This Is Where We Are -- And Headed

Since many of you are too eager to jump on the inevitable bottom in Hoboken RE prices, here's some context to temper your impatience...

Three more years anyone?

Stronger Banks = Weaker Consumers

Strengthening the financial system was believed to be a necessity - but for who?

The latest FICO data show that about a QUARTER of all American consumers are now removed from any possible eligibility to buy a home. The pundits who keep preaching that household formation is creating a backlog of homebuyers better check their facts.

Of course, Uncle Sam could start giving away homes instead of tax incentives!

The accompanying chart shows that a quarter of consumers — 43.4 million — now have a credit score below 600, marking them as poor risks for lenders. They can't get credit cards, auto loans or home mortgages under the lending rules banks use.

As consumers relied on debt to fuel their spending in recent years, their inability to access credit is one reason for the slowing economic recovery.

NJ's New Governor Comes Clean On Discretionary Ownership

If Hoboken property owners are that different in their situation from others in the state, then they should separate! But the reality dictates that prices will adjust - sooner rather than later, if we want to join any eventual upcycle in prices. My unfortunate prediction is that we will stagnate because the majority of property owners in this town are professionals in the business of real estate. Their (lost) fortunes are tied to it!

So, if you can't heed the advice of the Governor himself, then consider how you are going to protect your family's future:
“They should be talking about treating people like adults and telling them the truth: we’re in huge trouble,” he said. “And it’s going to mean cutting back on a lot of things that folks either have become used to or in a perfect world would like to have.”

All you adults know what's at the top of that "like to have" list.

DEFLATION was always the trend

With the latest economic data in mind, RE.ality is beginning to take hold - yes, it took a while due to government intervention with people's minds and home prices; both of which should continue breaking down for the rest of this year.

Our general price opinion on Hoboken properties points to another decline of 20% or so, similar to the first phase of declines over the past couple years. Rentals are not holding up either as supply from the sale side continues to compete with existing lease renewals.

Household formation (in Hoboken) has always been falling in the face of rising optimism, so a mini bubble was brewing before this next leg down.

The cry from the realtor business?
"It's never been more affordable and it's a great time to buy!"
Somehow they have forgotten to justify why it won't continue to be that way - even more "affordable" - for the foreseeable future.

Today's Case-Shiller numbers were good nationally, but down for NYC. That's because the high prices of homes here benefited the least from any interest in the government stimulus.

The NAR lobbyists are screaming for the country's staple diet right about now. Any common sense on this issue would allow the inventory to flush out sooner rather than later. But that's a longer story.

New Source of Home Sellers

The growing angst in Trenton is about to create an unforeseen group of property sellers, joining the ranks of financial services employees. Figure 1 attached.

Another Slap For Political Intervention In Markets

The Commerce Department said sales dropped a record 32.7 percent to a 300,000 unit annual rate, the lowest level since record keeping started in 1963, The fall unwound two months of gains inspired by a government tax credit. Enough said!

If this is east of Manhattan, what about...

Another picture says a thousand words. Queens is on the eastern front to the big city. Income and savings demographics are very similar to those of Hoboken where the population is tiny and more sensitive to economic changes in comparison.
The western frontage onto Manhattan has more dire municipal and state consequences, so there is no good ending in store for Hoboken.

The Back End of the Bubble

The FBI is preparing to arrest hundreds of people across the country as early as next week for offenses including:
- encouraging borrowers to falsify income on mortgage applications
- misleading home owners about foreclosure rescue programs
- inflating home appraisals.

The FBI is scheduled to release its 2009 mortgage report on June 17.

Let's see if any of Hoboken's finest transactions have brought any notoriety to the party.

FICO Survey: Credit Supply Unlikely to Meet Consumer Demand

FICO Survey Indicates Credit Supply Unlikely to Meet Consumer Demand

The survey, conducted in March 2010 found that while bankers generally expected consumers to pursue more new credit as well as spend more against their existing credit lines, most lenders are likely to keep a close eye on risk management.

Of the 127 bank risk professionals surveyed, 92 percent said they don’t expect to see an easing of lending standards in this quarter, 95 percent expected interest rates for consumer credit to stay at current levels or move higher, and 83 percent expected the average credit limit for new credit cards to be lower than in the past.

Why is this especially important in a property market like Hoboken and the new "core" category?
Because there is a total mismatch between local annual incomes (typically around $100,000) and property prices (current median around $750,000).

Single family homes which are typically $1 million+ are completely out of this realm.

Cash buyers are the only qualifiers in such a mispriced situation, but that makes them the next hit from depreciation regardless.

Hoboken's adjustments in price are not yet reflecting the mispricings of the past despite adjustments already underway in Manhattan. The bottom line: prices are simply declining at a slower pace over what will be a longer and more protracted time --> another 20% over the next four years.

Which ONE Of These Buys Hoboken Real Estate?

One in every 10 Americans missed a mortgage payment in the first quarter of this year, a new record.
One in 10 Americans' credit-card usage is being written off, also a new record.
One in six Americans are either unemployed or underemployed.
Over four in 10 of those jobless Americans have been out of work for at least six months and there are five unemployed workers competing for every job opening.
One in four Americans with a mortgage have negative equity in their homes.
One in eight Americans feel the current government policy is actually helping the economy.

Only one in 50 Americans plan to buy a home in the next six months.

Yes, It's Still A House Of Cards

The trend has barely budged, so this is getting repetitious.

Nationally, mortgage purchase applications plummet:
The Refinance Index increased 14.5 percent from the previous week and the seasonally adjusted Purchase Index decreased 27.1 percent from one week earlier. This is the lowest Purchase Index observed in the survey since May of 1997. The unadjusted Purchase Index decreased 27.0 percent compared with the previous week and was 24.1 percent lower than the same week one year ago.

Purchase applications plummeted 27 percent last week and have declined almost 20 percent over the past month, despite relatively low interest rates. The data continue to suggest that the tax credit pulled sales into April at the expense of the remainder of the spring buying season. In fact, this drop occurred even as rates on 30-year fixed-rate mortgages continued to fall, and at 4.83 percent are at their lowest level since November 2009. Refinance borrowers did react to these lower rates, with refi applications up almost 15 percent, hitting their highest level in nine weeks.

What this means is that there is very little holding this market up. The tax credit has stolen future sales which will result in a serious drop in sales. More disturbing is that this is happening as mortgage rates are 4.83%, or historically very low.

There is a lot of data to suggest that the shadow inventory, homes that are in or close to default, will continue to depress home prices, especially without the tax credit. The MBA also reported that mortgage delinquencies increased to a seasonally adjusted rate of 10.06 percent of all loans outstanding as of the end of the first quarter of 2010, an increase of 59 basis points from the fourth quarter of 2009, and up 94 basis points from one year ago .

The percentage of loans in the foreclosure process at the end of the first quarter was 4.63 percent, an increase of five basis points from the fourth quarter of 2009 and 78 basis points from one year ago. This represents another record high.

Existing Home Sales Report: March 2010

It’s important when reflecting on the sales results to consider that over 71.2% of all sales were for properties priced below $250,000 while just over 7.3% were priced at or above $500,000.

The results indicate that the government’s tax gimmick (second and final expiration is upon us) is driving a surge of phony demand and bringing a renewal of speculative animal spirits but the effect will likely be temporary.

Such stimulus is far more relevant to property prices of low level than those in areas like Hoboken where shadow inventory is bulging and buyers have completely disappeared.

Without Wall Street employment, where is Hoboken RE.ality?

Wall Street Work Force Falls to 16-Year Low
Reuters - Apr 16, 2010

NEW YORK - Wall Street shed 1,200 jobs in March, in a third straight month of job cuts that pushed employment in New York City's key banking and investment industry to its lowest level since October 1993, the New York state Department of Labor said on Thursday.

The city's jobless rate managed to edge down in March, easing 0.02 percentage point to 10 percent, while the state's jobless rate fell the same amount to 8.6 percent, the Labor Department said.

Total employment on Wall Street, New York City's most important industry, fell to 156,000 in March from February, James Brown, an analyst with the state's Department of Labor, said by telephone. Employment in the city's banking and securities industry in October 1993 had been at 155,000.

Wall Street employment had peaked in December 2000 at 200,300 jobs.

Wall Street is the bedrock industry for both New York City and New York state.

Securities and commodities companies generate about 12 percent of the city's taxes. Those companies account for 15 percent of the state's tax collections, down from 20 percent before the credit crunch, state officials say.

Brown said the three-month string of declines may reflect the end of severance payments, because workers are not counted as unemployed until their severance runs out.

"It's reasonable to assume that at least some of it is people coming off severance," Brown said, noting companies often time layoffs for the end or beginning of a year.

In the previous downturn, Wall Street bottomed out with a headcount of 159,000 in April 2003, Brown said.

Despite the job losses on Wall Street, banks and credit intermediation companies added 500 jobs, perhaps driven by the rise in refinancings and debt work-outs, Brown said. (Reporting by Joan Gralla; Editing by Leslie Adler)

Copyright 2010 by Reuters. All rights reserved.

The Richer Can Only Delay Longer - Not Avoid!

If Wall Street delayed the foreclosure process in Greenwich, Hartsdale and Short Hills, somebody forgot to tell the owners of those stately real estate properties.

The argument that the well-to-do continue doing well just doesn't hold a lot of water. They are about to file bankruptcies en masse.

Meanwhile, we have rose-colored RE professionals who vouch that Hoboken is on much sturdier footing with state support that has all but disappeared, schools being shut down for "renovation," property taxes that have yet to be standardized and a rent-to-buy ratio that continues to drop.

I want a front row seat in state court when they are pulled into one of the largest lawsuits to hit the NRA... oops, that should read NAR. Maybe there's little difference between the two!

10-Year Swap Spreads - Go negative!

A benchmark for the US mortgage market has gone AWOL! The difference between the 10-year LIBOR and 10-year US Treasury yields is NEGATIVE. The enormous issuance of debt and persistent agenda of using it to revive the dead patient is about to bite back. The 10-year yield will go higher.

As I've forecasted long ago, I do not expect mortgage rates to follow. Not for long. The disinflation is transforming into the ugly deflation threat now and that will kill any inflationary attempt. That means the real estate market gets hit at both ends of the affordability curve. And that is a correct response due to supply being held back from sale by banks as well as owners. The shadow inventory is estimated at THREE TIMES the listed number for the past two years now.

Spring will be but a blip, and quickly a bust! So all you fair weather fans who are just itching to get into your own home (aka INVESTMENT), start talking to your strategic default adviser before you sign at closing.

In Hoboken, fair value will now be deemed at a comp equivalent to mid-2003, down from early 2004 just a few months ago. The so-called recovery in prices has been a talking point aimed at marketing traffic. I wonder how many real estate professionals are being taken to court these days? Well, watch for that phenomenon soon. Far too many with advice rather than information and clarity on a property's financial history.

This bounce will try for one last gasp as spring approaches... and fail miserably. Peak to trough prices will start approaching the magic 40% mark for the metro NYC area. Is it any wonder that we have one-family homes racing to market right now?

Price it right! Or look for a lifesaver later.

Geithner's Testimony Leaked Night Before

The Treasury Secretary is making it clear to all those holding real estate assets: conditions have not improved to warrant stabilization in the residential market. In (mistakenly leaked) written testimony for the House Committee on Financial Services tomorrow morning, Geithner opens with the following:

"Private capital has not yet returned to provide the amount of funding that would be needed to allow families to get a mortgage to buy a new home or to sensibly refinance the house they already live in. Without the continued activity of the GSEs and the Federal Housing Administration (FHA) in the current environment, mortgage rates
would be higher and homeowners would have a significantly harder time obtaining credit. While conservatorship, undertaken by the Federal Housing Finance Agency (FHFA) during the Bush Administration, pursuant to Congressional authorization under the Housing and Economic Recovery Act (HERA), and continued under the Obama Administration, was necessary, together we must begin the process of fundamental reassessment and reform.

The failure of Fannie Mae and Freddie Mac was part of a broader crisis that revealed structural flaws in the entire housing finance system. Housing markets are subject to booms and busts – a key issue is whether the system of housing finance acts to dampen such cycles or to worsen them.
In this case the verdict is woefully clear. For many years, the housing finance system provided credit to households in a reliable and stable manner, setting appropriate standards for mortgage origination, and attracting diverse sources of capital though securitization. However, insufficient regulation and enforcement was unable to check increasingly lax underwriting, irresponsible lending and excessive risk taking. Increasing usage of complex products led to a growing misalignment of incentives facing mortgage brokers, originators, credit investors and borrowers.
This fueled unsustainable debt levels and house price appreciation. The risk of a fall in home prices was ignored by most and there was too much leverage in every part of the system. These problems were worst in the least regulated non-bank sectors that fed private-label securitizations.
Over time, problems associated with the absence of prudent underwriting standards and effective consumer protection migrated from these sectors to the more highly regulated channels of mortgage origination, including the banking sector."

If you haven't understood our discussions here surrounding deleveraging, Mr. Geithner is reading the definition to all who want to hear the truth. In due course, expect changes to the financing markets that parallel the real estate markets as well. You are being forewarned.

Don't Confuse Larger Picture With Noise!

The attached chart shows the state of the MBA Purchase Index.

The issue to consider is what lower rates HAVEN'T BEEN ABLE TO DO to this trend. The 4-week average takes us back to 1997 levels so far!

Affordability my ass!

The Kitchen Sink - Literally!

By JAMES R. HAGERTY

Pressure is growing on U.S. banks to ease terms for distressed homeowners on home-equity loans and other second-lien mortgages.

Rep. Barney Frank, chairman of the House Financial Services Committee, last week sent a letter to the four biggest U.S. banks demanding "immediate steps to write down second mortgages." The Massachusetts Democrat sent the letter to the chief executive officers of Bank of America Corp., Citigroup Inc., J.P. Morgan Chase & Co. and Wells Fargo & Co. Meanwhile, the Obama administration is preparing to launch long-planned initiatives aimed at addressing these obstacles.

Frank's Letter

Read Rep. Frank's letter to the four biggest U.S. banks

Rep. Frank said banks' reluctance to write down second mortgages is blocking efforts to reduce the first-lien mortgage balances of many borrowers who owe far more on their loans than the current values of their homes. Because such "underwater" borrowers often feel little incentive to keep paying, "homeowners are increasingly deciding to walk away and thus foreclosures continue to mount," he said.

View Full Image

Bloomberg News

A for-sale sign in front of a Newport Beach, Calif. home in December.

Many second liens have little value because of the plunge in home prices, Rep. Frank wrote, adding: "Yet because accounting rules allow holders of these seconds to carry the loans at artificially high values, many refuse to acknowledge the losses and write down the loans."

A Bank of America spokesman said that bank is "committed to working with all interested parties to develop additional solutions to help homeowners modify first and second mortgages." A J.P. Morgan spokesman declined to comment. Representatives of Citigroup and Wells provided no immediate comment.

Lack of cooperation from holders of second liens also can block short sales, in which the first-lien lender agrees to allow the home to be sold for less than the loan balance due to avoid a foreclosure. If the second-lien holder continues to press its claim against the borrower, the sale can fall through. The ensuing foreclosure is likely to be more costly for all the parties than a short sale would have been.

Under an Obama administration program due to begin in the next few weeks, borrowers who get reduced payments on their first-lien mortgage through the administration's Home Affordable Modification Program automatically would get a break on their second-lien mortgage. Bank of America Corp. already has agreed to take part in this program, and other big lenders are expected to follow suit.

In April, the administration is due to launch financial incentives to encourage alternatives to foreclosure for people who don't qualify for a loan modification. The alternatives include short sales and so-called deeds in lieu of foreclosure, in which the borrower voluntarily gives up title to the home and often gets cash to help with moving expenses.

Under this Home Affordable Foreclosure Alternatives program, holders of second-lien mortgages would be eligible to be paid 3% of the unpaid loan balance, up to a maximum of $3,000, for giving up all claims in the event of a short sale. Unclear is how many second-lien holders would participate.

Most first-lien home loans are held by the government-controlled mortgage companies Fannie Mae and Freddie Mac or by other investors in mortgage securities. By contrast, banks hold most of the seconds and other junior-lien mortgages. About $1.05 trillion of junior-lien home mortgages were outstanding as of Sept. 30, according to the Federal Reserve. Of those, $766.7 billion were held by commercial banks; most of the rest were owned by savings banks and credit unions.

If banks are forced to write down or write off large amounts of those second mortgages, many would suffer major dents in their capital. Laurie Goodman, a senior managing director at mortgage-bond trader Amherst Securities Group LP, said regulators may need to allow banks to recognize losses on second-lien loans over an extended period to avert a disastrous immediate hit to their capital.

One reason banks are reluctant to write off second mortgages is that some may still have value even after a foreclosure. Though the foreclosure wipes out the lien on the home, the consumer still has a legal obligation to repay the second mortgage debt in some cases. If the borrower has no significant assets remaining, banks generally don't bother trying to collect that debt. But they do retain that option and some say they will pursue it in cases where the borrower has significant assets or income, or may later have the ability to repay.

Write to James R. Hagerty at bob.hagerty@wsj.com

Copyright 2009 Dow Jones & Company, Inc. All Rights Reserved

Mortgage rates - Are we headed higher?

The attached chart is a technical "fix" on how pundits are betting on spreads in the mortgage market.

I've long held that deleveraging and its deflationary forces will allow for lower prices with continued lower rates. This is not uncommon during such types of recessions.

As you can see in the chart however, a divergence in the technical underpinnings is causing a lot of anxiety about a jump in mortgage rates. Whether or not my scenario holds, it would now be viewed as a BEST CASE situation let alone any hope for optimism in RE prices!

The clue is in the smart money activity but there are plenty of fools who will allow emotion to override such clues.

Even the NAR data does not match its own optimism!

Look closely at the enclosed data series. Does it show you aberrations from seasonal adjustments or a reason for optimism?

The latest Existing Home Sales numbers for January surprised to the downside at 5.05 million, a 7.2% drop from December's 5.44 million, which in turn was 16% lower than November's 6.49 million. January's consensus was for 5.5 million.

Regionally, the biggest drop was in the northeast (-10.9% sequentially). Total houses sold (-11.1% sequentially). Supply increased from 7 to 8 months and the decline in both median and average price came in at -3.4% and -3.1%, respectively.

Keep in mind that all this is taking place in an environment of unprecedented stimulation through Treasury and Federal Reserve policies. Property taxes have only one way to go over the next decade.

Data: Beneath It All, Truth Lurks

Demand for new mortgage applications has continued to be extremely low following the expiration of the original tax credit. It has been consistently running below the very depressed 2009 levels through January and into February. This is consistent with many buyers having moved their purchases forward to take advantage of the initial tax credit that was expected to expire at the end of November. The implication would be that demand will be especially weak in 2010 and therefore that prices will resume their decline.

RE.ality Increasingly Overpowers Ethics Or Morals

The New York Times
February 3, 2010
No Help in Sight, More Homeowners Walk Away
By DAVID STREITFELD

In 2006, Benjamin Koellmann bought a condominium in Miami Beach. By his calculation, it will be about the year 2025 before he can sell his modest home for what he paid. Or maybe 2040.

“People like me are beginning to feel like suckers,” Mr. Koellmann said. “Why not let it go in default and rent a better place for less?”

After three years of plunging real estate values, after the bailouts of the bankers and the revival of their million-dollar bonuses, after the Obama administration’s loan modification plan raised the expectations of many but satisfied only a few, a large group of distressed homeowners is wondering the same thing.

New research suggests that when a home’s value falls below 75 percent of the amount owed on the mortgage, the owner starts to think hard about walking away, even if he or she has the money to keep paying.

In a situation without precedent in the modern era, millions of Americans are in this bleak position. Whether, or how, to help them is one of the biggest questions the Obama administration confronts as it seeks a housing policy that would contribute to the economic recovery.

“We haven’t yet found a way of dealing with this that would, we think, be practical on a large scale,” the assistant Treasury secretary for financial stability, Herbert M. Allison Jr., said in a recent briefing.

The number of Americans who owed more than their homes were worth was virtually nil when the real estate collapse began in mid-2006, but by the third quarter of 2009, an estimated 4.5 million homeowners had reached the critical threshold, with their home’s value dropping below 75 percent of the mortgage balance.

They are stretched, aggrieved and restless. With figures released last week showing that the real estate market was stalling again, their numbers are now projected to climb to a peak of 5.1 million by June — about 10 percent of all Americans with mortgages.

“We’re now at the point of maximum vulnerability,” said Sam Khater, a senior economist with First American CoreLogic, the firm that conducted the recent research. “People’s emotional attachment to their property is melting into the air.”

Suggestions that people would be wise to renege on their home loans are at least a couple of years old, but they are turning into a full-throated barrage. Bloggers were quick to note recently that landlords of an 11,000-unit residential complex in Manhattan showed no hesitation, or shame, in walking away from their deeply underwater investment.

“Since the beginning of December, I’ve advised 60 people to walk away,” said Steve Walsh, a mortgage broker in Scottsdale, Ariz. “Everyone has lost hope. They don’t qualify for modifications, and being on the hamster wheel of paying for a property that is not worth it gets so old.”

Mr. Walsh is taking his own advice, recently defaulting on a rental property he owns. “The sun will come up tomorrow,” he said.

The difference between letting your house go to foreclosure because you are out of money and purposefully defaulting on a mortgage to save money can be murky. But a growing body of research indicates that significant numbers of borrowers are declining to live under what some waggishly call “house arrest.”

Using credit bureau data, consultants at Oliver Wyman calculated how many borrowers went straight from being current on their mortgage to default, rather than making spotty payments. They also weeded out owners having trouble paying other bills. Their estimate was that about 17 percent of owners defaulting in 2008, or 588,000 people, chose that option as a strategic calculation.

Some experts argue that walking away from mortgages is more discussed than done. People hate moving; their children attend the neighborhood school; they do not want to think of themselves as skipping out on a debt. Doubters cite a Federal Reserve study using historical data from Massachusetts that concludes there were relatively few walk-aways during the 1991 bust.

The United States Treasury falls into the skeptical camp.

“The overwhelming bulk of people who have negative equity stay in their homes and keep paying,” said Michael S. Barr, assistant Treasury secretary for financial institutions.

It would cost about $745 billion, slightly more than the size of the original 2008 bank bailout, to restore all underwater borrowers to the point where they were breaking even, according to First American.

Using government money to do that would be seen as unfair by many taxpayers, Mr. Barr said. On the other hand, doing nothing about underwater mortgages could encourage more walk-aways, dealing another blow to a fragile economy.

“It’s not an easy area,” he said.

Walking away — also called “jingle mail,” because of the notion that homeowners just mail their keys to the bank, setting off foreclosure proceedings — began in the Southwest during the 1980s oil collapse, though it has never been clear how widespread it was.

In the current bust, lenders first noticed something strange after real estate prices had fallen about 10 percent.

An executive with Wachovia, one of the country’s biggest and most aggressive lenders, said during a conference call in January 2008 that the bank was bewildered by customers who had “the capacity to pay, but have basically just decided not to.” (Wachovia failed nine months later and was bought by Wells Fargo. )

With prices now down by about 30 percent, underwater borrowers fall into two groups. Some have owned their homes for many years and got in trouble because they used the house as a cash machine. Others, like Mr. Koellmann in Miami Beach, made only one mistake: they bought as the boom was cresting.

It was April 2006, a moment when the perpetual rise of real estate was considered practically a law of physics. Mr. Koellmann was 23, a management consultant new to Miami.

Financially cautious by nature, he bought a small, plain one-bedroom apartment for $215,000, much less than his agent told him he could afford. He put down 20 percent and received a fixed-rate loan from Countrywide Financial.

Not quite four years later, apartments in the building are selling in foreclosure for $90,000.

“There is no financial sense in staying,” Mr. Koellmann said. With the $1,500 he is paying each month for his mortgage, taxes and insurance, he could rent a nicer place on the beach, one with a gym, security and valet parking.

Walking away, he knows, is not without peril. At minimum, it would ruin his credit score. Mr. Koellmann would like to attend graduate school. If an admission dean sees a dismal credit record, would that count against him? How about a new employer?

Most of all, though, he struggles with the ethical question.

“I took a loan on an asset that I didn’t see was overvalued,” he said. “As much as I would like my bank to pay for that mistake, why should it?”

That is an attitude Wall Street would like to encourage. David Rosenberg, the chief economist of the investment firm Gluskin Sheff, wrote recently that borrowers were not victims. They “signed contracts, and as adults should also be held accountable,” he wrote.

Of course, this is not necessarily how Wall Street itself behaves, as demonstrated by the case of Stuyvesant Town and Peter Cooper Village. An investment group led by the real estate giant Tishman Speyer recently defaulted on $4.4 billion in debt that it had used to buy the two apartment developments in Manhattan, handing the properties back to the lenders.

Moreover, during the boom, it was the banks that helped drive prices to unrealistic levels by lowering credit standards and unleashing a wave of speculative housing demand.

Mr. Koellmann applied last fall to Bank of America for a modification, noting that his income had slipped. But the lender came back a few weeks ago with a plan that added more restrictive terms while keeping the payments about the same.

“That may have been the last straw,” Mr. Koellmann said.

Guy D. Cecala, publisher of Inside Mortgage Finance magazine, says he does not hear much sympathy from lenders for their underwater customers.

“The banks tell me that a lot of people who are complaining were the ones who refinanced and took all the equity out any time there was any appreciation,” he said. “The banks are damned if they will help.”

Joe Figliola has heard that message. He bought his house in Elgin, Ill., in 2004, then refinanced twice to get better terms. He pulled out a little money both times to cover the closing costs and other expenses. Now his place is underwater while his salary as circulation manager for the local newspaper has been cut.

“It doesn’t seem right that I can rent a place somewhere for half of what I’m paying,” he said. “I told my bank, ‘Just take a little bite out of what I owe. That would ease me up. Isn’t that why the president gave you all this money?’ ”

Bank of America did not agree, so Mr. Figliola, who is 48, sees no recourse other than walking away. “I don’t believe this is the right thing to do,” he said, “but I’ve got to survive.”

Fitting... and Just Plain Justice!

THE WALL STREET JOURNAL

Mortgage Bankers Association Sells Headquarters at Big Loss

By JAMES R. HAGERTY

Like millions of American households, the Mortgage Bankers Association found itself stuck with real estate whose market value has plunged far below the amount it owed its lenders.

But the trade group for mortgage lenders is refusing to say exactly how it extracted itself from that predicament.

On Friday, CoStar Group Inc., a provider of commercial real estate data, announced that it had agreed to buy the MBA's 10-story headquarters building in Washington, D.C., for $41.3 million. The price is far below the $79 million the trade group says it paid for the glass-walled building in 2007, while it was still under construction. The price also is far below the $75 million financing that the MBA received from a group of banks led by PNC Financial Services Group Inc. to finance the purchase.

John Courson, chief executive officer of the trade group, declined in an interview Saturday to say whether the MBA would pay off the full loan amount. "We're not going to discuss the financing," he said. A spokeswoman for the MBA added that the MBA has reached "an agreement with all relevant parties" regarding the outstanding amount on that loan but declined to provide any details.

A spokesman for PNC, a banking company based in Pittsburgh, declined to comment.

Holliday Fenoglio Fowler LP, a real estate advisory firm, announced in June 2008 that it had arranged the $75 million financing for the MBA. At that time, HFF said the acquisition loan took the form of a variable-rate, 30-year taxable bond transaction backed by a letter of credit from PNC. HFF said such bonds are typically sold to money market funds.

In an interview late last year, Mr. Courson said he believed mortgage borrowers should keep paying their loans even if that no longer seemed to be in their economic interest. He said paying off a mortgage isn't only a matter of personal interest. Defaults hurt neighborhoods by lowering property values, Mr. Courson said. "What about the message they will send to their family and their kids and their friends?" he asked.

CoStar, currently based in nearby Bethesda, Md., plans to move its headquarters into the MBA building at 1331 L Street NW in Washington. The company was "fortunate to be able to take advantage of what we see as a historic opportunity to secure an exceptional asset at a greatly reduced price," Andrew Florance, CoStar's chief executive officer, said in a statement.

The MBA will move out of the building and rent elsewhere in Washington, the spokeswoman said. She added that a new space hadn't yet been found.

When the MBA announced the purchase of the building in early 2007, the trade group's president at the time, Jonathan Kempner, said: "We have come to the inescapable conclusion that owning our own building was the smartest long-term investment for the association." In October 2009, however, the MBA informed its members that it had put the building up for sale. At that time, the MBA said that continued ownership of the building, which was financed with $75 million of variable-rate debt, would be "economically imprudent."

The MBA spokeswoman said some members have since then concluded that the trade group shouldn't be in the business of owning real estate.

The MBA had trouble finding tenants for the space in the building it didn't occupy. The trade group uses about 40% of the building's 169,000 square feet and tenants occupy about 10%, the spokeswoman said.

Falling membership and heavy debt costs related to the building have squeezed the MBA's finances in recent years. The MBA's membership totals about 2,400, down from a peak of 3,000 several years ago, but has increased recently, the spokeswoman said, and the organization expects to show a small surplus in its accounts for the fiscal year ending Sept. 30. The MBA's staff has dropped to 107 from a peak of about 150, she said.

CoStar said the District of Columbia encouraged it to move its headquarters to Washington. CoStar is to receive $6.1 million in property-tax abatements over 10 years if it meets certain conditions, including hiring 100 District residents. CoStar said it may be eligible for additional tax benefits from the District.

Write to James R. Hagerty at bob.hagerty@wsj.com

Deflation is accelerating - not receding!

For those who don't understand beyond real estate, wise up!

One of These Things is Not Like the Other...

By Chris Pavese

Created 02/04/2010 - 11:35

One of these things is not like the other... [1]

The trends below bear watching as they served as important leading indicator of things to come in 2008. Kinks in the reflation trade were visible at the time despite CPI spiking higher through H1-08. Coincidentally, we expect increasing CPI prints through H1-10 as well. But recent kinks look eerily similar to the deteriorating internals ignored by so many ahead of the Great Contraction. Is the market beginning to sniff out heightened deflationary pressures later in 2010 or 2011? Time will tell, but given excessive valuations and heightened macroeconomic uncertainty in the aftermath of crisis, we are quite happy to take some risk off the table here, given the trends below.

Disclosure: At the time of publication, the author was long SPDR Gold Shares and short iShares FTSE/Xinhua China 25 Index, although positions may change at any time.

MBA Refi Index Fell 15.1%

Despite record-low mortgage rates, the number of qualified or willing borrowers continues to drop. The Mortgage Bankers Association refinance index dropped 15.1% while the purchase index dropped a seasonally adjusted 3.3%.

30-year fixed-rate mortgages averaged 5.02% last week, up from 5% the previous week, while 15-year fixed-rate mortgage carried a 4.34% average rate, up from 4.33%.

The Securitized Headwinds Have Not Subsided

This artwork is for those who believe it's a good time to buy a home. Chances are they are sellers, not buyers.

Wonder why?

When Realtors Opine... Run!!!

The chief economist for the National Association of Realtors published this book in 2005 - just months before the peak in real estate prices.

They are now busy trying to find a way to put all their members back to work - otherwise there will be no association soon!

When a realtor speaks economics but doesn't understand that a property is nothing more than a leveraged investment, the result is no different than CNBC "talent" discussing the merits of the stock market.

These are the types of signs that tell you when it's actually better to keep your savings in a mattress!

The Bigger They Are...

January 25, 2010 8:41 a.m. EST

THE WALL STREET JOURNAL

Tishman Abandons Stuyvesant Venture By LINGLING WEI AND MIKE SPECTOR A group led by Tishman Speyer Properties has decided to give up the sprawling Peter Cooper Village and Stuyvesant Town apartment complex in Manhattan to its creditors in the collapse of one of the most high-profile deals of the real-estate boom. The decision comes after the venture between Tishman and BlackRock Inc. defaulted on the $4.4 billion debt used to help finance the deal. The venture acquired the 56-building, 11,000-unit property for $5.4 billion in 2006 -- the most ever paid for a single residential property in the U.S. The venture had been struggling for months to restructure the debt but capitulated facing a massive debt load and a weak New York City economy that has undercut rents and demand for high-priced apartments. The property's owners signaled they would be unable to reach a deal with lenders and instead decided to allow creditors to proceed with what amounts to an orderly deed-in-lieu of foreclosure, which means a borrower voluntarily gives the property back to lenders to avoid a foreclosure proceeding. "It has become clear to us through this process that the only viable alternative to bankruptcy would be to transfer control and operation of the property, in an orderly manner, to the lenders and their representatives," the venture said in a statement to The Wall Street Journal. "We make this decision as we feel a battle over the property or a contested bankruptcy proceeding is not in the long-term interest of the property, its residents, our partnership or the city." The troubles at Stuyvesant Town reflect the dismal condition of the apartment market throughout the country as high unemployment hammers rents and occupancy levels. Hardest-hit are highly leveraged deals done by private companies that, unlike large public real-estate companies, have been closed out of the capital markets. Pressure on the Tishman group has mounted in recent weeks as some of the creditors have threatened to foreclose. In a letter sent to Tishman last week a group including Concord Capital, an affiliate of Winthrop Realty Trust, said it intends to pursue "its rights and remedies," including possibly moving to foreclose on the property within 90 to 180 days. By some accounts, Stuyvesant Town is only valued at $1.8 billion now, less than half the purchase price. By that measure, all the equity investors -- including the California Public Employees' Retirement System, a Florida pension fund and the Church of England -- and many of the debtholders, including Government of Singapore Investment Corp., or GIC, and Hartford Financial Services Group, are in danger of seeing most, if not all, of their investments wiped out. The Tishman venture's decision to hand back the keys represents a defeat for a company that for years represented the gold standard of commercial real-estate deals, reaping high returns for investors. Tishman Speyer owns such trophy assets as Rockefeller Center and the Chrysler Building, and its founder, Jerry Speyer, has been a major player in both real-estate and political circles for years. His son Rob Speyer is being groomed to take over the family real-estate empire. The Stuyvesant Town deal is one of several Tishman Speyer did at the top of the market that the company is trying to save. But the company itself isn't threatened. It took advantage of easy credit and investors' eagerness to buy into real estate during the good times. As a result, it didn't put much of its own cash into deals. Of the $5.4 billion price tag on the Stuyvesant property, Tishman invested only $112 million of its own money, with about $56 million from Jerry Speyer and Rob Speyer, co-chief executives of the New York-based company. Tishman has earned more than $10 million in property-management fees since the Stuyvesant Town acquisition, according to analysts at Deutsche Bank AG. Tishman Speyer "would not consider a long-term management contract to continue operating the property that does not involve ownership," the partnership said in the statement. "Without a restructuring that would keep our ownership group as part of the equity, we felt it best that the new owners install a new management team." The Stuyvesant Town complex was developed by MetLife for returning World War II veterans and remained a middle-class haven even as rents in other parts of the city soared. Tishman's plans were to raise the rents for hundreds of the units to market rates. But the strategy backfired because of a slowing New York economy, a heavy debt load and a court ruling hindering the owners' ability to convert rent-controlled units to market rentals. In January, the property depleted what was left in reserve funds and defaulted on its first mortgage. Nationwide, scores of other apartment deals also are tanking as landlords are being forced to cut rents and offer incentives like flat-screen TVs to attract and retain tenants. San Francisco's Lembi family, the biggest apartment owner in that city, has been forced to give up numerous apartment properties to its lenders because it couldn't repay debt. Investors who purchased commercial-mortgage-backed securities, or CMBS, also are facing losses. In December, more multifamily CMBS loans moved into delinquency than for any other property type, with 113 new loans, totaling $1.1 billion, becoming delinquent, according to Moody's Investors Service. The Stuyvesant Town collapse comes amid mounting woes in the market for retail stores, hotels, apartments and other commercial property. Mall-giant General Growth Properties and hotel-chain Extended Stay Inc. filed for bankruptcy-court protection last year, and more commercial-property projects could fail amid an inability to repay debt because of dwindling rent rolls and still-scarce financing for all but large real-estate investment trusts. The troubles experienced by landlords nationwide are stoking fears among regulators and bankers that turmoil in commercial real-estate may derail the hoped-for economic recovery. Research firm Foresight Analytics estimates delinquencies on commercial real-estate loans held by banks will rise to 9.47% in the fourth quarter, up from 5.49% a year earlier. Meanwhile, the delinquency rate on CMBS stood at 4.9% in December, according to Moody's, up five-fold in just a year.

No Secret Here But...

Home Economics: The 'American Dream' Is a "Scam", James Altucher Says

Posted Jan 22, 2010 10:30am EST by Aaron Task

The past few years have certainly challenged the idea that real estate prices only go in one direction. But the downside of the "American Dream" is even more pronounced, says James Altucher of Formula Capital.

Owning a home has "never been a great investment," Altucher says, noting housing went up a dismal 0.4% annually vs. 8% for the stock market from 1890 to 2004, according to the Social Security Advisory Board.

Moreover, Altucher says the notion buying a home is a ticket to financial security is a "scam" perpetrated on the American people by corporations seeking to keep us in debt, less mobile and with the storage to purchase all sorts of needless consumer goods.

That's a provocative statement, hard to prove, and certainly subject to debate. Such a view also leaves out the intangibles of home ownership, such as the stability and other benefits raising a family in a community can bring.

Still, it's hard to argue with Altucher's main point, as detailed in a recent Daily News article: from a purely economic basis, there's a lot of downsides and hidden costs to home ownership that get lost in the "American Dream" discussion:

• Insurance premium.
• Property taxes (which usually offset any tax deduction you get from your mortgage interest).
• Maintenance (pipes break, electricity problems, etc.).
• Remodeling costs.
• Utilities (utilities and maintenance for renters is often reflected in the rental price, but it's not reflected in a mortgage when you own).
• Yard work, pest control, etc. (again, rents usually have this built into the price, but mortgages don't).
• A down payment of at least 15%, which is $90,000 on a $600,000 home.
  Closing costs, usually 5% of loan amount, or another $25,000.

Rather than concentrating so much of your wealth in a potentially illiquid asset, Altucher says most of us would be better of renting. If you want to bet on a housing recovery - and he does believe housing is a good short-term bet here - Altucher recommends buying a REIT like the iShares FTSE NAREIT Residential Plus Capped Index Fund (REZ).

So if buying a house is a bad investment, should the more than 20% of American mortgage holders currently under water just walk away, as some advocate? Check the accompanying video to hear Altucher's take on this highly controversial topic.

The Appraisal Process Is Readjusting!

Bad Appraisals Would Not be Low Appraisals

The National Association of Realtors (NAR) is unhappy about new regulations that require that appraisers be picked independently of the realtor or the bank issuing the loan. The NAR complains that the appraisals are being driven down by inexperienced appraisers who don't understand the local market in which they are evaluating prices. If true, then it would be expected that there would be more variation in appraisals, but there is no reason that appraisals should come in consistently low. There is no reason to believe that these appraisers would have a bias towards issuing low appraisals.

Once again we have the villian admitting publicly that the game is rigged and corrupt.

THINK about it. Appraisals, by definition, should be almost mechanical, driven by a code of generally accepted and uniform rules.

The fact that the NAR is so intensly interested in controlling the appraisal process is like a siren going off. The NAR is concerned that without control of the process, independent price discovery may blossom and the "free market" may actually have a chance of working.

NO more bubbles?

Sometimes, logic "is" the right answer

"During the bubble years, the median period of homeownership was just 5 years. In prior times it was 7 years overall, but less than 5 years for low- and moderate-income families. With house prices likely to fall another 10-15 percent as the remaining air goes out of the bubble, it is improbable that even a homeowner who ends up with zero equity as a result of a principle write-down will have accumulated any equity at the point where they sell their home.

Furthermore, most modifications are likely to still leave homeowners paying more in ownership costs than they would pay to rent a comparable unit. This means that each month, they are effectively throwing away money that they could otherwise spend on their children, on saving, or other uses. It is difficult to see how this excess spending on housing benefits homeowners and their families."

- Dean Baker, CEPR

RE Market Requires Re-employment - So Dream On!

David Rosenberg had this to say about this very troubling trend:

"We started the decade with a national payroll level of 130.8 million. We finished the decade practically unchanged at 130.9 million. Meanwhile, the total pool of available labour rose from 146 million to 159 million. In other words, we have the same number of jobs today as we did a decade ago, and yet we also have 13 million more people competing for them. It was more than just a lost decade for the equity market. It was a lost decade for the labour market. Today’s report validated the Fed’s concern over the outlook for employment, which dominated the FOMC minutes released earlier in the week. Those pundits calling for an early exit from the central bank’s accommodative stance may have some reconsidering to do."

An even better way to visualize this, is the difference between the total number of civilians employed and the total US population (308.3 million). The number in December is a record 170.5 million. Keep in mind only 137.8 million are currently employed (source: BLS).

The employment picture in America is horrendous and getting worse. Rosenberg again:

"The so-called ‘employment rate’ — the ratio of employment to population — fell 58.2% from 58.5% in November and the cycle peak of 63.4% in 2007. This is extremely significant because what it means is that it would take an expansion in employment of 20 million over the next five years just to get back to those old cycle highs. But here’s the problem — the country has never before managed to come close to creating that number of jobs over a half-decade period, so what the future holds is one of ongoing deflationary labour market pressure as far as the eye can see."

That said, place Hoboken's employment concentration of developers, realtors, bankers and insurers in context and you've got a lot of hope with no REality.

Nov. Pending Home Sales in the Northeast and Midwest down 25.7%

Pending Home Sales Plunge in November, Exactly as Predicted

Pending home sales in the Northeast and Midwest were down 25.7 percent.

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The National Association of Realtors reported that pending home sales fell 16.0 percent in November, hitting their lowest level since June. Remarkably, this decline appeared to surprise many analysts. It should have been entirely predictable.

In the prior three months, there had been a sharp surge in home sales. This surge was obviously driven by the desire to close on a sale before the expiration of the original first-time buyers tax credit at the end of November. Because it depended on the closing date of a sale, buyers had to sign contracts by mid-October to ensure that they would qualify for the credit. This was before they knew that the credit would be extended.

This created a situation in which many people who would have otherwise purchased their home in 2010, or possibly even 2011, moved their purchase forward to take advantage of the credit. The pending home sales index for October, as well as the existing home sales for November (which reports closings, not contracts), hit their highest levels since 2006, at the peak of the bubble.

The collapse of sales was also foretold by a plunge in purchase mortgage applications in late October and November. People who sign contracts apply for mortgages. When the weekly applications numbers collapsed, hitting their lowest level since the late 90s, it should have been apparent that house sales would fall sharply.

In fact, the decline is likely even worse than the national data may indicate. There were sharp differences by region. While sales in the South were down 15.0 percent, roughly in line with the national average, sales in both the Northeast and Midwest were down 25.7 percent. The November level for the Midwest was the lowest for the year. These sharp plunges were offset by a relatively modest 2.7 percent decline in the West.

Part of the story in the West is that sales peaked in September (October numbers were down by 10.9 percent), but it is also likely that there is a different dynamic taking hold. With prices down by 50 percent or more in some of the former bubble markets, there are likely many investors moving in to buy large numbers of homes. This is helping to place a bottom on these markets.

While this is good news for the West, there is likely to be considerably more weakness in the rest of the country than is generally recognized. This will be amplified in the months ahead as mortgage interest rates rise due to the end of the Fed's mortgage-backed security purchase program. The curtailing of FHA loans will also reduce the number of potential homebuyers. And the ending of the extended homebuyers credit at the end of April will further reduce demand. (The new credit is tied to the signing of the contract rather than the closing of the sale, so it should lead to some boost in sales into May and June.) This weakness virtually ensures that the house price decline will resume somewhere in the next few months, even if we do not get back into the free fall seen last year.

The more newsworthy report this week was the release of construction data showing that both residential and non-residential construction fell in November. Residential construction fell 1.6 percent, which partially reversed an extraordinary jump in October. Private non-residential construction was down only minimally, but the October data was revised down to show a 4.8 percent drop. The November level was 20.6 percent lower than the year ago level.

All the components of the non-residential index are now below their year ago level, most sharply lower, with the exception of power plants. The boom in bio-fuels, that had supported construction of manufacturing facilities, is over and this component is now dropping sharply, off 13.1 percent from its July level. Public construction also edged downward in November, suggesting the boom associated with the stimulus might have reached its peak. While residential construction is likely to be reasonably stable at low levels in 2010, non-residential construction will be a drag on economic growth.

- January 6, 2010

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CEPR's Housing Market Monitor is published weekly and provides an incisive breakdown of the latest indicators and developments in the housing sector.