Matrix Blog

Wall Street Journal

Bonuses Expected To Save The Day

November 8, 2005 | 10:47 pm | |

Wall street bonuses are expected to rise 20% to 25% over last year [WSJ] which was already a good year. Investment bankers are expected to reap the largest gains [NYT].

Historically, bonus money flows through the real estate economy in New York at the beginning of the year. Wall Street provides in the vicinity of 20% of personal income and only 6% of the jobs. Its important to the real estate economy.

Other Bonus Stories
Manhattan After The Hoopla Over A 12.7% Drop: What Really Happened In 3Q 05? [Matrix]
Brokers Anticipate Sales Boost As Wall Street Awaits Bonuses [NY Sun]


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Gain In Job Gains, But Not Enough To Make Everyone Happy

November 7, 2005 | 8:35 am | |
Source: WSJ

Hiring cooled for the second straight month but wages rose at their fastest rate in two years [WSJ]. The BLS indicated that weakened job gains were not generally attributable to areas impacted by the hurricanes. In fact, the job gains would have been even weaker if not for the resolution of a large strike at Boeing and hurricane-related construction. Rising wages are expected to keep pressure on the Fed to keep raising rates.

Increasing price pressures are creating a new “conundrum” for policy makers. According to a WSJ article by Mark Gongloff, we don’t seem to be in a “Goldilocks” economy anymore – not too cold, not too hot – that the markets prefer.


Either way, it doesn’t appear that mortgage rates will be falling in the near term as a result.

Bureau of Labor Statistics Employment Situation Summary for November [BLS]

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Those Evil Hamburger Eating Rich, The Tax Panel Wants Their Fair Share Of The Sacred Cow

November 1, 2005 | 11:32 pm | |

President’s Advisory Panel on Federal Tax Reform released its recommendations today [TaxReformPanel.gov]. The panel was mandated to simplify the tax code for individuals and corporations. Its has been suggested that one of the reasons for the reform was to repeal the Alternative Minimum Tax which was initially created to “tax the rich.” However, since they did not index the the AMT for inflation (amazing!), the number of US taxpayers eligible for this tax has grown considerably. However, removal of the tax would eliminate billions from the revenue rolls so other sources of income had to be considered.

Of the provisions the panel recommended, one key item related to the real estate economy they chose to change is the home mortgage tax deduction, the sacred cow of American home ownership.

Executive Summary Of Panel Recommendation [WSJ PDF]

Arguably, this would affect a small percentage of housing markets since the median US housing price according to NAR is around $220,000. The hardest hit sector would be the upper end of the market, the luxury or high-end sectors, which are already most vulnerable to oversupply going forward.

Webmaster’s Note:

There is a bias caused by setting a price threshold such as $1.1M in housing markets where basic housing is far more expensive than other markets. This is particularly true on the west coast and the northeast which have the highest housing costs in the nation. Because of the higher cost of living in these markets, it is not reasonable to single out specific housing markets.

President Bush’s political capital is at an all-time low so it is not clear how far this potential hornet’s nest will go. It is cause for concern however because the housing market:

  • was built on the notion that the home mortgage interest rate deduction is an inherent right as a US taxpayer
  • Fannie Mae and the US government have long encouraged home ownership
  • Most importantly, there could be a sharp price correction as the deduction is eliminated causing homeowners to make up the difference.



A Category 12: Fuel Costs Signal More Measured Hikes From Fed Down The Road

November 1, 2005 | 10:44 pm | |

The Fed continued its “measured” rate increases showing continued concern over inflation [FOMC] even though core inflation was very low. The drop in fuel prices in recent weeks was not enough assurance that inflation was contained [Marketwatch]. They signaled more rate increases to come. At this pace, there could be as many as 2 more increases before Greenspan steps down on January 31st.

This is the highest rate level since June 2001 when the economy at that time began to slip into a recession. There is some speculation that the Fed may not stop until the discount rate reaches 5%.

The St. Louis Fed has a composite of key economic indicators [PDF] that shows inflation remains a concern (CPI). GDP which has been flat with a recent gain, adjusted for the hurricane effects [WSJ], employment levels show bigger gains than last year, the unemployment rate is down, but hourly wages are up but only at about the same rate as last year.

In other words, the economy seems to be generally better yet inflation remains a concern. The rising Federal defecit and concern about energy costs this winter are keeping the pressure on bond yields and long term rates. As a result, mortgage rates continue to trend upward.

If there is a silver lining in all this, fuel prices appear to be cooperating and much of the inflationary numbers the Fed has been looking at were hurricane related and could ease after the first of the year. Lets hope the Fed does not go too far with this measured increase strategy and choke off consumer spending as they did prior to the last recession (June 2001).


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Cendant: Parts Are Greater Than The Whole

October 25, 2005 | 1:43 pm | |

In the sign of a trend that bigger isn’t always better, Cendant, the travel, hotels and real-estate services company will split into 4 separate companies [NYT]. The Cendant name will no longer exist. The breakup will fall along the lines of their four primary businesses [WSJ]:


*Real Estate: Brands include Corcoran, Century 21, Coldwell Banker
*Travel: Orbitz, Galileo and Cheap Tickets
*Hotels: Ramada, Howard Johnson and Days Inn
*Car-rental: Avis and Budget

While the break up will allow the company to be more nimble and responsive to market dynamics, the pace of aquisition may slow as potential targets are able to look more closely at their suitor. Don’t these sort of things seem to go in cycles?

Remember the strategies of AT&T, ITT, GM and others when conglomerates were the envy of all? The idea was to reduce share volatility by spreading out to different industries to hedge against dips.

The break up will allow each entity to more fully realize their potential, especially real estate, which has posted strong earnings but has been overshadowed by the other seemingly weaker divisions.

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Hawaiian Shirts and Bermuda Shorts: Bush Names Bernanke To Replace Greenspan

October 25, 2005 | 7:56 am | |

As the Greenspan era comes to a close, I am going to miss the new phrases that would enter our vocabulary from time to time such as “frothy”, “irrational exuberance”, “conundrum”, “speculative excesses, “Greenspan-speak” and others. Most of all I am going to miss the confidence the markets placed in his policies. Replacing him is a tough act to follow although the financial markets appear relatively happy [Marketwatch] with the choice as the Dow and S&P had their biggest increase in 6 months after the announcement [Marketwatch].

Yesterday President Bush nominated Ben S. Bernanke, a former Federal Reserve Board member and Princeton professor who currently chair’s the President’s Council of Economic Advisors to be the next Chairman of the Federal reserve [NYT]. He is considered a “first, among equals” to his peers but his political views are largely unknown [NYT]. He actually penned a story in 2000 on the topic of replacing Greenspan [WSJ].

On a lighter note, there is some hope to fill the vocabulary void that I so enjoyed with Greenspan. He appears to have a sense of humor.

My proposal is that Fed governors should signal their commitment to public service by wearing Hawaiian shirts and Bermuda shorts has so far gone unheeded.

“Until he joined the Council of Economic Advisers, Mr. Bernanke had little contact with Mr. Bush [WSJ], and indeed in many ways is the antithesis of the power-suited business executives that Mr. Bush has preferred for top economic policy posts. But he appears to have earned Mr. Bush’s trust. Earlier this year, Mr. Bush gently chided Mr. Bernanke for showing up at an Oval Office meeting wearing a dark suit with tan socks, according to several people familiar with the incident.

A few days later, Mr. Bernanke showed up early for another meeting with Mr. Bush and distributed tan socks to the meeting’s other participants. When Mr. Bush arrived, all, including Vice President Dick Cheney, were wearing tan socks. Mr. Bush laughed.”

One of the more notable differences between Greenspan and Bernanke is how they handle inflation. Bernanke subscribes to the theory of setting a formal “Inflation Target” [WSJ]. which would demonstrate the Fed’s commitment to low inflation. Opponents of the strategy say that it will limit the central bank’s flexibility.

The WSJ has a series of charts that show the economic success of the Greenspan era.

Growth



Prices



Rates



Stocks




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Yuppie Starter Home Index

October 22, 2005 | 6:31 pm | |

The Dow Jones Real-Estate Index also includes a Starter Home Index [WSJ]. The data comes from First American Realty Solutions which uses condo and single family sales. These towns have a median income of $40,000.

Webmaster’s note: The data set shows a 5.3% increase in the Upper East Side neighborhood of Manhattan, which is the lowest of the areas presented. Its interesting because they are missing about 2/3 of the housing stock for that market because they do not track co-op apartments.



Floating Luxury Condos: Homeowner Fees Must Provide Adequate Water Displacement

October 18, 2005 | 10:28 pm | |

In the Cruising the Mall [WSJ] article, it describes how you can shop on a cruise ship The Orphalese in your spare time, and when you have had a enough, you can collapse in your own condo unit on the ship. Prices start at $1.8M with a model unit set up in their sales office in Las Vegas.

There are 200 condo units and 265 rooms for guests. Construction will be completed but condo units are available for sale now. The ship goes to a number of high profile events throughout the year [Luxist].

I assume they must be subject to property rights laws in the country of the ship’s registry. And financing? A mortgage? It would seem to be out of the question. Assuming the remaining parts of the ship are the common areas, its hard to conceptualize that there is no land associated with the residence.


The Conundrum: A riddle in a mystery in an enigma in a boom

October 13, 2005 | 11:17 am | |

Greenspan’s conundrum has been the fact that [Financial Times] bond yields have remained low. We are expecting to see some upward movement as more inflationary data comes out over the next few months.

Two sides are presented as to why the bond market yields have remained low, which has extended the housing boom and has been counter to historical patterns:

Why is the bond market right? Investors are buying bond yields at low rates because they believe the economy will slip. A flat yield curve often pre-dates a recession. Also, the bond market is not concerned about growth right now, only inflation. With central banks keeping rates low as well as heated competition from Asia. Also, demographics may be keeping yields low. The 25-44 year old age group is shrinking so consumption growth should shrink as well keep rates low in the long term.

Why is the bond market wrong? A recession is not in the forecast and the equity (stock) markets are not worried about one. Also, there may be a global savings surplus – and we hear this a lot – there is so much capital out there, seeking out limited opportunities for investment. A potential revaluation in the Yuan, high US budget deficit and further inflationary economic data would cause yields to re-adjust to proper levels. There was an article today in the Wall Street Journal that suggests that global inflation may return.

The sharp rise in energy costs and economic damage caused by the 2 recent hurricanes has added to the pressure.

In other words, no one really knows what the long term outlook is for bond yields. Yet it is critical to the housing market since mortgage rates are usually tied to bond yields.

On the other hand, the NAR’s Home Sales Forecast is rising [RisMedia]

[NAR’s 10-2005 US Economic Outlook] [PDF]


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Greenspan: Stability Fanned Speculative Excesses

October 12, 2005 | 8:44 am | |

In a speech today, Federal Reserve Chairman Alan Greenspan said that the US economy’s flexibility and stability have fanned speculative excesses [WSJ].

Here’s the text of his speech [FRB]

Although the business cycle has not disappeared, flexibility has made the economy more resilient to shocks and more stable overall during the past couple of decades. To be sure, that stability, by fostering speculative excesses, has created some new challenges for policymakers. But more fundamentally, an environment of greater economic stability has been key to the impressive growth in the standards of living and economic welfare so evident in the United States.

Greenspanspeak Translation: because the economy is so stable and flexible, its more risky. hmmm…


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Frank Lloyd Wright Meets His Match, Martha Stewart Is Designing Homes

October 12, 2005 | 8:13 am | |
Source: WSJ

Its a Good Thing? [WSJ]

Martha Stewart is lending her expertise to one of the nation’s largest home builders, KB Homes in building 650 houses. They are expected to be about 4,100 square feet and offer high end amenities in North Carolina.

Priced at $200,000 to $450,000 they are more expensive than typical homes in the area. I would imagine her inspiration house in Bedford, New York is 15 to 20 times more expensive.

I am still trying to motivate myself to hand paint my holiday wrapping paper.



Oiling The Mortgage Machine

September 29, 2005 | 11:21 pm | |

pump

While the Fed has expressed concern about the risk of inflation by tightening short term rates, there may be a plus side to rising fuel prices at the gas pump [WSJ].

And the winner is? Housing.

Foreign oil producers are investing their excess dollars in the US debt markets which is expected to keep bond yields low, thereby keeping mortgage rates down.

Does this mean we will see housing prices rise at the same torrid pace this year like we have seen over the past few years? Probably not. The supply of housing has been rising and affordability has been tested as lenders pare back on higher risk loan products [Matrix].

mortgageequation

Low mortgage rates have become the constant in the housing equation. Now its time to focus our attention on supply.

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