Critical Juncture

Posted by jeff

Wed Jun 30th, 2010 09:50 PM

Since March 2010, Mr. Bernstein has served as Senior Vice President, Research, for AH Lisanti Capital Growth, LLC, a registered investment adviser. This commentary solely represents Mr. Bernstein’s views and opinions as of June 30th, 2010, does not constitute investment advice and does not depict the views of AH Lisanti Capital Growth, LLC.

Yellow%20Light.jpgThe stock market has been tracing out a potential top for the last 6 Mos. (See my recent piece "Market Turbulence Or Something More"). To even the most novice chart reader a "Head & Shoulders" top is now plainly in view. Technical analysis only works about 70 percent of the time or lots of devotees like me would be rich and retired. However, the best way to think about technical analysis is like a traffic light. Following on this analogy we have been in a "yellow light" mode for a couple of months - PROCEED WITH CAUTION.


As can be noted from the chart above, we are now on the verge of seeing a red light flash STOP FOR YOUR OWN SAFETY. If the market violates the following levels on a closing basis SPX 1,040, DOW 9,750, COMP 2,139 and RUT (Russell 2000) 607, it will have transitioned into what my buddy Stan Weinstein calls Stage 4. This is the declining phase in a stock pattern (for you chart aficionados note the "dark cross" about to take place, where the 50 day moving average (MA) crosses the 200 day MA). In this case, major support exists in the 850 to 950 range on the S&P. Due to the imprecision of technical analysis, all that can be said is that this is the likely first stop, but as Stan said to me yesterday "When I called the 2007 top for you I had no idea the bear market would last 2 years". If the levels mentioned above are not all exceeded to the downside on a closing basis (some were yesterday and Tuesday, intra-day and on a closing basis) it will set up a "non confirmation" followed by a rally. That said, in Stan's words "This market is screwing up big time". So the odds are now high that the breakdown into Stage 4 will happen sometime in the next couple of months, regardless of the near-term action. Not to say that this is fate accompli. Back in 1975, after a huge run-up from the 1974 bottom, the market waffled around for 3 quarters before continuing its bull market ascent. I know of at least one firm that was committing over $100 million to buying stock at Tuesday's close, betting that the market will not break least not right now . However, considering that we are in the midst of a historic de-leveraging cycle, a bear market would be all the more de-stabilizing and thus the "yellow light" status should be respected and a "red light" vigilantly prepared for. A bear market would obviously be a negative for New York City residential real estate....something to keep in mind.

180,000 Buyers May Miss Tax Credit Deadline

Posted by urbandigs

Tue Jun 29th, 2010 12:51 PM

A: So naturally, they are begging for an extension of this credit program. Its very simple: the NAR, realtors, brokerage firms and buyers who signed a contract before April 30th to take advantage of the program all are screaming for an extension. Pretty much everyone else is saying, 'when does it end?'. And as is usual with government stimulative programs like this that ultimately fail, many people got caught up in it for both good and bad reasons. And I'm sure many people that should not have bought a home, did so, only to take advantage of this perceived 'gift' from government. Now the system is being blamed; as if someone duped them into signing a contract and sending in a deposit only because of this tax credit. This is what happens when we give away stupid shit to artificially prop up housing prices using taxpayer funds.

The tax credit money was never yours to begin with, yet people feel like they are owed the money even if they don't qualify for the terms of the program. Since last fall, buyers knew that the terms of the program called for simple deadlines of:

1) Sign a contract before April 30th, AND
2) Close the transaction before June 30th

There were other terms but these were the deadlines and they were very clear. As we approach the closing deadline, buyers that may not be able to pull of the deal in time are screaming 'foul'. Umm, no! This is part of the real estate market, a market that is illiquid and takes time to close a transaction. In today's world banks have tightened underwriting standards signifcantly and new rules call for outside appraisers to complete the process before a loan commitment is granted. The process in general is tighter and takes noticeably longer than it did during the boom when a 21-yr old unemployed gambler could get a $500,000 loan. As it should. We tried the easy credit + exotic products to stretch affordability road and it failed miserably. Now its back to the way it was before the boom; so get used to it and adapt.

Of course there will be innocent victims here - those that signed in March and are seeing delays in securing financing (low appraisals, not enough docs, etc) and those that signed a short sale (without knowing the intricacies of these types of transactions) in January and are experiencing delays with the selling bank approving the deal. But hey, that is how the real estate market works. It doesn't mean we should extend the tax credit program once again. We did that already, and once again these guys are asking for more. When does it end?

The weeks before the contract signing deadline, I discussed how I got numerous calls from prospective buyers so nervous and ancy about getting a deal done within 2 weeks to qualify for the program. 90% of these buyers should NEVER have considered buying a house, and they only did so because of this program.

The WSJ reports, "Race Is on to Grab Housing Tax Break" where this couple's only reason for signing a contract was the tax credit:

Kevin Malvey with his fiancé,...signed a contract days before the April 30 deadline in order to qualify, and he said that if he missed out on the tax credit, he wouldn't buy the house unless the seller reduced the asking price. "If he can't work with me, I will have to back out of the deal," said the 27-year-old facilities maintenance worker.
Are you kidding me? So, your ONLY reason for buying a house was a $8,000 tax credit??? Folks, do you see the problem here while others call me out for not being sympathetic to another extension? How many times do we need to discuss the future unintended consequences of these types of policy actions taken to stem the crisis we just faced? Everyone parties when new stimulus is announced and bitches when it ends. This is one of those times and many buyers won't be able to handle it; so they will lay blame everywhere and anywhere but on themselves. And no doubt the NAR will use this as a PR stunt to attempt to add credibility that they are 'for the people'.

As discussed back in May, "Tax Credit Expires: Good Riddance!", the only thing this program did was:

1) Pull future demand forward
2) Incentivize low quality buyers to jump in
3) Artificially prop up housing markets
4) Increase the deficit / allow fraud

And now here we are, with the complaints rolling in.

We are a stimulus addicted society, used to bailouts and free lunches resulting in expensive decisions regarding debt and leverage that are not as rational as they should be. This ingrained cultural behavior is dangerous and extending the deadline once again will only re-enforce the behavior of 'if you scream loud enough, we will give you what you want'. Well, its time we pull the drugs away from the addicts. Enough is enough!

Chart of the Day: 10YR Treasury Yields @ 2.96%

Posted by urbandigs

Tue Jun 29th, 2010 12:20 PM

A: Ugh, not the most bullish of signals when 10yr Treasury yields barrel lower through the 3% level. Investors are fleeing into safety looking for return of money instead of return on money. No doubt the bulls will come out of the woodwork and start to declare how 'wonderful a time it is to buy and lock in a low mortgage rate'. Back here on earth, the reality is uncertainty over the recovery, deflationary pressures, sovereign debt, debt rollovers, city/state deficits, high unemployment, etc..

Take a look at the recent sharp decline in yields for the 10YR Treasury via Yahoo Finance:


There are those that will look to the reasons why the 10YR is behaving this way and there are those that will look to the effects of the 10YR behaving this way. One view is bearish, the other is bullish. Expect brokers to spin this negative market move in a positive way to cover up some of the reasons why treasuries are rallying so much recently; away from risk assets into safety.

Barron's discusses, "Crazy Treasury Bulls Get It Right":

For those who are listening, record-low Treasury note yields are screaming an unambiguous message: the market is discounting deflationary, depression conditions, even if mainstream economists are not.
Contrarians no doubt will be going against this move, but that is when something unexpected usually comes along and jolts the markets. Lets see if that is how this will play out.

6 Remaining m127 Condos Auctioned Off

Posted by urbandigs

Mon Jun 28th, 2010 10:20 AM

A: Hat tip to and Malcolm Carter's Blog on this one. All winning bids had a 5% buyers premium and the average sale was $840/sft.

*image from

From, "m127 Auction Sells Six Luxury Condos in 20 Minutes":

Over 400 hundred people showed up, and in less than 20 minutes, the six remaining units in Cardinal Investments-developed m127, the building creatively named for the city's bus signage, were sold and it was all over.

Here's the slate of winning bids, each of which had a 5 percent bidder's premium:

1) Penthouse B: a 2,225 square-foot (with 338 square-foot terrace) 3BR,
2.5BA was originally listed at $3,400,000, got a highest bid of $1,950,000 and with the buyer’s premium comes to $2,047,000. This was the only unit to have a reserve bid, and the developer could not confirm whether it was met.

2) Unit 8: this 1,554 square-foot 2BR, 2BA was originally asking $1,900,000, got a highest bid of $1,350,000, and with the buyer’s premium sold for $1,417,500.

3) Unit 7: this 1,577 square foot 2BR, 2BA was originally asking $1,850,000, got a highest bid of $1,250,000, and with the buyer’s premium sold for $1,312,500.

4) Unit 6: this 1,577 square foot 2BR, 2BA was originally asking $1,775,000, got a highest bid of $1,175,000, and with the buyer’s premium sold for $1,233,750.

5) Unit 5
: this 1,577 square foot 2BR, 2BA was originally asking $1,725,000, got a highest bid of $1,185,000, and with the buyer’s premium sold for $1,244,250.

6) Unit 2: this 1,550 square foot 2BR 2BA was originally asking $1,600,000 got a highest bid of $1,170,000 and with the buyer’s premium sold for $1,228,500.

Everything came out to a grand total of $8,484,000 and an average price of $840/square foot.
According to the WSJ article, only 100 people were registered to bid on this auction - so that should be your buyer pool for this event. The apartments were originally on the market for "several years" and 5 of the 6 units auctioned off had no preset reserve or contingencies. This proves one thing:
When will developers learn that significantly overpriced listings that can't sell over a period of 2+ years is likely not the fault of the marketing team hired. Simply switching brokers is not the answer. Granted there are developers that have deeper pockets than others and construction terms vary from one project to another. But more often than not, the price was set too far above what the market was willing to absorb and aggressive cuts were nowhere to be found. Adjust the price, and properties should sell. Of course, it helps to know what the market is doing to stay ahead of your competition too!

Are More Fed Asset Purchases On Deck?

Posted by urbandigs

Mon Jun 28th, 2010 09:22 AM

A: Hard to believe isn't it? With Treasury yields suggesting another bump in our road and rates already as low as they can go, the only real stimulus the Fed can provide is renewing liquidity programs and restarting the great debt monetization experiment. I certainly think that the fed at some point will be forced into buying treasury securities if/when buyers of our gov't debt deem yields way too low; especially at the longer end where the fed has less control. But that concern is likely a year or two away. Today, its all a question of the whether or not the so-called recovery can hold itself together. You know, that recovery that was part physics (naturally rebounding from unsustainable gloom) and part stimulus - not the strongest foundation for a sustained healthy recovery!

Ambrose Evans-Pritchard discusses how "Ben Bernanke needs fresh monetary blitz as US recovery falters" at The Telegraph:

Federal Reserve chairman Ben Bernanke is waging an epochal battle behind the scenes for control of US monetary policy, struggling to overcome resistance from regional Fed hawks for further possible stimulus to prevent a deflationary spiral.

Fed watchers say Mr Bernanke and his close allies at the Board in Washington are worried by signs that the US recovery is running out of steam. The ECRI leading indicator published by the Economic Cycle Research Institute has collapsed to a 45-week low of -5.7 in the most precipitous slide for half a century. Such a reading typically portends contraction within three months or so.

"We're heading towards a double-dip recession," said Chris Whalen, a former Fed official and now head of Institutional Risk Analystics. Rob Carnell, global strategist at ING, said the Obama fiscal boost peaked in the first few months of this year. It will swing from a net stimulus of 2pc of GDP in 2010 to a net withdrawal of 2pc in 2011. The Fed's statement this week shows growing doubts about the health of the recovery. Growth is no longer "strengthening": it is "proceeding".
Deflation has been the theme since 2007; especially in the credit markets where we saw the destruction of trillions of dollars of wealth in the shadow banking system - almost crippling our entire banking system at the height of fear in early 2009. Since then markets went on a 14 month thrill ride all in The Search For Yield, as a fed engineered dollar carry trade was put in place to recapitalize that crippled banking system. It now seems the cracks in the dam are starting to show in various places!

With the M1 Multiplier still strongly below 1 and banks continuing to hoard more than $1Trln in Excess Reserves, its painfully clear that banks continue to choose NOT TO LEND! And this to me is probably the right call although politically the wrong one. Do we really want banks to aggressively lend to small business and consumers in a deflationary, high unemployment environment? Where would that put us in five years time? Our fractional reserve system of banking and multiplying money via credit creation is not working the way it was designed to work; which is a healthy reaction given the circumstances.

No, it seems that we are simply entering a new phase of the crisis. A phase that sees sovereign defaults, more debt monetization, more fiscal measures, more state and local fiscal problems that likely will lead to severe budget cuts, all at a time when bad/mismarked assets still loom on and off banks balance sheets. And who out there has dissected to what extent the Fed itself has compromised its balance sheet through all those asset purchases to what amounted to nothing more than a transfer of shit from banks to public balance sheets?

So many unanswered questions. The carry trade train ride was fun while it lasted and real in its ability to alter many minds out there - to instill hope and confidence that everything will be just fine. 10YR Treasury yields are on a downward trajectory and passing levels last seen in April 2009 - except going in the other direction. What is this telling us? I see Krugman already is discussing "The Third Depression":
We are now, I fear, in the early stages of a third depression. It will probably look more like the Long Depression than the much more severe Great Depression. But the cost — to the world economy and, above all, to the millions of lives blighted by the absence of jobs — will nonetheless be immense.

And this third depression will be primarily a failure of policy. Around the world — most recently at last weekend’s deeply discouraging G-20 meeting — governments are obsessing about inflation when the real threat is deflation, preaching the need for belt-tightening when the real problem is inadequate spending.
More spending? Really?

The tug of war between politics and banking is getting intense. Are we ready to put in place austerity measures to end uncontrollable spending programs? Already The Senate denied another extension of unemployment benefits, "suddenly cutting off a federal cash spigot opened by President Barack Obama when he took office 18 months ago". When do the mass state/city layoffs begin after years of gov't hiring? There are no free lunches and the piper will have to get paid. Therefore, I have little doubt in my mind that we have seen the end to Fed tricks as the next phases of the Great Recession ultimately reveal itself. The questions will be, in what form and what is the price we pay later on?

Financial Reform - Bullet Dodged

Posted by jeff

Sun Jun 27th, 2010 11:49 AM

Since March 2010, Mr. Bernstein has served as Senior Vice President, Research, for AH Lisanti Capital Growth, LLC, a registered investment adviser. This commentary solely represents Mr. Bernstein’s views and opinions as of June 27th, 2010, does not constitute investment advice and does not depict the views of AH Lisanti Capital Growth, LLC.


At Urban Digs we have been proponents of the idea that "as Wall Street goes so goes the New York City residential real estate market". We are not believers that the month-to-month or even year-to-year fluctuations in the market track the stock market averages. It's much too complex of a market with many other inputs to value for that to be the case. But like it or not the New York City economy is dependent on Wall Street profits (The Ax Man Cometh: Can the Tax Man Be Far Behind) and for this reason among many reasons we monitor the goings on in financial markets and the health of the Street.

As we all know dire predictions of Wall Street's demise have proven premature due to the TARP bailouts and Wall Street's central role in raising money for other financially stretched companies including high yield issuers of all sorts, REITs, and regional and local banks among others. The spritely rebound in the stock, bond and commodity markets and nascent economic recovery have also put Wall Street in a "done firing" mood.

As night follows day, after all financial debacles there are calls for increased regulation (Regulator Revenge: There's a New Sherriff in Town) There is always a threat that such regulation will cause a recapitulation (double entendre intended) of the markets and or asset classes that were involved in the original financial debacle. The financial reform effort going on in Washington carried just such a threat and it is no wonder that financial markets have been weak as this process came to a head. It is an old Wall Street saw that financial stocks tend to lead the stock market and if they are at all predictive of market and economic conditions to come the charts of stocks like Goldman Sachs(View image) and Morgan Stanley (View image) were a wary commentary on the potential pitfalls of the reform legislation.

I was fortunate enough to be on a conference call hosted by FBR Capital Markets, with their Washington Policy Analyst Edward Mills, who summarized the "Dodd- Frank" financial reform bill for listeners after spending the night attending the drafting session. The following are my interpretations of the key takeaways with my commentary in italics.

Consumer Protection Bureau - A consumer protection bureau will be established. It will be run by one individual with a large budget. Payday lenders, check cashers and those providing student loans will be regulated under this bureau in addition to the expected banks, thrifts, credit unions et al. The new regulations that will eventually be promulgated will likely raise compliance costs for these various institutions, but it seems unlikely that the establishment of consumer protections will significantly impact the depth and breadth of financial products available to American consumers. My guess is that the impact on economic growth will be deminimus in the near-term and small in the intermediate term. The development of products with the potential for abuse will be curtailed and with that the opportunity for ill gotten gains, but this shouldn't wreck any major players' business and you can expect cost increases to be transmitted to the consumer in one form or another.

Derivatives - Derivatives will be segregated into two types plain vanilla/low volatility products and complex/more volatile products. Banks will be allowed to continue dealing in interest rate swaps, foreign exchange, gold, silver and investment grade bond derivatives, through their regulated subsidiaries which utilize consumer deposits as a funding mechanism. In contrast, the broking of agricultural commodity, energy, other metals and non-investment grade derivatives and CDS, will be limited to seperate operations under the bank holding company structure, which do not put consumer deposits at risk. There will also be a code of conduct for derivative dealing with certainy types of clients like municipalities.Changing where within the holding company structure the derivatives books lie and requiring a seperate capital base supporting them will have very little effect on how these businesses are run. It is my understanding that Morgan Stanley and Goldman Sachs already run these operations under un-regulated subsidiaries.

Volker Rule - Banks will forced to curtail and modify some of their investment activities as a result of the new "Volker Rule" which will include conflict of interest standards. Investments by banks in hedge funds, private equity and venture capital funds will be limited to 3% of Tier I Capital (strangely all capital related limitations in the bill reportedly refer to Tier I requirements rather than the Tangible Capital measure which investors have come to depend on during times of trouble as the true dollars available to offset losses). Banks will have up to 7 years to divest themselves of stakes in these funds above mandated levels as there will be 2 years of rule making and they will be given 3 years to liquidate their holdings, with 5 years allowed for particularly illiquid partnership interests. Prohibitions on proprietray trading will be the purview of regulators. My guess is that proprietary positions assumed during the course of market making will be allowed, but pure proprietray desks or books may not. Certainly conflict of interest rules which forbid banks from selling products that may be deliterious to their clients health, and/or betting against products they are selling to customers, wll reduce profit making opportunities that may not otherwise exist. It is of course high time for some reduction in these kinds of conflicts, which are bad business in the long-run anyway. All in, the Volker rule is unlikely to have a big impact on bank profitability, recent media reports put Citi's proprietary trading at 2 - 3% of revenue and Goldman Sachs at approximetaly 7%.

Systemic Risk Regulator - "Too big to fail" institutions will be monitored and regulated by a systemic risk regulator, a position sorely needed due to the tangled web of leverage, derivatives, counter-party risks and insurance contracts that have come to underpin the entire financial system. Banks with assets over $50 billion and the largest hedge funds (assets > $10 billion) will be required to pay in about $19 billion over 5 years to pay for their regulator. This is perhaps the biggest cost of the bill to banks, even if one includes indirect impacts like limitations on profit making opportunities. It is certainly the most tangible at this juncture, yet here again, things coule have been worse.

Trust Preferred Securities (TRUPS) - These securities, which were issued by banks and utilized to meet capital requirements more easily, were also purchased largely by other banks and in a massive daisy chain effect, became a potential source of systemic risk in a "run on the banks" environment. Big banks (> $50 billion in assets) will be forced to replace TRUPS as a source of capital over a 5 year phase in period. Smaller institutions will have currently outstanding issues of these securities grandfathered in. This is eminently sensible in an environment where bank capital is already tight, continued loss taking is assured over the next couple of years, and the authorities would like to encourage banks to lend out capital, albeit wisely, rather than hoard it.

As one can surmise from the subject matter involved in this bill, there were any number of ways the legislation could have led to severe damaged to the currently anemic banking system. If anything, the bill lets banks off too easy, except for one crucial factor. This bill relies heavily on future rulemaking, largely slated for the next 2 to 2 1/2 years, which will mold the concepts outlined above into actual law. It is anybody's guess how that regulation will eventually fall out and what potentially perilous unintended consequences could result. That said, the government's restraint in this matter shows a regard for the importance of the financial systems and it's still fragile state in the face of a popular call for heads on pikes, indicating a wisdom I have not often witnessed from our elected officials....maybe ever. Don't get me wrong, the financial reform that is coming virtually assures that Wall Street peak returns on equity won't be seen again for a generation, but this process could have been much worse for the overall economic outlook and health of New York City.

As of Friday's close, a composite of larger banks and brokers including Bank of America, Goldman Sachs, Morgan Stanley, J.P. Morgan, Deutsche Bank and Citigroup was expected to see their earnings per share rise an average of 30% in 2011 (with a median of 22%). This despite Wall Street analysts' grave concerns about the financial overhaul. Now, it is possible that analysts were waiting to see the final bill, before slashing their numbers, so I will report back any significant change. However, if these numbers are even close to the real growth in earnings that these institutions will see in the early years of financial reform, it is good news indeed for the economy of the City of New York as well as New York city residential real estate.

Upcoming Q2 Report: Corcoran's Likely To Be Least Rosy

Posted by urbandigs

Wed Jun 23rd, 2010 08:21 AM

A: The market is definitely experiencing a seasonal slowdown right now. You can blame it on the volatile equity markets, the declining euro, or the decline in confidence/wealth effect with all the sovereign debt concerns floating around. I'm going to stick with 'the market simply needed a breather' line. After what was a very active 4 months to start the year, seeing a surge in sales pace, it's clear that it was unsustainable and normal considering the seasonality of our markets. Looking ahead to the upcoming Q2 report that is released in about 9 days, expect rosy year-over-year reports from Elliman & Halstead; a bit less so from Corcoran! I'll explain.

First, here is another sneak peak at one of the charts in the upcoming UD 2.0 showing you the monthly pace of contracts signed direct from the real time Broker Status Updates tool that we have developed:


You can see from the tabs at the top of this sneak peak the huge tasks I've taken on to build this new platform. Unfortunately with a project like this, delays in launching are part of the process. From this chart you can see how the reflation (orange bars showing 2009) morphed into a bit of a mini-frenzy in early 2010 (red bars showing 2010). The latest monthly pace fell sharply to about 1,100 contracts signed for May and I expect this to fall to around the 900 level for June. This is normal, seasonal, and expected given the unsustainable pace from the 4-5 months prior.

On to the upcoming Q2 report.

Back in May I discussed, "Why The Q3 Report Will Reveal Improvement". Most people look into year over year comparisons of the market in order to filter out the noise that is associated with seasonality. Monthly and quarterly moves are useful in determining the general trend of the market, but comparisons to the same period one year earlier give a seasonally adjusted view of the health of the marketplace. It is for this reason that I believe:

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 negative 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.

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.


Focusing on Q2 of 2009, you can see that Corcoran's price levels are significantly above those for Halstead & Elliman. Therefore, on a y-o-y basis, expect Corcoran to show a less rosy report than these other two big brokerages. Q3-2010 is a different story and likely will be a very good report on a y-o-y basis. As is usually the case, its very likely the market will be experiencing a different sales pace than the report suggests at the time of release due to the lagging nature of our marketplace. Time will tell!

Europe's Souring Taste For Manhattan Property?

Posted by urbandigs

Wed Jun 16th, 2010 07:47 AM

A: Well I wouldn't call it that, but I would call it something else. The WSJ discusses this topic and basically concludes that, "a certain type of European buyer that left a strong footprint on New York during the boom years may be gone for a very long time: middle-class professionals from countries like Spain and Ireland". That is for sure. The boom years of 2006-2007 were outliers, fueled by rampant speculation and availability of all sorts of credit products and leverage. Those days are way gone, and with it, the days of e-z borrowing & leverage for big time Manhattan property purchases. As the credit crisis ultimately morphed into a sovereign debt crisis in the Eurozone, there are two forces worth noting that I think are hovering over new buyers today: declining confidence + declining purchasing power.

The discusses, "Currency Fall Curbs Europe's Taste for New York Property":

The euro's 25% depreciation against the dollar, to less than $1.20 earlier this month means that Europeans are paying a quarter more for New York property in dollar terms than they did two years ago when one euro was exchanged into $1.60.

"I'm spending a lot of time talking people off the ledge,'' says Dolly Lenz, a top-selling broker with Prudential Douglas Elliman, referring to Italian, Spanish and English clients who are getting cold feet about buying in the city. "I'm doing this daily. People are losing confidence that it's going to turn around quickly.''

Their reticence comes as the New York housing market is showing signs of a tentative comeback; ...however, much of the industry is growing anxious that European demand among the speculative or less well-heeled buyer may be softening. Brokers worry that some Europeans who bought New York property near the peak and took a hit of 20% to 30% may have made enough back in currency appreciation to cancel out investment declines.

A certain type of European buyer that left a strong footprint on New York during the boom years may be gone for a very long time: middle-class professionals from countries like Spain and Ireland.
I discussed how all/mostly cash euro investors who bought at the peak can cancel out some asset depreciation back in May. But the more important element in the European equation is what forces are affecting the buy side; because as many of you know, its all about the bids! When the bids change, the markets change.

When it comes to the conditions that led to a 25% decline in the Euro against our Dollar, my gut thinks the following is happening in the minds of these future buyers:

1. Declining Confidence - European markets adjusted with the sovereign debt worries and that always leads to a negative wealth 'effect'. Considering where we came from, its hard to think many high net worth foreigners were not 'in the game' before the adjustment; so there was pain to be felt. The 'effect' usually changes the motivation of marginal buyers (who would rather put their buy on hold) and the aggressiveness of higher net worth individuals (who would rather bid more conservatively).

Evidence of this came in the WSJ article when broker Suzan Bennet's Belgian client, "worried about Europe's plummeting stock markets and currency, pulled out". The high end buyer eventually came back but at a reduced price.

2. Less Purchasing Power - Discussed in April, this is also a big force entering the minds of Euro buyers. There will ALWAYS be foreign buyers of our property, at all times, but how far their local money goes is now in question. In short, their money buys a lot less house than it did only a few years ago and that means less purchasing power.

When I left, my 30-day broker status box in my new system showed 1,130 new signed contracts. When I checked for the first time this morning, it shows 869 new contracts signed in the last 30 days. My new platform is being designed from the ground up to help you get a pulse on the market, and there are both short term and long term trend tools available. I like to view the longer trends to understand the bigger picture of what this market is doing. I love watching the shorter term analytics to track how this market changes with a 30-day window. The slowdown in signed deals is both seasonal and normal considering the sustained pace of the reflation this market experienced. I dont think its because of the topic of this post. Rather, nothing goes up forever and this market simply 'needed a breather' at a time when this market normally slows for seasonal reasons anyway.

I'll end this discussion with a snapshot of this Broker Status Tool (as of this am) and a near term chart of the sharp decline in the Euro:


Real Estate & Banking Reality Check

Posted by jeff

Sat Jun 12th, 2010 02:43 PM

Since March 2010, Mr. Bernstein has served as Senior Vice President, Research, for AH Lisanti Capital Growth, LLC, a registered investment adviser. This commentary solely represents Mr. Bernstein’s views and opinions as of June 12th, 2010, does not constitute investment advice and does not depict the views of AH Lisanti Capital Growth, LLC.

Reality%20Bites.jpg I had the pleasure of listening to a conference call with Matt Anderson of real estate market consulting firm Foresight Analytics last week, sponsored by Oppenheimer & Co. The call was billed as a state of the construction financing market review, but it was really a tour de force on the real estate, banking and CMBS markets. As these markets were and are still ground zero in the financial crisis, I thought it would be worthwhile to review exactly where we are in the healing process, particularly in light of the latest funk that has settled over the credit and equity markets.

According to Foresight, commercial construction deliveries are down from just over $200 billion in 2008 to approximately $75 billion in 2010. This level of activity is lower than the prior real estate cycle troughs of 2003 and 2002 and close to 1976 trough levels. Next year is also expected to be weak in terms of construction activity - not unexpected. Residential construction starts peaked in 2005 for both single-family and multi-family units. Single-family unit starts were about 1.7 MM, which eclipsed the 1978 level of about 1.4MM, when population was growing quite a bit faster. The trough was around 475,000 in 2008 (the lowest post World War II) and is currently running around a 600,000 rate, bumping up to about the trough levels seen in the 1982-1983 recession, and still well below recessionary 1992 levels. Multi-family starts of just over 2MM units followed a similar pattern.

In 2007 there were $90 billion of office building starts. This number is running about $37 billion in 2010. Warehouse construction value is down even more, declining from about $120 billion at 2007's peak to about $21 billion in 2010, which is actually an uptick from 2009. Total construction loans peaked at about $610 billion in 2007 and have declined to about $400 billion in 2009. Construction lending will be down in 2010 and likely in 2011. Construction loan delinquencies have been ballooning with condo loan delinquencies running an incredible 40%+ since late 2008 (although they appear to be peaking), and single-family construction loan delinquencies around 27% (they have been moving ever so slightly lower since mid 2009), according to FDIC data. Just under 14% of rental apartment construction loans are delinquent, with commercial construction loans just a shade behind. Neither of these give any appearance of slowing down from their currently less horrific levels.

From the work that I do on banks I can tell you that banks have been forced to "get busy" writing down their bad construction, development and land loans, particularly because of the very high severity of losses associated with this kind of paper. (In some areas where buildings can be purchased for less than their construction costs, the residual value analysis on land kicks out a negative value - as in "you'll have to hold the land for a long time and pay taxes on it before you can sell it or develop it.") As a reward for aggressively writing down bad construction, development and land loans, reserving for the eventual losses on disposal and raising enough capital to cover such losses, the FDIC allows you to stay in business. There is one more minor instantly get added to the list of surviving banks, which of necessity will be allowed to bid on and acquire other failing banks that did not "make the grade." While competition in these bids has heated up (the discounts to already written down asset value being bid have declined) and the FDIC has feathered back its 90/10 loss sharing deals to an 80/20 split, it is banks that are getting the opportunity to "shoot fish in a barrel" today rather than private real estate investors and REITs, which had the better opportunities in the old RTC days.

Now here is where it gets interesting, in my view, while banks (which equity investors have tapped as survivors) have raised enough money to deal with their land, development and construction loans, they have not necessarily raised enough money to deal with all their bad commercial (investor-owned and owner-occupied) loans. The issue is not so much delinquencies, which while they are a problem, are nowhere close to as big of an issue as dud construction loans. Rather, the more pressing issues are potential maturity defaults. First let's define some terms. A maturity default is when the loan of a borrower, who was making their loan payments, comes due, and that borrower can neither find a new loan to take its place, nor afford to pay off the remaining amount due under the loan. Let's look at a theoretical example of how this could happen.

Let's say that I bought a property for $10 million that generated net operating income (NOI) of $700,000 per year. I took out a five-year mortgage at 6% (typically with a 25-year amortization schedule) at an 80% loan-to-value ratio. This loan would have a debt service coverage ratio of 1.2x (these were pretty standard terms a couple of years ago). In the interim my NOI fell to $650,000 and the loan amount amortized down to $6.9 million; unfortunately, due to worries about the economy and declining rents and NOIs in the market, the appraised value of the property has fallen 20% to $8 million. Now that the loan is maturing the borrower needs to get a new 5-year loan (interestingly; rates are similar), but let's look at the new underwriting. The borrower needs $6.9 million on an $8 million property or an 86% LTV, a non-starter, when most banks have lowered the LTVs they will offer to 65% or less. Interestingly, in this case the debt service coverage ratio would remain 1.2x, so the cash flow from the property, although down somewhat, fully supports the debt needed. In some cases the NOI would be down even more and the debt coverage ratio would be insufficient to meet tighter banking standards of 1.25 or more now required in many cases. It's easy to see that banks are facing situations where perhaps a borrower could stay in a property if underwriting standards were made more lenient, or if they didn't have to meet both the LTV and DCR standards, but these borrowers would be unlikely to be offered another loan if current lending standards were strictly enforced. According to the many banks from across the country that I have talked to in recent months, the regulators are in no hurry to turn these marginal loans into bad loans right away. One really big motivation for the regulators participating in the pretend and extend strategy is that they too are short on capital, with the FDIC in particular out of money and raising its insurance premiums to banks as quickly as it can. True also, they learned from the experience of the early 1990s, when overzealous ex post facto regulation caused banks to write down collateral backing delinquent loans to levels that had to be reversed and written back up a few years later. Many more properties were blown out for big losses that would have recovered significant value later and the government lost money on properties it took over from failed banks by selling them through the RTC hastily.

According to Foresight, there are $270 billion of commercial and multi-family mortgages maturing in 2010 and $300 billion per year maturing between 2011 and 2013. However, about 60% of these loans are currently being extended. This means that the lender is being allowed to stay in the current mortgage, beyond its maturity date, with the current terms and underwriting standards. In some cases banks are entering into troubled debt restructuring agreements or "TDRs," a term you will be hearing more and more about. In these cases, the bank may require the borrower to post additional collateral against the loan. In extreme cases they will segment the loan into a good "A" piece that the borrower's property can support and write-off the bad "B" piece (with numerous variations on this theme). Foresight notes that commercial real estate prices are down much more than our example above, or roughly 42% according to Moody's, so there is apt to be a lot of situations where the messier "A" piece "B" piece scenario wins out over a standard "kick the can style" TDR.

Considering that banks hold a little bit more than 50% of the commercial real estate loans that will be maturing, bank solvency is still very much an issue to be grappled with going forward. Interestingly to me, the CMBS market, which seemed much more loosey goosey than the bank market, is reportedlly seeing similar default rates thus far. Acccording to Ken Rosen, of Rosen Real Estate Securities, Inc., there will be a similar $1 trillion of CMBS loans to be restructructured over the next couple of years, but with an improving economy and virtually no new construction, the severity of losses may not be extreme. Of course, the single-family residential debt issue is a much more severe one for the economy as a whole, with delinquencies continuing to soar to historically high rates according to Federal Reserve data (View image). According to Foresight, an expected $190 billion of total loans carrying > 100% LTVs by 2012, largely driven by single-family homes. This is a problem for Fannie, Fred, FHA and by way of paternity, Uncle Sam. No wonder the markets are a little freaked out about sovereign debt risks.

Calling the shots from the sidelines: why you need to be in the market to understand it

Posted by anamaria

Thu Jun 10th, 2010 09:14 AM

I had the opportunity to speak at length with an Apple, Peeled contributor, Mitch Askinas of Warburg Realty, about his observations of the market today. Pointing to two case studies, his current take on the market is that: 1) the higher end ($3MM+) is definitely picking up, and 2) the lower end is showing a material preference for fresh renovations. In our discussion, Mitch pointed to the correlation he sees between those high-end buyers/sellers and their respective confidence in their market understanding.

This reminded me of a conversation that Noah and I had about Gary Malin’s recent interview with TAP, in which he cited that, based on the data transparency that sites like PropertyShark and StreetEasy provide, clients now often think they know better than the “professionals”, even though they’re not actually in the market.

So what’s going on? The theory goes that a client making $1+ million a year, particularly in the finance industry, can be rather difficult to advise. The wealthier the clients, the bigger the “poker players” they are, as Mitch likes to say. This often translates into a greater satisfaction they tend to get from treating the negotiations process as sport, rather than the means to an end of selling or purchasing a property.

I don’t think this can be reiterated enough: you have to be in the market to know the market. Analyzing statistics and reading headlines will only take you so far. This was a point also vehemently made both by Gary Malin and Mellisa Cohn; data is only data … interpreting it requires an on-the-ground presence. Further, most data points out there are lagging indicators. We know that, by the time the NYT does an article about low inventory, the on-the-ground reality will have shifted. By the time the media says you must buy (or sell) now, that is often a contrarian indicator.

The market is more dynamic than ever; the best way to understand it is to be in it, be engaged, see properties, talk to buyers, place bids … it’s quite easy, and often enjoyable, to be on the sidelines analyzing it all. There’s even merit to doing so in order to maintain a more macro or objective perspective on what’s happening.

But the market is not clean. It doesn’t lend itself well to sterile analyses and logical predictions. There are egos involved, with real human beings on each end of the transaction. As such, the market does not have to be rational. It does not have to be efficient. Buyers don’t have to purchase, and sellers don’t always have to sell. Being attached to what should be versus what is will likely not get either party what it wants. Much like a marriage, there’s no such thing as an exact 50/50 in terms of who has the power in the relationship. In Q1 of 2009, sellers yielded, many out of fear and others out of necessity. In Q1 of this year, it seems more buyers have yielded, motivated by lower inventory and a solidified sense that the market may be turning.

The point is that neither a CFA, a large salary nor some website statistics does a real estate expert make. Get in the game, stay on the ground and test the market. If you’re going to work with a real estate professional, find one you trust and whose expertise you respect. The job of a true professional (in any field, frankly) is to partner with you and tell you what you need to hear, versus what you want to hear. Keep in mind that wherever transactions are happening, at whatever price-points, however under or overvalued they might be from an analytical standpoint, that IS the market, pure and simple.

To end on an old Buddhist quote: “To deny the reality of things is to miss their reality.”

GUEST POST: What NYC's rent multiplier tells us about housing prices

Posted by anamaria

Wed Jun 9th, 2010 08:17 AM

GUEST POST: Published by Yaron Sadan of


As a resident of New York City, this topic is near and dear to my heart, and I am obviously a biased observer; however, today we’ll just focus on the numbers.

Bloomberg recently had an article about New York real estate prices and new condo development. Within the article, was this:

The relationship between home prices and rents typically remains steady within a market, Miller said. In Manhattan, the average apartment, adjusted for inflation, cost 8.1 times annual rent from 1991 to 1997, according to Miller Samuel data. That means that in those years, buyers in Manhattan concluded that the long term benefits of owning an apartment — tax savings and property appreciation — were worth an initial investment of eight times the cost of renting.

Then in 1998, Manhattan prices began a decade-long climb, with year-over-year values rising by 10 percent or more in most quarters. By the second quarter of 2008 apartment prices peaked at 22.4 times annual rent, according to Miller Samuel data.

For the full article, click here.

I went to look at some apartment listing around the different neighborhoods. Here are some of my assumptions:

Assume you bought a 2 bedroom for roughly $900,000 (we’re talking about $750 sq ft) – a good deal, not the top building and a discount for the fact that many buildings in New York are co-ops that face a discount for a host of reasons (annoying boards, lack of liquidity, rental limitations, etc.). The rent on the apartment would be roughly $4,500/month at current rates.

At a rent multiplier of 15 (average of 8 and 22), we’re looking at a “fair value” of roughly $810,000 – a 10% drop in real estate prices. But rents have been falling – the article suggests by 6% from last years levels. Let’s assume a conservative 6% drop going forward to $4,230. If that’s the case, we’re facing a 15% decline in real estate prices.

Those are some serious assumptions – so let’s take a closer look.

1. Rents might stay stable, but with financial services continuing to be a big loser in the most recent unemployment figures (over the last 5 months, financial services lost 58,000 jobs) and those being the drivers of high rents in the city, it’s tough to see rents staying stable. A 6% decrease is just based on the rent decrease last year, however, rents could certainly drop by more. With a lot of the new developments mentioned in the article as shadow inventory for either sale or rent, one or the other will be pressured, probably both.

2. Rent multiplier: I used the average of the high to low mentioned in the article. It’s probably a fine long term assumption, but the trend has been for the multiplier to come down and it could certainly overshoot to the downside. At stable rents (not likely) and a multiplier of 10, we’re looking at a 40% decrease in prices.

3. Range of prices: I used a conservative $750 per square ft. assumption. Many listings are at $1,000 per square ft. or higher, and while the rents in those buildings might be higher, there were plenty available at lower ranges. That would translate into very different rates of change for the higher level and new construction apartments.

4. Condo vs. Co-op: New York is a quirky market. Co-ops are more restrictive, and most apartments are owner-occupied. Additionally, co-op boards have much stricter entry requirements for down payments than banks, so their conservatism means that their owners will face less pressure to sell. In turn this may actually result in MORE selling pressure in the condo market as investors and real estate owners who own both will have more liquidity in the condo market than co-op.

5. External buyers have always been attracted to New York. Pied-a-terre’s for retirees or international owners are relatively more common than most other cities. In 2004 to 2008, it was common to hear about European buyers coming in as strong bidders. Except, at the time, the euro was strong and getting stronger. These days, real estate in the US looks a lot more expensive and many investors don’t want to lock up their money. Not that there won’t be foreign buyers looking to lower their exposure to their home currencies, just that it will be more of a hurdle.

All of that leads me to be quite concerned about New York City real estate prices.

Where the Deals Are Happening 2 Q 2010

Posted by Toes

Tue Jun 8th, 2010 11:18 AM

April 2010 - What's going on?! After an unbelievably busy Nov-March, nothing seems to be happening! Apartment for sale or for rent in landlease building finds a renter first. Offer of $1.4M all cash for an UES property asking $1.6M, couldn't make a deal happen, reduced price to $1.55M in late May to try to get something closer to what sellers are hoping for. Apt still on market, more interest at reduced price. Apartment needs major renovating - tough to find buyers for fixxer uppers right now.

May 2010 - Offers of approx $2.5M made for two SoHo lofts. Just when we thought deal was struck, other buyers came in and out bid my customers, BOTH buyers were all cash (mine are financing 50%).

May 2010 - New development in Brooklyn comes back on line at significantly reduced prices (as in apartments that were $525K are now ~$400K). 40 buyers got prequalified by the building's lender within 2 days of first open house. Buyer makes offer 2 days after first open house for small one bedroom with large outdoor space but his first choice is gone already. Makes offer for similar apartment next door slightly below ask (this was the only other apartment in the building he wanted), sponsor paying transfer taxes (TTs) and Sponsor Attorney's Fees (SAFs.) Contracts out.

May 2010 - Made $600K offer on UES apt asking $665K. (Apt originally purchased in 2006 for $675K). Buyer came up to $615K, seller came down to $640K. Other broker and I could not get seller and buyer closer together. Apt still on market.

May 2010 - Received offer on Village one bedroom loft for ~7% below new asking price of $650K (was $675K). Seller gives good counter, but buyers will not come up enough to meet sellers "bottom line." Apt has only been at this price for 10 days including a holiday weekend and there are a few second showings scheduled... Received another offer. Trying to decide between higher offer but possibly less qualified buyer and lower offer from slightly more qualified buyer. To Be Continued...

Toes says: Studio and one bedroom market still strong. Two bedroom renovated lofts in SoHo/prime Tribeca (priced well) in the $2.5M range seem to be flying off of the shelves.

Toes says: Apartments that sell the fastest have something special about them - renovations, views, outdoor space, lofts, etc. Anything not renovated takes much longer to sell. The below 23rd Street and above Canal Street market is alive and well. Williamsburg is also really active now that prices have come down.

Toes says: In my own business, April / May were slightly slower than the first 3 months of 2010 as far as deal actually being done. I'm wondering if it is just my business or if other agents experienced the same thing. I did have two buyers who were rushing to take advantage of the home buyers tax credit, which made them more motivated to purchase.

Looking forward to seeing what the summer brings! My team also does rentals and we're booked solid since summer is the busiest season for rentals. Landlord concessions are way down, most have stopped paying broker's fees and/or free rent. Renters are going to have a hard time adjusting to new rental market.

China Syndrome?

Posted by jeff

Mon Jun 7th, 2010 02:21 PM

Since March 2010, Mr. Bernstein has served as Senior Vice President, Research, for AH Lisanti Capital Growth, LLC, a registered investment adviser. This commentary solely represents Mr. Bernstein’s views and opinions as of June 7th, 2010, does not constitute investment advice and does not depict the views of AH Lisanti Capital Growth, LLC.

China%20Syndrome.jpg If you read the newspaper or surf the web, you know that several well known market pundits and professional investors including Marc Faber, James Chanos, and Harvard's Kenneth Rogoff have been calling for a Chinese economic crash driven by a breakneck pace of growth, easy money and a real estate bubble. Owners of commodities, materials and energy stocks have shown obvious concerns about the recent tightening of monetary policy by the Chinese authorities, as well as direct regulatory efforts to rein in real estate speculation. The chart of Dr. Copper(View image), "the metal with an economics degree," clearly highlights the concerns that began in January about slowing Chinese growth. So the question becomes, is there really a Chinese housing bubble? and is it starting to pop right here right now?

I was fortunate enough to attend a teleconference last week hosted by JP Morgan with the head of Chinese real estate research at Jones Lang Lasalle in Beijing, Michael Klibaner. Klibaner explained some of the misconceptions about the Chinese residential real estate market. While the Chinese real estate market was operated with a fair amount of leverage on the part of developers in the past, a real estate downturn in 2007 cleansed this imbalance and developers are being forced by banks to maintain much higher liquidity levels. The typical construction loan is underwritten today at a reasonable 50% loan to value ratio. Recall that there was not a huge amount of spec building going on for most of the U.S. housing bubble, however. It was the buyers who were specs. The same issue is the one being nipped in the bud today in China. New regulations are limiting buyers of real estate to the purchase of two second homes and in some cases are only allowing current residents of a city to buy a second home.

Perhaps most interesting were the comments on why the Chinese real estate market is not considered to be a gambling arena so much as a primary savings vehicle. Due to the fast pace of economic growth and loose money policies being utilized to sustain it, China has a negative real interest rate, that is, the interest rate less the inflation rate. This means that if you put money in the bank you are guaranteed to lose money on an inflation adjusted basis. For this reason middle class and wealthy Chinese, who are benefitting mightily from the fast pace of economic growth in the terms of cash flow generated from their businesses, are challenged to find a place to invest their savings. The Chinese are prolific savers in part due to the country's lack of healthcare and other social safety nets. Furthermore, the populace has been turned off to equities due to the illiquidity and volatility of the Shanghai bourse. As a result, the Chinese have gravitated to real estate as their primary saving vehicle.....chilling you say?

Perhaps the most fascinating aspect of the discussion regarded the leverage trends in Chinese residential real estate. In part due to a desire to salt away as much cash as possible in real estate, Chinese buyers' taste for leverage is low, the volatility of prices and their generally string upward bias could be another factor. To wit, the average loan for the purchase of a home in China takes place at an LTV of.....drum roll.....55% and fully 25% of residential real estate purchases are made in cash. As a result of the general appreciation trend in real estate values in China, the average LTV of loans on the books of Chinese banks today is......45%, yes ladies and gentlemen 45%.

Bubble in prices or no, it takes three factors to make an unstoppable crash: elevated prices, excess supply and leverage. I would argue that the current U.S. commercial real estate bear market demonstrates that leverage is by far the most important factor. In China elevated prices are the only factor that seem likely to be in place. I would note that according to a recent U.K. Telegraph article, "Although China's property market is volatile, and will remain so, it's worth noting that even today's prices aren't out of alignment with the expansion of the economy. An index calculated by Commerzbank which divides Chinese property prices by nominal GDP has fallen more than 40pc since 1997. That suggests, over the long-term at least, current prices are sustainable."

Relieved? don't be too sanguine. According to Klibaner, the measures taken by the government have already caused building to slow markedly in several major cities and this is part of government's strategy to reduce economic growth from the double digit area to 8% exiting the year. This is already weighing on steel prices and other building-related commodities in the construction supply chain. So on the whole I don't believe we are seeing the beginning of a Chinese nuclear meltdown, those commodity ETFs and materials stocks could still have some downside.

Can a property be priced too low?

Posted by anamaria

Sun Jun 6th, 2010 04:12 PM

I am constantly reminded of the general inefficiency in the market when it comes to pricing properties. (As you might expect, the pricing part (“the ask”) has a much greater tendency towards inefficiency than the closing price, which has the benefit of incorporating the demand side of the transaction equation.) Nowhere does this stand out more than when looking to the land of FSBOs, and looking at wildly aberrant swings of pricing too high or pricing too low.

About a month ago, I posted the following on TAP (The Apple, Peeled):

The theory goes that FSBOs (for sale by owners) offer better deals to you, buyers, because they save on the typical 6% commission and can pass those savings on to you. We thought we would take a sampling of properties at different price points, and see if this theory holds water. (Of course, all we have to count on is the asking price, so bear with us.)

420 E 55th Street
FSBO: asking $575k for apt 1B
Broker: asking $550k for 9B, on the market 13 weeks

301 E 79th Street
FSBO: asking $740k for apt 8N
Broker: asking $650k for 17N, on the market for 17 weeks

299 W 12th Street
FSBO: asking $1.55mm for 15k
Broker: asking $1.47mm for 6K, on the market 25 weeks

It’s not surprising that pricing comes in above broker-represented properties. Back in 2006 when Urban Digs conducted a similar experiment, he yielded similar results. Just because owners save that 6% doesn’t mean they’ll trickle down those savings.

Now for the other side of the coin: when we dug into the FSBO listings for analysis, what we found is really a bifurcation of property pricing … a bi-polar pricing pattern, if you will: either pricing above market, as the above suggests, OR pricing significantly below building comps or below market. This begs the question of how much money they may, in fact, be leaving on the table for the sake of saving the broker commission.

This last piece is the part that I’d like to point to and question: the concept of under-pricing. Said in a different way: is there such a thing as pricing a property too low? Way back in November, a nice little conversation was started around this very premise. At that time, Noah commented that:

I find that sellers feel that they are GIVING AWAY MONEY if they price their unit at or slightly below where it likely should trade given market conditions and comps. The seller response is something like..."well, I know it should sell for around $1.5M, but how will we know if we cant get $1.6M if we don’t price near $1.8M"? So, they price at 1.8M, listing gets no traffic, no sense of urgency, gets stale over time, and after 2-3 price cuts every buyer out there knows they can probably approach the seller differently. Pricing high to test the market is usually counterproductive unless we are talking about a property with exceptional features.

Whereas other commenters noted:

Sellers can't disassociate psychologically from wanting to discount.

Your suggestion of option 3 [under-pricing] as "intellectually" the correct choice assumes multiple bids for a unit. Even if traffic is good and pricing is great, isn't assuming multiple bids coming in at the same time too much of a leap of faith?

As a potential buyer, I would not under any circumstances engage in a bidding war in this climate. I may offer above ask for a property that is clearly priced below, but I would walk away if a broker told me that I would have to engage in a bidding war to get the deal done.

I've sold twice without a broker before and both times did #3. Both times I sold in a bidding war. Both times I got more than the most recent building/area comps.

As a buyer, I can point to dozens of apartments that I really liked, but didn't even bother to look at, since the asking price made the seller look irrational. for some of those, its possible that I would have ultimately put in a bid, but they took themselves out of the running by indicating an unrealistic price expectation. More importantly, I've also seen a few (not as many as I would like) apartments clearly priced below market. For each one of these, I quickly contacted the broker to see the place in order to place a bid. In all of those circumstances, I found that there were already multiple bids at or above ask.

When the market was really hot, we sold two properties for well above asking by pricing enough below then-market value to generate a bidding war. But in this market I would assume that a place priced low might very well not sell above that price -- but it would sell, and pretty quickly.

Although, I'd hopefully drop out when it turned into a "bidding war", I don't see any issue competing with other buyers if I think they are also bidding rationally and the asking price started out below where I see fair value.

Since November, we have the benefit of hindsight knowledge: bidding wars have indeed materialized since then and sellers have been much more savvy in terms of pricing their properties to leverage those first few critical weeks on the market. The NY Real Estate Market (not the world economy, mind you), does appear to have at the very least stabilized, with the lower end comparing favorably to last year from a pricing standpoint. Sellers appear infinitely more realistic and the buyer pool has shifted away from deep value or distressed hunters to needs- and feature-based buyers.

My questions therefore are:
• Now that we are in a different market, is the concept of “under-pricing” that much less controversial, less of a leap of faith?
• Have the market dynamics normalized enough to conclude that the this strategy will, in fact, help a property reach “market pricing” in the quickest time possible?
[To even entertain this notion, you must first believe that markets determine prices, not sellers or brokers.]

Inquiring minds wanna know ☺

UPDATE on Where the Deals Are Happening, Q 1 2010

Posted by Toes

Fri Jun 4th, 2010 12:23 PM

Christine Toes here. Since Noah is on vacay, I thought I would update my post from late February on what I have seen in my own business in the first quarter of 2010:

Jan 2010 - 201 E 28th, large one bed co-op with HUGE outdoor space/views/three exposures, asking $799K on 9/1, reduced to $749K mid Oct, contract signed early January. Closed in May at $700K. Note that these sellers took a loss of at least $75K.

Jan 2010 - 77 Seventh Ave (14th St), renovated, converted alcove studio co-op w/ views asking $525K. Multiple offers. First open house 1/17, contract fully executed 1/27. Fastest co-op closing ever due to buyer who was really on top of everything and fast board approval. Closed in April at $520K, less than 1% below ask.

Jan 2010 - 101 W 23rd St, renovated, converted one bedroom in a landlease co-op building. In contract at asking price after being on market since 9/2009. Price drops in Oct & Nov, then with reduction from $275K to $260K on 1/4, OFAC within ten days. Since it hasn't closed, I can't give you a price yet, let's just say it was very very close to ask. Seller and buyer asked for delayed closing. Landlease building, praying for no last minute issues with financing. Note that this seller took a loss.

Feb 2010 - 115 East 9th St, updated, one bedroom co-op w/ views. On market 2/7, first showings 2/12, 52 buyers viewed property between 2/12 and 2/15. Four offers at best and final. Cash offer accepted over asking price, 1/15. Two bidders were putting over 50% cash down. Two of the bidders had just lost bidding wars on other units, came to view the apartment during a blizzard and came in strong with offers the next day. Seller changed mind, decided not to sell (long story).

Feb 2010 - Williamsburg, Brooklyn new development condo - Under $500K One bedroom, contract out at 8% below asking price, sponsor paying transfer taxes and sponsor's attorneys fees, so total package was 10% below asking price. Only 35% sold at time CSGN. Closings projected for late Summer/early Fall (which likely means late Fall/early Winter). This buyer backed out of a deal at another Brooklyn new development. His attorney and I made sure he had an "out clause" if they hadn't closed by a certain date. They were three months behind schedule with at least another 2 months before TCO. Buyer decided that the Williamsburg building was a better deal, even though there are risks involved because it isn't very far sold.

Feb 2010 - Williamsburg, Brooklyn new development condo immediate occupancy, 85% sold and closed. $830K two bedroom w/ city views, buyers wanted 15% below ask, developer would only do 10% citing market pick up. No deal.

Feb 2010 - Same buyers as above. Williamsburg, Brooklyn new development condo, 60% sold and closed - $850K two bedroom w/ city/bridge views, buyers wanted 15% below ask (prices already reduced 19% since offering plan filing), developer would only do 10%. After looking around a bit more and deciding that this was the best deal for them, buyers eventually increased offer but requested that an alteration be made to the master bath (addition of double sinks). Sponsor agreed to do renovations but buyers had to produce a mortgage commitment letter prior to the renovations being started. Closed May 2010 at $800K.

Feb 2010 - Upper East Side one bedroom co-op with outdoor space, ask $560K, on market for three open houses, contracts signed at less than 5% below ask. Buyer putting 50% cash down. No closing yet due to fact that 50% of building is sponsor-owned. (Buyer is real estate attorney and knew this could be an issue but loved the apartment and outdoor space. We had been looking in three boroughs for almost a year Plus he has a financing contingency). In February, bank said "no problem" re: sponsor ownership. Then lending guidelines changed between Feb and May and bank said "sorry, no deal." Buyer has new lender who says "no problem." Fingers crossed.

March 2010 - Chelsea one bedroom co-op asking $650K, thought customer had it for $615K, contracts went out, higher all cash offer came in, buyer lost apartment.

March 2010 - Same buyer as above finds Village apartment asking $590K. After another multiple offer situation, he signs contract on the apartment for slightly over the asking price. Closing in two weeks. Note that this seller purchased one year ago, did not do any renovations to the apartment and is selling at a higher price. Bank actually gave us a hard time on that one because they were arguing that it was a "flip," but it worked out in the end.

Post to follow tomorrow on 2nd Q 2010.

Market Turbulence Or Something More?

Posted by jeff

Wed Jun 2nd, 2010 07:27 AM

Since March 2010, Mr. Bernstein has served as Senior Vice President, Research, for AH Lisanti Capital Growth, LLC, a registered investment adviser. This commentary solely represents Mr. Bernstein’s views and opinions as of June 2nd, 2010, does not constitute investment advice and does not depict the views of AH Lisanti Capital Growth, LLC.

It has been way too long since my last post....apologies. I went back to the dark side (Wall Street) about six months ago and have been busy ramping up coverage of various industries. I hope to be much more active on the site again and I am looking forward to the Urban Digs 2.0 launch. So let's get down to business. It is no secret to anyone that the stock market acts like crud, actually stock markets worldwide act like crud. The question becomes, is this a normal bull market correction, is it an "Asia crisis type" intermediate-term correction or the end of a cyclical bull market within a secular bear market in place since 2000?


It is not happenstance that the market ran into trouble around 1,200 on the S&P 500, which was the area that the market really fell off a cliff from, back in late 2008 (circa Lehman Bros. failure). I noted the resistance at these levels back in November of last year (No one Here But Us Chickens) and opined that there would be more skepticism about the rebound at some I admitted at the time I am usually too early.

So the market has experienced a fainting spell just under major resistance.... predictable. But is it something more? Certainly the PIIGS situation is on everyone's mind, add some slowing in China and you have the makings of a "here we go again moment". (I will be addressing the China situation in a future post.) But from a technical standpoint, here are the key features of the chart above. The market, which had been in very good shape, trading above both its 50 and 200 day moving averages (with great breadth- meaning many many stocks and industry groups were participating in the rise), experienced a pull back to its 50 day moving average and then dove through its 200 day during the "flash crash". Vince Boening, the former DLJ market technician taught me years ago that when a market with a strongly positively sloped 200 day moving average (he actually used the 150 day), has a sudden breakdown, there is a natural dynamic tension for a snapback. (This lesson actually took place during the Asia crisis of 1998, when the market had a big swoon, but soon recovered and went on to new highs - Vince Boening was practically the only technician who stayed bullish through the "intermediate-term correction"). Right on cue this time the market had a huge rally catalyzed by the Trillion Euro bailout announcement.

Since that time, the market has begun to take on a much more toppy posture, rolling back over, breaking the flash crash lows and 200 day moving average again, and pushing the 50 day moving average into a negative (downward) slope. Recent action is now turning the "primary trend indicator" the 200 day moving average into a flat slope. The latest action has prompted highly regarded technicians like Stan Weinstein and Carter Worth (Vince Boening's disciple) to become highly suspect of this bull market's longevity. I too have become much less sanguine regarding the intermediate-term outlook (6 months) for the market. However, I would note that the market is now very oversold as illustrated by the MACD indicator at the bottom of chart above. It is very likely that we will see a rally from here, that will work off this oversold situation. My bet is that the rally conks out around 1,150 on the S&P tracing out a "head and shoulders top". Let's hope I am wrong - until the 200 day moving average becomes negatively sloped I won't turn fully bearish. The strong market and active fund raising of Wall Street has proven salubrious to the New York City economy and real estate market as Urban Digs has acknowledged. My outlook is turning more cautious with the technical deterioration I see in the market.

Off To EU: See You In 2 Weeks!

Posted by urbandigs

Tue Jun 1st, 2010 01:57 PM

Bon voyage all! Im burnt out, I dont want to see another raw piece of data again for at least 2 weeks, and I am ecstatic to get away from spot checking. Im off to France and Czech Republic and will try to stay dis-connected from the world for the next few weeks. I asked Jeff, Ana Maria and Toes to write a few articles while Im away.

I return mid-June when BETA testing will start. We expect only 2-4 weeks of testing with a few trusted brokers to make sure the system is as bug free as possible and as seamless as possible. Im very excited. This is the culmination of 3 years of envisioning, a year of development, and over 8 months of random spot checking to ensure accuracy and timeliness. I admit that when we first started, we questioned how much work it would take to get the gold out of the data. In the end, tedious is about the only word I can explain for the task that was at hand. This project truly took everything I got inside and when it launches I only hope you guys take the time to really see how this new platform can help you get a pulse on the Manhattan real estate marketplace. Until then, ENJOY all and expect content to be a bit light while Im away.