Wednesday, 27 May 2009 01:00

Who are ya gonna believe, the pundits or your lying eyes?

Everybody in the media says the worst is over, and we have visited a generational low in March. I say to myself, how in the hell do they know that? I know there are no astute real estate investors who believe such, and it is the leveraged real estate, derivatives and the real assets which first collapsed the big banks in the first place. As long as the value of the real estate goes down, the value of all of the assets attached to it will go down - and they have a loooong way to go. Then you have the necessary correction in all of the other bubblicious assets - levered loans, credit cards, credit lines - both consumer, corporate and small business, commercial loans, leasing, etc. We ain't done yet, not by a long shot.

In September of 2007, when I first started this blog, I warned of over-reliance on the Case Shiller indices (see The Real Trend in US Housing Prices... ), due to the narrow definition of what a house was. It excludes semi-detached housing, condos, coops, multi-family and investor properties, not to mention new construction. Well it appears as if someone in S&P was listening, since some of the holes in the index have been plugged. There is now a condo index, which reveals some interesting trends, the foremost of which portends a Miami-like residential real estate depression in dense urban areas such as NY, DC and LA.

There are significant economic differences in building condo units vs single houses. For instance, once you are finished building a house you can sell it. So, if you are building a master planned community and are running into problems, you can still  sell homes off individually. In a condo building you are forced to finish practically all of the units before delivering them. In cities such as NY, you cannot pre-sell units before issuing a red herring, which is an informational document demanded by the state regulator. Cities such as Miami have no such protections, and you see now that has ended. The condo scene in the Miami/Ft. Lauderdale is downright ugly, and doesn't seem to be getting much better.  What most people don't realize is that the same thing is coming to the more dense real estate geographies, including the big daddy of them all - NYC! You see, condos and coops are 90%+ of the "owner-occupied" housing in Manhattan, thus those Case Shiller numbers that everybody is used to seeing really has nothing to do with the real estate in NYC, proper, and not much to do with NYC at all (which has a lot of multi-family brownstones, 2-4 family attached housing, condos and coops).

The most recent Case Shiller Condo Index is below, and it shows a big dip in the dense urban areas.


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I know many of you are saying that the dip is sharp, but not necessarily as sharp the single family housing index. Let's look at it from a percentage perspective, and you drops as high as 50%, with an increasingly strengthening downward trend...

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Now just imagine if you bought San Fran condo in 2006 or 2007with a 90 LTV Option ARM. You will currently be sharing a 125% LTV loan with your bank, thoroughly underwater, but wait - it gets worse, much worse...

What makes this worse than it looks (and it actually looks pretty bad) is that:

  • a) we have had a moratorium on foreclosures which has held significant inventory off  of the market, and most importantly
  • b) there is significant inventory unused, with rampant construction still in process. This is despite the fact that there is a LARGE amount of extant inventory currently unsold, and organic owners who are having a problem selling. Condos are very expensive to build and have been getting up to 85% financing from the banks during the bubble boom. These loans are usually classified as C&D loans, and then there are the residential mortgage loans on the consumer side that are used to buy these properties.
  • Don't forget that condos also compete with the single family homes that receive such a whacking in the Case Shiller Home index.

To illustrate the situation in NYC, I took some pictures on the way from my house to Chelsea, to show those who are not familiar with the markets to see for themselves what's coming down the pike.

Standing at Chelsea Piers, roughly 16 St and the West Side Highway, this is what you can see via line of sight.

Below you have a condo tower being built right next one that just finished construction but can't seem to sell. They are asking somewhere between $1,200 and $2,200 per square foot. Remember, this is the town that just lost two of its five major investment banks, and whose five top industries (where it happens to lead the world in each and every one) -  Banking/Wall Street, Marketing, Real Estate, Media and Insurance -  are all deep in the crapper, to put it loquaciously.

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Turn a few degrees to the right, and there is another condo tower going up, surrounded by,,,,, unsold condo towers.[Clarification: the silver tower is a new hotel/condotel, but there are a rash of condos surrounding it that can't be seen from this photograph.] Banks are now demanding 20% and 25% down, AND that at least 70% of the condo development be sold before they will finance a condo buyer. But this brings us to that proverbial chicken and egg question - which comes first? How do you get 70% fill if banks won't finance your buyers until you're 70% full? Well, you can drop the prices low enough for buyers to buy in cash. But wait, your business plan called for a $2,000/ft sellout, and your break-even is $1,800/ft because you overpaid for the dirt/shell/conversion because banks were giving you money during the boom times much too easily. On top of it, you've got all this damn competition. I know its sexy in the meat market (this particular area of Manhattan), but the laws of supply and demand still reign, even if prudence and common sense didn't.

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Oh, wait. Just turn a few degrees to the right, and on the next block there is another condo tower going up. You can see the size and capacity of these towers - easily a hundred or so units each.

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Driving down the West Side highway towards Brooklyn, a few blocks from Chelsea, you see...You guessed it, more large condo towers being built right next to other large condo towers being built, surrounded by brand new condo towers that aren't selling out, with cranes building more stuff in the background. [Clarification below: there are condos all over this picture, but the large structure in the center is an office building. Many side streets off of this route has new residential structures. The office building was mistakenly labeled, but let there be no doubt that there is rampany overbuilding in both the office space and the residential space] These pictures weren't taken at the height of the bubble in 2006 or 2007, they were taken YESTERDAY!

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Peeking down the side street of that same block, what do you thing we see (it's the only blurred part), more condos being built across the street from more existing condos, around the corner from even more and bigger condos.

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On the corner, what do you think they are building as the biggest structure on that block? You'd never guess it was more condos. That entire orange structure from corner to corner is a single condo development, all line of sight with the rest of these pics. Wait, I have plenty more.

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The bottom of the building...

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The next block or two down, another massive development, superimposed against 3 or 4 brand new condo developments. I will show you close up pics of a few to see how empty the completed buildings are, abutted against in process construction, all funded by the banks who are allegedly having the most profitable quarters in history. Yeah, I know this brother in Brooklyn who has this bridge for sale, real cheap.... [See the note above regarding this office building]

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Another view...

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I know its hard to believe, but guess what's across the street, down the street, and the next block or two over... Those cranes are building condos and office buildings, promising to add significant capacity to an already glutted market. It is the site that was the Twin Towers, pre- 9/11. Of course, across the street you can find brand new condo development. Guess who footin' the bill and the credit risk?

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Hey, look! More condos and office buildings...

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And directly across the street you will find a two brand new apartment buildings and the Squid's new headquarters right next to an older building. I bet those apartments and office spaces are just flyin' off the shelves. After all, you see how tight supply is just right across the street (pictured above).We could always use a few hundred thousand more square feet of office space in  soft market right after the squid just added a hundred thousand or so and leaves there older space to the glutted market.

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As we cross the Brooklyn Bridge (you know that same one that my man has for sale???) into Brooklyn from downtown Manhattan, guess what you see in the background. Okay, I won't make you guess. Rampant condo construction (yes, all of these pics were taken yesterday, not two years ago). Cranes right, front and center - surrounded by brand new condo developments. If you think the ones in Manhattan were moving slow, you should see these - and these Brooklyn condos happen to have some killer amenities as well. Don't underestimate them. Some developer wasted a lot of good bank money to get these structures up!

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So we get off that bridge for sale and head towards Flatbush Avenue, and guess what we find...

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That empty lot next to the apartment for rent sign, which is next to the unfinished condo development is the beginnings of... Come people help me out, what comes next. For those that don't know the urban development game, space is very hard to come by. You usually have to buy and existing building (with bubble bank money), tear it down (with bubble bank money), get plans and approval for a new structure (with bubble bank money), then build that structure (with bubble bank money), then solicit sales. Guess what step of the process these guys are in...

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Don't fret, because if you look across the street and down the Flatbush Avenue block you will see one brand new condo building (that can't sell out, but has some killer amenities) overshadowing not one, but two works in progress. There are enough condos in the 10 minute trip from Chelsea to downtown Brooklyn to sate a medium sized city!

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Three of four blocks down, you have a 6 block contiguous space of torn down buildings. What happened, a tornado? Well, sort of. It was a credit bubble! You see, Forest City Ratner (a big time developer in my neck of the woods that got pushed out of a big short position by GGP - the lucky guys) decided to build a new Net's basketball stadium here, as well as 6,000 condo units, and 4 office towers. This is a multi-billion dollar endeavor, partially funded by NY Empire Bonds. Of course this was during the bubble. NY ain't got no money no more! Thus far, all he managed to do was to tear down some (that's right, you guessed it) condos, piss off the community through belligerent use of eminent domain, and miss a few loan payments. That's right, he's defaulted already and hasn't even started construction yet. Forest City actually just completed an equity offering, teeming up with an investment bank (you know, the banks that they probably owe money to but are not paying) to convert this near worthless debt into even more worthless equity to swindle (oops!, my bad) I mean sell to unsuspecting widows who believe the shills on CNBC that say the worst is over.

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In the mean time and in between time, real estate is as brisk as ever. You know with the dearth of supply and the screaming pace of demand in this "green shoots" "V" based economic recovery I keep hearing about in the MSM!

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For those who don't know NYC, this is not grasslands. This space in the 5 or so pics above abutts the 2nd largest transportation hub in all of NYC (Flatbush and Atlantic Avenues- with access to LIRR, and at least a dozen subway lines, the largest hub is Grand Central Station in Midtown Manhattan) and is walking distance from Manhattan.

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More gigantic, empty condo towers, empty lots that are paid for with bank money and will try to be condos, and more condos. This is all (all the pics from the Brooklyn side of the bridge (still for sale if you know anybody) line of site from Flatbush and Dekalb Avenues, about 10 minutes from Chelsea, with condos littered all along the way - with the occasional (or not so) empty retail space in prime areas - with of course - brand new condos in the background.

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And off that very same corner, the historically significant Williamsburg Bank and Clock Tower, bought by some smart speculators to convert into... I'll let you fill in the blanks. If you do, you'll be more successful than they are in filling all of those expensively built (with bank money) blank condo units. There are a lot, this is a BIG building (the tallest in the borough of Brooklyn), surrounded by many other BIG condo units, interspersed between many condo towers under BIG construction. By now, I would assume that you're recognizing a pattern here.

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Moving down the street, retail business is still brisk. This company had probably been in business longer than I've been around.

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And on the next block, right off of the beautiful Prospect Park (I live a couple of blocks off of the park), you will find... MORE NEW CONDOS. This glass building happens to be a beautiful building directly across the street from the 2nd largest park in NYC and just minutes from Manhattan. It's been two years, and they still cannot sell all of the units. I have a lot more, but I don't want to get too close to my house. We don't want any uninvited visitors...

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If I get the chance, I will get the lenders of these projects stuck in limbo and post them to the board. I wouldn't be surprised if it wasn't the same two or three banks. This is not even the worst of it. Areas such as Williamsburg, Brooklyn (the new SoHo) dominated by small, medium and even large builders such a Toll Brothers, have managed to accumulate YEARS worth of unsold condo inventory.

Now, to refresh your memory, let's take another look at that Case Shiller condo price appreciation graph, which is purposely lagged by two months.

shiller_condo_index__change_-_april_09.png

What do you think will happen to those pretty, colorful lines as all of this inventory picture above (just a 15 minute or so drive) hits the market, competing with an unprecedented amount of foreclosures and near record setting unemployment?


I use to invest in real estate directly, right along the corridor that is pictured in this article. I had a condo property to develop back in 2004, and even back then I thought the market ws too heady and too crowded, so I decided to sell all off in 2005. What the hell are these guys  thinking in 2009? Well, they believe that a building built is more valuable than a dirt lot, or maybe they watch CNBC green shoots and truly believe that the worst is behind us. Either way, the banks that are backing these loans probably have a world of hurt coming. It is evidence such as this that led me to short the banks, builders and monolines in the first place. Now that so many of them have run up so far in price, I'm right back there staring hard - after all, has the root cause of their problems been mitigated? If you think so, I suggest you take a stroll through NYC.

Hey, I believe its worse in CA, NV and FL and just as bad in DC, Philly (all places I have looked personally and followed data on, but not recently) and Atlanta. I just don't think the numbers have hit yet.

What could make things worse? How about higher interest rates that backfire on the Fed's QE and ZIRP policies. Uh Oh! Hell's bells...

The Dow Jones Industrial Average declined 172 points, giving back nearly all of the previous session's rally, after Treasury yields spiked in afternoon trading. Financial, materials and industrial stocks were among the market's weakest sectors, but selling reached across the board. The yield on the 10-year note jumped above 3.70%, a level last seen in November.

For more information, see: http://online.wsj.com/article/SB124342098814558235.html#mod=djemalertMARKET


Last modified on Wednesday, 30 June 2010 11:56

31 comments

  • Comment Link Steve Thursday, 09 September 2010 22:04 posted by Steve

    So these banks are not stupid right (well not totally)?
    Somehow they know all this stuff will be back stopped. The Treasury will buy it at par or it will become Section 8 with shortfalls guaranteed by HUD!

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  • Comment Link Kenny G Saturday, 03 July 2010 19:47 posted by Kenny G

    I'm down about 15k in both srs and close to the same amount in skf a financial short..... both of which suffer from time decay.... waiting on armagedon it seems before they return anything close to what i have lost.... all due to government intervention in the markets.

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  • Comment Link Reggie Middleton Thursday, 01 July 2010 12:13 posted by Reggie Middleton

    More accurately put, "Spain is the US".

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  • Comment Link dennis Thursday, 01 July 2010 11:33 posted by dennis

    nice post. So...basically, we're Spain??

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  • Comment Link Reggie Middleton Friday, 05 June 2009 15:25 posted by Reggie Middleton

    [url]http://online.wsj.com/article/SB124415072032886639.html[/url]

    Through its subsidiary, HSBC Finance Corp., HSBC is a big holder of risky U.S. consumer loans, a toxic portfolio on which it has already taken more than $40 billion in impairment charges. This year, HSBC raised $18.5 billion in fresh capital and said it would wind down most of HSBC Finance, moving to close a bad chapter in the parent bank's 144-year history.

    But because economic and housing data suggest many more U.S. consumers are likely to default, analysts are wondering how many billions of dollars more the bank may lose on loans it currently records as good. "There is the potential there for a large loss," says Adam Steer of research firm CreditSights.

    HSBC entered the U.S. subprime market in 2003 with the purchase of lender Household International Inc. and quickly built up a large portfolio of assets consisting mostly of risky mortgage loans. As of March 31, HSBC placed a value of $90 billion on those assets, well above the $57.5 billion the bank believed the loans would fetch were it to sell them in the markets.

    The bank's rationale is that while things might look very bad now, and cash-strapped investors are wary of buying such loans, chances are good that its customers will ultimately pay the loans back. An HSBC spokesman said the bank understands the value of the loans better than the market, because it sees day to day how borrowers are paying, and the "vast majority" in fact do pay back the loans.

    .Mr. Steer, though, isn't so sure. In a research report, he and colleague David Hendler note a steady increase in the number of home loans that HSBC Finance has modified or "re-aged" -- meaning, respectively, that the bank lowers the payments on delinquent loans, giving borrowers more time to catch up, or tacks missed payments onto the balance if borrowers manage to make their current payments.

    As of March 31, the bank had modified or re-aged some $28.8 billion in mortgage loans, up 12% from the end of last year and amounting to 41% of such holdings.

    "They had to provide longer-term assistance in order to avoid foreclosure," Mr. Steer said. "We know from experience that this generally doesn't work."

    In one ominous sign, borrowers are already falling behind on the modified loans at a high rate. As of March 31, 24% of loans modified or re-aged since January 2007 were more than 60 days delinquent again, and 3% had already been written off.

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  • Comment Link Reggie Middleton Friday, 05 June 2009 15:14 posted by Reggie Middleton

    This cuts in significantly to the government proffered bank welfare. In addition, to continue the conversation above in regards to rentals and condos turning into rentals. For one there is so many condos that they can glut both the condo market and the rental market. In addition, it is not just single family and condo pricing that is on the decline.
    From the [url=http://therealdeal.com/newyork/articles/19879/elert]Real Deal[/url]
    [img]http://s3.amazonaws.com/trd_three/images/88085/chart_1.jpg[/img]

    The beginnings of the current real estate downturn could be detected a year before this fall's Lehman Brothers meltdown, a Citi Habitats data analysis of rental data shows.

    The average rent for a Manhattan apartment in 2008 was $3,679, down from $3,724 the previous year, according to the report, released today, which measures Manhattan's residential rental rate as per signed lease from 2004 to 2008.

    As long as two years ago, the dizzying rent increases of 2005 and 2006 had already begun to slow, the data shows.

    At the beginning of the boom, the report says, average Manhattan monthly rents increased only modestly. Between 2003 and 2004, the average rent for a studio grew 1.6 percent to $1,693, 2.5 percent to $2,380 for one-bedroom apartments and 5.5 percent for to $4,577 for three-bedrooms. Two-bedrooms fell 1 percent to $3,331.

    By the next year, the boom had begun in earnest, with average rents in three of the four size categories shooting up roughly 7 percent.

    Then, between 2005 and 2006, rents in every category spiked more than 9 percent. The average rent for a studio apartment in 2006 was $1,995, up 9.5 percent from $1,822 the year before. Rent for one- and two-bedrooms rose 9.1 percent, while three-bedrooms climbed a breathtaking 13 percent to an average of $5,534.

    By 2007, the eye-popping increases had begun to slow, though it would be another year before the Wall Street meltdown barreled in Manhattan. The average studio in 2007 was $2,129, up 6.7 percent from the previous year. One-bedrooms climbed 4.9 percent, two-bedrooms 9.6 percent, and three-bedrooms 1.7 percent.

    Though the full impact of the economic crisis wouldn't be felt in New York City until later, economic trouble in other areas of the country had begun to affect the market.

    "The economy started to shift," said Gary Malin, the president of Citi Habitats. "You had those years of unbelievable appreciation -- it got to a point where it couldn't be sustained anymore."

    Not surprisingly, rents in nearly all categories fell between 2007 and 2008, data shows. The average rent for a studio in 2008 was $2,080, down 2.3 percent from the year before. Two-bedroom rents fell 2.8 percent to $4,151 and three-bedrooms fell by .7 percent. One-bedrooms rose .9 percent.

    Actual rents are probably 5 to 10 percent lower, the report said, because the data did not take into consideration "net effective" rents impacted by popular concessions like a month of free rent.

    Average rental vacancy rates followed a similar pattern, dropping from 1.03 percent in 2005 to .76 percent in 2006, then growing to .97 percent in 2007. In 2008, the average vacancy rate jumped to1.42 percent.

    Malin said Citi Habitats is starting to see signs of improvement in the market, with a slight increase in average rental rates in May 2009 from the previous month, the first time since May 2008 that has occurred. He added that the company has done more transactions in May of this year than in May 2008.

    Still, that may be due to seasonality and the bevy of concessions currently available in the marketplace, he said, and does not necessarily mean the real estate downturn has passed.

    "I still think it's too early for anybody to say that we're out of it," he said. "Maybe the doomsday scenario has been inverted. Maybe when you come off that cliff and you're on a normal cliff it doesn't look so bad. But no one can definitively say the worst is behind us."

    [img]http://s3.amazonaws.com/trd_three/images/88111/chart_3.jpg[/img]

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  • Comment Link cube660 Tuesday, 02 June 2009 22:23 posted by cube660

    People always come here thinking that they have their, [i]I'll set that Reggie guy straight[/i] facts in order well enough to rebut your postings. Only to find out that they don't!


    Btw Reggie, I think the bankruptcy reference was to GM, not them personally.


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  • Comment Link RobieB Tuesday, 02 June 2009 09:52 posted by RobieB

    This conversation is very similar to all the ones I have had since 2005 telling people not to buy Real Estate until it busts. Most people thought I was crazy. Everyone else new more than I did. All they had to do was look into the point of view instead of accept the dogma. Reggie thanks for proposing an alternate point of view that could possibly benefit people financially and for being willing to to discuss your thoughts in an open and frank manner.
    All long as the Banks problems are masked this country will not be on firm footing. Reggies opinion in not popular he will not be invited to MSN NBC except to made fun of as a crackpot. Well Fargo has 50 Billion in non performing loans and yet it post a 1st quarter profit of 3 Billion. Non performing loans went up 20 Billion in the first quarter for Wells 70%. The loan modification rate for all the big banks is currently 15% of non perfoming loans total. All of these numbers were posted prior to massive layoffs. You cannot win a war until you know how bad it is going. There are more NODs total in the past quarter than at any time in the past 4 years. The battle is being fought by smart idiots who keep trying to hide their failure. Keep at it Reggie

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  • Comment Link Reggie Middleton Tuesday, 02 June 2009 06:15 posted by Reggie Middleton

    Well, first I would like to offer my condolences to you and your family. I am truly sorry that you are going through a bankruptcy. It is something that I really would never want to go through personally. I have been through hard times, so I know it is no fun. Now, that we got that out of the way, how do I address your rather biting comment?
    You are talking to a long term Brooklyn resident who specialized in downtown Brooklyn investing for many years, before, during and after the gentrification occurred that brought people such as yourself to Gold Street. I think I know what I am talking about. I make mistakes, and I apparently called an office tower a condo. Sorry. There are more than enough condos in the area to make up for the mistake. I was driving in my car snapping pics. I also said [b]condos, rentals, and office buildings in the area around WTC[/b] in the post. Go back and read it. No need to apologize, though.
    “The buildings you pointed out near there are actually rentals and were planned as such. The buildings that you pointed to in Brooklyn off the BK bridge are mostly Rentals more importantly they were planned as such. Your statement that the Condo building off the Brooklyn Bridge is empty. I live in it, 306 gold street, there are 303 apts, and 115 apts have moved in, 1/3rd not bad in this economy.”
    You have proved my point, although I am reticient to push the point given your stated financial situation, but you came on my blog with such an accusatory attitude, I feel I need to set the record straight. What year did the condo in Gold St. that you say you live in start construction? You say it is 33% full, which is effectively empty enough from a bank and a developer's perspective. How are the full maintenance charges for the building going to get paid when only 33% of the building is occupied after completion of the building, when owners are probably facing financial difficulty and potentially not even paying their share, and there is so much competition cropping up all around it? This is the reason why so many banks want a 70% occupancy rate before they finance a mortgage in a building. The Gold Street property has been in the works since about '05 -'06, the latest ‘07. It is mid-2009 and they can only sell 33% of their inventory, which is guaranteed below their breakeven point. When a significant repair needs to be made, and only 1/3rd of you are in the building and potentially not all of that one third are current on their maintenance charges, how does the repair get completed? Who pays for it? The developer may do it the first few times, but then what? This is the dilemma that all of those beautiful buildings are in. The entire area is dramatically overbuilt, and the laws of economic s do not change once you cross the bridge to Brooklyn. We are talking a lot of money to build a lot of buildings that are effectively an economic waste of capital.
    “If you really want to take statistics why dont you add all new inventory that came online in Brooklyn or Manhattan and see what percent of it compares to the entire market. The answer is going to be less than 2%.”

    I don’t know where you got this data from, but it doesn’t make sense. If it is true, then why is your building only 1/3rd sold??? In addition, I allege that the entire market is glutted. As I stated in the comment, many of these buildings are between 20% to 70% vacant, with many closer to the 20% side.
    Most of the construction that you see coming off the bridge ARE condos. They say condos for sale on a big banner in the front of the building. The very large developments that are rentals in the area were turned into rental properties because of the glut of condos. It was financial decision by the developers and/or forced by the banks. There are no "planned" rental buildings in that area that I know of. The reason... The asking prices for the development space were much to high to justify building rentals. The numbers didn’t work out, and they didn’t even come close to working out. That's why everyone went the condo route. The reason you have some rentals in the area is because they are trying to save the project. Now that prices are falling dramatically, economics of the deal are changing, but you are also not getting much more rental supply as well. Come to think of it, with a little foresight, many could have come to the conclusion that the numbers for condos didn’t work out as well. If I am not mistaken, considerably less than a thousand condos were sold in the entire area in the 5 years preceding 2003, and you have 3 times that much going up in a two or three block area in just one year!!! This could have been seen coming.
    “Downtown NYC office market has the 2nd lowest vacancy in the country only higher than midtown. NYC office space is at a premium because there is very little Class A product that is needed for trading and new tech industry.”
    If you haven’t noticed, the trading industry has been going through an upheaval as of late. There are much less players now than there was just a year or so ago. Even before that, the NYC class A office space has been trending down in price. It started in late ’07 and early to mid ’08. What happens when you add supply to softening demand? That is what is happening when you build more office space in a time when many potential tenants are cutting back and going out of business. Listen, the real estate is simply overdone. The evidence is everywhere. I sympathize with your situation, but that doesn’t mean that I will sit back and agree with you while blatant evidence to the contrary appears everywhere.
    “If you think NYC is down and out with a glut of condos and office space take a look around the country. Stop the scare tactics. No point. The US gov't is broke. We are actually going through a bankruptcy now that our kids are going to pay for. Dont worry, all the stuff you called bubble loans is being wiped clean by the fed, all that credit card debt is being wiped clean, The big GM car companies debt is also being wiped clean. No worries. Your kids will pay for it or maybe they write about it like you, maybe China will stop buying our debt. who knows. Stop feeding people the scare.”
    IF only it were that simple, my friend. I think this problem is rampant around many, of not most dense urban areas around the country. So you’re right, it is not just NY, That doesn’t mean this is a good thing, though. The guys that financed all of this rampant overbuilding will have to pay the piper, and will probably have to pay him quite soon.
    The government cannot “wipe debt clean”. We have a few regulars on this blog who are of a similar mindset. Let’s say I owe you a million dollars. The government then comes in and says I don’t. Are you out of a million dollars? Let’s say the government pays you the million, but then taxes both of us $500,000 to pay for the debt. Has the debt truly been wiped clean? Let’s say the government pays you $1 million for me, but then devalues the dollar 1 million times, so your million dollar payment is only worth a dollar now. Has the debt really been wiped clean?
    You see, there are rampant losses hiding in all of those overbuilt structures in downtown Brooklyn, Chelsea, WTC, DC, Atlanta, Pheonix, LA, San Fran, Chicago, Detroit, MA, and everywhere else. These losses will have to be taken by somebody. They do not just magically go away. There are enough losses to drive the participants out of business. The government cannot just come in and, as you say “bubble loans is being wiped clean by the fed”.

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  • Comment Link the what not Monday, 01 June 2009 20:56 posted by the what not

    Reggie,
    That is some very entertaining information you managed to pull together. The building that you were reffering to being a condo across the street from WTC is the new Goldman Sachs head quarters. The buildings you pointed out near there are actually rentals and were planned as such. The buildings that you pointed to in Brooklyn off the BK bridge are mostly Rentals more importantly they were planned as such. Your statement that the Condo building off the Brooklyn Bridge is empty. I live in it, 306 gold street, there are 303 apts, and 115 apts have moved in, 1/3rd not bad in this economy. If you really want to take statistics why dont you add all new inventory that came online in Brooklyn or Manhattan and see what percent of it compares to the entire market. The answer is going to be less than 2%. Stop the spin. Downtown NYC office market has the 2nd lowest vacancy in the country only higher than midtown. NYC office space is at a premium because there is very little Class A product that is needed for trading and new tech industry. Anyone can look at the S&P and case schiller and make doom and gloom assumptions. If you think NYC is down and out with a glut of condos and office space take a look around the country. Stop the scare tactics. No point. The US gov't is broke. We are actually going through a bankruptcy now that our kids are going to pay for. Dont worry, all the stuff you called bubble loans is being wiped clean by the fed, all that credit card debt is being wiped clean, The big GM car companies debt is also being wiped clean. No worries. Your kids will pay for it or maybe they write about it like you, maybe China will stop buying our debt. who knows. Stop feeding people the scare. Bottom line, we are in the worst economic climate since the great depression, and its going to have to be worked out (one way or another). Sink or swim, the US is the only country that has swam so long and so far. If you want to quit and write scary stories go pack your bags and move to Brazil. They have a surplus and less condos. Nice education about how development works. Not that you ever developed anything. Capitalism its good to build condos, its good to build office space. Maybe we should all just farm, live in a cave, hunt, who knows? I'm going to sharpen my arrow and take your advice. I'll see you hunting for lions and bears. Oh, I had no idea you knew inside info on Bear? hmmm.... your suspect.

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  • Comment Link Reggie Middleton Monday, 01 June 2009 20:23 posted by Reggie Middleton

    There is a new hotel in the background, but I definitely cannot vouch for the JPM headquarters being there (unless you mean across from the WTC site, actually office space is glutted down there as well). I am in Chelsea about 3 times per week, so I will make sure when I am there. As for condo construction, there are no less than two dozen in the one block contiguous area of the pics, so all one has to do is turn the corner to a side street if any one particular building is actually other than a condo. In addition, since the banks will be financing constrution whether it is condo or not, the fundamentals of the argument pretty much remains the same.

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  • Comment Link Frank Monday, 01 June 2009 17:57 posted by Frank

    I agree overall with your market assessment, but in a few of the first images you posted, the buildings are not condos. The largest tower you show is actually the new JP Morgan headquarters . . . we'll see. Of the first two Meatpacking district towers, one is the new Standard Hotel. It probably has a few condo/hotel units for sale, but that is a somewhat different market and those unsold units can be used as rooms. Of course the hotel market is also in the toilet, but that's another story.

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  • Comment Link Reggie Middleton Monday, 01 June 2009 16:59 posted by Reggie Middleton

    One thing I didn't make clear in the "Lying Eyes" post above is that most of those "just opened" condo developments pictured above are anywhere from 20% to 75% vacant, with most of the them leaning towards the 20% end.

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  • Comment Link Reggie Middleton Monday, 01 June 2009 16:56 posted by Reggie Middleton

    The guys at Zack's investment research finally agree with me:
    [url]http://www.businesswire.com/portal/site/google/?ndmViewId=news_view&newsId=20090601005733&newsLang=en[/url]
    [quote] Investors Seek to Make Owners Rent

    In some select markets, even with foreclosures still looming, bidding wars are actually occurring.

    In Phoenix for example, a large supply of foreclosed families who can no longer qualify for a loan has spurred investor interest to turn as many of these families as possible into rent-paying tenants in the very homes they used to own. The bidding war is generally from absentee buyers (investor or vacation properties), which currently represents 4 out of 10 homes sold in the Phoenix metropolitan area as of April. This is about double the level experienced for 2007.

    Homes that sold originally for $225,000, now have been sold for $80,000-110,000. Great news for the investor, unless the population contracts.

    Similar antidotal data appears to be occurring in the California markets of such as Carlsbad, Oceanside and Vista, but only at much higher prices in the $350,000-400,000 range.

    [u][b]For the banks such as (but not limited to) Citigroup (NYSE: C), Bank of America (NYSE: BAC), Wells Fargo (NYSE: WFC), US Bancorp (NYSE: USB), JPMorgan Chase (NYSE: JPM), their respective Other Real Estate Owned (OREO) levels may not expand as these homes sell, but we would expect the need for additional substantial write-offs and provisions from the valuation of these sold homes has been cut more than in half.[/b][/u] [/quote]

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  • Comment Link Reggie Middleton Monday, 01 June 2009 16:35 posted by Reggie Middleton

    Here comes those higher mortgage rates. It still boggles the mind how anyone can be bullish on banks knowing they still have sensitive assets backing all of this empty space on their books. High rates mean lower commercial valuation, higher DCF hurdles, less affordability for buyers (added to more stringent underwriting standards and higher down payments) and lower extant bond values.

    This is what things looked like while rates were actually going DOWN:
    [img]http://4.bp.blogspot.com/_nSTO-vZpSgc/SiLRb7Vcs9I/AAAAAAAAGMA/f1fIfJ5Plks/s1600-h/mm12.png[/img]

    See [url]http://moremortgagemeltdown.com/download/pdf/T2_Partners_presentation_on_the_mortgage_crisis.pdf[/url] for more on this.

    [b]Mortgage-Bond Yields Climb, as Cycle With Treasuries Returns[/b]
    By Jody Shenn
    [quote]

    June 1 (Bloomberg) -- Yields on Fannie Mae and Freddie Mac mortgage bonds climbed, likely pushing up interest rates on new home loans after soaring last month and adding to the hurdles for a recovery in the housing market and economy.

    Yields on Washington-based Fannie Mae’s current-coupon 30- year fixed-rate mortgage bonds rose 0.20 percentage point to 4.52 percent as of 12:15 p.m. in New York, according to data compiled by Bloomberg. The level, driven higher today mainly by rising benchmark Treasury yields, is up from 3.94 percent on May 20.

    Rising home-loan rates are helping to fuel a cycle where they head even higher as mortgage-bond investors sell Treasuries in order to hedge and to rebalance their portfolios, according to Chris Ahrens, head interest-rate strategist at UBS Securities LLC in Stamford, Connecticut.

    “So much of this has to do with what’s going on with mortgage portfolios,” Ahrens, whose bank is one of 16 primary dealers required to bid in Treasury auctions, said in a telephone interview today. “The tail of the dog is mortgages and that’s driving rates higher.”

    Last week, investors stopped contributing to the Federal Reserve’s effort to keep loan rates low, deciding it was no longer safe to purchase mortgage securities at lower and lower yields relative to Treasuries, according to JPMorgan Chase & Co. analysts. Investors stopped assuming the central bank would succeed in capping mortgage-bond yields, they wrote in a report, after that view drove spreads between the debt and Treasuries tighter, blunting the impact of rising government yields.

    Helping the Fed

    “The market did the Fed’s work for it,” the New York- based analysts led by Matthew Jozoff wrote in a May 29 report. “Not anymore.”

    The Fed’s plan to buy as much as $1.25 trillion of mortgage securities has so far this year helped about two million more homeowners to refinance than otherwise would have been able to, according to the analysts, who had expected consumers to be aided at a faster pace. The rise in loan rates last month undid about one-third of the increase in the affordability of homes to buyers, they wrote.

    The difference between yields on the Fannie Mae bonds and 10-year Treasuries widened 0.01 percentage point today to 0.87 percentage point, Bloomberg data show. The gap, which grew to as much as 2.38 percentage points last year, contracted to 0.70 percentage point on May 22, the lowest since 1992.

    Crashing U.S. home prices have fueled the first global recession since World War II. Home prices in 20 major metropolitan areas fell 18.7 percent in March from a year earlier, according to an S&P/Case Shiller index released May 26. The average rate on a typical 30-year fixed-mortgage rose to 5.23 percent as of early May 29, from as low as 4.85 percent this year on April 28, according to Bankrate.com data.

    Altered Durations

    As rates climb, the expected average lives of mortgage bonds and loan-servicing contracts extend as potential refinancing drops, leaving holders with portfolios of longer- than-anticipated durations. Investors then may seek to pare durations by selling longer-dated Treasury securities, mortgage securities and interest-rate swaps, sending yields even higher.

    Today, yields on 10-year Treasuries climbed 0.19 percentage point to 3.65 percent, up from as low as 3.09 percent last month on May 14.

    Mortgage-bond hedging is “a much larger threat to rising real interest rates than larger budget deficits and/or Chinese selling of reserves,” Alan Boyce, the chief executive officer of Absalon, a joint venture between Soros Fund Management and VP Securities, wrote in a report dated May 28 distributed by Drobny Global Advisors in Manhattan Beach, California.

    Falling mortgage rates and home prices drove a National Association of Realtors affordability index to 172.5 in the first quarter, the highest since at least 1986, from 125 a year earlier. A reading of 100 means a family earning the median income has exactly the amount needed to purchase an existing home at the median resale price using conventional financing.

    A $300,000 30-year mortgage carries a $1,684.59 monthly payment with a 5.4 percent interest rate and $1,564.96 payment with a 4.75 percent rate, a difference of more than $1,400 a year.

    To contact the reporter on this story: Jody Shenn in New York at jshenn@bloomberg.net [/quote]

    The Fed cannot win in a fight against the global bond market!

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  • Comment Link gjk313 Thursday, 28 May 2009 14:14 posted by gjk313

    Millionaires Go Missing
    Wednesday, May 27, 2009provided by
    Here's a two-minute drill in soak-the-rich economics:

    Maryland couldn't balance its budget last year, so the state tried to close the shortfall by fleecing the wealthy. Politicians in Annapolis created a millionaire tax bracket, raising the top marginal income-tax rate to 6.25%. And because cities such as Baltimore and Bethesda also impose income taxes, the state-local tax rate can go as high as 9.45%. Governor Martin O'Malley, a dedicated class warrior, declared that these richest 0.3% of filers were "willing and able to pay their fair share." The Baltimore Sun predicted the rich would "grin and bear it."
    One year later, nobody's grinning. One-third of the millionaires have disappeared from Maryland tax rolls. In 2008 roughly 3,000 million-dollar income tax returns were filed by the end of April. This year there were 2,000, which the state comptroller's office concedes is a "substantial decline." On those missing returns, the government collects 6.25% of nothing. Instead of the state coffers gaining the extra $106 million the politicians predicted, millionaires paid $100 million less in taxes than they did last year -- even at higher rates.

    No doubt the majority of that loss in millionaire filings results from the recession. However, this is one reason that depending on the rich to finance government is so ill-advised: Progressive tax rates create mountains of cash during good times that vanish during recessions. For evidence, consult California, New York and New Jersey (see here).
    The Maryland state revenue office says it's "way too early" to tell how many millionaires moved out of the state when the tax rates rose. But no one disputes that some rich filers did leave. It's easier than the redistributionists think. Christopher Summers, president of the Maryland Public Policy Institute, notes: "Marylanders with high incomes typically own second homes in tax friendlier states like Florida, Delaware, South Carolina and Virginia. So it's easy for them to change their residency."
    All of this means that the burden of paying for bloated government in Annapolis will fall on the middle class. Thanks to the futility of soaking the rich, these working families will now pay Mr. O'Malley's "fair share."
    Copyrighted, Dow Jones & Company, Inc. All rights reserved.

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  • Comment Link MikeNYC. Thursday, 28 May 2009 13:55 posted by MikeNYC.

    I live in Washington Heights, where my stabilized 2 BR is now at or very near market rate.

    I sure wouldn't mind paying less for one of those surprisingly luxurious condos after they go rental, or even roll into one of the soon-to-be-cheaper existing or renovated apartments, soon to be vacated by those moving to the luxury condos.

    I wonder how prices in Harlem and other Uptown nabes will fare as things shake out? I know there was a LOT of gut-renovations going on in East Harlem. It's still a sketchy 'hood, so I gotta think any reduction in policing, drop in transit services, increase in crime, etc., combined with the market pushing down prices, are gonna clobber those guys. If it didn't mean I had to ride the 6 train, I'd look there for a distressed owner needing a renter.

    I saw a handful of similar-looking condos, existing older stock, go up for sale dirt cheap on Cabrini the other day (decent looking 1 brs for a little over 200k.) I wonder if an investor is having a fire sale?

    One thing about the NYC market: it's a little calcified by people stuck where they are and afraid to lose their 'deals.'

    This downturn and market shakeout will provide some much-needed opportunities for some to finally change domiciles.

    Provided they, I, can keep our jobs....


    MikeNYC

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  • Comment Link cH Thursday, 28 May 2009 12:07 posted by cH

    Seems part of a lenders criteria for lending to mew prospective buyers on a new / existing condo project is based on deliquency rate of existing owners HOA dues. Seems more and more of the projects in PDX (elsewhere likely, as well) are now no longer open for normal lending due to the high HOA due delinquency rates within these condo's. My wife is a realtor and more and more she is hearing this...meaning you need to be a cash buyer for prospective clients.

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  • Comment Link Reggie Middleton Thursday, 28 May 2009 10:05 posted by Reggie Middleton

    To exemplify how much trouble I feel the banks are in, the 6 block empty space pictured above where the new Net's stadium, 6,000 (the number is now reduced, of course) new condos, 4 office towers, retail space and a park was cleared by Ratner (the developer) tearing down newly built condos that were just put up two years earlier.

    Listen here, you overpay for land to out Condos up, these Condos get bought out to be torn down so you can put new, new condos up, yet you can' get financing to get the new condos up since you are missing payments while tearing down the old new condos.

    Damn, those green shoots...

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  • Comment Link gjk313 Thursday, 28 May 2009 09:09 posted by gjk313

    Interesting photos...I live in the DC area (Maryland suburbs) and I could post a similar group of photos. The amount of new condos built here in the past few years is amazing and yes, more are being constructed now. I always am amazed to drive by the completed projects at night and see less than 25% of the units with lights turned on. Some of the buildings seem completely empty and they have been completed for over 1 year.

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