I don’t think I am cut out to be a developer.
While I get the hard work and analysis part, I’m missing the blind optimism part.
And no, I’m not blindly pessimistic either – during the boom years blog commenters periodically accused me of being a shill for the real estate industrial complex (I liked the phrase so much I bought the domain).
Blind optimism is what makes developers successful because everyone tells them they can’t do it. But it is also their downfall because builders build until they can’t build anymore.
Today’s New York Times article by Charles Bagli “Building a Tower of Luxury Apartments in Midtown as Brokers Cross Their Fingers” which announces Barnett’s 1,005 foot condo with a hotel at the base. The site is due south of the Essex House between West 57th Street, a retail corridor and West 58th Street, a service road for Central Park South (West 59th). I’ve got a “let’s consider reality” quote and graphic in the piece.
The project is the first major construction start in New York since the fall of Lehman Brothers in September 2008, and it is an ambitious, even risky undertaking. Unemployment still hovers at 10 percent in the city, which has only just begun to gain back some of the 150,000 jobs lost during the recession. Not so long ago, the real estate industry was right behind Wall Street and the nation’s automakers in crying for a federal bailout.
Access to financing determines when and how something gets built – in this case it was Abu Dhabi since US banks are not interested new luxury condo development given the excess inventory that needs to be absorbed first.
Barnett said “We think it’ll be the nicest project ever built in New York.” Given the proximity and the success of nearby 15 Central Park West – my vote for the best Manhattan condo ever built, I’m guessing that’s the comparison being made. Although recent sales there have topped $6,000 per square foot, the building fronts Central Park and straddles Midtown and the Upper West Side, I’m not so sure its a reasonable comparison to make but I do wish them well.
Remember I’m not cut out to be a developer.
(courtesy: CS Monitor)
Admittedly I am getting annoyed about the lack of closure on this credit crunch thing. Can’t we simply point fingers, have someone apologize but indirectly deny responsibility and then we can then get back to buying stuff and building extensions on our houses?
Make no mistake, the credit crunch is one big mistake. It’s called a systemic breakdown because so many in the economy played a role in our economic demise. Moral hazard, government backstops, bailouts, stimulus, bonuses, trillions, synthetic CDOs have been placed in the forefront of our thinking.
But no clear financial reform path is being taken – in fact it took an investment bank using swear words in an email to get Washington’s attention and break the political maneuvering. Each party is planning to oversteer the solution to their agenda which was part of the problem that lead to this crisis. While we all worry about “free markets” we have forgotten how important it is to create a level playing field. Without rules, free markets degrade to chaos and lack of investor participation. We are seeing this now within the secondary mortgage market, especially jumbos.
We can never remove the human factor from the problem since regulators were clearly asleep at the switch (since Clinton) compensation had perverse incentives favoring short term profits over long term viability, regulators were neutered by the prior administration (think prior SEC under Bush) so its dumb to have some sort of czar. It’s never one factor – it a combination of people, events, institutions and politics that light the fuse.
I am looking forward to some sort of meaningful financial reform. If neutrality isn’t baked into the system, then this is all a big waste of time. Regulators need authority and can not be influenced and investment banks can’t pick the regulator they want. Rating agencies should not be paid directly by the investment banks whose products they rate. Appraisers can not be fearful of their livelihood because they don;t hit the number, etc.
Here’s what it all boils down to now: blame and being sorry.
Another Jonathon Miller (no relation, but awesome name) and his wife are suing a large builder for not preventing flipping in their housing development which brought in “irreverent transients” who party loudly, park erratically and install unauthorized satellite dishes.
I’m not doubting those conditions exist and it appears to be a creative way to get your money back.
When the housing market collapsed, some contracted buyers abandoned deals. From the outset, the project exhibited “ghost-town-like” qualities, the suit says.
Looking back, the Millers say the developer should have worked harder to prevent so-called flippers from buying units. Buyers were supposed to stick around for at least 18 months.
Saying I’m Sorry
In particularly interesting Reuters Summit Notebook piece, People make mistakes, take Alan Greenspan and Captain of Titanic
Phil Angelides, Financial Crisis Inquiry Commission chairman, says he’d rather see some taking of responsibility than hear another “I’m sorry.”
“Personally I don’t see my role as … to obtain apologies. What I don’t hear is a sense of responsibility and self-assessment about what occurred. There seems to be a disconnect between the practices that people undertook and the financial collapse,” he said at the Reuters Global Financial Regulation Summit.
“I’m struck by the extent to which all fingers point away generally from the person testifying,” Angelides said.
When it gets to this point, its too late. Let’s try to be proactive with some sort of meaningful financial reform. Not more regulation, not fewer protections for neutral parties.
If we can’t do this as a country, well, don’t blame me.
He is a terrific speaker and is always guilty of providing nothing less than clear cut commentary on the economic world around us. Plus he likes it when I call him irreverent.
This time we talk strategic non-foreclosure, existing home sales, interest rates, going to zero and the dumbest smart people in the room.
Check out the podcast
The National Association of Realtors released their October 2009 Existing Home Sale Report and the news was positive and kind of weird.
Driven by the first-time buyer tax credit, existing-home sales showed another big gain in October with a strong uptrend established over the past seven months, while inventories continue to decline.
It looks like the uptick in sales last month has been eliminated with the downward revision this month.
Existing-home sales – including single-family, townhomes, condominiums and co-ops – surged 10.1 percent to a seasonally adjusted annual rate1 of 6.10 million units in October from a downwardly revised pace of 5.54 million in September, and are 23.5 percent above the 4.94 million-unit level in October 2008. Sales activity is at the highest pace since February 2007 when it hit 6.55 million.
The number of sales was up 23.5% over the same period last year and up 10.1% from August. Both saw unusually sharp increases, caused by the expiration of the tax credit (and then renewal and expansion), falling mortgage rates, rising foreclosures (falling prices) and improved affordability.
If you remove the seasonality adjustment, the number of sales was up 20.8% over the same period last year and up 6.6% from August, still significant.
“It’s an impressive increase and shows a lot of pent-up demand for housing,” said Dean Maki, chief U.S. economist at Barclays Capital Inc. in New York. “Buyers have enough confidence to take the plunge. The housing market recovery will be a durable one.”
I’m not clear how the recovery is durable since it is solely dependent on artificially depressed mortgage rates, federal agency bailouts and tax credits.
Median existing home price
Prices continued to fall as there remained a large market share of foreclosures and lower priced properties and condos receive the most interest from buyers.
The national median existing-home price for all housing types was $173,100 in October, down 7.1 percent from October 2008. Distressed properties, which accounted for 30 percent of sales in October, continue to downwardly distort the median price because they usually sell at a discount relative to traditional homes in the same area.
Listing inventory continues to decline.
Total housing inventory at the end of October fell 3.7 percent to 3.57 million existing homes available for sale, which represents a 7.0-month supply2 at the current sales pace, down from an 8.0-month supply in September. Unsold inventory totals are 14.9 percent below a year ago.
Whats kind of weird about all of this good news, is that prices are falling,low end sales activity surged, market share of foreclosure sales remains high and high end housing market segments are the weak.
The NAR press release seems to couch readers in their anticipated sharp decline in sales over the winter.
Here is my latest handiwork for the Huffington Post.
The article is below in full if you don’t want to click on the link:
Current Wave of Housing Euphoria May Extend Downturn
Jonathan Miller 7-30-09
The spring housing market is behind us and we are now fully ensconced in summer, able to sit at the beach, sip our drink and watch the waves roll in.
Waves of housing statistics that is.
Seemingly everyone from the consumer to the POTUS has been waiting for a rogue wave that will finally bring some good news on housing. In fact most of us are aching from bad news overload and desperately want good news or at least a temporary reprieve from the bad.
Like the closing scene from the 1973 movie Papillion where Steve McQueen’s character–when trying to escape from the island–determined that every seventh wave was big enough to enable him to float past the rip currents that surrounded the island.
The monthly gauntlet of key housing market reports from the past week show a rising tide of better-than-we-have-heard-in-three-years-news on the state of US housing market.
Here’s a recap:
July 22, 2009 Federal Housing Finance Agency news release headline: “U.S. Monthly House Price Index Estimates 0.9 Percent Price Increase from April to May.” This report reflects sales with conforming mortgages through Fannie Mae and Freddie Mac at or below $417,000 plus the high priced housing markets such as the New York City area that have a $729,750 mortgage cap. Housing markets that rely on conforming mortgages are expected to recover first because the that mortgage market has been the target of recent federal stimulus and bailouts. However the month over month price increase of 0.9% touted in the report headline is the first such increase since February. Although 5 of the 9 regions show a month over month increase in prices only 1 of those 5 regions had an increase in the prior month. In other words, this trend is not very compelling.
July 23, 2009 National Association of Realtors Existing Home Sales report headline: “Existing-Home Sales Up Again” The number of re-sale increased 3.6% in June from May, the third month over month increase in activity. The number of sales was only 0.2% below the level of last year’s activity in the same month. This was largely due the 31% market share of foreclosures, assumed to be purchased by speculators plus the impact of the federal tax credit for first time buyers which expires at the end of November. However, this seasonally adjusted sales 3-peat was also seen at the end of 2006 and the beginning of 2007 before sales activity fell sharply. In other words, this trend is not very compelling.
July 27, 2009 Commerce Department New Home Sale Index headline: “New Residential Sales in June 2009.” This is the report that got everyone excited because of the 11% increase in new home sales month over month and the largest such increase in 8 years. Floyd Norris of the New York Times points out that if you look at the actual number of sales in June, it was the second lowest month of sales on record since the metric was tracked in 1963. In other words, this trend is not very compelling.
July 28, 2009 S&P/Case-Shiller Index “Home Price Declines Continue to Abate.” The 20-City Composite has shown a lower annual rate of decline for 4 consecutive months and 13 of the 20 metro areas posted month over month increases but this is before seasonality is adjusted for. In other words, we expect prices to rise in the spring if they are going to rise at any point during the year. If seasonality is factored in, month over month gains evaporate. In the New York City region, the 20-city composite index doesn’t cover co-ops, condos, foreclosures and new development, more than half the sales activity. In other words, this trend is not very compelling especially after considering that along with the most recent month in the report, the index has declined year over year for 29 straight months.
In a stroke of irony, big media, which was on the receiving end of the real estate industry’s “blaming the media” ire for the past three years–as responsible for making the downturn worse–has taken the positive outlook and run with it. Nearly every major news outlet has begun to report each of these reports by cherry-picking and overweighting the positive elements results in a downright giddy tone. Over the past week, the general sentiment in news coverage is clearly moving towards the positive but mainly confined to the headlines.
As a reporter once told me (and I am paraphrasing) “Negative news only sells for so long – consumers eventually stop reading it as they become become numb to it.”
Perhaps this is best exemplified by yesterday’s kind of thin New York Times page 1 story on housing:
“3-Year Descent in Home Prices Appears At End.”
This was the headline that put me off a bit since the article itself wasn’t very committal to the notion that the housing market has bottomed. Perhaps this is why the web version of the article was titled with a more sedate headline that was more in sync with my view:
“Recovery Signs in Housing Market Stir Some Hope.”
Step back for a second and ask why would the housing market start to improve now to lead the economy?
If more people are losing their jobs and credit remains tight, how can we expect the number of sales and housing prices to over come this. Unemployment is still rising and is expected to continue rising through next year even though the recession could be over right now or close to it. Housing inventory is still high and the number of sales, exclusive of distressed asset sales is still low. Speculators may be on their way to becoming a force again in the market. Mortgage rates are expected to trend higher over the next few years with all the new debt taken on by the federal government. Credit is still very tight, and while there has been some discussion of loosening in mortgage underwriting, banks still aren’t enthusiastic about lending. There appears to be some easing on conforming mortgage underwriting but a chokehold remains on jumbo and new development financing.
Here’s the problem.
Sellers tend to “chase” the market when it is falling, unable to respond to the decline in values as quickly as the market does. If sellers take this positive news too seriously and don’t focus on the realities of their local markets, they may end up being over confident when negotiating a sale, losing the buyer and falling even further behind the market than they would have otherwise, eventually selling for less.
Luxury condo developers and especially the lenders behind them, many of whom are facing stalled projects, could experience a sense of renewed optimism from the recent depiction of the housing market, causing them to miss the market, eventually realizing a larger loss.
So let’s be clear. While I am hopeful that we will see a housing recovery at some point in the future, I’d rather it be real.
In the meantime, I’ll sit at the beach and count the waves.
To figure out how to fix it, you’ve got to understand what’s going on.
Brooking’s has a created a quarterly series of interactive reports on the 100 largest metro areas called the MetroMonitor:
The Metropolitian Policy Program has launched a series of interactive quarterly reports, the MetroMonitor, a barometer of the health of America’s metropolitan economies, ranking the nation’s 100 largest metro areas—which generate three quarters of U.S. output—on key economic indicators.
They look at a number of metrics in the largest 100 US metro areas.
My only criticism is their use of FHFA data which will overstate the recovery of housing since it only covers Fannie and Freddie data, while comprising 80% of current mortgages being issued, is outperforming the remainder. FHFA doesn’t address higher priced housing, often found in metro markets and are usually financed with jumbo mortgages. Only conforming mortgages have been addressed in the stimulus and federal bailouts. The secondary mortgage market for jumbo financing is essentially gone.
Still, its interesting to see how various metro areas stack up. For example, New York:
Regional employment has fallen 2.1%, compared to 2.9% in the US and ranked 34th out of 100 (1 being the strongest). However, wages have fallen 1.5% compared to +1% in US and ranked near the bottom at 97.
I had the pleasure of speaking with Barry Ritholtz of Fusion IQ and The Big Picture weblog. He’s a wealth of information and never pulls any punches in his characterizations of the current economic mess we find ourselves in. Listening to Barry speak about this whole situation and reading his book is much pretty much required.
The Big Picture is the leading financial weblog with must-read content and it boasts a huge following (self-included).
Barry recently released a terrific book: Bailout Nation: How Greed and Easy Money Corrupted Wall Street and Shook the World Economy. I highly recommend it.