Wednesday, 17 June 2009 05:00

Who are you going to believe, the pundits or your lying eyes, part 2

This is part 2 of "Who are ya gonna believe, the pundits or your lying eyes?" where I am exposing the true risk that the national and regional banks have in their commercial loan portfolios, not to mention how far we still have to fall in the housing market. This is focusing primarily on condos and rentals, but nearly every major class of real estate is still being significantly overbuilt, in the face of excess supply and rapidly dwindling demand among rampant unemployment and severely restricted underwriting requirements.

Before we begin with part 2, let's rehash the most popular condo pricing metric reviewed in part one

from a percentage perspective, and you can see 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.

Now the we have refreshed our memories, click play on this video which will give you a tour of JUST TWO BLOCKS of downtown Brooklyn, NYC - just over the Manhattan Bridge, about a 4 minute drive to Manhattan. It was taken with an ultracompact camera on windy day, so it is not going to win a cinematography award, but it will give you a clue as to whether housing has bottomed or not in the top real estate city in the world. In the meantime, I will be at Chelsea Piers Surfside Marina Thursday, June 18th between 4 and 6 for those who want to stop by and meet me to chat, then will retire Morimoto, the Sushi joint on 10th Avenue and 17th Street, or thereabouts.

After you have viewed the video, scroll down for the other visual goodies that I have for you concerning the condo market in the big cities.

Now, that you have an idea of what the banks have put several billion dollars into (and this is just Brooklyn, not Manhattan, the other three boroughs, Jersey, Philly, DC, Atlanta, Miami [whoa!!] LA, San Diego, Seattle, you should get the point by now), let's take a close up view of what all those prospective vacancies mean in terms of operation...

Let's Drilldown to a specific building to get a closer look at what is going on...


This is the Toren, one of many condo towers under construction competing with a large swath of extant buildings newly constructed and existing buildings as well as the majority of housing in the area, brownstone rentals/owner occupied multifamily and coops. Now, this building which has been under construction and development since approximately late '06/early '07, has approximately 285 units. They have been marketing and selling the units for a little over a year according to insiders. Thy are currently 47% occupied, with the disclaimer concerning the definition of occupancy state above. Most lenders now want a condo building to be 70% occupied before financing a buyer with a mortgage, primarily because the lenders need to protect their collateral. In the event that the building does not get sold sufficiently to people who can actually pay the maintenance charges, there will be no maintenance. This means that the building will rapidly deteriorate and liens will pile up (ex. water and sewer, taxes, etc.).

To give you an idea of the level of maintenance that may be required, let's take a peek inside...





As you can see, this is not what you would expect to be across the street from the one of the largest (and what used to be one of the roughest) lower income housing projects in the city. The social science experiment that is gentrification will prove interesting as NYC is broke, and as they continue to cut back on services and unemployment ramps up, the intersection between lower class, working class, middle class and upper middle class Brooklynites will get interesting. This geospatial intermingling of social classes is occurring all over NYC as gentrification has been rampant throughout the housing boom. The swank restaurant that BoomBustBloggers meet at in the Meatpacking District is directly across the street from a NYCHA housing project. We shall see what the next phase of this rolling social experiment called gentrification brings when things are not so economically heated...

Below is the Schedule B, the operating budget, for the Toren Condo tower, which as you can see, will require some maintenance. It basically shows state authorities how it will pay the buildings bills using the maintenance charges levied upon the buildings occupants. But wait, they are only about 47% occupied - and I'm not even sure if that actually entails closings or just "in-contract" deals, which are quite likely to fall apart. Then there is the large swath of developer owned condo units, which is probably counted towards that occupancy rate as well, but which is really not occupied unless a 3rd party is living in them and contractually obligated to pay the bills, after all the developer is on the hook for it anyway...


When these buildings were first conceptualized, the developers were eyeing over $1,000 per foot on the sellout. Now they are looking at $700 per foot and being forced to negotiate down. Many thought they were getting a bargain on Brooklyn property. It may have been relatively cheap 4 years ago, but it just got a lot cheaper. The units range from about $600,000 to about $1.7 million, asking price. This is after the ongoing housing and employment and Wall Street crash, may I add. My educated guess is that initially aimed for a lot more (about 35%), as you can probably divine from the pics.

So, looking at the document above, you can see where someone, somewhere is going to have to come up with approximately a million dollars+ a year just to maintain the building at 50% occupancy. That is assuming they can achieve 50% occupancy. A commenter in part one of this visual walkthough stated, "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.". My reply to him was, "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."

That opinion still stands. These developments were funded by regional and national banks. The PNCs, JP Morgans and Citibanks of the world. Many of the constructions loans are either sitting on balance sheets or conduiots whole or have been sold off as CMBS. They are literally ticking time bombs, for many billions of dollars have been economically wasted in an attempt to build "Park Avenue" across from the housing projects during the time of the Great Housing Bubble.

According to Realpoint, the bomb is already exploding. Below is graph from their report showing the trend in CMBS delinquincies.


After reading my articles such as this one, part 1 of the "Lying Eyes" (Who are ya gonna believe, the pundits or your lying eyes?), my work on GGP (GGP and the type of investigative analysis you will not get from your brokerage house,), or the subscriber reports on the the other REITs that were covered, is there any wonder why this graph is spiking so? I suggest all read the Realpoint report.

The time to pay the piper is nigh, and no, we have not reached the bottom in housing. As a matter of fact, we are about to enter into round two with this new onslaught of supply and the resetting/recasting of Alt A loans (se The banking backdrop for 2009).

Click image to enlarge


Click image to enlarge


Last modified on Wednesday, 17 June 2009 05:00