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Hotel Hell - The Zombies Cometh
After reading some downbeat assessments of the U.S. hotel business in the media recently, I decided to circle back and get an update on the New York City hotel market. I caught up with John Fox, SVP at PKF Consulting and their New York City hotel guru.
John confirmed what I intuitively anticipated, that considering the travel slowdown I had reported on back in the fall in my piece New York City Hotels Going from Foist to Woist and Mike Stoler's Real Deal article on insane hotel prices I cited in a piece earlier this month.. According to Fox, PKF is expecting a 26% REVPAR (revenue per available room) drop in calendar 2009. Interestingly, about 16 percentage points of this is coming from rate declines and 12 points from the occupancy drop caused by the travel slowdown (#s don't add due to rounding).
As an aside, many in the industry have been talking about hoteliers getting smart regarding price cutting, having learned their lesson after 9/11. During that time period, internet hotel reservations were still ramping up significantly. I remember because I owned Hotels.com in my fund big time.....BOOOYA! The hotels put all their excess room availability online and saw a race to the bottom on price, as internet sites discounted the rooms like crazy to move them. The lesson was, you can boost occupancy by X%, but you put huge pressure on the rates you can charge for your entire hotel, 50 or 60% of which would have sold at higher prices. Long time readers of Urban Digs who understand how markets work, also know by now, never to believe that an industry has "learned its lesson." If there is excess supply, all it takes is a few guys holding weak hands to start cutting price and eventually the whole market will follow (we are seeing this in residential real estate in New York City now). Trust me, it's an immutable law of the universe (price fixing only works for periods of time when there is lots of industry concentration and no truly weak hands.....even OPEC can barely manage it).
It's not surprising then, that despite New York City enjoying occupancy way above the rest of the country - PKF expects NYC to bottom out at a 72 - 75% utilization rate, vs. the high 50s for the U.S. as a whole - rate compression is having a greater negative impact to REVPAR than occupancy declines. Perhaps even more interesting, Fox avers that half the decline in occupancy is actually denominator driven, i.e. it's not from slower travel trends it's from a greater number of available hotel rooms due to supply additions. I believe that this is a major reason why the Manhattan market is getting hit harder than the nation as a whole.
I did some hotel feasibility analysis work a couple of year's ago when the hotel boom was still inflating - fortunately we didn't build one. At the time, according to my calculations, there was a pipeline of new development that would have increased the number of rooms in Manhattan by 25 - 30% over the next 3 to 4 years. With the onset of the credit crunch, a fair amount of attrition of this pipeline took place as many projects failed to get financing. According to Fox, however, 10,000 to 12,000 new hotel rooms will open in New York City this year and next. That's on top of an existing 68,000 to 69,000 base, according to PKF's calculations. This equates to growth of about 14% to 18% (on top of significant 2008 deliveries), fueled by projects PKF sees as fully financed and likely to open.
New York is coming off an extraordinary period of 3 to 4 years where utilization was 85% or so and for the majority of the year Manhattan was "sold out". According to Fox, "No one had ever seen this before in any market." It is no surprise then that developers were happy to accommodate the market (pun intended). Please note however, that as in many corners of real estate, even novice hotel developers were given previously unheard of levels of leverage to work with. So despite the fact that New York City will trough at an occupancy rate that will be the envy of other markets in the U.S., I have to differ with PKF's outlook for 2010 and 2011. They are looking for Manhattan REVPAR to decline an additional 4% in 2010 (all in Q1), and an increase of 12% in 2011, driven by a resumption of rate increases. My guess is that 2010 will see double digit declines again, as more product comes to market and desperate new hotel owners slash prices to try to make their debt service payments. As for 2011, it's too far out for my radar, but my guess is if the economy cooperates there could be some recovery from a lower than expected trough. It is worthwhile to note that Fox reports year-to-date through March REVPAR is already down 28 - 29%, so the 2009 numbers are already looking hard to hit. As more companies do like Goldman Sachs, who now mandates that employees traveling to New York bunk at the Embassy suites, and more new hotels are delivered, I'm expecting second half room rate declines to accelerate.
As far as projects around town go: The Shangri La that was to be built at the old YMCA building on 53rd and Lex has reportedly been "tabled", while the Orient Express, that was to have been built at the New York Public Library (5th Ave and 42nd) has reportedly been "sidetracked". The Nobu downtown has reportedly been derailed completely by the Lehman bankruptcy. My conversations with a couple of brokers who have "off market" hotel listings indicates that deals that were supposed to have gone through a few months ago have fallen through and sellers are becoming more "flexible", but still looking for per key valuations that are outlandish in my book. I see these folks flexing much more in the coming months. If you built a zombie condo and have a big balance sheet, you can go rental, but what do you do with a zombie hotel? Especially with New York City hotel rooms that run on, shall we say, the anorexic side of petite. According to a Real Deal article, just out, Wells Fargo has reportedly filed to foreclose on 250 Bowery, a 63 unit hotel with $40 million plus in loans outstanding, putting the cost of the property at north of $630,000 per key, which ain't peanuts. In some cases, like that of the Jasper on Park Ave in the 30s, a zombie condo has morphed into a potential zombie hotel. Back in November, the developer told the Real Deal that a European investment group had signed a deal to convert the erstwhile condo development into a boutique hotel....yes they were going to gut 80 brand new condos to turn them into 200 hotel rooms. You see, the highest and best use of midtown real estate, was still naively believed to be hotel rather than condo, despite the developing travel weakness and abundant supply of hotel rooms coming on (these guys gotta start reading Urban Digs). Predictably, the European money never showed up. For anyone who cares, when I first looked at this deal I found that the lender of record was a big European bank, I couldn't tell from the filings if they were owed $51MM or $94MM. Either way I bet this one leaves a mark. If any more evidence of the coming hotel price debacle were needed, Sam Chang, the top developer of New York City hotels in terms of volume, recently seemed to display a change of strategy. Chang is a consummate land developer and hotel manufacturer. He generally puts together sites, permits them and builds them to order for clients. But in a break from past practice, Chang is reportedly going to hold onto a Holiday Inn he has in progress at Delancey and Suffolk street on the lower east side. My guess is his buyer walked and Chang has gone from trader to investor....don't ya hate when that happens. But hey, the hotel won't be done until late 2010, by the earliest. If PKF's current forecast is correct, Chang will undoubtedly have a buyer lined up by then.
One of New York's smartest hotel developers in my book is Richard Born, who has had his share of very successful developments in the city. One of the pearls of wisdom I heard drop from his lips last year regarding the cyclicality of the hotel business was "I don't particularly like to build hotels, I like to buy them from the guys who build them". I'm with you Rich.
As for how this impacts the New York City residential market, expect the collection of stalled semi finished construction eyesores to continue to pile up, particularly in otherwise "happening" neighborhoods. Fox at PKF avers that downtown will likely be hit hardest in terms of straight to bankruptcy new hotels, due to the significant amount of room capacity being added and the huge decline in Wall Street business levels. Of course, the fully constructed hotels that become bank REO zombies could become great homeless shelters, or maybe the city will come up with some other novel use for them.
Agents/Wall Streeters Reveal Their REAL Estate
A: Ahhh, nothing like a story like this to start your morning. What do you do when wall street is dismantled and real estate volume in Manhattan drops like a stone? You start pole dancing of course!
According to the NY Posts, "AXED GALS TAKE POLE POSITIONS":
Scores of professional New York women stripped of their six-figure jobs are now working as "gentlemen's club entertainers" at upscale Manhattan jiggle joints. Former Wall Streeters, fashion executives and real-estate agents are pole dancing and strip ping for as much as $1,500 a night -- but also because they like the flexible hours.I absolutely love the line, "...Now that I make better money as a stripper than as a real-estate agent, I'm going to buy my own apartment". Classic. If only there was a market for Jewish, balding, male bloggers with a gut to do this line of work, I would be the first to sign up!! What, no love?
Randi Newton, 28, who lives in Midtown, was a financial analyst at Morgan Stanley before the crash but was fired.
"A few nights after I got laid off, I went with friends to a strip club to get drunk and forget my unemployment troubles," Newton said. "The manager offered me a job as a dancer. I thought it was different. And fun."
Katie Haverton, 27, is one of them (real estate agents). She worked as a broker for a large real-estate company for three years until January, when she says she hadn't made a sale in six months and had $2 left in her bank account. She now performs at Flash Dancers in Midtown.
"With real estate, you can work 10 hours a day showing people apartments and you never know when the next sale will be," said Haverton, who lives on the Upper East Side. "But with dancing, the money is instant. Now that I make better money as a stripper than as a real-estate agent, I'm going to buy my own apartment."
It seems Randi Newton was an actress, professionally trained poker player, and former Morgan Stanley financial analyst before dancing (does this not sound perfect to anybody else?); what, she didn't know what a collateralized debt obligation was? All I know is, I plan to go see her special purpose vehicle over at Ricks Cabaret one of these nights real soon.
Picky & Patient: The Buyer-Seller Disconnect Continues
A: Four months ago I did my best to explain the Buyer - Seller Disconnect taking place in the Manhattan residential real estate marketplace. As we entered the normally busy wall street bonus season (JAN - APRIL or so), we had to deal with the fact that wall street was quite different than it was in years past. Brokers expected to get many deals done, sellers expected high traffic and strong bids, brokerage executives maintain that it is always a great time to buy, but buyers sang to a different tune. Hopefully by now everybody understands that real estate is an illiquid asset class that really is all about the buyers. When the bids disappear, the rest of the players (brokers, sellers, brokerage executives) in the game must adjust to the changing world. When they don't, you get very low sales volume and surprising deals taking place. As other brokers call this a temporary lull, I would argue that the marketplace is in medium term correction process, with the asset re-adjusting its value on the open market to a world significantly different than the one that powered the boom. It seems to be happening at lightning speed, and come 4Q 2009 or 1Q 2010, I would not be surprised to see the bulk of the correction complete. A muddled L-shaped picture then appears in my head. In the end, the new buyer in this new world is more picky and patient.
That is how I view the current marketplace; I'm a trader so if you have issues with looking at the world as a trade, you may not understand why some properties are not selling even though the asking price has been reduced to pre-peak levels. I discussed the recent pickup in foot traffic as a counter-trend surge in activity embedded in a longer term correction; via a Real Deal audiocast in early February. The world has changed, and so should your view of it - higher foot traffic does not necessarily mean the market is reversing course.
In December, I described the Manhattan real estate market (story):
Why is the market illiquid? Two main reasons:Today we get word from The Real Deal that, "Sales off 60% in 1st Quarter":
a) sellers are anchored to peak pricing; yet to realize the significant decline in buyer confidence OR that their property is likely worth 15-20% below peak levels
b) buyer confidence has not only declined, but has been shattered; as prices fall and fundamentals deteriorate, more buyers have rushed to the sidelines rather than jump into the market to take advantage of deals. The sideline money theory (the argument, mostly by brokers, that there will be a floor on prices because buyers will flock to pick up deals from the sidelines on even the most minuscule of price adjustments) was proven wrong once again
...the disconnect is making the market illiquid. Lets discuss each.
According to preliminary first quarter residential data, apartment sales are off more than 60 percent compared to last year. Condo sales in the first quarter totaled $1.8 billion, down from about $5.1 billion during the same period last year, the data showed. "The buyers and sellers have gotten different memos of what the price should be and no one is budging," said Dolly Lenz, vice chairman of Prudential Douglas Elliman.Sellers got different memos because their broker probably promised a sky-high transaction price to secure the exclusive listing. Buyers don't need memos from anybody; all they need to do is look at what is happening to their portfolios and their job security.
I discussed the high end nature of this slowdown, and the NY Times recently stated that "Only 10 co-ops costing more than $4 million sold in the first quarter"; that is quite a statistic reflecting the nature of this crisis.
If we look at residential real estate (in declining markets) as a curve, the buyers would be the leaders and the sellers would be the followers. So we must ask ourselves, are sellers ahead of the curve or behind it? To hear Dolly say it, sellers are still way behind the curve. But should we listen to a person who claimed last year that Manhattan real estate "hasn't worsened and most of the bad news is already factored in...prices have not slowed down; two red flags are inventory levels & buy versus rent analysis, right now it absolutely pays to buy..."; ummm yea, sound advice that wouldn't have turned out too well for those listening. Yes it was a year ago, but even at that time UrbanDigs warned readers to keep their head out of the sand, in regards to the severity of this credit crisis and the ultimate hit on the macro economy.
Buyers today are both picky & patient, and who could blame them considering the macro economic forces and negative wealth effect taking place. This is NOT a market where brokers can convince buyers to aggressively bid, because "the property is worth full ask and if they don't act now they will be priced out forever". Rather, this is a market where buyers bid what they want and set the terms that they are comfortable with. Brokers and sellers alike have to deal with this trend.
In my opinion, most sellers are just not ready to accept that current bids submitted are the best they will receive. Now you can't just expect to submit a bid 70% below peak for a property and then complain that the seller is unrealistic. To me, the market seems to be in a trading range of down 25% - 40% or so depending on the price point, property features, location, light & views - the high end is significantly more illiquid than the sub $1M market. Manhattan property features vary so greatly that it is impossible to generalize that the entire market is down x%; sorry, it doesn't work that way. Given the range that I suggested, if your bid is in that ballpark and the seller is not biting, it is highly likely that the seller is just not ready to accept the reality of where the market is today. That is the core of the problem here, and a big reason why sales volume is off so much. The disconnect continues and the inventory trends reflect this:
Transfer of Wealth - Taxpayer TO Banks via AIG
A: Tyler Durden is not just the founder of Fight Club, he is also the founder of ZeroHedge.com and quickly becoming the must read blog out there in the financial world. Bookmark it. The latest post gets into a correlation desk trader email, and if proven accurate, spills the details of the largest transfer of wealth this country has seen to date from you, the taxpayer, to the banking system. And it was only 5 days ago that I remarked, "...for what its worth, I am hearing that the banks are having a great quarter", when trying to put the recent rally into perspective. Could AIG be the vehicle to transfer taxpayer funds to the banks as part of a larger re-capitalization plan?
I am begging for some reader participation here to help verify if this claim is fully accurate, partially accurate, or just a rumor? It is NOT news that the AIG counterparties got bailed out in this mess, but this takes it one step further.
From ZeroHedge.com's, "AIG Was Responsible For The Banks' Januray & February Profitability":
"During Jan/Feb AIG would call up and just ask for complete unwind prices from the credit desk in the relevant jurisdiction. These were not single deal unwinds as are typically more price transparent - these were whole portfolio unwinds. The size of these unwinds were enormous, the quotes I have heard were "we have never done as big or as profitable trades - ever".Tyler offers his layman translation of this:
As these trades are unwound, the correlation desk needs to unwind the single name risk through the single name desks - effectively the AIG-FP unwinds caused massive single name protection buying. This caused single name credit to massively underperform equities - run a chart from say last September to current of say S&P 500 and Itraxx - credit has underperformed massively. This is largely due to AIG-FP unwinds.
I can only guess/extrapolate what sort of PnL this put into the major global banks (both correlation and single names desks) during this period. Allowing for significant reserve release and trade PnL, I think for the big correlation players this could have easily been US$1-2bn per bank in this period."
"In simple terms think of it as an auto dealer, which knows that U.S. taxpayers will provide for an infinite amount of money to fund its ongoing sales of horrendous vehicles (think Pontiac Azteks): the company decides to sell all the cars currently in contract, to lessors at far below the amortized market value, thereby generating huge profits for these lessors, as these turn around and sell the cars at a major profit, funded exclusively by U.S. taxpayers (readers should feel free to provide more gripping allegories).All I know is, the banks were big time under capitalized, marks were way off, AIG was on the wrong side of huge CDS trades and had to be bailed out by the government, AIG counterparties were made whole, and during this period of chaos it's hard to imagine no scams taking place as firms fight for survival. When the government takes taxpayer money to bail out the banks, this kind of behavior happens. The average Joe usually doesn't learn about the scam until much later, but in this new virtual world with so many attentive and capable bloggers feeding off of inside tips, scams are harder to get away with in regards to the unknowing public. I am still digesting this and must admit that this is something I know very little about (I assume AIG is unwinding whole portfolios of issued CDS positions at vast discounts funded by taxpayer rescue funds, but the article gets into corporate synthetic and asset backed CDO positions too), but I am not shocked at all to learn that there in fact was a transfer of wealth from the taxpayer to the banks. Does anyone really believe they will make out well with these investments; if you can call them that anymore?
What this all means is that the statements by major banks, i.e. JPM, Citi, and BofA, regarding abnormal profitability in January and February were true, however these profits were:
a) one-time in nature due to wholesale unwinds of AIG portfolios,
b) entirely at the expense of AIG, and thus taxpayers,
c) executed with Tim Geithner's (and thus the administration's) full knowledge and intent,
d) were basically a transfer of money from taxpayers to banks (in yet another form) using AIG as an intermediary.
For banks to proclaim their profitability in January and February is about as close to criminal hypocrisy as is possible. And again, the taxpayers fund this "one time profit", which causes a market rally, thus allowing the banks to promptly turn around and start selling more expensive equity, also funded by taxpayers' money flows into the market."
I would have liked to believe that the banks claim on recent profitability was a result of a pickup in traditional banking operations; mainly due to the fed's actions and ZIRP policy in place during this period of bank repair. I did NOT want to hear that the bulk of banks' profits to start the year came from taxpayer rescue funds that allowed AIG to unwind trades to the benefit of the counterparty; AIG received $182.5Bln in rescue funds to date.
Oh what a tangled web we weave! I knew the plan was to recapitalize the banks, but if this is the preferred path to achieve that, well, we may see chaos yet again. If we see a new round of share dilution to raise capital from the major banks left standing, well then we know there is some truth to this.
Twilight Zone
Back in 1999, Ed Yardeni, an economist and stock strategist who identified the huge impact of technology on the economy and the tech stock theme very early on, got very worried about the Y2K software bug. He warned very consistently that this software bug could cause major dislocations in the economy by disrupting businesses, utilities and perhaps most importantly, payment systems. In the fall of 1999, Yardeni was asked to speak at a Y2K conference in the Middle East. He was beside himself; if these folks were just waking up to the Y2K issue, there was no way they could do anything to help themselves before zero hour struck. This suggested to Yardeni that the world was nowhere near ready for Y2K, particularly outside the U.S.
Well, January 1, 2000 came and went with nary a data processing error reported anywhere on the planet. We all know now that Yardeni (like the Maestro Greenspan) took the Y2K worry way too far.....thank goodness he did because voices like his motivated people to remediate most of the critical software bugs on time. I saw Yardeni speak 6 months or so later and he readily admitted his error. He joked that he felt like he must have been in his own private twilight zone. Maybe it was only he who got the invitation to the Mideast conference, and saw so many other data points suggesting the world wasn't ready for Y2K. Was it a cruel joke cooked up by someone to plant data points that would lead him to the wrong conclusion?
So here I am in my own twilight zone (do do do do). As the market has been rallying I have been looking at the papers, news wires and blogs over the last couple of days and here is what I saw:
The U.S. government decides to start monetizing our debt.
A Russian government owned company defaulted on its debt (first sign the government of Russia is willing to let it's obligations lapse).
China suggests it's tired of the dollar as the world's reserve currency (after saying it's worried about the Uncle Sam's ability to pay back debt).
Berkshire Hathaway credit outlook is downgraded could lose AAA rating,
Wells Fargo and B of A credit downgraded.
IBM cutting more jobs.
Gilt and Treasury auctions see tepid demand (and we haven't even gotten started with the mountain of fund raising Uncle Sam and the Bank of England have ahead).
Japan exports drop 49%
(that's not a typo)
The U.K. which has already started monetizing it's debt is seeing a surge in inflation due to it's weak currency and dependence on imported goods (hello! anyone listening).
The fact that the market can rally on this news will be taken by many as a sign that these events are all discounted by the markets already and the market is looking ahead to better times. Interestingly, Sovereign CDS spreads have been tightening, suggesting not only that worries about debt defaults by nations are easing, but more so that risk appetites generally are increasing (the risks of sovereign defaults are actually pretty small, generally).
Now I don't think our quantitative easing will kill the dollar at this time, because the rest of the world has problems as big as ours, but has been taking their time admitting them. Check out how Brazil's government officials are taking heat for optimistic outlooks, while the economy is breaking down like a soup sandwich. I think the downgrades of Wells, B of A and the outlook cut on Berkshire are backward looking. I think China is a windbag, with nowhere else to put their cheap currency subsidized, ill gotten monies, than the almighty buck. But guys, business stinks and anecdotally people I talk to in many cases need to see a pickup soon or they potentially face failures or foreclosures, yet listening to the talking heads on Bloomberg radio, you would think that the economy is about to turnaround and rev up. A bounce in durable goods orders (one of the most volatile economic series around) and the fact that 50%- off homes are selling to crazy short sale investors qualifies as reason enough to pronounce the bottom being in for the economy. Yeah, I know the stock market has made up almost all the losses that occurred in the last 4 weeks, so maybe my wife will let me stop sleeping on the couch, but come on. The de-levering cycle promises to be a long and painful affair and it's just getting started....is it really fully discounted? (I suspect that the ultimate depth may be but not the length).
Am I alone here in the twilight zone? or do things seem bad and getting worse to you? Maybe it's the fact that New York has lagged the rest of the country in entering this downturn, particularly on the real estate side, and I see business through the lense of the commercial real estate market, which is just beginning to really implode. This morning the Wall Street Journal says, the current commercial real estate downturn could be as bad as the early 90s.....maybe that's discounted by the markets already....after all it was discussed at length in Urban Digs quite some time ago.
I do have a theory I have been entertaining since year-end and that is, that we had a Lehman/AIG/Stock market induced CNN effect in the fourth quarter of 2008. Folks cut their consumption to nothing during that time and there is a natural propensity for some bounce back, if only to meager levels. Economic numbers are sure to reflect this, with the stock market sniffing out the "improvement" as well. If so the fall could live up to it's name, maybe then a real bottom can be put in.
What are your thoughts?
2 out of 16: Hamptons Auction Deemed 'Success'
A: In a bizarre interpretation of a traditional baseball statistic, the latest Hamptons auction batted .125; selling only 2 out of 16 properties listed for sale yet considered a 'success'. Imagine that. For those of you not familiar with this analogy, batting .125 in baseball means your job as a bench warmer just got much brighter. Yet, in this case, batting .125 was deemed a 'success'. Anyway, the local Hamptons housing market will have to re-evaluate just how real they deem the latest round of price discovery to be. Apparently, that is where the market is right now. But who knows, the treasury may be minutes away from announcing a plan to stimulate Hamptons home prices, to make buyer & seller meet at the tax payers expense through an FDIC levered up program! Because if the bids are too low, someone has to prop them back up to make those deals happen - otherwise, the bank will get hurt!
Okay, I was joking at the end there. But the latest round of price discovery from the Hamptons is no joke. This is what happens when bids disappear - do you still think housing markets are not all about the buyers?
According to the NY Post, "Hamptons Homes Go For Nearly Half-Off" (Via Curbed):
Lucky buyers were able to purchase two luxury Hamptons homes for almost 50 percent off at an Internet auction of 16 properties in the tony East End.Thank god it was a success! I would hate to see what a failure might look like!!
One of the homes was a three-bedroom Victorian in Westhampton that has 2,277 square feet, a fireplace and a Jacuzzi. It was listed for $800,000, but the buyer reached a deal for about $488,000 or about 39 percent off the listing price.
The other home is a 1,800-square-foot, three-bedroom condo in Southampton Village.It was listed for $1,275,000 and went for $701,000, a 45 percent reduction.
Morabito, who organized the auction with fellow Prudential broker Vincent Horcasitas, said it was a success although agreements had been reached on only two of the properties.
Come on now people. Seriously. Spinning an inactive auction because the bids were not even high enough to meet the reserve price set by the bank, is to insult the intelligence of anybody listening. They are now asking the bidders to submit new, higher bids. Well how nice of them. Sooner or later these assets will have to be sold. Now that we have a new level of price discovery, existing homes trying to be sold by owners will have to convince some buyer that their house should not trade at such a discount. That is the feedback loop and residual damage that occurs when home auctions start occurring in your backyard.
Manhattan & Brooklyn will see their first 5 mid range to high projects auctioned off in April. How will this affect buy side confidence when results are published. The process continues.
Rally It Up - But What About Good Assets & The Household?
A: Another crazy day in the world of equities. This time the spark was Geithner's toxic asset plan. You've probably read about it everywhere so I won't dissect it, but basically the goal is to revitalize private capital via incentives to take on risk provided by the public; a so called public-private investment program (PPIP). The plan eliminates a major chunk of uncertainty for tradable markets and when applied to a market that plunged 60% or so, you end up with a monster rally. I learned long ago that bull markets don't rally 23% in a month off bottoms, bear markets do. So please do not confuse this bear market rally, which are always fierce, with the start of a new bull market because everything is OK again. As equities reprice the clarity that was just provided (whether you like the plan or not doesn't matter here), you must prepare yourself for a few future realities: more sour upcoming macro economic data reflecting the past three months of economic activity + spreading of toxicity to higher quality debt classes as more performing loans deteriorate + fed printing money to buy the government issued bonds to fund the incentives for the PPIF. So while this trillion dollar asset purchase plan works to rid one area of the banks balance sheet, trust me, other areas are still worsening! The fed & treasury's job now is to maintain order, limit chaos, and prevent global collapse. Well, we just saw their latest move. Don't think for a second that all these free lunches come with no strings attached.
It seems to me the goal of this plan is to just get private money into the market for residential mortgage backed securities that weren't trading. Why weren't they trading? Because the current bid in the marketplace was too low for banks (for what its worth, I am hearing that the banks are having a great quarter) to consider selling at; we know what happens when banks sell securities below their current marks, and the need to raise capital due to the writedowns. Enter the treasury to make the trade work.
Calculated Risk puts it best:
The key problem with the Geithner plan is that it incentivizes investors to pay more than market value for toxic assets by providing a non-recourse loan and with below market interest rates. The investors do not receive this incentive, the banks do. And the taxpayers pay it, so this is a transfer of wealth from taxpayers to the shareholders of the banks. The taxpayers will pay the price of the option in the future, the investors receive any future benefit, and the banks receive the current value of the option in cash. Geithner apparently believes the future value will be zero, and that is a possibility. If so, this is a great plan - if not, the taxpayers will pay that future value (and it could be significant).
Lower than market rates, financing provided by FDIC, use of leverage, and investors can buy assets with very little equity at risk; what a world! So, the public-private investment fund will buy the stuff that nobody wanted to raise their bid for in the free, open market last week? Okay. So lets use leverage, subsidies, and put most of the downside potential onto the taxpayer so that private money is incentivized to buy these bad assets that nobody seemed to want yesterday. Great, confidence seems to be restored and there is a market again for these securities. Nothing like artificially propping up a market when the bid is too low!
But what about the stuff that is considered GOOD on the books, and is not being traded in this program? Let us not forget that this plan is for the more toxic assets, the assets with no bid that were being held on the books of banks at much higher mark-to-model prices. Does this mean that ALL toxic assets are now transferred off the books, and all is well again? Candy canes and sugar cones? Doubtful.
Second, think about who this plan helps and who it doesn't. Are consumers really getting jobs, salary, and repaired balance sheets from this? I mean, did the economy just turn around on a dime because of this bad bank asset plan and the huge stock rally that came with it? Did households balance sheets just fully delever and get repaired? Did distressed sellers just get a solid bid at full ask and go into contract on their homes they have been trying to desperately sell? Did the mall landlord just fill all their empty spaces? Did the office complex owner just rent out their vacancies? Did those with massive credit card debt just wake up debt free? No, no, and no! So I ask you, what happens to the assets on the books that are considered good right now, but then start non-performing if the economy continues to struggle? Let's at least keep it real here and avoid the smoke & mirrors that this is a magic bullet to fix our ailing economy. The banks may be in better shape, but the household is not!
Via Steve Waldman:
Of course the whole notion of repairing bank balance sheet is a lie and misdirection. The balance sheets we should want to see repaired are household balance sheets. Banks have failed us profoundly. We want them reorganized, not repaired. A world in which the banks are all fixed but households are still broken is worse than what we have right now. Too-big-to-fail banks restored to health are too-big-to-fail banks restored to power. The idea that fixing legacy banks is prerequisite to fixing the broad economy is a lie perpetrated by legacy bankers.Waldman also discusses the saving grace for bondholders of troubled banks' and why it is worth it to participate in this plan, and take a loss on one investment to secure that no haircuts are taken on bigger holdings. An excellent point and a great read.
Back to the point. Have we forgotten that this is a complete debt crisis that is quickly spreading to higher quality debt classes. It was only four days ago that Moodys came out and announced that they may downgrade $241 billion of securities backed by prime quality 'Jumbo' mortgages:
In a move reflecting widening stress in the U.S. housing market, Moody's Investors Service on Thursday said it may downgrade $240.7 billion of securities backed by prime-quality "jumbo" U.S. residential mortgages because defaults will be higher than they expected.I think we will end up seeing PPIP round two and maybe round three before all is set & done, especially if the first round only works to remove toxic subprime/alt-a assets held on books that were causing the arteries to clog up. What about jumbo-prime, lbo's, cmbs, credit card, helocs, option arms, cosi/cofi, auto loans, student loans, etc.. Do not forget the nature of this crisis (debt) and how many types of debt were securitized back when there was a market for these assets. And do not forget about the consumer balance sheets that are still distressed and comprise 70% of the US economy.
Moody's put on review for downgrade 4,988 tranches of jumbo residential mortgage-backed securities with a current outstanding balance of $173.3 billion, and an original balance of $240.7 billion. The securities are backed by mortgages issued between 2005 and 2008.
It said 70 percent of the 2005 senior securities will likely remain investment-grade, with the rest falling to "junk." Securities issued later may suffer deeper downgrades. Moody's also said subordinated securities from 2006, 2007 and 2008 transactions "will likely be completely written down."
Manhattan Inventory Trends NOV 2007 - Present
A: Many asked me where Manhattan total inventory came from, y-o-y changes, longer term trends, etc.. We launched the chart system in November using Streeteasy data, however UrbanDigs Charts only goes back 6 months. You guys will have to deal with this for a while longer, but I promise you that I have grander plans to improve transparency for Manhattan buyers & sellers. Hopefully by fall of 2009 we will be ready to launch a suite of new data tools for you guys. For now, here is all the data I have for total inventory showing a whopping 79% increase in total inventory year over year. However, that stat could be a bit misleading as Streeteasy may have had less reach for all active listings here in May 2008, compared to today. Nevertheless, the trend is clear.
According to my widget, which:
a) deletes all duplicate listings
b) only for island of Manhattan
c) excludes listings with no exact address
d) includes coops, condos, condops, townhouses
e) streeteasy took years to expand their listings' reach, so earlier data may not have had the reach that today's data has; please keep in mind when analyzing year-over-year percentage changes
f) streeteasy data is ONLY as accurate as the real estate agent that updates/edit's the listing; in the end, maintaining quality of data is an ongoing project
According to the data from today, it seems year over year inventory rose by about 79%:
MARCH 23, 2008 - 6,121 listings
MARCH 23, 2009 - 10,965 listings
Manhattan Inventory Nearing 11,000
A: About to head out for day but just wanted to put up a quick check on Manhattan total active inventory, as powered by Streeteasy. As active as brokers and executives say it is out there, it still appears inventory is on a one-way trajectory. I still think this is simply a counter trend pickup in activity, with more lookers than bidders, embedded in a longer term correction process. When I see contracts signed data really pick up, I'll believe that the market has reached another comfort zone. The important question should be, what happens if you don't sell by May and we enter the normally slow summer months? Will we see fierce sell side competition to move property, OR, will units be taken off the market to try again another day? Enjoy your Sunday all!
Wall Street & Blogger Quotes on 90% 'Bonus Tax'
A: Wall street is reeling with talk about this new tax on bonuses over $250K for TARP recipients of $5Bln+; pay back the government to get below that, and the new tax wont apply. Thousands of employees could be affected. The Senate votes on the measure next week. I can think of both very real reasons and very psychological reasons why this law is causing such nervousness for many; yes, even those that are not on wall street but are trying to sell high end Manhattan properties. I discussed last month the high end nature of this Manhattan housing adjustment. It appears we have entered the 'regulatory' phase of this crisis - expect more. The new tax law, if passed, will be retroactive for 2008 tax year bonuses since it would apply to bonuses paid out by TARP recipients after Dec 31st, 2008. Bonuses are generally paid out during the first four months of the new calendar year, based on 2008's production. What happens to those that got their bonus, cashed that check, and spent the money already? Doh!
The fact that this law is going to Senate, is causing an immediate psychological reaction for both buyers and sellers of Manhattan real estate. As one would expect, sellers are more nervous than they already have been and buyers have one more reason to be cautious. I did not do this people, so don't blame me for any effect out there; as the media, I'm sure many will blame me for this. I'm just telling you what I sense.
The real impact comes later when we see how deeply this affects those who still have their job, but have big mortgages, expensive lifestyles and much lower net income. Think further along the economic chain how this may affect the local economy. Also consider how 'retention of talent' plays out with this new law. Seems like there will be a lot of good people (yes, there are some out there) heading to firms with no connection to TARP funds. Expect wall street to innovate ways around any tax code change to reward employees and retain talent.
Here are random thoughts from wall streeters (posted anonymously of course) versus bloggers on the expected new bonus tax.
If we had let market and Darwinian forces work to begin with, these entities would have failed and we wouldn't be in this situation. As always, unintended consequences from market intervention always comes back to bite, and the bite is more damaging than the original problem.
Class warfare is a dangerous seed."
Your thoughts? Bloggers can reach me here to participate and publicize their thoughts.
Waitin' for the Hatin': RE Frauds Still Going Strong
I was recently shown a couple of "real estate investment opportunities" by a professional acquaintance of mine. I believe that she may have made investments in both of these partnerships and she was encouraging me to take a look. The first was a partnership that was going to invest in sub-leasing retail space from retailers who were closing down stores.....ostensibly on the cheap. Then they were going to subdivide the space into kiosks, I guess flea market style, and sub lease these to small shop keepers. They had a whizzy web site, which you can find here. Now maybe this idea will have merit in certain very high traffic markets, when the real estate cycle is in its final leg down and the economy is set to recover....who knows? But the up-front advertisement of 30% to 37.5% proven annual returns was a dead giveaway to me that this was likely to be a fraud. (Although I love the touch of using a non-whole number like 37.5%) Interestingly, the entity uses the catchy phrase "private equity" in their name and you were supposed to be able to have 24/7 visibility of your investment using web cams and direct visibility of your investment account, with the ability to withdraw your funds at any time. All very reassuring.
The second "opportunity" was a firm that would help you buy foreclosed properties or real estate REO in hard-hit markets for cents on the dollar. I mean, imagine the opportunity to get rich buying foreclosed single-family homes in other markets, while you sit on your couch at home. All the management, financing etc, would be taken care of for you. You could buy properties for as little as $10,000. You can check out the site here. To me, this idea was just preposterous on the face of it (maybe its not a fraud but I am fairly certain its a really bad investment vehicle). Are you going to trust some company you know nothing about to buy foreclosed real estate for you in garden spots like Michigan (yeah, they advertise California, too but much of California is a desert) and believe that they will manage it so no squatters come in and rip out the copper piping, and that you are going to make big bucks when the market rebounds?
I had my partner take a look at the web site to get his reaction. He replied: is she working for Madoff now?
NEWS FLASH - There was a bubble in real estate, especially residential. It popped. Some day...not today....prices will stop falling. There is very little reason to believe that they will then have a big move upwards (in some circumstances there may be a bounce from well below long-term trend levels, but you can't play bounces in real estate). In fact, history indicates that it is more likely that prices will malinger near the lows for years. Eventually, there will be a period of strong returns, particularly in certain growth markets, but if you get in too early, the holding period to get to those returns will make your annual results very pedestrian. There may be better opportunities in income-producing commercial properties, where you can get paid to wait, but that bear market has just gotten going.
Yesterday, I received a frantic note from this colleague, who I am not trying to embarrass or ridicule and whose name I will not reveal, saying that she had cut off all relations with the first investment group mentioned above, when she had seen the following news concerning the Chairman of the operation article.
My point for doing this piece is three-fold. The first: If anyone promises you or suggests strongly to you that they can earn returns above the risk free rate, which is CURRENTLY ZERO, run the other way. If they say "we aim to make", or "our hurdle rate of return is," etc. etc, be appropriately circumspect and do your due diligence carefully (It's a post- Madoff/Stanford world). Stanford and Madoff were particularly brilliant in that they didn't offer world beating results, but rather appealed to conservative folks with pitches about security and consistency.
We are in a deflationary environment, so while many legitimate investors are still looking to earn 15% IRRs in real estate and higher, my guess is sights are going to have to be lowered.
Secondly and perhaps more importantly, in my personal experience, great value plays take place when people hate an asset....and I don't mean that they actively watch it and hate it obsessively. I mean they could care less about it and don't even want to hear about it....like gold at $260 and $300 and $400, oil in the teens and stocks in the late 1970s and early 1980s. Way back in September of 2007 I wrote my original Psychology of Asset Cycles piece, which has proven to be a great road map for the general course of things that followed, and I talked about how fraud gravitates to where frenetic investor activity is taking place....I neglected to mention that the frauds often come to light as a direct result of the tide going out on these investment themes.
The country is still overly interested in real estate (yes, I know it's the biggest purchase people ever make blah blah blah), but to my recollection most people just didn't think and talk about it much in 1993 and 1994, unless they were having a change of life of some kind, when it was a great time to buy from an investment perspective.
Lastly please be aware, that with times being tough folks are looking for hail marry passes to save the day. Lotto sales are up! and it is an environment where people are easily tempted by "long odds" bets. Beyond that, folks are simply in vulnerable positions and states of mind. be careful out there!
From the Blogosphere:
Experts Warn Recession May Fuel Financial Scams
Officials Say Scammers Taking Advantage of People Seeking Jobs in Hard Times
Beware Government Stimulus Program Related Frauds & Scams
As Stock Losses Loom, Don't Throw a "Hail Mary"
"Every Action Has An Equal & Opposite Reaction"
A: An interesting piece out today by Andrew Mickey over at Q1 Publishing, discussing the "Bernanke Buying Spree: The Good, the Bad, & the Reality". Many similarities to how Jeff & I view this current crisis via writings here on UrbanDigs - except that I don't think the fed's push to lower lending rates through QE will stop the more powerful housing market forces at work. A refi boom sure, but a surge in new applications? If you can't afford to buy a home with a 5.5% rate, I'm not so sure you should be buying a home, or worse, more home with a 4.875% rate. You can't force banks to lend and you can't force people to buy homes or take on huge amounts of new debt - housing will NEVER be anywhere as sexy of an asset class as it was from 2002-2006. Right now, it ain't cool being a debt turkey so close to Thanksgiving! And turkey-day is a ways off!
As long as unemployment continues to rise, debts remain on household balance sheets, and a huge negative wealth effect from plunging equities takes hold, housing prices will continue to be pressured. Last I checked it was the consumer who buys homes, not corporations with access to TARP funds. Yes we will see signs of life in distressed markets where sales volume surges due to record amounts of foreclosure activity; but that is hardly a sign of a strong market now is it! I mean, could you see how silly a statement like the following would be, "Sullivan County local real estate strengthens as foreclosure buying surges!"
In the end, the unintended consequences of policy actions (monetary inflation) will kick in to further stall economic growth; and the fed will do the unthinkable to try to stop it - raise rates and reign back credit facilities that were put in place as an attempt to reflate our way out of this mess. How will that affect lending and borrowing costs?
Andrew Mickey writes, "Bernanke Buying Spree: The Good, the Bad, & the Reality":
The big move though, and what got the markets rolling again, was when the Fed said it will be buying "longer-term" treasuries. This basically means the U.S. government can now borrow money directly from the Fed. It doesn't have to worry about China or Japan financing a massive debt load and can disregard any sort of fiscal discipline. The Fed is now the official sugar daddy.Well if China not only stops buying treasuries but decides to sell current holdings, I'm not sure the internal demand from the fed will be able to control the market from rolling over. Yet people STILL feel this time the fed has it right! I own gold because I thought the fed buying treasuries was a very likely final course of action, not because I thought it would be the magic bullet to save the economy. People should actually sit back and think about WHY the fed is taking such measures. Could it possibly be to combat the worst economic period since the great depression? Does anyone remember a time in the past 20-30 years where housing prices collapsed like they did, stock prices collapsed like they did, debts remained/rose on household/corporate balance sheets, huge demand destruction for goods/services, overcapacity/over-investment, credit contracting the way it is now, and the level of wealth destruction on banks balance sheets as it is today - all at the same time? The answer is No! You have to go back 75+ years to see that amalgam at work at the same time.
How will the Fed get all that money, you ask? Well, it can't tax people. And it can't take it from the banks. So it creates all that money out of thin air.
John Embry, of Sprott Asset Management, said, "Eventually, you reach a certain point where you can't really add any more debt because the capacity for the system to handle it has been exhausted. Once it reverses, it's very hard to change. They are going to try to change it by simply debasing the money."
If anything, understand that there is a reason they are using every option at their disposal to attempt to stop a deflationary spiral, and it is likely policy will have not one but many unintended consequences down the road as an opposite reaction to the initial actions taken. Just don't act surprised when they appear.
New Creative Ways to Sell New Developments
Toes here.
Am going to keep this post short, but wanted to let you know about a new way one developer is trying to sell apartments in a new construction building.
I visited 500 Fourth Avenue with a customer this weekend for their Grand Opening event. I thought their "Early Bird Special" was a unique idea that I hadn't yet seen. They are offering 10% off of all apartments for contracts signed in March and April. The building is expecting occupancy in late 2009.
It appears that they have released pricing on almost all of their units, which is something I don't normally see. Generally only a few apartments in each line are released at a time in a new development. One reason they may be doing this is that they have over 90 different layouts in the building, so almost every apartment is unique.
500 Fourth has approximately 40 studios (539 - 636 sq ft) and one bedrooms (556 - 799 sq ft) from $342K - $558K, some with balconies. When you take off the 10% discount, $308K is by far the least expensive apartment I have seen in a large luxury condo building in Brooklyn in the general South Slope/Park Slope area. (Unfortunately that particular apartment faces Fourth Avenue and probably wont work for my buyer. I am waiting to hear back about what kind of windows they're using. Triple paned would be most appropriate, especially for the lower floors).
There are approx 34 two bedrooms from 911 sq feet to 1,151 sq ft. 911 square feet for a 2 bed, 2 bath is really small, so I'm curious as to what demographic research led them to create such small layouts. I am wondering if the demand is there? A lot of developers have been shrinking room sizes in the last few years to get as many bedrooms and bathrooms into an apartment as possible.
They also have released 5 three bedroom, 2 bath homes that are 1,175 (small for a 3 bedroom) - 1,456 sq ft from $805K - $1,077,000.
421-A tax abatement
Another thing I have noticed lately is at 99 John Street in the Financial District. They're offering $20,000 off of the purchase price or closing costs for contracts signed by April 1st as well as a 110% "buy-back guarantee." If your apartment doesn't appreciate by 10% after 5 years, they will buy it back from you. Sponsor financing is also available for qualified buyers. Rockrose Development Corp is probably one of the few developers with deep enough pockets to offer this kind of incentive. They are also offering the "guaranteed profit" incentive at the View at Eastcost in Long Island City.
If memory serves, Related is/was one of the first to offer the "guaranteed profit" idea on Roosevelt Island at Riverwalk Court.
Of course when you sell a condo, you have about 8% in closing costs - 6% in broker's fees and 2% in NYC/NYS transfer taxes, plus other miscellaneous costs.
In addition to the closing costs, parking spaces, storage units, cabanas, and other incentives that we've been seeing since 2007, we're now seeing actual price reductions.
Wow, Quantitative Easing Here We Come...!!
A: Crazy day!! The fed just announced that it will buy $300Bln in Treasury securities and up to an ADDITIONAL $750Bln in agency debt; on top of the $600Bln in agency purchases already committed to. We are getting into some serious money printing here folks! The total approaches $1.65Trln or so, but hey, give or take a few hundred billion here and there. When the fed executes a quantitative easing strategy, they use the nuclear weaponry of their stimulative policy options available to them. There is a reason this policy is being announced last, when all other options have been exhausted. The dollar plunged, gold surged, and markets rallied on the news.
A quick explanation on what this means. When the fed buys assets from the primary dealers, via open market operations, it is pure money printing on a grand, electronic scale. At least it is for this announcement. The fed could perform debt swaps or issue debt on the shorter end of the curve to finance such asset purchases, but right now, the fed has used its reserves of treasuries to finance lending activities.
So, they click their mouse and POOF, a bank credit appears in the major money center banks' account (primary dealer) with the fed. Sound crazy? It is. Money created out of virtual 'thin air'. This is the gold trade by the way. Don't believe me? The New York Fed states it on their site in clear black & white:
Q: Will these operations be reserve neutral?This is money printing. I've discussed my feelings on a treasury bubble before, that is a longer term worry. Treasuries started to selloff a few months ago, and on February 8th I discussed, "Is the Bond Market Cooked, as Endgame Starts Early?", and stated:
A: No, these operations will be financed through the creation of additional bank reserves.
"Hmm, tough call but I honestly don't think so - especially when the fed can talk up purchases of treasuries and change investor sentiment on a dime."That was my short term thinking at the time and it appears it has just arrived. The fed is now officially announcing they will buy longer term treasuries, to keep rates down and expand the money supply at the same time. The piggy back trades get going as traders ride the coattails of the fed. I'm not messing with that, but I will continue to hold my gold as a money printing trade. Sooner or later, confidence in all fiat currencies may be pressured as global central banks 'print money' to combat the same deflationary forces. Lets see how it all plays out.
Previous posts on Quantitative Easing:
The Path of Deleveraging: Quantitative Ease Please
Fed To Begin Quantitative Easing in January
Is Helicopter Ben Printing Money or Not?
Don't Count on Manhattan RE as an Inflation Hedge
A: A new argument floating around out there is that future inflation threats are good news for Manhattan residential real estate - so buy now and protect yourself against the dreaded 'inflation monster'! Umm, no. Not this time around anyway and right now deflation is the battle. These are anything but normal circumstances and unless you were asleep at the wheel, we just witnessed a housing boom of unprecedented proportions fueled by parabolic credit that the system allowed for at the time. Now fed/treasury policy has been to print/borrow their way out of this mess. If your looking for a real estate related inflation hedge, income producing property is a better way to play it because you will generally benefit from rising rents; but you still have market risk there that is linked to the strength of the local economy. I would argue that the type of inflation we see will be the result of fiscal & monetary policies, showing up as an unintended consequence that further stalls future economic growth. I don't see wage inflation threats. Outside of that I would want to know, 'where did we come from' and 'what allowed housing to boom so fast', to figure out if future inflation is good news for property prices.
Q: Where did we come from? Well, from a level a lot lower than where we are today. In 2001-2002, you could buy a doorman condo unit for about $500-$650 per square foot or so; I'm ballparking here so lets keep range wide to account for variable sell side features. Then something happened. BOOM. Money was cheap, lending standards were very loose, banks wanted to pump & dump loans, loan products were designed to allow people to buy more house than they would otherwise afford, more loan products were designed for the buyer whose credit was too weak to get an affordable loan, and appraisals were easy to come by to make the deal work for all parties involved in the transaction. The secondary mortgage market was alive & well and RMBS were traded actively. Banks created loans, packaged them up, sliced and diced them, rated them and resold them to investors as structured credit products. Bank earnings soared and housing began to become a very hot asset class that everybody wanted a piece of. In the beginning housing was still fairly affordable given salaries and price/rent ratios - the asset boom had not yet occurred! But that would change quickly.
That is where we came from. When I look at the market now, I see that housing prices appreciated about 100% or so, more in high end I'm sure, from 2001-2002 levels. Take a look at DEC 2008 S&P / Case-Shiller New York Condominium Values Index, and you can see the runup since 2001:
Ask yourself, did incomes follow suit with a related rise to justify the higher prices? Rents certainly rose, but not to levels that would justify where prices went. The price rise was more a function of a parabolic credit boom and cheap/e-z money.
Paul Fried, chimes in on this past Real deal article titled, "This time, inflation may have different impact":
Paul Fried, a principal at AFC Realty Capital, a national boutique investment bank, said real estate might be a hedge in inflationary environments — as long as it's not the sector that went through the inflationary period.Exactly. Moving on to the system in place that allowed the boom to occur.
"Normally, you would think it would be good to hold real estate in an inflationary period, but you're assuming real estate is not the asset that's in the inflationary cycle," he said. "Right now, real estate values are at historical highs as a result of going through an inflationary cycle caused by cheap monetary policy."
Q: What allowed housing prices to boom? When I look at the credit/mortgage markets now, I see something very different than what was in place during the boom times. Today, I see:
1) a frozen securitization market - very low bids for toxic MBS, flawed ratings models
2) more expensive money; especially for jumbo loans, weaker credit quality borrowers
3) elimination of exotic loan products that allowed buyers to buy more house than they can afford - now you can only buy what you can afford to buy
4) a significant tightening of lending standards - banks now actually check to see if you can afford the property before committing to the loan
5) appraisals using negative time value - for markets deemed to be declining, appraisals are negatively adjusted for time. No more e-z appraisals to make the deal work.
6) banks cutback on lending / hoarding cash for own balance sheet repair and corporate survival
The combination of where we came from and what has changed that allowed the boom to take place, must be taken into account when looking into the future. In short, prices are still high and the system of credit that was in place during the boom, has deconstructed itself.
For now deflation is the enemy the treasury/fed are fighting. But many look at recent policy, bailouts, and fiscal stimulus as ultra-inflationary and something to be on guard against if it comes early. Me? I think it's a ways out and any inflation we see in the early phases will be confined to food, energy, health care, metals, etc..That first inflation wave will be painful, an unintended consequence, because it will hurt consumers at a time when they are already hurting from years of deflationary beat downs.
But lets assume inflation comes, what will happen? Well, for one, rates will rise! Given the artificial lowering of rates by our fed through rate cuts, lending facilities, and quantitative easing, the snap-up of rates may be quite fierce - unless of course you think that the fed can keep low rates forever and ever, without any consequences at all. I wonder about things like, how will housing perform if mortgage rates are 200-300 basis points higher? I think early signs of inflation will move the markets that make money more expensive, and that means inflation as an unintended consequence of policy, will act to depress real estate a bit further as the latter stage of the housing cycle plays out. I want to buy towards the end of that phase, not in anticipation of it for a hedge.
For most people, buying a house means taking on a mortgage; DEBT! If debt is more expensive, well then, the borrower can afford less house. How will confidence in housing as an asset class be viewed if/when inflation does appear? Will people be so sick of housing that the asset class is simply, unsexy? Will people be afraid of taking on debt? These are the questions that remain unanswered right now.
Inflation as an argument to buy real estate, to protect your precious dollars? I don't buy it at all right now or in the near future, given what type of inflation I see down the road, where we came from and the changes that have occurred that allowed the housing boom to occur in the first place. Buy a home because you can afford to do so, need a place to live, and you are happy with the products and the value out there right now; not because someone tells you it is a hedge against inflation!
Morsels of Good Housing News
I'm a skeptic on the current stock market rally. In my little world of commercial real estate I just see too much pain left to come and too much damage to the remaining non-nationalized banks on the horizon to feel the worst is behind us. I will turn bullish on the stock market when it busts out above it's 200 day moving average.....I will be late in terms of the absolute bottom, but hey I was completely out at the top and foolishly bought all the way down after Bear Stearns....you can't be perfect. For now, I'm happy to just sit and see if the ginormous efforts of men and nations can turn this tide. But we at Urban Digs are not stopped clocks. We do try to bring you, our faithful readers (I use plural because I think there are at least 1 or 2) all the information we see that we think is relevant. To wit, I want to point out some information from a piece of Seeking Alpha by a guy I can only describe as a super perma-bull.
Dr. Mark Perry, who has more degrees than a thermometer, has been relentlessly optimistic throughout the downturn as far as I can tell from his past posts (Mark, forgive me if I misread your basic disposition). However, Mark recently posted some data on housing that made me go hmmmmm. So just to cast a little positive light onto your likely gloomy day - the futures are lower and Pimco's El-Erian says private equity and hedge fund firms may be cut in half within two years - take a look at the positive charts on housing from Dr. Perry.
Now I appreciate that the data source is, how shall we say it...questionable, and that the messenger (Dr. Perry) is singular in his message, but my partner who I have the greatest deal of respect for, has said to me so many times throughout this downturn, "It won't get better until housing affordability improves", so I had to share this with you.
Interestingly, Dr. Perry also has recently featured some graphs on the hard-hit California and Florida markets on his web site. The good news is that these markets have adjusted price wise and liquidity has returned. It only took a 40.5% drop in the median sales price year-to-year in California (on top of the prior couple of year declines) and a 32.5% drop in median sales price in the Florida to get sales on an upward year-to-year trajectory, with sales in California doubling and sales in Florida rising 24%.
The bad news is that I imagine that affordability will improve in New York City eventually as well, and will ultimately cause a similar year-to-year surge in sales volume, when it does.
Late Night Happenings
A: Two pieces of news out later today that I think are more important than it appears at the moment. In my opinion anyway. Once we find out more and something official is released, I'll provide thoughts on it. For now, I'll leave emotion out of it and just report on the news and my gut reaction from a day trading point of view; considering where we are right now and where we came from.
Via Yves over at Naked Capitalism: Now It's Official: Public Private Partnership to Overpay for Toxic Bank Assets
Our suspicions have finally been confirmed. From Andy Lees at UBS:NOAH here. So, basically the price that will be paid for toxic assets will be somewhere in between current market bids and the much higher mark-to-model prices assigned by the institutions holding them. Shocker. Banks didnt want to hit the bid, so they stopped adjusting current market bids to assets held, or hid them in Level 3, and kept those higher valuations based on the previously proven flawed mark-to-model valuations. Debates raged on both sides - assign current bids to all the toxic assets and you have a big problem, assign model price and nothing will sell. Looks like a new market will be made in between - ain't life grand! Moving on to the next piece of news.
"The U.S. will give further details of the Geither public/private partnership plan to take bad assets off banks books, later this week a senior department official has said. The official said that the Treasury wants to put out enough information in the coming week so that the potential participants can better judge the proposal. It will also detail the timeframe in which it will become operational. So far the plan is expected to leverage both public and private capital to buy assets using government financing. The initial funding would be from what remains of the USD700bn financial rescue fund, but a "placeholder" provision in President Obama's fiscal 2010 budget plan signals a possible request of around USD750bn in new funds. Neel Kashkari, the Treasury's interim administrator for the USD700bn rescue fund told law makers last week that private investors are ready to invest in distressed mortgage assets if they can get financing. With no private financing available, they could only pay prices that are too low for banks to be willing to pay. The bad asset plan is expected to be structured along similar lines to the TALF, which is scheduled to launch this week, although the TALF will be restricted to funds investing in highly rated asset-backed securities."
Via Calculated Risk: FASB to Propose Changes to Mark-to-Market
The Financial Accounting Standards Board, pressured by lawmakers to change the fair-value rule blamed for worsening the financial crisis, proposed permitting companies to use "significant judgment" in valuing assets.NOAH here. Ok, you guys seeing what is going on here? Is everybody getting it? These two forces are linked. On one hand we have the mark-to-market order by the FASB and on the other we have the mark-to-model method used by comatose banking institutions. Something is about to change and it will come to both forces. Not only will we pay MORE than current bids (current market value) for these toxic assets, yet less than current asks, but the accounting standards board will relax mark-to-market rules via the 'permitting companies to use "significant judgment" in valuing assets' amendment.
Companies would be able to apply the revised rule to their first-quarter financial statements, FASB Chairman Robert Herz said today during a meeting at the U.S. accounting rulemaker's Norwalk, Connecticut, headquarters. The board is set to vote on the proposal April 2, after a 15-day public comment period.
That means the remaining assets that were not traded, would NOT have to be marked down much further because of the institutions' judgment call in valuing it. That's quite a 1-2 punch don't you think. Lets keep emotions out of this until we hear the official announcement, but this to me seems like market moving news for equities; maybe not realized right now, but it will.
Will this do what it is designed to do? SPARK PRIVATE INVESTMENT & REVITALIZE THE SECONDARY MORTGAGE MARKET that has been frozen for a heck of a long time; about 15-17 months now I think.
Price Flooring? Will Boards Try To Stop Price Discovery
A: I have been hearing stories lately about co-op boards rejecting purchase applications because they think the price is too low and may adversely affect future valuations for existing shareholders. I for one do not dismiss such rumors that quickly because of their source, past experience I have had with co-op boards, and colleagues of mine who I know and trust. In times like these co-op boards have a big problem on their hand regarding where to draw the line. Since the co-op board is comprised of, wait for it...., co-op shareholders, there is a vested interest in seeing price appreciation go through and avoiding what may be considered aggressive price deterioration because a shareholder must liquidate their shares. With the mortgage market significantly tighter than it was in the boom years from natural deflationary market forces, how will boards adjust? Will they loosen up guidelines if they were traditionally very tight? Will they tighten up guidelines if they were traditionally very loose? And most important, will they reject a purchase application because the price is deemed too low; a form of price flooring policy?
This is one of those 'look ahead' pieces that describes what ultimately will be an unintended consequence of a declining market. Like I discussed a year and a half ago, when the mortgage markets began to seize up causing the bid for RMBS to disappear, I thought there would be a problem with future new development closings, "New Dev Closings: A Potential Problem?". Well, now I seriously wonder about this co-op laden city and to what extent the boards of private corporations (buildings) will influence their power to 'further protect shareholder interests'.
When a neighborhood is dealing with foreclosures, the nearby homes that are in good standing start to seriously worry about the negative pricing effects that come with mark-to-market price discovery of that bank-owned auction. How will it affect homes next door? Down the block?
While Manhattan is not dealing with a foreclosure problem right now, I am hearing stories of co-op boards tightening up and being on guard against sales that are deemed 'too low' for current market conditions. Granted, these are just stories and I have not had a co-op board rejection to deal with personally, but I could see the potential problem. What rights do the co-op boards have to block a transaction based on price alone? What legal actions may be taken if a transaction is blocked? How will future buyers perceive the building if they will not allow market forces to determine value?
These are the important questions. Certainly boards will not intervene if the price was too high, because hey, that means the board's holdings have risen in value and everybody likes asset appreciation. But asset appreciation is hardly a term to be used today.
The Co-operator lists LOW PURCHASE PRICE as reason #9 for a co-op board to reject a purchase application; here are the rest of the reasons:
1. Financials
2. Job History
3. Bad Credit
4. Pied-a-Terre
5. Guarantor
6. Life Style
7. Home Work
8. Failure to Fulfill Additional Requirements
9. Low Purchase Prices
10. Pets
11. Noise
12. A Poor Interview
The problem is that co-op boards will be filled with people of vested interest in avoiding price depreciation; especially if a board member owns a similar line as the one in question. This is not a new phenomenon and Jonathan Miller would expect it to occur again.
In the NY Mag article, "Co-ops create new conundrums", Miller states:
"I'm finding co-op boards to be even further behind the market than sellers," said Jonathan Miller, president of appraisal firm Miller Samuel. "That's going to be a continuing problem during this period."Now, I have heard of old stories in the early 90's of co-ops amending the by-laws of the corporation to set a minimum floor on the value of its shares, to protect the value of other shareholders' investments. But I have no idea if this is in place today, especially after the boom this market has experienced when credit went parabolic.
The practice of rejecting buyers because of their proposed low purchase prices occurred frequently in the recession of the early 1990s and continued sporadically as home prices in New York skyrocketed. Now, it's becoming more common as prices begin to dip again, Miller said. "Boards are turning down deals that are selling too low," he said.
Price flooring is not new; the question of legality and if its good policy is an ongoing debate. The one legal case I could find about this was discussed in a 2001 NY Times article:
Bruce A. Cholst, a Manhattan co-op lawyer, said that there has been only one reported court case that addresses the legality of minimum-pricing policies.
In that 1995 case, he said, the court held that a co-op board does not have the authority to reject sales whose contract price is below a predesignated level.
''The court concluded that such a practice constitutes an impermissible restraint upon a shareholder's ability to sell his unit,'' Mr. Cholst said. Mr. Cholst added, however, that since the decision was from a Westchester County trial court and was never appealed, other judges in other courts are not legally bound to reach the same conclusion.
''And I believe, as do many of my colleagues, that the court's reasoning was flawed,'' Mr. Cholst said. ''Since the establishment of a floor price does not actually serve to prohibit the sale of an apartment, the practice should not have been viewed as an illegal restraint against transferability.'' In fact, he said, as long as floor-price policies are enforced in a nondiscriminatory manner, they would appear to constitute a legitimate exercise of the board's business judgment and should not be subject to judicial second-guessing.
My two cents? You can NOT place limitations on the open market - and that includes price flooring policies! If a seller is distressed, and must sell below a price floor, what will happen to shareholders' maintenance when the unit owner goes into default? It will rise, and that will negatively affect all shareholders and market value of all units with the now higher carrying charges. The co-op board has no business trying to control sales prices. The market will do what the market wants to do, and meddling with open market transactions to 'protect shareholder interests' will do more harm than good. Another NY Times article titled, "Should Co-op Boards Set 'Floor Prices'?" adds these three arguments:
It is an open secret in New York that some co-op boards have adopted what are known as "floor prices" — minimum sales prices for apartments in their buildings.There will be cases of this no matter what anybody says because greed sometimes overpowers rational thought. Hopefully the members of a co-op board review prospective purchase applications rationally, and it wouldn't hurt for them to get a lesson on what is happening in the broader market so they are prepared for what future purchase applications may bring. Losing today's price means potentially getting a lower price down the road!
"It is understandable that shareholders want to keep the value of their shares as high as possible," Mr. Sonnenschein said. "But the business of a corporation does not include trying to maintain the value of its shares." He contends that doing so is "basically a form of stock manipulation."
Aaron Shmulewitz, another Manhattan co-op lawyer, disagreed. "I don't see why co-op boards should not be doing this," he said. "Board members have a fiduciary duty to protect the financial interests of the corporation and all its shareholders. And allowing sales for below-market value would damage the financial interest of the co-op and its shareholders."
Arthur I. Weinstein, a Manhattan lawyer who is a vice president of the co-op and condo council, said that while he believes boards have the power to impose floor prices, this power should generally not be exercised.
"The co-op board should not be trying to second-guess the marketplace," he said. "And the marketplace determines what the value of an apartment is."
It is up to the listing agent to educate the board and consider submitting a written listing history with the board package. Tell the board how long the property has been on the market, where the original price was, number of price reductions, traffic procured as a result, number of open houses held, and even marketing strategies to show the board members that the transaction price was a function of current market conditions. In the end, the market will do what the market wants to do. Outside meddling by anyone, especially co-op boards, will prove counter productive and do more harm than good for the seller and the rest of the shareholders of the corporation. Condos are not affected by this problem because of the nature of real property transactions and the boards right to first refusal. If a condo deal is deemed to low, the board can decide to purchase the unit using reserve funds, matching the deal agreed upon between seller and original buyer.
Addicted To Debt / Household Formation Slowing
A: It should be no surprise to anyone that Americans were addicted to debt well before the housing bubble even began. Buy now and worry later was a way of life. But when the debt piling started to come from home equity extraction, we went from dangerous to nuclear. I discussed Mortgage Equity Withdrawal (MEW) over twenty times since mid 2006 here, but Calculated Risk should get top honors for showing why we had a debt problem on our hands and the role MEW played. The main point to take from all this is that while asset prices fall due to deflationary pressures, the debt remains! Understanding this reality should put your near term future view on this consumer driven economy into perspective. The drugs (new debt through extension of credit without savings/equity to back it up) are being taken away from us, and the withdrawal (asset price declines) is here. In the end, this is a necessary part of the process of becoming clean. For now, let us understand the addiction to debt first.
Over time the population grows, that we know. As the population grows, there is usually rising household formation that tends to have a positive trickle effect on the overall economy as the house is outfitted with products/services. First time home buyers generally have put 20% down on their homes, but for the period of the boom that reached 0% down in part because of the theory that home prices never go down. Those who have been in their homes for longer periods of time, built up substantial equity, which is why the average % of homeowner equity has tended to be above 50%. Not any longer. Rolfe at OptionARMageddon.com shows us the following chart on "% Homeowner Equity":
Because of the rising home prices, owners extracted equity (MEW) from their asset to be used for consumption - and banks were more than willing to offer their fee based re-financing/HELOC services. Now the asset's value is about to plunge! Consider what happens to percentage of homeowner equity in the home when the VALUE of that home falls, yet the debt remains or worse, rose higher. That is what the above chart tells us and it is not a strong foundation to build a new, sustainable consumer driven economic recovery on. But don't take my word for it, Rolfe adds a 2nd chart on "Outstanding US Debt by Sector":
That's a debt problem! The consumer balance sheet must correct itself through saving, frugality, bankruptcy, rising income, paying down or outright elimination of the debt; just like a corporation would. Think this is a quarter to quarter adjustment?
In the parabolic period, we had an easing of lending standards, cheap & easy money, and an increase in exotic loan products which allowed home transactions to take place with substantially lower up-front down payment requirements. Buyers were starting out with little to no equity in their homes, and that was basically unheard of prior to the early 1990s; before PMI insurance became widely available. It's amazing how government sponsored programs may catalyze the development of new free market products, for better or worse - in this case, the FHA low down payment programs for new homeowners leading to a broader free market solution to buy a home with bad credit and little to no income history. Of course, wall street took it too far proving once again that we are demons of our own design.
As the housing downturn matured (its getting close to being a 3-yr veteran by now), we are finding that household formation is slowing. Why? Let us not forget the level of immigration that had occurred as a direct result of the housing/credit boom, and the surging need for construction workers to build those new homes. The main drivers for household formation is jobs, demographics, and immigration trends; and we got two strikes right there between jobs & immigration trends. According to a recent US News & World Report article, "Household Formation: 2009 Housing Head Wind":
Slowing Household Formation: At the same time, the pace of new household formation is slowing, which further chips away at housing demand. Richard Moody, chief economist at Mission Residential, says the development is linked to three factors: More singles are moving in with each other, young adults are returning to live with their parents, and fewer immigrants are entering the country. "For those three reasons, you are seeing a slowdown in the rate of household formation," Moody says. "And to the extent that the economy and the labor market remain weak this year—which I think they will—then that's going to continue."Now the process is in reverse. It reminds me of the fiber optics craze of the dot com boom/bust - when bandwidth demand was perceived to be exponentially growing with no end in sight for the exploding internet.
Back to housing, the desire to own a home went up with rising prices/ez-money/no money down, and the desire to own a home is declining with falling prices/tighter lending standards/elimination of exotic loan products. Add in those that forcibly lost their homes due to foreclosure, and we get a dose of what is really going on out there. We were operating under the assumption that household formation was growing at 'X' pace (I believe 1.2-1.5 million homes annually for the US is normal under growth conditions), when that number was a fantasy number boosted by the euphoric boom. This is why when a market tops, it always goes down more than you think! Think back to the rise & fall of JDS Uniphase and Ciena in 2000 - 2002, for the fiber optics analogy - it was a doozy for those playing the game back then.
Slowing household formation is one lagging indicator showing the core of this crisis. The series of purchases that occurs with rising household formation, should ripple through the economic system; yet now we see the reverse effect. Using debt for consumption rather than for productive means has its disadvantages, and unfortunately the corrective phase is not anywhere near as fun as the debt driven party. The pain will run deep for those that mis-used debt and their home as an ever-lasting ATM machine, which is why I think the household deleveraging phase will last far longer than the financial sector one.
Global Dyspepsia
It's time again to visit some of the garden spots on planet Dearth (yes I have taken the editorial freedom afforded me here at Urban Digs to rename our collective home more appropriately for the times). Let's check out how the world financial crisis is impacting our various friends abroad. This is important because the worse things are and the more terrified people become the more they direct their savings to buying our ridiculously under-priced long-term government debt (which we all know or heavily suspect we will never be able to pay back in dollars worth even remotely what they are today). So for now bad news for our neighbors is good news for our ability to fund bailouts as well as the egregious pork our government throws around in addition to the normal everyday expenses of running the country. When global savings begin to be rededicated by the countries who save to investing in their own lands, we just may end up with an interest rate problem or currency collapse, but those subjects as tantalizing as they may be are the subject for future posts. If your tired of listening to me air out other country's dirty laundry...click on.
We were all briefly reminded by Alan Greenspan's editorial in the Wall Street Journal a couple of days ago, that the housing bubble was global, not just local - and therefore there is no way the Maestro could have caused it. The fomer imperial Count Du Monet points to an IMF study which found that the housing bubble in the U.S. was only at the median of housing bubbles worldwide.
So how are world economies holding up under the strain of popping bubbles in housing, commodities, commercial real estate and U.S. consumption? Let's take a brief tour:
According to the New York Tmes "Many of Russia's richest men were highly leveraged going into the financial crisis" Ahhh but how else could they make sure to capture their fair share of baubles, bling bling, Cristal and New York condos (or houses on the French Riviera, London pads et al?. The paper goes on to place the debt coming due this year for these Putin-pals at $128 billion. The sweet irony of it all being, that the Oligarchs, who gained control of their businesses through government privatizations, are now looking to the Kremlin for bailouts. The answer.... Nyet! The Czars ain't biting, as they have reportedly burned through a third of their FX reserves since August and can't be seen by foreign investors to be on the hook for corporate debts lest the ruble take another shellackering. Bloomberg reports that ,"Russia Not 'On Brink' of Moody's Cut on Steadying Ruble, Debt" I guess the cuts to their sovereign debt ratings by Fitch & S&P served to show them the light. With oil acting better the freefall in Russia is said to be over. "U-dA-chi!" (good luck).
Eastern Europe:
The former Soviet Republics of Eastern Europe are no better off, and they likewise owe most of their considerable debt to Western institutions. According to an Op Ed piece in the New York Times by Liaqat Ahamed, author of the highly topical "Lords of Finance - the Bankers Who Broke the World", countries including Bulgaria and Latvia borrowed the equivalent of more than 20% of GDP annually from 2004 to 2008. The 13 countries that were once part of of the Soviet Union collectively owed more than $1 Trillion (with "T") borrowed for investments and real estate (nothing about collectible Teddy bears was mentioned here at least). Apparently, exports have crashed for these countries and now Austrian and Italian banks are on the hook for the debt. No small potatoes for these countries either with the amount owed to Austrian institutions totting up to 70% of GDP (that'll leave a mark - pun intended).
The Financial Times recently published an article highlighting the unrest that has stemmed from the global financial crisis in many corners of Europe saying:
Economics is convulsing European politics. Governments have fallen in Iceland and Latvia; strikes or protests have erupted in Greece, Ireland, France, Germany, Britain, Lithuania, Ukraine and Bulgaria. Financial turmoil has shaken even the continent's furthest-flung outposts: the French Caribbean island of Guadeloupe has been ravaged by violent strikes, while Russia flew riot police into ice-bound Vladivostok to quell street protests.No wonder folks want to own a few greenbacks and Yankee bonds. Let's circumnavigate the globe now and check in on the far-east.
According to Reuters the city of Wenzhou in eastern China, which is an export powerhouse is "seeing a recovery thanks to Beijing's stimulus measures and the capacity of privately owned local firms to address challenges". Some how I fail to see how internal stimulus aimed largely at infrastructure projects is helping an export oriented city. Have no fear however, the City's Communist Party Secretary avers "I'm sure that things will turn better in March as compared with the first two months, and in the second quarter as compared to the first quarter". About 24 hours later China reported its export numbers for February.........down 25.7% year-to-year, the biggest drop on record. The comrade Secretary must be getting PR lessons from New York City real estate brokers. According to Paul Cavey, an economist with Macquarie Securities in Hong Kong, "China has finally and spectacularly succumbed to the world financial crisis on the export side, and it's difficult to see why that would improve in the short term,"
The markets were disappointed recently when China did not announce a follow on stimulus to it's original $586 billion stimulus, indeed some are claiming that from the looks of it's budget published last week the stimulus may be much smaller than the headline number. Perhaps China is being smart in saving up ammunition for the long-haul. Without a rebound in American and European consumption the country will be hard pressed to maintain its growth regardless of how many railroads it builds. Others believe that the Chinese government is wary of over-stimulating the economy and producing mal-investment and bad loans as a result. Either way these guys may be smarter than I sometimes give them credit for. I still don't understand how any market, including Chinese fixed investment, can grow 30% per year, year after year, without producing lazy underwriting and bad loans. When this thing blows it's gonna be a doozy. But don't listen to me, Jim Cramer says "China is red hot and staying hot". As I got ready to release this China told a gathering of the G20 nations that it was ready to pump more money into its economy....I guess thats because of all the strength.
Seldom has massive government bureaucracy been seen as a blessing, but in India it apparently has had the salutary effect of ensuring that the brain of the economy has not yet received the message from the body that the world is sinking into near-depression. According to Kranti Kumara writing on the World Socialist Web Site, "Especially troubling for the government was the recent report that India's economic growth slowed in the last three months of 2008 to an annualized rate of 5.3 percent. This was far below government forecasts and belied its claims, confidently repeated in the preceding weeks, that economic growth in India in the 2008-9 fiscal year, which ends March 31, will be in excess of 7 percent. Manufacturing output actually contracted by 0.2 percent in the last quarter of 2008, while agriculture, which continues to provide over half of India's population with its livelihood, suffered a 2.2 percent decline.
Overall growth in the first eight months of fiscal 2008-9 (April through December 2008) is reported to have been at an annualized rate of 6.9 percent. But there is every reason to believe that, following on from the last quarter, the pace of economic growth has continued to slow in the first three months of 2009. Thus the 2008-9 growth rate will fall far short not only of the government's early projections of well over 8 percent, but even the revised 7 percent figure.
Export earnings have fallen for five straight months. In January exports fell 16 percent from a year earlier to $12.3 billion and in February by 13 percent to $13 billion.
India's economic development strategy is predicated on the country registering an annual growth in exports of 20 percent or more. The government had set an export target of $200 billion for this year—less than one-sixth of the value of China's exports in 2007—but it is now expected that the figure will be around $170 billion. "
India's credit rating outlook was lowered last month as S&P said it might lower the nation's credit rating to junk status causing the Rupee to decline to a record low versus the dollar.
The government of Brazil, like so many others in emerging economies, continues to speak optimistically about economic trends. However, a recent jump in the inflation rate and decline of 3.6% in GDP for Q4 2008 belie this false hope. Interestingly, Brazil which is not known for free trade policies, is warning about the potential for an outbreak of protectionism. The slowdown in Brazil is demonstrating that being the world's biggest exporter of sugar, coffee, iron ore, beef and chicken, with a rapidly growing petroleum reserve base, cannot protect you from the global downturn, and of course protectionism would only make matters worse. Brazil just cut interest rates a larger than expected 150 basis points as inflation fighting has taken a back seat to stimulating the economy.
So Urban Digs readers please take solace in the fact that despite the maelstrom going on around you, the rest of the world suffers with you, some even have as far to fall as New York City and are in relatively commensurate denial. In the near-term the "safety" of the dollar and our own increased savings rate is helping keep our federal borrowing binge alive and the dollar buoyant...stay tuned.
From the Blogosphere:
China Businesses Turn to Pawn Shops as Loans Dry Up
Preview from Europe: the Horrow Show's Alive and Well
Testing Times for China's Economy
Financial Crisis Pushes Europe to the Brink of Disaster
India's Malnutrition Crisis
More Industry Change: William B. May
A: Didn't I tell you the times they are a changin'? The Real Deal reports on the latest brokerage firm, William B. May, to provide all of the commission earned to the agent; a subscription based business model of sorts that lures brokers over by delivering greater earnings power with lower sales volume. Trust me, more change is coming!
Via The Real Deal:
Brokerage William B. May has changed its business model so brokers can receive 100 percent of their commissions. Charles Rutenberg Realty adopted a similar model in 2006, as reported by The Real Deal, in which brokers pay fees to the brokerage, but don't have to give up any of their commission. At William B. May, brokers will be required to pay a one-time $1,500 fee, and $500 per month, according to managing partner Craig Lamb. The brokers don't have to pay a fee per transaction, which sets this system apart from Charles Rutenberg Realty's commission model.Below is the list of services being offered to newbies:
Lamb said he has been working on implementing this model for about two and a half years, and it comes just in time, as brokers are making fewer deals because of the recession.
"I don't really think brokers can afford to have the type of [commission] splits with the major houses anymore," Lamb said, adding that at most brokerages, brokers have to give up 25 to 50 percent of their commissions. "There is pressure on the marketplace in terms of people wanting to pay reduced commissions, and fewer people wanting to use brokers. And in this [economic] environment, it's very hard to justify giving [a chunk of your commission] up," he said.
It's not a bad idea given the bet that sales volume is unlikely to return to the parabolic 2007 levels. I certainly don't see that happening again for a long time. For those that don't know how crazy 2007 was in terms of volume, refer to the following 10 years of total sales volume provided by MillerSamuel.com:
Talk about 2007 being an outlier for sales volume with 13,430 transactions taking place at the height of the boom! I would not be surprised to see 2009 total volume come in under 7,500 when its ultimately released; being the lowest in 10 years. Switching to a monthly fee based model, at least promises the employing brokerage firm a clear and hopefully sustainable cash flow; something commission-only based firms don't have. Lower the overhead, offer virtual agent services, and collect your monthly fees. There will never be the upside though with this model, only more consistency assuming the firm is successful in procuring more agents willing to pay the fee.
Not the way I would do it, but you never know what changes/trends are seen/discovered to make one adjust a business model. I still think there is an open slot for a different type of brokerage model altogether, one that better suits the consumer (buyer + seller), not the agent. I'm yet to see that. For now, change has been focused on how to better service the agent, and get them over to your firm. In an industry where new agent signups may not fall as one would expect in a downturn, due to the likelihood of those losing jobs getting into real estate thinking they can make ez money for a while, that model may work for a bit. Time will tell. In the end, as time goes by and the correction ingrains deeper into this real estate crazed city, I think a totally new idea will emerge; one that provides more transparency and efficiency to the consumers. The question is, will it work and be used by the marketplace?
Fair Housing Brings Change To Property Descriptions
It is the policy of the NYC Housing Authority to provide equal housing opportunities for all qualified applicants and residents.
In New York City, there should be no housing discrimination based on race, color, religion, national origin, sex, sexual orientation, age, familial status, marital status, partnership status, military status, disability, lawful occupation, lawful source of income, alienage or citizenship status, or on the grounds that a person is a victim of domestic violence, dating violence or stalking. These laws are extremely important & I have been able to fall back on them many times over the years when working with owners. For example, an owner once told me that she didn't want me to rent her apartment to any Koreans. She said that she, herself, was Korean, so what she was doing wasn't illegal! She "loves the Korean people" but didn't want any of them living in her apartment. I was shocked! I thought that kind of stuff only happened in bad Lifetime movies, not in real life! But I digress...
Despite at least two or three hours of Fair Housing Training that NYC brokers must take each year, evidently some members of the brokerage community have not figured out that saying "Family Friendly" in a property description is ILLEGAL.
We learned in Fair Housing that by saying "Family-Friendly," we are discriminating - for example, we may accidentally be discriminating against a single person who happens to want a huge apartment in a building with a playroom. So any mention of "child," "children," or "family-sized apartments" are violations of Fair Housing Law.
We also can not list school districts in property descriptions. Customers need to check www.nyc.gov for more information.
Likewise, saying "Fabulous Bachelor/Bachelorette Pad" is illegal. What if a family of four wanted to live in an open loft with outdoor space, a wet bar and a hot tub?
Today we received a new list of over 200 banned words, sayings and descriptions that can no longer go into any property ads. Most of them were self explanatory...
But there were some things in the list that caught me off guard. We can't say "No Students," "Board approval required," "Shares," "Walking distance," or "Working."
This creates some frustration. I have had several listings in co-op buildings that don't allow students. You must be a working professional to live in the building. They want the person living in the apartment to be able to afford the apartment on their own. No co-signers or guarantors are allowed. "Board approval is required." Now I will field an extra 50 phone calls from people who don't qualify for the building. Even though my description says "no guarantors or co-signers," students who have their own money call anyway, thinking that they can just hand over a lump sum of money to avoid the guarantor / co-signer rule. Not in this building, sorry to waste your time!
Additionally, there are many buildings and private owners that don't allow "shares" - two unrelated people to live in the same apartment. So no more advertising tiny fifth floor walk up one bedrooms with a wall up in the living room to create a 2nd bedroom as "perfect for shares." Too bad I can't just say "perfect for two people who want to be room-mates" - "people" is on the list also (as are "couples.")
Then there becomes "walking distance," which we can no longer use. By saying "walking distance," I would be discriminating against those who are unable to walk. Hopefully I can still use "close proximity" to public transportation.
The buzzword that really made me crazy, though was "No Smokers". Since when did smokers become a protected class according to fair housing rules?
In case you're wondering some other words we can't use:
"Nanny's Room" (implies children)
"quiet tenants"
"quiet neighborhood"
Now more than ever there is more pressure on the apartment seeker to really read between the lines.
You'd be surprised how many buyers and renters ask "what is the ethnic makeup of the building?" My response: "there's a great mix of studios, one bedrooms, two bedrooms and combination of larger units in this building, so you a great cross-section of the population." When pressed by customers who are annoyed that I dodged their question, I encourage them to walk around the block and neighborhood, sit in the lobby or wait by the subway if they want to get a feel for the area.
Thank you for not asking me whether the neighborhood is "safe." My response will be for you to please "visit www.nyc.gov" where you can view the local precinct's crime statistics.
Fair Housing Laws are extremely, extremely necessary, but at times I wonder if maybe the pendulum has swung a bit too far?
Tentacles of The Credit Beast III
This financial crisis has been like an AIDs virus attacking the machinery that usually protects the system. That machinery is the creation of credit. It is being attacked the way acquired immune deficiency syndrome attacks the body's defenses by using the immune system itself to hide and multiply. When you think further about the analogy, one is an amazing piece of viral evolution and the other is an amazing piece of market evolution. Both lay bare weaknesses in the systems they have infected. The former crisis was only forestalled by instituting safer practices and the same will be the case for this one. Let's hope the patient can survive long enough for the safe practices to be instituted. One wrinkle with the financial crisis is that safe practices when instituted all at the same time can make the crisis worse rather than better.
To wit, in this morning's Wall Street Journal, Meredith Whitney, of Oppenheimer banking analysis fame, and now proprietor of an eponymous consulting firm, writes that credit card debt is the next credit crunch. You can find the gist of her piece here. Whitney's contention is that credit card companies are pulling back from lending all at once and are in fact threatening the availability of consumer credit even to those who deserve it. The credit card companies have found that their tried and true FICO scores failed them, when highly rated borrowers got underwater on their mortgages. They are therefore now limiting credit in hard hit zip codes. Whitney's contention is that revolving credit is used as a cash flow management tool, citing the statistic that 90% of credit-card users revolve a balance at least once a year and over 45% of credit card users revolve every month (I am amazed that the second number is that high). I would argue that for 45% it's not a cash flow management tool, but rather a way of maintaining higher consumption through a larger balance sheet for some period of time. As I have discussed previously on Urban Digs in my piece Regulator Revenge: There's a New Sheriff in Town, after the crimes have all been committed regulators wake up and put strong deterrents in place, that usually cause the collapse of the bubble which incited the fraudulent activity to be even worse. The same apparently goes for unfair lending, where according to Whitney, new provisions of the Unfair and Deceptive Acts or Practices (UDAP) regulations, which would restrict credit card providers ability to raise rates on customers, will likely result in no credit being offered at all.
Whitney makes a good point here about not having the medicine kill the patient. In keeping with this, up and down the economy we have seen officials tread lightly on things like allowing banks to stay open, despite severe losses, as they recognize that causing a panic on top of a crisis is self-defeating. However, moral hazards seem to be running very high and my personal feeling is that tacitly saying to 45% of the population that it's okay to carry revolving debt all year long, is a bad practice. Furthermore we need to all recognize that this unsustainable behavior, won't be sustained long-term no matter how many dollars are printed by Uncle Sam. The Deleveraging Will Be Televised. What do Urban Dig's readers think? It will be a delicate balance to not choke off the economy, by limiting credit, while trying to reform the unsustainable practices that got us here. Going back to 2006 ain't gonna happen, neither should it.
We need a lot more transparency in order to understand how to carry out the delicate work of fixing what is broken, without making matters worse. We still don't seem to be getting it. The Federal Home Loan Bank of Seattle has apparently failed to meet certain regulatory capital ratios at month's end due to writedowns on mortgage backed securities (MBS). I have highlited the risks to the Federal Home Loan Banking system before, but it does not seem like any significant steps are going to be taken by regulators at the present time. Interestingly, the Seattle Home Loan Bank took a $304.2 million write-down on the MBS paper, but said it only expects to have an actual loss of $12 million over the life of the loans. Yet the accounting language trigger for the write-down is if the drop in value is deemed "other than temporary". Come on guys let's get it straight, this paper is either going to go bad or it's not, pick one and conduct yourselves accordingly. This needs to happen up and down the system and hopefully the banking stress tests will give the markets some confidence here. Although I'm not sure I want to wager on that with how it has been handled to date.
Apparently however, another over-leveraged and likely under-regulated part of the system is coming under increased pressure as the tide of leverage goes out. There is no turning this tide, people are not dumb and if they didn't know before, they know now that they shouldn't depend on their bonuses to maintain their basic standard of living, that they shouldn't carry outrageous revolving debt to boost their living standard and speculation on housing prices is an easy way to go bankrupt. The economy must and will shrink to meet this lower level of leverage and activity. Only from that new equilibrium level can we move forward. In the meantime, I agree that the government must keep the patient on life support, but let's not encourage any new risky behavior.
For New York city residential real estate, the question is: Despite working in the notoriously cyclical business that is Wall Street and being ingrained in risk management culture, how many of our brethren engaged in the risky behaviors cited above? If many did, the risk to all will be greater. What are your thoughts?
Understanding 'Liquidity', or Lack Thereof For Manhattan
A: Everyone wants to know what is going on with Manhattan residential real estate, as if it changes daily. As if it is a liquid market. For the past 7 months it has been anything but liquid, but it does seem like prices have been changing daily. What is liquidity and how should we define it for real estate purposes? Is it simply how easily the asset could be converted to cash, or something deeper? I would argue that in terms of real estate transactions, the most liquidity could possibly mean is for the asset to be easily 'sellable' AND near a value that the seller deems reasonable considering market conditions and transaction fees - a somewhat tight bid-ask spread. That would describe a liquid RE marketplace, and does not interfere with the fact that the property is only worth what a buyer will pay. If one of these things don't fall into place for whatever reason, well then, the market becomes more illiquid. It would be wise to think about the market as such if you are a seller. It may even save you valuable 'denial' time that is usually wasted because the seller is unrealistic about the current market value of the asset. Do sellers truly understand the importance of liquidity or lack thereof, when the asset likely comprising the biggest portion of their net worth is at stake? Do they understand why the 'bids' are where they are? Do they see where their 'ask' is? Do they even know where the market is right now, and whether it is liquid or not? Chances are they don't and that is why this market will remain illiquid for the foreseeable future.
Let the proctologists pick bottoms (not the brokers or brokerage executives w/ vested interest in sales volume), for now, I'll focus on how this credit crisis ultimately affects our local housing market. In my humble opinion, despite the countertrend pickup in activity lately, the market is still for the most part illiquid. But its the definition of illiquid that may be in question here. Sure there may be OH traffic, private showings and low ball bids, but does that make this market more liquid?
I would argue that in regards to real estate here in Manhattan, liquidity is a sell side phenomenon, not a buy side one. The most liquid this market can be is if the property is:
A) easily sellable - meaning bids are being received for the asset, PLUS
B) near a value that the seller deems reasonable considering market conditions and transaction fees - ahhh, the important part and the emotional aspect of the process of selling. Let us not forget that a property is worth only what a buyer is willing & able pay for it, but its the seller that makes the call whether or not to ACCEPT/HIT THAT BID!
Right now the market seems illiquid because the bid-ask spread is too wide creating a disconnect; meaning that either sellers are still in denial about the price drop of their asset (current market value) OR buyers are too cautious to bid more aggressively for the asset. For me, I follow the buyers because in my opinion, they make the market. AngryBear goes into detail about this:
2) Liquidity - A property of an asset which indicates that it can be converted into money quickly and with low transaction costs.Since Manhattan is illiquid right now, for a number of reasons remove all those speculators and short term buyers that look at purchasing and selling for a quick profit. That train left the station a year ago.
This implies that if an asset is illiquid a rational person would not be willing to buy it intending to sell it again in the near future. People selling things are very unhappy when their market price has suddenly fallen. What if I can sell my asset right now, but I am extremely displeased by the price I am offered ? Is it less liquid ? Certainly not according to definition 2. Certainly according to people who say that the problem with financial markets is a loss of liquidity. This gives third definition:
3) Liquidity - the property of a price being as high as sellers think it should be.
This is really a high end recession in the Manhattan real estate market, that is rippling through to the lower price points. That is the best I can describe it. If I were to divide Manhattan into a few categories and where deals seem to be happening now, it would be something like:
HIGH END ($5M+) - down aprox 25% - 40% from peak
HIGH/MIDDLE ($2M - $5M) - down aprox 25% - 30% from peak
MID END ($1M - $2M) - down aprox 20% to 30% from peak
LOWER END (Under $1M) - down aprox 15% - 25% from peak
Notice the structure of the ranges and all just my gut feeling of course on where I think trades are occurring right now. This is what happens when Manhattan gets illiquid and we start to see where sellers are hitting bids at - the range has to be wider at the top. It doesn't mean every seller will hit a bid down around those levels, because that seller may not be ready to accept the current market valuation of their property.
You should get the idea of how an illiquid market in a city like Manhattan is impacted when the core of the crisis is on wall street and the high end. If you have to sell a high end property, strong bids are not easy to come by. The studio markets seem least affected as of right now, but not immune by any means to a higher percentage discount. In the end, level of desperation of seller and willingness to acknowledge current market valuations of their property plays the most crucial role in the painful process of acceptance.
I am hearing stories of some high end properties hitting the bid at levels 40% or so below peak. But don't take my word for it, the NY Times wrote a story about it:
After he signed the contract for 823 Park, Mr. Singh listed his prior home, a full-floor 4,225-square-foot co-op on the fifth floor of 860 Park Avenue, at 77th, for $13.4 million.Now maybe that original $12M bid wasn't real, maybe it would never have produced a signed contract, and maybe it would never had closed in spring of 2007, but one thing is for sure ---> the Manhattan peak was exactly at that time, ranging from contracts signed between early 2007 up until fall 2007. Mr. Singh eventually 'hit-the-bid' of $7M when his asking price was $9.5M.
Prices were moving higher in spring 2007, and Mr. Singh, brokers say, rebuffed offers of more than $12 million for his place at 860 Park. But as the market deteriorated he repeatedly cut the price, first to $12.75 million, in February 2008, then to $11.95 million in March, and $10.995 million in April. Finally, in October, after hiring Carrie Chiang of the Corcoran Group, he lowered it to $9.5 million.
Property records show that the 860 Park unit closed on Feb. 23 for $7 million, a bit more than half of the original price, and 42 percent below the $12 million that Mr. Singh reportedly turned down.
You never know how much your property is worth until you list it on the open market and procure a bid that produces a signed contract, and ultimately is able to close. Which means, your property is only worth what someone is both willing & able to buy it for at any given point in time. Your property is NOT worth what your broker insists it is, what past comps claim it should be, or what the owner expects it to trade for. Those dynamics are meaningless to me. The market will do what the market wants to do, and pressuring a buyer to up a bid in this environment is proving to be a very difficult task that has more risks than rewards. In the end, a buyer will bid what they want to bid, and too-pushy brokers will scare away the rabbit. If anything, your seller should know where the market is valuing the property; and if that bid is in the above stated range, I would seriously consider taking it because that is where the market seems to be right now regardless of where you think it is. Adjust your asking price to BELOW that level and you will probably realize that the market is significantly more liquid than it was at the higher price. What does that tell you?
This market is a fast moving animal right now, and you never know how a prospective buyer will value any given property, any given view, any given exposure, any given renovation, any given layout, any given building amenity, or and given amount of raw usable space. The usual valuation formulas (getting $1.50 back for every $1 of renovation you do, getting $15K per floor premium, etc.) simply do not apply in illiquid markets.
With equity prices down about 55% from peak, more and more buyers are becoming alienated from this marketplace (probably because nobody likes to buy a depreciating asset - a great discussion from late 2007 on the warning signs to our local marketplace) because of the correlation between this local housing market and wall street. Is there a correlation? Yes there is a level of relation, but it is more of a wealth effect and psychological one then anything else. I doubt there are studies proving that if stocks rally 30%, real estate will follow soon after and vice-versa. If anything, there is more of a correlation on the downside than upside because its hard to argue the negative wealth effect of a plunging equity market's effect on people's perception of net worth, confidence, and how much property they may or may not be able to afford.
Almost every broker out there discussed the 'sideline buyer' theory up until the tipping point here in Manhattan to support rising prices and floors. Well, its time to put that theory to rest already! It doesn't exist! There are always buyers waiting on the sideline, but to design a theory to support a bottom for a local housing marketplace because buyers will rush in if we fall 10%, is outright stupid and a product of a car salesman desperate to defend a rising market. The opposite is true and even though you can pick up a deal today at 20%-25% discount from peak, and perhaps more, it's clear buyers are NOT rushing back in.
Want some insight into what buyers are actually thinking? Check out this Streeteasy.com discussion thread titled, "Sideline Buyers - How Have Your Circumstances Changed?", where commenter Faustus discusses a personal situation and how he/she feels now about buying in this market:
I'm one of these sideline buyers that real estate brokers, owners and sellers are hoping will save the day. Doesn't it make sense to check in with me and other sideline buyers to see how our circumstances have changed?There are plenty more on that thread spilling their guts on how they are thinking. Interpret at your own risk, as anything can be made up, but still it is in-line with what one would expect given the unfolding events of this credit crisis.
I'll start:
i. My net worth. Since the market hit its peak, of course my net worth is down substantially. Down approximately 18% as of today from the peak in 07, which is actually relatively good but nonetheless pours a bucket of icewater on any burning desire to buy a piece of Manhattan.
ii. My job circumstances. Still employed, but highly uncertain as to both longevity and comp levels.
iii. My commitment to NYC. Related to (ii) of course, but I love NYC and would like to stick around (though it's not an absolute).
iv. My general outlook for NYC and the local real estate market. Bloody, grim and worsening. I fail to see what the catalyst will be to bring it back.
Lets just keep it real and acknowledge what is going on out there. Lets not make excuses or poor arguments for bottoms & recoveries when the buyers are in total control and the market remains for the most part, illiquid for mostly sell side reasoning and buy side caution. You want a more liquid marketplace? Get those ASKs closer to the BIDS!
NY Data Points - Not Every Single One Bad
Just a quick update on some New York City data points I have come across recently. Strangely, the Fed put out its Beige Book yesterday and the overview of New York (Second District) bears very little resemblance to the anecdotal data I am seeing.
My friend Mike Stoler has an article out in the Real Deal, entitled These hotel room prices are insane, on the plunge in New York City Hotel room rates. Now seasonally, we are not in the strongest of periods for New York City lodging, but the discounts which look to be verging on 50% off peak rates, suggest trouble for what was an over-heated area in terms of new development. As I noted in my piece New York City Hotels Going from Foist to Woist, it was an inopportune time for developers to be pumping an additional 20% more rooms into the New York hotel market, to say the least. But after condo prices flat-lined, hotels became the "highest and best" use of overpriced New York City land. Crain's report Shine comes off Big Apple suggesting that travelers are avoiding New York City due to it's reputation as a high cost destination if true, does not bode well.
In my opinion, there is no way new hotels coming to market are going to be able to survive the pressure on room rates unless they were very conservatively financed. The likelihood of that seem somewhere between slim and none, based on investor behavior across all other asset classes. My bet is a bunch of the new hotel product is going to become bank REO (real estate owned) and unfortunately banks are probably not particularly good managers of hotel assets.
On the subject of banks, Crain's reports on a couple of New York City banks with high Texas ratios (ratios of non-performing loans + REO to tangible equity + reserves for loan losses), who might not survive. One which sounds like it has some real issues is Park Avenue Bank. If this one goes tapioca, and it is definitely not "too big to fail", the headlines are not going to read well for New York City.
New York City unemployment data was just released by the New York State Department of Labor, and as fast as Wall Street is shedding jobs, New York City has not yet caught up to the national unemployment rate. The latest tick shows the New York City unemployment rate at 6.9% up from 4.8% one year ago, while the nation is at 7.6% versus 4.9% last year. According to a CoStar article, the financial services industry is doing more than its fair share of job cutting having "shed 17,600 jobs in the last three months of 2008, close to its fastest pace of decline in at least a decade. U.S. Bureau of Labor Statistics statistics show that the net loss of securities jobs from September to November has only once been exceeded in a three-month period over the last 10 years." The decimation is surely one of the reasons the Daily News reports "Lines snake around block for New York Monster.com job fair at Marriott Marquis Hotel in Times Square."
According to a recent article in The Economist , Robert Lieber, the mayor's deputy in charge of economic development, insists that "New York is in a good position now." But, he adds, "We don't know how long or how deep [the recession] is going to go." With the 1970s fiscal crisis in mind, when the city teetered towards bankruptcy and 1m people left, Mr Bloomberg is striving to maintain the low crime rate and keep rubbish off the streets, while finding ways to replace or redeploy finance-sector jobs. City Hall has an 11-step plan to help entrepreneurs and venture capitalists.
I hope the 11-step plan is effective. According to this post on blog Zero Hedge, which one of our Urban Digs readers brought to our attention, credit default swaps (CDS), on New York City debt, have blown out to record spreads over treasuries. A JP Morgan model indicates the CDS market is baking in a 50% chance of a default on New York City debt in the next 5 years.
But even through the rather thick thunderheads that have gathered over New York City there are some small rays of light poking through. Crain's reports that enterprising restaurateurs are sorting through the retail wreckage looking at great locations with newly reduced rents to find expansion opportunities. I have actually come across a bank willing to lend 15 year money (unheard of) to business real estate owners to support business expansion. Separately, another brand new New York City bank is on the prowl to put its pristine balance sheet to work for business owners who can bring owners' deposits and transaction balances over.
Maybe some of the incredible liquidity unleashed by the Fed and moral suasion out of Washington is starting to have some impact. I still believe that New York City has a lot of pain to endure before we reach a new lower equilibrium on Wall Street employment, apartment inventory, hotel room supply and bank branch locations, among other things. But let's not forget that downturns rationalize capacity and set the stage for eventual upturns, it is heartening to see at least some sparks of life resulting from the current strife.
Image from Daylife.com
Fightin' Stella!
A: My girl's fight is on and she is doing great so far. Thank you for all of your recommendations of vets, alternative treatments, kind words, and sharing your personal stories with me. It means so much to us.
Many have asked me for an update, so here it is. Stella has spindle cell sarcoma and unfortunately the CAT scan revealed that it is of an aggressive nature, covering most of the right jaw and spreading past the mid-line of mouth. I don't understand the rest of the report. Surgery is not an option because they wouldn't be able to get clear margins; and I wouldn't have done that anyway unless the mass was much smaller. We are on our way to Dr. Post in CT, a specialist, for a 2nd opinion and a few more tests to go over all of our options.
Stella is a very strong lab, so if anyone could fight this for as long as possible, its her!! She needs to be able to do 3 main things: eat, play, and sit at our legs when we are eating. If she is doing these things, she is happy. Occasionally Stella likes to:
I know she will tell us when it's time. Until that comes, this dog is living the high life! FIGHT BABY, FIGHT!
Sorry for the lack of content here lately, as any time outside of servicing my buyer/seller clients is going to her. Thanks again and Ill be back Thursday.