Markets Normalizing After 5+ Years of Fed Rigging? Where is the money going??

Posted by urbandigs

Thu Jun 20th, 2013 01:39 PM

A: Crazy stuff is going on in Equity markets and the US Treasury market right now as bonds are selling off in a fierce way. Sure, one can look at where we are and the bigger picture and say the infamous line, "but rates are still at historic lows.". But you can't just ignore the shock that comes with surging lending rates combined with equity selloffs. This is what happens when market's start to normalize after years of central bank engineering. While the 'end game' of all this is yet to reveal itself, this brief preview is quite sobering. It leaves me wondering, "where is the money going??"

While Manhattan continues to churn out deals at a high level, US Treasuries are starting to normalize and price in a world with out Fed manipulation -- and yes, the Fed is still buying $85Bln in Treasuries a month. Talk about unintended consequences finally kicking in!

Take a look at this 10YR chart comparing the S&P 500 (red) versus 10YR US Treasury yields (blue):spvstreasury.jpg
Typically, treasury yields rise as equity markets rise and confidence rises for broader economy growth/corporate earnings/higher inflation, etc.. Conversely, when equity market's selloff usually that money runs and hides into two main areas of safety: US Dollars & US Treasuries (sending yields lower). The chart above shows how since 2010 the gap between equity trends & treasury yields have been widening as a result of Fed's efforts to keep rates artificially low as banks continue to recapitalize and businesses/consumers refinance. This chart really puts the wizadry of the fed into context and is worrying when thinking about where rates might be today without all the intervention; and if the market is in the process of normalizing itself right now.

This is one of those situations where the trifecta of treasury bonds & equities & commodities are all selling off at the same time -- putting an added crunch on general investor sentiment that can feed upon itself if it continues.

It's hard to pin this selloff on anything other than the selloff in the treasury market and perhaps, the disruption of the yen carry trade & China's recent clampdown on their shadow banking system; both intervention led shocks as well. There are no free lunches and the party never goes on forever. It seems the US dollar is the only hiding place right now.

As for Manhattan, expect a minor hit to buy side confidence from recent events, but nothing near the level of shock that we saw back in 2008/2009. We are far far from those 'fear' times and the only real question is whether today's market forces ultimately define the top of this 4+ year reflation we have enjoyed since early 2009. I have said repeatedly in the past 2-4 months that "I can't think of a better time for sellers to list" -- as the UrbanDigs realtime system shows production at the highest levels since 2008.

We still continue to see bidding wars for desired property, especially below 14th street, and we continue to see the leverage pendulum swung to the sell side. But Manhattan is a very fast paced market and I'll be watching the UD daily production ticker to see if deal volume starts to slow. Should the trend of equity selloffs and surging rates continue, say to the tune of another 7% to 10% or so, expect a 'media effect' to kick in and buyers to add pause to their recent aggressive bidding strategies. Something Manhattan has not been used to recently. Stay tuned!

Reflecting on Manhattan's Recent Surge

Posted by urbandigs

Sat Jun 1st, 2013 04:11 PM

A: What we have been discussing here on UD for months is now starting to hit the mainstream media in a big way, with articles like "In a Sellers Market, Every Minute Counts" starting to come out. Perhaps a sign that the craziness has run its course? Who knows. When I look at deal volume I see that we are at the strongest levels of the year and blowing away production from past years. Hard to believe that in terms of contract activity, Manhattan is actually getting stronger! But it is. Today I not only want to reflect on this "first half surge" in Manhattan deal vol & decline in supply as I often do, but I also want to add in a view on Manhattan Price Action using the Streeteasy Condo Index as well. I don't like to look at median or average sale price trends because that is more a function of what types of properties are closing/filed and when; and less a barometer of 'price action' for the broader Manhattan housing market over time. Lets dig in.

TREND #1: Manhattan Deal Volume continues to Surge
There are a few reasons I haven't been writing much lately. One is because we are in the final stages of development for our new site, which turned out to be a complete re-engineering of our Manhattan market report system. The 2nd is because honestly, I'm tired of talking about how strong the market is! There is nothing new to report.

Inventory is still tight, although we are starting to see signs of an uptick in new supply -- Deal volume is through the roof, blowing away what we are used to seeing even in this "active" time of the year. I don't want to sound like a broken record every few days but in general, there continues to be a lack of quality product that is priced correctly on the open market -- in historically strong parts of Manhattan like West Village, Soho, Tribeca, etc., this translates into continued bidding wars for the 'best new stuff' that hits the market and plenty of "contracts out + backup" responses from listing agents.

Sellers are starting to change their approach in pricing strategy, to test how high a price the market might be able to absorb for their property. I'm starting to see some crazy pricing out there, but hey, if the seller chooses to take this approach then they have every right to do so. In the end, the market will dictate value.

Manhattan booked 1,486 new deals in May, that is +2.6% compared to a very strong prior month and +14.4% from May of 2012.

Here is Manhattan Monthly Contract Activity Since 2009, clearly showing how strong 2013 has been thus far:


TREND #2: Manhattan Supply continues to be Very Tight
The broader conclusion for general Manhattan supply is that it has been declining progressively since mid 2009 or so. Manhattan saw 4+ years of declining supply as "less stuff" was coming onto the active marketplace each month compared to past years. The chart below confirms this as the monthly supply bars take a downward trajectory over time.

However, the last two months saw "more stuff" come to market than what we saw the prior year -- which basically tells us that when factoring in seasonality, new supply is actually "ticking up" over the last few months. It's no where near the point where buyers have options again and more leverage in negotiations --for that we will need to see a macro or micro reason for buyers to pause, get less aggressive with bids, and perhaps go to the sidelines. Today's market is nothing like that and real-time deal volume trends continue to rise, although likely topping out for this active season.

Here is Manhattan Monthly New Supply Since 2009, showing the longer term decline & the recent tick up on a year-over-year basis:


TREND #3: Manhattan Price Action (SE Index) continues to Rise

The SE Index is a repeat sale regression algo that focuses on same unit transactions over time in an attempt to narrow down market price action. It's a barometer of Manhattan Price trends. By doing it this way, it removes the variables and flaws that come with grouping "all" property sales into 1 bucket and then simply looking at the median #. What I'm trying to say is that its the best tool available for the specific purpose of tracking Manhattan price action. Only thing is, it will be at a lag to what's happening in the field as there is a difference between when the deal was booked (the "contract execution date") and when the deal closed.

To show you this, I highlighted what I call the "Peak" period in yellow (mid-fall 2007) and what the UrbanDigs system shows as the "Bottom/Trough" period in orange (early 2009).

*Click here for UrbanDigs Chart showing Pending Sales bottoming in early 2009

With the latest April reading just released, the progressive reflation since 2009 becomes clear and the index puts us back to mid-2007 levels. We still have 2-3+ months of strong deals in the pipeline that are yet to (a) close, and (b) be counted in this index. Based on what the UD real-time system is telling me combined with what I am seeing in the field, I would expect the SE Index trend to continue to rise for another few months before topping out.

Hot products continue to be those with views, full renovations in prime areas, and unique features like outdoor space. I look forward to tracking Days on Market trends and Listing Discount trends in the new UD system soon; two metrics that should be added to this conversation to quantify Manhattan's frenzy first half of 2013, but are not completely engineered yet. In time.