Housing Price Decline: You Ain't Seen Nothing Yet 37 comments
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The NYC metro area has the highest aggregate price index in the country and has declined the least. Many sales people in the area have preached (up until a few quarters ago) that NYC was somehow immune to the laws of economics. Well, BoomBustBloggers are smarter than that. NYC metro has also experienced the largest price decrease on record in the month of 11/2008, and that was before a serious wave of firings and layoffs.
Believe it or not, the aforementioned is the good news. The price index used excludes the vast majority of the most volatile housing stock in Manhattan (coops and condos) and the most ubiquitous housing stock in the outer boroughs (multi-family homes that can provide rental income). It also excludes investment properties and flips - a significant portion of NYC real estate. See "A reminder concerning popular housing indices". The Case Shiller index makes NYC real estate performance look downright rosy in comparison to actual reality!
Wait! Before you walk away from that computer screen all dreary eyed, there's more. Let's not forget that the 6 main employment drivers in NYC have very recently been damaged or utterly destroyed. NYC is a populous and monied city that just so happens to be the world-wide mecca in the following:
- Finance via Wall Street - Well, Wall Street still exists (as in the street with that little green sign on it) but the bulge bracket investment bank is now relagated to history and 40% of what was the bulge bracket are literally no longer going concerns. THAT, my friend, is a dramatic change in one year's time. To add misty eyes to misery, everybody that is left is firing, en masse! Relevant research:
Goldman Sachs' Bank Holding Company Fundamental Valuation and Forensic Analysis - Professional (267.49 kB 2008-12-18 10:12:37) and Morgan Stanley_final_040408 (1.38 MB 2008-08-30 06:37:54), Is Lehman really a Lying Lemming in Disguise and Is this the Breaking of the Bear?
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Media - The MSM (mainstream media) companies are dropping like flies, bankruptcy, restructuring, disappointing results, and yes...the "F" word - firing or if the PC prefer, "laying off"... See
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Marketing: Madison Avenue literally means Marketing. Companies are not thinking about marketing budgets now, they are thinking about SURVIVAL! Madison Avenue Marketing, both large firms and boutiques, are shrinking at a rapid clip.
- Insurance - Contrary to popular belief, Omaha and Hartford are not insurance meccas, it is NYC. That is why Eric Dinallo's name is mentioned so often when dealing with insurers and monolines. Subscribers of this blog know that many insurers are f#@$ed, and the insurance industry in general is entering a soft phase in terms of premiums - all insurance sectors - life, P&C and health. To make things worse, insurers are the largest investors in financial company securities Uh Oh! See The Butterfly is Released!) and commercial mortgages (see GGP and the type of investigative analysis you will not get from your brokerage house for a textbook view of a commercial real estate empire collapsing. Relevant research: Hartford Insurance Group Forensic Analysis - Pro (619.29 kB 2008-11-22 06:30:43), HIG Actionable Item (189.75 kB 2008-11-22 06:32:24), HIG Actionable Intelligence Update 8-12-08 (49.96 kB 2008-12-08 08:54:33),
Hartford Insurance Group spreads and counterparty/debt holders - pro (149 kB 2008-11-22 06:31:47), and Principal Financial Group Actionable Intelligence Note - Pro version (252.74 kB 2009-01-15 11:18:50). I will be producing a lot more in this space, for I feel the exposure to loss is truly, truly under appreciated. -
Residential and Commercial Real Estate - See (again) GGP and the type of investigative analysis you will not get from your brokerage house and well as
Macerich Forensic Valuation - Professional (344.92 kB 2008-11-28 14:47:43) and Forest City Enterprise Peer Comparison (198.98 kB 2007-12-24 15:42:06). NYC has the largest (in dollar terms), deepest, and broadest residential, commercial and office real estate market in the world. It has a long way to fall, and will bring the dependent services sectors along with it, ex. brokerage, law, leasing and agencies, management, construction and development. We're talking a lot of jobs, people!
- Municipal employment: As one of the largest and prominent cities in the world, NYC is one of the largest and most prominent employers. Like most other cities in this country, NYC management binged on the free punch that was bubblistic construction permits and property tax revenues, increasing it's budget to unrealistic levels and when the bubble popped, NYC budget went pop along with it. There are now probably over a hundred thousand jobs being reviewed for the chopping block. This was not hard to see coming. See
- Municipal bond market and the securitization crisis - part I
- Municipal bond market and the securitization crisis - part 2 (should be read by whoever is not a muni expert - this newsbyte may be worth reading as well)
What should you take form this heavily hyperlinked bulleted list? Massive, and I mean MASSIVE unemployment. I am a lifelong NYC resident, and I see it all around me. Friends in finance are getting laid off faster than Spitzer can apologize about pretty ladies. If you think the real estate market was soft last year, you ain't seen nuthin' yet. Much of the new construction condo market (the bulk of Manhattan inventory this year) was actually dependent on something as fickle and volatile as Wall Street bonuses! Unfortunately, powerful factions of our government are still concerned with maintaining the already popped real estate bubble then addressing the pertinent problems at hand, primarily employment (See I guess I need to go back to DC).
From the Real Deal, the most prominent of NYC real estate rags:
City sees record home price drop
New York City posted its largest monthly home-price decline on record in November 2008, according to S&P/Case-Shiller Home Prices Index data released this week. Home prices within a 50-mile radius of New York City fell 1.6 percent between October and November, the largest drop in over 20 years, and 8.6 percent year over year, according to the index. Since the data does not include condo or co-op units, the report primarily reflects home prices in the outer boroughs, Connecticut, New Jersey and Westchester County. But the New York metropolitan area still has the highest index value, at 186.81, of any of the 20 cities measured by the index. This indicates that homes in the area have held their value better than homes in the other areas. The index was set at a base value of 100 in January 2000, meaning that homes in the New York metropolitan area have appreciated 86.81 percent since then. Of the 20 cities surveyed, seven others -- Atlanta, Boston, Charlotte, Chicago, Dallas, Portland and Seattle -- also posted their largest recorded monthly declines in November. TRD
Now, as usual, I have a lot of "I told you so's" from as far back as 2 years ago. See...
Manhattan Real Estate is Falling. That's Right, I said it!!! And Beware Those with Short Term Memory
(Archived/Reggie Middleton's Boom Bust Blog/MyBlog)When the residential real estate market falls hard, it falls. New York (Manhattan, too) is different from many other regions because it is denser, harder to build new supply, and has a generally rich population.
Thursday, 04 October 2007
Okay, I have just recharged the batteries in my crystal ball: Back tested Home Price Trends - Histor
(Archived/Reggie Middleton's Boom Bust Blog/MyBlog)Thursday, 18 October 2007
Bubbles, Bank, & Builders - Pt IV: I can't believe this guy
(Archived/Reggie Middleton's Boom Bust Blog/MyBlog)Apparently, the Citibank (C) analyst that has issued several bullish reports on the builders during their downturn is at it again. Citibank has enormous analytical resources, considerably more so than me.
Monday, 24 December 2007
A reminder concerning popular housing indices
(Archived/Reggie Middleton's Boom Bust Blog/MyBlog) The National Association of Realtors released results stating sales actually rose .04% (statistically significant?), but were down 20% from last year with prices down across the board. Tuesday, 01 January 2008
Straight Talk From the Homebuilder CFO: The Coming Land Recession, Pt I
(Archived/Reggie Middleton's Boom Bust Blog/MyBlog) This is actually a two part series within a twenty part series from an anonymous guest blogger. I fully believe we are in a land recession.Thursday, 11 October 2007
Straight Talk From the Homebuilder CFO: The Coming Land Recession, Pt II
(Archived/Reggie Middleton's Boom Bust Blog/MyBlog) Thursday, 11 October 2007
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On Feb 02 04:33 PM User 345288 wrote:
> interesting, but what's the trade? is there a NY specific short real
> estate etf? I know of things like SRPIX but this is not NY-specific.
of people. That class of people is shrinking so now it's less
exclusive. This is true in many cities to a lesser extent.
1. spending cuts in services will reduce the quality of living and New York. New York has historically had more crime than Chicago, but in recent years, Chicago had more crime, which means New York might see a huge spike.
2. the rise in the dollar, and the economic trouble overseas, reduces the buying power of foreigners.
3. wealthy people will flee if the city and state raise taxes, or congestion fees, to raise revenue. Companies will relocate elsewhere, like Altria Philip Morris.
4. New York is losing its prestige premium as Barack Obama's rise moves power, influence and prestige to Washington.
On Feb 04 06:09 PM john1 wrote:
> Just more unpatriotic negativity from liberals who hate America,
> and the troops.
theie new (?) Masters.
On Feb 02 02:32 PM Yamu wrote:
> Good post, but rather than make me worried about the housing market
> this makes me ****scared about New Yorks's finances.
I hate to waste time responding to John1, but think about this:
"It is because I love America that I criticize the crooks, charlatans and morality free sleazebags (and I don't just mean Republicans, though the previous administration was disgusting by any measure). We all have friends who have been injured or killed fighting abroad. Intervening in the always volatile Arab world has not brought us more freedom, safety or sunny future. Our leaders have an obligation to the soldiers risking their lives to ensure their mission is clear, rationale, and includes an exit strategy. They, and their regulators, also have an obligation to protect investors, homeowners, and decent working people, from the excesses or corporate greed. They have failed us and criticizing, and learning from, their failures, is a very American, and patriotic, thing to do.
of people. That class of people is shrinking so now it's less
exclusive."
Exclusive?
Oddly enough, in NYC, just like Chicago, only 25% of people have a college degree.
Even though Man.Hat.Tan is one of the centers for the "financial geniuses" (along with "The City" in London), NYC still depends on a plethora of uneducated "serfs" to keep the machine running....
On Feb 02 04:09 PM jwinkler wrote:
> The real question is whether the economy there will rebound--before
> there is a critical mass of angry unemployed people in a densely
> populated area that are so desperate that they riot.
>
> Anyone remember the effect of the east LA riots? It deterred business
> for a decade in that area. Can you imagine the banking industry
> leaving NYC for the suburbs?
>
>
>
>
Yeah, that's why were told that caps on compensation won't work because anyone will take the fat bonus babies & their rich, fabulous book of clients. So the gravy train will keep on rolling, right Reggie?
If your industry and congress had more like you, we would not be in this mess.
Today, the wreckage of those purchases is strewn across the country, from Southern California to Austin, Tex., to Chicago to New York. Many of the 16 companies that bought Equity Office buildings are now stuck with punishing debt, properties whose values are plummeting and millions of feet of office space they cannot fill. ...
The impact could ripple beyond the companies that bought Equity Office buildings and the investment banks that financed them. If the owners cannot make their loan payments, it could create a financial crisis for the pension funds, hedge funds and insurance companies that hold securities based on Equity Office mortgages. ..."
www.nytimes.com/2009/0...
European markets were up about 6% for the week. Asia gained about 5%, while Latin America rose about 13%. The strongest sector this week was steel, which gained 22%. The weakest sector was oil, which lost about 3.5%.
The top three unleveraged ETFs this week were Market Vectors Steel (SLX), up 22%; iShares Dow Jones U.S. Home Construction (ITB), up 17.3%; and SPDR S&P Homebuilders (XHB), up 16.4%.
The bottom three unleveraged ETFs this week were PowerShares Financial Preferred Portfolio (PGF), down 9.4%; iShares S&P U.S. Preferred Stock Index Fund (PFF), down 5.5%; and iShares S&P Global Clean Energy Index (ICLN), down 4.1%.
This is all too ludicrious! Why would anyone be betting on steel, home construction and homebuilders at this point in time. We are still a year or two away from any rebound in these industries and for sure before they show any profit if they survive.
This make me even more distrust the markets and the ETFs!
Who is manipulating the results? Who is looking out? the SEC????
"In 2007, Sam Zell, the billionaire Chicago investor, sold a portfolio of 573 properties he had assembled over three decades, Equity Office Properties Trust, to the Blackstone Group for $39 billion. It was the largest private equity deal in history, but Blackstone did not stop there: it immediately flipped hundreds of the buildings for $27 billion.
Today, the wreckage of those purchases is strewn across the country, from Southern California to Austin, Tex., to Chicago to New York. Many of the 16 companies that bought Equity Office buildings are now stuck with punishing debt, properties whose values are plummeting and millions of feet of office space they cannot fill. ... "
www.nytimes.com/2009/0...
On Sept. 1 2007, I said:
"I noticed that many pundits are focusing on single family residential market, most likely because it is in the news so often. It is bad, very bad. I am an ex-residential real estate investor who sold off in 2005 due to fundamentals that were totally out of whack. It appears that many do not see how precarious the commercial sector has become, with many deals being done at 2-5% cap rates (net profit yields) in Manhattan and many major metro areas, which is absolutely ridiculous considering the risk and illiquidity of these deals. The compensation for these deals are coming no where near justifying the risk. I am sure the excessive liquidity coupled with significant demand caused the cap rate compression, but the buyers fell for it assuming liquidity and demand would continue for some time. Well, corporate liquidity has just dried up, and many are stuck holding the bag with buildings that are yielding as low as half that of treasuries, yet easily quadrupling the risk. Some are even selling at lower cap rates in successful flips (reference the Blackstone purchase of Sam Zell's portfolio, which was totally overpriced, yet Blackstone managed to flip much of the portfolio over to speculators, some of which actually flipped it over to someone else at a profit - ALL in a period of a few months). This has now become nigh in impossible, but in an attempt to raise the cap rates, commercial rents have skyrocketed to all time highs in the major metro areas, causing significant pressure on corporate profits (I have inside knowledge of this affecting MAJOR public and private firms who are looking to expand and are getting squeezed).
And now, on to small residential (single family and 1-4 family residential)..."
boombustblog.com/20070...
Then I said in December 2007:
"Of course commercial real estate is going to fall. Why? For the exact same reason residential real estate is falling. But, there hasn't been an oversupply of commercial real estate, you say. Well, the oversupply is not the core reason why residential is falling right now. Residential RE's problem is that easy, cheap money brought upon wreckless, imprudent speculation from players who were not well versed in the real estate game - and even those who should have known better. The current oversupply is a byproduct of that liquidity induced speculation. Why split hairs? Because the devil is in the details. The downfall of CRE is the rampant speculation that caused many to significantly overpay for assets that are quite illiquid and take significant expertise and time to improve (or even sell), even incrementally. Not only did they overpay, but they applied significant leverage as well, much more than the industry norm.
A Quick Commercial Real Estate Primer: Pricing Commercial Real Estate
There are several ways to price and value CRE, but the simplest and most straight forward is the capitalization rate (cap rate). "
boombustblog.com/Reggi...
Then I said later on that month in 2007:
"My first post on my blog in September warned about the coming drop in real estate prices. I revisited the topic a couple of weeks ago, as I prepared the research of a short position in the sector. Well, we are almost done with the research and the position and I will release a summary of the research and the performance (expected and actual) of the position after Christmas.
In the meantime, this is a tidbit gleaned from my studies. We literally modeled and valued 260 properties of a certain REIT (each model is about 65 pages long, and very detailed and analytical - in real terms, no fluff here) that came up in a scan for CRE participants with bad numbers. We canvassed brokers, institutional data sources, sellers and buyers (9 sources in total) to get a detailed understanding of the lease rates, climate, and sentiment of the geographic area of each individual property. This is probably one of our the most ambitious works this year, and makes for extremely informative reading for those who have a real interest in the sector. We covered 41 states 2 countries and a whole lot of cities, all accurate to within a distinct business district of each property, where available.
What I found was that, at least where this REIT operates, the commercial real estate bubble (yes, there was an easy money induced bubble) peaked in Q4'05, where the spread between new leases and existing leases maxed out at about $5.30/ft. This spread actually went negative in Q4'06, and that negative margin increased substantially."
boombustblog.com/compo.../
Then the work began with GGP:
"A couple of weeks ago I informed BoomBustBlog.com readers that I was working on a big project concerning commercial real estate short candidates. I stated last year that I was sure CRE was headed down, hard. Well, I am now ready to start releasing the results of my research over the next week or so. Unfortunately, the market has moved against the subject of my research fiercely as I was completing it, but it appears to be far from over. Who is the subject of that research, you ask? General Growth Properties (GGP). I have actually seen this company pop up in the media and a few discussion groups from time to time, but they have no idea what the management of this company has been up to. First, a little background on how I got here. Those who are not versed in commercial real estate valuation are urged to read my quick and dirty primer on CRE valuation .
I told members of my analytical team to screen the commercial real estate trust, service, and development sector for the usual suspects, starting with the the guys that purchased Sam Zell's flipped properties from Blackstone. I made some of the companies available via blog post and download: icon Commercial Real Estate Cos. (43 kB). icon Forest City Enterprise Peer Comparison (198.98 kB), icon Vonardo Realty Trust (146.49 kB). After and exhaustive screen and resultant short list, we chose GGP. I then instructed the team to canvass local and national brokers (4), databases (5) and data aggregators (several) to get the most precise localized rental and expenses figures possible. This data, as well as purchase dates, prices, management actions, capital improvements, etc. were used to plug into models such as this 33 page illustrative example, icon GGPs Woodlands Village (612.34 kB), to ascertain the true value of GGP's portfolio. We also measured and valued their development operations, joint ventures, CMBS financing, off balance sheet vehicles and master planned communities. Sum total, I now have roughly 2 gigabytes of "REAL" valuation data on my servers covering 260 properties owned or partly owned by GGP. A this point, I may know more about their operations than they do.
What is more telling is the window of understanding this opens into the commercial real estate space in the US. It is my opinion that most are extremely over-optimistic regarding the prospects for this space. "
boombustblog.com/conte.../
The whole story is hear (1,000's of pages), from $60 per share in Nov. 2007, to $0.40 per share now:
boombustblog.com/20080...
Well, I have another REIT short report warning coming out next week after the stimulus plan is released, as well as a bank and an insurer (check my track record in these matters: boombustblog.com/20090...).
Anyone interested is advised to enlist the RSS feed to my blog or two create a subscription (there's a free option for those who don't feel compelled to pay for my work).
Second - most if not all CRE CMBS securities had a 1.5% default rate in them - we are still below that rate (but admittedly will be surpassing it soon).
The real risk is that the CMBS market remains closed and the bulk of these loans will be coming due over the next 3 years (increasing by factors of greater than one - each successive year). If this market does not turn around we are in for a world of pain (everyone).
The reason you were right back in 2007 was because you wanted to find the antidote to being out of the RE market. Everyone else was drinking the coolaid because we were in RE market. We all new the music would stop. What we did not know was the compounding confluence of speculation, the CDS scam and amount of pure greed corruption in the market including govt. ie. fanni, freddi, barni etc. ("Never underestimate the greed of the other guy or govt. official"). They sold out the economy for chump change. What brought this whole thing down was artificial low interest rates being offered to below prime borrowers on short string resetting fuses . The developers took advantage (supply vs demand 101) Their goal is to sell as many units as fast as they can at the greates profit. You cannot fault them for that. However they should have taken better care of policing the system. They knew it was not sustainable and that 100% financing through Country Wide and others was going to collapse eventually. I live in the Silicon Valley and we are now at the begining of the slide in CRE. Our biggest issue is the illiquidity. If the bailout does not prompt lending. LOOK OUT BELOW. No miracle in the Hudson, not enough glide ratio. There is an old idiom " If you have no conflict of interest, you have no interest".