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Archive for April, 2008

[East End] 1Q 2008 Hamptons/North Fork Market Overview Available For Download

April 30, 2008 | 1:39 pm | | Reports |

The online version of the Prudential Douglas Elliman 1Q 2008 Hamptons/North Fork Market Overview [Miller Samuel] is available for download.

I have been writing various incarnations of the New York regional market report series for Douglas Elliman since 1994.

To build Hamptons/North Fork custom data tables

To view Hamptons/North Fork charts

An excerpt

…Both median and average sales price indicators were above levels reached in the prior year quarter. There was an upward skew in average sales price not seen in the change in median sales price, which was $790,000 up 1.9% over the prior year period median sales price of $775,000. The average sales price was $1,728,610 this quarter, up 16.8% above the prior year quarter, the second highest quarterly average sales price after the third quarter of 2007, which had an average sales price of $1,805,104.

Besides the rise in price indicators within the top 20% of the market, perhaps one of the more striking characteristics of the East End was the decline in overall number of sales. The lower volume of sales activity is largely attributable to the declining national economic climate, tighter credit and a weaker employment picture in the New York City financial services sector…

Download report: 1Q 2008 Hamptons/North Fork Market Overview [pdf]

[Indebtor’s Ball] Subprime Discussion Without The Junk

April 29, 2008 | 9:50 am | | Radio |

Lost a reliable Internet connection at home for the past 3 days so my posting has been non-existent (but I did change a few lightbulbs with my free time)

Back in the day, I loved to read books like Barbarians at the Gate, Den of Thieves and Liars Poker covering the truth and mythology of Wall Street (now I read books like Pontoon). Michael Milken was directly or indirectly connected to many of those stories, as well as the firm he worked for Drexel Birnham Lambert because of the financial vehicle he championed, the fabled junk bonds.

When the subprime crisis first became kitchen table talk last summer, initially there was discussion that it was another “junk bond” crisis. I cringed because junk bonds weren’t bad in and of themselves. The investors that used or purchased them got into trouble, because didn’t appreciate the risks associated with them. Higher returns, equals higher risk. Sounds a lot like subprime market participants doesn’t it?

Andrew Ross Sorkin’s excellent article in the New York Times today called Junk Bonds, Mortgages and Milken addresses this issue:

“The financial crisis we’re in today stems from the invention by Drexel Burnham Lambert of the junk bond,” Martin Lipton, the superlawyer who co-founded Wachtell, Lipton, Rosen & Katz, said derisively at a conference last month. “You can draw a straight line from Drexel Burnham to the financial world today.”

Milken disagrees:

Critics who compare the subprime debacle to the bubble in high-yield, high-risk corporate bonds that Drexel helped inflate two decades ago are “people who don’t understand markets very well,” Mr. Milken said. He suggests that “their rationale is that both types of financial instruments are risky.”

And he says junk bonds, or those rated below investment grade, “have little in common with mispriced subprime mortgages,” which he says are the real culprits.

“Having financed several of America’s largest home builders, I know a few things about the housing industry,” Mr. Milken said. “What happened to housing was not a failure of securitization, but rather a disastrous lowering of underwriting standards and other unfortunate practices.”

Criticizing securitization — the slicing and dicing of debt that he helped popularize — is “like condemning scalpels because a few unqualified surgeons have injured patients,” he said.

With the introduction of new financial instruments, users tend to go overboard at the end of the cycle and then new regulation is introduced that tends to go to far (ie mortgage current underwriting standards will become a self-fulfilling prophecy).

Ultimately what junk Bonds and subprime mortgages really had in common, were the people that used them. They didn’t reflect adequate risk into their pricing. A more pro-active SEC might keep that in check, but then squash innovation.

I need to change some more lightbulbs.

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[Bail Out] Worried About Future, Banks Spread Out

April 27, 2008 | 4:57 pm |

Bank earnings are down.
Way down.
Real concerns about future losses from non-performing mortgages, other credit instruments like credit cards and the need to recapitalize.

Fed policy has been pretty generous to the economy, no?


Current hopeful scenario: Lower the federal funds rates a lot so that banks can lower mortgage rates to enable consumers to refi their way out of trouble for the time being or purchase a new home.

Looked good on paper…

But mortgage rates have been rising, whether it’s a jumbo or conforming, fixed or adjustable.

Banks need to recapitalize because they have been forced to lend and hold the mortgages they issue in their own portfolio.

Borrow at a low rate,
lend at a high rate.
Enjoy the spread.

Banks can lend at a higher rate because fewer banks are lending so there is less competition. In addition, the banks that are still lending have much tighter underwriting requirements compared to the past 3-4 years.

Why? Banks now have to be more accountable for risk in their mortgage lending decisions rather than offloading risk to investors, who would in turn offload the risk to other investors and so on.

It’s all about the credit markets. Until they begin to function again, banks will not be incentivized to offer lower the rates on mortgages they issue.

This is another form of “bailout.” The Fed is keeping the banking sector from imploding (opposite of spreading – very lame, sorry).

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[Getting Graphic] Something Old, Something New, Something To Borrow Against, Something Sitting

April 26, 2008 | 10:19 pm | |

Getting Graphic is a semi-sort-of-irregular collection of our favorite BIG real estate-related chart(s).

Source: NYT

Click here for full sized graphic.

Floyd Norris of the New York Times in this weekend’s paper had a great summary of the state of new home sales titled New Homes Turning Old as the Inventory Piles Up.

In normal times, the vast majority of new homes being offered for sale have not been completed, and deposits are put down well before houses are finished. But in March, builders were offering 189,000 houses that had been completed, nearly as many as the 201,000 unsold homes that were under construction. Those two figures have never been so close since the government began collecting that data in 1970.

Unlike the figures for existing homes on sale — some of them with owners who may decide not to sell — new homes on the market that have been completed are certainly available, and the financing costs facing the builder are growing with every week that passes while the homes sit unoccupied.

As said many times before, builders, build until they can’t build anymore. I think it is getting pretty close to that point. The natural ebb and flow of supply and demand. What’s wrong with fewer homes coming on the market?

Always Look On The Bright Side Of Life Housing

April 25, 2008 | 12:26 am | |

Bob Hagerty’s quarterly survey on the state of the housing market explores some positive news amid all the negativity. The article titled The Brighter Side of Housing brought to mind the Monty Python song in the Life of Brian movie: Always look on the bright side of life.. I can’t get that darn whistling out of my head.

Economists at Goldman Sachs say home prices are likely to level off by late 2009. They also point to improving affordability. Goldman’s chief U.S. economist, Jan Hatzius, says the share of a typical family’s income needed to pay mortgage payments on a median-priced home averaged about 17.5% from 1993 to 2003, before jumping to 26% in 2006. The figure now has fallen to 20% and is likely to keep declining as home prices fall.

I met Jan last year at a meeting and he pumps out some impressive research so this is something to look at.

The WSJ put together a very cool interactive table that sorts by metro area strength, change in inventory, month’s supply, price change and loan payments overdue.

I was surprised by the strength rating of Seattle given the spike in inventory over the past year as well as weak rating for New York given its low inventory levels.


Work-On-The-Boards: A-Predictor-Of-Construction-Demand

April 25, 2008 | 12:01 am |

The American Institute of Architects Architecture Billings Index is derived from a monthly survey of its AIA members (more than 300 firms participate) referred to “Work-on-the-Boards.” The index was introduced in 2005 but has 12 years of data.

Here’s the white paper.

This trade group is basically taking its billings and using it to project construction expenditures over the next 6 months. It’s a creative leverage of its members statistics but I am not clear whether it reliable since I haven’t heard of it before. Needless to say, its a different approach to anticipating future demand for construction.

March stats released today show “weakness.”

Business conditions continued to soften in March as the Architecture Billings Index (ABI) fell to 39.7. Weakness persisted in all regions of the country and across all sectors of practice.

This index correlates well with the drop in new home sales and suggests that the new home sale metric will be weak for the remainder of the year.

[In The Media] BBC World Business Report Clip For 4-24-08

April 24, 2008 | 6:14 pm | Public |

Today I was interviewed by BBC TV on the housing market, specifically relating to the new home stats released today by the US Commerce Department:

Sales of new one-family houses in March 2008 were at a seasonally adjusted annual rate of 526,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development.

This is 8.5 percent (±16.1%) below the revised February rate of 575,000 and is 36.6 percent (±11.1%) below the March 2007 estimate of 830,000.

Of course the ±16.1% is a wacky margin of error but the trend is clearly down.

Inventory is declining but that looks to be meaningless because the Commerce Department does not go back and restate their figures based on canceled contracts which have been at high levels.

Perhaps the only ray of hope was data showing that inventories of unsold homes fell for the 12th consecutive month in March, an indication that builders are making some progress to get their inventories under control. However, with sales plunging even faster, the supply of homes on the market rose to 11 months, the most in 27 years. Inventories are likely understated as well because of canceled sales contracts.

Like a broken record, “its all about credit.”

Here’s the BBC broadcast (2:44).

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Lenders Try Workout, But Sweat The Rise In Foreclosures

April 24, 2008 | 1:04 am | |

Banking commissioners have observed that efforts to work with borrowers going into default has been largely ineffective.

The study, compiled by the State Foreclosure Prevention Working Group, made up of banking regulators and attorneys general in 11 states, found that seven out of 10 borrowers who are seriously delinquent on their mortgages aren’t on track to receive any kind of help with their payment problems.

And that is not all.

Pew Charitable Trusts released a comprehensive report on the foreclosure problem called Defaulting on the Dream: States Respond to America’s Foreclosure Crisis which is a good read (homework: try to figure out why large organizations select lame stock photography pictures of houses. PCT did it for this report, and Fannie and PMI do it too – oh, the lack of humanity.)

Foreclosures are rising rapidly and that affects renters too. Housing is pushing the economy into a recession.

Almost every state in the country has seen a significant increase in mortgage foreclosures, largely triggered by defaults on subprime mortgages. Yet greater challenges lay ahead. Based on new foreclosure projections by the Center for Responsible Lending, Pew estimates that one in 33 current U.S. homeowners will be in foreclosure, primarily in the next two years—the direct result of subprime loans made in 2005 and 2006. Among the states hardest hit are Nevada, where one in 11 homeowners could soon be in foreclosure; California, with one in 20; Florida, with one in 26, and Georgia, with one in 27.

Of course there is a growing feeling of resentment by renters, which are one third of all US households, that a bailout of these borrowers is unacceptable.

“A third of the American public rents,” Brandon pointed out. “They’re saying ‘I’ve been saving for a mortgage for years. I could have jumped in on a subprime loan too. Now I’m going to have to pay for a government bailout.”

I don’t see how the Federal government can afford to bailout 1 out of every 33 homeowners. I don’t think it is going to correct the fundamental problem with the housing market. It’s about lack of liquidity in the credit markets. That has to be addressed in order for the free markets to work. Pumping money to borrowers won’t solve the problem.

The issue with the free markets as a solution is one of neutrality. If there is not a functioning structure in place that prevents the kind of collapse we are currently experiencing, it’s not a free market. It’s simply deja vu to the past problems. There was systemic collusion in the mortgage securitization industry – most parties to the ratings and collateral valuation process had their hand in the cookie jar. Until that is fixed, there isn’t much room for improvement and lenders will continue to sweat (and enjoy the large rate spreads).


[AAA] Ratings Agencies And The New Culture Of Partnership

April 24, 2008 | 12:42 am | |

There is an absolutely spot-on article in the New York Magazine called Triple-A Failure: The Ratings Game

I highly recommend that everyone read the article from start to finish.

In 1996, Thomas Friedman, the New York Times columnist, remarked on “The NewsHour With Jim Lehrer” that there were two superpowers in the world — the United States and Moody’s bond-rating service

Essentially in their quest for profits, the agencies’ relationship with Wall Street changed from a mysterious and powerful ratings entity to a firm working closely with their clients.

Rating agencies (Moody’s, S&P, Fitch are the biggies) sought fees from investment banks to rate securities. If the ratings were too conservative, the bank could simply go to one of the other agencies to get the rating they wanted to. The agencies were essentially behind the curve in understanding the sophisticated new products being introduced at a rapid rate.

A few years ago, as I was getting more and more frustrated at the lack of neutrality in the mortgage lending process and the shaft given to good appraisers in the form of pressure, even an outsider like me could see that something was wrong with the relationship. The system can’t allow a ratings agency to be at the mercy of fee driven investment banks. The proverbial hand in the cookie jar.

Rating agencies were the enabler of securitization much like appraisers were the enabler of shady lending practices. Search hard enough and long enough and anyone can find someone to make the deal work.

By providing the mortgage industry with an entree to Wall Street, the agencies also transformed what had been among the sleepiest corners of finance. No longer did mortgage banks have to wait 10 or 20 or 30 years to get their money back from homeowners. Now they sold their loans into securitized pools and — their capital thus replenished — wrote new loans at a much quicker pace.

Mortgage volume surged; in 2006, it topped $2.5 trillion. Also, many more mortgages were issued to risky subprime borrowers. Almost all of those subprime loans ended up in securitized pools; indeed, the reason banks were willing to issue so many risky loans is that they could fob them off on Wall Street.

The search for new profits and their close relationship with Wall Street placed them in a non-neutral position yet investors were relying on the ratings.

Thus the agencies became the de facto watchdog over the mortgage industry. In a practical sense, it was Moody’s and Standard & Poor’s that set the credit standards that determined which loans Wall Street could repackage and, ultimately, which borrowers would qualify. Effectively, they did the job that was expected of banks and government regulators. And today, they are a central culprit in the mortgage bust, in which the total loss has been projected at $250 billion and possibly much more.

The agencies have a very big credibility problem right now with investors. It’s all about the lack of activity in the credit markets right now.

It’s certainly telling that the three ratings agencies and four major mortgage related associations took the position with Congress that the current administration’s suggestions for fixing the problem were flawed. The Real Estate Roundtable, Mortgage Bankers Association, Commercial Mortgage Securities Association and the National Association of Realtors basically took the position not to do anything but teach investors how to, well…invest.

Are they kidding?

The credit markets are currently frozen because of the lack of neutrality in the rating and mortgage process, not because investors are ignorant. Next thing we will start hearing is that the agencies and associations will simply self-police.

Fear of change, living in denial.

Over rated.

Here’s something that’s not overrated: Joe’s Gizzard City, my favorite college hangout (note the Michigan State jersey).

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NAR Spin Cycle Set To Permanent Press

April 23, 2008 | 1:22 pm |

On Matrix I have long been critical of the NAR’s efforts to spin the market as positive no matter what is happening (there is an alternative to negative spin – it’s called neutral). NAR is a repository of great information so I am not sure what they are afraid of. They don’t make the market. This tactic really represents old school thinking.

I have wanted to visually show how this was done, but alas it never got, well…done. I don’t grab other posts but this time I need to make an exception since it was so brilliantly done (hat tip to reader RentinginNJ, a fan of NJ RE Report via Big Picture). Both Jim Bednar’s New Jersey RE Report and Barry Ritholtz’s The Big Picture are heavily trafficked go to blogs for real estate info.

View original post on New Jersey RE Report

Although Barry makes an interesting point, I’d have to say I see no real change in NAR’s orientation in delivery of information to the press other than the latest release. One slight negative release doesn’t show a trend (3 data points to make a trent I am told). In fact, the press release titles for the prior two months had nothing to do with the data in their reports.

Each press release statement pertains to the corresponding number in the above chart.

  1. “There’s no question there is a strong demand for housing from a growing population.” -David Lereah, NAR Chief Economist

  2. “For the foreseeable future, the demand for homes will continue to outstrip supply” -Al Mansell, NAR President

  3. “We’ve been expecting sales to remain at historically high levels, but this performance underscores the value of housing as an investment and the importance of homeownership in fulfilling the American dream.” -David Lereah, NAR Chief Economist

  4. “We are returning to more balanced markets between home buyers and sellers… We feel confident that housing is landing softly as rates continue to rise.” -David Lereah, NAR Chief Economist

  5. “This is part of the market adjustment we’ve been discussing, with a soft landing in sight for the housing sector. The level of home sales activity is now at a sustainable level. Overall fundamentals remain solid…” -David Lereah, NAR Chief Economist

  6. “Higher interest rates are slowing home sales, but we see this as another sign of a soft landing for the housing sector which remains at historically high levels.” -David Lereah, NAR Chief Economist “After five years of booming sales, we are now experiencing normal market conditions across most of the country… most owners can expect steadier gains in home values for the foreseeable future.” -Thomas M. Stevens, NAR President

  7. “Over the last three months home sales have held in a narrow range, easing to a level that is near our annual projection, which tells us the market is stabilizing” -David Lereah, NAR Chief Economist

  8. “Now sellers in many areas of the country are pricing to reflect current market realities. As a result, there could be some lift to home sales, but it’ll likely take some months for price appreciation to rise.” -David Lereah, NAR Chief Economist

  9. Existing-home sales stabilized at a sustainable pace in August -NAR

  10. “…the worst is behind us as far as a market correction — this is likely the trough for sales. When consumers recognize that home sales are stabilizing, we’ll see the buyers who’ve been on the sidelines get back into the market” -David Lereah, NAR Chief Economist

  11. “It looks like we’re moving beyond the low for the housing cycle last fall, and buyers are responding to historically low interest rates and competitive pricing by home sellers. In addition, a tightening inventory of homes on the market is supporting prices.” -David Lereah, NAR Chief Economist

  12. “Fundamentals have improved in the housing market and buyers see a window now with historically-low mortgage interest rates and competitive pricing by sellers,” -David Lereah, NAR Chief Economist

  13. “We also may be seeing some losses as a result of the subprime fallout. However, this is masking improved fundamentals in the housing market, with lower mortgage interest rates and motivated sellers.” -David Lereah, NAR Chief Economist

  14. “Buyers who’ve been on the sidelines may want to take a closer look at current conditions in their area – if they wait for sales to rise, their choices and negotiating position won’t be as good as they are now.” -Pat V. Combs, NAR President

  15. “The rise in sales and prices in the Northeast region on a fairly consistent basis in recent months is promising because this was the first region that underwent sales and price weakness after the boom. Now, it appears that it will be the first region to climb back, indicating that other regions could follow a similar path.” -Lawrence Yun, NAR Chief Economist

  16. “The unusual disruptions in the mortgage market, including a significant rise in jumbo loan rates, resulted in a fairly high number of postponed or cancelled sales…Once we get through these disruptions, we’ll get a better sense of where the actual market is in late fall as conditions begin to normalize,” -Lawrence Yun, NAR Chief Economist

  17. “Existing-Home Sales Rise in November, Market Likely Stabilizing” -NAR

  18. “Home sales remain weak despite improved affordability conditions in many parts of the country, but we could get a quick boost to the market if loan limits are raised in combination with the bold cut in the Fed funds rate,” -Lawrence Yun, NAR Chief Economist

  19. Existing-Home Sales to Stablize Before Upturn in Second Half of 2008 -NAR

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[GSE Searchlight] Oversight Is So Not Over

April 23, 2008 | 12:35 am |

There is a whole lot of oversight going on these days. OFHEO [Office of Housing Enterprise Oversight] and others are very concerned about the ability of the GSEs to avoid getting into trouble.

I wonder why there was so little oversight before the credit crunch? Was it an…oversight (sorry)?

It’s pretty scary to think that Fannie and Freddie (and HUD) are seen as the saviors of the housing market in the creation of a jumbo conforming mortgage product, expanded portfolio size and a housing market condition that continues to weaken (default rates rise as prices decline). They are already vulnerable.

Although few are predicting an imminent need for a bailout just yet, credit rating agency Standard & Poor’s recently placed an estimated price tag on this worst case scenario — $420 billion to $1.1 trillion of taxpayer’s money.

Fannie Mae and Freddie Mac are getting a lot more attention from the Treasury Department these days.

Treasury officials have stepped up efforts to strengthen the regulation of Fannie Mae and Freddie Mac, the two largest buyers of home mortgages, pressing key senators to break a legislative stalemate that has lasted for years.

In OFHEOs Report to Congress, it summarizes the concerns quite efficiently:

$5.0 trillion in guaranteed mortgage-backed securities outstanding and mortgage investments. Their market share of total mortgage originations grew from 37.4 percent in 2006 to 75.6 percent by the fourth quarter of 2007. There is increasing pressure for Fannie Mae and Freddie Mac to do even more to support the mortgage market, which is problematic in absence of GSE reform legislation to strengthen the regulatory process.

As evidenced by the lack of market enthusiasm for the new jumbo conforming mortgage product that was supposed to help the housing market (allowing some homeowners to refi their way out of trouble – which can’t be good for FNMA’s portfolio). And OFHEO is just wrapping up actions against former FNMA executives who manipulated earnings to enhance their bonus income.

It doesn’t seem reasonable to place all of our hopes for a solution on the GSEs.

Consider oversight in the classroom: How students see their classroom today.

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[In The Media] BBC World Service Radio Clip For 4-21-08

April 22, 2008 | 7:43 am | Public |

This weekend, in between cleaning my garage and taking my family to the Met (150 year old graffiti on the 2000 year old Temple of Dendur was a fav), I was called by the BBC to give my views on housing. They selected experts from leading economies in Europe, Asia and Latin America to provide their views and wanted perspective on the linkage to the US and it’s housing troubles. Pricing slipping, mortgage costs rising…

For the record, its all about credit.

Here’s the BBC broadcast (6:28).

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