Introducing the Less Worse Bull Market
"An optimist is the human personification of Spring" - Susan J. Bissonette
With Spring in full bloom in the metro area, and markets finally thawing from the credit crunch, this quotation seems extremely appropriate to welcome in the "It's Getting Less Worse Bull Market".
One week back from knee surgery, I'm still feeling some pain when sitting in front of a keyboard, so pardon me if the statistical back-up is a little lacking in this piece...but here we go. Corporate bond spreads have improved as you can see from the chart below comparing a High Yield ETF and the 10 Year Treasury.
The ABX Subprime Index has also rebounded as can be seen on this chart from Markit.com:
We know that the stock market has been acting much better, to the point that it has become extended - with nearly 77% of stocks above their 50 day moving averages (according to a recent Wall Street Journal article). It seems to be running into some corrective pressure, right where it should, at the declining 200 day moving average. In my piece Where is the Stock Market Headed? 200 Day SMA of February 4, I talked about the importance of this primary trend indicator turning negative, with specific reference to the rally that was under way at that time. I expected a retest of the lows of January at least. Frankly, with all the uncertainty at the time I expected the market to go appreciably lower. We got our "re-test" in March (getting back to the prior lows), and passed a financial market crash test (the Bear Stearns debacle) with flying colors. In the past, I have mentioned Ed Hyman and Nancy Lazar of ISI Group, and it is through Ed and Nancy that most every investor on Wall Street has learned that a wipe out of a major institution takes place at the crescendo of most every major financial crisis from Penn Central to Long-Term Capital, and that the stock market usually does much better once the poster child institution goes tapioca, as it encourages the Fed to bring out the big monetary guns. This has certainly been the case this time around, with the S&P 500 rocketing over 12% off the Bear Stearns low of 1260 to around 1,420 last Thursday. While the 200 day moving average is still negative and should continue to exert some downward pressure on the market, it is starting to flatten and I would not be all that surprised to see the market "break out" above it in the next month or two, signaling for many expectations of a more durable bull market.
So with all these emerging May flowers, one would have thought that the showers would be over with? It's easy to dwell on the continuing massive writeoffs and capital raises we are witnessing, including a small sampling here, here, and here. While the rating agencies' swords of damocles continues to hang over the mortgage insurance companies they continue to be forceful in their protest that with the latest capital infusions they will survive, as triple A rated credits no less.
The magnitude of the funds raised is pretty mind boggling. One wonders why investors are buying this new paper, if they don't expect some kind of rebound, as opposed to just an end to the bloodshed. Maybe playing the trade back to more normalized price to book values even on lower book values is enough for these players, who now see the risk of bankruptcy for financials as being behind them due to the implicit Fed put. My guess is that some players anticipate reversals of the current mark to markets at some point down the road, and see a big rebound in book value for their favorite horses in the race. It's possible, I guess, although for the most part we keep seeing default rates on various debt securities getting worse on not better.
Tom Brown of BankStocks.com has done a masterful job explaining why losses on 2006 sub prime loans will be less than expected, check out the pieces here and here. If he is right and his analysis is hard to fault, then the market's perception of the depth of the losses got over-done....basically the norm in these types of crises. Despite this, my guess is that the returns to be garnered on much of the capital raised to offset these losses will be low in general.
Just a brief anecdote illustrating why I believe this. I was speaking to a bank official for a large regional bank about assets the bank might have that are marked for disposition. The bank has experienced significant loan impairments already and has had to raise additional capital. The official noted that they were bringing in a new head of "special assets" to deal with disposing of bad loans and real estate owned (they don't have much real-estate owned today, but he admitted that they certainly would end up owning a lot more in the future). They wanted to put off discussions regarding disposing of non-performing assets until this new gentleman got up to speed, would not be selling any assets at fire sale prices and if they had any assets that were train wrecks they would hold them for their own account until they rebounded. In the intermediate future, they would dispose of some assets at a discount, but would not start the process until the commercial real estate markets had stabilized, which would depend on stabilization of the residential sector, which they were not seeing yet. I certainly sensed no panic on the part of said bank official, and no real urgency to act. Frankly, having been taught that your first sale is usually your best sale, I personally would not be putting my equity capital into the stock of a bank that was not trying to aggressively clean-up its books today - cleaning up responsibly and not in a fire sale, but cleaning up nonetheless. Although our banks have not totally ignored the bad debt issue as the Japanese banks did a decade ago - possibly because to marked to market accounting has not allowed them to - I get the feeling that the fed put and abundance of capital willing to re-liquify these institutions has destined us to a long, slow grinding re-adjustment, rather than a band aid pull-style quick turnaround in lending markets and commercial real estate prices in regions of the country that have over-supply problems.
Meanwhile, the economy overall seems to be holding onto its expansionary ways, if only by a thread. Residential construction hasn't helped the economy in a couple of years and the hurt has likely peaked. Commercial construction will slow but not crash. Domestically, large corporations employ only those deemed critical to be located in the U.S., so the slowdown is unlikely to result in massive U.S. job losses. Overseas markets are slowing with a lag and demand for our now cheap exports may be tempered, but probably not de-railed. The consumer, who constitutes 70% of the economy, is muddling through and reallocating spending to health care and education - the two positive growth sub sectors in the economy which are driving continued services economy expansion. So if a sub prime debacle, recapitalization of the financial system, raging food price inflation and $125 oil can't kill the economy, what will? Without an exogenous 9/11 type event, we may just be hitting bottom in the economy, until a new presidential administration gets the opportunity to make some bad policy choices some time in 2009.
So what does all this mean? In four words, It's getting less worse. While there are still tons of losses to be counted, and probably lots of capital to be raised to cover these losses, future bad news looks like it won't surpass recent bad news. The numbers might conceivably be equal in size, but the capital cushions being put into place and fed backstop facilities make it appear that future holes in the dike will not cause a collapse of the entire system. People are losing their sense of fear and are beginning to take risks again. My feeling is that their returns for this risk will be low, but hey, fed funds are negative on a real basis, so how much of a positive return can one expect to make anyway?
Less worse - that is what the coming bull stock market will be all about. It won't be about growth, which I predict will take several years to recover. But the stock market has done well in other periods of low growth. This time the cloud of incipient inflation and ultimately higher interest rates may restrain equity returns, but the worst could be behind us, which will cause pain to bull fighters and remaining sleeping bears.
Just to really test my hypothesis I checked in with my old buddy Stan Weinstein, technician extraordinaire. Stan has been telling his clients that he is intermediate term tepidly bullish. He thinks the market could exceed the S&P 500 1430 level and Dow Jones 13,135 level resulting in a big short squeeze, soon. Or it could fail to do so and correct for a month or so. Either way he doubts we are going to new lows and sees a selective bull market developing in the second half. Unfortunately, he thinks the coming bull market will grade a B- and we are set for several years of sub par stock market returns.
In the meantime, business around town is slow and getting slower and the mood may continue subdued even as the market breaks above its 200 day moving average. But a better stock market is "less worse" for New York real estate. Take it for what it is, not a huge vote of confidence, just a factor that may start to augur better for the moods of potential buyers as we head into the dog days of summer.
Other Less Worse Thoughts on The Stock Market From The Blogosphere:
Merrill To Crank Up Sell Ratings - Major Contrary Indicator
Add to NewsvineBidding When The Price Is Right
A: A great topic of discussion for the times I think. Let's say that you are a serious and qualified buyer, have good product knowledge, and have seen plenty of units in your price point making you a mini-expert on the current state of the market. Let's also assume that you have learned what 'priced right' actually is for your price point, and that gets confirmed after you analyzed building comps for one property in particular. How do you proceed?
The Manhattan real estate market is one of the faster housing markets out there. Demand can pop up at any time, deals can fall through in a heartbeat, bidding wars can erupt if a quality product is under-priced, and buy side attorney's must be very timely in their diligence to get a deal done quickly so the seller broker doesn't use the accepted offer as leverage to other interested buyers.
With all that said, in my humble opinion, a housing market is deemed weak or strong by the level of buy side demand. In a phrase, its 'all about the buyers'! When buy side demand dries up, you will see inventory rise very quickly and all of a sudden getting top dollar is a bit harder to accomplish than in past times with stronger buy side demand. But what happens when the environment is one of cautiousness and a quality product (yes, I view property as a product that will ultimately be resold on the open market) is actually priced correctly? How do you devise a bidding strategy?
First off let me say this for the current environment: A SELLER'S BEST CHANCE TO GET TOP DOLLAR IS TO PRICE CORRECTLY AND LET GO OF THE 'TEST THE MARKET' EMOTIONAL ELEMENT WHEN DETERMINING THE STARTING PRICING LEVEL
Hands down I believe in this. Sure, there will be pockets of luck here and there that will experience the beneficial 'perfect buyer' or 'greater fool theory' that generates a buyer paying a noticeable premium for an overpriced property; but these scenario's are few and far between.
As a seller do you risk it? I wouldn't advise it. Honestly, do you feel that the current market is 10% higher today than it was around this time last year? Some sellers do, I don't. But it has become socially acceptable to price a property in this manner, even when building trades from the past 6 months don't support the price that the seller has in mind. In addition, being pitched by hungry brokers promising the world and an extra $300/sft because they employ the most effective marketing techniques doesn't help. I digress.
The point of today's post comes from my in-field experience that I want to openly discuss with you. Keeping details private for now, how does a broker advise a buyer client when the right property pops up and is priced exactly how it should be priced? In short, it depends on the emotional element of the buyer, how the property meets the needs of the buyer, how the property fits into the financial affordability of the buyer, their willingness to bid in line with what the building trades for, and their acceptance that this product holds the best features for resale out of all the products viewed.
I discussed risk discounting in my quick update yesterday as a phenomenon that I am noticing with some of my buyers. But fact is, when the decision to buy is already made and the product at hand is clearly the best out of the price point in terms of value, location, raw space, light/views, and condition, AND its priced right, it is NOT the time to low-ball and price in downturn risk that has not occurred yet.
First off, you need to know how to determine what priced right is; so ask yourself:
a) Is the product's most attractive features changeable or not? Ideally, you want to put your money into a product that has the most attractive location, natural sunlight, views, and raw space. Everything else can either be changed or should be weighted less in terms of resale value.
b) Is the asking price tacking on the standard listing premium? What I mean is, many sellers typically add 5-10% to the starting asking price of their property over past comparables; giving them wiggle room to come down in negotiations? While it's not 'testing the market', its a typical practice common for Manhattan real estate sales.
c) How does the product compare to current active competition? After viewing 10-15 properties in your price point, you will learn a few things; such as, what 750 sft should look like, what a good view is, what GOOD/EXCELLENT/MINT condition means, and how all these things affect the asking price of the product.
d) Are imperfections priced into the property? All too often I notice buyers who immediately deduct imperfections from a property's asking price immediately, without questioning if the asking price already priced in work needed, or lack of light, or no view.
The final nail in the coffin is analyzing in-building trades in the past 4-6 months. Should you and your buyer broker find that the product in question set the asking price right in-line with past sales, you know it's priced to sell. Pricing in the value for a higher/lower floor unit, renovations, and layout is more of a science. In regards to what value to place per floor, the general rule of thumb is like $7,500 - $10,000 per floor; however, in my opinion this premium should be drastically lower if we are discussing properties whose light/views are relatively unchanged as you go higher up. In other words, the value of a 4th floor unit that does NOT clear the opposing building and the 12th floor unit that does and has unobstructed city views and sunlight could get away with the $10k/per floor premium. However, the difference between a 15th floor unit and a 20th floor unit where light/views are relatively unchanged, should be less.
Here is how I advise my buyer to bid, assuming the decision was made to buy and the decision was made to make this property their first choice.
#1 - Don't mess around with low-balling. It will be counter-productive and will likely result in a 'no-response' from the seller. Instead, bid a bit more aggressively than you might otherwise bid on an overpriced property. The goal is to get a response, get the seller interested and to the negotiating table. You want the seller to take your bid seriously. Using the typical 'bid 10% below ask' is not the way to handle this type of situation and will likely do more harm than good. Sure you can try, but I doubt you will get the desired result.
#2 - Present the bid properly and show you mean business. Very important. Submit the original bid in writing via an offer letter that discloses the buyer's name, job position, salary, liquid assets after closing, attorney information, lender information, and projected closing date. In addition, include a simple financial statement (assets/liabilities/salary/bonus) and a lender pre-approval letter with the original bid. This is business and you are serious. Submitting a verbal bid to the seller broker to 'feel them out' is not the way to go here. Rather, do that when you are trying to low-ball 20% below ask for an overpriced listing, not a listing that is priced to sell.
#3 - Narrow your expectations. Everyone wants a deal and to get a property at the lowest price possible. But when dealing with a property that is priced right, the risk of losing the deal is far greater than for an overpriced listing that is likely to sit for many months on the market. Assuming you know that this is a deal, that its priced right, and that it has the features you know will help at resale, you should also know that the seller is aware of these things too. The seller and seller broker has access to information that you, the buyer, do not. They know the level of interest in the property, if there are multiple second showings, and the level of desperation by the seller. Just because a property is priced right does NOT mean the seller is desperate to sell! Narrow your expectations on the seller's first response, and keep emotion out of the equation here. Deciding NOT to up your bid right below the seller's first response or accepting it outright because you have the need to feel like you won, is the wrong emotion in this situation!
UrbanDigs Says: There are deals to be had out there. Some deals show themselves as products that are priced right, while other's show themselves as a result of overpricing and now playing catch up with price cuts. The important thing to focus on is the quality of the product and the level of interest that you, the buyer, has. If you know you need to buy, and use the tax savings, and you find yourself in the above situation with a product that you know is priced right, be sure to alter your bidding strategy a bit and keep your emotions at bay. If you are a buyer that is in no rush, doesn't have to buy, are stretching to afford the product, clearly this strategy is not for you; in fact, you should re-evaluate the buy vs. rent strategy or your max budget altogether!
Light Week
Another light postings week guys. I am very busy with clients right now and finalizing work on charting/contractor directory with programmers for launch. As much as I love blogging, frequency of posts is determined by how much time I have outside of work. Please bear with me until the new tools are launched and my schedule opens up. For what its worth, my business is busy and buyers eager to take advantage of any softness that has resulted from rising inventory and declining confidence from the credit crisis and Bear Stearns headline shock. Uncertainty over the economy, jobs market, wall st, and real estate certainly are keeping buyers cautious and savvy. I am noticing some buyers pricing in potential downturn risk in their bids; sometimes it works, sometimes it doesn't. While seller's for the most part do not seem desperate (pockets of distress can be found, especially in buildings with fierce competition), I think nobody can argue that this wall street bonus season was sluggish compared to years past. In fact, I am finding it busier now, than it was from JAN - APRIL. Best I can tell you right now. I can't speak for other brokers out there, so take it as a simple in the field observation.
By the end of this week, you should have the new charting system up allowing all of us to get a better real-time glimpse into what is going on in Manhattan real estate.
Room Count: A Shady Science
A: Ever wonder how to actually count the number of rooms a property has? Ever wonder why so many brokers mis-represent their listings room count? Its probably because either they don't know what technically makes up a room OR they are pressured by the seller to market the property above what it actually is. Either way, in the world of New York City real estate it is up to YOU the buyer to know what makes up a room so that you don't waste your time visiting a property that isn't what you thought it was! Originally Published July 9th, 2007
The number of 'rooms' in an apartment. A living area, a bedroom, and a walled kitchen count as 'rooms'. Therefore, a one bedroom apartment with a living room and kitchen has three (3) rooms. A studio with a separate kitchen has two (2) rooms. A studio with a Pullman Kitchen has one room.
Definition of Room for Major Capital Improvement (MCI) Purposes
Bathrooms, walk-in closets, porches, terraces and hallways are not rooms.Therefore, when you have a JR4 property with one bedroom, one living room, a walled kitchen and a separate dining/office alcove, there SHOULD be 3.5 rooms.1. A windowless kitchen containing at least 59 square feet or a kitchen of any size with window. In either case, a kitchen must be enclosed by at least three sides, excluding the side(s) that contain(s) the entranceway; or
2. An enclosed area with window containing at least 60 square feet;or
3. An enclosed area without window containing at least 80 square feet.
1 Bedroom = 1 room
1 Living Room = 1 room
1 Walled Kitchen = 1 room
1 Alcove Space = 0.5 room
-----------------------------------------
Total = 3.5 Rooms
You may wonder why you see two of the same types of properties in the same building being marketed to the public so differently. This is a widespread issue and one that obviously won't get resolved by industry watchdogs like REBNY. Instead, it is up to you to understand and learn about these things so you are educated on what you are seeing and potentially purchasing. If you get duped, chances are you will have a hard time re-duping others when you eventually resell!
Here is a great real life example at 245 East 93rd Street; Astor Terrace Condominiums. Take a look at the difference between how unit 14J & 22J (both Junior 4's) were marketed to prospective buyers:
Both units enjoy this very same JR4 layout and are correctly quoting the property size as 960 sft! However, the measurements vary for the alcove space and the living room space which could be due to the converted 2nd bedroom installed in the higher floor unit. One must also take into account the premium for the higher floor unit which brings more sunlight and better views, as well as the renovations done when doing a pricing anaylsis. In short, 22J should be valued higher for work done and better light/views and NOT for having 4.5 rooms! I would consider a 4.5 room property to be a 2BR/2BTH with dining area plus separate kitchen; like this one at 392 Central Park West marketed by Lauren & Maria Cangiano of my firm Halstead; big difference!
The fact that both units are quoted at 960 total sft and that the layout is virtually the same makes this argument one of marketed room count and NOT one of misrepresentation of total size or # of bedrooms; technically the 2nd bedroom is absolutely fine and has a window, hvac, and over 100 sft of space. Apt 22J at most should be marketed at 4 rooms with the alcove space converted to a walled bedroom. The original JR4 layout is 3.5 rooms.
UrbanDigs Says: This is NOT a rip on any of the brokers or firms they work at in the above example! This is a common mistake in the industry (as agents are responsible for filling in their own listings data, with rare backup checks on accuracy) and since room count is generally NOT a criteria included in most of the online real estate search sites, its something that often goes unnoticed. The point of this post is to educate you on how the number of rooms is calculated so that you are savvy enough to realize when a error like this one is marketed to you. In my opinion, misrepresentation of total square footage or a certain type of view is much worse than misrepresenting the number of rooms. Its even rare that a buyer will ask for a certain number of rooms unless they are aware of this practice and want a true two or three bedroom property. But still a good topic to discuss and pass on to you.
A simple guide for you (Living room assumed):
Studio w/ Pullman Kitchen - 1 Room
Straight Studio w/ Separate Kitchen - 2 Rooms
Alcove Studio w/ Separate Kitchen - 2.5 Rooms
Straight 1BR w/ Separate Kitchen - 3 Rooms
JR4 w/ Separate Kitchen - 3.5 Rooms
2BR w/ Separate Kitchen - 4 Rooms
2BR + Alcove Dining Area w/ Separate Kitchen - 4.5 Rooms
2BR + Dining Room w/ Separate Kitchen - 5 Rooms
2BR + Dining Room + Maids Room w/ Separate Kitchen - 6 Rooms (Classic 6)
3BR + Dining Room + Maids Room w/ Separate Kitchen - 7 Rooms (Classic 7)
4BR + Dining Room + Maids Room w/ Separate Kitchen - 8 Rooms (Classic 8)
If you are looking for more than 8 rooms you are too rich to care if the listing is right or not!
Inventory Update: Why The Jump?
A: Because the good folks at Streeteasy.com are doing their job to solve the problem of transparency for Manhattan real estate! Here is the update.
You may have noticed that inventory for Manhattan jumped today by just under 700 new listings, bringing total active inventory (co-ops, condos, townhouses in Manhattan excluding duplicates, FSBO's and open listings) to about 7,659. The reason for the jump is that Streeteasy has expanded their listings database to include "a bunch of new sources in Manhattan". According to one of the tech guys over at Streeteasy, "...this should be the last big change, at this point we have pretty good coverage".
In a housing market without a standardized MLS system, new sites such as Streeteasy have emerged to solve the lack of transparency that is so troubling for many buyers and sellers. Transparency is a good thing, and knowing that the focus is on quality and accurate coverage makes me very proud to have partnered with such a great startup!
Here is the current inventory trend for Manhattan for the last two weeks:
I have spent the past 3-4 weeks working with developers on the new charting system for you guys, and let me say, it is looking sweeeeeeet! Very soon, the landscape will change and you will have a real-time analytical tool to monitor Manhattan total listings inventory, price reductions, new listings, and contracts signed.
The data will never be perfect without a regulated standardized MLS system, but I am extremely pleased with the accuracy of our efforts thus far. Data may not be 100% real-time, but it is accurate and in-line with respected published quarterly reports by Jonathan Miller.
For all those that can't wait, here is another glimpse into what is to come and one reason why I have been discussing the rising trend of inventory since the low in mid-December:
PREVIEW MANHATTAN TOTAL INVENTORY --> 6 Month Chart w/ % Changes Below
I hope it's worth it guys!!
Yield Curve Steepens / Hoenig Hawkish
A: Amazing how things change. Remember late 2006 all the talk about the bond market and the inverted yield curve predicting a coming slowdown in the economy; forcing the fed to eventually cut rates? Well, the fed did so about 10 months later and cut the FFR by 325 basis points to stimulate the economy and credit markets. Now, the yield curve is steepening again and Kansas City Fed President Thomas Hoenig may have something to do with it.
First, some econ 101 about a steepening yield curve:
Steep Yield Curve: Historically, the 20-year Treasury bond yield has averaged approximately two percentage points above that of three-month Treasury bills. In situations when this gap increases (e.g. 20-year Treasury yield rises relatively higher than the three-month Treasury yield), the economy is expected to improve quickly in the future. This type of curve can be seen at the beginning of an economic expansion (or after the end of a recession). 
Here, economic stagnation will have depressed short-term interest rates; however, rates begin to rise once the demand for capital is re-established by growing economic activity. A steep yield curve is generally a bullish indicator.
StockCharts.com has a great little Dynamic Yield Curve tool that time lapses the yield curve with the S&P 500 Index since 2000! By hitting animate, the yield curve tool will dynamically change as time goes on, and you can see what equities did as the yield curve flattened, inverted, and steepened! Current yield curve snapshot to the right.
The yield curve is not a perfect indicator, so don't go betting your $$$ on it so fast. I have my doubts about the recession ending so soon and a new economic boom coming; in my opinion, the steepening yield curve is pricing in future inflation concerns and not a new economic boom! I'll go on record for that one, as I am still cautious about the strength of the consumer given a tight credit market, correcting housing market, limited equity for withdrawal (spending) from homes, and irresponsible use of debt/leverage for so many years. In short, I just think the consumer is tapped out and this is not something that turns around so fast; lets not forget that 70% of the US economy is driven by the consumer and the reason why the Bush stimulus package was passed to give Americans more money to spend!
However, as someone who loves to learn and understand 'why' things happen the way they do, it's hard to ignore what is going on in the bond market. It signifies a few things:
a) heightened inflation expectations/concerns
b) rates expected to rise in medium term
c) US dollar support
d) economic slowdown/recession expected to be mild
Whether or not this turns out to be the case is the $64,000 question! Future economic data will certainly drive the yield curve over the next few months; if economic data deteriorates, you will see the yield curve flatten (long end come down more drastically than short end flattening the curve) signaling the fed may need to cut rates a bit further to stimulate the economy. In this case, the US dollar will likely fall further and commodities priced in US dollars will rise further, creating more pipeline inflation pressures.
Hoenig's statement is interesting because it has to do with INFLATION EXPECTATIONS! The psychology of living in a world of rising costs/prices may force businesses and consumers to alter their investment/spending patterns! Businesses will get cautious and look to cut costs to retain profits while consumers will cutback on spending and perhaps even save a bit to afford the higher costs of living.
According to Bloomberg:
The dollar strengthened versus the euro as Hoenig of the Kansas City Fed said in a speech in Denver yesterday that "serious" inflation pressure in the U.S. may compel the central bank to increase interest rates.The reference to the 1970's and 1980's is when fed chief Volcker had to raise rates to insanely high levels to give the nation the inflation medicine it needed to fight the disease of 'the worst tax of them all'."There is a significant risk that higher inflation will become embedded in the economy and require significant monetary policy tightening to reduce it," said Hoenig, who isn't a voting member of the Federal Open Market Committee this year. Consumers are gaining an "inflation psychology to an extent that I have not seen since the 1970s and early 1980s."
Below is a chart that Hoenig refers to in discussing the rise of inflation expectation (Federal Reserve Bank of St. Louis via Calculated Risk)
As I said April 15th, by talking tough on inflation we can remove the speculative currency trade in commodities and ease pipeline inflation pressures without action at this point. Thing is, commodity inflation is similar to fed rate cuts; it takes time to funnel through the system! So, $120 oil today, will have a lagging effect on corporate profits down the road! I can see it already!
2009 Fight of the Year: Inflation vs Economic Recovery
Credit Markets / Level 3 Rising / Fed Widening Collateral
A: In the post-Bear Stearns era of a saving grace federal reserve, the risk of a systemic crisis shutting down the financial system was all but removed. So, all those shorts in equities and credit markets had to unwind their bets and buy/bid to cover the very positions that were designed to profit on doomsday; the doomsday that Ben Bernanke will not allow to happen. When I look at the stock market & credit market indexes in the past 5 weeks, I see major short covering rallies and bids. Corporate spreads have narrowed, TED spread has fallen, ABX indices have rebounded, CMBX spreads have narrowed, Investment Grade spreads narrowed, and it seemed as if the credit market distress has eased significantly. Is it truly the end amidst all this new liquidity? If it were, LIBOR would have come in much more, Level 3 assets would be shrinking, capital raising would end, and the fed would not need to continue with TAF's and widening acceptable collateral!
The good news is that there are certainly signs of easing credit market distress as a result of everything the fed has done. The bad news is that we are NOT out of the woods yet, from those I talk to the credit markets still remain quite challenging, and the fed is continuing auctions and widening acceptable collateral to now include credit card receivables and student loan securities. The credit problem is clearly spreading.
If it weren't, Fannie Mae would not have just announced a $2.2Bln loss, cut their dividend, warn of 'severe weakness', and plan to raise an additional $6Bln in new capital by diluting shareholders further! Either you wake up, or you have your head in the sand. While the worst may be behind us, we are by no way, shape, or form in for a new boom!
Let me start with the positives and show you the credit market indices that have eased:
ABX AAA Index - Easing (up) Since mid-March (via Markit)
Corporate Spreads Narrow (Wachovia HY Corporate Bond vs iShares LEH 7-10YR Treasury Bond Fund via Bloomberg)
TED Spread Falling (via Bloomberg)
The 3 charts above show the following signs of easing distress in credit markets since the Bear Stearns bottom:
a) rising ABX AAA Index
b) narrowing corporate bond spreads
c) falling TED spread
What has not participated in easing significantly is the money markets and LIBOR. Banks are still reluctant to lend to one another at normal spreads, signaling the need for capital to remain on the books. In fact, banks need to raise MORE capital as balance sheets continue to update hard to value assets! This is why many brokerages and banks have decided to shift assets into their Level 3 hideout's on their balance sheets.
Look at what Merrill Lynch said this morning, according to CNN Money's "Merrill Lynch Level 3 assets increase through March":
Merrill Lynch & Co. disclosed Tuesday that highest-risk assets on its books rose 69 percent during the quarter ending March 28.Things that make you go hmmmmmmm!Merrill Lynch had $69.86 billion in so-called "Level 3" assets as of March 28, according to a filing with the Securities and Exchange Commission. Level 3 assets totaled $41.45 billion on Dec. 28. At the lowest end, Level 3 assets are those whose valuation is essentially a best guess by the investor, because there is virtually no active trading market for the product to use as a pricing guide.
Level 3 assets accounted for 15.5 percent of total assets as of March 28 at Merrill Lynch, compared with 9.2 percent as of Dec. 28. Level 3 assets as of March 28 included $9.3 billion of collateralized debt obligations, of which $9 billion were tied to subprime mortgages _ loans given to customers with poor credit history.
Another $20.6 billion of level 3 assets at Merrill Lynch are tied to derivatives of collateralized debt obligations. Within that $20.6 billion, $16.7 billion is related to subprime mortgages. About $18 billion are tied to credit derivatives from corporate and other non-mortgage debt.
No, things are not rosy just yet. Anyone notice how the fed snuck in another $25Bln in its auction to banks on Friday? And what about the little announcement that the fed will now take on credit card receivables and collateralized auto loans, and student loans! Geez Louise! What in the world is the fed doing here and who is still debating that this is contained to subprime?
According to Daily Reckoning's "US Fed Now Accepts Credit Card Debt as Collateral":
First the Fed increased by US$25 billion the amount of money it will auction to banks (commercial and investment) through its Term Auction Facility (TAF). Here banker people, borrow more. Please.When will it end? We have a major moral hazard problem brewing here and you can count on one thing: wall street will invent a new product to generate revenue from dodgy debts that utilize the gray areas of future regulation that will be imposed! The reason why? Because they will always get bailed out by our fed!Second, the Fed expanded the list of collateral it will accept for asset-swapping through its Term Securities Lending (Facility). Remember, that's the one that lets banks and prime brokers swap mortgage-backed securities for Treasury bonds for up to 28-days.
The Fed is now expanding that list of asset-backed securities to include collateralized car loans, credit card receivables, and student loans. It's doing so because the lack of demand for bonds backed by those assets has had a real political impact in an election year. What it really means is that that the Fed has lowered interest rates as far as it can to deal with the bank lending crisis. It still hasn't encouraged banks to loan to each other, or investors to buy bonds backed by various kinds of consumer liabilities.
Must be great to be an American wall street executive!
Inventory Rises Above 7,000; New Charts Coming Soon
A: As most of you probably know by monitoring the Streeteasy.com powered Manhattan inventory widget on UrbanDigs.com, total inventory in Manhattan seemed to rise above 7,000. The trend is clearly rising, and the reason is clearly sluggish demand. As buyer confidence started to decline late in 2007 as a result of the credit crisis and lagging effect on the equity markets, we started to see a consistent rise in inventory trends. The thing to note is that while this bonus season certainly will go down as a slow one, inventory is by no means at levels that would exemplify fierce seller competition.
First off, here is a preview of the new enhanced charting system that I am custom designing for readers of UrbanDigs.com! The chart below is 1 of 3 charts that will be at your disposal, and compares NEW LISTINGS & CONTRACTS SIGNED data.
The chart you are previewing is about 65% complete. You may notice that the line graph is very choppy/spikey. The reason is because Streeteasy updates their data systems during the wee hours of the morning, when web traffic is lightest. UrbanDigs sends a request to Streeteasy at around 8AM everyday to collect the updated information from the day before. So, there is a 24 hour lag, sometimes a bit longer, between when a listing is first displayed publicly and when it is captured by the Streeteasy systems. In an in-perfect world and a real estate market without a standard MLS listing system, this is the best data at my disposal. So far, it has proven to be fairly accurate.
Moving on, very little updating/editing/adding of new listings is done over the weekends. Since there is a 24 hour lag in data collection, the light data of SAT + SUN is collected by UrbanDigs's widget on SUN + MON! That is why you may notice very low data for contracts signed, price reductions, and new listings on Sunday's and Monday's. This is what is causing the spikes on the above graph. Needless to say, we will probably average the data from the week or come up with a different formula to 'smooth out' the line graph so that you can better interpret the trend without sacrificing data accuracy.
Feel free to offer your suggestion on fixing this in the comment section! The entire purpose of these charts is to get a sense of the general trend! Data will never be perfect or 100% real-time w/out a standardized MLS system, so please understand that these tools are for your general knowledge of trends! In this capacity, it really doesnt matter if a contract signed takes an extra few days to get noticed, or a new listing takes 2 days to get captured; as long as it is captured we can get a more real-time sense of what's going on in Manhattan real estate without waiting for lagging quarterly reports!
Back to the current Manhattan inventory data, it seems to me that listing inventory has:
a) risen about 54% since low in mid-December of 4,600 total listings
b) risen about 10% in the past 4-6 weeks or so; when we were hovering around 6,500 total listings
c) risen about 30% since May 2007; when we were at 5,500 total listings
To me, there is nothing wrong with publicly discussing our housing market; even if that means discussing rising inventory due to slower buy side demand. The trend that I consider worth noting is that at this time last year, we were coming off a very active wall street bonus season where total inventory was DECLINING going into the generally slow summer months. Right now, the trend is clearly RISING inventory coming off a slow wall street bonus season heading into the generally slower summer months.
Here is Jonathan Miller's Manhattan Co-op/Condo Listing Inventory Chart that I am basing these observations on:
NOTE: JM's chart was up until March, 2008. So, I added in green bars to plug in April and today's total inventory number; with this data provided by Streeteasy. It will help you visualize where we are at right now, and the trend.
Click on the chart for the larger version. Note how in the past 6 years, total inventory hit a high just below 8,000 in mid-2006. It seems we are on a path to these levels. Now, when I think back to the summer of 2006, I recall it being slow and hard to get top dollar for my sellers; but in no way were prices falling significantly! It was strange, as traffic was slow and listings took longer to sell (days on market definitely rose during summer of 2006), in the end the price paid was pretty strong and didn't dip as low as one might think given the sluggish activity. The reason I mention this is because it seems we will be close to that inventory high in a few more months, if sales volume continues to be light.
In order for asking prices to show a significant move down (as has occurred in many local markets across the nation), you need to see fierce seller competition at a time when buyer demand is very light. That just has not happened yet. I am still seeing buyer demand here in Manhattan, albeit lighter, and inventory is not at levels where sellers are competing with each other via sharp price cuts to move property. Of course you may find pockets of seller competition in buildings that have 15+ listings for sale (the Trump buildings on Riverside Blvd come to mind), in general the competition has not gotten nasty as of yet.
The new charting system should be ready in a week or so, barring any unforeseen programming issues, and should allow all of us to get a much better glimpse into this very mysterious but fast paced Manhattan housing market! I hope you guys like it!
Analyzing The REAL Jobs Report
A: We got some good news this morning on the jobs report between a less than expected loss of jobs, and a ticking down of the unemployment rate. Stocks are understandably rallying on the lack of a doomsday report. While I enjoy seeing the stock market rise, as it provides a positive wealth effect and helps to support confidence in general for other types of investments (i.e. real estate), I do not enjoy being told something that is a bold mis-representation of the truth. For all those that understand the BLS B/D adjustment model, you will see why this report was paints such a misleading bullish picture. You may wonder why this report seems to contradict reality; it does.
I've discussed this before, and Barry Ritholtz has been one of the biggest voices trying to bring the B/D adjustment crapola to light. Here is the quick definition of the B/D adjustment in the jobless claims report, before I go into today's discussion of fantasy (what we are told) and reality (what is really happening):
B/D Adjustment - There is an unavoidable lag between an establishment opening for business and its appearing on the sample frame and being available for sampling. Because new firm births generate a portion of employment growth each month, non-sampling methods must be used to estimate this growth.
Here is the B/D adjustment for April's Non-Farm Payroll's report, directly from BLS.com:
I am NOT making this up, this is REALITY and the report published to the public actually calculated in an ADDITION of 267,000 jobs! Are we really to believe that our economy actually added this many jobs? Let's just look at a few sectors and compare the fantasy vs reality!
CONSTRUCTION
Reality ---> Lost 61,000 Jobs
B/D Fantasy ---> Added 45,000 Jobs
PROFESSIONAL & BUSINESS SERVICES
Reality ---> Added 39,000 Jobs
B/D Fantasy ---> Added 72,000 Jobs
MANUFACTURING
Reality ---> Lost 46,000 Jobs
B/D Fantasy ---> Lost 10,000 Jobs
LEISURE & HOSPITALITY
Reality ---> Added 18,000 Jobs
B/D Fantasy ---> Added 83,000 Jobs
If we only look at these sectors, we will see the following discrepancy between reality and the B/D fantasy adjustments that are added to the report that we see:
REALITY ---> We LOST 50,000 Jobs
B/D ADJUSTMENT FANTASIZES ---> That We ADDED 190,000 Jobs
Right there, we have a swing of 240,000 jobs that was bullishly embedded into the jobs report; using the seasonally adjusted b/d adjustment! AM I MISSING SOMETHING HERE; If I am please do tell me!
This frustrates the hell out of me, and explains why things seem much worse in the real world when stocks and economic reports show otherwise. For the first 4 months of 2008, and using the fantasized data & b/d adjustment model, we STILL LOST ABOUT 260,000 jobs! In a normal growing economy, we should be adding about 150,000 jobs per month. Yet, with all these jobs lost and the smoke & mirrors used to minimize the REAL PAIN that is going on out there, the unemployment rate ticks down to 5%! The reason: the number of part-time workers who wanted to find full-time work but couldn't, surged to 306,000.
I just don't buy it! BR correctly points out:
• Private payrolls have fallen for five straight months. Weakness in the goods-producing sector is intensifying;• Employees working part time jobs is +306k this month to 5.2 million. This increase is either because a) Hours have been curtailed; or B)They cannot find full-time employment. Note that if your hours get cut back, you do not show up in the NFP or layoff data.
• As noted earlier, the Birth/Death model was a major distortion. (in several months, we will get the revisions). Lets look at how the B/D has changed from April 2007 (+262) to April 2008 (+267):
+45k construction jobs v 37k April 2007
+8k jobs were added in financial activities versus 1k last April.
+72k in professional/business services versus 48k last April.
+83k in leisure/hospitality (95k last April).I am certain that some country on some planet in our galaxy is adding more jobs in construction and finance versus one year ago, but it ain't the USA on planet Earth, that's for sure.
Fed Cuts 1/4; Growth Risks Remain
I did NOT read the statement yet, and simply heard the statement read on CNBC...my gut reaction, this is a much LESS hawkish statement than I thought would come out. Still a comment about risk to economic growth and to inflation, but certainly nothing that SHIFTS the focus from growth to inflation. Thats my gut reaction. More to come later. It seems a pause is in the works for a while now!
ADD-ON @ 2:33PM - After reading the statement here, I find this statement to be WAY LESS HAWKISH than I originally thought it would be. I see the following statements that are associated with growth concerns:
*Recent information indicates that economic activity remains weak.
*Household and business spending has been subdued and labor markets have softened further.
..and the clearest statement:
*Financial markets remain under considerable stress, and tight credit conditions and the deepening housing contraction are likely to weigh on economic growth over the next few quarters.
The 'downside risks' phrase was left out. Take it for what its worth, but this statement coming along with the rate cut, makes me think they will pause, with the full intention of ACTING if economic data continues to come in weak. I think many expected a strong stance in the wording against inflation. The fed still expects the slowing economy to help moderate inflation, so they aren't budging yet in taking the offensive against rising commodity prices and pipeline inflation threats. I think:
a) future rate CUTS are still a very real possibility
b) the fed will be data dependent again on the economic data side
c) the fed just doesn't know if the worst has come in yet, but also knows its way too early to abandon the focus on growth concerns
The street got what they were looking for, I just think is a lot less hawkish than some markets were pricing in. I wouldn't expect that strong dollar induced selloff in commodities just yet!
Manhattan Downshift, Yes or No?.......Let us Know
So someone has finally come out and said it. Business in New York City has slowed down. According to an article in this week's Crain's, Is there a cheaper bottle?, "across the city restaurants and hotels are noticing a significant falloff in what is traditionally a major cash cow: corporate parties and banquets."
Maybe three months ago my partner tells me, "when I take the subway home at night after working late, there's nobody on it, people aren't going out like they used to". He stops me on the street in front of Grand Central as we are walking to lunch last month and says "I used to work around the corner from here, and you could barely get down the block this time of day, there were so many people on the street....take a look around". "You're right," I say, "it's dead" (relatively). I launch into a story (something I'm infamous for...and although they are usually way too long, they often have a point): "So a buddy of mine calls me from San Francisco just after the tech bubble collapsed and tells me, I just drove back from seeing a company in the (Silicon) Valley and there was no traffic in either direction...business is dead." At the time I laughed and said "that dosn't mean anything"......but it sure did.
A couple of weeks ago I hear through the grapevine that a well-trafficked New York eatery, known for its power lunches, that happens to have a diverse clientele representing New York's major industries - Wall Street, media, real estate and supporting professional services like law and accounting - had seen a sharp slowdown in traffic. I stopped by and inquired...So how's business? The answer..."Don't tell anyone else, but it's slow." I contemplated this admission, which only made sense, and thought about trying to gather information for an Urban Digs piece. But let's face it, who would go on the record saying business was rolling over.....unless it was already so bad that everyone knew....sort of like asking brokers about a real estate slowdown or the President about a recession. I shouldn't have let it stop me....mea culpa. But I had trouble finding much corroborating evidence in the media. There was the hotel manager for an unnamed four star brand quoted by the blog HoweStreet.com saying ""business is down across all of our hotels in Manhattan. When the finance industry isn't doing so well, we aren't doing so well either." There was a quote by a manager at Delmonico's "You definitely see a little decline probably in the lunch crowds because I think the companies have cut down on their expenses." Offsetting the slowdown is the obvious surge of tourist money making its way into the coffers of New York businesses.
It's pretty clear, however, that corporations are cutting back on parties and banquets and trying to rein in hotel expenses, and this is impacting lodging and restaurants in the Big Apple. The Financial Times notes that Duetsche bank execs are being told to wash up at the airport frequent flyer lounge after an all-night flight instead of getting a hotel room to use to clean up before a morning meeting.
At the lower end of the economic spectrum, the strains of the slower economy are already being seen. The New York Daily News notes today that people in New York City receiving money from Uncle Sam's stimulus package expect to use it to pay existing bills.
I suspect that even the wealthy, sophisticated and good looking Urban Digs readership....LOL.... may be going out less, springing on fashion items and accessories less and maybe even driving your car/SUV less or generally keeping a lid on expenses. You may also be noticing that there are fewer people frequenting your local watering holes and eateries......although they can't be saving that much grabbing a slice of pizza instead. Anyway, we want to know. Tell us if you perceive that business in New York has slowed, whether it's your business, business at establishments you frequent or just how much money you are spending or plan to spend. Inquiring minds want to know!
Contract Re-Assignments: A Sign of the Times?
A: For all you guys that want front line reporting. I just went through my first contract re-assignment closing for a buyer client of mine; so basically, a buyer goes into contract for a property but for whatever reason CAN NOT close on the deal. Likely culprit is inability to get financing. Instead of going through the headache of litigation over the down payment and who can claim it, the original buyer attempts to assign the contract to a new buyer. The positives for the new buyer include getting a deal that was in a previous pricing amendment or a unit that was in a sold out line. The negative is that the terms of the deal with the sponsor are non-negotiable and will be the same as the original deal; but that doesn't mean you can't work something out with the assigner on incentives for taking on the transaction!
Lets go back 5 1/2 months when I published a post titled, "New Dev Closings: A Potential Problem?", where I stated in an unbiased discussion:
"I want to discuss something that has NOT happened, is not even in the very near term horizon, but very well may impact the Manhattan marketplace at some point in 2008; buyers with expected new development closings amidst the new credit world.The post back in October is a great example of me discussing my true feelings on what could be on the horizon, that was not a trend yet, but due to the macro fundamentals that were building at the time seemed a likely result for our marketplace. Its all about being one step AHEAD OF THE CURVE!What happens to all those new development buyers that are currently in contract, waiting for building completion to close, if the jumbo credit markets continue to be in distress and there is a much different lending world than when the original contract was signed?
What if the buyer doesn't have the doc's to get the commitment, if lending/underwriting standards have tightened so much in the past 3-6 months? What if the buyer gets a much higher interest rate than was originally anticipated? What if the bonus doesn't come in as expected? What if they lose their job? What if the property becomes unaffordable?"
Anyway, back to the assignment. What I discussed back in October is now reality; albeit a rare one at this point in time. There are actually a few other assignment requests in the same building that we just completed our deal for a few days ago. This was confirmed by the attorney who has done a number of deals in this building, and by this different ad in craigslist that I found this morning (all details, building, etc. were not included for privacy):
In an environment of tighter underwriting standards & credit quality based lending rates, contract assignments become a very real option for those that can't secure financing due to the credit crunch. I would expect this trend to continue, especially for those financially borderline buyers & speculative investors who signed new development contracts of sale BEFORE the credit crisis began in July 2007. Quite simply, it was a different world back then.
Now this is very important, I do NOT view this as anything that will take down our market; and is likely to be more of a rising 'pockets of distress' trend since contract assignments occur in strong markets too. It is just another sign of the times and tells you that the world we live in today is quite different than the world that existed during the boom times. For my client, they got to purchase a desired unit that was part of a sold-out line as of many months ago in a nearly sold out desirable building; plus a minor incentive by the original buyer to take on the assignment.
Anyone else hearing about contract re-assignments in their neighborhood/building? I would be interested to see how widespread this trend is at this point in time.
Fed Set To Reveal Poker Hand; LIBOR vs FFR
A: With the fed meeting this week and announcing their next move on Wednesday, plus the first glimpse of Q1 GDP, it seems the fed is set to reveal their hand and let us know if rate cuts are in fact ending soon! The current consensus on the street from people I talk to tends to be a 'one & done' move, with a change in the issued statement. With 3-Mth LIBOR still 65+ basis points above the fed funds rate, we are left to wonder whether the credit crisis is over or just in a the so called 'eye' of the storm.
Lets start with the fed. We will get a glimpse of Q1 advance GDP on Wednesday, before the fed announces their decision; so clearly that information is playing into the next fed move. However, with oil trading at $120/barrel, and other commodity prices surging to the 'weak-dollar' policy we have seen in the past, consensus is for a change in bias! I doubt the fed will disrupt market expectations, so instead of looking at their action (I'm expecting a 1/4 point cut, along with the street's expectation) focus on the issued statement for changes to the following passages from the previous statement:
a) 'inflation has been elevated and some indicators of inflation expectations have risen'
b) 'outlook for economy activity has weakened further'
c) 'financial markets remain under considerable stress'
Personally, I expect an increase focus on inflation and a decrease focus on 'considerable stress' in the financial markets; thinking this way since April 18th when 2YR treasury yields were about to go above the fed funds rate:
"Take a look at the 2-YR treasury yield over the past month (chart on right), up almost 70 basis points. In fact, yields are up across the board for treasuries, as the stock market rallied over 4% this week. The most dramatic action in the bond market was in the short end; 3mth, 6mth, 2yr & 3yr yields causing the so called 'flattening' of the yield curve. This gives investors more incentive to cash out of longer term treasuries, and put that money to work elsewhere (stocks?). It also could be a sign that expectations are rising for less action from our fed, probably resulting from pipeline inflation pressures."It's highly possible the markets rally on a positive fed statement in the sense that considerable stress is no longer seen! Time will tell. Certainly, there are signs of easing in a few sectors of the credit markets. Specifically:
1) spreads in CDX indices have narrowed
2) spreads in CMBX (commercial re mbs) have narrowed
3) investment grade corporate debt spreads narrowed
What isn't improving is:
1) money market rates
2) LIBOR rates
3) ABX indices
These are just a few sectors that I follow and discuss with friends I know on front lines. There are many other areas that I am not as real-time updated on. Lets focus on LIBOR for a moment. LIBOR, the London Interbank Offered Rate, is the most active interest rate market in the world. It is determined by rates that banks participating in the London money market offer each other for short-term deposits. LIBOR is used in determining the price of many other financial derivatives, including interest rate futures, swaps and Eurodollars. So, it's a worthy indicator of stress amongst the banks; are they aggressive or reluctant to lend to each other?
One way we can determine this is by comparing the LIBOR rate to the fed funds rate, and looking at the spread between the two rates. In normal markets, 3-MTH LIBOR is within about 15 basis points, or 0.15%, of the fed funds rate, which currently stands at 2.25% going into Wednesday's meeting! Below is a chart (courtesy of Financials.com) showing you the spread between 3-MTH LIBOR and FFR for the past 30 days; notice the widening of the spread in mid-April!
This is the simplest way to show you, what I like to look at for a glimpse into bank's willingness to lend to each other. Now, there could be a number of reasons for this abnormal spread of about 65 basis points:
1) credit worries remain
2) banks are capital constrained as they correct balance sheets
3) recent concerns about LIBOR reporting
4) expectations of rising fed funds rate in near term
I'm sure there are more. But fact is, this wide spread tells you that banks are still reluctant to lend to each other! It's a signal of continuing distress. Which leaves us wondering, who is right? Is LIBOR lagging and behind the curve in its behavior to narrow closer to the fed funds rate OR is LIBOR leading and telling us that more stress is yet to come in the credit markets?
One thing is for sure, and that is by end of day Wednesday we will know a lot more information regarding our economy, the potential recession's beginning, and what the fed is likely to do with rates over the next few months!
Renovating In A Cooling Market
Very busy right now with clients & the new urbandigs charting system. Postings will be light for next week or so, when enhanced chart system will be launched. Please bear with me! For now, here is a quick renovations tip for a seller looking to spice up their property for resale, in a tough marketplace; dollars & sense!
A: If you bought a wreck for a discounted price or just found an apartment in good, but not great condition, then you'll probably want to renovate. But what if you are looking to flip the property or sell it within the next 2 years or so? What renovations are worth it and what aren't in a cooling housing market? Let's try to answer this common problem! Originally Published July 31st, 2006
Past history tells us that money spent on kitchens, bathrooms, and floors get you the most money back at resale! But thats in a booming housing market, not a cooling one. To find out what renovations pay off in a slowing market, lets try to go into the minds of a buyer who is dealing with less affordability due to higher lending costs (like today), and may have some uncertainty about the market in general. In short, the buyer is very cautious how they spend their money!
Bobby Buyer makes $150K a year, has $150K in cash in banks, and wants to buy a $500K condo with 10% down. OK. Right off the bat he will need about $70K to close on the deal ($50K for down payment + $20K or so for closing costs). That leaves him with about $80K AFTER closing to do what he wants with the property. Chances are he is NOT finding a fully renovated condo for this price so lets assume the apartment needs work! Should he:
A: Renovate the kitchen
B: Renovate the bathroom
C: Renovate the floors
D: Renovate ALL OF THE ABOVE
Tough question. Now lets assume that Bobby Buyer intends to sell the apartment in 2 years, once he satisfies the tax code for primary resident tax exemption of up to $250K. Lets be conservative and assume the Manhattan real estate market will stay flat to down over the next 1-2 years, what renovations would make sense to you?
Here are my thoughts, one by one.
A. Renovate the kitchen - DEFINITELY NOT! It will cost about $20-$25K (min for gut renovation on most kitchens - add 10-15K easily for high end renovation on kitchen) or more to redo your entire kitchen, plus 1-2 months of contracting work that you have to deal with. In addition, kitchens are a very personal room that most buyers like to fit into their own taste. If your renovations conflict with the potential buyers taste, you may NOT get any premium when you go to resell.
Now, given current market conditions and our quick prediction on what the market might be like in 2 years, how are we to expect top dollar for this type of renovation where we cant guarantee the buyer will even like it? We can't! Pass on this given the situation at hand as to me it looks like a high risk (due to high cost), low reward (premium not guaranteed) scenario.
B: Renovate the bathroom - POSSIBLY! You can get away with cosmetic work to the bathroom for relatively cheap. Options include re-glazing the tub, re-tiling the floor, a new medicine cabinet, and a paint job. You don't have to spend $10K on a bathroom if you don't want to and being stingy on this work might make for a good investment at resale. Buyers HATE disgusting bathrooms and showing a nicely refinished bathroom could mean the difference between a bid of $425K and $440K. Dollars & Sense; if you can spend $5K and make a bathroom much nicer than it is now, then DO IT!
C: Renovate the floors - DEFINITELY! I'm huge on hardwood floor resurfacing because of the risk/reward ratio that this renovation offers. I know, you hear risk/reward and you think of gambling or stock trading. Well, thats how I view things. If you can spend $1000-$1250, or $2-$2.50 a square foot for a 500 sft surface area of hardwood flooring (whose apt size probably totals 650 sft), and get a newly finished floor that just shines back at you, THEN DO IT! Trust me, it is night and day for such a little amount of money. When you go to resell, buyers will have a great first impression when they open the door to a bright floor that shines in their face! A good first impression for the buyer is critical when selling a home and equates to a higher bid at resale.
D: Renovate ALL OF THE ABOVE - NO! If it was up to me, I would spend $6,000-$7,000 total on refinishing the floors and re-doing the bathroom as much as possible with the remaining funds. Adding in the kitchen renovation will boost your expenses to almost $30,000 and force you to get $585K or so at resale to break even (taking into account seller fees). It just doesn't add up.
The SKINNY: IN A SLOWING HOUSING MARKET YOU WANT TO DO THE LOW RISK HIGH REWARD RENOVATIONS THAT COULD PAYOFF AT RESALE. THESE INCLUDE FLOORS & BATHROOMS, NOT KITCHENS!
Of course, its entirely up to you and the money you want to spend on your new home. To each his own. Just before shelling out $20-$25K on renovations, ask yourself if you will want to sell in under 2 years. If you do, I strongly suggest cutting this expense down to $7K or under and that to me means floors and bathrooms! After all, spending more money than you want to will only worsen your financial situation and might force you to sell down the road sooner than you would otherwise want to. Not a good recipe should the housing market remain slow and you need to find a buyer fast!
LOST: Time Loop Theory
It's my birthday tomorrow and so today is a day off! I kind of wanted to talk about something totally unrelated to the economy and Manhattan real estate for once, but still provoke some thinking. So, I wanted to talk about this LOST theory that someone told me about.
WARNING: This theory is just some guy's, (Jason Hunter) opinion on what is going on in the show LOST. For me, this is it. While I don't think it spoils anything, some people may want to continue watching the show with as little info as possible, so they can figure it out on their own. So, if you are one of these people, you may not want to read this.
Below is a visual courtesy of TimeLoopTheory.com, here are the links if you want to understand this theory. It's pretty damn cool.
THE TIMELINE (READ THIS FIRST)
Q & A
REBUTTALS
SUPPORTING EVIDENCE
That's it, that's the end of the story. Anyone know a physicist to elaborate on this theory, and where the holes are?
