Rates: Down!!
Guys,
Quick update from the mortgage market:
CONFORMING RATES ARE DOWN!
Here is where I'm at right now:
30 Year: 4.875% @ 0 Points.
15 Year: 4.500% @ 0 Points.
The New York Fed started buying a lot of MBS yesterday and as a result the FNM coupons are trading very well as of this morning. Noah discussed the Fed's plan on quantitative easing about a week ago in the piece titled, "Fed to begin Quantitative Easing in January".
If you have a mortgage professional that you work with, I truly suggest you call them and discuss your mortgage scenario - it might make sense to refi. As I have said many times, rates go up much faster than they come down and I believe it is a great time to take advantage of the opportunity.
Getting approved is really the obstacle we need to get out of the way at this point in time.
Best of luck!
-MM.
Excess Reserves Go Berserk As Lending Flatlines
It's not too often that you see a chart that looks like this. So when Noah found it he sent me an e-mail asking for a plausible explanation as to what is going on with excess bank reserves.
The guy I talked to at the St. Louis Fed on Friday couldn't explain much about excess reserves and why they might be so elevated, except to say that the Board of Governors collected these data, not the St. Louis Fed, and that it was reserves held on deposit with the bank. So I had to go to a different source for more insight.
According to Wikipedia, excess reserves are bank reserves in excess of the minimum reserve requirements set by a central bank. These reserves held on deposit were generally considered uneconomical as they earn no interest. For this reason, the Wiki contributor avers, banks minimize their excess reserve amounts by putting them to more productive use, usually by making overnight loans on the fed funds market to other banks who may be short their reserve requirements, on that particular evening. A good, succinct definition, but unsatisfying with regard to the current situation. So I dove into a little history.
Recall that back in May of 2008 the Fed asked Congress to allow them to pay interest on bank reserves (Noah discussed this in October, "Serenity Now...Thoughts out Loud" with the unintended side effect of hoarding cash in reserves rather then lend to deteriorating consumer). Permission for this had actually been given back in 2006, with a target date for implementation of 2011. The theory was that it would allow the Fed to better control the fed funds rate set by the Fed, but traded by the market. In times when banks had excess reserves and wanted to put them to work, they might actually be tempted to lend them out at less than the going fed funds rate. In fact, back in 2007 when the financial crisis was just getting started there were a couple of episodes where fed funds rates plunged to zero on a few trades when volumes were low.
According to a Wall Street Journal Online article in May of 2008 regarding the new reserve interest paying policy:
"In addition, the Fed could theoretically combat the credit crunch by buying securities or extending loans without limit without causing the Federal-Funds rate to fall to zero, something that could fuel inflation or distort markets."So now that we have a picture of how banks deal with excess reserves in normal times, and a clue as to why the Fed wanted to be able to pay interest on bank reserves in normal times, let's focus on what is going on now in Abby Normal times, as Igor would say.
The Fed began paying interest on excess reserve balances on October 9, 2008 after the passage of the Emergency Economic Stabilization Act. Initially, the rate paid on excess balances had been set at fed funds minus 75 basis points, but that was quickly changed to fed funds less 35 basis points, starting October 23. The Fed judged that the narrower spread would "help foster trading in the funds market at rates closer to the target rate." Just to clarify here, the Fed wants to be able to control fed funds rates better, so it is paying a return on any excess reserves a bank happens to have, so that banks won't lend out their excess capital in the fed funds market at less than the stated fed funds rate.
Here is an explanation for the Fed's policy of paying interest on excess reserves in its own words. According to the Federal Reserve Bank of New York:
Without authority to pay interest on reserves, from time to time the Desk has been unable to prevent the federal funds rate from falling to very low levels. With the payment of interest on excess balances, market participants will have little incentive for arranging federal funds transactions at rates below the rate paid on excess. By helping set a floor on market rates in this way, payment of interest on excess balances will enhance the Desk’s ability to keep the federal funds rate around the target for the federal funds rate. Recently the Desk has encountered difficulty achieving the operating target for the federal funds rate set by the FOMC, because the expansion of the Federal Reserve’s various liquidity facilities has caused a large increase in excess balances. The expansion of excess reserves in turn has placed extraordinary downward pressure on the overnight federal funds rate. Paying interest on excess reserves will better enable the Desk to achieve the target for the federal funds rate, even if further use of Federal Reserve liquidity facilities, such as the recently announced increases in the amounts being offered through the Term Auction Facility, results in higher levels of excess balances.
Full Stop: Please Understand What This Means! If banks can't find any use for their capital i.e., lending it out to borrowers at rates well above fed funds, they could previously have kept this money on deposit at the Fed as excess reserves, and earned nothing for their trouble, or they could have lent the money out to other banks overnight in the Fed Funds market. Recall that a few months ago banks were afraid to lend to each other overnight, because they were terrified that the counter-party bank could go tapioca at a moments' notice. However, as the Fed has virtually guaranteed to rescue any large bank, it seems that a different problem has developed: keeping Fed Funds rates from going through the floor because banks don't really want to lend out any of their capital to real economy borrowers and are willing to settle for puny overnight rates paid by other banks. Additionally, as implied by the New York Fed's explanation concerning further use of Federal Reserve liquidity facilities, as the Fed keeps pumping up banks' capital bases by allowing them to swap bad paper as collateral for borrowing of safe treasury securities this problem is potentially exacerbated.
Now let's step back for a minute and think about what the Fed really hopes to achieve here. Some would argue that banks have more losses to recognize over the next couple of years than their entire capital bases (including all the preferred and common equity they have issued so far). The Fed has been allowing the banks to temporarily offload their bad paper onto its books in order to keep from having markdowns take their capital bases below the levels set by the OCC, Treasury etc. The way losses are normally absorbed is for them to be netted against bank earnings over time. There are three ways that losses will likely be recognized:
1) Presumably some of the bad paper the Fed is renting right now will go back on bank balance sheets as their earnings recover and there are enough profits for these losses to be netted against.
2) Some of the bad paper will actually be purchased outright by the Fed (taxpayers), removed from the banking system altogether and will be written off by the government.
3) Some of the bad paper that is STILL on bank balance sheets will be netted against new TARP funds that were taken in by the banks (essentially through preferred equity offerings to Uncle Sam) and the TARP funds taken in will melt away.
Just to be fair, the ultimate losses on the paper may be much lower with a government-managed process of this sort, than if all the banks went bust and vulture investors bought the paper at cents on the dollar in liquidations.
So how can the Fed help banks earn enough to offset all their losses and digest them without their capital bases ever falling so much that the regulators have to call them insolvent and close them? (So far the regulators have been afraid to even allow failures of big banks so they just arrange shotgun marriages before the bad news gets out).
1) The Fed allows the banks to borrow from the discount window at near-zero rates (ZIRP) and lend to the very best of borrowers for a spread above treasuries
2) The banks can just lend money back to Uncle Sam by buying treasuries.
3) If they don't like either of these options they can let their now-excessive un-lent capital sit as excess reserves at the Fed and get paid interest on them.
This is the reason for the mountain of excess reserves in the chart above. This chart also means that the fed is "pushing on a string" all the stimulus of TARP, Liquidity Facilities and ZIRP are just pumping up excess bank reserves right now, the funds are NOT getting into the market and therefore NOT having their intended multiplier effect (high velocity money).
Among the alternatives, only the spreads from lending to real borrowers are attractive to banks today due to the headlong rush by financial players into treasuries, but banks are still afraid to lend to all but the very best borrowers (and many of the lesser quality potential borrowers don't want to borrow), hence the explosion of excess reserves on bank balance sheets despite all the efforts to resucitate lending. Some would assume that this mountain of reserves will get put to work in the credit markets at some point and cause economic activity to go wild. My guess is that these excess reserves will be melted away as banks absorb losses on delinquent loans and as marked down securities see their income streams actually collapse.
Eventually, bank balance sheets will be cleaned up, the economic outlook will brighten and banks will start making well underwritten loans to worthwhile borrowers who are ready to invest in reasonable risk/reward opportunities. By that time some of the charged off real estate still on bank balance sheets may be found to have greater value than banks expected, but all of these would appear to be a long way down the tracks. At least that's my interpretation. In my view, any effort to force banks to lend out these reserves before the clean-up (recognition of losses) is finished will just cause more uneconomic loans to be made and ultimately prolong the pain. Banks are in intensive care and the excess reserve build we are seeing is like a measure of all the medicine being pumped in to save their lives. They are not ready to get up off the bed and run around the room yet. But we will keep watching this chart as a decline in excess reserves will probably signal that losses are being charged off as needed and eventually will signal that money is being lent out.
Inman Real Estate CONNECT NYC
A: Inman Real Estate Connect conference is back in New York City January 7th - January 9th. The event takes place at the New York Marriott Marquis Times Square. Continuing on with the success of July's heated housing debate, the Bull vs Bear debate will tackle what may be in store for 2009. I hope you can register and make it to the conference and this panel.
The last BULL vs BEAR debate (click link for post on discussions held at the last conference), held in San Francisco in July, saw Bill from Calculated Risk, Yves from NakedCapitalism, John from ShadowStats, Avram Goldman, Dottie Herman and myself go at it for about an hour.
Here is the info for next weeks conference:
Wednesday, Jan 7th, 3:45 p.m. – 4:30 p.m.
Bulls vs. Bears: The Great Housing Market Collapse
2008 was a tough year for real estate. Is 2009 going to be any better? Hear from these leading market watchers
Panelists:
Noah Rosenblatt, Founder, UrbanDigs.com
Barry Ritholtz, Chief Market Strategist, Ritholtz Research & CEO; Director of Equity Research, Fusion IQ
Carter Murdoch, SVP, Marketing and Compliance Executive, Bank of America
Lawrence Yun, Chief Economist and Senior VP of Research, National Association of REALTORS
BR we all know from The Big Picture & Fusion IQ, I never met Carter Murdoch before so I look forward to that, and I never met Lawrence either but, ummm, my advice to him would be..."take a few shots before coming to the panel!". The NAR has not had the best calls during the course of this national housing collapse and there was even a blog dedicated to Yun's calls.
This should make for a very interesting bull vs bear debate. The only problem that I see is that if you are always a Perma-Bull, eventually you'll be right. Sure you may have been wrong for years, but ultimately the market will bottom and it will be a great time to buy & a great time to sell, right? Whats a Perma-Bull you ask? It's someone who sees a bull market every day of every week of every year.
Still don't get it? Here check this out via Hedgefolios.com:
You know you are a Permabull when……Kudlow & Dennis Kneale are permabulls. They were both very bullish 12 months ago, and they are both STILL very bullish. And they will always be very bullish because media needs that role to portray to us people. Listen to them on down days, and you'll see what I mean. When the Dow was at 14,000, 13,000, 12,000, 11,000, 10,000, 9,000, 8,000, and 7,680 it was all the same story. Now that the Goldilocks moniker was alive, then sick, then alive again, then on life support and now dead, its all about the mustard seeds of growth!* each time the market declines you declare it a “healthy pullback”
* sideways moves are actually just the market “taking a breather” or a “pause”
* missing earnings estimates is ok as long as management confirms next quarter’s guidance
* bad guidance is ok as long as last quarter’s earnings beat estimates
* you criticize any analyst that downgrades your stock from “Strong Buy” to “Buy”
* you applaud poor economic results as good for the market because this time they will cause the Fed to stop raising rates
* any negative market commentary is evidence of a huge “wall of worry” that the market needs to go higher
* you plead that a 10% decline is a “great buying opportunity”
* you blame any market decline on short sellers who just don’t understand
* oil declines to $60 and you expect that will cause the market to head higher
* oil increases towards $70 and you point out how the market has been able to absorb higher oil prices
* you quote the cliches “history repeats itself” for positive things and “it’s different this time” for negative ones
* an inverted yield curve doesn’t concern you at all……
TRD: "Lowballing Turns Predatory"
A: The Real Deal has an article out titled, "Lowballing Turns Predatory", that I would like to address. Now I know Candace Taylor very well, and actually had a lunch-interview together in the past so that we could cover a number of topics regarding Manhattan real estate. So, this is not a hit on Candace, but is more a response to excerpts in the article and the strategy of pricing higher in anticipation of lower bids, that was suggested as a result. My counter arguments are below, so what I want to know is, where do you stand?
For sake of this one discussion I will have to break a few statements down and then offer my comment, as it makes it easier to translate for blog readers:
TRD: "At the dizzying height of New York City's real estate boom, apartment owners commonly put their homes on the market, then watched as the flood of offers — often at or above the asking price — streamed in. Buyers, meanwhile, waited anxiously for the seller's verdict, preparing to heap tens of thousands of dollars on top of the original offer.
Now, the opposite is true, brokers say."
MY COMMENT: Okay, first off, lets acknowledge that in the past few years, Manhattan real estate was booming, wall street was earning, stocks were performing, confidence in the asset was high, and anybody was able to get a loan. As a result, bids came in fast and hard. Buyers MADE the market. Now, the macro fundamentals have completely reversed, and bids are not coming in as fast or as high but one thing has NEVER changed ---> The buyers STILL make the market!
TRD: "Potential buyers are now putting very low offers — often 20 to 40 percent less than the asking price — on multiple properties at the same time, a strategy that was virtually unheard of only a few months ago."
MY COMMENT: The buyers continue to MAKE the market and reflect the changing times. This is the market working just as it should after an unsustainable boom. A home is only worth what someone is willing to pay for it at a given time on the open market. Just like before. Buyers perceive more control in the process of buying a home, pricing in downturn risks, and are bidding accordingly.
TRD: "Sellers, increasingly desperate to unload their property, are countering offers they once would have considered insulting. And as lowball offers become the norm, this back-and-forth seems to be accelerating the downward slide in prices."
MY COMMENT: My translation of this is that sellers are realizing that bids received are not where they hoped or what the broker may have promised, would be submitted. The 'back & forth' occurs in many housing market transactions and reflects the market mechanics until a 'meeting of the minds' occurs, and the deal agreed upon. It works the same way in boom cycles as it does in corrections. This is not the cause of what is accelerating the downward slide in prices. Rather, this is the end result/effect of a decline in buy side confidence due to an unsustainable rise in property prices from easy-credit, speculation & lax lending standards, the severe credit crisis/credit deflation, rising unemployment, deteriorating macro fundamentals, negative wealth effect from plunging equity prices, no more free money, deleveraging, and a general decline in confidence for the asset.
TRD: Even when lowball offers are accepted, many buyers are trigger-shy. Gomes represented the seller of a one-bedroom in Chelsea where a low offer was countered by his client. The potential buyers — a couple looking to purchase an apartment for their daughter — raised their price and the seller accepted, but then the couple backed out.
MY COMMENT: When an illiquid asset is attempting to be sold in an illiquid market (where buy side demand is on the decline), this will occur. Walking away from contracts, low ball bids accepted but later rejected, and bidding on multiple units at once are all actions that reflect a market where buyers FELL LIKE they have more control. The buyer continues to make the market.
TRD: "Whatever the motivation, the practice has become so common that Gomes has taken to listing apartments higher than the estimated sale price in anticipation of lowball offers.
"We've got to price things a little bit higher, because people are going to be looking for a 15 to 20 percent discount off the bat," he said."
MY COMMENT: This strategy does a major disservice to the seller and is counter productive in an illiquid market. As we enter a tough 2009 with deteriorating macro fundamentals for our local economy, this will result in significantly less foot traffic and showing inquiries for the seller. It will immediately put the property BEHIND THE CURVE, and in fact make other comparable listings look more attractive to interested buyers in that specific price point. It will HELP the competition sell unless the product has features that make the property truly unique. The seller will end up chasing a moving target, and if the market deteriorates further and bids are harder to come by in the future, they will likely see even lower bids and potentially miss their chance for a sale that would have come from proper pricing. Also, psychology tends to play a role and although the goal may be to price high so that you can deal with the lower bid, when it comes, the seller may not play ball because of how far it is from asking. A higher price is NOT the magic bullet for a sale, and it may even contribute to lower sales volume and rising inventory that defines most down cycles. A stronger economy, affordability, job security, clarity/confidence in the banking system, and rising confidence is the cure, and market forces will end up dictating both. Right now, as the market is illiquid, having an idea where the property is likely to sell for and advising/marketing around that should be central to any sell side strategy; not pricing high in anticipation of a low ball bid.
Also, by stating this, doesn't that just invite buyers to go ahead and bid 15%-20% below ask?
TRD: "Lowballing or not, buyers' stubborn refusal to pay listing prices appears to be having an impact on the market. "It's really insulting," Gomes said. "But at the same time, it's all about creating a dialogue. Anytime you have someone who's interested, you do the best you can to play nice and negotiate the deal."
MY COMMENT: Buyers are being prudent. Sellers are being stubborn. All until the price is right! Buyers make the market and determine what the property is worth on the open market based on their confidence in the asset, their financial position, how well the product meets their needs, and a solid knowledge of where the market currently is and how to value the property in question. If bids are low, it is because that is where buyers are confident in purchasing the asset. Without buyers, there is no price discovery. As long as jobs are not safe, buyers feel less wealthy, buyers are not confident with the asset, and the media enhances all these emotions, buyers will continue to have an impact on this market! In the early stages of a down cycle & especially when a market becomes illiquid (bids dry up), it is typically the asset holder that is in denial over the 'current value' of their asset.
Right now more then ever, sellers need quality consulting. Now, my business is mostly buy side, always has been and it always will be, so I constantly have a diversified pool of opinions on how confident they are bidding in this current market. Right now, most of them are patient and waiting either for a deal to present itself, more clarity on where Manhattan is right now in the downturn, confidence in the jobs market, clarity in the health of the overall economy, etc.. Those are very real forces driving buy side psychology right now, and until this changes, bids will likely be on the cautious side. Properties whose asking prices reflect this change in buy side confidence, and are 'pricing in' the current uncertainty in the asset class, are the ones ahead of the curve and likely to move first.
Mortgages Market Update: 01/09
Before I begin I would like to apologize for not posting anything in a while, it has been a little crazy here in the mortgage world (thank God) and I’ve had very little time for anything else but my clients. That said the past couple of months have been brutal to say the least, so let’s backtrack a little bit…
October and November were pretty much quiet, no sudden bursts of refinance activity, no one really purchasing much of anything, lots of downtime. Needless to say, I was pretty much bored. So to compensate for very little business and a drastic change in income, I went back to trading a bit and am now up about 24% in my portfolio. Not bad for an amateur (I think).
December started out slow but ended 2008 with a bang. Rates are low, business is there, and people are anxious to save money. Great news for all of us!
OK so now on to the changes…
1. Rates: First thing, first. I’m sure you guys read CNNMoney/Bloomberg/WSJ or listen to Suze Orman (barf)… Rates are at their very lows for conforming products! If you have a mortgage that is over 6.00%, a home equity, and you are not over the limit of $625,500 (NYC and many other counties nationwide) you should contact your mortgage loan officer/broker to refi! If your mortgage or combination of mortgage is above $625,500, and you have some money to pay down your balance, it may be a good investment to refinance as well.
Here are my rates as of today on conforming products:
30 Year Fixed: 5.25% @ 0 points
15 Year Fixed: 4.75% @ 0 points.Guys, we haven’t seen rates sub 5.625% since 2004 and if I know anything about the mortgage world it’s that rates go up much faster than they come down. Please don’t get greedy and make the excuse of waiting for the government to stabilize rates at 4.50%. Even if they do somehow accomplish this, there will be limitations. Nothing is free in this world.
2. PMI: Gone! If you are seeking a mortgage of over 80% financing and your mortgage professional is promising to get you the financing via Private Mortgage Insurance, please contact someone else, it’s not happening. All financial institutions use pretty much the same sources for mortgage insurance, either Radian, PMI, Genworth, AIG, MGIC, or RMIC. None of which want anything to do with mortgage insurance at the present time. The only way to get more than 80% financing is via an FHA mortgage.
3. New Construction Condominiums/Existing Condos: Whether you are going for a conforming or jumbo mortgage, PLEASE CONFIRM WITH YOUR LOAN OFFICER/BROKER THAT THEY ARE ABLE TO FINANCE IN THE PROJECT.
All banks who finance condos have an underwriting guideline certificate with the GSE’s which expires at different times for all financial institutions. Once they expire, new guidelines go in effect and they are extremely stringent and may put you at risk of not getting a mortgage!
Here is a short list of what will be needed:
• Declining market areas (Manhattan, 5 boroughs) 71% presale requirement! 51% for non-declining market areas.
• The unit must be 100% complete
• Building is in occupancy condition.
• No more than 10% of the building belongs to any one single investor.
Remember: it doesn’t matter if your mortgage is conforming or jumbo, these guidelines are a blanket for all products.
4. Jumbo Products: If you are shopping around for a jumbo mortgage I only have the following advice to offer: stay away from the big gorillas if you want a decent rate. Just don’t forget to make sure they are able to finance your property before doing so. Large banks do not want any unsalable loans on their portfolio and no one is buying jumbos at this time.
Before I sign off I would like to give you one last piece of advice in these crazy times. If your mortgage loan officer is quoting you a rate, it makes sense to you, and is within the market, PLEASE LOCK IN AND GET A CONFIRMATION! Rates change 4 times a day, everyday, and are very volatile - if the terms are decent, lock that sucker in!
Happy New Year guys! I wish you all the very best in the new year, may the year be prosperous for all of you!
Fed To Begin Quantitative Easing in January
A: Would love some reader feedback on this as I always like to educate myself on fed policies in times of distress, and this certainly qualifies. Starting next month, the fed will start large purchases of agency mortgage backed securities backed by Fannie & Freddie (now in gov't conservatorship), and by Ginnie Mae. The reason this is important is because it kicks in the definition of 'printing money'. I recall the huge drop in the US dollar index when the fed announced they will take on quantitative easing policies now that the fed funds rate has been cut to a target range of zero to 0.025%. In short, QE is the dollar negative actions that directly puts newly minted electronic money into the accounts of primary dealers and ultimately the economic system.
First off, lets see what the Fed officially announced they will buy:
What securities are eligible for purchase under the program?So, it seems only fixed rate conforming MBS backed by the GSEs are eligible here. Certainly this does not solve the toxic assets on the balance sheet of the financials problem. I still think 2009 will see some type of RTC like program to transfer these toxic holdings from the banks to the government. Time will tell if the situation is bad enough to warrant such a program.Only fixed-rate agency MBS securities guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae are eligible assets for the program. The program includes, but is not limited to, 30-year, 20-year and 15-year securities of these issuers. The program does not include CMOs, REMICs, Trust IOs/Trust POs and other mortgage derivatives or cash equivalents. Eligible assets may be purchased or sold in specified pools, in “to be announced” (TBA) transactions, and in the dollar roll market.
This is quantitative easing by the fed, to help free up the mortgage markets, keep rates low, and directly stimulate this area of the credit markets that need private capital to come back in! As the fed states:
Who will the investment managers trade with and who is eligible to sell agency MBS to the Federal Reserve under the program?So, where does the money come from? Ahhhhh, the biggest question of them all! Well, the fed simply 'CREATES IT' out of thin air. When you think of 'printing money' you likely think of the Bureau of Engraving & Printing, part of the US Treasury, that is in charge of printing the actual dollars that we use to buy goods and services.Initially, the investment managers will trade only with primary dealers who are eligible to transact directly with the Federal Reserve Bank of New York. Primary dealers are encouraged to submit offers for themselves and for their customers.
The 'printing' that is going on here, starts at the New York Fed's OMO trading desk. Most of the worlds transactions are electronic, seeing funds transfer in the virtual world from one account to another. Rarely do we take out say $10,000 in bills, and use that to pay for goods and services. Instead we wire money, write a check, or whatever to transfer the funds that need to be transferred. Well the quantitative easing that the fed is about to embark in works in the same manner; via an electronic credit to the primary dealer's account that sells the fed the agency mortgage backed securities.
The electronic credit was 'created' out of thin air by the fed, and BAM, you have more money injected directly into the economic system but first deposited into the banking reserve system! In this case the newly minted electronic money goes to the primary dealer's account that sells the assets to the fed. This is the 'printing money' that is associated with quantitative easing and is what hyper-inflationists worry about. The entire process is very dollar negative. Don't believe me though, the fed states it clearly:
How will purchases under the agency MBS program be financed?I have been writing about Ben's Printing, Ben's Printing Take II, and Ben's Printing Continues the past few months. The fed can buy MBS, or it can buy Treasuries from the primary dealers that have an account with the New York Fed. Either form of purchase will credit the primary dealer's account with newly created electronic money. In early December, the fed hinted that they may buy up long-dated Treasuries, kicking in the quantitative easing talk around the internet/blogosphere. Take a look at the US Dollar Index after this announcement in early December:Purchases will be financed through the creation of additional bank reserves.
The first two quarters of 2009 will see plenty of new electronic money entering the system, so lets keep an eye out for effects on:
a) the US dollar
b) lending
c) bank reserves - more hoarding?
d) dollar inverse trades - oil, precious metals, agriculture, etc.
e) the adjusted monetary base
f) bids for other classes of MBS
Interesting times indeed. Happy New Year ALL!!
Manhattan Real Estate Chart Porn
A: I hope everyone enjoyed their holidays and want to wish all a very Happy, Healthy New Year! I probably won't be blogging much because wifey is demanding my presence for a few more days. For today, here is some chart porn for our Manhattan real estate market. Discuss on your own what you think is going on out there. My feeling is 'not much'! Many sellers have taken their listing off the market for the past few weeks during a very slow holiday month, in the hopes of 'freshening up' the property for re-listing in January. I will be curious to see how much inventory rises by mid February from current levels. As I noted almost a year ago, with wall street gone and shrinking, I seriously doubt we will be able to call the next few months a 'wall street bonus season'; after all, if there is no more wall street, how can there be a season devoted to it?
6-MONTH TOTAL INVENTORY TREND
6-MONTH WEEKLY AVERAGED CONTRACTS SIGNED TREND
6-MONTH WEEKLY AVERAGED PRICE REDUCTIONS TREND
6-MONTH WEEKLY AVERAGED NEW LISTINGS TO MARKET TREND
Since Manhattan has no standardized public MLS system, mainly for reasons protecting the current brokerage model here in Manhattan, we are left to do what we can to get the most real-time glimpse into what is actually going on with our local marketplace. These charts were launched on UD.com last November, and the data is powered by Streeteasy.com. The data is NOT perfect, is only as good as the agent who updates the listing, is a bit flawed due to common behaviors of brokers (especially with listings in contract that are left as ACTIVE to get more buyers to call), and is mostly useful for monitoring trends!
Here at UrbanDigs.com the goal is to keep it real, discuss the state of the macro economy and how that may ultimately affect Manhattan residential real estate, and to try to make this market a bit more transparent for all of us! Transparency is GOOD! In the charts above, I would conclude the following:
Enjoy, be safe, eat, drink, and be merry! Happy New Year all!!
Noah's 2009 Predictions
A: Lets keep the tradition going and I apologize in advance for the length of this, hopefully you can find 5 min to read it all. Here were last years predictions for 2008, published December 27th, 2007; if you haven't read it yet and are new to this blog, please try to read it before continuing so you can see where I was right, and where I was wrong. I recall when I published those statements about 12 months ago, many accused me of trying to take down Manhattan real estate, and of being too doom & gloom so 'either I should blog and be gloomy, or I should be positive and sell real estate', emails. Just goes to show both the positive sentiment & denial in place at the time, when everyone thought the fed's rate cut fueled equity rallies were signaling hope. Anyway, we are at now now, stocks fell 40% or so, oil down 65% or so, housing deteriorating to depression-era trends, Manhattan's downturn came on fast.....so what's next? It's a game right, so I'll play and keep the same format as last year so we can go back and analyze later on.
NATIONAL HOUSING - Building on last years 'end of 2008' prediction, I think the worst is almost over for the rate of declines for housing markets across the nation. I think the 'L' shaped cycle will be close to the bottom of that 'L', by the end of 2009, leading to a few years of muddling around. Real estate is local and properties vary greatly, so to generalize here is to really tie any prediction to the health of the overall economy and general confidence. Lets not forget that it is all about the buyers when it comes to any local housing market!
I expect the rate of deterioration for most markets to slow as 2009 gets into the 2nd half, causing some major media sites to at least rationally discuss a stabilization in very hard hit markets. Hindsight will probably show a 40%-60% peak to trough correction in many markets when all is said and done (w/ distressed and foreclosed properties overshooting to the downside), so predicting this exact number now must have a wide range to it; we are not at the bottom yet but when we realize a bottom is in place, the market will already be recovering.
Buy side psychology for most conservative investors that have not purchased yet, but plan to, leads to a desire to buy an asset that is appreciating; or at least not depreciating at spectacular and uncertain rates. What I mean is, in general most conservative investors choose not to buy a depreciating asset unless the 'buy' decision is very one sided. Right now I think the mid sized private investors are buying up the majority of distressed/foreclosed assets so the question becomes, when will the general masses start buying:
a) they WANT to buy real estate again
b) feel CONFIDENT enough to buy real estate
c) can AFFORD to buy real estate again
d) can SECURE FINANCING to buy real estate again
It is likely that two out of the above 4 dynamics come into place during the course of 2009. I doubt all four will. The healing process after this housing collapse will be slow and most markets will in hindsight see an 'L' shaped adjustment in prices, with the bottom of the 'L' muddled for a few years. During this time sales volume will still likely be low, putting the most pain on those sellers that have a time pressure to move the property. However, it is very possible that the course of 2009 sees the highest level of fierce sell side competition in many local markets during this adjustment phase. I'm not saying this means a new bull market, it doesn't. I'm simply saying that the most distressed markets, with the most sell side competition, with the highest level of overall fear, may be nearing its peak of their local down cycle. From a risk/reward standpoint, if the property is income producing, in good shape, and in a solid town, well it could prove to be a solid investment. If anything, be a mini expert on your local market and keep tabs on the fierceness of sell side competition, for signs of opportunity.
I expect most markets to see average declines of another 8%-12% during the course of 2009, as the credit crisis finishes its wrath of doom.
MANHATTAN RESIDENTIAL REAL ESTATE - First off, when reading the new articles (trust me, there will be plenty of them now that downturn started) that come out calling for a bottom in Manhattan RE market, ask yourself if that same source discussed in advance the current downturn we are in now; chances are they never saw it coming. To defend a bottom or to call for a recovery based on assumptions that have not occurred yet, is quite silly. If they didn't see it coming to begin with, how can you rationalize a recovery with no fundamentals to back you up? There will be a time for a recovery, but for now, lets KEEP IT REAL!
Interesting to look back to my 2008 predictions for this one:
"As wall street falls, so will confidence and demand on the buy side for Manhattan real estate products. At the same time, we will see more types of sellers contribute to inventory builds toward the end of 2008; speculators, foreign buyers flipping, second home's selling, and struggling buyers who bought a bit more than they can chew or whose job security has changed to the negative. While we won't see a crash by any means, I think sellers will find that its a bit harder than they thought to move their property above last years comparable sales."
I certainly didn't expect the illiquidity to hit until 2009, so that was a bit of a shock as the fall of wall street occurred so fast; that is why I didn't expect the downturn to hit full gear in 2008! Nevertheless, the market became very illiquid around mid SEPT, with the fall of Lehman & gov't rescue of AIG. Here is the deal, buyer confidence started to decline around AUG 2007, so by JUNE/JULY of 2008 I started to notice 'Low Ball Bids & Cold Feet'; the market really slowed when it became so illiquid starting around mid September, with a noticeable buyers strike.
On to 2009, I expect this market to remain very illiquid. Its mid December now that I write this, and it will be published at year end, right before the so called 'bonus season' hits. Umm, not this year! As I stated early 2008, the 2009 bonus season is the one to worry about now that wall street is all but dead. Expect bonuses to be down about 50%, and this is not counting those that won't receive any bonus or got fired before they could receive a bonus. Retention bonuses & top performing PMs will be the most common bonuses, and I just don't see that money rushing back into the Manhattan residential housing marketplace; that is if the recipient doesn't own a home already.
I expect 2009 to be a dark year for Manhattan's real economy. The after effects of the credit crisis and the death of wall street will really hit home in 2009 as consumers tighten their belts; especially at the higher end. We will see massive job losses in the financial sector as forced mergers close and I think frugality will consume most of us that live here. The combination of:
a) job losses from financial sector and ultimately from real economy (retail, restaurants, etc.) in Manhattan
b) negative wealth effect from stock selloff
c) frugal mentality
d) deteriorating buy side confidence
e) lack of speculative buying
f) lack of foreign buying as credit crisis hits their local economies
g) continued tight lending standards
h) media enhancing the slowdown as reporters 'report' on lagging price data and low sales volume
...will continue to dampen buy side demand. Bids will come but the market will likely remain illiquid, and as a result I think the adjustment will continue to occur. For those arguing that supply plays a more vital role in this market, just look what happens when bids stop coming in! It's all about the buyers; always was, and always will be. It doesn't matter if there are 8,000/9,000/10,000 listings on the open market, your property is worth only what someone is both willing and able to pay at any given time.
For a real time guess on where we are right now, I put the deals being done right now down around 15%-25% from peak levels (peak being deals signed into contract in early/mid 2007). The large range is a result of the variable quality of product here in Manhattan + the fact that the downturn started earlier than most would like to admit. If we are down 10-15% since September, then I would say we were down 5-10% already before Lehman failed and AIG was rescued!
Cookie cutter and un-renovated properties, with few exceptional sell side features will be hard sells in an illiquid market and the seller is likely to eventually bite and 'hit the bid' received just to move the property. Chasing the curve and increasing sell side competition eventually hits seller mentality; it's just a matter of when they reach that breaking point and want to move the property. Unfortunately, many sellers who have been on the market for 4+ months already, likely received an earlier bid at or near their current asking price, but didn't accept it because of when the bid was received and how far from ask it might have been at that time.
For sell side, I expect 2009 to see rising inventory as both desired and forced re-sales hit the open market and buy side demand stays dampened. For the 4Q of 2008, I would not be surprised to find out that sales volume was down 40%-50% or more from previous year's level. I expect 2009 to reveal who is swimming naked, who is overexposed, who is over-leveraged, and who was a speculative investor that just took on too much riding the Manhattan gravy train; illiquidity brings this out - when the money stops flowing in and selling ain't so easy anymore. Clearly anyone that stuck to the statement that 'Manhattan real estate never goes down' & 'Buy Manhattan now or be priced out forever', has been proven very very wrong. Manhattan's real estate market is a market just like any other and as such is not immune to macro economic forces. If anything, 2008 has proven that being on top of your macro game would have kept you ahead of the curve in terms of the current slowdown now upon us.
With that said, everything has a price and this adjustment is all about price discovery. We are in that illiquid part of the process where price discovery ultimately surprises us, yet only the guys that transact and appraise the property know where the deal was done; UNTIL IT CLOSES. After the closing takes place, the world discovers the price and issues in the next level of price discovery that will set the new benchmark for comps and pricing analysis. The downturn is defined.
The key to 2009 will be the severity of:
1) job losses
2) illiquidity of the marketplace
..on buy side confidence. If we see job losses exceed even the worst of expectations, and buy side demand deteriorates further, this market could get even more illiquid and fierce sell side competition will likely arise. Once this happens, its fairly difficult to reverse course without any fundamental reason to draw buyers back to the market in mass. That fundamental reason usually is noticeably lower prices. Higher property taxes to fill budget gaps are also likely to play a role in this adjustment.
In short, if we are down 15%-25% right now from peak, I would expect 2009 to continue this downtrend and likely see prices fall another 10%-15% on top of where we are right now, by years end. That would make the range between 25%-40%, a wide one yes, but one certainly possible for this type of residential market with such a wide range of quality of product. The reason lies in the vast difference in product features including:
a) location
b) park/river views
c) outdoor space
d) prewar style - fireplace
etc., just to name a few. High quality products will retain value a bit better during the down cycle, than properties with no light, no view, plain layout, and just OK location. However, the high end is more susceptible to an illiquid marketplace due to the nature of this downturn and the kinds of jobs lost with the death of wall street. All in all though, no product type will be immune to this downturn. How fast a property must be moved will become central to 2009's level of sell side competition. If 2009 is the year that sees the distress really come out, then we should expect at least some level of fierce sell side competition as the cycle progresses here in Manhattan. After all this is a wall street city facing a wall street centered crisis.
Taking a step back for a moment, we are in the initial snap down from peak right now, and this is the fastest and most furious phase of the bubble correction (when the bids just seem to disappear, so to speak). By Fall of 2009 I would expect the majority of the furious initial adjustment to be complete and price drops thereafter to slow in pace and be more dependent on the level of desperation of the seller. Just like nobody could tell exactly where the top would be, nobody will be able to tell if we ultimately overshoot on the downside either.
As we near 'fair value' or what buyers perceive as 'fair value' for Manhattan properties, we will see sales volume start to stabilize; in the end I expect more of an 'L' shaped adjustment in prices. Right now we are trying to find that base of the 'L'. I don't buy into a quick 'V' shaped adjustment & recovery because of the nature of this recession and uncertain level of regulation coming to the credit markets. I often ask myself, what fundamentals are near that will drive real buyers back into this marketplace en masse, willing to pay a time premium again based on comps. Right now the only silver lining I can find is in ultra low interest rates as a result of fed meddling; and (a) I think this is temporary and not without its risks that I get into below, and (b) I don't think this overpowers the negative fundamentals causing buyers to remain sidelined and sellers forced to move property. You can't force buyers to buy and you can't force lenders to lend. As long as this market remains illiquid on the buy side, a negative time value is likely to be placed on open market properties and loan appraisals; which in essence, defines the down cycle.
My concerns beyond this lie in the perceived quality of life and the actual quality of life here in Manhattan, as the side effects of budget gaps ultimately result in service cuts and higher taxes. These effects that are perceived by families w/ kids, speculative investors, current homeowners, foreign demand, future buyers, etc.. won't be clear until 2010 or 2011.
THE FED - Well, there is no more room left to cut rates. The fed will be forced to engage in more lending facilities and quantitative easing from this point out to address the crisis/slowdown. Expect it to possibly expand to home builders, commercial, credit cards, student loans, auto loans, etc., as everyone looks for a piece of the TARP pie. I really wonder whether a very big bank will have to be nationalized or not; Citigroup being the biggest question mark. For 2009, here is what I expect:
1) Second round of TARP will be used like the first, most going to inject capital directly into the major banks. The remainder, say $75Bln-$100Bln, may be saved to help other sectors, smaller banks, big developers, autos, homebuilders, and whoever else they decide to be worthy of taxpayer rescue.
2) Obama's fiscal stimulus will be near $1Trln, and will focus on jobs, infrastructure, homeowner relief, foreclosure relief, some pork, and who else knows what sector they feel like including. As with most gov't packages, we must question how efficiently funds are applied, used, and when the goals of the program are actually achieved. Will it take 6 months, 12, 18? In the meantime, how deep does the recession get?
3) TARP II or RTC like program to directly take on distressed assets from the big banks? As the first $700Bln goes to recapitalize, and the next phase has the fed focused on getting the system interested in taking on riskier assets by driving up treasuries, the final phase may be to rid the balance sheets of the spreading toxic assets. Lets be real, as the problem spreads to alt-a, prime, helocs, credit cards, auto loans, lbos, option arms, etc.., more and more assets are becoming toxic as deflation continues. The final phase may be to just transfer these toxic assets from the banks to an RTC like vehicle. I'm not for gov't intervention, just telling you what I think is possible. Maybe this program is another $700Bln, who knows.
Ben wants to inflate, and is famous for his 'printing press' speech. The real question is how deep the quantitative easing becomes, and how much uumph they pump directly into the system. As this money goes in the front door, the shadow banking system is seeing the destruction of assets through the back. So, looking at a chart of the adjusted monetary base surge is kind of misleading. The 18 credit facilities were more to liquefy the markets so they remained operational.
I will keep an eye on the slowdown in velocity of money, adjusted monetary base, and reserves held by depository institutions throughout 2009 to see how this unprecedented fed actions hit the money supply, how often money is used within the system, and for banks reserves. There are no free lunches, and ultimately the fed will have to wane the system off these measures!
Will 2009 be the year for this? Hmm, hard to tell, certainly not the first half of 2009. For now, it seems large purchases of mortgages and treasuries are in the works. But by the end of 2009 we may see the fed pull back the reins on some of the lending facilities. I wonder how the system will react?
Back to 2009, what is interesting to me is when the markets may start pricing in future rate hikes and removal of credit facilities. In short, how long does the fed keep rates between 0% - 0.25%? I would expect for at least most of 2009 as macro data is lagging and will continue to deteriorate as an after effect of this credit tsunami. As long as unemployment is rising, and the job losses mounting, the fed will remain in 'stimulate' mode. If they hike significantly earlier then the lagging unemployment's peak, well, Volcker probably smells something he doesn't like!
STOCK MARKETS - Exactly one year ago I predicted a negative year for stocks and it turned out I was way too optimistic! With markets down about 35% or so for the calendar year, we have to wonder whether the market has discounted the current deflationary environment. We also need to wonder how all the fiscal and monetary stimulus will ultimately help to reflate the stock market.
Given such a huge move down already, I'm not as bearish on stocks as I would normally be for 2009. However, I do expect a few more rounds of forced selling amid hedge fund redemptions and more deleveraging before all is set and done. Lets not forget about all the securities on review for downgrade, and the lagging nature of Moodys and S&P to downgrade the credit rating of corporations. This will most likely occur during the first half of 2009. I think 2009 will see many HF's close their doors and who knows how many more "Madoff Scams" there are out there yet to reveal themselves; the cockroach theory usually proves correct in times like these. Making a call today on where we may be at the end of 2009 is so tough, given the highly volatile markets and the huge selloff we had already. But this is a game and I'll play.
I expect stocks to have a rough first half, but perhaps find a bottom sometime before mid year. Whether we muddle around for a while, who knows, but by mid year I would say most of the volatility will be over and it will be slow and boring for a year or two afterward as we deal with the stubbornly lagging macro headwinds and main street pain of this crisis. It will seem like the economic data doesn't get any better and most analysts will look for a silver lining in a 'slowing down of the bad data', for signs of stability.
All in all, I would expect us to end 2009 slightly negative again, because I would think that any rounds of forced selling will overpower any rounds of rallying later in the year. But, time is what we need and I am getting less and less bearish as this cycle plays out. Just keep in mind one very important thing:
Those buying stocks because P/E valuations seem cheap as stock prices plunged, watch out for the 'E' in 'P/E'! Sure, stocks may look cheap now based on already lowered analyst expectations for future profits, but one thing is for sure and that is we have NOT seen the full effect on corporate profits from this very severe and drawn out credit crisis. I fear that real earnings in the future may be significantly lower than already lowered analyst expectations, and that means the valuations that appear cheap today, really aren't!The bigger question is when stocks have 'priced in' the full effects of this severe and deep economic slowdown. Out of all asset classes, I would expect treasuries to perform well for first half (as the silliness phase of the bubble continues) of 2009 and precious metals to outperform as well. I would not be surprised to see financials lead a rally towards the end of 2009. But I just don't see any reason for anything other than bear market rallies when we don't know the depth of this credit crisis yet.
JOBS - The dark days of job losses are here and I think Manhattan is in the early stages of our local slowdown. Expect ugly jobs reports from Manhattan firms for the first half of 2009, especially as forced merger deals close and headcount is reduced.
As Manhattan handles its own slowdown, the combination of tight credit, frugality & tough business conditions are likely to spread to retail businesses leading to further job losses as the year goes on. I'm not too excited about 2009 from a jobs standpoint and this is the sad after effect of the death of wall street. Nobody's job is safe and there will be victims here.
If Manhattan real estate continues to be pressured, consumers in this city, especially the big spenders, will feel less wealth and that negative wealth effect is likely to cause frugality to set in. As a nation of spenders and credit, saving is not the best dynamic for businesses. If frugality sets in as Jeff & I expect it to as this process plays out, many of Manhattan's businesses will see a noticeable drop in demand for their products/services. Nobody likes a slowdown, and this cycle is no different. But lets keep it real here and understand that this is my opinion on what I see for 2009. Trust me, I hope I am proven wrong in hindsight!
INFLATION - We are fighting a deflationary spiral right now and the fed/treasury are throwing everything they have to stop it! Time will tell how successful they are. While markets will do what markets want to do, it's proven to be very difficult to control market forces by intervention. While the powers that be try to inflate, I think most of 2009 will show deflation continuing. The question is the back end of this cycle and if inflation will rear its ugly head as a result of super aggressive fiscal and monetary stimulus. I think that is a late 2010 - 2011 problem, at the earliest. Expect 2009 to show the after effects of this deflationary environment.
While treasuries prove to be the safest bet in times of deflation, I think the treasury market is in the 'silliness' stage of a bubble. How long it lasts and how big it inflates to is anyone's guess, but I do think when the party stops we could very well see a sharp and fast surge in rates. However, I would not put the treasury bubble in the same category as the tech bubble of the late 90s or oil bubble of 2007/2008. It may last much longer than these bubbles did before rolling over. Looking ahead, the question is how this ultimately affects borrowing costs just as the economy tries to recover from this crisis. It could be a big unintended consequence of polices taken to combat this deflationary spiral.
DISCLAIMER - I'm not always right, I am no messiah, and I never ever claim to be! UrbanDigs.com, since the very beginning, has been a way for me to 'speak out' on how I feel about the macro economy and the Manhattan residential real estate marketplace. I tell it how I see it, and nothing more. My true background is with a momentum style of equity trading as I was a NASDAQ equities trader with Tradescape from 1998-2004 and have been following the markets since 1990. I learned a lot along the way and I feel I have a much deeper understanding now, than I did 10 years ago when I started trading professionally, but that does NOT mean you should make any investment decisions based on what I say here! Talk to your financial adviser for that. As for buying or selling real estate here in Manhattan, no one can time the market perfectly and you should always take into account your unique financial situation and needs. So, if you are thinking of buying now, consider your job security, liquid assets, salary, timeline to own, and whether you can afford a product that meets your needs rather than day trade housing and waiting for the perfect entry point! Real estate investment decisions are very personal and everyone's situation is unique. With that said, I welcome any comments regarding what I said above!!
Jeff's 9 Predictions for 2009
So it's that time of year again, when bloggers and commentators the world over issue their predictions for the coming year. I thought it would only be fair to rate last year's performance, while I speculate on 2009. You can find the complete piece here....just to keep me honest.
#1 In late 2007 I predicted that "The U.S. will enter a recession." It was not a wildly contrarian call at the time, but I did say that "We may already be in it." My timing wasn't bad. The National Bureau of Economic Research, the official arbiter of recessions, stated a couple of weeks ago that the recession started in December 2007. My prediction for 2009 - MORE RECESSION! Really ugly in the first half, with the potential for a positive GDP quarter in the second half driven by government spending and easy comps, but 2010 could easily see a relapse of negative GDP for a quarter or two.
#2 Last year I also said "The dollar will remain weak, but will start to stabilize." I stated that this would be driven by weakening foreign economies. I got that call right, but also speculated that foreign investment in US assets would help, if it continued. I don't think it really has. Foreigners want to buy US government debt, even at negative rates of return, because the U.S. is the most politically stable economy in the world, one of the most transparent (scary as that sounds in the aftermath of Madoff with the money) and one of the most proactive when disaster hits. The dollar is a "safe haven" if you will, although it may be less of one than ever before. The dollar will continue to see inflows from wealthy people worldwide who are scared to death to own anything else....except maybe a little gold. While countries like China foolishly try to devalue their way into competitive prosperity, I predict a relatively stable dollar for 2009.
#3 For 2008 I predicted "Strong Manufacturing/Exports" - I think this one turned out to be about half right. It worked for the first half of the year, but crumbling world economies and a 16% trade-weighted rally in the dollar have started to chill exports since the summer. With 19% of manufacturing now going towards exports, the slowdown is going to sting. Of course, the domestic side has been slow for three years, so one would think it would not have too far to fall, but I predict that the auto industry debacle will result in a horrible year for manufacturing.
#4 Last time around I wrongly opined that "Commodity & Agricultural Prices Slow but Stay Firm." I did write, however, "I wouldn't be surprised to see a jaw- dropping correction in commodity prices in the first half." This is why I am not George Soros....my timing is always a tad early. If you had been short commodities in the first half you would have gotten your head ripped off. The second half collapse was also far worse than I expected. Frankly, I didn't have the guts to make a loud contrarian call on the BRIC nation economies at the time. But I did make a bunch of negative calls on emerging markets soon thereafter, starting with China. My call for this year is that the Russian, Chinese, Indian and Brazilian economies are gonna break down like a soup sandwich in 2009. Investors will start to say "Next time I mention the BRIC investment strategy, throw one at me!" Watch out overhead for falling oligarchs, conglomeratures, sultans, dictators and assorted banana republic-type billionaires. These guys were largely over levered to commodities and in hock up to their eyeballs, a combination that any Comex or Chicago Merc trader would tell you to avoid.
#5 I was early and accurate on one of my calls last year predicting "State Fiscal Crunches." For this this one I give myself a little gold star...and a cupcake which I am going to eat right now. The unfortunate thing is this is only going to get worse in 2009 and I see increased tax burdens coming for sure. They will be sneaky, strange, and irrational and will have UNINTENDED CONSEQUENCES. The New York State proposed "iPod tax" for downloading audio or video makes all the sense in the world to me. I will also make the bold prediction that services will be cut universally.
#6 In late 2007, I predicted that "Foreign Visitation Will Continue to Flourish." I will claim technical accuracy on this prediction. Through the first half of the year, tourism continued to come on strong. But by October, the city's tourism office, NYC & Company, was revising down the estimated number of people traveling to NYC in 2008 to 47.3MM, or 400,000 less than the 47.7 million initially expected. If this number proves out, the growth rate will have fallen to 2.2% from levels ranging from 2.8% to 7.1% in the prior five years. For 2009, my prediction is for a significant decline in NYC visitation, maybe 5%. This ain't gonna be good for all the new hotels being opened. According to John Fitzpatrick, Chairman of the Hotel Association of New York, "Our industry is already grappling with a twenty percent decrease in hotel revenue over last year, in November alone." The President & CEO of the Fitzpatrick Manhattan hotel group made the comment in response to word of a plan to significantly increase the city's hotel tax.
#7 Did I mention that sometimes I hallucinate? Apparently I was last year when I wrote that "Availability of Business Loans Will Be Strong." I guess if the BRIC countries had held up and exports had remained firm, this would have been somewhat more of the case. But SBA loans started to plummet earlier this year, in line with declining availability of business credit of all types. Today, SBA loans are becoming even harder to get due to new regulatory changes. These loans are one of the primary ways that entrepreneurs fund start-ups and that folks fund the acquisition of small businesses. Since small business formation often helps lead the way out of recession, you can understand why I am not at all bullish on an economic recovery. My prediction is that 2009 will not be a good one for small businesses, due to tough economic times and a shortage of capital, but by 2010 things should be truning the corner.
#8 Stocks Will Bottom in 2009 - Yes, I am bearish on the economy, but pretty neutral on stocks. I think there will be one more hair-raising sell-off (it will be much less impressive in terms of volume and fortunately I have hardly any hair left to raise), which ends the hedge fund liquidation process and the final towel-throwing by individual investors. Coming out of the bottom, small cap growth stocks will outperform because the premium put on any kind of sustainable growth will be huge. No one will care and only the intrepid and/or foolhardy? will profit. I think the economy is going to be moribund for years, but the debt liquidation crisis will end next year and hence stocks, which always look forward by 6 to 12 months, will bottom sometime in 2009.
#9 - Inflation will be nowhere to be seen in 2009 and 2010 - I don't care how many dollars we print. The complete destruction of commodity and manufacturing-levered foreign economies will cast a pall over "demand for stuff," particularly raw materials worldwide and pricing will be horrendous. Hence, despite all efforts to devalue the dollar and cause hyper-inflation, it won't happen in 2009 or 2010. Deflation will continue to be the bugaboo as the financial system continues to work through the ever-growing mountain of bad debt. Money is being destroyed faster than the government can print it. Next up is commercial real estate followed by municipal debt and corporate debt. By the time that's all over there will be only relatively less debt liquidation to worry about.
Bonus Prediction - 2009 will be the year that New York City residential real estate catches down to the rest of the country. I will wager that by June people will be calling the New York City residential market a disaster area and prices will be down 30 - 40%. For those looking for shelter it will be time to start looking around.
Of course it goes without saying that if you keep reading Urban Digs that you will not continue to have whiter teeth, fresher breath and be a hit at parties again in 2009. This prediction of 2008 was so dead on that I think you can just depend on it for the foreseeable future.
Have a Happy & Safe Holiday Season
YIKES...My UltraShort ETF Just Tanked...!!
A: Have a day off today before the holidays and just wanted to wish everyone out there a very safe, enjoyable, and Happy Holidays!! I'm a bit burned out over here from past few months, so taking a day to trade a bit on what is a very slow volume day. When I woke up today I noticed something strange, something that those trading this market via ETF's may have noticed too. Although the market was set to open flat, one of my UltraShort positions was set to open down $25! WTF??? Well, for those that got scared too, there is a reasonable explanation why and the money will be credited back to you on Dec 30th!
Sorry for the off-topic piece here, but I need a break from discussing Manhattan real estate anyway. Here is the deal if you noticed a big haircut today due to some ETF holdings you may have:
ProShares recently declared distributions for 4th Quarter 2008 and are now trading ex-dividend, meaning the shares are trading without the distribution amount. This impacted the trading price and Net Asset Value (NAV) for these funds. The chart below details important dates related to ProShares distributions. Please visit www.proshares.com and click on the “View 2008 Distributions” button to view fund specific details.Here are the details of the first 15 ETFs affected, a total of 52 out of the 76 ETFS were affected by this distribution (click on the image for all):
So, for example, I own some MZZ, which is the UltraShort MidCap 400 Index that tries to replicate the performance of 2X the inverse of the S&P MidCap 400 Index. It closed at $88, yesterday, and opened this morning at $63, a $25 difference.
If you notice the outlined row above, there was a dividend of $0.007783 and a short-term capital gain of $23.84952, distributed out of the index. So, what do you get back on the 30th? Here is the direct response from ProShares:
A payment will be made to your brokerage firm on December 30, 2008. Your brokerage firm will, in turn, place the payment into your brokerage account.I've been trading these ETF's for over 18 months or so now, but this is the first time I held a position in one that was affected by this distribution, so it did catch me a bit off guard. A few other traders I know called me too about this, so I figured to at least pass on what I know from ProShares in case anyone out there was affected but didn't understand why. Just check your statement in a few days and you should see the credit there. If not, contact your financial adviser or your representative at your brokerage firm.
These ETFs are certainly fun to trade, and this is a great traders market, but recently there has been much disappointment about these vehicles that seek to duplicate 1x, 2x, and now up to 3x the performance of any one index or other ETF. One recent article came from Eric Oberg, over at TheStreet.com:
What if you had perfect foresight and decided at the beginning of this year to go short U.S. real estate and short financials? What if I told you about an easy way to implement these trades, and to implement them with two or three times leverage? You'd expect to clean up, right?Here's a visual example, that is interesting to say the least. It seems that these products are engineered to go down over time and with lower volatility. I can see some class action lawsuits forming already; however, I'm sure ProShares is protected via the product disclosure statements but that won't stop investors from trying.What if I told you that if you were spot-on with your market call, positioned half of your portfolio in each short, you would still be down 23.4% year to date? That's better than the overall market, sure, but still a little perplexing, I mean, how could you be down for the year with one of the most prescient market calls of all time?
To be fair, these funds do exactly what they set out to do -- track the daily changes in these indices. But that is also their fatal flaw as any sort of long-term investment or portfolio hedge. It is the daily rebalancing of the portfolios in combination with the market volatility and the leverage that has eaten into the returns of what appeared to be a savvy bet. And the irony of it all is that these funds, due to their structure, actually contribute to the volatility, thus directly contribute to their own failure as instruments for anything other than a day trade.
So when you're frequently rebalancing, volatility nibbles away at your returns. When volatility goes to extreme levels, it eats away at your returns ... and with leverage, it devours your returns. This is essentially a short volatility position, and the short volatility position can outweigh the short index position, as evidenced by the returns in the chart. So these ETFs are not quite as effective as one would think as a mainstay in the portfolio, as a hedge or otherwise; in fact, they may be completely ineffective, or even counterproductive, at achieving objectives.
Corporate Bond Spreads Still Show Distress
A: Just a quick checkup into the spreads between High Yield corporate bonds to treasuries shows continued distress on the outlook of riskier companies. Given the actions taken by the Fed/Treasury, it will be interesting to see if there is a lagging improvement in these spreads. Also, we must take into account that the spreads would be tighter if it wasn't for the huge rally in treasuries, sparked by QE talk by Ben & Company that they may purchase longer term treasuries to help drive down rates.
WIDENING CREDIT SPREAD BETWEEN WACHOVIA HIGH YIELD CORPORATE BOND INDEX vs iSHARES LEHMAN 7-10 YR TREASURY BOND FUND
CHART LINK VIA BLOOMBERG: Simply add "IEF:US" symbol to this chart to compare credit spreads.
These rising spreads reflect investor sentiment of increasing risk that the borrower will default on its debts. As this spread widens, borrowing costs for riskier corporations rise eating in to potential future profits. Combine this with the economic slowdown, and the process feeds on itself. Rising borrowing costs + deteriorating macro fundamentals = increased pressure on the company to maintain/drive future profits. This is one area of the credit markets that have not come in noticeably. Everything else, LIBOR/OIS/TED has come in noticeably. A good sign.
Let me try to relate to those that come here for Manhattan real estate discussions, and who may not understand these macro discussions. Lets say you are trying to sell a property in today's tough market. Now lets say that Bloomberg raises property taxes on you by 10% to help fill budget gaps. How ill this affect you? Well, for one it will make the costs to carry the property rise and therefore make the property less affordable to a potential buyer. This rise in carrying costs should have a negative effect on the purchase price on the open market because as carrying costs rise, affordability goes down. The discrepancy is made up for in the purchase price. Just a simple little analogy for those that don't quite follow the corporate bond markets as a sign of credit stress. Not quite the same, but it should help explain that when corporate bonds are distressed like they are now, borrowing costs rise making it a bit tougher for the company to maximize profit potential; just like if a seller's property taxes rise 10%, it would make it tougher to maximize the selling price.
With 10YR treasuries yielding 2%, and HY bonds yielding mid 10s%, I wonder if future money will start to go for the risk and bring these spreads back in!
Ben's Printing Continues
A: In mid-late 2007, I decided to change the tune of this blog from daily discussions of Manhattan real estate, to the credit crisis. Now, its weeks before 2009, the credit crisis continues, the fed has taken unprecedented measures, and I will start to incorporate the effects of such policy into this site. Why? Because there are NO free lunches and with such drastic measures taken the best we can hope for is as few unintended consequences down the road. Many seem to think that with every bailout (FNM, FRE, Autos), with ZIRP policy, with every financial rescue (AIG/Citi), with every shotgun marraige (Bear, WaMu, Wachovia, Countrywide), with 18 credit lending facilities, with massive fiscal stimulus, that we are providing the necessary medicine to beat this deflationary spiral and will come out of it with no side effects. Yes, people actually believe this. I don't.
What will the unintended consequences be?
What unseen consequences do you foresee as a result of massive fiscal & monetary stimulus plus measures taken by the fed to recapitalize the financial system and avoid systemic disruptions?
I discussed Ben's Printing in late NOV, and then Ben's Printing Take II a few days later to show you the surge in the % Change y-o-y of the St. Louis Fed Adjusted Monetary Base. On the third look, we can see the surge continues:
You are going to hear alot of this type of talk going forward on CNBC and other financial blogs as we start to see the effects of 'printing' by the Fed. As we all know, the fed took on a ZIRP policy last week, leaving no more room to cut rates. The above chart is a bit misleading in the sense that it does not take into account the destruction of about $1Trln in the global shadow banking system as toxic derivatives lost much of their value. We saw this as writedowns on the books of financial firms.
So, Ben drops money from the helicopter in an attempt to recapitalize but until the fed starts buying real assets directly from the primary dealers, it was just wavering around. Which brings us to quantitative easing. Quantitative easing basically refers to the fed buying treasuries or asset backed securities from the primary dealers, taking the securities onto their books and crediting the receiving bank with the proper deposits. This 'printing' basically results in newly minted dollars (not really fresh made, but credits in the digital world) entering the financial system.
The talk of Ben buying longer term treasuries & large amounts of agency debt / MBS as part of the quantitative ease, has brought down rates substantially; which is what the fed wanted to do anyway but didn't succeed with rate cuts all the way to 0%. Anyway, it's clear the fed will do whatever they can think of to stop this crisis, putting unintended consequences on the side burner for now.
Right now, banks reserves seem to be surging as they hoard cash. This has led to many politicians yelling & screaming that the first dose of TARP funds was not used the way they were told it would be, and that lending has not resumed the way they were told it would by using these funds. Is anyone really that surprised? Mish has called this from Day 1 and the logic is sound:
Banks are hoarding cash because defaults are rising, unemployment is rising, and it simply makes no sense to lend. Bank balance sheets are already stuffed to the gills.Ask yourself, do we really want banks to just throw out this money to those that really need it, those that shouldn't get it, and businesses whose products are not selling? Would that be the cure for what ails us? Banks are not lending because credit quality is deteriorating, not rising, consumers are starting to save, not spend, unemployment is rising, not falling, defaults are spreading to higher quality debt classes, not tightening, and banks STILL have tons of toxic securities left on their balance sheets. Don't get me wrong, I don't want to see anybody suffer in hard times. But I also understand WHY & HOW we got into this mess to begin with, and continuing EZ-Money policy and giving a loan out to those that shouldn't get it is NOT the answer to our problems! The house of debt is dangling on a weak foundation and propping it up with more bad debts almost ensures a collapse later on.
In this environment, as Mish says, it just doesn't make much sense to lend. But this is not the American way, so public figures will demand answers and bank CEO's will be bobbing & weaving!
In my humble opinion, the second round of TARP will be used just like the first round, to inject capital directly into the banks via a community hand out to avoid singling out any one troubled firm. More companies will line up for access to this second round, and there will likely be less to go around for everyone. But the big banks will get the highest capital injections as they need the cushion the most. This doesn't solve the balance sheet assets problem though, so I would not be surprised to see TARP 2, or some type of RTC, to be announced down the road to buy distressed assets directly from the big firms; especially Citigroup. First recapitalize, Second clan up toxic assets. If this occurs, I would probably be a buyer of the bank stocks.
Right now the fed is only buying high quality MBS and agency debt in its quantitative easing, or at least what they perceive as 'high quality'. What does that mean anymore anyway, 'high quality'? What happens when prime starts to behave like subprime? We are already seeing Prime Jumbo Securitizations being downgraded by rating agencies. And what about commercial? Ugh, commercial, if 2007 was subprime, and 2008 was bailout nation, 2009 may be commercial/prime. Yesterday Moodys warned that $110 Billion of US Commercial CDO's face possible multi-notch downgrades due to deteriorating conditions. Certainly, this seems to be the problem that doesn't go away.
Are You Half Full or Half Empty?
A: Which are you? If you are half full, you are choosing to look at the fact that the fed took on a ZIRP policy for rates, threw in the kitchen sink, and that the treasury just bailed out the automakers with a $13.4Bln bridge loan. The half full mentality will say that this is all good stuff, it prevented a disaster, and that inflation will succeed in killing off deflation so buy stocks, buy real estate, and buy commodities. If you are half empty you look at the fact that things are so bad, that the fed had to take on a ZIRP policy, that the treasury felt forced to rescue the auto's for fear of collateral damage that bankruptcy would bring, and the more important news that S&P lowered its credit ratings on 11 US & European banks and on GE & GE Capital ratings to negative. For the half full folks, enjoy the champagne, but for me, it's way too early to celebrate.
At 2:14PM on Tuesday, one minute before the fed announced their decision on rates, the DOW was trading at 8,672. Then the following occurred:
1) Fed abandoned rate cuts and instead chose to announce that the fed funds target rate will be in a range from 0% to 0.25%. The reason was that the effective funds rate was already close to 0%, via massive liquidity injections, and a rate cut would be more psychological than real. So, they acknowledged this and chose to just take on a zero-interest-rate-policy, or ZIRP.
2) Fed hinted at the next steps of quantitative easing to combat the credit crisis, which in essence, is the fed printing money. By purchasing longer term treasuries and large amounts of mortgage backed securities, the fed can control rates more effectively. As they buy, the newly minted dollars enter the economic system from the primary dealers that sell the securities, hence the term 'printing money'.
3) Fed announced they will do everything and anything to fight deflation.
The markets surged almost 400 points on the heroin jolt. Today, the treasury announced a rescue for the automakers. They will receive 13.4Bln to survive until March when restructuring plans will be due. If they cannot prove the viability of their new model, the loans will be called in.
Between a ZIRP policy, fed buying massive amounts of mortgages, fed announcing likelihood of buying longer term treasuries, and the temporary rescue official for the automakers, stocks right now are exactly 75 points higher from the level they were trading at one minute before the fed announcement on Tuesday! Certainly not the jolt investors piggybacking the fed were hoping for, and down some 200 points from the close of trading Tuesday.
Does this make more people want to buy cars? Does this make more people want to buy homes? Perhaps, but I would argue that given the stress in the macro environment right now and the pain felt by consumers balance sheets, there is more reason to argue against this. Here is what has happened over the past 1-2 years:
a) Consumers homes are worth significantly less
b) Consumers debts are considerably more - especially those that used their homes as an ATM via mortgage equity withdrawal. The money is gone, but the debts remain.
c) Equity in homes have gone down as a result of (b) above
d) 1.91 Million people have lost their jobs so far in 2008 alone - this number continues to rise and is likely understated. The broader U6 unemployment rate is at 12.5%
e) Consumer confidence remains at very low levels
f) Negative wealth effect from equity markets down 35% in 2008 hurting portfolios and retirement accounts
g) Housing as an asset class has lost much of its luster - generally investors/consumers choose not to buy a depreciating asset
h) Affordability - lets not forget that house prices rose an unsustainable percentage from 2002-2006 as credit went parabolic. Both credit & housing bubbles popped. Even as prices are down 25-35% or so, they are still out of whack compared to price/rent affordability ratios
So I ask you? Taking into account where we are right now, where we came from, and how the near term future looks, do you honestly believe that bringing rates down from 5 7/8's to 4 7/8's will solve our housing problems and bring buyers back en masse? Lets keep it real. If you think so, fine.
If you are keeping your head out of the sand and fighting denial, you will see that things are worsening, not getting better, which is why S&P is cutting the credit ratings on 11 banks and GE/GE Capital.
WSJ.com, reports, "S&P Cuts Ratings on 11 Banks":
Standard & Poor's Ratings Services cut its ratings on 11 U.S. and European banks and put a 12th on watch for possible downgrade amid what it called significant pressure on the large, complex financial institutions' future performance because of increasing risk and the deepening global recession.As much as I would like to be optimistic, especially after the damage done in housing, credit and stock markets, I fear that the real economic pain is still yet to be felt by main street. Lets not forget that this is a consumer driven economy and that this is not just a subprime problem, this is an overall debt problem and it has been spreading to near prime (Alt-A) and Prime, credit cards, HELOCs, auto loans, student loans, LBOs, cov-lite LBOs, commerical loans, neg amortizing loans, etc..The downgrades come two days after S&P moved the U.S. and U.K. out of the highest of its 10 groupings of banks by country, noting the credit deterioration that is expected to continue. The banks downgraded were the banking operations of Bank of America Corp., Barclays PLC, Citigroup, Credit Suisse Group, Deutsche Bank AG, J.P. Morgan Chase & Co., Morgan Stanley, Royal Bank of Scotland Group PLC, UBS AG and Wells Fargo & Co. Also cut was Goldman Sachs Group Inc. None of the reduced ratings were lower than A.
Leverage is coming down to about 10/12:1 from high levels and this deleveraging process is both long & painful. Where are we now? Rolfe over at OptionARMaggedon had this chart on the leverage ratios:
Rolfe states:
All of those leverage ratios are high. And they actually understate the truth. For instance, besides the $2.1 trillion of assets Citi has ON its balance sheet, it has another $1.2 trillion OFF its balance sheet. The only reason I didn’t include these in my calculation is I wasn’t sure how much off-balance sheet exposures the other banks have and I wanted the leverage calculations to be consistent. (I tried to look it up in their SEC filings, but disclosure varies by company. Citi is the only one of the bunch that spells it out clearly.)In short, there is a reason rates are at 0%, we have seen the fed delve into buying mortgages, we have seen 18 credit lending facilities, we have seen the fed balance sheet expand to above $2Trln, we have seen the gov't rescue of AIG/Citi/Autos, we have seen the nationalization of Fannie/Freddie, we have seen the shotgun marriages of Countrywide/Bear Stearns/Merrill/WaMu/Wachovia with their new owners, we have seen the failure of Lehman, we have seen a $700,000,000,000 rescue package of which $350,000,000,000 was used to recapitalize banks balance sheets thus far, and we are about to see another $850,000,000,000 fiscal stimulus package early next year.This is the story of the housing crisis, the banking crisis and the global financial meltdown. Everyone, everywhere was levered to the hilt, using piles of borrowed money to make leveraged bets on everything from real estate, to stocks, to currencies, to bonds, to companies themselves (LBOs), etc. All of these government bailouts, er, “guarantees” are simply a transfer of risk from the balance sheets of various financial companies to governments’. To prevent “A” from falling too far, and thereby wiping out the “E” of the financial companies, the government absorbs the assets itself, immunizing the financial companies from loss.
The trouble is, the losses don’t just go away. Someone will lose. First it’s common shareholders. Next it will be the U.S. taxpayer.
Those that follow the 'Dont Fight The Fed' mantra since rate cuts started late 2007, have got murdered. I say, 'Don't Fight The Fed...Yet'. With fed rates at 0%, they are essentially out of bullets. I'll be looking for when they hike rates for the first sign of stability in the system and that the worst may be over. However, given credit deflation, the death of wall street, the regulation coming, and the new look of securitization process if any, I think the growth rate at the tail end of this mess will be much slower than some hope.
Me, I'm more looking forward to how well the JETS will do than I am the first six months of 2009; where macro data will be ugly. I'm most interested in getting through this whole mess with as few unintended consequences from policies taken to combat this deflationary spiral.
RE Transaction Revenue Down 61% - Hits MTA Funds
A: The decline in real estate transaction produced tax revenue has hit the MTA's kitty and is playing a role in today's decision to hike rates. Between the loss of collected tax revenue from Wall Street & real estate transactions, the city will be forced to either cutback on services or hike other rates to fill the void; or combination of both. Today's news confirms the illiquid nature of this market, and likely shows the buyer strike starting at or around the September time frame. Markets and investor psychology is funny like that, sometimes the writing is on the wall but until that spark comes, you won't see any drastic change. It seems rational to now declare that the fall of Lehman Brothers & rescue of AIG were the sparks that really started the buyer strike