Wednesday, 27 May 2009 05:00

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.


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...


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.


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.


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.


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!


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.


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.


The bottom of the building...


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]


Another view...


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?


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


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.


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!


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


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...


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!


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.



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!



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.


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.


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.


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


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...


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.


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.

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Last modified on Wednesday, 30 June 2010 15:56