"this summer will be a bloodbath"....?

G,
I'm not a broker but, the summer will be bad for sales. The inventory will slowly climb and buters will continue to watch and wait. Most buyers that could actually buy(pay cash/loan) are few and far between and, have been on the watch for some time. I would rather watch the market bottom and begin to recover before I purchase. I don't have to buy at the lowest moment to win, jut near that moment. The key is to get near the bottom of price and interest rates.

thats buyers not buters. (buters are too slippery anyway)

I'm not sure what rental assumptions he could have made that would ever have made this a positive cash flow investment with 25% down. They must have been absurd rental assumptions.... Well I mean we know they were, because the rental market is no where near down 40%. The rental market is down 15% or so. Yes he also illustrates the leverage of real estate.

Well, summer is generally slow and couple that with an expectation of another nasty down wave in equities, and it has the potential to be as illiquid as it was in the 4th quarter. So, ask yourself how good/bad that is for sellers that MUST sell, or hit a bid.

I wrote about this in my last week broker state of the market discussion, and said clearly my thoughts on this summer:

"So, my view is that this countertrend pickup in activity (which is mostly foot traffic and not a surge in contracts signed) will not last for much longer. Once we enter the slower summer months, history will probably repeat itself and this market could get significantly more illiquid; similar to what the 4th quarter of 2008 saw and bad news for anyone that must sell. If this seasonal component proves correct, serious sellers will find it even more difficult than it is now and that may ultimately mean a bid will have to be hit. Therefore, I think the latter half of the 2nd quarter all the way up to the 4th quarter will show continuing sluggish sales volume and perhaps the second wave of adjustments in pricing that is only proven after the fact. Time will tell. Nothing moves in a straight line and there will be deals at every price along the way."

http://www.urbandigs.com/2009/04/countertrend.html

UD: what do you think about the quality of the summer listings? I am afraid that the best units reasonably priced will go before then, if there are indeed more closings than last quarter. Also, is there a possibility that units will be taken off the market if they don't sell by July?

Was talking to a friend recently who's NYC broker friend had told her that the industry was bracing for a wave of foreclosures. I certainly don't expect anyone to put weight behind my friend-of-a-friend story, but I've always considered the "Manhattan is different" argument regarding foreclosures to be pretty nonsensical. There was a ton of stretching and speculation in condos, and many of the buyers that looked like safe bets to co-op boards are in a world of hurt.

I'm waiting for the huge shock of building foreclosures to hit the system. I have no idea how long it will take, but it seems inevitable.

all depends on the seller's motivation. Some great places may be owned by someone not willing to take a 25% haircut. Others will. Ultimately, we will know when a seller must sell. Wait until you see the level some Classic 6s, 7s, and 8s, close for that are in contract now. Not all, but some. The gap depends on urgency of the owner to cash out and close out debts. Every situation is unique.

From a buy side, I would certainly not chase a quality apartment just because the owner deems it not worth of a 25% haircut, and thinks it should trade much higher. But that is just me. I would only go to a certain point, and let someone else's client bid against themselves if a seller is stubborn. No price point is immune here and the most affected market is the high end / mid high end here.

Rhino86 is right. He must not have been investing for cash flow, he must have been thinking flip. Or just not thinking. (disclosure: I own several rental properties, none in NYC)

Good point, Rhino re: absurd rental assumptions.
Good posts, UD.

I think some owners had no notion that many of their new neighbors were intending to do exactly the same thing and what that supply pressure would do to their rental prices as the new units added up(in their own building and the market in general). They may have come close to breaking even two years ago, today it's a bloodbath out there. For some mid-town flavor, pull up the Veneto and have a look-see.

Yes, UD, distress doesn't always wait for a prime selling season.

Your doctor can afford a $1.5 million condo? Wow, he must be one well paid doctor because I know off the bat that most doctors out there cannnot come close to spending $1.5 million on RE.

the summer is only 1.5 months away. I really don't see much changing between now and then to warrant a "bloodbath." RE is very sticky and it takes a very long time to change. It's like turning an aircraft carrier around 360 degrees.

alpine, because the market is generally so slow, if there is distress it may be far more apparent. distressed sellers may start chasing the very few buyers. it doesn't take that many, which is why declines can be very intense under certain conditions.

Urbandigs......" with an expectation of another nasty down wave in equities,"

whose expectations? how can you be so sure? if the market rallies does that mean RE will be better? I don't think it makes a difference which way the stock market goes, nyc residential RE is going down either way, the correlation within these asset classes is low especially in the short term...

I've been pondering the options presented by Fluter and I'm going with 'just not thinking'. It's apparent from the original post that Dr. Flipper didn't even understand the transaction he entered into. He laments not having left his money in stocks because supposedly safe Midtown real estate is down even more. Well, actually not.

Let's say that he bought the apartment when the S&P was at 1,500 or so. So now stocks are down something approaching 45%. Meanwhile his apartment is down the 25% or so needed to wipe out his equity. Last time I checked, down 45% was worse than down 25%. Problem is that Dr. Flipper took his lower risk asset and borrowed 75% against it, manufacturing financial risk through leverage and making his equity in the condo (now down 100%) riskier than that stock market investment that he could have made. The story of the real estate bubble writ small, when you think about it. If he had bought the stock on margin (even at the 50% limit that is allowed for equities), he would be pretty much wiped out too, but even in hindsight he compares the 3:1 levered real estate investment to a no margin equity investment. Apparently hindsight is not always 20:20.

all of my contacts on street and ex-trader buddies that I keep in touch with all expect another wave down. I agree. Im not so sure, Im not 100% confident, but I think its highly probable. Who cares though what I think. However, if another wave down does occur, and it happens over the summer or Fall, or whenever, how may that further depress buy side confidence during a period of time that I expect to be fairly illiquid no matter what! You never know how it may affect either a buyer or a seller's psychology.

If market rallies, Im sure it will cause some buyers out there to get more confident to pull trigger, but it certainly will NOT cause a mad rush of new buyers that to enter this market that othwerwise would not have. Fundamentals drive real estate, not stock markets. Though a stock market rally or selloff may enhance or depress confidence slightly. So I agree with you, In the end, it wont matter because this market will do what it wants until fundamentals improve.

"Dr. Flipper didn't even understand the transaction he entered into.....The story of the real estate bubble writ small..." Exactly.

"Who cares though what I think." I do.

ps, cpalms - hey, I have no problems publishing feelings, even if they involve equity markets and I happen to get timing wrong. Its not investment advice. But if we have another nasty wave down, how do you expect buy side psychology to be affected? Couple that with a slow market already, sure a pickup in traffic but not so much in deals being done, and the fact that we are about to enter the slow summer months and its not so hard to predict another few quarters of illiquidity.

As for stocks, yes I feel like current rally is a typical bear rally and the complacency that comes with it. Let it roll on!!! The higher it goes, the more fierce the next wave down I think will be. Just my feeling. I also thought VNO at $98 was a great short, explained why, and discussed that here in a thread about 9-10 months ago and got chewed out because VNO went to 101 in the days after I made the argument. I was called a chump and the guy that said it told me he would keep his eyes on VNO to see if I would be right. He disagreed. Well, VNO fell to below $30 only 3-4 months later.

http://www.streeteasy.com/nyc/talk/discussion/4510-streeteasy-board-a-primer

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urbandigs - fyi, I am a trader so no need to explain the basics to me. My point is that you make a trading call with such certainty (ie. "Short VNO" 2 days ago) that it someone listened to you, they'd be feeling the pain now. Like I said, stick to real estate and leave the trading to professionals (like me). I feel no need to dispense advice on a trade when I might be in and out within hours and may leave someone hanging not knowing if they should sell or buy more. Hopefully, you realize the fallacy of your rebuttal and not let leave some poor schmuck stuck in a bad trade because you offered BAD advice. The market has a wonderful way of humbling jokers like you (with respect to your trading tips). Take the advice and redeem yourself otherwise you'll continue to look like a chump...Best I leave it there chump but I will be watching VNO..."

HA! Professionals like him! yea right. VNO fell to $29, from $101, within about 100 days from that statement. Yes the market does have a way of humbling jokers like me with respect to trading tips. Needless to say, MAVEN never responded after VNO rolled over.

UD, I always love it when I'm not the only conspiracy nutter around. I don't know if you saw this, but it was (kind of oddly) found in an Yves Smith/Naked Capitalism piece today on the stress tests.

Yves here. A surprisingly large number of market participants are of the view that the current rally is at least in part the result of market manipulation. I can't recall ever seeing so much commentary to that effect. It amounts to an open secret. Even during the commodities run-up of last year, if you dared suggest there was a speculative component, you were treated as a conspiracy theorist. Now a fair number of commentators are making more aggressive claims, and they don't seem terribly far out.

about ready,

Did you remember to buy a new tin foil hat?

aboutready - yes I did see that and I must admit, some of my contacts are telling me exactly the same thing, that the equity markets are 'rigged' right now. I do not discount it and I dont really consider myself a conspiracy guy. Bear rallies happen, and they get crazy. But in this case I see many other types of stocks doing very weird things. For banks, its get the stock UP, and then raise capital!! You watch out! The govt wants them to raise money privately, and to do that, the stock MUST go up first. Lets face it, the fed has engineered this world so that banks can make tons of money! They are, and they should be. How long it lasts is another story. GS already sold into this rally, insiders are selling at huge levels. Im watching the market at the close and I am telling you, weird stuff is going on! It aint a normal market.

No, alpine, the old one is still serviceable, and in the interest of thrift, I've decided not to upgrade.

I think I just veered OT again, but it can be brought back. I think that a significant decline in the stock market may stop some people who were considering buying due to lowered prices in their tracks. The stock market itself won't drive the market overall one way or the other. But it is, almost oddly, strongly correlative with consumer confidence (and is even an economic indicator in its own right, so it contributes to rosier forecasts which lead people to think things aren't so bad).

ud: the way to relate stock mkt to the title of this thread is that 'if' the next leg down is to happen late spring/summer it might be very disorderly. it's due to several reasons (all shorts have covered since mar 6, mkt way overbought and liquidity providers have been crushed). if there's a severe dislocation in the stock mkt it's impact on RE psychology will be different than an orderly decline which people just get complacent about.

yes, agreed

Sumamation;
1) Summer will not be a 'blood bath' more like a significant flesh wound.
2) Late Q3 that wound should be infected.
3) Q4 we wonder why the simulus package(the medicine) is not helping.
4) Q1-Q2 2010 we have no choice but to amputate.
I wouldn't call it a blood bath just, a horrible experience punctuated by a miserable outcome.
That will, as a best quess, represent the flattening of price for this city.

Dr. Flipper will know what I mean.

Urbandigs "But if we have another nasty wave down, how do you expect buy side psychology to be affected?"

depends on the severity of the down turn....if we sell of 10% -15% not so much, it will just stay as bad as it is now, but I think the bad real estate market sentiment will begin to feed on itself.....however, if make new lows, yeah I think this would affect psychology quite a bit. I think if we go back below ~670 on the S&P that represents failures of major money center banks/ failing stress tests, etc. If that occurs, I think people will begin leaving NYC in droves - looking for jobs in other industries, cheaper cost of living, maybe even to escape crime, etc. That being said I think the S&P will be flat to higher through the summer and here is why:
-Interest rates at historic lows
- other than NYC RE, RE is starting to see a light at the end of the tunnel... interest rates at alltime lows, affordability high (cheaper to rent than own in many cities). Housing lead us into this mess, it can lead us out.
- continued negative sentiment (market climbs a wall of worry) - particular in the hedge fund community - they are already invested with a significant short bias. If fundamentals improve slightly the market will squeeze higher as they cover.
- the market is cheap - it sold off more than 50% peak to trough - the S&P has a 10 year average of about 0%. At some point there will be a reversion to the mean.
- Massive Government Stimulus - the PPIP and the rest of the alphabet soup be even moderately successful that will be a huge positive
- traditional savings vehicles (money markets, t-bills) offer virtually no return. buying the best companies in the world like JNJ at an 11 p/e and 4% yield is looking attractive.

I could go on and on, there are still tons of negatives out there and this economy is certainly not out of the woods but the hard trade right now is to be long, that trade more often right than wrong..

Prices are sticky in real estate, no way will you see a huge drop in prices over the course of two months. Even now prices are all over the place, yes prices are down maybe 20%, but if you are expecting another 20% this summer then you are saying there will be another massive shock to the system. Summer months rarely suffer shocks. However the fall is always a different story. I don't really understand why NYC real estate would suffer a shock anyway. It's not like people can hit a button and sell, sell, sell. Real estate prices are going to fall, but at a much a slower rate and it will take years and years to hit bottom. You know we will hit bottom when most real estate brokers are out of work, and cities stop relying on transfer taxes to fill their coffers. It's gonna be real slow and boring from here.

"- the market is cheap - it sold off more than 50% peak to trough - the S&P has a 10 year average of about 0%. At some point there will be a reversion to the mean." Wrong, the market is not cheap. The best measure in my view is a multiple of schiller smoothed eps, on which it is fairly valued, not even close to cheap. Read about it. This is not to call this rally over, or even debate the possibility that the stock market saw its lows... Just don't call it cheap on my watch, that is ignorant.

Besides, real estate is in a bear market. Therefore, if the stock market plunges, that will be bad for real estate. If it rises, the bear market of real estate will mostly ignore it. That is how bear markets work. To further your understanding, see [Nineties, Late].

Also, allow me to be bearish (ha). This June we will see the first MBA and undergraduate recruiting classes since the shit hit the fan. Bear and Merrill are gone. Hiring will doubtless be weak at the remaining COMMERICAL banks. Also hedge funds with high high water marks are typically not robust recruiters.

Back to the stock market. Real estate in 2007 was as stupid as the stock market in 1999. Tell me when the stock market will re-achieve those highs... And now tell me when you expect real estate to re-achieve 2007 highs...Then tell me its a good investment now. Alpine, don't bother.

"It's gonna be real slow and boring from here."

It will be real slow and boring until a developer somehow decides or is forced to sell condos at $600/foot in below-96th Manhattan. Then the world can change in a hurry...Yes in as little at 1.5 months Alpine!

Foreclosures won't happen until the bid for an apartment is below the remaining mortgage, and the seller can no longer afford to carry the apartments cash flow. Considering that only 15% of buyers bought at the 2007/2008 peak. The bid is perhaps down 25% to 30%, and some mortgages were only 20% down. But what percentage of those buyers have "changed situations" did not have an extra two years of cash flow on the side for a rainy day. Changed situations -- perhaps 10 to 15%. Not having an extra two years of cash flow, perhaps 25%. So, we only should see 15% * 12.5% *25% = 0.5% actually going into foreclosure right now.

As time progresses and the changed situations go up by about 5% (people have to move, get laid off, or die), and people deplete their rainy day funds, and if bids drop another 10%, we will see more underwater mortgages and more people forced to sell. But this is in the future. You can extrapolate out the numbers to maybe 2% or 3%, and at that point perhaps a feedback effect takes hold as priced decline and more mortgages are underwater compared to the bid, leading to more foreclosures.

In the interim, people hit bids on the market from regular negotiated buyers because this is how they maximize the remaining value in their declined investment.

Yes, and each bid hit removes a bull from the buyer pool at a given level. Over time more foreclosures and lower bids. Also, fewer fresh buyers through the finance industry. Wow this can get really bad over a long long time.

Keep in mind that listing tend to drop in the summer as people who have kids need to be settled by then for the September school year. Therefore, supply will probably be more limited than it is right now.

Yeah I doubt people will be all about their showing convenience this summer. That is a very bull market consideration.

"He also laments that if he had put his 25% downpayment in the stock market, he would have taken losses, but would not have been completely wiped out, as he has been in "safe" midtown real estate."

Dr. Flipper can lose more than his 25% down if the banks seek a deficiency judgement.

This would be unfortunate, but not disastrous, if Dr. Flipper actually set up his investment to cover its monthly nut (and then some), like even the most unschooled Italian gardener would understand. Classic bull bullshit about how the market is down 50%...Americans can't do simple math its pathetic. Ohhh leverage, can you explain that to me again? Dr. Flipper, if you paid cash for that piece of shit condo, you're income yield would probably be 2%. Sound low, you effing dope?

Rhino...."just don't call it cheap on my watch, that is ignorant."

the p/e on the S&P is currently ~10, the historical average is 15 therefore 10 is yes (it peaked at ~45 in 2000)...Cheap

here is a good piece that uses Schillers data that concludes that, yes, the S&P based on p/e analysis is...Cheap

http://www.news-to-use.com/2009/03/s-500-valuation-analysis-near-bottom.html

Rhino..."Also hedge funds with high high water marks are typically not robust recruiters."

allow me to further your understanding. All hedge funds have high water marks. It is the measure in which they determine whether they will be paid their carry (typically 20%). Many hedge funds these day are below their high water mark therefore unable to receive their carry thus in your estimation not robust recruiters (are they ever?, Paulson employs 70 people). thought you would like to know, now you can go back to being an asshole.

Cpalms, there are two different ways to report earnings. They traditionally were very close. Now not so much. Guess which ones the analysts like? Do you really think that over the next year or so those certain expenses aren't going to continue to exist?

Excluding certain.....

Panacea to the market. Up to a point.

Oh, and Cpalms, I would always lead with the debt markets before the equities.

Cpalms, thanks for the article based on the S&P 25% ago, shithead. And it was 11x, not 10x at that point, but you are close enough to only be wrong by 35% with your 10x. Also, the hedge fund industry did quite a bit of hiring - sure, not any one firm - but that would be obvious to most readers. Further, no high water market exists until a fund has a down year, as most did last year (average was -15% or so). Most fund don't have a high water mark in a typical year. So what was your point?

man, you jackasses will quibble about the most miniscule shit. the p/e on the S&P right now is 10.57. http://finance.yahoo.com/q?s=spy Historically, this would indicate that the market is relatively inexpensive and that it would be difficult to use market valuation to as a reason not to be long (obviously you could come up with several other reasons). Even with the rise in the S&P over the last month or so it is still trading at a 10-11 multiple - in other words inexpensive. unless you argued that earnings estimates are unreasonable high. But given the slew of earnings (beats) we saw last week the bar has already been set extremely low. If you actually read my original post I never said the market was a screaming buy. Just that it looked "cheap" perhaps the use of the word cheap was slightly overstating my case. you got me.

High water mark definition from Wiki - sorry Rhino, but wrong again...

"High water marks
A high water mark (or "loss carryforward provision") is often applied to a performance fee calculation. This means that the manager only receives performance fees on increases in the net asset value of the fund in excess of the highest net asset value it has previously achieved. For example, if a fund were launched at a net asset value per share of $100, which then rose to $120 in its first year, a performance fee would be payable on the $20 return for each share. If the next year it dropped to $110, no fee is payable. If in the third year the NAV per share rises to $130, a performance fee will be payable only on the $10 return from $120 (the high water mark) to $130 rather than on the full return during that year from $110 to $130.
This measure is intended to link the manager's interests more closely to those of investors and to reduce the incentive for managers to seek volatile trades. If a high water mark is not used, a fund that ends alternate years at $100 and $110 would generate a performance fee every other year, enriching the manager but not the investors.
The mechanism does not provide complete protection to investors: a manager who has lost a significant percentage of the fund's value may close the fund and start again with a clean slate, rather than continue working for no performance fee until the loss has been made good.[10] This tactic is dependent on the manager's ability to persuade investors to trust him or her with their money in the new fund."

More on earnings (lot of lipstick being put on those pigs):

http://ftalphaville.ft.com/blog/2009/04/24/55058/equities-still-a-bubble-and-equity-guys-out-of-this-world-bnp-paribas-says/

From the BNP report quoted:

Over the past equity bubble decade, it has become fashionable for equity analysts to concentrate on Operating earnings as opposed to As Reported earnings, which factor in write-offs and restructuring charges (Charts 1 and 2). While the difference between the two measures was insignificant until the internet bubble, that difference has grown significantly to the extent that operating earnings look like numbers plucked out of thin air with little resemblance to economic reality. As credit analysts, we are taught that, for a given revenue base, rising costs lower profits, raise leverage and lower creditworthiness. How equity analysts can ignore this fundamental credit analysis is unfathomable to us.

makes sense that the times reports that bonus accruals are at 2007 level. i guess when you opt for denial you gotta go the whole way. "what dead body lying there are you referring to officer? i don't see anything. whatever are you talking about?"

Cpalms, you use a lot of words to explain how a market can trade at 10x earnings, rise 25%, and then be trading at 10.57x, but something doesn't add up. You mix and match normalized and actual eps, that may be your issue. On normalized eps of around 60 from Schiller, we are trading at 14x, which is not cheap. Get it finally? At 680 on the S&P we were trading at 11x, which was the high end of cheap. Then the market went up 25%. Get it? Seriously. These figures are all from your articles. 14x is not cheap.

Also not sure why you are trying to educate me on hedge funds. Have you ever worked at one? I have. My original point is hedge funds hired a lot of people from 2004-2007, and now they are not. They are likely on net releasing people. One of the reasons is after they lose money in a year, like most did in 2008, they need to make up that loss before getting paid their performance fee. There is no high water mark until a loss is made in a year. This is actually what your cut and paste says. My point was we will continue feel the impact of banks and hedge funds hiring fewer professionals, which had previously offset (and then some) the impact of a natural outflow of families in Manhattan.

"Representatives of several of the largest banks said much of their compensation budget covered expenses other than bonuses, like salaries, health care, pension plans and severance."

SEVERANCE? Did you say SEVERANCE?

On an As Reported basis, the market is trading at 30x. During most severe recessions, the market trough is around 7-8x.

Haha... that's why generally speaking I like the normalized concept. In hindsight clearly the 11x normalized was a trading opportunity. Now that we're here at 14x its at best a place where it is conscionable to have your 401k contributions allocated partially to equities. That said its kind of tough unless you think this recession is way overblown to see 14x as a good spot to invest.

And those pesky insiders are calling foul on the rally:

http://www.ritholtz.com/blog/2009/04/beware-insider-selling/

So many folks bragged about the investment potential of RE due to leverage.

They simply missed that it increases your losses as much as your gains.

Whoops.

"They simply missed that it increases your losses as much as your gains."

Yeah! And, ya gotta pay it back! And, if ya don't pay it back, that's bad, too. A little bit of leverage is OK, too much, not so good.

Its true though, about the leverage. Our government stacks the deck in favor of real estate. If you buy right, you can do so much better than stock. Have to be sure you can make your payments though.

"hedge funds hired a lot of people from 2004-2007, and now they are not."

It is oikkely that hedge funds will have to hire people in audit and compliance capacities that they never had to before as the focus on regulation zooms in on them. This isn't going to be a huge wave of hirings, but could have some positive impact when looked at the total number of people hired in the industry if each firm needs to hire another 3-4 people on average times a couple of thousand firms.

oikkely = likely...sorry about that.

Hundreds of hedge funds are LIQUIDATING. 70% lost money in 2008) meaning minimal fees and they have to make up the losses (meaning minimal fees for years)

Many others are laying off and subletting space.

Sorry, but if you're thinking hedge funds as empployers in this town are anything but collapsing, you are in denial.

Waverly compliance people are not the buyers of Manhattan real estate, and every hedge fund (of the survivors) does not need to hire 3-4 people. The market is just hosed. There is no way around it only conjecture about how low. Also no debate on whether it stops at this level.

yo dwell/waverly!

are there any more hedgies around? I thought they all went to Dubai and ended up being the Sultans' boy toys :)

re: Manhattan is different: yes and no.

It certainly is different in the sense that you haven't really seen much if any real foreclosure activity (and I'm not counting anything where the foreclosure auction doesn't actually take place), whereas you've seen TONS of it in LOTS of other places.

But it's not as different as most RE professionals want to pretend it is, because when those foreclosures do start, things are going to STOP being different.

I would also like to point out something from earlier in the thread (see post by buddah 2 days ago): it's not what people bought at, it's what their mortgage is at. Way back in ?2002? when NASDAQ took the big shit, Greenspan was testifying before Congress and for once someone asked an intelligent question. they said "Chairman Greenspan, you've been telling us the reason why our economy is so robust for years is the "Wealth Effect". With NASDAQ dropping from 5,000 to 2,000, won't that disappear?"

The next words out of Greenspan's mouth made a chill run up my spine, and it's when I first realized that whenever the bubble popped it would be Armageddon. he said "We've been studying that extensively and found that it's not the stock market profits that people have been spending. they have been tapping the equity in their homes and that is what they are spending". In other words, as the market rose and rose, people were not building equity, they were spending it.

What is so important about that? Well, up until the early 80's, generally speaking the average American who owned a home had like 90% of their net worth tied up in the equity in their homes and didn't directly "play" the stock market. That changed rapidly throughout the 80's and even up until today. in fact, what you've had in a lot of cases is people pulling the equity out of their houses to use as capital to play the stock market.

Now, under the "old way", budda would have been correct: you take a look at the price/time graph of housing prices (assume it looks at least a little like a bell curve) and you draw a straight line back to the place where it intersects the curve 'the last time". only people "above the line" are in the "at risk" category, because the others only lost paper profits and the market had not fallen far enough that it went even below where they bought at years ago.

But today things are different: with everyone and their cousins doing cash-out refi's for years, there's a shadow curve to that price curve: the debt curve. now, you didn't use to really need to pay attention to that curve when people weren't doing cash-out refi's, because you knew it was simply 20% to 40% below the sales prices 9based on average % cash in purchases). NOT ANY MORE!!!!!!!! now, even people who bought properties at 10% of the current market, IF THEY DID A CASH OUT REFI (which is a HUGE percent of the market) their risk of foreclosure isn't based on what they paid, but what they refi'ed at.

In other words, even though budda is correct that "only 15% of buyers bought at the 2007/2008 peak" you also have to ADD all the people who did cash out refi's which made them look like they bought at those prices. Now, I don't know how many it is, but I'll bet it's up to 3 to 4 times that 15% number.

There is also a VERY important concept in foreclosures which for some strange reason no one ever seems to talk about: people who have done cash-out refi's are much more likely to walk away from properties than those who have not. This is one of the reasons that in most states, a residential primary residence mortgage is NON RECOURSE!!!!!! (since NY isn't one of those places, most NYers don't know about this), but once you refi....... it's a full recourse loan. Let me give an example which will illustrate my point:

You have 2 "identical" units in a building (let's say one on top of the other with n difference in view and pretend they are worth exactly the same amount). Guy #1 buys his unit for $100,000, it goes up to 800,000 in value, he cash out refi's at $600,000 (75% LTV). Guy #2 buys at $800,000 and takes out an initial loan at $600,000.

The market falls so that both units are now worth $500,000. Guy #1 is about 10 times more likely to walk away from the property and hand the keys to the bank. Why? He made his profit. He's got $500,000 in profit sitting in his pocket and for that amount of money he's willing to take the hit to his credit score. OTOH, in Guy 2's mind, he's got $200,000 "invested" in this apartment and he's going to hold on as long as he can for dear life.

If you doubt this is the psychological truth, simply look at all the threads on here with people making all sorts of excuses as to why they shouldn't walk away from their 25% deposits on new construction which they haven't closed on yet, even though they know the current market value of the unit is less than the balance they will have to pay at closing.

Do a lot of Manhattanites refi their coops? Do coop boards need to approve that?

yes and yes...we refi'd a number of times over the years and it requires that the co-op board signs a recognition agreement.

i will never forget the first time i heard about cash out refi. i told everyone i knew about it and we all laughed thinking about how crazy it seemed. ah, the good old days.

Christ, more reasons for me to be bearish. It seems so clear I must be missing something. We saw a couple from our rental building out with a broker. I guess that's why the market moves so slowly. We will weed those out slowly. Foreclosures and auctions will have to hit these condos soon. Maybe one day people will look back in wonder at the days it cost a multiple to buy something in NYC vs. Boston or Chicago.

i can also remember the famous co-op board meeting where the managing agent explained to us that the underlying mortgage on our building was too low and that we should cash out re-fi that as well. i was the only dissenter in that argument---we blew all the money on the lobby which half the people in the building hated. ah....

What makes a mortgage too low? Did she do some efficient capital structure analysis? Ha. I guess theoretically if you spend the money right and get a low rate, it could be additive to value. Although, low maintenance seems the most additive to me and sounds like to you as well.

"Foreclosures and auctions will have to hit these condos soon."

anybody here knows whether in manhattan the banks can make a deficiency judgment? for the 1st and the rest (2nds, helocs, ...)?

Admin - in NY, unlike a lot of other states, home mortgages are not "non-recourse" (I know, to many negatives). However, in the THOUSANDS of Coop and Condo foreclosures i have been part of over the last 20 years, only ONCE did a bank actually go after the debtor, and it was more for fraud in the original loan than the deficiency judgment.

But aside from that, there's something brewing which is a much bigger issue now than it used to be because so much higher a percentage of residential units are Condos now: in a foreclosure on a Coop, the unpaid maintenance comes BEFORE the share loan (Coop Mortgage). However, in a Condo, the first mortgage comes BEFORE the unpaid Common Charges. So, we may see Condo Associations going after liens for unpaid Common Charges well before banks going after deficiency judgments for this reason: for any national bank, most of their loans were in states where by law they were non-recourse. it didn't make sense (and still may not) to set up a whole department to go after deficiency judgments if in most states they couldn't collect on them any way.

But in NY, foreclosing takes a long time (fast is like 9 months, usually over a year). plus they don't start to foreclose the second you miss one payment. But if someone is walking away from a Condo, odds are they aren't only defaulting on their mortgage, but their common charges as well. So, if the process takes over a year, the condo loses over 1 year's worth of Common Charges from that unit. Since we are seeing a decent amount of "small" buildings built with larger apartments and still full amenities, the Common Charges tend to be fairly high. Well, think about this scenario: some reasonably small but high priced loft building with a largely Wall Street based population sees 20% of their units in foreclosure (not all that crazy if you think about a 20 story building with one unit per floor: that's only 4 units. Well, it means there's a good chance that the Condominium Association is going to get wiped out of 1 FULL YEAR'S BUDGET!!!!!!!!!!! and then they will have to assess the remaining owners DOUBLE their common charges for a year to make up for it. Can you say OUCH!!!!!!!!?

columbiacounty: 16 West 16th Street? (wild guess - I can probably come up with about 3 dozen buildings who did something similar to that)

Rhino86; What makes a mortgage too low is Coop owner's refusal to accept that money is fungible and that they are OWNERS of the building. Cash out refi-ing the underlying mortgage is so attractive because it's like spending someone else's money - it's not their money; it's the Coop's money. And remember what the alternative is: the dreaded A S S E S S M E N T..... OMG, the sky is falling! an assessment? The vast, vast majority of Coop owners will choose spending their money out of a reserve fund rather than writing a check because the check comes out of their account and the reserve fund is the building's account. There is a total disconnect that either way, it's still their money.

Rhino86: Do a lot of Manhattanites refi their coops? Do coop boards need to approve that?

A very large percentage do. The funny part is, the very same Coop's which have cash requirements (in other words, they only allow a maximum of %X of the purchase price be financed) SPECIFICALLY to insure stability, then turn around and let shareholders cash-out refi, which makes having the cash requirement up front moot.

"for any national bank, most of their loans were in states where by law they were non-recourse. it didn't make sense (and still may not) to set up a whole department to go after deficiency judgments if in most states they couldn't collect on them any way."

according to what i've read the non-recourse apply to the purchase mortgage, not to the refis nor seconds nor Helocs (in california, for ex, is like this). only purchase mtg are non-recourse. i did heard of cases of banks making deficiency judgments to some that were foreclosed on. although it's a lengthy process and i think that bankruptcy could get rid of those. it might get some of those that did short sales or just walked away. i was just thinking of those that will be deeply under water in nyc, walking away might be a more risky proposition given that's not non-recourse. am i wrong about this?

BTW 30yrs_RE_20_in_REO, thanks a lot for answering!!! i've been wondering about this for weeks already :-)

You are correct that in most states the non-recourse statute is for purchase money mortgages only. However, given that historically people didn't refi, they just lived in their homes for 30 years and paid down the mortgage, the end result is the same in terms of not having a need for a mechanism to go after borrowers/debtors for non-existent judgments.

What I am saying is that historically no bank in NYC (I don't mean that the bank is located in NYC, I mean the property) ever made a practice of going after deficiency judgments. And trust me, last go round there were judgments that were worth going after if all you use as a benchmark is the $ size of the deficiency.

But there's a problem with going after deficiency judgments: the first thing the debtor will do is claim that the bank sold the asset for less than is was worth (I've actually had more than one property I bought on the courthouse steps (well, in the rotunda in Manhattan, but the term of art is "on the Courthouse steps" because that's where they used to hold the auctions) end up in State Supreme Court where the debtor tried to overturn the sale because the sales price was too low - even when there was no deficiency!!!!!!!!!

And let's play this out: if what happens is what i think is going to happen, once the dam breaks, the flood will come. And the banks will want to get rid of properties fast. Some will bundle them up and sell them to investor groups (like when Citibank sold a HUGE portfolio of REO to ONTRA, or when Dime sold it's Coops off to Nomura and it's Condo's to First Boston) for large discounts. Well, in such a case, how do you determine what the deficiency even is when it's part of a pool sale?

The one's who decide to do it themselves will need to get rid of them fast and furious: and when the one's i do consulting work for come to me, I know right now what I'm going to tell them: "Get out in front of the market". So, they actually will be selling the asset "below market". We can argue for 18 pages what, if anything that means, but it certainly will make it much harder to defend the claim that the deficiency is because the lender chose to sell low.

Also, things like this only really happen in poor economic times. The banks are getting a HUGE bailout from the Gov't. The politics of going after a whole lot of people for deficiency judgments in today's climate where the Gov't is trying to get those same banks not to even foreclose is tenuous. I don't think many banks can/could survive the political backlash which would occur if they instituted a policy of going after folks for deficiency judgments when it's never been done before.

But there's even another wrinkle: I believe in NY there is a statute which states that the bank can only use one lawsuit to collect on the mortgage debt. This makes them choose between suing the mortgagor for the amount of the debt and bringing a foreclosure action. now, the result of the first would likely have the same result (i.e. an auction where the asset was sold off), but I would imagine it would take considerably more time and money in legal fees.

30 years, thank you for your posting. I know little about the process, and you have been very informative.

I have a question, though. This is, granted, based on information I have read about other areas, not NYC. I have read that banks are not foreclosing because they will not or can not do so. They can't release all of the units, as they would hugely depress the market, do not want them to be vacant (less of a problem in a condo or coop from the vandalism standpoint, but in NYC you have the charges).

What do you think will be done in the medium term with these properties? Particularly the failed developments? After fire sale prices will they just be mothballed to keep them from deflating prices too greatly? Just curious.

30yrs, thanks a lot. Good stuff.

Rhino, cc's correct re board approval of a refinance. Typically, if little or no cash being taken out, the agent will just have the board president sign the docs. In my building, last I knew, nobody was borrowing largely using shares as collateral because they didn't want to go through the whole board-package hassle over again.

my experience was that a straight refi (I.e. no cash out) was largely as described above; for the cash outs, some financial info was req'd --prior tax returns, etc. but nothing that wasn't req'd for the re-itself. at the times that we did, ltv requirement from bank was 60%.

as to the general question of shareholder financial viability, that continues to amuse me. as endlessly discussed on these boards, many co-ops experience very little long term turnover so it is not unreasonable to conclude that less than 20% of the current shareholders have had their finances explored in the last 15 + yrs! given the financial events of the last few years, we all know that virtually everyone with any significant net worth has experienced signficant deterioration there of. so, the underlying financial stability in co-ops is yet another illusion with little or no basis in fact.

Back to doctors and RE, a procedural specialty not tied to insurance-reimbursement rates can generate lots of cash, even for a non-star doc.

Came across a hair-transplant guy the other day who'd borrowed into three Trump World Tower units at the peak. Apparently planned to flip soon -- like those he'd bought from -- as he almost immediately stopped paying his CCs. Then, natch, the market tanked and at least one of his lenders is foreclosing.

cc, right, by "board package" I meant financial stuff, not reference letters and all that other crap.

Well graffitigrammarian, you asked for a scoffer, you got one.

Most of the stories here are self-serving fantasy. Each of you spouting a story about your doctor or someone you know is exaggerating and you know it.

Sure, there were bad investments. Some really bad. Sure, some people are in some pain right now, paying common charges and mortgages out of other assets. And some people are going to take 25% losses on their properties if they closed 18-12 months ago

But this nonsense with stories like the doctor who is expecting foreclosure - not going to happen. This doctor, a professional with a practice and a long-term horizon, is NOT going to be foreclosed upon. He's going to do what it takes and he's already put 25% in. Or the "hair transplant" guy - he's going to take some losses for sure, but he isn't going into foreclosure - that's all crap and you know it. People with future prospects in their careers aren't going to put their credit and reputation into the shitter just because of a bad investment. In fact, the temptation is typically the opposite - that person will go out of his or her way to make a clean break no matter how painful because they don't want public records, they don't want the embarassment, etc.

So stop with the bullshit stories. I agree the market has declined and will continue to decline. I agree that there were many speculators who will lose money. I agree that this affects the working wealthy as well as the working poor. But don't make yourself feel better by posting falsities on streeteasy to make yourself sound smart and superior.

zdugoff, if the guy I cited isn't planning to be foreclosed upon, he's left it to late in the day to do something about it. The lender's advertised the sale. You or I wouldn't have let it get that far, but we don't know all his circumstances. He may have a high embarassment threshold.

zdugoff---you're missing the fundamental here. things are different...people (not everyone, by any means) have overextended themselves. overextended is a polite term for spending money that not only they didn't have but money that they have no way of covering...now or ever. you don't get it---when sumner redstone is forced to sell massive amounts of viacom stock to cover margin calls, do you think that's made up?

lucky for him, he had something else to sell to cover his positions. but, he is one of the wealthiest individuals in the world. what about all of the run of the mill, docs, lawyers, business people who leveraged themselves during this mass delusion? do you really think there aren't people who don't have the means to cover their mess?

Yes. There is no way a doctor could get foreclosed upon. There is no way a professional investor could get taken by Bernie Madoff. There is no way rating agencies could build models based on the assumption that real estate can't go down. There is no way Goldman would be forced to buy back the investments of its multimillionaire MDs to keep them solvent. None of this could happen.

30 yrs.....thank you for your thoughts. The balance between foreclosure, deficiency judgements, and cash out re-fi's is intricate.

What is your level of knowledge about the quantity (percentage) of folks living in Manhattan who did a cash-out over the past 5 years? Is this number 'know-able' through public records?

" I believe in NY there is a statute which states that the bank can only use one lawsuit to collect on the mortgage debt."

you are correct here. but IMHO it is PER bank. doesn't protect the debtor as far as i know from deficiency judgments in case of piggy loans, 2nd nor helocs with other banks. the banks are doing deficiency judgments in other states, it only takes them the issue of a letter, you don't really need to set up a special department for that. many people get scared and pay without even asking a lawyer. the fact that it didn't happen before when people use only 30yr mtg and didn't use their homes as ATMs is not relevant here as a precedent.

about the political backlash, very good point. but given that many times this is being played out as a transfer of debt from the ones that had the party to those that were prudent such backlash might not exist. i very much doubt that those that were prudent want the reckless to be able to walk away, transfer the burden to them and keep on enjoying a nice financial cushion at the same time. it's nice that those that took cash out for vacations and cars pay for that (as supposed to us). it brings a lot of asymmetry to the RE game, head you win, tails you walk away. very dangerous (kind of what the banks are getting away with!).

"Nobody could have predicted," malthus.

"the banks are doing deficiency judgments in other states, it only takes them the issue of a letter"

I think you are confusing a Demand for Payment with a Deficiency JUDGMENT. In NYS, any Judgment would have to be issued by a Court Order. I agree that some people will pay out of fear. But I think that number is very low: the reason why being is that if they had that money and were willing to part with it then odds are they could have done substantially better doing some sort of structured settlement with whatever institution is now making the demand.

Also, there's a big difference if we're talking Coop or Condo, because Coop sales are almost always done as "non-judicial sales" whereas actual Real Estate (Condos, houses) must go through a Judicial foreclosure process.

walterh7: I don't have any figures, but simply by talking to Mortgage Brokers and having applications for them passed in front of me to sign off on, my answer is "a lot". I guess it is knowable through public records for Condos (if someone had the wherewithal to go thru the city database), but for Coop's I don't think there's any way of knowing because even though sales prices started being recorded under ACRIS, I am not aware of any recording of the amounts of coop share loans, just the existence of them thru UCC 3's, which I don't think have amounts on them.

30yrs_RE_20_in_REO:

You have 2 "identical" units in a building (let's say one on top of the other with n difference in view and pretend they are worth exactly the same amount). Guy #1 buys his unit for $100,000, it goes up to 800,000 in value, he cash out refi's at $600,000 (75% LTV). Guy #2 buys at $800,000 and takes out an initial loan at $600,000.

The market falls so that both units are now worth $500,000. Guy #1 is about 10 times more likely to walk away from the property and hand the keys to the bank. Why? He made his profit. He's got $500,000 in profit sitting in his pocket and for that amount of money he's willing to take the hit to his credit score. OTOH, in Guy 2's mind, he's got $200,000 "invested" in this apartment and he's going to hold on as long as he can for dear life.

Not considering myself realestate savvy, this example is pretty clear to show that the risks are not just subprime!
I think I could audit these street easy boards for college credit!

Snarky joking aside, thanks REO.

"I think you are confusing a Demand for Payment with a Deficiency JUDGMENT. "

great point, thanks, 30 rocks!!

"Not considering myself realestate savvy, this example is pretty clear to show that the risks are not just subprime! "

there are too many sources for me to remember where I have seen anything these days, but about 2 or 3 weeks ago (perhaps "60 minutes"?) that is EXACTLY what some "expert" was interviewed as saying: the next wave is coming and it ain't just the sub-primes.

PS just out of curiosity: admin - are you really the admin / moderator here?

Update on the NJ hair doctor getting foreclosed upon at Trump World Tower: http://streeteasy.com/nyc/closing/1797604

I guess the condo now gets the two-plus years of CC arrears.

Wow.

"(He also laments that if he had put his 25% downpayment in the stock market, he would have taken losses, but would not have been completely wiped out, as he has been in "safe" midtown real estate.)"

It is sad, but I guess it takes something like this for folks to realize what has been true all along. Leverage a non-diversified investment 5x or 10x, and don't pretend it is anywhere near "safe" just because it is a physical asset.

GraGra, can you provide an update from your doctor?

Rhino86
about 4 years ago
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Member since: Sep 2006
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"- the market is cheap - it sold off more than 50% peak to trough - the S&P has a 10 year average of about 0%. At some point there will be a reversion to the mean." Wrong, the market is not cheap. The best measure in my view is a multiple of schiller smoothed eps, on which it is fairly valued, not even close to cheap. Read about it. This is not to call this rally over, or even debate the possibility that the stock market saw its lows... Just don't call it cheap on my watch, that is ignorant.

Besides, real estate is in a bear market. Therefore, if the stock market plunges, that will be bad for real estate. If it rises, the bear market of real estate will mostly ignore it. That is how bear markets work. To further your understanding, see [Nineties, Late].

Also, allow me to be bearish (ha). This June we will see the first MBA and undergraduate recruiting classes since the shit hit the fan. Bear and Merrill are gone. Hiring will doubtless be weak at the remaining COMMERICAL banks. Also hedge funds with high high water marks are typically not robust recruiters.

Back to the stock market. Real estate in 2007 was as stupid as the stock market in 1999. Tell me when the stock market will re-achieve those highs... And now tell me when you expect real estate to re-achieve 2007 highs...Then tell me its a good investment now. Alpine, don't bother.