving on from here, I see difficulty in sustaining the pace of rebound from one year ago and would expect the market to remain flat even as future reports start to reflect the improvement in price action I discussed. If something changes, I'll report on it. If you want to keep it real and timely, keep it here!