A: If 2009 was the year of net effective rents, then 2010 is shaping up to be the year where the concessions dissipate. For anyone using rental rates to gauge the strength of the Manhattan rental marketplace, I say good luck! Why? Because it was the concessions of 2009 that the hit to rental rates revealed itself through; NOT just the rates themselves.
In this marketplace its protocol for the renter to pay the brokers fees. So when the market does turn sour this is usually the first concession offered to consumers by the landlord. The way it works is simple. When demand is slow, the first concession kicks in as landlords call the big rental firms and tell them they are offering 1 MONTH's OP (Owner Pays) to the brokers who bring in a qualified tenant who agrees to the market rate. The end result is the brokers do not have to charge the consumer their fee, flooding the market with NO FEE and LOW FEE rental options.
The second concession tactic in tough times are offers of free months rent when signing a 12-month lease. Usually the offer is 1-month free when you agree to sign a 1-yr lease (effectively the 13th month is free) and 2-months free when you agree to sign a 2-yr lease. The final, and strongest yet less desired, tactic to move property is for landlords to lower the asking rents; 2009 saw all three of these tactics implemented. Therefore, the decline in rental rates were somewhat muted and did not accurately reflect the deals the tenants received in response to the market adjustment.
The WSJ reports, "Renters to Pay Fees Again":
At least three major Manhattan landlords have decided to stop paying broker's fees on some rental properties, signaling that many tenants need to brace themselves for extra expenses when apartment shopping.It's clear supply has come down as demand has picked up progressively with time; looking at the map below you can see that vacancy rates dropped about 105 basis points from 2.28% to 1.23% year over year; courtesy of Citi-Habitats via WSJ.com. Landlords usually don't cut back on these offered incentives unless they see broad market tick ups in demand sustained for a decent period of time.
This is a shift from last year, when landlords—desperate to fill empty units—would cover the broker's fee, typically a month's rent. In a recent email, Ogden CAP Properties LLC said it won't pay fees at several properties, including Normandie Court on East 95th Street and One Lincoln Plaza on West 64th Street. Pan Am Equities Inc., another large apartment owner, intends to stop paying the fee on June 1, according to brokers.
The rental unit of Related Cos., which has about 5,000 units across Manhattan, will stop paying the fee May 31. "There has been a serious uptick in the market. We have seen across-the-board a strengthening in the marketplace," said Daria Salusbury, a Related senior vice president. Related's vacancy of less than 1%—down from about 3.5% a year ago—"is better than projected," she said.
For those looking at the rental rate reports, you must use caution because 2009 saw net effective rents dramatically lower than actual rates signed. Take my lease renewal as an example with the prior history shown:
2006 Rate (signed Oct. 2006) ---> $2,900
2007 Rate (signed Oct. 2007) ---> $3,100
2008 Rate (signed Oct. 2008) ---> $3,300
2009 Rate (signed Oct. 2009) ---> $3,000 + 13th Month Free
So, my actual rental rate declined 9% from 2008 to 2009 reflecting the adjusted market but my net effective rent with the 13th Month Free results in a monthly rate of $2,769. The measured amount in the reports will be $3,000, the rate my lease was signed for, but the net effective rate with my negotiated incentive is about $240/month cheaper reflecting a 16% reduction from the prior year level. This is the reason why 2009 was the year of the net effective rent and why the data will under-report the dramatic adjustment our rental market experienced last year.
Today's rental market sees fewer 'no fee' and 'low fee' landlord OPs and less offers of free months rent. There are still some out there, but not near the levels of 2009. For rentals still offering no fee and free months incentives, I have to wonder if the asking rate is well above what the market can bear right now.
A: Hey guess what, the quarterly reports are lagging! For a list and explanation of the 7 main reasons why these reports are a view into the rear-view mirror, click the link. I want to show you why the Q3 report is the clear winner in regards to showing the improvement this market experienced. I also want to explain why these reports should NOT be used to interpret what may currently be going on with our marketplace upon release.
The two main reasons why the Q3-2010 report will be one to look forward to is:
1) Year-over-Year Comparison to Q3-2009 - It was the 3rd quarter report of 2009 that defined the downturn, a few months after the real trough in our market, as public record finally caught the sales that were signed into contract earlier last year. We are now heading into these defining reports, making y-o-y trends easier to beat.
2) Public Record Yet To Catch The Full Improvement - Due to the lagging nature of these reports, as time passes we will see how this market behaved for months that already passed. I can tell you that JAN-MARCH 2010 were very strong as tight inventory and strong demand caused some competition amongst buyers. The result was a sharp decline in days on market trends and listing discount measurements; as seen in the chart in my post, "Misinterpreting 'Bidding War' Statements From Brokers". With time, quarterly reports will gradual catch up with the progressive improvement right as we head into the two y-o-y reports that defined the downturn this market experienced.
The combination of these two forces will result in fairly positive reports, likely showing the first y-o-y price gains from the fear trades early in 2009. The Q3 report has the better chance of reflecting these yearly price gains based on when the data was captured.
Looking at the chart below, which shows you the Quarterly Average Sales Price Trends from 3 top Manhattan brokerages, we can visually see that Q2 and Q3 2009 reports were the weakest ones reflecting the adjustment we had.
I think time is on the reports side as ACRIS slowly catches up with the closed deals signed into contract many months ago; which are later reflected in these reports. My advice is to interpret the reports at your own risk when they are released, as its highly likely there will be a disconnect between conditions at the time of the release and what the report tells us about the state of the marketplace.
A: Man, markets certainly do fall way faster than they rise. As tensions in Asia mount, there is a renewed flight to safety giving US Treasuries and dollars another boost. Bulls will look to the declining lending rates to support their biases, and bears will look to the forces that are responsible for declining yields to explain why. Since confidence overwhelms everything and Manhattan real estate markets are all about the buyers, consider me on the bearish side of the conversation.
The data still shows solid demand out there, but this can quickly change if recent market jitters are our version of a canary in the coal mine. Here are some bullet points that are being magnified by a dollar carry unwind as huge FX and risk positions are unloaded:
These kinds of warning signs can turn selloffs into something much much worse as the costs for money and the markets for rolling over debt de-liquefies. The liquidity is a concern since it is coming right when governments and corporations need to roll over debts and raise fresh capital to run operations. Corporate debt is slated for one of the worst months in years after what seemed liked an endless demand for risk earlier in the year. It seems everything but gold, treasuries, and US dollars are being sold off right now and it's getting to the point where a new psychological down cycle may feed upon itselfl I wonder if we are in the 'Anxiety' or 'Denial' part of this cycle right now after a 14-month long 'Thrill' ride leading to 'Euphoria' and complacency.
I worried about complacency a few times in March & April. Seeing the markets continue to selloff makes me wonder how buyers in our markets might be absorbing these fears. My pipeline of buyers already bought so I am not out in the field as actively as I was earlier this year. And site development is taking all my time right now to get this platform launched for you guys. But my gut tells me that this selloff must be affecting buy side confidence in some capacity, and considering where we came from, I think all of us should expect sales volume to slow down noticeably. It's just too soon to tell the impact it might be having on bids submitted across the varying segments of this marketplace. Manhattan is not one market. Rather it is a combination of submarkets and price points and I would think the higher end once again will be affected first and more dramatically than lower end properties. Remember, this market took about a year to adjust in response to the first crisis and it took the trigger of Lehman's bankruptcy to set it off.
All of this right when I expect future quarterly reports to begin to show the improvement this market experienced from lows of 2009. The setup looks ripe for one of those times where the lagging report and the actual marketplace might show a significant disconnect when it is released July 2nd.
A: I just want to give a plug to Ana Maria's blog The Apple Peeled, for becoming a great place to read unbiased and intelligent discussions on the NYC real estate market. Ana has been a contributing writer here on UrbanDigs for a while now, but also maintains her own blog with many more of her thought provoking pieces on the markets. A few months ago she dug into the 'discipline' associated with buy side negotiations. Having been through many situations like this, I wanted to revisit the topic here.
Originally Published March 30th, 2010
From The Apple Peeled, "Maximize your negotiations efforts: what does “discipline” look like?":
How will you know when you’ve achieved your goal if you don’t define it beforehand? What is your goal price and how different is it than the highest price you are willing to pay as a buyer (or the lowest price you are willing to accept as a seller)?The first thing I do before discussing negotiating strategy with a client, is to conduct an analysis on the target property and see how its priced and where it might trade in today's market. You can read this for more on how I Value Manhattan Residential Real Estate.
Know this absolute highest price you are willing to pay before you place your offer and enter negotiations. This will give you the power to present your best and final offer with the conviction you need. It will also provide you with the clarity of walking away if necessary and prevent the emotional attachment that often ensues even with the most skilled of negotiators.
Now that you have a Fair Market Value range for the target property and where it is likely to trade in today's market (usually spanning 3% or so), you need to see how this compares with both your budget and comfort zone regarding the price you may have to pay to get the desired feature set of the unit. At this point in the buying process you should be a mini-expert on your price point and fully understand what features you should be getting for your desired budget.
How you bid should largely depend on the changing market conditions and the two prices that you have in mind for this property (similar to Ana's goal price and willing price discussed in her article):
1) The HOPE Price - this is the price that you would hope to get the property for
2) The GO TO Price - this is the price that you are willing to go to in order to get the deal done
Since the GO TO price is basically your top offer that you are willing to go to get the deal done, you should plan a 'worst case' scenario out in your head prior to getting to that level.
As the buyer attempts to get the lowest price possible and the seller tries to get the highest price possible, you will probably enter into a negotiation consisting of multiple moves - we call it 'the dance' in the field. How long the buyer and seller tends to dance before reaching a meeting of the minds depends largely on the quality of the buyer, terms of the deal, motivation of the seller, and demand for the property that only the seller and seller broker are privy too; i.e., other offers already submitted or expected to come in.
Because of this, I tend to advise my clients to leave about 0.5% - 1% of the purchase price as a safety net should we have to play tough later on. Generally, you have to play tough when the negotiation loses momentum and it has become clear that the seller has a pre-determined number in their head that happens to be above the highest offer you are willing to submit to get a deal done.
HOW TO PLAY TOUGH - When dealing with a bully seller, or a seller that has a firm number in their head which happens to be above where the comps justify or your willing to go to get the deal done, you have to fight strength with strength. Its the only way. In this situation, the seller needs to two things to happen to persuade them that it might be silly not to take a quality offer that is so close, yet below, that number in their head: a risk of losing the deal + the passage of time. Therefore, knowing that we have that 0.5% - 1% of the purchase price in room left to raise your offer, I would advise the buyer to formally WITHDRAW the offer; usually explained up front via a 24-48 hour deadline to accept our latest bid a day or two prior. Then you wait a week or two before making a casual call to the seller broker to see if the seller has received any higher offers; call, don't email the broker and talk this part out. If no deal has been signed yet, send in the new final offer consisting of your 'go to' price and say this is a last effort out of good faith to get the deal done - usually the strategy works either when you scare the seller and remove the offer or later on when you try one last time. If it fails, then at least you know you have a seller that is simply not ready to do a deal at your price.
Here is a real life example of this situation using different numbers with similar % moves to reflect exactly how the buyer-seller negotiation went and how the strategy on our side worked out:
TARGET APARTMENT ---> Asking Price of $1,795,000
COMPS ANALYSIS ---> Shows Unit Should Trade Between $1,650,000 - $1,690,000
BUYER HOPE/GO TO PRICE ---> Buyer Hopes To Get For $1,670,000, Willing To Go To $1,685,000 to get it
Buyer Initial Offer: $1,625,000
Seller Response: $1,765,000
Buyer Counter: $1,650,000
Seller Response: $1,735,000
Buyer Counter: $1,660,000
Seller Response: $1,720,000; seller broker explains that seller is simply not motivated to sell without a $1.7xx offer in front of them and feels the place is worth $1,700,000. If you get your client to $1.7m, we will have a deal!
Buyer Counter: $1,675,000 with a 48 hour deadline to Accept and leaving an additional $10,000 on the table to bring out later on for one last try should the response not be a desirable one
Seller Response: NO GO, 48 hours passes. Buyer WITHDRAWS offer pushing seller in corner and letting the reality of a lost deal to settle in
WHAT HAPPENED: Four days later the seller broker came back to us asking if the buyers would still do a deal at $1,675,000; I said I will do my best and find out. Later that day the deal was reached and the contract was signed 6 business days later.
Now I left out a few aspects of the brokering element in this situation but the point was that the buyer entered into the negotiations prepared and confident. As usual, the first response by the seller is the most important and every response thereafter gives us a little more information to take in and see how that might affect our future moves. In the end, there is nothing we can do about a higher offer coming in so we maintain our discipline to stick to our strategy and get tough when there is an opening to get tough. If its a real seller, they will WANT to do a deal too and if their preset price is higher than what my client's are willing to do to get a deal done, this is the most effective way to get the desired result.
Sometimes the seller needs to see for themselves that over a period of 7-21 days they cannot get a comparable offer that they just let go of. Only then will that preset number in their head become a 'WISH' price that they are now willing to shy away from to close the deal!
A: 2/3 of my biggest fears for 2010 seem to be rattling markets. Its clear that Sovereign debt concerns in Europe triggered the selloff after what seemed to be an endless rise upward for all asset classes since early 2009. As equities get hit we are left to wonder if this will ripple into Manhattan real estate? My feeling is that it has to, but considering where we came from it should not be a shock to see our markets cool off a bit for a while.
So the trigger reveals itself (sovereign debt concerns / dollar carry unwind) and the markets start their adjustment. Another 5-7% down in main indices and you start to see trading momentum, margin calls, and nervous retail investors start to really power the markets. As I see it now, it looks to me like the S&P 500 just crossed below the 200-day moving average - not the most optimistic of technical indicators!
With the VIX at 44.67, up 200% in the past 4 weeks, prepare yourself for a rocky ride. This is the kind of environment where buy side psychology can change fairly quickly - so my eyes are open. At this point, I don't see buyers running to the sidelines and the market data continues to show strength - buyers are still signing contracts!
I will say this --> "Considering where we came from 14-15 months ago and the improvement in our markets, it would be more than normal and seasonal if we start to take a breather for a few months. So, Im expecting sales volume to lighten up from the 1,100-1,200 deals signed pace we sustained for the past few months."
I'll also say this in regards to upcoming Q2 & Q3 reports --> "Considering the lagging nature of these reports and that the Avg & Median Sales Prices in most major reports revealed the downturn in Q2/Q3 2009, I would expect the next two quarterly reports to show Y-o-Y price gains - largely a function of being compared to the worst reports of 2009"
As time goes on, the market improvement noted here will be filtered through. Which always leaves the new question being, 'What is going on in the markets TODAY'! Well, today I see nervous markets and that could mean less-aggressive buyers if this trend sustains itself.
Buyers may want to take advantage if competition backed off of a desirable and well-priced property; and the seller is ready to go.
Sellers should keep in mind the improvement this market had, not get greedy, and choose to move property sooner rather than later - that means making sure your pricing strategy is right as we head into the slower summer months. It's still too soon to tell definitively if something deeper is going on, but I'll certainly let you know if the data shows any major changes.
A: Some food for thought. Lets look at how a foreigner using Euros to buy Manhattan property, all cash, has fared in the past 2 years.
Two years ago the world was quite different than it is today; and all the stuff in between was a roller coaster ride to say the least. Looking back two years, Manhattan sales prices had not yet fallen off a cliff (pre-Lehman failure), stocks were on their ways to the March 2009 lows, and the Euro was trading near its highs against the dollar.
So, lets see what happened to a foreigner who used Euros (the more local currency used, the higher the effect) to buy a Manhattan pad before the crash and see how the currency moves alone may have canceled out any asset depreciation. Lets use a $1.5m apartment as a hypothetical example, and lets keep this simple - leaving out transaction costs and other purchase expenses that would make this buy-sell more costly.
Euro Investor Closes on $1,500,000 Manhattan apt Purchase May 18th, 2008 (Pre-Lehman)
The Purchase --> It cost this investor E966,744 to buy the $1.5m Manhattan Property (E1 = $1.5516 at the time)
Euro Investor Closes on $1,200,000 Manhattan apt Sale May 18th, 2010
The Manhattan Market Adjusts Lower --> Post-Lehman, the Manhattan market froze up and adjusted lower. Lets assume a depreciation of 20%. The original $1.5m apartment now receives bids topping out at $1.2m
The Sale --> The US Dollar rose substantially against the Euro since the purchase (E1 = $1,2367 today @ 11:06am). The Euro investor sells the Manhattan property for $1,200,000 which now converts to E970,324.
Although it cost this investor only E966,744 to buy the $1.5m property, the recent currency appreciation in dollars offsets the 20% depreciation in the property since the original purchase Pre-Lehman, and a bit more. The euro investor now gets E970,324 back when converting their stronger dollars to their local currency. This example clearly does not include transaction costs to buy or sell, and only goes to show you how dramatic the recent currency moves have been. As discussed earlier this month:
"...the volatile currency moves are resulting in a decline of purchasing power for those foreigners converting Euros to Dollars when closing their transaction. On the flip side, this could make previous Euro investor-owners holding Manhattan property more inclined to sell to take advantage of the currency rise in their dollar based asset - especially if they bought near peak and are expecting to take a loss. The loss in the trade of the asset might be offset by the recent gain in the dollar against their local currency."
Interesting indeed. I really wonder how many Euro investors originally put money to work in Manhattan real estate as a hedge against the decline of their own currency?
UPDATE: Updated the math on the 20% discount in hypothetical example. Sorry, my bad.
A: Every seller that decides to interview brokers to possibly use to list, market, and sell their home should be aware of the 'sales pitch' game. The basic principal behind this game is a 1-2 punch that generally makes up the broker's agenda: first, GET the listing agreement signed and SECOND, get the price down. In order to get to the 2nd part of the plan, the broker needs to seal the deal first and that means buttering you, the seller, up! Not all brokers behave this way, but enough do to warrant a discussion on the topic. After another call from a seller asking me for advice because a few agents pitched him with very aggressive valuations and no marketing plan, I figured to make a post out of it.
First off, I have not been servicing sellers since I left Halstead in mid-2009; and I have always been more of a buy-side broker. It's been my niche since this blog started to become known. However, I have worked with enough sellers and went on plenty of sales pitches in my 6 years to be able to discuss such a situation.
Now, one of the tricks in this business is the practice by agents of throwing around insane property valuations to potential sellers as they work to secure a listing agreement. It is a well known fact by brokers everywhere, that sellers typically interview multiple brokers before signing on with any one sell side agent. Now STOP!
Because of this, a few things occur:
1) sell side broker's are aware of competition for the listing by other outside brokers
2) sell side broker's are aware that the chances of making money/deals rises dramatically if they can secure the listing for X months
3) sell side broker's are aware that the seller WANTS to hear that their property is worth a lot of money
4) sell side broker's are aware that once they get the listing, they can work on price reductions afterwards
5) sell side broker's are aware that the initial suggested valuation or starting price recommendation is their best chance to secure the listing
6) sell side broker's are aware that the seller is most likely to work with a broker who quotes the highest price for their property
7) sell side broker's are aware that the seller's willingness to hear that their place is worth as much as possible will often blind them from any quantifiable data available proving otherwise
...these are some powerful forces! But are seller's really this easily duped? It seems logical that most sellers will see right through this? But in my experience, its the other angle that makes the seller more willing to work with the broker quoting fantasy valuations. What I mean is, the brokers that quote realistic valuations which may seem low to the seller MAY come off as non-aggressive to the seller. Think about it. As a seller with a $1M apartment to move, which broker are you going to work with:
BROKER 1 (Inflating Valuation to secure the Listing): Insisting how hot the market is, how many clients they already have lined up, and how they alone could procure at least $1.1m to 1.15m in qualified offers for you within the first 4 weeks.
BROKER 2 (Realistic Valuation): Giving you actual data to show you how the market is doing and where comparables in your building have traded. Explaining and educating you how the market dictates value, not the brokers, and that realistically you should expect bids to come in around $1M. Outlining a clear marketing strategy customized for your price point and product.
One broker comes across as aggressive, a go-getter, hungry and willing to do anything and everything to sell the sh*t out of your apartment while quoting a very high valuation. The other broker comes across as realistic yet perhaps less aggressive, and more as a teacher educating her student where this market is and what you should expect to sell the place for. Its a numbers game, so who do you think has the edge over the longer term!
Now, it is VERY important to understand that there are many agents out there that do not practice this way, and in fact, have zero interest in working with an unrealistic seller. Whats that famous saying again, "Its best to be the 1st born, the 2nd wife, and the 3rd realtor!"
I guess there is some truth to that. I was never the best sell side sales pitcher because of one reason, I always told the seller what I GENUINELY THINK their place is worth! And that value is usually significantly lower than what the competing brokers suggest leading the seller to think I would not fight or try for the highest price possible. I always thought duping a seller with an unrealistic property valuation was more of a dis-service to the client and an insult to their intelligence?
I guess part of the problem is that at any time the marketplace is comprised of some sellers that must sell, some that are testing the market, some that really don't want to sell unless they get their #, and some that just want to waste broker's time and de-list the property once they get a full ask offer - yes, I had a few of those types of clients in past years.
But what really grinds my gears, to quote the famous Peter Griffin, is when a serious seller who has to sell has their mind poisoned by brokers acting in their own interests to secure a new listing; especially a high end one! This immediately will put the listing behind the curve and setup a situation for the property to get stale right when action seems to be hot.
THEREFORE, MY ADVICE TO THE CALLER AND SERIOUS SELLERS WHO NEED TO SELL - Be smart, Know the game and the tricks so you could sift through and find the truly best broker to represent your interests. You want to be represented by a broker that has a pulse on this market and advises you accordingly. Acknowledge that this market has improved but is still down from peak levels. Ask the broker one very simple question:
EXPLAIN TO ME WHY I SHOULD PRICE THE WAY YOU SUGGEST IF DATA IN MY BUILDING FOR RECENT SALES SUGGESTS A LESS AGGRESSIVE PRICE?Try to be unbiased and remove yourself from the emotional element that your home is better than the rest, that your renovations are higher quality than the competition, and that your views are one of a kind and deserve a premium. Ask the broker to educate you on your competition and discuss very clearly their marketing strategy. Why is your apartment marketed one way over another? Pricing is the single most important element in the sell side equation; so to get it wrong will put you at a disadvantage. In the end, the market will dictate value and the closer you get to proper pricing the higher the chance you will get multiple interest and generate a sense of urgency; which should be the goal of any serious seller. Take advantage of market action while its here, because once you get into the dog days of summer I would expect the recent buy side aggressiveness to wane a bit.
A: And the playbook to solve the debt crisis with more bailouts continue.
Via the WSJ.com, "EU Approves €750 Billion Bailout":
The European Union agreed an audacious €750 billion bailout plan in an effort to stanch a burgeoning sovereign debt crisis that began in Greece but now threatens the stability of financial markets world-wide.I'm sure the Germans are going to be fine with bailing out the Greeks on this one. Sarkozy must be on his high horse now, a few days after issuing a warning to speculators betting against the Euro. The short term reaction so far is a surging euro and surging equity futures. No country is too small to bail out now. With a TARP like bazooka setup, it seems the powers that be are preparing for the worst for Spain & Portugal & Italy and crafted a package not just for Greece but for the markets concerns over the entire Eurozone.
The money would be available to rescue euro-zone economies that get into financial troubles, the diplomats said. The plan would consist of €440 billion of loans from euro-zone governments, €60 billion from an EU emergency fund, and €250 billion from the International Monetary Fund.
The giant bailout package reflects the gravity of the crisis gripping Europe and growing fears that the situation may grow so dire as to hamper the fragile rebound in the global economy. It would also cast aside long-held notions that each EU nation should manage its own finances, opening an era in which members of the common currency take on unprecedented responsibilities for each others' fiscal troubles.
Elena Salgado, Spain's finance minister, said that the €440 billion would be available over three years, and would need approval from contributing governments. She said a new "special purpose vehicle" would be created to make these loans.
Lets see how the markets really feel about this after the knee jerk kool aid wears off. As of this writing, here are the Futures:
It seems like nobody will let anyone default anymore.
A: There are two different questions we can ask about the 15-minute 600 point drop in the Dow on Thursday. First, we can ask what was the source/trigger of the selloff after the markets already traded down 3%? Second, we can ask how this can possible happen. I have been in a lot of discussions lately with clients, colleagues and friends about the event and want to try to explain the answer to the second question. I can actually answer it with one word: Liquidity. In this case, a lack thereof.
Recall, that for 8 years I was a NASDAQ Momentum Equities trader with a shop formerly known as Tradescape, Inc., which was bought out by E-Trade and later taken private.
Now, the Manhattan real estate market is built on confidence and needs. When trading markets start to do crazy things, it can ripple into the mindsets of buyers and sellers of Manhattan property. For now, I don't see any general change in confidence outside of people 'talking' about the insanity and volatility of the markets recently. Time will tell how this evolves.
Moving on, you need to know a few basic things about how equity markets work. For sake of ease, I copied a visual of Lehman's Level II Stock Quote from a discussion on "Massive Deleveraging" back in September of 2008; kind of fitting to use a IB that no longer exists.
Think of every stock as having two towers; a bid tower (left side tower) and an ask tower (right side tower). At any given point in time, there is an Inside Market that consists of the highest bid & the lowest ask.
Underneath the highest bid (top of the left BID tower) and the lowest ask (top of the right ASK tower) are the supporting bids and offers waiting for the market to reach them. At any point, these bids and offers can be removed by whomever is supplying them. In this case you can see the bids in LEH going down to $9.24 and the offers in LEH going up to $9.52. Although you can't see more, the towers on both sides continue with bids and offers all the way up and all the way down. The market makers and the ECNs (electronic communication networks) are the players that you see in the snapshot above; who basically make a market or provide for a medium of electronic exchange in all securities. These are the guys that are providing for liquidity at any given moment in time for all securities. When I was trading the most popular ECN by far was ISLD (Island ECN), followed by INCA (Instinet), and BTRD (Bloomberg Tradebook) and the off market system of SelectNet.
The Event Thursday - Putting aside the actual cause of the event, what I can tell you is that what normally are very liquid markets immediately became Illiquid the moment traders, HFT boxes, market makers, etc.. figured out something was going on. As a result of this uncertainty and confusion on the downside of the event in an almost panicky manner, bids for most securities were PULLED OUT in essence causing the tower of bids to crumble down upon itself. Looking at the snapshot above, imagine if all the bids under the inside market just disappeared all at the same time; including all the bids below what is shown! That is how the markets plunged 600 points in only a few minutes.
As the markets figured out it was some type of glitch not warranting the move that just occurred, the reverse happened. That is, all the offers were removed in the tower of asks as the equity re-priced itself back to the level it was at before the event. The entire event lasted about 15 minutes as volume tumbled - proof positive of what happens in stock markets when liquidity disappears. Those that were able to pull of trades were either very happy or very upset.
Volume tumbled during the 15-min event because there were NO BIDS TO HIT on the way down and NO OFFERS TO TAKE on the way up. It was utter chaos and something I saw a few times during the course of my trading career. I recall the EMLX hoax back in August of 2000, that basically took the stock down from $104 to $43 in a matter of minutes - the bids basically disappeared as the stock became illiquid and tumbled a few points every 10 seconds until the halt. The stock re-opened around $112 or so later that day and a trader across my desk (known as Big Daddy for his risk taking and cahones) pocketed $400,000 because he loaded up on about 6,000 shares between $50 and $43 before the halt (one of the few traders providing liquidity when nobody else would) - losing around $25,000 before the halt but making $400,000 when the stock reopened. NASDAQ let the trades stand and sucks for those that hit Big Daddy's bids!
Back to the event. Putting the cause aside for a moment, what you guys witnessed is what happens when the stock markets become illiquid. Scary? You bet ya. This is what happens when investors panic and sell into a market with no bids. This is how an index can plunge 6% in 6-7 minutes and rally back in another 6-7 minutes on virtually light volume. In a world of dark pools, high frequency trading algos, and massive institutional trades, it is proof positive that outside forces can trigger markets to become highly illiquid at any time. The structure of these markets are supposed to correct themselves when there is a mis-pricing and always provide for liquid markets - we now know there are flaws in this structure.
A: Just a shout out for REBNY brokers out there that can attend this panel for free. It will be a good discussion and I'm trying to co-ordinate a sneak-peak walk through of the new data platform I will release soon to show brokers how they can use these new tools to gain a pulse on the market. Hope to see you next Thursday!
INSIDE SECRETS OF TOP BROKERS:
“ARMED AND DANGEROUS 3: LOCK AND LOAD WITH TECHNOLOGY AND SOCIAL MEDIA TOOLS”
*FREE FOR REBNY MEMBERS*
Thursday, May 13, 2010
5:30 p.m. - 7:00 p.m.
REBNY, 570 Lexington Avenue
Mendik Center, Lower Level
click here to register
***I WAS JUST TOLD THIS PANEL IS OVERBOOKED. IF YOU WANT TO GET ON A WAIT LIST FOR CANCELLATIONS, PLEASE EMAIL ANGELA DONOVAN AT REBNY!***
A: Tons of talk about this threat since middle of 2009. Has The Search For Yield ended with a fierce carry trade unwind?
When asked in November about what signs would indicate an that a carry trade unwind might be happening (5th comment), the response was:
Danny: Noah, what are some of the initial signs that may indicate the positive carry trade unwind is upon us?So lets see here:
Noah: the main sign will be a sharp, fierce rally in the US dollar and likely a similar fall in commodities/stocks. I wonder how metals will react as they may disconnect a bit given the nature of the crisis and actions taken across the world to stem it.
In Debt We Trust: The warning sign will be a jump in options volume for vix call futures.
1. Sharp/Fierce rally in US Dollar - check!
2. Selloff in Equities/Commodities - check
3. Disconnect in Metals/Gold - check!
4. Jump in options volume for VIX calls - check!
Eurodollar futures plunging which will reflect a rising LIBOR rate. HY/IG getting hit. These are all clear signs of stress. Sometimes the best discussions on this site occur in the comment threads! Hopefully that continues and reader participation and opinions only grow from here!
A: Only 3 weeks ago I discussed why it might be important to talk about the loss of purchasing power for foreign investors in the Manhattan real estate markets. A week before that was a discussion on Sovereign Debt concerns as CDS spreads widened for 5-YR government bonds of Greece, Portugal & Spain. By now, readers should see the interconnectedness of these forces.
So here we are today and I see plenty of craziness in the tradable markets across the globe:
Crazy. Crazy. Crazy.
The VIX is surging as volatility enters the markets with a vengeance and investors rush to buy downside protection rises; just months after reaching a 52-wk low suggesting complacency setting in.
I just want to put into perspective how dramatic these currency moves have been recently. Only 3 weeks ago a discussion on the loss of purchasing power for those investors with Euros to put to work, gets even juicier. At that time, E1,000,000.00 would purchase $1,357,100 worth of US real estate. That was just 3 weeks ago and was down from being able to buy $1,489,200 worth of US real estate in mid-November 2009. Right now, as I write this (see currency chart above right) the same E1,000,000.00 can buy $1,268,200 worth of US real estate - a loss of an additional $89,000 or so of dollar purchasing power from only 3 weeks ago.
It's not that foreigners are fleeing our markets or refusing to submit bids; something that I certainly can't measure in any meaningful way. Rather, the volatile currency moves are resulting in a decline of purchasing power for those foreigners converting Euros to Dollars when closing their transaction. In short, these guys can't buy nearly as much for their Euros as they could have just 7 months ago. On the flip side, this could make previous Euro investor-owners holding Manhattan property more inclined to sell to take advantage of the currency rise in their dollar based asset - especially if they bought near peak and are expecting to take a loss. The loss in the trade of the asset might be offset by the recent gain in the dollar against their local currency. Interesting.
If the weak dollar made headlines everywhere for a supportive argument on rising Manhattan property prices, right now the reverse force is in play. That's all Im saying because I know other brokers won't as it fits into the negative press category that 'can't do any good' in a commission based industry. It is what it is! Still, I'm surprised the markets have not sold off more so these are things worth following over the coming weeks and months.
A: You may often hear Manhattan brokers recommending to any buyer that they use a New York City based attorney and lender. There are reasons for this recommendation. Now of course the buyer has the right to shop around and go with an out-of-city lender if they offer the best rate/terms; but be advised that it may cause you some headaches down the road.
In a new development, all buyers pretty much wait for the temporary CoO to come in and those 30-day closing notice letters to be mailed out by the sponsor. Once that happens, the buyer's job is to make sure their loan is clear to close so that the attorneys can co-ordinate a closing date. Once a closing date is confirmed, a punchlist walkthrough can be setup for the buyer to inspect the property prior to closing. So the process goes.
But what happens when the lender erroneously advises the client that the loan is cleared to close, because they are not familiar with the NYC new development closing process? Here is what I just went through with a client who gave me the OK, along with their attorney, to discuss their experience here with the hopes of educating others out there who may find themselves in a similar situation:
The chain reaction of emails and frustration begins as confusion sets in on all sides wondering why there is a delay? The buyer was told they are clear. The attorney was told they are clear. In reality, the bank is not clear to close due to internal mis-understandings of the closing process here. The sponsor wont give a close date because the lender didnt clear the close. The contact at the new dev is emailed to 'break the silence' and help with the walkthrough. The punchlist team organizer is pinged, who can't do anything until a closing date is confirmed. The buyers are frustrated and rightfully so being told inaccurate information. The attorneys are trying to explain and the sponsor/new dev team are partially blamed for their silence. And of course me, the broker is left wondering where the source of the problem is; as I naturally assume what my client's lender told to us is correct information. Why shouldn't I?
Here was the problem:
"First off, your bank has not even sent their bank attorney your commitment letter. To top it off, then the Albany bank attorneys, need to communicate with their NYC representatives which has not happened at all. We cannot schedule a closing with the sponsor until the bank attorneys tell us your loan is fully cleared, which it is not. The lender is asking for things from the sponsor's counsel that are NOT provided in NYC sponsor condo transactions; for example, they are insisting that the deed be prepared ahead of time for bank review. Sponsor will not, nor are they required, to produce closing documents prior to the closing. The bank also does not understand how violations are cleared in NYC and in addition, they are asking for unnecessary and unavailable Certificates of Occupancy. Until the bank attorneys understand how to do a closing here, we are delayed."The following is some advice from Steven Matz of KatzMatz.net, an attorney I have worked with before and would recommend to any buyer or seller out there seeking a suggestion for an attorney to use.
For Co-ops: A few cooperatives exist in parts of Long Island, and in some other urban areas, such as Chicago and San Francisco, but they make up a minute sector of the real estate market in those locales. Contrast with New York City, where coops predominate the market -- many out of City lenders are simply unfamiliar with the components that make up a cooperative loan -- we have lien searches, not title reports; we have a stock certificate proving ownership, not a deed; we have Uniform Commercial Code filings, not recorded mortgages; add to the mix cooperative recognition agreements, questionnaires needed from managing agents, and the whole "board approval" process, and even a seasoned broker or lender's representative who is unfamiliar with these factors will inevitably find the process daunting and complex.
For New-Dev Condos: Many real estate attorneys in New York City are faced with trying to explain the unique nature of these transactions, as well as continually point out that "no, we don't have homeowner's associations here -- just a Sponsor run board", or needing to explain that a Temporary Certificate of Occupancy is absolutely sufficient to close on NYC, and that the Permanent Certificate of Occupancy may not issue for years, or what plan effectiveness and the filing of the declaration of Condominium actually means.
The Role of Bank Attorney at Closing: Another significant feature of New York Real estate that is quite unlike most other areas is that we are essentially an "attorney state"; Buyers and Sellers are represented by Counsel, and so are lending institutions! In many jurisdictions, a title or abstract company handles the documents, the filings and the disbursement of money. In New York City, the bank has their own counsel to represent them at a closing, something extremely rare in other places. We have encountered numerous lenders around the nation, who are completely unaware that they must retain local NYC counsel to represent them at the Closing -- this misunderstanding, and lack of communication between lender and attorney has caused more delays and problematic closings than can be estimated.
Final Thoughts: It is not my intention to make disparaging remarks about out of NYC lenders/brokers, or to add to any misconceptions about the "mystique" or "snobbery" of NYC real estate -- I merely urge all of my clients to consider a local lender to make their own lives exponentially easier. It is often difficult to persuade an out of City or State purchaser to take this advice; some have long standing relationships with their own local lenders or brokers and insist these people "know what to do." Yet time and time again, we are faced with significant delays in closings, and in some extreme cases, even the complete withdrawal of funding, because the Purchaser's local lender did not understand the particularities of a NYC real estate transaction. The New York real estate market and closing process can be difficult enough, without adding to the mix a lender or mortgage broker who is understandably unfamiliar with the complexities and nuances of our systems. All New York real estate attorneys and real estate brokers can make their deals much more streamlined and increase the probability of a swift and smooth closing, by gently but concertedly recommending a local broker or lender.
A: Who says Manhattan's real estate market doesn't move that much? This market has a tendency to lag into housing recessions and lead out of recoveries. Just a tendency, not a rule. One thing is for sure, this market is quite resilient given the extreme nature of what we went through.
Below is the 90 day moving average of sales trends direct from our ACRIS feed. In a world of broker maintained sales listings, to us this ACRIS feed represents the verify point. Its the one data source we can trust for when a sale actually took place, the sale price, and for what unit. This data feed plays a crucial role in the development and operation of our upcoming real time analytics platform. View larger image
UrbanDigs Says: Sales volume trends does not equal price action trends. However, the two do have some positive correlation. From looking at this chart, you can clearly see the new development boom and euphoria that came with the peak of 2007. You can also see the plunge in sales volume post-Lehman, the standstill in deals very early in 2009, and the noticeable sustained pickup in sales volume starting around April-May of 2009. On average, this market sees approximately 8,000 - 9,000 transactions a year; with over 13,000 in 2007. The means a rough average of between 666 - 750 contracts signed a month if we back this up to real time sales pace entering the pending sales pipeline. Seasonality then kicks in with hotter months seeing closer to 850 - 1,000 deals signed a month and slower months seeing 500 - 600 contracts signed a month. Right now, as you can see from the real time Broker Status Update box I added to the right here, the Manhattan market has seen 347 contracts signed in the last 7 days alone and 1,074 contracts signed in the last 30 days; not including today's updates yet to come in. What does this all mean? The market is STILL quite solid in terms of sales pace considering the sustained stronger volume since mid 2009. This may explain why inventory of well priced quality products are going to contract under the average days on market trend, and why buyers may be getting frustrated that competing bids for desirable property are coming in higher than theirs. This is not an environment ripe for buyers to successfully pull of a low-ball bidding strategy with the thinking that every seller is desperate and forced to liquidate. Think about it this way, the seller and the seller broker have way more information than any one interested buyer has on the state of the listing process for their unit - for all you know, multiple offers have already been submitted and rejected because the price was deemed 'too low' for the seller to move on. In this environment, its hard to believe that your offer is the only one that was sent in for a well priced desirable property. This is something buyers must adapt to in the market right now. The question is, when does this environment start to change.
A: More debts, more bailouts. No wonder gold is surging. For those that question the inter-connectedness of our fiat systems, check this out!
Via The NY Times, Europe's Web of Debt: In and Out of Each Other's European Wallets:
In the decade since the introduction of the euro, the economies on the continent have become increasingly interwoven. With cross-border banking and borrowing, many countries on the periphery of Europe owe vast sums to one another, as well as to richer neighbors like Germany and France.
Like the alliances that drew one country after another into World War I, a default by a single nation would send other countries tumbling. The first domino is Greece.
View larger image
Oh what a mighty web we weave!
A: Its about time that the government's interference to prop up housing prices expired. It should never have been implemented in the first place. My experience with the past 3-4 week rush to sign contracts was mostly negative. I will put aside the fact that one tax credit motivated buyer client turned out to miss the deadline and 'disappear' in the last 24 hours after an accepted offer a week ago. I received about 6 phone calls over the past 3-4 weeks from first time buyers hoping to sign on the dotted line before the expiration. What worried me was that the only one which should have even considered buying in the first place, was also the one to vanish as the deadline passed. The others simply wanted to buy so as not to miss out on the governments handout.
I can't help but think about Ana Maria's recent discussion on shady clients. Looking back to the other 5 calls I got from first time buyers, none of them should ever have been considering buying a home in the first place. The only motivation? Buy before the $8,000 tax credit expires. This is the beast the government created and I say good riddance!
The funny thing is, there is no doubt in my mind that any of these five buyers would have been able to find a condo property and a lender to allow them to make the purchase. No doubt. And here is why:
And of course the usual fees and expenses of the rest of the businesses that are involved in any one real estate transaction. Doing deals makes money and livings and is in the interest of all the parties involved. Whether or not the buyer should ever be purchasing in the first place is not their problem; afterall, the buyer is an adult and is entitled to make their own mistakes right?
This is where I have issues. The government policies created an environment that allowed housing to become a speculative asset class; winding down lending standards and increasing exotic products to expand affordability as the markets caused a psychological shift in the asset class. The end result was an engineered environment that allowed buyers who never should have been able to buy, to do so; along with hopes of a quick profit later on. We know what the engine of all this (wall street) did with these loans, and now we know the taxpayer basically assumed all the junk securities to keep the banking system from failing. A huge transfer of shit from the banks to the fed's balance sheet at the end of the day; totaling trillions of dollars. And now, we are doing it all over again!
My experience over the past 3-4 weeks was more of trying to talk sense into first time buyers whose motivation to purchase was misguided. These buyers felt a pressure, a stress to buy. Can you believe that? They werent looking to buy the home as a utility or an investment. They weren't looking at the purchase as a luxury resulting from achievements in their careers, years of saving up for the purchase, and something that lines up with their current financial situation and needs. A few of them even mentioned to me they didnt care what kind of property they ended up buying! All they cared about was signing the contract by April 30th and closing by June 30th to get the $8,000 government tax credit! HOW INSANE IS THAT!
Here is the rub: Given that we just went through a devastating collapse of the housing market and banking system, I don't see the euphoria being anywhere near levels that led to the initial crisis. However, if I alone got these calls I can only imagine how many buyers out there across the nation actually pulled the trigger to seal the deal only for this stupid incentive. Now I am not saying some rational buyers out there are stupid and bought for the wrong reasons. Not at all. At all times there are rational, savvy, and conservative buyers out there who are buying for all the right reasons and keeping their purchases well within their financial means. And those buyers got a nice bonus with this government incentive. No, I am talking about those buyers who have no reason buying at all and are only even considering it because they feel the power of the $8,000 tax credit is too good of a government gift to let slip through their hands. How many low quality buyers out there are making the same mistakes that led to the housing collapse in the first place? How many of these buyers are stretching their budgets because they feel rushed to buy prior to expiration and an expensive house is the only one that they liked on the open market these past few weeks?
The tax credit, in my opinion, is doing four things:
1) Pulling future demand forward - any buyer that was saving up for and planning to buy in the near future had incentive to pull the trigger earlier to take advantage of the tax credit. These were buyers that were going to buy anyway, and now are doing it at the government's expense
2) Incentivizing low quality buyers to jump in - do not discount this irrationality amongst buyers! I have a hard time believing the banking system is responsible enough to say "NO" to a ready and willing buyer, that may not be 'able' to afford the home they just signed a contract for. If one bank says no, I'm sure the buyer will find another bank that says YES! And that may be motivation enough for the lender to do what needs to be done to get the loan through
3) Artificially propping up housing markets - at the end of the day, this is a very weak foundation to support local housing markets on a longer term sustainable basis
4) Increases the deficit / fraud - this is not free money, although it plays the role of it on TV. As of mid-March, some $12,450,000,000.00 worth of tax credits were claimed (via The Big Picture). Also, lets not turn a blind eye to those engaging in criminal behaviors to defraud the government on this program! From 4-yr olds filing for tax credits, to buyers claiming credits for homes that were never purchased, to other buyers who don't qualify but expect a handout.
You can't make this shit up! But hey, it did make sales go up (albeit temporarily and stealing future demand) and it did prove to be one ingredient among many to reflate housing markets or at the very least, stabilize the hardest hit markets from falling further. To think there will be no unintended consequences from these types of programs is to have your head in the sand. To think banks smartened up and to say 'NO' to all un-able buyers, is to have your head in the sand. Buyers will do anything and everything to tweak a loan application to get it through underwriting and the mortgage brokers out there know how to advise clients as such. That is the world we live in, for better or worse. Gone are the days where a buyer is required to put down 20% of the purchase price, have sufficient post-closing liquidity, and strict employment history and salary as to keep total debt-to-income ratio's under a max of 33% or so. I know for a fact banks are lending to buyers with a d/i ratio of up to 45% these days. Simply amazing.
Now begins the phase where we see the negative whiplash effects from the inverse stimulatory effects these government programs provided the markets. You can't have it both ways. After that the markets will learn to stabilize without government assistance programs - I wonder if the people will soon blame government for any future lull in housing as a direct result of removing these programs? Typical. I say, END THE SUBSIDIES AND GOOD RIDDANCE!