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September 30, 2008

A Letter From The Inside

Here's a letter from an established real estate investment firm in the city to its investors that landed in our inbox yesterday. It's quite an interesting snapshot of where the various parts of the market stand, especially when it comes to financing. Of course, it was penned before yesterday's failed vote.

Although many of you may have experienced extreme difficulties and declines in your stock portfolios and the newspapers report daily on the dire problems with the housing market, our experience in the real estate rental business and the New York coop and condo market is not so extreme. Generally speaking our tenants continue to pay their rents and business continues in a more or less normal fashion. Although we are seeing more delinquencies than usual across our portfolio and we are carrying a greater number of residential vacancies than last year, it is fair to say so far the effects we have seen have been more consistent with a typical downturn in the economy and not more dramatic than that.

Given the current situation in the credit markets, we do anticipate having a more difficult time when seeking refinancing quotes, but we expect to be able to successfully resolve our various financing requirements. So far, our lenders have been negotiating normal mortgage extensions on appropriate market driven terms and at the moment, we do not foresee a problem in this area at least through the end of 2009...This is not to say we have not faced any problems with certain of our properties. We have found it difficult or impossible to arrange debt for new development and/or condominium conversion projects. The market is very reluctant to finance for-sale housing projects. As a result, we have put several new construction or conversion projects on hold and will continue to do so until the market returns to a more normal situation. In one case we even cancelled a deal and took a loss on our contract deposit rather than accepting inferior and expensive financing that would have strained our resources in an inappropriate manner.

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Very interesting... this little "snapshot" suggests that banks may be looking at *rental* property as more stable than *for-sale* property.

My schadenfreude neurons keep on firing....

Posted by: tybur6 at September 30, 2008 9:35 AM

Interesting that the writer implies financing probs may come AFTER 2009.

Posted by: itsagas at September 30, 2008 9:49 AM

That hand penned letter ( in script no less ) looks like something John Adams would have written to Thomas Jefferson. Did the writer use a quill pen too?

Posted by: Prodigal_Son at September 30, 2008 9:50 AM

What a cute little letter.

Here are some excerpts from a Washington Mutual press release dated about 9 months ago:

"The substantial infusion of new capital, dividend reduction, significant expense reductions, and the major change in our home loans business all combine to further fortify WaMu's strong capital and liquidity position.......Solid revenues and continued focus on expense control.......Net interest income remains strong...Solid quarterly results"

I won't bother to pull up any of the many other examples of reassuring letters from leaders of companies that are in big trouble and are making a pitch for confidence.

Posted by: lechacal at September 30, 2008 9:51 AM

itsagas...
the writer's ominous glimpse into the future should scare you. We, collectively, only have about a year left. Then around March of 2010 all hell will break loose. And then by autumn we'll all be surviving on nothing more than the carcasses of the weak.

Can free trade save us from cannibalism and subsistence noshing? Doubtful.

Posted by: tybur6 at September 30, 2008 9:54 AM

For anyone who really doesn't understand what the "bailout" consists of, here's a good editorial written by Larry Summers from y'days FT...

http://www.ft.com/cms/s/0/290ca9f6-8d8b-11dd-83d5-0000779fd18c.html?nclick_check=1

Posted by: daveinbedstuy at September 30, 2008 9:55 AM

Lechacal - that's funny about WaMu. Take a look at Bear Stearn's website (http://www.bearstearns.com/) Not even a bit of irony there! "STRENGTH"

I know they fired everyone... but couldn't JP Morgan have spent $50 on a web guy to change the banner?

Posted by: tybur6 at September 30, 2008 9:57 AM

"Then around March of 2010 all hell will break loose."

And in 2012, the world ends!

Whoohoooooo!!!

Posted by: Prodigal_Son at September 30, 2008 9:57 AM

Libor rate is around 7 percent. Ouch. Financing is hard to come by but not impossible. I spoke to a developer at a neighborhood meeting last night and they are moving along with a project of 100 or so units near my rental property in Jersey City. This area didn't have such a huge lift in prices during the boom but now has barely dropped. Rentals in the area support higher prices so maybe that is why the developer is having no problems with financing.

Posted by: HOBOKENROCKS at September 30, 2008 10:00 AM

Prodigal Son,
I give the world another few years... maybe 2025. (So much for the "Flatbush 2030" campaign) And it won't end per se. It'll just be like that Will Smith movie with deer and antelope running about midtown.

Posted by: tybur6 at September 30, 2008 10:00 AM

Financing is definitely not impossible to get in NYC. LTV ratios have declined from 85% to 65%, but rates are still not so bad. Some lenders will undoubtedly want the fallback rental value to support the condominium sellout value, but that isn't the end of the world either. As has been said countless times, the huge disparity between the cost to purchase a condo or rent a similar dwelling was simply untenable anyway.

New housing will continue to be built for the segments of the market that can afford it.

Posted by: Polemicist at September 30, 2008 10:09 AM

Old story. Banks and mortgage companies lend too much, then turn to lending too little. Very old story. History repeating on itself.

Posted by: chrishavens at September 30, 2008 10:16 AM

A statement from the outside: You are screwed and you know it.

Posted by: DOW8000SP800 at September 30, 2008 10:20 AM

DIBS;

While I might agree with some of what Larry Summers states, and I have the utmost respect for him, this article is an example of why this bailout is a non-starter, politically. A few reasons:

-he makes the argument that this is not an expansion of government, in that the $700B will be used to purchase real assets. True enough, in the short term. What he fails to address is what happens after these assets are sold, perhaps at a profit. Does anyone honestly believe that these proceeds will be used to pay off the debt that was used to finance these purchases? I certainly don't. Money is like crack to politicians. It will be Christmas in July when this money comes into the Treasury.

-he also fails to make the case as to why these assets cannot be handled via the private sector. The WSJ had an article showing that these bad securities amount to about 4% of the GDP. While this is not insignificant, it pales in comparison to the 25% ratio that Japan had to deal with in the early 90's (according to the WSJ) when they had their banking problem in the early 90's.

-finally, from a political point-of-view, folks are in no mood to take lectures from the very people who are part of the financial world that brought us to this mess. The way that the financial world has tried to sell this deal ("bail me out or I'll cause a collapse of the economy) is highly offensive to folks who earn their daily bread. The WSJ notes today that there were originally 70 House Replublicans lined up for the deal. After they received a "lecture" from Paulson, the number shrank to 20, as he refused to answer their questions about how this program would be administered.

You might argue the issue financially, but my point is that the folks who ran with this package completely botched it, from a political POV.

Posted by: benson at September 30, 2008 10:23 AM

Oh for Chrissake people, the world is not ending. Not by a long shot. This is a crisis of confidence, and confidence will return as soon as fear is again replaced by greed. I thought the drop in the market yesterday was great -- I am a buyer of stocks, not a seller, and I love buying things on sale. I will start to be a seller in 20 years or so.

We are ripping off the band-aid, which is exactly what Japan didn't do 20ish years ago. This means lots of pain and dislocation now, but a healthy financial system much faster than the 15 years it took the Japanese.

NYC will be hit harder than other places. NYC real estate will, in my opinion, take a gigantic bath. Particularly in Manhattan. But the world is not ending.

Posted by: lechacal at September 30, 2008 10:25 AM

"This is a crisis of confidence, and confidence will return as soon as fear is again replaced by greed." - QOTD!

That was stellar Mssr. Jackal! Hilarious, and likely all too true.

Posted by: cobblehiller at September 30, 2008 10:35 AM

FEAR WILL REIGN FOR A COUPLE OF YEARS THOUGH. Than we will again see the mother of all asset bubbles. Unless of course this is the mother of all asset bubbles.

Posted by: HOBOKENROCKS at September 30, 2008 10:40 AM

I agree that this is not the end of the world. It will be major correction though. I read that the state comptroller is predicting a loss of 40,000 financial sector jobs. That will effect our favorite subject -NYC real estate- significantly. Couple this with the European bank scare and there will be a lot of downward pressure on the price of Manhattan and pricey Brooklyn property. Of course one person's debacle is another person's buy opportunity, that is capitalism. On the upside, reservations at trendy restaurants should be much easier to make.

Posted by: sam at September 30, 2008 10:56 AM

The places that will suffer most in real estate losses are the suburbs where the hedge fund managers and all those guys who made all their money off this crisis they created, paid many millions of dollars for huge houses they can only sell to the similarly very rich. There was a recent article in the NY Times about that, if anybody saw it. I'd rather be in my little Brooklyn neighborhood that's still affordable to those from many OTHER industries, than sitting in a huge house in one of these suburbs, knowing my former Wall Street neighbors are all going bankrupt and their houses will sit unsold and unuccupied for possibly years.

Posted by: traditionalmod at September 30, 2008 10:58 AM

"knowing my former Wall Street neighbors are all going bankrupt"

That's quite a fantasy world you live in. The multi-millionaires aren't the folks that are going to go bankrupt.

Posted by: SnarkSlope at September 30, 2008 11:07 AM

"The places that will suffer most in real estate losses are the suburbs where the hedge fund managers and all those guys who made all their money off this crisis they created, paid many millions of dollars for huge houses they can only sell to the similarly very rich."

Suburbs? I thought those shitbirds were buying up Brooklyn. Or are all of those UC Berkeley sweatshirt wearin, Starbucks drinkin, Hybrid drivin, bugaboo pushin folks from some -other- profession?

Posted by: Prodigal_Son at September 30, 2008 11:10 AM

Traditionalmod, what affordable Bklyn neighborhood do you live in? Alas, for various reasons (including schools, commute, marital harmony, etc) we are seeking a house in PS, CG, CH, etc. - certainly not "affordable" right now to most people who need space for a growing family. I certainly hope these extremely expensive neighborhoods will go down in price. I don't think a major "bath" will be good for anyone, but I truly think (as I've said many times on this blog!) that a decline of even 30-40% will leave most sellers in OK shape as long as they've owned their property more than a couple of years. From my own experience, prices on some properties more than doubled since early 2000 (I know, we bought and sold) and it was a shockingly fast and steep rise, so even a pretty steep decline basically just puts us back to where we were a few years ago, and where things used to be considered "normal" before the bubble...

Posted by: Miss Muffett at September 30, 2008 11:12 AM

SnarkSlope: What is unusual about the current situation is that a very high income group of people is getting hit the hardest. I would not call them "multi-millionaires" as you did, because in my experience the net worth of many investment bankers, traders, etc. is often surpisingly small. The desire to live above one's means affects the rich even more than the middle class. I spend a lot of time around 7 and 8 figure earners, and their spending habits shock me. Someone recently brought up Bonfire of the Vanities, which has a good illustration of how high earners feel compelled to choose the appearance of wealth over actual wealth.

Posted by: lechacal at September 30, 2008 11:18 AM

lechacal - From your lips to God's ears.

Posted by: SnarkSlope at September 30, 2008 11:29 AM

prodigal son - you need to work on your social profiling skills. berkeley + starbucks = not happening. berkeley + maclaren + gorilla + no car = lawyer. harvard/yale/princeton + bugaboo + starbucks + starter beemer = wall street.

Posted by: i disagree at September 30, 2008 11:35 AM

i disagree-

I wrote that post on my laptop in a cafe. A guy walked by the cafe with a Berkeley shirt, with a starbucks cup on his bugaboo. I'd lay odds he's a hedgefunder fresh out of a job...

Posted by: Prodigal_Son at September 30, 2008 11:39 AM

he was probably a harvard guy going incognito.

Posted by: z at September 30, 2008 11:46 AM

I prefer a harvard guy going commando.

Posted by: SnarkSlope at September 30, 2008 11:51 AM

the shirt was probably for the berkeley carroll school. either way, i would take those odds.

Posted by: i disagree at September 30, 2008 12:11 PM

Lethacal is right on.
I have posted before about how many youngish affluent couples live right on the financial edge. They are spread thin with big mortgages, tuiton bills, SUV and sportscar payments, weekend house payments....many of these folks are living on credit card debt waiting for the holiday bonuses. It is pretty scary but that is their lifestyle and those who can't count on a bailout from mom and pop may be in real trouble this year and next.

Posted by: sam at September 30, 2008 12:25 PM

Sam;

If what you and Lethacal are saying is true, it might account for the shrillness in the arguments for those who most adamantly support this bailout. Last night I watched a number of news programs in which folks from the financial world were interviewed about the collapse of the package. The general gist of their argument was: "Don't the idiots who live in flyover country know what's good for them!". Not a good way to convince someone that they should write a check out to you, and the shrillness took me aback.

Posted by: benson at September 30, 2008 12:34 PM

http://www2.highlandstoday.com/content/2008/sep/30/la-bailout-for-aig-is-not-needed/

Posted by: East New York at September 30, 2008 12:47 PM

i find it hard to believe that a significant portion of people who were smart enough to get the high-paying financial jobs (or related positions with similarly high percentage of compensation traditionally as bonus) are really that stupid about their personal finances to be "living on credit card debt." i find it much more likely that they were living within their means, but perhaps not as conservatively as you or me. the "trouble" they'll be in is just as real, but it will be in ramping down from one "means" to a reduced "means," which involves painful adjustment from anyone who has to do it. i also don't think the spirit of schadenfreude is justified, but go on if it makes you feel better.

this isn't to say that there aren't a lot of people living beyond their means, but i don't think it's unique to the young "affluent" people or the people who most immediately are affected by this crisis.

Posted by: i disagree at September 30, 2008 12:59 PM

"i find it hard to believe that a significant portion of people who were smart enough to get the high-paying financial jobs (or related positions with similarly high percentage of compensation traditionally as bonus) are really that stupid about their personal finances to be "living on credit card debt."

Oh lordy lordy. I can only assume you don't have a lot of Wall Street friends. I have quite a few friends and acquaintances in their late 20s and early 30s who fit the profile perfectly. Some of them are Harvard/Yale. Some are Yale/Harvard. A few are even state school kids like I am. Some work in law, some in banking. Not a single one of them has managed to pay off his student loans, notwithstanding annual compensation into the 7 figures. Where does it go? To list just a few things:

- anything expensive that attracts that sort of woman (like table service at Manhattan see-and-be-seen bars)
- weekends in Vegas
- strippers
- surprisingly dandyish and expensive clothing for straight men
- sports betting

You wouldn't think a million dollars a year can actually disappear on those things, but it does.

They finally settle down with some expensive girl who went to Mount Holyoke or Smith and start popping out kids. Then the list changes (now it's BMWs and vacation houses and whatever else the wife needs to compete with her supposed friends), but the basic premise is the same. They are living poor, spending every penny on the illusion of wealth.

Not everyone is like this, but I think you would be shocked at how many people fit this profile.

Posted by: lechacal at September 30, 2008 2:10 PM

One can only hope that these people get attacked by "throngs of marauding hooligans".

Posted by: Prodigal_Son at September 30, 2008 2:16 PM

Idisagree, Lechacal is correct. My brother has a very high position on WS and I have been with a lot of his friends. Many of them anticipate their bonuses and spend them before they get them, not only those items that L mentions but also renovations. I know one guy who flew in some tile guy from Tuscany just for the perfect installation on his Hamptons patio. Fortunately my bother finds this behavior abhorrent so he'll be fine, but he regales me with these stories, some of which I heard directly from the people in question.

Posted by: denton at September 30, 2008 2:37 PM

"My brother has a very high position on WS and I have been with a lot of his friends."

So you're that kind of sister, are you?

Posted by: lechacal at September 30, 2008 2:53 PM

Story on Bloomberg now how the House members are getting flooded by calls from constituents telling them to pass the damn thing after they saw what it did to their stockholdings yesterday. A complete 180 degree turnaround in sentiment!!!!!

Posted by: daveinbedstuy at September 30, 2008 3:08 PM

All I know is that the governemnt did nothing back in 1929-32 and it resulted in the worst financial collapse we have ever seen. It took government action to finally pull us out of the Great Depression. Specifically the Japanese government's decidion to bomb our fleet at Pearl Harbor.
The congress has to put aside its bickering and do something.

Posted by: sam at September 30, 2008 3:22 PM

Lechacal that is a pretty grim picture of the Wall Street scene. not that I have any info to contradict it. So glad my life is not like that.

Posted by: wasder at September 30, 2008 3:44 PM

lechacal:

You forgot the drugs. Not cheap.

daveinbedstuy:

A 7% drop is not particularly significant - there have been several such drops since the 1987 crash which barely resulted in a public reaction. I highly doubt the veracity of your anecdote.

Posted by: Polemicist at September 30, 2008 3:46 PM

"A complete 180 degree turnaround in sentiment!!!!!"

Slow your roll, DIBS. I wouldn't go quite that far:

http://www.msnbc.msn.com/id/26948627/

Posted by: East New York at September 30, 2008 3:47 PM

Quick Poll:

Who believes the Paulson Plan, if passed, would actually work?

I myself am not yet convinced.

Posted by: SnarkSlope at September 30, 2008 4:05 PM

The Paulson Plan will assuredly fail. You cannot make unprofitable investments profitable, no matter how much money you throw at it.

Posted by: Polemicist at September 30, 2008 4:19 PM

Politicians listening to constituents, that might catch on. While I was originally inclined to panic and insist that the plan be approved, I now find myself thinking to hell with the bailout. Let everything go to crap and see how it all ends up. Feels invigorating.

Posted by: Guvna at September 30, 2008 4:27 PM

""My brother has a very high position on WS and I have been with a lot of his friends."

So you're that kind of sister, are you?"

Good one, P! Either that or I'm gay!

Posted by: denton at September 30, 2008 4:29 PM

The Paulson plan will fail because it does not provide enough money to really help the problem. The problems are not just the bad loans on the books but also the lack of capital these banks have to make loans. Combine that with fewer banks to lend and you see a tighter credit market. I NAILED THE 10400 LOW and now I tell you this market has a high of around 11400-11800 and if it doesn't reach those highs it is going down further. I also believe this plan should not pass, I think they need to make the plan better for future homebuyers and more capital for small banks who do alot of the lending as well. TRUST ME..

Posted by: HOBOKENROCKS at September 30, 2008 4:30 PM

polemicist, stick to polemics and lay off economics, you know not what you write. Buying distressed real estate is a way to make money not a way to lose money.
This is why the bailout will not only work to calm down the securities markets and unfreeze credit but will also end up making money for the Treasury. The current problem revolves around real estate or, to use econo-speak: "currently undervalued assets". But real estate will come back. It always does, and the governemnt has the luxury of being able to wait.
you get it?

Posted by: Inigo at September 30, 2008 4:36 PM

i do have a decent number of what you appear to be defining as "wall street friends." none of them fit this profile. my point isn't that they don't exist, but that they aren't any more or less representative of "young affluent couples" than the overspenders i know who are 65 and living off state pensions and modest investments are representative of the "elderly middle class couples." yes, it's fun to think that tuscan-tile-guy-importers are getting their comeuppance, but the reality is a lot less satisfying, and a lot less karmic than that.

Posted by: i disagree at September 30, 2008 5:14 PM

Inigo:

"polemicist, stick to polemics and lay off economics, you know not what you write."

I value commercial real estate for many of the most important organizations in this city. You're talking to the wrong person.

"Buying distressed real estate is a way to make money not a way to lose money."

That's true if you have lots of cash, but that has absolutely nothing to do with the current crisis.

"This is why the bailout will not only work to calm down the securities markets and unfreeze credit but will also end up making money for the Treasury."

I haven't heard of anyone, with the exception of the cows in Congress and the grand bankster Paulson himself who believes that. Yours is the view of a naive MBA twit who believes economics is a shell game unrelated to resource scarcity and productive work. There is more going on here than Keynesian confidence.

"The current problem revolves around real estate or, to use econo-speak: "currently undervalued assets". But real estate will come back. It always does, and the governemnt has the luxury of being able to wait."

One need only to look at Japan to see you are quite wrong. The real crux of the matter is the government is desperate to prevent a deflationary scenario similar to the Depression or Japan.

The only solution to this problem is to massively inflate the currency with the hopes we can somehow maintain employment and that wages will increase with inflation. Then, and ONLY then, will the face value of these mortgages remotely approach market value of the underlying collateral.

However, the bailout will undoubtedly fail because the US cannot inflate the currency dramatically without seriously pissing off every country upon which we are dependent for goods, food, and energy.

Posted by: Polemicist at September 30, 2008 5:17 PM

there are people in every income group who live at or beyond their means. its not just wall streeters. people w/ higher income brackets save more, especially when retirement savings are factored in.

Posted by: slick at September 30, 2008 7:42 PM

polemecist, if you truly have all that experience in finance, then I apologise, you are not ignorant.
Instead you are probably just a douchebag. As a businessman who deals with a wide variety of professional, believe me, I truly appreciate the difference between the ignorant and the douchebaggy.

Posted by: Inigo at September 30, 2008 7:42 PM

lechacal - I think there's a mini-series awaiting in the profiles of these folks you know. If you ever lose your job, you might want to pitch to HBO. What a sad group of people those big spenders must be.

Posted by: Miss Muffett at September 30, 2008 9:45 PM

They are a sad group of people, suicidal sometimes. it happens quite a bit.
I don't think it would make for a popular TV series. Too many people are in the same situation. It would not be entertainment. It would bomb.
But, people from rich families who overspend and act badly usually land on their feet, unless they are confronted with airport security and have a major meltdown. Middle-class life in America is resilient yet so fragile, no?
Let's hope things will be easier for our kids, and yet the years go by so quickly, who can tell the difference between our childhoods and theirs? and the their children's? Our intellects are on "fast forward" but human evolution and societal norms are on "slo-mo".

Posted by: Inigo at September 30, 2008 10:00 PM

"Unless we can find someone like Cramer who can convince voters that real action is needed, we won't get a bill out of Congress until the Dow is at 8,000." - NY Daily News ( http://tinyurl.com/3ngnow )

Posted by: DOW8000SP800 at September 30, 2008 10:04 PM

Inigo:

A spectacular failure at insulting me. Douchebag must be the most trite insult used today.

Posted by: Polemicist at September 30, 2008 10:16 PM

http://supportedthebailout.com/

Intriguing.

Posted by: DOW8000SP800 at September 30, 2008 11:01 PM

Lechecal is correct about the way the Wall Street people live and spend. Remember, already starting a year or two ago there have been reports of those people losing or having to sell their 2nd and 3rd houses in the Hamptons because they'd bought what they could not afford.

Something that happened on every income level in this country, not just the people in fly-over territory, during the bubble was a feeling of inadequacy if you did not spend wildly on status items and properties. Even if you could not afford it. Thus the credit crunch and mortgage crisis.

Posted by: traditionalmod at October 1, 2008 11:27 AM

« Secret to Brooklyn's Job Market: Diversity Is Pete Hamill Responsible for the Brooklyn Boom? »

September 30, 2008

A Letter From The Inside

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